Federal Home Loan Bank of Dallas - FORM 10-Q

Attached files

file	filename
EX-32.1 - CERTIFICATION OF CEO AND CFO - Federal Home Loan Bank of Dallas	fhlbdallas-93017xex_321.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - Federal Home Loan Bank of Dallas	fhlbdallas-93017xex_312.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Federal Home Loan Bank of Dallas	fhlbdallas-93017xex_311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2017



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)

(214) 441-8500

(Registrant’s telephone number, including area code)

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 (17 C.F.R. §232.405) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:



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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At October 31, 2017, the registrant had outstanding 22,130,009 shares of its Class B Capital Stock, $100 par value per share.

Table of Contents

FEDERAL HOME LOAN BANK OF DALLAS

TABLE OF CONTENTS



	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	1

Statements of Condition as of September 30, 2017 and December 31, 2016	1

Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016	2

Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016	3

Statements of Capital for the Nine Months Ended September 30, 2017 and 2016	4

Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016	5

Notes to Interim Unaudited Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Forward-Looking Information	41

Overview	41

Selected Financial Data	45

Impact of Hurricanes Harvey and Irma	47

Impact of California Wildfires	48

Regulatory and Market Developments	48

Financial Condition	50

Results of Operations	63

Critical Accounting Policies and Estimates	71

Liquidity and Capital Resources	71

Recently Issued Accounting Guidance	73

Item 3. Quantitative and Qualitative Disclosures About Market Risk	73

Item 4. Controls and Procedures	77

PART II. OTHER INFORMATION

Item 6. Exhibits	77

Signatures	78
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CONDITION

(Unaudited; in thousands, except share data)



	September 30, 2017		December 31, 2016
ASSETS
Cash and due from banks	$	147,528	$	27,696
Interest-bearing deposits	327		255
Securities purchased under agreements to resell (Note 10)	2,300,000		3,100,000
Federal funds sold	9,830,000		6,242,000
Trading securities (Note 3)	114,547		111,638
Available-for-sale securities (Notes 4, 10 and 15) ($565,892 and $613,351 pledged at September 30, 2017 and December 31, 2016, respectively, which could be rehypothecated)	14,978,247		13,175,933
Held-to-maturity securities^(a) (Note 5)	2,032,355		2,499,595
Advances (Notes 6 and 7)	36,287,884		32,506,175
Mortgage loans held for portfolio, net of allowance for credit losses of $141 at both September 30, 2017 and December 31, 2016, respectively (Note 7)	576,806		123,961
Loan to other FHLBank (Note 17)	—		290,000
Accrued interest receivable	112,555		87,977
Premises and equipment, net	17,353		17,972
Derivative assets (Notes 10 and 11)	43,043		15,637
Other assets	9,238		13,238
TOTAL ASSETS	$	66,449,883	$	58,212,077

LIABILITIES AND CAPITAL
Deposits
Interest-bearing	$	996,127	$	1,040,139
Non-interest bearing	19		19
Total deposits	996,146		1,040,158
Consolidated obligations (Note 8)
Discount notes	31,438,766		26,941,782
Bonds	30,060,229		26,997,487
Total consolidated obligations	61,498,995		53,939,269

Loan from other FHLBank (Note 17)	250,000		—
Mandatorily redeemable capital stock	7,032		3,417
Accrued interest payable	67,680		43,274
Affordable Housing Program (Note 9)	29,556		22,871
Derivative liabilities (Notes 10 and 11)	14,337		14,343
Other liabilities (Note 4)	297,552		331,403
Total liabilities	63,161,298		55,394,735

Commitments and contingencies (Notes 7 and 15)

CAPITAL (Note 12)
Capital stock
Capital stock — Class B-1 putable ($100 par value) issued and outstanding shares: 8,062,143 and 6,904,110 shares at September 30, 2017 and December 31, 2016, respectively	806,214		690,411
Capital stock — Class B-2 putable ($100 par value) issued and outstanding shares: 14,006,005 and 12,397,371 shares at September 30, 2017 and December 31, 2016, respectively	1,400,601		1,239,737
Total Class B Capital Stock	2,206,815		1,930,148
Retained earnings
Unrestricted	818,251		745,104
Restricted	102,663		78,880
Total retained earnings	920,914		823,984
Accumulated other comprehensive income (Note 18)	160,856		63,210
Total capital	3,288,585		2,817,342
TOTAL LIABILITIES AND CAPITAL	$	66,449,883	$	58,212,077

_____________________________


^(a)	Fair values: $2,057,431 and $2,514,512 at September 30, 2017 and December 31, 2016, respectively.

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

Table of Contents

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF INCOME

(Unaudited, in thousands)



	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2017		2016			2017		2016
INTEREST INCOME
Advances	$	123,268	$	56,830		$	294,405	$	152,180
Prepayment fees on advances, net	366		2,160			1,310		3,502
Interest-bearing deposits	697		1,012			1,635		2,531
Securities purchased under agreements to resell	1,963		2,593			3,685		4,758
Federal funds sold	25,748		5,535			56,073		14,737
Trading securities	581		579			1,729		2,336
Available-for-sale securities	64,171		36,347			169,756		92,170
Held-to-maturity securities	9,557		7,393			27,220		22,721
Mortgage loans held for portfolio	4,502		813			8,462		2,377
Total interest income	230,853		113,262			564,275		297,312
INTEREST EXPENSE
Consolidated obligations
Bonds	88,201		36,086			226,548		96,681
Discount notes	77,612		31,916			153,947		80,752
Deposits	2,463		586			6,838		1,641
Mandatorily redeemable capital stock	40		6			91		23
Other borrowings	45		—			99		—
Total interest expense	168,361		68,594			387,523		179,097
NET INTEREST INCOME	62,492		44,668			176,752		118,215

OTHER INCOME (LOSS)
Total other-than-temporary impairment losses on held-to-maturity securities	—		—			—		(310		)
Net non-credit impairment losses on held-to-maturity securities recognized in other comprehensive income	—		(8		)	—		290
Credit component of other-than-temporary impairment losses on held-to-maturity securities	—		(8		)	—		(20		)

Net gains (losses) on trading securities	296		(797		)	2,344		9,133
Net gains (losses) on derivatives and hedging activities	345		197			5,974		(20,563		)
Realized gains on sales of held-to-maturity securities	2,093		65			3,983		794
Realized gains on sales of available-for-sale securities	—		889			1,837		5,104
Letter of credit fees	2,061		1,430			5,454		4,275
Other, net	668		629			2,318		1,979
Total other income	5,463		2,405			21,910		702
OTHER EXPENSE
Compensation and benefits	12,551		14,468			38,722		38,069
Other operating expenses	6,640		6,788			18,352		17,970
Finance Agency	834		630			2,554		2,004
Office of Finance	1,088		842			2,693		2,322
Discretionary grants and donations	2,065		592			3,277		1,541
Derivative clearing fees	313		280			927		786
Total other expense	23,491		23,600			66,525		62,692
INCOME BEFORE ASSESSMENTS	44,464		23,473			132,137		56,225
Affordable Housing Program assessment	4,451		2,348			13,223		5,625
NET INCOME	$	40,013	$	21,125		$	118,914	$	50,600

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

Table of Contents

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)



	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
NET INCOME	$	40,013		$	21,125		$	118,914		$	50,600
OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized gains on available-for-sale securities, net of unrealized gains and losses relating to hedged interest rate risk included in net income	27,278			97,845			101,518			92,381
Reclassification adjustment for realized gains on sales of available-for-sale securities included in net income	—			(889		)	(1,837		)	(5,104		)
Unrealized gains (losses) on cash flow hedges	(917		)	2,147			(6,668		)	(12,980		)
Reclassification adjustment for losses on cash flow hedges included in net income	491			990			1,927			2,570
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities	—			—			—			(302		)
Reclassification adjustment for non-credit portion of other-than-temporary impairment losses recognized as credit losses in net income	—			8			—			12
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities	822			1,076			2,752			3,505
Postretirement benefit plan
Amortization of prior service cost included in net periodic benefit cost	5			5			15			15
Amortization of net actuarial gain included in net periodic benefit cost	(9		)	(25		)	(61		)	(74		)
Total other comprehensive income	27,670			101,157			97,646			80,023
TOTAL COMPREHENSIVE INCOME	$	67,683		$	122,282		$	216,560		$	130,623

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

Table of Contents

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CAPITAL

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(Unaudited, in thousands)



	Capital Stock Class B-1 - Putable (Membership/Excess)					Capital Stock Class B-2 - Putable (Activity)													Accumulated Other Comprehensive Income (Loss)
	Capital Stock Class B-1 - Putable (Membership/Excess)					Capital Stock Class B-2 - Putable (Activity)					Retained Earnings											Total Capital
	Shares		Par Value			Shares		Par Value			Unrestricted			Restricted		Total						Total Capital
BALANCE, JANUARY 1, 2017	6,904		$	690,411		12,397		$	1,239,737		$	745,104		$	78,880	$	823,984		$	63,210		$	2,817,342
Net transfers of shares between Class B-1 and Class B-2 Stock	8,252		825,222			(8,252	)	(825,222		)	—			—		—			—			—
Proceeds from sale of capital stock	72		7,225			9,984		998,353			—			—		—			—			1,005,578
Repurchase/redemption of capital stock	(7,303	)	(730,329		)	—		—			—			—		—			—			(730,329		)
Shares reclassified to mandatorily redeemable capital stock	(79	)	(7,963		)	(123	)	(12,267		)	—			—		—			—			(20,230		)
Comprehensive income
Net income	—		—			—		—			95,131			23,783		118,914			—			118,914
Other comprehensive income	—		—			—		—			—			—		—			97,646			97,646
Dividends on capital stock^(a)
Cash	—		—			—		—			(198		)	—		(198		)	—			(198		)
Mandatorily redeemable capital stock	—		—			—		—			(138		)	—		(138		)	—			(138		)
Stock	216		21,648			—		—			(21,648		)	—		(21,648		)	—			—

BALANCE, SEPTEMBER 30, 2017	8,062		$	806,214		14,006		$	1,400,601		$	818,251		$	102,663	$	920,914		$	160,856		$	3,288,585

BALANCE, JANUARY 1, 2016	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	5,734		573,408			(5,734	)	(573,408		)	—			—		—			—			—
Proceeds from sale of capital stock	48		4,761			8,718		871,790			—			—		—			—			876,551
Repurchase/redemption of capital stock	(5,486	)	(548,550		)	—		—			—			—		—			—			(548,550		)
Shares reclassified to mandatorily redeemable capital stock	(1	)	(68		)	—		—			—			—		—			—			(68		)
Comprehensive income
Net income	—		—			—		—			40,480			10,120		50,600			—			50,600
Other comprehensive income	—		—			—		—			—			—		—			80,023			80,023
Dividends on capital stock^(b)
Cash	—		—			—		—			(198		)	—		(198		)	—			(198		)
Mandatorily redeemable capital stock	—		—			—		—			(5		)	—		(5		)	—			(5		)
Stock	120		11,977			—		—			(11,977		)	—		(11,977		)	—			—

BALANCE, SEPTEMBER 30, 2016	6,740		$	673,982		12,061		$	1,206,060		$	727,513		$	73,110	$	800,623		$	(23,000	)	$	2,657,665

^(a) Dividends were paid at annualized rates of 0.599 percent and 1.599 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the first quarter of 2017, at 0.83 percent and 1.83 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the second quarter of 2017 and at 1.06 percent and 2.06 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the third quarter of 2017.

^(b) Dividends were paid at annualized rates of 0.375 percent and 1.251 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the first quarter of 2016, at 0.431 percent and 1.431 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the second quarter of 2016 and at 0.444 percent and 1.444 percent on Class B-1 Stock and Class B-2 Stock, respectively, in the third quarter of 2016.

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

Table of Contents

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



	For the Nine Months Ended
	September 30,
	2017			2016
OPERATING ACTIVITIES
Net income	$	118,914		$	50,600
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	69,451			64,114
Concessions on consolidated obligations	3,233			3,633
Premises, equipment and computer software costs	2,770			2,944
Non-cash interest on mandatorily redeemable capital stock	61			22
Credit component of other-than-temporary impairment losses on held-to-maturity securities	—			20
Gains on sales of held-to-maturity securities	(3,983		)	(794		)
Gains on sales of available-for-sale securities	(1,837		)	(5,104		)
Net increase in trading securities	(2,751		)	(9,599		)
Loss due to changes in net fair value adjustment on derivative and hedging activities	32,759			59,297
Increase in accrued interest receivable	(24,600		)	(22,178		)
Decrease (increase) in other assets	4,486			(28		)
Increase (decrease) in Affordable Housing Program (AHP) liability	6,685			(487		)
Increase (decrease) in accrued interest payable	24,402			(2,166		)
Increase in other liabilities	2,246			3,486
Total adjustments	112,922			93,160
Net cash provided by operating activities	231,836			143,760

INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing deposits, including swap collateral pledged	80,051			(482,108		)
Net decrease (increase) in securities purchased under agreements to resell	800,000			(2,250,000		)
Net increase in federal funds sold	(3,588,000		)	(4,632,000		)
Decrease in loan to other FHLBank	290,000			—
Decrease in trading securities held for investment	—			102,215
Purchases of available-for-sale securities	(2,380,099		)	(5,807,501		)
Proceeds from maturities of available-for-sale securities	412,625			37,186
Proceeds from sales of available-for-sale securities	250,262			2,655,395
Proceeds from sales of held-to-maturity securities	162,789			129,857
Proceeds from maturities of held-to-maturity securities	438,128			434,292
Purchases of held-to-maturity securities	(125,000		)	—
Principal collected on advances	408,582,680			441,973,938
Advances made	(412,379,559		)	(449,027,085		)
Principal collected on mortgage loans held for portfolio	17,268			10,643
Purchases of mortgage loans held for portfolio	(468,033		)	(25,570		)
Purchases of premises, equipment and computer software	(2,695		)	(2,850		)
Net cash used in investing activities	(7,909,583		)	(16,883,588		)

Table of Contents



	For the Nine Months Ended
	September 30,
	2017			2016
FINANCING ACTIVITIES
Net increase (decrease) in deposits, including swap collateral held	(138,458		)	75,481
Net payments on derivative contracts with financing elements	(65,707		)	(48,590		)
Increase in loan from other FHLBank	250,000			—
Net proceeds from issuance of consolidated obligations
Discount notes	267,181,998			276,563,409
Bonds	16,764,354			19,079,312
Debt issuance costs	(3,854		)	(3,686		)
Payments for maturing and retiring consolidated obligations
Discount notes	(262,710,106		)	(266,023,001		)
Bonds	(13,738,885		)	(13,993,680		)
Proceeds from issuance of capital stock	1,005,578			876,551
Payments for redemption of mandatorily redeemable capital stock	(16,814		)	(6,683		)
Payments for repurchase/redemption of capital stock	(730,329		)	(548,550		)
Cash dividends paid	(198		)	(198		)
Net cash provided by financing activities	7,797,579			15,970,365

Net increase (decrease) in cash and cash equivalents	119,832			(769,463		)
Cash and cash equivalents at beginning of the period	27,696			837,202
Cash and cash equivalents at end of the period	$	147,528		$	67,739

Supplemental Disclosures:
Interest paid	$	341,792		$	160,096
AHP payments, net	$	6,538		$	6,112
Stock dividends issued	$	21,648		$	11,977
Dividends paid through issuance of mandatorily redeemable capital stock	$	138		$	5
Variation margin recharacterized as settlement payments on derivative contracts (Note 10)	$	72,053		$	—
Net capital stock reclassified to mandatorily redeemable capital stock	$	20,230		$	68

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

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FEDERAL HOME LOAN BANK OF DALLAS

NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS

Note 1—Basis of Presentation

The accompanying interim financial statements of the Federal Home Loan Bank of Dallas (the “Bank”) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The financial statements contain all adjustments that are, in the opinion of management, necessary for a fair statement of the Bank’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

The Bank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2016. The interim financial statements presented herein should be read in conjunction with the Bank’s audited financial statements and notes thereto, which are included in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 24, 2017 (the “2016 10-K”). The notes to the interim financial statements update and/or highlight significant changes to the notes included in the 2016 10-K.

The Bank is one of 11 district 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.” The Office of Finance manages the sale and servicing of the FHLBanks’ consolidated obligations. The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, supervises and regulates the housing government-sponsored enterprises ("GSEs"), including the FHLBanks and the Office of Finance.

Use of Estimates and Assumptions. The preparation of financial statements in conformity with 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.

Note 2—Recently Issued Accounting Guidance

Contingent Put and Call Options in Debt Instruments. On March 14, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 results of operations or financial condition.

Premium Amortization on Purchased Callable Debt Securities. On March 30, 2017, the FASB issued ASU 2017-08, "Premium Amortization on Purchased Callable Debt Securities" ("ASU 2017-08"), which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. For public business entities, the guidance in ASU 2017-08 is effective for fiscal years beginning after December 15, 2018 (January 1, 2019 for the Bank), and interim periods within those fiscal years. Early adoption, including adoption in an interim period, is permitted. If an entity early adopts ASU 2017-08 in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The guidance is to be applied using a modified retrospective transition approach, with the cumulative-effect adjustment recognized in retained earnings as of the beginning of the period of adoption. The adoption of ASU 2017-08 is not expected to have a material impact on the Bank's results of operations or financial condition.

Derivatives and Hedging. On August 28, 2017, the FASB issued ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which is intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance requires that,

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for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in other comprehensive income. In addition, the guidance includes certain targeted improvements to the assessment of hedge effectiveness and permits, among other things, the following:


•	For fair value hedges, measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception.


•	Partial-term fair value hedges of interest-rate risk, in which it can be assumed that the hedged item has a term that reflects only the designated cash flows being hedged.


•	For prepayable financial instruments, consideration only of how changes in the benchmark interest rate affect a decision to settle a debt instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest rate risk.


•	For a cash flow hedge of interest-rate risk of a variable-rate financial instrument, designation of the variability in cash flows attributable to the contractually specified interest rate as the hedged risk.


•	For a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, designation of an amount that is not expected to be affected by prepayments, defaults and other events affecting the timing and amount of cash flows as a hedged item.

For public business entities, the guidance in ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 (January 1, 2019 for the Bank), and interim periods within those fiscal years. Early adoption, including adoption in an interim period, is permitted. If an entity early adopts ASU 2017-12 in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The guidance is to be applied to hedging relationships existing at the date of adoption using a modified retrospective transition approach as of the beginning of the year of adoption. For cash flow hedges existing on the date of adoption, the cumulative-effect adjustment is recognized in accumulated other comprehensive income with a corresponding adjustment to retained earnings. The amended presentation and disclosure guidance is required only prospectively. The Bank has not yet determined the effect that the adoption of ASU 2017-12 will have on its results of operations or financial condition.

