UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

OR

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

For the transition period from ________ to ________

Commission File Number 000-52004

FEDERAL HOME LOAN BANK OF TOPEKA

(Exact name of registrant as specified in its charter)

Federally chartered corporation	48-0561319
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
One Security Benefit Pl. Suite 100 Topeka, KS	66606
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 785.233.0507

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x  Yes  o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. ¨ Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨ Smaller reporting company

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

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

	Shares outstanding as of 11/04/2011
Class A Stock, par value $100	5,553,509
Class B Stock, par value $100	7,486,506

FEDERAL HOME LOAN BANK OF TOPEKA

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Statements of Condition	4
	Statements of Income	6
	Statements of Capital	7
	Statements of Cash Flows	9
	Notes to Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51
	Executive Level Overview	51
	Financial Market Trends	54
	Critical Accounting Policies and Estimates	56
	Results of Operations	56
	Financial Condition	68
	Liquidity and Capital Resources	84
	Risk Management	86
	Recently Issued Accounting Standards	89
	Recent Regulatory and Legislative Developments	89
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	92
Item 4.	Controls and Procedures	97
PART II	OTHER INFORMATION	97
Item 1.	Legal Proceedings	97
Item 1A.	Risk Factors	97
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	97
Item 3.	Defaults Upon Senior Securities	97
Item 4.	(Removed and Reserved)	97
Item 5.	Other Information	97
Item 6.	Exhibits	97
Exhibit 31.1	Certification of President and CEO Pursuant to Section 302
Exhibit 31.2	Certification of Senior VP and CAO Pursuant to Section 302
Exhibit 32	Certification of President and CEO and Senior VP and CAO Pursuant to Section 906
Exhibit 101	XBRL Documents

2

Important Notice about Information in this Quarterly Report

In this quarterly report, unless the context suggests otherwise, references to the “FHLBank,” “FHLBank Topeka,” “we,” “us” and “our” mean the Federal Home Loan Bank of Topeka, and “FHLBanks” mean the 12 Federal Home Loan Banks, including the FHLBank Topeka.

The information contained in this quarterly report is accurate only as of the date of this quarterly report and as of the dates specified herein.

The product and service names used in this quarterly report are the property of the FHLBank, and in some cases, the other FHLBanks. Where the context suggests otherwise, the products, services and company names mentioned in this quarterly report are the property of their respective owners.

Special Cautionary Notice Regarding Forward-looking Statements

The information contained in this Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements describing the objectives, projections, estimates or future predictions of the FHLBank’s operations. These statements may be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “is likely,” “could,” “estimate,” “expect,” “will,” “intend,” “probable,” “project,” “should,” or their negatives or other variations of these terms. The FHLBank cautions that by their nature forward-looking statements involve risk or uncertainty and that actual results may differ materially from those expressed in any forward-looking statements as a result of such risks and uncertainties, including but not limited to:

§   Governmental actions, including legislative, regulatory or other developments that affect the FHLBank, its members, counterparties, or investors, including those resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act);

§   Changes in economic and market conditions, including conditions in the mortgage, housing and capital markets;

§   Changes in demand for advances or consolidated obligations of the FHLBank and/or of the FHLBank System;

§   Effects of derivative accounting treatment, other-than-temporary impairment (OTTI) accounting treatment and other accounting rule requirements;

§   The effects of amortization/accretion;

§   Gains/losses on derivatives or on trading investments and the ability to enter into effective derivative instruments on acceptable terms;

§   Volatility of market prices, rates and indices and the timing and volume of market activity;

§   Membership changes, including changes resulting from member failures, mergers or changes in the principal place of business of members;

§   Our ability to declare dividends or to pay dividends at rates consistent with past practices;

§   Soundness of other financial institutions, including FHLBank members, nonmember borrowers, and the other FHLBanks;

§   Changes in the value or liquidity of collateral underlying advances to FHLBank members or nonmember borrowers or collateral pledged by derivative counterparties;

§   Competitive forces, including competition for loan demand, purchases of mortgage loans and access to funding;

§   The ability of the FHLBank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services;

§   The ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the FHLBank has joint and several liability;

§   Changes in the credit standing of the United States government, the FHLBank and the other FHLBanks, including the credit ratings assigned to each;

§   Changes in the fair value and economic value of, impairments of, and risks associated with, the FHLBank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and related credit enhancement (CE) protections;

§   The volume of eligible mortgage loans originated and sold by participating members to the FHLBank through its various mortgage finance products (Mortgage Partnership Finance® (MPF®) Program1); and

§   Adverse developments or events, including but not limited to legislative and regulatory developments, affecting or involving other FHLBanks, housing government sponsored enterprises (GSE) or the FHLBank System in general.

Readers of this report should not rely solely on the forward-looking statements and should consider all risks and uncertainties addressed throughout this report, as well as those discussed under Item 1A – “Risk Factors” in our annual report on Form 10-K, incorporated by reference herein.

All forward-looking statements contained in this Form 10-Q are expressly qualified in their entirety by this cautionary notice. The reader should not place undue reliance on such forward-looking statements, since the statements speak only as of the date that they are made and the FHLBank has no obligation and does not undertake publicly to update, revise or correct any forward-looking statement for any reason.

 1  "Mortgage Partnership Finance," "MPF" and "eMPF" are registered trademarks of the Federal Home Loan Bank of Chicago.

3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FEDERAL HOME LOAN BANK OF TOPEKA

STATEMENTS OF CONDITION – Unaudited

(In thousands, except par value)

	September 30, 2011			December 31, 2010
ASSETS
Cash and due from banks	$	1,797,507		$	260
Interest-bearing deposits		106			24
Federal funds sold		700,000			1,755,000
Investment securities:
Trading securities (Note 3)		6,192,849			6,334,939
Held-to-maturity securities1 (Note 3)		5,408,969			6,755,978
Total investment securities		11,601,818			13,090,917
Advances (Notes 4 and 6)		17,017,649			19,368,329
Mortgage loans held for sale (Notes 5 and 6)		0			120,525
Mortgage loans held for portfolio:
Mortgage loans held for portfolio (Note 5)		4,798,056			4,175,817
Less allowance for credit losses on mortgage loans (Note 6)		(3,613	)		(2,911	)
Mortgage loans held for portfolio, net		4,794,443			4,172,906
Accrued interest receivable		79,575			93,341
Premises, software and equipment, net		11,491			12,609
Derivative assets (Note 7)		29,034			26,065
Other assets		57,728			66,091
TOTAL ASSETS	$	36,089,351		$	38,706,067
LIABILITIES AND CAPITAL
Liabilities:
Deposits:
Interest-bearing (Note 8)	$	2,164,604		$	1,177,104
Non-interest-bearing (Note 8)		36,409			32,848
Total deposits		2,201,013			1,209,952
Consolidated obligations, net:
Discount notes (Note 9)		11,505,916			13,704,542
Bonds (Note 9)		20,380,300			21,521,435
Total consolidated obligations, net		31,886,216			35,225,977
Mandatorily redeemable capital stock (Note 12)		10,768			19,550
Accrued interest payable		103,421			128,551
Affordable Housing Program (Note 10)		29,515			39,226
Payable to Resolution Funding Corp. (REFCORP) (Note 11)		0			8,014
Derivative liabilities (Note 7)		113,601			255,707
Other liabilities		33,748			35,612
TOTAL LIABILITIES		34,378,282			36,922,589
Commitments and contingencies (Note 15)

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

4

FEDERAL HOME LOAN BANK OF TOPEKA

STATEMENTS OF CONDITION – Unaudited (continued)

(In thousands, except par value)

Capital:
Capital stock outstanding – putable:
Class A ($100 par value; 5,934 and 5,934 shares issued and outstanding) (Note 12)		593,444			593,386
Class B ($100 par value; 7,656 and 8,610 shares issued and outstanding) (Note 12)		765,607			861,010
Total capital stock		1,359,051			1,454,396
Unrestricted retained earnings		376,863			351,754
Accumulated other comprehensive income (loss):
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities (Note 3)		(21,721	)		(19,291	)
Defined benefit pension plan – net loss		(3,124	)		(3,381	)
Total accumulated other comprehensive income (loss)		(24,845	)		(22,672	)
TOTAL CAPITAL		1,711,069			1,783,478
TOTAL LIABILITIES AND CAPITAL	$	36,089,351		$	38,706,067

1 Fair value: $5,399,809 and $6,744,289 as of September 30, 2011 and December 31, 2010, respectively.

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

5

FEDERAL HOME LOAN BANK OF TOPEKA

STATEMENTS OF INCOME – Unaudited

(In thousands)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
INTEREST INCOME:
Interest-bearing deposits	$	65		$	78		$	126		$	148
Federal funds sold		412			1,281			2,031			3,453
Trading securities		19,205			22,415			60,875			68,776
Held-to-maturity securities		23,212			32,663			77,576			116,318
Advances		37,064			50,731			117,513			149,813
Prepayment fees on terminated advances		7,042			3,849			8,987			11,804
Mortgage loans held for sale		0			0			2,142			0
Mortgage loans held for portfolio		50,082			44,176			145,134			128,349
Overnight loans to other Federal Home Loan Banks		0			0			1			1
Other		545			644			1,702			2,001
Total interest income		137,627			155,837			416,087			480,663
INTEREST EXPENSE:
Deposits		804			849			2,047			2,121
Consolidated obligations:
Discount notes		1,589			5,793			8,642			15,863
Bonds		74,647			91,822			230,135			270,482
Overnight loans from other Federal Home Loan Banks		1			4			4			7
Securities sold under agreements to repurchase		0			3			0			3
Mandatorily redeemable capital stock (Note 12)		48			125			152			246
Other		96			188			335			605
Total interest expense		77,185			98,784			241,315			289,327
NET INTEREST INCOME		60,442			57,053			174,772			191,336
Provision for credit losses on mortgage loans (Note 6)		327			205			1,236			1,161
NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION		60,115			56,848			173,536			190,175
OTHER INCOME (LOSS):
Total other-than-temporary impairment losses on held-to-maturity securities (Note 3)		(5,847	)		0			(10,074	)		(17,482	)
Portion of other-than-temporary impairment losses on held-to-maturity securities recognized in other comprehensive income (loss)		3,824			(165	)		5,597			13,932
Net other-than-temporary impairment losses on held-to-maturity securities		(2,023	)		(165	)		(4,477	)		(3,550	)
Net gain (loss) on trading securities (Note 3)		24,732			26,768			28,299			74,887
Net gain (loss) on derivatives and hedging activities (Note 7)		(74,778	)		(52,600	)		(105,024	)		(232,140	)
Net realized gain (loss) on sale of mortgage loans held for sale (Note 5 and 6)		0			0			4,425			0
Service fees		1,219			1,276			3,701			3,973
Standby bond purchase agreement commitment fees		1,022			810			3,029			2,381
Other		213			419			557			959
Total other income (loss)		(49,615	)		(23,492	)		(69,490	)		(153,490	)
OTHER EXPENSES:
Compensation and benefits		6,472			6,226			21,898			18,712
Other operating		3,556			3,565			10,548			10,117
Finance Agency		822			358			3,134			1,137
Office of Finance		551			382			1,741			1,342
Other		1,650			463			4,154			2,547
Total other expenses		13,051			10,994			41,475			33,855
INCOME (LOSS) BEFORE ASSESSMENTS		(2,551	)		22,362			62,571			2,830
Affordable Housing Program (Note 10)		(250	)		256			5,091			256
REFCORP (Note 11)		0			515			11,822			515
Total assessments		(250	)		771			16,913			771
NET INCOME (LOSS)	$	(2,301	)	$	21,591		$	45,658		$	2,059

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

6

FEDERAL HOME LOAN BANK OF TOPEKA

STATEMENTS OF CAPITAL FOR PERIODS ENDED SEPTEMBER 30, 2011 AND 2010 – Unaudited

(In thousands)

																Accumulated
																Other
	Capital Stock Class A1						Capital Stock Class B1						Retained			Comprehensive			Total
	Shares			Par Value			Shares			Par Value			Earnings			Income (Loss)			Capital
BALANCE – DECEMBER 31, 2009		2,936		$	293,554			13,091		$	1,309,142		$	355,075		$	(11,861	)	$	1,945,910
Proceeds from issuance of capital stock		36			3,593			619			61,910									65,503
Repurchase/redemption of capital stock								(113	)		(11,301	)								(11,301	)
Comprehensive income (loss):
Net income (loss)														2,059
Other comprehensive income (loss):
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
Non-credit portion																	(16,398	)
Reclassification of non-credit portion included in net income																	2,466
Accretion of non-credit portion																	2,874
Defined benefit pension plan:
Amortization of prior service cost																	(5	)
Amortization of net loss																	205
Total comprehensive income (loss)																				(8,799	)
Net reclassification of shares to mandatorily redeemable capital stock		(795	)		(79,504	)		(1,360	)		(136,042	)								(215,546	)
Net transfer of shares between Class A and Class B		3,638			363,816			(3,638	)		(363,816	)								0
Dividends on capital stock (Class A – 0.8%, Class B – 3.0%):
Cash payment														(247	)					(247	)
Stock issued								296			29,652			(29,652	)					0
BALANCE – SEPTEMBER 30, 2010		5,815		$	581,459			8,895		$	889,545		$	327,235		$	(22,719	)	$	1,775,520

__________

1    Putable

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

7

FEDERAL HOME LOAN BANK OF TOPEKA

STATEMENTS OF CAPITAL FOR PERIODS ENDED SEPTEMBER 30, 2011 AND 2010 – Unaudited (continued)

(In thousands)

																Accumulated
																Other
	Capital Stock Class A1						Capital Stock Class B1						Retained			Comprehensive			Total
	Shares			Par Value			Shares			Par Value			Earnings			Income (Loss)			Capital
BALANCE – DECEMBER 31, 2010		5,934		$	593,386			8,610		$	861,010		$	351,754		$	(22,672	)	$	1,783,478
Proceeds from issuance of capital stock		59			5,923			1,000			99,959									105,882
Repurchase/redemption of capital stock								(35	)		(3,354	)								(3,354	)
Comprehensive income (loss):
Net income (loss)														45,658
Other comprehensive income (loss):
Net non-credit potion of other-than-temporary impairment losses on held-to-maturity securities:
Non-credit portion																	(8,734	)
Reclassification of non-credit portion included in net income																	3,137
Accretion of non-credit portion																	3,167
Defined benefit pension plan:
Amortization of net loss																	257
Total comprehensive income (loss)																				43,485
Net reclassification of shares to mandatorily redeemable capital stock		(1,384	)		(138,386	)		(797	)		(79,743	)								(218,129	)
Net transfer of shares between Class A and Class B		1,325			132,521			(1,325	)		(132,521	)								0
Dividends on capital stock (Class A – 0.4%, Class B –3.2%):
Cash payment														(293	)					(293	)
Stock issued								203			20,256			(20,256	)					0
BALANCE – SEPTEMBER 30, 2011		5,934		$	593,444			7,656		$	765,607		$	376,863		$	(24,845	)	$	1,711,069

__________

1    Putable

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

8

FEDERAL HOME LOAN BANK OF TOPEKA

STATEMENTS OF CASH FLOWS – Unaudited

(In thousands)

	For the Nine Months Ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	45,658		$	2,059
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization:
Premiums and discounts on consolidated obligations, net		(28,603	)		(14,371	)
Concessions on consolidated obligation bonds		8,258			12,486
Premiums and discounts on investments, net		(1,985	)		(2,423	)
Premiums and discounts on advances, net		(17,399	)		(10,744	)
Premiums, discounts and deferred loan costs on mortgage loans, net		4,511			1,936
Fair value adjustments on hedged assets or liabilities		16,786			10,804
Premises, software and equipment		2,157			2,947
Other		257			200
Provision for credit losses on mortgage loans		1,236			1,161
Non-cash interest on mandatorily redeemable capital stock		147			243
Net other-than-temporary impairment losses on held-to-maturity securities		4,477			3,550
Net realized (gain) loss on sale of mortgage loans held for sale		(4,425	)		0
Net realized (gain) loss on disposals of premises, software and equipment		(6	)		50
Other (gains) losses		163			(81	)
Net (gain) loss on trading securities		(28,299	)		(74,887	)
(Gain) loss due to change in net fair value adjustment on derivative and hedging activities		126,221			140,114
(Increase) decrease in accrued interest receivable		13,761			21,840
Change in net accrued interest included in derivative assets		(17,518	)		(9,048	)
(Increase) decrease in other assets		1,138			(1,946	)
Increase (decrease) in accrued interest payable		(25,135	)		(21,828	)
Change in net accrued interest included in derivative liabilities		6,326			(1,048	)
Increase (decrease) in Affordable Housing Program liability		(9,711	)		(5,785	)
Increase (decrease) in REFCORP liability		(8,014	)		(11,041	)
Increase (decrease) in other liabilities		2,586			4,112
Total adjustments		46,929			46,241
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		92,587			48,300
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits		(274,761	)		(108,425	)
Net (increase) decrease in Federal funds sold		1,055,000			(924,000	)
Net (increase) decrease in short-term trading securities		346,813			3,809,480
Proceeds from sale of long-term trading securities		284,445			152,435
Proceeds from maturities of and principal repayments on long-term trading securities		571,237			115,579
Purchases of long-term trading securities		(1,032,403	)		0
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities		1,347,384			2,266,309
Purchases of long-term held-to-maturity securities		0			(2,375,111	)
Principal collected on advances		23,868,006			32,428,470
Advances made		(21,386,449	)		(30,453,010	)
Proceeds from sale of mortgage loans held for sale		111,444			0
Principal collected on mortgage loans		523,594			472,944
Purchase or origination of mortgage loans		(1,136,161	)		(1,077,396	)
Proceeds from sale of foreclosed assets		4,766			6,550
Principal collected on other loans made		1,285			1,202
Proceeds from sale of premises, software and equipment		24			56
Purchases of premises, software and equipment		(1,057	)		(1,254	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		4,283,167			4,313,829

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

9

FEDERAL HOME LOAN BANK OF TOPEKA

STATEMENTS OF CASH FLOWS – Unaudited (continued)

(In thousands)

	For the Nine Months Ended September 30,
	2011			2010
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	$	986,761		$	710,612
Net proceeds from issuance of consolidated obligations:
Discount notes		52,166,029			74,033,688
Bonds		10,071,191			15,598,129
Payments for maturing and retired consolidated obligations:
Discount notes		(54,360,111	)		(75,085,080	)
Bonds		(11,250,900	)		(19,989,252	)
Net increase (decrease) in overnight loans from other FHLBanks		0			120,000
Net increase (decrease) in other borrowings		(5,000	)		(5,000	)
Proceeds from financing derivatives		0			142
Net interest payments received (paid) for financing derivatives		(61,654	)		(80,411	)
Proceeds from issuance of capital stock		105,882			65,503
Payments for repurchase/redemption of capital stock		(3,354	)		(11,301	)
Payments for repurchase of mandatorily redeemable capital stock		(227,058	)		(212,720	)
Cash dividends paid		(293	)		(247	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(2,578,507	)		(4,855,937	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,797,247			(493,808	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		260			494,553
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,797,507		$	745
Supplemental disclosures:
Interest paid	$	273,775		$	301,880
Affordable Housing Program payments	$	14,992		$	6,236
REFCORP payments	$	19,836		$	11,556
Net transfers of mortgage loans to real estate owned	$	4,691		$	5,257

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

10

FEDERAL HOME LOAN BANK OF TOPEKA

Notes to Financial Statements (Unaudited)

September 30, 2011

NOTE 1 – FINANCIAL STATEMENT PRESENTATION

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

The FHLBank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2010. The interim financial statements presented herein should be read in conjunction with the FHLBank’s audited financial statements and notes thereto, which are included in the FHLBank’s annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 24, 2011 (annual report on Form 10-K). The notes to the interim financial statements highlight significant changes to the notes included in the annual report on Form 10-K.

