Attached files

file filename
EX-99.2 - EXHIBIT 99.2 - Federal Home Loan Bank of Dallasfhlbdallas-123116xex_992.htm
EX-99.1 - EXHIBIT 99.1 - Federal Home Loan Bank of Dallasfhlbdallas-123116xex_991.htm
EX-32.1 - EXHIBIT 32.1 - Federal Home Loan Bank of Dallasfhlbdallas-123116xex_321.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Dallasfhlbdallas-123116xex_312.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Dallasfhlbdallas-123116xex_311.htm
EX-14.1 - EXHIBIT 14.1 - Federal Home Loan Bank of Dallasfhlbdallas-123116xex_141.htm
EX-12.1 - EXHIBIT 12.1 - Federal Home Loan Bank of Dallasfhlbdallas-123116xex_121.htm
EX-10.22 - EXHIBIT 10.22 - Federal Home Loan Bank of Dallasfhlbdallas-123116xex_1022.htm
EX-10.14 - EXHIBIT 10.14 - Federal Home Loan Bank of Dallasfhlbdallas-123116xex_1014.htm
EX-10.12 - EXHIBIT 10.12 - Federal Home Loan Bank of Dallasfhlbdallas-123116xex_1012.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-51405
FEDERAL HOME LOAN BANK OF DALLAS
(Exact name of registrant as specified in its charter)
Federally chartered corporation
(State or other jurisdiction of incorporation
or organization)
71-6013989
(I.R.S. Employer
Identification Number)
8500 Freeport Parkway South, Suite 600
Irving, TX
(Address of principal executive offices)
75063-2547
(Zip Code)
Registrant’s telephone number, including area code: (214) 441-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class B Capital Stock, $100 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The registrant’s capital stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value ($100 per share), subject to certain regulatory and statutory requirements. At March 17, 2017, the registrant had 20,838,015 shares of its capital stock outstanding. As of June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate par value of the registrant’s capital stock outstanding was approximately $1.814 billion
Documents Incorporated by Reference: None.
 
 
 
 
 



FEDERAL HOME LOAN BANK OF DALLAS
TABLE OF CONTENTS
 
Page
 
 
 
 
 EX-10.12
 
 EX-10.14
 
 EX-10.22
 
 EX-12.1
 
 EX-14.1
 
 EX-31.1
 
 EX-31.2
 
 EX-32.1
 
 EX-99.1
 
 EX-99.2
 
 EX-101
 



PART I

ITEM 1. BUSINESS
Background
The Federal Home Loan Bank of Dallas (the “Bank”) is one of 11 Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System,” or the “System”). The FHLBanks were created by the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”). Each of the 11 FHLBanks is a member-owned cooperative that operates as a separate federally chartered corporation with its own management, employees and board of directors. Each FHLBank helps finance housing, community lending, and community development needs in the specified states in its respective district. Federally insured commercial banks, savings banks, savings and loan associations, and federally or privately insured credit unions, as well as insurance companies and Community Development Financial Institutions that are certified under the Community Development Banking and Financial Institutions Act of 1994, are all eligible for membership in the FHLBank of the district in which the institution’s principal place of business is located. Housing associates, including state and local housing authorities, that meet certain statutory and regulatory criteria may also borrow from the FHLBanks.
The public purpose of the Bank is to promote housing, jobs and general prosperity through products and services that assist its members in providing affordable credit in their communities. The Bank’s primary business is to serve as a financial intermediary between the capital markets and its members. In its most basic form, this intermediation process involves raising funds by issuing debt in the capital markets and lending the proceeds to member institutions (in the form of loans known as advances) at rates that are slightly higher than the cost of the debt. The interest spread between the cost of the Bank’s liabilities and the yield on its assets, combined with the earnings on its invested capital, are the Bank’s primary sources of earnings. The Bank endeavors to manage its assets and liabilities in such a way that its net interest spread is consistent across a wide range of interest rate environments. The intermediation of its members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements. These agreements, commonly referred to as derivatives or derivative instruments, are discussed below in the section entitled “Use of Interest Rate Exchange Agreements.”
The Bank’s principal source of funds is debt issued in the capital markets. All 11 FHLBanks issue debt in the form of consolidated obligations through the Office of Finance as their agent, and each FHLBank uses these funds to make loans to its members, invest in debt securities, or for other business purposes. Generally, consolidated obligations are traded in the over-the-counter market. All 11 FHLBanks are jointly and severally liable for the repayment of all consolidated obligations. Although consolidated obligations are not obligations of or guaranteed by the U.S. government, FHLBanks are considered to be government-sponsored enterprises (“GSEs”) and thus have historically been able to borrow at the more favorable rates generally available to GSEs. Consolidated obligations are currently rated Aaa/P-1 by Moody’s Investors Service (“Moody’s”) and AA+/A-1+ by S&P Global Ratings (“S&P”). In the application of S&P's Government Related Entities criteria, the ratings of the FHLBanks are constrained by the long-term sovereign credit rating of the United States. These ratings indicate that each of these nationally recognized statistical rating organizations ("NRSROs") has concluded that the FHLBanks have a very strong capacity to meet their financial commitments on consolidated obligations. The ratings also reflect the FHLBank System’s status as a GSE. Historically, the FHLBanks' GSE status and very high credit ratings on consolidated obligations have provided the FHLBanks with excellent capital markets access. Deposits, other borrowings and the proceeds from the issuance of capital stock to members are also sources of funds for the Bank.
In addition to the ratings on the FHLBanks’ consolidated obligations, each FHLBank is rated individually by both S&P and Moody’s. These individual FHLBank ratings apply to the individual obligations of the respective FHLBanks, such as interest rate derivatives, deposits, and letters of credit. As of December 31, 2016, Moody’s had assigned a deposit rating of Aaa/P-1 to each of the FHLBanks and S&P had rated each of the FHLBanks AA+/A-1+.
Current and prospective shareholders and debtholders should understand that these credit ratings are not a recommendation to buy, hold or sell securities and they may be revised or withdrawn at any time by the NRSRO. The ratings from each of the NRSROs should be evaluated independently.
All members of the Bank are required to purchase capital stock in the Bank as a condition of membership and in proportion to their asset size and borrowing activity with the Bank. The Bank’s capital stock is not publicly traded and all stock is owned by members of the Bank, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other obligations that remain outstanding or until any applicable stock redemption or withdrawal notice period expires.
The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, is responsible for supervising and regulating the FHLBanks and the Office of Finance. The Finance Agency’s

1


stated mission is to ensure that the housing GSEs, including the FHLBanks, operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. Consistent with this mission, the Finance Agency establishes policies and regulations covering the operations of the FHLBanks.
The Bank’s debt and equity securities are exempt from registration under the Securities Act of 1933 and are “exempted securities” under the Securities Exchange Act of 1934 (the “Exchange Act”). On June 23, 2004, the Finance Agency's predecessor, the Federal Housing Finance Board, adopted a rule requiring each FHLBank to voluntarily register a class of its equity securities with the Securities and Exchange Commission (“SEC”) under Section 12(g) of the Exchange Act and the Housing and Economic Recovery Act of 2008 (the “HER Act”) subsequently codified this requirement. The Bank’s registration with the SEC became effective on April 17, 2006. As a registrant, the Bank is subject to the periodic reporting and disclosure regime as administered and interpreted by the SEC. Materials that the Bank files with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains reports and other information filed with the SEC. Reports and other information that the Bank files with the SEC are also available free of charge through the Bank’s website at www.fhlb.com. To access these reports and other information through the Bank’s website, click on “News,” then “Investor Relations,” and then “SEC” under the heading SEC Filings. The information on the Bank's website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of the Bank's other filings with the SEC.
Merger of Des Moines and Seattle FHLBanks
Prior to June 1, 2015, the FHLBank System included 12 FHLBanks. On September 25, 2014, the FHLBank of Des Moines and the FHLBank of Seattle announced that they had entered into a definitive agreement to merge the two FHLBanks. On December 19, 2014, the Finance Agency approved the merger application, subject to the satisfaction of certain closing conditions set forth in its approval letter, including the ratification of the merger agreement by members of both the Des Moines and Seattle FHLBanks. On February 27, 2015, the FHLBanks of Des Moines and Seattle announced that the merger agreement had been ratified by members of both FHLBanks. The merger was consummated effective May 31, 2015. At closing, the FHLBank of Seattle merged with and into the FHLBank of Des Moines, with the FHLBank of Des Moines surviving the merger as the continuing FHLBank. Headquartered in Des Moines, Iowa, the first day of operations for the combined FHLBank was June 1, 2015.
Membership
The Bank’s members are financial institutions with their principal place of business in the Ninth Federal Home Loan Bank District, which consists of Arkansas, Louisiana, Mississippi, New Mexico and Texas. The following table summarizes the Bank’s membership, by type of institution, as of December 31, 2016, 2015 and 2014.

MEMBERSHIP SUMMARY
 
December 31,
 
2016
 
2015
 
2014
Commercial banks
621

 
631

 
655

Savings institutions
60

 
59

 
68

Credit unions
108

 
104

 
103

Insurance companies
37

 
36

 
31

Community Development Financial Institutions
5

 
5

 
4

 
 
 
 
 
 
Total members
831

 
835

 
861

 
 
 
 
 
 
Housing associates
8

 
8

 
8

Non-member borrowers
8

 
11

 
10

 
 
 
 
 
 
Total
847

 
854

 
879

 
 
 
 
 
 
Community Financial Institutions (“CFIs”) (1)
619

 
636

 
670

(1) 
The figures presented above reflect the number of members that were CFIs as of December 31, 2016, 2015 and 2014 based upon the definitions of CFIs that applied as of those dates.
As of December 31, 2016, approximately 74 percent of the Bank’s members were Community Financial Institutions ("CFIs"). CFIs are defined by the FHLB Act (as amended by the HER Act) to include all institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) with average total assets over the three-year period preceding measurement of less than

2


$1.0 billion, as adjusted annually for inflation. For 2016, CFIs were FDIC-insured institutions with average total assets as of December 31, 2015, 2014 and 2013 of less than $1.128 billion. For 2015 and 2014, the asset cap was $1.123 billion and $1.108 billion, respectively. For 2017, the asset cap is $1.148 billion.
As of December 31, 2016, 2015 and 2014, approximately 53.5 percent, 54.5 percent and 53.9 percent, respectively, of the Bank’s members had outstanding advances from the Bank. These usage rates are calculated excluding housing associates and non-member borrowers. While eligible to borrow, housing associates are not members of the Bank and, as such, are not required to hold capital stock. Non-member borrowers consist of institutions that have acquired former members and assumed the advances and/or other extensions of credit of those former members and former members who have withdrawn from membership but that continue to have advances and/or other extensions of credit outstanding. Non-member borrowers are required to hold capital stock to support outstanding advances or other extensions of credit until the time when those advances have been repaid or the extensions of credit have expired, as applicable. During the period that their obligations remain outstanding, non-member borrowers may not request new extensions of credit, nor are they permitted to extend or renew the assumed advances.
As of December 31, 2013, the Bank had 875 members. The decline in the Bank's membership during the three years ended December 31, 2016 was largely attributable to intra-district merger activity.
The Bank’s membership currently includes the majority of commercial banks and savings institutions in its district that are eligible to become members. Eligible non-members are primarily insurance companies, credit unions and smaller commercial banks that have thus far elected not to join the Bank. While the Bank anticipates that some number of these eligible non-member institutions will apply for membership each year, the Bank also anticipates that some number of its existing members will be acquired or merge with other institutions and it does not currently anticipate a substantial increase in the number of member institutions.
As a cooperative, the Bank is managed with the primary objectives of enhancing the value of membership for member institutions and fulfilling its public purpose. The value of membership includes access to readily available credit and other services from the Bank, the value of the cost differential between Bank advances and other potential sources of funds, and the dividends paid on members’ investments in the Bank’s capital stock.
Business Segments
The Bank manages its operations as one business segment. Management and the Bank’s Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance. All of the Bank’s revenues are derived from U.S. operations.
Interest Income
The Bank’s interest income is derived primarily from advances and investment activities. Each of these revenue sources is more fully described below. During the years ended December 31, 2016, 2015 and 2014, interest income derived from each of these sources (expressed as a percentage of the Bank’s total interest income) was as follows:
 
Year Ended December 31,
 
2016
 
2015
 
2014
Advances (including prepayment fees)
51.5
%
 
60.9
%
 
64.8
%
Investments
47.7

 
37.5

 
33.0

Mortgage loans held for portfolio
0.8

 
1.6

 
2.2

Total
100.0
%
 
100.0
%
 
100.0
%
Total interest income (in thousands)
$
422,148

 
$
220,488

 
$
203,831

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

3


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

4


The Bank is required by the FHLB Act to obtain collateral that is sufficient, in the judgment of the Bank, to fully secure advances and other extensions of credit to members/borrowers. The Bank has not suffered any credit losses on advances in its 84-year history. In accordance with the Bank’s Capital Plan, members and former members must hold Class B-2 capital stock in proportion to their outstanding advances. In addition, members must hold Class B-1 capital stock to meet their membership investment requirement. Pursuant to the FHLB Act, the Bank has a lien upon and holds the Bank’s Class B-1 and Class B-2 capital stock owned by each of its shareholders as additional collateral for all of the respective shareholder’s obligations to the Bank.
In order to comply with the requirement to fully secure advances and other extensions of credit, the Bank and each of its members/borrowers execute a written security agreement that establishes the Bank’s security interest in a variety of the members’/borrowers’ assets. The Bank, pursuant to the FHLB Act and Finance Agency regulations, originates, renews, or extends advances only if it has obtained and is maintaining a security interest in sufficient eligible collateral at the time such advance is made, renewed, or extended. Eligible collateral includes whole first mortgages on improved residential real property (not more than 90 days delinquent) or securities representing an undivided interest in such mortgages; securities issued, insured, or guaranteed by the U.S. government or any of its agencies, including mortgage-backed and other debt securities issued or guaranteed by the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or the Government National Mortgage Association; term deposits in the Bank; and other real estate-related collateral acceptable to the Bank, provided that such collateral has a readily ascertainable value and the Bank can perfect a security interest in such assets.
In the case of CFIs, the Bank may also accept as eligible collateral secured small business, small farm, and small agribusiness loans, secured loans for community development activities, and securities representing a whole interest in such loans, provided the collateral has a readily ascertainable value and the Bank can perfect a security interest in such collateral. At December 31, 2016 and 2015, total CFI obligations secured by these types of collateral, including commercial real estate, totaled approximately $2.3 billion and $2.2 billion, respectively, which represented approximately 5.3 percent and 6.9 percent, respectively, of the total advances and letters of credit outstanding as of those dates.
The HER Act added secured loans for community development activities as a new type of eligible collateral for CFIs. To date, the Bank has not been requested to accept secured loans for community development activities as collateral.
Except as set forth in the next sentence, the FHLB Act affords any security interest granted to the Bank by any member/borrower of the Bank, or any affiliate of any such member/borrower, priority over the claims and rights of any party, including any receiver, conservator, trustee, or similar party having rights of a lien creditor. The Bank’s security interest is not entitled to priority over the claims and rights of a party that (i) would be entitled to priority under otherwise applicable law and (ii) is an actual bona fide purchaser for value or is a secured party who has a perfected security interest in such collateral in accordance with applicable law (e.g., a prior perfected security interest under the Uniform Commercial Code or other applicable law). For example, as discussed further below, the Bank usually perfects its security interest in collateral by filing a Uniform Commercial Code financing statement against the borrower. If another secured party, without knowledge of the Bank's lien, perfected its security interest in that same collateral by taking possession of the collateral, rather than or in addition to filing a Uniform Commercial Code financing statement against the borrower, then that secured party’s security interest that was perfected by possession may be entitled to priority over the Bank’s security interest that was perfected by filing a Uniform Commercial Code financing statement.
From time to time, the Bank agrees to subordinate its security interest in certain assets or categories of assets granted by a member/borrower of the Bank to the security interest of another creditor (typically, a Federal Reserve Bank or another FHLBank). If the Bank agrees to subordinate its security interest in certain assets or categories of assets granted by a member/borrower of the Bank to the security interest of another creditor, the Bank will not extend credit against those assets or categories of assets.
As stated above, each member/borrower of the Bank executes a security agreement pursuant to which such member/borrower grants a security interest in favor of the Bank in certain assets of such member/borrower. The assets in which a member grants a security interest fall into one of two general structures. In the first structure, the member grants a security interest in all of its assets that are included in the eligible collateral categories, as described above, which the Bank refers to as a “blanket lien.” A member may request that its blanket lien be modified, such that the member grants in favor of the Bank a security interest limited to certain of the eligible collateral categories (i.e., whole first residential mortgages, securities, term deposits in the Bank and other real estate-related collateral). In the second structure, the member grants a security interest in specifically identified assets rather than in the broad categories of eligible collateral covered by the blanket lien and the Bank identifies those members as being on “specific collateral only status.”
The basis upon which the Bank will lend to a member that has granted the Bank a blanket lien depends on numerous factors, including, among others, that member’s financial condition and general creditworthiness. Generally, and subject to certain limitations, a member that has granted the Bank a blanket lien may borrow up to a specified percentage of the value of eligible

5


collateral categories, as determined from that member’s financial reports filed with its federal regulator, without specifically identifying each item of collateral or delivering the collateral to the Bank. Under certain circumstances, including, among others, a deterioration of a member’s financial condition or general creditworthiness, the amount a member may borrow is determined only on the basis of the collateral that such member delivers to the Bank or a third-party custodian approved by the Bank. Under these circumstances, the Bank places the member on “custody status.” In addition, members on blanket lien status may choose to deliver some or all of the collateral to the Bank.
The members/borrowers that are granted specific collateral only status by the Bank are typically either insurance companies or members/borrowers with an investment grade credit rating from an NRSRO that have requested this type of structure. Insurance companies are permitted to borrow only against the eligible collateral that is delivered to the Bank, and insurance companies generally grant a security interest only in collateral they have delivered. Members/borrowers with an investment grade credit rating from an NRSRO may grant a security interest in, and would be permitted to borrow only against, delivered eligible securities and specifically identified, eligible first-lien mortgage loans. Such loans must be delivered to the Bank or a third-party custodian approved by the Bank, or the Bank and the member/borrower must otherwise take actions that ensure the priority of the Bank’s security interest in the loans. Investment grade rated members/borrowers that choose this option are subject to fewer provisions that allow the Bank to demand additional collateral or exercise other remedies based on the Bank’s discretion.
As of December 31, 2016, 694 of the Bank’s borrowers/potential borrowers with a total of $27.9 billion in outstanding advances were on blanket lien status, 38 borrowers/potential borrowers with $2.9 billion in outstanding advances were on specific collateral only status and 115 borrowers/potential borrowers with $1.7 billion in outstanding advances were on custody status.
The Bank perfects its security interest in members'/borrowers’ collateral in a number of ways. The Bank usually perfects its security interest in collateral by filing a Uniform Commercial Code financing statement against the relevant assets of the member/borrower. In the case of certain borrowers, the Bank perfects its security interest by taking possession or control of the collateral, which may be in addition to the filing of a financing statement. In these cases, the Bank also generally takes assignments of most of the mortgages and deeds of trust that are designated as collateral. Instead of requiring delivery of the collateral to the Bank, the Bank may allow certain borrowers to deliver specific collateral to a third-party custodian approved by the Bank or otherwise take actions that ensure the priority of the Bank’s security interest in such collateral.
On at least a quarterly basis, the Bank obtains updated information relating to collateral pledged to the Bank by depository institution members/borrowers, including those on blanket lien status. This information is either obtained directly from the member/borrower or obtained by the Bank from appropriate regulatory filings. In addition, on a monthly basis or as otherwise requested by the Bank, members/borrowers on custody status and members/borrowers on specific collateral only status must update information relating to collateral pledged to the Bank. Bank personnel regularly verify the existence and eligibility of collateral securing advances to members/borrowers on blanket lien status and members/borrowers on specific collateral only status with respect to any collateral not delivered to the Bank. The frequency and the extent of these collateral verifications depend on the average amount by which a member's/borrower’s outstanding obligations to the Bank during the year exceed the collateral value of its securities, loans and term deposits held by the Bank. Collateral verifications are not required for members/borrowers that have had no, or only a de minimis amount of, outstanding obligations to the Bank secured by a blanket lien during the prior calendar year, are on custody status, or are on blanket lien status but at all times have delivered to the Bank eligible loans, securities and term deposits with a collateral value in excess of the advances and other extensions of credit to the member/borrower.
As of December 31, 2016, the Bank’s outstanding advances (at par value) totaled $32.5 billion. As of that date, advances outstanding to the Bank’s five largest borrowers represented 26.4 percent of the Bank’s total outstanding advances. Advances to the Bank’s largest borrower (Comerica Bank) represented 8.6 percent of the Bank’s total outstanding advances as of December 31, 2016. For additional information regarding the composition and concentration of the Bank’s advances, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Advances.
Community Investment Offerings. The Bank offers a Community Investment Cash Advances (“CICA”) program (which includes a Community Investment Program and an Economic Development Program) as authorized by Finance Agency regulations. Advances made under the CICA program benefit low- to moderate-income households by providing funds for housing or economic development projects. CICA advances are made at rates below the rates the Bank charges on standard advances. The Bank currently prices CICA advances at interest rates that are approximately 1 to 5 basis points above the Bank’s matched maturity cost of funds. CICA advances are provided separately from and do not count toward the Bank’s statutory obligations under the Affordable Housing Program, through which the Bank provides grants to support projects that benefit low-income households (see the “Affordable Housing Program” section below). As of December 31, 2016, the par value of advances outstanding under the CICA program totaled approximately $402.9 million, representing approximately 1.2 percent of the Bank’s total advances outstanding as of that date.

6


If a member institution is approved for an Economic Development Program ("EDP") advance, the member's customer may then be eligible for an accompanying EDP Plus grant of up to $25,000.
The Bank also offers an Affordable Housing Program (“AHP”) as required by the FHLB Act and in accordance with Finance Agency regulations. The Bank sets aside 10 percent of each year’s earnings (as adjusted for interest expense on mandatorily redeemable capital stock) for its AHP, which provides grants for projects that facilitate development of rental and owner-occupied housing for low-income households. Each year, a portion of the amount set aside is typically allocated specifically for the Bank's Homebuyer Equity Leverage Partnership ("HELP") program and its Special Needs Assistance Program ("SNAP"). HELP provides grant funds for down payment and closing cost assistance for eligible first-time homebuyers. SNAP provides grant funds to special needs homeowners for rehabilitation costs. The calculation of the amount to be set aside is further discussed below in the section entitled “AHP Assessments.” Each year, the Bank conducts a competitive application process to allocate the AHP funds set aside from the prior year’s earnings. Applications submitted by Bank members and their community partners are scored in accordance with Finance Agency regulations and the Bank’s AHP Implementation Plan. The highest scoring proposals are approved to receive funds, which are disbursed upon receipt of documentation that the projects are progressing as specified in the original applications or in approved modifications thereto.
In addition, the Bank offers a Housing Assistance for Veterans program that is designed to provide grants to households of veterans or active service members who were disabled as a result of an injury during their active military service since September 11, 2001.
Further, the Bank offers a Partnership Grant Program which provides funding for the operational needs of community-based organizations ("CBOs"). CBOs include non-profit organizations involved in affordable housing, local community development funds and small business technical assistance providers.
Letters of Credit. The Bank’s credit services also include letters of credit issued or confirmed on behalf of members to facilitate business transactions with third parties that support residential housing finance, community lending, or asset/liability management or to provide liquidity to members. Letters of credit are also issued on behalf of members to secure the deposits of public entities that are held by such members. All letters of credit must be fully collateralized as though they were funded advances. At December 31, 2016 and 2015, outstanding letters of credit totaled $11.2 billion and $7.2 billion, respectively, of which $0.4 billion had been issued or confirmed under the Bank’s CICA program at each of those dates.
Correspondent Banking and Collateral Services. The Bank provides its members with a variety of correspondent banking and collateral services. These services include overnight and term deposit accounts, wire transfer services, securities safekeeping, and securities pledging services.
SecureConnect. The Bank provides secure on-line access to many of its products, services and reports through SecureConnect, a proprietary, secure on-line product delivery system. A substantial portion of the Bank’s advances and wire transfers are initiated by members through SecureConnect. In addition, a large proportion of account statements and other reports are made available through SecureConnect. Further, members may manage securities held in safekeeping by the Bank and participate in auctions for Bank advances and deposits through SecureConnect.
Interest Rate Swaps, Caps and Floors. The Bank offers interest rate swaps, caps and floors to its member institutions. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties which, if required, will be a third-party central clearinghouse. In order to be eligible, a member must have executed a master swap agreement with the Bank. The Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. At December 31, 2016 and 2015, the total notional amount of interest rate exchange agreements with members totaled $0.2 billion and $1.0 billion, respectively.
Standby Bond Purchase Agreements. The Bank offers standby bond purchase services to state housing finance agencies within its district. In these transactions, in order to enhance the liquidity of bonds issued by a state housing finance agency, the Bank, for a fee, would agree to stand ready to purchase, in certain circumstances specified in the standby agreement, a state housing finance agency’s bonds that the remarketing agent for the bonds is unable to sell. The specific terms for any bonds purchased by the Bank would be specified in the standby bond purchase agreement entered into by the Bank and the state housing finance agency. The Bank would reserve the right to sell any bonds it purchased at any time, subject to any conditions the Bank might agree to in the standby bond purchase agreement. To date, the Bank has not entered into any standby bond purchase agreements.
MPF Xtra. In December 2012, the Bank began offering the MPF Xtra® product to its members. MPF Xtra is offered under the Mortgage Partnership Finance® (“MPF”®) program administered by the FHLBank of Chicago, which is discussed on pages 9-10 of this report (“Mortgage Partnership Finance,” “MPF,” and "MPF Xtra" are registered trademarks of the FHLBank of

7


Chicago). MPF Xtra provides members that participate in the MPF program (known as participating financial institutions or "PFIs") an opportunity to sell certain fixed-rate, conforming mortgage loans into the secondary market. Under this program, loans are sold to the FHLBank of Chicago and are concurrently sold to Fannie Mae as a third-party investor. These loans are not held by the Bank, nor are they recorded on the Bank's balance sheet. Unlike other products offered under the MPF program, PFIs are not required to provide credit enhancement and do not receive credit enhancement fees when using the MPF Xtra product. Under the MPF Xtra program, the Bank receives a fee for any loans sold by its PFIs. During 2016, 2015 and 2014, $59.0 million, $52.8 million and $20.4 million, respectively, of loans were sold through the MPF Xtra program and the fees earned on the sale of these loans totaled $41,000, $37,000 and $16,000, respectively.
Investment Activities
The Bank maintains a portfolio of investments to enhance interest income and meet liquidity needs, including certain regulatory liquidity requirements, as discussed in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources. To ensure the availability of funds to meet members’ credit needs, the Bank’s operating needs, and its other general and regulatory liquidity requirements, the Bank maintains a portfolio of short-term investments typically consisting of overnight federal funds issued by highly rated domestic banks and U.S. branches of foreign financial institutions and overnight reverse repurchase agreements. From time to time, the Bank may also invest in short-term commercial paper and/or U.S. Treasury Bills. At December 31, 2016, the Bank’s short-term investments were comprised of $6.5 billion of overnight federal funds sold (including a $0.3 billion loan to another FHLBank) and $3.1 billion of overnight reverse repurchase agreements.
To enhance net interest income, the Bank maintains a long-term investment portfolio, which currently includes mortgage-backed securities ("MBS") issued by U.S. government-sponsored enterprises (i.e., Fannie Mae and Freddie Mac) and, to a far lesser extent, U.S. government agencies; non-agency (i.e., private label) residential MBS; non-MBS debt instruments issued or guaranteed by the U.S. government or secured by U.S. government guaranteed obligations; non-MBS debt instruments issued by U.S. government-sponsored enterprises (i.e., Fannie Mae, Freddie Mac and the Farm Credit System); and state housing agency obligations. The interest rate and, in the case of MBS, prepayment risk inherent in the securities is managed through a variety of debt and interest rate derivative instruments. As of December 31, 2016 and 2015, the composition of the Bank’s long-term investment portfolio was as follows (dollars in millions):
 
December 31,
 
2016
 
2015
 
Amortized
Cost
 
Percentage
 
Amortized
Cost
 
Percentage
Government-sponsored enterprises
 
 


 
 
 


Debentures
$
6,475

 
41.1
%
 
$
5,328

 
40.2
%
Commercial MBS
5,896

 
37.5

 
3,658

 
27.6

Residential MBS
2,211

 
14.1

 
2,909

 
22.0

Government-guaranteed securities
611

 
3.9

 
726

 
5.5

Non-agency residential MBS
115

 
0.7

 
143

 
1.1

Other
428

 
2.7

 
485

 
3.6

Total
$
15,736

 
100.0
%
 
$
13,249

 
100.0
%

The Bank is precluded from purchasing additional MBS if such purchase would cause the aggregate amortized cost of its MBS holdings to exceed an amount equal to 300 percent of its total regulatory capital. At December 31, 2016, the Bank's MBS holdings (at amortized cost) represented 298 percent of its total regulatory capital.
The Bank has historically attempted to maintain its investments in MBS close to the regulatory dollar limit. While the Finance Agency has established limits with respect to the types and structural characteristics of the FHLBanks’ MBS investments, the Bank has generally adhered to a more conservative set of guidelines.
The Bank is permitted to invest in the non-MBS debt obligations of any GSE provided such investments in any single GSE do not exceed the lesser of the Bank’s total regulatory capital or that GSE's total capital (taking into account the financial support provided by the U.S. Department of the Treasury, if applicable) at the time new investments are made. The Bank's investments in the non-MBS debt obligations of Fannie Mae, Freddie Mac and the Farm Credit System are each currently limited to an amount equal to 100 percent of the Bank's total regulatory capital.
In accordance with Finance Agency policy and regulations, total capital for purposes of determining the Bank’s MBS and non-MBS investment limitations excludes accumulated other comprehensive income (loss) and includes all amounts paid in for the Bank’s capital stock regardless of accounting classification (see Item 7 — Management’s Discussion and Analysis of Financial

8


Condition and Results of Operations). The Bank is not required to sell or otherwise reduce any investments that exceed these regulatory limits due to reductions in capital or changes in value after the investments are made, but it is precluded from making additional investments that exceed these limits.
Finance Agency regulations include a variety of restrictions and limitations on the FHLBanks’ investment activities, including limits on the types, amounts, and maturities of unsecured investments in private issuers. Finance Agency rules and regulations also prohibit the Bank from investing in certain types of securities, including:
instruments, such as common stock, that represent an ownership interest in an entity, other than stock in small business investment companies, or certain investments targeted to low-income persons or communities;
instruments issued by non-United States entities, other than those issued by United States branches and agency offices of foreign commercial banks;
debt instruments that are not investment quality, other than certain investments targeted to low-income persons or communities and instruments that became non-investment quality after purchase by the Bank;
whole mortgages or other whole loans, other than 1) those acquired by the Bank through a duly authorized Acquired Member Assets program such as the Mortgage Partnership Finance program discussed below; 2) certain investments targeted to low-income persons or communities; 3) certain marketable direct obligations of state, local, or tribal government units or agencies that are investment quality; 4) MBS or asset-backed securities backed by manufactured housing loans or home equity loans; and 5) certain foreign housing loans authorized under Section 12(b) of the FHLB Act;
non-U.S. dollar denominated securities;
interest-only or principal-only stripped MBS;
residual-interest or interest-accrual classes of collateralized mortgage obligations and real estate mortgage investment conduits; and
fixed-rate MBS or floating-rate MBS that, on trade date, are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest rate change of 300 basis points.
Acquired Member Assets ("AMA")
Through the MPF program, the Bank currently invests in conventional residential mortgage loans originated by its PFIs. The Bank previously purchased conventional mortgage loans and government-guaranteed/insured mortgage loans (i.e., those insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs) during the period from 1998 to mid-2003, and resumed acquiring conventional mortgage loans under this program in early 2016. All of the mortgage loans acquired in 2016 were originated by certain of the Bank's PFIs and the Bank acquired a 100 percent interest in such loans. For the loans that were acquired from its members during the period from 1998 to mid-2003, the Bank retained title to the mortgage loans, subject to any participation interest in such loans that was sold to the FHLBank of Chicago; the interest in the loans retained by the Bank ranged from 1 percent to 49 percent. Additionally, during the period from 1998 to 2000, the Bank also acquired from the FHLBank of Chicago a percentage interest (ranging up to 75 percent) in certain MPF loans originated by PFIs of other FHLBanks. The Bank manages the liquidity, interest rate and prepayment risk of these loans, while the PFIs or their designees retain the servicing activities. The Bank and the PFIs share in the credit risk of the loans with the Bank assuming the first loss obligation limited by the First Loss Account (“FLA”), and the PFIs assuming credit losses in excess of the FLA, up to the amount of the required credit enhancement obligation ("CE Obligation") as specified in the master agreement (“Second Loss Credit Enhancement”). The FLA is a memo account that is used to track the Bank's exposure to losses until the CE Obligation is available to cover losses. The CE Obligation is the amount of credit enhancement needed for a master commitment to have an estimated rating that is equivalent to an investment grade rated MBS. Credit enhancement levels are set by the Bank using an NRSRO model. Prior to December 22, 2016, the Bank set the credit enhancement level at a double-A equivalent. For loans delivered on and after that date, the credit enhancement level is set at a triple-B equivalent. The Bank assumes all losses in excess of the Second Loss Credit Enhancement. As further described below, the PFIs are paid a fee by the Bank for assuming a portion of the credit risk of the loans.
The PFI’s CE Obligation arises under its PFI Agreement while the amount and nature of the obligation are determined with respect to each master commitment. Under the Finance Agency’s Acquired Member Asset regulation (12 C.F.R. part 955) (“AMA Regulation”), the PFI must “bear the economic consequences” of certain credit losses with respect to a master commitment based upon the MPF product and other criteria. Under the MPF program, the PFI’s credit enhancement protection may take the form of the CE Obligation, which represents the direct liability to pay credit losses incurred with respect to that master commitment, or may require the PFI to obtain and pay for a supplemental mortgage insurance (“SMI”) policy insuring the Bank for a portion of the credit losses arising from the master commitment, and/or the PFI may contract for a contingent performance-based credit enhancement fee whereby such fees are reduced by losses up to a certain amount arising under the master commitment. The credit risk-sharing structures utilized by the Bank in 2016 did not include SMI. Under the AMA

9


Regulation, any portion of the CE Obligation that is a PFI’s direct liability must be collateralized by the PFI in the same way that advances are collateralized. The PFI Agreement provides that the PFI’s obligations under the PFI Agreement are secured along with other obligations of the PFI under its regular advances agreement with the Bank and, further, that the Bank may request additional collateral to secure the PFI’s obligations. PFIs are paid a credit enhancement fee (“CE fee”) as an incentive to minimize credit losses, to share in the risk of loss on MPF loans and to pay for SMI, rather than paying a guaranty fee to other secondary market purchasers. CE fees are paid monthly and are determined based on the remaining unpaid principal balance of the MPF loans. The required CE Obligation may vary depending on the MPF product alternatives selected. The Bank also pays performance-based CE fees that are based on the actual performance of the pool of MPF loans under each individual master commitment. To the extent that losses in the current month exceed accrued performance-based CE fees, the remaining losses may be recovered from future performance-based CE fees payable to the PFI.
In some cases, a portion of the credit support for MPF loans is provided under a primary and/or SMI policy. Given the small amount of its mortgage loans held for portfolio that are insured by mortgage insurance companies and the historical performance of those loans, the Bank believes its credit exposure to these insurance companies, both individually and in the aggregate, was not significant as of December 31, 2016.
PFIs must comply with the requirements of the PFI agreement, MPF guides, applicable law and the terms of mortgage documents. If a PFI fails to comply with any of these requirements, it may be required to repurchase the MPF loans that are impacted by such failure. The reasons that a PFI could be required to repurchase an MPF loan include, but are not limited to, the failure of the loan to meet underwriting standards, the PFI’s failure to deliver a qualifying promissory note and certain other relevant documents to an approved custodian, a servicing breach, fraud or other misrepresentations by the PFI. In addition, a PFI may, under the terms of the MPF servicing guide, elect to repurchase any government-guaranteed/insured loan for an amount equal to the loan’s then current scheduled principal balance and accrued interest thereon, provided no payment has been made by the borrower for three consecutive months. This policy allows PFIs to comply with loss mitigation requirements of the applicable government agency in order to preserve the insurance guaranty coverage. During the years ended December 31, 2016, 2015 and 2014, the principal amount of mortgage loans held by the Bank that were repurchased by the Bank’s PFIs totaled $0.5 million, $0.8 million and $1.3 million, respectively.
As of December 31, 2016 and 2015, MPF loans held for portfolio (net of allowance for credit losses) were $124 million and $55 million, respectively, representing approximately 0.2 percent and 0.1 percent, respectively, of the Bank’s total assets at each of those dates. Over time, the Bank expects to increase the balance of its mortgage loan portfolio to an amount that approximates 10 percent of its total assets. For the foreseeable future, the Bank intends to acquire a 100 percent interest in the mortgage loans that it purchases from its PFIs.
Core Mission Achievement
On July 14, 2015, the Finance Agency issued an Advisory Bulletin that provides guidance to the FHLBanks regarding core mission achievement. As stipulated in the Advisory Bulletin, the Finance Agency assesses each FHLBank’s core mission achievement by calculating the ratio of a FHLBank's primary mission assets (defined for this purpose as advances and mortgage loans held for portfolio) relative to its consolidated obligations (hereinafter referred to as the core mission asset or "CMA" ratio). The CMA ratio is calculated for each calendar year (beginning with the year ended December 31, 2015) using annual average par values.
The Advisory Bulletin also provides the Finance Agency’s expectations for each FHLBank’s strategic plan based on the FHLBank's CMA ratio, which are:
when the CMA ratio is 70 percent or higher, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining that level of core mission achievement;
when the CMA ratio is at least 55 percent but less than 70 percent, the strategic plan should explain the FHLBank’s plans to increase its mission focus; and
when the CMA ratio is below 55 percent, the strategic plan should include a robust explanation of the circumstances that caused the CMA ratio to be below that level, as well as a detailed description of the FHLBank's plans to increase the ratio. The Advisory Bulletin provides that if a FHLBank has a CMA ratio below 55 percent over the course of several consecutive reviews, then the FHLBank’s board of directors should consider possible strategic alternatives as part of its strategic planning.
Currently, the Bank's core mission assets are comprised almost entirely of advances. For the years ended December 31, 2016 and 2015, the Bank's CMA ratio was 60.74 percent and 55.96 percent. During the first six months of 2015, the amount of the Bank's short-term liquidity holdings was maintained at a level beyond that which was needed to satisfy Finance Agency liquidity requirements in order to generate additional earnings. In response to this Advisory Bulletin, the Bank has reduced somewhat the average amount of its short-term liquidity holdings and in so doing has reduced the amount of its outstanding consolidated obligations that were used to fund these non-mission investments. Further, average outstanding advances (at par

10


value) increased approximately 37 percent in 2016 as compared to 2015. The combination of the reduction in the Bank's short-term liquidity holdings and the increase in its average outstanding advances contributed to the increase in the Bank's CMA ratio from 2015 to 2016. As noted previously in the Acquired Member Assets section (and for reasons unrelated to the Advisory Bulletin), the Bank began to purchase mortgage loans through the MPF Program in early 2016. Over time, mortgage loan purchases are expected to increase the Bank's core mission assets. The Bank currently expects that its CMA ratio will approximate 62.5 percent for the year ending December 31, 2017.
Notwithstanding the negative impact that holding higher amounts of liquidity has on its CMA ratio, the Bank may from time to time maintain higher balances of liquidity if short-term debt markets are volatile or if, in management's judgment, they are expected to become more volatile, or if the returns from holding those higher balances are attractive. Further, the Bank does not currently intend to reduce the size of its long-term investment portfolio (which would have the effect of increasing the Bank's CMA Ratio but at the same time reducing its earnings), electing instead to focus on the continued growth of its advances and mortgage loans held for portfolio.
Funding Sources
General. The principal funding source for the Bank is consolidated obligations issued in the capital markets through the Office of Finance. Member deposits and the proceeds from the issuance of capital stock are also funding sources for the Bank. Consolidated obligations consist of consolidated obligation bonds and consolidated obligation discount notes. Discount notes are consolidated obligations with maturities of one year or less, and consolidated obligation bonds typically have maturities in excess of one year.
The Bank determines its participation in the issuance of consolidated obligations based upon, among other things, its own funding and operating requirements and the amounts, maturities, rates of interest and other terms available in the marketplace. The issuance terms for consolidated obligations are established by the Office of Finance, subject to policies established by its board of directors and the regulations of the Finance Agency. In addition, the Government Corporation Control Act provides that, before a government corporation issues and offers obligations to the public, the U.S. Secretary of the Treasury shall prescribe the form, denomination, maturity, interest rate, and conditions of the obligations, the way and time issued, and the selling price.
Consolidated obligation bonds generally satisfy long-term funding needs. Typically, the maturities of these securities range from 1 to 20 years, but their maturities are not subject to any statutory or regulatory limit. Consolidated obligation bonds can be fixed-rate or variable-rate and may be callable or non-callable.
Consolidated obligation bonds are issued and distributed through negotiated or competitively bid transactions with underwriters or bidding group members. The Bank receives 100 percent of the proceeds of bonds issued through direct negotiation with underwriters of System debt when it is the sole primary obligor on consolidated obligation bonds. When the Bank and one or more other FHLBanks jointly agree to the issuance of bonds directly negotiated with underwriters, the Bank receives the portion of the proceeds of the bonds agreed upon with the other FHLBanks; in those cases, the Bank is the primary obligor for a pro rata portion of the bonds based on the proceeds it receives. In these cases, the Bank records on its balance sheet only that portion of the bonds for which it is the primary obligor. The majority of the Bank’s consolidated obligation bond issuance has been conducted through direct negotiation with underwriters of System debt, and a majority of that issuance has been without participation by the other FHLBanks.
The Bank may also request that specific amounts of specific bonds be offered by the Office of Finance for sale through competitive auction conducted with underwriters that are bidding group members. One or more other FHLBanks may also request that amounts of these same bonds be offered for sale for their benefit through the same auction. The Bank may receive from zero to 100 percent of the proceeds of the bonds issued through competitive auction depending on the amounts and costs for the bonds bid by underwriters, the maximum costs the Bank or other FHLBanks, if any, participating in the same issue are willing to pay for the bonds, and Office of Finance guidelines for allocation of bond proceeds among multiple participating FHLBanks.
Consolidated obligation discount notes are a significant funding source for money market instruments and for advances with short-term maturities or repricing frequencies of less than one year. Discount notes are generally sold at a discount and mature at par, and are offered daily through a consolidated obligation discount notes selling group and through other authorized securities dealers.
On a daily basis, the Bank may request that specific amounts of consolidated obligation discount notes with specific maturity dates be offered by the Office of Finance at a specific cost for sale to securities dealers in the discount note selling group. One or more other FHLBanks may also request that amounts of discount notes with the same maturities be offered for sale for their benefit on the same day. The Office of Finance commits to issue discount notes on behalf of the participating FHLBanks when securities dealers in the selling group submit orders for the specific discount notes offered for sale. The Bank may receive from zero to 100 percent of the proceeds of the discount notes issued through this sales process depending on the maximum costs the

11


Bank or other FHLBanks, if any, participating in the same discount notes are willing to pay for the discount notes, the amounts of orders for the discount notes submitted by securities dealers, and Office of Finance guidelines for allocation of discount notes proceeds among multiple participating FHLBanks. Under the Office of Finance guidelines, FHLBanks generally receive funding on a first-come-first-served basis subject to threshold limits within each category of discount notes. For overnight discount notes, sales are allocated to the FHLBanks in lots of $250 million. For all other discount note maturities, sales are allocated in lots of $50 million. Within each category of discount notes, the allocation process is repeated until all orders are filled or canceled.
Twice weekly, the Bank may also request that specific amounts of consolidated obligation discount notes with fixed maturity dates ranging from 4 to 26 weeks be offered by the Office of Finance through competitive auctions conducted through securities dealers in the discount note selling group. One or more other FHLBanks may also request that amounts of those same discount notes be offered for sale for their benefit through the same auction. The discount notes offered for sale through competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. Prior to July 14, 2015, the FHLBanks received funding based on their requests at a weighted average rate of the winning bids from the dealers. On and after July 14, 2015, the FHLBanks receive funding at a single price based on a Dutch auction format. If the bids submitted are less than the total of the FHLBanks’ requests, the Bank receives funding based on the ratio of the Bank’s regulatory capital (defined on page 33 of this report) relative to the regulatory capital of the other FHLBanks offering discount notes. The majority of the Bank’s discount note issuance in maturities of four weeks or longer is conducted through the auction process. Regardless of the method of issuance, as with consolidated obligation bonds, the Bank is the primary obligor for the portion of discount notes issued for which it has received the proceeds.
On occasion, and as an alternative to issuing new debt, the Bank may assume the outstanding consolidated obligations for which other FHLBanks are the original primary obligors. This occurs in cases where the original primary obligor may have participated in a large consolidated obligation issue to an extent that exceeded its immediate funding needs in order to facilitate better market execution for the issue. The original primary obligor might then warehouse the funds until they were needed, or make the funds available to other FHLBanks. Transfers may also occur when the original primary obligor’s funding needs change, and that FHLBank offers to transfer debt that is no longer needed to other FHLBanks. Transferred debt is typically fixed-rate, fixed-term, non-callable debt, and may be in the form of discount notes or bonds. In connection with these transactions, the Bank becomes the primary obligor for the transferred debt.
The Bank participates in such transfers of funding from other FHLBanks when the transfer represents favorable pricing relative to a new issue of consolidated obligations with similar features. The Bank did not assume any consolidated obligations from other FHLBanks during the years ended December 31, 2016, 2015 or 2014.
In addition, the Bank occasionally transfers debt that it no longer needs to other FHLBanks. The Bank did not transfer any consolidated obligations to other FHLBanks during the years ended December 31, 2016, 2015 or 2014.
Joint and Several Liability. Although the Bank is primarily liable only for its portion of consolidated obligations (i.e., those consolidated obligations issued on its behalf and those that have been assumed from other FHLBanks), it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank with primary liability. The FHLBank with primary liability would have a corresponding liability to reimburse the FHLBank providing assistance to the extent of such payment and other associated costs (including interest to be determined by the Finance Agency). However, if the Finance Agency determines that the primarily liable FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. Consequently, the Bank has no means to determine how the Finance Agency might allocate the obligations of a FHLBank that is unable to pay consolidated obligations for which such FHLBank is primarily liable. In the event the Bank is holding a consolidated obligation as an investment for which the Finance Agency would allocate liability among the FHLBanks, the Bank might be exposed to a credit loss to the extent of its share of the assigned liability for that particular consolidated obligation (the Bank has not held any consolidated obligations of other FHLBanks as investments since 2008). If principal of or interest on any consolidated obligation issued by the FHLBank System is not paid in full when due, the Bank may not pay dividends to, or repurchase shares of stock from, any shareholder of the Bank.
The FHLBanks and the Office of Finance are parties to the Amended and Restated Federal Home Loan Banks P&I Funding and Contingency Plan Agreement which is designed to facilitate the timely funding of principal and interest payments on FHLBank System consolidated obligations in the event that a FHLBank is not able to meet its funding obligations in a timely manner.

12


For additional information regarding this agreement, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.
According to the Office of Finance, the 11 FHLBanks had (at par value) approximately $989 billion and $905 billion in consolidated obligations outstanding at December 31, 2016 and 2015, respectively. The Bank was the primary obligor on $54.1 billion and $38.6 billion (at par value), respectively, of these consolidated obligations.
Certification and Reporting Obligations. Under Finance Agency regulations, before the end of each calendar quarter and before paying any dividends for that quarter, the President and Chief Executive Officer of the Bank must certify to the Finance Agency that, based upon known current facts and financial information, the Bank will remain in compliance with its depository and contingent liquidity requirements and will remain capable of making full and timely payment of all current obligations (which includes the Bank’s obligation to pay principal of and interest on consolidated obligations) coming due during the next quarter. The Bank is required to provide notice to the Finance Agency if it (i) is unable to provide the required certification, (ii) projects at any time that it will fail to comply with its liquidity requirements or will be unable to meet all of its current obligations due during the quarter, (iii) actually fails to comply with its liquidity requirements or to meet all of its current obligations due during the quarter, or (iv) negotiates to enter into or enters into an agreement with one or more other FHLBanks to obtain financial assistance to meet its current obligations due during the quarter. The Bank has been in compliance with the applicable reporting requirements at all times since they became effective in 1999.
A FHLBank must file a consolidated obligation payment plan for the Finance Agency’s approval if (i) the FHLBank becomes a non-complying FHLBank as a result of failing to provide the required certification, (ii) the FHLBank becomes a non-complying FHLBank as a result of being required to provide the notice described above to the Finance Agency, except in the case of a failure to make a payment on a consolidated obligation caused solely by an external event such as a power failure, or (iii) the Finance Agency determines that the FHLBank will cease to be in compliance with its liquidity requirements or will lack the capacity to meet all of its current obligations due during the quarter.
A non-complying FHLBank is permitted to continue to incur and pay normal operating expenses in the regular course of business, but may not incur or pay any extraordinary expenses, or declare or pay dividends, or redeem any capital stock, until such time as the Finance Agency has approved the FHLBank’s consolidated obligation payment plan or inter-FHLBank assistance agreement, or ordered another remedy, and all of the non-complying FHLBank’s direct obligations have been paid.
Negative Pledge Requirements. Each FHLBank must maintain specified assets free from any lien or pledge in an amount at least equal to its participation in outstanding consolidated obligations. Eligible assets for this purpose include (i) cash; (ii) obligations of, or fully guaranteed by, the U.S. government; (iii) secured advances; (iv) mortgages having any guaranty, insurance, or commitment from the U.S. government or any related agency; and (v) investments described in Section 16(a) of the FHLB Act, which, among other items, include securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located. At December 31, 2016 and 2015, the Bank had eligible assets free from pledge of $57.3 billion and $41.7 billion, respectively, compared to its participation in outstanding consolidated obligations of $54.1 billion and $38.6 billion, respectively. In addition, the Bank was in compliance with its negative pledge requirements at all times during the years ended December 31, 2016, 2015 and 2014.
Office of Finance. The Office of Finance (“OF”) is a joint office of the 11 FHLBanks that executes the issuance of consolidated obligations, as agent, on behalf of the FHLBanks. The OF also services all outstanding consolidated obligation debt, serves as a source of information for the FHLBanks on capital market developments, manages the FHLBank System’s relationship with rating agencies as it pertains to the consolidated obligations, and prepares and distributes the annual and quarterly combined financial reports for the FHLBanks.
The OF’s board of directors is comprised of 16 directors: the 11 FHLBank presidents, who serve ex officio, and 5 independent directors, who each serve five-year terms that are staggered so that not more than one independent directorship is scheduled to become vacant in any one year. Independent directors are limited to two consecutive full terms. Independent directors must be United States citizens. As a group, the independent directors must have substantial experience in financial and accounting matters and they must not have any material relationship with any FHLBank or the OF.
One of the responsibilities of the board of directors of the OF is to establish policies regarding consolidated obligations to ensure that, among other things, such obligations are issued efficiently and at the lowest all-in funding costs for the FHLBanks over time consistent with prudent risk management practices and other market and regulatory factors.
The Finance Agency has regulatory oversight and enforcement authority over the OF and its directors and officers generally to the same extent as it has such authority over a FHLBank and its respective directors and officers. The FHLBanks are responsible for jointly funding the expenses of the OF, which are shared on a pro rata basis with two-thirds based on each FHLBank’s total consolidated obligations outstanding (as of each month end) and one-third divided equally among all of the FHLBanks.

13


Use of Interest Rate Exchange Agreements
Finance Agency regulations authorize and establish general guidelines for the FHLBanks’ use of derivative instruments, and the Bank’s Enterprise Market Risk Management Policy establishes specific guidelines for their use. The Bank can use interest rate swaps, swaptions, cap and floor agreements, calls, puts, and futures and forward contracts as part of its interest rate risk management and funding strategies. Regulations prohibit derivative instruments that do not qualify as hedging instruments pursuant to generally accepted accounting principles unless a non-speculative use is documented.
In general, the Bank uses interest rate exchange agreements in three ways: (1) by designating the agreement as a fair value hedge of a specific financial instrument or firm commitment; (2) by designating the agreement as a cash flow hedge of a forecasted transaction; or (3) by designating the agreement as a hedge of some defined risk in the course of its balance sheet management. For example, the Bank uses interest rate exchange agreements in its overall interest rate risk management activities to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets, including advances and investments, and/or to adjust the interest rate sensitivity of advances and investments to approximate more closely the interest rate sensitivity of its liabilities. In addition to using interest rate exchange agreements to manage mismatches between the coupon features of its assets and liabilities, the Bank uses interest rate exchange agreements to manage embedded options in assets and liabilities, to preserve the market value of existing assets and liabilities and to reduce funding costs.
The Bank frequently enters into interest rate exchange agreements concurrently with the issuance of consolidated obligation bonds and it simultaneously designates the agreement as a fair value hedge. This strategy of issuing bonds while simultaneously entering into interest rate exchange agreements enables the Bank to offer a wider range of attractively priced advances to its members. The attractiveness of such debt generally depends on yield relationships between the consolidated obligation bond and interest rate exchange markets. As conditions in these markets change, the Bank may alter the types or terms of the consolidated obligations that it issues.
In September 2015, the Bank began using interest rate exchange agreements to hedge the variability of cash flows associated with the forecasted issuances of consolidated obligation discount notes. Prior to September 2015, the Bank had not entered into cash flow hedges.
In addition, as discussed in the section above entitled “Products and Services,” the Bank offers interest rate swaps, caps and floors to its member institutions. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties.
For further discussion of interest rate exchange agreements, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Derivatives and Hedging Activities and the audited financial statements accompanying this report.
Competition
Demand for the Bank’s advances is affected by, among other things, the cost of other available sources of funds for its members, including deposits. The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including investment banking concerns, commercial banks and, in certain circumstances, other FHLBanks. Historically, sources of wholesale funds for its members have included unsecured long-term debt, unsecured short-term debt such as federal funds, repurchase agreements and deposits issued into the brokered certificate of deposit market. The availability of funds through these wholesale funding sources can vary from time to time as a result of a variety of factors including, among others, market conditions, members’ creditworthiness and availability of collateral. The availability of these alternative private funding sources could significantly influence the demand for the Bank’s advances. The Bank competes against other financing sources on the basis of cost, the relative ease by which the members can access the various sources of funds, collateral requirements, and the flexibility desired by the member when structuring the liability.
As a debt issuer, the Bank competes with Fannie Mae, Freddie Mac and other GSEs, as well as corporate, sovereign and supranational entities for funds raised in the national and global debt markets. Increases in the supply of competing debt products could, in the absence of increases in demand, result in higher debt costs for the FHLBanks. Although investor demand for FHLBank debt has historically been sufficient to meet the Bank’s funding needs, there can be no assurance that this will always be the case.
Capital
The Bank’s capital consists of capital stock owned by its members (and, in some cases, non-member borrowers or former members as described below), plus retained earnings and accumulated other comprehensive income (loss). Consistent with the FHLB Act and the Finance Agency's regulations, the Bank’s capital plan requires each member to own Class B stock (redeemable with five years’ written notice subject to certain restrictions) in an amount equal to the sum of a membership stock

14


requirement and an activity-based stock requirement. Specifically, the Bank’s Capital Plan requires members to hold capital stock in proportion to their total asset size and borrowing activity with the Bank.
The Bank’s capital stock is not publicly traded and it may be issued, repurchased, redeemed and, with the prior approval of the Bank, transferred only at its par value. In addition, the Bank’s capital stock may only be held by members of the Bank, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other obligations that remain outstanding or until any applicable stock redemption or withdrawal notice period expires.
On December 3, 2014, the Bank's Board of Directors adopted several amendments to the Bank’s Capital Plan, subject to approval by the Finance Agency and certain notification requirements. The Finance Agency approved the amendments to the Bank’s Capital Plan on June 1, 2015. Among other things, the Bank’s Capital Plan was amended to allow for the creation of two sub-classes of the Bank’s Class B Stock (Class B-1 Stock and Class B-2 Stock). On August 31, 2015, the Bank gave notice to its shareholders that the amended Capital Plan would be implemented and the two sub-classes of capital stock would be created on October 1, 2015.
On October 1, 2015, the Bank exchanged all shares of outstanding Class B Stock at the open of business on that date for an equal number of shares of capital stock consisting of shares of Class B-1 Stock and Class B-2 Stock allocated as described in the next sentence. For each shareholder, (i) a number of shares of existing Class B Stock in an amount sufficient to meet such shareholder's activity-based investment requirement were exchanged for an equal number of shares of Class B-2 Stock and (ii) all other outstanding shares of existing Class B Stock held by such shareholder were exchanged for an equal number of shares of Class B-1 Stock. Immediately following these exchanges, all shares of previously outstanding Class B Stock were retired.
From and after October 1, 2015, Class B-1 Stock is used to meet the membership investment requirement and Class B-2 Stock is used to meet the activity-based investment requirement. Subject to the limitations in the Capital Plan, the Bank converts shares of one sub-class of Class B Stock to the other sub-class of Class B Stock under the following circumstances: (i) shares of Class B-2 Stock held by a shareholder in excess of its activity-based investment requirement are converted into Class B-1 Stock, if necessary, to meet that shareholder’s membership investment requirement and (ii) shares of Class B-1 Stock held by a shareholder in excess of the amount required to meet its membership investment requirement are converted into Class B-2 Stock as needed in order to satisfy that shareholder’s activity-based investment requirement. All excess stock is held as Class B-1 Stock at all times.
For more information about the Bank’s minimum capital requirements, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk-Based Capital Rules and Other Capital Requirements.
Retained Earnings. The Bank has a retained earnings policy that calls for the Bank to maintain retained earnings in an amount at least sufficient to protect the par value of the Bank's capital stock against potential economic losses that could arise from a variety of designated risk factors. The Bank updates its retained earnings target calculations quarterly under an analytic framework that takes into account the potential losses for each risk factor at the 99 percent confidence stress level, or a stress scenario that approximates the 99th percentile. The Board of Directors reviews the Bank's retained earnings policy annually and revises the methodology as appropriate. The Bank’s current retained earnings policy target is described in Item 5 — Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
On February 28, 2011, the Bank entered into a Joint Capital Enhancement Agreement (the “JCE Agreement”) with the other FHLBanks. Effective August 5, 2011, the FHLBanks amended the JCE Agreement (the "Amended JCE Agreement"), and the Finance Agency approved an amendment to the Bank's Capital Plan to incorporate its provisions on that same date. The Amended JCE Agreement provides that the Bank (and each of the other FHLBanks) will, on a quarterly basis, allocate at least 20 percent of its net income to a separate restricted retained earnings account (“RRE Account”). Pursuant to the provisions of the Amended JCE Agreement, the Bank is required to build its RRE Account to an amount equal to one percent of its total outstanding consolidated obligations, which for this purpose is based on the most recent quarter’s average carrying value of all consolidated obligations, excluding hedging adjustments (“Total Consolidated Obligations”).
The Amended JCE Agreement provides that any quarterly net losses incurred by the Bank may be netted against its net income, if any, for other quarters during the same calendar year to determine the minimum required year-to-date or annual allocation to its RRE Account. In the event the Bank incurs a net loss for a cumulative year-to-date or annual period, the Bank may decrease the amount of its RRE Account such that the cumulative year-to-date or annual addition to its RRE Account is zero and the Bank shall apply any remaining portion of the net loss first to reduce retained earnings that are not restricted retained earnings until such retained earnings are reduced to zero, and thereafter may apply any remaining portion of the net loss to reduce its RRE Account. For any subsequent calendar quarter in the same calendar year, the Bank may decrease the amount of its quarterly allocation to its RRE Account in that subsequent calendar quarter such that the cumulative year-to-date addition to the RRE Account is equal to 20 percent of the amount of such cumulative year-to-date net income. In the event the Bank sustains a net loss for a calendar year, any such net loss first shall be applied to reduce retained earnings that are not restricted retained earnings until such retained earnings are reduced to zero, and thereafter any remaining portion of the net loss for the calendar

15


year may be applied to reduce the Bank’s RRE Account. If during a period in which the Bank’s RRE Account is less than one percent of its Total Consolidated Obligations, the Bank incurs a net loss for a cumulative year-to-date or annual period that results in a decrease to the balance of its RRE Account as of the beginning of that calendar year, the Bank’s quarterly allocation requirement shall thereafter increase to 50 percent of quarterly net income until the cumulative difference between the allocations made at the 50 percent rate and the allocations that would have been made at the regular 20 percent rate is equal to the amount of the decrease to the balance of its RRE Account at the beginning of that calendar year.
The Amended JCE Agreement provides that if the Bank’s RRE Account exceeds 1.5 percent of its Total Consolidated Obligations, the Bank may transfer amounts from its RRE Account to its unrestricted retained earnings account, but only to the extent that the balance of its RRE Account remains at least equal to 1.5 percent of the Bank’s Total Consolidated Obligations immediately following such transfer.
The Amended JCE Agreement further provides that the Bank may not pay dividends out of its RRE Account, nor may it reallocate or transfer amounts out of its RRE Account except as described above. In addition, during periods in which the Bank’s RRE Account is less than one percent of its Total Consolidated Obligations, the Bank may not pay dividends out of the amount of its quarterly net income that is required to be allocated to its RRE Account.
Dividends. Subject to the FHLB Act, Finance Agency regulations and other Finance Agency directives, the Bank pays dividends to holders of its capital stock quarterly or as otherwise determined by its Board of Directors. The Board of Directors may declare dividends at the same rate for all shares of Class B Stock, or at different rates for Class B-1 Stock and Class B-2 Stock, provided that in no event can the dividend rate on Class B-2 Stock be lower than the dividend rate on Class B-1 Stock. Dividends may be paid in the form of cash, additional shares of either, or both, sub-classes of Class B Stock, or a combination thereof as determined by the Bank’s Board of Directors. The dividend rates on Class B-1 Stock and Class B-2 Stock are paid on all shares of Class B-1 Stock and Class B-2 Stock, respectively, regardless of their classification for accounting purposes. The Bank is permitted by statute and regulation to pay dividends only from previously retained earnings or current net earnings, and the payment of dividends is also subject to the terms of the Amended JCE Agreement.
Because the Bank’s returns from net interest income (excluding net prepayment fees on advances) generally track short-term interest rates, the Bank benchmarks the dividend rate that it pays on capital stock to a short-term index. Prior to the implementation of the changes to its Capital Plan, the Bank had a long-standing practice of benchmarking the dividend rate that it paid on capital stock to the average federal funds rate. In conjunction with the changes to the Bank's Capital Plan, the Bank's Board of Directors adopted new dividend target ranges for the two sub-classes of Class B Stock. While there can be no assurances about future dividends or future dividend rates, the target for quarterly dividends on Class B-1 Stock is an annualized rate that approximates the average one-month LIBOR rate for the immediately preceding quarter, with the expectation that dividend rates on Class B-1 Stock will not be lower than an annualized rate of 0.375 percent (the rate that was paid on outstanding Class B shares from 2010 until their retirement). The target range for quarterly dividends on Class B-2 Stock is an annualized rate that approximates the average one-month LIBOR rate for the immediately preceding quarter plus 0.5 – 1.0 percent.
The Bank generally pays dividends in the form of capital stock. When dividends are paid, capital stock is issued in full shares and any fractional shares are paid in cash. For a more detailed discussion of the Bank’s dividend policy and the restrictions relating to its payment of dividends, see Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Legislative and Regulatory Developments
Finance Agency Actions
Final Rule on FHLBank Membership
On January 20, 2016, the Finance Agency issued a final rule that, among other things:
makes captive insurance companies ineligible for FHLBank membership; and
subject to specified exceptions, defines the “principal place of business” of an institution eligible for FHLBank membership to be the state in which it maintains its home office and from which the institution conducts business operations.
The rule defines a captive insurance company as a company that is authorized under state law to conduct an insurance business but whose primary business is the underwriting of insurance for affiliated persons or entities.
Captive insurance company members that were admitted as FHLBank members prior to September 12, 2014 (the date of the Finance Agency's proposed rule on FHLBank Membership) will have their memberships terminated by February 18, 2021. For these institutions, the rule restricts the level and maturity of advances that FHLBanks can make during the five-year sunset

16


period. Captive insurance company members that were admitted as FHLBank members on or after September 12, 2014 had their memberships terminated by February 18, 2017.
In the final rule, which became effective on February 19, 2016, the Finance Agency elected not to adopt certain proposed provisions that would have required FHLBank members to hold specified levels of home mortgage loan assets on an ongoing basis.
The Bank does not have any captive insurance company members and the other provisions of the final rule have not had any impact on the Bank's existing members.
Joint Proposed Rule on Incentive-Based Compensation Arrangements
On April 26, 2016, the Finance Agency, jointly with five other federal regulators, published a proposed rule in response to Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), which requires implementation of regulations or guidelines to: (1) prohibit incentive-based payment arrangements that encourage inappropriate risks by certain financial institutions and (2) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator.
The proposed rule identifies three categories of institutions that would be covered by these regulations based on average total consolidated assets, applying less prescriptive incentive-based compensation program requirements to the smallest covered institutions (Level 3) and progressively more rigorous requirements to the larger covered institutions (Level 1). Under the proposed rule, the Bank would fall into the middle category (Level 2). The proposed rule would supplement existing Finance Agency executive compensation rules.
The proposed rule would prohibit the Bank from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risks by “senior executive officers” and “significant risk-takers” (each as defined in the proposed rule, and together, “covered persons”) that could lead to a material financial loss at the Bank.
If adopted in its current form, the proposed rule would, among other things, impose requirements relating to the Bank’s incentive-based compensation arrangements for covered persons, including the following:
mandatory deferrals of 50 percent and 40 percent of annual and long-term incentive-based compensation payments for senior executive officers and significant risk takers, respectively, over no less than three years for annual incentive-based compensation and one year for compensation awarded under a long-term incentive plan;
risk of downward adjustment and forfeiture of awards;
clawbacks of vested compensation; and
limits on the maximum incentive-based compensation opportunities.
Comments on the proposed rule were due by July 22, 2016.
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 a FHLBank to an officer, director, employee, or other entity-affiliated party in connection with an administrative proceeding or civil action initiated by the Finance Agency is prohibited or permissible. Under the proposed rule, those payments would only be 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 that a board of directors must undertake prior to making any permitted indemnification payment for expenses of defending an action initiated by the Finance Agency.
Comments on the proposed rule were due by December 21, 2016.

17


Final Rule on Acquired Member Assets
On December 19, 2016, the Finance Agency issued a revised AMA Regulation, which governs a FHLBank’s ability to purchase and hold certain types of mortgage loans from its members. The rule, which became effective on January 18, 2017, replaced the previous AMA Regulation which had been in effect since 2000. Among other things, the new AMA Regulation:
expands the types of assets that 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;
enhances the credit risk sharing requirement by allowing a FHLBank to utilize its own model in lieu of an NRSRO ratings model to determine the credit enhancement for AMA loan assets and loan pools. Delivered assets must now be credit enhanced by the member up to “AMA investment grade” (as determined by the FHLBank) rather than a specific NRSRO rating; and
retains the option to allow a member to meet its credit enhancement obligation by purchasing loan level SMI or pool level insurance, but only after a FHLBank has established standards for qualified insurers.
The Bank does not anticipate that the new AMA Regulation will have a significant impact (positive or negative) on the volume of its future mortgage loan purchases. In addition, the Bank's current credit enhancement levels comply with the new AMA Regulation.
Final Rule on New Business Activities
On December 19, 2016, the Finance Agency issued a final rule that, among other things, reduces the scope of new business activities ("NBAs") for which a FHLBank must seek approval from the Finance Agency. In addition, the final rule establishes certain timelines for the Finance Agency's review and approval of NBA notices. The final rule also clarifies the protocol for the Finance Agency's review of NBAs. Under the final rule, which became effective on January 18, 2017, acceptance of new types of legally permissible collateral by the FHLBanks will no longer constitute a new business activity or require approval from the Finance Agency prior to acceptance. Instead, the Finance Agency will review new collateral types as part of its annual exam process.
Other Developments
Joint Final Rule on Margin and Capital Requirements for Covered Swap Entities
In October 2015, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC, the Farm Credit Administration, and the Finance Agency (each an “Agency” and, collectively, the “Agencies”) jointly adopted final rules to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants that are subject to the jurisdiction of one of the Agencies (such entities, “Covered Swap Entities,” and the joint final rules, the “Final Margin Rules”).
When they take effect, the Final Margin Rules will subject non-cleared derivatives and non-cleared security-based derivatives between Covered Swap Entities and financial end-users that have material derivatives exposure (i.e., an average daily aggregate notional of $8 billion or more in non-cleared derivatives calculated in accordance with the Final Margin Rules) to a mandatory two-way minimum initial margin requirement. The minimum amount of the initial margin required to be posted or collected would be either the amount calculated by the Covered Swap Entity using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model of the Covered Swap Entity conforming to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction over the particular Covered Swap Entity.
The Final Margin Rules specify the types of collateral that may be posted or collected as initial margin for non-cleared derivatives and non-cleared security-based derivatives with financial end-users (generally cash, certain government and GSE securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold) and set forth haircuts for certain collateral asset classes. Initial margin must be segregated with an independent, third-party custodian and, generally, may not be rehypothecated, except that cash may be placed with a custodian bank in return for a general deposit obligation under certain specified circumstances.
The Final Margin Rules will require minimum variation margin to be exchanged daily for non-cleared derivatives and non-cleared security-based derivatives between Covered Swap Entities and all financial end-users (without regard to the derivatives exposure of the particular financial end-user). The minimum variation margin amount is the daily mark-to-market change in the value of the derivative to the Covered Swap Entity, taking into account variation margin previously posted or collected. For non-cleared derivatives and security-based derivatives between Covered Swap Entities and financial end-users, variation margin may be posted or collected in cash or non-cash collateral that is considered eligible for initial margin purposes.

18


Variation margin is not subject to segregation with an independent, third-party custodian and may, if permitted by contract, be rehypothecated.
The variation margin requirement under the Final Margin Rules became effective for the Bank on March 1, 2017. Because the Bank was already posting and collecting variation margin on non-cleared derivatives, the implementation of the variation margin requirement under the Final Margin Rules did not have a significant impact on the Bank.
The initial margin requirement under the Final Margin Rules is expected to become effective for the Bank on September 1, 2020. While the Bank is not a Covered Swap Entity under the Final Margin Rules, it is a financial end-user under those rules, and it is likely that it will have material derivatives exposure when the initial margin requirements become effective. As a result, the Bank anticipates that its costs of engaging in non-cleared derivatives may increase at that time.
The Commodity Futures Trading Commission (“CFTC”) and the SEC are expected to adopt their own versions of the Final Margin Rules that will be comparable to the Final Margin Rules. The CFTC’s and SEC’s rules will only apply to a limited number of registered swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants that are not subject to the jurisdiction of one of the Agencies.
Joint Proposed Rule Regarding Net Stable Funding Ratio
On May 3, 2016, the Federal Reserve Board ("FRB"), the Department of Treasury and the FDIC jointly issued a proposed rule that would implement a stable funding requirement for large and internationally active banking organizations. The net stable funding ratio ("NSFR") would require institutions to maintain liquidity to match their assets over a one-year time horizon. The FRB is proposing a modified NSFR requirement for bank holding companies and certain savings and loan holding companies that, in each case, have more than $50 billion but less than $250 billion in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure. If adopted in its current form, the proposed rule would provide that secured funding with maturities between six months and one year, including FHLBank advances, would be assigned 50 percent liquidity credit for purposes of calculating compliance with the NSFR, which could affect demand for the Bank’s advances.
Comments on the proposed rule were due by August 5, 2016.
Final Rule Establishing Margin Requirements for the TBA Market
On June 15, 2016, the SEC approved a rule that was proposed by the Financial Industry Regulatory Authority (“FINRA”) which will require the margining of certain “to-be-announced” (“TBA”) transactions. Specifically, FINRA Rule 4210 will require FINRA members to collect from, but not post to, their customer’s maintenance margin (i.e., initial margin) and variation margin on transactions that are “Covered Agency Transactions,” subject to certain exemptions. A “Covered Agency Transaction” includes:
TBA transactions inclusive of ARM transactions and Specified Pool Transactions (each as defined by FINRA rules) for which the difference between the trade date and contractual settlement date is greater than one business day; and
Collateralized mortgage obligations issued in conformity with a program of an agency or a GSE for which the difference between the trade date and contractual settlement date is greater than three business days.
Covered Agency Transactions with a counterparty in multifamily housing securities are exempt from the margin requirements provided that certain requirements are met.
Under the rule, the Bank is exempt from posting initial margin but would be required to post variation margin to its FINRA-member counterparty in connection with any Covered Agency Transactions, provided the Bank has more than $10 million in gross open positions with the counterparty.
FINRA members will be required to comply with the new margin requirements beginning in December 2017.
Regulatory Oversight
As discussed above, the Finance Agency supervises and regulates the FHLBanks and the OF. The Finance Agency has a statutory responsibility and corresponding authority to ensure that the FHLBanks operate in a safe and sound manner. Consistent with that duty, the Finance Agency has an additional responsibility to ensure the FHLBanks carry out their housing and community development finance mission. In order to carry out those responsibilities, the Finance Agency establishes regulations governing the entire range of operations of the FHLBanks, conducts ongoing off-site monitoring and supervisory reviews, performs annual on-site examinations and periodic interim on-site reviews, and requires the FHLBanks to submit monthly and quarterly information regarding their financial condition, results of operations and risk metrics.
The Comptroller General of the United States (the “Comptroller General”) has authority under the FHLB Act to audit or examine the Finance Agency and the Bank and to decide the extent to which they fairly and effectively fulfill the purposes of the FHLB Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of a FHLBank’s financial statements conducted by an independent registered public accounting firm. If the Comptroller

19


General conducts such a review, then he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget, and the FHLBank in question. The Comptroller General may also conduct his or her own audit of the financial statements of any FHLBank.
As an SEC registrant, the Bank is subject to the periodic reporting and disclosure regime as administered and interpreted by the SEC. The Bank must also submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General; these reports are required to include a statement of financial condition, a statement of operations, a statement of cash flows, a statement of internal accounting and administrative control systems, and the report of the independent registered public accounting firm on the financial statements. In addition, the Treasury receives the Finance Agency’s annual report to Congress and other reports reflecting the operations of the FHLBanks.
Employees
As of December 31, 2016, the Bank employed 218 people, all but two of whom were located in one office in Irving, Texas. None of the Bank’s employees are subject to a collective bargaining agreement and the Bank believes its relationship with its employees is good.
AHP Assessments
Although the Bank is exempt from all federal, state, and local income taxes, the FHLB Act requires each FHLBank to establish and fund an AHP. Annually, the FHLBanks must collectively set aside for the AHP the greater of $100 million or 10 percent of their current year’s income before AHP expenses. Interest expense on capital stock that is classified as a liability (i.e., mandatorily redeemable capital stock) is added back to income for purposes of computing the Bank’s AHP assessment. The Bank’s AHP funds are made available to members in the form of direct grants to assist in the purchase, construction, or rehabilitation of housing for very low-, low- and moderate-income households.
Business Strategy and Outlook
The Bank maintains a Strategic Business Plan that provides the framework for its future business direction. The goals and strategies for the Bank’s major business activities are encompassed in this plan, which is updated and approved by the Board of Directors at least annually and at any other time that revisions are deemed necessary.
As described in its Strategic Business Plan, the Bank operates under a cooperative business model that is intended to maximize the overall value of membership in the Bank. This business model envisions that the Bank will limit and carefully manage its risk profile while generating sufficient profitability to maintain an appropriate level of retained earnings, to pay dividends on Class B-1 Stock at a rate at least equal to average one-month LIBOR (subject to a floor of 0.375 percent) and on Class B-2 Stock at a rate at least equal to average one-month LIBOR plus 0.5-1.0 percent, and to absorb periodic earnings volatility related to hedging and derivatives or other external shocks. Consistent with this business model, the Bank places the highest priority on being able to meet its members’ liquidity and funding needs.
The Bank intends to continue to operate under its cooperative business model for the foreseeable future. The Bank’s earnings are typically expected to rise and fall with the general level of market interest rates, particularly short-term money market rates. Developments that may have an effect on the extent to which the Bank’s return on average capital stock exceeds short-term interest rates include general economic and credit market conditions; the level, volatility of and relationships between short-term money market rates such as federal funds and one-month and three-month LIBOR; the future availability and cost of the Bank’s long-term debt relative to benchmark rates such as LIBOR; the availability of interest rate exchange agreements at competitive prices; whether the Bank’s larger borrowers continue to be members of the Bank and the level at which they maintain their borrowing activity; the impact of any future credit market disruptions; and the impact of ongoing economic conditions on demand for the Bank’s credit products from its members.
During 2014, 2015 and 2016, the Bank's lending activities expanded due to increased demand for loans at member institutions which the Bank attributes to improving economic conditions, more robust activity in the housing markets served by its members and increased usage of advances to fund investment activities and members' liquidity requirements. However, advances outstanding remain well below the peak levels experienced in 2008, due largely to high deposit levels at member institutions. If high deposit levels persist, the demand for advances may remain subdued. Alternatively, continued improvement in regional economic conditions may have a positive impact on advance demand. While the Bank cannot predict future economic conditions or future levels of advances demand from its members, based on its current expectations the Bank anticipates that its earnings will be sufficient both to pay quarterly dividends at targeted levels and to continue building retained earnings for the foreseeable future.
While the Bank’s primary focus will be to continue to prudently meet the liquidity and funding needs of its members, the Bank continues to consider ways in which it can enhance its product and/or service offerings in order to become a more valuable resource to its members. To this end, the Bank introduced fluctuating balance letters of credit in 2014, several new advance products in 2014 and 2015 and, in 2016, it began purchasing mortgage loans from its members and it introduced a new deposit

20


product. The FHLB Act and Finance Agency regulations limit the products and services that the Bank can offer to its members and govern many of the terms of the products and services that the Bank offers. The Bank is also required by regulation to file NBA notices with the Finance Agency for any new products or services that would constitute new business activities under the regulation (as recently revised) and, therefore, it will have to assess any potential new products or services offerings in light of these statutory and regulatory restrictions.

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

21


in which the acquired institutions are merged into institutions located outside our district with which we cannot do business. We could also be adversely impacted by the reduction in business volume that would arise from the failure of one or more of our members.
The loss of one or more borrowers that represent a significant proportion of our business, or a significant reduction in the borrowing levels of one or more of these borrowers, could, depending on the magnitude of the impact, cause us to lower dividend rates, raise advances rates, attempt to reduce operating expenses (which could cause a reduction in service levels), or undertake some combination of these actions. The magnitude of the impact would depend, in part, on our size and profitability at the time such institution repays its advances to us.
Members’ funding needs may decline, which could reduce loan demand and adversely affect our earnings.
Market factors or regulatory changes could reduce loan demand from our member institutions, which could adversely affect our earnings. Demand for advances from all segments of our membership increased throughout the period of credit market disruption that began in the third quarter of 2007, peaked at the beginning of the fourth quarter of 2008 and declined to a cyclical low in the first quarter of 2014 before increasing over the remainder of 2014 and in 2015 and 2016. At December 31, 2016, our outstanding advances were approximately 52 percent lower than they were at September 30, 2008 but approximately 114 percent higher than they were at March 31, 2014. Continued high deposit levels and/or low demand for loans at member institutions could limit members’ needs for funding. A decline in the demand for advances, if significant, could negatively affect our results of operations.
We face competition for loan demand, which could adversely affect our earnings.
Our primary business is making advances to our members. We compete with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks and, in certain circumstances, other FHLBanks. Our members have access to alternative funding sources, which may provide more favorable terms than we do on our advances, including more flexible credit or collateral standards.
The availability to our members of alternative funding sources that are more attractive than the funding products offered by us may significantly decrease the demand for our advances. Any change made by us in the pricing of our advances in an effort to compete more effectively with these competitive funding sources may decrease the profitability on advances. A decrease in the demand for advances or a decrease in our profitability on advances would negatively affect our financial condition and results of operations.
Changes in investors’ perceptions of the creditworthiness of the FHLBanks may adversely affect our ability to issue consolidated obligations on favorable terms.
We, and the other ten FHLBanks, currently have the highest credit rating from Moody’s and are rated AA+/A-1+ by S&P. The consolidated obligations issued by the FHLBanks are rated Aaa/P-1 by Moody’s and AA+/A-1+ by S&P. Each of these NRSROs has assigned a stable outlook to its long-term credit rating on the FHLBank System's consolidated obligations and to its long-term rating of each of the FHLBanks.
Pursuant to criteria used by S&P and Moody's, the FHLBank System's debt rating and the credit ratings of the individual FHLBanks are linked closely to the U.S. sovereign credit rating because of the FHLBanks' GSE status. The U.S. government's fiscal challenges could negatively impact the credit rating of the U.S. government, which could in turn result in a downgrade of the rating assigned to us and/or the consolidated obligations of the FHLBank System.
Because the FHLBanks have joint and several liability for all of the FHLBanks' consolidated obligations, negative developments at any FHLBank could also adversely affect S&P's and/or Moody's credit ratings on us and/or the FHLBanks' consolidated obligations or result in one or both of these NRSROs issuing a negative credit report on the FHLBank System.
Our primary source of liquidity is the issuance of consolidated obligations. Historically, the FHLBank System’s status as a GSE and its favorable credit ratings have provided us with excellent access to the capital markets. Any downgrades of the FHLBank System’s consolidated obligations by S&P and/or Moody’s, negative guidance from the rating agencies, or negative announcements by one or more of the FHLBanks could result in higher funding costs and/or disruptions in our access to the capital markets. To the extent that we cannot access funding when needed on acceptable terms, our financial condition and results of operations could be adversely impacted.
Changes in overall credit market conditions and/or competition for funding may adversely affect our cost of funds and our access to the capital markets.
The cost of our consolidated obligations depends in part on prevailing conditions in the capital markets at the time of issuance, which are generally beyond our control. For instance, a decline in overall investor demand for debt issued by the FHLBanks and similar issuers could adversely affect our ability to issue consolidated obligations on favorable terms. Investor demand is influenced by many factors including changes or perceived changes in general economic conditions, changes in investors’ risk

22


tolerances or balance sheet capacity, or, in the case of overseas investors, changes in preferences for holding dollar-denominated assets. Credit market disruptions similar to those that occurred during the period from late 2007 through early 2009 and which dampened investor demand for longer-term debt, including longer-term FHLBank consolidated obligations, could occur again, making it more difficult for us to match the maturities of our assets and liabilities. In addition, changes in the relationships between the cost of our consolidated obligations and interest rate swaps could increase our net cost of funds, which could negatively impact our results of operations. Further, higher long-term debt costs could cause us to fund some long-term assets with short-term debt, creating mismatches between the maturities of our assets and liabilities.
We compete with Fannie Mae, Freddie Mac and other GSEs, as well as commercial banking, corporate, sovereign and supranational entities for funds raised through the issuance of unsecured debt in the global debt markets. Increases in the supply of competing debt products may, in the absence of increased investor demand, result in higher debt costs, which could negatively affect our financial condition and results of operations. Further, if investors limit their demand for our debt, our ability to fund our operations and to meet the credit and liquidity needs of our members by accessing the capital markets could eventually be compromised.
Our inability to issue consolidated obligations for a relatively short period of time could jeopardize our ability to continue operating.
We typically issue consolidated obligations almost every day. As more fully described in the Liquidity and Capital Resources section of this report, we manage our liquidity to ensure that, at a minimum, we have sufficient funds to meet our obligations under 5- and 15-day scenarios in which we assume we are unable to access the market for consolidated obligations. We also maintain access to other sources of contingent liquidity. However, if we were unable to issue consolidated obligations for an extended period of time and our other sources of contingent liquidity were either not available or were not available in sufficient quantities, our ability to meet our obligations and otherwise conduct our operations would be compromised.
Our joint and several liability for all consolidated obligations may adversely impact our earnings, our ability to pay dividends, and our ability to redeem or repurchase capital stock.
Under the FHLB Act and Finance Agency regulations, we are jointly and severally liable with the other FHLBanks for the consolidated obligations issued by the FHLBanks through the Office of Finance regardless of whether we receive all or any portion of the proceeds from any particular issuance of consolidated obligations.
If another FHLBank were to default on its obligation to pay principal of or interest on any consolidated obligations, the Finance Agency may allocate the outstanding liability among one or more of the remaining FHLBanks on a pro rata basis or on any other basis the Finance Agency may determine. In addition, the Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. Accordingly, we could incur significant liability beyond our primary obligation under consolidated obligations due to the failure of other FHLBanks to meet their payment obligations, which could negatively affect our financial condition and results of operations.
Further, the FHLBanks may not pay any dividends to members or redeem or repurchase any shares of stock unless the principal and interest due on all consolidated obligations has been paid in full. Accordingly, our ability to pay dividends or to redeem or repurchase stock could be affected not only by our own financial condition but also by the financial condition of one or more of the other FHLBanks.
Exposure to credit risk on our investments and MPF loans could have a negative impact on our profitability and financial condition.
We are exposed to credit risk from our MPF loans held in portfolio (the balance of which is expected to continue to grow) and our secured and unsecured investment portfolio. A deterioration of economic conditions, declines in residential real estate values, changes in monetary policy or other events that could negatively impact the economy and the markets as a whole could lead to borrower defaults, which in turn could cause us to incur losses on our MPF loans or additional losses on our investment portfolio.
During 2009, 2010 and 2011, delinquencies and losses with respect to residential mortgage loans generally increased and residential property values declined in many states. Due to these deteriorating conditions, 14 of our non-agency residential mortgage-backed securities were deemed to be other-than-temporarily impaired during the period from January 1, 2009 through June 30, 2012. One additional non-agency residential mortgage-backed security was deemed to be other-than-temporarily impaired at December 31, 2014, at each quarter-end in 2015 and at the first three quarter-ends in 2016. We recognized credit losses on these securities totaling $13.1 million. As of December 31, 2016, the unpaid principal balance of the Bank's 24 non-agency residential mortgage-backed securities totaled $124 million.
If the actual and/or projected performance of the loans underlying our non-agency residential mortgage-backed securities is worse than our current expectations, we could recognize additional losses on these 15 securities as well as losses on our other

23


investments in non-agency residential mortgage-backed securities, which would negatively impact our results of operations and financial condition.
In addition, if delinquencies, default rates and loss severities on residential mortgage loans increase, and/or there is a decline in residential real estate values, we could experience losses on our MPF loans held in portfolio.
Changes in the regulatory environment could negatively impact our operations and financial results and condition.
On July 21, 2010, Barack Obama, then President of the United States, signed into law the Dodd-Frank Act, which makes significant changes to a number of aspects of the regulation of financial institutions. This legislation contains several provisions that either have had or could have an impact on us and/or our members. Because the Dodd-Frank Act requires several entities (among them, the Financial Stability Oversight Council, the Board of Governors of the Federal Reserve System, and the SEC) to issue a number of regulations, orders, determinations, and reports, the full effect of this legislation on us and our activities, and on our members and their activities, will become known only after all of the required regulations, orders, determinations, and reports are issued and implemented. On February 3, 2017, Donald Trump, as President of the United States, signed an executive order that directs federal agencies to evaluate and restructure some of the regulations that have been implemented pursuant to the Dodd-Frank Act. The impact, if any, that this executive order will ultimately have on rules that have either been implemented or are now pending in response to the Dodd-Frank Act and the resulting impact on us and/or our members, if any, is uncertain.
We could be materially adversely affected by the adoption of new laws, policies or regulations or changes in existing laws, policies or regulations, including, but not limited to, changes in the interpretations or applications by the Finance Agency or as the result of judicial reviews that modify the present regulatory environment. For instance, since 2013, several housing reform proposals have been introduced by members of the U.S. Congress. It is not possible to determine if or when legislation regarding housing reform will be enacted, nor are the ultimate provisions of any such legislation determinable at this time. To the extent that legislation is enacted, it is possible that the FHLBanks could be impacted.
In addition, the regulatory environment affecting our members could change in a manner that could have a negative impact on their ability to own our stock or take advantage of our products and services.
For a discussion of recent legislative and regulatory developments, see Item 1 — Business — Legislative and Regulatory Developments beginning on page 16 of this report.
Changes in our access to the interest rate derivatives market on acceptable terms may adversely affect our ability to maintain our current hedging strategies.
We actively use derivative instruments to manage interest rate risk. The effectiveness of our interest rate risk management strategy depends to a significant extent upon our ability to enter into these instruments with acceptable counterparties in the necessary quantities and under satisfactory terms to hedge our corresponding assets and liabilities. We currently enjoy ready access to the market for uncleared interest rate derivatives through a diverse group of investment grade rated counterparties. Several factors could have an adverse impact on our access to this market, including changes in our credit rating, changes in the current counterparties’ credit ratings, reductions in our counterparties’ allocation of resources to the interest rate derivatives business, and changes in the liquidity of that market created by a variety of regulatory or market factors. In addition, the financial market disruptions that occurred during the period from late 2007 through early 2009 resulted in mergers of several of our derivatives counterparties. Further consolidation of the financial services industry, if it occurs, could increase our concentration risk with respect to counterparties in this industry. Further, defaults by, or even negative rumors or questions about, one or more financial services institutions, or the financial services industry in general, could lead to market-wide disruptions in which it may be difficult for us to find acceptable counterparties for such transactions. If changes in our access to the derivatives market result in our inability to manage our hedging activities efficiently and economically, we may be unable to find economical alternative means to manage our interest rate risk effectively, which could adversely affect our financial condition and results of operations.
Prior to June 10, 2013, all of the derivatives we used to manage our interest rate risk were negotiated in the over-the-counter (“OTC”) derivatives market. Beginning on June 10, 2013, many of the derivative transactions that we enter into are required to be cleared through a third-party clearinghouse, which exposes us to credit risk to other parties that we do not have when transacting in the OTC market. In addition, many of the other derivatives that we continue to trade in the OTC market could eventually be subject to central clearing. For our derivative transactions that are not cleared, we will be subject to an initial margin requirement beginning in September 2020 if those transactions have an aggregate notional balance of $8 billion or more. If applicable, this requirement may increase our hedging costs, which would negatively impact our results of operations.

