10-K 1 fhlbpit10k2015.htm 10-K 10-K
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, 2015
or
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                    to                                   
 
Commission File Number: 000-51395
FEDERAL HOME LOAN BANK OF PITTSBURGH
 
(Exact name of registrant as specified in its charter) 
Federally Chartered Corporation
 
25-6001324
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
601 Grant Street
Pittsburgh, PA 15219
 (Address of principal executive offices)
 
15219
 (Zip Code)
 
(412) 288-3400 
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
None
Title of Each Class: None
 
 
Securities registered pursuant to Section 12(g) of the Act:
 
Name of Each Exchange on
Capital Stock, putable, par value $100
 
Which Registered: None
(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.
[]Yes [x]No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  
[]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 []No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [x] Yes [] 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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [x]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer
 
o Accelerated filer
x Non-accelerated filer
 
o Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [] Yes [x] No

Registrant’s stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. At June 30, 2015, the aggregate par value of the stock held by current and former members of the registrant was approximately $3,425.8 million. There were 34,294,094 shares of common stock outstanding at February 29, 2016.




FEDERAL HOME LOAN BANK OF PITTSBURGH

TABLE OF CONTENTS

PART I
 
Item 1: Business
 
Item 1A: Risk Factors
 
Item 1B: Unresolved Staff Comments
 
Item 2: Properties
 
Item 3: Legal Proceedings
 
Item 4: Mine Safety Disclosures
 
PART II
 
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Item 6: Selected Financial Data
 
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
  Risk Management
 
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
 
Item 8: Financial Statements and Supplementary Financial Data
 
Financial Statements for the Years 2015, 2014, and 2013
 
Notes to Financial Statements
 
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Item 9A: Controls and Procedures
 
Item 9B: Other Information
 
PART III
 
Item 10: Directors, Executive Officers and Corporate Governance
 
Item 11: Executive Compensation
 
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13: Certain Relationships and Related Transactions, and Director Independence
 
Item 14: Principal Accountant Fees and Services
 
PART IV
 
Item 15: Exhibits and Financial Statement Schedules
 
Glossary
 
Signatures
 






i.


PART I – FINANCIAL INFORMATION

Forward-Looking Information

Statements contained in this Form 10-K, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of Pittsburgh (the Bank), may be “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: economic and market conditions, including, but not limited to, real estate, credit and mortgage markets; volatility of market prices, rates, and indices related to financial instruments; political, legislative, regulatory, litigation, or judicial events or actions; changes in assumptions used in the quarterly other-than-temporary impairment (OTTI) process; risks related to mortgage-backed securities; changes in the assumptions used in the allowance for credit losses; changes in the Bank’s capital structure; changes in the Bank’s capital requirements; membership changes; changes in the demand by Bank members for Bank advances; an increase in advances’ prepayments; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; changes in the Federal Home Loan Bank (FHLBank) System’s debt rating or the Bank’s rating; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; applicable Bank policy requirements for retained earnings and the ratio of the market value of equity to par value of capital stock; the Bank’s ability to maintain adequate capital levels (including meeting applicable regulatory capital requirements); business and capital plan adjustments and amendments; technology and cyber-security risks; and timing and volume of market activity.

Item 1: Business

The Bank’s mission is to provide its members with readily available liquidity, including serving as a low-cost source of funds for housing and community development. The Bank strives to enhance the availability of credit for residential mortgages and targeted community development. The Bank manages its own liquidity so that funds are available to meet members’ demand for advances (loans to members and eligible nonmember housing associates). By providing needed liquidity and enhancing competition in the mortgage market, the Bank’s lending programs benefit homebuyers and communities.

General
 
History.  The Bank is one of 11 Federal Home Loan Banks (FHLBanks). The FHLBanks operate as separate entities with their own managements, employees and boards of directors. The 11 FHLBanks, along with the Office of Finance (OF - the FHLBanks’ fiscal agent) comprise the FHLBank System. The FHLBanks were organized under the authority of the Federal Home Loan Bank Act of 1932, as amended (the Act). The FHLBanks are commonly referred to as government-sponsored enterprises (GSEs), which generally mean they are a combination of private capital and public sponsorship. The public sponsorship attributes include: (1) being exempt from federal, state and local taxation, except real estate taxes; (2) being exempt from registration under the Securities Act of 1933 (the 1933 Act) (although the FHLBanks are required by Federal Housing Finance Agency (FHFA or Finance Agency) regulation and the Housing and Economic Recovery Act of 2008 (the Housing Act or HERA) to register a class of their equity securities under the Securities Exchange Act of 1934 (the 1934 Act)) and (3) having a line of credit with the U.S. Treasury. This line represents the U.S. Treasury’s authority to purchase consolidated obligations in an amount up to $4 billion.

Cooperative.  The Bank is a cooperative institution, owned by financial institutions that are also its primary customers. Any building and loan association, savings and loan association, commercial bank, homestead association, insurance company, savings bank, credit union, community development financial institution (CDFI), or insured depository institution that maintains its principal place of business in Delaware, Pennsylvania or West Virginia and that meets varying requirements can apply for membership in the Bank. All members are required to purchase capital stock in the Bank as a condition of membership. The capital stock of the Bank can be purchased only by members.

Mission.  The Bank’s primary mission is to intermediate between the capital markets and the housing market through member financial institutions. The Bank provides credit for housing and community development through two primary programs. First, it provides members with advances against the security of residential mortgages and other types of high-quality

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collateral. Second, the Bank purchases residential mortgage loans originated by or through eligible member institutions. The Bank also offers other types of credit and noncredit products and services to member institutions. These include letters of credit, interest rate exchange agreements (interest rate swaps, caps, collars, floors, swaptions and similar transactions), affordable housing grants, securities safekeeping, and deposit products and services. The Bank issues debt to the public (consolidated obligation bonds and discount notes) in the capital markets through the OF and uses these funds to provide its member financial institutions with a reliable source of credit for these programs. The U.S. government does not guarantee the debt securities or other obligations of the Bank or the FHLBank System.

Overview.  As a GSE, the Bank’s principal strategic position has historically been derived from its ability to raise funds in the capital markets at narrow spreads to the U.S. Treasury yield curve. This fundamental competitive advantage, coupled with the joint and several cross-guarantee on FHLBank System debt, has distinguished the Bank in the capital markets and has enabled it to provide attractively priced funding to members.

 
Though chartered by Congress, the Bank is privately capitalized by its member institutions, which are voluntary participants in its cooperative structure. The characterization of the Bank as a voluntary cooperative with the status of a federal instrumentality differentiates the Bank from a traditional banking institution in three principal ways:

 
Members voluntarily commit capital required for membership principally to gain access to the funding and other services provided by the Bank. The value in membership is derived from the access to liquidity and the availability of favorably priced liquidity, as well as the potential for a dividend on the capital investment. Management recognizes that financial institutions choose membership in the Bank principally for access to attractively priced liquidity, the value of the products offered within this cooperative, and the potential to receive dividends.

 
Because the Bank’s customers and shareholders are predominantly the same institutions, normally there is a need to balance the pricing expectations of customers with the dividend expectations of shareholders. By charging wider spreads on loans to customers, the Bank could potentially generate higher earnings and potentially dividends for shareholders. Yet these same shareholders viewed as customers would generally prefer narrower loan spreads. The Bank strives to achieve a balance between the goals of providing liquidity and other services to members at advantageous prices and potentially generating a market-based dividend. The Bank typically does not strive to maximize the dividend yield on the stock, but to produce a dividend that compares favorably to short-term interest rates, compensating members for the cost of the capital they have invested in the Bank.

 
The Bank is different from a traditional banking institution because its GSE charter is based on a public policy purpose to assure liquidity for its members and to enhance the availability of affordable housing for lower-income households. In upholding its public policy mission, the Bank offers a number of programs that consume a portion of earnings that might otherwise be available to its shareholders. The cooperative GSE character of this voluntary membership organization leads management to strive to optimize the primary purpose of membership, access to funding, as well as the overall value of Bank membership. 

Nonmember Borrowers.  In addition to member institutions, the Bank is permitted under the Act to make advances to nonmember housing associates that are approved mortgagees under Title II of the National Housing Act. These eligible housing associates must be chartered under law, be subject to inspection and supervision by a governmental agency, and lend their own funds as their principal activity in the mortgage field. The Bank must approve each applicant. Housing associates are not subject to certain provisions of the Act that are applicable to members, such as the capital stock purchase requirements. However, they are generally subject to more restrictive lending and collateral requirements than those applicable to members. Housing associates that are not state housing finance agencies are limited to pledging to the Bank as security for advances their Federal Housing Administration (FHA) mortgage loans and securities backed by FHA mortgage loans. Housing associates that are state housing finance agencies (that is, they are also instrumentalities of state or local governments) may, in addition to pledging FHA mortgages and securities backed by FHA mortgages, also pledge the following as collateral for Bank advances: (1) U.S. Treasury and agency securities; (2) single and multifamily mortgages; (3) AAA-rated securities backed by single and multifamily mortgages; and (4) deposits with the Bank. As of December 31, 2015, the Bank had approved three state housing finance agencies; two are currently eligible to borrow from the Bank but had no outstanding advance balances as of December 31, 2015.


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Regulatory Oversight, Audits and Examinations
 
Supervision and Regulation.  The Bank and OF are supervised and regulated by the Finance Agency, which is an independent agency in the executive branch of the United States government. The Finance Agency ensures that the Bank carries out its housing finance mission, remains adequately capitalized and operates in a safe and sound manner. The Finance Agency establishes regulations and otherwise supervises Bank operations primarily via periodic examinations. The Government Corporation Control Act provides that, before a government corporation issues and offers obligations to the public, the Secretary of the U.S. Treasury has the authority to prescribe the form, denomination, maturity, interest rate, and conditions of the obligations; the way and time issued; and the selling price. The U.S. Treasury receives the Finance Agency’s annual report to Congress and other reports on operations. The Bank is also subject to regulation by the Securities and Exchange Commission (SEC).

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

Audit.  The Bank has an internal audit department that conducts internal audits and reports directly to the Audit Committee of the Bank’s Board of Directors (Board). In addition, an independent Registered Public Accounting Firm (RPAF) audits the annual financial statements of the Bank. The independent RPAF conducts these audits following the Standards of the Public Company Accounting Oversight Board (PCAOB) of the United States of America and Government Auditing Standards issued by the Comptroller General. The Bank, the Finance Agency, and Congress all receive the RPAF audit reports.

Advances

Advance Products

The Bank makes advances on the security of pledged mortgage loans and other eligible types of collateral.

The following table summarizes the advance products offered by the Bank as of December 31, 2015. This information excludes mortgage loans purchased by the Bank and held for portfolio and loans relating to the Banking on Business (BOB) program, which are discussed separately in this Item 1.
Product
Description
Maturity
RepoPlus
Short-term fixed-rate advances(2); principal and interest paid at maturity
1 day to 89 days
Mid-Term Repo
Mid-term fixed-rate and adjustable-rate advances(2); principal paid at maturity; interest paid monthly or quarterly
3 months to 3 years
Core (Term)
Long-term fixed-rate and adjustable-rate advances(2)(3); principal paid at maturity; interest paid monthly or quarterly (Note: amortizing loans principal and interest paid monthly)
1 year to 30 years
Returnables
Short-term and long-term fixed-rate and adjustable-rate advances with returnable options owned by member; principal paid at maturity; interest paid monthly or quarterly
2 months to 30 years
Convertible Select
Long-term fixed-rate and adjustable-rate advances with conversion options sold by member; principal paid at maturity; interest paid quarterly
2 years to 15 years
Notes:
(1) Pricing spread over the Bank’s cost of funds at origination, quoted in basis points (bps). One basis point equals 0.01%.
(2) May include loans made under the Community Lending Program (CLP).
(3) May also include Affordable Housing Program (AHP) loans.

RepoPlus.  The Bank’s RepoPlus advance products serve member short-term liquidity needs. RepoPlus is typically a short-term (1-89 day) fixed-rate product while the Open RepoPlus is a revolving line of credit which allows members to borrow, repay and re-borrow based on the terms of the line of credit. As of December 31, 2015, the total par value of these advances was $14.1 billion, or 19% of the total advance portfolio. These short-term balances tend to be extremely volatile as members borrow and repay frequently.

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Mid-Term Repo.  The Mid-Term Repo product assists members with managing intermediate-term interest rate risk. To assist members with managing the basis risk, or the risk of a change in the spread relationship between two indices, the Bank offers adjustable-rate Mid-Term Repo advances with maturity terms between 3 months and 3 years. Adjustable-rate, Mid-Term Repo advances can be priced based on 1-month London Interbank Offered Rate (LIBOR) or 3-month LIBOR indices. As of December 31, 2015, the par value of Mid-Term Repo advances totaled $16.1 billion, or 22% of the total advance portfolio. These balances tend to be somewhat unpredictable as these advances are not always replaced as they mature; members’ liquidity needs drive these fluctuations.

 
Core (Term) Advances.  For managing longer-term interest rate risk and to assist with asset/liability management, the Bank offers long-term fixed-rate advances for terms from one year to 30 years. Amortizing long-term fixed-rate advances can be fully amortized on a monthly basis over the term of the loan or amortized balloon-style, based on an amortization term longer than the maturity of the loan. As of December 31, 2015, the par value of Core (Term) advances totaled $30.0 billion, or 40% of the total advance portfolio.

Returnables.  Some of the Bank's advances permit the member to prepay an advance on certain pre-determined dates without a fee. As of December 31, 2015, the Bank had $12.6 billion of Returnable advances or 17% of the total advance portfolio.

Convertible Select.  Some of the Bank’s advances contain embedded options which the member can sell to the Bank. If the option is exercised by the Bank (based on a predetermined frequency), the member can choose to either repay the advance or allow the advance to be converted into an adjustable-rate advance with a predetermined spread. As of December 31, 2015, the par value of these Convertible Select advances was $1.5 billion, or 2% of the total advance portfolio.


Collateral

The Bank makes advances to members and eligible nonmember housing associates based upon the security of pledged mortgage loans and other eligible types of collateral. In addition, the Bank has established lending policies and procedures to minimize risk of loss while balancing the members’ needs for funding. The Bank also protects against credit risk by fully collateralizing all member and nonmember housing associate advances and other credit products. The Act requires the Bank to obtain and maintain a security interest in eligible collateral at the time it originates or renews an advance.

 
Collateral Agreements.  The Bank provides members with two types of collateral agreements: a blanket lien collateral pledge agreement and a specific collateral pledge agreement. In both cases, the Bank perfects its security interest under Article 9 of the Uniform Commercial Code (UCC) by filing a financing statement. The specific agreement covers only those assets or categories of assets identified; the Bank therefore is relying on a specific subset of the member’s total eligible collateral as security for the member’s obligations to the Bank. The Bank requires housing finance agencies (HFAs) and insurance companies to sign a specific collateral pledge agreement. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for a description of blanket and specific agreements.

 
Collateral Status.  These collateral agreements require one of three types of collateral status: undelivered, detailed listing or specific pledge, and delivered status (all securities pledged must be delivered). A member is assigned a collateral status based on the member’s needs and on the Bank’s determination of the member’s current financial condition and credit product usage, as well as other available information.

The least restrictive collateral status, and the most widely used by the Bank’s members, is the undelivered collateral status. This status is generally assigned to lower risk institutions pledging collateral. Under undelivered collateral status, a member borrower is not required to deliver detailed reporting on pledged loans; rather, the Bank monitors eligible collateral using the Qualifying Collateral Report (QCR), derived from regulatory financial reports, which are submitted quarterly to the Bank by the member. Origination of new advances or renewal of advances must be secured by eligible collateral categories.

 
With respect to the Bank’s detailed listing practice, the Bank may require a member to provide a detailed listing of eligible collateral being pledged if the member is under a specific agreement, or if participating in the Bank’s market-value based pricing program, or as determined based on its credit condition. In this case, the member typically retains physical possession of collateral pledged to the Bank but provides a listing of assets pledged. In some cases, the member may benefit by choosing to list collateral, in lieu of non-listed status, since it may result in a higher collateral weighting being applied to the collateral.

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The Bank benefits from detailed listing collateral status because it provides more loan information to calculate a more precise valuation of the collateral.

 
The third collateral status is delivered collateral status. In this case, the Bank requires the member to deliver physical possession, or grant control of, eligible collateral (in an amount sufficient to fully secure TCE) to the Bank, including through a third party custodian for the Bank. Typically, the Bank would take physical possession/control of collateral if the financial condition of the member was deteriorating. Delivery of collateral also may be required if there is action taken against the member by its regulator that would indicate inadequate controls or other conditions that would be of concern to the Bank. Collateral delivery status is often required for members borrowing under specific pledge agreements, as a practical means for maintaining specifically listed collateral. For all securities pledged as collateral, the Bank requires delivery to either a restricted account at the Bank or an account with a third party custodian under the Bank’s control. The Bank also requires delivery of collateral from de novo institution members at least until two consecutive quarters of profitability are achieved and for any other new member where a pre-existing blanket lien is in force with another creditor unless an effective subordination agreement is executed with such other creditor.

 
With respect to certain specific collateral pledge agreement borrowers (typically HFAs and insurance companies, as noted above), the Bank takes control of all collateral pledged at the time the loan is made through the delivery of securities or, where applicable, mortgage loans to the Bank or its custodian. Approximately 87% of total credit exposure (TCE) outstanding was secured by collateral pledged to the Bank under a blanket lien agreement and in undelivered status at December 31, 2015. The remaining 13% of TCE outstanding was secured by collateral pledged under detailed listing or specific pledge and delivery status.

As of December 31, 2015, eight of the Bank’s top ten borrowers (ranked by TCE and outstanding advances) were in undelivered collateral status; the remaining two were in detailed listing or specific pledge status. These included a banking institution member which elected to have residential loan collateral specifically pledged under a detailed listing affiliate pledge lending arrangement. In addition, an insurance company member has securities collateral specifically pledged to and controlled by the Bank in accordance with the Bank’s policy requiring all insurance companies to sign a specific pledge type master borrowing agreement.

 
All eligible collateral securing advances is discounted to protect the Bank from default in adverse conditions. These discounts, also referred to as lending value, vary by collateral type and whether the calculation is based on book value or fair value of the collateral. The Bank’s collateral discounted values are presented in the table entitled “Lending Value Assigned to the Collateral as a Percentage of Value” below. The discounts typically include margins for estimated costs to sell or liquidate the collateral and the risk of a decline in the collateral value due to market or credit volatility. The Bank reviews the collateral weightings periodically and may adjust them, as well as the members’ reporting requirements to the Bank, for individual borrowers on a case-by-case basis.

 
The Bank determines the type and amount of collateral each member has available to pledge as security for a member’s obligations to the Bank by reviewing, on a quarterly basis, call reports the members file with their primary banking regulators. The resulting total value of collateral available to be pledged to the Bank after any collateral weighting is referred to as a member’s maximum borrowing capacity (MBC). For blanket lien members, and depending on a member’s credit product usage and current financial condition, that member may also be required to file a QCR on a quarterly or monthly basis. At a minimum, all members whose usage exceeds 20% of their MBC and all members who are not community financial institutions (CFIs) as defined below must file a QCR quarterly.

 
The Bank also performs periodic on-site collateral reviews of its borrowing members to confirm the amounts and quality of the eligible collateral pledged for the members’ obligations to the Bank. For certain pledged residential and commercial mortgage loan collateral, as well as delivered and Bank-controlled securities, the Bank employs outside service providers to assist in determining market values. In addition, the Bank has developed and maintains an Internal Credit Rating (ICR) system that assigns each member a numerical credit rating on a scale of one to ten, with one being the best rating and ten being the worst. Credit availability and term guidelines are based on a member’s ICR and MBC usage. The Bank reserves the right, at its discretion, to refuse certain collateral or to adjust collateral weightings that are applied. In addition, the Bank can require additional or substitute collateral while any obligations of a member to the Bank remain outstanding to protect the Bank’s security interest and ensure that it remains fully secured at all times.


See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for further information on collateral policies and practices and details of eligible

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collateral, including amounts and percentages of eligible collateral securing members’ obligations to the Bank as of December 31, 2015.

 
As additional security for each member’s obligations to the Bank, the Bank has a statutory lien on the member’s capital stock in the Bank. In the event of deterioration in the financial condition of a member, the Bank will take possession or control of sufficient eligible collateral to further perfect its security interest in collateral pledged to secure the member’s obligations to the Bank. Members with deteriorating creditworthiness are required to deliver collateral to the Bank or the Bank’s custodian to secure the members’ obligations with the Bank. Furthermore, the Bank requires specific approval of each of such members’ new or renewed advances.

 
Priority.  The Act affords any security interest granted to the Bank by any member, or any affiliate of a member, priority over the claims and rights of any third party, including any receiver, conservator, trustee or similar party having rights of a lien creditor. The only two exceptions are: (1) claims and rights that would be entitled to priority under otherwise applicable law and are held by actual bona fide purchasers for value; and (2) parties that are secured by actual perfected security interests ahead of the Bank’s security interest. The Bank has detailed liquidation plans in place to promptly exercise the Bank’s rights regarding securities, loan collateral, and other collateral upon the failure of a member. At December 31, 2015 and 2014, respectively, on a borrower-by-borrower basis, the Bank had a perfected security interest in eligible collateral with an eligible collateral value (after collateral weightings) in excess of the book value of all members’ and nonmember housing associates’ obligations to the Bank. Management believes that adequate policies and procedures are in place to effectively manage the Bank’s credit risk associated with lending to members and nonmember housing associates. To ensure its position as a first-lien priority secured creditor, the Bank takes possession of collateral pledged by insurance companies.

 
Types of Collateral.  Single-family, residential mortgage loans may be used to secure members’ obligations to the Bank. The Bank contracts with a leading provider of comprehensive mortgage analytical pricing to provide more precise valuations of some listed and delivered residential mortgage loan collateral. In determining borrowing capacity for members with non-listed and non-delivered collateral, the Bank utilizes book value as reported on each member's regulatory call report.

 
The Bank also may accept other real estate related collateral (ORERC) as eligible collateral if it has a readily ascertainable value and the Bank is able to perfect its security interest in such collateral. Types of eligible ORERC include commercial mortgage loans and second-mortgage installment loans. The Bank uses a leading provider of multi-family and commercial mortgage analytical pricing to provide more precise valuations of listed and delivered multi-family and commercial mortgage loan collateral.

A third category of eligible collateral is high quality investment securities, defined as U.S. Treasury and U.S. Agency securities, REFCORP bonds, GSE mortgage-backed securities (MBS), and commercial and residential private label MBS with a minimum credit rating of single A. In addition, municipal securities with a real estate nexus (e.g. proceeds used for real estate development) with a minimum credit rating of single A are included. Members have the option to deliver such high quality investment securities to the Bank to increase their MBC. Upon delivery, these securities are valued daily and private label residential MBS are subject to weekly ratings reviews.

The Bank also accepts FHLBank deposits and multi-family residential mortgage loans as eligible collateral. In addition, member CFIs may pledge a broader array of collateral to the Bank, including secured small business, small farm, small agri-business and community development loans. The Housing Act defines member CFIs as Federal Deposit Insurance Corporation (FDIC)-insured institutions with no more than $1.1 billion (the limit during 2015) in average assets over the past three years. This limit may be adjusted by the Finance Agency based on changes in the Consumer Price Index. The determination to accept such collateral is at the discretion of the Bank and is made on a case-by-case basis. These advances were also collateralized by sufficient levels of non-CFI collateral. All member advances are fully secured by residential mortgage assets, ORERC, eligible securities and/or CFI collateral. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for the percentage of each type of collateral held by the Bank at December 31, 2015.

The Bank does not accept subprime residential mortgage loans (defined as FICO® score of 660 or below) as qualifying collateral unless certain mitigating factors are met. The Bank requires members to identify the amount of subprime and nontraditional mortgage collateral in their QCRs each quarter.

Nontraditional residential mortgage loans are defined by the Bank’s Collateral Policy as mortgage loans that allow borrowers to defer payment of principal or interest. These loans, also referred to as “alternative” or “exotic” mortgage loans, may be interest-only loans, payment-option loans, negative-amortization, or have other features, such as, but not limited to,

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variable interest rates with below-market introductory rates, simultaneous second-lien loans and reduced documentation to support the repayment capacity of the borrower. Nontraditional residential mortgage loans exhibit characteristics that may result in increased risk relative to traditional residential mortgage loan products. They may pose even greater risk when granted to borrowers with undocumented or undemonstrated repayment capacity, for example, low or no documentation loans or credit characteristics that would be characterized as subprime. The potential for increased risk is particularly true if the nontraditional residential mortgage loans are not underwritten to the fully indexed rate.

Regarding nontraditional mortgage collateral for the QCR, the Bank requires filing members to stratify their holdings of first lien residential mortgage loans into traditional, qualifying low FICO®, and qualifying unknown FICO® categories. Under limited circumstances, the Bank allows nontraditional residential mortgage loans that are consistent with Federal Financial Institutions Examination Council (FFIEC) guidance to be pledged as collateral and used to determine a member’s MBC.

Management believes that the Bank has limited collateral exposure to subprime and nontraditional loans due to its business model, conservative policies pertaining to collateral and low credit risk due to the design of its mortgage loan purchase programs. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for specific requirements regarding subprime and non-traditional loan collateral.

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The various types of eligible collateral and related lending values as of December 31, 2015 are summarized below. Collateral includes wholly-owned member assets (or unencumbered assets of an affiliate or subsidiary of the member pledged to the Bank, if applicable and approved by FHLBank). The weightings are analyzed on at least a semi-annual basis and adjusted as necessary. At the discretion of the Bank, on a case-by-case basis, the collateral weighting on loan categories may be increased (up to a maximum of 95 percent) upon completion of specific market valuation of such collateral and authorization from the Bank’s Membership Credit Committee.
Types of Qualifying Collateral
Lending Value Assigned to the Collateral
(as a Percentage of Fair Value)
Securities Collateral
 
FHLBank deposit pledged to FHLBank and under the sole control of FHLBank
100%
U.S. Treasury securities; U.S. Agency securities, including securities of FNMA, FHLMC, FFCB, NCUA, SBA, USDA and FDIC notes; FHLBank consolidated obligations; REFCorp Bonds (1)
97%
MBS, including collateralized mortgage obligations (CMO) issued or guaranteed by Ginnie Mae (GNMA), FHLMC, and FNMA
95%
U.S. Treasury Strips (interest-only and principal only)
90%
Non-agency residential MBS, including CMOs, representing a whole interest in such mortgages.
AAA 85%
AA 75%
A 70%
Commercial mortgage-backed securities (CMBS)
AAA 85%
AA 75%
A 70%
Securities issued by a state or local government or their agencies, or authorities or instrumentalities in the United States (Municipals) with a real estate nexus.
AAA 92%
AA 90%
A 88%
Types of Qualifying Collateral
Lending Value Assigned to the Collateral (3)
Loan Collateral
Blanket - Lien Undelivered
Specific Pledge, Collateral Listing
or
Blanket Delivered (Policy)
Blanket Delivered (Credit)
Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and Conventional whole, fully disbursed, first mortgage loans secured by 1-to-4 family residences
80%
75%
70%
Nontraditional mortgage loans and loans with unknown FICO® (2)
70%
65%
60%
Conventional and FHA whole, fully-disbursed mortgage loans secured by multifamily properties
70%
65%
60%
Farmland loans
70%
65%
60%
Commercial real estate loans (owner & non-owner occupied)
70%
65%
60%
Low FICO® loans with mitigating factors as defined by FHLBank
60%
55%
50%
Conventional, fully disbursed, second-mortgage loans secured by 1-to-4 family residences. Both term loans and revolving lines of credit (HELOC)
60%
55%
50%
Commercial business loans (CFI only)
60%
55%
50%
Note:
(1) Defined as Federal National Mortgage Association (Fannie Mae or FNMA), Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC), Federal Farm Credit Bank (FFCB), National Credit Union Administration (NCUA), Small Business Administration (SBA), and U.S. Department of Agriculture (USDA), and Federal Deposit Insurance Corporation (FDIC).
(2) Nontraditional mortgage loan portfolios may be required to be independently identified for collateral review and valuation for inclusion in a member’s MBC. This may include a request for loan-level listing on a periodic basis.
(3) For the categories Blanket-Lien Undelivered, Blanket Delivered (Policy), and Blanket Delivered (Credit), lending value is assigned as a percentage of book value. For the Specific Pledge and Collateral Listing category, lending value is assigned as a percentage of fair market value.


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During 2015, the Bank implemented some changes to its collateral policies and practices. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for details regarding these changes.

Investments
 
Overview.  The Bank maintains a portfolio of investments for three main purposes: liquidity; collateral for derivative counterparties; and additional earnings. For liquidity purposes, the Bank invests in shorter-term instruments, including overnight Federal funds and overnight reverse repurchase agreements, to ensure the availability of funds to meet member borrowing requests. In addition, the Bank may invest in other short-term instruments, including term Federal funds, and interest-earning certificates of deposit. The Bank also maintains a secondary liquidity portfolio, which consists primarily of U.S. agency debentures that can be financed under normal market conditions in securities repurchase agreement transactions to raise additional funds. U.S. Treasury securities may be purchased and pledged as collateral for derivative transactions.
 
The Bank further enhances income by acquiring securities issued by GSEs and state and local government agencies as well as Agency MBS. The Bank's private label MBS portfolio continues to run-off; no private label MBS have been purchased since late 2007. Securities currently in the portfolio were required to carry one of the top two ratings from Moody’s Investors Service, Inc. (Moody’s), Standard & Poor’s Ratings Services (S&P) or Fitch Ratings (Fitch) at the time of purchase. All MBS securities in the Bank’s investment portfolio were AAA rated at the time of purchase with the exception of one pre-2004 vintage security which was rated AA at the time of purchase. The long-term investment portfolio is intended to provide the Bank with higher returns than those available in the short-term money markets. Investment income also bolsters the Bank’s capacity to meet its commitment to affordable housing and community investment, and to cover operating expenses. See the Credit and Counterparty Risk – Investments discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for discussion of the credit risk of the investment portfolio and further information on these securities’ current ratings.
 
Prohibitions.  Under Finance Agency regulations, the Bank is prohibited from purchasing certain types of securities, including:
instruments, such as common stock, that represent an ownership interest in an entity, other than stock in small business investment companies or certain investments targeted to low-income persons or communities;
instruments issued by non-U.S. entities, other than those issued by United States branches and agency offices of foreign commercial banks;
non-investment-grade debt instruments, other than certain investments targeted to low-income persons or communities and instruments that were downgraded after purchase by the Bank;
whole mortgages or other whole loans, other than: (1) those acquired under the Bank’s mortgage purchase program; (2) certain investments targeted to low-income persons or communities; (3) certain marketable direct obligations of state, local or tribal government units or agencies that are of investment quality; (4) MBS or asset-backed securities (ABS) backed by manufactured housing loans or home equity loans (HELOCs); and (5) certain foreign housing loans authorized under Section 12(b) of the Act; and
non-U.S. dollar denominated securities.
 
The provisions of Finance Agency regulation further limit the Bank’s investment in MBS and ABS. These provisions require that the total book value of MBS owned by the Bank not exceed 300% of the Bank’s previous month-end regulatory capital on the day of purchase of additional MBS. In addition, the Bank is prohibited from purchasing:
interest-only or principal-only strips of MBS;
residual-interest or interest-accrual classes of collateralized mortgage obligations and real estate mortgage investment conduits; and
fixed-rate or floating-rate MBS that on the trade date are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest rate change of 300 basis points.
 
The FHLBanks are prohibited from purchasing an FHLBank consolidated obligation as part of the consolidated obligation’s initial issuance. The Bank’s investment policy is even more restrictive, as it prohibits it from investing in another FHLBank consolidated obligation at any time. The Federal Reserve Board (Federal Reserve) requires Federal Reserve Banks (FRBs) to release interest and principal payments on the FHLBank System consolidated obligations only when there are sufficient funds in the FHLBanks’ account to cover these payments. The prohibitions on purchasing FHLBank consolidated obligations noted above will be temporarily waived if the Bank is obligated to accept the direct placement of consolidated obligation discount notes to assist in the management of any daily funding shortfall of another FHLBank.
 
The Bank does not consolidate any off-balance sheet special-purpose entities or other conduits.


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Mortgage Partnership Finance® (MPF®) Program
 
Under the MPF Program, the Bank purchases qualifying 5- to 30-year conventional conforming and government-insured fixed-rate mortgage loans secured by one-to-four family residential properties. The MPF Program provides participating members and eligible housing associates a secondary market alternative that allows for increased balance sheet liquidity and provides a method for removal of assets that carry interest rate and prepayment risks from their balance sheets. In addition, the MPF Program provides a greater degree of competition among mortgage purchasers and allows small and mid-sized community-based financial institutions to participate more effectively in the secondary mortgage market.
 
The Bank currently offers five products under the MPF Program to Participating Financial Institutions (PFIs): MPF Original, MPF 35, MPF Government, MPF Direct and MPF Xtra. Further details regarding the credit risk structure for each of the products, as well as additional information regarding the MPF Program and the products offered by the Bank, is provided in the Financial Condition section and the Credit and Counterparty Risk - Mortgage Loans discussion in Risk Management, both in Item 7. Management’s Discussion and Analysis in this Form 10-K.
 
PFI. Members and eligible housing associates must specifically apply to become a PFI. The Bank reviews their eligibility including servicing qualifications and ability to supply documents, data and reports required to be delivered under the MPF Program. The Bank added seven new PFIs in 2015, and as of December 31, 2015, 132 members were approved participants in the MPF Program. Of the Bank’s ten largest members, based on asset size, three members have executed PFI agreements. The Bank purchased mortgage loans totaling $456.1 million during 2015, none of which were from these three members.

Under the MPF Program, PFIs generally market, originate and service qualifying residential mortgages for sale to the Bank. Member banks have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing PFIs to originate mortgage loans, whether through retail or wholesale operations, and to retain or sell servicing of mortgage loans, the MPF Program gives control of the functions that relate to credit risk to PFIs. PFIs also may receive a servicing fee if they choose to retain loan servicing rather than transfer servicing rights to a third-party servicer.
 
PFIs are paid a credit enhancement (CE) fee for retaining and managing a portion of the credit risk in the conventional mortgage loan portfolios sold to the Bank under the MPF Original Program. The CE structure motivates PFIs to minimize loan losses on mortgage loans sold to the Bank. The Bank is responsible for managing the interest rate risk, prepayment risk, liquidity risk and a portion of the credit risk associated with the mortgage loans.

Mortgage Loan Purchases. The Bank and the PFI enter into a Master Commitment which provides the general terms under which the PFI will deliver mortgage loans, including a maximum loan delivery amount, maximum CE amount and expiration date. Mortgage loans are purchased by the Bank directly from a PFI pursuant to a delivery commitment, a binding agreement between the PFI and the Bank.

Mortgage Loan Participations. The Bank may sell participation interests in purchased mortgage loans to other FHLBanks, institutional third party investors approved in writing by the FHLBank of Chicago, the member that provided the CE, and other members of the FHLBank System. The Bank also may purchase mortgage loans from other FHLBanks.

Mortgage Loan Servicing. Under the MPF Program, PFIs may retain or sell servicing to third parties. The Bank does not service loans or own any servicing rights. The FHLBank of Chicago acts as the master servicer for the Bank and has contracted with Wells Fargo Bank, N.A. to fulfill the master servicing duties. The Bank pays the PFI or third-party servicer a servicing fee to perform these duties. The servicing fee is generally 25 basis points for conventional loans.

MPF Xtra. MPF Xtra allows PFIs to sell residential, conforming fixed-rate mortgages to FHLBank of Chicago, which concurrently sells them to Fannie Mae on a nonrecourse basis. MPF Xtra does not have the CE structure of the traditional MPF Program. Additionally, because these loans are sold from the PFI to FHLBank of Chicago to Fannie Mae, they are not reported on the Bank’s Statement of Condition. With the MPF Xtra product, there is no credit obligation assumed by the PFI or the Bank and no CE fees are paid. PFIs which have completed all required documentation and training are eligible to offer the product. As of December 31, 2015, 50 PFIs were eligible to offer the product. Of these, 12 PFIs sold $52.5 million of mortgage loans through MPF Xtra for 2015. The Bank receives a nominal fee for facilitating these MPF Xtra transactions.

MPF Direct. This is operationally similar to MPF Xtra and allows PFIs to sell residential, jumbo fixed-rate mortgages to FHLBank Chicago, which concurrently sells them to a third party on a nonrecourse basis. PFIs which have completed all required documentation and training are eligible to offer the product. MPF Direct does not have the credit structure of the traditional MPF Program, and there is no CE obligation assumed by the PFI or the Bank and no CE fees are paid. The Bank

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receives a nominal fee for facilitating MPF Direct transactions. Given the arrangement, these loans are not reported on the Bank's Statement of Condition.

MPF 35. This product is similar to the MPF Original product but has a CE fee structure that is based partly on performance, a FLA equal to 35 basis points, and an option for the PFI’s CE obligation to be covered by a third party.

The FHLBank of Chicago, in its role as MPF Provider, provides the programmatic and operational support for the MPF Program and is responsible for the development and maintenance of the origination, underwriting and servicing guides.
 
“Mortgage Partnership Finance”, “MPF”, “MPF Xtra”, “MPF Direct” and “MPF 35” are registered trademarks of the FHLBank of Chicago.

Specialized Programs
 
The Bank helps members meet their Community Reinvestment Act (CRA) responsibilities. Through community investment cash advance programs such as AHP and CLP, members have access to subsidized and other low-cost funding. Members use the funds from these programs to create affordable rental and homeownership opportunities, and for community and economic development activities that benefit low- and moderate-income neighborhoods and help revitalize their communities.
Banking on Business (BOB) Loans
 
See Note 1 - Summary of Significant Accounting Policies in Item 8. in this Form 10-K for a description of the BOB program. In 2015 and 2014, the Bank made $3.5 million and $2.8 million available, respectively, to assist small businesses through the BOB loan program.


Deposits
 
The Act allows the Bank to accept deposits from its members, from any institution for which it is providing correspondent services, from other FHLBanks, or from other Federal instrumentalities. Deposit programs are low-cost funding resources for the Bank, which also provide members a low-risk earning asset that is used in meeting their regulatory liquidity requirements. The Bank offers several types of deposit programs to its members including demand, overnight and term deposits.

Debt Financing — Consolidated Obligations
 
The primary source of funds for the Bank is the sale of debt securities, known as consolidated obligations. These consolidated obligations are issued as both bonds and discount notes, depending on maturity. Consolidated obligations are the joint and several obligations of the 11 FHLBanks. Consolidated obligations are not obligations of the U.S. government, and the U.S. government does not guarantee them. Moody’s has rated consolidated obligations Aaa with stable outlook/P-1, and S&P has rated them AA+ with stable outlook/A-1+. The following table presents the total par value of the consolidated obligations of the Bank and the FHLBank System at December 31, 2015 and 2014.
 
(in millions)
December 31, 2015
December 31, 2014
Consolidated obligation bonds
$
48,515.7

$
43,602.1

Consolidated obligation discount notes
42,318.5

37,065.7

Total Bank consolidated obligations
90,834.2

80,667.8

Total FHLBank System combined consolidated obligations
$
905,201.8

$
847,174.8

 
OF.  The OF has responsibility for issuing and servicing consolidated obligations on behalf of the FHLBanks. The OF also serves as a source of information for the Bank on capital market developments, markets the FHLBank System’s debt on behalf of the FHLBanks, selects and evaluates underwriters, prepares combined financial statements, and manages the Banks’ relationship with the rating agencies and the U.S. Treasury with respect to the consolidated obligations.
 
Consolidated Obligation Bonds.  On behalf of the Bank, the OF issues bonds that the Bank uses to fund advances, the MPF Program and its investment portfolio. Generally, the maturity of these bonds ranges from one year to ten years, although the maturity is not subject to any statutory or regulatory limit. Bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. In some instances, the Bank swaps its term fixed-rate debt issuance to floating rates through the use of interest rate swaps. Bonds can be issued through:


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A daily auction for both bullet (non-callable and non-amortizing) and American-style (callable daily after lockout period expires) callable bonds.
A selling group, which typically has multiple lead investment banks on each issue.
A negotiated transaction with one or more dealers.

The process for issuing bonds under the three methods above can vary depending on whether the bonds are non-callable or callable. For example, the Bank can request funding through the TAP auction program (quarterly debt issuances that reopen or “tap” into the same CUSIP number) for fixed-rate non-callable (bullet) bonds. This program uses specific maturities that may be reopened daily during a three-month period through competitive auctions. The goal of the TAP program is to aggregate frequent smaller issues into a larger bond issue that may have greater market liquidity.
 
Consolidated Obligation Discount Notes.  The OF also sells discount notes to provide short-term funds for advances for seasonal and cyclical fluctuations in deposit flows, mortgage financing, short-term investments and other funding needs. Discount notes are sold at a discount and mature at par. These securities have maturities of up to 365 days.
 
There are three methods for issuing discount notes:

The OF auctions one-, two-, three- and six-month discount notes twice per week and any FHLBank can request an amount to be issued. The market sets the price for these securities.
Via the OF’s window program, through which any FHLBank can offer a specified amount of discount notes at a maximum rate and a specified term up to 365 days. These securities are offered daily through a consolidated discount note selling group of broker-dealers.
Via reverse inquiry, wherein a dealer requests a specified amount of discount notes be issued for a specific date and price. The OF presents reverse inquiries to the FHLBanks, which may or may not choose to issue those particular discount notes.

See the Liquidity and Funding Risk discussion in the Risk Management section in Item 7. Management’s Discussion and Analysis in this Form 10-K for further information regarding consolidated obligations and related liquidity risk.

Capital Resources

Capital Plan.  The Bank currently has two subclasses of capital stock: B1 membership and B2 activity. The Capital Plan generally sets the calculation of the annual Membership Asset Value (MAV) stock purchase requirement based on the member’s assets as set forth in its prior December 31 call report data. Membership assets include, but are not limited to, the following: U.S. Treasury securities; U.S. Agency securities; U.S. Agency MBS; non-Agency MBS; 1-4 family residential first mortgage loans; multi-family mortgage loans; 1-4 family residential second mortgage loans; home equity lines of credit; and commercial real estate loans. A factor is applied to each membership asset category and the resulting MAV is determined by summing the products of the membership asset categories and the respective factor. Adjustments to the amount of membership and activity stock that each member must hold can be made periodically by the Bank's Board of Directors in accordance with the terms of the Capital Plan. Ranges have been built into the Capital Plan to allow the Bank to adjust the stock purchase requirement to meet its regulatory capital requirements, if necessary. Currently, these are the stock purchase requirements for each class of stock.

Each member is required to purchase and maintain membership stock equal to the following:
 
Range of membership stock requirement according to the Capital Plan
 
 
Minimum
Maximum
Current requirement
% of membership assets
0.05%
1.0%
0.1%
Membership stock cap
$5 million
$100 million
$45 million
Membership stock floor
 
 
$10 thousand

Each member is required to purchase and maintain activity stock equal to the percentage of the book value of the following transactions as shown in the table below:

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Range of activity stock requirement according to the Capital Plan
 
 
Minimum
Maximum
Current requirement
Outstanding advances
2.0%
6.0%
4.0%
Acquired member assets
0.0%
6.0%
4.0%
Letters of credit
0.0%
4.0%
0.75%
Outstanding advance commitments (settling more than 30 days after trade date)
0.0%
6.0%
0.0%

Bank capital stock may not be publicly traded; it may be issued, redeemed and repurchased at its stated par value of $100 per share. Under the Capital Plan, capital stock may be redeemed upon five years’ notice, subject to certain conditions. In addition, the Bank has the discretion to repurchase excess stock from members. Currently, the Bank's practice is to repurchase all excess capital stock on a weekly basis.

Dividends and Retained Earnings.  As prescribed in the Capital Plan, the Bank may pay dividends from current net earnings or previously retained earnings, subject to certain limitations and conditions. The Bank’s Board may declare and pay dividends in either cash or capital stock. The Bank’s practice has been to pay only a cash dividend. The amount of dividends the Board determines to pay out, if any, is affected by, among other factors, the level of retained earnings recommended under the Bank’s retained earnings policy. In addition, as set forth in the Capital Plan, the dividends paid on subclass B2 activity stock will be equal to or higher than the dividends being paid on subclass B1 membership stock at that time.

In February 2015, the Bank paid a quarterly dividend equal to an annual yield of 4.0%. This dividend was based on average member capital for the fourth quarter of 2014. In addition, the Bank paid a special dividend of 2.5%. The special dividend was based on average member capital stock for the full year of 2014. In April, July and October 2015, the Bank paid quarterly dividends equal to an annual yield of 5.0% on activity stock and 3.0% on membership stock. These dividends were based on stockholders' average balances for the first quarter (April dividend), second quarter (July dividend), and third quarter (October dividend). In February 2016, the Bank paid a quarterly dividend equal to an annual yield of 5.0% on activity stock and 3.0% on membership stock. The dividends were based on average member capital for the fourth quarter of 2015.

As of December 31, 2015, the balance in retained earnings was $881.2 million, of which $162.5 million was deemed restricted. Refer to the Capital Resources section and the Risk Governance discussion in Risk Management, both in Item 7. Management’s Discussion and Analysis in this Form 10-K for additional discussion of the Bank’s capital-related metrics, retained earnings, dividend payments, capital levels and regulatory capital requirements.

Derivatives and Hedging Activities
 
The Bank may enter into interest rate swaps, swaptions, interest rate cap and floor agreements and forward contracts (collectively, derivatives) to manage its exposure to changes in interest rates. The Bank uses these derivatives to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve its risk management objectives. The Bank may use derivative financial instruments in the following ways: (1) by designating them as a fair value hedge of an underlying financial instrument or a firm commitment; or (2) in asset/liability management (i.e., an economic hedge).

The Finance Agency regulates the Bank’s use of derivatives. The regulations prohibit the trading in or speculative use of these instruments and limit credit risk arising from these instruments. All derivatives are recorded in the Statement of Condition at fair value. See Note 11- Derivatives and Hedging Activities to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K for additional information.

Competition
 
Advances.  The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including the FRBs, commercial banks, investment banking divisions of commercial banks, and brokered deposits, largely on the basis of interest rates as well as types and weightings of collateral. Competition is often more significant when originating advances to larger members, which have greater access to the capital markets. Competition within the FHLBank System is somewhat limited; however, there may be some members of the Bank that have affiliates that are members of other FHLBanks. The Bank's ability to compete successfully with other FHLBanks for business depends primarily on pricing, dividends, capital stock requirements, credit and collateral terms, and products offered. Despite these competitive factors, advances rose 17.5% to

13



$74.5 billion at December 31, 2015 compared to $63.4 billion at December 31, 2014. This was primarily driven by increases in fixed- and floating-rate term advance borrowings by several members. Additional details regarding the advance portfolio are available in the Financial Condition discussion in Item 7. Management's Discussion and Analysis in this Form 10-K.

Purchase of Mortgage Loans.  Members have several alternative outlets for their mortgage loan production including Fannie Mae, Freddie Mac, and other secondary market conduits. The MPF Program competes with these alternatives on the basis of price and product attributes. Additionally, a member may elect to hold all or a portion of its mortgage loan production in portfolio, potentially funded by an advance from the Bank. The Bank’s focus is on purchasing MPF loans from community and regional member banks in its district.

Issuance of Consolidated Obligations.  The Bank competes with the U.S. Treasury, Fannie Mae, Freddie Mac and other GSEs as well as corporate, sovereign and supranational entities 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 cost. The Bank’s status as a GSE affords certain preferential treatment for its debt obligations under the current regulatory scheme for depository institutions operating in the U.S. as well as preferential tax treatment in a number of state and municipal jurisdictions. Any change in these regulatory conditions as they affect the holders of Bank debt obligations would likely alter the relative competitive position of such debt issuance and result in potentially higher costs to the Bank.

Major Customers

PNC Bank, N.A., Santander Bank, N.A., Chase Bank USA, N.A., and Ally Bank each had advance balances in excess of 10% of the Bank’s total portfolio as of December 31, 2015. See further discussion in Item 1A. Risk Factors and the “Credit and Counterparty Risk - TCE and Collateral” discussion in the Risk Management section in Item 7. Management’s Discussion and Analysis, both in this Form 10-K.

Personnel

As of December 31, 2015, the Bank had 213 full-time employee positions and two part-time employee positions, for a total of 214 full-time equivalents. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good.

Taxation

The Bank is exempt from all Federal, state and local taxation with the exception of real estate property taxes and certain employer payroll taxes.

AHP

The FHLBanks must set aside for the AHP annually, on a combined basis, the greater of an aggregate of $100 million or 10% of current year’s net income (GAAP net income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP). If the Bank experienced a full year net loss, as defined in Note 15 - Affordable Housing Program (AHP) to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K, the Bank would have no obligation to the AHP for the year except in the following circumstance: if the result of the aggregate 10% calculation described above is less than $100 million for all 11 FHLBanks, then the Act requires that each FHLBank contribute such prorated sums as may be required to assure that the aggregate contributions of the FHLBanks equal $100 million. The proration would be made on the basis of an FHLBank’s net income in relation to the income of all FHLBanks for the previous year. Each FHLBank’s required annual AHP contribution is limited to its annual net income. If an FHLBank finds that its required contributions are negatively impacting the financial stability of that FHLBank, it may apply to the Finance Agency for a temporary suspension of its contributions. As allowed by AHP regulations, an FHLBank can elect to allot fundings based on future periods’ required AHP contributions to be awarded during a year (referred to as Accelerated AHP). The Accelerated AHP allows an FHLBank to commit and disburse AHP funds to meet the FHLBank’s mission when it would otherwise be unable to do so, based on its normal funding mechanism.
 
For additional details regarding the AHP assessment, please see the Earnings Performance discussion in Item 7. Management’s Discussion and Analysis and Note 15 - Affordable Housing Program (AHP) in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K.

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SEC Reports and Corporate Governance Information

The Bank is subject to the informational requirements of the 1934 Act and, in accordance with the 1934 Act, files annual, quarterly and current reports with the SEC. The Bank’s SEC File Number is 000-51395. Any document filed with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, information statements and other information regarding registrants that file electronically with the SEC, including the Bank’s filings. The SEC’s website address is www.sec.gov. Copies of such materials can also be obtained at prescribed rates from the public reference section of the SEC at 100 F Street NE, Washington, D.C. 20549.
 
The Bank also makes the Annual Report filed on Form 10-K, Quarterly Reports filed on Form 10-Q, Current Reports filed on Form 8-K, and amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the 1934 Act available free of charge on or through its internet website as soon as reasonably practicable after such material is filed with, or furnished to, the SEC. The Bank’s internet website address is www.fhlb-pgh.com. The Bank filed the certifications of the President and Chief Executive Officer, Chief Financial Officer, and the Chief Accounting Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 with respect to the Bank’s 2015 Annual Report on Form 10-K as exhibits to this Report.
 
Information about the Bank’s Board and its committees and corporate governance, as well as the Bank’s Code of Conduct, is available in the governance section of the “Investor Relations” link on the Bank’s website at www.fhlb-pgh.com. Printed copies of this information may be requested without charge upon written request to the Legal Department at the Bank.

Item 1A: Risk Factors

There are many factors - including those beyond the Bank's control - that could cause financial results to differ significantly from the Bank's expectations. The following discussion summarizes some of the more important factors that should be considered carefully in evaluating the Bank's business. This discussion is not exhaustive and there may be other factors not described or factors, such as credit, market, operations, business, liquidity, interest rate and other risks, changes in regulations, and changes in accounting requirements, which are described elsewhere in this report (see the Risk Management discussion in Item 7. Management's Discussion and Analysis in this Form 10-K), which could cause results to differ materially from the Bank's expectations. However, management believes that these risks represent the material risks relevant to the Bank, its business and industry. Any factor described in this report could by itself, or together with one or more other factors, adversely affect the Bank's business operations, future results of operations, financial condition or cash flows.

The Bank is subject to legislative and regulatory actions, including a complex body of Finance Agency regulations, which may be amended in a manner that may affect the Bank's business, operations and financial condition and members' investment in the Bank.

The FHLBanks' business operations, funding costs, rights, obligations, and the environment in which FHLBanks carry out their housing-finance mission continue to be impacted by the evolving regulations impacting the finance industry. To date, the Bank has effectively implemented all requirements for derivatives clearing including establishing relationships with Futures Commission Merchants (FCMs) and an integration of swap execution facilities. Final regulations regarding uncleared swaps were issued in October, 2015. When they take effect, the Final Margin Rules will subject uncleared swaps and uncleared security-based swaps between Covered Swap Entities and Swap Entities and between Covered Swap Entities and financial end-users that have material swaps exposure (i.e., an average daily aggregate notional of $8 billion or more in uncleared swaps) to a mandatory two-way initial margin requirement. The Final Margin Rules will require variation margin to be exchanged daily for uncleared swaps and uncleared security-based swaps between Covered Swap Entities and Swap Entities and between Covered Swap Entities and all financial end-users (without regard to the swaps exposure of the particular financial end-user). Variation margin requirement under the Final Margin Rules will become effective for the Bank on March 1, 2017, and the initial margin requirements under the Final Margin Rules are expected to become effective for the Bank on September 1, 2020. Since the Bank is currently posting and collecting variation margin on uncleared swaps, it is not anticipated that the variation margin requirement under the Final Margin Rules will have a material impact on the Bank's costs. However, when the initial margin requirements under the Final Margin Rules become effective, the Bank anticipates that the cost of engaging in uncleared swaps may increase. Additional details regarding the Dodd-Frank Act and its implementing regulations are included in Legislative and Regulatory Developments in Item 7. Management's Discussion and Analysis in this Form 10-K.

The Bank continued to clear certain derivative transactions through a third-party central clearinghouse in 2015. These swaps are subject to mandatory reporting, record-keeping and documentation requirements established by applicable regulators, an initial and a variation margin requirement established by the clearinghouse and its clearing members. Guidance from the

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Commodity Futures Trading Commission (CFTC) also addressed treatment of customer collateral for cleared swaps and additional protections for such collateral.

The Bank's ability to achieve its risk management objectives has not been materially impacted by the initial derivative clearing requirements and these requirements have not negatively impacted the Bank's cost of funds. The impact of the recently adopted final regulations regarding uncleared swaps specifically the initial margin requirements that become effective for the Bank September 1, 2020, could have a material impact on the Bank’s cost of funds, results of operations and financial condition.

The Housing Act was intended to, among other things, address the housing finance crisis, expand the Finance Agency's authority and address GSE reform issues. Several GSE reform bills have been crafted, and the Administration and Congress will further address GSE reform going forward. Depending on the terms, such legislation could have a material effect on the Bank. The series of housing initiatives such as mortgage modification and refinancing programs enacted to aid homeowners have helped to stabilize and heal the housing market. In an attempt to boost credit availability for housing purchases, the FHA cut insurance premiums and continues to work toward clarifying putback and indemnification policies. The Housing GSEs, Fannie Mae and Freddie Mac also adopted clarifications to their putback policies. The effects on the mortgage market from these programs and policies, or the introduction of any new programs or policies may impact the value of the Bank's MBS holdings and how the Bank executes loan modifications on its portfolio of mortgages.

The FHLBanks are also governed by Federal laws and regulations as adopted by Congress and applied by the Finance Agency. The Finance Agency's extensive statutory and regulatory authority over the FHLBanks includes, without limitation, the authority to liquidate, merge or consolidate FHLBanks, redistrict or adjust equities among the FHLBanks. The Bank cannot predict if or how the Finance Agency could exercise such authority in regard to any FHLBank or the potential impact of such action on members' investment in the Bank. The Finance Agency also has authority over the scope of permissible FHLBank products and activities, including the authority to impose limits on those products and activities. The Finance Agency supervises the Bank and establishes the regulations governing the Bank. Changes in Finance Agency leadership may also impact the nature and extent of any new or revised regulations on the Bank.

The Bank cannot predict whether new regulations will be promulgated nor the effect of any new regulations (including, without limitation, capital and liquidity requirements on the Bank’s members) on the Bank's operations. Regulatory requirements on the Bank’s members may affect their capacity and demand for Bank products, and as a result, impact the Bank’s operations and financial condition. Changes in Finance Agency regulations and other Finance Agency regulatory actions could result in, among other things, changes in the Bank's capital requirements, an increase in the Banks' cost of funding, a change in permissible business activities, a decrease in the size, scope, or nature of the Banks' lending, investment or mortgage purchase program activities, or a decrease in demand for the Bank's products and services, which could negatively affect its financial condition and results of operations and members' investment in the Bank. As discussed below, the Finance Agency has recently issued a final rule on membership.

Any future legislative changes to the Act may significantly affect the Bank's business, results of operations and financial condition.

The loss of significant Bank members or borrowers may have a negative impact on the Bank's advances and capital stock outstanding and could result in lower demand for its products and services, lower dividends paid to members and higher borrowing costs for remaining members, all of which may affect the Bank's results of operations and financial condition.

One or more significant Bank borrowing members could choose to decrease their business activities with the Bank, move their business to another FHLBank, merge into a nonmember or withdraw their membership, which could lead to a significant decrease in the Bank's total assets. Membership withdrawal may be due to a move to another FHLBank district. If member institutions are acquired by institutions outside the Bank's district and the acquiring institution decides not to maintain membership (for example, by dissolving charters), the Bank may be adversely affected, resulting in lower demand for products and services and ultimately requiring the redemption of related capital stock. In the event the Bank would lose one or more large borrowers that represent a significant proportion of its business, the Bank could, depending on the magnitude of the impact, compensate for the loss by suspending, or otherwise restricting, dividend payments and repurchases of excess capital stock, raising advance rates, attempting to reduce operating expenses (which could cause a reduction in service levels or products offered) or by undertaking some combination of these actions. The magnitude of the impact would depend, in part, on the Bank's size and profitability at the time the financial institution ceases to be a borrower.

At December 31, 2015, the Bank's five largest customers, PNC Bank, N.A., Chase Bank USA, N.A., Santander Bank, N.A., TD Bank, N.A., and Ally Bank, accounted for 72% of its TCE and owned 68% of its outstanding capital stock. Of these

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members, PNC Bank, N.A., Santander Bank, N.A., Ally Bank and Chase Bank USA, N.A. each had outstanding advance balances in excess of 10% of the total portfolio. If any of the Bank’s five largest customers paid off their outstanding advances, reduced their letter of credit activity with the Bank or withdrew from membership, the Bank could experience a material adverse effect on its outstanding advance levels and TCE, which would impact the Bank's financial condition and results of operations. As discussed in the Legislative and Regulatory Developments section of this Form 10-K, the Finance Agency has issued a final membership regulation. Unlike the proposed rule, the final regulation does not impose ongoing asset tests on prospective and current Bank members. As a result, under this final regulation the Bank does not face the risk of losing existing members (with resulting potentially material reduction in advance balances) due to failing to meet an ongoing asset test requirement. The final regulation as with the proposed regulation prohibits captive insurance companies from becoming members of an FHLBank and establishes principal place of business requirements for new insurance company membership applicants to an FHLBank. Future legislative changes or Finance Agency regulatory actions regarding eligibility for membership in an FHLBank to the extent they result in a significant reduction in the Bank’s outstanding advances could affect the Bank’s financial condition and results of operations.

See further discussion of the final membership regulation in Legislative and Regulatory Developments in Item 7. Management's Discussion and Analysis in this Form 10-K.

The Bank faces competition for advances, mortgage loan purchases and access to funding, which could negatively impact earnings.

The Bank's primary business is making advances to its members. The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including commercial banks and their investment banking divisions, the FRBs, providers of brokered deposits and, in some circumstances, other FHLBanks. Members have access to alternative funding sources, which may offer more favorable terms than the Bank offers on its advances, including more flexible credit or collateral standards. In addition, many of the Bank's competitors are not subject to the same body of regulations applicable to the Bank, which enables those competitors to offer products and terms that the Bank is not able to offer.

The availability of alternative funding sources that is more attractive than those funding products offered by the Bank may significantly decrease the demand for advances. Any changes made by the Bank in the pricing of its advances in an effort to compete effectively with these competitive funding sources may decrease advance profitability. A decrease in advance demand or a decrease in the Bank's profitability on advances could negatively affect its financial condition and results of operations.

In connection with the MPF Program, the Bank is subject to competition regarding the purchase of conventional, conforming fixed-rate mortgage loans. In this regard, the Bank faces competition in the areas of customer service, purchase prices for the MPF loans and ancillary services such as automated underwriting. The Bank's strongest competitors are large mortgage aggregators and the other housing GSEs, Fannie Mae and Freddie Mac. The Bank may also compete with other FHLBanks with which members have a relationship through affiliates. Most of the FHLBanks participate in the MPF Program or a similar program known as the Mortgage Purchase Program (MPP). Competition among FHLBanks for MPF business may be affected by the requirement that a member and its affiliates can sell loans into the MPF Program through only one FHLBank relationship at a time. Some of these mortgage loan competitors have greater resources, larger volumes of business, longer operating histories and more product offerings. In addition, because the volume of conventional, conforming fixed-rate mortgages fluctuates depending on the level of interest rates, the demand for MPF Program products could diminish. Increased competition can result in a reduction in the amount of mortgage loans the Bank is able to purchase and consequently lower net income.

The FHLBanks also compete with the U.S. Treasury, Fannie Mae and Freddie Mac, as well as corporate, sovereign and supranational entities 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 or lower amounts of debt issued at the same cost than otherwise would be the case. Increased competition could adversely affect the Bank's ability to have access to funding, reduce the amount of funding available or increase the cost of funding. Any of these effects could adversely affect the Bank's financial condition and results of operations.

Global financial market disruptions could result in uncertainty and unpredictability for the Bank in managing its business. Geopolitical conditions or a natural disaster, especially one affecting the Bank's district, customers or counterparties, could also adversely affect the Bank's business, results of operations or financial condition.

The Bank's business and earnings are affected by international, domestic and district-specific business and economic conditions. These economic conditions, which may also affect counterparty and members' business, include real estate values, residential mortgage originations, short-term and long-term interest rates, inflation and inflation expectations, unemployment

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levels, money supply, fluctuations in both debt and equity markets, and the strength of the foreign, domestic and local economies in which the Bank operates.

The Bank is affected by the global economy through member ownership and investor appetite. Changes in perception regarding the stability of the U.S. economy, the creditworthiness of the U.S. government, the degree of government support of financial institutions or the depletion of funds available for investment by overseas investors could lead to changes in foreign interest in investing in, or supporting, U.S. financial institutions or holding FHLBank debt. While the Bank’s debt costs are still at historical lows, the swap spreads on debt have tightened as the yield curve for U.S. Treasuries has flattened due to increased corporate debt issuance and selling of U.S. Treasuries.

Geopolitical conditions can also affect earnings. Acts or threats of terrorism, actions taken by the U.S. or other governments in response to acts or threats of terrorism, or military conflicts, could affect business and economic conditions in the U.S., including both debt and equity markets.

Damage caused by acts of terrorism or natural disasters could adversely impact the Bank or its members, leading to impairment of assets and potential loss exposure. Real property that could be damaged in these events may serve as collateral for advances, or security for the mortgage loans the Bank purchases from its members and the MBS held as investments. If this real property is not sufficiently insured to cover the damages that may occur, there may be insufficient collateral to secure the Bank's advances or investment securities and the Bank may be severely impaired with respect to the value of these assets.

The Bank is also exposed to risk related to a changing interest rate environment, especially in difficult economic times. If this risk is not properly monitored and managed, it could affect the Bank's results of operations and financial condition.

State and municipal governments continue to experience significant budgetary problems. These entities may be forced to cut expenses, raise taxes, or both. The expense reductions could include reduced government employment levels. Any of the above actions or the inability of state and municipal governments to address budgetary problems could have a negative effect on the economy. Many of these government entities have already suffered credit downgrades and funding challenges over the past several years. Many member banks invest in securities of, or lend directly to, these state and municipal government entities; these members could be negatively impacted by additional credit deterioration.

The Bank is jointly and severally liable for the consolidated obligations of other FHLBanks. Additionally, the Bank may receive from or provide financial assistance to the other FHLBanks. Changes in the Bank's, other FHLBanks' or other GSEs' credit ratings, as well as the rating of the U.S. Government, may adversely affect the Bank's ability to issue consolidated obligations and enter into derivative transactions on acceptable terms.

Each of the FHLBanks relies upon the issuance of consolidated obligations as a primary source of funds. Consolidated obligations are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, the Bank is jointly and severally liable with the other FHLBanks for all consolidated obligations issued, regardless of whether the Bank receives all or any portion of the proceeds from any particular issuance of consolidated obligations. As of December 31, 2015, out of a total of $905.2 billion in par value of consolidated obligations outstanding, the Bank was the primary obligor on $90.8 billion, or approximately 10.0% of the total.

The Finance Agency at its discretion may also require any FHLBank to make principal or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. For example, if the assets of an FHLBank are insufficient to satisfy all of its direct obligations on its outstanding consolidated obligations, the Finance Agency could allocate the outstanding liability among the other FHLBanks on a pro-rata or other basis. Accordingly, the Bank could incur significant liability beyond its primary obligation under consolidated obligations which could negatively affect the Bank's financial condition and results of operations.

The Bank or any other FHLBank may be required to, or may voluntarily decide to, provide financial assistance to one or more other FHLBanks. The Bank could be in the position of either receiving or providing such financial assistance, which could have a material effect on the Bank's financial condition and the members' investment in the Bank.

As of March 9, 2016, FHLBank System consolidated obligation bonds have been assigned Aaa/Stable Outlook and AA+/Stable Outlook ratings by Moody's and S&P, respectively. Consolidated obligation discount notes have been assigned a P-1 and A-1+ rating by Moody's and S&P, respectively. In addition, all FHLBanks have been assigned a long-term rating of Aaa/Stable Outlook and AA+/Stable Outlook by Moody’s and S&P, respectively. All FHLBanks have been assigned a short-term rating of P-1 and A-1+ by Moody’s and S&P, respectively. These ratings indicate that the FHLBanks have a strong capacity to meet their

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commitments to pay principal of and interest on consolidated obligations and that the consolidated obligations are judged to be of high quality with minimal credit risk. The ratings also reflect the FHLBanks' status as GSEs.

It is possible that the credit rating of an FHLBank, another GSE or the U.S. government could be lowered further by at least one NRSRO. This could adversely affect the Bank's costs of doing business as described above. In addition, further downgrades could negatively impact the Bank's reputation and may result in heightened scrutiny by the regulator.

Additional ratings actions or negative guidance may adversely affect the Bank's cost of funds and ability to issue consolidated obligations and enter into derivative transactions on acceptable terms, which could negatively affect financial condition and results of operations. In some states, acceptance of the Bank's letters of credit as collateral for public funds deposits requires an AAA rating from at least one rating agency. If all the NRSROs downgrade their ratings, the Bank's letters of credit business in those states may be affected and the amount of the Bank's letters of credit may be reduced, both of which could negatively affect financial condition and results of operations. The Bank's costs of doing business and ability to attract and retain members could also be adversely affected if the credit ratings assigned to the consolidated obligations were lowered from AA+.

The Bank's business is dependent upon its computer information systems. An inability to process information or implement technological changes, or an interruption in the Bank's systems, may result in lost business or increased operational risk. The Bank's dependence on computer systems and technologies to engage in business transactions and to communicate with its stakeholders has increased the Bank's exposure to cyber-security risks and cyber incidents.

The Bank's business is dependent upon its ability to effectively exchange and process information using its computer information systems. The Bank's products and services require a complex and sophisticated computing environment, which includes purchased and custom-developed software. Maintaining the effectiveness and efficiency of the Bank's operations is dependent upon the continued timely implementation of technology solutions and systems, which may require ongoing capital expenditures, as well as the ability to sustain ongoing operations during technology solution implementations or upgrades. As interest rates continue to be at historic lows, there is the potential for negative interest rates. If that occurs, certain automated processes in the Bank may have to be completed manually which may increase operational risk. If the Bank were unable to sustain its technological capabilities, it may not be able to remain competitive, and its business, financial condition and profitability may be significantly compromised.

The Bank's dependence on computer systems and technologies to engage in business transactions and to communicate with its stakeholders has increased the Bank's exposure to cyber-security risks and cyber incidents. For example, the Bank provides on-line banking transactional capability to enable its members to execute borrowing and other transactions with the Bank. Although the Bank has security measures in place and devotes significant resources to secure the Bank's computer systems and networks, it might not be able to anticipate or implement effective preventive measures against all security breaches. To date, the Bank has not experienced a successful cyber-security incident related to malicious code, unauthorized access or other various cyber-attack vectors that affected Bank systems or operations in any material manner. The Bank’s technology control environment, along with security policies and standards, incident response procedures, security controls testing and dedicated information security resources, have protected the Bank against cyber-security attacks. If a successful penetration were to occur, it might result in unauthorized access to digital systems for purposes of misappropriating assets or sensitive information (including confidential information of the Bank, members, counterparties or mortgage loan borrowers), corrupt data or cause operational disruption. This may result in financial loss or a violation of privacy or other laws. The Bank could incur substantial costs and suffer other negative consequences as a result, including but not limited to remediation costs, increased security costs, litigation, penalties, and reputational damage.

In addition to internal computer systems, the Bank relies on third party vendors and service providers for many of its communications and information systems needs. Any failure or interruption of these systems, or any disruption of service, could result in failures or interruptions in the Bank's ability to conduct and manage its business effectively, including, and without limitation, its hedging, advances and wire activities. While the Bank has implemented a Business Continuity Plan, there is no assurance that such failure or interruptions will not occur or, if they do occur, that they will be adequately addressed by the Bank or the third parties on which the Bank relies. Any failure or interruption could significantly harm the Bank's customer relations and business operations, which could negatively affect its financial condition, profitability and cash flows. Additionally, any breach of sensitive Bank data stored at a third party could result in financial loss, damage to the Bank’s reputation, litigation, potential legal or regulatory actions and penalties, increased regulatory scrutiny and increased expense in terms of incident response costs and damages. While the Bank does assess the adequacy of security controls for its significant third parties, there is no assurance that such a breach will not occur.


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Regulatory changes are resulting in necessary updates to the Bank's current computer information systems to support the requirements. Given the timing of these requirements, changes to the Bank's existing infrastructure may not be fully implemented and the Bank may need to implement work-arounds, at least in the short term. Recent legislative and regulatory proposals regarding enhanced cybersecurity standards and requirements may result in increased costs to the Bank as well as additional work-arounds until the Bank fully implements technology necessary to meet these additional requirements.

The Bank may be unable to optimally manage its market risk due to unexpected sizable adverse market movements that threaten the Bank's interest rate risk/market risk profile faster than Bank strategies can offset. In addition, the Bank’s MBS portfolio introduces specific interest rate and prepayment risk, which may impact the value of and income associated with those investments. Not prudently managing this risk may adversely affect the Bank's net interest income, results of operations and the market value of its equity.

The Bank is subject to various market risks, including interest rate risk and prepayment risk. The Bank realizes income primarily from the spread between interest earned on advances and investment securities and interest paid on debt and other liabilities, known as net interest income. The Bank's financial performance is affected by fiscal and monetary policies of the Federal government and its agencies and in particular by the policies of the Federal Reserve. The Federal Reserve's policies, which are difficult to predict, directly and indirectly influence the yield on the Bank's interest-earning assets and the cost of interest-bearing liabilities. Although the Bank uses various methods and procedures to monitor and manage exposures due to changes in interest rates, the Bank may experience instances when the timing of the re-pricing of interest-bearing liabilities does not coincide with the timing of re-pricing of interest-earning assets, or when the timing of the maturity or paydown of interest-bearing liabilities does not coincide with the timing of the maturity or paydown of the interest-earning assets.

The Bank's ability to anticipate changes regarding the direction and speed of interest rate changes, or to hedge the related exposures, significantly affects the success of the asset and liability management activities and the level of net interest income. The Bank uses derivative instruments to reduce interest rate risk. The Bank has strategies which reduce the amount of one-sided fair value adjustments and the resulting impact to the Bank's income. However, market movements and volatility affecting the valuation of instruments in hedging relationships can cause income volatility in the form of hedge ineffectiveness. Should the use of derivatives be limited, with that activity being replaced with a higher volume of debt funding, the Bank may still experience income volatility driven by the market and interest rate sensitivities.

In addition, the Bank's profitability and the market value of its equity are significantly affected by its ability to manage interest rate risks. The Bank uses a number of measures and analyses to monitor and manage interest rate risk. Given the unpredictability of the financial markets, capturing all potential outcomes in these analyses is not practical. Key assumptions include, but are not limited to, advance volumes and pricing, market conditions for the Bank's consolidated obligations, interest rate spreads and prepayment speeds and cash flows on mortgage-related assets. These assumptions are inherently uncertain and, as a result, the measures cannot precisely predict the impact of higher or lower interest rates on net interest income or the market value of equity. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.

With respect to the Bank’s MBS portfolio, increases in interest rates may slow prepayments and extend mortgage cash flows. If the debt funding the mortgage assets matures, it could be re-issued at a higher rate and decrease the Bank's net interest income.

Decreases in interest rates may cause an increase in mortgage prepayments and may result in increased premium amortization expense and substandard performance in the Bank's mortgage portfolio as the Bank experiences a return of principal that it must re-invest in a lower rate environment, adversely affecting net interest income over time, if associated debt remains outstanding (i.e., debt overhang).

See additional discussion in Risk Management in Item 7. Management's Discussion and Analysis in this Form 10-K.

The Bank relies on both internally and externally developed models to manage market and other risks, to make business decisions and for financial accounting and reporting purposes. The Bank's business could be adversely affected if these models fail to produce reliable and useful results.

The Bank makes significant use of business and financial models for making business decisions and managing risk. For example, the Bank uses models to measure and monitor exposures to interest rate and other market risks and credit risk, including prepayment risk. A credit scoring model is also used in part as a basis for credit decisions. The Bank also uses models in determining the fair value of certain financial instruments. The information provided by these models is also used in making business decisions relating to strategies, initiatives, transactions and products and in financial reporting.

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Models are inherently imperfect predictors of actual results because they are based on assumptions about future performance. The risk metrics, valuations, OTTI and loan loss reserve estimations produced by the Bank's models may be different from actual results, which could adversely affect the Bank's business results, cash flows, fair value of net assets, business prospects and future earnings. Outdated information or inaccurate internal scoring could result in poor credit decisions. Changes in any models or in any of the assumptions, judgments or estimates used in the models may cause the results generated by the model to be materially different. Changes to the Bank’s model inputs could occur due to changes in market participants’ valuation practices.

