UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~June~~September 30, 2017



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

Commission File Number: 000-51999

FEDERAL HOME LOAN BANK OF DES MOINES

(Exact name of registrant as specified in its charter)



	Federally chartered corporation (State or other jurisdiction of incorporation or organization)		42-6000149 (I.R.S. employer identification number)

	~~Skywalk Level~~Financial Center ~~801~~666 Walnut Street ~~Suite 200~~ Des Moines, IA (Address of principal executive offices)		50309 (Zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer o
Non-accelerated filer x		Smaller reporting company o
		Emerging growth company o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

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



		Shares outstanding as of ~~July~~October 31, 2017
Class B Stock, par value $100		~~62,691,068~~57,074,826



Table of Contents

Part I - Financial Information

Item 1.	Financial Statements (Unaudited)	3

	Statements of Condition	3

	Statements of Income	4

	Statements of Comprehensive Income	5

	Statements of Capital	6

	Statements of Cash Flows	8

	Condensed Notes to the Unaudited Financial Statements	10

	Background Information	10

	Note 1 - Basis of Presentation	11

	Note 2 - Recently Adopted and Issued Accounting Guidance	12

	Note 3 - Trading Securities	1415

	Note 4 - Available-for-Sale Securities	1516

	Note 5 - Held-to-Maturity Securities	1819

	Note 6 - Other-Than-Temporary Impairment	2021

	Note 7 - Advances	2122

	Note 8 - Mortgage Loans Held for Portfolio	2223

	Note 9 - Allowance for Credit Losses	2324

	Note 10 - Derivatives and Hedging Activities	2829

	Note 11 - Consolidated Obligations	3233

	Note 12 - Capital	3334

	Note 13 - Fair Value	3738

	Note 14 - Commitments and Contingencies	4445

	Note 15 - Activities with Stockholders	4546

	Note 16 - Activities with Other FHLBanks	4647

	Note 17 - Subsequent Events	4748

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4849

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	8790

Item 4.	Controls and Procedures	8790

Part II - Other Information

Item 1.	Legal Proceedings	8891

Item 1A.	Risk Factors	8992

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8993

Item 3.	Defaults Upon Senior Securities	8993

Item 4.	Mine Safety Disclosures	8993

Item 5.	Other Information	9093

Item 6.	Exhibits	9194

Signatures		9295

~~Table of Contents~~

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

FEDERAL HOME LOAN BANK OF DES MOINES

STATEMENTS OF CONDITION

(dollars and shares in millions, except capital stock par value)

(Unaudited)


	June 30, 2017		December 31, 2016			September 30, 2017		December 31, 2016
ASSETS
Cash and due from banks	$	964	$	223		$	218	$	223
Interest-bearing deposits	2		2			1		2
Securities purchased under agreements to resell	3,500		5,925			5,500		5,925
Federal funds sold	5,100		5,095			6,770		5,095
Investment securities
Trading securities (Note 3)	2,549		2,553			1,792		2,553
Available-for-sale securities (Note 4)	22,403		22,969			21,459		22,969
Held-to-maturity securities (fair value of $4,265 and $4,706) (Note 5)	4,209		4,674
Held-to-maturity securities (fair value of $3,880 and $4,706) (Note 5)						3,819		4,674
Total investment securities	29,161		30,196			27,070		30,196
Advances (Note 7)	118,878		131,601			117,514		131,601
Mortgage loans held for portfolio, net of allowance for credit losses of $2 and $2 (Notes 8 and 9)	6,953		6,913			7,031		6,913
Loans to other FHLBanks	—		200			—		200
Accrued interest receivable	206		197			239		197
Derivative assets, net (Note 10)	139		191			119		191
Other assets	85		62			83		62
TOTAL ASSETS	$	164,988	$	180,605		$	164,545	$	180,605
LIABILITIES
Deposits
Interest-bearing	$	868	$	1,021		$	861	$	1,021
Non-interest-bearing	96		92			73		92
Total deposits	964		1,113			934		1,113
Consolidated obligations (Note 11)
Discount notes	66,558		80,947			52,976		80,947
Bonds	89,171		89,898			102,294		89,898
Total consolidated obligations	155,729		170,845			155,270		170,845
Mandatorily redeemable capital stock (Note 12)	480		664			422		664
Accrued interest payable	209		180			227		180
Affordable Housing Program payable	133		116			137		116
Derivative liabilities, net (Note 10)	23		76			3		76
Other liabilities	54		210			54		210
TOTAL LIABILITIES	157,592		173,204			157,047		173,204
Commitments and contingencies (Note 14)
CAPITAL (Note 12)
Capital stock - Class B putable ($100 par value); 56 and 59 issued and outstanding shares	5,623		5,917			5,624		5,917
Additional capital from merger	—		52			—		52
Retained earnings
Unrestricted	1,399		1,219			1,463		1,219
Restricted	285		231			311		231
Total retained earnings	1,684		1,450			1,774		1,450
Accumulated other comprehensive income (loss)	89		(18		)	100		(18		)
TOTAL CAPITAL	7,396		7,401			7,498		7,401
TOTAL LIABILITIES AND CAPITAL	$	164,988	$	180,605		$	164,545	$	180,605

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

~~Table of Contents~~

FEDERAL HOME LOAN BANK OF DES MOINES

STATEMENTS OF INCOME

(dollars in millions)

(Unaudited)


	For the Three Months Ended						For the Six Months Ended					For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,					September 30,						September 30,
	2017			2016			2017		2016			2017			2016			2017		2016
INTEREST INCOME
Advances	$	380		$	188		$	713	$	357		$	451		$	237		$	1,164	$	594
Prepayment fees on advances, net	1			1			1		5			—			1			1		6
Interest-bearing deposits	1			—			1		1			—			1			1		2
Securities purchased under agreements to resell	8			5			16		9			14			4			30		13
Federal funds sold	15			4			27		8			26			5			53		13
Trading securities	12			14			23		26			12			13			35		39
Available-for-sale securities	89			57			168		113			98			63			266		176
Held-to-maturity securities	20			19			40		40			20			19			60		59
Mortgage loans held for portfolio	59			59			117		120			59			56			176		176
Total interest income	585			347			1,106		679			680			399			1,786		1,078
INTEREST EXPENSE
Consolidated obligations - Discount notes	124			113			233		222			163			98			396		320
Consolidated obligations - Bonds	286			135			539		251			338			177			877		428
Deposits	1			—			2		—			1			1			3		1
Mandatorily redeemable capital stock	4			5			9		9			4			6			13		15
Total interest expense	415			253			783		482			506			282			1,289		764
NET INTEREST INCOME	170			94			323		197			174			117			497		314
Provision (reversal) for credit losses on mortgage loans	—			1			—		1			1			1			1		2
NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR CREDIT LOSSES	170			93			323		196			173			116			496		312
OTHER INCOME (LOSS)
Net gains (losses) on trading securities	4			18			9		53			1			(2		)	10		51
Net gains (losses) on derivatives and hedging activities	(3		)	(30		)	3		(73		)	(2		)	(3		)	1		(76		)
Gains on litigation settlements, net	—			200			21		337			—			—			21		337
Other, net	5			4			8		7			5			—			13		7
Total other income (loss)	6			192			41		324			4			(5		)	45		319
OTHER EXPENSE
Compensation and benefits	14			12			27		26			12			13			39		39
Contractual services	3			3			6		6			2			1			8		7
Professional fees	5			3			10		4			5			4			15		8
Other operating expenses	5			5			10		9			6			5			16		14
Federal Housing Finance Agency	2			2			5		4			3			2			8		6
Office of Finance	2			1			4		3			1			2			5		5
Other, net	—			1			1		2			1			1			2		3
Total other expense	31			27			63		54			30			28			93		82
NET INCOME BEFORE ASSESSMENTS	145			258			301		466			147			83			448		549
Affordable Housing Program assessments	15			26			31		47			15			9			46		56
NET INCOME	$	130		$	232		$	270	$	419		$	132		$	74		$	402	$	493

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

~~Table of Contents~~

FEDERAL HOME LOAN BANK OF DES MOINES

STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)

(Unaudited)


	For the Three Months Ended				For the Six Months Ended					For the Three Months Ended					For the Nine Months Ended
	June 30,				June 30,					September 30,					September 30,
	2017		2016		2017		2016			2017			2016		2017		2016
Net income	$	130	$	232	$	270	$	419		$	132		$	74	$	402	$	493
Other comprehensive income (loss)
Net unrealized gains (losses) on available-for-sale securities	41		36		105		(1		)	12			46		117		45
Pension and postretirement benefits	1		1		2		—			(1		)	—		1		—
Total other comprehensive income (loss)	42		37		107		(1		)	11			46		118		45
TOTAL COMPREHENSIVE INCOME (LOSS)	$	172	$	269	$	377	$	418		$	143		$	120	$	520	$	538

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

~~Table of Contents~~

FEDERAL HOME LOAN BANK OF DES MOINES

STATEMENTS OF CAPITAL

(dollars and shares in millions)

(Unaudited)


	Capital Stock Class B (putable)					Additional Capital from Merger			Capital Stock Class B (putable)					Additional Capital from Merger
	Shares		Par Value			Additional Capital from Merger			Shares		Par Value			Additional Capital from Merger
BALANCE, DECEMBER 31, 2015	47		$	4,714		$	194		47		$	4,714		$	194
Comprehensive income (loss)	—		—			—			—		—			—
Proceeds from issuance of capital stock	32		3,232			—			48		4,792			—
Repurchases/redemptions of capital stock	(20	)	(1,974		)	—			(31	)	(3,116		)	—
Net shares reclassified (to) from mandatorily redeemable capital stock	(7	)	(731		)	—			(7	)	(732		)	—
Cash dividends on capital stock	—		—			(66		)	—		—			(102		)
BALANCE, JUNE 30, 2016	52		$	5,241		$	128
BALANCE, SEPTEMBER 30, 2016									57		$	5,658		$	92

BALANCE, DECEMBER 31, 2016	59		$	5,917		$	52		59		$	5,917		$	52
Comprehensive income (loss)	—		—			—			—		—			—
Proceeds from issuance of capital stock	29		2,905			—			43		4,364			—
Repurchases/redemptions of capital stock	(32	)	(3,171		)	—			(46	)	(4,617		)	—
Net shares reclassified (to) from mandatorily redeemable capital stock	—		(28		)	—			—		(40		)	—
Cash dividends on capital stock	—		—			(52		)	—		—			(52		)
BALANCE, JUNE 30, 2017	56		$	5,623		$	—
BALANCE, SEPTEMBER 30, 2017									56		$	5,624		$	—

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

~~Table of Contents~~

FEDERAL HOME LOAN BANK OF DES MOINES

STATEMENTS OF CAPITAL (continued from previous page)

(dollars and shares in millions)

(Unaudited)


	Retained Earnings								Accumulated Other Comprehensive Income (Loss)				Total Capital				Retained Earnings											Accumulated Other Comprehensive Income (Loss)				Total Capital
	Unrestricted			Restricted		Total							Total Capital			Unrestricted				Restricted				Total				Accumulated Other Comprehensive Income (Loss)				Total Capital
BALANCE, DECEMBER 31, 2015	$	700		$	101	$	801		Accumulated Other Comprehensive Income (Loss)	$	(84	)		$	5,625			$	700			$	101			$	801		$	(84	)		$	5,625
Comprehensive income (loss)	335			84		419			(1		)		418				394				99				493			45				538
Proceeds from issuance of capital stock	—			—		—			—				3,232				—				—				—			—				4,792
Repurchases/redemptions of capital stock	—			—		—			—				(1,974		)		—				—				—			—				(3,116		)
Net shares reclassified (to) from mandatorily redeemable capital stock	—			—		—			—				(731		)		—				—				—			—				(732		)
Cash dividends on capital stock	—			—		—			—				(66		)		—				—				—			—				(102		)
BALANCE, JUNE 30, 2016	$	1,035		$	185	$	1,220		$	(85	)		$	6,504
BALANCE, SEPTEMBER 30, 2016																	$	1,094			$	200			$	1,294		$	(39	)		$	7,005

BALANCE, DECEMBER 31, 2016	$	1,219		$	231	$	1,450		$	(18	)		$	7,401			$	1,219			$	231			$	1,450		$	(18	)		$	7,401
Comprehensive income (loss)	216			54		270			107				377				322				80				402			118				520
Proceeds from issuance of capital stock	—			—		—			—				2,905				—				—				—			—				4,364
Repurchases/redemptions of capital stock	—			—		—			—				(3,171		)		—				—				—			—				(4,617		)
Net shares reclassified (to) from mandatorily redeemable capital stock	—			—		—			—				(28		)		—				—				—			—				(40		)
Cash dividends on capital stock	(36		)	—		(36		)	—				(88		)		(78		)		—				(78		)	—				(130		)
BALANCE, JUNE 30, 2017	$	1,399		$	285	$	1,684		$	89			$	7,396
BALANCE, SEPTEMBER 30, 2017																	$	1,463			$	311			$	1,774		$	100			$	7,498



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

~~Table of Contents~~

FEDERAL HOME LOAN BANK OF DES MOINES

STATEMENTS OF CASH FLOWS

(dollars in millions)

(Unaudited)


	For the Six Months Ended						For the Nine Months Ended
	June 30,						September 30,
	2017			2016			2017			2016
OPERATING ACTIVITIES
Net income	$	270		$	419		$	402		$	493
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization	16			52			30			37
Net (gains) losses on trading securities	(9		)	(53		)	(10		)	(51		)
Net change in derivatives and hedging activities	(1		)	45			—			5
Other adjustments	(1		)	(8		)	7			(5		)
Net change in:
Accrued interest receivable	(36		)	(37		)	(85		)	(64		)
Other assets	(4		)	(2		)	(2		)	(1		)
Accrued interest payable	29			14			46			62
Other liabilities	(15		)	38			(11		)	42
Total adjustments	(21		)	49			(25		)	25
Net cash provided by (used in) operating activities	249			468			377			518
INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits	17			(460		)	40			(366		)
Securities purchased under agreements to resell	2,425			(25		)	425			525
Federal funds sold	(5		)	(2,080		)	(1,675		)	(2,365		)
Premises, software, and equipment	(21		)	(5		)	(25		)	(7		)
Loans to other FHLBanks	200			—			200			—
Trading securities
Proceeds from maturities of long-term	13			12			771			1,617
Purchases of long-term	—			(1,598		)	—			(1,597		)
Available-for-sale securities
Proceeds from sales and maturities of long-term	1,002			1,306			1,962			1,902
Purchases of long-term	(402		)	(1,791		)	(402		)	(3,465		)
Held-to-maturity securities
Proceeds from maturities of long-term	457			752
Proceeds from sales and maturities of long-term							844			1,178
Purchases of long-term							—			(64		)
Advances
Principal collected	142,862			90,807			211,223			134,568
Originated or purchased	(130,163		)	(117,776		)	(197,191		)	(171,179		)
Mortgage loans held for portfolio
Principal collected	516			555			790			931
Originated or purchased	(566		)	(452		)	(925		)	(988		)
Proceeds from sales of foreclosed assets	4			9			7			10
Net cash provided by (used in) investing activities	16,339			(30,746		)	16,044			(39,300		)

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

~~Table of Contents~~

FEDERAL HOME LOAN BANK OF DES MOINES

STATEMENTS OF CASH FLOWS (continued from previous page)

(dollars in millions)

(Unaudited)


	For the Six Months Ended						For the Nine Months Ended
	June 30,						September 30,
	2017			2016			2017			2016
FINANCING ACTIVITIES
Net change in deposits	(150		)	(44		)	(171		)	(77		)
Net payments on derivative contracts with financing elements	(2		)	(3		)	(3		)	(4		)
Net proceeds from issuance of consolidated obligations
Discount notes	118,084			143,494			162,882			209,409
Bonds	26,848			49,439			53,241			77,918
Payments for maturing and retiring consolidated obligations
Discount notes	(132,486		)	(150,017		)	(190,878		)	(223,948		)
Bonds	(27,575		)	(14,169		)	(40,832		)	(26,667		)
Proceeds from issuance of capital stock	2,905			3,232			4,364			4,792
Payments for repurchases/redemptions of capital stock	(3,171		)	(1,974		)	(4,617		)	(3,116		)
Net payments for repurchases/redemptions of mandatorily redeemable capital stock	(212		)	(136		)	(282		)	(160		)
Cash dividends paid	(88		)	(66		)	(130		)	(102		)
Net cash provided by (used in) financing activities	(15,847		)	29,756			(16,426		)	38,045
Net increase (decrease) in cash and due from banks	741			(522		)	(5		)	(737		)
Cash and due from banks at beginning of the period	223			982			223			982
Cash and due from banks at end of the period	$	964		$	460		$	218		$	245

SUPPLEMENTAL DISCLOSURES
Cash Transactions:
Interest paid	$	1,091		$	783		$	1,747		$	1,200
Affordable Housing Program payments	15			8			25			14
Non-Cash Transactions:
Capitalized interest on reverse mortgage investment securities	27			11			43			20
Mortgage loan charge-offs	1			1			1			2
Transfers of mortgage loans to other assets	3			5			5			6
Capital stock reclassified to (from) mandatorily redeemable capital stock, net	28			731			40			732

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

~~Table of Contents~~

FEDERAL HOME LOAN BANK OF DES MOINES

CONDENSED NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

Background Information

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

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

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

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

~~Table of Contents~~

Note 1 — Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements and should be read in conjunction with the audited financial statements for the year ended December 31, 2016, which are contained in the ~~Bank's~~Bank’s 2016 Annual Report on Form 10-K filed with the SEC on March 21, 2017 (2016 Form 10-K).

In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of results for the interim periods. The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.

FHLB Des Moines Headquarters. ~~The Bank leases its headquarters office space from Wells Fargo Bank.~~ On June 22, 2017, a storm pipe broke at the ~~Bank's~~Bank’s headquarters causing significant water damage to the ~~Bank's~~Bank’s office space and rendering it totally uninhabitable. From June 23 through July 14 of this year, the Bank utilized its back-up data center, and employees worked out of a business recovery center located in Urbandale, Iowa, additional leased space in downtown Des Moines, and remotely. On July 17, 2017, the Bank resumed use of its primary data center at its ~~headquarters; however, staff continue~~headquarters, which was not damaged. However, as a result of the water damage, the estimated time to ~~work from alternative locations.~~complete repairs, and the Bank’s plan to relocate its headquarters to a building in downtown Des Moines that it purchased in April of 2017, the Bank terminated its lease with Wells Fargo Financial, an affiliate of Wells Fargo Bank effective September 30, 2017. The Bank entered into a nine month lease agreement with Wells Fargo Financial effective September 30, 2017 to lease approximately 1,200 square feet of the former headquarters to support general business functions. In addition, in July and August 2017, the Bank amended the Bank’s lease at 666 Walnut St., Des Moines, Iowa to lease additional space for the Bank’s temporary headquarters. The Bank expects to remain at this location until its recently purchased building at 909 Locust St., Des Moines, Iowa is ready for occupancy, which is currently anticipated for late 2018. Through the date of this filing, there have been no material disruptions to the ~~Bank's~~Bank’s operations or to its ability to serve its members.

The Bank incurred immaterial expenses related to damages caused by the storm drain break during the second ~~quarter~~and third quarters of ~~2017. The Bank expects additional expenses, including~~2017 primarily related to the write-off of equipment and lease costs related to ~~the lease of~~ back-up office space, to be incurred during the third quarter 2017. At this time, the full amount of combined property damage and recoveries cannot be estimated, and accordingly, no additional amounts, including amounts for insurance recoveries, have been recorded in the Bank's financial statements as of June 30, 2017.

space. The Bank ~~expects~~anticipates that insurance, less applicable deductibles, will cover the majority of the costs incurred to maintain operations and repair or replace damaged Bank property and ~~assets, and restore~~assets. The Bank does not expect any material expenses to be incurred during the premises to the condition it was in prior to the time the water damage occurred. The timing is uncertain as to when the repairs to the Bank's headquarters will be completed and the Bank's office space will be ready for re-occupancy. The total impact of the water damage is not expected, however, to materially impact the Bank's financial condition or results of operations.fourth quarter.

SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the ~~Bank's~~Bank’s significant accounting policies during the ~~six~~nine months ended ~~June~~September 30, 2017, with the exception of one policy noted below which was updated in the first quarter 2017 Form 10-Q. Descriptions of all significant accounting policies are included in ~~"Note~~“Note 1 - Summary of Significant Accounting ~~Policies"~~Policies” in the 2016 Form 10-K.

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

The Bank utilizes one Derivative Clearing Organization (Clearinghouse), CME Clearing, for all cleared derivative transactions. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments, which are a component of the derivative fair value, rather than collateral. Initial margin is considered cash collateral.

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Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED ACCOUNTING GUIDANCE

Contingent Put and Call Options in Debt Instruments

On March 14, 2016, the Financial Accounting Standards Board (FASB) issued amendments to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The guidance requires entities to apply only the four-step decision sequence when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2017. The adoption of this guidance did not have an effect on the ~~Bank's~~Bank’s financial conditions, results of operations, or cash flows.

ISSUED ACCOUNTING GUIDANCE

Targeted Improvements to Accounting for Hedging Activities

On August 28, 2017, the FASB issued amended guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in other comprehensive income (OCI). In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness and permit, among other things, the following:

Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determine at hedge inception.

Measurement of the hedged item in a partial-term fair value hedge of interest-rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged.

Consideration only of how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its schedule maturity in calculating the change in the fair value of the hedged item attributable to interest-rate risk.

For a cash flow hedge of interest-rate risk of a variable-rate financial instrument, an entity could designate as the hedge risk the variability in cash flows attributable to the contractually specified interest-rate.

This guidance becomes effective for the Bank for interim and annual periods beginning on January 1, 2019, and early adoption is permitted. For all cash flow hedges existing on the date of adoption, this guidance should be applied through a cumulative-effect adjustment to accumulated other comprehensive income (AOCI) with a corresponding adjustment to retained earnings as of the beginning of the year of adoption. The amended presentation and disclosure guidance is required only prospectively. The Bank does not intend to adopt this guidance early. The Bank is in the process of evaluating this guidance, and its effect on the Bank’s financial condition, results of operations, and cash flows has not yet been determined.

Premium Amortization on Purchased Callable Debt Securities

On March 30, 2017, FASB issued guidance for the amortization period for certain purchased callable debt securities held at a premium. Specifically, this guidance requires the premium to be amortized to the earliest call date. This guidance does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance affects all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). This guidance is effective for the Bank for interim and annual periods beginning on January 1, 2019, and early adoption is permitted. This guidance should be applied using a modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Bank is in the process of evaluating this guidance, but its effect on the ~~Bank's~~Bank’s financial condition, results of operations, and cash flows has not yet been determined.

Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

On March 10, 2017, the FASB issued the guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This guidance requires entities to disaggregate the service cost component from the other components of net benefit cost. The guidance also ~~provide~~provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and ~~allow~~allows only the service cost component of net benefit cost to be eligible for capitalization. This guidance is effective for the Bank for interim and annual periods beginning on January 1, 2018, and early adoption is permitted. This guidance should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Bank ~~is in the process of evaluating~~has evaluated this guidance ~~but~~and its effect on the ~~Banks’~~Bank’s financial condition, results of operations, ~~and~~or cash flows ~~has~~is not ~~yet been determined.~~expected to be material.

Classification of Certain Cash Receipts and Cash Payments

On August 26, 2016, the FASB issued amendments to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for the Bank for interim and annual periods beginning on January 1, 2018, and early adoption is permitted. This guidance should be applied using a retrospective transition method to each period presented. The Bank does not intend to adopt this guidance early. The adoption of this guidance will have no effect on the ~~Bank's~~Bank’s financial condition, results of operations, or cash flows.

Measurement of Credit Losses on Financial Instruments

On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to measure expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The new guidance requires a financial asset, or a group of financial assets, measured at amortized cost to be presented at the net amount expected to be collected. The guidance also requires, among other things, the following:

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The statement of income to reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.

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

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

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

This guidance is effective for the Bank for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018. This guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for PCD assets upon adoption and for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Bank does not intend to adopt the new guidance early. While the Bank is in the process of evaluating this guidance, the Bank expects the adoption of the guidance may result in an increase in the allowance for credit losses, including an allowance for debt securities, given the requirement to assess losses for the entire estimated life of the financial asset. The effect on the ~~Bank's~~Bank’s financial condition, results of operations, and cash flows will depend upon the composition of financial assets held by the Bank at the adoption date as well as the economic conditions and forecasts at that time.

Leases

On February 25, 2016, the FASB issued guidance which requires recognition of lease assets and lease liabilities on the statement of condition and disclosure of key information about leasing arrangements. Specifically, this guidance requires a lessee, of operating or finance leases, to recognize on the statement of condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. Under previous GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from operating leases on the statement of condition. While this guidance does not fundamentally change lessor accounting, some changes have been made to align that guidance with the lessee guidance and other areas within GAAP.

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

Recognition and Measurement of Financial Assets and Financial Liabilities

On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance includes, but is not limited to, the following:

Requires an entity to present separately in ~~other comprehensive income (OCI)~~OCI the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the statements of condition or the accompanying notes to the financial statements.

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Eliminates the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the statements of condition.

This guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2018, and early adoption is only permitted for certain provisions. The amendments, in general, should be applied by means of a cumulative-effect adjustment to the statements of condition as of the beginning of the period of adoption. While this guidance will affect the ~~Bank's~~Bank’s disclosures, the Bank does not expect the requirement to present the instrument-specific credit risk in OCI to have ~~a material~~any effect on ~~the Bank's~~its financial condition, results of operations, or cash flows.

Revenue from Contracts with Customers

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

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

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

Note 3 — Trading Securities

MAJOR SECURITY TYPES

Trading securities were as follows (dollars in millions):


	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Non-mortgage-backed securities
Other U.S. obligations¹	$	207	$	216	$	203	$	216
GSE and Tennessee Valley Authority obligations	1,612		1,611		861		1,611
Other²	275		273		274		273
Total non-mortgage-backed securities	2,094		2,100		1,338		2,100
Mortgage-backed securities
GSE multifamily	455		453		454		453
Total fair value	$	2,549	$	2,553	$	1,792	$	2,553


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


2	Consists of taxable municipal bonds.

NET GAINS (LOSSES) ON TRADING SECURITIES

The Bank did not sell any trading securities during the three and ~~six~~nine months ended ~~June~~September 30, 2017 and 2016. During the three and ~~six~~nine months ended ~~June~~September 30, 2017, the Bank recorded net holding gains of $4$1 million and $9$10 million on its trading securities compared to net holding losses of $2 million and net holding gains of ~~$18 million and $53~~$51 million for the same periods in 2016.

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Note 4 — Available-for-Sale Securities

MAJOR SECURITY TYPES

AFS securities were as follows (dollars in millions):


	June 30, 2017									September 30, 2017
	Amortized Cost¹		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost¹		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Non-mortgage-backed securities
Other U.S. obligations²	$	3,325	$	5	$	(7	)	$	3,323	$	3,204	$	7	$	(4	)	$	3,207
GSE and Tennessee Valley Authority obligations	1,278		26		—			1,304		1,248		27		—			1,275
State or local housing agency obligations	989		—		(1		)	988		962		—		(1		)	961
Other³	273		8		—			281		273		8		—			281
Total non-mortgage-backed securities	5,865		39		(8		)	5,896		5,687		42		(5		)	5,724
Mortgage-backed securities
Other U.S. obligations single-family²	3,936		12		(2		)	3,946		3,831		12		(1		)	3,842
GSE single-family	1,116		9		—			1,125		1,046		9		—			1,055
GSE multifamily	11,395		51		(10		)	11,436		10,792		52		(6		)	10,838
Total mortgage-backed securities	16,447		72		(12		)	16,507		15,669		73		(7		)	15,735
Total	$	22,312	$	111	$	(20	)	$	22,403	$	21,356	$	115	$	(12	)	$	21,459



	December 31, 2016
	Amortized Cost¹		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Non-mortgage-backed securities
Other U.S. obligations²	$	3,537	$	5	$	(13	)	$	3,529
GSE and Tennessee Valley Authority obligations	1,341		11		(1		)	1,351
State or local housing agency obligations	1,010		—		(1		)	1,009
Other³	272		6		—			278
Total non-mortgage-backed securities	6,160		22		(15		)	6,167
Mortgage-backed securities
Other U.S. obligations single-family²	3,852		2		(16		)	3,838
GSE single-family	1,257		7		(3		)	1,261
GSE multifamily	11,714		30		(41		)	11,703
Total mortgage-backed securities	16,823		39		(60		)	16,802
Total	$	22,983	$	61	$	(75	)	$	22,969


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


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


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

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UNREALIZED LOSSES

The following tables summarize AFS securities with unrealized losses by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in millions). In cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.


