UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended December 31, 2018

or

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

For the transition period from __________ to __________.

Commission File No. 000-51399

FEDERAL HOME LOAN BANK OF CINCINNATI

(Exact name of registrant as specified in its charter)

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

Registrant's telephone number, including area code

(513) 852-7500

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

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

Class B Stock, par value $100 per share

(Title of class)

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

o Yes   x No

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

o Yes   x No

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x	Smaller reporting company o
	Emerging growth company 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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

The capital stock of the registrant is not listed on any securities exchange or quoted on any automated quotation system, only may be owned by members and former members and is transferable only at its par value of $100 per share. At June 30, 2018, the aggregate par value of all Class B stock held by members and former members was $4,562,356,400. As of February 28, 2019, the registrant had 42,485,437 shares of capital stock outstanding, which included stock classified as mandatorily redeemable.

Documents Incorporated by Reference: None

Page 1 of 165

Table of Contents

	PART I
Item 1.	Business	4
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	22
Item 2.	Properties	22
Item 3.	Legal Proceedings	22
Item 4.	Mine Safety Disclosures	22
	PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	24
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	75
Item 8.	Financial Statements and Supplementary Data
	Financial Statements for the Years Ended 2018, 2017, and 2016	76
	Notes to Financial Statements	84
	Supplemental Financial Data	134
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	135
Item 9A.	Controls and Procedures	135
Item 9B.	Other Information	135
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	137
Item 11.	Executive Compensation	142
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	158
Item 13.	Certain Relationships and Related Transactions, and Director Independence	159
Item 14.	Principal Accountant Fees and Services	160
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	161
Item 16.	Form 10-K Summary	161
Signatures		162

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PART I

Special Cautionary Notice Regarding Forward Looking Information

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

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

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

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

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

▪ changes in investor demand for Consolidated Obligations;

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

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

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

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

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

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

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Item 1. Business.

COMPANY INFORMATION

Company Background

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

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

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

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

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

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

At December 31, 2018, we had 646 members, 225 full-time employees, and four part-time employees. Our employees are not represented by a collective bargaining unit. We consider our relationship with our employees to be good.

Our internet address is www.fhlbcin.com. Information on our website is not incorporated by reference into this report.

Mission and Corporate Objectives

Our mission is to provide member-stockholders with financial services and a competitive return on their capital investment to help them facilitate and expand housing finance and community investment and achieve their objectives for liquidity and asset liability management.

How We Achieve the Mission

We achieve our mission through a cooperative business model. We raise private-sector capital from member stockholders and issue low-cost high-quality debt in the global capital markets jointly with other FHLBanks. The capital and proceeds from debt issuance enable us to provide members services—primarily, access to liquidity via reliable, readily available, and low-cost sources of funding to support their business activities including affordable housing and community investment. Another

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important member service is that we offer a program to purchase certain mortgage loans, which provides members liquidity and helps them reduce market risk. Additionally, we provide a competitive return on members' capital investment in our company.

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

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

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

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

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

Corporate Objectives

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

▪ Mission Asset Activity:Implement strategies and tactics and effectively manage operations to promote members’ usage of Mission Assets and stand ready at all times to provide liquidity to members.

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

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

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

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

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

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Business Activities

Mission Asset Activity

The following are our principal business activities with members:

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

▪ We issue collateralized Letters of Credit.

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

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

Affordable Housing and Community Investment

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

Investments

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

Sources of Earnings

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

Major items of expense are:

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

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

▪ non-interest expenses.

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

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

Capital

Due to our cooperative structure, we obtain capital from members. Each member must own capital stock as a condition of membership and normally must acquire additional stock above the membership stock amount in order to gain access to Mission Assets. Acquiring capital in connection with growth in Mission Assets ensures that these assets are self-capitalizing. We issue, redeem, and repurchase capital stock only at its stated par value of $100 per share. By law, our stock is not publicly traded.

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We also maintain an amount of capital to ensure we meet all of our regulatory and business requirements relating to capital adequacy and protection of creditors against losses. We hold retained earnings to protect members' stock investment against impairment risk and to help stabilize dividend payments when earnings may be volatile.

Tax Status

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

Ratings of Nationally Recognized Statistical Rating Organizations

The FHLBank System's comparative advantage in funding is acknowledged in its excellent credit ratings from nationally recognized statistical rating organizations (NRSROs). Moody's Investors Service (Moody's) currently assigns, and historically has assigned, the System's Consolidated Obligations the highest ratings available: long-term debt is rated Aaa and short-term debt is rated P-1. It also assigns a Prime-1 short-term bond rating on each FHLBank. It affirmed these ratings in 2018 and maintained a stable outlook. In 2018, Standard & Poor's affirmed its issuer credit ratings on each FHLBank and its AA+ ratings on the System's senior debt and also maintained a stable outlook. The ratings closely follow the U.S. sovereign ratings from both agencies.

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

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

Regulatory Oversight

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

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

BUSINESS SEGMENTS

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

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Traditional Member Finance

Credit Services

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

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

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

Adjustable-rate Advances have interest rates typically priced off benchmark rate indices such as LIBOR or SOFR. Adjustable-rate Advances may be structured at the member's option as either prepayable with a fee or prepayable without a fee if the prepayment is made on a repricing date.

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

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

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

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

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

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

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

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

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determined it necessary to establish a loan loss reserve for Advances. "Quantitative and Qualitative Disclosures About Risk Management” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 8 and 10 of the Notes to Financial Statements have more detail on our credit risk management of member borrowings.

Housing and Community Investment

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

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

Our Board of Directors also may allocate funds to voluntary housing programs. In 2018, the Board re-authorized an additional $1.5 million to the Carol M. Peterson Housing Fund for use during the year. In January 2019, the Board authorized an increase in this fund to $2.1 million for use in 2019. These funds are primarily used as grants to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners. In 2012, the Board of Directors also established the Disaster Reconstruction Program, a voluntary housing program that provides grants for purchase or rehabilitation of a home within the Fifth District for residents that have suffered loss or damage to their primary residence as a result of a state or federally declared disaster. In December 2018, the Board approved an additional $3.6 million to continue the Disaster Reconstruction Program. When combined with the existing $1.4 million available under the original authorization, the total disaster funds available were $5.0 million at December 31, 2018.

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

Investments

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

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

▪ MBS and collateralized mortgage obligations (together, referred to as MBS) issued by GSEs or private issuers;

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

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

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

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

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

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

▪ Earnings enhancement. The investments portfolio, especially MBS, assists with earning a competitive return on capital, and increasing funding for Housing and Community Investment programs. In addition, liquidity investments help stabilize earnings because they typically earn a relatively stable spread to the cost of debt issued to fund them.

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

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

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

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

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

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

Deposits

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

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

Description of the MPP

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

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

A “conventional” mortgage refers to a non-government-guaranteed mortgage. A “conforming” mortgage refers to the maximum amount permissible to be lent as a regular prime (i.e., non-jumbo, non-subprime) mortgage. For 2019, the Finance Agency established the conforming limit at $484,350 with loans originated in a limited number of high-cost cities and counties receiving higher conforming limits. We do not purchase mortgages subject to these higher amounts.

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

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

How We Manage Risks of the MPP

Market Risk. We mitigate the MPP's market risk similarly to how we mitigate market risk from MBS.

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

We manage credit risk exposure for conventional loans primarily through underwriting and pool composition requirements and by applying layered credit enhancements. These enhancements, which apply after a homeowner's equity is exhausted, include available primary mortgage insurance, the Lender Risk Account (discussed below), and Supplemental Mortgage Insurance. Supplemental Mortgage Insurance is applicable to loans acquired before February 2011 and was purchased by the PFI from one of our approved third-party providers naming us as the beneficiary. These credit enhancements are designed to protect us against credit losses in scenarios of severe downward movements in housing prices and unfavorable changes in other factors that can affect loan delinquencies and defaults.

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

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

"Quantitative and Qualitative Disclosures About Risk Management” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations provides more detail on how we manage market and credit risks for the MPP.

Earnings from the MPP

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

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

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

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

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

FUNDING - CONSOLIDATED OBLIGATIONS

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

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

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

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

▪ to acquire liquidity investments.

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

We use fixed-rate Bonds to fund longer-term fixed-rate Advances and longer-term fixed-rate mortgage assets, and use adjustable-rate Bonds to fund adjustable-rate Advances and certain longer-term fixed rate investments that have been swapped to an adjustable-rate.

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

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

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

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

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

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

LIQUIDITY

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

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

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

CAPITAL RESOURCES

Capital Requirements

Statutory and Regulatory Requirements

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

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

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

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

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

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

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

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

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

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

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

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

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

Capital Plan

Our Capital Plan ties the amount of each member's required capital stock to the amount of the member's assets and the amount and type of its Mission Asset Activity with us. The Capital Plan has the following basic characteristics:

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

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

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

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

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

At December 31, 2018, the amount of membership stock required for each member ranged from a minimum of $1,000 to a maximum of $25 million, with the amount within that range determined as a percentage of member assets. Beginning in April 2019, the maximum amount of membership stock required for each member was increased to $30 million. Separate from its

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

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

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

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

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

Retained Earnings

Purposes and Amount of Retained Earnings

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

We have a policy that sets forth a range for the amount of retained earnings we believe is needed to mitigate impairment risk and facilitate dividend stability in light of the risks we face. At December 31, 2018, the minimum retained earnings requirement ranges from $400 million to $600 million, based on mitigating quantifiable risks under very stressed business and market scenarios to a 99 percent confidence level. At the end of 2018, our retained earnings totaled $1,023 million. We believe the current amount of retained earnings is fully sufficient to protect our capital stock against impairment risk and to provide for dividend stability.

Joint Capital Agreement to Augment Retained Earnings

The FHLBanks entered into a Joint Capital Enhancement Agreement (the “Capital Agreement”) in February 2011. The Capital Agreement provides that each FHLBank will allocate quarterly at least 20 percent of its net income to a restricted retained earnings account (the “Account”). The Account is not available to be distributed as dividends except under certain limited circumstances. The Capital Agreement does not limit our ability to use retained earnings held outside of the Account to pay dividends. Although we have always maintained compliance with our capital requirements, we believe the Capital Agreement enhances risk mitigation by building a larger capital buffer over time to absorb unexpected losses, if any, that we may experience.

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USE OF DERIVATIVES

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

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

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

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

The derivatives we transact related to investments hedge market risk exposure by effectively converting the fixed-rate investment to an adjustable-rate investment. The derivatives we transact related to mortgage assets primarily hedge interest rate risk and prepayment risk. Such derivatives include options on interest rates swaps (swaptions) and sales of to-be-announced MBS for forward settlement.

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

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

COMPETITION

Advances

Members' demand for our Advances is affected by, among other things, the cost of other sources of funding available, including our members' customer deposits. We compete with other suppliers of wholesale funding, both secured and unsecured, including the federal government, commercial banks, investment banking divisions of commercial banks, brokered deposits and other FHLBanks when our members' affiliated institutions are members of other FHLBanks. In addition, competition is often more significant when originating Advances to larger members, which have greater access to the national and global capital markets.

Our ability to compete successfully with other suppliers of wholesale funding, including other FHLBanks, depends primarily on the total cost of our products to members, which include the rates we charge, earnings and dividend performance, collateral policies, capital stock requirements, product features and members' perceptions of our relative safety and soundness. In addition, our competitive environment continues to be impacted by the Federal Reserve's low interest-rate environment. See Item 1A. Risk Factors below for further discussion.

Mortgage Purchase Program

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

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Debt Issuance

The FHLBank System primarily competes with the U.S. government and other GSEs for funds raised through the issuance of unsecured debt in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs.

Item 1A.Risk Factors.

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

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

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

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

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

▪ interest rates;

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

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

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

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

The economy has grown at a measured pace in recent years, a major reason for tempered overall demand for Mission Asset Activity. In addition, overall Advance demand has been and continues to be unfavorably affected by the substantial amount of deposit-based liquidity provided to financial institutions through the monetary actions of the Federal Reserve. See the "Competition" risk factor for further discussion.

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

Our primary business is providing liquidity to our members by making Advances to, and purchasing mortgage loans from, our members. Members have access to alternative funding sources, including their customers' deposits and wholesale funding, which may offer more favorable terms than we offer, such as more flexible credit or collateral standards. Some of our competitors are not subject to the same body of regulations applicable to us, which enables those competitors to offer products and terms that we are not able to offer. In addition, state and federal regulators’ perception of the stability and reliability of our Advances can also directly impact the amount of Advances used by members.

In connection with purchasing mortgage loans from our members, we face competition in the areas of customer service, purchase prices for the MPP loans and ancillary services such as automated underwriting and loan servicing options. Our primary competitors are Fannie Mae, Freddie Mac, government agencies such as Ginnie Mae, and other secondary mortgage market conduits. In addition, our members face increased origination competition from originators that are not members of an FHLBank, which could reduce the amount of mortgage loans that members can make available to us to purchase.

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Increased competition could decrease the amount of Advances and mortgage loans and narrow profitability on those products, both of which could cause stockholders to request withdrawals of capital.

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

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

The amount of Mission Asset Activity and capital is concentrated among a small number of our large members. Additionally, the financial industry continues to consolidate and in recent years there has been a systemic trend of financial institutions that are currently ineligible for FHLB membership gaining an increasing market share, especially related to mortgage finance. However, the legislative and regulatory environment faced by the FHLBanks has not changed in response to this trend. Our members could decrease their Mission Asset Activity and the amount of their capital stock as a result of merger and acquisition activity or continued loss of market share to ineligible entities. At December 31, 2018, one member, JPMorgan Chase Bank, N.A., held over 40 percent of our Advances and one member PFI, Union Savings Bank, accounted for over 30 percent of the outstanding MPP principal balance. Our business model is structured to be able to absorb sharp changes in Mission Asset Activity because we can undertake commensurate reductions in liability balances and capital and because of our relatively modest operating expenses. However, an extremely large and sustained reduction in Mission Asset Activity could affect our profitability and ability to pay competitive dividends, as well as, at the FHLBank System level, raise policy questions about the relevance of the FHLBank System in its traditional mission of supporting housing finance.

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

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

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

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

In addition to potential GSE reform, the legislative and regulatory environment in which the System operates continues to undergo change. Recently-promulgated and future legislative and regulatory actions could significantly affect our business model, financial condition, or results of operations. Furthermore, the overall increase in demand for short-term funding due to the effects of reform in the money markets in the last few years combined with our growing role as a market liquidity provider for large financial institutions have resulted in heightened regulatory scrutiny.

We believe that, taken as a whole, legislative and regulatory actions have raised our operating costs and imparted added uncertainty regarding the business model and membership base under which the FHLBanks may operate in the future. We

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are unable at this time to predict the ultimate effects the regulatory environment could have on the FHLBank System's business model or on our financial condition and results of operations.

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

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

We are exposed to liquidity risk if significant disruptions in the capital markets occur. Although the System was able to maintain access to the capital markets for debt issuances on acceptable terms during 2018, there is no assurance this will continue to be the case. Future ability to effectively access the capital markets could be adversely affected by external events (such as general economic and financial instabilities, political instability, wars, and natural disasters), deterioration in the perception of financial market participants about the financial strength of Consolidated Obligations, or downgrades to the System's credit ratings. The System could also be affected by the continued changes in the capital markets in response to financial regulations and by the joint and several liability for Consolidated Obligations, which exposes the System as a whole to events at individual FHLBanks. If access to capital markets were to be impaired for an extended period, the effect on our financial condition and results of operations could be material. At the extreme, the System's ability to achieve its mission and satisfy its financial obligations could be threatened.

Credit and Counterparty Risk. We are exposed to credit risk that, if realized, could materially affect our financial condition and results of operations.

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

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

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

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

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

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Market Risk. Changes in interest rates and mortgage prepayment speeds (together referred to as market risk exposure or interest rate risk exposure) could significantly affect our financial condition and results of operations.

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

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

In some extremely stressful scenarios, changes in interest rates and prepayment speeds could result in dividends being below stockholders' expectations for an extended period of time and/or market capitalization ratios falling below par which could indicate potential impairment of member stock. In such a situation, members could engage in less Mission Asset Activity and could request a withdrawal of capital. See "Quantitative and Qualitative Disclosures About Risk Management" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information about market risk exposure.

Asset Profitability. Spreads on assets to funding costs may narrow because of changes in other risk factors such as the economy, interest rates, and competition, resulting in lower profitability.

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

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

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

LIBOR Replacement. Replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations.

The United Kingdom's Financial Conduct Authority (FCA), which has regulated LIBOR since April 2013, has made significant improvements to the index since LIBOR began to face scrutiny in 2009. However, the LIBOR index is now expected to be phased out no later than the end of 2021. The Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (ARRC) to 1) develop a robust alternative to U.S. dollar LIBOR and 2) develop a plan to encourage its use in derivatives and other transactions as appropriate. The ARRC has settled on the establishment of the Secured Overnight Financing Rate (SOFR) as its recommended alternative to U.S. dollar LIBOR. SOFR is based on a broad segment of the overnight Treasuries repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities. The Federal Reserve Bank of New York began publishing SOFR in April

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2018. During the third quarter of 2018, several market participants began utilizing SOFR through the issuance of variable-rate debt securities indexed to SOFR. In the fourth quarter of 2018, we participated in the FHLBank System's first issuance of SOFR-linked Consolidated Bonds and have continued to participate in subsequent issuances. However, many of our assets and liabilities still remain indexed to LIBOR. Therefore, we are planning for the eventual replacement of our LIBOR-indexed instruments away from the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. We are not currently able to predict whether LIBOR will remain as an available rate index, whether and when an alternative rate such as SOFR will become a robust market benchmark rate in place of LIBOR, or what the impact of such a transition may be on our business, financial condition, and results of operations.

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

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

Exposure to the Office of Finance. Failures of the Office of Finance could disrupt the ability to conduct and manage our business.

The Office of Finance is a joint office of the FHLBanks established to facilitate the issuance and servicing of Consolidated Obligations, among other things. Pursuant to Finance Agency regulations, the Office of Finance, often in conjunction with the FHLBanks, has adopted policies and procedures for the purposes of facilitating and approving the issuance of Consolidation Obligations. A failure or interruption of the Office of Finance's services as a result of breaches, cyberattacks, or technological risks could disrupt each FHLBank's access to these funds, which could also harm the System's debt franchise. Although the Office of Finance has a business continuity plan in place, our business operations could be constrained, disrupted or otherwise negatively affected if the Office of Finance was not able to perform its functions for a period of time.

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

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

We rely heavily on internal and third-party information systems and other technology to manage our business, including the secure processing, storage and transmission of confidential and other information in computer systems and networks. For instance, due to our reliance on the book-entry system of the Federal Reserve Banks for debt issuance and servicing operations, we depend on them and their fiscal agent, the Federal Reserve Bank of New York, and one or more settlement agents to issue and make payments of principal and interest on Consolidated Obligations.

Computer systems, software and networks can be vulnerable to failures and interruptions including cyberattacks, which may include breaches, unauthorized access, misuse, computer viruses or other malicious code and other events against information owned by our company and customers. These failures and interruptions could jeopardize the confidentiality or integrity of information, or otherwise cause interruptions or malfunctions in operations. We can make no assurance that we will be able to prevent, timely and adequately address, or mitigate failures, interruptions, or cyberattacks in information systems and other technology. If we experience a failure, interruption, or cyberattack in any of these systems, we may be unable to effectively conduct or manage business activities, operating processes, and risk management, which could significantly harm customer relations, our reputation, and operating costs, potentially resulting in material adverse effects on our financial condition and results of operations.

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

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

Item 1B.Unresolved Staff Comments.

None.

Item 2.Properties.

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

Item 3.Legal Proceedings.

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

Item 4.        Mine Safety Disclosures.

Not applicable.

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PART II

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

By law our stock is not publicly traded, and only our members (and former members with a withdrawal notice pending) may own our stock. The par value of our capital stock is $100 per share. As of December 31, 2018, we had 646 stockholders and approximately 43 million shares of capital stock outstanding, all of which were Class B Stock.

We paid quarterly dividends in 2018 and 2017 as outlined in the table below.

(Dollars in millions)
	2018						2017
			Annualized						Annualized
Quarter	Amount		Rate		Form	Quarter	Amount		Rate		Form
First	$	61	5.75	%	Cash	First	$	47	4.50	%	Cash
Second	62		5.75		Cash	Second	49		4.75		Cash
Third	68		6.00		Cash	Third	54		5.25		Cash
Fourth	65		6.00		Cash	Fourth	58		5.50		Cash
Total	$	256	5.88			Total	$	208	5.00

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

A Finance Agency rule prohibits us from issuing new excess capital stock to members, either by paying stock dividends or otherwise, if before or after the issuance the amount of member excess capital stock exceeds or would exceed one percent of the FHLB's assets. Excess capital stock for this regulatory purpose is calculated as the aggregate of capital stock owned that is in excess of all membership and Mission Asset Activity requirements (as defined in our Capital Plan). At December 31, 2018, we had excess capital stock outstanding totaling more than one percent of total assets.

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

RECENT SALES OF UNREGISTERED SECURITIES

From time to time, we provide Letters of Credit in the ordinary course of business to support members' obligations issued in support of unaffiliated, third-party offerings of notes, bonds or other securities. We did not provide such credit support during 2018. We provided $12 million and $60 million of such credit support during 2017 and 2016. To the extent that these Letters of Credit are securities for purposes of the Securities Act of 1933, their issuance is exempt from registration pursuant to section 3(a)(2) thereof.

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Item 6. Selected Financial Data.

The following table presents selected Statement of Condition data, Statement of Income data and financial ratios for the five years ended December 31, 2018.

	Year Ended December 31,
(Dollars in millions)	2018			2017			2016			2015			2014
STATEMENT OF CONDITION DATA AT PERIOD END:
Total assets	$	99,203		$	106,895		$	104,635		$	118,756		$	106,607
Advances	54,822			69,918			69,882			73,292			70,406
Mortgage loans held for portfolio	10,502			9,682			9,150			7,954			6,956
Allowance for credit losses on mortgage loans	1			1			1			2			5
Investments (1)	33,614			27,058			25,334			37,356			26,007
Consolidated Obligations, net:
Discount Notes	46,944			46,211			44,690			77,199			41,232
Bonds	45,659			54,163			53,191			35,092			59,217
Total Consolidated Obligations, net	92,603			100,374			97,881			112,291			100,449
Mandatorily redeemable capital stock	23			30			35			38			63
Capital:
Capital stock - putable	4,320			4,241			4,157			4,429			4,267
Retained earnings	1,023			940			834			737			656
Accumulated other comprehensive loss	(13		)	(16		)	(13		)	(13		)	(17		)
Total capital	5,330			5,165			4,978			5,153			4,906
STATEMENT OF INCOME DATA:
Net interest income	$	499		$	429		$	363		$	327		$	327
Non-interest income (loss)	(37		)	(1		)	46			30			23
Non-interest expense	85			79			111			75			68
Affordable Housing Program assessments	38			35			30			28			28
Net income	$	339		$	314		$	268		$	254		$	254
FINANCIAL RATIOS:
Dividend payout ratio (2)	75.6		%	66.3		%	63.9		%	67.7		%	69.5		%
Weighted average dividend rate (3)	5.88			5.00			4.00			4.00			4.00
Return on average equity	6.29			6.15			5.35			5.04			5.16
Return on average assets	0.32			0.31			0.25			0.24			0.25
Net interest margin (4)	0.47			0.42			0.35			0.31			0.32
Average equity to average assets	5.11			5.00			4.76			4.78			4.86
Regulatory capital ratio (5)	5.41			4.88			4.80			4.38			4.68
Operating expenses to average assets (6)	0.063			0.060			0.061			0.054			0.050

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

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

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

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

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

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

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

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

EXECUTIVE OVERVIEW

Financial Condition

Mission Asset Activity

In 2018, the FHLB fulfilled its mission by providing a key source of readily available and competitively priced wholesale funding to its member financial institutions, supporting its commitment to affordable housing and community investment, and paying stockholders a competitive dividend return on their capital investment.

Mission Assets, which we define as Advances, Letters of Credit, and total MPP (including purchase commitments), are the primary means by which we fulfill our mission with direct connections to members. We regularly monitor our balance sheet concentration of Mission Asset Activity. In 2018, our Primary Mission Asset ratio, which measures the sum of average Advances and mortgage loans as a percentage of average Consolidated Obligations, was 76 percent, exceeding the Federal Housing Finance Agency (Finance Agency) preferred ratio of 70 percent. In assessing overall mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of which is Letters of Credit issued to members.

The following table summarizes our Mission Asset Activity.

	Year Ended December 31,
	Ending Balances				Average Balances
(In millions)	2018		2017		2018		2017
Mission Asset Activity:
Advances (principal)	$	54,872	$	69,978	$	65,593	$	67,683
Mortgage Purchase Program (MPP):
Mortgage loans held for portfolio (principal)	10,272		9,454		9,743		9,224
Mandatory Delivery Contracts (notional)	146		219		287		293
Total MPP	10,418		9,673		10,030		9,517
Letters of Credit (notional)	14,847		14,691		14,619		16,457
Total Mission Asset Activity	$	80,137	$	94,342	$	90,242	$	93,657

The balance of Mission Asset Activity was $80.1 billion at December 31, 2018, a decrease of $14.2 billion (15 percent) from year-end 2017, driven by lower Advance balances. Advance principal balances decreased $15.1 billion (22 percent) in 2018 primarily due to a reduction in borrowings from a few large-asset members. However, average Advance principal balances for 2018 declined only $2.1 billion compared to 2017. Advance balances are often volatile due to our members' ability to quickly, normally on the same day, increase or decrease their amount of Advances. We believe providing members flexibility in their funding levels helps support their asset-liability management needs and is a key benefit of membership. At December 31, 2018, 70 percent of members held Mission Asset Activity, which was relatively stable compared to prior periods.

Based on the most-recently available figures, members funded an average of 3.2 percent of their assets with Advances. As in recent years, most members continued to have modest demand for Advance borrowings. Demand for Advances is affected by the accessibility and cost of other sources of liquidity and funding, such as deposits, available to members.

The MPP principal balance rose $0.8 billion (nine percent) from year-end 2017. During 2018, we purchased $1.9 billion of mortgage loans, while principal reductions totaled $1.1 billion.

Based on earnings in 2018, we accrued $38 million for the Affordable Housing Program (AHP) pool of funds to be available to members in 2019. In addition to the required AHP assessment, we continued our voluntary sponsorship of two other housing

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programs, which provide resources to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners and to help members aid their communities following natural disasters.

Investments and Other Assets

The balance of investments at December 31, 2018 was $33.6 billion, an increase of $6.6 billion (24 percent) from year-end 2017. Investments averaged $29.8 billion in 2018, an increase of $5.2 billion (21 percent) from the average balance during 2017. The increases in the ending and average balances of investments were primarily driven by higher liquidity investments, which can vary significantly on a daily basis during times of volatility in Advance balances. At December 31, 2018, investments included $15.7 billion of mortgage-backed securities (MBS) and $17.9 billion of other investments, which were mostly short-term instruments held for liquidity. All of our MBS held at December 31, 2018 were issued and guaranteed by Fannie Mae, Freddie Mac or a U.S. agency.

We maintained a robust amount of asset liquidity throughout 2018 across a variety of liquidity measures, as discussed in the "Liquidity Risk" section of "Quantitative and Qualitative Disclosures About Risk Management."

Capital

Capital adequacy remained strong in 2018, surpassing all minimum regulatory capital requirements. The GAAP capital-to-assets ratio at December 31, 2018 was 5.37 percent, while the regulatory capital-to-assets ratio was 5.41 percent. Both ratios exceeded the regulatory required minimum of four percent. Regulatory capital includes mandatorily redeemable capital stock accounted for as a liability under GAAP. The amounts of GAAP and regulatory capital increased $165 million and $155 million, respectively, in 2018, due to purchases of capital stock associated with Advance activity and the growth in retained earnings. Retained earnings totaled $1.0 billion at December 31, 2018, an increase of nine percent from year-end 2017. The increase in capital was partially offset by a repurchase of $297 million in excess stock from members as part of our capital management strategy.

Results of Operations

Overall Results

The table below summarizes our results of operations.

	Year Ended December 31,
(Dollars in millions)	2018			2017			2016
Net income	$	339		$	314		$	268
Affordable Housing Program assessments	38			35			30
Return on average equity (ROE)	6.29		%	6.15		%	5.35		%
Return on average assets	0.32			0.31			0.25
Weighted average dividend rate	5.88			5.00			4.00
Average 3-month LIBOR	2.31			1.26			0.74
ROE spread to 3-month LIBOR	3.98			4.89			4.61
Dividend rate spread to 3-month LIBOR	3.57			3.74			3.26

Net income in 2018 increased $25 million (eight percent) compared to 2017. The increase in net income and ROE was primarily the result of higher net interest income. Net interest income was higher in 2018 compared to 2017 primarily due to the rise in short-term interest rates, which improved earnings from funding assets with interest-free capital.

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

In December 2018, we paid stockholders a quarterly 6.00 percent annualized dividend rate on their capital investment in our company. The higher dividend rates paid throughout 2018 compared to 2017 was driven in large part by the effects of higher short-term interest rates. In 2018, we paid an average dividend rate of 5.88 percent compared to 5.00 percent in 2017.

We believe that our operations and financial condition will continue to generate competitive profitability, reflecting the combination of a stable business model, and a consistent and conservative management of risk. Our business model is

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structured to be able to absorb sharp changes in Mission Asset Activity because we can execute commensurate changes in liability balances and capital. Key factors that can cause significant periodic earnings volatility are changes in the level of interest rates, changes in spreads between benchmark interest rates (such as LIBOR) and our short-term funding costs, recognition of net amortization, and fair value adjustments related to the use of derivatives and the associated hedged items.

Effect of Interest Rate Environment

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

	Year 2018				Year 2017				Year 2016
	Ending		Average		Ending		Average		Ending		Average
Federal funds effective	2.40	%	1.83	%	1.33	%	1.00	%	0.55	%	0.39	%
3-month LIBOR	2.81		2.31		1.69		1.26		1.00		0.74
2-year LIBOR	2.66		2.75		2.08		1.65		1.45		1.00
10-year LIBOR	2.71		2.95		2.40		2.29		2.34		1.70
2-year U.S. Treasury	2.49		2.52		1.89		1.39		1.19		0.83
10-year U.S. Treasury	2.69		2.91		2.41		2.33		2.45		1.84
15-year mortgage current coupon (1)	3.06		3.20		2.52		2.40		2.49		1.94
30-year mortgage current coupon (1)	3.51		3.65		3.00		3.03		3.14		2.63

	Year 2018 by Quarter - Average
	Quarter 1		Quarter 2		Quarter 3		Quarter 4
Federal funds effective	1.45	%	1.74	%	1.93	%	2.22	%
3-month LIBOR	1.93		2.34		2.34		2.63
2-year LIBOR	2.40		2.74		2.86		2.98
10-year LIBOR	2.77		2.96		2.99		3.09
2-year U.S. Treasury	2.15		2.47		2.66		2.80
10-year U.S. Treasury	2.76		2.92		2.92		3.04
15-year mortgage current coupon (1)	2.93		3.20		3.24		3.42
30-year mortgage current coupon (1)	3.40		3.64		3.67		3.89

(1) Simple average of current coupon rates of Fannie Mae and Freddie Mac par MBS indications.

In December 2018, the target overnight Federal funds rate increased from a 2.00 to 2.25 percent range to a 2.25 to 2.50 percent range. Average short-term rates were approximately 0.80 to 1.10 percentage points higher in 2018 compared to 2017, while average long-term rates increased approximately 0.60 to 0.80 percentage points during that same period. The gradually rising interest rate environment continued to benefit income during 2018 primarily because of earnings generated by funding assets with interest-free capital. However, the trends of rising short-term interest rates and flatter market yield curves could lower profitability if they were to continue for a prolonged period or if market yield curves were inverted between certain maturity points. For example, earnings may decrease as a consequence of a flat to inverted yield curve due to narrower spreads between yields earned on new mortgage assets and the costs of new Consolidated Obligations used to fund them.

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Business Outlook and Risk Management

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

Strategic/Business Risk

Advances: Our business is cyclical and Mission Asset Activity normally grows slowly or stabilizes in periods of moderate macro-economic growth, when financial institutions have ample liquidity, or when there is significant growth in the money supply. Other factors that constrain widespread demand for Advances are the relatively low levels of interest rates and little deviation in Advance rates versus deposit rates, and other competitive sources of wholesale funding.

In the last several years, the percentage of assets that members funded with Advances has shown little variation, in the range of three to four percent. We may see a broad-based increase in Advance demand if one or more of the following occur: aggregate loan portfolios of our members grow quicker than aggregate deposits, the economy experiences a sustained growth trend, interest rates continue to increase over time, or changes in Federal Reserve policy reduce other sources of liquidity available to members.

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

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

Market Risk

During 2018, as in 2017, the market risk exposure to changing interest rates was moderate overall and well within policy limits. We believe that profitability would not become uncompetitive unless interest rates were to change quickly and significantly.

Capital Adequacy

We believe members place a high value on their capital investment in our company. Capital ratios at December 31, 2018, and all throughout the year, exceeded the regulatory required minimum of four percent. We believe the amount of retained earnings is sufficient to protect against members' impairment risk of their capital stock investment in the FHLB and to provide the opportunity to stabilize or increase future dividends. Our capital policies and Capital Plan also have safeguards to ensure we meet regulatory and prudential capital requirements.

Credit Risk

In 2018, we continued to experience a de minimis level of overall residual credit risk exposure from our Credit Services, investments, and derivative transactions. We believe policies and procedures related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks. We have never experienced any credit losses, and we continue to have no loan loss reserves or impairment recorded for these instruments. Residual credit risk exposure in the mortgage loan portfolio was minimal. The allowance for credit losses in the MPP was stable during the year and was $1 million at December 31, 2018.

Liquidity Risk

Our liquidity position remained strong during 2018, as did our overall ability to fund operations through the issuance of Consolidated Obligations at acceptable interest costs. Investor demand for FHLBank System debt continued to be robust. There were no substantive stresses on market access or liquidity from external market and political events. Although we can make no assurances, we believe there is only a remote possibility of a liquidity or funding crisis in the System that could impair our ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capital levels, or pay competitive dividends.

Regulatory and Legislative Risk and Significant Developments

General: The FHLBank System is subject to legislative and regulatory oversight. Legislative and regulatory actions applicable, directly or indirectly, to the FHLBank System in the last decade have increased uncertainty regarding the business model and membership base under which the FHLBanks may operate in the future. This is due primarily to the uncertainty around potential future GSE reform, which shows no signs of resolution, and the evolution of mortgage financing moving towards financial institutions currently not eligible for FHLBank membership. See Item 1A. Risk Factors for more discussion. We

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cannot predict the ultimate outcome of GSE reform and whether our membership base will be legislatively and regulatorily permitted to evolve in concert with the housing finance market.

LIBOR Replacement:We are planning for the replacement of LIBOR given the announcement that the LIBOR index is expected to be phased out no later than the end of 2021 and the Federal Reserve Bank of New York's establishment of the Secured Overnight Financing Rate (SOFR) as its recommended alternative to U.S. dollar LIBOR. In the fourth quarter of 2018, we participated in the FHLBank System's first issuance of SOFR-linked Consolidated Bonds and have continued to participate in subsequent issuances. We also began offering SOFR-linked Advances in the fourth quarter of 2018. However, many of our assets and liabilities still remain indexed to LIBOR. Therefore, we are continuing to plan for the eventual replacement of our LIBOR-indexed instruments away from the LIBOR benchmark interest rate. The market transition away from LIBOR towards SOFR is expected to be gradual and complicated, including the development of term and credit adjustments to accommodate differences between LIBOR and SOFR. As such, we are not currently able to predict the ultimate impact of such a transition on our business, financial condition, and results of operations. See Item 1A. Risk Factors for more discussion.

Liquidity Advisory Bulletin:Advisory Bulletin 2018-07 Federal Home Loan Bank Liquidity Guidance (Liquidity AB). In August 2018, the Finance Agency issued a final Advisory Bulletin on expectations with respect to the maintenance of sufficient liquidity to enable the FHLBanks to provide Advances and Letters of Credit for members for a specified number of days without access to the capital markets or other unsecured funding sources. The Liquidity AB rescinds the 2009 liquidity guidance previously issued by the Finance Agency. In addition, the Liquidity AB provides guidance related to asset/liability maturity funding gap limits. Funding gap metrics measure the difference between assets and liabilities that are scheduled to mature during a specified period of time and are expressed as a percentage of total assets. The Liquidity AB provides for the funding gap limits to reduce the liquidity risks associated with a mismatch in asset and liability maturities, including an undue reliance on short-term debt funding, which may increase debt rollover risk. The Liquidity AB also addresses liquidity stress testing, contingent funding plans and an adjustment to the calculation of the Primary Mission Asset ratio. Portions of the Liquidity AB were implemented on December 31, 2018, with further implementation to take place on March 31, 2019 and full implementation on December 31, 2019.

The Liquidity AB will require us to hold an additional amount of liquid assets to meet the new guidance related to the base case liquidity expectations, which may raise our cost of funding. We currently do not believe these changes will have a material effect on our results of operations, but they will make managing liquidity and the balance sheet more operationally challenging. Refer to the "Liquidity Risk" section of "Quantitative and Qualitative Disclosures About Risk Management" for further discussion of the requirements set forth in the Liquidity AB.

Final Rule on FHLBank Capital Requirements: On February 20, 2019, the Finance Agency published a final rule, effective January 1, 2020, pertaining to the capital requirements for the FHLBanks. The final rule revises the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The main revisions remove requirements that we calculate credit risk capital charges and unsecured credit limits based on ratings issued by a Nationally Recognized Statistical Rating Organization (NRSRO), and instead require that we establish and use our own internal rating methodology. With respect to derivatives, the rule imposes a new capital charge for cleared derivatives to align with the Dodd-Frank Act’s clearing mandate. The final rule also revises the percentages used to calculate credit risk capital charges for Advances and for non-mortgage assets. We do not expect this rule to materially affect our financial condition or results of operations.

Final Rule Amending AHP Regulations: On November 28, 2018, the Finance Agency published a final rule that amends the operating requirements of the FHLBanks’ AHP. The final rule amendments:

▪ revise the scoring criteria to create different and new scoring priorities;

▪ remove the retention agreement requirement on owner-occupied units using the subsidy solely for rehabilitation;

▪ increase the per-household set-aside grant amount to $22,000 with an annual housing price inflation adjustment (up from the current fixed limit of $15,000);

▪ clarify the requirements for remediating AHP noncompliance;

▪ prohibit our Board of Directors from delegating approval of AHP strategic policy decisions to a committee; and

▪ further align AHP monitoring with certain federal government funding programs.

The majority of the rule’s provisions take effect January 1, 2021, while the owner-occupied retention agreement requirements take effect January 1, 2020. We do not expect this rule to materially affect our financial condition or results of operations.

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Proposed Rule on Housing Goals: On November 2, 2018, the Finance Agency published a proposed rule that would amend its existing Federal Home Loan Bank Housing Goals regulation. If adopted as proposed, the proposed amendments would:

▪ eliminate the $2.5 billion mortgage loan purchase volume threshold that triggers the application of housing goals;

▪ establish the target level for the new prospective mortgage loan purchase housing goal at 20 percent of total mortgage loan purchases that are for very low-income families, low-income families, or families in low-income areas, and require that at least 75 percent of all mortgage purchases that count toward the goal be for borrowers with incomes at or below 80 percent of the area median income;

▪ establish a goal that 50 percent of mortgage program users meet the definition of “small members” whose assets do not exceed the "community financial institution" asset cap, which is currently set at $1.199 billion; and

▪ allow the FHLBanks to request FHFA approval of alternative target percentages for mortgage loan purchase housing goals and small member participation goals.

We continue to evaluate this proposed rule and its effect on our financial condition and results of operation.

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ANALYSIS OF FINANCIAL CONDITION

Credit Services

Credit Activity and Advance Composition

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

(Dollars in millions)	December 31, 2018				December 31, 2017
	Balance		Percent(1)		Balance		Percent(1)
Adjustable/Variable Rate-Indexed:
LIBOR	$	28,740	52	%	$	32,420	47	%
Other	2,144		4		941		1
Total	30,884		56		33,361		48
Fixed-Rate:
Repurchase based (REPO)	7,003		13		19,890		28
Regular Fixed-Rate	10,972		20		11,191		16
Putable (2)	460		1		280		—
Amortizing/Mortgage Matched	2,702		5		2,776		4
Other	2,851		5		2,479		4
Total	23,988		44		36,616		52
Other Advances	—		—		1		—
Total Advances Principal	$	54,872	100	%	$	69,978	100	%
Letters of Credit (notional)	$	14,847			$	14,691

(Dollars in millions)	December 31, 2018				September 30, 2018				June 30, 2018				March 31, 2018
	Balance		Percent(1)		Balance		Percent(1)		Balance		Percent(1)		Balance		Percent(1)
Adjustable/Variable-Rate Indexed:
LIBOR	$	28,740	52	%	$	20,940	36	%	$	26,659	44	%	$	31,646	50	%
Other	2,144		4		637		1		1,130		2		781		1
Total	30,884		56		21,577		37		27,789		46		32,427		51
Fixed-Rate:
REPO	7,003		13		18,446		32		15,355		25		14,540		23
Regular Fixed-Rate	10,972		20		11,929		21		12,059		20		11,677		18
Putable (2)	460		1		235		—		110		—		175		—
Amortizing/Mortgage Matched	2,702		5		2,800		5		2,821		5		2,810		4
Other	2,851		5		2,894		5		2,532		4		2,355		4
Total	23,988		44		36,304		63		32,877		54		31,557		49
Other Advances	—		—		5		—		—		—		1		—
Total Advances Principal	$	54,872	100	%	$	57,886	100	%	$	60,666	100	%	$	63,985	100	%
Letters of Credit (notional)	$	14,847			$	13,952			$	14,482			$	15,606

(1) As a percentage of total Advances principal.    