If the models are not reliable or the Bank does not use them appropriately, the Bank could make poor business decisions, including asset and liability management decisions, or other decisions, which could result in an adverse financial impact. Further, any strategies that the Bank employs to attempt to manage the risks associated with the use of models may not be effective. See Quantitative Disclosures Regarding Market Risk - The Bank's Market Risk Model discussion in Risk Management in Item 7. Management's Discussion and Analysis in this Form 10-K for more information.

The Bank invests in MBS and is subject to the risk of credit deterioration. The Bank is also subject to the risk that MBS servicers may fail to perform their obligations to service mortgage loans as collateral for MBS. These risks have adversely impacted the Bank's results of operations and could impact the Bank’s capital position.

The Bank currently invests in Agency and other U.S. obligation MBS, which support the Bank’s mission. Prior to 2008, the Bank also had invested in private label MBS, which exposed the Bank to a higher level of credit risk relative to the other investments within the Bank’s portfolio, and resulted in credit-related OTTI losses over the last several years. However, this portion of the Bank’s portfolio has continued to run off, with no new investments purchased since 2007; minimal credit-related OTTI losses were recognized in 2015. Given the profile of the current portfolio, the Bank is subject to less credit risk.

MBS are backed by residential mortgage loans, the properties of which are geographically diverse, but could include exposure in some areas that experienced a rapid decline in property values. The MBS portfolio is also subject to interest rate risk, prepayment risk, operational risk, servicer risk and originator risk, all of which can have a negative impact on the underlying collateral of the MBS investments. The rate and timing of unscheduled payments and collections of principal on mortgage loans serving as collateral for these securities are difficult to predict and can be affected by a variety of factors, including the level of prevailing interest rates, restrictions on voluntary prepayments contained in the mortgage loans, the availability of lender credit, loan modifications and other economic, demographic, geographic, tax and legal factors.

MBS servicers have a significant role in servicing the mortgage loans that serve as collateral for the Bank's MBS portfolio, including playing an active role in loss mitigation efforts and making servicer advances. The Bank's credit risk exposure to the servicer counterparties includes the risk that they will not perform their obligation to service these mortgage loans, which could adversely affect the Bank's financial condition or results of operations.

The MPF Program has different risks than those related to the Bank's traditional advance business, which could adversely impact the Bank's profitability.

The Bank participates in the MPF Program with the FHLBank of Chicago as MPF provider. Net mortgage loans held for portfolio accounted for 3.2% of the Bank's total assets as of December 31, 2015 and approximately 17.3% of the Bank's total interest income in 2015. In contrast to the Bank's traditional member advance business, the MPF Program is highly subject to competitive pressures, more susceptible to loan losses, and also carries more interest rate risk, prepayment risk and operational complexity. The residential mortgage loan origination business historically has been a cyclical industry, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. General changes in market conditions could have a negative effect on the mortgage loan market. These would include, but are not limited to: rising interest rates slowing mortgage loan originations; an economic downturn creating increased defaults and lowered housing prices; innovative products that do not currently meet the criteria of the MPF Program; and new government programs or mandates. Any of these changes could have a negative impact on the profitability of the MPF Program. The Finance Agency made a series of changes to the Home Affordable Refinance Program (HARP) in an effort to assist more eligible borrowers who can benefit from refinancing of their home mortgage and extended the program through December 31, 2016. Other agencies have also implemented programs over the last few years aimed at preventing foreclosure. The Bank offers a loan modification program for its MPF Program loans. To date, the Bank has not experienced any significant impact on its portfolio levels from the HARP program, the Bank's MPF loan modification program or the existing foreclosure prevention programs. However, program execution and related changes, as well as any new programs at either the federal or state level, may change that experience.


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The rate and timing of unscheduled payments and collections of principal on mortgage loans are difficult to predict and can be affected by a variety of factors, including the level of prevailing interest rates, the availability of lender credit, and other economic, demographic, geographic, tax and legal factors. The Bank manages prepayment risk through a combination of consolidated obligation issuance and, to a lesser extent, derivatives. If the level of actual prepayments is higher or lower than expected, the Bank may experience a mismatch with a related consolidated obligation issuance, which could have an adverse impact on net interest income. Also, increased prepayment levels will cause premium amortization to increase, reducing net interest income, and increase the potential for debt overhang. In certain MPF Program products, increased prepayments may also reduce credit enhancements available to absorb credit losses. To the extent one or more of the geographic areas in which the Bank's MPF loan portfolio is concentrated experiences considerable declines in the local housing market, declining economic conditions or a natural disaster, the Bank could experience an increase in the required allowance for loan losses on this portfolio.

The MPF loan portfolio is analyzed for risk of loss due to credit factors through the allowance for loan losses process. If delinquency and loss rates on MPF loans increase, or there are additional declines in residential real estate values, the Bank will likely experience increases in the allowance for loan losses on its MPF loan portfolio.

As a part of the MPF Program, mortgage loans with an LTV ratio of 80% or greater at origination are required to have Primary Mortgage Insurance (PMI) to provide a limited amount of credit protection to the Bank. PMI companies experienced significant credit deterioration due to the mortgage crisis. If PMI companies are unable to pay claims at the contractual rate, additional loan losses could occur.

For the MPF Plus product Master Commitments, Supplemental Mortgage Insurance (SMI) coverage was typically available for PFIs to purchase. Due to a lack of insurers writing new SMI policies, the MPF Plus product is not currently being offered to members and the Bank has not purchased loans under MPF Plus commitments since July 2006. For any legacy MPF Plus SMI exposure with ratings issues, the Bank required the affected PFIs to secure the SMI exposure.

If FHLBank of Chicago changes or ceases to operate the MPF Program, this could have a negative impact on the Bank's mortgage purchase business, and, consequently, a related decrease in the Bank's financial condition and results of operations. Additionally, if FHLBank of Chicago or its third party vendors experiences operational difficulties, such difficulties could have a negative impact on the Bank's financial condition and results of operations.

For a description of the MPF Program, the obligations of the Bank with respect to loan losses and a PFI's obligation to provide credit enhancement, see the Mortgage Partnership Finance Program discussion in Item 1. Business, and Item 7. Management's Discussion and Analysis in this Form 10-K. See additional details regarding SMI exposure in the Credit and Counterparty Risk - Mortgage Loans, BOB Loans and Derivatives discussion in Risk Management in Item 7. Management's Discussion and Analysis in this Form 10-K.

The Bank may be limited in its ability to access the capital markets, which could adversely affect the Bank's liquidity. In addition, if the Bank's ability to access the long-term debt markets would be limited, this may have a material adverse effect on its results of operations and financial condition, as well as its ability to fund operations, including advances.

The Bank's ability to operate its business, meet its obligations and generate net interest income depends primarily on the ability to issue large amounts of debt frequently, with a variety of maturities and call features and at attractive rates. The Bank actively manages its liquidity position to maintain stable, reliable, and cost-effective sources of funds, while taking into account market conditions, member credit demand for short-and long-term advances, investment opportunities and the maturity profile of the Bank's assets and liabilities. The Bank recognizes that managing liquidity is critical to achieving its statutory mission of providing low-cost funding to its members. In managing liquidity risk, the Bank is required to maintain a level of liquidity in accordance with policies established by management and the Board and Finance Agency guidance. See the Liquidity and Funding Risk discussion in Risk Management in Item 7. Management's Discussion and Analysis in this Form 10-K for additional information on the Finance Agency guidance.

The ability to obtain funds through the sale of consolidated obligations depends in part on current conditions in the capital markets and the short-term capital markets in particular. Accordingly, the Bank may not be able to obtain funding on acceptable terms, if at all. If the Bank cannot access funding when needed, its ability to support and continue its operations, including providing term funding to members, would be adversely affected, which would negatively affect its financial condition and results of operations.

Regulations related to capital and liquidity have impacted how dealers are managing their balance sheets. The capacity for FHLBank debt is lower, as dealers have directed their focus on those assets that provide a higher return on equity. The

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FHLBanks are engaged in discussions with dealers to identify issues and provide strategies that could provide benefits to the business needs of those entities and maintain the level of FHLBank debt on the dealers’ balance sheets.

The U.S. Treasury has the authority to prescribe the form, denomination, maturity, interest rate and conditions of consolidated obligations issued by the FHLBanks. The U.S. Treasury can, at any time, impose either limits or changes in the manner in which the FHLBanks may access the capital markets. For example, the U.S. Treasury could require the Bank to hold additional liquidity, which could adversely impact the type, amount and profitability of various advance products the Bank could make available to its members.

The Administration and Congress may continue deliberating GSE reform. The outcome of those deliberations and resulting legislation, if any, could have a material impact on the issuance of and costs associated with FHLBank debt.

Ineffective or inadequate Bank governance, risk identification and management may negatively impact the Bank's results of operations and financial condition.

The Bank is subject to the risk of ineffective or inadequate leadership or governance. Management could: make poor business decisions, engage in poor succession planning, or make decisions based on inaccurate or incomplete data; adopt ill-formed policy without understanding the implications to the Bank and its members; fail to identify and properly manage and mitigate risks to the Bank, all of which could negatively impact the Bank's results of operations and financial condition. The Bank develops and monitors a periodic strategic plan, an annual operating plan and an ongoing financial forecast to generate the proper level of information and background with which to manage the Bank effectively and identify risks and concerns to be monitored. Improper alignment of the Bank's strategic plan and operating plan with the Bank's risk profile and appetite may result in inconsistent management or governance.

The Bank is subject to credit risk due to default, including failure or ongoing instability of any of the Bank's member, derivative, money market or other counterparties, which could adversely affect the Bank's results of operations or financial condition.

The Bank faces credit risk on advances, mortgage loans, investment securities, derivatives, certificates of deposit, and other financial instruments. The Bank protects against credit risk on advances through credit underwriting standards and collateralization. In addition, under certain circumstances the Bank has the right to obtain additional or substitute collateral during the life of an advance to protect its security interest. The Act defines eligible collateral as certain investment securities, residential mortgage loans, deposits with the Bank, and other real estate related assets. All capital stock of the Bank owned by the borrower is also available as supplemental collateral. In addition, members that qualify as CFIs may pledge secured small-business, small-farm, and small-agribusiness loans as collateral for advances. The Bank is also allowed to make advances to nonmember housing associates and requires them to deliver adequate collateral.

The types of collateral pledged by members are evaluated and assigned a borrowing capacity, generally based on a percentage of its value. This value can be based on either book value or market value, depending on the nature and form of the collateral being pledged. The volatility of market prices and interest rates could affect the value of the collateral held by the Bank as security for the obligations of Bank members as well as the ability of the Bank to liquidate the collateral in the event of a default by the obligor. Volatility within collateral indices may affect the method used in determining collateral weightings, which would ultimately affect the eventual collateral value. With respect to TCE, including advances, the Bank's policies require the Bank to be over-collateralized. In addition, all advances are current and no loss has ever been incurred in the portfolio. Based on these factors, no allowance for credit losses on advances is required. The Bank has policies and procedures in place to manage the collateral positions; these are subject to ongoing review, evaluation and enhancements as necessary.

If member institution failures and mergers or consolidations occur affecting the Bank's district, particularly out-of-district acquirers, this activity may reduce the number of current and potential members in the Bank's district. The resulting loss of business could negatively impact the Bank's financial condition and results of operations. Additionally, if a Bank member fails and the FDIC or the member (or another applicable entity) does not either (1) promptly repay all of the failed institution's obligations to the Bank or (2) assume the outstanding advances, the Bank may be required to liquidate the collateral pledged by the failed institution to satisfy its obligations to the Bank. If that were the case, the proceeds realized from the liquidation of pledged collateral may not be sufficient to fully satisfy the amount of the failed institution's obligations and the operational cost of liquidating the collateral. The Bank did not experience any member failure in 2015.

The Bank has expanded its number of insurance company members. There are several unique risks the Bank may be exposed to regarding members in the insurance industry. To the extent the Bank determines that the risk it faces in regard to an insurance company or insurance company members in a specific state requires additional mitigation, the Bank takes steps to

23


mitigate this risk. These steps may include limits on eligible collateral and establishing over-collateralization levels to address risk of collateral volatility.

In 2014, the Bank approved its first Community Development Financial Institution (CDFI) member and in 2015 added a second. CDFIs are not generally subject to a banking or insurance primary regulatory scheme. The Bank’s lending practices for CDFIs recognize risk differences such as the potential application of the federal bankruptcy code for the insolvency of a CDFI. The Bank takes steps to mitigate this risk, which may include requiring specific over-collateralization levels or limits on eligible collateral. For all insurance company and CDFI members, the Bank requires delivery of collateral pledged to secure the Bank’s advances and other credit products provided to such members.

The Bank follows Board-established guidelines on unsecured extensions of credit which limit the amounts and terms of unsecured credit exposure to highly rated counterparties, the U.S. government and other FHLBanks. The Bank's primary unsecured credit exposure includes Federal funds and money market exposure as well as the unsecured portion of any derivative transaction. Unsecured credit exposure to any counterparty is limited by the credit quality and capital level of the counterparty and by the capital level of the Bank. Nevertheless, the insolvency of a major counterparty or the inability of a major counterparty to meet its obligations under such transactions or other agreement could cause the Bank to incur losses and have an adverse effect on the Bank's financial condition and results of operations.

In addition, the Bank's ability to engage in routine derivatives, funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide disruptions in which it may be difficult for the Bank to find counterparties for such transactions.

If the number of high quality counterparties available for uncleared hedging transactions decreases, the Bank's ability to enter into hedging transactions may be constrained. As a result, the Bank may not be able to effectively manage interest rate risk, which could negatively affect its results of operations and financial condition. In addition, the Bank may be limited in the number of counterparties available with which it can conduct business with respect to money market investments, liquidity positions and other business transactions. It may also affect the Bank's credit risk position and the advance products the Bank can offer to members. The Bank has limited its unsecured investment activity to overnight maturities only with European counterparties in AAA- or AA-rated Eurozone countries; term investment exposure is limited to counterparties in the U.S., Canada and Australia. The Bank also requires all derivatives to be collateralized.

For additional discussion regarding the Bank's credit and counterparty risk, see the Credit and Counterparty Risk discussion in Risk Management in Item 7. Management's Discussion and Analysis in this Form 10-K.

The Bank may fail to maintain a sufficient level of retained earnings, fail to meet its minimum regulatory capital requirements, or be otherwise designated by the Finance Agency as undercapitalized, which would impact the Bank's ability to conduct business “as usual,” result in prohibitions on dividends, excess capital stock repurchases and capital stock redemptions and potentially impact the value of Bank membership. This designation may also negatively impact the Bank's high credit rating provided by certain NRSROs and could hinder the achievement of the Bank's economic/community development mission.

The Bank is required to maintain sufficient permanent capital, defined as capital stock plus retained earnings, to meet its combined risk based capital (RBC) requirements. These requirements include components for credit risk, market risk and operational risk. Each of the Bank's investments carries a credit RBC requirement that is based on the rating of the investment. As a result, ratings downgrades or credit deterioration of individual investments would cause an increase in the total credit RBC requirement. Additionally, the market values on private label MBS would have a significant impact on the market RBC requirement. The Bank is also required to maintain certain regulatory capital and leverage ratios, which it has done. Any violation of these requirements will result in prohibitions on stock redemptions and repurchases and dividend payments.

Under the Finance Agency's final Prompt Correct Action Regulation (PCA Regulation), if the Bank becomes undercapitalized either by failing to meet its regulatory capital requirements, by the Finance Agency exercising its discretion to categorize an FHLBank as undercapitalized or by the Bank failing to meet any additional Finance Agency-imposed minimum capital requirements, it will also be subject to asset growth limits. This is in addition to the capital stock redemption, excess capital stock repurchase and dividend prohibitions noted above. If it becomes significantly undercapitalized, it could be subject to additional actions such as replacement of its Board and management, required capital stock purchase increases and required asset divestiture. The regulatory actions applicable to an FHLBank in a significantly undercapitalized status may also be imposed on an FHLBank by the Finance Agency at its discretion on an undercapitalized FHLBank. Violations could also result

24


in changes in the Bank's member lending, investment or MPF Program purchase activities and changes in permissible business activities, as well as restrictions on dividend payments and capital stock redemptions and repurchases.

Declines in market conditions could also result in a violation of regulatory or statutory capital requirements and may impact the Bank's ability to redeem capital stock at par value. For example, this could occur if: (1) a member were to withdraw from membership (or seek to have its excess capital stock redeemed) at a time when the Bank is not in compliance with its minimum capital requirements or is deemed to be undercapitalized despite being in compliance with its minimum capital requirements; or (2) it is determined the Bank's capital stock is or is likely to be impaired as a result of losses in, or the depreciation of, assets which may not be recoverable in future periods. The Bank's primary business is making advances to its members, which in turn creates capital for the Bank. As members increase borrowings, the Bank's capital grows. As advance demand declines, so does the amount of capital required to support those balances. Ultimately, this capital would be returned to the member. Without new borrowing activity to offset the run-off of existing borrowings, capital levels could eventually decline. The Bank has the ability to increase the capital requirements on existing borrowings to boost capital levels; however, this may deter new borrowings and reduce the value of membership as the return on that investment may not be as profitable to the member as other investment opportunities.

Under Finance Agency regulation, the Bank may pay dividends on its capital stock only out of unrestricted retained earnings or current net income. The payment of dividends is subject to certain statutory and regulatory restrictions (including that the Bank is in compliance with all minimum capital requirements and has not been designated undercapitalized by the Finance Agency) and is highly dependent on the Bank's ability to continue to generate future net income and maintain adequate retained earnings and capital levels.

The Finance Agency now requires the FHLBanks to conduct annual stress tests, which are used to evaluate each FHLBank's capital adequacy under adverse economic and financial conditions. Each FHLBank is required to provide an annual report on the results of the stress tests to the Finance Agency and Federal Reserve. The Bank first reported stress test results in April 2014 and the latest results were reported April 2015. The regulator moved the next stress test reporting to August 2016. See the Risk Governance discussion in Item 7. Management's Discussion and Analysis in this Form 10-K for additional details regarding the current year stress test results.

The Bank's accounting policies and methods are fundamental to how the Bank reports its market value of equity, financial condition and results of operations, and they require management to make estimates about matters that are inherently uncertain.

The Bank has identified several accounting policies as being critical to the presentation of its financial statements because they require management to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be recorded under different conditions or using different assumptions. These critical accounting policies relate to the Bank's determination of fair values, accounting for derivatives, and accounting for OTTI for investment securities, among others. Additional information is included in the Critical Accounting Polices and Estimates section in Item 7. Management's Discussion and Analysis in this Form 10-K.

Bank management exercises significant judgment in assigning fair value to all of its financial assets and liabilities. These fair values are reported in Note 19 - Estimated Fair Values to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K. The fair values assigned to financial assets and liabilities have a considerable impact on the Bank's market value of equity. If market values are inaccurate, decisions regarding management of the balance sheet may be negatively affected. Management monitors market conditions and takes what it deems to be appropriate action to preserve the value of equity and earnings. The ability to appropriately manage the market value of equity is dependent on reliable information regarding the market conditions in which the Bank is operating. For additional discussion regarding market value of equity and OTTI, see Risk Management in Item 7. Management's Discussion and Analysis and Note 7 - OTTI to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data, in this Form 10-K.

The Bank may be adversely affected by litigation.

From time to time, the Bank's customers or counterparties may make claims or take legal action relating to performance of contractual responsibilities. The Bank may also face other legal claims, regulatory or governmental inquiries or investigations. In any such claims or actions, demands for substantial monetary damages may be asserted against the Bank and may result in financial liability or an adverse effect on the Bank's reputation. In regulatory enforcement matters, claims for disgorgement, the imposition of penalties and the imposition of other remedial sanctions are possible.


25


The Bank's controls and procedures may fail or be circumvented, risk management policies and procedures may be inadequate and circumstances beyond the Bank's control could cause unexpected operating losses. Failures of critical vendors and other third parties could disrupt the Bank’s ability to conduct business. In addition, the loss of key employees may have an adverse effect on the Bank's business and operations.

The Bank may fail to identify and manage risks related to a variety of aspects of its business, including, but not limited to, operational risk, interest rate risk, legal and compliance risk, liquidity risk, market risk and credit risk. The Bank has adopted many controls, procedures, policies and systems to monitor and manage risk. Management cannot provide complete assurance that those controls, procedures, policies and systems are adequate to identify and manage the risks inherent in the Bank's various businesses. In addition, these businesses are continuously evolving. The Bank may fail to fully understand the implications of changes in the businesses and fail to enhance the risk governance framework in a timely or adequate fashion to address those changes. If the risk governance framework is ineffective, the Bank could incur losses.

Operating risk is the risk of unexpected operating losses attributable to human error; systems failures; fraud; noncompliance with laws, regulations and the Bank's internal Code of Conduct; unenforceability of contracts; or inadequate internal controls and procedures. Although management has systems and procedures in place to address each of these risks, some operational risks are beyond the Bank's control, and the failure of other parties to adequately address their operational risks could adversely affect the Bank as well.

The Bank relies on vendors and other third parties to perform certain critical services. A failure in, or interruption to, one or more of those services provided could constrain, disrupt or otherwise negatively affect the Bank’s ongoing operations. Additionally, the use of vendors and other third parties could expose the Bank to the risk of a loss of intellectual property or
confidential information or other harm.

Certain employees are especially important to the continued successful operation of the Bank. Failure to attract or retain such key individuals may adversely affect the Bank's business operations. It may result in increased operating expenses (i.e., consultant expense to address new hire) and operational risks as responsibilities are transitioned between employees. The loss of a key employee may also result in incremental regulatory scrutiny of the quality of the Bank's overall corporate governance.

Item 1B: Unresolved Staff Comments

None

Item 2: Properties

The Bank leases 96,240 square feet of office space at 601 Grant Street, Pittsburgh, Pennsylvania, 15219 and additional office space at the following locations: (1) 1301 Pennsylvania Avenue, Washington, DC 20004; (2) 2300 Computer Avenue, Willow Grove, Pennsylvania, 19090; (3) 435 N. DuPont Highway, Dover, Delaware 19904; (4) 1286 Suncrest Town Center, Morgantown, WV 26505; and (5) 580 and 768 Vista Park Drive, Pittsburgh, Pennsylvania 15205. The Washington, DC office space is shared with the FHLBanks of Atlanta and Des Moines. Essentially all of the Bank’s operations are housed at the Bank’s headquarters at the Grant Street location.

Item 3: Legal Proceedings

The Bank may be subject to various legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any such proceedings that might result in the Bank’s ultimate liability in an amount that will have a material effect on the Bank’s financial condition or results of operations.

Item 4: Mine Safety Disclosures

Not applicable.


26



PART II – OTHER INFORMATION

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

The capital stock of the Bank can be purchased only by members and may be held by nonmembers due to out of district mergers. There is no established marketplace for the Bank’s stock; the Bank’s stock is not publicly traded and may be repurchased or redeemed by the Bank at par value. The Bank has two subclasses of capital stock: B1 membership and B2 activity.

The members may request that the Bank redeem all or part of the common stock they hold in the Bank five years after the Bank receives a written request by a member. This is referred to as mandatorily redeemable capital stock. The Bank reclassifies stock subject to redemption from capital stock to a liability after a member provides written notice of redemption, gives notice of intention to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination or other involuntary termination from membership. In addition, the Bank, at its discretion, may repurchase shares held by members in excess of their required stock holdings upon one business day’s notice. Excess stock is Bank capital stock not required to be held by the member to meet its minimum stock purchase requirement under the Bank’s Capital Plan. The Bank's current practice is to repurchase all excess capital stock, including excess capital stock that is classified as mandatorily redeemable, on a weekly basis.

The members’ minimum stock purchase requirement is subject to change from time to time at the discretion of the Board of Directors of the Bank in accordance with the Capital Plan. Par value of each share of capital stock is $100. As of December 31, 2015, the total mandatorily redeemable capital stock reflected the balance for three institutions, two of which were merged out of district and considered to be nonmembers. One other institution has notified the Bank of its intention to voluntary redeem its capital stock and withdraw from membership. This institution will continue to be a member of the Bank until the withdrawal period is completed.

The total number of shares of capital stock outstanding as of December 31, 2015 was 35,457,007 of which members held 35,397,178 shares and nonmembers held 59,829 shares.

The Bank’s cash dividends declared in each quarter are reflected in the table below.
(in millions)
2015
2014
First quarter
$99.7
$16.8
Second quarter
34.7
28.7
Third quarter
38.1
28.0
Fourth quarter
40.3
30.4

See Note 16 - Capital to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K for further information regarding statutory and regulatory restrictions on capital stock redemption.


27



Item 6: Selected Financial Data

The following should be read in conjunction with the financial statements and Item 7. Management’s Discussion and Analysis, each included in this Form 10-K. The Condensed Statements of Income data for 2015, 2014 and 2013, and the Condensed Statements of Condition data as of December 31, 2015 and 2014 are derived from the financial statements included in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K. The Statements of Income data for 2012 and 2011 and the Condensed Statements of Condition data as of December 31, 2013 and 2012 are derived from the financial statements in Item 8. Financial Statements and Supplementary Financial Data included in the Bank’s 2013 Form 10-K. The Condensed Statements of Condition data as of December 31, 2011 is derived from the financial statements in Item 8. Financial Statements and Supplementary Financial Data included in the Bank’s 2012 Form 10-K.

Condensed Statements of Income
 
 
Year Ended December 31,
(in millions, except per share data)
2015
2014
2013
2012
2011
Net interest income
$
317.8

$
283.1

$
195.1

$
209.8

$
154.4

Provision (benefit) for credit losses
(0.2
)
(4.1
)
(1.8
)
0.4

10.0

Other noninterest income (loss):
 
 
 
 
 
  Net OTTI losses, credit portion (1)
(1.8
)

(0.4
)
(11.4
)
(45.1
)
  Net gains (losses) on trading securities
1.6

22.4

(4.6
)
0.4

(0.1
)
  Net realized gains from sale of
    available-for-sale (AFS) securities




7.3

  Net gains (losses) on derivatives and
    hedging activities
3.4

(37.5
)
30.2

10.7

(5.7
)
  Net gains (losses) on extinguishment of debt


9.6



  Gains on litigation settlements, net
15.3

70.9

1.5



  Other, net
26.0

19.8

11.2

7.4

10.6

Total other noninterest income (loss)
44.5

75.6

47.5

7.1

(33.0
)
Other expense
77.5

78.6

80.0

72.3

65.0

Income before assessments
285.0

284.2

164.4

144.2

46.4

AHP Assessment (2)
28.5

28.4

16.6

14.5

8.4

Net income
$
256.5

$
255.8

$
147.8

$
129.7

$
38.0

Earnings per share (3)
$
8.04

$
8.89

$
5.40

$
4.28

$
1.05

Dividends (4)
$
212.8

$
103.9

$
21.4

$
5.8

$

Dividend payout ratio(5)
82.96
%
40.64
%
14.49
%
4.30
%
%
Return on average equity
6.16
%
6.83
%
4.32
%
3.75
%
0.98
%
Return on average assets
0.29
%
0.36
%
0.24
%
0.23
%
0.07
%
Net interest margin (6)
0.36
%
0.40
%
0.32
%
0.37
%
0.30
%
Regulatory capital ratio (7)
4.60
%
4.53
%
5.16
%
5.89
%
7.44
%
GAAP capital ratio(8)
4.67
%
4.67
%
5.22
%
5.31
%
6.47
%
Total average equity to average assets
4.66
%
5.22
%
5.60
%
6.02
%
7.53
%
Notes:
(1) Represents the credit-related portion of OTTI losses on private label MBS portfolio.
(2) Includes Resolution Funding Corporation (REFCORP) assessments through second quarter 2011. On August 5, 2011, the FHLBanks fully satisfied the REFCORP obligation; as a result, the Bank did not record any REFCORP assessments after the second quarter of 2011. Although the Bank is not subject to federal or state income taxes, by regulation, the Bank is required to allocate 10% of its income before assessments to fund AHP. AHP assessments are included for all periods presented.
(3) Calculated based on net income and weighted average shares outstanding.
(4) The Bank temporarily suspended dividend payments effective December 2008 and resumed paying dividends in 2012.
(5) Represents dividends paid as a percentage of net income for the respective periods presented.
(6) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(7) Regulatory capital ratio is the sum of period-end capital stock, mandatorily redeemable capital stock, and retained earnings as a percentage of total assets at period-end.
(8) GAAP capital ratio is sum of capital stock, retained earnings and accumulated other comprehensive income (AOCI) as a percentage of total assets at period-end.


28



Condensed Statements of Condition
 
December 31,
(in millions)
2015
2014
2013
2012
2011
Cash and due from banks
$
2,377.0

$
2,451.1

$
3,121.3

$
1,350.6

$
634.3

Investments(1)
16,144.0

16,528.4

13,875.2

19,057.2

16,639.5

Advances
74,504.8

63,408.4

50,247.5

40,497.8

30,604.8

Mortgage loans held for portfolio, net(2)
3,086.9

3,123.3

3,224.1

3,532.5

3,883.1

Total assets
96,336.3

85,677.1

70,670.9

64,616.3

51,994.3

Consolidated obligations, net:
 
 
 
 
 
  Discount notes
42,276.8

37,058.1

28,236.3

24,148.5

10,921.5

  Bonds
48,606.0

43,714.5

37,698.3

35,135.6

35,613.0

Total consolidated obligations, net(3)
90,882.8

80,772.6

65,934.6

59,284.1

46,534.5

Deposits
686.0

641.2

694.4

999.9

1,099.7

Mandatorily redeemable capital stock
6.0

0.6


431.6

45.7

AHP payable
70.9

56.0

36.3

24.5

13.6

Total liabilities
91,834.7

81,674.1

66,978.7

61,187.3

48,331.4

Capital stock - putable
3,539.7

3,041.0

2,962.2

2,816.0

3,389.9

Unrestricted retained earnings
718.7

726.3

625.6

528.8

430.8

Restricted retained earnings
162.5

111.2

60.1

30.5

4.5

AOCI
80.7

124.5

44.3

53.7

(162.3
)
Total capital
4,501.6

4,003.0

3,692.2

3,429.0

3,662.9

Notes:
(1) Includes trading, AFS and Held-to-maturity (HTM) investment securities, securities purchased under agreements to resell, Federal funds sold, and interest-bearing deposits.
(2) Net of allowance for loan losses of $5.7 million, $7.3 million, $11.4 million, $14.2 million and $14.3 million at December 31, 2015 through 2011, respectively.
(3) Aggregate FHLBank System-wide consolidated obligations (at par) were $905.2 billion, $847.2 billion, $766.8 billion, $687.9 billion and $691.9 billion at December 31, 2015 through 2011, respectively.




29


Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

Statements contained in this Form 10-K, including statements describing the objectives, projections, estimates, or predictions of the future of the Bank, may be “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: economic and market conditions, including, but not limited to, real estate, credit and mortgage markets; volatility of market prices, rates, and indices related to financial instruments; political, legislative, regulatory, litigation, or judicial events or actions; changes in assumptions used in the quarterly OTTI process; risks related to mortgage-backed securities; changes in the assumptions used in the allowance for credit losses; changes in the Bank’s capital structure; changes in the Bank’s capital requirements; membership changes; changes in the demand by Bank members for Bank advances; an increase in advances’ prepayments; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; changes in the FHLBank System’s debt rating or the Bank’s rating; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; applicable Bank policy requirements for retained earnings and the ratio of the market value of equity to par value of capital stock; the Bank’s ability to maintain adequate capital levels (including meeting applicable regulatory capital requirements); business and capital plan adjustments and amendments; technology and cyber-security risks; and timing and volume of market activity.

This Management’s Discussion and Analysis should be read in conjunction with the Bank’s audited financial statements in Item 8. Financial Statements and Supplementary Data and footnotes and Item 1A. Risk Factors included herein.

Executive Summary

Overview. The Bank's financial condition and results of operations are influenced by the interest rate environment, global and national economies, local economies within its three-state district, and the conditions in the financial, housing and credit markets.

The interest rate environment significantly impacts the Bank's profitability. Net interest income is affected by several external factors, including market interest rate levels and volatility, credit spreads and the general state of the economy. To manage interest rate risk, a portion of the Bank's advances and debt have been hedged with interest-rate exchange agreements in which 1-month or 3-month LIBOR is received (advances) or paid (debt). Short-term interest rates also directly affect the Bank's earnings on invested capital. Finally, the Bank's mortgage-related assets make it sensitive to changes in mortgage rates. The Bank earns relatively narrow spreads between yields on assets (particularly advances, its largest asset) and the rates paid on corresponding liabilities. During 2015, funding spreads (i.e., the cost of FHLBank debt relative to LIBOR) deteriorated compared to 2014 as a result of swap spreads moving closer to U.S. Treasury rates.

The Bank's earnings are affected not only by rising or falling interest rates but also by the particular path and volatility of changes in market interest rates and the prevailing shape of the yield curve. The flattening of the yield curve tends to compress the Bank's net interest margin, while steepening of the curve offers better opportunities to purchase assets with wider net interest spreads. The performance of the Bank's mortgage asset portfolios is particularly affected by shifts in the 10-year maturity range of the yield curve, which is the point that heavily influences mortgage rates and potential refinancings. Yield curve shape can also influence the pace at which borrowers refinance or prepay their existing loans, as borrowers may select shorter-duration mortgage products. The Bank continues to adjust as necessary its prepayment estimates in its models to ensure they reflect actual borrower activity. In addition, the Bank’s higher yielding private label mortgage backed securities (MBS) portfolio continues its expected runoff. As higher coupon mortgage loans prepay and mature along with higher yielding private label MBS, the return of principal cannot be invested in assets with a comparable yield, resulting in a decline in the aggregate yield on the remaining loan portfolio and investments and a possible decrease in the net interest margin. However, the Bank has accretion of interest income on certain private label residential MBS as a result of significant projected increases in cash flows. During 2015, this accretion resulted in additional interest income of $27.4 million compared to $23.6 million in 2014.


30


Results of Operations. The Bank’s net income for 2015, totaled $256.5 million, slightly higher than $255.8 million in 2014. In the year-over-year comparison, the primary earnings factors were higher net gains on derivatives and hedging activities and higher net interest income, offset by lower gains on the resolution of litigation settlements (net of legal fees and expenses) and lower net gains on trading securities. Net interest income was $317.8 million for 2015, an increase of $34.7 million compared to $283.1 million in 2014, primarily due to higher interest income on advances partially offset by higher interest expense on consolidated obligations.

For the fourth quarter of 2015, net income was $54.4 million, compared to $64.3 million in the fourth quarter of 2014. This $9.9 million decrease was primarily driven by net losses on trading securities and lower net interest income, partially offset by net gains on derivatives and hedging activities. In addition, there were no gains from the resolution of litigation settlements (net of legal fees and expenses) in the fourth quarter of 2015 compared to gains of $20.2 million in the fourth quarter 2014. Net interest income was $78.1 million for the fourth quarter of 2015, compared to $82.7 million in the fourth quarter of 2014, a decrease of $4.6 million. The decline in net interest income reflected higher interest expense of $24.8 million due to consolidated obligations, which more than offset higher interest income of $20.2 million, primarily due to advances.

The net interest margin for 2015 was 36 basis points compared to 40 basis points in 2014. The four basis point decrease was due primarily to lower advance prepayment fees and a large increase in lower-spread assets, mainly advances.

Financial Condition. Advances. Advances totaled $74.5 billion at December 31, 2015, an increase of $11.1 billion compared to $63.4 billion at December 31, 2014. Advance volume growth in 2015 was driven primarily by demand from larger members; however, advance volumes increased in all member classifications. Along with an increase in the size of the advance portfolio during 2015, the term of advances also increased modestly. At December 31, 2015, approximately 55% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 53% at December 31, 2014.

The ability to grow and/or maintain the advance portfolio is affected by, among other things, the following: (1) the liquidity demands of the Bank’s borrowers; (2) the composition of the Bank's membership; (3) member’s regulatory requirements; (4) current and future credit market conditions; (5) housing market trends; (6) the shape of the yield curve and (7) advance pricing.

Investments. At December 31, 2015, the Bank held $16.1 billion of total investment securities, including trading, AFS and HTM investment securities as well as securities purchased under agreements to resell, interest-bearing deposits and Federal funds sold. By comparison, at December 31, 2014, these investments totaled $16.5 billion. The decrease of $0.4 billion was primarily driven by decreases in Federal funds sold due to market-driven demand.

Consolidated Obligations. The Bank's consolidated obligations totaled $90.9 billion at December 31, 2015, an increase of $10.1 billion from December 31, 2014. This growth in consolidated obligations was due to increases in both discount notes and bonds, primarily to support advance activity. At December 31, 2015, bonds represented 53% of the Bank's consolidated obligations, compared with 54% at December 31, 2014. Discount notes represented 47% of the Bank's consolidated obligations at December 31, 2015 compared with 46% at year-end 2014.

Capital Position and Regulatory Requirements. Total retained earnings at December 31, 2015 were $881.2 million, up from $837.5 million at year-end 2014 reflecting the Bank's net income for 2015 which was partially offset by dividends paid. AOCI was $80.7 million at December 31, 2015 a decrease of $43.8 million from December 31, 2014. This decrease was primarily due to the changes in the fair values of securities within the AFS portfolio.

In February 2015, the Bank paid a quarterly dividend equal to an annual yield of 4.0%. In addition, the Bank paid a special dividend of 2.5%. The special dividend was based on average member capital stock for the full year of 2014. In April, July, and October 2015, the Bank paid quarterly dividends equal to an annual yield of 5.0% on activity stock and 3.0% on membership stock. These dividends were based on stockholders' average balances for the first quarter (April dividend), second quarter (July dividend), and third quarter (October dividend). In February 2016, the Bank paid quarterly dividends of 5.0% annualized on activity stock and 3.0% annualized on membership stock. The dividends were based on average member capital for the fourth quarter of 2015.

The Bank met all of its capital requirements as of December 31, 2015, and in the Finance Agency’s most recent determination, as of September 30, 2015, the Bank was deemed "adequately capitalized."


31


2016 Outlook

Generally, the Bank’s members have experienced a heightened focus on liquidity and capital management by their regulators and other important market constituencies. This has resulted in certain members utilizing additional advance products at the Bank. For 2016, the Bank anticipates that certain members will continue to utilize advances to meet liquidity needs. If the economy continues to improve loan growth opportunities and strong competition for retail deposits should also be beneficial for advance demand at regional banks and CFIs.
The Bank has been, and will continue to be, mission driven. Advances are central to the Bank’s mission and, along with other key activities, are crucial to the Bank continuing to meet the needs of its membership and communities.
Earnings Performance

The following should be read in conjunction with the Bank's audited financial statements included in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank’s net income for 2015 was $256.5 million, slightly higher than 2014’s $255.8 million. In a year-over-year comparison, the primary earnings factors were higher net gains on derivatives and hedging activities and higher net interest income, offset by lower gains on the resolution of litigation settlements (net of legal fees and expenses) and lower net gains on trading securities. Net gains on derivatives and hedging activities were $3.4 million in 2015, an increase of $40.9 million compared to a net loss of $37.5 million in 2014. Net interest income was $317.8 million for 2015, an increase of $34.7 million compared to $283.1 million in 2014. Higher net interest income was primarily due to higher interest income on advances partially offset by higher interest expense on consolidated obligations. In 2015, the Bank recorded $15.3 million related to the resolution of litigation (net of legal fees and expenses) related to matters arising from investments the Bank made in private label MBS, a decrease of $55.6 million compared to $70.9 million in 2014. Net gains on trading securities were $1.6 million for 2015, a decrease of $20.8 million compared to a net gain of $22.4 million in 2014. The Bank’s return on average equity for 2015 was 6.16% compared to 6.83% for the prior year period.

2014 vs. 2013. The Bank recorded net income of $255.8 million in 2014 compared to $147.8 million in 2013, an increase of $108.0 million. The increase was primarily due to higher net interest income, gains on litigation settlements (net of legal fees and expenses), and net gains on trading securities, partially offset by net losses on derivatives and hedging activities. The Bank’s return on average equity for 2014 was 6.83%, compared to 4.32% for 2013.

32


Net Interest Income

The following table summarizes the yields and rates paid on interest-earning assets and interest-bearing liabilities, respectively, the average balance for each of the primary balance sheet classifications and the net interest margin for 2015, 2014 and 2013.
Average Balances and Interest Yields/Rates Paid
 
2015
2014
2013


(dollars in millions)

Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)

Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)

Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)
Assets:
 
 
 
 
 
 
 
 
 
Federal funds sold and securities purchased under agreements to resell(1)
$
7,486.3

$
8.2

0.11
$
5,734.2

$
3.9

0.07
$
5,815.3

$
5.2

0.09
Interest-bearing deposits(2)
308.8

0.4

0.11
443.3

0.4

0.08
458.5

0.5

0.10
Investment securities(3)
11,056.8

217.0

1.96
11,208.7

219.5

1.96
11,493.9

219.1

1.91
Advances(4) 
65,739.9

349.5

0.53
50,376.8

272.9

0.54
39,353.1

230.0

0.58
Mortgage loans held for portfolio(5)
3,079.3

120.5

3.91
3,160.1

129.4

4.09
3,400.1

141.7

4.17
Total interest-earning assets
87,671.1

695.6

0.79
70,923.1

626.1

0.88
60,520.9

596.5

0.99
Allowance for credit losses
(8.2
)
 
 
(10.4
)
 
 
(15.1
)
 
 
Other assets(6)
1,569.4

 
 
850.7

 
 
650.4

 
 
Total assets
$
89,232.3

 
 
$
71,763.4

 
 
$
61,156.2

 
 
Liabilities and capital:
 
 
 
 
 
 
 
 
 
Deposits (2)
$
675.9

$
0.3

0.04
$
700.5

$
0.2

0.03
$
813.8

$
0.3

0.04
Consolidated obligation discount notes
35,181.0

54.1

0.15
27,793.8

24.2

0.09
18,733.5

18.5

0.10
Consolidated obligation bonds(7)
48,376.4

323.2

0.67
38,618.7

318.4

0.82
36,999.8

381.3

1.03
Other borrowings
3.5

0.2

4.76
2.9

0.2

6.73
198.9

1.3

0.67
Total interest-bearing liabilities
84,236.8

377.8

0.45
67,115.9

343.0

0.51
56,746.0

401.4

0.71
Other liabilities
834.2

 
 
902.2

 
 
983.3

 
 
Total capital
4,161.3

 
 
3,745.3

 
 
3,426.9

 
 
Total liabilities and capital
$
89,232.3

 
 
$
71,763.4


 
$
61,156.2

 
 
Net interest spread
 
 
0.34
 
 
0.37
 
 
0.28
Impact of noninterest-bearing funds
 
 
0.02
 
 
0.03
 
 
0.04
Net interest income/net interest margin
 
$
317.8

0.36
 
$
283.1

0.40
 
$
195.1

0.32
Average interest-bearing assets to interest-bearing liabilities
104.1
%
 
 
105.7
%
 
 
106.7
%
 
 
Notes:
(1) The average balance of Federal funds sold and securities purchased under agreements to resell and the related interest income and average yield calculations may include loans to other FHLBanks.
(2) Average balances of deposits (assets and liabilities) include cash collateral received from/paid to counterparties which is reflected in the Statements of Condition as derivative assets/liabilities.
(3) Investment securities include trading, AFS and HTM securities. The average balances of AFS and HTM are reflected at amortized cost; therefore, the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized OTTI reflected in AOCI.
(4) Average balances reflect noninterest-earning hedge accounting adjustments of $0.3 billion, $0.5 billion and $0.7 billion in 2015, 2014 and 2013, respectively.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) The noncredit portion of OTTI losses on investment securities is reflected in other assets for purposes of the average balance sheet presentation.
(7) Average balances reflect noninterest-bearing hedge accounting adjustments of $13.6 million, $(28.2) million and $53.1 million in 2015, 2014 and 2013, respectively.

Net interest income increased $34.7 million in 2015 compared to 2014 primarily due to an increase in interest income on advances partially offset by an increase in interest expense on consolidated obligations. Interest-earning assets increased 23.6% with higher demand for advances and increased purchases of Federal funds sold and securities purchased under agreement to resell partially offset by a lower amount of investments and mortgage loans. Higher interest income on advances was partially offset by lower interest income on mortgage loans held for portfolio. Interest income on advances increased as advance volume more than offset a slight decline in yield. Interest income on mortgage loans declined due to both lower volume and the run-off

33


of higher-yielding assets that have been replaced with lower-yielding assets. Interest expense increased due to an increased level of discount notes and bonds which more than offset a six basis point decline in the rate paid on interest-bearing liabilities.

Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between 2015, 2014 and 2013.
 
Increase (Decrease) in Interest Income/Expense Due to Changes in
Rate/Volume
 
2015 Compared to 2014
2014 Compared to 2013
(in millions)
Volume
Rate
Total
Volume
Rate
Total
Federal funds sold
$
1.5

$
2.8

$
4.3

$
(0.1
)
$
(1.2
)
$
(1.3
)
Interest-bearing deposits
(0.1
)
0.1



(0.1
)
(0.1
)
Investment securities
(3.0
)
0.5

(2.5
)
(5.5
)
5.9

0.4

Advances
81.7

(5.1
)
76.6

60.7

(17.8
)
42.9

Mortgage loans held for portfolio
(3.2
)
(5.7
)
(8.9
)
(9.9
)
(2.4
)
(12.3
)
 Total interest-earning assets
$
76.9

$
(7.4
)
$
69.5

$
45.2

$
(15.6
)
$
29.6

 
 
 
 
 
 
 
Interest-bearing deposits
$

$
0.1

$
0.1

$

$
(0.1
)
$
(0.1
)
Consolidated obligation discount notes
7.7

22.2

29.9

8.1

(2.4
)
5.7

Consolidated obligation bonds
71.7

(66.9
)
4.8

16.1

(79.0
)
(62.9
)
Other borrowings



(2.5
)
1.4

(1.1
)
 Total interest-bearing liabilities
$
79.4

$
(44.6
)
$
34.8

$
21.7

$
(80.1
)
$
(58.4
)
Total increase (decrease) in net interest income
$
(2.5
)
$
37.2

$
34.7

$
23.5

$
64.5

$
88.0


Interest income increased in 2015 compared to 2014 due to a volume increase partially offset by a rate decrease. Higher advance volume drove the interest income increase. Interest expense increased in 2015 compared to 2014 due to higher volumes partially offset by lower rates. The increase reflected higher consolidated obligation volumes partially offset by a rate decrease.

The following table presents the average par balances of the Bank's advance portfolio for 2015, 2014 and 2013. These balances do not reflect any hedge accounting adjustments.
(in millions)
 
Change 2015 vs. 2014
Change 2014 vs. 2013
Product
2015
2014
2013
%
%
Repo/Mid-Term Repo
$
20,466.2

$
17,903.4

$
12,687.7

14.3
41.1
Core (Term)
43,547.7

30,091.4

23,627.7

44.7
27.4
Convertible Select
1,462.0

1,929.0

2,351.7

(24.2)
(18.0)
Total par value
$
65,475.9

$
49,923.8

$
38,667.1

31.2
29.1
The increase in advance volume in 2015 compared to 2014 led to an increase in interest income, partially offset by a small decrease in the yield related to prepayment fees. Advance volume growth in 2015 was driven primarily by demand from larger members; however, advance volumes increased in all member classifications.

The average mortgage loans held for portfolio balance declined in 2015 due to the continued run-off of the Mortgage Partnership Finance (MPF) Plus portfolio. The Bank has not purchased loans into this portion of the portfolio since July 2006, and the run-off more than offset purchases of new loans into the MPF Original and MPF 35 portions of the portfolio. Interest income decreased as the newer loans have generally lower yields than those that are paying down.
Interest expense on the average consolidated obligations portfolio increased in 2015 compared to 2014 as average discount note and bond balances both increased. Rates paid on discount notes rose as the Federal funds target rate increase in mid-December 2015 was reflected in discount note pricing earlier in the fourth quarter of 2015. These increases were partially offset by a decline in rates paid on bonds. The rate decrease on bonds was primarily due to longer term debt that was called or matured and replaced with lower cost debt. A portion of the bond portfolio is currently swapped to 3-month LIBOR; therefore,

34


as the LIBOR rate (decreases) increases, interest expense on swapped bonds, including the impact of swaps, (decreases) increases. See details regarding the impact of swaps on the rates paid in the “Interest Income Derivatives Effects” discussion below.
2014 vs. 2013. Interest income increased in 2014 compared to 2013 driven by volume increases partially offset by rate decreases. The increase was primarily driven by an increase in advance volume partially offset by lower advance yields. The investment securities portfolio experienced a rate increase that was mostly offset by a volume decrease while interest income in the mortgage loans held for portfolio declined due to both volume and rate decreases. Interest expense decreased in 2014 compared to 2013 as a rate decrease more than offset a volume increase. The primary interest expense driver was a decrease in rates paid on consolidated obligation bonds. Members’ liquidity needs contributed to the increase in advance volume, while the rate decline was driven by changes in the composition of the portfolio. Mortgage loans held for portfolio decreased as the run-off of existing loans exceeded the purchase of new loans. The rate decline in consolidated obligation bonds was primarily due to longer-term debt that was called or matured and replaced with lower cost debt. Consolidated obligation balances overall increased in 2014 commensurate with the increase in interest-earning assets.

Interest Income Derivative Effects. The following tables quantify the effects of the Bank’s derivative activities on interest income and interest expense for 2015, 2014 and 2013. Derivative and hedging activities are discussed below.
2015

(dollars in millions)

Average Balance
Interest Inc./
 Exp. with Derivatives
Avg.
Yield/
Rate (%)
Interest Inc./ Exp. without
Derivatives
Avg.
Yield/
Rate (%)

Impact of
Derivatives(1)
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
65,739.9

$
349.5

0.53
$
553.0

0.84
$
(203.5
)
(0.31
)
Mortgage loans held for
 portfolio
3,079.3

120.5

3.91
124.6

4.04
(4.1
)
(0.13
)
All other interest-earning
 assets
18,851.9

225.6

1.20
244.6

1.30
(19.0
)
(0.10
)
Total interest-earning
 assets
$
87,671.1

$
695.6

0.79
$
922.2

1.05
$
(226.6
)
(0.26
)
Liabilities:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
48,376.4

$
323.2

0.67
$
551.3

1.14
$
(228.1
)
(0.47
)
All other interest-bearing
 liabilities
35,860.4

54.6

0.15
54.6

0.15


Total interest-bearing
 liabilities
$
84,236.8

$
377.8

0.45
$
605.9

0.72
$
(228.1
)
(0.27
)
Net interest income/net
 interest spread
 
$
317.8

0.34
$
316.3

0.33
$
1.5

0.01




35


2014

(dollars in millions)

Average Balance
Interest Inc./
 Exp. with Derivatives
Avg.
Yield/
Rate (%)
Interest Inc./ Exp. without
Derivatives
Avg.
Yield/
Rate (%)

Impact of
Derivatives(1)
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
50,376.8

$
272.9

0.54
$
507.5

1.01
$
(234.6
)
(0.47
)
Mortgage loans held for
 portfolio
3,160.1

129.4

4.09
132.5

4.19
(3.1
)
(0.10
)
All other interest-earning
 assets
17,386.2

223.8

1.29
235.3

1.35
(11.5
)
(0.06
)
Total interest-earning
 assets
$
70,923.1

$
626.1

0.88
$
875.3

1.23
$
(249.2
)
(0.35
)
Liabilities:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
38,618.7

$
318.4

0.82
$
577.9

1.50
$
(259.5
)
(0.68
)
All other interest-bearing
 liabilities
28,497.2

24.6

0.09
24.6

0.09


Total interest-bearing
 liabilities
$
67,115.9

$
343.0

0.51
$
602.5

0.90
$
(259.5
)
(0.39
)
Net interest income/net
 interest spread
 
$
283.1

0.37
$
272.8

0.33
$
10.3

0.04

2013

(dollars in millions)

Average Balance
Interest Inc./
 Exp. with Derivatives
Avg.
Yield/
Rate (%)
Interest Inc./ Exp. without
Derivatives
Avg.
Yield/
Rate (%)

Impact of
Derivatives(1)
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
39,353.1

$
230.0

0.58
$
494.5

1.26
$
(264.5
)
(0.68
)
Mortgage loans held for
 portfolio
3,400.1

141.7

4.17
145.5

4.28
(3.8
)
(0.11
)
All other interest-earning
 assets
17,767.7

224.8

1.27
228.0

1.28
(3.2
)
(0.01
)
Total interest-earning
 assets
$
60,520.9

$
596.5

0.99
868.0

1.44
$
(271.5
)
(0.45
)
Liabilities:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
36,999.8

$
381.3

1.03
$
631.2

1.71
$
(249.9
)
(0.68
)
All other interest-bearing
 liabilities
19,746.2

20.1

0.10
20.1

0.10


Total interest-bearing
 liabilities
56,746.0

401.4

0.71
651.3

1.15
(249.9
)
(0.44
)
Net interest income/net
 interest spread
 
195.1

0.28
216.7

0.29
$
(21.6
)
(0.01
)
Note:
(1) Impact of Derivatives includes net interest settlements, amortization of basis adjustments resulting from previously terminated hedging relationships and the amortization of the market value of mortgage purchase commitments classified as derivatives at the time the commitment settled.

The use of derivatives had little impact on net interest income and net interest spread in 2015. In 2014, the use of derivatives resulted in increases to both net interest income and net interest spread. By comparison, in 2013, both net interest income and net interest spread were negatively impacted by the use of derivatives. The variances in the advances and consolidated obligation derivative impacts from period to period are driven by the change in the average LIBOR-based variable rate, the timing of interest rate resets and the average hedged portfolio balances outstanding during any given period.

The Bank uses derivatives to hedge the fair market value changes attributable to the change in the LIBOR benchmark interest rate. The Bank generally uses interest rate swaps to hedge a portion of advances and consolidated obligations which convert the interest rates on those instruments from a fixed rate to a LIBOR-based variable rate. The purpose of this strategy is

36


to protect the interest rate spread. Using derivatives to convert interest rates from fixed to variable can increase or decrease net interest income.

The Bank uses many different funding and hedging strategies. One strategy involves closely match-funding bullet advances with bullet debt. This is designed in part to avoid the use of derivatives where prudent and reduce the Bank's reliance on short-term funding.

Provision (Benefit) for Credit Losses. The provision (benefit) for credit losses on mortgage loans held for portfolio and BOB loans for 2015 was $(0.2) million compared to $(4.1) million in 2014. The benefit in 2015 was primarily due to continued improvement in the housing market and the related reduction in mortgage loan delinquencies and loss levels. The benefit in 2014 was primarily due to the adoption of certain provisions of AB 2012-02 which is discussed in more detail in the Financial Condition section of this Item 7.

2014 vs. 2013. The provision (benefit) for credit losses on mortgage loans held for portfolio and BOB loans was $(4.1) million in 2014 compared to $(1.9) million in 2013. The 2013 benefit was due primarily to the MPF Plus portion of the portfolio which had a benefit of $(2.4) million partially offset by the MPF Original portion of the portfolio which had a provision of $0.4 million. The benefit on MPF Plus is due primarily to lower estimated losses given default as a result of the improved housing market and an increase in the estimated life of the portfolio due to rising interest rates. The provision on MPF Original is due to the growth of the first loss account (FLA) during 2013 in accordance with the credit structure terms of the product.

Other Noninterest Income
(in millions)
2015
2014
2013
Net OTTI losses, credit portion
$
(1.8
)
$

$
(0.4
)
Net gains (losses) on trading securities
1.6

22.4

(4.6
)
Net gains (losses) on derivatives and hedging activities
3.4

(37.5
)
30.2

Net gains on extinguishment of debt


9.6

Gains on litigation settlements, net
15.3

70.9

1.5

Standby letters of credit fees
23.6

17.4

9.1

Other, net
2.4

2.4

2.1

Total other noninterest income
$
44.5

$
75.6

$
47.5


The Bank's lower total other noninterest income for 2015 compared to 2014 was due primarily to lower gains on litigation settlements, net of legal fees and expenses, and lower net gains on trading securities partially offset by higher net gains on derivatives and hedging activities and higher standby letters of credit fees. The litigation settlements relate to investments the Bank made in private label MBS. The net gains on trading securities reflects the impact of fair market value changes on Agency investments held in the Bank’s trading portfolio. The activity related to derivatives and hedging activities is discussed in more detail below. The increase in standby letters of credit fees was due to higher volume and an increase in the fee on letters of credit.

2014 vs. 2013. The Bank's higher total other noninterest income for 2014 compared to 2013 was due primarily to the settlement of litigation claims, net of legal fees and expenses, net gains on trading securities, and standby letter of credit fees, partially offset by net losses on derivatives and hedging activities. The increase in standby letter of credit fees was due to higher volume.

Derivatives and Hedging Activities. The Bank enters into interest rate swaps, caps, floors and swaption agreements, referred to collectively as interest rate exchange agreements and more broadly as derivatives transactions. The Bank enters into derivatives transactions to offset all or portions of the financial risk exposures inherent in its member lending, investment and funding activities. All derivatives are recorded on the balance sheet at fair value. Changes in derivatives’ fair values are recorded in the Statement of Income.

The Bank's hedging strategies consist of fair value accounting hedges and economic hedges. Fair value hedges are discussed in more detail below. Economic hedges address specific risks inherent in the Bank's balance sheet, but they do not qualify for hedge accounting or the Bank does not elect to apply hedge accounting. As a result, income recognition on the

37


derivatives in economic hedges may vary considerably compared to the timing of income recognition on the underlying asset or liability. The Bank does not enter into derivatives for speculative purposes nor does it have any cash flow hedges.

Regardless of the hedge strategy employed, the Bank's predominant hedging instrument is an interest rate swap. At the time of inception, the fair market value of an interest rate swap generally equals or is close to zero. Notwithstanding the exchange of interest payments made during the life of the swap, which are recorded as either interest income/expense or as a gain (loss) on derivatives, depending upon the accounting classification of the hedging instrument, the fair value of an interest rate swap returns to zero at the end of its contractual term. Therefore, although the fair value of an interest rate swap is likely to change over the course of its full term, upon maturity any unrealized gains and losses generally net to zero.

The following tables detail the net effect of derivatives and hedging activities for 2015, 2014 and 2013.
 
2015
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(5.0
)
$

$
(4.1
)
$
9.9

$

$
0.8

  Net interest settlements included in net interest income (2)
(198.5
)
(19.0
)

218.2


0.7

Total effect on net interest income (loss)
$
(203.5
)
$
(19.0
)
$
(4.1
)
$
228.1

$

$
1.5

Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains on fair value hedges
$
0.9

$
1.0

$

$
2.9

$

$
4.8

Gains (losses) on derivatives not receiving hedge accounting
(5.0
)
(37.3
)
(0.8
)
42.8

(1.1
)
(1.4
)
Total net gains (losses) on derivatives and hedging activities
$
(4.1
)
$
(36.3
)
$
(0.8
)
$
45.7

$
(1.1
)
$
3.4

Total net effect of derivatives and hedging activities
$
(207.6
)
$
(55.3
)
$
(4.9
)
$
273.8

$
(1.1
)
$
4.9

 
2014
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(8.9
)
$

$
(3.1
)
$
25.7

$

$
13.7

  Net interest settlements included in net interest income (2)
(225.7
)
(11.5
)

233.8


(3.4
)
Total effect on net interest income (loss)
$
(234.6
)
$
(11.5
)
$
(3.1
)
$
259.5

$

$
10.3

Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
3.9

$
(1.6
)
$

$
2.0

$

$
4.3

Gains (losses) on derivatives not receiving hedge accounting
(7.2
)
(81.4
)
(10.3
)
56.7

0.4

(41.8
)
Total net gains (losses) on derivatives and hedging activities
$
(3.3
)
$
(83.0
)
$
(10.3
)
$
58.7

$
0.4

$
(37.5
)
Total net effect of derivatives and hedging activities
$
(237.9
)
$
(94.5
)
$
(13.4
)
$
318.2

$
0.4

$
(27.2
)

38


 
2013
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Total
Net interest income:
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest
    income (1)
$
(9.4
)
$

$
(3.8
)
$
32.1

$
18.9

  Net interest settlements included in net interest income (2)
(255.1
)
(3.2
)

217.8

(40.5
)
Total effect on net interest income (loss)
$
(264.5
)
$
(3.2
)
$
(3.8
)
$
249.9

$
(21.6
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
Gains on fair value hedges
$
3.1

$
1.4

$

$
1.2

$
5.7

Gains (losses) on derivatives not receiving hedge accounting

25.9

18.6

(20.0
)
24.5

Total net gains (losses) on derivatives and hedging activities
$
3.1

$
27.3

$
18.6

$
(18.8
)
$
30.2

Total net effect of derivatives and hedging activities
$
(261.4
)
$
24.1

$
14.8

$
231.1

$
8.6

Notes:
(1) Represents the amortization/accretion of hedging fair value adjustments.
(2) Represents interest income/expense on derivatives included in net interest income.

Fair Value Hedges. The Bank uses fair value hedge accounting treatment for most of its fixed-rate advances and consolidated obligations using interest rate swaps. The interest rate swaps convert these fixed-rate instruments to a variable-rate (i.e. LIBOR). During 2015, total ineffectiveness related to these fair value hedges resulted in net gains of $4.8 million compared to net gains of $4.3 million during 2014. The total notional amount decreased to $30.4 billion at December 31, 2015 from $32.2 billion at December 31, 2014. Fair value hedge ineffectiveness represents the difference between the change in the fair value of the derivative compared to the change in the fair value of the underlying asset/liability hedged. Fair value hedge ineffectiveness is generated by movement in the benchmark interest rate being hedged and by other structural characteristics of the transaction involved. For example, the presence of an upfront fee associated with a structured debt hedge will introduce valuation differences between the hedge and hedged item that will fluctuate over time.

Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting, also referred to as “economic hedges,” the Bank includes the net interest settlements and the changes in the fair value of the hedges in the “Net gains (losses) on derivatives and hedging activities” financial statement line item. For economic hedges, the Bank recorded net losses of $(1.4) million in 2015 compared to $(41.8) million for 2014. For 2015 and 2014, the change in net losses on economic hedges was driven by changes to the composition of the economic hedge portfolio as well as changes in interest rates. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $14.2 billion at December 31, 2015 and $12.7 billion at December 31, 2014.

2014 vs. 2013. Fair Value Hedges. In 2014 and 2013, total ineffectiveness related to fair value hedges resulted in net gains of $4.3 million and $5.7 million, respectively. The total notional amount increased to $32.2 billion in 2014 from $25.4 billion in 2013.

2014 vs. 2013. Derivatives not receiving hedge accounting. For economic hedges, the Bank recorded a net loss of $(41.8) million in 2014 and a net gain of $24.5 million in 2013. The total notional amount of economic hedges was $12.7 billion and $11.8 billion at December 31, 2014 and 2013, respectively.


39


Other Expense
(in millions)
2015
2014
2013
Compensation and benefits
$
43.2

$
43.1

$
44.7

Occupancy
2.7

2.6

2.7

Other
21.5

24.6

24.9

Finance Agency
5.4

4.5

4.0

Office of Finance
4.7

3.8

3.7

Total other expenses
$
77.5

$
78.6

$
80.0


The Bank's total other expenses for 2015 decreased slightly compared to 2014. The decline was primarily due to lower legal expenses related to the Bank’s private label MBS litigation and lower voluntary contributions to the Bank’s pension plan, partially offset by higher total compensation expense, including incentive payments. The voluntary contributions to the Bank’s pension plan in 2015 were $4.3 million.

2014 vs 2013. The Bank's total other expenses for 2014 decreased slightly compared to 2013 primarily due to lower compensation and benefits. The decrease included the impact of $6.9 million in voluntary contributions to the Bank’s pension plan in 2014.

Collectively, the 11 FHLBanks are responsible for the operating expenses of the Finance Agency and the OF. These payments, allocated among the FHLBanks according to a cost-sharing formula, are reported as other expense on the Bank’s Statement of Income. The Bank has no control over the operating expenses of the Finance Agency. The FHLBanks are able to exert a limited degree of control over the operating expenses of the OF as two directors of the OF are also FHLBank presidents.

AHP Assessment

The Bank’s mission includes the important public policy goal of making funds available for housing and economic development in the communities served by the Bank’s member financial institutions. In support of this goal, the Bank administers a number of programs, some mandated and some voluntary, which make Bank funds available through member financial institutions. In all of these programs, the Bank’s funding flows through member financial institutions into areas of need throughout the region.

The AHP, mandated by the Act, is the largest and primary public policy program of the Bank. The AHP funds, which are offered on a competitive basis, provide grants and below-market loans for both rental and owner-occupied housing for households at 80% or less of the area median income. The Bank is required to contribute approximately 10% of its net income (GAAP net income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP) to AHP and makes these funds available for use in the subsequent year. Each year, the Bank’s Board adopts an implementation plan that defines the structure of the program pursuant to the AHP regulations. The Bank’s contribution was $28.5 million, $28.4 million and $16.6 million for 2015, 2014 and 2013, respectively. The following table details the funding rounds the Bank conducted and the distribution of AHP funds for 2015, 2014, and 2013.
 
2015
2014
2013
Funding rounds
1
1
1
Eligible applications
163
116
132
Grants
$23.8 million
$15.0 million
$13.6 million
Projects
63
38
42
Project development costs
$351.7 million
$280.9 million
$207.9 million
Units of affordable housing
2,390
1,954
1,430

The CLP offers advances at low-cost (i.e., the Bank’s cost of funds), providing the full advantage of a low-cost funding source. CLP loans help member institutions finance housing construction and rehabilitation, infrastructure improvement, and economic and community development projects that benefit targeted neighborhoods and households. At December 31, 2015, the CLP loan balance totaled $726.0 million, compared to $524.3 million at December 31, 2014, reflecting an increase of $201.7 million, or 38%.


40


The First Front Door Program (FFD) offers grants to first time homebuyers up to $5,000 to assist with the purchase of a home. FFD grants are available to households earning 80% or less of the area median income. During 2015, $2.9 million in FFD grants were disbursed.

Financial Condition

The following should be read in conjunction with the Bank’s audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K.

Assets

Total assets were $96.3 billion at December 31, 2015, compared to $85.7 billion at December 31, 2014. The increase of $10.6 billion was primarily due to higher advances. Advances increased to $74.5 billion at December 31, 2015 from $63.4 billion at December 31, 2014. Advance volume growth in 2015 was driven primarily by demand from larger members; however, advance volumes increased in all member classifications.

The Finance Agency has communicated its interest in keeping all of the FHLBanks focused on activities related to their missions, such as making advances. For additional information, refer to the Legislative and Regulatory Developments section of Item 7. Management’s Discussion and Analysis in this Form 10-K .

Advances. Advances (par) totaled $74.3 billion at December 31, 2015 compared to $63.1 billion at December 31, 2014. At December 31, 2015, the Bank had advances to 199 borrowing members, compared to 189 borrowing members at December 31, 2014. A significant amount of the advances continued to be generated from the Bank’s five largest borrowers, reflecting the asset concentration mix of the Bank’s membership base. Total advances outstanding to the Bank’s five largest members represented 74.1% of total advances as of December 31, 2015, compared to 73.8% at December 31, 2014.

The following table provides information on advances at par by product type at December 31, 2015 and December 31, 2014.
 
December 31,
December 31,
in millions
2015
2014
Adjustable/variable-rate indexed:
 
 
    Repo/Mid-Term Repo
$
9,233.8

$
9,314.7

    Core (Term)
21,163.6

21,242.2

    Returnables
11,900.0


      Total adjustable/variable-rate indexed
$
42,297.4

$
30,556.9

Fixed rate:
 
 
    Repo/Mid-Term Repo
$
21,047.8

$
23,672.3

    Core (Term)
8,533.9

6,723.8

    Returnables
650.0


      Total fixed rate
$
30,231.7

$
30,396.1

Convertible
$
1,462.0

$
1,923.0

Amortizing/mortgage-matched:
 
 
    Core (Term)
342.2

250.0

Total par balance
$
74,333.3

$
63,126.0


The Bank had no putable advances at December 31, 2015 or 2014. In 2015, the Bank introduced a new adjustable, returnable advance product which has a floating rate and can be returned at a predetermined time.


41


The following table provides a distribution of the number of members, categorized by individual member asset size that had an outstanding advance balance during 2015 and 2014.
 
December 31,
December 31,
Member Asset Size
2015
2014
Less than $100 million
24

25

Between $100 million and $500 million
132

130

Between $500 million and $1 billion
44

45

Between $1 billion and $5 billion
35

33

Greater than $5 billion
21

19

Total borrowing members during the year
256

252

Total membership
307

304

Percentage of members borrowing during the period
83.4
%
82.9
%
Total borrowing members with outstanding loan balances at period-end
199

189

Percentage of members borrowing at period-end
64.8
%
62.2
%

During 2015, the Bank has experienced a net increase of three members. The Bank added 15 new members and lost 12 members. Of these 12, ten members merged with other institutions within the Bank's district and two members merged out of district.

The following table provides information at par on advances by member classification at December 31, 2015 and December 31, 2014. Commercial Bank, Thrift, and Credit Union members are classified by asset size as follows: Large (over $25 billion), Regional ($4 to $25 billion), Mid-size ($1.1 to $4 billion) and CFI (under $1.1 billion).
(in thousands)
December 31, 2015
December 31, 2014
Increase/(Decrease)
Member Classification
Large
$
55,075.1

$
47,825.2

15.2
 %
Regional
9,090.3

8,041.9

13.0
 %
Mid-size
3,443.7

2,657.6

29.6
 %
CFI (1)
4,262.2

3,963.9

7.5
 %
Insurance
2,459.8

633.4

288.3
 %
Non-member
2.2

4.0

(45.0
)%
Total
$
74,333.3

$
63,126.0

17.8
 %
Notes:
(1) For purposes of this member classification reporting, the Bank groups smaller credit unions with CFIs. CFIs are FDIC-insured depository institutions whose assets do not exceed the applicable regulatory limit.

As of December 31, 2015, total advances increased 18% compared with balances at December 31, 2014. Advances increased across all member classifications. The largest increases were in fixed- and floating-rate term advance borrowings by several members.

See the Credit and Counterparty Risk - TCE and Collateral discussion in the Risk Management section of this Item 7. Management’s Discussion and Analysis in this Form 10-K for further information on collateral policies and practices and details regarding eligible collateral, including amounts and percentages of eligible collateral securing member advances as of December 31, 2015.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses was $3.1 billion at both December 31, 2015 and December 31, 2014. The Bank’s focus is on purchasing MPF loans from community and regional member banks in its district. In the second quarter of 2015, the Bank introduced a new MPF product called MPF 35. It is similar to the MPF Original product but has a CE fee structure that is based partly on performance, a FLA equal to 35 basis points, and an option for the participating financial institution's (PFI) CE obligation to be covered by a third party. In the third quarter of 2015, the Bank introduced a new MPF product called MPF Direct. It is operationally similar to MPF Xtra and allows PFIs to sell residential, jumbo fixed-rate mortgages to FHLBank Chicago, which concurrently sells them to a third party on a nonrecourse basis. PFIs which have completed all required documentation and training are eligible to offer the product. MPF Dire

42


ct does not have the credit structure of the traditional MPF Program, and there is no CE obligation assumed by the PFI or the Bank and no CE fees are paid. The Bank receives a nominal fee for facilitating MPF Direct transactions. Given the arrangement, these loans will not be reported on the Bank's Statement of Condition.

The Bank places conventional mortgage loans that are 90 days or more delinquent on nonaccrual status. In addition, the Bank records cash payments received as a reduction of 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 the recording of interest income. However, government mortgage loans that are 90 days or more delinquent remain in accrual status due to government guarantees or insurance. The Bank has a loan modification program for PFIs under the MPF Program. The Bank considers loan modifications or Chapter 7 bankruptcies where the obligation is discharged under the MPF program to be troubled debt restructurings (TDRs), since some form of concession has been made by the Bank.

Foregone interest represents income the Bank would have recorded if the loan was paying according to its contractual terms. Foregone interest for the Bank’s mortgage loans was $0.6 million, $1.3 million, $2.5 million, $2.9 million and $4.0 million, for years 2015 through 2011, respectively. Foregone interest for the Bank’s BOB loans was immaterial. Balances regarding the Bank’s loan products are summarized below.
 
December 31,
(in millions)
2015
2014
2013
2012
2011
Advances(1)
$
74,504.8

$
63,408.4

$
50,247.5

$
40,497.8

$
30,604.8

Mortgage loans held for portfolio, net(2)
3,086.9

3,123.3

3,224.1

3,532.5

3,883.1
Nonaccrual mortgage loans(3)
32.5

44.6

57.8

72.5

86.1

Mortgage loans 90 days or more delinquent and still accruing interest(4)
4.2

6.8

8.3

7.2

8.5

BOB loans, net
11.3

11.6

11.4

12.8

14.0

Notes:
(1) There are no advances which are past due or on nonaccrual status.
(2) All mortgage loans are fixed-rate. Balances are reflected net of the allowance for credit losses.
(3) Nonaccrual mortgage loans are reported net of interest applied to principal and does not include performing TDRs of $14.8 million, $12.8 million, $12.0 million, $10.2 million and $4.1 million at December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
(4) Only government-insured or -guaranteed loans continue to accrue interest after becoming 90 days or more delinquent.

The performance of the mortgage loans in the Bank’s MPF Program has been relatively stable since year-end 2014, and the MPF Original portfolio continues to out-perform the market based on national delinquency statistics. As of December 31, 2015, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.5% of the MPF Original portfolio and 3.3% of the MPF Plus portfolio compared with 0.6% and 3.8%, respectively, at December 31, 2014.

Allowance for Credit Losses (ACL).  The Bank has not incurred any losses on advances since its inception. Due to the collateral held as security and the repayment history for advances, management believes that an ACL for advances is unnecessary. This assessment also includes letters of credit, which have the same collateral requirements as advances. For additional information, see discussion regarding collateral policies and standards on the advances portfolio in the Advance Products discussion in Item 1. Business in this Form 10-K.

The ACL on mortgage loans is based on the losses inherent in the Bank's mortgage loan portfolio after taking into consideration the CE structure of the MPF Program. The losses inherent in the portfolio are based on either an individual or collective assessment of the mortgage loans. The Bank purchases government-guaranteed and/or -insured and conventional fixed-rate residential mortgage loans. Because the credit risk on the government-guaranteed/insured loans is predominantly assumed by other entities, only conventional mortgage loans are evaluated for an ACL.