Note 3—Trading Securities

Trading securities as of September 30, 2017 and December 31, 2016 were as follows (in thousands):



	September 30, 2017		December 31, 2016
U.S. Treasury Note	$	102,986	$	101,495
Other	11,561		10,143
Total	$	114,547	$	111,638

Other trading securities consist solely of mutual fund investments associated with the Bank's non-qualified deferred compensation plans.

Note 4—Available-for-Sale Securities

Major Security Types. Available-for-sale securities as of September 30, 2017 were as follows (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Debentures
U.S. government-guaranteed obligations	$	476,655	$	8,399	$	—	$	485,054
GSE obligations	6,544,363		84,444		37		6,628,770
Other	182,608		1,275		—		183,883
	7,203,626		94,118		37		7,297,707
GSE commercial mortgage-backed securities	7,616,353		71,528		7,341		7,680,540
Total	$	14,819,979	$	165,646	$	7,378	$	14,978,247

Included in the table above are GSE commercial mortgage-backed securities ("MBS") that were purchased but which had not yet settled as of September 30, 2017. The aggregate amount due of $261,453,000 is included in other liabilities on the statement of condition at that date.

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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 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.

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 (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of September 30, 2017. 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	3	$	61,779	$	37	—	$	—	$	—	3	$	61,779	$	37
GSE commercial MBS	24	619,365		1,703		36	1,305,580		5,638		60	1,924,945		7,341
Total	27	$	681,144	$	1,740	36	$	1,305,580	$	5,638	63	$	1,986,724	$	7,378

The following table summarizes (in thousands, except number of positions) 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

At September 30, 2017, the gross unrealized losses on the Bank’s available-for-sale securities were $7,378,000. 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 September 30, 2017, 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 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 are rated triple-A by Moody's and Fitch, and are not rated by S&P. 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 September 30, 2017 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 September 30, 2017 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

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their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at September 30, 2017.

Redemption Terms. The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at September 30, 2017 and December 31, 2016 are presented below (in thousands).



	September 30, 2017				December 31, 2016
Maturity	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Maturity	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Debentures
Due in one year or less	$	757,337	$	757,739	$	1,001,054	$	1,003,309
Due after one year through five years	2,827,166		2,858,239		2,079,374		2,100,171
Due after five years through ten years	3,382,191		3,441,560		3,989,554		4,022,456
Due after ten years	236,932		240,169		212,954		215,480
	7,203,626		7,297,707		7,282,936		7,341,416
GSE commercial MBS	7,616,353		7,680,540		5,834,410		5,834,517
Total	$	14,819,979	$	14,978,247	$	13,117,346	$	13,175,933

Interest Rate Payment Terms. At September 30, 2017 and December 31, 2016, all of the Bank's available-for-sale securities were fixed rate securities which were swapped to a variable rate.

Sales of Securities. There were no sales of available-for-sale securities during the three months ended September 30, 2017. During the nine months ended September 30, 2017, the Bank sold available-for-sale securities with an amortized cost (determined by the specific identification method) of $248,425,000. Proceeds from the sales totaled $250,262,000, resulting in realized gains of$1,837,000. During the three and nine months ended September 30, 2016, the Bank sold available-for-sale securities with an amortized cost (determined by the specific identification method) of $200,214,000 and $2,650,291,000, respectively. Proceeds from the sales totaled $201,103,000 and $2,655,395,000, respectively, resulting in realized gains of $889,000 and $5,104,000, respectively.

Note 5—Held-to-Maturity Securities

Major Security Types. Held-to-maturity securities as of September 30, 2017 were as follows (in thousands):



	Amortized Cost		OTTI Recorded in Accumulated Other Comprehensive Income		Carrying Value		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses		Estimated Fair Value
Debentures
U.S. government-guaranteed obligations	$	11,460	$	—	$	11,460	$	22	$	1	$	11,481
State housing agency obligations	160,000		—		160,000		288		182		160,106
	171,460		—		171,460		310		183		171,587
Mortgage-backed securities
U.S. government-guaranteed residential MBS	2,060		—		2,060		5		—		2,065
GSE residential MBS	1,739,123		—		1,739,123		12,049		1,816		1,749,356
Non-agency residential MBS	98,852		14,405		84,447		15,731		906		99,272
GSE commercial MBS	35,265		—		35,265		—		114		35,151
	1,875,300		14,405		1,860,895		27,785		2,836		1,885,844
Total	$	2,046,760	$	14,405	$	2,032,355	$	28,095	$	3,019	$	2,057,431

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Held-to-maturity securities as of December 31, 2016 were as follows (in thousands):



	Amortized Cost		OTTI Recorded in Accumulated Other Comprehensive Income		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

The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of September 30, 2017. The unrealized losses include other-than-temporary impairments recorded in accumulated other comprehensive income ("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	1	$	499	$	1	—	$	—	$	—	1	$	499	$	1
State housing agency obligations	1	34,818		182		—	—		—		1	34,818		182
Mortgage-backed securities
GSE residential MBS	7	10,004		27		26	593,726		1,789		33	603,730		1,816
Non-agency residential MBS	—	—		—		17	60,931		2,925		17	60,931		2,925
GSE commercial MBS	—	—		—		1	35,151		114		1	35,151		114
Total	9	$	45,321	$	210	44	$	689,808	$	4,828	53	$	735,129	$	5,038

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The following table summarizes (in thousands, except number of positions) 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

At September 30, 2017, the gross unrealized losses on the Bank’s held-to-maturity securities were $5,038,000, of which $2,925,000 were attributable to its holdings of non-agency (i.e., private-label) residential MBS, $1,931,000 were attributable to securities that are either guaranteed by the U.S. government or issued and guaranteed by GSEs and $182,000 were attributable to a security issued by a state housing agency.

As of September 30, 2017, 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 obligation that was in an unrealized loss position at September 30, 2017 would not be settled at an amount less than the Bank's amortized cost basis in this investment. In addition, based upon the credit ratings assigned by the NRSROs and the Bank's assessment of the strength of the GSEs’ guarantees of the Bank’s holdings of GSE MBS, the Bank expects that its holdings of GSE MBS that were in an unrealized loss position at September 30, 2017 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 September 30, 2017 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 September 30, 2017.

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 September 30, 2017 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 closely 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.

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To assess whether the entire amortized cost bases of its 23 non-agency RMBS holdings are likely to be recovered, the Bank performed a cash flow analysis for each security as of September 30, 2017 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 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 September 30, 2017 assumed changes in home prices ranging from declines of 6 percent to increases of 13 percent over the 12-month period beginning July 1, 2017. For the vast majority of markets, the changes were projected to range from increases of 1 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 is likely that it will fully recover the remaining amortized cost bases of all of its non-agency RMBS. 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 remaining amortized cost bases, none of the Bank's non-agency RMBS were deemed to be other-than-temporarily impaired at September 30, 2017.

During the year ended December 31, 2016, one of the Bank's non-agency RMBS was determined to be other-than-temporarily impaired. In addition, 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 three and nine months ended September 30, 2017 and 2016 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 (in thousands).



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Balance of credit losses, beginning of period	$	9,961		$	11,120		$	10,515		$	11,696
Credit losses on securities for which an other-than-temporary impairment was previously recognized	—			8			—			20
Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)	(263		)	(313		)	(817		)	(901		)
Balance of credit losses, end of period	9,698			10,815			9,698			10,815
Cumulative principal shortfalls on securities held at end of period	(1,973		)	(1,865		)	(1,973		)	(1,865		)
Cumulative amortization of the time value of credit losses at end of period	550			418			550			418
Credit losses included in the amortized cost bases of other-than-temporarily impaired securities at end of period	$	8,275		$	9,368		$	8,275		$	9,368

For a discussion regarding the Bank's assessment of the impact of Hurricanes Harvey and Irma on the Bank's non-agency RMBS holdings, see Note 15 - Commitments and Contingencies.

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Redemption Terms. The amortized cost, carrying value and estimated fair value of held-to-maturity securities by contractual maturity at September 30, 2017 and December 31, 2016 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.



	September 30, 2017						December 31, 2016
Maturity	Amortized Cost		Carrying Value		Estimated Fair Value		Amortized Cost		Carrying Value		Estimated Fair Value
Debentures
Due in one year or less	$	1,737	$	1,737	$	1,740	$	2,007	$	2,007	$	2,007
Due after one year through five years	4,495		4,495		4,500		2,874		2,874		2,882
Due after five years through ten years	5,228		5,228		5,241		11,092		11,092		10,998
Due after ten years	160,000		160,000		160,106		110,000		110,000		108,605
	171,460		171,460		171,587		125,973		125,973		124,492
Mortgage-backed securities	1,875,300		1,860,895		1,885,844		2,390,779		2,373,622		2,390,020
Total	$	2,046,760	$	2,032,355	$	2,057,431	$	2,516,752	$	2,499,595	$	2,514,512

The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net purchase discounts of $5,039,000 and $9,671,000 at September 30, 2017 and December 31, 2016, respectively.

Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as held-to-maturity at September 30, 2017 and December 31, 2016 (in thousands):



	September 30, 2017		December 31, 2016
Amortized cost of variable-rate held-to-maturity securities other than MBS	$	171,460	$	125,973
Amortized cost of held-to-maturity MBS
Fixed-rate pass-through securities	125		147
Collateralized mortgage obligations
Fixed-rate	240		305
Variable-rate	1,839,670		2,328,515
Variable-rate multi-family MBS	35,265		61,812
	1,875,300		2,390,779
Total	$	2,046,760	$	2,516,752

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 2016 or the nine months ended September 30, 2017.

Sales of Securities. During the three and nine months ended September 30, 2017, the Bank sold held-to-maturity securities with an amortized cost (determined by the specific identification method) of $59,763,000 and $158,806,000, respectively. Proceeds from these sales totaled $61,856,000 and $162,789,000 respectively, resulting in realized gains of $2,093,000 and $3,983,000, respectively. During the three and nine months ended September 30, 2016, the Bank sold held-to-maturity securities with an amortized cost (determined by the specific identification method) of $14,842,000 and $129,063,000, respectively. Proceeds from these sales totaled $14,907,000 and $129,857,000, respectively, resulting in realized gains of $65,000 and $794,000, 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.

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Note 6—Advances

Redemption Terms. At September 30, 2017 and December 31, 2016, the Bank had advances outstanding at interest rates ranging from 0.54 percent to 8.27 percent and from 0.40 percent to 8.27 percent, respectively, as summarized below (dollars in thousands).



	September 30, 2017					December 31, 2016
Contractual Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in one year or less	$	23,796,032		1.27	%	$	17,477,220		0.71	%
Due after one year through two years	1,971,426			1.58		5,115,095			1.07
Due after two years through three years	1,092,150			2.07		1,059,823			1.63
Due after three years through four years	1,319,770			1.60		1,347,926			1.56
Due after four years through five years	515,743			1.88		593,061			1.74
Due after five years	6,159,839			1.33		5,431,116			0.85
Amortizing advances	1,414,163			2.68		1,448,003			2.76
Total par value	36,269,123			1.40	%	32,472,244			0.97	%

Premiums	26					52
Deferred net prepayment fees	(11,760		)			(13,272		)
Commitment fees	(118		)			(123		)
Hedging adjustments	30,613					47,274
Total	$	36,287,884				$	32,506,175

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 September 30, 2017 and December 31, 2016, the Bank had aggregate prepayable and callable advances totaling $11,715,352,000 and $12,432,264,000, respectively.

The following table summarizes advances outstanding at September 30, 2017 and December 31, 2016, 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	September 30, 2017		December 31, 2016
Due in one year or less	$	30,384,616	$	25,953,500
Due after one year through two years	1,609,346		2,336,974
Due after two years through three years	909,850		989,223
Due after three years through four years	637,070		757,626
Due after four years through five years	398,473		443,311
Due after five years	915,605		543,607
Amortizing advances	1,414,163		1,448,003
Total par value	$	36,269,123	$	32,472,244

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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 September 30, 2017 and December 31, 2016, the Bank had putable advances outstanding totaling $1,133,450,000 and $1,053,071,000, respectively.

The following table summarizes advances outstanding at September 30, 2017 and December 31, 2016, by the earlier of contractual maturity or next possible put date (in thousands):



Contractual Maturity or Next Put Date	September 30, 2017		December 31, 2016
Due in one year or less	$	24,440,032	$	18,153,670
Due after one year through two years	1,781,926		4,473,645
Due after two years through three years	1,099,650		1,024,823
Due after three years through four years	1,319,770		1,347,926
Due after four years through five years	480,743		593,061
Due after five years	5,732,839		5,431,116
Amortizing advances	1,414,163		1,448,003
Total par value	$	36,269,123	$	32,472,244

Interest Rate Payment Terms. The following table provides interest rate payment terms for advances outstanding at September 30, 2017 and December 31, 2016 (in thousands):



	September 30, 2017		December 31, 2016
Fixed-rate
Due in one year or less	$	18,269,208	$	13,417,280
Due after one year	5,788,507		6,215,744
Total fixed-rate	24,057,715		19,633,024
Variable-rate
Due in one year or less	5,602,224		4,136,153
Due after one year	6,609,184		8,703,067
Total variable-rate	12,211,408		12,839,220
Total par value	$	36,269,123	$	32,472,244

At September 30, 2017 and December 31, 2016, 22 percent and 25 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. The Bank records prepayment fees received from members/borrowers on prepaid advances net of any associated hedging adjustments on those advances. These fees are reflected as interest income 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 and the advance meets the accounting criteria to qualify as a modification of the prepaid advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized into interest income on advances over the life of the modified advance using the level-yield method. During the three months ended September 30, 2017 and 2016, gross advance prepayment fees received from members/borrowers were $712,000 and $4,878,000, respectively, of which $476,000 and $172,000, respectively, were deferred. During the nine months ended September 30, 2017 and 2016, gross advance prepayment fees received from members/borrowers were $1,578,000 and $7,613,000, respectively, of which $695,000 and $456,000, respectively, were deferred.

The Bank also offers 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 payable to the Bank. During the three and nine months ended September 30, 2017, symmetrical prepayment advances with aggregate par values of $6,000,000 and $17,000,000, respectively, were prepaid. The differences by which the par values of these advances exceeded their fair values, less the make-whole amounts, totaled $4,000 and $194,000, respectively, and were recorded in prepayment fees on advances, net of the associated

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hedging adjustments on the advances. There were no prepayments of symmetrical prepayment advances during the nine months ended September 30, 2016.

Note 7—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.

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/borrowers, 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.

During the nine months ended September 30, 2017 and 2016, there were no significant purchases or sales of financing receivables, nor were any financing receivables reclassified to held for sale.

As discussed below, the Bank did not provide for any credit losses on its extensions of credit to members or mortgage loans held for portfolio during the three months ended September 30, 2017. For a discussion regarding the Bank's assessment of the impact of Hurricanes Harvey and Irma and the recent wildfires in Northern California, see Note 15 - Commitments and Contingencies.

Advances and Other Extensions of Credit to Members. In accordance with federal statutes, including the Federal Home Loan Bank Act of 1932, as amended (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. 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.

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 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 September 30, 2017 or December 31, 2016.

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 September 30, 2017 and December 31, 2016, 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 September 30, 2017 and December 31, 2016, 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 or government-insured. The Bank’s government-guaranteed or government-insured fixed-rate mortgage loans are guaranteed or insured by the Federal Housing Administration or the Department of Veterans Affairs and were acquired through the Mortgage Partnership Finance^® (“MPF”^®) program (as more fully described in the Bank’s 2016 10-K) in periods prior to 2004. Any losses from these loans are expected to be recovered

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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 or government-insured mortgage loans. Government-guaranteed or government-insured loans are not placed on nonaccrual status.

Mortgage Loans — Conventional Mortgage Loans. The Bank’s conventional mortgage loans have also been acquired through the MPF program. 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 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.

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 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 and interest 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.

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 by payment status for mortgage loans at September 30, 2017 and December 31, 2016 (dollars in thousands).



	September 30, 2017									December 31, 2016
	Conventional Loans			Government- Guaranteed/ Insured Loans			Total			Conventional Loans			Government- Guaranteed/ Insured Loans			Total
Mortgage loans:
30-59 days delinquent	$	4,639		$	903		$	5,542		$	899		$	989		$	1,888
60-89 days delinquent	283			97			380			191			172			363
90 days or more delinquent	252			96			348			276			130			406
Total past due	5,174			1,096			6,270			1,366			1,291			2,657
Total current loans	553,748			19,389			573,137			99,690			22,386			122,076
Total mortgage loans	$	558,922		$	20,485		$	579,407		$	101,056		$	23,677		$	124,733

Other delinquency statistics:
In process of foreclosure ⁽¹⁾	$	158		$	27		$	185		$	57		$	28		$	85
Serious delinquency rate ⁽²⁾	0.1		%	0.5		%	0.1		%	0.3		%	0.6		%	0.3		%
Past due 90 days or more and still accruing interest ⁽³⁾	$	—		$	96		$	96		$	—		$	130		$	130
Nonaccrual loans	$	252		$	—		$	252		$	276		$	—		$	276
Troubled debt restructurings	$	—		$	—		$	—		$	—		$	—		$	—

_____________________________


⁽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.

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At September 30, 2017 and December 31, 2016, the Bank’s other assets included $45,000 and $89,000, respectively, of real estate owned.

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 September 30, 2017 and December 31, 2016, 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 September 30, 2017. There was no activity in the allowance for credit losses during the nine months ended September 30, 2017 or 2016.

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 September 30, 2017 and December 31, 2016 (in thousands).



	September 30, 2017		December 31, 2016
Ending balance of allowance for credit losses related to loans collectively evaluated for impairment	$	141	$	141

Recorded investment
Individually evaluated for impairment	$	252	$	276
Collectively evaluated for impairment	558,670		100,780
	$	558,922	$	101,056

Note 8—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. 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 15.

The par amounts of the 11 FHLBanks’ outstanding consolidated obligations, including consolidated obligations held as investments by other FHLBanks, were approximately $1.028 trillion and $989 billion at September 30, 2017 and December 31, 2016, respectively. The Bank was the primary obligor on $61.6 billion and $54.1 billion (at par value), respectively, of these consolidated obligations.

Interest Rate Payment Terms. The following table summarizes the Bank’s consolidated obligation bonds outstanding by interest rate payment terms at September 30, 2017 and December 31, 2016 (in thousands, at par value).