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

Advance balances at December 31, 2018 decreased 22 percent compared to year-end 2017, as a result of lower REPO and variable-rate borrowings by a few large-asset members. However, the average Advance principal balance of $65.6 billion during 2018 was significantly higher than the ending balance at December 31, 2018. REPOs, which traditionally have the most

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volatile balances because a majority of them have overnight maturities, allow our members the most flexibility as their liquidity needs may change daily.

Advance Usage

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

	December 31, 2018		September 30, 2018		June 30, 2018		March 31, 2018		December 31, 2017
Average Advances-to-assets for members
Assets less than $1.0 billion (557 members)	3.05	%	3.16	%	3.18	%	2.86	%	3.04	%
Assets over $1.0 billion (89 members)	4.26		4.61		4.85		4.10		4.95
All members	3.22		3.36		3.41		3.03		3.28

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

(Dollars in millions)	December 31, 2018				December 31, 2017
	Principal Amount of Advances		Percent of Total Principal Amount of Advances		Principal Amount of Advances		Percent of Total Principal Amount of Advances
Commercial Banks	$	39,195	71	%	$	52,899	76	%
Savings Institutions	5,424		10		7,369		10
Credit Unions	1,564		3		1,293		2
Insurance Companies	8,676		16		8,357		12
Community Development Financial Institutions	1		—		1		—
Total member Advances	54,860		100		69,919		100
Former member borrowings	12		—		59		—
Total principal amount of Advances	$	54,872	100	%	$	69,978	100	%

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

(Dollars in millions)
December 31, 2018					December 31, 2017
Name	Principal Amount of Advances		Percent of Total Principal Amount of Advances		Name	Principal Amount of Advances		Percent of Total Principal Amount of Advances
JPMorgan Chase Bank, N.A.	$	23,400	43	%	JPMorgan Chase Bank, N.A.	$	23,950	34	%
U.S. Bank, N.A.	4,574		8		U.S. Bank, N.A.	8,975		13
Third Federal Savings and Loan Association	3,727		7		Third Federal Savings and Loan Association	3,756		5
Nationwide Life Insurance Company	2,510		5		The Huntington National Bank	3,732		5
Pinnacle Bank	1,444		3		Fifth Third Bank	3,140		4
Total of Top 5	$	35,655	66	%	Total of Top 5	$	43,553	61	%

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

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

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

(In millions)	2018			2017
Balance, beginning of year	$	9,454		$	8,926
Principal purchases	1,936			1,747
Principal reductions	(1,118		)	(1,219		)
Balance, end of year	$	10,272		$	9,454

Although there were 102 active members participating in the MPP at December 31, 2018, over 50 percent of the principal purchases in 2018 resulted from activity of our three largest sellers. All loans acquired in 2018 were conventional loans.

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

(Dollars in millions)	December 31, 2018					December 31, 2017
	Principal		% of Total			Principal		% of Total
Union Savings Bank	$	3,449	34	%	Union Savings Bank	$	3,247	34	%
Guardian Savings Bank FSB	987		10		Guardian Savings Bank FSB	933		10
All others	5,836		56		PNC Bank, N.A. (1)	516		5
Total	$	10,272	100	%	All others	4,758		51
					Total	$	9,454	100	%

(1)Former member.

We closely track the refinancing incentives of our mortgage assets (including loans in the MPP and MBS) because the option for homeowners to change their principal payments normally represents the largest portion of our market risk exposure and can affect MPP balances. MPP principal paydowns in 2018 and 2017 were low, equating to eight and nine percent annual constant prepayment rates, respectively, due to a sustained increase in mortgage rates.

The MPP's composition of balances by loan type, original final maturity, and weighted-average mortgage note rate did not change materially in 2018. The weighted average note rate increased by 0.09 percentage points in 2018 to end the year at 4.00 percent. MPP yields earned in 2018, after consideration of funding and hedging costs, continued to offer favorable returns relative to their market and credit risk exposure.

Housing and Community Investment

In 2018, we accrued $38 million of earnings for the Affordable Housing Program, which will be awarded to members in 2019. This amount represents an increase of $3 million from 2017 due to the higher earnings in 2018.

Including funds available in 2018 from previous years, we had $29 million available for the competitive Affordable Housing Program in 2018, which we awarded to 67 projects through a single competitive offering. In addition, we disbursed $13 million to 188 members on behalf of 2,553 homebuyers through the Welcome Home Program, which assists homebuyers with down payments and closing costs. In total, more than one-third of members applied for funding under the two Affordable Housing Programs. 

Additionally, in 2018, our Board committed $1.5 million to the Carol M. Peterson Housing Fund, which helped 262 homeowners, and replenished the Disaster Reconstruction Program (DRP) with an added $3.6 million, bringing the DRP fund to $5 million. Both are voluntary programs beyond the 10 percent of earnings that we are required by law to set aside for the Affordable Housing Program.

Our activities to support affordable housing and economic development also include offering Advances through the Affordable Housing Program, Community Investment Program and Economic Development Program with below-market interest rates at or near funding costs. At the end of 2018, Advance balances under these programs totaled $444 million.

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Investments

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

(In millions)	2018				2017
	Ending Balance		Average Balance		Ending Balance		Average Balance
Liquidity investments	$	17,858	$	13,989	$	12,286	$	9,757
MBS	15,756		15,741		14,772		14,710
Other investments (1)	—		64		—		84
Total investments	$	33,614	$	29,794	$	27,058	$	24,551

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

We continued to maintain a robust amount of asset liquidity. Liquidity investment levels can vary significantly based on changes in the amount of Advances, liquidity needs, the availability of acceptable net spreads, and the number of eligible counterparties that meet our unsecured credit risk criteria. It is normal for liquidity investments to vary by up to several billion dollars on a daily basis. The higher amount of liquidity investments at December 31, 2018 was primarily due to volatility in Advance activity, especially short-term and variable-rate Advance borrowings.

Our overarching strategy for balances of MBS is to keep holdings as close as possible to the regulatory maximum of three times regulatory capital, subject to the availability of securities that we believe provide acceptable risk/return tradeoffs. The ratio of MBS to regulatory capital was 2.94 at December 31, 2018. The balance of MBS at December 31, 2018 consisted of $13.7 billion of securities issued by Fannie Mae or Freddie Mac (of which $8.7 billion were floating-rate securities), $0.3 billion of floating-rate securities issued by the National Credit Union Administration (NCUA), and $1.7 billion of securities issued by Ginnie Mae (which are primarily fixed rate). We held no private-label MBS.

The table below shows principal purchases and paydowns of our MBS for each of the last two years.

(In millions)	MBS Principal
	2018			2017
Balance, beginning of year	$	14,746		$	14,487
Principal purchases	3,839			2,679
Principal paydowns	(2,851		)	(2,420		)
Balance, end of year	$	15,734		$	14,746

Principal paydowns in 2018 equated to a 16 percent annual constant prepayment rate, compared to a 15 percent rate in 2017.

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Consolidated Obligations

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

(In millions)	2018						2017
	Ending Balance			Average Balance			Ending Balance			Average Balance
Discount Notes:
Par	$	47,071		$	49,273		$	46,259		$	43,166
Discount	(127		)	(88		)	(48		)	(42		)
Total Discount Notes	46,944			49,185			46,211			43,124
Bonds:
Unswapped fixed-rate	25,982			26,566			26,710			26,707
Unswapped adjustable-rate	15,470			16,967			20,895			18,500
Swapped fixed-rate	4,195			5,982			6,552			7,131
Total par Bonds	45,647			49,515			54,157			52,338
Other items (1)	12			(13		)	6			29
Total Bonds	45,659			49,502			54,163			52,367
Total Consolidated Obligations (2)	$	92,603		$	98,687		$	100,374		$	95,491

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

(2) The 11 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations for all of the FHLBanks was (in millions) $1,031,617 and $1,034,260 at December 31, 2018 and 2017, respectively.

The balances of Consolidated Obligations fluctuate with changes in the balances of our assets. For example, the volatility in certain Advances and liquidity investments contributed to the higher average balance of Discount Notes in 2018. Additionally, the decline in unswapped adjustable-rate Bonds at December 31, 2018 was primarily due to lower variable-rate Advance balances. We fund variable-rate assets with Discount Notes, adjustable-rate Bonds, and swapped fixed-rate Bonds because they give us the ability to effectively match the underlying rate reset periods embedded in these assets.

The composition of unswapped fixed-rate Bonds, which typically have initial maturities greater than one year, was relatively stable in 2018 compared to 2017. The following table shows the allocation on December 31, 2018 of unswapped fixed-rate Bonds according to their final remaining maturity and next call date (for callable Bonds). We believe that the allocations of Bonds among these classifications provide effective mitigation of market risk exposure to both higher and lower interest rates.

(In millions)	Year of Maturity						Year of Next Call
	Callable		Non-callable		Total		Callable
Due in 1 year or less	$	704	$	4,738	$	5,442	$	6,268
Due after 1 year through 2 years	1,036		4,179		5,215		36
Due after 2 years through 3 years	1,629		3,121		4,750		—
Due after 3 years through 4 years	394		2,471		2,865		—
Due after 4 years through 5 years	952		2,232		3,184		—
Thereafter	1,589		2,937		4,526		—
Total	$	6,304	$	19,678	$	25,982	$	6,304

Deposits

Total deposits with us are normally a relatively minor source of low-cost funding. Total interest bearing deposits at December 31, 2018 were $0.7 billion, an increase of two percent from year-end 2017. The average balance of total interest bearing deposits in 2018 was $0.8 billion, an 18 percent increase from the average balance during 2017.

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Derivatives Hedging Activity and Liquidity

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

Capital Resources

The following tables present capital amounts and capital-to-assets ratios, on both a GAAP and regulatory basis. We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio because, although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same manner as GAAP capital stock and retained earnings.

	Year Ended December 31,
(In millions)	2018				2017
	Period End		Average		Period End		Average
GAAP and Regulatory Capital
GAAP Capital Stock	$	4,320	$	4,387	$	4,241	$	4,183
Mandatorily Redeemable Capital Stock	23		30		30		46
Regulatory Capital Stock	4,343		4,417		4,271		4,229
Retained Earnings	1,023		1,025		940		928
Regulatory Capital	$	5,366	$	5,442	$	5,211	$	5,157

	2018				2017
	Period End		Average		Period End		Average
GAAP and Regulatory Capital-to-Assets Ratio
GAAP	5.37	%	5.11	%	4.83	%	5.00	%
Regulatory (1)	5.41		5.16		4.88		5.06

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

The following table presents the sources of change in regulatory capital stock balances in 2018 and 2017.

(In millions)	2018			2017
Regulatory stock balance at beginning of year	$	4,271		$	4,192
Stock purchases:
Membership stock	25			13
Activity stock	413			341
Stock repurchases/redemptions:
Redemption of member excess	(40		)	(259		)
Repurchase of member excess	(297		)	—
Withdrawals	(29		)	(16		)
Regulatory stock balance at the end of the year	$	4,343		$	4,271

The table below shows the amount of excess capital stock.

(In millions)	December 31, 2018		December 31, 2017
Excess capital stock (Capital Plan definition)	$	1,015	$	391
Cooperative utilization of capital stock	$	558	$	585
Mission Asset Activity capitalized with cooperative capital stock	$	13,950	$	14,620

A portion of our capital stock is excess, meaning it is not required as a condition to being a member and is not currently capitalizing Mission Asset Activity. Excess capital stock provides a base of capital to manage financial leverage at prudent levels, augments loss protections for bondholders, and capitalizes a portion of growth in Mission Assets. The amount of excess

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capital stock at December 31, 2018 increased $624 million compared to year-end 2017 due to lower Advance balances. In February 2019, we repurchased $294 million of excess capital stock as part of our ongoing efforts to manage our capital and financial performance to levels that are efficient and effective. Although the balances of excess stock have been and may continue to be volatile due to changes in Advance demand, we have the ability to repurchase all excess stock on a timely basis and continue to meet our regulatory and prudential capital requirements.

See the "Capital Adequacy" section in “Quantitative and Qualitative Disclosures About Risk Management” for discussion of our retained earnings.

Membership and Stockholders

In 2018, we added 10 new member stockholders and lost 24 member stockholders, ending the year at 646 member stockholders. Of the members lost, 17 merged with other Fifth District members, six merged out of the District and one was ineligible for membership due to a conversion of its charter.

In 2018, there were no material changes in the allocation of membership by state, charter type, or asset size. At the end of 2018, the composition of membership by state was Ohio with 298, Kentucky with 178, and Tennessee with 170.

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

	December 31,
	2018	2017
Commercial Banks	374	385
Savings Institutions	83	92
Credit Unions	134	132
Insurance Companies	48	46
Community Development Financial Institutions	7	5
Total	646	660

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

(In millions)	December 31,
	2018		2017
Commercial Banks	$	3,353	$	3,232
Savings Institutions	353		416
Credit Unions	176		169
Insurance Companies	437		423
Community Development Financial Institutions	1		1
Total GAAP Capital Stock	4,320		4,241
Mandatorily Redeemable Capital Stock	23		30
Total Regulatory Capital Stock	$	4,343	$	4,271

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

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

	December 31,
Member Asset Size(1)	2018	2017
Up to $100 million	166	171
> $100 up to $500 million	319	338
> $500 million up to $1 billion	72	66
> $1 billion	89	85
Total Member Stockholders	646	660

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

Most members are smaller community financial institutions, with 75 percent having assets up to $500 million. As noted elsewhere, having larger members is important to help achieve our mission objectives, including providing valuable products and services to all members.

RESULTS OF OPERATIONS

Components of Earnings and Return on Equity

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

(Dollars in millions)	2018					2017					2016
	Amount			ROE (1)		Amount			ROE (1)		Amount			ROE (1)
Net interest income	$	499		9.24	%	$	429		8.42	%	$	363		7.24	%
Provision for credit losses	—			—		—			0.01		—			—
Net interest income after provision for credit losses	499			9.24		429			8.41		363			7.24
Non-interest income (loss):
Net realized gains from sale of held-to-maturity securities	—			—		—			—		39			0.77
Net losses on derivatives and hedging activities	(41		)	(0.75	)	(24		)	(0.48	)	(47		)	(0.95	)
Net (losses) gains on financial instruments held under fair value option	(14		)	(0.26	)	10			0.20		40			0.81
Other non-interest income, net	18			0.33		13			0.25		14			0.29
Total non-interest income (loss)	(37		)	(0.68	)	(1		)	(0.03	)	46			0.92
Total income	462			8.56		428			8.38		409			8.16
Non-interest expense	85			1.57		79			1.54		111			2.21
Affordable Housing Program assessments	38			0.70		35			0.69		30			0.60
Net income	$	339		6.29	%	$	314		6.15	%	$	268		5.35	%

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

Net Interest Income

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

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

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Components of Net Interest Income

We generate net interest income from the following two components:

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

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

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

(Dollars in millions)	2018					2017					2016
	Amount			% of Earning Assets		Amount			% of Earning Assets		Amount			% of Earning Assets
Components of net interest rate spread:
Net (amortization)/accretion (1) (2)	$	(17	)	(0.02	)%	$	(20	)	(0.02	)%	$	(54	)	(0.05	)%
Prepayment fees on Advances, net (2)	1			—		1			—		10			0.01
Other components of net interest rate spread	407			0.39		382			0.38		360			0.34
Total net interest rate spread	391			0.37		363			0.36		316			0.30
Earnings from funding assets with interest-free capital	108			0.10		66			0.06		47			0.05
Total net interest income/net interest margin (3)	$	499		0.47	%	$	429		0.42	%	$	363		0.35	%

(1) Includes monthly recognition of premiums and discounts paid on purchases of mortgage assets, premiums, discounts and concessions paid on Consolidated Obligations and other hedging basis adjustments.

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

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

Net Amortization/Accretion (generally referred to as "amortization"): While net amortization has been substantial and volatile in the past, it was moderate in both 2018 and 2017. Amortization was higher in 2016 primarily because of an acceleration in prepayment speeds as long-term interest rates generally declined in 2016. Periodic amortization adjustments do not necessarily indicate a trend in economic return over the entire life of mortgage assets, although it is one component of lifetime economic returns.

Prepayment Fees on Advances: Fees for members' early repayment of certain Advances, which are included in net interest income, are designed to make us economically indifferent to whether members hold Advances to maturity or repay them before maturity. Although Advance prepayment fees can be and have been significant in the past, they were minimal in 2018 and 2017, reflecting a low amount of member prepayments of Advances. Advance prepayment fees were higher in 2016 due to the prepayment of Advances related to an in-district merger in the third quarter of 2016.

Other Components of Net Interest Rate Spread: Excluding net amortization and prepayment fees, the total other components of net interest rate spread increased$25 million in 2018 compared to 2017, compared to an increase of $22 million in 2017 over 2016. The net increases were primarily due to the factors below.

2018 Versus 2017

▪ Higher spreads on mortgage assets-Favorable: Higher spreads earned on mortgage assets increased net interest income by an estimated $13 million. Spreads improved primarily due to the rising interest rate environment.

▪ Growth in average mortgage asset balances-Favorable: The $0.5 billion increase in the average balance of mortgage loans held for portfolio and the $1.0 billion increase in the average balance of MBS improved net interest income by an estimated $10 million.

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▪ Higher spreads on Advances-Favorable: Higher spreads earned on certain Advances increased net interest income by an estimated $5 million. However, the increase in Advance net interest income was more than offset by higher net interest payments on related derivatives not receiving hedge accounting, which are reflected in other non-interest income. The net interest payments relate to derivatives used to limit the market risk exposure of Advances to acceptable levels.

▪ Growth in average liquidity investment balances-Favorable: The $4.2 billion increase in average liquidity investment balances improved net interest income by an estimated $3 million.

▪ Other factors-Favorable: Various other factors, individually less than $1 million, increased net interest income by an estimated $5 million.

▪ Lower average Advance balances-Unfavorable: The $2.2 billion decline in average Advance balances decreased net interest income by an estimated $6 million.

▪ Lower spreads on liquidity investments-Unfavorable: Lower spreads earned on liquidity investments decreased net interest income by an estimated $5 million.

2017 Versus 2016

▪ Higher spreads on short-term and LIBOR-indexed Advances-Favorable: Wider spreads on outstanding short-term and LIBOR-indexed Advances relative to funding costs on Discount Notes and adjustable-rate Bonds increased net interest income by an estimated $44 million. This increase in net interest income was partially offset by earnings reductions in other non-interest income related to derivatives and hedging activities. The wider spreads were due to Advances repricing quicker than the debt funding them and regulatory requirements for the money market industry, which became effective in October 2016. These requirements raised investor demand for short-term government and GSE debt compared to prime institutional funds, which improved the pricing advantage for our funding. This factor was partially offset by a decrease in the amount of LIBOR-indexed assets funded by lower-cost Discount Notes.

▪ Growth in MPP balances-Favorable: A $0.9 billion higher average balance of MPP loans increased net interest income by an estimated $13 million.

▪ Higher spreads on liquidity investments-Favorable: Higher spreads earned on liquidity investments increased net interest income by an estimated $7 million. These spreads widened primarily due to liquidity investments repricing to higher rates quicker than the debt funding them and due to the improved pricing advantage for our funding given the money market reform discussed above.

▪ Lower spreads on mortgage assets-Unfavorable: Lower spreads earned on MPP loans and MBS decreased net interest income by an estimated $38 million. The decline was driven by actions taken to reduce market risk exposure, and by continued paydowns of higher-yielding mortgage assets and low-cost debt. These negative factors were partially offset by an increase in spreads from additional utilization of hedging with derivatives (swaptions) and the decision to call and replace certain debt at lower rates throughout the first three quarters of 2016.

▪ Lower Advance balances-Unfavorable: The $1.6 billion decline in average Advance balances decreased net interest income by an estimated $4 million.

Earnings from Capital: Earnings from capital increased$42 million in 2018 compared to 2017, and increased $19 million in 2017 compared to 2016, primarily due to higher short-term interest rates. Average short-term rates were approximately 0.80 to 1.10 percentage points higher in 2018 compared to 2017, which drove the larger increase in 2018.

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Average Balance Sheet and Rates

The following table provides average balances and rates for major balance sheet accounts, which determine the changes in net interest rate spreads. The average rates are affected by the inclusion or exclusion of net interest income or expense associated with our use of derivatives. For example, if derivatives qualify for fair value hedge accounting, the net interest settlements of interest receivables or payables associated with the derivatives is included in net interest income and interest rate spread. If the derivatives do not qualify for fair value hedge accounting, the net interest settlements of interest receivables or payables associated with the derivatives is excluded from net interest income and from the calculation of interest rate spread and is recorded in “Non-interest income (loss)” as “Net losses on derivatives and hedging activities.” Amortization associated with some hedging-related basis adjustments is also reflected in net interest income, which affects interest rate spread.

(Dollars in millions)	2018						2017						2016
	Average Balance		Interest		Average Rate (1)		Average Balance		Interest		Average Rate (1)		Average Balance		Interest		Average Rate (1)
Assets
Advances	$	65,491	$	1,409	2.15	%	$	67,656	$	905	1.34	%	$	69,282	$	587	0.85	%
Mortgage loans held for portfolio (2)	9,967		321		3.22		9,447		297		3.14		8,541		261		3.06
Federal funds sold and securities    purchased under resale agreements	12,122		228		1.88		9,184		94		1.02		11,218		44		0.39
Interest-bearing deposits in banks (3) (4) (5)	1,843		41		2.22		624		6		1.03		1,071		6		0.57
MBS	15,741		380		2.41		14,710		306		2.08		15,061		325		2.16
Other investments (4)	88		2		2.69		33		—		0.83		32		—		0.44
Loans to other FHLBanks	1		—		1.46		—		—		—		3		—		0.41
Total interest-earning assets	105,253		2,381		2.26		101,654		1,608		1.58		105,208		1,223		1.16
Less: allowance for credit losses    on mortgage loans	1						1						1
Other assets	288						264						218
Total assets	$	105,540					$	101,917					$	105,425
Liabilities and Capital
Term deposits	$	77	1		1.78		$	76	1		0.72		$	100	—		0.35
Other interest bearing deposits (5)	747		13		1.69		621		4		0.68		734		1		0.13
Discount Notes	49,185		915		1.86		43,124		385		0.89		49,835		174		0.35
Unswapped fixed-rate Bonds	26,618		554		2.08		26,768		527		1.97		26,549		532		2.00
Unswapped adjustable-rate Bonds	16,967		317		1.87		18,500		185		1.00		14,512		84		0.58
Swapped Bonds	5,917		80		1.36		7,099		75		1.05		7,973		66		0.83
Mandatorily redeemable capital stock	30		2		6.00		46		2		5.42		88		3		4.01
Other borrowings	—		—		1.81		1		—		1.17		—		—		0.37
Total interest-bearing liabilities	99,541		1,882		1.89		96,235		1,179		1.22		99,791		860		0.86
Non-interest bearing deposits	4						2						1
Other liabilities	599						582						618
Total capital	5,396						5,098						5,015
Total liabilities and capital	$	105,540					$	101,917					$	105,425
Net interest rate spread					0.37	%					0.36	%					0.30	%
Net interest income and    net interest margin (6)			$	499	0.47	%			$	429	0.42	%			$	363	0.35	%
Average interest-earning assets to    interest-bearing liabilities					105.74	%					105.63	%					105.43	%

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

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

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

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

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

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

Rates on short-term and adjustable-rate assets and liabilities rose more substantially than longer-term rates in 2018 and 2017 due to the increases in short-term LIBOR and the Federal funds target rate. The result was increases in the average rates on total interest-earning assets of 0.68 percentage points in 2018 compared to 2017 and 0.42 percentage points in 2017 over 2016.

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The increase in the net interest rate spread in both 2018 and 2017 was due to the net effect of the favorable earnings factors discussed in the previous section. The increase in net interest margin in 2018 and 2017 was also driven by higher earnings from funding assets with interest-free capital.

Volume/Rate Analysis

Changes in both average balances (volume) and interest rates influence changes in net interest income, as shown in the following table.

(In millions)	2018 over 2017							2017 over 2016
	Volume (1)(3)			Rate (2)(3)		Total		Volume (1)(3)			Rate (2)(3)			Total
Increase (decrease) in interest income
Advances	$	(30	)	$	534	$	504	$	(14	)	$	332		$	318
Mortgage loans held for portfolio	16			8		24		28			8			36
Federal funds sold and securities purchased under resale agreements	37			97		134		(9		)	59			50
Interest-bearing deposits in banks	22			13		35		(4		)	4			—
MBS	23			51		74		(7		)	(12		)	(19		)
Other investments	1			1		2		—			—			—
Loans to other FHLBanks	—			—		—		—			—			—
Total	69			704		773		(6		)	391			385
Increase (decrease) in interest expense
Term deposits	—			—		—		—			1			1
Other interest-bearing deposits	1			8		9		—			3			3
Discount Notes	61			469		530		(26		)	237			211
Unswapped fixed-rate Bonds	(3		)	30		27		4			(9		)	(5		)
Unswapped adjustable-rate Bonds	(17		)	149		132		27			74			101
Swapped Bonds	(14		)	19		5		(8		)	17			9
Mandatorily redeemable capital stock	—			—		—		(2		)	1			(1		)
Other borrowings	—			—		—		—			—			—
Total	28			675		703		(5		)	324			319
Increase (decrease) in net interest income	$	41		$	29	$	70	$	(1	)	$	67		$	66

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

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

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

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Effect of the Use of Derivatives on Net Interest Income

The following table shows the impact on net interest income from the effect of derivatives and hedging activities. For derivatives designated as a fair value hedge, the net interest settlements of interest receivables or payables related to such derivatives are recognized as adjustments to the interest income or expense of the designated hedged item. The effect on earnings from other components of derivatives, including market value adjustments and net interest settlements on derivatives not receiving hedge accounting, is provided in “Non-Interest Income and Non-Interest Expense.”

(In millions)	2018			2017			2016
Advances:
Amortization of hedging activities in net interest income	$	(1	)	$	(2	)	$	(3	)
Net interest settlements included in net interest income	24			(18		)	(60		)
Mortgage loans:
Amortization of derivative fair value adjustments in net interest income	(1		)	(3		)	(7		)
Consolidated Obligation Bonds:
Net interest settlements included in net interest income	(3		)	(1		)	8
Increase (decrease) to net interest income	$	19		$	(24	)	$	(62	)

Most of our use of derivatives synthetically convert the fixed interest rates on certain Advances and Bonds to adjustable rates tied to short-term LIBOR (one- and three-month repricing resets). The positive net effect of derivatives on net interest income in 2018 was primarily due to increases in short-term LIBOR, which resulted in higher net interest settlements received on certain Advances where the fixed interest rates were converted to adjustable-coupon rates. The fluctuation in earnings from the use of derivatives was acceptable because it enabled us to lower market risk exposure by matching actual cash flows between assets and liabilities more closely than would otherwise occur.

Provision for Credit Losses

There was no provision for estimated incurred credit losses in 2018 and 2016. In 2017, we recorded a $0.5 million provision for estimated incurred credit losses in the MPP related to the hurricanes that impacted the United States in the third quarter of 2017. See the "Credit Risk - MPP" section in "Quantitative and Qualitative Disclosures About Risk Management" and Note 10 of the Notes to Financial Statements for additional information on credit exposure in the MPP.

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Non-Interest Income and Non-Interest Expense

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

(Dollars in millions)	2018			2017			2016
Non-interest income (loss)
Net realized gains from sale of held-to-maturity securities	$	—		$	—		$	39
Net losses on derivatives and hedging activities	(41		)	(24		)	(47		)
Net (losses) gains on financial instruments held under fair value option	(14		)	10			40
Other non-interest income, net	18			13			14
Total non-interest income (loss)	$	(37	)	$	(1	)	$	46
Non-interest expense
Compensation and benefits	$	46		$	42		$	38
Other operating expense	20			19			26
Finance Agency	7			7			6
Office of Finance	5			4			4
Litigation settlement	—			—			25
Other	7			7			12
Total non-interest expense	$	85		$	79		$	111
Average total assets	$	105,540		$	101,917		$	105,425
Average regulatory capital	5,442			5,157			5,115
Total non-interest expense to average total assets (1)	0.08		%	0.08		%	0.11		%
Total non-interest expense to average regulatory capital (1)	1.56			1.53			2.17

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

Non-interest income (loss) decreased $36 million in 2018 compared to 2017, primarily due to derivatives and hedging activities. The table below presents further information on the net effect of derivatives and hedging activities on non-interest income. The increase in non-interest expense in 2018 compared to 2017 was driven in part by higher compensation and benefit expenses.

The lower non-interest income (loss) in 2017 compared to 2016 was a result of gains on the sale of securities during the fourth quarter of 2016. Non-interest expense decreased in 2017 compared to 2016 primarily due to a litigation settlement in 2016 of all claims related to the 2008 Lehman bankruptcy.

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Effect of Derivatives and Hedging Activities on Non-Interest Income

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

(In millions)	2018
	Advances		Investment Securities			Mortgage Loans			Consolidated Obligation Bonds			Balance Sheet (1)			Total
Net effect of derivatives and hedging activities
Gains (losses) on fair value hedges	$	2	$	—		$	—		$	—		$	—		$	2
Gains (losses) on derivatives not receiving hedge accounting	1		(9		)	(1		)	18			(6		)	3
Net interest settlements on derivatives not receiving hedge accounting	—		—			—			(46		)	—			(46		)
Net gains (losses) on derivatives and hedging activities	3		(9		)	(1		)	(28		)	(6		)	(41		)
Gains (losses) on trading securities (2)	—		7			—			—			—			7
Gains (losses) on financial instruments held under fair value option (3)	—		—			—			(14		)	—			(14		)
Total net effect on non-interest income	$	3	$	(2	)	$	(1	)	$	(42	)	$	(6	)	$	(48	)

(In millions)	2017
	Advances			Mortgage Loans		Consolidated Obligation Bonds			Balance Sheet (1)			Other (4)		Total
Net effect of derivatives and hedging activities
Gains (losses) on fair value hedges	$	(1	)	$	—	$	1		$	—		$	—	$	—
Gains (losses) on derivatives not receiving hedge accounting	2			4		(6		)	(17		)	—		(17		)
Net interest settlements on derivatives not receiving hedge accounting	(1		)	—		(7		)	—			—		(8		)
Price alignment amount	—			—		—			—			1		1
Net gains (losses) on derivatives and hedging activities	—			4		(12		)	(17		)	1		(24		)
Gains (losses) on financial instruments held under fair value option (3)	—			—		10			—			—		10
Total net effect on non-interest income	$	—		$	4	$	(2	)	$	(17	)	$	1	$	(14	)

(In millions)	2016
	Advances			Mortgage Loans		Consolidated Obligation Bonds			Balance Sheet (1)		Total
Net effect of derivatives and hedging activities
Gains (losses) on fair value hedges	$	1		$	—	$	—		$	—	$	1
Gains (losses) on derivatives not receiving hedge accounting	1			3		(70		)	6		(60		)
Net interest settlements on derivatives not receiving hedge accounting	(1		)	—		13			—		12
Net gains (losses) on derivatives and hedging activities	1			3		(57		)	6		(47		)
Gains (losses) on financial instruments held under fair value option (3)	—			—		40			—		40
Total net effect on non-interest income	$	1		$	3	$	(17	)	$	6	$	(7	)

(1) Balance sheet includes swaptions, which are not designated as hedging a specific financial instrument.

(2) Includes only those gains (losses) on trading securities that have an assigned economic derivative; therefore, this line item may not agree to the Statement of Income.

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

(4) Other includes the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract.

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The total amount of income volatility in derivatives and hedging activities during 2018, 2017, and 2016 was moderate and consistent with the close hedging relationships of our derivative transactions. The higher net losses in 2018 compared to 2017 and 2016 were primarily the result of increases in short-term LIBOR, which drove larger net interest settlement payments associated with certain Bonds where the fixed interest rates were converted to adjustable rates. The fluctuation in net interest settlements was acceptable because it enabled us to lower market risk exposure by matching actual cash flows between assets and liabilities more closely than would otherwise occur. The volatility in each of the periods was also a result of both unrealized fair value gains and losses on instruments we expect to hold to maturity and the realized costs of utilizing swaptions to hedge market risk exposure associated with mortgage assets.

Analysis of Quarterly ROE

The following table summarizes the components of 2018's quarterly ROE and provides quarterly ROE for 2017 and 2016.

	1st  Quarter		2nd  Quarter		3rd  Quarter		4th  Quarter		Total
Components of 2018 ROE:
Net interest income:
Other net interest income	9.19	%	9.65	%	10.09	%	9.24	%	9.54	%
Net amortization	(0.31	)	(0.31	)	(0.33	)	(0.31	)	(0.31	)
Prepayment fees	—		0.03		—		0.01		0.01
Total net interest income	8.88		9.37		9.76		8.94		9.24
Net (losses) gains on derivatives and    hedging activities	(1.98	)	(0.84	)	(0.66	)	0.47		(0.75	)
Other non-interest income (loss)	1.69		(0.09	)	(0.01	)	(1.30	)	0.07
Total non-interest (loss) income	(0.29	)	(0.93	)	(0.67	)	(0.83	)	(0.68	)
Total income	8.59		8.44		9.09		8.11		8.56
Total non-interest expense	1.66		1.60		1.45		1.55		1.57
Affordable Housing Program assessments	0.70		0.69		0.77		0.66		0.70
2018 ROE	6.23	%	6.15	%	6.87	%	5.90	%	6.29	%
2017 ROE	5.25	%	6.94	%	5.97	%	6.42	%	6.15	%
2016 ROE	4.50	%	4.93	%	4.82	%	7.15	%	5.35	%

The volatility in quarterly ROE during 2018 and 2017 was primarily driven by unrealized gains and losses related to the net effect of derivatives and hedging activities. ROE in the first three quarters of 2018 and 2017 was higher than the first three quarters of 2016 primarily due to lower net amortization of premiums and discounts related to mortgage assets and Consolidated Obligations, and higher earnings from capital. Additionally, ROE in 2017 was higher than the first three quarters of 2016 as a result of higher net spreads earned on short-term and LIBOR indexed assets. ROE in the fourth quarter of 2016 included gains from the sale of securities.

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Segment Information

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

(Dollars in millions)	Traditional Member Finance			MPP			Total
2018
Net interest income after provision for credit losses	$	390		$	109		$	499
Net income	$	255		$	84		$	339
Average assets	$	93,531		$	12,009		$	105,540
Assumed average capital allocation	$	4,781		$	615		$	5,396
Return on average assets (1)	0.27		%	0.70		%	0.32		%
Return on average equity (1)	5.34		%	13.65		%	6.29		%
2017
Net interest income after provision for credit losses	$	335		$	94		$	429
Net income	$	243		$	71		$	314
Average assets	$	91,485		$	10,432		$	101,917
Assumed average capital allocation	$	4,576		$	522		$	5,098
Return on average assets (1)	0.27		%	0.68		%	0.31		%
Return on average equity (1)	5.30		%	13.60		%	6.15		%
2016
Net interest income after provision for credit losses	$	288		$	75		$	363
Net income	$	205		$	63		$	268
Average assets	$	96,855		$	8,570		$	105,425
Assumed average capital allocation	$	4,607		$	408		$	5,015
Return on average assets (1)	0.21		%	0.73		%	0.25		%
Return on average equity (1)	4.45		%	15.44		%	5.35		%

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

Traditional Member Finance Segment

2018 Versus 2017:The increase in net income in 2018 compared to 2017 was due primarily to higher earnings from funding assets with interest-free capital, the growth in investment balances and higher spreads earned on MBS. However, these positive factors were partially offset by lower spreads on liquidity investments and lower average Advance balances.

2017 Versus 2016:The increase in net income in 2017 compared to 2016 was due primarily to lower net amortization and higher spreads earned on short-term and LIBOR-indexed Advances as discussed in the "Components of Net Interest Income" section above. These positive factors were partially offset by lower spreads on MBS.

MPP Segment

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

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

2018 Versus 2017:The MPP continued to earn a substantial level of profitability compared to market interest rates, with a moderate amount of market risk and a minimal amount of credit risk. In 2018, the MPP averaged 11 percent of total average assets while accounting for 25 percent of earnings. Net income increased in 2018 compared to 2017 primarily due to the rising interest rate environment and growth in average MPP balances.

2017 Versus 2016:Net income increased in 2017 compared to 2016 primarily due to lower amortization of purchased premiums on mortgage loans and concession fees on Consolidated Obligations and the positive impact from growth in average MPP balances. The increase in net income was partially offset by lower spreads earned on MPP, as a result of actions taken to reduce market risk exposure, and losses on derivatives and hedging activities.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT

Overview

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

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

We practice this conservative risk philosophy in many ways:

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

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

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

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

▪ We maintain a prudent amount of financial leverage.

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

▪ We hold an amount of retained earnings that we believe will protect the par value of capital stock and provide for dividend stabilization.

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

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

▪ by anticipating potential business risks and developing appropriate responses;

▪ by defining permissible lines of business;

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

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

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

▪ by specifying capital adequacy minimums; and

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

Market Risk

Overview

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

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

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

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

Policy Limits on Market Risk Exposure

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

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

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

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

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

▪ Market Capitalization. The market capitalization ratio (defined as the ratio of the market value of equity to the par value of regulatory stock) must be above 100 percent in the current rate environment and must be above 95 percent in each of the two interest rate shock scenarios.

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

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

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

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

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

Market Value of Equity

(Dollars in millions)	Down 300			Down 200			Down 100			Flat Rates		Up 100			Up 200			Up 300
Average Results
2018 Full Year
Market Value of Equity	$	4,936		$	5,154		$	5,306		$	5,264	$	5,176		$	5,105		$	5,045
% Change from Flat Case	(6.2		)%	(2.1		)%	0.8		%	—		(1.7		)%	(3.0		)%	(4.2		)%
2017 Full Year
Market Value of Equity	$	4,702		$	4,765		$	4,973		$	5,021	$	4,956		$	4,881		$	4,815
% Change from Flat Case	(6.3		)%	(5.1		)%	(0.9		)%	—		(1.3		)%	(2.8		)%	(4.1		)%
Month-End Results
December 31, 2018
Market Value of Equity	$	4,736		$	4,911		$	5,130		$	5,149	$	5,043		$	4,951		$	4,906
% Change from Flat Case	(8.0		)%	(4.6		)%	(0.4		)%	—		(2.1		)%	(3.8		)%	(4.7		)%
December 31, 2017
Market Value of Equity	$	4,764		$	4,837		$	5,095		$	5,165	$	5,097		$	5,027		$	4,955
% Change from Flat Case	(7.8		)%	(6.3		)%	(1.3		)%	—		(1.3		)%	(2.7		)%	(4.1		)%

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Duration of Equity

(In years)	Down 300		Down 200		Down 100		Flat Rates	Up 100	Up 200	Up 300
Average Results
2018 Full Year	(4.5	)	(4.7	)	(0.9	)	1.7	1.4	1.2	1.1
2017 Full Year	(1.7	)	(4.2	)	(3.8	)	0.4	1.6	1.4	1.4
Month-End Results
December 31, 2018	(3.8	)	(5.6	)	(2.5	)	1.2	2.0	1.0	0.6
December 31, 2017	(2.0	)	(5.3	)	(4.4	)	0.5	1.5	1.4	1.5

The overall market risk exposure to changing interest rates was stable, at a moderate level, and well within policy limits. The duration of equity provides an estimate of the change in market value of equity for a 1.00 percentage point further change in interest rates from the rate shock level.

Based on the totality of our risk analysis, we expect that profitability, defined as the level of ROE compared with short-term market rates, will remain competitive unless interest rates change by large amounts in a short period of time. Large decreases in long-term interest rates could substantially decrease profitability in the near term before reverting over time to levels above market interest rates. Similarly, we believe that profitability would not become uncompetitive in a rising rate environment unless interest rates were to permanently increase in a short period of time by four percentage points or more and persist at the higher levels for a long period of time.

Market Risk Exposure of the Mortgage Assets Portfolio

The mortgage assets portfolio normally accounts for almost all market risk exposure because of prepayment volatility that we cannot completely hedge while maintaining sufficient net spreads. Sensitivities of the market value of equity allocated to the mortgage assets portfolio under interest rate shocks (in basis points) are shown below. The average mortgage assets portfolio had an assumed capital allocation of $1.3 billion in 2018 based on the entire balance sheet's average regulatory capital-to-assets ratio. Average results are compiled using data for each month end. The market value sensitivities are one measure we use to analyze the portfolio's estimated market risk exposure.