The Bank’s conventional mortgage loan portfolio is comprised of large groups of smaller-balance homogeneous loans made to borrowers by PFIs that are secured by residential real estate. A mortgage loan is considered impaired when it is probable that all contractual principal and interest payments will not be collected as scheduled based on current information and events. The Bank evaluates certain conventional mortgage loans for impairment individually. Beginning January 1, 2015, the Bank adopted the charge-off provisions of AB 2012-02. As a result, the estimated credit loss on individually evaluated MPF loans is charged-off against the reserve. However, if the estimated loss can be recovered through CE, a receivable is established, resulting in a net charge-off. The CE receivable is evaluated for collectibility, and a reserve, included as part of the allowance for credit losses, is established, if required.

43



The remainder of the portfolio's incurred loss is estimated using a collective assessment, which is based on probability and loss given default. Probability of default and loss given default are based on the prior 12 month historical performance of the Bank's mortgage loans. Probability of default is based on a migration analysis, and loss given default is based on realized losses incurred on the sale of mortgage loan collateral including a factor that reduces estimated proceeds from PMI given the credit deterioration experienced by those companies.
 

The following table presents the rollforward of ACL on the mortgage loans held for portfolio for the years 2011 through 2015.
(in millions)
2015
2014
2013
2012
2011
Balance, beginning of year
$
7.3

$
11.4

$
14.2

$
14.3

$
3.2

(Charge-offs) Recoveries, net
(0.8
)
0.3

(1.0
)
(0.5
)
(0.5
)
Provision (benefit) for credit losses
(0.8
)
(4.4
)
(1.8
)
0.4

11.6

Balance, end of year
$
5.7

$
7.3

$
11.4

$
14.2

$
14.3

As a % of mortgage loans held for portfolio
0.2
%
0.2
%
0.4
%
0.4
%
0.4
%

The CE structure of the MPF Program is designed such that initial losses on mortgage loans are incurred by the Bank up to an agreed upon amount, referred to as the FLA. Additional eligible credit losses are covered by CEs provided by PFIs (available CE) until exhausted. Certain losses incurred by the Bank on MPF Plus can be recaptured by withholding fees paid to the PFI for its retention of credit risk. All additional losses are incurred by the Bank. The following table presents the impact of the CE structure on the ACL and the balance of the FLA and available CE at December 31, 2015 and December 31, 2014.
 
MPF CE structure
December 31, 2015
ACL
December 31, 2015
(in millions)
FLA
Available CE
Estimate of Credit Loss
Charge -offs
Reduction to the ACL due
to CE
ACL
MPF Original
$
3.7

$
177.1

$
4.3

$
(0.9
)
$
(4.1
)
$
0.2

MPF Plus
18.9

32.1

12.7


(7.2
)
5.5

Total
$
22.6

$
209.2

$
17.0

$
(0.9
)
$
(11.3
)
$
5.7

 
MPF CE structure
December 31, 2014
ACL
December 31, 2014
(in millions)
FLA
Available CE
Estimate of Credit Loss
Reduction to the ACL due
to CE
ACL
MPF Original
$
3.2

$
157.2

$
3.5

$
(2.9
)
$
0.6

MPF Plus
20.0

35.8

15.7

(9.0
)
6.7

Total
$
23.2

$
193.0

$
19.2

$
(11.9
)
$
7.3


The ACL on mortgage loans decreased $1.6 million to $5.7 million from $7.3 million during 2015. The ACL associated with MPF Original decreased slightly due to charge-offs and the CE structure of the program. The increased estimate of credit losses on MPF Original during 2015 was covered by the PFI’s through CE. The ACL associated with MPF Plus decreased primarily due to the expanded use of fair values for collateral on MPF Plus loans, which were originated in 2006 and earlier, which resulted in a lower estimate of loss due in part to an improving housing market reflected in generally higher home values and higher property equity. Additionally the Bank adopted the charge-off provisions of AB 2012-02, discussed above. The Advisory Bulletin requires the Bank to charge-off the portion of the loan classified as a “loss”.

The ACL for BOB is based on probability of default and loss given default. Loss given default is considered to be 100% due to the fact that the BOB program has no collateral or CE requirements. Beginning January 1, 2011, probability of default is based on the actual performance of the BOB loan portfolio. Prior to that time, probability of default was based on NRSRO statistics for speculative grade corporate debt securities and trends in GDP. The following table presents the ACL on the BOB loans for the years 2011 through 2015.
 

44


(in millions)
2015
2014
2013
2012
2011
Balance, beginning of year
$
1.8

$
2.2

$
2.5

$
3.3

$
5.8

(Charge-offs) Recoveries, net
(0.4
)
(0.6
)
(0.2
)
(0.8
)
(0.9
)
Provision (benefit) for credit losses
0.7

0.2

(0.1
)

(1.6
)
Balance, end of year
$
2.1

$
1.8

$
2.2

$
2.5

$
3.3

As a % of BOB loans
18.2
%
15.9
%
16.2
%
16.2
%
18.6
%

Based on the nature of the BOB program, to assist small and start-up businesses, the Bank expects that some of the loans will default. The ratio of charge-offs to average loans outstanding, net, was approximately 3.8% and 5.4% during 2015 and 2014, respectively.

Real Estate Owned (REO). When a PFI or servicer forecloses on a delinquent mortgage loan, the Bank reclassifies the carrying value of the loan to other assets as REO at fair value less estimated selling expenses. If the fair value of the REO property is lower than the carrying value of the loan, then the difference to the extent such amount is not expected to be recovered through recapture of performance-based CE fees is recorded as a charge-off to the ACL. The fair value less estimated costs to sell the property becomes the new cost basis for subsequent accounting. If the fair value of the REO property is higher than the carrying value of the loan, then the REO property is recorded at fair value less estimated selling costs. This is rare as the Bank believes this situation would require additional validation of the fair value. The servicer is charged with the responsibility for disposing of real estate on defaulted mortgage loans on behalf of the Bank. Once a property has been sold, the servicer presents a summary of the gain or loss for the individual mortgage loan to the master servicer for reimbursement of any loss. Gains on the sale of REO property are held and offset by future losses in the pool of loans, ahead of any remaining balances in the FLA. Losses are deducted from the FLA, if it has not been fully used. At December 31, 2015 and 2014, the Bank held $6.5 million and $6.9 million, respectively, of REO.

Cash and Due From Banks.  At December 31, 2015, cash and due from banks totaled $2.4 billion compared to $2.5 billion at December 31, 2014.


45


Investments. At December 31, 2015, the sum of the Bank’s interest-bearing deposits, Federal funds sold and securities purchased under agreement to resell increased approximately $0.4 billion from December 31, 2014 to $5.0 billion. The Bank’s strategy is to maintain its short-term liquidity position in part to be able to meet members’ loan demand and regulatory liquidity requirements. Investment securities, including trading, AFS, and HTM securities, totaled $11.2 billion at December 31, 2015 compared to $11.9 billion at December 31, 2014. Details of the investment securities portfolio follow.
 
Carrying Value
 
December 31,
(in millions)
2015
2014
2013
Trading securities:
 
 
 
  Mutual funds
$
5.4

$
4.7

$
4.6

  GSE and Tennessee Valley Authority (TVA) obligations
389.3

276.3

234.6

Total trading securities
$
394.7

$
281.0

$
239.2

AFS securities:
 
 
 
  Mutual funds
$
2.0

$
2.0

$
2.0

  GSE and TVA obligations
3,469.2

3,233.7

2,096.2

  State or local agency obligations
134.2

99.0

14.0

  MBS:
 
 
 
     Other U.S. obligations single family MBS
268.5

329.4

385.3

     GSE single-family MBS
2,383.6

2,882.1

2,282.1

     GSE multifamily MBS
1,010.5

879.8

840.1

     Private label residential MBS
822.7

971.1

1,123.6

     Private label HELOCs
9.2

11.7

14.4

Total AFS securities
$
8,099.9

$
8,408.8

$
6,757.7

HTM securities:
 
 
 
  GSE securities
$

$
13.0

$
16.2

  State or local agency obligations
169.5

184.4

242.9

  MBS:
 
 
 
     Other U.S. obligations single family MBS
819.6

1,122.5

1,435.5

     GSE single-family MBS
294.6

417.2

561.6

     GSE multifamily MBS
863.1

818.1

856.3

     Private label residential MBS
516.5

691.6

873.3

     Private label HELOCs


9.7

Total HTM securities
$
2,663.3

$
3,246.8

$
3,995.5

Total investment securities
$
11,157.9

$
11,936.6

$
10,992.4





46


The following table presents the composition of investment securities and investments, assuming no principal prepayments, as of December 31, 2015. Contractual maturity of MBS is not a reliable indicator of their expected life because borrowers generally have the right to prepay their obligation at any time.
(dollars in millions)
Due in 1 year or less
Due after 1 year through 5 years
Due after 5 years through 10 years
Due after 10 years
Carrying Value
Trading securities:
 
 
 
 
 
  Mutual funds
$
5.4

$

$

$

$
5.4

  GSE and TVA obligations


267.2

122.1

389.3

Total trading securities
$
5.4

$

$
267.2

$
122.1

$
394.7

Yield on trading securities
n/a

n/a

2.88
%
3.13
%
2.92
%
AFS securities:
 
 
 
 
 
  Mutual funds
$
2.0

$

$

$

$
2.0

  GSE and TVA obligations
26.7

1,919.0

824.5

699.0

3,469.2

  State or local agency obligations


1.1

133.1

134.2

  MBS:
 
 
 
 
 
    Other U.S. obligations single family MBS



268.5

268.5

    GSE single-family MBS


111.0

2,272.6

2,383.6

    GSE multifamily MBS
71.9

353.5

585.1


1,010.5

    Private label residential MBS



822.7

822.7

    Private label HELOCs



9.2

9.2

Total AFS securities
$
100.6

$
2,272.5

$
1,521.7

$
4,205.1

$
8,099.9

Yield on AFS Securities
1.33
%
1.25
%
2.43
%
2.36
%
2.05
%
HTM securities:
 
 
 
 
 
  State or local agency obligations
$

$

$
57.5

$
112.0

$
169.5

  MBS:
 
 
 
 
 
    Other U.S. obligations single family MBS

216.5


603.1

819.6

    GSE single-family MBS

5.4

63.2

226.0

294.6

    GSE multifamily MBS

703.9

159.2


863.1

    Private label residential MBS

10.1


506.4

516.5

Total HTM securities
$

$
935.9

$
279.9

$
1,447.5

$
2,663.3

Yield on HTM securities
n/a

2.81
%
2.67
%
1.77
%
2.23
%
Total investment securities
$
106.0

$
3,208.4

$
2,068.8

$
5,774.7

$
11,157.9

Yield on investment securities
1.26
%
1.70
%
2.52
%
2.23
%
2.12
%
Interest-bearing deposits
6.1




6.1

Federal funds sold
3,980.0




3,980.0

Securities purchased under agreements to resell
1,000.0




1,000.0

Total investments
$
5,092.1

$
3,208.4

$
2,068.8

$
5,774.7

$
16,144.0


The yield on AFS securities increased to 2.05% at December 31, 2015 from 1.73% at December 31, 2014 and was due primarily to the increase in yield on seven securities that have previously incurred OTTI. Recoveries of OTTI occur through interest income, which happen if there is a significant increase in estimated cash flows whereby the Bank increases the yield on the Bank’s investment and recognizes recovery as interest income over the life of the investment.


47


As of December 31, 2015, the Bank held securities from the following issuers with a book value greater than 10% of Bank total capital.
 
Total
Book Value
Total
Fair Value
(in millions)
Freddie Mac
$
4,490.9

$
4,511.2

Fannie Mae
2,046.5

2,059.3

Federal Farm Credit Banks
1,766.8

1,766.8

Ginnie Mae
871.6

876.6

Total
$
9,175.8

$
9,213.9


For additional information on the credit risk of the investment portfolio, see Credit and Counterparty Risk - Investments discussion in the Risk Management section of this Item 7. Management’s Discussion and Analysis in this Form 10-K.

Liabilities and Capital

Time Deposits. At December 31, 2015 and 2014, the Bank had no time deposits.

Short-term Borrowings. For the table below, borrowings with original maturities of one year or less are classified as short-term. The following is a summary of key statistics for the Bank’s short-term borrowings at par.
 
Consolidated Obligations - Discount Notes
Consolidated Obligations -Bonds with original maturities of one year or less
(dollars in millions)
2015
2014
2013
2015
2014
2013
Outstanding at the end of the period
$
42,318.5

$
37,065.7

$
28,242.2

$
14,237.6

$
6,850.9

$
6,859.7

Weighted average rate at end of the
  period
0.32
%
0.10
%
0.09
%
0.29
%
0.15
%
0.13
%
Daily average outstanding for the
  period
$
35,193.8

$
27,798.7

$
18,737.3

$
9,542.5

$
5,480.1

$
6,128.7

Weighted average rate for the period
0.15
%
0.09
%
0.10
%
0.19
%
0.12
%
0.16
%
Highest outstanding at any month-end
$
42,318.5

$
37,065.7

$
28,242.2

$
16,440.6

$
6,850.9

$
8,274.0


Contractual Obligations. The following table summarizes the expected payment of significant contractual obligations by due date or stated maturity date at December 31, 2015.
(in millions)
Total
Less than
1 Year
1 to 3
Years
4 to 5
Years
Thereafter
Consolidated obligations (at par):
 
 
 
 
 
     Bonds (1)
$
48,515.7

$
26,818.9

$
13,904.1

$
4,058.7

$
3,734.0

     Discount notes
42,318.5

42,318.5




Mandatorily Redeemable Capital Stock
6.0



6.0


Operating leases:
 
 
 
 
 
     Premises & Equipment
17.8

2.0

3.9

3.7

8.2

Pension and post-retirement contributions
8.1

0.9

0.9

1.3

5.0

Total
$
90,866.1

$
69,140.3

$
13,908.9

$
4,069.7

$
3,747.2

Note:
(1) Specific bonds or notes incorporate features, such as calls or indices, which could cause redemption at different times than the stated maturity dates.

Commitments and Off-Balance Sheet Items. As of December 31, 2015, the Bank was obligated to fund approximately $480.6 million in additional advances and BOB loans, $10.0 million of mortgage loans and $20.2 billion in outstanding standby letters of credit, and to issue $261.0 million in consolidated obligations. The Bank does not consolidate any off-balance sheet special purpose entities or other off-balance sheet conduits.


48


Capital and Retained Earnings. The Finance Agency has issued regulatory guidance to the FHLBanks relating to capital management and retained earnings. The guidance directs each FHLBank to assess, at least annually, the adequacy of its retained earnings with consideration given to future possible financial and economic scenarios. The guidance also outlines the considerations that each FHLBank should undertake in assessing the adequacy of its retained earnings.

Management monitors capital adequacy, including the level of retained earnings, through the evaluation of market value of equity to par value of capital stock (MV/CS) as well as other risk metrics. Details regarding these metrics are discussed in Risk Management portion in Item 7. Management’s Discussion and Analysis in this Form 10-K.

Management has developed and adopted a framework for evaluating retained earnings adequacy, consistent with regulatory guidance and requirements. Retained earnings are intended to cover unexpected losses and protect members’ par value of capital stock. The framework includes four risk elements that comprise the Bank’s total retained earnings target: (1) market risk (which includes private label MBS risk); (2) credit risk; (3) operating risk; and (4) accounting risk. The retained earnings target generated from this framework is sensitive to changes in the Bank’s risk profile, whether favorable or unfavorable. The framework assists management in its overall analysis of the level of future dividends. The framework generated a retained earnings target of $507 million as of December 31, 2015. The Bank’s retained earnings of $881.2 million at December 31, 2015 exceeded the target.

Retained earnings increased $43.7 million to $881.2 million at December 31, 2015, compared to $837.5 million at December 31, 2014. The increase in retained earnings during 2015 reflected net income that was offset by $212.8 million of dividends paid. Included in this amount was $72.0 million of a special dividend which was paid in February 2015. Total retained earnings at December 31, 2015 included unrestricted retained earnings of $718.7 million and RRE of $162.5 million.


49


Other Financial Information

Selected Quarterly Financial Data

The following tables present the Bank’s unaudited quarterly operating results for each quarter in 2015 and 2014.
 
2015
(in millions, except per share amounts)
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Interest income
$
185.7

$
177.4

$
169.3

$
163.1

Interest expense
107.6

94.3

88.2

87.6

Net interest income
78.1

83.1

81.1

75.5

Provision (benefit) for credit losses
0.2

(0.2
)
0.3

(0.5
)
Net interest income after provision
   (benefit) for credit losses
77.9

83.3

80.8

76.0

Other noninterest income (loss):
 
 
 
 
  Net OTTI losses, credit portion
(0.9
)
(0.4
)
(0.5
)

  Net gains (losses) on trading securities
(3.8
)
8.7

(10.1
)
6.8

  Net gains (losses) on derivatives and
    hedging activities
7.3

(25.4
)
29.1

(7.6
)
  Gains on litigation settlements, net



15.3

  Other, net
5.4

6.4

7.7

6.5

Total other noninterest income (loss)
8.0

(10.7
)
26.2

21.0

Other expense
25.5

16.7

17.4

18.0

Income before assessments
60.4

55.9

89.6

79.0

AHP assessment
6.0

5.6

9.0

7.9

Net income
$
54.4

$
50.3

$
80.6

$
71.1

Earnings per share (1)
$
1.65

$
1.51

$
2.53

$
2.42

 
2014
(in millions, except per share amounts)
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Interest income
$
165.5

$
154.8

$
153.9

$
151.9

Interest expense
82.8

82.5

88.1

89.6

Net interest income
82.7

72.3

65.8

62.3

Provision (benefit) for credit losses
(0.2
)
(0.4
)
0.4

(3.9
)
Net interest income after provision
   (benefit) for credit losses
82.9

72.7

65.4

66.2

Other noninterest income (loss):
 
 
 
 
  Net gains (losses) on trading securities
5.9

(0.1
)
6.8

9.8

  Net gains (losses) on derivatives and
    hedging activities
(19.0
)
0.2

(9.5
)
(9.2
)
  Gains on litigation settlements, net
20.2

14.1


36.6

  Other, net
5.2

5.0

5.1

4.5

Total other noninterest income
12.3

19.2

2.4

41.7

Other expense
23.8

17.5

18.2

19.1

Income before assessments
71.4

74.4

49.6

88.8

AHP assessment
7.1

7.4

5.0

8.9

Net income
$
64.3

$
67.0

$
44.6

$
79.9

Earnings per share (1)
$
2.32

$
2.22

$
1.59

$
2.75

Note:
(1) The sum of the quarterly amounts for each year does not equal the year’s amount because the quarterly calculations are based on a changing number of average shares.

50



Capital Resources
 
The following should be read in conjunction with Note 16 - Capital to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K.

 
Liquidity and Funding.  Refer to the Liquidity and Funding Risk section of Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for details.

Capital Plan and Dividends.  Refer to the Capital Resources section of Item 1. Business in this Form 10-K for details.

Risk-Based Capital (RBC)

The Finance Agency’s RBC regulatory framework requires the Bank to maintain sufficient permanent capital, defined as retained earnings plus capital stock, to meet its combined credit risk, market risk and operations risk. Each of these components is computed as specified in regulations and directives issued by the Finance Agency.
 
December 31,
(in millions)
2015
2014
Permanent capital:
 
 
 Capital stock (1)
$
3,545.7

$
3,041.6

 Retained earnings
881.2

837.5

Total permanent capital
$
4,426.9

$
3,879.1

 
 
 
RBC requirement:
 
 
 Credit risk capital
$
477.0

$
544.8

 Market risk capital
154.2

107.0

 Operations risk capital
189.4

195.6

Total RBC requirement
$
820.6

$
847.4

Excess permanent capital over RBC requirement
$
3,606.3

$
3,031.7

Note:
 
 
(1)Capital stock includes mandatorily redeemable capital stock.

The total RBC requirement decreased in 2015 as discussed further below. Total permanent capital increased in 2015 due to increases in both capital stock and retained earnings. The Bank continues to maintain significant excess permanent capital over the RBC requirement.

On December 10, 2015, the Bank received final notification from the Finance Agency that it was considered “adequately capitalized” for the quarter ended September 30, 2015. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended December 31, 2015.

Credit Risk Capital.  The Bank’s credit risk capital requirement is the sum of credit risk capital charges computed for assets, off-balance sheet items, and derivative contracts based on the credit risk percentages assigned to each item as determined by the Finance Agency. The credit risk capital requirement decline in 2015 compared to 2014 was primarily due to run-off of the private label MBS portfolio.

 
Market Risk Capital.  The Bank’s market risk capital requirement is the sum of the market value of the Bank’s portfolio at risk from movements in interest rates and the amount, if any, by which the Bank’s current market value of equity is less than 85% of the Bank’s book value of equity as of the measurement calculation date. The Bank calculates the market value of its portfolio at risk and the current market value of its total capital by using a market risk model that is subject to annual independent validation.

 
The market risk component of the overall RBC framework is designed around a “stress test” approach. Simulations of several hundred historical market interest rate scenarios are generated and, under each scenario, the hypothetical beneficial/adverse effects on the Bank’s current market value of equity are determined. The hypothetical beneficial/adverse effect

51


associated with each historical scenario is calculated by simulating the effect of each set of market conditions upon the Bank’s current risk position, which reflects current assets, liabilities, derivatives and off-balance-sheet commitment positions as of the measurement date. From the resulting simulated scenarios, the most severe deterioration in market value of capital is identified as that scenario associated with a probability of occurrence of not more than 1% (i.e., a 99% confidence interval). The hypothetical deterioration in market value of equity in this scenario, derived under the methodology described above, represents the market value risk component of the Bank’s regulatory RBC requirement. The market risk component increase in 2015 compared to 2014 was primarily a result of interest changes during the periods.
 
Operations Risk Capital.  The Bank’s operations risk capital requirement as prescribed by Finance Agency regulation is equal to 30% of the sum of its credit risk capital requirement and its market risk capital requirement.

Regulatory Capital and Leverage Ratios

In addition to the RBC requirements, the Finance Agency has mandated maintenance of total regulatory capital and leverage ratios of at least 4.0% and 5.0% of total assets, respectively. Management has an ongoing program to measure and monitor compliance with the ratio requirements. The Bank exceeded all regulatory capital requirements at December 31, 2015.
 
December 31,
December 31,
(dollars in millions)
2015
2014
Regulatory Capital Ratio
 
 
Minimum capital (4.0% of total assets)
$
3,853.5

$
3,427.1

Regulatory capital
4,426.9

3,879.1

Total assets
96,336.3

85,677.1

Regulatory capital ratio (regulatory capital as a percentage of total assets)
4.6
%
4.5
%
 
 
 
Leverage Ratio
 
 
Minimum leverage capital (5.0% of total assets)
$
4,816.8

$
4,283.9

Leverage capital (permanent capital multiplied by a 1.5 weighting factor)
6,640.5

5,818.7

Leverage ratio (leverage capital as a percentage of total assets)
6.9
%
6.8
%

The Bank’s capital stock is owned by its members. The concentration of the Bank’s capital stock by institution type is presented below.
(dollars in millions)
December 31, 2015
December 31, 2014
Commercial banks
170

$
3,055.3

179

$
2,687.5

Thrifts
69

278.1

72

254.9

Insurance companies
17

161.1

10

57.1

Credit unions
49

44.7

42

41.4

CDFI
2

0.5

1

0.1

Total member institutions / total GAAP capital stock
307

$
3,539.7

304

$
3,041.0

Mandatorily redeemable capital stock
 
6.0

 
0.6

Total capital stock
 
$
3,545.7

 
$
3,041.6



52


Critical Accounting Policies and Estimates

The Bank’s financial statements are prepared by applying certain accounting policies. Note 1 - Summary of Significant Accounting Policies in the Notes to Financial Statements in Item 8. of this Form 10-K describes the most significant accounting policies used by the Bank. Certain of these policies require management to make estimates or economic assumptions that may prove inaccurate or be subject to variations that may significantly affect the Bank’s reported results and financial position for the period or in future periods.

Fair Value Calculations and Methodologies.  The Bank carries certain assets and liabilities, including investments classified as AFS and trading, and derivatives on the Statement of Condition at fair value. The Bank also provides certain fair value based disclosures, including the methods and significant assumptions used to estimate those fair values. Fair value is the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. At times there may be little, if any, market activity for an asset at the measurement date; however, the fair value measurement objective remains the same, that is, the price that would be received by the holder of the financial asset in an orderly transaction (an exit price notion) that is not a forced liquidation or distressed sale at the measurement date. Even in times of market dislocation, it is not appropriate to conclude that all market activity represents forced liquidations or distressed sales. However, it is also not appropriate to automatically conclude that any transaction price is determinative of fair value. Determining fair value in a dislocated market depends on the facts and circumstances and may require the use of significant judgment about whether individual transactions are forced liquidations or distressed sales. The determination of fair value by the Bank for each asset or liability assumes that the transaction occurs in the principal market by market participants.

Fair values are based on quoted market prices, if such prices are available. If quoted market prices are not available, fair values are determined using a modified matrix pricing approach for MBS or are based on valuation models that use discounted cash flows, using market estimates of interest rates and volatility. At times, dealer prices on similar instruments are used to determine fair value.

Pricing models and their underlying assumptions are based on the best estimates of management with respect to:
interest rate projections;
discount rates;
prepayments;
market volatility; and
other factors.

These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the income and expense related thereto. The use of different assumptions, as well as changes in market conditions, could result in materially different net income and retained earnings. With respect to those fair values that are based on valuation models, the Bank regularly validates the models used to generate the fair values. Such model validations are generally performed by third-party specialists and are supplemented by additional validation processes performed by the Bank, most notably, benchmarking model-derived fair values to counterparties, third-party vendors, or occasionally, alternative internal valuation models.
 

The Bank’s methodology for estimating MBS fair values was developed by the FHLBanks’ MBS Pricing Governance Committee to achieve consistency across the FHLBank System. The methodology requires that the Bank request prices for all MBS from four third-party vendors and calculate a median price. All prices received from the vendors that fall within certain tolerance thresholds to the median price are deemed to be in a cluster and are averaged to calculate the default price of each MBS. Prices received that are outside of the cluster are evaluated to determine if any of those or a different price, is the best fair value estimate of the MBS. In certain limited instances (i.e., prices are all outside of the cluster or the third-party services do not provide a price), the Bank will obtain a price from securities dealers or internally model a price that is deemed most appropriate after consideration of all relevant factors that would be considered by market participants. Prices for CUSIPs held in common with other FHLBanks are reviewed for consistency. In using this common methodology, each FHLBank remains responsible for the selection and application of its fair value methodology and the reasonableness of assumptions and inputs used.

The four pricing vendors use various proprietary models to price MBS. Since many MBS do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process, which facilitates resolution of potentially erroneous prices identified by the Bank. The Bank had a minimal number of

53


price exceptions that required a challenge, and such challenges had an insignificant impact on fair value, as the Bank used the average cluster prices in almost all instances. The Bank conducted reviews of the four pricing vendors to understand the vendors’ pricing processes, methodologies and control procedures. To the extent available, the Bank also reviewed the vendors’ independent auditors’ reports regarding the internal controls over their valuation processes, and no information obtained caused the Bank to modify its process or invalidate its results. As an additional step, the Bank reviewed the fair value estimates of certain private label MBS as of December 31, 2015 for inconsistencies using an implied yield test, which resulted in no adjustments to fair value.

The Bank categorizes financial instruments carried at fair value into a three-level hierarchy. The valuation hierarchy is based upon the transparency (observability) of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s own assumptions that it believes market participants would use. In general, the Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. However, in markets that are illiquid, the Bank may utilize more unobservable inputs if they better reflect market value. With respect to the Bank’s private label MBS, the Bank concluded that overall, the inputs used to determine fair value are unobservable (i.e., Level 3).

Accounting for Derivatives. The Bank uses derivative instruments as part of its risk management activities to protect the value of certain assets, liabilities and future cash flows against adverse interest rate movements. The accounting for derivatives is considered critical because such transactions are subject to complex accounting rules and because derivative and hedge accounting related valuations are based on techniques that involve the use of highly subjective assumptions.

Derivative instruments are presented on the Statement of Condition at fair value. Any change in the fair value of a derivative is required to be reflected in current period earnings, regardless of how fair value changes in the assets or liabilities being hedged may be treated. This accounting treatment can cause significant volatility in reported net income from period to period.

The Bank is subject to credit risk in derivative transactions due to potential nonperformance by the derivative counterparties. For cleared derivatives, the centralized Clearing Houses are the Bank’s counterparties. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily, through a clearing agent, and the amount of required collateral puts the Bank in an over-collateralized position to limit risk. For uncleared trades, the Bank evaluates the potential for the fair value of the derivative instruments to be impacted by changes in its own creditworthiness and the creditworthiness of the derivative counterparties after consideration of legally enforceable risk mitigation agreements. For example, the Bank requires counterparties to enter into a Credit Support Annex that specifies when collateral must be posted against exposure over an unsecured threshold amount. The Credit Support Annex also governs netting and security rights of the parties concerning pledged collateral and requires that collateral (cash and securities) be pledged and delivered at specified levels based on individual credit ratings as reported by the credit rating agencies. The Credit Support Annexes predominantly allow re-hypothecation of collateral. In certain instances, the Bank utilizes a third party custodian to hold the collateral. Due to the credit risk mitigation provided by the derivative counterparty agreements, the Bank has determined that the impact of credit risk on the fair value of its derivatives is insignificant and no adjustments are necessary.

Generally, the Bank uses derivatives when they are likely to provide a cost-effective means to mitigate the interest rate risk inherent in its business. The most common objectives of hedging with derivatives include: (1) preserving an interest rate spread between the yield of an asset and the cost of a supporting liability; (2) mitigating the adverse earnings effects resulting from the potential prepayment or extension of certain assets and liabilities; and (3) protecting the value of existing asset or liability positions or of anticipated transactions. Much of the Bank’s hedging activity is directed toward reducing interest rate risk and basis risk from loans and supporting debt. Historically, the Bank has used structured debt to create low-cost funding, which is used primarily to provide more attractively priced loans to the Bank’s members. Derivatives are also used to hedge loans with specialized embedded pricing features, customized to meet individual member funding needs and/or to reduce member borrowing costs.

The Bank’s policy remains consistent with Finance Agency regulation, which is to use derivative instruments only to reduce the market risk exposures inherent in the otherwise unhedged asset and funding positions of the Bank.

OTTI Assessments for Investment Securities. For debt securities, impairment is considered to be other than temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its amortized cost basis, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell the security), which occurs if the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security (any such shortfall is referred to as a credit loss).

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The Bank evaluates AFS and HTM securities in an unrealized loss position (i.e., impaired securities) for OTTI on a quarterly basis. For its private label residential MBS, the Bank employs models or alternative procedures to determine the cash flows that it is likely to collect. These models consider borrower characteristics and the particular attributes of the loans underlying the securities, in conjunction with assumptions about future changes in home prices and interest rates, to predict the likelihood a loan will default and the impact on default frequency, loss severity and remaining credit enhancement. A significant input to these models is the forecast of future housing price changes for the relevant states and metropolitan statistical areas, which is based upon an assessment of the various housing markets. In general, since the ultimate receipt of contractual payments on these securities will depend upon the credit and prepayment performance of the underlying loans and, if needed, the credit enhancements for the senior securities owned by the Bank, the Bank uses these models to assess whether the credit enhancement associated with each security is sufficient to protect against likely losses of principal and interest on the underlying mortgage loans. The development of the modeling assumptions requires significant judgment.

The modeling assumptions are developed through the FHLBanks’ OTTI Governance Committee, which is responsible for reviewing and approving the key assumptions. The OTTI Governance Committee requires the FHLBanks to generate cash flow projections on a common platform. For certain private label residential MBS where underlying loan level collateral data is not available, alternative procedures are used to assess these securities for OTTI, potentially including a cash flow test. Additionally, the OTTI Governance Committee requires the FHLBanks to perform OTTI analysis on sample securities to ensure that the OTTI analysis produces consistent results among the FHLBanks. If the Bank determines that a commonly owned security is other-than-temporarily impaired, the FHLBanks that jointly own the common security will consult with each other on the financial results.

During each quarter of 2015, the Bank reviewed the FHLBank System-wide assumptions used in the OTTI process. Based on the results of these reviews, the Bank deemed the FHLBank System-wide assumptions to be reasonable and adopted them. However, different assumptions could produce materially different results, which could impact the Bank’s conclusions as to whether an impairment is considered other-than-temporary and the magnitude of the credit loss.

If the Bank intends to sell an impaired debt security, or more likely than not will be required to sell the security before recovery of its amortized cost basis, the impairment is other-than-temporary and is recognized currently in earnings in an amount equal to the entire difference between fair value and amortized cost. To date, the Bank has not met either of these conditions.

In instances in which the Bank determines that a credit loss exists but the Bank does not intend to sell the security and it is not more likely than not that the Bank will be required to sell the security before the anticipated recovery of its remaining amortized cost basis, the OTTI is separated into (1) the amount of the total impairment related to the credit loss and (2) the amount of the total impairment related to all other factors (i.e., the noncredit portion). The amount of the OTTI related to the credit loss, which could be up to the difference between the security’s amortized cost basis and its fair value, is recognized in earnings. The amount of the total OTTI related to all other factors is recognized in AOCI. The total OTTI is presented in the Statement of Income with an offset for the amount of the total OTTI that is recognized in AOCI. Absent the intent or requirement to sell a security, if a credit loss does not exist, any impairment is considered to be temporary.

Regardless of whether an OTTI is recognized in its entirety in earnings or if the credit portion is recognized in earnings and the noncredit portion is recognized in AOCI, the estimation of fair values has a significant impact on the amount(s) of any impairment that is recorded.

The Bank transfers investment securities from HTM to AFS when an OTTI credit loss has been recorded to increase its flexibility to sell the securities if management determines it is prudent to do so. The Bank believes that the credit loss constitutes evidence of a significant decline in the issuer’s creditworthiness. The noncredit portion of any OTTI losses on securities classified as AFS is adjusted to fair value with an offsetting adjustment to the carrying value of the security. The fair value adjustment could increase or decrease the carrying value of the security.
 
In periods subsequent to the recognition of an OTTI loss, the other-than-temporarily impaired debt security is accounted for as if it had been purchased on the measurement date of the OTTI at an amount equal to the previous amortized cost basis less the credit-related OTTI recognized in earnings. In future OTTI evaluations, if the present value of cash flows expected to be collected is less than the amortized cost basis, an additional OTTI credit loss is recorded in earnings. If the present value of cash flows expected to be collected is greater than amortized cost by a significant amount, the Bank adjusts the accretable yield on a prospective basis. Therefore, the Bank recognizes significant cash flow improvements in securities through interest income.


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Advances and Related Allowance for Credit Losses. Since its establishment in 1932, the Bank has never experienced a credit loss on advances. Further, management does not anticipate credit losses on any advances currently outstanding to members. The Bank is required by statute to obtain sufficient collateral on advances to protect against losses and to accept as collateral on member loans only high quality investment securities, residential mortgage loans, deposits in the Bank, and ORERC and CFI assets. The Bank continues to have rights to mortgage loans and/or securities as collateral on a member-by-member basis with an estimated net realizable value in excess of the outstanding advances of each individual borrower. Accordingly, there is no allowance for credit losses for advances.

Guarantees and Consolidated Obligations. The Bank is jointly and severally liable for the payment of all the consolidated obligations of the entire FHLBank System. Accordingly, if one or more of the FHLBanks were unable to repay its direct participation in the consolidated obligations, each of the other FHLBanks could be called upon to repay all or part of those obligations, as approved or directed by the Finance Agency. The Finance Agency at its discretion may also require any FHLBank to make principal or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. For example, if the assets of an FHLBank are insufficient to satisfy all of its direct obligations on its outstanding consolidated obligations, the Finance Agency could allocate the outstanding liability among the other FHLBanks on a pro-rata or other basis. The Bank does not recognize a liability for its joint and several obligations related to consolidated obligations issued for other FHLBanks because the Bank does not expect to pay any amount on behalf of the other FHLBanks. On the Statement of Condition, the Bank records a liability for consolidated obligations associated only with the proceeds it receives from the issuance of those consolidated obligations.

Accounting for Premiums/Discounts, Prepayment Fees and Basis Adjustments on Advances, Mortgage Loans, MBS and Consolidated Obligations. Typically, the Bank purchases mortgage loans and MBS at amounts that are different than the contractual note amount. The difference between the purchase price and the contractual note amount establishes a premium or discount. The Bank also receives or incurs various mortgage related fees and at times receives advance prepayment fees that may be deemed to be a minor modification. Mortgage loans and MBS are reported on the Statement of Condition at their principal amount outstanding net of deferred loan fees and premiums or discounts. Bank policy requires the amortization or accretion of these items to interest income using the contractual method. This produces a constant effective yield over the contractual life, which represents the stated maturity. Under the contractual method to maturity, the income effects of the amortization or accretion are recognized in a manner that reflects the actual behavior of the underlying assets during the period in which the behavior occurs. Also, this method tracks the contractual terms of the assets without regard to changes in estimates based on assumptions about future borrower behavior. Premiums and discounts on MBS that are determined to be OTTI are not accounted for in accordance with this policy, but with the Bank’s accounting for OTTI above. Basis adjustments are accreted or amortized over the remaining lives of the advances or debt using the contractual method. Examples of events that may cause basis adjustments include the termination of a fair value hedging relationship and prepayment fees associated with a minor modification of an advance.

Allowance for Credit Losses on Mortgage Loans Held for Portfolio. The Bank bases the allowance for credit losses on management’s estimate of loan losses inherent in the Bank’s mortgage loan portfolio as of the balance sheet date taking into consideration CE structure of the MPF Program. For impaired collateral-dependent loans, the Bank estimates the loss based upon the fair value of the loan as determined by a third-party automated valuation model (AVM), adjusted based on the amount historically received by the Bank on liquidations, less estimated selling costs. For the remainder of the portfolio, the Bank estimates the probability of default and loss given default based on the actual 12 month historical performance of the Bank’s mortgage loans. Actual probability of default is determined by applying migration analysis to categories of mortgage loans (current, 30 days past due, 60 days past due, and 90 days past due). Actual loss given default is determined based on realized losses incurred on the sale of mortgage loan collateral.

The Bank charges off any estimated credit loss on impaired MPF loans against the reserve. The total estimated losses and charge-offs are reduced by the CEs available under the MPF Program, which are contractually set. The Bank incurs the initial losses on mortgage loans up to an agreed upon amount, referred to as the first loss account (FLA). Losses in excess of the FLA are covered by the CEs of the MPF Program and are excluded from the determination of the allowance for credit losses. Losses in excess of the CEs are incurred by the Bank. In addition, certain losses incurred by the Bank can be recaptured by withholding fees paid to the PFI (or Seller) for its retention of credit risk. Losses expected to be recaptured are also excluded from the determination of the allowance for credit losses. The CE Receivable is also evaluated for collectability and a reserve, if required, is established as part of the allowance for credit losses.

Proposed and Recently Issued Accounting Standards. The Financial Accounting Standards Board (FASB) has been working on various changes related to the accounting for financial instruments including classification and measurement, credit losses, and derivatives and hedging activities. The FASB's overall financial instruments projects may have a material impact on

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the Bank's reporting of its financial condition and results of operations. The Bank will continue to monitor the FASB's progress on these matters.

The Finance Agency issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention (AB 2012-02), as amended by AB 2013-02. AB 2012-02 establishes a standard and uniform methodology for adverse classification and identification of special mention assets and off-balance sheet credit exposures at the FHLBanks, excluding investment securities. The Bank incorporated the adverse classification requirements of AB 2012-02 as well as estimates of fair values on loans in its calculation of the required “loss” on MPF loans beginning January 1, 2014, which resulted in an immaterial benefit to the Bank’s Allowance for Credit Losses. The charge-off requirements of AB 2012-02 became effective for the Bank beginning January 1, 2015, and did not have a material impact on the Bank’s Statements of Income, Comprehensive Income, and Condition.

The FASB issued an ASU addressing the accounting for debt issuance costs. The ASU was effective for the Bank beginning January 1, 2016, and requires the Bank to record these costs as a direct deduction from the related debt on its Statement of Condition, consistent with debt discounts. The Bank adopted this guidance retrospectively, and its first quarter 2016 Statement of Condition will reflect an immaterial reclassification of debt issuance costs from Other Assets to Consolidated Obligations.

The FASB issued an ASU which amends existing guidance on the classification and measurement of financial instruments. Although much of the existing requirements are not changed, this guidance revises the accounting for equity securities, financial liabilities measured under the fair value option, and certain disclosure requirements for fair value of financial instruments. The Bank is evaluating the impact of this guidance, which will be effective for the Bank beginning January 1, 2018.

The FASB issued guidance which amends the accounting for leases. The guidance will require lessees to recognize a right-of-use asset and lease liability for virtually all leases, other than short-term leases. The Bank is evaluating the impact of this guidance, which will be effective for the Bank beginning January 1, 2019.

See Note 2 - Accounting Adjustments, Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K. Note 2 contains information on new accounting pronouncements impacting the 2015 financial statements or that will become effective for the Bank in future periods.

Legislative and Regulatory Developments

The legislative and regulatory environment in which the Bank and its members operate continues to evolve as a result of regulations enacted pursuant to the Housing Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The Bank’s business operations, funding costs, rights, obligations, and/or the environment in which the Bank carries out its housing finance, community lending and liquidity mission are likely to continue to be significantly impacted by these changes. Significant regulatory actions and developments for the period covered by this report are summarized below.

Significant Finance Agency Developments

Finance Agency Final Rule on FHLBank Membership. On January 20, 2016, the Finance Agency published a final rule effective February 19, 2016, that among other things:

defines “insurance company” as an entity that holds an insurance license or charter under state law and whose primary business is the underwriting of insurance for persons or entities that are not its affiliates;
defines a “captive” as an entity that holds an insurance license or charter under state law, but that does not meet the definition of “insurance company” set forth in the rule or fall within any other category of institution eligible for FHLBank membership;
defines an institution’s principal place of business as the state in which it maintains its home office and from which the institution conducts business operations. The requirement in the final rule regarding conducting business operations is a change from the prior rule and may have an effect on the membership eligibility of insurance companies; and
makes captive insurance companies ineligible for FHLBank membership.

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Captive insurance company members that were admitted as FHLBank members prior to September 12, 2014, (the date the Finance Agency proposed this rule) shall have their memberships terminated by February 19, 2021. There are restrictions on the level and maturity of advances that FHLBanks can make to these members during this “wind down” period. Captive insurance company members that were admitted as FHLBank members after September 12, 2014, shall have their memberships terminated by February 19, 2017 and the respective FHLBanks shall not make or renew any advances to these captives.

In the final rule, the Finance Agency declined to adopt certain proposed provisions that would have required FHLBank members to hold specified levels of home mortgage loan assets on an ongoing basis. The Bank does not expect the final rule to have a material impact on our financial condition or results of operations.

Finance Agency Proposed Rule on Acquired Member Assets. On December 17, 2015, the Finance Agency published a proposed rule that would amend the current Acquired Member Assets (AMA) rule, which governs an FHLBank’s ability to purchase and hold certain types of mortgage loans from its members. The proposed rule would allow an FHLBank to utilize its own model in lieu of a Nationally Recognized Statistical Ratings Organization (NRSRO) ratings model to determine the credit rating for AMA loan assets and loan pools. The proposed rule would also eliminate the use of pool level insurance, such as supplemental mortgage insurance, as part of the required credit risk-sharing structure for AMA products; however, the FHLBanks are not currently acquiring AMA loans using this structure. In addition, the proposed rule permits the transfer of servicing for MPF loans to non-FHLBank members. It is not possible to predict whether the proposed rule (if adopted) would have a negative impact on the volume of AMA loan assets or on the Bank’s costs of operation. Comments on the proposed rule are due by April 15, 2016.

Finance Agency Final Rule on Responsibilities of Boards of Directors, Corporate Practices and Corporate Governance Matters. On November 19, 2015, the Finance Agency issued a final rule effective December 21, 2015, that among other things requires each FHLBank to:

operate an enterprise wide risk management program and assign its chief risk officer certain enumerated responsibilities;
maintain a compliance program headed by a compliance officer who reports directly to the chief executive officer and must regularly report to the board of directors (or a board committee);
maintain board committees specifically responsible for the following matters: (a) risk management; (b) audit; (c) compensation; and (d) corporate governance; and
designate in its bylaws a body of law to follow for its corporate governance and indemnification practices and procedures that may arise for which no federal law controls, choosing from (a) the law of the jurisdiction in which the FHLBank maintains its principal office; (b) the Delaware General Corporation Law; or (c) the Revised Model Business Corporation Act. As of March 10, 2016, the Bank adopted revised bylaws and selected Delaware law for this purpose. See Exhibit 3.2.1 to this Form 10-K.

Additionally, the final rule states that the Finance Agency has the authority to review a regulated entity’s indemnification policies, procedures and practices to ensure they are conducted in a safe and sound manner and that they are consistent with the body of law adopted by an FHLBank’s board of directors. The final rule is not expected to materially affect the Bank’s financial condition or results of operation.

Joint Final Rule on Margin and Capital Requirements for Covered Swap Entities. In October 2015, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Finance Agency (each an “Agency” and, collectively, the “Agencies”) jointly adopted final rules to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (“Swap Entities”) that are subject to the jurisdiction of one of the Agencies (such entities, “Covered Swap Entities,” and the joint final rules, the “Final Margin Rules”). On January 6, 2016, the Commodity Futures Trading Commission (CFTC) published its own version of the Final Margin Rules that generally mirrors the Final Margin Rules. The CFTC’s rules apply only to a limited number of registered swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants that are not subject to the jurisdiction of one of the Agencies.


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When they take effect, the Final Margin Rules will subject uncleared swaps and uncleared security-based swaps between Covered Swap Entities and financial end users that have material swaps exposure (i.e., an average daily aggregate notional amount of $8 billion in uncleared swaps, calculated in accordance with the Final Margin Rules), to a mandatory two-way minimum initial margin requirement. The minimum amount of the initial margin required to be posted or collected would be either the amount calculated by the Covered Swap Entity using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model of the Covered Swap Entity conforming to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction over the particular Covered Swap Entity.

The Final Margin Rules specify the types of collateral that may be posted or collected as initial margin for uncleared swaps and uncleared security-based swaps with financial end users (generally, cash, certain government and GSE securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold); and set forth haircuts for certain collateral asset classes. Initial margin must be segregated with an independent, third-party custodian and, generally, may not be rehypothecated, except that, cash funds may be placed with a custodian bank in return for a general deposit obligation under certain specified circumstances.

The Final Margin Rules will require minimum variation margin to be exchanged daily for uncleared swaps and uncleared security-based swaps between Covered Swap Entities and all financial end-users (without regard to the swaps exposure of the particular financial end-user). The minimum variation margin amount is the daily mark-to-market change in the value of the swap to the Covered Swap Entity, taking into account variation margin previously posted or collected. For uncleared swaps and security-based swaps between Covered Swap Entities and financial end-users, variation margin may be posted or collected in cash or non-cash collateral that is considered eligible for initial margin purposes. Variation margin is not subject to segregation with an independent, third-party custodian, and may, if permitted by contract, be rehypothecated.

The variation margin requirement under the Final Margin Rules will become effective for the Bank on March 1, 2017, and the initial margin requirement under the Final Margin Rules is expected to become effective for the Bank on September 1, 2020.

The Bank is not a Covered Swap Entity under the Final Margin Rules. Rather, the Bank is a financial end-user under the Final Margin Rules, and may have material swaps exposure when the initial margin requirements under the Final Margin Rules become effective. Because the Bank is currently posting and collecting variation margin on uncleared swaps, it is not anticipated that the variation margin requirement under the Final Margin Rules will have a material effect on the Bank’s costs. However, when the initial margin requirements under the Final Margin Rules become effective, the Bank anticipates that the cost of engaging in uncleared swaps may increase.

Finance Agency Core Mission Achievement Advisory Bulletin 2015-05. On July 14, 2015, the Finance Agency issued an advisory bulletin that provides guidance relating to a core mission asset ratio by which the Finance Agency will assess each FHLBank’s core mission achievement. The Finance Agency plans to assess core mission achievement by using a ratio of primary mission assets, which includes advances and mortgage loans acquired from members (also referred to as acquired member assets), to consolidated obligations. The core mission asset ratio will be calculated annually at year-end as part of the Finance Agency’s examination process, using annual average par values.

The advisory bulletin provides the Finance Agency’s expectations for each FHLBank’s strategic plan based on its ratio, which are:

when the ratio is at least 70% or higher, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining this level;
when the ratio is at least 55% but less than 70%, the strategic plan should explain the FHLBank’s plan to increase its mission focus; and
when the ratio is below 55%, the strategic plan should include an explanation of the circumstances that caused the ratio to be at that level and detailed plans to increase the ratio. The advisory bulletin provides that if an FHLBank maintains a ratio below 55% over the course of several consecutive reviews, then the FHLBank’s board of directors should consider possible strategic alternatives.

The Bank’s core mission activities primarily include the issuance of advances. In addition, the Bank acquires member assets through the MPF program. As of December 31, 2015, the Bank’s average par amounts for advances and MPF loans totaled $68.5 billion resulting in a core mission asset ratio of 82.1%.

Other Significant Development

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Amendment of FHLBank Act to Make Privately-Insured Credit Unions Eligible for FHLBank Membership. On December 4, 2015, President Obama signed a bill known as the Fixing America’s Surface Transportation Act (“FAST Act”), which includes a provision that amends the FHLBank Act to allow privately-insured credit unions to be eligible for FHLBank membership. The FAST Act requires privately-insured credit unions to satisfy certain initial and ongoing eligibility and reporting requirements. The FHLBanks are awaiting implementing regulatory guidance from the Finance Agency with respect to membership eligibility of privately-insured credit unions.

Risk Management

The Bank employs a corporate governance and internal control framework designed to support the effective management of the Bank’s business activities and the related inherent risks. As part of this framework, the Board has a Risk Governance Policy and a Member Products Policy, both of which are reviewed regularly and re-approved at least annually. The Risk Governance Policy establishes risk guidelines, limits (if applicable), and standards for credit risk, market risk, liquidity risk, operating risk, and business risk in accordance with Finance Agency regulations and consistent with the Bank’s risk appetite. The Member Products Policy establishes the eligibility and authorization requirements, policy limits and restrictions, and the terms applicable to each type of Bank product or service, as well as collateral requirements. The risk appetite is established by the Board, as are other applicable guidelines in connection with the Bank’s Capital Plan and overall risk management.

Risk Governance

The Bank’s lending, investment and funding activities and use of derivative instruments expose the Bank to a number of risks that include market and interest rate risk, credit and counterparty risk, liquidity and funding risk, and operating and business risk, among others. In addition, the Bank’s risks are affected by current and projected financial and residential market trends including those described in Item 1A. Risk Factors in this Form 10-K.

The Bank believes that a strong and dynamic risk management process serves as a base for building member value in the cooperative. The Bank has a risk management infrastructure that addresses risk governance, appetite, measurement and assessment, and reporting, along with top and emerging risks, as follows:
the Bank’s policies and committees provide effective governance over the risk management process;
the Bank’s risk appetite is integrated with the strategic plan and reinforced through management initiatives;
all material risk exposures have been reviewed to establish a robust set of key indicators, many with associated limits and guidelines;
the Bank has a risk reporting system that provides for management and Board oversight of risk and a clear understanding of risks that the Bank faces; and
management and the Board are actively engaged in surveying and assessing top and emerging risks.

Top risks are existing, material risks the Bank faces; these are regularly reviewed and actively managed. Emerging risks are those risks that are new or evolving forms of existing risks; once identified, potential action plans are considered based on probability and severity.

The Board and its committees have adopted a comprehensive risk governance framework to oversee the risk management process and manage the Bank’s risk exposures. The focus of the Board’s Finance Committee is balance sheet management and entails oversight of market events and risk activities over interest rate, pricing, liquidity, hedging and funding risks and counterparty credit risk. The Board’s Operational Risk Committee has responsibility for the oversight of operating risks including compliance, fraud and the Bank-wide risk assessment as well as risks related to information technology, continuity and cyber risk. The Audit Committee oversees the adequacy of the Bank’s allowance for credit losses. The member-oriented Affordable Housing, Products & Services Committee has responsibility for member credit risk and collateral management. The Enterprise Risk Management Committee, which is comprised of the full Board, focuses on the Bank’s comprehensive risk appetite and position, risk issues that are significant for several committees, and updates on regulatory issues. All Board members are provided training dealing with specific risk issues relevant to the Bank.

As previously mentioned, key components of this risk governance framework are the Board-level Member Products Policy and Risk Governance Policy. The Member Products Policy, which applies to products offered to members and housing associates, addresses the credit risk of secured credit by establishing appropriate collateralization levels and collateral valuation methodologies. The Risk Governance Policy establishes risk limits for the Bank in accordance with the risk profile established by the Board, Finance Agency regulations, credit underwriting criteria, and other applicable guidelines. The magnitude of the risk limits reflects the Bank’s risk appetite given the market environment, the business strategy and the financial resources

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available to absorb potential losses. The limits are reviewed and continually re-evaluated with adjustments requiring Board approval and are included in the Risk Governance Policy. All breaches of risk limits are reported in a timely manner to the Board and senior management and the affected business unit must take appropriate action, as applicable, to rationalize and/or reduce affected positions. The risk governance framework also includes supplemental risk management policies and procedures that are reviewed on a regular basis to ensure that they provide effective governance of the Bank’s risk-taking activities.

Further, Internal Audit provides an assessment of the internal control systems. Internal Audit activities are designed to provide reasonable assurance for the Board that: (1) risks are appropriately identified and managed; (2) significant financial, managerial and operating information is materially accurate, reliable and timely; and (3) employees’ actions are in compliance with Bank policies, standards, procedures and applicable laws and regulations. Additionally, as a GSE, the Bank is subject to a comprehensive examination by the Finance Agency which executes its responsibilities via onsite examinations, periodic offsite evaluations, and through monitoring of the various compliance and activity reports provided by the Bank.

The Risk Management Committee (RMC) is a senior management committee that provides Bank-wide oversight of the Bank’s primary risks. The RMC delegates direct oversight of specific technology and operational risks to the Operational Risk Management Committee (ORMC). Member credit and collateral risk is managed by the Membership Credit Committee (MCC) while market and liquidity risk is managed by the Asset/Liability Committee (ALCO). Strategic and reputation risk is managed by the Bank’s Executive Committee. RMC may also approve key overarching risk policies and Bank objectives that it deems appropriate in managing the Bank’s risks.

Capital Adequacy Measures. MV/CS provides a current assessment of the liquidation value of the balance sheet and measures the Bank’s current ability to honor the par put redemption feature of its capital stock. This is one of the risk metrics used to evaluate the adequacy of retained earnings which is used to develop dividend payment recommendations and support the repurchase of excess capital stock.

The current Board-approved floor for MV/CS is 90.0%. MV/CS is measured against the floor monthly. When MV/CS is below the established floor, excess capital stock repurchases and dividend payouts are restricted.

The MV/CS ratio was 127.9% at December 31, 2015 and 135.3% at December 31, 2014. The decline was primarily due to an increase in funding and advance spreads relative to LIBOR and an increase in capital stock balances as a result of advance growth.

Subprime and Nontraditional Loan Exposure. The Bank policy definitions of subprime and nontraditional residential mortgage loans and securities are consistent with FFIEC and Finance Agency guidance. According to policy, the Bank does not accept subprime residential mortgage loans (defined as FICO® score of 660 or below) as qualifying collateral unless there are certain mitigating factors including an LTV ratio of 65% or less (100% if loan level data is provided by the member for valuation) and one of the following: (1) a debt-to-income ratio of 35% (50 % if loan level data is provided by member) or less or (2) a satisfactory payment history over the past 12 months (no 30-day delinquencies). The Bank requires members to identify the amount of subprime and nontraditional mortgage collateral in their QCR each quarter and provide periodic certification that they comply with the FFIEC guidance. Loans identified as subprime which do not have the mitigating factors described above are not included when determining a member’s MBC.

Limits have been established for exposure to low FICO® and nontraditional residential mortgages. A limit of 25% has been established for the percentage of member collateral that is categorized as low FICO® (with acceptable mitigating factors), missing (unknown) FICO® score loans and nontraditional loans and securities. A limit of 25% has also been established for total exposure related to nontraditional, subprime and low FICO® whole mortgage loans acquired through the Bank’s MPF program.

Results of the Finance Agency Stress Tests Severely Adverse Scenario. The Finance Agency requires the FHLBanks to conduct annual stress testing to determine whether the FHLBanks have the capital necessary to absorb losses under adverse economic conditions. The FHLBanks must also consider the results when making changes to capital structure; when assessing exposures, concentrations, and risk positions; and in improving overall risk management. The Finance Agency provides the

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inputs and key assumptions, and the results should not be viewed as a forecast of expected likely outcomes of future results. Results were projected over a nine-quarter period from the fourth quarter of 2014 to the fourth quarter of 2016, starting with September 30, 2014 balances.

In addition, the FHLBanks are required to disclose the results of the severely adverse stress test scenario. The Bank disclosed on its website the results of the severely adverse stress test scenario on July 23, 2015. The Bank's severely adverse stress test scenario results demonstrated capital adequacy as projected regulatory capital and leverage capital ratios exceeded regulatory requirements. The Bank regularly uses stress tests including those required by the Dodd-Frank Act in capital planning to measure the exposure to material risks and to evaluate the adequacy of capital resources available to absorb potential losses arising from those risks.

Qualitative and Quantitative Disclosures Regarding Market Risk

Managing Market Risk. The Bank’s market risk management objective is to protect member/shareholder and bondholder value consistent with the Bank’s housing mission and safe and sound operations across a wide range of interest rate environments. Management believes that a disciplined approach to market risk management is essential to maintaining a strong capital base and uninterrupted access to the capital markets.

Market risk is defined as the risk to earnings or capital arising from adverse changes in market rates, prices and other relevant market factors. Interest rate risk, which represents the primary market risk exposure to the Bank, is the risk that relative and absolute changes in prevailing interest rates may adversely affect an institution’s financial performance or condition. Interest rate risk arises from a variety of sources, including repricing risk, yield curve risk, basis risk and options risk. The Bank invests in mortgage assets, such as mortgage loans and MBS, which together represent the primary source of options risk. Management regularly reviews the estimated market risk of the entire portfolio of assets and related funding and hedges to assess the need for re-balancing strategies. These re-balancing strategies may include entering into new funding and hedging transactions, terminating existing funding and hedging transactions, or forgoing or modifying certain funding or hedging transactions normally executed with asset acquisition or debt issuance.

The Bank’s Market Risk Model. Significant resources are devoted to ensuring that the level of market risk in the balance sheet is accurately measured, thus allowing management to monitor the risk against policy and regulatory limits. The Bank uses externally developed models to evaluate its financial position and market risk. One of the most critical market-based models relates to the prepayment of principal on mortgage-related instruments. Management regularly reviews the major assumptions and methodologies used in its models, as well as the performance of the models relative to empirical results, so that appropriate changes to the models can be made. Based on the results of management’s regular review process, the Bank reviewed and approved prepayment model changes during the second quarter of 2015, which reduced projected prepayment speeds and aligns modeled prepayments more closely with actual portfolio experience.

The Bank regularly validates the models used to measure market risk. Such model validations are performed by third-party specialists or the Bank’s model validation department, both of which are considered to be independent. The model validations are supplemented by additional validation processes performed by the Bank, most notably, benchmarking model-derived fair values to those provided by third-party services or alternative internal valuation models. This analysis is performed by a group that is independent of the model owner who is responsible for measuring risk and the units conducting the business transactions. Results of the validation process, as well as any changes in valuation methodologies, are reported to the Bank’s ALCO, which is responsible for reviewing and approving the approaches used in the valuation of such risks to ensure that they are well controlled and effective, and result in reasonable fair values.

Duration of Equity. One key risk metric used by the Bank is duration. Duration is a measure of the sensitivity of a financial instrument’s value, or the value of a portfolio of instruments, to a 100 basis point parallel shift in interest rates. Duration (typically expressed in years) is commonly used by investors throughout the fixed income securities market as a measure of financial instrument price sensitivity.

The Bank’s asset/liability management policy approved by the Board calls for actual duration of equity to be maintained within a + 4.5 year range in the base case. In addition, the duration of equity exposure limit in an instantaneous parallel interest rate shock of + 200 basis points is + 7 years. Management analyzes the duration of equity exposure against this policy limit on a daily basis and regularly evaluates its market risk management strategies.


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The following table presents the Bank's duration of equity exposure at December 31, 2015 and 2014. Given the low level of interest rates, an instantaneous parallel interest rate shock of “down 200 basis points” and “down 100 basis points” cannot be meaningfully measured for these periods and therefore is not presented.  
(in years)
Base
Case
Up 100
 basis points
Up 200
 basis points
Actual Duration of Equity:
 
 
 
December 31, 2015
(0.6)
0.2
0.8
December 31, 2014
(0.4)
0.7
1.5

Duration of equity changes from prior year-end primarily reflect the impact of balance sheet management actions and lower long-term interest rates which more than offset the prepayment model changes noted above. The Bank continues to monitor the mortgage and related fixed-income markets, including the impact that changes in the market or anticipated modeling changes may have on duration of equity and other market risk measures, and may take actions to reduce market risk exposures as needed. Management believes that the Bank's current market risk profile is reasonable given these market conditions.

Return on Equity (ROE) Spread Volatility. Interest rate risk is also measured based on the volatility in the Bank’s projected return on capital in excess of the return of an established benchmark market index. ROE spread is defined as the Bank's return on average equity, including capital stock and retained earnings, in excess of the average of 3-month LIBOR. ROE spread volatility is a measure of the variability of the Bank’s projected ROE spread in response to shifts in interest rates and represents the change in ROE spread compared to an ROE spread that is generated by the Bank in its base forecasting scenario. ROE spread volatility is measured over a rolling forward 12 month period for selected interest rate scenarios and excludes the income sensitivity resulting from mark-to-market changes which are separately described below.

The ROE spread volatility presented in the table below reflects spreads relative to 3-month LIBOR. Management uses both parallel and non-parallel rate scenarios to assess interest rate risk. The steeper and flatter yield curve shift scenarios are represented by appropriate increases and decreases in short-term and long-term interest rates using the three-year point on the yield curve as the pivot point. Given the current low rate environment, management replaced a down 200 basis points parallel rate scenario with a down 100 basis point longer term rate shock as an additional non-parallel rate scenario that reflects a decline in longer term rates.
ROE Spread Volatility Increase/(Decline)
(in basis points)
Down 100 bps Longer Term Rate Shock
100 bps Steeper
100 bps Flatter
Up 200 bps Parallel Shock
December 31, 2015
32
(40)
108
143
December 31, 2014
19
(25)
92
125

The changes in ROE spread volatility from December 31, 2014 were mainly the result of the prepayment model changes as well as balance sheet management actions and lower long-term interest rates, which had a varying effect on ROE spread volatility. The Board’s limit on the decline in ROE spread is set at no greater than 100 basis points. The Bank was in compliance with the ROE spread volatility limit across all selected interest rate shock scenarios at December 31, 2015 and 2014.

Mark-to-Market Risk. The Bank measures earnings risk associated with certain mark-to-market positions, including economic hedges. This framework establishes a forward-looking, scenario-based exposure limit based on interest rate and volatility shocks that would apply to any existing or proposed transaction that is marked to market through the income statement without an offsetting mark arising from a qualifying hedge relationship. The Bank’s Capital Markets and Corporate Risk Management also monitor the actual profit/loss change on a daily, monthly cumulative, and quarterly cumulative basis.

During 2015, the daily limit of mark-to-market risk as approved by the Board was $3.5 million. The Bank’s ALCO establishes its own operating limit within the Board limit. During the fourth quarter of 2015, the Bank’s ALCO increased the operating guideline from $2.8 million to $3.0 million. The exposure exceeded the operating guideline on a limited number of days during the second quarter and third quarter of 2015; however, it was within the Board limit throughout 2015. At December 31, 2015, mark-to-market risk measured $2.0 million.

Derivatives and Hedging Activities. Members may obtain loans through a variety of product types that include features such as variable- and fixed-rate coupons, overnight to 30-year maturities, and bullet or amortizing redemption schedules. The

63


Bank funds loans primarily through the issuance of consolidated obligation bonds and discount notes. The terms and amounts of these consolidated obligations and the timing of their issuance is determined by the Bank and is subject to investor demand as well as FHLBank System debt issuance policies. The intermediation of the timing, structure, and amount of Bank members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate derivatives. The Bank’s general practice is to simultaneously execute interest rate swaps or derivative transactions when extending term and option-embedded advances and/or issuing liabilities to convert the instruments’ cash flows to a floating-rate that is indexed to LIBOR. By doing so, the Bank strives to reduce its interest rate risk exposure and preserve the value of, and attempts to earn more stable returns on, its members’ capital investment.

The Bank may also acquire assets with structural characteristics that reduce the Bank’s ability to enter into interest rate exchange agreements having mirror image terms. These assets can include small fixed-rate, fixed-term loans and small fixed schedule amortizing loans. These assets may require the Bank to employ risk management strategies in which the Bank hedges the aggregated risks. The Bank may use fixed-rate, callable or non-callable debt or interest rate swaps to manage these aggregated risks.

The use of derivatives is integral to the Bank’s financial management strategy, and their impact on the Bank’s financial statements is significant. Management has a risk management framework that outlines the permitted uses of derivatives that adjusts the effective maturity, repricing frequency or option characteristics of various financial instruments to achieve the Bank’s risk and earnings objectives. The Bank utilizes derivatives to hedge identifiable risks; none are used for speculative purposes.

The Bank uses derivatives as follows: (1) by designating them as either a fair value hedge of an underlying financial instrument or a firm commitment ; or (2) in asset/liability management (i.e., an economic hedge). For example, the Bank uses derivatives in its overall interest rate risk management to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of assets (advances, investment securities, and mortgage loans), and/or to adjust the interest rate sensitivity of advances, investment securities, or mortgage loans to approximate more closely the interest rate sensitivity of liabilities. In addition to using derivatives to hedge mismatches of interest rates between assets and liabilities, the Bank also uses derivatives to hedge: (1) embedded options in assets and liabilities; (2) the market value of existing assets and liabilities and anticipated transactions; or (3) the duration risk of prepayable instruments. See Note 11 - Derivatives and Hedging Activities of the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K for additional information regarding the Bank’s derivative and hedging activities.


64


The following tables summarize the derivative instruments, along with the specific hedge transaction utilized to manage various interest rate and other risks as noted below.
Hedged Item/Hedging Instrument
Hedging Objective
Hedge Accounting Designation (1)
Notional Amount at December 31, 2015
(in billions)
Advances
 
 
 
Pay-fixed, receive floating interest rate swap (without options)
Converts the advance’s fixed rate to a variable rate index.
Fair Value
$
9.5

Economic
1.7

Pay-fixed, receive floating interest rate swap (with options)
Converts the advance’s fixed rate to a variable rate index and offsets option risk in the advance.
Fair Value
0.5

Pay floating with embedded features, receive floating interest rate swap (callable)
Reduces interest rate sensitivity and repricing gaps by converting the advance’s variable rate to a different variable rate index and offsets embedded option risk in the advance.
Fair Value
0.7

Subtotal - advances
 
 
$
12.4

 
 
 
 
Investments
 
 
 
Pay-fixed, receive floating interest-rate swap
Converts the investment’s fixed rate to a variable-rate index.
Fair Value
$
1.2

Economic
1.6

Interest-rate cap or floor

Offsets the interest-rate cap or floor embedded in a variable rate investment.
Economic
0.8

Subtotal - investments
 
 
$
3.6

 
 
 
 
Mortgage Loans
 
 
 
Pay-fixed, receive floating interest rate swap
Converts the mortgage loan’s fixed rate to a variable rate index.
Economic
$
0.4

 
 
 
 
Consolidated Obligation Bonds
 
 
 
Receive-fixed, pay floating interest rate swap (without options)
Converts the bond’s fixed rate to a variable rate index.
Fair Value
$
12.9

Economic
4.1

Receive-fixed, pay floating interest rate swap (with options)
Converts the bond’s fixed rate to a variable rate index and offsets option risk in the bond.
Fair Value
5.6

Economic
1.1

Subtotal - consolidated obligation bonds
 
 
$
23.7

 
 
 
 
Consolidated Obligation Discount Notes
 
 
Receive-fixed, pay floating interest rate swap
Converts the discount note’s fixed rate to a variable-rate index.
Economic
$
4.5

Total notional amount
 
 
$
44.6

Note:
(1) The Fair Value designation represents hedging strategies for which qualifying hedge accounting is achieved. The Economic designation represents hedging strategies for which qualifying hedge accounting is not achieved.


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Credit and Counterparty Risk - Total Credit Exposure (TCE) and Collateral

TCE. The Bank manages the credit risk of each member on the basis of the member’s TCE to the Bank, which includes advances and related accrued interest, fees, basis adjustments and estimated prepayment fees; letters of credit; forward-dated advance commitments; member derivatives; and MPF credit enhancement and related obligations. This credit risk is managed by monitoring the financial condition of borrowers and by requiring all borrowers (and, where applicable in connection with member affiliate pledge arrangements approved by the Bank, their affiliates) to pledge sufficient eligible collateral for all borrower obligations to the Bank to ensure that all potential forms of credit-related exposures are covered by sufficient eligible collateral. This may include collateral pledged by a member’s affiliate. At December 31, 2015, aggregate TCE was $95.9 billion, comprised of approximately $74.3 billion in advance principal outstanding, $20.8 billion in letters of credit (including forward commitments), $0.5 billion in advance commitments and $0.3 billion in accrued interest, prepayment fees, MPF credit enhancement obligations and other fees.

The Bank establishes an MBC for each member based on collateral weightings applied to eligible collateral as described in the Bank’s Member Products Policy. Details regarding this policy are available in the Advance Products discussion in Item 1. Business in this Form 10-K. According to the Policy, eligible collateral is weighted to help ensure that the collateral value will exceed the amount that may be owed to the Bank in the event of a default. The Bank also has the ability to call for additional or substitute collateral while any indebtedness is outstanding to protect the Bank’s fully secured position.

The financial condition of all members and eligible nonmember housing associates is closely monitored for compliance with financial criteria as set forth in the Bank’s credit policies. The Bank has developed an ICR system that calculates financial scores and rates member institutions on a quarterly basis using a numerical rating scale from one to ten, with one being the best rating. Generally, scores are objectively calculated based on financial ratios computed from publicly available data. The scoring system gives the highest weighting to the member’s asset quality and capitalization. Other key factors include earnings and balance sheet composition. Operating results for the previous four quarters are used, with the most recent quarter’s results given a higher weighting. Additionally, a member’s credit score can be adjusted for various qualitative factors, such as the financial condition of the member’s holding company. A rating in one of the higher number (i.e., worse) categories indicates that a member exhibits defined financial weaknesses. Members in these categories are reviewed for potential collateral delivery status. Other uses of the ICR include the scheduling of on-site collateral reviews. A separate financial analysis method is used to analyze insurance company exposure. While depository institution member analysis is based on standardized regulatory Call Report data and risk modeling, insurance company credit risk analysis is based on various forms of financial data, including, but not limited to, statutory reporting filed by insurance companies with state insurance regulators, which requires specialized methodologies and dedicated underwriting resources.

During 2015, there were eight failures of FDIC-insured institutions nationwide. None of them were a member of the Bank.

Management believes that it has adequate policies and procedures in place to effectively manage credit risk exposure related to member TCE. These credit and collateral policies balance the Bank’s dual goals of meeting members’ needs as a reliable source of liquidity and limiting credit loss by adjusting the credit and collateral terms in response to deterioration in creditworthiness. The Bank has never experienced a loss on its member advance exposure; losses have been reserved for the MPF program.

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The following table presents the Bank’s top ten members with respect to their TCE at December 31, 2015.
 
December 31, 2015
(dollars in millions)
TCE
% of Total
PNC Bank, National Association, DE (1)
$
25,278.3

26.4
%
Santander Bank, N.A., DE (2)
16,340.4

17.0

Chase Bank USA, N.A., DE
10,303.5

10.7

Ally Bank, UT (3)
9,379.3

9.8

TD Bank, National Association, DE
8,058.3

8.4

Customers Bank, PA
3,036.6

3.2

Citizens Bank of Pennsylvania, PA
2,772.4

2.9

MetLife Insurance Company USA, DE
1,571.8

1.6

First National Bank of Pennsylvania, PA
1,501.5

1.6

First Commonwealth Bank, PA
1,430.9

1.5

 
79,673.0

83.1

Other financial institutions
16,246.2

16.9

Total TCE outstanding
$
95,919.2

100.0
%
Notes:
(1) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(2) Santander Bank, N.A., is a subsidiary of Banco Santander, which is located in Spain.
(3) For Bank membership purposes, principal place of business is Horsham, PA.

Member Advance Concentration Risk. The following table lists the Bank’s top ten borrowers based on advance balances at par as of December 31, 2015.
 
December 31, 2015
(dollars in millions)
Advance Balance
% of Total
PNC Bank, National Association, DE (1)
$
19,920.1

26.8
%
Santander Bank, N.A., DE (2)
13,885.0

18.7

Chase Bank USA, N.A., DE
10,300.0

13.9

Ally Bank, UT (3)
9,370.0

12.6

Customers Bank, PA
1,625.3

2.2

Citizens Bank of Pennsylvania, PA
1,600.0

2.2

MetLife Insurance Company USA, DE
1,570.0

2.1

First National Bank of Pennsylvania, PA
1,490.0

2.0

First Commonwealth Bank, PA
1,409.3

1.9

WesBanco Bank, Inc., WV
1,025.7

1.4

 
62,195.4

83.8

Other borrowers
12,137.9

16.2

Total advances
$
74,333.3

100.0
%
Notes:
(1) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(2) Santander Bank, N.A., is a subsidiary of Banco Santander, which is located in Spain.
(3) For Bank membership purposes, principal place of business is Horsham, PA.

The average 2015 balances for the ten largest borrowers totaled $52.7 billion, or 80.5% of total average advances outstanding. During 2015, the maximum outstanding balance to any one borrower was $21.9 billion. The advances made by the Bank to each of these borrowers are secured by collateral with an estimated value, after collateral weightings, in excess of the book value of the advances. The Bank does not expect to incur any losses on these advances. The Bank has implemented specific credit and collateral review monitoring for these members.


