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Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to                     .
Commission File No. 000-51399
FEDERAL HOME LOAN BANK OF CINCINNATI
(Exact name of registrant as specified in its charter)
     
Federally chartered corporation   31-6000228
(State or other jurisdiction of   (I.R.S. Employer 
incorporation or organization)   Identification No.)
     
1000 Atrium Two, P.O. Box 598,    
Cincinnati, Ohio   45201-0598
(Address of principal executive offices)       (Zip Code)
Registrant’s telephone number, including area code
(513) 852-7500
     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.
þ 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o Yes þ No
     As of October 31, 2009, the registrant had 36,578,770 shares of capital stock outstanding. The capital stock of the Federal Home Loan Bank of Cincinnati is not listed on any securities exchange or quoted on any automated quotation system, only may be owned by members and former members and is transferable only at its par value of $100 per share.
Page 1 of 100
 
 


 

Table of Contents
             
           
   
 
       
Item 1.          
   
 
       
        3  
   
 
       
        4  
   
 
       
        5  
   
 
       
        6  
   
 
       
        8  
   
 
       
Item 2.       45  
   
 
       
Item 3.       97  
   
 
       
Item 4.       98  
   
 
       
           
   
 
       
Item 1A.       98  
   
 
       
Item 2.       98  
   
 
       
Item 5.       98  
   
 
       
Item 6.       98  
   
 
       
Signatures     99  
 EX-3.2
 EX-31.1
 EX-31.2
 EX-32

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Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CONDITION
(In thousands, except par value)
(Unaudited)
    September 30,     December 31,  
    2009     2008  
ASSETS
               
Cash and due from banks
  $ 2,733,228     $ 2,867  
Interest-bearing deposits
    166       19,906,234  
Federal funds sold
    5,775,000       -  
Trading securities
    2,252,568       2,985  
Available-for-sale securities
    5,725,076       2,511,630  
Held-to-maturity securities (includes $0 and $0 pledged as collateral at September 30, 2009 and December 31, 2008, respectively, that may be repledged) (a)
    12,471,895       12,904,200  
Advances
    38,082,056       53,915,972  
Mortgage loans held for portfolio, net
    9,736,249       8,631,873  
Accrued interest receivable
    161,166       275,560  
Premises, software, and equipment
    10,154       9,611  
Derivative assets
    8,864       17,310  
Other assets
    27,140       27,827  
 
           
 
               
TOTAL ASSETS
  $ 76,983,562     $ 98,206,069  
 
           
 
               
LIABILITIES
               
Deposits:
               
Interest bearing
  $ 1,665,253     $ 1,192,593  
Non-interest bearing
    4,195       868  
 
           
Total deposits
    1,669,448       1,193,461  
 
           
 
               
Consolidated Obligations, net:
               
Discount Notes
    29,169,806       49,335,739  
Bonds
    41,202,616       42,392,785  
 
           
Total Consolidated Obligations, net
    70,372,422       91,728,524  
 
           
 
               
Mandatorily redeemable capital stock
    87,415       110,909  
Accrued interest payable
    290,706       394,346  
Affordable Housing Program
    105,144       102,615  
Payable to REFCORP
    15,372       14,054  
Derivative liabilities
    269,842       286,476  
Other liabilities
    113,587       93,815  
 
           
 
               
Total liabilities
    72,923,936       93,924,200  
 
           
 
               
Commitments and contingencies
               
 
               
CAPITAL
               
Capital stock Class B putable ($100 par value); 36,578 and 39,617 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively
    3,657,848       3,961,698  
Retained earnings
    406,895       326,446  
Accumulated other comprehensive income:
               
Net unrealized gain (loss) on available-for-sale securities
    76       (458 )
Pension and postretirement plans
    (5,193 )     (5,817 )
 
           
Total capital
    4,059,626       4,281,869  
 
           
 
               
TOTAL LIABILITIES AND CAPITAL
  $ 76,983,562     $ 98,206,069  
 
           
(a)   Fair values: $12,947,773 and $13,163,337 at September 30, 2009 and December 31, 2008, respectively.
The accompanying notes are an integral part of these financial statements.

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FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
                                       
    Three Months Ended September 30,   Nine Months Ended September 30,
    2009     2008     2009     2008  
INTEREST INCOME:
                               
Advances
  $ 108,429     $ 438,097     $ 488,048     $ 1,450,982  
Prepayment fees on Advances, net
    1,716       913       6,569       1,627  
Interest-bearing deposits
    207       1,222       8,597       5,713  
Securities purchased under agreements to resell
    514       2,395       979       13,794  
Federal funds sold
    2,906       33,325       9,130       136,406  
Trading securities
    1,341       43       1,440       138  
Available-for-sale securities
    3,944       32       14,187       32  
Held-to-maturity:
                               
Securities
    147,242       183,293       437,840       507,187  
Securities of other FHLBanks
    -       -       22       -  
Mortgage loans held for portfolio
    115,546       112,122       367,455       344,900  
Loans to other FHLBanks
    11       43       15       280  
 
                       
Total interest income
    381,856       771,485       1,334,282       2,461,059  
 
                       
 
                               
INTEREST EXPENSE:
                               
Consolidated Obligations – Discount Notes
    15,478       228,431       104,405       773,750  
Consolidated Obligations – Bonds
    271,561       443,016       910,220       1,388,784  
Deposits
    424       6,280       1,521       23,990  
Loans from other FHLBanks
    -       -       1       -  
Mandatorily redeemable capital stock
    3,287       1,788       5,485       6,643  
Other borrowings
    -       2       -       26  
 
                       
Total interest expense
    290,750       679,517       1,021,632       2,193,193  
 
                       
 
                               
NET INTEREST INCOME
    91,106       91,968       312,650       267,866  
 
                       
 
                               
OTHER INCOME:
                               
Service fees
    406       294       1,297       919  
Net gains (losses) on trading securities
    179       (22 )     401       (35 )
Net gains on held-to-maturity securities
    -       -       5,943       -  
Net gains on derivatives and hedging activities
    4,846       9,893       12,797       9,391  
Other, net
    1,701       1,855       4,719       4,814  
 
                       
Total other income
    7,132       12,020       25,157       15,089  
 
                       
 
                               
OTHER EXPENSE:
                               
Compensation and benefits
    7,646       6,081       21,623       18,777  
Other operating
    3,926       3,398       10,844       9,800  
Finance Agency
    700       780       2,174       2,338  
Office of Finance
    596       476       2,258       1,791  
Other
    1,311       3,096       1,857       4,345  
 
                       
Total other expense
    14,179       13,831       38,756       37,051  
 
                       
 
                               
INCOME BEFORE ASSESSMENTS
    84,059       90,157       299,051       245,904  
 
                       
 
                               
Affordable Housing Program
    7,197       7,543       24,972       20,752  
REFCORP
    15,373       16,522       54,816       45,030  
 
                       
Total assessments
    22,570       24,065       79,788       65,782  
 
                       
 
                               
NET INCOME
  $ 61,489     $ 66,092     $ 219,263     $ 180,122  
 
                       
The accompanying notes are an integral part of these financial statements.

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FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CAPITAL
Nine Months Ended September 30, 2009 and 2008
(In thousands)
(Unaudited)
                                         
                          Accumulated      
    Capital Stock           Other      
    Class B*     Retained   Comprehensive   Total  
    Shares       Par Value       Earnings     Income   Capital  
       
 
                                       
BALANCE, DECEMBER 31, 2007
    34,734     $   3,473,361     $ 286,428     $ (5,203 )   $  3,754,586  
Proceeds from sale of capital stock
    3,558       355,817                       355,817  
Net reclassified to mandatorily redeemable capital stock
    (82 )     (8,222 )                     (8,222 )
 
                                       
Comprehensive income:
                                       
Net income
                    180,122               180,122  
Other comprehensive income:
                                       
Net unrealized loss on available-for-sale securities
                            (1,438 )     (1,438 )
Pension and postretirement benefits
                            479       479  
 
                                   
 
                                       
Total other comprehensive income
                            (959 )     (959 )
 
                                       
Total comprehensive income
                                    179,163  
 
                                     
 
                                       
Dividends on capital stock:
                                       
Cash
                    (108 )             (108 )
Stock
    1,474       147,490       (147,631 )             (141 )
       
 
                                       
BALANCE, SEPTEMBER 30, 2008
    39,684     $ 3,968,446     $ 318,811     $ (6,162 )   $ 4,281,095  
       
 
                                       
   
 
                                       
BALANCE, DECEMBER 31, 2008
    39,617     $ 3,961,698     $ 326,446     $ (6,275 )   $ 4,281,869  
Proceeds from sale of capital stock
    869       86,948                       86,948  
Net reclassified to mandatorily redeemable capital stock
    (3,908 )     (390,798 )                     (390,798 )
 
                                       
Comprehensive income:
                                       
Net income
                    219,263               219,263  
Other comprehensive income:
                                       
Net unrealized gain (loss) on available-for-sale securities
                            534       534  
Pension and postretirement benefits
                            624       624  
 
                                   
Total other comprehensive income
                            1,158       1,158  
 
                                       
Total comprehensive income
                                    220,421  
 
                                     
 
                                       
Dividends on capital stock:
                                       
Cash
                    (138,814 )             (138,814 )
       
 
                                       
BALANCE, SEPTEMBER 30, 2009
    36,578     $ 3,657,848     $ 406,895     $ (5,117 )   $ 4,059,626  
       
* Putable
The accompanying notes are an integral part of these financial statements.

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FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
                 
    Nine Months Ended September 30,  
    2009     2008  
OPERATING ACTIVITIES:
               
 
               
Net income
  $ 219,263     $ 180,122  
 
           
 
               
Adjustments to reconcile net income to net cash provided by operating activities:
               
 
               
Depreciation and amortization
    (54,632 )     (5,034 )
Change in net fair value adjustment on derivative and hedging activities
    119,981       (158,744 )
Net fair value adjustment on trading securities
    (401 )     35  
Other adjustments
    (5,913 )     4,854  
Net change in:
               
Accrued interest receivable
    114,417       42,184  
Other assets
    3,334       2,929  
Accrued interest payable
    (103,643 )     (11,524 )
Other liabilities
    24,480       1,883  
 
           
 
               
Total adjustments
    97,623       (123,417 )
 
           
 
               
Net cash provided by operating activities
    316,886       56,705  
 
           
 
               
INVESTING ACTIVITIES:
               
 
               
Net change in:
               
Interest-bearing deposits
    20,145,191       (106,301 )
Federal funds sold
    (5,775,000 )     (370,000 )
Premises, software and equipment
    (2,539 )     (2,430 )
 
               
Trading securities:
               
Net increase in short-term
    (2,248,088 )     -  
Proceeds from long-term
    246       474  
 
               
Available-for-sale securities:
               
Net increase in short-term
    (3,213,220 )     -  
Purchases of long-term
    -       (28,755 )
 
               
Held-to-maturity securities:
               
Net (increase) decrease in short-term
    (661 )     754,893  
Net decrease in other FHLBanks
    6       -  
Proceeds from long-term
    3,145,943       1,666,727  
Purchases of long-term
    (2,706,091 )     (2,843,871 )
 
               
Advances:
               
Proceeds
    316,153,047       1,328,105,277  
Made
    (300,605,516 )     (1,337,731,164 )
 
               
Mortgage loans held for portfolio:
               
Principal collected
    2,287,146       1,081,155  
Purchases
    (3,390,764 )     (689,489 )
 
           
 
               
Net cash provided by (used in) investing activities
    23,789,700       (10,163,484 )
 
           
The accompanying notes are an integral part of these financial statements.

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(continued from previous page)
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
                 
    Nine Months Ended September 30,  
    2009     2008  
 
               
FINANCING ACTIVITIES:
               
 
               
Net increase in deposits and pass-through reserves
  $ 468,187     $ 320,855  
Net (payments) proceeds on derivative contracts with financing elements
    (112,730 )     228,879  
 
               
Net proceeds from issuance of Consolidated Obligations:
               
Discount Notes
    493,773,421       719,677,329  
Bonds
    26,541,073       29,537,672  
Bonds transferred from other FHLBanks
    -       271,988  
 
               
Payments for maturing and retiring Consolidated Obligations:
               
Discount Notes
    (513,868,108 )     (712,084,138 )
Bonds
    (27,711,910 )     (28,239,184 )
 
               
Proceeds from issuance of capital stock
    86,948       355,817  
Payments for redemption of mandatorily redeemable capital stock
    (414,292 )     (3 )
Cash dividends paid
    (138,814 )     (108 )
 
           
 
               
Net cash (used in) provided by financing activities
    (21,376,225 )     10,069,107  
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    2,730,361       (37,672 )
Cash and cash equivalents at beginning of the period
    2,867       52,606  
 
           
 
               
Cash and cash equivalents at end of the period
  $ 2,733,228     $ 14,934  
 
           
 
               
Supplemental Disclosures:
               
Interest paid
  $ 1,189,466     $ 2,214,574  
 
           
AHP payments, net
  $ 22,443     $ 20,806  
 
           
REFCORP assessments paid
  $ 53,498     $ 45,046  
 
           
The accompanying notes are an integral part of these financial statements.

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FEDERAL HOME LOAN BANK OF CINCINNATI
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Background Information
The Federal Home Loan Bank of Cincinnati (the FHLBank), a federally chartered corporation, is one of 12 District Federal Home Loan Banks (FHLBanks). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The FHLBank is regulated by the Federal Housing Finance Agency (Finance Agency).
Note 1— Basis of Presentation
The accompanying interim financial statements of the FHLBank have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates. These assumptions and estimates affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ from these estimates. The interim financial statements presented are unaudited, but they include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial condition, results of operations, and cash flows for such periods. These financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with the audited financial statements and notes included in the FHLBank’s annual report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission (SEC). Results for the three and nine months ended September 30, 2009 are not necessarily indicative of operating results for the full year.
The FHLBank has evaluated subsequent events for potential recognition or disclosure through the issuance of these financial statements, which occurred on November 12, 2009, and believes there have been no material subsequent events requiring additional disclosure or recognition in these financial statements.
Note 2—Recently Issued Accounting Standards and Interpretations
Fair Value Measurements and Disclosures — Measuring Liabilities at Fair Value. On August 28, 2009, the Financial Accounting Standards Board (FASB) issued amended guidance for the fair value measurement of liabilities. The update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: (1) a valuation technique that uses: (a) the quoted price of the identical liability when traded as an asset or (b) quoted prices for similar liabilities or for similar liabilities when traded as assets; or (2) another valuation technique that is consistent with the principles of fair value measurements. This guidance is effective for the first reporting period (including interim periods) beginning after issuance (October 1, 2009 for the FHLBank). The FHLBank does not believe that the adoption of this guidance will have a material effect on its financial condition, results of operations or cash flows.
Codification of Accounting Standards. On June 30, 2009, the FASB established the FASB Accounting Standards Codification (ASC) as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The ASC does not change current GAAP; rather, its intent is to organize all accounting literature by topic in one place in order to enable users to quickly identify appropriate GAAP. The ASC is effective for interim and annual periods ending after September 15, 2009. The FHLBank adopted the ASC for the period ending September 30, 2009. The FHLBank’s adoption of the ASC did not have a material effect on its financial condition, results of operations or cash flows.
Accounting for Transfers of Financial Assets. On June 12, 2009, the FASB issued guidance which is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. The guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the FHLBank), for interim periods within that first annual reporting period and for interim and annual reporting periods

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thereafter. Earlier application is prohibited. The FHLBank does not believe that the adoption of this guidance will have a material effect on its financial condition, results of operations or cash flows.
Recognition and Presentation of Other-Than-Temporary Impairments. On April 9, 2009, the FASB issued guidance amending the other-than-temporary impairment guidance in U.S. GAAP for debt securities. This “other-than-temporary impairment” guidance clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired and changes the presentation and calculation of the other-than-temporary impairment on debt securities recognized in earnings in the financial statements. The guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairment of equity securities. However, it expands and increases the frequency of existing disclosures about other-than-temporary impairment for both debt and equity securities and requires new disclosures to help users of financial statements understand the significant inputs used in determining a credit loss, as well as a rollforward of that amount each period.
If the fair value of a debt security is less than its amortized cost basis at the measurement date, an entity is required to assess whether (a) it has the intent to sell the debt security, or (b) it is more likely than not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an other-than-temporary impairment on the security must be recognized.
In instances in which a determination is made that a credit loss (the difference between the present value of the cash flows expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis, this guidance changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. In these instances, the impairment is separated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in other comprehensive income. Subsequent non-other-than-temporary impairment related increases and decreases in the fair value of available-for-sale securities are included in other comprehensive income. The other-than-temporary impairment recognized in other comprehensive income for debt securities classified as held-to-maturity is amortized over the remaining life of the debt security as an increase in the carrying value of the security (with no effect on earnings unless the security is subsequently sold or there is additional other-than-temporary impairment related to credit loss recognized).
This “other-than-temporary impairment” guidance is effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted. When adopting this guidance, an entity is required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the non-credit component of any previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income if the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis.
The FHLBank elected to adopt this “other-than-temporary impairment” guidance as of January 1, 2009. Adoption did not affect the FHLBank’s financial condition, results of operations or cash flows, nor did it require the FHLBank to record a cumulative effect adjustment, since the FHLBank did not consider any investments to be other-than-temporarily impaired.

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Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. On April 9, 2009, the FASB issued guidance which clarifies the approach to and provides additional factors to consider in estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted. As required, the FHLBank adopted this guidance as of January 1, 2009 when it adopted the “other-than-temporary impairment” guidance. The adoption of this guidance did not affect the FHLBank’s financial condition, results of operations or cash flows.
Interim Disclosures about Fair Value of Financial Instruments. On April 9, 2009, the FASB issued guidance to require disclosures about the fair value of financial instruments, including disclosure of the method(s) and significant assumptions used to estimate the fair value of financial instruments, in interim financial statements as well as in annual financial statements. Previously, these disclosures were required only in annual financial statements. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. Early adoption of this guidance was permitted in conjunction with the early adoption of the “other-than-temporary impairment” guidance and “fair value measurement” guidance. In periods after initial adoption, this guidance requires comparative disclosures only for periods ending subsequent to initial adoption and does not require earlier periods to be disclosed for comparative purposes at initial adoption. The FHLBank elected to adopt this guidance as of January 1, 2009, which resulted in increased interim financial statement disclosures.

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Note 3—Trading Securities
Major Security Types. Trading securities as of September 30, 2009 and December 31, 2008 were as follows (in thousands):
                 
    September 30,   December 31,
    2009     2008  
    Estimated     Estimated  
      Fair Value         Fair Value    
 
               
Government-sponsored enterprises*
  $ 2,249,755     $ -  
Mortgage-backed securities:
               
Other U.S. obligation residential
mortgage-backed securities **
    2,813       2,985  
 
           
 
               
Total
  $ 2,252,568     $ 2,985  
 
           
*   Consists of debt securities issued or guaranteed by Federal Home Loan Mortgage Corporation (Freddie Mac), which are not obligations of the U.S. government.
 