% Change in Market Value of Equity-Mortgage Assets Portfolio

	Down 300		Down 200		Down 100		Flat Rates	Up 100		Up 200		Up 300
Average Results
2018 Full Year	(35.9	)%	(15.2	)%	0.3	%	—	(4.3	)%	(7.4	)%	(10.0	)%
2017 Full Year	(36.1	)%	(29.1	)%	(6.8	)%	—	(3.8	)%	(8.6	)%	(12.8	)%
Month-End Results
December 31, 2018	(41.2	)%	(24.7	)%	(3.6	)%	—	(7.0	)%	(13.2	)%	(15.9	)%
December 31, 2017	(39.4	)%	(32.2	)%	(8.7	)%	—	(2.4	)%	(4.9	)%	(7.8	)%

The average risk exposure of the mortgage assets portfolio in 2018 remained aligned with our preference to keep our exposure to market risk at a low to moderate level. The variances between periods shown reflect normal changes in the balance sheet composition, and for the down 200 and down 300 shocks, the lower levels of interest rates in 2017. We believe the mortgage asset portfolio will continue to provide an acceptable risk adjusted return consistent with our risk appetite philosophy.

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Use of Derivatives in Market Risk Management

A key component of hedging market risk exposure is the use of derivative transactions. The following table presents the notional amounts of the derivatives classified by how we designate the hedging relationship. The notional amount of derivatives at December 31, 2018 decreased by $0.7 billion (five percent) from the end of 2017, driven primarily by normal fluctuations in balance sheet composition.

(In millions)		December 31, 2018				December 31, 2017
Hedged Item/Hedging Instrument	Hedging Objective	Fair Value Hedge		Economic Hedge		Fair Value Hedge		Economic Hedge
Advances:
Pay-fixed, receive-float interest rate swap (without options)	Converts the Advance's fixed rate to a variable-rate index.	$	5,408	$	10	$	4,686	$	15
Pay-fixed, receive-float interest rate swap (with options)	Converts the Advance's fixed rate to a variable-rate index and offsets option risk in the Advance.	493		150		379		150
Total Advances		5,901		160		5,065		165
Investment securities:
Pay-fixed, receive-float interest rate swap (without options)	Converts the investment security's fixed rate to a variable-rate index.	52		222		—		—
Mortgage Loans:
Forward settlement agreement	Protects against changes in market value of fixed-rate Mandatory Delivery Contracts resulting from changes in interest rates.	—		131		—		212
Consolidated Obligations Bonds:
Receive-fixed, pay-float interest rate swap (without options)	Converts the Bond's fixed rate to a variable-rate index.	15		3,376		874		5,529
Receive-fixed, pay-float interest rate swap (with options)	Converts the Bond's fixed rate to a variable-rate index and offsets option risk in the Bond.	239		565		54		95
Total Consolidated Obligations    Bonds		254		3,941		928		5,624
Balance Sheet:
Interest rate swaptions	Provides the option to enter into an interest rate swap to offset interest-rate or prepayment risk.	—		3,000		—		2,316
Stand-Alone Derivatives:
Mandatory Delivery Contracts	Exposure to fair-value risk associated with fixed rate mortgage purchase commitments.	—		146		—		219
Total		$	6,207	$	7,600	$	5,993	$	8,536

See Note 11 of the Notes to Financial Statements for additional information on how we use derivatives and the types of assets and liabilities hedged with derivatives.

Capital Adequacy

Retained Earnings

We must hold sufficient capital to protect against exposure to various risks, including market, credit, and operational. We regularly conduct a variety of measurements and assessments for capital adequacy. At December 31, 2018, our capital management policy set forth a range of $400 million to $600 million as the minimum amount of retained earnings we believe is necessary to mitigate impairment risk and to provide for dividend stability from factors that could cause earnings to be volatile.

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The following table presents retained earnings.

(In millions)	December 31, 2018		December 31, 2017
Unrestricted retained earnings	$	632	$	617
Restricted retained earnings (1)	391		323
Total retained earnings	$	1,023	$	940

(1) Pursuant to the FHLBank System's Joint Capital Enhancement Agreement we are not permitted to distribute as dividends.

As noted in the table above, our current balance of retained earnings exceeds the policy range, which we expect will continue to be the case as we bolster capital adequacy over time by allocating a portion of earnings to the restricted retained earnings account.

Risk-Based Capital

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

(Dollars in millions)	December 31, 2018			Monthly Average 2018			December 31, 2017
Market risk-based capital	$	327		$	374		$	421
Credit risk-based capital	317			327			261
Operational risk-based capital	194			210			204
Total risk-based capital requirement	838			911			886
Total permanent capital	5,366			5,442			5,211
Excess permanent capital	$	4,528		$	4,531		$	4,325
Risk-based capital as a percent of permanent capital	16		%	17		%	17		%

The risk-based capital requirement has historically not been a constraint on operations, and we do not use it to actively manage any of our risks. It has normally ranged from 10 to 20 percent of permanent capital.

Dodd-Frank Stress Test

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, all FHLBanks are required to perform an annual stress test for capital adequacy. We completed and published the test in November 2018, based on our financial condition as of December 31, 2017 and the methodology prescribed by the Finance Agency. Capital adequacy was sufficient under all established scenarios to fully absorb losses under both adverse and severely adverse economic conditions.

Market Capitalization Ratios

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

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

	December 31, 2018		Monthly Average Year Ended December 31, 2018		December 31, 2017
Market Value of Equity to Par Value of Regulatory Capital Stock - Base Case (Flat Rates) Scenario	119	%	119	%	121	%
Market Value of Equity to Par Value of Regulatory Capital Stock - Down Shock (1)	118		120		119
Market Value of Equity to Par Value of Regulatory Capital Stock - Up Shock (2)	114		115		118

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

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

A base case value below 100 percent could indicate that, in the remote event of an immediate liquidation scenario involving redemption of all capital stock, capital stock may be returned to stockholders at a value below par. This could be due to experiencing risks that lower the market value of capital and/or to having an insufficient amount of retained earnings. In 2018, the market capitalization ratios in the scenarios presented continued to be above our policy requirements. Although the base case ratio of 119 percent was slightly lower at the end of 2018 compared to the end of 2017, it was well above 100 percent because retained earnings were 24 percent of regulatory capital stock at December 31, 2018 and we maintained risk exposures at moderate levels.

The following table presents the market value of equity to the book value of total capital and mandatorily redeemable capital stock.

	December 31, 2018		Monthly Average Year Ended December 31, 2018		December 31, 2017
Market Value of Equity to Book Value of Capital - Base Case (Flat Rates) Scenario (1)	96	%	97	%	99	%
Market Value of Equity to Book Value of Capital - Down Shock (1)(2)	96		98		98
Market Value of Equity to Book Value of Capital - Up Shock (1)(3)	93		94		97

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

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

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

A base-case value below 100 percent indicates that we have realized or could realize risks (especially market risk), such that the market value of total capital owned by stockholders is below the book value of total capital. The base-case ratio of 96 percent at December 31, 2018 indicates that the market value of total capital is $204 million below the book value of total capital. In a scenario in which interest rates increase 200 basis points, the market value of total capital would be $402 million below the book value of total capital. This indicates that in a liquidation scenario, stockholders would not receive the full sum of their total equity ownership in the FHLB. We believe the likelihood of a liquidation scenario is extremely remote; and therefore, we accept the risk of diluting equity ownership in such a scenario.

Credit Risk

Overview

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

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Credit Services

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

Collateral: We require each member to provide a security interest in eligible collateral before it can undertake any secured borrowing. At December 31, 2018, our policy of over-collateralization resulted in total collateral pledged of $348.0 billion to serve members' total borrowing capacity of $283.7 billion of which $214.0 billion was unused. The estimated value of pledged collateral is discounted in order to offset market, credit, and liquidity risks that may affect the collateral's realizable value in the event it must be liquidated. Over-collateralization by one member is not applied to another member.

The table below shows the total pledged collateral (unadjusted for Lendable Value Rates).

	December 31, 2018				December 31, 2017
(Dollars in billions)			Percent of Total				Percent of Total
	Collateral Amount		Pledged Collateral		Collateral Amount		Pledged Collateral
Single family loans	$	204.6	59	%	$	192.3	58	%
Multi-family loans	60.1		17		59.7		18
Commercial real estate	43.3		13		38.6		12
Home equity loans/lines of credit	27.9		8		24.9		8
Bond Securities	11.4		3		12.5		4
Farm real estate	0.7		—		0.7		—
Total	$	348.0	100	%	$	328.7	100	%

At December 31, 2018, 67 percent of collateral was related to residential mortgage lending in single-family loans and home equity loans/lines of credit.

We assign each member one of three levels of collateral status: Blanket, Listing, or Delivery. Assignment is based on a number of factors, including credit ratings, regulatory ratings, problem loan levels and stressed capitalization. Blanket collateral status, which we assign to approximately 89 percent of borrowers, is the least restrictive status and is available to lower-risk bank and credit union members. Approximately 61 percent of pledged collateral is under Blanket status. We monitor the level of eligible collateral pledged under Blanket status using quarterly regulatory financial reports or periodic collateral “Certification” documents submitted by all significant borrowers. Securities collateral and loan collateral pledged by members in Listing status are subject to a periodic market valuation process.

Under Listing collateral status, a member provides us detailed information on specifically identified individual loans that meet certain minimum qualifications. Delivery is the most restrictive collateral status, which we assign to members experiencing significant financial difficulties, insurance companies, Community Development Financial Institutions and newly chartered institutions. We require borrowers in Delivery status to deliver into our custody securities and/or original notes, mortgages or deeds of trust. Under any collateral status, members may elect to pledge bond securities, which we either hold in our custody or, less often, have third parties control on our behalf.

We use third-party services to regularly estimate market values of collateral under Listing and Delivery status. Third-party services use various proprietary models to estimate market values. Assumptions may be made on factors that affect collateral value, such as market liquidity, discount rates, prepayments, liquidation and servicing costs in the event of a default and economic and market conditions. We have policies and procedures for evaluating the reasonableness of collateral valuations.

Borrowing Capacity/Lendable Value: We determine borrowing capacity against pledged collateral by applying collateral discounts, or haircuts, to the value of the collateral. These haircuts result in Lendable Value Rates (LVRs) that are less than the amount of pledged collateral.

LVRs are determined by statistical analysis and management assumptions relating to historical price volatility, inherent credit risks, liquidation costs, and the current credit and economic environment. We apply LVR results to the estimated values of pledged assets. LVRs vary among pledged assets and members based on the member institution type, the financial strength of the member institution, the form of valuation, the issuer of bond collateral or the quality of securitized assets, the quality of the loan collateral as reflected in the manner in which it was underwritten, and the marketability of the pledged assets.

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The table below indicates the range of lendable values remaining after the application of LVRs for each major collateral type pledged at December 31, 2018.

	Lending Values Applied to Collateral
Blanket Status:
Prime 1-4 family loans	71-83%
Multi-family loans	61-74%
Prime home equity loans/lines of credit	50-57%
Commercial real estate loans	67-83%
Farm real estate loans	61-74%
Listing Status/Physical Delivery:
Cash/U.S. Government/U.S. Treasury/U.S. agency securities	92-100%
U.S. agency MBS/collateralized mortgage obligations	92-97%
Private-label residential MBS	66-91%
Private-label commercial MBS	60-90%
Municipal securities	78-94%
Small Business Administration certificates	93-95%
Prime 1-4 family loans	69-87%
Multi-family loans	67-83%
Prime home equity loans/lines of credit	65-80%
Commercial real estate loans	71-87%
Farm real estate loans	69-83%

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

Subprime and Nontraditional Mortgage Loan Collateral:We have policies and processes to identify subprime and nontraditional residential mortgage loans pledged by members. We perform collateral reviews to estimate the volume of subprime and nontraditional loans pledged. Depending on the quality of underwriting and administration, we may subject these loans to lower LVRs.

Internal Credit Ratings: We perform credit underwriting of our members and nonmember borrowers and assign them an internal credit rating on a scale of one to seven, with a higher number representing a less favorable assessment of the institution's financial condition. These credit ratings are based on internal ratings models, credit analyses and consideration of credit ratings from independent credit rating organizations. Credit ratings are used in conjunction with other measures of credit risk in managing secured credit risk exposure.

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

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

(Dollars in billions)
December 31, 2018				December 31, 2017
	Borrowers				Borrowers
		Collateral-Based				Collateral-Based
Credit		Borrowing		Credit		Borrowing
Rating	Number	Capacity		Rating	Number	Capacity
1-3	486	$	272.2	1-3	532	$	262.4
4	131	11.0		4	101	9.2
5	26	0.4		5	28	0.5
6	5	0.1		6	5	0.1
7	7	—		7	5	—
Total	655	$	283.7	Total	671	$	272.2

We consider members with credit ratings of "1" through "4" to be financially sound institutions. At December 31, 2018, 38 borrowers (six percent of the total) had credit ratings of "5" through "7," the same as the end of 2017. These members had $0.5 billion of borrowing capacity at December 31, 2018. Additionally, the decrease in members with credit ratings of "1" through "4" in 2018 was a result of the decline in the overall number of members. We believe the credit rating distribution continues to show a financially sound membership base.

Member Failures, Closures, and Receiverships: There were no member failures in 2018.

MPP

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

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

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

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

▪ credit losses totaling $0.4 million in 2018 and $19.0 million since the introduction of the program in 2000, which represent an immaterial percentage of conventional loans' current unpaid principal balances at December 31, 2018 and of total purchases-to-date for the entire MPP; and

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

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

FICO® Score (1)	December 31, 2018		December 31, 2017
< 620	—	%	—	%
620 to < 660	—		1
660 to < 700	6		6
700 to < 740	17		16
>= 740	77		77
Weighted Average	765		765

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

There was minimal change in the distribution of FICO^® scores at origination in 2018 compared to 2017. The distribution of FICO^® scores at origination is one indication of the portfolio's overall favorable credit quality. At December 31, 2018, 77

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percent of the portfolio had scores at an excellent level of 740 or above and 94 percent had scores above 700, which is a threshold generally considered indicative of homeowners with good credit quality.

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

	Based on Estimated Origination Value					Based On Estimated Current Value
Loan-to-Value	December 31, 2018		December 31, 2017		Loan-to-Value	December 31, 2018		December 31, 2017
<= 60%	13	%	14	%	<= 60%	40	%	41	%
> 60% to 70%	14		15		> 60% to 70%	27		29
> 70% to 80%	58		56		> 70% to 80%	27		24
> 80% to 90%	9		9		> 80% to 90%	5		5
> 90%	6		6		> 90% to 100%	1		1
					> 100%	—		—
Weighted Average	74	%	73	%	Weighted Average	62	%	61	%

The levels of loan-to-value ratios are consistent with the portfolio's excellent credit quality. At December 31, 2018, we estimated that six percent of loans have current loan-to-value ratios above 80 percent, which was unchanged from year-end of 2017.

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

The following table presents the geographical allocation based on the unpaid principal balance of conventional loans in the MPP.

	December 31, 2018			December 31, 2017
Ohio	61	%	Ohio	65	%
Kentucky	13		Kentucky	14
Indiana	11		Indiana	11
Tennessee	3		Tennessee	2
Michigan	1		Michigan	1
All others	11		All others	7
Total	100	%	Total	100	%

Credit Enhancements: Conventional mortgage loans are supported against credit losses by various combinations of primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) (for loans purchased before February 2011), and the Lender Risk Account (LRA). The LRA is a hold back of a portion of the initial purchase price to cover expected credit losses for a specific pool of loans. Starting after five years from the loan purchase date, we may return the hold back to PFIs if they manage credit risk to predefined acceptable levels of exposure on the loan pools they sell to us. As a result, some pools of loans may have sufficient credit enhancements to recapture all losses while other pools of loans may not. The LRA had balances of $213 million and $201 million at December 31, 2018 and 2017, respectively. For more information, see Note 10 of the Notes to Financial Statements.

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

	Conventional Loan Delinquencies
(Dollars in millions)	December 31, 2018			December 31, 2017
Early stage delinquencies - unpaid principal balance (1)	$	36		$	43
Serious delinquencies - unpaid principal balance (2)	$	13		$	17
Early stage delinquency rate (3)	0.4		%	0.5		%
Serious delinquency rate (4)	0.1		%	0.2		%
National average serious delinquency rate (5)	1.6		%	2.0		%

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

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

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

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

(5) National average number of fixed-rate prime and subprime conventional loans that are 90 days or more past due or in the process of foreclosure is based on the most recent national delinquency data available. The December 31, 2018 rate is based on September 30, 2018 data.

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

We consider a high risk loan as having a current loan-to-value ratio above 100 percent. Historically, high risk loans have experienced a minimal amount of serious delinquencies (i.e., delinquencies that are 90 days or more past due or in the process of foreclosure). For example, of the $4 million of conventional principal balances with current estimated loan-to-values above 100 percent at December 31, 2018, none of them were seriously delinquent. We believe these data further support our view that the overall portfolio is comprised of high-quality, well-performing loans.

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

(In millions)	December 31, 2018			December 31, 2017
Estimated incurred credit losses, before credit enhancements	$	(4	)	$	(6	)
Estimated amounts deemed recoverable by:
Primary mortgage insurance	1			1
Supplemental mortgage insurance	1			3
Lender Risk Account	1			1
Estimated incurred credit losses, after credit enhancements	$	(1	)	$	(1	)

The minimal amount of incurred credit losses provides further support on the aggregate health of the portfolio. Credit risk exposure depends on the actual and potential credit performance of the loans in each pool compared to the pool's equity (on individual loans) and credit enhancements, including PMI, the LRA, and SMI. We have assessed that we do not have any credit risk exposure to our PMI providers and our estimation of credit exposure to SMI providers was not considered material at December 31, 2018.

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

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Investments

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

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

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

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

(In millions)	December 31, 2018
	Long-Term Rating
	AA		A		Total
Unsecured Liquidity Investments
Federal funds sold	$	5,640	$	5,153	$	10,793
Certificates of deposit	800		1,550		2,350
Total unsecured liquidity investments	6,440		6,703		13,143
Guaranteed/Secured Liquidity Investments
Securities purchased under agreements to resell	4,402		—		4,402
U.S. Treasury obligations	36		—		36
GSE obligations	277		—		277
Total guaranteed/secured liquidity investments	4,715		—		4,715
Total liquidity investments	$	11,155	$	6,703	$	17,858

	December 31, 2017
	Long-Term Rating
	AA		A		Total
Unsecured Liquidity Investments
Federal funds sold	$	1,465	$	2,185	$	3,650
Certificates of deposit	800		100		900
Total unsecured liquidity investments	2,265		2,285		4,550
Guaranteed/Secured Liquidity Investments
Securities purchased under agreements to resell	7,702		—		7,702
U.S. Treasury obligations	34		—		34
Total guaranteed/secured liquidity investments	7,736		—		7,736
Total liquidity investments	$	10,001	$	2,285	$	12,286

During 2018, we purchased a portion of our total liquidity investments from counterparties for which the investments are secured with collateral (secured resale agreements). We believe these investments present no credit risk exposure to us.

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

(In millions)	December 31, 2018
	Counterparty Rating (1)
Domicile of Counterparty	AA		A		Total
Domestic	$	2,890	$	1,200	$	4,090
U.S. branches and agency offices of foreign commercial banks:
Canada	250		1,286		1,536
Australia	1,500		—		1,500
Finland	1,400		—		1,400
Germany	—		1,250		1,250
United Kingdom	—		800		800
France	—		700		700
Netherlands	—		700		700
Sweden	400		300		700
Norway	—		400		400
Austria	—		67		67
Total U.S. branches and agency offices of foreign commercial banks	3,550		5,503		9,053
Total unsecured investment credit exposure	$	6,440	$	6,703	$	13,143

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

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

(In millions)	December 31, 2018
Domicile of Counterparty	Overnight		Due 2 days through 30 days		Due 31 days through 90 days		Total
Domestic	$	4,090	$	—	$	—	$	4,090
U.S. branches and agency offices of foreign commercial banks:
Canada	1,436		—		100		1,536
Australia	1,500		—		—		1,500
Finland	1,000		—		400		1,400
Germany	500		350		400		1,250
United Kingdom	800		—		—		800
France	700		—		—		700
Netherlands	700		—		—		700
Sweden	—		200		500		700
Norway	—		—		400		400
Austria	67		—		—		67
Total U.S. branches and agency offices of foreign commercial banks	6,703		550		1,800		9,053
Total unsecured investment credit exposure	$	10,793	$	550	$	1,800	$	13,143

At December 31, 2018, all of the $13.1 billion of unsecured investment exposure was to counterparties with holding companies domiciled in countries receiving either AAA or AA long-term sovereign ratings. Furthermore, we restrict a significant portion of unsecured lending to overnight maturities, which further limits risk exposure to these counterparties. By Finance Agency regulation, all counterparties exposed to non-U.S. countries are required to be domestic U.S. branches of foreign counterparties.

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MBS:

GSE MBS

At December 31, 2018, $13.7 billion of MBS held were GSE securities issued by Fannie Mae and Freddie Mac, which provide credit safeguards by guaranteeing either timely or ultimate payments of principal and interest. We believe that the conservatorships of Fannie Mae and Freddie Mac lower the chance that they would not be able to fulfill their credit guarantees and that the securities issued by these two GSEs are effectively government guaranteed. In addition, based on the data available to us and our purchase practices, we believe that most of the mortgage loans backing our GSE MBS are of high quality with acceptable credit performance.

MBS Issued by Other Government Agencies

We also invest in MBS issued and guaranteed by Ginnie Mae and the NCUA. These investments totaled $2.0 billion at December 31, 2018. We believe that the strength of the issuers' guarantees and backing by the full faith and credit of the U.S. government is sufficient to protect us against credit losses on these securities.

Derivatives

Credit Risk Exposure: We mitigate most of the credit risk exposure resulting from derivative transactions through collateralization or use of daily settled contracts. The table below presents the credit rating for derivative positions to which we had credit risk exposure at December 31, 2018.

(In millions)
	Total Notional		Net Derivatives Fair Value Before Collateral			Cash Collateral Pledged to (from) Counterparties		Net Credit Exposure to Counterparties
Nonmember counterparties:
Asset positions with credit exposure:
Uncleared derivatives:
AA-rated	$	60	$	—		$	—	$	—
Total uncleared derivatives	60		—			—		—
Cleared derivatives (1)	3,662		1			16		17
Liability positions with credit exposure:
Uncleared derivatives:
A-rated	15		—			—		—
Total uncleared derivatives	15		—			—		—
Cleared derivatives (1)	5,366		(5		)	52		47
Total derivative positions with credit exposure to nonmember counterparties	9,103		(4		)	68		64
Member institutions (2)	145		2			—		2
Total	$	9,248	$	(2	)	$	68	$	66

(1) Represents derivative transactions cleared with LCH Ltd. and CME Clearing, the FHLB's clearinghouses, which are not rated. LCH Ltd.'s ultimate parent, London Stock Exchange Group Plc is rated A3 by Moody's and A- by Standard & Poor's. CME Clearing's parent, CME Group Inc. is rated Aa3 by Moody's and AA- by Standard & Poor's.

(2) Represents Mandatory Delivery Contracts.

Our exposure to cleared derivatives is primarily associated with our requirement to post initial margin through the clearing agent to the Derivatives Clearing Organizations. The amount of cash collateral pledged as initial margin has increased from our use of cleared derivatives. However, the use of cleared derivatives mitigates credit risk exposure because a central counterparty is substituted for individual counterparties.

At December 31, 2018, the gross and net exposure of uncleared derivatives with residual credit risk exposure was less than $1 million. Gross exposure would likely increase if interest rates rise and could increase if the composition of our derivatives change. However, contractual collateral provisions in these derivatives would limit net exposure to acceptable levels.

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Although we cannot predict if we will realize credit risk losses from any of our derivatives counterparties, we believe that all of the counterparties will be able to continue making timely interest payments and, more generally, to continue to satisfy the terms and conditions of their derivative contracts with us. As of December 31, 2018, we had $549 million of notional principal of interest rate swaps with one member, JPMorgan Chase Bank, N.A., which also had outstanding credit services with us. Due to the amount of market value collateralization, we had no outstanding credit exposure to this counterparty related to interest rate swaps outstanding.

Liquidity Risk

Liquidity Overview

We strive to be in a liquidity position at all times to meet the borrowing needs of our members and to meet all current and future financial commitments. This objective is achieved by managing liquidity positions to maintain stable, reliable, and cost-effective sources of funds while taking into account market conditions, member demand, and the maturity profile of assets and liabilities. Our liquidity position complies with the FHLBank Act, Finance Agency regulations, and internal policies.

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

We believe our liquidity position, as well as that of the System, continued to be strong during 2018. Our overall ability to effectively fund our operations through debt issuances remained sufficient. Investor demand for System debt was robust in 2018. Although we can make no assurances, we expect this to continue to be the case. We believe the possibility of a liquidity or funding crisis in the System that would impair our ability to participate, on a cost-effective basis, in issuances of debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends is remote.

The System works collectively to manage and monitor the System-wide liquidity and funding risks. Liquidity risk includes the risk the System could have difficulty rolling over short-term Obligations when market conditions change, also called refinancing risk. The System has a large reliance on short-term funding; therefore, it has a sharp focus on managing liquidity risk to very low levels. As shown on the Statements of Cash Flows, in 2018, our portion of the System's debt issuances totaled $552.6 billion for Discount Notes and $29.1 billion for Bonds. Access to short-term debt markets has been reliable because investors, driven by liquidity preferences and risk aversion, have sought the System’s short-term debt, which has resulted in strong demand for debt maturing in one year or less.

See the Notes to Financial Statements for more detailed information regarding maturities of certain financial assets and liabilities which are instrumental in determining the amount of liquidity risk. In addition to contractual maturities, other assumptions regarding cash flows such as estimated prepayments, embedded call optionality, and scheduled amortization are considered when managing liquidity risks.

Liquidity Management and Regulatory Requirements

We manage liquidity risk by ensuring compliance with our regulatory liquidity requirements and regularly monitoring other metrics. In particular, current Finance Agency guidance requires us to target at least 5 to 15 consecutive days of a positive amount of liquidity based on specific assumptions under a scenario where no Advances are renewed and a scenario where certain Advances are renewed. We target holding at least three extra days of positive liquidity under each scenario, although as market conditions warrant we may hold, and often do hold, additional amounts.

As discussed in the "Regulatory and Legislative Risk" section of "Executive Overview," the Finance Agency issued the Liquidity AB in August 2018 increasing the expectations with respect to the maintenance of sufficient liquidity for a specified number of days. Under the new Liquidity AB, the calculation of liquidity is intended to provide additional assurance that we can continue to provide Advances to members over an extended period without access to the capital markets. As part of the base case liquidity expectations, the Liquidity AB requires the FHLBanks to maintain sufficient liquidity for an increased period of between 10 to 30 calendar days. Contemporaneously with the issuance of the Liquidity AB, the Finance Agency issued a supervisory letter that identifies initial thresholds for measures of liquidity. The supervisory letter sets forth a phase-in period for the maintenance of sufficient liquidity by requiring 10 calendar days or more of positive daily cash balances, net of cumulative cash flows, by March 31, 2019 and 20 calendar days or more of such balances by December 31, 2019. Under the new guidance, all Advance maturities are now assumed to renew, unless the Advances relate to former members who are ineligible to borrow new Advances.

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The Liquidity AB also provided guidance related to asset/liability maturity funding gap limits, which was implemented beginning December 31, 2018. Funding gap metrics measure the difference between assets and liabilities that are scheduled to mature during a specified period of time and are expressed as a percentage of total assets. The Liquidity AB provides guidance on maintaining appropriate funding gaps for three-month (-10 percent to -20 percent) and one-year (-25 percent to -35 percent) maturity horizons. The Finance Agency's supervisory letter set forth initial funding gap percentage limits of -15 percent and -30 percent for the three-month and one-year maturity horizons, respectively. As of December 31, 2018, we were operating within those limits.

We also meet operational and contingency liquidity requirements. We satisfy the operational liquidity requirement by both meeting a contingency liquidity requirement, discussed below, and because we are able to adequately access the capital markets to issue debt. In addition, we focus on maintaining an adequate liquidity balance and a funding balance between our financial assets and financial liabilities.

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

(In millions)	December 31, 2018			December 31, 2017
Contingency Liquidity Requirement
Total Contingency Liquidity Reserves (1)	$	34,808		$	40,850
Total Requirement (2)	(18,745		)	(32,349		)
Excess Contingency Liquidity Available	$	16,063		$	8,501

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

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

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

(In millions)	December 31, 2018			December 31, 2017
Deposit Reserve Requirement
Total Eligible Deposit Reserves	$	66,643		$	73,728
Total Member Deposits	(664		)	(649		)
Excess Deposit Reserves	$	65,979		$	73,079

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Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2018. We believe that, as in the past, we will continue to have sufficient liquidity, including from access to the debt markets to issue Consolidated Obligations, to satisfy these obligations on a timely basis.

(In millions)	< 1 year		1 < 3 years		3 < 5 years		> 5 years		Total
Contractual Obligations
Long-term debt (Bonds) - par (1)	$	21,086	$	13,828	$	6,207	$	4,526	$	45,647
Operating leases (include premises and equipment)	1		3		2		3		9
Mandatorily redeemable capital stock	17		1		5		—		23
Commitments to fund mortgage loans	146		—		—		—		146
Pension and other postretirement benefit obligations	3		5		5		30		43
Total Contractual Obligations	$	21,253	$	13,837	$	6,219	$	4,559	$	45,868

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

Off-Balance Sheet Arrangements

The following table summarizes our off-balance sheet items at December 31, 2018. For more information, see Note 20 of the Notes to Financial Statements.

(In millions)	< 1 year		1 < 3 years		3 < 5 years		> 5 years		Total
Off-balance sheet items(1)
Standby Letters of Credit	$	14,579	$	60	$	192	$	16	$	14,847
Standby bond purchase agreements	23		55		—		—		78
Consolidated Obligations traded, not yet settled	525		29		51		12		617
Total off-balance sheet items	$	15,127	$	144	$	243	$	28	$	15,542

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

Member Concentration Risk

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

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

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

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

Operational Risks

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

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of Directors, regularly monitors and tests compliance with our policies, procedures, applicable regulatory requirements and best practices.

Internal Department Procedures and Controls

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

Information Systems

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

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

Disaster Recovery Provisions

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

Insurance Coverage

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

Human Resources Policies and Procedures

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

Comprehensive policies and procedures are in place to limit Employment Practices Risk. These are supported by an established internal control system that is routinely monitored and audited. With respect to Human Capital Risk, we strive to maintain a competitive salary and benefit structure, which is regularly reviewed and updated as appropriate to attract and retain qualified staff. In addition, we have a management succession plan that is reviewed and approved by our Board of Directors.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Introduction

The preparation of financial statements in accordance with GAAP requires management to make a number of significant judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although

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management believes its judgments, estimates, and assumptions are reasonable, actual results may differ and other parties could arrive at different conclusions.

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

Accounting for Derivatives and Hedging Activity

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

Fair Value Hedges

As indicated in the "Use of Derivatives in Market Risk Management" section of "Quantitative and Qualitative Disclosures About Risk Management," we designate a portion of our derivatives as fair value hedges. Fair value hedge accounting permits the changes in fair values of the hedged risk in the hedged instruments to be recorded in the current period, thus offsetting, partially or fully, the change in fair value of the derivatives. As of December 31, 2017, for derivatives accounted as fair value hedges, the hedged risk is designated to be changes in LIBOR benchmark interest rates. The result is that there has been a relatively small amount of unrealized earnings volatility from hedging market risk with derivatives.

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

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

Fair value differences that have actually occurred have historically resulted in a relatively small amount of earnings volatility.Each month, we compute fair values on all derivatives and related hedged instruments across a range of interest rate scenarios. For derivatives receiving long-haul fair value hedge accounting, the additional amount of earnings volatility under an assumption of stressed interest rate environments as of year-end 2018 was in a range of positive $9 million to negative $12 million. This range is minimal compared to the notional principal amount.

Fair Value Option--Economic Hedge

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

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

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Accounting for Premiums and Discounts on Mortgage Loans and MBS

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

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

We have historically purchased most MPP loans at premium prices. MBS outstanding at the end of 2018 were purchased at net premium prices close to par. At the end of 2018, the MPP had a net premium balance of $230 million and MBS had a net premium balance of $23 million, resulting in a total mortgage net premium balance of $253 million.

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

Contractual Method

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

Retrospective Method

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

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

It is difficult to calculate how much amortization/accretion is likely to change over time because prepayment projections are inherently subject to uncertainty. Exact trends depend on the relationship between market interest rates and coupon rates on outstanding mortgage assets, the historical evolution of mortgage interest rates, the age of the mortgage loans, demographic and population trends, and other market factors. Changes in amortization/accretion also depend on 1) the accuracy of prepayment projections compared to actual realized prepayments and 2) term structure models used to simulate possible future evolution of various interest rates. The term structure models depend heavily on theories and assumptions related to future interest rates and interest rate volatility. We strive to maintain consistency in our use of prepayment and term structure models, although we do enhance these models based on developments in theories, technologies, best practices, and market conditions.

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Provision for Credit Losses

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

Advances

We evaluate probable credit losses inherent in Advances due to borrower default or delayed receipt of interest and principal, taking into consideration the amount recoverable from the collateral pledged by members to secure Advances. This analysis is performed for each member separately on at least a quarterly basis. We believe we have adequate policies and procedures in place to effectively manage credit risk exposure on Advances. These include monitoring the creditworthiness and financial condition of the institutions to which we lend funds, determining the quality and value of collateral pledged, estimating borrowing capacity based on collateral value and type for each member, and evaluating historical loss experience. At December 31, 2018, we had rights to collateral (either loans or securities), on a member-by-member basis, with an estimated fair value that exceeds the amount of outstanding Advances. At the end of 2018, the aggregate estimated value of this collateral was $348.0 billion. Although some of this over-collateralization may reflect a desire to maintain excess borrowing capacity, all of a member's pledged collateral would be available as necessary to cover any of that member's credit obligations to the FHLB.

Based on the nature and quality of the collateral held as security for Advances, including over-collateralization, our credit analyses of members and collateral, and members' prior repayment history (i.e., we have never recorded a loss from an Advance), we believe that no allowance for losses was necessary at December 31, 2018. See Notes 1 and 10 of the Notes to Financial Statements for additional information.

Mortgage Loans Acquired Under the MPP

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

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

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

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

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

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

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

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

▪ loss severity estimates;

▪ historical claims and default experience;

▪ expected proceeds from credit enhancements;

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

▪ comparisons to industry reported data; and

▪ current economic trends and conditions.

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

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Based on our analysis, as of December 31, 2018, we determined that an allowance for credit losses of $1 million was required for our conventional mortgage loans in the MPP. Substantial reductions in home prices or other economic variables that affect mortgage defaults could increase credit losses experienced in the portfolio.

Fair Values

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

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

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

We categorize each of our financial instruments carried at fair value into one of three levels in accordance with the fair value hierarchy. The hierarchy is based upon the transparency (observable or unobservable) of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources (Levels 1 and 2), while unobservable inputs reflect our assumptions of market variables (Level 3). Management utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Because items classified as Level 3 are valued using significant unobservable inputs, the process for determining the fair value of these items is generally more subjective and involves a high degree of management judgment and use of assumptions. As of December 31, 2018 and 2017, all of our assets and liabilities measured at fair value on a recurring basis were classified as Level 2 within the fair value hierarchy.

RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS

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

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OTHER FINANCIAL INFORMATION

Income Statements (Quarter amounts are unaudited)

Summary income statements for each quarter within the last two years are provided in the tables below.

	2018
(In millions)	1st  Quarter			2nd  Quarter			3rd  Quarter			4th  Quarter			Total
Interest income	$	524		$	594		$	598		$	665		$	2,381
Interest expense	406			465			468			543			1,882
Net interest income	118			129			130			122			499
Non-interest income (loss)	(4		)	(13		)	(9		)	(11		)	(37		)
Non-interest expense	31			31			30			31			123
Net income	$	83		$	85		$	91		$	80		$	339

	2017
(In millions)	1st  Quarter			2nd  Quarter		3rd  Quarter			4th  Quarter		Total
Interest income	$	344		$	385	$	437		$	442	$	1,608
Interest expense	241			279		327			332		1,179
Net interest income	103			106		110			110		429
Non-interest income (loss)	(11		)	10		(3		)	3		(1		)
Non-interest expense	27			29		29			29		114
Net income	$	65		$	87	$	78		$	84	$	314

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Investments

Data on investments for the years ended December 31, 2018, 2017 and 2016 are provided in the tables below.

(In millions)	Carrying Value at December 31,
	2018		2017		2016
Trading securities:
GSE obligations	$	224	$	—	$	—
MBS:
U.S. obligation single-family MBS	—		1		1
Total trading securities	224		1		1
Available-for-sale securities:
Certificates of deposit	2,350		900		1,300
GSE obligations	53		—		—
Total available-for-sale securities	2,403		900		1,300
Held-to-maturity securities:
U.S. Treasury obligations	36		34		—
GSE obligations	—		—		31
MBS:
U.S. obligation single-family MBS	2,041		2,484		3,183
GSE single-family MBS	5,544		6,703		8,186
GSE multi-family MBS	8,171		5,584		3,146
Total held-to-maturity securities	15,792		14,805		14,546
Total securities	18,419		15,706		15,847
Securities purchased under agreements to resell	4,402		7,702		5,230
Federal funds sold	10,793		3,650		4,257
Total investments	$	33,614	$	27,058	$	25,334

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As of December 31, 2018, investments had the following maturity and yield characteristics.

(Dollars in millions)	Due in one year or less			Due after one year through five years			Due after five through 10 years			Due after 10 years			Carrying Value
Trading securities:
GSE obligations	$	—		$	—		$	168		$	56		$	224
MBS(1):
U.S. obligation single-family MBS	—			—			—			—			—
Total trading securities	—			—			168			56			224
Yield on trading securities	—		%	—		%	3.49		%	3.54		%
Available-for-sale securities:
Certificates of deposit	$	2,350		$	—		$	—		$	—		$	2,350
GSE obligations	—			—			49			4			53
Total available-for-sale securities	2,350			—			49			4			2,403
Yield on available-for sale securities	2.67		%	—		%	3.30		%	3.54		%
Held-to-maturity securities:
U.S. Treasury obligations	$	36		$	—		$	—		$	—		$	36
MBS(1):
U.S. obligation single-family MBS	—			354			—			1,687			2,041
GSE single-family MBS	—			—			36			5,508			5,544
GSE multi-family MBS	43			50			7,883			195			8,171
Total held-to-maturity securities	79			404			7,919			7,390			15,792
Yield on held-to-maturity securities	2.39		%	2.83		%	2.76		%	2.44		%
Total securities	$	2,429		$	404		$	8,136		$	7,450		$	18,419
Securities purchased under agreements to resell	4,402			—			—			—			4,402
Federal funds sold	10,793			—			—			—			10,793
Total investments	$	17,624		$	404		$	8,136		$	7,450		$	33,614

(1) MBS allocated based on contractual principal maturities assuming no prepayments.

As of December 31, 2018, the FHLB held securities of the following issuers with a carrying value greater than 10 percent of FHLB capital. The table includes GSEs, securities of the U.S. government, government agencies and corporations, and privately issued certificates of deposit.

(In millions)	Total		Total
Name of Issuer	Carrying Value		Fair Value
Fannie Mae	$	7,607	$	7,512
Freddie Mac	6,108		6,034
Government National Mortgage Association	1,688		1,640
Other (1)	3,016		3,016
Total investment securities	$	18,419	$	18,202

(1) Includes issuers of securities that have a carrying value that is less than 10 percent of FHLB capital.

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Loan Portfolio Analysis

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

(Dollars in millions)	2018			2017			2016			2015			2014
Domestic:
Advances	$	54,822		$	69,918		$	69,882		$	73,292		$	70,406
Real estate mortgages	$	10,502		$	9,682		$	9,150		$	7,954		$	6,956
Real estate mortgages past due 90 days    or more (including those in process of foreclosure)    and still accruing interest, unpaid principal balance	$	19		$	26		$	33		$	42		$	66
Non-accrual loans, unpaid principal balance (1)	$	3		$	3		$	4		$	7		$	4
Troubled debt restructurings, unpaid principal balance (not included above)	$	9		$	9		$	8		$	8		$	5
Allowance for credit losses on mortgage loans,    beginning of year	$	1		$	1		$	2		$	5		$	7
Net charge-offs	—			—			(1		)	(3		)	(2		)
Provision (reversal) for credit losses	—			—			—			—			—
Allowance for credit losses on mortgage loans,    end of year	$	1		$	1		$	1		$	2		$	5
Ratio of net charge-offs during the period to    average loans outstanding during the period	—		%	—		%	0.01		%	0.04		%	0.03		%

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

Other Borrowings

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

(Dollars in millions)	2018			2017			2016
Discount Notes
Outstanding at year-end (book value)	$	46,944		$	46,211		$	44,690
Weighted average rate at year-end (1) (2)	2.35		%	1.23		%	0.46		%
Daily average outstanding for the year (book value)	$	49,185		$	43,124		$	49,835
Weighted average rate for the year (2)	1.86		%	0.89		%	0.35		%
Highest outstanding at any month-end (book value)	$	64,045		$	51,762		$	63,137
Bonds (short-term)
Outstanding at year-end (principal amount)	$	14,728		$	14,405		$	11,332
Weighted average rate at year-end (2) (3)	2.38		%	1.35		%	0.66		%
Daily average outstanding for the year (principal amount)	$	14,937		$	10,359		$	11,996
Weighted average rate for the year (2) (3)	1.87		%	0.93		%	0.51		%
Highest outstanding at any month-end (principal amount)	$	19,438		$	14,405		$	14,591

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

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

(3) Represents the effective coupon rate.