24


Defaults by or the insolvency of one or more of our derivative counterparties could adversely affect our profitability and financial condition.
We regularly enter into derivative transactions with major financial institutions and third-party clearinghouses. Our financial condition and results of operations could be adversely affected if derivative counterparties to whom we have exposure fail.
We have entered into master agreements with all of our non-member bilateral derivative counterparties that require the delivery (or return) of collateral consisting of cash or very liquid, highly rated securities if credit risk exposures rise above certain minimum amounts (generally ranging from $100,000 to $500,000). Upon a request made by the unsecured counterparty, the party that has the unsecured obligation to the counterparty bearing the risk of the unsecured credit exposure must deliver sufficient collateral to reduce the unsecured credit exposure to zero. In addition, excess collateral must be returned by a party in an oversecured position. Delivery or return of the collateral generally occurs within one business day and, until such delivery or return, we may be in an undersecured position, which could result in a loss in the event of a default by the counterparty, or we may be due excess collateral, which could result in a loss in the event that the counterparty is unable or unwilling to return the collateral.
Cleared trades are subject to initial and variation margin requirements established by the clearinghouse and its clearing members. Collateral is delivered (or returned) daily and, unlike bilateral derivatives, is not subject to any maximum unsecured credit exposure thresholds. With cleared transactions, we are exposed to credit risk in the event that the clearinghouse or the clearing member fails to meet its obligations to us.
Because derivative valuations are determined based on market conditions at particular points in time, they can change quickly. Even after the delivery or return of collateral, we may be in an undersecured position, or be due the return of excess collateral, as the values upon which the delivery or return was based may have changed since the valuation was performed. In addition, we may incur additional losses if any non-cash collateral held by us cannot be readily liquidated at prices that are sufficient to fully recover the value of the derivatives. Further, the initial margin that we are required to post with third-party clearinghouses is over and above the amount of collateral (i.e., variation margin) that is needed to fully secure the value of our derivative positions and therefore exposes us to additional credit risk in the event that the clearinghouse or clearing member fails.
An interruption in our access to the capital markets would limit our ability to obtain funds.
We conduct our business and fulfill our public purpose primarily by acting as an intermediary between our members and the capital markets. Certain events, such as a natural disaster or terrorist act, could limit or prevent us from accessing the capital markets in order to issue consolidated obligations for some period of time. An event that precludes us from accessing the capital markets may also limit our ability to enter into transactions to obtain funds from other sources. External forces are difficult to predict or prevent, but can have a significant impact on our ability to manage our financial needs and to meet the credit and liquidity needs of our members.
A failure or interruption in our information systems or other technology may adversely affect our ability to conduct and manage our business effectively.
We rely heavily upon information systems and other technology to conduct and manage our business and deliver a very large portion of our services to members on an automated basis. Our operations rely on the secure processing, storage and transmission of confidential and other information in computer systems and networks. Computer systems, software and networks can be vulnerable to failures and interruptions, including "cyberattacks" (e.g., breaches, unauthorized access, misuse, computer viruses or other malicious code and other events) that could jeopardize the confidentiality or integrity of information, or otherwise cause interruptions or malfunctions in operations. To the extent that we experience a failure or interruption in any of these systems or other technology, we may be unable to conduct and manage our business effectively, including, without limitation, our hedging and advances activities. We can make no assurance that we will be able to prevent or timely and adequately address any such failure or interruption. Any failure or interruption could significantly harm our customer relations, reputation, risk management, and profitability, which could negatively affect our financial condition and results of operations.
Lack of a public market and restrictions on transferring our stock could result in an illiquid investment for the holder.
Under the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”), Finance Agency regulations, and our capital plan, our stock may be redeemed upon the expiration of a five-year redemption period following a redemption request. Only stock in excess of a member’s minimum investment requirement, stock held by a member that has submitted a notice to withdraw from membership, or stock held by a member whose membership has been terminated may be redeemed at the end of the redemption period. Further, we may elect to repurchase excess stock of a member at any time at our sole discretion.
There is no guarantee, however, that we will be able to redeem stock held by an investor even at the end of the redemption period. If the redemption or repurchase of the stock would cause us to fail to meet our minimum capital requirements, then the redemption or repurchase is prohibited by Finance Agency regulations and our capital plan. Likewise, under such regulations and the terms of our capital plan, we could not honor a member’s capital stock redemption notice if the redemption would

25


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

26


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

ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

27



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

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

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

28


PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Bank is a cooperative and all of its outstanding capital stock, which is known as Class B Stock, is owned by its members or, in some cases, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other extensions of credit that remain outstanding or until any applicable stock redemption or withdrawal notice period expires. All members must hold stock in the Bank. All of the Bank’s shareholders are financial institutions; no individual may own any of the Bank’s capital stock. The Bank’s capital stock is not publicly traded, nor is there an established market for the stock. The Bank’s capital stock has a par value of $100 per share and it may be purchased, redeemed, repurchased and transferred only at its par value. By regulation, the parties to a transaction involving the Bank’s stock can include only the Bank and its member institutions (or non-member institutions or former members, as described above). While a member could transfer stock to another member of the Bank, such transfer could occur only upon approval of the Bank and then only at par value. Members may redeem excess stock, or withdraw from membership and redeem all outstanding capital stock, with five years' written notice to the Bank. The Bank does not issue options, warrants or rights relating to its capital stock, nor does it provide any type of equity compensation plan. As of March 17, 2017, the Bank had 841 shareholders and 20,838,015 shares of capital stock outstanding.
On December 3, 2014, the Bank's Board of Directors adopted several amendments to the Bank’s Capital Plan, subject to approval by the Finance Agency and certain notification requirements. The Finance Agency approved the amendments to the Bank’s Capital Plan on June 1, 2015. Among other things, the Bank’s Capital Plan was amended to allow for the creation of two sub-classes of the Bank’s Class B Stock (Class B-1 Stock and Class B-2 Stock). On August 31, 2015, the Bank gave notice to its shareholders that the amended Capital Plan would be implemented and the two sub-classes of capital stock would be created on October 1, 2015.
On October 1, 2015, the Bank exchanged all shares of outstanding Class B Stock at the open of business on that date for an equal number of shares of capital stock consisting of shares of Class B-1 Stock and Class B-2 Stock allocated as described in the next sentence. For each shareholder, (i) a number of shares of existing Class B Stock in an amount sufficient to meet such shareholder’s activity-based investment requirement were exchanged for an equal number of shares of Class B-2 Stock and (ii) all other outstanding shares of existing Class B Stock held by such shareholder were exchanged for an equal number of shares of Class B-1 Stock. Immediately following these exchanges, all shares of previously outstanding Class B Stock were retired.
From and after October 1, 2015, Class B-1 Stock is used to meet the membership investment requirement and Class B-2 Stock is used to meet the activity-based investment requirement. Daily, subject to the limitations in the Capital Plan, the Bank converts shares of one sub-class of Class B Stock to the other sub-class of Class B Stock under the following circumstances: (i) shares of Class B-2 Stock held by a shareholder in excess of its activity-based investment requirement are converted into Class B-1 Stock, if necessary, to meet that shareholder’s membership investment requirement and (ii) shares of Class B-1 Stock held by a shareholder in excess of the amount required to meet its membership investment requirement are converted into Class B-2 Stock as needed in order to satisfy that shareholder’s activity-based investment requirement. All excess stock is held as Class B-1 Stock at all times.
Subject to Finance Agency directives and the terms of the Amended Joint Capital Enhancement Agreement described below, the Bank is permitted by statute and regulation to pay dividends on members’ capital stock in either cash or capital stock only from previously retained earnings or a portion of current net earnings. The Bank’s Board of Directors may not declare or pay a dividend based on projected or anticipated earnings, nor may it declare or pay a dividend if the Bank is not in compliance with its minimum capital requirements or if the Bank would fail to meet its minimum capital requirements after paying such dividend (for a discussion of the Bank’s minimum capital requirements, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk-Based Capital Rules and Other Capital Requirements). Further, the Bank may not declare or pay any dividends in the form of capital stock if excess stock held by its shareholders is greater than one percent of the Bank’s total assets or if, after the issuance of such shares, excess stock held by its shareholders would be greater than one percent of the Bank’s total assets. Shares of capital stock issued as dividend payments have the same rights, obligations, and restrictions as all other shares of capital stock, including rights, privileges, and restrictions related to the repurchase and redemption of capital stock. To the extent such shares represent excess stock, they may be repurchased or redeemed by the Bank in accordance with the provisions of the Bank’s Capital Plan.
The Bank, and the other FHLBanks, are parties to a Joint Capital Enhancement Agreement, as amended (the "Amended JCE Agreement"), which provides that the Bank (and each of the other FHLBanks) will, on a quarterly basis, allocate at least 20 percent of its net income to a restricted retained earnings account ("RRE Account"). Pursuant to the provisions of the Amended JCE Agreement, the Bank is required to build its RRE Account to an amount equal to one percent of its total outstanding consolidated obligations, which for this purpose is based on the most recent quarter’s average carrying value of all

29


outstanding consolidated obligations, excluding hedging adjustments. The Amended JCE Agreement provides that during periods in which the Bank’s RRE Account is less than the amount prescribed in the preceding sentence, it may pay dividends only from unrestricted retained earnings or from the portion of its quarterly net income that exceeds the amount required to be allocated to its RRE Account. The allocations to, and restrictions associated with, its RRE Account have not had nor are they currently expected to have an effect on the Bank’s dividend payment practices. For additional information regarding the Amended JCE Agreement, see Item 1 — Business — Capital — Retained Earnings.
The Bank has had a long-standing practice of paying quarterly dividends in the form of capital stock. Prior to the fourth quarter of 2015, the Bank also had a long-standing practice of benchmarking the dividend rate that it pays on its capital stock to the average federal funds rate. In conjunction with the implementation of the changes to the Bank’s Capital Plan discussed above, the Bank's Board of Directors adopted new dividend target ranges for the two sub-classes of Class B Stock. While there can be no assurances about future dividends or future dividend rates, the target for quarterly dividends on Class B-1 Stock is an annualized rate that approximates average one-month LIBOR, with the expectation that dividend rates on Class B-1 Stock will not be lower than the annualized rate of 0.375 percent that was paid on outstanding Class B shares from 2010 until they were retired on October 1, 2015. The target range for quarterly dividends on Class B-2 Stock is an annualized rate that approximates average one-month LIBOR plus 0.5 – 1.0 percent. When stock dividends are paid, capital stock is issued in full shares and any fractional shares are paid in cash. Dividends are typically paid on or about the last business day of each quarter and are based upon the Bank’s operating results, shareholders’ average capital stock holdings and the applicable rate for the preceding quarter. Beginning with the dividend that was paid on December 31, 2015, capital stock dividends are paid in the form of Class B-1 shares.
During 2016, the Bank paid dividends totaling $17.7 million. The Bank’s first quarter 2016 dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 0.375 percent (as average one-month LIBOR for the fourth quarter of 2015 was 0.251 percent) and 1.251 percent (a rate equal to average one-month LIBOR for the fourth quarter of 2015 plus 1.0 percent), respectively. The Bank’s second quarter 2016 dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 0.431 percent (a rate equal to average one-month LIBOR for the first quarter of 2016) and 1.431 percent (a rate equal to average one-month LIBOR for the first quarter of 2016 plus 1.0 percent), respectively. The Bank’s third quarter 2016 dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 0.444 percent (a rate equal to average one-month LIBOR for the second quarter of 2016) and 1.444 percent (a rate equal to average one-month LIBOR for the second quarter of 2016 plus 1.0 percent), respectively. The Bank’s fourth quarter 2016 dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 0.508 percent (a rate equal to average one-month LIBOR for the third quarter of 2016) and 1.508 percent (a rate equal to average one-month LIBOR for the third quarter of 2016 plus 1.0 percent), respectively.
During 2015, the Bank paid dividends totaling $4.8 million. During each of the first three quarters of 2015, the Bank paid dividends at an annualized rate equal to the upper end of the Federal Reserve’s target range for the federal funds rate for the immediately preceding quarter plus 12.5 basis points. The average effective federal funds rates for the fourth quarter of 2014 and each of the first two quarters in 2015 were below the upper end of the Federal Reserve’s target range of 0.25 percent for the federal funds rate for those periods, which was also the rate that depository institutions could earn on both required and excess reserves maintained at the Federal Reserve during those periods. As a result of this disparity, the Bank elected to benchmark its dividends in the first three quarters of 2015 to the upper end of the Federal Reserve’s target range for the federal funds rate. For the fourth quarter of 2015, the Bank paid dividends on average Class B Stock outstanding during the third quarter of 2015 at an annualized rate of 0.375 percent as average one-month LIBOR for the third quarter of 2015 was below 0.375 percent. All dividends in 2016 and 2015 were paid in the form of capital stock except for fractional shares, which were paid in cash.

30


The following table sets forth certain information regarding the quarterly dividends that were declared and paid by the Bank during the years ended December 31, 2016 and 2015.
DIVIDENDS PAID
(dollars in thousands)
 
2016
 
2015
 
Amount(1)
 
Annualized
Rate(3)
 
Amount(2)
 
Annualized
Rate(3)
First Quarter
$
3,467

 
0.930
%
 
$
1,100

 
0.375
%
Second Quarter
4,048

 
1.020
%
 
1,123

 
0.375
%
Third Quarter
4,665

 
1.069
%
 
1,200

 
0.375
%
Fourth Quarter
5,488

 
1.161
%
 
1,343

 
0.375
%
____________________________________
(1) 
Amounts exclude (in thousands) $4, $11, $9 and $4 of dividends paid on mandatorily redeemable capital stock for the first, second, third and fourth quarters of 2016, respectively. For financial reporting purposes, these dividends were classified as interest expense.
(2) 
Amounts exclude (in thousands) $4, $5, $4 and $4 of dividends paid on mandatorily redeemable capital stock for the first, second, third and fourth quarters of 2015, respectively. For financial reporting purposes, these dividends were classified as interest expense.
(3) 
Reflects the annualized rate paid on all of the Bank’s average capital stock outstanding regardless of its classification for financial reporting purposes as either capital stock or mandatorily redeemable capital stock. Rates in 2016 represent the blended rates paid on Class B-1 and Class B-2 stock (computed as the total dividend paid divided by the aggregate average balance of both classes of stock).
The Bank has a retained earnings policy that calls for the Bank to maintain retained earnings in an amount at least sufficient to protect the par value of the Bank's capital stock against potential economic losses that could arise from a variety of designated risk factors, including those related to potential permanent losses, potential earnings shortfalls or losses in periodic earnings, and potential reductions in the Bank's estimated market value of equity. The results of the Bank's annual stress test mandated by the Dodd-Frank Act are also considered when establishing the Bank's retained earnings targets. With certain exceptions, the Bank’s policy calls for the Bank to maintain its total retained earnings balance at or above its policy target when determining the amount of funds available to pay dividends. The Bank’s current retained earnings policy target, which was last updated in December 2016, calls for the Bank to maintain a total retained earnings balance of at least $445 million to protect against the risks identified in the policy. Notwithstanding the fact that the Bank’s December 31, 2016 retained earnings balance of $824 million exceeds the policy target balance, the Bank currently expects to continue to build its retained earnings in keeping with its long-term strategic objectives and the provisions of the Amended JCE Agreement.
While there can be no assurances, taking into consideration its current earnings expectations and anticipated market conditions, the Bank currently expects to pay dividends on Class B-1 Stock in 2017 at a rate at least equal to average one-month LIBOR for the applicable dividend period, with the expectation that annualized dividend rates for Class B-1 Stock will not be lower than 0.375 percent. The Bank expects to pay dividends on Class B-2 Stock at an annualized rate that approximates average one-month LIBOR for the applicable dividend period plus 0.5 - 1.0 percent.
On March 22, 2017, the Bank’s Board of Directors approved dividends on Class B-1 and Class B-2 Stock in the form of additional shares of Class B-1 Stock for the first quarter of 2017 at annualized rates of 0.599 percent (a rate equal to average one-month LIBOR for the fourth quarter of 2016) and 1.599 percent (a rate equal to average one-month LIBOR for the fourth quarter of 2016 plus 1.0 percent), respectively. The first quarter 2017 dividends, to be applied to average Class B-1 Stock and Class B-2 Stock held during the period from October 1, 2016 through December 31, 2016, will be paid on March 29, 2017.

Pursuant to the terms of an SEC no-action letter dated September 13, 2005, the Bank is exempt from the requirements to report: (1) sales of its equity securities under Item 701 of Regulation S-K and (2) repurchases of its equity securities under Item 703 of Regulation S-K. In addition, the HER Act specifically exempts the Bank from periodic reporting requirements under the securities laws pertaining to the disclosure of unregistered sales of equity securities.

31


ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(dollars in thousands)
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Balance sheet (at year end)
 
 
 
 
 
 
 
 
 
Advances
$
32,506,175

 
$
24,746,802

 
$
18,942,400

 
$
15,978,945

 
$
18,394,797

Investments (1)
25,419,421

 
16,323,518

 
17,422,344

 
13,130,343

 
16,198,823

Mortgage loans
124,102

 
55,258

 
71,554

 
91,275

 
121,661

Allowance for credit losses on mortgage loans
141

 
141

 
143

 
165

 
183

Total assets
58,212,077

 
42,082,027

 
38,045,868

 
30,221,824

 
35,755,329

Consolidated obligations — discount notes
26,941,782

 
20,541,329

 
19,131,832

 
5,984,530

 
6,984,378

Consolidated obligations — bonds
26,997,487

 
18,024,692

 
16,078,700

 
21,486,712

 
25,697,936

Total consolidated obligations(2)
53,939,269

 
38,566,021

 
35,210,532

 
27,471,242

 
32,682,314

Mandatorily redeemable capital stock(3)
3,417

 
8,929

 
5,059

 
3,065

 
4,504

Capital stock — putable
1,930,148

 
1,540,132

 
1,222,738

 
1,123,675

 
1,216,986

Unrestricted retained earnings
745,104

 
699,213

 
650,224

 
615,620

 
549,617

Restricted retained earnings
78,880

 
62,990

 
49,552

 
39,850

 
22,276

Total retained earnings
823,984

 
762,203

 
699,776

 
655,470

 
571,893

Accumulated other comprehensive income (loss)
63,210

 
(103,023
)
 
(3,601
)
 
(32,641
)
 
(18,245
)
Total capital
2,817,342

 
2,199,312

 
1,918,913

 
1,746,504

 
1,770,634

Dividends paid(3)
17,668

 
4,766

 
4,203

 
4,293

 
4,555

Income statement
 
 
 
 
 
 
 
 
 
Net interest income (4)
$
165,030

 
$
121,589

 
$
120,583

 
$
147,857

 
$
161,389

Other income
7,824

 
29,774

 
8,042

 
20,692

 
2,203

Other expense
84,574

 
76,702

 
74,725

 
70,913

 
72,711

Assessments
8,831

 
7,468

 
5,391

 
9,766

 
9,090

Net income
79,449

 
67,193

 
48,509

 
87,870

 
81,791

Performance ratios
 
 
 
 
 
 
 
 
 
Net interest margin(5)
0.31
%
 
0.29
%
 
0.35
%
 
0.45
%
 
0.45
%
Return on average assets
0.15
%
 
0.16
%
 
0.14
%
 
0.27
%
 
0.23
%
Return on average equity
3.16
%
 
3.26
%
 
2.67
%
 
5.15
%
 
4.77
%
Return on average capital stock (6)
4.44
%
 
4.98
%
 
4.25
%
 
7.92
%
 
6.76
%
Total average equity to average assets
4.75
%
 
4.88
%
 
5.29
%
 
5.27
%
 
4.83
%
Regulatory capital ratio(7)
4.74
%
 
5.49
%
 
5.07
%
 
5.90
%
 
5.02
%
Dividend payout ratio (3)(8)
22.24
%
 
7.09
%
 
8.66
%
 
4.89
%
 
5.57
%
Ratio of earnings to fixed charges
1.34 x

 
1.75 x

 
1.65 x

 
2.02 x

 
1.61 x

Interest rates
 
 
 
 
 
 
 
 
 
Average effective federal funds rate(9)
0.39
%
 
0.13
%
 
0.09
%
 
0.11
%
 
0.14
%
Average one-month LIBOR (10)
0.50
%
 
0.20
%
 
0.16
%
 
0.19
%
 
0.24
%
Average three-month LIBOR (10)
0.74
%
 
0.32
%
 
0.23
%
 
0.27
%
 
0.43
%


32





____________________________________
(1) 
Investments consist of federal funds sold, securities purchased under agreements to resell, loans to other FHLBanks, interest-bearing deposits and securities classified as held-to-maturity, available-for-sale and trading.
(2) 
The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all of the FHLBanks. At December 31, 2016, 2015, 2014, 2013 and 2012, the outstanding consolidated obligations (at par value) of all of the FHLBanks totaled approximately $989 billion, $905 billion, $847 billion, $767 billion and $688 billion, respectively. As of those dates, the Bank’s outstanding consolidated obligations (at par value) were $54.1 billion, $38.6 billion, $35.2 billion, $27.6 billion and $32.6 billion, respectively. The Bank records on its statement of condition only that portion of the consolidated obligations for which it has received the proceeds.
(3) 
Mandatorily redeemable capital stock represents capital stock that is classified as a liability under accounting principles generally accepted in the United States of America. Dividends on mandatorily redeemable capital stock are recorded as interest expense and excluded from dividends paid. Dividends paid on mandatorily redeemable capital stock totaled $28 thousand, $17 thousand, $18 thousand, $22 thousand and $27 thousand for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
(4) 
Net interest income (expense) excludes the net interest income/expense associated with interest rate exchange agreements that do not qualify for hedge accounting. The net interest income (expense) associated with such agreements totaled $1.92 million, $(0.02) million, $1.36 million, $3.63 million and $10.41 million for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
(5) 
Net interest margin is net interest income as a percentage of average earning assets.
(6) 
Return on average capital stock is derived by dividing net income by average capital stock balances excluding mandatorily redeemable capital stock.
(7) 
The regulatory capital ratio is computed by dividing regulatory capital (the sum of capital stock — putable, mandatorily redeemable capital stock and retained earnings) by total assets at each year-end.
(8) 
Dividend payout ratio is computed by dividing dividends paid by net income for the year.
(9) 
Rates obtained from the Federal Reserve Statistical Release.
(10) 
Rates obtained from Bloomberg.


33


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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the annual audited financial statements and notes thereto for the years ended December 31, 2016, 2015 and 2014 beginning on page F-1 of this Annual Report on Form 10-K.

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

34



Financial Market Conditions
Economic growth in the United States expanded moderately during 2016, 2015 and 2014. The gross domestic product increased 2.4 percent, 2.6 percent and 1.6 percent in 2014, 2015 and 2016, respectively. The nationwide unemployment rate fell from 6.7 percent at the end of 2013 to 5.6 percent at the end of 2014, 5.0 percent at the end of 2015 and 4.7 percent at the end of 2016. Housing prices improved in most major metropolitan areas during 2014, 2015 and 2016.
The Federal Open Market Committee ("FOMC") maintained its target for the federal funds rate at a range between 0 and 0.25 percent throughout 2014 and most of 2015. In December 2015, the FOMC raised its target for the federal funds rate to a range between 0.25 percent and 0.50 percent. This range was maintained until it was raised to 0.50 percent to 0.75 percent in December 2016. During these years, the Federal Reserve paid interest on required and excess reserves held by depository institutions at a rate equivalent to the upper boundary of the target range for federal funds. A sustained high level in bank reserves during those years combined with the rate of interest being paid on those reserves has contributed to an effective federal funds rate that has generally been below the upper end of the targeted range for all of 2014, 2015 and 2016. At its March 2017 meeting, the FOMC raised its target for the federal funds rate to a range between 0.75 percent and 1.00 percent. At that time, the FOMC stated that it expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
One-month and three-month LIBOR rates were 0.17 percent and 0.25 percent, respectively, as of December 31, 2013 and 0.17 percent and 0.26 percent, respectively, at the end of 2014. One-month and three-month LIBOR increased to 0.43 percent and 0.61 percent, respectively, at the end of 2015 and to 0.77 percent and 1.00 percent, respectively, at the end of 2016. Relatively stable one-month and three-month LIBOR rates, combined with relatively small spreads between those two indices and between those indices and overnight lending rates, suggest that inter-bank lending markets are reasonably stable.
The following table presents information on various market interest rates at December 31, 2016 and 2015 and various average market interest rates for the years ended December 31, 2016, 2015 and 2014.
 
Ending Rate
 
Average Rate
 
December 31,
 
December 31,
 
For the Year Ended December 31,
 
2016
 
2015
 
2016
 
2015
 
2014
Federal Funds Target (1)
0.75%
 
0.50%
 
0.51%
 
0.26%
 
0.25%
Average Effective Federal Funds Rate (2)
0.55%
 
0.20%
 
0.39%
 
0.13%
 
0.09%
1-month LIBOR (1)
0.77%
 
0.43%
 
0.50%
 
0.20%
 
0.16%
3-month LIBOR (1)
1.00%
 
0.61%
 
0.74%
 
0.32%
 
0.23%
2-year LIBOR (1)
1.45%
 
1.18%
 
1.00%
 
0.88%
 
0.62%
5-year LIBOR (1)
1.98%
 
1.74%
 
1.32%
 
1.62%
 
1.75%
10-year LIBOR (1)
2.34%
 
2.19%
 
1.70%
 
2.18%
 
2.65%
3-month U.S. Treasury (1)
0.51%
 
0.16%
 
0.32%
 
0.05%
 
0.03%
2-year U.S. Treasury (1)
1.20%
 
1.06%
 
0.83%
 
0.69%
 
0.46%
5-year U.S. Treasury (1)
1.93%
 
1.76%
 
1.33%
 
1.53%
 
1.64%
10-year U.S. Treasury (1)
2.45%
 
2.27%
 
1.84%
 
2.14%
 
2.54%
____________________________________
(1) 
Source: Bloomberg
(2) 
Source: Federal Reserve Statistical Release
2016 In Summary
The Bank ended 2016 with total assets of $58.2 billion compared with $42.1 billion at the end of 2015. The $16.1 billion increase in total assets was attributable primarily to increases in the Bank's advances ($7.8 billion), short-term liquidity portfolio ($5.7 billion) and long-term investments ($2.6 billion).
Total advances at December 31, 2016 were $32.5 billion, compared to $24.7 billion at the end of 2015. During 2016, the Bank's lending activities expanded due to increased demand for loans at member institutions which the Bank attributes to improving economic conditions, more robust activity in the housing markets served by its members and increased usage of advances to fund investment activities and members' liquidity requirements.

35


The Bank’s net income for 2016 was $79.4 million, which represented a return on average capital stock of 4.44 percent. In comparison, the Bank's net income for 2015 was $67.2 million, which represented a return on average capital stock of 4.98 percent for that year. The $12.2 million increase in net income from 2015 to 2016 was attributable to a $43.4 million increase in net interest income, partially offset by a $21.9 million decrease in other income, a $7.9 million increase in other expenses and a $1.4 million increase in the Bank's AHP assessment.
At all times during 2016, the Bank was in compliance with all of its regulatory capital requirements. In addition, the Bank’s total retained earnings increased to $824.0 million at December 31, 2016 from $762.2 million at December 31, 2015. Retained earnings represented 1.4 percent and 1.8 percent of total assets at December 31, 2016 and 2015, respectively. At December 31, 2016, the balance of the Bank's restricted retained earnings account was $78.9 million.
In 2016, the Bank paid dividends totaling $17.7 million, which, based on the applicable average capital stock balances, equated to an overall blended rate of 1.055 percent for the year.
Financial Condition
The following table provides selected period-end balances as of December 31, 2016, 2015 and 2014, as well as selected average balances for the years ended December 31, 2016, 2015 and 2014. As shown in the table, the Bank’s total assets increased by 38.3 percent (or $16.1 billion) during the year ended December 31, 2016 after increasing by 10.6 percent (or $4.0 billion) during the year ended December 31, 2015. The increase in total assets during the year ended December 31, 2016 was attributable primarily to increases in the Bank's advances ($7.8 billion), short-term liquidity portfolio ($5.7 billion) and long-term available-for-sale securities portfolio ($3.5 billion), partially offset by decreases in the Bank's long-term held-to-maturity securities portfolio ($0.7 billion) and holdings of U.S. Treasury Notes ($0.1 billion). As the Bank’s assets increased, the funding for those assets also increased. During the year ended December 31, 2016, total consolidated obligations increased by $15.4 billion, as consolidated obligation discount notes and consolidated obligation bonds increased by $6.4 billion and $9.0 billion, respectively.
The increase in total assets during the year ended December 31, 2015 was attributable primarily to increases in the Bank's advances ($5.8 billion), long-term available-for-sale securities portfolio ($3.3 billion) and holdings of U.S. Treasury Notes ($0.2 billion), partially offset by decreases in the Bank's short-term liquidity portfolio ($3.8 billion) and long-term held-to-maturity securities portfolio ($1.4 billion). As the Bank’s assets increased, the funding for those assets also increased. During the year ended December 31, 2015, total consolidated obligations increased by $3.4 billion, as consolidated obligation discount notes and consolidated obligation bonds increased by $1.4 billion and $2.0 billion, respectively.

36


The activity in each of the major balance sheet captions is discussed in the sections following the table.
SUMMARY OF CHANGES IN FINANCIAL CONDITION
(dollars in millions)
 
December 31, 2016
 
December 31, 2015
 
Balance at
December 31, 2014
 
 
 
Increase (Decrease)
 
 
 
Increase (Decrease)
 
 
Balance
 
Amount
 
Percentage
 
Balance
 
Amount
 
Percentage
 
Advances
$
32,506

 
$
7,759

 
31.4
 %
 
$
24,747

 
$
5,805

 
30.6
 %
 
$
18,942

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

 
(800
)
 
(100.0
)
 
800

 
(680
)
 
(45.9
)
 
1,480

Securities purchased under agreements to resell
3,100

 
2,100

 
210.0

 
1,000

 
650

 
185.7

 
350

Federal funds sold
6,242

 
4,071

 
187.5

 
2,171

 
(3,442
)
 
(61.3
)
 
5,613

U.S Treasury Bills

 

 

 

 
(400
)
 
(100.0
)
 
400

Loan to other FHLBank
290

 
290

 
*

 

 

 

 

Long-term investments
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
101

 
(101
)
 
(50.0
)
 
202

 
202

 
*

 

Available-for-sale securities
13,176

 
3,463

 
35.7

 
9,713

 
3,324

 
52.0

 
6,389

Held-to-maturity securities
2,500

 
(728
)
 
(22.6
)
 
3,228

 
(1,434
)
 
(30.8
)
 
4,662

Mortgage loans, net
124

 
69

 
125.5

 
55

 
(16
)
 
(22.5
)
 
71

Total assets
58,212

 
16,130

 
38.3

 
42,082

 
4,036

 
10.6

 
38,046

Consolidated obligations — bonds
26,997

 
8,972

 
49.8

 
18,025

 
1,946

 
12.1

 
16,079

Consolidated obligations — discount notes
26,942

 
6,401

 
31.2

 
20,541

 
1,409

 
7.4

 
19,132

Total consolidated obligations
53,939

 
15,373

 
39.9

 
38,566

 
3,355

 
9.5

 
35,211

Mandatorily redeemable capital stock
3

 
(6
)
 
(66.7
)
 
9

 
4

 
80.0

 
5

Capital stock
1,930

 
390

 
25.3

 
1,540

 
317

 
25.9

 
1,223

Retained earnings
824

 
62

 
8.1

 
762

 
62

 
8.9

 
700

Average total assets
52,900

 
10,714

 
25.4

 
42,186

 
7,776

 
22.6

 
34,410

Average capital stock
1,790

 
440

 
32.6

 
1,350

 
208

 
18.2

 
1,142

Average mandatorily redeemable capital stock
5

 
1

 
25.0

 
4

 

 

 
4

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


37


Advances
The following table presents advances outstanding, by type of institution, as of December 31, 2016, 2015 and 2014.
ADVANCES OUTSTANDING BY BORROWER TYPE
(par value, dollars in millions)
 
December 31,
 
2016
 
2015
 
2014
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Commercial banks
$
23,416

 
72
%
 
$
17,726

 
72
%
 
$
13,608

 
72
%
Savings institutions
3,318

 
10

 
2,590

 
11

 
2,399

 
13

Credit unions
2,851

 
9

 
2,763

 
11

 
1,968

 
11

Insurance companies
2,817

 
9

 
1,546

 
6

 
799

 
4

Community Development Financial Institutions
14

 

 
11

 

 
4

 

Total member advances
32,416

 
100

 
24,636

 
100

 
18,778

 
100

Housing associates
46

 

 
2

 

 
2

 

Non-member borrowers
10

 

 
12

 

 
15

 

Total par value of advances
$
32,472

 
100
%
 
$
24,650

 
100
%
 
$
18,795

 
100
%
Total par value of advances outstanding to CFIs (1)
$
6,758

 
21
%
 
$
6,559

 
27
%
 
$
6,362

 
34
%
____________________________________
(1) 
The figures presented above reflect the advances outstanding to Community Financial Institutions (“CFIs”) as of December 31, 2016, 2015 and 2014 based upon the definitions of CFIs that applied as of those dates.

The Bank's advances balances (at par value) increased $7.8 billion during 2016, due largely to increased demand for loans from its larger members, which the Bank attributed in part to increased loan demand at those institutions. In addition, the Bank's larger members used advances to varying degrees to fund investment activities and to meet liquidity requirements. Comerica Bank, the Bank's largest borrower as of December 31, 2016, borrowed $2.8 billion in 2016. Comerica did not have any outstanding borrowings as of December 31, 2015.
The Bank's advances balances (at par value) increased $5.8 billion during 2015. The Bank's lending activities expanded due to increased demand for loans from some of its larger borrowers, which the Bank attributed to increased loan demand and a decrease in liquidity levels at those institutions. In addition, as discussed further in the section entitled "Capital," the Bank made available a special advances offering during the period from October 21, 2015 through December 31, 2015. Under this offering, the activity-based stock investment requirement was reduced from 4.1 percent to 2 percent for advances with a minimum maturity of one year or greater, provided the advances increased the member institution's outstanding advances balance above its October 20, 2015 balance, less any advances balances that were scheduled to mature during the period from October 21, 2015 through December 31, 2015. Approximately $4.9 billion of advances were funded under this offering.


38


At December 31, 2016, advances outstanding to the Bank’s five largest borrowers totaled $8.6 billion, representing 26.4 percent of the Bank’s total outstanding advances as of that date. The following table presents the Bank’s five largest borrowers as of December 31, 2016.
FIVE LARGEST BORROWERS
(par value, dollars in millions)
 
 
As of December 31, 2016
Name
 
Par Value of
Advances
 
Percent of
Total Par Value
of Advances
Comerica Bank
 
$
2,800

 
8.6
%
Texas Capital Bank, N.A.
 
2,000

 
6.2

Southside Bank
 
1,310

 
4.0

Centennial Bank
 
1,305

 
4.0

Life Insurance Company of the Southwest
 
1,166

 
3.6

 
 
$
8,581

 
26.4
%
As of December 31, 2015 and 2014, advances outstanding to the Bank's five largest borrowers comprised $6.5 billion (26 percent) and $4.5 billion (24 percent), respectively, of the total advances portfolio at those dates.
The following table presents information regarding the composition of the Bank’s advances by product type as of December 31, 2016 and 2015.
ADVANCES OUTSTANDING BY PRODUCT TYPE
(par value, dollars in millions)
 
December 31, 2016
 
December 31, 2015
 
Balance
 
Percentage
of Total
 
Balance
 
Percentage
of Total
Fixed-rate
$
18,185

 
56.0
%
 
$
17,220

 
69.9
%
Adjustable/variable-rate indexed
12,839

 
39.5

 
5,949

 
24.1

Amortizing
1,448

 
4.5

 
1,481

 
6.0

Total par value
$
32,472

 
100.0
%
 
$
24,650

 
100.0
%
The Bank is required by statute and regulation to obtain sufficient collateral from members/borrowers to fully secure all advances and other extensions of credit. The Bank’s collateral arrangements with its members/borrowers and the types of collateral it accepts to secure advances are described in Item 1 — Business. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances, the Bank applies various haircuts, or discounts, to determine the value of the collateral against which borrowers may borrow. From time to time, the Bank reevaluates the adequacy of its collateral haircuts under a range of stress scenarios to ensure that its collateral haircuts are sufficient to protect the Bank from credit losses on advances and other extensions of credit.
In addition, as described in Item 1 — Business, the Bank reviews the financial condition of its depository institution borrowers on at least a quarterly basis to identify any borrowers whose financial condition indicates they might pose an increased credit risk and, as needed, takes appropriate action. The Bank has not experienced any credit losses on advances since it was founded in 1932 and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on advances. Accordingly, the Bank has not provided any allowance for losses on advances.
Short-Term Liquidity Holdings
At December 31, 2016, the Bank’s short-term liquidity holdings were comprised of $6.5 billion of overnight federal funds sold (including a $0.3 billion loan to another FHLBank) and $3.1 billion of overnight reverse repurchase agreements. At December 31, 2015, the Bank’s short-term liquidity holdings were comprised of $2.2 billion of overnight federal funds sold, a $1.0 billion overnight reverse repurchase agreement and $0.8 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas. All of the Bank's federal funds sold during 2016 and 2015 were transacted with domestic bank counterparties and U.S. branches of foreign financial institutions on an overnight basis. The amount of the Bank’s short-term liquidity holdings fluctuates in response to several factors, including the anticipated demand for advances, the timing and extent of advance prepayments, changes in the Bank’s deposit balances, the Bank’s pre-funding activities, prevailing conditions (or anticipated changes in conditions) in the short-term debt markets, changes in the returns provided by short-term investment

39


alternatives relative to the Bank’s discount note funding costs, the level of liquidity needed to satisfy Finance Agency requirements and, on and after July 14, 2015, the Finance Agency's expectations with regard to the Bank's core mission achievement. For a discussion of the Finance Agency’s liquidity requirements, see the section below entitled “Liquidity and Capital Resources.” For a discussion of the Finance Agency's guidance regarding core mission achievement, see Item 1- Business (specifically, the section entitled Core Mission Achievement beginning on page 10 of this report).
Finance Agency regulations and Bank policies govern the Bank’s investments in unsecured money market instruments, such as overnight and term federal funds and commercial paper. Those regulations and policies establish limits on the amount of unsecured credit that may be extended to borrowers or to affiliated groups of borrowers, and require the Bank to base its investment limits on the creditworthiness of its counterparties.
As of December 31, 2016, the Bank’s overnight federal funds sold consisted of $1.5 billion sold to counterparties rated double-A, $4.0 billion sold to counterparties rated single-A and $1.0 billion sold to counterparties rated triple-B. The credit ratings presented in the preceding sentence represent the lowest long-term rating assigned to the counterparty by Moody’s, S&P or Fitch Ratings, Ltd. (“Fitch”).

40


Long-Term Investments
The composition of the Bank's long-term investment portfolio at December 31, 2016 and 2015 is set forth in the table below.
COMPOSITION OF LONG-TERM INVESTMENT PORTFOLIO
(in millions)
 
 
 
Balance Sheet Classification
 
Total Long-Term Investments
(at carrying value)
 
 
 
December 31, 2016
 
Held-to-Maturity
 (at carrying value)
 
Available-for-Sale
(at fair value)
 
Trading
(at fair value)
 
 
Held-to-Maturity
(at fair value)
 
 
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
$
16

 
$
496

 
$
101

 
$
613

 
$
16

 
GSE obligations
 

 
6,526

 

 
6,526

 

 
State housing agency obligations
 
110

 

 

 
110

 
109

 
Other
 

 
320

 

 
320

 

 
Total debentures
 
126

 
7,342

 
101

 
7,569

 
125

 
 
 
 
 
 
 
 
 
 
 
 
 
MBS portfolio
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
 
3

 

 

 
3

 
3

 
GSE residential MBS
 
2,211

 

 

 
2,211

 
2,215

 
GSE commercial MBS
 
61

 
5,834

 

 
5,895

 
61

 
Non-agency residential MBS
 
98

 

 

 
98

 
111

 
Total MBS
 
2,373

 
5,834

 

 
8,207

 
2,390

 
Total long-term investments
 
$
2,499

 
$
13,176

 
$
101

 
$
15,776

 
$
2,515

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Classification
 
Total Long-Term Investments
(at carrying value)
 
 
 
 
 
Held-to-Maturity
 (at carrying value)
 
Available-for-Sale
 (at fair value)
 
Trading
(at fair value)
 
 
Held-to-Maturity
 (at fair value)
 
December 31, 2015
 
 
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
$
22

 
$
498

 
$
202

 
$
722

 
$
21

 
GSE obligations
 

 
5,339

 

 
5,339

 

 
State housing agency obligations
 
110

 

 

 
110

 
110

 
Other
 

 
371

 

 
371

 

 
Total debentures
 
132

 
6,208

 
202

 
6,542

 
131

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

 

 

 
4

 
4

 
GSE residential MBS
 
2,909

 

 

 
2,909

 
2,931

 
GSE commercial MBS
 
62

 
3,505

 

 
3,567

 
61

 
Non-agency residential MBS
 
121

 

 

 
121

 
135

 
Total MBS
 
3,096

 
3,505

 

 
6,601

 
3,131

 
Total long-term investments
 
$
3,228

 
$
9,713

 
$
202

 
$
13,143

 
$
3,262



41


The Bank is precluded by regulation from purchasing additional MBS if such purchase would cause the aggregate amortized cost of its MBS holdings to exceed 300 percent of the Bank’s total regulatory capital (the sum of its capital stock, mandatorily redeemable capital stock and retained earnings). As of December 31, 2016, the Bank held $8.2 billion of MBS (at amortized cost), which represented 298 percent of its total regulatory capital at that date. As of December 31, 2015, the Bank held $6.7 billion of MBS (at amortized cost), which represented 291 percent of its total regulatory capital at that date. The Bank intends to continue to purchase additional GSE MBS if securities with adequate returns are available when the Bank has the regulatory capacity to increase its MBS portfolio.
During the years ended December 31, 2016, 2015 and 2014, the Bank acquired $2.4 billion, $2.5 billion and $1.0 billion of GSE commercial MBS ("CMBS"), all of which are backed by multifamily loans. Substantially all of the GSE CMBS purchases were hedged with fixed-for-floating interest rate swaps. Because ASC 815 does not allow hedge accounting treatment for fair value hedges of investment securities designated as held-to-maturity, all of these securities were classified as available-for-sale. In addition, during the year ended December 31, 2014, the Bank acquired $0.4 billion of LIBOR-indexed floating rate collateralized mortgage obligations ("CMOs") issued by either Fannie Mae or Freddie Mac that the Bank designated as held-to-maturity. As further described below, the floating rate coupons of these residential MBS ("RMBS") are subject to interest rate caps.
In addition to MBS, the Bank is also permitted under applicable policies and regulations to purchase certain other types of highly rated, long-term, non-MBS investments subject to certain limitations. These investments include but are not limited to the non-MBS debt obligations of other GSEs, provided such investments in any single GSE do not exceed the lesser of the Bank’s total regulatory capital or that GSE's total capital, taking into account the financial support provided by the U.S. Department of the Treasury, if applicable, at the time new investments are made.
During the years ended December 31, 2016 and 2015, the Bank purchased $3.7 billion and $1.5 billion, respectively, of GSE debentures, all of which were non-MBS debt obligations of Fannie Mae, Freddie Mac and the Farm Credit System. Substantially all of these securities were classified as available-for-sale and hedged with fixed-for-floating interest rate swaps. The Bank did not purchase any GSE debentures during the year ended December 31, 2014. The Bank's investments in the non-MBS debt obligations of Fannie Mae, Freddie Mac and the Farm Credit System are each currently limited to an amount equal to 100 percent of the Bank's total regulatory capital at the time of purchase. In addition, in 2016, the Bank also acquired $0.3 billion of U.S. Treasury Notes (classified as available-for-sale). In 2015, the Bank also acquired $0.5 billion of U.S. government-guaranteed debentures (classified as available-for-sale), $0.2 billion of U.S. Treasury Notes (classified as trading) and $0.1 billion of state housing agency obligations (classified as held-to-maturity). The Bank did not acquire any of these types of investments in 2014. Subject to applicable regulatory limits and the constraints imposed by the Finance Agency's July 2015 guidance regarding core mission achievement, the Bank may continue to add these types of securities to its long-term investment portfolio if attractive opportunities to do so are available.
During the years ended December 31, 2016, 2015 and 2014, proceeds from maturities and paydowns of held-to-maturity securities totaled approximately $0.6 billion, $0.7 billion and $1.0 billion, respectively. Proceeds from maturities of available-for-sale securities totaled $65 million, $40 million and $26 million during the years ended December 31, 2016, 2015 and 2014, respectively. During the years ended December 31, 2016 and 2015, the Bank sold approximately $158 million and $816 million (par value), respectively, of GSE RMBS (CMO LIBOR floaters with embedded caps) classified as held-to-maturity securities. The aggregate gains recognized on these sales totaled $0.9 million and $14.5 million, respectively. For each of these securities, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition. As such, the sales were considered maturities for purposes of security classification. The proceeds from these sales were reinvested in GSE CMBS. During 2016 and 2015, the Bank also sold approximately $2.3 billion and $871 million (par value), respectively, of GSE debentures and, in 2016, it sold $0.3 billion of U.S. Treasury Notes, all of which had been classified as available-for-sale. The aggregate gains recognized on these sales totaled $5.1 million and $3.9 million, respectively. The GSE debentures that were sold were replaced with longer-dated, higher-yielding GSE debentures. The Bank did not sell any long-term investments during the year ended December 31, 2014.
As of December 31, 2016, the U.S. government and the issuers of the Bank's holdings of GSE debentures and GSE MBS were rated triple-A by Moody's and Fitch and AA+ by S&P. At that same date, the Bank's holdings of other debentures, which were comprised of securities issued by the Private Export Funding Corporation, were rated triple-A by Moody's and Fitch. The PEFCO debentures are not currently rated by S&P. Further, the Bank's holdings of state housing agency debentures were rated triple-A by Moody's, S&P and Fitch. The credit ratings associated with the Bank's holdings of non-agency RMBS are presented in the table on page 43.
The Bank evaluates outstanding held-to-maturity and available-for-sale investment securities in an unrealized loss position as of the end of each calendar quarter for other-than-temporary impairment (“OTTI”). An investment security is impaired if the fair value of the investment is less than its amortized cost. At December 31, 2016, the gross unrealized losses on the Bank’s held-to-maturity and available-for-sale investment securities were $15.6 million and $35.1 million, respectively. As of that date, $5.9 million (or 38 percent) of the unrealized losses associated with its held-to-maturity securities portfolio were related to the

42


Bank's holdings of non-agency (i.e., private-label) RMBS. For a summary of the Bank's OTTI evaluation, see the audited financial statements included in this report (specifically, Notes 4 and 5 beginning on pages F-18 and F-21, respectively).
The deterioration in the U.S. housing markets that occurred primarily during the period from 2007 through 2011, as reflected during that period by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency RMBS, generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. Based on its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of December 31, 2016 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.
All but one of the Bank’s non-agency RMBS are rated by one or more of the following NRSROs: Moody’s, S&P and/or Fitch. The following table presents the credit ratings assigned to the Bank’s non-agency RMBS holdings as of December 31, 2016. The credit ratings presented in the table represent the lowest rating assigned to the security by Moody’s, S&P or Fitch.
NON-AGENCY RMBS BY CREDIT RATING
(dollars in thousands)
Credit
Rating
 
Number of
Securities
 
Unpaid
Principal
Balance
 
Amortized
Cost
 
Carrying
Value
 
Estimated
Fair Value
 
Unrealized
Losses
Single-A
 
1
 
$
6,756

 
$
6,756

 
$
6,756

 
$
6,445

 
$
311

Triple-B
 
3
 
14,611

 
14,611

 
14,611

 
13,996

 
615

Double-B
 
1
 
656

 
656

 
656

 
650

 
6

Single-B
 
5
 
18,085

 
17,976

 
16,222

 
16,202

 
1,774

Triple-C
 
12
 
75,217

 
68,090

 
54,251

 
66,082

 
3,203

Single-D
 
1
 
8,933

 
7,044

 
5,480

 
7,083

 

Not Rated
 
1
 
97

 
97

 
97

 
91

 
6

Total
 
24
 
$
124,355

 
$
115,230

 
$
98,073

 
$
110,549

 
$
5,915

At December 31, 2016, the Bank’s portfolio of non-agency RMBS was comprised of 5 securities with an aggregate unpaid principal balance of $16 million that are backed by first lien fixed-rate loans and 19 securities with an aggregate unpaid principal balance of $108 million that are backed by first lien option adjustable-rate mortgage (“option ARM”) loans. In comparison, as of December 31, 2015, the Bank’s non-agency RMBS portfolio was comprised of 8 securities backed by fixed-rate loans that had an aggregate unpaid principal balance of $25 million and 19 securities backed by option ARM loans that had an aggregate unpaid principal balance of $128 million. Three of the Bank's non-agency RMBS were paid in full during the year ended December 31, 2016.

43


The following table provides a summary of the Bank’s non-agency RMBS as of December 31, 2016 by classification by the originator at the time of issuance and collateral type; the Bank does not hold any RMBS that were labeled as subprime by the originator at the time of issuance.
NON-AGENCY RMBS BY UNDERLYING COLLATERAL TYPE
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average
Collateral Delinquency (1)(2)
 
Credit Enhancement Statistics
Classification
 
Number of
Securities
 
Unpaid
Principal
Balance
 
Amortized
Cost
 
Estimated
Fair Value
 
Unrealized
Losses
 
 
Current
Weighted
Average (1)(3)
 
Original
Weighted
Average (1)
 
Minimum
Current (4)
Prime collateral(5)
 
20

 
$
100

 
$
95

 
$
90

 
$
5

 
15.70
%
 
28.90
%
 
39.01
%
 
%
Alt-A collateral(5)
 
4

 
24

 
20

 
21

 
1

 
18.73
%
 
15.61
%
 
30.04
%
 
2.94
%
Total non-agency RMBS
 
24

 
$
124

 
$
115

 
$
111

 
$
6

 
16.28
%
 
26.35
%
 
37.29
%
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate collateral
 
5

 
$
16

 
$
14

 
$
14

 
$
1

 
10.31
%
 
1.63
%
 
7.78
%
 
%
Option ARM collateral
 
19

 
108

 
101

 
97

 
5

 
17.19
%
 
30.12
%
 
41.78
%
 
10.12
%
Total non-agency RMBS
 
24

 
$
124

 
$
115

 
$
111

 
$
6

 
16.28
%
 
26.35
%
 
37.29
%
 
%
____________________________________
(1) 
Weighted average percentages are computed based upon unpaid principal balances.
(2) 
Collateral delinquency reflects the percentage of the underlying loan balances that are 60 or more days past due, including loans in foreclosure and real estate owned.
(3) 
Current credit enhancement percentages reflect the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior classes held by the Bank are impacted (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pools before the securities held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pools, it is possible that the senior classes held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.
(4) 
Minimum credit enhancement reflects the security in each category with the lowest current credit enhancement.
(5) 
Reflects the label assigned to the securities by the originator at the time of issuance.
Because the ultimate receipt of contractual payments on the Bank’s non-agency RMBS will depend upon the credit and prepayment performance of the underlying loans and the credit enhancements for the senior securities owned by the Bank, the Bank monitors these investments in an effort to determine whether the credit enhancement associated with each security is sufficient to protect against potential losses of principal and interest on the underlying mortgage loans. The credit enhancement for each of the Bank’s non-agency RMBS is provided by a senior/subordinate structure, and none of the securities owned by the Bank are insured by third-party bond insurers. More specifically, each of the Bank’s non-agency RMBS represents a single security class within a securitization that has multiple classes of securities. Each security class has a distinct claim on the cash flows from the underlying mortgage loans, with the subordinate securities having a junior claim relative to the more senior securities. The Bank’s non-agency RMBS have a senior claim on the cash flows from the underlying mortgage loans.
To assess whether the entire amortized cost bases of its non-agency RMBS will be recovered, the Bank performed a cash flow analysis for each of its non-agency RMBS holdings as of the end of each calendar quarter in 2016 under a base case (or best estimate) scenario. The procedures used in these analyses, together with the results thereof, are summarized in Note 5 to the Bank’s audited financial statements included in this report.
During the period from 2009 through 2012, the Bank recorded credit impairments totaling $13.0 million on 14 of its non-agency RMBS. During 2016, 2015 and 2014, the Bank recorded credit impairments totaling $20,000, $33,000 and $37,000, respectively, on one previously unimpaired security. Through December 31, 2016, the Bank has amortized $0.4 million of the time value associated with the aggregate credit losses of $13.1 million. Through this same date, actual principal shortfalls on the 15 securities have totaled $1.8 million and the Bank has recognized recoveries (i.e., increases in cash flows expected to be collected) totaling $2.6 million. Based on the cash flow analyses performed as of December 31, 2016, the Bank currently expects to recover in future periods an additional $8.7 million of the previously recorded losses. These anticipated recoveries will be accreted as interest income over the remaining lives of the applicable securities in the same manner as the recoveries that have been recorded through December 31, 2016.

44


In addition to evaluating its non-agency RMBS under a best estimate scenario, the Bank also performed a cash flow analysis for each of these securities as of December 31, 2016 under a more stressful housing price scenario. This more stressful scenario was based on a housing price forecast that assumed home price changes for the 12-month period beginning October 1, 2016 were 5 percentage points lower than the base case scenario followed by home price changes that are 33 percent lower than those used in the base case scenario. As of December 31, 2016, none of the Bank's non-agency RMBS would have been deemed to be other-than-temporarily impaired under the more stressful housing price scenario.
While substantially all of the Bank's RMBS portfolio is comprised of CMOs with variable-rate coupons ($2.3 billion par value at December 31, 2016) that do not expose it to interest rate risk if interest rates rise moderately, these securities include caps that would limit increases in the variable-rate coupons if short-term interest rates rise above the caps. In addition, if interest rates rise, prepayments on the mortgage loans underlying the securities would likely decline, thus lengthening the time that the securities would remain outstanding with their coupon rates capped. As of December 31, 2016, one-month LIBOR was 0.77 percent and the effective interest rate caps on one-month LIBOR (the interest cap rate minus the stated spread on the coupon) embedded in the CMO floaters ranged from 5.95 percent to 15.29 percent. The largest concentration of embedded effective caps ($1.9 billion) was between 6.00 percent and 6.50 percent. As of December 31, 2016, one-month LIBOR rates were approximately 518 basis points below the lowest effective interest rate cap embedded in the CMO floaters. To hedge a portion of the potential cap risk embedded in these securities, the Bank held $1.2 billion of interest rate caps with remaining maturities ranging from 21 to 56 months as of December 31, 2016 and strike rates of 6.50 percent. If three-month LIBOR rises above 6.50 percent, the Bank will be entitled to receive interest payments according to the terms and conditions of such agreements. These payments would be based upon the notional amounts of those agreements and the difference between 6.50 percent and three-month LIBOR.
The following table provides a summary of the notional amounts and expiration periods of the Bank’s portfolio of stand-alone CMO-related interest rate cap agreements as of December 31, 2016.
SUMMARY OF CMO-RELATED INTEREST RATE CAP AGREEMENTS
(dollars in millions)
Expiration
 
Notional Amount
Third quarter 2018
 
$
200

First quarter 2019
 
250

Third quarter 2021 (1)
 
750

 
 
$
1,200

 
 
 
(1) This cap is effective beginning in August 2018 and its notional balance declines by $250 million in August 2019 and again in August 2020, to $500 million and $250 million, respectively.
Consolidated Obligations and Deposits
During the year ended December 31, 2016, the Bank’s outstanding consolidated obligations (at par value) increased by $15.5 billion; consolidated obligation discount notes increased by $6.4 billion and consolidated obligation bonds increased by $9.1 billion. The following table presents the composition of the Bank’s outstanding bonds at December 31, 2016 and 2015.

COMPOSITION OF CONSOLIDATED OBLIGATION BONDS OUTSTANDING
(par value, dollars in millions)
 
December 31, 2016
 
December 31, 2015
 
Balance
 
Percentage
of Total
 
Balance
 
Percentage
of Total
Fixed-rate
 
 
 
 
 
 
 
Non-callable
$
8,597

 
31.7
%
 
$
9,244

 
51.3
%
Callable
2,356

 
8.7

 
2,515

 
13.9

Variable-rate
13,151

 
48.5

 
3,625

 
20.1

Callable step-up
2,829

 
10.4

 
2,510

 
13.9

Callable step-down
200

 
0.7

 
150

 
0.8

Total par value
$
27,133

 
100.0
%
 
$
18,044

 
100.0
%

45


Fixed-rate bonds have coupons that are fixed over the life of the bond. Some fixed-rate bonds contain provisions that enable the Bank to call the bonds at its option on predetermined call dates. Variable-rate bonds have variable-rate coupons that generally reset based on either one-month or three-month LIBOR; these bonds may contain caps that limit the increases in the variable-rate coupons. Callable step-up bonds pay interest at increasing fixed rates for specified intervals over the life of the bond and contain provisions enabling the Bank to call the bonds at its option on predetermined dates. Callable step-down bonds pay interest at decreasing fixed rates for specified intervals over the life of the bond and contain provisions enabling the Bank to call the bonds at its option on predetermined dates.
The FHLBanks rely extensively on the underwriters of their securities, including investment banks, money center banks and large commercial banks, to source investors for consolidated obligations. Investors may be located in the United States or overseas. The features of consolidated obligations are structured to meet the requirements of investors. The various types of consolidated obligations included in the table above reflect the features of the Bank’s outstanding bonds as of December 31, 2016 and 2015 and do not represent all of the various types and styles of consolidated obligation bonds that may be issued by by the Bank or the other FHLBanks.
Consistent with its risk management philosophy, the Bank uses interest rate exchange agreements (i.e., interest rate swaps) to convert many of the fixed-rate consolidated obligation bonds that it issues to variable-rate instruments that periodically reset based on an index such as one-month or three-month LIBOR. Generally, the Bank receives a coupon on the interest rate swap that is identical to the coupon it pays on the consolidated obligation bond while paying a variable-rate coupon on the interest rate swap that resets based on either one-month or three-month LIBOR. Typically, the formula for the variable-rate coupon also includes a spread to the index; for instance, the Bank may pay a coupon on the interest rate swap equal to three-month LIBOR minus 15 basis points.
During the years ended December 31, 2016, 2015 and 2014, the Bank issued $28.0 billion, $18.1 billion and $11.4 billion, respectively, of consolidated obligation bonds. The proceeds from these issuances were generally used to replace maturing or called consolidated obligations and to support some of the growth in the Bank's balance sheet. During the year ended December 31, 2016, the Bank's consolidated obligation bond issuance consisted primarily of variable-rate bonds, fixed-rate non-callable bonds (most of which were swapped) and swapped fixed-rate callable bonds, including step-up bonds. During the year ended December 31, 2015, the Bank's consolidated obligation bond issuance consisted primarily of fixed-rate non-callable bonds (most of which were swapped) and swapped fixed-rate callable bonds, including step-up bonds.The majority of the consolidated obligation bonds issued during the year ended December 31, 2014 were swapped fixed-rate callable bonds, including step-up bonds.
At December 31, 2016 and 2015, discount notes comprised approximately 50 percent and 53 percent, respectively, of the Bank's total outstanding consolidated obligations. During 2016, the Bank issued approximately $134 billion of consolidated obligation discount notes (excluding those with overnight terms), the proceeds of which were used primarily to replace maturing or called consolidated obligation bonds and maturing consolidated obligation discount notes, as well as to fund a portion of the growth in the Bank's advances and investments.
The primary benchmark the Bank uses to analyze the effectiveness of its debt issuance efforts and trends in its debt issuance costs is the spread to LIBOR that the Bank pays on interest rate swaps used to convert its fixed-rate consolidated obligations to LIBOR. The costs of the Bank’s consolidated obligations, when expressed relative to LIBOR, are impacted by many factors. These include factors that may influence all credit market spreads, such as investors’ perceptions of general economic conditions, changes in investors’ risk tolerances or maturity preferences, or, in the case of overseas investors, changes in preferences for holding dollar-denominated assets. They also include factors that primarily influence the yields of GSE debt, such as a marked change in the debt issuance patterns of GSEs stemming from a rapid change in the size of their balance sheets or changes in market interest rates or the availability of debt with similar perceived credit quality. Finally, the specific features of consolidated obligations and the associated interest rate swaps influence the spread to LIBOR that the Bank pays on its interest rate swaps. During the years ended December 31, 2016, 2015 and 2014, the weighted average LIBOR cost of swapped and variable-rate consolidated obligation bonds issued by the Bank was approximately LIBOR minus 21 basis points, LIBOR minus 14 basis points and LIBOR minus 15 basis points, respectively.
The Bank's funding levels (relative to LIBOR) for consolidated obligation bonds deteriorated in the second half of 2015 due to a significant decrease in swap spreads during that period and an increase in competing debt issuance by other GSEs. Swap spreads tightened relative to U.S. Treasury debt during the second half of 2015 due to several factors, including a large volume of swapped corporate debt issuance, a rise in repo rates and increased sales of U.S. Treasury debt by central banks. As a result of these funding levels, the Bank relied more heavily on the use of consolidated obligation discount notes during this period. Swap spreads widened during the second, third and fourth quarters of 2016, resulting an improvement in the Bank's funding levels (relative to LIBOR) for consolidated obligation bonds. The widening of swap spreads in the second and third quarters was mainly due to the then impending changes to the rules that govern money market funds, which became effective in October 2016.

46


The cost of the Bank's consolidated obligation discount notes also increased during the second half of 2015 due to short-term debt investors' desire to invest only in very short maturity instruments, which was attributable to the uncertainty at that time regarding potential interest rate increases by the FOMC at its September 2015 and December 2015 meetings. Dealers' reduced capacity to hold consolidated obligation discount notes (due to balance sheet constraints) also contributed to the increase in the Bank's discount note funding costs during the second half of 2015. While dealers' balances sheets were less constrained in 2016, the cost of discount notes increased commensurate with the increase in short-term interest rates both early and late in the year. In the middle part of 2016, the Bank's discount note funding costs improved due in part to Great Britain's vote to exit the European Union and the then impending changes that govern money market funds, each of which contributed to increased demand for discount notes.
Demand and term deposits were $1.0 billion at both December 31, 2016 and 2015. The Bank has a deposit auction program under which deposits with varying maturities and terms are offered for competitive bid at periodic auctions. The deposit auction program offers the Bank’s members an alternative way to invest their excess liquidity at competitive rates of return, while providing an alternative source of funds for the Bank. The size of the Bank’s deposit base varies as market factors change, including the attractiveness of the Bank’s deposit pricing relative to the rates available to members on alternative money market investments, members’ investment preferences with respect to the maturity of their investments, and member liquidity.
Capital Stock
The Bank’s outstanding capital stock (excluding mandatorily redeemable capital stock) was $1.9 billion and $1.5 billion at December 31, 2016 and 2015, respectively, while the Bank’s average outstanding capital stock (for financial reporting purposes) was $1.8 billion and $1.4 billion, respectively.
At December 31, 2016, the Bank’s five largest shareholders held $378 million of capital stock, which represented 19.6 percent of the Bank’s total outstanding capital stock (including mandatorily redeemable capital stock) as of that date. The following table presents the Bank’s five largest shareholders as of December 31, 2016.
FIVE LARGEST SHAREHOLDERS AS OF DECEMBER 31, 2016
(par value, dollars in thousands)
Name
 
Par Value of
Capital Stock
 
Percent of
Total Par Value
of Capital Stock
Comerica Bank
 
$
121,800

 
6.3
%
Texas Capital Bank, N.A.
 
72,200

 
3.7

Centennial Bank
 
67,963

 
3.5

Southside Bank
 
61,084

 
3.2

Prosperity Bank
 
55,430

 
2.9

 
 
$
378,477

 
19.6
%
As of December 31, 2016, all of the stock held by the five institutions shown in the table above was classified as capital in the statement of condition.
As described in Item 1 — Business, members are required to maintain an investment in Class B stock equal to the sum of a membership investment requirement and an activity-based investment requirement. Currently, the membership investment requirement is 0.04 percent of each member’s total assets as of the previous calendar year end, subject to a minimum of $1,000 and a maximum of $7,000,000. The activity-based investment requirement is currently 4.10 percent of outstanding advances. The Bank’s Board of Directors reviews these requirements at least annually and has the authority to adjust them periodically within ranges established in the Capital Plan, as amended from time to time, to ensure that the Bank remains adequately capitalized. There were no changes to the investment requirements during the years ended December 31, 2016 or 2014.
On December 3, 2014, the Bank's Board of Directors adopted several amendments to the Bank’s Capital Plan, subject to approval by the Finance Agency and certain notification requirements. The Finance Agency approved the amendments to the Bank’s Capital Plan on June 1, 2015. Among other things, the Bank’s Capital Plan was amended to allow for the creation of two sub-classes of the Bank’s Class B Stock (Class B-1 Stock and Class B-2 Stock). On August 31, 2015, the Bank gave notice to its shareholders that the amended Capital Plan would be implemented and the two sub-classes of capital stock would be created on October 1, 2015.
On October 1, 2015, the Bank exchanged all shares of outstanding Class B Stock at the open of business on that date for an equal number of shares of capital stock consisting of shares of Class B-1 Stock and Class B-2 Stock allocated as described in the next sentence. For each shareholder, (i) a number of shares of existing Class B Stock in an amount sufficient to meet such shareholder’s activity-based investment requirement were exchanged for an equal number of shares of Class B-2 Stock and (ii)

47


all other outstanding shares of existing Class B Stock held by such shareholder were exchanged for an equal number of shares of Class B-1 Stock. Immediately following these exchanges, all shares of previously outstanding Class B Stock were retired.
From and after October 1, 2015, Class B-1 Stock is used to meet the membership investment requirement and Class B-2 Stock is used to meet the activity-based investment requirement. Daily, subject to the limitations in the Capital Plan, the Bank converts shares of one sub-class of Class B Stock to the other sub-class of Class B Stock under the following circumstances: (i) shares of Class B-2 Stock held by a shareholder in excess of its activity-based investment requirement are converted into Class B-1 Stock, if necessary, to meet that shareholder’s membership investment requirement and (ii) shares of Class B-1 Stock held by a shareholder in excess of the amount required to meet its membership investment requirement are converted into Class B-2 Stock as needed in order to satisfy that shareholder’s activity-based investment requirement. All excess stock is held as Class B-1 Stock at all times.
The Bank’s Board of Directors may declare dividends at the same rate for all shares of Class B Stock, or at different rates for Class B-1 Stock and Class B-2 Stock, provided that in no event can the dividend rate on Class B-2 Stock be lower than the dividend rate on Class B-1 Stock. Dividend payments may be made in the form of cash, additional shares of either, or both, sub-classes of Class B Stock, or a combination thereof as determined by the Bank’s Board of Directors. As the Bank’s dividends for any given quarter are based upon average capital stock outstanding during the preceding quarter, the first time that differential dividend rates were paid was the first quarter of 2016. For additional information, see Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Capital Plan amendments did not change members’ voting rights in any way. For the purpose of voting rights, all shares of Class B Stock, regardless of sub-class, are treated the same.
The Bank also amended its Capital Plan to modify the permissible range for the advances-based component of the activity-based investment requirement. Effective October 1, 2015, the permissible range for the advances-based component of the activity-based investment requirement changed from a range of 3.0 percent to 5.0 percent of members’ advances outstanding to a range of 2.0 percent to 5.0 percent of members’ advances outstanding. The requirement remained at 4.1 percent of members’ advances outstanding upon the implementation of the amended Capital Plan. The amendments did not alter the permissible ranges for the membership investment requirement or the Acquired Member Asset component of the activity-based investment requirement and no changes to the existing requirements were made upon the implementation of the amended Capital Plan.
Further, under the amended Capital Plan, the Bank’s Board of Directors may also establish one or more separate advances investment requirement percentages (each an "advance type specific percentage") within the range described above to be applied to a specific category of advances in lieu of the generally applicable advances-related investment requirement percentage in effect at the time. Such category of advances may be defined as a particular advances product offering, advances with particular maturities or other features, advances that represent an increase in member borrowing, or such other criteria as the Bank’s Board of Directors may determine. Any advance type specific percentage may be established for an indefinite period of time, or for a specific time period, at the discretion of the Bank’s Board of Directors. Pursuant to the amended Capital Plan, any changes to either the membership or activity-based investment requirements require at least 30 days advance notice to the Bank’s members.
On September 21, 2015, the Bank announced a Board-authorized reduction in the activity-based stock investment requirement from 4.1 percent to 2 percent for certain advances that were funded during the period from October 21, 2015 through December 31, 2015. The terms of this special advances offering were as follows:
Advances with a minimum maturity of one year or greater were eligible for the reduced activity-based investment requirement;
Advances funded had to increase the member institution’s outstanding advances balance above its October 20, 2015 balance, less any advances balances that were scheduled to mature during the period from October 21, 2015 through December 31, 2015; and
The total advances offering was $8 billion. Of this total offering, $2 billion was reserved through December 1, 2015 for members whose total assets fell below the then-applicable three-year average asset cap for CFIs ($1.123 billion).
The standard activity-based stock investment requirement of 4.1 percent continued to apply to all other advances that were funded during the period from October 21, 2015 through December 31, 2015. All other minimum investment requirements also continued to apply during that period.
Quarterly, the Bank generally repurchases a portion of members’ excess capital stock. Excess stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum investment requirement. The portion of members’ excess capital stock subject to repurchase is known as surplus stock. For the repurchases that occurred during 2016, surplus stock was defined as the amount of stock held by a member in excess of 125 percent of the member’s minimum investment requirement. For those repurchases, which occurred on February 25, 2016, June 27, 2016, September 27, 2016 and December 27, 2016, a shareholder's surplus stock was not repurchased if: (1) the amount of that shareholder's surplus stock was

48


$2,500,000 or less, (2) the shareholder elected to opt out of the repurchase, or (3) the shareholder was on restricted collateral status (subject to certain exceptions). For the quarterly repurchases that occurred during the period from January 31, 2014 through August 7, 2015, surplus stock was defined as the amount of stock held by a member in excess of 102.5 percent of the member’s minimum investment requirement. For the repurchases that occurred during this period, the Bank’s practice was that a member’s surplus stock was not repurchased if the amount of that member’s surplus stock was $100,000 or less, or if, subject to certain exceptions, the member was on restricted collateral status. For the repurchase that occurred on November 6, 2015, surplus stock was defined as the amount of stock held by a member in excess of 120 percent of the member’s minimum investment requirement. For the repurchase that occurred on November 6, 2015, a member's surplus stock was not repurchased if the amount of that member's surplus stock was $1,000,000 or less, or if, subject to certain exceptions, the member was on restricted collateral status. For each of the repurchases that occurred in 2015, members were given the opportunity to opt-out of the repurchase if they chose to do so. In the future, the Bank may continue this practice or, alternatively, it may modify its practices for repurchasing and managing excess stock in other ways that would allow members to hold larger amounts of excess stock. Further, the Bank may from time to time modify the definition of surplus stock or the timing and/or frequency of surplus stock repurchases.
At December 31, 2016, excess stock held by the Bank’s members and former members totaled $398 million, which represented 0.7 percent of the Bank’s total assets as of that date.
The following table sets forth the repurchases of surplus stock that have occurred since January 1, 2014.

SURPLUS STOCK REPURCHASED UNDER QUARTERLY REPURCHASE PROGRAM
(dollars in thousands)
Date of Repurchase
by the Bank
 
Shares
Repurchased
 
Amount of
Repurchase
 
Amount Classified as
Mandatorily Redeemable
Capital Stock at Date of
Repurchase
January 31, 2014
 
2,413,181

 
$
241,318

 
$

April 30, 2014
 
1,289,766

 
128,977

 

July 31, 2014
 
2,586,078

 
258,608

 

October 31, 2014
 
2,722,135

 
272,214

 

January 30, 2015
 
1,347,470

 
134,747

 

April 30, 2015
 
1,587,217

 
158,722

 

August 7, 2015
 
1,757,714

 
175,771

 

November 6, 2015
 
1,056,555

 
105,656

 

February 25, 2016
 
1,037,073

 
103,707

 

June 27, 2016
 
609,986

 
60,999

 

September 27, 2016
 
477,834

 
47,783

 

December 27, 2016
 
1,001,588

 
100,158

 

Accounting principles generally accepted in the United States of America (“U.S. GAAP”) require issuers to classify as liabilities certain financial instruments that embody obligations for the issuer (hereinafter referred to as “mandatorily redeemable financial instruments”). Pursuant to these requirements, the Bank reclassifies shares of capital stock from the capital section to the liability section of its balance sheet at the point in time when either a written redemption or withdrawal notice is received from a member or a membership withdrawal or termination is otherwise initiated, because the shares of capital stock then meet the definition of a mandatorily redeemable financial instrument. Shares of capital stock meeting this definition are reclassified to liabilities at fair value. Following reclassification of the stock, any dividends paid or accrued on such shares are recorded as interest expense in the statements of income. As the repurchases presented in the table above are made at the sole discretion of the Bank, the repurchase, in and of itself, does not cause the shares underlying these repurchases to meet the definition of mandatorily redeemable financial instruments.
Stock dividends paid on capital stock that is classified as mandatorily redeemable capital stock are reported as either an issuance of capital stock or as an increase in the mandatorily redeemable capital stock liability depending upon the event that caused the stock on which the dividend is being paid to be classified as a liability. Stock dividends paid on stock subject to a written redemption notice are reported as an issuance of capital stock as such dividends are not covered by the original redemption notice. Stock dividends paid on stock that is subject to a withdrawal notice (or its equivalent) are reported as an

49


increase in the mandatorily redeemable capital stock liability. During the years ended December 31, 2016, 2015 and 2014, the Bank did not receive any stock redemption notices.
Mandatorily redeemable capital stock outstanding at December 31, 2016 and 2015 was $3.4 million and $8.9 million, respectively. For the years ended December 31, 2016 and 2015, average mandatorily redeemable capital stock was $5.4 million and $4.2 million, respectively. Although mandatorily redeemable capital stock is excluded from capital (equity) for financial reporting purposes, this stock is considered capital for regulatory purposes (see the section below entitled “Risk-Based Capital Rules and Other Capital Requirements” for further information).
The following table presents capital stock outstanding, by type of institution, as of December 31, 2016 and 2015.
CAPITAL STOCK OUTSTANDING BY INSTITUTION TYPE
(dollars in millions)
 
December 31, 2016
 
December 31, 2015
 
Amount
 
Percent
 
Amount
 
Percent
Commercial banks
$
1,378

 
71
 %
 
$
1,065

 
69
%
Savings institutions
171

 
9

 
152

 
10

Credit unions
224

 
12

 
226

 
15

Insurance companies
156

 
8

 
97

 
6

Community Development Financial Institutions
1

 

 

 

Total capital stock classified as capital
1,930

 
100

 
1,540

 
100

Mandatorily redeemable capital stock
3

 

 
9

 

Total regulatory capital stock
$
1,933

 
100
 %
 
$
1,549

 
100
%
Derivatives and Hedging Activities
The Bank functions as a financial intermediary by channeling funds provided by investors in its consolidated obligations to member institutions. During the course of a business day, all member institutions may obtain advances through a variety of product types that include features as diverse as variable and fixed coupons, overnight to 40-year maturities, and bullet (principal due at maturity) or amortizing redemption schedules. The Bank funds advances primarily through the issuance of consolidated obligation bonds and discount notes. The terms and amounts of these consolidated obligation bonds and discount notes and the timing of their issuance is determined by the Bank and is subject to investor demand as well as FHLBank System debt issuance policies.
The intermediation of the timing, structure, and amount of Bank members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements. The Bank’s general practice is to contemporaneously execute interest rate exchange agreements when acquiring longer maturity assets and/or issuing longer maturity liabilities in order to convert the instruments’ cash flows to a variable rate that is indexed to LIBOR. By doing so, the Bank reduces its interest rate risk exposure and preserves the value of, and earns more stable returns on, its members’ capital investment.
This use of derivatives is integral to the Bank’s financial management strategy, and the impact of these interest rate exchange agreements permeates the Bank’s financial statements. Management has put in place a risk management framework that outlines the permitted uses of interest rate derivatives and that requires frequent reporting of their values and impact on the Bank’s financial statements. All interest rate derivatives employed by the Bank hedge identifiable risks and none are used for speculative purposes. All of the Bank’s derivative instruments that are designated in ASC 815 hedging relationships are either hedging fair value risk attributable to changes in LIBOR, the designated benchmark interest rate, or hedging the variability of cash flows associated with forecasted transactions.
ASC 815 requires that all derivative instruments be recorded in the statements of condition at their fair values. Changes in the fair values of the Bank’s derivatives, other than those designated in cash flow hedging relationships, are recorded each period in current earnings. ASC 815 also sets forth conditions that must exist in order for balance sheet items to qualify for fair value hedge accounting. If an asset or liability qualifies for fair value hedge accounting, changes in the fair value of the hedged item that are attributable to the hedged risk are also recorded in earnings. As a result, the net effect is that only the “ineffective” portion of a qualifying fair value hedge has an impact on current earnings. To the extent they are effective, changes in the fair

50


values of the Bank’s derivatives designated in cash flow hedging relationships are recorded each period in other comprehensive income.
Under ASC 815, periodic earnings variability for fair value hedges occurs in the form of the net difference between changes in the fair values of the derivative (the hedging instrument) and the hedged item (the asset or liability), if any, for accounting purposes. For the Bank, two types of fair value hedging relationships are primarily responsible for creating earnings volatility.
The first type involves transactions in which the Bank enters into interest rate swaps with coupon cash flows identical or nearly identical to the cash flows of the hedged item (e.g., an advance, investment security or consolidated obligation). In some cases involving hedges of this type, an assumption of “no ineffectiveness” can be made and the changes in the fair values of the derivative and the hedged item are considered identical and offsetting (hereinafter referred to as the shortcut method). However, if the derivative or the hedged item do not have certain characteristics defined in ASC 815, the assumption of “no ineffectiveness” cannot be made, and the derivative and the hedged item must be marked to fair value independently (hereinafter referred to as the long-haul method). Under the long-haul method, the two components of the hedging relationship are marked to fair value using different discount rates, and the resulting changes in fair value are generally slightly different from one another. Even though these differences are generally relatively small when expressed as prices, their impact can become more significant when multiplied by the principal amount of the transaction and then evaluated in the context of the Bank’s net income. Further, during periods in which short-term interest rates are volatile, the Bank may experience increased earnings variability related to differences in the timing between changes in short-term rates and interest rate resets on the floating-rate leg of its interest rate swaps. The floating-rate legs of most of the Bank’s fixed-for-floating interest rate swaps reset every three months and are then fixed until the next reset date. When short-term rates change significantly between the reset date and the valuation date, discounting the cash flows of the floating-rate leg at current market rates until the swap’s next reset date can cause near-term volatility in the Bank’s earnings. Nonetheless, the impact of these types of ineffectiveness-related adjustments on earnings is transitory as the net earnings impact will be zero over the life of the hedging relationship if the derivative and hedged item are held to maturity or their call dates, which is generally the case for the Bank.
The second type involves transactions in which the Bank enters into interest rate exchange agreements to hedge identifiable portfolio risks that either do not qualify for fair value hedge accounting under ASC 815 or are not designated in an ASC 815 fair value hedging relationship (hereinafter referred to as an “economic hedge”). For instance, as described above, the Bank holds interest rate caps as a hedge against embedded caps in its variable-rate CMOs classified as held-to-maturity securities. The changes in fair value of the interest rate caps flow through current earnings without an offsetting change in the fair value of the hedged items (i.e., the variable-rate CMOs with embedded caps), which increases the volatility of the Bank’s earnings. The impact of these changes in value on earnings over the life of the transactions will equal the purchase price of the caps if these instruments are held until their maturity. In addition, from time to time, the Bank uses interest rate basis swaps to reduce its exposure to changes in spreads between one-month and three-month LIBOR. From time to time, the Bank also uses fixed-for-floating interest rate swaps to hedge its fair value risk exposure associated with some of its longer-term discount notes. Excluding net interest settlements, the impact of the changes in fair value of these stand-alone interest rate swaps on earnings over the life of the transactions will be zero if these instruments are held until their maturity. The Bank generally holds its discount note swaps to maturity.
At times, the Bank enters into fixed rate advances that provide members with the right to increase the principal amount of the advance on a specified future date at the original interest rate for the remaining term of the advance, provided the member has satisfied all of the customary requirements for that advance. The Bank hedges these commitments through the use of interest rate swaptions. At December 31, 2016 and 2015, the Bank was a party to interest rate swaptions with aggregate notional balances of $3.0 million and $4.0 million, respectively. These swaptions were designated as fair value hedges of the optional commitments associated with existing advances. As of December 31, 2014, the Bank was not a party to any interest rate swaptions.
Because the use of interest rate derivatives enables the Bank to better manage its economic risks, and thus run its business more effectively and efficiently, the Bank will continue to use them during the normal course of its balance sheet management. The Bank views the accounting consequences of using interest rate derivatives as being an important, but secondary, consideration.
As a result of using interest rate exchange agreements extensively to fulfill its role as a financial intermediary, the Bank has a large notional amount of interest rate exchange agreements relative to its size. As of December 31, 2016, 2015 and 2014, the Bank’s notional balance of interest rate exchange agreements was $35.5 billion, $31.0 billion and $24.9 billion, respectively, while its total assets were $58.2 billion, $42.1 billion and $38.0 billion, respectively. The notional amount of interest rate exchange agreements does not reflect the Bank’s credit risk exposure which, as discussed below, is much less than the notional amount.

51


The following table provides the notional balances of the Bank’s derivative instruments, by balance sheet category and accounting designation, as of December 31, 2016, 2015 and 2014.
COMPOSITION OF DERIVATIVES BY BALANCE SHEET CATEGORY AND ACCOUNTING DESIGNATION
(in millions)
 
Fair Value Hedges
 
 
 
 
 
 
 
Shortcut
Method
 
Long-Haul
Method
 
Cash Flow Hedges
 
Economic
Hedges
 
Total
December 31, 2016
 
 
 
 
 
 
 
 
 
Advances
$
3,835

 
$
1,170

 
$

 
$

 
$
5,005

Investments

 
13,107

 

 
1,203

 
14,310

Consolidated obligation bonds

 
12,776

 

 

 
12,776

Consolidated obligation discount notes

 

 
425

 
1,276

 
1,701

Balance sheet

 

 

 
1,000

 
1,000

Other

 

 

 
327

 
327

Intermediary positions

 

 

 
422

 
422

Total notional balance
$
3,835

 
$
27,053

 
$
425

 
$
4,228

 
$
35,541

December 31, 2015
 
 
 
 
 
 
 
 
 
Advances
$
3,361

 
$
1,443

 
$

 
$
2

 
$
4,806

Investments

 
9,375

 

 
1,753

 
11,128

Consolidated obligation bonds

 
12,988

 

 

 
12,988

Consolidated obligation discount notes

 

 
100

 

 
100

Intermediary positions

 

 

 
2,006

 
2,006

Total notional balance
$
3,361

 
$
23,806

 
$
100

 
$
3,761

 
$
31,028

December 31, 2014
 
 
 
 
 
 
 
 
 
Advances
$
3,593

 
$
1,369

 
$

 
$
2

 
$
4,964

Investments

 
5,878

 

 
2,901

 
8,779

Consolidated obligation bonds

 
10,102

 

 

 
10,102

Intermediary positions

 

 

 
1,030

 
1,030

Total notional balance
$
3,593

 
$
17,349

 
$

 
$
3,933

 
$
24,875


52


The following table provides the notional balances of the Bank’s derivative instruments, by hedging strategy, as of December 31, 2016 and 2015.
HEDGING STRATEGIES
(in millions)
 
 
 
 
Hedge
Accounting
Designation
 
Notional Amount
at December 31,
Hedged Item / Hedging Instrument
 
Hedging Objective
 
 
2016
 
2015
Advances
 
 
 
 
 
 

 
 

Pay fixed, receive floating interest rate swap (without options)
 
Converts the advance’s fixed rate to a variable- rate index.
 
Fair Value
 
$
3,810

 
$
3,569

 
 
Economic
 

 
2

 
 
 
 
 
 
 
 
 
Pay fixed, receive floating interest rate swap (with options)
 
Converts the advance’s fixed rate to a variable- rate index and offsets option risk in the advance.
 
Fair Value
 
1,185

 
1,227

 
 
 
 
 
 
Pay fixed, receive floating interest rate swap combined with purchased swaption
 
Converts the advance’s fixed rate to a variable- rate index and offsets an optional commitment embedded in the advance that allows the member to increase the amount of the advance.
 
Fair Value
 
10

 
8

Investments
 
 
 
 
 
 

 
 

Pay fixed, receive floating interest rate swap
 
Converts the investment security's fixed rate to a variable-rate index.
 
Fair Value
 
13,107

 
9,375

 
 
Economic
 
3

 
103

 
 
 
 
 
 
 
 
 
Interest rate caps
 
Offsets the interest rate caps embedded in a portfolio of variable-rate investment securities.
 
Economic
 
1,200

 
1,650

Consolidated Obligation Bonds
 
 
 
 
 
 

 
 

Receive fixed, pay floating interest rate swap (without options)
 
Converts the bond’s fixed rate to a variable-rate index.
 
Fair Value
 
7,178

 
7,563

Receive fixed, pay floating interest rate swap (with options)
 
Converts the bond’s fixed rate to a variable-rate index and offsets option risk in the bond.
 
Fair Value
 
5,598

 
5,425

Consolidated Obligation Discount Notes
 
 
 
 
 
 

 
 

Receive floating, pay fixed interest rate swap
 
Reduces cash flow variability by converting the variable cash flows of rolling 3-month discount notes to fixed cash flows.
 
Cash Flow
 
425

 
100

Receive fixed, pay floating interest rate swap
 
Converts the discount note's fixed rate to a variable rate index.
 
Economic
 
1,276

 

Balance Sheet
 
 
 
 
 
 

 
 

Pay floating, receive floating basis swap
 
To reduce interest rate sensitivity and repricing gaps by converting the asset's or liability’s variable rate to the same variable-rate index as the funding source or asset being funded.
 