	June 30, 2017															September 30, 2017
	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Non-mortgage-backed securities
Other U.S. obligations¹	$	305	$	(1	)	$	2,356	$	(6	)	$	2,661	$	(7	)	$	179	$	(1	)	$	2,173	$	(3	)	$	2,352	$	(4	)
State or local housing agency obligations	53		—			628		(1		)	681		(1		)	38		—			621		(1		)	659		(1		)
Total non-mortgage-backed securities	358		(1		)	2,984		(7		)	3,342		(8		)	217		(1		)	2,794		(4		)	3,011		(5		)
Mortgage-backed securities
Other U.S. obligations single-family¹	—		—			1,335		(2		)	1,335		(2		)	—		—			914		(1		)	914		(1		)
GSE single-family	115		—			61		—			176		—			—		—			57		—			57		—
GSE multifamily	544		—			3,293		(10		)	3,837		(10		)	791		—			2,912		(6		)	3,703		(6		)
Total mortgage-backed securities	659		—			4,689		(12		)	5,348		(12		)	791		—			3,883		(7		)	4,674		(7		)
Total	$	1,017	$	(1	)	$	7,673	$	(19	)	$	8,690	$	(20	)	$	1,008	$	(1	)	$	6,677	$	(11	)	$	7,685	$	(12	)



	December 31, 2016
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Non-mortgage-backed securities
Other U.S. obligations¹	$	209	$	—		$	2,972	$	(12	)	$	3,181	$	(12	)
GSE and Tennessee Valley Authority obligations	—		—			126		(1		)	126		(1		)
State or local housing agency obligations	354		(1		)	395		(1		)	749		(2		)
Total non-mortgage-backed securities	563		(1		)	3,493		(14		)	4,056		(15		)
Mortgage-backed securities
Other U.S. obligations single-family¹	1,123		(2		)	2,076		(14		)	3,199		(16		)
GSE single-family	545		(3		)	32		—			577		(3		)
GSE multifamily	2,713		(6		)	6,315		(35		)	9,028		(41		)
Total mortgage-backed securities	4,381		(11		)	8,423		(49		)	12,804		(60		)
Total	$	4,944	$	(12	)	$	11,916	$	(63	)	$	16,860	$	(75	)


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

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CONTRACTUAL MATURITY

The following table summarizes AFS securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):


	June 30, 2017				December 31, 2016				September 30, 2017				December 31, 2016
Year of Contractual Maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Non-mortgage-backed securities
Due in one year or less	$	227	$	231	$	133	$	134	$	200	$	202	$	133	$	134
Due after one year through five years	727		731		489		496		720		724		489		496
Due after five years through ten years	3,858		3,862		4,452		4,447		3,725		3,734		4,452		4,447
Due after ten years	1,053		1,072		1,086		1,090		1,042		1,064		1,086		1,090
Total non-mortgage-backed securities	5,865		5,896		6,160		6,167		5,687		5,724		6,160		6,167
Mortgage-backed securities	16,447		16,507		16,823		16,802		15,669		15,735		16,823		16,802
Total	$	22,312	$	22,403	$	22,983	$	22,969	$	21,356	$	21,459	$	22,983	$	22,969

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Note 5 — Held-to-Maturity Securities

MAJOR SECURITY TYPES

Held-to-maturity (HTM) securities were as follows (dollars in millions):


	June 30, 2017									September 30, 2017
	Amortized Cost¹		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost¹		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Non-mortgage-backed securities
GSE and Tennessee Valley Authority obligations	$	395	$	66	$	—		$	461	$	394	$	66	$	—		$	460
State or local housing agency obligations	655		2		(9		)	648		473		2		(4		)	471
Total non-mortgage-backed securities	1,050		68		(9		)	1,109		867		68		(4		)	931
Mortgage-backed securities
Other U.S. obligations single-family²	20		—		—			20		17		—		—			17
Other U.S. obligations commercial²	3		—		—			3		3		—		—			3
GSE single-family	3,122		7		(10		)	3,119		2,919		6		(9		)	2,916
Private-label residential	14		—		—			14		13		—		—			13
Total mortgage-backed securities	3,159		7		(10		)	3,156		2,952		6		(9		)	2,949
Total	$	4,209	$	75	$	(19	)	$	4,265	$	3,819	$	74	$	(13	)	$	3,880



	December 31, 2016
	Amortized Cost¹		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Non-mortgage-backed securities
GSE and Tennessee Valley Authority obligations	$	397	$	60	$	(1	)	$	456
State or local housing agency obligations	688		1		(11		)	678
Total non-mortgage-backed securities	1,085		61		(12		)	1,134
Mortgage-backed securities
Other U.S. obligations single-family²	26		—		—			26
Other U.S. obligations commercial²	4		—		—			4
GSE single-family	3,543		4		(20		)	3,527
Private-label residential	16		—		(1		)	15
Total mortgage-backed securities	3,589		4		(21		)	3,572
Total	$	4,674	$	65	$	(33	)	$	4,706


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


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

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UNREALIZED LOSSES

The following tables summarize HTM securities with unrealized losses by major security type and the length of time that individual securities have been in a continuous unrealized loss position (dollars in millions). In cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.


	June 30, 2017															September 30, 2017
	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Non-mortgage-backed securities
State or local housing agency obligations	$	1	$	—		$	268	$	(9	)	$	269	$	(9	)	$	—	$	—		$	182	$	(4	)	$	182	$	(4	)
Total non-mortgage-backed securities	1		—			268		(9		)	269		(9		)	—		—			182		(4		)	182		(4		)
Mortgage-backed securities
Other U.S. obligations single-family¹	10		—			1		—			11		—			9		—			1		—			10		—
Other U.S. obligations commercial¹	—		—			2		—			2		—			—		—			2		—			2		—
GSE single-family	800		(7		)	937		(3		)	1,737		(10		)	824		(7		)	803		(2		)	1,627		(9		)
Private-label residential	—		—			9		—			9		—			—		—			9		—			9		—
Total mortgage-backed securities	810		(7		)	949		(3		)	1,759		(10		)	833		(7		)	815		(2		)	1,648		(9		)
Total	$	811	$	(7	)	$	1,217	$	(12	)	$	2,028	$	(19	)	$	833	$	(7	)	$	997	$	(6	)	$	1,830	$	(13	)



	December 31, 2016
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Non-mortgage backed securities
GSE and Tennessee Valley Authority obligations	$	73	$	(1	)	$	—	$	—		$	73	$	(1	)
State or local housing agency obligations	291		(11		)	10		—			301		(11		)
Total non-mortgage-backed securities	364		(12		)	10		—			374		(12		)
Mortgage-backed securities
Other U.S. obligations single-family¹	12		—			—		—			12		—
Other U.S. obligations commercial¹	—		—			3		—			3		—
GSE single-family	1,918		(15		)	1,224		(5		)	3,142		(20		)
Private-label residential	5		—			10		(1		)	15		(1		)
Total mortgage-backed securities	1,935		(15		)	1,237		(6		)	3,172		(21		)
Total	$	2,299	$	(27	)	$	1,247	$	(6	)	$	3,546	$	(33	)


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

~~Table of Contents~~

CONTRACTUAL MATURITY

The following table summarizes HTM securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):


	June 30, 2017				December 31, 2016				September 30, 2017				December 31, 2016
Year of Contractual Maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Non-mortgage-backed securities
Due in one year or less	$	11	$	11	$	11	$	11	$	20	$	20	$	11	$	11
Due after one year through five years	55		55		62		62		72		72		62		62
Due after five years through ten years	363		397		367		399		343		377		367		399
Due after ten years	621		646		645		662		432		462		645		662
Total non-mortgage-backed securities	1,050		1,109		1,085		1,134		867		931		1,085		1,134
Mortgage-backed securities	3,159		3,156		3,589		3,572		2,952		2,949		3,589		3,572
Total	$	4,209	$	4,265	$	4,674	$	4,706	$	3,819	$	3,880	$	4,674	$	4,706

Note 6 — Other-Than-Temporary Impairment

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for other-than-temporary impairment (OTTI) on a quarterly basis. As part of its evaluation of securities for OTTI, the Bank considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Bank will recognize an OTTI charge to earnings equal to the entire difference between the ~~security's~~security’s amortized cost basis and its fair value at the reporting date. For securities in an unrealized loss position that meet neither of these conditions, the Bank performs analyses to determine if any of these securities are other-than-temporarily impaired. The analysis of the ~~Bank's~~Bank’s AFS and HTM investment securities in an unrealized loss position at ~~June~~September 30, 2017 is discussed below:

Other U.S. obligations and GSE and Tennessee Valley Authority obligations. The unrealized losses were due primarily to changes in interest rates and credit spreads, and not to a significant deterioration in the fundamental credit quality of the obligations. The strength of the ~~issuers'~~issuers’ guarantees through direct obligations or support from the U.S. Government was sufficient to protect the Bank from losses based on current expectations. The Bank expects to recover the amortized cost bases on these securities and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before recovery of their amortized cost bases. As such, the Bank did not consider these securities to be other-than-temporarily impaired at ~~June~~September 30, 2017.

State or local housing agency obligations. The unrealized losses were due to changes in interest rates, credit spreads, and illiquidity in the credit markets, and not to a significant deterioration in the fundamental credit quality of the obligations. The creditworthiness of the issuers and the strength of the underlying collateral and credit enhancements were sufficient to protect the Bank from losses based on current expectations. The Bank does not intend to sell these securities nor is it more likely than not that it will be required to sell these securities before recovery of their amortized cost bases. As such, the Bank did not consider these securities to be other-than-temporarily impaired at ~~June~~September 30, 2017.

Private-label residential mortgage-backed securities. On a quarterly basis, the Bank engages other designated FHLBanks to perform cash flow analyses on its private-label mortgage-backed securities (private-label MBS). As of ~~June~~September 30, 2017, the Bank compared the present value of cash flows expected to be collected with respect to its private-label MBS to the amortized cost bases of the securities to determine whether a credit loss existed. At ~~June~~September 30, 2017, the ~~Bank's~~Bank’s cash flow analyses for private-label MBS did not project any credit losses. The Bank does not intend to sell its private-label MBS nor is it more likely than not that the Bank will be required to sell its private-label MBS before recovery of their amortized cost bases. As a result, the Bank did not consider any of its private-label MBS to be other-than-temporarily impaired at ~~June~~September 30, 2017.

~~Table of Contents~~

Note 7 — Advances

CONTRACTUAL MATURITY

The following table summarizes the ~~Bank's~~Bank’s advances outstanding by contractual maturity (dollars in millions):


	June 30, 2017					December 31, 2016					September 30, 2017					December 31, 2016
Year of Contractual Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Overdrawn demand deposit accounts	$	3		4.31	%	$	1		3.81	%	$	1		4.33	%	$	1		3.81	%
Due in one year or less	42,781			1.45		22,532			1.13		47,049			1.46		22,532			1.13
Due after one year through two years	19,797			1.45		29,791			1.12		20,734			1.52		29,791			1.12
Due after two years through three years	14,030			1.48		30,023			0.98		9,147			1.65		30,023			0.98
Due after three years through four years	21,118			1.41		17,615			1.00		24,354			1.55		17,615			1.00
Due after four years through five years	8,707			1.72		17,197			1.11		5,863			1.75		17,197			1.11
Thereafter	12,402			1.80		14,378			1.11		10,357			1.89		14,378			1.11
Total par value	118,838			1.50	%	131,537			1.07	%	117,505			1.56	%	131,537			1.07	%
Premiums	65					83					58					83
Discounts	(5		)			(7		)			(12		)			(7		)
Fair value hedging adjustments	(20		)			(12		)			(37		)			(12		)
Total	$	118,878				$	131,601				$	117,514				$	131,601

The following table summarizes all advances by year of contractual maturity or next call date for callable advances, and by year of contractual maturity or next put date for putable advances (dollars in millions):


	Year of Contractual Maturity or Next Call Date				Year of Contractual Maturity or Next Put Date				Year of Contractual Maturity or Next Call Date				Year of Contractual Maturity or Next Put Date
	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Overdrawn demand deposit accounts	$	3	$	1	$	3	$	1	$	1	$	1	$	1	$	1
Due in one year or less	79,669		93,471		43,130		23,532		79,330		93,471		47,151		23,532
Due after one year through two years	17,712		9,978		19,640		28,983		19,629		9,978		20,695		28,983
Due after two years through three years	9,390		15,515		14,030		30,023		6,598		15,515		9,147		30,023
Due after three years through four years	2,841		2,734		20,980		17,615		5,919		2,734		24,319		17,615
Due after four years through five years	6,906		7,670		8,674		17,026		3,824		7,670		5,841		17,026
Thereafter	2,317		2,168		12,381		14,357		2,204		2,168		10,351		14,357
Total par value	$	118,838	$	131,537	$	118,838	$	131,537	$	117,505	$	131,537	$	117,505	$	131,537

The Bank offers advances to members and eligible housing associates that may be prepaid on pertinent dates (call dates) prior to maturity without incurring prepayment fees (callable advances). Other advances may only be prepaid by paying a fee to the Bank (prepayment fee) that makes the Bank financially indifferent to the prepayment of the advance. At ~~June~~September 30, 2017 and December 31, 2016, the Bank had callable advances outstanding totaling ~~$45.5~~$40.4 billion and $78.5 billion.

The Bank also offers putable advances. With a putable advance, the Bank has the right to terminate the advance from the borrower on the predetermined exercise dates. Generally, these put options are exercised when interest rates increase relative to contractual rates. At ~~June~~September 30, 2017 and December 31, 2016, the Bank had putable advances outstanding totaling ~~$1.3~~$0.8 billion and $1.9 billion.

~~Table of Contents~~

PREPAYMENT FEES

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

The following table summarizes the ~~Bank's~~Bank’s prepayment fees on advances, net (dollars in millions):


	For the Three Months Ended					For the Six Months Ended					For the Three Months Ended						For the Nine Months Ended
	June 30,					June 30,					September 30,						September 30,
	2017		2016			2017		2016			2017			2016			2017			2016
Prepayment fee income	$	1	$	2		$	1	$	9		$	1		$	2		$	2		$	11
Fair value hedging adjustments¹	—		(1		)	—		(4		)	(1		)	(1		)	(1		)	(5		)
Prepayment fees on advances, net	$	1	$	1		$	1	$	5		$	—		$	1		$	1		$	6


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

CREDIT RISK EXPOSURE AND SECURITY TERMS

The ~~Bank's~~Bank’s potential credit risk from advances is concentrated in commercial banks, savings institutions, and insurance companies. At ~~June~~September 30, 2017 and December 31, 2016, the Bank had outstanding advances of ~~$63~~$60 billion and $77 billion to one member that individually held 10 percent or more of the ~~Bank's~~Bank’s advances, which represents 5351 percent and 59 percent of total outstanding advances. For information related to the ~~Bank's~~Bank’s credit risk exposure on advances, refer to ~~"Note~~“Note 9 — Allowance for Credit Losses."”

Note 8 — Mortgage Loans Held for Portfolio

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

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

~~Table of Contents~~

The following tables present information on the ~~Bank's~~Bank’s mortgage loans held for portfolio (dollars in millions):


	June 30, 2017								September 30, 2017
	MPF			MPP		Total			MPF			MPP			Total
Fixed rate, long-term single-family mortgage loans	$	5,440		$	347	$	5,787		$	5,569		$	330		$	5,899
Fixed rate, medium-term¹ single-family mortgage loans	1,071			3		1,074			1,036			2			1,038
Total unpaid principal balance	6,511			350		6,861			6,605			332			6,937
Premiums	85			11		96			87			11			98
Discounts	(7		)	—		(7		)	(6		)	(1		)	(7		)
Basis adjustments from mortgage loan commitments	5			—		5			5			—			5
Total mortgage loans held for portfolio	6,594			361		6,955			6,691			342			7,033
Allowance for credit losses	(2		)	—		(2		)	(2		)	—			(2		)
Total mortgage loans held for portfolio, net	$	6,592		$	361	$	6,953		$	6,689		$	342		$	7,031



	December 31, 2016
	MPF			MPP			Total
Fixed rate, long-term single-family mortgage loans	$	5,272		$	397		$	5,669
Fixed rate, medium-term¹ single-family mortgage loans	1,148			6			1,154
Total unpaid principal balance	6,420			403			6,823
Premiums	82			14			96
Discounts	(8		)	(1		)	(9		)
Basis adjustments from mortgage loan commitments	5			—			5
Total mortgage loans held for portfolio	6,499			416			6,915
Allowance for credit losses	(2		)	—			(2		)
Total mortgage loans held for portfolio, net	$	6,497		$	416		$	6,913


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

The following tables present the ~~Bank's~~Bank’s mortgage loans held for portfolio by collateral or guarantee type (dollars in millions):


	June 30, 2017						September 30, 2017
	MPF		MPP		Total		MPF		MPP		Total
Conventional mortgage loans	$	6,007	$	315	$	6,322	$	6,104	$	299	$	6,403
Government-insured mortgage loans	504		35		539		501		33		534
Total unpaid principal balance	$	6,511	$	350	$	6,861	$	6,605	$	332	$	6,937



	December 31, 2016
	MPF		MPP		Total
Conventional mortgage loans	$	5,907	$	361	$	6,268
Government-insured mortgage loans	513		42		555
Total unpaid principal balance	$	6,420	$	403	$	6,823

For information related to the ~~Bank's~~Bank’s credit risk exposure on mortgage loans held for portfolio, refer to ~~"Note~~“Note 9 — Allowance for Credit Losses."”

Note 9 — Allowance for Credit Losses

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

~~Table of Contents~~

CREDIT PRODUCTS

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

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

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

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

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

Using a risk-based approach and taking into consideration each ~~borrower's~~borrower’s financial strength, the Bank considers the types and level of collateral to be the primary indicator of credit quality on its credit products. At ~~June~~September 30, 2017 and December 31, 2016, the Bank had rights to collateral on a borrower-by-borrower basis with an unpaid principal balance or market value, if available, in excess of its outstanding extensions of credit.

At ~~June~~September 30, 2017 and December 31, 2016, none of the ~~Bank's~~Bank’s credit products were past due, on non-accrual status, or considered impaired. In addition, there were no troubled debt restructurings (TDRs) related to credit products during the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016.

The Bank has never experienced a credit loss on its credit products. Based upon the ~~Bank's~~Bank’s collateral and lending policies, the collateral held as security, and the repayment history on credit products, management has determined that there were no probable credit losses on its credit products as of ~~June~~September 30, 2017 and December 31, 2016. Accordingly, the Bank has not recorded any allowance for credit losses for its credit products.

~~Table of Contents~~

GOVERNMENT-INSURED MORTGAGE LOANS

The Bank invests in government-insured fixed rate mortgage loans in both the MPF and MPP portfolios that are insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture. The servicer or PFI obtains and maintains insurance or a guaranty from the applicable government agency. The servicer or PFI is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable guarantee or insurance with respect to defaulted government-insured mortgage loans. Any losses incurred on these loans that are not recovered from the insurer/guarantor are absorbed by the servicers. As such, the Bank only has credit risk for these loans if the servicer or PFI fails to pay for losses not covered by the guarantee or insurance. Management views this risk as remote and has never experienced a credit loss on its government-insured mortgage loans. As a result, the Bank did not establish an allowance for credit losses for its government-insured mortgage loans at ~~June~~September 30, 2017 and December 31, 2016. Furthermore, none of these mortgage loans have been placed on non-accrual status because of the U.S. Government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

MPF CONVENTIONAL MORTGAGE LOANS

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

Homeowner Equity.

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

First Loss Account (FLA). For each master commitment, the ~~Bank's~~Bank’s potential loss exposure prior to the ~~PFI's~~PFI’s credit enhancement obligation is estimated and tracked in a memorandum account called the FLA.

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

MPP CONVENTIONAL MORTGAGE LOANS

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

Homeowner Equity.

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

ALLOWANCE METHODOLOGY

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

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

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

~~Table of Contents~~

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

The following table summarizes the allowance for credit losses and the recorded investment of the ~~Bank's~~Bank’s conventional mortgage loan portfolio by impairment methodology (dollars in millions):


	MPF		MPP¹		Total		MPF		MPP¹		Total
Allowance for credit losses, June 30, 2017
Allowance for credit losses, September 30, 2017
Collectively evaluated for impairment	$	2	$	—	$	2	$	2	$	—	$	2

Allowance for credit losses, December 31, 2016
Collectively evaluated for impairment	$	2	$	—	$	2	$	2	$	—	$	2

Recorded investment, June 30, 2017²
Recorded investment, September 30, 2017²
Collectively evaluated for impairment	$	6,067	$	302	$	6,369	$	6,169	$	287	$	6,456
Individually evaluated for impairment, without a related allowance	43		23		66		41		22		63
Total recorded investment	$	6,110	$	325	$	6,435	$	6,210	$	309	$	6,519

Recorded investment, December 31, 2016²
Collectively evaluated for impairment	$	5,960	$	346	$	6,306	$	5,960	$	346	$	6,306
Individually evaluated for impairment, without a related allowance	45		27		72		45		27		72
Total recorded investment	$	6,005	$	373	$	6,378	$	6,005	$	373	$	6,378

1 The allowance for credit losses on MPP loans was less than $1 million at ~~June~~September 30, 2017 and December 31, 2016.

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

CREDIT QUALITY INDICATORS

Key credit quality indicators for mortgage loans include the migration of past due loans, loans in process of foreclosure, and non-accrual loans. The table below summarizes the ~~Bank's~~Bank’s key credit quality indicators for mortgage loans at ~~June~~September 30, 2017 (dollars in millions):


	June 30, 2017															September 30, 2017
	MPF						MPP									MPF						MPP
	Conventional			Government			Conventional			Government			Total			Conventional			Government			Conventional			Government			Total
Past due 30 - 59 days	$	46		$	16		$	9		$	4		$	75		$	44		$	17		$	7		$	3		$	71
Past due 60 - 89 days	12			5			4			—			21			12			5			5			1			23
Past due 90 - 179 days	8			4			3			—			15			10			6			2			—			18
Past due 180 days or more	16			5			9			1			31			15			4			8			1			28
Total past due mortgage loans	82			30			25			5			142			81			32			22			5			140
Total current mortgage loans	6,028			487			300			32			6,847			6,129			483			287			30			6,929
Total recorded investment of mortgage loans¹	$	6,110		$	517		$	325		$	37		$	6,989		$	6,210		$	515		$	309		$	35		$	7,069

In process of foreclosure (included above)²	$	12		$	2		$	5		$	—		$	19		$	10		$	2		$	4		$	—		$	16
Serious delinquency rate³	—		%	2		%	4		%	2		%	1		%	—		%	2		%	3		%	2		%	1		%
Past due 90 days or more and still accruing interest⁴	$	—		$	9		$	—		$	1		$	10		$	—		$	10		$	—		$	1		$	11
Non-accrual mortgage loans⁵	$	29		$	—		$	21		$	—		$	50		$	29		$	—		$	19		$	—		$	48


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


2	Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans depending on their payment status.


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


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


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

~~Table of Contents~~

The table below summarizes the ~~Bank's~~Bank’s key credit quality indicators for mortgage loans at December 31, 2016 (dollars in millions):



	December 31, 2016
	MPF						MPP
	Conventional			Government			Conventional			Government			Total
Past due 30 - 59 days	$	50		$	18		$	11		$	4		$	83
Past due 60 - 89 days	17			7			5			2			31
Past due 90 - 179 days	9			6			2			1			18
Past due 180 days or more	22			5			12			2			41
Total past due mortgage loans	98			36			30			9			173
Total current mortgage loans	5,907			491			343			35			6,776
Total recorded investment of mortgage loans¹	$	6,005		$	527		$	373		$	44		$	6,949

In process of foreclosure (included above)²	$	16		$	2		$	7		$	—		$	25
Serious delinquency rate³	1		%	2		%	4		%	7		%	1		%
Past due 90 days or more and still accruing interest⁴	$	—		$	11		$	—		$	3		$	14
Non-accrual mortgage loans⁵	$	36		$	—		$	24		$	—		$	60


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


2	Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans depending on their payment status.


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


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


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

INDIVIDUALLY EVALUATED IMPAIRED LOANS

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

The Bank did not recognize any interest income on impaired loans during the ~~six~~three and nine months ended ~~June~~September 30, 2017 and 2016.

The following table summarizes the average recorded investment of the ~~Bank's~~Bank’s individually evaluated impaired loans (dollars in millions):


	For the Three Months Ended				For the Six Months Ended				For the Three Months Ended				For the Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2017		2016		2017		2016		2017		2016		2017		2016
Impaired loans without an allowance
Conventional MPF Loans	$	45	$	34	$	44	$	35	$	42	$	32	$	43	$	34
Conventional MPP Loans	23		27		25		28		22		25		25		27
Total	$	68	$	61	$	69	$	63	$	64	$	57	$	68	$	61

TERM SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

Term securities purchased under agreements to resell are considered collateralized financing agreements and represent short-term investments. The terms of these investments are structured such that if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. Otherwise, the dollar value of the resale agreement will decrease accordingly. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement will be charged to earnings to establish an allowance for credit losses. Based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for its term securities purchased under agreements to resell at ~~June~~September 30, 2017 and December 31, 2016.

~~Table of Contents~~

OFF-BALANCE SHEET CREDIT EXPOSURES

At ~~June~~September 30, 2017 and December 31, 2016, the Bank did not record a liability to reflect an allowance for credit losses for off-balance sheet credit exposures. For additional information on the ~~Bank's~~Bank’s off-balance sheet credit exposures, see ~~"Note~~“Note 14 — Commitments and Contingencies."”

Note 10 — Derivatives and Hedging Activities

NATURE OF BUSINESS ACTIVITY

The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and its related funding sources. The goal of the ~~Bank's~~Bank’s interest rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept.

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

Derivative financial instruments are used by the Bank to achieve its financial and risk management objectives. The Bank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or may adopt new strategies. The most common ways in which the Bank uses derivatives are to:

reduce the interest rate sensitivity and repricing gaps of assets and liabilities;

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

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

manage embedded options in assets and liabilities; and

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.

TYPES OF DERIVATIVES

The Bank may use the following derivative instruments:

interest rate swaps;

options;

swaptions;

interest rate caps and floors; and

futures/forwards contracts.

~~Table of Contents~~

The Bank may have the following types of hedged items:

investment securities;

advances;

mortgage loans;

consolidated obligations; and

firm commitments.

For additional information on the ~~Bank's~~Bank’s derivative and hedging accounting policy, see ~~"Note~~“Note 1 — Basis of ~~Presentation"~~Presentation” in this Form 10-Q and ~~"Note~~“Note 1 — Summary of Significant Accounting ~~Policies"~~Policies” in the 2016 Form 10-K.

FINANCIAL STATEMENT EFFECT AND ADDITIONAL FINANCIAL INFORMATION

The notional amount of derivatives serves as a factor in determining periodic interest payments and cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.

The following table summarizes the ~~Bank's~~Bank’s notional amount and the fair value of derivative instruments, including the effect of netting adjustments, cash collateral, and variation margin for daily settled contracts. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest (dollars in millions):


	June 30, 2017								December 31, 2016								September 30, 2017								December 31, 2016
	Notional Amount		Derivative Assets			Derivative Liabilities			Notional Amount		Derivative Assets			Derivative Liabilities			Notional Amount		Derivative Assets			Derivative Liabilities			Notional Amount		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments (fair value hedges)
Interest rate swaps	$	50,686	$	162		$	611		$	51,896	$	183		$	688		$	52,381	$	170		$	556		$	51,896	$	183		$	688
Derivatives not designated as hedging instruments (economic hedges)
Interest rate swaps	1,380		18			55			1,414		20			56			1,386		17			55			1,414		20			56
Forward settlement agreements (TBAs)	110		—			—			94		1			—			108		1			—			94		1			—
Mortgage delivery commitments	113		—			—			102		—			—			114		—			—			102		—			—
Total derivatives not designated as hedging instruments	1,603		18			55			1,610		21			56			1,608		18			55			1,610		21			56
Total derivatives before netting and collateral adjustments	$	52,289	180			666			$	53,506	204			744			$	53,989	188			611			$	53,506	204			744
Netting adjustments, cash collateral, and variation margin for daily settled contracts¹			(41		)	(643		)			(13		)	(668		)			(69		)	(608		)			(13		)	(668		)
Total derivative assets and derivative liabilities			$	139		$	23				$	191		$	76				$	119		$	3				$	191		$	76

Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions, cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty, and includes fair value adjustments on derivatives for variation margin, which effective January 3, 2017, is characterized as a daily settled contract. Cash collateral posted by the Bank (including accrued interest) was ~~$264~~$242 million and $658 million at ~~June~~September 30, 2017 and December 31, 2016. At ~~June~~September 30, 2017 ~~the Bank did not receive cash collateral from clearing agents and/or counterparties. At~~and December 31, 2016 the Bank received cash collateral from clearing agents and/or counterparties of $8 million and $2 million. Variation margin for daily settled contracts was ~~$339~~$305 million at ~~June~~September 30, 2017. Variation margin was considered cash collateral prior to January 3, 2017.