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Letters of Credit. The following table presents the Bank’s total outstanding letters of credit, as of December 31, 2015 and December 31, 2014. The letter of credit product is collateralized under the same policies, procedures and guidelines that apply to advances.
(dollars in millions)
December 31, 2015
December 31, 2014
Letters of credit:
 
 
   Public unit deposit
$
20,149.1

$
19,918.8

   Other
22.5

23.3

Total (1)
$
20,171.6

$
19,942.1

Notes:
(1) For 2015 and 2014 respectively, excludes approved requests to issue future standby letters of credit of $136.4 million and $146.8 million; also excludes available master standby letters of credit of $479.4 million and $129.2 million.

As of December 31, 2015, the Bank had a concentration of letters of credit with two members (PNC Bank and TD Bank) totaling $12.9 billion or 63.9% of the total outstanding amount. At December 31, 2014, $13.3 billion or 66.8% of the letters of credit were concentrated with these same two members.

Collateral Policies and Practices. All members are required to maintain eligible collateral to secure their TCE. The Board approved Collateral Policy updates during 2015 to provide members with opportunities to expand their MBC and more effectively manage their credit relationship with the Bank. All Collateral Policy revisions are reflected in the Bank's Member Products Policy. The Collateral Policy changes approved during 2015 include those highlighted below:

During the second quarter of 2015, the Bank expanded its acceptance of the currently eligible U.S. government securities category to include U.S. Treasury Interest-Only Strips (UST IO Strips). With this change, the Bank now accepts both UST Principal-Only (PO) and UST IO Strips at a standard collateral weighting of 90 percent.
During the fourth quarter of 2015, the Board approved Collateral Policy revisions to become effective on March 7, 2016 including: (1) a standard collateral weighting increase of 5% for multifamily loans; (2) standard lending values established to be applied to loans for members participating in the Bank’s loan collateral market value valuation program; and (3) the elimination of restrictions for agency Z-tranche securities.

The Bank periodically reviews the collateral pledged by members or affiliates, where applicable. Additionally, the Bank conducts periodic collateral verification reviews to ensure the eligibility, adequacy and sufficiency of the collateral pledged. The Bank may, in its discretion, require the delivery of loan collateral at any time.

The Bank reviews and assigns borrowing capacities based on this collateral, taking into account the known credit attributes in assigning the appropriate secondary market discounts to determine that a member’s TCE is fully collateralized. Other factors that the Bank may consider in calculating a member’s MBC include the collateral status for loans, frequency of loan data reporting, collateral field review results, the member’s financial strength and condition, and the concentration of collateral type by member.

The Bank uses a QCR that is designed to provide timely, detailed collateral information. Depending on a member’s credit product usage and financial condition, a member may be required to file the QCR on a quarterly or monthly basis. The QCR is designed to strengthen the Bank’s collateral analytical review procedures. The output of the QCR is a member’s MBC. For the small number of members who opt out of QCR filing, MBC is calculated by the Bank, based on the member’s regulatory filing data. For such members, final MBC is established at 20% of the aggregate weighted collateral value. Such members are required to file an Annual Collateral Certification Report.

The Bank does not accept subprime residential mortgage loans (defined as FICO® score of 660 or below) as qualifying collateral unless there are other mitigating factors, including a LTV ratio of 65% or less (100% if loan level data is provided by the member for valuation), and one of the following: (1) a debt-to-income ratio of 35% (50% if loan level data is provided) or less; or (2) a satisfactory payment history over the past 12 months (i.e., no 30-day delinquencies). Loans which do not have the mitigating factors described above are not included in a member’s MBC. Loans identified as low FICO® with mitigating factors and for those in which no FICO® score is available, a reduced collateral weighting ranging from 50-60%, depending on pledging and delivery status, will apply. The Bank allows nontraditional residential mortgage loans to be included in collateral and are used to determine a member’s MBC. The Bank may require specific loan level characteristic reporting on nontraditional residential mortgage loans and will generally assign a reduced collateral weighting ranging from 60-70%

68



depending on pledging and delivery status. At December 31, 2015, less than 13% of the Bank’s total pledged collateral was considered to be nontraditional.

The Bank is allowed by regulation to expand eligible collateral for many of its members. Members that qualify as CFIs can pledge expanded collateral which includes small-business, small-farm, small-agribusiness and community development loans as collateral for credit products from the Bank. At December 31, 2015, loans to CFIs secured with both eligible standard and expanded collateral represented approximately $4.3 billion, or 5.8% of total par value of loans outstanding. Eligible expanded collateral represented 8.7% of total eligible collateral for these loans. However, these loans were collateralized by sufficient levels of standard collateral.

Collateral Agreements and Valuation. The Bank provides members with two types of collateral agreements: a blanket lien collateral pledge agreement and a specific collateral pledge agreement. Under a blanket lien agreement, the Bank obtains a lien against all of the member’s unencumbered eligible collateral assets and most ineligible assets to secure the member’s obligations with the Bank. Under a specific collateral pledge agreement, the Bank obtains a lien against specific eligible collateral assets of the member or its affiliate (if applicable) to secure the member’s obligations with the Bank. The member provides a detailed listing, as an addendum to the specific collateral agreement, identifying those assets pledged as collateral or delivered to the Bank or its third party custodian.


69



The following table summarizes average lending values assigned to various types of collateral which are part of the Bank’s Member Products Policy. The reported range of effective lending values applied to collateral may be impacted by collateral adjustments applied to individual members. At the discretion of the Bank, on a case-by-case basis, the collateral weighting on loan categories may be increased (up to a maximum of 95 percent) upon completion of specific market valuation of such collateral and authorization from the Bank’s Membership Credit Committee.
Collateral Type
Standard Weighting (1)
Range of Effective Lending Values Applied
to Collateral(2)
Combined Weighted Average Effective Lending Value
 
 
 
 
Blanket Lien
 
 
 
Single family mortgage loans (3)
80%
61-84%
79%
Multi-family mortgage loans
70%
55-87%
79%
Home equity loans/lines of credit
60%
60-75%
63%
CFI collateral
60%
45-60%
60%
Commercial real estate loans
70%
55-82%
70%
Other loan collateral (farmland)
70%
70%
70%
 
 
 
 
Delivered or Specific Pledge
 
 
 
FHLBank deposits
100%
100%
100%
U.S. government /U.S. Treasury/U.S.
Agency securities and notes, REFCORP bonds
97%
92-97%
95%
U.S. Treasury Strips (interest-only and principal-only)
90%
90%
90%
State and local government securities (municipal) (rated A/AA/AAA)
88/90/92%
88-92%
90%
U.S. Agency MBS and CMOs
95%
90-95%
95%
Private label MBS and CMOs (rated A/AA/AAA)
70/75/85%
69-84%
82%
Commercial MBS (rated A/AA/AAA)
70/75/85%
74-82%
81%
Single-family mortgage loans(3) (4)
75%
65-84%
84%
Multi-family mortgage loans(4)
65%
55-70%
66%
Home equity loans/lines of credit(4)
55%
45-60%
57%
CFI collateral (4)
55%
45-60%
57%
Commercial real estate loans (4)
65%
50-70%
67%
Other loan collateral (farmland)(4)
65%
65-70%
70%
Notes:
 
 
 
(1) Represents the Bank's standard collateral weighting percentages.
 
 
 
(2) Effective lending value in excess of standard weighting is due to one or more large borrowing members utilizing the Bank’s market-value based collateral weighting program. This program permits a lending value in excess of the standard weighting.
(3) Includes non-traditional loans, loans with unknown FICO® scores, and low FICO® loans with mitigating factors, which all receive a lower collateral weighting.
(4) Standard weighting shown is for loans under specific pledge, collateral listing, or delivered status. A 5% lower collateral weighting is applied to loans delivered for credit reasons.

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For all of the Bank’s members, the following table summarizes total eligible collateral values, after collateral weighting, by type under both blanket lien and specific collateral pledge agreements as of December 31, 2015 and 2014. The amount of excess collateral by individual borrowers varies significantly.
(dollars in millions)
All members
December 31, 2015
December 31, 2014
Amount
Percentage
Amount
Percentage
One-to-four single family residential mortgage loans
$
82,284.4

41.7
%
$
78,615.9

43.0
%
High quality investment securities(1)
10,055.1

5.1

6,070.2

3.3

ORERC/CFI eligible collateral
88,560.7

44.8

83,472.1

45.6

Multi-family residential mortgage loans
16,571.7

8.4

14,758.0

8.1

Total eligible collateral value
$
197,471.9

100.0
%
$
182,916.2

100.0
%
Total TCE
$
95,919.2

 
$
83,539.1

 
Collateralization ratio (eligible collateral value to TCE
outstanding)
205.9
%
 
219.0
%
 
Note:
(1) High quality investment securities are defined as U.S. Treasury and U.S. Agency securities, REFCORP bonds, GSE MBS, commercial and residential private label MBS with a minimum credit rating of single A, which the Bank considers as part of its evaluation of the collateral. In addition, municipal securities with a real estate nexus (e.g. proceeds primarily used for real estate development) with a minimum credit rating of single A are included.

For only member borrowers, the following tables present information on a combined basis regarding the type of collateral securing their outstanding credit exposure and the collateral status as of December 31, 2015 and 2014.
 
December 31, 2015
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single family
  residential mortgage loans
$
66,514.2

37.8
%
$11,547.9
81.8%
$
116.9

21.8
%
$78,179.0
41.0
%
High quality investment securities(1)
6,509.8

3.7

2,564.9
18.2
54.5

10.2

9,129.2
4.8

ORERC/ CFI eligible collateral
86,301.8

49.1

347.2

64.9

86,649.0
45.5

Multi-family residential mortgage
  loans
16,474.6

9.4

16.5

3.1

16,491.1
8.7

Total eligible collateral value
$
175,800.4

100.0
%
$
14,112.8

100.0
%
$
535.1

100.0
%
$
190,448.3

100.0
%
Total TCE
$
83,049.8

86.6
%
$
12,781.2

13.3
%
$
88.2

0.1
%
$
95,919.2

100.0
%
Number of members
211
91.7
%
11
4.8
%
8
3.5
%
230
100.0
%
 
December 31, 2014
(dollars in millions)
Blanket Lien
Listing
Delivery
Total
Amount
%
Amount
%
Amount
%
Amount
%
One-to-four single family
  residential mortgage loans
$
62,977.8

38.8
%
$
11,047.9

86.6
%
$
234.4

27.4
%
$
74,260.1

42.2
%
High quality investment securities(1)
4,254.0

2.6

1,710.4

13.4

75.1

8.8

6,039.5

3.4

ORERC/ CFI eligible collateral
80,563.3

49.6



521.6

61.0

81,084.9

46.1

Multi-family residential mortgage
  loans
14,570.9

9.0



24.0

2.8

14,594.9

8.3

Total eligible collateral value
$
162,366.0

100.0
%
$
12,758.3

100.0
%
$
855.1

100.0
%
$
175,979.4

100.0
%
Total TCE
$
74,056.7

88.7
%
$
9,393.2

11.2
%
$
89.2

0.1
%
$
83,539.1

100.0
%
Number of members
208

92.8
%
8

3.6
%
8

3.6
%
224

100.0
%
Note:
(1) High quality investment securities are defined as U.S. Treasury and U.S. Agency securities, REFCORP bonds, GSE MBS, commercial and residential private label MBS with a minimum credit rating of single A, which the Bank considers as part of its evaluation of the collateral. In addition, municipal securities with a real estate nexus (e.g. proceeds primarily used for real estate development) with a minimum credit rating of single A are included. Members have the option to deliver such high quality investment securities to the Bank to increase their maximum borrowing capacity. Upon delivery, these securities are valued daily and private label residential MBS are subject to weekly ratings reviews.


71


Credit and Counterparty Risk - Investments

The Bank is also subject to credit risk on investments consisting of money market investments and investment securities. The Bank considers a variety of credit quality factors when analyzing potential investments, including collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, credit ratings based on NRSROs, and/or the financial health of the underlying issuer. As of December 31, 2015 and 2014, the Bank’s carrying value of investment securities issued by entities other than the U.S. government, Federal agencies or GSEs was $1.7 billion and $2.0 billion, respectively.

Investment Quality and External Credit Ratings. The following tables present the Bank’s investment carrying values as of December 31, 2015 and 2014 based on the lowest rating from the NRSROs (Moody’s, S&P and Fitch).
 
December 31, 2015 (1) (2) (3)
 
Long-Term Rating
 
(in millions)
AAA
AA
A
BBB
Below Investment Grade
Total
Money market investments:
 
 
 
 
 
 
   Securities purchased under agreements
   to resell
$
500.0

$

$

$

$
500.0

$
1,000.0

  Federal funds sold

1,850.0

2,130.0



3,980.0

Total money market investments
500.0

1,850.0

2,130.0


500.0

4,980.0

Investment securities:
 
 
 
 
 
 
  GSE and TVA obligations

3,858.5




3,858.5

  State or local agency obligations
30.5

264.5

8.7



303.7

Total non-MBS
30.5

4,123.0

8.7



4,162.2

  Other U.S. obligations single family MBS

1,088.1




1,088.1

  GSE single-family MBS

2,678.2




2,678.2

  GSE multifamily MBS

1,873.6




1,873.6

  Private label residential MBS

3.3

39.0

210.9

1,083.4

1,336.6

  HELOCs




9.2

9.2

Total MBS

5,643.2

39.0

210.9

1,092.6

6,985.7

Total investments
$
530.5

$
11,616.2

$
2,177.7

$
210.9

$
1,592.6

$
16,127.9

 
December 31, 2014 (1) (2) (3)
 
Long-Term Rating
 
(in millions)
AAA
AA
A
BBB
Below Investment Grade
Total
Money market investments:
 
 
 
 
 
 
  Federal funds sold
$

$
800.0

$
3,555.0

$
230.0

$

$
4,585.0

Total money market investments

800.0

3,555.0

230.0


4,585.0

Investment securities:
 
 
 
 
 
 
  GSE and TVA obligations

3,523.0




3,523.0

  State or local agency obligations
12.9

270.5




283.4

Total non-MBS
12.9

3,793.5




3,806.4

  Other U.S. obligations single family MBS

1,451.9




1,451.9

  GSE single-family MBS

3,299.3




3,299.3

  GSE multifamily MBS

1,697.9




1,697.9

  Private label residential MBS

4.7

26.5

277.1

1,350.8

1,659.1

  HELOCs




11.7

11.7

Total MBS

6,453.8

26.5

277.1

1,362.5

8,119.9

Total investments
$
12.9

$
11,047.3

$
3,581.5

$
507.1

$
1,362.5

$
16,511.3

Notes:

72


(1) Various deposits not held as investments as well as mutual fund equity investments held by the Bank through Rabbi trusts which are not generally assigned a credit rating are excluded from the tables above. The mutual fund equity investment balances totaled $7.4 million and $6.7 million at December 31, 2015 and December 31, 2014, respectively.
(2) Balances exclude $2.6 million and $3.6 million pertaining to one unrated private label MBS security at December 31, 2015 and December 31, 2014, respectively.
(3) Balances exclude total accrued interest of $25.2 million and $21.8 million at December 31, 2015 and December 31, 2014, respectively.

The Bank also manages credit risk based on an internal credit rating system. For purposes of determining the internal credit rating, the Bank measures credit exposure through a process which includes internal credit review and various external factors, including placement of the counterparty on negative watch by one or more NRSROs. For internal reporting purposes, the incorporation of negative credit watch into the credit rating analysis of an investment may translate into a downgrade of one credit rating level from the external rating. The Bank does not rely solely on any NRSRO rating in deriving its final internal credit rating.

Short-term Investments. The Bank maintains a short-term investment portfolio to provide funds to meet the credit needs of its members and to maintain liquidity. The FHLBank Act and Finance Agency regulations set liquidity requirements for the FHLBanks. In addition, the Bank maintains a contingency liquidity plan in the event of operational disruptions at the Bank and the OF. See the Liquidity and Funding Risk section of Item 7. Management’s Discussion and Analysis in this Form 10-K for a discussion of the Bank’s liquidity management.

Within the portfolio of short-term investments, the Bank faces credit risk from unsecured exposures. The Bank's unsecured credit investments have maturities generally ranging between overnight and six months and may include the following types:

Interest-bearing deposits. Primarily consists of unsecured deposits that earn interest;
Federal funds sold. Unsecured loans of reserve balances at the FRBs between financial institutions that are made on an overnight and term basis;
Certificates of deposit. Unsecured negotiable promissory notes issued by banks and payable to the bearer on demand.

Under the Bank’s Risk Governance Policy, the Bank can place money market investments, which include those investment types listed above, on an unsecured basis with large financial institutions with long-term credit ratings no lower than BBB. Management actively monitors the credit quality of these counterparties.

As of December 31, 2015, the Bank had unsecured exposure to eight counterparties totaling $4.0 billion with six counterparties each exceeding 10% of the total exposure. The following table presents the Banks' unsecured credit exposure with private counterparties by investment type at December 31, 2015 and 2014. The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period.
(in millions)
 
 
Carrying Value (1)
December 31, 2015
December 31, 2014
Federal funds sold
$
3,980.0

$
4,585.0

Total
$
3,980.0

$
4,585.0

Note:
(1) Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and supranational entities.

As of December 31, 2015, 67% of the Bank’s unsecured investment credit exposure in Federal funds sold was to U.S. branches and agency offices of foreign commercial banks. The Bank actively monitors its credit exposures and the credit quality of its counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, sovereign support, and the current market perceptions of the counterparties. General macro-economic, political and market conditions may also be considered when deciding on unsecured exposure. As a result, the Bank may limit or suspend existing exposures.

Finance Agency regulations include limits on the amount of unsecured credit the Bank may extend to a counterparty or to a group of affiliated counterparties. This limit is based on a percentage of eligible regulatory capital and the counterparty's overall credit rating. Under these regulations, the level of eligible regulatory capital is determined as the lesser of the Bank's total regulatory capital or the eligible amount of regulatory capital of the counterparty. The eligible amount of regulatory capital is then multiplied by a stated percentage. This percentage is 1% to 15% and is based on the counterparty's credit rating. The

73


calculation of term extensions of unsecured credit includes on-balance sheet transactions, off-balance sheet commitments, and derivative transactions.

Finance Agency regulation also permits the Bank to extend additional unsecured credit for overnight transactions and for sales of Federal funds subject to continuing contracts that renew automatically. For overnight exposures only, the Bank's total unsecured exposure to a counterparty may not exceed twice the applicable regulatory limit, or a total of 2% to 30% of the eligible amount of regulatory capital, based on the counterparty's credit rating. As of December 31, 2015, the Bank was in compliance with the regulatory limits established for unsecured credit.

The Bank's unsecured credit exposures to U.S. branches and agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. The Bank's unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties. Bank management has limited its unsecured investment activity with all European private counterparties to overnight maturities only.

The following table presents the long-term credit ratings of the 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 based on the NRSROs used. This table does not reflect the foreign sovereign government's credit rating.
(in millions)
 
 
 
 
December 31, 2015 (1) (2)
Carrying Value
Domicile of Counterparty
Investment Grade (3) (4)
 
 
AA
A
BBB
Total
Domestic
$
950.0

$
380.0

$

$
1,330.0

U.S. branches and agency offices of foreign commercial banks:
 
 
 
 
  Australia
400.0



400.0

  Canada
 
650.0


650.0

  Finland
500.0



500.0

  Netherlands

600.0


600.0

  Sweden

500.0


500.0

  Total U.S. branches and agency offices of foreign commercial banks
900.0

1,750.0


2,650.0

Total unsecured investment credit exposure
$
1,850.0

$
2,130.0

$

$
3,980.0

(in millions)
 
 
 
 
December 31, 2014 (1) (2)
Carrying Value
Domicile of Counterparty
Investment Grade (3) (4)
 
 
AA
A
BBB
Total
Domestic
$

$
680.0

$
80.0

$
760.0

U.S. subsidiaries of foreign commercial banks


150.0

150.0

  Total domestic and U.S. subsidiaries of foreign commercial banks

680.0

230.0

910.0

U.S. branches and agency offices of foreign commercial banks:
 
 
 
 
  Australia
800.0



800.0

  Canada

1,375.0


1,375.0

  Finland

500.0


500.0

  Netherlands

500.0


500.0

  Norway

500.0


500.0

  Total U.S. branches and agency offices of foreign commercial banks
800.0

2,875.0


3,675.0

Total unsecured investment credit exposure
$
800.0

$
3,555.0

$
230.0

$
4,585.0

Notes:
(1) Does not reflect any changes in ratings, outlook or watch status occurring after December 31, 2015.
(2) These ratings represent the lowest rating available for each security owned by the Bank based on the NRSROs used by the Bank. The Bank’s internal ratings may differ from those obtained from the NRSROs.

74


(3) Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and supranational entities.
(4) Represents the NRSRO rating of the counterparty not the country. There were no AAA rated investments at either December 31, 2015 or 2014.

At December 31, 2015 and 2014, all the unsecured investments held by the Bank had overnight maturities.

U.S. Treasury Bills, Agency, GSE Securities and State and Local Agency Obligations. In addition to U.S. Treasury bills and securities issued or guaranteed by U.S. Agencies or U.S. government corporations, the Bank invests in and is subject to credit risk related to GSE securities and state and local agency obligations. As a secondary liquidity portfolio, the Bank purchases investments such as U.S. Treasury, U.S. Agency and GSE/TVA securities. Further, the Bank maintains a portfolio of state and local agency obligations to enhance net interest income. These portfolios totaled $4.2 billion and $3.8 billion at December 31, 2015 and December 31, 2014, respectively.

Agency and GSE MBS. The Bank invests in and is subject to credit risk related to MBS issued or guaranteed by Federal agencies and GSEs that are directly supported by underlying mortgage loans. The Bank’s total agency and GSE MBS portfolio at December 31, 2015 was $5.6 billion which was a decrease of $809.2 million from December 31, 2014. This decrease was due to paydowns and decreases in the in fair value of the securities, partially offset by purchases of $385.5 million.

Private Label MBS. The Bank also holds investments in private label MBS, which are supported by underlying mortgage loans. The Bank made investments in private label MBS that were rated AAA at the time of purchase with the exception of one, which was rated AA at the time of purchase. However, since the time of purchase, there have been significant downgrades. Current ratings are in the table below. The carrying value of the Bank’s private label MBS portfolio at December 31, 2015 was $1.3 billion which was a decrease of $326.0 million from December 31, 2014. This decline was primarily due to repayments.

Unrealized gains of OTTI securities in AOCI at December 31, 2015 was $73.0 million compared to $94.5 million at December 31, 2014. The decrease was due to repayments on securities, and the weighted average price on these securities was 87.5 and 88.0 at December 31, 2015 and 2014, respectively. These fair values are determined using unobservable inputs (i.e., Level 3) derived from four third-party pricing services. There continues to be unobservable inputs and a lack significant market activity for private label MBS; therefore, as of December 31, 2015, the Bank classified private label MBS as Level 3. The Bank uses the unadjusted prices received from the third-party pricing services in its process relating to fair value calculations and methodologies as described further in the Critical Accounting Policies and Estimates section in Item 7. Management’s Discussion and Analysis in this Form 10-K.

Approximately 19% of the Bank’s MBS portfolio at December 31, 2015 was issued by private label issuers. In late 2007, the Bank discontinued the purchase of private label MBS.

Participants in the mortgage market often characterize single family loans based upon their overall credit quality at the time of origination, generally considering them to be Prime, Alt-A or subprime. There is no universally accepted definition of these segments or classifications. The subprime segment of the mortgage market primarily serves borrowers with poorer credit payment histories, and such loans typically have a mix of credit characteristics that indicate a higher likelihood of default and higher loss severities than Prime loans. Further, many mortgage participants classify single family loans with credit characteristics that range between Prime and subprime categories as Alt-A because these loans have a combination of characteristics of each category or may be underwritten with low or no documentation compared to a full documentation mortgage loan. Industry participants often use this classification principally to describe loans for which the underwriting process is less rigorous and to reduce the documentation requirements of the borrower.

75


Private Label MBS Collateral Statistics. The following tables provide collateral performance and credit enhancement information for the Bank’s private label MBS portfolio by par and by collateral type as of December 31, 2015. The Bank has not purchased any private label MBS since 2007.
 
Private Label MBS
(dollars in millions)
Prime
Alt-A (4)
Subprime
Total
Par by lowest external long-
 term rating:
 
 
 
 
  AA
$
3.3

$

$

$
3.3

  A
6.7

32.1


38.8

  BBB
177.4

31.7

3.2

212.3

Below investment grade:
 
 
 
 
  BB
111.7

28.6


140.3

  B
89.2

5.7


94.9

  CCC
11.0

134.1


145.1

  CC
1.4

7.6


9.0

  C
14.9



14.9

  D
385.2

421.1

1.9

808.2

  Unrated
2.6



2.6

    Total
$
803.4

$
660.9

$
5.1

$
1,469.4

Amortized cost
$
720.7

$
550.8

$
4.3

$
1,275.8

Gross unrealized losses (1)
(4.6
)
(1.6
)
(0.3
)
(6.5
)
Fair value
755.8

584.9

4.1

1,344.8

OTTI (2):
 
 
 
 
  Total 2015 OTTI taken
$
(3.0
)
$

$

$
(3.0
)
  Noncredit-related OTTI taken
1.2

(0.1
)

1.1

Credit-related OTTI taken
$
(1.8
)
$
(0.1
)
$

$
(1.9
)
Weighted average fair value/par
94.1
%
88.5
%
80.4
%
91.5
%
Original weighted average credit support
6.5

9.5

9.9

7.9

Weighted-average credit support - current
7.3

5.4

36.4

6.5

Weighted avg. collateral delinquency(3)
10.4

15.7

22.1

12.8

Notes:
(1) Represents total gross unrealized losses including non-credit-related OTTI recognized in AOCI. The unpaid principal balance and amortized cost of private label MBS in a gross unrealized loss position was $459.7 million and $444.5 million, respectively at December 31, 2015.
(2) For the year ended December 31, 2015.
(3) Delinquency information is presented at the cross-collateralization level.
(4) Includes HELOCs.

OTTI. The Bank recognized $1.8 million and $0.4 million of credit-related OTTI charges in earnings during 2015 and 2013, respectively, and none in 2014. Because the Bank does not intend to sell and it is not more likely than not that the Bank will be required to sell any OTTI securities before anticipated recovery of their amortized cost basis, the Bank does not have an additional OTTI charge for the difference between amortized cost and fair value. The Bank has not recorded OTTI on any other type of security (i.e., U.S. Agency MBS or non-MBS securities).

The Bank’s estimate of cash flows has a significant impact on the determination of credit losses. Cash flows expected to be collected are based on the performance and type of private label MBS and the Bank’s expectations of the economic environment. To ensure consistency in determination of the OTTI for private label MBS among all FHLBanks, each quarter the Bank works with the OTTI Governance Committee to update its OTTI analysis based on actual loan performance and current housing market assumptions in the collateral loss projection models, which generate the estimated cash flows from the Bank’s private label MBS. This process is described in Note 7 - OTTI to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K.


76


The Bank’s quarterly OTTI analysis is based on current and forecasted economic trends. Significant assumptions used on the Bank’s private label MBS as part of its fourth quarter 2015 analysis are presented below.
 
Significant Inputs for Private Label Residential MBS
 
Prepayment Rates
 
Default Rates
 
Loss Severities
 
Current Credit Enhancement
Year of securitization
Weighted Avg %
 
Weighted Avg %
 
Weighted Avg %
 
Weighted Avg %
Prime
13.8
 
7.9
 
25.5
 
6.1
Alt-A
12.9
 
17.3
 
35.2
 
5.4
Subprime
4.9
 
26.7
 
55.8
 
36.4
 Total Private Label Residential MBS
13.3
 
12.3
 
30.1
 
5.9

The Bank’s life-to-date credit losses are concentrated in its 2006 and 2007 vintage bonds. These vintages represent 92% of life-to-date credit losses, of which 48% relates to Prime and 44% relates to Alt-A, with the remainder in subprime and HELOC. The Bank has recognized life-to-date OTTI as follows:
(dollars in millions)
December 31, 2015
December 31, 2014
Number of private label MBS with an OTTI charge:
 
 
   Life-to-date
60

57

   Still outstanding
48

45

Total OTTI credit loss recorded life-to-date
$
455.9

$
454.0

Principal write-downs on private label MBS
(139.6
)
(121.1
)
Credit losses on private label MBS no longer owned:
 
 
   Private label MBS sold
(106.0
)
(106.0
)
   Private label MBS matured (less principal write-downs realized)
(4.4
)
(4.4
)
Remaining amount of previously recognized OTTI credit losses
$
205.9

$
222.5


The table above excludes recoveries of OTTI through interest income, which occur if there is a significant increase in estimated cash flows whereby the Bank increases the yield on the Bank’s investment and recognizes recovery as interest income over the life of the investment. OTTI recovered through interest income on these securities was $27.4 million, $23.6 million and $12.2 million for 2015, 2014 and 2013, respectively, and $86.9 million life-to-date. The interest income was recognized on 37, 38 and 34 private label MBS during 2015, 2014 and 2013, respectively. The same private label MBS can have multiple increases in cash flows that are deemed to be significant.

The Bank transfers private label MBS from HTM to AFS when an OTTI credit loss is recorded on a security. The Bank believes that a credit loss constitutes evidence of deterioration in the credit quality of the security. The Bank believes that the transfer increases its flexibility to potentially sell other-than-temporarily-impaired securities if it makes economic sense. There were three transfers during 2015, and none during 2014.

Management will continue to evaluate all impaired securities, including those on which OTTI has been recorded. Material credit losses have occurred on PLMBS and may occur in the future. The specific amount of credit losses will depend on the actual performance of the underlying loan collateral as well as the Bank’s future modeling assumptions. The Bank cannot estimate the future amount of any additional credit losses.
 
As discussed above, the projection of cash flows expected to be collected on private label MBS involves significant judgment with respect to key modeling assumptions. Therefore, on all private label MBS, the Bank performed a cash flow analysis under one additional scenario which was agreed to by the OTTI Governance Committee that represented meaningful, plausible and more adverse external assumptions. This more adverse scenario decreases the short-term forecast by five percentage points, and slows housing price recovery rates 33%. The adverse scenario estimated cash flows were generated using the same model (Prime, Alt-A or subprime) as the base scenario. Using a model with more severe assumptions could increase the estimated credit loss recorded by the Bank. The securities included in this stress scenario were only those that were in an unrealized loss position at December 31, 2015. Additionally, the maximum credit loss under the adverse case was limited to the amount of the security's unrealized loss. The adverse case housing price forecast is not management’s current best estimate of cash flows and is therefore not used as a basis for determining OTTI. The results of the analysis were immaterial.


77



Credit and Counterparty Risk - Mortgage Loans, BOB Loans and Derivatives

Mortgage Loans. The Finance Agency has authorized the Bank to hold mortgage loans under the MPF Program whereby the Bank acquires mortgage loans from participating members in a shared credit risk structure. These assets carry CEs, which give them the approximate equivalent of a AA credit rating at the time of purchase by the Bank, although the CE is not actually rated. The Bank had net mortgage loans held for portfolio of $3.1 billion at both December 31, 2015 and 2014, after an allowance for credit losses of $5.7 million and $7.3 million, respectively.

The tables below present additional mortgage loan portfolio statistics including portfolio balances categorized by product. The data in the FICO® and LTV ratio range tables is based on original FICO® scores and LTV ratios and unpaid principal balance for the loans remaining in the portfolio at December 31, 2015 and 2014. The geographic breakdown tables are also based on the unpaid principal balance at December 31, 2015 and 2014.
(dollars in millions)
December 31, 2015
December 31, 2014
Balance
% of Total
Balance
% of Total
Conventional loans:
 
 
 
 
     MPF Original
$
1,968.0

65.3
$
1,805.5

59.0
     MPF Plus
743.1

24.7
974.5

31.9
     MPF 35
52.8

1.7

Total conventional loans
$
2,763.9

91.7
$
2,780.0

90.9
Government-insured loans:
 
 
 
 
     MPF Government
248.8

8.3
278.5

9.1
Total par value
$
3,012.7

100.0
$
3,058.5

100.0
(dollars in millions)
2015
2014
2013
Mortgage loans interest income
$
120.5

$
129.4

$
141.7

Average mortgage loans portfolio balance
$
3,079.3

$
3,160.1

$
3,400.1

Average yield
3.91
%
4.10
%
4.17
%
Weighted average coupon (WAC)
4.76
%
4.93
%
5.10
%
Weighted average estimated life (WAL)
5.2 years

5.8 years

5.6 years

 
December 31, 2015
December 31, 2014
Original FICO® scores:
 
 
   Greater than or equal to 740
53%
52%
   700 to 739
22%
23%
   660 to 699
17%
17%
   620 to 659
7%
7%
   Less than 620
1%
1%
 
December 31, 2015
December 31, 2014
Original LTV ratio range:
 
 
   60% or below
14%
16%
   Above 60% to 70%
13%
14%
   Above 70% to 80%
54%
54%
   Above 80% to 90%
9%
8%
   Greater than 90%
10%
8%


78



 
December 31, 2015
December 31, 2014
Regional concentrations:
 
 
Midwest (IA, IL, IN, MI, MN, ND, NE, OH, SD and WI)
9%
9%
Northeast (CT, DE, MA, ME, NH, NJ, NY, PA, PR, RI, VI and VT)
66%
61%
Southeast (AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA and WV)
16%
18%
Southwest (AR, AZ, CO, KS, LA, MO, NM, OK, TX and UT)
4%
6%
West (AK, CA, GU, HI, ID, MT, NV, OR, WA and WY)
5%
6%
Top state concentrations:
 
 
   Pennsylvania
60%
54%
   Ohio
4%
3%
   West Virginia
4%
4%
   Maryland
4%
4%
   California
3%
4%
   New Jersey
3%
4%
   Other states
22%
27%

Underwriting Standards. Purchased mortgage loans must meet certain underwriting standards established in the MPF Program guidelines. Key standards and/or eligibility guidelines include the following loan criteria:
Conforming loan size, established annually; may not exceed the loan limits set by the Finance Agency;
Fixed-rate, fully-amortizing loans with terms from 5 to 30 years;
Secured by first lien mortgages on owner-occupied residential properties and second homes;
Generally, 95% maximum LTV; all LTV ratio criteria generally are based on the loan purpose, occupancy and borrower citizenship status; all loans with LTV ratios above 80% require PMI coverage; and
Unseasoned or current production with up to 12 payments made by the borrowers.

The following types of mortgage loans are not eligible for delivery under the MPF Program: (1) mortgage loans that are not ratable by S&P; (2) mortgage loans not meeting the MPF Program eligibility requirements as set forth in the MPF Guides and agreements; and (3) mortgage loans that are classified as high cost, high rate, Home Ownership and Equity Protection Act (HOEPA) loans, or loans in similar categories defined under predatory lending or abusive lending laws.

Under the MPF Program, the FHLBank of Chicago (in its role as MPF Provider) and the PFI both conduct quality assurance reviews on a sample of the conventional mortgage loans to ensure compliance with MPF Program requirements. The PFI may be required to repurchase at book value the individual loans which fail these reviews. Subsequent to this quality assurance review, any loans which are discovered to breach representations and warranties may be required to be repurchased by the PFI. Additionally, MPF Government residential mortgage loans which are 90 days or more past due are contractually permitted to be repurchased by the PFI. For 2015 and 2014, the total funded amount of conventional and government repurchased mortgage loans was $19.0 million, or 4.2%, and $20.5 million, or 5.6%, respectively, of total funded loans.

Layers of Loss Protection. The Bank is required to put a CE structure in place at purchase that assures that the Bank’s exposure to credit risk on mortgage loans is no greater than that of a mortgage asset rated at least AA. The PFI must bear a specified portion of the direct economic consequences of actual loan losses on the individual mortgage loans or pool of loans, which may be provided by a CE obligation or SMI. Each MPF product structure has various layers of loss protection as presented below.

79



Layer
MPF Original
MPF Plus
MPF 35
First
Borrower’s equity in the property
Borrower’s equity in the property
Borrower’s equity in the property
Second (required for mortgage loans with LTV greater than 80%)
PMI issued by qualified mortgage insurance companies (if applicable)
PMI issued by qualified mortgage insurance companies (if applicable)
PMI issued by qualified mortgage insurance companies (if applicable)
Third
Bank FLA (1)
(allocated amount)
Bank FLA (1)
(upfront amount)
Bank FLA (1)
(upfront amount)
Fourth
PFI CE amount (2)
SMI and/or PFI CE amount, if applicable (2)
PFI CE amount (2)
Final
Bank loss
Bank loss
Bank loss
Notes:
(1) The FLA either builds over time or is an amount equal to an agreed-upon percentage of the aggregate balance of the mortgage loans purchased. The type of FLA is established by MPF product. The Bank does not receive fees in connection with the FLA.
(2) The PFI’s CE amount for each pool of loans, together with any PMI or SMI, is sized at the time of loan purchase to equal the amount of losses in excess of the FLA to the equivalent of an AA rated mortgage investment.

By credit enhancing each loan pool, the PFI maintains an interest in the performance of the mortgage loans it sells to the Bank and may service for the Bank. For managing this risk, the PFI is paid a monthly CE fee by the Bank. CE fees are recorded as an offset to mortgage loan net interest income in the Statement of Income. For 2015, 2014, and 2013, CE fees were $3.0 million, $3.2 million and $3.5 million, respectively. Performance-based CE fees paid are reduced by losses absorbed through the FLA, where applicable.

MPF Original. Under MPF Original, the FLA is zero on the day the first loan is purchased and generally increases steadily over the life of the Master Commitment based on the month-end outstanding aggregate principal balance. Loan losses not covered by PMI, but not to exceed the FLA, are deducted from the FLA and recorded as losses by the Bank for financial reporting purposes. Losses in excess of FLA are allocated to the PFI under its CE obligation for each pool of loans. The PFI is paid a fixed CE fee for providing this CE obligation. Loan losses in excess of both the FLA and the CE amount are recorded as losses by the Bank based on the Bank’s participation interest in the master commitment.

MPF Plus. Under MPF Plus, the first layer of losses (following any PMI coverage) is applied to the FLA equal to a specified percentage of the loans in the pool as of the sale date. Any losses allocated to this FLA are the responsibility of the Bank. The PFI obtains additional CE in the form of a SMI policy to cover losses in excess of the deductible of the policy, which is equal to the FLA. Loan losses not covered by the FLA and SMI are paid by the PFI, up to the amount of the PFI’s CE obligation, if any, for each pool of loans. If applicable, the PFI is paid a fixed CE fee and a performance-based fee for providing the CE obligation. Loan losses applied to the FLA as well as losses in excess of the combined FLA, the SMI policy amount, and the PFI’s CE obligation are recorded by the Bank based on the Bank’s participation interest. Losses incurred by the Bank up to its exposure under the FLA may be able to be recaptured through the recovery of future performance-based CE fees earned by the PFI. Any loan losses in excess of both the FLA and the CE would be treated in the same manner as MPF Original. The MPF Plus product is currently not being offered by the Bank.

MPF 35. Under MPF 35, the FLA is equal to a specified percentage of the amount of loans funded in the Master Commitment. Loan losses not covered by PMI, but not to exceed the FLA, are deducted from the FLA and recorded as losses by the Bank for financial reporting purposes. Losses in excess of FLA are allocated to the PFI under its CE obligation. The PFI is paid a fixed CE fee and a performance-based fee for providing the CE obligation. Losses incurred by the Bank up to its exposure under the FLA may be recaptured through recovery of future performance-based CE fees earned by the PFI. Any loan losses in excess of both the FLA and the CE would be treated in the same manner as MPF Original.

The following table presents the outstanding balances in the FLAs for the MPF Original, MPF Plus, and MPF 35 products.
(in millions)
MPF Original
MPF Plus
MPF 35
Total
December 31, 2015
$
3.7

$
18.8

$
0.2

$
22.7

December 31, 2014
3.2

19.9


23.1

December 31, 2013
2.8

22.4


25.2



80



Mortgage Insurers. The Bank’s MPF Program currently has credit exposure to 11 mortgage insurance companies which provide PMI and/or SMI for the Bank’s various products. The Bank closely monitors the financial condition of these mortgage insurers. PMI for MPF Program loans must be issued by a mortgage insurance company on the approved mortgage insurance company list whenever PMI coverage is required.

None of the Bank’s mortgage insurers currently maintain a rating by at least one NRSRO of A+ or better. Given the credit deterioration of PMI providers, the estimate of the allowance for credit losses includes projected reduced claim payments. As required by the MPF Program, for originations with PMI, the ratings model currently requires additional CE from the PFI to compensate for the mortgage insurer rating when it is below A+. All PFIs have met this requirement.

The MPF Plus product required SMI under the MPF Program when each pool was established. At December 31, 2015, eight of the 14 MPF Plus pools still have SMI policies in place. The Bank does not currently offer the MPF Plus product and has not purchased loans under MPF Plus Commitments since July 2006. Per MPF Program guidelines, the existing MPF Plus product exposure is required to be secured by the PFI once the SMI company is rated below AA-. The Finance Agency guidelines require mortgage insurers that underwrite SMI to be rated AA- or better. This requirement has been temporarily waived by the Finance Agency provided that the Bank otherwise mitigates the risk by requiring the PFI to secure the exposure. As of December 31, 2015, $49.1 million of SMI exposure had been secured by two PFIs.

The unpaid principal balance and maximum coverage outstanding for seriously delinquent loans with PMI as of December 31, 2015 was $10.8 million and $4.4 million, respectively. As of December 31, 2014 the unpaid principal balance and maximum coverage outstanding for seriously delinquent loans with PMI was $13.9 million and $5.5 million, respectively.

BOB Loans. See Note 1 - Summary of Significant Accounting Policies in Item 8. in this Form 10-K for a description of the BOB program. At December 31, 2015, the allowance for credit losses on BOB loans was $2.1 million, an increase of $0.3 million from December 31, 2014.

Derivative Counterparties. Derivative transactions may be either executed with a counterparty (referred to as uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) or a Swap Execution Facility with a Derivatives Clearing Organization (referred to as cleared derivatives). For uncleared derivatives, the Bank transacts most of 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. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.

The Bank is subject to credit risk due to the risk of non-performance by counterparties to its derivative transactions. The amount of credit risk on derivatives depends on the extent to which netting procedures, collateral requirements and other credit enhancements are used and are effective in mitigating the risk. The Bank manages credit risk through credit analysis, collateral management, and other credit enhancements.

Uncleared Derivatives. The Bank is subject to non-performance by counterparties to its uncleared derivative transactions. The Bank requires collateral on uncleared derivative transactions. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty. A counterparty must deliver collateral to the Bank if the total market value of the Bank's exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its uncleared derivative transactions with counterparties as of December 31, 2015.

Cleared Derivatives. The Bank is subject to credit risk due to non-performance by the Clearing Houses and clearing agent. The requirement that the Bank post initial and variation margin, through the clearing agent, to the Clearing Houses, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearing Houses fail to meet their obligations. Initial margin is the amount calculated based on anticipated exposure to future changes in the value of a swap and protects the Clearing Houses from market risk in the event of default by one of its clearing agents. Variation margin is the amount calculated to cover the current exposure arising from changes in the market value of the position since the trade was executed or the previous time the position was marked to market. The Bank's use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily for changes in the value of cleared derivatives through a clearing agent. The Bank does not anticipate any credit losses on its cleared derivatives as of December 31, 2015.

The contractual or notional amount of derivative transactions reflects the involvement of the Bank in the various classes of financial instruments. The maximum credit risk of the Bank with respect to derivative transactions is the estimated cost of replacing the derivative transactions if there is a default, minus the value of any related collateral, including initial and variation margin. In determining maximum credit risk, the Bank considers accrued interest receivables and payables as well as the

81



netting requirements to net assets and liabilities. The following table presents the derivative positions with non-member counterparties and member institutions to which the Bank has credit exposure at December 31, 2015 and 2014.

(in millions)
December 31, 2015
Credit Rating (1)
Notional Amount
Net Derivatives Fair Value Before Collateral
Cash Collateral Pledged To (From) Counterparties
Net Credit Exposure to Counterparties
Non-member counterparties
 
 
 
 
Asset positions with credit
   exposure:
 
 
 
 
  Uncleared derivatives
 
 
 
 
    AA
$
10.0

$
0.1

$

$
0.1

    A
1,390.4

2.9

(1.9
)
1.0

Liability positions with credit
   exposure:
 
 
 
 
   Cleared derivatives (2)
32,509.6

(167.7
)
232.2

64.5

Total derivative positions with credit exposure to non-member counterparties
33,910.0

(164.7
)
230.3

65.6

Member institutions (3)
9.9

0.3


0.3

Total
$
33,919.9

$
(164.4
)
$
230.3

$
65.9

Derivative positions without credit exposure
10,649.9

 
 
 
Total notional
$
44,569.8

 
 
 
(in millions)
December 31, 2014
Credit Rating (1)
Notional Amount
Net Derivatives Fair Value Before Collateral
Cash Collateral Pledged To (From) Counterparties
Net Credit Exposure to Counterparties
Non-member counterparties
 
 
 
 
Asset positions with credit
   exposure:
 
 
 
 
  Uncleared derivatives
 
 
 
 
    AA
$
200.0

$
2.6

$

$
2.6

    A
385.0

1.6


1.6

Liability positions with credit
exposure:
 
 
 
 
  Uncleared derivatives
 
 
 
 
    A
1,325.0

(16.6
)
18

1.4

   Cleared derivatives (2)
23,373.5

(174.9
)
204.4

29.5

Total derivative positions with credit exposure to non-member counterparties
25,283.5

(187.3
)
222.4

35.1

Member institutions (3)
18.3

0.4


0.4

Total
$
25,301.8

$
(186.9
)
$
222.4

$
35.5

Derivative positions without credit exposure
19,551.2

 
 
 
Total notional
$
44,853.0

 
 
 
Notes:
(1) This table does not reflect any changes in rating, outlook or watch status occurring after December 31, 2015. The ratings presented in this table represent the lowest long-term counterparty credit rating available for each counterparty based on the NRSROs used by the Bank.
(2) Represents derivative transactions cleared through Clearing Houses.
(3) Member institutions include mortgage delivery commitments.


82



The following tables summarize the Bank’s uncleared derivative counterparties which represent more than 10% of the Bank’s total notional amount outstanding and net credit exposure as of December 31, 2015 and 2014.
Notional Greater Than 10%
December 31, 2015
December 31, 2014
(dollars in millions)
Derivative Counterparty
Credit Rating
Notional
% of Notional
Credit Rating
Notional
% of Notional
Deutsche Bank AG
BBB
$
2,343.0

19.4
A
$
4,567.4

21.3
Morgan Stanley Capital
BBB
2,136.5

17.7
BBB
3,328.6

15.5
Barclays Bank
A
1,916.9

15.9
(1) 
(1) 

(1) 
Bank of America, NA
A
1,530.5

12.7
(1) 
(1) 

(1) 
JP Morgan Chase Bank, NA
(1) 
(1) 

(1) 
A
2,885.6

13.4
All others
n/a
4,133.3

34.3
n/a
10,697.9

49.8
 Total
 
$
12,060.2

100.0
 
$
21,479.5

100.0
Net Credit Exposure
  Greater Than 10%
December 31, 2015
December 31, 2014
(dollars in millions)
Derivative Counterparty
Credit Rating
Net Credit Exposure
% of Net Credit Exposure
Credit Rating
Net Credit Exposure
% of Net Credit Exposure
BNP Paribas
A
$
0.7

49.1
(3) 
(3) 

(3) 
JP Morgan Chase Bank, NA
A
0.4

25.8
(2) 
(2) 

(2) 
Royal Bank of Canada
(3) 
(3) 

(3) 
AA
$
2.6

43.0
HSBC Bank USA, NA
(2) 
(2) 

(2) 
A
1.2

19.7
Goldman Sachs Group, Inc
(3) 
(3) 

(3) 
A
0.7

11.3
All others
n/a
0.3

25.1
n/a
1.5

26.0
 Total
 
$
1.4

100.0
 
$
6.0

100.0
Notes:
(1) The percentage of notional was not greater than 10%.
(2) The percentage of net credit exposure was not greater than 10%.
(3) The counterparty had no credit exposure for the period-end.

To manage market risk, the Bank enters into derivative contracts. Some of these derivatives are with U.S. branches of financial institutions located in Europe. In terms of counterparty credit risk exposure, European financial institutions are exposed to the Bank as shown below.
(in millions)
December 31, 2015
December 31, 2014
Country of Counterparty
Market Value of Total Exposure
Collateral Obligation (Net Exposure)
Collateral Pledged by the Bank
Market Value of Total Exposure
Collateral Obligation (Net Exposure)
Collateral Pledged by the Bank
Switzerland
$
32.6

$
32.6

$
32.6

$
37.5

$
37.5

$
37.8

France
0.6


0.4




United Kingdom
14.1

6.7

6.5

25.7

20.7

20.6

Germany
15.7

0.7

0.4

41.6

26.6

27.6

Total
$
63.0

$
40.0

$
39.9

$
104.8

$
84.8

$
86.0

Note: The average maturity of these derivative contracts is July 2019 and October 2018 at December 31, 2015 and 2014, respectively. Collateral Obligation (Net Exposure) is defined as Market Value of Total Exposure minus delivery threshold and minimum collateral transfer requirements.

In addition, the Bank is exposed to counterparty credit risk with U.S. branches of European financial institutions, as presented in the tables below.

83



(in millions)
December 31, 2015
December 31, 2014
Country of Counterparty
Market Value of Total Exposure
Collateral Obligation (Net Exposure)
Collateral Pledged to the Bank
Market Value of Total Exposure
Collateral Obligation (Net Exposure)
Collateral Pledged to the Bank
France
$
1.3

$

$
0.4

$
0.6

$
0.6

$
3.1

United Kingdom
0.1



3.8

2.6

3.9

Switzerland



0.4



Total
$
1.4

$

$
0.4

$
4.8

$
3.2

$
7.0

Note: The average maturity of these derivative contracts is November 2019 and March 2019 at December 31, 2015 and 2014, respectively. Collateral Obligation (Net Exposure) is defined as Market Value of Total Exposure minus delivery threshold and minimum collateral transfer requirements.

To appropriately assess potential credit risk to its European holdings, the Bank annually underwrites each counterparty and country and regularly monitors NRSRO rating actions and other publications for changes to credit quality. The Bank also actively monitors its counterparties' approximate indirect exposure to European sovereign debt and considers this exposure as a component of its credit risk review process.

Liquidity and Funding Risk

As a wholesale bank, the Bank employs financial strategies that are designed to enable it to expand and contract its assets, liabilities and capital in response to changes in member credit demand, membership composition and other market factors. The Bank’s liquidity resources are designed to support these strategies. The Bank actively manages its liquidity position to maintain stable, reliable, and cost-effective sources of funds, while taking into account market conditions, member credit demand for short-and long-term loans, investment opportunities and the maturity profile of the Bank’s assets and liabilities. The Bank recognizes that managing liquidity is critical to achieving its statutory mission of providing funding to its members. In managing liquidity risk, the Bank is required to maintain a level of liquidity in accordance with certain Finance Agency guidance and policies established by management and the Board. The Bank’s various liquidity requirements are designed to enhance the Bank’s protection against temporary disruptions in access to the debt markets. Longer term contingency liquidity is discussed in the contingency liquidity section below.
 
Consolidated obligation bonds and discount notes, along with member deposits and capital, represent the primary funding sources used by the Bank to support its asset base. Consolidated obligations benefit from the Bank’s GSE status; however, they are not obligations of the U.S., and the U.S. government does not guarantee them.

Consolidated obligation bonds and discount notes are rated Aaa with stable outlook/P-1 by Moody’s and AA+ with stable outlook/A-1+ by S & P as of December 31, 2015. These ratings measure the likelihood of timely payment of principal and interest. At December 31, 2015, the Bank’s consolidated obligation bonds outstanding increased to $48.6 billion compared to $43.7 billion at December 31, 2014. The Bank also issues discount notes, which are shorter-term consolidated obligations, to support its short-term member loan portfolio and other short-term asset funding needs. Total discount notes outstanding at December 31, 2015 increased to $42.3 billion compared to $37.1 billion at December 31, 2014, primarily due to an increase in advance activity.

The Bank’s ability to operate its business, meet its obligations and generate net interest income depends primarily on the ability to issue large amounts of various debt structures at attractive rates. When treasury rates tighten relative to LIBOR, as occurred in 2015, debt structures tied to interest rate swaps become more expensive for the Bank. As a result, the Bank's structured debt cost in 2015 was slightly higher when compared to the prior year.

Consolidated obligations bonds often have investor-determined features. The decision to issue a bond using a particular structure is based upon the desired amount of funding, and the ability of the Bank to hedge the risks. The issuance of a bond with a simultaneously-transacted interest-rate exchange agreement usually results in a funding vehicle with a lower cost than the Bank could otherwise achieve. The continued attractiveness of such debt/swap transactions depends on price relationships in both the consolidated bond and interest-rate exchange markets. If conditions in these markets change, the Bank may alter the types or terms of the bonds issued. The increase in funding alternatives available to the Bank through negotiated debt/swap transactions is beneficial to the Bank because it may reduce funding costs and provide additional asset/liability management tools. The types of consolidated obligations bonds issued can fluctuate based on comparative changes in their cost levels, supply and demand conditions, advance demand, and the Bank’s balance sheet management strategy. The Bank primarily uses noncallable bonds as a source of funding but also utilizes structured notes such as callable bonds. Unswapped callable bonds

84



primarily fund the Bank’s mortgage portfolio while swapped callable bonds fund other floating rate assets. At December 31, 2015, callable bonds issued by the Bank were down approximately $6.2 billion from December 31, 2014. Additional information regarding the Bank’s consolidated obligations is provided in Note 14 - Consolidated Obligations to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K.

The Bank’s investments also represent a key source of liquidity. Total investments available for liquidity purposes may include trading securities, AFS securities, Federal funds sold, securities purchased under agreements to resell, and certificates of deposit. The Bank also maintains a secondary liquidity portfolio which may include U.S. Treasuries, U.S. agency securities and other GSE securities that can be financed under normal market conditions in securities repurchase agreement transactions to raise additional funds. The Bank utilizes repurchase transactions as a contingent source of liquidity. In addition, U.S. Treasuries may be used as collateral for derivative counterparty obligations in lieu of cash.

The Bank is required to maintain a level of liquidity in accordance with certain Finance Agency guidance and policies established by management and the Board. Under these policies and guidelines, the Bank is required to maintain sufficient liquidity in an amount at least equal to its anticipated net cash outflows under two different scenarios. One scenario assumes that the Bank cannot access the capital markets for a period of 15 days and that, during that time, members do not renew any maturing, prepaid and called advances. The second scenario assumes that the Bank cannot access the capital markets for five days and that, during that period, it will automatically renew maturing and called advances for all members except very large, highly rated members. These requirements are designed to enhance the Bank’s protection against temporary disruptions in access to the debt markets. The Bank was in compliance with these requirements at December 31, 2015.

Deposit Reserves. The Bank offers demand, overnight and term deposits for members and qualifying nonmembers. Total deposits at December 31, 2015 increased to $686.0 million from $641.2 million at December 31, 2014. Factors that generally influence deposit levels include turnover in members’ investment securities portfolios, changes in member demand for liquidity driven by member institution deposit growth, the slope of the yield curve and the Bank’s deposit pricing compared to other short-term money market rates. Fluctuations in this source of the Bank’s funding are typically offset by changes in the issuance of consolidated obligation discount notes. The Act requires the Bank to have assets, referred to as deposit reserves, invested in obligations of the United States, deposits in eligible banks or trust companies or loans with a maturity not exceeding five years, totaling at least equal to the current deposit balance. As of December 31, 2015 and 2014, excess deposit reserves were $78.9 billion and $68.0 billion, respectively.

Contingency Liquidity. In their asset/liability management planning, members may look to the Bank to provide standby liquidity. The Bank seeks to be in a position to meet its customers’ credit and liquidity needs without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. To satisfy these requirements and objectives, the Bank’s primary sources of liquidity are the issuance of new consolidated obligation bonds and discount notes and short-term investments, such as Federal funds sold and overnight securities purchased under agreements to resell.

The Bank maintains contingency liquidity plans designed to enable it to meet its obligations and the liquidity needs of members in the event of short-term capital market disruptions, operational disruptions at other FHLBanks or the OF, or short-term disruptions of the consolidated obligations markets. Through February 19, 2016, the Bank had a Liquidity and Funds Management Policy which requires the Bank to maintain at least 90 days of liquidity to enable the Bank to meet its obligations in the event of a longer-term consolidated obligations market disruption. The Bank has determined that it no longer needs this requirement as other liquidity and funding risk measures have been introduced since the initial adoption of the 90 day measurement. Additionally, consistent with the 90-day measurement, the operations the Bank undertakes if a market or operational disruption occurred that prevented the issuance of new consolidated obligation bonds or discount notes through the capital markets would remain the same. The Bank could meet its obligations by: (1) allowing short-term liquid investments to mature; (2) purchasing Federal funds; (3) using eligible securities as collateral for repurchase agreement borrowings; and (4) if necessary, allowing advances to mature without renewal. The Bank’s GSE status and the FHLBank System consolidated obligation credit rating, which reflects the fact that all 11 FHLBanks share a joint and several liability on the consolidated obligations, have historically provided excellent capital market access.

The Bank’s liquidity measures are estimates which are dependent upon certain assumptions which may or may not prove valid in the event of an actual complete capital market disruption. Management believes that under normal operating conditions, routine member borrowing needs and consolidated obligation maturities could be met under these requirements; however, under extremely adverse market conditions, the Bank’s ability to meet a significant increase in member loan demand could be impaired without immediate access to the consolidated obligation debt markets. The Bank’s access to the capital markets has never been interrupted to the extent the Bank’s ability to meet its obligations was compromised, and the Bank currently has no reason to believe that its ability to issue consolidated obligations will be impeded to that extent. Specifically,

85



the Bank’s sources of contingency liquidity include maturing overnight and short-term investments, maturing advances, unencumbered repurchase-eligible assets, trading securities, AFS securities and MBS repayments. Uses of contingency liquidity include net settlements of consolidated obligations, member loan commitments, mortgage loan purchase commitments, deposit outflows and maturing other borrowed funds. Excess contingency liquidity is calculated as the difference between sources and uses of contingency liquidity. At December 31, 2015 and 2014, excess contingency liquidity was approximately $20.8 billion and $19.7 billion, respectively.

The OF has developed a standard methodology for the allocation of the proceeds from the issuance of consolidated obligations when consolidated obligations cannot be issued in sufficient amounts to satisfy all FHLBank demand for funding during periods of financial distress and when its existing allocation processes are deemed insufficient. In general, this methodology provides that the proceeds in such circumstances will be allocated among the FHLBanks based on relative FHLBank total regulatory capital unless the OF determines that there is an overwhelming reason to adopt a different allocation method. As is the case during any instance of a disruption in the Bank's ability to access the capital markets, market conditions or this allocation could adversely impact the Bank's ability to finance operations, which could thereby adversely impact its financial condition and results of operations.

Repurchases of Excess Capital Stock. Beginning in December 2014, the Bank began to repurchase all excess capital stock on a weekly basis. Additionally, as of December 31, 2015 and 2014, the Bank had outstanding capital redemption requests of $6.0 million and $0.6 million respectively. See Note 16 - Capital to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K for additional information.

Negative Pledge Requirement. Finance Agency regulations require the Bank to maintain qualifying assets free from any lien or pledge in an amount at least equal to its portion of the total consolidated obligations outstanding issued on its behalf. Qualifying assets are defined as: (1) cash; (2) obligations of, or fully guaranteed by, the United States; (3) secured advances; (4) mortgages which have any guaranty, insurance or commitment from the United States or a Federal agency; and (5) investments described in Section 16(a) of the Act, which includes securities that a fiduciary or trust fund may purchase under the laws of any of the three states in which the Bank operates. As of December 31, 2015 and 2014, the Bank held total negative pledge qualifying assets in excess of total consolidated obligations of $5.3 billion and $4.8 billion, respectively. The FHLBanks will continue to be required to operate individually and collectively to ensure that consolidated obligations maintain a high level of acceptance and are perceived by investors as presenting a low level of credit risk. See Legislative and Regulatory Developments section of this Form 10-K for additional information.

Joint and Several Liability. Although the Bank is primarily liable for its portion of consolidated obligations, (i.e., those issued on its behalf), the Bank is also jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on consolidated obligations of all the FHLBanks. The Finance Agency, in its discretion and notwithstanding any other provisions, may at any time order any FHLBank to make principal or interest payments due on any consolidated obligation, even in the absence of default by the primary obligor. To the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the non-paying FHLBank, which has a corresponding obligation to reimburse the FHLBank to the extent of such assistance and other associated costs. However, if the Finance Agency determines that the non-paying FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Agency may determine. Finance Agency regulations govern the issuance of debt on behalf of the FHLBanks and authorize the FHLBanks to issue consolidated obligations, through the OF as its agent. The Bank is not permitted to issue individual debt without Finance Agency approval. See Note 14 - Consolidated Obligations of the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K for additional information.

Consolidated obligation bonds and discount notes outstanding for each of the FHLBanks acting as primary obligor are presented in the following table, exclusive of combining adjustments. The Bank’s total consolidated obligation bonds and discount notes represented 10.0% and 9.5% of total FHLBank System consolidated obligations at December 31, 2015 and 2014, respectively.

86



 
 
December 31, 2015
 
December 31, 2014
 
 
 
Discount
 
 
 
 
Discount
 
 
(in millions - par value)
 
Bonds
Notes
 
Total
 
Bonds
Notes
 
Total
Atlanta
 
$
63,773.3

$
69,480.5

 
$
133,253.8

 
$
91,787.7

$
37,169.4

 
$
128,957.1

Boston
 
25,307.3

28,487.6

 
53,794.9

 
25,328.4

25,312.0

 
50,640.4

Chicago
 
22,684.3

41,584.5

 
64,268.8

 
34,401.2

31,059.8

 
65,461.0

Cincinnati
 
35,036.7

77,225.3

 
112,262.0

 
59,123.3

41,238.1

 
100,361.4

Dallas
 
18,044.0

20,544.8

 
38,588.8

 
16,111.1

19,134.3

 
35,245.4

Des Moines
 
30,899.0

99,074.2

 
129,973.2

 
32,332.9

57,781.2

 
90,114.1

Indianapolis
 
27,866.7

19,267.4

 
47,134.1

 
25,498.8

12,570.8

 
38,069.6

New York
 
67,216.6

46,875.9

 
114,092.5

 
72,998.6

50,054.1

 
123,052.7

Pittsburgh
 
48,515.7

42,318.5

 
90,834.2

 
43,602.1

37,065.7

 
80,667.8

San Francisco
 
51,691.7

27,662.9

 
79,354.6

 
46,723.0

21,814.6

 
68,537.6

Seattle (1)
 


 

 
16,745.6

14,941.5

 
31,687.1

Topeka
 
19,823.8

21,821.1

 
41,644.9

 
20,159.3

14,221.3

 
34,380.6

Total FHLBank System
 
$
410,859.1

$
494,342.7

 
$
905,201.8

 
$
484,812.0

$
362,362.8

 
$
847,174.8

Notes:
(1) As previously announced, the FHLBank of Des Moines and the FHLBank of Seattle entered into a definitive agreement to merge the two FHLBanks. The merger was completed on May 31, 2015.

Operating and Business Risks

Operating Risk. Operating risk is defined as the risk of unexpected loss resulting from human error, system malfunctions, man-made or natural disasters, fraud, legal risk, compliance risk, or circumvention or failure of internal controls. The Bank has established operating policies and procedures to manage each of the specific operating risks, which are categorized as financial reporting, compliance, fraud, legal, information and personnel. The Bank’s Internal Audit department, which reports directly to the Audit Committee of the Board, regularly monitors compliance with established policies and procedures. Management monitors the effectiveness of the internal control environment on an ongoing basis and takes action as appropriate to enhance the environment. Some operating risk may also result from external factors which are beyond the Bank’s control, such as the failure of other parties with which the Bank conducts business to adequately address their own operating risks. Governance over the management of operating risks takes place through the Bank’s various risk management committees. Business areas retain primary responsibility for identifying, assessing and reporting their operational risks. To assist them in discharging this responsibility and to ensure that operational risk is managed consistently throughout the organization, the Bank has an effective operating risk management framework, which includes quantitative and qualitative key risk indicators, as well as a Bank-wide compliance framework designed to promote awareness of compliance requirements and monitor compliance activities.

In addition to the particular risks and challenges that it faces, the Bank also experiences ongoing operating risks that are similar to those of other large financial institutions. The Bank relies on third-party vendors and other service providers for ongoing support of business activities. Disruption or failure of service or breach of security at one of these suppliers could impact the Bank’s ability to conduct business or expose the Bank to financial loss, loss of intellectual property, or confidential information. The Bank has a vendor management office to manage third-party relationships. The Bank is also exposed to the risk that a catastrophic event, such as a terrorist event or a natural disaster, could result in significant business disruption and an inability to process transactions through normal business processes. To mitigate these risks, the Bank maintains and tests business continuity plans and has established backup facilities for critical business processes and systems away from, although in the same metropolitan area as, the main office. The Bank also has a reciprocal backup agreement in place with another FHLBank to provide short-term loans and debt servicing in the event that both of the Pittsburgh facilities are inoperable. The results of the Bank’s periodic business continuity tests are presented annually to the Board. Management can make no assurances that these measures will be sufficient to respond to the full range of catastrophic events that might occur.

The Bank's dependence on computer systems and technologies has increased its exposure to cyber-security risks and cyber incidents, including unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data or causing operational disruption or loss. To date, the Bank’s technology control environment, along with security policies and standards, incident response procedures, security controls testing and dedicated information security resources, have prevented successful cyber-security attacks from impacting the Bank in any material manner. While these security measures are in place and the Bank devotes significant resources to secure the Bank's computer systems and networks, it might not be able to anticipate or implement effective preventive measures against all security breaches. It may incur

87



substantial costs and suffer other negative consequences as a result, including but not limited to remediation costs, increased security costs, lost revenue, litigation and reputational damage.

The Bank maintains insurance coverage for employee misappropriation, as well as director and officer liability protection. Additionally, insurance coverage is in place for electronic data-processing equipment and software, personal property, leasehold improvements, property damage, personal injury and cyber-related incidents. The Bank maintains additional insurance protection as deemed appropriate. The Bank regularly reviews its insurance coverage for adequacy as well as the financial claims paying ability of its insurance carriers.

Business Risk. Business risk is the risk of an adverse impact on the Bank’s profitability or financial or business strategies resulting from external factors that may occur in the short-term and/or long-term. This risk includes the potential for strategic business constraints to be imposed through regulatory, legislative or political changes. Examples of external factors may include, but are not limited to: continued financial services industry consolidation, a declining membership base, concentration of borrowing among members, the introduction of new competing products and services, increased non-Bank competition, weakening of the FHLBank System’s GSE status, changes in the deposit and mortgage markets for the Bank’s members, mortgage market changes that could occur if new GSE legislation is implemented, and other factors that may have a significant direct or indirect impact on the ability of the Bank to achieve its mission and strategic objectives. The Bank’s Risk Management Committee monitors economic indicators and the external environment in which the Bank operates and attempts to mitigate this risk through long-term strategic planning.

A discussion of various Bank risks is also included in Item 1A. Risk Factors in this Form 10-K.

Item 7A:  Quantitative and Qualitative Disclosures about Market Risk

See the Risk Management section of Item 7. Management’s Discussion and Analysis in this Form 10-K.



88


Item 8:  Financial Statements and Supplementary Financial Data

Management’s Annual Report on Internal Control over Financial Reporting

The management of the Bank is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Bank’s internal control over financial reporting is designed by and under the supervision of the Bank’s management, including the Chief Executive Officer, Chief Financial Officer, and the Chief Accounting Officer. The Bank’s internal controls over financial reporting are to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP 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 Bank’s management assessed the effectiveness of the Bank’s internal control over financial reporting as of December 31, 2015. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control-Integrated Framework (2013). Based on its assessment, management of the Bank determined that as of December 31, 2015, the Bank’s internal control over financial reporting was effective based on those criteria.

The effectiveness of the Bank’s internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, the Bank’s independent registered public accounting firm, as stated in their report that follows.