	September 30, 2017		December 31, 2016
Variable-rate	$	15,111,000	$	13,151,000
Fixed-rate	11,712,360		10,952,280
Step-up	3,184,500		2,829,500
Step-down	150,000		200,000
Total par value	$	30,157,860	$	27,132,780

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At September 30, 2017 and December 31, 2016, 88 percent and 91 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped to a variable rate.

Redemption Terms. The following is a summary of the Bank’s consolidated obligation bonds outstanding at September 30, 2017 and December 31, 2016, by contractual maturity (dollars in thousands):



	September 30, 2017					December 31, 2016
Contractual Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in one year or less	$	17,385,930		1.16	%	$	16,586,590		0.66	%
Due after one year through two years	3,934,000			1.26		4,045,240			1.42
Due after two years through three years	2,067,035			1.56		1,617,600			1.15
Due after three years through four years	2,103,820			1.52		980,100			1.63
Due after four years through five years	1,880,525			1.72		1,546,000			1.38
Due after five years	2,786,550			2.16		2,357,250			1.99
Total par value	30,157,860			1.35	%	27,132,780			0.99	%

Premiums	7,489					10,993
Discounts	(1,719		)			(1,477		)
Debt issuance costs	(1,930		)			(1,308		)
Hedging adjustments	(101,471		)			(143,501		)
Total	$	30,060,229				$	26,997,487

At September 30, 2017 and December 31, 2016, the Bank’s consolidated obligation bonds outstanding included the following (in thousands, at par value):



	September 30, 2017		December 31, 2016
Non-callable bonds	$	24,346,360	$	21,747,530
Callable bonds	5,811,500		5,385,250
Total par value	$	30,157,860	$	27,132,780

The following table summarizes the Bank’s consolidated obligation bonds outstanding at September 30, 2017 and December 31, 2016, by the earlier of contractual maturity or next possible call date (in thousands, at par value):



Contractual Maturity or Next Call Date	September 30, 2017		December 31, 2016
Due in one year or less	$	22,823,430	$	21,749,840
Due after one year through two years	3,708,000		3,607,240
Due after two years through three years	1,647,035		1,262,600
Due after three years through four years	1,186,820		415,100
Due after four years through five years	625,525		89,000
Due after five years	167,050		9,000
Total par value	$	30,157,860	$	27,132,780

Discount Notes. At September 30, 2017 and December 31, 2016, 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

September 30, 2017	$	31,438,766	$	31,490,238	1.01	%

December 31, 2016	$	26,941,782	$	26,964,305	0.46	%

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Note 9—Affordable Housing Program (“AHP”)

The following table summarizes the changes in the Bank’s AHP liability during the nine months ended September 30, 2017 and 2016 (in thousands):



	Nine Months Ended September 30,
	2017			2016
Balance, beginning of period	$	22,871		$	22,710
AHP assessment	13,223			5,625
Grants funded, net of recaptured amounts	(6,538		)	(6,112		)
Balance, end of period	$	29,556		$	22,223

Note 10—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 September 30, 2017 or December 31, 2016.

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. Effective January 3, 2017, one of the Bank's two clearinghouse counterparties made certain amendments to its rulebook that changed the legal characterization of variation margin payments on cleared derivatives to settlements on the contracts. Prior to January 3, 2017, these amounts were characterized as collateral pledged to secure outstanding credit exposure on the derivative contracts. Initial and variation margin (regardless of whether it is characterized as collateral or settlements) is typically delivered/paid (or returned/received) 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 (which fair value amounts include, in the case of one clearinghouse counterparty, variation margin paid or received on daily settled contracts) and any 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 and variation margin received or paid on daily settled derivative contracts as of September 30, 2017 and December 31, 2016 (in thousands). For daily settled derivative contracts, the variation margin payments/receipts are presented in the same manner as collateral (i.e., as amounts that are offset in the statement of condition).

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	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
September 30, 2017

Assets

Derivatives
Bilateral derivatives	$	28,096	$	(2,875	)	$	25,221	$	(23,987	)	⁽²⁾	$	1,234
Cleared derivatives	163,741		(145,919		)	17,822		—				17,822
Total derivatives	191,837		(148,794		)	43,043		(23,987		)		19,056
Securities purchased under agreements to resell	2,300,000		—			2,300,000		(2,300,000		)		—

Total assets	$	2,491,837	$	(148,794	)	$	2,343,043	$	(2,323,987	)		$	19,056

Liabilities

Derivatives
Bilateral derivatives	$	166,400	$	(152,063	)	$	14,337	$	—			$	14,337
Cleared derivatives	237,409		(237,409		)	—		—			⁽³⁾	—

Total liabilities	$	403,809	$	(389,472	)	$	14,337	$	—			$	14,337

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		)	⁽⁴⁾	—

Total liabilities	$	457,285	$	(442,942	)	$	14,343	$	(1,743	)		$	12,600

_____________________________


⁽¹⁾	Any overcollateralization or any excess variation margin associated with daily settled contracts 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⁾	The Bank had pledged securities with an aggregate fair value of $565,892,000 at September 30, 2017 to further secure its cleared derivatives, which is a result of the initial margin requirements imposed upon the Bank.


⁽⁴⁾	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 securities with an aggregate fair value of $611,608,000 at December 31, 2016 to further secure its cleared derivatives, which is a result of the initial margin requirements imposed upon the Bank.

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Note 11—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 September 30, 2017, 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 (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, among other things, 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.

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.

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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.

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.

Accounting for Derivatives and Hedging Activities. The Bank accounts for derivatives and hedging activities in accordance with the guidance in Topic 815 of the FASB’s Accounting Standards Codification (“ASC”) 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

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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 hedge 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 item) beginning on the trade date.

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.

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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 "net 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 "net gains (losses) on derivatives and hedging activities."

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Impact of Derivatives and Hedging Activities. The following table summarizes the notional balances and estimated fair values of the Bank’s outstanding derivatives (before consideration of variation margin on daily settled contracts) and the amounts offset against those values in the statement of condition at September 30, 2017 and December 31, 2016 (in thousands).



	September 30, 2017								December 31, 2016
	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	$	5,314,124	$	18,587		$	51,918		$	5,002,011	$	20,367		$	74,032
Available-for-sale securities	14,755,408		118,883			225,663			13,106,770		175,507			223,122
Consolidated obligation bonds	13,310,375		11,731			86,814			12,776,280		10,756			129,772
Consolidated obligation discount notes	425,000		15,856			619			425,000		19,050			486
Interest rate swaptions related to advances	2,000		30			—			3,000		66			—
Total derivatives designated as hedging instruments under ASC 815	33,806,907		165,087			365,014			31,313,061		225,746			427,412
Derivatives not designated as hedging instruments under ASC 815
Interest rate swaps
Available-for-sale securities	2,993		19			32			2,624		34			27
Consolidated obligation discount notes	—		—			—			1,276,563		2,626			—
Basis swaps	—		—			—			1,000,000		—			676
Intermediary transactions	2,338,817		26,113			23,094			341,671		11,174			10,128
Other	342,000		389			15,334			325,000		—			18,479
Mortgage delivery commitments	58,411		—			118			2,030		2			—
Interest rate caps
Held-to-maturity securities	1,200,000		12			—			1,200,000		260			—
Intermediary transactions	80,000		217			217			80,000		563			563
Total derivatives not designated as hedging instruments under ASC 815	4,022,221		26,750			38,795			4,227,888		14,659			29,873
Total derivatives before collateral, variation margin for daily settled contracts and netting adjustments	$	37,829,128	191,837			403,809			$	35,540,949	240,405			457,285

Cash collateral (including related accrued interest) and variation margin for daily settled contracts			(200		)	(240,878		)			(94,650		)	(312,824		)
Netting adjustments			(148,594		)	(148,594		)			(130,118		)	(130,118		)
Total collateral, variation margin for daily settled contracts and netting adjustments⁽¹⁾			(148,794		)	(389,472		)			(224,768		)	(442,942		)
Net derivative balances reported in statements of condition			$	43,043		$	14,337				$	15,637		$	14,343

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⁽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 (including variation margin for daily settled contracts) as well as any cash collateral held or placed with those same counterparties.

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The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the statements of income for the three and nine months ended September 30, 2017 and 2016 (in thousands).



	Gain (Loss) Recognized in Earnings for the						Gain (Loss) Recognized in Earnings for the
	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Derivatives and hedged items in ASC 815 fair value hedging relationships
Interest rate swaps	$	(1,561	)	$	2,071		$	(5,964	)	$	(23,148	)
Interest rate swaptions	—			(1		)	(36		)	(8		)
Total net gain (loss) related to fair value hedge ineffectiveness	(1,561		)	2,070			(6,000		)	(23,156		)
Derivatives not designated as hedging instruments under ASC 815
Interest rate swaps	545			(2,720		)	8,162			1,209
Net interest income on interest rate swaps	360			836			1,281			1,817
Interest rate caps	(13		)	(2		)	(247		)	(528		)
Mortgage delivery commitments	794			13			2,257			95
Total net gain (loss) related to derivatives not designated as hedging instruments under ASC 815	1,686			(1,873		)	11,453			2,593
Price alignment amount on variation margin for daily settled derivative contracts	220			—			521			—
Net gains (losses) on derivatives and hedging activities reported in the statements of income	$	345		$	197		$	5,974		$	(20,563	)

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 three and nine months ended September 30, 2017 and 2016 (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⁾
Three Months Ended September 30, 2017
Advances	$	7,294		$	(7,227	)	$	67		$	(7,001	)
Available-for-sale securities	8,527			(8,726		)	(199		)	(23,785		)
Consolidated obligation bonds	(3,078		)	1,649			(1,429		)	8,299
Total	$	12,743		$	(14,304	)	$	(1,561	)	$	(22,487	)

Three Months Ended September 30, 2016
Advances	$	39,433		$	(39,327	)	$	106		$	(15,458	)
Available-for-sale securities	114,056			(111,855		)	2,201			(37,119		)
Consolidated obligation bonds	(42,596		)	42,359			(237		)	12,298
Total	$	110,893		$	(108,823	)	$	2,070		$	(40,279	)

Nine Months Ended September 30, 2017
Advances	$	15,340		$	(15,101	)	$	239		$	(26,787	)
Available-for-sale securities	(75,804		)	69,316			(6,488		)	(82,190		)
Consolidated obligation bonds	42,313			(42,064		)	249			31,406
Total	$	(18,151	)	$	12,151		$	(6,000	)	$	(77,571	)

Nine Months Ended September 30, 2016
Advances	$	(26,126	)	$	25,899		$	(227	)	$	(49,862	)
Available-for-sale securities	(423,390		)	404,240			(19,150		)	(112,314		)
Consolidated obligation bonds	15,239			(19,018		)	(3,779		)	45,643
Total	$	(434,277	)	$	411,121		$	(23,156	)	$	(116,533	)

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⁽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.

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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 losses reclassified from AOCI into earnings for the three and nine months ended September 30, 2017 and 2016 (in thousands).



Derivatives in Cash Flow Hedging Relationships	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2017			2016		2017			2016
Interest rate swaps related to anticipated issuances of consolidated obligation discount notes
Amount of gains (losses) recognized in other comprehensive income on derivatives (effective portion)	$	(917	)	$	2,147	$	(6,668	)	$	(12,980	)
Amount of losses reclassified from AOCI into interest expense (effective portion) ⁽¹⁾	491			990		1,927			2,570
Amount of losses recognized in net gains (losses) on derivatives and hedging activities (ineffective portion)	—			—		—			—

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

For the three and nine months ended September 30, 2017 and 2016, 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 September 30, 2017, $756,000 of deferred net losses on derivative instruments in AOCI are expected to be reclassified to earnings during the next 12 months. At September 30, 2017, 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 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 contracts have been cleared through third-party central clearinghouses (as of September 30, 2017, the notional balance of cleared transactions outstanding totaled $25.1 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 derivative contracts have been transacted bilaterally with large financial institutions under master netting agreements or, to a much lesser extent, with member institutions (as of September 30, 2017, the notional balance of outstanding transactions with non-member bilateral counterparties and member counterparties totaled $11.5 billion and $1.2 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 10. Based on the netting provisions and collateral requirements (or variation margin on daily settled contracts) 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.

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Note 12—Capital

At all times during the nine months ended September 30, 2017, the Bank was in compliance with all applicable statutory and regulatory capital requirements. The following table summarizes the Bank’s compliance with those capital requirements as of September 30, 2017 and December 31, 2016 (dollars in thousands):



	September 30, 2017						December 31, 2016
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	801,028		$	3,134,761		$	683,690		$	2,757,549
Total capital	$	2,657,995		$	3,134,761		$	2,328,483		$	2,757,549
Total capital-to-assets ratio	4.00		%	4.72		%	4.00		%	4.74		%
Leverage capital	$	3,322,494		$	4,702,141		$	2,910,604		$	4,136,324
Leverage capital-to-assets ratio	5.00		%	7.08		%	5.00		%	7.11		%

Members are required to maintain an investment in Class B Capital 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 December 31, 2016, subject to a minimum of $1,000 and a maximum of $7,000,000. The activity-based investment requirement is currently 4.1 percent of outstanding advances, except as described below.

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.

The Bank generally repurchases surplus stock quarterly. For the repurchases that occurred during the nine months ended September 30, 2017, 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 March 28, 2017, June 27, 2017 and September 26, 2017, 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). On March 28, 2017, June 27, 2017 and September 26, 2017, the Bank repurchased surplus stock totaling $148,179,500, $75,728,500 and $104,278,700, respectively, none of which was classified as mandatorily redeemable capital stock at those dates. From time to time, the Bank may modify the definition of surplus stock or the timing and/or frequency of surplus stock repurchases.

Note 13—Employee Retirement Plans

The Bank sponsors a retirement benefits program that includes health care and life insurance benefits for eligible retirees. Components of net periodic benefit cost (credit) related to this program for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Service cost	$	5		$	6		$	17		$	17
Interest cost	6			7			16			22
Amortization of prior service cost	5			5			15			15
Amortization of net actuarial gain	(9		)	(25		)	(61		)	(74		)
Net periodic benefit cost (credit)	$	7		$	(7	)	$	(13	)	$	(20	)

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Note 14—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 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 within 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 nine months ended September 30, 2017 and 2016, 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 September 30, 2017 and December 31, 2016. 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, loans to other FHLBanks and loans from other FHLBanks. All federal funds sold, securities purchased under agreements to resell, loans to other FHLBanks and loans from 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 U.S. Treasury Note classified as a trading security, 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.

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.

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

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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. 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 September 30, 2017, 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 the mutual funds.

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).

As the collateral (or variation margin in the case of daily settled contracts) and netting provisions of the Bank’s arrangements with its derivative counterparties significantly reduce the risk from nonperformance (see Note 10), 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 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 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

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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. Prior to April 2017, the Bank used as inputs to the valuation for all consolidated obligations the CO curve and, for consolidated obligations containing options, swaption volatility. In April 2017, the Bank refined its method for estimating the fair values of callable consolidated obligation bonds. To value its callable bonds, the Bank began using the LIBOR swap curve minus (or plus) a spread and swaption volatility. This refinement did not have a significant impact on the estimated fair value of the Bank’s aggregate portfolio of consolidated obligation bonds at the time it was implemented.

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, was not material at September 30, 2017 or December 31, 2016.

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The following table presents the carrying values and estimated fair values of the Bank’s financial instruments at September 30, 2017 (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	$	147,528	$	147,528	$	147,528	$	—		$	—		$	—
Interest-bearing deposits	327		327		—		327			—			—
Securities purchased under agreements to resell	2,300,000		2,300,000		—		2,300,000			—			—
Federal funds sold	9,830,000		9,830,000		—		9,830,000			—			—
Trading securities ⁽¹⁾	114,547		114,547		11,561		102,986			—			—
Available-for-sale securities⁽¹⁾	14,978,247		14,978,247		—		14,978,247			—			—
Held-to-maturity securities	2,032,355		2,057,431		—		1,958,159		⁽²⁾	99,272		⁽³⁾	—
Advances	36,287,884		36,324,051		—		36,324,051			—			—
Mortgage loans held for portfolio, net	576,806		579,998		—		579,998			—			—
Accrued interest receivable	112,555		112,555		—		112,555			—			—
Derivative assets⁽¹⁾	43,043		43,043		—		191,837			—			(148,794		)

Liabilities:
Deposits	996,146		996,143		—		996,143			—			—
Consolidated obligations
Discount notes	31,438,766		31,436,890		—		31,436,890			—			—
Bonds	30,060,229		30,053,933		—		30,053,933			—			—
Loan from other FHLBank	250,000		250,000		—		250,000			—			—
Mandatorily redeemable capital stock	7,032		7,032		7,032		—			—			—
Accrued interest payable	67,680		67,680		—		67,680			—			—
Derivative liabilities⁽¹⁾	14,337		14,337		—		403,809			—			(389,472		)

___________________________


⁽¹⁾	Financial instruments measured at fair value on a recurring basis as of September 30, 2017.


⁽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 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 (including variation margin for daily settled contracts) as well as any cash collateral held or placed with those same counterparties. The estimated fair values of the Bank's derivative assets and liabilities are before consideration of variation margin for daily settled contracts.

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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.

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Note 15—Commitments and Contingencies

Joint and several liability. 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 September 30, 2017, the par amount of the other 10 FHLBanks’ outstanding consolidated obligations was approximately $967 billion. 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 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. 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.

Impact of Hurricanes Harvey and Irma. During the three months ended September 30, 2017, two significant hurricanes struck the continental United States. On August 25, 2017, Hurricane Harvey made landfall near Rockport, Texas, causing substantial flooding and other damage in southeast Texas, including the Houston metropolitan area, and lesser damage in Louisiana. Then, on September 10, 2017, Hurricane Irma made landfall near Marco Island, Florida, causing significant damage in Florida and lesser damage in other southeastern states.

Member institutions throughout the district could be adversely affected over time and to varying degrees by Hurricanes Harvey and Irma, including, potentially, the inability of their borrowers to repay loans made by the institutions and damage to the borrowers’ properties that serve as collateral for the loans made by the institutions. The primary source of repayment of advances (including those that may be created when letters of credit have been funded) is derived from the borrowing members’ ongoing operations. For a variety of reasons, it is still too early to assess the impact that insurance settlements and federal and/or other assistance for members’ consumer and commercial borrowers will have on the borrowers’ ability to repair or rebuild their homes and businesses and repay outstanding loans to member institutions, or what assistance might be available to those institutions from their primary regulators or through Congressional action.