~~Table of Contents~~

The following table summarizes the components of “Net gains (losses) on derivatives and hedging activities” as presented in the Statements of Income (dollars in millions):


	For the Three Months Ended						For the Six Months Ended						For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2017			2016			2017			2016			2017			2016			2017			2016
Derivatives designated as hedging instruments (fair value hedges)
Interest rate swaps	$	6		$	(8	)	$	10		$	(9	)	$	(1	)	$	(7	)	$	9		$	(16	)
Derivatives not designated as hedging instruments (economic hedges)
Interest rate swaps	(6		)	(18		)	(1		)	(55		)	1			10			—			(45		)
Forward settlement agreements (TBAs)	—			(2		)	(1		)	(3		)	(1		)	(2		)	(2		)	(5		)
Mortgage delivery commitments	—			2			1			3			1			1			2			4
Net interest settlements	(3		)	(4		)	(7		)	(9		)	(3		)	(5		)	(10		)	(14		)
Total net gains (losses) related to derivatives not designated as hedging instruments	(9		)	(22		)	(8		)	(64		)	(2		)	4			(10		)	(60		)
Other¹	—			—			1			—			1			—			2			—
Net gains (losses) on derivatives and hedging activities	$	(3	)	$	(30	)	$	3		$	(73	)	$	(2	)	$	(3	)	$	1		$	(76	)


1	~~Consists~~Effective January 3, 2017 consists of price alignment amount on derivatives for variation margin which is characterized as a daily settled contract.

The following tables summarize, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships, the net fair value hedge ineffectiveness, and the effect of those derivatives on the ~~Bank's~~Bank’s net interest income (dollars in millions):


	For the Three Months Ended June 30, 2017												For the Three Months Ended September 30, 2017
Hedged Item Type	Gains (Losses) on Derivatives			Gains (Losses) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect on Net Interest Income¹			Gains (Losses) on Derivatives		Gains (Losses) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect on Net Interest Income¹
Available-for-sale investments	$	(41	)	$	49		$	8		$	(24	)	$	9	$	(13	)	$	(4	)	$	(21	)
Advances²	(25		)	26			1			(21		)	17		(16		)	1			(14		)
Consolidated obligation bonds	72			(75		)	(3		)	7			1		1			2			(8		)
Total	$	6		$	—		$	6		$	(38	)	$	27	$	(28	)	$	(1	)	$	(43	)


	For the Three Months Ended June 30, 2016												For the Three Months Ended September 30, 2016
Hedged Item Type	Gains (Losses) on Derivatives			Gains (Losses) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect on Net Interest Income¹			Gains (Losses) on Derivatives			Gains (Losses) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect on Net Interest Income¹
Available-for-sale investments	$	(128	)	$	120		$	(8	)	$	(36	)	$	69		$	(82	)	$	(13	)	$	(36	)
Advances²	(42		)	41			(1		)	(37		)	95			(95		)	—			(34		)
Consolidated obligation bonds	84			(83		)	1			18			(103		)	109			6			23
Total	$	(86	)	$	78		$	(8	)	$	(55	)	$	61		$	(68	)	$	(7	)	$	(47	)

Represents the net interest settlements on derivatives in fair value hedge relationships and the amortization of the financing element of off-market derivatives, both of which are included in the interest income or interest expense line item of the respective hedged item type. This amortization for off-market derivatives totaled $4$3 million and $8$7 million for the three months ended ~~June~~September 30, 2017 and 2016.


2	Includes net gains (losses) on fair value hedge firm commitments of forward starting advances.

~~Table of Contents~~


	For the Six Months Ended June 30, 2017												For the Nine Months Ended September 30, 2017
Hedged Item Type	Gains (Losses) on Derivatives			Gains (Losses) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect on Net Interest Income¹			Gains (Losses) on Derivatives		Gains (Losses) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect on Net Interest Income¹
Available-for-sale investments	$	(4	)	$	18		$	14		$	(53	)	$	5	$	5		$	10		$	(74	)
Advances²	8			(6		)	2			(45		)	25		(22		)	3			(59		)
Consolidated obligation bonds	22			(28		)	(6		)	26			23		(27		)	(4		)	18
Total	$	26		$	(16	)	$	10		$	(72	)	$	53	$	(44	)	$	9		$	(115	)


	For the Six Months Ended June 30, 2016												For the Nine Months Ended September 30, 2016
Hedged Item Type	Gains (Losses) on Derivatives			Gains (Losses) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect on Net Interest Income¹			Gains (Losses) on Derivatives			Gains (Losses) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect on Net Interest Income¹
Available-for-sale investments	$	(404	)	$	401		$	(3	)	$	(74	)	$	(335	)	$	319		$	(16	)	$	(110	)
Advances²	(178		)	179			1			(77		)	(83		)	84			1			(111		)
Consolidated obligation bonds	152			(159		)	(7		)	33			49			(50		)	(1		)	56
Total	$	(430	)	$	421		$	(9	)	$	(118	)	$	(369	)	$	353		$	(16	)	$	(165	)

Represents the net interest settlements on derivatives in fair value hedge relationships and the amortization of the financing element of off-market derivatives, both of which are included in the interest income or interest expense line item of the respective hedged item type. This amortization for off-market derivatives totaled $9$12 million and ~~$16~~$23 million for the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016.


2	Includes net gains (losses) on fair value hedge firm commitments of forward starting advances.

MANAGING CREDIT RISK ON DERIVATIVES

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

For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. The Bank requires collateral agreements with collateral delivery thresholds on the majority of its uncleared derivatives.

Certain of the ~~Bank's~~Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the ~~Bank's~~Bank’s credit rating. If the ~~Bank's~~Bank’s credit rating is lowered by a nationally recognized statistical rating organization (NRSRO), the Bank may be required to deliver additional collateral on uncleared derivative instruments in net liability positions. The aggregate fair value of all uncleared derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at ~~June~~September 30, 2017 was ~~$145~~$3 million, for which the Bank ~~posted~~was not required to post collateral ~~of $133 million~~ in the normal course of business. If the ~~Bank's~~Bank’s credit rating had been lowered from its current rating to the next lower rating, ~~that would have triggered additional collateral to be delivered,~~ the Bank would not have been required to deliver an additional ~~$4 million of~~ collateral to its uncleared derivative counterparties at ~~June~~September 30, ~~2017~~.2017.

For cleared derivatives, the Clearinghouse is the ~~Bank's~~Bank’s counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent in turn notifies the Bank. The Bank utilizes one Clearinghouse for all cleared derivative transactions, CME Clearing. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook changing the legal characteristics of variation margin payments to be daily settlement payments, rather than collateral. Initial margin is considered cash collateral. The requirement that the Bank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Bank to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments for changes in the fair value of cleared derivatives is posted daily through a clearing agent.

~~Table of Contents~~

The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and has determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default, including a bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the clearing agent, or both. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse. The Clearinghouse determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. The Bank was not required to post additional initial margin by its clearing agents, based on credit considerations at ~~June~~September 30, 2017.

OFFSETTING OF DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES

The Bank presents derivative instruments, related cash collateral, including initial margin pledged, and associated accrued interest on a net basis by clearing agent and/or by counterparty when it has met the netting requirements. Additional information regarding these agreements is provided in ~~"Note~~“Note 1 — Basis of ~~Presentation"~~Presentation” in this Form 10-Q and ~~"Note~~“Note 1 -— Summary of Significant Accounting ~~Policies"~~Policies” in the 2016 Form 10-K.

The following table presents the fair value of derivative instruments meeting or not meeting the netting requirements, including the related collateral received from or pledged to counterparties and variation margin for daily settled contracts (dollars in millions):


	June 30, 2017						December 31, 2016						September 30, 2017						December 31, 2016
	Derivative Assets			Derivative Liabilities			Derivative Assets			Derivative Liabilities			Derivative Assets			Derivative Liabilities			Derivative Assets			Derivative Liabilities
Derivative instruments meeting netting requirements
Gross recognized amount
Uncleared derivatives	$	79		$	223		$	97		$	263		$	83		$	195		$	97		$	263
Cleared derivatives	101			443			107			481			105			416			107			481
Total gross recognized amount	180			666			204			744			188			611			204			744
Gross amounts of netting adjustments, cash collateral, and variation margin for daily settled contracts
Uncleared derivatives	(68		)	(200		)	(95		)	(187		)	(78		)	(192		)	(95		)	(187		)
Cleared derivatives	27			(443		)	82			(481		)	9			(416		)	82			(481		)
Total gross amounts of netting adjustments, cash collateral, and variation margin for daily settled contracts	(41		)	(643		)	(13		)	(668		)	(69		)	(608		)	(13		)	(668		)
Net amounts after netting adjustments, cash collateral, and variation margin for daily settled contracts
Uncleared derivatives	11			23			2			76			5			3			2			76
Cleared derivatives	128			—			189			—			114			—			189			—
Total derivative assets and derivative liabilities	$	139		$	23		$	191		$	76		$	119		$	3		$	191		$	76

Note 11 — Consolidated Obligations

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

Although the Bank is primarily liable for the portion of consolidated obligations issued on its behalf, it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all FHLBank System consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal and/or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that consolidated obligation. The Finance Agency has never exercised this discretionary authority. At ~~June~~September 30, 2017 and December 31, 2016, the total par value of outstanding consolidated obligations of the FHLBanks was $1$1.0 trillion and ~~$989~~$989.3 billion.

~~Table of Contents~~

DISCOUNT NOTES

The following table summarizes the ~~Bank's~~Bank’s discount notes (dollars in millions):


	June 30, 2017					December 31, 2016					September 30, 2017					December 31, 2016
	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Par value	$	66,668		0.91	%	$	81,019		0.49	%	$	53,074		1.07	%	$	81,019		0.49	%
Discounts and concessions¹	(110		)			(72		)			(98		)			(72		)
Total	$	66,558				$	80,947				$	52,976				$	80,947


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

BONDS

The following table summarizes the ~~Bank's~~Bank’s bonds outstanding by contractual maturity (dollars in millions):


	June 30, 2017					December 31, 2016					September 30, 2017					December 31, 2016
Year of Contractual Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in one year or less	$	48,266		1.05	%	$	47,733		0.88	%	$	49,500		1.16	%	$	47,733		0.88	%
Due after one year through two years	17,427			1.28		13,135			0.94		32,331			1.28		13,135			0.94
Due after two years through three years	10,047			1.73		15,414			1.48		6,953			1.83		15,414			1.48
Due after three years through four years	2,015			2.71		2,288			3.28		5,013			1.83		2,288			3.28
Due after four years through five years	6,799			1.67		7,152			1.66		4,000			2.10		7,152			1.66
Thereafter	4,768			3.03		4,331			3.04		4,659			3.05		4,331			3.04
Total par value	89,322			1.36	%	90,053			1.22	%	102,456			1.40	%	90,053			1.22	%
Premiums	224					254					210					254
Discounts and concessions¹	(69		)			(79		)			(65		)			(79		)
Fair value hedging adjustments	(306		)			(330		)			(307		)			(330		)
Total	$	89,171				$	89,898				$	102,294				$	89,898


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

The following table summarizes the ~~Bank's~~Bank’s bonds outstanding by call features (dollars in millions):


	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Noncallable or nonputable	$	86,408	$	87,804	$	99,682	$	87,804
Callable	2,914		2,249		2,774		2,249
Total par value	$	89,322	$	90,053	$	102,456	$	90,053

Note 12 — Capital

CAPITAL STOCK

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

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

~~Table of Contents~~

EXCESS STOCK

Capital stock owned by members in excess of their investment requirement is deemed excess capital stock. Under its Capital Plan, the Bank, at its discretion and upon 15 ~~days'~~days’ written notice, may repurchase excess membership capital stock. The Bank, at its discretion, may also repurchase excess activity-based capital stock to the extent that (i) the excess capital stock balance exceeds an operational threshold set forth in the Capital Plan, which is currently set at zero, or (ii) a member submits a notice to redeem all or a portion of the excess activity-based capital stock. At ~~June~~September 30, 2017 and December 31, 2016, the Bank had no excess capital stock outstanding.

MANDATORILY REDEEMABLE CAPITAL STOCK

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

As a result of the final rule on membership issued by the Finance Agency effective February 19, 2016, the eligibility requirements for FHLBank members were changed rendering captive insurance companies ineligible for FHLBank membership. On the effective date of the final rule, the Bank reclassified $723 million of capital stock, the total outstanding capital stock held by all of the ~~Bank's~~Bank’s captive insurance companies, to mandatorily redeemable capital stock. In accordance with the final rule, on February 17, 2017, the Bank terminated the membership of all captive insurance company members that were admitted as members after September 12, 2014 (the date the Finance Agency proposed this rule) and repurchased outstanding capital stock to these captive insurance company members in the amount of $148 million. Captive insurance company members that were admitted as members prior to September 12, 2014 will also have their memberships terminated no later than February 19, 2021. At ~~June~~September 30, 2017 and December 31, 2016, the ~~Bank's~~Bank’s mandatorily redeemable capital stock totaled ~~$480~~$422 million and $664 million. During the three and ~~six~~nine months ended ~~June~~September 30, 2017, interest expense on mandatorily redeemable capital stock was $4 million and $9$13 million. Interest expense on mandatorily redeemable capital stock was $5$6 million and $9$15 million for the three and ~~six~~nine months ended ~~June~~September 30, 2016.

The following tables ~~summarizes~~summarize changes in mandatorily redeemable capital stock (dollars in millions):


	For the Three Months Ended June 30,						For the Three Months Ended September 30,
	2017			2016			2017			2016
Balance, beginning of period	$	494		$	732		$	480		$	698
Capital stock reclassified to (from) mandatorily redeemable capital stock, net	18			1			12			1
Repurchases/redemptions of mandatorily redeemable capital stock	(32		)	(35		)	(70		)	(24		)
Balance, end of period	$	480		$	698		$	422		$	675

For the Six Months Ended June 30,
2017 2016
Balance, beginning of period $ 664
$ 103
Capital stock reclassified to (from) mandatorily redeemable capital stock, net 28
731
Repurchases/redemptions of mandatorily redeemable capital stock (212 ) (136 )
Balance, end of period $ 480
$ 698

~~Table of Contents~~



	For the Nine Months Ended September 30,
	2017			2016
Balance, beginning of period	$	664		$	103
Capital stock reclassified to (from) mandatorily redeemable capital stock, net	40			732
Repurchases/redemptions of mandatorily redeemable capital stock	(282		)	(160		)
Balance, end of period	$	422		$	675

The following table summarizes the ~~Bank's~~Bank’s mandatorily redeemable capital stock by year of contractual redemption (dollars in millions):


Year of Contractual Redemption¹	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Due in one year or less	$	4	$	4	$	4	$	4
Due after one year through two years	—		5		—		5
Due after two years through three years	4		4		2		4
Due after three years through four years	1		—		1		—
Due after four years through five years	21		1		22		1
Thereafter²	433		631		378		631
Past contractual redemption date due to outstanding activity with the Bank	17		19		15		19
Total	$	480	$	664	$	422	$	664


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


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

ADDITIONAL CAPITAL FROM MERGER

The Bank recognized the net assets acquired from the Seattle Bank by recording the par value of capital stock issued in the transaction as capital stock, with the remaining portion of net assets acquired reflected in a capital account captioned as “Additional capital from merger.” The Bank treated this additional capital from merger as a component of total capital for regulatory capital purposes. Dividends on capital stock were paid from this account following the Merger until the balance was depleted following the first quarter dividend payment in May 2017. At December 31, 2016, the ~~Bank's~~Bank’s additional capital from merger balance totaled $52 million.

RESTRICTED RETAINED EARNINGS

The Bank entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other FHLBanks in February 2011. The JCE Agreement, as amended, is intended to enhance the capital position of the Bank over time. It requires the Bank to allocate 20 percent of its quarterly net income to a separate restricted retained earnings account until the balance of that account equals at least one percent of its average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends. At ~~June~~September 30, 2017 and December 31, 2016, the ~~Bank's~~Bank’s restricted retained earnings account totaled ~~$285~~$311 million and $231 million.

~~Table of Contents~~

ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes changes in ~~accumulated other comprehensive income (AOCI)~~AOCI (dollars in millions):


	Net unrealized gains (losses) on AFS securities (Note 4)			Pension and postretirement benefits			Total AOCI			Net unrealized gains (losses) on AFS securities (Note 4)			Pension and postretirement benefits			Total AOCI
Balance, March 31, 2016	$	(119	)	$	(3	)	$	(122	)
Balance, June 30, 2016										$	(83	)	$	(2	)	$	(85	)
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities										46			—			46
Net current period other comprehensive income (loss)										46			—			46
Balance, September 30, 2016										$	(37	)	$	(2	)	$	(39	)

Balance, June 30, 2017										$	91		$	(2	)	$	89
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities	36			—			36			12			—			12
Reclassifications from other comprehensive income (loss) to net income
Amortization - pension and postretirement	—			1			1			—			(1		)	(1		)
Net current period other comprehensive income (loss)	36			1			37			12			(1		)	11
Balance, June 30, 2016	$	(83	)	$	(2	)	$	(85	)

Balance, March 31, 2017	$	50		$	(3	)	$	47
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities	41			—			41
Reclassifications from other comprehensive income (loss) to net income
Amortization - pension and postretirement	—			1			1
Net current period other comprehensive income (loss)	41			1			42
Balance, June 30, 2017	$	91		$	(2	)	$	89
Balance, September 30, 2017										$	103		$	(3	)	$	100

Balance, December 31, 2015	$	(82	)	$	(2	)	$	(84	)	$	(82	)	$	(2	)	$	(84	)
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities	(1		)	—			(1		)	45			—			45
Net current period other comprehensive income (loss)	(1		)	—			(1		)	45			—			45
Balance, June 30, 2016	$	(83	)	$	(2	)	$	(85	)
Balance, September 30, 2016										$	(37	)	$	(2	)	$	(39	)

Balance, December 31, 2016	$	(14	)	$	(4	)	$	(18	)	$	(14	)	$	(4	)	$	(18	)
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities	105			—			105			117			—			117
Reclassifications from other comprehensive income (loss) to net income
Amortization - pension and postretirement	—			2			2			—			1			1
Net current period other comprehensive income (loss)	105			2			107			117			1			118
Balance, June 30, 2017	$	91		$	(2	)	$	89
Balance, September 30, 2017										$	103		$	(3	)	$	100

REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to three regulatory capital requirements:

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

Regulatory capital. The Bank is required to maintain a minimum four percent capital-to-asset ratio, which is defined as total regulatory capital divided by total assets. Total regulatory capital includes Class B stock (including mandatorily redeemable capital stock) and retained earnings. It does not include AOCI. At December 31, 2016, regulatory capital also included additional capital from merger. The additional capital from merger balance was depleted in May of 2017 following the first quarter dividend payment.

~~Table of Contents~~

Leverage capital. The Bank is required to maintain a minimum five percent leverage ratio, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times, divided by total assets. The Bank did not hold any nonpermanent capital at ~~June~~September 30, 2017. At December 31, 2016, nonpermanent capital included additional capital from merger.

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

The following table shows the ~~Bank's~~Bank’s compliance with the Finance ~~Agency's~~Agency’s regulatory capital requirements (dollars in millions):


	June 30, 2017						December 31, 2016						September 30, 2017						December 31, 2016
	Required			Actual			Required			Actual			Required			Actual			Required			Actual
Regulatory capital requirements
Risk-based capital	$	940		$	7,787		$	1,046		$	8,031		$	1,059		$	7,820		$	1,046		$	8,031
Regulatory capital	$	6,600		$	7,787		$	7,224		$	8,083		$	6,582		$	7,820		$	7,224		$	8,083
Leverage capital	$	8,249		$	11,681		$	9,030		$	12,098		$	8,227		$	11,730		$	9,030		$	12,098
Capital-to-assets ratio	4.00		%	4.72		%	4.00		%	4.48		%	4.00		%	4.75		%	4.00		%	4.48		%
Leverage ratio	5.00		%	7.08		%	5.00		%	6.70		%	5.00		%	7.13		%	5.00		%	6.70		%

Note 13 — Fair Value

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

The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:

Level 1 Inputs. Quoted prices (unadjusted) for identical assets or liabilities in an active market that the Bank can access on the measurement date.

Level 2 Inputs. Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, implied volatilities, and credit spreads), and (iv) market-corroborated inputs.

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

The Bank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. These reclassifications are reported as transfers in/out as of the beginning of the quarter in which the changes occur. There were no such transfers during the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016.

~~Table of Contents~~

The following table summarizes the carrying value, fair value, and fair value hierarchy of the ~~Bank's~~Bank’s financial instruments at ~~June~~September 30, 2017 (dollars in millions). The fair values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets and liabilities.


				Fair Value																	Fair Value
Financial Instruments	Carrying Value			Level 1			Level 2			Level 3		Netting Adjustment¹			Total			Carrying Value			Level 1			Level 2			Level 3		Netting Adjustment¹			Total
Assets
Cash and due from banks	$	964		$	964		$	—		$	—	$	—		$	964		$	218		$	218		$	—		$	—	$	—		$	218
Interest-bearing deposits	2			—			2			—		—			2			1			—			1			—		—			1
Securities purchased under agreements to resell	3,500			—			3,500			—		—			3,500			5,500			—			5,500			—		—			5,500
Federal funds sold	5,100			—			5,100			—		—			5,100			6,770			—			6,770			—		—			6,770
Trading securities	2,549			—			2,549			—		—			2,549			1,792			—			1,792			—		—			1,792
Available-for-sale securities	22,403			—			22,403			—		—			22,403			21,459			—			21,459			—		—			21,459
Held-to-maturity securities	4,209			—			4,251			14		—			4,265			3,819			—			3,867			13		—			3,880
Advances	118,878			—			119,119			—		—			119,119			117,514			—			117,731			—		—			117,731
Mortgage loans held for portfolio, net	6,953			—			6,981			69		—			7,050			7,031			—			7,078			66		—			7,144
Accrued interest receivable	206			—			206			—		—			206			239			—			239			—		—			239
Derivative assets, net	139			—			180			—		(41		)	139			119			—			188			—		(69		)	119
Other assets	26			26			—			—		—			26			27			27			—			—		—			27
Liabilities
Deposits	(964		)	—			(964		)	—		—			(964		)	(934		)	—			(934		)	—		—			(934		)
Consolidated obligations
Discount notes	(66,558		)	—			(66,550		)	—		—			(66,550		)	(52,976		)	—			(52,976		)	—		—			(52,976		)
Bonds	(89,171		)	—			(89,636		)	—		—			(89,636		)	(102,294		)	—			(102,743		)	—		—			(102,743		)
Total consolidated obligations	(155,729		)	—			(156,186		)	—		—			(156,186		)	(155,270		)	—			(155,719		)	—		—			(155,719		)
Mandatorily redeemable capital stock	(480		)	(480		)	—			—		—			(480		)	(422		)	(422		)	—			—		—			(422		)
Accrued interest payable	(209		)	—			(209		)	—		—			(209		)	(227		)	—			(227		)	—		—			(227		)
Derivative liabilities, net	(23		)	—			(666		)	—		643			(23		)	(3		)	—			(611		)	—		608			(3		)


1	Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty. In addition, the amount includes the fair value adjustments on derivatives for variation margin which is characterized as a daily settled contract.

~~Table of Contents~~

The following table summarizes the carrying value, fair value, and fair value hierarchy of the ~~Bank's~~Bank’s financial instruments at December 31, 2016 (dollars in millions):



				Fair Value
Financial Instruments	Carrying Value			Level 1			Level 2			Level 3		Netting Adjustment¹			Total
Assets
Cash and due from banks	$	223		$	223		$	—		$	—	$	—		$	223
Interest-bearing deposits	2			—			2			—		—			2
Securities purchased under agreements to resell	5,925			—			5,925			—		—			5,925
Federal funds sold	5,095			—			5,095			—		—			5,095
Trading securities	2,553			—			2,553			—		—			2,553
Available-for-sale securities	22,969			—			22,969			—		—			22,969
Held-to-maturity securities	4,674			—			4,691			15		—			4,706
Advances	131,601			—			131,772			—		—			131,772
Mortgage loans held for portfolio, net	6,913			—			6,918			71		—			6,989
Loans to other FHLBanks	200			—			200			—		—			200
Accrued interest receivable	197			—			197			—		—			197
Derivative assets, net	191			—			204			—		(13		)	191
Other assets	24			24			—			—		—			24
Liabilities
Deposits	(1,113		)	—			(1,113		)	—		—			(1,113		)
Consolidated obligations
Discount notes	(80,947		)	—			(80,943		)	—		—			(80,943		)
Bonds	(89,898		)	—			(90,370		)	—		—			(90,370		)
Total consolidated obligations	(170,845		)	—			(171,313		)	—		—			(171,313		)
Mandatorily redeemable capital stock	(664		)	(664		)	—			—		—			(664		)
Accrued interest payable	(180		)	—			(180		)	—		—			(180		)
Derivative liabilities, net	(76		)	—			(744		)	—		668			(76		)


1	Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.

SUMMARY OF VALUATION TECHNIQUES AND PRIMARY INPUTS

Cash and Due from Banks. The fair value equals the carrying value.

Interest-Bearing Deposits. For interest-bearing deposits with less than three months to maturity, the fair value approximates the carrying value. For interest-bearing deposits with more than three months to maturity, the fair value is determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest receivable.

Securities Purchased under Agreements to Resell. For overnight and term securities purchased under agreements to resell with less than three months to maturity, the fair value approximates the carrying value. For term securities purchased under agreements to resell with more than three months to maturity, the fair value is determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest receivable. The discount rates used in these calculations are the rates for securities with similar terms.

Federal Funds Sold. The fair value approximates the carrying value.

~~Table of Contents~~

Investment Securities. The ~~Bank's~~Bank’s valuation technique incorporates prices from multiple designated third-party pricing vendors, when available. The pricing vendors generally use various proprietary models to price investment securities. The inputs to those models are derived from various sources including, but not limited to, benchmark securities and yields, reported trades, dealer estimates, issuer spreads, bids, offers, and other market-related data. Since many investment securities do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established process in place to challenge investment valuations, which facilitates resolution of questionable prices identified by the Bank. Annually, the Bank conducts reviews of its pricing vendors to confirm and further augment its understanding of the ~~vendors'~~vendors’ pricing processes, methodologies, and control procedures for investment securities.

The ~~Bank's~~Bank’s valuation technique for estimating the fair values of its investment securities 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. All prices that are outside the threshold (outliers) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. Alternatively, if the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security. In limited instances, when no prices are available from one of the designated pricing services, the Bank obtains prices from dealers.

As of ~~June~~September 30, 2017 and December 31, 2016, multiple prices were received for the majority of the ~~Bank's~~Bank’s investment securities. Based on the ~~Bank's~~Bank’s review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the Bank believes its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further, that the fair value measurements are classified appropriately in the fair value hierarchy.

Advances. The fair value of advances is determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest receivable. The discount rates used in these calculations are equivalent to the replacement advance rates for advances with similar terms. In accordance with Finance Agency regulations, advances generally require a prepayment fee sufficient to make the Bank financially indifferent to a ~~borrower's~~borrower’s decision to prepay the advances. Therefore, the fair value of advances assumes no prepayment risk.

The Bank uses the following inputs for measuring the fair value of advances:

Consolidated Obligation Curve (CO Curve). The Office of Finance constructs a market-observable curve referred to as the CO Curve. The CO Curve is constructed using the U.S. Treasury Curve as a base curve which is then adjusted by adding indicative spreads obtained largely from market-observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, recent GSE trades, and secondary market activity. The Bank utilizes the CO Curve as its input to fair value for advances because it represents the ~~Bank's~~Bank’s cost of funds and is used to price advances.

Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

Spread assumption. Represents a spread adjustment to the CO Curve.

Mortgage Loans Held for Portfolio. The fair value of mortgage loans held for portfolio is estimated based on quoted market prices of similar mortgage loans available in the market, if available, or modeled prices. The modeled prices start with prices for new MBS issued by GSEs or similar new mortgage loans. The prices are adjusted for factors such as credit risk, servicing spreads, seasoning, delinquency status, and cash flow remittances. The prices for new MBS or similar new mortgage loans are highly dependent upon the underlying prepayment assumptions priced in the secondary market. Changes in expected prepayment rates often have a material effect on the fair value estimates.

~~Table of Contents~~

Impaired Mortgage Loans Held for Portfolio. The fair value of impaired mortgage loans held for portfolio is estimated by obtaining property values from an external pricing vendor. This vendor utilizes multiple pricing models that generally factor in market observable inputs, including actual sales transactions and home price indices. The Bank applies an adjustment to these values to capture certain limitations in the estimation process and takes into consideration estimated selling costs and expected PMI proceeds. In limited instances, the Bank may estimate the fair value of an impaired mortgage loan by calculating the present value of expected future cash flows discounted at the ~~loan's~~loan’s effective interest rate.