89


Report of Independent Registered Public Accounting Firm

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

In our opinion, the accompanying statements of condition and the related statements of income, comprehensive income, changes in capital, and cash flows present fairly, in all material respects, the financial position of the Federal Home Loan Bank of Pittsburgh (the FHLBank) at December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLBank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The FHLBank'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 Annual Report on Internal Control over Financial Reporting and which appears on the previous page. Our responsibility is to express opinions on these financial statements and on the FHLBank's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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


/s/  PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania
March 10, 2016


90




Federal Home Loan Bank of Pittsburgh
Statements of Income
 
Year ended December 31,
(in thousands, except per share amounts)
2015
2014
2013
Interest income:
 

 
 
Advances
$
345,957

$
255,863

$
227,681

     Prepayment fees on advances, net
3,599

16,956

2,306

Interest-bearing deposits
348

351

464

Securities purchased under agreements to resell
965

73

1,037

Federal funds sold
7,230

3,856

4,251

     Trading securities
9,784

7,663

1,274

Available-for-sale (AFS) securities
145,430

137,623

121,209

Held-to-maturity (HTM) securities
61,826

74,304

96,651

Mortgage loans held for portfolio
120,433

129,399

141,699

Total interest income
695,572

626,088

596,572

Interest expense:
 
 
 
     Consolidated obligations - discount notes
54,126

24,201

18,461

     Consolidated obligations - bonds
323,191

318,371

381,313

Mandatorily redeemable capital stock
145

165

1,326

Deposits
274

220

321

Other borrowings
20

29

16

Total interest expense
377,756

342,986

401,437

Net interest income
317,816

283,102

195,135

Provision (benefit) for credit losses
(167
)
(4,129
)
(1,849
)
Net interest income after provision (benefit) for credit losses
317,983

287,231

196,984

Other noninterest income:
 
 
 
      Total OTTI losses (Note 7)
(3,005
)


      OTTI losses reclassified to (from) AOCI (Note 7)
1,156


(442
)
        Net OTTI losses, credit portion (Note 7)
(1,849
)

(442
)
      Net gains (losses) on trading securities (Note 4)
1,598

22,408

(4,594
)
      Net gains (losses) on derivatives and hedging activities (Note 11)
3,380

(37,500
)
30,251

      Net gains on extinguishment of debt (Note 14)


9,665

      Gains on litigation settlements, net
15,263

70,896

1,482

      Standby letters of credit fees
23,655

17,383

9,083

Other, net
2,440

2,480

2,056

Total other noninterest income
44,487

75,667

47,501

Other expense:
 
 
 
     Compensation and benefits
43,146

43,098

44,689

Other operating
24,191

27,228

27,634

Finance Agency
5,364

4,592

4,005

Office of Finance
4,720

3,772

3,704

Total other expense
77,421

78,690

80,032

Income before assessments
285,049

284,208

164,453

Affordable Housing Program (AHP) assessment (Note 15)
28,519

28,437

16,578

Net income
$
256,530

$
255,771

$
147,875

Earnings per share:
 
 
 
Weighted avg shares outstanding (excludes mandatorily redeemable capital stock)
31,900

28,767

27,395

Basic and diluted earnings per share
$
8.04

$
8.89

$
5.40

Dividends per share
$
6.67

$
3.61

$
0.78

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

91


Federal Home Loan Bank of Pittsburgh
Statements of Comprehensive Income

 
Year ended December 31,
(in thousands)
2015
2014
2013
Net income
$
256,530

$
255,771

$
147,875

Other comprehensive income (loss):
 
 
 
Net unrealized gains (losses) on AFS securities:
 
 
 
  Unrealized gains (losses)
(23,712
)
64,941

(67,912
)
  Reclassification of realized losses included in net income


41

Total net unrealized gains (losses) on AFS
(23,712
)
64,941

(67,871
)
Net non-credit portion of OTTI losses on AFS securities:
 
 
 
  Non-credit portion of OTTI losses transferred from HTM securities
(1,665
)


  Net change in fair value of OTTI securities
(20,325
)
16,809

58,201

  Net amount of impairment losses reclassified to non-interest income
509


442

Total net non-credit portion of OTTI gains (losses) on AFS securities
(21,481
)
16,809

58,643

Net non-credit portion of OTTI losses on HTM securities:
 
 
 
  Non-credit portion
(1,665
)


  Transfer of non-credit portion from HTM to AFS securities
1,665



Total net non-credit portion of OTTI losses on HTM securities



Reclassification of net losses (gains) included in net income relating to hedging activities
(25
)
(15
)
1

Pension and post-retirement benefits
1,468

(1,642
)
(138
)
Total other comprehensive income (loss)
(43,750
)
80,093

(9,365
)
Total comprehensive income
$
212,780

$
335,864

$
138,510


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


92


Federal Home Loan Bank of Pittsburgh
Statements of Condition

 
December 31,
2015
 
December 31,
2014
(in thousands)
 
ASSETS
 

 
 

Cash and due from banks (Note 3)
$
2,376,964

 
$
2,451,131

Interest-bearing deposits
6,075

 
6,782

Federal funds sold
3,980,000

 
4,585,000

Securities purchased under agreements to resell
1,000,000

 

Investment securities:
 
 
 
Trading securities (Note 4)
394,737

 
281,016

AFS securities, at fair value (Note 5)
8,099,894

 
8,408,835

     HTM securities; fair value of $2,684,071 and $3,286,547, respectively (Note 6)
2,663,304

 
3,246,788

          Total investment securities
11,157,935

 
11,936,639

Advances, net (Note 8)
74,504,776

 
63,408,355

Mortgage loans held for portfolio (Note 9), net of allowance for credit losses of
    $5,665 and $7,260 respectively (Note 10)
3,086,855

 
3,123,334

Banking on Business (BOB) loans, net of allowance for credit losses of $2,052 and
    $1,840, respectively (Note 10)
11,276

 
11,567

Accrued interest receivable
107,345

 
86,109

Premises, software and equipment, net (Note 12)
10,687

 
10,446

Derivative assets (Note 11)
65,855

 
36,217

Other assets
28,515

 
21,496

Total assets
$
96,336,283

 
$
85,677,076



93


Federal Home Loan Bank of Pittsburgh
Statements of Condition (continued)

 
December 31, 2015
 
December 31, 2014
(in thousands, except par value)
 
LIABILITIES AND CAPITAL
 

 
 

Liabilities
 
 
 

Deposits: (Note 13)
 

 
 

Interest-bearing
$
635,468

 
$
601,454

Noninterest-bearing
50,469

 
39,726

Total deposits
685,937

 
641,180

Consolidated obligations, net: (Note 14)
 
 
 
Discount notes
42,276,815

 
37,058,118

Bonds
48,605,982

 
43,714,510

Total consolidated obligations, net
90,882,797

 
80,772,628

Mandatorily redeemable capital stock (Note 16)
6,053

 
586

Accrued interest payable
92,765

 
103,151

AHP payable (Note 15)
70,907

 
55,997

Derivative liabilities (Note 11)
42,508

 
58,964

Other liabilities
53,715

 
41,614

Total liabilities
91,834,682

 
81,674,120

Commitments and contingencies (Note 20)


 


Capital (Note 16)
 
 
 
Capital stock - putable ($100 par value) issued and outstanding 35,396 and 30,410 shares
3,539,648

 
3,040,976

Retained earnings:
 
 
 
    Unrestricted
718,727

 
726,309

    Restricted
162,543

 
111,238

Total retained earnings
881,270

 
837,547

Accumulated Other Comprehensive Income (AOCI)
80,683

 
124,433

Total capital
4,501,601

 
4,002,956

Total liabilities and capital
$
96,336,283

 
$
85,677,076


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


94



Federal Home Loan Bank of Pittsburgh
Statements of Cash Flows
 
Year Ended December 31,
(in thousands)
2015
2014
2013
OPERATING ACTIVITIES
 
 

 

Net income
$
256,530

$
255,771

$
147,875

Adjustments to reconcile net income to net cash provided by
 operating activities:
 
 
 
Depreciation and amortization
(59,674
)
(59,788
)
(41,724
)
Net change in derivatives and hedging activities
54,567

83,449

12,041

Net OTTI credit losses
1,849


442

Net gains on extinguishment of debt


(9,665
)
Other adjustments
(185
)
(4,838
)
(1,809
)
Net change in:
 
 
 
Trading securities
(113,721
)
(51,717
)
124,292

Accrued interest receivable
(21,240
)
9,266

(2,649
)
Other assets
(1,417
)
(903
)
(711
)
Accrued interest payable
(10,387
)
5,463

(16,317
)
Other liabilities
28,150

21,099

16,828

Net cash provided by operating activities
$
134,472

$
257,802

$
228,603

INVESTING ACTIVITIES
 
 
 
Net change in:
 
 
 
Interest-bearing deposits (including $707, $1,013 and $3,640
  from other FHLBanks for mortgage loan program)
$
58,652

$
131,413

$
(151,402
)
Securities purchased under agreements to resell
(1,000,000
)

2,500,000

Federal funds sold
605,000

(1,710,000
)
1,720,000

AFS securities:
 
 
 
Proceeds (includes $19,909 from sale of AFS securities in 2013)
3,869,773

1,819,780

1,959,687

Purchases
(3,566,673
)
(3,333,306
)
(2,801,220
)
HTM securities:
 
 
 
Net change in short-term


400,000

Proceeds from long-term maturities
705,178

749,354

1,272,264

Purchases
(134,336
)


Advances:
 
 
 
Proceeds
535,178,961

647,779,277

263,745,577

Made
(546,386,629
)
(661,191,580
)
(273,786,491
)
Mortgage loans held for portfolio:
 
 
 
Proceeds
483,923

464,995

753,311

Purchases
(463,969
)
(375,214
)
(464,699
)
     Proceeds from sale of foreclosed assets
11,050

17,748

22,417

Premises, software and equipment :
 
 
 
      Proceeds from sale

900


      Purchases
(3,961
)
(3,923
)
(3,043
)
Net cash (used) in investing activities
$
(10,643,031
)
$
(15,650,556
)
$
(4,833,599
)
 
 
 
 

95



Federal Home Loan Bank of Pittsburgh
Statements of Cash Flows (continued)
 
 
 
 
 
 
 
 
 
Year Ended December 31,
(in thousands)
2015
2014
2013
FINANCING ACTIVITIES
 
 
 
Net change in:
 
 
 
Deposits and pass-through reserves
$
35,376

$
(48,945
)
$
(329,871
)
 Net payments for derivative contracts with financing element
(32,218
)
(32,699
)
(32,272
)
Net proceeds from issuance of consolidated obligations:
 
 
 
Discount notes
154,729,878

131,729,844

232,107,226

Bonds (includes $65,576 from other FHLBanks during 2014)
35,225,737

26,050,080

27,631,175

Payments for maturing and retiring consolidated obligations:
 
 
 
Discount notes
(149,530,556
)
(122,909,347
)
(228,019,303
)
Bonds
(30,285,157
)
(20,041,829
)
(24,674,356
)
Proceeds from issuance of capital stock
3,153,069

2,135,063

1,664,951

Payments for repurchase/redemption of mandatorily redeemable
  capital stock
(31,162
)
(7,876
)
(432,224
)
Payments for repurchase/redemption of capital stock
(2,617,768
)
(2,047,808
)
(1,518,075
)
Cash dividends paid
(212,807
)
(103,943
)
(21,504
)
Net cash provided by financing activities
$
10,434,392

$
14,722,540

$
6,375,747

Net (decrease) increase in cash and due from banks
$
(74,167
)
$
(670,214
)
$
1,770,751

Cash and due from banks at beginning of the period
2,451,131

3,121,345

1,350,594

Cash and due from banks at end of the period
$
2,376,964

$
2,451,131

$
3,121,345

Supplemental disclosures:
 
 
 
Interest paid
$
407,926

$
378,194

$
464,250

AHP payments
13,609

8,793

4,682

Transfers of mortgage loans to real estate owned
7,704

14,257

17,167

Non-cash transfer of OTTI HTM securities to AFS
10,286




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


96


Federal Home Loan Bank of Pittsburgh
Statements of Changes in Capital

 
Capital Stock - Putable
 
Retained Earnings
 
 
 
(in thousands)
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
AOCI
 
Total Capital
December 31, 2012
28,160

 
$
2,815,965

 
$
528,767

 
$
30,508

 
$
559,275

 
$
53,705

 
$
3,428,945

Issuance of capital stock
16,650

 
1,664,951

 

 

 

 

 
1,664,951

Repurchase/redemption of capital stock
(15,181
)
 
(1,518,075
)
 

 

 

 

 
(1,518,075
)
Net shares reclassified to mandatorily redeemable capital stock
(7
)
 
(698
)
 

 

 

 

 
(698
)
Comprehensive income (loss)

 

 
118,300

 
29,575

 
147,875

 
(9,365
)
 
138,510

Cash dividends

 

 
(21,431
)
 

 
(21,431
)
 

 
(21,431
)
December 31, 2013
29,622

 
$
2,962,143

 
$
625,636

 
$
60,083

 
$
685,719

 
$
44,340

 
$
3,692,202



 
Capital Stock - Putable
 
Retained Earnings
 
 
 
(in thousands)
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
AOCI
 
Total Capital
December 31, 2013
29,622

 
$
2,962,143

 
$
625,636

 
$
60,083

 
$
685,719

 
$
44,340

 
$
3,692,202

Issuance of capital stock
21,350

 
2,135,063

 

 

 

 

 
2,135,063

Repurchase/redemption of capital stock
(20,478
)
 
(2,047,808
)
 

 

 

 

 
(2,047,808
)
Net shares reclassified to mandatorily redeemable capital stock
(84
)
 
(8,422
)
 

 

 

 

 
(8,422
)
Comprehensive income (loss)

 

 
204,616

 
51,155

 
255,771

 
80,093

 
335,864

Cash dividends

 

 
(103,943
)
 

 
(103,943
)
 

 
(103,943
)
December 31, 2014
30,410

 
$
3,040,976


$
726,309


$
111,238


$
837,547


$
124,433


$
4,002,956

 


 
Capital Stock - Putable
 
Retained Earnings
 
 
 
(in thousands)
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
AOCI
 
Total Capital
December 31, 2014
30,410

 
$
3,040,976

 
$
726,309

 
$
111,238

 
$
837,547

 
$
124,433

 
$
4,002,956

Issuance of capital stock
31,530

 
3,153,069

 

 

 

 

 
3,153,069

Repurchase/redemption of capital stock
(26,178
)
 
(2,617,768
)
 

 

 

 

 
(2,617,768
)
Net shares reclassified to mandatorily redeemable capital stock
(366
)
 
(36,629
)
 

 

 

 

 
(36,629
)
Comprehensive income (loss)

 

 
205,225

 
51,305

 
256,530

 
(43,750
)
 
212,780

Cash dividends

 

 
(212,807
)
 

 
(212,807
)
 

 
(212,807
)
December 31, 2015
35,396

 
$
3,539,648

 
$
718,727

 
$
162,543

 
$
881,270

 
$
80,683

 
$
4,501,601


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

97


Federal Home Loan Bank of Pittsburgh
Notes to Financial Statements

Background Information

The Bank, a federally chartered corporation, is one of 11 district FHLBanks. The FHLBanks are government-sponsored enterprises (GSEs) that serve the public by increasing the availability of credit for residential mortgages and community development. The Bank provides a readily available, low-cost source of funds to its member institutions. The Bank is a cooperative, which means that current members own nearly all of the outstanding capital stock of the Bank. All holders of the Bank’s capital stock may, to the extent declared by the Board, receive dividends on their capital stock. Regulated financial depositories and insurance companies engaged in residential housing finance that maintain their principal place of business (as defined by Finance Agency regulation) in Delaware, Pennsylvania or West Virginia may apply for membership. Community Development Financial Institutions (CDFIs) which meet membership regulation standards are also eligible to become Bank members. State and local housing associates that meet certain statutory and regulatory criteria may also borrow from the Bank. While eligible to borrow, state and local housing associates are not members of the Bank and, as such, are not required to hold capital stock.

All members must purchase stock in the Bank. The amount of capital stock a member owns is based on membership requirements (membership asset value) and activity requirements (i.e., outstanding advances, letters of credit, and the principal balance of certain residential mortgage loans sold to the Bank). The Bank considers those members with capital stock outstanding in excess of 10% of total capital stock outstanding to be related parties. See Note 18 - Transactions with Related Parties for additional information.

The Federal Housing Finance Agency (Finance Agency) is the independent regulator of the FHLBanks. The mission of the Finance Agency is to ensure the FHLBanks operate in a safe and sound manner so 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 Bank does not consolidate any off-balance sheet special-purpose entities or other conduits.

As provided by the Federal Home Loan Bank Act (FHLBank Act), or Finance Agency regulation, the Bank’s debt instruments, referred to as consolidated obligations, are the joint and several obligations of all the FHLBanks and are the primary source of funds for the FHLBanks. These funds are primarily used to provide advances, purchase mortgages from members through the Mortgage Partnership Finance (MPF) Program and purchase certain investments. See Note 14 - Consolidated Obligations for additional information. The Office of Finance (OF) is a joint office of the FHLBanks established to facilitate the issuance and servicing of the consolidated obligations of the FHLBanks and to prepare the combined quarterly and annual financial reports of all 11 FHLBanks. Deposits, other borrowings, and capital stock issued to members provide other funds. The Bank primarily invests these funds in short-term investments to provide liquidity. The Bank also provides member institutions with correspondent services, such as wire transfer, safekeeping and settlement.



98

Notes to Financial Statements (continued)

Note 1 – Summary of Significant Accounting Policies

Basis of Presentation

Cash Flows. In the Statement of Cash Flows, the Bank considers cash and due from banks as cash and cash equivalents.

Use of Estimates. The preparation of financial statements in accordance with GAAP requires management to make subjective assumptions and estimates that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expense. The most significant of these estimates include the fair value of derivatives and certain investment securities that are reported at fair value in the Statement of Condition, determination of other-than-temporary impairments of certain mortgage-backed securities, and the determination of the Allowance for Credit Losses. Actual results could differ from these estimates significantly.

Fair Value. The fair value amounts, recorded on the Statement of Condition and in the note disclosures for the periods presented, have been determined by the Bank using available market and other pertinent information, and reflect the Bank’s best judgment of appropriate valuation methods. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values are not necessarily equal to the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how a market participant would estimate the fair values. See Note 19 - Estimated Fair Values for more information.

Significant Accounting Policies

Financial Instruments Meeting Netting Requirements. The Bank presents certain financial instruments on a net basis when it has a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). For these financial instruments, the Bank has elected to offset its asset and liability positions, as well as cash collateral received or pledged, when it has met the netting requirements.

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

Interest-Bearing Deposits, Federal Funds Sold, and Securities Purchased under Agreements to Resell. These investments provide short-term liquidity and are carried at cost. Interest-bearing deposits include certificates of deposit and bank notes not meeting the definition of a security. Federal funds sold consist of short-term, unsecured loans made to investment-grade counterparties. The Bank records securities purchased under agreements to resell as short-term collateralized loans to a third party which are classified as assets in the Statement of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. Should the market value of the underlying securities decrease below the market value required as collateral, the counterparty has the option to provide additional collateral equivalent to the amount of the shortfall by (1) placing an equivalent amount of additional securities in safekeeping in the name of the Bank or (2) remitting an equivalent amount of cash; otherwise, the dollar value of the resale agreement will be decreased accordingly.

Investment Securities. The Bank classifies investment securities as trading, AFS and HTM at the date of acquisition. and sales of securities are recorded on a trade date basis.

Trading. Securities classified as trading are carried at fair value. The Bank records changes in the fair value of these investments through noninterest income as “Net gains (losses) on trading securities.”

Available-for-Sale (AFS). Securities that are not classified as HTM or trading are classified as AFS and are carried at fair value. The Bank records changes in the fair value of these securities in AOCI as “Net unrealized gains (losses) on AFS securities.” However, for AFS securities that have been hedged and qualify as a fair value hedge, the Bank records the portion of the change in value related to the risk being hedged in noninterest 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 AOCI as “Net unrealized gains (losses) on AFS securities.”


99

Notes to Financial Statements (continued)

Held-to-Maturity (HTM). Securities that the Bank has both the ability and intent to hold to maturity are classified as HTM 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 Bank to change its intent to hold a security to maturity without calling into question its intent to hold other debt securities to maturity. Thus, the sale or transfer of an HTM security due to certain changes in circumstances, such as evidence of significant deterioration in the issuer’s creditworthiness or changes in regulatory requirements, is not considered to be inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for the Bank that could not have been reasonably anticipated may cause the Bank to sell or transfer an HTM security without necessarily calling into question its intent to hold other debt securities to maturity. In addition, a sale of a debt security that meets either of the following two conditions would not be considered inconsistent with the original classification of that security: (1) the sale occurs near enough to its maturity date (or call date if exercise of the call is probable) that interest-rate risk is substantially eliminated as a pricing factor and the changes in market interest rates would not have a significant effect on the security’s fair value, or (2) the sale of a security occurs after the Bank has already collected a substantial portion (at least 85%) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments (both principal and interest) over its term.

Premiums and Discounts. The Bank amortizes purchased premiums and accretes purchased discounts on investment securities using the contractual level-yield method (contractual method). The contractual method recognizes the income effects of premiums and discounts over the contractual life of the securities based on the actual behavior of the underlying assets, including adjustments for actual prepayment activities, and reflects the contractual terms of the securities without regard to changes in estimated prepayments based on assumptions about future borrower behavior.

Gains and Losses on Sales. The Bank computes gains and losses on sales of its investment securities using the specific identification method and includes these gains and losses in other noninterest income.
 
Investment Securities - OTTI. The Bank evaluates its individual AFS and HTM securities in unrealized loss positions for OTTI quarterly. A security is considered impaired when its fair value is less than its amortized cost basis. In those cases, the Bank considers an OTTI to have occurred under any of the following conditions:

it has an intent to sell the impaired debt security;
if, based on available evidence, it believes it is more likely than not that it will be required to sell the impaired debt security before the recovery of its amortized cost basis; or
it does not expect to recover the entire amortized cost basis of the impaired debt security.

Recognition of OTTI. If either of the first two conditions above is met, the Bank recognizes an OTTI charge in earnings equal to the entire difference between the security’s amortized cost basis and its fair value as of the Statement of Condition date. For securities in an unrealized loss position that do not meet either of these conditions, the security is evaluated to determine the extent and amount of credit loss.

To determine whether a credit loss exists, the Bank performs an analysis, which includes a cash flow test for private label mortgage-backed securities (MBS), to determine if it will recover the entire amortized cost basis of each of these securities. The present value of the cash flows expected to be collected is compared to the amortized cost basis of the debt security. If there is a credit loss (the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security), the carrying value of the debt security is adjusted to its fair value. However, rather than recognizing the entire difference between the amortized cost basis and fair value in earnings, only the amount of the impairment representing the credit loss (i.e., the credit component) is recognized in earnings, while the amount related to all other factors (i.e., the non-credit component) is recognized in AOCI, which is a component of capital. The credit loss on a debt security is limited to the amount of that security’s unrealized losses.

The total OTTI is presented in the Statement of Income with an offset for the amount of the non-credit portion of OTTI that is recognized in AOCI. The remaining amount in the Statement of Income represents the credit loss for the period.

Accounting for OTTI Recognized in AOCI. For subsequent accounting of an other-than-temporarily impaired security, the Bank records an additional OTTI if the present value of cash flows expected to be collected is less than the amortized cost of the security. The total amount of this additional OTTI (both credit and non-credit component, if any) is determined as the difference between the security’s amortized cost less the amount of OTTI recognized in AOCI prior to the determination of this additional OTTI and its fair value. Any additional credit loss is limited to that security’s unrealized losses, or the difference between the security’s amortized cost and its fair value, as of the Statement of Condition date. This additional credit loss, up to

100

Notes to Financial Statements (continued)

the amount in AOCI related to the security, is reclassified out of AOCI and charged to earnings. Any credit loss in excess of the related AOCI is charged to earnings.

Subsequent related increases and decreases (if not an additional OTTI) in the fair value of AFS securities are netted against the non-credit component of OTTI recognized previously in AOCI. For debt securities classified as AFS, the Bank does not accrete the OTTI recognized in AOCI to the carrying value because the subsequent measurement basis for these securities is fair value.

Interest Income Recognition. When a debt security has been other-than-temporarily impaired, a new accretable yield is calculated for that security at its impairment measurement date. This adjusted yield is used to calculate the interest income recognized over the remaining life of that security, matching the amount and timing of its estimated future collectible cash flows. Subsequent to that security’s initial OTTI, the Bank re-evaluates estimated future collectible cash flows on a quarterly basis. If the security has no additional OTTI based on this evaluation, the accretable yield is reassessed for possible upward adjustment on a prospective basis. The accretable yield is adjusted if there is a significant increase in the security’s expected cash flows.

Variable Interest Entities (VIEs). The Bank has investments in VIEs that include, but are not limited to, senior interests in private label MBS. The carrying amounts and classification of the assets that relate to the Bank’s investments in VIEs are included in investment securities on the Statement of Condition. The Bank has no liabilities related to these VIEs. The maximum loss exposure for these VIEs is limited to the amortized cost of the Bank’s investments in the VIEs.

If the Bank determines it is the primary beneficiary of a VIE, it would be required to consolidate that VIE. The Bank performs a quarterly evaluation to determine whether it is the primary beneficiary of any VIEs. To perform this evaluation, the Bank considers whether it has both:

the power to direct the VIE’s activities that most significantly impact the VIEs’ economic performance; and
the obligation to absorb the VIE’s losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Based on an evaluation of the above characteristics, the Bank has determined that consolidation is not required for its VIEs for the periods presented. The Bank typically does not have the power to direct the VIEs’ activities that most significantly impact the VIEs’ economic performance. In addition, the Bank has not provided financial or other support to any (explicitly or implicitly) during the periods presented. Furthermore, the Bank was not previously contractually required to provide, nor does it intend to provide, such support in the future.

Advances. The Bank reports advances (secured loans to members, former members or housing associates) at amortized cost net of premiums and discounts (including discounts related to AHP and hedging adjustments). The Bank amortizes/accretes premiums and discounts and recognizes hedging adjustments to interest income using a contractual methodology. The Bank records interest on advances to interest income as earned.

Commitment Fees. The Bank records fees for standby letters of credit as a deferred credit when the Bank receives the fee and accretes them using the straight-line method over the term of the standby letter of credit.

Advance Modifications. In cases in which the Bank funds a new advance concurrent with or within a short period of time before or after the prepayment of an existing advance, the Bank evaluates whether the new advance meets the accounting criteria to qualify as a modification of an existing advance or whether it constitutes a new advance. The Bank compares the present value of cash flows on the new advance to the present value of cash flows remaining on the existing advance. If there is at least a 10% difference in the cash flows or if the Bank concludes the difference between the advances is more than minor based on a qualitative assessment of the modifications made to the advance’s original contractual terms, then 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 Bank charges a borrower a prepayment fee when the borrower prepays certain advances before the original maturity. The Bank records prepayment fees net of adjustments related to hedging activities as “Prepayment fees on advances, net” in the interest income section of the Statement of Income.

In the event that a new advance is issued in connection with a prepayment of an outstanding advance but the new advance does not qualify as a modification of an existing advance, any prepayment fee, net of hedging activities, is recorded in “Prepayment fees on advances, net.”


101

Notes to Financial Statements (continued)

If a new advance qualifies as a modification of an existing advance, any prepayment fee, net of hedging activities, is deferred and amortized using a level-yield methodology over the life of the modified advance to advance interest income.

Mortgage Loans Held for Portfolio. The Bank participates in the MPF Program under which the Bank invests in residential mortgage loans, which are purchased from members that are Participating Financial Institutions (PFIs). The Bank manages the liquidity, interest-rate risk (including prepayment risk) and optionality of the loans, while the PFI may retain the marketing and servicing activities. The Bank and the PFI share in the credit risk of the conventional loans with the Bank assuming the first loss obligation limited by the First Loss Account (FLA), while the PFI assumes credit losses in excess of the FLA, referred to as Credit Enhancement (CE) obligation, up to the amount of the CE obligation as specified in the master commitment. The Bank assumes losses in excess of the CE obligation.

The Bank classifies mortgage loans that it has the intent and ability to hold for the foreseeable future as held for portfolio. Accordingly, these mortgage loans are reported net of premiums, discounts, deferred loan fees or costs, hedging adjustments, charge-offs, and the allowance for credit losses.

Premiums and Discounts. The Bank defers and amortizes/accretes mortgage loan premiums and discounts paid to and received from the Bank’s PFIs, deferred loan fees or costs, and hedging basis adjustments to interest income using the contractual method.

CE Fees. For conventional mortgage loans, PFIs retain a portion of the credit risk on the loans they sell to the Bank by providing CE either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide Supplemental Mortgage Insurance (SMI). PFIs are paid a CE fee for assuming credit risk, and in some instances all or a portion of the CE fee may be performance-based. CE fees are paid monthly based on the remaining unpaid principal balance of the loans in a master commitment. CE fees are recorded as an offset to mortgage loan interest income. To the extent the Bank experiences losses in a master commitment, it may be able to recapture CE fees paid to the PFIs to offset these losses.

Other Fees. The Bank may receive other non-origination fees, such as delivery commitment extension fees, pair-off fees and price adjustment fees. Delivery commitment extension fees are received when a PFI requests an extension of the delivery commitment period beyond the original stated maturity. These fees compensate the Bank for lost interest as a result of late funding and are recorded as part of the mark-to-market of the delivery commitment derivatives, and as such, eventually become basis adjustments to the mortgage loans funded as part of the delivery commitment. Pair-off fees represent a make-whole provision and are received when the amount funded is less than a specific percentage of the delivery commitment amount and are recorded in noninterest income. Price adjustment fees are received when the amount funded is greater than a specified percentage of the delivery commitment amount and represent purchase price adjustments to the related loans acquired and are recorded as a part of the loan basis.

BOB Loans. The Bank’s BOB loan program to members is targeted to small businesses in the Bank’s district of Delaware, Pennsylvania and West Virginia. The program’s objective is to assist in the growth and development of small business, including both the start-up and expansion of these businesses. The Bank makes funds available to members to extend credit to approved small business borrowers, enabling small businesses to qualify for credit that would otherwise not be available. The intent of the BOB program is for it to serve as a grant program to members to help facilitate community economic development; however, repayment provisions within the program require that the BOB program be accounted for as an unsecured loan program. Therefore, the accounting for the program follows the provisions of loan accounting whereby an asset (loan receivable) is recorded for disbursements to members and an allowance for credit losses is estimated and established through provision for credit losses. As the members collect directly from the borrowers, the members remit repayment of the loans to the Bank as stated in the agreements. If the business is unable to repay the loan, it may be forgiven at the member’s request, subject to the Bank’s approval, at which time the BOB loan is charged off. The Bank places a BOB loan that is delinquent or deferred on non-accrual status and ceases to accrue interest income, and accrued but uncollected interest is reversed. At times, the Bank permits a borrower to defer payment of principal and interest for up to one year. A BOB loan may be restored to accrual when none of its contractual principal and interest due are unpaid.

Allowance for Credit Losses. Establishing Allowance for Credit Loss. An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if it is probable that impairment has occurred in the Bank’s portfolio as of the Statement of Condition date and the amount of loss can be reasonably estimated. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability.

Portfolio Segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology for determining its allowance for credit losses. The Bank has developed and documented a systematic methodology for determining an allowance for credit losses, where applicable, for: (1) advances, letters of credit and other

102

Notes to Financial Statements (continued)

extensions of credit to members, collectively referred to as credit products; (2) government-guaranteed or insured mortgage loans held for portfolio; (3) conventional MPF loans held for portfolio; and (4) BOB loans.

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

Nonaccrual Loans. The Bank places a conventional mortgage loan on nonaccrual status if it is determined that either (1) the collection of interest or principal is doubtful or (2) interest or principal is past due for 90 days or more, except when the loan is well-secured (e.g., through CE) and in the process of collection. For those mortgage loans placed on nonaccrual status, accrued but uncollected interest is charged against interest income. The Bank records cash payments received as a reduction of principal because the collection of the remaining principal amount due is considered doubtful and 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 nonaccrual status may be restored to accrual when (1) none of its contractual principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual interest and principal or (2) it otherwise becomes well secured and in the process of collection.

Troubled Debt Restructuring. The Bank considers a troubled debt restructuring 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, such as a loan modification. Loans that are discharged in Chapter 7 bankruptcy and have not been reaffirmed by the borrowers are also considered to be troubled debt restructurings, except in cases where all contractual amounts due are expected to be collected as a result of government guarantees or insurance.

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

Loans that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property less estimated selling costs. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property; that is, there is no other available and reliable source of repayment. The Bank considers its impaired loans to be collateral-dependent. Collateral-dependent loans are impaired if the fair value of the underlying collateral is insufficient to recover the unpaid principal balance on the loan. Interest income on impaired loans is recognized in the same manner as non-accrual loans.

Charge-off Policy. A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. The Bank evaluates whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure, notification of a claim against any of the CE, a loan that is 180 or more days delinquent, or certain loans for which the borrower has filed for bankruptcy. If the loss is expected to be recovered through CE, the Bank recognizes a CE fee receivable for the amount of the loss and assesses it for collectability along with the mortgage loans. The CE fee receivable is recorded in other assets.

BOB Loans. See “BOB Loans” in this Note 1 for a description of the allowance for credit losses policies relating to the BOB program.

Real Estate Owned (REO). REO includes assets that have been received in satisfaction of debt through foreclosures. REO is initially recorded at fair value less estimated selling costs and is subsequently carried at the lower of that amount or current fair value less estimated selling costs. The Bank recognizes a charge-off to the allowance for credit losses or CE fee receivable if the fair value of the REO less estimated selling costs is less than the recorded investment in the loan at the date of transfer from loans to REO. Any subsequent realized gains, realized or unrealized losses and carrying costs are included in other noninterest expense in the Statement of Income. REO is recorded in other assets on the Statement of Condition.

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

Derivative Designations. Each derivative is designated as either:

103

Notes to Financial Statements (continued)

a qualifying hedge of the change in fair value of a recognized asset or liability or an unrecognized firm commitment (a fair value hedge); or
a non-qualifying hedge (an economic hedge) for asset and 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 are expected to be highly effective, they qualify for fair value accounting and the offsetting changes in fair value of the hedged items may be recorded in earnings. Two approaches that the Bank uses for hedge accounting are:
Long-haul hedge accounting. The application of long-haul hedge accounting requires the Bank to formally assess (both at the hedge’s inception and at least quarterly) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of hedged items attributable to the hedged risk or forecasted transactions and whether those derivatives may be expected to remain effective in future periods. 
Short-cut hedge accounting. Transactions that meet certain criteria qualify for the short-cut method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item, due to changes in the benchmark rate, exactly offsets the change in fair value of the related derivative. Under the short-cut method, the entire change in fair value of the interest rate swap is considered to be effective at achieving offsetting changes in fair values of the hedged asset or liability.

Fair value derivatives are typically executed at the same time as the hedged item, and the Bank designates the hedged item in a qualifying hedge relationship at the trade date. In many hedging relationships, the Bank may designate the hedging relationship upon its commitment to disburse an advance or trade a consolidated obligation in which settlement occurs within normal market settlement conventions. The Bank then 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 noninterest income as “Net gains (losses) on derivatives and hedging activities.”

For fair value hedges, any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item attributable to the hedged risk) is recorded in other noninterest income as “Net gains (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 fair value hedge accounting, but is an acceptable hedging strategy under the Bank’s risk management program. These economic hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative hedge transactions. An economic hedge by definition introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in the Bank’s income. As a result, the Bank recognizes the net interest and the change in fair value of these derivatives in other noninterest income as “Net gains (losses) on derivatives and hedging activities” with no offsetting fair value adjustments for the economically hedged assets, liabilities, or firm commitments.

Accrued Interest Receivables and Payables. The net settlements of interest receivables and payables related to derivatives designated in fair value hedge relationships are recognized as adjustments to the income or expense of the designated hedged item.

Discontinuance of Hedge Accounting. The Bank 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 (including hedged items such as firm commitments ); (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (3) a hedged firm commitment no longer meets the definition of a firm commitment; or (4) management determines to no longer designate the derivative as a hedging instrument (i.e., de-designation).

When hedge accounting is discontinued on a fair value hedge, the Bank either terminates the derivative or continues to carry the derivative on the Statement 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.

When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank continues to carry the derivative on the Statement of Condition at its fair value, removing from the Statement of

104

Notes to Financial Statements (continued)

Condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.

Embedded Derivatives. The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument is “embedded.” Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the 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. 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) when the Bank 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. However, 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 eligible for the fair value option), or if the Bank cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract is carried at fair value and no portion of the contract is designated as a hedging instrument. The Bank currently does not have any instruments containing embedded derivatives that are not clearly and closely related to the economic characteristics of the host contract.

Premises, Software and Equipment. The Bank records premises, software and equipment at cost less accumulated depreciation and amortization and computes depreciation using the straight-line method over the estimated useful lives of assets, which range from one to ten years. The Bank amortizes leasehold improvements using the straight-line method over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The Bank capitalizes improvements and major renewals but expenses ordinary maintenance and repairs when incurred. The Bank includes gains and losses on the disposal of premises, software and equipment in “Other noninterest income (loss).”

The cost of computer software developed or obtained for internal use is capitalized and amortized over its useful life.

Consolidated Obligations. Consolidated obligations are recorded at amortized cost.

Discounts and Premiums. The Bank accretes/amortizes the discounts and premiums as well as hedging basis adjustments on consolidated obligations to interest expense using the interest method over the term to maturity of the consolidated obligation.

Concessions. The Bank pays concessions to dealers in connection with the issuance of certain consolidated obligations. The OF prorates the amount of the concession to the Bank based upon the percentage of the debt issued that is assumed by the Bank. Concessions paid on consolidated obligations are deferred and amortized using the interest method, over the term to maturity of the consolidated obligation. Unamortized concessions are included in other assets, and the amortization of such concessions is included in consolidated obligation interest expense.

Mandatorily Redeemable Capital Stock. The Bank reclassifies stock subject to redemption from capital stock to a liability after a member provides written notice of redemption, gives notice of intention to withdraw from membership, or attains non-member status by merger or acquisition, charter termination or other involuntary termination from membership, because the member’s shares will then meet the definition of a mandatorily redeemable financial instrument. Shares meeting this definition are reclassified to a liability at fair value, which is par plus estimated dividends. Dividends declared on shares classified as a liability are accrued at the expected dividend rate and reflected as interest expense in the Statement of Income. The repurchase or redemption of mandatorily redeemable capital stock is reflected as a financing cash outflow in the Statement of Cash Flows.

If a member cancels its written notice of redemption or notice of withdrawal, the Bank will reclassify mandatorily redeemable capital stock from liabilities to capital. After the reclassification, dividends on the capital stock will no longer be classified as interest expense.

Restricted Retained Earnings (RRE). In accordance with the Joint Capital Enhancement Agreement (JCEA) entered into by the Bank, as amended, the Bank contributes 20% of its quarterly net income to a separate restricted retained earnings account until the account balance equals at least one percent of the Bank’s average balance of outstanding consolidated obligations for the previous quarter. These restricted retained earnings are not available to pay dividends and are presented separately on the Statement of Condition. See Note 16 - Capital for more information.


105

Notes to Financial Statements (continued)

Gains on Litigation Settlements, Net. Litigation settlement gains, net of related legal fees and expenses, are recorded in noninterest income as “Gains on litigation settlements, net” in the Statement of Income. A litigation settlement gain is considered realized and recorded when the Bank receives cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, a litigation settlement gain is considered realizable and recorded when the Bank enters into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. The related legal expenses are contingent-based fees and are only incurred and recorded upon a litigation settlement gain.

Finance Agency Expenses. The Bank, along with the other 10 FHLBanks, funds the costs of operating the Finance Agency. The portion of the Finance Agency’s expenses and working capital fund paid by the FHLBanks are allocated among the FHLBanks based on the pro rata share of the 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 Bank’s proportionate share of the OF operating and capital expenditures is calculated using a formula based upon the following components: (1) two-thirds based upon its share of total consolidated obligations outstanding and (2) one-third based upon an equal pro-rata allocation.

AHP Assessment. The FHLBank Act requires each FHLBank to establish and fund an AHP, providing subsidies to members to assist in the purchase, construction, or rehabilitation of housing for very low-to-moderate-income households. As allowed per AHP regulations, the Bank can elect to allot fundings based on future periods’ required AHP contributions (referred to as Accelerated AHP). The Accelerated AHP allows the Bank to commit and disburse AHP funds to meet the Bank’s mission when it would otherwise be unable to do so based on its normal funding mechanism.

The Bank charges the required funding for AHP to earnings and establishes a liability. The Bank primarily makes the AHP subsidy available to members as a grant. Alternatively, the Bank could provide the member with an interest rate below a normal advance rate based on the present value of the difference between an AHP advance rate and the Bank’s cost of funds. If the Bank provides a discounted interest rate, this discount is accreted to interest income using the contractual method over the life of the advance. See Note 15 - AHP for more information.

Earnings per Share. Basic earnings per share of capital stock is computed on the basis of weighted average number of shares of capital stock outstanding. Mandatorily redeemable capital stock is excluded from the calculation. The Bank does not have diluted earnings per share because it has no financial instruments convertible to capital stock.


106

Notes to Financial Statements (continued)

Note 2 – Accounting Adjustments, Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations

Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. In April 2012, the Finance Agency issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention (AB 2012-02 or Advisory Bulletin), which is applicable to Fannie Mae, Freddie Mac and the FHLBanks. The Advisory Bulletin establishes guidelines for adverse classification of various assets, primarily MPF loans at the Bank. Among other requirements, this Advisory Bulletin requires that the Bank classify the portion of an outstanding single-family loan balance in excess of the fair value of the underlying property, less costs to sell and adjusted for any CE, as a “loss” no later than when the loan becomes 180 days delinquent, except in certain specified circumstances (such as those involving properly secured loans with an LTV ratio equal to or less than 60%). The Bank implemented these classification provisions effective January 1, 2014. During the first quarter 2014, the Bank incorporated estimates of fair values on loans as applicable under the Advisory Bulletin in its calculation of the required “loss” on MPF loans. This change in the Bank's accounting estimate resulted in an immaterial benefit to the Bank's Allowance for Loan Losses at March 31, 2014. See Note 10 - Allowance for Credit Losses for more information.

The Advisory Bulletin also requires the Bank to charge-off the portion of the loan classified as a “loss.” The Advisory Bulletin specifies that, if the Bank subsequently receives full or partial payment of a previously charged-off loan, it may report a recovery of the amount charged-off either through loss reserves or as a reduction in foreclosed property expenses. As required, the Bank adopted the charge-off provisions of the Advisory Bulletin on January 1, 2015. Upon adoption of the charge-off provisions, the Bank’s allowance for loan losses on the impacted loans was eliminated and the corresponding recorded investment in the loans was reduced by the amount charged-off, unless it is expected to be recovered through CE, for which the Bank recognizes a CE fee receivable. The amount of losses realized on the Bank's loan portfolio will ultimately be the same under the Advisory Bulletin as under the Bank's past accounting practices. However, the timing of when the Bank recognizes those losses in its financial statements will differ. The adoption of the charge-off provisions of the Advisory Bulletin did not have a material impact on the Bank’s financial condition or results of operations.

Revenue from Contracts with Customers. In May 2014, the FASB issued revised guidance for revenue recognition. This guidance will increase comparability across industries by providing a single, comprehensive revenue recognition model for all contracts with customers. The guidance will require recognition of revenue to reflect the economics of the transaction and will require expanded disclosures regarding revenue recognition. This guidance, which will be effective for the Bank beginning January 1, 2017, is not expected to materially impact the Bank's financial condition or results of operations.

Going Concern. In August 2014, the FASB issued guidance which requires all entities to perform an interim and annual assessment of their ability to continue as a going concern for one year from the date of issuance of their respective financial statements. The guidance also requires disclosures if there is “substantial doubt” of the entity’s ability to continue as a going concern. The Bank's initial quarterly assessment will be required to be completed on its December 31, 2016 financial statements.

Extraordinary Items. In January 2015, the FASB issued guidance which eliminates the concept of extraordinary items. As a result, preparers and auditors no longer need to determine whether an event is extraordinary. However, the guidance continues to require separate presentation on the Statement of Income for items that are both unusual and infrequent. This guidance was effective for the Bank beginning January 1, 2016 and did not impact the Bank’s results of operations.

Consolidation. In February 2015, the FASB issued amendments to its existing consolidation guidance which may impact the Bank’s evaluation of which entities are considered to be Variable Interest Entities (VIEs) and if the Bank is required to consolidate a VIE. This guidance was effective for the Bank beginning January 1, 2016 and did not impact the Bank's financial condition.

Simplifying the Presentation of Debt Issuance Costs. In April 2015, the FASB issued guidance which requires the Bank to present debt issuance costs as a direct deduction from the related debt on the statement of condition, consistent with debt discounts. This guidance was effective for the Bank beginning January 1, 2016 and will be applied retrospectively. This guidance will result in an immaterial reclassification of debt issuance costs from Other Assets to Consolidated Obligations in the Bank's first quarter 2016 Statement of Condition.

Cloud Computing Arrangements. In April 2015, the FASB issued guidance which clarifies circumstances under which a cloud computing arrangement should be accounted for as a license of internal-use software as opposed to a service contract.

107

Notes to Financial Statements (continued)

This guidance, which was effective for the Bank beginning January 1, 2016, did not impact the Bank's financial condition or results of operations.

Recognition and Measurement of Financial Assets and Liabilities. In January 2016, the FASB issued guidance which amends existing guidance on the classification and measurement of financial instruments. Although many of the existing requirements are not changed, this guidance revises the accounting for equity securities, financial liabilities measured under the fair value option, and certain disclosure requirements for fair value of financial instruments. The Bank is evaluating the impact of this guidance, which will be effective for the Bank beginning January 1, 2018.

Leases. In February 2016, the FASB issued guidance which amends the accounting for leases. The guidance will require lessees to recognize a right-of-use asset and lease liability for virtually all leases, other than short-term leases. The Bank is evaluating the impact of this guidance, which will be effective for the Bank beginning January 1, 2019.

Note 3 – Cash and Due from Banks

The Bank maintains compensating and collected cash balances with commercial banks in return for certain services. These agreements contain no legal restrictions about the withdrawal of funds. The average compensating and collected cash balances for 2015 and 2014 were approximately $298.8 million and $141.6 million, respectively.

Pass-through Deposit Reserves.  The Bank acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks (FRBs). The amount shown as cash and due from banks includes pass-through reserves deposited with FRBs of approximately $22.4 million and $26.6 million as of December 31, 2015 and 2014, respectively. The Bank includes member reserve balances in noninterest-bearing deposits within liabilities on the Statement of Condition.


108

Notes to Financial Statements (continued)

Note 4 – Trading Securities

The following table presents trading securities as of December 31, 2015 and December 31, 2014.
(in thousands)
December 31,
2015
December 31,
2014
Mutual funds
$
5,442

$
4,721

GSE and Tennessee Valley Authority (TVA) obligations
389,295

276,295

Total
$
394,737

$
281,016


The mutual funds are held in a Rabbi trust to generate returns that seek to offset changes in liabilities related to market risk of certain deferred compensation agreements. These deferred compensation liabilities were $5.6 million and $4.9 million at December 31, 2015 and December 31, 2014, respectively, and are included in Other liabilities in the Statement of Condition.

The following table presents net gains (losses) on trading securities for 2015, 2014 and 2013.
 
Year ended December 31,
(in thousands)
2015
2014
2013
Net unrealized gains (losses) on trading securities held at year-end
$
1,598

$
22,322

$
(4,559
)
Net realized gains (losses) on securities sold/matured during the year

86

(35
)
Net gains (losses) on trading securities
$
1,598

$
22,408

$
(4,594
)



109

Notes to Financial Statements (continued)

Note 5 – Available-for-Sale (AFS) Securities

The following tables present AFS securities as of December 31, 2015 and December 31, 2014.
 
December 31, 2015
(in thousands)
Amortized Cost(1)
 
OTTI Recognized in AOCI(2)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
 
Mutual funds
$
1,993

 
$

 
$
5

 
$

 
$
1,998

GSE and TVA obligations
3,468,665

 

 
15,332

 
(14,792
)
 
3,469,205

State or local agency obligations
133,038

 

 
2,055

 
(973
)
 
134,120

Total non-MBS
$
3,603,696

 
$

 
$
17,392

 
$
(15,765
)
 
$
3,605,323

MBS:
 
 
 
 
 
 
 
 
 
Other U.S. obligations single family MBS
$
268,105

 
$

 
$
501

 
$
(70
)
 
$
268,536

GSE single-family MBS
2,378,589

 

 
9,965

 
(4,924
)
 
2,383,630

GSE multifamily MBS
1,008,511

 

 
5,614

 
(3,628
)
 
1,010,497

Private label MBS:
 
 
 
 
 
 
 
 
 
Private label residential MBS
751,703

 
(889
)
 
72,263

 
(337
)
 
822,740

HELOCs
7,572

 

 
1,596

 

 
9,168

Total private label MBS
759,275

 
(889
)
 
73,859

 
(337
)
 
831,908

Total MBS
$
4,414,480

 
$
(889
)
 
$
89,939

 
$
(8,959
)
 
$
4,494,571

Total AFS securities
$
8,018,176

 
$
(889
)
 
$
107,331

 
$
(24,724
)
 
$
8,099,894


 
December 31, 2014
(in thousands)
Amortized Cost(1)
 
OTTI Recognized in AOCI(2)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
 
 
Mutual funds
$
1,993

 
$

 
$
5

 
$

 
$
1,998

GSE and TVA obligations
3,221,543

 

 
17,661

 
(5,501
)
 
3,233,703

State or local agency obligations
98,616

 

 
752

 
(384
)
 
98,984

Total non-MBS
$
3,322,152

 
$

 
$
18,418

 
$
(5,885
)
 
$
3,334,685

MBS:
 
 
 
 
 
 
 
 
 
Other U.S. obligations single family MBS
$
328,787

 
$

 
$
592

 
$

 
$
329,379

GSE single-family MBS
2,869,855

 

 
16,433

 
(4,126
)
 
2,882,162

GSE multifamily MBS
872,509

 

 
9,511

 
(2,193
)
 
879,827

Private label MBS:
 
 
 
 
 
 
 
 
 
Private label residential MBS
879,376

 
(863
)
 
92,860

 
(290
)
 
971,083

HELOCs
9,245

 

 
2,454

 

 
11,699

Total private label MBS
888,621

 
(863
)
 
95,314

 
(290
)
 
982,782

Total MBS
$
4,959,772

 
$
(863
)
 
$
121,850

 
$
(6,609
)
 
$
5,074,150

Total AFS securities
$
8,281,924

 
$
(863
)
 
$
140,268

 
$
(12,494
)
 
$
8,408,835

Notes:
(1) Amortized cost includes adjustments made to the cost basis of an investment for accretion of discounts and/or amortization of premiums, collection of cash, previous OTTI recognized in earnings, and/or fair value hedge accounting adjustments.
(2) Represents the non-credit portion of an OTTI recognized during the life of the security.


110

Notes to Financial Statements (continued)

The Bank has established a Rabbi trust to secure a portion of the Bank’s benefit obligation under its supplemental retirement plan. The Rabbi trust assets are invested in mutual funds. These obligations were $6.7 million and $7.0 million at December 31, 2015 and December 31, 2014, respectively and are included in Other liabilities in the Statements of Condition.

As of December 31, 2015, the amortized cost of the Bank’s MBS classified as AFS included net purchased discounts of $9.7 million, credit losses of $205.9 million and OTTI-related accretion adjustments of $31.5 million. As of December 31, 2014, these amounts were $9.5 million, $222.5 million, and $11.7 million, respectively.

The following table presents a reconciliation of the AFS OTTI loss recognized through AOCI to the total net non-credit portion of OTTI gains on AFS securities in AOCI as of December 31, 2015 and 2014.
(in thousands)
December 31, 2015
December 31, 2014
Non-credit portion of OTTI losses
$
(889
)
$
(863
)
Net unrealized gains on OTTI securities since their last OTTI credit charge
73,859

95,314

Net non-credit portion of OTTI gains on AFS securities in AOCI
$
72,970

$
94,451

 

The following tables summarize the AFS securities with unrealized losses as of December 31, 2015 and December 31, 2014. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
December 31, 2015
 
Less than 12 Months
 
Greater than 12 Months
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses(1)
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE and TVA obligations
$
2,396,493

 
$
(12,937
)
 
$
184,772

 
$
(1,855
)
 
$
2,581,265

 
$
(14,792
)
State or local agency obligations
41,727

 
(863
)
 
3,890

 
(110
)
 
45,617

 
(973
)
Total non-MBS
$
2,438,220

 
$
(13,800
)
 
$
188,662

 
$
(1,965
)
 
$
2,626,882

 
$
(15,765
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family MBS
$
70,490

 
$
(48
)
 
$
11,984

 
$
(22
)
 
$
82,474

 
$
(70
)
GSE single-family MBS
465,658

 
(761
)
 
114,028

 
(4,163
)
 
579,686

 
(4,924
)
GSE multifamily MBS
420,982

 
(3,628
)
 

 

 
420,982

 
(3,628
)
Private label residential MBS
65,080

 
(775
)
 
9,332

 
(451
)
 
74,412

 
(1,226
)
Total MBS
$
1,022,210

 
$
(5,212
)
 
$
135,344

 
$
(4,636
)
 
$
1,157,554

 
$
(9,848
)
Total
$
3,460,430

 
$
(19,012
)
 
$
324,006

 
$
(6,601
)
 
$
3,784,436

 
$
(25,613
)



111

Notes to Financial Statements (continued)

 
December 31, 2014
 
Less than 12 Months
 
Greater than 12 Months
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses(1)
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE and TVA obligations
$
1,783,202

 
$
(4,380
)
 
$
322,691

 
$
(1,121
)
 
$
2,105,893

 
$
(5,501
)
State or local agency obligations
1,576

 
(14
)
 
11,385

 
(370
)
 
12,961

 
(384
)
Total non-MBS
$
1,784,778

 
$
(4,394
)
 
$
334,076

 
$
(1,491
)
 
$
2,118,854

 
$
(5,885
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE single-family MBS
19,405

 
(3
)
 
228,257

 
(4,123
)
 
247,662

 
(4,126
)
GSE multifamily MBS
15,322

 
(104
)
 
185,153

 
(2,089
)
 
200,475

 
(2,193
)
Private label residential MBS
58,553

 
(191
)
 
49,383

 
(962
)
 
107,936

 
(1,153
)
Total MBS
$
93,280

 
$
(298
)
 
$
462,793

 
$
(7,174
)
 
$
556,073

 
$
(7,472
)
Total
$
1,878,058

 
$
(4,692
)
 
$
796,869

 
$
(8,665
)
 
$
2,674,927

 
$
(13,357
)
Note:
(1) Total unrealized losses equal the sum of “OTTI Recognized in AOCI” and “Gross Unrealized Losses” in the first two tables of this Note 5.

Securities Transferred.  The Bank may transfer investment securities from HTM to AFS when an OTTI credit loss has been recorded on the security. The Bank believes that a credit loss constitutes evidence of a significant decline in the issuer’s creditworthiness. The Bank transfers these securities from HTM to AFS to increase its flexibility to sell the securities if management determines it is prudent to do so. See Note 1 - Summary of Significant Accounting Policies. The Bank transferred three private label MBS from HTM to AFS during 2015, which is the period in which an OTTI credit loss was recorded on the security. There were no transfers during 2014 and 2013.
(in thousands)
Amortized
Cost
OTTI Recognized in OCI
Fair Value
December 31, 2015 transfer
$
7,556

$
(638
)
$
6,918

June 30, 2015 transfer
4,394

(1,026
)
3,368

Total 2015 transfers
$
11,950

$
(1,664
)
$
10,286


Redemption Terms. The amortized cost and fair value of AFS securities by contractual maturity as of December 31, 2015 and December 31, 2014 are presented below. Expected maturities of some securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
(in thousands)
December 31, 2015
 
December 31, 2014
Year of Maturity
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
28,706

 
$
28,688

 
$
301,985

 
$
302,087

Due after one year through five years
1,925,398

 
1,919,024

 
2,058,695

 
2,054,517

Due after five years through ten years
812,550

 
825,558

 
662,805

 
676,064

Due in more than ten years
837,042

 
832,053

 
298,667

 
302,017

AFS securities excluding MBS
3,603,696

 
3,605,323

 
3,322,152

 
3,334,685

MBS
4,414,480

 
4,494,571

 
4,959,772

 
5,074,150

Total AFS securities
$
8,018,176

 
$
8,099,894

 
$
8,281,924

 
$
8,408,835



112

Notes to Financial Statements (continued)

Interest Rate Payment Terms.  The following table details interest payment terms at December 31, 2015 and December 31, 2014.
(in thousands)
December 31,
2015
 
December 31,
2014
Amortized cost of AFS securities other than MBS:
 
 
 
  Fixed-rate
$
3,518,980

 
$
2,902,430

  Variable-rate
84,716

 
419,722

Total non-MBS
$
3,603,696

 
$
3,322,152

Amortized cost of AFS MBS:
 
 
 
  Fixed-rate
$
1,593,414

 
$
2,002,208

  Variable-rate
2,821,066

 
2,957,564

Total MBS
$
4,414,480

 
$
4,959,772

Total amortized cost of AFS securities
$
8,018,176

 
$
8,281,924

Note: Certain MBS have a fixed-rate component for a specified period of time, then have a rate reset on a given date. Examples of this type of instrument include securities supported by underlying 3/1, 5/1, 7/1 and 10/1 hybrid ARMs. In addition, certain of these securities may contain provisions permitting the fixed rate to be adjusted for items such as prepayment, defaults and loan modification. For purposes of the table above, these securities are reported as fixed-rate until the rate reset date is hit. At that point, the security is considered to be variable-rate.

Realized Gains and Losses on AFS Securities.  The following table provides a summary of proceeds and gross losses on sales of AFS securities for 2015, 2014 and 2013. The gross losses are included in “Other, net” in the Statement of Income.
 
Year ended December 31, 2015
(in thousands)
2015
2014
2013
Proceeds from sale of AFS securities
$

$

$
19,909

Gross losses on sale of AFS securities


(41
)



113

Notes to Financial Statements (continued)

Note 6 – Held-to-Maturity (HTM) Securities

The following tables present HTM securities as of December 31, 2015 and December 31, 2014.
 
December 31, 2015
(in thousands)
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
State or local agency obligations
$
169,520

 
$
118

 
$
(14,484
)
 
$
155,154

MBS:
 
 
 
 
 
 
 
Other U.S. obligations single-family MBS
$
819,602

 
$
5,651

 
$
(5
)
 
$
825,248

GSE single-family MBS
294,568

 
4,459

 
(75
)
 
298,952

GSE multifamily MBS
863,122

 
30,124

 
(1,394
)
 
891,852

Private label residential MBS
516,492

 
1,717

 
(5,344
)
 
512,865

Total MBS
$
2,493,784

 
$
41,951

 
$
(6,818
)
 
$
2,528,917

Total HTM securities
$
2,663,304

 
$
42,069

 
$
(21,302
)
 
$
2,684,071

 
December 31, 2014
(in thousands)
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
GSE securities
$
13,041

 
$
382

 
$

 
$
13,423

State or local agency obligations
184,412

 
1,314

 
(15,445
)
 
170,281

Total non-MBS
$
197,453

 
$
1,696

 
$
(15,445
)
 
$
183,704

MBS:
 
 
 
 
 
 
 
Other U.S. obligations single-family MBS
$
1,122,537

 
$
8,604

 
$

 
$
1,131,141

GSE single-family MBS
417,217

 
7,226

 
(118
)
 
424,325

GSE multifamily MBS
818,037

 
43,431

 

 
861,468

Private label residential MBS
691,544

 
3,506

 
(9,141
)
 
685,909

Total MBS
$
3,049,335

 
$
62,767

 
$
(9,259
)
 
$
3,102,843

Total HTM securities
$
3,246,788

 
$
64,463

 
$
(24,704
)
 
$
3,286,547


114

Notes to Financial Statements (continued)

The following tables summarize the HTM securities with unrealized losses as of December 31, 2015 and December 31, 2014. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
December 31, 2015
 
Less than 12 Months
 
Greater than 12 Months
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
State or local agency obligations
$
20,154

 
$
(1
)
 
$
110,737

 
$
(14,483
)
 
$
130,891

 
$
(14,484
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family MBS
$
10,237

 
$
(5
)
 
$

 
$

 
$
10,237

 
$
(5
)
GSE single-family MBS

 

 
9,091

 
(75
)
 
9,091

 
(75
)
GSE multifamily MBS
132,835

 
(1,394
)
 

 

 
132,835

 
(1,394
)
Private label residential MBS
110,665

 
(717
)
 
252,851

 
(4,627
)
 
363,516

 
(5,344
)
Total MBS
$
253,737

 
$
(2,116
)
 
$
261,942

 
$
(4,702
)
 
$
515,679

 
$
(6,818
)
Total
$
273,891

 
$
(2,117
)
 
$
372,679

 
$
(19,185
)
 
$
646,570

 
$
(21,302
)

 
December 31, 2014
 
Less than 12 Months
 
Greater than 12 Months
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Non-MBS:
 
 
 
 
 
 
 
 
 
 
 
State or local agency obligations
$
3,361

 
$
(54
)
 
$
116,488

 
$
(15,391
)
 
$
119,849

 
$
(15,445
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
GSE single-family MBS

 

 
11,058

 
(118
)
 
11,058

 
(118
)
Private label residential MBS
185,673

 
(1,291
)
 
233,287

 
(7,850
)
 
418,960

 
(9,141
)
Total MBS
$
185,673

 
$
(1,291
)
 
$
244,345

 
$
(7,968
)
 
$
430,018

 
$
(9,259
)
Total
$
189,034

 
$
(1,345
)
 
$
360,833

 
$
(23,359
)
 
$
549,867

 
$
(24,704
)

Securities Transferred. The Bank transferred three private label MBS from HTM to AFS during 2015 and none during 2014 and 2013. See Note 5 - Available-for-Sale Securities for additional information.

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


115

Notes to Financial Statements (continued)

Redemption Terms. The amortized cost and fair value of HTM securities by contractual maturity as of December 31, 2015 and December 31, 2014 are presented below. Expected maturities of some securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
(in thousands)
December 31, 2015
 
December 31, 2014
Year of Maturity
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Non-MBS:
 
 
 
 
 
 
 
Due in one year or less
$

 
$

 
$
13,042

 
$
13,423

Due after one year through five years

 

 
3,415

 
3,361

Due after five years through ten years
57,490

 
55,797

 
21,807

 
22,263

Due after ten years
112,030

 
99,357

 
159,189

 
144,657

HTM securities excluding MBS
169,520

 
155,154

 
197,453

 
183,704

MBS
2,493,784

 
2,528,917

 
3,049,335

 
3,102,843

Total HTM securities
$
2,663,304

 
$
2,684,071

 
$
3,246,788

 
$
3,286,547


Interest Rate Payment Terms. The following table details interest rate payment terms at December 31, 2015 and December 31, 2014.
 
December 31, 2015
 
December 31, 2014
(in thousands)
 
Amortized cost of HTM securities other than MBS:
 

 
 

Fixed-rate
$
28,565

 
$
44,453

Variable-rate
140,955

 
153,000

Total non-MBS
$
169,520

 
$
197,453

Amortized cost of HTM MBS:
 
 
 
Fixed-rate
$
1,023,636

 
$
1,114,059

Variable-rate
1,470,148

 
1,935,276

Total MBS
$
2,493,784

 
$
3,049,335

Total HTM securities
$
2,663,304

 
$
3,246,788

Note: Certain MBS have a fixed-rate component for a specified period of time, then have a rate reset on a given date. Examples of this type of instrument include securities supported by underlying 3/1, 5/1, 7/1 and 10/1 hybrid ARMs. In addition, certain of these securities may contain provisions permitting the fixed rate to be adjusted for items such as prepayment, defaults and loan modification. For purposes of the table above, these securities are reported as fixed-rate until the rate reset date is hit. At that point, the security is considered to be variable-rate.

Note 7 – Other-Than-Temporary Impairment

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for OTTI on a quarterly basis. To ensure consistency among the FHLBanks, the Bank completes its OTTI analysis of private label MBS based on the methodologies and key modeling assumptions provided by the FHLBanks’ OTTI Governance Committee. The OTTI analysis is a cash flow analysis that is run on a common platform. The Bank performs the cash flow analysis on all of its private label MBS portfolio that have available data. Private label MBS backed by HELOCs and certain other securities are not able to be cash flow tested using the FHLBanks’ common platform. For these types of private label MBS and certain securities where underlying collateral data is not available, alternate procedures, as prescribed by the FHLBanks’ OTTI Governance Committee, are used by the Bank to assess these securities for OTTI. Securities evaluated using alternative procedures were not significant to the Bank.

The Bank’s evaluation includes estimating the projected cash flows that the Bank is likely to collect based on an assessment of all available information, including the structure of the applicable security and certain assumptions, to determine whether the Bank will recover the entire amortized cost basis of the security, such as:
the remaining payment terms for the security;
prepayment speeds and default rates;
loss severity on the collateral supporting each security based on underlying loan-level borrower and loan characteristics;
expected housing price changes; and

116

Notes to Financial Statements (continued)

interest-rate assumptions.

To determine the amount of the credit loss, the Bank compares the present value of the cash flows expected to be collected from its private label residential MBS to its amortized cost basis. For the Bank’s private label residential MBS, the Bank uses a forward interest rate curve to project the future estimated cash flows. To calculate the present value of the estimated cash flows for fixed rate bonds the Bank uses the effective interest rate for the security prior to impairment. To calculate the present value of the estimated cash flows for variable rate and hybrid private label MBS, the Bank uses the contractual interest rate plus a fixed spread that sets the present value of cash flows equal to amortized cost before impairment. For securities previously identified as other-than-temporarily impaired, the Bank updates its estimate of future estimated cash flows on a quarterly basis and uses the previous effective rate or spread until there is a significant increase in cash flows. When the Bank determines there is a significant increase in cash flows, the effective rate is increased.

The Bank performed a cash flow analysis using two third-party models to assess whether the amortized cost basis of its private label residential MBS will be recovered. The first third-party model considers borrower characteristics and the particular attributes of the loans underlying an FHLBank's securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults, and loss severities. A significant input to the projection of cash flows expected to be collected is the forecast of future housing price changes for the relevant states and core-based statistical areas (CBSAs) which are based upon an assessment of the individual housing markets. During the fourth quarter of 2015, the OTTI Governance Committee developed a short-term housing price forecast using whole percentages with changes ranging from (3.0)% to 8.0% over the 12 month period beginning October 1, 2015. For the vast majority of markets the short-term forecast has changes from 2.0% to 5.0%. Thereafter, a unique path is projected for each geographic area based on an internally developed framework derived from historical data.

The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults, and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.

All of the Bank's other-than-temporarily impaired securities were classified as AFS as of December 31, 2015. The “Total OTTI securities” balances below summarize the Bank’s securities as of December 31, 2015 for which an OTTI has been recognized during the life of the security. The “Private label MBS with no OTTI” balances below represent AFS securities on which an OTTI was not taken. The sum of these two totals reflects the entire AFS private label MBS portfolio.
 
OTTI Recognized During the Life of the Security
(in thousands)
Unpaid Principal Balance
 
Amortized Cost(1)
 
Fair Value
Private label residential MBS:
 

 
 

 
 

Prime
$
428,561

 
$
347,845

 
$
385,510

Alt-A
506,768

 
399,589

 
433,160

Subprime
1,887

 
1,109

 
1,246

HELOCs
10,065

 
7,572

 
9,168

Total OTTI securities
947,281

 
756,115

 
829,084

Private label MBS with no OTTI
3,160

 
3,160

 
2,824

Total AFS private label MBS
$
950,441

 
$
759,275

 
$
831,908

Notes:
(1) Amortized cost includes adjustments made to the cost basis of an investment for accretion of discounts and/or amortization of premiums, collection of cash, and/or previous OTTI recognized in earnings.


117

Notes to Financial Statements (continued)

The following table presents the rollforward of the amounts related to OTTI credit losses recognized during the life of the security for which a portion of the OTTI charges was recognized in AOCI for 2015, 2014 and 2013.
(in thousands)
2015
 
2014
 
2013
Beginning balance
$
290,935

 
$
314,224

 
$
326,024

Additions:
 
 
 
 
 
Credit losses for which OTTI was not previously recognized
1,794

 

 

Additional OTTI credit losses for which an OTTI charge was previously recognized (1)
55

 

 
442

Reductions:
 
 
 
 
 
Securities sold and matured during the period (2)

 
292

 
(59
)
Increases in cash flows expected to be collected (accreted as interest income over the remaining lives of the applicable securities)
(27,405
)
 
(23,581
)
 
(12,183
)
Ending balance
$
265,379

 
$
290,935

 
$
314,224

Notes:
(1) For 2015, 2014 and 2013, additional OTTI credit losses for which an OTTI charge was previously recognized relates to all securities that were also previously impaired prior to January 1, 2015, 2014 and 2013, respectively.
(2) Represents reductions related to securities sold or having reached final maturity during the period, and therefore are no longer held by the Bank at the end of the period.

All Other AFS and HTM Investments. At December 31, 2015 and 2014, the Bank held certain securities in an unrealized loss position. These unrealized losses were considered to be temporary as the Bank expects to recover the entire amortized cost basis on the remaining securities in unrealized loss positions based on the creditworthiness of the underlying creditor, guarantor, or implicit government support, and the Bank neither intends to sell these securities nor considers it more likely than not that the Bank would be required to sell any such security before its anticipated recovery. As a result, the Bank did not consider any of these other investments to be other-than-temporarily impaired at December 31, 2015 and 2014.


118

Notes to Financial Statements (continued)

Note 8 – Advances

General Terms. The Bank offers a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality. Fixed-rate advances generally have maturities ranging from one day to 30 years. Variable-rate advances generally have maturities ranging from less than 30 days to ten years, and the interest rates reset periodically at a fixed spread to LIBOR or other specified indices.

At December 31, 2015 and December 31, 2014, the Bank had advances outstanding, including AHP advances, with interest rates ranging from 0.11% to 7.40%. AHP subsidized advances have interest rates ranging from 2.00% to 5.50%.

The following table details the Bank’s advances portfolio by year of contractual maturity as of December 31, 2015 and December 31, 2014.
(dollars in thousands)
December 31, 2015
 
December 31, 2014
Year of Contractual Maturity
Amount
 
Weighted Average Interest Rate
 
Amount
 
Weighted Average Interest Rate
Due in 1 year or less
$
33,192,256

 
0.70
%
 
$
29,380,685

 
0.42
%
Due after 1 year through 2 years
18,989,266

 
0.99

 
7,754,473

 
1.22

Due after 2 years through 3 years
13,071,338

 
0.96

 
12,764,348

 
1.14

Due after 3 years through 4 years
6,260,864

 
0.93

 
9,361,638

 
0.82

Due after 4 years through 5 years
1,800,994

 
1.68

 
3,373,989

 
0.84

Thereafter
1,018,555

 
2.66

 
490,823

 
2.77

Total par value
74,333,273

 
0.89
%
 
63,125,956

 
0.76
%
Discount on AHP advances
(21
)
 
 
 
(66
)
 
 
Deferred prepayment fees
(4,749
)
 
 
 
(8,600
)
 
 
Hedging adjustments
176,273

 
 
 
291,065

 
 
Total book value
$
74,504,776

 
 
 
$
63,408,355

 
 

The Bank also offers convertible advances. Convertible advances allow the Bank to convert an advance from one interest rate structure to another. When issuing convertible advances, the Bank may purchase put options from a member that allow the Bank to convert the fixed-rate advance to a variable-rate advance at the current market rate or another structure after an agreed-upon lockout period. A convertible advance carries a lower interest rate than a comparable-maturity fixed-rate advance without the conversion feature. Variable to fixed-rate convertible advances have a defined lockout period during which the interest rates adjust based on a spread to LIBOR. At the end of the lockout period, these advances may convert to fixed-rate advances. The fixed rates on the converted advances are determined at origination. At December 31, 2015 and December 31, 2014, the Bank had convertible advances outstanding of $1.5 billion and $1.9 billion, respectively.

The Bank offers certain advances to members that provide a member the right, based upon predetermined exercise dates, to prepay the advance prior to maturity without incurring prepayment or termination fees (returnable advances). Beginning in May 2015, the Bank began offering variable-rate returnable advances in addition to fixed-rate returnable advances which had already been offered. At December 31, 2015, the Bank had $12.6 billion of returnable advances, and at December 31, 2014, the Bank had no returnable advances. At December 31, 2015 and December 31, 2014, the Bank did not have any advances with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative.


119

Notes to Financial Statements (continued)

The following table summarizes advances by (i) year of contractual maturity or next call date and (ii) year of contractual maturity or next convertible date as of December 31, 2015 and 2014.
 
Year of Contractual Maturity or
Next Call Date
Year of Contractual Maturity or Next Convertible Date
(in thousands)
December 31, 2015
December 31, 2014
December 31, 2015
December 31, 2014
Due in 1 year or less
$
34,692,256

$
29,380,685

$
33,771,756

$
31,164,685

Due after 1 year through 2 years
18,939,266

7,754,473

18,629,266

6,846,973

Due after 2 years through 3 years
11,661,338

12,764,348

12,877,338

12,179,348

Due after 3 years through 4 years
6,245,864

9,361,638

6,255,364

9,095,638

Due after 4 years through 5 years
1,775,994

3,373,989

1,800,994

3,368,489

Thereafter
1,018,555

490,823

998,555

470,823

Total par value
$
74,333,273

$
63,125,956

$
74,333,273

$
63,125,956


Interest Rate Payment Terms.  The following table details interest rate payment terms for advances as of December 31, 2015 and 2014.
(in thousands)
December 31,
2015
 
December 31,
2014
 Fixed-rate – overnight
$
4,681,918

 
$
2,012,230

Fixed-rate – term:
 
 
 
Due in 1 year or less
13,532,806

 
20,740,508

Thereafter
13,121,108

 
9,116,344

       Total fixed-rate
31,335,832

 
31,869,082

Variable-rate:
 
 
 
Due in 1 year or less
14,977,532

 
6,627,947

Thereafter
28,019,909

 
24,628,927

       Total variable-rate
42,997,441

 
31,256,874

Total par value
$
74,333,273

 
$
63,125,956


Credit Risk Exposure and Security Terms. The Bank’s potential credit risk from advances is concentrated in commercial banks and savings institutions. As of December 31, 2015, the Bank had advances of $55.1 billion outstanding to its five largest borrowers, which represented 74.1% of total advances outstanding. Of these five, four had outstanding advance balances that were each in excess of 10% of the total portfolio at December 31, 2015.

As of December 31, 2014, the Bank had advances of $46.6 billion outstanding to the five largest borrowers, which represented 73.8% of total advances outstanding. Of these five, three had outstanding advance balances that were each in excess of 10% of the total portfolio at December 31, 2014.

See Note 10 for information related to the Bank’s allowance for credit losses.


120

Notes to Financial Statements (continued)

Note 9 – Mortgage Loans Held for Portfolio

Under the MPF Program, the Bank invests in mortgage loans that it purchases from its participating members and housing associates. The Bank’s participating members originate, service, and credit enhance residential mortgage loans that are sold to the Bank. See Note 18 for further information regarding transactions with related parties.

The following table presents balances as of December 31, 2015 and December 31, 2014 for mortgage loans held for portfolio.
(in thousands)
December 31,
2015
 
December 31,
2014
Fixed-rate long-term single-family mortgages(1)
$
2,660,615

 
$
2,640,633

Fixed-rate medium-term single-family mortgages(1)
352,082

 
417,830

Total par value
3,012,697

 
3,058,463

Premiums
50,857

 
51,214

Discounts
(3,899
)
 
(4,872
)
Hedging adjustments
32,865

 
25,789

Total mortgage loans held for portfolio
$
3,092,520

 
$
3,130,594

Note:
(1) Long-term is defined as greater than 15 years. Medium-term is defined as a term of 15 years or less.

The following table details the par value of mortgage loans held for portfolio outstanding categorized by type as of December 31, 2015 and December 31, 2014.
(in thousands)
December 31,
2015
 
December 31,
2014
Conventional loans
$
2,763,930

 
$
2,779,962

Government-guaranteed/insured loans
248,767

 
278,501

Total par value
$
3,012,697

 
$
3,058,463


See Note 10 - Allowance for Credit Losses for information related to the Bank’s credit risk on mortgage loans and allowance for credit losses.

Note 10 – Allowance for Credit Losses

The Bank has established an allowance methodology for each of the Bank’s portfolio segments: credit products, government-guaranteed or insured mortgage loans held for portfolio, conventional MPF loans held for portfolio, and BOB loans.

Credit Products. The Bank manages its total credit exposure (TCE), which includes advances, letters of credit, advance commitments, and other credit product exposure, through an integrated approach. This approach generally calls for a credit limit to be established for each borrower, includes an ongoing review of each borrower’s financial condition and is coupled with collateral and lending policies to limit risk of loss while balancing each borrower’s need for a reliable source of funding. In addition, the Bank lends to its members in accordance with the FHLBank Act and Finance Agency regulations. Specifically, the FHLBank Act requires the Bank to obtain 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 weightings, or haircuts, to the value of the collateral. The Bank accepts cash, certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, Community Financial Institutions (CFIs) are eligible to utilize expanded statutory collateral provisions for small business, agriculture, and community development loans. The Bank’s capital stock owned by the borrowing member is pledged as secondary collateral. Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance, borrowing capacity, and overall credit exposure to the borrower. The Bank can require additional or substitute collateral to help ensure that credit products continue to be secured by adequate collateral. Management of the Bank believes that these policies effectively manage the Bank’s credit risk from credit products.


121

Notes to Financial Statements (continued)

Based upon the financial condition of the member, the Bank either allows a member to retain physical possession of the collateral assigned to the Bank or requires the member to specifically deliver physical possession or control of the collateral to the Bank or its custodians. However, regardless of the member’s financial condition, the Bank always takes possession or control of securities used as collateral if they are used for maximum borrowing capacity (MBC) or to secure advances. The Bank perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the Bank by a member (or an affiliate of a member) priority over the claims or rights of any other party except for claims or rights of a third party that would be otherwise entitled to priority under 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 Bank considers the payment status, collateral types and concentration levels, and borrower’s financial condition to be indicators of credit quality on its credit products. At December 31, 2015 and December 31, 2014, the Bank had rights to collateral on a member-by-member basis with a value in excess of its outstanding extensions of credit.

The Bank continues to evaluate and, as necessary, make changes to its collateral guidelines based on current market conditions. At December 31, 2015 and December 31, 2014, the Bank did not have any credit products that were past due, on nonaccrual status, or considered impaired. In addition, the Bank did not have any credit products considered to be troubled debt restructurings (TDRs).

Based upon the collateral held as security, its credit extension policies, collateral policies, management’s credit analysis and the repayment history on credit products, the Bank has not incurred any credit losses on credit products since inception. Accordingly, the Bank has not recorded any allowance for credit losses for these products. Additionally, at December 31, 2015 and December 31, 2014, the Bank has not recorded any allowance for credit losses for off-balance sheet credit products.

Mortgage Loans - Government-Guaranteed or Insured. The Bank invests in government-guaranteed or insured fixed-rate mortgage loans secured by one-to-four family residential properties. Government-guaranteed mortgage loans are those insured or guaranteed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), the Rural Housing Service (RHS) of the Department of Agriculture and/or by Housing and Urban Development (HUD). Any losses from such loans are expected to be recovered from those entities. If not, losses from such loans must be contractually absorbed by the servicers. Therefore, there is no allowance for credit losses on government-guaranteed or insured mortgage loans.

Mortgage Loans - Conventional MPF. The allowances for conventional loans are determined by 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 includes: (1) reviewing all residential mortgage loans at the individual master commitment level; (2) reviewing specifically identified collateral-dependent loans for impairment; and/or (3) reviewing homogeneous pools of residential mortgage loans.

The Bank’s allowance for credit losses takes into consideration the CE associated with conventional mortgage loans under the MPF Program. Specifically, the determination of the allowance generally considers expected Primary Mortgage Insurance (PMI), Supplemental Mortgage Insurance (SMI), and other CE amounts. Any incurred losses that are expected to be recovered from the CE reduce the Bank’s allowance for credit losses.