If a member institution fails or is otherwise unable to meet its obligations, a secondary source of repayment is the collateral pledged by the member. At September 30, 2017, approximately 333 of the Bank’s member institutions had outstanding obligations that were secured in part by collateral that was located in areas that had been designated as disaster areas by the Federal Emergency Management Agency (“FEMA”) as a result of Hurricanes Harvey and Irma. Of these institutions, the Bank has identified 20 members with a high concentration of loans secured by properties located in the FEMA-designated disaster areas relative to their total pledged collateral. For a variety of reasons, including forbearances provided to borrowers for loan payments, the uncertainty of the amount of damage sustained by the underlying properties, the amount of insurance settlements that may be made on those properties, and the ultimate marketability of those properties, it is not possible at this time to determine the impact that the hurricanes may have had on the value of the loan collateral supporting the Bank’s advances and letters of credit. If the value of pledged loan collateral declines such that a member’s obligations to the Bank are not fully secured, that member would have to either substitute collateral or reduce its outstanding obligations to the Bank. As more information becomes available to the Bank over time, its assessment of the impact of the hurricanes on individual institutions’ operations may change.

At this time, all principal and interest amounts on the Bank’s advances have been received in accordance with the contractual terms of the applicable agreements. Additionally, the Bank has not been required to fund any letters of credit.

At September 30, 2017, the Bank also held interests totaling $57,742,000 (unpaid principal balance or “UPB”) in conventional mortgage loans acquired through the MPF Program and held for portfolio that were collateralized by properties located in the areas that had been designated as disaster areas by FEMA, making them eligible for individual assistance from the federal government ($14,477,000 UPB was collateralized by properties located in Hurricane Harvey disaster areas and $43,265,000 UPB was collateralized by properties located in Hurricane Irma disaster areas). As of September 30, 2017, the aggregate UPB represented 10.0 percent of the Bank’s mortgage loans held for portfolio, 0.1 percent of the Bank’s total assets

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and 6.3 percent of the Bank’s retained earnings. Under the terms of the MPF Program, all mortgagors are required to carry hazard insurance and, if the property is located in a federal government-designated flood zone, they must also carry flood insurance. Federal assistance may also be available to mortgagors affected by the storms. In addition, mortgage loans with a loan-to-value ratio greater than 80 percent are required to have private mortgage insurance (“PMI”). Members selling mortgage loans to the Bank under the MPF Program are also required to retain a portion of the credit risk associated with those loans (“MPF credit enhancements”). The Bank is still assessing the damage to the underlying properties and the potential for recovery under insurance policies and MPF credit enhancements. While it is not currently possible to quantify the ultimate impact of the hurricanes on its mortgage loan portfolio, the Bank believes the protections that are in place including, but not limited to, borrowers’ equity, PMI, hazard insurance and, if applicable, flood insurance, along with MPF credit enhancements, will limit any potential losses to an amount that will not have a material effect on the Bank’s financial condition or results of operations.

The Bank also owns several non-agency RMBS that are collateralized in part by loans on properties that are located in Florida and, to a lesser extent, Texas (the states most affected by Hurricanes Irma and Harvey, respectively). Credit support for the senior tranches of these securities held by the Bank is provided by subordinated tranches that absorb losses before the senior tranches held by the Bank would be affected. The amount of loans in Florida and Texas generally represent a small portion of the underlying loan pools and, therefore, the Bank does not currently anticipate any material losses in its non-agency RMBS portfolio related to Hurricanes Irma or Harvey.

Based on currently available information, the Bank did not record any reserves related to Hurricanes Harvey or Irma as of September 30, 2017. The Bank is continuing to evaluate the impact of the hurricanes on its advances (including those that may be created if a letter of credit is required to be funded), mortgage loans held for portfolio and non-agency RMBS investments. If information becomes available indicating that any of these assets has been impaired and the amount of the loss can be reasonably estimated, the Bank will record appropriate reserves at that time.

Impact of California Wildfires. In October 2017, several significant wildfires destroyed thousands of homes and businesses in Northern California. The Bank’s primary exposure to the destruction caused by these wildfires relates to its mortgage loans held for portfolio. As of September 30, 2017, the Bank held interests totaling $12,351,000 UPB in conventional mortgage loans acquired through the MPF Program that were collateralized by properties located in the areas that had been designated as disaster areas by FEMA, making them eligible for individual assistance from the federal government. As of September 30, 2017, this balance represented 2.1 percent of the Bank’s mortgage loans held for portfolio, less than 0.1 percent of the Bank’s total assets and 1.3 percent of the Bank’s retained earnings. As noted in the discussion regarding Hurricanes Harvey and Irma, all mortgagors are required under the terms of the MPF Program to carry hazard insurance. For this reason and the other reasons set forth in that discussion, the Bank does not currently anticipate any material losses as a result of the California wildfires.

Other commitments and contingencies. At September 30, 2017 and December 31, 2016, the Bank had commitments to make additional advances totaling approximately $26,156,000 and $35,400,000, respectively. In addition, outstanding standby letters of credit totaled $14,355,246,000 and $11,186,897,000 at September 30, 2017 and December 31, 2016, 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 7).

At September 30, 2017 and December 31, 2016, the Bank had commitments to purchase conventional mortgage loans totaling $58,411,000 and $2,030,000, respectively, from certain of its members that participate in the MPF program.

At September 30, 2017 and December 31, 2016, the Bank had commitments to issue $196,310,000 and $45,000,000, respectively, of consolidated obligation bonds, of which $161,310,000 and $45,000,000, respectively, were hedged with interest rate swaps. In addition, at September 30, 2017 and December 31, 2016, the Bank had commitments to issue $281,868,000 and $500,000 (par values), respectively, 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 September 30, 2017 and December 31, 2016, the Bank had pledged cash collateral of $160,529,000 and $312,705,000, 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 September 30, 2017 and December 31, 2016, the Bank had pledged securities with carrying values (and fair values) of $565,892,000 and $613,351,000, 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 statements of condition.

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.

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Note 16— Transactions with Shareholders

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.

Note 17 — Transactions with Other FHLBanks

Occasionally, the Bank loans (or borrows) short-term federal funds to (or from) other FHLBanks. During the nine months ended September 30, 2017 and 2016, interest income from loans to other FHLBanks totaled $13,425 and $1,138, respectively. The following table summarizes the Bank’s loans to other FHLBanks during the nine months ended September 30, 2017 and 2016 (in thousands).



	Nine Months Ended September 30,
	2017			2016
Balance at January 1,	$	290,000		$	—
Loans made to:
FHLBank of Topeka	—			112,000
FHLBank of Boston	225,000			—
Collections from:
FHLBank of San Francisco	(290,000		)	—
FHLBank of Topeka	—			(112,000		)
FHLBank of Boston	(225,000		)	—
Balance at September 30,	$	—		$	—

During the nine months ended September 30, 2017 and 2016, interest expense on borrowings from other FHLBanks totaled $15,669 and $1,910, respectively. The following table summarizes the Bank’s borrowings from other FHLBanks during the nine months ended September 30, 2017 and 2016 (in thousands).



	Nine Months Ended September 30,
	2017			2016
Balance at January 1,	$	—		$	—
Borrowings from:
FHLBank of Indianapolis	20,000			—
FHLBank of Topeka	10,000			125,000
FHLBank of Atlanta	250,000			—
Repayments to:
FHLBank of Indianapolis	(20,000		)	—
FHLBank of Topeka	(10,000		)	(125,000		)
Balance at September 30,	$	250,000		$	—

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Note 18 — Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in the components of AOCI for the three and nine months ended September 30, 2017 and 2016 (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
Three Months Ended September 30, 2017
Balance at July 1, 2017	$	130,990		$	16,065		$	(15,227	)	$	1,358		$	133,186
Reclassifications from AOCI to net income
Losses on cash flow hedges included in interest expense	—			491			—			—			491
Amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense	—			—			—			(4		)	(4		)
Other amounts of other comprehensive income (loss)
Net unrealized gains on available-for-sale securities	27,278			—			—			—			27,278
Unrealized losses on cash flow hedges	—			(917		)	—			—			(917		)
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities	—			—			822			—			822
Total other comprehensive income (loss)	27,278			(426		)	822			(4		)	27,670
Balance at September 30, 2017	$	158,268		$	15,639		$	(14,405	)	$	1,354		$	160,856

Three Months Ended September 30, 2016
Balance at July 1, 2016	$	(91,957	)	$	(14,394	)	$	(19,245	)	$	1,439		$	(124,157	)
Reclassifications from AOCI to net income
Realized gains on sales of available-for-sale securities included in net income	(889		)	—			—			—			(889		)
Losses on cash flow hedges included in interest expense	—			990			—			—			990
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities recognized as credit losses in net income	—			—			8			—			8
Amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense	—			—			—			(20		)	(20		)
Other amounts of other comprehensive income (loss)
Net unrealized gains on available-for-sale securities	97,845			—			—			—			97,845
Unrealized gains on cash flow hedges	—			2,147			—			—			2,147
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities	—			—			1,076			—			1,076
Total other comprehensive income (loss)	96,956			3,137			1,084			(20		)	101,157
Balance at September 30, 2016	$	4,999		$	(11,257	)	$	(18,161	)	$	1,419		$	(23,000	)

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	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
Nine Months Ended September 30, 2017
Balance at January 1, 2017	$	58,587		$	20,380		$	(17,157	)	$	1,400		$	63,210
Reclassifications from AOCI to net income
Realized gains on sales of available-for-sale securities included in net income	(1,837		)	—			—			—			(1,837		)
Losses on cash flow hedges included in interest expense	—			1,927			—			—			1,927
Amortization of prior service costs and net actuarial gains recognized in compensation and benefits expense	—			—			—			(46		)	(46		)
Other amounts of other comprehensive income (loss)
Net unrealized gains on available-for-sale securities	101,518			—			—			—			101,518
Unrealized losses on cash flow hedges	—			(6,668		)	—			—			(6,668		)
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities	—			—			2,752			—			2,752
Total other comprehensive income (loss)	99,681			(4,741		)	2,752			(46		)	97,646
Balance at September 30, 2017	$	158,268		$	15,639		$	(14,405	)	$	1,354		$	160,856

Nine Months Ended September 30, 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	—			2,570			—			—			2,570
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	—			—			—			(59		)	(59		)
Other amounts of other comprehensive income (loss)
Net unrealized gains on available-for-sale securities	92,381			—			—			—			92,381
Unrealized losses on cash flow hedges	—			(12,980		)	—			—			(12,980		)
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	—			—			3,505			—			3,505
Total other comprehensive income (loss)	87,277			(10,410		)	3,215			(59		)	80,023
Balance at September 30, 2016	$	4,999		$	(11,257	)	$	(18,161	)	$	1,419		$	(23,000	)

_____________________________

⁽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.

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ITEM 2. 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 financial statements and notes thereto included in “Item 1. Financial Statements.”

Forward-Looking Information

This quarterly report contains forward-looking statements that reflect current beliefs and expectations of the Federal Home Loan Bank of Dallas (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 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 these 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 government-sponsored enterprise (“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” in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on March 24, 2017 (the “2016 10-K”). 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

Business

The Bank 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 "FHLBank Act"). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages, community lending and targeted community development. As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. 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 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 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, credit unions, and Community Development Financial Institutions that are certified under the Community Development Banking and Financial Institutions Act of 1994. 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, substantially all 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 or government-insured and conventional mortgage loans which were acquired through the Mortgage Partnership Finance^® (“MPF”^®) Program administered by the FHLBank of Chicago. Approximately $523 million of the $559 million (unpaid principal balance) of mortgage loans on the Bank's balance sheet at September 30, 2017 were conventional loans acquired in 2016 and the first nine months of 2017. The remaining $36 million of the mortgage loan portfolio is comprised of government-guaranteed or government-insured loans ($20 million) and conventional loans ($16 million) 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

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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 capital stock is not publicly traded and can be held only 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. All members must hold stock in the Bank. The Bank’s capital stock has a par value of $100 per share and is 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, that 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 FHLBanks’ debt instruments (known as consolidated obligations) are their primary source of funds and are the joint and several obligations of all 11 FHLBanks. Consolidated obligations are issued through the Office of Finance (acting as agent for the FHLBanks) and generally are publicly traded in the over-the-counter market. The Bank records on its statements of condition only those consolidated obligations for which it receives the proceeds. Consolidated obligations are not obligations of the U.S. government and the U.S. government does not guarantee them. 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”). 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 commitments to pay principal and interest 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 capital stock issued to members are also sources of funds for the Bank.

In addition to 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 September 30, 2017, 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+.

Shareholders, bondholders and prospective shareholders and bondholders should understand that these credit ratings are not a recommendation to buy, hold or sell securities and they may be subject to revision or withdrawal at any time by the NRSRO. The ratings from each of the NRSROs should be evaluated independently.

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.”

The Bank’s profitability objective is to generate sufficient earnings to allow the Bank to continue to increase its retained earnings and pay dividends on capital stock at rates that meet the Bank's dividend targets. The Bank's 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. 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 preceding quarter plus 0.5 - 1.0 percent. While the Bank has had a long-standing practice of paying quarterly dividends, future dividend payments cannot be assured.

The Bank operates in only one reportable segment. All of the Bank’s revenues are derived from U.S. operations.

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The following table summarizes the Bank’s membership, by type of institution, as of September 30, 2017 and December 31, 2016.



MEMBERSHIP SUMMARY
	September 30, 2017	December 31, 2016
Commercial banks	609	621
Savings institutions	59	60
Credit unions	114	108
Insurance companies	35	37
Community Development Financial Institutions	6	5
Total members	823	831
Housing associates	8	8
Non-member borrowers	8	8
Total	839	847
Community Financial Institutions (“CFIs”) ⁽¹⁾	601	619

_____________________________


⁽¹⁾	The figures shown reflect the number of institutions that were Community Financial Institutions as of September 30, 2017 and December 31, 2016 based upon the definitions of Community Financial Institutions that applied as of those dates.

For 2017, Community Financial Institutions (“CFIs”) are defined to include all institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) with average total assets as of December 31, 2016, 2015 and 2014 of less than $1.148 billion. For 2016, CFIs were defined as FDIC-insured institutions with average total assets as of December 31, 2015, 2014 and 2013 of less than $1.128 billion.

Financial Market Conditions

Economic growth in the United States expanded during the third quarter of 2017. The gross domestic product increased at an annual rate of 3.0 percent during the third quarter of 2017, after increasing at an annual rate of 3.1 percent during the second quarter of 2017, 1.2 percent during the first quarter of 2017 and an annual rate of 1.5 percent during 2016. The nationwide unemployment rate was 4.2 percent at September 30, 2017, down slightly from 4.4 percent at June 30, 2017, 4.5 percent at March 31, 2017 and 4.7 percent at December 31, 2016. Housing prices continued to increase in most major metropolitan areas.

At a meeting that was held on January 31, 2017 and February 1, 2017, the Federal Open Market Committee ("FOMC") maintained its target for the federal funds rate at a range between 0.50 percent and 0.75 percent. Then at a meeting held on March 14/15, 2017, the FOMC raised its target for the federal funds rate to a range between 0.75 percent and 1.00 percent. At its June 13/14, 2017 meeting, the FOMC further raised its target range for the federal funds rate to 1.00 percent to 1.25 percent. At its July 25/26, 2017, September 19/20, 2017 and October 31/November 1, 2017 meetings, the FOMC left unchanged the target range for the federal funds rate. At the meeting held on October 31/November 1, 2017, 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 FOMC further stated that the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. In addition, through September 2017, the FOMC maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. In October 2017, the FOMC began implementing a balance sheet normalization program, which gradually reduces the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities. The FOMC's next regular meeting is scheduled to occur on December 12/13, 2017.

One-month and three-month LIBOR increased during the first nine months of 2017, with one-month and three-month LIBOR ending the third quarter at 1.23 percent and 1.33 percent, respectively, as compared to 0.77 percent and 1.00 percent, respectively, at the end of 2016.

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The following table presents information on various market interest rates at September 30, 2017 and December 31, 2016 and various average market interest rates for the three and nine-month periods ended September 30, 2017 and 2016.



	Ending Rate		Average Rate		Average Rate
	September 30, 2017	December 31, 2016	Third Quarter 2017	Third Quarter 2016	Nine Months Ended September 30, 2017	Nine Months Ended September 30, 2016
Federal Funds Target ⁽¹⁾	1.25%	0.75%	1.25%	0.50%	1.03%	0.50%
Average Effective Federal Funds Rate ⁽²⁾	1.06%	0.55%	1.14%	0.40%	0.93%	0.38%
1-month LIBOR ⁽¹⁾	1.23%	0.77%	1.23%	0.51%	1.04%	0.46%
3-month LIBOR ⁽¹⁾	1.33%	1.00%	1.31%	0.79%	1.20%	0.69%
2-year LIBOR ⁽¹⁾	1.74%	1.45%	1.60%	0.96%	1.57%	0.92%
5-year LIBOR ⁽¹⁾	2.00%	1.98%	1.88%	1.14%	1.93%	1.21%
10-year LIBOR ⁽¹⁾	2.29%	2.34%	2.20%	1.43%	2.26%	1.60%
3-month U.S. Treasury ⁽¹⁾	1.06%	0.51%	1.05%	0.30%	0.86%	0.28%
2-year U.S. Treasury ⁽¹⁾	1.47%	1.20%	1.36%	0.73%	1.30%	0.78%
5-year U.S. Treasury ⁽¹⁾	1.92%	1.93%	1.81%	1.13%	1.86%	1.24%
10-year U.S. Treasury ⁽¹⁾	2.33%	2.45%	2.24%	1.56%	2.32%	1.74%

_____________________________


⁽¹⁾	Source: Bloomberg (reflects upper end of target range)


⁽²⁾	Source: Federal Reserve Statistical Release

Year-to-Date 2017 Summary

•

The Bank ended the third quarter of 2017 with total assets of $66.4 billion compared with $58.2 billion at the end of 2016. The $8.2 billion increase in total assets during the nine-month period was attributable primarily to increases in the Bank's advances ($3.8 billion), short-term liquidity portfolio ($2.5 billion), long-term investments ($1.3 billion) and mortgage loans held for portfolio ($0.5 billion).


•	Total advances increased from $32.5 billion at December 31, 2016 to $36.3 billion at September 30, 2017.


•	During the first, second and third quarters of 2017, the Bank acquired $55.9 million, $198.5 million and $199.6 million (unpaid principal balances), respectively, of conventional mortgage loans through the MPF Program.