Loans to other FHLBanks. The Bank may lend or borrow unsecured overnight funds to or from other FHLBanks. All such transactions are at current market rates. The fair value approximates the carrying value.

Accrued Interest Receivable and Payable. The fair value approximates the carrying value.

Derivative Assets and Liabilities. The fair value of derivatives is generally estimated using standard valuation techniques such as discounted cash flow analyses and comparisons to similar instruments, and also effective January 3, 2017, includes variation margin payments for daily settled contracts. In limited instances, fair value estimates for interest-rate related derivatives may be obtained using an external pricing model that utilizes observable market data. The Bank is subject to credit risk in derivatives transactions due to the potential nonperformance of its derivatives counterparties. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments is posted daily, through a clearing agent, for changes in the fair value of cleared derivatives. To mitigate credit risk on uncleared derivatives, the Bank enters into master netting agreements with its counterparties as well as collateral agreements that provide for the delivery of collateral at specified levels tied to those ~~counterparties'~~counterparties’ credit ratings. The Bank has evaluated the potential for the fair value of its derivatives to be affected by counterparty credit risk and its own credit risk and has determined that no adjustments were significant to the overall fair value measurements.

The fair values of the ~~Bank's~~Bank’s derivative assets and derivative liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. The fair values of derivatives are netted by clearing agent and/or counterparty if the netting requirements are met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability.

The ~~Bank's~~Bank’s discounted cash flow model utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). The Bank uses the following inputs for measuring the fair value of interest-related derivatives:

Discount rate assumption. The Bank utilizes the Overnight-Index Swap (OIS) curve.

Forward interest rate assumption. The Bank utilizes the London Interbank Offered Rate (LIBOR) swap curve.

Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

For forward settlement agreements (TBAs), the Bank utilizes TBA securities prices that are determined by coupon class and expected term until settlement. For mortgage delivery commitments, the Bank utilizes TBA securities prices adjusted for factors such as credit risk and servicing spreads.

Other Assets. These represent grantor trust assets, which are carried at estimated fair value based on quoted market prices as of the last business day of the reporting period.

Deposits. For deposits with three months or less to maturity, the fair value approximates the carrying value. For deposits with more than three months to maturity, the fair value is determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.

Consolidated Obligations. The fair value of consolidated obligations is determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest payable. The discount rates used in these calculations are for consolidated obligations with similar terms. The Bank uses the CO Curve and a volatility assumption for measuring the fair value of these consolidated obligations.

~~Table of Contents~~

Mandatorily Redeemable Capital Stock. The fair value of capital stock subject to mandatory redemption is generally reported at par value. Fair value also includes an estimated dividend earned at the time of reclassification from equity to a liability (if applicable), until such amount is paid. Capital stock can only be acquired by members at par value and redeemed at par value. Capital stock is not publicly traded and no market mechanism exists for the exchange of stock outside the cooperative structure.

Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methods previously described are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates.

FAIR VALUE ON A RECURRING BASIS

The following table summarizes, for each hierarchy level, the ~~Bank's~~Bank’s assets and liabilities that are measured at fair value in the Statements of Condition at ~~June~~September 30, 2017 (dollars in millions):


Recurring Fair Value Measurements	Level 1		Level 2			Level 3		Netting Adjustment¹			Total			Level 1		Level 2			Level 3		Netting Adjustment¹			Total
Assets
Trading securities
Other U.S. obligations	$	—	$	207		$	—	$	—		$	207		$	—	$	203		$	—	$	—		$	203
GSE and Tennessee Valley Authority obligations	—		1,612			—		—			1,612			—		861			—		—			861
Othernon-MBS	—		275			—		—			275			—		274			—		—			274
GSE multifamily MBS	—		455			—		—			455			—		454			—		—			454
Total trading securities	—		2,549			—		—			2,549			—		1,792			—		—			1,792
Available-for-sale securities
Other U.S. obligations	—		3,323			—		—			3,323			—		3,207			—		—			3,207
GSE and Tennessee Valley Authority obligations	—		1,304			—		—			1,304			—		1,275			—		—			1,275
State or local housing agency obligations	—		988			—		—			988			—		961			—		—			961
Other non-MBS	—		281			—		—			281			—		281			—		—			281
Other U.S. obligations single-family MBS	—		3,946			—		—			3,946			—		3,842			—		—			3,842
GSE single-family MBS	—		1,125			—		—			1,125			—		1,055			—		—			1,055
GSE multifamily MBS	—		11,436			—		—			11,436			—		10,838			—		—			10,838
Total available-for-sale securities	—		22,403			—		—			22,403			—		21,459			—		—			21,459
Derivative assets, net
Interest-rate related	—		180			—		(41		)	139			—		188			—		(69		)	119
Other assets	26		—			—		—			26			27		—			—		—			27
Total recurring assets at fair value	$	26	$	25,132		$	—	$	(41	)	$	25,117		$	27	$	23,439		$	—	$	(69	)	$	23,397
Liabilities
Derivative liabilities, net
Interest-rate related	—		(666		)	—		643			(23		)	—		(611		)	—		608			(3		)
Total recurring liabilities at fair value	$	—	$	(666	)	$	—	$	643		$	(23	)	$	—	$	(611	)	$	—	$	608		$	(3	)


1	Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty. In addition, the amount includes the fair value adjustments on derivatives for variation margin which is characterized as a daily settled contract.

~~Table of Contents~~

The following table summarizes, for each hierarchy level, the ~~Bank's~~Bank’s assets and liabilities that are measured at fair value in the Statements of Condition at December 31, 2016 (dollars in millions):



Recurring Fair Value Measurements	Level 1		Level 2			Level 3		Netting Adjustment¹			Total
Assets
Trading securities
Other U.S. obligations	$	—	$	216		$	—	$	—		$	216
GSE and Tennessee Valley Authority obligations	—		1,611			—		—			1,611
Othernon-MBS	—		273			—		—			273
GSE multifamily MBS	—		453			—		—			453
Total trading securities	—		2,553			—		—			2,553
Available-for-sale securities
Other U.S. obligations	—		3,529			—		—			3,529
GSE and Tennessee Valley Authority obligations	—		1,351			—		—			1,351
State or local housing agency obligations	—		1,009			—		—			1,009
Other non-MBS	—		278			—		—			278
Other U.S. obligations single-family MBS	—		3,838			—		—			3,838
GSE single-family MBS	—		1,261			—		—			1,261
GSE multifamily MBS	—		11,703			—		—			11,703
Total available-for-sale securities	—		22,969			—		—			22,969
Derivative assets, net
Interest-rate related	—		204			—		(13		)	191
Other assets	24		—			—		—			24
Total recurring assets at fair value	$	24	$	25,726		$	—	$	(13	)	$	25,737
Liabilities
Derivative liabilities, net
Interest-rate related	—		(744		)	—		668			(76		)
Total recurring liabilities at fair value	$	—	$	(744	)	$	—	$	668		$	(76	)


1	Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.

FAIR VALUE ON A NON-RECURRING BASIS

The Bank measures certain impaired mortgage loans held for portfolio at level 3 fair value on a non-recurring basis. These assets are subject to fair value adjustments in certain circumstances. The Bank estimates the fair value of these assets based primarily on a broker price opinion or property values from an external pricing vendor. The Bank applies an adjustment to these values to capture certain limitations in the estimation process and takes into consideration estimated selling costs and expected PMI proceeds. At ~~June~~September 30, 2017 and December 31, 2016, impaired mortgage loans held for portfolio recorded at fair value as a result of a non-recurring change in fair value were $6$7 million and $15 million. These fair values were as of the date the fair value adjustment was recorded during the ~~six~~nine months ended ~~June~~September 30, 2017 and year-ended December 31, 2016.

~~Table of Contents~~

Note 14 — Commitments and Contingencies

Joint and Several Liability. The FHLBanks have joint and several liability for all consolidated obligations issued. Accordingly, if an FHLBank were unable to repay any consolidated obligation for which it is the primary obligor, each of the other FHLBanks could be called upon by the Finance Agency to repay all or part of such obligations. No FHLBank has ever been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank. At ~~June~~September 30, 2017 and December 31, 2016, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which the Bank is jointly and severally liable was approximately ~~$855.5~~$873.2 billion and $818.2 billion.

The following table summarizes additional off-balance sheet commitments for the Bank (dollars in millions):


	June 30, 2017						December 31, 2016		September 30, 2017						December 31, 2016
	Expire within one year		Expire after one year		Total		Total		Expire within one year		Expire after one year		Total		Total
Standby letters of credit	$	7,487	$	156	$	7,643	$	7,281
Standby letters of credit¹									$	7,312	$	102	$	7,414	$	7,281
Standby bond purchase agreements	124		575		699		458		109		698		807		458
Commitments to purchase mortgage loans	113		—		113		102		113		—		113		102
Commitments to issue bonds	360		—		360		—		24		—		24		—
Commitments to issue discount notes	15		—		15		—
Commitments to fund advances	1,032		28		1,060		280		1,420		18		1,438		280


1	Excludes commitments to issue standby letters of credit of $32 million and $1 million at September 30, 2017 and December 31, 2016 .

Standby Letters of Credit. A standby letter of credit is a financing arrangement between the Bank and a member. Standby letters of credit are executed with members for a fee. If the Bank is required to make payment for a ~~beneficiary's~~beneficiary’s draw, the payment is withdrawn from the ~~member's~~member’s demand account. Any resulting overdraft is converted into a collateralized advance to the member. The original terms of standby letters of credit range from less than one month to 13 years, currently no later than 2025. ~~Unearned fees for~~The carrying value of guarantees related to standby letters of credit are recorded in “Other liabilities” in the Statements of Condition and amounted to $4$3 million at ~~June~~September 30, 2017 and ~~$3 million at~~ December 31, 2016.

The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of its borrowers. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit. Based on ~~management's~~management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have any provision for credit losses on these standby letters of credit. All standby letters of credit are fully collateralized at the time of issuance.

Standby Bond Purchase Agreements. The Bank has entered into standby bond purchase agreements with state housing associates within its district whereby, for a fee, it agrees to serve as a standby liquidity provider if required, to purchase and hold the housing ~~associate's~~associate’s bonds until the designated marketing agent can find a suitable investor or the housing associate repurchases the bonds according to a schedule established by the agreement. Each standby bond purchase agreement includes the provisions under which the Bank would be required to purchase the bonds. At ~~June~~September 30, 2017, the Bank had standby bond purchase agreements with ~~seven~~eight housing associates. The standby bond purchase commitments entered into by the Bank have original expiration periods of up to seven years, currently no later than 2024. During both the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016, the Bank was not required to purchase any bonds under these agreements. For ~~both~~ the three months ended ~~June~~September 30, 2017 and 2016, the Bank received fees for the guarantees that amounted to $1 million and less than $1 million. For ~~both~~ the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016, the Bank received fees for the guarantees that amounted to $2 million and $1 million.

Commitments to Purchase Mortgage Loans. The Bank enters into commitments that unconditionally obligate it to purchase mortgage loans from its members. Commitments are generally for periods not to exceed 45 days. These commitments are considered derivatives and their estimated fair value at ~~June~~September 30, 2017 and December 31, 2016 is reported in “Note 10 — Derivatives and Hedging Activities” as mortgage delivery commitments.

Commitments to Issue Bonds. At ~~June~~September 30, 2017, the Bank had commitments to issue ~~$360~~$24 million of consolidated obligation bonds. At December 31, 2016, the Bank had no commitments to issue consolidated obligations bonds.

~~Commitments to Issue Discount Notes.~~ ~~At June 30, 2017, the Bank had commitments to issue~~ ~~$15 million~~ ~~of consolidated obligation discount notes. At December 31, 2016, the Bank had no commitments to issue consolidated obligation discount notes.~~

~~Table of Contents~~

Commitments to Fund Advances. The Bank enters into commitments that legally bind it to fund additional advances up to 24 months in the future. At ~~June~~September 30, 2017 and December 31, 2016, the Bank had commitments to fund advances of ~~$1.1~~$1.4 billion and $280 million.

Other Commitments. For each master commitment, the ~~Bank's~~Bank’s potential loss exposure prior to the ~~PFI's~~PFI’s credit enhancement obligation is estimated and tracked in a memorandum account called the FLA. For absorbing certain losses in excess of the FLA, PFIs are paid a credit enhancement fee, a portion of which may be performance-based. To the extent the Bank experiences losses under the FLA, it may be able to recapture performance-based credit enhancement fees paid to the PFI to offset these losses. The FLA balance for all MPF master commitments with a PFI credit enhancement obligation was ~~$103~~$102 million and $99 million at ~~June~~September 30, 2017 and December 31, 2016. ~~For additional information related to the FLA commitment, refer to "Note 9 — Allowance for Credit Losses."~~

Legal Proceedings. As a result of the Merger, the Bank has been involved in a number of legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairment of certain private-label MBS. Although the Seattle Bank sold all private-label MBS during the first quarter of 2015 and all of the lawsuits have been either settled or dismissed, the Bank has appealed certain claims dismissed by the court against three defendants. Other than the private-label MBS litigation, the Bank does not believe any legal proceedings to which it is a party could have a material impact on its financial condition, results of operations, or cash flows.

Litigation settlement gains are considered realized and recorded when the Bank receives cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, litigation settlement gains are considered realizable and recorded when the Bank enters into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, the Bank considers potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income.

The Bank records legal expenses related to litigation settlements as incurred in other expenses in the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. The Bank incurs and recognizes these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement. During the three months ended ~~June~~September 30, 2017 and 2016, the Bank did not settle any private-label MBS claims. During the nine months ended September 30, 2017, the Bank ~~did not recognize net gains on litigation settlements. During the six months ended June 30, 2017, the Bank~~settled a private-label MBS claim and recognized $21 million in net gains on litigation ~~settlements through other income (loss), due to the settlement of one of the Bank's private-label MBS claims.~~settlements. During the ~~three and six~~nine months ended ~~June~~September 30, 2016, the Bank recognized ~~$200 million and~~ $337 million in net gains on litigation settlements.

Note 15 — Activities with Stockholders

TRANSACTIONS WITH ~~DIRECTORS'~~DIRECTORS’ FINANCIAL INSTITUTIONS

In the normal course of business, the Bank extends credit to its members whose directors and officers serve as Bank directors ~~(Directors'~~(Directors’ Financial Institutions). Finance Agency regulations require that transactions with ~~Directors'~~Directors’ Financial Institutions be made on the same terms and conditions as those with any other member.

The following table summarizes the ~~Bank's~~Bank’s outstanding transactions with ~~Directors'~~Directors’ Financial Institutions (dollars in millions):


	June 30, 2017			December 31, 2016			September 30, 2017			December 31, 2016
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total
Advances	$	5,386	5	$	2,497	2	$	5,056	4	$	2,497	2
Mortgage loans	57		1	186		3	62		1	186		3
Deposits	23		2	82		7	42		4	82		7
Capital stock	270		4	157		2	257		4	157		2

~~Table of Contents~~

BUSINESS CONCENTRATIONS

The Bank considers itself to have business concentrations with stockholders owning 10 percent or more of its total capital stock outstanding (including mandatorily redeemable capital stock). At ~~June~~September 30, 2017, the Bank had the following business concentrations with stockholders (dollars in millions):


	Capital Stock					Mortgage		Interest		Capital Stock					Mortgage		Interest
Stockholder	Amount		% of Total¹	Advances		Loans		Income²		Amount		% of Total¹	Advances		Loans		Income²
Wells Fargo Bank, N.A.	$	2,510	41	$	62,500	$	—	$	390	$	2,406	40	$	59,895	$	—	$	629
Superior Guaranty Insurance Company³	25		—	—		596		—		23		—	—		556		—
Wells Fargo Bank Northwest, N.A.³	1		—	—		33		—		1		—	—		31		—
Total	$	2,536	41	$	62,500	$	629	$	390	$	2,430	40	$	59,895	$	587	$	629


1	Pursuant to applicable Finance Agency regulations, the ~~Bank's~~Bank’s voting structure limits the voting rights of these stockholders and other members holding a significant amount of the ~~Bank's~~Bank’s capital stock.


2	Represents interest income earned on advances during the ~~six~~nine months ended ~~June~~September 30, 2017. Interest income on mortgage loans is excluded from this table as this interest relates to the borrower, not to the stockholder.


3	Superior Guaranty Insurance Company and Wells Fargo Bank Northwest, N.A. are affiliates of Wells Fargo Bank, N.A.

At December 31, 2016, the Bank had the following business concentrations with stockholders (dollars in millions):



	Capital Stock					Mortgage		Interest
Stockholder	Amount		% of Total¹	Advances		Loans		Income²
Wells Fargo Bank, N.A.	$	3,093	47	$	77,075	$	—	$	429
Superior Guaranty Insurance Company³	28		1	—		683		—
Wells Fargo Bank Northwest N.A.³	2		—	—		38		—
Total	$	3,123	48	$	77,075	$	721	$	429


1	Pursuant to applicable Finance Agency regulations, the ~~Bank's~~Bank’s voting structure limits the voting rights of these stockholders and other members holding a significant amount of the ~~Bank's~~Bank’s capital stock.


2	Represents interest income earned on advances during the year ended December 31, 2016. Interest income on mortgage loans is excluded from this table as this interest relates to the borrower, not to the stockholder.


3	Superior Guaranty Insurance Company and Wells Fargo Bank Northwest, N.A. are affiliates of Wells Fargo Bank, N.A.

LEASE TRANSACTIONS

On June 22, 2017, a storm pipe broke at the Bank’s headquarters causing significant water damage to the Bank’s office space and rendering it totally uninhabitable. As a result of the water damage, the estimated time to complete repairs, and the Bank’s plan to relocate its headquarters to a building in downtown Des Moines that it purchased in April of 2017, the Bank terminated its lease with Wells Fargo Financial, an affiliate of Wells Fargo Bank, effective September 30, 2017. The Bank paid lease termination fees of less than $1 million to Wells Fargo Financial related to the termination.

The Bank entered into a nine month lease agreement with Wells Fargo Financial effective September 30, 2017 to lease approximately 1,200 square feet of the former headquarters that was not damaged to serve general business functions. For information related to the water damage to the Bank’s office space, refer to “Note 1 — Basis of Presentation.”

Note 16 — Activities with Other FHLBanks

Overnight Funds. The Bank may lend or borrow unsecured overnight funds to or from other FHLBanks. All such transactions are at current market rates. During the ~~six~~nine months ended ~~June~~September 30, 2016, the Bank did not lend funds to other FHLBanks. The following table summarizes loan activity to other FHLBanks during the ~~six~~nine months ended ~~June~~September 30, 2017 (dollars in millions):



Other FHLBank	Beginning Balance		Loans		Principal Repayment			Ending Balance
2017
San Francisco	$	200	$	—	$	(200	)	$	—

During the ~~six~~nine months ended ~~June~~September 30, 2017, the Bank did not borrow funds from other FHLBanks. The following table summarizes borrowing activity from other FHLBanks during the ~~six~~nine months ended ~~June~~September 30, 2016 (dollars in millions):



Other FHLBank	Beginning Balance		Borrowing		Principal Payment			Ending Balance
2016
San Francisco	$	—	$	200	$	(200	)	$	—

At ~~June~~September 30, 2017 and 2016, none of the previous transactions were outstanding on the ~~Bank's~~Bank’s Statements of Condition. The interest income and expense related to this activity were immaterial.

~~Table of Contents~~

Advance Transfers. The Bank may purchase or sell advances from/to other FHLBanks. These transfers are accounted for in the same manner as an advances origination with a member bank. During the ~~six~~nine months ended ~~June~~September 30, 2017, a member of the Federal Home Loan Bank of Chicago (Chicago Bank) re-designated its charter, and concurrently transferred its Federal Home Loan Bank membership from the Chicago Bank to the Des Moines Bank. In conjunction with this transfer and at request of the member, the Bank purchased $37 million of par value advances outstanding to this member from the Chicago Bank and recognized related premiums of $1 million. There were no advance transfers during the ~~six~~nine months ended ~~June~~September 30, 2016.

Note 17 — Subsequent Events

Subsequent events have been evaluated from ~~July~~October 1, 2017, through the time of the Form 10-Q filing with the Securities and Exchange Commission. No material subsequent events requiring disclosure were identified.

~~Table of Contents~~

ITEM 2. ~~MANAGEMENT'S~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our ~~Management's~~Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations should be read in conjunction with our financial statements and condensed notes at the beginning of this Form 10-Q and in conjunction with our MD&A and Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission (SEC) on March 21, 2017 (2016 Form 10-K). Our MD&A is designed to provide information that will help the reader develop a better understanding of our financial statements, key financial statement changes from quarter to quarter, and the primary factors driving those changes. Our MD&A is organized as follows:



CONTENTS

Forward-Looking Information		4950

Executive Overview		5051

Bank Developments		53

Conditions in the Financial Markets		54

Selected Financial Data		56

Results of Operations		57

Net Income		57

Net Interest Income		58

Other Income (Loss)		61

Hedging Activities		62

Other Expense		6465

Statements of Condition		6566

Financial Highlights		65

~~Cash and Due from Banks~~		6566

Advances		6566

Mortgage Loans		6768

Investments		6869

Consolidated Obligations		6970

Deposits		6970

Mandatorily Redeemable Capital Stock		6970

Capital		7071

Derivatives		7071

Liquidity and Capital Resources		7172

Critical Accounting Policies and Estimates		7576

Legislative and Regulatory Developments		7677

Risk Management		7779

~~Table of Contents~~

FORWARD-LOOKING INFORMATION

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

political or economic events, including legislative, regulatory, monetary, judicial, or other developments that affect us, our members, our counterparties, and/or our investors in the consolidated obligations of the 11 Federal Home Loan Banks (FHLBanks);

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

risks related to the other FHLBanks that could trigger our joint and several liability for debt issued by the other 10 FHLBanks;

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

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

the ability to meet capital and liquidity requirements;

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

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

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

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

increases in delinquency or loss estimates on mortgage loans;

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

the ability to develop and support internal controls, information systems, and other operating technologies that effectively manage the risks we ~~face;~~face, including but not limited to, cyberattacks and other business interruptions;

the ability to attract and retain key personnel;

member consolidations and failures; and

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

~~Table of Contents~~

For additional information regarding these and other risks and uncertainties that could cause our actual results to differ materially from the expectations reflected in our forward-looking statements, see “Item 1A. Risk Factors” in this quarterly report and in our 2016 Form 10-K. You are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements apply only as of the date they are made, and we undertake no obligation to update or revise any forward-looking statement.

EXECUTIVE OVERVIEW

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

Financial Results

For the three and ~~six~~nine months ended ~~June~~September 30, 2017, we reported net income of ~~$130~~$132 million and ~~$270~~$402 million compared to ~~$232~~$74 million and ~~$419~~$493 million for the same periods in 2016. Our net income for the three and ~~six~~nine months ended ~~June~~September 30, 2017, calculated in accordance with accounting principles generally accepted in the United States of America (GAAP), was primarily driven by net interest income, other income (loss), and other expense.

Net interest income totaled ~~$170~~$174 million and ~~$323~~$497 million for the three and ~~six~~nine months ended ~~June~~September 30, 2017 compared to ~~$94~~$117 million and ~~$197~~$314 million for the same periods last year due primarily to higher advance ~~spreads and~~spreads. In addition, the increase was partially due to higher average advance ~~balances.~~balances for the nine months ended September 30, 2017. Our net interest margin was ~~0.41~~0.40 percent and ~~0.37~~0.38 percent during the three and ~~six~~nine months ended ~~June~~September 30, 2017 compared to ~~0.24~~0.27 percent and 0.26 percent for the ~~three and six months ended June 30,~~same periods in 2016. The increase was primarily driven by changes made to advance pricing on certain variable rate callable advance products and our interest-earning assets repricing to higher interest rates at a quicker pace than our interest-bearing liabilities during the first ~~half~~nine months of 2017.

We recorded net gains of $6$4 million and ~~$41~~$45 million in other income (loss) for the three and ~~six~~nine months ended ~~June~~September 30, 2017 compared to net ~~gains~~losses of ~~$192~~$5 million and ~~$324~~income of $319 million for the same periods last year. Other income (loss) was primarily impacted by net gains ~~on litigation settlements~~ of $21 ~~million during the six months ended June 30, 2017 and $200~~ million and $337 million during the ~~three and six~~nine months ended ~~June~~September 30, 2017 and 2016, as a result of settlements with certain defendants in our private-label mortgage-backed securities (private-label MBS) litigation. We did not record any litigation settlements during either the three months ended ~~June~~September 30, ~~2017.~~2017 or 2016. Although all of the private-label MBS lawsuits have been either settled or dismissed, we have appealed certain claims dismissed by the court against three defendants. Other factors impacting other income (loss) included net gains (losses) on derivatives and hedging activities, ~~and~~ net gains (losses) on trading securities, ~~as described below.~~

~~During the three~~ and ~~six months ended June 30, 2017, we recorded net losses of $3 million and net gains of $3 million on our derivatives and hedging activities through~~ other, income (loss) compared to net losses of $30 million and $73 million during the same periods last year. The fair value changes were primarily driven by changes in interest rates. These changes impacted our fair value hedge relationships and fair value changes on interest rate swaps that we utilized to economically hedge our investment securities portfolio. We utilize derivative instruments to manage interest rate risk. Refer to "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Hedging Activities" for additional discussion on our derivatives and hedging activities, including the net impact of economic hedge relationships.

During the three and six months ended June 30, 2017, we recorded net gains on trading securities of $4 million and $9 million compared to net gains of $18 million and $53 million during the same periods in 2016. These changes in fair value were primarily due to the impact of interest rates and credit spreads on our fixed rate trading securities.net.

Our total assets decreased to ~~$165.0~~$164.5 billion at ~~June~~September 30, 2017, from $180.6 billion at December 31, 2016, due primarily to a decrease in advances. Advances decreased due primarily to the repayment of advances held by a large depository institution member and by certain captive insurance company members whose membership was terminated in response to the Finance Agency final rule affecting FHLBank membership.

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The decrease was partially offset by an increase in advances across other institution types.

Our total liabilities decreased to ~~$157.6~~$157.0 billion at ~~June~~September 30, 2017, from $173.2 billion at December 31, 2016, driven primarily by a decline in the amount of consolidated obligations needed to fund our assets.

Total capital ~~remained stable~~increased to $7.5 billion at September 30, 2017 from $7.4 billion at ~~June 30, 2017 and~~ December 31, 2016. Retained earnings increased to ~~$1.7~~$1.8 billion at ~~June~~September 30, 2017 from $1.5 billion at December 31, 2016 due to net income, partially offset by dividends paid. Our regulatory capital ratio increased to ~~4.72~~4.75 percent at ~~June~~September 30, 2017, from 4.48 percent at December 31, 2016 and was above the required regulatory minimum at each period end. Regulatory capital includes all capital stock, mandatorily redeemable capital stock, and retained earnings.

Refer to “Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition” for additional discussion on our financial condition.

Adjusted Earnings

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

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

Effective January 1, 2017, management approved a revision to the adjusted net income methodology to calculate adjusted net income on a post Affordable Housing Program (AHP) assessment basis. The revision was made to better align adjusted net income results to the Bank’s strategic business plan which is calculated on a post AHP assessment basis. Management believes AHP assessments are a fundamental component of our business and believes this assessment should be included in our adjusted net income calculation. In addition, one of our incentive plan targets, our adjusted return on capital stock spread to LIBOR target, is calculated on a post AHP assessment basis. ~~This change~~The revision also aligns the adjusted net income measure to the measure used as the incentive plan target. Adjusted net income for the three and ~~six~~nine months ended ~~June~~September 30, ~~2017~~2016 has been revised to be reported on a post AHP assessment basis for comparability.

As indicated in the tables that follow, our adjusted net interest income and adjusted net income increased during the three and ~~six~~nine months ended ~~June~~September 30, 2017 when compared to the same periods in 2016. The increase in our adjusted net interest income and adjusted net income was primarily due to an increase in interest income due to improved advance ~~spreads and~~spreads. In addition, the increase was partially due to higher advance ~~balances.~~

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balances for the nine months ended September 30, 2017.