Economic
 
1,000

 

Pay floating, receive fixed interest rate swap
 
To hedge risks to the Bank's earnings that are not directly linked to specific assets, liabilities or forecasted transactions
 
Economic
 
325

 

Intermediary Positions
 
 
 
 
 
 

 
 

Pay fixed, receive floating interest rate swap, and receive fixed, pay floating interest rate swap
 
To provide interest rate swaps to members and to offset these interest rate swaps by executing interest rate swaps with the Bank’s derivative counterparties.
 
Economic
 
342

 
1,926

Interest rate caps
 
To provide interest rate caps to members and to offset these interest rate caps by executing interest rate caps with the Bank's derivative counterparties.
 
Economic
 
80

 
80

Total derivatives used to hedge risk
 
 
 
 
 
35,539

 
31,028

Mortgage delivery commitments
 
 
 
 
 
2

 

 
 
 
 
 
 
 
 
 
Total notional amount of derivatives
 
 
 
 
 
$
35,541

 
$
31,028



53


The following table presents the earnings impact of derivatives and hedging activities, and the changes in fair value of any hedged items recorded at fair value during the years ended December 31, 2016, 2015 and 2014.
NET EARNINGS IMPACT OF DERIVATIVES AND HEDGING ACTIVITIES
(in millions)
 
Advances
 
Investments
 
Consolidated
Obligation
Bonds
 
Consolidated
Obligation
Discount Notes
 
Intermediary
 Transactions
 
Balance
Sheet and Other
 
Total
Year ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$
(1
)
 
$
73

 
$
(7
)
 
$

 
$

 
$

 
$
65

Net interest settlements included in net interest income (2)
(65
)
 
(218
)
 
62

 
(4
)
 

 

 
(225
)
Net gain (loss) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on fair value hedges
1

 
13

 
(2
)
 

 

 

 
12

Net gains (losses) on economic hedges

 
(3
)
 
(2
)
 
1

 

 
(19
)
 
(23
)
Net interest settlements on economic hedges

 

 

 

 

 
2

 
2

Total net gains (losses) on derivatives and hedging activities
1

 
10

 
(4
)
 
1

 

 
(17
)
 
(9
)
Net impact of derivatives and hedging activities
(65
)
 
(135
)
 
51

 
(3
)
 

 
(17
)
 
(169
)
Net gain on hedged financial instrument classified as trading

 
2

 

 

 

 

 
2

 
$
(65
)
 
$
(133
)
 
$
51

 
$
(3
)
 
$

 
$
(17
)
 
$
(167
)
Year ended December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$
(6
)
 
$
96

 
$
(1
)
 
$

 
$

 
$

 
$
89

Net interest settlements included in net interest income (2)
(94
)
 
(218
)
 
132

 
(1
)
 

 

 
(181
)
Net gain (loss) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains on fair value hedges

 
1

 

 

 

 

 
1

Net gains on economic hedges

 
1

 
3

 

 
1

 

 
5

Total net gains on derivatives and hedging activities

 
2

 
3

 

 
1

 

 
6

Net impact of derivatives and hedging activities
$
(100
)
 
$
(120
)
 
$
134

 
$
(1
)
 
$
1

 
$

 
$
(86
)
Net loss on hedged financial instrument classified as trading

 
(1
)
 

 

 

 

 
(1
)
 
$
(100
)
 
$
(121
)
 
$
134

 
$
(1
)
 
$
1

 
$

 
$
(87
)
Year ended December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$

 
$
109

 
$

 
$

 
$

 
$

 
$
109

Net interest settlements included in net interest income (2)
(110
)
 
(196
)
 
117

 

 

 

 
(189
)
Net gain (loss) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on fair value hedges
(1
)
 
(3
)
 
1

 

 

 

 
(3
)
Net gains (losses) on economic hedges

 
(3
)
 

 

 
1

 
3

 
1

Net interest settlements on economic hedges

 

 

 

 

 
1

 
1

Total net gains (losses) on derivatives and hedging activities
(1
)
 
(6
)
 
1

 

 
1

 
4

 
(1
)
Net impact of derivatives and hedging activities
$
(111
)
 
$
(93
)
 
$
118

 
$

 
$
1

 
$
4

 
$
(81
)
____________________________________
(1) 
Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.
(2) 
Represents interest income/expense on derivatives included in net interest income.

54


As a result of statutory and regulatory requirements emanating from the Dodd-Frank Act, certain derivative transactions that the Bank enters into on and after June 10, 2013 are required to be cleared through a third-party central clearinghouse. As of December 31, 2016, the Bank had cleared trades outstanding with notional amounts totaling $24 billion. Cleared trades are subject to initial and variation margin requirements established by the clearinghouse and its clearing members. Collateral is delivered (or returned) daily and, unlike bilateral derivatives, is not subject to any maximum unsecured credit exposure thresholds. The fair values of all interest rate derivatives (including accrued interest receivables and payables) with each clearing member of each clearinghouse are offset for purposes of measuring credit exposure and determining initial and variation margin requirements. With cleared transactions, the Bank is exposed to credit risk in the event that the clearinghouse or the clearing member fails to meet its obligations to the Bank. The Bank has determined that the exercise by a non-defaulting party of the setoff rights incorporated in its cleared derivative transactions should be upheld in the event of a default, including a bankruptcy, insolvency or similar proceeding involving the clearinghouse or any of its clearing members or both.
The Bank has transacted some of its interest rate exchange agreements bilaterally with large financial institutions (with which it has in place master agreements). In doing so, the Bank has generally exchanged a defined market risk for the risk that the counterparty will not be able to fulfill its obligations in the future. The Bank manages this credit risk by spreading its transactions among as many highly rated counterparties as is practicable, by entering into master agreements with each of its non-member bilateral counterparties that include maximum unsecured credit exposure amounts ranging from $100,000 to $500,000, and by monitoring its exposure to each counterparty on a daily basis. In addition, all of the Bank’s master agreements with its bilateral counterparties include netting arrangements whereby the fair values of all interest rate derivatives (including accrued interest receivables and payables) with each counterparty are offset for purposes of measuring credit exposure. As of December 31, 2016, the notional balance of outstanding interest rate exchange agreements transacted with non-member bilateral counterparties totaled $11 billion.
Under the Bank’s master agreements with its non-member bilateral counterparties, the unsecured credit exposure thresholds must be met before collateral is required to be delivered by one party to the other party. Once the counterparties agree to the valuations of the interest rate exchange agreements, and if it is determined that the unsecured credit exposure exceeds the threshold, then, upon a request made by the unsecured counterparty, the party that has the unsecured obligation to the counterparty bearing the risk of the unsecured credit exposure generally must deliver sufficient collateral (or return a sufficient amount of previously remitted collateral) to reduce the unsecured credit exposure to zero (or, in the case of pledged securities, to an amount equal to the discount applied to the securities under the terms of the master agreement). Collateral is delivered (or returned) daily when these thresholds are met. The master agreements with the Bank's non-member bilateral counterparties require the delivery of collateral consisting of cash or very liquid, highly rated securities (generally consisting of U.S. government-guaranteed or agency debt securities) if credit risk exposures rise above the thresholds.
The notional amount of interest rate exchange agreements does not reflect the Bank's credit risk exposure, which is much less than the notional amount. The Bank's net credit risk exposure is based on the current estimated cost, on a present value basis, of replacing at current market rates all interest rate exchange agreements with individual counterparties, if those counterparties were to default, after taking into account the value of any cash and/or securities collateral held or remitted by the Bank. For counterparties with which the Bank is in a net gain position, the Bank has credit exposure when the collateral it is holding (if any) has a value less than the amount of the gain. For counterparties with which the Bank is in a net loss position, the Bank has credit exposure when it has delivered collateral with a value greater than the amount of the loss position.
As of December 31, 2016, cash collateral totaling $241 million had been delivered by the Bank to its non-member bilateral derivative counterparties under the terms of the collateral exchange agreements. At that date, the Bank held $1 million of cash as collateral from one of its non-member bilateral derivative counterparties under the terms of the applicable collateral exchange agreement and $94 million of cash collateral to secure some of its cleared derivative transactions. In addition, the Bank had pledged $72 million of cash as collateral for the remainder of its cleared derivatives as of December 31, 2016. Further, the Bank had pledged $613 million (fair value) of securities to satisfy initial margin requirements associated with its cleared derivatives as of that date.


55


The following table provides information regarding the Bank’s derivative counterparty credit exposure as of December 31, 2016.
DERIVATIVES COUNTERPARTY CREDIT EXPOSURE
(dollars in millions)
Credit Rating(1)
 
Number of Bilateral Counterparties
 
Notional Principal(2)
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged To (From) Counterparty
 
Other Collateral Pledged To Counterparty
 
Net Credit Exposure
Non-member counterparties
 
 
 
 
 
 
 
 
 
 
 
 
Asset positions with credit exposure
 
 
 
 
 
 
 
 
 
 
 
 
Cleared derivatives (3)
 

 
$
12,862.0

 
$
100.7

 
$
(94.3
)
 
$
552.8

 
$
559.2

Liability positions with credit exposure
 
 
 
 
 
 
 
 
 
 
 
 
Single-A
 
3

 
387.0

 
(4.0
)
 
4.7

 

 
0.7

Cleared derivatives (3)
 

 
11,509.3

 
(73.8
)
 
72.1

 
60.5

 
58.8

Total derivative positions with non-member counterparties to which the Bank had credit exposure
 
3

 
24,758.3

 
22.9

 
(17.5
)
 
613.3

 
618.7

 
 
 
 
 
 
 
 
 
 
 
 
 
Asset positions without credit exposure
 
1

 
85.0

 
0.2

 
(0.4
)
 

 

Liability positions without credit exposure (4)
 
14

 
10,484.8

 
(246.1
)
 
236.1

 

 

Total non-member counterparties
 
18

 
35,328.1

 
(223.0
)
 
$
218.2

 
$
613.3

 
$
618.7

 
 
 
 
 
 
 
 
 
 
 
 
 
Member institutions 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate exchange agreements (5)
 
 
 
 
 
 
 
 
 
 
 
 
Asset positions
 
8

 
145.8

 
8.5

 
 
 
 
 
 
Liability positions
 
2

 
65.0

 
(2.5
)
 
 
 
 
 
 
Mortgage delivery commitments
 
 
 
2.0

 

 
 
 
 
 
 
Total member institutions
 
10

 
212.8

 
6.0

 
 
 
 
 
 
Total
 
28

 
$
35,540.9

 
$
(217.0
)
 
 
 
 
 
 
____________________________________
(1) 
Credit ratings shown in the table reflect the lowest rating from Moody’s, S&P or Fitch and are as of December 31, 2016.
(2) 
Includes amounts that had not settled as of December 31, 2016.
(3) 
The counterparties to the Banks cleared derivatives transactions are unrated.
(4) 
The figures for the liability positions without credit exposure included transactions with a counterparty that is affiliated with a member institution and transactions with two counterparties that are affiliated with a non-member shareholder of the Bank. Transactions with those counterparties had an aggregate notional principal of $2.4 billion.
(5) 
This product offering and the collateral provisions associated therewith are discussed in the paragraph below.
The Bank offers interest rate swaps, caps and floors to its members to assist them in meeting their risk management objectives. In derivative transactions with its members, the Bank acts as an intermediary by entering into an interest rate exchange agreement with the member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s non-member derivative counterparties discussed above. When entering into interest rate exchange agreements with its members, the Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. Eligible collateral for derivative transactions consists of collateral that is eligible to secure advances and other obligations under the member’s Advances and Security Agreement with the Bank (for a description of eligible collateral, see Item 1 – Business — Products and Services – Advances).

56


The Dodd-Frank Act changed the regulatory framework for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While the Bank expects to be able in certain instances to continue to enter into uncleared trades on a bilateral basis, those transactions will be subject to new regulatory requirements, including initial margin requirements imposed by regulators. For additional discussion, see Item 1 - Business - Legislative and Regulatory Developments.
Market Value of Equity
The ratio of the Bank’s estimated market value of equity to its book value of equity was 104 percent and 105 percent at December 31, 2016 and 2015, respectively. For additional discussion, see Item 7A — Quantitative and Qualitative Disclosures About Market Risk.
Results of Operations
Net Income
Net income for 2016, 2015 and 2014 was $79.4 million, $67.2 million and $48.5 million, respectively. The Bank’s net income for 2016 represented a return on average capital stock (“ROCS”) of 4.44 percent. In comparison, the Bank’s ROCS was 4.98 percent in 2015 and 4.25 percent in 2014. To derive the Bank’s ROCS, net income is divided by average capital stock outstanding excluding stock that is classified as mandatorily redeemable capital stock. The factors contributing to the changes in the Bank's net income are discussed below.
While the Bank is exempt from all federal, state and local income taxes, it is obligated to set aside 10 percent of its income before assessments (adjusted for interest expense on mandatorily redeemable capital stock) for its AHP. The AHP provides grants that members can use to support affordable housing projects in their communities. Generally, the Bank’s AHP assessment is derived by adding interest expense on mandatorily redeemable capital stock to income before assessments; the result of this calculation is then multiplied by 10 percent. For the years ended December 31, 2016, 2015 and 2014, the Bank’s AHP assessments totaled $8.8 million, $7.5 million and $5.4 million, respectively. In each of these years, the effective assessment rate closely approximated 10 percent. Because interest expense on mandatorily redeemable capital stock is not deductible for purposes of computing the Bank’s AHP assessment, the effective assessment rate could exceed 10 percent in future periods.
Income Before Assessments
During 2016, 2015 and 2014, the Bank’s income before assessments was $88.3 million, $74.7 million and $53.9 million, respectively. The $13.6 million increase in income before assessments for 2016 as compared to 2015 was attributable to a $43.4 million increase in net interest income, offset by a $21.9 million decrease in other income and a $7.9 million increase in other expenses. The $20.8 million increase in income before assessments for 2015 as compared to 2014 was attributable to a $1.0 million increase in net interest income and a $21.7 million increase in other income, offset by a $2.0 million increase in other expenses. The components of income before assessments (net interest income, other income and other expense) are discussed in more detail in the following sections.
Net Interest Income
In 2016, 2015 and 2014, the Bank’s net interest income was $165.0 million, $121.6 million and $120.6 million, respectively, and its net interest margin was 31 basis points, 29 basis points and 35 basis points, respectively. The increase in net interest income from 2015 to 2016 was due primarily to an increase in the average balances of the Bank's interest-earning assets from $42.6 billion in 2015 to $53.6 billion in 2016. The small increase in net interest income from 2014 to 2015 was due primarily to an increase in the average balances of the Bank's interest-earning assets from $34.9 billion in 2014 to $42.6 billion in 2015, largely offset by a decrease in the Bank's net interest spread.


57


The following table presents average balance sheet amounts together with the total dollar amounts of interest income and expense and the weighted average interest rates of major earning asset categories and the funding sources for those earning assets for 2016, 2015 and 2014.
YIELD AND SPREAD ANALYSIS
(dollars in millions)
 
For the year ended December 31,
 
2016
 
2015
 
2014
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate(a)
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate(a)
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate(a)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (b)
$
817

 
$
3

 
0.38
%
 
$
599

 
$
1

 
0.13
%
 
$
730

 
$
1

 
0.09
%
Securities purchased under agreements to resell
1,567

 
6

 
0.40
%
 
2,412

 
2

 
0.10
%
 
908

 
1

 
0.07
%
Federal funds sold (c)
5,716

 
24

 
0.41
%
 
6,066

 
8

 
0.12
%
 
3,429

 
3

 
0.08
%
Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading
164

 
3

 
1.78
%
 
237

 
1

 
0.48
%
 
805

 

 
0.06
%
Available-for-sale (d)
12,424

 
135

 
1.09
%
 
7,618

 
42

 
0.55
%
 
5,803

 
22

 
0.38
%
Held-to-maturity (d)
2,879

 
30

 
1.04
%
 
3,792

 
29

 
0.76
%
 
5,075

 
40

 
0.80
%
Advances (e)
29,959

 
217

 
0.72
%
 
21,832

 
134

 
0.61
%
 
18,071

 
132

 
0.73
%
Mortgage loans held for portfolio
69

 
4

 
5.08
%
 
63

 
4

 
5.77
%
 
81

 
5

 
5.72
%
Total earning assets
53,595

 
422

 
0.79
%
 
42,619

 
221

 
0.52
%
 
34,902

 
204

 
0.58
%
Cash and due from banks
44

 
 
 
 
 
67

 
 
 
 
 
138

 
 
 
 
Other assets
157

 
 
 
 
 
137

 
 
 
 
 
112

 
 
 
 
Derivatives netting adjustment (b)
(828
)
 
 
 
 
 
(603
)
 
 
 
 
 
(730
)
 
 
 
 
Fair value adjustment on available-for-sale securities (d)
(49
)
 
 
 
 
 
(10
)
 
 
 
 
 
18

 
 
 
 
Adjustment for net non-credit portion of other-than-temporary impairments on held-to-maturity securities (d)
(19
)
 
 
 
 
 
(24
)
 
 
 
 
 
(30
)
 
 
 
 
Total assets
$
52,900

 
422

 
0.80
%
 
$
42,186

 
221

 
0.52
%
 
$
34,410

 
204

 
0.59
%
Liabilities and Capital
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits (b) (f)
$
875

 
3

 
0.28
%
 
$
883

 

 
0.03
%
 
$
746

 

 
0.01
%
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds
21,247

 
144

 
0.68
%
 
19,455

 
77

 
0.40
%
 
18,873

 
73

 
0.39
%
Discount notes
27,965

 
110

 
0.40
%
 
19,413

 
22

 
0.11
%
 
12,720

 
10

 
0.08
%
Mandatorily redeemable capital stock and other borrowings
18

 

 
0.19
%
 
12

 

 
0.18
%
 
11

 

 
0.19
%
Total interest-bearing liabilities
50,105

 
257

 
0.51
%
 
39,763

 
99

 
0.25
%
 
32,350

 
83

 
0.26
%
Other liabilities
1,109

 
 
 
 
 
966

 
 
 
 
 
971

 
 
 
 
Derivatives netting adjustment (b)
(828
)
 
 
 
 
 
(603
)
 
 
 
 
 
(730
)
 
 
 
 
Total liabilities
50,386

 
257

 
0.51
%
 
40,126

 
99

 
0.25
%
 
32,591

 
83

 
0.26
%
Total capital
2,514

 
 
 
 
 
2,060

 
 
 
 
 
1,819

 
 
 
 
Total liabilities and capital
$
52,900

 
 
 
0.49
%
 
$
42,186

 
 
 
0.23
%
 
$
34,410

 
 
 
0.24
%
Net interest income
 
 
$
165

 
 
 
 
 
$
122

 
 
 
 
 
$
121

 
 
Net interest margin
 
 
 
 
0.31
%
 
 
 
 
 
0.29
%
 
 
 
 
 
0.35
%
Net interest spread
 
 
 
 
0.28
%
 
 
 
 
 
0.27
%
 
 
 
 
 
0.32
%
Impact of non-interest bearing funds
 
 
 
 
0.03
%
 
 
 
 
 
0.02
%
 
 
 
 
 
0.03
%
____________________________________

58


(a) 
Amounts used to calculate average rates are based on whole dollars. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
(b) 
The Bank offsets the fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against the fair value amounts recognized for derivative instruments transacted under a master netting agreement or other similar arrangement. The average balances of interest-bearing deposit assets for the years ended December 31, 2016, 2015 and 2014 in the table above include $0.82 billion, $0.60 billion and $0.73 billion, respectively, which are classified as derivative assets/liabilities on the statements of condition. In addition, the average balances of interest-bearing deposit liabilities for the years ended December 31, 2016, 2015 and 2014 in the table above include $10.4 million, $4.3 million and $0.4 million, respectively, which are classified as derivative assets/liabilities on the statements of condition.
(c) 
Includes overnight federal funds sold to other FHLBanks.
(d) 
Average balances for available-for-sale and held-to-maturity securities are calculated based upon amortized cost.
(e) 
Interest income and average rates include net prepayment fees on advances.
(f) 
Average balances of deposits for the years ended December 31, 2016, 2015 and 2014 include time deposits of $104 million, $117 million and $99 million, respectively. The remaining balances are substantially comprised of interest-bearing demand deposits. During the years ended December 31, 2016, 2015 and 2014, interest was paid on time deposits at average rates of 0.31 percent, 0.06 percent and 0.01 percent, respectively.
Net interest margin, or net interest income as a percent of average earning assets, is a function of net interest spread and the rates of return on assets funded by the investment of the Bank’s capital. Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Due to low short-term interest rates in 2016, 2015 and 2014, the contribution of the Bank’s invested capital to the net interest margin (the impact of non-interest bearing funds) was 3 basis points in 2016, 2 basis points in 2015 and 3 basis points in 2014. The Bank’s net interest spread was 28 basis points in 2016, 27 basis points in 2015 and 32 basis points in 2014.
The decline in the Bank's net interest spread from 2014 to 2015 was due primarily to an increase in the Bank's average short-term liquidity portfolio and lower yields on the Bank's advances. A significant portion of the Bank's advances that were funded during 2015 were either short-term advances or longer-term advances that re-price frequently (e.g., every three months), each of which have lower yields than the Bank's other longer-term assets. These lower yields were offset in part by an increase in the yield on the Bank's available-for-sale securities portfolio, which was primarily the result of purchasing higher-yielding GSE CMBS throughout the second half of 2014 and all of 2015.


59


Rate and Volume Analysis
Changes in both volume (i.e., average balances) and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between 2016 and 2015 and between 2015 and 2014 and excludes net interest income on economic hedge derivatives as discussed above. Changes in interest income and interest expense that cannot be attributed to either volume or rate have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.
RATE AND VOLUME ANALYSIS
(in millions)
 
2016 vs. 2015
Increase (Decrease) Due To
 
2015 vs. 2014
Increase (Decrease) Due To
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest income
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$

 
$
2

 
$
2

 
$

 
$

 
$

Securities purchased under agreements to resell
(1
)
 
5

 
4

 
1

 

 
1

Federal funds sold
(1
)
 
17

 
16

 
3

 
2

 
5

Investments
 
 
 
 
 
 
 
 
 
 
 
Trading

 
2

 
2

 

 
1

 
1

Available-for-sale
37

 
56

 
93

 
8

 
12

 
20

Held-to-maturity
(8
)
 
9

 
1

 
(10
)
 
(1
)
 
(11
)
Advances
56

 
27

 
83

 
25

 
(23
)
 
2

Mortgage loans held for portfolio

 

 

 
(1
)
 

 
(1
)
Total interest income
83

 
118

 
201

 
26

 
(9
)
 
17

Interest expense
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits

 
3

 
3

 

 

 

Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
Bonds
8

 
59

 
67

 
2

 
2

 
4

Discount notes
13

 
75

 
88

 
7

 
5

 
12

Mandatorily redeemable capital stock and other borrowings

 

 

 

 

 

Total interest expense
21

 
137

 
158

 
9

 
7

 
16

Changes in net interest income
$
62

 
$
(19
)
 
$
43

 
$
17

 
$
(16
)
 
$
1



60


Other Income (Loss)
The following table presents the various components of other income (loss) for the years ended December 31, 2016, 2015 and 2014.

OTHER INCOME (LOSS)
(in thousands)
 
2016
 
2015
 
2014
Net interest income (expense) associated with:
 
 
 
 
 
Economic hedge derivatives related to consolidated obligation bonds
$

 
$

 
$
81

Economic hedge derivatives related to consolidated obligation discount notes
252

 
63

 

Stand-alone economic hedge derivatives (basis swaps)
(142
)
 

 
1,204

Member/offsetting swaps
196

 
191

 
107

Economic hedge derivatives related to trading securities
(296
)
 
(234
)
 

Economic hedge derivatives related to available-for-sale securities
(19
)
 
(38
)
 

Economic hedge derivatives related to advances
(27
)
 
(6
)
 
(30
)
Other stand-alone economic hedge derivatives
1,958

 

 

Total net interest income (expense) associated with economic hedge derivatives
1,922

 
(24
)
 
1,362

Gains (losses) related to economic hedge derivatives
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
Advances
27

 
(2
)
 
(144
)
Available-for-sale securities
23

 
1,294

 
411

Trading securities
(2,067
)
 

 

Consolidated obligation bonds
(1,905
)
 
3,033

 
126

Consolidated obligation discount notes
652

 

 

Stand-alone economic hedge derivatives (basis swaps)
75

 

 
2,337

Other stand-alone economic hedge derivatives
(19,681
)
 

 

Mortgage delivery commitments
691

 

 

Interest rate caps related to held-to-maturity securities
(478
)
 
(687
)
 
(2,601
)
Member/offsetting swaps and caps
203

 
1,357

 
1,170

Total fair value gains (losses) related to economic hedge derivatives
(22,460
)
 
4,995

 
1,299

Gains (losses) related to fair value hedge ineffectiveness
 
 
 
 
 
Advances and associated hedges
507

 
308

 
(825
)
Available-for-sale securities and associated hedges
13,284

 
1,030

 
(2,644
)
Consolidated obligation bonds and associated hedges
(2,079
)
 
174

 
385

Total fair value hedge ineffectiveness
11,712

 
1,512

 
(3,084
)
Total net gains (losses) on derivatives and hedging activities
(8,826
)
 
6,483

 
(423
)
Net gains (losses) on trading securities
2,186

 
(1,792
)
 
625

Credit component of other-than-temporary impairment losses on held-to-maturity securities
(20
)
 
(33
)
 
(37
)
Gains on early extinguishment of debt

 

 
962

Gains on sales of held-to-maturity securities
940

 
14,514

 

Gains on sales of available-for-sale securities
5,104

 
3,922

 

Service fees
2,295

 
2,303

 
2,508

Letter of credit fees
5,784

 
4,415

 
4,832

Other, net
361

 
(38
)
 
(425
)
Total other
16,650

 
23,291

 
8,465

Total other income
$
7,824

 
$
29,774

 
$
8,042

Fair Value Hedge Ineffectiveness
The Bank uses interest rate swaps to hedge the risk of changes in the fair value of some of its advances and consolidated obligation bonds and substantially all of its available-for-sale securities. These hedging relationships are designated as fair value hedges. To the extent these relationships qualify for hedge accounting, changes in the fair values of both the derivative (the interest rate swap) and the hedged item (limited to changes attributable to the hedged risk) are recorded in earnings. For

61


those relationships that qualified for hedge accounting, the differences between the change in fair value of the hedged items and the change in fair value of the associated interest rate swaps (representing hedge ineffectiveness) were net gains (losses) of $11.7 million, $1.5 million and $(3.1) million in 2016, 2015 and 2014, respectively. To the extent these hedging relationships do not qualify for hedge accounting, or cease to qualify because they are determined to be ineffective, only the change in fair value of the derivative is recorded in earnings (in this case, there is no offsetting change in fair value of the hedged item). The net gains (losses) on derivatives associated with specific advances, available-for-sale securities and consolidated obligation bonds that did not qualify for hedge accounting, or ceased to qualify because they were determined to be ineffective, totaled $(1.9) million, $4.3 million and $0.4 million in 2016, 2015 and 2014, respectively.
The increase in fair value hedge ineffectiveness during the year ended December 31, 2016 as compared to the year ended December 31, 2015, was due in large part to the addition of higher yielding, longer duration GSE CMBS and GSE debentures to the Bank’s available-for-sale securities portfolio during 2016 and 2015. Substantially all of the Bank’s GSE CMBS and GSE debentures classified as available-for-sale are hedged with fixed-for-floating interest rate swaps in long-haul hedging relationships. The hedge ineffectiveness gains and losses associated with these particular relationships are attributable in large part to the use of different discount curves to value the interest rate swaps (OIS) and the GSE CMBS/GSE debentures (LIBOR plus a constant spread). Notwithstanding the hedge ineffectiveness gains and losses, these hedging relationships have been, and are expected to continue to be, highly effective in achieving offsetting changes in fair values attributable to the hedged risk. While the ineffectiveness-related gains and losses associated with these hedging relationships can be significant when evaluated in the context of the Bank’s net income, they are relatively small when expressed as a percentage of the values of the positions. Because the Bank expects to hold these interest rate swaps to maturity, the unrealized ineffectiveness-related gains (or losses) associated with its holdings of GSE CMBS and GSE debentures are expected to be transitory, meaning that they will reverse in future periods in the form of ineffectiveness-related losses (or gains).
Economic Hedge Derivatives
Notwithstanding the transitory nature of the ineffectiveness-related gains and losses associated with the Bank's available-for-sale securities portfolio (discussed above), the Bank entered into several derivative transactions in 2016 in an effort to mitigate a portion of the periodic earnings variability that can result from those fair value hedging relationships. For the year ended December 31, 2016, the losses associated with stand-alone economic hedge derivatives used for this purpose were $19.7 million.
From time to time, the Bank has entered into interest rate basis swaps to reduce its exposure to changing spreads between one-month and three-month LIBOR. Under these agreements, the Bank generally either receives three-month LIBOR and pays one-month LIBOR or receives one-month LIBOR and pays three-month LIBOR. The Bank accounts for interest rate basis swaps as stand-alone derivatives and, as such, the fair value changes associated with these instruments can be a source of volatility in the Bank’s earnings, particularly when one-month and/or three-month LIBOR, or the spreads between these two indices, are or are projected to be volatile. The fair values of one-month LIBOR to three-month LIBOR basis swaps generally fluctuate based on the timing of the interest rate reset dates, the relationship between one-month LIBOR and three-month LIBOR at the time of measurement, the projected relationship between one-month LIBOR and three-month LIBOR for the remaining term of the interest rate basis swap, the projected overnight index swap rates over the remaining term of the interest rate basis swap and the relationship between the current coupons for the interest rate swap and the prevailing LIBOR rates at the valuation date. During the year ended December 31, 2016, the Bank entered into two interest rate basis swaps with an aggregate notional amount of $2.0 billion. At December 31, 2016, one interest rate basis swap with a notional amount of $1.0 billion remained outstanding. During the year ended December 31, 2016, the Bank terminated one interest rate basis swap with a notional amount of $1.0 billion. Proceeds from this termination totaled $0.3 million, which reflected the cumulative life-to-date gains (excluding net interest settlements) realized on the transaction. The Bank was not a party to any interest rate basis swaps during the year ended December 31, 2015. During the year ended December 31, 2014, the Bank terminated four interest rate basis swaps with an aggregate notional amount of $2.7 billion. Proceeds from these terminations totaled $11.4 million, which reflected the cumulative life-to-date gains (excluding net interest settlements) realized on the transactions. There were no other terminations of interest rate basis swaps during the year ended December 31, 2014. Further, one interest rate basis swap with a notional amount of $1.0 billion matured during the year ended December 31, 2014.
As discussed previously in the section entitled “Financial Condition – Long-Term Investments,” to hedge a portion of the risk associated with a significant increase in short-term interest rates, the Bank held 3 interest rate cap agreements having a total notional amount of $1.2 billion as of December 31, 2016. The premiums paid for these caps totaled $4.3 million. The Bank did not terminate any interest rate caps during the years ended December 31, 2016, 2015 or 2014. The fair values of interest rate cap agreements are dependent upon the level of interest rates, volatilities and remaining term to maturity. In general (assuming constant volatilities and no erosion in value attributable to the passage of time), interest rate caps will increase in value as market interest rates rise and will diminish in value as market interest rates decline. The value of interest rate caps will increase as volatilities increase and will decline as volatilities decrease. Absent changes in volatilities or interest rates, the value of interest rate caps will decline with the passage of time. As stand-alone derivatives, the changes in the fair values of the Bank’s

62


interest rate cap agreements are recorded in earnings with no offsetting changes in the fair values of the hedged CMO LIBOR floaters with embedded caps and therefore can also be a source of volatility in the Bank’s earnings. At December 31, 2016, the carrying values of the Bank’s stand-alone interest rate cap agreements totaled $0.3 million.
From time to time, the Bank hedges the risk of changes in the fair value of some of its longer-term consolidated obligation discount notes using fixed-for-floating interest rate swaps. As of December 31, 2016, the aggregate notional balance of these swaps totaled $1.3 billion. As stand-alone derivatives, the changes in the fair values of the Bank’s discount note swaps are recorded in earnings with no offsetting changes in the fair values of the hedged items (i.e., the consolidated obligation discount notes) and therefore can also be a source of volatility in the Bank’s earnings.
Other
During the years ended December 31, 2016 and 2015, the Bank sold approximately $158 million and $816 million (par values), respectively, of GSE RMBS classified as held-to-maturity securities. The aggregate gains recognized on these sales totaled $0.9 million and $14.5 million, respectively. For each of these securities, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition. As such, the sales were considered maturities for purposes of security classification. During these same periods, the Bank sold approximately $2.6 billion and $871 million (par values), respectively, of non-MBS securities classified as available-for-sale, including $2.3 billion of GSE debentures in 2016. The aggregate gains recognized on these sales totaled $5.1 million and $3.9 million, respectively. There were no sales of long-term investment securities during the year ended December 31, 2014.
During September and October 2015, the Bank acquired fixed rate U.S. Treasury Notes with par values of $104.8 million and $100.0 million, respectively. Each of these securities was classified as trading. Due to fluctuations in long-term interest rates, losses on the security acquired in September 2015 totaled $0.9 million for the year ended December 31, 2016. Prior to its sale in June 2016, the U.S. Treasury Note that was acquired in October 2015 generated current year gains of $2.3 million. While held by the Bank, this U.S. Treasury Note was economically hedged with a fixed-for-floating interest rate swap; during 2016, this swap, which was terminated concurrent with the sale of the U.S. Treasury Note, produced losses of $2.1 million.
At various times during 2014, market conditions were such that the Bank was able to extinguish certain consolidated obligation bonds and simultaneously terminate the associated interest rate exchange agreements at net amounts that were profitable for the Bank, while new consolidated obligations could be issued and then converted (through the use of interest rate exchange agreements) to a floating rate that approximated the cost of the extinguished debt including any associated interest rate swaps. In 2014, the Bank repurchased $46 million of its consolidated obligations in the secondary market and terminated the related interest rate exchange agreements. The gains on these debt extinguishments totaled $1.0 million. The Bank did not early extinguish any debt during 2016 or 2015.
For the years ended December 31, 2016, 2015 and 2014, letter of credit fees totaled $5.8 million, $4.4 million and $4.8 million, respectively. At December 31, 2016, 2015 and 2014, outstanding letters of credit totaled $11.2 billion, $7.2 billion and $4.3 billion, respectively. Beginning on October 1, 2014, the Bank reduced the pricing on all custodial and standby letters of credit and it introduced a new fluctuating balance feature which provides members with the option of paying only for the amount of the letter of credit that the member is required to pledge as collateral.
Other Expense
Total other expense, which includes the Bank’s compensation and benefits, other operating expenses and its proportionate share of the costs of operating the Finance Agency and the Office of Finance, totaled $84.6 million, $76.7 million and $74.7 million in 2016, 2015 and 2014, respectively.
Compensation and benefits totaled $50.8 million for 2016, compared to $43.7 million for 2015 and $39.6 million for 2014. The $7.1 million increase in compensation and benefits for the year ended December 31, 2016, as compared to the year ended December 31, 2015, was due largely to: (1) increased costs associated with the Bank's participation in the Pentegra Defined Benefit Plan for Financial Institutions; (2) increased costs associated with the Bank's 2014 and 2015 Long-Term Incentive Plans, due largely to the retroactive inclusion (in August 2016) of additional executives in these plans (based on the date that these executives joined the Bank's Executive Management Committee) and higher anticipated goal achievement for the 2015 Long-Term Incentive Plan; (3) increased employee medical costs; (4) an increase in headcount; and (5) merit and cost-of-living adjustments, partially offset by a reduction in employee separation costs. The Bank's average headcount was 214 employees in 2016, as compared to 202 employees in 2015. At December 31, 2016, the Bank employed 218 people, an increase of 11 employees from December 31, 2015. The $4.1 million increase in compensation and benefits for the year ended December 31, 2015, as compared to the year ended December 31, 2014, was due largely to: (1) an increase in headcount; (2) increased expenses related to the Bank's short-term and long-term incentive compensation plans; and (3) higher separation costs, offset by lower employee medical costs. The Bank's average headcount was 202 employees in 2015, as compared to 184 employees in 2014. At December 31, 2015, the Bank employed 207 people, an increase of 15 employees from December 31, 2014. The increase in expenses relating to the Bank's short-term incentive compensation plan was due to the increase in headcount and

63


higher goal achievement in 2015 (as compared to 2014), partially offset by adjustments to the incentive opportunities that are available to some of the Bank's employees. The increase in expenses related to the Bank's long-term incentive plans was due largely to the higher incentive opportunities associated with the 2015 plan.
Other operating expenses for the years ended December 31, 2016, 2015 and 2014 were $25.0 million, $26.2 million and $29.2 million, respectively. The $1.2 million decrease in other operating expenses from 2015 to 2016 resulted from offsetting increases and decreases in many of the Bank's other operating expenses, none of which were individually significant. The $2.9 million decrease in other operating expenses from 2014 to 2015 resulted from a $4.2 million decrease in legal fees, which was partially offset by a $1.7 million increase in costs related to the use of independent contractors to support various initiatives within the Bank.
Derivative clearing fees for the years ended December 31, 2016, 2015 and 2014 were $1.1 million, $0.4 million and $0.1 million, respectively. The increases in derivative clearing fees was attributable to the higher volume of cleared trades in 2016 and 2015.
The Bank, together with the other FHLBanks, is assessed for the costs of operating the Office of Finance and a portion of the costs of operating the Finance Agency. The Bank’s allocated share of the Office of Finance's expenses totaled $3.0 million, $2.7 million and $2.3 million in 2016, 2015 and 2014, respectively. In these years, the Bank's allocated share of the Finance Agency's expenses totaled $2.9 million, $2.4 million and $2.3 million, respectively.
Liquidity and Capital Resources
In order to meet members’ credit needs and the Bank’s financial obligations, the Bank maintains a portfolio of money market instruments typically consisting of overnight federal funds and overnight reverse repurchase agreements. From time to time, the Bank may also invest in short-term commercial paper and U.S. Treasury Bills. Beyond those amounts that are required to meet members’ credit needs and its own obligations, the Bank typically holds additional balances of short-term investments that fluctuate as the Bank invests the proceeds of debt issued to replace maturing and called liabilities, as the balance of deposits changes, as the returns provided by short-term investments vary relative to the costs of the Bank’s discount notes, and as the level of liquidity needed to satisfy Finance Agency requirements changes. At December 31, 2016, the Bank’s short-term liquidity portfolio was comprised of $6.5 billion of overnight federal funds sold (including a $0.3 billion loan to another FHLBank) and $3.1 billion of overnight reverse repurchase agreements.
The Bank’s primary source of funds is the proceeds it receives from the issuance of consolidated obligation bonds and discount notes in the capital markets. Historically, the FHLBanks have issued debt throughout the business day in the form of discount notes and bonds with a wide variety of maturities and structures. Generally, the Bank has access to the capital markets as needed during the business day to acquire funds to meet its needs.
In addition to the liquidity provided from the proceeds of the issuance of consolidated obligations, the Bank also maintains access to wholesale funding sources such as federal funds purchased and securities sold under agreements to repurchase (e.g., borrowings secured by its investments in MBS and/or agency debentures). Furthermore, the Bank has access to borrowings (typically short-term) from the other FHLBanks.
The 11 FHLBanks and the Office of Finance are parties to the Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, as amended and restated effective January 1, 2017 (the “Contingency Agreement”). The Contingency Agreement and related procedures are designed to facilitate the timely funding of principal and interest payments on FHLBank System consolidated obligations in the event that a FHLBank is not able to meet its funding obligations in a timely manner. The Contingency Agreement and related procedures provide for the issuance of overnight consolidated obligations ("Plan COs") directly to one or more FHLBanks that provide funds to avoid a shortfall in the timely payment of principal and interest on any consolidated obligations for which another FHLBank is the primary obligor. The direct placement by a FHLBank of consolidated obligations with another FHLBank is permitted only in those instances when direct placement of consolidated obligations is necessary to ensure that sufficient funds are available to timely pay all principal and interest on FHLBank System consolidated obligations due on a particular day. Through the date of this report, no Plan COs have ever been issued pursuant to the terms of the Contingency Agreement.
On occasion, and as an alternative to issuing new debt, the Bank may assume the outstanding consolidated obligations for which other FHLBanks are the original primary obligors. This occurs in cases where the original primary obligor may have participated in a large consolidated obligation issue to an extent that exceeded its immediate funding needs in order to facilitate better market execution for the issue. The original primary obligor might then warehouse the funds until they were needed, or make the funds available to other FHLBanks. Transfers may also occur when the original primary obligor’s funding needs change, and that FHLBank offers to transfer debt that is no longer needed to other FHLBanks. Transferred debt is typically fixed-rate, fixed-term, non-callable debt, and may be in the form of discount notes or bonds. The Bank did not assume any consolidated obligations from other FHLBanks during the years ended December 31, 2016, 2015 or 2014.

64


The Bank manages its liquidity to ensure that, at a minimum, it has sufficient funds to meet operational and contingent liquidity requirements. When measuring its liquidity for these purposes, the Bank includes only contractual cash flows and the amount of funds it estimates would be available in the event the Bank were to use securities held in its long-term investment portfolio as collateral for repurchase agreements. While it believes purchased federal funds might be available as a source of funds, it does not include this potential source of funds in its calculations of available liquidity.
The Bank’s operational liquidity requirement stipulates that it have sufficient funds to meet its obligations due on any given day plus an amount equal to the statistically estimated (at the 99-percent confidence level) cash and credit needs of its members and associates for one business day during a stress period of elevated advances demand without accessing the capital markets for the sale of consolidated obligations. As of December 31, 2016, the Bank’s estimated operational liquidity requirement was $4.7 billion. At that date, the Bank estimated that its operational liquidity exceeded this requirement by approximately $19.0 billion.
The Bank’s contingent liquidity requirement further requires that it maintain adequate balance sheet liquidity and access to other funding sources should it be unable to issue consolidated obligations for five business days. The combination of funds available from these sources must be sufficient for the Bank to meet its obligations as they come due and the cash and credit needs of its members, with the potential needs of members statistically estimated at the 99-percent confidence level. As of December 31, 2016, the Bank’s estimated contingent liquidity requirement was $7.8 billion. At that date, the Bank estimated that its contingent liquidity exceeded this requirement by approximately $16.0 billion.
In addition to the liquidity measures described above, the Bank is required, pursuant to guidance issued by the Finance Agency, to meet two daily liquidity standards, each of which assumes that the Bank is unable to access the market for consolidated obligations during a prescribed period. The first standard requires the Bank to maintain sufficient funds to meet its obligations for 15 days under a scenario in which it is assumed that members do not renew any maturing, prepaid or called advances. The second standard requires the Bank to maintain sufficient funds to meet its obligations for 5 days under a scenario in which it is assumed that members renew all maturing and called advances, with certain exceptions for very large, highly rated members. These requirements are more stringent than the 5-day contingent liquidity requirement discussed above. The Bank was in compliance with both of these liquidity requirements at all times during the years ended December 31, 2016, 2015 and 2014.
The Bank’s access to the capital markets has never been interrupted to an extent that the Bank’s ability to meet its obligations was compromised and the Bank does not currently believe that its ability to issue consolidated obligations will be impeded to that extent in the future. If, however, the Bank were unable to issue consolidated obligations for an extended period of time, the Bank would eventually exhaust the availability of purchased federal funds (including borrowings from other FHLBanks) and repurchase agreements as sources of funds. It is also possible that an event (such as a natural disaster) that might impede the Bank’s ability to raise funds by issuing consolidated obligations would also limit the Bank’s ability to access the markets for federal funds purchased and/or repurchase agreements.
Under those circumstances, to the extent that the balance of principal and interest that came due on the Bank’s debt obligations and the funds needed to pay its operating expenses exceeded the cash inflows from its interest-earning assets and proceeds from maturing assets, and if access to the market for consolidated obligations was not again available, the Bank would seek to access funding under the Contingency Agreement to repay any principal and interest due on its consolidated obligations. However, if the Bank were unable to raise funds by issuing consolidated obligations, it is likely that the other FHLBanks would have similar difficulties issuing debt. If funds were not available under the Contingency Agreement, the Bank’s ability to conduct its operations would be compromised even earlier than if this funding source was available.

65


The following table summarizes the Bank’s contractual cash obligations and off-balance-sheet lending-related financial commitments by due date or remaining maturity as of December 31, 2016.
CONTRACTUAL OBLIGATIONS
(in millions)
 
Payments due by Period
 
 
 
< 1 Year
 
1-3 Years
 
3-5 Years
 
> 5 Years
 
Total
Long-term debt
$
16,586.6

 
$
5,662.8

 
$
2,526.1

 
$
2,357.3

 
$
27,132.8

Mandatorily redeemable capital stock
1.7

 
0.5

 
1.2

 

 
3.4

Operating leases
0.3

 
0.2

 

 

 
0.5

Purchase obligations
 
 
 
 
 
 
 
 
 
Advances
15.7

 
19.7

 

 

 
35.4

Letters of credit
10,079.7

 
973.2

 
134.0

 

 
11,186.9

  Mortgage delivery commitments
2.0

 

 

 

 
2.0

Pension and post-retirement
4.5

 
0.3

 
0.2

 
0.4

 
5.4

Total contractual obligations
$
26,690.5

 
$
6,656.7

 
$
2,661.5

 
$
2,357.7

 
$
38,366.4

The table above excludes derivatives and obligations (other than consolidated obligation bonds) with contractual payments having an original maturity of one year or less. The distribution of long-term debt is based upon contractual maturities. The actual repayments of long-term debt could be impacted by factors affecting redemptions such as call options.
The above table presents the Bank’s mandatorily redeemable capital stock by year of earliest mandatory redemption, which is the earliest time at which the Bank is required to repurchase the shareholder’s capital stock. The earliest mandatory redemption date is based on the assumption that the advances and/or other extensions of credit associated with the activity-based stock will have matured or otherwise concluded by the time the notice of redemption or withdrawal expires. The Bank expects to repurchase activity-based stock as the associated advances and/or other extensions of credit are reduced, which may be before or after the expiration of the five-year redemption/withdrawal notice period.
In addition to the capital stock repurchase and redemption related events noted above, shareholders may, at any time, request the Bank to repurchase excess capital stock. Excess stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum investment requirement (i.e., the amount of stock held in excess of its activity-based investment requirement and, in the case of a member, its membership investment requirement). Although the Bank is not obligated to repurchase excess stock prior to the expiration of a five-year redemption or withdrawal notification period, it will typically endeavor to honor such requests within a reasonable period of time (generally not exceeding 30 days) so long as the Bank will continue to meet its regulatory capital requirements following the repurchase. At December 31, 2016, excess stock held by the Bank’s members and former members totaled $397.8 million, of which $1.6 million was classified as mandatorily redeemable.
Risk-Based Capital Rules and Other Capital Requirements
The Bank is required to maintain at all times permanent capital in an amount at least equal to its risk-based capital requirement, which is the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, as further described below. Permanent capital is defined under the Finance Agency’s rules as retained earnings and amounts paid in for Class B Stock (which, for the Bank, includes both Class B-1 Stock and Class B-2 Stock), regardless of its classification as equity or liabilities for financial reporting purposes, as further described above in the section entitled “Financial Condition – Capital Stock.” For reasons of safety and soundness, the Finance Agency may require the Bank, or any other FHLBank, to maintain a greater amount of permanent capital than is required by the risk-based capital requirements as defined.
The Bank’s credit risk capital requirement is determined by adding together the credit risk capital charges for advances, investments, mortgage loans, derivatives, other assets and off-balance-sheet commitment positions (e.g., outstanding letters of credit and commitments to fund advances). Among other things, these charges are computed based upon the credit risk percentages assigned to each item as required by Finance Agency rules, taking into account the time to maturity and credit ratings of certain of the items. These percentages are applied to the book value of assets or, in the case of off-balance-sheet commitments, to their balance sheet equivalents.

66


The Bank’s market risk capital requirement is determined by estimating the potential loss in market value of equity under a wide variety of market conditions and adding the amount, if any, by which the Bank’s current market value of total capital is less than 85 percent of its book value of total capital. The potential loss component of the market risk capital requirement employs a “stress test” approach, using a 99-percent confidence level. Simulations of over 290 historical market interest rate scenarios dating back to January 1992 (using changes in interest rates and volatilities over each six-month period since that date) are generated and, under each scenario, the hypothetical impact on the Bank’s current market value of equity is determined. The hypothetical impact associated with each historical scenario is calculated by simulating the effect of each set of rate and volatility conditions upon the Bank’s current risk position, each of which reflects current actual assets, liabilities, derivatives and off-balance-sheet commitment positions as of the measurement date. From the complete set of resulting simulated scenarios, the scenario resulting in the third worst estimated deterioration in market value of equity is identified as that scenario associated with a probability of occurrence of not more than one percent (i.e., the 99-percent confidence level). The hypothetical deterioration in market value of equity derived under the methodology described above typically represents the market risk component of the Bank’s regulatory risk-based capital requirement which, in conjunction with the credit risk and operations risk components, determines the Bank’s overall risk-based capital requirement. Prior to May 2015, the Bank used simulations of historical market interest rate scenarios dating back to January 1978 to compute the market risk component of its risk-based capital requirement. At December 31, 2014, over 400 historical market interest rate scenarios were used. For these simulated scenarios, the scenario resulting in the fourth worst estimated deterioration in market value of equity was identified as the scenario associated with a probability of occurrence of not more than one percent. As discussed in the audited financial statements included in this report (specifically, Note 16 beginning on page F-48, the Bank replaced its third-party pricing/risk model with a new third-party pricing/risk model in May 2015. In conjunction with the implementation of this new model, the Bank re-evaluated the number of simulations that were being used to calculate the market risk component of its risk-based capital requirement and, in order to improve operational efficiency, it eliminated from the simulations the historical market interest rate scenarios prior to 1992. At the time this change was implemented, it did not have a significant impact on the market risk component of the Bank's risk-based capital requirement.
The Bank’s operations risk capital requirement is equal to 30 percent of the sum of its credit risk capital requirement and its market risk capital requirement. At December 31, 2016, the Bank’s credit risk, market risk and operations risk capital requirements were $304 million, $222 million and $158 million, respectively. These requirements were $213 million, $167 million and $114 million, respectively, at December 31, 2015.
In addition to the risk-based capital requirement, the Bank is subject to two other capital requirements. First, the Bank must, at all times, maintain a minimum total capital-to-assets ratio of 4.0 percent. For this purpose, total capital is defined by Finance Agency rules and regulations as the Bank’s permanent capital and the amount of any general allowance for losses (i.e., those reserves that are not held against specific assets). Second, the Bank is required to maintain at all times a minimum leverage capital-to-assets ratio in an amount at least equal to 5.0 percent of its total assets. In applying this requirement to the Bank, leverage capital includes the Bank’s permanent capital multiplied by a factor of 1.5 plus the amount of any general allowance for losses. The Bank did not have any general reserves at December 31, 2016 or December 31, 2015. Under the regulatory definitions, total capital and permanent capital exclude accumulated other comprehensive income (loss). The Bank is required to submit monthly capital compliance reports to the Finance Agency. At all times during the three years ended December 31, 2016, the Bank was in compliance with all of its regulatory capital requirements. For a summary of the Bank’s compliance with the Finance Agency’s capital requirements as of December 31, 2016 and 2015, see the audited financial statements included in this report (specifically, Note 14 beginning on page F-40).
A final regulation adopted by the Finance Agency in 2009 (the "Capital Classification Regulation") establishes criteria for four capital classifications for the FHLBanks: adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An adequately capitalized FHLBank meets all existing risk-based and minimum capital requirements. An undercapitalized FHLBank does not meet one or more of its risk-based or minimum capital requirements, but nevertheless has total capital equal to or greater than 75 percent of all capital requirements. A significantly undercapitalized FHLBank does not have total capital equal to or greater than 75 percent of all capital requirements, but the FHLBank does have total capital greater than 2 percent of its total assets. A critically undercapitalized FHLBank has total capital that is less than or equal to 2 percent of its total assets.
The Director of the Finance Agency determines each FHLBank’s capital classification no less often than once a quarter; the Director may make a determination more often than quarterly. The Director may reclassify a FHLBank one category below the otherwise applicable capital classification (e.g., from adequately capitalized to undercapitalized) if the Director determines that (i) the FHLBank is engaging in conduct that could result in the rapid depletion of permanent or total capital, (ii) the value of collateral pledged to the FHLBank has decreased significantly, (iii) the value of property subject to mortgages owned by the FHLBank has decreased significantly, (iv) after notice to the FHLBank and opportunity for an informal hearing before the Director, the FHLBank is in an unsafe and unsound condition, or (v) the FHLBank is engaging in an unsafe and unsound practice because the FHLBank’s asset quality, management, earnings or liquidity were found to be less than satisfactory during the most recent examination, and any deficiency has not been corrected. Before classifying or reclassifying a FHLBank, the

67


Director must notify the FHLBank in writing and give the FHLBank an opportunity to submit information relative to the proposed classification or reclassification. Since the adoption of the Capital Classification Regulation, the Bank has been classified as adequately capitalized for each quarterly period for which the Director has made a final determination.
In addition to restrictions on capital distributions by a FHLBank that does not meet all of its risk-based and minimum capital requirements, a FHLBank that is classified as undercapitalized, significantly undercapitalized or critically undercapitalized is required to take certain actions, such as submitting a capital restoration plan to the Director of the Finance Agency for approval. Additionally, with respect to a FHLBank that is less than adequately capitalized, the Director of the Finance Agency may take other actions that he or she determines will help ensure the safe and sound operation of the FHLBank and its compliance with its risk-based and minimum capital requirements in a reasonable period of time.
The Director may appoint the Finance Agency as conservator or receiver for any FHLBank that is classified as critically undercapitalized. The Director may also appoint the Finance Agency as conservator or receiver of any FHLBank that is classified as undercapitalized or significantly undercapitalized if the FHLBank fails to submit a capital restoration plan acceptable to the Director within the time frames established by the Capital Classification Regulation or materially fails to implement any capital restoration plan that has been approved by the Director. At least once in each 30-day period following classification of a FHLBank as critically undercapitalized, the Director must determine whether during the prior 60 days the FHLBank had assets less than its obligations to its creditors and others or if the FHLBank was not paying its debts on a regular basis as such debts became due. If either of these conditions apply, then the Director must appoint the Finance Agency as receiver for the FHLBank.
A FHLBank for which the Director appoints the Finance Agency as conservator or receiver may bring an action in the United States District Court for the judicial district in which the FHLBank is located or in the United States District Court for the District of Columbia for an order requiring the Finance Agency to remove itself as conservator or receiver. A FHLBank that is not critically undercapitalized may also seek judicial review of any final capital classification decision or of any final decision to take supervisory action made by the Director under the Capital Classification Regulation.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. To understand the Bank’s financial position and results of operations, it is important to understand the Bank’s most significant accounting policies and the extent to which management uses judgment and estimates in applying those policies. The Bank’s critical accounting policies and estimates involve the following:
Derivatives and Hedging Activities;
Estimation of Fair Values; and
Amortization of Premiums and Accretion of Discounts Associated with Mortgage-Related Assets.
The Bank considers these policies to be critical because they require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Management bases its judgments and estimates on current market conditions and industry practices, historical experience, changes in the business environment and other factors that it believes to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions and/or conditions. For additional discussion regarding the application of these and other accounting policies, see Note 1 to the Bank’s audited financial statements included in this report.
Derivatives and Hedging Activities
The Bank enters into interest rate swap, cap and, on occasion, swaption, floor and forward rate agreements to manage its exposure to changes in interest rates. Through the use of these derivatives, the Bank may adjust the effective maturity, repricing index and/or frequency or option characteristics of financial instruments to achieve its risk management objectives. By regulation, the Bank may only use derivatives to mitigate identifiable risks. Accordingly, all of the Bank’s derivatives are positioned to offset interest rate risk exposures inherent in its investment, funding and member lending activities.
ASC 815 requires that all derivatives be recorded on the statement of condition at their fair value. Changes in the fair value of all derivatives, excluding those designated as cash flow hedges (discussed below), are recorded each period in current earnings. Under ASC 815, the Bank is required to recognize unrealized gains and losses on derivative positions whether or not the transaction qualifies for fair value hedge accounting, in which case offsetting losses or gains on the hedged assets or liabilities may also be recognized. Therefore, to the extent certain derivative instruments do not qualify for fair value hedge accounting under ASC 815, or changes in the fair values of derivatives are not exactly offset by changes in their hedged items, the accounting framework imposed by ASC 815 introduces the potential for a considerable mismatch between the timing of income and expense recognition for assets or liabilities being hedged and their associated hedging instruments. As a result, during periods of significant changes in market prices and interest rates, the Bank’s earnings may exhibit considerable volatility.

68


The judgments and assumptions that are most critical to the application of this accounting policy are those affecting whether a hedging relationship qualifies for fair value hedge accounting under ASC 815 and, if so, whether an assumption of "no ineffectiveness" can be made. In addition, the estimation of fair values (discussed below) has a significant impact on the actual results being reported.
At the inception of each fair value hedge transaction, the Bank formally documents the hedge relationship and its risk management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk will be assessed. In all cases involving a recognized asset, liability or firm commitment, the designated risk being hedged is the risk of changes in its fair value attributable to changes in the designated benchmark interest rate (LIBOR). Therefore, for this purpose, changes in the fair value of the hedged item (e.g., an advance, investment security or consolidated obligation) reflect only those changes in value that are attributable to changes in the designated benchmark interest rate (hereinafter referred to as “changes in the benchmark fair value”).
For hedging relationships that are designated as fair value hedges and qualify for hedge accounting, the change in the benchmark fair value of the hedged item is recorded in earnings, thereby providing some offset to the change in fair value of the associated derivative. The difference in the change in fair value of the derivative and the change in the benchmark fair value of the hedged item represents “hedge ineffectiveness.” If a fair value hedging relationship qualifies for the shortcut method of accounting, the Bank can assume that the change in the benchmark fair value of the hedged item is equal and offsetting to the change in the fair value of the derivative and, as a result, no ineffectiveness is recorded in earnings. However, ASC 815 limits the use of the shortcut method to hedging relationships of interest rate risk involving a recognized interest-bearing asset or liability and an interest rate swap, and then only if nine specific conditions are met.
If the fair value hedging relationship qualifies for hedge accounting but does not meet all nine conditions specified in ASC 815, the assumption of "no ineffectiveness" cannot be made and the long-haul method of accounting is used. Under the long-haul method, the change in the benchmark fair value of the hedged item is calculated independently from the change in fair value of the derivative. As a result, the net effect is that the hedge ineffectiveness has an impact on earnings.
In all cases where the Bank is applying fair value hedge accounting, it is hedging interest rate risk through the use of interest rate swaps, swaptions or caps. For those interest rate swaps, swaptions and caps that are in fair value hedging relationships that do not qualify for the shortcut method of accounting, the Bank uses regression analysis to assess hedge effectiveness. Effectiveness testing is performed at the inception of each hedging relationship to determine whether the hedge is expected to be highly effective in offsetting the identified risk, and at each month-end thereafter to ensure that the hedge relationship has been effective historically and to determine whether the hedge is expected to be highly effective in the future. Hedging relationships accounted for under the shortcut method are not tested for hedge effectiveness.
A fair value hedge relationship is considered effective only if certain specified criteria are met. If a hedge fails the effectiveness test at inception, the Bank does not apply hedge accounting. If the hedge fails the effectiveness test during the life of the transaction, the Bank discontinues hedge accounting prospectively. In that case, the Bank continues to carry the derivative on its statement of condition at fair value, recognizes the changes in fair value of that derivative in current earnings, ceases to adjust the hedged item for changes in its benchmark fair value and amortizes the cumulative basis adjustment on the formerly hedged item into earnings over its remaining term. Unless and until the derivative is redesignated in a qualifying fair value hedging relationship for accounting purposes, changes in its fair value are recorded in current earnings without an offsetting change in the benchmark fair value from a hedged item.
Changes in the fair value of derivative positions that do not qualify for hedge accounting under ASC 815 (economic hedges) are recorded in current earnings without an offsetting change in the benchmark fair value of the hedged item.
Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in AOCI until earnings are affected by the variability of the cash flows of the hedged transaction. Any ineffective portion of a cash flow hedge (which represents the amount by which the change in the fair value of the derivative differs from the change in fair value of a hypothetical derivative having terms that match identically the critical terms of the hedged forecasted transaction) is recognized in other income (loss) as “net gains (losses) on derivatives and hedging activities.” As of December 31, 2016 and 2015, the Bank had only $425 million and $100 million (notional), respectively, of derivatives that were designated as cash flow hedges.
As of December 31, 2016, the Bank’s derivatives portfolio included $3.8 billion (notional amount) that was accounted for using the shortcut method, $27.1 billion (notional amount) that was accounted for using the long-haul method, $0.4 billion (notional amount) that was designated in cash flow hedging relationships and $4.2 billion (notional amount) that did not qualify for hedge accounting. By comparison, at December 31, 2015, the Bank’s derivatives portfolio included $3.4 billion (notional amount) that was accounted for using the shortcut method, $23.8 billion (notional amount) that was accounted for using the long-haul method, $0.1 billion (notional amount) that was designated in a cash flow hedging relationship and $3.8 billion (notional amount) that did not qualify for hedge accounting.

69


Estimation of Fair Values
The Bank’s derivatives and investments classified as available-for-sale and trading are presented in the statements of condition at fair value. Fair value is defined under U.S. GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. U.S. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
Level 1 Inputs — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. The fair values of the Bank’s mutual fund investments classified as trading securities were determined using Level 1 inputs.
Level 2 Inputs — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active or in which little information is released publicly; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data (e.g., implied spreads). Level 2 inputs were used to determine the estimated fair values of the Bank’s derivative contracts, U.S. Treasury obligations classified as trading securities and investment securities classified as available-for-sale.
Level 3 Inputs — Unobservable inputs for the asset or liability that are supported by little or no market activity. None of the Bank’s assets or liabilities that are recorded at fair value on a recurring basis were measured using significant Level 3 inputs.
The fair values of the Bank’s assets and liabilities that are carried at fair value are estimated based upon quoted market prices when available. However, some of these instruments lack an available trading market characterized by frequent transactions between a willing buyer and willing seller engaging in an exchange transaction (e.g., derivatives). In these cases, such values are generally estimated using a pricing model and inputs that are observable for the asset or liability, either directly or indirectly. For its derivatives, the Bank compares the fair values obtained from its pricing model to non-binding dealer estimates (in the case of bilateral derivatives) and clearinghouse valuations (in the case of cleared derivatives) and may also compare its fair values to those of similar instruments to ensure such fair values are reasonable. The assumptions and inputs used have a significant effect on the reported carrying values of assets and liabilities and the related income and expense. The use of different assumptions/inputs could result in materially different net income and reported carrying values.
Prior to September 30, 2014, the fair values of the Bank’s interest rate basis swaps and interest rate caps were obtained from dealers (for each basis swap and cap, one dealer estimate was received). These non-binding fair value estimates were corroborated using the Bank's pricing model and observable market data. Effective September 30, 2014, the Bank began using the fair values obtained from its pricing model to value its interest rate basis swaps and interest rate caps. This change in valuation technique did not have a significant impact on the estimated fair values of the Bank's basis swaps or caps in 2014.
The Bank also estimates the fair values of certain assets on a nonrecurring basis in periods subsequent to their initial recognition (for example, impaired assets). During the years ended December 31, 2016, 2015 and 2014, the Bank recorded total other-than-temporary impairment losses on one of its non-agency RMBS classified as held-to-maturity. The fair values of this security were estimated as described below. Based upon the lack of significant market activity for non-agency RMBS, the nonrecurring fair value measurements for this impaired security were classified as Level 3 measurements in the fair value hierarchy.
In addition to those items that are carried at fair value, the Bank estimates fair values for its other financial instruments for disclosure purposes and, in applying ASC 815, it calculates the periodic changes in the fair values of hedged items (e.g., certain advances, available-for-sale securities and consolidated obligations) that are attributable solely to changes in LIBOR, the designated benchmark interest rate ("the benchmark fair values") and, beginning in September 2015, the periodic changes in the fair values of hypothetical derivatives associated with cash flow hedges. For most of these instruments (other than the Bank’s holdings of MBS and state housing agency debentures classified as held-to-maturity, as described below), such values are estimated using a pricing model that employs discounted cash flows or other similar pricing techniques. Significant inputs to the pricing model (e.g., yield curves and volatilities) are based on current observable market data. To the extent this model is used to calculate changes in the benchmark fair values of hedged items, the inputs have a significant effect on the reported carrying values of assets and liabilities and the related income and expense; the use of different inputs could result in materially different net income and reported carrying values.

70


Consistent with market practice, the Bank uses the overnight index swap ("OIS") curve (rather than the LIBOR swap curve) to discount the cash flows on its interest rate exchange agreements for valuation purposes. Depending upon the spreads between LIBOR and OIS rates, the use of the OIS curve to value the Bank's interest rate exchange agreements and the LIBOR swap curve (plus a constant spread) to derive the benchmark fair values of the Bank's hedged items can result in increased fair value hedge ineffectiveness on long-haul hedging relationships. In addition, while not likely, this valuation methodology has the potential to lead to the loss of hedge accounting for some of these hedging relationships. Either of these outcomes could result in increased earnings volatility, which could potentially be material.
To value its holdings of U.S. Treasury obligations classified as trading securities, all of its available-for-sale securities and its holdings of MBS and state housing agency debentures classified as held-to-maturity, the Bank obtains prices from three designated third-party pricing vendors when available. Prior to December 31, 2015, the Bank obtained prices from four designated third-party pricing vendors (the three vendors currently in use as well as one additional vendor). The pricing vendors use various proprietary models to price these securities. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Because many 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 challenge process in place for all security valuations, which facilitates resolution of potentially erroneous prices identified by the Bank. Recently, the Bank conducted reviews of the three pricing vendors to reconfirm its understanding of the vendors' pricing processes, methodologies and control procedures and was satisfied that those processes, methodologies and control procedures were adequate and appropriate.
A “median” price is first established for each security using a formula that is based upon the number of prices received. 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 some type of validation similar to the evaluation of outliers described below. Prior to December 31, 2015, if four prices were received, the average of the middle two prices was the median price. 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. If, on the other hand, 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.
If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
The Bank’s pricing model is subject to an external validation every three years. In those years when an external validation is not performed, the pricing model is subject to a limited scope review performed by the Bank's internal model validation team. The Bank periodically reviews and refines, as appropriate, its assumptions and valuation methodologies to reflect market indications as closely as possible. The Bank believes it has the appropriate personnel, technology, and policies and procedures in place to enable it to value its financial instruments in a reasonable and consistent manner.
The Bank’s fair value measurement methodologies for its assets and liabilities are more fully described in the audited financial statements accompanying this report (specifically, Note 16 beginning on page F-48).
Amortization of Premiums and Accretion of Discounts Associated with Mortgage-Related Assets
The Bank estimates prepayments for purposes of amortizing premiums and accreting discounts associated with its MBS holdings. Under U.S. GAAP, premiums and discounts are required to be recognized in income at a constant effective yield over the life of the instrument. Because actual prepayments often deviate from the estimates, the Bank periodically recalculates the effective yield to reflect actual prepayments to date and anticipated future prepayments. Anticipated future prepayments are estimated using an externally developed mortgage prepayment model. This model considers past prepayment patterns; historical, current and projected interest rate environments; and historical changes in home prices, among other factors, to predict future cash flows.
Adjustments are recorded on a retrospective basis, meaning that the net investment in the instrument is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the instrument. As interest rates (and thus prepayment speeds) change, these accounting requirements can be a source of income volatility. Declines in interest rates generally accelerate prepayments, which accelerate the amortization of premiums and reduce current earnings. Typically, declining interest rates also accelerate the accretion of discounts, thereby increasing current earnings. Conversely, in a rising

71


interest rate environment, prepayments will generally decline, thus lengthening the effective maturity of the instruments and shifting some of the premium amortization and discount accretion to future periods.
As of December 31, 2016, the unamortized premiums and discounts associated with investment securities for which prepayments are estimated totaled $83.4 million and $26.4 million, respectively. At that date, the carrying values of these investment securities totaled $5.9 billion and $1.9 billion, respectively.
The Bank uses the contractual method to amortize premiums and accrete discounts on mortgage loans. The contractual method recognizes the income effects of premiums and discounts in a manner that is reflective of the actual behavior of the mortgage loans during the period in which the behavior occurs while also reflecting the contractual terms of the assets without regard to changes in estimated prepayments based upon assumptions about future borrower behavior.

Recently Issued Accounting Guidance
For a discussion of recently issued accounting guidance, see the audited financial statements accompanying this report (specifically, Note 2 beginning on page F-16).

72



Statistical Financial Information
Investment Portfolio
The following table sets forth the Bank’s investments at December 31, 2016, 2015 and 2014:
Investments
(in thousands)
 
Carrying Value at December 31,
 
2016
 
2015
 
2014
Trading securities
 
 
 
 
 
U.S. Treasury Notes
$
101,495

 
$
202,199

 
$

U.S. Treasury Bills

 

 
399,794

Mutual fund investments related to employee benefit plans
10,143

 
8,857

 
8,769

Total trading securities
111,638

 
211,056

 
408,563

Available-for-sale securities
 
 
 
 
 
U.S. government-guaranteed debentures
495,898

 
497,752

 
49,974

GSE debentures
6,525,525

 
5,338,947

 
4,921,550

Other debentures
319,993

 
371,540

 
411,311

GSE commercial MBS
5,834,517

 
3,504,952

 
1,005,667

Total available-for-sale securities
13,175,933

 
9,713,191

 
6,388,502

Held-to-maturity securities
 
 
 
 
 
U.S. government-guaranteed debentures
15,973

 
21,546

 
27,119

State housing agency obligations
110,000

 
110,000

 

Mortgage-backed securities
 
 
 
 
 
U.S. government-guaranteed residential MBS
2,578

 
4,040

 
6,642

GSE residential MBS
2,211,159

 
2,909,065

 
4,424,542

Non-agency residential MBS
98,073

 
121,544

 
141,891

GSE commercial MBS
61,812

 
61,816

 
61,819

Total held-to-maturity mortgage-backed securities
2,373,622

 
3,096,465

 
4,634,894

Total held-to-maturity securities
2,499,595

 
3,228,011

 
4,662,013

Total securities
15,787,166

 
13,152,258

 
11,459,078

Interest-bearing deposits
255

 
260

 
266

Securities purchased under agreements to resell
3,100,000

 
1,000,000

 
350,000

Federal funds sold
6,242,000

 
2,171,000

 
5,613,000

Loan to other FHLBank
290,000

 

 

Total investments
$
25,419,421

 
$
16,323,518

 
$
17,422,344


The following table presents supplemental information regarding the maturities and yields of the Bank’s investments (at carrying value) as of December 31, 2016. Maturities are based on the contractual maturities of the securities.

73



INVESTMENT MATURITIES AND YIELDS
(dollars in thousands)
 
Due In One
Year Or Less
 
Due After One Year
Through Five Years
 
Due After Five Years
Through Ten Years
 
Due After
Ten Years
 
Total
Maturities
 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
 
  U.S. Treasury Notes
$

 
$

 
$
101,495

 
$

 
$
101,495

Mutual fund investments related to employee benefit plans
10,143

 

 

 

 
10,143

Total trading securities
10,143

 

 
101,495

 

 
111,638

Available-for-sale securities
 
 
 
 
 
 
 

 
 
U.S. government-guaranteed debentures
11,038

 
49,279

 
435,581

 

 
495,898

GSE debentures
852,302

 
1,910,296

 
3,547,447

 
215,480

 
6,525,525

Other debentures
139,969

 
140,596

 
39,428

 

 
319,993

GSE commercial MBS

 

 
4,909,037

 
925,480

 
5,834,517

Total available-for-sale securities
1,003,309

 
2,100,171

 
8,931,493

 
1,140,960

 
13,175,933

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed debentures
2,007

 
2,874

 
11,092

 

 
15,973

State housing agency obligations

 

 

 
110,000

 
110,000

Mortgage-backed securities
 
 
 
 
 
 
 

 
 
U.S. government-guaranteed residential MBS

 

 

 
2,578

 
2,578

GSE residential MBS

 
1,472

 
1,347

 
2,208,340

 
2,211,159

Non-agency residential MBS
270

 
655

 

 
97,148

 
98,073

GSE commercial MBS

 

 
61,812

 

 
61,812

Total held-to-maturity securities
2,277

 
5,001

 
74,251

 
2,418,066

 
2,499,595

Total securities
1,015,729

 
2,105,172

 
9,107,239

 
3,559,026

 
15,787,166

Interest-bearing deposits
255

 

 

 

 
255

Securities purchased under agreements to resell
3,100,000

 

 

 

 
3,100,000

Federal funds sold
6,242,000

 

 

 

 
6,242,000

Loan to other FHLBank
290,000

 

 

 

 
290,000

Total investments
$
10,647,984

 
$
2,105,172

 
$
9,107,239

 
$
3,559,026

 
$
25,419,421

Weighted average yields
 
 
 
 
 
 
 
 
 
U.S. Treasury Notes
%
 
%
 
2.24
%
 
%
 
2.24
%
Mutual fund investments related to employee benefit plans
1.62

 

 

 

 
1.62

Yield on trading securities
1.62

 

 
2.24

 

 
2.18

Available-for-sale securities
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed debentures
1.54

 
1.89

 
2.46

 

 
2.38

GSE debentures
1.76

 
1.90

 
2.19

 
2.67

 
2.06

Other debentures
1.49

 
1.91

 
2.54

 

 
1.80

GSE commercial MBS

 

 
2.70

 
2.95

 
2.74

Yield on available-for-sale securities
1.72

 
1.90

 
2.49

 
2.90

 
2.37

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed debentures
1.50

 
1.61

 
1.17

 

 
1.29

State housing agency obligations

 

 

 
1.37

 
1.37

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS

 

 

 
1.13

 
1.13

GSE residential MBS

 
2.78

 
1.68

 
1.20

 
1.20

Non-agency residential MBS
1.15

 
1.15

 

 
1.16

 
1.16

GSE commercial MBS

 

 
0.99

 

 
0.99

Yield on held-to-maturity securities
1.46

 
1.89

 
1.03

 
1.21

 
1.20

Yield on total securities
1.72
%
 
1.90
%
 
2.48
%
 
1.75
%
 
2.18
%

74


Other available-for-sale debentures consisted of securities with a fair value of $319,993,000 at December 31, 2016 that were issued by the Private Export Funding Corporation. The U.S. government and GSEs were the only other issuers whose securities exceeded 10 percent of the Bank’s total capital at December 31, 2016.
Mortgage Loan Portfolio Analysis
The Bank’s mortgage loans, nonaccrual mortgage loans, and mortgage loans 90 days or more past due and accruing interest for each of the five years in the period ended December 31, 2016 were as follows:
COMPOSITION OF LOANS
(in thousands)
 
Year ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Real estate mortgages
$
123,961

 
$
55,117

 
$
71,411

 
$
91,110

 
$
121,478

Nonperforming real estate mortgages
$
276

 
$
387

 
$
316

 
$
694

 
$
994

Real estate mortgages past due 90 days or more and still accruing interest(1)
$
130

 
$
202

 
$
299

 
$
253

 
$
313

Interest contractually due during the year on nonaccrual loans
$
18

 
 
 
 
 
 
 
 
Interest actually received during the year on nonaccrual loans
$
8

 
 
 
 
 
 
 
 
____________________________________
(1) 
Only government guaranteed/insured loans continue to accrue interest after they become 90 days or more past due.
Allowance for Credit Losses
Activity in the allowance for credit losses for each of the five years in the period ended December 31, 2016 is presented below. All activity relates to domestic real estate mortgage loans.
ALLOWANCE FOR CREDIT LOSSES
(in thousands)
 
2016
 
2015
 
2014
 
2013
 
2012
Balance, beginning of year
$
141

 
$
143

 
$
165

 
$
183

 
$
192

Chargeoffs

 
(2
)
 
(22
)
 
(18
)
 
(9
)
Balance, end of year
$
141

 
$
141

 
$
143

 
$
165

 
$
183

Geographic Concentration of Mortgage Loans
The following table presents the geographic concentration of the Bank’s mortgage loan portfolio as of December 31, 2016.
GEOGRAPHIC CONCENTRATION OF MORTGAGE LOANS
Midwest (IA, IL, IN, MI, MN, ND, NE, OH, SD, and WI)
4.2
%
Northeast (CT, DE, MA, ME, NH, NJ, NY, PA, PR, RI, VI, and VT)
0.6

Southeast (AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, and WV)
14.6

Southwest (AR, AZ, CO, KS, LA, MO, NM, OK, TX, and UT)
48.0

West (AK, CA, GU, HI, ID, MT, NV, OR, WA, and WY)
32.6

 
100.0
%

75


Deposits
Time deposits in denominations of $100,000 or more totaled $283.8 million at December 31, 2016. These deposits mature as follows: $267.8 million in three months or less, $5.0 million in over three months through six months, $6.0 million in over six months through 12 months and $5.0 million over 12 months.
Short-term Borrowings
Borrowings with original maturities of one year or less are classified as short-term. Supplemental information regarding the Bank’s discount notes and short-term consolidated obligation bonds for the years ended December 31, 2016, 2015 and 2014 is provided in the following table.
SHORT-TERM BORROWINGS
(dollars in millions)
 
December 31,
 
2016
 
2015
 
2014
Consolidated obligation bonds
 
 
 
 
 
Outstanding at year end
$
8,710

 
$
2,640

 
$

Weighted average rate at year end
0.58
%
 
0.31
%
 
%
Daily average outstanding for the year
$
5,911

 
$
554

 
$
1,200

Weighted average rate for the year
0.47
%
 
0.22
%
 
0.16
%
Highest outstanding at any month end
$
8,710

 
$
2,640

 
$
2,501

Consolidated obligation discount notes
 
 
 
 
 
Outstanding at year end
$
26,942

 
$
20,541

 
$
19,132

Weighted average rate at year end
0.46
%
 
0.18
%
 
0.09
%
Daily average outstanding for the year
$
27,965

 
$
19,413

 
$
12,720

Weighted average rate for the year
0.40
%
 
0.11
%
 
0.08
%
Highest outstanding at any month end
$
32,222

 
$
20,541

 
$
19,132

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Overview
As a financial intermediary, the Bank is subject to interest rate risk. Changes in the level of interest rates, the slope of the interest rate yield curve, and/or the relationships (or spreads) between interest yields for different instruments have an impact on the Bank’s estimated market value of equity and its net earnings. This risk arises from a variety of instruments that the Bank enters into on a regular basis in the normal course of its business.
The terms of member advances, investment securities and consolidated obligations may present interest rate risk and/or embedded option risk. As discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Bank makes extensive use of interest rate derivative instruments, primarily interest rate swaps, swaptions and caps, to manage the risk arising from these sources.
The Bank has investments in residential mortgage-related assets, primarily CMOs and, to a much smaller extent, MPF mortgage loans, both of which present prepayment risk. This risk arises from the mortgagors’ option to prepay their mortgages, making the effective maturities of these mortgage-based assets relatively more sensitive to changes in interest rates and other factors that affect the mortgagors’ decisions to repay their mortgages as compared to other long-term investment securities that do not have prepayment features. A decline in interest rates generally accelerates mortgage refinancing activity, thus increasing prepayments and thereby shortening the effective maturity of the mortgage-related assets. Conversely, rising rates generally slow prepayment activity and lengthen a mortgage-related asset’s effective maturity.
The Bank has managed the potential prepayment risk embedded in mortgage assets by purchasing floating rate securities, by purchasing securities that maintain their original principal balance for a fixed number of years, by purchasing highly structured tranches of mortgage securities that substantially limit the effects of prepayment risk, by issuing debt with features similar to the mortgage assets, and/or by using interest rate derivative instruments to offset prepayment risk specific both to particular securities and to the overall mortgage portfolio.
The Bank uses a variety of risk measurements to monitor its interest rate risk. The Bank has made a substantial investment in sophisticated financial modeling systems to measure and analyze interest rate risk. These systems enable the Bank to routinely

76


and regularly measure interest rate risk metrics, including the sensitivity of its market value of equity and income under a variety of interest rate scenarios. Management regularly monitors the information derived from these models and provides the Bank’s Board of Directors with risk measurement reports. The Bank uses these periodic assessments, in combination with its evaluation of the factors influencing the results, when developing its funding and hedging strategies.
The Bank’s Enterprise Market Risk Management Policy provides a risk management framework for the financial management of the Bank consistent with the strategic principles outlined in its Strategic Business Plan. The Bank develops its funding and hedging strategies to manage its interest rate risk within the risk limits established in its Enterprise Market Risk Management Policy.
Business Objectives
The Bank serves as a financial intermediary between the capital markets and its members. In its most basic form, this intermediation process involves raising funds by issuing consolidated obligations in the capital markets and lending the proceeds to member institutions at slightly higher rates. The interest spread between the cost of the Bank’s liabilities and the yield on its assets, combined with the earnings on its invested capital, are the Bank’s primary sources of earnings. The Bank’s primary asset liability management goal is to manage its assets and liabilities in such a way that its current and projected net interest spread is consistent across a wide range of interest rate environments, although the Bank may occasionally take actions that are not necessarily consistent with this objective for short periods of time in response to unusual market conditions.
The objective of maintaining a stable interest spread is complicated under normal conditions by the fact that the intermediation process outlined above cannot be executed for all of the Bank’s assets and liabilities on an individual basis. In the course of a typical business day, the Bank continuously offers a wide range of fixed and floating rate advances with maturities ranging from overnight to 40 years that members can borrow in amounts that meet their specific funding needs at any given point in time. At the same time, the Bank issues consolidated obligations to investors who have their own set of investment objectives and preferences for the terms and maturities of securities that they are willing to purchase.
Because it is not possible to consistently issue debt simultaneously with the issuance of an advance to a member in the same amount and with the same terms as the advance, or to predict what types of advances members might want or what types of consolidated obligations investors might be willing to buy on any particular day, the Bank must have a ready supply of funds on hand at all times to meet member advance demand.
In order to have a ready supply of funds, the Bank typically issues debt as opportunities arise in the market, and makes the proceeds of those debt issuances (many of which bear fixed interest rates and have relatively long maturities) available for members to borrow in the form of advances. Holding fixed-rate liabilities in anticipation of member borrowing subjects the Bank to interest rate risk, and there is no assurance in any event that members will borrow from the Bank in quantities or maturities that will match these warehoused liabilities. Therefore, in order to intermediate the mismatches between advances with certain terms and features, and consolidated obligations with a different set of terms and features, the Bank typically converts both longer maturity assets and longer maturity liabilities to a LIBOR floating rate index, and attempts to manage the interest spread between the pools of floating-rate assets and liabilities.
This process of intermediating the timing, structure, and amount of Bank members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements. The Bank’s general practice is, as often as practical, to contemporaneously execute interest rate exchange agreements when acquiring longer maturity fixed-rate assets and/or issuing longer maturity fixed-rate liabilities in order to convert the cash flows to LIBOR floating rates. Doing so reduces the Bank’s interest rate risk exposure, which allows it to preserve the value of, and earn more stable returns on, members’ capital investment.
However, in the normal course of business, the Bank also acquires (or has acquired) assets whose structural characteristics and/or size reduce the Bank’s ability to enter into interest rate exchange agreements having mirror image terms. These assets include small fixed-rate, fixed-term advances; small fixed-schedule amortizing advances; and floating-rate mortgage-related securities with embedded caps. These assets require the Bank to employ risk management strategies in which the Bank hedges against aggregated risks. The Bank may use fixed-rate, callable or non-callable debt or interest rate exchange agreements, such as fixed-for-floating interest rate swaps, floating-rate basis swaps or interest rate caps, to manage these aggregated risks.
Interest Rate Risk Measurement
As discussed above, the Bank measures its market risk regularly and generally manages its market risk within its Enterprise Market Risk Management Policy limits on estimated market value of equity losses under 200 basis point interest rate shock scenarios. The Enterprise Market Risk Management Policy articulates the Bank’s tolerance for the amount of overall interest rate risk the Bank will assume by limiting the maximum estimated loss in market value of equity that the Bank would incur under simulated 200 basis point changes in interest rates to 15 percent of the estimated base case market value. As reflected in the table below, the Bank was in compliance with this limit at each month-end during the period from December 2015 through December 2016.

77


As part of its ongoing risk management process, the Bank calculates an estimated market value of equity for a base case interest rate scenario and for interest rate scenarios that reflect parallel interest rate shocks. The base case market value of equity is calculated by determining the estimated fair value of each instrument on the Bank’s balance sheet, and subtracting the estimated aggregate fair value of the Bank’s liabilities from the estimated aggregate fair value of the Bank’s assets. For purposes of these calculations, mandatorily redeemable capital stock is treated as equity rather than as a liability. The fair values of the Bank’s financial instruments (both assets and liabilities) are determined using either vendor prices or a pricing model. For those instruments for which a pricing model is used, the calculations are based upon parameters derived from market conditions existing at the time of measurement, and are generally determined by discounting estimated future cash flows at the replacement (or similar) rate for new instruments of the same type with the same or very similar characteristics. The market value of equity calculations include non-financial assets and liabilities, such as premises and equipment, other assets, payables for AHP, and other liabilities at their recorded carrying amounts.
For purposes of compliance with the Bank’s Enterprise Market Risk Management Policy limit on estimated losses in market value, market value of equity losses are defined as the estimated net sensitivity of the value of the Bank’s equity (the net value of its portfolio of assets, liabilities and interest rate derivatives) to 200 basis point parallel shifts in interest rates. In addition, the Bank routinely performs projections of its future earnings over a rolling horizon that includes the current year and the next four calendar years under a variety of interest rate and business environments.
The following table provides the Bank’s estimated base case market value of equity and its estimated market value of equity under up and down 200 basis point interest rate shock scenarios (and, for comparative purposes, its estimated market value of equity under up and down 100 basis point interest rate shock scenarios) for each month-end during the period from December 2015 through December 2016. In addition, the table provides the percentage change in estimated market value of equity under each of these shock scenarios for the indicated periods.
MARKET VALUE OF EQUITY
(dollars in billions)
 
 
 
Up 200 Basis Points (1)
 
Down 200 Basis Points(2)
 
Up 100 Basis Points(1)
 
Down 100 Basis Points(2)
 
Base Case
Market
Value
of Equity
 
Estimated
Market
Value
of Equity
 
Percentage
Change
from
Base Case
 
Estimated
Market
Value
of Equity
 
Percentage
Change
from
Base Case
 
Estimated
Market
Value
of Equity
 
Percentage
Change
from
Base Case
 
Estimated
Market
Value
of Equity
 
Percentage
Change
from
Base Case
December 2015
$
2.318

 
$
2.271

 
(2.03)%
 
$
2.389

 
3.06
%
 
$
2.310

 
(0.35
)%
 
$
2.313

 
(0.22
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 2016
2.343

 
2.343

 
0.01%
 
2.495

 
6.49
%
 
2.359

 
0.68
 %
 
2.354

 
0.47
 %
February 2016
2.191

 
2.187

 
(0.18)%
 
2.445

 
11.59
%
 
2.204

 
0.59
 %
 
2.212

 
0.96
 %
March 2016
2.332

 
2.315

 
(0.73)%
 
2.560

 
9.78
%
 
2.337

 
0.21
 %
 
2.366

 
1.46
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
April 2016
2.509

 
2.477

 
(1.28)%
 
2.746

 
9.45
%
 
2.504

 
(0.20
)%
 
2.554

 
1.79
 %
May 2016
2.617

 
2.600

 
(0.65)%
 
2.847

 
8.79
%
 
2.620

 
0.11
 %
 
2.640

 
0.88
 %
June 2016
2.519

 
2.530

 
0.44%
 
2.864

 
13.70
%
 
2.537

 
0.71
 %
 
2.581

 
2.46
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 2016
2.610

 
2.601

 
(0.34)%
 
2.957

 
13.30
%
 
2.616

 
0.23
 %
 
2.676

 
2.53
 %
August 2016
2.711

 
2.727

 
0.59%
 
3.022

 
11.47
%
 
2.729

 
0.66
 %
 
2.759

 
1.77
 %
September 2016
2.769

 
2.789

 
0.72%
 
3.034

 
9.57
%
 
2.793

 
0.87
 %
 
2.819

 
1.81
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2016
2.839

 
2.841

 
0.07%
 
3.064

 
7.93
%
 
2.854

 
0.53
 %
 
2.877

 
1.34
 %
November 2016
2.968

 
2.957

 
(0.37)%
 
3.043

 
2.53
%
 
2.977

 
0.30
 %
 
2.973

 
0.17
 %
December 2016
2.932

 
2.930

 
(0.07)%
 
2.986

 
1.84
%
 
2.944

 
0.41
 %
 
2.934

 
0.07
 %
____________________________________
(1) 
In the up 100 and 200 basis point scenarios, the estimated market value of equity is calculated under assumed instantaneous +100 and +200 basis point parallel shifts in interest rates.
(2) 
In the down 100 and 200 basis point scenarios, the estimated market value of equity is calculated under assumed instantaneous -100 and -200 basis point parallel shifts in interest rates, subject to a floor of 0.01 percent.