•

The Bank’s net income for the three and nine months ended September 30, 2017 was $40.0 million and $118.9 million, respectively, as compared to $21.1 million and $50.6 million during the corresponding periods in 2016. The increase of $18.9 million for the three months ended September 30, 2017 compared to the corresponding period in 2016 was due primarily to a $17.8 million increase in net interest income, a $2.0 million increase in gains on sales of held-to-maturity securities and a $1.2 million favorable change in the aggregate net gains and losses associated with the Bank's derivatives and hedging activities and its trading securities portfolio (most of which are expected to be transitory in nature), offset by a $2.1 million increase in Affordable Housing Program expenses. The increase of $68.3 million for the nine months ended September 30, 2017 compared to the corresponding period in 2016 was due primarily to a $58.5 million increase in net interest income and a $19.7 million favorable change in the aggregate net gains and losses associated with the Bank's derivatives and hedging activities and its trading securities portfolio (most of which are expected to be transitory in nature), offset by a $3.8 million increase in other expenses and a $7.6 million increase in Affordable Housing Program expenses. For additional discussion, see the section entitled "Results of Operations" beginning on page 63 of this report.


•	At all times during the first nine months of 2017, the Bank was in compliance with all of its regulatory capital requirements. In addition, the Bank’s retained earnings increased to $920.9 million at September 30, 2017 from $824.0 million at December 31, 2016. Retained earnings was 1.39 percent and 1.42 percent of total assets at September 30, 2017 and December 31, 2016, respectively.

•

During the first nine months of 2017, the Bank paid dividends totaling $22.0 million. The Bank’s first quarter 2017 dividends on Class B-1 Stock and Class B-2 Stock were paid 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 Bank’s second quarter 2017 dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 0.83 percent (a rate equal to average one-month LIBOR for the first quarter of 2017) and 1.83 percent (a rate equal to average one-month LIBOR for the first quarter

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of 2017 plus 1.0 percent), respectively. The Bank’s third quarter 2017 dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 1.06 percent (a rate equal to average one-month LIBOR for the second quarter of 2017) and 2.06 percent (a rate equal to average one-month LIBOR for the second quarter of 2017 plus 1.0 percent), respectively.

Selected Financial Data

SELECTED FINANCIAL DATA

(dollars in thousands)



	2017									2016
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter
Balance sheet (at quarter end)
Advances	$	36,287,884		$	34,132,238		$	31,058,811		$	32,506,175		$	31,821,835
Investments ⁽¹⁾	29,255,476			28,122,619			26,040,636			25,419,421			26,200,193
Mortgage loans	576,947			379,026			178,248			124,102			70,129
Allowance for credit losses on mortgage loans	141			141			141			141			141
Total assets	66,449,883			62,862,497			57,525,685			58,212,077			58,357,619
Consolidated obligations — discount notes	31,438,766			28,014,878			22,783,297			26,941,782			31,099,645
Consolidated obligations — bonds	30,060,229			30,020,333			30,127,957			26,997,487			23,122,425
Total consolidated obligations⁽²⁾	61,498,995			58,035,211			52,911,254			53,939,269			54,222,070
Mandatorily redeemable capital stock⁽³⁾	7,032			23,146			2,865			3,417			2,341
Capital stock — putable	2,206,815			2,114,575			1,952,078			1,930,148			1,880,042
Unrestricted retained earnings	818,251			794,884			767,134			745,104			727,513
Restricted retained earnings	102,663			94,660			85,908			78,880			73,110
Total retained earnings	920,914			889,544			853,042			823,984			800,623
Accumulated other comprehensive income (loss)	160,856			133,186			136,180			63,210			(23,000		)
Total capital	3,288,585			3,137,305			2,941,300			2,817,342			2,657,665
Dividends paid⁽³⁾	8,643			7,261			6,080			5,488			4,665
Income statement (for the quarter)
Net interest income	$	62,492		$	61,514		$	52,746		$	46,815		$	44,668
Other income	5,463			7,890			8,557			7,122			2,405
Other expense	23,491			20,774			22,260			21,882			23,600
AHP assessment	4,451			4,867			3,905			3,206			2,348
Net income	40,013			43,763			35,138			28,849			21,125
Performance ratios
Net interest margin⁽⁴⁾	0.39		%	0.42		%	0.38		%	0.32		%	0.31		%
Net interest spread ⁽⁵⁾	0.32			0.37			0.34			0.29			0.28
Return on average assets	0.25			0.30			0.25			0.20			0.15
Return on average equity	4.83			5.74			4.83			4.12			3.23
Return on average capital stock ⁽⁶⁾	7.12			8.55			7.05			5.90			4.49
Total average equity to average assets	5.12			5.23			5.21			4.80			4.61
Regulatory capital ratio⁽⁷⁾	4.72			4.82			4.88			4.74			4.60
Dividend payout ratio ⁽³⁾⁽⁸⁾	21.60			16.59			17.30			19.02			22.08

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_____________________________


⁽¹⁾	Investments consist of interest-bearing deposits, federal funds sold, securities purchased under agreements to resell, loans to other FHLBanks 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 September 30, 2017, June 30, 2017, March 31, 2017, December 31, 2016 and September 30, 2016, the outstanding consolidated obligations (at par value) of all of the FHLBanks totaled approximately $1.028 trillion, $1.012 trillion, $959 billion, $989 billion and $968 billion, respectively. As of those dates, the Bank’s outstanding consolidated obligations (at par value) were $62 billion, $58 billion, $53 billion, $54 billion and $54 billion, respectively.

⁽³⁾

Mandatorily redeemable capital stock represents capital stock that is classified as a liability under accounting principles generally accepted in the United States of America. Dividends on mandatorily redeemable capital stock are recorded as interest expense and excluded from dividends paid. Dividends paid on mandatorily redeemable capital stock totaled $47 thousand, $8 thousand, $6 thousand, $4 thousand and $9 thousand for the quarters ended September 30, 2017, June 30, 2017, March 31, 2017, December 31, 2016 and September 30, 2016, respectively.


⁽⁴⁾	Net interest margin is net interest income as a percentage of average earning assets.


⁽⁵⁾	Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.


⁽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 quarter-end.


⁽⁸⁾	Dividend payout ratio is computed by dividing dividends paid by net income for each quarter.

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Impact of Hurricanes Harvey and Irma

During the third quarter of 2017, two significant hurricanes struck the continental United States. On August 25, 2017, Hurricane Harvey made landfall near Rockport, Texas, causing substantial flooding and other damage in southeast Texas, including the Houston metropolitan area, and lesser damage in Louisiana. Then, on September 10, 2017, Hurricane Irma made landfall near Marco Island, Florida, causing significant damage in Florida and lesser damage in other southeastern states.

These storms had varying degrees of impact on the Bank’s members, its members’ borrowers and the properties pledged as collateral for those borrowings, and MPF mortgage loan borrowers and the properties pledged as collateral for those mortgage loans. The Bank has analyzed the potential impact that damage related to Hurricanes Harvey and Irma might have on its advances, letters of credit, mortgage loans held for portfolio, and non-agency residential mortgage-backed securities ("MBS") investments. Letters of credit are included in the Bank’s analysis as if they were advances because a letter of credit would be converted into an advance if a member defaults on its obligation to the beneficiary. At issuance, letters of credit are required to be collateralized as if they were advances. Based on the information that is currently available, the Bank does not currently expect that the potential losses, if any, resulting from these hurricanes will have a material effect on its financial condition or results of operations. However, as more information becomes available over time, its assessment of the impact of these hurricanes may change.

At September 30, 2017, approximately 113 of the Bank’s member institutions had their main offices located in the areas that had been designated as disaster areas by the Federal Emergency Management Agency (“FEMA”) as a result of Hurricane Harvey. Member institutions with main offices located in the areas affected by Hurricane Harvey reported little or no physical damage to their properties and no major service disruptions.

However, member institutions throughout the district could be adversely affected over time and to varying degrees by Hurricanes Harvey and Irma, including, potentially, the inability of their borrowers to repay loans made by the institutions and damage to the borrowers’ properties that serve as collateral for the loans made by the institutions. The primary source of repayment of advances (including those that may be created when letters of credit have been funded) is derived from the borrowing members’ ongoing operations. For a variety of reasons, it is still too early to assess the impact that insurance settlements and federal and/or other assistance for members’ consumer and commercial borrowers will have on the borrowers’ ability to repair or rebuild their homes and businesses and repay outstanding loans to member institutions, or what assistance might be available to those institutions from their primary regulators or through Congressional action.

If a member institution fails or is otherwise unable to meet its obligations, a secondary source of repayment is the collateral pledged by the member. At September 30, 2017, approximately 333 of the Bank’s member institutions had outstanding obligations that were secured in part by collateral that was located in areas that had been designated as disaster areas by FEMA as a result of Hurricanes Harvey and Irma. Of these institutions, the Bank has identified 20 members with a high concentration of loans secured by properties located in the FEMA-designated disaster areas relative to their total pledged collateral. For a variety of reasons, including forbearances provided to borrowers for loan payments, the uncertainty of the amount of damage sustained by the underlying properties, the amount of insurance settlements that may be made on those properties, and the ultimate marketability of those properties, it is not possible at this time to determine the impact that the hurricanes may have had on the value of the loan collateral supporting the Bank’s advances and letters of credit. If the value of pledged loan collateral declines such that a member’s obligations to the Bank are not fully secured, that member would have to either substitute collateral or reduce its outstanding obligations to the Bank. As more information becomes available to the Bank over time, its assessment of the impact of the hurricanes on individual institutions’ operations may change.

At September 30, 2017, the Bank also held interests totaling $57.7 million (unpaid principal balance or “UPB”) in conventional mortgage loans acquired through the MPF Program and held for portfolio that were collateralized by properties located in the areas that had been designated as disaster areas by FEMA, making them eligible for individual assistance from the federal government ($14.5 million UPB was collateralized by properties located in Hurricane Harvey disaster areas and $43.2 million UPB was collateralized by properties located in Hurricane Irma disaster areas). As of September 30, 2017, the aggregate UPB represented 10.0 percent of the Bank’s mortgage loans held for portfolio, 0.1 percent of the Bank’s total assets and 6.3 percent of the Bank’s retained earnings. Under the terms of the MPF Program, all mortgagors are required to carry hazard insurance and, if the property is located in a federal government-designated flood zone, they must also carry flood insurance. Federal assistance may also be available to mortgagors affected by the storms. In addition, mortgage loans with a loan-to-value ratio

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greater than 80 percent are required to have private mortgage insurance (“PMI”). Members selling mortgage loans to the Bank under the MPF Program are also required to retain a portion of the credit risk associated with those loans (“MPF credit enhancements”). The Bank is still assessing the damage to the underlying properties and the potential for recovery under insurance policies and MPF credit enhancements. While it is not currently possible to quantify the ultimate impact of the hurricanes on its mortgage loan portfolio, the Bank believes the protections that are in place including, but not limited to, borrowers’ equity, PMI, hazard insurance and, if applicable, flood insurance, along with MPF credit enhancements, will limit any potential losses to an amount that will not have a material effect on the Bank’s financial condition or results of operations.

Additionally, in response to the hurricanes, the Bank’s mortgage loan servicers were authorized to grant forbearance or temporarily suspend mortgage payments for up to 90 days for borrowers whose income is affected by the disaster or for borrowers whose property is located in a FEMA-designated disaster area. Mortgage loan servicers were also directed, under certain circumstances, to suspend collections and foreclosure proceedings in these areas for 90 days.

The Bank also owns several non-agency residential MBS that are collateralized in part by loans on properties that are located in Florida and, to a lesser extent, Texas (the states most affected by Hurricanes Irma and Harvey, respectively). Credit support for the senior tranches of these securities held by the Bank is provided by subordinated tranches that absorb losses before the senior tranches held by the Bank would be affected. The amount of loans in Florida and Texas generally represent a small portion of the underlying loan pools and, therefore, the Bank does not currently anticipate any material losses in its non-agency residential MBS portfolio related to Hurricanes Irma or Harvey.

Based on currently available information, the Bank did not record any reserves related to Hurricanes Harvey or Irma as of September 30, 2017. The Bank is continuing to evaluate the impact of the hurricanes on its advances (including those that may be created if a letter of credit is required to be funded), mortgage loans held for portfolio and non-agency residential MBS investments. If information becomes available indicating that any of these assets has been impaired and the amount of the loss can be reasonably estimated, the Bank will record appropriate reserves at that time.

Impact of California Wildfires

In October 2017, several significant wildfires destroyed thousands of homes and businesses in Northern California. The Bank’s primary exposure to the destruction caused by these wildfires relates to its mortgage loans held for portfolio. As of September 30, 2017, the Bank held interests totaling $12.4 million UPB in conventional mortgage loans acquired through the MPF Program that were collateralized by properties located in the areas that had been designated as disaster areas by FEMA, making them eligible for individual assistance from the federal government. As of September 30, 2017, this balance represented 2.1 percent of the Bank’s mortgage loans held for portfolio, less than 0.1 percent of the Bank’s total assets and 1.3 percent of the Bank’s retained earnings. As noted in the discussion regarding Hurricanes Harvey and Irma, all mortgagors are required under the terms of the MPF Program to carry hazard insurance. For this reason and the other reasons set forth in that discussion, the Bank does not currently anticipate any material losses as a result of the California wildfires.

Regulatory and Market Developments

FHLBank Capital Requirements

On July 3, 2017, the Finance Agency published a proposed rule to adopt, with amendments, the regulations of the Federal Housing Finance Board (predecessor to the Finance Agency) pertaining to the capital requirements for the FHLBanks. The proposed rule would carry over most of the existing regulations without material change but would substantively revise the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The revisions would remove the requirements that the FHLBanks calculate credit risk capital charges and unsecured credit limits based on ratings issued by an NRSRO, and instead require that the FHLBanks establish and use their own internal rating methodology. With respect to derivatives, the proposed rule would impose a new capital charge for cleared derivatives, which under the existing regulation do not carry a capital charge, to align with the clearing mandate prescribed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The proposed rule would also revise the percentages used in the regulation’s tables to calculate credit risk capital charges for advances, collateralized mortgage obligations and non-mortgage assets (including, as defined, commercial mortgage-backed securities), off-balance sheet items and uncleared derivative contracts. The Finance Agency proposes to retain, for now, the percentages used in the tables to calculate capital charges for residential mortgages and residential mortgage securities, and to address the methodology for residential mortgage assets at a later date. Under the proposed rule, the percentages for non-rated assets would also remain unchanged. While a March 2009 regulatory directive pertaining to certain liquidity standards will continue to remain in place, the Finance Agency

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also proposes to rescind certain minimum regulatory liquidity requirements for the FHLBanks and to address these liquidity requirements in a separate rulemaking.

As proposed, the rule would reduce the amount of unsecured credit that the Bank could extend to GSEs that are not operating with capital support or some other form of direct financial assistance from the U.S. government, which could adversely impact the Bank's operating results. Comments on the proposed rule were due by September 1, 2017.

FHLBank Membership for Non-Federally-Insured Credit Unions

On June 5, 2017, the Finance Agency issued a final rule governing FHLBank membership that implements statutory amendments to the FHLBank Act that authorize FHLBanks to accept applications for membership from state-chartered credit unions without federal share insurance, provided that certain prerequisites have been met. The rule, which became effective on July 5, 2017, generally treats these credit unions the same as other depository institutions with an additional requirement that the credit unions obtain: (1) an affirmative statement from their state regulator that they meet the requirements for federal insurance as of the date of their application for FHLBank membership; (2) a written statement from their state regulator that the regulator cannot or will not make any determination regarding eligibility for federal insurance; or (3) if the state regulator fails or refuses to respond to the credit union’s request within six months, confirmation of the failure to receive a response.

The Bank does not anticipate that this rule will have a significant impact on its membership.

LIBOR Developments

In July 2017, the United Kingdom’s Financial Conduct Authority (“FCA”) announced that it intends to stop persuading or compelling banks to voluntarily submit LIBOR rates after 2021, and that the FCA will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate (or rates). Other financial services regulators and industry groups, including the International Swaps and Derivatives Association, are evaluating the possible phase-out of LIBOR and the development of alternative interest rate indices or reference rates. As noted throughout this report, many of the Bank's assets and liabilities are indexed to LIBOR. In 2014, the Federal Reserve Board convened the Alternative Reference Rates Committee (“ARRC”) to identify alternative reference rates for possible use as market benchmarks. In June 2017, the ARRC selected the Secured Overnight Financing Rate ("SOFR"), a broad measure of overnight Treasury financing transactions, as a replacement for U.S. dollar LIBOR. In August 2017, the Federal Reserve Board requested public comment on a proposal to begin publishing the SOFR and two other alternative rates beginning in 2018. The Bank is unable to predict at this time whether LIBOR will cease to be available after 2021, whether the alternative rates that the Federal Reserve Board proposes to publish will become market benchmarks in place of LIBOR, or what impact a transition from LIBOR to an alternative reference rate (or rates) could have on the Bank's business, financial condition or results of operations.

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Financial Condition

The following table provides selected period-end balances as of September 30, 2017 and December 31, 2016, as well as selected average balances for the nine-month period ended September 30, 2017 and the year ended December 31, 2016. As shown in the table, the Bank’s total assets increased by 14.2 percent between December 31, 2016 and September 30, 2017, due primarily to increases in the Bank's advances ($3.8 billion), short-term liquidity portfolio ($2.5 billion), long-term investments ($1.3 billion) and mortgage loans held for portfolio ($0.5 billion). As the Bank’s assets increased, the funding for those assets also increased. During the nine months ended September 30, 2017, total consolidated obligations increased by $7.6 billion as consolidated obligation discount notes increased by $4.5 billion and consolidated obligation bonds increased by $3.1 billion.

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)



	September 30, 2017
			Increase (Decrease)					Balance at
	Balance		Amount			Percentage		December 31, 2016
Advances	$	36,288	$	3,782		11.6	%	$	32,506
Short-term liquidity holdings
Securities purchased under agreements to resell	2,300		(800		)	(25.8	)%	3,100
Federal funds sold	9,830		3,588			57.5	%	6,242
Loan to other FHLBank	—		(290		)	(100.0	)%	290
Long-term investments
Trading securities	103		2			2.0	%	101
Available-for-sale securities	14,978		1,802			13.7	%	13,176
Held-to-maturity securities	2,032		(468		)	(18.7	)%	2,500
Mortgage loans held for portfolio, net	577		453			365.3	%	124
Total assets	66,450		8,238			14.2	%	58,212
Consolidated obligations — bonds	30,060		3,063			11.3	%	26,997
Consolidated obligations — discount notes	31,439		4,497			16.7	%	26,942
Total consolidated obligations	61,499		7,560			14.0	%	53,939
Mandatorily redeemable capital stock	7		4			133.3	%	3
Capital stock	2,207		277			14.4	%	1,930
Retained earnings	921		97			11.8	%	824
Average total assets	59,783		6,883			13.0	%	52,900
Average capital stock	2,102		312			17.4	%	1,790
Average mandatorily redeemable capital stock	10		5			100.0	%	5

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Advances

The Bank's advances balances (at par value) increased by $3.8 billion (11.7 percent) during the first nine months of 2017. The increase in the Bank's advances was due largely to an increase in advances to the Bank's largest borrowers. The following table presents advances outstanding, by type of institution, as of September 30, 2017 and December 31, 2016.