The following table summarizes the reconciliation between GAAP and adjusted net interest income (dollars in millions):


	For the Three Months Ended						For the Six Months Ended						For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2017			2016			2017			2016			2017			2016			2017			2016
GAAP net interest income before provision (reversal) for credit losses on mortgage loans	$	170		$	94		$	323		$	197		$	174		$	117		$	497		$	314
Exclude:
Prepayment fees on advances, net¹	1			1			1			5			—			1			1			6
Prepayment fees on investments, net²	—			—			—			2			—			—			—			2
Mandatorily redeemable capital stock interest expense	(4		)	(5		)	(9		)	(9		)	(4		)	(6		)	(13		)	(15		)
Total adjustments	(3		)	(4		)	(8		)	(2		)	(4		)	(5		)	(12		)	(7		)
Include items reclassified from other income (loss):
Net interest expense on economic hedges	(3		)	(4		)	(7		)	(9		)	(3		)	(4		)	(10		)	(13		)
Adjusted net interest income	$	170		$	94		$	324		$	190		$	175		$	118		$	499		$	308
Adjusted net interest margin	0.41		%	0.23		%	0.37		%	0.25		%	0.41		%	0.27		%	0.38		%	0.25		%


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


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

The following table summarizes the reconciliation between GAAP net income before assessments and adjusted net income (dollars in millions):


	For the Three Months Ended						For the Six Months Ended						For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2017			2016			2017			2016			2017			2016			2017			2016
GAAP net income before assessments	$	145		$	258		$	301		$	466		$	147		$	83		$	448		$	549
Exclude:
Prepayment fees on advances, net¹	1			1			1			5			—			1			1			6
Prepayment fees on investments, net²	—			—			—			2			—			—			—			2
Mandatorily redeemable capital stock interest expense	(4		)	(5		)	(9		)	(9		)	(4		)	(6		)	(13		)	(15		)
Net gains (losses) on trading securities	4			18			9			53			1			(2		)	10			51
Net gains (losses) on derivatives and hedging activities	(3		)	(30		)	3			(73		)	(2		)	(3		)	1			(76		)
Gains on litigation settlements, net	—			200			21			337			—			—			21			337
Include:
Net interest expense on economic hedges	(3		)	(4		)	(7		)	(9		)	(3		)	(4		)	(10		)	(13		)
Adjusted net income before assessments	144			70			269			142			149			89			418			231
Adjusted AHP assessments³	14			7			27			14			15			9			42			23
Adjusted net income	$	130		$	63		$	242		$	128		$	134		$	80		$	376		$	208


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


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


3	Adjusted AHP assessments for this non-GAAP measure are calculated as 10 percent of adjusted net income before assessments. For additional discussion on AHP assessments, refer to ~~"Item~~“Item 8. Financial Statements and Supplementary Data — Note 14 — Affordable Housing ~~Program"~~Program” in our 2016 10-K.

For additional discussion on items impacting our GAAP earnings, refer to “Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”

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BANK DEVELOPMENTS

~~We lease our headquarters office space from Wells Fargo Bank.~~ On June 22, 2017, a storm ~~drain~~ pipe broke at our headquarters causing significant water damage to our office space and rendering it totally uninhabitable. From June 23 tothrough July 14 of this year, we utilized our back-up data center, and employees worked out of a business recovery center located in Urbandale, Iowa, additional leased space in downtown Des Moines, and remotely. On July 17, 2017, we resumed use of our primary data center at our ~~headquarters; however, staff continue~~headquarters, which was not damaged. However, as a result of the water damage, the estimated time to ~~work from alternative locations.~~complete repairs, and our plan to relocate our headquarters to a building in downtown Des Moines that we purchased in April of 2017, we terminated our lease with Wells Fargo Financial, an affiliate of Wells Fargo Bank effective September 30, 2017. We entered into a nine month lease agreement with Wells Fargo Financial effective September 30, 2017 to lease approximately 1,200 square feet of the former headquarters to support general business functions. In addition, in July and August 2017, we amended our lease at 666 Walnut St., Des Moines, Iowa to lease additional space for our temporary headquarters. We expect to remain at this location until our recently purchased building at 909 Locust St., Des Moines, Iowa is ready for occupancy, which is currently anticipated for late 2018. Through the date of this filing, there have been no material disruptions to our operations or to our ability to serve our members.

We ~~have~~ incurred immaterial expenses related to damages caused by the storm drain break during the second ~~quarter~~and third quarters of 2017 as a result of the damaged headquarters. While we continue to incur costs, we expect those costs to be immaterial. We anticipate that we will be able to recover the majority of these ~~costs and incur immaterial expenses in the future. For additional information on the water damage, refer to "Note 1 — Basis of Presentation."~~costs.

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CONDITIONS IN THE FINANCIAL MARKETS

Economy and Financial Markets

Economic and market data received ~~during~~since the Federal Open Market Committee (FOMC or Committee) meeting in ~~June~~July of 2017 indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have ~~moderated but have been~~remained solid ~~on average, since the beginning of the year,~~in recent months, and the unemployment rate has ~~declined.~~stayed low. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent ~~months and business fixed investment has continued to expand.~~quarters. On a 12-month basis, overall inflation ~~has declined recently~~ and ~~like the inflation measure~~measures excluding food and energy prices ishave declined this year and are running ~~somewhat~~ below two percent. Market-based measures of inflation adjusted compensation ~~remained~~remain low and long-term inflation expectations ~~remained~~remain stable.

In its ~~June 14,~~September 20, 2017 statement, the FOMC stated it continues to seek to foster maximum employment and price stability. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium or long term. Consequently, the Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat ~~further,~~further. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation ~~will~~temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below two percent in the near term but to stabilize around the Committee’s two percent objective over the ~~medium-term.~~medium term. The Committee stated that near-term risks to the economic outlook appear ~~nearly balanced. The~~roughly balanced, but the FOMC is ~~expected~~monitoring inflation developments closely. For additional information on the potential impact the hurricanes may have on our financial condition or results of operations, refer to ~~continue to monitor inflation~~“Item 2. Management’s Discussion and ~~global economic~~Analysis of Financial Condition and ~~financial developments closely.~~Results of Operations — Risk Management — Credit Risk.”

Mortgage Markets

The housing market ~~remained strong~~continued to grow throughout the ~~second~~third quarter of 2017, as indicated by rising home prices, lower inventories of properties for sale, ~~increased~~and continued strong housing construction ~~activity, and increased sales of existing homes.~~activity. The improvement in the housing market has been partly attributable to ~~the continued strengthening of the economy and partly to the seasonality impact on home sales.~~lower interest rates.

Mortgage rates fell slightly in the ~~second~~third quarter, but are higher than rates observed in the prior year. ~~This~~The decrease in rates has resulted in ~~housing market activity becoming increasingly driven by purchase activity versus~~a small increase in refinance activity. The annual increase in mortgage rates has not slowed down the demand for home purchases thus far as inventories remain limited. However, as prices increase and rates rise further, the pace of purchases may slow.

Interest Rates

The following table shows information on key market interest rates¹:


	Second Quarter 2017 3-Month Average		Second Quarter 2016 3-Month Average		Second Quarter 2017 6-Month Average		Second Quarter 2016 6-Month Average		June 30, 2017 Ending Rate		December 31, 2016 Ending Rate		Third Quarter 2017 3-Month Average		Third Quarter 2016 3-Month Average		Third Quarter 2017 9-Month Average		Third Quarter 2016 9-Month Average		September 30, 2017 Ending Rate		December 31, 2016 Ending Rate
Federal funds	0.95	%	0.37	%	0.83	%	0.37	%	1.06	%	0.55	%	1.16	%	0.40	%	0.94	%	0.38	%	1.06	%	0.55	%
Three-month LIBOR	1.20		0.64		1.14		0.63		1.30		1.00		1.32		0.79		1.20		0.69		1.33		1.00
2-year U.S. Treasury	1.29		0.77		1.26		0.80		1.38		1.19		1.36		0.72		1.29		0.77		1.49		1.19
10-year U.S. Treasury	2.26		1.75		2.35		1.83		2.31		2.45		2.24		1.56		2.31		1.74		2.33		2.45
30-year residential mortgage note	3.99		3.60		4.09		3.68		3.88		4.32		3.89		3.45		4.02		3.60		3.83		4.32


1	Source is Bloomberg.

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In its ~~June~~September 2017 meeting, the FOMC ~~increased~~maintained the Federal ~~Reserve's~~Reserve’s key target interest rate, the Federal funds rate, toat a range of 1.00 to 1.25 percent compared to a range of 0.25 to 0.50 percent for the same period in 2016. The ~~Committee's~~Committee’s stance on monetary policy remains accommodative, ~~even after this increase, and is expected to support~~thereby supporting some further strengthening in the labor market conditions and a sustained return towards their inflation rate of two percent. The FOMC stated that it will assess realized and expected economic conditions relative to its longer-run goals of maximum employment and a two percent inflation rate. The assessment is expected to take into account measures of labor market conditions, indicators of inflation pressures, inflation expectations, and financial and international developments. The Committee stated that it anticipates economic conditions will evolve in a manner that will warrant gradual increases in the Federal funds rate, which is likely to remain below levels that are expected to prevail in the longer run.

The 10-year U.S. Treasury yields and mortgage rates were higher on average in the ~~second~~third quarter of 2017 when compared to the same period in prior year. Interest rates increased as the FOMC raised their target rate during 2017, and economic data remained strong.

In its ~~June 14,~~September 20, 2017 statement, the Committee stated it ~~expects to begin implementing a~~will initiate the balance sheet normalization program ~~this year, provided that the economy evolves broadly as anticipated.~~in October. This program ~~would~~will gradually reduce the Federal ~~Reserve's~~Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities.

Funding Spreads

The following table reflects our funding spreads to LIBOR (basis points)¹:


	Second Quarter 2017 3-Month Average		Second Quarter 2016 3-Month Average		Second Quarter 2017 6-Month Average		Second Quarter 2016 6-Month Average		June 30, 2017 Ending Spread		December 31, 2016 Ending Spread		Third Quarter 2017 3-Month Average		Third Quarter 2016 3-Month Average		Third Quarter 2017 9-Month Average		Third Quarter 2016 9-Month Average		September 30, 2017 Ending Spread		December 31, 2016 Ending Spread
3-month	(25.1	)	(25.2	)	(33.6	)	(23.8	)	(23.6	)	(42.7	)	(24.6	)	(43.1	)	(30.6	)	(30.3	)	(27.6	)	(42.7	)
2-year	(15.4	)	(2.8	)	(17.7	)	0.7		(17.0	)	(16.5	)	(15.5	)	(8.2	)	(16.9	)	(2.3	)	(17.2	)	(16.5	)
5-year	3.1		17.5		3.0		20.4		0.6		9.0		0.6		15.3		2.2		18.7		0.5		9.0
10-year	47.7		58.5		49.6		62.7		39.9		57.7		39.1		51.7		46.1		59.0		38.4		57.7


1	Source is the Office of Finance.

As a result of our credit quality, we generally have ready access to funding at relatively competitive interest rates. During the ~~second~~third quarter of 2017, our funding spreads were mixed relative to London Interbank Offered Rate (LIBOR). Short-term spreads deteriorated when compared to spreads at December 31, 2016 as LIBOR has increased more slowly than our funding spreads year-to-date, while long-term spreads improved when compared to spreads at December 31, 2016 as longer-term swap spreads have widened ~~in recent months.~~year-to-date. During the first ~~six~~nine months of 2017, we utilized step-up, callable, and term fixed and floating rate consolidated obligation bonds in addition to consolidated obligation discount notes to capture attractive funding, match the repricing structures on advances, and meet liquidity requirements.

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SELECTED FINANCIAL DATA

The following tables present selected financial data for the periods indicated (dollars in millions):


Statements of Condition	June 30, 2017		March 31, 2017		December 31, 2016			September 30, 2016			June 30, 2016			September 30, 2017		June 30, 2017		March 31, 2017		December 31, 2016			September 30, 2016
Cash and due from banks	$	964	$	237	$	223		$	245		$	460		$	218	$	964	$	237	$	223		$	245
Investments¹	37,763		41,792		41,218			42,851			44,143			39,341		37,763		41,792		41,218			42,851
Advances	118,878		123,609		131,601			125,828			116,294			117,514		118,878		123,609		131,601			125,828
Mortgage loans held for portfolio, net²	6,953		6,870		6,913			6,792			6,640			7,031		6,953		6,870		6,913			6,792
Total assets	164,988		172,918		180,605			176,074			167,860			164,545		164,988		172,918		180,605			176,074
Consolidated obligations
Discount notes	66,558		72,549		80,947			84,481			92,521			52,976		66,558		72,549		80,947			84,481
Bonds	89,171		90,956		89,898			82,454			66,599			102,294		89,171		90,956		89,898			82,454
Total consolidated obligations³	155,729		163,505		170,845			166,935			159,120			155,270		155,729		163,505		170,845			166,935
Mandatorily redeemable capital stock	480		494		664			675			698			422		480		494		664			675
Total liabilities	157,592		165,469		173,204			169,069			161,356			157,047		157,592		165,469		173,204			169,069
Capital stock — Class B putable	5,623		5,803		5,917			5,658			5,241			5,624		5,623		5,803		5,917			5,658
Additional capital from merger	—		9		52			92			128			—		—		9		52			92
Retained earnings	1,684		1,590		1,450			1,294			1,220			1,774		1,684		1,590		1,450			1,294
Accumulated other comprehensive income (loss)	89		47		(18		)	(39		)	(85		)	100		89		47		(18		)	(39		)
Total capital	7,396		7,449		7,401			7,005			6,504			7,498		7,396		7,449		7,401			7,005
Regulatory capital ratio⁴														4.75		4.72		4.57		4.48			4.38


	For the Three Months Ended															For the Three Months Ended
Statements of Income	June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016			June 30, 2016			September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016
Net interest income	$	170		$	153		$	135		$	117		$	94		$	174		$	170		$	153		$	135		$	117
Provision (reversal) for credit losses on mortgage loans	—			—			1			1			1			1			—			—			1			1
Other income (loss)⁴	6			35			77			(5		)	192
Other expense⁵	31			32			36			28			27
Other income (loss)⁵																4			6			35			77			(5		)
Other expense⁶																30			31			32			36			28
AHP assessments	15			16			19			9			26			15			15			16			19			9
Net income	130			140			156			74			232			132			130			140			156			74
Selected Financial Ratios⁶
Net interest spread⁷	0.37		%	0.31		%	0.27		%	0.24		%	0.21		%
Net interest margin⁸	0.41			0.35			0.30			0.27			0.24
Selected Financial Ratios⁷
Net interest spread⁸																0.35		%	0.37		%	0.31		%	0.27		%	0.24		%
Net interest margin⁹																0.40			0.41			0.35			0.30			0.27
Return on average equity	7.13			7.52			8.81			4.35			15.34			6.96			7.13			7.52			8.81			4.35
Return on average capital stock	9.30			9.49			10.99			5.40			19.11			9.19			9.30			9.49			10.99			5.40
Return on average assets	0.31			0.31			0.35			0.17			0.59			0.31			0.31			0.31			0.35			0.17
Average equity to average assets	4.41			4.16			4.00			3.92			3.86			4.42			4.41			4.16			4.00			3.92
Regulatory capital ratio⁹	4.72			4.57			4.48			4.38			4.34
Dividend payout ratio¹⁰	34.53			30.74			26.01			47.85			15.24			32.26			34.53			30.74			26.01			47.85


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


2	Includes an allowance for credit losses of $2 million at September 30, 2017, June 30, 2017, March 31, 2017, December 31, 2016, and September ~~30, 2016, and $1 million at June~~ 30, 2016.


3	The total par value of outstanding consolidated obligations of the FHLBanks was $1.0 trillion, $1.0 trillion, $959.3 billion, $989.3 billion, and $967.7 billion ~~and $963.8 billion~~ at September 30, 2017, June 30, 2017, March 31, 2017, December 31, 2016, ~~September 30, 2016,~~ and ~~June~~September 30, 2016, respectively.

Represents period-end regulatory capital expressed as a percentage of period-end total assets. Regulatory capital includes Class B capital stock (including mandatorily redeemable capital stock), and retained earnings. At March 31, 2017, December 31, 2016, and September 30, 2016, regulatory capital also included additional capital from merger. The additional capital from merger balance was depleted in May of 2017 following the first quarter dividend payment.

Other income (loss) includes, among other things, net gains (losses) on investment securities, net gains (losses) on derivatives and hedging activities, net gains (losses) on the disposal of fixed assets, and gains on litigation settlements, net. During the three months ended March 31, 2017 and December 31, ~~2016, and June 30,~~ 2016, other income (loss) was impacted by net gains on litigation settlements. ~~The Bank~~We did not record any litigation settlements during the three months ended September 30, 2017, June 30, 2017 and September 30, 2016.


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


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


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


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

Represents period-end regulatory capital expressed as a percentage of period-end total assets. Regulatory capital includes Class B capital stock (including mandatorily redeemable capital stock), and retained earnings. At March 31, 2017, December 31, 2016, September 30, 2016, and June 30, 2016 regulatory capital also included additional capital from merger. The additional capital from merger balance was depleted in May of 2017 following the first quarter dividend payment.


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

~~Table of Contents~~

RESULTS OF OPERATIONS

Net Income

The following table presents comparative highlights of our net income for the three and ~~six~~nine months ended ~~June~~September 30, 2017 and 2016 (dollars in millions). See further discussion of these items in the sections that follow.

For the Three Months Ended For the Six Months Ended
June 30, June 30,
2017 2016 $ Change % Change 2017 2016 $ Change % Change
Net interest income $ 170
$ 94
$ 76
81 % $ 323
$ 197
$ 126
64 %
Provision (reversal) for credit losses on mortgage loans —
1
(1 ) (100 ) —
1
(1 ) (100 )
Other income (loss) 6
192
(186 ) (97 ) 41
324
(283 ) (87 )
Other expense 31
27
4
15
63
54
9
17
AHP assessments 15
26
(11 ) (42 ) 31
47
(16 ) (34 )
Net income $ 130
$ 232
$ (102 ) (44 )% $ 270
$ 419
$ (149 ) (36 )%

~~Table of Contents~~



	For the Three Months Ended									For the Nine Months Ended
	September 30,									September 30,
	2017		2016			$ Change		% Change		2017		2016		$ Change			% Change
Net interest income	$	174	$	117		$	57	49	%	$	497	$	314	$	183		58	%
Provision (reversal) for credit losses on mortgage loans	1		1			—		—		1		2		(1		)	(50	)
Other income (loss)	4		(5		)	9		180		45		319		(274		)	(86	)
Other expense	30		28			2		7		93		82		11			13
AHP assessments	15		9			6		67		46		56		(10		)	(18	)
Net income	$	132	$	74		$	58	78	%	$	402	$	493	$	(91	)	(18	)%

Net Interest Income

Our net interest income is impacted by changes in average interest-earning asset and interest-bearing liability balances, and the related yields. The following table presents average balances and rates of major asset and liability categories (dollars in millions):


	For the Three Months Ended June 30,												For the Three Months Ended September 30,
	2017						2016						2017						2016
	Average Balance¹		Yield/Cost		Interest Income/ Expense		Average Balance¹		Yield/Cost		Interest Income/ Expense		Average Balance¹		Yield/Cost		Interest Income/ Expense		Average Balance¹		Yield/Cost		Interest Income/ Expense
Interest-earning assets
Interest-bearing deposits	$	258	0.76	%	$	1	$	884	0.35	%	$	—	$	269	0.93	%	$	—	$	945	0.38	%	$	1
Securities purchased under agreements to resell	3,945		0.84		8		4,759		0.35		5		5,028		1.07		14		5,076		0.36		4
Federal funds sold	5,993		0.96		15		4,580		0.38		4		8,845		1.17		26		5,492		0.40		5
Mortgage-backed securities^2,3	20,361		1.61		81		19,246		1.11		53		19,731		1.79		89		20,295		1.13		58
Other investments^2,3,4	9,078		1.77		40		13,164		1.11		37		8,268		1.98		41		11,998		1.23		37
Advances^3,5	119,283		1.28		381		107,260		0.71		189		120,223		1.49		451		121,016		0.78		238
Mortgage loans⁶	6,901		3.44		59		6,645		3.56		59		6,995		3.33		59		6,704		3.33		56
Total interest-earning assets	165,819		1.42		585		156,538		0.89		347		169,359		1.59		680		171,526		0.93		399
Non-interest-earning assets	1,088		—		—		503		—		—		1,165		—		—		545		—		—
Total assets	$	166,907	1.41	%	$	585	$	157,041	0.89	%	$	347	$	170,524	1.58	%	$	680	$	172,071	0.92	%	$	399
Interest-bearing liabilities
Deposits	$	892	0.52	%	$	1	$	914	0.07	%	$	—	$	878	0.72	%	$	1	$	979	0.09	%	$	1
Consolidated obligations
Discount notes	64,062		0.78		124		97,877		0.46		113		62,267		1.04		163		86,422		0.45		98
Bonds³	92,970		1.23		286		49,888		1.09		135		98,255		1.37		338		75,549		0.93		177
Other interest-bearing liabilities⁷	482		3.39		4		714		3.38		5		450		3.38		4		689		3.40		6
Total interest-bearing liabilities	158,406		1.05		415		149,393		0.68		253		161,850		1.24		506		163,639		0.69		282
Non-interest-bearing liabilities	1,148		—		—		1,583		—		—		1,143		—		—		1,681		—		—
Total liabilities	159,554		1.04		415		150,976		0.68		253		162,993		1.23		506		165,320		0.68		282
Capital	7,353		—		—		6,065		—		—		7,531		—		—		6,751		—		—
Total liabilities and capital	$	166,907	1.00	%	$	415	$	157,041	0.65	%	$	253	$	170,524	1.18	%	$	506	$	172,071	0.65	%	$	282
Net interest income and spread⁸			0.37	%	$	170			0.21	%	$	94			0.35	%	$	174			0.24	%	$	117
Net interest margin⁹			0.41	%					0.24	%					0.40	%					0.27	%
Average interest-earning assets to interest-bearing liabilities			104.68	%					104.78	%					104.64	%					104.82	%


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


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


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


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


5	Advance interest income includes prepayment fee income of less than $1 million and $1 million for the three months ended ~~June~~September 30, 2017 and 2016.


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


7	Other interest-bearing liabilities consists primarily of mandatorily redeemable capital stock.


8	Represents yield on total interest-earning assets minus yield on total interest-bearing liabilities.


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

~~Table of Contents~~

The following table presents average balances and rates of major asset and liability categories (dollars in millions):


	For the Six Months Ended June 30,												For the Nine Months Ended September 30,
	2017						2016						2017						2016
	Average Balance¹		Yield/Cost		Interest Income/ Expense		Average Balance¹		Yield/Cost		Interest Income/ Expense		Average Balance¹		Yield/Cost		Interest Income/ Expense		Average Balance¹		Yield/Cost		Interest Income/ Expense
Interest-earning assets
Interest-bearing deposits	$	253	0.64	%	$	1	$	868	0.34	%	$	1	$	258	0.74	%	$	1	$	894	0.36	%	$	2
Securities purchased under agreements to resell	4,780		0.69		16		4,988		0.35		9		4,864		0.82		30		5,018		0.35		13
Federal funds sold	6,506		0.83		27		4,345		0.37		8		7,295		0.97		53		4,730		0.38		13
Mortgage-backed securities^2,3	20,589		1.51		154		18,983		1.13		107		20,300		1.60		243		19,423		1.13		165
Other investments^2,3,4	9,140		1.71		77		13,110		1.11		72		8,846		1.79		118		12,737		1.14		109
Advances^3,5	124,554		1.16		714		104,435		0.70		362		123,094		1.27		1,165		110,003		0.73		600
Mortgage loans⁶	6,897		3.43		117		6,674		3.61		120		6,930		3.40		176		6,684		3.51		176
Loans to other FHLBanks	2		0.55		—		—		—		—		1		0.55		—		—		—		—
Total interest-earning assets	172,721		1.29		1,106		153,403		0.89		679		171,588		1.39		1,786		159,489		0.90		1,078
Non-interest-earning assets	1,092		—		—		510		—		—		1,117		—		—		521		—		—
Total assets	$	173,813	1.28	%	$	1,106	$	153,913	0.89	%	$	679	$	172,705	1.38	%	$	1,786	$	160,010	0.90	%	$	1,078
Interest-bearing liabilities
Deposits	$	932	0.38	%	$	2	$	943	0.06	%	$	—	$	914	0.49	%	$	3	$	955	0.07	%	$	1
Consolidated obligations
Discount notes	71,142		0.66		233		101,684		0.44		222		68,151		0.78		396		96,560		0.44		320
Bonds³	92,597		1.17		539		43,352		1.16		251		94,504		1.24		877		54,163		1.06		428
Other interest-bearing liabilities⁷	516		3.39		9		564		3.37		9		494		3.39		13		605		3.38		15
Total interest-bearing liabilities	165,187		0.96		783		146,543		0.66		482		164,063		1.05		1,289		152,283		0.67		764
Non-interest-bearing liabilities	1,186		—		—		1,422		—		—		1,171		—		—		1,509		—		—
Total liabilities	166,373		0.95		783		147,965		0.66		482		165,234		1.04		1,289		153,792		0.66		764
Capital	7,440		—		—		5,948		—		—		7,471		—		—		6,218		—		—
Total liabilities and capital	$	173,813	0.91	%	$	783	$	153,913	0.63	%	$	482	$	172,705	1.00	%	$	1,289	$	160,010	0.64	%	$	764
Net interest income and spread⁸			0.33	%	$	323			0.23	%	$	197			0.34	%	$	497			0.23	%	$	314
Net interest margin⁹			0.37	%					0.26	%					0.38	%					0.26	%
Average interest-earning assets to interest-bearing liabilities			104.56	%					104.68	%					104.59	%					104.73	%


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


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


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


4	Other investments primarily include other U.S. obligations, GSE obligations and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and PEFCO bonds.


5	Advance interest income includes prepayment fee income of $1 million and $5$6 million for the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016.


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


7	Other interest-bearing liabilities consists primarily of mandatorily redeemable capital stock.


8	Represents yield on total interest-earning assets minus yield on total interest-bearing liabilities.


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

~~Table of Contents~~

The following table presents changes in interest income and interest expense. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but rather equally attributable to both volume and rate changes, are allocated to the volume and rate categories based on the proportion of the absolute value of the volume and rate changes (dollars in millions).


	Three Months Ended										Six Months Ended											Three Months Ended										Nine Months Ended
	June 30, 2017 vs. June 30, 2016										June 30, 2017 vs. June 30, 2016											September 30, 2017 vs. September 30, 2016										September 30, 2017 vs. September 30, 2016
	Total Increase (Decrease) Due to						Total Increase (Decrease)				Total Increase (Decrease) Due to								Total Increase (Decrease)			Total Increase (Decrease) Due to						Total Increase (Decrease)				Total Increase (Decrease) Due to							Total Increase (Decrease)
	Volume			Rate						Volume				Rate				Volume					Rate				Volume					Rate
Interest income
Interest-bearing deposits	$	—		$	1		$	1			$	(1	)		$	1			$	—		$	(1	)	$	—			$	(1	)		$	(2	)		$	1		$	(1	)
Securities purchased under agreements to resell	(1		)	4			3				—				7				7			—			10			10				—				17			17
Federal funds sold	2			9			11				5				14				19			5			16			21				10				30			40
Mortgage-backed securities	3			25			28				9				38				47			(2		)	33			31				8				70			78
Other investments	(14		)	17			3				(26		)		31				5			(14		)	18			4				(40		)		49			9
Advances	24			168			192				80				272				352			(2		)	215			213				78				487			565
Mortgage loans	2			(2		)	—				4				(7		)		(3		)	3			—			3				6				(6		)	—
Total interest income	16			222			238				71				356				427			(11		)	292			281				60				648			708
Interest expense
Deposits	—			1			1				—				2				2			—			—			—				—				2			2
Consolidated obligations
Discount notes	(48		)	59			11				(79		)		90				11			(34		)	99			65				(114		)		190			76
Bonds	131			20			151				286				2				288			63			98			161				366				83			449
Other interest-bearing liabilities	(1		)	—			(1		)		—				—				—			(2		)	—			(2		)		(2		)		—			(2		)
Total interest expense	82			80			162				207				94				301			27			197			224				250				275			525
Net interest income	$	(66	)	$	142		$	76			$	(136	)		$	262			$	126		$	(38	)	$	95		$	57			$	(190	)		$	373		$	183

NET INTEREST SPREAD

Net interest spread equals the yield on total interest-earning assets minus the cost of total interest-bearing liabilities. For the three and ~~six~~nine months ended ~~June~~September 30, 2017, our net interest spread was ~~0.37~~0.35 percent and ~~0.33~~0.34 percent compared to ~~0.21~~0.24 percent and 0.23 percent during the same periods in 2016. Our net interest ~~spread~~spreads during the ~~first half of~~three and nine months ended September 30, 2017 ~~was~~were primarily impacted by a higher yield on total interest-earning assets, which was partially offset by a higher cost on total interest-bearing liabilities. The primary components of our interest income and interest expense are discussed below.

Advances

Interest income on advances (including prepayment fees on advances, net) increased during the three and ~~six~~nine months ended ~~June~~September 30, 2017 when compared to the same periods in 2016 due primarily to pricing changes made to certain variable rate callable advance products and the higher interest rate ~~environment, and~~environment. Additionally, interest income increased due to higher average advance ~~balances.~~balances during the nine months ended September 30, 2017. While period end advance balances declined from December 31, 2016, average advance balances for the ~~three and six~~nine months ended ~~June~~September 30, 2017 increased when compared to the prior year. The increase was due primarily to borrowings from large depository institution members, which was partially offset by a decrease in borrowings from certain captive insurance company members.