78


A related measure of interest rate risk is duration of equity. Duration is the weighted average maturity (typically measured in months or years) of an instrument’s cash flows, weighted by the present value of those cash flows. As such, duration provides an estimate of an instrument’s sensitivity to small changes in market interest rates. The duration of assets is generally expressed as a positive figure, while the duration of liabilities is generally expressed as a negative number. The change in value of a specific instrument for given changes in interest rates will generally vary in inverse proportion to the instrument’s duration. As market interest rates decline, instruments with a positive duration are expected to increase in value, while instruments with a negative duration are expected to decrease in value. Conversely, as interest rates rise, instruments with a positive duration are expected to decline in value, while instruments with a negative duration are expected to increase in value.
The values of instruments having relatively longer (or higher) durations are more sensitive to a given interest rate movement than instruments having shorter durations; that is, risk increases as the absolute value of duration lengthens. For instance, the value of an instrument with a duration of three years will theoretically change by three percent for every one percentage point (100 basis point) change in interest rates, while the value of an instrument with a duration of five years will theoretically change by five percent for every one percentage point change in interest rates.
The duration of individual instruments may be easily combined to determine the duration of a portfolio of assets or liabilities by calculating a weighted average duration of the instruments in the portfolio. These combinations provide a single straightforward metric that describes the portfolio’s sensitivity to interest rate movements. These additive properties can be applied to the assets and liabilities on the Bank’s balance sheet. The difference between the combined durations of the Bank’s assets and the combined durations of its liabilities is sometimes referred to as duration gap and provides a measure of the relative interest rate sensitivities of the Bank’s assets and liabilities.
Duration gap is a useful measure of interest rate sensitivity but does not account for the effect of leverage, or the effect of the absolute duration of the Bank’s assets and liabilities, on the sensitivity of its estimated market value of equity to changes in interest rates. The inclusion of these factors results in a measure of the sensitivity of the value of the Bank’s equity to changes in market interest rates referred to as the duration of equity. Duration of equity is the market value weighted duration of assets minus the market value weighted duration of liabilities divided by the market value of equity.
The significance of an entity’s duration of equity is that it can be used to describe the sensitivity of the entity’s market value of equity to movements in interest rates. A duration of equity equal to zero would mean, within a narrow range of interest rate movements, that the Bank had neutralized the impact of changes in interest rates on the market value of its equity.
A positive duration of equity would mean, within a narrow range of interest rate movements, that for each one year of duration the estimated market value of the Bank’s equity would be expected to decline by about 0.01 percent for every positive 0.01 percent change in the level of interest rates. A positive duration generally indicates that the value of the Bank’s assets is more sensitive to changes in interest rates than the value of its liabilities (i.e., that the duration of its assets is greater than the duration of its liabilities).
Conversely, a negative duration of equity would mean, within a narrow range of interest rate movements, that for each one year of negative duration the estimated market value of the Bank’s equity would be expected to increase by about 0.01 percent for every positive 0.01 percent change in the level of interest rates. A negative duration generally indicates that the value of the Bank’s liabilities is more sensitive to changes in interest rates than the value of its assets (i.e., that the duration of its liabilities is greater than the duration of its assets).

79


The following table provides information regarding the Bank’s base case duration of equity as well as its duration of equity in up and down 100 and 200 basis point interest rate shock scenarios for each month-end during the period from December 2015 through December 2016.
DURATION ANALYSIS
(expressed in years)
 
Base Case Interest Rates
 
Duration of Equity
 
Asset
Duration
 
Liability Duration
 
Duration
Gap
 
Duration
of Equity
 
Up 100(1)
 
Up 200(1)
 
Down 100(2)
 
Down 200(2)
December 2015
0.26

 
(0.31
)
 
(0.05
)
 
(0.53
)
 
1.11

 
2.16

 
0.88

 
3.49

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 2016
0.24

 
(0.33
)
 
(0.09
)
 
(1.36
)
 
0.04

 
1.19

 
1.44

 
3.45

February 2016
0.27

 
(0.35
)
 
(0.08
)
 
(1.15
)
 
0.10

 
1.32

 
1.79

 
4.23

March 2016
0.28

 
(0.33
)
 
(0.05
)
 
(0.79
)
 
0.42

 
1.36

 
2.02

 
4.23

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
April 2016
0.31

 
(0.34
)
 
(0.03
)
 
(0.20
)
 
0.68

 
1.43

 
1.74

 
3.93

May 2016
0.26

 
(0.30
)
 
(0.04
)
 
(0.60
)
 
0.36

 
1.07

 
0.77

 
4.54

June 2016
0.25

 
(0.31
)
 
(0.06
)
 
(0.97
)
 
(0.21
)
 
0.61

 
1.49

 
5.17

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 2016
0.25

 
(0.29
)
 
(0.04
)
 
(0.52
)
 
0.17

 
0.88

 
1.46

 
5.46

August 2016
0.25

 
(0.31
)
 
(0.06
)
 
(1.01
)
 
(0.27
)
 
0.36

 
0.24

 
4.00

September 2016
0.26

 
(0.34
)
 
(0.08
)
 
(1.23
)
 
(0.34
)
 
0.49

 
0.72

 
3.15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2016
0.26

 
(0.33
)
 
(0.07
)
 
(1.01
)
 
(0.02
)
 
0.87

 
0.45

 
2.94

November 2016
0.26

 
(0.33
)
 
(0.07
)
 
(0.94
)
 
0.19

 
1.09

 
(0.73
)
 
1.32

December 2016
0.26

 
(0.32
)
 
(0.06
)
 
(0.90
)
 
0.03

 
0.88

 
(0.72
)
 
0.86

____________________________________
(1) 
In the up 100 and 200 basis point scenarios, the duration of equity is calculated under assumed instantaneous +100 and +200 basis point parallel shifts in interest rates.
(2) 
In the down 100 and 200 basis point scenarios, the duration of equity is calculated under assumed instantaneous -100 and -200 basis point parallel shifts in interest rates.
Duration of equity measures the impact of a parallel shift in interest rates on an entity’s market value of equity but may not be a good metric for measuring changes in value related to non-parallel rate shifts. An alternative measure for that purpose uses key rate durations, which measure portfolio sensitivity to changes in interest rates at particular points on a yield curve. Key rate duration is a specialized form of duration. It is calculated by estimating the change in value due to changing the market rate for one specific maturity point on the yield curve while holding all other variables constant. The sum of the key rate durations across an applicable yield curve is approximately equal to the overall portfolio duration.
The duration of equity measure represents the expected percentage change in the Bank’s market value of equity for a one percentage point (100 basis point) parallel change in interest rates. The key rate duration measure represents the expected percentage change in the Bank’s market value of equity for a one percentage point (100 basis point) parallel change in interest rates for a given maturity point on the yield curve, holding all other rates constant. The Bank's key rate duration limit is 5 years, measured as the difference between the maximum and minimum key rate durations calculated for 11 defined individual maturity points on the yield curve. The Bank calculates these metrics monthly and was in compliance with these policy limits at each month-end during the year ended December 31, 2016.
As discussed on page F-51, in May 2015, the Bank replaced its third-party pricing/risk model with a new third-party pricing/risk model. In addition to pricing certain individual financial instruments, the model is used to calculate the Bank's market value of equity and its duration measures. On the date of implementation, the change to the new model did not have a significant impact on any of the Bank's risk measurements.


80


Interest Rate Risk Components
The Bank manages the interest rate risk of a significant percentage of its assets and liabilities on a transactional basis. Using interest rate exchange agreements, the Bank pays (in the case of an asset) or receives (in the case of a liability) a coupon that is identical or nearly identical to the balance sheet item, and receives or pays in return, respectively, a floating rate typically indexed to LIBOR. The combination of the interest rate exchange agreement with the balance sheet item has the effect of reducing the duration of the asset or liability to the term to maturity of the LIBOR index, which is typically either one month or three months. After converting its longer maturity assets and liabilities to LIBOR, the Bank can then focus on managing the spread between the assets and liabilities while remaining relatively insensitive to overall movements in market interest rates.
Because individual assets and liabilities with longer maturities are typically converted to floating rates at the time they are acquired or issued, mismatches can develop between the reset dates for aggregate balances of floating-rate assets and floating-rate liabilities. The mismatch between the average time to repricing of the assets and the liabilities converted to floating rates in this manner can, however, cause the Bank’s duration of equity to fluctuate from month to month. While the realization of these reset timing differences is generally not material to the Bank’s results of operations under normal market conditions in which one-month and three-month LIBOR rates change in relatively modest increments, these reset timing differences can have a more significant impact during periods in which short-term LIBOR rates are volatile. As a result, the Bank analyzes these reset timing differences and periodically enters into hedging transactions, such as basis swaps or forward rate agreements, to reduce the risk they pose to the Bank’s periodic earnings.
In the normal course of business, the Bank also acquires assets whose structural characteristics and/or size limit the Bank’s ability to enter into interest rate exchange agreements having mirror image cash flows. These assets include fixed-rate, fixed-schedule, amortizing advances and mortgage-related assets. The Bank manages the interest rate risk of these assets by issuing non-callable liabilities, and by entering into interest rate exchange agreements that are not designated against specific assets or liabilities for accounting purposes (stand-alone or economic derivatives). These hedging transactions serve to preserve the value of the asset and minimize the impact of changes in interest rates on the spread between the asset and liability due to maturity mismatches.
In the normal course of business, the Bank may issue fixed-rate advances in relatively small sizes (e.g., $1.0 — $5.0 million) that are too small to efficiently hedge on an individual basis. These advances may require repayment of the entire principal at maturity or may have fixed amortization schedules that require repayment of portions of the original principal each month or at other specified intervals over their term. This activity tends to extend the Bank’s duration of equity over time. To monitor and hedge this risk, the Bank periodically evaluates the amount of its unhedged advances and may issue a corresponding amount of fixed-rate debt with similar maturities or enter into interest rate swaps to offset the interest rate risk created by the pool of fixed-rate assets.
As of December 31, 2016, the Bank also held approximately $2.3 billion (par value) of variable-rate CMOs that reset monthly in accordance with one-month LIBOR, but that contain terms that will cap their interest rates at levels predominantly between 6.0 percent and 6.5 percent. To offset a portion of the potential risk that the coupons on these securities might reach their caps at some point in the future, the Bank held as of December 31, 2016 a total of $1.2 billion (notional balance) of stand-alone interest rate caps with strike rates of 6.5 percent and maturities ranging from 2018 to 2021. The Bank periodically evaluates the residual risk of the caps embedded in the CMOs and determines whether to purchase additional caps.
Because the majority of the Bank’s variable-rate debt is indexed to three-month LIBOR, the Bank’s portfolio of variable-rate CMOs and other assets indexed to one-month LIBOR can at times present risk to periodic changes in the spread between one-month and three-month LIBOR. When this risk is elevated, the Bank will typically use basis swaps to convert three-month repricing debt to one-month repricing frequency. As of December 31, 2016, the Bank held one interest rate basis swap with a notional balance of $1.0 billion that matures in May 2017.
In practice, management analyzes a variety of factors in order to assess the suitability of the Bank’s interest rate exposure within the established risk limits. These factors include current and projected market conditions, including possible changes in the level, shape, and volatility of the term structure of interest rates, possible changes to the composition of the Bank’s balance sheet, and possible changes in the delivery channels for the Bank’s assets, liabilities, and hedging instruments. Many of these same variables are also included in the Bank’s income modeling processes. While management considered the Bank’s interest rate risk profile to be appropriate given market conditions during 2016, the Bank may adjust its exposure to market interest rates based on the results of its analyses of the impact of these conditions on future earnings.
As noted above, the Bank typically manages interest rate risk on a transaction by transaction basis as much as possible. To the extent that the Bank finds it necessary or appropriate to modify its interest rate risk position, it would normally do so through one or more cash or interest rate derivative transactions, or a combination of both. For instance, if the Bank wished to shorten its duration of equity, it would typically do so by issuing additional fixed-rate debt with maturities that correspond to the maturities of specific assets or pools of assets that have not previously been hedged. This same result might also be

81


implemented by executing one or more interest rate swaps to convert specific assets from a fixed rate to a variable rate of interest. A similar approach would be taken if the Bank determined it was appropriate to extend rather than shorten its duration.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Bank’s annual audited financial statements for the years ended December 31, 2016, 2015 and 2014, together with the notes thereto and the report of PricewaterhouseCoopers LLP thereon, are included in this Annual Report on pages F-1 through F-59.
The following is a summary of the Bank’s unaudited quarterly operating results for the years ended December 31, 2016 and 2015.

SELECTED QUARTERLY FINANCIAL DATA
(unaudited, in thousands)
 
Year ended December 31, 2016
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
Interest income
$
85,194

 
$
98,856

 
$
113,262

 
$
124,836

 
$
422,148

Net interest income
35,734

 
37,813

 
44,668

 
46,815

 
165,030

Other income (loss)
 
 
 
 
 
 
 
 
 
Credit component of other-than-temporary impairment losses on held-to-maturity securities
(8
)
 
(4
)
 
(8
)
 

 
(20
)
Net gains (losses) on trading securities
6,917

 
3,013

 
(797
)
 
(6,947
)
 
2,186

Net gains (losses) on derivatives and hedging activities
(16,939
)
 
(3,821
)
 
197

 
11,737

 
(8,826
)
Realized gains on sales of held-to-maturity securities
470

 
259

 
65

 
146

 
940

Realized gains on sales of available-for-sale securities
651

 
3,564

 
889

 

 
5,104

Letter of credit fees, service fees and other, net
1,813

 
2,382

 
2,059

 
2,186

 
8,440

Other expense
19,430

 
19,662

 
23,600

 
21,882

 
84,574

AHP assessments
922

 
2,355

 
2,348

 
3,206

 
8,831

Net income
8,286

 
21,189

 
21,125

 
28,849

 
79,449

 
Year ended December 31, 2015
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
Interest income
$
50,414

 
$
54,113

 
$
53,586

 
$
62,375

 
$
220,488

Net interest income
29,084

 
31,397

 
28,349

 
32,759

 
121,589

Other income (loss)
 
 
 
 
 
 
 
 
 
Credit component of other-than-temporary impairment losses on held-to-maturity securities
(6
)
 
(19
)
 
(3
)
 
(5
)
 
(33
)
Net gains (losses) on trading securities
277

 
62

 
1,169

 
(3,300
)
 
(1,792
)
Net gains (losses) on derivatives and hedging activities
4,237

 
8,449

 
(10,832
)
 
4,629

 
6,483

Realized gains on sales of held-to-maturity securities
6,226

 
3,887

 
3,297

 
1,104

 
14,514

Realized gains on sales of available-for-sale securities
2,345

 

 
1,457

 
120

 
3,922

Letter of credit fees, service fees and other, net
1,621

 
1,594

 
1,602

 
1,863

 
6,680

Other expense
18,130

 
18,843

 
18,872

 
20,857

 
76,702

AHP assessments
2,566

 
2,653

 
617

 
1,632

 
7,468

Net income
23,088

 
23,874

 
5,550

 
14,681

 
67,193


82



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
The Bank’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Bank’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, the Bank’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Bank’s disclosure controls and procedures were effective in: (1) recording, processing, summarizing and reporting information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act within the time periods specified in the SEC’s rules and forms and (2) ensuring that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bank’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control over Financial Reporting
Management’s Report on Internal Control over Financial Reporting as of December 31, 2016 is included herein on page F-2. The Bank’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has also issued a report regarding the effectiveness of the Bank’s internal control over financial reporting as of December 31, 2016, which is included herein on page F-3.
Changes in Internal Control over Financial Reporting
There were no changes in the Bank’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

83


PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
Pursuant to the HER Act, each FHLBank is governed by a board of directors of 13 persons or so many persons as the Director of the Finance Agency may determine. The HER Act divides directors of FHLBanks into two categories. The first category is comprised of “member” directors who are elected by the member institutions of each state in the FHLBank’s district to represent that state. The second category is comprised of “independent” directors who are nominated by a FHLBank’s board of directors, after consultation with its affordable housing Advisory Council, and elected by the FHLBank’s members at-large.
Pursuant to the HER Act and an implementing Finance Agency regulation, member directors must constitute a majority of the members of the board of directors of each FHLBank and independent directors must constitute at least 40 percent of the members of each board of directors. At least two of the independent directors must be public interest directors with more than four years’ experience representing consumer or community interests in banking services, credit needs, housing, or consumer financial protections. Annually, the Board of Directors of the Bank is required to determine how many of its independent directorships should be designated as public interest directorships, provided that the Bank at all times has at least two public interest directorships. By order of the Finance Agency on June 8, 2016, the Director of the Finance Agency designated that, for 2017, the Bank would have nine member directors and eight independent directors. With respect to the director elections that the Bank conducted during calendar year 2016, for terms beginning January 1, 2017, the order designated that one member director would be elected in Louisiana, two member directors would be elected in Texas, and two independent directors would be elected. Prior to January 1, 2017, the Bank had nine member directors and seven independent directors.
With one exception, the term of office of each directorship is four years. For the two independent directors that were elected in 2016, for terms beginning January 1, 2017, the order designated that the candidate receiving the fewest votes would serve a three-year term. Director terms commence on January 1 (except in instances where a vacancy is filled, as further discussed below) and end on December 31. Directors (both member and independent) cannot serve more than three consecutive full terms for which they have been elected by the Bank's members.
Member Directors
Each year the Finance Agency designates the number of member directorships for each state in the Bank’s district. The Finance Agency allocates the member directorships among the states in the Bank’s district as follows: (1) one member directorship is allocated to each state; (2) if the total number of member directorships allocated pursuant to clause (1) is less than eight, the Finance Agency allocates additional member directorships among the states using the method of equal proportions (which is the same equal proportions method used to apportion seats in the U.S. House of Representatives among states) until the total allocated for the Bank equals eight; (3) if the number of member directorships allocated to any state pursuant to clauses (1) and (2) is less than the number that was allocated to that state on December 31, 1960, the Finance Agency allocates such additional member directorships to that state until the total allocated to that state equals the number allocated to that state on December 31, 1960; and (4) after consultation with the Bank, the Finance Agency may approve additional discretionary member directorships. For 2017, the Finance Agency designated the Bank’s member directorships as follows: Arkansas – 1; Louisiana – 2 (the grandfather provision in clause (3) of the preceding sentence guarantees Louisiana two of the member directorships in the Bank’s district); Mississippi – 1; New Mexico – 1; and Texas – 4.
To be eligible to serve as a member director, a candidate must be: (1) a citizen of the United States and (2) an officer or director of a member institution that is located in the represented state and that meets all of the minimum capital requirements established by its federal or state regulator. For purposes of election of directors, a member is deemed to be located in the state in which a member’s principal place of business is located as of December 31 of the calendar year immediately preceding the election year (“Record Date”). In most cases, a member’s principal place of business is the state in which such member maintains its home office as established in conformity with the laws under which it is organized and from which the member conducts business operations; provided, however, a member may request in writing to the FHLBank in the district where such member maintains its home office that a state other than the state in which it maintains its home office be designated as its principal place of business. Within 90 calendar days of receipt of such written request, the board of directors of the FHLBank in the district where the member maintains its home office shall designate a state other than the state where the member maintains its home office as the member’s principal place of business, provided all of the following criteria are satisfied: (a) at least 80 percent of such member’s accounting books, records, and ledgers are maintained, located or held in such designated state; (b) a majority of meetings of such member’s board of directors and constituent committees are conducted in such designated state; and (c) a majority of such member’s five highest paid officers have their place of employment located in such designated state.

84


For an insurance company or CDFI member that cannot satisfy the requirements in the previous paragraph, the principal place of business is the location from which the member conducts the predominant portion of its business activities. A member will be deemed to conduct the predominant portion of its business activities in a particular state if any two of the following factors are present: (i) the member's largest office based on number of employees is located in the state; (ii) a plurality of the institution's employees are located in the state; or (iii) the places of employment for a plurality of the member's senior executives are located in the state. If an entity cannot identify a location from which it conducts the predominant portion of its business activities based on the factors enumerated in the previous sentence, the entity's state of domicile or incorporation shall be designated as its principal place of business.
Candidates for member directorships are nominated by members located in the state to be represented by that particular directorship. Member directors may be elected without a vote by members if the number of nominees from a state is equal to or less than the number of directorships to be filled from that state. In that case, the Bank will notify the members in the affected voting state in writing (in lieu of providing a ballot) that the directorships are to be filled without an election due to a lack of nominees.
For each member directorship that is to be filled in an election, each member institution that is located in the state to be represented by the directorship is entitled to cast one vote for each share of capital stock that the member was required to hold as of the Record Date; provided, however, that the number of votes that any member may cast for any one directorship cannot exceed the average number of shares of capital stock that are required to be held as of the Record Date by all members located in the state to be represented. The effect of limiting the number of shares that a member may vote to the average number of shares required to be held by all members in the member’s state is generally to equalize voting rights among members. Members required to hold the largest number of shares above the average generally have proportionately less voting power, and members required to hold a number of shares closer to or below such average have proportionately greater voting power than would be the case if each member were entitled to cast one vote for each share of stock it was required to hold. A member may not split its votes among multiple nominees for a single directorship, nor, where there are multiple directorships to be filled for a voting state, may it cumulatively vote for a single nominee. Any ballots cast in violation of these restrictions are void.
No shareholder meetings are held for the election of directors; the election process is conducted electronically using a third-party vendor experienced in administering secure, online elections. For members that choose to opt out of the electronic balloting process or that are unable for whatever reason to cast their votes electronically, the process is conducted by mail. The Bank’s Board of Directors does not solicit proxies, nor are member institutions permitted to solicit or use proxies to cast their votes in an election. Except as set forth in the next sentence, no director, officer, employee, attorney or agent of the Bank may (i) communicate in any manner that a director, officer, employee, attorney or agent of the Bank, directly or indirectly, supports or opposes the nomination or election of a particular individual for a member directorship or (ii) take any other action to influence the voting with respect to any particular individual. A Bank director, officer, employee, attorney or agent may, acting in his or her personal capacity, support the nomination or election of any individual for a member directorship, provided that no such individual may purport to represent the views of the Bank or its Board of Directors in doing so.
In the event of a vacancy in any member directorship, such vacancy is to be filled by an affirmative vote of a majority of the Bank’s remaining directors, regardless of whether such remaining directors constitute a quorum of the Bank’s Board of Directors. A member director so elected shall satisfy the requirements for eligibility that were applicable to his or her predecessor and will fill the unexpired term of office of the vacant directorship.
Independent Directors
Independent directors are nominated by the Bank’s Board of Directors after consultation with its affordable housing Advisory Council. Any individual who seeks to be an independent director of the Board of Directors of the Bank may deliver to the Bank, on or before the deadline set by the Bank, an executed independent director application form prescribed by the Finance Agency. Before announcing any independent director nominee, the Bank must deliver to the Finance Agency a copy of the independent director application forms executed by the individuals proposed to be nominated for independent directorships by the Board of Directors of the Bank. If within two weeks of such delivery the Finance Agency provides comments to the Bank on any independent director nominee, the Board of Directors of the Bank must consider the Finance Agency’s comments in determining whether to proceed with that nominee or to reopen the nomination process. If within the two-week period the Finance Agency offers no comment on a nominee, the Bank’s Board of Directors may proceed to nominate such nominee.
The Bank conducts elections for independent directorships in conjunction with elections for member directorships. Independent directors are elected by a plurality of the Bank’s members at-large; in other words, all eligible members in every state in the Bank’s district vote on the nominees for independent directorships. If the Bank’s Board of Directors nominates only one individual for each independent directorship, then, to be elected, each nominee must receive at least 20 percent of the number of votes eligible to be cast in the election. If any independent directorship is not filled through this initial election process, the Bank must conduct the election process again until a nominee receives at least 20 percent of the votes eligible to be cast in the election. If, however, the Bank’s Board of Directors nominates more persons for the type of independent directorship to be

85


filled (either a public interest directorship or other independent directorship) than there are directorships of that type to be filled in the election, then the Bank will declare elected the nominee receiving the highest number of votes, without regard to whether the nominee received at least 20 percent of the number of votes eligible to be cast in the election. The same determinations and limitations that apply to the number of votes that any member may cast for a member directorship apply equally to the election of independent directors.
No shareholder meetings are held for the election of independent directors; the election process is conducted in the same manner as the election process for member directorships. The Bank’s Board of Directors does not solicit proxies, nor are member institutions permitted to solicit or use proxies to cast their votes in an election. A Bank director, officer, employee, attorney or agent and the Bank’s Board of Directors and affordable housing Advisory Council (including members of the Advisory Council) may support the candidacy of any individual nominated by the Board of Directors for election to an independent directorship, but may not otherwise (i) communicate in any manner that a director, officer, employee, attorney or agent of the Bank, directly or indirectly, supports or opposes the nomination or election of a particular individual for an independent directorship or (ii) take any other action to influence the voting with respect to any particular individual.
As determined by the Bank, at least two of the independent directors must be public interest directors with more than four years’ experience representing consumer or community interests in banking services, credit needs, housing, or consumer financial protections. The remainder of the independent directors must have demonstrated knowledge of or experience in one or more of the following areas: auditing and accounting; derivatives; financial management; organizational management; project development; risk management practices; or the law. The independent director’s knowledge of or experience in the above areas should be commensurate with that needed to oversee a financial institution with a size and complexity that is comparable to that of the Bank. The Bank’s Board of Directors has designated two of its independent directors, Dianne W. Bolen and C. Kent Conine, as public interest directors.
In the event of a vacancy in any independent directorship occurring other than by failure of a sole nominee for an independent directorship to receive votes equal to at least 20 percent of all eligible votes, such vacancy is to be filled by an affirmative vote of a majority of the Bank’s remaining directors, regardless of whether the remaining directors constitute a quorum of the Bank’s Board of Directors. An independent director so elected shall satisfy the requirements for eligibility that were applicable to his or her predecessor and will fill the unexpired term of office of the vacant directorship. If the Board of Directors of the Bank is electing an independent director to fill the unexpired term of office of a vacant directorship, the Bank must deliver to the Finance Agency for its review a copy of the independent director application form of each individual being considered by the Bank’s Board of Directors.
To be eligible to serve as an independent director, a person must be: (1) a citizen of the United States and (2) a resident in the Bank’s district. Additionally, an independent director is prohibited from serving as an officer of any FHLBank or as an officer, employee or director of any member of the Bank, or of any recipient of advances from the Bank, except that an independent director may serve as an officer, employee or director of a holding company that controls one or more members of, or recipients of advances from, the Bank if the assets of all such members or recipients of advances constitute less than 35 percent of the assets of the holding company, on a consolidated basis. For these purposes, any officer position, employee position or directorship of the director’s spouse is attributed to the director. An independent director must disclose to the Bank all officer, employee or director positions described above that the director or the director’s spouse holds.

86


2017 Directors
The following table sets forth certain information regarding each of the Bank’s directors (ages are as of March 24, 2017):
Name
 
Age
 
Director
Since
 
Expiration of
Term as Director
 
Board
Committees
Joseph F. Quinlan, Jr., Chairman (Member)
 
69
 
2008
 
2020
 
(a)(b)(c)(d)(e)(f)(g)
Robert M. Rigby, Vice Chairman (Member)
 
70
 
2010
 
2019
 
(a)(b)(c)(d)(e)(f)(g)
Cheryl D. Alston (Independent)
 
50
 
2017
 
2020
 
(a)(d)
Dianne W. Bolen (Independent)
 
68
 
2012
 
2018
 
(e)(f)
Patricia P. Brister (Independent)
 
70
 
2008
 
2019
 
(c)(e)(g)
Tim H. Carter (Member)
 
62
 
2013
 
2020
 
(b)(d)
Mary E. Ceverha (Independent)
 
72
 
2004
 
2018
 
(a)(b)(c)
Albert C. Christman (Member)
 
65
 
2014
 
2017
 
(a)(d)(g)
C. Kent Conine (Independent)
 
62
 
2007
 
2017
 
(c)(e)(f)(g)
James D. Goudge (Member)
 
63
 
2014
 
2017
 
(a)(e)
W. Wesley Hoskins (Member)
 
65
 
2013
 
2020
 
(d)(e)
Michael C. Hutsell (Member)
 
66
 
2014
 
2017
 
(b)(f)
A. Fred Miller, Jr. (Member)
 
67
 
2015
 
2018
 
(a)(c)(f)
Sally I. Nelson (Independent)
 
63
 
2014
 
2017
 
(b)(c)(d)
John P. Salazar (Independent)
 
74
 
2010
 
2019
 
(d)(e)(f)(g)
Margo S. Scholin (Independent)
 
66
 
2007
 
2019
 
(b)(d)(g)
Ron G. Wiser (Member)
 
60
 
2010
 
2018
 
(a)(b)(g)
_______________________________________
(a) 
Member of Risk Management Committee
(b) 
Member of Audit Committee
(c) 
Member of Compensation and Human Resources Committee
(d) 
Member of Strategic Planning, Operations and Technology Committee
(e) 
Member of Government and External Affairs Committee
(f) 
Member of Affordable Housing and Economic Development Committee
(g) 
Member of Executive and Governance Committee
Joseph F. Quinlan, Jr. is Chairman of the Board of Directors of the Bank and has served in that capacity since January 1, 2015. Mr. Quinlan serves as Chairman of First National Bankers Bank (a member of the Bank) and as Chairman, President and Chief Executive Officer of its privately held holding company, First National Bankers Bankshares, Inc. (Baton Rouge, Louisiana) and has served in such capacities since 1984. From 2000 through March 2011, Mr. Quinlan also served as Chairman of the Mississippi National Bankers Bank, a former member of the Bank, and from 2003 through March 2011 he served as Chairman of the First National Bankers Bank, Alabama. Further, Mr. Quinlan served as a director of the Arkansas Bankers Bank, a former member of the Bank, from December 2008 through March 2011 and as its Chairman from February 2009 through March 2011. Mississippi National Bankers Bank, First National Bankers Bank, Alabama, and Arkansas Bankers Bank were merged into First National Bankers Bank on March 31, 2011. In addition, Mr. Quinlan serves as Chairman of FNBB Services Corp. LLC, FNBB Capital Markets LLC, FNBB Insurance Agency LLC and FNBB Holdings LLC and has served in those capacities since 1998, 2003, 2010 and 2016, respectively. He currently serves on the Council of Federal Home Loan Banks and is a member of the Chair and Vice Chair Committee of the Council of Federal Home Loan Banks. Mr. Quinlan also serves as Chairman of the Executive and Governance Committee of the Bank’s Board of Directors.
Robert M. Rigby is Vice Chairman of the Board of Directors of the Bank and has served in that capacity since January 1, 2015. Mr. Rigby serves as Market President of Liberty Bank in North Richland Hills, Texas (a member of the Bank) and has served in that capacity since August 2008. From 1998 to August 2008, he served as a director, President and Chief Executive Officer of Liberty Bank. Since August 2008, he has served as an advisory director for Liberty Bank. Prior to joining Liberty Bank, Mr. Rigby served as a director and Executive Vice President of First National Bank of Weatherford from 1980 to 1998. He currently serves as an advisory director for the Texas Tech University School of Banking. In addition, Mr. Rigby serves as vice chairman of the North Richland Hills Economic Development Advisory Committee. He previously served on the BankPac Committee of the American Bankers Association ("ABA") and he is a past chairman of the Texas Bankers Association. Further, Mr. Rigby previously served on the Weatherford College Board of Trustees, the board of directors of the Birdville ISD

87


Education Foundation and as an advisory director for the North Texas Special Needs Assistance Partners. He is also a past chairman of the Northeast Tarrant Chamber of Commerce. Mr. Rigby currently serves on the Council of Federal Home Loan Banks and is a member of the Chair and Vice Chair Committee of the Council of Federal Home Loan Banks. He also serves as Vice Chairman of the Executive and Governance Committee of the Bank’s Board of Directors.
Cheryl D. Alston serves as Executive Director and Chief Investment Officer of the Employees' Retirement Fund of the City of Dallas ("ERF"), a $3.2 billion pension plan for the city's civilian employees. Ms. Alston has served in that capacity since October 2004 and is responsible for strategy development, finance, operations and investments. Prior to joining ERF, Ms. Alston served as Vice President (from October 2002 to April 2004) and Assistant Vice President (from February 1998 to October 2002) of the Retirement & Investment Services Division of Cigna Corporation. From 1988 to 1998, she served in various financial and management roles for Chase Global Securities. In 2011, Ms. Alston was appointed by President Barack Obama to the Pension Benefit Guaranty Corporation ("PBGC") Advisory Committee. In 2013, she was reappointed to serve a second term on the PBGC Advisory Committee, which term ended in 2016. Ms. Alston currently serves on the board of directors of CHRISTUS Health, a faith-based international health care system, and serves as the chair of that board's Finance & Strategy Committee and as chair of its Investment Sub-Committee. In addition, she serves on the boards of directors of Blue Cross Blue Shield of Kansas City and the Dallas Women's Foundation and is a member of both the Dallas Assembly and the International Women's Forum Dallas.
Dianne W. Bolen served as Executive Director of the Mississippi Home Corporation in Jackson, Mississippi from 1997 until her retirement on December 31, 2014. The Mississippi Home Corporation is a state housing finance agency that provides rental and homeownership programs to persons of low to moderate income. Ms. Bolen joined the Mississippi Home Corporation in 1990. From 1990 to 1992, she served as Finance Director and from 1992 to 1997, she served as Deputy Executive Director. Ms. Bolen also served as Assistant Secretary Treasurer from 1990 until June 2014. Since April 2015, she has served as a consultant to the Mississippi Home Corporation. Ms. Bolen previously served on the board of directors of the National Council of State Housing Agencies ("NCSHA") and, until December 31, 2014, she co-chaired the NCSHA's Municipal Disclosure Task Force. Prior to her retirement, Ms. Bolen also served as a member of the National Mortgage Bankers Association and the Affordable Housing Tax Credit Coalition. She currently serves as Vice Chairman of the Affordable Housing and Economic Development Committee of the Bank’s Board of Directors. Ms. Bolen previously served on the Bank's affordable housing Advisory Council from 1998 through 1999 and from 2007 through 2009.
Patricia P. Brister serves as President of St. Tammany Parish in Mandeville, Louisiana and has served in that capacity since December 2011. Since March 2006, she has served on the board of directors of Habitat for Humanity St. Tammany West and from March 2007 to March 2009 she served as its chairman. From January 2009 to September 2011, she served as Executive Director of the Northshore Business Council. In 2007 and 2008, Ms. Brister served as a director of Volunteers of America – Greater New Orleans. From June 2006 to January 2008, she served as the United States Ambassador to the United Nations Commission on the Status of Women. She previously served as a Councilwoman for St. Tammany Parish from 2000 to 2007 and is a past chairman of the Women’s Build Habitat for Humanity. From 1975 to 2000, Ms. Brister served as Secretary/Treasurer of Brister-Stephens, Inc., a privately owned mechanical contracting company in the New Orleans area. Ms. Brister currently serves as Chairman of the Compensation and Human Resources Committee of the Bank’s Board of Directors. She previously served as a director of the Bank from 2002 to 2004 and was Vice Chairman of the Bank’s Board of Directors in 2004.
Based in Fort Worth, Texas, Tim H. Carter serves as President, North Texas Region for Southside Bank (a member of the Bank headquartered in Tyler, Texas). On December 17, 2014, Mr. Carter's former employer, Fort Worth-based OmniAmerican Bank (then a member of the Bank) was merged with and into Southside Bank, a wholly-owned subsidiary of Southside Bancshares, Inc., Southside Bank's publicly traded holding company. Upon the closing of the merger, Mr. Carter became an officer of Southside Bank. From June 2007 until December 17, 2014, Mr. Carter served as a director, President and Chief Executive Officer of OmniAmerican Bank and its publicly traded holding company, OmniAmerican Bancorp, Inc. Immediately prior to the OmniAmerican Bank/Southside Bank merger, OmniAmerican Bancorp, Inc. was acquired by Southside Bancshares, Inc. He also serves as an advisory director for Southside Bank and has served in that capacity since December 17, 2014. Mr. Carter currently serves as vice chairman of the board of directors of Texas Wesleyan University. He also serves on the boards of directors of Safe City Commission and Lena Pope and as chairman of the board of North Texas LEAD. Mr. Carter is a past board member of the TCU Business School International Board of Visitors, the Van Cliburn Foundation, the Fort Worth Club (for which he served as chairman), and the Hill School (for which he also served as chairman). Mr. Carter is a past president and chief executive officer of the United Way of Metropolitan Tarrant County and a former president of the Harris Methodist Health Foundation. He currently serves as Vice Chairman of the Strategic Planning, Operations and Technology Committee of the Bank’s Board of Directors.
Mary E. Ceverha, a civic volunteer who resides in Dallas, Texas, has served as a director of the Bank since 2004. Ms. Ceverha is also a current director and past president of Trinity Commons Foundation, Inc. Founded by Ms. Ceverha in 2001, this not-for-profit organization coordinates fundraising and other activities relating to the construction of the Trinity River Project, a

88


public works redevelopment project in Dallas, Texas. Previously, she served on the steering committee of the President’s Research Council for the University of Texas Southwestern Medical Center, which raises funds for medical research, and as a member of the Greater Dallas Planning Council. Ms. Ceverha is also a former board member and president of Friends of Fair Park, a non-profit citizens group dedicated to the preservation of Fair Park, a national historic landmark in Dallas, Texas, and she is a former Commissioner of the Dallas Housing Authority. From 1995 to 2004, she served on the Texas State Board of Health. Ms. Ceverha currently serves as Vice Chairman of the Compensation and Human Resources Committee of the Bank’s Board of Directors. She previously served as Vice Chairman of the Bank’s Board of Directors from December 2005 to December 2014 and as Acting Vice Chairman of the Bank's Board of Directors from January 2005 to December 2005.
Albert C. Christman serves as Chairman and Chief Executive Officer of Guaranty Bank & Trust Company of Delhi (a member of the Bank located in Delhi, Louisiana) and as a director, President and Chief Executive Officer of its privately held holding company, Delhi Bancshares, Inc. He has served as Chairman of Guaranty Bank & Trust Company of Delhi since November 2016 and as Chief Executive Officer since 1986. From 1986 to November 2016, Mr. Christman also served as a director and President of Guaranty Bank & Trust Company of Delhi. He has served as a director, President and Chief Executive Officer of Delhi Bancshares, Inc. since 1986. Since 1987, Mr. Christman has also served on the boards of directors of First National Bankers Bank, a member of the Bank, and its privately held holding company, First National Bankers Bankshares, Inc. He is the founder of Delhi Charter School and Community Financial Insurance Center, LLC. Mr. Christman has served as Chairman of both organizations since their inception in 2001 and 2004, respectively. In addition, he serves as a director of Pecan Haven Addiction Center, LLC. Further, Mr. Christman serves as a director and Chief Executive Officer of Southern Fidelity Agency, Inc., a privately held insurance agency he founded in 1998. He is a past chairman of the Louisiana Bankers Association. Mr. Christman currently serves as Chairman of the Risk Management Committee of the Bank's Board of Directors.
C. Kent Conine serves as President of Conine Residential Group, Inc. and has served in that capacity since 1995. Based in Dallas, Texas, Conine Residential Group, Inc. is a privately held company that specializes in single-family home building and subdivision development and the construction, management and development of multifamily apartment communities. From 1997 to December 2011, Mr. Conine served on the board of directors of the Texas Department of Housing & Community Affairs ("TDHCA") and was chairman of the board of directors of TDHCA from 2009 to 2011. He is also a past president of the National Association of Home Builders. From July 2004 to February 2008, he served on the board of directors of NGP Capital Resources Company (“NGP”), a publicly traded financial services company that invests primarily in small and mid-size private energy companies. NGP is a registered investment company under the Investment Company Act of 1940, as amended. Mr. Conine currently serves as Chairman of the Affordable Housing and Economic Development Committee of the Bank’s Board of Directors.
James D. Goudge serves as Chairman of Broadway National Bank in San Antonio, Texas. He joined Broadway National Bank (a member of the Bank) in 1989 and has served as Chairman since 2001. From 2001 to 2016, Mr. Goudge also served as Chief Executive Officer of Broadway National Bank. From 1998 to 2001, Mr. Goudge served as President and Chief Executive Officer. From 1989 to 1998, he served as Executive Vice President in charge of Broadway National Bank's Lending Division. Since 2001, Mr. Goudge has also served as Chairman and Chief Executive Officer of Broadway Bancshares, Inc., Broadway National Bank's privately held holding company. Mr. Goudge previously served on the ABA's Government Relations Committee and he is a past chairman of the Texas Bankers Association. He currently serves as Vice Chairman of the Risk Management Committee of the Bank's Board of Directors.
W. Wesley Hoskins serves as Chairman, President and Chief Executive Officer of First Community Bank (a member of the Bank located in Corpus Christi, Texas). Mr. Hoskins has served as Chairman since 2001, as President and Chief Executive Officer since 1997 and as a director since 1992. Since 1999, he has also served as Chairman of Coastal Bend Bancshares, Inc., First Community Bank's privately held holding company. In addition, Mr. Hoskins has served as a director and President of WBH Inc., a privately held real estate holding company in Premont, Texas since August 1996 and as President of LTF Holdings, Inc., a privately held real estate holding company in Corpus Christi, Texas since September 2010. He is a current member and past chairman of the Texas Bankers Association. Further, Mr. Hoskins presently serves as chairman of the ABA's BankPac Committee and as chairman of the Corpus Christi Chamber of Commerce. He currently serves as Vice Chairman of the Government and External Affairs Committee of the Bank's Board of Directors.
Michael C. Hutsell serves as a board member and President of First Security Bank in Searcy, Arkansas. Mr. Hutsell joined First Security Bank, a member of the Bank, in 1989 and has served as a board member and President since March 2006. From January 2002 to March 2006, he served as Executive Vice President and from October 1996 to January 2002, he served as Operations Officer. Mr. Hutsell currently serves on the boards of directors of the City of Searcy Planning Commission and the Sunshine School (a private school for students with developmental disabilities in Searcy, Arkansas). Mr. Hutsell previously served on the board of directors of Main Street Searcy and he is a past chairman of the Searcy Chamber of Commerce and the Searcy Kiwanis Club. Mr. Hutsell currently serves as Vice Chairman of the Bank’s Audit Committee.

89


A. Fred Miller, Jr. serves as Chairman of Bank of Anguilla in Anguilla, Mississippi. He joined Bank of Anguilla, a member of the Bank, in 1971 and has served as Chairman since January 2015. From 1986 to January 2015, Mr. Miller served as a director, President and Chief Executive Officer. From 2008 to January 2015, Mr. Miller also served as President and Chief Executive Officer of Pyramid Financial Corporation, Bank of Anguilla's privately held holding company. He has served as Chairman of Pyramid Financial Corporation since January 2014 and as a director since 2008. Since January 2016, Mr. Miller has also served on the board of directors of Hope Enterprise Corporation. Mr. Miller previously served as a director of the Bank from 1997 to 2004. In 2002 and 2003, Mr. Miller served as Vice Chairman of the Bank's Board of Directors and in 2004 he served as Chairman of the Bank's Board of Directors.
Sally I. Nelson serves as an advisor to the Huntsville Memorial Hospital board of directors and is the chairman of the Huntsville Memorial Hospital Foundation in Huntsville, Texas and has served in such capacities since January 2012. From 2007 until January 2013, Ms. Nelson served as Chief Executive Officer of Huntsville Memorial Hospital. Prior to that, she served as a board member and officer of the Greater Houston Area Chapter of the American Red Cross from 2005 to 2008. From 1986 to 2004, Ms. Nelson served as Executive Vice President, Chief Financial Officer and Chief Operations Officer of Texas Children's Hospital in Houston, Texas. From 1999 to 2005, she served as chair of the Finance and Audit committees of the United Way of Houston. Ms. Nelson is a Certified Public Accountant.
John P. Salazar is an attorney and director with the law firm of Rodey, Dickason, Sloan, Akin & Robb, P.A. in Albuquerque, New Mexico, where he specializes in real estate-related matters, including land use and development law. He has been with Rodey, Dickason, Sloan, Akin & Robb, P.A. since 1968 and has represented single-family residential and multifamily housing developers and builders. Mr. Salazar currently serves as a member of the Advisory Council of the Inter-American Foundation and he is a past chairman of the foundation's board of directors. He is a member of the Albuquerque Economic Forum, the Greater Albuquerque Chamber of Commerce, the Albuquerque Hispano Chamber of Commerce and the Albuquerque Chapter of the National Association of Office and Industrial Parks. Mr. Salazar previously served on the board of directors of the Greater Belen Economic Development Corporation, the board of trustees of the Albuquerque Community Foundation and the board of directors of the KIMO Foundation. Further, he is a past board chairman of the Albuquerque Hispano Chamber of Commerce, the Greater Albuquerque Chamber of Commerce, and the University of New Mexico Alumni Association. Mr. Salazar currently serves as Chairman of the Government and External Affairs Committee of the Bank’s Board of Directors.
Margo S. Scholin is a retired partner of the law firm of Baker Botts L.L.P. in Houston, Texas. As a member of the law firm’s Corporate Section, she specialized in corporate and securities law, including securities law reporting, corporate transactions and governance, corporate finance and the issuance of debt and equity securities. Ms. Scholin joined Baker Botts L.L.P. in 1983 and was a partner from 1991 until her retirement in December 2010. She served on the board of directors of the University of Houston Law Center Law Review until October 2016. From 1997 to 2004, she served as chair of the Regulatory Committee of the Texas State Board of Health. Ms. Scholin is a past chairman of the board of directors of the Houston Area Women’s Center, a non-profit agency serving victims of domestic violence and sexual abuse and has served on numerous other non-profit boards. She currently serves as Chairman of the Strategic Planning, Operations and Technology Committee of the Bank’s Board of Directors.
Ron G. Wiser serves as a director, President and Chief Executive Officer of Bank of the Southwest (a member of the Bank) and as a director and Secretary/Treasurer of its privately held holding company, New Mexico National Financial, Inc. (Roswell, New Mexico). He has served as President of Bank of the Southwest since 1996 and as its Chief Executive Officer since December 2003. Mr. Wiser also served as Chief Executive Officer of Bank of the Southwest from 1996 to November 2000. He has served as Secretary/Treasurer of New Mexico National Financial, Inc. and as a director of both companies since 1996. Mr. Wiser is a current board member and past president of the New Mexico Bankers Association and he previously served on the Community Bankers Council of the ABA. Mr. Wiser is a Certified Public Accountant and he currently serves as Chairman of the Bank’s Audit Committee.
Audit Committee Financial Expert
The Bank’s Board of Directors has determined that Mr. Wiser qualifies as an “audit committee financial expert” as defined by SEC rules. The Bank is required by SEC rules to disclose whether Mr. Wiser is “independent” and, in making that determination, is required to apply the independence standards of a national securities exchange or an inter-dealer quotation system. For this purpose, the Bank has elected to use the independence standards of the New York Stock Exchange. Under those standards, the Bank’s Board of Directors has determined that presumptively its member directors, including Mr. Wiser, are not independent. However, Mr. Wiser is independent under applicable Finance Agency regulations and under Rule 10A-3 of the Exchange Act related to the independence of audit committee members. For more information regarding director independence, see Item 13 – Certain Relationships and Related Transactions, and Director Independence.

90


Director Qualifications and Attributes
As more fully described above, the size of the Bank’s Board of Directors, including the number of member directors and independent directors, is determined by the Finance Agency, subject to a minimum number of directors established by statute. Candidates for member directorships are nominated and elected by members located in the state to be represented by that particular directorship. The Bank’s Board of Directors does not nominate member directors nor can it support or oppose the nomination or election of a particular individual for a member directorship. In the event of a vacancy in any member directorship, such vacancy is to be filled by an affirmative vote of a majority of the Bank’s remaining directors, regardless of whether the remaining directors constitute a quorum of the Bank’s Board of Directors.
Independent directors, on the other hand, are nominated by the Bank’s Board of Directors (after consultation with its affordable housing Advisory Council) and are elected by a plurality of the Bank’s members at-large. A vacancy in any independent directorship is similarly filled by an affirmative vote of a majority of the Bank’s remaining directors, regardless of whether the remaining directors constitute a quorum of the Bank’s Board of Directors.
In evaluating an independent director candidate (or a candidate to fill a vacancy in any member directorship), the Board of Directors considers factors that it has determined to be in the best interests of the Bank and its shareholders and which go beyond the statutory eligibility requirements, including the knowledge, experience, integrity and judgment of each candidate; the experience and competencies that the Board desires to have represented; each candidate’s ability to devote sufficient time and effort to his or her duties as a director; geographic representation in the Bank’s five-state district; prior tenure on the Board; the need to have at least two public interest directors from among the Bank’s independent directors; and any core competencies or technical expertise necessary to staff committees of the Board of Directors. In addition, the Board of Directors assesses whether a candidate possesses the integrity, judgment, knowledge, experience, skills and expertise that are likely to enhance the Board’s ability to manage and direct the affairs and business of the Bank including, when applicable, to enhance the ability of committees of the Board to fulfill their duties.
Each of the Bank’s member directors and independent directors brings a unique background and strong set of skills to the Board, giving the Board as a whole competence and experience in a wide variety of areas, including corporate governance and board service, executive management, finance, accounting, human resources, legal, risk management, affordable housing, economic development and government relations. Set forth below are the attributes of each of the Bank’s independent directors (and Mr. Goudge, the only current member director who was elected by the Board) that the Board of Directors considered important to his or her inclusion on the Board. The Board of Directors does not make any judgments with regard to its member directors who have been elected by the Bank’s members, although the skills and experience of those directors may bear on the Board of Directors’ decisions with regard to the competencies it seeks when nominating candidates for independent directorships or when filling vacancies in either member or independent directorships.
Ms. Alston was elected by the Bank’s members at-large to serve a four-year term that commenced on January 1, 2017. Ms. Alston brings to the Board extensive experience in the areas of investment management, finance and corporate governance. Since 2004, she has served as the Executive Director and Chief Investment Officer of the Employees' Retirement Fund of the City of Dallas, where she provides leadership for the fund's staff in implementing the programs necessary to achieve the mission, goals and objectives established by the fund's board of trustees. Altogether, Ms. Alston brings to the Board over 28 years of experience in the financial services industry. From 2011 to 2016, Ms. Alston served on the Advisory Committee for the PBGC. Currently, she serves on the boards of directors of CHRISTUS Health and Blue Cross Blue Shield of Kansas City.
Ms. Bolen was elected by the Bank’s members at-large to serve a four-year term that commenced on January 1, 2015. She has served on the Bank’s Board of Directors since November 5, 2012. Ms. Bolen brings to the Board extensive experience in the areas of affordable housing, community development, organizational management and finance. From 1997 until December 31, 2014, she served as the Executive Director of the Mississippi Home Corporation. From 1990 to 1992, she served as Finance Director and from 1992 to 1997, she served as Deputy Executive Director. From 1998 through 1999 and from 2007 through 2009, Ms. Bolen served as a member of the Bank’s affordable housing Advisory Council, which advises the Bank’s Board of Directors regarding opportunities for community revitalization through specialized community investment and affordable housing programs. Ms. Bolen previously served on the board of directors of the NCSHA and, until December 31, 2014, she co-chaired the NCSHA's Municipal Disclosure Task Force.
Ms. Brister was elected by the Bank’s members at-large to serve a four-year term that commenced on January 1, 2016. She has served on the Bank’s Board of Directors since January 1, 2008 and previously served a three-year term on the Bank’s Board of Directors from January 2002 through December 2004 and was Vice Chairman of the Bank’s Board of Directors in 2004. Ms. Brister has extensive experience in the areas of affordable housing, economic development, small business, government relations and policy-making. She currently serves as President of St. Tammany Parish. Ms. Brister is a current board member and past chairman of the Habitat for Humanity St. Tammany West and is a past chairman of the Women’s Build Habitat for Humanity. Previously, she served as a Councilwoman for St. Tammany Parish. She also co-owned and managed a small, privately held mechanical contracting company for 25 years.

91


Ms. Ceverha was elected by the Bank’s members at-large to serve a four-year term that commenced on January 1, 2015. She has served on the Bank’s Board of Directors since January 1, 2004 and was Vice Chairman of the Bank’s Board of Directors from December 2005 to December 2014 and Acting Vice Chairman of the Bank's Board of Directors from January 2005 to December 2005. Ms. Ceverha brings to the Board extensive experience in housing, government relations, corporate governance and policy-making. She has held leadership roles in numerous local government agencies and not-for-profits, including serving as vice chairman of the Texas State Board of Health, as a commissioner of the Dallas Housing Authority, and as the founder and past president of an organization that was established for the purpose of coordinating fundraising and other activities relating to the construction of the Trinity River Project in Dallas, Texas. She also provides extensive knowledge of the Texas legislative process to the Board.
Mr. Conine was elected by the Bank’s members at-large to serve a four-year term that commenced on January 1, 2014. He has served on the Bank’s Board of Directors since April 10, 2007. He brings to the Board extensive knowledge of affordable housing, homebuilding, mortgage finance and government relations. Mr. Conine heads a company that specializes in the development of single-family and multifamily housing. From 1997 to 2011, he served as a director of the Texas Department of Housing and Community Affairs and was chairman of the board of directors of TDHCA from 2009 to 2011. In 2003, he served as president of the National Association of Home Builders. Mr. Conine has testified before the U.S. Congress on proposed legislation regarding GSEs and he also served on the board of directors of another SEC registrant from July 2004 to February 2008.
Mr. Goudge was elected by the Bank's Board of Directors to fulfill the unexpired term of a member director representing the state of Texas beginning April 24, 2014. He brings over 35 years of broad-based management and lending expertise to the Board. In addition, Mr. Goudge has extensive experience in government relations.
Ms. Nelson was elected by the Bank’s members at-large to serve a four-year term that commenced on January 1, 2014. Ms. Nelson brings to the Board extensive experience in accounting, finance, organizational management, corporate governance and matters involving executive compensation. She currently serves as an advisor to the Huntsville Memorial Hospital board of directors and is the chairman of the Huntsville Memorial Hospital Foundation. From 2007 to January 2013, Ms. Nelson served as Chief Executive Officer of Huntsville Memorial Hospital. Prior to that, she served as Executive Vice President, Chief Financial Officer and Chief Operations Officer of Texas Children's Hospital in Houston, Texas for 18 years. In addition, she has served on numerous boards of directors. Ms. Nelson is a Certified Public Accountant.
Mr. Salazar was elected by the Bank’s members at-large to serve a four-year term that commenced on January 1, 2016. He has served on the Bank's Board of Directors since January 1, 2010. As an attorney with Rodey, Dickason, Sloan, Akin and Robb, P.A. for over 40 years, he brings extensive legal experience to the Board. Mr. Salazar specializes in real estate related matters, including land use and development law, and has represented single-family residential and multifamily housing developers and builders. Currently, he serves as a member of the Advisory Council of the Inter-American Foundation. Mr. Salazar is also a member of the Greater Albuquerque Chamber of Commerce and the Albuquerque Hispano Chamber of Commerce. He has previously served in leadership positions on the boards of these and other non-profit organizations that promote economic development, housing availability and/or housing finance.
Ms. Scholin was elected by the Bank’s members at-large to serve a three-year term that commenced on January 1, 2017. She has served on the Bank’s Board of Directors since April 10, 2007. As a former partner with Baker Botts L.L.P. for 20 years, she brings a wealth of legal experience to the Board. Prior to her retirement in December 2010, Ms. Scholin specialized in general corporate, corporate finance and securities law (including securities law reporting) and she has extensive knowledge of regulatory issues. In addition, Ms. Scholin brings to the Board expertise in corporate governance and compliance matters.

92


Executive Officers
Set forth below is certain information regarding the Bank’s executive officers (ages are as of March 24, 2017). The executive officers serve at the discretion of, and are elected annually by, the Bank’s Board of Directors.
Name
 
Age
 
Position Held
 
Officer
Since
Sanjay Bhasin
 
48

 
President and Chief Executive Officer
 
2014
Brehan Chapman
 
40

 
Executive Vice President and Chief Administrative Officer
 
2009
Sandra Damholt
 
64

 
Senior Vice President and General Counsel
 
2010
Kelly Davis
 
49

 
Senior Vice President and Chief Risk Officer
 
2015
Paul Joiner
 
64

 
Executive Vice President and Chief Strategy Officer
 
1986
Tom Lewis
 
54

 
Executive Vice President and Chief Financial Officer
 
2003
Kalyan Madhavan
 
50

 
Executive Vice President and Group Head, Members and Markets
 
2014
Gustavo Molina
 
44

 
Senior Vice President and Chief Banking Operations Officer
 
2009
Jibo Pan
 
44

 
Executive Vice President and Head of Capital Markets
 
2014
Jeff Yeager
 
43

 
Senior Vice President and Chief Information Officer
 
2015
Michael Zheng
 
47

 
Senior Vice President and Chief Credit Officer
 
2015
Sanjay Bhasin serves as President and Chief Executive Officer of the Bank and has served in that capacity since he joined the Bank in May 2014. Prior to his employment with the Bank, Mr. Bhasin served as Executive Vice President, Members and Markets for the Federal Home Loan Bank of Chicago (the "Chicago Bank") from 2011 until May 2014. He joined the Chicago Bank in 2004 as Vice President, Mortgage Finance and was promoted to Senior Vice President, Mortgage Finance in 2007 and to Executive Vice President, Financial Markets in 2008, a position he held until his appointment as Executive Vice President, Members and Markets. Prior to joining the Chicago Bank, Mr. Bhasin was responsible for managing the interest rate risk associated with Bank One, NA’s mortgage pipeline holdings from 1999 to 2004. Mr. Bhasin currently serves on the Council of Federal Home Loan Banks and as a director of the FHLBanks Office of Finance.
Brehan Chapman serves as Executive Vice President and Chief Administrative Officer. In this capacity, Ms. Chapman has responsibility for the Bank’s corporate communications, government and industry relations, human resources, property and facilities management, and compliance function. She joined the Bank in December 2004 as a Content Management Specialist. In November 2005, Ms. Chapman was promoted to Corporate Communications Manager, a position she held until her appointment as Vice President and Director of Corporate Communications and External Affairs in July 2009. In November 2013, her responsibilities were expanded to include human resources. In April 2014 and May 2014, Ms. Chapman's responsibilities were further expanded to include the Bank's compliance function and property and facilities management, respectively. Ms. Chapman also serves as the Bank’s Corporate Secretary and has served in that capacity since February 2008. She was promoted to Senior Vice President in January 2012, to Chief Administrative Officer in February 2014 and to Executive Vice President in January 2016. Prior to joining the Bank, Ms. Chapman served as the Public Relations Manager for Waubonsee Community College from 2001 to 2004.
Sandra Damholt serves as Senior Vice President and General Counsel of the Bank. Ms. Damholt joined the Bank in October 2009 as Deputy General Counsel, and was promoted to Vice President and General Counsel in October 2010. She was promoted to Senior Vice President in January 2014. Prior to joining the Bank, Ms. Damholt served as Senior Vice President and General Counsel of Dovenmuehle Mortgage, Inc. from January 2008 through May 2009. From 2000 to 2007, Ms. Damholt served in several capacities for the Chicago Bank, including Deputy General Counsel and Director of Compliance and Ethics. Prior to that, Ms. Damholt served in various legal and management roles in the financial services industry, including 13 years with PNC Mortgage Corporation (formerly Sears Mortgage Corporation) and 3 years with the State of Oklahoma Department of Banking.
Kelly Davis serves as Senior Vice President and Chief Risk Officer of the Bank. In this capacity, Ms. Davis has responsibility for the Bank’s market risk, operational risk and model risk management functions. In January 2017, her responsibilities were expanded to include income forecasting. She joined the Bank in August 2008 as a Senior Strategic Planning Analyst. In September 2013, Ms. Davis was promoted to Risk Reporting Manager, a position she held until her appointment as Director of Operational Risk Management and Enterprise Risk Management Reporting in July 2014. Ms. Davis was promoted to Chief Risk Officer in June 2015 and to Senior Vice President in July 2015. Prior to joining the Bank, she served in various consulting and management roles for Liberty Mutual Insurance Group from 2002 to 2008, as Assistant Treasurer of Georgia State University from 1999 to 2001, and in various audit positions from 1991 to 1999, including roles with KPMG LLP and the U.S. Government Accountability Office. Ms. Davis is a Certified Public Accountant.

93


Paul Joiner serves as Executive Vice President and Chief Strategy Officer of the Bank. He has served as Chief Strategy Officer since May 2014. Mr. Joiner also served in this capacity from June 2007 to September 2013 and from February 2005 to June 2006. From September 2013 to May 2014, he served as Interim President and Chief Executive Officer of the Bank. From April to June 2015, he also served as Interim Chief Risk Officer. As Chief Strategy Officer, Mr. Joiner has responsibility for corporate planning and research. In January 2017, his responsibilities were expanded to include oversight of the Bank's mortgage loan acquisition program. Concurrent with this change, responsibility for the Bank's income forecasting was transferred from Mr. Joiner to Ms. Davis. From June 2006 to June 2007, Mr. Joiner served as Chief Risk Officer of the Bank. In this role, he had responsibility for the Bank’s risk management functions and income forecasting. Mr. Joiner joined the Bank in August 1983 and served in various marketing, planning and financial positions prior to his appointment as Director of Research and Planning in September 1999, a position he held until his appointment as Chief Strategy Officer in February 2005. Mr. Joiner served as a Vice President of the Bank from 1986 to 1993 and as a Senior Vice President from 1993 to 2015. He was promoted to Executive Vice President in January 2016.
Tom Lewis serves as Executive Vice President and Chief Financial Officer of the Bank. He joined the Bank in January 2003 as Vice President and Controller and was promoted to Senior Vice President in April 2004 and to Chief Accounting Officer in February 2005, a position he held until his appointment as Chief Financial Officer in June 2014. Mr. Lewis was promoted to Executive Vice President in January 2016. From May 2002 through December 2002, Mr. Lewis served as Senior Vice President and Chief Financial Officer for Trademark Property Company (“Trademark”), a privately held commercial real estate developer. Prior to joining Trademark, Mr. Lewis served as Senior Vice President, Chief Financial Officer and Controller for AMRESCO Capital Trust (“AMCT”), a publicly traded real estate investment trust, from February 2000 to May 2002. From AMCT’s inception in 1998 until February 2000, he served as Vice President and Controller. Prior to that, Mr. Lewis served in a number of accounting and finance positions with AMRESCO, INC., a publicly traded financial services company, from 1995 to 1998 and Prentiss Properties Limited, Inc., a privately held commercial real estate company, from 1989 to 1995. From 1985 to 1989, he served as an auditor for Price Waterhouse LLP. Mr. Lewis is a Certified Public Accountant.
Kalyan Madhavan serves as Executive Vice President and Group Head, Members and Markets and has served in that capacity since he joined the Bank in August 2014. As Group Head, Members and Markets, Mr. Madhavan has overall responsibility for the Bank's treasury operations, member sales and community investment. From April to November 2015, he also served as Interim Chief Information Officer. Prior to joining the Bank, Mr. Madhavan served as Senior Vice President and Co-Head, Members and Markets for the Chicago Bank, where he was responsible for asset acquisitions, funding, liquidity management, and marketing strategy. He joined the Chicago Bank in 2005 as a portfolio manager and was promoted to Assistant Vice President in 2006 and to Vice President in 2007. In 2008, he was appointed as Treasurer. In 2009, Mr. Madhavan was promoted to Senior Vice President and in 2011 his responsibilities were expanded to include member strategy and solutions. He served as Senior Vice President, Treasurer and Head of Member Strategy and Solutions from March 2012 until his appointment as Co-Head, Members and Markets in May 2014. Prior to joining the Chicago Bank, Mr. Madhavan served in various financial and operations management roles for 11 years in the credit card, airline and manufacturing industries.
Gustavo Molina serves as Senior Vice President and Chief Banking Operations Officer. In this capacity, Mr. Molina oversees the Bank’s member services, collateral services, MPF operations, correspondent operations and safekeeping function. He joined the Bank in April 2002 as Credit Operations Manager and was promoted to Credit and Collateral Vault Operations Manager in 2004, to Customer Operations and Support Manager in 2007 and to Director of Banking Operations in 2009, a position he held until his appointment as Chief Banking Operations Officer in February 2014. Mr. Molina served as a Vice President of the Bank from 2009 to 2011. He was promoted to Senior Vice President in 2011. Prior to joining the Bank, Mr. Molina served as a Project Manager in the Operational Control and Risk Management Department of Fleet Bank Boston Financial (now Bank of America).
Jibo Pan serves as Executive Vice President and Head of Capital Markets of the Bank. As Head of Capital Markets, Mr. Pan has responsibility for the Bank's investment, funding and hedging activities. Mr. Pan joined the Bank in August 2014 as Senior Vice President and Head of Capital Markets and was promoted to Executive Vice President in January 2016. Prior to joining the Bank, Mr. Pan served as Senior Vice President for the Chicago Bank where he was responsible for overseeing that institution's hedging activities. He joined the Chicago Bank in 2002 as a Senior Quantitative Analyst and was promoted to Assistant Vice President in 2006 and to Vice President in 2007, a position he held until his appointment as Senior Vice President in 2008. In 2006 and 2007, Mr. Pan managed the Chicago Bank's option portfolio. From 1994 to 2000, Mr. Pan served in various engineering roles for Hewlett Packard/Agilent Technologies Medical Division in Qingdao, China.
Jeff Yeager serves as Senior Vice President and Chief Information Officer of the Bank and has served in that capacity since joining the Bank in November 2015. From 1999 to May 2015, Mr. Yeager served in various information technology positions for Horizon Lines, LLC ("Horizon LLC"), a wholly-owned subsidiary of Horizon Lines, Inc. ("Horizon"), a publicly traded provider of ocean transportation services. Among other roles, he served as Chief Information Officer from 2010 to 2015 and prior to that he served as Director of Technology from 2007 to 2010. Horizon was acquired by Matson, Inc. ("Matson") in May 2015. Mr. Yeager was employed by Matson until July 2015 at which time he joined The Pasha Group ("Pasha") as a consultant.

94


Pasha had acquired a portion of Horizon's business prior to the Matson transaction. Mr. Yeager left Pasha to join the Bank. Prior to joining Horizon LLC, Mr. Yeager held various systems engineering positions with Electronic Data Systems from 1995 to 1999. 
Michael Zheng serves as Senior Vice President and Chief Credit Officer of the Bank. In this capacity, Mr. Zheng has responsibility for the Bank's credit risk and enterprise risk modeling functions. He joined the Bank in July 2012 as Credit and Capital Risk Manager. In July 2014, Mr. Zheng was promoted to Director of Enterprise Risk Modeling and Analysis, a position he held until his appointment as Chief Credit Officer in January 2015. Mr. Zheng was promoted to Senior Vice President in July 2015. Prior to joining the Bank, Mr. Zheng served as Director of Enterprise Risk Analytics for USAA, a member-owned diversified financial services organization, from 2010 to 2012. Mr. Zheng joined USAA in 2008 as Director of Modeling Analytics and he served in that role until his appointment as Director of Enterprise Risk Analytics. Prior to that, Mr. Zheng held risk management/risk modeling positions at Washington Mutual Bank (2005 to 2008) and CitiGroup, Inc. (2001 to 2005) and various other roles at Mitsui & Co., Ltd. in China and Japan (1994 to 1999). Mr. Zheng is a Certified Financial Risk Manager.
Relationships
There are no family relationships among any of the Bank’s directors or executive officers. Except as described above, none of the Bank’s directors holds directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940. There are no arrangements or understandings between any director or executive officer and any other person pursuant to which that director or executive officer was selected.
Code of Ethics
The Board of Directors has adopted a code of ethics that applies to the Bank's President and Chief Executive Officer (its principal executive officer), the Bank's Executive Vice President and Chief Financial Officer (its principal financial and accounting officer) and specified management personnel within the Bank's Accounting Department (collectively, the Bank's "Financial Professionals").
Annually, the Bank's Financial Professionals are required to certify that they have read and complied with the Code of Ethics for Financial Professionals. A copy of the Code of Ethics for Financial Professionals is filed as an exhibit to this report and is also available on the Bank’s website at www.fhlb.com by clicking on “About Us,” then “Corporate Governance” and then “Code of Ethics for Financial Professionals.”
The Board of Directors has also adopted a Code of Conduct and Ethics for Employees that applies to all employees of the Bank, including the Financial Professionals, and a Code of Conduct and Ethics and Conflict of Interest Policy for Directors that applies to all directors of the Bank (each individually a “Code of Conduct and Ethics” and together the “Codes of Conduct and Ethics”). The Codes of Conduct and Ethics embody the Bank’s commitment to high standards of ethical and professional conduct. The Codes of Conduct and Ethics set forth policies on standards for conduct of the Bank’s business, the protection of the rights of the Bank and others, and compliance with laws and regulations applicable to the Bank and its employees and directors. All employees and directors are required to annually certify that they have read and complied with the applicable Code of Conduct and Ethics. A copy of the Code of Conduct and Ethics for Employees is available on the Bank’s website at www.fhlb.com by clicking on “About Us,” then “Corporate Governance” and then “Code of Conduct and Ethics for Employees.” A copy of the Code of Conduct and Ethics and Conflict of Interest Policy for Directors is available on the Bank’s website by clicking on “About Us,” then “Corporate Governance” and then “Code of Conduct and Ethics and Conflict of Interest Policy for Directors.” Information on the Bank's website does not constitute part of this report.

95




ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS
The Compensation and Human Resources Committee of the Board of Directors (the “Committee”) has responsibility for, among other things, establishing, reviewing and monitoring compliance with our compensation philosophy. In support of that philosophy, the Committee is responsible for making recommendations regarding, and monitoring implementation of, compensation and benefit programs that are consistent with our short- and long-term business strategies and objectives. The Committee’s recommendations regarding our compensation philosophy and benefit programs are subject to the approval of our Board of Directors.
Compensation Philosophy and Objectives
The goal of our compensation program is to attract, retain, and motivate employees and executives with the requisite skills and experience to enable us to achieve our short- and long-term strategic business objectives. Historically, we have attempted to accomplish this goal as it relates to our executive officers through a mix of base salary, short- and long-term incentive awards and other benefit programs. While we believe that we offer a work environment in which employees can find attractive career challenges and opportunities, we also recognize that those employees have a choice regarding where they pursue their careers and that the compensation we offer may play a significant role in their decision to join or remain with us. As a result, we seek to deliver fair and competitive compensation for our employees, including the named executive officers identified in the Summary Compensation Table on page 117.
For 2016, our named executive officers were: Sanjay Bhasin, our President and Chief Executive Officer, who joined us on May 12, 2014; Tom Lewis, our Executive Vice President and Chief Financial Officer; Kalyan Madhavan, our Executive Vice President and Group Head, Members and Markets, who joined us on August 11, 2014; Jibo Pan, our Executive Vice President and Head of Capital Markets, who joined us on August 11, 2014; and Paul Joiner, our Executive Vice President and Chief Strategy Officer. Messrs. Lewis and Joiner have been employed by us since 2003 and 1983, respectively.
For our executive officers, we attempt to align and weight total direct and indirect compensation with the prevailing competitive market and provide total compensation opportunities that are consistent with each executive’s responsibilities and individual performance and with our overall business results. For 2016, the Committee and Board of Directors defined the competitive market for our executives as: (1) the other Federal Home Loan Banks (each individually a “FHLBank” and collectively with us, the “FHLBanks” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System”); (2) commercial banks with $20 billion or more in assets (including, to the extent data is available, the Federal Reserve Banks but excluding global investment banks); and (3) public proxy peers with assets between $10 billion and $20 billion. In addition to the other FHLBanks, we believe that the other institutions included in our peer group present a breadth and level of complexity of operations that are generally comparable to our own.
Generally, it is our overall intent to provide total direct compensation, comprised of base salary and targeted incentive opportunities, for our executive officers at or above the competitive market median for comparable positions.
Responsibility for Compensation Decisions
The Board of Directors makes all decisions regarding the compensation of our President and Chief Executive Officer. The President and Chief Executive Officer's performance is reviewed annually by the full Board. The Committee is responsible for making recommendations to the Board of Directors regarding the President and Chief Executive Officer's compensation. The Board of Directors is responsible for reviewing and approving and has discretion to modify any of the Committee's recommendations regarding the President and Chief Executive Officer's compensation.
The President and Chief Executive Officer annually reviews the performance and has responsibility for making recommendations to the Committee regarding the compensation of our other executive officers. The Committee is responsible for reviewing and approving or disapproving the recommendations that are made by the President and Chief Executive Officer. The performance reviews for all of our executive officers are generally conducted in December of each year and salary adjustments, if any, are typically made on January 1 of the following year.
The President and Chief Executive Officer can recommend to the Committee additional base salary adjustments at any time during the year if warranted based on market data, job performance and/or other factors, such as a change in job responsibilities. In the absence of a promotion or a change in an officer’s job responsibilities, base salary adjustments on any date other than January 1 are rare.

96


The Board of Directors is responsible for approving our short-term incentive compensation plan known as the Variable Pay Program or VPP. The VPP provides all regular, full-time employees, including our named executive officers in years prior to 2017, with the opportunity to earn an annual incentive award. The Committee is responsible for recommending annually to the Board of Directors the approval of the VPP for the next year and the performance goals that will be applicable for that year under the Corporate plan (including the addendum for our Capital Markets Department) and the plans for our Internal Audit, Risk Management and Member Sales Departments. The VPP plan goals for our Internal Audit Department are approved by our Audit Committee before Internal Audit's VPP plan is considered by the Committee. Through 2016, all of our named executive officers participated in the Corporate plan and their participation in such plan was unaffected by the addendum thereto.
The Board of Directors has also been responsible for approving our long-term incentive compensation plans, which we refer to as our LTIPs. The LTIPs provide a designated group of individuals, including our executive officers (at the time their participation is approved by our Board of Directors), with the opportunity to earn long-term incentive awards over successive three-year performance periods that have commenced annually. The Committee has been responsible for recommending annually to the Board of Directors the approval of the LTIP for the next three-year plan cycle and the performance goals applicable to that plan’s three-year performance period. On December 3, 2015, the Board of Directors, acting upon a recommendation from the Committee, approved what ultimately became our final LTIP (the 2016 LTIP), subject to the Finance Agency's review. On January 21, 2016, the Finance Agency informed us that it did not object to the 2016 LTIP. The 2016 LTIP is discussed more fully in the "Grants of Plan-Based Awards" section beginning on page 118.
Further, the Board of Directors is responsible for approving our new executive incentive plan known as the EIP, which will apply initially for the 2017 plan year. As more fully described in the section entitled "2017 Compensation Actions" beginning on page 110, the EIP provides cash-based award opportunities to officers of the Bank who are voting members of our Executive Management Committee ("EMC"), which include, among other executive officers, each of our named executive officers. The EIP replaces the VPP for 2017 (and future years) and it will replace the LTIPs beginning in 2019. The Committee is responsible for recommending annually to the Board of Directors the approval of the EIP for the next year and the performance goals that will be applicable for that year, which goals are (in the case of the 2017 EIP) and will be (in future years) the same as the goals for the Corporate VPP.
Acting upon recommendations from the Committee, the Board of Directors is also responsible for approving any proposed revisions to our defined benefit and defined contribution plans, our deferred compensation plans, our Reduction in Workforce Policy and any other benefit plan as the Committee or Board of Directors deems appropriate.
The Finance Agency requires us to provide advance notice of pending actions to be taken by the Committee or our Board of Directors with respect to any aspect of the compensation of one or more of our named executive officers. As part of the notification process, we are required to provide the proposed compensation actions and any supporting materials, including studies of comparable compensation.
Use of Compensation Consultants and Surveys
Annually, we typically engage an independent compensation consultant to help ensure that our executive compensation program is both competitive and targeted at or above market-median compensation levels.
In September 2015 (for compensation to be paid in 2016), the Committee and Board of Directors engaged McLagan Partners ("McLagan") to conduct a competitive market pay study for all of our officers who were serving as executive officers at that time, which included, among others, all of our named executive officers for 2016. The competitive market pay study involved an analysis of total direct compensation for benchmark jobs at a total of 135 institutions, including the other FHLBanks; the value of retirement plans and other benefits were not considered as part of the study. To account for differences in the size and scope of the benchmark jobs included in the study, low quartile data (25th percentile), median data (50th percentile) or high quartile data (75th percentile) was judgmentally selected for each of those jobs to develop a market composite benchmark for each of the positions held by our named executive officers. In the case of the public proxy peers, the 25th percentile was used for all of the comparable positions at those institutions. For purposes of our comparative analysis, total direct compensation within +/- 15 percent of the median market composite compensation was considered to be within the competitive market range.
Elements of Executive Compensation
We have historically relied upon a mix of base salary, short- and long-term incentive compensation, and benefits to attract, retain and motivate our executive officers. As a cooperative whose stock can only be held by member institutions, we are precluded from offering equity-based compensation to our employees, including our executive officers.
For executives that have had the opportunity to earn both short- and long-term incentives in 2014 (which were derived from the 2014 VPP and 2012 LTIP), 2015 (which were derived from the 2015 VPP and 2013 LTIP) and 2016 (which were derived from the 2016 VPP and 2014 LTIP), the formula for computing their awards has included a weighting factor of either 50 percent for

97


the VPP and 50 percent for the LTIP or, as further described below, a higher weighting factor for the VPP and a lower weighting factor for the LTIP (which factors equal 100 percent) based on an executive's tenure with us. By structuring the incentive calculations in this manner and maintaining the executives' maximum award percentage that existed prior to the introduction of our LTIP in 2010 (which has been used in both the VPP and LTIP calculations), we have kept the executives' annual pre-2017 incentive opportunities substantially the same as they were in the years when we had only VPP award payouts (that is, for 2011 and prior years), with certain exceptions as described below. Subject to those exceptions, the maximum award percentages have been 60 percent of base salary for our President and Chief Executive Officer and 43.75 percent of base salary for our other named executive officers. Previously, our executives were not eligible to participate in the LTIP until their first full year of employment with us and, because of this, their VPP was weighted 100 percent for each year until the third year of the first LTIP in which the executive was a participant.
On July 21, 2016, the Board of Directors, acting upon a recommendation from the Committee, expanded the eligibility for executive management participation in our LTIPs to include officers at the time they become a voting member of our EMC through hiring or promotion. On August 3, 2016, the Finance Agency informed us that it did not object to this new practice. As a result of this expanded eligibility, Messrs. Bhasin, Madhavan and Pan participated in our 2014 LTIP on a pro rata basis from the dates that each officer joined us in 2014. These changes were made in recognition of the contributions that each of these executives had made and was then making toward the accomplishment of our 2014 LTIP performance goals. Messrs. Bhasin, Madhavan and Pan did not participate in the 2012 or 2013 LTIPs. Messrs. Lewis and Joiner were participants in the 2012, 2013 and 2014 LTIPs.
By way of example, for Messrs. Lewis and Joiner, the results of the 2016 VPP goal achievement and the 2014 LTIP goal achievement were each weighted 50 percent to determine their total non-equity incentive plan payouts for 2016 before the additional incentives described in the next paragraph. Likewise, their total non-equity incentive plan payouts for 2014 and 2015 (before the additional incentives) were calculated in the same manner. For Messrs. Bhasin, Madhavan and Pan, the results of the 2016 VPP were weighted 56.25 percent, 60.42 percent and 60.42 percent, respectively, and the results of the 2014 LTIP were weighted 43.75 percent, 39.58 percent and 39.58 percent, respectively. The non-equity incentive plan payouts for Messrs. Bhasin, Madhavan and Pan for 2014 and 2015 were based solely upon the results of our VPP for those years.
The 2012, 2013 and 2014 LTIPs each provided for additional incentive payments equal to either 10 percent or 15 percent of a participant's average base salary (over the respective three-year performance periods) if certain achievement levels were met. For Messrs. Bhasin, Madhavan and Pan, the additional incentives offered by the 2014 LTIP were prorated based upon the portion of the three-year performance period that each executive was employed by us.
In connection with the approval of the 2015 LTIP in December 2014, the Board of Directors increased the incentives that can be earned by our executives in 2017 and modified the formula that will be used to compute awards under the 2015 LTIP and the 2017 VPP, which has since been replaced with the 2017 EIP. These changes apply only to the 2015 LTIP (and the total incentives that can be earned in 2017) and reflect the significant amount of effort that will be required to achieve the growth objectives set forth in that plan. As more fully described in the "2017 Compensation Actions" section beginning on page 110, our named executive officers (among other participating executives) will be eligible to earn LTIP incentives of up to 150 percent of their average base salary during the period from January 1, 2015 through December 31, 2017 if the stretch objective is achieved for each of the 2015 LTIP's performance goals. The potential award payments can be 50 percent of salary (if the threshold objective is achieved for each of the performance goals) or 100 percent of salary (if the target objective is achieved for each of the performance goals).
In late 2016, the Finance Agency sought to have us eliminate our two-plan structure for our named executive officers in favor of one annual incentive compensation plan with a deferral component. In response to this request, we engaged McLagan to provide insight and analysis as we considered the framework for a new incentive compensation plan for our executive officers. On December 8, 2016, the Board of Directors, acting upon a recommendation from the Committee, approved our Omnibus Incentive Plan (the "2017 Executive Incentive Plan" or "2017 EIP"), subject to the review of the Finance Agency. On December 20, 2016, the Finance Agency informed us that it did not object to the 2017 EIP. The 2017 EIP was effective as of January 1, 2017. As more fully described in the "2017 Compensation Actions" section, the 2017 EIP includes two transitional components that are designed to address gaps in our executive officers' annual incentive compensation opportunities (one in 2017 and the other in 2019) that would not otherwise exist if we had continued to offer both the VPP and the LTIP to our executive officers. The transitional components are designed to operate in conjunction with the 2015 LTIP and the 2016 LTIP, the last two LTIPs for which the three-year performance periods have not been completed.
Under the 2017 EIP, our President and Chief Executive Officer and other named executive officers will be eligible to earn incentives in 2017 of up to 60 percent and 43.75 percent, respectively, of their base salaries in 2017 in addition to the incentives that can be earned under the 2015 LTIP. Unlike previous LTIPs, a weighting factor will not be applied to the 2015 LTIP nor will a weighting factor be applied to the incentives that can be earned in 2017 under the 2017 EIP. However, under no circumstances

98


can a participating executive officer earn more than 1.5 times his or her 2017 base salary when the 2017 EIP and 2015 LTIP incentive awards are combined for 2017.
The 2016 LTIP, in combination with our anticipated 2018 EIP, will provide maximum incentive opportunities in 2018 of 95 percent of base salary for our President and Chief Executive Officer and 65 percent of base salary for our other named executive officers, which reflect increases from what would have been (inclusive of additional LTIP incentives) 75 percent of base salary and 58.75 percent of base salary, respectively, if not for the changes that were made by the Board of Directors in connection with the implementation of the new executive incentive plan structure. In that year, the targeted incentive opportunities for our President and Chief Executive Officer and other executives will be 75 percent and 50 percent of base salary, respectively, which reflect increases from what would have been (inclusive of additional LTIP incentives) 58 percent and 45 percent of base salary, respectively. The threshold incentive opportunities in 2018 for our President and Chief Executive Officer and other executives will be 50 percent and 30 percent of base salary, respectively, which reflect increases from what would have been 36 percent and 26.25 percent of base salary, respectively.
The maximum award percentages for our named executive officers are reviewed and approved annually by the Committee and Board of Directors. Excluding the incentive opportunities available to our named executive officers in 2017 (which, for that one year, are above the competitive market median for each of our named executive officers), our annual target award opportunities have historically been below the competitive market median for each of our named executive officers, which led the Committee and Board of Directors, in late 2016, to increase the executives' future incentive opportunities beginning in 2018. In establishing the higher award percentages, the Committee and Board of Directors took into consideration the incentive opportunities that are available to similarly situated executives at the other FHLBanks. Based on this information, the Committee and Board of Directors set the threshold and target award percentages at the comparable median of the other FHLBanks and the maximum award percentages slightly below the comparable median of the other FHLBanks.
The Committee regularly considers the nature of our compensation program, including the various compensation elements that comprise our overall compensation program for executive officers.
Base Salary
Base salary is one of the two key components of our compensation program (the other is the incentive opportunities that we offer to our executive officers). We use the base salary element to provide the foundation of a fair and competitive compensation opportunity for each of our executive officers. Base salaries are reviewed annually in December for all of our officers and at other times as circumstances warrant. For our executive officers, we target base salary compensation at or above the market median base salary practices of our defined competitive market for those officers, although we maintain flexibility to deviate from market-median practices for individual circumstances. In making base salary determinations, we also consider factors such as time in the position, prior related work experience, individual job performance, the position’s scope of duties and responsibilities within our organizational structure and hierarchy, and how these factors compare to other similar positions within our defined competitive market.
In setting Mr. Bhasin's base salary for 2016, the Committee and Board of Directors took into consideration the results of a competitive market pay study which was conducted by McLagan in October 2015. The results of the competitive pay study showed that Mr. Bhasin's base salary and targeted incentive opportunities were below the competitive range for his position, even when the higher incentives offered by the 2015 LTIP were taken into consideration. Based on this information, the consultant's recommendations and Mr. Bhasin's outstanding performance, the Committee and Board of Directors wanted to give Mr. Bhasin an above standard merit increase. However, Mr. Bhasin informed the Committee and Board of Directors that he preferred to receive a standard merit increase, wanting first to accomplish the more significant longer-term objectives that he had laid out for us upon his arrival in May 2014. The Board of Directors, acting upon a recommendation from the Committee, honored Mr. Bhasin's request, giving him a standard 3 percent merit increase.
In setting the base salaries of our other named executive officers for 2016, the Committee took into consideration the findings of the competitive market pay study that was conducted by McLagan in October 2015. The results of that study showed that on a look-back basis, each of these executives' total direct compensation had fallen behind the competitive market which, for purposes of the 2015 analysis, had been modified to include public proxy peers with assets between $10 billion (rather than $5 billion) and $20 billion (aside from this change, our defined competitive market remained the same). However, when the higher incentives offered by the 2015 LTIP were factored into the analysis, each of these executives' base salaries and targeted incentive opportunities for the three-year period covered by the LTIP were expected to be within the competitive market range for their positions, except for our Head of Capital Markets. Based on this information, the Committee, acting upon a recommendation from Mr. Bhasin, approved standard merit increases of 3 percent for Messrs. Lewis, Madhavan and Joiner and an above standard merit increase of 7 percent for Mr. Pan.
The base salaries of our named executive officers are presented in the Summary Compensation Table on page 117.