ADVANCES OUTSTANDING BY BORROWER TYPE

(par value, dollars in millions)



	September 30, 2017				December 31, 2016
	Amount		Percent		Amount		Percent
Commercial banks	$	27,383	75	%	$	23,416	72	%
Credit unions	3,431		10		2,851		9
Insurance companies	3,127		9		2,817		9
Savings institutions	2,176		6		3,318		10
Community Development Financial Institutions	14		—		14		—
Total member advances	36,131		100		32,416		100
Housing associates	118		—		46		—
Non-member borrowers	20		—		10		—
Total par value of advances	$	36,269	100	%	$	32,472	100	%
Total par value of advances outstanding to CFIs ⁽¹⁾	$	7,555	21	%	$	6,758	21	%

_____________________________


⁽¹⁾	The figures shown reflect the advances outstanding to CFIs as of September 30, 2017 and December 31, 2016 based upon the definitions of CFIs that applied as of those dates.

At September 30, 2017, advances outstanding to the Bank’s five largest borrowers totaled $10.3 billion, representing 28.5% percent of the Bank’s total outstanding advances as of that date. In comparison, advances outstanding to the Bank’s five largest borrowers as of December 31, 2016 totaled $8.6 billion, representing 26.4 percent of the total outstanding advances at that date. The following table presents the Bank’s five largest borrowers as of September 30, 2017.

FIVE LARGEST BORROWERS AS OF SEPTEMBER 30, 2017

(par value, dollars in millions)



Name	Par Value of Advances		Percent of Total Par Value of Advances
Comerica Bank	$	3,300	9.1	%
Texas Capital Bank, N.A.	2,500		6.9
Iberiabank	1,945		5.4
Life Insurance Company of the Southwest	1,332		3.7
Trustmark National Bank	1,250		3.4
	$	10,327	28.5	%

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The following table presents information regarding the composition of the Bank’s advances by product type as of September 30, 2017 and December 31, 2016.

ADVANCES OUTSTANDING BY PRODUCT TYPE

(par value, dollars in millions)



	September 30, 2017				December 31, 2016
	Balance		Percentage of Total		Balance		Percentage of Total
Fixed-rate	$	22,644	62.4	%	$	18,185	56.0	%
Adjustable/variable-rate indexed	12,211		33.7		12,839		39.5
Amortizing	1,414		3.9		1,448		4.5
Total par value	$	36,269	100.0	%	$	32,472	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 the 2016 10-K. 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.

In addition, as described in the 2016 10-K, 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 September 30, 2017, the Bank’s short-term liquidity holdings were comprised of $9.8 billion of overnight federal funds sold and $2.3 billion of overnight reverse repurchase agreements. 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. All of the Bank's federal funds sold during the nine months ended September 30, 2017 were transacted with domestic bank counterparties and U.S. branches of foreign financial institutions on an overnight basis. As of September 30, 2017, the Bank’s overnight federal funds sold consisted of $2.4 billion sold to counterparties rated double-A, $6.5 billion sold to counterparties rated single-A and $0.9 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”).

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 alternatives relative to the Bank’s discount note funding costs, the level of liquidity needed to satisfy Finance Agency requirements and 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 - Core Mission Achievement in the 2016 10-K. For the nine months ended September 30, 2017, the Bank's core mission asset ("CMA") ratio was 63.14 percent. In comparison, the Bank's CMA ratio was 60.74 percent for the year ended December 31, 2016.

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Long-Term Investments

The composition of the Bank's long-term investment portfolio at September 30, 2017 and December 31, 2016 is set forth in the table below.

COMPOSITION OF LONG-TERM INVESTMENT PORTFOLIO

(in millions)



	Balance Sheet Classification						Total Long-Term
	Held-to-Maturity		Available-for-Sale		Trading		Investments		Held-to-Maturity
September 30, 2017	(at carrying value)		(at fair value)		(at fair value)		(at carrying value)		(at fair value)
Debentures
U.S. government-guaranteed obligations	$	12	$	485	$	103	$	600	$	12
GSE obligations	—		6,629		—		6,629		—
State housing agency obligations	160		—		—		160		160
Other	—		183		—		183		—
Total debentures	172		7,297		103		7,572		172

Mortgage-backed securities ("MBS") portfolio
U.S. government-guaranteed residential MBS	2		—		—		2		2
GSE residential MBS	1,739		—		—		1,739		1,749
GSE commercial MBS	35		7,681		—		7,716		35
Non-agency residential MBS	84		—		—		84		99
Total MBS	1,860		7,681		—		9,541		1,885
Total long-term investments	$	2,032	$	14,978	$	103	$	17,113	$	2,057

	Balance Sheet Classification						Total Long-Term
	Held-to-Maturity		Available-for-Sale		Trading		Investments		Held-to-Maturity
December 31, 2016	(at carrying value)		(at fair value)		(at fair value)		(at carrying value)		(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

Mortgage-backed securities 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

As of September 30, 2017, 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. The Bank's holdings of other debentures, which were comprised of securities issued by the Private Export Funding Corporation ("PEFCO"), are currently rated triple-A by Moody's and Fitch. The PEFCO debentures are not currently rated by S&P. The credit ratings associated with the Bank's holdings of non-agency residential MBS ("RMBS") are presented in the table on page 54.

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During the nine months ended September 30, 2017, the Bank acquired (based on trade date) $1.8 billion of GSE commercial MBS ("CMBS") and $583 million of GSE debentures, all of which were classified as available-for-sale. All of the Bank's CMBS holdings are backed by multi-family loans. During this same period, the Bank purchased a $125 million state housing agency obligation, which was classified as held-to-maturity. During the nine months ended September 30, 2017, the proceeds from maturities and paydowns of held-to-maturity securities and available-for-sale securities totaled approximately $438 million and $413 million, respectively.

During the nine months ended September 30, 2017, the Bank sold $260 million (par value) of GSE debentures classified as available-for-sale. The gains recognized on these sales totaled $1.8 million. The GSE debentures that were sold were replaced with longer-dated, higher-yielding GSE debentures. During this same nine-month period, the Bank also sold $163 million (par value) of GSE RMBS classified as held-to-maturity securities. The gains recognized on these sales totaled $4.0 million. The proceeds from these sales were reinvested in higher yielding GSE CMBS.

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). However, the Bank is not required to sell any mortgage securities that it purchased at a time when it was in compliance with this ratio. At September 30, 2017, the Bank held $9.5 billion (amortized cost) of MBS, which represented 303 percent of its total regulatory capital as of 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.

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 (including but not limited to the non-MBS debt obligations of other GSEs, subject to certain limits). Subject to applicable regulatory limits and the constraints imposed by the Finance Agency's 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.

Gross unrealized losses on the Bank’s MBS investments decreased from $46.8 million at December 31, 2016 to $12.2 million at September 30, 2017. As of September 30, 2017, $7.5 million of the gross unrealized losses related to the Bank’s holdings of GSE CMBS, $2.9 million related to non-agency RMBS and $1.8 million related to GSE RMBS. At September 30, 2017, gross unrealized losses associated with the Bank's non-MBS investments totaled $0.2 million.

The Bank evaluates all 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. For a summary of the Bank’s OTTI evaluation, see “Item 1. Financial Statements” (specifically, Notes 4 and 5 beginning on pages 8 and 10, respectively, of this report).

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. However, based upon its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of September 30, 2017 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 September 30, 2017. 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 CREDIT RATINGS

(dollars in thousands)



Credit Rating	Number of Securities	Unpaid Principal Balance		Amortized Cost		Carrying Value		Estimated Fair Value		Unrealized Losses
Single-A	1	$	5,783	$	5,783	$	5,783	$	5,609	$	174
Triple-B	3	12,794		12,794		12,794		12,557		237
Single-B	5	16,067		15,955		14,462		15,095		860
Triple-C	13	72,387		64,226		51,314		65,923		1,648
Not Rated	1	94		94		94		88		6
Total	23	$	107,125	$	98,852	$	84,447	$	99,272	$	2,925

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At September 30, 2017, the Bank’s portfolio of non-agency RMBS was comprised of 4 securities with an aggregate unpaid principal balance of $12 million that are backed by first lien fixed-rate loans and 19 securities with an aggregate unpaid principal balance of $95 million that are backed by first lien option adjustable-rate mortgage (“option ARM”) loans. In comparison, as of December 31, 2016, the Bank’s portfolio of non-agency RMBS was comprised of 5 securities backed by fixed-rate loans that had an aggregate unpaid principal balance of $16 million and 19 securities backed by option ARM loans that had an aggregate unpaid principal balance of $108 million. One of the Bank's non-agency RMBS was paid in full during the three months ended September 30, 2017. 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 is presented in the 2016 10-K; there were no material changes to this information during the nine months ended September 30, 2017.

To assess whether the entire amortized cost bases of its non-agency RMBS are likely to be recovered, the Bank performed a cash flow analysis for each of its non-agency RMBS holdings as of September 30, 2017 under a base case (or best estimate) scenario. The procedures used in this analysis, together with the results thereof, are summarized in “Item 1. Financial Statements” (specifically, Note 5 beginning on page 10 of this report).

Since 2009, the Bank has recorded credit impairments totaling $13.1 million on 15 of its non-agency RMBS. The vast majority of these credit impairments were recorded in 2009, 2010 and 2011. Through September 30, 2017, the Bank has amortized $0.6 million of the time value associated with these credit losses. Through this same date, actual principal shortfalls on these securities have totaled $2.0 million and the Bank has recognized recoveries (i.e., increases in cash flows expected to be collected) totaling $3.5 million. Based on the cash flow analyses performed as of September 30, 2017, the Bank currently expects to recover in future periods an additional $7.6 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 September 30, 2017.

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 September 30, 2017 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 July 1, 2017 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. 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 collateralized mortgage obligations ("CMOs") with variable-rate coupons ($1.9 billion par value at September 30, 2017) 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 September 30, 2017, one-month LIBOR was 1.23 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 12.30 percent. The largest concentration of embedded effective caps ($1.5 billion) was between 6.00 percent and 6.50 percent. As of September 30, 2017, one-month LIBOR rates were 472 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 12 months to 47 months as of September 30, 2017, and strike rates of 6.50 percent. If three-month LIBOR rises above 6.5 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.

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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 September 30, 2017.

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 nine months ended September 30, 2017, the Bank’s outstanding consolidated obligation bonds (at par value) increased by $3.0 billion and its outstanding consolidated obligation discount notes increased by $4.5 billion. The following table presents the composition of the Bank’s outstanding bonds at September 30, 2017 and December 31, 2016.

COMPOSITION OF CONSOLIDATED OBLIGATION BONDS OUTSTANDING

(par value, dollars in millions)



	September 30, 2017				December 31, 2016
	Balance		Percentage of Total		Balance		Percentage of Total
Variable-rate	$	15,111	50.1	%	$	13,151	48.5	%
Fixed-rate
Non-callable	9,235		30.6		8,597		31.7
Callable	2,477		8.2		2,356		8.7
Callable step-up	3,185		10.6		2,829		10.4
Callable step-down	150		0.5		200		0.7
Total par value	$	30,158	100.0	%	$	27,133	100.0	%

During the first nine months of 2017, the Bank issued $16.8 billion of consolidated obligation bonds and approximately $99.2 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 discount notes, as well as to fund the increase in the Bank's advances and investment portfolio. At September 30, 2017 and December 31, 2016, discount notes comprised approximately 51 percent and 50 percent, respectively, of the Bank's total outstanding consolidated obligations. In comparison, discount notes comprised approximately 57 percent of the Bank's total outstanding consolidated obligations at September 30, 2016. During the nine months ended September 30, 2017, the Bank's bond issuance (based on par value) consisted of approximately $11.1 billion of variable-rate bonds, $3.6 billion of fixed-rate non-callable bonds (most of which were swapped), and $2.1 billion of swapped fixed-rate callable bonds (including step-up bonds).

The weighted average cost of swapped and variable-rate consolidated obligation bonds issued by the Bank approximated LIBOR minus 20 basis points during the three months ended September 30, 2017, compared to LIBOR minus 20 basis points during the three months ended June 30, 2017, LIBOR minus 30 basis points during the three months ended March 31, 2017 and LIBOR minus 19 basis points during the three months ended September 30, 2016. Floating rate bond spreads (relative to LIBOR) improved to their historically most favorable level in February 2017 and then began to deteriorate slightly as short-term rates increased throughout the second quarter of 2017, before leveling off in the third quarter of 2017.

The cost of the Bank's discount notes increased during the first nine months of 2017 as a result of anticipated and actual increases in the target federal funds rate.

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Demand and term deposits were $1.0 billion at both September 30, 2017 and December 31, 2016. 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

The Bank’s outstanding capital stock (excluding mandatorily redeemable capital stock) was $2.2 billion and $1.9 billion at September 30, 2017 and December 31, 2016, respectively. The Bank’s average outstanding capital stock (excluding mandatorily redeemable capital stock) increased from $1.8 billion for the year ended December 31, 2016 to $2.1 billion for the nine months ended September 30, 2017.

Mandatorily redeemable capital stock outstanding at September 30, 2017 and December 31, 2016 was $7.0 million and $3.4 million, respectively. Although mandatorily redeemable capital stock is excluded from capital (equity) for financial reporting purposes, it is considered capital for regulatory purposes.

At September 30, 2017 and December 31, 2016, the Bank’s five largest shareholders collectively held $465 million and $378 million, respectively, of capital stock, which represented 20.9 percent and 19.6 percent, respectively, of the Bank’s total outstanding capital stock (including mandatorily redeemable capital stock) as of those dates. The following table presents the Bank’s five largest shareholders as of September 30, 2017.

FIVE LARGEST SHAREHOLDERS AS OF SEPTEMBER 30, 2017

(par value, dollars in thousands)



Name	Par Value of Capital Stock		Percent of Total Par Value of Capital Stock
Comerica Bank	$	142,300	6.4	%
Iberiabank	93,672		4.2
Texas Capital Bank, N.A.	92,700		4.2
Centennial Bank	68,781		3.1
Whitney Bank	67,088		3.0
	$	464,541	20.9	%

As of September 30, 2017, all of the stock held by the five institutions shown in the table above was classified as capital in the statement of condition.

The following table presents outstanding capital stock, by type of institution, as of September 30, 2017 and December 31, 2016.

CAPITAL STOCK OUTSTANDING BY INSTITUTION TYPE

(par value, dollars in millions)



	September 30, 2017				December 31, 2016
	Par Value of Capital Stock		Percent of Total Par Value of Capital Stock		Par Value of Capital Stock		Percent of Total Par Value of Capital Stock
Commercial banks	$	1,585	72	%	$	1,378	71	%
Credit unions	315		14		224		12
Insurance companies	179		8		156		8
Savings institutions	127		6		171		9
Community Development Financial Institutions	1		—		1		—
Total capital stock classified as capital	2,207		100		1,930		100
Mandatorily redeemable capital stock	7		—		3		—
Total regulatory capital stock	$	2,214	100	%	$	1,933	100	%

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

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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 4.1 percent of outstanding advances, except for advances that were funded under the Bank's special reduced stock advances offering that ran from October 21, 2015 through December 31, 2015. The activity-based investment requirement for those advances was (and continues to be) 2.0 percent of the outstanding advances. 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.

Quarterly, the Bank generally repurchases a portion of members’ excess capital stock. Excess capital 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 the nine months ended September 30, 2017, 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 March 28, 2017, June 27, 2017 and September 26, 2017, 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). On March 28, 2017, June 27, 2017 and September 26, 2017, the Bank repurchased surplus stock totaling $148.2 million, $75.7 million and $104.3 million, none of which was classified as mandatorily redeemable capital stock at those dates.

At September 30, 2017, the Bank’s excess stock totaled $502.2 million, which represented 0.8 percent of the Bank’s total assets as of that date.

During the nine months ended September 30, 2017, the Bank’s retained earnings increased by $96.9 million, from $824.0 million to $920.9 million. During this same period, the Bank paid dividends on capital stock totaling $22.0 million, which represented a weighted average annualized dividend rate of 1.463 percent. The Bank’s first quarter dividends on Class B-1 Stock and Class B-2 Stock were paid 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 dividends, which were applied to average Class B-1 Stock and average Class B-2 Stock held during the period from October 1, 2016 through December 31, 2016, were paid on March 29, 2017. The Bank’s second quarter dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 0.83 percent (a rate equal to average one-month LIBOR for the first quarter of 2017) and 1.83 percent (a rate equal to average one-month LIBOR for the first quarter of 2017 plus 1.0 percent), respectively. The second quarter dividends, which were applied to average Class B-1 Stock and average Class B-2 Stock held during the period from January 1, 2017 through March 31, 2017, were paid on June 28, 2017. The Bank’s third quarter dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 1.06 percent (a rate equal to average one-month LIBOR for the second quarter of 2017) and 2.06 percent (a rate equal to average one-month LIBOR for the second quarter of 2017 plus 1.0 percent), respectively. The third quarter dividends, which were applied to average Class B-1 Stock and average Class B-2 Stock held during the period from April 1, 2017 through June 30, 2017, were paid on September 27, 2017.

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 during the fourth quarter of 2017 at an annualized rate equal to average one-month LIBOR for the third quarter of 2017. Further, the Bank currently expects to pay dividends on Class B-2 Stock during the fourth quarter of 2017 at an annualized rate equal to average one-month LIBOR for the third quarter of 2017 plus 1.0 percent.

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 in the 2016 10-K. 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. At September 30, 2017, the Bank’s total risk-based capital requirement was $801 million, comprised of credit risk, market risk and operations risk capital requirements of $379 million, $237 million and $185 million, respectively, and its permanent capital was $3.1 billion.

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 allowance for losses at September 30, 2017 or December 31, 2016. Under the regulatory definitions, total capital and permanent capital exclude accumulated other comprehensive income (loss). At all times during the nine months ended September 30, 2017, the Bank was in compliance with all of its regulatory capital requirements. At September 30, 2017, the Bank's total capital-to-assets and leverage capital-to-assets ratios were 4.72 percent and 7.08

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percent, respectively. For a summary of the Bank’s compliance with the Finance Agency’s capital requirements as of September 30, 2017 and December 31, 2016, see “Item 1. Financial Statements” (specifically, Note 12 on page 30 of this report).