For conventional MPF loans, credit losses that are not fully covered by PMI are allocated to the Bank up to an agreed-upon amount, referred to as the FLA. The FLA functions as a tracking mechanism for determining the point after which the PFI is required to cover losses. The Bank pays the PFI a fee, a portion of which may be based on the credit performance of the mortgage loans, in exchange for absorbing the second layer of losses up to an agreed-upon CE amount. The CE amount may be a direct obligation of the PFI and/or an SMI policy paid for by the PFI, and may include performance-based fees which can be withheld to cover losses allocated to the Bank (referred to as recaptured CE fees). The PFI is required to pledge collateral to secure any portion of its CE amount that is a direct obligation. A receivable which is assessed for collectability is generally established for losses expected to be recovered by withholding CE fees. Estimated losses exceeding the CE, if any, are incurred by the Bank. At December 31, 2015 and December 31, 2014, the MPF exposure under the FLA was $22.7 million and $23.1 million, respectively. The Bank records CE fees paid to PFIs as a reduction to mortgage loan interest income. The Bank incurred CE fees of $3.0 million, $3.2 million and $3.5 million in 2015, 2014 and 2013, respectively.

Collectively Evaluated Mortgage Loans. The Bank collectively evaluates the homogeneous mortgage loan portfolio for impairment. The allowance for credit loss methodology for mortgage loans considers loan pool specific attribute data, applies loss severities and incorporates the CEs of the MPF Program and PMI. The probability of default and loss given default are based on the actual 12-month historical performance of the Bank’s mortgage loans. Actual probability of default was

122

Notes to Financial Statements (continued)

determined by applying migration analysis to categories of mortgage loans (current, 30 days past due, 60 days past due, and 90 days past due). Actual loss given default was determined based on realized losses incurred on the sale of mortgage loan collateral over the previous 12 months. The resulting estimated losses are reduced by the CEs the Bank expects to be eligible to receive. The CEs are contractually set and calculated by a master commitment agreement between the Bank and the PFI. Losses in excess of the CEs are incurred by the Bank.

Individually Evaluated Mortgage Loans. The Bank evaluates certain conventional mortgage loans for impairment individually. Prior to January 1, 2014, these loans were limited to TDRs. Beginning January 1, 2014, the Bank adopted the classification provisions required by AB 2012-02 as described in Note 2 - Accounting Adjustments, Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations. As a result, the population of individually evaluated mortgage loans expanded to include impaired loans considered collateral-dependent loans where repayment is expected to be provided by the sale of the underlying property, which primarily consists of MPF loans that are 180 days or more delinquent and other loans where the borrower has filed for bankruptcy.

The estimated credit losses on impaired collateral-dependent loans are separately determined because sufficient information exists to make a reasonable estimate of the inherent loss for such loans on an individual basis. The incurred loss on each loan is equal to the difference between the carrying value of the loan and the estimated fair value of the collateral less estimated selling costs and recovery through PMI. The estimated fair value is determined based on a value provided by a third party's retail-based Automated Valuation Model (AVM). The Bank adjusts the AVM based on the amount it has historically received on liquidations. During 2014, the resulting loss was reduced by available CE. Beginning January 1, 2015, the Bank adopted the charge-off provisions of AB 2012-02. As a result, the estimated credit loss on individually evaluated MPF loans is charged-off against the reserve. However, if the estimated loss can be recovered through CE, a receivable is established, resulting in a net charge-off. The CE receivable is evaluated for collectibility, and a reserve, included as part of the allowance for credit losses, is established if required

Rollforward of Allowance for Credit Losses. Mortgage Loans - Conventional MPF.
(in thousands)
2015
2014
2013
Balance, beginning of period
$
7,260

$
11,359

$
14,163

(Charge-offs) Recoveries, net (1)
(815
)
299

(1,035
)
Provision (benefit) for credit losses
(780
)
(4,398
)
(1,769
)
Balance, December 31
$
5,665

$
7,260

$
11,359

Notes:
(1) Net charge-offs that the Bank does not expect to recover through CE receivable.

Allowances for Credit Losses and Recorded Investment by Impairment Methodology. Mortgage Loans - Conventional MPF.
(in thousands)
2015
2014
2013
Ending balance, individually evaluated for impairment
$
5,018

$
6,034

$
795

Ending balance, collectively evaluated for impairment
647

1,226

10,564

Total allowance for credit losses
$
5,665

$
7,260

$
11,359

Recorded investment balance, end of period:
 
 
 
Individually evaluated for impairment, with or without a
related allowance
$
60,762

$
68,144

$
15,571

Collectively evaluated for impairment
2,789,517

2,789,826

2,919,583

Total recorded investment
$
2,850,279

$
2,857,970

$
2,935,154


BOB Loans. Both the probability of default and loss given default are determined and used to estimate the allowance for credit losses on BOB loans. Loss given default is considered to be 100% due to the fact that the BOB program has no collateral or credit enhancement requirements. The probability of default is based on the actual performance of the BOB program. The Bank considers BOB loans that are delinquent to be nonperforming assets.


123

Notes to Financial Statements (continued)

Rollforward of Allowance for Credit Losses. BOB Loans.
(in thousands)
2015
2014
2013
Balance, beginning of period
$
1,840

$
2,231

$
2,481

(Charge-offs) Recoveries, net
(429
)
(610
)
(154
)
Provision (benefit) for credit losses
641

219

(96
)
Balance, December 31
$
2,052

$
1,840

$
2,231


Allowances for Credit Losses and Recorded Investment by Impairment Methodology. BOB Loans.
(in thousands)
2015
2014
2013
Ending balance, individually evaluated for impairment
$
25

$

$

Ending balance, collectively evaluated for impairment
2,027

1,840

2,231

Total allowance for credit losses
$
2,052

$
1,840

$
2,231

Recorded investment balance, end of period:
 
 
 
Individually evaluated for impairment, with or without a
related allowance
$
63

$

$

Collectively evaluated for impairment
13,347

13,518

13,742

Total recorded investment
$
13,410

$
13,518

$
13,742


Credit Quality Indicators. Key credit quality indicators for mortgage and BOB loans include the migration of past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans.
(in thousands)
December 31, 2015
Recorded investment:(1)
Conventional MPF Loans
Government-Guaranteed or Insured Loans
BOB Loans
Total
Past due 30-59 days
$
42,746

$
14,997

$
86

$
57,829

Past due 60-89 days
11,752

4,260

78

16,090

Past due 90 days or more
25,169

4,382

156

29,707

  Total past due loans
$
79,667

$
23,639

$
320

$
103,626

  Total current loans
2,770,612

234,376

13,090

3,018,078

  Total loans
$
2,850,279

$
258,015

$
13,410

$
3,121,704

Other delinquency statistics:
 
 
 
 
In process of foreclosures, included above (2)
$
15,353

$
1,356

$

$
16,709

Serious delinquency rate (3)
0.9
%
1.7
%
1.2
%
1.0
%
Past due 90 days or more still accruing interest
$

$
4,382

$

$
4,382

Loans on nonaccrual status
$
29,075

$

$
383

$
29,458



124

Notes to Financial Statements (continued)

(in thousands)
December 31, 2014
Recorded investment:(1)
Conventional MPF Loans
Government-Guaranteed or Insured Loans
BOB Loans
Total
Past due 30-59 days
$
50,680

$
19,238

$
124

$
70,042

Past due 60-89 days
11,841

6,034

73

17,948

Past due 90 days or more
41,983

7,024

8

49,015

  Total past due loans
$
104,504

$
32,296

$
205

$
137,005

  Total current loans
2,753,466

256,606

13,313

3,023,385

  Total loans
$
2,857,970

$
288,902

$
13,518

$
3,160,390

Other delinquency statistics:
 
 
 
 
In process of foreclosures, included above (2)
$
26,981

$
2,389

$

$
29,370

Serious delinquency rate (3)
1.5
%
2.4
%
0.1
%
1.6
%
Past due 90 days or more still accruing interest
$

$
7,024

$

$
7,024

Loans on nonaccrual status
$
45,900

$

$
205

$
46,105

Notes:
(1) The recorded investment in a loan is the unpaid principal balance of the loan, adjusted for charge-offs of estimated losses, accrued interest, net deferred loan fees or costs, unamortized premiums or unaccreted discounts and adjustments for fair value hedges. The recorded investment is not net of any valuation allowance.
(2) Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
(3) Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio class.

Individually Evaluated Impaired Loans. Information regarding individually evaluated impaired loans is as follows. As indicated above, these loans include impaired loans considered collateral-dependent. BOB loans are not significant and are excluded from the tables below.
 
December 31, 2015
(in thousands)
Recorded Investment
Unpaid
Principal Balance
Related Allowance for Credit Losses
With no related allowance:
 
 
 
  Conventional MPF loans
$
33,737

$
33,428

$

With a related allowance:
 
 
 
  Conventional MPF loans
$
27,025

$
26,774

$
5,018

Total:
 
 
 
  Conventional MPF loans
$
60,762

$
60,202

$
5,018

 
December 31, 2014
(in thousands)
Recorded Investment
Unpaid
Principal Balance
Related Allowance for Credit Losses
With no related allowance:
 
 
 
  Conventional MPF loans
$
31,749

$
31,448

$

With a related allowance:
 
 
 
  Conventional MPF loans
$
36,395

$
36,175

$
6,034

Total:
 
 
 
  Conventional MPF loans
$
68,144

$
67,623

$
6,034



125

Notes to Financial Statements (continued)

The table below presents the average recorded investment of individually impaired loans and related interest income recognized. The Bank included the individually impaired loans as of the date on which they became impaired.
 
Year ended December 31, 2015
Year ended December 31, 2014
Year ended December 31, 2013
(in thousands)
Average Recorded Investment (1)
Interest Income Recognized
Average Recorded Investment (1)
Interest Income Recognized
Average Recorded Investment (1)
Interest Income Recognized
Conventional MPF loans
$
63,683

$
1,966

$
74,956

$
1,388

$
14,552

$
645

Notes:
(1) Includes gross charge-offs.

Beginning January 1, 2014, with the adoption of AB 2012-02, the Bank now considers all loans that are180 days or more delinquent or where the borrower has filed for bankruptcy to be individually evaluated impaired loans, which is the reason for the increase as compared to 2013.

TDRs. TDRs are considered to have occurred when a concession is granted to the debtor that would not have been considered had it not been for economic or legal reasons related to the debtor’s financial difficulties. 

Mortgage Loans - Conventional MPF. The Bank offers a loan modification program for its MPF Program. The loans modified under this program are considered TDRs. The Bank also considers a TDR to have occurred when a borrower files for Chapter 7 bankruptcy, the bankruptcy court discharges the borrower’s obligation and the borrower does not reaffirm the debt. The recorded investment in mortgage loans classified as TDRs was $16.9 million as of December 31, 2015 and $16.8 million as of December 31, 2014. The financial amounts related to TDRs are not material to the Bank’s financial condition, results of operations, or cash flows.

BOB Loans. The Bank offers a BOB loan deferral which the Bank considers a TDR. A deferred BOB loan is not required to pay principal or accrue interest for a period up to one year. The credit loss is measured by factoring expected shortfalls incurred as of the reporting date. BOB loan TDRs are not material to the Bank’s financial condition, results of operations, or cash flows.

Real Estate Owned (REO). The Bank had $6.5 million and $6.9 million of REO reported in Other assets on the Statement of Condition at December 31, 2015 and 2014, respectively.

Purchases, Sales and Reclassifications. During 2015 and 2014, there were no significant purchases or sales of financing receivables. Furthermore, none of the financing receivables were reclassified to held-for-sale.


126

Notes to Financial Statements (continued)

Note 11 – Derivatives and Hedging Activities

Nature of Business Activity. The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and interest-bearing liabilities that finance these assets. The goal of the Bank’s interest rate risk management strategy is not to eliminate interest rate risk but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the Bank monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets, and interest-bearing liabilities.

Consistent with Finance Agency requirements, the Bank enters into derivatives to manage the interest rate risk exposures inherent in otherwise unhedged assets and funding positions and to achieve the Bank’s risk management objectives. Finance Agency regulation and the Bank’s Risk Governance Policy prohibit trading in or the speculative use of derivative instruments and limit credit risk arising from these instruments. The Bank may use derivatives to reduce funding costs for consolidated obligations and to manage interest rate risk and mortgage prepayment risk positions. Derivatives are an integral part of the Bank’s financial management strategy.

The Bank may use derivatives to:
reduce interest rate sensitivity and repricing gaps of assets, liabilities and interest rate exchange agreements;
reduce funding costs by combining a derivative with a consolidated obligation as the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation bond;
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). Without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the advance does not match a change in the interest rate on the bond;
mitigate the adverse earnings effects of the shortening or extension of certain assets (e.g., advances or mortgage assets) and liabilities;
protect the value of existing asset or liability positions or of firm commitments;
manage embedded options in assets and liabilities; and
manage its overall asset/liability portfolio.

Types of Derivatives. The Bank’s Risk Governance Policy establishes guidelines for its use of derivatives. The Bank can use instruments such as the following to reduce funding costs and to manage exposure to interest rate risks inherent in the normal course of business:
interest rate swaps, including option-embedded interest rate swaps;
interest rate swaptions; and
interest rate caps or floors, including interest rate collars and corridors.

Interest Rate Swaps.  An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional amount at a variable-rate index for the same period of time. The variable rate received or paid by the Bank in most derivatives is LIBOR.

Swaptions.  A swaption is an option that gives the buyer the right to enter into a specified interest rate swap at a certain time in the future. When used as a hedge, a swaption can protect the Bank when it is planning to lend or borrow funds in the future against future interest rate changes. The Bank 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.

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

Application of Derivatives. Derivative financial instruments are used by the Bank as follows:

127

Notes to Financial Statements (continued)

by designating them as a fair value hedge of an associated financial instrument or firm commitment; or
in asset/liability management (i.e., “economic” hedges that do not qualify for hedge accounting).

Management uses derivatives when they are considered to be a cost-effective alternative to achieve the Bank’s financial and risk management objectives. Accordingly, the Bank may enter into derivatives that do not qualify for hedge accounting (economic hedges). The Bank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.

Derivative transactions may be executed either with a counterparty (referred to as uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) or a Swap Execution Facility with a Derivatives Clearing Organization (referred to as cleared derivatives). Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearing House), the derivative transaction is novated and the executing counterparty is replaced with the Clearing House. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit. For uncleared derivatives, the Bank transacts most of 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.

Types of Hedged Items. The Bank documents at inception all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to (1) assets and liabilities on the Statement of Condition, or (2) firm commitments. The Bank also formally assesses (both at the hedge’s inception and on a monthly basis) whether the derivatives that it uses in hedging transactions have been effective in offsetting changes in the fair value of the hedged items attributable to the hedged risk and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges.

Investments. The Bank primarily invests in certificates of deposit, U.S. Treasuries, U.S. agency obligations, MBS, and the taxable portion of state or local housing finance agency obligations, which may be classified as HTM, AFS or trading securities. The interest rate and prepayment risks associated with these investment securities are managed through a combination of debt issuance and derivatives. The Bank may manage the prepayment and interest rate risks by funding investment securities with consolidated obligations that have call features or by hedging the prepayment risk with caps or floors, callable swaps or swaptions. The Bank may manage duration risk by funding investment securities with consolidated obligations that contain call features. The Bank may also manage the risk arising from changing market prices and volatility of investment securities by matching the cash outflow on the derivatives with the cash inflow on the investment securities. When the Bank has derivatives associated with trading securities, carried at fair value, or HTM securities, carried at amortized cost, they are designated as economic hedges. When the Bank has AFS securities that have been hedged, it may qualify as a fair value hedge.

Advances. The Bank offers a wide array of advance structures to meet members’ funding needs. These advances may have maturities up to 30 years with variable or fixed rates and may include early termination features or options. The Bank may use derivatives to manage the repricing and/or options characteristics of advances to match more closely the characteristics of the funding liabilities. In general, whenever a member executes a fixed-rate advance or a variable-rate advance with embedded options, the Bank will simultaneously execute a derivative that offsets the terms and embedded options, if any, in the advance. For example, the Bank may hedge a fixed-rate advance with an interest rate swap where the Bank pays a fixed-rate coupon and receives a variable-rate coupon, effectively converting the fixed-rate advance to a variable-rate advance. This type of hedge is typically treated as a fair value hedge.

When issuing convertible advances, the Bank has the right to convert to/from a fixed rate advance from/to a variable rate if interest rates increase/decrease. A convertible advance carries an interest rate lower than a comparable-maturity fixed-rate advance that does not have the conversion feature. With a putable advance, the Bank effectively purchases a put option from the member that allows the Bank to put or extinguish the fixed-rate advance, which the Bank normally would exercise when interest rates increase. The Bank may hedge these advances by entering into a cancellable derivative.

Mortgage Loans. The Bank invests in fixed-rate mortgage loans. The prepayment options embedded in these mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. The Bank manages the interest rate and prepayment risks associated with mortgages through a combination of debt issuance and, at times, derivatives, such as interest rate caps and floors, swaptions and callable swaps.

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 hedge accounting.

128

Notes to Financial Statements (continued)


Consolidated Obligations. The Bank enters into derivatives to hedge the interest rate risk associated with its specific debt issuances. The Bank manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflow on the derivative with the cash outflow on the consolidated obligation.

For instance, in a typical transaction, fixed-rate consolidated obligations are issued by the Bank, and the Bank simultaneously enters into a matching derivative in which the counterparty pays fixed cash flows designed to mirror, in timing and amount, the cash outflows the Bank pays on the consolidated obligation. The Bank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate advances (typically one- or three-month LIBOR). The fixed-rate obligation and matching derivative are treated as fair value hedge relationships. The Bank may issue variable-rate consolidated bonds indexed to LIBOR, the U.S. Prime rate, or Federal funds rate and simultaneously execute interest rate swaps to hedge the basis risk of the variable-rate debt. Basis risk represents the risk that changes to one interest rate index will not perfectly offset changes to another interest rate index.

Firm Commitments. The Bank’s mortgage purchase commitments are considered derivatives and are recorded at fair value. When the mortgage purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan and amortized accordingly. Because the market in which the purchase of MPF loans differs from the principle market, the transaction price may not equal fair value on the date of the inception of the commitment and may result in a gain or loss for the Bank.

The Bank may also hedge a firm commitment for a forward starting advance through the use of an interest rate swap. In this case, the swap functions as the hedging instrument for both the firm commitment and the subsequent advance. Because the firm commitment ends at the same exact time that the advance is settled, the fair value change associated with the firm commitment is effectively rolled into the basis of the advance. If the hedge relationship is de-designated when the commitment is terminated and the advance is issued, the fair value change associated with the firm commitment will be recorded as a basis adjustment of the advance. The basis adjustment will then be amortized into interest income over the life of the advance. In addition, if a hedged firm commitment no longer qualifies as a fair value hedge, the hedge would be terminated and net gains and losses would be recognized in current period earnings.

Financial Statement Effect and Additional Financial Information. Derivative Notional Amounts. The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives reflects the Banks' involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk; the overall risk is much smaller. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged and any offsets between the derivatives and the items being hedged. Additionally, notional values are not meaningful measures of the risks associated with derivatives.


129

Notes to Financial Statements (continued)

The following tables summarize the notional and fair value of derivative instruments, including the effect of netting adjustments and cash collateral as of December 31, 2015 and 2014. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
 
December 31, 2015
(in thousands)
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives designated as hedging instruments:
 

 
 

 
 

Interest rate swaps
$
30,416,262

 
$
49,104

 
$
269,354

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
$
13,363,652

 
$
18,426

 
$
62,384

 Interest rate swaptions
25,000

 

 

Interest rate caps
755,000

 
2,695

 

Mortgage delivery commitments
9,950

 
253

 

Total derivatives not designated as hedging instruments:
$
14,153,602

 
$
21,374

 
$
62,384

Total derivatives before netting and collateral adjustments
$
44,569,864

 
$
70,478

 
$
331,738

Netting adjustments and cash collateral(1)
 
 
(4,623
)
 
(289,230
)
Derivative assets and derivative liabilities as reported on the Statement of Condition
 
 
$
65,855

 
$
42,508

 
December 31, 2014
(in thousands)
Notional Amount of Derivatives
 
Derivative Assets
 
Derivative Liabilities
Derivatives designated as hedging instruments:
 

 
 

 
 

Interest rate swaps
$
32,196,669

 
$
84,205

 
$
414,760

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
$
11,937,989

 
$
21,396

 
$
52,925

 Interest rate swaptions
25,000

 
1,312

 

Interest rate caps
675,000

 
4,425

 

Mortgage delivery commitments
18,308

 
434

 

Total derivatives not designated as hedging instruments
$
12,656,297

 
$
27,567

 
$
52,925

Total derivatives before netting and collateral adjustments
$
44,852,966

 
$
111,772

 
$
467,685

Netting adjustments and cash collateral(1)
 
 
(75,555
)
 
(408,721
)
Derivative assets and derivative liabilities as reported on the Statement of Condition
 
 
$
36,217

 
$
58,964

Note:
(1)Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing agent and/or counterparties. Cash collateral posted was $287.0 million and $345.0 million at December 31, 2015 and 2014. Cash collateral received was $2.4 million and $11.8 million at December 31, 2015 and 2014.

130

Notes to Financial Statements (continued)

The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the Statements of Income.
 
Year ended December 31,
(in thousands)
2015
2014
2013
Derivatives designated as hedging instruments:
 

 

 
Interest rate swaps (1)
$
4,769

$
4,287

$
5,687

Derivatives not designated as hedging instruments:
 

 
 
Economic hedges:
 

 
 
Interest rate swaps
$
(21,514
)
$
(73,836
)
$
(5,507
)
Interest rate swaptions
56

1,410


Interest rate caps
(1,988
)
(4,496
)
2,630

Net interest settlements
10,959

26,369

20,444

Mortgage delivery commitments
11,074

8,739

6,982

Other
24

27

15

Total net gains (losses) related to derivatives not designated
  as hedging instruments
$
(1,389
)
$
(41,787
)
$
24,564

Net gains (losses) on derivatives and hedging activities
$
3,380

$
(37,500
)
$
30,251

Note:
(1) Pertains to total net gains for fair value hedge ineffectiveness.

The following tables present, 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 Bank’s net interest income for 2015, 2014 and 2013.
(in thousands)
Gains/(Losses) on Derivative
 
Gains/(Losses) on Hedged Item
 
Net Fair Value Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income(1)
2015
 
 
 
 
 
 
 
Hedged item type:
 
 
 
 
 
 
 
Advances
$
110,659

 
$
(109,811
)
 
$
848

 
$
(198,536
)
Consolidated obligations – bonds
28,735

 
(25,822
)
 
2,913

 
218,194

          AFS securities
(7,075
)
 
8,083

 
1,008

 
(19,032
)
Total
$
132,319

 
$
(127,550
)
 
$
4,769

 
$
626

(in thousands)
Gains/(Losses) on Derivative
 
Gains/(Losses) on Hedged Item
 
Net Fair Value Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income(1)
2014
 
 
 
 
 
 
 
Hedged item type:
 
 
 
 
 
 
 
Advances
$
249,742

 
$
(245,817
)
 
$
3,925

 
$
(225,722
)
Consolidated obligations – bonds
74,726

 
(72,766
)
 
1,960

 
233,774

          AFS securities
(32,530
)
 
30,932

 
(1,598
)
 
(11,442
)
Total
$
291,938

 
$
(287,651
)
 
$
4,287

 
$
(3,390
)

131

Notes to Financial Statements (continued)

(in thousands)
Gains/(Losses) on Derivative
 
Gains/(Losses) on Hedged Item
 
Net Fair Value Hedge Ineffectiveness
 
Effect of Derivatives on Net Interest Income(1)
2013
 
 
 
 
 
 
 
Hedged item type:
 
 
 
 
 
 
 
Advances
$
290,036

 
$
(286,937
)
 
$
3,099

 
$
(255,143
)
Consolidated obligations – bonds
(315,332
)
 
316,551

 
1,219

 
217,753

          AFS securities
6,188

 
(4,819
)
 
1,369

 
(3,189
)
Total
$
(19,108
)
 
$
24,795

 
$
5,687

 
$
(40,579
)
Note:
(1)Represents the net interest settlements on derivatives in fair value hedge relationships presented in the interest income/expense line item of the respective hedged item. These amounts do not include $0.8 million, $13.8 million and $18.9 million of amortization/accretion of the basis adjustment related to discontinued fair value hedging relationships for the years ended December 31, 2015, 2014 and 2013.

The Bank had no active cash flow hedging relationships during 2015, 2014 or 2013.

Managing Credit Risk on Derivatives. The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. The Bank manages counterparty 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 netting arrangements are included in such contracts to mitigate the risk. The Bank requires collateral agreements with collateral delivery thresholds on all uncleared derivatives.

For cleared derivatives, the Clearing Houses are the Bank's counterparties. The Clearing House notifies the clearing agent of the required initial and variation margin. The requirement that the Bank post initial and variation margin through the clearing agent, which notifies the FHLBank on behalf of the Clearing Houses, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearing Houses fail to meet their respective obligations. Initial margin is the amount calculated based on anticipated exposure to future changes in the value of a swap and protects the Clearing Houses from market risk in the event of default by one of their respective clearing agents. Variation margin is the amount calculated to cover the current exposure arising from changes in the market value of the position since the trade was executed or the previous time the position was marked to market.

The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily, through a clearing agent, for changes in the fair value of cleared derivatives. The Bank 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 a bankruptcy, insolvency or similar proceeding involving the Clearing Houses or the Bank’s clearing agent, or both. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearing House.

Based on credit analyses and collateral requirements, the Bank does not anticipate credit losses related to its derivative agreements. See Note 19 - Estimated Fair Values for discussion regarding the Bank's fair value methodology for derivative assets and liabilities, including an evaluation of the potential for the fair value of these instruments to be affected by counterparty credit risk.

Generally, the Bank’s ISDA agreements for uncleared derivatives contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating and the net liability position exceeds the relevant threshold. If the Bank’s credit rating is lowered by a major credit rating agency, the Bank would be required to deliver additional collateral on uncleared derivative instruments in net liability positions. The aggregate fair value of all uncleared derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at December 31, 2015 was $96.9 million for which the Bank has posted cash collateral with a fair value of approximately $54.8 million . If the Bank’s credit rating had been lowered one notch (i.e., from its current rating to the next lower rating), the Bank would have been required to deliver up to an additional $24.3 million of collateral to its derivative counterparties at December 31, 2015.

132

Notes to Financial Statements (continued)


For cleared derivatives, the Clearing House determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including but not limited to credit rating downgrades. The Bank was not required by its clearing agents to post additional initial margin at December 31, 2015.

Offsetting of Derivative Assets and Derivative Liabilities. When it has met the netting requirements, the Bank presents derivative instruments, related cash collateral, including initial and variation margin, received or pledged and associated accrued interest on a net basis by clearing agent and/or by counterparty. The following tables present separately the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties.
 
 
Derivative Assets
 (in thousands)
 
December 31, 2015
December 31, 2014
 Derivative instruments meeting netting requirements:
 
 
 
 Gross recognized amount:
 
 
 
          Uncleared derivatives
 
$
39,068

$
102,570

          Cleared derivatives
 
31,157

8,768

Total gross recognized amount
 
70,225

111,338

Gross amounts of netting adjustments and cash collateral:
 
 
 
          Uncleared derivatives
 
(37,981
)
(96,286
)
        Cleared derivatives
 
33,358

20,731

Total gross amounts of netting adjustments and cash collateral
 
(4,623
)
(75,555
)
 Net amounts after netting adjustments:
 
 
 
          Uncleared derivatives
 
1,087

6,284

        Cleared derivatives
 
64,515

29,499

Total net amounts after netting adjustments
 
65,602

35,783

Derivative instruments not meeting netting requirements: (1)
 
 
 
          Uncleared derivatives
 
253

434

        Cleared derivatives
 


Total derivative instruments not meeting netting requirements:
 
253

434

 Total derivative assets:
 
 
 
          Uncleared derivatives
 
1,340

6,718

        Cleared derivatives
 
64,515

29,499

Total derivative assets as reported in the Statement of Condition
 
65,855

36,217

 Non-cash collateral received or pledged not offset:
 
 
 
     Can be sold or repledged
 
 
 
          Uncleared derivatives
 

(636
)
        Cleared derivatives
 


Total Can be sold or repledged
 

(636
)
 Net unsecured amount
 
 
 
          Uncleared derivatives
 
1,340

6,082

        Cleared derivatives
 
64,515

29,499

 Total net unsecured amount
 
$
65,855

$
35,581



133

Notes to Financial Statements (continued)

 
 
Derivative Liabilities
 (in thousands)
 
December 31, 2015
 
December 31, 2014
 Derivative instruments meeting netting requirements:
 
 
 
 
 Gross recognized amount:
 
 
 
 
          Uncleared derivatives
 
$
132,910

 
$
283,979

          Cleared derivatives
 
198,828

 
183,706

Total gross recognized amount
 
331,738

 
467,685

Gross amounts of netting adjustments and cash collateral:
 
 
 
 
          Uncleared derivatives
 
(90,402
)
 
(225,015
)
          Cleared derivatives
 
(198,828
)
 
(183,706
)
Total gross amounts of netting adjustments and cash collateral
 
(289,230
)
 
(408,721
)
 Net amounts after netting adjustments:
 
 
 
 
          Uncleared derivatives
 
42,508

 
58,964

          Cleared derivatives
 

 

Total net amounts after netting adjustments
 
42,508

 
58,964

 Total derivative liabilities:
 
 
 
 
          Uncleared derivatives
 
42,508

 
58,964

          Cleared derivatives
 

 

Total derivative liabilities as reported in the Statement of Condition
 
42,508

 
58,964

 Net unsecured amount
 
 
 
 
          Uncleared derivatives
 
42,508

 
58,964

 Total net unsecured amount
 
$
42,508

 
$
58,964

Note:
(1) Represents derivatives that are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments and certain interest rate futures or forwards).


134

Notes to Financial Statements (continued)

Note 12 – Premises, Software and Equipment
 
December 31,
(in thousands)
2015
2014
Computer hardware and software
$
54,593

$
52,369

Furniture
915

959

Leasehold improvements
2,478

2,331

Equipment and other
980

974

Total premises, software and equipment, gross
58,966

56,633

Less: Accumulated depreciation and amortization
48,279

46,187

Total premises, software and equipment, net
$
10,687

$
10,446

Depreciation and amortization expense on premises, software, and equipment was $3.7 million, $4.3 million and $5.3 million for 2015, 2014 and 2013, respectively. Gains and losses on disposal of premises and equipment are included in other, net income on the Statement of Income. There were no material net realized gains (losses) on disposal of premises and equipment for 2015, 2014 or 2013.
Included in total depreciation and amortization expense is amortization expense on software of $3.1 million, $3.7 million and $4.5 million for 2015, 2014 and 2013, respectively. The unamortized software balance was $9.5 million and $9.0 million at December 31, 2015 and 2014, respectively.
During 2015 and 2014, the Bank capitalized $3.6 million and $3.8 million, respectively, in costs associated with computer software developed for internal use.

Note 13 – Deposits

The Bank offers demand and overnight deposits to both members and qualifying nonmembers and term deposits to members. Noninterest-bearing demand and overnight deposits are comprised of funds collected by members pending disbursement to the mortgage loan holders, as well as member funds deposited at the FRB.

Interest-bearing deposits classified as demand and overnight pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit. The weighted-average interest rates paid on interest bearing deposits were 0.04%, 0.03% and 0.04% during 2015, 2014 and 2013, respectively.

The following table details interest-bearing and noninterest-bearing deposits as of December 31, 2015 and 2014.
 
December 31,
(in thousands)
2015
2014
Interest-bearing:
 

 

Demand and overnight
$
635,468

$
601,454

Noninterest-bearing:
 
 
Demand and overnight
50,469

39,726

Total deposits
$
685,937

$
641,180

There were no outstanding term deposits as of December 31, 2015 and December 31, 2014.

135

Notes to Financial Statements (continued)

Note 14 – Consolidated Obligations

Consolidated obligations consist of consolidated bonds and discount notes. The FHLBanks issue consolidated obligations through the OF as their agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants issued on its behalf. The OF tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank 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 OF. Consolidated bonds are issued primarily to raise intermediate and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on their maturity. Consolidated discount notes are issued primarily to raise short-term funds. These notes generally sell at less than their face amount and are redeemed at par value when they mature.
Although the Bank is primarily liable for its portion of consolidated obligations, the Bank is also jointly and severally liable with the other ten FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations 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 one FHLBank is required make such payments on behalf of another FHLBank, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement from the non-complying FHLBank for any payments made on its behalf and other associated costs including interest to be determined by the Finance Agency. However, if the Finance Agency determines that the non-complying FHLBank is unable to satisfy its repayment obligations, then the Finance Agency may allocate the outstanding liabilities of the non-complying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding. The Finance Agency reserves the right to allocate the outstanding liabilities for the consolidated obligations among the FHLBanks in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner.
The par amount of the 11 FHLBanks’ outstanding consolidated obligations was $905.2 billion and $847.2 billion at December 31, 2015 and 2014, respectively. Regulations require the Bank to maintain unpledged qualifying assets equal to its participation of 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 Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the Bank 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 are free from lien or pledge for purposes of compliance with these regulations.
General Terms.  Consolidated obligations are issued with either fixed-rate coupon payment terms or variable-rate coupon payment terms that can use a variety of indices for interest rate resets including the federal funds effective rate, LIBOR, and others. To meet the expected specific needs of certain investors in consolidated obligations, both fixed-rate bonds and variable-rate bonds may contain features which may result in complex coupon payment terms and call options. When such consolidated obligations are issued, the Bank may enter into derivatives containing offsetting features that effectively convert the terms of the bond to those of a simple variable-rate bond or a fixed-rate bond. The Bank has no outstanding consolidated obligations denominated in currencies other than U.S. dollars.
These consolidated obligations, beyond having fixed-rate or simple variable-rate coupon payment terms, may also have the following broad terms regarding either principal repayment or coupon payment terms:
Indexed Principal Redemption Bonds (index amortizing notes) repay principal according to predetermined amortization schedules that are linked to the level of a certain index. A form of an indexed principal redemption bond that the Bank has issued in the past is an Amortizing Prepayment Linked Security (APLS). The APLS redeem based on the prepayments of Fannie Mae, Freddie Mac, Ginnie Mae or private label reference pools. As of December 31, 2015 and 2014, most of the index amortizing notes had fixed-rate coupon payment terms. Usually, as market interest rates rise (fall), the average life of the index amortizing notes extends (contracts).
Optional Principal Redemption  Bonds (callable bonds) that the Bank may redeem in whole or in part at its discretion on predetermined call dates according to the terms of the bond offerings.
Interest Rate Payment Terms.  With respect to interest payments, consolidated obligation bonds may also have the following terms:


136

Notes to Financial Statements (continued)

Step-up Bonds generally pay interest at increasing fixed rates at specified intervals over the life of the bond. These bonds generally contain provisions enabling the Bank to call bonds at its option on the step-up dates; and

Conversion Bonds have coupons that the Bank may convert from fixed to floating, or floating to fixed, or from one U.S. or other currency index to another, at its discretion on predetermined dates according to the terms of the bond offerings.

The following table details interest rate payment terms for the Bank’s consolidated obligation bonds as of December 31, 2015 and 2014.
 
December 31,
(in thousands)
2015
 
2014
Par value of consolidated bonds:
 

 
 

Fixed-rate
$
31,945,658

 
$
36,296,100

Step-up
1,860,000

 
3,116,000

Floating-rate
14,650,000

 
4,190,000

Conversion bonds - fixed to floating
60,000

 

Total par value
48,515,658

 
43,602,100

Bond premiums
107,339

 
147,824

Bond discounts
(9,629
)
 
(12,111
)
Hedging adjustments
(7,386
)
 
(23,303
)
Total book value
$
48,605,982

 
$
43,714,510


Maturity Terms. The following table presents a summary of the Bank’s consolidated obligation bonds outstanding by year of contractual maturity as of December 31, 2015 and 2014.
 
December 31, 2015
 
December 31, 2014
(dollars in thousands)
Year of Contractual Maturity
Amount
 
Weighted Average Interest Rate
 
Amount
 
Weighted Average Interest Rate
Due in 1 year or less
$
26,814,155

 
0.68
%
 
$
15,033,450

 
1.00
%
Due after 1 year through 2 years
8,753,810

 
1.21

 
9,316,860

 
1.42

Due after 2 years through 3 years
4,998,335

 
1.46

 
5,346,515

 
1.64

Due after 3 years through 4 years
2,017,720

 
1.84

 
4,709,300

 
1.50

Due after 4 years through 5 years
2,040,940

 
1.91

 
2,911,350

 
1.72

Thereafter
3,733,950

 
2.66

 
5,959,265

 
2.35

Index amortizing notes
156,748

 
4.73

 
325,360

 
4.14

Total par value
$
48,515,658

 
1.12
%
 
$
43,602,100

 
1.48
%

The following table presents the Bank’s consolidated obligation bonds outstanding between noncallable and callable as of December 31, 2015 and 2014.
 
December 31,
(in thousands)
2015
 
2014
Noncallable
$
41,462,658

 
$
30,388,100

Callable
7,053,000

 
13,214,000

Total par value
$
48,515,658

 
$
43,602,100



137

Notes to Financial Statements (continued)

The following table presents consolidated obligation bonds outstanding by the earlier of contractual maturity or next call date as of December 31, 2015 and 2014.
(in thousands)
December 31,
Year of Contractual Maturity or Next Call Date
2015
 
2014
Due in 1 year or less
$
33,517,155

 
$
28,232,450

Due after 1 year through 2 years
7,778,810

 
8,114,860

Due after 2 years through 3 years
3,672,335

 
3,551,515

Due after 3 years through 4 years
1,202,720

 
1,390,300

Due after 4 years through 5 years
810,940

 
1,028,350

Thereafter
1,376,950

 
959,265

Index amortizing notes
156,748

 
325,360

Total par value
$
48,515,658

 
$
43,602,100


During 2015 and 2014, the Bank did not repurchase any consolidated obligations. In 2013, the Bank repurchased $758.0 million of swapped callable bonds. These early extinguishments resulted in a net gain of $9.6 million.

Consolidated Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to one year. These notes are issued at less than their face amount and redeemed at par value when they mature. The following table details the Bank’s consolidated obligation discount notes as of December 31, 2015 and 2014.
 
December 31,
(dollars in thousands)
2015
 
2014
Book value
$
42,276,815

 
$
37,058,118

Par value
42,318,509

 
37,065,745

Weighted average interest rate (1)
0.32
%
 
0.10
%
Note:
(1) Represents yield to maturity excluding concession fees.

Concessions on Consolidated Obligations. Unamortized concessions, included in other assets on the Statement of Condition, were $6.5 million at both December 31, 2015 and 2014. The amortization of such concessions is included in consolidated obligations interest expense on the Statement of Income and totaled $7.2 million, $4.3 million and $4.1 million for 2015, 2014, and 2013, respectively.


138

Notes to Financial Statements (continued)

Note 15 – Affordable Housing Program (AHP)

In support of the goal of providing funding for housing and economic development in its district’s communities, the Bank administers a number of programs, some mandated and some voluntary, which make funds available through member financial institutions. In all of these programs, Bank funds flow through member financial institutions into areas of need throughout the region. The AHP, mandated by the Act, is the largest and primary public policy program of the FHLBanks. The Act requires the Bank to contribute 10% of its current year net income (as defined by a Finance Agency advisory bulletin as GAAP net income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP) to AHP and make these funds available for use in the subsequent year. Each year, the Bank’s Board adopts an implementation plan that defines the structure of the program pursuant to the AHP regulations.

Each FHLBank provides subsidies in the form of direct grants and/or below-market interest rate advances where the funds are used to assist in the purchase, construction or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must collectively set aside for the AHP the greater of $100 million or 10% of income subject to assessment. The Bank accrues this expense monthly based on its net income. The Bank reduces the AHP liability as members use subsidies.

If the Bank experienced a net loss during a quarter, but still had net earnings for the year, the Bank’s obligation to the AHP would be calculated based on the Bank’s year-to-date net income. If the Bank had net income in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the Bank experienced a net loss for a full year, the Bank would have no obligation to the AHP for the year since each FHLBank’s required annual AHP contribution is limited to its annual net income. If the aggregate 10% calculation described above was less than $100 million for all the FHLBanks, each FHLBank would be required to assure that the aggregate contributions of the FHLBanks equal $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 in 2015, 2014, or 2013. If an FHLBank finds that its required contributions are contributing to the financial instability of that FHLBank, it may apply to the Finance Agency for a temporary suspension of its contributions. The Bank did not make any such application in 2015, 2014, or 2013. The Bank had outstanding principal in AHP-related advances of $1.4 million and $2.3 million at December 31, 2015 and 2014, respectively.

The following table presents an analysis of the AHP payable for 2015, 2014, and 2013.
(in thousands)
 
2015
 
2014
 
2013
Balance, beginning of the year
 
$
55,997

 
$
36,353

 
$
24,457

Assessments
 
28,519

 
28,437

 
16,578

Subsidy usage, net
 
(13,609
)
 
(8,793
)
 
(4,682
)
Balance, end of the year
 
$
70,907

 
$
55,997

 
$
36,353


Note 16 – Capital

The Bank is subject to the following three capital requirements under its current Capital Plan Structure and the Finance Agency rules and regulations. Regulatory capital does not include AOCI, but does include mandatorily redeemable capital stock.

Risk-based capital (RBC). Under this capital requirement, the Bank 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. The Finance Agency may require the Bank to maintain a greater amount of minimum capital levels than is required based on the Finance Agency rules and regulations.
Total regulatory capital. Under this capital requirement, the Bank is required to maintain at all times a total capital-to-assets ratio of at least 4.0%. 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; and
Leverage capital. Under this third capital requirement, the Bank is required to maintain at all times a leverage capital-to-assets ratio of at least 5.0%. Leverage capital is defined as the sum of (i) permanent capital weighted 1.5 times and (ii) all other capital without a weighting factor.

At December 31, 2015, the Bank was in compliance with all regulatory capital requirements.

139

Notes to Financial Statements (continued)


The Bank has two subclasses of capital stock: B1 membership stock and B2 activity stock. At December 31, 2015, the Bank had $0.3 billion and $3.2 billion in B1 membership stock and B2 activity stock, respectively. At December 31, 2014, the Bank had $0.3 billion and $2.7 billion in B1 membership stock and B2 activity stock, respectively.

The following table demonstrates the Bank’s compliance with these capital requirements at December 31, 2015 and 2014.
 
December 31, 2015
 
December 31, 2014
(dollars in thousands)
Required
 
Actual
 
Required
 
Actual
Regulatory capital requirements:
 

 
 

 
 

 
 

  RBC
$
820,621

 
$
4,426,971

 
$
847,424

 
$
3,879,108

  Total capital-to-asset ratio
4.0
%
 
4.6
%
 
4.0
%
 
4.5
%
  Total regulatory capital
3,853,451

 
4,426,971

 
3,427,083

 
3,879,108

  Leverage ratio
5.0
%
 
6.9
%
 
5.0
%
 
6.8
%
  Leverage capital
4,816,814

 
6,640,456

 
4,283,854

 
5,818,663


When the Finance Agency implemented the prompt corrective action provisions of the Housing Act, it established four capital classifications for the FHLBanks: adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. On December 10, 2015, the Bank received final notification from the Finance Agency that it was considered “adequately capitalized” for the quarter ended September 30, 2015. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended December 31, 2015.

Capital Concentrations. The following tables present member holdings of 10% or more of the Bank’s total capital stock including mandatorily redeemable capital stock outstanding as of December 31, 2015 and December 31, 2014.
(dollars in thousands)
December 31, 2015
Member(1)
Capital Stock
 
% of Total
PNC Bank, N.A., Wilmington, DE
$
881,552

 
24.9
%
Santander Bank, N.A., Wilmington, DE
600,872

 
17.0

Chase Bank USA, N.A., Wilmington, DE
424,502

 
12.0

Ally Bank, Midvale, UT
391,287

 
11.0

(dollars in thousands)
December 31, 2014
Member(1)
Capital Stock
 
% of Total
PNC Bank, N.A., Wilmington, DE
$
876,305

 
28.8
%
Santander Bank, N.A., Wilmington, DE
424,955

 
14.0

Chase Bank USA, N.A., Wilmington, DE
362,050

 
11.9

Note:
(1) For Bank membership purposes, the principal place of business for PNC Bank is Pittsburgh, PA. For Ally Bank, the principal place of business is Horsham, PA.

Mandatorily Redeemable Capital Stock. Each FHLBank is a cooperative whose member financial institutions and former members own all of the relevant FHLBank’s issued and outstanding capital stock. Shares cannot be purchased or sold except between an FHLBank and its members at the shares’ par value of $100, as mandated by each FHLBank’s capital plan.

At December 31, 2015 and December 31, 2014, the Bank had $6.0 million and $586 thousand, respectively, in capital stock subject to mandatory redemption with payment subject to a five-year waiting period and the Bank meeting its minimum regulatory capital requirements. Estimated dividends on mandatorily redeemable capital stock which were recorded as interest expense were immaterial in 2015, 2014 and 2013.


140

Notes to Financial Statements (continued)

The following table provides the related dollar amounts for activities recorded in mandatorily redeemable capital stock during 2015, 2014, and 2013.
(in thousands)
2015
2014
2013
Balance, beginning of the period
$
586

$
40

$
431,566

Capital stock subject to mandatory redemption reclassified from capital
36,629

8,422

698

Net redemption/repurchase of mandatorily redeemable stock
(31,162
)
(7,876
)
(432,224
)
Balance, end of the period
$
6,053

$
586

$
40


As of December 31, 2015, the total mandatorily redeemable capital stock reflected the balance for three institutions. Two institutions were merged out of district and are considered to be nonmembers. One other institution has notified the Bank of its intention to voluntary redeem its capital stock and withdraw from membership. This institution will continue to be a member of the Bank until the withdrawal period is completed.

The following table shows the amount of mandatorily redeemable capital stock by contractual year of redemption at December 31, 2015 and December 31, 2014.
 
December 31,
(in thousands)
2015
 
2014
Due in 1 year or less
$

 
$

Due after 1 year through 2 years

 

Due after 2 years through 3 years

 

Due after 3 years through 4 years
546

 

Due after 4 years through 5 years
5,507

 
586

Total
$
6,053

 
$
586


The year of redemption in the table above is the end of the five-year redemption period for the mandatorily redeemable capital stock. Under the terms of the Bank’s Capital Plan, membership capital stock is redeemable five years from the date of membership termination or withdrawal notice from the member. If the membership is terminated due to a merger or consolidation, the membership capital stock is deemed to be excess stock and is repurchased. The activity capital stock (i.e., supporting advances, letters of credit and MPF) relating to termination, withdrawal, mergers or consolidation is recalculated based on the underlying activity. Any excess activity capital stock is repurchased on an ongoing basis as part of the Bank’s excess stock repurchase program that is in effect at the time. Therefore, the redemption period could be less than five years if the stock becomes excess stock. However, the redemption period could extend beyond five years if the underlying activity is still outstanding.

Dividends and Retained Earnings. Each FHLBank is required to contribute 20% of its net income each quarter to a RRE account until the balance of that account equals at least 1% of that FHLBank’s average balance of outstanding consolidated obligations for the previous quarter. These RRE will not be available to pay dividends. At December 31, 2015, retained earnings were $881.2 million, including $718.7 million of unrestricted retained earnings and $162.5 million of RRE.

The Finance Agency has issued regulatory guidance to the FHLBanks relating to capital management and retained earnings. The guidance directs each FHLBank to assess, at least annually, the adequacy of its retained earnings with consideration given to future possible financial and economic scenarios. The guidance also outlines the considerations that each FHLBank should undertake in assessing the adequacy of the Bank’s retained earnings. The Bank’s retained earnings policy and capital adequacy metric utilize this guidance.


141

Notes to Financial Statements (continued)

Dividends paid by the Bank are subject to Board approval and may be paid in either capital stock or cash; historically, the Bank has paid cash dividends only. Dividends paid in 2015, 2014, and 2013 were as follows in the table below. These dividends were based on stockholders' average balances for the previous quarter.
 
Dividend - Annual Yield
 
2015
2014
2013
 
Membership
Activity
 
 
February
(1) 
(1) 
2.50%
0.32%
April
3.00%
5.00%
4.00%
0.29%
July
3.00%
5.00%
4.00%
1.00%
October
3.00%
5.00%
4.00%
1.50%
Note:
(1) The Bank did not differentiate dividends on activity and membership stock prior to April 2015. In February 2015, the Bank paid a quarterly dividend equal to an annual yield of 4.00%. In addition, the Bank paid a special dividend of 2.50%. This special dividend was based on average member capital stock for the full year of 2014.

In February 2016, the Bank paid a quarterly dividend equal to an annual yield of 5.0% and 3.0% on activity stock and membership stock, respectively.

142

Notes to Financial Statements (continued)

The following table summarizes the changes in AOCI for 2015, 2014 and 2013.
(in thousands)
Net Unrealized Gains(Losses) on AFS
Non-credit OTTI Gains(Losses) on AFS
Non-credit OTTI Gains(Losses) on HTM
Net Unrealized Gains (Losses) on Hedging Activities
Pension and Post-Retirement Plans
Total
December 31, 2012
$
35,390

$
18,999

$

$
286

$
(970
)
$
53,705

Other comprehensive income (loss) before
  reclassifications:
 
 
 
 
 
 
  Net unrealized gains (losses)
(67,912
)
32,802




(35,110
)
  Net change in fair value of OTTI securities

25,399




25,399

Reclassifications from OCI to net income:
 
 
 
 
 


  Non-credit OTTI to credit OTTI

442




442

  Reclassifications adjustment included in net
    income
41





41

  Amortization on hedging activities



1


1

  Pension and post-retirement




(138
)
(138
)
December 31, 2013
$
(32,481
)
$
77,642

$

$
287

$
(1,108
)
$
44,340

 
 
 
 
 
 
 
December 31, 2013
$
(32,481
)
$
77,642

$

$
287

$
(1,108
)
$
44,340

Other comprehensive income (loss) before
  reclassifications:
 
 
 
 
 
 
  Net unrealized gains
64,941

13,896




78,837

  Net change in fair value of OTTI securities

2,913




2,913

  Amortization on hedging activities



(15
)

(15
)
  Pension and post-retirement




(1,642
)
(1,642
)
December 31, 2014
$
32,460

$
94,451

$

$
272

$
(2,750
)
$
124,433

 
 
 
 
 
 
 
December 31, 2014
$
32,460

$
94,451

$

$
272

$
(2,750
)
$
124,433

Other comprehensive income (loss) before
  reclassifications:
 
 
 
 
 
 
  Net unrealized (losses)
(23,712
)
(21,510
)



(45,222
)
  Non-credit component of OTTI losses


(1,665
)


(1,665
)
  Non-credit OTTI losses transferred

(1,665
)
1,665




  Net change in fair value of OTTI securities

1,185




1,185

Reclassifications from OCI to net income:
 
 
 
 
 

  Non-credit OTTI to credit OTTI

509




509

  Amortization on hedging activities



(25
)

(25
)
  Pension and post-retirement




1,468

1,468

December 31, 2015
$
8,748

$
72,970

$

$
247

$
(1,282
)
$
80,683



143

Notes to Financial Statements (continued)

Note 17 – Employee Retirement Plans

Qualified Defined Benefit Multiemployer Plan. The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Defined Benefit Plan), a tax qualified defined benefit pension plan. The Defined Benefit Plan is treated as a multiemployer plan for accounting purposes, but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC). As a result, certain multiemployer plan disclosures are not applicable to the Defined Benefit Plan. Under the Defined Benefit Plan, contributions made by a participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The plan covers substantially all officers and employees of the Bank that meet certain eligibility requirements.
The Defined Benefit Plan operates on a fiscal year from July 1 through June 30. The 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 Bank.
The 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 the plan’s assets divided by the funding target (100% of the present value of all benefit liabilities accrued at that date). During 2012, the calculation of the discount rate used to determine the funding target was changed by the Moving Ahead for Progress in the 21st Century Act (MAP-21). Certain provisions of MAP-21 were extended in 2014. MAP-21 resulted in a higher discount rate, which increased the Bank’s funded status significantly. As permitted by ERISA, the Defined Benefit Plan accepts contributions for the prior plan year up to eight and a half months after the asset valuation date. As a result, the market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30 that the plan’s participants may choose to make.
The most recent Form 5500 available for the Defined Benefit Plan is for the fiscal year ended June 30, 2014. The Bank’s contributions to the Defined Benefit Plan during 2015 were less than 5% of total plan contributions during the plan year ended June 30, 2014. The Bank’s contributions to the Defined Benefit Plan during 2014 were more than 5% of total plan contributions.
(dollars in thousands)
2015
 
2014
 
2013
 
Net pension cost charged to compensation and benefit expense for the year ended December 31
$
4,687

 
$
7,247

 
$
8,876

 
Defined Benefit Plan funded status as of July 1
106.9
%
(a) 
111.4
%
(b) 
101.3
%
 
Bank’s funded status as of July 1
126.7
%
 
128.6
%
 
107.8
%
 
(a) The Defined Benefit Plan’s funded status as of July 1, 2015 is preliminary and may increase because the plan’s participants are permitted to make contributions for the plan year ended June 30, 2015 through March 15, 2016. The final funded status will not be available until the Form 5500 is filed (this Form 5500 is due April 2017).
(b) The funded status disclosed was preliminary as the Form 5500 had not been filed when disclosed. The Bank did not update this preliminary funded status for final results.

Included in the net pension costs above are discretionary contributions of $4.3 million, $6.9 million and $8.5 million in 2015, 2014, and 2013, respectively. However, these contributions may not be applied to the Bank’s funded status in the same plan year due to differences in year-ends.

Qualified Defined Contribution Plan. The Bank also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax qualified defined contribution pension plan. The Bank’s contributions consist of a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The Bank contributed $1.2 million, $1.0 million and $0.9 million for 2015, 2014 and 2013, respectively.

Nonqualified Supplemental Deferred Compensation Plans. In addition, the Bank maintains nonqualified deferred compensation plans, available to select employees and directors, which are, in substance, unfunded supplemental defined contribution retirement plans. The plans’ liabilities consist of the accumulated compensation deferrals and accrued earnings (losses) on the deferrals. The Bank’s obligation from these plans was $6.5 million and $5.8 million at December 31, 2015 and 2014, respectively, and the Bank recognized operating expenses of $0.2 million, $0.6 million, and $1.1 million for 2015, 2014 and 2013, respectively. Although the nonqualified compensation plans are unfunded, the Bank owns mutual funds held in a

144

Notes to Financial Statements (continued)

Rabbi trust to help secure the Bank’s obligation to participants and to partially offset the earnings (losses) of certain deferred compensation agreements. See Note 4 - Trading Securities for additional information.

Post-retirement Health Benefit Plan.  The Bank sponsors an unfunded retiree benefits program that includes health care and life insurance benefits for eligible retirees. Employees who retired prior to January 1, 1992, receive health care benefits at the Bank’s expense after age 65. Employees retiring after January 1, 1992, participate in a health reimbursement account (HRA). At the discretion of the Bank, the amount can be modified. A limited life insurance benefit is provided at the Bank’s expense for retirees who retired prior to January 1, 2009. Employees who retired after January 1, 1992 but prior to January 1, 2009, also met specific eligibility requirements of age 65 years or age 60 years with a minimum of ten years of service at the time of retirement to be eligible for retiree health and life insurance benefits. The Accumulated Post-retirement Benefit Obligation (APBO) as of December 31, 2015 and 2014 was $1.9 million and $2.0 million.
Supplemental Executive Retirement Plan (SERP).  The Bank also maintains an unfunded SERP, a nonqualified defined benefit retirement plan, for certain executives. The SERP ensures, among other things, that participants receive the full amount of benefits to which they would have been entitled under the qualified defined benefit pension plan in the absence of limits on benefits levels imposed by the Internal Revenue Service. The accumulated benefit obligation for the SERP was $5.2 million and $4.7 million at December 31, 2015 and 2014, respectively. As noted above, all nonqualified plans maintained by the Bank are unfunded; however, the Bank owns mutual funds held in a Rabbi trust to help secure the Bank’s obligation to participants. See Note 5 - AFS Securities for additional information.
The Post-retirement Health Benefit Plan and SERP are not material to the Bank. However, the following table sets forth their benefit obligations recorded in “Other liabilities” and amounts recognized in AOCI. In addition, the Bank recognized $1.2 million, $953 thousand, and $960 thousand in “Compensation and benefits” expense related to these two plans at December 31, 2015, 2014 and 2013, respectively.
 
SERP
Post-retirement Health Benefit Plan
Total
(in thousands)
2015
2014
2015
2014
2015
2014
Benefit obligations
$
6,673

$
7,030

$
1,876

$
1,990

$
8,549

$
9,020

Unrealized actuarial gains (losses) in AOCI
$
(1,799
)
$
(3,123
)
$
517

$
373

$
(1,282
)
$
(2,750
)

Note 18 – Transactions with Related Parties

The Bank is a cooperative whose member institutions own the capital stock of the Bank and may receive dividends on their investments. In addition, certain former members that still have outstanding transactions are also required to maintain their investment in Bank capital stock until the transactions mature or are paid off. All loans, including BOB loans, are issued to members and all mortgage loans held for portfolio are purchased from members. The Bank also maintains demand deposit accounts for members primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases. All transactions with members are entered into in the normal course of business. In instances where the member also has an officer or a director who is a Director of the Bank, those transactions are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as all other transactions. Related parties are defined as those parties meeting any one of the following criteria: (1) other FHLBanks in the System; (2) members with capital stock outstanding in excess of 10% of total capital stock outstanding; or (3) members and nonmember borrowers that have an officer or director who is a Director of the Bank.
The following table includes significant outstanding related party member balances.
 
December 31,
(in thousands)
2015
 
2014
Investments
$
176,345

 
$
157,025

Advances
54,610,238

 
38,765,267

Letters of credit (1)
8,245,423

 
9,608,983

MPF loans
1,052,569

 
1,326,807

Deposits
24,636

 
13,678

Capital stock
2,366,721

 
1,714,432


145

Notes to Financial Statements (continued)

Note:
(1) Letters of credit are off-balance sheet commitments.

The following table summarizes the effects on the Statement of Income corresponding to the related party member balances above. Amounts related to interest income on investments and interest expense on deposits were immaterial for the periods presented.
 
Year ended December 31,
(in thousands)
2015
 
2014
 
2013
Interest income on advances (1)
$
200,743

 
$
138,121

 
$
131,092

Interest income on MPF loans
64,002

 
80,674

 
101,353

Letter of credit fees
10,796

 
8,481

 
1,609

Prepayment fees on advances

 
13,787

 

Notes:
(1) For 2015, 2014 and 2013, respectively, includes contractual interest income of $341.5 million, $319.5 million, and $348.2 million; net interest settlements on derivatives in fair value hedge relationships of $(139.8) million, $(177.8) million, and $(214.3) million; and total amortization of basis adjustments of $(0.9) million, $(3.6) million, and $(2.8) million.

The following table includes the MPF activity of the related party members.
(in thousands)
2015
 
2014
 
2013
Total MPF loan volume purchased
$
8,756

 
$
13,049

 
$
14,558


The following table summarizes the effect of the MPF activities with FHLBank of Chicago.
 
Year ended December 31,
(in thousands)
2015
 
2014
 
2013
Servicing fee expense
$
1,147

 
$
994

 
$
916

 
December 31,
(in thousands)
2015
 
2014
Interest-bearing deposits maintained with FHLBank of Chicago
$
6,075

 
$
6,782


From time to time, the Bank may borrow from or lend to other FHLBanks on a short-term uncollateralized basis. For 2015, 2014 and 2013, there was no borrowing or lending activity between the Bank and other FHLBanks.

Subject to mutually agreed upon terms, on occasion an FHLBank may transfer at fair value its primary debt obligations to another FHLBank, which becomes the primary obligor on the transferred debt upon completion of the transfer. During 2014, the Bank assumed the debt of FHLBank New York with a par value of $59.0 million and fair value of $65.6 million. During 2015 and 2013, there were no transfers of debt between the Bank and another FHLBank.

From time to time, a member of one FHLBank may be acquired by a member of another FHLBank. When such an acquisition occurs, the two FHLBanks may agree to transfer at fair value the loans of the acquired member to the FHLBank of the surviving member. The FHLBanks may also agree to the purchase and sale of any related hedging instrument. The Bank had no such activity during 2015, 2014 and 2013.


146

Notes to Financial Statements (continued)

Note 19– Estimated Fair Values

Fair value amounts have been determined by the Bank using available market information and appropriate valuation methods. These estimates are based on recent market data and other pertinent information available to the Bank at December 31, 2015 and 2014. Although the management of the Bank believes that the valuation methods are appropriate and provide a reasonable determination of the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values are not necessarily equal to the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how a market participant would estimate the fair values.

The carrying value and estimated fair value of the Banks’ financial instruments at December 31, 2015 and 2014 are presented in the table below.
Fair Value Summary Table
 
December 31, 2015
(in thousands)
Carrying
Value
Level 1
Level 2
Level 3
Netting Adjust. (2)
Estimated
Fair Value
Assets:
 

 
 
 
 
 

Cash and due from banks
$
2,376,964

$
2,376,964

$

$

$

$
2,376,964

Interest-bearing deposits
6,075


6,075



6,075

Federal funds sold
3,980,000


3,979,884



3,979,884

Securities purchased under agreement to resell
1,000,000


999,984



999,984

Trading securities
394,737

5,442

389,295



394,737

AFS securities
8,099,894

1,998

7,265,988

831,908


8,099,894

HTM securities
2,663,304


2,171,206

512,865


2,684,071

Advances
74,504,776


74,434,577



74,434,577

Mortgage loans held for portfolio, net
3,086,855


3,219,846



3,219,846

BOB loans, net
11,276



11,276


11,276

Accrued interest receivable
107,345


107,345



107,345

Derivative assets
65,855


70,478


(4,623
)
65,855

Liabilities:
 

 
 
 
 
 
Deposits
$
685,937

$

$
685,951

$

$

$
685,951

Discount notes
42,276,815


42,269,700



42,269,700

Bonds
48,605,982


48,660,776



48,660,776

Mandatorily redeemable capital stock (1)
6,053

6,130




6,130

Accrued interest payable (1)
92,765


92,688



92,688

Derivative liabilities
42,508


331,738


(289,230
)
42,508


147

Notes to Financial Statements (continued)


 
December 31, 2014
(in thousands)
Carrying
Value
Level 1
Level 2
Level 3
Netting Adjust. (2)
Estimated
Fair Value
Assets:
 
 
 
 
 
 
Cash and due from banks
$
2,451,131

$
2,451,131

$

$

$

$
2,451,131

Interest-bearing deposits
6,782


6,782



6,782

Federal funds sold
4,585,000


4,584,981



4,584,981

Trading securities
281,016

4,721

276,295



281,016

AFS securities
8,408,835

1,998

7,424,055

982,782


8,408,835

HTM securities
3,246,788


2,600,638

685,909


3,286,547

Advances
63,408,355


63,471,078



63,471,078

Mortgage loans held for portfolio, net
3,123,334


3,312,186



3,312,186

BOB loans, net
11,567



11,567


11,567

Accrued interest receivable
86,109


86,109



86,109

Derivative assets
36,217


111,772


(75,555
)
36,217

Liabilities:
 
 
 
 
 
 
Deposits
$
641,180

$

$
641,183

$

$

$
641,183

Discount notes
37,058,118


37,059,347



37,059,347

Bonds
43,714,510


43,881,951



43,881,951

Mandatorily redeemable capital stock (1)
586

705




705

Accrued interest payable (1)
103,151


103,032



103,032

Derivative liabilities
58,964


467,685


(408,721
)
58,964

Notes:
(1) The estimated fair value amount for the mandatorily redeemable capital stock line item includes accrued dividend interest; this amount is excluded from the estimated fair value for the accrued interest payable line item.
(2) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed by the Bank with the same clearing agent and/or counterparties.

Fair Value Hierarchy. The fair value hierarchy is used to prioritize the inputs used to measure fair value for those assets and liabilities carried at fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of the market observability of the fair value measurement for the asset or liability.

The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:

Level 1 Inputs - Quoted prices (unadjusted) for identical assets or liabilities in an active market that the 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 or in which little information is released publicly; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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

The Bank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. These reclassifications are reported as transfers in/out as of the beginning of the quarter in which the changes occur. There were no such transfers during 2015 and 2014.


148

Notes to Financial Statements (continued)

Summary of Valuation Methodologies and Primary Inputs

Cash and Due from Banks. The fair values equal the carrying values.

Interest-Bearing Deposits. The fair value is determined by calculating the present value of the future cash flows. The discount rates used in these calculations are the rates for interest-bearing deposits with similar terms. These instruments’ maturity term is overnight.

Federal Funds Sold. The fair value of Federal funds sold is determined by calculating the present value of the future cash flows. The discount rates used in these calculations are the rates for Federal funds with similar terms. These instruments’ maturity term is overnight.

Securities Purchased Under Agreements to Resell. The fair values are determined by calculating the present value of the future cash flows. The discount rates used in these calculations are the rates for securities with similar terms. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. There were no offsetting liabilities related to these securities at December 31, 2015. These instruments’ maturity term is overnight.

Investment Securities – non-MBS. The Bank uses the income approach to determine the estimated fair value of non-MBS investment securities. The significant inputs include a market-observable interest rate curve and a discount spread, if applicable. The market-observable interest rate curves used by the Bank and the related instrument types they measure are as follows:

Treasury curve: U.S. Treasury obligations
LIBOR Swap curve: certificates of deposit
CO curve: GSEs, state and local agency, and other U.S. obligations

Investment Securities – MBS.  To value MBS holdings, the Bank obtains prices from four 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. Since 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, as applicable. Each pricing vendor has an established challenge process in place for all MBS valuations, which facilitates resolution of potentially erroneous prices identified by the Bank.

During the year, the Bank conducts reviews of the four pricing vendors to enhance its understanding of the vendors' pricing processes, methodologies and control procedures for agency and private label MBS. To the extent available, the Bank also reviews the vendors' independent auditors' reports regarding the internal controls over their valuation processes.

The Bank's valuation technique first requires the establishment of a median price for each security. All prices that are within a specified tolerance threshold of the median price are included in the cluster of prices that are averaged to compute a default price. Prices that are outside the threshold (outliers) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. If, on the other hand, the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security. If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
 
The Bank also reviewed the final fair value estimates of its private label MBS holdings as of December 31, 2015 for reasonableness using an implied yield test. On certain securities, the Bank calculated an implied yield using the estimated fair value derived from the process described above and the security’s projected cash flows from the Bank’s OTTI process and compared such yield to the market yield to dealer sources to the extent comparable market yield data was available. This analysis did not indicate that any adjustments to the fair value estimates were necessary.


149

Notes to Financial Statements (continued)

As of December 31, 2015, four vendor prices were received for a majority of the Bank’s MBS holdings, and the final prices for nearly all of those securities were computed by averaging the four prices. Based on the Bank’s reviews of the pricing methods including inputs and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers or significant yield variances, the Bank’s additional analyses), the Bank believes the final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further that the fair value measurements are classified appropriately in the fair value hierarchy. There continues to be unobservable inputs and a lack significant market activity for private label MBS; therefore, as of December 31, 2015, the Bank classified private label MBS as Level 3.

Mutual Funds Offsetting Deferred Compensation and Employee Benefit Plan Obligations. Fair values for publicly traded mutual funds are based on quoted market prices.

Advances. The Bank determines the fair value by calculating the present value of expected future cash flows from the advances. The discount rates used in these calculations are equivalent to the replacement advance rates for advances with similar terms. The inputs used to determine fair value of advances are the LIBOR curve, a volatility assumption for advances with optionality, and a spread adjustment.

Mortgage Loans Held For Portfolio. The fair value is determined based on quoted market prices for new MBS issued by U.S. GSEs. Prices are then adjusted for differences in coupon, seasoning and credit quality between the Bank’s mortgage loans and the referenced MBS. The prices of the referenced MBS are highly dependent upon the underlying prepayment assumptions priced in the secondary market.

Accrued Interest Receivable and Payable. The fair values approximate the carrying values.

Derivative Assets/Liabilities. The Bank bases the fair values of derivatives with similar terms on market prices, when available. However, market prices do not exist for many types of derivative instruments. Consequently, fair values for these instruments are estimated using standard valuation techniques such as discounted cash flow analysis and comparisons to similar instruments. Estimates developed using these methods are highly subjective and require judgment regarding significant matters such as the amount and timing of future cash flows, volatility of interest rates and the selection of discount rates that appropriately reflect market and credit risks.

The Bank is subject to credit risk on uncleared derivatives transactions due to the potential nonperformance by the derivatives counterparties. To mitigate this risk, the Bank has entered into netting arrangements for its uncleared derivative transactions. In addition, the Bank has entered into uncleared security agreements with all active derivatives counterparties that provide for delivery of collateral at specified levels tied to those counterparties’ credit ratings to limit the Bank’s net unsecured credit exposure to these counterparties. For cleared derivatives, the Bank’s credit risk exposure is mitigated because a central counterparty is substituted for individual counterparties and collateral is posted daily for changes in the value of cleared derivatives. The Bank has evaluated the potential for the fair value of the instruments to be affected 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 Bank’s derivative assets and liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. The fair values of derivatives are netted by clearing agent and/or by counterparty pursuant to the provisions of each of the Bank’s netting agreements. If these netted amounts are positive, they are classified as an asset, and, if negative, as a liability.

The discounted cash flow analysis used to determine the fair value of derivative instruments utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). Inputs by class of derivative are as follows:

Interest-rate related:
Discount rate assumption. Overnight Index Swap (OIS) curve.
Forward interest rate assumption. LIBOR Swap Curve.
Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

Mortgage delivery commitments:
To Be Announced (TBA) securities prices. Market-based prices of TBAs are determined by coupon class and expected term until settlement.

150

Notes to Financial Statements (continued)


BOB Loans. The fair value approximates the carrying value.

Deposits. The Bank determines the fair value by calculating the present value of expected future cash flows from the deposits. The discount rates used in these calculations are the cost of deposits with similar terms. Substantially all of these instruments’ maturity terms are overnight.

Consolidated Obligations. The Bank’s internal valuation model determines fair values of consolidated obligations bonds and discount notes by calculating the present value of expected cash flows using market-based yield curves. The inputs used to determine fair value of consolidated obligations are a CO curve and a LIBOR swap curve, a volatility assumption for consolidated obligations with optionality, and a spread adjustment. The OF constructs an internal curve, referred to as the CO curve, using the U.S. Treasury curve as a base curve that is then adjusted by adding indicative spreads obtained from market observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, recent GSE trades and secondary market activity.

Mandatorily Redeemable Capital Stock. The fair value of capital stock subject to mandatory redemption is generally its par value plus estimated dividends at the time of reclassification and any subsequently estimated dividend. FHLBank stock is not traded and no market mechanism exists for the exchange of stock outside the FHLBank System’s cooperative structure.

Commitments. For fixed-rate loan commitments, fair value considers the difference between current levels of interest rates and the committed rates. The Bank issues standby letters of credit for a fee. The unamortized fee is the letter of credit’s carrying value and represents its fair value. The fair value of the Bank’s commitments to extend credit for advances and letters of credit was immaterial at December 31, 2015 and 2014.

Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methods described above are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates. These estimates are susceptible to material near term changes because they are made as of a specific point in time.


151

Notes to Financial Statements (continued)

Fair Value Measurements. The following tables present, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on a recurring or non-recurring basis on its Statements of Condition at December 31, 2015 and 2014. The Bank measures certain mortgage loans held for portfolio at fair value when a charge-off is recognized. Real estate owned is measured using fair value when the assets' fair value less costs to sell is lower than the carrying amount.
 
December 31, 2015
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment(1) 
 
Total
Recurring fair value measurements - Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 

 
 

 
 

 
 

 
 

GSE and TVA obligations
$

 
$
389,295

 
$

 
$

 
$
389,295

Mutual funds
5,442

 

 

 

 
5,442

Total trading securities
$
5,442

 
$
389,295

 
$

 
$

 
$
394,737

AFS securities:
 

 
 

 
 

 
 

 
 

GSE and TVA obligations
$

 
$
3,469,205

 
$

 
$

 
$
3,469,205

State or local agency obligations

 
134,120

 

 

 
134,120

Mutual funds
1,998

 

 

 

 
1,998

   Other U.S. obligations single family MBS

 
268,536

 

 

 
268,536

   GSE single family MBS

 
2,383,630

 

 

 
2,383,630

   GSE multifamily MBS

 
1,010,497

 

 

 
1,010,497

  Private label MBS:
 
 
 
 
 
 
 
 
 
Private label residential MBS

 

 
822,740

 

 
822,740

HELOCs

 

 
9,168

 

 
9,168

Total AFS securities
$
1,998

 
$
7,265,988

 
$
831,908

 
$

 
$
8,099,894

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest rate related
$

 
$
70,225

 
$

 
$
(4,623
)
 
$
65,602

Mortgage delivery commitments

 
253

 

 

 
253

Total derivative assets
$

 
$
70,478

 
$

 
$
(4,623
)
 
$
65,855

Total recurring assets at fair value
$
7,440

 
$
7,725,761

 
$
831,908

 
$
(4,623
)
 
$
8,560,486

Recurring Fair Value Measurements - Liabilities
 

 
 

 
 

 
 

 
 

Derivative liabilities:
 

 
 

 
 

 
 

 
 

Interest rate related
$

 
$
331,738

 
$

 
$
(289,230
)
 
$
42,508

Total recurring liabilities at fair value (2)
$

 
$
331,738

 
$

 
$
(289,230
)
 
$
42,508

Non-recurring fair value measurements - Assets
 
 
 
 
 
 
 
 
 
Impaired mortgage loans held for portfolio (3)
$

 
$

 
$
32,294

 
$

 
$
32,294

Real estate owned (3)

 

 
8,175

 

 
8,175

Total non-recurring assets at fair value
$

 
$

 
$
40,469

 
$

 
$
40,469

 

152

Notes to Financial Statements (continued)

 
December 31, 2014
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment(1) 
 
Total
Recurring fair value measurements - Assets:
 

 
 

 
 

 
 

 
 

Trading securities:
 

 
 

 
 

 
 

 
 

GSE and TVA Obligations
$

 
$
276,295

 
$

 
$

 
$
276,295

Mutual funds
4,721

 

 

 

 
4,721

Total trading securities
$
4,721

 
$
276,295

 
$

 
$

 
$
281,016

AFS securities:
 

 
 

 
 

 
 

 
 

GSE and TVA securities
$

 
$
3,233,703

 
$

 
$

 
$
3,233,703

State or local agency obligations

 
98,984

 

 

 
98,984

Mutual funds
1,998

 

 

 

 
1,998

   Other U.S. obligations single family MBS

 
329,379

 

 

 
329,379

   GSE single family MBS

 
2,882,162

 

 

 
2,882,162

   GSE multifamily MBS

 
879,827

 

 

 
879,827

  Private label MBS:
 
 
 
 
 
 
 
 
 
Private label residential MBS

 

 
971,083

 

 
971,083

HELOCs

 

 
11,699

 

 
11,699

Total AFS securities
$
1,998

 
$
7,424,055

 
$
982,782

 
$

 
$
8,408,835

Derivative assets:
 
 
 
 
 
 
 
 
 
      Interest rate related
$

 
$
111,338

 
$

 
$
(75,555
)
 
$
35,783

      Mortgage delivery commitments

 
434

 

 

 
434

Total derivative assets
$

 
$
111,772

 
$

 
$
(75,555
)
 
$
36,217

Total recurring assets at fair value
$
6,719

 
$
7,812,122

 
$
982,782

 
$
(75,555
)
 
$
8,726,068

Recurring Fair Value Measurements - Liabilities
 

 
 

 
 

 
 

 
 

Derivative liabilities:
 

 
 

 
 

 
 

 
 

      Interest rate related
$

 
$
467,685

 
$

 
$
(408,721
)
 
$
58,964

Total recurring liabilities at fair value (2)
$

 
$
467,685

 
$

 
$
(408,721
)
 
$
58,964

Note:
(1)Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held or placed by the Bank with the same clearing agent and/or counterparties.
(2) Derivative liabilities represent the total liabilities at fair value.
(3) These amounts were immaterial for the year ended December 31, 2014. The estimated fair values of impaired mortgage loans held for portfolio and real estate owned are determined based on values provided by a third party's retail-based AVM. The Bank adjusts the AVM value based on the amount it has historically received on liquidation.