99


Short-Term Incentive Compensation
In 2016 and prior years, our executive officers (in addition to all of our other regular, full-time employees) have participated in our VPP, under which they have had the opportunity to earn an annual cash incentive award. The VPP is designed to encourage and reward achievement of annual performance goals. All VPP awards are calculated as a percentage of an employee’s base salary as of the beginning of the year to which the award payment pertains (or, on a prorated basis, the employee’s base salary as of his or her start date if hired during the year on or before September 15). As Messrs. Bhasin, Madhavan and Pan were hired in 2014 before September 15th of that year, they were each eligible to receive a prorated VPP award for 2014. Potential individual award percentages vary based upon an employee’s level of responsibility and have been higher for those persons serving as our executive officers. Our Corporate VPP plan, in which all of our named executive officers have participated, has provided for substantially the same method of allocation of benefits between management and non-management participants, except that non-management participants are generally required to have individual goals which also factor into the calculation of their incentive award.
Award payments under the 2016 VPP that applied to our named executive officers depended upon the extent to which we achieved a number of corporate operational goals that were aligned with our long-term strategic business objectives. These corporate operational goals were established by the Board of Directors.
We used the following formula to calculate the 2016 VPP award payments for all of our named executive officers except Mr. Bhasin:
Base Salary
as of 1/1/16
Employee’s Maximum
Potential Award
Percentage
  X 
Corporate Operating
Goal Achievement
Percentage
  X 
VPP Weighting Factor
For Mr. Bhasin, 75 percent of his 2016 VPP award was derived based solely upon the achievement of our corporate operating objectives, while 25 percent was based solely upon his overall individual performance as subjectively assessed by our Board of Directors. The formula that we used to calculate Mr. Bhasin’s 2016 VPP award is set forth below:
75%
 
X
 
 Base Salary as of 1/1/16
 
X
 
Maximum
Potential
Award
Percentage
 
X
 
Corporate
Operating Goal
Achievement
Percentage
 
X
 
VPP Weighting Factor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
plus
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
25%
 
X
 
 Base Salary as of 1/1/16
 
X
 
Maximum
Potential
Award
Percentage
 
X
 
Individual
Performance Goal
Achievement
Percentage
 
X
 
VPP Weighting Factor
 
For 2016, our corporate operating objectives fell into the following broad categories: (a) growth objectives (which included, among other objectives, an earnings initiative); (b) diversity and inclusion initiatives; (c) learning initiatives; and (d) operational excellence. Each corporate operating objective was assigned a specific percentage weight together with a target and stretch objective (and in some cases a threshold objective) or a pass/fail objective. The threshold objective or, in those cases where there was not a threshold objective, the target objective, represented a minimum acceptable level of performance for the year. The target objective reflected performance that was consistent with our long-term strategic objectives. The stretch objective reflected outstanding performance that exceeded our long-term strategic objectives.
The corporate operating objectives under our 2016 VPP operated on a sliding scale. For each objective, the percentage achievement could have been 0 percent (if the threshold objective was not met or, in those cases where there was not a threshold objective, the target objective was not met or, in the case of a pass/fail objective, the objective was not met), 60 percent (if results were equal to the threshold objective for those objectives with a threshold objective), 80 percent (if results were equal to the target objective) or 100 percent (if results were equal to or greater than the stretch objective or, in the case of a pass/fail objective, the objective was met). Achievement levels between threshold and target and between target and stretch for each corporate operating goal that had those achievement levels were interpolated in a manner as determined by the Committee. The results for each corporate operating goal were multiplied by the assigned percentage weight to determine its contribution to the overall corporate operating goal achievement percentage. For example, if the target objective was achieved for a goal with a percentage weight of 12.5 percent, then the contribution of that goal to our overall corporate goal achievement would be 10 percent (12.5 percent x 80 percent). The sum of the percentages derived from this calculation for each corporate operating objective yielded our overall corporate operating goal achievement percentage for the 2016 VPP. Generally, the Board of

100


Directors has attempted to set the threshold, target and stretch objectives such that the relative difficulty of achieving each level has been consistent from year to year.
For 2016, the Board of Directors established 15 separate VPP corporate operating objectives, each of which had a specific percentage weight ranging from 2 percent to 20 percent. As further set forth in the table below, the objectives relating to our growth, diversity and inclusion initiatives, learning initiatives and operational excellence comprised 50 percent, 10 percent, 20 percent and 20 percent, respectively, of our overall corporate operating goals.
Our earnings initiative for purposes of the 2016 VPP was based upon a measure of our net income that excluded (1) unrealized gains and losses on derivatives and hedging activities (including the exclusion of the related basis adjustments in the calculation of the gains associated with the sale of our previously hedged investment securities), (2) net prepayment fees on advances, (3) other-than-temporary impairment charges on our private-label mortgage-backed securities (and any subsequent recoveries of those charges) and (4) interest expense on mandatorily redeemable capital stock. In addition, so as not to exclude the costs associated with our interest rate caps, we included proforma amortization of the premiums paid for such caps. Further, for similar reasons, we included the actual losses (i.e., principal shortfalls) incurred during the year on our private-label mortgage-backed securities.

101


2016 Corporate VPP Objectives
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Contribution
to Overall
Achievement
Percentage
 
Percentage Weight
 
Objective
 
 
 
 
 
Threshold
 
Target
 
Stretch
 
Results
 
Growth Objectives
 
 
 
 
 
 
 
 
 
 
 
1. Earnings Initiative (Adjusted Net Income)
12.5%
 
$
50

 
$
53

 
$
56

 
$
85.3

 
12.50
%
2. Outstanding Advances as of December 31, 2016
15.0%
 
$
24,000

 
$
25,000

 
$
27,000

 
$
32,472

 
15.00
%
3. Outstanding Letters of Credit as of December 31, 2016
5.0%
 
$
6,250

 
$
6,500

 
$
7,000

 
$
11,187

 
5.00
%
4. CFI Advances Growth from December 31, 2015
5.0%
 
8.0
%
 
10.0
%
 
12.5
%
 
10.7
%
 
4.26
%
5. MPF Assets Purchased from Members in 2016
7.5%
 
$
500

 
$
650

 
$
1,000

 
$
80

 
%
6. Total CIP/EDP Advances Projects Funded
5.0%
 
70

 
85

 
110

 
118

 
5.00
%
 
50.0%
 
 
 
 
 
 
 
 
 
41.76
%
Diversity and Inclusion Initiatives
 
 
 
 
 
 
 
 
 
 
 
1. Cornell D&I Training
4.0%
 
 
 
Pass/Fail
 
 
 
Pass
 
4.00
%
2. Formalize and Hold OMWI Dealer Meetings
2.5%
 
 
 
Pass/Fail
 
 
 
Pass
 
2.50
%
3. Hold Annual Diversity Week
2.5%
 
 
 
Pass/Fail
 
 
 
Pass
 
2.50
%
4. Research and Select Diverse Vendor Database
1.0%
 
 
 
Pass/Fail
 
 
 
Pass
 
1.00
%
 
10.0%
 
 
 
 
 
 
 
 
 
10.00
%
Learning Initiatives
 
 
 
 
 
 
 
 
 
 
 
1. External: (1) conduct three MPF workshops, (2) launch Member Advisory Committee, and (3) conduct member training workshops
6.0%
 
N/A
 
2 of 3
 
3 of 3
 
3 of 3
 
6.00
%
2. Internal: (1) develop department skill development plan, (2) develop department level key metrics, and (3) develop corporate training program
8.0%
 
N/A
 
2 of 3
 
3 of 3
 
3 of 3
 
8.00
%
3. Individual: Aggregate training hours for our employees
2.0%
 
N/A
 
8,000 hours
 
9,000 hours
 
16,568 hours
 
2.00
%
4. Corporate: (1) implement skills and competencies-based performance appraisal, (2) participate in a large community project, and (3) implement a speakers bureau
4.0%
 
N/A
 
2 of 3
 
3 of 3
 
3 of 3
 
4.00
%
 
20.0%
 
 
 
 
 
 
 
 
 
20.00
%
Operational Excellence
 
 
 
 
 
 
 
 
 
 
 
Pass/Fail
20.0%
 
N/A
 
12 of 15
 
15 of 15
 
15 of 15
 
20.00
%
Customer Relationship Management System Phase II
 
 
 
 
 
 
 
 
Completed
 
 
Document Management Program Scope and Phase I
 
 
 
 
 
 
 
 
Completed
 
 
Signature Card Business Process Reengineering
 
 
 
 
 
 
 
 
Completed
 
 
Wire System Replacement Phase I (Vendor Selection)
 
 
 
 
 
 
 
 
Completed
 
 
G/L Replacement Phase I (Vendor Selection)
 
 
 
 
 
 
 
 
Completed
 
 
Remediate 2015 Exam Findings
 
 
 
 
 
 
 
 
Completed
 
 
Disaster Recovery Location Plan
 
 
 
 
 
 
 
 
Completed
 
 
Information Technology Platform Simplification Plan
 
 
 
 
 
 
 
 
Completed
 
 
Capital Plan Dividend Enhancements
 
 
 
 
 
 
 
 
Completed
 
 
Enterprise Data Warehouse (Credit/Accounting/Collateral)
 
 
 
 
 
 
 
 
Completed
 
 
Telephony Replacement Phase II
 
 
 
 
 
 
 
 
Completed
 
 
Unsecured Credit Redesign
 
 
 
 
 
 
 
 
Completed
 
 
Implement Verify
 
 
 
 
 
 
 
 
Completed
 
 
Milestone Upgrade
 
 
 
 
 
 
 
 
Completed
 
 
BOD Automated Elections
 
 
 
 
 
 
 
 
Completed
 
 
Overall Corporate Operating Goal Achievement Percentage
 
 
 
 
 
 
 
 
 
 
91.76
%
As shown above, we did not achieve the threshold objective for one of our six corporate operating objectives that had a threshold objective. We attribute this in part to the competitiveness of our mortgage loan pricing, which was negatively impacted by our higher long-term debt costs in the first half of 2016 and the complexity of the product offering. We achieved

102


the stretch objective for four of the other five corporate operating goals that had a threshold objective and exceeded the target objective for the fifth goal. In addition, we passed the four goals that had a pass/fail objective. Further, we achieved the stretch objective for all of the five corporate operating goals that had only target and stretch objectives such that our overall corporate operating goal achievement rate for 2016 was 91.76 percent, which was above our target level of 80 percent. Over the previous five years, our overall corporate operating goal achievement was as follows: 2011 — 70 percent; 2012 — 82 percent; 2013 — 96 percent; 2014 — 76 percent; and 2015 — 91 percent.
The calculation of individual incentive awards is based upon each executive’s performance as determined based upon his appraisal rating, maximum award percentage and VPP weighting factor.
Mr. Bhasin assessed the performance of Messrs. Lewis, Madhavan, Pan and Joiner using a performance appraisal form which consisted of 10 performance factors. Each of these executives had to receive a score of at least 6 (the maximum possible score was 10) to achieve a “Meets Expectations” performance rating, which is a requirement to receive an annual VPP award. For 2016, each of the executives received at least a "Meets Expectations" performance rating.
Mr. Bhasin's individual goal achievement for purposes of the VPP was derived from his performance appraisal, which was prepared by our Board of Directors. For 2016, his performance was assessed based on seven principal accountabilities. Mr. Bhasin's individual goal achievement is expressed as a percentage and is calculated by dividing the number of points received on his performance appraisal form by the 100 total possible points. For 2016, Mr. Bhasin received 95.87 points on his appraisal form, which resulted in an individual goal achievement percentage of 95.87 percent.
The possible VPP payouts to our named executive officers for 2016 are presented in the Grants of Plan-Based Awards table on page 119, while the actual VPP awards earned by these executives for 2016 are included in the Summary Compensation Table on page 117 (in the column entitled “Non-Equity Incentive Plan Compensation”). The calculation of the VPP awards earned by our named executive officers in 2016 is shown in the table below.

Name
 
Base Salary as of
January 1, 2016 ($)
 
Award
Component
Percentage
 
Maximum
Potential Award
Percentage
 
Corporate Operating Goal
Achievement
Percentage
 
Individual Goal
Achievement
Percentage
 
2016 VPP
 Weighting Factor
 
2016 VPP
Award ($)
Sanjay Bhasin
 
656,625

 
75.00
%
 
60.00
%
 
91.76
%
 
 
 
56.25
%
 
152,513

 
 
656,625

 
25.00
%
 
60.00
%
 
 
 
95.87
%
 
56.25
%
 
53,115

 
 
 
 
 
 
 
 
 
 
 
 
 
 
205,628

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tom Lewis
 
338,293

 
 
 
43.75
%
 
91.76
%
 
 
 
50.00
%
 
67,904

Kalyan Madhavan
 
446,505

 
 
 
43.75
%
 
91.76
%
 
 
 
60.42
%
 
108,303

Jibo Pan
 
343,791

 
 
 
43.75
%
 
91.76
%
 
 
 
60.42
%
 
83,389

Paul Joiner
 
328,523

 
 
 
43.75
%
 
91.76
%
 
 
 
50.00
%
 
65,943

Under the VPP, discretion cannot be exercised to increase the size of any award. However, discretion can be used (through the performance appraisal process) to reduce or eliminate a VPP award. In addition, management (or, in the case of our President and Chief Executive Officer, the Board of Directors) can modify or eliminate individual awards within their sole discretion based on circumstances unique to an individual employee such as misconduct, failure to follow Bank policies, insubordination or other job performance factors.
In addition to our VPP, our President and Chief Executive Officer was granted authority by our Board of Directors to award discretionary bonuses to those employees who made significant contributions to us in 2014, some of which ultimately included our named executive officers. Upon a recommendation from Mr. Bhasin, the executive officers' 2014 discretionary bonuses were approved by the Committee on January 26, 2015, subject to the Finance Agency's review. On that same date, the Board of Directors, acting upon a recommendation from the Committee, approved a discretionary bonus for Mr. Bhasin in recognition of his extraordinary contributions to us in 2014. Mr Bhasin's discretionary bonus was also subject to the Finance Agency's review. On March 24, 2015, the Finance Agency informed us that it did not object to the payment of these discretionary bonuses. The discretionary bonuses earned by our named executive officers in 2014 are shown in the "Bonus" column of the Summary Compensation Table on page 117.
On April 24, 2014, the Board of Directors, acting upon a recommendation from the Committee, approved a special bonus for Mr. Joiner in the amount of $150,000 in recognition of his service as our Interim President and Chief Executive Officer during the period from September 17, 2013 through May 11, 2014. This special bonus was supported by data and analysis provided by Pearl Meyer & Partners, an independent compensation consultant, and was subject to the Finance Agency's review. The special bonus, which was paid to Mr. Joiner in May 2014, is shown in the "Bonus" column of the Summary Compensation Table on page 117.

103


Long-Term Incentive Compensation
Our LTIP provides cash-based award opportunities based on the achievement of performance goals over successive three-year periods that have commenced annually (each a “Performance Period”) to those employees who have been designated by the Board of Directors to be participants in the LTIP. For the three-year Performance Period that ended on December 31, 2016, which was covered by the 2014 LTIP, the Board of Directors had (in December 2013) designated, among others, Messrs. Lewis and Joiner (each of whom was employed by us as of January 1, 2013) as participants in the plan. As discussed in the "Elements of Executive Compensation" section beginning on page 97, Messrs. Bhasin, Madhavan and Pan (among other executive officers) were added as participants in the 2014 LTIP in August 2016. As a result, Messrs. Bhasin, Madhavan and Pan participated in the 2014 LTIP on a pro rata basis from the date that each executive joined us.
Performance goals under the 2014 LTIP were established by our Board of Directors. Each performance goal under the 2014 LTIP was assigned a specific percentage weight together with a threshold, target and maximum achievement level except for the goal relating to our overall performance in achieving our annual short-term VPP objectives, which was computed as the average percentage achievement in our VPP during the three-year Performance Period. For each performance goal with a threshold, target and maximum achievement level, the percentage achievement could have been 0 percent (if the threshold goal was not met), 60 percent (if results were equal to the threshold goal), 80 percent (if results were equal to the target goal) or 100 percent (if results were equal to or greater than the maximum goal). LTIP achievement levels between threshold and target and between target and maximum were interpolated in a manner as determined by the Committee. The results for each performance goal were multiplied by the assigned percentage weight to determine their contribution to the overall 2014 LTIP goal achievement. Generally, awards became vested under the 2014 LTIP only if the performance goals for the three-year Performance Period were satisfied and the participant was actively employed by us on the last day of the Performance Period (i.e., December 31, 2016).
The 2014 LTIP provided for discretionary awards and other adjustments as well as additional incentive payments if certain thresholds were met. If, for the 2014-2016 Performance Period, the overall LTIP goal achievement was equal to or greater than 90 percent, our named executive officers were each entitled to receive an additional incentive payment in an amount equal to 15 percent of his average base salary during the period from January 1, 2014 through December 31, 2016 (prorated in the case of Messrs. Bhasin, Madhavan and Pan). If the overall 2014 LTIP goal achievement was equal to or greater than 80 percent but less than 90 percent, our named executive officers were each entitled to receive an additional incentive payment in an amount equal to 10 percent of his average base salary during the period from January 1, 2014 through December 31, 2016 (again, prorated in the case of Messrs. Bhasin, Madhavan and Pan). In addition, the final 2014 LTIP awards could have been modified up or down at the Board of Directors' discretion to account for performance that was not captured in the performance goals.
The amount of the award that was ultimately payable to our named executive officers under the 2014 LTIP was based upon the level at which the performance goals were achieved, plus or minus any discretionary awards or adjustments. In addition to the level at which the 2014 LTIP performance goals were achieved, the Board of Directors based its decision on the following qualifiers when deciding whether to approve payouts under the 2014 LTIP: (i) the consistent ability to pay quarterly dividends to members throughout the 2014-2016 Performance Period; (ii) the consistent ability to repurchase excess capital stock throughout the 2014-2016 Performance Period; and (iii) the maintenance of a triple-A credit rating from Moody's and S&P.
On August 5, 2011, S&P lowered its long-term sovereign credit rating on the United States from AAA to AA+ and, on August 8, 2011, it lowered the long-term credit rating on the FHLBank System’s consolidated obligations and our long-term counterparty credit rating from AAA to AA+. In the application of S&P's Government Related Entities criteria, the ratings of the FHLBanks are constrained by the long-term sovereign credit rating of the United States. Because the downgrade of our credit rating was due solely to the downgrade of the long-term credit rating of the U.S. government, and our credit rating was the highest it could be given the credit rating of the U.S. government, the Board of Directors did not apply any negative adjustment to the amount of the 2014 LTIP payouts as a result of our AA+ credit rating from S&P.
Further, the Board of Directors had discretion to reduce the amount of the 2014 LTIP awards for one or more of our participating executives if during the 2014-2016 Performance Period it determined that: (i) operational errors or omissions resulted in material revisions to our financial results, the information submitted to the Finance Agency or the data used to determine incentive award amounts; (ii) the submission of information to the SEC, the FHLBanks Office of Finance, and/or the Finance Agency was not provided in a timely manner; or (iii) we failed to make sufficient progress, as determined and communicated to us by the Finance Agency, in the timely remediation of examination, monitoring, and other supervisory findings/matters requiring executive management's attention. Although there was an instance in 2016 in which we did not timely file a Current Report on Form 8-K, the Board of Directors did not reduce the 2014 LTIP awards for our named executive officers because none of these executives was responsible for the late filing.
When assessing performance results and determining final 2014 LTIP awards, the Board of Directors could have considered those events that, in its opinion and discretion, were outside the significant influence of the participant or us and which had a significant unanticipated effect, whether positive or negative, on our operating and/or financial results. Further, the Board of

104


Directors could have adjusted the performance goals for the 2014-2016 Performance Period to ensure that the purpose of the 2014 LTIP was served.
In determining the final payments under the 2014 LTIP, there were no discretionary awards, modifications or adjustments of any kind.
As further set forth in the table below, the Board of Directors established 5 separate objectives for the 2014 LTIP, each of which had a specific percentage weight of 20 percent.
2014 LTIP Objectives
(dollars in millions)

 
 
 
 
 
 
 
 
 
 
 
Contribution
to Overall
Achievement
Percentage
 
Percentage Weight
 
Objective
 
 
 
 
 
Threshold
 
Target
 
Stretch
 
Results
 
1. Contribution to Retained Earnings from pre-ASC 815 net income for 2014-2016
20%
 
$90
 
$105
 
$115
 
$187
 
20.00
%
 
 
 
 
 
 
 
 
 
 
 
 
2. Maintain an Average Ratio of our Market Value of Equity (MVE ) ≥ a specified percentage of our Book Value of Equity (BVE) for all month-end reporting periods (excluding the impact of our private label residential MBS)
20%
 
Average MVE ≥ 100% of BVE
 
Average
MVE ≥
102% of
BVE
 
Average
MVE ≥
104% of
BVE
 
Average
MVE =
107.8% of
BVE
 
20.00
%
 
 
 
 
 
 
 
 
 
 
 
 
3. Maintain the Integrity of our System of Internal Controls
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Minimize the number and severity of external audit findings related to internal controls during the 2014-2016 Performance Period
20%
 
No Material Weaknesses
 
No material weaknesses and no more than 3 significant deficiencies
 
No material weaknesses and no more than 1 significant deficiency
 
No material weaknesses and 1 significant deficiency in 2014
 
20.00
%
 
 
 
 
 
 
 
 
 
 
 
 
4. Timely Remediation of Finance Agency Examination Findings (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adequately remediate Finance Agency examination findings for each year during the 2014-2016 Performance Period within the time periods specified in management's responses (2)
20%
 
Remediate 80% of exam findings rated "weakness" or more severe in specified time
 
Remediate 100% of exam findings rated "weakness" or more severe in specified time
 
In addition to meeting the Target Objective, remediate lower rated exam findings as identified in the remediation plan
 
95.7% of exam findings rated "weakness" or more severe during the Performance Period were remediated within the time period specified by management, resulting in 75.7% goal achievement
 
15.16
%
 
 
 
 
 
 
 
 
 
 
 
 
5. Average VPP Achievement During the 2014-2016 Performance Period
20%
 
Average percentage achievement for the 2014-2016 Performance Period times goal weight
 
86.2%
 
17.24
%
 
 
 
 
 
 
 
 
 
 
 
 
Overall 2014 LTIP Goal Achievement Percentage
 
 
 
 
 
 
 
 
 
 
92.40
%
_________________________________
(1) Applied to findings from the 2013, 2014 and 2015 exams, excluding findings related to Internal Audit.

(2) The Board of Directors had discretion to determine the percentage achievement for the exam finding remediation objective based on management and Internal Audit reports, subsequent examination reports, and any additional feedback received from the Finance Agency prior to approval of the final awards.
As shown above, we achieved the stretch objective for three of our four 2014 LTIP goals that had specific objectives. Our average VPP goal achievement during the 2014-2016 Performance Period was 86.2 percent, resulting in an overall 2014 LTIP goal achievement rate of 92.4 percent. In comparison, our overall goal achievement for the 2010, 2011, 2012 and 2013 LTIPs was 94.7 percent, 89.5 percent, 89.2 percent and 91.8 percent, respectively.
Because the overall 2014 LTIP goal achievement rate was greater than 90 percent, each of our named executive officers was entitled to receive an additional incentive payment in an amount equal to 15 percent of his average base salary during the period

105


from January 1, 2014 through December 31, 2016. In the case of Messrs. Bhasin, Madhavan and Pan, these payments were prorated based upon the number of months that each executive was employed by us during the 2014-2016 Performance Period. During this period, Messrs. Madhavan and Pan were each employed by us for 28.5 months and Mr. Bhasin was employed by us for 31.5 months.
For the 2014 LTIP, we used the following formula to calculate the LTIP award payments for our named executive officers:
Average Base Salary for the 2014-2016 Performance Period
 
X
 
Employee's Maximum
Potential
Award Percentage
 
X
 
2014 LTIP Achievement Percentage
 
X
 
LTIP Weighting Factor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
plus
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Base Salary for the 2014-2016 Performance Period
 
X
 
Additional
Incentive
Percentage
 
X
 
Number of Months Employed by Us During the
2014-2016 Performance Period
 
 
 
 
 
 
36 Months
The calculation of the 2014 LTIP awards earned by our named executive officers is shown in the table below and such awards are included in the Summary Compensation Table on page 117 in the column entitled "Non-Equity Incentive Plan Compensation."
Name
 
Average Base Salary
 2014-2016 ($)
 
Maximum
Potential Award
Percentage
 
2014 LTIP
Achievement
Percentage
 
2014 LTIP
 Weighting
 Factor
 
2014 LTIP
 Award Before
 Additional Incentive ($)
 
Additional Incentive Award ($)
 
Total 2014 LTIP
Award ($)
Sanjay Bhasin
 
639,708

 
60.00
%
 
92.40
%
 
43.75
%
 
155,161

 
83,962

 
239,123

Tom Lewis
 
325,783

 
43.75
%
 
92.40
%
 
50.00
%
 
65,849

 
48,867

 
114,716

Kalyan Madhavan
 
435,002

 
43.75
%
 
92.40
%
 
39.58
%
 
69,601

 
51,656

 
121,257

Jibo Pan
 
326,697

 
43.75
%
 
92.40
%
 
39.58
%
 
52,272

 
38,795

 
91,067

Paul Joiner
 
320,059

 
43.75
%
 
92.40
%
 
50.00
%
 
64,692

 
48,009

 
112,701


Based upon their significant contributions to us in 2015, and their ineligibility to participate in our 2013 LTIP, we elected to award discretionary bonuses to Messrs. Bhasin, Madhavan and Pan in amounts that were substantially equivalent (when expressed as a percentage of salary) to the additional incentive awards that were earned by Messrs. Lewis and Joiner under the 2013 LTIP. Upon a recommendation from Mr. Bhasin, the 2015 discretionary bonuses for Messrs. Madhavan and Pan were approved by the Committee on January 25, 2016, subject to the Finance Agency's review. On that same date, the Board of Directors, acting upon a recommendation from the Committee, approved Mr. Bhasin's 2015 discretionary bonus. Mr. Bhasin's discretionary bonus was also subject to the Finance Agency's review. On February 26, 2016, the Finance Agency informed us that it did not object to the payment of these discretionary bonuses. The discretionary bonuses earned by Messrs. Bhasin, Madhavan and Pan in 2015 are shown in the "Bonus" column of the Summary Compensation Table on page 117.
We did not pay any discretionary bonuses to our named executive officers for 2016, nor do we anticipate paying discretionary bonuses to our named executive officers in the future.
Defined Benefit Pension Plan
All regular employees hired prior to January 1, 2007 who work a minimum of 1,000 hours per year participate in the Pentegra Defined Benefit Plan for Financial Institutions, a tax-qualified multiemployer defined benefit pension plan. The plan also covers any of our regular employees hired on or after January 1, 2007 who work a minimum of 1,000 hours per year, provided that the employee had prior service with a financial services institution that participated in the Pentegra Defined Benefit Plan for Financial Institutions, during which service the employee was covered by such plan. Effective July 1, 2015, coverage was extended to include all of our non-highly compensated employees (as defined by Internal Revenue Service rules) who were hired on and after January 1, 2007 but before August 1, 2010 who work a minimum of 1,000 hours per year. Concurrently, we amended our participation in the Pentegra Defined Benefit Plan for Financial Institutions such that some of the benefits offered by the plan were reduced prospectively (that is, on and after July 1, 2015) for employees who were hired prior to July 1, 2003. Under these participation rules, all of our named executive officers participate in the plan. Because this is a qualified defined benefit plan, it is subject to certain compensation and benefit limitations imposed by the Internal Revenue Service. In 2016, the maximum compensation limit was $265,000 and the maximum annual benefit limit was $210,000. The pension benefit earned under the plan is based on the number of years of credited service (up to a maximum of 30 years) and compensation earned over an employee’s 36 highest consecutive months of earnings. For employees hired prior to July 1, 2003, the high 36-month average compensation for purposes of the benefit earned prior to that date became fixed as of July 1, 2015. For employees hired

106


on and after July 1, 2003, the high 36-month average compensation is calculated over the employee's entire participation period.
This element of our compensation program is one of several that constitute an integral part of our retention strategy, which is to reward tenure by linking it to compensation. It also represents an effort on our part to partially offset our inability to provide equity-based compensation to our employees. We consider this benefit to be a significant element of our compensation program as it pertains to our tenured executives and other key tenured employees. Based on this belief, we have elected to provide a benefit under this plan that we believe is at or near the median for comparable companies that offer this benefit, although we have not conducted any recent studies to confirm this.
The details of this plan and the accumulated pension benefits for our named executive officers can be found in the Pension Benefits Table and accompanying narrative on pages 120-123 of this report.
Defined Contribution Savings Plan
We offer all regular employees who work a minimum of 1,000 hours per year, including our executive officers, the opportunity to participate in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified multiemployer defined contribution plan. Because this is a qualified plan, it is subject to the maximum compensation limit set by the Internal Revenue Code, which for 2016 was $265,000 per year. In addition, the combined contributions to this plan from both us and the employee are limited by the Internal Revenue Code. For 2016, combined contributions to the plan could not exceed $53,000. The plan includes a pre-tax 401(k) option along with an opportunity to make contributions on an after-tax basis. The limitation on combined contributions applies to an employee's pre-tax and after-tax contributions and any matching contributions we make on his or her behalf. The limitation on an employee's pre-tax contributions was $18,000 for 2016. Employees who were age 50 or older could elect in 2016 to make additional pre-tax contributions (commonly known as catch-up contributions) of up to $6,000. Catch-up contributions are not taken into account in applying the combined contribution limit.
Subject to the limits prescribed by the Internal Revenue Code, employees can contribute up to 65 percent of their monthly base salary to the plan on either a pre-tax or after-tax basis (prior to January 1, 2016, this percentage was 25 percent). Employees are not permitted to contribute any of their incentive compensation to the plan. We provide matching funds on the first 3 percent of eligible monthly base salary contributed by employees who are eligible to participate in the Pentegra Defined Benefit Plan for Financial Institutions, and on the first 5 percent of eligible monthly base salary contributed by employees who are not eligible to participate in the Pentegra Defined Benefit Plan for Financial Institutions. In each case, our matching contribution is 100 percent, 150 percent or 200 percent depending upon the employee’s length of service, including, if applicable, their service with a financial services institution that participated in the Pentegra Defined Contribution Plan for Financial Institutions, during which service the employee was covered by such plan. Employees who are eligible to participate in the Pentegra Defined Benefit Plan for Financial Institutions are fully vested in our matching contributions at the time such funds are deposited in their account. For employees who do not participate in the Pentegra Defined Benefit Plan for Financial Institutions, there is a 2-6 year step vesting schedule for our matching contributions with the employee becoming fully vested after 6 years. Participants can elect to invest plan contributions in up to 28 different fund options. Based on their tenure with us (and, in the case of Messrs. Bhasin, Madhavan and Pan, their service with the Federal Home Loan Bank of Chicago during which service each of them was covered by the Pentegra Defined Contribution Plan for Financial Institutions), each of our named executive officers was eligible to receive in 2016 a 200 percent matching contribution on the first 3 percent of his eligible monthly base salary that he contributed to the plan, subject in all cases to the compensation limit prescribed by the Internal Revenue Code. The matching contributions that were made by us are included in the “All Other Compensation” column of the Summary Compensation Table found on page 117 and further set forth under the “401(k)/Thrift Plan” column of the related “Components of All Other Compensation for 2016” table.
We offer the savings plan as a competitive practice and believe that our matching contributions to the plan are at or above the market median for comparable companies, although we have not conducted any recent studies to confirm this.
Deferred Compensation Program
Under the terms of our nonqualified deferred compensation program, we offer our highly compensated employees, including our named executive officers, the opportunity to voluntarily defer receipt of all or part of their base salary and all or part of their non-equity incentive plan compensation, regardless of its source. Prior to 2016 (for amounts to be earned in 2017), we did not permit participants to defer any portion of their LTIP awards. The program allows participants to save for retirement or other future-dated in-service obligations (e.g., college, home purchase, etc.) in a tax-effective manner, as contributions and earnings on those contributions are not taxable to the participant until received. Under the program, amounts deferred by the participant and our matching contributions can be invested in an array of externally managed mutual funds.
We offer the program to higher-level employees in order to allow them to voluntarily defer more compensation than they would otherwise be permitted to defer under our tax-qualified defined contribution savings plan as a result of the limits imposed by the

107


Internal Revenue Code. Further, we offer this program as a competitive practice to help us attract and retain top talent. The matching contributions that we provide in this plan are intended to make the participant whole with respect to the amount of matching funds that he or she would have otherwise been eligible to receive in the Pentegra Defined Contribution Plan for Financial Institutions if not for the limits imposed on that plan by the Internal Revenue Code. These matching contributions are included in the “All Other Compensation” column of the Summary Compensation Table found on page 117 and further set forth under the “Nonqualified Deferred Compensation Plan (NQDC Plan)” column of the related “Components of All Other Compensation for 2016” table. As noted above, we believe that our matching contributions to the qualified savings plan are at or above the market median for comparable companies. Based on our experience and general knowledge of the competitive market, we believe this may also be true for the matching contributions that we provide under the deferred compensation program, although we have not conducted a study to confirm this. The provisions of this program are described more fully in the narrative accompanying the Nonqualified Deferred Compensation table on pages 123-127.
Supplemental Executive Retirement Plan
We maintain a supplemental executive retirement plan (“SERP”) that currently serves as an additional incentive for one of our executive officers (Mr. Lewis) to remain with us. As discussed below, Mr. Joiner, the only other named executive officer that participates in the SERP, is already fully vested in his benefits. The SERP is a nonqualified defined contribution plan and, as such, it does not provide for a specified retirement benefit. Based on a recommendation from management in 2014, the Committee and Board of Directors decided to discontinue contributions to our SERP for the foreseeable future. While the Committee and Board of Directors could consider reactivating or replacing the SERP at some point in the future, there is no current plan to do so. If the SERP is ever reactivated or replaced, the Committee and Board of Directors would expect to add our other executive officers as participants. While active, our intent with the SERP was to make up a portion of the pension benefit that was lost under our tax-qualified plan due to limitations imposed by the Internal Revenue Code (it was never our intention to provide a full restoration of the lost benefit under the tax-qualified defined benefit plan). Our final contribution to the SERP, totaling $24,876, was made on Mr. Lewis' behalf in 2014. Each participant’s benefit under the SERP consists of the contributions we made on his behalf, plus an allocation of the investment gains or losses on the assets used to fund the plan. Contributions to the SERP were determined solely at the discretion of our Board of Directors and were, during the periods in which they were made, based upon our desire to provide a reasonable level of supplemental retirement income to the participants. Generally, benefits under the SERP vest when the participant attains the “Rule of 70.” A participant attains the Rule of 70 when the sum of his age and years of service with us is at least 70. As of December 31, 2016, Mr. Joiner met the Rule of 70. If his employment with us continues, Mr. Lewis will attain the Rule of 70 in early 2018. The provisions of the plan provide for accelerated vesting and payment in the event of a participant’s death or disability if such participant is not otherwise vested at the time of his death or disability. Otherwise, vested benefits are not payable to the participant until he reaches age 62 or, if later, upon retirement. We maintain the right at any time to amend or terminate the SERP, or remove a participant from the SERP at our discretion, except that no amendment, modification or termination may reduce the then vested account balance of any participant.
Many other comparable financial institutions in our defined competitive markets offer supplemental executive retirement plans that are designed to fully restore the lost benefits under their tax qualified plans and therefore our decision not to offer this form of compensation may put us at a competitive disadvantage.
For details regarding the operation of Groups 1 and 2 of our SERP and the current account balances for Messrs. Lewis and Joiner, please refer to the Nonqualified Deferred Compensation table and accompanying narrative beginning on page 123.
Other Benefits
We offer a number of other benefits to our executive officers pursuant to benefit programs that are available to all of our regular, full-time employees. These benefits include: medical, dental, vision and prescription drug benefits; a wellness program; paid time off (in the form of vacation and flex leave); short- and long-term disability coverage; life and accidental death and dismemberment insurance; charitable gift matching (limited to $500 per employee per year); health and dependent care flexible spending accounts; healthcare savings accounts; and certain other benefits including, but not limited to, retiree health and life insurance benefits (provided certain eligibility requirements are met).
Our employees accrue vacation at different rates depending upon their job grade level and length of service. After an employee has completed 12 or more years of service (including any prior service with another FHLBank, subject to certain exceptions), he or she is entitled to 200 hours of annual vacation leave, regardless of job grade level. We limit the amount of accrued and unused vacation leave that an employee can accumulate to two times the amount of vacation he or she earns in an annual period. This policy is effected by allowing employees to carry over no more than the amount of vacation that he or she earns in an annual period to the next calendar year. Based on their job grade level and length of service (including, in the case of Messrs. Bhasin, Madhavan and Pan, their service with the Federal Home Loan Bank of Chicago), Mr. Madhavan currently accrues 160 hours of vacation leave per year while our other named executive officers each accrue 200 hours of vacation leave per year. If

108


an employee's employment with us is terminated for any reason, he or she is entitled to receive a payment for all accrued but unused vacation time as of their termination date, which, as noted above, cannot exceed two times the amount of vacation that he or she earns in an annual period. This payment is derived by multiplying the number of accrued but unused vacation hours as of the employee's termination date by his or her hourly rate. For this purpose, the hourly rate is computed by dividing the employee's base salary by 2,080 hours.
All of our regular full-time employees, including our executive officers, accrue 80 hours of flex leave per year. Flex leave is defined as accrued leave that is available for personal injury or illness, family injury or illness, personal time off (limited to no more than 32 hours per year), and leave covered under the provisions of the Family and Medical Leave Act of 1993. We limit employees' annual flex leave carryover amount to 520 hours. Employees (including executive officers) are not entitled to receive any payments under our flex leave policy under any circumstances, including a termination of their employment for any reason.
Perquisites
In 2016, we provided a limited number of perquisites to our named executive officers, which consisted of the payment of meal costs associated with a spouse accompanying the officer to our in-town board function that was held in December 2016. In 2016, Mr. Joiner utilized this benefit at a total incremental cost to us of $191.
Executive Employment Agreements
On November 20, 2007 (“Effective Date”), we entered into employment agreements with Messrs. Lewis and Joiner. These agreements were authorized and approved by the Committee and Board of Directors and resulted from the Board’s desire at that time to retain the services of these executive officers for no less than the three-year term of the agreements. As of each anniversary of the Effective Date in years prior to 2014, an additional year was automatically added to the unexpired term of the employment agreements because neither we nor the executive officer gave a notice of non-renewal. On November 3, 2014, we gave a written notice of non-renewal to both Mr. Lewis and Mr. Joiner and in so doing we fixed the term of the employment agreements. As a result, the employment agreements with each of these executive officers expired on November 19, 2016. We took this action in an effort to ultimately bring the executives' compensation packages more in line with current market practices. While the payments resulting from the specified triggering events in the employment agreements were similar in nature and amount to those commonly found in agreements that were used by comparable companies at the time these executive employment agreements were entered into, we determined that such amounts were not comparable to those found in more recent agreements. Upon the expiration of these agreements, we did not offer new employment agreements to Mr. Lewis or Mr. Joiner, nor did Mr. Lewis or Mr. Joiner seek to enter into new employment agreements with us.
On March 24, 2015, we entered into an employment agreement with Mr. Bhasin. This agreement was authorized and approved by the Committee and Board of Directors and resulted from the Board’s desire to retain Mr. Bhasin's services for no less than the one-year term of the agreement. On each yearly anniversary, Mr. Bhasin's employment agreement automatically renews for an additional one-year term unless either we or Mr. Bhasin gives a notice of non-renewal not less than 30 days prior to the expiration date. On March 24, 2017, Mr. Bhasin's employment agreement was automatically extended through March 23, 2018.
As more fully described in the section entitled “Potential Payments Upon Termination or Change in Control” beginning on page 127, the employment agreement with Mr. Bhasin provides for payments in the event that his employment with us is terminated either by him for good reason or by us other than for cause, by reason of his death or disability, or as a result of us giving notice of non-renewal of the employment agreement at a time when he is willing and able to continue his employment on substantially the same terms. We believe the specified triggering events and the payments resulting from those events are similar in nature and amount to those commonly found in agreements used by comparable companies and therefore advance our objective of retaining Mr. Bhasin.
We considered the action with respect to Mr. Bhasin to be prudent based on our belief that he is extremely well qualified to perform the duties of his job, that he has a skill set that is highly sought after in the financial services industry, and that his continued employment with us is essential to our ability to meet our business objectives.
To date, Messrs. Madhavan and Pan have elected not to enter into employment agreements with us.

109


2017 Compensation Actions
The 2017 base salaries for our named executive officers (and the percentage change from the salaries in effect at December 31, 2016) are presented below. All of the salaries in the table below were effective January 1, 2017.
Name
 
2017 Base Salary

 
Percentage Change
Sanjay Bhasin
 
$
725,000

 
Increase of 10.4 percent
Tom Lewis
 
$
348,442

 
Increase of 3.0 percent
Kalyan Madhavan
 
$
477,760

 
Increase of 7.0 percent
Jibo Pan
 
$
367,856

 
Increase of 7.0 percent
Paul Joiner
 
$
338,378

 
Increase of 3.0 percent
In August 2016, we engaged McLagan to conduct a competitive market pay study for all of our executive officers. The results of this study showed that Mr. Bhasin's base salary and targeted incentive opportunities continued to lag the competitive market range for his position, even when the higher incentives offered by the 2015 LTIP were taken into consideration. Based on this information and Mr. Bhasin's outstanding performance, the Committee and Board of Directors gave Mr. Bhasin an above standard merit increase of 10.4 percent.
As for our other named executive officers, the study showed that each of these executives' total direct compensation was either at or below the median market composite compensation for his position excluding the incrementally higher incentives that are available in 2017. For the three positions that were below the market median, two were just within the competitive market range and one was outside the competitive market range. Based on this information and Mr. Bhasin's subjective assessments of various other factors, he recommended, and the Committee approved, above standard merit increases of 7 percent for Messrs. Madhavan and Pan and standard merit increases of 3 percent for Messrs. Lewis and Joiner.
As described above in the section entitled "Elements of Executive Compensation," our 2017 EIP was approved in December 2016. The 2017 EIP provides cash-based award opportunities to all of our executive officers, including our named executive officers. As further described below, the 2017 EIP has three components: (i) an annual award ("Annual Award"), which is based on the achievement of short-term performance goals for the period from January 1, 2017 through December 31, 2017 (the "2017 Performance Goals") and, for 50 percent of that award, the satisfaction of safety and soundness goals for the period from January 1, 2018 through December 31, 2020; (ii) a one-time make-whole award ("Make-Whole Award"), which is also based on the achievement of the 2017 Performance Goals; and (iii) a one-time special Gap Year Award ("Gap Year Award"), which is based on the achievement of long-term performance goals for the period from January 1, 2017 through December 31, 2019 (the "2017-2019 Performance Goals").
The 2017 Performance Goals that will be used to calculate the Annual Award and the Make-Whole Award were established by the Board of Directors and fall into the following broad categories: (a) growth objectives (which include, among other objectives, an earnings initiative); (b) learning initiatives; (c) diversity and inclusion initiatives; and (d) operational excellence. Within each category, there are multiple goals. Each 2017 Performance Goal has been assigned a specific percentage weight. For 2017 Performance Goals comprising 50 percent of the executives’ 2017 Annual Award opportunity, each goal has been assigned a threshold, target and maximum objective. For 2017 Performance Goals comprising 40 percent of the executives’ 2017 Annual Award opportunity, each goal has been assigned only a target and maximum objective. The remaining 10 percent of the executives’ 2017 Annual Award opportunity is based upon performance goals for which achievement will be assessed on a pass/fail basis.
For our President and Chief Executive Officer, the incentive factor for each 2017 Performance Goal can be 0 percent (if the threshold objective is not met or, in those cases where there is not a threshold objective, the target objective is not met or, in the case of a pass/fail objective, the objective is not met), 50 percent (if results are equal to the threshold objective for those 2017 Performance Goals that have a threshold objective), 75 percent (if results are equal to the target objective) or 95 percent (if results are equal to or greater than the maximum objective or, in the case of a pass/fail objective, the objective is met). For our other named executive officers, the incentive factor for each 2017 Performance Goal can be 0 percent (if the threshold objective is not met or, in those cases where there is not a threshold objective, the target objective is not met or, in the case of a pass/fail objective, the objective is not met), 30 percent (if results are equal to the threshold objective for those 2017 Performance Goals that have a threshold objective), 50 percent (if results are equal to the target objective) or 65 percent (if results are equal to or greater than the maximum objective or, in the case of a pass/fail objective, the objective is met).
Achievement levels between threshold and target and between target and maximum for each 2017 Performance Goal that has those achievement levels will be interpolated in a manner as determined by the Committee. The results for each 2017 Performance Goal will be multiplied by the assigned percentage weight to determine its contribution to the overall 2017 EIP short-term goal percentage. For example, if the target objective is achieved for a goal with a percentage weight of 15 percent,

110


then the contribution of that goal to the President and Chief Executive Officer’s overall short-term goal percentage would be 11.25 percent (15 percent x 75 percent). For the other named executive officers, the contribution of that same goal to their overall short-term goal percentage would be 7.5 percent (15 percent x 50 percent). The percentages derived from this calculation for each 2017 Performance Goal will be added together to derive each executive’s overall short-term goal percentage for the 2017 EIP, which percentage will then be multiplied by the executive’s salary to determine his final Annual Award.
For our President and Chief Executive Officer, the potential Annual Award under the 2017 EIP (before interest on the deferred portion, as described below), can be 34.5 percent of salary (if the threshold objective is achieved for each of our 2017 Performance Goals that has a threshold objective and all of the pass/fail goals are met), 77 percent of salary (if the target objective is achieved for each of our 2017 Performance Goals that has a target objective and all of the pass/fail goals are met) or 95 percent of salary (if the maximum objective is achieved for each of our 2017 Performance Goals that has a maximum objective and all of the pass/fail goals are met). For each of our other named executive officers, the potential Annual Award under the 2017 EIP (before interest on the deferred portion), can be 21.5 percent of salary (if the threshold objective is achieved for each of our 2017 Performance Goals that has a threshold objective and all of the pass/fail goals are met), 51.5 percent of salary (if the target objective is achieved for each of our 2017 Performance Goals that has a target objective and all of the pass/fail goals are met) or 65 percent of salary (if the maximum objective is achieved for each of our 2017 Performance Goals that has a maximum objective and all of the pass/fail goals are met). The achievement levels described in this paragraph were used to compute the estimated awards shown in Table A below.
For purposes of the Annual Award, salary means the executive’s annual base salary for 2017. Given the number of variables involved in the calculation of the Annual Awards, the ultimate payouts (other than the maximum payouts) could vary significantly. For instance, the Annual Awards could be less than 34.5 percent of salary for our President and Chief Executive Officer and 21.5 percent of salary for each of our other named executive officers if we fail to achieve the threshold objective for one or more of our 2017 Performance Goals that have a threshold objective but achieve the threshold objective for each of our other 2017 Performance Goals that has a threshold objective.
Fifty percent of an executive’s final Annual Award under the 2017 EIP (the "Current Award") will become earned and vested on December 31, 2017 if: (i) the 2017 Performance Goals have been met; (ii) the executive receives at least a "Meets Expectations" performance rating for 2017; and (iii) the executive is actively employed on December 31, 2017. An executive’s Current Award under the 2017 EIP is payable no later than March 15, 2018. The remaining 50 percent of an executive’s final Annual Award under the 2017 EIP (the "Deferred Award") will become earned and vested on December 31, 2020 if: (i) the safety and soundness goals set forth in the next paragraph are satisfied during the three-year deferral performance period which runs from January 1, 2018 through December 31, 2020; (ii) the executive receives at least a "Meets Expectations" performance rating for 2020; and (iii) the executive is actively employed on December 31, 2020. An executive’s Deferred Award under the 2017 EIP is payable no later than March 15, 2021 with interest at 6 percent compounded annually over the three-year deferral performance period.
The safety and soundness goals that must be satisfied during the three-year deferral performance period are: (i) no material risk management deficiency exists at the Bank; (ii) no operational errors or omissions result in material revisions to our financial results, information submitted to the Finance Agency, or data used to determine incentive payouts; (iii) no submission of material information to the SEC, the FHLBanks Office of Finance, and/or the Finance Agency is significantly past due; (iv) we make sufficient progress, as determined by the Board of Directors, in the timely remediation of significant examination, monitoring and other supervisory findings; and (v) we have sufficient capital to pay dividends and repurchase members’ stock.
Table A sets forth an estimate of the possible Current Awards and Deferred Awards (before interest) that can be earned by our named executive officers under the 2017 EIP.
TABLE A
 
 
 
 
 
 
 
 
 
2017 Current Award
 
2017 Deferred Award
 
Total 2017 Annual Award
Name
 
Threshold
 ($)
 
Target
($)
 
Maximum
 ($)
 
Threshold
 ($)
 
Target
($)
 
Maximum
 ($)
 
Threshold
 ($)
 
Target
($)
 
Maximum
 ($)
Sanjay Bhasin
 
125,063

 
279,125

 
344,375

 
125,062

 
279,125

 
344,375

 
250,125

 
558,250

 
688,750

Tom Lewis
 
37,458

 
89,724

 
113,244

 
37,457

 
89,724

 
113,243

 
74,915

 
179,448

 
226,487

Kalyan Madhavan
 
51,359

 
123,023

 
155,272

 
51,359

 
123,023

 
155,272

 
102,718

 
246,046

 
310,544

Jibo Pan
 
39,545

 
94,723

 
119,553

 
39,544

 
94,723

 
119,553

 
79,089

 
189,446

 
239,106

Paul Joiner
 
36,376

 
87,133

 
109,973

 
36,375

 
87,132

 
109,973

 
72,751

 
174,265

 
219,946


111


Table B shows the anticipated growth in the estimated Deferred Awards during the period from January 1, 2018 through December 31, 2020 and the total Deferred Awards (inclusive of interest) that will be payable in early 2021.
TABLE B
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated Possible Payouts in Early 2021 Under Non-Equity Incentive Plan Awards for 2017 EIP
 
 
2017 Deferred Award (1)
 
Interest on Deferred Award (2)
 
Total Deferred Award
Including Interest
Name
 
Threshold
 ($)
 
Target
($)
 
Maximum
 ($)
 
Threshold
 ($)
 
Target
($)
 
Maximum
 ($)
 
Threshold
 ($)
 
Target
($)
 
Maximum
 ($)
Sanjay Bhasin
 
125,062

 
279,125

 
344,375

 
23,889

 
53,317

 
65,781

 
148,951

 
332,442

 
410,156

Tom Lewis
 
37,457

 
89,724

 
113,243

 
7,155

 
17,139

 
21,631

 
44,612

 
106,863

 
134,874

Kalyan Madhavan
 
51,359

 
123,023

 
155,272

 
9,810

 
23,499

 
29,659

 
61,169

 
146,522

 
184,931

Jibo Pan
 
39,544

 
94,723

 
119,553

 
7,554

 
18,094

 
22,837

 
47,098

 
112,817

 
142,390

Paul Joiner
 
36,375

 
87,132

 
109,973

 
6,948

 
16,644

 
21,007

 
43,323

 
103,776

 
130,980

(1) Amounts are from Table A.
(2) Amounts represent interest on the Deferred Awards at 6 percent, compounded annually.
Our named executive officers also participate in the 2015 LTIP, which provides cash-based award opportunities for these officers (as well as our other executive officers) based on the achievement of performance goals for the period from January 1, 2015 through December 31, 2017 (the "2015-2017 Performance Period"). The performance goals under the 2015 LTIP were established by the Board of Directors in December 2014 and are based upon growth objectives relating to our advances, letters of credit and earnings. Each of the three performance goals under the 2015 LTIP has been assigned a specific percentage weight together with a threshold, target and maximum achievement level. The results for each performance goal will be multiplied by the assigned percentage weight to determine its contribution to the overall 2015 LTIP goal achievement. For all of the named executive officers, the potential award payments under the 2015 LTIP can be 50 percent of salary (if the threshold objective is achieved for each of the performance goals), 100 percent of salary (if the target objective is achieved for each of the performance goals) or 150 percent of salary (if the maximum objective is achieved for each of the performance goals). For purposes of the 2015 LTIP, salary means the executive’s average base salary during the 2015-2017 Performance Period. Given the number of variables involved in the calculation of the 2015 LTIP awards and the interpolation of achievement levels between threshold and target and between target and maximum, the ultimate payouts (other than the maximum payouts) could vary significantly. For instance, the 2015 LTIP payouts could be substantially less than the threshold amounts if we achieve one or two (but not all three) of the threshold objectives relating to the 2015 LTIP goals. Similarly, because achievement levels between threshold and target and between target and maximum are interpolated, the ultimate 2015 LTIP payouts could vary significantly between the threshold and maximum amounts. Awards become vested under the 2015 LTIP only if the performance goals for the 2015-2017 Performance Period have been met and the awards have received final approval by the Board of Directors following the end of the three-year performance period. If an executive officer's employment is terminated for any reason during the 2015-2017 Performance Period, his or her unvested 2015 LTIP awards will generally be forfeited. Awards under the 2015 LTIP are payable no later than March 15, 2018. Table C sets forth an estimate of the possible 2015 LTIP awards that can be earned by our named executive officers for the 2015-2017 Performance Period. The threshold, target and maximum amounts were computed based upon the assumption that we will achieve the threshold objective for each of our three 2015 LTIP performance goals, the target objective for each of our three 2015 LTIP performance goals, and the maximum objective for each of our three 2015 LTIP performance goals, respectively.
TABLE C
 
 
 
 
 
 
 
 
 
Estimated Possible Payouts in Early 2018 Under
Non-Equity Incentive Plan Awards for 2015 LTIP
Name
 
Threshold ($)
 
Target ($)
 
Maximum ($)
Sanjay Bhasin
 
336,521

 
673,042

 
1,009,563

Tom Lewis
 
169,196

 
338,392

 
507,588

Kalyan Madhavan
 
226,294

 
452,588

 
678,882

Jibo Pan
 
172,158

 
344,316

 
516,474

Paul Joiner
 
164,309

 
328,618

 
492,927


112


At the time the 2015 LTIP was approved, it was contemplated that a short-term (one-year) incentive plan would be adopted for 2017 and that such plan would provide our President and Chief Executive Officer and other named executive officers with the opportunity to earn incentives up to 60 percent and 43.75 percent, respectively, of their 2017 base salaries (which incentives would have been payable in their entirety no later than March 15, 2018) in addition to the incentives that can be earned under the 2015 LTIP. However, as stipulated in the 2015 LTIP, under no circumstances can an executive officer earn more than 1.5 times his or her 2017 base salary when the 2017 short-term and 2015 LTIP incentive awards are combined for 2017. To ensure that our executive officers would not be adversely impacted in 2017 by the adoption of a short-term incentive plan that included a deferral component, the Board of Directors determined it was appropriate to include a one-time Make-Whole Award in the 2017 EIP.
The Make-Whole Award represents the difference in the 2017 earning opportunity that is payable in early 2018 between the Current Award opportunity provided by the 2017 EIP and the annual short-term incentive that could have been earned (and which would have been payable in early 2018) if we had implemented a short-term incentive plan for 2017 in the form that was contemplated at the time the 2015 LTIP was adopted (which plan would have provided for a 100 percent payout of the earned incentive in early 2018 vs. the 50 percent payout provided by the Current Award component of the 2017 EIP). The Make-Whole Award is based upon the achievement level of the 2017 Performance Goals and it becomes earned and vested on December 31, 2017. Like the Current Award, the Make-Whole Award is payable no later than March 15, 2018.
At the maximum achievement level, the Make-Whole Award provides our President and Chief Executive Officer with the opportunity to earn an additional incentive equal to 12.5 percent of his 2017 base salary, which percentage was derived by multiplying his new, post-2016 maximum Annual Award opportunity (95 percent of salary) by 50 percent (i.e., the equivalent of a Current Award at the maximum achievement level) and then subtracting the result from his pre-2017 maximum annual short-term incentive opportunity (60 percent of salary). At the maximum achievement level, the Make-Whole Award provides each of our other named executive officers with the opportunity to earn an additional incentive equal to 11.25 percent of his 2017 base salary, which percentage was derived by multiplying their new, post-2016 maximum Annual Award opportunity (65 percent of salary) by 50 percent (i.e., the equivalent of a Current Award at the maximum achievement level) and then subtracting the result from their pre-2017 maximum annual short-term incentive opportunity (43.75 percent of salary). However, as described above, in no event can an executive officer earn more than 1.5 times his or her 2017 base salary when all of the awards are combined for 2017 (that is, the Current Award and Make-Whole Award provided by the 2017 EIP and the long-term award provided by the 2015 LTIP). Table D sets forth an estimate of the 2017 Current Award (from Table A) and the 2017 Make-Whole Award that each named executive officer can earn in 2017 (and receive in early 2018). The threshold, target and maximum amounts for the 2017 Make-Whole Awards were computed based upon the same assumptions that were used to compute the threshold, target and maximum amounts for the 2017 Current Awards.
TABLE D
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated Possible Payouts in Early 2018 Under Non-Equity Incentive Plan Awards for 2017 EIP
 
 
2017 Current Award(1)
 
2017 Make-Whole Award
 
Total 2017 EIP Awards That Can Be Fully Earned in 2017
Name
 
Threshold
 ($)
 
Target
($)
 
Maximum
 ($)
 
Threshold
 ($)
 
Target
($)
 
Maximum
 ($)
 
Threshold
 ($)
 
Target
($)
 
Maximum
 ($)
Sanjay Bhasin
 
125,063

 
279,125

 
344,375

 
48,937

 
77,575

 
90,625

 
174,000

 
356,700

 
435,000

Tom Lewis
 
37,458

 
89,724

 
113,244

 
23,519

 
35,280

 
39,199

 
60,977

 
125,004

 
152,443

Kalyan Madhavan
 
51,359

 
123,023

 
155,272

 
32,249

 
48,373

 
53,748

 
83,608

 
171,396

 
209,020

Jibo Pan
 
39,545

 
94,723

 
119,553

 
24,830

 
37,245

 
41,384

 
64,375

 
131,968

 
160,937

Paul Joiner
 
36,376

 
87,133

 
109,973

 
22,840

 
34,261

 
38,067

 
59,216

 
121,394

 
148,040

(1) Amounts are from Table A.

Table E combines the possible Current Awards and Make-Whole Awards under the 2017 EIP (from Table D) with the possible 2015 LTIP awards (from Table C) and represents the total non-equity incentive plan compensation that can be earned by our named executive officers in 2017 and received in early 2018. The sum of the maximum 2017 EIP awards and the maximum 2015 LTIP awards presented in the table do not equal the total maximum 2017 incentive opportunities as each executive's maximum incentive compensation for 2017 cannot exceed 1.5 times his 2017 salary.

113


TABLE E
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Estimated Non-Equity Incentive Plan Awards That Can Be Earned in 2017 and Received in Early 2018
 
 
Total 2017 EIP Awards That Can Be Fully Earned in 2017 (1)
 
2015 LTIP (2)
 
Total 2017 Incentive Opportunities
 
 
Threshold
 ($)
 
Target
($)
 
Maximum
 ($)
 
Threshold
 ($)
 
Target
 ($)
 
Maximum
 ($)
 
Threshold
 ($)
 
Target
 ($)
 
Maximum
 ($)
Sanjay Bhasin
 
174,000

 
356,700

 
435,000

 
336,521

 
673,042

 
1,009,563

 
510,521

 
1,029,742

 
1,087,500

Tom Lewis
 
60,977

 
125,004

 
152,443

 
169,196

 
338,392

 
507,588

 
230,173

 
463,396

 
522,663

Kalyan Madhavan
 
83,608

 
171,396

 
209,020

 
226,294

 
452,588

 
678,882

 
309,902

 
623,984

 
716,640

Jibo Pan
 
64,375

 
131,968

 
160,937

 
172,158

 
344,316

 
516,474

 
236,533

 
476,284

 
551,784

Paul Joiner
 
59,216

 
121,394

 
148,040

 
164,309

 
328,618

 
492,927

 
223,525

 
450,012

 
507,567

(1) Amounts are from Table D.
(2) Amounts are from Table C.
Because we no longer intend to offer long-term incentive plans to our executive officers, the Board of Directors determined that it was also appropriate to grant in 2017 a one-time special Gap Year Award to our executive officers to address a gap in the executives’ incentive opportunity for 2019 (payable in early 2020). The incentive opportunities for 2017 (which will be payable in early 2018) are described above. For the incentives that can be earned in 2018 (which will be payable in early 2019), it is anticipated that our executive officers will derive 50 percent of their incentive opportunity from a 2018 executive incentive plan similar to the 2017 EIP (via the Current Award component of that plan) and 50 percent of their incentive opportunity from the 2016 LTIP (for a discussion of the 2016 LTIP, refer to the "Grants of Plan-Based Awards" section beginning on page 118). In connection with the approval of the 2017 EIP and as a result of the increased percentage opportunities being implemented for 2017 and future years, the 2016 LTIP was amended (by way of a Board resolution) to eliminate the additional incentives of up to 15 percent of the executives’ base salaries that could have been earned if certain growth objectives associated with that incentive plan were achieved (which incentives were available only in the event that the overall goal achievement for that plan’s safety and soundness goals met a threshold level of achievement). For the incentives that can be earned in 2019 (which will be payable in early 2020), it is anticipated that our executive officers will derive 50 percent of their incentive opportunity from a 2019 executive incentive plan similar to the 2017 EIP (via the Current Award component of that plan) and 50 percent of their incentive opportunity from the Gap Year Award provided by the 2017 EIP. In 2020 and years thereafter, it is anticipated that the executive officers’ incentive opportunities will be derived solely from plans that are similar to the 2017 EIP, with 50 percent derived from a Current Award and 50 percent derived from a Deferred Award. For example, our executive officers are expected to derive 50 percent of their 2020 incentive opportunity from a Current Award provided by a 2020 executive incentive plan similar to the 2017 EIP and the other 50 percent from the Deferred Award under the 2017 EIP.
The 2017-2019 Performance Goals under the 2017 EIP were established by the Board of Directors for the Gap Year Award and are based upon growth objectives relating to our advances, mortgage loans held for portfolio and retained earnings as well as factors relating to our market value of equity, internal controls and Finance Agency examination findings. Each of the 2017-2019 Performance Goals has been assigned a percentage weight of either 15 percent or 20 percent together with a threshold, target and maximum objective. For our President and Chief Executive Officer, the incentive factor for each 2017-2019 Performance Goal can be 0 percent (if the threshold objective is not met), 50 percent (if results are equal to the threshold objective), 75 percent (if results are equal to the target objective) or 95 percent (if results are equal to or greater than the maximum objective). For our other named executive officers, the incentive factor for each 2017-2019 Performance Goal can be 0 percent (if the threshold objective is not met), 30 percent (if results are equal to the threshold objective), 50 percent (if results are equal to the target objective) or 65 percent (if results are equal to or greater than the maximum objective).
Achievement levels between threshold and target and between target and maximum for each 2017-2019 Performance Goal will be interpolated in a manner as determined by the Committee. The results for each 2017-2019 Performance Goal will be multiplied by the assigned percentage weight to determine its contribution to the overall Gap Year Award percentage in the same manner as described above for the 2017 Annual Awards. The percentages derived from this calculation for each 2017-2019 Performance Goal will be added together to derive each executive’s overall goal percentage for the Gap Year Award, which will then be multiplied by the executive’s average base salary during the 2017-2019 performance period ("Gap Year Salary"). The result of that calculation will then be multiplied by 50 percent to determine the executive’s final Gap Year Award.
The maximum Gap Year Awards that can be earned by the executive officers under the 2017 EIP are equal to 47.5 percent of Gap Year Salary for our President and Chief Executive Officer and 32.5 percent of Gap Year Salary for all other executive officers. These percentages were derived by multiplying the executives’ anticipated maximum annual potential award

114


percentages in 2019 (95 percent of salary and 65 percent of salary, respectively) by 50 percent. It is anticipated that the other 50 percent of the executive officers’ 2019 incentive opportunity will be derived from the Current Award component of a 2019 executive incentive plan similar to the 2017 EIP.
Given the number of variables involved in the calculation of the Gap Year Awards, the ultimate payouts (other than the maximum payouts) could vary significantly. For instance, the Gap Year Awards could be less than 25 percent of salary for our President and Chief Executive Officer and 15 percent of salary for all of our other executive officers (that is, less than threshold achievement) if we fail to achieve the threshold objective for one or more of the 2017-2019 Performance Goals but achieve the threshold objective for each of the other 2017-2019 Performance Goals. At the target achievement level, the Gap Year Award payouts for our President and Chief Executive Officer and all other executive officers would be 37.5 percent and 25 percent, respectively.
An executive’s final Gap Year Award will become earned and vested on December 31, 2019 if: (i) the 2017-2019 Performance Goals have been met; (ii) the executive receives at least a "Meets Expectations" performance rating for 2019; and (iii) the executive is actively employed on December 31, 2019. An executive’s Gap Year Award is payable no later than March 15, 2020. Table F sets forth an estimate of the Gap Year Awards that can be earned by our named executive officers for the 2017-2019 performance period. The threshold, target and maximum amounts were computed based upon the assumption that we will achieve the threshold objective for each of our 2017-2019 Performance Goals, the target objective for each of our 2017-2019 Performance Goals, and the maximum objective for each of our 2017-2019 Performance Goals, respectively. For purposes of estimating the possible Gap Year Award payouts, the average base salaries were computed based upon the assumption that the named executive officers' base salaries presented in the table on page 110 would remain unchanged in 2018 and 2019. As a result, the estimated possible Gap Year Award payments for the named executive officers could increase depending upon the actions, if any, that are taken in December 2017 and December 2018 with respect to the named executive officers' base salaries for 2018 and 2019, respectively.
TABLE F
 
 
 
 
 
 
 
 
 
Estimated Possible Payouts (Gap Year Awards) in Early 2020 Under Non-Equity Incentive Plan Awards for 2017 EIP
Name
 
Threshold ($)
 
Target ($)
 
Maximum ($)
Sanjay Bhasin
 
181,250

 
271,875

 
344,375

Tom Lewis
 
52,266

 
87,111

 
113,244

Kalyan Madhavan
 
71,664

 
119,440

 
155,272

Jibo Pan
 
55,178

 
91,964

 
119,553

Paul Joiner
 
50,757

 
84,595

 
109,973

If an executive officer's employment is terminated for any reason other than death, disability or a reduction in force (as defined in the 2017 EIP), his or her unvested 2017 EIP awards will be forfeited.
If an executive officer’s employment is terminated due to death or disability, then his or her Current Award will be treated as earned and vested based on the portion of 2017 during which the executive was employed based on the assumption that we would have achieved the 2017 Performance Goals at the target achievement level. The executive’s pro rata Deferred Award and his or her entire Gap Year Award will be treated as fully earned and vested based on the assumption that we would have achieved the 2017 Performance Goals and the 2017-2019 Performance Goals, respectively, at the target achievement level. Payment of awards in connection with a death or disability would be made in a single lump sum within 75 days of the executive’s termination date.
If an executive’s employment is terminated due to a reduction in force, then the Current Award and Make-Whole Award will be treated as earned and vested based on the portion of 2017 during which the executive was employed and the extent to which the 2017 Performance Goals are ultimately satisfied. The executive’s pro rata Deferred Award and his or her entire Gap Year Award will be treated as fully earned and vested upon completion of the three-year performance periods applicable to each award and will be based upon the extent to which the 2017 Performance Goals and the 2017-2019 Performance Goals, respectively, are achieved. Payment of awards in connection with a reduction in force would be made according to the normal scheduled dates and would be contingent upon the executive executing a severance agreement with the Bank.
If we are involved in a merger, consolidation, reorganization or sale of all or substantially all of our assets, or we are liquidated or dissolved (collectively, a "Reorganization"), subject to certain exceptions for which the Director of the Finance Agency has determined should not be a basis for accelerated vesting, then the Current Award will be treated as earned and vested on a pro rata basis while any pro rata Deferred Award or entire Gap Year Award which has not otherwise become earned and vested as of the date of the Reorganization will be treated as fully earned and vested effective as of the Reorganization date based on the

115


assumption that we would have achieved the 2017 Performance Goals and the 2017-2019 Performance Goals, as applicable, at the target achievement level. Payment of awards in connection with a Reorganization would be made in a single lump sum on the date on which the Reorganization occurs.
The Board of Directors may adjust the 2017 Performance Goals and/or the 2017-2019 Performance Goals to ensure the purposes of the 2017 EIP are served. In addition, the Board of Directors, in its discretion, may consider extraordinary occurrences when assessing performance results and determining award payments. Extraordinary occurrences mean those events that, in the opinion and at the discretion of the Board of Directors, are outside the significant influence of the executive or us and are likely to have a significant unanticipated effect, whether positive or negative, on our operating and/or financial results.
Any awards not yet paid may be reduced or eliminated if any actual losses or other measures or aspects of performance are realized which would have caused a reduction in the amount of the awards. Further, if during the most recent examination of us by the Finance Agency, the Finance Agency identified an unsafe or unsound practice or condition that is material to the financial operation of the Bank within the executive’s area(s) of responsibility and such unsafe or unsound practice or condition is not subsequently resolved in our favor, then all of an executive’s vested and unvested awards under the 2017 EIP will be forfeited. Any future payments for a vested award will cease and we will have no further obligation to make such payments.
By resolution, the Board of Directors may reduce or eliminate an award that is otherwise earned under the 2017 EIP but not yet paid if the Board of Directors finds that a serious, material safety and soundness problem or a serious, material risk management deficiency exists at the Bank, or if: (i) operational errors or omissions result in material revisions to our financial results, the information submitted to the Finance Agency, or the data used to determine incentive payouts; (ii) the submission of material information to the SEC, the FHLBanks Office of Finance, and/or the Finance Agency is significantly past due; or (iii) we fail to make sufficient progress, as determined by the Board of Directors, in the timely remediation of significant examination, monitoring and other supervisory findings.
The Board of Directors may amend the 2017 EIP at any time in its sole discretion. However, the Board of Directors may not amend the 2017 EIP to reduce an executive’s awards as determined on the day immediately preceding the effective date of the amendment or to otherwise retroactively impair or adversely affect the rights of an executive.
In addition, the Board of Directors may terminate the 2017 EIP at any time in its sole discretion. Absent an amendment to the contrary, incentives that were earned and vested prior to the termination will be paid at the times and in the manner provided for by the 2017 EIP at the time of the termination.


Compensation Committee Report
The Compensation and Human Resources Committee has reviewed and discussed with management the Compensation Discussion and Analysis found on pages 96-116 of this report. Based on our review and discussions, we recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Bank’s Annual Report on Form 10-K.

The Compensation and Human Resources Committee

Patricia P. Brister, Chairman
Mary E. Ceverha, Vice Chairman
C. Kent Conine
A. Fred Miller, Jr.
Sally I. Nelson
Joseph F. Quinlan, Jr.
Robert M. Rigby

116




SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation for 2016, 2015 and 2014 (to the extent applicable) of our President and Chief Executive Officer (who joined the Bank on May 12, 2014); our Executive Vice President and Chief Financial Officer (who served as our Chief Accounting Officer during the period from January 1, 2014 through June 10, 2014 and as our principal financial officer during all of 2016, 2015 and 2014), and our three other most highly compensated executive officers who were serving as executive officers at the end of 2016. Collectively, the five individuals presented in the table are referred to as our "named executive officers." Because Jibo Pan, who joined the Bank on August 11, 2014, was a named executive officer in 2016 and 2015, but not 2014, only his 2016 and 2015 compensation information is presented. Kalyan Madhavan joined the Bank on August 11, 2014.
Name and
Principal Position
 
Year
 
Salary ($)
 
Bonus ($)
 
Stock
Awards ($)
 
Option
Awards ($)
 
Non-equity
Incentive Plan
Compensation ($) (3)
 
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings ($) (4)
 
All Other
Compensation ($) (5)
 
Total ($)
Sanjay Bhasin
 
2016
 
656,625

 

 

 

 
444,751

 
93,000

 
39,397

 
1,233,773

President/CEO
 
2015
 
637,500

 
100,000

(1) 

 

 
350,849

 
22,000

 
37,894

 
1,148,243

 
 
2014
 
400,240

 
150,000

(1) 

 

 
199,531

 
153,000

 
237,248

 
1,140,019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tom Lewis
 
2016
 
338,293

 

  

 

 
182,620

 
135,000

 
20,297

 
676,210

EVP/Chief Financial
 
2015
 
328,440

 

 

 

 
174,051

 

 
20,329

 
522,820

Officer
 
2014
 
310,615

 
22,518

(1) 

 

 
136,986

 
304,000

 
50,407

 
824,526

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kalyan Madhavan
 
2016
 
446,505

 

 

 

 
229,560

 
94,000

 
26,758

 
796,823

EVP/Group Head,
 
2015
 
433,500

 
61,882

(1) 

 

 
172,208

 
32,000

 
53,255

 
752,845

Members & Markets
 
2014
 
167,548

 
95,479

(1) 

 

 
58,880

 
136,000

 
165,732

 
623,639

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jibo Pan
 
2016
 
343,791

 

 

 

 
174,456

 
89,000

 
20,628

 
627,875

EVP/Head of Capital
 
2015
 
321,300

 
45,866

(1) 

 

 
127,636

 
10,000

 
18,193

 
522,995

Markets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paul Joiner
 
2016
 
328,523

 

  

 

 
178,644

 
34,000

 
19,711

 
560,878

EVP/Chief Strategy Officer
 
2015
 
318,954

 

 

 

 
172,717

 

 
19,137

 
510,808

 
 
2014
 
312,700

 
165,635

(2) 

 

 
141,610

 
403,000

 
18,762

 
1,041,707

___________________________________
(1) 
Amounts represent discretionary awards for services rendered in the indicated years. All of the amounts shown for 2015 were paid to the executive officers in March 2016. All of the amounts shown for 2014 were paid to the executive officers in March 2015.
(2) 
The amount reported for Mr. Joiner consists of a $150,000 special bonus in recognition of his services as our Interim President and Chief Executive Officer during the period from September 17, 2013 through May 11, 2014 and a $15,635 discretionary award for the other services he rendered in 2014. The special bonus was paid to Mr. Joiner in May 2014 and his discretionary award was paid in March 2015.
(3) 
Amounts for 2016 represent VPP awards earned for services rendered in 2016 and LTIP awards earned for services rendered during 2014, 2015 and 2016; the VPP and LTIP awards for Messrs. Bhasin, Madhavan and Pan were prorated based on the dates that each officer joined the Bank in 2014. Amounts for 2015 represent VPP awards earned for services rendered in 2015 and, for Mr. Lewis and Mr. Joiner, LTIP awards earned for services rendered during 2013, 2014 and 2015. Amounts for 2014 represent VPP awards earned for services rendered in 2014 and, for Mr. Lewis and Mr. Joiner, LTIP awards earned for services rendered during 2012, 2013 and 2014. The amounts shown for 2016 were paid to the executive officers on February 15, 2017. The amounts shown for 2015 and 2014 were paid to the executive officers in March 2016 and March 2015, respectively. The components of this column for 2016 are provided in the table below entitled "Components of Non-Equity Incentive Plan Compensation for 2016."
(4) 
Amounts reported in this column for 2016, 2015 and 2014 are attributable solely to the change in the actuarial present value of the named executive officers’ accumulated benefit under the Pentegra Defined Benefit Plan for Financial Institutions during those years (or, in the case of Messrs. Bhasin and Madhavan, the period during which each of them was employed by us in 2014), calculated for each such period in accordance with the assumptions and limitations set forth in the narrative following the pension benefits table on pages 120-123. None of our named executive officers received preferential or above-market earnings on nonqualified deferred compensation during 2016, 2015 or 2014. In 2015, the actuarial present value of the accumulated pension benefits for Mr. Lewis and Mr. Joiner decreased by $45,000 and $129,000, respectively.
(5) 
The components of this column for 2016 are provided in the table below entitled "Components of All Other Compensation for 2016."

117


Components of Non-Equity Incentive Plan Compensation for 2016
Name
 
2016 VPP ($)
 
2014 LTIP ($) (1)
 
Total Non-Equity Incentive Plan
Compensation ($)
 
 
 
Sanjay Bhasin
 
205,628

 
239,123

 
444,751

Tom Lewis
 
67,904

 
114,716

 
182,620

Kalyan Madhavan
 
108,303

 
121,257

 
229,560

Jibo Pan
 
83,389

 
91,067

 
174,456

Paul Joiner
 
65,943

 
112,701

 
178,644

_______________________________________
(1) The 2014 LTIP covered the three-year performance period from January 1, 2014 through December 31, 2016. Messrs. Bhasin, Madhavan and Pan participated in the 2014 LTIP from the dates that each officer joined us through December 31, 2016.
Components of All Other Compensation for 2016
Name
 
Bank Contributions to Vested Defined Contribution Plans
 
 
 
 
 
 
401(k)/Thrift
Plan ($)
 
Nonqualified
Deferred Compensation
 Plan (NQDC Plan) ($)
 
 
Perquisites ($)
 
Tax
Gross ups ($)
Total All Other
Compensation ($)
 
 
 
 
Sanjay Bhasin
 
15,900
 
23,497

 
 
 

39,397

Tom Lewis
 
15,900
 
4,397

 
 
 

20,297

Kalyan Madhavan
 
15,900
 
10,858

 
 
 

26,758

Jibo Pan
 
15,900
  
4,728

 
 
 

20,628

Paul Joiner
 
15,900
 
3,811

 
 
*
 

19,711

* Amount was less than $200.

GRANTS OF PLAN-BASED AWARDS
The following table sets forth an estimate of the possible VPP awards that could have been earned by our named executive officers for 2016. The threshold amounts were computed based upon the assumption that we would only achieve the threshold objective for each of the six corporate operating goals that had a threshold objective and that we would accomplish the four corporate operating goals that had only a pass/fail objective (40 percent overall corporate goal achievement). The target amounts were computed based upon the assumption that we would achieve the target objective for each of our 11 corporate operating goals that had a target objective and that we would accomplish the four corporate operating goals that had only a pass/fail objective (82 percent overall corporate goal achievement). The maximum amounts were computed based upon the assumption that we would achieve the stretch objective for each of our 11 corporate operating goals that had a stretch objective and that we would accomplish the four corporate operating goals that had only a pass/fail objective (100 percent overall corporate goal achievement). In addition, the threshold, target and maximum amounts presented in the table below were based upon the assumption that Mr. Bhasin would receive a perfect score on his performance appraisal. The threshold, target and maximum amounts were further based upon the assumption that each of our named executive officers other than Mr. Bhasin would receive at least a “Meets Expectations” performance rating. Given the number of variables involved in the calculation of our VPP awards, the ultimate payouts (other than the maximum payouts) can vary significantly. For instance, the VPP awards could have been less than the threshold amounts if we achieved one or some (but not all) of the threshold objectives relating to the six corporate operating goals that had such an objective and/or we failed to accomplish one or more of the four corporate operating goals that had only a pass/fail objective. In addition, achievement levels between threshold and target (as it related to six of the goals) and between target and maximum (as it related to 11 of the goals) are interpolated and, as a result, the ultimate VPP awards payable to the named executive officers could vary significantly between the threshold and maximum amounts presented in the table. The 2016 VPP awards that were actually earned by our named executive officers are presented in the Non-Equity Incentive Plan Compensation column in the Summary Compensation Table above and are described more fully in the Compensation Discussion and Analysis on pages 96 through 116.


118


 
 
Estimated Possible Payouts Under
Non-Equity Incentive Plan Awards for 2016 VPP
Name
 
Threshold ($)
 
Target ($)
 
Maximum ($)
Sanjay Bhasin
 
121,886

 
191,694

 
221,611

Tom Lewis
 
29,601

 
60,681

 
74,002

Kalyan Madhavan
 
47,211

 
96,783

 
118,028

Jibo Pan
 
36,351

 
74,519

 
90,877

Paul Joiner
 
28,746

 
58,929

 
71,864

On December 3, 2015, the Board of Directors, acting upon a recommendation from the Committee, approved our 2016 LTIP, subject to the Finance Agency's review. On January 21, 2016, the Finance Agency informed us that it did not object to the 2016 LTIP. The 2016 LTIP was retroactively effective as of January 1, 2016.
The 2016 LTIP provides cash-based award opportunities for all of our executive officers (including our named executive officers) based on the achievement of performance goals for the period from January 1, 2016 through December 31, 2018 (the "2016-2018 Performance Period"). The performance goals under the 2016 LTIP were established by the Board of Directors and are based upon factors that relate to our safety and soundness (hereinafter referred to as the "safety and soundness goals"). Prior to the modifications discussed in the next paragraph, the 2016 LTIP also provided additional incentives that were tied to several growth objectives.
By way of a resolution that was approved on December 8, 2016, the Board of Directors, acting upon a recommendation from the Committee, revised the terms of the 2016 LTIP to: (1) increase the incentive opportunities associated with the plan's safety and soundness goals; (2) eliminate the factoring that would have been performed based on the maximum incentive award percentage (for example, using 30 percent of salary for threshold, 50 percent of salary for target and 65 percent of salary for maximum rather than multiplying the then maximum award percentage by 60 percent, 80 percent and 100 percent to arrive at these achievement levels); and (3) eliminate the additional incentives associated with the plan's growth objectives. These changes were made to align the provisions of the 2016 LTIP with the new executive incentive plan structure that was put in place beginning in 2017, which structure will be phased in from 2017 to 2020 as existing incentive plans conclude (i.e., the 2015 LTIP, the 2016 LTIP and the long-term portion of the 2017 EIP).
Beginning in 2018, the threshold, target and maximum annual incentive awards that can be earned by our President and Chief Executive Officer will be 50 percent, 75 percent and 95 percent of his base salary, respectively. For all of our other executive officers, the threshold, target and maximum annual incentive awards that they can earn will be equal to 30 percent, 50 percent and 65 percent of their base salary, respectively. In the absence of these changes, our President and Chief Executive Officer's threshold, target and maximum incentive awards in 2018 would have been 36 percent, 48 percent and 60 percent of salary, respectively, before the additional incentives discussed below. For our other executive officers, the threshold, target and maximum incentive awards in 2018 would have been 26.25 percent, 35 percent and 43.75 percent of salary, respectively, before the additional incentives discussed below. As was the case prior to the modifications, 50 percent of our executive officers' 2018 incentive compensation will be derived from the 2016 LTIP. By way of example, for our executive officers other than our President and Chief Executive Officer, the 2016 LTIP payouts can be 15 percent (30 percent x 50 percent), 25 percent (50 percent x 50 percent) or 32.5 percent (65 percent x 50 percent) of salary at the threshold, target and maximum levels. Prior to the modifications, all of our executive officers would have had the opportunity in 2018 to earn additional incentives of up to 15 percent of their salary based on the achievement of certain growth objectives, provided our overall goal achievement relating to the 2016 LTIP's safety and soundness goals was at least 60 percent.
Each of the five safety and soundness goals under the 2016 LTIP has been assigned a percentage weight of 20 percent together with a threshold, target and stretch achievement level. For the Bank's President and Chief Executive Officer, the incentive factor can be 0 percent (if the threshold objective is not met), 50 percent (if results are equal to the threshold objective), 75 percent (if results are equal to the target objective) or 95 percent (if results are equal to or greater than the stretch objective). For our other executive officers, the incentive factor can be 0 percent (if the threshold objective is not met), 30 percent (if results are equal to the threshold objective), 50 percent (if results are equal to the target objective) or 65 percent (if results are equal to or greater than the stretch objective). LTIP achievement levels between threshold and target and between target and stretch for each safety and soundness goal will be interpolated in a manner as determined by the Committee. The results for each safety and soundness goal will be multiplied by 20 percent to determine its contribution to the overall 2016 LTIP goal achievement. For example, if the target objective is achieved for one of the goals, then the contribution of that goal to the President and Chief Executive Officer's overall LTIP goal percentage would be 15 percent (20 percent x 75 percent). For the other named executive officers, the contribution of that same goal to their overall LTIP goal percentage would be 10 percent (20 percent x 50 percent). The percentages derived from this calculation for each performance goal will be added together to derive each executive's overall goal percentage for the 2016 LTIP, which percentage will then be multiplied by the executive's average

119


base salary for the 2016-2018 Performance Period. The result of this calculation will then be multiplied by 50 percent to determine the executive's final 2016 LTIP award. It is our expectation that the other 50 percent of each executive officer's 2018 incentive opportunity will be derived from his participation in a 2018 Executive Incentive Plan similar to the 2017 EIP. Awards become vested under the 2016 LTIP only if the performance goals for the 2016-2018 Performance Period have been met and the awards have received final approval by the Board of Directors following the end of the three-year performance period. Awards under the 2016 LTIP are payable no later than March 15, 2019 provided the Finance Agency has no objections.
If an executive officer’s employment is terminated for any reason during the 2016-2018 Performance Period, his or her unvested 2016 LTIP awards will generally be forfeited.
Among other reasons, the Board of Directors may exercise its discretion to reduce the amount of the 2016 LTIP awards for one or more of our executive officers if during the 2016-2018 Performance Period: (i) operational errors or omissions result in material revisions to our financial results, the information submitted to the Finance Agency, or the data used to determine incentive award amounts; (ii) in 2016, the submission of information to the SEC, the FHLBanks Office of Finance, and/or the Finance Agency was not provided in a timely manner; (iii) we fail to make sufficient progress, as determined and communicated to us by the Finance Agency, in the timely remediation of examination, monitoring, and other supervisory findings/matters requiring executive management’s attention; or (iv) an executive officer is determined by the Board of Directors to have committed a violation of our Code of Conduct and Ethics for Employees or similar policy that is sufficiently significant to warrant a reduction or forfeiture of the executive's award. Further, the Board of Directors may remove an executive officer from the 2016 LTIP at any time in its sole discretion.
The following table sets forth an estimate of the possible 2016 LTIP awards that can be earned by our named executive officers. The threshold amounts were computed based upon the assumption that we will achieve the threshold objective for each of our five 2016 LTIP goals (50 percent and 30 percent overall LTIP goal achievement for our President and Chief Executive Officer and all other named executive officers, respectively). The target amounts were computed based upon the assumption that we will achieve the target objective for each of our five 2016 LTIP goals (75 percent and 50 percent overall LTIP goal achievement for our President and Chief Executive Officer and all other named executive officers, respectively). The maximum amounts were computed based upon the assumption that we will achieve the stretch objective for each of our five 2016 LTIP goals (95 percent and 65 percent overall LTIP goal achievement for our President and Chief Executive Officer and all other named executive officers, respectively). For purposes of estimating the possible payouts under the 2016 LTIP, the average base salaries were computed based upon the assumption that the named executive officers' base salaries presented in the table on page 110 would remain unchanged in 2018. As a result, the estimated possible 2016 LTIP payments for the named executive officers could increase depending upon the actions, if any, that are taken in December 2017 with respect to the named executive officers' base salaries for 2018. The ultimate 2016 LTIP payouts (other than the maximum payouts) could vary significantly from the amounts presented in the table given the number of variables involved in the calculation of the final payouts. For instance, the 2016 LTIP payouts could be substantially less than the threshold amounts if we achieve one or some (but not all) of the threshold objectives relating to the five 2016 LTIP goals. Similarly, because achievement levels between threshold and target and between target and maximum are interpolated, the ultimate 2016 LTIP payouts could vary significantly between the threshold and maximum amounts presented in the table.
 
 
Estimated Possible Payouts Under
Non-Equity Incentive Plan Awards for 2016 LTIP
Name
 
Threshold ($)
 
Target ($)
 
Maximum ($)
Sanjay Bhasin
 
175,552

 
263,328

 
333,549

Tom Lewis
 
51,759

 
86,265

 
112,144

Kalyan Madhavan
 
70,101

 
116,836

 
151,886

Jibo Pan
 
53,975

 
89,959

 
116,946

Paul Joiner
 
50,264

 
83,773

 
108,905


PENSION BENEFITS
All of our regular full-time employees hired prior to January 1, 2007 participate in the Pentegra Defined Benefit Plan for Financial Institutions (“Pentegra DB Plan”), a tax-qualified multiemployer defined benefit pension plan. The Pentegra DB Plan also covers any of our regular full-time employees who were hired on or after January 1, 2007, provided that the employee had prior service with a financial services institution that participated in the Pentegra DB Plan, during which service the employee was covered by such plan. Effective July 1, 2015, coverage was extended to include all of our non-highly compensated employees (as defined by Internal Revenue Service rules) who were hired on and after January 1, 2007 but before August 1, 2010. Concurrently, we amended our participation in the Pentegra DB Plan such that some of the benefits offered by the plan were reduced prospectively (that is, on and after July 1, 2015) for employees who were hired prior to July 1, 2003. Messrs.