**   Consists of Government National Mortgage Association (Ginnie Mae) securities.
Net gain (loss) on trading securities for the three months ended September 30, 2009 and 2008 included changes in net unrealized gain (loss) (in thousands) of $179 and $(22), respectively, for securities held on September 30, 2009 and 2008. Net gain (loss) on trading securities for the nine months ended September 30, 2009 and 2008 included changes in net unrealized gain (loss) (in thousands) of $401 and $(35), respectively, for securities held on September 30, 2009 and 2008.
Note 4—Available-for-Sale Securities
Major Security Types. Available-for-sale securities as of September 30, 2009 and December 31, 2008 were as follows (in thousands):
                                 
    September 30, 2009  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     (Losses)     Value  
       
 
                               
Certificates of deposit
  $  5,725,000     $ 146     $ (70 )   $  5,725,076  
 
                       
                                 
    December 31, 2008  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     (Losses)     Value  
       
 
                               
Certificates of deposit and bank notes
  $  2,512,088     $ 93     $ (551 )   $  2,511,630  
 
                       
All securities outstanding with gross unrealized losses at September 30, 2009 have been in a continuous unrealized loss position for less than 12 months.

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Redemption Terms. The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at the dates indicated are shown below (in thousands).
                                 
    September 30, 2009     December 31, 2008  
            Estimated             Estimated  
    Amortized     Fair     Amortized     Fair  
Year of Maturity   Cost     Value     Cost     Value  
         
 
                               
Due in one year or less
  $ 5,725,000     $ 5,725,076     $ 2,512,088     $ 2,511,630  
 
                       
Interest Rate Payment Terms. The following table details additional interest rate payment terms for investment securities classified as available-for-sale as of September 30, 2009 and December 31, 2008 (in thousands):
                   
  September 30, 2009   December 31, 2008
 
                 
Amortized cost of available-for-sale securities:
                 
Fixed-rate
  $ 5,725,000       $ 2,512,088  
 
             
Realized Gains and Losses. There were no sales of available-for-sale securities for the nine months ended September 30, 2009 or 2008.

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Note 5—Held-to-Maturity Securities
Major Security Types. Held-to-maturity securities as of September 30, 2009 and December 31, 2008 were as follows (in thousands):
                                 
    September 30, 2009  
            Gross     Gross        
            Unrecognized     Unrecognized        
    Amortized     Holding     Holding     Estimated  
    Cost (1)     Gains     (Losses)     Fair Value  
Government-sponsored enterprises *
  $ 26,668     $ 16     $ -     $ 26,684  
State or local housing agency obligations
    11,185       -       (413 )     10,772  
Mortgage-backed securities:
                               
Other U.S. obligation residential mortgage-backed securities **
    2,617       4       -       2,621  
Government-sponsored enterprise residential mortgage-backed securities ***
    12,220,789       482,595       (4,025 )     12,699,359  
Private-label residential mortgage-backed securities
    210,636       -       (2,299 )     208,337  
 
                       
 
                               
Total mortgage-backed securities
    12,434,042       482,599       (6,324 )     12,910,317  
 
                       
 
                               
Total
  $ 12,471,895     $ 482,615     $ (6,737 )   $ 12,947,773  
 
                       
                                 
    December 31, 2008  
            Gross     Gross        
            Unrecognized     Unrecognized        
    Amortized     Holding     Holding     Estimated  
    Cost (1)     Gains     (Losses)     Fair Value  
Government-sponsored enterprises *
  $ 26,012     $ 38     $ -     $ 26,050  
State or local housing agency obligations
    12,080       -       (536 )     11,544  
Mortgage-backed securities:
                               
Other U.S. obligation residential mortgage-backed securities **
    9,103       -       (3 )     9,100  
Government-sponsored enterprise residential mortgage-backed securities ***
    12,552,810       301,671       (1,138 )     12,853,343  
Private-label residential mortgage-backed securities
    304,195       -       (40,895 )     263,300  
 
                       
 
                               
Total mortgage-backed securities
    12,866,108       301,671       (42,036 )     13,125,743  
 
                       
 
                               
Total
  $ 12,904,200     $ 301,709     $ (42,572 )   $ 13,163,337  
 
                       
(1)   Carrying value equals amortized cost.
 
*   Consists of debt securities issued or guaranteed by Freddie Mac and/or Federal National Mortgage Association (Fannie Mae), which are not obligations of the U.S. government.
 
**   Consists of Ginnie Mae securities.
 
***   Consists of securities issued or guaranteed by Freddie Mac and/or Fannie Mae, which are not obligations of the U.S. government.
The FHLBank’s mortgage-backed security investments consist of senior classes of agency guaranteed securities, government-sponsored enterprise securities, and private-label prime residential mortgage-backed securities. The FHLBank’s investments in mortgage-backed securities must be triple-A rated at the time of purchase.
Investments in government-sponsored enterprise securities, specifically debentures issued by Fannie Mae and Freddie Mac, have been affected by investor concerns regarding the adequacy of those entities’ capital levels to offset expected credit losses from declining home prices and increasing delinquencies. The Housing and Economic Recovery Act (HERA) contains provisions allowing the U.S. Treasury Department to provide support to Fannie Mae and Freddie Mac. Additionally, in

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September 2008, the U.S. Treasury and the Finance Agency announced that Fannie Mae and Freddie Mac had been placed into conservatorship, with the Finance Agency named as conservator. The Finance Agency is acting as the conservator of Fannie Mae and Freddie Mac in an attempt to stabilize their financial condition and their ability to support the secondary mortgage market.
The FHLBank has increased exposure to the risk of loss on its investments in mortgage-backed securities when the loans backing the mortgage-backed securities exhibit high rates of delinquency and foreclosure, and when there are losses on the sale of foreclosed properties. Credit safeguards for the FHLBank’s mortgage-backed securities consist of either payment guarantees of principal and interest in the case of U.S. government-guaranteed mortgage-backed securities and government-sponsored enterprise mortgage-backed securities, or credit enhancements for residential mortgage-backed securities issued by entities other than government-sponsored enterprises (private-label mortgage-backed securities) in the form of subordinate tranches in a security structure that absorb the losses before the security purchased by the FHLBank takes a loss. Since the surety of the FHLBank’s private-label mortgage-backed securities holdings relies on credit enhancements and the quality of the underlying loan collateral, the FHLBank analyzes these investments on an ongoing basis in an effort to determine whether the credit enhancement associated with each security is sufficient to protect against potential losses of principal and/or interest on the underlying mortgage loans. The FHLBank has not historically used monoline insurance as a form of credit enhancement for mortgage-backed securities.
The following table summarizes the par value of our six private-label mortgage-backed securities by year of issuance, as well as the weighted-average credit enhancement on the applicable securities as of September 30, 2009 (in thousands, except percentages). The weighted-average credit enhancement is the percent of protection in place to absorb losses of principal that could occur within the specified senior tranches.
                                         
    As of September 30, 2009
                            Percent   Serious
Private-Label           Unrealized     Investment     Average Credit   Delinquency
Mortgage-Backed Securities   Par     (Losses)     Rating     Enhancement   Rate (2)
Prime(1) – Year of Securitization
                                       
2003
  $ 210,405     $ (2,299 )   AAA     7.5%       0.54%  
 
                                   
 
                                       
Total
  $ 210,405     $ (2,299 )                        
 
                                   
(1)   As defined by the originator at the time of origination.
 
(2)   Seriously delinquent is defined as loans 60 days or more past due that underlie the securities, all bankruptcies, foreclosures, and real estate owned.

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The following tables summarize the held-to-maturity securities with unrealized losses as of September 30, 2009 and December 31, 2008. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (in thousands).
                                                 
    September 30, 2009  
    Less than 12 Months     12 Months or more     Total  
    Estimated     Gross     Estimated     Gross     Estimated     Gross  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     (Losses)     Value     (Losses)     Value     (Losses)  
                         
State or local housing agency obligations
  $ -     $ -     $ 10,772     $ (413 )   $ 10,772     $ (413 )
Mortgage-backed securities:
                                               
Government-sponsored enterprise residential mortgage-backed securities *
    746,535       (4,025 )     -       -       746,535       (4,025 )
Private-label residential mortgage- backed securities
    -       -       208,337       (2,299 )     208,337       (2,299 )
                         
 
                                               
Total
  $ 746,535     $ (4,025 )   $ 219,109     $ (2,712 )   $ 965,644     $ (6,737 )
                         
                                                 
    December 31, 2008  
    Less than 12 Months     12 Months or more     Total  
    Estimated     Gross     Estimated     Gross     Estimated     Gross  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     (Losses)     Value     (Losses)     Value     (Losses)  
                         
State or local housing agency obligations
  $ 11,544     $ (536 )   $ -     $ -     $ 11,544     $ (536 )
Mortgage-backed securities:
                                               
Other U.S. obligation residential mortgage-backed securities **
    9,100       (3 )     -       -       9,100       (3 )
Government-sponsored enterprise residential mortgage-backed securities *
    171,811       (1,138 )     -       -       171,811       (1,138 )
Private-label residential mortgage- backed securities
    -       -       263,300       (40,895 )     263,300       (40,895 )
                         
 
                                               
Total
  $ 192,455     $ (1,677 )   $ 263,300     $ (40,895 )   $ 455,755     $ (42,572 )
                         
*   Consists of securities issued or guaranteed by Freddie Mac and/or Fannie Mae, which are not obligations of the U.S. government.
 
**   Consists of Ginnie Mae securities.
Redemption Terms. The amortized cost and estimated fair value of held-to-maturity securities at the dates indicated by year of contractual maturity are shown below (in thousands). Expected maturities of some securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
                                 
  September 30, 2009     December 31, 2008  
  Amortized     Estimated     Amortized     Estimated  
Year of Maturity Cost (1)     Fair Value     Cost (1)     Fair Value  
Other than mortgage-backed securities:
                               
Due in 1 year or less
  $ 26,668     $ 26,684     $ 26,012     $ 26,050  
Due after 1 year through 5 years
    -       -       -       -  
Due after 5 years through 10 years
    8,020       7,765       5       5  
Due after 10 years
    3,165       3,007       12,075       11,539  
 
                       
 
                               
Total other
    37,853       37,456       38,092       37,594  
 
                       
 
                               
Mortgage-backed securities
    12,434,042       12,910,317       12,866,108       13,125,743  
 
                       
 
                               
Total
  $ 12,471,895     $ 12,947,773     $ 12,904,200     $ 13,163,337  
 
                       
(1)   Carrying value equals amortized cost.

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The amortized cost of the FHLBank’s mortgage-backed securities classified as held-to-maturity includes net discounts (in thousands) of $10,913 and $27,521 at September 30, 2009 and December 31, 2008.
Interest Rate Payment Terms. The following table details additional interest rate payment terms for investment securities classified as held-to-maturity at September 30, 2009 and December 31, 2008 (in thousands):
                        
  September 30, 2009   December 31, 2008
Amortized cost of held-to-maturity securities other than mortgage-backed securities:
                 
Fixed-rate
  $ 34,688       $ 34,722  
Variable-rate
    3,165         3,370  
 
             
 
                 
Total other
    37,853         38,092  
 
             
Amortized cost of held-to-maturity mortgage-backed securities:
                 
Pass-through securities:
                 
Fixed-rate
    8,600,052         7,443,417  
Collateralized mortgage obligations:
                 
Fixed-rate
    3,833,990         5,422,691  
 
             
 
                 
Total mortgage-backed securities
    12,434,042         12,866,108  
 
             
 
                 
Total
  $     12,471,895       $     12,904,200  
 
             
The FHLBank did not sell any securities out of its held-to-maturity portfolio during the year ended December 31, 2008.
The FHLBank sold securities out of its held-to-maturity portfolio during the nine months ended September 30, 2009, each of which had less than 15 percent of the acquired principal outstanding at the time of the sale. Such sales are considered as maturities for the purposes of security classification. The FHLBank realized (in thousands) $5,943 in gross gains and no gross losses on these sales during the nine months ended September 30, 2009.
Note 6—Other-Than-Temporary Impairment Analysis
The FHLBank evaluates its individual available-for-sale and held-to-maturity investment securities holdings in an unrealized loss position for other-than-temporary impairment on a quarterly basis. As part of its securities’ evaluation for other-than-temporary impairment, the FHLBank considers its intent to sell each debt security and whether it is more likely than not that the FHLBank will be required to sell the security before its anticipated recovery. If either of these conditions is met, the FHLBank recognizes an other-than-temporary impairment in earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities in unrealized loss positions that meet neither of these conditions, the FHLBank performs analyses to determine if any of these securities are other-than-temporarily impaired.
For its government-sponsored enterprise residential mortgage-backed securities, the FHLBank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLBank from losses based on current expectations. As a result, the FHLBank has determined that, as of September 30, 2009, all of the gross unrealized losses on its government-sponsored enterprise mortgage-backed securities are temporary as the declines in market value of these securities are not attributable to credit quality. Furthermore, the FHLBank does not intend to sell the investments, and it is not more likely than not that the FHLBank will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLBank does not consider any of these investments to be other-than-temporarily impaired at September 30, 2009.
Beginning with the third quarter of 2009, the FHLBank assessed whether the entire amortized cost bases of the private-label residential mortgage-backed securities would be recovered by initially selecting all private-label mortgage-backed securities in an unrealized loss position for cash flow analysis. For certain private-label mortgage-backed securities where underlying collateral data are not available, alternative procedures, such as a screening process, are used to assess these securities for other-than-temporary impairment. Prior to the third quarter of 2009, the FHLBank only performed a cash flow analysis if an initial screening process revealed conditions (i.e., a likely credit loss) suggesting that a detailed cash flow analysis was required. The FHLBank used a screening process for two securities for which underlying collateral data was not available.

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The FHLBank performs cash flow analyses for securities in which underlying loan collateral data is available by using two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the FHLBank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which is based upon an assessment of the individual housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget. As currently defined, a CBSA must contain at least one urban area with a population of 10,000 or more people. The FHLBank’s housing price forecast assumed CBSA level current-to-trough home price declines ranging from 0 percent to 20 percent over the next 9 to 15 months. Thereafter, home prices are projected to remain flat in the first six months, before increasing 0.5 percent in the next six months, 3 percent in the second year and 4 percent in each subsequent year.
The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach described above reflects a best estimate of the present value of cash flows expected to be collected.
As a result of the evaluation, the FHLBank believes that it will recover the entire amortized cost basis in its private-label residential mortgage-backed securities. Additionally, because the FHLBank does not intend to sell such securities nor is it more likely than not that the FHLBank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis, it did not consider the private-label residential mortgage-backed securities to be other-than-temporarily impaired at September 30, 2009.
The FHLBank also reviewed its available-for-sale securities and the remainder of its held-to-maturity securities that have experienced unrealized losses at September 30, 2009 and determined that the unrealized losses were temporary, based on the creditworthiness of the issuers and the related collateral characteristics and that the FHLBank will recover its entire amortized cost basis. Additionally, because the FHLBank does not intend to sell its securities nor is it more likely than not that the FHLBank will be required to sell the securities before recovery, it did not consider the investments to be other-than-temporarily impaired at September 30, 2009.

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Note 7—Advances
Redemption Terms. At September 30, 2009 and December 31, 2008, the FHLBank had Advances outstanding, including Affordable Housing Program (AHP) Advances (see Note 12), at interest rates ranging from 0.00 percent to 9.75 percent, as summarized below (dollars in thousands). Advances with interest rates of 0.00 percent are AHP-subsidized Advances.
                                 
    September 30, 2009   December 31, 2008
            Weighted           Weighted
            Average           Average
            Interest           Interest
Year of Contractual Maturity       Amount         Rate       Amount         Rate
 
                               
Overdrawn demand deposit accounts
  $ 349       0.19 %   $ 82       0.46 %
 
                               
Due in 1 year or less
    10,021,156       1.89       19,453,340       2.66  
Due after 1 year through 2 years
    3,704,579       3.52       7,027,588       3.29  
Due after 2 years through 3 years
    9,550,936       2.38       5,759,670       2.51  
Due after 3 years through 4 years
    3,689,743       1.85       8,022,345       3.36  
Due after 4 years through 5 years
    1,135,118       2.88       2,955,172       2.95  
Thereafter
    9,152,252       2.33       9,580,509       3.50  
 
                           
 
                               
Total par value
    37,254,133       2.31       52,798,706       3.00  
 
                               
Commitment fees
    (1,125 )             (1,160 )        
Discount on AHP Advances
    (30,863 )             (33,316 )        
Premiums
    4,477               4,664          
Discount
    (7,934 )             (6,689 )        
Hedging adjustments
    863,368               1,153,767          
 
                           
 
                               
Total
  $ 38,082,056             $ 53,915,972          
 
                           
The FHLBank offers Advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable Advances). Other Advances may only be prepaid subject to a fee to the FHLBank (prepayment fee) that makes the FHLBank financially indifferent to the prepayment of the Advance. At September 30, 2009 and December 31, 2008, the FHLBank had callable Advances (in thousands) of $14,304,834 and $21,634,101.
The following table summarizes Advances at the dates indicated by year of contractual maturity or next call date for callable Advances (in thousands):
                                 
Year of Contractual Maturity   September 30,     Percentage   December 31,     Percentage
or Next Call Date   2009     of Total   2008     of Total
 
                               
Overdrawn demand deposit accounts
  $ 349       - %   $ 82       - %
 
                               
Due in 1 year or less
    20,404,103       55       32,026,608       61  
Due after 1 year through 2 years
    3,397,005       9       6,434,692       12  
Due after 2 years through 3 years
    6,072,336       16       2,276,596       4  
Due after 3 years through 4 years
    1,468,998       4       6,019,345       11  
Due after 4 years through 5 years
    955,490       3       968,120       2  
Thereafter
    4,955,852       13       5,073,263       10  
 
                           
 
                               
Total par value
  $ 37,254,133       100 %   $ 52,798,706       100 %
 
                           
The FHLBank also offers putable Advances. With a putable Advance, the FHLBank effectively purchases a put option from the member that allows the FHLBank to terminate the Advance at predetermined dates. The FHLBank normally would exercise its option when interest rates increase relative to contractual rates. At September 30, 2009 and December 31, 2008, the FHLBank had putable Advances outstanding totaling (in thousands) $7,045,350 and $6,981,250.