Use of Estimates: The preparation of financial statements under GAAP requires management to make estimates and assumptions as of the date of the financial statements in determining the reported amounts of assets, liabilities and estimated fair values and in determining the disclosure of any contingent assets or liabilities. Estimates and assumptions by management also affect the reported amounts of income and expense during the reporting period. Many of the estimates and assumptions, including those used in financial models, are based on financial market conditions as of the date of the financial statements. Because of the volatility of the financial markets, as well as other factors that affect management estimates, actual results may vary from these estimates.

Reclassifications: Certain amounts in the financial statements have been reclassified to conform to current period presentations. Such reclassifications have no impact on total assets, net income or capital.

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NOTE 2 – RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS AND CHANGES IN AND ADOPTIONS OF ACCOUNTING PRINCIPLES

Receivables – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses: In July 2010, the Financial Accounting Standards Board (FASB) issued guidance expanding the disclosure requirements associated with receivables. In addition, the guidance introduced the concepts of financing receivables, portfolio segment and class of financing receivable.

§   Financing receivables, as defined by this guidance, are financing arrangements that represent a contractual right to receive money on demand or on fixed or determinable dates and is recognized as an asset in the FHLBank’s Statements of Condition excluding: (1) receivables measured at fair value with changes in fair value reported in earnings; (2) receivables measured at lower of cost or fair value; (3) trade accounts receivable that have a contractual maturity of one year or less and that have arose from the sale of goods or services; (4) debt securities within the scope of the guidance for Investments-Debt and Equity Securities; or (5) a transferor’s interests in securitization transactions that are accounted for as sales and purchased beneficial interests in securitized financial assets within the scope of the guidance for Investments-Other.

§   Portfolio segment represents the level at which the FHLBank develops and documents a systematic method for determining the allowance for credit losses. This guidance requires the FHLBank to expand its disclosures by portfolio segment to include: (1) a description of the FHLBank’s accounting policies and methodology used to estimate the allowance for credit loss and charging off of uncollectible financing receivables; (2) a roll-forward of the allowance for credit losses; (3) disclosures quantifying the effects of changes in the method of estimating the allowance for credit loss; (4) disclosure of the amount of significant purchases and sales of financing receivables during each reporting period; (5) disclosure of the balance of the allowance for credit loss by impairment method at the end of each period; and (6) the recorded investment in financing receivables at the end of each period related to each balance in the allowance for credit loss disaggregated on the basis of impairment method.

§   Class of financing receivable represents a subset of the portfolio segment that is determined on the basis of initial measurement attribute, risk characteristics and the FHLBank’s method of monitoring and assessing credit risk. In addition to the portfolio disclosures, the guidance requires the FHLBank to provide disclosures by class of financing receivable that include: (1) the recorded investment in impaired loans and the amount of recorded investment in which there is a related allowance for credit losses determined on an individual loan impairment basis; (2) the recorded investment in impaired loans for which there is no related allowance for credit losses determined on an individual loan impairment basis; (3) the total unpaid principal balance (UPB) of the impaired loans along with the FHLBank’s policy for determining which loans are assessed for impairment on an individual loan basis; (4) the factors considered in determining if a loan is impaired; (5) qualitative and quantitative information about troubled debt restructurings; and (6) qualitative and quantitative information related to modified loans that have defaulted within 12 months of the modification.

The disclosure guidance that is applicable to activity that occurs during a reporting period was effective for the first interim or annual period beginning on or after December 15, 2010 (January 1, 2011 for the FHLBank) and the remaining disclosures were effective for the first interim or annual period ending on or after December 15, 2010 (December 31, 2010 for the FHLBank). In January 2011, the FASB issued an amendment to this accounting guidance which deferred the effective date of disclosures about troubled debt restructurings. The deferral in this amendment was effective upon issuance. In April 2011, the FASB issued an additional amendment to this guidance that eliminated the deferral of the disclosures related to troubled debt restructurings and provided expanded guidance of what constitutes a troubled debt restructuring. This amendment was effective for public companies for the first interim or annual period beginning on or after June 15, 2011 (July 1, 2011 for the FHLBank), and was applied retroactively to the beginning of the annual period of adoption. Measuring impairment on receivables considered impaired under the new guidance was applied prospectively for the first interim or annual period beginning on or after June 15, 2011 (July 1, 2011 for the FHLBank). Receivables considered impaired based on the new guidance that were previously impaired using a pool level assessment require disclosure in periods after the adoption of this amendment. Comparative disclosures are not required in the period of initial adoption for any previous period presented. The adoption of this guidance resulted in increased financial statement disclosures, but did not affect the FHLBank’s financial condition, results of operations or cash flows.

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Transfers and Servicing – Reconsideration of Effective Control for Repurchase Agreements: In April 2011, the FASB issued guidance that removed the criterion which required the transferor of financial assets to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee to preclude sales accounting for the transfer. In addition, the new guidance removed the collateral maintenance implementation guidance from the determination of maintaining effective control over the transferred financial assets. This amendment is effective for the first interim or annual period beginning on or after December 15, 2011 (January 1, 2012 for the FHLBank). The guidance will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date and early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on the FHLBank’s financial condition, results of operations or cash flows.

Fair Value Measurement – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs: In May 2011, the FASB issued guidance which represents the converged guidance of FASB and the International Accounting Standards Board on fair value measurement and disclosures. In particular, the new guidance: (1) requires the disclosure of the level within the fair value hierarchy level for financial instruments that are not measured at fair value but for which the fair value is required to be disclosed; (2) expands level 3 fair value disclosures about valuation process and sensitivity of the fair value measurement to changes in unobservable inputs; (3) permits an exception to measure fair value of a net position for financial assets and financial liabilities managed on a net position basis; and (4) clarifies that the highest and best use measurement is only applicable to nonfinancial assets. This amendment is effective for interim and annual periods beginning after December 15, 2011 (January 1, 2012 for the FHLBank) with early application not permitted. The adoption of this guidance will result in increased financial statement disclosures, but is not expected to impact the FHLBank’s financial condition, results of operations or cash flows.

Comprehensive Income – Presentation of Comprehensive Income: In June 2011, the FASB issued guidance which requires all non-owner changes in stockholders’ equity to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated by this new guidance. The FHLBank has preliminarily decided to present non-owner changes using the two-statement approach. The two-statement approach requires the first statement to present total net income and its components followed, consecutively, by a second statement that presents total other comprehensive income, the components of other comprehensive income, and total comprehensive income. The guidance will be applied retrospectively for interim and annual periods beginning after December 15, 2011 (January 1, 2012 for the FHLBank) with early adoption permitted. The adoption of this guidance will result in new presentation within the Statements of Income and the Statements of Capital, but will not impact the FHLBank’s financial condition, overall results of operations or cash flows.

Compensation – Retirement Benefits-Multiemployer Plans – Disclosure about an Employer’s Participation in a Multiemployer Plan: In September 2011, the FASB issued guidance expanding the disclosure requirements associated with multiemployer plans. The guidance requires that employers provide additional separate disclosures for multiemployer pension plans and other multiemployer postretirement benefit plans. For employers that participate in multiemployer pension plans, the guidance requires an employer to provide additional quantitative and qualitative disclosures. The amended disclosures provide users with more detailed information about an employer’s involvement in multiemployer pension plans, including: (1) the significant multiemployer plans in which an employer participates; (2) the level of an employer’s participation in the significant multiemployer plans, as well as the employer’s contributions made to the plans and an indication of whether the employer’s contributions represent more than five percent of the total contributions made to the plan by all contributing employers; (3) the financial health of the significant multiemployer plans, including among other thing, an indication of the funded status; and (4) the nature of the employer commitments to the plan. This amendment is effective for annual periods ending after December 15, 2011 (December 31, 2011 for the FHLBank) with early application permitted. The adoption of this guidance will result in increased financial statement disclosures, but is not expected to impact the FHLBank’s financial condition, results of operations or cash flows.

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NOTE 3 – INVESTMENT SECURITIES

Major Security Types: Trading and held-to-maturitysecurities as of September 30, 2011 are summarized in the following table (in thousands):

	Trading		Held-to-maturity
	Fair Value		Carrying Value		OTTI Recognized in OCI		Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Commercial paper	$	1,969,549	$	0	$	0	$	0	$	0	$	0	$	0
Certificates of deposit		1,544,954		0		0		0		0		0		0
TCCULGP1 obligations		205,681		0		0		0		0		0		0
TLGP2 obligations		533,086		0		0		0		0		0		0
FHLBank3 obligations		127,346		0		0		0		0		0		0
Fannie Mae4obligations		356,427		0		0		0		0		0		0
Freddie Mac4obligations		801,208		0		0		0		0		0		0
Farm Credit4 obligations		252,451		0		0		0		0		0		0
Farmer Mac4 obligations		32,178		0		0		0		0		0		0
State or local housing agency obligations		0		87,294		0		87,294		128		13,308		74,114
Subtotal		5,822,880		87,294		0		87,294		128		13,308		74,114
Mortgage-backed securities:
Fannie Mae residential4		216,562		2,108,443		0		2,108,443		22,065		1,438		2,129,070
Freddie Mac residential4		151,994		2,290,448		0		2,290,448		21,939		1,163		2,311,224
Ginnie Mae residential5		1,413		19,449		0		19,449		965		1		20,413
Private-label mortgage-backed securities:
Residential loans		0		861,960		21,365		883,325		6,049		67,210		822,164
Commercial loans		0		39,880		0		39,880		745		0		40,625
Home equity loans		0		1,495		356		1,851		448		100		2,199
Mortgage-backed securities		369,969		5,321,675		21,721		5,343,396		52,211		69,912		5,325,695
TOTAL	$	6,192,849	$	5,408,969	$	21,721	$	5,430,690	$	52,339	$	83,220	$	5,399,809

1	Represents corporate credit union debentures guaranteed by the National Credit Union Administration (NCUA) under the Temporary Corporate Credit Union Liquidity Guarantee Program (TCCULGP).
2	Represents corporate debentures guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP).
3	See Note 17 for transactions with other FHLBanks.
4	Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Farm Credit Bank (Farm Credit), and Federal Agricultural Mortgage Corporation (Farmer Mac) are government sponsored enterprises (GSEs). Fannie Mae and Freddie Mac were placed into conservatorship by the Federal Housing Finance Agency (Finance Agency) on September 7, 2008 with the Finance Agency named as conservator.
5	Government National Mortgage Association (Ginnie Mae) securities are guaranteed by the U.S. government.

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Trading and held-to-maturitysecurities as of December 31, 2010 are summarized in the following table (in thousands):

	Trading		Held-to-maturity
	Fair Value		Carrying Value		OTTI Recognized in OCI		Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Commercial paper	$	2,349,565	$	0	$	0	$	0	$	0	$	0	$	0
Certificates of deposit		1,755,013		0		0		0		0		0		0
U.S. Treasuries		282,996		0		0		0		0		0		0
FHLBank1 obligations		120,876		0		0		0		0		0		0
Fannie Mae2obligations		396,750		0		0		0		0		0		0
Freddie Mac2obligations		988,097		0		0		0		0		0		0
State or local housing agency obligations		0		99,012		0		99,012		10		12,754		86,268
Subtotal		5,893,297		99,012		0		99,012		10		12,754		86,268
Mortgage-backed securities:
Fannie Mae residential2		259,678		2,635,277		0		2,635,277		26,831		1,256		2,660,852
Freddie Mac residential2		180,430		2,738,943		0		2,738,943		27,799		898		2,765,844
Ginnie Mae residential3		1,534		23,048		0		23,048		1,279		1		24,326
Private-label mortgage-backed securities:
Residential loans		0		1,217,904		18,606		1,236,510		7,881		81,681		1,162,710
Commercial loans		0		40,022		0		40,022		1,800		0		41,822
Home equity loans		0		1,684		685		2,369		289		278		2,380
Manufactured housing loans		0		88		0		88		0		1		87
Mortgage-backed securities		441,642		6,656,966		19,291		6,676,257		65,879		84,115		6,658,021
TOTAL	$	6,334,939	$	6,755,978	$	19,291	$	6,775,269	$	65,889	$	96,869	$	6,744,289

1	See Note 17 for transactions with other FHLBanks.
2	Fannie Mae and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency on September 7, 2008.
3	Ginnie Mae securities are guaranteed by the U.S. government.

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The following table summarizes (in thousands) the held-to-maturity securities with unrecognized losses as of September 30, 2011. The unrecognized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrecognized loss position.

	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses
State or local housing agency obligations	$	22,688	$	4,687	$	23,139	$	8,621	$	45,827	$	13,308
Subtotal		22,688		4,687		23,139		8,621		45,827		13,308
Mortgage-backed securities:
Fannie Mae residential1		117,812		125		342,573		1,313		460,385		1,438
Freddie Mac residential1		78,258		142		278,432		1,021		356,690		1,163
Ginnie Mae residential2		358		1		0		0		358		1
Private-label mortgage-backed securities:
Residential loans		65,180		424		403,777		66,786		468,957		67,210
Home equity loans		0		0		452		100		452		100
Mortgage-backed securities		261,608		692		1,025,234		69,220		1,286,842		69,912
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	284,296	$	5,379	$	1,048,373	$	77,841	$	1,332,669	$	83,220

__________

1	Fannie Mae and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency on September 7, 2008.
2	Ginnie Mae securities are guaranteed by the U.S. government.

The following table summarizes (in thousands) the held-to-maturity securities with unrecognized losses as of December 31, 2010. The unrecognized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrecognized loss position.

	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses
State or local housing agency obligations	$	41,203	$	12,467	$	1,968	$	287	$	43,171	$	12,754
Subtotal		41,203		12,467		1,968		287		43,171		12,754
Mortgage-backed securities:
Fannie Mae residential1		79,562		55		395,329		1,201		474,891		1,256
Freddie Mac residential1		51,402		57		343,999		841		395,401		898
Ginnie Mae residential2		466		1		0		0		466		1
Private-label mortgage-backed securities:
Residential loans		35,722		334		619,611		81,347		655,333		81,681
Home equity loans		0		0		1,219		278		1,219		278
Manufactured housing loans		0		0		87		1		87		1
Mortgage-backed securities		167,152		447		1,360,245		83,668		1,527,397		84,115
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	208,355	$	12,914	$	1,362,213	$	83,955	$	1,570,568	$	96,869

1	Fannie Mae and Freddie Mac are GSEs. GSE securities are not guaranteed by the U.S. government.
2	Ginnie Mae securities are guaranteed by the U.S. government

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Redemption Terms:The fair values of trading securities and the amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of September 30, 2011 and December 31, 2010 are shown in the following table (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

	Trading				Held-to-maturity
	09/30/2011		12/31/2010		09/30/2011						12/31/2010
	Fair Value		Fair Value		Amortized Cost		Carrying Value		Fair Value		Amortized Cost		Carrying Value		Fair Value
Due in one year or less	$	4,149,820	$	4,360,368	$	0	$	0	$	0	$	0	$	0	$	0
Due after one year through five years		1,423,673		274,798		0		0		0		0		0		0
Due after five years through 10 years		249,387		1,258,131		5,450		5,450		5,450		5,740		5,740		5,742
Due after 10 years		0		0		81,844		81,844		68,664		93,272		93,272		80,526
Subtotal		5,822,880		5,893,297		87,294		87,294		74,114		99,012		99,012		86,268
Mortgage-backed securities		369,969		441,642		5,343,396		5,321,675		5,325,695		6,676,257		6,656,966		6,658,021
TOTAL	$	6,192,849	$	6,334,939	$	5,430,690	$	5,408,969	$	5,399,809	$	6,775,269	$	6,755,978	$	6,744,289

As of September 30, 2011 and December 31, 2010, 22.1 percent and 25.5 percent, respectively, of the FHLBank’s fixed rate trading securities were swapped to a floating rate.