120


Lewis and Joiner were hired prior to July 1, 2003. Messrs. Bhasin, Madhavan and Pan, each of whom was hired after January 1, 2007, participate in the Pentegra DB Plan because each of them had prior service with the Federal Home Loan Bank of Chicago during which service each of them was covered by the plan. We do not offer any other defined benefit plans (including supplemental executive retirement plans) that provide for specified retirement benefits. The following table shows the present value of the current accrued pension benefit and the number of years of credited service for each of our named executive officers as of December 31, 2016. The number of years of credited service and the pension benefits shown for Messrs. Bhasin, Madhavan and Pan are inclusive of their prior service with the Federal Home Loan Bank of Chicago.
Name
 
Plan Name
 
Number of
Years of Credited
Service (#)
 
Present Value
of Accumulated
Benefit ($)
 
Payments During
Last Fiscal
Year ($)
Sanjay Bhasin
 
Pentegra DB Plan
 
12.1

 
541,000

 

Tom Lewis
 
Pentegra DB Plan
 
13.9

 
979,000

 

Kalyan Madhavan
 
Pentegra DB Plan
 
11.2

 
544,000

 

Jibo Pan
 
Pentegra DB Plan
 
13.8

 
529,000

 

Paul Joiner
 
Pentegra DB Plan
 
30.0

 
2,732,000

 

The regular form of retirement benefit under the Pentegra DB Plan is a single life annuity that includes a lump sum death benefit. The normal retirement age is 65, but the plan provides for an unreduced retirement benefit beginning at age 60 as it relates solely to benefits that were accrued prior to July 1, 2015 (for employees hired prior to July 1, 2003) or age 62 (for employees hired on or after July 1, 2003 that meet the eligibility requirements to participate in the Pentegra DB Plan and, for employees hired prior to July 1, 2003, the benefits that those employees accrue on and after July 1, 2015). For employees who are not eligible to participate in the Pentegra DB Plan, we offer an enhanced defined contribution plan.
Valuation Assumptions
The accumulated pension benefits reflected in the table above were calculated using the following assumptions:
Retirement at the earliest age at which retirement benefits may be received without any reduction in benefits (that is, benefits that have been accumulated through December 31, 2016 commence at age 62 for Messrs. Bhasin, Lewis, Madhavan and Pan and are discounted to December 31, 2016);
Mr. Joiner's accumulated benefit is not discounted as he was eligible to receive an unreduced benefit as of December 31, 2016;
Present values are calculated by weighting the present value of a benefit provided in the form of an annuity by 50 percent and the value of a benefit provided as a lump sum by 50 percent. The annuity benefit is calculated using a discount rate of 4.14 percent. The lump sum benefit is calculated using a discount rate of either 4.14 percent or, for those participants impacted by the Internal Revenue Code Section 415 limits, 5.50 percent (which is the discount rate used to calculate the maximum lump sum payable under Internal Revenue Code Section 415);
The annuity benefit is valued using the RP-2014 white collar worker annuitant table with mortality improvement scale MP-2016 and the lump sum benefit is valued using the applicable Internal Revenue Service mortality table for 2016; and
No pre-retirement decrements (i.e., no pre-retirement termination from any cause including but not limited to voluntary resignation, death or early retirement).
Tax Code Limitations
As a tax-qualified defined benefit plan, the Pentegra DB Plan is subject to limitations imposed by the Internal Revenue Code of 1986, as amended. Specifically, Section 415(b)(1)(A) of the Internal Revenue Code places a limit on the amount of the annual pension benefit that can be paid from a tax-qualified plan (for 2016, this amount was $210,000 at age 65). The annual pension benefit limit is less than $210,000 in the event that an employee retires before reaching age 65 (the extent to which the limit is reduced is dependent upon the age at which the employee retires, among other factors). In addition, Section 401(a)(17) of the Internal Revenue Code limits the amount of annual earnings that can be used to calculate a pension benefit (for 2016, this amount was $265,000).
From time to time, the Internal Revenue Service may increase the maximum compensation limit for qualified plans. Future increases, if any, would be expected to increase the value of the accumulated pension benefits accruing to our named executive officers. For 2017, the Internal Revenue Service increased the maximum compensation limit to $270,000 per year. In addition, the Internal Revenue Service increased the maximum allowable annual benefit to $215,000 for 2017.

121


Benefit Formula
Subject to the exceptions noted below for Messrs. Bhasin, Madhavan and Pan, the annual benefit payable under the Pentegra DB Plan (assuming a participant chooses a single life annuity with a lump sum death benefit) is calculated using the following formula:

3 percent x years of service credited prior to July 1, 2003 x high 36-month average compensation earned prior to July 1, 2015
plus

2 percent x years of service credited on or after July 1, 2003 x high 36-month average compensation for the entire period of participation in the Pentegra DB Plan

The high 36-month average compensation is the average of a participant’s highest 36 consecutive months of compensation. Compensation covered by the Pentegra DB Plan includes taxable compensation as reported on the executive officer’s W-2 (reduced by any receipts of compensation deferred from a prior year) plus any pre-tax contributions to our Section 401(k) plan and/or Section 125 cafeteria plan, subject to the 2016 Internal Revenue Code limitation of $265,000 per year. In 2016, the compensation of all of our named executive officers exceeded the Internal Revenue Code limit.
The plan limits the maximum years of benefit service for all participants to 30 years. As of December 31, 2016, Messrs. Bhasin, Lewis, Madhavan, Pan and Joiner had accumulated 2.6, 13.5, 2.3, 2.3 and 10.1 years of credited service, respectively, at the 2 percent service accrual rate. For Mr. Lewis and Mr. Joiner, the remainder of their service (0.4 and 19.9 years, respectively) has been credited at the 3 percent service accrual rate. While employed by the Federal Home Loan Bank of Chicago, Messrs. Bhasin, Madhavan and Pan accrued benefits at a service accrual rate of 2.25 percent. As a matter of policy, we do not grant extra years of credited service to participants in the Pentegra DB Plan.
Vesting
As of December 31, 2016, all of the named executive officers that participate in the Pentegra DB Plan were fully vested in their accrued pension benefits.
Early Retirement
Employees enrolled in the Pentegra DB Plan are eligible for early retirement at age 45 if hired prior to July 1, 2003. If hired on or after July 1, 2003 and before January 1, 2007, employees are eligible for early retirement at age 55 if they have at least 10 years of service with us. Employees hired on or after January 1, 2007 who meet the eligibility requirements to participate in the Pentegra DB Plan are eligible for early retirement at age 55 if they have at least 10 years of accrued benefit service in the Pentegra DB Plan, including prior credited service. If an employee wishes to retire before reaching his or her unreduced benefit age, an early retirement reduction factor (or penalty) is applied. If the sum of an employee’s age and benefit service (including any prior credited service) is at least 70, the “Rule of 70” would apply and the employee’s benefit would be reduced by 1.5 percent for each year that the benefit is paid prior to reaching his or her unreduced benefit age. If an employee hired prior to July 1, 2003 terminates his or her employment prior to attaining the Rule of 70, the portion of that employee’s benefit that was earned prior to July 1, 2015 would be reduced by 3 percent for each year that the benefit is paid prior to reaching age 60. The portion of the benefit earned by that employee on and after July 1, 2015 (if commenced before reaching age 62) would be reduced by 6 percent per year from age 62 to age 60, 4 percent per year from age 60 to age 55 and 3 percent per year from age 55 to age 45. The penalties that apply from age 55 until the employee reaches age 62 (as described in the immediately preceding sentence) are equivalent to the penalties that apply to employees hired on or after July 1, 2003 who have not attained the Rule of 70 prior to termination. The early retirement reduction factor does not apply to an eligible employee if he or she retires as a result of a disability.
As of December 31, 2016, Mr. Joiner was eligible to retire with full benefits. Because Mr. Lewis was hired prior to July 1, 2003, he is eligible to receive his pre-July 1, 2015 benefits without reduction at age 60 and his post-June 30, 2015 benefits without reduction at age 62. Given their hire dates, Messrs. Bhasin, Madhavan and Pan are eligible to receive an unreduced benefit at age 62. As of December 31, 2016, Mr. Lewis was eligible for early retirement with reduced benefits. Because he has not met the Rule of 70, the early retirement reduction factor applicable to Mr. Lewis as of that date would have been approximately 18 percent as it relates to the benefits he had earned prior to July 1, 2015 and approximately 35 percent as it relates to the benefits he had earned on and after July 1, 2015. Given their ages and hire dates, Messrs. Bhasin, Madhavan and Pan are not yet eligible for early retirement.

122


Forms of Benefit
Participants in the Pentegra DB Plan can choose from among the following standard payment options:
Single life annuity — that is, a monthly payment for the remainder of the participant’s life (this option provides for the largest annuity payment);
Single life annuity with a lump sum death benefit equal to 12 times the annual retirement benefit — under this option, the death benefit is reduced by 1/12 for each year that the retiree receives payments under the annuity. Accordingly, the death benefit is no longer payable after 12 years (this option provides for a smaller annuity payment as compared to the single life annuity);
Joint and 50 percent survivor annuity — a monthly payment for the remainder of the participant’s life. If the participant dies before his or her survivor, the survivor receives (for the remainder of his or her life) a monthly payment equal to 50 percent of the amount the participant was receiving prior to his or her death (this option provides for a smaller annuity payment as compared to the single life annuity with a lump sum death benefit);
Joint and 100 percent survivor annuity with a 10-year certain benefit feature — a monthly payment for the remainder of the participant’s life. If the participant dies before his or her survivor, the survivor receives (for the remainder of his or her life) the same monthly payment that the participant was receiving prior to his or her death. If both the participant and the survivor die before the end of 10 years, the participant’s named beneficiary receives the same monthly payment for the remainder of the 10-year period (this option provides for a smaller annuity payment as compared to the joint and 50 percent survivor annuity); or
Lump sum payment at retirement in lieu of a monthly annuity.
In addition, other payment options, actuarially equivalent to the foregoing, can be designed for a participant, subject to certain limitations.

NONQUALIFIED DEFERRED COMPENSATION
The following table sets forth information for 2016 regarding our nonqualified deferred compensation plan (“NQDC Plan”) and our Special Nonqualified Deferred Compensation Plan. The Special Nonqualified Deferred Compensation Plan serves primarily as a supplemental executive retirement plan (“SERP”) for Messrs. Lewis and Joiner. Messrs. Bhasin, Madhavan and Pan do not participate in the SERP. As discussed more fully in the Compensation Discussion and Analysis on page 108, we do not intend in the foreseeable future to add any new participants to the SERP, nor do we intend to make any additional SERP contributions on behalf of Mr. Lewis or Mr. Joiner. The term "NQDC Plan" refers to our 2017 Deferred Compensation Plan, our Consolidated Deferred Compensation Plan and any predecessor plans. The NQDC Plan and the SERP are defined contribution plans. The assets associated with these plans are held in a grantor trust that is administered by a third party. All assets held in the trust may be subject to forfeiture in the event of our receivership or conservatorship. As explained in the narrative following the table, our SERP is divided into two groups (Group 1 and Group 2) based upon differences in participation and vesting characteristics.

123


Name
 
Executive Contributions
in Last Fiscal Year ($) (1)
 
Registrant Contributions in Last Fiscal Year ($) (2)
 
Aggregate Earnings
(Losses) in Last
Fiscal Year ($) (3)
 
Aggregate Withdrawals/
Distributions ($)
 
Aggregate Balance at Last Fiscal Year End ($)(4)
Sanjay Bhasin
 
 
 
 
 
 
 
 
 
 
NQDC Plan
 
60,448

 
23,497

 
11,476

 

 
179,231

 
 
 
 
 
 
 
 
 
 
 
Tom Lewis
 
 
 
 
 
 
 
 
 
 
NQDC Plan
 
3,600

 
4,397

 
323

 
(17,315
)
 
20,667

SERP — Group 1
 

 

 
26,374

 

 
315,767

SERP — Group 2
 

 

 
700

 

 
10,857

 
 
3,600

 
4,397

 
27,397

 
(17,315
)
 
347,291

 
 
 
 
 
 
 
 
 
 
 
Kalyan Madhavan
 
 
 
 
 
 
 
 
 
 
NQDC Plan
 
96,313

 
10,858

 
15,866

 

 
175,825

 
 
 
 
 
 
 
 
 
 
 
Jibo Pan
 
 
 
 
 
 
 
 
 
 
NQDC Plan
 
25,000

 
4,728

 
1,465

 
 
 
31,193

 
 
 
 
 
 
 
 
 
 
 
Paul Joiner
 
 
 
 
 
 
 
 
 
 
NQDC Plan
 
99,352

 
3,811

 
15,238

 

 
257,345

SERP — Group 1
 

 

 
38,941

 

 
466,217

 
 
99,352

 
3,811

 
54,179

 

 
723,562

_______________________________________
(1) 
All amounts in this column are included in the “Salary” column for 2016 in the Summary Compensation Table.
(2) 
All amounts in this column are included in the “All Other Compensation” column for 2016 in the Summary Compensation Table.
(3) 
The earnings presented in this column are not included in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column for 2016 in the Summary Compensation Table as such earnings are not at above-market or preferential rates.
(4) 
The balances presented in this column are comprised of the amounts shown in the table below entitled “Components of Nonqualified Deferred Compensation Accounts at Last Fiscal Year End.”
Components of Nonqualified Deferred Compensation Accounts
at Last Fiscal Year End
The following table sets forth the amounts included in the aggregate balance of each named executive officer’s nonqualified deferred compensation accounts as of December 31, 2016 that are attributable to: (1) executive and Bank contributions that are reported in the Summary Compensation Table on page 117; (2) executive and Bank contributions that either were reported in the summary compensation tables for 2006 through 2013 or that would have been reportable in years prior to 2006 if we had been a registrant in those years and a summary compensation table (in the tabular format presented on page 117) had been required; and (3) earnings (losses) accumulated through December 31, 2016 (2016 and prior years) that either have not been reported, or would not have been reportable, in a summary compensation table because such earnings were not at above-market or preferential rates. Because Mr. Lewis and Mr. Joiner have received distributions from our NQDC Plan in the past, the amounts presented for these officers exclude any prior contributions and the accumulated earnings or losses on those contributions that have previously been distributed, as such assets are no longer held in their NQDC Plan accounts.

124


 
 
Amounts Reported in
Summary Compensation Table
 
Reported/Reportable
Compensation
Related to Years
Prior to 2014 ($)
 
Cumulative Earnings
 (Losses) Excluded
from Reportable
Compensation ($)
 
 
Name
 
2016 ($)
 
2015 ($)
 
2014 ($)
 
 
 
Total ($)
Sanjay Bhasin
 
83,945

 
60,244

 
23,313

 

 
11,729

 
179,231

Tom Lewis
 
7,997

 
5,846

 
24,876

 
217,761

 
90,811

 
347,291

Kalyan Madhavan
 
107,171

 
53,460

 

 

 
15,194

 
175,825

Jibo Pan
 
29,728

 

 

 

 
1,465

 
31,193

Paul Joiner
 
103,163

 
73,028

 
5,202

 
322,610

 
219,559

 
723,562

NQDC Plan
Through 2015, our named executive officers and other highly compensated employees could elect under our NQDC Plan to defer receipt of all or part of their VPP award and all or part of their base salary. Deferral elections are made in December of each year for amounts to be earned in the following year and are irrevocable. In 2015 and prior years, we did not permit the deferral of LTIP awards. In 2016, we froze our Consolidated Deferred Compensation Plan and established the 2017 Deferred Compensation Plan for deferrals made on and after January 1, 2017. Deferred compensation that was earned in 2016 (whether it was paid in 2016 or, in the case of the 2016 VPP, early 2017) is governed by the Consolidated Deferred Compensation Plan while compensation earned in 2017 and later years (to the extent it is deferred) is governed by the 2017 Deferred Compensation Plan. Among other things, the 2017 Deferred Compensation Plan expanded the deferral sources to include any non-equity incentive plan compensation, including but not limited to LTIP awards. By way of example, a named executive officer could have elected in December 2016 to defer all or part of his 2017 Current Award, his 2017 Make-Whole Award and/or his 2015 LTIP award, all of which are payable in early 2018. In addition, that same executive officer could have elected to defer all or part of his 2017 base salary.
Based upon the length of service of our named executive officers (including, in the case of Messrs. Bhasin, Madhavan and Pan, their service with the Federal Home Loan Bank of Chicago during which service each of them was a participant in the Pentegra Defined Contribution Plan for Financial Institutions), we match 200 percent of the first 3 percent of their contributed base salary reduced by 6 percent of their eligible compensation under the Pentegra Defined Contribution Plan for Financial Institutions (for 2016, the maximum compensation limit for this plan was $265,000). We do not provide any matching on employees' incentive compensation awards that are contributed to the NQDC Plan. Base salary and incentive compensation deferred under our NQDC Plan are not included in eligible compensation for purposes of our defined benefit pension plan (the Pentegra DB Plan). All of our participating employees, including our named executive officers, are fully vested in their NQDC Plan account balance at all times, including our matching contributions.
Participating executives direct the investment of their NQDC Plan account balances in an array of externally managed mutual funds that are approved from time to time by our Investment and Administrative Committee, which is comprised of several of our senior officers. Participants can choose from among several different investment options, including domestic and international equity funds, bond funds, money market funds and advisor managed portfolios. The mutual funds offered through the NQDC Plan (and our other non-qualified plans) employ investment strategies that are similar (although not identical) to those used in the funds that are available to participants in our tax-qualified 401(k) plan, which is managed by a different third-party sponsor. Participants can change their investment selections prospectively by contacting the trust administrator. There are no limitations on the frequency and manner in which participants can change their investment selections.
When participants elect to defer amounts into our NQDC Plan, they also specify when the amounts will ultimately be distributed to them. Under our Consolidated Deferred Compensation Plan, distributions could either be made in a specific year, whether or not the participant's employment has then ended, or at a time that begins at or after the participant’s retirement or separation. Participants could elect to receive either a lump sum distribution or annual installment payments over periods ranging from 2 to 20 years.
Under the 2017 Deferred Compensation Plan, participants can have up to five scheduled in-service accounts and one retirement account. Distributions may either be made in a specific year (or years in the case of installments) or upon retirement, which for this purpose is defined as a separation of service on or after the participant has attained age 55. For scheduled distribution accounts, participants can elect to receive either a lump sum distribution or equal annual installments over a period of up to 4 years (in January of the year designated by the participant and, if installments are elected, in each succeeding January). For retirement accounts, participants can elect to receive either a lump sum distribution or equal annual installments over a period of up to 15 years (in January of the year following the year in which the retirement occurs and, if installments are elected, in each succeeding January). In the event of a participant’s termination of service (other than a termination of service that qualifies as a retirement), the vested balances of his or her retirement account and any scheduled distribution accounts that have

125


not yet commenced distribution will be paid in a lump sum in the month following the month in which the termination of service occurs. In the event of a participant’s termination of service that qualifies as a retirement, the vested balances of his or her scheduled distribution accounts that have not yet commenced distribution will be paid in a lump sum distribution in January of the year following the year in which the retirement occurs unless the participant has made an alternative election on a timely basis to receive equal annual installments over a period of up to 15 years. In the event of a participant’s termination of service for any reason (other than death) after one or more scheduled distribution accounts has commenced installment payments, such installment payments will continue as if the termination of service had not occurred. In the event of a participant’s death, all vested balances then remaining in any retirement or scheduled distribution accounts will be paid to the participant’s beneficiary in a lump sum in the month following the month in which the death occurs.
Once selected, participants’ distribution schedules cannot be accelerated under our NQDC Plan. For deferrals made on or after January 1, 2005, a participant may postpone a distribution from the NQDC Plan to a future date that is later than the date originally specified on the deferral election form if the following two conditions are met: (1) the participant must make the election to postpone the distribution at least one year prior to the date the distribution was originally scheduled to occur and (2) the future date must be at least five years later than the originally scheduled distribution date. Participants may not postpone deferrals made prior to January 1, 2005 without the approval of our Investment and Administrative Committee.
SERP
Our SERP was established primarily to provide supplemental retirement benefits to those employees who were serving as our executive officers at the time the SERP was established. Messrs. Lewis and Joiner are the only remaining executives from that group. As noted above, our SERP is divided into two groups (Group 1 and Group 2) based upon differences in participation and vesting characteristics. Group 2, as explained below, was established to provide benefits to a specified group of our employees, only one of whom is a named executive officer.
Group 1
Messrs. Lewis and Joiner participate in Group 1. Each participant’s benefit in Group 1 consists of contributions made by us on the participant’s behalf, plus or minus an allocation of the investment gains or losses on the assets used to fund the plan. Group 1 benefits vest on the date on which the sum of the participant’s age and years of service with us is at least 70. If, prior to becoming vested, the officer terminates employment for any reason other than death or disability, or he is removed from Group 1, all benefits under the plan are forfeited. The provisions of the plan provide for accelerated vesting in the event of a participant’s death or disability. Contributions to the Group 1 SERP are determined solely at the discretion of our Board of Directors and we have no obligation or current intention to make any future contributions to the Group 1 SERP. Messrs. Lewis and Joiner are not permitted to make contributions to the Group 1 SERP. The ultimate benefit to Mr. Lewis and Mr. Joiner is based solely on the contributions that were made by us on their behalf and the earnings or losses on those contributions. We do not guarantee a specific benefit amount or investment return to either participant. In addition, we have the right at any time to amend or terminate the Group 1 SERP, or to remove a participant at our discretion, except that no amendment, modification or termination may reduce the then vested account balance of either participant. Based upon his age (64) and years of service with us as of December 31, 2016, Mr. Joiner is fully vested in his Group 1 benefits. Mr. Lewis is not vested in his Group 1 benefits as the sum of his age and years of service with us was approximately 67.8 as of December 31, 2016. If a vested executive retires or is terminated prior to reaching age 62, that participant’s Group 1 account balance will be paid at the time the executive reaches age 62, in either a lump sum distribution or annual installment payments over periods ranging from 2 to 20 years based on that participant’s preexisting election. If the executive retires or is terminated after reaching age 62, or upon a separation of service at any age due to a disability, the participant’s Group 1 account balance will be paid at that time in either a lump sum distribution or annual installment payments over periods ranging from 2 to 20 years based on that participant’s preexisting election. Mr. Joiner has elected to receive his Group 1 benefits in annual installments over 10 years. Upon his retirement or termination, Mr. Joiner's Group 1 account balance will be deposited into our NQDC Plan and invested in accordance with his investment selections. Mr. Lewis has elected to receive his Group 1 benefits in a lump sum distribution. If Mr. Lewis dies before reaching age 62, his Group 1 account balance will be paid to his beneficiary in a lump sum distribution within 90 days of his death. Group 1 assets are currently invested in a portfolio of mutual funds that are actively managed by the administrator of our grantor trust. Decisions regarding the investment of the Group 1 assets are the sole responsibility of our Investment and Administrative Committee.
Group 2
Mr. Lewis is the only named executive officer who participates in Group 2. Eligibility for the Group 2 SERP was limited to all of our employees who were employed as of June 30, 2003 but who were not eligible to receive a special one-time supplemental contribution to our qualified plan (the Pentegra Defined Contribution Plan for Financial Institutions) because of limitations imposed by that plan (only employees eligible to receive a matching contribution as of December 31, 2002 were eligible to receive the one-time supplemental contribution to our qualified plan). At the time the SERP was established, 22 ineligible

126


employees, including Mr. Lewis, were enrolled in Group 2. The supplemental contribution, equal to 3 percent of each ineligible employee’s base salary as of June 30, 2003, was made to the Group 2 SERP to partially offset a reduction in the employee service accrual rate applicable to our defined benefit pension plan (the Pentegra DB Plan) from 3 percent to 2 percent effective July 1, 2003. Because Mr. Joiner, our only other named executive officer who was employed by us as of June 30, 2003, was eligible to receive a matching contribution as of December 31, 2002, the special one-time supplemental contribution was made on his behalf to our qualified plan in 2003. Our employees are not permitted to make contributions to the Group 2 SERP, nor do we intend to make any future contributions to the Group 2 SERP. Mr. Lewis is fully vested in the one-time contribution and the accumulated earnings on that contribution. The ultimate benefit to be derived by Mr. Lewis from Group 2 is dependent upon the earnings or losses generated on the one-time contribution. We have not guaranteed a specific benefit amount or investment return to him or any of the other employees participating in Group 2. Based on his preexisting election, Mr. Lewis' benefit under Group 2 is payable as a lump sum distribution upon termination of his employment for any reason. Group 2 assets are currently invested in one of the asset allocation funds managed by the administrator of our grantor trust. Similar to Group 1, decisions regarding the investment of the Group 2 assets are the sole responsibility of our Investment and Administrative Committee.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
On March 24, 2015, we entered into an employment agreement with Mr. Bhasin that provides for certain termination benefits in specified circumstances. As of December 31, 2016 (and as of the date of this report), no employment agreement or contract of any kind existed between us and Messrs. Lewis, Madhavan, Pan and Joiner. However, we have a Reduction in Workforce Policy ("RIF Policy") that applied to all of our employees at that date other than certain executive officers with whom we have entered into employment agreements, including Mr. Bhasin. With certain exceptions, our RIF Policy provides severance pay and the continuation of certain employee benefits for any employee in a job position that is eliminated due to economic conditions, functional reorganization, budgetary constraints or other business conditions (a "RIF Policy Triggering Event"). Accordingly, at December 31, 2016, Messrs. Lewis, Madhavan, Pan and Joiner would have been entitled to termination benefits under our RIF Policy if a RIF Policy Triggering Event had occurred on that date.
In addition, under the terms of our 2014 LTIP agreement, if a named executive officer’s employment with us had been terminated on December 31, 2016 due to certain specified events, the LTIP award relating to that plan's three-year performance period would have been, to the extent the performance goals were satisfied, treated as earned and vested on that date. If one of the specified events had occurred on a day other than the last day of 2016, the executive's 2014 LTIP award would have been treated as earned in a pro rata manner based upon the relative portion of the performance period prior to the specified event. By their terms, the 2015 and 2016 LTIPs do not provide for pro rata vesting or accelerated vesting under any circumstances. The potential payments upon termination under Mr. Bhasin's employment agreement and our RIF Policy (as applied to our named executive officers other than Mr. Bhasin) are discussed in the following sections.
Employment Agreement with Mr. Bhasin
On March 24, 2015, we entered into an employment agreement with Mr. Bhasin. This employment agreement provides that we will employ Mr. Bhasin for one year (such period, as it may be extended, the "Employment Period"), unless terminated earlier for any of the following reasons: (1) death; (2) disability; (3) termination by us for cause (as discussed below); (4) termination by us for other than cause (i.e., for any other reason or for no reason); or (5) termination by Mr. Bhasin with good reason (as discussed below). On each yearly anniversary, the employment agreement automatically renews for an additional one-year term unless either we or Mr. Bhasin gives a notice of non-renewal. Not less than 30 days prior to the anniversary date, either we or Mr. Bhasin may give a notice of non-renewal, in which case Mr. Bhasin's employment with us would terminate at the end of the Employment Period. We may, in our sole discretion, pay Mr. Bhasin in lieu of such 30-day notice an amount equal to the base salary that would otherwise be payable to him for such 30-day period, in which case the termination of Mr. Bhasin would become effective immediately upon the date of such payment. On March 24, 2017, Mr. Bhasin's employment agreement was automatically extended through March 23, 2018.
For purposes of the employment agreement, cause for termination shall mean a finding by us that: (i) Mr. Bhasin has failed to perform his assigned duties for us after written notice of the failure and an opportunity to cure within 10 days of receipt of the notice (provided we determine that the failure is curable); (ii) Mr. Bhasin has failed or refused to comply in any material respect with our policies, procedures, practices, standards or other written directives; (iii) Mr. Bhasin has engaged in dishonesty, misconduct, gross negligence or falsification of records involving us; (iv) Mr. Bhasin has committed an act which injures or could reasonably be expected to injure our reputation, business or business relationships; (v) Mr. Bhasin fails to devote all of his business time and attention exclusively to our business and affairs; (vi) Mr. Bhasin has been convicted of, or has entered a plea of guilty or nolo contendere to, any crime involving moral turpitude or any felony; (vii) Mr. Bhasin has engaged in conduct which causes him to be barred from employment with us by any law or regulation or by any order of, or agreement with, any regulatory authority; or (viii) Mr. Bhasin breaches his employment agreement.

127


For purposes of the employment agreement, good reason means the occurrence, without Mr. Bhasin's written consent, of any of the following events: (a) any material diminution in Mr. Bhasin's authority, duties or responsibilities with us; (b) a material reduction by us in Mr. Bhasin’s incentive compensation award range under the VPP or LTIP, except for an across-the-board reduction similarly affecting substantially all similarly-situated employees; (c) a material reduction in Mr. Bhasin’s base salary, except for across-the-board salary reductions similarly affecting substantially all similarly-situated employees; (d) a requirement by us that Mr. Bhasin perform his principal services more than 100 miles from his place of primary employment on March 24, 2015 or such other location at which he has later agreed to provide such services; (e) a material breach by us of any material provision of the employment agreement; or (f) we, or substantially all of our assets, are effectively acquired by another FHLBank through merger or other form of acquisition and the surviving bank’s Board of Directors or President makes a material diminution in Mr. Bhasin’s authority, duties or responsibilities.
No resignation will be treated as resignation for good reason unless (x) Mr. Bhasin has given written notice to us of his intention to terminate his employment for good reason, describing in detail the grounds for such action, no later than 30 days after the first occurrence of such circumstance, (y) Mr. Bhasin has provided us with at least 30 days in which to cure the circumstance, and (z) if we are not successful in curing the circumstance, Mr. Bhasin ends employment within 30 days following the conclusion of the cure period in (y). If we inform Mr. Bhasin that we will not treat his resignation as for good reason, he may either withdraw the resignation and remain employed by us (provided that he does so before the original notice of resignation becomes effective) or proceed to dispute our decision.
Under the terms of Mr. Bhasin's employment agreement, in the event that his employment with us is terminated either by him for good reason or by us other than for cause, or in the event that we give notice of non-renewal while he is willing and able to continue employment on the same terms (each, a "Triggering Event"), Mr. Bhasin shall be entitled to receive the following severance benefits in addition to those payable under any applicable incentive and benefit programs in effect at the time of termination and in accordance with their terms:
(a) base salary continuation (at the base salary in effect at the time of termination) for 12 months;
(b)
a pro rata portion of his non-equity incentive plan compensation (including the VPP and LTIP) for the year in which his termination occurs, based on actual performance for such year and payable at the time that annual incentive awards, if any, are paid to other executives, but in no event later than March 15 following the year in which the termination occurred; and
(c)
continuation of any elective group health and dental insurance benefits that we are providing to him as of his termination date for a period of 12 months.
If Mr. Bhasin's employment with us is terminated for any reason other than a Triggering Event, he will be entitled only to his base salary through the last day of his actual employment with us unless his termination is due to a death or disability in which case he (or his estate) will also be entitled to receive his base salary for an additional 30-day period.
The terms of the employment agreement specify that the right to receive payments under items (a) through (c) above is contingent upon Mr. Bhasin delivering to us an executed severance agreement and a release of claims in a form provided by us.
The terms of the employment agreement with Mr. Bhasin provide that during his employment and for a period of one year after the termination of such employment for any reason, he will not: (i) engage in a managerial capacity in any business or enterprise in which he would serve in a role to affect that entity's decisions with respect to any product or service that competes with our credit products; (ii) directly or indirectly, either alone or in association with others, solicit, recruit, induce, or attempt to solicit, recruit or induce for employment or hire or engage as an independent contractor, any of our employees with whom he had contact during his employment with us; or (iii) directly or indirectly, either alone or in association with others, solicit, divert or take away, or attempt to solicit, divert or take away, the business or patronage of any of our members or customers with which he had material contact during his employment with us or about which he learned confidential information.
Table 1 sets forth the amounts that would have been payable to Mr. Bhasin as of December 31, 2016 if a Triggering Event had occurred on that date.
TABLE 1
Name
 
Accrued/Unused
Vacation as of 12/31/16 ($)
 
Undiscounted Value of Base Salary
Continuation ($)
 
2016 VPP Award ($)
 
2014 LTIP Award ($)
 
Undiscounted Value of
Health Care Benefits
Continuation ($)
 
Total Termination
 Benefit ($)
Sanjay Bhasin
 
63,137

 
656,625

 
205,628

 
239,123

 
23,175

 
1,187,688


If our employment of Mr. Bhasin had been terminated on December 31, 2016 due to his death or disability, he (or his beneficiary in the case of his death) would have been entitled to receive an amount totaling $562,607, comprised of the following: (i) his accrued/unused vacation ($63,137); (ii) his base salary for one month ($54,719); (iii) his 2016 VPP award ($205,628); and (iv) his 2014 LTIP award ($239,123). While not required by the terms of the 2016 VPP, an assumption was

128


made that the payment of Mr. Bhasin's 2016 VPP award would have been approved by our Board of Directors in the event of his death or disability.
Termination Benefits for Messrs. Lewis, Madhavan, Pan and Joiner Under our RIF Policy
As of December 31, 2016, no employment agreement or contract of any kind existed between us and Messrs. Lewis, Madhavan, Pan or Joiner. However, as discussed above, these executive officers would have been entitled to benefits under our RIF Policy as of December 31, 2016 if a RIF Policy Triggering Event had occurred on that date. The severance benefit provided under the RIF Policy is based upon an employee's status (nonexempt, exempt, officer or senior officer), length of service (including, in the case of Messrs. Madhavan and Pan, their service with the Federal Home Loan Bank of Chicago pursuant to our standard FHLBank System transfer procedures) and base salary at the time of termination, subject to certain minimum and maximum amounts. In no event may the severance benefit paid to any senior officer under the RIF Policy exceed an amount equal to one year's base salary plus the continuation of certain employee benefits for a one-year period. In addition, employees are entitled to receive a lump sum payment for any accrued and unused vacation. If an employee is involuntarily terminated due to a reduction in force, disability, or death, he or she is not eligible to receive a prorated portion of their VPP award, unless specifically approved in advance by our President and Chief Executive Officer. However, if the same employee is involuntarily terminated during the first two months of a calendar year and prior to the payout of the previous year's VPP award, the employee is eligible to receive the VPP award for the prior year assuming all of the other eligibility requirements are met.
Benefits continuation includes vacation that would have been accrued by the employee during the severance benefit period, matching contributions that otherwise would have been made on his or her behalf to our 401(k)/Thrift Plan during the severance benefit period (based on elections in effect at the date of termination), and continuation of any health care benefits that we were providing to the employee at the date of his or her termination (our health care benefits are elective and include medical, dental, vision and prescription drug benefits). The dollar equivalent of the future vacation benefit and matching contributions are paid in cash to the employee upon termination. Employees are eligible to continue their pre-existing participation in our health care benefit program, if any, for the length of the severance period by paying premiums at the same subsidized rates that we charge our active employees. If an employee elects to continue his or her coverage, we will pay the difference between the subsidized rate and the full cost of providing the health care benefits during the severance period (in Table 2 below, these amounts are presented in the column entitled "Undiscounted Value of Health Care Benefits Continuation").
Any employee who voluntarily resigns, retires or is discharged for cause is not entitled to any benefits under our RIF Policy. We reserve the right in our sole discretion to amend or discontinue our RIF Policy at any time.
As of December 31, 2016, Messrs. Lewis, Pan and Joiner would have been entitled under our RIF Policy to severance pay and benefits continuation for one year while Mr. Madhavan would have been entitled to severance pay and benefits continuation for 11.7 months. Table 2 sets forth the amounts that would have been payable to these executive officers as of December 31, 2016 if a RIF Policy Triggering Event had occurred on that date. The amounts presented in Table 2 assume that the RIF Policy Triggering Event occurred at the end of the day on December 31, 2016 and therefore these executives were "actively employed" on that date for purposes of fulfilling the vesting requirements under the 2014 LTIP. Further, the amounts presented in Table 2 assume that the payments of these executives' 2016 VPP awards would have been approved by Mr. Bhasin.

TABLE 2
Name
 
Accrued/Unused
Vacation as of
 12/31/16 ($)
 
Undiscounted
Value of
Base Salary
Continuation ($)
 
2016
VPP Award ($)
 
2014
 LTIP Award ($)
 
Undiscounted
Value of
Health Care
Benefits
Continuation ($)
 
Lump Sum
 Payment for
 Loss of Future
 Vacation
 Benefits ($)
 
Lump Sum
 Payment for Loss
 of Future
 Matching
 Contributions ($)
 
SERP
($) (1)
 
Total
Termination
Benefit ($)
Tom Lewis
 
32,528

 
338,293

 
67,904

 
114,716

 
23,175

 
32,528

 
15,900

 
10,857

 
635,901

Kalyan Madhavan
 
14,353

 
435,342

 
108,303

 
121,257

 
24,682

 
34,347

 
15,900

 

 
754,184

Jibo Pan
 
26,617

 
343,791

 
83,389

 
91,067

 
24,682

 
33,057

 
15,900

 

 
618,503

Paul Joiner
 
29,902

 
328,523

 
65,943

 
112,701

 
13,513

 
31,589

 
15,900

 
466,217

 
1,064,288

______________________________________________________________________________________
(1) Amounts reflect the vested balances in Mr. Lewis' Group 2 SERP account and Mr. Joiner's Group 1 SERP account. Mr. Lewis' Group 2 SERP account would have been payable as a lump sum while Mr. Joiner's Group 1 SERP account would have been payable in 10 annual installment payments. Mr. Lewis' Group 1 SERP account would have been forfeited if his employment had been terminated on December 31, 2016 pursuant to a RIF Policy Triggering Event.

129


Messrs. Lewis, Madhavan, Pan and Joiner would have been required to execute non-disparagement/confidentiality agreements in order to receive the termination benefits described above, excluding the accrued/unused vacation, 2014 LTIP awards and SERP benefits, if applicable. These executive officers would not have been required to execute any non-compete or non-solicitation agreements in order to receive the termination benefits.
If our employment of Messrs. Lewis, Madhavan, Pan or Joiner had been terminated on December 31, 2016 due to the executive's death, disability, retirement (provided the officer was age 55 or older with at least 10 years of service at the time of his retirement) or special circumstances as approved by our Board of Directors (which may have included, but was not limited to, a significant change in the executive’s job responsibilities other than for cause), the 2014 LTIP award would have been, to the extent the performance goals were satisfied, treated as earned and vested on December 31, 2016 and would have been payable to the executive (or his beneficiary in the event of the executive’s death) no later than March 15, 2017. As of December 31, 2016, only Mr. Joiner satisfied the eligibility requirements to receive a 2014 LTIP award in connection with a planned, voluntary retirement. For the amounts that would have been payable to Messrs. Lewis, Madhavan, Pan and Joiner in early 2017 (under the 2014 LTIP) if such executive’s employment with us had been terminated on December 31, 2016 due to his death, disability, retirement (in the case of Mr. Joiner only) or special circumstances as approved by our Board of Directors, please refer to the column entitled “2014 LTIP Award” in Table 2 above.
If on December 31, 2016: (1) we had merged or consolidated with or reorganized into or with another FHLBank or other entity, or another FHLBank or other entity had merged or consolidated into us; (2) we had sold or transferred all or substantially all of our business and/or assets to another FHLBank or other entity; or (3) we had liquidated or dissolved (each, a “Significant Transaction”), then the 2014 LTIP award would have been treated as earned and vested (and would have been payable) on that date. In the case of a Significant Transaction, 2014 LTIP-related payments were not conditioned upon a termination of the executive’s employment with us. For the amounts that would have been payable to Messrs. Lewis, Madhavan, Pan and Joiner under the 2014 LTIP as of December 31, 2016 if a Significant Transaction had occurred on that date, please refer to the column entitled “2014 LTIP Award” in Table 2 above.
Other
In the event of the death or disability of any of our executive officers, we have no obligation to provide any life insurance or disability benefits beyond those that are provided for in our group life and disability insurance programs that are available generally to all salaried employees and that do not discriminate in scope, terms or operation in favor of our executive officers, with the following exception. Under our short-term disability plan, officers (including but not limited to our executive officers) are entitled to receive an income benefit equal to 100 percent of their base salary for up to 6 months. For non-officers, the plan provides an income benefit equal to 50 percent of their base salary for up to 6 months. In each case, the employee must first use up all of his or her accrued and unused vacation and flex leave. Except as previously noted with regard to our SERP, our qualified and nonqualified retirement plans do not provide for any enhancements or accelerated vesting in connection with a termination, including a termination resulting from any of the events described above or the death or disability of a named executive officer. Following a termination for any reason, the balance of a named executive officer’s NQDC Plan account would be distributed pursuant to the instructions in his deferral election forms or as prescribed by the 2017 Deferred Compensation Plan, as applicable, and he would be entitled to cash out any accrued and unused vacation. Other than the benefits described above in connection with each covered circumstance and ordinary retirement benefits subject to applicable requirements for those benefits (such as eligibility), we do not provide any post-employment benefits or perquisites to any employees, including our named executive officers.
We also sponsor a retirement benefits program that includes health care and life insurance benefits for eligible retirees. While eligibility for participation in the program and required participant contributions vary depending upon an employee’s age, hire date and length of service, the provisions of the plan apply equally to all employees, including our executive officers. For a discussion of our retirement benefits program, see pages F-45 through F-48 of this Annual Report on Form 10-K.
Regulatory Rules Regarding Golden Parachute Payments
On July 30, 2008, the Housing and Economic Recovery Act of 2008 was enacted. Among other things, this legislation gave the Director of the Finance Agency (the “Director”) the authority to limit, by regulation or order, any golden parachute payment. On January 28, 2014, the Finance Agency published a final rule relating to golden parachute payments (the “Golden Parachute Regulation”). The Golden Parachute Regulation defines a “golden parachute payment” as any payment (or any agreement to make any payment) in the nature of compensation by any FHLBank for the benefit of certain entity-affiliated parties (including but not limited to a FHLBank’s officers) that (i) is contingent on, or by its terms is payable on or after, the termination of such party’s primary employment or affiliation with the FHLBank and (ii) is received on or after, or is made in contemplation of, any of the following events: (a) the insolvency of the FHLBank; (b) the appointment of any conservator or receiver for the FHLBank; or (c) the FHLBank is in a troubled condition.
The Golden Parachute Regulation prohibits a FHLBank from making, or agreeing to make, any golden parachute payment unless: (1) the Director determines that the payment or agreement is permissible; (2) the agreement is made in order to hire a

130


person to become an entity-affiliated party either at the time when the FHLBank is insolvent, in a troubled condition or the subject of a conservatorship or receivership or in an effort to prevent such an event, and the Director consents in writing to the amount and terms of the golden parachute payment; or (3) the payment is made pursuant to an agreement which provides for a reasonable severance payment, not to exceed 12 months’ salary, in the event of a change in control (excluding a change in control resulting from a conservatorship or receivership); provided, however, that the consent of the Director is obtained prior to making the payment. In all of these cases, the FHLBank must demonstrate that it does not have any reasonable basis to believe that the payee (a) has committed any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse that is likely to have a material adverse effect on the FHLBank; (b) is substantially responsible for the insolvency of, the appointment of a conservator or receiver for, or the troubled condition of the FHLBank; (c) has materially violated any applicable federal or state law or regulation that has had or is likely to have a material effect on the FHLBank; and (4) has violated or conspired to violate certain specified sections of the United States Code.
The following types of payments are excluded from the definition of “golden parachute payment” under the Golden Parachute Regulation: (i) any payment made pursuant to a pension or retirement plan that is qualified (or is intended within a reasonable period of time to be qualified) under Section 401 of the Internal Revenue Code of 1986 or pursuant to a pension or other retirement plan that is governed by the laws of any foreign country; (ii) any payment made pursuant to any plan, contract, agreement of other arrangement which is an “employee welfare benefit plan” as that term is defined in section 3(1) of the Employee Retirement Income Security Act of 1974, as amended, or other usual and customary plans such as dependent care, tuition reimbursement, group legal services, or cafeteria plans; (iii) any payment made pursuant to a bona fide deferred compensation plan or arrangement (iv) any payment made by reason of death or by reason of termination caused by the disability of the entity-affiliated party; (v) any payment made pursuant to a nondiscriminatory severance pay plan or arrangement that provides for payment of severance benefits of not more than 12 months’ base compensation to all eligible employees upon involuntary termination other than for cause, voluntary resignation or early retirement (other than payments to a named executive officer and any other officer identified by the Director whose base salary exceeds $300,000); or (vi) any severance or similar payment that is required to be made pursuant to a state statute or foreign law that is applicable to all employers within the appropriate jurisdiction (with the exception of employers that may be exempt due to their small number of employees or other similar criteria).
The Golden Parachute Regulation was effective February 27, 2014. Accordingly, payments that might otherwise be payable to Mr. Bhasin under his employment agreement or our other named executive officers under our RIF Policy could be reduced if the event giving rise to such payments were to occur at a time at which we were (or it was contemplated that we could become) insolvent, in a troubled condition or the subject of a conservatorship or receivership.
On January 28, 2014, the Finance Agency also published a final rule relating broadly to executive compensation (the "Executive Compensation Regulation"). Under the Executive Compensation Regulation, which became effective on February 27, 2014, the Director has the authority to prohibit us from providing compensation (including termination benefits) to any named executive officer that the Director determines is not reasonable and comparable with compensation for employment in other similar businesses involving similar duties and responsibilities. In determining whether compensation to a named executive officer is not reasonable and comparable, the Director may take into consideration any factors the Director considers relevant, including any wrongdoing on the part of the executive, such as any fraudulent act or omission, breach of trust or fiduciary duty, violation of law, rule, regulation, order or written agreement, and insider abuse. The Executive Compensation Regulation provides that we must provide at least 30 days' advance written notice prior to making any payments to a named executive officer in connection with a change in control or a termination of the executive's employment with us. Accordingly, it is possible that payments that might otherwise be payable to our named executive officers could be reduced even if the event that triggers those payments were to occur at a time when we were not insolvent, in a troubled condition or the subject of a conservatorship or receivership.


DIRECTOR COMPENSATION
Director fees and reimbursable expenses are determined at the discretion of our Board of Directors, subject to the authority of the Finance Agency’s Director to object to, and to prohibit prospectively, compensation and/or expenses that he determines are not reasonable. For 2016, our directors received fees based on the number of our regularly scheduled board meetings that they attended in person and the number and type of telephonic meetings in which they participated, subject to a maximum compensation limit. The following table sets forth the annual compensation limits and attendance fees that our directors were entitled to receive for each regular board meeting that they attended in 2016 (subject to a maximum of six meetings). In addition, each director was entitled to receive (subject to the annual compensation limits) $1,000 for his or her participation in in-person or special telephonic meetings of the Audit Committee, $500 for his or her participation in in-person or special telephonic meetings of other Board committees, and $500 for his or her participation in any special telephonic meetings of the Board of Directors.

131


 
Annual
Compensation
Limit for 2016
 
Fee For
Attendance at
Each Regular
Board Meeting
Chairman of the Board
$
97,500

 
$
16,750

Vice Chairman of the Board
92,500

 
15,500

Chairman of the Audit Committee
87,500

 
14,750

Chairman of the Risk Management Committee
87,500

 
14,750

Chairman of the Strategic Planning, Operations and Technology Committee
87,500

 
14,750

Chairmen of all other Board Committees
80,500

 
13,500

All other Directors
72,500

 
12,250

The following table sets forth the actual compensation earned by our directors in 2016.
Name
 
Fees Earned
 or Paid in
 Cash ($)
 
Stock
Awards ($)
 
Option
Awards ($)
 
Non-equity
Incentive Plan
Compensation ($)
 
Change in Pension
Value and Nonqualified
Deferred Compensation
Earnings ($)
 
All Other
Compensation ($)
 
Total ($)
Joseph F. Quinlan, Jr., Chairman in 2016
 
97,500

 

 

 

 

 
*
 
97,500

Robert M. Rigby, Vice Chairman in 2016
 
92,500

 

 

 

 

 
*
 
92,500

Dianne W. Bolen
 
72,500

 

 

 

 

 
*
 
72,500

Patricia P. Brister
 
80,500

 

 

 

 

 
*
 
80,500

Tim H. Carter
 
72,500

 

 

 

 

 
*
 
72,500

Mary E. Ceverha
 
72,500

 

 

 

 

 
*
 
72,500

Albert C. Christman
 
87,500

 

 

 

 

 
*
 
87,500

C. Kent Conine
 
80,500

 

 

 

 

 
*
 
80,500

James D. Goudge
 
72,500

 

 

 

 

 
*
 
72,500

W. Wesley Hoskins
 
72,500

 

 

 

 

 
*
 
72,500

Michael C. Hutsell
 
72,500

 

 

 

 

 
*
 
72,500

A. Fred Miller, Jr.
 
72,500

 

 

 

 

 
*
 
72,500

Sally I. Nelson
 
72,500

 

 

 

 

 
*
 
72,500

John P. Salazar
 
80,500

 

 

 

 

 
*
 
80,500

Margo S. Scholin
 
87,500

 

 

 

 

 
*
 
87,500

Ron G. Wiser
 
87,500

 

 

 

 

 
*
 
87,500

_______________________________________
*
Our directors did not receive any other form of compensation in 2016 other than the limited perquisites which are discussed below. For each director, the aggregate amount of such perquisites was either less than $1,750 or zero.
Under our NQDC Plan, our directors may elect to defer any or all of their fees. Deferral elections must be made in December of each year for amounts to be earned in the following year and are irrevocable. Participating board members can elect to receive distributions under the same rules that apply to our highly compensated employees who have elected to participate in the plan. Similarly, directors’ distribution schedules cannot be accelerated but they can be postponed under the same rules that apply to our highly compensated employees who have elected to participate in the plan. Participating board members direct the investment of their deferred fees among the same externally managed mutual funds that are available to our employee participants. As the earnings derived from these mutual funds are not at above-market or preferential rates, they are not included in the table above. Our liability for directors’ deferred compensation (including both current and former directors), which consists of the accumulated compensation deferrals and the accrued earnings or losses on those deferrals, totaled $1,842,000 at December 31, 2016.
We have a policy under which we will reimburse our directors for all travel and meal expenses of a spouse accompanying them to no more than two meetings of our board and/or any of its committees each year. In addition, we will reimburse our directors for the meal expenses of a spouse accompanying them to any group functions of the Board of Directors regardless of whether the meal occurs during one of the trips specified in the immediately preceding sentence provided the meal was incurred in

132


connection with a group outing in which directors and officers were in attendance. Further, we will pay for the expenses of directors' spouses attending up to two group spousal functions annually, provided the functions are organized by us. In 2016, all but three of the directors presented in the table used these benefits to some extent at a total cost to us of $10,470. As no individual director was reimbursed more than $1,749 for spousal travel and meal expenses, these perquisites are not reportable as compensation in the table above.
In accordance with Finance Agency regulations, we have established a formal policy governing the travel reimbursement provided to our directors. During 2016, our directors’ Bank-related travel expenses totaled $191,039, not including the spousal travel and meal reimbursements described above.
For 2017, our directors will receive fees based on the number of our regularly scheduled board meetings that they attend in person and the number of telephonic meetings in which they participate, subject to a maximum compensation limit. The following table sets forth the annual compensation limits and attendance fees that our directors will be entitled to receive for each regular board meeting that they attend in 2017 (subject to a maximum of five out of the six meetings to be held). In addition, each director will receive (subject to the annual compensation limits) $1,000 for his or her participation in telephonic meetings of the Board of Directors and $1,000 for his or her participation in telephonic or special in-person meetings of its committees.
 
Annual
Compensation
Limit for 2017
 
Fee For
Attendance
at Each Regular
Board Meeting
Chairman of the Board
$
125,000

 
$
25,000

Vice Chairman of the Board
110,000

 
22,000

Chairman of the Audit Committee
110,000

 
22,000

Chairmen of all other Board Committees
105,000

 
21,000

All other Directors
95,000

 
19,000


Compensation Committee Interlocks and Insider Participation
None of our directors who served on our Compensation and Human Resources Committee during 2016 was, prior to or during 2016, an officer or employee of the Bank, nor did they have any relationships requiring disclosure under applicable related party requirements. None of our executive officers served as a member of the compensation committee (or similar committee) or board of directors of any entity whose executive officers served on our Compensation and Human Resources Committee or Board of Directors.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The Bank has two sub-classes of Class B capital stock authorized and outstanding, Class B-1 and Class B-2 Capital Stock, both of which have a par value of $100 per share. The Bank does not have any other authorized classes of capital stock. The Bank is a cooperative and all of its outstanding capital stock is owned by its members or, in some cases, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other activity that remains outstanding or until any applicable stock redemption or withdrawal notice period expires. No individual owns any of the Bank’s capital stock. As a condition of membership, members are required to maintain an investment in Class B-1 Capital Stock of the Bank that is equal to a percentage of the member’s total assets, subject to minimum and maximum thresholds. In addition, members are required to hold Class B-2 Capital Stock based upon an activity-based investment requirement. Financial institutions that cease to be members are required to continue to comply with the Bank’s activity-based investment requirement until such time that the activities giving rise to the requirement have been fully extinguished.
As provided by statute and as further discussed in Item 10 — Directors, Executive Officers and Corporate Governance, the Bank’s members are entitled to vote for the election of directors. Each member directorship is designated to one of the five states in the Bank’s district and a member is entitled to vote only for member director candidates for the state in which the member’s principal place of business is located. In addition, all eligible members in the Bank’s district are entitled to vote for the nominees for independent directorships. In each case, a member is entitled to cast, for each applicable directorship, one vote for each share of Class B-1 and Class B-2 Capital Stock that the member is required to hold, subject to a statutory limitation. Under this limitation, the total number of votes that a member may cast is limited to the average number of shares of the Bank’s

133


capital stock that were required to be held by all members in that member’s state as of the record date for voting. Non-member shareholders are not entitled to cast votes for the election of directors.
As of March 17, 2017, there were 20,838,015 shares of the Bank’s capital stock (including mandatorily redeemable capital stock) outstanding. The following table sets forth certain information with respect to each shareholder that beneficially owned more than five percent of the Bank’s outstanding capital stock as of March 17, 2017. Each shareholder has sole voting and investment power for all shares shown (subject to the restrictions described above), none of which represent shares with respect to which the shareholder has a right to acquire beneficial ownership.
Beneficial Owners of More than 5% of the Bank's Outstanding Stock
Name and Address of Beneficial Owner
 
Number
of Shares
Owned
 
Percentage of
Outstanding
Shares Owned
Comerica Bank
1717 Main Street, Dallas, TX 75201
 
1,218,000

 
5.85
%
The Bank does not offer any type of compensation plan under which its equity securities are authorized to be issued to any person. Nine of the Bank’s 17 directorships are designated as member directorships which by law must be occupied by officers or directors of a member of the Bank. The following table sets forth, as of March 17, 2017, the number of shares owned beneficially by members that have one of their officers and/or directors serving as a director of the Bank and the name of the director of the Bank who is affiliated with each such member. Each shareholder has sole voting and investment power for all shares shown (subject to the restrictions described above), none of which represent shares with respect to which the shareholder has a right to acquire beneficial ownership.
Security Ownership of Directors’ Financial Institutions
Name and Address of Beneficial Owner
 
Bank Director Affiliated with
Beneficial Owner
 
Number
of Shares
Owned**
 
Percentage of
Outstanding
Shares Owned
Southside Bank
1201 South Beckham, Tyler, TX 75701
 
Tim H. Carter
 
610,843

 
2.93
%
First Security Bank
314 North Spring, Searcy, AR 72143
 
Michael C. Hutsell
 
141,685

 
*

Broadway National Bank
1177 NE Loop 410, San Antonio, TX 78209
 
James D. Goudge
 
115,562

 
*

Guaranty Bank & Trust Company of Delhi
120 Oak Street, Delhi, LA 71232
 
Albert C. Christman
 
14,415

 
*

First National Bankers Bank
7813 Office Park Boulevard, Baton Rouge, LA 70809
 
Joseph F. Quinlan, Jr./Albert C. Christman
 
13,990

 
*

Bank of Anguilla
130 Holland Street, Anguilla, MS 38721
 
A. Fred Miller, Jr.
 
9,977

 
*

First Community Bank
416 North Water Street, Corpus Christi, TX 78401
 
W. Wesley Hoskins
 
8,750

 
*

Liberty Bank
860 W. Airport Freeway, Suite 100, Hurst, TX 76054
 
Robert M. Rigby
 
3,736

 
*

Bank of the Southwest
226 North Main Street, Roswell, NM 88201
 
Ron G. Wiser
 
2,707

 
*

 
 
 
 
 
 
 
All Directors’ Financial Institutions as a group
 
 
 
921,665

 
4.42
%
_______________________________________
*
Indicates less than one percent ownership.
**
All shares owned by the Directors’ Financial Institutions are pledged as collateral to secure extensions of credit from the Bank.

134



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
Our capital stock can only be held by our members or, in some cases, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by our former members that retain capital stock to support advances or other activity that remains outstanding or until any applicable stock redemption or withdrawal notice period expires. All members are required by law to purchase our capital stock. As a cooperative, our products and services are provided almost exclusively to our shareholders. In the ordinary course of business, transactions between us and our shareholders are carried out on terms that either are determined by competitive bidding in the case of auctions for our advances and deposits or are established by us, including pricing and collateralization terms, under our Member Products and Credit Policy, which treats all similarly situated members on a non-discriminatory basis. We provide, in the ordinary course of business, products and services to members whose officers or directors may serve as our directors (“Directors’ Financial Institutions”). Currently, 9 of our 17 directors are officers and/or directors of member institutions. Our products and services are provided to Directors’ Financial Institutions and to holders of more than five percent of our capital stock, if any, on terms that are no more favorable to them than comparable transactions with our other similarly situated members.
We have adopted written policies prohibiting our employees and directors from accepting any personal benefits where such acceptance may create either the appearance of, or an actual, conflict of interest. These policies also prohibit our employees and directors from having a direct or indirect financial interest that conflicts, or appears to conflict, with that employee’s or director’s duties and responsibilities to us, subject to certain exceptions. Any of our employees who regularly deal with our members or major financial institutions that do business with us must disclose any personal financial relationships with those members or major financial institutions annually in a manner that we prescribe. Our directors are required to disclose all actual or apparent conflicts of interest and any financial interest of the director or an immediate family member or business associate of the director in any matter to be considered by the Board of Directors. Directors must refrain from participating in the deliberations regarding or voting on any matter in which they, any immediate family members or any business associates have a financial interest, except that member directors may vote on the terms on which our products are offered to all members and other routine corporate matters, such as the declaration of dividends. With respect to our AHP, directors and employees may not participate in or attempt to influence decisions by us regarding the evaluation, approval, funding or monitoring, or any remedial process for an AHP project if the director or employee, or a family member of such individual, has a financial interest in, or is a director, officer or employee of, an organization involved in such AHP project.
In addition, our Board of Directors has adopted a written policy for the review and approval or ratification of a “related person transaction” as defined by policy (the “Transactions with Related Persons Policy”). The Transactions with Related Persons Policy requires that each related person transaction must be presented to the Audit Committee of the Board of Directors for review and consideration. Those members of the Audit Committee who are not related persons with respect to the related person transaction in question will consider the transaction to determine whether, if practicable, the related person transaction will be conducted on terms that are no less favorable than the terms that could be obtained from a non-related person or an otherwise unaffiliated third party on an arms’-length basis. In making such determination, the Audit Committee will review all relevant factors regarding the goods or services that form the basis of the related party transaction, including, as applicable, (i) the nature of the goods or services, (ii) the scope and quality of the goods or services, (iii) the timing of receiving the goods or services through the related person transaction versus a transaction not involving a related person or an otherwise unaffiliated third party, (iv) the reputation and financial standing of the provider of the goods or services, (v) any contractual terms and (vi) any competitive alternatives (if practicable).
After review, the Audit Committee will approve such transaction only if the Audit Committee reasonably believes that the transaction is in, or is not opposed to, our best interests. If a related person transaction is not presented to the Audit Committee for review in advance of such transaction, the Audit Committee may ratify such transaction only if the Audit Committee reasonably believes that the transaction is in, or is not opposed to, our best interests.
A “related person” is defined by the Transactions with Related Persons Policy to be (i) any person who was one of our directors or executive officers at any time since the beginning of our last fiscal year, (ii) any immediate family member of any of the foregoing persons and (iii) any of our members or non-member institutions owning more than five percent of our total outstanding capital stock when the transaction occurred or existed.
For purposes of the Transactions with Related Persons Policy, a “related person transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we were, are or will be a participant and in which any related person has or will have a direct or indirect material interest. The Transactions with Related Persons Policy includes as exceptions to the definition of “related person transaction” those exceptions set forth in Item 404(a) of Regulation S-K (and the related instructions to that item) promulgated under the Exchange Act. Additionally, in connection

135


with the registration of our capital stock under Section 12 of the Exchange Act, the SEC issued a no-action letter dated September 13, 2005 concurring with our view that, despite registration of our capital stock under Section 12(g) of the Exchange Act, disclosure of related party transactions pursuant to the requirements of Item 404 of Regulation S-K is not applicable to us to the extent that such transactions are in the ordinary course of our business. Also, the HER Act specifically exempts the FHLBanks from periodic reporting requirements under the securities laws pertaining to the disclosure of related party transactions that occur in the ordinary course of business between the FHLBanks and their members. The Transactions with Related Persons Policy, therefore, also excludes from the definition of “related person transaction” acquisitions or sales of our capital stock by members or non-member institutions, payment by us of dividends on our capital stock and provision of our products and services to members. This exception applies to Directors’ Financial Institutions.
Since January 1, 2016, we have not engaged in any transactions with any of our directors, executive officers, or any members of their immediate families that require disclosure under applicable rules and regulations, including Item 404 of Regulation S-K. Additionally, since January 1, 2016, we have not had any dealings with entities that are affiliated with our directors that require disclosure under applicable rules and regulations. None of our directors or executive officers or any of their immediate family members has been indebted to us at any time since January 1, 2016.
As of December 31, 2016 and 2015, advances outstanding to Directors’ Financial Institutions aggregated $1.708 billion and $1.408 billion, respectively, representing 5.3 percent and 5.7 percent, respectively, of our total outstanding advances as of those dates.
Director Independence
General
Our Board of Directors is currently comprised of 17 directors. Eight of our directors were elected by our member institutions to represent the five states in our district (“member directors”) while eight of our directors were elected by a plurality of our members at-large (“independent directors”). In addition, one member director was appointed by our Board of Directors to fulfill the unexpired term of a former member director representing the state of Texas. All member directors must be an officer or director of a member institution, but no member director can be one of our employees or officers. Independent directors, as well as their spouses, are prohibited from serving as an officer of any FHLBank and (subject to the specific exception noted below) from serving as a director, officer or employee of a member of the FHLBank on whose board the director serves, or of any recipient of advances from that FHLBank. The exception provides that an independent director or an independent director’s spouse may serve as a director, officer or employee of a holding company that controls one or more members of, or recipients of advances from, the FHLBank if the assets of all such members or recipients of advances constitute less than 35 percent of the assets of the holding company, on a consolidated basis. Additional discussion of the qualifications of member and independent directors is included in Item 10 — Directors, Executive Officers and Corporate Governance.
We are required to determine whether our directors are independent pursuant to three distinct director independence standards. First, Finance Agency regulations establish independence criteria for directors who serve as members of our Audit Committee. Second, the HER Act requires us to comply with Rule 10A-3 of the Exchange Act regarding independence standards relating to audit committees. Third, the SEC’s rules and regulations require that our Board of Directors apply the definition of independence of a national securities exchange or inter-dealer quotation system to determine whether our directors are independent.
Finance Agency Regulations
The Finance Agency’s regulations prohibit directors 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 director’s independent judgment. Disqualifying relationships include employment with us currently or at any time during the last five years; acceptance of compensation from us other than for service as a director; being a consultant, advisor, promoter, underwriter or legal counsel for us currently or at any time within the last five years; and 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 current members of our Audit Committee are Tim H. Carter, Mary E. Ceverha, Michael C. Hutsell, Sally I. Nelson, Joseph F. Quinlan, Jr., Robert M. Rigby, Margo S. Scholin and Ron G. Wiser, each of whom is independent within the meaning of the Finance Agency’s regulations.
Rule 10A-3 of the Exchange Act
Rule 10A-3 of the Exchange Act (“Rule 10A-3”) requires that each member of our Audit Committee be independent. In order to be considered independent under Rule 10A-3, a member of the Audit Committee may not, other than in his or her capacity as a member of the Audit Committee, the Board of Directors or any other committee of the Board of Directors (i) accept directly or indirectly any consulting, advisory or other compensatory fee from us, provided that compensatory fees do not include the

136


receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with us (provided that such compensation is not contingent in any way on continued service); or (ii) be an affiliated person of us.
For purposes of Rule 10A-3, “indirect” acceptance of any consulting, advisory or other compensatory fee includes acceptance of such a fee by a spouse, a minor child or stepchild or a child or stepchild sharing a home with the Audit Committee member, or by an entity in which the Audit Committee member is a partner, member, principal or officer, such as managing director, or occupies a similar position (except limited partners, non-managing members and those occupying similar positions who, in each case, have no active role in providing services to the entity) and that provides accounting, consulting, legal, investment banking, financial or other advisory services or any similar services to us. The term “affiliate” of, or a person “affiliated” with, a specified person, means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. “Control” (including the terms “controlling,” “controlled by” and under “common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. A person will be deemed not to be in control of a specified person if the person (i) is not the beneficial owner, directly or indirectly, of more than 10 percent of any class of voting equity securities of the specified person and (ii) is not an executive officer of the specified person.
The current members of our Audit Committee are independent within the meaning of Rule 10A-3.
SEC Rules and Regulations
The SEC’s rules and regulations require us to determine whether each of our directors is independent under a definition of independence of a national securities exchange or of an inter-dealer quotation system. Because we are not a listed issuer whose securities are listed on a national securities exchange or listed in an inter-dealer quotation system, we may choose which national securities exchange’s or inter-dealer quotation system’s definition of independence to apply. Our Board of Directors has selected the independence standards of the New York Stock Exchange (the “NYSE”) for this purpose. However, because we are not listed on the NYSE, we are not required to meet the NYSE’s director independence standards and our Board of Directors is using such NYSE standards only to make the independence determination required by SEC rules, as described below.
Our Board of Directors determined that presumptively our member directors are not independent under the NYSE’s subjective independence standard. Our Board of Directors determined that, under the NYSE independence standards, member directors have a material relationship with us through their member institutions’ relationships with us. This determination was based upon the fact that we are a member-owned cooperative and each member director is required to be an officer or director of a member institution. Also, a member director’s member institution may routinely engage in transactions with us that could occur frequently and in large dollar amounts and that we encourage. Furthermore, because the level of each member institution’s business with us is dynamic and our desire is to increase our level of business with each of our members, our Board of Directors determined it would be inappropriate to make a determination of independence with respect to each member director based on the director’s member’s given level of business as of a particular date. As the scope and breadth of the member director’s member’s business with us changes, such member’s relationship with us might, at any time, constitute a disqualifying transaction or business relationship with respect to the member’s member director under the NYSE’s objective independence standards. Therefore, our member directors are presumed to be not independent under the NYSE’s independence standards. Our Board of Directors could, however, in the future, determine that a member director is independent under the NYSE’s independence standards based on the particular facts and circumstances applicable to that member director. Furthermore, the determination by our Board of Directors regarding member directors’ independence under the NYSE’s standards is not necessarily determinative of any member director’s independence with respect to his or her service on any special or ad hoc committee of the Board of Directors to which he or she may be appointed in the future. Our current member directors are Tim H. Carter, Albert C. Christman, James D. Goudge, W. Wesley Hoskins, Michael C. Hutsell, A. Fred Miller, Jr., Joseph F. Quinlan, Jr., Robert M. Rigby and Ron G. Wiser.
Our Board of Directors affirmatively determined that each of our current independent directors is independent under the NYSE’s independence standards. Our Board of Directors noted as part of its determination that independent directors and their spouses are specifically prohibited from being an officer of any FHLBank or an officer, employee or director of any of our members, or of any recipient of advances from us, subject to the exception discussed above for positions in certain holding companies. This independence determination applies to Cheryl D. Alston, Dianne W. Bolen, Patricia P. Brister, Mary E. Ceverha, C. Kent Conine, Sally I. Nelson, John P. Salazar and Margo S. Scholin.
Our Board of Directors also assessed the independence of the members of our Audit Committee under the NYSE standards for audit committees. Our Board of Directors determined that, for the same reasons set forth above regarding the independence of our directors generally, none of the member directors serving on our Audit Committee (Tim H. Carter, Michael C. Hutsell, Joseph F. Quinlan, Jr., Robert M. Rigby and Ron G. Wiser) is independent under the NYSE standards for audit committees.

137


Our Board of Directors determined that Mary E. Ceverha, Sally I. Nelson and Margo S. Scholin, independent directors who serve on our Audit Committee, are independent under the NYSE standards for audit committees.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed to the Bank for the years ended December 31, 2016 and 2015 for services rendered by PricewaterhouseCoopers LLP (“PwC”), the Bank’s independent registered public accounting firm.
 
(In thousands)
Year Ended December 31,
 
2016
 
2015
Audit fees
$
760

 
$
818

Audit-related fees
8

 
8

Tax fees

 

All other fees

 

Total fees
$
768

 
$
826


In 2016 and 2015, audit fees were for services rendered in connection with the integrated audits of the Bank’s financial statements and its internal control over financial reporting.
In 2016 and 2015, the fees associated with audit-related services were for discussions regarding miscellaneous accounting-related matters.
The Bank is assessed its proportionate share of the costs of operating the FHLBanks Office of Finance, which includes the expenses associated with the annual audits of the combined financial statements of the 11 (previously 12) FHLBanks. The audit fees for the combined financial statements are billed directly by PwC to the Office of Finance and the Bank is assessed its proportionate share of these expenses. In 2016 and 2015, the Bank was assessed $30,000 and $26,000, respectively, for the costs associated with PwC’s audits of the combined financial statements for those years. These assessments are not included in the table above.
Under the Audit Committee’s pre-approval policies and procedures, the Audit Committee is required to pre-approve all audit and permissible non-audit services (including the fees and terms thereof) to be performed by the Bank’s independent registered public accounting firm, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act. The Audit Committee has delegated pre-approval authority to the Chairman of the Audit Committee for: (1) permissible non-audit services that would be characterized as “Audit-Related Services” and (2) auditor-requested fee increases associated with any unforeseen cost overruns relating to previously approved “Audit Services” (if additional fees are requested by the independent registered public accounting firm as a result of changes in audit scope, the Audit Committee must specifically pre-approve such increase). The Chairman’s pre-approval authority is limited in all cases to $50,000 per service request. The Chairman must report (for informational purposes only) any pre-approval decisions that he or she has made to the Audit Committee at its next regularly scheduled meeting. Bank management is required to periodically update the Audit Committee with regard to the services provided by the independent registered public accounting firm and the fees associated with those services.
All of the services provided by PwC in 2016 and 2015 were pre-approved by the Audit Committee. There were no services for which the de minimis exception was used.

138


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
The financial statements are set forth on pages F-1 through F-59 of this Annual Report on Form 10-K.
(b) Exhibits
3.1
Organization Certificate of the Registrant (incorporated by reference to Exhibit 3.1 to the Bank’s Registration Statement on Form 10 filed February 15, 2006).
3.2
Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Bank's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed on March 22, 2016).*
4.1
Capital Plan of the Registrant, as amended and revised on December 3, 2014 and approved by the Federal Housing Finance Agency on June 1, 2015 and for which notice of implementation was given to shareholders on August 31, 2015 (filed as Exhibit 4.1 to the Bank’s Current Report on Form 8-K dated August 31, 2015 and filed with the SEC on August 31, 2015, which exhibit is incorporated herein by reference).*    
10.1
Deferred Compensation Plan of the Registrant, effective July 24, 2004 (governs deferrals made prior to January 1, 2005) (incorporated by reference to Exhibit 10.1 to the Bank’s Registration Statement on Form 10 filed February 15, 2006).
10.2
2011 Amendment to Deferred Compensation Plan of the Registrant for Deferrals Prior to January 1, 2005, effective March 31, 2011 (incorporated by reference to Exhibit 10.2 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed on March 23, 2012).*
10.3
Deferred Compensation Plan of the Registrant for Deferrals Effective January 1, 2005 (incorporated by reference to Exhibit 10.2 to the Bank’s Registration Statement on Form 10 filed February 15, 2006).
10.4
2008 Amendment to Deferred Compensation Plan of the Registrant for Deferrals Effective January 1, 2005, dated December 10, 2008 (incorporated by reference to Exhibit 10.3 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 27, 2009).*
10.5
2010 Amendment to Deferred Compensation Plan of the Registrant for Deferrals Effective January 1, 2005, dated July 22, 2010 (incorporated by reference to Exhibit 10.1 to the Bank’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2010, filed on November 12, 2010).*
10.6
Non-Qualified Deferred Compensation Plan for the Board of Directors of the Registrant, effective July 24, 2004 (governs deferrals made prior to January 1, 2005) (incorporated by reference to Exhibit 10.3 to the Bank’s Registration Statement on Form 10 filed February 15, 2006).
10.7
2011 Amendment to Non-Qualified Deferred Compensation Plan for the Board of Directors of the Registrant for deferrals prior to January 1, 2005, effective March 31, 2011 (incorporated by reference to Exhibit 10.7 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed on March 23, 2012).*
10.8
Non-Qualified Deferred Compensation Plan for the Board of Directors of the Registrant for Deferrals Effective January 1, 2005 (incorporated by reference to Exhibit 10.4 to the Bank’s Registration Statement on Form 10 filed February 15, 2006).
10.9
2008 Amendment to Non-Qualified Deferred Compensation Plan for the Board of Directors of the Registrant for Deferrals Effective January 1, 2005, dated December 10, 2008 (incorporated by reference to Exhibit 10.6 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 27, 2009).*
10.10
2010 Amendment to Non-Qualified Deferred Compensation Plan for the Board of Directors of the Registrant for Deferrals Effective January 1, 2005, dated July 22, 2010 (incorporated by reference to Exhibit 10.2 to the Bank’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2010, filed on November 12, 2010).*
10.11
Consolidated Deferred Compensation Plan of the Registrant for deferrals made on or after January 1, 2011, as adopted by the Bank’s Board of Directors on December 29, 2010 (incorporated by reference to Exhibit 10.9 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed on March 25, 2011).*
10.12
2017 Deferred Compensation Plan of the Registrant for deferrals made on or after January 1, 2017, as adopted by the Bank’s Board of Directors on July 21, 2016.

139


10.13
Form of Special Non-Qualified Deferred Compensation Plan of the Registrant, as amended and restated effective December 31, 2010 (filed as Exhibit 10.1 to the Bank’s Current Report on Form 8-K dated May 25, 2011 and filed with the SEC on June 1, 2011, which exhibit is incorporated herein by reference).*
10.14
Amended and Restated Federal Home Loan Banks P&I Funding and Contingency Plan Agreement entered into effective January 1, 2017, by and among the Office of Finance and each of the Federal Home Loan Banks.
10.15
Form of Employment Agreement between the Registrant and each of Brehan Chapman and Gustavo Molina, entered into effective January 1, 2014 (incorporated by reference to Exhibit 10.15 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on March 24, 2014).*
10.16
Employment Agreement between the Registrant and Sandra Damholt, entered into effective January 1, 2014(incorporated by reference to Exhibit 10.16 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on March 24, 2014).*
10.17
Employment Agreement between the Registrant and Sanjay Bhasin, entered into effective March 24, 2015(incorporated by reference to Exhibit 10.2 to the Bank’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2015, filed on May 13, 2015).*
10.18
Form of 2014 Long Term Incentive Plan including the Form of Award Agreement (filed as Exhibit 10.1 to the Bank's Current Report on Form 8-K dated March 28, 2014 and filed with the SEC on April 3, 2014, which exhibit is incorporated herein by reference).*
10.19
Form of 2015 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Bank’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2015, filed on August 12, 2015).*
10.20
Form of 2016 Long-Term Incentive Plan (filed as Exhibit 10.1 to the Bank's Current Report on Form 8-K dated January 21, 2016 and filed with the SEC on February 29, 2016, which exhibit is incorporated herein by reference).*
10.21
Amendment to Registrant's Incentive Plans, effective as of August 3, 2016 (filed as Exhibit 10.1 to the Bank's Current Report on Form 8-K dated August 3, 2016 and filed with the SEC on August 9, 2016, which exhibit is incorporated herein by reference).*
10.22
2017 Omnibus Incentive Plan.
10.23
Form of Indemnification Agreement between the Registrant and each of its officers, entered into on various dates on or after November 7, 2008 (incorporated by reference to Exhibit 10.13 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 27, 2009).*
10.24
Form of Indemnification Agreement between the Registrant and each of its directors, entered into on various dates on or after October 24, 2008 (incorporated by reference to Exhibit 10.14 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 27, 2009).*
10.25
Joint Capital Enhancement Agreement, as amended effective August 5, 2011 (filed as Exhibit 10.1 to the Bank's Current Report on Form 8-K dated August 5, 2011 and filed with the SEC on August 5, 2011, which exhibit is incorporated herein by reference).*
12.1
Computation of Ratio of Earnings to Fixed Charges.
14.1
Code of Ethics for Financial Professionals.
31.1
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1
Charter of the Audit Committee of the Board of Directors.
99.2
Report of the Audit Committee of the Board of Directors.


140


101
The following materials from the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Statements of Condition as of December 31, 2016 and 2015, (ii) Statements of Income for the Years Ended December 31, 2016, 2015 and 2014, (iii) Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015 and 2014, (iv) Statements of Capital for the Years Ended December 31, 2016, 2015 and 2014, (v) Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014, and (vi) Notes to the Financial Statements for the fiscal year ended December 31, 2016.

*    Commission File No. 000-51405

ITEM 16. FORM 10-K SUMMARY
None.


141


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 Dallas
 
March 24, 2017
By  
/s/ Sanjay Bhasin
Date
 
Sanjay Bhasin
 
 
President and Chief Executive Officer 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 24, 2017.
/s/ Sanjay Bhasin
 
Sanjay Bhasin
 
President and Chief Executive Officer
(Principal Executive Officer) 
 
/s/ Tom Lewis 
 
Tom Lewis 
 
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 
 
/s/ Joseph F. Quinlan, Jr. 
 
Joseph F. Quinlan, Jr. 
 
Chairman of the Board of Directors 
 
/s/ Robert M. Rigby
 
Robert M. Rigby 
 
Vice Chairman of the Board of Directors 
 
 
 
Cheryl D. Alston
 
Director 
 
/s/ Dianne W. Bolen
 
Dianne W. Bolen
 
Director 
 
/s/ Patricia P. Brister 
 
Patricia P. Brister 
 
Director 
 
/s/ Tim H. Carter
 
Tim H. Carter
 
Director 
 
/s/ Mary E. Ceverha
 
Mary E. Ceverha
 
Director 
 
/s/ Albert C. Christman
 
Albert C. Christman
 
Director 
 

S-1


/s/ C. Kent Conine 
 
C. Kent Conine 
 
Director 
 
/s/ James D. Goudge
 
James D. Goudge
 
Director 
 
/s/ W. Wesley Hoskins
 
W. Wesley Hoskins 
 
Director 
 
/s/ Michael C. Hutsell
 
Michael C. Hutsell
 
Director 
 
/s/ A. Fred Miller, Jr.
 
A. Fred Miller, Jr.
 
Director 
 
/s/ Sally I. Nelson
 
Sally I. Nelson
 
Director 
 
/s/ John P. Salazar
 
John P. Salazar 
 
Director 
 
/s/ Margo S. Scholin 
 
Margo S. Scholin 
 
Director 
 
/s/ Ron G. Wiser 
 
Ron G. Wiser 
 
Director 
 



S-2


Federal Home Loan Bank of Dallas
Index to Financial Statements

F-1


Management’s Report on Internal Control over Financial Reporting
Management of the Federal Home Loan Bank of Dallas (the “Bank”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Bank’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. 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 Bank’s assets; (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 Bank are being made only in accordance with authorizations of the Bank’s management and board of directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Bank’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. Further, 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 evaluated the effectiveness of the Bank’s internal control over financial reporting as of December 31, 2016 based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 edition of Internal Control — Integrated Framework. Based upon that evaluation, management concluded that the Bank’s internal control over financial reporting was effective as of December 31, 2016.
The effectiveness of the Bank’s internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, the Bank’s independent registered public accounting firm, as stated in their report which appears on page F-3.

F-2


Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of the Federal Home Loan Bank of Dallas:
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 Dallas (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 maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The 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 the accompanying Management’s Report on Internal Control over Financial Reporting. 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
 
Dallas, Texas
 
March 24, 2017
 





F-3


FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CONDITION
(In thousands, except share data)
 
December 31,
 
2016
 
2015
ASSETS
 
 
 
Cash and due from banks
$
27,696

 
$
837,202

Interest-bearing deposits
255

 
260

Securities purchased under agreements to resell (Note 12)
3,100,000

 
1,000,000

Federal funds sold (Notes 18 and 19)
6,242,000

 
2,171,000

Trading securities (Note 3)
111,638

 
211,056

Available-for-sale securities (Notes 4, 12 and 17) ($613,351 and $300,184 pledged at December 31, 2016 and 2015, respectively, which could be rehypothecated)
13,175,933

 
9,713,191

Held-to-maturity securities (a) (Note 5)
2,499,595

 
3,228,011

Advances (Notes 6, 8 and 18)
32,506,175

 
24,746,802

Mortgage loans held for portfolio, net of allowance for credit losses of $141 at both December 31, 2016 and 2015 (Notes 7, 8 and 18)
123,961

 
55,117

Loan to other FHLBank (Note 19)
290,000

 

Accrued interest receivable
87,977

 
69,676

Premises and equipment, net
17,972

 
18,520

Derivative assets (Notes 12 and 13)
15,637

 
23,080

Other assets
13,238

 
8,112

TOTAL ASSETS
$
58,212,077

 
$
42,082,027

 
 
 
 
LIABILITIES AND CAPITAL
 
 
 
Deposits (Notes 9 and 18)
 
 
 
Interest-bearing
$
1,040,139

 
$
1,045,939

Non-interest bearing
19

 
19

Total deposits
1,040,158

 
1,045,958

Consolidated obligations (Note 10)
 
 
 
Discount notes
26,941,782

 
20,541,329

Bonds
26,997,487

 
18,024,692

Total consolidated obligations
53,939,269

 
38,566,021

Mandatorily redeemable capital stock (Note 14)
3,417

 
8,929

Accrued interest payable
43,274

 
38,972

Affordable Housing Program (Note 11)
22,871

 
22,710

Derivative liabilities (Notes 12 and 13)
14,343

 
6,964

Other liabilities (Note 4)
331,403

 
193,161

Total liabilities
55,394,735

 
39,882,715

Commitments and contingencies (Notes 11, 13, 15 and 17)

 

CAPITAL (Notes 14 and 18)
 
 
 
Capital stock
 
 
 
Capital stock — Class B-1 putable ($100 par value) issued and outstanding shares: 6,904,110 and 6,324,540 at December 31, 2016 and 2015, respectively
690,411

 
632,454

Capital stock — Class B-2 putable ($100 par value) issued and outstanding shares: 12,397,371 and 9,076,781 at December 31, 2016 and 2015, respectively
1,239,737

 
907,678

Total Class B Capital Stock
1,930,148

 
1,540,132

Retained earnings
 
 
 
Unrestricted
745,104

 
699,213

Restricted
78,880

 
62,990

Total retained earnings
823,984

 
762,203

Accumulated other comprehensive income (loss) (Note 20)
63,210

 
(103,023
)
Total capital
2,817,342

 
2,199,312

TOTAL LIABILITIES AND CAPITAL
$
58,212,077

 
$
42,082,027

_______________________________________
(a) 
Fair values: $2,514,512 and $3,262,283 at December 31, 2016 and 2015, respectively.
The accompanying notes are an integral part of these financial statements.