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Through December 2005, the FHLBank offered convertible Advances. At September 30, 2009 and December 31, 2008, the FHLBank had convertible Advances outstanding totaling (in thousands) $3,230,700 and $3,478,700.
The following table summarizes Advances at the dates indicated by year of contractual maturity or next put/convert date for putable/convertible Advances (in thousands):
                                 
Year of Contractual Maturity   September 30,     Percentage   December 31,     Percentage
or Next Put/Convert Date   2009     of Total   2008     of Total
 
                               
Overdrawn demand deposit accounts
  $ 349       - %   $ 82       - %
 
                               
Due in 1 year or less
    18,582,606       49.9       28,142,090       53.3  
Due after 1 year through 2 years
    3,116,779       8.4       6,735,288       12.7  
Due after 2 years through 3 years
    6,008,036       16.1       5,153,270       9.8  
Due after 3 years through 4 years
    3,284,243       8.8       4,341,845       8.2  
Due after 4 years through 5 years
    911,418       2.4       2,788,772       5.3  
Thereafter
    5,350,702       14.4       5,637,359       10.7  
 
                           
 
                               
Total par value
  $ 37,254,133       100.0 %   $ 52,798,706       100.0 %
 
                           
The FHLBank has never experienced a credit loss on an Advance to a member. Based upon the collateral held as security for its Advances and the repayment history of the FHLBank’s Advances, management believes that an allowance for credit losses on Advances is unnecessary.
The following table shows Advance balances at the dates indicated to members holding five percent or more of total Advances and includes any known affiliates of these members that are members of the FHLBank (dollars in millions):
                                         
September 30, 2009   December 31, 2008
    Principal     % of Total           Principal     % of Total
 
                                       
U.S. Bank, N.A.
  $ 10,315       28 %  
U.S. Bank, N.A.
  $ 14,856       28 %
National City Bank
    4,409       12    
National City Bank
    6,435       12  
Fifth Third Bank
    2,038       5    
Fifth Third Bank
    5,639       11  
 
                                   
 
                                       
Total
  $ 16,762       45 %  
Total
  $ 26,930       51 %
 
                                   
Interest Rate Payment Terms. The following table details additional interest rate payment terms for Advances at the dates indicated (in thousands):
                                 
    September 30, 2009   December 31, 2008
    Amount     % of Total   Amount     % of Total
Par amount of Advances:
                               
Fixed-rate
  $ 18,452,950       50 %   $ 24,501,522       46 %
Variable-rate
    18,801,183       50       28,297,184       54  
 
                       
 
                               
Total
  $ 37,254,133       100 %   $ 52,798,706       100 %
 
                       
Prepayment Fees. The FHLBank records prepayment fees received from members on prepaid Advances net of any associated fair-value hedging adjustments on those Advances. The net amount of prepayment fees is reflected as interest income in the Statements of Income. Gross Advance prepayment fees received from members (in thousands) were $4,791 and $293 for the three months ended September 30, 2009 and 2008, respectively, and $10,662 and $2,538 for the nine months ended September 30, 2009 and 2008, respectively.

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Note 8—Mortgage Loans Held for Portfolio, Net
The following table presents information at the dates indicated on mortgage loans held for portfolio (in thousands):
                   
  September 30, 2009   December 31, 2008
Real Estate:
                 
Fixed rate medium-term single-family mortgages (1)
  $ 1,428,249       $ 1,177,689  
Fixed rate long-term single-family mortgages
    8,221,896         7,412,329  
 
             
 
                 
Subtotal fixed rate single-family mortgages
    9,650,145         8,590,018  
 
                 
Premiums
    99,946         61,390  
Discounts
    (9,616 )       (9,934 )
Hedging basis adjustments
    (4,226 )       (9,601 )
 
             
 
                 
Total
  $ 9,736,249       $ 8,631,873  
 
             
(1)   Medium-term is defined as a term of 15 years or less.
The following table details the par value of mortgage loans held for portfolio outstanding at the dates indicated (in thousands):
                   
  September 30, 2009   December 31, 2008
 
                 
Government-guaranteed/insured loans
  $ 1,483,166       $ 1,396,411  
Conventional loans
    8,166,979         7,193,607  
 
             
 
                 
Total par value
  $ 9,650,145       $ 8,590,018  
 
             
The conventional mortgage loans are supported by primary and supplemental mortgage insurance and the Lender Risk Account in addition to the associated property as collateral. The following table presents changes in the Lender Risk Account for the nine months ended September 30, 2009 (in thousands):
         
Lender Risk Account at December 31, 2008
  $ 48,782  
Additions
    12,272  
Claims
    (1,094 )
Scheduled distributions
    (2,760 )
 
     
 
       
Lender Risk Account at September 30, 2009
  $ 57,200  
 
     
The FHLBank had no nonaccrual loans at September 30, 2009 and December 31, 2008.
Mortgage loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when, based on current information and events, it is probable that the FHLBank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement. At September 30, 2009 and December 31, 2008, the FHLBank had no mortgage loans that were considered impaired.
The FHLBank has experienced no credit losses on mortgage loans to date and no event has occurred that would cause the FHLBank to believe it will have to absorb any credit losses on these mortgage loans. Accordingly, the FHLBank has not provided any allowances for losses on these mortgage loans.
The following table shows unpaid principal balances at the dates indicated to members supplying five percent or more of total unpaid principal and includes any known affiliates that are members of the FHLBank (dollars in millions):
                                 
    September 30, 2009   December 31, 2008
    Principal   % of Total   Principal   % of Total
 
                               
National City Bank
  $ 3,763       39 %   $ 4,709       55 %
Union Savings Bank
    3,078       32       1,995       23  
Guardian Savings Bank FSB
    809       8       544       6  
 
                           
 
                               
Total
  $ 7,650       79 %   $ 7,248       84 %
 
                           

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Note 9—Derivatives and Hedging Activities
Nature of Business Activity
The FHLBank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and its funding sources which finance these assets.
Consistent with Finance Agency policy, the FHLBank enters into derivatives to manage the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the FHLBank’s risk management objectives and to act as an intermediary between its members and counterparties. Finance Agency Regulations and the FHLBank’s financial management policy prohibit trading in or the speculative use of derivative instruments and limit credit risk arising from these instruments. The FHLBank may only use derivatives to reduce funding costs for Consolidated Obligations and to manage its interest rate risk, mortgage prepayment risk and foreign currency risk positions. Derivatives are an integral part of the FHLBank’s financial management strategy.
The most common ways in which the FHLBank uses derivatives are to:
  §   reduce the interest rate sensitivity and repricing gaps of assets, liabilities, and certain other derivative instruments;
 
  §   manage embedded options in assets and liabilities;
 
  §   reduce funding costs by combining a derivative with a Consolidated Obligation, as the cost of a combined funding structure can be lower than the cost of a comparable Consolidated Obligation Bond;
 
  §   preserve a favorable interest rate spread between the yield of an asset (e.g., an Advance) and the cost of the related liability (e.g., the Consolidated Obligation Bond used to fund the Advance); without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the Advance does not match a change in the interest rate on the Bond; and
 
  §   protect the value of existing asset or liability positions.
Types of Derivatives
The FHLBank’s financial management policy establishes guidelines for its use of derivatives. The FHLBank may enter into interest rate swaps (including callable and putable swaps), swaptions, interest rate cap and floor agreements, calls, puts, futures, and forward contracts to manage its exposure to changes in interest rates.
The FHLBank may use these types of derivatives to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments (such as Advances, and Consolidated Obligations) to achieve risk/return management objectives.
The FHLBank uses either derivative strategies or embedded options in its funding to minimize hedging costs. Interest rate swaps are used to manage interest rate exposures. Swaptions, caps and floors may be used to manage interest rate and volatility exposures.
An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable-rate index for the same period of time. The variable-rate received by the FHLBank in its interest rate swaps is LIBOR.

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Application of Interest Rate Swaps
The FHLBank generally uses derivatives as fair value hedges of underlying financial instruments. However, because the FHLBank uses interest rate swaps when they are considered to be the most cost-effective alternative to achieve the FHLBank’s financial and risk management objectives, it may enter into interest rate swaps that do not necessarily qualify for hedge accounting (economic hedges). The FHLBank re-evaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.
Types of Assets and Liabilities Hedged
The FHLBank documents at inception all relationships between derivatives designated as hedging instruments and the hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities on the Statements of Condition. The FHLBank also formally assesses (both at the hedge’s inception and at least quarterly) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of the hedged items and whether those derivatives may be expected to remain effective in future periods. The FHLBank currently uses regression analyses to assess the effectiveness of its hedges.
Consolidated Obligations – While Consolidated Obligations are the joint and several obligations of the FHLBanks, each FHLBank has Consolidated Obligations for which it is the primary obligor. To date, no FHLBank has ever had to assume or pay the Consolidated Obligations of another FHLBank. The FHLBank enters into derivatives to hedge the interest rate risk associated with its specific debt issuances.
The FHLBank manages the risk arising from changing market prices and volatility of a Consolidated Obligation by matching the cash inflow on a derivative with the cash outflow on the Consolidated Obligation. In addition, the FHLBank requires collateral on derivatives at specified levels correlated to counterparty credit ratings and contractual terms.
For instance, in a typical transaction, fixed-rate Consolidated Obligations are issued for one or more FHLBanks, and the FHLBank simultaneously enters into a matching interest rate swap in which the counterparty pays fixed cash flows to the FHLBank designed to mirror in timing and amount the cash outflows the FHLBank pays on the Consolidated Obligation. The FHLBank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate Advances, typically 3-month LIBOR. These transactions are treated as fair value hedges.
This strategy of issuing Bonds while simultaneously entering into derivatives enables the FHLBank to offer a wider range of attractively priced Advances to its members and may allow the FHLBank to reduce its funding costs. The continued attractiveness of such debt depends on yield relationships between the Bond and the derivative markets. If conditions in these markets change, the FHLBank may alter the types or terms of the Bonds that it issues. By acting in both the capital and the swap markets, the FHLBank can raise funds at lower costs than through the issuance of simple fixed- or variable-rate Consolidated Obligations in the capital markets alone.
Advances – The FHLBank offers a wide array of Advance structures to meet members’ funding needs. These Advances may have maturities up to 30 years with variable or fixed rates and may include early termination features or options. The FHLBank may use derivatives to adjust the repricing and/or options characteristics of Advances in order to more closely match the characteristics of the FHLBank’s funding liabilities. In general, whenever a member executes a fixed-rate Advance or a variable-rate Advance with embedded options, the FHLBank will simultaneously execute a derivative with terms that offset the terms and embedded options, if any, in the Advance. For example, the FHLBank may hedge a fixed-rate Advance with an interest rate swap where the FHLBank pays a fixed-rate coupon and receives a floating-rate coupon, effectively converting the fixed-rate Advance to a floating-rate Advance. These types of hedges are treated as fair value hedges.
When issuing a putable Advance, the FHLBank effectively purchases a put option from the member that allows the FHLBank to put or extinguish the fixed-rate Advance, which the FHLBank normally would exercise when interest rates increase. The FHLBank may hedge these Advances by entering into a cancelable derivative.

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Mortgage Loans – The FHLBank invests in fixed rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. The FHLBank may manage the interest rate and prepayment risks associated with mortgages through a combination of debt issuance and derivatives. The FHLBank issues both callable and noncallable debt and prepayment linked Consolidated Obligations to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLBank is permitted to use derivatives to match the expected prepayment characteristics of the mortgages, although to date it has not done so.

Firm Commitment Strategies – Certain mortgage purchase commitments are considered derivatives. The FHLBank normally hedges these commitments by selling to-be-announced (TBA) mortgage-backed securities for forward settlement. A TBA represents a forward contract for the sale of mortgage-backed securities at a future agreed upon date for an established price. The mortgage purchase commitment and the TBA used in the firm commitment hedging strategy (economic hedge) are recorded as a derivative asset or derivative liability at fair value, with changes in fair value recognized in the current period earnings. When the mortgage purchase commitment derivative settles, the current market value of the commitment is included in the basis of the mortgage loan and amortized accordingly.
Investments – The FHLBank invests in certificates of deposit, bank notes, U.S. agency obligations, government-sponsored enterprise debt securities, mortgage-backed securities, and the taxable portion of state or local housing finance agency obligations, which may be classified as held-to-maturity, available-for-sale or trading securities. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and, possibly, derivatives. The FHLBank may manage the prepayment and interest rate risk by funding investment securities with Consolidated Obligations that have call features or by hedging the prepayment risk with caps or floors, callable swaps or swaptions.
Managing Credit Risk on Derivatives
The FHLBank is subject to credit risk due to nonperformance by counterparties to its derivative agreements. The degree of counterparty risk depends on the extent to which master netting arrangements are included in the contracts to mitigate the risk. The FHLBank manages counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in FHLBank policies and Finance Agency Regulations. Based on credit analyses and collateral requirements at September 30, 2009, the management of the FHLBank does not expect any credit losses on its derivative agreements.
The contractual or notional amount of derivatives reflects the involvement of the FHLBank in the various classes of financial instruments. The notional amount of derivatives does not measure the credit risk exposure of the FHLBank, and the maximum credit exposure of the FHLBank is substantially less than the notional amount. The FHLBank requires collateral agreements on all derivatives, which establish collateral delivery thresholds. The maximum credit risk is the estimated cost of replacing interest rate swaps, forward rate agreements, and mandatory delivery contracts for mortgage loans that have a net positive market value, assuming the counterparty defaults and the related collateral, if any, is of no value to the FHLBank. The FHLBank has not sold or repledged the collateral it received.
As of September 30, 2009 and December 31, 2008, the FHLBank’s maximum credit risk, as defined above, was approximately $44,066,000 and $60,317,000, respectively. These totals include $28,189,000 and $16,145,000 of net accrued interest receivable. In determining maximum credit risk, the FHLBank considers accrued interest receivables and payables, and the legal right to offset derivative assets and liabilities, by counterparty. The FHLBank held $35,202,000 and $43,007,000 of cash as collateral as of September 30, 2009 and December 31, 2008, for net uncollateralized balances of $8,864,000 and $17,310,000, respectively. The FHLBank held no securities as collateral as of September 30, 2009 or December 31, 2008. Additionally, collateral related to derivatives with member institutions includes collateral assigned to the FHLBank, as evidenced by a written security agreement, and held by the member institution for the benefit of the FHLBank.

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Certain of the FHLBank’s interest rate swap contracts contain provisions that require the FHLBank to post additional collateral with its counterparties if there is deterioration in the FHLBank’s credit rating. If the FHLBank’s credit rating were lowered by a major credit rating agency, the FHLBank could be required to deliver additional collateral. The aggregate fair value of all interest rate swaps with credit-risk-related contingent features that were in a liability position at September 30, 2009 was $802,582,000, for which the FHLBank has posted collateral of $532,753,000 in the normal course of business, resulting in a net balance of $269,829,000. If the FHLBank’s credit ratings had been lowered from its current rating to the next lower rating, the FHLBank would have been required to deliver up to an additional $159,422,000 of collateral (at fair value) to its derivatives counterparties at September 30, 2009. However, the FHLBank’s credit ratings have not changed during the previous 12 months.
The FHLBank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. The FHLBank is not a derivative dealer and thus does not trade derivatives for short-term profit.
Financial Statement Effect and Additional Financial Information
The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. As indicated above, the notional amount represents neither the actual amounts exchanged nor the overall exposure of the FHLBank to credit and market risk. Notional values are not meaningful measures of the risks associated with derivatives. The risks of derivatives only can be measured meaningfully on a portfolio basis that takes into account the derivatives, the items being hedged and any offsets between the two.

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The following table summarizes the fair value of the FHLBank’s derivative instruments without the effect of netting arrangements or collateral (in thousands). For purposes of this disclosure, the derivative values include accrued interest on the instruments.
                         
    September 30, 2009  
    Notional              
    Amount of     Derivative     Derivative  
    Derivatives     Assets     Liabilities  
Derivatives designated as fair value hedging instruments:
                       
Interest rate swaps
  $ 27,055,050     $ 192,895     $ (951,893 )
 
                       
Derivatives not designated as hedging instruments:
                       
Interest rate swaps
    396,800       9,019       (9,802 )
Forward rate agreements
    -       -       -  
Mortgage delivery commitments
    126,566       1,265       (13 )
 
                 
Total derivatives not designated as hedging instruments
    523,366       10,284       (9,815 )
 
                 
 
                       
Total derivatives before netting and collateral adjustments
  $ 27,578,416       203,179       (961,708 )
 
                 
 
                       
Netting adjustments
            (159,113 )     159,113  
Cash collateral and related accrued interest
            (35,202 )     532,753  
 
                   
Total collateral and netting adjustments (1)
            (194,315 )     691,866  
 
                   
Derivative assets and derivative liabilities as reported on the Statement of Condition
          $ 8,864     $ (269,842 )
 
                   
                         
    December 31, 2008  
    Notional              
    Amount of     Derivative     Derivative  
    Derivatives     Assets     Liabilities  
Derivatives designated as fair value hedging instruments:
                       
Interest rate swaps
  $ 25,830,900     $ 226,043     $ (1,221,004 )
 
                       
Derivatives not designated as hedging instruments:
                       
Interest rate swaps
    1,976,300       7,632       (13,191 )
Forward rate agreements
    386,000       -       (3,670 )
Mortgage delivery commitments
    917,435       6,282       (153 )
 
                 
Total derivatives not designated as hedging instruments
    3,279,735       13,914       (17,014 )
 
                 
 
                       
Total derivatives before netting and collateral adjustments
  $ 29,110,635       239,957       (1,238,018 )
 
                 
 
                       
Netting adjustments
            (179,640 )     179,640  
Cash collateral and related accrued interest
            (43,007 )     771,902  
 
                   
Total collateral and netting adjustments (1)
            (222,647 )     951,542  
 
                   
Derivative assets and derivative liabilities as reported on the Statement of Condition
          $ 17,310     $ (286,476 )
 
                   
  (1)   Amounts represent the effects of legally enforceable master netting agreements that allow the FHLBank to settle positive and negative positions and of cash collateral held or placed with the same counterparties.