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Term Deposits

At December 31, 2018, term deposits in denominations of $100,000 or more totaled $51,550,000. The table below presents the maturities for term deposits in denominations of $100,000 or more:

(In millions) By remaining maturity at December 31, 2018	3 months or less		Over 3 months but within 6 months		Over 6 months but within 12 months		Over 12 months but within 24 months		Total
Time certificates of deposit	$	21	$	8	$	19	$	4	$	52

Ratios

	2018		2017		2016
Return on average assets	0.32	%	0.31	%	0.25	%
Return on average equity	6.29		6.15		5.35
Average equity to average assets	5.11		5.00		4.76
Dividend payout ratio	75.60	%	66.31	%	63.92	%

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

Information required under this Item is set forth in the “Quantitative and Qualitative Disclosures About Risk Management” caption at Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, of this filing.

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Item 8. Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To theBoard of Directors and Shareholders of the

Federal Home Loan Bank of Cincinnati

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying statements of condition of the Federal Home Loan Bank of Cincinnati (the “FHLB”) as of December 31, 2018 and 2017, and the related statements of income, comprehensive income, capital and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “financial statements”). We also have audited the FHLB’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the FHLB as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLB maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.

Basis for Opinions

The FHLB’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the FHLB’s financial statements and on the FHLB’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the FHLB in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

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

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

Cincinnati, Ohio

March 21, 2019

We have served as the FHLB’s auditor since 1990.

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FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF CONDITION

(In thousands, except par value)	December 31,
	2018			2017
ASSETS
Cash and due from banks (Note 3)	$	10,037		$	26,550
Interest-bearing deposits	122			140
Securities purchased under agreements to resell	4,402,208			7,701,929
Federal funds sold	10,793,000			3,650,000
Investment securities:
Trading securities (Note 4)	223,980			781
Available-for-sale securities (Note 5)	2,402,897			899,876
Held-to-maturity securities (includes $0 and $0 pledged as collateral in 2018 and 2017, respectively, that may be repledged) (a) (Note 6)	15,791,222			14,804,970
Total investment securities	18,418,099			15,705,627
Advances (includes $10,008 and $15,013 at fair value under fair value option in 2018 and 2017, respectively) (Note 8)	54,822,252			69,918,224
Mortgage loans held for portfolio, net of allowance for credit losses of $840 and $1,190 in 2018 and 2017, respectively (Note 9 and Note 10)	10,500,917			9,680,940
Accrued interest receivable	169,982			128,561
Derivative assets (Note 11)	65,765			60,695
Other assets	20,191			22,548
TOTAL ASSETS	$	99,202,573		$	106,895,214
LIABILITIES
Deposits (Note 12)	$	669,016		$	650,531
Consolidated Obligations: (Note 13)
Discount Notes	46,943,632			46,210,458
Bonds (includes $3,906,610 and $5,577,315 at fair value under fair value option in 2018 and 2017, respectively)	45,659,138			54,163,061
Total Consolidated Obligations	92,602,770			100,373,519
Mandatorily redeemable capital stock (Note 15)	23,184			30,031
Accrued interest payable	147,337			128,652
Affordable Housing Program payable (Note 14)	117,336			109,877
Derivative liabilities (Note 11)	4,586			2,893
Other liabilities	308,128			435,198
Total liabilities	93,872,357			101,730,701
Commitments and contingencies (Note 20)
CAPITAL (Note 15)
Capital stock Class B putable ($100 par value); issued and outstanding shares: 43,205 shares in 2018 and 42,411 shares in 2017	4,320,459			4,241,140
Retained earnings:
Unrestricted	631,971			617,034
Restricted	390,829			322,999
Total retained earnings	1,022,800			940,033
Accumulated other comprehensive loss (Note 16)	(13,043		)	(16,660		)
Total capital	5,330,216			5,164,513
TOTAL LIABILITIES AND CAPITAL	$	99,202,573		$	106,895,214

(a) Fair values: $15,575,368 and $14,682,329 at December 31, 2018 and 2017, respectively.

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF INCOME

(In thousands)	For the Years Ended December 31,
	2018			2017			2016
INTEREST INCOME:
Advances	$	1,407,702		$	903,620		$	576,970
Prepayment fees on Advances, net	679			1,351			9,874
Interest-bearing deposits	704			181			320
Securities purchased under agreements to resell	48,454			23,340			9,491
Federal funds sold	179,552			70,287			34,313
Investment securities:
Trading securities	1,535			19			20
Available-for-sale securities	40,444			6,228			5,822
Held-to-maturity securities	380,304			306,204			325,500
Total investment securities	422,283			312,451			331,342
Mortgage loans held for portfolio	321,328			297,075			261,071
Loans to other FHLBanks	20			—			13
Total interest income	2,380,722			1,608,305			1,223,394
INTEREST EXPENSE:
Consolidated Obligations:
Discount Notes	915,032			384,976			173,595
Bonds	951,298			786,922			681,757
Total Consolidated Obligations	1,866,330			1,171,898			855,352
Deposits	14,009			4,738			1,320
Loans from other FHLBanks	5			10			1
Mandatorily redeemable capital stock	1,806			2,514			3,517
Other borrowings	—			2			—
Total interest expense	1,882,150			1,179,162			860,190
NET INTEREST INCOME	498,572			429,143			363,204
Provision for credit losses	—			500			—
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	498,572			428,643			363,204
NON-INTEREST INCOME (LOSS):
Net gains (losses) on investment securities	7,086			(6		)	38,758
Net (losses) gains on financial instruments held under fair value option	(14,184		)	10,409			40,503
Net losses on derivatives and hedging activities	(40,398		)	(24,464		)	(47,431		)
Other, net	10,678			12,824			14,401
Total non-interest income (loss)	(36,818		)	(1,237		)	46,231
NON-INTEREST EXPENSE:
Compensation and benefits	46,317			42,272			38,034
Other operating expenses	20,019			18,880			25,935
Finance Agency	6,389			6,598			6,325
Office of Finance	4,984			4,484			4,284
Litigation settlement	—			—			25,250
Other	7,010			6,484			11,235
Total non-interest expense	84,719			78,718			111,063
INCOME BEFORE ASSESSMENTS	377,035			348,688			298,372
Affordable Housing Program assessments	37,884			35,120			30,189
NET INCOME	$	339,151		$	313,568		$	268,183

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)	For the Years Ended December 31,
	2018		2017			2016
Net income	$	339,151	$	313,568		$	268,183
Other comprehensive income adjustments:
Net unrealized gains (losses) on available-for-sale securities	14		(147		)	(58		)
Pension and postretirement benefits	3,603		(3,257		)	79
Total other comprehensive income adjustments	3,617		(3,404		)	21
Comprehensive income	$	342,768	$	310,164		$	268,204

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF CAPITAL

(In thousands)	Capital Stock Class B - Putable					Retained Earnings								Accumulated Other Comprehensive			Total
	Shares		Par Value			Unrestricted			Restricted		Total			Loss			Capital
BALANCE, DECEMBER 31, 2015	44,288		$	4,428,756		$	530,998		$	206,648	$	737,646		$	(13,277	)	$	5,153,125
Comprehensive income						214,546			53,637		268,183			21			268,204
Proceeds from sale of capital stock	920		92,027														92,027
Net shares reclassified to mandatorily    redeemable capital stock	(3,639	)	(363,839		)												(363,839		)
Cash dividends on capital stock						(171,422		)			(171,422		)				(171,422		)
BALANCE, DECEMBER 31, 2016	41,569		4,156,944			574,122			260,285		834,407			(13,256		)	4,978,095
Comprehensive income						250,854			62,714		313,568			(3,404		)	310,164
Proceeds from sale of capital stock	3,547		354,654														354,654
Net shares reclassified to mandatorily    redeemable capital stock	(2,705	)	(270,458		)												(270,458		)
Cash dividends on capital stock						(207,942		)			(207,942		)				(207,942		)
BALANCE, DECEMBER 31, 2017	42,411		4,241,140			617,034			322,999		940,033			(16,660		)	5,164,513
Comprehensive income						271,321			67,830		339,151			3,617			342,768
Proceeds from sale of capital stock	4,392		439,157														439,157
Repurchase of capital stock	(2,972	)	(297,252		)												(297,252		)
Net shares reclassified to mandatorily    redeemable capital stock	(626	)	(62,586		)												(62,586		)
Cash dividends on capital stock						(256,384		)			(256,384		)				(256,384		)
BALANCE, DECEMBER 31, 2018	43,205		$	4,320,459		$	631,971		$	390,829	$	1,022,800		$	(13,043	)	$	5,330,216

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF CASH FLOWS

(In thousands)	For the Years Ended December 31,
	2018			2017			2016
OPERATING ACTIVITIES:
Net income	$	339,151		$	313,568		$	268,183
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	59,577			57,973			55,296
Net change in derivative and hedging activities	(4,706		)	6,927			63,806
Net change in fair value adjustments on trading securities	(7,086		)	6			5
Net change in fair value adjustments on financial instruments held under fair value option	14,184			(10,409		)	(40,503		)
Other adjustments	(10		)	489			(38,774		)
Net change in:
Accrued interest receivable	(41,482		)	(18,701		)	(15,028		)
Other assets	1,651			23,686			(24,325		)
Accrued interest payable	18,077			4,743			21,273
Other liabilities	25,792			15,456			32,560
Total adjustments	65,997			80,170			54,310
Net cash provided by operating activities	405,148			393,738			322,493
INVESTING ACTIVITIES:
Net change in:
Interest-bearing deposits	(7,089		)	46,981			(113,516		)
Securities purchased under agreements to resell	3,299,721			(2,472,442		)	5,302,492
Federal funds sold	(7,143,000		)	607,000			6,588,000
Premises, software, and equipment	(2,173		)	(2,647		)	(1,623		)
Trading securities:
Proceeds from maturities of long-term	164			182			184
Purchases of long-term	(216,277		)	—			—
Available-for-sale securities:
Net (increase) decrease in short-term	(1,450,000		)	400,000			(600,000		)
Purchases of long-term	(36,000		)	—			—
Held-to-maturity securities:
Net (increase) decrease in short-term	(1,634		)	(2,753		)	1,404
Proceeds from maturities of long-term	2,851,296			2,420,330			2,924,469
Proceeds from sale of long-term	—			—			852,199
Purchases of long-term	(3,996,773		)	(2,992,069		)	(2,529,144		)
Advances:
Repaid	2,889,037,056			2,366,633,884			1,364,290,711
Originated	(2,873,930,828		)	(2,366,705,248		)	(1,360,955,355		)
Mortgage loans held for portfolio:
Principal collected	1,117,727			1,218,035			1,661,697
Purchases	(1,978,111		)	(1,788,156		)	(2,899,907		)
Net cash provided by (used in) investing activities	7,544,079			(2,636,903		)	14,521,611
The accompanying notes are an integral part of these financial statements.

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(continued from previous page)
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)	For the Years Ended December 31,
	2018			2017			2016
FINANCING ACTIVITIES:
Net change in deposits and pass-through reserves	$	28,225		$	(99,633	)	$	3,567
Net payments on derivative contracts with financing elements	(1,107		)	(4,210		)	(23,185		)
Net proceeds from issuance of Consolidated Obligations:
Discount Notes	552,603,900			449,775,543			325,535,819
Bonds	29,071,856			27,080,080			50,922,924
Payments for maturing and retiring Consolidated Obligations:
Discount Notes	(551,919,437		)	(448,296,555		)	(358,051,273		)
Bonds	(37,565,265		)	(26,065,750		)	(32,787,008		)
Proceeds from issuance of capital stock	439,157			354,654			92,027
Payments for repurchase of capital stock	(297,252		)	—			—
Payments for repurchase/redemption of mandatorily redeemable capital stock	(69,433		)	(275,209		)	(366,952		)
Cash dividends paid	(256,384		)	(207,942		)	(171,422		)
Net cash (used in) provided by financing activities	(7,965,740		)	2,260,978			(14,845,503		)
Net (decrease) increase in cash and cash equivalents	(16,513		)	17,813			(1,399		)
Cash and cash equivalents at beginning of the period	26,550			8,737			10,136
Cash and cash equivalents at end of the period	$	10,037		$	26,550		$	8,737
Supplemental Disclosures:
Interest paid	$	1,851,838		$	1,157,662		$	858,401
Affordable Housing Program payments, net	$	30,425		$	30,126		$	32,658

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

NOTES TO FINANCIAL STATEMENTS

Background Information

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

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

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

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

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

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

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

Significant Accounting Policies

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

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Reclassifications. Certain amounts in the 2017 and 2016 financial statements and footnotes have been reclassified to conform to the 2018 presentation. Specifically, due to a change in presentation, variation margin on certain cleared derivatives has been reclassified from netting adjustments and cash collateral and allocated to the individual derivative instruments. Refer to Note 11 for additional information. Also, on January 1, 2018, the FHLB retrospectively adopted the guidance, Improving the Presentation of Net Periodic Pension and Postretirement Benefit Cost, issued by the Financial Accounting Standards Board (FASB) on March 10, 2017. As a result of the adoption, $3,271,000 and $3,898,000 of other components of net benefit costs were reclassified from "Compensation and benefits" to "Other" within the non-interest expense section of the Statements of Income for the years ended December 31, 2017 and December 31, 2016, respectively.

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

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

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

Interest Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold. These investments provide short-term liquidity and are carried at cost. Interest bearing deposits include certificates of deposits (CDs) not meeting the definition of an investment security. The FHLB treats securities purchased under agreements to resell as short-term collateralized loans, which are classified as assets on the Statements of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the FHLB by third-party custodians approved by the FHLB. If the market value of the underlying securities decrease below the market value required as collateral, the counterparty has the option to (1) place an equivalent amount of additional securities in safekeeping in the name of the FHLB or (2) remit an equivalent amount of cash. Federal funds sold consist of short-term, unsecured loans generally transacted with counterparties that are considered by the FHLB to be of investment quality.

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

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

Available-for-Sale. Securities that are not classified as held-to-maturity or trading are classified as available-for-sale and are carried at fair value. The change in fair value of available-for-sale securities is recorded in other comprehensive income as net unrealized gains (losses) on available-for-sale securities. For available-for-sale securities that have been hedged and qualify as a fair value hedge, the FHLB records the portion of the change in the fair value of the investment related to the risk being hedged in non-interest income as net gains (losses) on derivatives and hedging activities together with the related change in the fair value of the derivative, and records the remainder of the change in the fair value of the investment in other comprehensive income as net unrealized gains (losses) on available-for-sale securities.

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

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

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

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

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

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

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

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

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

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

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

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

Prepayment Fees. The FHLB charges a borrower a prepayment fee when the borrower prepays certain Advances before the original maturity. The FHLB records prepayment fees, net of basis adjustments related to hedging activities included in the

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carrying value of the Advances, as “Prepayment fees on Advances, net” in the interest income section of the Statements of Income.

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

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

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

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

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

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

Allowance for Credit Losses.An allowance for credit losses is separately established for each identified portfolio segment, if it is probable that a loss triggering event has occurred in the FHLB's portfolio as of the Statements of Condition date and the amount of loss can be reasonably estimated. A loan is considered impaired when, based on current information and events, it is probable that the FHLB will be unable to collect all amounts due according to the contractual terms of the loan agreement. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability. See Note 10 for details on each allowance methodology.

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

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

Collateral-dependent Loans. An impaired loan is 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 loan that is considered collateral-dependent is measured for impairment based on the fair value of the underlying property less estimated selling costs, with any shortfall recognized as an allowance for loan loss or charged-off. Interest income on impaired loans is recognized in the same manner as non-accrual loans noted below.

Non-accrual Loans. The FHLB places a conventional mortgage loan on non-accrual status if it is determined that either (1) the collection of interest or principal is doubtful (e.g., when a related allowance for credit losses is recorded on a loan considered to be a troubled debt restructuring as a result of the individual evaluation for impairment), or (2) interest or principal is past due for 90 days or more, except when the loan is well-secured and in the process of collection (e.g., through credit enhancements

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and with monthly remittances on a schedule/scheduled basis). Loans with remittances on a schedule/scheduled basis means the FHLB receives monthly principal and interest payments from the servicer regardless of whether the mortgagee is making payments to the servicer. Loans with monthly remittances on an actual/actual basis are considered well-secured; however, servicers of actual/actual loan types contractually do not advance principal and interest regardless of borrower creditworthiness. As a result, these loans are placed on non-accrual status once they become 90 days delinquent.

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

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

Premises, Software and Equipment, Net. Premises, software and equipment are included in other assets on the Statements of Condition. The FHLB records premises, software and equipment at cost less accumulated depreciation and amortization. The FHLB computes depreciation on a straight-line methodology over the estimated useful lives of assets ranging from three to ten years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The FHLB capitalizes improvements and major renewals but expenses ordinary maintenance and repairs when incurred. The FHLB capitalizes and amortizes the cost of computer software developed or obtained for internal use over future periods. In addition, the FHLB includes gains and losses on the disposal of premises, software and equipment in other non-interest income in the Statements of Income.

Premises, software and equipment were $8,190,000 and $8,896,000, which was net of accumulated depreciation and amortization of $29,007,000 and $26,167,000 as of December 31, 2018 and 2017, respectively. For the years ended December 31, 2018, 2017, and 2016, the depreciation and amortization expense for premises, software and equipment was $2,889,000, $2,949,000, and $2,883,000, respectively.

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

The FHLB utilizes two Derivative Clearing Organizations (Clearinghouses), for all cleared derivative transactions, LCH Ltd. and CME Clearing. Effective January 16, 2018, LCH Ltd. made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral. CME Clearing made the same changes to its rulebook on January 3, 2017. As a result, at both Clearinghouses, variation margin is characterized as daily settlement payments, rather than cash collateral. At both Clearinghouses, initial margin is considered cash collateral.

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

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

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

Accounting for Fair Value Hedges. If hedging relationships meet certain criteria including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they are eligible for fair value hedge accounting and the offsetting changes in fair value of the hedged items attributable to the hedged risk may be recorded in

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earnings. The application of hedge accounting generally requires the FHLB to evaluate the effectiveness of the hedging relationships at inception and on an ongoing basis and to calculate the changes in fair value of the derivatives and related hedged items independently. This is known as the “long-haul” method of accounting. Transactions that meet more stringent criteria qualify for the “shortcut” method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in value of the related derivative.

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

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

Accounting for Economic Hedges. An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities, or firm commitments that does not qualify, or was not designated, for hedge accounting, but is an acceptable hedging strategy under the FHLB's risk management program. These economic hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative hedge transactions. An economic hedge introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in the FHLB's income but that are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. As a result, the FHLB recognizes the net interest and the change in fair value of these derivatives in non-interest income as “Net losses on derivatives and hedging activities” with no offsetting fair value adjustments for the assets, liabilities, or firm commitments.

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

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

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

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

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

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

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

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

Mandatorily Redeemable Capital Stock. The FHLB reclassifies stock subject to redemption from equity to liability upon expiration of the “grace period” after a member provides written notice of redemption, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or involuntary termination from membership, because the member's shares then meet the definition of a mandatorily redeemable financial instrument. Shares meeting this definition are reclassified to a liability at fair value. Dividends declared on shares classified as a liability are accrued at the expected dividend rate and reflected as interest expense in the Statements of Income. The repurchase or redemption of mandatorily redeemable capital stock is reflected as a cash outflow in the financing activities section of the Statements of Cash Flows.

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

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

Standby Letters of Credit. The FHLB records commitment fees for Standby Letters of Credit as deferred income when it receives the fees and accretes them using a straight-line methodology over the term of the Standby Letter of Credit. Based upon past experience, the FHLB's management believes that the likelihood of Standby Letters of Credit being drawn upon is remote.

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

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

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

Affordable Housing Program (AHP).The FHLBank Act requires each FHLBank to establish and fund an AHP. The FHLB charges the required funding for AHP to earnings and establishes a liability. The AHP funds provide subsidies to members to

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

Note 2 - Recently Issued Accounting Standards and Interpretations

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. On October 25, 2018, the FASB issued guidance that permits the OIS rate based on SOFR as an eligible U.S. benchmark interest rate for hedge accounting purposes, to facilitate the LIBOR to SOFR transition. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2019 (concurrent with the adoption of the hedging standard mentioned below). This guidance was adopted prospectively for qualifying new or re-designated hedging relationships entered into on or after January 1, 2019; however, the FHLB did not implement any SOFR OIS hedge strategies upon adoption. The FHLB will continue to assess opportunities to expand its eligible hedge strategies in the future.

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. On August 29, 2018, the FASB issued amended guidance that aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance becomes effective for the FHLB for the interim and annual periods beginning on January 1, 2020. Early adoption is permitted. The FHLB is in the process of evaluating the guidance, and its effect on the FHLB’s financial condition, results of operations, and cash flows has not yet been determined.

Changes to the Disclosure Requirements for Defined Benefit Plans. On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans to improve disclosure effectiveness. This guidance becomes effective for annual periods ending after December 15, 2020 (December 31, 2020 for the FHLB) and will be applied retrospectively for all comparative periods presented. Early adoption is permitted. The FHLB does not intend to adopt this guidance early. The adoption of this guidance will affect the FHLB's disclosures, but will not have any effect on the FHLB's financial condition, results of operations, or cash flows.

Changes to the Disclosure Requirements for Fair Value Measurement. On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for fair value measurements to improve disclosure effectiveness. This guidance becomes effective for the FHLB for the interim and annual periods beginning on January 1, 2020. Early adoption is permitted. The FHLB does not intend to adopt this guidance early. The adoption of this guidance will affect the FHLB's disclosures, but will not have any effect on the FHLB's financial condition, results of operations, or cash flows.

Targeted Improvements to Accounting for Hedging Activities. On August 28, 2017, the FASB issued amended guidance 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, 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. In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2019 and was applied to all existing hedging relationships as of that date. On January 1, 2019, the FHLB modified the presentation of fair value hedge results on its Statements of Income, as well as relevant disclosures, prospectively. However, the adoption of this guidance did not have a material effect on the FHLB's financial condition, results of operations, or cash flows.

Premium Amortization on Purchased Callable Debt Securities. On March 30, 2017, the FASB issued amended guidance to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance was adopted on January 1, 2019, and is applied using a modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The guidance did not have an impact on the FHLB’s financial condition, results of operations, or cash flows.

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Measurement of Credit Losses on Financial Instruments. On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to immediately record the full amount of expected credit losses in their loan portfolios. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also requires, among other things, credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses and expanded disclosure requirements. The guidance becomes effective for the FHLB for the interim and annual periods beginning on January 1, 2020. Early adoption is permitted. The guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The FHLB does not intend to adopt the new guidance early. Based on its preliminary assessments, the FHLB does not expect the guidance to result in an allowance for credit losses for certain financial instruments including Advances, U.S. obligations/GSE investments, securities purchased under agreement to resell and other short-term investments given the specific terms, issuer guarantees, and/or collateralized/secured nature of the instruments. For mortgage loans held for portfolio, the FHLB does not expect the guidance to have a material impact. However, the FHLB's expectation of the guidance's ultimate impact on its financial condition, results of operations, and cash flows may change depending upon the composition of the FHLB’s financial assets at the adoption date and the economic conditions and forecasts at that time.

Leases. On February 25, 2016, the FASB issued guidance which requires recognition of lease assets and lease liabilities on the Statement of Condition and disclosure of key information about leasing arrangements. In particular, this guidance requires a lessee, of operating or finance leases, to recognize on the Statement of Condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2019. However, the adoption of this guidance did not have a material impact on the FHLB's financial condition, results of operations, or cash flows.

Note 3 - Cash and Due from Banks

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

Compensating Balances. The FHLB maintains collected cash balances with commercial banks in return for certain services. These agreements contain no legal restrictions on the withdrawal of funds. The average collected cash balances for the years ended December 31, 2018 and 2017 were approximately $118,000 and $98,000.

Pass-through Deposit Reserves. The FHLB acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. The amount shown as “Cash and due from banks” includes pass-through reserves deposited with Federal Reserve Banks of approximately $6,478,000 and $1,805,000 as of December 31, 2018 and 2017.

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Note 4 - Trading Securities

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

Fair Value	December 31, 2018		December 31, 2017
Non-MBS:
GSE obligations	$	223,368	$	—
MBS:
U.S. obligation single-family MBS	612		781
Total	$	223,980	$	781

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

	For the Years Ended December 31,
	2018		2017			2016
Net gains (losses) on trading securities held at period end	$	7,086	$	(6	)	$	(5	)
Net gains (losses) on trading securities	$	7,086	$	(6	)	$	(5	)

Note 5 - Available-for-Sale Securities

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

	December 31, 2018
	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Certificates of deposit	$	2,350,000	$	71	$	(69	)	$	2,350,002
GSE obligations	53,007		16		(128		)	52,895
Total	$	2,403,007	$	87	$	(197	)	$	2,402,897
	December 31, 2017
	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Certificates of deposit	$	900,000	$	—	$	(124	)	$	899,876
Total	$	900,000	$	—	$	(124	)	$	899,876

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

All securities outstanding with gross unrealized losses at December 31, 2018 and 2017 were in a continuous unrealized loss position for less than 12 months.

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

	December 31, 2018				December 31, 2017
Year of Maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in 1 year or less	$	2,350,000	$	2,350,002	$	900,000	$	899,876
Due after 1 year through 5 years	—		—		—		—
Due after 5 years through 10 years	48,999		48,904		—		—
Due after 10 years	4,008		3,991		—		—
Total	$	2,403,007	$	2,402,897	$	900,000	$	899,876

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Table 5.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)

	December 31, 2018		December 31, 2017
Amortized cost of available-for-sale securities:
Fixed-rate	$	2,403,007	$	900,000

Realized Gains and Losses. The FHLB had no sales of securities out of its available-for-sale portfolio for the years endedDecember 31, 2018, 2017, or 2016.

Note 6 - Held-to-Maturity Securities

Table 6.1 - Held-to-Maturity Securities by Major Security Types (in thousands)

	December 31, 2018
	Amortized Cost (1)		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses			Fair Value
Non-MBS:
U.S. Treasury obligations	$	35,667	$	—	$	(6	)	$	35,661
Total non-MBS	35,667		—		(6		)	35,661
MBS:
U.S. obligation single-family MBS	2,040,642		540		(47,463		)	1,993,719
GSE single-family MBS	5,543,524		9,891		(162,097		)	5,391,318
GSE multi-family MBS	8,171,389		1,739		(18,458		)	8,154,670
Total MBS	15,755,555		12,170		(228,018		)	15,539,707
Total	$	15,791,222	$	12,170	$	(228,024	)	$	15,575,368
	December 31, 2017
	Amortized Cost (1)		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses			Fair Value
Non-MBS:
U.S. Treasury obligations	$	34,033	$	—	$	(6	)	$	34,027
Total non-MBS	34,033		—		(6		)	34,027
MBS:
U.S. obligation single-family MBS	2,483,446		1,974		(23,547		)	2,461,873
GSE single-family MBS	6,703,367		37,265		(138,960		)	6,601,672
GSE multi-family MBS	5,584,124		4,956		(4,323		)	5,584,757
Total MBS	14,770,937		44,195		(166,830		)	14,648,302
Total	$	14,804,970	$	44,195	$	(166,836	)	$	14,682,329

(1) Carrying value equals amortized cost.

Table 6.2 - Net Purchased Premiums Included in the Amortized Cost of MBS Classified as Held-to-Maturity (in thousands)

	December 31, 2018			December 31, 2017
Premiums	$	42,299		$	49,713
Discounts	(19,730		)	(24,243		)
Net purchased premiums	$	22,569		$	25,470

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Table 6.3 summarizes the held-to-maturity securities with unrealized losses, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 6.3 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position (in thousands)

	December 31, 2018
	Less than 12 Months					12 Months or more					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Non-MBS:
U.S. Treasury obligations	$	35,661	$	(6	)	$	—	$	—		$	35,661	$	(6	)
Total non-MBS	35,661		(6		)	—		—			35,661		(6		)
MBS:
U.S. obligation single-family MBS	175,663		(1,571		)	1,526,835		(45,892		)	1,702,498		(47,463		)
GSE single-family MBS	401,509		(1,581		)	3,859,608		(160,516		)	4,261,117		(162,097		)
GSE multi-family MBS	5,976,323		(18,185		)	229,739		(273		)	6,206,062		(18,458		)
Total MBS	6,553,495		(21,337		)	5,616,182		(206,681		)	12,169,677		(228,018		)
Total	$	6,589,156	$	(21,343	)	$	5,616,182	$	(206,681	)	$	12,205,338	$	(228,024	)
	December 31, 2017
	Less than 12 Months					12 Months or more					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Non-MBS:
U.S. Treasury obligations	$	34,027	$	(6	)	$	—	$	—		$	34,027	$	(6	)
Total non-MBS	34,027		(6		)	—		—			34,027		(6		)
MBS:
U.S. obligation single-family MBS	1,193,566		(10,455		)	657,209		(13,092		)	1,850,775		(23,547		)
GSE single-family MBS	1,169,590		(14,171		)	3,578,537		(124,789		)	4,748,127		(138,960		)
GSE multi-family MBS	1,133,452		(4,307		)	136,051		(16		)	1,269,503		(4,323		)
Total MBS	3,496,608		(28,933		)	4,371,797		(137,897		)	7,868,405		(166,830		)
Total	$	3,530,635	$	(28,939	)	$	4,371,797	$	(137,897	)	$	7,902,432	$	(166,836	)

Table 6.4 - Held-to-Maturity Securities by Contractual Maturity (in thousands)

	December 31, 2018				December 31, 2017
Year of Maturity	Amortized Cost (1)		Fair Value		Amortized Cost (1)		Fair Value
Non-MBS:
Due in 1 year or less	$	35,667	$	35,661	$	34,033	$	34,027
Due after 1 year through 5 years	—		—		—		—
Due after 5 years through 10 years	—		—		—		—
Due after 10 years	—		—		—		—
Total non-MBS	35,667		35,661		34,033		34,027
MBS (2)	15,755,555		15,539,707		14,770,937		14,648,302
Total	$	15,791,222	$	15,575,368	$	14,804,970	$	14,682,329

(1) Carrying value equals amortized cost.

(2) MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

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Table 6.5 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)

	December 31, 2018		December 31, 2017
Amortized cost of non-MBS:
Fixed-rate	$	35,667	$	34,033
Total amortized cost of non-MBS	35,667		34,033
Amortized cost of MBS:
Fixed-rate	6,652,055		8,003,906
Variable-rate	9,103,500		6,767,031
Total amortized cost of MBS	15,755,555		14,770,937
Total	$	15,791,222	$	14,804,970

Realized Gains and Losses. The FHLB sold securities out of its held-to-maturity portfolio during the period noted below in Table 6.6, each of which had less than 15 percent of the acquired principal outstanding at the time of the sale. These sales were considered maturities for the purposes of security classification.

Table 6.6 - Proceeds from Sale and Gains on Held-to-Maturity Securities (in thousands)

	For the Years Ended December 31,
	2018		2017		2016
Proceeds from sale of held-to-maturity securities	$	—	$	—	$	852,199
Gross gains from sale of held-to-maturity securities	—		—		38,763

Note 7 - Other-Than-Temporary Impairment Analysis

The FHLB evaluates any of its individual available-for-sale and held-to-maturity investment securities holdings in an unrealized loss position for other-than-temporary impairment on a quarterly basis.

U.S. Obligations and GSE Investments

For its U.S. obligations and GSE investments (MBS and non-MBS), the FHLB has determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLB from losses based on current expectations. As a result, the FHLB determined that, as of December 31, 2018, all of the gross unrealized losses on these investments were temporary as the declines in market value of these securities were not attributable to credit quality. Furthermore, the FHLB does not intend to sell the investments, and it is not more likely than not that the FHLB will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLB did not consider any of these investments to be other-than-temporarily impaired at December 31, 2018.

All Other Investment Securities

The FHLB also reviewed its other securities that have experienced unrealized losses at December 31, 2018 and determined that the unrealized losses are due primarily to interest rate volatility and/or illiquidity. These losses are considered temporary as the FHLB expects to recover its entire amortized cost basis. Additionally, because the FHLB does not intend to sell these securities, nor is it more likely than not that the FHLB will be required to sell the securities before recovery, it did not consider the investments to be other-than-temporarily impaired at December 31, 2018.

The FHLB did not consider any of its investments to be other-than-temporarily impaired at December 31, 2017.

Note 8 - Advances

The FHLB offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. Fixed-rate Advances generally have maturities ranging from one day to 30 years. Variable-rate advances generally have maturities ranging from less than 30 days to 10 years, where the interest rates reset periodically at a fixed spread to a specified index. The following table presents Advance redemptions by contractual maturity, including index-amortizing Advances, which are presented according to their predetermined amortization schedules.

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Table 8.1 - Advances by Redemption Term (dollars in thousands)

	December 31, 2018					December 31, 2017
Redemption Term	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Overdrawn demand deposit accounts	$	—		—	%	$	1,302		1.55	%
Due in 1 year or less	38,592,494			2.56		40,473,141			1.55
Due after 1 year through 2 years	6,461,276			2.39		15,655,118			1.69
Due after 2 years through 3 years	3,146,830			2.30		6,537,170			1.74
Due after 3 years through 4 years	1,145,118			2.56		1,980,655			2.00
Due after 4 years through 5 years	935,439			2.76		893,283			2.07
Thereafter	4,591,015			2.98		4,437,731			2.17
Total principal amount	54,872,172			2.56		69,978,400			1.66
Commitment fees	(456		)			(510		)
Discount on Affordable Housing Program (AHP) Advances	(4,386		)			(5,795		)
Premiums	1,510					1,789
Discounts	(3,090		)			(4,252		)
Hedging adjustments	(43,506		)			(51,421		)
Fair value option valuation adjustments and accrued interest	8					13
Total	$	54,822,252				$	69,918,224

The FHLB offers certain fixed and variable-rate Advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable Advances). If the call option is exercised, replacement funding may be available to members. Other Advances may only be prepaid subject to a prepayment fee paid to the FHLB that makes the FHLB financially indifferent to the prepayment of the Advance.

Table 8.2 - Advances by Redemption Term or Next Call Date (in thousands)

Redemption Term or Next Call Date	December 31, 2018		December 31, 2017
Overdrawn demand deposit accounts	$	—	$	1,302
Due in 1 year or less	43,793,555		46,390,733
Due after 1 year through 2 years	4,338,117		15,054,889
Due after 2 years through 3 years	3,490,580		3,768,534
Due after 3 years through 4 years	753,716		2,903,655
Due after 4 years through 5 years	905,189		506,557
Thereafter	1,591,015		1,352,730
Total principal amount	$	54,872,172	$	69,978,400

The FHLB also offers putable Advances. With a putable Advance, the FHLB effectively purchases put options from the member that allows the FHLB to terminate the Advance at predetermined dates. The FHLB normally would exercise its put option when interest rates increase relative to contractual rates.

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Table 8.3 - Advances by Redemption Term or Next Put Date for Putable Advances (in thousands)

Redemption Term or Next Put Date	December 31, 2018		December 31, 2017
Overdrawn demand deposit accounts	$	—	$	1,302
Due in 1 year or less	38,827,494		40,588,641
Due after 1 year through 2 years	6,611,276		15,649,618
Due after 2 years through 3 years	3,221,830		6,537,170
Due after 3 years through 4 years	1,145,118		1,980,655
Due after 4 years through 5 years	835,439		893,283
Thereafter	4,231,015		4,327,731
Total principal amount	$	54,872,172	$	69,978,400

Table 8.4 - Advances by Interest Rate Payment Terms (in thousands)

	December 31, 2018		December 31, 2017
Fixed-rate (1)
Due in one year or less	$	14,965,711	$	26,505,900
Due after one year	9,022,587		10,109,877
Total fixed-rate (1)	23,988,298		36,615,777
Variable-rate (1)
Due in one year or less	23,626,783		13,968,543
Due after one year	7,257,091		19,394,080
Total variable-rate (1)	30,883,874		33,362,623
Total principal amount	$	54,872,172	$	69,978,400

(1) Payment terms based on current interest rate terms, which reflect any option exercises or rate conversions that have occurred subsequent to the related Advance issuance.

Credit Risk Exposure. Advances outstanding that were greater than or equal to $1.0 billion per borrower were $41.3 billion (75.3 percent) and $54.8 billion (78.3 percent) at December 31, 2018 and 2017, respectively. These Advances were made to 10 and 12 borrowers (members and former members) at December 31, 2018 and 2017, respectively. See Note 10 for information related to the FHLB's credit risk on Advances and allowance methodology for credit losses.

Table 8.5 - Borrowers Holding Five Percent or more of Total Advances, Including Any Known Affiliates that are Members of the FHLB (dollars in millions)

December 31, 2018					December 31, 2017
	Principal		% of Total Principal Amount of Advances			Principal		% of Total Principal Amount of Advances
JPMorgan Chase Bank, N.A.	$	23,400	43	%	JPMorgan Chase Bank, N.A.	$	23,950	34	%
U.S. Bank, N.A.	4,574		8		U.S. Bank, N.A.	8,975		13
Third Federal Savings and Loan Association	3,727		7		Third Federal Savings and Loan Association	3,756		5
Total	$	31,701	58	%	The Huntington National Bank	3,732		5
					Total	$	40,413	57	%

Note 9 - Mortgage Loans Held for Portfolio

Total mortgage loans held for portfolio represent residential mortgage loans under the MPP that the FHLB's members originate, credit enhance, and then sell to the FHLB. The FHLB does not service any of these loans. The FHLB plans to retain its existing portfolio of mortgage loans.

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Table 9.1 - Mortgage Loans Held for Portfolio (in thousands)

	December 31, 2018			December 31, 2017
Unpaid principal balance:
Fixed rate medium-term single-family mortgage loans (1)	$	933,340		$	1,128,749
Fixed rate long-term single-family mortgage loans	9,338,814			8,325,465
Total unpaid principal balance	10,272,154			9,454,214
Premiums	227,161			217,716
Discounts	(2,603		)	(3,173		)
Hedging basis adjustments (2)	5,045			13,373
Total mortgage loans held for portfolio	$	10,501,757		$	9,682,130

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

(2) Represents the unamortized balance of the mortgage purchase commitments' market values at the time of settlement. The market value of the commitment is included in the basis of the mortgage loan and amortized accordingly.

Table 9.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands)

	December 31, 2018		December 31, 2017
Unpaid principal balance:
Conventional mortgage loans	$	9,999,307	$	9,129,003
FHA mortgage loans	272,847		325,211
Total unpaid principal balance	$	10,272,154	$	9,454,214

For information related to the FHLB's credit risk on mortgage loans and allowance for credit losses, see Note 10.

Table 9.3 - Members, Including Any Known Affiliates that are Members of the FHLB, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)

	December 31, 2018					December 31, 2017
	Principal		% of Total			Principal		% of Total
Union Savings Bank	$	3,449	34	%	Union Savings Bank	$	3,247	34	%
Guardian Savings Bank FSB	987		10		Guardian Savings Bank FSB	933		10
					PNC Bank, N.A. (1)	516		5

(1) Former member.

Note 10 - Allowance for Credit Losses

The FHLB has established an allowance methodology for each of the FHLB's portfolio segments: credit products (Advances, Letters of Credit and other extensions of credit to members); FHA mortgage loans held for portfolio; and conventional mortgage loans held for portfolio.

Credit Products

The FHLB manages its credit exposure to credit products through an integrated approach that includes establishing a credit limit for each borrower, ongoing review of each borrower's financial condition, coupled with collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the FHLB lends to eligible borrowers in accordance with federal law and Finance Agency regulations, which require the FHLB to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member's credit products is calculated by applying collateral discounts, or haircuts, to the value of the collateral. The FHLB accepts certain investment securities, residential mortgage loans, deposits and other real estate related assets as collateral. In addition, community financial institutions are eligible to utilize expanded statutory collateral provisions for small business, agriculture loans and community development loans. The FHLB's capital stock owned by its member borrowers is also pledged as collateral. Collateral arrangements and a member’s borrowing capacity vary based on the financial condition and performance of the institution, the

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types of collateral pledged and the overall quality of those assets. The FHLB can also require additional or substitute collateral to protect its security interest. Management of the FHLB believes that these policies effectively manage the FHLB's credit risk from credit products.

Members experiencing financial difficulties are subject to FHLB-performed “stress tests” of the impact of poorly performing assets on the member’s capital and loss reserve positions. Depending on the results of these tests and the level of over-collateralization, a member may be allowed to maintain pledged loan assets in its custody, may be required to deliver those loans into the custody of the FHLB or its agent, or may be required to provide details on these loans to facilitate an estimate of their fair value. The FHLB perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the FHLB by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and that are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach, the FHLB considers the payment status, collateralization levels, and borrower's financial condition to be indicators of credit quality for its credit products. At December 31, 2018 and 2017, the FHLB had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

The FHLB evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At December 31, 2018 and 2017, the FHLB did not have any Advances that were past due, in non-accrual status or impaired. In addition, there were no troubled debt restructurings related to credit products of the FHLB during 2018 or 2017.