Investments

Interest income on investments increased during the three and ~~six~~nine months ended ~~June~~September 30, 2017 when compared to the same periods in 2016 due primarily to the higher interest rate environment, partially offset by lower average balances of other investments.

~~Table of Contents~~

Bonds

Interest expense on bonds increased during the three and ~~six~~nine months ended ~~June~~September 30, 2017 when compared to the same periods in 2016 due primarily to higher average bond balances and the higher interest rate environment. The increase in average balances was primarily due to our increased utilization of bonds in place of discount notes to ~~align~~reduce the maturity gap between our ~~obligations with~~assets and liabilities and match the change in our advance ~~products outstanding.~~product mix.

Discount Notes

Interest expense on discount notes increased during the three and ~~six~~nine months ended ~~June~~September 30, 2017 when compared to the same periods in 2016 primarily due to the higher interest rate environment, partially offset by a decrease in average discount note balances. Average discount note balances decreased primarily due to our increased use of bonds in place of discount notes ~~in response~~ to ~~changes~~reduce the maturity gap between our assets and liabilities and match the change in our advance ~~products outstanding during the first half~~product mix.

For additional information on our maturity gap, refer to “Item 2. Management’s Discussion and Analysis of ~~the year.~~Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

Other Income (Loss)

The following table summarizes the components of other income (loss) (dollars in millions):


	For the Three Months Ended						For the Six Months Ended					For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,					September 30,						September 30,
	2017			2016			2017		2016			2017			2016			2017		2016
Net gains (losses) on trading securities	$	4		$	18		$	9	$	53		$	1		$	(2	)	$	10	$	51
Net gains (losses) on derivatives and hedging activities	(3		)	(30		)	3		(73		)	(2		)	(3		)	1		(76		)
Gains on litigation settlements, net	—			200			21		337			—			—			21		337
Other, net	5			4			8		7			5			—			13		7
Total other income (loss)	$	6		$	192		$	41	$	324		$	4		$	(5	)	$	45	$	319

Other income (loss) can be volatile from period to period depending on the type of activity recorded. We recorded net gains of $6$4 million and ~~$41~~$45 million during the three and ~~six~~nine months ended ~~June~~September 30, 2017 compared to ~~$192~~net losses of $5 million and ~~$324~~net gains of $319 million during same periods in 2016. Other income (loss) was primarily impacted by net gains ~~on litigation settlements~~ of $21 ~~million during six months ended June 30, 2017 and $200~~ million and $337 million during the ~~three and six~~nine months ended ~~June~~September 30, 2017 and 2016, as a result of settlements with certain defendants in our private-label MBS litigation. We did not record any litigation settlements during the three months ended ~~June~~September 30, ~~2017.~~2017 or 2016. Other factors impacting other income (loss) included net gains (losses) on derivatives and hedging activities, ~~and~~ net gains (losses) on trading securities, and net gains in other, net as described below.

During the three and ~~six~~nine months ended ~~June~~September 30, 2017, we recorded net losses of $3$2 million and net gains of $3$1 million on our derivatives and hedging activities through other income (loss) compared to net losses of ~~$30~~$3 million and ~~$73~~$76 million during the same periods in 2016. The fair value changes were primarily driven by changes in interest rates. These changes impacted our fair value hedge relationships and interest rate swaps that we utilized to economically hedge our investment securities portfolio. Accounting rules require all derivatives to be recorded at fair value and therefore we may be subject to income statement volatility. Refer to “Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Hedging Activities” for additional discussion on our derivatives and hedging activities, including the net impact of economic hedge relationships.

During the three and ~~six~~nine months ended ~~June~~September 30, 2017, we recorded net gains on trading securities of $4$1 million and $9$10 million compared to net losses of $2 million and net gains of ~~$18 million and $53~~$51 million during the same periods in 2016. These changes in fair value were primarily due to the impact of interest rates and credit spreads on our fixed rate trading securities. Trading securities are recorded at fair value with changes in fair value reflected through other income (loss).

~~Table~~During the three and nine months ended September 30, 2017, we recorded net gains in other, net of ~~Contents~~$5 million and $13 million compared to less than $1 million and $7 million during the same periods in 2016. The increase was driven by rental income recorded during the three and nine months ended September 30, 2017 related to the lease of a portion of our new headquarters building and fewer losses on disposals of fixed assets in 2017 compared to 2016.

Hedging Activities

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

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

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

The following tables categorize the net effect of hedging activities on net income by product (dollars in millions):


	For the Three Months Ended June 30, 2017															For the Three Months Ended September 30, 2017
Net Effect of Hedging Activities	Advances			Investments			Mortgage Loans			Bonds			Total			Advances			Investments			Mortgage Loans		Bonds			Other		Total
Net interest income:
Net amortization/accretion¹	$	5		$	1		$	(1	)	$	(1	)	$	4		$	3		$	2		$	—	$	(3	)	$	—	$	2
Net interest settlements	(25		)	(26		)	—			9			(42		)	(19		)	(23		)	—		(4		)	—		(46		)
Total impact to net interest income	(20		)	(25		)	(1		)	8			(38		)	(16		)	(21		)	—		(7		)	—		(44		)
Other income (loss):
Net gains (losses) on derivatives and hedging activities:
Gains (losses) on fair value hedges	1			8			—			(3		)	6			1			(4		)	—		2			—		(1		)
Gains (losses) on economic hedges	—			(9		)	—			—			(9		)	—			(2		)	—		—			—		(2		)
Price alignment amount on derivatives²																—			—			—		—			1		1
Total net gains (losses) on derivatives and hedging activities	1			(1		)	—			(3		)	(3		)	1			(6		)	—		2			1		(2		)
Net gains (losses) on trading securities²	—			5			—			—			5
Net gains (losses) on trading securities³																—			2			—		—			—		2
Total impact to other income (loss)	1			4			—			(3		)	2			1			(4		)	—		2			1		—
Total net effect of hedging activities³	$	(19	)	$	(21	)	$	(1	)	$	5		$	(36	)
Total net effect of hedging activities⁴																$	(15	)	$	(25	)	$	—	$	(5	)	$	1	$	(44	)


	For the Three Months Ended June 30, 2016														For the Three Months Ended September 30, 2016
Net Effect of Hedging Activities	Advances			Investments			Mortgage Loans			Bonds		Total			Advances			Investments			Mortgage Loans			Bonds		Total
Net interest income:
Net amortization/accretion¹	$	7		$	1		$	(1	)	$	1	$	8		$	6		$	—		$	—		$	1	$	7
Net interest settlements	(46		)	(37		)	—			20		(63		)	(42		)	(38		)	—			26		(54		)
Total impact to net interest income	(39		)	(36		)	(1		)	21		(55		)	(36		)	(38		)	—			27		(47		)
Other income (loss):
Net gains (losses) on derivatives and hedging activities:
Gains (losses) on fair value hedges	(1		)	(8		)	—			1		(8		)	—			(13		)	—			6		(7		)
Gains (losses) on economic hedges	—			(22		)	—			—		(22		)	—			5			(1		)	—		4
Total net gains (losses) on derivatives and hedging activities	(1		)	(30		)	—			1		(30		)	—			(8		)	(1		)	6		(3		)
Net gains (losses) on trading securities²	—			18			—			—		18
Net gains (losses) on trading securities³															—			(4		)	—			—		(4		)
Total impact to other income (loss)	(1		)	(12		)	—			1		(12		)	—			(12		)	(1		)	6		(7		)
Total net effect of hedging activities³	$	(40	)	$	(48	)	$	(1	)	$	22	$	(67	)
Total net effect of hedging activities⁴															$	(36	)	$	(50	)	$	(1	)	$	33	$	(54	)


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


2	Effective January 3, 2017, amount includes the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract.


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


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

~~Table of Contents~~

The following tables categorize the net effect of hedging activities on net income by product (dollars in millions):


	For the Six Months Ended June 30, 2017																	For the Nine Months Ended September 30, 2017
Net Effect of Hedging Activities	Advances			Investments			Mortgage Loans			Bonds			Other		Total			Advances			Investments			Mortgage Loans			Bonds			Other		Total
Net interest income:
Net amortization/accretion¹	$	10		$	3		$	(1	)	$	(2	)	$	—	$	10		$	13		$	5		$	(1	)	$	(5	)	$	—	$	12
Net interest settlements	(56		)	(56		)	—			31			—		(81		)	(75		)	(79		)	—			27			—		(127		)
Total impact to net interest income	(46		)	(53		)	(1		)	29			—		(71		)	(62		)	(74		)	(1		)	22			—		(115		)
Other income (loss):
Net gains (losses) on derivatives and hedging activities:
Gains (losses) on fair value hedges	2			14			—			(6		)	—		10			3			10			—			(4		)	—		9
Gains (losses) on economic hedges	—			(8		)	—			—			—		(8		)	—			(10		)	—			—			—		(10		)
Price alignment amount on derivatives²	—			—			—			—			1		1			—			—			—			—			2		2
Total net gains (losses) on derivatives and hedging activities	2			6			—			(6		)	1		3			3			—			—			(4		)	2		1
Net gains (losses) on trading securities³	—			10			—			—			—		10			—			12			—			—			—		12
Total impact to other income (loss)	2			16			—			(6		)	1		13			3			12			—			(4		)	2		13
Total net effect of hedging activities⁴	$	(44	)	$	(37	)	$	(1	)	$	23		$	1	$	(58	)	$	(59	)	$	(62	)	$	(1	)	$	18		$	2	$	(102	)


	For the Six Months Ended June 30, 2016															For the Nine Months Ended September 30, 2016
Net Effect of Hedging Activities	Advances			Investments			Mortgage Loans			Bonds			Total			Advances			Investments			Mortgage Loans			Bonds			Total
Net interest income:
Net amortization/accretion¹	$	13		$	1		$	(1	)	$	—		$	13		$	19		$	1		$	(1	)	$	1		$	20
Net interest settlements	(96		)	(77		)	—			39			(134		)	(138		)	(115		)	—			65			(188		)
Total impact to net interest income	(83		)	(76		)	(1		)	39			(121		)	(119		)	(114		)	(1		)	66			(168		)
Other income (loss):
Net gains (losses) on derivatives and hedging activities:
Gains (losses) on fair value hedges	1			(3		)	—			(7		)	(9		)	1			(16		)	—			(1		)	(16		)
Gains (losses) on economic hedges	—			(64		)	—			—			(64		)	—			(59		)	(1		)	—			(60		)
Total net gains (losses) on derivatives and hedging activities	1			(67		)	—			(7		)	(73		)	1			(75		)	(1		)	(1		)	(76		)
Net gains (losses) on trading securities³	—			51			—			—			51			—			47			—			—			47
Total impact to other income (loss)	1			(16		)	—			(7		)	(22		)	1			(28		)	(1		)	(1		)	(29		)
Total net effect of hedging activities⁴	$	(82	)	$	(92	)	$	(1	)	$	32		$	(143	)	$	(118	)	$	(142	)	$	(2	)	$	65		$	(197	)


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


2	Effective January 3, 2017, amount includes the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract.


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


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

NET AMORTIZATION/ACCRETION

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

NET INTEREST SETTLEMENTS

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

~~Table of Contents~~

GAINS (LOSSES) ON FAIR VALUE HEDGES

Gains (losses) on fair value hedges are driven by hedge ineffectiveness. Hedge ineffectiveness occurs when changes in the fair value of the derivative and the related hedged item do not perfectly offset each other. The factors that affect hedge ineffectiveness include changes in the benchmark interest rate, volatility, and the divergence in the valuation curves used to value our assets, liabilities, and derivatives.

GAINS (LOSSES) ON ECONOMIC HEDGES

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

Investments

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

The following table summarizes gains and losses on these economic derivatives as well as the related trading securities (dollars in millions):


	For the Three Months Ended						For the Six Months Ended						For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2017			2016			2017			2016			2017			2016			2017			2016
Gains (losses) on interest rate swaps economically hedging our investments	$	(6	)	$	(18	)	$	(1	)	$	(55	)	$	1		$	10		$	—		$	(45	)
Interest settlements	(3		)	(4		)	(7		)	(9		)	(3		)	(5		)	(10		)	(14		)
Net gains (losses) on investment derivatives	(9		)	(22		)	(8		)	(64		)	(2		)	5			(10		)	(59		)
Net gains (losses) on related trading securities	5			18			10			51			2			(4		)	12			47
Net gains (losses) on economic investment hedge relationships	$	(4	)	$	(4	)	$	2		$	(13	)	$	—		$	1		$	2		$	(12	)

Other Expense

The following table shows the components of other expense (dollars in millions):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016		2017		2016		2017		2016
Compensation and benefits	$	14	$	12	$	27	$	26	$	12	$	13	$	39	$	39
Contractual services	3		3		6		6		2		1		8		7
Professional fees	5		3		10		4		5		4		15		8
Other operating expenses	5		5		10		9		6		5		16		14
Total operating expenses	27		23		53		45		25		23		78		68
Federal Housing Finance Agency	2		2		5		4		3		2		8		6
Office of Finance	2		1		4		3		1		2		5		5
Other, net	—		1		1		2		1		1		2		3
Total other expense	$	31	$	27	$	63	$	54	$	30	$	28	$	93	$	82

Other expense totaled ~~$31~~$30 million and ~~$63~~$93 million for the three and ~~six~~nine months ended ~~June~~September 30, 2017 compared to ~~$27~~$28 million and ~~$54~~$82 million for the same periods last year. The increase in other expense during the nine months ended September 30, 2017 was primarily due to an increase in professional fees as a result of hiring external resources to assist with improving our internal control environment.

~~Table of Contents~~

STATEMENTS OF CONDITION

Financial Highlights

Our total assets decreased to ~~$165.0~~$164.5 billion at ~~June~~September 30, 2017 from $180.6 billion at December 31, 2016. Our total liabilities decreased to $~~157.6~~157.0 billion at ~~June~~September 30, 2017 from $173.2 billion at December 31, 2016. Total capital ~~remained stable at~~increased to $~~7.4~~7.5 billion at ~~June~~September 30, 2017 ~~and~~from $7.4 billion at December 31, 2016. See further discussion of changes in our financial condition in the appropriate sections that follow.

~~Cash and Due from Banks~~

At June 30, 2017, our total cash balance was $964 million compared to $223 million at December 31, 2016. Our cash balance was high at June 30, 2017 due to limited investment opportunities on the last day of the quarter.

Advances

The following table summarizes our advances by type of institution (dollars in millions):


	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Commercial banks	$	84,998	$	94,939	$	82,887	$	94,939
Savings institutions	1,480		1,376		2,478		1,376
Credit unions	3,398		2,903		3,918		2,903
Non-captive insurance companies	18,416		17,441		19,089		17,441
Captive insurance companies	9,867		14,510		8,516		14,510
Community development financial institution	2		3		3		3
Total member advances	118,161		131,172		116,891		131,172
Housing associates	73		61		81		61
Non-member borrowers	604		304		533		304
Total par value	$	118,838	$	131,537	$	117,505	$	131,537

Our total advance par value decreased ~~$12.7~~$14.0 billion or 1011 percent at ~~June~~September 30, 2017 when compared to December 31, 2016. The decrease in total par value was primarily due to the repayment of ~~$14.6~~$17.2 billion in advances held by a large depository institution member and ~~$4.6~~$6.0 billion held by certain captive insurance company members. The decrease was partially offset by an increase in advances of $9.2 billion across other institution types.

As a result of the final rule on membership issued by the Finance Agency effective February 19, 2016, the eligibility requirements for FHLBank members were changed rendering captive insurance company members ineligible for FHLBank membership. In accordance with the final rule, captive insurance company members that were admitted as members after September 12, 2014 (the date the Finance Agency proposed this rule) had their memberships terminated on February 17, 2017. Captive insurance company members that were admitted as members prior to September 12, 2014 will also have their memberships terminated no later than February 19, 2021. The magnitude of the impact of the final rule at that date will depend, in part, on our size and profitability at the time of membership termination or maturity of the related advances. As of ~~June~~September 30, 2017, we had six captive insurance company members ~~held approximately $9.9~~with total advances outstanding of $8.5 billion, which represented seven percent of our total advances outstanding. One captive insurance company member was included in ~~advances.~~our five largest member borrowers at September 30, 2017 as shown in the table below.

The following table summarizes our advances by product type (dollars in millions):


	June 30, 2017				December 31, 2016				September 30, 2017				December 31, 2016
	Amount			% of Total	Amount			% of Total	Amount			% of Total	Amount			% of Total
Variable rate	$	81,284		69	$	104,594		80	$	79,997		68	$	104,594		80
Fixed rate	35,941			30	25,453			19	35,842			31	25,453			19
Amortizing	1,613			1	1,490			1	1,666			1	1,490			1
Total par value	118,838			100	131,537			100	117,505			100	131,537			100
Premiums	65				83				58				83
Discounts	(5		)		(7		)		(12		)		(7		)
Fair value hedging adjustments	(20		)		(12		)		(37		)		(12		)
Total advances	$	118,878			$	131,601			$	117,514			$	131,601

Fair value hedging adjustments changed $8$25 million at ~~June~~September 30, 2017 when compared to December 31, 2016 due to the impact of interest rates on our cumulative fair value adjustments on advances in hedge relationships.

~~Table of Contents~~

At ~~June~~September 30, 2017 and December 31, 2016, 3834 and 59 percent of our advances were variable rate callable advances. Callable advances may be prepaid by borrowers on pertinent dates (call dates) and therefore provide borrowers a source of long-term financing with prepayment flexibility. Interest rates on our variable rate callable advances reset at each call date to be consistent with either the underlying LIBOR index or our current offering rate of our underlying cost of funds. In addition, we retain the flexibility to adjust the spread relative to our cost of funds for the majority of these variable rate advances on each reset date. We generally fund our variable rate callable advances with either discount notes, LIBOR indexed debt, or debt swapped to a LIBOR index. During the second quarter, we changed our pricing on certain variable rate callable advance products. As a result, we experienced a decrease in advance balances and a change in the composition of our advance portfolio to a higher percentage of fixed rate advances during the second ~~quarter~~and third quarters of 2017. For additional discussion on our funding strategies, refer to ~~"Item~~“Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

At ~~June~~September 30, 2017 and December 31, 2016, advances outstanding to our five largest member borrowers totaled ~~$76.9~~$74.1 billion and $92.2 billion, representing 6563 and 70 percent of our total advances outstanding. The following table summarizes advances outstanding to our five largest member borrowers at ~~June~~September 30, 2017 (dollars in millions):


	Amount		% of Total	Amount		% of Total
Wells Fargo Bank, N.A.	$	62,500	53	$	59,895	51
Transamerica Life Insurance Company¹	4,145		3	4,145		3
Truman Insurance Company²	3,588		3	3,588		3
ZB, National Association	3,400		3	3,250		3
Principal Life Insurance Company	3,250		3	3,250		3
Total par value	$	76,883	65	$	74,128	63


1	Excludes $2$1.5 billion of advances with Transamerica Premier Life Insurance Company, an affiliate of Transamerica Life Insurance Company.


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

As indicated in the table above, one of our top five largest member borrowers at June 30, 2017 was a captive insurance company member. As of June 30, 2017, we had six captive insurance company members with total advances outstanding of $9.9 billion, which represented eight percent of our total advances outstanding. In accordance with the Finance Agency final rule affecting FHLBank membership, all of our remaining captive insurance company members, including one of our top five largest borrowers, will have their membership terminated on or before February 19, 2021. The magnitude of the impact of the final rule at that date will depend, in part, on our size and profitability at the time of membership termination or maturity of the related advances.

We manage our credit exposure to advances through an approach that provides for an established credit limit for each borrower, ongoing reviews of each ~~borrower's~~borrower’s financial condition, and detailed collateral and lending policies to limit risk of loss while balancing ~~borrowers'~~borrowers’ needs for a reliable source of funding. In addition, we lend to our borrowers in accordance with the Federal Home Loan Bank Act of 1932 (FHLBank Act), Federal Housing Finance Agency (Finance Agency) regulations, and other applicable laws and regulations.

The FHLBank Act requires that we obtain sufficient collateral on advances to protect against losses. We have never experienced a credit loss on an advance to a member or eligible housing associate. Based upon our collateral and lending policies, the collateral held as security, and the repayment history on advances, management has determined that there were no probable credit losses on our advances as of ~~June~~September 30, 2017 and December 31, 2016. Accordingly, we have not recorded any allowance for credit losses on our advances. See additional discussion regarding our collateral requirements in “Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Advances.”

~~Table of Contents~~

Mortgage Loans

The following tables summarize information on our mortgage loans held for portfolio (dollars in millions):


	June 30, 2017								September 30, 2017
	MPF			MPP		Total			MPF			MPP			Total
Fixed rate conventional loans	$	6,007		$	315	$	6,322		$	6,104		$	299		$	6,403
Fixed rate government-insured loans	504			35		539			501			33			534
Total unpaid principal balance	6,511			350		6,861			6,605			332			6,937
Premiums	85			11		96			87			11			98
Discounts	(7		)	—		(7		)	(6		)	(1		)	(7		)
Basis adjustments from mortgage loan commitments	5			—		5			5			—			5
Total mortgage loans held for portfolio	6,594			361		6,955			6,691			342			7,033
Allowance for credit losses	(2		)	—		(2		)	(2		)	—			(2		)
Total mortgage loans held for portfolio, net	$	6,592		$	361	$	6,953		$	6,689		$	342		$	7,031



	December 31, 2016
	MPF			MPP			Total
Fixed rate conventional loans	$	5,907		$	361		$	6,268
Fixed rate government-insured loans	513			42			555
Total unpaid principal balance	6,420			403			6,823
Premiums	82			14			96
Discounts	(8		)	(1		)	(9		)
Basis adjustments from mortgage loan commitments	5			—			5
Total mortgage loans held for portfolio	6,499			416			6,915
Allowance for credit losses	(2		)	—			(2		)
Total mortgage loans held for portfolio, net	$	6,497		$	416		$	6,913

Our total mortgage loans ~~remained relatively stable~~increased slightly at ~~June~~September 30, 2017 when compared to December 31, 2016. The ~~slight~~ increase was primarily due to loan purchases exceeding principal paydowns. For additional discussion on our mortgage loan credit risk, refer to ~~"Item~~“Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Mortgage Assets."”

~~Table of Contents~~

Investments

The following table summarizes the carrying value of our investments (dollars in millions):


	June 30, 2017			December 31, 2016			September 30, 2017			December 31, 2016
	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total
Short-term investments¹
Interest-bearing deposits	$	1	—	$	1	—	$	—	—	$	1	—
Securities purchased under agreements to resell	3,500		9	5,925		14	5,500		14	5,925		14
Federal funds sold	5,100		14	5,095		12	6,770		17	5,095		12
Total short-term investments	8,601		23	11,021		26	12,270		31	11,021		26
Long-term investments²
Interest-bearing deposits	1		—	1		—	1		—	1		—
Mortgage-backed securities
GSE single-family	4,247		12	4,804		12	3,974		10	4,804		12
GSE multifamily	11,891		31	12,156		30	11,292		29	12,156		30
Other U.S. obligations single-family³	3,966		11	3,864		9	3,859		10	3,864		9
Other U.S. obligations commercial³	3		—	4		—	3		—	4		—
Private-label residential	14		—	16		—	13		—	16		—
Total mortgage-backed securities	20,121		54	20,844		51	19,141		49	20,844		51
Non-mortgage-backed securities
Other U.S. obligations³	3,530		9	3,745		9	3,410		9	3,745		9
GSE and Tennessee Valley Authority obligations	3,310		9	3,359		8	2,530		6	3,359		8
State or local housing agency obligations	1,643		4	1,697		4	1,434		4	1,697		4
Other	557		1	551		2	555		1	551		2
Total non-mortgage-backed securities	9,040		23	9,352		23	7,929		20	9,352		23
Total long-term investments	29,162		77	30,197		74	27,071		69	30,197		74
Total investments	$	37,763	100	$	41,218	100	$	39,341	100	$	41,218	100


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


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


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

Our investments decreased ~~$3.5~~$1.9 billion or ~~eight~~five percent at ~~June~~September 30, 2017 when compared to December 31, 2016 due primarily to ~~a reduction in~~maturities of MBS and agency securities, partially offset by money market ~~investments needed~~investment purchases to ~~manage~~increase our liquidity position during the quarter.

The Finance Agency limits our investments in MBS by requiring that the total book value of our MBS not exceed three times regulatory capital at the time of purchase. Our ratio of MBS to regulatory capital was 2.44 and 2.58 at ~~both June~~September 30, 2017 and December 31, 2016.

We evaluate AFS and HTM securities in an unrealized loss position for other-than-temporary-impairment (OTTI) on at least a quarterly basis. As part of our OTTI evaluation, we consider our intent to sell each debt security and whether it is more likely than not that we will be required to sell the security before its anticipated recovery. If either of these conditions is met, we will recognize an OTTI charge to earnings equal to the entire difference between the ~~security's~~security’s amortized cost basis and its fair value at the reporting date. For securities in an unrealized loss position that meet neither of these conditions, we perform analyses to determine if any of these securities are other-than-temporarily impaired. At ~~June~~September 30, 2017 we did not consider any of these securities to be other-than-temporarily-impaired. Refer to “Item 1. Financial Statements — Note 6 — Other-Than-Temporary Impairment” for additional information on our OTTI analysis performed at ~~June~~September 30, 2017.

~~Table of Contents~~

Consolidated Obligations

Consolidated obligations, which include bonds and discount notes, are the primary source of funds to support our advances, mortgage loans, and investments. At ~~June~~September 30, 2017 and December 31, 2016, the carrying value of consolidated obligations for which we are primarily liable totaled ~~$155.7~~$155.3 billion and $170.8 billion.

DISCOUNT NOTES

The following table summarizes our discount notes, all of which are due within one year (dollars in millions):


	June 30, 2017			December 31, 2016			September 30, 2017			December 31, 2016
Par value	$	66,668		$	81,019		$	53,074		$	81,019
Discounts and concession fees¹	(110		)	(72		)	(98		)	(72		)
Total	$	66,558		$	80,947		$	52,976		$	80,947


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

Our discount notes decreased ~~$14.4~~$28.0 billion or 1835 percent at ~~June~~September 30, 2017 when compared to December 31, 2016. The decrease was primarily due to our increased use of bonds in place of discount notes to reduce the maturity gap between our assets and liabilities and in response to changes in our advance products ~~outstanding during the second quarter.~~outstanding. For additional information on our discount notes and maturity gap, refer to “Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

BONDS

The following table summarizes information on our bonds (dollars in millions):


	June 30, 2017			December 31, 2016			September 30, 2017			December 31, 2016
Total par value	$	89,322		$	90,053		$	102,456		$	90,053
Premiums	224			254			210			254
Discounts and concession fees¹	(69		)	(79		)	(65		)	(79		)
Fair value hedging adjustments	(306		)	(330		)	(307		)	(330		)
Total bonds	$	89,171		$	89,898		$	102,294		$	89,898


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

Our bonds ~~remained relatively stable~~increased $12.4 billion or 14 percent at ~~June~~September 30, 2017 when compared to December 31, 2016. The ~~slight decrease~~increase was driven by ~~a decline~~our increased use of bonds in place of discount notes to reduce the ~~amount of consolidated obligations needed~~maturity gap between our assets and liabilities and in response to ~~fund the Bank’s assets.~~changes in our advance products outstanding. Fair value hedging adjustments changed ~~$24~~$23 million at ~~June~~September 30, 2017 when compared to December 31, 2016 due to the impact of interest rates on our cumulative fair value adjustments on bonds in hedge relationships.

For additional information on our bonds and maturity gap, refer to ~~"Item~~“Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

Deposits

Deposit levels will vary based on member alternatives for short-term investments. Our deposits decreased ~~$149~~$179 million or 1316 percent at ~~June~~September 30, 2017 when compared to December 31, 2016 due to a decrease in interest-bearing deposits.

Mandatorily Redeemable Capital Stock

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

~~Table of Contents~~

Our total mandatorily redeemable capital stock balance decreased ~~$184~~$242 million at ~~June~~September 30, 2017 when compared to December 31, 2016 due ~~primarily~~in part to the repurchase of $148 million in capital stock outstanding to certain captive insurance company members in the first quarter of 2017. The repurchase was in response to the Finance Agency final rule affecting membership eligibility that became effective February 19, 2016. In accordance with the final rule, on February 17, 2017, we terminated the membership of all captive insurance company members that were admitted as members after September 12, 2014 (the date the Finance Agency proposed this rule) and repurchased outstanding capital stock to these captive insurance company members in the amount of $148 million. Captive insurance company members that were admitted as members prior to September 12, 2014 will also have their memberships terminated no later than February 19, 2021. At ~~June~~September 30, 2017 and December 31, 2016, our mandatorily redeemable capital stock totaled ~~$480~~$422 million and $664 million.