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The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the Statements of Income for the dates indicated (in thousands):
                 
    Three Months Ended September 30,  
    2009     2008  
Derivatives and hedged items in fair value hedging relationships:
               
Interest rate swaps
  $ 3,291     $ 8,974  
 
               
Derivatives not designated as hedging instruments:
               
Economic Hedges:
               
Interest rate swaps
    (1,863 )     1,204  
Forward rate agreements
    (2,807 )     281  
Net interest settlements
    400       (281 )
 
               
Mortgage delivery commitments
    5,825       (285 )
 
           
 
               
Total net gain related to derivatives not designated as hedging instruments
    1,555       919  
 
           
 
               
Net gains on derivatives and hedging activities
  $ 4,846     $ 9,893  
 
           
                 
    Nine Months Ended September 30,  
    2009     2008  
Derivatives and hedged items in fair value hedging relationships:
               
Interest rate swaps
  $ 10,643     $ 10,756  
 
               
Derivatives not designated as hedging instruments:
               
Economic Hedges:
               
Interest rate swaps
    2,169       445  
Forward rate agreements
    339       2,830  
Net interest settlements
    1,138       (293 )
 
               
Mortgage delivery commitments
    (1,492 )     (4,347 )
 
           
 
               
Total net gain (loss) related to derivatives not designated as hedging instruments
    2,154       (1,365 )
 
           
 
               
Net gains on derivatives and hedging activities
  $ 12,797     $ 9,391  
 
           

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The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank’s net interest income for the dates indicated (in thousands):
                                                             
    Three Months Ended September 30,  
                            Effect of  
      Gain/(Loss)     Gain/(Loss)   Net Fair   Derivatives on  
      on     on Hedged   Value Hedge   Net Interest  
      Derivative     Item   Ineffectiveness   Income  
2009
                               
Hedged Item Type:
                               
Advances
  $ (53,110 )   $ 56,469     $ 3,359     $ (135,551 )
Consolidated Bonds
    18,881       (18,949 )     (68 )     40,330  
 
                       
 
                               
 
  $ (34,229 )   $ 37,520     $ 3,291     $ (95,221 )
 
                       
 
                               
2008
                               
Hedged Item Type:
                               
Advances
  $ 11,730     $ (17,315 )   $ (5,585 )   $ (63,513 )
Consolidated Bonds
    (8,674 )     23,233       14,559       23,280  
 
                       
 
                               
 
  $ 3,056     $ 5,918     $ 8,974     $ (40,233 )
 
                       
                                                             
    Nine Months Ended September 30,  
                            Effect of  
      Gain/(Loss)     Gain/(Loss)   Net Fair   Derivatives on  
      on     on Hedged   Value Hedge     Net Interest  
      Derivative     Item   Ineffectiveness     Income  
2009
                               
Hedged Item Type:
                               
Advances
  $ 296,853     $ (290,296 )   $ 6,557     $ (376,466 )
Consolidated Bonds
    (36,744 )     40,830       4,086       111,927  
 
                       
 
                               
 
  $ 260,109     $ (249,466 )   $ 10,643     $ (264,539 )
 
                       
 
                               
2008
                               
Hedged Item Type:
                               
Advances
  $ 2,887     $ (8,540 )   $ (5,653 )   $ (136,247 )
Consolidated Bonds
    (6,471 )     22,880       16,409       58,583  
 
                       
 
                               
 
  $ (3,584 )   $ 14,340     $ 10,756     $ (77,664 )
 
                       

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Note 10—Deposits
The FHLBank offers demand and overnight deposits to members and qualifying non-members. In addition, the FHLBank offers short-term interest-bearing deposit programs to members. A member that services mortgage loans may deposit in the FHLBank funds collected in connection with the mortgage loans, pending disbursement of such funds to the owners of the mortgage loans; the FHLBank classifies these items as other interest bearing deposits.
The following table details interest bearing and non-interest bearing deposits with the FHLBank at the dates indicated (in thousands):
                     
    September 30, 2009   December 31, 2008
 
                   
Interest bearing:
                   
Demand and overnight
    $ 1,563,508       $ 1,074,138  
Term
      78,050         94,150  
Other
      23,695         24,305  
 
               
 
                   
Total interest bearing
      1,665,253         1,192,593  
 
               
 
                   
Non-interest bearing:
                   
Other
      4,195         868  
 
               
 
                   
Total non-interest bearing
      4,195         868  
 
               
 
                   
Total deposits
    $ 1,669,448       $ 1,193,461  
 
               
The average interest rates paid on interest bearing deposits were 0.10 percent and 1.79 percent in the three months ended September 30, 2009 and 2008, respectively, and 0.12 percent and 2.18 percent in the nine months ended September 30, 2009 and 2008, respectively.
Aggregate time deposits with a denomination of $100 thousand or more were (in thousands) $77,950 and $94,050 as of September 30, 2009 and December 31, 2008.

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Note 11—Consolidated Obligations
Redemption Terms. The following is a summary of the FHLBank’s participation in Consolidated Bonds outstanding at the dates indicated by year of contractual maturity (dollars in thousands):
                                                           
    September 30, 2009     December 31, 2008  
            Weighted             Weighted  
            Average             Average  
            Interest             Interest  
Year of Contractual Maturity   Amount     Rate     Amount     Rate  
 
                               
Due in 1 year or less
  $ 14,067,600       2.12 %   $ 17,162,400       3.02 %
Due after 1 year through 2 years
    6,899,750       2.30       5,271,000       3.98  
Due after 2 years through 3 years
    5,767,000       3.22       5,316,750       4.03  
Due after 3 years through 4 years
    4,378,450       3.60       3,805,000       4.57  
Due after 4 years through 5 years
    2,534,000       3.85       3,090,450       4.40  
Thereafter
    7,197,000       4.53       7,317,000       5.15  
Index amortizing notes
    216,747       4.99       251,757       4.99  
 
                           
 
                               
Total par value
    41,060,547       3.01       42,214,357       3.89  
 
                               
Premiums
    35,326               35,868          
Discounts
    (29,712 )             (35,726 )        
Deferred net loss on terminated hedges
    659               1,496          
Hedging adjustments
    135,796               176,790          
 
                           
 
                               
Total
  $ 41,202,616             $ 42,392,785          
 
                           
The FHLBank’s Consolidated Bonds outstanding at the dates indicated included (in thousands):
                     
    September 30, 2009   December 31, 2008
Par amount of Consolidated Bonds:
                   
Non-callable
    $ 28,588,947       $ 30,239,957  
Callable
      12,471,600         11,974,400  
 
               
 
                   
Total par value
    $ 41,060,547       $ 42,214,357  
 
               
The following table summarizes Consolidated Bonds outstanding at the dates indicated by year of contractual maturity or next call date (in thousands):
                                 
            Percent           Percent
Year of Contractual Maturity or Next Call Date September 30, 2009   of Total   December 31, 2008   of Total
 
                               
Due in 1 year or less
  $ 24,493,600       60 %   $ 28,372,400       67 %
Due after 1 year through 2 years
    7,884,750       19       4,786,000       11  
Due after 2 years through 3 years
    3,112,000       8       2,396,750       6  
Due after 3 years through 4 years
    2,513,450       6       2,430,000       6  
Due after 4 years through 5 years
    1,193,000       3       1,815,450       4  
Thereafter
    1,647,000       4       2,162,000       5  
Index amortizing notes
    216,747       -       251,757       1  
 
                       
 
                               
Total par value
  $ 41,060,547       100 %   $ 42,214,357       100 %
 
                       

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Interest Rate Payment Terms. The following table details Consolidated Bonds by interest rate payment type (in thousands):
                     
    September 30, 2009   December 31, 2008
Par value of Consolidated Bonds:
                   
Fixed-rate
    $ 39,289,947       $ 35,789,957  
Variable-rate
      1,770,600         6,424,400  
 
               
 
                   
Total par value
    $ 41,060,547       $ 42,214,357  
 
               
Consolidated Discount Notes. Consolidated Discount Notes are issued to raise short-term funds. Discount Notes are Consolidated Obligations with original maturities up to one year. These notes are issued at less than their face amount and redeemed at par value when they mature. The FHLBank’s participation in Consolidated Discount Notes was as follows (dollars in thousands):
                                                 
                    Weighted Average
    Book Value     Par Value     Interest Rate (1)
 
September 30, 2009
  $ 29,169,806     $ 29,173,794       0.16 %
 
                   
December 31, 2008
  $ 49,335,739     $ 49,388,776       0.79 %
 
                   
  (1)   Represents an implied rate.
Note 12—Affordable Housing Program (AHP)
The following table presents changes in the AHP liability for the nine months ended September 30, 2009 (in thousands):
         
Balance at December 31, 2008
  $ 102,615  
Expense (current year additions)
    24,972  
Subsidy uses, net
    (22,443 )
 
     
 
Balance at September 30, 2009
  $ 105,144  
 
     
Note 13—Capital
The following table demonstrates the FHLBank’s compliance with the Finance Agency’s capital requirements at the dates indicated (dollars in thousands):
                                 
    September 30, 2009     December 31, 2008  
    Required     Actual     Required     Actual  
Regulatory capital requirements:
                               
Risk-based capital
  $ 580,517     $ 4,152,158     $ 542,630     $ 4,399,053  
Capital-to-assets ratio
    4.00%     5.39%     4.00%     4.48%
Regulatory capital
  $ 3,079,342     $ 4,152,158     $ 3,928,243     $ 4,399,053  
Leverage capital-to-assets ratio
    5.00%     8.09%     5.00%     6.72%
Leverage capital
  $ 3,849,178     $ 6,228,237     $ 4,910,303     $ 6,598,580  

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As of September 30, 2009 and December 31, 2008, the FHLBank had (in thousands) $87,415 and $110,909 in capital stock classified as mandatorily redeemable capital stock on its Statements of Condition. At the dates indicated, these balances were comprised as follows:
                                 
    September 30, 2009     December 31, 2008  
    Number of           Number of    
    Stockholders   Amount     Stockholders   Amount  
Capital stock subject to mandatory redemption due to:
                               
Withdrawals(1)
    17     $ 87,415       15     $ 110,679  
Other redemptions
    -       -       1       230  
 
                           
 
                               
Total
    17     $ 87,415       16     $ 110,909  
 
                           
  (1)   Withdrawals primarily include members that attain non-member status by merger or acquisition, charter termination, or involuntary termination of membership.
The following table provides the dollar amounts for activities recorded in mandatorily redeemable capital stock for the noted period as follows (in thousands):
         
Balance, December 31, 2008
$   110,909  
Capital stock subject to mandatory redemption reclassified from equity:
       
Withdrawals
    15,182  
Other redemptions
    375,616  
Redemption (or other reduction) of mandatorily redeemable capital stock:
       
Withdrawals
    (38,446 )
Other redemptions
    (375,846 )
 
     
 
       
Balance, September 30, 2009
  $ 87,415  
 
     
The following table shows the amount of mandatorily redeemable capital stock by year of redemption at the dates indicated (in thousands):
                               
Contractual Year of Redemption   September 30, 2009   December 31, 2008
Due in 1 year or less
  $ 5,268     $ 335  
Due after 1 year through 2 years
    8,694       7,043  
Due after 2 years through 3 years
    48,896       7,524  
Due after 3 years through 4 years
    9,335       83,057  
Due after 4 years through 5 years
    15,222       12,950  
 
           
Total par value
  $ 87,415     $ 110,909  
 
           
Capital Concentration. The following table presents holdings of five percent or more of the FHLBank’s total Class B stock, including mandatorily redeemable capital stock, outstanding at the dates indicated and includes stock held by any known affiliates that are members of the FHLBank (dollars in millions):

                                   
September 30, 2009
            Percent
Name   Balance   of Total
     
 
               
U.S. Bank, N.A.
  $ 591       16 %
National City Bank
    404       11  
Fifth Third Bank
    401       11  
The Huntington National Bank
    241       6  
 
             
 
               
Total
  $    1,637       44 %
 
             
                                   
December 31, 2008
            Percent
Name   Balance   of Total
     
 
               
U.S. Bank, N.A.
  $ 841       21 %
National City Bank
    404       10  
Fifth Third Bank
    394       10  
The Huntington National Bank
    241       6  
AmTrust Bank
    223       5  
 
             
 
               
Total
  $    2,103       52 %
 
             


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Note 14—Comprehensive Income
The following table shows the FHLBank’s comprehensive income for the three and nine months ended September 30, 2009 and 2008 (in thousands):
                                        
  Three Months Ended September 30,   Nine Months Ended September 30,
    2009     2008     2009     2008  
 
                                 
Net income
  $      61,489     $      66,092       $ 219,263     $ 180,122  
 
                                 
Other comprehensive income:
                                 
Net unrealized gain (loss) on available-for-sale securities
    510       (1,438 )       534       (1,438 )
Pension and postretirement benefits
    311       129         624       479  
 
                         
Total other comprehensive income
    821       (1,309 )       1,158       (959 )
 
                         
 
                                 
Total comprehensive income
  $ 62,310     $ 64,783       $ 220,421     $ 179,163  
 
                         
Note 15—Employee Retirement Plans
The FHLBank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a tax-qualified defined benefit pension plan. The Plan covers substantially all officers and employees of the FHLBank. Funding and administrative costs of the Pentegra Defined Benefit Plan charged to other operating expenses were $844,000 and $697,000 in the three months ended September 30, 2009 and 2008, respectively, and $2,471,000 and $2,308,000 in the nine months ended September 30, 2009 and 2008, respectively.
The FHLBank also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified defined contribution pension plan. The FHLBank contributes a percentage of the participants’ compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The FHLBank contributed $133,000 and $125,000 to this Plan in the three months ended September 30, 2009 and 2008, respectively, and $591,000 and $520,000 in the nine months ended September 30, 2009 and 2008, respectively.
The FHLBank has a Benefit Equalization Plan (BEP). The BEP is a non-qualified supplemental retirement plan which restores those pension benefits that would be available under the qualified plans (both defined benefit and defined contribution features) were it not for legal limitations on such benefits. The FHLBank also sponsors a fully insured postretirement benefits program that includes health care and life insurance benefits for eligible retirees.
The FHLBank’s contributions to the defined contribution feature of the BEP use the same matching rules as the qualified defined contribution plan discussed above as well as the market related earnings. The FHLBank’s contributions for the three and nine months ended September 30 were (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
 
                               
Matching contributions
  $ 25     $ 26     $ 92     $ 93  
Market related earnings (losses)
    514       (225 )     667       (488 )
 
                       
Net
  $ 539     $ (199 )   $ 759     $ (395 )
 
                       

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Components of the net periodic benefit cost for the defined benefit feature of the BEP and the postretirement benefits plan for the three and nine months ended September 30 were (in thousands):
                                 
    Three Months Ended September 30,  
                    Postretirement  
    BEP     Benefits Plan  
    2009     2008     2009     2008  
Net Periodic Benefit Cost
                               
Service cost
  $ 157     $ 130     $ 14     $ 12  
Interest cost
    337       259       48       46  
Amortization of unrecognized net loss
    311       129       -       -  
 
                       
Net periodic benefit cost
  $ 805     $ 518     $ 62     $ 58  
 
                       
                                 
    Nine Months Ended September 30,  
                    Postretirement  
    BEP     Benefits Plan  
    2009     2008     2009     2008  
Net Periodic Benefit Cost
                               
Service cost
  $ 377     $ 296     $ 43     $ 37  
Interest cost
    884       748       144       136  
Amortization of unrecognized net loss
    624       479       -       -  
 
                       
Net periodic benefit cost
  $ 1,885     $ 1,523     $ 187     $ 173  
 
                       

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Note 16—Segment Information
The FHLBank has identified two primary operating segments based on its method of internal reporting: Traditional Member Finance and the Mortgage Purchase Program. These segments reflect the FHLBank’s two primary Mission Asset Activities and the manner in which they are managed from the perspective of development, resource allocation, product delivery, pricing, credit risk and operational administration. The segments identify the primary ways the FHLBank provides services to member stockholders.
The following tables set forth the FHLBank’s financial performance by operating segment for the three and nine months ended September 30, 2009 and 2008 (in thousands):
                                 
    Three Months Ended September 30,  
    Traditional Member     Mortgage Purchase        
      Finance         Program       Total  
2009
                               
Net interest income
    $ 65,073         $ 26,033            $     91,106  
Other income
      4,112           3,020         7,132  
Other expenses
      12,007           2,172         14,179  
 
                         
 
                               
Income before assessments
      57,178           26,881         84,059  
 
                         
 
                               
Affordable Housing Program
      5,003           2,194         7,197  
REFCORP
      10,435           4,938         15,373  
 
                         
 
                               
Total assessments
      15,438           7,132         22,570  
 
                         
 
                               
Net income
    $ 41,740         $ 19,749       $ 61,489  
 
                         
 
                               
Average assets
    $ 71,248,065         $ 9,807,156       $ 81,055,221  
 
                         
 
                               
Total assets
    $ 67,204,184         $ 9,779,378       $ 76,983,562  
 
                         
 
                               
2008
                               
Net interest income
    $ 73,758         $ 18,210       $ 91,968  
Other income
      12,017           3         12,020  
Other expenses
      12,016           1,815         13,831  
 
                         
 
                               
Income before assessments
      73,759           16,398         90,157  
 
                         
 
                               
Affordable Housing Program
      6,205           1,338         7,543  
REFCORP
      13,510           3,012         16,522  
 
                         
 
                               
Total assessments
      19,715           4,350         24,065  
 
                         
 
                               
Net income
    $ 54,044         $ 12,048       $ 66,092  
 
                         
 
                               
Average assets
    $ 86,100,391         $ 8,610,778       $ 94,711,169  
 
                         
 
                               
Total assets
    $ 88,714,455         $ 8,568,614       $ 97,283,069  
 
                         

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      Nine Months Ended September 30,  
      Traditional Member     Mortgage Purchase        
        Finance         Program       Total  
2009
                                           
Net interest income
      $      218,257         $      94,393       $      312,650  
Other income (loss)
        26,299           (1,142 )       25,157  
Other expenses
        33,033           5,723         38,756  
 
                           
 
                                 
Income before assessments
        211,523           87,528         299,051  
 
                           
 
                                 
Affordable Housing Program
        17,827           7,145         24,972  
REFCORP
        38,739           16,077         54,816  
 
                           
 
                                 
Total assessments
        56,566           23,222         79,788  
 
                           
 
                                 
Net income
      $ 154,957         $ 64,306       $ 219,263  
 
                           
 
                                 
Average assets
      $ 77,593,865         $ 9,602,215       $ 87,196,080  
 
                           
 
                                 
Total assets
      $ 67,204,184         $ 9,779,378       $ 76,983,562  
 
                           
 
                                 
2008
                                 
Net interest income
      $ 203,871         $ 63,995       $ 267,866  
Other income (loss)
        16,588           (1,499 )       15,089  
Other expenses
        31,693           5,358         37,051  
 
                           
 
                                 
Income before assessments
        188,766           57,138         245,904  
 
                           
 
                                 
Affordable Housing Program
        16,088           4,664         20,752  
REFCORP
        34,535           10,495         45,030  
 
                           
 
                                 
Total assessments
        50,623           15,159         65,782  
 
                           
 
                                 
Net income
      $ 138,143         $ 41,979       $ 180,122  
 
                           
 
                                 
Average assets
      $ 84,503,576         $ 8,767,183       $ 93,270,759  
 
                           
 
                                 
Total assets
      $ 88,714,455         $ 8,568,614       $ 97,283,069  
 
                           

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Note 17—Fair Value Disclosures
The FHLBank records derivatives, trading securities and available-for-sale securities at fair value on the Statements of Condition. Fair value is a market-based measurement and is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (an exit price). The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. In order to determine whether a transaction price represents the fair value (or exit price) of an asset or liability, the FHLBank must determine the unit of account, highest and best use, principal or most advantageous market for the asset or liability, and the market participants with whom the transaction would take place. These determinations allow the FHLBank to define the inputs for fair value. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition.
Fair Value Option. The fair value option provides an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not otherwise carried at fair value. It requires a company to display the fair value of those assets and liabilities for which it has chosen to use fair value on the face of the Statements of Condition. If the fair value option is elected, fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in net income. The FHLBank did not elect to record any financial assets or financial liabilities at fair value during the nine months ended September 30, 2009.
Fair Value Hierarchy. The fair value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated and an overall level for the measurement is determined. This overall level is an indication of how market observable the fair value measurement is and defines the level of disclosure. Outlined below is the application of the fair value hierarchy to the FHLBank’s financial assets and financial liabilities that were carried at fair value at September 30, 2009.
Level 1 – defined as those instruments for which inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market is a market in which the transactions for the instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – defined as those instruments for which inputs to the valuation methodology include quoted prices for similar instruments in active markets, and for which inputs are observable, either directly or indirectly, for substantially the full term of the financial instrument. The FHLBank’s trading securities, available-for-sale securities and derivative instruments are considered Level 2 instruments based on the inputs utilized to derive fair value.
Level 3 – defined as those instruments for which inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those supported by little or no market activity or by the entity’s own assumptions.