Derivatives and Hedging Activities

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 and/or to adjust the effective maturity, repricing index and/or frequency or option characteristics of financial instruments. 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. For additional discussion, see “Item 1. Financial Statements” (specifically, Note 11 beginning on page 23 of this report).

The following table provides the notional balances of the Bank’s derivative instruments, by balance sheet category and accounting designation, as of September 30, 2017 and December 31, 2016.

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
September 30, 2017
Advances	$	4,408	$	908	$	—	$	—	$	5,316
Investments	—		14,756		—		1,203		15,959
Consolidated obligation bonds	—		13,310		—		—		13,310
Consolidated obligation discount notes	—		—		425		—		425
Intermediary positions	—		—		—		2,419		2,419
Other	—		—		—		400		400
Total notional balance	$	4,408	$	28,974	$	425	$	4,022	$	37,829
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
Intermediary positions	—		—		—		422		422
Other	—		—		—		327		327
Total notional balance	$	3,835	$	27,053	$	425	$	4,228	$	35,541

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The following table presents the earnings impact of derivatives and hedging activities during the three and nine months ended September 30, 2017 and 2016.

NET EARNINGS IMPACT OF DERIVATIVES AND HEDGING ACTIVITIES

(in millions)



	Advances			Investments			Consolidated Obligation Bonds			Consolidated Obligation Discount Notes			Intermediary Transactions			Other			Total
Three Months Ended September 30, 2017
Amortization/accretion of hedging activities in net interest income ⁽¹⁾	$	—		$	16		$	(1	)	$	—		$	—		$	—		$	15
Net interest settlements included in net interest income ⁽²⁾	(7		)	(40		)	10			(1		)	—			—			(38		)
Net gain (loss) on derivatives and hedging activities
Net losses on fair value hedges	—			—			(2		)	—			—			—			(2		)
Net gains (losses) on economic hedges	—			—			—			—			(1		)	2			1
Price alignment amount	—			—			—			—			—			1			1
Total net gains (losses) on derivatives and hedging activities	—			—			(2		)	—			(1		)	3			—
Net impact of derivatives and hedging activities	$	(7	)	$	(24	)	$	7		$	(1	)	$	(1	)	$	3		$	(23	)

Three Months Ended September 30, 2016
Amortization/accretion of hedging activities in net interest income ⁽¹⁾	$	—		$	17		$	(1	)	$	—		$	—		$	—		$	16
Net interest settlements included in net interest income ⁽²⁾	(16		)	(55		)	13			(1		)	—			—			(59		)
Net gain (loss) on derivatives and hedging activities
Net gains on fair value hedges	—			2			—			—			—			—			2
Net losses on economic hedges	—			—			—			(2		)	—			(2		)	(4		)
Net interest settlements on economic hedges	—			—			—			1			—			—			1
Total net gains (losses) on derivatives and hedging activities	—			2			—			(1		)	—			(2		)	(1		)
Net impact of derivatives and hedging activities	$	(16	)	$	(36	)	$	12		$	(2	)	$	—		$	(2	)	$	(44	)

Nine Months Ended September 30, 2017
Amortization/accretion of hedging activities in net interest income ⁽¹⁾	$	—		$	49		$	(3	)	$	—		$	—		$	—		$	46
Net interest settlements included in net interest income ⁽²⁾	(28		)	(132		)	35			(2		)	—			—			(127		)
Net gain (loss) on derivatives and hedging activities
Net losses on fair value hedges	—			(6		)	—			—			—			—			(6		)
Net gains on economic hedges	—			—			—			—			3			7			10
Net interest settlements on economic hedges	—			—			—			—			—			1			1
Price alignment amount	—			—			—			—			—			1			1
Total net gains (losses) on derivatives and hedging activities	—			(6		)	—			—			3			9			6
Net impact of derivatives and hedging activities	$	(28	)	$	(89	)	$	32		$	(2	)	$	3		$	9		$	(75	)

Nine Months Ended September 30, 2016
Amortization/accretion of hedging activities in net interest income ⁽¹⁾	$	(1	)	$	55		$	(6	)	$	—		$	—		$	—		$	48
Net interest settlements included in net interest income ⁽²⁾	(51		)	(168		)	50			(3		)	—			—			(172		)
Net gain (loss) on derivatives and hedging activities
Net losses on fair value hedges	—			(19		)	(4		)	—			—			—			(23		)
Net gains (losses) on economic hedges	—			(3		)	(2		)	—			—			5			—
Net interest settlements on economic hedges	—			—			—			1			—			1			2
Total net gains (losses) on derivatives and hedging activities	—			(22		)	(6		)	1			—			6			(21		)
Net impact of derivatives and hedging activities	(52		)	(135		)	38			(2		)	—			6			(145		)
Net gain on hedged financial instrument classified as trading	—			2			—			—			—			—			2
	$	(52	)	$	(133	)	$	38		$	(2	)	$	—		$	6		$	(143	)

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⁽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.

As a result of statutory and regulatory requirements emanating from the Dodd-Frank Act, certain derivative transactions that the Bank enters into are required to be cleared through a third-party central clearinghouse. As of September 30, 2017, the Bank had cleared trades outstanding with notional amounts totaling $25.1 billion. Cleared trades are subject to initial and variation margin requirements established by the clearinghouse and its clearing members. Collateral (or variation margin on daily settled derivative contracts) is typically delivered/paid (or returned/received) 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 thresholds 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 September 30, 2017, the notional balances of outstanding interest rate exchange agreements transacted with non-member bilateral counterparties totaled $11.5 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.

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The following table provides information regarding the Bank’s derivative counterparty credit exposure as of September 30, 2017.

DERIVATIVES COUNTERPARTY CREDIT EXPOSURE

(dollars in millions)



Credit Rating⁽¹⁾	Number of Bilateral Counterparties	Notional Principal⁽²⁾		Net Derivatives Fair Value Before Collateral and Variation Margin for Daily Settled Contracts			Cash Collateral Pledged To (From) Counterparty and Variation Margin Paid (Received) on Daily Settled Contracts		Other Collateral Pledged To Counterparty		Net Credit Exposure
Non-member counterparties
Asset positions with credit exposure
Single-A	1	$	5.0	$	—		$	—	$	—	$	—
Cleared derivatives ⁽³⁾	—	15,463.1		2.3			11.3		535.2		548.8
Liability positions with credit exposure
Single-A	1	175.4		(6.2		)	6.2		—		—
Triple-B ⁽⁴⁾	2	2,123.1		(47.0		)	48.2		—		1.2
Cleared derivatives ⁽³⁾	—	9,626.2		(75.9		)	80.2		30.7		35.0
Total derivative positions with non-member counterparties to which the Bank had credit exposure	4	27,392.8		(126.8		)	145.9		565.9		585.0
Liability positions without credit exposure⁽⁴⁾	14	9,168.5		(107.2		)	94.8		—		—
Total derivative positions with non-member counterparties to which the Bank did not have credit exposure	14	9,168.5		(107.2		)	94.8		—		—
Total non-member counterparties	18	36,561.3		(234.0		)	$	240.7	$	565.9	$	585.0

Member institutions
Interest rate exchange agreements⁽⁵⁾
Asset positions	8	1,139.4		24.0
Liability positions	3	70.0		(1.9		)
Mortgage delivery commitments	—	58.4		—
Total member institutions	11	1,267.8		22.1

Total	29	$	37,829.1	$	(211.9	)

_____________________________


⁽¹⁾	Credit ratings shown in the table reflect the lowest rating from Moody’s, S&P or Fitch and are as of September 30, 2017.


⁽²⁾	Includes amounts that had not settled as of September 30, 2017.


⁽³⁾	Each of the counterparties to the Bank's cleared derivatives transactions is rated double-A.

⁽⁴⁾

The figures for the liability positions with credit exposure for triple-B rated counterparties included transactions with a counterparty that is affiliated with a non-member shareholder of the Bank. Transactions with that counterparty had an aggregate notional principal of $1.2 billion and a net credit exposure of $1.0 million as of September 30, 2017. The figures for the liability positions without credit exposure included transactions with a counterparty that is affiliated with the same non-member shareholder of the Bank and transactions with another counterparty that is affiliated with a member institution. Transactions with those counterparties had an aggregate notional principal of $1.1 billion as of September 30, 2017.


⁽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

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consists of collateral that is eligible to secure advances and other obligations under the member’s Advances and Security Agreement with the Bank.

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 minimum initial margin requirements imposed by regulators. For additional discussion, see Item 1 - Business - Legislative and Regulatory Developments in the 2016 10-K.

Market Value of Equity

The ratio of the Bank’s estimated market value of equity to its book value of equity was approximately 102 percent and 104 percent at September 30, 2017 and December 31, 2016, respectively. For additional discussion, see “Part I / Item 3 — Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk.”

Results of Operations

Net Income

Net income for the three months ended September 30, 2017 and 2016 was $40.0 million and $21.1 million, respectively. The Bank’s net income for the three months ended September 30, 2017 represented an annualized return on average capital stock (“ROCS”) of 7.12 percent. In comparison, the Bank’s ROCS was 4.49 percent for the three months ended September 30, 2016. Net income for the nine months ended September 30, 2017 and 2016 was $118.9 million and $50.6 million, respectively. The Bank’s net income for the nine months ended September 30, 2017 represented an annualized ROCS of 7.56 percent. In comparison, the Bank’s ROCS was 3.89 percent for the nine months ended September 30, 2016. 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.

Income Before Assessments

During the three months ended September 30, 2017 and 2016, the Bank’s income before assessments was $44.5 million and $23.5 million, respectively. As discussed in more detail below, the $21.0 million increase in income before assessments from period to period was attributable to a $17.8 million increase in net interest income, a $3.1 million favorable change in other income (loss) and a $0.1 million increase in other expense. During the nine months ended September 30, 2017 and 2016, the Bank’s income before assessments was $132.1 million and $56.2 million, respectively. As discussed in more detail below, the $75.9 million increase in income before assessments from period to period was attributable to a $58.5 million increase in net interest income and an $21.2 million favorable change in other income (loss), offset by a $3.8 million increase in other expense.

The components of income before assessments (net interest income, other income/loss and other expense) are discussed in more detail in the following sections.

Net Interest Income

For the three and nine months ended September 30, 2017, the Bank’s net interest income was $62.5 million and $176.8 million, respectively, compared to net interest income of $44.7 million and $118.2 million, respectively, for the comparable periods in 2016. The increase in net interest income for the three- and nine-month periods ended September 30, 2017 as compared to the corresponding periods in 2016 was due to increases in both the average balances of the Bank's interest-earning assets and the Bank's net interest spread. The Bank's average balance of interest-earning assets increased from $57.2 billion and $52.0 billion during the three and nine months ended September 30, 2016, respectively, to $64.0 billion and $59.7 billion during the comparable periods in 2017.

For the three months ended September 30, 2017 and 2016, the Bank’s net interest margin was 39 basis points and 31 basis points, respectively. The Bank’s net interest margin was 40 basis points and 30 basis points for the nine months ended September 30, 2017 and 2016, respectively. Net interest margin, or net interest income as a percentage 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. The Bank’s net interest spread was 32 basis points and 34 basis points for the three and nine months ended September 30, 2017, respectively, compared to 28 basis points and 27 basis points for the three and nine months ended September 30, 2016, respectively. The increases in the Bank's net interest spreads were due primarily to an improvement in its funding costs and the addition of higher-yielding long-term investments.

The contribution of earnings from the Bank’s invested capital to the net interest margin (the impact of non-interest bearing funds) was 7 basis points and 6 basis points during the three and nine months ended September 30, 2017, respectively, compared to 3 basis points during both the three and nine months ended September 30, 2016.

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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 the three months ended September 30, 2017 and 2016.

YIELD AND SPREAD ANALYSIS

(dollars in millions)



	For the Three Months Ended September 30,
	2017							2016
	Average Balance			Interest Income/ Expense		Average Rate⁽¹⁾		Average Balance			Interest Income/ Expense		Average Rate⁽¹⁾
Assets
Interest-bearing deposits ⁽²⁾	$	257		$	1	1.08	%	$	1,019		$	1	0.40	%
Securities purchased under agreements to resell	653			2		1.19	%	2,409			3		0.43	%
Federal funds sold	8,673			26		1.18	%	5,386			6		0.41	%
Investments
Trading	115			—		2.03	%	119			—		1.95	%
Available-for-sale ⁽³⁾	14,562			64		1.76	%	13,080			36		1.11	%
Held-to-maturity ⁽³⁾	2,132			10		1.79	%	2,785			7		1.06	%
Advances ⁽⁴⁾	37,169			124		1.33	%	32,336			59		0.73	%
Mortgage loans held for portfolio	480			4		3.75	%	67			1		4.89	%
Total earning assets	64,041			231		1.44	%	57,201			113		0.79	%
Cash and due from banks	35							39
Other assets	194							152
Derivatives netting adjustment ⁽²⁾	(260		)					(1,021		)
Fair value adjustment on available-for-sale securities ⁽³⁾	134							(46		)
Adjustment for net non-credit portion of other-than-temporary impairments on held-to-maturity securities ⁽³⁾	(15		)					(19		)
Total assets	$	64,129		231		1.44	%	$	56,306		113		0.80	%
Liabilities and Capital
Interest-bearing deposits ⁽²⁾	$	951		3		1.03	%	$	794		1		0.29	%
Consolidated obligations
Bonds	29,462			88		1.20	%	21,186			36		0.68	%
Discount notes	29,895			78		1.04	%	31,447			32		0.41	%
Mandatorily redeemable capital stock and other borrowings	28			—		1.23	%	4			—		0.53	%
Total interest-bearing liabilities	60,336			169		1.12	%	53,431			69		0.51	%
Other liabilities	767							1,298
Derivatives netting adjustment ⁽²⁾	(260		)					(1,021		)
Total liabilities	60,843			169		1.11	%	53,708			69		0.51	%
Total capital	3,286							2,598
Total liabilities and capital	$	64,129				1.05	%	$	56,306				0.49	%
Net interest income				$	62						$	44
Net interest margin						0.39	%						0.31	%
Net interest spread						0.32	%						0.28	%
Impact of non-interest bearing funds						0.07	%						0.03	%

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_____________________________


⁽¹⁾	Percentages are annualized figures. 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.

⁽²⁾

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 three months ended September 30, 2017 and 2016 in the table above include $256 million and $1.0 billion, respectively, which are classified as derivative assets/liabilities on the statements of condition. In addition, the average balance of interest-bearing deposit liabilities for the three months ended September 30, 2017 and 2016 in the table above includes $3 million and $2 million, respectively, which are classified as derivative assets/liabilities on the statements of condition.


⁽³⁾	Average balances for available-for-sale and held-to-maturity securities are calculated based upon amortized cost.


⁽⁴⁾	Interest income and average rates include net prepayment fees on advances.

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YIELD AND SPREAD ANALYSIS

(dollars in millions)



	For the Nine Months Ended September 30,
	2017							2016
	Average Balance			Interest Income/ Expense		Average Rate⁽¹⁾		Average Balance			Interest Income/ Expense		Average Rate⁽¹⁾
Assets
Interest-bearing deposits ⁽²⁾	$	244		$	2	0.90	%	$	898		$	3	0.38	%
Securities purchased under agreements to resell	455			4		1.08	%	1,637			5		0.39	%
Federal funds sold	7,690			56		0.97	%	5,083			15		0.39	%
Investments
Trading	113			1		2.03	%	180			2		1.73	%
Available-for-sale ⁽³⁾	13,913			170		1.63	%	12,144			92		1.01	%
Held-to-maturity ⁽³⁾	2,318			27		1.57	%	2,971			22		1.02	%
Advances ⁽⁴⁾	34,701			296		1.14	%	29,021			156		0.72	%
Mortgage loans held for portfolio	295			8		3.82	%	58			3		5.46	%
Total earning assets	59,729			564		1.26	%	51,992			298		0.76	%
Cash and due from banks	34							45
Other assets	208							147
Derivatives netting adjustment ⁽²⁾	(281		)					(902		)
Fair value adjustment on available-for-sale securities ⁽³⁾	109							(72		)
Adjustment for net non-credit portion of other-than-temporary impairments on held-to-maturity securities ⁽³⁾	(16		)					(20		)
Total assets	$	59,783		564		1.26	%	$	51,190		298		0.77	%
Liabilities and Capital
Interest-bearing deposits ⁽²⁾	$	1,111		7		0.82	%	$	858		2		0.26	%
Consolidated obligations
Bonds	29,752			227		1.02	%	19,794			97		0.65	%
Discount notes	25,476			154		0.81	%	27,860			81		0.39	%
Mandatorily redeemable capital stock and other borrowings	27			—		0.96	%	21			—		0.14	%
Total interest-bearing liabilities	56,366			388		0.92	%	48,533			180		0.49	%
Other liabilities	599							1,135
Derivatives netting adjustment ⁽²⁾	(281		)					(902		)
Total liabilities	56,684			388		0.91	%	48,766			180		0.49	%
Total capital	3,099							2,424
Total liabilities and capital	$	59,783				0.86	%	$	51,190				0.47	%
Net interest income				$	176						$	118
Net interest margin						0.40	%						0.30	%
Net interest spread						0.34	%						0.27	%
Impact of non-interest bearing funds						0.06	%						0.03	%

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_____________________________


⁽¹⁾	Percentages are annualized figures. 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.

⁽²⁾

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 nine months ended September 30, 2017 and 2016 in the table above include $243 million and $898 million, respectively, which are classified as derivative assets/liabilities on the statements of condition. In addition, the average balance of interest-bearing deposit liabilities for the nine months ended September 30, 2017 and 2016 in the table above includes $37 million and $4 million, respectively, which are classified as derivative assets/liabilities on the statements of condition.


⁽³⁾	Average balances for available-for-sale and held-to-maturity securities are calculated based upon amortized cost.


⁽⁴⁾	Interest income and average rates include net prepayment fees on advances.