The FHLB has not experienced any credit losses on Advances since it was founded in 1932. Based upon the collateral held as security, its credit extension and collateral policies and the repayment history on credit products, the FHLB did not record any credit losses on credit products as of December 31, 2018 or 2017. Accordingly, the FHLB did not record any allowance for credit losses on Advances.

At December 31, 2018 and 2017, the FHLB did not record any liability to reflect an allowance for credit losses for off-balance sheet credit exposures. See Note 20 for additional information on the FHLB's off-balance sheet credit exposure.

MortgageLoans Held for Portfolio- FHA

The FHLB invests in fixed-rate mortgage loans secured by one-to-four family residential properties insured by the FHA. The FHLB expects to recover any losses from such loans from the FHA. Any losses from these loans that are not recovered from the FHA would be due to a claim rejection by the FHA and, as such, would be recoverable from the selling participating financial institutions. Therefore, the FHLB only has credit risk for these loans if the seller or servicer fails to pay for losses not covered by the FHA insurance. As a result, the FHLB did not establish an allowance for credit losses on its FHA insured mortgage loans. Furthermore, due to the insurance, none of these mortgage loans have been placed on non-accrual status.

Mortgage Loans Held for Portfolio - Conventional Mortgage Purchase Program (MPP)

The FHLB determines the allowance for conventional loans through analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for credit losses consists of: (1) collectively evaluating homogeneous pools of residential mortgage loans; (2) reviewing specifically identified loans for impairment; and (3) considering other relevant qualitative factors.

Collectively Evaluated Mortgage Loans. The credit risk analysis of conventional loans evaluated collectively for impairment considers historical delinquency migration, applies estimated loss severities, and incorporates the associated credit enhancements in order to determine the FHLB's best estimate of probable incurred losses at the reporting date. Migration analysis is a methodology for determining, through the FHLB's experience over a historical period, the rate of default on loans. The FHLB applies migration analysis to loans based on payment status categories such as current, 30, 60, and 90 days past due. The FHLB then estimates how many loans in these categories may migrate to a loss realization event and applies a current loss severity to estimate losses. The estimated losses are then reduced by the probable cash flows resulting from available credit enhancements. To properly determine the credit enhancements available to recover estimated losses, the FHLB performs the credit risk analysis of all conventional mortgage loans at the individual Master Commitment Contract level. The Master Commitment Contract is an agreement with a member in which the member agrees to make a best efforts attempt to sell a specific dollar amount of loans to the FHLB generally over a one-year period. Any credit enhancement cash flows that are projected and assessed as not probable of receipt do not reduce estimated losses.

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Individually Evaluated Mortgage Loans. Conventional mortgage loans that are considered troubled debt restructurings are specifically identified for purposes of calculating the allowance for credit losses. The FHLB measures impairment of these specifically identified loans by either estimating the present value of expected cash flows, estimating the loan's observable market price, or estimating the fair value of the collateral if the loan is collateral dependent. The FHLB removes specifically identified loans evaluated for impairment from the collectively evaluated mortgage loan population.

Qualitative Factors. The FHLB also assesses other qualitative factors in its estimation of loan losses for the collectively evaluated population. This amount represents a subjective management judgment, based on facts and circumstances that exist as of the reporting date, which is intended to cover other incurred losses that may not otherwise be captured in the methodology described above.

Allowance for Credit Losses on Mortgage Loans. The following tables present a rollforward of the allowance for credit losses on conventional mortgage loans as well as the recorded investment in mortgage loans by impairment methodology. The recorded investment in a loan is the unpaid principal balance of the loan adjusted for accrued interest, unamortized premiums or discounts, hedging basis adjustments and direct write-downs. The recorded investment is not net of any allowance.

Table 10.1 - Rollforward of Allowance for Credit Losses on Conventional Mortgage Loans (in thousands)

	For the Years Ended December 31,
	2018			2017			2016
Balance, beginning of period	$	1,190		$	1,142		$	1,686
Net charge offs	(350		)	(452		)	(544		)
Provision for credit losses	—			500			—
Balance, end of period	$	840		$	1,190		$	1,142

Table 10.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)

	December 31, 2018		December 31, 2017
Allowance for credit losses:
Collectively evaluated for impairment	$	840	$	1,190
Individually evaluated for impairment	—		—
Total allowance for credit losses	$	840	$	1,190
Recorded investment:
Collectively evaluated for impairment	$	10,249,169	$	9,373,393
Individually evaluated for impairment	10,554		10,109
Total recorded investment	$	10,259,723	$	9,383,502

Credit Enhancements. The conventional mortgage loans under the MPP are supported by some combination of credit enhancements (primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) and the Lender Risk Account (LRA), including pooled LRA for those members participating in an aggregated MPP pool). The amount of credit enhancements needed to protect the FHLB against credit losses is determined through use of a third-party default model. These credit enhancements apply after a homeowner's equity is exhausted. Beginning in February 2011, the FHLB discontinued the use of SMI for all new loan purchases and replaced it with expanded use of the LRA. The LRA is funded by the FHLB as a portion of the purchase proceeds to cover expected losses. The LRA is recorded in other liabilities in the Statements of Condition. Excess funds over required balances are distributed to the member in accordance with a step-down schedule that is established upon execution of a Master Commitment Contract, subject to performance of the related loan pool. The LRA established for a pool of loans is limited to only covering losses of that specific pool of loans.

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Table 10.3 - Changes in the LRA (in thousands)

	For the Years Ended December 31,
	2018			2017			2016
LRA at beginning of year	$	200,745		$	187,684		$	158,010
Additions	24,784			20,677			34,338
Claims	(492		)	(506		)	(885		)
Scheduled distributions	(11,777		)	(7,110		)	(3,779		)
LRA at end of period	$	213,260		$	200,745		$	187,684

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Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, loans in process of foreclosure, and non-accrual loans. The table below summarizes the FHLB's key credit quality indicators for mortgage loans.

Table 10.4 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)

	December 31, 2018
	Conventional MPP Loans			FHA Loans			Total
Past due 30-59 days delinquent	$	29,596		$	14,845		$	44,441
Past due 60-89 days delinquent	7,175			4,238			11,413
Past due 90 days or more delinquent	12,807			7,210			20,017
Total past due	49,578			26,293			75,871
Total current mortgage loans	10,210,145			250,308			10,460,453
Total mortgage loans	$	10,259,723		$	276,601		$	10,536,324
Other delinquency statistics:
In process of foreclosure, included above (1)	$	7,557		$	4,635		$	12,192
Serious delinquency rate (2)	0.13		%	2.65		%	0.19		%
Past due 90 days or more still accruing interest (3)	$	11,773		$	7,210		$	18,983
Loans on non-accrual status, included above	$	2,535		$	—		$	2,535
	December 31, 2017
	Conventional MPP Loans			FHA Loans			Total
Past due 30-59 days delinquent	$	36,662		$	20,992		$	57,654
Past due 60-89 days delinquent	8,040			6,974			15,014
Past due 90 days or more delinquent	16,702			10,484			27,186
Total past due	61,404			38,450			99,854
Total current mortgage loans	9,322,098			291,371			9,613,469
Total mortgage loans	$	9,383,502		$	329,821		$	9,713,323
Other delinquency statistics:
In process of foreclosure, included above (1)	$	10,039		$	4,767		$	14,806
Serious delinquency rate (2)	0.19		%	3.19		%	0.29		%
Past due 90 days or more still accruing interest (3)	$	15,431		$	10,484		$	25,915
Loans on non-accrual status, included above	$	2,713		$	—		$	2,713

(1) Includes loans where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.

(2) Loans that are 90 days or more past due or in the process of foreclosure (including past due or current loans in the process of foreclosure) expressed as a percentage of the total loan portfolio class recorded investment amount.

(3) Each conventional loan past due 90 days or more still accruing interest is on a schedule/scheduled monthly settlement basis and contains one or more credit enhancements. Loans that are well secured and in the process of collection as a result of remaining credit enhancements and schedule/scheduled settlement are not placed on non-accrual status.

The FHLB did not have any real estate owned at December 31, 2018 or 2017.

Troubled Debt Restructurings. A troubled debt restructuring is considered to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower's financial difficulties and that concession would not have been considered otherwise. The FHLB's troubled debt restructurings primarily involve loans where an agreement permits the recapitalization of past due amounts up to the original loan amount and certain loans discharged in Chapter 7 bankruptcy. A loan considered a troubled debt restructuring is individually evaluated for impairment when determining its related allowance for credit losses. Credit loss is measured by estimating expected cash shortfalls incurred as of the reporting date.

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The FHLB's recorded investment in modified loans considered troubled debt restructurings was (in thousands) $10,554 and $10,109 at December 31, 2018 and 2017, respectively. The amount of troubled debt restructurings is not considered material to the FHLB's financial condition, results of operations, or cash flows.

Note 11 - Derivatives and Hedging Activities

Nature of Business Activity

The FHLB is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and on the interest-bearing liabilities that finance these assets. The goal of the FHLB's interest-rate risk management strategy is not to eliminate interest-rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the FHLB has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the FHLB monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and interest-bearing liabilities. The FHLB uses derivatives when they are considered to be the most cost-effective alternative to achieve the FHLB's financial and risk management objectives.

The FHLB transacts its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. Derivative transactions may be either executed with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Derivative Clearing Organization (cleared derivatives). Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the executing counterparty is replaced with the Clearinghouse. The FHLB is not a derivative dealer and does not trade derivatives for short-term profit.

Consistent with Finance Agency regulations, the FHLB enters into derivatives to manage the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the FHLB's risk management objectives and to act as an intermediary between its members and counterparties. The use of derivatives is an integral part of the FHLB's financial management strategy. However, Finance Agency regulations and the FHLB's financial management policy prohibit trading in, or the speculative use of, derivative instruments and limit credit risk arising from them.

The most common ways in which the FHLB uses derivatives are to:

▪ reduce the interest rate sensitivity and repricing gaps of assets and liabilities;

▪ preserve a favorable interest rate spread between the yield of an asset (e.g., an Advance) and the cost of the related liability (e.g., the Consolidated Obligation Bond used to fund the Advance);

▪ manage embedded options in assets and liabilities;

▪ reduce funding costs by combining a derivative with a Consolidated Obligation Bond, as the cost of a combined funding structure can be lower than the cost of a comparable Consolidated Obligation Bond; and

▪ protect the value of existing asset or liability positions.

Types of Derivatives

The FHLB primarily uses the following derivative instruments:

Interest rate swaps - An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be exchanged and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable-rate index for the same period of time. As of December 31, 2018, the variable-rate transacted by the FHLB in its derivatives is LIBOR.

Swaptions - A swaption is an option on a swap that gives the buyer the right to enter into a specified interest rate swap at a certain time in the future. The FHLB may enter into both payer swaptions and receiver swaptions. A payer swaption is the option to make fixed interest payments at a later date and a receiver swaption is the option to receive fixed interest payments at a later date.

Forwards Contracts - Forwards contracts gives the buyer the right to buy or sell a specific type of asset at a specific time at a given price. For example, certain mortgage purchase commitments entered into by the FHLB are considered derivatives. The

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FHLB may hedge these commitments by selling to-be-announced (TBA) mortgage-backed securities for forward settlement. A TBA represents a forward contract for the sale of mortgage-backed securities at a future agreed upon date for an established price.

Application of Derivatives

The FHLB documents at inception all relationships between derivatives designated as hedging instruments and the hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities on the Statements of Condition.

The FHLB may use certain derivatives as fair value hedges of associated financial instruments. However, because the FHLB uses derivatives when they are considered to be the most cost-effective alternative to achieve the FHLB's financial and risk management objectives, it may enter into derivatives that do not necessarily qualify for hedge accounting (economic hedges). The FHLB re-evaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.

Types of Hedged Items

The types of assets and liabilities currently hedged with derivatives are:

Investments - The interest rate and prepayment risks associated with the FHLB's investment securities are managed through a combination of debt issuance and, possibly, derivatives. The FHLB may manage the prepayment and interest rate risk by funding investment securities with Consolidated Obligations that have call features or by hedging these risks with interest rate swaps, caps or floors, or swaptions. The FHLB purchases swaptions to minimize the prepayment risk embedded in certain investments. Although these derivatives are valid economic hedges against the prepayment risk of the investments, they are not specifically linked to individual investments and therefore do not receive fair value hedge accounting. These derivatives are marked-to-market through earnings.

Advances- The FHLB offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics, and optionality. The FHLB may use derivatives to manage the repricing and/or option characteristics of Advances in order to more closely match the characteristics of the FHLB's funding liabilities. In general, whenever a member executes a fixed-rate Advance or a variable-rate Advance with embedded options, the FHLB may simultaneously execute a derivative with terms that offset the terms and embedded options in the Advance. For example, the FHLB may hedge a fixed-rate Advance with an interest rate swap where the FHLB pays a fixed-rate and receives a variable-rate, effectively converting the fixed-rate Advance to a variable-rate Advance. These types of hedges are typically treated as fair value hedges.

When issuing a putable Advance, the FHLB effectively purchases a put option from the member that allows the FHLB to put or extinguish the fixed-rate Advance, which the FHLB normally would exercise when interest rates increase. The FHLB may hedge these Advances by entering into a cancelable derivative.

Mortgage Loans - The FHLB invests in fixed-rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in actual and estimated prepayment speeds. The FHLB may manage the interest rate and prepayment risks associated with mortgage loans through a combination of debt issuance and derivatives. The FHLB issues both callable and non-callable debt and prepayment linked Consolidated Obligations to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLB may purchase swaptions to minimize the prepayment risk embedded in mortgage loans. Although these derivatives are valid economic hedges against the prepayment risk of the loans, they are not specifically linked to individual loans and therefore do not receive fair value hedge accounting. These derivatives are marked-to-market through earnings.

Consolidated Obligations - The FHLB may enter into derivatives to hedge the interest rate risk associated with its debt issuances. The FHLB manages the risk arising from changing market prices and volatility of a Consolidated Obligation by matching the cash inflow on a derivative with the cash outflow on the Consolidated Obligation.

For example, fixed-rate Consolidated Obligations are issued and the FHLB may simultaneously enter into a matching interest rate swap in which the counterparty pays fixed cash flows to the FHLB designed to mirror in timing and amount the cash outflows the FHLB pays on the Consolidated Obligation. The FHLB pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate Advances. These transactions are treated as fair value hedges.

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This strategy of issuing Consolidated Obligations while simultaneously entering into derivatives enables the FHLB to offer a wider range of attractively priced Advances to its members and may allow the FHLB to reduce its funding costs. The continued attractiveness of such debt depends on yield relationships between the FHLB's Consolidated Obligations and the derivative markets. If conditions in these markets change, the FHLB may alter the types or terms of the Consolidated Obligations.

Firm Commitments - Certain mortgage loan purchase commitments, such as mortgage delivery commitments, are considered derivatives. The FHLB may hedge these commitments by selling TBA mortgage-backed securities for forward settlement. The mortgage loan purchase commitment and the TBA used in the firm commitment hedging strategy are treated as an economic hedge and are marked-to-market through earnings. When the mortgage loan purchase commitment derivative settles, the current market value of the commitment is included in the basis of the mortgage loan and amortized accordingly.

Financial Statement Effect and Additional Financial Information

The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. The notional amount reflects the FHLB's involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLB to credit and market risk; the overall risk is much smaller. The risks of derivatives only can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged and any offsets between the derivatives and the items being hedged.

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Table 11.1 summarizes the notional amount and fair value of derivative instruments and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.

Table 11.1 - Fair Value of Derivative Instruments (in thousands)

	December 31, 2018
	Notional Amount of Derivatives		Derivative Assets			Derivative Liabilities
Derivatives designated as fair value hedging instruments:
Interest rate swaps	$	6,207,278	$	2,393		$	16,810
Derivatives not designated as hedging instruments:
Interest rate swaps	4,322,480		3,311			1,904
Interest rate swaptions	3,000,000		15,911			—
Forward rate agreements	131,000		—			2,664
Mortgage delivery commitments	146,009		1,726			1
Total derivatives not designated as hedging instruments	7,599,489		20,948			4,569
Total derivatives before adjustments	$	13,806,767	23,341			21,379
Netting adjustments and cash collateral (1)			42,424			(16,793		)
Total derivative assets and total derivative liabilities			$	65,765		$	4,586
	December 31, 2017 (2)
	Notional Amount of Derivatives		Derivative Assets			Derivative Liabilities
Derivatives designated as fair value hedging instruments:
Interest rate swaps	$	5,992,762	$	58,027		$	9,190
Derivatives not designated as hedging instruments:
Interest rate swaps	5,789,265		2,639			363
Interest rate swaptions	2,316,000		3,171			—
Forward rate agreements	212,000		27			230
Mortgage delivery commitments	218,651		453			17
Total derivatives not designated as hedging instruments	8,535,916		6,290			610
Total derivatives before adjustments	$	14,528,678	64,317			9,800
Netting adjustments and cash collateral (1)			(3,622		)	(6,907		)
Total derivative assets and total derivative liabilities			$	60,695		$	2,893

(1) Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions, and also cash collateral and related accrued interest held or placed by the FHLB with the same clearing agent and/or counterparty. Cash collateral posted and related accrued interest was (in thousands) $71,246 and $64,079 at December 31, 2018 and 2017. Cash collateral received and related accrued interest was (in thousands) $12,029 and $60,794 at December 31, 2018 and 2017.

(2) To conform with current presentation, (in thousands) $74,431 in variation margin has been allocated to the individual derivative instruments as of December 31, 2017. Previously, this amount was included with Netting adjustments and cash collateral.

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Table 11.2 presents the components of net losses on derivatives and hedging activities as presented in the Statements of Income.

Table 11.2 - Net Losses on Derivatives and Hedging Activities (in thousands)

	For the Years Ended December 31,
	2018			2017			2016
Derivatives and hedged items in fair value hedging relationships:
Interest rate swaps	$	1,875		$	(60	)	$	697
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps	10,722			(4,067		)	(69,266		)
Interest rate swaptions	(5,725		)	(17,016		)	6,229
Forward rate agreements	4,446			(6,054		)	2,794
Net interest settlements	(46,093		)	(8,298		)	12,009
Mortgage delivery commitments	(5,349		)	10,424			106
Total net losses related to derivatives not designated as hedging instruments	(41,999		)	(25,011		)	(48,128		)
Price alignment amount (1)	(274		)	607			—
Net losses on derivatives and hedging activities	$	(40,398	)	$	(24,464	)	$	(47,431	)

(1) This amount is for derivatives for which variation margin is characterized as a daily settled contract.

Table 11.3 presents by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLB's net interest income.

Table 11.3 - Effect of Fair Value Hedge-Related Derivative Instruments (in thousands)

	For the Years Ended December 31,
2018	Gain/(Loss) on Derivative			Gain/(Loss) on Hedged Item			Net Fair Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income(1)
Hedged Item Type:
Advances	$	(6,443	)	$	8,517		$	2,074		$	24,006
Consolidated Bonds	2,758			(2,950		)	(192		)	(3,215		)
Available-for-sale securities	(1,015		)	1,008			(7		)	(44		)
Total	$	(4,700	)	$	6,575		$	1,875		$	20,747
2017
Hedged Item Type:
Advances	$	35,570		$	(36,152	)	$	(582	)	$	(17,907	)
Consolidated Bonds	240			282			522			(1,101		)
Total	$	35,810		$	(35,870	)	$	(60	)	$	(19,008	)
2016
Hedged Item Type:
Advances	$	76,401		$	(75,744	)	$	657		$	(59,560	)
Consolidated Bonds	(6,641		)	6,681			40			7,624
Total	$	69,760		$	(69,063	)	$	697		$	(51,936	)

(1) For fair value hedge relationships, the net effect of derivatives on net interest income is included in the interest income or interest expense line item of the respective hedged item type. These amounts include the effect of net interest settlements attributable to designated fair value hedges but do not include (in thousands) $(602), $(2,131) and $(2,908) of (amortization)/accretion related to fair value hedging activities for the years endedDecember 31, 2018, 2017 and 2016.

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Credit Risk on Derivatives

The FHLB is subject to credit risk due to the risk of non-performance by counterparties to its derivative transactions, and manages credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.

For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. The FHLB requires collateral agreements on its uncleared derivatives where the collateral delivery threshold is set to zero.

For cleared derivatives, the Clearinghouse is the FHLB's counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent in turn notifies the FHLB. The FHLB utilizes two Clearinghouses for all cleared derivative transactions, LCH Ltd. and CME Clearing. Effective January 16, 2018, LCH Ltd. made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral. CME Clearing made the same change to its rulebook on January 3, 2017. As a result, at both Clearinghouses, variation margin is characterized as daily settlement payments, rather than cash collateral. At both Clearinghouses, initial margin continues to be considered collateral. The requirement that the FHLB post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the FHLB to credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments for changes in the value of cleared derivatives is posted daily through a clearing agent.

For cleared derivatives, the Clearinghouse determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. At December 31, 2018, the FHLB was not required to post additional initial margin by its clearing agents based on credit considerations.

Offsetting of Derivative Assets and Derivative Liabilities

The FHLB presents derivative instruments, related cash collateral received or pledged, and associated accrued interest, on a net basis by clearing agent and/or by counterparty when it has met the netting requirements.

The FHLB has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default including bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the FHLB's clearing agent, or both. Based on this analysis, the FHLB presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.

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Table 11.4 presents separately the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties. At December 31, 2018 and 2017, the FHLB did not receive or pledge any non-cash collateral. Any over-collateralization under an individual clearing agent and/or counterparty level is not included in the determination of the net unsecured amount.

Table 11.4 - Offsetting of Derivative Assets and Derivative Liabilities (in thousands)

	December 31, 2018
	Derivative Instruments Meeting Netting Requirements
	Amount Recognized		Gross Amount of Netting Adjustments and Cash Collateral			Derivative Instruments Not Meeting Netting Requirements(1)		Total Derivative Assets and Total Derivative Liabilities
Derivative Assets:
Uncleared	$	20,284	$	(20,250	)	$	1,726	$	1,760
Cleared	1,331		62,674			—		64,005
Total								$	65,765
Derivative Liabilities:
Uncleared	$	13,745	$	(11,824	)	$	2,665	$	4,586
Cleared	4,969		(4,969		)	—		—
Total								$	4,586
	December 31, 2017 (2)
	Derivative Instruments Meeting Netting Requirements
	Amount Recognized		Gross Amount of Netting Adjustments and Cash Collateral			Derivative Instruments Not Meeting Netting Requirements(1)		Total Derivative Assets and Total Derivative Liabilities
Derivative Assets:
Uncleared	$	5,239	$	(5,215	)	$	480	$	504
Cleared	58,598		1,593			—		60,191
Total								$	60,695
Derivative Liabilities:
Uncleared	$	8,773	$	(6,127	)	$	247	$	2,893
Cleared	780		(780		)	—		—
Total								$	2,893

(1) Represents mortgage delivery commitments and forward rate agreements that are not subject to an enforceable netting agreement.

(2) To conform with current presentation, (in thousands) $74,431 in variation margin has been allocated to the individual derivative instruments with the Amount Recognized as of December 31, 2017. Previously, this amount was included with Gross Amount of Netting Adjustments and Cash Collateral.

Note 12 - Deposits

The FHLB offers demand and overnight deposits to members and to qualifying nonmembers. In addition, the FHLB offers short-term interest bearing deposit programs to members, and in certain cases, to qualifying nonmembers. A member that services mortgage loans may deposit funds collected in connection with the mortgage loans at the FHLB, pending disbursement of such funds to the owners of the mortgage loans. The FHLB classifies these funds as other interest bearing deposits. Deposits classified as demand, overnight, and other pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit.

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Certain financial institutions have agreed to maintain compensating balances in consideration for correspondent and other non-credit services. These balances are included in interest bearing deposits on the accompanying financial statements. The compensating balances required to be held by the FHLB averaged (in thousands) $8,343 and $22,370 during 2018 and 2017.

Non-interest bearing deposits represent funds for which the FHLB acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks.

Table 12.1 - Deposits (in thousands)

	December 31, 2018		December 31, 2017
Interest bearing:
Demand and overnight	$	605,979	$	590,617
Term	51,600		52,600
Other	4,959		5,509
Total interest bearing	662,538		648,726
Non-interest bearing:
Other	6,478		1,805
Total non-interest bearing	6,478		1,805
Total deposits	$	669,016	$	650,531

Note 13 - Consolidated Obligations

Consolidated Obligations consist of Consolidated Bonds and Discount Notes. The FHLBanks issue Consolidated Obligations through the Office of Finance as their agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the FHLBank records as a liability its specific portion of Consolidated Obligations for which it is the primary obligor.

The Finance Agency and the U.S. Secretary of the Treasury oversee the issuance of FHLBank debt through the Office of Finance. Consolidated Bonds may be issued to raise short-, intermediate-, and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated Discount Notes are issued primarily to raise short-term funds and have original maturities up to one year. These notes generally sell at less than their face amount and are redeemed at par value when they mature.

Although the FHLB is primarily liable for its portion of Consolidated Obligations, the FHLB is also jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on all Consolidated Obligations of each of the other FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any Consolidated Obligation whether or not the Consolidated Obligation represents a primary liability of such FHLBank. Although an FHLBank has never paid the principal or interest payments due on a Consolidated Obligation on behalf of another FHLBank, if that event should occur, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement from the FHLBank that is primarily liable for that Consolidated Obligation for any payments and other associated costs, including interest to be determined by the Finance Agency. If, however, that FHLBank is unable to satisfy its repayment obligations, the Finance Agency may allocate the outstanding liabilities of that FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all Consolidated Obligations outstanding or in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner.

The par values of the 11 FHLBanks' outstanding Consolidated Obligations were approximately $1,031.6 billion and $1,034.3 billion at December 31, 2018 and 2017. Finance Agency regulations require the FHLB to maintain unpledged qualifying assets equal to its participation in the Consolidated Obligations outstanding. Qualifying assets are defined as cash; secured Advances; obligations of or fully guaranteed by the United States; obligations, participations, or other instruments of or issued by Fannie Mae or Ginnie Mae; mortgages, obligations, or other securities which are or ever have been sold by Freddie Mac under the FHLBank Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLB is located. Any assets subject to a lien or pledge for the benefit of holders of any issue of Consolidated Obligations are treated as if they were free from lien or pledge for purposes of compliance with these regulations.

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Table 13.1 - Consolidated Discount Notes Outstanding (dollars in thousands)

	Book Value		Principal Amount		Weighted Average Interest Rate (1)
December 31, 2018	$	46,943,632	$	47,071,113	2.35	%
December 31, 2017	$	46,210,458	$	46,258,644	1.23	%

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

Table 13.2 - Consolidated Bonds Outstanding by Contractual Maturity (dollars in thousands)

	December 31, 2018					December 31, 2017
Year of Contractual Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in 1 year or less	$	21,085,800		2.20	%	$	28,940,265		1.34	%
Due after 1 year through 2 years	6,998,565			2.13		5,841,800			1.74
Due after 2 years through 3 years	6,829,595			2.05		4,770,565			1.89
Due after 3 years through 4 years	2,958,620			2.39		6,017,000			1.92
Due after 4 years through 5 years	3,248,975			2.63		2,244,620			2.24
Thereafter	4,525,635			2.94		6,343,055			2.72
Total principal amount	45,647,190			2.29		54,157,305			1.69
Premiums	75,809					86,521
Discounts	(29,275		)			(30,669		)
Hedging adjustments	(196		)			(3,146		)
Fair value option valuation adjustment and    accrued interest	(34,390		)			(46,950		)
Total	$	45,659,138				$	54,163,061

Consolidated Bonds outstanding were issued with either fixed-rate coupon payment terms or variable-rate coupon payment terms that are indexed to either LIBOR or the Secured Overnight Financing Rate. To meet the expected specific needs of certain investors in Consolidated Obligations, both fixed-rate Bonds and variable-rate Bonds may contain features that result in complex coupon payment terms and call options. When these Consolidated Bonds are issued, the FHLB may enter into derivatives containing features that offset the terms and embedded options, if any, of the Consolidated Bonds.

Table 13.3 - Consolidated Bonds Outstanding by Call Features (in thousands)

	December 31, 2018		December 31, 2017
Principal Amount of Consolidated Bonds:
Non-callable	$	38,539,190	$	47,155,305
Callable	7,108,000		7,002,000
Total principal amount	$	45,647,190	$	54,157,305

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Table 13.4 - Consolidated Bonds Outstanding by Contractual Maturity or Next Call Date (in thousands)

Year of Contractual Maturity or Next Call Date	December 31, 2018		December 31, 2017
Due in 1 year or less	$	27,173,800	$	35,029,265
Due after 1 year through 2 years	5,773,565		5,369,800
Due after 2 years through 3 years	5,060,595		3,715,565
Due after 3 years through 4 years	2,470,620		4,388,000
Due after 4 years through 5 years	2,231,975		1,823,620
Thereafter	2,936,635		3,831,055
Total principal amount	$	45,647,190	$	54,157,305

Consolidated Bonds, beyond having fixed-rate or variable-rate interest-rate payment terms, may also have a step-up interest-rate payment type. Step-up bonds pay interest at increasing fixed rates for specified intervals over the life of the Consolidated Bond. These Consolidated Bonds generally contain provisions enabling the FHLB to call the Consolidated Bonds at its option on the step-up dates.

Table 13.5 - Consolidated Bonds by Interest-rate Payment Type (in thousands)

	December 31, 2018		December 31, 2017
Principal Amount of Consolidated Bonds:
Fixed-rate	$	29,837,190	$	33,252,305
Variable-rate	15,470,000		20,895,000
Step-up	340,000		10,000
Total principal amount	$	45,647,190	$	54,157,305

Note 14 - Affordable Housing Program (AHP)

The FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate AHP Advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Each FHLBank is required to contribute to its AHP the greater of 10 percent of its previous year's income subject to assessment, or the prorated sum required to ensure the aggregate contribution by the FHLBanks in no less than $100 million for each year. For purposes of the AHP calculation, income subject to assessment is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The FHLB accrues AHP expense monthly based on its income subject to assessment. The FHLB reduces the AHP liability as members use subsidies.

If the FHLB experienced a net loss during a quarter, but still had income subject to assessment for the year, the FHLB's obligation to the AHP would be calculated based on the FHLB's year-to-date income subject to assessment. If the FHLB had income subject to assessment in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the FHLB experienced a net loss for a full year, the FHLB would have no obligation to the AHP for the year, because each FHLBank's required annual AHP contribution is limited to its annual income subject to assessment. If the aggregate 10 percent calculation described above was less than $100 million for the FHLBanks, each FHLBank would be required to contribute a prorated sum to ensure that the aggregate contributions by the FHLBanks equaled $100 million. The proration would be made on the basis of an FHLBank's income in relation to the income of all FHLBanks for the previous year.

There was no shortfall, as described above, in 2018, 2017, or 2016. If an FHLBank finds that its required AHP obligations are contributing to its financial instability, it may apply to the Finance Agency for a temporary suspension of its contributions. The FHLB has never made such an application.

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Table 14.1 - Analysis of AHP Liability (in thousands)

	2018			2017
Balance at beginning of year	$	109,877		$	104,883
Assessments (current year additions)	37,884			35,120
Subsidy uses, net	(30,425		)	(30,126		)
Balance at end of year	$	117,336		$	109,877

Note 15 - Capital

The FHLB is subject to three capital requirements under its Capital Plan and the Finance Agency rules and regulations. Regulatory capital does not include accumulated other comprehensive income, but does include mandatorily redeemable capital stock.

1. Risk-based capital. The FHLB must maintain at all times permanent capital, defined as Class B stock and retained earnings, in an amount at least equal to the sum of its credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency.

2. Total regulatory capital. The FHLB must maintain at all times a total regulatory capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, Class A stock, any general loss allowance, if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the Finance Agency as available to absorb losses.

3. Leverage capital. The FHLB must maintain at all times a leverage capital-to-assets ratio of at least five percent. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital without a weighting factor.

The Finance Agency may require the FHLB to maintain greater permanent capital than is required based on Finance Agency rules and regulations.

At December 31, 2018 and 2017, the FHLB was in compliance with each of these capital requirements.

Table 15.1 - Capital Requirements (dollars in thousands)

	December 31, 2018						December 31, 2017
	Minimum Requirement			Actual			Minimum Requirement			Actual
Risk-based capital	$	837,666		$	5,366,443		$	886,033		$	5,211,204
Capital-to-assets ratio (regulatory)	4.00		%	5.41		%	4.00		%	4.88		%
Regulatory capital	$	3,968,103		$	5,366,443		$	4,275,809		$	5,211,204
Leverage capital-to-assets ratio (regulatory)	5.00		%	8.11		%	5.00		%	7.31		%
Leverage capital	$	4,960,129		$	8,049,665		$	5,344,761		$	7,816,806

The FHLB currently offers only Class B stock, which is issued and redeemed at a par value of $100 per share. Class B stock may be issued to meet membership and activity stock purchase requirements, to pay dividends, and to pay interest on mandatorily redeemable capital stock. Membership stock is required to become a member of and maintain membership in the FHLB. The membership stock requirement is based upon a percentage of the member's total assets. At December 31, 2018, the membership stock requirement was determined within a declining range from 0.12 percent to 0.03 percent of each member's total assets, with a minimum of $1 thousand and a maximum of $25 million for each member. In addition to membership stock, a member may be required to hold activity stock to capitalize its Mission Asset Activity with the FHLB.

Mission Asset Activity includes Advances, certain funds and rate Advance commitments, and MPP activity that occurred after implementation of the Capital Plan on December 30, 2002. Members must maintain an activity stock balance at least equal to the minimum activity allocation percentage, which currently is zero percent for the MPP and two percent for all other Mission

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Asset Activity. If a member owns more than the maximum activity allocation percentage, which currently is four percent of all Mission Asset Activity, the additional stock is that member's excess stock. The FHLB's unrestricted excess stock is defined as total Class B stock minus membership stock, activity stock calculated at the maximum allocation percentage, shares reserved for exclusive use after a stock dividend, and shares subject to redemption and withdrawal notices. The FHLB's excess stock may normally be used by members to support a portion of their activity stock requirement as long as those members maintain at least their minimum activity stock allocation percentage.

A member may request redemption of all or part of its Class B stock or may withdraw from membership by giving five years' advance written notice. When the FHLB repurchases capital stock, it must first repurchase shares for which a redemption or withdrawal notice's five-year redemption period or withdrawal period has expired. Since its Capital Plan was implemented, the FHLB has repurchased, at its discretion, all member shares subject to outstanding redemption notices prior to the expiration of the five-year redemption period.

Any member that has withdrawn from membership may not be readmitted to membership in any FHLBank until five years from the divestiture date for all capital stock that was held as a condition of membership, unless the institution has canceled its notice of withdrawal prior to the divestiture date. This restriction does not apply if the member is transferring its membership from one FHLBank to another on an uninterrupted basis.

Each class of FHLB stock is considered putable by the member and the FHLB may repurchase, in its sole discretion, any member's stock investments that exceed the required minimum amount. However, there are significant statutory and regulatory restrictions on the obligation to redeem, or right to repurchase, the outstanding stock. As a result, whether or not a member may have its capital stock in the FHLB repurchased (at the FHLB's discretion at any time before the end of the redemption period) or redeemed (at a member's request, completed at the end of a redemption period) will depend on whether the FHLB is in compliance with those restrictions.

The FHLB's retained earnings are owned proportionately by the current holders of Class B stock. The holders' interest in the retained earnings is realized at the time the FHLB periodically declares dividends or at such time as the FHLB is liquidated. The FHLB's Board of Directors may declare and pay dividends in either cash or capital stock, assuming the FHLB is in compliance with Finance Agency rules and regulations.

Restricted Retained Earnings. The Capital Agreement is intended to enhance the capital position of each FHLBank. The Capital Agreement provides that each FHLBank contributes 20 percent of its net income each quarter to a separate restricted retained earnings account until the balance of that account equals at least one percent of that FHLBank's average balance of outstanding Consolidated Obligations for the previous quarter. These restricted retained earnings are not available to pay dividends but are available to absorb unexpected losses, if any, that an FHLBank may experience.At December 31, 2018 and 2017 the FHLB had (in thousands) $390,829 and $322,999 in restricted retained earnings.

Mandatorily Redeemable Capital Stock.The FHLB is a cooperative whose members own most of the FHLB's capital stock. Former members (including certain nonmembers that own the FHLB's capital stock as a result of a merger or acquisition, relocation, charter termination, or involuntary termination of an FHLB member) own the remaining capital stock to support business transactions still carried on the FHLB's Statements of Condition. Member shares cannot be purchased or sold except between the FHLB and its members at its $100 per share par value, as mandated by the FHLB's Capital Plan. The FHLB reclassifies stock subject to redemption from equity to liability upon expiration of the “grace period” after a member submits a written redemption request or withdrawal notice, or when the member attains nonmember status by merger or acquisition, relocation, charter termination, or involuntary termination of membership. A member may cancel or revoke its written redemption request or its withdrawal notice prior to the end of the five-year redemption period. Under the FHLB's Capital Plan, there is a five calendar day “grace period” for revocation of a redemption request and a 30 calendar day “grace period” for revocation of a withdrawal notice during which the member may cancel the redemption request or withdrawal notice without a penalty or fee. The cancellation fee after the “grace period” is currently two percent of the requested amount in the first year and increases one percent a year until it reaches a maximum of six percent in the fifth year. The cancellation fee can be waived by the FHLB's Board of Directors for a bona fide business purpose.

Stock subject to a redemption or withdrawal notice that is within the “grace period” continues to be considered equity because there is no penalty or fee to retract these notices. Expiration of the “grace period” triggers the reclassification from equity to a liability (mandatorily redeemable capital stock) at fair value because after the “grace period” the penalty to retract these notices is considered substantive. If a member cancels its written notice of redemption or notice of withdrawal, the FHLB will reclassify mandatorily redeemable capital stock from a liability to equity. Dividends related to capital stock classified as a liability are accrued at the expected dividend rate and reported as interest expense in the Statements of Income. For the years

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ended December 31, 2018, 2017, and 2016 dividends on mandatorily redeemable capital stock (in thousands) of $1,806, $2,514 and $3,517 were recorded as interest expense.

Table 15.2 - Mandatorily Redeemable Capital Stock Rollforward (in thousands)

	2018			2017			2016
Balance, beginning of year	$	30,031		$	34,782		$	37,895
Capital stock subject to mandatory redemption reclassified from equity	68,185			270,458			363,839
Capital stock previously subject to mandatory redemption reclassified to capital	(5,599		)	—			—
Repurchase/redemption of mandatorily redeemable capital stock	(69,433		)	(275,209		)	(366,952		)
Balance, end of year	$	23,184		$	30,031		$	34,782

The number of stockholders holding the mandatorily redeemable capital stock was 25, 26 and 28 at December 31, 2018, 2017, and 2016.

As of December 31, 2018 there were no members or former members that had requested redemptions of capital stock whose stock had not been reclassified as mandatorily redeemable capital stock because the “grace periods” had not yet expired on these requests.

Table 15.3 shows the amount of mandatorily redeemable capital stock by contractual year of redemption. The year of redemption in the table is the end of the five-year redemption period. Consistent with the Capital Plan currently in effect, the FHLB is not required to redeem membership stock until five years after either (i) the membership is terminated or (ii) the FHLB receives notice of withdrawal. The FHLB is not required to redeem activity-based stock until the later of the expiration of the notice of redemption or until the activity to which the capital stock relates no longer remains outstanding. If activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding, the FHLB may repurchase such shares, in its sole discretion, subject to the statutory and regulatory restrictions on capital stock redemption.

Table 15.3 - Mandatorily Redeemable Capital Stock by Contractual Year of Redemption (in thousands)

Contractual Year of Redemption	December 31, 2018		December 31, 2017
Year 1	$	1,633	$	20
Year 2	371		1,811
Year 3	357		439
Year 4	1,209		2,912
Year 5	3,553		5,257
Thereafter (1)	624		610
Past contractual redemption date due to remaining activity (2)	15,437		18,982
Total	$	23,184	$	30,031

(1) Represents mandatorily redeemable capital stock resulting from a Finance Agency rule effective February 19, 2016, that made captive insurance companies ineligible for FHLB membership. Captive insurance companies that were admitted as FHLB members prior to September 12, 2014, will have their membership terminated no later than February 19, 2021. Captive insurance companies that were admitted as FHLB members on or after September 12, 2014, had their membership terminated no later than February 19, 2017. The related mandatorily redeemable capital stock is not required to be redeemed until five years after the member's termination.

(2) Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because there is activity outstanding to which the mandatorily redeemable capital stock relates.

Excess Capital Stock. Finance Agency regulations limit the ability of an FHLBank to create member excess stock under certain circumstances. The FHLB may not pay dividends in the form of capital stock or issue new excess stock to members if its excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the FHLB's excess stock to exceed one percent of its total assets. At December 31, 2018, the FHLB had excess capital stock outstanding totaling more than one percent of its total assets. At December 31, 2018, the FHLB was in compliance with the Finance Agency's excess stock rules.