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The FHLBank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The valuation techniques, inputs, and validation processes (as applicable) utilized by the FHLBank for the assets and liabilities carried at fair value at September 30, 2009 and December 31, 2008 on the Statements of Condition were as follows:
Trading securities: The FHLBank’s trading portfolio consists of discount notes issued by Freddie Mac and mortgage-backed securities issued by Ginnie Mae. Quoted market prices in active markets are not available for these securities. Therefore, the fair value of each discount note is determined using indicative fair values derived from a discounted cash flow methodology using market-observed inputs for the interest rate environment. For mortgage-backed securities, the FHLBank requests prices from four specific third-party vendors, and, depending on the number of prices received for each security, selects a median price as defined by the FHLBank’s methodology. The methodology also incorporates variance thresholds to assist in identifying prices that may require further review. In certain limited instances (i.e., prices remain outside of variance thresholds or there is no price available from the third-party services), the FHLBank could obtain a price from securities dealers or internally model a price that is deemed most appropriate after consideration of all relevant facts and circumstances that would be considered by market participants. The third-party vendors use price indications, which generally utilize processes that could include, but are not limited to, the following market observable components: trader inputs, calculated inputs, matrix development, and evaluation models. The third-party vendors derive the fair value from an option-adjusted spread or discounted cash flow methodology.
Available-for-sale securities: The FHLBank’s available-for-sale portfolio consists of certificates of deposit and bank notes. Quoted market prices in active markets are not available for these securities. Therefore, the fair value of each security is determined using indicative fair values derived from an option-adjusted discounted cash flow methodology using market-observed inputs for the interest rate environment and similar instruments.
The FHLBank performs several validation steps in order to verify the accuracy and reasonableness of these fair values. These steps may include, but are not limited to, a detailed review of instruments with significant periodic price changes and a comparison of the fair values received from multiple third-party sources.
Derivative assets/liabilities: The FHLBank’s derivative assets/liabilities consist of interest rate swaps, to-be-announced mortgage-backed securities and mortgage delivery commitments. The FHLBank’s interest rate swaps are not listed on an exchange. Therefore, the FHLBank determines the fair value of each individual interest rate swap using market value models that use readily observable market inputs as their basis (inputs that are actively quoted and can be validated to external sources). The FHLBank uses a mid-market pricing convention as a practical expedient for fair value measurements within a bid-ask spread. These models reflect the contractual terms of the interest rate swaps, including the period to maturity, and estimate fair value based on the LIBOR swap curve and forward rates at period end and, for agreements containing options, on market-based expectations of future interest rate volatility implied from current market prices for similar options. The estimated fair value uses the standard valuation technique of discounted cash flow analysis.
The FHLBank performs several validation steps to verify the reasonableness of the fair value output generated by the primary market value model. In addition to an annual model validation, the FHLBank prepares a monthly reconciliation of the model’s fair values to estimates of fair values provided by the derivative counterparties and to another third party model. The FHLBank believes these processes have provided a reasonable basis for it to place continued reliance on the derivative fair values generated by the primary model.
The fair value of to-be-announced mortgage-backed securities is based on independent indicative and/or quoted prices generated by market transactions involving comparable instruments. The FHLBank determines the fair value of mortgage delivery commitments using market prices from the TBA/mortgage-backed security market or TBA/Ginnie Mae market and adjusts them to reflect the contractual terms of the mortgage delivery commitments, similar to the mortgage loans held for portfolio process. The adjustments to the market prices are market observable, or can be corroborated with observable market data.
The FHLBank is subject to credit risk in derivatives transactions due to potential nonperformance by the derivatives counterparties. To mitigate this risk, the FHLBank enters into derivatives with highly-rated institutions and executes master netting agreements with its derivative counterparties. In addition, to limit the FHLBank’s net unsecured credit exposure to these counterparties, the FHLBank has entered into bilateral security agreements with all active derivatives dealer counterparties that provide for delivery of collateral at specified levels tied to counterparty credit ratings. The FHLBank has

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evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements at September 30, 2009.
Fair Value on a Recurring Basis. The following table presents for each hierarchy level, the FHLBank’s assets and liabilities that were measured at fair value on its Statements of Condition at the dates indicated (in thousands):
Fair Value Measurements at September 30, 2009 Using:
                            Netting        
                            Adjustment        
                            and Cash        
    Level 1     Level 2     Level 3     Collateral (1)     Total  
Assets
                                       
Trading securities:
                                       
Non mortgage-backed securities government-sponsored
enterprise debt
  $     -     $     2,249,755     $     -     $     -     $     2,249,755  
Other U.S. obligation residential mortgage-backed securities
    -       2,813       -       -       2,813  
Available-for-sale securities:
                                       
Certificates of deposit
    -       5,725,076       -       -       5,725,076  
Derivative assets
    -       203,179       -       (194,315 )     8,864  
 
                             
 
                                       
Total assets at fair value
  $     -     $     8,180,823     $     -     $     (194,315 )   $     7,986,508  
 
                             
 
                                       
Liabilities
                                       
Derivative liabilities
  $     -     $     (961,708 )   $     -     $     691,866     $     (269,842 )
 
                             
 
                                       
Total liabilities at fair value
  $     -     $     (961,708 )   $     -     $     691,866     $     (269,842 )
 
                             
Fair Value Measurements at December 31, 2008 Using:
                            Netting        
                            Adjustment        
                            and Cash        
    Level 1     Level 2     Level 3     Collateral (1)     Total  
Assets
                                       
Trading securities:
                                       
Other U.S. obligation residential mortgage-backed securities
  $     -     $     2,985     $     -     $     -     $     2,985  
Available-for-sale securities:
                                       
Certificates of deposit and bank notes
    -       2,511,630       -       -       2,511,630  
Derivative assets
    -       239,957       -       (222,647 )     17,310  
 
                             
 
                                       
Total assets at fair value
  $     -     $     2,754,572     $     -     $     (222,647 )   $     2,531,925  
 
                             
 
                                       
Liabilities
                                       
Derivative liabilities
  $     -     $     (1,238,018 )   $     -     $     951,542     $     (286,476 )
 
                             
 
                                       
Total liabilities at fair value
  $     -     $     (1,238,018 )   $     -     $     951,542     $     (286,476 )
 
                             
  (1)   Amounts represent the effects of legally enforceable master netting agreements that allow the FHLBank to settle positive and negative positions and of cash collateral held or placed with the same counterparties.
For instruments carried at fair value, the FHLBank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out of a level at fair value in the quarter in which the changes occur.

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Estimated Fair Values. The estimated fair value amounts shown on the following Fair Value Summary Table have been determined by the FHLBank using available market information and the FHLBank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the FHLBank as of September 30, 2009 and December 31, 2008. The estimated fair values reflect the FHLBank’s judgment of how a market participant would estimate the fair values. The Fair Value Summary Table does not represent an estimate of the overall market value of the FHLBank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities. The valuation techniques, inputs, and validation processes (as applicable) utilized by the FHLBank for the assets and liabilities at September 30, 2009 and December 31, 2008 on the Fair Value Summary Table were as follows:
Cash and due from banks: The estimated fair value approximates the recorded book balance.
Interest-bearing deposits and investment securities: The estimated fair value is determined based on each security’s quoted prices, excluding accrued interest, as of the last business day of the period.
Federal funds sold: The estimated fair value of overnight Federal funds approximates the recorded book balance. The estimated fair value of term Federal funds is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for Federal funds with similar terms, as approximated by adding an estimated current spread to the LIBOR swap curve for Federal funds with similar terms. The estimated fair value excludes accrued interest.
Held-to-maturity securities: The estimated fair value for each individual mortgage-backed security and collateralized mortgage obligation is obtained by requesting prices from four specific third-party vendors, and, depending on the number of prices received for each security, selecting a median price as defined by the FHLBank’s methodology. The methodology also incorporates variance thresholds to assist in identifying prices that may require further review. In certain limited instances (i.e., prices remain outside of variance thresholds or there is no price available from the third-party services), the FHLBank could obtain a price from securities dealers or internally model a price that is deemed most appropriate after consideration of all relevant facts and circumstances that would be considered by market participants. The third-party vendors use price indications, which generally utilize processes that could include, but are not limited to, the following market observable components: trader inputs, calculated inputs, matrix development, and evaluation models. The third-party vendors derive the fair value from an option-adjusted spread or discounted cash flow methodology. The estimated fair value excludes accrued interest. The estimated fair value for taxable municipal bonds is determined based on each security’s indicative market price obtained from a third-party vendor excluding accrued interest. The FHLBank uses various techniques to validate the fair values received from third-party vendors for accuracy and reasonableness.
Advances: The FHLBank determines the estimated fair value of Advances by calculating the present value of expected future cash flows from the Advances excluding accrued interest. The discount rates used in these calculations are the replacement rates for Advances with similar terms, as approximated either by adding an estimated current spread to the LIBOR swap curve or by using current indicative market yields, as indicated by the FHLBank’s Advance pricing methodologies for Advances with similar current terms. Advance pricing is determined based on the FHLBank’s rates on Consolidated Obligations. In accordance with Finance Agency Regulations, Advances with a maturity and repricing period greater than six months require a prepayment fee sufficient to make the FHLBank financially indifferent to the borrower’s decision to prepay the Advances. Therefore, the estimated fair value of Advances does not assume prepayment risk.
For swapped option-based Advances, the estimated fair value is determined (independently of the related derivative) by the discounted cash flow methodology based on the LIBOR swap curve and forward rates at the end of the period adjusted for the estimated current spread on new swapped Advances to the swap curve. For swapped Advances with a conversion option, the conversion option is valued by taking into account the LIBOR swap curve and forward rates at the end of the period and the market’s expectations of future interest rate volatility implied from current market prices of similar options.

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Mortgage loans held for portfolio, net: The estimated fair values of mortgage loans are determined based on quoted market prices offered to approved members as indicated by the FHLBank’s Mortgage Purchase Program pricing methodologies for mortgage loans with similar current terms excluding accrued interest. The quoted prices offered to members are based on Fannie Mae price indications on to-be-announced mortgage-backed securities and FHA price indications on government-guaranteed loans; the FHLBank then adjusts these indicative prices to account for particular features of the FHLBank’s Mortgage Purchase Program that differ from the Fannie Mae and FHA securities. These features include, but may not be limited to:
  §   the Mortgage Purchase Program’s credit enhancements;
 
  §   marketing adjustments that reflect the FHLBank’s cooperative business model, and preferences for particular kinds of loans and mortgage note rates.
These prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions.
Accrued interest receivable and payable: The estimated fair value approximates the recorded book value.
Deposits: The FHLBank determines the estimated fair value of FHLBank deposits with fixed rates by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.
Consolidated Obligations: The FHLBank determines the estimated fair value of Discount Notes by calculating the present value of expected future cash flows from the Discount Notes excluding accrued interest. The discount rates used in these calculations are current replacement rates for Discount Notes with similar current terms, as approximated by adding an estimated current spread to the LIBOR swap curve. Each month’s cash flow is discounted at that month’s replacement rate.
The FHLBank determines the estimated fair value of non-callable Consolidated Obligation Bonds (both unswapped and swapped) by calculating the present value of scheduled future cash flows from the bonds excluding accrued interest. The discount rates used in these calculations are estimated current market yields, as indicated by the Office of Finance, for bonds with similar current terms.
The FHLBank determines the estimated fair value of callable Consolidated Obligation Bonds (both unswapped and swapped) by calculating the present value of expected future cash flows from the bonds excluding accrued interest. The estimated fair value is determined by the discounted cash flow methodology based on the LIBOR swap curve and forward rates adjusted for the estimated spread on new callable bonds to the swap curve and based on the market’s expectations of future interest rate volatility implied from current market prices of similar options.
Adjustments may be necessary to reflect the 12 FHLBanks’ credit quality when valuing Consolidated Obligation Bonds measured at fair value. Due to the joint and several liability of Consolidated Obligations, the FHLBank monitors its own creditworthiness and the creditworthiness of the other FHLBanks to determine whether any credit adjustments are necessary in its fair value measurement of Consolidated Obligation Bonds. The credit ratings of the FHLBanks and any changes to these credit ratings are the basis for the FHLBanks to determine whether the fair values of Consolidated Obligation Bonds have been significantly affected during the reporting period by changes in the instrument-specific credit risk. The FHLBank had no adjustment during the nine months ended September 30, 2009.
Mandatorily redeemable capital stock: The fair value of capital subject to mandatory redemption is par value for the dates indicated as indicated by member contemporaneous purchases and sales at par value. FHLBank stock can only be acquired by members at par value and redeemed at par value. FHLBank stock is not traded and no market mechanism exists for the exchange of stock outside the cooperative structure. 
Commitments: The estimated fair value of the FHLBank’s commitments to extend credit is determined using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The estimated fair value of Standby Letters of Credit is based on the present value of fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The estimated fair value of standby bond purchase agreements is based on the present value of the estimated fees taking into account the remaining terms of the agreements.

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Subjectivity of estimates. Estimates of the fair value of Advances with options, mortgage instruments, derivatives with embedded options and bonds with options using the methods described above and other methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speeds, interest rate volatility, distributions of future interest rates used to value options, and discount rates that appropriately reflect market and credit risks. The judgments also include the parameters, methods, and assumptions used in models to value the options. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near term changes.
The carrying values and estimated fair values of the FHLBank’s financial instruments at September 30, 2009 and December 31, 2008 were as follows (in thousands):
FAIR VALUE SUMMARY TABLE
                                 
    September 30, 2009     December 31, 2008  
    Carrying     Estimated     Carrying     Estimated  
Financial Instruments   Value     Fair Value     Value     Fair Value  
 
                               
Assets:
                               
Cash and due from banks
  $ 2,733,228     $ 2,733,228     $ 2,867     $ 2,867  
Interest-bearing deposits
    166       166       19,906,234       19,906,234  
Federal funds sold
    5,775,000       5,775,000       -       -  
Trading securities
    2,252,568       2,252,568       2,985       2,985  
Available-for-sale securities
    5,725,076       5,725,076       2,511,630       2,511,630  
Held-to-maturity securities
    12,471,895       12,947,773       12,904,200       13,163,337  
Advances
    38,082,056       38,298,971       53,915,972       54,150,919  
Mortgage loans held for portfolio, net
    9,736,249       10,062,477       8,631,873       8,888,577  
Accrued interest receivable
    161,166       161,166       275,560       275,560  
Derivative assets
    8,864       8,864       17,310       17,310  
 
                               
Liabilities:
                               
Deposits
    (1,669,448 )     (1,669,669 )     (1,193,461 )     (1,193,818 )
Consolidated Obligations:
                               
Discount Notes
    (29,169,806 )     (29,171,619 )     (49,335,739 )     (49,383,752 )
Bonds
    (41,202,616 )     (42,042,752 )     (42,392,785 )     (43,298,966 )
Mandatorily redeemable capital stock
    (87,415 )     (87,415 )     (110,909 )     (110,909 )
Accrued interest payable
    (290,706 )     (290,706 )     (394,346 )     (394,346 )
Derivative liabilities
    (269,842 )     (269,842 )     (286,476 )     (286,476 )
 
                               
Other:
                               
Commitments to extend credit for Advances
    -       -       -       284  
Standby bond purchase agreements
    -       2,174       -       2,155  

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Note 18—Commitments and Contingencies
During the third quarter of 2008, the FHLBank entered into a Lending Agreement with the U.S. Treasury in connection with the U.S. Treasury’s establishment of the Government Sponsored Enterprise Credit Facility (GSECF), as authorized by HERA. As of September 30, 2009, the FHLBank had provided the U.S. Treasury with listings of Advance collateral amounting to $19.0 billion, which provides for maximum borrowings of $16.8 billion. The 12 FHLBanks have joint and several liability for any liquidity accessed by an FHLBank under the GSECF. Neither the FHLBank nor any of the other FHLBanks had drawn on this available source of liquidity as of September 30, 2009.
The following table sets forth the FHLBank’s commitments at the dates indicated (in thousands):
                 
    September 30, 2009   December 31, 2008
Commitments to fund additional Advances
  $ -     $ 4,541  
Mandatory Delivery Contracts for mortgage loans
    126,566       917,435  
Forward rate agreements
    -       386,000  
Outstanding Standby Letters of Credit
    5,564,203       7,916,613  
Consolidated Obligations – committed to, not settled (par value) (1)
    385,300       225,000  
Standby bond purchase agreements (principal)
    411,965       413,125  
(1) At September 30, 2009, $165 million of these commitments were hedged with associated interest rate swaps.
In addition, the 12 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amounts of the outstanding Consolidated Obligations of all 12 FHLBanks were $973.6 billion and $1,251.5 billion at September 30, 2009 and December 31, 2008, respectively.
Note 19—Transactions with Other FHLBanks
The FHLBank notes all transactions with other FHLBanks on the face of its financial statements. Occasionally, the FHLBank loans short-term funds to and borrows short-term funds from other FHLBanks. These loans and borrowings are transacted at then current market rates when traded. There were no such loans or borrowings outstanding at September 30, 2009 or December 31, 2008. Additionally, the FHLBank occasionally invests in Consolidated Discount Notes issued on behalf of another FHLBank. These investments are purchased in the open market from third parties and are accounted for in the same manner as other similarly classified investments. There were no such investments outstanding at September 30, 2009 or December 31, 2008. The following table details the average daily balance of lending, borrowing and investing between the FHLBank and other FHLBanks for the nine months ended September 30 (in thousands):
                 
    Average Daily Balances  
    2009     2008  
Loans to other FHLBanks
  $ 14,037     $ 14,792  
 
               
Borrowings from other FHLBanks
    1,832       -  
 
               
Investments in other FHLBanks
    9,092       -  
The FHLBank may, from time to time, assume the outstanding primary liability for Consolidated Obligations of another FHLBank (at then current market rates on the day when the transfer is traded) rather than issue new debt for which the FHLBank is the primary obligor. The FHLBank then becomes the primary obligor on the transferred debt. There were no Consolidated Obligations transferred to the FHLBank during the nine months ended September 30, 2009. During the nine months ended September 30, 2008, the par amounts of the liability on Consolidated Obligations transferred to the FHLBank totaled (in thousands) $265,000, being (in thousands) $150,000 transferred by the FHLBank of Dallas and $115,000 transferred by the FHLBank of Chicago. The net premiums associated with these transactions were (in thousands) $6,988 during the nine months ended September 30, 2008. The FHLBank did not transfer any Consolidated Obligations to other FHLBanks during these periods.