Interest Rate Payment Terms: The following table details interest rate payment terms for held-to-maturity securities as of September 30, 2011 and December 31, 2010 (in thousands):

	09/30/2011		12/31/2010
Amortized cost of held-to-maturity securities other than mortgage-backed securities:
Fixed rate	$	23,219	$	26,637
Variable rate		64,075		72,375
Subtotal		87,294		99,012
Amortized cost of held-to-maturity mortgage-backed securities:
Pass-through securities:
Fixed rate		338		435
Variable rate		4,918		5,409
Collateralized mortgage obligations:
Fixed rate		799,852		1,205,791
Variable rate		4,538,288		5,464,622
Subtotal		5,343,396		6,676,257
TOTAL	$	5,430,690	$	6,775,269

The carrying value of the FHLBank’s mortgage-backed securities (MBS) and asset-backed securities (ABS) included net discounts of $35,133,000, of which $10,280,000 represented credit related impairment discount and $21,721,000 represented non-credit related impairment discount, as of September 30, 2011. The carrying value of the FHLBank’s MBS/ABS included net discounts of $30,507,000, of which $5,938,000 represented credit related impairment discount and $19,291,000 represented non-credit related impairment discount, as of December 31, 2010. No premiums or discounts were recorded on other held-to-maturity securities as of September 30, 2011 and December 31, 2010.

Gains and Losses: Net realized and unrealized gains (losses) on trading securities during the three- and nine-month periods ended September 30, 2011 and 2010 were as follows (in thousands):

	Three-month Period Ended						Nine-month Period Ended
	09/30/2011			09/30/2010			09/30/2011			09/30/2010
Net gains (losses) on trading securities held at September 30, 2011	$	25,826		$	29,819		$	32,753		$	79,939
Net gains (losses) on trading securities sold or matured prior to September 30, 2011		(1,094	)		(3,051	)		(4,454	)		(5,052	)
NET GAINS (LOSSES) ON TRADING SECURITIES RECORDED IN OTHER INCOME (LOSS)	$	24,732		$	26,768		$	28,299		$	74,887

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Other-than-temporary Impairment: The FHLBank evaluates its individual held-to-maturity investment securities holdings in an unrealized loss position for other-than-temporary impairment (OTTI) at least quarterly, or more frequently if events or changes in circumstances indicate that these investments may be other-than-temporarily impaired. As part of this process, if the fair value of a security is less than its amortized cost basis, the FHLBank considers its intent to sell the debt security and whether 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, the FHLBank recognizes an OTTI charge in earnings equal to the entire difference between the debt security’s amortized cost and its fair value as of the balance sheet date. For securities in unrealized loss positions that meet neither of these conditions, the FHLBank performs an analysis to determine if any of these securities are other-than-temporarily impaired.

For state and local housing agency obligations, the FHLBank determined that, as of September 30, 2011, all of the gross unrealized losses on these bonds are temporary because the strength of the underlying collateral and credit enhancements was sufficient to protect the FHLBank from losses based on current expectations.

For Agency MBS, 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, 2011, all of the gross unrealized losses on its Agency MBS are temporary.

The FHLBanks’ OTTI Governance Committee, which is comprised of representation from all 12 FHLBanks, has responsibility for reviewing and approving the key modeling assumptions, inputs and methodologies to be used by the FHLBanks to generate cash flow projections used in analyzing credit losses and determining OTTI for private-label MBS/ABS. To support consistency among the FHLBanks, FHLBank Topeka completed its OTTI analysis primarily based upon cash flow analysis prepared by the FHLBank of San Francisco on behalf of FHLBank Topeka using key modeling assumptions provided by the FHLBanks’ OTTI Governance Committee for the majority of its private-label residential MBS and home equity loan ABS. Certain private-label investments backed by multi-family and commercial real estate loans, home equity lines of credit and manufactured housing loans were outside of the scope of the OTTI Governance Committee and were analyzed for OTTI by the FHLBank utilizing other methodologies.

For private-label commercial MBS, consistent with the other FHLBanks, the FHLBank assesses the creditworthiness of the issuer, the credit ratings assigned by the Nationally Recognized Statistical Rating Organizations (NRSRO), the performance of the underlying loans and the credit support provided by the subordinate securities to make a conclusion as to whether the commercial MBS will be settled at an amount less than the amortized cost basis. The FHLBank had only one private-label commercial MBS as of September 30, 2011, and its fair value was higher than its amortized cost, so it was not reviewed for impairment.

An OTTI cash flow analysis is run by the FHLBank of San Francisco for each of the FHLBank’s remaining private-label MBS/ABS using the FHLBank System’s common platform and agreed-upon assumptions. For certain private-label MBS/ABS where underlying collateral data is not available, alternative procedures as determined by each FHLBank are used to assess these securities for OTTI.

The evaluation includes estimating projected cash flows that are likely to be collected based on assessments of all available information about each individual security, the structure of the security and certain assumptions as determined by the FHLBanks’ OTTI Governance Committee, such as the remaining payment terms for the security, prepayment speeds, default rates, loss severity on the collateral supporting the FHLBank’s security based on underlying borrower and loan characteristics, expected housing price changes and interest rate assumptions, to determine whether the FHLBank will recover the entire amortized cost basis of the security. In performing a detailed cash flow analysis, the FHLBank identifies the best estimate of the cash flows expected to be collected. If this estimate results in a present value of expected cash flows (discounted at the security’s effective yield) that is less than the amortized cost basis of a security (that is, a credit loss exists), an OTTI is considered to have occurred.

To assess whether the entire amortized cost basis of securities will be recovered, the FHLBank of San Francisco, on behalf of the FHLBank, performed a cash flow analysis using two third-party models. The first third-party 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 are 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 of 10,000 or more people. The FHLBank’s housing price forecast assumed current-to-trough home price declines ranging from 0 percent (for those housing markets that are believed to have reached their trough) to 8.0 percent. For those markets for which further home price declines are anticipated, such declines were projected to occur over the three- to nine-month period beginning July 1, 2011. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market. Under those recovery paths, home prices were projected to increase within a range of 0 percent to 2.8 percent in the first year, 0 percent to 3.0 percent in the second year, 1.5 percent to 4.0 percent in the third year, 2.0 percent to 5.0 percent in the fourth year, 2.0 percent to 6.0 percent in each of the fifth and sixth years, and 2.3 percent to 5.6 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 balances are 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 model approach reflects a best estimate scenario and includes a base case current-to-trough housing price forecast and a base case housing price recovery path.

18

As a result of these security-level evaluations, the projected cash flows as of September 30, 2011 on 18 private-label MBS/ABS indicated that the FHLBank would not receive all principal and interest payments throughout the remaining lives of these securities. Credit losses were recognized in earnings upon initial impairment on all of these securities because the present value of the expected cash flows was less than the amortized cost. Eight additional securities that have been previously identified as other-than-temporarily impaired have had improvements in their cash flows such that neither principal nor interest shortfalls are currently projected. Consequently, the FHLBank expects to recover the entire amortized cost of these securities and to amortize the entire OTTI balance through to maturity. The 26 securities on which OTTI charges have been recorded included 10 private-label MBS/ABS that were initially identified as other-than-temporarily impaired prior to 2011, 7 private-label MBS/ABS that were first identified as other-than-temporarily impaired in the first quarter of 2011, 2 private-label MBS/ABS that were first identified as other-than-temporarily impaired in the second quarter of 2011, and 7 private-label MBS/ABS that were first identified as other-than-temporarily impaired in the third quarter of 2011. The OTTI amount related to non-credit losses represents the difference between the current fair value of the security and the present value of the FHLBank’s best estimate of the cash flows expected to be collected, which is calculated as described previously. The OTTI amount recognized in other comprehensive income (OCI) is accreted to the carrying value of the security on a prospective basis over the remaining life of the security. That accretion increases the carrying value of the security and continues until the security is sold or matures, or there is an additional OTTI that is recognized in earnings. The FHLBank does not intend to sell any of these 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 of the 26 OTTI securities.

For those securities for which an OTTI was determined to have occurred as of September 30, 2011 (that is, securities for which the FHLBank determined that it was more likely than not that the amortized cost basis would not be recovered), the following table presents a summary of the significant inputs used to measure the amount of credit loss recognized in earnings during this period as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before the FHLBank will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the private-label MBS/ABS investments in each category shown. The classification (prime, Alt-A and subprime) is based on the model used to run the estimated cash flows for the CUSIP, which may not necessarily be the same as the classification at the time of origination.

Private-label residential MBS
Year of Securitization	Significant Inputs						Current Credit Enhancement
	Prepayment Rates		Default Rates		Loss Severities
	Weighted Average	Rates/ Range	Weighted Average	Rates/ Range	Weighted Average	Rates/ Range	Weighted Average	Rates/ Range
Prime:
2004 and prior	7.3%	7.0-7.7%	19.1%	2.8-30.7%	32.5%	27.8-35.8%	8.5%	4.0-11.8%
2005	9.5	9.5	19.3	19.3	40.9	40.9	2.3	2.3
Total Prime	8.1	7.0-9.5	19.2	2.8-30.7	35.5	27.8-40.9	6.3	2.3-11.8
Alt-A:
2004 and prior	9.5	9.4-9.8	24.0	22.2-26.5	44.4	43.4-45.7	9.4	8.9-9.7
2005	9.2	7.5-10.0	18.9	15.8-22.7	43.8	38.4-47.5	4.7	2.4-7.6
Total Alt-A	9.3	7.5-10.0	20.0	15.8-26.5	44.0	38.4-47.5	5.7	2.4-9.7
TOTAL	9.1%	7.0-10.0%	19.9%	2.8-30.7%	42.5%	27.8-47.5%	5.8%	2.3-11.8%

Home Equity Loan ABS
Year of Securitization	Significant Inputs						Current Credit Enhancement
	Prepayment Rates		Default Rates		Loss Severities1
	Weighted Average	Rates/ Range	Weighted Average	Rates/ Range	Weighted Average	Rates/ Range	Weighted Average	Rates/ Range
Subprime:
2004 and prior	1.2%	1.2%	5.0%	5.0%	126.8%	126.8%	0.0%	0.0%

__________

1 Although MBS/ABS investment losses cannot exceed 100 percent, the loss severity of the underlying collateral can exceed 100 percent as a result of extended periods in foreclosure which result in an accumulation of taxes, insurance, maintenance and other fees.

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For the 12 private-label securities on which OTTI charges were recognized during the three-month period ended September 30, 2011, the FHLBank’s reported balances as of September 30, 2011 are as follows (in thousands):

	Unpaid Principal Balance		Amortized Cost		Carrying Value		Fair Value
Private-label residential MBS:
Prime	$	17,142	$	16,631	$	14,393	$	14,566
Alt-A		80,185		77,755		61,627		62,633
Total private-label residential MBS		97,327		94,386		76,020		77,199
Home equity loan ABS:
Subprime		1,386		652		599		747
TOTAL	$	98,713	$	95,038	$	76,619	$	77,946

For the 26 private-label securities identified as other-than-temporarily impaired, the FHLBank’s reported balances as of September 30, 2011 are as follows (in thousands):

	Unpaid Principal Balance		Amortized Cost		Carrying Value		Fair Value
Private-label residential MBS:
Prime	$	75,080	$	73,825	$	70,013	$	71,371
Alt-A		90,199		83,532		65,979		66,573
Total private-label residential MBS		165,279		157,357		135,992		137,944
Home equity loan ABS:
Subprime		4,486		1,851		1,495		2,199
TOTAL	$	169,765	$	159,208	$	137,487	$	140,143

The FHLBank recognized OTTI on its held-to-maturity securities portfolio for the three- and nine-month periods ended September 30, 2011 and 2010 based on the FHLBank’s impairment analysis of its investment portfolio, as follows (in thousands):

	Three-month Period Ended
	09/30/2011							09/30/2010
	OTTI Related to Credit Losses		OTTI Related to Non-credit Losses			Total OTTI Losses		OTTI Related to Credit Losses		OTTI Related to Non-credit Losses			Total OTTI Losses
Private-label residential MBS:
Prime	$	140	$	2,182		$	2,322	$	0	$	0		$	0
Alt-A1		1,685		1,840			3,525		59		(59	)		0
Total private-label residential MBS		1,825		4,022			5,847		59		(59	)		0
Home equity loan ABS:
Subprime		198		(198	)		0		106		(106	)		0
TOTAL	$	2,023	$	3,824		$	5,847	$	165	$	(165	)	$	0

 1 The three-month period ended September 30, 2011 includes an out-of-period $699,000 reclassification adjustment of the non-credit portion of OTTI to net income applicable to the three-month period ended June 30, 2011. The amount was not material to the FHLBank's financial condition, results of operation or cash flows.

20

	Nine-month Period Ended
	09/30/2011							09/30/2010
	OTTI Related to Credit Losses		OTTI Related to Non-credit Losses			Total OTTI Losses		OTTI Related to Credit Losses		OTTI Related to Non-credit Losses			Total OTTI Losses
Private-label residential MBS:
Prime	$	687	$	2,938		$	3,625	$	256	$	254		$	510
Alt-A		3,517		2,932			6,449		2,190		14,782			16,972
Total private-label residential MBS		4,204		5,870			10,074		2,446		15,036			17,482
Home equity loan ABS:
Subprime		273		(273	)		0		1,104		(1,104	)		0
TOTAL	$	4,477	$	5,597		$	10,074	$	3,550	$	13,932		$	17,482

The following table presents a roll-forward of OTTI activity for the three- and nine-month periods ended September 30, 2011 and 2010 related to credit losses recognized in earnings and OTTI activity related to all other factors recognized in OCI (in thousands):

	Three-month Period Ended
	09/30/2011									09/30/2010
	OTTI Related to Credit Loss			OTTI Related to Other Factors			Total OTTI			OTTI Related to Credit Loss		OTTI Related to Other Factors			Total OTTI
Balance, beginning of period	$	8,296		$	18,976		$	27,272		$	5,158	$	22,244		$	27,402
Additional charge on securities for which OTTI was not previously recognized1		504			4,830			5,334			0		0			0
Additional charge on securities for which OTTI was previously recognized1		97			416			513			0		0			0
Reclassification adjustment of non-credit portion of OTTI included in net income2		1,422			(1,422	)		0			165		(165	)		0
Amortization of credit component of OTTI3		(39	)		0			(39	)		188		0			188
Accretion of OTTI related to all other factors		0			(1,079	)		(1,079	)		0		(1,302	)		(1,302	)
Balance, end of period	$	10,280		$	21,721		$	32,001		$	5,511	$	20,777		$	26,288

__________

1	For the three-month period ended September 30, 2011, securities previously impaired represent all securities that were impaired prior to July 1, 2011. For the three-month period ended September 30, 2010, securities previously impaired represent all securities that were impaired prior to July 1, 2010.
2	The three-month period ended September 30, 2011 includes an out-of-period $699,000 reclassification adjustment of the non-credit portion of OTTI to net income applicable to the three-month period ended June 30, 2011. The amount was not material to the FHLBank's financial condition, results of operation or cash flows.
3	The FHLBank amortizes the credit component based on estimated cash flows prospectively up to the amount of expected principal to be recovered. The discounted cash flows will move from the discounted loss value to the ultimate principal to be written off at the projected date of loss. If the expected cash flows improve, the amount of expected loss decreases which causes a corresponding decrease in the calculated amortization. Based on the level of improvement in the cash flows, the amortization could become a positive adjustment to income.

21

	Nine-month Period Ended
	09/30/2011									09/30/2010
	OTTI Related to Credit Loss			OTTI Related to Other Factors			Total OTTI			OTTI Related to Credit Loss			OTTI Related to Other Factors			Total OTTI
Balance, beginning of period	$	5,938		$	19,291		$	25,229		$	2,034		$	9,719		$	11,753
Additional charge on securities for which OTTI was not previously recognized1		1,089			8,734			9,823			426			16,398			16,824
Additional charge on securities for which OTTI was previously recognized2		251			0			251			658			0			658
Reclassification adjustment of non-credit portion of OTTI included in net income		3,137			(3,137	)		0			2,466			(2,466	)		0
Amortization of credit component of OTTI2		(135	)		0			(135	)		(73	)		0			(73	)
Accretion of OTTI related to all other factors		0			(3,167	)		(3,167	)		0			(2,874	)		(2,874	)
Balance, end of period	$	10,280		$	21,721		$	32,001		$	5,511		$	20,777		$	26,288

__________

1

For the nine-month period ended September 30, 2011, securities previously impaired represent all securities that were impaired prior to January 1, 2011. For the nine-month period ended September 30, 2010, securities previously impaired represent all securities that were impaired prior to January 1, 2010.

2

The FHLBank amortizes the credit component based on estimated cash flows prospectively up to the amount of expected principal to be recovered. The discounted cash flows will move from the discounted loss value to the ultimate principal to be written off at the projected date of loss. If the expected cash flows improve, the amount of expected loss decreases which causes a corresponding decrease in the calculated amortization. Based on the level of improvement in the cash flows, the amortization could become a positive adjustment to income.

The fair value of a portion of the FHLBank’s held-to-maturity securities portfolio remains below the amortized cost of the securities due to interest rate volatility, illiquidity in the marketplace and credit deterioration in the U.S. mortgage markets since early 2008. However, the decline in fair value of these securities is considered temporary as the FHLBank expects to recover the entire amortized cost basis on the remaining held-to-maturity securities in unrecognized loss positions and neither intends to sell these 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.