F-4


FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF INCOME
(In thousands)
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
INTEREST INCOME
 
 
 
 
 
Advances
$
213,112

 
$
122,717

 
$
122,199

Prepayment fees on advances, net
4,061

 
11,475

 
9,789

Interest-bearing deposits
3,126

 
767

 
642

Securities purchased under agreements to resell
6,251

 
2,301

 
630

Federal funds sold
23,666

 
7,498

 
2,913

Trading securities
2,911

 
1,140

 
454

Available-for-sale securities
135,462

 
42,147

 
22,225

Held-to-maturity securities
30,077

 
28,799

 
40,351

Mortgage loans held for portfolio
3,482

 
3,644

 
4,628

Total interest income
422,148

 
220,488

 
203,831

 
 
 
 
 
 
INTEREST EXPENSE
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
Bonds
144,170

 
76,888

 
72,804

Discount notes
110,474

 
21,727

 
10,344

Deposits
2,440

 
263

 
79

Mandatorily redeemable capital stock
30

 
16

 
15

Other borrowings
4

 
5

 
6

Total interest expense
257,118

 
98,899

 
83,248

 
 
 
 
 
 
NET INTEREST INCOME
165,030

 
121,589

 
120,583

 
 
 
 
 
 
OTHER INCOME (LOSS)
 
 
 
 
 
Total other-than-temporary impairment losses on held-to-maturity securities
(310
)
 
(287
)
 
(1,386
)
Net non-credit impairment losses on held-to-maturity securities recognized in other comprehensive income
290

 
254

 
1,349

Credit component of other-than-temporary impairment losses on held-to-maturity securities
(20
)
 
(33
)
 
(37
)
 
 
 
 
 
 
Service fees
2,295

 
2,303

 
2,508

Net gains (losses) on trading securities
2,186

 
(1,792
)
 
625

Net gains (losses) on derivatives and hedging activities
(8,826
)
 
6,483

 
(423
)
Realized gains on sales of held-to-maturity securities
940

 
14,514

 

Realized gains on sales of available-for-sale securities
5,104

 
3,922

 

Gains on early extinguishment of debt

 

 
962

Letter of credit fees
5,784

 
4,415

 
4,832

Other, net
361

 
(38
)
 
(425
)
Total other income
7,824

 
29,774

 
8,042

 
 
 
 
 
 
OTHER EXPENSE
 
 
 
 
 
Compensation and benefits
50,820

 
43,668

 
39,584

Other operating expenses
25,001

 
26,168

 
29,158

Finance Agency
2,890

 
2,415

 
2,298

Office of Finance
3,006

 
2,707

 
2,344

Discretionary grant programs
1,798

 
1,303

 
1,250

Derivative clearing fees
1,059

 
441

 
91

Total other expense
84,574

 
76,702

 
74,725

 
 
 
 
 
 
INCOME BEFORE ASSESSMENTS
88,280

 
74,661

 
53,900

 
 
 
 
 
 
Affordable Housing Program assessment
8,831

 
7,468

 
5,391

 
 
 
 
 
 
NET INCOME
$
79,449

 
$
67,193

 
$
48,509

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

F-5


FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)

 
 
For the Years Ended December 31,
 
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
NET INCOME
 
$
79,449

 
$
67,193

 
$
48,509

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities, net of unrealized gains and losses relating to hedged interest rate risk included in net income
 
145,969

 
(100,768
)
 
23,280

Reclassification adjustment for realized gains on sales of available-for-sale securities included in net income
 
(5,104
)
 
(3,922
)
 

Unrealized gains (losses) on cash flow hedges
 
17,748

 
(1,424
)
 

Reclassification adjustment for losses on cash flow hedges included in net income
 
3,479

 
577

 

Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
 
(302
)
 
(254
)
 
(1,349
)
Reclassification adjustment for non-credit portion of other-than-temporary impairment losses recognized as credit losses in net income
 
12

 

 

Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities
 
4,509

 
6,227

 
7,200

Postretirement benefit plan
 
 
 
 
 
 
Amortization of prior service cost included in net periodic benefit cost
 
20

 
8

 
2

Actuarial gain (loss)
 
8

 
222

 
(2
)
Amortization of net actuarial gain included in net periodic benefit cost
 
(106
)
 
(88
)
 
(91
)
Total other comprehensive income (loss)
 
166,233


(99,422
)
 
29,040

TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
245,682

 
$
(32,229
)
 
$
77,549


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

F-6






FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(In thousands)
 
Capital Stock
Class B-1 - Putable (Membership/Excess)
 
Capital Stock
Class B-2 - Putable (Activity)
 

 Capital Stock
Class B - Putable
 
Retained Earnings
 
Accumulated Other
Comprehensive
Income (Loss)
 
Total
Capital
 
Shares
 
Par Value
 
Shares
 
Par Value
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, JANUARY 1, 2014

 
$

 

 
$

 
11,237

 
$
1,123,675

 
$
615,620

 
$
39,850

 
$
655,470

 
$
(32,641
)
 
$
1,746,504

Proceeds from sale of capital stock

 

 

 

 
11,773

 
1,177,333

 

 

 

 

 
1,177,333

Repurchase/redemption of capital stock

 

 

 

 
(10,792
)
 
(1,079,169
)
 

 

 

 

 
(1,079,169
)
Shares reclassified to mandatorily redeemable capital stock

 

 

 

 
(31
)
 
(3,130
)
 

 

 

 

 
(3,130
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
38,807

 
9,702

 
48,509

 

 
48,509

Other comprehensive income

 

 

 

 

 

 

 

 

 
29,040

 
29,040

Dividends on capital stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash

 

 

 

 

 

 
(169
)
 

 
(169
)
 

 
(169
)
Mandatorily redeemable capital stock

 

 

 

 

 

 
(5
)
 

 
(5
)
 

 
(5
)
Stock

 

 

 

 
40

 
4,029

 
(4,029
)
 

 
(4,029
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2014

 

 

 

 
12,227

 
1,222,738

 
650,224

 
49,552

 
699,776

 
(3,601
)
 
1,918,913

Issuance of Class B-1 and Class B-2 Stock
5,379

 
537,936

 
9,264

 
926,370

 

 

 

 

 

 

 
1,464,306

Retirement of Class B Stock

 

 

 

 
(14,643
)
 
(1,464,306
)
 

 

 

 

 
(1,464,306
)
Net transfers of shares between Class B-1 and Class B-2 Stock
3,304

 
330,344

 
(3,304
)
 
(330,344
)
 

 

 

 

 

 

 

Proceeds from sale of capital stock
7

 
728

 
3,117

 
311,652

 
8,941

 
894,107

 

 

 

 

 
1,206,487

Repurchase/redemption of capital stock
(2,321
)
 
(232,150
)
 

 

 
(6,545
)
 
(654,493
)
 

 

 

 

 
(886,643
)
Shares reclassified to mandatorily redeemable capital stock
(57
)
 
(5,700
)
 

 

 
(13
)
 
(1,344
)
 

 

 

 

 
(7,044
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
53,755

 
13,438

 
67,193

 

 
67,193

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 
(99,422
)
 
(99,422
)
Dividends on capital stock
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

 
 

Cash

 

 

 

 

 

 
(164
)
 

 
(164
)
 

 
(164
)
Mandatorily redeemable capital stock

 

 

 

 

 

 
(8
)
 

 
(8
)
 

 
(8
)
Stock
13

 
1,296

 

 

 
33

 
3,298

 
(4,594
)
 

 
(4,594
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2015
6,325

 
632,454

 
9,077

 
907,678

 

 

 
699,213

 
62,990

 
762,203

 
(103,023
)
 
2,199,312

Net transfers of shares between Class B-1 and Class B-2 Stock
7,956

 
795,559

 
(7,956
)
 
(795,559
)
 

 

 

 

 

 

 

Proceeds from sale of capital stock
49

 
4,955

 
11,276

 
1,127,618

 

 

 

 

 

 

 
1,132,573

Repurchase/redemption of capital stock
(7,571
)
 
(757,083
)
 

 

 

 

 

 

 

 

 
(757,083
)
Shares reclassified to mandatorily redeemable capital stock
(29
)
 
(2,863
)
 

 

 

 

 

 

 

 

 
(2,863
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
63,559

 
15,890

 
79,449

 

 
79,449

Other comprehensive income

 

 

 

 

 

 

 

 

 
166,233

 
166,233

Dividends on capital stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
Cash

 

 

 

 

 

 
(266
)
 

 
(266
)
 

 
(266
)
Mandatorily redeemable capital stock

 

 

 

 

 

 
(13
)
 

 
(13
)
 

 
(13
)
Stock
174

 
17,389

 

 

 

 

 
(17,389
)
 

 
(17,389
)
 

 

BALANCE, DECEMBER 31, 2016
6,904

 
$
690,411

 
12,397

 
$
1,239,737

 

 
$

 
$
745,104

 
$
78,880

 
$
823,984

 
$
63,210

 
$
2,817,342


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


F-7


FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CASH FLOWS
(In thousands)
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
 
 
Net income
$
79,449

 
$
67,193

 
$
48,509

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
Net premiums and discounts on advances, consolidated obligations, investments and mortgage loans
77,651

 
93,416

 
79,024

Concessions on consolidated obligations
4,655

 
3,818

 
2,111

Premises, equipment and computer software costs
4,068

 
3,920

 
3,563

Non-cash interest on mandatorily redeemable capital stock
25

 
14

 
14

Net decrease (increase) in trading securities
(2,754
)
 
1,640

 
(823
)
Losses due to change in net fair value adjustment on derivative and hedging activities
54,122

 
51,448

 
92,002

Gains on early extinguishment of debt

 

 
(962
)
Gains on sales of held-to-maturity securities
(940
)
 
(14,514
)
 

Gains on sales of available-for-sale securities
(5,104
)
 
(3,922
)
 

Credit component of other-than-temporary impairment losses on held-to-maturity securities
20

 
33

 
37

Net losses (gains) on disposition of premises, equipment and computer software
(2
)
 
64

 
76

Increase in accrued interest receivable
(18,354
)
 
(4,508
)
 
(743
)
Decrease (increase) in other assets
(4,593
)
 
(1,652
)
 
3,206

Increase (decrease) in Affordable Housing Program (AHP) liability
161

 
(3,288
)
 
(5,866
)
Increase (decrease) in accrued interest payable
4,305

 
(753
)
 
(7,310
)
Increase in other liabilities
5,458

 
1,708

 
1,158

Total adjustments
118,718

 
127,424

 
165,487

Net cash provided by operating activities
198,167

 
194,617

 
213,996

 
 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
 
Net decrease in interest-bearing deposits, including swap collateral pledged
211,171

 
115,587

 
185,321

Net increase in securities purchased under agreements to resell
(2,100,000
)
 
(650,000
)
 
(350,000
)
Net decrease (increase) in federal funds sold
(4,071,000
)
 
3,442,000

 
(4,145,000
)
Net increase in loan to other FHLBank
(290,000
)
 

 

Net decrease in short-term trading securities held for investment
102,215

 
195,666

 
599,854

Proceeds from maturities of available-for-sale securities
64,813

 
40,120

 
26,497

Purchases of available-for-sale securities
(6,270,127
)
 
(4,355,315
)
 
(986,971
)
Proceeds from sales of available-for-sale securities
2,655,395

 
959,791

 

Proceeds from sales of held-to-maturity securities
157,647

 
821,323

 

Proceeds from maturities of long-term held-to-maturity securities
579,388

 
747,985

 
1,005,647

Purchases of long-term held-to-maturity securities

 
(110,000
)
 
(453,459
)
Principal collected on advances
575,329,003

 
720,391,854

 
444,676,288

Advances made
(583,151,639
)
 
(726,246,510
)
 
(447,675,939
)
Principal collected on mortgage loans held for portfolio
13,737

 
16,364

 
19,542

Purchases of mortgage loans held for portfolio
(82,659
)
 

 

Purchases of premises, equipment and computer software
(4,072
)
 
(4,930
)
 
(2,820
)
Net cash used in investing activities
(16,856,128
)
 
(4,636,065
)
 
(7,101,040
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-8


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
FINANCING ACTIVITIES
 
 
 
 
 
Net increase (decrease) in deposits, including swap collateral held
87,230

 
249,910

 
(90,522
)
Net payments on derivative contracts with financing elements
(84,601
)
 
(146,123
)
 
(191,320
)
Net proceeds from issuance of consolidated obligations
 
 
 
 
 
Discount notes
351,967,556

 
674,400,185

 
399,156,245

Bonds
28,040,268

 
18,145,483

 
11,387,763

Debt issuance costs
(4,697
)
 
(2,905
)
 
(2,492
)
Payments for maturing and retiring consolidated obligations
 
 
 
 
 
Discount notes
(345,583,432
)
 
(672,993,302
)
 
(386,010,247
)
Bonds
(18,940,680
)
 
(16,198,790
)
 
(16,862,596
)
Proceeds from issuance of capital stock
1,132,573

 
1,206,487

 
1,177,333

Proceeds from issuance of mandatorily redeemable capital stock

 
2

 
5

Payments for redemption of mandatorily redeemable capital stock
(8,413
)
 
(3,198
)
 
(1,160
)
Payments for repurchase/redemption of capital stock
(757,083
)
 
(886,643
)
 
(1,079,169
)
Cash dividends paid
(266
)
 
(164
)
 
(169
)
Net cash provided by financing activities
15,848,455

 
3,770,942

 
7,483,671

 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(809,506
)
 
(670,506
)
 
596,627

Cash and cash equivalents at beginning of the year
837,202

 
1,507,708

 
911,081

Cash and cash equivalents at end of the year
$
27,696

 
$
837,202

 
$
1,507,708

 
 
 
 
 
 
Supplemental disclosures
 
 
 
 
 
Interest paid
$
235,718

 
$
102,415

 
$
115,042

AHP payments, net
$
8,670

 
$
10,756

 
$
11,257

Stock dividends issued
$
17,389

 
$
4,594

 
$
4,029

Dividends paid through issuance of mandatorily redeemable capital stock
$
13

 
$
8

 
$
5

Capital stock reclassified to mandatorily redeemable capital stock, net
$
2,863

 
$
7,044

 
$
3,130


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


F-9


FEDERAL HOME LOAN BANK OF DALLAS
NOTES TO FINANCIAL STATEMENTS
Background Information
The Federal Home Loan Bank of Dallas (the “Bank”), a federally chartered corporation, is one of 11 district Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Federal Home Loan Banks Office of Finance (“Office of Finance”), a joint office of the FHLBanks, the “FHLBank System”) that were created by the Federal Home Loan Bank Act of 1932 (as amended, the “FHLB Act”). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The Bank serves eligible financial institutions in Arkansas, Louisiana, Mississippi, New Mexico and Texas (collectively, the Ninth District of the FHLBank System). The Bank provides a readily available, competitively priced source of funds to its member institutions. The Bank is a cooperative whose member institutions own the capital stock of the Bank. Regulated depository institutions and insurance companies engaged in residential housing finance and Community Development Financial Institutions that are certified under the Community Development Banking and Financial Institutions Act of 1994 may apply for membership in the Bank. All members must purchase stock in the Bank. Housing associates, including state and local housing authorities, 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 required or allowed to hold capital stock.
The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, supervises and regulates the FHLBanks and the Office of Finance. The Finance Agency’s stated mission is to ensure that the housing government-sponsored enterprises ("GSEs"), including the FHLBanks, operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. Consistent with this mission, the Finance Agency establishes policies and regulations covering the operations of the FHLBanks. Each FHLBank operates as a separate entity with its own management, employees, and board of directors. The Bank does not have any special purpose entities or any other type of off-balance sheet conduits.
The Office of Finance facilitates the issuance and servicing of the FHLBanks’ debt instruments (known as consolidated obligations). As provided by the FHLB Act and Finance Agency regulation, the FHLBanks’ consolidated obligations are backed only by the financial resources of all 11 FHLBanks. Consolidated obligations are the joint and several obligations of all the FHLBanks and are the FHLBanks’ primary source of funds. Deposits, other borrowings, and the proceeds from capital stock issued to members provide other funds. The Bank primarily uses these funds to provide loans (known as advances) to its members, to purchase single-family mortgage loans from its members, and to fund other investments. The Bank’s credit services also include letters of credit issued or confirmed on behalf of members; in addition, the Bank offers interest rate swaps, caps and floors to its members. Further, the Bank provides its members with a variety of correspondent banking services, including overnight and term deposit accounts, wire transfer services, securities safekeeping and securities pledging services.

Note 1—Summary of Significant Accounting Policies
     Use of Estimates and Assumptions. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make assumptions and estimates. These assumptions and estimates may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Significant estimates include the valuations of the Bank’s investment securities, as well as its derivative instruments and any associated hedged items. Actual results could differ from these estimates.
     Federal Funds Sold, Securities Purchased Under Agreements to Resell, Loans to Other FHLBanks and Interest-Bearing Deposits. These investments are carried at cost.
     Investment Securities. The Bank records investment securities on trade date. The Bank carries investment securities for which it has both the ability and intent to hold to maturity (held-to-maturity securities) at cost, adjusted for the amortization of premiums and accretion of discounts using the level-yield method. The carrying amount of held-to-maturity securities is further adjusted for any other-than-temporary impairment charges, as described below.
The Bank classifies certain investment securities that it may sell before maturity as available-for-sale and carries them at fair value. For available-for-sale securities that have been hedged (with fixed-for-floating interest rate swaps) and qualify as fair value hedges, the Bank records the portion of the change in value related to the risk being hedged in other income (loss) as “net gains (losses) on derivatives and hedging activities” together with the related change in the fair value of the derivative, and records the remainder of the change in value of the securities in other comprehensive income as “net unrealized gains (losses) on available-for-sale securities.”

F-10


The Bank classifies certain other investments as trading and carries them at fair value. The Bank records changes in the fair value of these investments in other income (loss) in the statements of income. Although the securities are classified as trading, the Bank does not engage in active or speculative trading practices.
The Bank computes the amortization and accretion of premiums and discounts on mortgage-backed securities ("MBS") for which prepayments are probable and reasonably estimable using the level-yield method over the estimated lives of the securities. This method requires a retrospective adjustment of the effective yield each time the Bank changes the estimated life as if the new estimate had been known since the original acquisition date of the securities. The Bank computes the amortization and accretion of premiums and discounts on other investments using the level-yield method to the contractual maturity of the securities.
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) in the statements of income. The Bank treats securities purchased under agreements to resell as collateralized financings.
The Bank evaluates outstanding available-for-sale and held-to-maturity securities for other-than-temporary impairment on a quarterly basis. An investment security is impaired if the fair value of the investment is less than its amortized cost. Amortized cost includes adjustments (if any) made to the cost basis of an investment for accretion, amortization, the credit portion of previous other-than-temporary impairments and hedging. The Bank considers the impairment of a debt security to be other than temporary if the Bank (i) intends to sell the security, (ii) more likely than not will be required to sell the security before recovering its amortized cost basis, or (iii) does not expect to recover the security’s entire amortized cost basis (even if the Bank does not intend to sell the security). Further, an impairment is considered to be other than temporary if the Bank’s best estimate of the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security (any such shortfall is referred to as a “credit loss”).
If an other-than-temporary impairment (“OTTI”) occurs because the Bank intends to sell an impaired debt security, or more likely than not will be required to sell the security before recovery of its amortized cost basis, the impairment is recognized currently in earnings in an amount equal to the entire difference between fair value and amortized cost.
In instances in which a determination is made that a credit loss exists but the Bank does not intend to sell the debt security and it is not more likely than not that the Bank will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis, the other-than-temporary impairment (i.e., the difference between the security’s then-current carrying amount and its estimated fair value) is separated into (i) the amount of the total impairment related to the credit loss (i.e., the credit component) and (ii) the amount of the total impairment related to all other factors (i.e., the non-credit component). The credit component is recognized in earnings and the non-credit component is recognized in other comprehensive income. The total other-than-temporary impairment is presented in the statement of income with an offset for the amount of the total other-than-temporary impairment that is recognized in other comprehensive income.
The non-credit component of any OTTI losses recognized in other comprehensive income for debt securities classified as held-to-maturity is accreted over the remaining life of the debt security (in a prospective manner based on the amount and timing of future estimated cash flows) as an increase in the carrying value of the security unless and until the security is sold, the security matures, or there is an additional other-than-temporary impairment that is recognized in earnings. In instances in which an additional other-than-temporary impairment is recognized in earnings, the amount of the credit loss is reclassified from accumulated other comprehensive income (loss) ("AOCI") to earnings. Further, if an additional other-than-temporary impairment is recognized in earnings and the held-to-maturity security’s then-current carrying amount exceeds its fair value, an additional non-credit impairment is concurrently recognized in other comprehensive income. Conversely, if an additional other-than-temporary impairment is recognized in earnings and the held-to-maturity security’s then-current carrying value is less than its fair value, the carrying value of the security is not increased. In periods subsequent to the recognition of an OTTI loss, the other-than-temporarily impaired debt security is accounted for as if it had been purchased on the measurement date of the other-than-temporary impairment at an amount equal to the previous amortized cost basis less the other-than-temporary impairment recognized in earnings. The difference between the new amortized cost basis and the cash flows expected to be collected is accreted as interest income over the remaining life of the security in a prospective manner based on the amount and timing of future estimated cash flows. In instances when there is a significant increase in a security's expected cash flows, the amount to be accreted is adjusted prospectively.
     Advances. The Bank reports advances at their principal amount outstanding, net of unearned commitment fees and deferred prepayment fees, if any, as discussed below. The Bank credits interest on advances to income as earned.
     Mortgage Loans Held for Portfolio. Through the Mortgage Partnership Finance® (“MPF”®) program administered by the FHLBank of Chicago, the Bank invests in conventional residential mortgage loans. Under the MPF program, the Bank purchased conventional mortgage loans and government-guaranteed/insured mortgage loans (i.e., those insured or guaranteed by the Federal Housing Administration (“FHA”) or the Department of Veterans Affairs (“DVA”)) during the period from 1998 to mid-2003. The Bank resumed acquiring conventional mortgage loans under this program in 2016. In 2016, all of the

F-11


acquired mortgage loans were originated by certain of the Bank's member institutions that participate in the MPF program ("Participating Financial Institutions" or “PFIs”) and the Bank acquired a 100 percent interest in such loans. For loans that were acquired from its members during the period from 1998 to mid-2003, the Bank retained title to the mortgage loans, subject to any participation interest in such loans that was sold to the FHLBank of Chicago; the interest in these loans that was retained by the Bank ranged from 1 percent to 49 percent. Additionally, during the period from 1998 to 2000, the Bank also acquired from the FHLBank of Chicago a percentage interest (ranging up to 75 percent) in certain MPF loans originated by PFIs of other FHLBanks. The Bank manages the liquidity, interest rate and prepayment risk of these loans, while the PFIs or their designees retain the servicing activities. The Bank and the PFIs share in the credit risk of the loans with the Bank assuming the first loss obligation limited by the First Loss Account (“FLA”), and the PFIs assuming credit losses in excess of the FLA, up to the amount of the credit enhancement obligation as specified in the master agreement (“Second Loss Credit Enhancement”). The Bank assumes all losses in excess of the Second Loss Credit Enhancement.
The Bank classifies mortgage loans held for portfolio as held for investment and, accordingly, reports them at their principal amount outstanding net of deferred premiums, discounts and the fair value amount of the delivery commitment (which represents the unrealized gains and losses from loans initially classified as mortgage loan commitments) as of the purchase (i.e., settlement) date. The Bank credits interest on mortgage loans to income as earned. The Bank amortizes or accretes the deferred amounts to interest income using the contractual method. The contractual method uses the cash flows required by the loan contracts, as adjusted for any actual prepayments, to apply the interest method. Future prepayments of principal are not anticipated under this method. The Bank has the ability and intent to hold these mortgage loans until maturity.
     Allowance for Credit Losses. An allowance for credit losses is separately established for each of the Bank’s identified portfolio segments, if necessary, to provide for probable losses inherent in its financing receivables portfolio and other off-balance sheet credit exposures as of the balance sheet date. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability. See Note 8 — Allowance for Credit Losses for information regarding the determination of the allowance for credit losses.
A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. The Bank has developed and documented a systematic methodology for determining an allowance for credit losses for the following portfolio segments: (1) advances and other extensions of credit to members, collectively referred to as “extensions of credit to members;” (2) government-guaranteed/insured mortgage loans held for portfolio; and (3) conventional mortgage loans held for portfolio.
Classes of financing receivables are generally a disaggregation of a portfolio segment and are determined on the basis of their initial measurement attribute, the risk characteristics of the financing receivable and an entity’s method for monitoring and assessing credit risk. Because the credit risk arising from the Bank’s financing receivables is assessed and measured at the portfolio segment level, the Bank does not have separate classes of financing receivables within each of its portfolio segments.
The Bank places a conventional mortgage loan on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due. When a mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income. The Bank records cash payments received on nonaccrual loans first as interest income until it recovers all interest, and then as a reduction of principal. A loan on nonaccrual status is 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 interest and principal. Government-guaranteed/insured loans are not placed on nonaccrual status.
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. Collateral-dependent loans that are on nonaccrual status are measured for impairment based on the fair value of the underlying mortgaged property less estimated selling costs. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property; that is, there is no other available and reliable source of repayment. A collateral-dependent loan is impaired if the fair value of the underlying collateral is insufficient to recover the unpaid principal balance on the loan. Interest income on impaired loans is recognized in the same manner as it is for nonaccrual loans noted above.
The Bank evaluates whether to record a charge-off on a conventional mortgage loan when the loan becomes 180 days or more past due or upon the occurrence of a confirming event, whichever occurs first. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. A charge-off is recorded if the recorded investment in the loan will not be recovered.
     Real Estate Owned. Real estate owned includes assets that have been received in satisfaction of debt or as a result of actual or in-substance foreclosures. Real estate owned is initially recorded at fair value less estimated costs to sell (and subsequently carried at the lower of cost or fair value less estimated costs to sell) and is included in other assets in the statements of condition. If the fair value of the real estate owned less estimated costs to sell is less than the recorded investment in the mortgage loan at the date of transfer, the Bank recognizes a charge-off to the allowance for loan losses. Subsequent realized gains and realized or unrealized losses are included in other income (loss) in the statements of income.

F-12


     Premises and Equipment. The Bank records premises and equipment at cost less accumulated depreciation and amortization. At December 31, 2016 and 2015, the Bank’s accumulated depreciation and amortization relating to premises and equipment was $31,573,000 and $33,416,000, respectively. The Bank computes depreciation using the straight-line method over the estimated useful lives of assets ranging from 3 to 39 years. It amortizes leasehold improvements on the straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The Bank capitalizes improvements and major renewals but expenses ordinary maintenance and repairs when incurred. Depreciation and amortization expense was $2,124,000, $2,176,000 and $2,050,000 during the years ended December 31, 2016, 2015 and 2014, respectively. The Bank includes gains and losses on disposal of premises and equipment, if any, in other income (loss) under the caption “other, net.”
     Computer Software. The cost of purchased computer software and certain costs incurred in developing computer software for internal use are capitalized and amortized over future periods. As of December 31, 2016 and 2015, the Bank had $2,635,000 and $2,081,000, respectively, in unamortized computer software costs included in other assets. Amortization of computer software costs charged to expense was $1,944,000, $1,744,000 and $1,513,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
     Derivatives and Hedging Activities. The Bank accounts for derivatives and hedging activities in accordance with the guidance in Topic 815 of the Financial Accounting Standards Board’s ("FASB") Accounting Standards Codification entitled “Derivatives and Hedging” (“ASC 815”). All derivatives are recognized on the statements of condition at their fair values, including accrued interest receivable and payable. For purposes of reporting derivative assets and derivative liabilities, the Bank offsets the fair value amounts recognized for derivative instruments (including the right to reclaim cash collateral and the obligation to return cash collateral) where a legally enforceable right of setoff exists.
Changes in the fair value of a derivative that is effective as — and that is designated and qualifies as — a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect gains or losses on firm commitments), are recorded in current period earnings. Any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item attributable to the hedged risk) is recorded in other income (loss) as “net gains (losses) on derivatives and hedging activities.” Net interest income/expense associated with derivatives that qualify for fair value hedge accounting under ASC 815 is recorded as a component of net interest income.
If fair value hedging relationships meet certain criteria specified in ASC 815, they are eligible for hedge accounting and the offsetting changes in fair value of the hedged items may be recorded in earnings. The application of hedge accounting generally requires the Bank to evaluate the effectiveness of the fair value hedging relationships on an ongoing basis and to calculate the changes in fair value of the derivatives and related hedged items independently. This is commonly known as the “long-haul” method of accounting. Transactions that meet more stringent criteria qualify for the “shortcut” method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in value of the related derivative. The Bank considers hedges of committed advances to be eligible for the shortcut method of accounting as long as the settlement of the committed advance occurs within the shortest period possible for that type of instrument based on market settlement conventions, the fair value of the swap is zero at the inception of the hedging relationship, and the transaction meets all of the other criteria for shortcut accounting specified in ASC 815. The Bank has defined the market settlement convention to be five business days or less for advances.
Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in AOCI until earnings are affected by the variability of the cash flows of the hedged transaction. Any ineffective portion of a cash flow hedge (which represents the amount by which the change in the fair value of the derivative differs from the change in fair value of a hypothetical derivative having terms that match identically the critical terms of the hedged forecasted transaction) is recognized in other income (loss) as “net gains (losses) on derivatives and hedging activities.”
An economic hedge is defined as a derivative hedging specific or non-specific assets or liabilities that does not qualify or was not designated for hedge accounting under ASC 815, but is an acceptable hedging strategy under the Bank’s Enterprise Market Risk Management Policy. These hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative derivative transactions. An economic hedge by definition introduces the potential for earnings variability as changes in the fair value of a derivative designated as an economic hedge are recorded in current period earnings with no offsetting fair value adjustment to an asset or liability. Both the net interest income/expense and the fair value changes associated with derivatives in economic hedging relationships are recorded in other income (loss) as “net gains (losses) on derivatives and hedging activities.”
The Bank records the changes in fair value of all derivatives (and, in the case of fair value hedges, the hedged items) beginning on the trade date.

F-13


Cash flows associated with all derivatives are reported as cash flows from operating activities in the statements of cash flows, unless the derivative contains an other-than-insignificant financing element, in which case its cash flows are reported as cash flows from financing activities.
The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument is “embedded” and the financial instrument that embodies the embedded derivative instrument is not remeasured at fair value with changes in fair value reported in earnings as they occur. 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 financial instrument (i.e., the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as either (1) a hedging instrument in a fair value hedge or (2) a stand-alone derivative instrument pursuant to an economic hedge. However, if the entire contract were to be measured at fair value, with changes in fair value reported in current earnings, or if the Bank could not reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the statement of condition at fair value and no portion of the contract would be separately accounted for as a derivative.
The Bank discontinues hedge accounting prospectively when: (1) management determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (3) it is no longer probable that a forecasted transaction will occur within the originally specified time frame; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging instrument in accordance with ASC 815 is no longer appropriate.
In all cases in which hedge accounting is discontinued and the derivative remains outstanding, the Bank will carry the derivative at its fair value on the statement of condition, recognizing any additional changes in the fair value of the derivative in current period earnings.
When fair value hedge accounting for a specific derivative is discontinued due to the Bank’s determination that such derivative no longer qualifies for hedge accounting treatment or because the derivative is terminated, the Bank will cease to adjust the hedged asset or liability for changes in fair value and amortize the cumulative basis adjustment on the formerly hedged item into earnings over its remaining term using the level-yield method.
When 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 statement of condition at its fair value, removing from the statement of condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.
When cash flow hedge accounting for a specific derivative is discontinued due to the Bank's determination that such derivative no longer qualifies for hedge accounting treatment or because the derivative is terminated, the Bank will reclassify the cumulative fair value gains or losses recorded in AOCI as of the discontinuance date from AOCI into earnings when earnings are affected by the original forecasted transaction, except in cases where the cash flow hedge is discontinued because the forecasted transaction is no longer probable (i.e., the forecasted transaction will not occur in the originally expected period or within an additional two-month period of time thereafter). In such cases, any fair value gains or losses recorded in AOCI as of the determination date are immediately reclassified to earnings as a component of "gains (losses) on derivatives and hedging activities." Similarly, if the Bank expects at any time that continued reporting of a net loss in AOCI would lead to recognizing a net loss on the combination of the hedging instrument and hedged transaction in one or more future periods, the amount that is not expected to be recovered is immediately reclassified to earnings as a component of "gains (losses) on derivatives and hedging activities."
     Mandatorily Redeemable Capital Stock. The Bank reclassifies shares of capital stock from the capital section to the liability section of its statement of condition at the point in time when a member submits a written redemption notice, gives notice of its intent to withdraw from membership, or becomes a non-member by merger or acquisition, charter termination, or involuntary termination from membership, as the shares of capital stock then meet the definition of a mandatorily redeemable financial instrument. Shares of capital stock meeting this definition are reclassified to liabilities at fair value. Following reclassification of the stock, any dividends paid or accrued on such shares are recorded as interest expense in the statement of income. Repurchase or redemption of these mandatorily redeemable financial instruments is reported as a cash outflow in the financing activities section of the statement of cash flows.
If a member cancels a written redemption or withdrawal notice, the Bank reclassifies the shares subject to the cancellation notice from liabilities back to equity. Following this reclassification to equity, dividends on the capital stock are once again recorded as a reduction of retained earnings.

F-14


Although mandatorily redeemable capital stock is excluded from capital for financial reporting purposes, it is considered capital for regulatory purposes. See Note 14 for more information, including restrictions on stock redemption.
     Affordable Housing Program. The FHLB Act requires each FHLBank to establish and fund an Affordable Housing Program (“AHP”) (see Note 11). The Bank charges the required funding for AHP to earnings and establishes a liability. The Bank makes AHP funds available to members in the form of direct grants to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households.
     Prepayment Fees. The Bank charges a prepayment fee when members/borrowers prepay certain advances before their original maturities. The Bank records prepayment fees received from members/borrowers net of hedging adjustments included in the book basis of the prepaid advance, if any, as interest income on advances in the statements of income either immediately (as prepayment fees on advances) or over time (as interest income on advances), as further described below. In cases in which the Bank funds a new advance concurrent 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. If the new advance qualifies as a modification of the existing advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized into interest income over the life of the modified advance using the level-yield method. This amortization is recorded in interest income on advances. If the Bank determines that the advance should be treated as a new advance, or in instances where no new advance is funded, it records the net fees as “prepayment fees on advances” in the interest income section of the statements of income.
     Commitment Fees. The Bank defers commitment fees for advances and amortizes them to interest income using the level-yield method over the life of the advance. The Bank records commitment fees for letters of credit as a deferred credit when it receives the fees and amortizes them over the term of the letter of credit using the straight-line method.
     Concessions on Consolidated Obligations. The Bank defers and amortizes, using the level-yield method, the amounts paid to securities dealers in connection with the sale of consolidated obligation bonds over the term to maturity of the related bonds. The Office of Finance prorates the amount of the concession to the Bank based upon the percentage of the debt issued that is assumed by the Bank. Unamortized concessions were $1,308,000 and $1,266,000 at December 31, 2016 and 2015, respectively, and are recorded as a reduction in the balance of consolidated obligation bonds on the statements of condition. As discussed in Note 2, the unamortized concessions were previously recorded in other assets on the statement of condition and were retrospectively reclassified as of December 31, 2015. Amortization of such concessions is included in consolidated obligation bond interest expense and totaled $1,261,000, $2,544,000 and $2,111,000 during the years ended December 31, 2016, 2015 and 2014, respectively. The Bank charges to expense as incurred the concessions applicable to the sale of consolidated obligation discount notes because of the short maturities of these notes. Concessions related to the sale of discount notes totaling $3,394,000, $1,274,000 and $870,000 are included in interest expense on consolidated obligation discount notes in the statements of income for the years ended December 31, 2016, 2015 and 2014, respectively.
     Discounts and Premiums on Consolidated Obligations. The Bank expenses the discounts on consolidated obligation discount notes using the level-yield method over the term to maturity of the related notes. It accretes the discounts and amortizes the premiums on consolidated obligation bonds to expense using the level-yield method over the term to maturity of the bonds.
     Finance Agency and Office of Finance Expenses. The Bank is assessed its proportionate share of the costs of operating the Finance Agency and the Office of Finance. The assessment for the FHLBanks’ portion of the Finance Agency’s operating and capital expenditures is allocated among the FHLBanks based on the ratio between each FHLBank’s minimum required regulatory capital and the aggregate minimum required regulatory capital of all FHLBanks determined as of June 30 of each year. The expenses of the Office of Finance are shared on a pro rata basis with two-thirds based on each FHLBank’s total consolidated obligations outstanding (as of the current month-end) and one-third divided equally among all of the FHLBanks. These costs are included in the other expense section of the statements of income.
     Estimated Fair Values. Some of the Bank’s financial instruments (e.g., advances) lack an available trading market characterized by transactions between a willing buyer and a willing seller engaging in an exchange transaction. Therefore, the Bank uses internal models employing assumptions regarding interest rates, volatilities, prepayments, and other factors to perform present-value calculations when disclosing estimated fair values for these financial instruments. The Bank assumes that book value approximates fair value for certain financial instruments with three months or less to repricing or maturity. For a discussion of the Bank's valuation techniques and the estimated fair values of its financial instruments, see Note 16.
     Cash Flows. The Bank considers cash and due from banks as cash and cash equivalents in the statements of cash flows.



F-15


Note 2— Recently Issued Accounting Guidance
Revenue from Contracts with Customers. On May 28, 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers" ("ASU 2014-09"), which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. In addition, ASU 2014-09 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. ASU 2014-09 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 in ASU 2014-09 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 (January 1, 2017 for the Bank). Early application was not permitted. On August 12, 2015, the FASB issued ASU 2015-14 "Deferral of Effective Date," which deferred the effective date of ASU 2014-09 by one year. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Bank will adopt ASU 2014-09 effective January 1, 2018. The Bank does not expect the adoption of ASU 2014-09 to have a material impact on its results of operations or financial condition.
Simplifying the Presentation of Debt Issuance Costs. On April 7, 2015, the FASB issued ASU 2015-03 "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the statement of condition as a direct deduction from that debt liability, consistent with the presentation of a debt discount. For public business entities, the guidance in ASU 2015-03 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 (January 1, 2016 for the Bank). The guidance is required to be applied on a retrospective basis to each individual period presented on the statement of condition. Accordingly, $1,267,000 of unamortized debt issuance costs were reclassified as a reduction of consolidated obligation bonds in the accompanying statement of condition as of December 31, 2015. Previously, these unamortized debt issuance costs were included in other assets. The adoption of this guidance did not have any impact on the Bank's results of operations.
On August 18, 2015, the FASB issued ASU 2015-15 "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" ("ASU 2015-15"). ASU 2015-15 clarifies that, given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The adoption of this guidance on January 1, 2016 did not have any impact on the Bank's results of operations or financial condition.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. On April 15, 2015, the FASB issued ASU 2015-05 "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" ("ASU 2015-05"), which clarifies when fees paid in a cloud computing arrangement pertain to the acquisition of a software license, services, or both. For public business entities, the guidance in ASU 2015-05 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 (January 1, 2016 for the Bank). Early adoption was permitted. The Bank could elect to adopt ASU 2015-05 either (i) prospectively to all arrangements entered into or materially modified after the effective date or (ii) retrospectively. The Bank elected to adopt this guidance prospectively effective January 1, 2016. The adoption of this guidance has not had any impact on the Bank's results of operations or financial condition.
Recognition and Measurement of Financial Assets and Financial Liabilities. On January 5, 2016, the FASB issued ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"), which makes targeted improvements to existing U.S. GAAP by: (i) requiring certain equity investments to be measured at fair value with changes in fair value recognized in earnings, (ii) simplifying the impairment assessment of equity investments without readily determinable fair values, (iii) requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (iv) requiring 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 statement of condition or in the accompanying notes to the financial statements, (v) eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities, (vi) eliminating the requirement for public business 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 statement of condition, (vii) requiring a reporting organization 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 (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, and (viii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. For public business entities, the guidance in ASU 2016-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (January 1, 2018 for the Bank). Early adoption is permitted for certain provisions. The adoption of ASU 2016-01 is not expected to have a material impact on the Bank's results of operations or financial condition.

F-16


Leases. On February 25, 2016, the FASB issued ASU 2016-02 "Leases" (“ASU 2016-02”), which requires entities that lease assets (lessees) to recognize in the statement of condition assets and liabilities for the rights and obligations created by those leases. Specifically, ASU 2016-02 requires a lessee of operating or finance leases to recognize a right-of-use asset and a liability to make lease payments for leases with terms of more than 12 months. Lessor accounting will remain largely unchanged from current U.S. GAAP. ASU 2016-02 also requires extensive quantitative and qualitative disclosures to help financial statement users understand the amount, timing and uncertainty of cash flows arising from leases. For public business entities, the guidance in ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (January 1, 2019 for the Bank). Early adoption is permitted. The adoption of ASU 2016-02 is not expected to have a material impact on the Bank's results of operations or financial condition.
Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. On March 10, 2016, the FASB issued ASU 2016-05, "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships" ("ASU 2016-05"), which clarifies the hedge accounting impact when there is a change in one of the counterparties to the derivative contract (i.e., a novation). ASU 2016-05 clarifies that a change in the counterparty to a derivative contract, in and of itself, does not require the dedesignation of a hedging relationship. An entity will, however, still need to evaluate whether it is probable that the counterparty will perform under the contract as part of its ongoing effectiveness assessment for hedge accounting. For public business entities, the guidance in ASU 2016-05 is effective for fiscal years beginning after December 15, 2016 (January 1, 2017 for the Bank), and interim periods within those fiscal years. Early adoption is permitted. Entities have the option to adopt ASU 2016-05 on a prospective basis to new derivative contract novations or on a modified retrospective basis. The Bank elected to adopt this guidance on a prospective basis beginning January 1, 2016. The adoption of ASU 2016-05 has not had any impact on the Bank's results of operations or financial condition.
Contingent Put and Call Options in Debt Instruments. On March 14, 2016, the FASB issued ASU 2016-06, "Contingent Put and Call Options in Debt Instruments" ("ASU 2016-06"), which clarifies the requirements for assessing whether contingent call or 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 or put options are clearly and closely related to the economic characteristics and risks of their debt hosts. Consequently, when a call or put option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call or put option is related to interest rates or credit risks. For public business entities, the guidance in ASU 2016-06 is effective for fiscal years beginning after December 15, 2016 (January 1, 2017 for the Bank), and interim periods within those fiscal years. Early adoption is permitted. The guidance is to be applied on a modified retrospective basis to existing debt instruments as of the beginning of the period for which the amendments are effective. The Bank adopted this guidance effective January 1, 2017. The adoption of ASU 2016-06 has not had any impact on the Bank's financial condition or results of operations.
Credit Losses on Financial Instruments. On June 16, 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which amends the guidance for the accounting for credit losses on financial instruments by replacing the current incurred loss methodology with an expected credit loss methodology. Among other things, ASU 2016-13 requires:
entities to present financial assets, or groups of financial assets, measured at amortized cost at the net amount expected to be collected, which is computed by deducting an allowance for credit losses from the amortized cost basis of the financial asset(s);
the measurement of expected credit losses to be based upon relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount;
the statement of income to reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases in 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 ("PCD assets") that are measured at amortized cost in a manner similar to other financial assets measured at amortized cost (the initial allowance for credit losses on PCD assets is added to the purchase price rather than being reported as a credit loss expense);
credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses, the amount of which is limited to the amount by which fair value is below amortized cost; and
public business entities to further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by year of origination.
For public business entities that are SEC filers, the guidance in ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 (January 1, 2020 for the Bank), and interim periods within those fiscal years. Early adoption is permitted

F-17


for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the amendments are adopted. However, entities are required to use a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the date of adoption. The Bank has not yet determined the effect that the adoption of ASU 2016-13 will have on its results of operations or financial condition.
Classification of Certain Cash Receipts and Cash Payments. On August 26, 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), which clarifies the guidance for classifying certain cash receipts and cash payments in the statement of cash flows. The guidance is intended to reduce existing diversity in practice regarding eight specific cash flow presentation issues. For public business entities, the guidance in ASU 2016-15 is effective for fiscal years beginning after December 15, 2017 (January 1, 2018 for the Bank), and interim periods within those fiscal years. Early adoption, including adoption in an interim period, is permitted. The guidance is to be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied as if the change was made prospectively as of the earliest date practicable. The adoption of ASU 2016-15 will not have any impact on the Bank's statement of cash flows, nor will it have any impact on the Bank's results of operations or financial condition.
Restricted Cash. On November 17, 2016, the FASB issued ASU 2016-18, "Restricted Cash" ("ASU 2016-18"), which clarifies the guidance for classifying and presenting certain cash transfers, cash receipts and cash payments in the statement of cash flows. The guidance is intended to reduce existing diversity in practice regarding restricted cash and restricted cash equivalents. For public business entities, the guidance in ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 (January 1, 2018 for the Bank), and interim periods within those fiscal years. Early adoption, including adoption in an interim period, is permitted. The guidance is to be applied using a retrospective transition method to each period presented. The adoption of ASU 2016-18 will not have any impact on the Bank's statement of cash flows, nor will it have any impact on the Bank's results of operations or financial condition.

Note 3—Trading Securities
     Major Security Types. Trading securities as of December 31, 2016 and 2015 were as follows (in thousands):
 
December 31, 2016
 
December 31, 2015
U.S. Treasury Notes
$
101,495

 
$
202,199

Other
10,143

 
8,857

Total
$
111,638

 
$
211,056


Other trading securities consist solely of mutual fund investments associated with the Bank's non-qualified deferred compensation plans.
Net gains (losses) on trading securities during the years ended December 31, 2016, 2015 and 2014 included changes in net unrealized holding gain (loss) of $(182,000), $(1,983,000) and $418,000 for securities that were held on December 31, 2016, 2015 and 2014, respectively.

Note 4—Available-for-Sale Securities
Major Security Types. Available-for-sale securities as of December 31, 2016 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
489,573

 
$
6,325

 
$

 
$
495,898

GSE obligations
6,475,140

 
52,746

 
2,361

 
6,525,525

Other
318,223

 
1,770

 

 
319,993

 
7,282,936

 
60,841

 
2,361

 
7,341,416

GSE commercial MBS
5,834,410

 
32,861

 
32,754

 
5,834,517

Total
$
13,117,346

 
$
93,702

 
$
35,115

 
$
13,175,933

Included in the table above are GSE agency debentures and GSE commercial MBS that were purchased but which had not yet settled as of December 31, 2016. The aggregate amounts due of $15,000,000 and $282,595,000, respectively, are included in other liabilities on the statement of condition at that date.

F-18


Available-for-sale securities as of December 31, 2015 were as follows (in thousands):
 
Amortized
Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
$
498,185

 
$
1,315

 
$
1,748

 
$
497,752

GSE obligations
5,328,125

 
12,597

 
1,775

 
5,338,947

Other
372,532

 
10

 
1,002

 
371,540

 
6,198,842

 
13,922


4,525


6,208,239

GSE commercial MBS
3,596,627

 
766

 
92,441

 
3,504,952

Total
$
9,795,469

 
$
14,688


$
96,966


$
9,713,191

Included in the table above are GSE commercial MBS that were purchased in 2015 but which did not settle until 2016. The aggregate amount due of $164,889,000 as of December 31, 2015 is included in other liabilities on the statement of condition at that date.
Other debentures are comprised of securities issued by the Private Export Funding Corporation ("PEFCO"). These debentures are fully secured by U.S. government-guaranteed obligations and the payment of interest on the debentures is guaranteed by an agency of the U.S. government. The amortized cost of the Bank's available-for-sale securities includes hedging adjustments.
The following table summarizes (dollars in thousands) the available-for-sale securities with unrealized losses as of December 31, 2016. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
GSE debentures
8

 
$
839,683

 
$
2,293

 
1

 
$
50,476

 
$
68

 
9

 
$
890,159

 
$
2,361

GSE commercial MBS
49

 
1,388,917

 
15,595

 
46

 
1,531,930

 
17,159

 
95

 
2,920,847

 
32,754

Total
57

 
$
2,228,600

 
$
17,888

 
47

 
$
1,582,406

 
$
17,227

 
104

 
$
3,811,006

 
$
35,115



F-19


The following table summarizes (dollars in thousands) the available-for-sale securities with unrealized losses as of December 31, 2015. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government-guaranteed obligations
7

 
$
229,793

 
$
1,748

 

 
$

 
$

 
7

 
$
229,793

 
$
1,748

GSE obligations
28

 
802,283

 
1,775

 

 

 

 
28

 
802,283

 
1,775

Other
22

 
279,138

 
522

 
8

 
48,567

 
480

 
30

 
327,705

 
1,002

GSE commercial MBS
80

 
2,401,148

 
63,602

 
29

 
849,297

 
28,839

 
109

 
3,250,445

 
92,441

Total
137

 
$
3,712,362


$
67,647


37


$
897,864


$
29,319


174


$
4,610,226


$
96,966


At December 31, 2016, the gross unrealized losses on the Bank’s available-for-sale securities were $35,115,000. All of the Bank's available-for-sale securities are either guaranteed by the U.S. government, issued by GSEs or fully secured by collateral that is guaranteed by the U.S. government. As of December 31, 2016, the U.S. government and the issuers of the Bank’s holdings of GSE debentures and GSE commercial MBS were rated triple-A by Moody’s Investors Service (“Moody’s”) and Fitch Ratings, Ltd. (“Fitch”) and AA+ by S&P Global Ratings (“S&P”). The Bank's holdings of PEFCO debentures were rated triple-A by Moody's and Fitch, and were not rated by S&P at that date. Based upon the Bank's assessment of the creditworthiness of the issuers of the GSE debentures and the credit ratings assigned by each of the nationally recognized statistical rating organizations (“NRSROs”), the Bank expects that its holdings of GSE debentures that were in an unrealized loss position at December 31, 2016 would not be settled at an amount less than the Bank's amortized cost bases in these investments. In addition, based upon the Bank's assessment of the strength of the GSEs' guarantees of the Bank's holdings of GSE commercial MBS and the credit ratings assigned by each of the NRSROs, the Bank expects that its holdings of GSE commercial MBS that were in an unrealized loss position at December 31, 2016 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the current market value deficits associated with the Bank's available-for-sale securities are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at December 31, 2016.
Redemption Terms. The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at December 31, 2016 and 2015 are presented below (in thousands).
 
 
December 31, 2016
 
December 31, 2015
Maturity
 
Amortized Cost
 
Estimated
Fair Value
 
Amortized Cost
 
Estimated
Fair Value
 
 
 
 
Debentures
 
 
 
 
 
 
 
 
Due in one year or less
 
$
1,001,054

 
$
1,003,309

 
$
133,117

 
$
133,077

Due after one year through five years
 
2,079,374

 
2,100,171

 
3,637,966

 
3,643,909

Due after five years through ten years
 
3,989,554

 
4,022,456

 
2,313,112

 
2,316,854

Due after ten years
 
212,954

 
215,480

 
114,647

 
114,399

 
 
7,282,936

 
7,341,416

 
6,198,842

 
6,208,239

GSE commercial MBS
 
5,834,410

 
5,834,517

 
3,596,627

 
3,504,952

Total
 
$
13,117,346

 
$
13,175,933

 
$
9,795,469

 
$
9,713,191


F-20


Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as available-for-sale at December 31, 2016 and 2015 (in thousands):
 
December 31, 2016
 
December 31, 2015
Amortized cost of available-for-sale securities other than MBS
 
 
 
Fixed-rate
$
7,282,936

 
$
6,123,842

Variable-rate

 
75,000

 
7,282,936

 
6,198,842

Amortized cost of fixed-rate multi-family MBS
5,834,410

 
3,596,627

Total
$
13,117,346

 
$
9,795,469


At December 31, 2016 and 2015, substantially all of the Bank’s fixed-rate available-for-sale securities were swapped to a variable rate.
Sales of Securities. During the year ended December 31, 2016, the Bank sold available-for-sale securities with an amortized cost (determined by the specific identification method) of $2,650,291,000. Proceeds from the sales totaled $2,655,395,000, resulting in realized gains of $5,104,000. During the year ended December 31, 2015, the Bank sold available-for-sale securities with an amortized cost (determined by the specific identification method) of $955,869,000. Proceeds from the sales totaled $959,791,000, resulting in realized gains of $3,922,000. There were no sales of available-for-sale securities during the year ended December 31, 2014.

Note 5—Held-to-Maturity Securities
     Major Security Types. Held-to-maturity securities as of December 31, 2016 were as follows (in thousands):
 
 
Amortized
Cost
 
OTTI Recorded in AOCI
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
$
15,973

 
$

 
$
15,973

 
$
8

 
$
94

 
$
15,887

State housing agency obligations
 
110,000

 

 
110,000

 
15

 
1,410

 
108,605

 
 
125,973

 

 
125,973

 
23

 
1,504

 
124,492

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
 
2,578

 

 
2,578

 
2

 
3

 
2,577

GSE residential MBS
 
2,211,159

 

 
2,211,159

 
12,086

 
7,914

 
2,215,331

Non-agency residential MBS
 
115,230

 
17,157

 
98,073

 
14,508

 
2,032

 
110,549

GSE commercial MBS
 
61,812

 

 
61,812

 

 
249

 
61,563

 
 
2,390,779

 
17,157

 
2,373,622

 
26,596

 
10,198

 
2,390,020

Total
 
$
2,516,752


$
17,157


$
2,499,595


$
26,619


$
11,702

 
$
2,514,512



F-21


Held-to-maturity securities as of December 31, 2015 were as follows (in thousands):
 
 
Amortized
Cost
 
OTTI Recorded in
AOCI
 
Carrying
Value
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Estimated
Fair
Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
$
21,546

 
$

 
$
21,546

 
$
15

 
$
151

 
$
21,410

State housing agency obligations
 
110,000

 

 
110,000

 

 

 
110,000

 
 
131,546

 

 
131,546

 
15

 
151

 
131,410

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
 
4,040

 

 
4,040

 
11

 

 
4,051

GSE residential MBS
 
2,909,065

 

 
2,909,065

 
22,457

 
766

 
2,930,756

Non-agency residential MBS
 
142,920

 
21,376

 
121,544

 
16,118

 
2,963

 
134,699

GSE commercial MBS
 
61,816

 

 
61,816

 

 
449

 
61,367

 
 
3,117,841

 
21,376

 
3,096,465

 
38,586

 
4,178

 
3,130,873

Total
 
$
3,249,387

 
$
21,376

 
$
3,228,011

 
$
38,601

 
$
4,329

 
$
3,262,283

The following table summarizes (dollars in thousands) the held-to-maturity securities with unrealized losses as of December 31, 2016. The unrealized losses include other-than-temporary impairments recorded in AOCI and gross unrecognized holding losses (or, in the case of the Bank's holdings of non-agency residential MBS, gross unrecognized holding gains) and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
2

 
$
10,998

 
$
94

 

 
$

 
$

 
2
 
$
10,998

 
$
94

State housing agency obligations
1

 
33,590

 
1,410

 

 

 

 
1
 
33,590

 
1,410

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
2

 
832

 
3

 

 

 

 
2
 
832

 
3

GSE residential MBS
24

 
513,602

 
1,291

 
33

 
790,653

 
6,623

 
57
 
1,304,255

 
7,914

Non-agency residential MBS
1

 
267

 
2

 
18

 
75,897

 
5,913

 
19
 
76,164

 
5,915

GSE commercial MBS

 

 

 
3

 
61,563

 
249

 
3
 
61,563

 
249

Total
30

 
$
559,289


$
2,800


54


$
928,113


$
12,785


84

$
1,487,402


$
15,585


F-22


The following table summarizes (dollars in thousands) the held-to-maturity securities with unrealized losses as of December 31, 2015. The unrealized losses include other-than-temporary impairments recorded in AOCI and gross unrecognized holding losses (or, in the case of the Bank's holdings of non-agency residential MBS, gross unrecognized holding gains) and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Number of
Positions
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
2

 
$
12,683

 
$
151

 

 
$

 
$

 
2
 
$
12,683

 
$
151

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE residential MBS
 
19

 
503,000

 
697

 
1

 
44,782

 
69

 
20
 
547,782

 
766

Non-agency residential MBS
 

 

 

 
24

 
107,302

 
9,060

 
24
 
107,302

 
9,060

GSE commercial MBS
 

 

 

 
3

 
61,366

 
449

 
3
 
61,366

 
449

Total
 
21

 
$
515,683

 
$
848

 
28

 
$
213,450

 
$
9,578

 
49
 
$
729,133

 
$
10,426

At December 31, 2016, the gross unrealized losses on the Bank’s held-to-maturity securities were $15,585,000, of which $5,915,000 were attributable to its holdings of non-agency (i.e., private label) residential MBS, $8,260,000 were attributable to securities that are either guaranteed by the U.S. government or issued and guaranteed by GSEs and $1,410,000 were attributable to securities issued by a state housing agency.
As of December 31, 2016, the U.S. government and the issuers of the Bank's holdings of GSE MBS were rated triple-A by Moody's and Fitch and AA+ by S&P. Based upon the Bank's assessment of the strength of the government guaranty, the Bank expects that the U.S. government-guaranteed debentures that were in an unrealized loss position at December 31, 2016 would not be settled at an amount less than the Bank's amortized cost bases in the investments. In addition, based upon the Bank’s assessment of the strength of the GSEs' guarantees and the credit ratings assigned by the NRSROs, the Bank expects that its holdings of GSE MBS that were in an unrealized loss position at December 31, 2016 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Finally, based upon the Bank’s assessment of the creditworthiness of the state housing agency and the triple-A credit ratings assigned by the NRSROs, the Bank expects that the state housing agency debenture that was in an unrealized loss position at December 31, 2016 would not be settled at an amount less than the Bank’s amortized cost basis in this investment. Because the current market value deficits associated with these securities are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at December 31, 2016.
The deterioration in the U.S. housing markets that occurred primarily during the period from 2007 through 2011, as reflected during that period by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency residential MBS ("RMBS"), generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. However, based upon its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of December 31, 2016 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.
Because the ultimate receipt of contractual payments on the Bank’s non-agency RMBS will depend upon the credit and prepayment performance of the underlying loans and the credit enhancements for the senior securities owned by the Bank, the Bank monitors these investments in an effort to determine whether the credit enhancement associated with each security is sufficient to protect against potential losses of principal and interest on the underlying mortgage loans. The credit enhancement for each of the Bank’s non-agency RMBS is provided by a senior/subordinate structure, and none of the securities owned by the Bank are insured by third-party bond insurers. More specifically, each of the Bank’s non-agency RMBS represents a single security class within a securitization that has multiple classes of securities. Each security class has a distinct claim on the cash flows from the underlying mortgage loans, with the subordinate securities having a junior claim relative to the more senior securities. The Bank’s non-agency RMBS have a senior claim on the cash flows from the underlying mortgage loans.
To assess whether the entire amortized cost bases of its 24 non-agency RMBS holdings are likely to be recovered, the Bank performed a cash flow analysis for each security as of the end of each calendar quarter in 2016 using two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss

F-23


severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which are based upon an assessment of the individual housing markets. (The term “CBSA” refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people.) The Bank’s housing price forecast as of December 31, 2016 assumed changes in home prices ranging from declines of 3 percent to increases of 10 percent over the 12-month period beginning October 1, 2016. For the vast majority of markets, the changes were projected to range from increases of 2 percent to 6 percent. Thereafter, home price changes for each market were projected to return (at varying rates and over varying transition periods based on historical housing price patterns) to their long-term historical equilibrium levels. Following these transition periods, the constant long-term annual rates of appreciation for the vast majority of markets were projected to range between 2 percent and 5 percent.
The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.
Based on the results of its cash flow analyses, the Bank determined it was not likely that it would fully recover the remaining amortized cost basis of one of its previously other-than-temporarily impaired non-agency RMBS and, accordingly, this security was deemed to be other-than-temporarily impaired during 2016. No securities were deemed to be other-than-temporarily impaired as of December 31, 2016. The difference between the present value of the cash flows expected to be collected from this security and its amortized cost basis (i.e., the credit loss) totaled $20,000 in 2016. Because the Bank does not intend to sell the investment and it is not more likely than not that the Bank will be required to sell the investment before recovery of its remaining amortized cost basis, only the amount related to the credit loss was recognized in earnings. None of the Bank's other non-agency RMBS were deemed to be other-than-temporarily impaired in 2016.
For the security for which an other-than-temporary impairment was determined to have occurred in 2016, the following table presents a summary of the significant inputs used to measure the amount of the most recent credit loss recognized in earnings (dollars in thousands):
 
 
 
 
 
 
 
 
Significant Inputs(2)
 
 
Year of
Securitization
 
Collateral
Type(1)
 
Unpaid Principal Balance as of December 31, 2016
 
Quarterly Period of Most Recent Impairment
 
Projected
 Prepayment Rate
 
Projected
 Default Rate
 
Projected
 Loss Severity
 
Current Credit Enhancement as of
 December 31, 2016(3)
2005
 
Alt-A/Option ARM
 
$
9,588

 
Q3 2016
 
8.5
%
 
17.6
%
 
35.4
%
 
30.8
%
________________________________________
(1) 
Although the other-than-temporarily impaired security was not labeled as Alt-A at the time of issuance, based upon its current collateral and performance characteristics, it was analyzed using Alt-A assumptions.
(2) 
The prepayment rate reflects the weighted average of projected future voluntary prepayments. The default rate reflects the total balance of loans projected to default as a percentage of the current unpaid principal balance of the underlying loan pool. The loss severity reflects the total projected loan losses as a percentage of the total balance of loans that are projected to default.
(3) 
The current credit enhancement percentage reflects the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior class held by the Bank is impacted (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pool before the security held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pool, it is possible that the senior class held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.

F-24


In addition to the security that was determined to be other-than-temporarily impaired in 2016, 14 of the Bank's holdings of non-agency RMBS were determined to be other-than-temporarily impaired in periods prior to 2013. The following table presents a rollforward for the years ended December 31, 2016, 2015 and 2014 of the amount related to credit losses on the Bank’s non-agency RMBS holdings for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss) (in thousands).
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Balance of credit losses, beginning of year
 
$
11,696

 
$
12,512

 
$
12,901

Credit losses on securities for which an other-than-temporary impairment was not previously recognized
 

 

 
37

Credit losses on securities for which an other-than-temporary impairment was previously recognized
 
20

 
33

 

Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)
 
(1,201
)
 
(849
)
 
(426
)
Balance of credit losses, end of year
 
10,515

 
11,696

 
12,512

Cumulative principal shortfalls on securities held at end of year
 
(1,832
)
 
(1,668
)
 
(1,210
)
Cumulative amortization of the time value of credit losses at end of year
 
444

 
350

 
293

Credit losses included in the amortized cost bases of other-than-temporarily impaired securities at end of year
 
$
9,127

 
$
10,378

 
$
11,595

 Redemption Terms. The amortized cost, carrying value and estimated fair value of held-to-maturity securities by contractual maturity at December 31, 2016 and 2015 are presented below (in thousands). The expected maturities of some debentures could differ from the contractual maturities presented because issuers may have the right to call such debentures prior to their final stated maturities.
 
 
December 31, 2016
 
December 31, 2015
Maturity
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
 
Amortized Cost
 
Carrying Value
 
Estimated Fair Value
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
2,007

 
$
2,007

 
$
2,007

 
$

 
$

 
$

Due after one year through five years
 
2,874

 
2,874

 
2,882

 
8,712

 
8,712

 
8,727

Due after five years through ten years
 
11,092

 
11,092

 
10,998

 
12,834

 
12,834

 
12,683

Due after ten years
 
110,000

 
110,000

 
108,605

 
110,000

 
110,000

 
110,000

 
 
125,973

 
125,973

 
124,492

 
131,546

 
131,546

 
131,410

Mortgage-backed securities
 
2,390,779

 
2,373,622

 
2,390,020

 
3,117,841

 
3,096,465

 
3,130,873

Total
 
$
2,516,752

 
$
2,499,595

 
$
2,514,512

 
$
3,249,387

 
$
3,228,011

 
$
3,262,283

The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net purchase discounts of $9,671,000 and $13,139,000 at December 31, 2016 and 2015, respectively.
     Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as held-to-maturity at December 31, 2016 and 2015 (in thousands):
 
2016
 
2015
Amortized cost of variable-rate held-to-maturity securities other than MBS
$
125,973

 
$
131,546

Amortized cost of held-to-maturity MBS
 
 
 
Fixed-rate pass-through securities
147

 
228

Collateralized mortgage obligations
 
 
 
Fixed-rate
305

 
453

Variable-rate
2,328,515

 
3,055,344

Variable-rate multi-family MBS
61,812

 
61,816

 
2,390,779

 
3,117,841

Total
$
2,516,752

 
$
3,249,387


F-25


All of the Bank’s variable-rate collateralized mortgage obligations classified as held-to-maturity securities have coupon rates that are subject to interest rate caps, none of which were reached during the years ended December 31, 2016 or 2015.
Sales of Securities. During the year ended December 31, 2016, the Bank sold held-to-maturity securities with an amortized cost (determined by the specific identification method) of $156,707,000. Proceeds from the sales totaled $157,647,000, resulting in realized gains of $940,000. During the year ended December 31, 2015, the Bank sold held-to-maturity securities with an amortized cost (determined by the specific identification method) of $806,809,000. Proceeds from the sales totaled $821,323,000, resulting in realized gains of $14,514,000. For each of these securities, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition. As such, the sales were considered maturities for purposes of security classification. There were no sales of held-to-maturity securities during the year ended December 31, 2014.

Note 6—Advances
     Redemption Terms. At December 31, 2016 and 2015, the Bank had advances outstanding at interest rates ranging from 0.40 percent to 8.27 percent and from 0.21 percent to 8.27 percent, respectively, as summarized below (dollars in thousands).
 
 
2016
 
2015
Contractual Maturity
 
Amount
 
Weighted
Average
Interest Rate
 
Amount
 
Weighted
Average
Interest Rate
Due in one year or less
 
$
17,477,220

 
0.71
%
 
$
12,431,831

 
0.44
%
Due after one year through two years
 
5,115,095

 
1.07

 
5,886,049

 
0.77

Due after two years through three years
 
1,059,823

 
1.63

 
1,375,560

 
2.11

Due after three years through four years
 
1,347,926

 
1.56

 
613,243

 
2.01

Due after four years through five years
 
593,061

 
1.74

 
1,129,859

 
1.53

Due after five years
 
5,431,116

 
0.85

 
1,732,577

 
1.44

Amortizing advances
 
1,448,003

 
2.76

 
1,480,532

 
3.15

Total par value
 
32,472,244

 
0.97
%
 
24,649,651

 
0.93
%
Premiums
 
52

 
 
 
22

 
 
Deferred net prepayment fees
 
(13,272
)
 
 
 
(16,113
)
 
 
Commitment fees
 
(123
)
 
 
 
(131
)
 
 
Hedging adjustments
 
47,274

 
 
 
113,373

 
 
Total
 
$
32,506,175

 
 
 
$
24,746,802

 
 
Amortizing advances require repayment according to predetermined amortization schedules.
The Bank offers advances to members that may be prepaid on specified dates without the member incurring prepayment or termination fees (prepayable and callable advances). The prepayment of other advances requires the payment of a fee to the Bank (prepayment fee) if necessary to make the Bank financially indifferent to the prepayment of the advance. At December 31, 2016 and 2015, the Bank had aggregate prepayable and callable advances totaling $12,432,264,000 and $5,895,751,000, respectively.
The following table summarizes advances outstanding at December 31, 2016 and 2015, by the earlier of contractual maturity or next call date, or the first date on which prepayable advances can be repaid without a prepayment fee (in thousands):
Contractual Maturity or Next Call Date
 
December 31, 2016
 
December 31, 2015
Due in one year or less
 
$
25,953,500

 
$
18,135,949

Due after one year through two years
 
2,336,974

 
1,727,927

Due after two years through three years
 
989,223

 
1,375,559

Due after three years through four years
 
757,626

 
605,243

Due after four years through five years
 
443,311

 
613,459

Due after five years
 
543,607

 
710,982

Amortizing advances
 
1,448,003

 
1,480,532

Total par value
 
$
32,472,244

 
$
24,649,651


F-26


The Bank also offers putable advances. With a putable advance, the Bank purchases a put option from the member that allows the Bank to terminate the fixed-rate advance on specified dates and offer, subject to certain conditions, replacement funding at prevailing market rates. At December 31, 2016 and 2015, the Bank had putable advances outstanding totaling $1,053,071,000 and $1,097,071,000, respectively.
The following table summarizes advances at December 31, 2016 and 2015, by the earlier of contractual maturity or next possible put date (in thousands):
Contractual Maturity or Next Put Date
 
2016
 
2015
Due in one year or less
 
$
18,153,670

 
$
13,523,902

Due after one year through two years
 
4,473,645

 
5,489,429

Due after two years through three years
 
1,024,823

 
715,109

Due after three years through four years
 
1,347,926

 
578,243

Due after four years through five years
 
593,061

 
1,129,859

Due after five years
 
5,431,116

 
1,732,577

Amortizing advances
 
1,448,003

 
1,480,532

Total par value
 
$
32,472,244

 
$
24,649,651

     Credit Concentrations. Due to the composition of its shareholders, the Bank’s potential credit risk from advances is concentrated in commercial banks and savings institutions. No borrower represented more than 10 percent of advances outstanding at December 31, 2016, 2015 or 2014.
     Interest Rate Payment Terms. The following table provides interest rate payment terms for advances outstanding at December 31, 2016 and 2015 (in thousands):
 
 
2016
 
2015
Fixed-rate
 
 
 
 
Due in one year or less
 
$
13,417,280

 
$
12,236,879

Due after one year
 
6,215,744

 
6,463,464

Total fixed-rate
 
19,633,024

 
18,700,343

Variable-rate
 
 
 
 
Due in one year or less
 
4,136,153

 
208,590

Due after one year
 
8,703,067

 
5,740,718

Total variable-rate
 
12,839,220

 
5,949,308

Total par value
 
$
32,472,244

 
$
24,649,651

At December 31, 2016 and 2015, 25 percent and 26 percent, respectively, of the Bank’s fixed-rate advances were swapped to a variable rate.
     Prepayment Fees. When a member/borrower prepays an advance, the Bank could suffer lower future income if the principal portion of the prepaid advance is reinvested in lower-yielding assets. To protect against this risk, the Bank generally charges a prepayment fee that makes it financially indifferent to a borrower’s decision to prepay an advance. As discussed in Note 1, the Bank records prepayment fees received from members/borrowers on prepaid advances net of any associated hedging adjustments on those advances. Gross advance prepayment fees received from members/borrowers during the years ended December 31, 2016, 2015 and 2014 were $9,317,000, $27,724,000 and $26,035,000, respectively. During the years ended December 31, 2016, 2015 and 2014, the Bank deferred $681,000, $6,398,000 and $5,835,000 of these gross advance prepayment fees.
                                                                                                                

F-27


Note 7—Mortgage Loans Held for Portfolio
Mortgage loans held for portfolio represent held-for-investment loans acquired through the MPF program (see Note 1). The following table presents information as of December 31, 2016 and 2015 for mortgage loans held for portfolio (in thousands):
 
2016
 
2015
Fixed-rate medium-term* single-family mortgages
$
7,677

 
$
4,570

Fixed-rate long-term single-family mortgages
114,168

 
50,404

Premiums
1,783

 
352

Discounts
(209
)
 
(68
)
Deferred net derivative gains associated with mortgage delivery commitments
683

 

Total mortgage loans held for portfolio
124,102

 
55,258

Less: allowance for credit losses
(141
)
 
(141
)
Total mortgage loans held for portfolio, net of allowance for credit losses
$
123,961

 
$
55,117

________________________________________
*Medium-term is defined as an original term of 15 years or less.
The unpaid principal balance of mortgage loans held for portfolio at December 31, 2016 and 2015 was comprised of government-guaranteed/insured loans totaling $23,426,000 and $29,741,000, respectively, and conventional loans totaling $98,419,000 and $25,233,000, respectively.
PFIs are paid a credit enhancement fee (“CE fee”) as an incentive to minimize credit losses, to share in the risk of loss on MPF loans and to pay for supplemental mortgage insurance, rather than paying a guaranty fee to other secondary market purchasers. CE fees are paid monthly and are determined based on the remaining unpaid principal balance of the MPF loans. The required credit enhancement obligation varies depending upon the MPF product type. CE fees, payable to a PFI as compensation for assuming credit risk, are recorded as a reduction to mortgage loan interest income when paid by the Bank. During the years ended December 31, 2016, 2015 and 2014, mortgage loan interest income was reduced by CE fees totaling $28,000, $21,000 and $26,000, respectively. The Bank also pays performance-based CE fees that are based on the actual performance of the pool of MPF loans under each individual master commitment. To the extent that losses in the current month exceed accrued performance-based CE fees, the remaining losses may be recovered from future performance-based CE fees payable to the PFI. During the years ended December 31, 2016, 2015 and 2014, performance-based CE fees that were forgone and not paid to the Bank’s PFIs totaled $14,000, $18,000 and $24,000, respectively.

Note 8—Allowance for Credit Losses
The Bank has established an allowance methodology for each of its portfolio segments: advances and other extensions of credit to members/borrowers, collectively referred to as "extensions of credit to members"; government-guaranteed/insured mortgage loans held for portfolio; and conventional mortgage loans held for portfolio.
     Advances and Other Extensions of Credit to Members. In accordance with federal statutes, including the FHLB Act, the Bank lends to financial institutions within its five-state district that are involved in housing finance. The FHLB Act requires the Bank to obtain and maintain sufficient collateral for advances and other extensions of credit to protect against losses. The Bank makes advances and otherwise extends credit only against eligible collateral, as defined by regulation. Eligible collateral includes whole first mortgages on improved residential real property (not more than 90 days delinquent), or securities representing a whole interest in such mortgages; securities issued, insured, or guaranteed by the U.S. government or any of its agencies, including mortgage-backed and other debt securities issued or guaranteed by the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or the Government National Mortgage Association (“Ginnie Mae”); term deposits in the Bank; and other real estate-related collateral acceptable to the Bank, provided that such collateral has a readily ascertainable value and the Bank can perfect a security interest in such property. In the case of Community Financial Institutions (which for 2016 included all FDIC-insured institutions with average total assets as of December 31, 2015, 2014 and 2013 of less than $1.128 billion), the Bank may also accept as eligible collateral secured small business, small farm and small agribusiness loans, securities representing a whole interest in such loans, and secured loans for community development activities. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances and other extensions of credit, the Bank applies various haircuts, or discounts, to the collateral to determine the value against which borrowers may borrow. As additional security, the Bank has a statutory lien on each borrower’s capital stock in the Bank.

F-28


Each member/borrower of the Bank executes a security agreement pursuant to which such member/borrower grants a security interest in favor of the Bank in certain assets of such member/borrower. The agreements under which a member grants a security interest fall into one of two general structures. In the first structure, the member grants a security interest in all of its assets that are included in the eligible collateral categories, as described in the preceding paragraph, which the Bank refers to as a “blanket lien.” A member may request that its blanket lien be modified, such that the member grants in favor of the Bank a security interest limited to certain of the eligible collateral categories (i.e., whole first residential mortgages, securities, term deposits in the Bank and other real estate-related collateral). In the second structure, the member grants a security interest in specifically identified assets rather than in the broad categories of eligible collateral covered by the blanket lien and the Bank identifies such members as being on “specific collateral only status.”
The basis upon which the Bank will lend to a member that has granted the Bank a blanket lien depends on numerous factors, including, among others, that member’s financial condition and general creditworthiness. Generally, and subject to certain limitations, a member that has granted the Bank a blanket lien may borrow up to a specified percentage of the value of eligible collateral categories, as determined from such member’s financial reports filed with its federal regulator, without specifically identifying each item of collateral or delivering the collateral to the Bank. Under certain circumstances, including, among others, a deterioration of a member’s financial condition or general creditworthiness, the amount a member may borrow is determined on the basis of only that portion of the collateral subject to the blanket lien that such member delivers to the Bank. Under these circumstances, the Bank places the member on “custody status.” In addition, members on blanket lien status may choose to deliver some or all of the collateral to the Bank.
The members/borrowers that are granted specific collateral only status by the Bank are typically either insurance companies or members/borrowers with an investment grade credit rating from an NRSRO that have requested this type of structure. Insurance companies are permitted to borrow only against the eligible collateral that is delivered to the Bank or a third-party custodian approved by the Bank, and insurance companies generally grant a security interest only in collateral they have delivered. Members/borrowers with an investment grade credit rating from an NRSRO may grant a security interest in, and would only be permitted to borrow against, delivered eligible securities and specifically identified, eligible first-lien mortgage loans. Such loans must be delivered to the Bank or a third-party custodian approved by the Bank, or the Bank and such member/borrower must otherwise take actions that ensure the priority of the Bank’s security interest in such loans. Investment grade rated members/borrowers that choose this option are subject to fewer provisions that allow the Bank to demand additional collateral or exercise other remedies based on the Bank’s discretion; however, the collateral they pledge is generally subject to larger haircuts (depending on the credit rating of the member/borrower from time to time) than are applied to similar types of collateral pledged by members under a blanket lien arrangement.
The Bank perfects its security interests in borrowers’ collateral in a number of ways. The Bank usually perfects its security interest in collateral by filing a Uniform Commercial Code financing statement against the borrower. In the case of certain borrowers, the Bank perfects its security interest by taking possession or control of the collateral, which may be in addition to the filing of a financing statement. In these cases, the Bank also generally takes assignments of most of the mortgages and deeds of trust that are designated as collateral. Instead of requiring delivery of the collateral to the Bank, the Bank may allow certain borrowers to deliver specific collateral to a third-party custodian approved by the Bank or otherwise take actions that ensure the priority of the Bank’s security interest in such collateral.
With certain exceptions set forth below, Section 10(e) of the FHLB Act affords any security interest granted to the Bank by any member/borrower of the Bank, or any affiliate of any such member/borrower, priority over the claims and rights of any party, including any receiver, conservator, trustee, or similar party having rights of a lien creditor. However, the Bank’s security interest is not entitled to priority over the claims and rights of a party that (i) would be entitled to priority under otherwise applicable law and (ii) is an actual bona fide purchaser for value or is a secured party who has a perfected security interest in such collateral in accordance with applicable law (e.g., a prior perfected security interest under the Uniform Commercial Code or other applicable law). For example, in a case in which the Bank has perfected its security interest in collateral by filing a Uniform Commercial Code financing statement against the borrower, another secured party’s security interest in that same collateral that was perfected by possession and without prior knowledge of the Bank's lien may be entitled to priority over the Bank’s security interest that was perfected by filing a Uniform Commercial Code financing statement.
From time to time, the Bank agrees to subordinate its security interest in certain assets or categories of assets granted by a member/borrower of the Bank to the security interest of another creditor (typically, a Federal Reserve Bank or another FHLBank). If the Bank agrees to subordinate its security interest in certain assets or categories of assets granted by a member/borrower of the Bank to the security interest of another creditor, the Bank will not extend credit against those assets or categories of assets.
On at least a quarterly basis, the Bank evaluates all outstanding extensions of credit to members/borrowers for potential credit losses. These evaluations include a review of: (1) the amount, type and performance of collateral available to secure the outstanding obligations; (2) metrics that may be indicative of changes in the financial condition and general creditworthiness of the member/borrower; and (3) the payment status of the obligations. Any outstanding extensions of credit that exhibit a

F-29


potential credit weakness that could jeopardize the full collection of the outstanding obligations would be classified as substandard, doubtful or loss. The Bank did not have any advances or other extensions of credit to members/borrowers that were classified as substandard, doubtful or loss at December 31, 2016 or 2015.
The Bank considers the amount, type and performance of collateral to be the primary indicator of credit quality with respect to its extensions of credit to members/borrowers. At December 31, 2016 and 2015, the Bank had rights to collateral on a borrower-by-borrower basis with an estimated value in excess of each borrower’s outstanding extensions of credit.
The Bank continues to evaluate and, as necessary, modify its credit extension and collateral policies based on market conditions. At December 31, 2016 and 2015, the Bank did not have any advances that were past due, on nonaccrual status, or considered impaired. There have been no troubled debt restructurings related to advances.
The Bank has never experienced a credit loss on an advance or any other extension of credit to a member/borrower and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on its extensions of credit to members/borrowers. Accordingly, the Bank has not provided any allowance for credit losses on advances, nor has it recorded any liabilities to reflect an allowance for credit losses related to its off-balance sheet credit exposures.
     Mortgage Loans — Government-guaranteed/Insured. The Bank’s government-guaranteed/insured fixed-rate mortgage loans are insured or guaranteed by the FHA or the DVA. Any losses from these loans are expected to be recovered from those entities. Any losses from these loans that are not recovered from those entities are absorbed by the servicers. Therefore, the Bank has not established an allowance for credit losses on government-guaranteed/insured mortgage loans.
     Mortgage Loans — Conventional Mortgage Loans. The allowance for losses on conventional mortgage loans is determined by an analysis that includes consideration of various data such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics and prevailing economic conditions. The allowance for losses on conventional mortgage loans also factors in the credit enhancement under the MPF program. Any incurred losses that are expected to be recovered from the credit enhancements are not reserved as part of the Bank’s allowance for loan losses.
The Bank considers the key credit quality indicator for conventional mortgage loans to be the payment status of each loan. The table below summarizes the recorded investment (including accrued interest) by payment status for mortgage loans at December 31, 2016 and 2015 (dollars in thousands).
 
December 31, 2016
 
December 31, 2015
 
Conventional Loans
 
Government-
Guaranteed/
Insured Loans
 
Total
 
Conventional Loans
 
Government-
Guaranteed/
Insured Loans
 
Total
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
30-59 days delinquent
$
899

 
$
989

 
$
1,888

 
$
920

 
$
1,180

 
$
2,100

60-89 days delinquent
191

 
172

 
363

 
348

 
337

 
685

90 days or more delinquent
276

 
130

 
406

 
387

 
202

 
589

Total past due
1,366

 
1,291

 
2,657

 
1,655

 
1,719

 
3,374

Total current loans
99,690

 
22,386

 
122,076

 
23,844

 
28,340

 
52,184

Total mortgage loans
$
101,056

 
$
23,677

 
$
124,733

 
$
25,499

 
$
30,059

 
$
55,558

Other delinquency statistics:
 
 
 
 
 
 
 
 
 
 
 
In process of foreclosure(1)
$
57

 
$
28

 
$
85

 
$
329

 
$
77

 
$
406

Serious delinquency rate (2)
0.3
%
 
0.6
%
 
0.3
%
 
1.5
%
 
0.7
%
 
1.1
%
Past due 90 days or more and still accruing interest (3)
$

 
$
130

 
$
130

 
$

 
$
202

 
$
202

Nonaccrual loans
$
276

 
$

 
$
276

 
$
387

 
$

 
$
387

Troubled debt restructurings
$

 
$

 
$

 
$
118

 
$

 
$
118

________________________________________
(1) 
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been made.
(2) 
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the loan portfolio.
(3) 
Only government-guaranteed/insured mortgage loans continue to accrue interest after they become 90 days or more past due.
At December 31, 2016 and 2015, the Bank’s other assets included $89,000 and $49,000, respectively, of real estate owned.

F-30


Mortgage loans are considered impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement. Each nonaccrual mortgage loan and each troubled debt restructuring is specifically reviewed for impairment. At December 31, 2016 and 2015, the estimated value of the collateral securing each of these loans, plus the estimated amount that can be recovered through credit enhancements and mortgage insurance, if any, exceeded the outstanding loan amount. Therefore, no specific reserve was established for any of these mortgage loans. The remaining conventional mortgage loans were evaluated for impairment on a pool basis. Based upon the current and past performance of these loans and current economic conditions, the Bank determined that an allowance for loan losses of $141,000 was adequate to reserve for credit losses in its conventional mortgage loan portfolio at December 31, 2016.
The following table presents the activity in the allowance for credit losses on conventional mortgage loans held for portfolio during the years ended December 31, 2016, 2015 and 2014 (in thousands):
 
Year Ended December 31,
 
2016
 
2015
 
2014
Balance, beginning of year
$
141

 
$
143

 
$
165

Chargeoffs

 
(2
)
 
(22
)
Balance, end of year
$
141

 
$
141

 
$
143


The following table presents information regarding the balances of the Bank's conventional mortgage loans held for portfolio that were individually or collectively evaluated for impairment as well as information regarding the ending balance of the allowance for credit losses as of December 31, 2016 and 2015 (in thousands).
 
 
December 31,
 
 
2016
 
2015
Ending balance of allowance for credit losses related to loans collectively evaluated for impairment
 
$
141

 
$
141

 
 
 
 
 
Recorded investment
 
 
 
 
Individually evaluated for impairment
 
$
276

 
$
407

Collectively evaluated for impairment
 
100,780

 
25,092

 
 
$
101,056

 
$
25,499


Note 9—Deposits
The Bank offers demand and overnight deposits for members and qualifying non-members. In addition, the Bank offers short-term interest-bearing deposit programs to members and qualifying non-members. Interest-bearing deposits classified as demand and overnight pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate, or a stepped fixed rate schedule, that is determined on the issuance date of the deposit. The weighted average interest rates paid on average outstanding deposits were 0.28 percent, 0.03 percent and 0.01 percent during 2016, 2015 and 2014, respectively. For additional information regarding other interest-bearing deposits, see Note 13.
The following table details interest-bearing and non-interest bearing deposits as of December 31, 2016 and 2015 (in thousands):
 
2016
 
2015
Interest-bearing
 
 
 
Demand and overnight
$
756,301

 
$
954,546

Term
283,838

 
91,393

Non-interest bearing (other)
19

 
19

Total deposits
$
1,040,158

 
$
1,045,958

The aggregate amount of time deposits with a denomination of $250,000 or more was $283,350,000 and $91,134,000 as of December 31, 2016 and 2015, respectively.


F-31


Note 10—Consolidated Obligations
Consolidated obligations are the joint and several obligations of the FHLBanks and consist of consolidated obligation bonds and discount notes. Consolidated obligations are backed only by the financial resources of the 11 FHLBanks. Consolidated obligations are not obligations of, nor are they guaranteed by, the U.S. government. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. In connection with each debt issuance, one or more of the FHLBanks specifies the amount of debt it wants issued on its behalf; the Bank receives the proceeds of only the debt issued on its behalf and records on its statements of condition only that portion of the consolidated obligations for which it has received the proceeds. The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance. Consolidated obligation bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated obligation discount notes are issued to raise short-term funds and have maturities of one year or less. These notes are generally issued at a price that is less than their face amount and are redeemed at par value when they mature. For additional information regarding the FHLBanks’ joint and several liability on consolidated obligations, see Note 17.
The par amounts of the FHLBanks’ outstanding consolidated obligations, including consolidated obligations held as investments by other FHLBanks, were approximately $989 billion and $905 billion at December 31, 2016 and 2015, respectively. The Bank was the primary obligor on $54.1 billion and $38.6 billion (at par value), respectively, of these consolidated obligations. Regulations require each of the FHLBanks to maintain unpledged qualifying assets equal to its participation in the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; obligations of or fully guaranteed by the U.S. government; obligations, participations, mortgages, or other instruments of or issued by Fannie Mae or Ginnie Mae; mortgages, obligations or other securities which are or have ever been sold by Freddie Mac under the FHLB Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBank is located. Any assets subject to a lien or pledge for the benefit of holders of any issue of consolidated obligations are treated as if they were free from lien or pledge for purposes of compliance with these regulations.
     General Terms. Consolidated obligation bonds are issued with either fixed-rate coupon payment terms or variable-rate coupon payment terms that use a variety of indices for interest rate resets such as LIBOR or the federal funds rate. To meet the specific needs of certain investors in consolidated obligations, both fixed-rate bonds and variable-rate bonds may contain complex coupon payment terms and call options. When such consolidated obligations are issued, the Bank generally enters into interest rate exchange agreements containing offsetting features that effectively convert the terms of the bond to those of a simple variable-rate bond.
The consolidated obligation bonds typically issued by the Bank, beyond having fixed-rate or simple variable-rate coupon payment terms, may also have the following broad terms regarding either principal repayment or coupon payment terms:
Optional principal redemption bonds (callable bonds) may be redeemed in whole or in part at the Bank's discretion on predetermined call dates according to the terms of the bond offerings;
Capped floating rate bonds pay interest at variable rates subject to an interest rate ceiling;
Step-up bonds pay interest at increasing fixed rates for specified intervals over the life of the bond. These bonds generally contain provisions that enable the Bank to call the bonds at its option on predetermined call dates;
Conversion bonds have coupons that convert from fixed to variable, or from variable to fixed, on predetermined dates;
Step-down bonds pay interest at decreasing fixed rates for specified intervals over the life of the bond. These bonds generally contain provisions that enable the Bank to call the bonds at its option on predetermined call dates.
     Interest Rate Payment Terms. The following table summarizes the Bank’s consolidated obligation bonds outstanding by interest rate payment terms at December 31, 2016 and 2015 (in thousands, at par value).
 
2016
 
2015
Fixed-rate
$
10,952,280

 
$
11,759,035

Variable-rate
13,151,000

 
3,625,000

Step-up
2,829,500

 
2,510,000

Step-down
200,000

 
150,000

Total par value
$
27,132,780

 
$
18,044,035

At December 31, 2016 and 2015, 91 percent and 90 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped to a variable rate.

F-32


   Redemption Terms. The following is a summary of the Bank’s consolidated obligation bonds outstanding at December 31, 2016 and 2015, by contractual maturity (dollars in thousands):
 
 
2016
 
2015
Contractual Maturity
 
Amount
 
Weighted
Average
Interest Rate
 
Amount
 
Weighted
Average
Interest Rate
Due in one year or less
 
$
16,586,590

 
0.66
%
 
$
5,811,410

 
0.75
%
Due after one year through two years
 
4,045,240

 
1.42

 
5,383,590

 
0.77

Due after two years through three years
 
1,617,600

 
1.15

 
3,313,585

 
1.54

Due after three years through four years
 
980,100

 
1.63

 
585,180

 
1.41

Due after four years through five years
 
1,546,000

 
1.38

 
1,275,000

 
1.56

Due after five years
 
2,357,250

 
1.99

 
1,675,270

 
2.00

Total par value
 
27,132,780

 
0.99
%
 
18,044,035

 
1.09
%
Premiums
 
10,993

 
 
 
11,612

 
 
Discounts
 
(1,477
)
 
 
 
(2,708
)
 
 
Debt issuance costs
 
(1,308
)
 
 
 
(1,267
)
 
 
Hedging adjustments
 
(143,501
)
 
 
 
(26,980
)
 
 
Total
 
$
26,997,487

 
 
 
$
18,024,692

 
 
At December 31, 2016 and 2015, the Bank’s consolidated obligation bonds outstanding included the following (in thousands, at par value):
 
2016
 
2015
Non-callable bonds
$
21,747,530

 
$
12,868,765

Callable bonds
5,385,250

 
5,175,270

Total par value
$
27,132,780

 
$
18,044,035

The following table summarizes the Bank’s consolidated obligation bonds outstanding at December 31, 2016 and 2015, by the earlier of contractual maturity or next possible call date (in thousands, at par value):
Contractual Maturity or Next Call Date
 
2016
 
2015
Due in one year or less
 
$
21,749,840

 
$
10,774,680

Due after one year through two years
 
3,607,240

 
4,888,590

Due after two years through three years
 
1,262,600

 
2,005,585

Due after three years through four years
 
415,100

 
245,180

Due after four years through five years
 
89,000

 
130,000

Due after five years
 
9,000

 

Total par value
 
$
27,132,780

 
$
18,044,035

     Discount Notes. At December 31, 2016 and 2015, the Bank’s consolidated obligation discount notes, all of which are due within one year, were as follows (dollars in thousands):
 
Book Value
 
Par Value
 
Weighted
Average Implied
Interest Rate
December 31, 2016
$
26,941,782

 
$
26,964,305

 
0.46
%
December 31, 2015
$
20,541,329

 
$
20,544,821

 
0.18
%

Note 11—Affordable Housing Program
Section 10(j) of the FHLB Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and/or below market interest rate advances to members who use the funds to assist with the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. The Bank provides subsidies

F-33


under its AHP solely in the form of direct grants. Annually, each FHLBank must set aside for the AHP 10 percent of its current year’s income before charges for AHP (as adjusted for interest expense on mandatorily redeemable capital stock), subject to a collective minimum contribution for all 11 FHLBanks of $100 million. The exclusion of interest expense on mandatorily redeemable capital stock is required pursuant to a Finance Agency regulatory interpretation. If the result of the aggregate 10 percent calculation is less than $100 million for all 11 FHLBanks, then the FHLB Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income before AHP to the sum of the income before AHP of all of the FHLBanks provided, however, that each FHLBank’s required annual AHP contribution is limited to its annual net earnings. There was no shortfall during the years ended December 31, 2016, 2015 or 2014. If a FHLBank determines that its required contributions are contributing to its financial instability, it may apply to the Finance Agency for a temporary suspension of its AHP contributions. No FHLBank applied for a suspension of its AHP contributions in 2016, 2015 or 2014.
The Bank’s AHP assessment is derived by adding interest expense on mandatorily redeemable capital stock (see Note 14) to reported income before assessments; the result of this calculation is then multiplied by 10 percent. The Bank charges the amount set aside for AHP to income and recognizes it as a liability. The Bank relieves the AHP liability as members receive AHP grants. If the Bank experiences a loss during a calendar quarter but still has income for the calendar year, the Bank’s obligation to the AHP is based upon its year-to-date income. In years where the Bank’s income before assessments (as adjusted for interest expense on mandatorily redeemable capital stock) is zero or less, the amount of the AHP assessment is typically equal to zero, and the Bank would not typically be entitled to a credit that could be used to reduce required contributions in future years.
The following table summarizes the changes in the Bank’s AHP liability during the years ended December 31, 2016, 2015 and 2014 (in thousands):
 
2016
 
2015
 
2014
Balance, beginning of year
$
22,710

 
$
25,998

 
$
31,864

AHP assessment
8,831

 
7,468

 
5,391

Grants funded, net of recaptured amounts
(8,670
)
 
(10,756
)
 
(11,257
)
Balance, end of year
$
22,871

 
$
22,710

 
$
25,998


Note 12—Assets and Liabilities Subject to Offsetting
The Bank has derivatives and securities purchased under agreements to resell that are subject to enforceable master netting agreements or similar arrangements. For purposes of reporting derivative assets and derivative liabilities, the Bank offsets the fair value amounts recognized for derivative instruments (including the right to reclaim cash collateral and the obligation to return cash collateral) where a legally enforceable right of setoff exists. The Bank did not have any liabilities that were eligible to offset its securities purchased under agreements to resell (i.e., securities sold under agreements to repurchase) as of December 31, 2016 or 2015.
The Bank's derivative transactions are executed either bilaterally or, if required, cleared through a third-party central clearinghouse. The Bank has entered into master agreements with each of its bilateral derivative counterparties that provide for the netting of all transactions with each of these counterparties. Under its master agreements with its non-member bilateral derivative counterparties, collateral is delivered (or returned) daily when certain thresholds (ranging from $100,000 to $500,000) are met. The Bank offsets the fair value amounts recognized for bilaterally traded derivatives executed with the same counterparty, including any cash collateral remitted to or received from the counterparty. When entering into derivative transactions with its members, the Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. Eligible collateral for derivative transactions with members consists of collateral that is eligible to secure advances and other obligations under the member's Advances and Security Agreement with the Bank. The Bank is not required to pledge collateral to its members to secure derivative positions. For cleared derivatives, all transactions with each clearing member of each clearinghouse are netted pursuant to legally enforceable setoff rights. Cleared derivatives are subject to initial and variation margin requirements established by the clearinghouse and its clearing members. Collateral associated with cleared derivatives (i.e., initial and variation margin) is typically delivered (or returned) daily and is not subject to any maximum unsecured thresholds. The Bank offsets the fair value amounts recognized for cleared derivatives transacted with each clearing member of each clearinghouse, including cash collateral pledged or received.
The following table presents derivative instruments and securities purchased under agreements to resell with the legal right of offset, including the related collateral received from or pledged to counterparties as of December 31, 2016 and 2015 (in thousands).