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Note 16 - Accumulated Other Comprehensive Income (Loss)

The following tables summarize the changes in accumulated other comprehensive income (loss) for the years endedDecember 31, 2018, 2017 and 2016.

Table 16.1 - Accumulated Other Comprehensive Income (Loss) (in thousands)

	Net unrealized gains (losses) on available-for-sale securities			Pension and postretirement benefits			Total accumulated other comprehensive (loss) income
BALANCE, DECEMBER 31, 2015	$	81		$	(13,358	)	$	(13,277	)
Other comprehensive income before reclassification:
Net unrealized losses	(58		)	—			(58		)
Net actuarial losses	—			(2,283		)	(2,283		)
Reclassifications from other comprehensive income to net income:
Amortization - pension and postretirement benefits	—			2,362			2,362
Net current period other comprehensive (loss) income	(58		)	79			21
BALANCE, DECEMBER 31, 2016	23			(13,279		)	(13,256		)
Other comprehensive income before reclassification:
Net unrealized losses	(147		)	—			(147		)
Net actuarial losses	—			(4,964		)	(4,964		)
Reclassifications from other comprehensive income to net income:
Amortization - pension and postretirement benefits	—			1,707			1,707
Net current period other comprehensive loss	(147		)	(3,257		)	(3,404		)
BALANCE, DECEMBER 31, 2017	(124		)	(16,536		)	(16,660		)
Other comprehensive income before reclassification:
Net unrealized gains	14			—			14
Net actuarial gains	—			1,403			1,403
Reclassifications from other comprehensive income to net income:
Amortization - pension and postretirement benefits	—			2,200			2,200
Net current period other comprehensive income	14			3,603			3,617
BALANCE, DECEMBER 31, 2018	$	(110	)	$	(12,933	)	$	(13,043	)

Note 17 - Pension and Postretirement Benefit Plans

Qualified Defined Benefit Multi-employer Plan. The FHLB participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a tax-qualified defined benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multi-employer plan for accounting purposes, but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, certain multi-employer plan disclosures, including the certified zone status, are not applicable to the Pentegra Defined Benefit Plan. Under the Pentegra Defined Benefit Plan, contributions made by one participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The Pentegra Defined Benefit Plan covers all officers and employees of the FHLB who meet certain eligibility requirements.

The Pentegra Defined Benefit Plan operates on a plan year from July 1 through June 30. The Pentegra Defined Benefit Plan files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 13-5645888 and the three-digit plan number is 333. There are no collective bargaining agreements in place at the FHLB.

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The Pentegra Defined Benefit Plan's annual valuation process includes calculating the plan's funded status and separately calculating the funded status of each participating employer. The funded status is defined as the market value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra Defined Benefit Plan accepts contributions for the prior plan year up to eight and a half months after the end of the prior plan year. As a result, the market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.

The most recent Form 5500 available for the Pentegra Defined Benefit Plan is for the year ended June 30, 2017. The FHLB did not contribute more than five percent of the total contributions to the Pentegra Defined Benefit Plan for the plan years ended June 30, 2017 and 2015. The FHLB contributed more than five percent of the total contributions to the Pentegra Defined Benefit Plan for the plan year ended June 30, 2016.

Table 17.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status (dollars in thousands)

	2018				2017				2016
Net pension cost charged to compensation and benefit expense for        the year ended December 31	$	8,988			$	8,340			$	6,659
Pentegra Defined Benefit Plan funded status as of July 1	109.86		%	(a)	111.75		%	(b)	104.72		%
FHLB's funded status as of July 1	124.65		%		124.35		%		118.53		%

(a) The Pentegra Defined Benefit Plan's funded status as of July 1, 2018 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2018 through March 15, 2019. Contributions made on or before March 15, 2019, and designated for the plan year ended June 30, 2018, will be included in the final valuation as of July 1, 2018. The final funded status as of July 1, 2018 will not be available until the Form 5500 for the plan year July 1, 2018 through June 30, 2019 is filed (this Form 5500 is due to be filed no later than April 2020).

(b) The Pentegra Defined Benefit Plan's funded status as of July 1, 2017 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2017 through March 15, 2018. Contributions made on or before March 15, 2018, and designated for the plan year ended June 30, 2017, will be included in the final valuation as of July 1, 2017. The final funded status as of July 1, 2017 will not be available until the Form 5500 for the plan year July 1, 2017 through June 30, 2018 is filed (this Form 5500 is due to be filed no later than April 2019).

Qualified Defined Contribution Plan. The FHLB also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified, defined contribution pension plan. The FHLB contributes a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The FHLB contributed $1,249,000, $1,191,000, and $1,026,000 in the years ended December 31, 2018, 2017, and 2016, respectively. The FHLB's contributions are recorded as compensation and benefits expense in the Statements of Income.

Nonqualified Supplemental Defined Benefit Retirement Plan (Defined Benefit Retirement Plan). The FHLB maintains a nonqualified, unfunded defined benefit plan. The plan ensures that participants receive the full amount of benefits to which they would have been entitled under the qualified defined benefit plan in the absence of limits on benefit levels imposed by the IRS. There are no funded plan assets. The FHLB has established a grantor trust, which is included in held-to-maturity securities on the Statements of Condition, to meet future benefit obligations and current payments to beneficiaries.

Postretirement Benefits Plan. The FHLB also sponsors a Postretirement Benefits Plan that includes health care and life insurance benefits for eligible retirees. Future retirees are eligible for the postretirement benefits plan if they were hired prior to August 1, 1990, are age 55 or older, and their age plus years of continuous service at retirement are greater than or equal to 80. Spouses are covered subject to required contributions. There are no funded plan assets that have been designated to provide postretirement benefits.

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Table 17.2 presents the obligations and funding status of the FHLB's Defined Benefit Retirement Plan and Postretirement Benefits Plan. The benefit obligation represents projected benefit obligation for the nonqualified supplemental Defined Benefit Retirement Plan and accumulated postretirement benefit obligation for the Postretirement Benefits Plan.

Table 17.2 - Benefit Obligation, Fair Value of Plan Assets and Funded Status (in thousands)

	Defined Benefit Retirement Plan						Postretirement Benefits Plan
Change in benefit obligation:	2018			2017			2018			2017
Benefit obligation at beginning of year	$	39,545		$	34,303		$	4,795		$	4,867
Service cost	1,129			882			19			28
Interest cost	1,353			1,367			166			197
Actuarial (gain) loss	(1,127		)	5,060			(276		)	(96		)
Benefits paid	(2,213		)	(2,067		)	(223		)	(201		)
Benefit obligation at end of year	38,687			39,545			4,481			4,795
Change in plan assets:
Fair value of plan assets at beginning of year	—			—			—			—
Employer contribution	2,213			2,067			223			201
Benefits paid	(2,213		)	(2,067		)	(223		)	(201		)
Fair value of plan assets at end of year	—			—			—			—
Funded status at end of year	$	(38,687	)	$	(39,545	)	$	(4,481	)	$	(4,795	)

Amounts recognized in “Other liabilities” on the Statements of Condition for the FHLB's nonqualified supplemental Defined Benefit Retirement Plan and Postretirement Benefits Plan as of December 31, 2018 and 2017 were (in thousands) $43,168 and $44,340.

Table 17.3 - Amounts Recognized in Accumulated Other Comprehensive Income (in thousands)

	Defined Benefit Retirement Plan				Postretirement Benefits Plan
	2018		2017		2018		2017
Net actuarial loss	$	12,779	$	16,106	$	154	$	430

Table 17.4 - Net Periodic Benefit Cost and Other Amounts Recognized in Accumulated Other Comprehensive Income (in thousands)

	For the Years Ended December 31,
	Defined Benefit Retirement Plan									Postretirement Benefits Plan
	2018			2017			2016			2018			2017			2016
Net Periodic Benefit Cost
Service cost	$	1,129		$	882		$	730		$	19		$	28		$	50
Interest cost	1,353			1,367			1,317			166			197			219
Amortization of net loss	2,200			1,702			2,316			—			5			46
Net periodic benefit cost	$	4,682		$	3,951		$	4,363		$	185		$	230		$	315
Other Changes in Benefit Obligations Recognized in Other Comprehensive Income
Net (gain) loss	$	(1,127	)	$	5,060		$	2,617		$	(276	)	$	(96	)	$	(334	)
Amortization of net loss	(2,200		)	(1,702		)	(2,316		)	—			(5		)	(46		)
Total recognized in other comprehensive income	(3,327		)	3,358			301			(276		)	(101		)	(380		)
Total recognized in net periodic benefit cost and    other comprehensive income	$	1,355		$	7,309		$	4,664		$	(91	)	$	129		$	(65	)

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For the Defined Benefit Retirement Plan and the Postretirement Benefits Plan, the related service cost is recorded as part of Non-Interest Expense - Compensation and Benefits on the Statements of Income. The non-service related components of interest cost and amortization of net loss are recorded as Non-Interest Expense - Other in the Statements of Income.

Table 17.5 presents the estimated net actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year.

Table 17.5 - Amortization for Next Fiscal Year (in thousands)

	Defined Benefit Retirement Plan		Postretirement Benefits Plan
Net actuarial loss	$	1,605	$	—

Table 17.6 presents the key assumptions used for the actuarial calculations to determine benefit obligations for the nonqualified supplemental Defined Benefit Retirement Plan and Postretirement Benefits Plan.

Table 17.6 - Benefit Obligation Key Assumptions

	Defined Benefit Retirement Plan				Postretirement Benefits Plan
	2018		2017		2018		2017
Discount rate	4.10	%	3.45	%	4.15	%	3.53	%
Salary increases	5.00	%	5.00	%	N/A		N/A

Table 17.7 presents the key assumptions used for the actuarial calculations to determine net periodic benefit cost for the FHLB's Defined Benefit Retirement Plan and Postretirement Benefit Plan.

Table 17.7 - Net Periodic Benefit Cost Key Assumptions

	Defined Benefit Retirement Plan						Postretirement Benefits Plan
	2018		2017		2016		2018		2017		2016
Discount rate	3.45	%	3.91	%	4.02	%	3.53	%	4.10	%	4.33	%
Salary increases	5.00	%	4.50	%	4.50	%	N/A		N/A		N/A

Table 17.8 - Postretirement Benefits Plan Assumed Health Care Cost Trend Rates

	2018		2017
Assumed for next year	6.50	%	7.00	%
Ultimate rate	5.00	%	5.00	%
Year that ultimate rate is reached	2021		2021

The effect of a percentage point increase in the assumed health care trend rates would be an increase in net periodic postretirement benefit expense of $35,000 and in accumulated postretirement benefit obligation (APBO) of $725,000. The effect of a percentage point decrease in the assumed health care trend rates would be a decrease in net periodic postretirement benefit expense of $28,000 and in APBO of $589,000.

The discount rates for the disclosures as of December 31, 2018 were determined by using a discounted cash flow approach, which incorporates the timing of each expected future benefit payment. Estimated future benefit payments are based on each plan's census data, benefit formulas and provisions, and valuation assumptions reflecting the probability of decrement and survival. The present value of the future benefit payments is determined by using weighted average duration based interest rate yields from a variety of highly rated relevant corporate bond indices as of December 31, 2018, and solving for the single discount rate that produces the same present value.

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Table 17.9 presents the estimated future benefits payments reflecting expected future services for the years ended after December 31, 2018.

Table 17.9 - Estimated Future Benefit Payments (in thousands)

Years	Defined Benefit Retirement Plan		Postretirement Benefit Plan
2019	$	2,573	$	222
2020	2,197		230
2021	2,313		246
2022	2,428		248
2023	1,894		249
2024 - 2028	10,756		1,305

Note 18 - Segment Information

The FHLB has identified two primary operating segments based on its method of internal reporting: Traditional Member Finance and the MPP. These segments reflect the FHLB's two primary Mission Asset Activities and the manner in which they are managed from the perspective of development, resource allocation, product delivery, pricing, credit risk and operational administration. The segments identify the principal ways the FHLB provides services to member stockholders. The FHLB, as an interest rate spread manager, considers a segment's net interest income, net interest rate spread and, ultimately, net income as the key factors in allocating resources. Resource allocation decisions are made by considering these profitability measures in the context of the historical, current and expected risk profile of each segment and the entire balance sheet, as well as current incremental profitability measures relative to the incremental market risk profile.

Overall financial performance and risk management are dynamically managed primarily at the level of, and within the context of, the entire balance sheet rather than at the level of individual business segments or product lines. Also, the FHLB hedges specific asset purchases and specific subportfolios in the context of the entire mortgage asset portfolio and the entire balance sheet. Under this holistic approach, the market risk/return profile of each business segment does not correspond, in general, to the performance that each segment would generate if it were completely managed on a separate basis, and it is not possible to accurately determine what the performance would be if the two business segments were managed on a stand-alone basis. Further, because financial and risk management is a dynamic process, the performance of a segment over a single identified period may not reflect the long-term expected or actual future trends for the segment.

The Traditional Member Finance segment includes products such as Advances and investments and the borrowing costs related to those assets. The FHLB assigns its investments to this segment primarily because they historically have been used to provide liquidity for Advances and to support the level and volatility of earnings from Advances. All interest rate swaps and a portion of swaptions, including their market value adjustments, are allocated to the Traditional Member Finance segment. The FHLB executed all of its interest rate swaps in its management of market risk for the Traditional Member Finance segment. The FHLB enters into swaptions to minimize the prepayment risk in its overall mortgage asset portfolio.

Income from the MPP is derived primarily from the difference, or spread, between the yield on mortgage loans and the borrowing cost of Consolidated Obligations outstanding allocated to this segment at the time debt is issued. MPP income also includes the gains (losses) on derivatives associated with the MPP segment, comprising all mortgage delivery commitments and forward rate agreements and a portion of swaptions.

Both segments also earn income from investment of interest-free capital. Capital is allocated proportionate to each segment's average assets based on the total balance sheet's average capital-to-assets ratio. Expenses are allocated based on cost accounting techniques that include direct usage, time allocations and square footage of space used. AHP assessments are calculated using the current assessment rates based on the income before assessments for each segment.

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The following tables set forth the FHLB's financial performance by operating segment for the years ended December 31.

Table 18.1 - Financial Performance by Operating Segment (in thousands)

	For the Years Ended December 31,
	Traditional Member Finance			MPP			Total
2018
Net interest income after provision for credit losses	$	389,615		$	108,957		$	498,572
Non-interest income (loss)	(32,415		)	(4,403		)	(36,818		)
Non-interest expense	73,441			11,278			84,719
Income before assessments	283,759			93,276			377,035
Affordable Housing Program assessments	28,556			9,328			37,884
Net income	$	255,203		$	83,948		$	339,151
2017
Net interest income	$	334,383		$	94,760		$	429,143
Provision for credit losses	—			500			500
Net interest income after provision for credit losses	334,383			94,260			428,643
Non-interest income (loss)	2,979			(4,216		)	(1,237		)
Non-interest expense	67,571			11,147			78,718
Income before assessments	269,791			78,897			348,688
Affordable Housing Program assessments	27,230			7,890			35,120
Net income	$	242,561		$	71,007		$	313,568
2016
Net interest income after provision for credit losses	$	287,721		$	75,483		$	363,204
Non-interest income (loss)	40,423			5,808			46,231
Non-interest expense	99,758			11,305			111,063
Income before assessments	228,386			69,986			298,372
Affordable Housing Program assessments	23,190			6,999			30,189
Net income	$	205,196		$	62,987		$	268,183

Table 18.2 - Asset Balances by Operating Segment (in thousands)

	Assets
	Traditional Member Finance		MPP		Total
December 31, 2018	$	86,042,150	$	13,160,423	$	99,202,573
December 31, 2017	95,525,754		11,369,460		106,895,214

Note 19 - Fair Value Disclosures

The fair value amounts recorded on the Statements of Condition and presented in the related note disclosures have been determined by the FHLB using available market information and the FHLB's best judgment of appropriate valuation methods. GAAP defines fair value 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 (i.e., an exit price). The fair values reflect the FHLB's judgment of how a market participant would estimate the fair values.

Fair Value Hierarchy. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the measurement is determined. This overall level is an indication of how market observable the fair value measurement is. An entity must disclose the level within the fair value hierarchy in which the measurements are classified.

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The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:

Level 1 Inputs - Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.

Level 2 Inputs - Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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

The FHLB reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain financial assets or liabilities. Such reclassifications would be reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. The FHLB did not have any transfers of assets or liabilities between fair value levels during the years endedDecember 31, 2018 or 2017.

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Table 19.1 presents the carrying value, fair value, and fair value hierarchy of financial assets and liabilities of the FHLB. The FHLB records trading securities, available-for-sale securities, derivative assets, derivative liabilities, certain Advances and certain Consolidated Obligation Bonds at fair value on a recurring basis, and on occasion, certain mortgage loans held for portfolio on a nonrecurring basis. The FHLB records all other financial assets and liabilities at amortized cost. Refer to Table 19.2 for further details about the financial assets and liabilities held at fair value on either a recurring or nonrecurring basis.

Table 19.1 - Fair Value Summary (in thousands)

	December 31, 2018
			Fair Value
Financial Instruments	Carrying Value		Total		Level 1		Level 2		Level 3		Netting Adjustments and Cash Collateral (1)
Assets:
Cash and due from banks	$	10,037	$	10,037	$	10,037	$	—	$	—	$	—
Interest-bearing deposits	122		122		—		122		—		—
Securities purchased under agreements to resell	4,402,208		4,402,237		—		4,402,237		—		—
Federal funds sold	10,793,000		10,793,000		—		10,793,000		—		—
Trading securities	223,980		223,980		—		223,980		—		—
Available-for-sale securities	2,402,897		2,402,897		—		2,402,897		—		—
Held-to-maturity securities	15,791,222		15,575,368		—		15,575,368		—		—
Advances (2)	54,822,252		54,736,645		—		54,736,645		—		—
Mortgage loans held for portfolio, net	10,500,917		10,329,982		—		10,317,010		12,972		—
Accrued interest receivable	169,982		169,982		—		169,982		—		—
Derivative assets	65,765		65,765		—		23,341		—		42,424
Liabilities:
Deposits	669,016		668,947		—		668,947		—		—
Consolidated Obligations:
Discount Notes	46,943,632		46,944,523		—		46,944,523		—		—
Bonds (3)	45,659,138		45,385,615		—		45,385,615		—		—
Mandatorily redeemable capital stock	23,184		23,184		23,184		—		—		—
Accrued interest payable	147,337		147,337		—		147,337		—		—
Derivative liabilities	4,586		4,586		—		21,379		—		(16,793		)
Other:
Standby bond purchase agreements	—		443		—		443		—		—

(1) Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty.

(2) Includes (in thousands) $10,008 of Advances recorded under the fair value option at December 31, 2018.

(3) Includes (in thousands) $3,906,610 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 2018.

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	December 31, 2017
			Fair Value
Financial Instruments	Carrying Value		Total		Level 1		Level 2		Level 3		Netting Adjustments and Cash Collateral (1)(2)
Assets:
Cash and due from banks	$	26,550	$	26,550	$	26,550	$	—	$	—	$	—
Interest-bearing deposits	140		140		—		140		—		—
Securities purchased under agreements to resell	7,701,929		7,701,934		—		7,701,934		—		—
Federal funds sold	3,650,000		3,650,000		—		3,650,000		—		—
Trading securities	781		781		—		781		—		—
Available-for-sale securities	899,876		899,876		—		899,876		—		—
Held-to-maturity securities	14,804,970		14,682,329		—		14,682,329		—		—
Advances (3)	69,918,224		69,894,641		—		69,894,641		—		—
Mortgage loans held for portfolio, net	9,680,940		9,731,947		—		9,714,802		17,145		—
Accrued interest receivable	128,561		128,561		—		128,561		—		—
Derivative assets	60,695		60,695		—		64,317		—		(3,622		)
Liabilities:
Deposits	650,531		650,422		—		650,422		—		—
Consolidated Obligations:
Discount Notes	46,210,458		46,209,716		—		46,209,716		—		—
Bonds (4)	54,163,061		54,095,627		—		54,095,627		—		—
Mandatorily redeemable capital stock	30,031		30,031		30,031		—		—		—
Accrued interest payable	128,652		128,652		—		128,652		—		—
Derivative liabilities	2,893		2,893		—		9,800		—		(6,907		)
Other:
Commitments to extend credit for Advances	—		4		—		4		—		—
Standby bond purchase agreements	—		354		—		354		—		—

(1) Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty.

(2) To conform with current presentation, (in thousands) $74,431 in variation margin has been allocated to the individual derivative instrument as of December 31, 2017. Previously, this amount was included with Netting Adjustments and Cash Collateral.

(3) Includes (in thousands) $15,013 of Advances recorded under the fair value option at December 31, 2017.

(4) Includes (in thousands) $5,577,315 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 2017.

Summary of Valuation Methodologies and Primary Inputs.

The valuation methodologies and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the Statement of Condition are listed below. The fair values and level within the fair value hierarchy of these assets and liabilities are reported in Table 19.2.

Investment securities – MBS: To value MBS holdings, the FHLB incorporates prices from multiple designated third-party pricing vendors, when available. The pricing vendors use various proprietary models to price MBS. 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. As many MBS do not trade on a daily basis, the pricing vendors use available information such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all MBS valuations, which facilitates resolution of potentially erroneous prices identified by the FHLB. The FHLB

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has conducted reviews of multiple pricing vendors to confirm and further augment its understanding of the vendors' pricing processes, methodologies and control procedures for specific instruments.

The FHLB's valuation technique for estimating the fair values of MBS first requires the establishment of a “median” price for each security. All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, non-binding dealer estimates, and/or use of an internal model that is deemed most appropriate) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. Alternatively, if the analysis confirms that an outlier is in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.

If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.

Multiple prices were received for substantially all of the FHLB's MBS holdings and the final prices for those securities were computed by averaging the prices received. Based on the FHLB's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLB believes its final prices result in reasonable estimates of fair value and further that the fair value measurements are classified appropriately in the fair value hierarchy.

Investment securities – Non-MBS: To determine the estimated fair values of non-MBS investment securities, the FHLB can use either (a) an income approach based on a market-observable interest rate curve that may be adjusted for a spread, or (b) prices received from third-party pricing vendors. For its U.S. Treasury obligations, the FHLB determines the fair value using the income approach. The income approach uses indicative fair values derived from a discounted cash flow methodology. The FHLB uses the Treasury curve as the market-observable interest rate curve. For GSE obligations and certificates of deposit, the fair value is determined using prices received from third-party pricing vendors. For GSE obligations, the FHLB uses prices from multiple third-party pricing vendors. The pricing vendors' methodology and the FHLB's validation process is consistent with the MBS process described above. For certificates of deposit, the fair value is determined based on each security’s indicative fair value obtained from a third-party vendor. The FHLB performs several validation steps in order to verify the accuracy and reasonableness of the fair values obtained for certificates of deposit. These steps may include, but are not limited to, a detailed review of instruments with significant periodic price changes and a derived fair value from an option-adjusted discounted cash flow methodology using market-observed inputs for the interest rate environment and similar instruments.

Advances recorded under the fair value option: The FHLB determines the fair values of Advances recorded under the fair value option by calculating the present value of expected future cash flows from these Advances. The discount rates used in these calculations are the replacement rates for Advances with similar terms, as approximated either by adding an estimated current spread to the LIBOR Swap Curve or by using current indicative market yields, as indicated by the FHLB's pricing methodologies for Advances with similar current terms. Advance pricing is determined based on the FHLB's rates on Consolidated Obligations. To determine the estimated fair value for Advances with optionality, market-based expectations of future interest rate volatility implied from current prices for similar options are also used. In accordance with Finance Agency regulations, Advances with a maturity and repricing period greater than six months require a prepayment fee sufficient to make the FHLB financially indifferent to the borrower's decision to prepay the Advances. Therefore, the fair value of Advances does not assume prepayment risk.

Impaired mortgage loans held for portfolio: The estimated fair values of impaired mortgage loans held for portfolio on a non-recurring basis are based on property values obtained from a third-party pricing vendor.

Derivative assets/liabilities: The FHLB's derivative assets/liabilities generally consist of interest rate swaps, interest rate swaptions, TBA MBS (forward rate agreements), and mortgage delivery commitments. The FHLB's interest rate related derivatives (swaps and swaptions) are traded in the over-the-counter market. Therefore, the FHLB determines the fair value of each individual instrument using market value models that use readily observable market inputs as their basis (inputs that are actively quoted and can be validated to external sources). The FHLB uses a mid-market pricing convention as a practical expedient for fair value measurements within a bid-ask spread. These models reflect the contractual terms, including the period to maturity, as well as the significant inputs noted below. The fair value determination uses the standard valuation technique of discounted cash flow analysis.

The FHLB performs several validation steps to verify the reasonableness of the fair value output generated by the primary market value model. In addition to an annual model validation, the FHLB prepares a monthly reconciliation of the model's fair

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values to estimates of fair values provided by the derivative counterparties. The FHLB believes these processes provide a reasonable basis for it to place continued reliance on the derivative fair values generated by the model.

The fair value of TBA MBS is based on independent indicative and/or quoted prices generated by market transactions involving comparable instruments. The FHLB determines the fair value of mortgage delivery commitments using market prices from the TBA/mortgage-backed security market or TBA/Ginnie Mae market and adjustments noted below.

The FHLB's discounted cash flow analysis uses market-observable inputs. Inputs, by class of derivative, are as follows:

Interest rate swaps and interest rate swaptions:

▪ Discount rate assumption. Overnight Index Swap Curve;

▪ Forward interest rate assumption. LIBOR Swap Curve; and

▪ Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

TBA MBS:

▪ Market-based prices by coupon class and expected term until settlement.

Mortgage delivery commitments:

▪ TBA securities prices. Market-based prices by coupon class and expected term until settlement, adjusted to reflect the contractual terms of the mortgage delivery commitments. The adjustments to the market prices are market observable, or can be corroborated with observable market data.

The FHLB is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. The FHLB has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements.

The fair values of the FHLB's derivatives include accrued interest receivable/payable and related cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. Derivatives are presented on a net basis by counterparty when it has met the netting requirements. If these netted amounts are positive, they are classified as an asset and if negative, they are classified as a liability.

Consolidated Obligations recorded under the fair value option: The FHLB determines the fair values of non-option-based Consolidated Obligation Bonds recorded under the fair value option by calculating the present value of scheduled future cash flows from the bonds. Inputs used to determine the fair value of these Consolidated Obligation Bonds are the discount rates, which are estimated current market yields, as indicated by the Office of Finance, for bonds with similar current terms. 

The FHLB determines the fair values of option-based Consolidated Obligation Bonds recorded under the fair value option based on pricing received from designated third-party pricing vendors. The pricing vendors used apply various proprietary models to price these Consolidated Obligation Bonds. The inputs to those models are derived from various sources including, but not limited to, benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many Consolidated Obligation Bonds do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual Consolidated Obligation Bonds. Each pricing vendor has an established challenge process in place for all valuations, which facilitates resolution of potentially erroneous prices identified by the FHLB.

When pricing vendors are used, the FHLB's valuation technique first requires the establishment of a “median” price for each Consolidated Obligation Bond. All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, non-binding dealer estimates, and/or use of an internal model that is deemed most appropriate) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. Alternatively,

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if the analysis confirms that an outlier is in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.

If all prices received for a Consolidated Obligation Bond are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.

Multiple vendor prices were received for the FHLB's Consolidated Obligation Bonds and the final prices for those bonds were computed by averaging the prices received. Based on the FHLB's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLB believes its final prices result in reasonable estimates of fair value and that the fair value measurements are classified appropriately in the fair value hierarchy.

The FHLB has conducted reviews of its pricing vendors to confirm and further augment its understanding of the vendors' pricing processes, methodologies and control procedures for Consolidated Obligation Bonds.

Adjustments may be necessary to reflect the 11 FHLBanks' credit quality when valuing Consolidated Obligation Bonds recorded under the fair value option. Due to the joint and several liability for Consolidated Obligations, the FHLB monitors its own creditworthiness and the creditworthiness of the other FHLBanks to determine whether any credit adjustments are necessary in its fair value measurement of Consolidated Obligation Bonds. No adjustments were considered necessary at December 31, 2018 or 2017.

Subjectivity of estimates. Estimates of the fair values of financial assets and liabilities using the methods described above and other methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speeds, interest rate volatility, distributions of future interest rates used to value options, and discount rates that appropriately reflect market and credit risks. The judgments also include the parameters, methods, and assumptions used in models to value the options. The use of different assumptions could have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near term changes.

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Fair Value Measurements.

Table 19.2 presents the fair value of financial assets and liabilities that are recorded on a recurring or nonrecurring basis at December 31, 2018 and 2017, by level within the fair value hierarchy. The FHLB records nonrecurring fair value adjustments to reflect partial write-downs on certain mortgage loans.

Table 19.2 - Fair Value Measurements (in thousands)

	Fair Value Measurements at December 31, 2018
	Total		Level 1		Level 2		Level 3		Netting Adjustments and Cash Collateral (1)
Recurring fair value measurements - Assets
Trading securities:
GSE obligations	$	223,368	$	—	$	223,368	$	—	$	—
U.S. obligation single-family MBS	612		—		612		—		—
Total trading securities	223,980		—		223,980		—		—
Available-for-sale securities:
Certificates of deposit	2,350,002		—		2,350,002		—		—
GSE obligations	52,895		—		52,895		—		—
Total available-for-sale securities	2,402,897		—		2,402,897		—		—
Advances	10,008		—		10,008		—		—
Derivative assets:
Interest rate related	64,039		—		21,615		—		42,424
Mortgage delivery commitments	1,726		—		1,726		—		—
Total derivative assets	65,765		—		23,341		—		42,424
Total assets at fair value	$	2,702,650	$	—	$	2,660,226	$	—	$	42,424
Recurring fair value measurements - Liabilities
Consolidated Obligation Bonds	$	3,906,610	$	—	$	3,906,610	$	—	$	—
Derivative liabilities:
Interest rate related	1,921		—		18,714		—		(16,793		)
Forward rate agreements	2,664		—		2,664		—		—
Mortgage delivery commitments	1		—		1		—		—
Total derivative liabilities	4,586		—		21,379		—		(16,793		)
Total liabilities at fair value	$	3,911,196	$	—	$	3,927,989	$	—	$	(16,793	)
Nonrecurring fair value measurements - Assets (2)
Mortgage loans held for portfolio	$	311	$	—	$	—	$	311

(1) Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty.

(2) The fair value information presented is as of the date the fair value adjustment was recorded during the year ended December 31, 2018.

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	Fair Value Measurements at December 31, 2017
	Total		Level 1		Level 2		Level 3		Netting Adjustments and Cash Collateral (1)(2)
Recurring fair value measurements - Assets
Trading securities:
U.S. obligation single-family MBS	$	781	$	—	$	781	$	—	$	—
Available-for-sale securities:
Certificates of deposit	899,876		—		899,876		—		—
Advances	15,013		—		15,013		—		—
Derivative assets:
Interest rate related	60,215		—		63,837		—		(3,622		)
Forward rate agreements	27		—		27		—		—
Mortgage delivery commitments	453		—		453		—		—
Total derivative assets	60,695		—		64,317		—		(3,622		)
Total assets at fair value	$	976,365	$	—	$	979,987	$	—	$	(3,622	)
Recurring fair value measurements - Liabilities
Consolidated Obligation Bonds	$	5,577,315	$	—	$	5,577,315	$	—	$	—
Derivative liabilities:
Interest rate related	2,646		—		9,553		—		(6,907		)
Forward rate agreements	230		—		230		—		—
Mortgage delivery commitments	17		—		17		—		—
Total derivative liabilities	2,893		—		9,800		—		(6,907		)
Total liabilities at fair value	$	5,580,208	$	—	$	5,587,115	$	—	$	(6,907	)
Nonrecurring fair value measurements - Assets (3)
Mortgage loans held for portfolio	$	598	$	—	$	—	$	598

(1) Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty.

(2) To conform with current presentation, (in thousands) $74,431 in variation margin has been allocated to the individual derivative instrument as of December 31, 2017. Previously, this amount was included with Netting Adjustments and Cash Collateral.

(3) The fair value information presented is as of the date the fair value adjustment was recorded during the year ended December 31, 2017.

Fair Value Option. The fair value option provides an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires a company to display the fair value of those assets and liabilities for which it has chosen to use fair value on the face of the Statements of Condition. Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in net income. If elected, interest income and interest expense on Advances and Consolidated Bonds carried at fair value are recognized based solely on the contractual amount of interest due or unpaid. Any transaction fees or costs are immediately recognized into other non-interest income or other non-interest expense.

The FHLB has elected the fair value option for certain financial instruments that either do not qualify for hedge accounting or may be at risk for not meeting hedge effectiveness requirements. These fair value elections were made primarily in an effort to mitigate the potential income statement volatility that can arise from economic hedging relationships in which the carrying value of the hedged item is not adjusted for changes in fair value.

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Table 19.3 presents net (losses) gains recognized in earnings related to financial assets and liabilities in which the fair value option was elected during the years endedDecember 31, 2018, 2017 and 2016.

Table 19.3 – Fair Value Option - Financial Assets and Liabilities (in thousands)

	For the Years Ended December 31,
Net (Losses) Gains from Changes in Fair Value Recognized in Earnings	2018			2017			2016
Advances	$	(4	)	$	(81	)	$	37
Consolidated Bonds	(14,180		)	10,490			40,466
Total net (losses) gains	$	(14,184	)	$	10,409		$	40,503

For instruments recorded under the fair value option, the related contractual interest income and contractual interest expense are recorded as part of net interest income on the Statements of Income. The remaining changes in fair value for instruments in which the fair value option has been elected are recorded as “Net (losses) gains on financial instruments held under fair value option” in the Statements of Income, except for changes in fair value related to instrument specific credit risk, which are recorded in accumulated other comprehensive income in the Statement of Condition. The FHLB has determined that none of the remaining changes in fair value were related to instrument-specific credit risk for the years endedDecember 31, 2018 or 2017. In determining that there has been no change in instrument-specific credit risk period to period, the FHLB primarily considered the following factors:

▪ The FHLB is a federally chartered GSE, and as a result of this status, the FHLB’s Consolidated Obligations have historically received the same credit ratings as the government bond credit rating of the United States, even though they are not Obligations of the United States and are not guaranteed by the United States.

▪ The FHLB is jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on all Consolidated Obligations of each of the other FHLBanks.

The following table reflects the difference between the aggregate unpaid principal balance outstanding and the aggregate fair value for Advances and Consolidated Bonds for which the fair value option has been elected.

Table 19.4 – Aggregate Unpaid Balance and Aggregate Fair Value (in thousands)

	December 31, 2018							December 31, 2017
	Aggregate Unpaid Principal Balance		Aggregate Fair Value		Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance			Aggregate Unpaid Principal Balance		Aggregate Fair Value		Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance
Advances (1)	$	10,000	$	10,008	$	8		$	15,000	$	15,013	$	13
Consolidated Bonds	3,941,000		3,906,610		(34,390		)	5,624,265		5,577,315		(46,950		)

(1) At December 31, 2018 and 2017, none of the Advances were 90 days or more past due or had been placed on non-accrual status.

Note 20- Commitments and Contingencies

As previously described, Consolidated Obligations are backed only by the financial resources of the FHLBanks. The joint and several liability Finance Agency regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal and interest on Consolidated Obligations for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any Consolidated Obligation on behalf of another FHLBank, and as of December 31, 2018, and through the filing date of this report, the FHLB does not believe that it is probable that it will be asked to do so.

The FHLB determined that it was not necessary to recognize a liability for the fair values of its joint and several obligation related to other FHLBanks' Consolidated Obligations at December 31, 2018 or 2017. The joint and several obligations are

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mandated by Finance Agency regulations and are not the result of arms-length transactions among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation.

Table 20.1 - Off-Balance Sheet Commitments (in thousands)

	December 31, 2018						December 31, 2017
Notional Amount	Expire within one year		Expire after one year		Total		Expire within one year		Expire after one year		Total
Standby Letters of Credit	$	14,578,925	$	268,395	$	14,847,320	$	14,388,745	$	302,237	$	14,690,982
Commitments for standby bond purchases	23,215		54,820		78,035		27,230		44,645		71,875
Commitments to fund additional Advances	—		—		—		5,000		—		5,000
Commitments to purchase mortgage loans	146,009		—		146,009		218,651		—		218,651
Unsettled Consolidated Bonds, principal amount (1)	92,000		—		92,000		—		—		—
Unsettled Consolidated Discount Notes, principal amount (1)	525,000		—		525,000		309,662		—		309,662

(1) Expiration is based on settlement period rather than underlying contractual maturity of Consolidated Obligations.

Standby Letters of Credit. The FHLB issues Standby Letters of Credit on behalf of its members to support certain obligations of the members (or member's customer) to third-party beneficiaries. These Standby Letters of Credit are subject to the same collateralization and borrowing limits that are applicable to Advances. Standby Letters of Credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use Standby Letters of Credit as collateral for deposits from federal and state government agencies. Standby Letters of Credit are executed for members for a fee. If the FHLB is required to make payment for a beneficiary's draw, the member either reimburses the FHLB for the amount drawn or, subject to the FHLB's discretion, the amount drawn may be converted into a collateralized Advance to the member. However, Standby Letters of Credit usually expire without being drawn upon.Standby Letters of Credit have original expiration periods of up to 18 years, currently expiring no later than 2024. Unearned fees and the value of guarantees related to Standby Letters of Credit are recorded in other liabilities and amounted to (in thousands) $3,331 and $3,889 at December 31, 2018 and 2017.

The FHLB monitors the creditworthiness of its members that have Standby Letters of Credit. In addition, Standby Letters of Credit are subject to the same collateralization and borrowing limits that apply to Advances and are fully collateralized at the time of issuance. As a result, the FHLB has deemed it unnecessary to record any additional liability on these commitments.

Standby Bond Purchase Agreements. The FHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bonds according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLB to purchase the bonds. The bond purchase commitments entered into by the FHLB have original expiration periods up to 3 years, currently no later than 2021, although some are renewable at the option of the FHLB. During 2018 and 2017, the FHLB was not required to purchase any bonds under these agreements.

Commitments to Purchase Mortgage Loans. The FHLB enters into commitments that unconditionally obligate the FHLB to purchase mortgage loans. Commitments are generally for periods not to exceed 90 days. The delivery commitments are recorded as derivatives at their fair values.

Pledged Collateral. The FHLB may pledge securities, as collateral, related to derivatives. See Note 11 - Derivatives and Hedging Activities for additional information about the FHLB's pledged collateral and other credit-risk-related contingent features.

Lease Commitments. The FHLB charged to operating expenses net rental and related costs of approximately $1,998,000,$1,990,000, and $1,899,000 for the years ending December 31, 2018, 2017, and 2016. Total future minimum operating lease payments were $8,590,000 at December 31, 2018. Lease agreements for FHLB premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the FHLB's financial condition or results of operations.

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Legal Proceedings. From time to time, the FHLB is subject to legal proceedings arising in the normal course of business. The FHLB would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount could be reasonably estimated. After consultation with legal counsel, management does not anticipate that ultimate liability, if any, arising out of any matters will have a material effect on the FHLB's financial condition or results of operations.

Note 21 - Transactions with Other FHLBanks

The FHLB notes all transactions with other FHLBanks on the face of its financial statements. Occasionally, the FHLB loans short-term funds to and borrows short-term funds from other FHLBanks. These loans and borrowings are transacted at then current market rates when traded. There were no such loans or borrowings outstanding at December 31, 2018, 2017, or 2016. The following table details the average daily balance of lending and borrowing between the FHLB and other FHLBanks for the years endedDecember 31.

Table 21.1 - Lending and Borrowing Between the FHLB and Other FHLBanks (in thousands)

	Average Daily Balances for the Years Ended December 31,
	2018		2017		2016
Loans to other FHLBanks	$	1,370	$	14	$	3,142
Borrowings from other FHLBanks	274		959		273

In addition, the FHLB may, from time to time, assume the outstanding primary liability for Consolidated Obligations of another FHLBank (at then current market rates on the day when the transfer is traded) rather than issuing new debt for which the FHLB is the primary obligor. The FHLB then becomes the primary obligor on the transferred debt. There are no formal arrangements governing the transfer of Consolidated Obligations between the FHLBanks, and these transfers are not investments of one FHLBank in another FHLBank. Transferring debt at current market rates enables the FHLBank System to satisfy the debt issuance needs of individual FHLBanks without incurring the additional selling expenses (concession fees) associated with new debt. It also provides the transferring FHLBanks with outlets for extinguishing debt structures no longer required for their balance sheet management strategies.

There were no Consolidated Obligations transferred to the FHLB during the years ended December 31, 2018, 2017, or 2016. The FHLB had no Consolidated Obligations transferred to other FHLBanks during these periods.

Note 22 - Transactions with Stockholders

As a cooperative, the FHLB's capital stock is owned by its members, by former members that retain the stock as provided in the FHLB's Capital Plan and by nonmember institutions that have acquired members and must retain the stock to support Advances or other activities with the FHLB. All Advances are issued to members and all mortgage loans held for portfolio are purchased from members. The FHLB also maintains demand deposit accounts for members, primarily to facilitate settlement activities that are directly related to Advances and mortgage loan purchases. Additionally, the FHLB may enter into interest rate swaps with its stockholders. The FHLB may not invest in any equity securities issued by its stockholders and it has not purchased any MBS securitized by, or other direct long-term investments in, its stockholders.