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Note 20—Transactions with Stockholders
Transactions with Directors’ Financial Institutions. In the ordinary course of its business, the FHLBank may provide products and services to members whose officers or directors serve as directors of the FHLBank (Directors’ Financial Institutions). Finance Agency regulations require that transactions with Directors’ Financial Institutions be made on the same terms as those with any other member. The following table reflects balances with Directors’ Financial Institutions for the items indicated below at the dates indicated (dollars in millions):
                                 
    September 30, 2009   December 31, 2008
    Balance     % of Total (1)   Balance     % of Total (1)
Advances
  $ 1,210       3.2 %   $ 734       1.4 %
Mortgage Purchase Program
    110       1.1       29       0.3  
Mortgage-backed securities
    -       -       -       -  
Regulatory capital stock
    179       4.8       61       1.5  
Derivatives
    -       -       -       -  
  (1)   Percentage of total principal (Advances), unpaid principal balance (Mortgage Purchase Program), principal balance (mortgage-backed securities), regulatory capital stock, and notional balances (derivatives).
Concentrations. The following tables show regulatory capital stock balances, outstanding Advance principal balances, and unpaid principal balances of Mortgage Loans Held for Portfolio at the dates indicated to members and former members holding five percent or more of regulatory capital stock and include any known affiliates that are members of the FHLBank (dollars in millions):
                                       
    Regulatory         Mortgage Purchase
    Capital Stock   Advance   Program Unpaid
September 30, 2009
  Balance   % of Total   Principal   Principal Balance
 
U. S. Bank, N.A.
  $ 591       16 %   $ 10,315     $ 99  
National City Bank
    404       11       4,409       3,763  
Fifth Third Bank
    401       11       2,038       12  
The Huntington National Bank
    241       6       921       289  
 
                         
 
                               
Total
  $ 1,637       44 %   $ 17,683     $ 4,163  
 
                         
                                 
    Regulatory         Mortgage Purchase
    Capital Stock   Advance   Program Unpaid
December 31, 2008
  Balance   % of Total   Principal   Principal Balance
 
U. S. Bank, N.A.
  $ 841       21 %   $ 14,856     $ 116  
National City Bank
    404       10       6,435       4,709  
Fifth Third Bank
    394       10       5,639       15  
The Huntington National Bank
    241       6       2,590       310  
AmTrust Bank
    223       5       2,338       -  
 
                         
 
                               
Total
  $ 2,103       52 %   $ 31,858     $ 5,150  
 
                         

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Non-member Affiliates. The FHLBank has relationships with two non-member affiliates, the Kentucky Housing Corporation and the Ohio Housing Finance Agency. The nature of these relationships is twofold: one as an approved borrower from the FHLBank and one in which the FHLBank invests in the purchase of these non-members’ bonds. The Kentucky Housing Corporation and the Ohio Housing Finance Agency had no borrowings during the nine months ended September 30, 2009 or 2008. The FHLBank had principal investments in the bonds of the Kentucky Housing Corporation of $11,185,000 and $12,075,000 as of September 30, 2009 and December 31, 2008, respectively. The FHLBank did not have any investments in the bonds of the Ohio Housing Finance Agency as of September 30, 2009 and December 31, 2008. Charles J. Ruma, a Director of the FHLBank, serves on the board of the Ohio Housing Finance Agency. The FHLBank did not have any investments in or borrowings extended to any other non-member affiliates during the nine months ended September 30, 2009 or 2008.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This document contains forward-looking statements that describe the objectives, expectations, estimates, and assessments of the FHLBank. These statements use words such as “anticipates,” “expects,” “believes,” “could,” “estimates,” “may,” and “should.” By their nature, forward-looking statements relate to matters involving risks or uncertainties, some of which we may not be able to know, control, or completely manage. Actual future results could differ materially from those expressed or implied in forward-looking statements or could affect the extent to which we are able to realize an objective, expectation, estimate, or assessment. Some of the risks and uncertainties that could affect our forward-looking statements include the following:
     
  § the effects of economic, financial, credit, market, and member conditions on our financial condition and results of operations, including changes in economic growth, general liquidity conditions, interest rates, interest rate spreads, interest rate volatility, mortgage originations, prepayment activity, housing prices, asset delinquencies, and members’ mergers and consolidations, deposit flows, liquidity needs, and loan demand;
 
  § political events, including legislative, regulatory, federal government, judicial or other developments that could affect us, our members, our counterparties, other FHLBanks and other government-sponsored enterprises, and/or investors in the FHLBank System’s Consolidated Obligations;
 
  § competitive forces, including those related to other sources of funding available to members, to purchases of mortgage loans, and to our issuance of Consolidated Obligations;
 
  § the financial results and actions of other FHLBanks that could affect our ability, in relation to the System’s joint and several liability for Consolidated Obligations, to access the capital markets on favorable terms or preserve our profitability, or could alter the regulations and legislation to which we are subject;
 
  § changes in investor demand for Consolidated Obligations;
 
  § the volatility of market prices, interest rates, credit quality, and other indices that could affect the value of investments and collateral we hold as security for member obligations and/or for counterparty obligations;
 
  § the ability to attract and retain skilled individuals;
 
  § the ability to sufficiently develop and support technology and information systems to effectively manage the risks we face;
 
  § the ability to successfully manage new products and services;
 
  § the risk of loss arising from litigation filed against us or one or more of the other FHLBanks; and
 
  § inflation and deflation.
The FHLBank does not undertake any obligation to update any forward-looking statements made in this document.
In this filing, the interrelated disruptions in 2008’s and 2009’s financial, credit, housing, capital, and mortgage markets are referred to generally as the “financial crisis.”

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EXECUTIVE OVERVIEW
Organizational Structure and Business Activities
The Federal Home Loan Bank of Cincinnati (FHLBank) is a regional wholesale bank that provides financial products and services to our member financial institutions. We are one of 12 District Banks in the Federal Home Loan Bank System (FHLBank System); our region, known as the Fifth District, comprises Kentucky, Ohio and Tennessee. Each District Bank is a government-sponsored enterprise (GSE) of the United States of America and operates as a separate entity with its own stockholders, employees, and Board of Directors. A GSE combines private sector ownership with public sector sponsorship. The FHLBanks are not government agencies but are exempt from federal, state, and local taxation (except real property taxes). The U.S. government does not guarantee the debt securities or other obligations of the FHLBank System. In addition to being GSEs, the FHLBanks are cooperative institutions. This means that private-sector financial institutions voluntarily become members of our FHLBank and purchase our capital stock in order to gain access to products and services. Only members can purchase our capital stock.
Our FHLBank’s mission is to provide financial intermediation between our member stockholders and the capital markets in order to facilitate and expand the availability of financing for housing and community lending throughout the Fifth District. We achieve our mission through a cooperative business model. We raise private-sector capital from our member stockholders and issue high-quality debt in the worldwide capital markets in conjunction with other FHLBanks to provide members with competitive services—primarily a reliable, readily available, low-cost source of funds called Advances—and a competitive return on their FHLBank capital investment through quarterly dividend payments. An important component of our mission is supporting members in their efforts to assist lower-income housing markets.
The FHLBank System also includes the Federal Housing Finance Agency (Finance Agency) and the Office of Finance. The Finance Agency is an independent agency in the executive branch of the U.S. government that regulates the FHLBanks, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The Finance Agency also oversees the conservatorships of Fannie Mae and Freddie Mac. The Office of Finance is a joint office of the District Banks established by the Finance Agency to facilitate the issuing and servicing of the FHLBank System’s debt securities (called Consolidated Obligations or Obligations).

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Financial Condition
Mission Asset Activity
The following table summarizes our financial condition.
                                                 
    Ending Balances     Average Balances  
                            Nine Months Ended     Year Ended  
    September 30,     December 31,     September 30,     December 31,  
(Dollars in millions)   2009     2008     2008     2009     2008     2008  
 
                                               
Advances (principal)
  $ 37,254     $ 62,580     $ 52,799     $ 46,058     $ 60,441     $ 59,973  
 
                                               
Mortgage Purchase Program:
                                               
 
                                               
Mortgage loans held for
portfolio (principal)
    9,650       8,462       8,590       9,489       8,661       8,621  
 
                                               
Mandatory Delivery
Contracts (notional)
    126       178       917       705       141       182  
             
 
                                               
Total Mortgage Purchase Program
    9,776       8,640       9,507       10,194       8,802       8,803  
 
                                               
Letters of Credit (notional)
    5,564       8,023       7,917       6,057       7,824       7,894  
             
 
                                               
Total Mission Asset Activity
  $ 52,594     $ 79,243     $ 70,223     $ 62,309     $ 77,067     $ 76,670  
             
 
                                               
Retained earnings
  $ 407     $ 319     $ 326     $ 398     $ 327     $ 335  
 
                                               
Capital-to-assets ratio
    5.27 %     4.40 %     4.36 %     4.98 %     4.36 %     4.37 %
 
                                               
Regulatory capital-to-assets ratio (1)
    5.39       4.54       4.48       5.16       4.50       4.51  
     (1) See the “Capital Resources” section for further description of regulatory capital.
The trends in our financial condition that began in the fourth quarter of 2008 continued in the first nine months of 2009. The ending and average balances of Mission Asset Activity—comprised of Advances, Letters of Credit, and the Mortgage Purchase Program—decreased in each of the first three quarters of 2009. Overall, Advances and Letters of Credit fell, while balances in the Mortgage Purchase Program increased.
Comparing September 30, 2009 to December 31, 2008, the total principal balance of Mission Asset Activity decreased $17,629 million (25 percent). The principal balance of Advances fell $15,545 million (29 percent), the notional principal of Letters of Credit fell $2,353 million (30 percent), and aggregate balances and commitments in the Mortgage Purchase Program grew $269 million (3 percent). The decrease in Advances was even larger (a 40 percent reduction) from September 30, 2008 to September 30, 2009 because Advance balances began to decrease in the fourth quarter of 2008 after they had reached record highs in October 2008. The decrease in Advances occurred broadly throughout our membership but was disproportionately represented by our larger members.

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We believe that Advance balances have decreased from their high point in 2008 for three reasons.
  §   The economic recession resulted in members’ slower loan growth in the second half of 2008 and a decrease in their loans outstanding in the first three quarters of 2009.
 
  §   There was a substantial increase in members’ retail deposits.
 
  §   The availability to members of new funding and liquidity options increased dramatically due to the various fiscal and monetary stimuli and financial guarantees initiated by the federal government, including most importantly the Federal Reserve System and Treasury Department, to combat the financial crisis and recession. In particular, new sources of government-induced liquidity through the Troubled Asset Relief Program (TARP) and the exponential increase in bank reserves initiated by the Federal Reserve have decreased demand for our Advances.
We expect Advance demand to remain weak until monetary policy tightens and an economic recovery begins with expansion of financial institutions’ lending.
Despite the decrease in Advance balances, we continued to fulfill our business role as an important provider of reliable and attractively priced wholesale funding to our members. Although various measures of market penetration have decreased this year, members overall continue to fund over five percent of their assets with our Advances. Our Advance business is cyclical, and we expect slower growth, if not a decrease, in an economic contraction, especially when combined with the extraordinary liquidity that the federal government has provided.
The total principal balance of the Mortgage Purchase Program grew in the first nine months of 2009 due to accelerated refinancing activity in response to lower mortgage rates, especially in the first quarter. The Program currently has strong member participation and interest. This was evidenced this year by the 23 members approved for the Program, with a similar number of additional applications currently being processed for approval, and an over 50 percent increase in regular sellers.
Based on the strong earnings in the first nine months of 2009, we accrued an additional $25 million for future use in the Affordable Housing Program, a $4 million increase over the same period in 2008. By regulation, we annually set aside 10 percent of net income before assessments for this Program. In addition, in April 2009, our Board authorized $5 million in commitments for two voluntary housing programs. We have disbursed more than $15 million of voluntary housing-related funds since 2003, which are over and above the statutory Affordable Housing requirements.
Capital
Our capital adequacy continued to be strong in the first nine months of 2009 and we maintained compliance with all of our regulatory and internal capital limits. Regulatory capital (which includes capital stock accounted for as a liability under mandatorily redeemable stock) at September 30, 2009 totaled $4,152 million, a $247 million (6 percent) decrease from year-end 2008. The decrease in capital resulted from our repurchase of $415 million of stock, most of which had been the subject of two members’ excess stock redemption requests. These repurchases were partially offset by required stock purchases from other members and increases in retained earnings. The regulatory capital-to-assets ratio at September 30 was 5.39 percent, well above the regulatory minimum of 4.00 percent and at a sufficient level to enable us to effectively manage our financial performance and risk exposures. Retained earnings, which totaled $407 million on September 30, grew $81 million (25 percent) in the first nine months. The business and market environment generated sufficient earnings for us to pay stockholders a competitive dividend return in each of the first three quarters as well as to retain a substantial portion of earnings to bolster our capitalization.

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Results of Operations
The table below summarizes our results for operations.
                                         
    Three Months     Nine Months     Year Ended  
    Ended September 30,   Ended September 30,   December 31,
(Dollars in millions)   2009     2008     2009     2008       2008  
 
                                       
Net income
  $ 61     $         66         $ 219     $         180         $         236      
 
                                       
Affordable Housing Program accrual
    7       8           25       21           27      
 
                                       
Return on average equity (ROE)
    5.70 %     6.26%     6.75 %     5.92%     5.73%
 
                                       
Return on average assets
    0.30       0.28           0.34       0.26           0.25      
 
                                       
Weighted average dividend rate
    5.00       5.50           4.67       5.42           5.31      
 
                                       
Average 3-month LIBOR
    0.41       2.91           0.83       2.98           2.92      
 
                                       
Average overnight Federal Funds effective rate
    0.15       1.94           0.17       2.40           1.92      
 
                                       
ROE spread to 3-month LIBOR
    5.29       3.35           5.92       2.94           2.81      
 
                                       
Dividend rate spread to 3-month LIBOR
    4.59       2.59           3.84       2.44           2.39      
 
                                       
ROE spread to Federal Funds effective rate
    5.55       4.32           6.58       3.52           3.81      
 
                                       
Dividend rate spread to Federal Funds effective rate
    4.85       3.56           4.50       3.02           3.39      
When short-term interest rates decline dramatically, as occurred in 2009, net income normally decreases. However, earnings in the nine months ended September 30, 2009 improved substantially over the same period of 2008, as net income grew $39 million (22 percent) and ROE increased 0.83 percentage points. By contrast, in the third quarter of 2009 compared to the same period of 2008, net income fell $5 million (7 percent) and ROE decreased 0.56 percentage points.
The ROE spreads to 3-month LIBOR and overnight Federal funds are two market benchmarks we believe our stockholders use to assess the competitiveness of return on their capital investment in the FHLBank, which, along with access to our products and services, is a key source of membership value. These spreads in 2009 were significantly above those in the same periods of 2008.
There were four major reasons for the changes in earnings and profitability:
     
  § Beginning in late 2008 and continuing in the first nine months of 2009, in response to the decline in intermediate- and long-term interest rates, we retired before their final maturities approximately $14 billion of high-cost long-term debt (i.e., Consolidated Bonds), which we had issued mostly to fund mortgage assets, and replaced them with new Bonds at substantially lower costs.
 
  § Average portfolio spreads between short-term and adjustable-rate assets indexed to short-term LIBOR and their related funding costs were wider in the first nine months of 2009 than the same period in 2008 and wider than historical norms. The financial crisis raised the cost of inter-bank lending (represented by LIBOR) relative to other short-term interest costs such as our Discount Notes. We believe this cost differential indicated that, during the financial crisis, market participants viewed the System’s short-term debt as a lower risk investment than other short-term investments. Because we use Discount Notes to fund a large amount (normally between $10 billion and $20 billion) of our LIBOR-indexed Advances, earnings benefited from our relatively more favorable funding costs.
 
    In the third quarter of 2009, short-term LIBOR decreased, causing the spread between LIBOR and Discount Notes to revert back to, and even go below, historical average levels. We believe this was due to market participants’ view that the financial disruptions had eased and to the effects of the massive amounts of liquidity injected into the financial system. As a result, the higher profits from the wider LIBOR to Discount Note spreads dissipated during the third quarter.

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  § Market yield curves became significantly steeper as short-term interest rates fell to historical lows of close to zero. This benefited earnings due to our modest utilization of short-term debt to fund long-term assets. In addition, due to mismatches of principal paydowns of long-term assets versus liabilities, including muted acceleration of mortgage prepayments, the amount of short funding increased in the first three quarters of 2009.
 
  § There were other gains totaling approximately $14 million, most of which occurred in the first quarter of 2009, including: $6 million from the sale of $216 million of mortgage-backed securities; a $4 million increase in Advance prepayment fees; and a $4 million increase in net market value (primarily unrealized) relating to accounting for derivatives and hedging activities.
Several factors partially offset the favorable earnings drivers. Most significant was the extremely low short-term interest rate environment, which substantially decreased the amount of earnings generated from funding assets with our interest-free capital. For example, the benchmark 3-month LIBOR rate averaged 0.83 percent in the first nine months of 2009, compared to 2.98 percent for the same period in 2008. The positive earnings factors also were partially offset by a reduction in assets, especially Advances.
The lower earnings for the third quarter of 2009 compared to the third quarter of 2008 were primarily the result of the narrowing of the LIBOR to Discount Note Spread discussed above, the decrease in short-term interest rates, the reduction in Advances, and a $5 million reduction in fair value gains from accounting for derivatives and hedging activity. We recognized substantial fair value gains in the third quarter of 2008 due principally to the sharp increase in short-term LIBOR as a result of the accelerating financial crisis.
Our Board authorized paying stockholders a cash dividend in each of the first two quarters of 2009 at a 4.50 percent annualized rate and in the third quarter at an annualized rate of 5.00 percent. These dividend payouts represented historically wide spreads to the average 3-month LIBOR. The difference between the 6.75 percent ROE in the first nine months of 2009 and the 4.67 percent average dividend rate enabled us to increase retained earnings by $81 million. The $239 million increase in retained earnings since year-end 2004 represents more than a doubling of retained earnings as a percent of regulatory capital stock. We believe the increase in retained earnings as a percent of capital stock has enhanced our ability to protect future dividends against earnings volatility and members’ capital stock against impairment risk.
Risk Exposure
Funding and Liquidity Risk
We believe that in the first nine months of 2009, our liquidity position remained strong and our overall ability to fund our operations through debt issuance at acceptable interest costs remained sufficient. Although we can make no assurances, we expect this to continue to be the case and we believe the possibility of a liquidity or funding crisis in the FHLBank System that would impair our FHLBank’s ability to issue new debt, service our outstanding debt or pay competitive dividends is remote. The financial crisis significantly elevated our long-term funding costs, compared to U.S. Treasury securities and LIBOR, in the first half of 2009 as in most of 2008. As the financial crisis appeared to have eased, especially in the third quarter, our long-term funding costs improved relative to these market benchmarks. As a result, late in the second quarter and continuing in the third quarter, we determined it was acceptable from a risk perspective to partially reduce the amount of asset liquidity held, which can be at a cost to earnings, from funding short-term (mostly overnight) investments with longer-term Consolidated Obligation Discount Notes.
Market Risk
Our residual exposures to market risk continued to be moderate, at levels consistent with historical averages and with our cooperative business model. The current level of market risk exposure should ensure that profitability would be competitive across a wide range of stressed interest rate and business environments. We have historically emphasized strategies and tactics aimed at providing a competitive earnings stream over a multitude of market and business environments and a relative lack of earnings volatility. These strategies and tactics include (among others): 1) conservative management of market risk exposure, 2) controlled growth in mortgage assets, 3) holding a nominal amount of riskier types of mortgage-backed securities, 4) accounting and hedging practices that attempt to minimize earnings volatility from use of derivatives, and 5) limiting growth in operating expenses.