F-34


 
 
Gross Amounts of Recognized Financial Instruments
 
Gross Amounts Offset in the Statement of Condition
 
Net Amounts Presented in the Statement of Condition
 
Collateral Not Offset in the Statement of Condition (1)
 
Net Unsecured Amount
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
  
 
 
 
Bilateral derivatives
 
$
12,620

 
$
(3,443
)
 
$
9,177

 
$
(8,511
)
(2) 
$
666

Cleared derivatives
 
227,785

 
(221,325
)
 
6,460

 

 
6,460

Total derivatives
 
240,405

 
(224,768
)
 
15,637

 
(8,511
)
 
7,126

Securities purchased under agreements to resell
 
3,100,000

 

 
3,100,000

 
(3,100,000
)
 

 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
3,340,405

 
$
(224,768
)
 
$
3,115,637

 
$
(3,108,511
)
 
$
7,126

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
  
 
 
 
Bilateral derivatives
 
$
256,453

 
$
(243,853
)
 
$
12,600

 
$

 
$
12,600

Cleared derivatives
 
200,832

 
(199,089
)
 
1,743

 
(1,743
)
(3) 

 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
$
457,285

 
$
(442,942
)
 
$
14,343

 
$
(1,743
)
 
$
12,600

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
$
25,809

 
$
(8,110
)
 
$
17,699

 
$
(13,214
)
(2) 
$
4,485

Cleared derivatives
 
25,962

 
(20,581
)
 
5,381

 

 
5,381

Total derivatives
 
51,771

 
(28,691
)
 
23,080

 
(13,214
)
 
9,866

Securities purchased under agreements to resell
 
1,000,000

 

 
1,000,000

 
(1,000,000
)
 

 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
1,051,771

 
$
(28,691
)
 
$
1,023,080

 
$
(1,013,214
)
 
$
9,866

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
 
Bilateral derivatives
 
$
300,494

 
$
(293,530
)
 
$
6,964

 
$

 
$
6,964

Cleared derivatives
 
257,480

 
(257,480
)
 

 

(4) 

 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
$
557,974

 
$
(551,010
)
 
$
6,964

 
$

 
$
6,964

 
 
 
 
 
 
 
 
 
 
 
_____________________________
(1)
Any overcollateralization at an individual clearinghouse/clearing member or bilateral counterparty level is not included in the determination of the net unsecured amount.
(2)
Consists of collateral pledged by member counterparties.
(3) 
Consists of securities pledged by the Bank. In addition to the amount needed to secure the counterparties' exposure to the Bank, the Bank had pledged additional securities with an aggregate fair value of $611,608,000 at December 31, 2016 to secure its cleared derivatives, which is a result of the initial margin requirements imposed upon the Bank.
(4) 
The Bank had pledged securities with an aggregate fair value of $300,184,000 at December 31, 2015 to further secure its cleared derivatives, which is a result of the initial margin requirements imposed upon the Bank.


F-35


Note 13—Derivatives and Hedging Activities
     Hedging Activities. As a financial intermediary, the Bank is exposed to interest rate risk. This risk arises from a variety of financial instruments that the Bank enters into on a regular basis in the normal course of its business. The Bank enters into interest rate swap, swaption, cap and forward rate agreements (collectively, interest rate exchange agreements) to manage its exposure to changes in interest rates. The Bank may use these instruments to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. In addition, the Bank may use these instruments to hedge the variable cash flows associated with forecasted transactions. The Bank has not entered into any credit default swaps or foreign exchange-related derivatives and, as of December 31, 2016, it was not a party to any forward rate agreements.
The Bank uses interest rate exchange agreements in three ways: (1) by designating the agreement as a fair value hedge of a specific financial instrument or firm commitment; (2) by designating the agreement as a cash flow hedge of a forecasted transaction; or (3) by designating the agreement as a hedge of some other defined risk in the course of its balance sheet management (referred to as an “economic hedge”). For example, the Bank uses interest rate exchange agreements in its overall interest rate risk management activities to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets (both advances and investments), and/or to adjust the interest rate sensitivity of advances or investments to approximate more closely the interest rate sensitivity of its liabilities. In addition to using interest rate exchange agreements to manage mismatches between the coupon features of its assets and liabilities, the Bank also uses interest rate exchange agreements to manage embedded options in assets and liabilities, to preserve the market value of existing assets and liabilities, to hedge the duration risk of prepayable instruments, to hedge the variable cash flows associated with forecasted transactions, to offset interest rate exchange agreements entered into with members (the Bank serves as an intermediary in these transactions), and to reduce funding costs.
The Bank, consistent with Finance Agency regulations, enters into interest rate exchange agreements only to reduce potential market risk exposures inherent in otherwise unhedged assets and liabilities or anticipated transactions, or to act as an intermediary between its members and the Bank’s non-member derivative counterparties. The Bank is not a derivatives dealer and it does not trade derivatives for short-term profit.
At inception, the Bank formally documents the relationships between derivatives designated as hedging instruments and their hedged items, its risk management objectives and strategies for undertaking the hedge transactions, and its method for assessing the effectiveness of the hedging relationships. For fair value hedges, this process includes linking the derivatives to: (1) specific assets and liabilities on the statements of condition or (2) firm commitments. For cash flow hedges, this process includes linking the derivatives to forecasted transactions. The Bank also formally assesses (both at the inception of the hedging relationship and on a monthly basis thereafter) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of hedged items or the cash flows associated with forecasted transactions and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges.
     Investments — The Bank has invested in agency and non-agency MBS. The interest rate and prepayment risk associated with these investment securities is managed through consolidated obligations and/or derivatives. The Bank may manage prepayment and duration risk presented by some investment securities with either callable or non-callable consolidated obligations or interest rate exchange agreements, including caps and interest rate swaps.
A substantial portion of the Bank’s held-to-maturity securities are variable-rate MBS that include caps that would limit the variable-rate coupons if short-term interest rates rise dramatically. To hedge a portion of the potential cap risk embedded in these securities, the Bank has entered into interest rate cap agreements. These derivatives are treated as economic hedges.
Substantially all of the Bank's available-for-sale securities are fixed-rate agency and other highly rated debentures and agency commercial MBS. To hedge the interest rate risk associated with these fixed-rate investment securities, the Bank has entered into fixed-for-floating interest rate exchange agreements, which are designated as fair value hedges.
     Advances — The Bank issues both fixed-rate and variable-rate advances. When appropriate, the Bank uses interest rate exchange agreements to adjust the interest rate sensitivity of its fixed-rate advances to approximate more closely the interest rate sensitivity of its liabilities. With issuances of putable advances, the Bank purchases from the member a put option that enables the Bank to terminate a fixed-rate advance on specified future dates. This embedded option is clearly and closely related to the host advance contract. The Bank typically hedges a putable advance by entering into a cancelable interest rate exchange agreement where the Bank pays a fixed-rate coupon and receives a variable-rate coupon, and sells an option to cancel the swap to the swap counterparty. This type of hedge is treated as a fair value hedge. The swap counterparty can cancel the interest rate exchange agreement on the call date and the Bank can cancel the putable advance and offer, subject to certain conditions, replacement funding at prevailing market rates.

F-36


A small portion of the Bank’s variable-rate advances are subject to interest rate caps that would limit the variable-rate coupons if short-term interest rates rise above a predetermined level. To hedge the cap risk embedded in these advances, the Bank generally enters into interest rate cap agreements. This type of hedge is treated as a fair value hedge.
The Bank may hedge a firm commitment for a forward-starting advance through the use of an interest rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent advance. The carrying value of the firm commitment will be included in the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.
The Bank enters into optional advance commitments with its members. In an optional advance commitment, the Bank sells an option to the member that provides the member with either the right to enter into an advance (a stand-alone option) or increase the amount of an existing advance (an embedded option) at a specified fixed rate and term on a specified future date, provided the member has satisfied all of the customary requirements for such advance. Optional advance commitments involving Community Investment Program and Economic Development Program advances with a commitment period of three months or less are currently provided at no cost to members. The Bank may hedge an optional advance commitment through the use of an interest rate swaption. In this case, the swaption will function as the hedging instrument for both the commitment and, if the option is exercised by the member, the subsequent advance. These swaptions are treated as either economic hedges (in the case of stand-alone options) or fair value hedges (in the case of embedded options).
     Consolidated Obligations - While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank is the primary obligor for the consolidated obligations it has issued or assumed from another FHLBank. The Bank generally enters into derivative contracts to hedge the interest rate risk associated with its specific debt issuances.
To manage the interest rate risk of certain of its consolidated obligations, the Bank will match the cash outflow on a consolidated obligation with the cash inflow of an interest rate exchange agreement. With issuances of fixed-rate consolidated obligation bonds, the Bank typically enters into a matching interest rate exchange agreement in which the counterparty pays fixed cash flows to the Bank that are designed to mirror in timing and amount the cash outflows the Bank pays on the consolidated obligation. In this transaction, the Bank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate assets, typically one-month or three-month LIBOR. These transactions are treated as fair value hedges. On occasion, the Bank may enter into fixed-for-floating interest rate exchange agreements to hedge the interest rate risk associated with certain of its consolidated obligation discount notes. The derivatives associated with the Bank’s fair value discount note hedging are treated as economic hedges. The Bank may also use interest rate exchange agreements to convert variable-rate consolidated obligation bonds from one index rate (e.g., the daily effective federal funds rate) to another index rate (e.g., one-month or three-month LIBOR). These transactions are treated as economic hedges.
The Bank has not issued consolidated obligations denominated in currencies other than U.S. dollars.
Forecasted Issuances of Consolidated Obligations The Bank uses derivatives to hedge the variability of cash flows over a specified period of time as a result of the forecasted issuances and maturities of short-term, fixed-rate instruments, such as three-month consolidated obligation discount notes. Although each short-term consolidated obligation discount note has a fixed rate of interest, a portfolio of rolling consolidated obligation discount notes effectively has a variable interest rate. The variable cash flows associated with these liabilities are converted to fixed-rate cash flows by entering into receive-variable, pay-fixed interest rate swaps. The maturity dates of the cash flow streams are closely matched to the interest rate reset dates of the derivatives. These derivatives are treated as cash flow hedges.
     Balance Sheet Management — From time to time, the Bank may enter into interest rate basis swaps to reduce its exposure to changing spreads between one-month and three-month LIBOR. In addition, to reduce its exposure to reset risk, the Bank may occasionally enter into forward rate agreements. These derivatives are treated as economic hedges.
     Intermediation — The Bank offers interest rate swaps, caps and floors to its members to assist them in meeting their hedging needs. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties. All interest rate exchange agreements related to the Bank’s intermediary activities with its members are accounted for as economic hedges.
      Other — From time to time, the Bank may enter into derivatives to hedge risks to its earnings that are not directly linked to specific assets, liabilities or forecasted transactions. These derivatives are treated as economic hedges.

F-37


Impact of Derivatives and Hedging Activities. The following table summarizes the notional balances and estimated fair values of the Bank’s outstanding derivatives at December 31, 2016 and 2015 (in thousands).
 
December 31, 2016
 
December 31, 2015
 
Notional
Amount of
Derivatives
 
Estimated Fair Value
 
Notional
Amount of
Derivatives
 
Estimated Fair Value
 
 
Derivative
Assets
 
Derivative
Liabilities
 
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging
  instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
 
 
 
 
Advances
$
5,002,011

 
$
20,367

 
$
74,032

 
$
4,800,307

 
$
3,176

 
$
126,161

Available-for-sale securities
13,106,770

 
175,507

 
223,122

 
9,375,109

 
11,109

 
401,543

Consolidated obligation bonds
12,776,280

 
10,756

 
129,772

 
12,988,035

 
21,319

 
16,273

Consolidated obligation discount notes
425,000

 
19,050

 
486

 
100,000

 

 
1,508

Interest rate swaptions related to advances
3,000

 
66

 

 
4,000

 
17

 

Total derivatives designated as
  hedging instruments under ASC 815
31,313,061

 
225,746

 
427,412

 
27,267,451

 
35,621

 
545,485

Derivatives not designated as hedging
  instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
 
 
 
 
Advances

 

 

 
1,500

 
2

 

Available-for-sale securities
2,624

 
34

 
27

 
2,625

 
21

 
40

Trading securities

 

 

 
100,000

 
1,270

 

Consolidated obligation discount notes
1,276,563

 
2,626

 

 

 

 

Basis swaps
1,000,000

 

 
676

 

 

 

Intermediary transactions
341,671

 
11,174

 
10,128

 
1,925,960

 
13,480

 
11,810

Other
325,000

 

 
18,479

 

 

 

Mortgage delivery commitments
2,030

 
2

 

 

 

 

Interest rate caps
 

 
 

 
 

 
 

 
 

 
 

Held-to-maturity securities
1,200,000

 
260

 

 
1,650,000

 
738

 

Intermediary transactions
80,000

 
563

 
563

 
80,000

 
639

 
639

Total derivatives not designated as
  hedging instruments under ASC 815
4,227,888

 
14,659

 
29,873

 
3,760,085

 
16,150

 
12,489

Total derivatives before collateral and netting adjustments
$
35,540,949

 
240,405

 
457,285

 
$
31,027,536

 
51,771

 
557,974

Cash collateral and related accrued interest
 
 
(94,650
)
 
(312,824
)
 
 
 
(1,617
)
 
(523,936
)
Netting adjustments
 
 
(130,118
)
 
(130,118
)
 
 
 
(27,074
)
 
(27,074
)
Total collateral and netting adjustments(1)
 
 
(224,768
)
 
(442,942
)
 
 
 
(28,691
)
 
(551,010
)
Net derivative balances reported in statements of condition
 
 
$
15,637

 
$
14,343

 
 
 
$
23,080

 
$
6,964

________________________________________
(1) 
Amounts represent the effect of legally enforceable master netting agreements or other legally enforceable arrangements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.

F-38


The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the statements of income for the years ended December 31, 2016, 2015 and 2014 (in thousands).
 
Gain (Loss) Recognized in Earnings
for the Year Ended December 31,
 
2016
 
2015
 
2014
Derivatives and hedged items in ASC 815 fair value hedging relationships
 
 
 
 
 
Interest rate swaps
$
11,663

 
$
1,508

 
$
(3,082
)
Interest rate swaptions
49

 
4

 

Interest rate caps

 

 
(2
)
Total net gain (loss) related to fair value hedge ineffectiveness
11,712

 
1,512

 
(3,084
)
Derivatives not designated as hedging instruments under ASC 815
 
 
 
 
 
Net interest income (expense) on interest rate swaps
1,922

 
(24
)
 
1,362

Interest rate swaps
(22,673
)
 
5,682

 
3,900

Interest rate caps
(478
)
 
(687
)
 
(2,601
)
Mortgage delivery commitments
691

 

 

Total net gain (loss) related to derivatives not designated as hedging instruments under ASC 815
(20,538
)
 
4,971

 
2,661

Net gains (losses) on derivatives and hedging activities reported in the statements of income
$
(8,826
)
 
$
6,483

 
$
(423
)
The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in ASC 815 fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the years ended December 31, 2016, 2015 and 2014 (in thousands).
Hedged Item
 
Gain (Loss) on
Derivatives
 
Gain (Loss) on
Hedged Items
 
Net Fair Value Hedge
Ineffectiveness(1)
 
Derivative Net Interest
Income (Expense)(2)
Year ended December 31, 2016
 
 
 
 
 
 
 
 
Advances
 
$
58,591

 
$
(58,084
)
 
$
507

 
$
(62,510
)
Available-for-sale securities
 
306,325

 
(293,041
)
 
13,284

 
(145,139
)
Consolidated obligation bonds
 
(120,163
)
 
118,084

 
(2,079
)
 
56,185

Total
 
$
244,753

 
$
(233,041
)
 
$
11,712

 
$
(151,464
)
 
 
 
 
 
 
 
 
 
Year ended December 31, 2015
 
 
 
 
 
 
 
 
Advances
 
$
34,686

 
$
(34,378
)
 
$
308

 
$
(90,567
)
Available-for-sale securities
 
4,683

 
(3,653
)
 
1,030

 
(122,560
)
Consolidated obligation bonds
 
7,300

 
(7,126
)
 
174

 
131,790

Total
 
$
46,669

 
$
(45,157
)
 
$
1,512

 
$
(81,337
)
 
 
 
 
 
 
 
 
 
Year ended December 31, 2014
 
 
 
 
 
 
 
 
Advances
 
$
18,468

 
$
(19,293
)
 
$
(825
)
 
$
(105,885
)
Available-for-sale securities
 
(61,063
)
 
58,419

 
(2,644
)
 
(80,808
)
Consolidated obligation bonds
 
96,746

 
(96,361
)
 
385

 
115,928

Total
 
$
54,151

 
$
(57,235
)
 
$
(3,084
)
 
$
(70,765
)
________________________________________
(1) 
Reported as net gains (losses) on derivatives and hedging activities in the statements of income.
(2) 
The net interest income (expense) associated with derivatives in ASC 815 fair value hedging relationships is reported in the statements of income in the interest income/expense line item for the indicated hedged item.
  

F-39


The following table presents, by type of hedged item, the gains (losses) on derivatives in ASC 815 cash flow hedging relationships that were recognized in other comprehensive income and the gains (losses) reclassified from AOCI into earnings for the years ended December 31, 2016 and 2015 (in thousands). The Bank did not have any derivatives designated in cash flow hedging relationships during the year ended December 31, 2014.
Derivatives in Cash Flow Hedging Relationships
 
Amount of Gains (Losses) Recognized in Other Comprehensive Income on Derivatives
(Effective Portion)
 
Amount of Losses Reclassified from AOCI into Interest Expense
(Effective Portion) (1)
 
Amount of Gains (Losses) Recognized in Net Gains (Losses)
 on Derivatives and Hedging Activities
 (Ineffective Portion)
Year ended December 31, 2016
 
 
 
 
 
 
Interest rate swaps related to anticipated issuances of consolidated obligation discount notes
 
$
17,748

 
$
3,479

 
$

Year ended December 31, 2015
 
 
 
 
 
 
Interest rate swap related to anticipated issuances of consolidated obligation discount notes
 
$
(1,424
)
 
$
577

 
$

_____________________________
(1) 
Represents net interest expense associated with the derivatives.

For the years ended December 31, 2016 and 2015, there were no amounts reclassified from AOCI into earnings as a result of the discontinuance of cash flow hedges because the original forecasted transactions occurred by the end of the originally specified time periods or within two-month periods thereafter. At December 31, 2016, $2,404,000 of deferred net losses on derivative instruments in AOCI are expected to be reclassified to earnings during the next 12 months. At December 31, 2016, the maximum length of time over which the Bank is hedging its exposure to the variability in future cash flows for forecasted transactions is 9.75 years.
  Credit Risk Related to Derivatives. The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative agreements. The Bank manages derivative counterparty credit risk through the use of master netting agreements or other similar collateral exchange arrangements, credit analysis, and adherence to the requirements set forth in the Bank’s Enterprise Market Risk Management Policy, Enterprise Credit Risk Management Policy and Finance Agency regulations. The majority of the Bank's derivative transactions have been cleared through third-party central clearinghouses (as of December 31, 2016, the notional balance of cleared transactions outstanding totaled $24.4 billion). With cleared transactions, the Bank is exposed to credit risk in the event that the clearinghouse or the clearing member fails to meet its obligations to the Bank. The remainder of the Bank's interest rate exchange agreements have been transacted bilaterally with large financial institutions under master netting agreements or, to a much lesser extent, with member institutions (as of December 31, 2016, the notional balance of outstanding transactions with non-member bilateral counterparties and member counterparties totaled $10.9 billion and $0.2 billion, respectively). Some of these institutions (or their affiliates) buy, sell, and distribute consolidated obligations.
The notional amount of the Bank's interest rate exchange agreements does not reflect its credit risk exposure, which is much less than the notional amount. The Bank's net credit risk exposure is based on the current estimated cost, on a present value basis, of replacing at current market rates all interest rate exchange agreements with individual counterparties, if those counterparties were to default, after taking into account the value of any cash and/or securities collateral held or remitted by the Bank. For counterparties with which the Bank is in a net gain position, the Bank has credit exposure when the collateral it is holding (if any) has a value less than the amount of the gain. For counterparties with which the Bank is in a net loss position, the Bank has credit exposure when it has delivered collateral with a value greater than the amount of the loss position. The net exposure on derivative agreements is presented in Note 12. Based on the netting provisions and collateral requirements associated with its derivative agreements and the creditworthiness of its derivative counterparties, Bank management does not currently anticipate any credit losses on its derivative agreements.

Note 14—Capital
Under the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) and the Finance Agency’s capital regulations, each FHLBank may issue Class A stock or Class B stock, or both, to its members. The Bank’s Capital Plan provides that it will issue only Class B capital stock. The Class B stock has a par value of $100 per share and is purchased, redeemed, repurchased and, with the prior approval of the Bank, transferred only at its par value. As required by statute and regulation, members may request the Bank to redeem excess Class B stock, or withdraw from membership and request the Bank to redeem all outstanding capital stock, with five years’ written notice to the Bank. The regulations also allow the Bank, in its sole discretion, to repurchase members’ excess stock at any time without regard for the five-year notification period as long as the Bank continues to meet its regulatory capital requirements following any stock repurchases, as described below.

F-40


Members are required to maintain an investment in Class B Stock equal to the sum of a membership investment requirement and an activity-based investment requirement. The membership investment requirement is currently 0.04 percent of each member’s total assets as of the previous calendar year-end, subject to a minimum of 1,000 and a maximum of 7,000,000. Except as described below, the activity-based investment requirement is (and has been) 4.1 percent of outstanding advances. Members and institutions that acquire members must comply with the activity-based investment requirements for as long as the relevant advances remain outstanding. The Bank’s Board of Directors has the authority to adjust these requirements periodically within ranges established in the Capital Plan, as amended from time to time, to ensure that the Bank remains adequately capitalized.
On December 3, 2014, the Bank's Board of Directors adopted several amendments to the Bank’s Capital Plan, subject to approval by the Finance Agency and certain notification requirements. The Finance Agency approved the amendments to the Bank’s Capital Plan on June 1, 2015. Among other things, the Bank’s Capital Plan was amended to allow for the creation of two sub-classes of the Bank’s Class B Stock (Class B-1 Stock and Class B-2 Stock). On August 31, 2015, the Bank gave notice to its shareholders that the amended Capital Plan would be implemented and the two sub-classes of capital stock would be created on October 1, 2015.
On October 1, 2015, the Bank exchanged all shares of outstanding Class B Stock at the open of business on that date for an equal number of shares of capital stock consisting of shares of Class B-1 Stock and Class B-2 Stock allocated as described in the next sentence. For each shareholder, (i) a number of shares of existing Class B Stock in an amount sufficient to meet such shareholder’s activity-based investment requirement were exchanged for an equal number of shares of Class B-2 Stock and (ii) all other outstanding shares of existing Class B Stock held by such shareholder were exchanged for an equal number of shares of Class B-1 Stock. Immediately following these exchanges, all shares of previously outstanding Class B Stock were retired. The Capital Plan amendments did not change members' voting rights in any way. For the purpose of voting rights, all shares of Class B Stock, regardless of sub-class, are treated the same.
From and after October 1, 2015, Class B-1 Stock is used to meet the membership investment requirement and Class B-2 Stock is used to meet the activity-based investment requirement. Daily, subject to the limitations in the Capital Plan, the Bank converts shares of one sub-class of Class B Stock to the other sub-class of Class B Stock under the following circumstances: (i) shares of Class B-2 Stock held by a shareholder in excess of its activity-based investment requirement are converted into Class B-1 Stock, if necessary, to meet that shareholder’s membership investment requirement and (ii) shares of Class B-1 Stock held by a shareholder in excess of the amount required to meet its membership investment requirement are converted into Class B-2 Stock as needed in order to satisfy that shareholder’s activity-based investment requirement.
The Bank also amended its Capital Plan to modify the permissible range for the advances-based component of the activity-based investment requirement. Effective October 1, 2015, the permissible range for the advances-based component of the activity-based investment requirement changed from a range of 3.0 percent to 5.0 percent of members’ advances outstanding to a range of 2.0 percent to 5.0 percent of members’ advances outstanding. The requirement remained at 4.1 percent of members' advances outstanding upon the implementation of the amended Capital Plan. The amendments did not alter the permissible ranges for the membership investment requirement or the Acquired Member Asset component of the activity-based investment requirement and no changes to the then existing requirements were made upon the implementation of the amended Capital Plan.
Further, under the amended Capital Plan, the Bank’s Board of Directors may also establish one or more separate advances investment requirement percentages (each an "advance type specific percentage") within the range described above to be applied to a specific category of advances in lieu of the generally applicable advances-related investment requirement percentage in effect at the time. Such category of advances may be defined as a particular advances product offering, advances with particular maturities or other features, advances that represent an increase in member borrowing, or such other criteria as the Bank’s Board of Directors may determine. Any advance type specific percentage may be established for an indefinite period of time, or for a specific time period, at the discretion of the Bank’s Board of Directors. Pursuant to the amended Capital Plan, any changes to the activity-based investment requirement require at least 30 days advance notice to the Bank’s members.
On September 21, 2015, the Bank announced a Board-authorized reduction in the activity-based stock investment requirement from 4.1 percent to 2.0 percent for certain advances that were funded during the period from October 21, 2015 through December 31, 2015. To be eligible for the reduced activity-based investment requirement, advances funded during this period had to have a minimum maturity of one year or greater, among other things. The standard activity-based stock investment requirement of 4.1 percent continued to apply to all other advances that were funded during the period from October 21, 2015 through December 31, 2015. All other minimum investment requirements also continued to apply.
Excess stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum investment requirement (i.e., the amount of stock held in excess of its activity-based investment requirement and, in the case of a member, its membership investment requirement). From and after October 1, 2015, all excess stock is held as Class B-1 Stock at all times. At any time, shareholders may request the Bank to repurchase excess capital stock. Although the Bank is not obligated to repurchase excess stock prior to the expiration of a five-year redemption or withdrawal notification

F-41


period, it will typically endeavor to honor such requests within a reasonable period of time (generally not exceeding 30 days) so long as the Bank will continue to meet its regulatory capital requirements following the repurchase.
The Bank’s Member Products and Credit Policy provides that the Bank may periodically repurchase a portion of members’ excess capital stock. The Bank generally repurchases surplus stock quarterly. For the repurchases that occurred during 2016, surplus stock was defined as the amount of stock held by a shareholder in excess of 125 percent of the shareholder’s minimum investment requirement. For those repurchases, which occurred on February 25, 2016, June 27, 2016, September 27, 2016 and December 27, 2016, a shareholder's surplus stock was not repurchased if: (1) the amount of that shareholder's surplus stock was $2,500,000 or less, (2) the shareholder elected to opt out of the repurchase, or (3) the shareholder was on restricted collateral status (subject to certain exceptions). For the repurchases that occurred between January 31, 2014 and August 7, 2015, surplus stock was defined as the amount of stock held by a shareholder in excess of 102.5 percent of the shareholder’s minimum investment requirement. For the repurchases that occurred between January 31, 2014 and August 7, 2015, a shareholder's surplus stock was not repurchased if the amount of that shareholder's surplus stock was $100,000 or less or if, subject to certain exceptions, the shareholder was on restricted collateral status. For the repurchase that occurred on November 6, 2015, surplus stock was defined as the amount of stock held by a shareholder in excess of 120 percent of the shareholder’s minimum investment requirement. For the repurchase that occurred on November 6, 2015, a shareholder's surplus stock was not repurchased if the amount of that shareholder's surplus stock was $1,000,000 or less or if, subject to certain exceptions, the shareholder was on restricted collateral status. For each of the repurchases that occurred in 2015, shareholders were also given the opportunity to opt-out of the repurchase if they chose to do so. During the years ended December 31, 2016, 2015 and 2014, the Bank repurchased surplus stock totaling $312,647,000, $574,896,000, and $901,117,000, respectively, none of which was classified as mandatorily redeemable capital stock at the time of repurchase. From time to time, the Bank may further modify the definition of surplus stock or the timing and/or frequency of surplus stock repurchases.
The following table presents total excess stock at December 31, 2016 and 2015 (in thousands).
 
2016
 
2015
Excess stock
 
 
 
Capital stock
$
396,167

 
$
356,394

Mandatorily redeemable capital stock
1,602

 
2,613

Total
$
397,769

 
$
359,007

Under the Finance Agency’s regulations, the Bank is subject to three capital requirements. First, the Bank must maintain at all times permanent capital (defined under the Finance Agency’s rules and regulations as retained earnings and all Class B stock regardless of its classification for financial reporting purposes) in an amount at least equal to its risk-based capital requirement, which is the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, calculated in accordance with the rules and regulations of the Finance Agency. The Finance Agency may require the Bank to maintain a greater amount of permanent capital than is required by the risk-based capital requirements as defined. Second, the Bank must, at all times, maintain total capital in an amount at least equal to 4.0 percent of its total assets (capital-to-assets ratio). For the Bank, total capital is defined by Finance Agency rules and regulations as the Bank’s permanent capital and the amount of any general allowance for losses (i.e., those reserves that are not held against specific assets). Finally, the Bank is required to maintain at all times a minimum leverage capital-to-assets ratio in an amount at least equal to 5.0 percent of its total assets. In applying this requirement to the Bank, leverage capital includes the Bank’s permanent capital multiplied by a factor of 1.5 plus the amount of any general allowance for losses. The Bank did not have any general reserves at December 31, 2016 or 2015. Under the regulatory definitions, total capital and permanent capital exclude AOCI. Additionally, mandatorily redeemable capital stock is considered capital for purposes of determining the Bank’s compliance with its regulatory capital requirements.

F-42


At all times during the three years ended December 31, 2016, the Bank was in compliance with the aforementioned capital requirements. The following table summarizes the Bank’s compliance with the Finance Agency’s capital requirements as of December 31, 2016 and 2015 (dollars in thousands):
 
December 31, 2016
 
December 31, 2015
 
Required
 
Actual
 
Required
 
Actual
Regulatory capital requirements:
 
 
 
 
 
 
 
Risk-based capital
$
683,690

 
$
2,757,549

 
$
493,617

 
$
2,311,264

Total capital
$
2,328,483

 
$
2,757,549

 
$
1,683,332

 
$
2,311,264

Total capital-to-assets ratio
4.00
%
 
4.74
%
 
4.00
%
 
5.49
%
Leverage capital
$
2,910,604

 
$
4,136,324

 
$
2,104,165

 
$
3,466,896

Leverage capital-to-assets ratio
5.00
%
 
7.11
%
 
5.00
%
 
8.24
%
On August 4, 2009, the Finance Agency adopted a final rule establishing capital classifications and critical capital levels for the FHLBanks. The rule defines critical capital levels for the FHLBanks and establishes criteria for each of the following capital classifications identified in the Safety and Soundness Act, as amended by the Housing and Economic Recovery Act of 2008: adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An adequately capitalized FHLBank meets all existing risk-based and minimum capital requirements. An undercapitalized FHLBank does not meet one or more of its risk-based or minimum capital requirements, but nonetheless has total capital equal to or greater than 75 percent of all capital requirements. A significantly undercapitalized FHLBank does not have total capital equal to or greater than 75 percent of all capital requirements, but the FHLBank does have total capital greater than 2 percent of its total assets. A critically undercapitalized FHLBank has total capital that is less than or equal to 2 percent of its total assets. The Bank has been classified as adequately capitalized since the rule became effective.
In addition to restrictions on capital distributions by a FHLBank that does not meet all of its risk-based and minimum capital requirements, a FHLBank that is classified as undercapitalized, significantly undercapitalized or critically undercapitalized is required to take certain actions, such as submitting a capital restoration plan to the Director of the Finance Agency for approval. Additionally, with respect to a FHLBank that is less than adequately capitalized, the Director of the Finance Agency may take other actions that he or she determines will help ensure the safe and sound operation of the FHLBank and its compliance with its risk-based and minimum capital requirements in a reasonable period of time.
The GLB Act made membership voluntary for all members. Members that withdraw from membership may not be readmitted to membership in any FHLBank for at least five years following the date that their membership was terminated and all of their shares of stock were redeemed or repurchased.
Effective February 28, 2011, the Bank entered into a Joint Capital Enhancement Agreement (the “JCE Agreement”) with the other FHLBanks. Effective August 5, 2011, the FHLBanks amended the JCE Agreement, and the Finance Agency approved an amendment to the Bank's capital plan to incorporate its provisions on that same date. The amended JCE Agreement provides that the Bank (and each of the other FHLBanks) will, on a quarterly basis, allocate at least 20 percent of its net income to a restricted retained earnings account (“RRE Account”). Pursuant to the provisions of the amended JCE Agreement, the Bank is required to build its RRE Account to an amount equal to one percent of its total outstanding consolidated obligations, which for this purpose is based on the most recent quarter’s average carrying value of all outstanding consolidated obligations, excluding hedging adjustments. Amounts allocated to the Bank’s RRE Account are not available to pay dividends.
The Bank’s Board of Directors may declare dividends at the same rate for all shares of Class B Stock, or at different rates for Class B-1 Stock and Class B-2 Stock, provided that in no event can the dividend rate on Class B-2 Stock be lower than the dividend rate on Class B-1 Stock. Dividend payments may be made in the form of cash, additional shares of either, or both, sub-classes of Class B Stock, or a combination thereof as determined by the Bank’s Board of Directors and can be paid only from unrestricted retained earnings or a portion of current earnings. The Bank’s Board of Directors may not declare or pay a dividend if the Bank is not in compliance with its minimum capital requirements or if the Bank would fail to meet its minimum capital requirements after paying such dividend. In addition, the Bank’s Board of Directors may not declare or pay a dividend based on projected or anticipated earnings; further, the Bank may not declare or pay any dividends in the form of capital stock if its excess stock is greater than 1 percent of its total assets or if, after the issuance of such shares, the Bank’s outstanding excess stock would be greater than 1 percent of its total assets.
     Mandatorily Redeemable Capital Stock. As discussed in Note 1, the Bank’s capital stock is classified as equity (capital) for financial reporting purposes until either a written redemption or withdrawal notice is received from a member or a membership withdrawal or termination is otherwise initiated, at which time the capital stock is reclassified to liabilities. The Finance Agency has confirmed that the accounting classification of certain shares of its capital stock as liabilities does not affect the definition of capital for purposes of determining the Bank’s compliance with its regulatory capital requirements.

F-43


At December 31, 2016, the Bank had $3,417,000 in outstanding capital stock subject to mandatory redemption held by 15 institutions. As of December 31, 2015, the Bank had $8,929,000 in outstanding capital stock subject to mandatory redemption held by 16 institutions. These amounts are classified as liabilities in the statements of condition. During the years ended December 31, 2016, 2015 and 2014, dividends on mandatorily redeemable capital stock in the amount of $30,000, $16,000 and $15,000, respectively, were recorded as interest expense in the statements of income.
The Bank is not required to redeem or repurchase activity-based stock until the later of the expiration of a notice of redemption or withdrawal or the date the activity no longer remains outstanding. If activity-based stock becomes excess stock as a result of reduced activity, the Bank, in its discretion and subject to certain regulatory restrictions, may repurchase excess stock prior to the expiration of the notice of redemption or withdrawal. The Bank will generally repurchase such excess stock as long as it expects to continue to meet its minimum capital requirements following the repurchase.
The following table summarizes the Bank’s mandatorily redeemable capital stock at December 31, 2016 by year of earliest mandatory redemption (in thousands). The earliest mandatory redemption reflects the earliest time at which the Bank is required to redeem the shareholder’s capital stock, and is based on the assumption that the activities associated with the activity-based stock have concluded by the time the notice of redemption or withdrawal expires.
2017
$
1,681

2018
557

2019
11

2020
6

2021
1,162

Total
$
3,417

The following table summarizes the Bank’s mandatorily redeemable capital stock activity during 2016, 2015 and 2014 (in thousands).
Balance, January 1, 2014
$
3,065

Capital stock that became subject to mandatory redemption during the year
3,130

Redemption/repurchase of mandatorily redeemable capital stock
(1,160
)
Mandatorily redeemable capital stock issued during the year
5

Stock dividends classified as mandatorily redeemable
19

Balance, December 31, 2014
5,059

Capital stock that became subject to mandatory redemption during the year
7,044

Redemption/repurchase of mandatorily redeemable capital stock
(3,198
)
Mandatorily redeemable capital stock issued during the year
2

Stock dividends classified as mandatorily redeemable
22

Balance, December 31, 2015
8,929

Capital stock that became subject to mandatory redemption during the year
2,863

Redemption/repurchase of mandatorily redeemable capital stock
(8,413
)
Stock dividends classified as mandatorily redeemable
38

Balance, December 31, 2016
$
3,417

A member may cancel a previously submitted redemption or withdrawal notice by providing a written cancellation notice to the Bank prior to the expiration of the five-year redemption/withdrawal notice period. A member that cancels a stock redemption or withdrawal notice more than 30 days after it is received by the Bank and prior to its expiration is subject to a cancellation fee equal to a percentage of the par value of the capital stock subject to the cancellation notice.

F-44


The following table provides the number of institutions that held mandatorily redeemable capital stock and the number that submitted a withdrawal notice or otherwise initiated a termination of their membership and the number of terminations completed during 2016, 2015 and 2014:
 
2016
 
2015
 
2014
Number of institutions, beginning of year
16

 
18

 
16

Due to mergers and acquisitions
4

 
7

 
7

Terminations completed during the year
(5
)
 
(9
)
 
(5
)
Number of institutions, end of year
15

 
16

 
18

The Bank did not receive any stock redemption notices in 2016, 2015 or 2014.
    Limitations on Redemption or Repurchase of Capital Stock. The GLB Act imposes the following restrictions on the redemption or repurchase of the Bank’s capital stock.
In no event may the Bank redeem or repurchase capital stock if the Bank is not in compliance with its minimum capital requirements or if the redemption or repurchase would cause the Bank to be out of compliance with its minimum capital requirements, or if the redemption or repurchase would cause the member to be out of compliance with its minimum investment requirement. In addition, the Bank’s Board of Directors may suspend redemption of capital stock if the Bank reasonably believes that continued redemption of capital stock would cause the Bank to fail to meet its minimum capital requirements in the future, would prevent the Bank from maintaining adequate capital against a potential risk that may not be adequately reflected in its minimum capital requirements, or would otherwise prevent the Bank from operating in a safe and sound manner.
In no event may the Bank redeem or repurchase capital stock without the prior written approval of the Finance Agency if the Finance Agency or the Bank’s Board of Directors has determined that the Bank has incurred, or is likely to incur, losses that result in, or are likely to result in, charges against the capital of the Bank. For this purpose, charges against the capital of the Bank means an other than temporary decline in the Bank’s total equity that causes the value of total equity to fall below the Bank’s aggregate capital stock amount. Such a determination may be made by the Finance Agency or the Board of Directors even if the Bank is in compliance with its minimum capital requirements.
The Bank may not repurchase any capital stock without the written consent of the Finance Agency during any period in which the Bank has suspended redemptions of capital stock. The Bank is required to notify the Finance Agency if it suspends redemptions of capital stock and set forth its plan for addressing the conditions that led to the suspension. The Finance Agency may require the Bank to reinstate redemptions of capital stock.
In no event may the Bank redeem or repurchase shares of capital stock if the principal and interest due on any FHLBank System consolidated obligations issued through the Office of Finance have not been paid in full or, under certain circumstances, if the Bank becomes a non-complying FHLBank under Finance Agency regulations as a result of its inability to comply with regulatory liquidity requirements or to satisfy its current obligations.
If at any time the Bank determines that the total amount of capital stock subject to outstanding stock redemption or withdrawal notices with expiration dates within the following 12 months exceeds the amount of capital stock the Bank could redeem and still comply with its minimum capital requirements, the Bank will determine whether to suspend redemption and repurchase activities altogether, to fulfill requests for redemption sequentially in the order in which they were received, to fulfill the requests on a pro rata basis, or to take other action deemed appropriate by the Bank.


Note 15—Employee Retirement Plans
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 covers substantially all officers and employees of the Bank who were hired prior to January 1, 2007, and any new employee of the Bank who was hired on or after January 1, 2007, provided that the employee had prior service with a financial services institution that participated in the Pentegra DB Plan, during which service the employee was covered by such plan. In addition, effective July 1, 2015, coverage was extended to include all of the Bank's non-highly compensated employees (as defined by Internal Revenue Service rules) who were hired on and after January 1, 2007 but before August 1, 2010. 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, including the certified zone status, 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. In addition, in the event a participating employer is unable

F-45


to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately.  
 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 at the Bank.
The Pentegra DB Plan's annual valuation process includes separate calculations of the plan's funded status as well as the funded status of each participating employer. Participating employers in an under-funded position are billed for their required contributions while those in an over-funded position can use their surplus to offset all or a portion of their contribution requirement. The funded status is defined as the market value of assets divided by the funding target (an amount equal to 100 percent of the present value of all benefit liabilities accrued at the valuation date) and is calculated as of the beginning of the Pentegra DB Plan year. As permitted by ERISA, the Pentegra DB Plan accepts contributions for a plan year up to eight and a half months after the end of that plan year and, as a result, the market value of assets at the valuation date (July 1) is increased by any subsequent contributions that are 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. For the plan years ended June 30, 2015 and 2014, the Bank's contributions did not represent more than 5 percent of the total contributions to the plan.
The following table presents the Bank's net pension cost and its funded status, as well as the funded status of the Pentegra DB Plan (dollars in thousands, including amounts presented in the footnotes to the table).
 
2016
 
2015
 
2014
Net pension cost charged to compensation and benefit expense for the year ended December 31
$
4,518

 
 
$
2,187

 
 
$
1,806

 
Pentegra DB Plan funded status as of July 1
104.1
%
(a) 
 
107.0
%
(b) 
 
111.4
%
 
Bank's funded status as of July 1
93.8
%
 
 
95.1
%
  
 
107.0
%
 
____________
(a) 
The Pentegra DB Plan's funded status as of July 1, 2016 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2016 through March 15, 2017. Contributions made during the period from July 1, 2016 through March 15, 2017 and designated for the plan year ended June 30, 2016 will be included in the final valuation as of July 1, 2016. The final funded status as of July 1, 2016 will not be available until the Form 5500 for the plan year July 1, 2016 through June 30, 2017 is filed (this Form 5500 is due to be filed no later than April 2018).
(b) 
The Pentegra DB Plan's funded status as of July 1, 2015 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2015 through March 15, 2016. Contributions made during the period from July 1, 2015 through March 15, 2016 and designated for the plan year ended June 30, 2015 will be included in the final valuation as of July 1, 2015. The final funded status as of July 1, 2015 will not be available until the Form 5500 for the plan year July 1, 2015 through June 30, 2016 is filed (this Form 5500 is due to be filed no later than April 2017).
The Bank also participates in the Pentegra Defined Contribution Plan for Financial Institutions (“Pentegra DC Plan”), a tax-qualified defined contribution plan. The Bank’s contributions to the Pentegra DC Plan are equal to a percentage of voluntary employee contributions, subject to certain limitations. During the years ended December 31, 2016, 2015 and 2014, the Bank contributed $1,355,000, $1,257,000 and $1,171,000, respectively, to the Pentegra DC Plan.
Additionally, the Bank maintains a non-qualified deferred compensation plan that is available to some employees, which is, in substance, an unfunded supplemental retirement plan. The Bank’s liability, which consists of the accumulated employee compensation deferrals, accrued earnings (or losses) on those deferrals and matching Bank contributions corresponding to the contribution percentages applicable to the defined contribution plan, was $3,341,000 and $2,550,000 at December 31, 2016 and 2015, respectively. Compensation and benefits expense includes accrued earnings on deferred employee compensation and Bank contributions totaling $302,000, $46,000 and $146,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
The Bank's non-qualified deferred compensation plan is also available to all of its directors. The Bank’s liability for directors' deferred compensation, which consists of the accumulated compensation deferrals (representing directors’ fees) and the accrued earnings (losses) on those deferrals, was $1,842,000 and $1,483,000 at December 31, 2016 and 2015, respectively.
The Bank maintains a Special Non-Qualified Deferred Compensation Plan (the “Plan”), a defined contribution plan that was established primarily to provide supplemental retirement benefits to those employees who were serving as the Bank’s executive officers at the time the Plan was established. Each participant’s benefit under the Plan consists of contributions that were made by the Bank on the participant’s behalf, plus an allocation of the investment gains or losses on the assets used to fund the Plan. Contributions to the Plan are determined solely at the discretion of the Bank’s Board of Directors; the Bank has no obligation or current intention to make future contributions to the Plan. The Bank’s accrued liability under this plan was

F-46


$4,894,000 and $4,722,000 at December 31, 2016 and 2015, respectively. During the year ended December 31, 2014, the Bank contributed $25,000 to the Plan. The Bank did not make any contributions to the Plan during the years ended December 31, 2016 or 2015.
The Bank sponsors a retirement benefits program that includes health care and life insurance benefits for eligible retirees. The health care portion of the program is contributory while the life insurance benefits, which are available to retirees with at least 20 years of service, are offered on a noncontributory basis. Prior to January 1, 2005, retirees were eligible to remain enrolled in the Bank’s health care benefits plan if age 50 or older with at least 10 years of service at the time of retirement. In December 2004, the Bank modified the eligibility requirements relating to retiree health care continuation benefits. Effective January 1, 2005, retirees are eligible to remain enrolled in the Bank’s health care benefits plan if age 55 or older with at least 15 years of service at the time of retirement. Employees who were age 50 or older with 10 years of service and those who had 20 years of service as of December 31, 2004 were not subject to the revised eligibility requirements. Additionally, then current retiree benefits were unaffected by these modifications. In October 2005, the Bank modified the participant contribution requirements relating to its retirement benefits program. Effective December 31, 2005, retirees who are age 55 or older with at least 15 years of service at the time of retirement can remain enrolled in the Bank’s health care benefits program by paying 100% of the expected plan cost. Previously, participant contributions were subsidized by the Bank; this subsidy was based upon the Bank’s COBRA premium rate and the employee’s age and length of service with the Bank. Then current retirees, employees who were hired prior to January 1, 1991 and those who, as of December 31, 2004, had at least 20 years of service or were age 50 or older with 10 years of service are not subject to these revised contribution requirements prior to age 65. Under the revised plan, at age 65, all plan participants are required to pay 100% of the expected plan cost. The Bank does not have any plan assets set aside for the retirement benefits program.
The Bank uses a December 31 measurement date for its retirement benefits program. A reconciliation of the accumulated postretirement benefit obligation (“APBO”) and funding status of the retirement benefits program for the years ended December 31, 2016 and 2015 is as follows (in thousands):
 
Year Ended December 31,
 
2016
 
2015
Change in APBO
 
 
 
APBO at beginning of year
$
1,044

 
$
1,410

Service cost
23

 
19

Interest cost
28

 
46

Actuarial gain
(8
)
 
(222
)
Participant contributions
167

 
162

Benefits paid
(416
)
 
(371
)
APBO at end of year
838

 
1,044

Change in plan assets
 
 
 
Fair value of plan assets at beginning of year

 

Benefits paid by the Bank
249

 
209

Participant contributions
167

 
162

Benefits paid
(416
)
 
(371
)
Fair value of plan assets at end of year

 

Funded status recognized in other liabilities at end of year
$
(838
)
 
$
(1,044
)
Amounts recognized in AOCI at December 31, 2016 and 2015 consist of the following (in thousands):
 
December 31,
 
2016
 
2015
Net actuarial gain
$
1,549

 
$
1,648

Prior service cost
(149
)
 
(170
)
 
$
1,400

 
$
1,478

The amounts in AOCI include $20,000 of prior service cost and $104,000 of net actuarial gains that are expected to be recognized as components of net periodic benefit cost in 2017.

F-47


The actuarial assumptions used in the measurement of the Bank’s benefit obligation included a gross health care cost trend rate of 7.6 percent for 2017. For 2016, 2015 and 2014, gross health care cost trend rates of 6.7 percent, 7.8 percent and 8.0 percent, respectively, were used. The gross health care cost trend rate is assumed to decline by 0.04 percent per year to a final rate of 4.4 percent in 2095 and thereafter. To compute the APBO at December 31, 2016 and 2015, weighted average discount rates of 3.12 percent and 3.08 percent were used. Weighted average discount rates of 3.08 percent, 3.44 percent and 4.64 percent were used to compute the net periodic benefit cost for 2016, 2015 and 2014, respectively.
Components of net periodic benefit cost (credit) for the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands):
 
Year Ended December 31,
 
2016
 
2015
 
2014
Service cost
$
23

 
$
19

 
$
18

Interest cost
28

 
46

 
61

Amortization of prior service cost
20

 
8

 
2

Amortization of net actuarial gain
(106
)
 
(88
)
 
(91
)
Net periodic benefit credit
$
(35
)
 
$
(15
)
 
$
(10
)
Under U.S. GAAP, the Bank is required to recognize the overfunded or underfunded status of its retirement benefits program as an asset or liability in its statement of condition and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. Changes in benefit obligations recognized in other comprehensive income during the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands):
 
Year Ended December 31,
 
2016
 
2015
 
2014
Amortization of prior service cost included in net periodic benefit cost
$
20

 
$
8

 
$
2

Actuarial gain (loss)
8

 
222

 
(2
)
Amortization of net actuarial gain included in net periodic benefit cost
(106
)
 
(88
)
 
(91
)
Total changes in benefit obligations recognized in other comprehensive income
$
(78
)
 
$
142

 
$
(91
)
A 1 percent increase in the health care cost trend rate would have reduced the APBO at December 31, 2016 by $121,000 and the aggregate of the service and interest cost components of the net periodic benefit cost for the year ended December 31, 2016 by $3,000. Alternatively, a 1 percent decrease in the health care cost trend rate would have increased the APBO at December 31, 2016 by $83,000 and the aggregate of the service and interest cost components of the net periodic benefit cost for the year ended December 31, 2016 by $2,000.
The following net postretirement benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
Year Ended
December 31,
 
Expected Benefits
Payments, Net of
Participant
Contributions
2017
 
$
165

2018
 
146

2019
 
153

2020
 
131

2021
 
122

2022-2026
 
390

 
 
$
1,107


Note 16—Estimated Fair Values
Fair value is defined under U.S. GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal

F-48


market, the most advantageous market for the asset or liability. U.S. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. U.S. GAAP also requires an entity to disclose the level within the fair value hierarchy in which each measurement is classified. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
Level 1 Inputs — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
     Level 2 Inputs — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active or in which little information is released publicly; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data (e.g., implied spreads).
     Level 3 Inputs — Unobservable inputs for the asset or liability that are supported by little or no market activity. None of the Bank’s assets or liabilities that are recorded at fair value on a recurring basis were measured using significant Level 3 inputs.
For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. Reclassifications, if any, would be reported as transfers as of the beginning of the quarter in which the changes occurred. For the years ended December 31, 2016 and 2015, the Bank did not reclassify any fair value measurements.
The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of December 31, 2016 and 2015. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for many of the Bank’s financial instruments (e.g., advances, non-agency RMBS and mortgage loans held for portfolio), in certain cases their fair values are not subject to precise quantification or verification. Therefore, the estimated fair values presented below in the Fair Value Summary Tables may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. Further, 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.
The valuation techniques used to measure the fair values of the Bank’s financial instruments are described below.
     Cash and due from banks. The estimated fair value equals the carrying value.
     Interest-bearing deposit assets. Interest-bearing deposit assets earn interest at floating market rates; therefore, the estimated fair value of the deposits approximates their carrying value.
     Securities purchased under agreements to resell, federal funds sold and loans to other FHLBanks. All federal funds sold, securities purchased under agreements to resell and loans to other FHLBanks represent overnight balances. The estimated fair values approximate the carrying values.
     Trading, available-for-sale and held-to-maturity securities. To value its holdings of U.S. Treasury Notes classified as trading securities, all of its available-for-sale securities, and its held-to-maturity MBS holdings and state housing agency debentures, the Bank obtains prices from three designated third-party pricing vendors when available. Prior to December 31, 2015, the Bank obtained prices from four designated third-party pricing vendors (the three vendors currently in use as well as one additional vendor). This change in valuation technique did not have a significant impact on the estimated fair values of the financial instruments referred to above as of December 31, 2015.
The pricing vendors use various proprietary models to price these securities. The inputs to those models are derived from various sources including, but not limited to, benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Because many 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 challenge process in place for all security valuations, which facilitates resolution of potentially erroneous prices identified by the Bank.
Recently, the Bank conducted reviews of the three pricing vendors to reconfirm its understanding of the vendors' pricing processes, methodologies and control procedures and was satisfied that those processes, methodologies and control procedures were adequate and appropriate.

F-49


A “median” price is first established for each security using a formula that is based upon the number of prices received. 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 some type of validation similar to the evaluation of outliers described below. Prior to December 31, 2015, if four prices were received, the average of the middle two prices was the median price. 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. If, on the other hand, 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.
If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
As of December 31, 2016 and 2015, three vendor prices were received for substantially all of the Bank's trading, available-for-sale and held-to-maturity securities referred to above and the final prices for substantially all of those securities were computed by averaging the three prices. Based on the Bank's understanding of the pricing methods employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers, the Bank's additional analyses), the Bank believes its final prices result in reasonable estimates of the fair values and that the fair value measurements are classified appropriately in the fair value hierarchy.
The Bank estimates the fair values of its held-to-maturity government-guaranteed debentures using a pricing model and observable market data (i.e., the U.S. Government Agency Fair Value curve and, for debentures containing call features, swaption volatility).
To value its mutual fund investments classified as trading securities, the Bank obtains quoted prices for identical securities.
     Advances. The Bank determines the estimated fair values of advances by calculating the present value of expected future cash flows from the advances using the replacement advance rates for advances with similar terms and, for advances containing options, swaption volatility. This amount is then reduced for accrued interest receivable. Each FHLBank prices advances at a spread to its cost of funds. Each FHLBank's cost of funds approximates the "CO curve," which is derived by adding to the U.S. Treasury curve indicative spreads obtained from market-observable sources. The indicative spreads are generally derived from dealer pricing indications, recent trades, secondary market activity and historical pricing relationships.
     Mortgage loans held for portfolio. The Bank estimates the fair values of mortgage loans held for portfolio based upon the prices for to-be-announced ("TBA") securities, which represent quoted market prices for forward settling agency MBS. The prices are adjusted for differences in coupon, cost to carry, vintage, remittance type and product type between the Bank's mortgage loans and the referenced TBA MBS. The prices of the referenced TBA MBS and the Bank's mortgage loans are highly dependent upon current mortgage rates and the market's expectations of future mortgage rates and prepayments.
     Accrued interest receivable and payable. The estimated fair value of accrued interest receivable and payable approximates the carrying value due to their short-term nature.
     Derivative assets/liabilities. The fair values of the Bank’s interest rate swap and swaption agreements are estimated using a pricing model with inputs that are observable in the market (e.g., the relevant interest rate curves (that is, the relevant LIBOR swap curve and, for purposes of discounting, the overnight index swap ("OIS") curve) and, for agreements containing options, swaption volatility). The fair values of the Bank’s interest rate caps are also estimated using a pricing model with inputs that are observable in the market (that is, cap volatility, the relevant LIBOR swap curve and, for purposes of discounting, the OIS curve).
Prior to September 30, 2014, the fair values of the Bank’s interest rate basis swaps and interest rate caps were obtained from dealers (for each basis swap and cap, one dealer estimate was received). These non-binding fair value estimates were corroborated using the Bank's pricing model and observable market data. Effective September 30, 2014, the Bank began using the fair values obtained from its pricing model to value its interest rate basis swaps and interest rate caps. This change in valuation technique did not have a significant impact on the estimated fair values of the Bank's basis swaps or caps as of September 30, 2014.
As the collateral and netting provisions of the Bank’s arrangements with its derivative counterparties significantly reduce the risk from nonperformance (see Note 12), the Bank does not consider its own nonperformance risk or the nonperformance risk associated with each of its counterparties to be a significant factor in the valuation of its derivative assets and liabilities. The Bank compares the fair values obtained from its pricing model to clearinghouse valuations (in the case of cleared

F-50


derivatives) and non-binding dealer estimates (in the case of bilateral derivatives) and may also compare its fair values to those of similar instruments to ensure that the fair values are reasonable.
The fair values of the Bank’s derivative assets and 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 the Bank's bilateral derivatives are netted by counterparty pursuant to the provisions of the credit support annexes to the Bank’s master netting agreements with its non-member bilateral derivative counterparties. The Bank's cleared derivative transactions with each clearing member of each clearinghouse are netted pursuant to the Bank's arrangements with those parties. In each case, if the netted amounts are positive, they are classified as an asset and, if negative, as a liability.
The fair values of the Bank's mortgage delivery commitments are estimated in a manner similar to the method used to value the Bank's mortgage loans held for portfolio.
     Deposit liabilities. The Bank determines the estimated fair values of its deposit liabilities with fixed rates and more than three months to maturity by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are based on replacement funding rates for liabilities with similar terms. The estimated fair value approximates the carrying value for deposits with variable rates and fixed rates with three months or less to their maturity or repricing date.
     Consolidated obligations. The Bank estimates the fair values of consolidated obligations by calculating the present value of expected future cash flows using discount rates that are based on replacement funding rates for liabilities with similar terms and reducing this amount for accrued interest payable. The inputs to the valuation are the CO curve and, for consolidated obligations containing options, swaption volatility.
     Mandatorily redeemable capital stock. The fair value of capital stock subject to mandatory redemption is generally equal to its par value ($100 per share), as adjusted for any estimated dividend earned but unpaid at the time of reclassification from equity to liabilities. The Bank’s capital stock cannot, by statute or implementing regulation, be purchased, redeemed, repurchased or transferred at any amount other than its par value.
     Commitments. The estimated fair value of the Bank’s commitments to extend credit, including advances and letters of credit, and to purchase mortgage loans was not material at December 31, 2016 or 2015.
In May 2015, the Bank replaced its third-party pricing/risk model with a new third-party pricing/risk model. Among other things, the third-party pricing/risk model is used to estimate the fair values of the Bank's interest rate exchange agreements, advances, consolidated obligations, term deposits and held-to-maturity debentures. In addition, this model is used to calculate the periodic changes in the fair values of hedged items (e.g., certain advances, available-for-sale securities and consolidated obligations) that are attributable to changes in LIBOR, the designated benchmark interest rate ("the benchmark fair values") and, beginning in September 2015, the periodic changes in the fair values of hypothetical derivatives associated with cash flow hedges. The implementation of the new model did not have a significant impact on the estimated fair values and, where applicable, the benchmark fair values of the financial instruments referred to above. On the date the new model was implemented, there was an increase of approximately $3,100,000 in the computed amount of the Bank's net hedge ineffectiveness gains (including both fair value and economic hedges) relating to the Bank's entire derivatives portfolio. The derivatives portfolio approximated $30.4 billion (notional balance) at that time.

F-51


The following table presents the carrying values and estimated fair values of the Bank’s financial instruments at December 31, 2016 (in thousands), as well as the level within the fair value hierarchy in which the measurements are classified. Financial assets and liabilities are classified in their entirety based on the lowest level input that is significant to the fair value estimate.
FAIR VALUE SUMMARY TABLE

 
 
 
 
Estimated Fair Value
Financial Instruments
 
Carrying Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment(4)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
27,696

 
$
27,696

 
$
27,696

 
$

 
$

 
$

Interest-bearing deposits
 
255

 
255

 

 
255

 

 

Securities purchased under agreements to resell
 
3,100,000

 
3,100,000

 

 
3,100,000

 

 

Federal funds sold
 
6,242,000

 
6,242,000

 

 
6,242,000

 

 

Trading securities (1)
 
111,638

 
111,638

 
10,143

 
101,495

 

 

Available-for-sale securities (1)
 
13,175,933

 
13,175,933

 

 
13,175,933

 

 

Held-to-maturity securities
 
2,499,595

 
2,514,512

 

 
2,403,963

(2) 
110,549

(3) 

Advances
 
32,506,175

 
32,514,400

 

 
32,514,400

 

 

Mortgage loans held for portfolio, net
 
123,961

 
127,486

 

 
127,486

 

 

Loan to other FHLBank
 
290,000

 
290,000

 

 
290,000

 

 

Accrued interest receivable
 
87,977

 
87,977

 

 
87,977

 

 

Derivative assets (1)
 
15,637

 
15,637

 

 
240,405

 

 
(224,768
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
1,040,158

 
1,040,149

 

 
1,040,149

 

 

Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
26,941,782

 
26,937,934

 

 
26,937,934

 

 

Bonds
 
26,997,487

 
26,917,278

 

 
26,917,278

 

 

Mandatorily redeemable capital stock
 
3,417

 
3,417

 
3,417

 

 

 

Accrued interest payable
 
43,274

 
43,274

 

 
43,274

 

 

Derivative liabilities (1)
 
14,343

 
14,343

 

 
457,285

 

 
(442,942
)

___________________________
(1) 
Financial instruments measured at fair value on a recurring basis as of December 31, 2016.
(2) 
Consists of the Bank's holdings of U.S. government-guaranteed debentures, state housing agency obligations, U.S. government-guaranteed RMBS, GSE RMBS and GSE commercial MBS.
(3) 
Consists of the Bank's holdings of non-agency RMBS.
(4) 
Amounts represent the impact of legally enforceable master netting agreements or other legally enforceable arrangements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.

F-52


The following table presents the carrying values and estimated fair values of the Bank’s financial instruments at December 31, 2015 (in thousands), as well as the level within the fair value hierarchy in which the measurements are classified. Financial assets and liabilities are classified in their entirety based on the lowest level input that is significant to the fair value estimate.
FAIR VALUE SUMMARY TABLE

 
 
 
 
Estimated Fair Value
Financial Instruments
 
Carrying Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment(4)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
837,202

 
$
837,202

 
$
837,202

 
$

 
$

 
$

Interest-bearing deposits
 
260

 
260

 

 
260

 

 

Security purchased under agreement to resell
 
1,000,000

 
1,000,000

 

 
1,000,000

 

 

Federal funds sold
 
2,171,000

 
2,171,000

 

 
2,171,000

 

 

Trading securities (1)
 
211,056

 
211,056

 
8,857

 
202,199

 

 

Available-for-sale securities (1)
 
9,713,191

 
9,713,191

 

 
9,713,191

 

 

Held-to-maturity securities
 
3,228,011

 
3,262,283

 

 
3,127,584

(2) 
134,699

(3) 

Advances
 
24,746,802

 
24,795,949

 

 
24,795,949

 

 

Mortgage loans held for portfolio, net
 
55,117

 
60,756

 

 
60,756

 

 

Accrued interest receivable
 
69,676

 
69,676

 

 
69,676

 

 

Derivative assets (1)
 
23,080

 
23,080

 

 
51,771

 

 
(28,691
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
1,045,958

 
1,045,956

 

 
1,045,956

 

 

Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
20,541,329

 
20,539,576

 

 
20,539,576

 

 

Bonds
 
18,024,692

 
17,994,494

 

 
17,994,494

 

 

Mandatorily redeemable capital stock
 
8,929

 
8,929

 
8,929

 

 

 

Accrued interest payable
 
38,972

 
38,972

 

 
38,972

 

 

Derivative liabilities (1)
 
6,964

 
6,964

 

 
557,974

 

 
(551,010
)

___________________________
(1)
Financial instruments measured at fair value on a recurring basis as of December 31, 2015.
(2)
Consists of the Bank's holdings of U.S. government-guaranteed debentures, state housing agency obligations, U.S. government-guaranteed RMBS, GSE RMBS and GSE commercial MBS.
(3)
Consists of the Bank's holdings of non-agency RMBS.
(4)
Amounts represent the impact of legally enforceable master netting agreements or other legally enforceable arrangements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.
During the year ended December 31, 2016, the Bank recorded non-credit OTTI losses on one of its non-agency RMBS classified as held-to-maturity (see Note 5). Based on the lack of significant market activity for non-agency RMBS, the nonrecurring fair value measurement for this impaired security was classified as a Level 3 measurement in the fair value hierarchy. Three third-party vendor prices were received for this security and the average of the three prices was used to determine the final fair value measurement.

Note 17—Commitments and Contingencies
     Joint and several liability. As described in Note 10, the Bank is jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. At December 31, 2016 and 2015, the par amounts of the other 10 FHLBanks’ outstanding consolidated obligations totaled $935 billion and $867 billion, respectively. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on

F-53


any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Agency determines that the primary obligor is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked.
The joint and several obligations are mandated by Finance Agency regulations and are not the result of arms-length transactions among the FHLBanks. As described above, the FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several liability. If the Bank expected that it would be required to pay any amounts on behalf of its co-obligors under its joint and several liability, the Bank would charge to income the amount of the expected payment. Based upon the creditworthiness of the other FHLBanks, the Bank currently believes that the likelihood that it would have to pay any amounts beyond those for which it is primarily liable is remote.
     Other commitments and contingencies. At December 31, 2016 and 2015, the Bank had commitments to make additional advances totaling approximately $35,400,000 and $36,892,000, respectively. At December 31, 2016, $15,699,000 of the outstanding commitments to make additional advances expire in 2017 and the remainder expire in 2018 or 2019.
The Bank issues standby letters of credit for a fee on behalf of its members. Standby letters of credit serve as performance guarantees. If the Bank is required to make payment for a beneficiary’s draw on the letter of credit, the amount funded is converted into a collateralized advance to the member. Letters of credit are fully collateralized in the same manner as advances (see Note 6). Outstanding standby letters of credit totaled $11,186,897,000 and $7,180,763,000 at December 31, 2016 and 2015, respectively. At December 31, 2016, outstanding letters of credit had original terms of up to 8 years with a final expiration in 2021. Unearned fees on standby letters of credit are recorded in other liabilities and totaled $3,726,000 and $3,685,000 at December 31, 2016 and 2015, respectively. 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 letters of credit (see Note 8).
At December 31, 2016, the Bank had commitments to purchase conventional mortgage loans totaling $2,030,000 from certain of its PFIs. The Bank did not have any commitments to purchase mortgage loans as of December 31, 2015.
At December 31, 2016 and 2015, the Bank had commitments to issue $45,000,000 and $90,000,000, respectively, of consolidated obligation bonds, all of which were hedged with interest rate swaps. In addition, at December 31, 2016 and 2015, the Bank had commitments to issue $500,000 and $750,000,000 of consolidated obligation discount notes, none of which were hedged.
The Bank has transacted interest rate exchange agreements with large financial institutions and third-party clearinghouses that are subject to collateral exchange arrangements. As of December 31, 2016 and 2015, the Bank had pledged cash collateral of $312,705,000 and $523,871,000, respectively, to those parties that had credit risk exposure to the Bank related to interest rate exchange agreements. The pledged cash collateral (i.e., interest-bearing deposit asset) is netted against derivative assets and liabilities in the statements of condition. In addition, as of December 31, 2016 and 2015, the Bank had pledged securities with carrying values (and fair values) of $613,351,000 and $300,184,000, respectively, to parties that had credit risk exposure to the Bank related to interest rate exchange agreements. The pledged securities may be rehypothecated and are not netted against derivative assets and liabilities in the statement of condition.
During the years ended December 31, 2016, 2015 and 2014, the Bank charged to operating expenses net rental costs of approximately $394,000, $405,000, and $370,000, respectively. Future minimum rentals at December 31, 2016, were as follows (in thousands):
Year
 
Premises
 
Equipment
 
Total
2017
 
$
265

 
$
51

 
$
316

2018
 
131

 
30

 
161

2019
 
34

 

 
34

2020
 
3

 

 
3

Total
 
$
433

 
$
81

 
$
514

Lease agreements for Bank premises generally provide for increases in the base rentals resulting from increases in property taxes and maintenance expenses. These increases are not expected to have a material effect on the Bank.

F-54


The Bank has entered into certain lease agreements to rent space to outside parties in its building. Future minimum rentals under these operating leases at December 31, 2016 were as follows (in thousands):
Year
 
Total
2017
 
$
1,387

2018
 
1,419

2019
 
1,443

2020
 
1,369

2021
 
919

Total
 
$
6,537

In the ordinary course of its business, the Bank is subject to the risk that litigation may arise. Currently, the Bank is not a party to any material pending legal proceedings.
For a discussion of other commitments and contingencies, see Notes 11, 12 and 15.

Note 18 — Transactions with Shareholders
As a cooperative, the Bank’s capital stock is owned by its members, by former members that retain the stock as provided in the Bank’s Capital Plan or by non-member institutions that have acquired members and must retain the stock to support advances or other activities with the Bank. No shareholder owns more than 10% of the voting interests of the Bank due to statutory limits on members’ voting rights. As of December 31, 2016, nine of the Bank’s directors were member directors. By law, member directors must be officers or directors of a member of the Bank.
Substantially all of the Bank’s advances are made to its shareholders (while eligible to borrow from the Bank, housing associates are not required or allowed to hold capital stock). In addition, the majority of its mortgage loans held for portfolio were purchased from certain of its shareholders. The Bank maintains demand deposit accounts for shareholders primarily as an investment alternative for their excess cash and to facilitate settlement activities that are directly related to advances. As an additional service to members, the Bank also offers term deposit accounts. Further, the Bank offers interest rate swaps, caps and floors to its members. Periodically, the Bank may sell (or purchase) federal funds to (or from) shareholders and/or their affiliates. These transactions are executed on terms that are the same as those with other eligible third-party market participants, except that the Bank’s underwriting guidelines specify a lower minimum threshold for the amount of capital that members must have to be an eligible federal funds counterparty than non-members. The Bank has never held any direct equity investments in its shareholders or their affiliates.
Affiliates of two of the Bank’s derivative counterparties (Citigroup and Wells Fargo) acquired member institutions on March 31, 2005 and October 1, 2006, respectively. Since the acquisitions were completed, the Bank has continued to enter into interest rate exchange agreements with Citigroup and Wells Fargo in the normal course of business and under the same terms and conditions as before. Effective October 1, 2006, Citigroup terminated the Ninth District charter of the affiliate that acquired the member institution and, as a result, an affiliate of Citigroup became a non-member shareholder of the Bank.
The Bank did not purchase any debt or equity securities issued by any of its shareholders or their affiliates during the years ended December 31, 2016, 2015 or 2014.
All transactions with shareholders are entered into in the ordinary course of business. The Bank provides the same pricing for advances and other services to all similarly situated members regardless of asset or transaction size, charter type, or geographic location.
The Bank provides, in the ordinary course of its business, products and services to members whose officers or directors may serve as directors of the Bank (“Directors’ Financial Institutions”). Finance Agency regulations require that transactions with Directors’ Financial Institutions be made on the same terms as those with any other member. As of December 31, 2016 and 2015, advances outstanding to Directors’ Financial Institutions aggregated $1,708,177,000 and $1,408,060,000, respectively, representing 5.3 percent and 5.7 percent, respectively, of the Bank’s total outstanding advances as of those dates. The Bank did not acquire any mortgage loans from Directors’ Financial Institutions during the years ended December 31, 2016, 2015 or 2014. As of December 31, 2016 and 2015, capital stock outstanding to Directors’ Financial Institutions aggregated $87,189,000 and $68,951,000, respectively, representing 4.5 percent of the Bank’s outstanding capital stock at each of those dates. For purposes of this determination, the Bank’s outstanding capital stock includes those shares that are classified as mandatorily redeemable.


F-55


Note 19 — Transactions with Other FHLBanks
Occasionally, the Bank loans (or borrows) short-term federal funds to (from) other FHLBanks. During the years ended December 31, 2016, 2015 and 2014, interest income on loans to other FHLBanks totaled $9,354, $4,214 and $3,504, respectively; these amounts are reported as interest income from federal funds sold in the statements of income. The following table summarizes the Bank’s loans to other FHLBanks during the years ended December 31, 2016, 2015 and 2014 (in thousands).
 
Year Ended December 31,
 
2016
 
2015
 
2014
Balance at January 1,
$

 
$

 
$

Loans made to:
 
 
 
 
 
FHLBank of San Francisco
290,000

 
915,000

 
1,365,000

FHLBank of Topeka
112,000

 
55,000

 

FHLBank of Des Moines

 
200,000

 
60,000

FHLBank of Boston

 
200,000

 

FHLBank of Atlanta

 

 
60,000

Collections from:
 
 
 
 
 
FHLBank of San Francisco

 
(915,000
)
 
(1,365,000
)
FHLBank of Topeka
(112,000
)
 
(55,000
)
 

FHLBank of Des Moines

 
(200,000
)
 
(60,000
)
FHLBank of Boston

 
(200,000
)
 

FHLBank of Atlanta

 

 
(60,000
)
Balance at December 31,
$
290,000

 
$

 
$

During the years ended December 31, 2016, 2015 and 2014, interest expense on borrowings from other FHLBanks totaled $6,285, $4,860 and $1,958, respectively. The following table summarizes the Bank’s borrowings from other FHLBanks during the years ended December 31, 2016, 2015 and 2014 (in thousands).
 
Year Ended December 31,
 
2016
 
2015
 
2014
Balance at January 1,
$

 
$

 
$

Borrowings from:
 
 
 
 
 
  FHLBank of Chicago
450,000

 
150,000

 
90,000

FHLBank of Topeka
125,000

 
360,000

 
40,000

FHLBank of Boston

 
570,000

 

FHLBank of San Francisco

 
530,000

 
565,000

FHLBank of Atlanta

 
250,000

 
20,000

FHLBank of Indianapolis

 

 
90,000

Repayments to:
 
 
 
 
 
  FHLBank of Chicago
(450,000
)
 
(150,000
)
 
(90,000
)
FHLBank of Topeka
(125,000
)
 
(360,000
)
 
(40,000
)
  FHLBank of Boston

 
(570,000
)
 

FHLBank of San Francisco

 
(530,000
)
 
(565,000
)
FHLBank of Atlanta

 
(250,000
)
 
(20,000
)
FHLBank of Indianapolis

 

 
(90,000
)
Balance at December 31,
$

 
$

 
$


F-56


The Bank has, from time to time, assumed the outstanding debt of another FHLBank rather than issue new debt. In connection with these transactions, the Bank becomes the primary obligor for the transferred debt. The Bank did not assume any debt from other FHLBanks during the years ended December 31, 2016, 2015 or 2014. When they occur, the Bank accounts for these transfers in the same manner as it accounts for new debt issuances (see Note 1).
Occasionally, the Bank transfers debt that it no longer needs to other FHLBanks. In connection with these transactions, the assuming FHLBanks become the primary obligors for the transferred debt. The Bank did not transfer any debt to other FHLBanks during the years ended December 31, 2016, 2015 or 2014.

Note 20 — Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in the components of AOCI for the years ended December 31, 2016, 2015 and 2014 (in thousands).
 
Net Unrealized
 Gains (Losses) on
 Available-for-Sale
 Securities (1)
 
Net Unrealized Gains (Losses) on Cash Flow Hedges
 
Non-Credit Portion of
 Other-than-Temporary
Impairment Losses on
Held-to-Maturity Securities
 
Postretirement Benefits
 
Total AOCI
Year ended December 31, 2016
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
(82,278
)
 
$
(847
)
 
$
(21,376
)
 
$
1,478

 
$
(103,023
)
Reclassifications from AOCI to net income
 
 
 
 
 
 
 
 
 
Realized gains on sales of available-for-sale securities included in net income
(5,104
)
 

 

 

 
(5,104
)
Losses on cash flow hedges included in interest expense

 
3,479

 

 

 
3,479

Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities recognized as credit losses in net income

 

 
12

 

 
12

Amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense

 

 

 
(86
)
 
(86
)
Other amounts of other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
145,969

 

 

 

 
145,969

Unrealized gains on cash flow hedges

 
17,748

 

 

 
17,748

Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities

 

 
(302
)
 

 
(302
)
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities

 

 
4,509

 

 
4,509

Actuarial gain

 

 

 
8

 
8

Total other comprehensive income (loss)
140,865

 
21,227

 
4,219

 
(78
)
 
166,233

Balance at December 31, 2016
$
58,587

 
$
20,380

 
$
(17,157
)
 
$
1,400

 
$
63,210

 
 
 
 
 
 
 
 
 
 

F-57


 
Net Unrealized
 Gains (Losses) on
Available-for-Sale
 Securities (1)
 
Net Unrealized Gains (Losses) on Cash Flow Hedges
 
Non-Credit Portion of
 Other-than-Temporary
 Impairment Losses on
 Held-to-Maturity Securities
 
Postretirement Benefits
 
Total AOCI
Year ended December 31, 2015
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
$
22,412

 
$

 
$
(27,349
)
 
$
1,336

 
$
(3,601
)
Reclassifications from AOCI to net income
 
 
 
 
 
 
 
 
 
Realized gains on sales of available-for-sale securities included in net income
(3,922
)
 

 

 

 
(3,922
)
Losses on cash flow hedge included in interest expense

 
577

 

 

 
577

Amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense

 

 

 
(80
)
 
(80
)
Other amounts of other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
Net unrealized losses on available-for-sale securities
(100,768
)
 

 

 

 
(100,768
)
Unrealized loss on cash flow hedge

 
(1,424
)
 

 

 
(1,424
)
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities

 

 
(254
)
 

 
(254
)
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities

 

 
6,227

 

 
6,227

Actuarial gain

 

 

 
222

 
222

Total other comprehensive income (loss)
(104,690
)
 
(847
)
 
5,973

 
142

 
(99,422
)
Balance at December 31, 2015
$
(82,278
)
 
$
(847
)
 
$
(21,376
)
 
$
1,478

 
$
(103,023
)
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2014
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
$
(868
)
 
$

 
$
(33,200
)
 
$
1,427

 
$
(32,641
)
Reclassifications from AOCI to net income
 
 
 
 
 
 
 
 
 
Amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense

 

 

 
(89
)
 
(89
)
Other amounts of other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities
23,280

 

 

 

 
23,280

Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities

 

 
(1,349
)
 

 
(1,349
)
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities

 

 
7,200

 

 
7,200

Actuarial loss

 

 

 
(2
)
 
(2
)
Total other comprehensive income (loss)
23,280

 

 
5,851

 
(91
)
 
29,040

Balance at December 31, 2014
$
22,412

 
$

 
$
(27,349
)
 
$
1,336

 
$
(3,601
)
 
 
 
 
 
 
 
 
 
 

(1) Net unrealized gains (losses) on available-for-sale securities are net of unrealized gains and losses relating to hedged interest rate risk included in net income.




F-58


Note 21 — Other Operating Expenses
The following table presents the significant components of other operating expenses for the years ended December 31, 2016, 2015 and 2014 (in thousands).
 
Year Ended December 31,
 
2016
 
2015
 
2014
Occupancy expense
$
2,273

 
$
2,396

 
$
2,607

Legal fees
601

 
1,214

 
5,440

Professional fees
3,512

 
3,245

 
3,984

Independent contractors
2,687

 
2,634

 
977

Database fees
2,238

 
3,125

 
3,181

Software costs
4,656

 
4,691

 
5,069

Other
9,034

 
8,863

 
7,900

Total other operating expenses
$
25,001

 
$
26,168

 
$
29,158




F-59


EXHIBIT INDEX
Exhibit
 
 
3.1

 
Organization Certificate of the Registrant (incorporated by reference to Exhibit 3.1 to the Bank’s Registration Statement on Form 10 filed February 15, 2006).
 

 
 
3.2

 
Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Bank's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed on March 22, 2016).*
 

 
 
4.1

 
Capital Plan of the Registrant, as amended and revised on December 3, 2014 and approved by the Federal Housing Finance Agency on June 1, 2015 and for which notice of implementation was given to shareholders on August 31, 2015 (filed as Exhibit 4.1 to the Bank’s Current Report on Form 8-K dated August 31, 2015 and filed with the SEC on August 31, 2015, which exhibit is incorporated herein by reference).*    
 

 
 
10.1

 
Deferred Compensation Plan of the Registrant, effective July 24, 2004 (governs deferrals made prior to January 1, 2005) (incorporated by reference to Exhibit 10.1 to the Bank’s Registration Statement on Form 10 filed February 15, 2006).
 
 
 
10.2

 
2011 Amendment to Deferred Compensation Plan of the Registrant for Deferrals Prior to January 1, 2005, effective March 31, 2011 (incorporated by reference to Exhibit 10.2 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed on March 23, 2012). *
 

 
 
10.3

 
Deferred Compensation Plan of the Registrant for Deferrals Effective January 1, 2005 (incorporated by reference to Exhibit 10.2 to the Bank’s Registration Statement on Form 10 filed February 15, 2006).
 

 
 
10.4

 
2008 Amendment to Deferred Compensation Plan of the Registrant for Deferrals Effective January 1, 2005, dated December 10, 2008 (incorporated by reference to Exhibit 10.3 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 27, 2009). *
 

 
 
10.5

 
2010 Amendment to Deferred Compensation Plan of the Registrant for Deferrals Effective January 1, 2005, dated July 22, 2010 (incorporated by reference to Exhibit 10.1 to the Bank’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2010, filed on November 12, 2010). *
 

 
 
10.6

 
Non-Qualified Deferred Compensation Plan for the Board of Directors of the Registrant, effective July 24, 2004 (governs deferrals made prior to January 1, 2005) (incorporated by reference to Exhibit 10.3 to the Bank’s Registration Statement on Form 10 filed February 15, 2006).
 
 
 
10.7

 
2011 Amendment to Non-Qualified Deferred Compensation Plan for the Board of Directors of the Registrant for deferrals prior to January 1, 2005, effective March 31, 2011 (incorporated by reference to Exhibit 10.7 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed on March 23, 2012). *
 

 
 
10.8

 
Non-Qualified Deferred Compensation Plan for the Board of Directors of the Registrant for Deferrals Effective January 1, 2005 (incorporated by reference to Exhibit 10.4 to the Bank’s Registration Statement on Form 10 filed February 15, 2006).
 

 
 
10.9

 
2008 Amendment to Non-Qualified Deferred Compensation Plan for the Board of Directors of the Registrant for Deferrals Effective January 1, 2005, dated December 10, 2008 (incorporated by reference to Exhibit 10.6 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 27, 2009). *
 

 
 
10.10

 
2010 Amendment to Non-Qualified Deferred Compensation Plan for the Board of Directors of the Registrant for Deferrals Effective January 1, 2005, dated July 22, 2010 (incorporated by reference to Exhibit 10.2 to the Bank’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2010, filed on November 12, 2010). *
 

 
 
10.11

 
Consolidated Deferred Compensation Plan of the Registrant for deferrals made on or after January 1, 2011, as adopted by the Bank’s Board of Directors on December 29, 2010 (incorporated by reference to Exhibit 10.9 to the Bank's Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed on March 25, 2011). *



 
 
 
Exhibit
 
10.12

 
2017 Deferred Compensation Plan of the Registrant for deferrals made on or after January 1, 2017, as adopted by the Bank's Board of Directors on July 21, 2016.
 
 
 
10.13

 
Form of Special Non-Qualified Deferred Compensation Plan of the Registrant, as amended and restated effective December 31, 2010 (filed as Exhibit 10.1 to the Bank’s Current Report on Form 8-K dated May 25 2011 and filed with the SEC on June 1, 2011, which exhibit is incorporated herein by reference). *
 

 
 
10.14

 
Amended and Restated Federal Home Loan Banks P&I Funding and Contingency Plan Agreement entered into effective January 1, 2017, by and among the Office of Finance and each of the Federal Home Loan Banks.
 
 
 
10.15

 
Form of Employment Agreement between the Registrant and each of Brehan Chapman and Gustavo Molina, entered into effective January 1, 2014 (incorporated by reference to Exhibit 10.15 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on March 24, 2014).*
 
 
 
10.16

 
Employment Agreement between the Registrant and Sandra Damholt, entered into effective January 1, 2014 (incorporated by reference to Exhibit 10.16 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on March 24, 2014).*
 
 
 
10.17

 
Employment Agreement between the Registrant and Sanjay Bhasin, entered into effective March 24, 2015(incorporated by reference to Exhibit 10.2 to the Bank’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2015, filed on May 13, 2015).*

 
 
 
10.18

 
Form of 2014 Long Term Incentive Plan including the Form of Award Agreement (filed as Exhibit 10.1 to the Bank's Current Report on Form 8-K dated March 28, 2014 and filed with the SEC on April 3, 2014, which exhibit is incorporated herein by reference).*
 
 
 
10.19

 
Form of 2015 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Bank’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2015, filed on August 12, 2015).*
 
 
 
10.20

 
Form of 2016 Long-Term Incentive Plan (filed as Exhibit 10.1 to the Bank's Current Report on Form 8-K dated January 21, 2016 and filed with the SEC on February 29, 2016, which exhibit is incorporated herein by reference).*
 
 
 
10.21

 
Amendment to Registrant's Incentive Plans, effective as of August 3, 2016 (filed as Exhibit 10.1 to the Bank's Current Report on Form 8-K dated August 3, 2016 and filed with the SEC on August 9, 2016, which exhibit is incorporated herein by reference).*
 
 
 
10.22

 
2017 Omnibus Incentive Plan.
 
 
 
10.23

 
Form of Indemnification Agreement between the Registrant and each of its officers, entered into on various dates on or after November 7, 2008 (incorporated by reference to Exhibit 10.13 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 27, 2009). *
 
 
 
10.24

 
Form of Indemnification Agreement between the Registrant and each of its directors, entered into on various dates on or after October 24, 2008 (incorporated by reference to Exhibit 10.14 to the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 27, 2009). *
 
 
 
10.25

 
Joint Capital Enhancement Agreement, as amended effective August 5, 2011 (filed as Exhibit 10.1 to the Bank's Current Report on Form 8-K dated August 5, 2011 and filed with the SEC on August 5, 2011, which exhibit is incorporated herein by reference). *
 
 
 
12.1

 
Computation of Ratio of Earnings to Fixed Charges.



 
 
 
Exhibit
 
14.1

 
Code of Ethics for Financial Professionals.
 
 
 
31.1

 
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2

 
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1

 
Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
99.1

 
Charter of the Audit Committee of the Board of Directors.
 
 
 
99.2

 
Report of the Audit Committee of the Board of Directors.
 
 
 
101

 
The following materials from the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Statements of Condition as of December 31, 2015 and 2014, (ii) Statements of Income for the Years Ended December 31, 2015, 2014 and 2013, (iii) Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015, 2014 and 2013, (iv) Statements of Capital for the Years Ended December 31, 2015, 2014 and 2013, (v) Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013, and (vi) Notes to the Financial Statements for the fiscal year ended December 31, 2015.
*    Commission File No. 000-51405