Capital

The following table summarizes information on our capital (dollars in millions):


	June 30, 2017		December 31, 2016			September 30, 2017		December 31, 2016
Capital stock	$	5,623	$	5,917		$	5,624	$	5,917
Additional capital from merger	—		52			—		52
Retained earnings	1,684		1,450			1,774		1,450
Accumulated other comprehensive income (loss)	89		(18		)	100		(18		)
Total capital	$	7,396	$	7,401		$	7,498	$	7,401

Our capital ~~remained relatively stable~~increased at ~~June~~September 30, 2017 when compared to December 31, 2016. The slight ~~decrease~~increase was due to an increase in retained earnings due to net income earned and an increase in AOCI due primarily to changes in unrealized gains on our MBS GSE and agency securities. These increases were partially offset by a decline in capital stock due to a decrease in member activity and a decline in additional capital from merger driven by dividend payments paid during 2017. As a result of the ~~second~~first quarter dividend payment, the additional capital from merger balance was depleted. ~~These decreases were partially offset by an increase in retained earnings due to net income earned and an increase in AOCI due primarily to unrealized gains on our MBS GSE and agency securities.~~ Refer to “Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Capital Stock” for additional information on our capital stock activity.

Derivatives

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

The following table categorizes the notional amount of our derivatives by type (dollars in millions):


	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Interest rate swaps
Noncallable	$	49,257	$	49,887	$	51,367	$	49,887
Callable by counterparty	2,637		3,287		2,228		3,287
Callable by the Bank	172		136		172		136
Total interest rate swaps	52,066		53,310		53,767		53,310
Forward settlement agreements (TBAs)	110		94		108		94
Mortgage delivery commitments	113		102		114		102
Total notional amount	$	52,289	$	53,506	$	53,989	$	53,506

The notional amount of our derivative contracts ~~decreased $1.2 billion or 2 percent~~remained relatively stable at ~~June~~September 30, 2017 when compared to December 31, 2016. During 2017, we ~~reduced~~continued our use of swapped consolidated obligation bonds, in ~~response~~addition to ~~market conditions, and increased our utilization of~~ LIBOR indexed debt to capture attractive funding, match repricing structures on advances, and provide additional liquidity.

~~Table of Contents~~

LIQUIDITY AND CAPITAL RESOURCES

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

Liquidity

SOURCES OF LIQUIDITY

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

Our primary source of liquidity is proceeds from the issuance of consolidated obligations (bonds and discount notes) in the capital markets. During the ~~six~~nine months ended ~~June~~September 30, 2017, proceeds from the issuance of bonds and discount notes were ~~$26.8~~$53.2 billion and ~~$118.1~~$162.9 billion compared to ~~$49.4~~$77.9 billion and ~~$143.5~~$209.4 billion for the same period in 2016. We continued to issue ~~shorter-term discount notes as well as~~ term fixed and floating rate, callable, and step-up rate consolidated obligation bonds as well as shorter-term discount notes to capture attractive funding, match repricing structures on advances, and provide additional liquidity.

We maintained continual access to funding and adapted our debt issuance to meet the needs of our members, ~~including demand for variable rate callable advance products that~~which has generally favored the issuance of shorter-term debt. Access to short-term debt markets has been reliable asbecause investors, driven by increased liquidity preferences and risk aversion, including the effects of money market fund reform, have sought the FHLBanks' short-term debt as an asset of choice, which has led to advantageous funding opportunities and increased utilization of ~~consolidated obligation short-term bonds as well as discount notes.~~debt maturing in one year or less. However, due to the short-term maturity of the debt, we may be exposed to additional risks associated with refinancing and our ability to access the capital markets.

~~Table of Contents~~

We monitor our debt refinancing risk and continue to enhance our liquidity and funding management. In measuring the level of assets requiring refinancing, we consider the maturity characteristics of our assets and liabilities. The following table presents the composition of our assets and liabilities by maturity (dollars in millions):


	June 30, 2017							December 31, 2016							September 30, 2017							December 31, 2016
	1 year or less			> 1 year		Total		1 year or less			> 1 year		Total		1 year or less			> 1 year		Total		1 year or less			> 1 year		Total
Assets
Investments¹	$	11,957		$	25,383	$	37,340	$	14,265		$	26,653	$	40,918	$	14,786		$	24,136	$	38,922	$	14,265		$	26,653	$	40,918
Advances²	42,783			76,055		118,838		22,533			109,004		131,537		47,049			70,456		117,505		22,533			109,004		131,537
Mortgage loans held for portfolio³	969			5,892		6,861		862			5,961		6,823		934			6,003		6,937		862			5,961		6,823
Other interest earning assets⁴	—			—		—		200			—		200		—			—		—		200			—		200
Subtotal	$	55,709		$	107,330	163,039		$	37,860		$	141,618	179,478		$	62,769		$	100,595	163,364		$	37,860		$	141,618	179,478
Other⁵						1,949							1,127							1,181							1,127
Total assets						$	164,988						$	180,605						$	164,545						$	180,605

Liabilities
Consolidated obligation bonds⁶	$	48,266		$	41,056	$	89,322	$	47,733		$	42,320	$	90,053	$	49,500		$	52,956	$	102,456	$	47,733		$	42,320	$	90,053
Consolidated obligation discount notes⁶	66,668			—		66,668		81,019			—		81,019		53,074			—		53,074		81,019			—		81,019
Subtotal	$	114,934		$	41,056	155,990		$	128,752		$	42,320	171,072		$	102,574		$	52,956	155,530		$	128,752		$	42,320	171,072
Other⁵						1,602							2,132							1,517							2,132
Total liabilities						$	157,592						$	173,204						$	157,047						$	173,204
Maturity gap	$	59,225						$	90,892						$	39,805						$	90,892
Maturity gap percentage⁷	36		%					50		%					24		%					50		%

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


2	Represents the principal balance of advances based on contractual maturity. At ~~June~~September 30, 2017 and December 31, 2016, 3834 percent and 60 percent of our advances ~~are~~were callable, many of which have call dates in the next year. For further detail of our advance call dates, refer to ~~"Item~~“Item 1. Financial Statements — Note 7 — ~~Advances".~~Advances.”


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


4	Represents loans outstanding to other FHLBanks at December 31, 2016. There were no loans outstanding to other FHLBanks at ~~June~~September 30, 2017.


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


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


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

During the ~~first half of~~nine months ended September 30, 2017, we continued to monitor the maturity gap between our assets and liabilities and made efforts to reduce our maturity gap percentage to reduce the level of refinancing risk that could potentially occur if we could not obtain funding in the capital markets due to an unforeseen event. Our maturity gap objective in the future may vary based on a number of factors, including our member borrowing needs, supply and demand in the debt markets, and other factors.

Our ability to raise funds in the capital markets as well as our cost of borrowing may be affected by our credit ratings. As of ~~July~~October 31, 2017, our consolidated obligations were rated AA+/A-1+ by Standard and ~~Poor's~~Poor’s and Aaa/P-1 by ~~Moody's~~Moody’s and both ratings had a stable outlook. For further discussion of how credit rating changes and our ability to access the capital markets may impact us in the future, refer to “Item 1A. Risk Factors” in our 2016 Form 10-K.

Although we are primarily liable for the portion of consolidated obligations which are issued on our behalf, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations issued by the FHLBank System. At ~~June~~September 30, 2017 and December 31, 2016, the total par value of outstanding consolidated obligations for which we are primarily liable was ~~$156.0~~$155.5 billion and $171.1 billion. At ~~June~~September 30, 2017 and December 31, 2016, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which we are jointly and severally liable was approximately ~~$855.5~~$873.2 billion and $818.2 billion.

~~Table of Contents~~

The Office of Finance and FHLBanks have contingency plans in place that prioritize the allocation of proceeds from the issuance of consolidated obligations during periods of financial distress if consolidated obligations cannot be issued in sufficient amounts to satisfy all FHLBank demand. In the event of significant market disruptions or local disasters, our President or his designee is authorized to establish interim borrowing relationships with other FHLBanks. To provide further access to funding, the FHLBank Act also authorizes the U.S. Treasury to directly purchase new issue consolidated obligations of the GSEs, including FHLBanks, up to an aggregate principal amount of $4.0 billion. As of ~~July~~October 31, 2017, no purchases had been made by the U.S. Treasury under this authorization.

USES OF LIQUIDITY

We use our available liquidity, including proceeds from the issuance of consolidated obligations, primarily to repay consolidated obligations, fund advances, and purchase investments. During the ~~six~~nine months ended ~~June~~September 30, 2017, repayments of consolidated obligations totaled $~~160.1~~231.7 billion compared to ~~$164.2~~$250.6 billion for the same period in 2016. A portion of these payments were due to the call of certain bonds in an effort to better match our projected asset cash flows. During the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016, we called bonds with a total par value of ~~$95~~$110 million and ~~$1.0~~$1.6 billion.

During the ~~six~~nine months ended ~~June~~September 30, 2017, advance disbursements totaled ~~$130.2~~$197.2 billion compared to ~~$117.8~~$171.2 billion for the same period in 2016. During the ~~six~~nine months ended ~~June~~September 30, 2017, investment purchases (excluding overnight investments) totaled ~~$48.6~~$76.6 billion compared to ~~$62.6~~$88.7 billion for the same period in 2016. Investment purchases during each period were primarily driven by the purchase of money market investments, including secured resale agreements in an effort to manage our liquidity position.

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

LIQUIDITY REQUIREMENTS

Finance Agency regulations mandate three liquidity requirements. First, we are required to maintain contingent liquidity sufficient to meet our liquidity needs, which shall, at a minimum, cover five calendar days of inability to access the consolidated obligation debt markets. Second, we are required to have available at all times an amount greater than or equal to ~~members'~~members’ current deposits invested in advances with maturities not to exceed five years, deposits in banks or trust companies, and obligations of the U.S. Treasury. Third, we are required to maintain, in the aggregate, unpledged qualifying assets in an amount at least equal to the amount of our participation in total consolidated obligations outstanding. At ~~June~~September 30, 2017 and December 31, 2016, we were in compliance with all three of the Finance Agency liquidity requirements.

In addition to the liquidity measures previously discussed, the Finance Agency has provided us with guidance to maintain sufficient liquidity in an amount at least equal to our anticipated cash outflows under two different scenarios. One scenario (roll-off scenario) assumes that we cannot access the capital markets to issue debt for a period of 10 to 20 days with initial guidance set at 15 days and that during that time members do not renew any maturing, prepaid, and called advances. The second scenario (renew scenario) assumes that we cannot access the capital markets to issue debt for a period of three to seven days with initial guidance set at five days and that during that time we will automatically renew maturing and called advances for all members except very large, highly-rated members. This guidance is designed to protect against temporary disruptions in the debt markets that could lead to a reduction in market liquidity and thus the inability for us to provide advances to our members. At ~~June~~September 30, 2017 and December 31, 2016, we were in compliance with this liquidity guidance.

Capital

CAPITAL REQUIREMENTS

We are subject to three regulatory capital requirements. First, the FHLBank Act requires that we maintain at all times permanent capital greater than or equal to the sum of our credit, market, and operations risk capital requirements, all calculated in accordance with Finance Agency regulations. Only permanent capital, defined as Class B capital stock, (including mandatorily redeemable capital stock), and retained earnings can satisfy this risk-based capital requirement. Second, the FHLBank Act requires a minimum four percent capital-to-asset ratio, which is defined as total regulatory capital divided by total assets. Total regulatory capital includes Class B capital stock (including mandatorily redeemable capital stock), additional capital from merger, and retained earnings. It does not include AOCI. Third, the FHLBank Act imposes a five percent minimum leverage ratio, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times, divided by total assets. Nonpermanent capital includes additional capital from merger. At ~~June~~September 30, 2017 and December 31, 2016, we were in compliance with all three of the Finance ~~Agency's~~Agency’s regulatory capital requirements. Refer to ~~"Item~~“Item 1. Financial Statements — Note 12 — ~~Capital"~~Capital” for additional information.

~~Table of Contents~~

CAPITAL STOCK

Our capital stock has a par value of $100 per share, and all shares are issued, redeemed, and repurchased only at the stated par value. We generally issue a single class of capital stock (Class B stock). We have two subclasses of Class B capital stock: membership and activity-based. Each member must purchase and hold membership capital stock in an amount equal to 0.12 percent of its total assets as of the preceding December 31^st, subject to a cap of $10.0 million and a floor of $10,000. Each member is also required to purchase activity-based capital stock equal to 4.00 percent of its advances and mortgage loans outstanding. All Class B capital issued is subject to a five year notice of redemption period.

We reclassify capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) when a member provides written notice of redemption, gives notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership.

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

Capital stock owned by members in excess of their investment requirement is deemed excess capital stock. Under our Capital Plan, we, at our discretion and upon 15 ~~days'~~days’ written notice, may repurchase excess membership capital stock. We, at our discretion, may also repurchase excess activity-based capital stock to the extent that (i) the excess capital stock balance exceeds an operational threshold set forth in the Capital Plan, which is currently set at zero, or (ii) a member submits a notice to redeem all or a portion of the excess activity-based capital stock. At ~~June~~September 30, 2017 and December 31, 2016, we had no excess capital stock outstanding.

The following table summarizes our regulatory capital stock by type of member (dollars in millions):


	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Commercial banks	$	4,176	$	4,549	$	4,096	$	4,549
Savings institutions	126		121		150		121
Credit unions	357		320		386		320
Non-captive insurance companies	531		296		614		296
Captive insurance companies	433		631		378		631
Total GAAP capital stock	5,623		5,917		5,624		5,917
Mandatorily redeemable capital stock	480		664		422		664
Total regulatory capital stock	$	6,103	$	6,581	$	6,046	$	6,581

The decrease in regulatory capital stock held at ~~June~~September 30, 2017 when compared to December 31, 2016 was due to a decline in mandatorily redeemable capital stock and in GAAP capital stock. The decline in the mandatorily redeemable capital stock was driven by the repurchase of capital stock held by certain captive insurance company members whose membership was terminated on February 17, 2017 in response to the Finance Agency final rule affecting FHLBank membership. The decrease in GAAP capital stock was due to a decline in member activity.

Additional Capital from Merger

We recognized net assets acquired from the Seattle Bank by recording the par value of capital stock issued in the transaction as capital stock, with the remaining portion of net assets acquired reflected in a capital account captioned “Additional capital from merger.” We treated this additional capital from merger as a component of total capital for regulatory capital purposes. Dividends on capital stock were paid from this account following the Merger until the balance was depleted following the first quarter dividend payment in May 2017.

~~Table of Contents~~

Retained Earnings

Our Enterprise Risk Management Policy (ERMP) includes a target level of retained earnings and additional capital from merger based on the amount we believe necessary to protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend. We monitor our achievement of this target and may utilize tools such as restructuring our balance sheet, generating additional income, reducing our risk exposures, increasing capital stock requirements, or reducing our dividends to enable us to return to our targeted level of retained earnings over time. At ~~June~~September 30, 2017, we exceeded our retained earnings target.

We entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other FHLBanks in February 2011. The JCE Agreement, as amended, is intended to enhance our capital position by allocating the earnings historically paid to satisfy the Resolution Funding Corporation obligation to a separate restricted retained earnings account. Under the JCE Agreement, we allocate 20 percent of our quarterly net income to a restricted retained earnings account until the balance of that account equals at least one percent of our average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends and are presented separately in our Statements of Condition. At ~~June~~September 30, 2017 and December 31, 2016, our restricted retained earnings balance totaled ~~$285~~$311 million and $231 million. One percent of our average balance of outstanding consolidated obligations for the three months ended ~~March 31,~~June 30, 2017 was ~~$1.7~~$1.6 billion. For more information on our JCE Agreement, refer to ~~"Item~~“Item 1. Business — Retained ~~Earnings"~~Earnings” in our 2016 Form 10-K.

Dividends

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

The following table summarizes dividend-related information (dollars in millions):


	For the Three Months Ended						For the Six Months Ended						For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2017			2016			2017			2016			2017			2016			2017			2016
Aggregate cash dividends paid¹	$	45		$	35		$	88		$	66		$	42		$	36		$	130		$	102
Effective combined annualized dividend rate paid on capital stock	3.10		%	2.94		%	3.08		%	2.88		%	3.06		%	2.98		%	3.07		%	2.91		%
Annualized dividend rate paid on membership capital stock	1.00		%	0.50		%	0.88		%	0.50		%	1.00		%	0.75		%	0.92		%	0.58		%
Annualized dividend rate paid on activity-based capital stock	3.50		%	3.50		%	3.50		%	3.50		%	3.50		%	3.50		%	3.50		%	3.50		%
Average three-month LIBOR	1.20		%	0.64		%	1.14		%	0.63		%	1.32		%	0.79		%	1.20		%	0.69		%

Amounts for the three and ~~six~~nine months ended ~~June~~September 30, 2017 exclude cash dividends of $4 million and ~~$10~~$14 million paid on mandatorily redeemable capital stock, which is recorded as interest expense on the Statements of Income. Amounts for the three and ~~six~~nine months ended ~~June~~September 30, 2016 exclude cash dividends of $3$6 million and $4$10 million paid on mandatorily redeemable capital stock.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a discussion of our critical accounting policies and estimates, refer to our 2016 Form 10-K. There have been no material changes to our critical accounting policies and estimates during the ~~six~~nine months ended ~~June~~September 30, 2017 with the exception of one policy noted below:

We utilize one Derivative Clearing Organization (Clearinghouse), CME Clearing, for all cleared derivative transactions. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral. Initial margin is considered cash collateral.

~~Table of Contents~~

LEGISLATIVE AND REGULATORY DEVELOPMENTS

Information Security Management Advisory Bulletin

On September 28, 2017, the Finance Agency issued an Advisory Bulletin that supersedes previous guidance on an FHLBank’s information security program. The Advisory Bulletin describes three main components of an information security program and provides the expectation that each FHLBank will use a risk-based approach to implement its information security program. The Advisory Bulletin contains expectations related to (i) governance, including guidance related to roles and responsibilities, risk assessments, industry standards, and cyber-insurance; (ii) engineering and architecture, including guidance on network security, software security, and security of endpoints; and (iii) operations, including guidance on continuous monitoring, vulnerability management, baseline configuration, asset life cycle, awareness and training, incident response and recovery, user access management, data classification and protection, oversight of third parties, and threat intelligence sharing.

We do not expect this advisory bulletin to materially affect our financial condition or results of operations.

Minority and Women Inclusion

On July 25, 2017, the Finance Agency published a final rule, effective August 24, 2017, amending its Minority and Women Inclusion regulations to clarify the scope of the FHLBanks’ obligation to promote diversity and ensure inclusion. The final rule updates the existing Finance Agency regulations aimed at promoting diversity and the inclusion and use of minorities, women, and individuals with disabilities, and the businesses they own (MWDOB) in all FHLBank business and activities, including management, employment, and contracting. The final rule will:

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

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

require us to develop policies that address reasonable accommodations for employees to observe their religious beliefs;

require us to provide information in our annual reports to the Finance Agency about our efforts to advance diversity and inclusion through financial transactions, identification of ways in which we might be able to improve MWDOB business with the Bank by enhancing customer access by MWDOB businesses, including through our affordable housing and community investment programs and strategies for promoting the diversity of supervisors and managers; and

require us to classify and provide additional data in our annual reports about the number of and amounts paid under its contracts with MWDOB.

We do not expect this final rule to materially affect our financial condition or results of operations, but anticipate that it may result in increased compliance costs and substantially increase the amount of tracking, monitoring, and reporting that would be required.

FHLBank Capital Requirements

On July 3, 2017, the Finance Agency published a proposed rule to adopt, with amendments, the regulations of the Federal Housing Finance Board (predecessor to the ~~Finance Agency)~~FHFA) pertaining to the capital requirements for the FHLBanks. The proposed rule would carry over most of the existing regulations without material change but would substantively revise the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The main revisions would remove requirements that we calculate credit risk capital charges and unsecured credit limits based on ratings issued by a Nationally Recognized Statistical Rating Organization (NRSRO), and instead, require that wethe FHLBanks establish and use their own internal rating methodology. With respect to derivatives, the proposed rule would impose a new capital charge for cleared derivatives, which under the existing rule do not carry a capital charge, to align with the Dodd-Frank Act’s clearing mandate. The proposed rule also would revise the percentages used in the regulation’s tables to calculate credit risk capital charges for advances and for non-mortgage assets. The Finance Agency proposes to retain, for now, the percentages used in the tables to calculate capital charges for mortgage-related assets, and to address the methodology for residential mortgage assets at a later date. While a March 2009 regulatory directive pertaining to certain liquidity matters will continue to remain in place, the Finance Agency also proposes to rescind certain minimum regulatory liquidity requirements for the FHLBanks and address these liquidity requirements in a separate rulemaking.

We ~~continue~~submitted a joint comment letter with the other FHLBanks on August 31, 2017. We are continuing to evaluate the proposed rule but do not expect this rule, if adopted in final form, to materially affect our financial condition or results of operations. ~~Comments on the proposed rule are due by September 1, 2017.~~

FHLBank Membership for Non-Federally-Insured Credit Unions

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

We do not expect this rule to materially affect our financial condition or results of operations.

~~Minority and Women Inclusion~~Other Significant Developments

Mandatory Contractual Stay Requirements for Qualified Financial Contracts (QFCs)

On ~~July 25,~~September 12, 2017, the ~~Finance Agency~~Federal Reserve Board (FRB) published a final rule, effective ~~August 24,~~November 13, 2017, ~~amending its Minority~~requiring certain global systemically important banking institutions (GSIBs) regulated by the FRB to amend their covered qualified financial contracts (QFCs) to limit a counterparty’s immediate termination or exercise of default rights under the QFCs in the event of bankruptcy or receivership of the GSIB or an affiliate of the GSIB. Covered QFCs include derivatives, repurchase agreements (known as repos) and ~~Women Inclusion regulations to clarify~~reverse repos, and securities lending and borrowing agreements. On September 27, 2017, the ~~scope of our obligation to promote diversity and ensure inclusion. The~~FDIC adopted a substantively identical final rule, ~~updates the existing Finance Agency regulations aimed at promoting diversity and the inclusion and use of minorities, women, and individuals~~effective January 1, 2018, with ~~disabilities, and the businesses they own (MWDOB) in all Bank business and activities, including management, employment, and contracting. The final rule would:~~respect to QFCs entered into with certain FDIC-supervised institutions.

~~require us~~Although we are not a covered entity under these rules, as a counterparty to ~~develop stand-alone diversity and inclusion strategic plans~~covered entities under QFCs, we may be required to amend QFCs entered into with FRB-regulated GSIBs or ~~incorporate diversity and inclusion into our existing strategic planning processes and adopt strategies for promoting diversity and ensuring inclusion;~~

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

~~require us to develop policies that address reasonable accommodations for employees to observe their religious beliefs;~~

require us to provide information in our annual reports to the Finance Agency about our efforts to advance diversity and inclusion through financial transactions, identification of ways in which we might be able to improve business with the Bank by enhancing customer access by MWDOB businesses, including through our affordable housing and community investment programs and strategies for promoting the diversity of supervisors and managers;

~~require us to classify and provide additional data in our annual reports about the number and amounts paid under our contracts with MWDOB.~~

~~Table of Contents~~

applicable FDIC-supervised institutions. We do not expect ~~this~~these final ~~rule~~rules to materially affect our financial condition or results of ~~operations, but anticipate that it may result in increased compliance costs and substantially increase the amount of tracking, monitoring, and reporting that would be required.~~operations.

RISK MANAGEMENT

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

Market Risk

We define market risk as the risk that Market Value of Capital Stock (MVCS) or net income will change as a result of changes in market conditions, such as interest rates, spreads, and volatilities. Interest rate risk was our predominant type of market risk exposure during the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016. Our general approach toward managing interest rate risk is to acquire and maintain a portfolio of assets, liabilities, and derivatives, which, taken together, limit our expected exposure to interest rate risk. Management regularly reviews our sensitivity to interest rate changes by monitoring our market risk measures in parallel and non-parallel interest rate changes and spread and volatility movements.

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

MARKET VALUE OF CAPITAL STOCK SENSITIVITY

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

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

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

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

We monitor and manage to the MVCS policy limits to ensure the stability of the ~~Bank's~~Bank’s value. Our policy limits are based on declines from the base case in parallel and non-parallel interest rate change scenarios. Any policy limit breach requires a prompt action to address the measure outside of the policy limit and the breach must be reported to the Enterprise Risk Committee of the Bank and the Risk Committee of the Board of Directors. We were in compliance with the MVCS policy limits at ~~June~~September 30, 2017 and December 31, 2016.

Our down 200 basis point policy limit is suspended when the 10-year swap rate is below 2.50 percent and remains so for five consecutive days. At ~~June~~September 30, 2017 and December 31, 2016, the 10-year swap rate was below 2.50 percent and therefore the associated policy limit was suspended.

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The following tables show our policy limits and base case and change from base case MVCS in dollars per share and percent change respectively, based on outstanding shares of capital stock, including shares classified as mandatorily redeemable, assuming instantaneous parallel changes in interest rates at ~~June~~September 30, 2017 and December 31, 2016:


	Market Value of Capital Stock (dollars per share)														Market Value of Capital Stock (dollars per share)
	Down 200		Down 100		Down 50		Base Case		Up 50		Up 100		Up 200		Down 200		Down 100		Down 50		Base Case		Up 50		Up 100		Up 200
June 30, 2017	$	127.1	$	128.0	$	128.4	$	128.0	$	127.2	$	126.1	$	123.3
September 30, 2017															$	128.6	$	129.7	$	130.3	$	130.1	$	129.5	$	128.5	$	126.0
December 31, 2016	$	119.8	$	120.3	$	120.0	$	119.6	$	118.7	$	117.6	$	114.9	$	119.8	$	120.3	$	120.0	$	119.6	$	118.7	$	117.6	$	114.9


	% Change from Base Case														% Change from Base Case
	Down 200		Down 100		Down 50		Base Case		Up 50		Up 100		Up 200		Down 200		Down 100		Down 50		Base Case		Up 50		Up 100		Up 200
June 30, 2017	(0.8	)%	—	%	0.3	%	—	%	(0.7	)%	(1.5	)%	(3.7	)%
September 30, 2017															(1.2	)%	(0.3	)%	0.1	%	—	%	(0.5	)%	(1.3	)%	(3.1	)%
December 31, 2016	0.2	%	0.6	%	0.4	%	—	%	(0.7	)%	(1.7	)%	(3.9	)%	0.2	%	0.6	%	0.4	%	—	%	(0.7	)%	(1.7	)%	(3.9	)%

Policy Limits (declines from base case)
Down 200 Down 100 Down 50 Base Case Up 50 Up 100 Up 200
June 30, 2017 and December 31, 2016 (12.0 )% (5.0 )% (2.2 )% — % (2.2 )% (5.0 )% (12.0 )%



	Policy Limits (declines from base case)
	Down 200		Down 100		Down 50		Base Case		Up 50		Up 100		Up 200
September 30, 2017 and December 31, 2016	(12.0	)%	(5.0	)%	(2.2	)%	—	%	(2.2	)%	(5.0	)%	(12.0	)%

The following tables show our policy limits and base case and change from base case MVCS in dollars per share and percent change respectively, based on outstanding shares of capital stock, including shares classified as mandatorily redeemable, assuming instantaneous non-parallel changes in interest rates at ~~June~~September 30, 2017 and December 31, 2016:


	Market Value of Capital Stock (dollars per share)														Market Value of Capital Stock (dollars per share)
	Down 200		Down 100		Down 50		Base Case		Up 50		Up 100		Up 200		Down 200		Down 100		Down 50		Base Case		Up 50		Up 100		Up 200
June 30, 2017	$	128.0	$	128.5	$	128.5	$	128.0	$	127.2	$	126.0	$	123.1
September 30, 2017															$	129.9	$	130.4	$	130.5	$	130.1	$	129.4	$	128.3	$	125.4
December 31, 2016	$	121.0	$	120.9	$	120.4	$	119.6	$	118.3	$	117.0	$	114.2	$	121.0	$	120.9	$	120.4	$	119.6	$	118.3	$	117.0	$	114.2


	% Change from Base Case														% Change from Base Case
	Down 200		Down 100		Down 50		Base Case		Up 50		Up 100		Up 200		Down 200		Down 100		Down 50		Base Case		Up 50		Up 100		Up 200
June 30, 2017	(0.1	)%	0.4	%	0.3	%	—	%	(0.7	)%	(1.6	)%	(3.9	)%
September 30, 2017															(0.2	)%	0.2	%	0.3	%	—	%	(0.6	)%	(1.4	)%	(3.6	)%
December 31, 2016	1.2	%	1.1	%	0.7	%	—	%	(1.0	)%	(2.1	)%	(4.5	)%	1.2	%	1.1	%	0.7	%	—	%	(1.0	)%	(2.1	)%	(4.5	)%

Policy Limits (declines from base case)
Down 200 Down 100 Down 50 Base Case Up 50 Up 100 Up 200
June 30, 2017 and December 31, 2016 (13.0 )% (5.5 )% (2.5 )% — % (2.5 )% (5.5 )% (13.0 )%



	Policy Limits (declines from base case)
	Down 200		Down 100		Down 50		Base Case		Up 50		Up 100		Up 200
September 30, 2017 and December 31, 2016	(13.0	)%	(5.5	)%	(2.5	)%	—	%	(2.5	)%	(5.5	)%	(13.0	)%

Our base case MVCS was ~~128.0~~130.1 at ~~June~~September 30, 2017 when compared to 119.6 at December 31, 2016. The change was primarily attributable to the following factors:

Increase in net income: We recorded net income of ~~$270~~$402 million during the ~~six~~nine months ended ~~June~~September 30, 2017, which was primarily driven by net interest income of ~~$323~~$497 million. Dividend payments for the ~~six~~nine months ended ~~June~~September 30, 2017 totaled ~~$88~~$130 million. The earnings in excess of dividends paid had a positive impact on the market value of our assets, thereby increasing MVCS.