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NOTE 4 – ADVANCES

General Terms: The FHLBank offers a wide range of fixed and variable rate advance types with different maturities, interest rates, payment characteristics and optionality. Fixed rate advances generally have maturities ranging from 3 days to 15 years. Variable rate advances generally have maturities ranging from overnight to 15 years, where the interest rates reset periodically at a fixed spread to the London Interbank Offered Rate (LIBOR) or other specified index. As of September 30, 2011 and December 31, 2010, the FHLBank had advances outstanding at interest rates ranging from 0 percent (AHP advances) to 8.01 percent. The following table presents advances summarized by year of contractual maturity as of September 30, 2011 and December 31, 2010 (in thousands):

	09/30/2011						12/31/2010
Year of Contractual Maturity	Amount			Weighted Average Interest Rate			Amount			Weighted Average Interest Rate
Due in one year or less	$	2,471,265			1.79	%	$	2,920,522			1.70	%
Due after one year through two years		1,642,739			2.74			1,525,657			2.79
Due after two years through three years		1,600,848			2.63			1,747,226			2.89
Due after three years through four years		1,777,696			2.41			1,407,668			3.53
Due after four years through five years		1,372,560			2.37			1,639,026			1.98
Thereafter		7,577,437			1.87			9,683,160			1.78
Total par value		16,442,545			2.12	%		18,923,259			2.10	%
Discounts		(31,528	)					(48,084	)
Hedging adjustments1		606,632						493,154
TOTAL	$	17,017,649					$	19,368,329

_________

1 See Note 7 for a discussion of: (1) the FHLBank’s objectives for using derivatives; (2) the types of assets and liabilities hedged; and (3) the accounting for derivatives and the related assets and liabilities hedged.

The FHLBank’s advances outstanding include advances that contain call options that may be exercised with or without prepayment fees at the borrower’s discretion on specific dates (call dates) before the stated advance maturities (callable advances). The borrowers normally exercise their call options on these advances when interest rates decline (fixed rate advances) or spreads change (adjustable rate advances). The FHLBank’s advances as of September 30, 2011 and December 31, 2010 include callable advances totaling $5,949,537,000 and $7,044,658,000, respectively. Of these callable advances, there were $5,931,704,000 and $7,026,484,000 of variable rate advances as of September 30, 2011 and December 31, 2010, respectively.

Convertible advances allow the FHLBank to convert an advance from one interest payment term structure to another. When issuing convertible advances, the FHLBank may purchase put options from a member that allow the FHLBank to convert the fixed rate advance to a variable rate advance at the current market rate or another structure after an agreed-upon lockout period. A convertible advance carries a lower interest rate than a comparable-maturity fixed rate advance without the conversion feature. As of September 30, 2011 and December 31, 2010, the FHLBank had convertible advances outstanding totaling $2,822,517,000 and $3,560,332,000, respectively.

The following table presents advances summarized by contractual maturity or next call date (for callable advances) and by contractual maturity or next conversion date (for convertible advances) as of September 30, 2011 and December 31, 2010 (in thousands):

	Year of Contractual Maturity or Next Call Date				Year of Contractual Maturity or Next Conversion Date
Redemption Term	09/30/2011		12/31/2010		09/30/2011		12/31/2010
Due in one year or less	$	8,187,309	$	9,685,703	$	4,654,982	$	5,690,629
Due after one year through two years		1,491,367		1,243,941		1,604,364		1,331,857
Due after two years through three years		1,222,544		1,479,576		1,643,873		1,798,151
Due after three years through four years		1,142,365		1,293,831		1,653,096		1,361,793
Due after four years through five years		837,873		1,025,527		1,212,310		1,275,926
Thereafter		3,561,087		4,194,681		5,673,920		7,464,903
TOTAL PAR VALUE	$	16,442,545	$	18,923,259	$	16,442,545	$	18,923,259

23

Interest Rate Payment Terms: The following table details additional interest rate payment terms for advances as of September 30, 2011 and December 31, 2010 (in thousands):

Par Value of Advances	09/30/2011		12/31/2010
Fixed rate:
Due in one year or less	$	1,537,195	$	1,479,588
Due after one year		8,136,076		9,034,433
Total fixed rate		9,673,271		10,514,021
Variable rate
Due in one year or less		934,070		1,440,934
Due after one year		5,835,204		6,968,304
Total variable rate		6,769,274		8,409,238
TOTAL PAR VALUE	$	16,442,545	$	18,923,259

As of September 30, 2011 and December 31, 2010, 68.6 percent and 70.5 percent, respectively, of the FHLBank’s fixed rate advances were swapped to a floating rate.

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NOTE 5 – MORTGAGE LOANS

The Mortgage Partnership Finance (MPF) Program involves the FHLBank investing in mortgage loans, which are either funded by the FHLBank through or purchased from its participating members. These mortgage loans are government-insured or guaranteed (by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Rural Housing Service of the Department of Agriculture (RHS) and/or the Department of Housing and Urban Development (HUD)) loans and conventional residential loans credit-enhanced by participating financial institutions (PFI). Depending upon a member’s product selection, the servicing rights can be retained or sold by the participating member. The FHLBank does not buy or own any mortgage servicing rights.

Mortgage Loans Held for Sale: On December 31, 2010, the FHLBank transferred mortgage loans held for portfolio to held for sale based on its intent to sell specifically identified mortgage loans. All of these loans were classified as conventional mortgage loans. The following table presents information as of December 31, 2010 on mortgage loans held for sale (in thousands):

	12/31/2010
Real Estate:
Fixed rate, medium-term1, single-family mortgages	$	16,730
Fixed rate, long-term, single-family mortgages		103,845
Total unpaid principal balance		120,575
Premiums		389
Discounts		(241	)
Hedging adjustments2		(113	)
Total before fair value adjustments		120,610
Fair value adjustments		(85	)
MORTGAGE LOANS HELD FOR SALE	$	120,525

1	Medium-term defined as a term of 15 years or less.
2	See Note 7 for a discussion of: (1) the FHLBank’s objectives for using derivatives; (2) the types of assets and liabilities hedged; and (3) the accounting for derivatives and the related assets and liabilities hedged.

On May 6, 2011, all mortgage loans held for sale were sold at a net gain, which is included in Other Income (Loss) on the Statements of Income. Following are details of the sale (in thousands):

	Nine-month Period Ended 09/30/2011
Net proceeds	$	111,444
Cost basis		(107,019	)
NET REALIZED GAIN (LOSS) ON SALE OF MORTGAGE LOANS HELD FOR SALE	$	4,425

Mortgage Loans Held for Portfolio: The following table presents information as of September 30, 2011 and December 31, 2010 on mortgage loans held for portfolio (in thousands):

	09/30/2011			12/31/2010
Real Estate:
Fixed rate, medium-term1, single-family mortgages	$	1,330,315		$	1,181,982
Fixed rate, long-term, single-family mortgages		3,409,006			2,952,556
Total unpaid principal balance		4,739,321			4,134,538
Premiums		56,141			43,974
Discounts		(7,258	)		(7,497	)
Deferred loan costs, net		2,481			2,514
Other deferred fees		(585	)		0
Hedging adjustments2		7,956			2,288
Total before Allowance for Credit Losses on Mortgage Loans		4,798,056			4,175,817
Allowance for Credit Losses on Mortgage Loans		(3,613	)		(2,911	)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET	$	4,794,443		$	4,172,906

1	Medium-term defined as a term of 15 years or less.
2	See Note 7 for a discussion of: (1) the FHLBank’s objectives for using derivatives; (2) the types of assets and liabilities hedged; and (3) the accounting for derivatives and the related assets and liabilities hedged.

The following table presents information as of September 30, 2011 and December 31, 2010 on the outstanding UPB of mortgage loans held for portfolio (in thousands):

	09/30/2011		12/31/2010
Conventional loans	$	4,175,235	$	3,666,532
Government-guaranteed or insured loans		564,086		468,006
TOTAL UNPAID PRINCIPAL BALANCE	$	4,739,321	$	4,134,538

25

NOTE 6 – ALLOWANCE FOR CREDIT LOSSES

The FHLBank has established an allowance methodology for each of its portfolio segments: credit products; government-guaranteed or insured mortgage loans held for portfolio; conventional mortgage loans held for portfolio; and the direct financing lease receivable.

Credit products: The FHLBank manages its credit exposure to credit products through an integrated approach that generally provides for a credit limit to be established for each borrower, includes an ongoing review of each borrower’s financial condition and is coupled with conservative collateral/lending policies to limit risk of loss while balancing borrowers’ needs for a reliable source of funding. In addition, the FHLBank lends to its members in accordance with Federal statutes and Finance Agency regulations. Specifically, the FHLBank complies with the Federal Home Loan Bank Act of 1932, as amended (Bank Act), which requires the FHLBank to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member’s credit products is calculated by applying collateral discounts, or haircuts, to the par value or market value of the collateral. The FHLBank accepts certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, community financial institutions are eligible to utilize expanded statutory collateral provisions for small business loans, small farm loans and small agri-business loans. The FHLBank’s capital stock owned by borrowing members is held by the FHLBank as further collateral security for all indebtedness of the member to the FHLBank. Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance; borrowing capacity; and overall credit exposure to the borrower. The FHLBank can call for additional or substitute collateral to protect its security interest. FHLBank management believes that these policies effectively manage the FHLBank’s credit risk from credit products.

Based upon the financial condition of the member, the FHLBank either allows a member to retain physical possession of the collateral assigned to it, or requires the member to specifically assign or place physical possession of the collateral with the FHLBank or its safekeeping agent. The FHLBank perfects its security interest in all pledged collateral. The Bank Act affords any security interest granted to the FHLBank by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach and taking into consideration each borrower’s financial strength, the FHLBank considers the type and level of collateral to be the primary indicator of credit quality on its credit products. As of September 30, 2011 and December 31, 2010, the FHLBank had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

The FHLBank continues to evaluate and make changes to its collateral guidelines, as necessary, based on current market conditions. As of September 30, 2011 and December 31, 2010, the FHLBank did not have any advances that were past due, on nonaccrual status or considered impaired. In addition, there have been no troubled debt restructurings related to credit products during the nine-month periods ended September 30, 2011 and 2010.

Based upon the collateral held as security, its credit extension, and collateral policies, management’s credit analysis and the repayment history on credit products, the FHLBank has not recorded any allowance for credit losses as of September 30, 2011 and December 31, 2010. As of September 30, 2011 and December 31, 2010, no liability to reflect an allowance for credit losses for off-balance sheet credit exposures was recorded. For additional information on the FHLBank’s off-balance sheet credit exposure see Note 15.

Mortgage Loans – Government-guaranteed or Insured: The FHLBank invests in government-guaranteed or insured fixed rate mortgage loans secured by one-to-four family residential properties. Government-guaranteed mortgage loans are mortgage loans insured or guaranteed by FHA, VA, RHS and/or HUD. The servicer provides and maintains insurance or a guaranty from the applicable government agency. Additionally, the servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable insurance or guaranty with respect to defaulted mortgage government loans. Any losses incurred on such loans that are not recovered from the issuer or guarantor are absorbed by the servicers. Therefore, the FHLBank only has credit risk for these loans if the servicer fails to pay for losses not covered by FHA or HUD insurance, or VA or RHS guarantees. Based on the FHLBank’s assessment of its servicers, it did not establish an allowance for credit losses on government-guaranteed or insured mortgage loans.

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Mortgage Loans – Conventional: The allowances for conventional loans are determined by performing a migration analysis to determine the probability of default and loss severity rates. This is done through analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data and prevailing economic conditions. The measurement of the allowance for loan losses may consist of: (1) reviewing all residential mortgage loans at the individual master commitment level; (2) reviewing specifically identified collateral-dependent loans for impairment; (3) reviewing homogeneous pools of residential mortgage loans; and/or (4) estimating credit losses in the remaining portfolio.

The FHLBank’s management of credit risk in the MPF Program involves several layers of loss protection that are defined in agreements among the FHLBank and its PFIs. The availability of loss protection may differ slightly among MPF products. The FHLBank’s loss protection consists of the following loss layers, in order of priority:

§   Homeowner Equity.

§   Primary Mortgage Insurance (PMI). PMI is on all loans with homeowner equity of less than 20 percent of the original purchase price or appraised value.

§   First Loss Account (FLA). The FLA functions as a tracking mechanism for determining the FHLBank’s potential loss exposure under each master commitment prior to the PFI’s credit enhancement obligation (CE obligation). If the FHLBank experiences losses in a master commitment, these losses will either be: (1) recovered through the withholding of future performance-based credit enhancement fees (CE fees) from the PFI; or (2) absorbed by the FHLBank. As of September 30, 2011 and December 31, 2010, the FHLBank’s exposure under the FLA was $22,804,000 and $20,938,000, respectively.

§   CE Obligation. PFIs have a CE obligation to absorb losses in excess of the FLA in order to limit the FHLBank’s loss exposure to that of an investor in an MBS that is rated the equivalent of double-A by an NRSRO. PFIs must either fully collateralize their CE obligation with assets considered acceptable by the FHLBank’s Member Products Policy (MPP) or purchase supplemental mortgage insurance (SMI) from mortgage insurers. Any incurred losses that would be absorbed by the CE obligation are not reserved as part of the FHLBank’s allowance for loan losses. Accordingly, the calculated allowance was reduced by $1,226,000 and $550,000 as of September 30, 2011 and December 31, 2010, respectively, for the amount in excess of the FLA to be covered by PFIs’ CE obligations. As of September 30, 2011 and December 31, 2010, CE obligations available to cover losses were $198,080,000 and $164,306,000, respectively.

The FHLBank pays the participating member a fee, a portion of which may be based on the credit performance of the mortgage loans, in exchange for absorbing the CE obligation loss layer up to an agreed-upon amount. Performance-based fees may be withheld to cover losses allocated to the FHLBank. The FHLBank records CE fees paid to the participating members as a reduction to mortgage interest income. The following table presents net CE fees paid to participating members for the three- and nine-month periods ended September 30, 2011 and 2010 (in thousands):

	Three-month Period Ended						Nine-month Period Ended
	09/30/2011			09/30/2010			09/30/2011			09/30/2010
Gross CE fees paid to PFIs	$	947		$	747		$	2,764		$	2,171
Performance-based CE fees recovered from PFIs		(52	)		(4	)		(150	)		(192	)
Net CE fees paid	$	895		$	743		$	2,614		$	1,979

Mortgage Loans Evaluated at the Individual Master Commitment Level:The credit risk analysis of all conventional loans is performed at the individual master commitment level to properly determine the credit enhancements available to recover losses on mortgage loans under each individual master commitment.

Collectively Evaluated Mortgage Loans: The credit risk analysis of conventional loans evaluated collectively for impairment considers loan pool specific attribute data, applies estimated loss severities and incorporates the credit enhancements of the mortgage loan programs. Migration analysis is a methodology for determining, through the FHLBank’s experience over a historical period, the rate of loss incurred on pools of similar loans. The FHLBank applies migration analysis to loans based on the following categories: (1) loans in foreclosure; (2) nonaccrual loans; (3) delinquent loans; and (4) all other remaining loans. The FHLBank then estimates how many loans in these categories may migrate to a realized loss position and applies a loss severity factor to estimate losses incurred as of the Statement of Condition date.

Individually Evaluated Mortgage Loans:Certain conventional mortgage loans, primarily impaired mortgage loans that are considered collateral-dependent, may be specifically identified for purposes of calculating the allowance for credit losses. A mortgage loan is considered collateral-dependent if repayment is only expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default and there is no CE obligation from a PFI to offset losses under the master commitment. The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss for such loans on an individual loan basis. The FHLBank applies an appropriate loss severity rate, which is used to estimate the fair value of the collateral. The resulting incurred loss is equal to the carrying value of the loan less the estimated fair value of the collateral less estimated selling costs.

Charge-off Policy: The FHLBank evaluates whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. A charge-off is recorded if the recorded investment in the loan will not be recovered.

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Direct Financing Lease Receivable: The FHLBank has a recorded investment in a direct financing lease receivable with a member for a building complex and property. Under the office complex agreement, the FHLBank has all rights and remedies under the lease agreement as well as all rights and remedies available under the member’s Advance, Pledge and Security Agreement. Consequently, the FHLBank can apply any excess collateral securing credit products to any shortfall in the leasing arrangement.

Roll-forward of Allowance for Credit Losses: As of September 30, 2011, the FHLBank determined that an allowance for credit losses was only necessary on conventional mortgage loans held for portfolio. The following table presents roll-forwards of the allowances for credit losses for the three- and nine-month periods ended September 30, 2011 as well as the method used to evaluate impairment relating to all portfolio segments regardless of whether or not an estimated credit loss has been recorded as of September 30, 2011 (in thousands):

	Conventional Loans			Government-Guaranteed or Insured Loans		Credit Products		Direct Financing Lease Receivable		Total
Allowance for credit losses:
Balance, beginning of three-month period	$	3,420		$	0	$	0	$	0	$	3,420
Charge-offs		(134	)		0		0		0		(134	)
Provision for credit losses		327			0		0		0		327
Balance, end of three-month period	$	3,613		$	0	$	0	$	0	$	3,613
Balance, beginning of nine-month period	$	2,911		$	0	$	0	$	0	$	2,911
Charge-offs		(534	)		0		0		0		(534	)
Provision for credit losses		1,236			0		0		0		1,236
Balance, end of nine-month period	$	3,613		$	0	$	0	$	0	$	3,613
Ending allowance balance, individually evaluated for impairment	$	0		$	0	$	0	$	0	$	0
Ending allowance balance, collectively evaluated for impairment	$	3,613		$	0	$	0	$	0	$	3,613
Recorded investment1, end of period:
Individually evaluated for impairment2	$	0		$	0	$	17,046,270	$	27,830	$	17,074,100
Collectively evaluated for impairment	$	4,248,403		$	577,183	$	0	$	0	$	4,825,586

____________

1	The recorded investment in a financing receivable is the UPB, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts and direct write-downs. The recorded investment is not net of any valuation allowance.
2	No financing receivables individually evaluated for impairment were determined to be impaired.