There were no transfers between Levels 1 or 2 during 2015 or 2014.


153

Notes to Financial Statements (continued)

Level 3 Disclosures for all Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis. The following table presents a reconciliation of all assets and liabilities that are measured at fair value on the Statements of Condition using significant unobservable inputs (Level 3)  for the years ended December 31, 2015, 2014 and 2013. For instruments carried at fair value, the Bank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value in the quarter in which the changes occur and transfers are reported as of the beginning of the period. During 2015, the Bank transferred three private label MBS from its HTM portfolio to its AFS portfolio, in the period in which the OTTI charge was recorded. There were no Level 3 transfers during 2014 and 2013.
(in thousands)
AFS Private
Label MBS-Residential
Year Ended
December 31, 2015
AFS Private
Label MBS- HELOCs
Year Ended
December 31, 2015
Balance at January 1
$
971,083

$
11,699

Total gains (losses) (realized/unrealized) included in:
 
 
Accretion of credit losses in interest income
18,479

1,382

Net OTTI losses, credit portion
(894
)

Net unrealized (losses) on AFS in OCI
(46
)

Reclassification of non-credit portion included in net income
509


Net change in fair value on OTTI AFS in OCI
1,185


Unrealized (losses) on OTTI AFS in OCI
(20,651
)
(859
)
Purchases, issuances, sales, and settlements:
 
 
Settlements
(157,211
)
(3,054
)
Transfer of OTTI securities from HTM to AFS
10,286


Balance at December 31
$
822,740

$
9,168

Total amount of gains for the period presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at December 31, 2015
$
17,585

$
1,382

(in thousands)
AFS Private
Label MBS-Residential
Year Ended
December 31, 2014
AFS Private
Label MBS-HELOCs
Year Ended
December 31, 2014
Balance at January 1
$
1,123,624

$
14,428

Total gains (losses) (realized/unrealized) included in:
 
 
Accretion of credit losses in interest income
12,864

1,415

Net unrealized (losses) on AFS in OCI
(127
)

Net change in fair value on OTTI AFS in OCI
2,804

109

Unrealized gains on OTTI AFS in OCI
14,298

(402
)
Purchases, issuances, sales, and settlements:
 
 
Settlements
(182,380
)
(3,851
)
Transfer of OTTI securities from HTM to AFS


Balance at December 31
$
971,083

$
11,699

Total amount of gains for the period presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at December 31, 2014
$
12,864

$
1,415



154

Notes to Financial Statements (continued)

(in thousands)
AFS Private
Label MBS-Residential
Year Ended
December 31, 2013
AFS Private
Label MBS-HELOCs
Year Ended
December 31, 2013
Balance at January 1
$
1,410,476

$
14,758

Total gains (losses) (realized/unrealized) included in:
 
 
Accretion of credit losses in interest income
(538
)
873

Net OTTI losses, credit portion
(345
)
(97
)
Net unrealized gains on AFS in OCI
204


      Reclassification of non-credit portion included in net income
345

97

Net change in fair value on OTTI AFS in OCI
25,073

326

Unrealized gains on OTTI AFS in OCI
30,574

2,228

Purchases, issuances, sales, and settlements:
 
 
Settlements
(342,165
)
(3,757
)
Balance at December 31
$
1,123,624

$
14,428

Total amount of gains (losses) for the period presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at December 31, 2013
$
(883
)
$
776


Note 20 – Commitments and Contingencies

The following table presents the Bank’s various off-balance sheet commitments which are described in detail below.
(in thousands)
December 31, 2015
December 31, 2014
Notional amount
Expiration Date Within One Year
 
Expiration Date After One Year (3)
 
Total
Total
Standby letters of credit outstanding (1) (2)
$
20,171,604

 
$

 
$
20,171,604

$
19,942,125

Commitments to fund additional advances and BOB loans
405,634

 
75,000

 
480,634

21,124

Commitments to fund or purchase mortgage loans
9,950

 

 
9,950

18,308

Unsettled consolidated obligation bonds, at par (3)
261,000

 

 
261,000

95,530

Unsettled consolidated obligation discount notes, at par

 

 

500,000

Notes:
(1) Excludes approved requests to issue future standby letters of credit of $136.4 million and $146.8 million at December 31, 2015 and 2014, respectively.
(2) $5.5 billion of these letters of credit have annual renewal language that, as long as both parties agree, permit the letter of credit to be renewed for an additional year with a maximum renewal period of 5 years.
(3) Includes $115.0 million and $83.1 million of consolidated obligation bonds which were hedged with associated interest rate swaps at December 31, 2015 and 2014, respectively.

Commitments to Extend Credit on Standby Letters of Credit, Additional Advances and BOB Loans. Standby letters of credit are issued on behalf of members for a fee. A standby letter of credit is a financing arrangement between the Bank and its member. If the Bank is required to make payment for a beneficiary’s draw, these amounts are withdrawn from the member’s Demand Deposit Account (DDA). Any remaining amounts not covered by the withdrawal from the member’s DDA are converted into a collateralized advance.

Unearned fees related to standby letters of credit are recorded in other liabilities and had a balance of $5.7 million and $4.8 million as of 2015 and 2014, respectively. The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of the member. The Bank has established parameters for the review, assessment, monitoring and measurement of credit risk related to these standby letters of credit.

Based on management’s credit analyses, collateral requirements, and adherence to the requirements set forth in Bank policy and Finance Agency regulations, the Bank has not recorded any additional liability on these commitments and standby letters of credit. Excluding BOB, commitments and standby letters of credit are collateralized at the time of issuance. The Bank records a liability with respect to BOB commitments, which is reflected in other liabilities on the Statements of Condition.


155

Notes to Financial Statements (continued)

The Bank does not have any legally binding or unconditional unused lines of credit for advances at December 31, 2015 and 2014. However, within the Bank’s Open RepoPlus advance product, there were conditional lines of credit outstanding of $7.4 billion at both December 31, 2015 and 2014 respectively.

Commitments to Fund or Purchase Mortgage Loans. The Bank may enter into commitments that unconditionally obligate the Bank to purchase mortgage loans under the MPF program. These delivery commitments are generally for periods not to exceed 45 days. Such commitments are recorded as derivatives.

Pledged Collateral. The Bank may pledge cash and securities, as collateral, related to derivatives. Refer to Note 11 - Derivatives and Hedging Activities in this Form 10-K for additional information about the Bank's pledged collateral and other credit-risk-related contingent features.

Lease Commitments. The Bank charged to operating expense net rental costs of approximately $2.1 million for each of the years 2015, 2014, and 2013. Lease agreements for Bank 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 Bank. The table below presents the future minimum rentals for operating leases as of December 31, 2015.
 
December 31, 2015
(in thousands)
Premises and Equipment
2016
$
2,017

2017
1,975

2018
1,849

2019
1,829

2020
1,861

Thereafter
8,229

Total
$
17,760


Legal Proceedings. The Bank is subject to legal proceedings arising in the normal course of business. The Bank would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount can be reasonably estimated. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition, results of operations, or cash flows.

Notes 1, 8, 11, 14, 15, 16, and 18 also discuss other commitments and contingencies.

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

None

Item 9A: Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of the Bank’s management, including the chief executive officer, chief financial officer, and chief accounting officer, the Bank conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the 1934 Act). Based on this evaluation, the Bank’s chief executive officer, chief financial officer, and chief accounting officer concluded that the Bank’s disclosure controls and procedures were effective as of December 31, 2015.
Management’s Report on Internal Control Over Financial Reporting

See Item 8. Financial Statements and Supplementary Financial Data — Management’s Annual Report on Internal Control over Financial Reporting in this Form 10-K.


156



Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the fourth quarter of 2015 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

Item 9B: Other Information

None

PART III 

Item 10: Directors, Executive Officers and Corporate Governance

As required by the Housing Act, the Bank’s Board is comprised of a combination of industry directors elected by the Bank’s member institutions (Member Directors) on a state-by-state basis and independent directors elected by a plurality of the Bank’s members (Independent Directors). No member of the Bank’s management may serve as a director of an FHLBank. The Bank’s Board currently includes ten Member Directors and seven Independent Directors. The Housing Act requires that all of the Bank's Directors be elected by the Bank's members.

Nomination of Member Directors

Member Directors are required by statute and regulation to meet certain specific criteria in order to be eligible to be elected and serve as Bank Directors. To be eligible, an individual must: (1) be an officer or director of a Bank member institution located in the state in which there is an open Bank Director position; (2) the member institution must be in compliance with the minimum capital requirements established by its regulator; and (3) the individual must be a U.S. citizen. See 12 U.S.C. 1427 and 12 C.F.R. 1261 et. seq. These criteria are the only permissible eligibility criteria that Member Directors must meet. The FHLBanks are not permitted to establish additional eligibility criteria or qualifications for Member Directors or nominees. For Member Directors, each eligible institution may nominate representatives from member institutions in its respective state to serve four-year terms on the Board of the Bank. As a matter of statute and regulation, only FHLBank stockholders may nominate and elect Member Directors. FHLBank Boards are not permitted to nominate or elect Member Directors. Specifically, institutions, which are members required to hold stock in the Bank as of the record date (i.e., December 31 of the year prior to the year in which the election is held), are entitled to participate in the election process. With respect to Member Directors, under Finance Agency regulations, no director, officer, employee, attorney, or agent of the Bank (except in his/her personal capacity) may, directly or indirectly, support the nomination or election of a particular individual for a Member Directorship. Because of the laws and regulations governing FHLBank Member Director nominations and elections, an FHLBank does not know what factors the Bank’s member institutions consider in selecting Member Director nominees or electing Member Directors. Under 12 C.F.R. 1261.9, if an FHLBank’s Board has performed a self-assessment, then, in publishing the nomination or election announcement, that FHLBank can include a statement indicating to the FHLBank’s members participating in the election what skills or experience the Board believes would enhance the FHLBank’s Board. In 2015, the Bank included a statement in its nomination announcement that hedging/derivatives and insurance company experience, and candidate diversity, should be considered by members when nominating candidates for Member Directorships. In 2014, 2013 and 2012, the Bank followed this same process and included statements that diversity should be considered by members when nominating candidates for Member Directorships.

Nomination of Independent Directors

For the remainder of directors (referred to as Independent Directors), the members elect these individuals on a district-wide basis to four-year terms. Independent Directors cannot be officers or directors of a Bank member. Independent Director nominees must meet certain statutory and regulatory eligibility criteria and must have experience in, or knowledge of, one or more of the following areas: auditing and accounting, derivatives, financial management, organizational management, project development, and risk management practices. In the case of a public interest Independent Director nominee, such nominee must have four years’ experience representing consumer or community interests in banking services, credit needs, housing, or consumer financial protection. See 12 C.F.R. 1261.6.

Finance Agency regulations permit a Bank Director, officer, attorney, employee, or agent and the Bank’s Board and Advisory Council to support the candidacy of any person nominated by the Board for election to an Independent Directorship. Under the Finance Agency regulation governing Independent Directors, members are permitted to recommend candidates to be

157



considered by the Bank to be included on the nominee slate and the Bank maintains a standing notice soliciting nominations for Independent Director positions on its public website.

In 2015, the Bank’s Independent Director nomination notice included a statement encouraging members to consider diversity, and individuals with hedging/derivatives and insurance company experience. Prior to finalizing the Independent Director nominee slate, the Bank’s Board (or representatives thereof) is required to consult with the Bank’s Affordable Housing Advisory Council and the slate must be sent to the Finance Agency for its review.

In 2015, the Bank’s Board selected incumbent directors Mr. Darr and Ms. Godwin as Independent director nominees, based on a determination that they met the required regulatory qualifications (financial management experience). Additionally, Mr. Darr met the identified need for hedging/derivatives experience and Ms. Godwin met the identified need for insurance company experience. Mr. Darr was re-elected to the Bank’s Board in 2015 (for a term beginning January 2016) and his biographical information is set forth below. Ms. Godwin was re-elected to the Board in 2015 (for a term beginning January 2016) and her biographical information is set forth below.

In 2014, the Bank’s Board selected Mr. Brooks as the public interest Independent Director nominee, based on a determination that he met the required regulatory qualifications for a public interest director described above. Mr. Brooks was elected to the Bank’s Board in 2014 (for a term beginning January 2015) and his biographical information is set forth below.

In 2013, the Bank’s Board selected Ms. Yochem as an Independent Director nominee based on the determination that she met the regulatory qualifications (e.g. project management) and the Bank’s identified need for information technology experience. Ms. Yochem was elected to the Bank’s Board in 2013 (for a term beginning January 2014) and her biographical information is set forth below.

In 2013, the Bank’s Board selected Mr. Cortés as the Independent Director nominee based on a determination that he met the required regulatory qualifications (e.g., public interest director) described above.

In 2012, the Bank’s Board selected Mr. Bond and Mr. Hudson as public interest Independent Director nominees, based on a determination that they met the required regulatory qualifications for a public interest director described above. Mr. Bond and Mr. Hudson were re-elected to the Board in 2012 (for terms beginning January 2013) and their biographical information is set forth below.

2015 Member and Independent Director Elections

Voting rights and process with regard to the election of Member and Independent Directors are set forth in 12 U.S.C. 1427 and 12 C.F.R. 1261. For the election of both Member Directors and Independent Directors, each eligible institution is entitled to cast one vote for each share of stock that it was required to hold as of the record date (December 31 of the preceding year); however, the number of votes that each institution may cast for each directorship cannot exceed the average number of shares of stock that were required to be held by all member institutions located in that state on the record date. The only matter submitted to a vote of shareholders in 2015 was the election of vacant Member and Independent Directors, which occurred in the fourth quarter of 2015 as described above. The Bank conducted these elections to fill the open Member and Independent Directorships for 2015 designated by the Finance Agency. In 2015, the nomination and election of Member Directors and Independent Directors was conducted electronically. No meeting of the members was held in regard to the election. The Board of the Bank does not solicit proxies, nor are eligible institutions permitted to solicit or use proxies to cast their votes in an election for Member or Independent Directors. The election was conducted in accordance with 12 C.F.R. 1261. The Member Directors re-elected were: William C. Marsh and Pamela C. Asbury. Additionally, Gerald P. Plush was elected as a new Delaware Member Director. The Independent Directors re-elected were Mr. Darr and Ms. Godwin. Information about the results of the 2015 Member and Independent Director elections, including the votes cast, was reported in Form 8-K filed on November 23, 2015, included as Exhibit 22.1 to this Form 10-K.

Information Regarding Current FHLBank Directors

The following table sets forth certain information (ages as of February 29, 2016) regarding each of the Directors serving on the Bank’s Board, beginning on January 1, 2016. No Director of the Bank is related to any other Director or executive officer of the Bank by blood, marriage, or adoption.

158



Name
Age
Director Since
Term
Expires
Board
Committees
Patrick A. Bond (Independent) *
66
2007
2016
(a)(b)(c)(d)(e)(f)(g)(h)
John K. Darr (Vice Chair) (Independent) *
71
2008
2019
(a)(b)(c)(d)(e)(f)(g)(h)
Pamela C. Asbury (Member) ****
51
2015
2019
(a)(d)(h)
Glenn R. Brooks (Independent)
52
2015
2018
(a)(e)(h)
Rev. Luis A. Cortés, Jr. (Independent) **
58
2007
2017
(d)(c)(h)
Pamela H. Godwin (Independent)
66
2013
2019
(c)(f)(g)(h)
Brian A. Hudson (Independent)
61
2007
2016
(a)(f)(g)(h)
William C. Marsh (Member)
49
2012
2019
(b)(d)(h)
Charlotte B. McLaughlin (Member)
62
2011
2018
(b)(f)(g)(h)
Lynda A. Messick (Member) ***
63
2011
2018
(c)(e)(h)
John S. Milinovich (Member)
63
2009
2016
(c)(f)(g)(h)
Charles J. Nugent (Member)
67
2010
2017
(b)(e)(g)(h)
Gerald P. Plush (Member)
57
2016
2019
(b)(f)(h)
Bradford E. Ritchie (Member)
48
2011
2018
(a)(d)(h)
Frederick E. Schea (Member)
67
2013
2016
(b)(e)(h)
Patrick J. Ward (Member)
60
2007
2017
(c)(d)(g)(h)
Angela J. Yochem (Independent)
44
2014
2017
(a)(e)(h)
(a) Member of Audit Committee
(b) Member of Finance Committee
(c) Member of Governance and Public Policy Committee
(d) Member of Affordable Housing, Products and Services Committee
(e) Member of Operational Risk Committee
(f) Member of Human Resources Committee
(g) Member of Executive Committee
(h) Member of Enterprise Risk Management Committee

* Serves on the Executive Committee and Enterprise Risk Management Committee and as a nonvoting ex-officio member of other committees.
** Rev. Cortés served a previous term from 2002 to 2004 as an appointed director.
*** Ms. Messick was elected by the Board in 2011 to fill a seat vacated by Mr. Gibson for a term that ended December 31, 2011. She was again elected in June 2012 to fill a seat vacated by Mr. Mason for a term that ended December 31, 2014.
**** Ms. Asbury was elected in 2015 by the Board to fill a seat vacated by Mr. Prizzia for a term ending December 31, 2015, as reported on Form 8-K filed by the Bank on January 29, 2015.

Patrick A. Bond (Chair). Patrick Bond joined the Board of Directors of the Bank in May 2007. He is a Founding General Partner of Mountaineer Capital, LP in Charleston, West Virginia. He graduated with a BS in Industrial Engineering and an MS in Industrial Engineering from West Virginia University. He is a former President of the West Virginia Symphony Orchestra, former Chairman of the Board of Charleston Area Alliance, Chairman of the Board of Directors of Mid-Atlantic Holdings, and a former member of the Bank’s Affordable Housing Advisory Council.

John K. Darr (Vice Chair). John Darr joined the Board of Directors of the Bank in January 2008. Mr. Darr retired from the FHLBanks’ Office of Finance at the end of 2007 where he served as CEO and Managing Director for 15 years. He was responsible for issuing debt in the global capital markets on behalf of the FHLBanks, consistent with their mission of providing low-cost liquidity for member-owner financial institutions. He also was responsible for issuing the FHLBank System’s Combined Financial Statement and was intimately involved in the FHLBank System’s SEC Registration process. Mr. Darr has a total of 45 years of business experience, including several years as Treasurer of FHLBank San Francisco, serving as a control officer of three member institutions, and as CFO of Sallie Mae, CEO of a registered investment management company, and Managing Director of Mortgage Finance at a securities dealer. In addition to his service on the Board of FHLBank Pittsburgh, Mr. Darr is a Trustee of a mutual fund complex serving as a Trustee of Advisors Inner Circle Fund I, Advisors Inner Circle Fund II, and Bishop Street Funds. Mr. Darr also serves as a Director of two non-profit entities, including Meals on Wheels, Lewes/Rehoboth and the West Rehoboth Land Trust.

Pamela C. Asbury. Pamela Asbury joined the Board of Directors of the Bank in January 2015. Ms. Asbury is Vice President of the U.S. life insurance companies of Genworth Financial, Inc., including Genworth Life Insurance Company and has over 29 years of experience in the insurance industry. She is an active member of insurance industry committees including

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the American Council of Life Insurers and has served as past chair of the LOMA Group Pension and Investment Products Committee and as a member of the Stable Value Investment Association. Ms. Asbury received her undergraduate degree from Virginia Commonwealth University’s School of Business and is a certified Six Sigma Black Belt under the GE Capital Project Management Program.

Glenn R. Brooks. Glenn Brooks joined the Board of Directors of the Bank in January 2015. He is the Chief Operating Officer and Senior Vice President of Leon N. Weiner & Associates, Inc., a Wilmington, Delaware based home-building, development and property management firm. The Weiner organization and its affiliated companies have developed and constructed more than 4,500 homes and 9,000 apartments as well as several hotels, office and retail properties. He is responsible for the Weiner organization’s development activities and is a member of the firm’s Board of Directors. He has been employed by the firm since 1986. Mr. Brooks served on the Bank’s Affordable Housing Advisory Council between 2004 and 2012. He served as Vice Chairman of the Council in 2006 and 2007 and as Chairman from 2008 to 2010. Mr. Brooks sits on the Multifamily Board of Trustees and is Chairman of the Housing Credit Group of the National Association of Homebuilders. He is also a member of the Steering Team of Grove United Methodist Church in West Chester, Pennsylvania. He holds a Bachelor of Business Degree from the College of William and Mary in Virginia.

Luis A. Cortés, Jr. Luis Cortés joined the Board of Directors of the Bank in April 2007. Reverend Cortés has served as the President and CEO of Esperanza since its inception in 1986. Esperanza is the largest Hispanic faith-based organization in the country. The not-for-profit corporation has over 340 employees and manages a $39 million budget. The organization is networked with over twelve thousand Latino congregations in the United States. He is also President Emeritus of Hispanic Clergy of Philadelphia, a religious organization. He has served as a Board member of the Bank from 2002 through 2004, which included his serving as Vice Chairman of the Board. He also serves on the Board of The Cancer Treatment Centers of America, a privately held cancer hospital as well as on the Board of the Kimmel Center in Philadelphia. He developed housing and commercial real estate in the millions of dollars in inner city communities and has published several books, two of which are focused on financial literacy.

Pamela H. Godwin. Pamela Godwin joined the Board of Directors of the Bank in January 2013. Pamela Godwin is President of Change Partners, Inc. an executive coaching and change management consulting firm. Previously, she was President and Chief Operating Officer of GMAC Insurance Personal Lines-Agency Division. Ms. Godwin is a director of Unum Group (NYSE) where she is Chair of the Governance Committee and a member of the Risk and Finance Committee. She is a 2011 NACD Board Leadership Fellow and serves on the board of the Philadelphia Chapter of NACD. Ms. Godwin is currently a member of the Board of Pathways PA. She is a member of Women Corporate Directors, the Committee of 200 and Philadelphia’s Forum of Executive Women, of which she is past President. A Phi Beta Kappa graduate of Pennsylvania State University, Ms. Godwin also holds the Chartered Property and Casualty Underwriter designation (CPCU).

Brian A. Hudson. Brian Hudson joined the Board of Directors of the Bank in May 2007. Mr. Hudson is currently the Executive Director and Chief Executive Officer of Pennsylvania Housing Finance Agency (PHFA) in Harrisburg, Pennsylvania. He has a BA from Pennsylvania State University. He is a CPA and a Certified Treasury Professional (CTP). He is a member and past President of the Board of National Council of State Housing Agencies, Chair of Commonwealth Cornerstone Group, Board member of National Housing Trust, and former member of the Federal Reserve Consumer Advisory Council.

William C. Marsh. William Marsh joined the Board of Directors of the Bank in January 2012. Since January 2009 he has been Chairman of the Board, President and Chief Executive Officer of Emclaire Financial Corp. and The Farmers National Bank of Emlenton. Prior to that he served as Executive Vice President and Chief Financial Officer of these entities since June 2006. Mr. Marsh has served as the chief financial officer and executive of a number of publicly-traded bank holding companies since 1994. Prior to that he served as an audit manager with the international accounting firm, KPMG. Mr. Marsh is a CPA.

Charlotte B. McLaughlin. Charlotte McLaughlin joined the Board of Directors of the Bank in January 2010. Ms. McLaughlin is Executive Vice President of PNC Bank, N.A. and President and Chief Executive Officer of PNC Capital Markets, LLC. Ms. McLaughlin is responsible for all aspects of PNC’s capital markets business, including product strategy, sales, risk management, and financial accountability. Ms. McLaughlin is also responsible for the Financial Institutions group. Ms. McLaughlin has over 35 years of banking and securities industry experience. She joined PNC’s Corporate Banking business in July 1996 as senior vice president and managing director, responsible for the Derivatives Trading and Foreign Exchange groups. In August 2001, she assumed responsibility for the fixed income sales and trading area. She was named to her current position in July 2002. Prior to joining PNC, Ms. McLaughlin served as manager of Global Rate Risk Management Products for Mellon Bank. She is a director of the ABA Securities Association, Inc. in Washington, D.C., director and executive committee member for the National Futures Association, and is a member of the external advisory board for Penn

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State Schreyer Honors College. Ms. McLaughlin received her BS degree from Pennsylvania State University in 1975 and received a master's degree in finance from the University of Pittsburgh in 1981.

Lynda A. Messick. Lynda Messick joined the Board of Directors of the Bank in 2012 to serve the remainder of the term of a Delaware Director whose bank was acquired. She is a Director of County Bank and was formerly the President and CEO of Community Bank Delaware since 2006, and was formerly the President of Delaware National Bank, a community bank she helped found in 1979. Ms. Messick is Chair of the Nanticoke Health Services board, a nonprofit health care provider in Sussex County Delaware. She also served on the Sussex County Pension committee and is a former board member of the American Red Cross of the Delmarva Peninsula, the United Way of Delaware, Junior Achievement of Delaware, the Rehoboth Beach Film Society, and the friends of the Lewes Canalfront Park. She is also treasurer of Micronics Inc. Board of Directors, a privately held water technology company. She is a former member of the Delaware Bankers' Association Board and the Independent Community Bankers Association of America (ICBAA) board. Ms. Messick also serves as a director of Atlantic Community Bankers Bank.

John S. Milinovich. John Milinovich joined the Board of Directors of the Bank in January 2009. Mr. Milinovich is Executive Vice President, Treasurer, and CFO of Washington Financial Bank. Mr. Milinovich's 41-year career combines strong financial expertise with 16 years of banking experience gained through executive level finance, operations, and strategic planning functions and 25 years of public accounting experience, including audit, tax, and management consulting services. At Washington Financial Bank, Mr. Milinovich provides a leadership role for the Senior Management Group, manages the financial reporting process and investment portfolios for the bank and its subsidiaries, heads up the annual budget process and oversees the Asset/Liability Management, Cash Management, Treasury and Liquidity processes. Mr. Milinovich has broad public accounting experience which spans from an international accounting firm (Ernst & Ernst - now Ernst & Young) to a number of medium-sized local CPA firms, including his own firm for over ten years. He also has experience serving as an independent Bank Director for a community bank. Mr. Milinovich holds a BS degree in Accounting from Duquesne University and has continuously maintained his CPA license in Pennsylvania from 1976 to present. He has completed the graduate-level America's Community Bankers - National School of Banking program at Fairfield University, where he received the prestigious Chairman's Award for leadership ability and academic excellence. Over the past few years, Mr. Milinovich has served as the past Chairman of the Washington County Chamber of Commerce, on the Steering Committee of the Southwestern PA Growth Alliance, the Board of Directors of the Southwest Corner Workforce Investment Board, the Board of Governors of the Pennsylvania Economy League - Western Division, as Chairman of the Washington County Branch of the Pennsylvania Economy League, as Treasurer and Board Member of the United Way of Washington County, as Chairman of the PICPA State Continuing Professional Education Committee and as a Committee member of the PICPA State Education Committee. In 2014, Mr. Milinovich received the NACD Board Leadership Fellow designation.

Charles J. Nugent. Charles Nugent joined the Board of Directors of the Bank in January 2010. Mr. Nugent is Vice President of Fulton Bank, N.A. Through December 2013, he also served as Senior Executive Vice President and Chief Financial Officer of Fulton Financial Corporation. Prior to joining Fulton in 1992, he served for eight years as the Chief Financial Officer of First Peoples Financial Corporation in New Jersey. Earlier in his career, he worked for Philadelphia National Corporation and Price Waterhouse. He has been active in a variety of community activities, having served on the Boards of Directors of St. Joseph’s Hospital of Lancaster, the United Way of Lancaster County, the Susquehanna Association for the Blind and Vision Impaired, the Lancaster Symphony Orchestra, the Hamilton Club of Lancaster and the YMCA of Lampeter Strasburg. Mr. Nugent earned a BS degree in Business Administration from LaSalle University. He is a CPA.

Gerald P. Plush. Gerald Plush joined the Board of Directors of the Bank in January 2016. Mr. Plush joined Santander in April of 2014 as Chief Financial Officer of Santander Holdings US (SHUSA), and is a Senior Executive Vice President of Santander Bank, NA. He currently serves as a member of the SHUSA Executive Management Committee and as a director for Santander Consumer USA. Prior to joining Santander, Mr. Plush served as President and Chief Operating Officer of Webster Bank, where he previously served as CFO and Chief Risk Officer and was a member of the board of directors. Prior to Webster Bank, he worked at MBNA America, most recently as Senior Executive Vice President and Managing Director for corporate development and acquisitions, where he also previously served in a number of senior roles, including as CFO - North America.

Bradford E. Ritchie. Bradford Ritchie joined the Board of Directors of the Bank in January 2011. Mr. Ritchie is currently the President of Summit Community Bank. Prior to joining Summit Community Bank he served as the President of Charleston Market of United Bank Inc. until July 2008. Before then, Mr. Ritchie spent seven years at Arnett & Foster, a West Virginia CPA firm. Mr. Ritchie is a graduate of West Virginia University with a degree in Business Administration/Accounting. He is a CPA and is a member of the Board of Directors of the West Virginia Society of Certified Public Accountants. Mr. Ritchie serves on the Board of Trustees of the University of Charleston and is a past director of the United Way of Central West Virginia and the Community Council of Charleston.


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Frederick E. Schea. Frederick Schea joined the Board of Directors of the Bank in January 2013. Mr. Schea serves on the Board of Penn Community Bank. He retired as the President and Chief Executive Officer of First Savings Bank of Perkasie, Perkasie, Pennsylvania in 2015. Mr. Schea joined First Savings Bank in December 2005. He previously served as the Chief Financial Officer of several financial institutions. Mr. Schea earned a Bachelor’s degree in Finance and an MBA from Lehigh University. He is a licensed CPA and Certified Management Accountant who served as global Chair of the Institute of Management Accountants. Mr. Schea serves on the Board of Directors of Pearl S. Buck International, Bucks County Community College Foundation (Chair), Doylestown Hospital, and the Lutheran Community at Telford (Chair). He is the past Council President of the Washington Crossing Council, Boy Scouts of America, and Trustee for Chalfont Chemical Fire Engine Company No. 1. He is also an Advisory Board member for Bucks County Habitat for Humanity, Board Member and Treasurer of the James A. Michener Art Museum, and Trustee for the Central Bucks Family YMCA.

Patrick J. Ward. Patrick Ward joined the Board of Directors of the Bank in January 2007. Mr. Ward is currently Chairman and Chief Executive Officer of Penn Liberty Bank. Mr. Ward has more than 20 years of experience in the banking industry, including executive experience with Citizens Bank of Pennsylvania and Commonwealth Bancorp in Malvern, Pennsylvania. He also held a variety of positions at Mellon Bank. Mr. Ward is a graduate of Carnegie Mellon University with a degree in Economics and earned his MBA at The University of Notre Dame. He serves on the Boards of Directors of the Philadelphia Police Athletic League, EconomicsPennsylvania, and the Chester County Chamber Foundation.

Angela J. Yochem. Angela Yochem joined the Board of Directors of the Bank in January 2014. She is the Global Chief Information Officer of BDP International, a privately-held global transportation and logistics management firm, where she is responsible for the company’s technology estate and digital products. From 2011 through 2013, Ms. Yochem was the global Chief Technology Officer at AstraZeneca, a major pharmaceutical company, where she was responsible for the company’s technology strategy and engineering. She joined AstraZeneca from Dell, where she held several executive roles, ultimately responsible for all technology supporting the company’s services business. Prior to 2008, Ms. Yochem held executive roles at Bank of America and SunTrust, and senior roles at UPS and IBM. Ms. Yochem is a published author and U.S. Patent holder, and serves on the industry advisory boards of the University of Tennessee Electrical Engineering and Computer Science department.

Audit Committee

The Audit Committee has a written charter adopted by the Bank’s Board of Directors. The Audit Committee is responsible for the appointment, compensation, and oversight of the Bank’s independent Registered Public Accounting Firm (RPAF) and Chief Internal Auditor. The Audit Committee is also responsible for approving all audit engagement fees, as well as any permitted non-audit services with the independent RPAF. The Audit Committee pre-approves all auditing services and permitted non-audit services to be performed for the Bank by the independent RPAF. The independent RPAF reports directly to the Audit Committee. The Bank’s Chief Internal Auditor also reports directly to the Committee. The Audit Committee assists the Board in fulfilling its responsibilities for general oversight of:

The Bank’s financial reporting processes and the audit of the Bank’s financial statements, including the integrity of the Bank’s financial statements;
The Bank’s administrative, operating, and internal accounting controls;
The Bank’s compliance with legal and regulatory requirements;
The independent auditors’ qualifications and independence; and
The performance of the Bank’s internal audit function and independent auditors.

As of February 29, 2016, the Audit Committee was composed of Messrs. Hudson (Chair), Ritchie, (Vice Chair), Brooks, Ms. Yochem and Ms. Asbury. The Audit Committee regularly holds separate sessions with the Bank’s management, internal auditors, and independent RPAF.

The Board has determined that Messrs. Hudson and Ritchie are each an “audit committee financial expert” within the meaning of the SEC rules. The Bank is required for the purposes of SEC rules regarding disclosure to use a definition of independence of a national securities exchange or a national securities association and to disclose whether each “audit committee financial expert” is “independent” under that definition. The Board has elected to use the New York Stock Exchange definition of independence, and under that definition, Messrs. Hudson, Ritchie and Ms. Asbury, are not independent; Mr. Brooks and Ms. Yochem are independent under that definition. Messrs. Hudson, Ritchie, Brooks, Ms. Asbury and Ms. Yochem are independent according to the Finance Agency rules applicable to members of the audit committees of the Boards of Directors of the FHLBanks.


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Executive Officers

The following table sets forth certain information (ages as of February 29, 2016) regarding the executive officers of the Bank.
Executive Officer
Age
Capacity In Which Serves
Winthrop Watson
61
President and Chief Executive Officer
Kristina K. Williams
51
Chief Operating Officer
John P. Cassidy
52
Chief Information Officer
David G. Paulson
51
Chief Financial Officer
Michael A. Rizzo
54
Chief Risk Officer
Dana A. Yealy
56
General Counsel and Corporate Secretary
Winthrop Watson was appointed by the Board of Directors as President and Chief Executive Officer effective January 1, 2011. Previously, he was Chief Operating Officer, a position that he assumed in November 2009. Prior to joining the Bank, Mr. Watson worked at J.P. Morgan for 24 years in a variety of capital markets and financial institution roles most recently as Managing Director in its Asia Pacific investment banking business. Earlier, Mr. Watson led the building of the company’s investment and commercial banking franchise for U.S. government-sponsored enterprises. Mr. Watson serves as a director of the Office of Finance of the Federal Home Loan Banks and the Pentegra Defined Benefit Plan. He is involved in the community as a board member of the Pittsburgh Ballet Theater, the Neighborhood Academy, Economics Pennsylvania and the Pennsylvania Economy League of Greater Pittsburgh. Mr. Watson holds an MBA from Stanford University and a BA from the University of Virginia.
Kristina K. Williams, Chief Operating Officer, joined the Bank in 2004 as Chief Accounting Officer and has held a number of executive positions at the Bank. As Chief Operating Officer, she has responsibility for all member-facing activities, including member services, community investment, product delivery, communications and information technology. Ms. Williams became Chief Financial Officer in 2006; Executive Vice President, with additional responsibility for technology and operating services and human resources, in 2010; and Chief Operating Officer in 2011. Previously, Ms. Williams served as Chief Financial Officer of Wholesale Banking for PNC Financial Services Group, where she also spent time in SEC and regulatory reporting and served as Director of Accounting Policy. Previous experience includes public accounting with PricewaterhouseCoopers and Deloitte & Touche. Ms. Williams graduated from West Liberty University, received her master’s in Professional Accountancy from West Virginia University and is a CPA. Ms. Williams is also a member of the American Institute of Certified Public Accountants, Pennsylvania Institute of Certified Public Accountants, and is the audit committee Chairperson on the Board of Directors for the West Liberty University Foundation.
John P. Cassidy joined the Bank in 1999. In January 2012, Mr. Cassidy was promoted to Chief Information Officer. He previously served as the Director of Information Technology since 2005. As the Director of Information Technology, Mr. Cassidy was responsible for the implementation and support of systems and technologies that support the Bank's business processes. Prior to joining the Bank, Mr. Cassidy held various IT leadership positions at DuPont, GMAC Mortgage, and Electronic Data Systems (EDS). In addition to a BS degree in Computer Science, Mr. Cassidy has an MBA with a focus on Information Technology from the Katz Graduate School of Business at the University of Pittsburgh.
David G. Paulson, Chief Financial Officer, joined the Bank in March 2010 as Director, Mortgage Finance and Balance Sheet Management. Mr. Paulson became the Managing Director of Capital Markets in 2012 and Chief Financial Officer in 2013. Mr. Paulson came to the Bank from National City Corporation, where he worked for 14 years in a number of capacities. Most recently, he served as Senior Vice President, Interest Rate Risk and Chief Investment Portfolio Manager. Prior to that, Mr. Paulson was a portfolio manager at Integra Financial Corporation. He holds a BS in Finance and an MBA, both from Duquesne University.

Michael A. Rizzo joined the Bank in March 2010 and is the Bank’s Chief Risk Officer. Mr. Rizzo served as the Chief Risk Officer of Residential Finance Group, the U.S. residential mortgage lending unit of GMAC ResCap. In addition, Mr. Rizzo served as Chief Credit Officer for Ally (GMAC) Bank mortgage operations. Previous experience includes approximately 15 years in risk and portfolio management roles with Provident Bank in Cincinnati, FleetBoston Financial Corporation and BankBoston. During his seven years with the Office of the Comptroller of the Currency (OCC), Mr. Rizzo was a commissioned national bank examiner and a CPA. He holds a BS degree in Accounting from Bucknell University.


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Dana Yealy joined the Bank in 1986, and has served as General Counsel since August 1991. Mr. Yealy is responsible for the legal, government relations, corporate secretary, and human resources functions of the Bank. Prior to joining the Bank, he was an attorney with the Federal Home Loan Bank of Dallas. Mr. Yealy earned his Bachelors degree in Economics from Westminster College, his Juris Doctorate from Dickinson School of Law, and his LL.M in Banking Law from the Boston University School of Law. Mr. Yealy is an active member of the Association of Corporate Counsel, the American Society of Corporate Secretaries, and the Society of Corporate Compliance and Ethics. Mr. Yealy is also a member of several committees of the American, Pennsylvania, and Allegheny County Bar Associations. Mr. Yealy is a Board member of the Pittsburgh Civic Light Opera.

Each executive officer serves at the pleasure of the Board of Directors.

Code of Conduct

The Bank has adopted a code of ethics for all of its employees and directors, including its Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Controller, and those individuals who perform similar functions. A copy of the code of ethics is on the Bank’s public website, www.fhlb-pgh.com, and will be provided without charge upon written request to the Legal Department of the Bank at 601 Grant Street, Pittsburgh, Pennsylvania 15219, Attention: General Counsel. Any amendments to the Bank’s Code of Conduct are posted to the Bank’s public website.

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Item 11: Executive Compensation

Compensation Discussion and Analysis

Introduction

     This Compensation Discussion and Analysis (CD&A) presents information related to the Bank's compensation program for its Principal Executive Officer (the CEO) and other Named Executive Officers (other Executives and/or NEO). The information includes, among other things, the objectives of the Bank's compensation program and the elements of compensation the Bank provides to its CEO and other Executives.

The Bank's Board has determined that it is necessary to consider the nature, level, and cumulative effect of all elements of the Bank's compensation and benefits program to establish each element of the program at the appropriate level.

2015 Compensation Philosophy

The Bank's compensation program is designed to:
Attract, motivate, and retain staff critical to the Bank's long-term success and thereby
Enable the Bank to meet its public policy mission while balancing the evolving needs of customers and shareholders.

For 2015, the Bank's CEO and other Executives were compensated through a mix of base salary, eligibility for incentive compensation awards, benefits, and perquisites. Base salary was the core component of the total compensation package. The Bank's executive compensation for the CEO and other Executives was benchmarked against three peer groups: (1) commercial banks (using a “Divisional Head” benchmark); (2) other FHLBanks; and (3) named executive officer benchmarks from publicly traded banks/financial institutions with $5 billion to $20 billion in assets. The peer group data was collected and analyzed by the Bank’s compensation consultant, McLagan, an Aon Hewitt company. For certain positions, when considering data from the larger peer group companies, and with input from McLagan, applicable job specific benchmarks for the Bank’s CEO and other Executives were identified, as they were determined to be market comparable and represented realistic employment opportunities. Typically, the identified positions at the larger peer group institutions were at a lower level than the comparative Bank executive officer title (e.g., comparison of the CEO position to a COO or similar position(s) at such larger peer group companies). The Bank targets the median total compensation for the benchmarked positions. See the table below setting forth the peer companies used in benchmarking both base salary and incentive compensation. As the Bank is a cooperative, it does not offer equity-based compensation as is typically offered in publicly traded financial services institutions; however, the Bank’s incentive compensation and enhanced retirement benefits for the CEO and other Executives together provide a competitive compensation package.

For 2015, the Bank executive officer incentive compensation plan (in which the CEO and other Executives participated) continued to be aligned with market practices and provided for deferral of 50% of the incentive award, with payment of such deferred amount contingent on the Bank meeting ongoing performance criteria over the long-term performance period.

As part of an overall review of the Bank's compensation programs, the Bank evaluated the various aspects of these programs, taking into consideration associated risk as it pertained to the expectations and goals of each element of compensation. The Bank does not offer commission or similar bonus compensation programs. The only portion of the compensation package in which the risk element exists and should be considered is the incentive compensation awards because such incentive compensation could, among other things, encourage short term performance at the expense of long term performance. The Bank’s incentive compensation plans for its CEO and other Executives address this risk by requiring deferred payment of a portion of earned incentive compensation and condition such deferred payments upon future Bank performance. Details regarding the 2015 incentive compensation goals are discussed below.

As discussed above, for 2015, for the CEO and other Executives, the Bank engaged McLagan to perform a base salary and incentive compensation benchmarking review. This review included the following three peer groups.


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1.
The commercial bank peer group (using a “Divisional Head” benchmark) included the following firms:
ABN AMRO Securities (USA) LLC
Credit Agricole CIB
Natixis
AIB Capital Markets
Credit Industriel et Commercial
Nord/LB
Ally Financial Inc.
Dexia
OCBC Bank
Australia & New Zealand Banking Group
DnB Bank
PNC Bank
Banco Bilbao Vizcaya Argentaria
DVB Bank
Popular Community Bank
Banco Santander
DZ Bank
Rabobank Nederland
Banco Hapoalim
East West Bancorp
RBS/Citizens Bank
Bank of America
Espirito Santo Investment
Regions Financial Corporation
Bank of China
Fannie Mae
Royal Bank of Canada
Bank of Ireland Corporate Banking
Fifth Third Bank
Sallie Mae
Bank of the West
First Niagara
Societe Generale
Bank of Tokyo- Mitsubishi UFJ
First Tennessee Bank/First Horizon
Sovereign Bank
Bayerische Landesbank
Freddie Mac
Standard Bank
BBVA Compass
Frost National Bank
Standard Chartered Bank
BMO Financial Group
GE Capital
SunTrust Banks
BNP Paribas
Huntington Bancshares, Inc.
SVB Financial Group
BOK Financial Corporation
HSBC
Synovus
Branch Banking & Trust Co.
ING
TD Securities
Capital One
JP Morgan Chase
The Bank of Nova Scotia
China Construction Bank
KBC Bank
The CIT Group
China International Capital Corporate
KeyCorp
The NorinchukinBank, New York Branch
China Merchants Bank
Landesbank Baden-Wuerttenberg
U.S. Bancorp
CIBC World Markets
Lloyds Banking Group
UniCredit
Citigroup
M&T Bank Corporation
Union Bank, N.A.
City National Bank
Macquarie Bank
Webster Bank
Comerica
Mitsubishi UFJ Trust & Banking Corporation (USA)
Wells Fargo Bank
Commerzbank
Mizuho Corporate Bank, Ltd.
Westpac Banking Corporation
Commonwealth Bank of Australia
National Australia Bank
Zions Bancorporation


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2.
The Federal Home Loan Bank peer group included all of the other Federal Home Loan Banks.

3.
The CEO and other Executives’ benchmarks from publicly traded banks/financial institutions with $5 billion to $20 billion in assets included the following firms:
Astoria Financial Corp.
First Interstate BancSystem
PrivateBancorp Inc.
BancFirst Corp.
First Midwest Bancorp Inc.
Prosperity Bancshares Inc.
BancorpSouth Inc.
FirstMerit Corp.
Provident Financial Services
Bank of Hawaii Corp.
Flagstar Bancorp Inc.
SCBT Financial Corp
BankUnited Inc.
Fulton Financial Corp.
Signature Bank
BBCN Bancorp Inc.
Glacier Bancorp Inc.
Sterling Financial Corp
Beneficial Mutual Bncp (MHC)
Hancock Holding Co.
Susquehanna Bancshares Inc.
Berkshire Hills Bancorp. Inc.
Hilltop Holdings Inc.
Taylor Capital Group
Boston Private Financial
IBERIABANK Corp.
TCF Financial Corp.
Brookline Bancorp Inc.
Independent Bank Corp.
Texas Capital Bancshares Inc.
Capital Bank Finl Corp
International Bancshares Corp.
Trustmark Corp.
CapitalSource Inc.
Investors Bancorp Inc. (MHC)
UMB Financial Corp.
Cathay General Bancorp
MB Financial Inc.
Umpqua Holdings Corp.
Chemical Financial Corp.
National Bank Holdings Corp.
United Bankshares Inc.
Citizens Republic Bancorp Inc.
National Penn Bancshares Inc.
United Community Banks Inc.
Community Bank System Inc.
NBT Bancorp Inc.
Valley National Bancorp
CVB Financial Corp.
Northwest Bancshares, Inc.
Washington Federal Inc.
Doral Financial Corp.
Old National Bancorp
Webster Financial Corp.
EverBank Financial
Oriental Financial Group Inc.
WesBanco Inc.
F.N.B. Corp.
PacWest Bancorp
Westamerica Bancorp.
First BanCorp.
Park National Corp.
Western Alliance Bancorp
First Commonwealth Financial
Pinnacle Financial Partners
Wintrust Financial Corp.
First Financial Bancorp.
 
 

Human Resources Committee's Role and Responsibilities

The Human Resources Committee (HR Committee) is responsible for the establishment and oversight of the CEO's compensation and oversight of other Executives' compensation. This includes setting the objectives of and reviewing performance under the Bank's compensation, benefits, and perquisites programs for the CEO and other Executives.

Additionally, the HR Committee has adopted the practice of periodically retaining compensation and benefit consultants and other advisors, as well as reviewing analysis from the Bank's Human Resources Department (HR Department), to assist in performing its duties regarding the CEO's and other Executives' compensation.

Role of the Federal Housing Finance Agency

The FHLBank’s regulator, the Finance Agency, has been granted certain authority over executive compensation. Specifically under the Housing Act: (1) the Director of the Finance Agency is authorized to prohibit executive compensation that is not reasonable and comparable with compensation in similar businesses; (2) if an FHLBank is undercapitalized, the Director of the Finance Agency may also restrict executive compensation; and (3) if an FHLBank is determined to be in a troubled condition, the Finance Agency may reduce or prohibit certain golden parachute payments in the event that an FHLBank is subject to a triggering event (for example, insolvency, subject to appointment of a conservator or receiver). Under the Finance Agency Executive Compensation Regulation, additional advance notice and approval requirements are imposed in regard to an FHLBank entering into or adopting: (1) employment agreements; (2) severance policy/agreements; (3) incentive compensation award payouts; (4) material modifications to nonqualified plans; and (5) any ad hoc termination payments. The Finance Agency has implemented this authority by requiring the FHLBanks to submit to the Agency for non-objection salary, incentive compensation and benefits changes which affect an FHLBank’s NEOs.

The Finance Agency has established the following standards against which it will evaluate each FHLBank's executive compensation: (1) each individual executive's compensation should be reasonable and comparable to that offered to executives

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in similar positions at comparable financial institutions; (2) such compensation should be consistent with sound risk management and preservation of the par value of FHLBank stock; (3) a significant percentage of incentive-based compensation should be tied to longer-term performance indicators; and (4) the Board should promote accountability and transparency with respect to the process of setting compensation.

Determining the CEO's Cash Compensation

For 2015, the HR Committee used the analysis from McLagan for benchmarking the CEO's cash compensation. In determining Mr. Watson's cash compensation (including both base salary and incentive compensation), it was compared to the median for all of the peer groups as listed in the tables above. Based on this analysis, Mr. Watson’s 2015 base salary was $725,003.

Determining Other Executives' Cash Compensation

In 2015, other Executives' base salaries and incentive compensation levels were determined by the CEO and validated using the results of the McLagan study and were reviewed and approved by the HR Committee. The annual review of the McLagan study and corresponding Board review of these findings validated the appropriateness of compensation levels for the CEO and other Executives.

Effective January 1, 2015, base salary increases were provided to the other Executives and are reflected in the Summary Compensation Table presented in this Item 11. Executive Compensation.

Executive Officer Incentive Plans

2015 Executive Officer Incentive Compensation Plan (2015 Plan):
The 2015 Plan is designed to retain and motivate the CEO and other Executives and reward (1) achievement of key annual goals and (2) maintenance of satisfactory financial condition and member value over the longer term. The 2015 Plan established the following award opportunity levels (expressed as a percentage of base salary):
Participant Level
Threshold
Target
Maximum
CEO
50%
75%
100%
CFO, COO
35%
55%
75%
Other NEOs
25%
45%
65%

The Board has evaluated the performance of the CEO and other Executives against the incentive goals for 2015 set forth in the Non-Equity Incentive Plan Compensation section following the Summary Compensation Table below and determined the total incentive award (if any) based on that performance. The total incentive award was divided into two parts: (1) a current incentive award; and (2) a deferred incentive award, payable in installments. The following table illustrates how the 2015 current awards and deferred incentive award installments would be paid under the 2015 Plan:
Payment
Description
Payment Year*
Current Incentive Award
50% of total award
2016
Deferred Incentive Award installment
Up to 33 1/3% of deferred incentive award
2017
Deferred Incentive Award installment
Up to 33 1/3% of deferred incentive award
2018
Deferred Incentive Award installment
Up to 33 1/3% of deferred incentive award
2019
* Payment will be made no later than March 15 in the year indicated.

Payment of each deferred incentive award installment under the 2015 Plan is contingent on the Bank continuing to meet certain Bank performance criteria and the participant meeting his or her requirements described below. The amount of the deferred incentive award payout opportunity is set forth in the Grants of Plan-Based Awards table. See “Stated Bank Performance Criteria, 2015” under Grants of Plan-Based Awards table for details regarding the Bank performance criteria.

Participant Requirements of Continued Employment and Satisfactory Performance. Participants who terminate employment with the Bank for any reason other than death, disability, involuntary termination without cause or retirement (as defined in the 2015 Plan) prior to the current incentive award payout date will not be eligible for an award. Participants who terminate employment due to retirement or involuntary termination (other than for cause) after the current incentive award payout date but before completion of the payment of all corresponding deferred incentive award installments shall receive such

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deferred incentive award installment payments at the same time as such payments are made to plan participants who are current Bank employees. Participants who otherwise resign employment before the completion of the payment of all corresponding deferred incentive award installments shall not receive payment of such installments. In the event of a participant’s employment termination due to death or disability, the participant shall receive payout of deferred award installments. Any participant who is terminated by the Bank for cause (as defined in the 2015 Plan) prior to receiving payment of all corresponding deferred incentive award installments shall not receive payment of any remaining unpaid deferred incentive award installments. Finally, the plan provides for vesting of deferred award installments in the event of a Change in Control. See Exhibit 10.12.2 to the 2014 Form 10-K for the full terms of the 2015 Plan.

2016 Executive Officer Incentive Compensation Plan (2016 Plan):
For 2016, the Board has adopted the 2016 Plan which has received Finance Agency non-objection. The 2016 Plan is designed to retain and motivate the CEO and other Executives and reward (1) achievement of key annual goals and (2) maintenance of satisfactory financial condition and member value over the longer term. The 2016 Plan terms are the same as the 2015 Plan terms except for the award opportunity levels as shown in the table below. The change in levels as a percentage of base salary was approved by the Board and was based on the results of a McLagan benchmarking analysis. The peer group used in this 2016 benchmarking analysis was publicly traded banks/financial institutions with $10 billion to $20 billion in assets. This change in peer group is a more appropriate benchmark as it compares the Bank to other institutions with similar regulatory compliance obligations. The 2016 Plan establishes the following award opportunity levels (expressed as a percentage of base salary):
Participant Level
Threshold
Target
Maximum
CEO
50%
75%
100%
COO
55%
70%
85%
CFO
50%
65%
80%
Other NEOs
40%
55%
70%

This benchmarking analysis was also used for setting the 2016 base salary levels for the CEO and other Executives. For 2016, merit increases were also approved for the CEO and other Executives by the Board, and the Bank received non-objection from the Finance Agency on the resulting base salaries. For more information, refer to the Bank’s Form 8-K filed on December 22, 2015.

Following December 31, 2016, the Board will evaluate performance against the incentive goals set forth under the Grants of Plan-Based Awards table applicable to awards granted for 2016 and determine the total incentive award (if any) based on that performance. The total incentive award will be divided into two parts: (1) a current incentive award; and (2) a deferred incentive award, payable in installments. The following table illustrates how the 2016 current awards and deferred incentive award installments would be paid under the 2016 Plan:
Payment
Description
Payment Year*
Current Incentive Award
50% of total award
2017
Deferred Incentive Award installment
Up to 33 1/3% of deferred incentive award
2018
Deferred Incentive Award installment
Up to 33 1/3% of deferred incentive award
2019
Deferred Incentive Award installment
Up to 33 1/3% of deferred incentive award
2020
* Payment will be made no later than March 15 in the year indicated.

Payment of each deferred incentive award installment under the 2016 Plan is contingent on the Bank continuing to meet certain Bank performance criteria and the participant meeting his or her requirements described below. The amount of the deferred incentive award payout opportunity is set forth in the Grants of Plan-Based Awards table. See “Stated Bank Performance Criteria, 2016” under Grants of Plan-Based Awards table for details regarding the Bank performance criteria.

Participant Requirements of Continued Employment and Satisfactory Performance. These terms in the 2016 Plan are the same as set forth in the 2015 Plan described above. See Exhibit 10.12.2 to this Form 10-K for the full terms of the 2016 Plan.

Additional Incentives for Other Executives


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From time to time, the CEO has recommended for the other Executives, and the Board has approved, additional incentive awards in connection with specific projects or other objectives of a unique, challenging, and time-sensitive nature. No such additional incentive awards were granted for any of the other Executives in 2015.

Perquisites and Other Benefits

The Board views the perquisites afforded to the CEO and other Executives as an element of the total compensation program, provided primarily as a benefit associated with their overall position duties and responsibilities. Examples of perquisites for the CEO and/or other Executives may include the following:
Personal use of a Bank-owned/leased automobile;
Financial and tax planning;
Payment of relocation expenses; and
Business club membership.

The Bank may also provide a tax gross-up for some of the perquisites offered, including relocation benefits. Additionally, for the CEO and other Executives, the Bank provides parking. Perquisites for the CEO and other Executives are detailed on the Summary Compensation Table and accompanying narrative, where an individual’s aggregate perquisites exceeded $10,000.

Employee Benefits

The Board and Bank management are committed to providing competitive, high-quality benefits designed to promote health, well-being, and income protection for all employees. The Bank offers all employees a core level of benefits and the opportunity to choose from a variety of optional benefits. Core and optional benefits offered include, but are not limited to, medical, dental, prescription drug, vision, long-term disability, short-term disability, flexible spending accounts, worker's compensation insurance, and life and accident insurance. The CEO and other Executives participate in these benefits on the same basis as all other full-time employees. In addition, the CEO and other Executives are eligible for individual disability income insurance if the individual’s salary exceeds the monthly long term disability limit.

Qualified and Nonqualified Defined Benefit Plans

The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a tax-qualified, multi-employer defined-benefit retirement plan. The Pentegra Defined Benefit Plan is a funded, noncontributory plan that covers all eligible employees. For all employees hired prior to January 1, 2008, benefits under the plan are based upon a 2% accrual rate, the employees' years of benefit service and the average annual salary for the three consecutive years of highest salary during benefit service. The regular form of retirement benefits provides a single life annuity, with a guaranteed 12-year payment. A lump-sum payment and other additional payment options are also available. Employees are not vested until they have completed five years of employment. The benefits are not subject to offset for Social Security or any other retirement benefits received.

For all employees hired on or after January 1, 2008, benefits under the plan are based upon a 1.5% accrual rate, the employees' years of benefit service and the average annual salary for the five consecutive years of highest salary during benefit service. The regular form of retirement benefit payment is guaranteed for the life of the retiree but not less than 120 monthly installments. If a retiree dies before 120 monthly installments have been paid, the beneficiary would be entitled to the commuted value of such unpaid installments paid in a lump sum. Employees are not vested until they have completed five years of employment. The benefits are not subject to offset for Social Security or any other retirement benefits received.

The CEO and other Executives also participate in a Supplemental Executive Retirement Plan (SERP). The SERP provides the CEO and other Executives with a retirement benefit that the Bank is unable to offer under the Pentegra Defined Benefit Plan due to Internal Revenue Code (IRC) and Pentegra Defined Benefit Plan limitations, including the IRC limitations on qualified pension plan benefits for employees earning cash compensation of at least $265 thousand for 2015.

As a nonqualified plan, the SERP benefits do not receive the same tax treatment and funding protection as the Pentegra Defined Benefit Plan, and the Bank's obligations under the SERP are a general obligation of the Bank. The terms of the SERP provide for distributions from the SERP upon termination of employment with the Bank or in the event of the death or disability of the employee. Payment options under the SERP include annuity options as well as a lump-sum distribution option.

Following Finance Agency non-objection received in May 2015, effective as of January 1, 2015 the portion of the incentive compensation award percentages that are included in determining the CEO's and other Executives' SERP benefit is limited to the current incentive award portion of any incentive award under the Bank’s executive incentive compensation plan.

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The description of the Pentegra Defined Benefit Plan contained in the Summary Plan Description for the Financial Institutions Retirement Fund and the description of the SERP contained in the Supplemental Executive Retirement Plan are included as Exhibits 10.5.1 to the Bank’s 2013 Form 10-K and 10.5.2 to the Bank’s First Quarter 2015 Form 10-Q, respectively.

Qualified and Nonqualified Defined Contribution Plans

Eligible employees have the option to participate in the Financial Institutions Thrift Plan (Thrift Plan), a qualified defined contribution plan under the IRC. Subject to IRC and Thrift Plan limitations, employees can contribute up to 50% of their base salary in the Thrift Plan. The Bank matches employee contributions based on their length of service and the amount of employee contribution as follows:
Years of service:
Bank match:
Minimum 2, up to 3 years
100% match up to 3% of employee's base salary
Minimum 3, up to 5 years
150% match up to 3% of employee's base salary
More than 5 years
200% match up to 3% of employee's base salary

In addition to the Thrift Plan, the CEO and other Executives are also eligible to participate in the Supplemental Thrift Plan, an unfunded nonqualified defined contribution plan that, in many respects, mirrors the Thrift Plan. The Supplemental Thrift Plan ensures, among other things, that the CEO and other Executives whose benefits under the Thrift Plan would otherwise be restricted by certain provisions of the IRC or limitations in the Thrift Plan are able to make elective pretax deferrals and receive the Bank matching contributions on those deferrals. In addition, the Supplemental Thrift Plan permits deferrals of Bank matching contributions on the incentive compensation awards, subject to the limits on deferrals of compensation under the Supplemental Thrift Plan.

The CEO and other Executives may defer up to 80% of their total cash compensation, less their contributions to the qualified Thrift Plan. Following Finance Agency non-objection received in May 2015, effective as of January 1, 2015, the deferred portion of an incentive award as defined under the executive officer incentive compensation plan is eligible for deferral under the Supplemental Thrift Plan.

For each deferral period in the Supplemental Thrift Plan, the Bank credits a matching contribution equal to:
200% match on up to 3% of the CEO's or other Executives' base salary and current incentive compensation irrespective of their years of service; less
The Bank's matching contribution to the qualified Thrift Plan.

The terms of the Supplemental Thrift Plan provide for distributions upon termination of employment with the Bank, in the event of the death of the employee or upon disability, at the discretion of the HR Committee, and in accordance with applicable IRC and other applicable requirements. Payment options under the Supplemental Thrift Plan include a lump-sum payment and annual installments for up to 10 years. No loans are permitted from the Supplemental Thrift Plan.

The current incentive award portion of any incentive compensation award for the CEO and other Executives is eligible for a Bank matching contribution under the Supplemental Thrift Plan; the deferred incentive award installments are not eligible for a Bank matching contribution. A description of the Supplemental Thrift Plan is also contained in the Supplemental Thrift Plan filed as Exhibit 10.6.2 to the Bank’s First Quarter 2015 Form 10-Q.

Rabbi Trust Arrangements

The Bank has established Rabbi trusts to partially help secure benefits under both the SERP and Supplemental Thrift Plan. See the Pension Benefits Table and Nonqualified Deferred Compensation Table and narratives below for more information.

Additional Retirement Benefits

The Bank provides post-retirement medical benefit dollars in the form of a Health Reimbursement Account (HRA) for retirees and their spouses age 65 and older. HRA dollars can be used to purchase individual healthcare coverage and other eligible out-of-pocket healthcare expenses.

Severance Policy (excluding Change-in-Control)


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The Bank provides severance benefits to the CEO and other Executives. These benefits reflect the potential difficulty employees may encounter in their search for comparable employment within a short period of time. The Board determined that such severance arrangements are a common practice in the marketplace.

The Bank's severance policy is designed to help bridge this gap in employment. The policy provides the following for other Executives:
Four weeks' base salary continuation per year of service, with a minimum of 26 weeks and a maximum of 52 weeks;
Effective January 1, 2015 taxable compensation in the amount equivalent to the amount the Bank pays for medical coverage for its active employees for the length of the salary continuation; and
Individualized outplacement service for a maximum of 12 months.

The Board provided a separate severance agreement as part of the employment offer for the CEO, providing for severance in the amount of 12 months of salary which is more fully described in the Post-Termination Compensation Table below.

Change-in-Control (CIC) Agreements

The Bank has entered into CIC agreements with the CEO and other Executives. The Board believes that CIC agreements are an important recruitment and retention tool and, that such agreements enable the CEO and other Executives to effectively perform and meet their obligations to the Bank if faced with the possibility of consolidation with another FHLBank. These agreements are a common practice in the marketplace.

In the event of a merger of the Bank with another FHLBank, where the merger results in the termination of employment (including resignation for “good reason” as defined under the CIC agreement) for the CEO or any other Executives, each such individual(s) is (are) eligible for severance payments under his/her CIC agreement. Such severance is in lieu of severance under the Severance Policy discussed above. The Severance Policy (and in the case of the CEO, his separate severance agreement) continues to apply to employment terminations of the other Executives, other than those resulting from a Bank merger.

Benefits under the CIC agreement for the CEO and other Executives are as follows:
Two years base salary;
Two times the incentive compensation award payout eligibility at target in the year of separation from service;
Effective January 1, 2015 taxable compensation equivalent to the Bank’s monthly contribution to its active employees’ medical plan coverage for the benefits continuation period of 18 months; and
Individualized outplacement service for a maximum of 12 months.

In addition, under his CIC Agreement, the CEO also receives a payment equal to the additional benefit amount that he would receive for two additional years of credited service at the same annual compensation at the time of separation from the Bank under the qualified and nonqualified defined benefit plans and two times six percent of his annual compensation (as defined in the Supplemental Thrift Plan) in the year of separation from service. This amount is intended to replace the matching contribution under the Bank’s qualified and nonqualified defined contribution plans. See Exhibit 10.9.4 to the Bank’s 2010 Form 10-K for details regarding the Amended and Restated CIC agreement effective January 1, 2011.

Compensation Committee Interlocks and Insider Participation

There were no Interlocks in 2015 and there are no current Interlocks. With respect to Directors Godwin, McLaughlin, Hudson, Milinovich and Plush, see Item 13. Certain Relationships and Related Transactions, and Director Independence of this Form 10-K and for information regarding transactions with PNC Bank, N.A., Santander Bank, N.A., and Pennsylvania Housing Finance Agency respectively, which were approved under the Bank's Related Person Transaction Policy.

The HR Committee has reviewed and discussed the CD&A with management. Based on that review and discussion, the HR Committee has recommended to the Board that the CD&A be included in the Bank’s 2015 Form 10-K.

The Human Resources Committee of the Board of Directors

Ms. Pamela H. Godwin            Chair
Ms. Charlotte B. McLaughlin        Vice-Chair
Mr. Brian A. Hudson
Mr. John S. Milinovich
Mr. Gerald P. Plush

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Summary Compensation Table (SCT)
Name and
Principal Position
Year
Salary
Bonus
Non-Equity Incentive Plan Compensation
Change in Pension Value
All Other Compensation
Total
Winthrop Watson (1)
President and CEO
2015
$
725,003
$-
$
738,723
$
249,000

$
73,137
$
1,785,863
2014
694,980
-
578,406
335,000
 
62,394
1,670,780
2013
675,000
-
618,041
114,000
 
60,445
1,467,486
Kristina K. Williams (2)
Chief Operating Officer
2015
$
466,458
$-
$
343,849
$
110,000

$
39,834
$
960,141
2014
448,518
-
260,658
476,000
 
39,227
1,224,403
2013
431,267
-
276,108
76,000
 
37,302
820,677
David G. Paulson (3)
Chief Financial Officer
2015
$
327,450
$-
$
194,148
$
46,000

$
24,781
$
592,379
2014
292,956
-
125,260
83,000
 
23,679
524,895
2013
270,006
-
126,278
19,000
 
20,587
435,871
Michael A. Rizzo (4)
Chief Risk Officer
2015
$
322,644
$-
$
206,414
$
52,000

$
24,525
$
605,583
2014
313,246
-
155,800
114,000
 
25,732
608,778
2013
307,104
-
165,504
26,000
 
25,162
523,770
Dana A. Yealy (5) (6)
General Counsel
2015
$
306,120
$-
$
193,520
$
141,000

$
23,168
$
663,808
2014
291,542
-
144,426
802,000
 
23,827
1,261,795
2013
280,329
-
154,281
-
 
22,970
457,580
Notes:
(1)  
For 2015, Mr. Watson’s non-equity incentive plan compensation was the incentive plan described above and was based on the 2015 performance against goals as set forth below as well as deferred incentive earned in 2015 under the 2012, 2013, and 2014 Executive Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $62,655, the remainder is in insurance premium contributions, parking, spouse travel and mileage. For 2014, Mr. Watson’s non-equity incentive plan compensation was the incentive plan described in the Bank’s 2014 Form 10-K as well as deferred incentive earned in the 2012 and 2013 Executive Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $61,949 and the remainder is insurance premium contributions. For 2013, Mr. Watson's non-equity incentive plan compensation was the incentive and transition plans described in the Bank’s 2013 Form 10-K as well as the deferred incentive earned in the 2012 Executive Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $60,000 and the remainder is insurance premium contributions.

(2) 
For 2015, Ms. William’s non-equity incentive plan compensation was the incentive plan described above and was based on 2015 performance against goals as set forth below as well as deferred incentive earned in 2015 under the 2012, 2013, and 2014 Executive Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $36,678 and the remainder is insurance premium contributions. For 2014, Ms. William’s non-equity incentive plan compensation was the incentive plan described in the Bank’s 2014 Form 10-K as well as deferred incentive earned in the 2012 and 2013 Executive Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $36,614 and the remainder is insurance premium contributions. For 2013, Ms. Williams’ non-equity incentive plan compensation was the incentive and transition plans described in the Bank’s 2013 Form 10-K as well as the deferred incentive earned in the 2012 Executive Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $35,207 and the remainder is insurance premium contributions.

(3)  
For 2015, Mr. Paulson’s non-equity incentive plan compensation was the incentive plan described above and was based on 2015 performance against goals as set forth below as well as the deferred incentive earned in 2012 under the Key Employee Plan and in 2013 and 2014 Executive Officer Incentive Compensation Plans. All other compensation included employer contributions to defined contribution plans of $24,754 and the remainder is insurance premium contributions. In 2014, Mr. Paulson became the Bank’s principal financial officer as of September 1 with the CAO reporting to him. At that time, Mr. Paulson also received a base pay increase that was subject to non-objection by the Finance Agency. For 2014, Mr. Paulson’s non-equity incentive plan compensation was the incentive plan described in the Bank’s 2014 Form 10-K as well as the deferred incentive earned in 2012 under the Key Employee Plan and in 2013 under the Executive Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $23,652 and the remainder is insurance premium contributions. In 2013, Mr. Paulson’s non-equity incentive plan compensation was the incentive and transition plans described in the Bank’s 2014 Form 10-K as well as the deferred incentive earned in 2012 under the Key Employee Plan. All other compensation included employer contributions to defined contribution plans of $20,560 and the remainder is insurance premium contributions.

(4)  
For 2015, Mr. Rizzo’s non-equity incentive plan compensation was the incentive plan described above and was based on 2015 performance against goals as set forth below as well as the deferred incentive earned in 2015 under the 2012, 2013, and 2014 Executive

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Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $24,498 and the remainder is insurance premium contributions. For 2014, Mr. Rizzo’s non-equity incentive plan compensation was the incentive plan described in the Bank’s 2014 Form 10-K as well as the deferred incentive earned in the 2012 and 2013 Executive Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $25,705 and the remainder is insurance premium contributions. For 2013, Mr. Rizzo's non-equity incentive plan compensation was the incentive and transition plans described in the Bank’s 2013 Form 10-K as well as the deferred incentive earned in the 2012 Executive Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $25,135 and the remainder is insurance premium contributions.

(5)  
For 2015, Mr. Yealy's non-equity incentive plan compensation was the incentive plan described above and was based on 2015 performance against goals as set forth below as well as the deferred incentive earned in 2015 under the 2012, 2013, and 2014 Executive Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $23,141 and the remainder is insurance premium contributions. For 2014, Mr. Yealy's non-equity incentive plan compensation was the incentive plan described in the Bank’s 2014 Form 10-K as well as the deferred incentive earned in the 2012 and 2013 Executive Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $23,800 and the remainder is insurance premium contributions. For 2013, Mr. Yealy's non-equity incentive plan compensation was the incentive and transition plans described in the Bank’s 2013 Form 10-K as well as the deferred incentive earned in the 2012 Executive Officer Incentive Compensation Plan. All other compensation included employer contributions to defined contribution plans of $22,943 and the remainder is insurance premium contributions.

(6)
Mr. Yealy is a long-service employee, so the impact to the present value of his pension benefits due to a change in interest rates is more significant. The rise in interest rates in 2013 caused his 2013 Change in Pension Value to be a negative $96,000. The decrease in interest rate resulted in the significant positive movement in 2014. For 2013, the negative amount is not taken into account in determining his total compensation.

Non-Equity Incentive Plan Compensation

Under the 2015 Plan, the actual annual award opportunity for January 1, 2015 through December 31, 2015, and payouts are based on a percentage of the executive's base salary as of December 31, 2015. Each goal includes performance measures at threshold, target and maximum. The specific performance goals and total weighting for each goal for the CEO and other Executives are as follows. However, goals A, C, and D have different weightings for the CRO, as noted below:

Deliver Member Value:
A.
Increase total number of Bank products used by members including execution of advances, letters of credit, safekeeping and all MPF products (30% weighting) (20% CRO weighing);
B.
Increase number of members participating in the AHP, BOB, CLP, FFD and a housing rehabilitation product, if offered (15% weighting);
Manage Risk and Return:
C.
Profitability as measured by adjusted earnings relative to GAAP capital in excess of average three month LIBOR within risk parameters (35% weighting) (30% CRO weighting);
Continuous Improvement:
D.
Re-examine Bank’s enterprise risk management framework to ensure effective risk management dashboards that accurately and correctly measure the stated risk appetite. Result will be improved risk identification metrics and measurement techniques to improve strategic executive decision making and Board oversight (10% weighting) (25% CRO weighting);
Develop, Reward, and Engage Employees:
E.
Realize higher organizational performance through employee engagement, diversity and inclusion, and strategic workforce solutions (10% weighting).

Adjusted earnings and other terms referenced above are as defined in the 2015 Plan. See Exhibit 10.12.2 to the Bank’s 2014 Form 10-K.

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To Achieve:
 
 
Payout %
Goal
Other NEO Weighting
CRO
Weighting
Threshold Payout
Target Payout
Maximum
Payout
2015
Results
Achievement Level
CEO

COO/
CFO
Other NEOs
CRO
A
30%
20%
485
510
535
563
Maximum
30%
22.5%
19.5%
13%
B
15%
15%
110
120
135
146
Maximum
15%
11.25%
9.75%
9.75%
C
35%
30%
425bp
503bp
555bp
562bp
Maximum
35%
26.25%
22.75%
19.5%
D (1)
10%
25%
Interpolation of results based on completion of identified goals
Maximum
Maximum
10%
7.5%
6.5%
16.25%
E (1)
10%
10%
Interpolation of results based on completion of identified goals
Maximum
Maximum
10%
7.5%
6.5%
6.5%
Total Payout
100%
75%
65%
65%
Notes:
(1) Refer to incentive goal scorecard attached to the 2015 Plan document for details on qualitative goals.