Option-adjusted spread: The spread between mortgage interest rates and LIBOR, adjusted for the mortgage prepayment option, decreased at ~~June~~September 30, 2017 when compared to December 31, 2016. This had a positive impact on MVCS as it increased the value of mortgage-related assets.

Decreased shares of activity-based capital stock: During the ~~first half of~~nine months ended September 30, 2017, our advance activity with members declined, and therefore our activity-based capital stock requirements decreased. As we repurchased this activity-based capital stock back at par, which is below our current MVCS level, our MVCS was positively impacted.

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PROJECTED INCOME SENSITIVITY

We monitor the Bank’s projected 24-month income sensitivity through our review of the projected return on capital stock measure. Projected return on capital stock is computed as an annualized ratio of projected net income over a 24 month period to average projected capital stock over the same period.

We monitor and manage projected 24-month income sensitivity in an effort to limit the short-term earnings volatility of the Bank. The projected 24-month income sensitivity is based on the forward interest rates, business, and risk management assumptions.

Our primary income sensitivity policy limits specify a floor on our projected return on capital stock of no less than 50 percent of average projected 3-month LIBOR over 24 months for the up and down 100 and 200 basis point parallel interest rate change scenarios as well as for the up and down 100 basis point non-parallel interest rate changes for each shock scenario. Any policy limit breach requires a prompt action to address the measure outside of the policy limit. The breach must be reported to the Enterprise Risk Committee of the Bank and the Risk Committee of the Board of Directors. We were in compliance with the projected 24-month income sensitivity policy limits at both ~~June~~September 30, 2017 and December 31, 2016. For more information on our Projected Income Sensitivity, refer to ~~"Item~~“Item 7. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk — Projected Income ~~Sensitivity"~~Sensitivity” in our 2016 10-K.

Capital Adequacy

An adequate capital position is necessary for providing safe and sound operations of the Bank. Our key capital adequacy measure is MVCS. In addition to MVCS, we maintain capital levels in accordance with Finance Agency regulations and monitor retained earnings and additional capital from merger. For a discussion of our key capital adequacy measure, MVCS, refer to ~~"Item~~“Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk — Market Value of Capital Stock ~~Sensitivity".~~Sensitivity.”

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

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

Liquidity Risk

We define liquidity risk as the risk that we will be unable to meet our obligations as they come due or meet the credit needs of our members and housing associates in a timely and cost efficient manner. To manage this risk, we maintain liquidity in accordance with Finance Agency regulations. For additional information on our compliance with these requirements, refer to “Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Liquidity ~~Requirements".~~Requirements.”

Credit Risk

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

~~Table~~During the third quarter of ~~Contents~~2017, two significant hurricanes impacted the southeastern coasts of the United States. We have analyzed the potential impact that damage related to Hurricanes Irma and Harvey might have on our advances, letters of credit, mortgage loans held for portfolio, and non-agency MBS securities. Based on the information currently available, we do not anticipate that the impact of the hurricanes will have a material effect, if any, on the Bank’s financial condition or results of operations. We continue to evaluate the impact of the hurricanes on advances, letters of credit, mortgage loans held for portfolio, and non-agency MBS investments. If additional information becomes available indicating that any of these assets has been impaired and the amount of the loss can be reasonably estimated, we will record appropriate reserves at that time.

ADVANCES

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

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

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

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

Although management has policies and procedures in place to manage credit risk, we may be exposed to this risk if our outstanding advance value exceeds the liquidation value of our collateral. We mitigate this risk by applying collateral discounts or haircuts to the unpaid principal balance or market value, if available, of the collateral to determine the advance equivalent value of the collateral securing each ~~borrower's~~borrower’s obligation. The amount of these discounts will vary based on the type of collateral and security agreement. We determine these discounts or haircuts using data based upon historical price changes, discounted cash flow analyses, and loan level modeling.

At ~~June~~September 30, 2017 and December 31, 2016, borrowers pledged ~~$324.3~~$325.0 billion and $330.4 billion of collateral (net of applicable discounts) to support activity with us, including advances. All of our advances are required to be collateralized at a minimum of 100 percent, net of applicable discounts. Borrowers pledge collateral in excess of their collateral requirement mainly to demonstrate available liquidity and to borrow additional amounts in the future.

Based upon our collateral and lending policies, the collateral held as security, and the repayment history on credit products, management has determined that there were no probable credit losses on our credit products as of ~~June~~September 30, 2017 and December 31, 2016. Accordingly, we have not recorded any allowance for credit losses on our credit products.

MORTGAGE LOANS

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

~~Table of Contents~~

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

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

The following table presents the unpaid principal balance of our MPF and MPP portfolios by product type (dollars in millions):


Product Type	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
MPF Conventional	$	6,007	$	5,907	$	6,104	$	5,907
MPF Government	504		513		501		513
Total MPF	6,511		6,420		6,605		6,420

MPP Conventional	315		361		299		361
MPP Government	35		42		33		42
Total MPP	350		403		332		403
Total mortgage loan unpaid principal balance	$	6,861	$	6,823	$	6,937	$	6,823

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

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

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Conventional Mortgage Loans. For our conventional mortgage loans, we have several layers of legal loss protection that are defined in agreements among us and our PFIs. For our MPF loans, these loss layers may vary depending on the MPF product alternatives selected and credit profile of the loans. Loss layers may consist of (i) homeowner equity, (ii) primary mortgage insurance (PMI), (iii) a first loss account (FLA), and (iv) a credit enhancement obligation of the PFI. For our MPP loans, these loss layers consist of (i) homeowner equity and (ii) PMI. For a detailed discussion of these loss layers, refer to “Item 1. Financial Statements — Note 9 — Allowance for Credit Losses.”

Allowance for Credit Losses. We utilize an allowance for credit losses to reserve for estimated losses in our conventional MPF and MPP mortgage loan portfolios at the balance sheet date. The measurement of our MPF and MPP allowance for credit losses is determined by (i) reviewing similar conventional mortgage loans for impairment on a collective basis, (ii) reviewing conventional mortgage loans for impairment on an individual basis, and (iii) estimating additional credit losses in the conventional mortgage loan portfolio. The allowance for credit losses on our conventional MPF mortgage loans was $2 million at ~~June~~September 30, 2017 and December 31, 2016. The allowance for credit losses on our conventional MPP mortgage loans was less than $1 million at both ~~June~~September 30, 2017 and December 31, 2016.

Refer to “Item 1. Financial Statements — Note 9 — Allowance for Credit Losses” for additional information on our allowance for credit losses.

~~Table of Contents~~

Non-Accrual Loans and Delinquencies. We place a conventional mortgage loan on non-accrual status if it is determined that either the collection of interest or principal is doubtful or interest or principal is 90 days or more past due. We do not place a government-insured mortgage loan on non-accrual status due to the U.S. Government guarantee of the loan and contractual obligation of the loan servicer to repurchase the loan when certain criteria are met. Refer to “Item 1. Financial Statements — Note 9 — Allowance for Credit Losses” for a summary of our non-accrual loans and mortgage loan delinquencies.

INVESTMENTS

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

Finance Agency regulations limit the type of investments we may purchase. We are prohibited from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks, unless otherwise approved by the Finance Agency. Our unsecured credit exposures to U.S. branches and agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. Our unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties. At ~~June~~September 30, 2017, we were in compliance with the above regulation and did not own any financial instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks, and those approved by the Finance Agency.

Finance Agency regulations also include limits on the amount of unsecured credit we may extend to a counterparty or to a group of affiliated counterparties. This limit is based on a percentage of eligible regulatory capital and the ~~counterparty's~~counterparty’s overall credit rating. Under these regulations, the level of eligible regulatory capital is determined as the lesser of our total regulatory capital or the eligible amount of regulatory capital of the counterparty. The eligible amount of regulatory capital is then multiplied by a stated percentage. The percentage that we may offer for term extensions of unsecured credit ranges from three to 15 percent based on the ~~counterparty's~~counterparty’s credit rating. Our total overnight unsecured exposure to a counterparty may not exceed twice the regulatory limit for term exposures, or a total of six to 30 percent of the eligible amount of regulatory capital, based on the ~~counterparty's~~counterparty’s credit rating. At ~~June~~September 30, 2017, we were in compliance with the regulatory limits established for unsecured credit.

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

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

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

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

~~Table of Contents~~

At ~~June~~September 30, 2017, our unsecured investment exposure consisted of overnight Federal funds sold. The following table presents our unsecured investment exposure by counterparty credit rating and domicile at ~~June~~September 30, 2017 (excluding accrued interest receivable) (dollars in millions):


	Credit Rating^1,2								Credit Rating^1,2
Domicile of Counterparty	AA		A		BBB		Total		AA		A		BBB		Total
Domestic	$	—	$	—	$	450	$	450	$	—	$	—	$	875	$	875
U.S subsidiaries of foreign commercial banks	—		100		—		100		—		45		—		45
Total domestic and U.S. subsidiaries of foreign commercial banks	—		100		450		550		—		45		875		920
U.S. branches and agency offices of foreign commercial banks
Australia									700		—		—		700
Canada	—		600		—		600		—		600		—		600
France	—		900		—		900		—		700		—		700
Germany									—		600		—		600
Japan	—		600		—		600		—		600		—		600
Netherlands	—		650		—		650		—		300		—		300
Norway	—		600		—		600		—		600		—		600
Sweden	1,200		—		—		1,200		1,150		600		—		1,750
Total U.S. branches and agency offices of foreign commercial banks	1,200		3,350		—		4,550		1,850		4,000		—		5,850
Total unsecured investment exposure	$	1,200	$	3,450	$	450	$	5,100	$	1,850	$	4,045	$	875	$	6,770


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


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

Investment Ratings

The following table summarizes the carrying value of our investments by credit rating (dollars in millions):


	June 30, 2017													September 30, 2017
	Credit Rating¹													Credit Rating¹
	AAA		��	AA		A		BBB		BB or Lower		Total		AAA		AA		A		BBB		BB or Lower		Total
Interest-bearing deposits²	$	—		$	2	$	—	$	—	$	—	$	2	$	—	$	1	$	—	$	—	$	—	$	1
Securities purchased under agreements to resell	500			250		—		2,750		—		3,500		500		250		1,000		3,750		—		5,500
Federal funds sold	—			1,200		3,450		450		—		5,100		—		1,850		4,045		875		—		6,770
Investment securities:
Mortgage-backed securities
GSE single-family	—			4,247		—		—		—		4,247		—		3,974		—		—		—		3,974
GSE multifamily	—			11,891		—		—		—		11,891		—		11,292		—		—		—		11,292
Other U.S. obligations single-family³	—			3,966		—		—		—		3,966		—		3,859		—		—		—		3,859
Other U.S. obligations commercial³	—			3		—		—		—		3		—		3		—		—		—		3
Private-label residential	—			5		—		8		1		14		—		4		—		7		2		13
Total mortgage-backed securities	—			20,112		—		8		1		20,121		—		19,132		—		7		2		19,141
Non-mortgage-backed securities
Other U.S. obligations³	—			3,530		—		—		—		3,530		—		3,410		—		—		—		3,410
GSE and Tennessee Valley Authority obligations	—			3,311		—		—		—		3,311		—		2,530		—		—		—		2,530
State or local housing agency obligations	1,205			438		—		—		—		1,643		1,150		284		—		—		—		1,434
Other	455			101		—		—		—		556		454		101		—		—		—		555
Total non-mortgage-backed securities	1,660			7,380		—		—		—		9,040		1,604		6,325		—		—		—		7,929
Total investments⁴	$	2,160		$	28,944	$	3,450	$	3,208	$	1	$	37,763	$	2,104	$	27,558	$	5,045	$	4,632	$	2	$	39,341


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


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


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


4	At ~~June~~September 30, 2017, ~~fourteen~~17 percent of our total investments were unsecured.

~~Table of Contents~~

The following table summarizes the carrying value of our investments by credit rating (dollars in millions):



	December 31, 2016
	Credit Rating¹
	AAA		AA		A		BBB		BB or Lower		Total
Interest-bearing deposits²	$	—	$	2	$	—	$	—	$	—	$	2
Securities purchased under agreements to resell	1,425		250		500		3,750		—		5,925
Federal funds sold	—		200		4,050		845		—		5,095
Investment securities:
Mortgage-backed securities
GSE single-family	—		4,804		—		—		—		4,804
GSE multifamily	—		12,156		—		—		—		12,156
Other U.S. obligations single-family³	—		3,864		—		—		—		3,864
Other U.S. obligations commercial³	—		4		—		—		—		4
Private-label residential	—		—		5		9		2		16
Total mortgage-backed securities	—		20,828		5		9		2		20,844
Non-mortgage-backed securities
Other U.S. obligations³	—		3,745		—		—		—		3,745
GSE and Tennessee Valley Authority obligations	—		3,359		—		—		—		3,359
State or local housing agency obligations	1,242		455		—		—		—		1,697
Other	449		102		—		—		—		551
Total non-mortgage-backed securities	1,691		7,661		—		—		—		9,352
Total investments⁴	$	3,116	$	28,941	$	4,555	$	4,604	$	2	$	41,218


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


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


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


4	At December 31, 2016, ~~twelve~~12 percent of our total investments were unsecured.

Our total investments decreased at ~~June~~September 30, 2017 when compared to December 31, 2016 due primarily to ~~a reduction in~~maturities of MBS and agency securities, partially offset by money market ~~investments needed~~investment purchases to ~~manage~~increase our liquidity position during the quarter.

At ~~June~~September 30, 2017 and December 31, 2016, we did not consider any of our investments to be other-than-temporarily impaired. For more information on our evaluation of OTTI, refer to “Item 1. Financial Statements — Note 6 — Other-Than-Temporary Impairment.”

Mortgage-Backed Securities

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

We limit our investments in MBS to those guaranteed by the U.S. Government or issued by a GSE. Further, our ERMP prohibits new purchases of private-label MBS. We perform ongoing analysis on these investments to determine potential credit issues. At ~~June~~September 30, 2017 and December 31, 2016, we owned ~~$20.1~~$19.1 billion and $20.8 billion of MBS, of which approximately 99.9 percent were guaranteed by the U.S. Government or issued by GSEs and 0.1 percent were private-label MBS at each period end.

DERIVATIVES

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

~~Table of Contents~~

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

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

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

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

The following table shows our derivative counterparty credit exposure (dollars in millions):


	June 30, 2017									September 30, 2017
Credit Rating¹	Notional Amount		Net Derivatives Fair Value Before Collateral and Variation Margin for Daily Settled Contracts			Cash Collateral Pledged To (From) Counterparty and Variation Margin for Daily Settled Contracts²		Net Credit Exposure to Counterparties		Notional Amount		Net Derivatives Fair Value Before Collateral and Variation Margin for Daily Settled Contracts			Cash Collateral Pledged To (From) Counterparty and Variation Margin for Daily Settled Contracts²			Net Credit Exposure to Counterparties
Non-member counterparties:
Asset positions with credit exposure
Uncleared derivatives
A	$	2,419	$	2		$	—	$	2	$	2,540	$	9		$	(8	)	$	1
BBB⁴										499		—			—			—
Liability positions with credit exposure
Uncleared derivatives
AA										551		(25		)	26			1
A	6,666		(84		)	91		7		4,970		(64		)	66			2
AA	555		(27		)	28		1
BBB	1,841		(12		)	13		1		1,166		(26		)	27			1
Cleared derivatives^{2, 3}	40,364		(343		)	471		128		43,029		(311		)	425			114
Total derivative positions with credit exposure to non-member counterparties	51,845		(464		)	603		139		52,755		(417		)	536			118
Member institutions^4,5	105		—			—		—		105		—			—			—
Total	51,950		$	(464	)	$	603	$	139	52,860		$	(417	)	$	536		$	118
Derivative positions without credit exposure	339									1,129
Total notional	$	52,289								$	53,989


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


2	Includes variation margin for daily unsettled contracts of ~~$339~~$305 million at ~~June~~September 30, 2017.


3	Represents derivative transactions cleared with CME Clearing, our clearinghouse, who is not rated. CME Clearing's parent, CME Group Inc. was rated Aa3 by Moody's and AA- by Standard and Poor's at ~~June~~September 30, 2017.


4	Net credit exposure is less than $1 million.


5	Represents mortgage delivery commitments with our member institutions.

~~Table of Contents~~

The following table shows our derivative counterparty credit exposure (dollars in millions):



	December 31, 2016
Credit Rating¹	Notional Amount		Net Derivatives Fair Value Before Collateral			Cash Collateral Pledged To (From) Counterparty		Net Credit Exposure to Counterparties
Non-member counterparties:
Asset positions with credit exposure
Uncleared derivatives
A	$	94	$	1		$	—	$	1
Liability positions with credit exposure
Uncleared derivatives
BBB	736		(8		)	9		1
Cleared derivatives²	40,678		(374		)	563		189
Total derivative positions with credit exposure to non-member counterparties	41,508		(381		)	572		191
Member institutions^3,4	49		—			—		—
Total	41,557		$	(381	)	$	572	$	191
Derivative positions without credit exposure	11,949
Total notional	$	53,506


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


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


3	Net credit exposure is less than $1 million.


4	Represents mortgage delivery commitments with our member institutions.

Operational Risk

We define operational risk as the risk of loss or harm from inadequate or failed processes, people, and/or systems, including those emanating from external sources. Operational risk is inherent in all of our business activities, processes, and ~~processes.~~systems. Management has established policies and procedures to reduce the likelihood of operational risk and designed our annual risk assessment process to provide ongoing identification, measurement, and monitoring of operational risk. Due to the manual nature of many of our processes, our operational risk exposure ishas been designated as elevated. To mitigate this risk, we continue to focus on process and control improvements, system upgrades, and adding staff to lead and support critical business functions. In addition, we continue to strengthen the execution of controls surrounding spreadsheets by streamlining and eliminating spreadsheets through automation.

As a result of the storm drain pipe break and water damage to our headquarters on June 22, 2017, we utilized our back-up data center, and employees worked out of a business recovery center located in Urbandale, Iowa, additional leased space in downtown Des Moines, and remotely ~~from~~during June 23 through July 14 of this year. ~~During this time, our operational risk profile was further elevated.~~ On July 17, 2017 we resumed use of our primary data center at our headquarters, which was not damaged. However, as a result of the water damage, the estimated time to complete repairs, and our plan to relocate our headquarters to a building in downtown Des Moines that we purchased in April of 2017, we terminated our lease with Wells Fargo Financial, an affiliate of Wells Fargo Bank effective September 30, 2017. We entered into a nine month lease agreement with Wells Fargo Financial effective September 30, 2017 to lease approximately 1,200 square feet of the former headquarters to support general business functions. In addition, in July and August 2017, we amended our lease at 666 Walnut St., Des Moines, Iowa to lease additional space for our temporary headquarters. We expect to remain at this location until our recently purchased building at 909 Locust St., Des Moines, Iowa is ready for occupancy, which is currently anticipated for late 2018. As a result of the storm drain pipe and transitioning employees to a temporary headquarters location, our operational risk profile was elevated. No known material disruptions in member services or material impacts to our financial condition and results of operations have been experienced due to the disruption.

Strategic Risk

We define strategic risk as the risk of an adverse impact on our mission, financial condition, or current and future profitability resulting from external factors that may occur in both the short- and long-term. Strategic risk includes political, reputation, regulatory, and/or environmental factors, many of which are beyond our control. From time to time, proposals are made, or legislative and regulatory changes are considered, which could affect our cost of doing business or other aspects of our business. We mitigate strategic risk through strategic business planning and monitoring of our external environment. For additional information on some of the more important risks we face, refer to ~~"Item~~“Part II — Item 1A. Risk ~~Factors"~~Factors” and “Item 1A. Risk Factors” in our 2016 Form 10-K.

~~Table of Contents~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk” and the sections referenced therein for quantitative and qualitative disclosures about market risk.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management is responsible for establishing and maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act) is (i) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to our management, including our President and chief executive officer (CEO), and chief financial officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.

Management, with the participation of our President and CEO, and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this report. Based on that evaluation, and ~~management's~~management’s previous identification of the material weakness in our internal control over financial reporting at December 31, 2016, our President and CEO, and CFO have concluded that our disclosure controls and procedures were not effective as of ~~June~~September 30, 2017.

As previously disclosed in our 2016 Form 10-K, management identified one material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the ~~company's~~company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Management identified the following material weakness in our internal control over financial reporting: We did not maintain effective controls over spreadsheets used in our financial close and reporting process. Specifically, we identified multiple failures with the operating effectiveness of controls over key spreadsheets used in our financial close and reporting process. There were no material misstatements identified in our annual and interim financial statements as a result of this material weakness. However, this material weakness could result in misstatements of various account balances or disclosures given its pervasive nature that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Remediation of Material Weakness in Internal Control over Financial Reporting

Management is committed to improving our overall system of internal control over financial reporting and we continue to take steps to remediate the remaining material weakness related to spreadsheet controls. These steps include streamlining certain spreadsheets, training our personnel, risk assessment of key controls and mapping to spreadsheets, and reducing our reliance on spreadsheets. These actions are subject to ongoing review by our senior management, as well as oversight by the audit committee of our board of directors. We have placed a high priority on the remediation process and are allocating the necessary resources to the remediation efforts.

Changes in Internal Control over Financial Reporting

Other than the actions described above, there were no changes in our internal control over financial reporting that occurred during the quarter ended ~~June~~September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~Table of Contents~~

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

Private-Label MBS Litigation

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

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

Litigation Settlement Gains

Litigation settlement gains are considered realized and recorded when we receive cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, litigation settlement gains are considered realizable and recorded when we enter into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, we consider potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income.

We record legal expenses related to litigation settlements as incurred in other expenses in the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. We incur and recognize these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement.

During the three months ended ~~June~~September 30, 2017 and 2016 we did not settle any private-label MBS claims. During the ~~six~~nine months ended ~~June~~September 30, 2017, we settled a private-label MBS claim and recognized $21 million in net gains on litigation settlements. During the ~~three and six~~nine months ended ~~June~~September 30, 2016, we recognized ~~$200 million and~~ $337 million in net gains on litigation settlements.

~~Table of Contents~~

ITEM 1A. RISK FACTORS

For a discussion of our risk factors, refer to our 2016 Form 10-K. There have been no material changes to our risk factors during the ~~six~~nine months ended ~~June~~September 30, 2017, except as follows:

FAILURES OR INTERRUPTIONS IN INTERNAL CONTROLS, INFORMATION SYSTEMS, AND OTHER OPERATING TECHNOLOGIES COULD HARM OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS, REPUTATION, AND RELATIONS WITH MEMBERS

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

Moreover, we rely heavily upon information systems and other operating technologies to conduct and manage our business. To the extent that we, our members, vendors, or counterparties experience a technical failure or interruption in any of these systems or other operating technologies, including any "cyberattacks" or other breaches of technical security, we may be unable to conduct and manage our business effectively. Although we have implemented our disaster recovery and business continuity plans, there can be no assurance that it will be able to prevent, timely and adequately address, or mitigate the negative effects of any technical failure or interruption. Any technical failure or interruption could harm our customer relations, risk management, and profitability, and could adversely impact our financial condition and results of operations.

During 2016, we identified certain control deficiencies in our internal control over financial reporting. These control deficiencies were evaluated, individually and in the aggregate, and as a result, we determined one material weakness in our internal control over financial reporting remained from the previous year which related to our failure to maintain effective controls over spreadsheets used in our financial close and reporting process. This material weakness is described more fully in “Item 4. Controls and Procedures”. These control deficiencies could result in a misstatement of any of our financial statement accounts and disclosures that could in turn result in a material misstatement of the annual or interim financial statements that would not be prevented or detected. Accordingly, management has concluded that these control deficiencies constitute a material weakness. In addition, other material weaknesses or deficiencies may be identified in the future.

If we are unable to correct the material weakness or deficiencies in internal control over financial reporting in a timely manner, our ability to record, process, summarize, and report financial information accurately and within the time periods specified in the rules and forms of the SEC could be adversely affected. This failure could cause our members to lose confidence in our reported financial information, subject us to government enforcement actions, and generally, materially, and adversely impact our business and financial condition.

On June 22, 2017, a storm ~~drain~~ pipe broke at our headquarters causing significant water damage to our office space and rendering it totally uninhabitable. From June 23 through July 14 of this year, we utilized our back-up data center, and employees worked out of a business recovery center located in Urbandale, Iowa, additional leased space in downtown Des Moines, and remotely. On July 17, 2017, we resumed use of our primary data center at our ~~headquarters; however, staff continue~~headquarters, which was not damaged. However, as a result of the water damage, the estimated time to ~~work from alternative locations.~~complete repairs, and our plan to relocate our headquarters to a building in downtown Des Moines that we purchased in April of 2017, we terminated our lease with Wells Fargo Financial, an affiliate of Wells Fargo Bank effective September 30, 2017. We entered into a nine month lease agreement with Wells Fargo Financial effective September 30, 2017 to lease approximately 1,200 square feet of the former headquarters to support general business functions. In addition, in July and August 2017, we amended our lease at 666 Walnut St., Des Moines, Iowa to lease additional space for our temporary headquarters. We expect to remain at this location until our recently purchased building at 909 Locust St., Des Moines, Iowa is ready for occupancy, which is currently anticipated for late 2018. Through the ~~time~~date of this filing we have not experienced material disruptions in member services or material impacts to our financial condition and results of operations; however, there can be no assurance that future technical failures or interruption will not take place. Any technical failure or interruption could harm our customer relations, risk management, and profitability, and could adversely impact our financial condition and results of operations.

CHANGES TO AND REPLACEMENT OF THE LIBOR BENCHMARK INTEREST RATE COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS

In July 2017, the United Kingdom's Financial Conduct Authority (FCA), a regulator of financial services firms and financial markets in the U.K., stated that they will plan for a phase out of regulatory oversight of LIBOR interest rate indices. The FCA has indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate(s). Other financial services regulators and industry groups, including the International Swaps and Derivatives Association (ISDA), are evaluating the possible phase-out of LIBOR and the development of alternate interest rate indices or reference rate(s). As noted throughout this report, many of the Bank's assets and liabilities are indexed to LIBOR. We are not able to predict whether LIBOR will cease to be available after 2021, whether the alternative rates the Federal Reserve Board proposes to publish will become market benchmarks in place of LIBOR, or what the impact of such a transition may be on our business, financial condition, and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

~~Table of Contents~~

ITEM 5. OTHER INFORMATION

There were no material changes to the disclosure related to the Rule 2-01 (c)(1)(ii)(A) of SEC Regulation S-X (the Loan Rule) included in our 2016 10-K. Refer to "“ Part II. Item 9B - Other Information "“ in our 2016 Form 10-K for additional information.

~~Table of Contents~~

ITEM 6. EXHIBITS



3.1	Organization Certificate of the Federal Home Loan Bank of Des Moines, as amended and restated effective May 31, 2015¹
3.2	Bylaws of the Federal Home Loan Bank of Des Moines, as amended and restated effective February 10, 2016²
4.1	Federal Home Loan Bank of Des Moines Capital Plan, as amended and approved by the Federal Housing Finance Agency on May 31, 2015¹
10.1	2017 Director Fee Policy, effective January 1, 2017³
31.1	Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document


1	Incorporated by reference to our Form 8-K filed with the SEC on June 1, 2015 (Commission File No. 000-51999).


2	Incorporated by reference to our Form 8-K filed with the SEC on February 17, 2016 (Commission File No. 000-51999).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



FEDERAL HOME LOAN BANK OF DES MOINES
(Registrant)

Date:		~~August~~November 9, 2017


By:		/s/ Michael L. Wilson
		Michael L. Wilson President and Chief Executive Officer

By:		/s/ Ardis E. Kelley
		Ardis E. Kelley Senior Vice President and Chief Accounting Officer and Chief Strategic Planning Officer (Principal Accounting Officer)

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