The following table presents roll-forwards of the allowance for credit losses on conventional mortgage loans held for portfolio for the three- and nine-month periods ended September 30, 2010 (in thousands):

Allowance for Credit Losses	Three-month Period Ended  09/30/2010			Nine-month Period Ended  09/30/2010
Balance, beginning of period	$	2,536		$	1,897
Charge-offs		(128	)		(445	)
Provision for credit losses		205			1,161
Balance, end of period	$	2,613		$	2,613

Credit Quality Indicators: The FHLBank’s key credit quality indicators include: (1) past due loans; (2) nonaccrual loans; (3) loans in process of foreclosure; and (4) impaired loans, all of which are used, either on an individual or pool basis, to determine the allowance for credit losses.

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Non-accrual Loans: The FHLBank places a conventional mortgage loan on non-accrual status if it is determined that either: (1) the collection of interest or principal is doubtful; or (2) interest or principal is past due for 90 days or more, except when the loan is well-secured and in the process of collection (e.g., through credit enhancements). For those mortgage loans placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The FHLBank records cash payments received on non-accrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful. If the collection of the remaining principal amount due is considered doubtful then cash payments received would be applied first solely to principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording interest income. A loan on non-accrual status may be restored to accrual when: (1) none of its contractual principal and interest is due and unpaid, and the FHLBank expects repayment of the remaining contractual principal and interest; or (2) it otherwise becomes well secured and in the process of collection.

The following table summarizes the delinquency aging and key credit quality indicators for all of the FHLBank’s portfolio segments as of September 30, 2011 (dollar amounts in thousands):

	Conventional Loans			Government-Guaranteed or Insured Loans			Credit Products			Direct Financing Lease Receivable			Total
Recorded investment1:
Past due 30-59 days delinquent	$	29,928		$	16,485		$	0		$	0		$	46,413
Past due 60-89 days delinquent		8,013			4,521			0			0			12,534
Past due 90 days or more delinquent		23,614			9,648			0			0			33,262
Total past due		61,555			30,654			0			0			92,209
Total current loans		4,186,848			546,529			17,046,270			27,830			21,807,477
Total recorded investment	$	4,248,403		$	577,183		$	17,046,270		$	27,830		$	21,899,686
Other delinquency statistics:
In process of foreclosure, included above2	$	14,457		$	4,761		$	0		$	0		$	19,218
Serious delinquency rate3		0.6	%		1.7	%		0.0	%		0.0	%		0.2	%
Past due 90 days or more still accruing interest	$	0		$	9,648		$	0		$	0		$	9,648
Loans on non-accrual status4	$	27,343		$	0		$	0		$	0		$	27,343

____________

1	The recorded investment in a loan is the UPB of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts and direct write-downs. The recorded investment is not net of any valuation allowance.
2	Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
3	Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.
4	Loans on non-accrual status include $209,000 of troubled debt restructurings. Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

The following table summarizes the key credit quality indicators for the FHLBank’s mortgage loans as of December 31, 2010 (in thousands):

	Conventional Loans			Government-Guaranteed or Insured Loans			Credit Products			Direct Financing Lease Receivable			Total
Recorded investment1:
Past due 30-59 days delinquent	$	32,466		$	12,826		$	0		$	0		$	45,292
Past due 60-89 days delinquent		10,006			3,580			0			0			13,586
Past due 90 days or more delinquent		22,296			9,812			0			0			32,108
Total past due		64,768			26,218			0			0			90,986
Total current loans		3,658,735			450,384			18,951,222			29,123			23,089,464
Total recorded investment	$	3,723,503		$	476,602		$	18,951,222		$	29,123		$	23,180,450
Other delinquency statistics:
In process of foreclosure, included above2	$	12,789		$	3,393		$	0		$	0		$	16,182
Serious delinquency rate3		0.6	%		2.1	%		0.0	%		0.0	%		0.1	%
Past due 90 days or more still accruing interest	$	0		$	9,812		$	0		$	0		$	9,812
Loans on non-accrual status4	$	25,837		$	0		$	0		$	0		$	25,837

____________

1	The recorded investment in a loan is the UPB of the loan, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts and direct write-downs. The recorded investment is not net of any valuation allowance.
2	Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
3	Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.
4	Loans on non-accrual status include $222,000 of troubled debt restructurings. Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

The FHLBank had $4,589,000 and $4,498,000 classified as real estate owned in other assets as of September 30, 2011 and December 31, 2010, respectively.

Purchases, Sales and Reclassifications: During the three- and nine-month periods ended September 30, 2011, the FHLBank had no significant purchases or sales of financing receivables. Additionally, no financing receivables were reclassified to held for sale.

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NOTE 7 – 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 that finance these assets. The goal of the FHLBank’s interest-rate risk management strategy is not to eliminate interest-rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the FHLBank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the FHLBank monitors the risk to its revenue, net interest margin and average maturity of interest-earning assets and funding sources.

Consistent with Finance Agency regulation, the FHLBank enters into derivatives only to reduce the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve risk management objectives and to act as an intermediary between its members and counterparties. Accordingly, the FHLBank may enter into derivatives that do not necessarily qualify for hedge accounting (economic hedges).

Common ways in which the FHLBank uses derivatives are to:

§   Reduce funding costs by combining an interest rate swap with a consolidated obligation, as the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation;

§   Reduce the interest rate sensitivity and repricing gaps of assets and liabilities;

§   Preserve a favorable interest rate spread between the yield of an asset (e.g., an advance) and the cost of the related liability (e.g., the consolidated obligation 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 consolidated obligation;

§   Mitigate the adverse earnings effects of the shortening or extension of certain assets (e.g., advances or mortgage assets) and liabilities;

§   Manage embedded options in assets and liabilities; and

§   Manage its overall asset-liability management.

Application of Derivatives: Derivative financial instruments may be used by the FHLBank as follows:

§   As a fair value or cash flow hedge of an associated financial instrument, a firm commitment or an anticipated transaction;

§   As an economic hedge to manage certain defined risks in the course of its balance sheet. These hedges are primarily used to manage mismatches between the coupon features of its assets and liabilities. For example, the FHLBank may use interest rate exchange agreements in its overall interest rate risk management activities to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets (both advances and investments), and/or to adjust the interest rate sensitivity of advances or investments to approximate more closely the interest rate sensitivity of its liabilities; and

§   As an intermediary hedge to meet the asset/liability management needs of its members. The FHLBank acts as an intermediary by entering into interest-rate exchange agreements with its members and offsetting interest-rate exchange agreements with other counterparties. This intermediation grants smaller members indirect access to the derivatives market. The derivatives used in intermediary activities do not receive hedge accounting treatment and are separately marked-to-market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the FHLBank.

Derivative financial instruments are used by the FHLBank when they are considered to be the most cost-effective alternative to achieve the FHLBank’s financial and risk management objectives. The FHLBank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.

Types of Derivatives: The FHLBank commonly enters into interest rate swaps (including callable and putable swaps), swaptions, and interest rate cap and floor agreements (collectively, derivatives) to manage its exposure to changes in interest rates.

Types of Hedged Items: At the inception of every hedge transaction, the FHLBank documents all hedging 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 or cash flow hedges to: (1) assets and/or liabilities on the Statements of Condition; (2) firm commitments; or (3) forecasted transactions. The FHLBank formally assesses (both at the hedge’s inception and at least quarterly on an ongoing basis) whether the derivatives that are used have been effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain effective in future periods. The FHLBank typically uses regression analyses or similar statistical analyses to assess the effectiveness of its hedging relationships. The types of hedged items are:

§   Consolidated obligations;

§   Advances;

§   Mortgage loans;

§   Firm commitment strategies;

§   Investments; and

§   Anticipated debt issuance.

Managing Credit Risk on Derivatives: The FHLBank is subject to credit risk due to nonperformance by counterparties to the derivative agreements. The degree of counterparty risk on derivative agreements depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The FHLBank manages counterparty credit risk through credit analyses and collateral requirements and by following the requirements set forth in its RMP. The FHLBank requires collateral agreements on all derivatives that establish collateral delivery thresholds. Additionally, collateral related to derivatives with member institutions includes collateral assigned to an FHLBank, as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBank. The maximum credit risk applicable to a single counterparty was $30,451,000 and $29,783,000 as of September 30, 2011 and December 31, 2010, respectively. The counterparty was different each period.

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The following table presents credit risk exposure on derivative instruments, excluding circumstances where the FHLBank’s pledged collateral exceeds the FHLBank’s net position (in thousands):

	09/30/2011			12/31/2010
Total net exposure at fair value1	$	88,818		$	90,155
Cash collateral held		(59,784	)		(64,090	)
Net positive exposure after cash collateral		29,034			26,065
Other collateral2		(2,369	)		(2,952	)
NET EXPOSURE AFTER COLLATERAL	$	26,665		$	23,113

__________

1	Includes net accrued interest receivable of $28,769,000 and $11,251,000 as of September 30, 2011 and December 31, 2010, respectively.
2	Collateral held with respect to derivatives with members, which represents either collateral physically held by or on behalf of the FHLBank or collateral assigned to the FHLBank as evidenced by a written security agreement and held by the member for the benefit of the FHLBank.

Certain of the FHLBank’s derivative instruments 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 is lowered by an NRSRO, the FHLBank would be required to deliver additional collateral on derivative instruments in which the FHLBank has a net derivative liability recorded on its Statements of Condition. The aggregate fair value of all derivative instruments with derivative counterparties containing credit-risk-related contingent features that were classified as net derivative liabilities as of September 30, 2011 and December 31, 2010 was $487,289,000 and $352,908,000, respectively, for which the FHLBank has posted collateral with a fair value of $374,160,000 and $99,468,000, respectively, in the normal course of business. If the FHLBank’s credit rating had been lowered one level (e.g., from AA to A as of September 30, 2011 or AAA to AA as of December 31, 2010), the FHLBank would have been required to deliver an additional $85,047,000 and $133,350,000 of collateral to its derivative counterparties as of September 30, 2011 and December 31, 2010.

The FHLBank transacts a significant portion of its derivatives with major banks and primary broker/dealers. Some of these banks and broker/dealers or their affiliates buy, sell and distribute consolidated obligations. No single entity dominates the FHLBank’s derivatives business. The FHLBank is not a derivatives dealer and thus does not trade derivatives for short-term profit.

Financial Statement Impact and Additional Financial Information: The notional amount of derivatives reflects the volume of the FHLBank’s hedges, but it does not measure the credit exposure of the FHLBank because there is no principal at risk. The notional amount in derivative contracts serves as a factor in determining periodic interest payments or cash flows received and paid.

The FHLBank considers accrued interest receivables and payables and the legal right to offset derivative assets and liabilities by counterparty. Consequently, derivative assets and liabilities reported on the Statements of Condition include the net cash collateral and accrued interest from counterparties. Therefore, an individual derivative may be in an asset position (counterparty would owe the FHLBank the current fair value, which includes net accrued interest receivable or payable on the derivative, if the derivative was settled as of the Statement of Condition date) but when the derivative fair value and cash collateral fair value (includes accrued interest on the collateral) are netted by counterparty, the derivative may be recorded on the Statements of Condition as a derivative liability. Conversely, a derivative may be in a liability position (FHLBank would owe the counterparty the fair value if settled as of the Statement of Condition date) but may be recorded on the Statements of Condition as a derivative asset after netting.

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The following table represents outstanding notional balances and fair values (includes net accrued interest receivable or payable on the derivatives) of the derivatives outstanding by type of derivative and by hedge designation as of September 30, 2011 (in thousands):

	09/30/2011
	Gross Asset Positions				Gross Liability Positions					Net Derivative Assets					Net Derivative Liabilities
	Notional		Fair Value		Notional		Fair Value			Notional		Fair Value			Notional		Fair Value
Fair value hedges:
Interest rate swaps	$	7,339,000	$	337,585	$	7,942,388	$	(604,687	)	$	6,036,296	$	113,801		$	9,245,092	$	(380,903	)
Interest rate caps/floors		0		0		247,000		(5,104	)		97,000		(1,902	)		150,000		(3,202	)
Total fair value hedges		7,339,000		337,585		8,189,388		(609,791	)		6,133,296		111,899			9,395,092		(384,105	)
Economic hedges:
Interest rate swaps		2,025,000		4,055		1,296,320		(186,477	)		540,000		(38,705	)		2,781,320		(143,717	)
Interest rate caps/floors		6,910,533		55,200		282,000		(365	)		2,911,300		14,667			4,281,233		40,168
Mortgage delivery commitments		97,351		957		30,660		(107	)		97,351		957			30,660		(107	)
Total economic hedges		9,032,884		60,212		1,608,980		(186,949	)		3,548,651		(23,081	)		7,093,213		(103,656	)
TOTAL	$	16,371,884	$	397,797	$	9,798,368	$	(796,740	)	$	9,681,947	$	88,818		$	16,488,305	$	(487,761	)
Total derivative fair value												$	88,818				$	(487,761	)
Fair value of cash collateral delivered to counterparties																		374,160
Fair value of cash collateral received from counterparties													(59,784	)
NET DERIVATIVE FAIR VALUE												$	29,034				$	(113,601	)

The following table represents outstanding notional balances and fair values (includes net accrued interest receivable or payable on the derivatives) of the derivatives outstanding by type of derivative and by hedge designation as of December 31, 2010 (in thousands):

	12/31/2010
	Gross Asset Positions				Gross Liability Positions					Net Derivative Assets					Net Derivative Liabilities
	Notional		Fair Value		Notional		Fair Value			Notional		Fair Value			Notional		Fair Value
Fair value hedges:
Interest rate swaps	$	8,626,899	$	315,969	$	9,084,209	$	(518,805	)	$	7,528,867	$	96,142		$	10,182,241	$	(298,978	)
Interest rate caps/floors		30,000		369		159,000		(1,855	)		97,000		(1,038	)		92,000		(448	)
Total fair value hedges		8,656,899		316,338		9,243,209		(520,660	)		7,625,867		95,104			10,274,241		(299,426	)
Economic hedges:
Interest rate swaps		1,425,000		7,167		2,224,820		(190,531	)		1,330,000		(55,629	)		2,319,820		(127,735	)
Interest rate caps/floors		7,257,533		124,642		332,000		(743	)		3,819,300		50,389			3,770,233		73,510
Mortgage delivery commitments		54,737		291		88,602		(1,524	)		54,737		291			88,602		(1,524	)
Total economic hedges		8,737,270		132,100		2,645,422		(192,798	)		5,204,037		(4,949	)		6,178,655		(55,749	)
TOTAL	$	17,394,169	$	448,438	$	11,888,631	$	(713,458	)	$	12,829,904	$	90,155		$	16,452,896	$	(355,175	)
Total derivative fair value												$	90,155				$	(355,175	)
Fair value of cash collateral delivered to counterparties													0					99,468
Fair value of cash collateral received from counterparties													(64,090	)				0
NET DERIVATIVE FAIR VALUE												$	26,065				$	(255,707	)

The following tables provide information regarding gains and losses on derivatives and hedging activities by type of hedge and type of derivative and gains and losses by hedged item for fair value hedges.

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For the three- and nine-month periods ended September 30, 2011 and 2010, the FHLBank recorded net gain (loss) on derivatives and hedging activities as follows (in thousands):

	Three-month Period Ended						Nine-month Period Ended
	09/30/2011			09/30/2010			09/30/2011			09/30/2010
Derivatives and hedge items in fair value hedging relationships:
Interest rate swaps	$	(4,264	)	$	(1,950	)	$	878		$	(4,062	)
Interest rate caps/floors		0			(19	)		(57	)		(64	)
Total net gain (loss) related to fair value hedge ineffectiveness		(4,264	)		(1,969	)		821			(4,126	)
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps		(22,423	)		(22,538	)		(14,121	)		(76,016	)
Interest rate caps/floors		(44,276	)		(23,894	)		(68,455	)		(119,141	)
Net interest settlements		(9,867	)		(7,431	)		(31,217	)		(41,358	)
Mortgage delivery commitments		6,059			3,242			7,961			8,531
Intermediary transactions:
Interest rate swaps		(7	)		(10	)		(24	)		(33	)
Interest rate caps/floors		0			0			11			3
Total net gain (loss) related to derivatives not designated as hedging instruments		(70,514	)		(50,631	)		(105,845	)		(228,014	)
NET GAIN (LOSS) ON DERIVATIVES AND HEDGING ACTIVITIES	$	(74,778	)	$	(52,600	)	$	(105,024	)	$	(232,140	)

The FHLBank carries derivative instruments at fair value on its Statements of Condition. Any change in the fair value of derivatives designated under a fair value hedging relationship is recorded each period in current period earnings. Fair value hedge accounting allows for the offsetting fair value of the hedged risk in the hedged item to also be recorded in current period earnings. For the three-month periods ended September 30, 2011 and 2010, the FHLBank recorded net gain (loss) 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 as follows (in thousands):

	Three-month Period Ended
	09/30/2011												09/30/2010
	Gain (Loss) on Derivatives			Gain (Loss) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income1			Gain (Loss) on Derivatives			Gain (Loss) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income1
Advances	$	(142,402	)	$	140,318		$	(2,084	)	$	(56,457	)	$	(114,719	)	$	113,604		$	(1,115	)	$	(66,537	)
Consolidated obligation bonds		72,072			(74,253	)		(2,181	)		56,008			30,850			(31,638	)		(788	)		63,653
Consolidated obligation discount notes		(57	)		58			1			25			1,849			(1,915	)		(66	)		701
TOTAL	$	(70,387	)	$	66,123		$	(4,264	)	$	(424	)	$	(82,020	)	$	80,051		$	(1,969	)	$	(2,183	)

__________

1 The differentials between accruals of interest receivables and payables on derivatives designated as fair value hedges as well as the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the designated underlying hedged item.