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Credit Risk
We continued to have limited credit risk exposure from offering Advances, purchasing mortgage loans, making investments, and executing derivative transactions. We have robust policies, strategies and processes designed to identify, manage and mitigate credit risk. Our Advances are overcollateralized and we have a perfected first lien position on all pledged loan collateral. The Mortgage Purchase Program is comprised only of conforming fixed-rate conventional loans and loans fully insured by the Federal Housing Administration. Multiple layers of credit enhancements on the Program’s loans protect us against credit losses down to approximately a 50 percent loan-to-value level (based on value at origination). Actual program delinquencies on conventional loans are well below national averages on similar loans and any losses have been well below the amount of our credit enhancements.
At September 30, 2009, 98 percent of our mortgage-backed securities were issued and guaranteed by Fannie Mae or Freddie Mac, which we believe have the backing of the United States government. Only 2 percent ($211 million) of the holdings were in private-label mortgage-backed securities; these securities are comprised of high-quality residential mortgage loans issued and purchased in 2003 and were rated triple-A at September 30, 2009. The underlying collateral has a de minimis level of delinquencies and foreclosures as reflected in the average serious delinquency rate (loans at least 60 days past due) of 0.54 percent of total principal, while their average credit enhancement stood at 7.5 percent.
Although most of our money market investments are unsecured, we invest in the debt securities of highly rated, investment-grade institutions, have conservative limits on dollar and maturity exposure to each institution, and believe we have strong credit underwriting practices. Finally, we collateralize most of the credit risk exposure resulting from interest rate swap transactions; only the uncollateralized portion of our derivative asset position ($8 million at September 30, 2009) represents unsecured exposure. We continue to expect no credit losses on this source of unsecured credit exposure.
Overall, we have never experienced a credit-related loss on, nor have we ever established a loss reserve for any asset. In addition, we have not taken an impairment charge on any investment. Based on our analysis of exposures and application of GAAP we continue to believe no loss reserves are required for our Advances or mortgage assets, nor do we consider any of our investments to be other-than-temporarily impaired. We expect that this will continue to be the case.
Business Related Developments and Update on Risk Factors
Many of the issues related to our financial condition, results of operations, and liquidity discussed throughout this document relate directly to the financial crisis and economic recession, and to the federal government’s actions to attempt to mitigate their unfavorable effects. During 2009, these factors have resulted in sharply improved profitability relative to short-term interest rates, substantially lower Advance balances, and a modest increase in Mortgage Purchase Program balances. This section provides relevant updates on several risk factors identified in our annual report on Form 10-K.
We continue to monitor several scenarios that could result in further reductions in Mission Asset Activity and lower profitability. Although cyclicality of our Mission Asset Activity and profitability relative to the state of the economy is expected, the effects from the recession and the financial crisis could result in a longer and more severe reduction in our Mission Asset Activity. The scenarios that could unfavorably affect Mission Asset Activity include:
     
  § a continuation of the economic recession, which could further reduce Advance demand;
 
  § a continuation of the financial crisis, which could result in additional measures to add even more liquidity to the financial markets;
 
  § unfavorable effects on the competitiveness of our business model from current or future federal government actions to mitigate the recession and financial crisis;
 
  § potentially unfavorable actions regarding the ultimate financial, legislative and regulatory disposition of issues involving the GSEs, especially actions related to Fannie Mae and Freddie Mac with whom the FHLBanks share a common regulator; and
 
  § issues with earnings pressures and capital adequacy at other FHLBanks.

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As discussed above, our profitability relative to short-term interest rates began to decrease in the third quarter of 2009. We expect our profitability will further decrease in the fourth quarter of 2009 and beyond. The profitability in the first nine months of 2009 is inconsistent with the sustained fundamental earnings generated by our business model. The following are the major factors affecting earnings that we are experiencing or expect to experience in the near-to intermediate-term future:
     
  § extremely low short-term interest rates;
 
  § the effects of the collapsing LIBOR to Discount Note spread back to, and even below, historically normal levels;
 
  § replacing expected paydowns of mortgages earning wide net spreads with new mortgages assumed to earn lower net spreads;
 
  § continued reductions in Advance balances; and
 
  § because of the stressed mortgage markets and government purchases that are reducing acceptable mortgages to purchase, the possibility of not being able to fully utilize our mortgage-backed security regulatory authority at acceptable risk-adjusted returns.
Notwithstanding these concerns, we expect our profitability and capacity to pay dividends to remain competitive across a wide range of economic, business, and market rate environments—even many stressful ones. We believe that credit and operational risk will not affect our earnings materially. Based on our earnings simulations, we believe that short-term interest rates would have to increase dramatically, quickly, and last for a sustained period of time before ROE would not exceed 3-month LIBOR. We also believe that a decrease in mortgage rates by 100 basis points that lasted for three years, which would place the 30-year fixed mortgage note rate in a range of 4.00 to 4.50 percent, would not cause ROE to fall below 3-month LIBOR.
Our business model is able to absorb sharp changes in our Mission Asset Activity because we can undertake commensurate reductions in our liability balances and capital and because of our low operating expenses. However, if several large members were to withdraw from membership or otherwise reduce activity with us, the decrease in Mission Asset Activity and/or capital could materially reduce dividend rates available to our remaining members. On November 6, 2009, National City Bank, which was acquired in January 2009 by PNC Financial Services Group, Inc., notified us of its decision to withdraw from membership in our FHLBank. PNC Bank is not a member of our FHLBank because it is chartered outside our District.
Although in the last several years, National City has been one of our largest stockholders and Advance borrowers and our largest historical seller of loans in the Mortgage Purchase Program, we believe that losing this member will have no material affect on our business model. We also believe the membership loss will not materially affect the adequacy of our liquidity, our ability to make timely principal and interest payments on our participations in Consolidated Obligations and other liabilities, our ability to continue providing sufficient membership value to our members, or our profitability. This assessment is similar to one made, and subsequently experienced, when we lost one of our largest members (RBS Citizens, N.A.) in 2007 due to a consolidation of its charter outside of the Fifth District.
The Mortgage Purchase Program has expanded this year due to lower mortgage rates, increased refinancing activity and increased interest from our members. We continue to emphasize both recruiting community financial institution members to the Program and increasing the number of regular sellers. However, issues with our two Supplemental Mortgage Insurance providers could harm the Program’s sustainability. Due to the deterioration in the mortgage markets over the last two years, the providers currently have ratings below the double-A rating required by a Finance Agency Regulation, which means we are in technical violation of this Regulation. On August 11, 2009, the Finance Agency, with certain stipulations, granted a one-year waiver of the double-A rating requirement for existing loans and commitments and a six month waiver for new commitments. We have submitted a proposal to the Finance Agency that, if approved, would replace the current reliance on the credit enhancement provided by these insurers with increased use of the credit enhancement provided by members. We believe this change in credit enhancement structure would maintain compliance with the Program’s legal, accounting, and other regulatory requirements, preserve the Program’s minimal credit risk profile, and enable the Program to continue as a beneficial business activity for our member stockholders. We cannot provide at this time any assurance as to whether the Finance Agency will approve the proposal.

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We cannot estimate the ultimate impact on the earnings and capital of other FHLBanks from the market value and credit losses on their private-label securities. Therefore, we can provide no assurance about the potential effects on us from System-wide earnings and capital issues identified in this risk factor in our 2008 annual report on Form 10-K. These potential effects could include 1) requiring us to provide financial assistance to one or more other FHLBanks, 2) higher and more volatile debt costs, 3) more difficulty in issuing debt, especially longer-term debt, at maturity points we would prefer for our asset/liability management needs, and 4) decreases in our Mission Asset Activity and profitability, which are the two key sources of membership value.
CONDITIONS IN THE ECONOMY AND FINANCIAL MARKETS
Economy
The primary external factors that affect our Mission Asset Activity and earnings are the general state and trends of the economy and financial institutions, especially in the states of our District; conditions in the financial, credit, and mortgage markets; and interest rates. The economy entered a sharp recession in December 2007, which continued through 2008 and into 2009. As measured by real Gross Domestic Product (GDP), the national economy contracted by 5.4 percent in the fourth quarter of 2008, 6.4 percent in the first quarter of 2009, and 0.7 percent in the second quarter, and expanded by an advance estimate of 3.5 percent in the third quarter (all rates are annualized).
Although there are indications—including the growth in third quarter GDP, reduction in credit spreads, and unfreezing of some credit markets—that the recession and financial crisis may have subsided, or even ended, in the second and third quarters, it is premature to know if the positive indications will be sustained. Contraindications against a robust pickup in economic activity are that lending by financial institutions appears not to have accelerated in the third quarter, unemployment appears to still be increasing (although unemployment is generally a lagging indicator of economic growth), financial institutions continue having credit difficulties, interest rates remain low, and most stock market indices remain well below the highs from earlier in the decade.
The residual effects on our members of the financial crisis and recession may continue to be serious for some time. These continued effects may include diminished lending activity, credit risk difficulties, strong deposit growth, and existence of substantial liquidity and funding alternatives from the federal government. To the extent these effects continue to be realized, we expect a continuation of subdued demand for our Advances.

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Interest Rates
Trends in market interest rates affect members’ demand for Mission Asset Activity, earnings, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following table presents key market interest rates (obtained from Bloomberg L.P.).
                                                                                 
                                    Nine Months Ended Sept 30,
    Quarter 3 2009     Quarter 2 2009     Quarter 1 2009     2009   2008   Year 2008  
    Average   Ending   Average   Ending   Average   Ending   Average   Average   Average   Ending
 
                                                                               
Federal Funds Target
    0.25 %     0.25 %     0.25 %     0.25 %     0.25 %     0.25 %     0.25 %     2.43 %     2.09 %     0.25 %
Federal Funds Effective
    0.15       0.07       0.18       0.22       0.18       0.16       0.17       2.40       1.92       0.14  
 
                                                                               
3-month LIBOR
    0.41       0.29       0.85       0.60       1.24       1.19       0.83       2.98       2.92       1.43  
2-year LIBOR
    1.40       1.28       1.50       1.53       1.54       1.38       1.48       3.16       2.95       1.48  
5-year LIBOR
    2.86       2.65       2.74       2.97       2.38       2.21       2.66       3.88       3.70       2.13  
10-year LIBOR
    3.72       3.46       3.50       3.78       2.94       2.86       3.39       4.46       4.25       2.56  
 
                                                                               
2-year U.S. Treasury
    1.01       0.95       1.01       1.11       0.89       0.80       0.97       2.26       2.00       0.77  
5-year U.S. Treasury
    2.45       2.31       2.23       2.56       1.75       1.66       2.15       3.00       2.79       1.55  
10-year U.S. Treasury
    3.50       3.31       3.31       3.54       2.71       2.67       3.18       3.79       3.64       2.21  
 
                                                                               
15-year mortgage current coupon (1)
    3.82       3.57       3.84       4.01       3.75       3.59       3.80       5.03       4.97       3.64  
30-year mortgage current coupon (1)
    4.50       4.26       4.31       4.63       4.13       3.89       4.31       5.58       5.47       3.93  
 
                                                                               
15-year mortgage note rate (2)
    4.61       4.46       4.63       4.87       4.72       4.58       4.65       5.64       5.63       4.91  
30-year mortgage note rate (2)
    5.16       5.04       5.01       5.42       5.06       4.85       5.08       6.09       6.05       5.14  
  (1)   Simple average of current coupon rates of Fannie Mae and Freddie Mac mortgage-backed securities.
 
  (2)   Simple weekly average of 125 national lender’s mortgage rates surveyed and published by Freddie Mac.
After decreasing sharply in 2008, the overnight Federal funds target and effective rates were relatively stable in the first nine months of 2009. The Federal Reserve maintained the overnight Federal funds target rate at a range of zero to 0.25 percent, which it had established by the end of 2008. Short-term LIBOR decreased at a slower pace. By the third quarter of 2009, short-term LIBOR had decreased to a level consistent with its historical relationship to Federal funds. The slower pace of reduction in short-term LIBOR significantly improved our earnings in the first half of 2009.
In the first three quarters of 2009, longer-term LIBOR and U.S. Treasury rates tended to rise. However, spreads of our Consolidated Obligation Bonds to these indices narrowed, with the result being relatively stable and even lower Bond rates. The combination of falling short-term rates and more stable longer-term Bond rates resulted in a steeper funding yield curve, which improved earnings. In addition, earnings benefited from the reduction in Bond spreads relative to market indices. Likewise, mortgage note rates were more stable in 2009 than longer-term LIBOR and U.S. Treasuries, which, along with falling home prices, the recession, and difficult mortgage refinancing conditions, resulted in relatively small increases in mortgage prepayments.
More discussion of the effects on our earnings and market risk exposure from interest rate trends are discussed above in “Executive Overview” and below in “Results of Operations,” as well as in the “Market Risk” section of “Quantitative and Qualitative Disclosures About Risk Management.”

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ANALYSIS OF FINANCIAL CONDITION
Asset Composition Data
Mission Asset Activity includes the following components:
  §   the principal balance of Advances;
 
  §   the notional principal amount of available lines in the Letters of Credit program;
 
  §   the principal balance in the Mortgage Purchase Program (Mortgage Loans Held for Portfolio); and
 
  §   the notional principal amount of Mandatory Delivery Contracts.
The following two tables show the composition of our total assets, which support the discussions in this section and in the “Executive Overview.”
Asset Composition - Ending Balances (Dollars in millions)
                                                                                   
    September 30, 2009   December 31, 2008   September 30, 2008     September 30, 2009  
            % of           % of           % of     Change From   Change From
            Total           Total           Total     December 31, 2008   September 30, 2008
    Balance     Assets   Balance     Assets   Balance     Assets     Amount     Pct   Amount     Pct
Advances
                                                                                 
Principal
  $ 37,254       48 %   $ 52,799       54 %   $ 62,580       65 %     $ (15,545 )     (29 )%   $ (25,326 )     (40 )%
Other items (1)
    828       1       1,117       1       348       -         (289 )     (26 )     480       138  
                                                       
 
                                                                                 
Total book value
    38,082       49       53,916       55       62,928       65         (15,834 )     (29 )     (24,846 )     (39 )
 
                                                                                 
Mortgage Loans Held for Portfolio
                                                                                 
Principal
    9,650       13       8,590       9       8,462       9         1,060       12       1,188       14  
Other items
    86       -       42       -       60       -         44       105       26       43  
                                                       
 
                                                                                 
Total book value
    9,736       13       8,632       9       8,522       9         1,104       13       1,214       14  
 
                                                                                 
Investments
                                                                                 
 
                                                                                 
Mortgage-backed securities
                                                                                 
Principal
    12,448       16       12,897       13       13,357       14         (449 )     (3 )     (909 )     (7 )
Other items
    (11 )     -       (28 )     -       (37 )     -         17       61       26       70  
                                                       
 
                                                                                 
Total book value
    12,437       16       12,869       13       13,320       14         (432 )     (3 )     (883 )     (7 )
 
                                                                                 
Short-term money market
    13,777       18       22,444       23       12,142       12         (8,667 )     (39 )     1,635       13  
 
                                                                                 
Other long-term investments
    11       -       12       -       40       -         (1 )     (8 )     (29 )     (73 )
                                                       
 
                                                                                 
Total investments
    26,225       34       35,325       36       25,502       26         (9,100 )     (26 )     723       3  
 
                                                                                 
Loans to other FHLBanks
    -       -       -       -       -       -         -       -       -       -  
                                                       
 
                                                                                 
Total earning assets
    74,043       96       97,873       100       96,952       100         (23,830 )     (24 )     (22,909 )     (24 )
 
                                                                                 
Other assets
    2,941       4       333       -       331       -         2,608       783       2,610       789  
                                                       
 
                                                                                 
Total assets
  $ 76,984       100 %   $ 98,206       100 %   $ 97,283       100 %     $ (21,222 )     (22 )   $ (20,299 )     (21 )
                                                       
 
                                                                                 
Other Business Activity (Notional)
                                                                                 
 
                                                                                 
Letters of Credit
  $ 5,564             $ 7,917             $ 8,023               $ (2,353 )     (30 )   $ (2,459 )     (31 )
 
                                                                       
Mandatory Delivery Contracts
  $ 126             $ 917             $ 178               $ (791 )     (86 )   $ (52 )     (29 )
 
                                                                       
 
                                                                                 
Total Mission Asset Activity (Principal and Notional)
  $ 52,594       68 %   $ 70,223       72 %   $ 79,243       81 %     $ (17,629 )     (25 )   $ (26,649 )     (34 )
                                                       
  (1)   The majority of these balances are hedging related adjustments.