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 the three and nine-month periods ended September 30, 2017 and 2016. 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)



	For the Three Months Ended								For the Nine Months Ended
	September 30, 2017 vs. 2016								September 30, 2017 vs. 2016
	Volume			Rate		Total			Volume			Rate			Total
Interest income
Interest-bearing deposits	$	(1	)	$	1	$	—		$	(3	)	$	2		$	(1	)
Securities purchased under agreements to resell	(3		)	2		(1		)	(5		)	4			(1		)
Federal funds sold	5			15		20			9			32			41
Investments
Trading	—			—		—			(1		)	—			(1		)
Available-for-sale	5			23		28			15			63			78
Held-to-maturity	(1		)	4		3			(6		)	11			5
Advances	10			55		65			35			105			140
Mortgage loans held for portfolio	3			—		3			6			(1		)	5
Total interest income	18			100		118			50			216			266
Interest expense
Interest-bearing deposits	—			2		2			1			4			5
Consolidated obligations
Bonds	18			34		52			62			68			130
Discount notes	(2		)	48		46			(7		)	80			73
Mandatorily redeemable capital stock and other borrowings	—			—		—			—			—			—
Total interest expense	16			84		100			56			152			208
Changes in net interest income	$	2		$	16	$	18		$	(6	)	$	64		$	58

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Other Income (Loss)

The following table presents the various components of other income (loss) for the three and nine months ended September 30, 2017 and 2016.

OTHER INCOME (LOSS)

(in thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net interest income (expense) associated with:
Member/offsetting swaps	$	118		$	42		$	288		$	152
Economic hedge derivatives related to advances	1			14			2			(27		)
Economic hedge derivatives related to trading securities	—			—			—			(296		)
Economic hedge derivatives related to available-for-sale securities	(4		)	(4		)	(11		)	(14		)
Economic hedge derivatives related to consolidated obligation discount notes	—			167			(503		)	627
Interest rate basis swaps	—			—			385			—
Other stand-alone economic hedge derivatives	245			617			1,120			1,375
Total net interest income associated with economic hedge derivatives	360			836			1,281			1,817
Gains (losses) related to economic hedge derivatives
Interest rate swaps
Advances	(1		)	30			(3		)	27
Available-for-sale securities	2			27			(18		)	(177		)
Trading securities	—			—			—			(2,067		)
Mortgage loans held for portfolio	178			—			178			—
Consolidated obligation bonds	29			—			29			(1,905		)
Consolidated obligation discount notes	—			(857		)	310			437
Interest rate basis swaps	—			—			186			—
Other stand-alone economic hedge derivatives	439			(1,946		)	3,987			4,620
Mortgage delivery commitments	794			13			2,257			95
Interest rate caps related to held-to-maturity securities	(13		)	(2		)	(247		)	(528		)
Member/offsetting swaps and caps	(102		)	26			3,493			274
Total fair value gains (losses) related to economic hedge derivatives	1,326			(2,709		)	10,172			776
Price alignment amount on daily settled derivative contracts	220			—			521			—
Gains (losses) related to fair value hedge ineffectiveness
Advances and associated hedges	67			106			239			(227		)
Available-for-sale securities and associated hedges	(199		)	2,201			(6,488		)	(19,150		)
Consolidated obligation bonds and associated hedges	(1,429		)	(237		)	249			(3,779		)
Total fair value hedge ineffectiveness	(1,561		)	2,070			(6,000		)	(23,156		)
Total net gains (losses) on derivatives and hedging activities	345			197			5,974			(20,563		)
Net gains (losses) on trading securities	296			(797		)	2,344			9,133
Credit component of other-than-temporary impairment losses on held-to-maturity securities	—			(8		)	—			(20		)
Gains on sales of held-to-maturity securities	2,093			65			3,983			794
Gains on sales of available-for-sale securities	—			889			1,837			5,104
Service fees	592			619			1,745			1,640
Letter of credit fees	2,061			1,430			5,454			4,275
Other, net	76			10			573			339
Total other	5,118			2,208			15,936			21,265
Total other income	$	5,463		$	2,405		$	21,910		$	702

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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, currently, 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 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 $(1.6) million and $2.1 million for the three months ended September 30, 2017 and 2016, respectively, and $(6.0) million and $(23.2) million for the nine months ended September 30, 2017 and 2016, respectively. A significant portion of the decrease in fair value hedge ineffectiveness related to the Bank's available-for-sale securities portfolio and was due primarily to lower variability in long-term interest rates during the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. To the extent that the Bank's fair value 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). For the three months ended September 30, 2017 and 2016, the change in the fair value of derivatives associated with specific advances, available-for-sale securities and consolidated obligation bonds that were not in qualifying hedging relationships was $30,000 and $57,000, respectively. The change in the fair value of derivatives associated with specific advances, available-for-sale securities and consolidated obligation bonds that were not in qualifying hedging relationships was $8,000 and $(2,055,000) for the nine months ended September 30, 2017 and 2016, respectively.

The addition of higher yielding, longer duration fixed-rate GSE CMBS and GSE debentures to the Bank’s available-for-sale securities portfolio since 2014 (all of which have been hedged with fixed-for-floating interest rate swaps in long-haul hedging relationships) has generally increased its exposure to periodic earnings variability in the form of fair value hedge ineffectiveness. 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 has entered into several derivative transactions since late February 2016 in an effort to mitigate a portion of the periodic earnings variability that can result from those fair value hedging relationships. For the three months ended September 30, 2017 and 2016, the gains (losses) associated with stand-alone economic hedge derivatives used for this purpose were $0.4 million and $(1.9) million, respectively. The gains (losses) associated with stand-alone economic hedge derivatives used for this purpose were $4.0 million and $4.6 million for the nine months ended September 30, 2017 and 2016, respectively.

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 nine months ended September 30, 2017, the Bank was a party to one interest rate basis swap with a notional amount of $1.0 billion. This swap agreement expired in May 2017. The Bank was not a party to any interest rate basis swaps during the nine months ended September 30, 2016.

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, as of September 30, 2017, 3 interest rate cap agreements having a total notional amount of $1.2 billion. The premiums paid for these caps totaled $4.3 million. The fair values of interest rate cap agreements are dependent upon the level of interest rates, volatilities and remaining term to maturity.

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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 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 September 30, 2017, the carrying values of the Bank’s stand-alone interest rate cap agreements totaled $12,000.

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 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 be an additional source of volatility in the Bank’s earnings as they were during the nine months ended September 30, 2017 and 2016. At September 30, 2017, the Bank did not have outstanding any discount note swaps that were used for this purpose.

As discussed previously in the section entitled “Financial Condition — Derivatives and Hedging Activities," 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. The net change in the fair values of derivatives transacted with members and the offsetting derivatives was $(102,000) and $26,000 for the three months ended September 30, 2017 and 2016, respectively, and $3.5 million and $0.3 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in the amount of this change for both the three-month and nine-month periods was due primarily to a net increase in the notional amount of intermediary swaps during the nine months ended September 30, 2017 as compared to the corresponding period in 2016.

Price Alignment Amount

Effective January 3, 2017, one of the Bank's clearinghouse counterparties made certain amendments to its rulebook that changed the legal characterization of variation margin payments on cleared derivative transactions. Prior to January 3, 2017, these payments were considered collateral pledged to secure outstanding credit exposure on the derivative contracts. Beginning January 3, 2017, these payments are considered settlements on the derivative contracts. The Bank receives or pays a price alignment amount on the cumulative variation margin payments associated with these contracts. The price alignment amount approximates the amount of interest the Bank would have received or paid had the variation margin payments continued to be characterized as collateral.

Other

During the nine months ended September 30, 2017 and 2016, the Bank sold approximately $163 million (par value) and $130 million (par value), respectively, of GSE RMBS classified as held-to-maturity securities. The aggregate gains recognized on these sales totaled $4.0 million and $0.8 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 nine-month periods, the Bank sold approximately $260 million (par value) and $2.3 billion (par value), respectively, of shorter maturity GSE debentures classified as available-for-sale. The aggregate gains recognized on these sales totaled $1.8 million and $4.6 million, respectively. In addition, the Bank sold $0.3 billion (par value) of U.S. Treasury Notes classified as available-for-sale during the nine months ended September 30, 2016 at a realized gain of $0.5 million. There were no other sales of long-term investment securities during the nine months ended September 30, 2017 or 2016.

During 2015, the Bank acquired two 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, the $100.0 million (par value) U.S. Treasury Note produced a gain of $2.3 million in 2016 prior to its sale in June of that year. Prior to its sale, this security was economically hedged with a fixed-for-floating interest rate swap. In 2016, this swap, which was terminated concurrent with the sale of the U.S. Treasury Note, produced unrealized losses of $2.1 million. Due to fluctuations in long-term interest rates, the unrealized gains on the $104.8 million (par value) U.S. Treasury Note were $1.3 million and $6.2 million for the nine months ended September 30, 2017 and 2016, respectively.

Other Expense

Total other expense, which includes the Bank’s compensation and benefits, other operating expenses, discretionary grants and donations, derivative clearing fees and its proportionate share of the costs of operating the Finance Agency and the Office of Finance, totaled $23.5 million and $66.5 million for the three and nine months ended September 30, 2017, respectively, compared to $23.6 million and $62.7 million, respectively, for the corresponding periods in 2016.

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Compensation and benefits were $12.6 million and $38.7 million for the three and nine months ended September 30, 2017, respectively, compared to $14.5 million and $38.1 million for the corresponding periods in 2016. The decrease in compensation and benefits for the three months ended September 30, 2017, as compared to the corresponding period in 2016, was due largely to a decrease in the costs associated with the Bank's Long-Term Incentive Plans, which was attributable in large part to the retroactive inclusion (in August 2016) of additional executives in the Bank's 2014 and 2015 Long-Term Incentive Plans and a contemporaneous increase in the anticipated goal achievement for the 2015 Long-Term Incentive Plan. For the nine months ended September 30, 2017, as compared to the corresponding period in 2016, lower Long-Term Incentive Plan costs were more than offset by: (1) increased costs associated with the Bank's participation in the Pentegra Defined Benefit Plan for Financial Institutions; (2) increased employee medical costs; (3) increased employee separation costs; and (4) merit and cost-of-living adjustments. The Bank's average headcount was 209 employees and 213 employees for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017, the Bank employed 206 people, a decrease of 12 employees from December 31, 2016.

Other operating expenses for the three and nine months ended September 30, 2017 were $6.6 million and $18.4 million, respectively, compared to $6.8 million and $18.0 million for the corresponding periods in 2016. The fluctuations in other operating expenses for the three and nine months ended September 30, 2017, as compared to the corresponding periods in 2016, resulted from offsetting increases and decreases in many of the Bank's other operating expenses, none of which were individually significant.

Derivative clearing fees were $0.3 million and $0.9 million for the three and nine months ended September 30, 2017, compared to $0.3 million and $0.8 million for the corresponding periods in 2016. The small increase in derivative clearing fees for the nine-month period was attributable to the slightly higher volume of cleared trades in 2017 as compared to 2016.

Discretionary grants and donations were $2.1 million and $3.3 million for the three and nine months ended September 30, 2017, compared to $0.6 million and $1.5 million for the corresponding periods in 2016. The increase in discretionary grants and donations was due largely to $1.8 million of grants and donations that were made in September 2017 to support recovery efforts in the areas impacted by Hurricane Harvey. In early September 2017, the Bank announced that it would make $6.7 million in funds available for special disaster relief grants for members’ employees and small businesses affected by the hurricane, as well as community-based organizations that were involved in recovery efforts. At the same time, the Bank also announced that it would provide $0.8 million in donations to a number of organizations to assist with disaster relief efforts. In September 2017, the Bank made donations totaling approximately $0.6 million and approximately $1.2 million of the grant funds were disbursed. The Bank currently expects that most if not all of the remaining funds totaling approximately $5.7 million will likely be disbursed during the fourth quarter of 2017.

The Bank, together with the other FHLBanks, is assessed for the costs of operating the Finance Agency and the Office of Finance. The Bank’s share of these expenses totaled $1.9 million and $5.2 million for the three and nine months ended September 30, 2017, respectively, compared to $1.5 million and $4.3 million for the corresponding periods in 2016.

AHP Assessments

While the Bank is exempt from all federal, state and local income taxes, it is obligated to set aside amounts for its Affordable Housing Program (“AHP”).

As required by statute, each year the Bank contributes 10 percent of its earnings (as adjusted for interest expense on mandatorily redeemable capital stock) to 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. The Bank’s AHP assessments totaled $4.5 million and $2.3 million for the three months ended September 30, 2017 and 2016, respectively, and $13.2 million and $5.6 million for the nine months ended September 30, 2017 and 2016, respectively.

Critical Accounting Policies and Estimates

A discussion of the Bank’s critical accounting policies and the extent to which management uses judgment and estimates in applying those policies is provided in the 2016 10-K. There were no substantial changes to the Bank’s critical accounting policies, or the extent to which management uses judgment and estimates in applying those policies, during the nine months ended September 30, 2017.

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, U.S. Treasury Bills and GSE discount notes. Beyond those amounts that

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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 September 30, 2017, the Bank’s short-term liquidity portfolio was comprised of $9.8 billion of overnight federal funds sold and $2.3 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 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 nine months ended September 30, 2017 or 2016.

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 September 30, 2017, the Bank’s estimated operational liquidity requirement was $6.4 billion. At that date, the Bank estimated that its operational liquidity exceeded this requirement by approximately $21.5 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 during a stress period of elevated advances demand. 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 September 30, 2017, the Bank’s estimated contingent liquidity requirement was $9.1 billion. At that date, the Bank estimated that its contingent liquidity exceeded this requirement by approximately $19.0 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

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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 nine months ended September 30, 2017.

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.

A summary of 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 is provided in the 2016 10-K. There have been no material changes in the Bank’s contractual obligations outside the normal course of business during the nine months ended September 30, 2017.

Recently Issued Accounting Guidance

For a discussion of recently issued accounting guidance, see “Item 1. Financial Statements” (specifically, Note 2 beginning on page 7 of this report).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following quantitative and qualitative disclosures about market risk should be read in conjunction with the quantitative and qualitative disclosures about market risk that are included in the 2016 10-K. The information provided in this item is intended to update the disclosures made in the 2016 10-K.

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 and caps, to manage the risk arising from these sources.

The Bank has investments in residential mortgage-related assets, primarily CMOs and, to a 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 a combination of callable and non-callable debt with varying maturities, and/or by using interest rate derivative instruments to offset prepayment risk specific both to particular securities and to the overall mortgage portfolio.

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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.

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 nine months ended September 30, 2017.

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 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.

As more fully described in Note 14 to the Bank's financial statements beginning on page 31 of this report, the Bank refined its method for estimating the fair values of callable consolidated obligation bonds in April 2017. At the time the Bank implemented this refinement, it resulted in an increase in the estimated fair value of the Bank's callable consolidated obligation bonds and a small decrease in the Bank's estimated market value of equity.

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.

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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 2016 through September 2017. 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 2016	$	2.932	$	2.930	(0.07	)%	$	2.986	1.84	%	$	2.944	0.41	%	$	2.934	0.07	%

January 2017	3.053		3.052		(0.03	)%	3.123		2.29	%	3.064		0.36	%	3.064		0.36	%
February 2017	3.089		3.109		0.65	%	3.141		1.68	%	3.111		0.71	%	3.085		(0.13	)%
March 2017	3.053		3.046		(0.23	)%	3.112		1.93	%	3.060		0.23	%	3.043		(0.33	)%

April 2017	3.094		3.048		(1.49	)%	3.204		3.56	%	3.075		(0.61	)%	3.113		0.61	%
May 2017	3.171		3.117		(1.70	)%	3.280		3.44	%	3.149		(0.69	)%	3.183		0.38	%
June 2017	3.239		3.180		(1.82	)%	3.334		2.93	%	3.214		(0.77	)%	3.249		0.31	%

July 2017	3.350		3.298		(1.55	)%	3.453		3.07	%	3.328		(0.66	)%	3.357		0.21	%
August 2017	3.411		3.380		(0.91	)%	3.532		3.55	%	3.400		(0.32	)%	3.410		(0.03	)%
September 2017	3.373		3.328		(1.33	)%	3.458		2.52	%	3.355		(0.53	)%	3.375		0.06	%

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⁽¹⁾	In the up 100 and up 200 scenarios, the estimated market value of equity is calculated under assumed instantaneous +100 and +200 basis point parallel shifts in interest rates.


⁽²⁾	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.

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.

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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).

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 2016 through September 2017.

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 2016	0.26	(0.32)	(0.06)	(0.90)	0.03	0.88	(0.72)	0.86

January 2017	0.27	(0.32)	(0.05)	(0.78)	0.02	0.76	(0.56)	1.18
February 2017	0.24	(0.32)	(0.08)	(1.14)	(0.32)	0.39	(1.08)	0.81
March 2017	0.26	(0.31)	(0.05)	(0.59)	0.13	0.79	(0.42)	1.25

April 2017	0.26	(0.25)	0.01	0.44	0.77	1.00	0.52	1.84
May 2017	0.26	(0.25)	0.01	0.50	0.88	1.08	0.62	2.10
June 2017	0.26	(0.25)	0.01	0.54	0.94	1.13	0.49	1.82

July 2017	0.25	(0.25)	—	0.44	0.81	0.98	0.48	1.72
August 2017	0.24	(0.25)	(0.01)	0.08	0.48	0.63	0.28	1.55
September 2017	0.26	(0.26)	—	0.32	0.68	0.89	0.18	1.27

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⁽¹⁾	In the up 100 and up 200 scenarios, the duration of equity is calculated under assumed instantaneous +100 and +200 basis point parallel shifts in interest rates.


⁽²⁾	The duration of equity was calculated under assumed instantaneous -100 and -200 basis point parallel shifts in interest rates.

As described above, the Bank refined its method for estimating the fair values of callable consolidated obligation bonds in April 2017. At the time the Bank implemented this refinement, it resulted in an increase of approximately 1.3 years in the Bank's duration of equity.

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

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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 nine months ended September 30, 2017.

ITEM 4. 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.

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 September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS



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.

101		The following materials from the Bank’s quarterly report on Form 10-Q for the quarterly period ended September 30, 2017, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Statements of Condition as of September 30, 2017 and December 31, 2016; (ii) Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016; (iii) Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016; (iv) Statements of Capital for the Nine Months Ended September 30, 2017 and 2016; (v) Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016; and (vi) Notes to the Financial Statements for the quarter ended September 30, 2017.

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SIGNATURES

Pursuant to the requirements 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.



November 13, 2017	By	/s/ Tom Lewis
Date		Tom Lewis
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX



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.

101		The following materials from the Bank’s quarterly report on Form 10-Q for the quarterly period ended September 30, 2017, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Statements of Condition as of September 30, 2017 and December 31, 2016; (ii) Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016; (iii) Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016; (iv) Statements of Capital for the Nine Months Ended September 30, 2017 and 2016; (v) Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016; and (vi) Notes to the Financial Statements for the quarter ended September 30, 2017.

Federal Home Loan Bank of Dallas - FORM 10-Q - November 13, 2017

Attached files

Federal Home Loan Bank of Dallas Reports