For the nine-month periods ended September 30, 2011 and 2010, the FHLBank recorded net gain (loss) 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 as follows (in thousands):

	Nine-month Period Ended
	09/30/2011												09/30/2010
	Gain (Loss) on Derivatives			Gain (Loss) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income1			Gain (Loss) on Derivatives			Gain (Loss) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income1
Advances	$	(143,727	)	$	141,256		$	(2,471	)	$	(181,410	)	$	(281,822	)	$	278,964		$	(2,858	)	$	(225,468	)
Consolidated obligation bonds		58,979			(55,352	)		3,627			168,970			159,997			(161,514	)		(1,517	)		235,521
Consolidated obligation discount notes		(1,130	)		795			(335	)		1,244			1,614			(1,365	)		249			964
TOTAL	$	(85,878	)	$	86,699		$	821		$	(11,196	)	$	(120,211	)	$	116,085		$	(4,126	)	$	11,017

__________

1 The differentials between accruals of interest receivables and payables on derivatives designated as fair value hedges as well as the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the designated underlying hedged item.

There were no amounts for the three- and nine-month periods ended September 30, 2011 and 2010 that were reclassified into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter. As of September 30, 2011, no amounts relating to hedging activities remain in accumulated OCI.

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NOTE 8 – DEPOSITS

The FHLBank offers demand and overnight deposit programs to its members and to other qualifying non-members. In addition, the FHLBank offers short-term deposit programs to members. A member that services mortgage loans may deposit with the FHLBank funds collected in connection with the mortgage loans, pending disbursement of such funds to owners of the mortgage loans. The FHLBank classifies these items as “Non-interest-bearing deposits” on its Statements of Condition. The following table details the types of deposits held by the FHLBank as of September 30, 2011 and December 31, 2010 (in thousands):

	09/30/2011		12/31/2010
Interest-bearing:
Demand	$	211,204	$	149,304
Overnight		1,941,100		980,600
Term		12,300		47,200
Total interest-bearing		2,164,604		1,177,104
Non-interest-bearing:
Demand		233		151
Other		36,176		32,697
Total non-interest-bearing		36,409		32,848
TOTAL DEPOSITS	$	2,201,013	$	1,209,952

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NOTE 9 – CONSOLIDATED OBLIGATIONS

Consolidated obligations consist of consolidated bonds and discount notes and, as provided by the Bank Act or Finance Agency regulation, are backed only by the financial resources of the FHLBanks. The FHLBanks jointly issue consolidated obligations with the Office of Finance acting as their agent. The Office of Finance tracks the amounts of debt issued on behalf of each FHLBank. In addition, the FHLBank separately tracks and records as a liability its specific portion of consolidated obligations for which it is the primary obligor. The FHLBank utilizes a debt issuance process to provide a scheduled monthly issuance of global bullet consolidated obligation bonds. As part of this process, management from each of the FHLBanks determine and communicate a firm commitment to the Office of Finance for an amount of scheduled global debt to be issued on its behalf. If the FHLBanks’ orders do not meet the minimum debt issue size, the proceeds are allocated to all FHLBanks based on the larger of the FHLBank’s commitment or allocated proceeds based on the individual FHLBank’s regulatory capital to total system regulatory capital. If the FHLBanks’ commitments exceed the minimum debt issue size, the proceeds are allocated based on relative regulatory capital of the FHLBanks with the allocation limited to the lesser of the allocation amount or actual commitment amount. The FHLBanks can, however, pass on any scheduled calendar slot and not issue any global bullet consolidated obligation bonds upon agreement of 8 of the 12 FHLBanks.

The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance. Consolidated obligation bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits as to maturities. Consolidated obligation discount notes, which are issued to raise short-term funds, are issued at less than their face amounts and redeemed at par when they mature.

Consolidated Obligation Bonds: The following table presents the FHLBank’s participation in consolidated obligation bonds outstanding as of September 30, 2011 and December 31, 2010 (in thousands):

	09/30/2011						12/31/2010
Year of Maturity	Amount			Weighted Average Interest Rate			Amount			Weighted Average Interest Rate
Due in one year or less	$	5,181,720			1.02	%	$	5,880,320			1.91	%
Due after one year through two years		4,080,000			1.73			3,622,300			1.63
Due after two years through three years		2,081,000			2.81			2,699,000			2.70
Due after three years through four years		1,229,500			1.98			1,452,500			2.96
Due after four years through five years		1,555,500			2.83			883,000			2.51
Thereafter		5,965,000			3.65			6,755,500			3.64
Total par value		20,092,720			2.33	%		21,292,620			2.61	%
Premium		52,602						52,342
Discount		(8,016	)					(10,321	)
Hedging adjustments1		242,994						186,794
TOTAL	$	20,380,300					$	21,521,435

__________

1 See Note 7 for a discussion of: (1) the FHLBank’s objectives for using derivatives; (2) the types of assets and liabilities hedged; and (3) the accounting for derivatives and the related assets and liabilities hedged.

Consolidated obligation bonds are issued with either fixed rate coupon or variable rate coupon payment terms. Variable rate coupon bonds use a variety of indices for interest rate resets including LIBOR, Constant Maturity Treasuries (CMT) and Eleventh District Cost of Funds Index (COFI). In addition, to meet the specific needs of certain investors in consolidated obligation bonds, fixed rate and variable rate bonds may contain certain features that may result in complex coupon payment terms and call features. When the FHLBank issues such structured bonds that present interest rate or other risks that are unacceptable to the FHLBank, it will simultaneously enter into derivatives containing offsetting features that effectively alter the terms of the complex bonds to the equivalent of simple fixed rate coupon bonds or variable rate coupon bonds tied to indices such as those detailed above.

The FHLBank’s participation in consolidated obligation bonds outstanding as of September 30, 2011 and December 31, 2010 includes callable bonds totaling $7,495,000,000 and $7,655,500,000, respectively. The FHLBank uses the unswapped callable bonds for financing its callable advances (Note 4), MBS (Note 3) and MPF mortgage loans (Note 5). Contemporaneous with a majority of its fixed rate callable bond issues, the FHLBank will also enter into interest rate swap agreements (in which the FHLBank generally pays a variable rate and receives a fixed rate) with call features that mirror the options in the callable bonds (a sold callable swap). The combined sold callable swap and callable debt transaction allows the FHLBank to obtain attractively priced variable rate financing.

The following table summarizes the FHLBank’s participation in consolidated obligation bonds outstanding by year of maturity, or by the next call date for callable bonds as of September 30, 2011 and December 31, 2010 (in thousands):

Year of Maturity or Next Call Date	09/30/2011		12/31/2010
Due in one year or less	$	11,311,720	$	11,723,820
Due after one year through two years		4,990,000		4,624,300
Due after two years through three years		1,675,000		2,770,000
Due after three years through four years		537,500		722,500
Due after four years through five years		610,500		236,000
Thereafter		968,000		1,216,000
TOTAL PAR VALUE	$	20,092,720	$	21,292,620

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The following table summarizes interest rate payment terms for consolidated obligation bonds as of September 30, 2011 and December 31, 2010 (in thousands):

	09/30/2011		12/31/2010
Par value of consolidated obligation bonds:
Fixed rate	$	13,613,720	$	14,586,120
Variable rate		4,015,000		3,713,500
Step ups/step downs		2,043,000		2,773,000
Range bonds		421,000		220,000
TOTAL PAR VALUE	$	20,092,720	$	21,292,620

As of September 30, 2011 and December 31, 2010, 44.6 percent and 44.0 percent, respectively, of the FHLBank’s fixed rate consolidated bonds were swapped to a floating rate, and 70.8 percent and 75.0 percent, respectively, of the FHLBank’s variable rate consolidated bonds were swapped to a different variable rate index/spread.

Consolidated Discount Notes: Consolidated discount notes are issued to raise short-term funds. Consolidated discount notes are consolidated obligations with original maturities of up to one year. These consolidated discount notes are issued at less than their face amount and redeemed at par value when they mature.

The following table summarizes the FHLBank’s participation in consolidated obligation discount notes, all of which are due within one year (in thousands):

	Book Value		Par Value		Weighted Average Interest Rates
September 30, 2011	$	11,505,916	$	11,506,835		0.04	%
December 31, 2010	$	13,704,542	$	13,706,746		0.16	%

As of September 30, 2011 and December 31, 2010, 0.9 percent and 7.2 percent, respectively, of the FHLBank’s fixed rate consolidated discount notes were swapped to a floating rate.

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NOTE 10 – AFFORDABLE HOUSING PROGRAM

The Bank Act requires each FHLBank to establish an Affordable Housing Program (AHP). As a part of its AHP, the FHLBank provides subsidies in the form of direct grants or below-market interest rate advances to members that use the funds to assist in the purchase, construction or rehabilitation of housing for very low-, low- and moderate-income households. By regulation, to fund the AHP, the 12 district FHLBanks as a group must annually set aside the greater of $100,000,000 or 10 percent of the current year’s net earnings after the assessment for the Resolution Funding Corporation (REFCORP). For purposes of the AHP calculation, the term “net earnings” is defined as income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP, but after the assessment to REFCORP. The requirement to add back interest expense related to mandatorily redeemable capital stock is a regulatory calculation determined by the Finance Agency. The FHLBank accrues this expense monthly based on its net earnings. Prior to July 1, 2011, the AHP and REFCORP assessments were calculated simultaneously because of their interdependence on each other. Calculation of the REFCORP assessment and satisfaction of that liability is discussed in Note 11.

The amount set aside for AHP is charged to expense and recognized as a liability. As subsidies are provided through the disbursement of grants or issuance of subsidized advances, the AHP liability is reduced accordingly. If the FHLBank’s net earnings before AHP and REFCORP would ever be zero or less, the amount of AHP liability would generally be equal to zero. However, if the result of the aggregate 10 percent calculation described above is less than the $100,000,000 minimum for all 12 FHLBanks, then the Bank Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income for the previous year. If an FHLBank determines that its required AHP contributions are exacerbating any financial instability of that FHLBank, it may apply to the Finance Agency for a temporary suspension of its AHP contributions. The FHLBank has never applied to the Finance Agency for a temporary suspension of its AHP contributions.

The following table details the change in the AHP liability for the three- and nine-month periods ended September 30, 2011 and 2010 (in thousands):

	Three-month Period Ended						Nine-month Period Ended
	09/30/2011			09/30/2010			09/30/2011			09/30/2010
Appropriated and reserved AHP funds as of the beginning of the period	$	35,976		$	40,337		$	39,226		$	44,117
AHP set aside based on current year income		(250	)		256			5,091			256
Direct grants disbursed		(6,307	)		(2,341	)		(14,992	)		(6,236	)
Recaptured funds1		96			80			190			195
Appropriated and reserved AHP funds as of the end of the period	$	29,515		$	38,332		$	29,515		$	38,332

1 Recaptured funds are direct grants returned to the FHLBank in those instances where the commitments associated with the approved use of funds are not met and repayment to the FHLBank is required by regulation. Recaptured funds are returned as a result of: (1) AHP-assisted homeowner’s transfer or sale of property within the five-year retention period that the assisted homeowner is required to occupy the property; (2) homeowner’s failure to acquire sufficient loan funding (funds previously approved and disbursed cannot be used); or (3) unused grants. Recaptured funds are reallocated to future periods.

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NOTE 11 – RESOLUTION FUNDING CORPORATION

Prior to July 1, 2011, each FHLBank was required to pay 20 percent of income calculated in accordance with GAAP after the assessment for AHP, but before the assessment for REFCORP. The AHP and REFCORP assessments were calculated simultaneously because of their interdependence on each other. Based upon this calculation and income reported by the FHLBanks through June 30, 2011, the aggregate amounts actually assessed through that date, and payments made in July 2011 by all 12 FHLBanks, fully satisfied the REFCORP obligation. Consequently, no additional payments to REFCORP are required. This was confirmed by the Finance Agency through a notice issued on August 5, 2011 certifying that the FHLBanks’ payments to the U.S. Department of the Treasury resulted in full satisfaction of the FHLBanks’ REFCORP obligation. The following table details the change in the REFCORP liability for the three- and nine-month periods ended September 30, 2011 and 2010 (in thousands):

	Three-month Period Ended					Nine-month Period Ended
	09/30/2011			09/30/2010		09/30/2011			09/30/2010
REFCORP obligation as of the beginning of the period	$	5,792		$	0	$	8,014		$	11,556
REFCORP assessments		0			515		11,822			515
REFCORP payments		(5,792	)		0		(19,836	)		(11,556	)
REFCORP obligation as of the end of the period	$	0		$	515	$	0		$	515

NOTE 12 – CAPITAL

The FHLBank is subject to three capital requirements under the provisions of the Gramm-Leach-Bliley Act (GLB Act) and the Finance Agency’s capital structure regulation:

§   Risk-based capital. The FHLBank must maintain at all times permanent capital in an amount at least equal to the sum of its credit risk, market risk and operations risk capital requirements. The risk-based capital requirements are all calculated in accordance with the rules and regulations of the Finance Agency.Only permanent capital, defined as Class B Common Stock and retained earnings, can be used by the FHLBank to satisfy its risk-based capital requirement. The Finance Agency may require the FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined, but the Finance Agency has not placed any such requirement on the FHLBank to date.

§   Total capital. The GLB Act requires the FHLBank to maintain at all times at least a 4.0 percent total capital-to-asset ratio. Total regulatory capital is defined as the sum of permanent capital, Class A stock, any general loss allowance, if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the Finance Agency as available to absorb losses.

§   Leverage capital. The FHLBank is required to maintain at all times a leverage capital-to-assets ratio of at least 5.0 percent, with the leverage capital ratio defined as the sum of permanent capital weighted 1.5 times and non-permanent capital (currently only Class A Common Stock) weighted 1.0 times divided by total assets.

The following table illustrates that the FHLBank was in compliance with its regulatory capital requirements as of September 30, 2011 and December 31, 2010 (in thousands):

	09/30/2011						12/31/2010
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	236,816		$	1,145,572		$	268,569		$	1,218,503
Total capital-to-asset ratio		4.0	%		4.8	%		4.0	%		4.7	%
Total capital	$	1,433,574		$	1,746,682		$	1,548,243		$	1,825,700
Leverage capital ratio		5.0	%		6.4	%		5.0	%		6.3	%
Leverage capital	$	1,804,468		$	2,319,468		$	1,935,303		$	2,434,951

Note that for the purposes of the regulatory capital calculations in the above table, actual capital includes all capital stock subject to mandatory redemption that has been reclassified to a liability.

The following table provides the related dollar amounts for activities recorded in “Mandatorily redeemable capital stock” for the three- and nine-month periods ended September 30, 2011 and 2010 (in thousands):

	Three-month Period Ended						Nine-month Period Ended
	09/30/2011			09/30/2010			09/30/2011			09/30/2010
Balance as of the beginning of period	$	13,535		$	28,227		$	19,550		$	22,437
Capital stock subject to mandatory redemption reclassified from equity during the period		85,020			120,417			218,129			215,546
Redemption or repurchase of mandatorily redeemable capital stock during the period		(87,834	)		(123,262	)		(227,058	)		(212,720	)
Stock dividend classified as mandatorily redeemable capital stock during the period		47			124			147			243
Balance as of the end of period	$	10,768		$	25,506		$	10,768		$	25,506

38

The following table shows the amount of mandatorily redeemable capital stock by contractual year of redemption as of September 30, 2011 and December 31, 2010 (in thousands). The year of redemption in the table is the end of the redemption period in accordance with the FHLBank’s capital plan. The FHLBank is not required to redeem or repurchase membership stock until six months (Class A Common Stock) or five years (Class B Common Stock) after the FHLBank receives notice for withdrawal. Additionally, the FHLBank is not required to redeem or repurchase activity-based stock until any activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding. However, the FHLBank intends to repurchase the excess activity-based stock of non-members to the extent that it can do so and still meet its regulatory capital requirements.

Contractual Year of Repurchase	09/30/2011		12/31/2010
Year 1	$	1	$	2,396
Year 2		0		1
Year 3		2,779		0
Year 4		0		2,779
Year 5		319		2,950
Past contractual redemption date due to remaining activity1		7,669		11,424
TOTAL	$	10,768	$	19,550

__________

1 Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because there is activity outstanding to which the mandatorily redeemable capital stock relates.

Joint Capital Enhancement Agreement (JCE Agreement) – Effective February 28, 2011, the FHLBank entered into a JCE Agreement with the other 11 FHLBanks. The JCE Agreement provides that upon satisfaction of the FHLBanks’ obligations to REFCORP, each FHLBank will, on a quarterly basis, allocate at least 20 percent of its net income to a separate restricted retained earnings account (RRE Account). See Note 11 for a discussion of the calculation of the REFCORP assessment and satisfaction of that liability. Under the JCE Agreement, each FHLBank is required to commence the required allocation to its RRE Account beginning as of the end of the calendar quarter in which the final payments are made by the FHLBanks with respect to their REFCORP obligations. The REFCORP obligations were satisfied as of the end of the second quarter of 2011 with the final payments made in July 2011. Thus, each FHLBank began allocating 20 percent of its net income to a RRE Account beginning in the third quarter 2011. However, FHLBank Topeka recorded a net loss for the quarter ended September 30, 2011; therefore, no allocation has been made to date (see key provisions below).

To implement the provisions of the JCE Agreement, the FHLBank amended its capital plan on May 12, 2011 and submitted it to the Finance Agency for approval. The Finance Agency approved the capital plan amendments on August 5, 2011 and such amendments became effective on September 5, 2011. The FHLBank’s JCE Agreement was also amended on August 5, 2011 and became effective on September 5, 2011. These amendments reflect differences between the original JCE Agreement and the capital plan amendments, including changes to the definition of an automatic termination event, provisions for determining whether an automatic termination event has occurred, and modifications to the provisions regarding the release of restricted retained earnings if the JCE Agreement is terminated.

Key provisions under the JCE Agreement are as follows:

§   Under the JCE Agreement, each FHLBank will build its RRE Account to a minimum of 1 percent of its total outstanding consolidated obligations through the 20 percent allocation. For this purpose, total outstanding consolidated obligations is based on the most recent quarter's average carrying value of all consolidated obligations for which an FHLBank is the primary obligor, excluding hedging adjustments (Total Consolidated Obligations). Under the JCE Agreement, an FHLBank may make voluntary allocations above 20 percent of its net income and/or above the targeted balance of 1 percent of its Total Consolidated Obligations.