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Asset Composition - Average Balances (Dollars in millions)
                                                                                   
    Nine Months Ended   Year Ended   Nine Months Ended      
    September 30, 2009   December 31, 2008   September 30, 2008     September 30, 2009  
                                                      Change From   Change From
            % of           % of           % of     Year Ended   Nine Months Ended
            Total           Total           Total     December 31, 2008   September 30, 2008
    Balance     Assets   Balance     Assets   Balance     Assets     Amount     Pct   Amount     Pct
Advances
                                                                                 
Principal
  $ 46,058       53 %   $ 59,973       64 %   $ 60,441       65 %     $ (13,915 )     (23 )%   $ (14,383 )     (24 )%
Other items (1)
    895       1       526       -       503       -         369       70       392       78  
                                                       
 
                                                                                 
Total book value
    46,953       54       60,499       64       60,944       65         (13,546 )     (22 )     (13,991 )     (23 )
 
                                                                                 
Mortgage Loans Held for Portfolio
                                                                                 
Principal
    9,489       11       8,621       9       8,661       10         868       10       828       10  
Other items
    68       -       62       -       63       -         6       10       5       8  
                                                       
 
                                                                                 
Total book value
    9,557       11       8,683       9       8,724       10         874       10       833       10  
 
                                                                                 
Investments
                                                                                 
 
                                                                                 
Mortgage-backed securities
                                                                                 
Principal
    12,166       14       12,623       14       12,448       13         (457 )     (4 )     (282 )     (2 )
Other items
    (20 )     -       (30 )     -       (28 )     -         10       33       8       29  
                                                       
 
                                                                                 
Total book value
    12,146       14       12,593       14       12,420       13         (447 )     (4 )     (274 )     (2 )
 
                                                                                 
Short-term money market
    18,221       21       12,206       13       10,814       12         6,015       49       7,407       68  
 
                                                                                 
Other long-term investments
    11       -       16       -       16       -         (5 )     (31 )     (5 )     (31 )
                                                       
 
                                                                                 
Total investments
    30,378       35       24,815       27       23,250       25         5,563       22       7,128       31  
 
                                                                                 
Loans to other FHLBanks
    14       -       18       -       15       -         (4 )     (22 )     (1 )     (7 )
                                                       
 
                                                                                 
Total earning assets
    86,902       100       94,015       100       92,933       100         (7,113 )     (8 )     (6,031 )     (6 )
 
                                                                                 
Other assets
    294       -       342       -       338       -         (48 )     (14 )     (44 )     (13 )
                                                       
 
                                                                                 
Total assets
  $ 87,196       100 %   $ 94,357       100 %   $ 93,271       100 %     $ (7,161 )     (8 )   $ (6,075 )     (7 )
                                                       
 
                                                                                 
Other Business Activity (Notional)
                                                                                 
 
                                                                                 
Letters of Credit
  $ 6,057             $ 7,894             $ 7,824               $ (1,837 )     (23 )   $ (1,767 )     (23 )
 
                                                                       
Mandatory Delivery Contracts
  $ 705             $ 182             $ 141               $ 523       287     $ 564       400  
 
                                                                       
 
                                                                                 
Total Mission Asset Activity (Principal and Notional)
  $ 62,309       71 %   $ 76,670       81 %   $ 77,067       83 %     $ (14,361 )     (19 )   $ (14,758 )     (19 )
 
                                                                 
  (1)   The majority of these balances are hedging related adjustments.
To measure the extent of our success in achieving growth in Mission Asset Activity, we consider changes in both period-end balances and period-average balances. There can be large differences in the results of these two computations. Average data can provide more meaningful information about the ongoing condition of and trends in Mission Asset Activity and earnings than period-end data because day-to-day volatility can impact the latter.
On September 30, 2009, Advances represented just under half (49 percent) of our total assets, a decrease of six percentage points from year-end 2008. The Mortgage Portfolio Program increased to 13 percent of total assets, due to growth in the Program and the decrease in total assets, led by Advances. The large balance in other assets on September 30, 2009 was due to our decision to keep funds at the Federal Reserve on that day instead of investing with traditional unsecured counterparties because of the zero or negative interest rate available on overnight investments at the end of the quarter.

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Credit Services
The principal balance of Advances decreased significantly in the first nine months of 2009. The decrease began in the fourth quarter of 2008, after Advances had reached record highs in October 2008. Available lines and member usage of the Letters of Credit program also fell substantially. Most of our Letters of Credit support members’ public unit deposits. We earn fees on the actual amount of the available lines members use, which can be substantially less than the lines outstanding.
The following table presents Advance balances by major program.
                                                 
(Dollars in millions)   September 30, 2009   December 31, 2008   September 30, 2008
    Balance       Percent(1)   Balance       Percent(1)   Balance       Percent(1)
     
 
                                               
Short-Term and Adjustable-Rate
                                               
REPO/Cash Management
  $ 1,770       5 %   $ 5,886       11 %   $ 11,161       18 %
LIBOR
    15,354       41       24,225       46       29,619       47  
       
Total
    17,124       46       30,111       57       40,780       65  
 
                                               
Long-Term
                                               
Regular Fixed Rate
    7,830       21       9,722       18       9,332       15  
Convertible (2)
    3,231       9       3,479       7       3,506       6  
Putable (2)
    7,046       19       6,981       13       6,894       11  
Mortgage Related
    1,740       4       1,815       4       1,860       3  
       
Total
    19,847       53       21,997       42       21,592       35  
 
                                               
Other Advances
    283       1       691       1       208       -  
       
 
                                               
Total Advances Principal
    37,254       100 %     52,799       100 %     62,580       100 %
 
                                               
 
                                               
Other Items
    828               1,117               348          
 
                                         
 
                                               
Total Advances Book Value
  $ 38,082             $ 53,916             $ 62,928          
 
                                         
  (1)   As a percentage of total Advances principal.
 
  (2)   Related interest rate swaps executed to hedge these Advances convert them to an adjustable-rate tied to LIBOR.
Most of the reduction in balances occurred in the REPO, LIBOR, and Regular Fixed Rate Advance programs. REPO and LIBOR programs normally have the most fluctuation in balances because larger members tend to use them disproportionately more than smaller members do, they tend to have shorter-term maturities than other programs and, in the case of LIBOR Advances, they can be prepaid without a fee on repricing dates subject to pre-established prepayment “lock out” periods. Other Advance programs experienced smaller changes.

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The following tables present the principal balances and related weighted average interest rates for our top five Advance borrowers.
     (Dollars in millions)
                                         
September 30, 2009   December 31, 2008
    Ending     Weighted Average           Ending     Weighted Average
Name   Balance     Interest Rate   Name   Balance     Interest Rate
 
U.S. Bank, N.A.
  $ 10,315       1.57 %   U.S. Bank, N.A.   $ 14,856       3.02 %
National City Bank
    4,409       1.00     National City Bank     6,435       2.83  
Fifth Third Bank
    2,038       2.40     Fifth Third Bank     5,639       3.18  
AmTrust Bank
    1,786       3.91     The Huntington National Bank     2,590       1.22  
RBS Citizens, N.A.
    1,287       0.33     AmTrust Bank     2,338       3.75  
 
                                   
 
                                       
Total of Top 5
  $ 19,835       1.66    
Total of Top 5
  $ 31,858       2.92  
 
                                   
 
                                       
Total Advances (Principal)
  $ 37,254       2.31     Total Advances (Principal)   $ 52,799       3.00  
 
                                   
 
                                       
Top 5 Percent of Total
    53 %           Top 5 Percent of Total     60 %        
 
                                   
RBS Citizens, N.A. and National City Bank are former members. The decrease in total weighted average interest rates from the end of 2008 to September 30, 2009 was due to the reductions in short-term interest rates during 2009, especially LIBOR.
As indicated above, our Advances are concentrated among a small number of members. Concentration ratios have been relatively stable in the last several years. We believe that having large members who actively use our Mission Asset Activity augments the value of membership to all members because it enables us to improve operating efficiency, increase financial leverage, possibly enhance dividend returns, obtain more favorable funding costs, and provide competitively priced Mission Asset Activity.
Although Advance usage fell broadly across the membership, usage decreased disproportionately among our largest borrowers. The top five borrowers accounted for 77 percent of the total decrease in Advance balances, but they represented a smaller proportion (53 percent) of total Advances. In addition, as shown in the following table, the unweighted average ratio of each member’s Advance balance to its most-recently available total assets decreased more for larger members than smaller members. Despite their decrease, we believe the level of these ratios and the fact that the number of borrowing members has held steady at approximately 77 percent of total membership continue to demonstrate that our members view Advances as important sources of funding and liquidity, even in business conditions in which retail deposit growth exceeds loan growth and in which there are abundant sources of liquidity.
                        
    September 30, 2009   December 31, 2008
 
               
Average Advances-to-Assets for Members
               
 
               
Smaller members: assets less than $1.0 billion (681 members)
    5.29 %     6.11 %
 
               
Larger members: assets over $1.0 billion (58 members)
    4.45 %     5.47 %
 
               
All members
    5.22 %     6.06 %
Mortgage Purchase Program (Mortgage Loans Held for Portfolio)
The expansion of the Mortgage Purchase Program in the first nine months of 2009 came after several years in which the Program’s balance was relatively stable. Significantly lower mortgage interest rates in the fourth quarter of 2008 and the first quarter of 2009 increased refinancing activity, which resulted in Program balances increasing. In addition, because of falling home prices, the recession, and difficult mortgage refinancing conditions, mortgage prepayments did not accelerate as much as would normally have been the case given the lower mortgage rates. The growth in the Program helped offset a portion of the earnings lost from the lower balances in the Advance portfolio. The Program’s growth slowed in the second and third quarters, primarily due to diminishing refinancing activity.

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Our focus continues to be on recruiting community-based members to participate in the Program and on increasing the number of regular sellers. We approved 23 members to the Program in the first nine months of 2009 and there is a similar number of members in the pipeline either interested in joining the Program or in the process of joining. The number of regular sellers has doubled in the last year. Through September 30, members transacted approximately 3,300 separate commitments to sell us loans, 50 percent more than the amount in any prior full year. Because the recent increases in the number of sellers and new approvals to the Program have come from our smaller community-based members and because we have self-imposed constraints on growth, we expect that the Program will not grow significantly.
The following table reconciles changes in the Program’s principal balance (excluding Mandatory Delivery Contracts) for the nine months ended September 30, 2009.
         
    Mortgage Purchase
(In millions)   Program Principal
 
       
Balance at December 31, 2008
  $ 8,590  
Principal purchases
    3,347  
Principal paydowns
    (2,287 )
 
     
 
       
Balance at September 30, 2009
  $ 9,650  
 
     
We closely track the refinancing incentives of all of our mortgage assets because the mortgage prepayment option represents almost all of our market risk exposure. The principal paydowns in the first three quarters equated to an annual constant prepayment rate of 29 percent, compared to 12 percent in all of 2008. The acceleration in prepayment rates reflected the significant drop in mortgage rates in late 2008 and early 2009. However, as noted above, the refinancing response was muted. The Program’s composition of balances by loan type and original final maturity did not change materially in the first nine months of 2009. However, the weighted average mortgage note rate fell from 5.80 percent at year-end 2008 to 5.56 percent at September 30, 2009, reflecting the prepayments of higher rate notes and the purchase of lower rate notes in the declining mortgage rate environment.
As shown in the following table, the percentage of principal balances from members supplying five percent or more of total principal decreased five percentage points from year-end 2008 to September 30, 2009.
                                      
    September 30, 2009   December 31, 2008
(Dollars in millions)   Unpaid Principal   % of Total   Unpaid Principal   % of Total
 
                               
National City Bank
  $     3,763       39 %   $     4,709       55 %
Union Savings Bank
    3,078       32       1,995       23  
Guardian Savings Bank FSB
    809       8       544       6  
 
                               
 
                               
Total
  $     7,650       79 %   $     7,248       84 %
 
                               
The decrease in the percentage of loans outstanding from National City Bank reflected its lack of new activity with us since mid-2007, while the increase from Union Savings Bank and Guardian Saving Bank FSB reflected refinancing activity in their portfolio that resulted in new loans sold to us.
As in prior years, in the first nine months of 2009, yields we earned on new mortgage loans in the Program relative to funding costs continued to provide profitable risk-adjusted returns. The federal government’s actions to purchase mortgage-backed securities put upward pressure on mortgage prices, which normally lowers yields, but the impact was not large enough to cause profitability on new mortgages to decrease substantially. We cannot predict whether the effects on net spreads from the government’s purchase activities will continue to be modest.

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Investments
Money Market Investments
Short-term unsecured money market instruments consist of the following accounts on the Statements of Condition: interest-bearing deposits; Federal funds sold; GSE discount notes, most of which are in our trading portfolio; and certificates of deposit and bank notes in our available-for-sale portfolio. In the first nine months of 2009, our investment portfolio continued to provide liquidity and helped us manage market risk and capital adequacy.
The composition of our money market investment portfolio varies over time based on relative value considerations. Daily balances can fluctuate significantly, usually within a range of $8,000 million to $20,000 million, due to numerous factors, including changes in the actual and anticipated amount of Mission Asset Activity, liquidity requirements, net spreads, opportunities to warehouse debt at attractive rates for future use, and management of financial leverage. Money market investments normally have one of the lowest net spreads of any of our assets, typically ranging from 5 to 15 basis points.
In the nine months ended September 30, 2009, we maintained average money market balances at higher than historical levels, with the portfolio having an average balance of $18,221 million. The increase in balances, which mostly had overnight maturities, began in the fourth quarter of 2008 and occurred primarily because the financial crisis and the Finance Agency’s guidance to target as many as 15 days of liquidity required us to increase asset liquidity. We funded the increased asset liquidity with longer-term Discount Notes. Because of the upward sloping yield curve, these actions tended to negatively affect our earnings.
In the third quarter of 2009, we began to invest in the short-term Discount Note obligations of Freddie Mac. These investments provide us a vehicle to diversify our short-term investments at attractive yields, and we believe that there is less credit risk of delayed or nonrepayment of the principal and interest on these obligations than of other unsecured short-term investments. On September 30, 2009 our investment in Freddie Mac Discount Notes totaled $2,250 million.
Mortgage-Backed Securities
We invest in mortgage-backed securities in order to enhance profitability and to help support the housing market. Mortgage-backed securities currently comprise almost 100 percent of the held-to-maturity securities and $3 million of the trading securities on the Statements of Condition. Our current philosophy is to invest in the mortgage-backed securities of GSEs and government agencies. We have not purchased any mortgage-backed securities issued by other entities since 2003.
We historically have been permitted by Finance Agency Regulation to hold mortgage-backed securities up to a multiple of three times our regulatory capital. In May 2008, the Finance Agency approved our request, pursuant to a Finance Agency authorization permitting a higher multiple, to temporarily expand our mortgage-backed security percentage by up to an additional 1.5 times regulatory capital. In July 2008, we utilized a small portion of this authority. However, because of the financial crisis and recession, in the last twelve months there has been a limited availability of securities that fit our investment parameters, including offering an acceptable risk/return tradeoff. On September 30, 2009, the principal balance of our mortgage-backed securities was $12,448 million and regulatory capital was $4,152 million, for a multiple of 3.00. We cannot predict if we will find attractive securities to again utilize the temporary expanded authority before it expires on March 31, 2010.
As shown in the following table, throughout 2009 principal paydowns exceeded principal purchases of mortgage-backed securities. The principal paydowns equated to an annual constant prepayment rate of 28 percent, compared to 16 percent in all of 2008.
         
    Mortgage-backed
(In millions)   Securities Principal
 
       
Balance at December 31, 2008
  $ 12,897  
Principal purchases
    2,690  
Principal paydowns
    (2,923 )
Principal sales
    (216 )
 
     
 
       
Balance at September 30, 2009
  $ 12,448  
 
     

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The following table presents the composition of the principal balances of the mortgage-backed securities portfolio by security type, collateral type, and issuer. Most purchases in the first nine months of 2009 were 15-year pass-through collateral.
                 
(In millions) September 30, 2009 December 31, 2008
 
               
Security Type
               
Collateralized mortgage obligations
  $ 3,843     $ 5,433  
Pass-throughs (1)
    8,605       7,464  
 
           
 
               
Total
  $ 12,448     $ 12,897  
 
           
 
               
Collateral Type (2)
               
15-year collateral
  $ 5,959     $ 5,169  
20-year collateral
    3,404       3,365  
30-year collateral
    3,085       4,363  
 
           
 
               
Total
  $ 12,448     $ 12,897  
 
           
Issuer
               
GSE residential mortgage-backed securities
  $ 12,232     $ 12,581  
Agency residential mortgage-backed securities
    6       12  
Private-label residential mortgage-backed securities
    210       304  
 
           
 
               
Total
  $ 12,448     $ 12,897  
 
           
(1)   On each date, only $3 million of the pass-throughs were 30-year adjustable-rate mortgages. All others were 15-year or 20-year fixed-rate pass-throughs.
(2)   On each date, all but $3 million of principal were comprised of fixed-rate mortgages.
Consolidated Obligations
Changes in Balances and Composition
Our primary source of funding and liquidity is through participating in the issuance of the System’s debt securities—Consolidated Obligations—in the capital markets. The table below presents the ending and average balances of our participations in Consolidated Obligations. All of our Obligations issued and outstanding in 2009, as in the last several years, had “plain-vanilla” interest terms. None had step-up, inverse floating rate, convertible, range, or zero-coupon structures.
                                                 
    Nine Months Ended     Year Ended     Nine Months Ended  
      (In millions)   September 30, 2009     December 31, 2008     September 30, 2008  
    Ending     Average     Ending     Average     Ending     Average  
    Balance     Balance     Balance     Balance     Balance     Balance  
                   
 
                                               
Consolidated Discount Notes:
                                               
Par
  $ 29,174     $ 37,725     $ 49,389     $ 40,450     $ 43,134     $ 39,283  
Discount
    (4 )     (17 )     (53 )     (94 )     (127 )     (94 )
                   
 
                                               
Total Consolidated Discount Notes
    29,170       37,708       49,336       40,356       43,007       39,189  
                   
 
                                               
Consolidated Bonds:
                                               
Unswapped fixed-rate
    25,822       25,383       25,650       25,468       27,737       24,788  
Unswapped adjustable-rate
    1,771       4,380       6,424       9,638       7,525       10,486  
Swapped fixed-rate
    13,467       11,979       10,140       11,969       12,485       11,966  
                   
 
                                               
Total Par Consolidated Bonds
    41,060       41,742       42,214       47,075       47,747       47,240  
                   
 
                                               
Other items (1)
    142       137       179       62       -       59  
                   
Total Consolidated Bonds
    41,202       41,879       42,393       47,137       47,747       47,299  
                   
 
                                               
Total Consolidated Obligations (2)
  $ 70,372     $ 79,587     $ 91,729     $ 87,493     $ 90,754     $ 86,488  
                   
(1)   Includes unamortized premiums/discounts, hedging and other basis adjustments.
(2)   The 12 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. See Note 11 of the Notes to Unaudited Financial Statements for additional detail and discussion related to Consolidated Obligations. The par amount of the outstanding Consolidated Obligations of all 12 FHLBanks was (in millions) $973,579 and $1,251,542 at September 30, 2009 and December 31, 2008, respectively.

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Balances of the various Obligation types can fluctuate significantly based on Advance demand, money market investment balances, comparative changes in their cost levels relative to swapped Consolidated Bonds, supply and demand conditions, and our balance sheet management strategies. In the first nine months of 2009, the average balance of Discount Notes was similar to the average balances for all of 2008 and the first nine months of 2008. Beginning in the second quarter of 2009 and continuing in the third quarter, we decreased our issuance of Discount Notes compared to the first quarter of 2009 and all of 2008. The reduced reliance on Discount Notes reflected the reduction in Advance balances in 2009 and our lower holdings of asset liquidity using money market investments, which we normally fund with Discount Notes. By September 30, Discount Note balances were down substantially from levels earlier in 2009 and in 2008.
The relatively stable balance of unswapped fixed-rate Bonds in the first nine months of 2009 compared to the 2008 periods reflected primarily the relatively modest growth in our mortgage assets.
The following table shows the allocation on September 30, 2009 of unswapped fixed-rate Bonds according to their final remaining maturity and next call date (for callable Bonds).
                                         
     (In millions)   Year of Maturity   Year of Next Call
      Callable   Noncallable   Amortizing   Total   Callable
         
Due in 1 year or less
  $ -     $ 4,429     $ 4     $ 4,433     $ 8,791  
Due after 1 year through 2 years
    445       3,005       4       3,454       1,695  
Due after 2 years through 3 years
    1,580       2,672       54       4,306       125  
Due after 3 years through 4 years
    1,695       2,339       14       4,048       -  
Due after 4 years through 5 years
    1,366       1,168       3       2,537       25  
Thereafter
    5,550       1,357       137       7,044       -  
             
             
Total
  $ 10,636     $ 14,970     $ 216