Named Executive Officer
Salary on which incentive is based (1)
Incentive payout %
Incentive payout potential $(2)
2015 actual incentive payout
(A)
2014 deferred incentive $ (B) (5)
2013 deferred incentive $
(C) (6)
2012 deferred incentive $ (D) (7)
Total incentive payout (3)
Winthrop Watson
$
725,003
100%
$
725,003
$
362,502
$
117,054
$
123,750

$
135,417
$
738,723
Kristina K. Williams
$
466,458
75%
$
349,844
$
174,922
$
53,107
$
55,346

$
60,474
$
343,849
David G. Paulson (4)
$
327,450
75%
$
245,587
$
122,794
$
31,208
$
29,700

$
10,446
$
194,148
Michael A. Rizzo
$
322,644
65%
$
209,718
$
104,859
$
31,405
$
32,880

$
37,270
$
206,414
Dana A. Yealy
$
306,120
65%
$
198,978
$
99,489
$
29,175
$
30,836

$
34,020
$
193,520
Notes:
(1) Base salary in effect on December 31, 2015 used to calculate payouts.
(2) NEOs will be paid 50% of the incentive payout in 2015 (see column A) and the remaining amount will be deferred and contingently payable in 2017, 2018 and 2019.
(3) Total incentive payout includes the sum of columns (A) (B) (C) and (D).
(4) Mr. Paulson’s 2012 deferred incentive was earned in 2012 under the Key Employee Incentive Compensation Plan.
(5) Based on the provisions of the 2014 Executive Officer Incentive Compensation Plan the deferral amount from the 2014 plan year includes a 10% increase since the deferral criteria were met at the maximum level payout.
(6) Based on the provisions of the 2013 Executive Officer Incentive Compensation Plan the deferral amount from the 2013 plan year includes a 10% increase since the deferral criteria were met at the maximum level payout.
(7) Based on the provisions of the 2012 Executive Officer Incentive Compensation Plan the deferral amount from the 2012 plan year includes a 25% increase since the deferral criteria were met at the maximum level payout.


175



The following table illustrates for each participant the maximum amount of unpaid deferred installments as of December 31, 2015 distributable under the 2012, 2013, 2014 and 2015 plans.
Name and Principal Position
Amount Distributable in 2016
Amount Distributable in 2017
Amount Distributable in 2018
Amount Distributable in 2019
Total(1)(2)
Winthrop Watson
President and CEO
 
$376,221
 
 
$391,847
 
 
$268,097
 
 
$151,043
 
 
$1,187,208
 
Kristina K. Williams
Chief Operating Officer
 
$168,927
 
 
$181,337
 
 
$125,991
 
 
$72,884
 
 
$549,139
 
David G. Paulson
Chief Financial Officer
 
$71,354
 
 
$112,072
 
 
$82,372
 
 
$51,164
 
 
$316,962
 
Michael A. Rizzo
Chief Risk Officer
 
$101,555
 
 
$107,976
 
 
$75,096
 
 
$43,691
 
 
$328,318
 
Dana A. Yealy
General Counsel
 
$94,031
 
 
$101,465
 
 
$70,629
 
 
$41,454
 
 
$307,579
 
Notes:
(1) Based on the provisions of the 2012 and 2015 Executive Officer Incentive Compensation Plans the deferral amount from the 2012 and 2015 plan years includes a 25% increase since the deferral criteria were met at the maximum level payout.
(2) Based on the provisions of the 2013 and 2014 Executive Officer Incentive Compensation Plans the deferral amount from the 2013 and 2014 plan years includes a 10% increase since the deferral criteria were met at the maximum level payout.

Change in Pension Value

The Pentegra Defined Benefit Plan provides a benefit of 2.00% of a participant's highest 3-year average earnings, multiplied by the participant's years of benefit service for employees hired prior to January 1, 2008; or 1.50% of a participant's highest 5-year average earnings, multiplied by the participant's years of benefit service for employees hired on or after January 1, 2008. Earnings are defined as base salary, subject to an annual IRS limit of $265,000 for 2015. Annual benefits provided under the Pentegra Defined Benefit Plan also are subject to IRS limits, which vary by age and benefit payment type. The participant's accrued benefits are calculated as of December 31, 2014 and December 31, 2015. The present value is calculated using the accrued benefit at each date multiplied by a present value factor based on an assumed age 65 retirement date. As of December 31, 2014, 50% of the benefit is valued using the RP-2014 mortality table for white collar workers (with mortality improvement scale MP-2014) and 50% of the benefit is valued using the RP-2000 static mortality table for lump sums projected to 2014. As of December 31, 2015, 50% of the benefit is valued using the RP-2014 mortality table for white collar (with mortality improvement scale MP-2015) and 50% of the benefit is valued using the RP-2000 static mortality table for lump sums projected to 2015. The interest rates used are 3.95% as of December 31, 2014 and 4.34% as of December 31, 2015. The difference between the present value of the December 31, 2015 accrued benefit and the present value of the December 31, 2014 accrued benefit is the “change in pension value” for the Defined Benefit Plan.

The SERP provides benefits under the same terms and conditions as the Pentegra Defined Benefit Plan, except earnings are defined as base salary plus incentive compensation. Also the SERP does not limit annual earnings or benefits. Benefits provided under the Pentegra Defined Benefit Plan are an offset to the benefits provided under the SERP. The participants' benefits are calculated as of December 31, 2014 and December 31, 2015. The present value is calculated by multiplying the benefits accrued at each date by a present value factor based on an assumed age 65 retirement date. As of December 31, 2014, the benefit is valued using the RP-2014 mortality table for white collar workers (with mortality improvement scale MP-2014). As of December 31, 2015, the benefit is valued using the RP-2014 mortality table for white collar workers (with mortality improvement scale MP-2015). The interest rates used are 3.75% as of December 31, 2014 and 4.25% as of December 31, 2015. The difference between the present value of the December 31, 2015 accrued benefit and the present value of the December 31, 2014 accrued benefit is the “change in pension value” for the SERP.

The total change in pension value is the sum of the change in the Pentegra Defined Benefit Plan and the change in the SERP.

176



Grants of Plan-Based Awards

The following table is based on salary as of December 31, 2015 and shows the value of non-equity incentive plan awards granted to the CEO and other Executives in 2015 or future periods, as applicable. Note that these amounts are based on the potential awards available under the terms of the 2015 Plan not actual performance. Actual performance under the 2015 Plan is as reflected in the SCT and in the detailed incentive award tables set forth below the SCT.

2015 Grants
Name and
Principal Position
 
Performance Achieved in 2015
Amount Payable 2016
Amount Payable 2017
Amount Payable 2018
Amount Payable 2019
Winthrop Watson
President and CEO

Threshold
Target
Maximum
Total Opportunity
$362,502
$543,752
$725,003
50% Payout
$181,251
$271,876
$362,502
Deferred Amount
$75,521
$113,282
$151,043
Deferred Amount
$75,521
$113,282
$151,043
Deferred Amount
$75,521
$113,282
$151,043
Kristina K. Williams
Chief Operating Officer

Threshold
Target
Maximum
Total Opportunity
$163,260
$256,552
$349,844
50% Payout
$81,630
$128,276
$174,922
Deferred Amount
$34,013
$53,448
$72,884
Deferred Amount
$34,013
$53,448
$72,884
Deferred Amount
$34,013
$53,448
$72,884
David G. Paulson
Chief Financial Officer

Threshold
Target
Maximum
Total Opportunity
$114,608
$180,098
$245,588
50% Payout
$57,304
$90,049
$122,794
Deferred Amount
$23,877
$37,520
$51,164
Deferred Amount
$23,877
$37,520
$51,164
Deferred Amount
$23,877
$37,520
$51,164
Michael A. Rizzo
Chief Risk Officer

Threshold
Target
Maximum
Total Opportunity
$80,661
$145,190
$209,718
50% Payout
$40,331
$72,595
$104,859
Deferred Amount
$16,804
$30,248
$43,691
Deferred Amount
$16,804
$30,248
$43,691
Deferred Amount
$16,804
$30,248
$43,691
Dana A. Yealy
General Counsel

Threshold
Target
Maximum
Total Opportunity
$76,530
$137,754
$198,978
50% Payout
$38,265
$68,877
$99,489
Deferred Amount
$15,944
$28,699
$41,454
Deferred Amount
$15,944
$28,699
$41,454
Deferred Amount
$15,944
$28,699
$41,454
Note: As described above in the 2015 Plan, payment of each deferred incentive award installment is contingent on the participant meeting the required criteria and the Bank meeting the stated payment criteria described below. For the 2015 Plan, the first year payout is 50% of the award amount and then 33 1/3% of the remaining 50% in each deferral installment over the next three years based on whether or not the stated payment criteria were met. The deferred amount shown for each of the years 2017, 2018, and 2019 is 125% of the deferred amount if both MV/CS and retained earnings levels are maintained, which we have assumed is met in each year for purposes of this calculation.

Stated Bank Performance Criteria, 2015. Payment of each deferred incentive award installment in 2017, 2018, and 2019 related to December 31, 2015 is contingent on the Bank continuing to meet the stated Bank performance criteria as well as being contingent on the participant continuing to meet his/her requirements. In no event shall the aggregate amount of any current incentive award and deferred incentive award installments paid to a participant in any payment year exceed 100% of the participant's base salary.
MV/CS - The annual MV/CS must have an average above 105% (the annual average amount will be calculated using the ending amount of each month during the year); and
Retained Earnings Level - Have retained earnings that exceed the Bank's retained earnings target at each year-end of the applicable deferred payment period.

Each of the two stated criteria above is equal to 50% of the deferred incentive payment amount. The Board will also consider the following criteria and may exercise its discretion to adjust an award:
Remediation of Examination Findings. This criterion is defined as the Bank making sufficient progress, as determined by the Finance Agency and communicated to Bank management or the Board, in the timely remediation of examination, monitoring, and other supervisory findings and matters requiring executive management attention; and
Timeliness of Finance Agency, SEC, and OF Filings. This criterion is defined as SEC periodic filings, call report filings with the Finance Agency, and FRS filings with the OF that are timely filed and no material restatement by the Bank is required.

At least one of the two stated quantifiable criteria above must have been met in the preceding year in order for any installment payment to be made. In the event that both of the stated quantifiable criteria are met in the preceding year, the payment will be made at 125% of the deferred amount. The Plan states that in no event shall the aggregate amount of any current incentive award and deferred incentive award installments paid to a participant in any payment year exceed 100% of the participant’s base salary. For the CEO, the aggregate amount of the 2015 Current Incentive Award plus the 2012, 2013 and 2014 Deferred Incentive Award installments payable by March 15, 2016 equaled 101.9% of the CEO's base salary. Because the

177



total amount exceeded the 100% limit by a de minimis amount (less than 2%), the Bank's Board determined, on an exception basis, to approve payment of the aggregate amount, irrespective of the 100% of base salary limitation in the Plan. The Board's action was subject to Finance Agency review and non-objection, which was received by the Bank.

Estimated future payouts presented above were calculated based on the executives' base salary as of January 1, 2015. The actual amount of the payout will be based on the executives' base salary at December 31, 2015.

2016 Grants
Name and
Principal Position
 
Performance Achieved in 2016
Amount Payable 2017
Amount Payable 2018
Amount Payable 2019
Amount Payable 2020
Winthrop Watson
President and CEO

Threshold
Target
Maximum
Total Opportunity
$387,877
$581,815
$775,753
50% Payout
$193,938
$290,907
$387,877
Deferred Amount
$161,615
Deferred Amount
$161,615
Deferred Amount
$161,615
Kristina K. Williams
Chief Operating Officer

Threshold
Target
Maximum
Total Opportunity
$269,380
$342,847
$416,314
50% Payout
$134,690
$171,423
$208,157
Deferred Amount
$86,732
Deferred Amount
$86,732
Deferred Amount
$86,732
David G. Paulson
Chief Financial Officer

Threshold
Target
Maximum
Total Opportunity
$192,541
$250,303
$308,065
50% Payout
$96,270
$125,151
$154,032
Deferred Amount
$64,180
Deferred Amount
$64,180
Deferred Amount
$64,180
Michael A. Rizzo
Chief Risk Officer

Threshold
Target
Maximum
Total Opportunity
$146,351
$201,233
$256,115
50% Payout
$73,176
$100,616
$128,057
Deferred Amount
$53,357
Deferred Amount
$53,357
Deferred Amount
$53,357
Dana A. Yealy
General Counsel

Threshold
Target
Maximum
Total Opportunity
$138,856
$190,926
$242,997
50% Payout
$69,428
$95,463
$121,499
Deferred Amount
$50,624
Deferred Amount
$50,624
Deferred Amount
$50,624
Note: As described above in the 2016 Plan, payment of each deferred incentive award installment is contingent on the participant meeting the required criteria and the Bank meeting the stated payment criteria described below. For the 2016 Plan, the first year payout is 50% of the award amount and then 33 1/3% of the remaining 50% in each deferral installment over the next three years based on whether or not the stated payment criteria were met. The deferred amount shown for each of the years 2018, 2019, and 2020 is 125% of the maximum deferred amount if both MV/CS and retained earnings levels are maintained, which we have assumed is met in each year for purposes of this calculation.

Under the 2016 Plan, the actual annual award opportunity for January 1, 2016, through December 31, 2016, and payouts are based on a percentage of the executive's base salary as of December 31, 2016. Each goal includes performance measures at threshold, target and maximum. The specific performance goals and total weighting for each goal for the CEO and other Executives are as follows. However, some goals have different weightings for the CRO as noted below.

Increase member use of core products by year-end 2016. Core products include: Advances, MPF, letters of credit, safekeeping and four community investment products (Affordable Housing Program, Community Lending Program, Banking On Business and First Front Door) (30% weighting);
Profitability as measured by adjusted earnings relative to GAAP capital in excess of average three month LIBOR within identified risk parameters (40% weighting) (35% CRO weighting);
KRI performance (10% weighting) (15% CRO weighting);
Peer operating expense scorecard - basket of 4 metrics (10% weighting);
Strengthen employee engagement and diversity and inclusion (10% weighting).

Adjusted earnings and other measures referenced above are as defined in the 2016 Plan. See Exhibit 10.12.2 to this Form 10-K.

Stated Bank Performance Criteria, 2016. Payment of each deferred incentive award installment in 2018, 2019, and 2020 related to December 31, 2016 is contingent on the Bank continuing to meet the stated Bank performance criteria as well as being contingent on the participant continuing to meet his/her requirements. In no event shall the aggregate amount of any current incentive award and deferred incentive award installments paid to a participant in any payment year exceed 100% of the participant's base salary.
MV/CS - The annual MV/CS must have an average above 105% (the annual average amount will be calculated using the ending amount of each month during the year); and

178



Retained Earnings Level - Have retained earnings that exceed the Bank's retained earnings target at each year-end of the applicable deferred payment period.

Each of the two stated criteria above is equal to 50% of the deferred incentive payment amount. The Board will also consider the following criteria and may exercise its discretion to adjust an award:
Remediation of Examination Findings. This criterion is defined as the Bank making sufficient progress, as determined by the Finance Agency and communicated to Bank management or the Board, in the timely remediation of examination, monitoring, and other supervisory findings and matters requiring executive management attention; and
Timeliness of Finance Agency, SEC, and OF Filings. This criterion is defined as SEC periodic filings, call report filings with the Finance Agency, and FRS filings with the OF that are timely filed and no material restatement by the Bank is required.

At least one of the two stated quantifiable criteria above must have been met in the preceding year in order for any installment payment to be made. In the event that both of the stated quantifiable criteria are met in the preceding year, the payment will be made at 125% of the deferred amount. In no event shall the aggregate amount of any Current Incentive Award and Deferred Incentive Award installments paid to a participant in any payment year exceed 100% of the participant’s base salary.

Estimated future payouts presented above were calculated based on the executives' base salary as of January 1, 2016. The actual amount of the payout will be based on the executives' base salary at December 31, 2016.

179



Pension Benefits
Name and
Principal Position
Plan Name
Number of Years
Credit Service
Present Value of Accumulated Benefits
Payments During
Last Fiscal Year
Winthrop Watson
President and CEO
Pentegra Defined Benefit Plan
5.58
 
 
$
247,000
 
 
 
-
SERP
6.08
 
 
$
738,000
 
 
 
-
Kristina K. Williams
Chief Operating Officer
Pentegra Defined Benefit Plan
10.50
 
 
$
449,000
 
 
 
-
SERP
11.00
 
 
$
692,000
 
 
 
-
David G. Paulson
Chief Financial Officer
Pentegra Defined Benefit Plan
5.25
 
 
$
131,000
 
 
 
-
SERP
5.75
 
 
$
75,000
 
 
 
-
Michael A. Rizzo
Chief Risk Officer
Pentegra Defined Benefit Plan
5.33
 
 
$
176,000
 
 
 
-
SERP
5.83
 
 
$
119,000
 
 
 
-
Dana A. Yealy
General Counsel
Pentegra Defined Benefit Plan
29.83
 
 
$
1,554,000
 
 
 
-
SERP
30.33
 
 
$
847,000
 
 
 
-

The description of the Pentegra Defined Benefit Plan contained in the Summary Plan Description for the Financial Institutions Retirement Fund and the description of the SERP contained in the Supplemental Executive Retirement Plan are included as Exhibit 10.5.1 to the 2013 Form 10-K and Exhibit 10.5.2 to the Bank’s First Quarter 2015 Form 10-Q. See “Qualified and Non-Qualified Defined Benefit Plans” under “Compensation Discussion and Analysis” in this Item 11. of this Form 10-K for the different purposes for each plan.

This table represents an estimate of retirement benefits payable at normal retirement age in the form of the actuarial present value of the accumulated benefit. The amounts were computed as of the same plan measurement date that the Bank uses for financial statement reporting purposes. The same assumptions were used that the Bank uses to derive amounts for disclosure for financial reporting, except the above information assumed normal retirement age as defined in the plan. See narrative discussion of the “Change in Pension Value” column under the SCT.

Compensation used in calculating the benefit for the Pentegra Defined Benefit Plan includes base salary only. Compensation used in calculating the benefit for the SERP includes the current incentive award portion of any award under the Bank’s executive compensation plan. Benefits under the SERP vest after completion of 5 years of employment (the vesting requirement under the Pentegra Defined Benefit Plan) subject to the forfeiture for cause provisions of the SERP.

Normal Retirement: Upon termination of employment at or after age 65 where an executive has met the vesting requirement of completing 5 years of employment, an executive hired prior to January 1, 2008 is entitled to a normal retirement benefit under the Pentegra Defined Benefit Plan equal to: 2% of his/her highest three-year average salary multiplied by his/her years' of benefit service. Under the SERP normal retirement benefit, the executive also would receive 2% of his/her highest three-year average incentive payment (as defined in the SERP) for such same three-year period multiplied by his/her years of benefit service. An executive hired on or after January 1, 2008 is entitled to a normal retirement benefit under the Pentegra Defined Benefit Plan equal to: 1.5% of his/her highest five-year average salary multiplied by his/her years of benefit service. Under the SERP normal retirement benefit, the executive also would receive 1.5% of his/her highest five-year average incentive payment (as defined in the SERP) for such same five-year period multiplied by his/her years of benefit service.

Early Retirement: Upon termination of employment prior to age 65, executives meeting the 5 year vesting and age 45 (age 55 if hired on or after January 1, 2008) early retirement eligibility criteria are entitled to an early retirement benefit. The early retirement benefit amount, for those hired prior to January 1, 2008, is calculated by taking the normal retirement benefit amount and reducing it by 3% times the difference between the age of the early retiree and age 65. For example, if an individual retires at age 61, the early retirement benefit amount would be 88% of the normal retirement benefit amount, a total reduction of 12%. At December 31, 2015, Mr. Watson, Ms. Williams, and Mr. Yealy were eligible for early retirement benefits.

180



Non-Qualified Deferred Compensation
Name and
Principal Position
Executive Contributions in 2015
Registrant Contributions in 2015
Aggregate Earnings (Losses) in
2015
Aggregate Withdrawals/
Distributions
Aggregate Balance at December 31, 2015
Winthrop Watson
President and CEO
 
$
286,620
 
 
 
$57,217
 
($9,712)
 
$-
 
 
$1,598,295
Kristina K. Williams
Chief Operating Officer
 
$
20,778
 
 
 
$20,778
 
($13,798)
 
$-
 
 
$1,069,725
David Paulson
Chief Financial Officer
 
$
85,141
 
 
 
$20,661
 
($2,953)
 
$-
 
 
$342,022
Michael A. Rizzo
Chief Risk Officer
 
$
29,282
 
 
 
$15,922
 
$3,262
 
$-
 
 
$283,701
Dana A. Yealy
General Counsel
 
$
30,305
 
 
 
$15,488
 
$27,899
 
$-
 
 
$1,271,880

See descriptions in the Qualified and Nonqualified Defined Contribution Plans section of the CD&A. A description of the Supplemental Thrift Plan is in Exhibit 10.6.2 to the Bank’s First Quarter 2015 Form 10-Q.

Amounts shown as "Executive Contributions in 2015" were deferred and reported as "Salary" in the SCT. Amounts shown as "Registrant Contributions in 2015" are reported as "All Other Compensation" in the SCT.

The CEO and other Executives may defer up to 80% of their total cash compensation (base salary and annual incentive compensation), less their contributions to the qualified thrift plan. All benefits are fully vested at all times subject to the forfeiture for cause provisions of the Supplemental Thrift Plan.

The investment options available under the nonqualified deferred compensation plan are closely matched to those available under the qualified defined contribution plan. Investment options include stock funds, bond funds, money market funds and target retirement funds.

181



Post-Termination Compensation

The CEO and other Executives would have received the benefits below in accordance with the Bank's severance policy (or in the case of the CEO the terms of his separate agreement, as applicable) if their employment had been severed without cause during 2015.

Post-Termination Compensation - Severance (Excluding Change-In-Control)
Name and
Principal Position
Base Salary
Medical Coverage (1)
Executive
Outplacement (2)
Total
Length
Amount
Length
Amount
Length
Amount
Winthrop Watson
President and CEO
52 weeks
$
725,003
 
52 weeks
$
13,048
12 months
$
11,000
$
749,051
Kristina K. Williams
Chief Operating Officer
44 weeks
$
394,695
 
44 weeks
$
11,041
12 months
$
11,000
$
416,736
David G. Paulson
Chief Financial Officer
26 weeks
$
163,725
 
26 weeks
$
6,524
12 months
$
11,000
$
181,249
Michael A. Rizzo
Chief Risk Officer
26 weeks
$
161,322
 
26 weeks
$
6,524
12 months
$
11,000
$
178,846
Dana A. Yealy
General Counsel
52 weeks
$
306,120
 
52 weeks
$
13,048
12 months
$
11,000
$
330,168
Notes:
(1) Additional taxable compensation equivalent to the Bank’s share of medical coverage costs for its active employees.
(2) Estimated cost based on one year of individualized outplacement services with a firm of the Bank's choosing.

Under the CIC Agreements, in the event of employment termination other than for cause (including constructive discharge) following a change in control event, in place of the severance benefits above, the CEO and other Executives would instead receive the benefits below.


182



Post-Termination Compensation - Change-In-Control
Name and
Principal Position
Base
Salary(1)
Potential Incentive
Award(2) (7)
Medical Coverage (3)
Outplace-
ment
Services(4)*
Severance/
Defined Benefit Service Amount (5)**
Accelerated Deferred Incentive Installment Amount(7)
Severance/
Defined Contribution Match Amount(6)**
Total
Winthrop Watson
President and CEO
$
1,450,006
$
1,087,505
$
19,572
$
11,000
$478,487
$
1,187,208
$152,251
$
4,386,029
Kristina K. Williams
Chief Operating Officer
$
932,916
$
513,104
$
19,572
$
11,000
n/a
$
549,139
n/a
$
2,025,731
David G. Paulson
Chief Financial Officer
$
654,900
$
360,195
$
19,572
$
11,000
n/a
$
316,962
n/a
$
1,362,629
Michael A. Rizzo
Chief Risk Officer
$
645,288
$
290,380
$
19,572
$
11,000
n/a
$
328,318
n/a
$
1,294,558
Dana A. Yealy
General Counsel
$
612,240
$
275,508
$
19,572
$
11,000
n/a
$
307,579
n/a
$
1,225,899
n/a - not applicable
* Estimated cost based on one year of individualized outplacement services with a firm of the Bank's choosing.
** Includes both qualified and nonqualified plans.
Notes:
(1) CIC agreements stipulate two years of base salary for eligible participants.
(2) CIC agreements stipulate an amount equal to two times the payout award that could have been received at target payout amount for eligible participants.
(3) CIC agreements stipulate 18 months of additional taxable compensation equivalent to the Bank’s share of medical coverage costs for its active employees.
(4) CIC agreements stipulate 12 months of outplacement services for eligible participants.
(5) CIC agreement for CEO also stipulates additional severance in an amount equivalent to the additional benefit amount that he would receive for two additional years of service at the same annual compensation at the time of separation from the Bank under the qualified and nonqualified defined benefit.
(6) CIC agreement for CEO stipulates additional severance in an amount equivalent to two years of defined contribution match. Note that compensation for the defined contribution match includes base compensation and annual incentive.
(7) The 2012, 2013, and 2014 Executive Officer Incentive Compensation Plans provide for vesting of the remaining unpaid deferred award installments that correspond to each participant’s 2012, 2013 and 2014 current incentive award. The 2015 Executive Officer Incentive Compensation Plan also provides for vesting of deferred award installments in the event of a Change in Control. As a result, the unpaid deferred award installments for each participant that corresponds to the 2015 current incentive award would also be paid out upon a CIC event along with the 2012, 2013 and 2014 Plans’ unpaid deferred installments. This payment is in addition to any current incentive award payout reflected in the SCT. The unpaid deferred installments that would vest for each participant are as set forth above in the deferred installments table. See Exhibit 10.12 to the Bank’s 2013 Form 10-K for the full terms of the 2014 Plan. See Exhibit 10.10 to the Bank’s 2011 Form 10-K for the terms of the 2012 Plan and Exhibit 10.11.1 to the Bank’s 2013 Form 10-K for the terms of the 2013 Plan. See Exhibit 10.12.2 to the Bank’s 2014 Form 10-K for the terms of the 2015 Plan.

183



DIRECTOR COMPENSATION

The Bank's directors were compensated in accordance with the 2015 Directors’ Compensation Policy (2015 Compensation Policy) as adopted by the Bank's Board. Under the 2015 Compensation Policy, the total annual director fees were paid as a combination of a quarterly retainer fee and per meeting fees. The following table sets forth the maximum fees that Bank directors could earn in 2015.
 
Retainer Fees
Meeting Fees
Total
Board Chair
$55,500
$57,000
$112,500
Board Vice Chair
$46,300
$46,200
$92,500
Committee Chair
$46,300
$46,200
$92,500
Director
$40,000
$40,000
$80,000

The 2015 Compensation Policy fee levels were as set forth in Exhibit 10.4.1 to the Bank's 2014 Form 10-K. The Finance Agency has determined that the payment of director compensation is subject to Finance Agency review. Compensation can exceed the guidelines under the 2015 Compensation Policy based on a Director assuming additional responsibilities, such as chairing a Committee or Board meeting.
Name
Fees Earned or
Paid in Cash
All Other Compensation
Total Compensation
Patrick A. Bond (Chair)
$
112,500
$
27
$
112,527

John K. Darr (Vice Chair)
92,500
27
92,527
 
Pamela C. Asbury
80,000
27
80,027
 
Joseph M. Blaston
80,000
27
80,027
 
Glenn R. Brooks
80,000
27
80,027
 
Luis A. Cortés Jr.
80,000
27
80,027
 
Pamela H. Godwin
92,500
27
92,527
 
Brian A. Hudson
92,500
27
92,527
 
William C. Marsh
80,000
27
80,027
 
Charlotte McLaughlin
92,500
27
92,527
 
Lynda Messick
80,000
27
80,027
 
John S. Milinovich
92,500
27
92,527
 
Charles J. Nugent
92,500
27
92,527
 
Bradford Ritchie
80,000
27
80,027
 
Frederick E. Schea
80,000
27
80,027
 
Patrick J. Ward
92,500
27
92,527
 
Angela J. Yochem
80,000
27
80,027
 

"Total Compensation" does not include previously deferred director fees for prior years' service and earnings on such fees for those directors participating in the Bank's nonqualified deferred compensation deferred fees plan for directors. The plan allows directors to defer their fees for the year in total and receive earnings based on returns available under or comparable to certain publicly available mutual funds, including equity funds and money market funds. No Bank matching contributions are made under the plan. Directors that attended all Board and applicable Committee meetings in 2015 received the maximum total fees. In 2015, the Bank had a total of seven Board meetings and 62 Board Committee meetings (including Executive Committee meetings).

"All Other Compensation" for each includes $27 per director annual premium for director travel and accident insurance.

For 2016, the Bank's Board adopted and submitted to the Finance Agency the 2016 Directors' Compensation Policy with the basis for fee payment being a combination of quarterly retainer and per-meeting fees, as was the case under the 2015 Directors’ Compensation Policy. In general, the 2016 Directors' Compensation Policy provides for total fees for the Chair of $125,000; $103,750 for the Vice Chair and for each of the Committee Chairs; and $91,250 for each of the other Directors. See Exhibit 10.4.2 to the Bank Third Quarter 2015 Form 10-Q for additional details on the 2016 Directors' Compensation Policy.

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

Generally, the Bank may issue capital stock only to members. As a result, the Bank does not offer any compensation plan under which equity securities of the Bank are authorized for issuance.

Member Institutions Holding 5% or More of Outstanding Capital Stock
as of February 29, 2016
Name
Address
Capital Stock
% of Total
Capital Stock
PNC Bank, N.A. (a)
222 Delaware Avenue
Wilmington, Delaware 19899
$
902,152,000

26.3
%
Santander Bank, N.A.
824 North Market Street, Suite 100
Wilmington, Delaware 19801
555,492,100

16.2
%
Chase Bank USA, N.A.
201 North Walnut Street
Wilmington, Delaware 19801
424,585,700

12.4
%
Ally Bank (b)
6985 Union Park Center, Suite 435
Midvale, Utah 84047
341,286,900

10.0
%
(a) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(b) For Bank membership purposes, principal place of business is Horsham, PA.

Additionally, due to the fact that a majority of the Board of the Bank is elected from the membership of the Bank, these elected directors are officers and/or directors of member institutions that own the Bank’s capital stock. These institutions are provided in the following table.

Capital Stock Outstanding to Member Institutions
Whose Officers and/or Directors Served as a Director of the Bank
as of February 29, 2016
Name
Address
Capital Stock
% of Total
Capital Stock
PNC Bank, N.A. (a)
222 Delaware Avenue
Wilmington, Delaware 19899
$
902,152,000

26.3
%
Santander Bank, N.A.
824 North Market Street, Suite 100
Wilmington, Delaware 19801
555,492,100

16.2
%
Fulton Bank, N.A.
One Penn Square, P.O. Box 4887
Lancaster, Pennsylvania 17604
25,821,700

0.8
%
Genworth Life Insurance Company
2711 Centerville Road, Suite 400
Wilmington, Delaware 19808
18,103,600

0.5
%
Penn Community Bank
219 S. Ninth Street
Perkasie, Pennsylvania 18944
12,584,500

0.4
%
Summit Community Bank, Inc.
310 North Main Street
Moorefield, West Virginia 26836
8,266,500

0.2
%
Washington Financial Bank
77 South Main Street
Washington, Pennsylvania 15301
4,043,900

0.1
%
The Farmers National Bank of Emlenton
612 Main Street
Emlenton, Pennsylvania 16373
1,934,700

0.1
%
Atlantic Community Bankers Bank
1400 Market Street
Camp Hill, Pennsylvania 17011
1,395,000

*

Penn Liberty Bank
724 W Lancaster Avenue, Ste 210
Wayne, Pennsylvania 19087
287,400

*

County Bank
19927 Shuttle Road
Rehoboth Beach, Delaware 19971
149,000

*

*Less than 0.1%.
(a) For Bank membership purposes, principal place of business is Pittsburgh, PA.
Note: In accordance with Section 10(c) of the Act and the terms of the Bank’s security agreement with each member, the capital stock held by each member is pledged to the Bank as additional collateral to secure that member’s loans and other indebtedness to the Bank.

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Item 13: Certain Relationships and Related Transactions, and Director Independence

Corporate Governance Guidelines

The Bank has adopted corporate governance guidelines titled “Governance Principles” which are available at www.fhlb-pgh.com by first clicking “Investor Relations” and then “Governance.” The Governance Principles are also available in print to any member upon written request to the Bank, 601 Grant Street, Pittsburgh, Pennsylvania 15219, Attention: General Counsel. These principles were adopted by the Board of Directors to help ensure that the Board of Directors is independent from management, that the Board of Directors adequately performs its function as the overseer of management and to help ensure that the interests of the Board of Directors and management align with the interests of the Bank’s members.

On an annual basis, each director and executive officer is obligated to complete a director and officer questionnaire which requires disclosure of any transactions with the Bank in which the director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest. All directors must adhere to the Bank’s Code of Conduct which addresses conflicts of interest. Under the Code of Conduct, only the Board can grant a waiver of the Code’s requirements in regard to a director or executive officer.

Bank’s Cooperative Structure

All members are required by law to purchase capital stock in the Bank. The capital stock of the Bank can be purchased only by members. As a cooperative, the Bank’s products and services are provided almost exclusively to its members. In the ordinary course of business, transactions between the Bank and its members are carried out on terms that are established by the Bank, including pricing and collateralization terms that treat all similarly situated members on a nondiscriminatory basis. Loans included in such transactions did not involve more than the normal risk of collectibility or present other unfavorable terms. Currently, ten of the Bank’s seventeen directors are officers or directors of members. In recognition of the Bank’s status as a cooperative, in correspondence from the Office of Chief Counsel of the Division of Corporation Finance of the SEC, dated September 28, 2005, transactions in the ordinary course of the Bank’s business with member institutions are excluded from SEC Related Person Transaction disclosure requirements. No individual director or executive officer of the Bank or any of their immediate family members has been indebted to the Bank at any time.

Related Person Transaction Policy

In addition to the Bank’s Code of Conduct which continues to govern potential director and executive officer conflicts of interest, originally effective January 31, 2007 (most recently updated effective November 1, 2015), the Bank has adopted a written Related Person Transaction Policy. The Policy is subject to annual review and approval and was most recently re-approved by the Board in February 2016. In accordance with the terms of the Policy, the Bank will enter into Related Person Transactions that are not in the ordinary course of Bank business only when the Governance and Public Policy Committee of the Board determines that the Related Person Transaction is in the best interests of the Bank and its investors. Ordinary course of Bank business is defined as providing the Bank’s products and services, including affordable housing products, to member institutions on terms no more favorable than the terms of comparable transactions with similarly situated members. A Related Person Transaction requiring disclosure is a transaction, arrangement or relationship (or a series of transactions, arrangements or relationships) in which the Bank was, is or will be a participant, the amount involved exceeds $120 thousand and in which a Related Person had, has or will have a direct or indirect material interest. A Related Person is any director or executive officer of the Bank, any member of their immediate families or any holder of 5 percent or more of the Bank’s outstanding capital stock. A transaction with a company with which a Related Person is associated is deemed pre-approved where the Related Person: (1) serves only as a director of such company; (2) is only an employee (and not an executive officer) of such company; or (3) is the beneficial owner of less than 10 percent of such company’s shares.

Related Person Transactions

Beginning in 1997, the Bank began purchasing bonds issued by Pennsylvania Housing Finance Agency (PHFA). On May 14, 2007, Brian Hudson, Executive Director and Chief Executive Officer of PHFA, was appointed as a director of the Bank by the Finance Agency. On June 25, 2007, in accordance with the Related Person Transaction Policy, the Governance Committee approved the Bank’s continued purchases of PHFA bonds. In 2015, the Bank purchased $31.7 million of PHFA Bonds. As of February 29, 2016, the total outstanding principal amount of PHFA bonds held by the Bank was $176.3 million. The greatest aggregate outstanding principal amount of all PHFA bonds held by the Bank in 2015 was $176.3 million. The greatest amou

186



nt of any single PHFA bond held by the Bank in 2015 was $41.0_ million. In 2015, the Bank received $1.3 million in interest payments on outstanding PHFA bonds and $14.9 million in principal payments due to bond calls and redemptions.

PHFA, as the state housing finance agency for Pennsylvania, provides funding for housing for very-low- and low-income households. As a result, many of the projects that PHFA provides funding to are projects that also apply for and receive funding from the Bank’s AHP program. Consequently, on June 25, 2007, the Governance Committee also approved the Bank continuing to enter into AHP grant transactions in which PHFA participates. In 2015, the Bank approved $8.5 million in AHP grants for 20 projects in which PHFA served as a sponsor or otherwise participated. AHP grants were approved in accordance with the competitive AHP scoring regulations of the Finance Agency, including the requirement that any FHLBank director who is associated with, or whose institution is associated with, an AHP grant under consideration for approval, recuse themselves from the consideration of the grant by the Bank’s Board. See 12 C.F.R. 1291.10. The Bank followed this process in regard to its Board’s consideration and approval of these AHP grants at its meeting in December 2015. Mr. Hudson did not participate in the consideration or approval of these $8.5 million in grant requests presented to the Board.

Since December 2000, as permitted under the Finance Agency’s AHP Regulations at 12 C.F.R. 1291.7 PHFA has been a party to an AHP project monitoring agreement with the Bank under which PHFA agrees to monitor the AHP compliance requirements for the Bank with respect to projects in which PHFA also monitors federal tax credit compliance. The Bank pays PHFA a fee of $225 for each AHP project monitored by PHFA during the year. In 2015, the Bank paid PHFA $900 in AHP monitoring fees. The amount of fees paid by the Bank fluctuates each year and is dependent on the number of projects the Bank identifies each year that need to be monitored for compliance with AHP requirements.

As a state housing finance agency, PHFA is eligible to apply to the Bank and be approved as a non-member housing associate borrower from the Bank in accordance with Finance Agency Regulations. See 12 C.F.R. 1264.3. The Bank approved PHFA as a housing associate borrower on December 19, 2007. With the approval of PHFA as a housing associate, the Bank has three housing associate borrowers. The terms of any Bank loans to such housing associates are ordinary course of business transactions governed by the Bank’s Member Products Policy and applied to all housing associates. Under the terms of the Bank’s Related Person Transaction Policy, provided that the loans to any related person are in accordance with the terms of the Bank’s Member Products Policy, then, such transactions are within the ordinary course of business of the Bank and not subject to Governance Committee approval. As of February 29, 2016, there were no outstanding loans from the Bank to PHFA.

In 2001, in furtherance of its mission to provide funding for economic development in the Bank’s district, the Bank entered into an agreement to make up to a $500,000 capital contribution to Mountaineer Capital, LP (Mountaineer Capital). Mountaineer Capital is a Small Business Investment Company (SBIC) which provides financing for small businesses in West Virginia. On May 14, 2007, Patrick Bond, General Partner for Mountaineer Capital, was appointed to serve as a director of the Bank. On January 23, 2007, the Bank made a capital contribution of $50,000 to Mountaineer Capital. At year-end 2007, the total amount of Bank capital contributions was $375,000. On February 12, 2008, the Governance Committee approved a $50,000 capital contribution request and granted approval for additional capital contributions to Mountaineer Capital in accordance with the terms of the Bank’s agreement, up to a total amount of $500,000. Through February 29, 2016, the Bank’s total capital contributions to Mountaineer Capital were $475,000. Mountaineer Capital has informed the Bank and its other limited partners that it is no longer seeking further capital contributions.

On February 19, 2009, the Governance Committee approved the Bank entering into interest bearing deposit, Federal funds, unsecured note purchase and other money market transactions with Bank members, including five (5) percent or greater shareholders of the Bank and Member Directors’ institutions. Beginning in 2011, the Governance Committee continued re-authorization in regard to additional member money market transactions annually. All such transactions must be in accordance with the terms of the Bank’s investment and counterparty policy statements and limits.

In 2015, the Bank engaged in Federal funds transactions with the following related persons:

Fulton Bank. The largest principal amount outstanding with Fulton Bank during 2015 was $45 million and the total amount of interest paid was $563.

Santander Bank. The largest principal amount outstanding with Santander Bank during 2015 was $200 million and the total amount of interest paid was $17,549.

Through February 29, 2016, the Bank had $225 million of additional Federal funds transactions with related persons.

Prior to Director McLaughlin’s service on the Board, the Bank had approved, pursuant to applicable Bank policies, the use of PNC Capital Markets, LLC (PNC Capital Markets) as an authorized Bank broker for Bank investment transactions. On

187



February 24, 2011, the Governance Committee initially approved (and renewed such authorization in the years 2012 through 2015) the Bank entering into MBS and other authorized investments using as its broker PNC Capital Markets; provided that, PNC Capital Markets meets the Bank’s applicable credit and other Bank policy requirements regarding authorized Bank brokers. Ms. McLaughlin is an Executive Vice President of PNC Bank, N.A. and also serves as a managing member of PNC Capital Markets. Ms. McLaughlin did not participate in the Governance Committee’s determination. There were no Bank investment transactions executed in 2015 in which PNC Capital Markets served as broker.

Under the terms of the Bank’s Related Person Transaction Policy as most recently approved, the Governance Committee annually reviews previously approved Related Person Transactions to determine whether to authorize any new Related Person Transactions with each Related Person that the Committee has previously approved. Such re-authorization applies solely to new Related Person Transactions with such entity(ies) and does not affect the authorized status of any existing and outstanding Related Person Transactions. In February 2016, the Committee considered the previously approved PHFA, PNC Capital Markets and member money market transactions as described above and determined to continue the authorization of new Related Person Transactions with these entities. In addition, the Committee approved the continued waiver of daylight overdraft fees due from any member, including any Related Person, provided that the Bank does not incur a charge.

Director Independence

Under the Act, Bank management is not allowed to serve on the Bank’s Board. Consequently, all directors of the Bank are outside directors. As discussed in Item 10. Directors, Executive Officers and Corporate Governance in this Form 10-K, directors are classified under the Act as either being a Member Director or an Independent Director. By statute, the Board cannot expand or reduce the number of directors that serve on the Board. Only the Finance Agency has the authority to determine how many seats exist on the Board, which is currently set at 17. As of February 29, 2016, the Board was comprised of 17 directors: ten Member Directors and seven Independent Directors.

The Bank’s Directors are prohibited from personally owning stock in the Bank. In addition, the Bank is required to determine whether its directors are independent under two distinct director independence standards. First, the Act and Finance Agency Regulations establish substantive independence criteria, including independence criteria for directors who serve on the Bank’s Audit Committee. Second, the SEC rules require, for disclosure purposes, that the Bank’s Board apply the independence criteria of a national securities exchange or automated quotation system in assessing the independence of its directors.

The Act and Finance Agency Regulations. Following the enactment of the Housing Act amendments to the Act on July 30, 2008, an individual is not eligible to be an Independent Bank director if the individual serves as an officer, employee, or director of any member of the Bank, or of any recipient of loans from the Bank. During 2015 and through February 29, 2016, none of the Bank’s Independent Directors were an officer, employee or director of any member or of any institution that received advances from the Bank.

Effective on enactment of the Housing Act, the FHLBanks are required to comply with the substantive Audit Committee director independence standards under Section 10A(m) of the Exchange Act. Rule 10A-3(b)(ii)(B) implementing Section 10A(m) provides that in order to be considered to be independent, a member of an audit committee may not: a) accept directly or indirectly a compensatory fee (other than from the issuer for service on the Board) or b) be an affiliated person of the issuer, defined as someone who directly or indirectly controls the issuer. The SEC implementing regulations provide that a person will be deemed not to control an issuer if the person does not own directly or indirectly more than 10% of any class of voting equity securities. The existence of this safe harbor does not create a presumption in any way that a person exceeding the ownership requirement controls or is otherwise an affiliate of a specified person. In regard to the Bank and the other FHLBanks, this provision of the Housing Act raises an issue whether a Member Director whose institution is a 10% or greater Bank shareholder could be viewed as an affiliate of the Bank, rendering such Member Director ineligible to serve on the Bank’s Audit Committee. Because of the cooperative structure of the FHLBanks, the limited items on which FHLBank stockholders may vote and the statutory cap limiting the votes that any one member may cast for a director to the state average, it is not clear that the fact that a Member Director’s institution is a 10% or greater Bank shareholder is an affiliate of the Bank. Nevertheless, none of the Bank’s current Audit Committee members nor those who served during 2015 were Member Directors from institutions that were 10% or greater Bank shareholders.

In addition, the Finance Agency director independence standards prohibit individuals from serving as members of the Bank’s Audit Committee if they have one or more disqualifying relationships with the Bank or its management that would interfere with the exercise of that individual’s independent judgment. Disqualifying relationships considered by the Board are: employment with the Bank at any time during the last five years; acceptance of compensation from the Bank other than for service as a director; being a consultant, advisor, promoter, underwriter or legal counsel for the Bank at any time within the last five years; and being an immediate family member of an individual who is or who has been within the past five years, a Bank executive officer. As of February 29, 2016, all current members of the Audit Committee were independent under the substantive Act and Finance Agency regulatory criteria.

SEC Rules. Pursuant to the SEC rules applicable to the Bank for disclosure purposes, the Bank’s Board has adopted the independence standards of the New York Stock Exchange (NYSE) to determine which of its directors are independent, which members of its Human Resources Committee are not independent, which members of its Audit Committee are not independent and whether the Bank’s Audit Committee financial expert is independent. As the Bank is not a listed company, the NYSE director independence standards are not substantive standards that are applied to determine whether individuals can serve as members of the Bank’s Board or its Human Resources, or Audit Committees.

After applying the NYSE independence standards, the Board determined that for purposes of the SEC disclosure rules, as of February 19, 2016, with respect to the Bank’s current directors, six of the Bank’s Independent Directors, Directors Bond, Brooks, Cortés, Darr, Godwin and Yochem are independent. In determining that Director Cortés was independent, the Board considered that Esperanza, the non-profit organization for which Director Cortés serves as President, has received AHP grants and charitable contributions from the Bank from time to time, including when Director Cortés was not a Bank Director. None of these transactions occurred in 2015 that required consideration under the Bank’s Related Person Transaction Policy.

With respect to the Bank’s remaining current Independent Director, the Board determined that in view of the historic and ongoing relationship and transactions described above with respect to PHFA that Director Hudson is not independent.

The Board was unable to affirmatively determine that there are no material relationships (as defined in the NYSE rules) between the Bank and its Member Directors, and on February 19, 2016 concluded that none of the Bank’s current Member Directors was independent under the NYSE independence standards. In making this determination, the Board considered the cooperative relationship between the Bank and its Member Directors. Specifically, the Board considered the fact that each of the Bank’s Member Directors are officers or directors of a Bank member institution, and each member institution has access to, and is encouraged to use, the Bank’s products and services. Furthermore, the Board considered the appropriateness of making a determination of independence with respect to the Member Directors based on a member’s given level of business as of a particular date, when the level of each member’s business with the Bank is dynamic and the Bank’s desire as a cooperative is to increase its level of business with each of its members. As the scope and breadth of a member’s business with the Bank changes, such member’s relationship with the Bank might, at any time, constitute a disqualifying transaction or business relationship under the NYSE’s independence standards. For Member Director Blaston, who served on the Board in 2015 but did not run for re-election as a Member Director, the Board determined that he was not independent.

The Board’s Human Resources Committee has responsibility for overseeing executive compensation. Applying the NYSE independence standards for compensation committee members, the Board determined that the current Member Directors serving on the Human Resources Committee, Directors McLaughlin, Plush and Milinovich are not independent and that Director Hudson is not independent as well. The Board determined that Director Godwin is independent.

The Board has a standing Audit Committee. The Board determined that none of the current Member Directors serving as members of the Bank’s Audit Committee, Directors Ritchie and Asbury are independent under the NYSE standards for Audit Committee members. In addition, the Board determined that Director Hudson is not independent under the NYSE independence standards for audit committee members. The Board has determined that Directors Brooks and Yochem are independent. All of the Bank’s Audit Committee members are independent under the Finance Agency independence standards. With respect to Member Director Messick who served on the Committee in 2015, the Board determined that she was not independent.

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Item 14: Principal Accountant Fees and Services

The following table sets forth the aggregate fees billed to the Bank for 2015 and 2014 by its independent registered public accounting firm, PricewaterhouseCoopers LLP.
 
(in thousands)
2015
2014
Audit fees
$
784

$
750

Audit-related fees
54

49

All other fees
24

4

Total fees
$
862

$
803

 
Audit fees consist of fees billed for professional services rendered for the audits of the financial statements, reviews of interim financial statements, and audits of the Bank’s internal controls over financial reporting for the years ended December 31, 2015 and 2014.
 
Audit-related fees consist of fees billed during 2015 and 2014 for assurance and related services reasonably related to the performance of the audit or review of the financial statements. Audit-related fees were primarily for accounting consultations.
 
The Bank is exempt from all Federal, state and local income taxation with the exception of real estate property taxes and certain employer payroll taxes. There were no tax fees paid during 2015 and 2014.
 
The Audit Committee approves the annual engagement letter for the Bank’s audit. All other services provided by the independent accounting firm are pre-approved by the Audit Committee. The Audit Committee delegates to the Chair of the Audit Committee the authority to pre-approve non-audit services not prohibited by law to be performed by the independent auditors, subject to any single request involving a fee of $100,000 or higher being circulated to all Audit Committee members for their information and comment. The Chair shall report any decision to pre-approve such services to the full Audit Committee at its next meeting.
 
The Bank paid additional fees to PricewaterhouseCoopers LLP in the form of assessments paid to the OF. These fees were approximately $57 thousand and $48 thousand for 2015 and 2014, respectively. These fees were classified as Other Expense - Office of Finance on the Statement of Income and were not included in the totals above.

PART IV

Item 15: Exhibits and Financial Statement Schedules

(a)(1) Financial Statements

The following Financial Statements and related notes, together with the report of PricewaterhouseCoopers LLP, appear in Item 8.
 
Statements of Income for each of the years ended December 31, 2015, 2014 and 2013
Statements of Comprehensive Income for each of the years ended December 31, 2015, 2014, and 2013
Statements of Condition as of December 31, 2015 and 2014
Statements of Cash Flows for each of the years ended December 31, 2015, 2014 and 2013
Statements of Changes in Capital for each of the years ended December 31, 2015, 2014 and 2013
 
(2) Financial Statement Schedules
 
The schedules required by the applicable accounting regulations of the Securities and Exchange Commission that would normally appear in Item 8. Financial Statements and Supplementary Data are included in the Earnings Performance and Financial Condition sections within Item 7. Management’s Discussion and Analysis. 



189



(b) Index of Exhibits

The following is a list of the exhibits filed with the Bank’s 2015 Form 10-K or incorporated herein by reference:

Exhibit No.
Description
Method of Filing +
3.1
Certificate of Organization
Incorporated by reference to the correspondingly numbered Exhibit to the Bank’s registration statement on Form 10 filed with the SEC on June 9, 2006.
3.2
The Bylaws of the Federal Home Loan Bank of Pittsburgh
Incorporated by reference to the correspondingly numbered Exhibit to the Bank's Form 10-K filed with the SEC on March 18, 2010.
3.2.1
The Bylaws of the Federal Home Loan Bank of Pittsburgh as amended effective March 10, 2016
Filed herewith.
4.1
Bank Capital Plan
Incorporated by reference to the correspondingly numbered Exhibit to the Bank’s registration statement on Form 10 filed with the SEC on June 9, 2006.
4.1.1
Amended Bank Capital Plan
Incorporated by reference to the correspondingly numbered Exhibit to the Bank's Form 10-Q filed with the SEC on August 9, 2010.
4.1.2
Amended Bank Capital Plan as further amended effective September 5, 2011
Incorporated by reference to Exhibit 99.2 to the Bank's current report filed on Form 8-K on August 5, 2011.
4.1.3
Amended Bank Capital Plan effective October 6, 2014
Incorporated by reference to Exhibit 99.3 to the Bank’s current report on Form 8-K filed on July 29, 2014.
10.1
April 2012 Severance Policy*
Incorporated by reference to Exhibit 10.1.1 to the Bank's Form 10-K filed with the SEC on March 13, 2014.
10.1.1
January 2015 Severance Policy*
Incorporated by reference to Exhibit 10.1.2 to the Bank's Form 10-K filed with the SEC on March 12, 2015.
10.2
Services Agreement with FHLBank of Chicago
Incorporated by reference to Exhibit 10.7 to the Bank’s registration statement on Form 10 filed with the SEC on June 9, 2006.
10.3
Federal Home Loan Banks P&I Funding and Contingency Plan Agreement
Incorporated by reference to Exhibit 10.10 to Amendment No. 1 to the Bank's registration statement on Form 10 filed with the SEC on July 19, 2006.
10.4
2015 Directors' Compensation Policy*
Incorporated by reference to Exhibit 10.4.1 to the Bank's Form 10-K filed with the SEC on March 12, 2015.
10.4.1
2016 Directors’ Compensation Policy*
Incorporated by reference to Exhibit 10.4.2 to the Bank's Form 10-Q filed with the SEC on November 5, 2015.
10.5
Supplemental Executive Retirement Plan Amended and Restated Effective June 26, 2007, Revised December 19, 2008, December 18, 2009 and October 26, 2012*
Incorporated by reference to Exhibit 10.5 to the Bank's Form 10-K filed with the SEC on March 14, 2013.
10.5.1
Pentegra Defined Benefit Plan for Financial Institutions Summary Plan Description Dated July 1, 2013*
Incorporated by reference to the correspondingly numbered Exhibit to the Bank's Form 10-K filed with the SEC on March 13, 2014.
10.5.2
Supplemental Executive Retirement Plan as amended March 26, 2015*
Incorporated by reference to Exhibit 10.5.2 to the Bank's Form 10-Q filed with the SEC on May 7, 2015.
10.6
Supplemental Thrift Plan Amended and Restated Effective June 26, 2007, Revised September 26, 2007, December 19, 2008, December 18, 2009, and October 26, 2012*
Incorporated by reference to Exhibit 10.6 to the Bank's Form 10-K filed with the SEC on March 14, 2013.
10.6.1
Pentegra Defined Contribution Plan for Financial Institutions Summary Plan Description Dated May 1, 2012*
Incorporated by reference to Exhibit 10.6.1 to the Bank's Form 10-K filed with the SEC on March 14, 2013.
10.6.2
Supplemental Thrift Plan as amended March 26, 2015*
Incorporated by reference to Exhibit 10.6.2 to the Bank's Form 10-Q filed with the SEC on May 7, 2015.
10.6.3
Pentegra Defined Contribution Plan for Financial Institutions Summary Plan Description dated January 1, 2015*
Filed herewith.
10.7
Mortgage Partnership Finance® Services Agreement Dated August 31, 2007, with FHLBank of Chicago
Incorporated by reference to Exhibit 10.17 to the Bank's Form 10-Q filed with the SEC on November 7, 2007.
10.8
Form of Change in Control Agreement with Executive Officers Yealy and Williams*
Incorporated by reference to Exhibit 10.18 to the Bank's Form 10-K filed with the SEC on March 13, 2008.
10.8.1
Change in Control Agreement with Mr. Rizzo*
Incorporated by reference to Exhibit 10.9.1 to the Bank's Form 10-K filed with the SEC on March 18, 2011.

190



Exhibit No.
Description
Method of Filing +
10.8.2
Change in Control Agreement with Mr. Watson*
Incorporated by reference to Exhibit 10.9.2 to the Bank's Form 10-K filed with the SEC on March 18, 2010.
10.8.3
Amended and Restated Change in Control Agreement with Mr. Watson effective January 1, 2011*
Incorporated by reference to Exhibit 10.9.4 to the Bank's Form 10-K filed with the SEC on March 18, 2011.
10.8.4
Form of Change in Control Agreement with Executive Officers Mason and Paulson*
Incorporated by reference to Exhibit 10.8.4 to the Bank’s Form 10-K filed with the SEC on March 13, 2014.
10.9
Form of Amendment to Change in Control Agreement with Executive Officers Watson, Williams, Paulson, Rizzo, Mason, and Yealy effective January 1, 2015*
Incorporated by reference to Exhibit 10.9 to the Bank’s Form 10-K filed with the SEC on March 12, 2015.
10.10
2012 Executive Officer Incentive Compensation Plan*
Incorporated by reference to Exhibit 10.10 to the Bank's Form 10-K filed with the SEC on March 15, 2012.
10.11
2013 Executive Officer Incentive Compensation Plan*
Incorporated by reference to Exhibit 10.11 to the Bank's Form 10-K filed with the SEC on March 14, 2013.
10.11.1
2013 Amended Executive Officer Incentive Compensation Plan*
Incorporated by reference to Exhibit 10.11.1 to the Bank's Form 10-Q filed with the SEC on May 8, 2013.
10.12
2014 Executive Officer Incentive Compensation Plan*
Incorporated by reference to the correspondingly numbered Exhibit to the Bank’s Form 10-K filed March 13, 2014.
10.12.1
2015 Executive Incentive Compensation Plan*
Incorporated by reference to Exhibit 10.12.2 to the Bank’s Form 10-K filed March 12, 2015.
10.12.2
2016 Executive Incentive Compensation Plan*
Filed herewith.
10.13
Offer Letter for Winthrop Watson*
Incorporated by reference to Exhibit 10.15 to the Bank's Form 10-Q filed with the SEC on November 12, 2009.
10.14
Joint Capital Enhancement Agreement dated February 28, 2011
Incorporated by reference to Exhibit 99.1 of the Bank's Form 8-K filed with the SEC on March 1, 2011.
10.14.1
Amended Joint Capital Enhancement Agreement dated August 5, 2011
Incorporated by reference to Exhibit 99.1 of the Bank's Form 8-K filed with the SEC on August 5, 2011.
12.1
Ratio of Earnings to Fixed Charges
Filed herewith.
22.1
Election of Directors Report
Incorporated by reference to Exhibit 99.2 of the Bank's current report on Form 8-K filed with the SEC on November 23, 2015.
24.0
Power of Attorney
Filed herewith.
31.1
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a)
Filed herewith.
31.2
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)
Filed herewith.
31.3
Certification of the Principal Accounting Officer pursuant to Rule 13a-14(a)
Filed herewith.
32.1
Certification of the Principal Executive Officer pursuant to 18 U.S.C. § 1350
Filed herewith.
32.2
Certification of the Principal Financial Officer pursuant to 18 U.S.C. § 1350
Filed herewith.
32.3
Certification of the Principal Accounting Officer pursuant to 18 U.S.C. § 1350
Filed herewith.
99.1
Federal Home Loan Bank of Pittsburgh Board of Directors Audit Committee Charter
Filed herewith.
99.2
Report of the Audit Committee
Furnished herewith.
101
Interactive Data File (XBRL)
Filed herewith.
+ Incorporated document references to filings by the registrant are to SEC File No. 000-51395.
* Denotes management contract or compensatory plan.

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GLOSSARY
       ABS: Asset-Backed Securities
       ACL: Allowance for Credit Losses
AMA: Acquired member assets
APBO: Accumulated Post-retirement Benefit Obligation
Accumulated Other Comprehensive Income (Loss) (AOCI): Represents gains and losses of the Bank that have not yet been realized; balance is presented in the Equity section of the Statement of Condition.
Advance: Secured loan made to a member
Adjustable-rate mortgage (ARM): Mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index.
Affordable Housing Program (AHP): Bank program that provides primarily direct grants and/or subsidized loans to assist members in meeting communities’ affordable housing needs. Each FHLBank sets aside 10% of its pre-assessment income to fund the program with a minimum $100 million annual contribution by all 12 FHLBanks.
Banking On Business (BOB): Bank program that assists eligible small businesses with start-up and expansion. A small business is defined as any firm, proprietorship, partnership or corporation that has less than 50 employees and the lesser of $10 million in annual receipts or the annual receipts limits set by the Small Business Administration’s (SBA) size standards by North American Industry Classification (NAIC).
       CFTC: Commodity Futures Trading Commission
Capital stock: The five-year redeemable stock issued by the Bank pursuant to its capital plan.
Collateral: Property subject to a security interest that secures the discharge of an obligation (e.g., mortgage or debt obligation); a security interest that the Bank is required by statute to obtain and thereafter maintain beginning at the time of origination or renewal of a loan.
Collateralized mortgage obligation (CMO): Type of bond that divides cash flows from a pool of mortgages into multiple classes with different maturities or risk profiles.
Committee on Uniform Securities Identification Procedures (CUSIP): CUSIP-based identifiers provide a unique name for a wide range of global financial instruments including equity and debt issues, derivatives and syndicated loans. The CUSIP consists of a combination of nine characters, both letters and numbers, which identify a company or issuer and the type of security.
Community Development Financial Institution (CDFI): Private institutions that provide financial services dedicated to economic development and community revitalization in underserved markets; include community development loan funds, venture capital funds and state-chartered credit unions without Federal deposit insurance. Effective February 4, 2010, CDFIs were eligible to become Bank members.
Community Financial Institution (CFI): Bank member that has deposits insured under the FDIC and is exempt from the requirement of having at least 10% of total assets in residential mortgage loans.
Community Lending Program (CLP): Bank program that funds community and development projects. When loans are repaid, the money is available to be lent to other projects.
Consolidated Obligation (CO): Bonds and discount notes that are the joint and several liability of all 12 FHLBanks and are issued and serviced through the OF. These instruments are the primary source of funds for the FHLBanks.
Constant Maturity Treasury (CMT): Refers to the par yield that would be paid by a U. S. Treasury bill, note or bond that matures in exactly one, two, three, five, seven, ten, 20 or 30 years.
Conventional loan/mortgage: Mortgage that is neither insured nor guaranteed by the FHA, VA or any other agency of the Federal government.
       Core Based Statistical Areas (CBSA): Refers collectively to metropolitan and micropolitan statistical areas as defined
       by the United States Office of Management and Budget. As currently defined, a CBSA must contain at least one urban
       area of 10,000 or more people.
       Cost of funds: Estimated cost of issuing FHLBank System consolidated obligations and discount notes.
Credit enhancement (CE) fee: Fee payable monthly by an MPF Bank to a PFI in consideration of the PFI’s obligation to fund the realized loss for a Master Commitment; based on fee rate applicable to such Master Commitment and subject to terms of the Master Commitment and applicable MPF mortgage product, which may include performance and risk participation features.
Delivery commitment: Mandatory commitment of the parties, evidenced by a written, machine- or electronically generated transmission issued by an MPF Bank to a PFI accepting the PFI’s oral mortgage loan delivery commitment offer.
Demand Deposit Account (DDA): The account each member maintains with the Bank. All incoming and outgoing wires, loan credits and debits, as well as any principal and interest payments from securities and loans are posted into the DDA.

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Duration:  A common measure of the price sensitivity of an asset or liability to specified changes in interest rates.
       FFIEC: Federal Financial Institutions Examination Council
Federal Deposit Insurance Corporation (FDIC): Federal agency established in 1933 that guarantees (with limits) funds on deposit in member banks and performs other functions such as making loans to or buying assets from member banks to facilitate mergers or prevent failures.
Federal Home Loan Bank Act of 1932 (the Act): Enacted by Congress in 1932 creating the FHLBank Board, whose role was to supervise a series of discount banks across the country. The intent was to increase the supply of money available to local institutions that made home loans and to serve them as a reserve credit resource. The FHLBank Board became the Federal Housing Board in 1989, which was replaced by The Federal Housing Finance Agency in 2008.
Federal Home Loan Bank Office of Finance (OF): FHLBank System’s centralized debt issuance facility that also prepares combined financial statements, selects/evaluates underwriters, develops/maintains the infrastructure needed to meet FHLBank System goals, and administers REFCORP and FICO® funding programs.
Federal Home Loan Mortgage Corporation, (Freddie Mac or FHLMC): GSE chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing.
Federal Housing Administration (FHA): Government agency established in 1934 and insures lenders against loss on residential mortgages.
Federal Housing Finance Agency (FHFA or Finance Agency): Independent regulatory agency (established on enactment of the Housing Act) of the executive branch ensuring the FHLBanks, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation operate in a safe and sound manner, carry out their statutory missions and remain adequately capitalized and able to raise funds in the capital markets.
Federal National Mortgage Association (Fannie Mae or FNMA): GSE established in 1938 to expand the flow of mortgage money by creating a secondary market.
Federal Reserve Bank (FRB): One part of the Federal Reserve System. There are a total of 12 regional privately-owned FRBs located in major cities throughout the U.S., which divide the nation into 12 districts. The FRBs act as fiscal agents for the U.S. Treasury; each have their own nine-member board of directors. The FRBs are located in Boston, New York City, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco.
Federal Reserve Board (Federal Reserve): Governing body over the Federal Reserve System, the Federal Reserve is responsible for: (1) conducting the nation’s monetary policy; (2) supervising and regulating banking institutions; (3) maintaining the stability of the financial system and containing systemic risk; and (4) providing financial services to depository institutions, the U.S. government and foreign official institutions.
Federal Reserve System: Central banking system of the U.S.
Financial Accounting Standards Board (FASB): Board created in 1973 responsible for establishing and interpreting generally accepted accounting principles and improving standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors and users of financial information.
Financing Corporation (FICO®): Mixed-ownership, government corporation in charge of servicing debt on bonds that were issued as a result of the savings and loan “bailout”. Mixed-ownership corporations are those with capital stock owned by both the United States and borrowers or other private holders.
       First Front Door (FFD): Bank program developed to provide grant assistance to cover the down payment and
       closing costs to first time homebuyers at or below 80% median income.
First Loss Account (FLA): Notational account established by an MPF Bank for each Master Commitment based on and in the amount required under the applicable MPF mortgage product description and Master Commitment.
Generally Accepted Accounting Principles (GAAP): Accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. GAAP includes not only broad guidelines of general application, but also detailed practices and procedures. Those conventions, rules, and procedures provide a standard by which to measure financial presentations.
Government National Mortgage Association (Ginnie Mae or GNMA): GSE established by Congress in 1968 that guarantees securities backed by a pool of mortgages.
Government-sponsored enterprise (GSE): A private organization with a government charter whose function is to provide liquidity for the residential loan market or another identified government purpose.
       HARP: Home Affordable Refinance Program
       HELOC: Home Equity Line of Credit
Housing and Economic Recovery Act of 2008 (the Housing Act or HERA): Enacted by Congress in 2008; designed primarily to address the subprime mortgage crisis. Established the Finance Agency, replacing the Federal Housing Finance Board and the Office of Federal Housing Enterprise Oversight.
Internal Credit Rating (ICR): A scoring system used by the Bank to measure the financial condition of a member or housing associate and is based on quantitative and qualitative factors.

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Joint and several liability: Obligation for which multiple parties are each individually and all collectively liable for payment.
       Loan to Value (LTV): The loan-to-value (LTV) ratio expresses the amount of a first mortgage lien as a percentage of
       the total appraised value of real property.
London Interbank Offered Rate (LIBOR): Offer rate that a Euromarket bank demands to place a deposit at (or equivalently, make a loan to) another Euromarket bank in London. LIBOR is frequently used as the reference rate for the floating-rate coupon in interest rate swaps and option contracts such as caps and floors.
Master Commitment: A document executed by a PFI and an MPF Bank, which provides the terms under which the PFI will deliver mortgage loans to the MPF Bank.
Master Servicer: Financial institution that the MPF Provider has engaged to perform various master servicing duties on its behalf in connection with the MPF Program.
Maximum Borrowing Capacity (MBC): Total possible borrowing limit for an individual member. This is determined based on the type and amount of collateral each member has available to pledge as security for Bank advances. It is computed using specific asset balances (market and/or book values) from qualifying collateral categories, which are discounted by applicable collateral weighting percentages. The MBC is equal to the aggregate collateral value net of any pledged assets.
Mortgage-Backed securities (MBS): Investment instruments backed by mortgage loans as security.
Mortgage Partnership Finance® (MPF®) Program: FHLBank of Chicago program offered by select FHLBanks to their members to provide an alternative for funding mortgages through the creation of a secondary market.
National Credit Union Administration (NCUA):  Independent federal agency that charters and supervises federal credit unions, backed by the full faith and credit of the U.S. government.
Nationally Recognized Statistical Rating Organization (NRSRO): Credit rating agency registered with the SEC. Currently nine firms are registered as NRSROs.
ORERC: Other real estate-related collateral.
Other-than-Temporary Impairment (OTTI):  From an accounting standpoint, an “impairment” of a debt or equity security occurs when the fair value of the security is less than its amortized cost basis, i.e., whenever a security has an unrealized loss.
       OTTI Governance Committee: FHLB System OTTI governance committee formed by the FHLBs with the
       responsibility for reviewing and approving the key modeling assumptions, inputs and methodologies to be used to
       generate cash flow projections, which are used in analyzing credit losses and determining OTTI for private label MBS.
       PMI: Primary Mortgage Insurance
Pair-off fee: A fee assessed against a PFI when the aggregate principal balance of mortgages funded or purchased under a delivery commitment falls above or below the tolerance specified.
Participating Financial Institution (PFI): Bank member participating in the MPF Program, which is legally bound to originate, sell and/or service mortgages in accordance with the PFI Agreement, which it signs with the MPF Bank of which it is a member.
Permanent capital: Retained earnings plus capital stock; capital stock includes mandatorily redeemable capital stock.
       QCR: Qualifying Collateral Report
       RBC: Risk Based Capital
       ROE: Return on Equity
       RRE: Restricted Retained Earnings
Real Estate Owned (REO): Mortgaged property acquired by a servicer on behalf of the mortgagee, through foreclosure or deed in lieu of foreclosure.
Resolution Funding Corporation (REFCORP): Mixed-ownership, government corporation created by Congress in 1989 to issue “bailout” bonds and raise industry funds to finance activities of the Resolution Trust Corporation, and merge or close insolvent institutions inherited from the disbanded Federal Savings and Loan Insurance Corporation. Mixed-ownership corporations are those with capital stock owned by both the United States and borrowers or other private holders.
SERP: Supplemental Executive Retirement Plan.
Servicer: Institution approved to service mortgages funded or purchased by an MPF Bank. The term servicer refers to the institution acting in the capacity of a servicer of mortgages for an MPF Bank under a PFI Agreement.
Standby letter of credit: Document issued by the FHLBanks on behalf of a member as a guarantee against which funds can be drawn, that is used to facilitate various types of business transactions the member may have with third parties. Standby is defined as the Bank standing by to make good on the obligation made by the member to the beneficiary.
Supplemental Mortgage Insurance (SMI) policy: Any and all supplemental or pool mortgage guarantee insurance policies applicable to mortgages delivered under the Master Commitment.
       TDR: Troubled Debt Restructure

194



TAP auction debt: Term used to address multiple FHLBank debt issuances within a given quarter which have the same terms. As an FHLBank issues debt with terms similar to other FHLBank debt already issued, the FHLBank ‘taps’ the original issuance and is assigned the same CUSIP; this creates one larger, more liquid issue.
       Total Credit Exposure (TCE): In addition to TCP, it includes accrued interest on all outstanding advances and
       estimated potential prepayment fee amounts, where applicable, for advances to members in full delivery
       collateral status.
Underlying: A specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates or other variable. An underlying may be the price or rate of an asset or liability, but is not the asset or liability itself.
Variable Interest Entities (VIEs): An entity (the investee) in which the investor holds a controlling interest that is not based on the majority of voting rights. It is closely related to the concept of a special purpose entity. The importance of identifying a VIE is that a company needs to consolidate such entities if it is the primary beneficiary of the VIE.
Veterans Affairs, Department of (VA): Federal agency with oversight for programs created for veterans of the U.S. armed forces. Mortgage loans granted by a lending institution to qualified veterans or to their surviving spouses may be guaranteed by the VA.
Weighted average coupon (WAC): Weighted average of the interest rates of loans within a pool or portfolio.
Weighted average life (WAL): The average amount of time that will elapse from the date of a security’s issuance until each dollar of principal is repaid. The WAL of mortgage loans or MBS is only an assumption. The average amount of time that each dollar of principal is actually outstanding is influenced by, among other factors, the rate at which principal, both scheduled and unscheduled, is paid on the mortgage loans.

195



SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Federal Home Loan Bank of Pittsburgh
(Registrant)




Date: March 10, 2016



By: /s/Winthrop Watson
Winthrop Watson
President and Chief Executive Officer

Signature
Capacity
Date
/s/ Winthrop Watson
Winthrop Watson
President and Chief Executive Officer
March 10, 2016
/s/ David G. Paulson
David G. Paulson
Chief Financial Officer
March 10, 2016
/s/ Edward V. Weller
Edward V. Weller
Chief Accounting Officer
March 10, 2016
*/s/ Patrick A. Bond
Patrick A. Bond
Chairman of the Board of Directors
March 10, 2016
*/s/ John K. Darr
John K. Darr
Vice Chairman of the Board of Directors
March 10, 2016
*/s/ Pamela C. Asbury
Pamela C. Asbury
Director
March 10, 2016
*/s/ Glenn R. Brooks
Glenn R. Brooks
Director
March 10, 2016
*/s/ Rev. Luis A. Cortés, Jr.
Rev. Luis A. Cortés, Jr.
Director
March 10, 2016


196



Signature
Capacity
Date
*/s/ Pamela H. Godwin
Pamela H. Godwin
Director
March 10, 2016
*/s/ Brian A. Hudson
Brian A. Hudson
Director
March 10, 2016
*/s/ William C. Marsh
William C. Marsh
Director
March 10, 2016
*/s/ Charlotte B. McLaughlin
Charlotte B. McLaughlin
Director
March 10, 2016
*/s/ Lynda A. Messick
Lynda A. Messick
Director
March 10, 2016
*/s/ John S. Milinovich
John S. Milinovich
Director
March 10, 2016
*/s/ Charles J. Nugent
Charles J. Nugent
Director
March 10, 2016
*/s/ Gerald P. Plush
Gerald P. Plush
Director
March 10, 2016
*/s/ Bradford E. Ritchie
Bradford E. Ritchie
Director
March 10, 2016
*/s/ Frederick E. Schea
Frederick E. Schea
Director
March 10, 2016
*/s/ Patrick J. Ward 
Patrick J. Ward
Director
March 10, 2016
*/s/ Angela J. Yochem 
Angela J. Yochem
Director
March 10, 2016
*By: /s/ Dana A. Yealy
Dana A. Yealy, Attorney-in-fact
 
 



197