§   The JCE Agreement provides that any quarterly net losses of an FHLBank may be netted against its net income, if any, for other quarters during the same calendar year to determine the minimum required year-to-date or annual allocation to its RRE Account. Any year-to-date or annual losses must first be allocated to the unrestricted retained earnings of an FHLBank until such retained earnings are reduced to a zero balance. Thereafter, any remaining losses may be applied to reduce the balance of an FHLBank’s RRE Account, but not below a zero balance. In the event an FHLBank incurs a net loss for a cumulative year-to-date or annual period that results in a decrease to the balance of its RRE Account below the balance of the RRE Account as of the beginning of that calendar year, such FHLBank’s quarterly allocation requirement will thereafter increase to 50 percent of quarterly net income until the cumulative difference between the allocations made at the 50 percent rate and the allocations that would have been made at the regular 20 percent rate is equal to the amount of the decrease to the balance of its RRE Account at the beginning of that calendar year.

§   If the size of an FHLBank’s balance sheet would decrease and consequently, Total Consolidated Obligations would decline, the percent allocated could exceed the targeted one percent of Total Consolidated Obligations. The JCE Agreement provides that if an FHLBank's RRE Account exceeds 1.5 percent of its Total Consolidated Obligations, such FHLBank may transfer amounts from its RRE Account to the unrestricted retained earnings account, but only to the extent that the balance of its RRE Account remains at least equal to 1.5 percent of the FHLBank’s Total Consolidated Obligations immediately following such transfer. Finally, the JCE Agreement provides that during periods in which an FHLBank’s RRE Account is less than one percent of its Total Consolidated Obligations, such FHLBank may pay dividends only from unrestricted retained earnings or from the portion of quarterly net income not required to be allocated to its RRE Account.

§   The JCE Agreement can be voluntarily terminated by an affirmative vote of two-thirds of the boards of directors of the FHLBanks, or automatically after the occurrence of a certain event after following certain proscribed procedures (Automatic Termination Event). An Automatic Termination Event means: (1) a change in the FHLBank Act, or another applicable statute, that will have the effect of creating a new, or higher, assessment or taxation on net income or capital of the FHLBanks; or (2) a change in the FHLBank Act, or another applicable statute, or relevant regulations that will result in a higher mandatory allocation of an FHLBank’s quarterly net income to any retained earnings account other than the annual amount, or total amount, specified in an FHLBank’s capital plan. An FHLBank’s obligation to make allocations to the RRE Account terminates after it has been determined that an Automatic Termination Event has occurred and one year thereafter the restrictions on paying dividends out of the RRE Account, or otherwise reallocating funds from the RRE Account, are also terminated. Upon the voluntary termination of the JCE Agreement, an FHLBank’s obligation to make allocations to the RRE Account is terminated on the date written notice of termination is delivered to the Finance Agency, and restrictions on paying dividends out of the RRE Account, or otherwise reallocating funds from the RRE Account, terminate one year thereafter.

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NOTE 13 – PENSION AND POSTRETIREMENT BENEFIT PLANS

The FHLBank maintains a benefit equalization plan (BEP) covering certain senior officers. This non-qualified plan contains provisions for a deferred compensation and a defined benefit component. The BEP is, in substance, an unfunded supplemental retirement plan.

Components of the net periodic pension cost for the defined benefit portion of the FHLBank’s BEP for the three- and nine-month periods ended September 30, 2011 and 2010, were (in thousands):

	Three-month Period Ended					Nine-month Period Ended
	09/30/2011		09/30/2010			09/30/2011		09/30/2010
Service cost	$	93	$	102		$	305	$	234
Interest cost		114		126			349		322
Amortization of prior service cost		0		(2	)		0		(5	)
Amortization of net loss		79		114			257		205
NET PERIODIC POSTRETIREMENT BENEFIT COST	$	286	$	340		$	911	$	756

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NOTE 14 – FAIR VALUES

The FHLBank determines fair values using available market information and the FHLBank’s best judgment of appropriate valuation methodologies. These fair values are based on pertinent information available to the FHLBank as of September 30, 2011 and December 31, 2010. Although the FHLBank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the FHLBank’s financial instruments, fair values in certain cases are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the FHLBank’s judgment of how a market participant would estimate the fair values. The Fair Value Summary Tables do 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.

Subjectivity of Estimates: Estimates of the fair value of advances with options, mortgage instruments, derivatives with embedded options and consolidated obligation bonds with options using the methods described below and other methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, methods to determine possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on fair values. Since these fair values are determined as of a specific point in time, they are susceptible to material near term changes.

The carrying value, net unrealized gains (losses) and fair values of the FHLBank’s financial instruments as of September 30, 2011 are summarized in the following table (in thousands):

	Carrying Value			Net Unrealized Gains (Losses)			Fair Value
Assets:
Cash and due from banks	$	1,797,507		$	0		$	1,797,507
Interest-bearing deposits		106			0			106
Federal funds sold		700,000			0			700,000
Trading securities		6,192,849			0			6,192,849
Held-to-maturity securities		5,408,969			(9,160	)		5,399,809
Advances		17,017,649			150,857			17,168,506
Mortgage loans held for portfolio, net of allowance		4,794,443			249,480			5,043,923
Accrued interest receivable		79,575			0			79,575
Derivative assets		29,034			0			29,034
Liabilities:
Deposits		2,201,013			(1	)		2,201,014
Consolidated obligation discount notes		11,505,916			140			11,505,776
Consolidated obligation bonds		20,380,300			(300,850	)		20,681,150
Mandatorily redeemable capital stock		10,768			0			10,768
Accrued interest payable		103,421			0			103,421
Derivative liabilities		113,601			0			113,601
Other Asset (Liability):
Standby letters of credit		(1,297	)		0			(1,297	)
Standby bond purchase agreements		49			3,059			3,108

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The carrying value, net unrealized gains (losses) and fair values of the FHLBank’s financial instruments as of December 31, 2010 are summarized in the following table (in thousands):

	Carrying Value			Net Unrealized Gains (Losses)			Fair Value
Assets:
Cash and due from banks	$	260		$	0		$	260
Interest-bearing deposits		24			0			24
Federal funds sold		1,755,000			0			1,755,000
Trading securities		6,334,939			0			6,334,939
Held-to-maturity securities		6,755,978			(11,689	)		6,744,289
Advances		19,368,329			113,411			19,481,740
Mortgage loans held for sale		120,525			9,128			129,653
Mortgage loans held for portfolio, net of allowance		4,172,906			138,887			4,311,793
Accrued interest receivable		93,341			0			93,341
Derivative assets		26,065			0			26,065
Liabilities:
Deposits		1,209,952			0			1,209,952
Consolidated obligation discount notes		13,704,542			1,671			13,702,871
Consolidated obligation bonds		21,521,435			(138,452	)		21,659,887
Mandatorily redeemable capital stock		19,550			0			19,550
Accrued interest payable		128,551			0			128,551
Derivative liabilities		255,707			0			255,707
Other Asset (Liability):
Standby letters of credit		(1,526	)		0			(1,526	)
Standby bond purchase agreements		338			2,928			3,266

Fair Value Methodologies and Techniques and Significant Inputs:

Cash and Due From Banks: The fair values approximate the recorded book balances.

Interest-bearing Deposits: The balance is comprised of interest-bearing deposits in banks. Based on the nature of the accounts, the recorded book value approximates the fair value.

Federal Funds Sold: The book value of overnight Federal funds approximates fair value, and term Federal funds are valued using projected future cash flows discounted at the current replacement rate.

Investment securities – non-MBS: The fair values of non-MBS investments are determined based on quoted prices, excluding accrued interest, as of the last business day of each period. Certain investments for which quoted prices are not readily available are valued by third parties or by using internal pricing models. The significant input associated with all classes of non-MBS investment securities is a market-observable interest rate curve adjusted for a spread, if applicable. Differing spreads may be applied to distinct term points along the discount curve in determining the fair value of instruments with varying maturities; therefore, the spread adjustment is presented as a range. The following table presents the inputs used for each non-MBS investment security class as of September 30, 2011:

	Interest Rate Curve	Spread Range
Certificates of deposit	LIBOR swap	-8.0 to -8.4 basis points
Commercial paper	LIBOR swap	-3.5 to -5.3 basis points

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For non-MBS long-term (as determined by original issuance date) securities, the FHLBank’s valuation technique incorporates prices from up to four designated third-party pricing vendors when available. These pricing vendors use methods that generally employ, but are not limited to, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing. The FHLBank established a price for each of its non-MBS long-term securities using a formula that is based upon the number of prices received. If four prices are received, the average of the middle two prices is used. If three prices are received, the middle price is used. If two prices are received, the average of the two prices is used. If one price is received, it is used subject to some type of validation as described below. The computed prices are tested for reasonableness using specified tolerance thresholds. Prices within the established thresholds are generally accepted unless strong evidence suggests that using the formula-driven price would not be appropriate. Preliminary fair values that are outside the tolerance thresholds, or that management believes may not be appropriate based on all available information (including those limited instances in which only one price is received), are subject to further analysis including, but not limited to, a comparison to the prices for similar securities and/or to non-binding dealer estimates or use of an internal model that is deemed most appropriate after consideration of all relevant facts and circumstances that a market participant would consider. As of September 30, 2011, vendor prices were received for substantially all of the FHLBank’s non-MBS long-term holdings and substantially all of those prices fell within the specified thresholds. The relative proximity of the prices received supports the FHLBank’s conclusion that the final computed prices are reasonable estimates of fair value.

Investment securities – MBS/ABS: For MBS/ABS securities, the FHLBank’s valuation technique incorporates prices from up to four designated third-party pricing vendors when available. These pricing vendors use methods that generally employ, but are not limited to, benchmark tranche yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing. The FHLBank established a price for each of its MBS/ABS using the same formula described above for non-MBS long-term securities. As of September 30, 2011, vendor prices were received for substantially all of the FHLBank’s MBS holdings and substantially all of those prices fell within the specified thresholds. The relative proximity of the prices received supports the FHLBank’s conclusion that the final computed prices are reasonable estimates of fair value. Based on the current lack of significant market activity for certain private-label MBS/ABS, the non-recurring fair value measurements for OTTI securities as of September 30, 2011 fell within Level 3 of the fair value hierarchy.

Advances: The fair values of advances are determined by calculating the present values of the expected future cash flows from the advances. The calculated present values are reduced by the accrued interest receivable. The discount rate used in the variable rate advance calculations was current LIBOR. When setting interest rates on the FHLBank’s advances, volume discounts are applied according to the appropriate level or tier for the advance par value. The appropriate replacement rate based on the tier is reflected in the determination of the fair values of applicable advance products.

Advance Type	Method of Valuation
Fixed rate non-callable and fixed rate callable advances	Valued using discounted cash flows incorporating estimates of future interest rate volatility, if applicable, and discounted using weighted average advance replacement rates.
Fixed rate convertible and step-up advances	Valued using discounted cash flows incorporating estimates of future interest rate volatility and discounted using LIBOR adjusted for spread to LIBOR using the tier specific replacement spread.
All other advances	Valued using discounted cash flows incorporating estimates of future interest rate volatility, if applicable, and discounted using LIBOR.

Mortgage Loans Held for Sale:Fair values are determined based on quoted market prices of similar mortgage loans. These prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions. Once a firm commitment is signed with a buyer, the fair values will be based on commitment prices.

Mortgage Loans Held for Portfolio:Fair values are determined based on quoted market prices of similar mortgage loans. These prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions.

Commitments to Extend Credit: The fair values of the FHLBank’s commitments to extend credit are estimated 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 mortgage loan commitments, fair value also considers any difference between current levels of interest rates and the committed rates. Certain mortgage loan purchase commitments are recorded as derivatives at their fair values. With one particular MPF product, the member originates mortgage loans as an agent for the FHLBank, and the FHLBank funds to close the mortgage loans. The commitments that unconditionally obligate the FHLBank to fund the mortgage loans related to this product are not considered derivatives. Their fair values were negligible as of September 30, 2011 and December 31, 2010.

Accrued Interest Receivable and Payable:The fair values approximate the recorded book balances.

Derivative assets/liabilities: The FHLBank bases the fair values of derivatives on instruments with similar terms or available market prices including accrued interest receivable and payable. The fair values use standard valuation techniques for derivatives, such as discounted cash flow analysis and comparisons to similar instruments. The FHLBank is subject to credit risk in derivative transactions because of the potential nonperformance by the derivative counterparties. To mitigate this risk, the FHLBank enters into master netting agreements for derivative agreements with highly-rated institutions. In addition, the FHLBank has entered into bilateral security agreements with all active derivative dealer counterparties. These agreements provide for delivery of collateral at specified levels tied to counterparty credit ratings to limit the FHLBank’s net unsecured credit exposure to these counterparties. The FHLBank has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements of derivatives.

The derivative fair values are netted by counterparty where such legal right exists and offset against fair value amounts recognized for the obligation to return cash collateral held or the right to reclaim cash collateral pledged to the particular counterparty. If these netted amounts are positive, they are classified as an asset and, if negative, a liability.

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The discounted cash flow model uses an income approach based on market-observable inputs (inputs that are actively quoted and can be validated to external sources). Inputs by class of derivative are as follows:

§   Interest-rate related derivatives:

·   LIBOR swap curve;

·   Volatility assumptions - market-based expectations of future interest rate volatility implied from current market prices for similar options; and

·   Prepayment assumptions.

§   Mortgage delivery commitments:

·   To be announced (TBA) price - market-based prices of TBAs by coupon class and expected term until settlement.

Deposits: The fair values of deposits are determined by calculating the present values of the expected future cash flows from the deposits. The calculated present values are reduced by the accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.

Consolidated Obligations: The fair values for consolidated obligation bonds and discount notes are determined based on projected future cash flows. Fixed rate consolidated obligations that do not contain options are discounted using a replacement rate. Variable rate consolidated obligations that do not contain options are discounted using LIBOR. Consolidated obligations that contain optionality are valued using estimates of future interest rate volatility and discounted using LIBOR.

Mandatorily Redeemable Capital Stock: The fair value of capital stock subject to mandatory redemption is generally at par value. Fair value also includes estimated dividends earned at the time of reclassification from equity to liabilities, until such amount is paid, and any subsequently declared stock dividend. FHLBank Topeka’s dividends are declared and paid at each quarter end; therefore, fair value equaled par value as of the end of the periods presented. Stock can only be acquired by members at par value and redeemed or repurchased at par value. Stock is not traded and no market mechanism exists for the exchange of stock outside the cooperative structure.

Standby Letters of Credit: The fair values of standby letters of credit are based on the present value of fees currently charged for similar agreements. The value of these guarantees is recognized and recorded in other liabilities.

Standby Bond Purchase Agreements: The fair values of the standby bond purchase agreements are estimated using the present value of the future fees on existing agreements with fees determined using rates currently charged for similar agreements.

Fair Value Hierarchy: The FHLBank records trading securities, derivative assets and derivative liabilities at fair value. 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. 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 general, the transaction price will equal the exit price and, therefore, represents the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in that market.

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 fair value measurement is determined. This overall level is an indication of the market observability of the fair value measurement. Fair value is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability at the measurement date (an exit price). In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.

Outlined below is the application of the fair value hierarchy to the FHLBank’s financial assets and financial liabilities that are carried at fair value.

§   Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

§   Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The types of assets and liabilities carried at Level 2 fair value generally include trading investment securities and derivative contracts.

§   Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. A significant portion of the unobservable inputs are supported by little or no market activity and reflect the entity’s own assumptions. The types of assets and liabilities carried at Level 3 fair value generally include private-label MBS/ABS that the FHLBank has determined to be other-than-temporarily impaired.

The FHLBank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value is first determined based on quoted market prices or market-based prices, where available. If quoted market prices or market-based prices are not available, fair value is determined based on valuation models that use market-based information available to the FHLBank as inputs to the models.

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, if any, are reported as transfers in/out at fair value in the quarter in which the changes occur. The FHLBank had no financial assets or liabilities measured on a recurring basis for which the fair value classification changed during the nine-months ended September 30, 2011.

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Fair Value on a Recurring Basis: The following table presents, for each hierarchy level, the FHLBank’s assets and liabilities that are measured at fair value on a recurring basis on the Statements of Condition as of September 30, 2011 (in thousands):

	Total			Level 1		Level 2		Level 3		Net Accrued Interest on Derivatives and Cash Collateral
Commercial paper	$	1,969,549		$	0	$	1,969,549	$	0	$	0
Certificates of deposit		1,544,954			0		1,544,954		0		0
TCCULGP1 obligations		205,681			0		205,681		0		0
TLGP2 obligations		533,086			0		533,086		0		0
FHLBank3 obligations		127,346			0		127,346		0		0
Fannie Mae4 obligations		356,427			0		356,427		0		0
Freddie Mac4obligations		801,208			0		801,208		0		0
Farm Credit4obligations		252,451			0		252,451		0		0
Farmer Mac4obligations		32,178			0		32,178		0		0
Subtotal		5,822,880			0		5,822,880		0		0
Mortgage-backed securities:
Fannie Mae residential4		216,562			0		216,562		0		0
Freddie Mac residential4		151,994			0		151,994		0		0
Ginnie Mae residential5		1,413			0		1,413		0		0
Mortgage-backed securities		369,969			0		369,969		0		0
Trading securities		6,192,849			0		6,192,849		0		0
Derivative fair value:
Interest-rate related		87,861			0		59,092		0		28,769
Mortgage delivery commitments		957			0		957		0		0
Subtotal		88,818			0		60,049		0		28,769
Net cash collateral (received) delivered		(59,784	)		0		0		0		(59,784	)
Derivative assets		29,034			0		60,049		0		(31,015	)
TOTAL ASSETS MEASURED AT FAIR VALUE	$	6,221,883		$	0	$	6,252,898	$	0	$	(31,015	)
Derivative fair value:
Interest-rate related	$	487,654		$	0	$	477,246	$	0	$	10,408
Mortgage delivery commitments		107			0		107		0		0
Subtotal		487,761			0		477,353		0		10,408
Net cash collateral received (delivered)		(374,160	)		0		0		0		(374,160	)
Derivative liabilities		113,601			0		477,353		0		(363,752	)
TOTAL LIABILITIES MEASURED AT FAIR VALUE	$	113,601		$	0	$	477,353	$	0	$	(363,752	)

__________

1	Represents corporate credit union debentures guaranteed by NCUA under the TCCULGP.
2	Represents corporate debentures guaranteed by FDIC under the TLGP.
3	See Note 17 for transactions with other FHLBanks.
4	Fannie Mae, Freddie Mac, Farm Credit, and Farmer Mac are GSEs. Fannie Mae and Freddie Mac were placed into conservatorship by the Finance Agency on September 7, 2008.
5	Ginnie Mae securities are guaranteed by the U.S. government.