For financial statement purposes, the FHLB defines related parties as those members with more than 10 percent of the voting interests of the FHLB capital stock outstanding. Federal statute prescribes the voting rights of members in the election of both Member and Independent directors. For Member directorships, the Finance Agency designates the number of Member directorships in a given year and an eligible voting member may vote only for candidates seeking election in its respective state. For Independent directors, the FHLB's Board of Directors nominates candidates to be placed on the ballot in an at-large election. For both Member and Independent director elections, a member is entitled to vote one share of required capital stock, subject to a statutory limitation, for each applicable directorship. Under this limitation, the total number of votes that a member may cast is limited to the average number of shares of the FHLB's capital stock that were required to be held by all members in that state as of the record date for voting. Nonmember stockholders are not eligible to vote in director elections. Due to these statutory limitations, no member owned more than 10 percent of the voting interests of the FHLB at December 31, 2018 or 2017.

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All transactions with stockholders are entered into in the ordinary course of business. Finance Agency regulations require the FHLB to offer the same pricing for Advances and other services to all members regardless of asset or transaction size, charter type, or geographic location. However, the FHLB may, in pricing its Advances, distinguish among members based upon its assessment of the credit and other risks to the FHLB of lending to any particular member or upon other reasonable criteria that may be applied equally to all members. The FHLB's policies and procedures require that such standards and criteria be applied consistently and without discrimination to all members applying for Advances.

Transactions with Directors' Financial Institutions. In the ordinary course of its business, the FHLB may provide products and services to members whose officers or directors serve as directors of the FHLB (Directors' Financial Institutions). Finance Agency regulations require that transactions with Directors' Financial Institutions be made on the same terms as those with any other member. The following table reflects balances with Directors' Financial Institutions for the items indicated below. The FHLB had no MBS or derivatives transactions with Directors' Financial Institutions at December 31, 2018 or 2017.

Table 22.1 - Transactions with Directors' Financial Institutions (dollars in millions)

	December 31, 2018				December 31, 2017
	Balance		% of Total(1)		Balance		% of Total (1)
Advances	$	3,424	6.2	%	$	3,558	5.1	%
MPP	585		5.7		112		1.2
Regulatory capital stock	419		9.6		187		4.4

(1) Percentage of total principal (Advances), unpaid principal balance (MPP), and regulatory capital stock.

Concentrations. The following table shows regulatory capital stock balances, outstanding Advance principal balances, and unpaid principal balances of mortgage loans held for portfolio of stockholders holding five percent or more of regulatory capital stock and includes any known affiliates that are members of the FHLB.

Table 22.2 - Stockholders Holding Five Percent or more of Regulatory Capital Stock (dollars in millions)

	Regulatory Capital Stock				Advance		MPP Unpaid
December 31, 2018	Balance		% of Total		Principal		Principal Balance
JPMorgan Chase Bank, N.A.	$	1,085	25	%	$	23,400	$	—
U.S. Bank, N.A.	796		18		4,574		19
The Huntington National Bank	248		6		6		486

	Regulatory Capital Stock				Advance		MPP Unpaid
December 31, 2017	Balance		% of Total		Principal		Principal Balance
JPMorgan Chase Bank, N.A.	$	1,059	25	%	$	23,950	$	—
U.S. Bank, N.A.	593		14		8,975		23
The Huntington National Bank	282		7		3,732		456
Fifth Third Bank	248		6		3,140		2

Nonmember Affiliates. The FHLB has relationships with three nonmember affiliates, the Kentucky Housing Corporation, the Ohio Housing Finance Agency and the Tennessee Housing Development Agency. The FHLB had no investments in or borrowings to any of these nonmember affiliates at December 31, 2018 or 2017. The FHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. For the years ended December 31, 2018 and 2017, the FHLB was not required to purchase any bonds under these agreements.

SUPPLEMENTAL FINANCIAL DATA

Supplemental financial data required is set forth in the “Other Financial Information” caption at Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this report.

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

There were no changes in or disagreements with our accountants on accounting and financial disclosure during the two most recent fiscal years.

Item 9A. Controls and Procedures.

DISCLOSURE CONTROLS AND PROCEDURES

As of December 31, 2018, the FHLB's management, including its principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, these two officers each concluded that, as of December 31, 2018, the FHLB maintained effective disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files under the Exchange Act is (1) accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure and (2) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the FHLB is responsible for establishing and maintaining adequate internal control over financial reporting. The FHLB's internal control over financial reporting is designed by, or under the supervision of, the FHLB's management, including its principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

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

The FHLB's management assessed the effectiveness of the FHLB's internal control over financial reporting as of December 31, 2018. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment, management of the FHLB determined that, as of December 31, 2018, the FHLB's internal control over financial reporting was effective based on those criteria.

The effectiveness of the FHLB's internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP (PwC), an independent registered public accounting firm, as stated in their report which is included in Item 8. Financial Statements and Supplementary Data.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the FHLB's internal control over financial reporting that occurred during the fourth quarter ended December 31, 2018 that materially affected, or are reasonably likely to materially affect, the FHLB's internal control over financial reporting.

Item 9B. Other Information.

PwC serves as the independent registered public accounting firm for the FHLB. Rule 201(c)(1)(ii)(A) of SEC Regulation S-X (the Loan Rule) prohibits an accounting firm, such as PwC, from having certain financial relationships with its audit clients and affiliated entities. Specifically, the Loan Rule provides, in relevant part, that an accounting firm generally would not be independent if it or a covered person in the firm receives a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.” A covered person in the firm includes personnel on the audit engagement team, personnel in the chain of command, partners and managers who provide ten or more hours of non-audit services to the audit client, and partners in the office where the lead engagement partner practices in connection with the client.

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PwC has advised the FHLB that as of December 31, 2018, PwC and certain covered persons had borrowing relationships with two FHLB members (referred below as the “lenders”) who own more than ten percent of the FHLB’s capital stock, which under the Loan Rule, may reasonably be thought to bear on PwC’s independence with respect to the FHLB. The FHLB is providing this disclosure to explain the facts and circumstances, as well as PwC’s and the Audit Committee’s conclusions, concerning PwC’s objectivity and impartiality with respect to the audit of the FHLB.

PwC advised the Audit Committee of the Board that it believes that, in light of the facts of these borrowing relationships, its ability to exercise objective and impartial judgment on all matters encompassed within PwC’s audit engagement has not been impaired and that a reasonable investor with knowledge of all relevant facts and circumstances would reach the same conclusion. PwC has advised the Audit Committee that this conclusion is based in part on the following considerations:

▪ the firm's borrowings are in good standing and neither lender has the right to take action against PwC, as borrower, in connection with the financings;

▪ the debt balances outstanding are immaterial to PwC and to each lender;

▪ PwC has borrowing relationships with a diverse group of lenders, therefore PwC is not dependent on any single lender or group of lenders; and

▪ the PwC audit engagement team has no involvement in PwC’s treasury function and PwC’s treasury function has no oversight or ability to influence the PwC audit engagement team.

Additionally, the Audit Committee assessed PwC’s ability to perform an objective and impartial audit, including consideration of the ownership structure of the FHLB, the limited voting rights of members and the composition of the Board of Directors. In addition to the above listed considerations, the Audit Committee considered the following:

▪ although the lenders owned more than ten percent of the FHLB’s capital stock, the lenders' voting rights are each less than ten percent;

▪ no individual officer or director that serves on the Board of Directors has the ability to significantly influence the FHLB based on the composition of the Board of Directors; and

▪ as of December 31, 2018, and as of the date of the filing of this Form 10-K, no officer or director of either lender served on the Board of Directors of the FHLB.

Based on this evaluation, the Audit Committee has concluded that PwC’s ability to exercise objective and impartial judgment on all issues encompassed within PwC’s audit engagement has not been impaired.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

NOMINATION AND ELECTION OF DIRECTORS

The Finance Agency has authorized us to have a total of 18 directors: 10 Member directors and eight Independent directors. Two of our Independent directors are designated as Public Interest directors and all 18 directors are elected by our members.

For both Member and Independent directorship elections, a member institution may cast one vote per seat or directorship up for election for each share of stock that the member was required to hold as of December 31 of the calendar year immediately preceding the election year. However, the number of votes that any member may cast for any one directorship cannot exceed the average number of shares of FHLB stock that were required to be held by all members located in its state. The election process is conducted by mail. Our Board of Directors does not solicit proxies nor is any member institution permitted to solicit proxies in an election.

Finance Agency regulations also provide for two separate selection processes for Member and Independent director candidates.

Member director candidates are nominated by any officer or director of a member institution eligible to vote in the respective statewide election, including the candidate's own institution. After the FHLB determines that the candidate meets all Member director eligibility requirements per Finance Agency regulations, the candidate may run for election and the candidate's name is placed on the ballot.

Independent director candidates are self-nominated. Any individual may submit an Independent director application form to the FHLB and request to be considered for election. The FHLB reviews all application forms to determine that the individual satisfies the appropriate public interest or non-public interest Independent director eligibility requirements per Finance Agency regulations before forwarding the application form to the Board for review of the candidate's qualifications and skills. The Board then nominates an individual whose name will appear on the ballot after consultation with the Affordable Housing Advisory Council and after the nominee information has been submitted to the Finance Agency for review. As part of the nomination process, the Board may consider several factors including the individual's contributions and service on the Board, if a former or incumbent director, and the specific experience and qualifications of the candidate. The Board also considers diversity in nominating Independent directors and how the attributes of the candidate may add to the overall strength and skill set of the Board. These same factors are considered when the Board fills a Member or Independent director vacancy.

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DIRECTORS

The following table sets forth certain information (ages as of March 1, 2019) regarding each of our current directors.

Name	Age	Director Since	Expiration of Term as a Director	Independent or Member (State)
J. Lynn Anderson	55	2017 (1)	12/31/20	Independent (OH)
Grady P. Appleton	71	2007	12/31/21	Independent (OH)
April Miller Boise	50	2019	12/31/22	Independent (OH)
Brady T. Burt	46	2017	12/31/20	Member (OH)
Greg W. Caudill	60	2014	12/31/21	Member (KY)
Mark N. DuHamel	61	(2009-2015) 2018	12/31/21	Member (OH)
Leslie D. Dunn	73	2007	12/31/20	Independent (OH)
James A. England, Vice Chair	67	2011	12/31/22	Member (TN)
Robert T. Lameier	66	2016	12/31/19	Member (OH)
Michael R. Melvin	74	(1995-2001) 2006	12/31/19	Member (OH)
Donald J. Mullineaux, Chair	73	2010	12/31/19	Independent (KY)
Alvin J. Nance	61	2009	12/31/20	Independent (TN)
Michael P. Pell	55	2019	12/31/22	Member (OH)
Charles J. Ruma	77	(2002-2004) 2007	12/31/19	Independent (OH)
David E. Sartore	58	2014	12/31/21	Member (KY)
William S. Stuard, Jr.	64	2011	12/31/22	Member (TN)
Nancy E. Uridil	67	2015	12/31/22	Independent (OH)
James J. Vance	57	2017	12/31/20	Member (OH)

(1) Ms. Anderson, an Independent director beginning in 2017, also served as a Member director from 2011-2016.

Member Directors

Finance Agency regulations govern the eligibility requirements for our Member directors. Each Member director, and each nominee to a Member directorship, must be a U.S. citizen and an officer or director of a member that: is located in the voting state to be represented by the Member directorship, was a member of the FHLB as of the record date, and meets all minimum capital requirements established by its appropriate Federal banking agency or state regulator.

Each Member director is nominated and elected by our members through an annual voting process administered by us. Any member that is entitled to vote in the election may nominate an eligible individual to fill each available Member directorship for its voting state, and all eligible nominees must be presented to the membership in the voting state. In accordance with Finance Agency regulations, except when acting in a personal capacity, no director, officer, attorney, employee or agent of the FHLB may communicate in any manner that he or she directly or indirectly, supports or opposes the nomination or election of a particular individual for a Member directorship or take any other action to influence the voting with respect to a particular individual. As a result, the FHLB is not in a position to know which factors its member institutions considered in nominating candidates for Member directorships or in voting to elect Member directors.

Mr. Burt has been the Senior Vice President and Chief Financial Officer of The Park National Bank, Newark, Ohio, a subsidiary of Park National Corporation, since December 2012. He also serves as the Secretary, Treasurer, and Chief Financial Officer of Park National Corporation.

Mr. Caudill has been Chief Executive Officer of Farmers National Bank, Danville, Kentucky since December 2002. He also served as President of Farmers National Bank from December 2002 until April 2016.

Mr. DuHamel has been Executive Vice President and Corporate Treasurer of The Huntington National Bank, Columbus, Ohio since August 2016. Previously, he served as the Executive Vice President and Deputy Chief Financial Officer of FirstMerit Bank, N.A. from May 2015 to August 2016. In addition, he served as the Executive Vice President of FirstMerit Bank, N.A. from February 2005 to May 2015 and Treasurer of FirstMerit Bank, N.A. from 1996 to May 2015.

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Mr. England has been Chairman of Decatur County Bank, Decaturville, Tennessee since 1990. He also served as Chief Executive Officer of Decatur County Bank from 1990 to 2013.

Mr. Lameier has been President, Chief Executive Officer, and a director of Miami Savings Bank, Miamitown, Ohio since 1993.

Mr. Melvin has been President and a director of Perpetual Federal Savings Bank, Urbana, Ohio since 1980.

Mr. Pell has been President and Chief Executive Officer of First State Bank, Winchester, Ohio since March 2006.

Mr. Sartore became Executive Vice President and Chief Financial Officer of Field & Main Bank, Henderson, Kentucky in January 2015 when Ohio Valley Financial Group and BankTrust Financial merged to form Field & Main Bank. Previously, Mr. Sartore was Senior Vice President and Chief Financial Officer of Ohio Valley Financial Group since 1992.

Mr. Stuard has been Chairman of F&M Bank, Clarksville, Tennessee, since January 2016 and President and Chief Executive Officer of F&M Bank since January 1991.

Mr. Vance has been Senior Vice President and Treasurer of Western-Southern Life Assurance Company and related subsidiaries (Cincinnati, Ohio) since March 2016. Previously, he served as Vice President and Treasurer of Western-Southern Life Assurance Company and related subsidiaries from 1999 to March 2016.

Independent Directors

Finance Agency regulations also govern the eligibility requirements of our Independent directors. Each Independent director, and each nominee to an Independent directorship, must be a U.S. citizen and bona fide resident of our District. At least two of our Independent directors must be designated by our Board as public interest directors. Public interest Independent directors must have more than four years experience representing consumer or community interest in banking services, credit needs, housing, or consumer financial protections. All other Independent directors must have knowledge of or experience in one or more of the following areas: auditing and accounting; derivatives; financial management; organizational management; project development; risk management practices; and the law. Our Board of Directors nominates candidates for Independent directorships. Directors, officers, employees, attorneys, or agents of the FHLB are permitted to support directly or indirectly the nomination or election of a particular individual for an Independent directorship.

Ms. Anderson was the Senior Vice President-Member Solutions Integration for Nationwide Mutual Insurance Company, Columbus, Ohio from March 2016 to December 2016. She also served as President of Nationwide Bank from November 2009 to March 2016. Ms. Anderson is a Certified Public Accountant and has nine years of experience serving on the board of a non-profit entity which focuses on providing low- to moderate-income housing. Ms. Anderson's prior leadership positions within the banking and insurance industries contribute skills to the Board in the areas of auditing and accounting, operations and corporate governance.

Mr. Appleton was the President and Chief Executive Officer of East Akron Neighborhood Development Corporation (EANDC), Akron, Ohio, from January 2014 to January 2018. He also served as Executive Director of EANDC for more than 30 years. EANDC improves communities by providing quality and affordable housing, comprehensive homeownership services and economic development opportunities. Mr. Appleton's years of experience with EANDC bring insight to the Board that contributes to the FHLB's corporate objective of maximizing the effectiveness of contributions to Housing and Community Investment programs. Mr. Appleton also served as a member of the FHLB's Advisory Council from 1997 until 2006.

Ms. Boise has been Senior Vice President, Chief Legal Officer, and Corporate Secretary of Meritor Incorporated, Troy, Michigan, since August 2016. Previously, Ms. Boise served as Senior Vice President, General Counsel, Head of Global Mergers and Acquisitions and Corporate Secretary of Avintiv Incorporated from March 2015 to December 2015. She also served as Vice President, General Counsel, Corporate Secretary and Chief Privacy Officer of Veyance Technologies Incorporated from January 2011 to January 2015. Ms. Boise has 25 years of legal experience and expertise leading corporate development and implementing strategic growth plans, while mitigating related risks. Her knowledge and background offers the Board valuable insight on the FHLB’s governance and risk management corporate objectives.

Ms. Dunn was Senior Vice President of Business Development, General Counsel and Secretary of Cole National Corporation, a New York Stock Exchange listed retailer now owned by EssilorLuxottica, from September 1997 until October 2004. Prior to joining Cole, she had been a partner since 1985 in the Business Practice of the Jones Day law firm. She currently is engaged in various public and private company board activities and serves in leadership positions with a number of civic and philanthropic

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organizations. Ms. Dunn has served as a director of New York Community Bancorp, Inc. since September 2015 and serves on its Audit, Risk Assessment, Compensation, and Nominating and Corporate Governance Committees. Ms. Dunn's experience as a director and senior officer of publicly held companies and as a law firm partner representing numerous publicly held companies brings perspective to the Board regarding the FHLB's status as an SEC registrant, corporate governance matters, and the Board's responsibility to oversee the FHLB's operations.

Dr. Mullineaux is the Emeritus duPont Endowed Chair in Banking and Financial Services in the Gatton College of Business and Economics at the University of Kentucky. He held the duPont Endowed Chair from 1984 until 2014. Previously, he was on the staff of the Federal Reserve Bank of Philadelphia, where he served as Senior Vice President and Director of Research from 1979 until 1984. He also served as a director of Farmers Capital Bank Corporation from 2005 until 2009. He has published numerous articles and lectured on a variety of banking topics, including risk management, financial markets and economics. He served as the Curriculum Director for the ABA's Stonier Graduate School of Banking from 2001 to 2016. Dr. Mullineaux brings knowledge and experience to the Board in areas vital to the operation of financial institutions in today's economy.

Mr. Nance has been Chief Executive Officer of LHP Development LLC and LHP Management LLC, Knoxville, Tennessee, since April 2015. Previously, he was Executive Director and the Chief Executive Officer of Knoxville's Community Development Corporation (KCDC) Knoxville, Tennessee from 2000 to 2015. The KCDC is the public housing and redevelopment authority for the City of Knoxville and Knox County, which strives to improve Knoxville's neighborhoods and communities, including through providing quality affordable housing. Mr. Nance also served as Chairman of the Legislative Committee for the Tennessee Association of Housing and Redevelopment Authorities, which provides assistance and support to the state's public and affordable housing agencies. In addition, Mr. Nance served an eight-year term where he held the office of Vice Chairman on the Tennessee Housing Development Agency, the state's housing finance agency, which promotes the production of affordable housing for very low, low, and moderate, income individuals and families in the state. Mr. Nance also serves on the Board of Knoxville Habitat for Humanity. Mr. Nance's depth of experience with these organizations brings insight to the Board that contributes to the FHLB's corporate objective of maximizing the effectiveness of its contributions to Housing and Community Investment programs.

Mr. Ruma has been President and Chief Executive Officer of Virginia Homes Ltd., a Columbus, Ohio area homebuilder, since 1975. He served on the board of the Ohio Housing Finance Agency (OHFA), the state's housing agency, from 2004 to 2009. OHFA helps Ohio's first-time homebuyers, renters, senior citizens, and others find quality, affordable housing that meets their needs. OHFA's programs also support developers and property managers of affordable housing throughout the state. Mr. Ruma's years of experience in the home building industry and with the OHFA bring insight to the Board that contributes to the FHLB's mission and corporate objectives.

Ms. Uridil was the Senior Vice President of Global Operation for Moen Incorporated, North Olmsted, Ohio, from September 2005 until March 2014. Ms. Uridil is currently on the Board of Directors of Flexsteel Industries, Inc., where she serves on the Compensation Committee and chairs the Nominations and Governance Committee. Previously, Ms. Uridil served as a Senior Vice President of Estée Lauder Companies, from 2000 to 2005. Ms. Uridil also served as a Senior Vice President of Mary Kay, Incorporated, from 1996 to 2000. Serving on executive teams for global businesses for more than 18 years, Ms. Uridil has extensive experience in strategy, expense and capital management, merger and acquisition integration and sourcing. Ms. Uridil's qualifications and insight provide valuable skills to the Board in the important areas of personnel, compensation, information technology and operations.

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EXECUTIVE OFFICERS

The following table sets forth certain information (ages as of March 1, 2019) regarding our executive officers.

Name	Age	Position	Employee of the FHLB Since
Andrew S. Howell	57	President and Chief Executive Officer	1989
Stephen J. Sponaugle	56	Executive Vice President-Chief Financial Officer	1992
R. Kyle Lawler	61	Executive Vice President-Chief Business Officer	2000
J. Gregory Dooley, Sr.	65	Executive Vice President-Chief Risk and Compliance Officer	2006
Damon v. Allen	48	Senior Vice President-Housing and Community Investment Officer	1999
J. Christopher Bates	43	Senior Vice President-Chief Accounting Officer	2005
Roger B. Batsel	47	Senior Vice President-Chief Information and Operations Officer	2014
David C. Eastland	61	Senior Vice President-Chief Credit Officer	1999
Tami L. Hendrickson	58	Senior Vice President-Treasurer	2006
Bridget C. Hoffman	42	Senior Vice President-General Counsel	2018

Mr. Howell became President and Chief Executive Officer in June 2012. Previously, he served as the Executive Vice President-Chief Operating Officer since January 2008.

Mr. Sponaugle became Executive Vice President-Chief Financial Officer in January 2018. Previously, he served as the Executive Vice President-Chief Risk and Compliance Officer since January 2017. Mr. Sponaugle also served as the FHLB's Senior Vice President-Chief Risk and Compliance Officer from November 2015 to December 2016, and as Senior Vice President-Chief Risk Officer from January 2007 to October 2015.

Mr. Lawler became Executive Vice President-Chief Business Officer in August 2012. Previously, he served as the Senior Vice President-Chief Credit Officer since May 2007.

Mr. Dooley became the Executive Vice President-Chief Risk and Compliance Officer in January 2018. Previously, he served as the FHLB's Senior Vice President-Internal Audit since January 2013.

Mr. Allen became Senior Vice President-Housing and Community Investment Officer in January 2012. Previously, he served as the FHLB's Vice President and Community Investment Officer since July 2011.

Mr. Bates became Senior Vice President-Chief Accounting Officer in January 2015. Previously, he served as the FHLB's Vice President-Controller since January 2013.

Mr. Batsel became Senior Vice President-Chief Information and Operations Officer in July 2018. Previously, he served as the FHLB's Senior Vice President-Chief Information Officer since January 2014.

Mr. Eastland became the Senior Vice President-Chief Credit Officer in January 2015. Prior to that, he served as the FHLB's Vice President-Credit Risk Management since January 2002.

Ms. Hendrickson became Senior Vice President-Treasurer in January 2015. Previously, she served as the FHLB's Vice President-Treasurer since January 2010.

Ms. Hoffman became Senior Vice President-General Counsel in May 2018. Previously, she was a partner of the law firm Taft Stettinius & Hollister LLP from January 2011 to May 2018.

All officers are appointed annually by our Board of Directors.

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AUDIT COMMITTEE FINANCIAL EXPERT

The Board of Directors has determined (1) that Ms. J. Lynn Anderson, Chair of the Audit Committee, and Committee member Mr. David E. Sartore, have the relevant accounting and related financial management expertise, and therefore are qualified, to serve as the Audit Committee financial experts within the meaning of the regulations of the SEC and (2) that each is independent under SEC Rule 10A-3(b)(1). Ms. Anderson has experience in the internal audit disciplines within the financial industry and is a Certified Public Accountant. Mr. Sartore's experience has principally been in the accounting and finance disciplines within the financial industry and is a Certified Public Accountant. For additional information regarding the independence of the directors of the FHLB, see Item 13. Certain Relationships and Related Transactions, and Director Independence.

CODES OF ETHICS

The Board of Directors has adopted a “Code of Ethics for Senior Financial Officers” that applies to the principal executive officer and the principal financial officer, as well as all other executive officers. This policy serves to promote honest and ethical conduct, full, fair and accurate disclosure in the FHLB's reports to regulatory authorities and other public communications, and compliance with applicable laws, rules and regulations. The Code is posted on the FHLB's website (www.fhlbcin.com). If a waiver of any provision of the Code is granted to a covered officer, or if any amendment is made to the Code, information concerning the waiver or amendment will be posted on our website.

The Board of Directors has also adopted a “Standards of Conduct” policy that applies to all employees. The purpose of this policy is to promote a strong ethical climate that protects the FHLB against fraudulent activities and fosters an environment in which open communication is expected and protected.

Item 11. Executive Compensation.

2018 COMPENSATION DISCUSSION AND ANALYSIS

The following provides discussion and analysis regarding our compensation program for executive officers for 2018, and in particular our Named Executive Officers. Named Executive Officers for 2018 were: Andrew S. Howell, President and Chief Executive Officer (CEO); Stephen J. Sponaugle, Executive Vice President- Chief Financial Officer; R. Kyle Lawler, Executive Vice President- Chief Business Officer; J. Gregory Dooley, Sr., Executive Vice President- Chief Risk and Compliance Officer, Roger B. Batsel, Senior Vice President- Chief Information and Operations Officer, and Donald R. Able, former Executive Vice President- Chief Operating Officer who retired effective June 30, 2018.

Compensation Program Overview (Philosophy and Objectives)

Our Board of Directors (the Board) is responsible for determining the philosophy and objectives of the compensation program. The philosophy of the program is to provide a flexible and market-based approach to compensation that attracts, retains and motivates high performing, accomplished financial services executives who, by their individual and collective performance, achieve strategic business initiatives to fulfill the FHLB's mission. The program is primarily designed to focus executives on increasing business with member institutions within established profitability and risk tolerance levels, while also encouraging teamwork.

We compensate executive officers using a combination of base salary, short-term and deferred incentive-based cash compensation, retirement benefits and modest fringe benefits. We believe the compensation program communicates short and long-term goals and standards of performance for the FHLB's mission and key business objectives and appropriately motivates and rewards executives commensurate with their contributions and achievements. The combination of base salary and short-term and deferred incentive pay creates a total compensation opportunity for executives who contribute to and influence strategic plans and who are primarily responsible for the FHLB's strategic business plan, execution, and performance.

Oversight of the compensation program is the responsibility of the Board's Human Resources, Compensation and Inclusion Committee (the Committee). The Committee annually reviews the components of the compensation program to ensure it is consistent with and supports the FHLB's mission, strategic business objectives, and short and long-term goals. In carrying out its responsibilities, the Committee may engage executive compensation consultants to assist in evaluating the effectiveness of the program and in determining the appropriate mix of compensation provided to executive officers. Because individuals are

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not permitted to own the FHLB's capital stock, all compensation is paid in cash and we have no equity compensation plans or arrangements.

The Committee recommends the President's annual compensation package to the Board, which is responsible for approving all compensation provided to the President. Additionally, the Committee is responsible for reviewing and approving the compensation program's budget for all officers, including the other Named Executive Officers, and submitting its recommendations to the Board for final approval.

Management Involvement - Executive Compensation

While the Board is ultimately responsible for determining the compensation of the President and all other executive officers, the President and the Human Resources department periodically advise the Committee regarding competitive and administrative issues affecting the compensation program. The President and the Human Resources department also present recommendations to the Committee regarding the compensation of all other executive officers, and administer programs approved by the Committee and the Board.

Finance Agency Oversight - Executive Compensation

The Director of the Finance Agency is required by regulation to prohibit an FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. Finance Agency rules direct the FHLBanks to provide all compensation actions affecting their Named Executive Officers to the Finance Agency for review. Accordingly, following our Board's November 2018 and January 2019 meetings, we submitted the 2019 base salaries as well as incentive payments earned for 2018 for the Named Executive Officers to the Finance Agency. At this time, we do not expect the regulatory requirements to have a material impact on our executive compensation programs.

Use of Comparative Compensation Data

The compensation program aims to provide a market competitive compensation package when recruiting and retaining highly talented executives seeking stable, long-term employment. To this end, we gather compensation data from a wide variety of sources, including broad-based national and regional surveys, information on compensation programs at other FHLBanks, and formal and informal interactions with our compensation consultant. Our consultant, McLagan, is a nationally recognized compensation consulting firm specializing in the financial services industry. We also participate in multiple surveys including the annual McLagan Federal Home Loan Bank Custom Survey and the annual Federal Home Loan Bank System Key Position Compensation Survey. Both surveys contain executive and non-executive compensation information for various key positions across all FHLBanks. When determining the compensation program, the Committee and the President use compensation data collected from these sources to inform themselves regarding trends in compensation practices and as a comparison check against general market data (market check).

In setting 2019 compensation, we primarily relied upon information from the McLagan Custom Survey. It encompassesinformation relating to 2018 compensation from mortgage banks, commercial financial institutions that typically had assets of less than $20 billion, and other FHLBanks. However, we believe the positions at other FHLBanks generally are more directly comparable to ours given the unique nature of the FHLBank System. The FHLBanks share the same public policy mission, interact routinely with each other, and share a common regulator and regulatory constraints, including the need for Finance Agency review of all compensation actions affecting executive officers. However, there are significant differences across the FHLBank System, including the sizes of the various FHLBanks, the complexity of their operations, their organizational and cost structures and the types of compensation packages offered. Thus, we do not and, as a practical matter could not, calculate compensation packages for our Named Executive Officers based solely on comparisons to the other FHLBanks.

Compensation Program Approach

The Committee utilizes a balanced approach for delivering base salary, short-term incentive and deferred pay with our compensation program. The annual (short-term) incentive compensation component rewards all officers and staff for the achievement of FHLB annual strategic business goals. The deferred compensation component is provided to certain officers, including the Named Executive Officers, for maintaining the value of our members' capital stock above a minimum threshold over a three-year period. The Committee has not established or assigned specific percentages to each element of the compensation program. Instead, the Committee strives to create a program that generally delivers a total compensation opportunity, i.e., base salary, annual and deferred incentive compensation and other benefits (including a retirement plan), to

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each executive officer that, when the FHLB meets its target performance goals, is at or near the median of the other FHLBanks and is generally consistent with the market check. However, individual elements of compensation as well as total compensation for individual executives may vary from the median due to an executive's tenure, experience and responsibilities.

While the competitiveness of the compensation program is an important factor for attracting and retaining executives, the Committee also reviews all elements of the program to ensure it is well designed and fiscally responsible from both a regulatory and corporate governance perspective.

Impact of Risk-Taking on Compensation Program

The Committee reviews the overall program to ensure the compensation of executive officers does not encourage unnecessary or excessive risk-taking that could threaten the long-term value of the FHLB. Strong risk management is an integral part of our culture. The Committee believes that base salary is a sufficient percentage of total compensation to discourage excessive risk-taking by executive officers. The Committee also believes the mix of incentive goals, which include risk-related metrics, does not encourage unnecessary or excessive risk-taking and achieves an appropriate balance of incentive for meeting short and long-term organizational goals. Moreover, the Committee and the Board retain the discretion to reduce or withhold incentive compensation payments if a determination is made that an executive has caused the FHLB to incur such a risk that could threaten the long-term value of the FHLB.

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Elements of Total Compensation Program

The following table summarizes all compensation to the FHLB's Named Executive Officers for the years ended December 31, 2018, 2017 and 2016. Discussion of each component follows the table.

Summary Compensation Table

Name and Principal Position	Year	Salary(1)		Bonus		Non-Equity Incentive Plan Compensation(2)		Change in Pension Value & Non-Qualified Deferred Compensation Earnings(3)		All Other Compensation(4)		Total
Current Named Executive Officers:
Andrew S. Howell	2018	$	901,538	$	—	$	722,867	$	192,000	$	34,233	$	1,850,638
President and CEO	2017	854,808		—		650,066		2,149,000		32,837		3,686,711
	2016	800,625		—		648,357		1,426,000		27,215		2,902,197
Stephen J. Sponaugle	2018	405,231		—		245,058		193,000		16,500		859,789
Executive Vice President-	2017	368,750		—		215,949		777,000		16,200		1,377,899
Chief Financial Officer	2016	337,692		—		191,269		494,000		15,900		1,038,861
R. Kyle Lawler	2018	424,250		—		284,925		170,000		16,500		895,675
Executive Vice President-	2017	404,654		—		255,349		661,000		16,200		1,337,203
Chief Business Officer	2016	379,385		—		261,931		438,000		15,900		1,095,216
J. Gregory Dooley, Sr.	2018	307,518		—		194,570		103,000		16,382		621,470
Executive Vice President-	2017	262,014		—		176,729		99,000		16,200		553,943
Chief Risk and Compliance Officer	2016	251,333		—		162,790		68,000		15,900		498,023
Roger B. Batsel (5)	2018	316,635		—		190,309		26,000		12,375		545,319
Senior Vice President-	2017	295,000		—		168,365		38,000		11,980		513,345
Chief Information and Operations Officer
Former Named Executive Officer:
Donald R. Able (6)	2018	244,582		—		279,737		2,409,683		16,500		2,950,502
Former Executive Vice President-	2017	433,846		—		273,250		1,559,000		16,200		2,282,296
Chief Operating Officer	2016	418,952		50,000		278,474		943,000		15,900		1,706,326

(1) Includes excess accrued vacation benefits automatically paid in accordance with established policy (applicable to all employees), which for 2018 were as follows: Mr. Howell, $61,538; Mr. Sponaugle $15,231; Mr. Lawler, $19,250; Mr. Dooley, $7,518 and Mr. Able $28,082.

(2) Amounts shown for 2018 reflect total payments pursuant to the current portion of the 2018 Incentive Plan and the deferred portion of the 2015 Incentive Plan (2016 - 2018 performance period), as follows. In connection with Mr. Able's retirement, his 2018 Incentive Plan payment includes the deferred portion of the total incentive award earned in 2018.

Name	2018 Incentive Plan (current incentive)		2015 Incentive Plan  (three-year deferred incentive)		Total
Andrew S. Howell	$	368,999	$	353,868	$	722,867
Stephen J. Sponaugle	137,058		108,000		245,058
R. Kyle Lawler	142,329		142,596		284,925
J. Gregory Dooley, Sr.	105,921		88,649		194,570
Roger B. Batsel	95,460		94,849		190,309
Donald R. Able	152,169		127,568		279,737

(3) Represents change in the actuarial present value of accumulated pension benefits only, which is primarily dependent on changes in interest rates, years of benefit service and salary. See "Retirement Benefits" and "2018 Pension Benefits" for additional information.

(4) Amounts represent matching contributions to the qualified defined contribution pension plan in 2018. For Mr. Howell, 2018 also includes perquisites totaling $17,733, which consisted of personal use of an FHLB-owned vehicle, premiums for an Executive long-term disability plan, guest travel expenses and an airline program membership. The value of perquisites are based on the actual cash cost to the FHLB.

(5) Mr. Batsel's 2016 compensation amount is not included as he was not a Named Executive Officer in that year.

(6) Mr. Able's 2018 compensation was earned through June 30, 2018, the date of his retirement.

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Salary

Base salary is both a key component of the total compensation program and a key factor when attracting and retaining executive talent. While base salaries for the Named Executive Officers are influenced by a number of factors, the Board generally targets the median of the competitive market. Other factors affecting an executive's base salary include length of time in position, relevant experience, individual achievement, and the size and scope of assigned responsibilities as compared to the responsibilities of other executives. Base salary increases traditionally take effect at the beginning of each calendar year and are granted after a review of the individual's performance and leadership contributions to the achievement of our annual business plan goals and strategic objectives.

Each of the current Named Executive Officers received a base salary increase at the beginning of 2018. For each of the current Named Executive Officers other than the President, total salary increases, including merit, market, and promotional adjustments, ranged from 5.08 percent to 15.11 percent. These increases were based on the President's recommendation for each executive, which took into consideration market data, and an evaluation of each executive's annual performance. For Mr. Howell, directors provided feedback to the Chair, and the Committee recommended, and the Board subsequently approved a salary increase of 5.00 percent. In recommending and approving Mr. Howell's 2018 increase, the Committee and Board took into consideration competitive market analysis and the directors' appraisals of his performance during the year.

With the retirement of the Chief Operating Officer in mid-2018, Mr. Batsel was promoted to Senior Vice President-Chief Information and Operations Officer, with a base salary increase to $325,000 effective July 23, 2018.

In October 2018, the Committee recommended and the Board approved a 4.50 percent salary increase pool for 2019 for all employees, comprised of 3.00 percent for merit increases and 1.50 percent for market and promotional adjustments. Using the same process as described above, in November 2018, the Committee recommended, and the Board approved, the following 2019 base salaries and percent increases for the Named Executive Officers: Mr. Howell, $875,000 (4.17 percent); Mr. Sponaugle, $409,500 (5.00 percent); Mr. Lawler, $425,000 (4.94 percent); Mr. Dooley, $309,000 (3.00 percent); and Mr. Batsel, $341,000 (4.92 percent). On November 20, 2018, we were informed that the Finance Agency had completed its review and did not object to the Board-approved compensation actions affecting the Named Executive Officers in 2019.

Non-Equity Incentive Compensation Plan (Incentive Plan)

The Incentive Plan is a cash-based total incentive award that is divided into two equal parts: (1) a current incentive award, and (2) a three-year deferred incentive award. The current component of the Incentive Plan is awarded annually and designed to promote and reward higher levels of performance for accomplishing Board-approved annual goals. The long-term component of the Incentive Plan is a three-year deferred incentive award that is designed to promote safety and soundness and serve as an employment retention tool for executive officers, including the Named Executive Officers.

The Incentive Plan annual goals generally reflect desired financial, operational, risk and public mission objectives for the current and future fiscal years. Each goal is weighted reflecting its relative importance and potential impact on our mission and annual strategic business plan. Each goal is assigned a quantitative threshold, target and maximum level of performance. Each Named Executive Officer's award opportunity is based entirely on bank-wide performance. However, the Chief Risk and Compliance Officer's award opportunity is weighted 75 percent on bank-wide goals and 25 percent on Enterprise Risk Management (ERM) specific goals, which are developed with the Risk Committee in order to provide incentive and maintain a level of independence for risk management initiatives.

When establishing the Incentive Plan goals and corresponding performance levels, the Board anticipates that we will successfully achieve a threshold level of performance nearly every year. The target level is aligned with expected performance and is anticipated to be reasonably achievable in a majority of plan years. The maximum level of performance reflects a graduated level of difficulty from the target performance level and is designed to require superior performance to achieve.

Each Named Executive Officer is assigned a total incentive award opportunity, stated as a percentage of base salary, which corresponds to the individual's level of organizational responsibility and ability to contribute to and influence overall performance. The total incentive award opportunity established for executives is designed to be comparable to incentive opportunities for executives with similar duties and responsibilities at other financial institutions, primarily other FHLBanks, and generally consistent with our market check. The Board believes the total incentive opportunity and plan design provide an appropriate, competitive reward to all officers, including the Named Executive Officers, commensurate with the achievement levels expected for the incentive goals.

The total incentive award earned is determined based on the actual achievement level for each goal in comparison with the performance levels established for that goal.

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The total incentive award opportunities for the 2018 plan year stated as a percentage of base salary were as follows:

	Incentive Opportunity
Name	Threshold		Target		Maximum
Current Named Executive Officers:
Andrew S. Howell	50.0	%	75.0	%	100.0	%
Stephen J. Sponaugle	40.0		60.0		80.0
R. Kyle Lawler	40.0		60.0		80.0
J. Gregory Dooley, Sr.	40.0		60.0		80.0
Roger B. Batsel	30.0		50.0		70.0
Former Named Executive Officer:
Donald R. Able	40.0		60.0		80.0

If actual performance falls below the threshold level of performance, no payment is made for that goal. If actual performance exceeds the maximum level, only the value assigned as the performance maximum is paid. When actual performance falls between the assigned threshold, target and maximum performance levels, an interpolated achievement is calculated for that goal. The achievement for each goal is then multiplied by the corresponding incentive weight assigned to that goal and the results for each goal are summed to arrive at the final incentive award payable to the executive. No final awards (or payments) will be made to executives under the Incentive Plan if we receive the lowest "Composite Rating" during the most recent examination by the Finance Agency. Such a rating would indicate that we have been found to be operating in an unacceptable manner, that we exhibit serious deficiencies in corporate governance, risk management or financial condition and performance, or that we are in substantial noncompliance with laws, Finance Agency regulations or supervisory guidance.

Fifty percent of the total opportunity for the Incentive Plan is awarded in cash following the plan year (current incentive award) and 50 percent is mandatorily deferred for three years after the end of the Plan year (deferred incentive award). The deferred incentive awards earned from 2016 - 2018 were calculated based on the actual performance or achievement level for each deferred plan goal at the end of the three-year performance period, with interpolations made for results between achievement levels. The achievement level for each goal then was multiplied by the corresponding incentive weight assigned to that goal. The final value of the deferred award was adjusted based on the goal achievement level determined using separate performance measures over the 2016 - 2018 deferral period. For all Named Executive Officers, the final value of the deferred award was 75 percent for a Threshold level of achievement, 100 percent for a Target level of achievement, or 125 percent for a Maximum level of achievement. If a goal achievement level over the three-year deferral period was below the threshold, no payment would be made for that deferred goal.

In November 2018, the Board established a new safety and soundness metric to determine if the deferred portion of the 2018 Incentive Plan and future plans will be awarded rather than using the calculation described above. The safety and soundness metric is tied to the FHLB’s market capitalization ratio defined as the market value of total capital divided by the par value of capital stock. The market capitalization ratio is measured as the simple average at 36 month ends in the three-year performance period using the base-case interest rate and business environment used in reports to the Board at each month end. If the FHLB's market capitalization ratio is greater than 100 percent during the deferred performance period, the final value will be 100 percent of the deferred award plus interest based on the annual interest rates applicable to the FHLB’s qualified defined benefit plan.

Except as noted above with respect to exam ratings, the Board has ultimate authority over the Incentive Plan and may modify or terminate the Plan at any time or for any reason. The Board also has sole discretion to increase or decrease any Incentive Plan awards. In addition, payments under the Plan are subject to certain claw back provisions that allow the FHLB to recover any incentive paid to a participant based on achievement of financial or operational goals that subsequently are deemed to be inaccurate, misstated or misleading. The Board believes these claw back requirements serve as a deterrent to any manipulation of financial statements or performance metrics in a manner that would assure and/or increase an incentive payment.

2018Incentive Plan.For calendar year 2018, the Board approved a total of six performance measures in the functional areas of Franchise Value Promotion, Mission Asset Activity and Stockholder Risk/Return. The mix of financial and non-financial goals measures performance across our mission and corporate objectives and is intended to discourage unnecessary or excessive risk-taking. Because we consider risk management to be an essential component in the achievement of our mission and corporate objectives, the goals below include a separate risk-related metric.

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At its January 2019 meeting, following certification of the 2018 performance results and in accordance with those results, the Board authorized the distribution to the Named Executive Officers of the current awards shown in Note 2 to the Summary Compensation Table. For the 2018 plan year, we cumulatively achieved approximately 88 percent of the available maximum incentive opportunity for FHLB goals. This was higher than the 85 percent overall performance achieved for 2017 primarily due to exceeding the target performance level for five of the six goals in 2018.

The following table presents the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for the 2018 Incentive Plan performance measures for all Named Executive Officers.

2018 Incentive Plan Performance Levels and Results

(Dollars in thousands)
	Incentive Weight		Threshold Performance			Target Performance			Maximum Performance			Results Achieved
Franchise Value Promotion
1) Mission Outreach	10.0	%	86			100			115			117
2) Mission Asset Participation	10.0		65		%	72		%	80		%	82		%
Mission Asset Activity
3) Average Advance Balances for Members with Assets of $50 billion or Less	15.0		$	20,500,000		$	22,500,000		$	24,500,000		$	24,929,388
4) Mortgage Purchase Program New Mandatory Delivery Commitments	15.0		1,500,000			1,800,000			2,200,000			1,938,115
Stockholder Risk/Return
5) Decline in Market Value of Equity	25.0		< 7%			< 5%			3% or less			3.0		%
6) Profitability-Available Earnings vs. Average 3-month LIBOR Rate	25.0		375 bps			435 bps			490 bps			402 bps

During 2018, the Board, the Committee and the President periodically reviewed the Incentive Plan goals presented above to determine progress toward the goals. Although the Board and the President discussed various external factors that were affecting achievement of the performance measures, the Board did not take any actions to revise or change the Incentive Plan goals.

The 2018 incentive program for the Chief Risk and Compliance Officer was weighted 75 percent on bank-wide goals, shown above, and 25 percent on the ERM department goal, as follows:

Implement specific initiatives of the FHLB's ERM program within the ERM Department.

Weight of Goal: 100 percent

Threshold: 3 initiatives satisfactorily completed*

Target: 4 initiatives satisfactorily completed*    

Maximum: 5 initiatives satisfactorily completed*    

2018 Results Achieved: 4.6 initiatives satisfactorily completed*

* Specific initiatives include efforts in: 1) the comprehensive review of the FHLB's risk management programs; 2) continuing to improve the operational risk assessment process 3) implementing a company-wide framework to promote consistency for compliance related activities; 4) MPP credit modeling initiative; and 5) enhancing Board reporting.

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2019Incentive Plan.At its November 2018 meeting, the Board established the 2019 Incentive Plan goals, the incentive weights and the performance measures corresponding to each Incentive Plan goal and award opportunity for the 2019 Incentive Plan. After that meeting, the 2019 Incentive Plan was sent to the Finance Agency and we received notification of the completion of their review and non-objection in December 2018. The 2019 Incentive Plan goals for our executives are set forth below.

2019 Incentive Plan Goals

Franchise Value Promotion
Mission Outreach	Weight:    10.0%
Mission Asset Participation	Weight:    10.0%
Mission Asset Activity
Average Advances Balances for Members with Assets of $50 billion or Less	Weight:    15.0%
Mortgage Purchase Program New Mandatory Delivery Commitments	Weight:    15.0%
Stockholder Risk/Return
Decline in Market Value of Equity	Weight:    25.0%
Profitability-Available Earnings vs. Average 3-month LIBOR Rate	Weight:    25.0%

As reflected above, the Board decided to keep all of the 2019 goals the same as those in 2018 although the performance metrics have been adjusted. In setting the performance measures for the 2019 Incentive Plan, the Board reviewed the results against target for 2018 and considered relevant aspects of our financial outlook for 2019 including the impact of the anticipated interest rate environment, market volatility and changes in the mortgage market that continue to affect Mission Asset Activity and profitability. The Board also considered opportunities to increase mission asset participation by members.

The Board also approved a separate ERM department goal for the Chief Risk and Compliance Officer, whose annual incentive is weighted 75 percent on bank-wide goals and 25 percent on the ERM goal.

2019 ERM Goal

Implement specific initiatives of the FHLB's ERM program within the ERM Department.

Weight of Goal: 100 percent

Threshold: 3 initiatives satisfactorily completed*

Target: 4 initiatives satisfactorily completed*    

Maximum: 5 initiatives satisfactorily completed*

* Specific initiatives include efforts in: 1) implementing a data integrity project; 2) credit and collateral model migration; 3) leveraging technology to improve efficiency and effectiveness of risk management; 4) MPP credit modeling initiative; and 5) enhancing risk management practices.

Three-Year Deferred Incentive Awards.During 2018, the Board, the Committee and the President periodically reviewed progress toward the deferred plan goals for each ongoing performance period. At its January 2019 meeting, following certification of the performance results for the deferred portion of the 2015 Incentive Plan (2016 - 2018 performance period) and in accordance with those results, the Board authorized the distribution of payments to eligible officers including the Named Executive Officers. Cumulatively, we achieved approximately 87 percent of the available maximum incentive opportunity for FHLB goals. The deferred payments for the 2016 - 2018 performance period are shown in Note 2 to the Summary Compensation Table.

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The following table presents, for all Named Executive Officers, the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for each of the goals in the deferred portion of the 2015 Incentive Plan (2016 - 2018 performance period):

	Incentive Weight	Threshold Performance	Target Performance	Maximum Performance	Results Achieved
Operating Efficiency:
Ranking of Operating Efficiency Ratio in comparison to other FHLBanks	20%	6th	4th	1st	2nd
Earnings Volatility Adjusted Profitability:
Ranking of monthly volatility adjusted return on average equity (ROE) spread to average 3-month LIBOR in comparison to other FHLBanks	20%	8th	5th	1st	5th
Market Capitalization Ratio:
Ratio of Market Value of Equity to Par Value of Regulatory Capital Stock	20%	95%	100%	110%	113%
Advance Utilization Ratio:
Ranking of average of each member's Advances-to-assets ratio multiplied by the average member borrower penetration ratio in comparison to other FHLBanks	20%	7th	4th	1st	5th
Strategic Business Plan Achievement:
Percentage of Strategic Business Plan strategies achieved	20%	70%	80%	100%	90%

As described above, the deferred portion of the 2018 Incentive Plan (2019 - 2021 performance period) is based on a safety and soundness metric tied to the FHLB’s market capitalization ratio. If the FHLB's market capitalization ratio is greater than 100 percent during the 2019 - 2021 performance period, the final value will be 100 percent of the deferred award plus interest based on the annual interest rates applicable to the FHLB’s qualified defined benefit plan.

The terms for the deferred component of the 2019 Incentive Plan, which includes the 2020 - 2022 performance period, is expected to be reviewed at the November 2019 Board meeting.

Non-Equity Incentive Plan Compensation Grants

The following table provides information on grants made under our Incentive Plans.

Grants of Plan-Based Awards

		Estimated Future Payouts Under Non-Equity Incentive Plan Awards
Name	Grant Date (1)	Threshold		Target		Maximum
Andrew S. Howell	November 15, 2018	$	437,500	$	656,250	$	875,000
Stephen J. Sponaugle	November 15, 2018	163,800		245,700		327,600
R. Kyle Lawler	November 15, 2018	170,000		255,000		340,000
J. Gregory Dooley, Sr.	November 15, 2018	123,600		185,400		247,200
Roger B. Batsel	November 15, 2018	119,350		179,025		238,700

(1) Awards granted on this date are for the 2019 Incentive Plan.

Under the awards shown above, 50 percent of the estimated future payout will be awarded in cash following the Plan year. The other 50 percent of the estimated future payout will be mandatorily deferred for three years after the end of the Plan year. If the FHLB operates in a safe and sound manner according to the market capitalization ratio metric during the deferred performance period, the final value will be 100 percent of the deferred award plus interest based on the annual interest rates applicable to the FHLB’s qualified defined benefit plan. See the "Non-Equity Incentive Compensation Plan (Incentive Plan)" section above for further detail.

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Retirement Benefits

We maintain a comprehensive retirement program for executive officers comprised of two qualified retirement plans (a defined benefit plan and a defined contribution plan) and a non-qualified pension plan. For our qualified plans, we participate in the Pentegra Defined Benefit Plan for Financial Institutions and the Pentegra Defined Contribution Plan for Financial Institutions. The non-qualified plan, the Benefit Equalization Plan (BEP), restores benefits that eligible highly compensated employees would have received were it not for Internal Revenue Service limitations on benefits from the defined benefit plan. Generally, benefits under the BEP vest and are payable according to the corresponding provisions of the qualified plans.

The plans provide benefits based on a combination of an employee's tenure and annual compensation. As such, the benefits provided by the plans are one component of the total compensation opportunity for executive officers and, the Board believes, serve as valuable retention tools since retirement benefits increase as executives' tenure and compensation with the FHLB grow.

Qualified Defined Benefit Pension Plan. The Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB) is a funded tax-qualified plan that is maintained on a non-contributory basis, meaning, employee contributions are not required. Participants' pension benefits vest upon completion of five years of service. The pension benefits payable under the Pentegra DB plan are determined using a pre-established formula that provides a single life annuity payable monthly at age 65 or normal retirement.

The benefit formula for employees hired prior to January 1, 2006, which includes Messrs. Howell, Sponaugle, Lawler, and Able, is 2.50 percent for each year of benefit service multiplied by the highest three-year average compensation. Compensation is defined as base salary, excess accrued vacation benefits and annual incentive compensation, and excludes any deferred incentive payments. In the event of retirement prior to attainment of age 65, a reduced pension benefit is payable under the plan, with payments commencing as early as age 45.

For employees who are hired after January 1, 2006, which includes Messrs. Dooley and Batsel, the current benefit formula is 1.25 percent for each year of benefit service multiplied by the highest five-year average compensation. Beginning in 2006 through the end of 2017, compensation was defined as base salary only and excluded all other forms of compensation. Beginning January 1, 2018, compensation is defined as base salary, excess accrued vacation benefits and annual incentive compensation, and excludes any deferred incentive payments. In addition, the current plan provides for a reduced pension benefit in the event of retirement prior to attainment of age 65 with payment commencing as early as age 55 if the participant has 10 years or more of service.

Lastly, the Pentegra DB plan provides certain actuarially equivalent forms of benefit payments other than a single life annuity, including a limited lump sum distribution option, which is available only to employees hired prior to February 1, 2006.

Non-Qualified Defined Benefit Pension Plan. Executive officers and other employees whose pay exceeds IRS pension limitations are eligible to participate in the Defined Benefit component of the Benefit Equalization Plan (DB/BEP), an unfunded, non-qualified pension plan that mirrors the Pentegra DB plan in all material respects. In determining whether a restoration of retirement benefits is due an eligible employee, the DB/BEP utilizes the identical benefit formula applicable to the Pentegra DB plan. In the event that the benefits payable from the Pentegra DB plan have been reduced or otherwise limited, the executive's lost benefits are payable under the terms of the DB/BEP. Because the DB/BEP is a non-qualified plan, the benefits received from this plan do not receive the same tax treatment and funding protection associated with the qualified plan.

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The following table provides the present value of benefits payable to the Named Executive Officers (other than Mr. Able) upon retirement at age 65 from the Pentegra DB plan and the DB/BEP, and is calculated in accordance with the formula currently in effect for specified years-of-service and remuneration for participating in both plans. For Mr. Able, the benefits reflect his retirement during 2018. Our pension benefits do not include any reduction for a participant's Social Security benefits.

2018 Pension Benefits

Name	Plan Name	Number of Years Credited Service (1)	Present Value (2) of Accumulated Benefits		Payments During Year Ended December 31, 2018
Current Named Executive Officers:
Andrew S. Howell	Pentegra DB	28.50	$	2,119,000	$	—
	DB/BEP	28.50	7,961,000		—
Stephen J. Sponaugle	Pentegra DB	25.33	1,890,000		—
	DB/BEP	25.33	1,515,000		—
R. Kyle Lawler	Pentegra DB	17.50	1,591,000		—
	DB/BEP	17.50	1,603,000		—
J. Gregory Dooley, Sr.	Pentegra DB	11.33	486,000		—
	DB/BEP	11.33	49,000		—
Roger B. Batsel	Pentegra DB	3.92	92,000		—
	DB/BEP	3.92	15,000		—
Former Named Executive Officer:
Donald R. Able	Pentegra DB	37.00	891,000		1,591,655
	DB/BEP	37.00	6,659,614		222,414

(1) For pension plan purposes, the calculation of credited service begins upon completion of a required waiting period following the date of employment. Accordingly, the years shown are less than the executive's actual years of employment. Because IRS regulations generally prohibit the crediting of additional years of service under the qualified plan, such additional service also is precluded under the DB/BEP, which only restores those benefits lost under the qualified plan.

(2) See Note 17 of the Notes to Financial Statements for details regarding valuation assumptions.

Qualified Defined Contribution Plan. The Pentegra Defined Contribution Plan for Financial Institutions (Pentegra DC) is a tax-qualified defined contribution plan to which we make tenure-based matching contributions. Matching contributions begin immediately and subsequently increase based on length of employment to a maximum of six percent of eligible compensation. Eligible compensation in the Pentegra DC plan is defined as base salary and annual bonus (current incentive award) and excludes any deferred incentive awards.

Under the Pentegra DC plan, a participant may elect to contribute up to 75 percent of eligible compensation on either a before-tax or after-tax basis. The plan permits participants to self-direct investment elections into one or more investment funds. All returns are at the market rate of the related fund. Investment fund elections may be changed daily by the participants. A participant may withdraw vested account balances while employed, subject to certain plan limitations, which include those under IRS regulations. Participants also are permitted to revise their contribution/deferral election once each pay period. However, the revised election is only applicable to future earnings and may also be limited by IRS regulations.  

Fringe Benefits and Perquisites

Executive officers are eligible to participate in the traditional fringe benefit plans made available to all other employees, including participation in the retirement plans, medical, dental and vision insurance program and group term life and standard long term disability (LTD) insurance plans, as well as annual leave (i.e., vacation) and sick leave policies. Executives participate in our subsidized medical, dental and vision insurance and group term life and standard LTD insurance programs on the same basis and terms as all of our employees. However, executives are required to pay higher premiums for medical coverage. Executive officers also receive on-site parking at our expense.

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During 2018, the President was also provided with an FHLB-owned vehicle for his business and personal use, along with the operating expenses associated with the vehicle. An executive officer's personal use of an FHLB-owned vehicle, including use for the daily commute to and from work, is reported as a taxable fringe benefit. In addition to the standard LTD insurance plan provided to all FHLB employees, Named Executive Officers may elect to receive additional LTD coverage. The premiums the FHLB pays for the additional LTD coverage are considered a taxable fringe benefit. Additionally, with prior approval, our current Travel Policy permits a guest to accompany an executive officer on authorized business trips. The transportation and other related expenses associated with the guest's travel are reimbursed by the FHLB and reported as a taxable fringe benefit.

The perquisites provided by the FHLB represent a small fraction of an executive officer's annual compensation. During 2018, perquisites totaled $17,733 for Mr. Howell, as shown in the Summary Compensation Table. Perquisites did not individually or collectively exceed $10,000 for any other Named Executive Officers and are therefore excluded from the Summary Compensation Table.

Employment Arrangements and Severance Benefits

Pursuant to the FHLBank Act, all employees of the FHLB are “at will” employees. Accordingly, an employee may resign employment at any time and an employee's employment may be terminated at any time for any reason, with or without cause and with or without notice.

We have no employment agreements with any Named Executive Officer. Other than normal pension benefits and eligibility to participate in our retiree medical and life insurance programs (if hired prior to August 1, 1990), no perquisites, tax gross-ups or other special benefits are provided to our executive officers in the event of a resignation, retirement or other termination of employment. However, Named Executive Officers may receive certain benefits under our severance policy and Change in Control Plan, described below.

Severance Policy. We have a severance policy under which all employees may receive benefits in the event of termination of employment resulting from job elimination, substantial job modification, job relocation, or a planned reduction in staff. Under this policy, an executive officer is entitled to one month's pay for each year of continuous employment, rounded to the next whole year for partial years, with a minimum of one month and a maximum of six months' severance pay, as well as payment for all unused, accrued vacation benefits. At our discretion, executive officers and employees receiving benefits under this policy may also receive outplacement assistance as well as continuation of health insurance coverage on a limited basis.

Executive Change in Control Plan (Change in Control Plan).We have a Change in Control Plan that provides certain payments and benefits in the event of a qualifying termination within 24 months following a change in control. The purpose of the Change in Control Plan is to facilitate the hiring and retention of senior executives by providing them with certain protection and benefits in the event of a qualifying termination following a defined change in control of the FHLB. Change in control benefit payments are in lieu of, not in addition to, the severance benefit payments described above. The Change in Control Plan applies to officers as designated by the Board. Current designees are the President, all Executive Vice Presidents, and all Senior Vice Presidents.

Under the Change in Control Plan, a “qualifying termination” is defined as any separation, termination or other discontinuation of the employment relationship between the FHLB and a participant, (a) by the FHLB, other than for “cause” (as defined in the Change in Control Plan), death or disability; or (b) by the participant, for “good reason” (as defined in the Change in Control Plan).

“Change in Control” is defined under the Change in Control Plan as:

▪ the merger, reorganization, or consolidation of the FHLB with or into, or acquisition of the FHLB by, another Federal Home Loan Bank or other entity;

▪ the sale or transfer of all or substantially all of the business or assets of the FHLB to another Federal Home Loan Bank or other entity;

▪ a change in the composition of the FHLB’s board that causes the combined number of Member directors from the jurisdictions of Kentucky, Ohio and Tennessee to cease to constitute a majority of the Bank’s directors; or

▪ the FHLB’s liquidation or dissolution.

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“Cause” is defined in the Change in Control Plan to include:

▪ the participant’s failure to perform substantially his/her duties;

▪ the participant’s engagement in illegal conduct or willful misconduct injurious to the FHLB;

▪ the participant’s material violation of law or regulation or of the FHLB’s written policies or guidelines;

▪ a written request from the Finance Agency requesting that the FHLB terminate the participant’s employment;

▪ crimes involving a felony, fraud or other dishonest acts;

▪ certain other notices from or actions by the Finance Agency;

▪ the participant’s breach of fiduciary duty or breach of certain covenants in the Change in Control Plan; or

▪ the participant’s refusal to comply with a lawful directive from the President or the Board of Directors.

“Good Reason” is defined in the Change in Control Plan to include:

▪ a material diminution in the participant’s base salary or in his/her duties or authority;

▪ the FHLB requiring the participant to be based at any office or location more than 100 miles from Cincinnati, Ohio; or

▪ a material breach of the Change in Control Plan by the FHLB.

In the event of a qualifying termination, the participant will receive a severance payment equal to a compensation multiplier times the sum of the participant's base salary plus target annual incentive amount for the year in which the Change in Control occurs. The President (Tier 1) is subject to a compensation multiplier of 2.50, Executive Vice Presidents (Tier 2) are subject to a compensation multiplier of 1.75 and Senior Vice Presidents (Tier 3) are subject to a compensation multiplier of 1.50. Participants will also receive a lump sum cash payment equal to accrued vacation benefits and the amount that would have been payable pursuant to the participant’s annual incentive compensation award for the year in which the date of a qualifying termination occurs based on actual FHLB performance, prorated based on the number of days the participant was employed that year. In addition, participants will receive a cash payment for outplacement assistance of $7,500 for Tier 1, $4,500 for Tier 2 and $2,500 for Tier 3, as well as the continuation of health care coverage for 24 months for Tier 1, 18 months for Tier 2 and 12 months for Tier 3.

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The following table presents the total amounts that would be payable to our Named Executive Officers if their employment had terminated as of December 31, 2018.

Total Potential Payment Upon Termination ⁽¹⁾ 

Separation Event	Andrew S. Howell		Stephen J. Sponaugle		R. Kyle Lawler		J. Gregory Dooley, Sr.		Roger B. Batsel
Involuntary termination for Cause	$	—	$	—	$	—	$	—	$	—
Voluntary resignation not due to a Change in Control or resignation without Good Reason due to a Change in Control (2)	96,923		24,750		31,154		18,462		9,831
Involuntary termination without Cause not due to a Change in Control (3)	516,923		219,750		233,654		168,462		145,248
Involuntary termination without Cause due to a Change in Control or resignation for Good Reason due to a Change in Control (4)	4,432,423		1,372,500		1,429,904		1,060,212		913,665

(1) Due to the number of factors that affect the nature and amounts of compensation and benefits provided upon the potential termination events, the actual amounts paid may be different than the estimates presented. Mr. Able is not included in this table because he was not an employee on December 31, 2018.

(2) Named Executive Officers would only receive payment for unused, accrued vacation.

(3) Named Executive Officers would receive payment for one month's pay for each year of continuous employment, rounded to the next whole year for partial years, subject to a six months' pay maximum, plus unused, accrued vacation.

(4) Named Executive Officers would receive payment as follows:

Component	Andrew S. Howell		Stephen J. Sponaugle		R. Kyle Lawler		J. Gregory Dooley, Sr.		Roger B. Batsel
Salary	$	2,100,000	$	682,500	$	708,750	$	525,000	$	487,500
Incentive compensation	1,575,000		409,500		425,250		315,000		237,519
Other (a)	757,423		280,500		295,904		220,212		188,646
Total	$	4,432,423	$	1,372,500	$	1,429,904	$	1,060,212	$	913,665

(a) Includes accrued annual incentive compensation from the current year, accrued vacation benefits, outplacement assistance and health care coverage.

COMPENSATION COMMITTEE REPORT

The Committee has furnished the following report for inclusion in this Annual Report on Form 10-K:

The Committee has reviewed and discussed the 2018 Compensation Discussion and Analysis set forth above with the FHLB's management. Based on such review and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

Donald J. Mullineaux (Chair)

Grady P. Appleton

Leslie D. Dunn

James A. England

Michael R. Melvin

Nancy E. Uridil

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COMPENSATION OF DIRECTORS

As required by Finance Agency regulations and the FHLBank Act, we have established a formal policy governing the compensation and travel reimbursement provided to our directors. The goal of the policy is to compensate Board members for work performed on behalf of the FHLB. Under our policy, compensation is comprised of per meeting fees, subject to an annual cap, and reimbursement for reasonable FHLB travel-related expenses. The fees are intended to compensate directors for time spent reviewing materials sent to them, preparing for meetings, participating in other FHLB activities and attending the meetings of the Board of Directors and its committees.

The following table sets forth the per meeting fees and the maximum base fees for 2018 and 2019:

	Per Meeting Fee		Maximum Base Fees
Chair	$	20,720	$	145,000
Vice Chair	17,930		125,500
Other members	15,720		110,000

In addition to the base fees, annual fees are paid to the Audit Committee Chair and Other Committee Chairs of $15,500 and $12,500, respectively. These fees are subject to certain attendance requirements.

During 2018, total directors' fees and travel expenses incurred by the FHLB were $2,080,290 and $304,858, respectively.

With prior approval, our Travel Policy permits a guest to accompany a director on authorized business trips. The transportation and other related expenses associated with the guest's travel are reimbursed by the FHLB, subject to certain limitations, and reported as a taxable fringe benefit. During 2018, there were 13 directors that received reimbursement for guest travel expenses. These expenses did not exceed $10,000 for any director and, therefore, are excluded from the Directors Compensation Table below.

The following table sets forth the fees earned by each director for the year ended December 31, 2018.

2018 Directors Compensation Table

Name	Fees Earned or Paid in Cash
J. Lynn Anderson	$	125,500
Grady P. Appleton	110,000
Brady T. Burt	110,000
Greg W. Caudill	110,000
James R. DeRoberts	110,000
Mark N. DuHamel	110,000
Leslie D. Dunn	122,500
James A. England, Vice Chair	125,500
Charles J. Koch	94,290
Robert T. Lameier	110,000
Michael R. Melvin	110,000
Donald J. Mullineaux, Chair	145,000
Alvin J. Nance	110,000
Charles J. Ruma	122,500
David E. Sartore	122,500
William S. Stuard, Jr.	122,500
Nancy E. Uridil	110,000
James J. Vance	110,000
Total	$	2,080,290

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The following table summarizes the total number of board meetings and meetings of its designated committees held in 2017 and 2018.

	Number of Meetings Held
Meeting Type	2017	2018
Board Meeting	10	10
Audit Committee	10	11
Risk Committee	7	7
Business and Operations Committee	5	5
Governance	7	7
Housing and Community Development Committee	6	6
Human Resources, Compensation and Inclusion Committee (f.k.a. Personnel and Compensation Committee)	6	6

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Committee is charged with responsibility for the FHLB's compensation policies and programs. None of the 2018 or 2019 Committee members are or previously were officers or employees of the FHLB. Additionally, none of the FHLB's executive officers served or serve on the board of directors or the compensation committee of any entity whose executive officers served on the Committee or Board of Directors. This Committee was and is composed of the following members:

2018	2019
Donald J. Mullineaux (Chair)	Donald J. Mullineaux (Chair)
Grady P. Appleton	Grady P. Appleton
Leslie D. Dunn	Leslie D. Dunn
James A. England	James A. England
Charles J. Koch	Michael R. Melvin
Michael R. Melvin	Nancy E. Uridil
Nancy E. Uridil

PAY RATIO

As required by the Dodd-Frank Act, information about the 2018 total compensation for the FHLB's median employee and the President and CEO, Mr. Howell, is as follows:

▪ the median of the annual total compensation of all FHLB employees (other than the President) was $108,624; and

▪ the annual total compensation of the President, as reported in the Summary Compensation Table, was $1,850,638.

Based on this information, for 2018, the ratio of the annual total compensation of the President to the median of the annual total compensation of all employees was 17 to 1.

The median employee was identified in 2017. To identify the median employee, we compared the compensation of all full-time and part-time employees who were employed at the FHLB as of November 3, 2017. We annualized the compensation of employees who were hired in 2017 but did not work for us the entire fiscal year. This compensation measure, which was consistently applied to all employees, included base salary, overtime pay and incentive compensation that was all payable in cash.

We have updated the median employee's compensation for 2018, which includes base salary, excess accrued vacation benefits, incentive compensation, matching contributions to the qualified defined contribution pension plan, and the value of such employee’s pension benefits. The value of the median employee's pension benefits represents only the change in the actuarial present value of accumulated pension benefits, which is primarily dependent on changes in interest rates, years of benefit service and salary. With respect to the annual total compensation of the President, we used the amount reported in the “Total” column of our 2018 Summary Compensation Table.

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

We have one class of capital stock, Class B Stock, all of which is owned by our current and former member institutions. Individuals, including directors and officers of the FHLB, are not permitted to own our capital stock. Therefore, we have no equity compensation plans.

The following table lists institutions holding five percent or more of outstanding capital stock at February 28, 2019 and includes any known affiliates that are members of the FHLB:

(Dollars in thousands)
		Capital		Percent of Total		Number
Name	Address	Stock		Capital Stock		of Shares
JPMorgan Chase Bank, N.A.	1111 Polaris Parkway Columbus, OH 43240	$	1,281,000	30	%	12,810,000
U.S. Bank, N.A.	425 Walnut Street Cincinnati, OH 45202	650,253		15		6,502,525

The following table lists capital stock outstanding as of February 28, 2019 held by member institutions that have an officer or director who serves as a director of the FHLB:

(Dollars in thousands)
		Capital		Percent of Total
Name	Address	Stock		Capital Stock
The Huntington National Bank	41 South High Street Columbus, OH 43215	$	194,646	4.6	%
Western & Southern Financial Group (1)	400 Broadway Street Cincinnati, OH 45202	114,537		2.7
The Park National Bank	50 North Third Street Newark, OH 43058	40,265		0.9
F&M Bank	50 Franklin Street Clarksville, TN 37040	4,998		0.1
Perpetual Federal Savings Bank	120 North Main Street Urbana, OH 43078	2,794		0.1
Field & Main Bank	140 North Main Street Henderson, KY 42420	1,818		0.0
Farmers National Bank	304 West Main Street Danville, KY 40422	1,782		0.0
First State Bank	19230 State Route 136 Winchester, OH 45697	1,079		0.0
Miami Savings Bank	8008 Ferry Street Miamitown, OH 45041	737		0.0
Decatur County Bank	56 North Pleasant Street Decaturville, TN 38329	646		0.0
The Plateau Group (2)	2701 North Main Street Crossville, TN 38555	97		0.0

(1) Includes five subsidiaries (Western-Southern Life Assurance Co., Integrity Life Insurance Company, Lafayette Life Insurance Company, Columbus Life Insurance Company and National Integrity Life Insurance Company), which are FHLB members.

(2) Includes two subsidiaries (Plateau Casualty Insurance Company and Plateau Insurance Company), which are FHLB members.

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

DIRECTOR INDEPENDENCE

Because we are a cooperative, capital stock ownership is a prerequisite to transacting any business with us. Transactions with our stockholders are part of the ordinary course of - and are essential to the purpose of - our business.

Our capital stock is not permitted to be publicly traded and is not listed on any stock exchange. Therefore, we are not governed by stock exchange rules relating to director independence. If we were so governed, arguably none of our industry directors, who are elected by our members, would be deemed independent because all are directors and/or officers of members that do business with us. Messrs. Appleton, Mullineaux, Nance and Ruma and Mses. Anderson, Boise, Dunn and Uridil, our eight non-industry directors, have no material transactions, relationships or arrangements with the FHLB other than in their capacity as directors. Therefore, our Board of Directors has determined that each of them is independent under the independence standards of the New York Stock Exchange.

The Finance Agency director independence standards specify independence criteria for members of our Audit Committee. Under these criteria, all of our directors serving on the Audit Committee are independent.

TRANSACTIONS WITH RELATED PERSONS

See Note 22 of the Notes to Financial Statements for information on transactions with stockholders, including information on transactions with Directors' Financial Institutions and concentrations of business, and transactions with nonmember affiliates, which information is incorporated herein by reference.

See also “Compensation Committee Interlocks and Insider Participation” in Item 11. Executive Compensation.

Review and Approval of Related Persons Transactions. Ordinary course transactions with Directors' Financial Institutions and with members holding five percent or more of our capital stock are reviewed and approved by our management in the normal course of events so as to assure compliance with Finance Agency regulations.

As required by Finance Agency regulations, we have a written conflict of interest policy. This policy requires directors (1) to disclose to the Board of Directors any known personal financial interests that they, their immediate family members or their business associates have in any matter to be considered by the Board and in any other matter in which another person or entity does or proposes to do business with the FHLB and (2) to recuse themselves from considering or voting on any such matter. The scope of the Finance Agency's conflict of interest regulation (available at www.fhfa.gov) and our conflict of interest policy (posted on our website at www.fhlbcin.com) is similar, although not identical, to the scope of the SEC's requirements governing transactions with related persons. In March 2007, our Board of Directors adopted a written related person transaction policy that is intended to close any gaps between Finance Agency and SEC requirements. The policy includes procedures for identifying, approving and reporting related person transactions as defined by the SEC. One of the tools that we used to monitor non-ordinary course transactions and other relationships with our directors and executive officers is an annual questionnaire that uses the New York Stock Exchange criteria for independence. Finally, our Insider Trading Policy provides that any request for redemption of excess stock (except for de minimis amounts) held by a Director's Financial Institution must be approved by the Board of Directors or by the Executive Committee of the Board.

We believe these policies are effective in bringing to the attention of management and the Board any non-ordinary course transactions that require Board review and approval and that all such transactions since January 1, 2018 have been so reviewed and approved.

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Item 14. Principal Accountant Fees and Services.

The following table sets forth the aggregate fees billed to the FHLB for the years ended December 31, 2018 and 2017 by its independent registered public accounting firm, PwC:

	For the Years Ended
(In thousands)	December 31,
	2018		2017
Audit fees	$	721	$	697
Audit-related fees	70		38
Tax fees	—		—
All other fees	3		2
Total fees	$	794	$	737

Audit fees were for professional services rendered for the audits of the FHLB's financial statements.

Audit-related fees were for assurance and services related to the performance of the audit and review of the FHLB's financial statements and primarily consisted of accounting consultations, control advisory services and fees related to participation in and presentations at conferences.

The FHLB is exempt from all federal, state and local income taxation. Therefore, no fees were paid for tax services during the years presented.

All other fees were for the annual license of accounting research software and a disclosure compliance checklist.

The Audit Committee approves the annual engagement letter for the FHLB's audit. In evaluating the performance of the independent registered public accounting firm, the Audit Committee considers a number of factors, such as:

▪ PwC's independence and process for maintaining independence;

▪ PwC's historical and recent performance on the FHLB's audit, including the results of an internal survey of PwC service and quality with the FHLB and the FHLBank System;

▪ external data related to audit quality and performance, including recent Public Company Accounting Oversight Board audit quality inspection reports on PwC; and

▪ the appropriateness of PwC's audit fees.

The Audit Committee also establishes a fixed dollar limit for other recurring annual accounting related consultations, which include the FHLB's share of FHLBank System-related accounting issues. The status of these services is periodically reviewed by the Audit Committee throughout the year with any increase in these services requiring pre-approval. All other services provided by the independent accounting firm are specifically approved by the Audit Committee in advance of commitment.

The FHLB paid additional fees to PwC in the form of assessments paid to the Office of Finance. The FHLB is assessed its proportionate share of the costs of operating the Office of Finance, which includes the expenses associated with the annual audits of the combined financial statements of the FHLBanks. These assessments, which totaled $49,000 and $47,000 in 2018 and 2017, respectively, are not included in the table above.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) Financial Statements. The following financial statements of the Federal Home Loan Bank of Cincinnati, set forth in Item 8. Financial Statements and Supplementary Data above, are filed as a part of this registration statement.

Report of Independent Registered Public Accounting Firm

Statements of Condition as of December 31, 2018 and 2017

Statements of Income for the years ended December 31, 2018, 2017 and 2016

Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016

Statements of Capital for the years ended December 31, 2018, 2017 and 2016

Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016

Notes to Financial Statements

(b) Exhibits.

See Index of Exhibits

Item 16. Form 10-K Summary.

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 21st day of March 2019.

FEDERAL HOME LOAN BANK OF CINCINNATI

(Registrant)

By:	/s/ Andrew S. Howell
	Andrew S. Howell
	President and Chief Executive Officer

SIGNATURES AND POWER OF ATTORNEY

We, the undersigned directors of the Federal Home Loan Bank of Cincinnati, hereby appoint Andrew S. Howell and Stephen J. Sponaugle, or either of them, our true and lawful attorneys and agents to do any and all acts and things in our names and on our behalves, in our capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable said registrant to comply with the Securities Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2018, including, without limitation, power and authority to sign for us, or any of us, in our names in the capacities indicated below, the Report and any and all amendments to the Report, and we hereby ratify and confirm all that said attorneys and agents, or each of them, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of the 21st day of March 2019.

Signatures	Title
/s/ Andrew S. Howell	President and Chief Executive Officer
Andrew S. Howell	(principal executive officer)
/s/ Stephen J. Sponaugle	Executive Vice President-Chief Financial Officer
Stephen J. Sponaugle	(principal financial officer)
/s/ J. Christopher Bates	Senior Vice President-Chief Accounting Officer
J. Christopher Bates	(principal accounting officer)
/s/ J. Lynn Anderson	Director
J. Lynn Anderson
/s/ Grady P. Appleton	Director
Grady P. Appleton
/s/ April Miller Boise	Director
April Miller Boise
/s/ Brady T. Burt	Director
Brady T. Burt
/s/ Greg W. Caudill	Director
Greg W. Caudill
/s/ Mark N. DuHamel	Director
Mark N. DuHamel

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/s/ Leslie D. Dunn	Director
Leslie D. Dunn
/s/ James A. England	Director (Vice Chair)
James A. England
/s/ Robert T. Lameier	Director
Robert T. Lameier
/s/ Michael R. Melvin	Director
Michael R. Melvin
/s/ Donald J. Mullineaux	Director (Chair)
Donald J. Mullineaux
/s/ Alvin J. Nance	Director
Alvin J. Nance
/s/ Michael P. Pell	Director
Michael P. Pell
/s/ Charles J. Ruma	Director
Charles J. Ruma
/s/ David E. Sartore	Director
David E. Sartore
/s/ William S. Stuard, Jr.	Director
William S. Stuard, Jr.
/s/ Nancy E. Uridil	Director
Nancy E. Uridil
/s/ James J. Vance	Director
James J. Vance

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INDEX OF EXHIBITS

Exhibit Number (1)	Description of exhibit	Document filed or furnished, as indicated below
3.1	Organization Certificate	Form 10, filed December 5, 2005
3.2	Bylaws, as amended through January 17, 2019	Filed Herewith
4	Capital Plan, as of June 21, 2018	Form 10-Q, filed August 9, 2018
10.1	Form of Blanket Agreement for Advances and Security Agreement, as in effect for signatories prior to November 21, 2005	Form 10, filed December 5, 2005
10.2	Form of Blanket Security Agreement, for new signatories on and after November 21, 2005	Form 10, filed December 5, 2005
10.3	Form of Mortgage Purchase Program Master Selling and Servicing Master Agreement	Form 10, filed December 5, 2005
10.4	Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, entered into as of July 20, 2006, by and among the Office of Finance and each of the Federal Home Loan Banks, as amended and restated on January 1, 2017	Form 10-K, filed March 16, 2017
10.5	Joint Capital Enhancement Agreement, as amended on August 5, 2011, by and among each of the Federal Home Loan Banks	Form 8-K, filed August 5, 2011
10.6(2)	Incentive Compensation Plan as of January 1, 2018	Form 10-K, filed March 15, 2018
10.7 (2)	Incentive Compensation Plan as of January 1, 2019	Filed Herewith
10.8 (2)	Federal Home Loan Bank of Cincinnati Benefit Equalization Plan (December 2008 Restatement)	Form 10-K, filed March 18, 2010
10.9 (2)	First Amendment to the Federal Home Loan Bank of Cincinnati Benefit Equalization Plan (December 2008 Restatement)	Form 10-K, filed March 18, 2010
10.10	Form of indemnification agreement between the Federal Home Loan Bank and each of its directors and executive officers (used from July 29, 2009 to December 31, 2016)	Form 8-K, filed July 30, 2009
10.11	Form of indemnification agreement between the Federal Home Loan Bank and each of its directors and executive officers (used from January 1, 2017 to November 4, 2018)	Form 10-K, filed March 16, 2017
10.12	Form of indemnification agreement between the Federal Home Loan Bank and each of its directors and executive officers (used after November 5, 2018)	Filed Herewith
10.13	Federal Home Loan Bank of Cincinnati Executive Change in Control Severance Plan	Form 10-Q, filed November 9, 2017
24	Power of Attorney (included in Signature Page)	Filed Herewith
31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer	Filed Herewith
31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer	Filed Herewith
32	Section 1350 Certifications	Furnished Herewith

164

Exhibit Number (1)	Description of exhibit	Document filed or furnished, as indicated below
99.1	Audit Committee Letter	Furnished Herewith
99.2	Audit Committee Charter	Furnished Herewith
101.INS	XBRL Instance Document	Filed Herewith
101.SCH	XBRL Taxonomy Extension Schema Document	Filed Herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed Herewith
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed Herewith
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed Herewith
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed Herewith

(1) Numbers coincide with Item 601 of Regulation S-K.

(2) Indicates management compensation plan or arrangement.

165