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The following table presents, for each hierarchy level, the FHLBank’s assets and liabilities that are measured at fair value on a recurring basis on the Statements of Condition as of December 31, 2010 (in thousands):

	Total			Level 1		Level 2		Level 3		Net Accrued Interest on Derivatives and Cash Collateral
Commercial paper	$	2,349,565		$	0	$	2,349,565	$	0	$	0
Certificates of deposit		1,755,013			0		1,755,013		0		0
U.S. Treasuries		282,996			0		282,996		0		0
FHLBank1 obligations		120,876			0		120,876		0		0
Fannie Mae2 obligations		396,750			0		396,750		0		0
Freddie Mac2obligations		988,097			0		988,097		0		0
Subtotal		5,893,297			0		5,893,297		0		0
Mortgage-backed securities:
Fannie Mae2 residential		259,678			0		259,678		0		0
Freddie Mac2 residential		180,430			0		180,430		0		0
Ginnie Mae3 residential		1,534			0		1,534		0		0
Mortgage-backed securities		441,642			0		441,642		0		0
Trading securities		6,334,939			0		6,334,939		0		0
Derivative fair value:
Interest-rate related		89,864			0		78,613		0		11,251
Mortgage delivery commitments		291			0		291		0		0
Subtotal		90,155			0		78,904		0		11,251
Net cash collateral (received) delivered		(64,090	)		0		0		0		(64,090	)
Derivative assets		26,065			0		78,904		0		(52,839	)
TOTAL ASSETS MEASURED AT FAIR VALUE	$	6,361,004		$	0	$	6,413,843	$	0	$	(52,839	)
Derivative fair value:
Interest-rate related	$	353,651		$	0	$	349,569	$	0	$	4,082
Mortgage delivery commitments		1,524			0		1,524		0		0
Subtotal		355,175			0		351,093		0		4,082
Net cash collateral received (delivered)		(99,468	)		0		0		0		(99,468	)
Derivative liabilities		255,707			0		351,093		0		(95,386	)
TOTAL LIABILITIES MEASURED AT FAIR VALUE	$	255,707		$	0	$	351,093	$	0	$	(95,386	)

__________

1	See Note 17 for transactions with other FHLBanks.
2	Fannie Mae and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency on September 7, 2008.
3	Ginnie Mae securities are guaranteed by the U.S. government.

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Fair Value on a Nonrecurring Basis: The FHLBank measures certain held-to-maturity securities and mortgage loans (including real estate owned) at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances (i.e., when there is evidence of OTTI).

The following table presents assets by level within the valuation hierarchy for which a nonrecurring change in fair value has been recorded during the nine-month period ended September 30, 2011 (in thousands):

	Fair Value Measurements for the Nine-month Period Ended 09/30/2011
	Total		Level 1		Level 2		Level 3
Held-to-maturity securities1,2:
Private-label residential MBS3	$	135,658	$	0	$	0	$	135,658
Real estate owned4		1,635		0		1,635		0
TOTAL	$	137,293	$	0	$	1,635	$	135,658

_________

1	Excludes impaired securities with carrying values less than their fair values at date of impairment.
2	A security will be included in the fair value total each time it is written down, which could be multiple times throughout the time period presented.
3	As of March 31, 2011, private-label residential MBS/ABS classified as held-to-maturity securities with a carrying value prior to write-down of $68,026,000 were written down to a fair value of $66,723,000. As of June 30, 2011, private-label residential MBS/ABS classified as held-to-maturity securities with a carrying value prior to write-down of $17,466,000 were written down to $14,542,000. As of September 30, 2011, private-label residential MBS/ABS classified as held-to-maturity securities with a carrying value prior to write-down of $60,240,000 were written down to $54,393,000. These write-downs resulted in OTTI charges of $5,847,000 and $10,074,000 for the three- and nine-month periods ended September 30, 2011, respectively.
4	During the nine-month period ended September 30, 2011, mortgage loans with a book value of $2,007,000 were transferred to real estate owned at a fair value of $1,635,000 less estimated cost to sell of $162,000, resulting in a $534,000 charge-off to the allowance for credit losses on mortgage loans.

The following table presents assets by level within the valuation hierarchy, for which a nonrecurring change in fair value was recorded as of December 31, 2010 (in thousands):

	Fair Value Measurements as of 12/31/2010
	Total		Level 1		Level 2		Level 3
Held-to-maturity securities1,2:
Private-label residential MBS3	$	50,979	$	0	$	0	$	50,979
Real estate owned4		1,755		0		1,755		0
TOTAL	$	52,734	$	0	$	1,755	$	50,979

_________

1	Excludes impaired securities with carrying values less than their fair values at date of impairment.
2	A security will be included in the fair value total each time it is written down, which could be multiple times throughout the time period presented.
3	As of March 31, 2010, private-label residential MBS classified as held-to-maturity securities with a carrying value prior to write-down of $43,783,000 were written down to a fair value of $27,695,000. As of June 30, 2010, private-label residential MBS classified as held-to-maturity securities with a carrying value prior to write-down of $21,650,000 were written down to a fair value of $20,256,000. As of September 30, 2010, no private-label MBS classified as held-to-maturity securities were written down to fair value. As of December 31, 2010, private-label residential MBS classified as held-to-maturity securities with a carrying value prior to write-down of $3,324,000 were written down to a fair value of $3,028,000. These write-downs resulted in OTTI charges of $17,778,000 for the year ended December 31, 2010.
4	During the year ended December 31, 2010, mortgage loans with a book value of $2,067,000 were transferred to real estate owned at a fair value of $1,755,000 less estimated cost to sell of $171,000, resulting in a $483,000 charge-off to the allowance for credit losses on mortgage loans.

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NOTE 15 – COMMITMENTS AND CONTINGENCIES

Joint and Several Liability: As provided by the Bank Act or Finance Agency regulation and as described in Note 9, consolidated obligations are backed only by the financial resources of the FHLBanks. FHLBank Topeka is jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. The par amounts for which FHLBank Topeka is jointly and severally liable were approximately $665,006,234,000 and $761,374,310,000 as of September 30, 2011 and December 31, 2010, respectively. To the extent that an FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Agency determines that the primary obligor is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor. As a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked.

The joint and several obligations are mandated by Finance Agency regulations and are not the result of arms-length transactions among the FHLBanks. As described above, the FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several liability. Because the FHLBanks are subject to the authority of the Finance Agency as it relates to decisions involving the allocation of the joint and several liability for the FHLBank’s consolidated obligations, the FHLBank Topeka regularly monitors the financial condition of the other 11 FHLBanks to determine whether it should expect a loss to arise from its joint and several obligations. If the FHLBank were to determine that a loss was probable and the amount of such loss could be reasonably estimated, the FHLBank would charge to income the amount of the expected loss. Based upon the creditworthiness of the other 11 FHLBanks as of September 30, 2011, FHLBank Topeka believes that a loss accrual is not necessary at this time.

Off-balance Sheet Commitments: As of September 30, 2011 and December 31, 2010, off-balance sheet commitments were as follows (in thousands):

	09/30/2011						12/31/2010
Notional Amount	Expire Within One Year		Expire After One Year		Total		Expire Within One Year		Expire After One Year		Total
Standby letters of credit outstanding	$	2,422,721	$	36,402	$	2,459,123	$	2,888,880	$	60,058	$	2,948,938
Commitments for standby bond purchases		101,206		1,444,889		1,546,095		582,468		981,041		1,563,509
Commitments to fund or purchase mortgage loans		128,011		0		128,011		148,572		0		148,572
Commitments to issue consolidated bonds, at par		1,365,000		0		1,365,000		239,000		0		239,000

Commitments to Extend Credit: Standby letters of credit are executed for members for a fee. A standby letter of credit is a short-term financing arrangement between the FHLBank and its member or non-member housing associate. If the FHLBank is required to make payment for a beneficiary’s draw, these amounts are converted into a collateralized advance to the member. As of September 30, 2011, outstanding standby letters of credit had original terms of 8 days to 10 years with a final expiration in 2020. As of December 31, 2010, outstanding standby letters of credit had original terms of 6 days to 10 years with a final expiration in 2020. Unearned fees as well as the value of the guarantees related to standby letters of credit are recorded in other liabilities and amounted to $1,297,000 and $1,526,000 as of September 30, 2011 and December 31, 2010, respectively. The standby letters of credit are fully collateralized with assets allowed by the FHLBank’s MPP. Based upon management’s credit analysis of members and collateral requirements under the MPP, the FHLBank does not expect to incur any credit losses on the letters of credit.

Standby Bond-Purchase Agreements: The FHLBank has entered into standby bond purchase agreements with state housing authorities within its four-state district whereby the FHLBank, for a fee, agrees to purchase and hold the authorities’ bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLBank to purchase the bond. The bond purchase commitments entered into by the FHLBank expire no later than 2014, though some are renewable at the option of the FHLBank. The total commitments for bond purchases were with the same two state housing authorities as of September 30, 2011 and December 31, 2010. The FHLBank was not required to purchase any bonds under these agreements during the three- or nine-month periods ended September 30, 2011 and 2010.

Commitments to Fund or Purchase Mortgage Loans: These commitments that unconditionally obligate the FHLBank to fund/purchase mortgage loans from participating FHLBank Topeka members in the MPF Program are generally for periods not to exceed 60 calendar days. Certain commitments are recorded as derivatives at their fair values on the Statements of Condition. The FHLBank recorded mortgage delivery commitment derivative asset (liability) balances of $(850,000) and $(1,233,000) as of September 30, 2011 and December 31, 2010, respectively.

Lehman Proceedings: As previously reported, the FHLBank was advised by representatives of the Lehman Brothers Holdings, Inc. bankruptcy estate in 2009 and 2010 that they believed that the FHLBank had been unjustly enriched in connection with the close out of its interest rate swap transactions with Lehman at the time of the Lehman bankruptcy in 2008. In August 2010, the FHLBank received a Derivatives Alternative Dispute Resolution Notice from the Lehman bankruptcy estate stating disagreement with how the settlement was calculated in connection with the early termination of the swap transactions and the amounts the FHLBank received when replacing the swaps with new swaps transacted with other counterparties. The FHLBank settled the dispute on September 15, 2011. The settlement amount did not have a material impact to the FHLBank’s financial condition or results of operations.

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NOTE 16 – TRANSACTIONS WITH STOCKHOLDERS AND HOUSING ASSOCIATES

The FHLBank is a cooperative whose members own the capital stock of the FHLBank and generally receive dividends on their investments. In addition, certain former members that still have outstanding transactions are also required to maintain their investments in FHLBank capital stock until the transactions mature or are paid off. Nearly all outstanding advances are with current members, and the majority of outstanding mortgage loans held for portfolio were purchased from current or former members. The FHLBank also maintains demand deposit accounts for members primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases.

Transactions with members are entered into in the ordinary course of business. In instances where members also have officers or directors who are directors of the FHLBank, transactions with those members are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as other transactions with members. For financial reporting and disclosure purposes, the FHLBank defines related parties as FHLBank directors’ financial institutions and members with capital stock investments in excess of 10 percent of the FHLBank’s total regulatory capital stock outstanding, which includes mandatorily redeemable capital stock.

Activity with Members that Exceed a 10 Percent Ownership in FHLBank Capital Stock: As of September 30, 2011, no members owned more than 10 percent of outstanding FHLBank regulatory capital stock. The following tables present information as of December 31, 2010 on members that owned more than 10 percent of outstanding FHLBank regulatory capital stock (in thousands). None of the officers or directors of this member currently serve on the FHLBank’s board of directors.

12/31/2010
Member Name	State	Total Class A Stock Par Value		Percent of Total Class A			Total Class B Stock Par Value		Percent of Total Class B			Total Capital Stock Par Value		Percent of Total Capital Stock
MidFirst Bank	OK	$	1,000		0.2	%	$	156,427		18.1	%	$	157,427		10.7	%

Advance and deposit balances with members that owned more than 10 percent of outstanding FHLBank regulatory capital stock as of December 31, 2010 are summarized in the following table (in thousands).

	12/31/2010					12/31/2010
Member Name	Outstanding Advances		Percent Of Total			Outstanding Deposits1		Percent of Total
MidFirst Bank	$	3,088,000		16.3	%	$	1,366		0.1	%

1 Excludes cash pledged as collateral by derivative counterparties, netted against derivative liabilities, and Member Pass-through Deposit Reserves, classified as non-interest-bearing deposits.

MidFirst Bank did not originate any mortgage loans for or sell mortgage loans into the MPF Program during the three- or nine-months ended September 30, 2010.

Transactions with FHLBank Directors’ Financial Institutions: The following tables present information as of September 30, 2011 and December 31, 2010 for members that had an officer or director serving on the FHLBank’s board of directors (in thousands). Information is only listed for the year in which the officer or director served on the FHLBank’s board of directors. Capital stock listed is regulatory capital stock, which includes mandatorily redeemable capital stock.

	09/30/2011					12/31/2010
	Outstanding Amount		Percent of Total			Outstanding Amount		Percent of Total
Advances	$	122,370		0.7	%	$	66,798		0.3	%
Deposits	$	9,723		0.4	%	$	9,011		0.8	%
Class A Common Stock	$	30,783		5.1	%	$	6,610		1.1	%
Class B Common Stock		9,406		1.2			3,736		0.4
Total Capital Stock	$	40,189		2.9	%	$	10,346		0.7	%

The following table presents mortgage loans funded or acquired during the three- and nine-month periods ended September 30, 2011 and 2010 for members that had an officer or director serving on the FHLBank’s board of directors as of September 30, 2011 or 2010 (in thousands). Information is only listed for the three- or nine-month period in which the officer or director served on the FHLBank’s board of directors.

Three-month Period Ended										Nine-month Period Ended
09/30/2011					09/30/2010					09/30/2011					09/30/2010
Mortgage Loans Acquired		Percent of Total			Mortgage Loans Acquired		Percent of Total			Mortgage Loans Acquired		Percent of Total			Mortgage Loans Acquired		Percent of Total
$	19,286		4.9	%	$	22,602		3.9	%	$	66,441		5.9	%	$	34,612		3.3	%

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NOTE 17 – TRANSACTIONS WITH OTHER FHLBANKS

FHLBank Topeka had the following business transactions with other FHLBanks during the three- and nine-month periods ended September 30, 2011 and 2010 (in thousands). All transactions occurred at market prices.

	Three-month Period Ended				Nine-month Period Ended
Business Activity	09/30/2011		09/30/2010		09/30/2011		09/30/2010
Average overnight interbank loan balances to other FHLBanks1	$	1,604	$	0	$	1,640	$	549
Average overnight interbank loan balances from other FHLBanks1		3,191		7,609		5,731		5,110
Average deposit balance with FHLBank of Chicago for shared expense transactions2		101		57		68		47
Average deposit balance with FHLBank of Chicago for MPF transactions2		25		30		25		27
Transaction charges paid to FHLBank of Chicago for transaction service fees3		595		453		1,713		1,248
Par amount of purchases of consolidated obligations issued on behalf of other FHLBanks4		0		0		0		0

1	Occasionally, the FHLBank loans (or borrows) short-term funds to (from) other FHLBanks. Interest income on loans to other FHLBanks and interest expense on borrowings from other FHLBanks are separately identified on the Statements of Income.
2	Balance is interest bearing and is classified on the Statements of Condition as interest-bearing deposits.
3	Fees are calculated monthly based on 5.5 basis points per annum of outstanding loans originated since January 1, 2010 and are recorded in other expense. For outstanding loans originated since January 1, 2004 and through December 31, 2009, fees are calculated monthly based on 5.0 basis points per annum.
4	Purchases of consolidated obligations issued on behalf of one FHLBank and purchased by the FHLBank occur at market prices with third parties and are accounted for in the same manner as similarly classified investments. Outstanding balances are presented in Note 3. Interest income earned on these securities totaled $1,395,000 for each of the three-month periods ended September 30, 2011 and 2010. For the nine-month periods ended September 30, 2011 and 2010, interest income earned on these securities totaled $4,186,000 and $7,548,000, respectively.

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

The following Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist the reader in understanding our business and assessing our operations both historically and prospectively. This discussion should be read in conjunction with the interim financial statements and notes presented under Part I Item 1 of this quarterly report on Form 10-Q and the annual report on Form 10-K, which includes audited financial statements and related notes for the year ended December 31, 2010. Our MD&A includes the following sections:

§   Executive Level Overview – a general description of our business and financial highlights;

§   Financial Market Trends – a discussion of current trends in the financial markets and overall economic environment, including the related impact on our operations;

§   Critical Accounting Policies and Estimates – a discussion of accounting policies that require critical estimates and assumptions;

§   Results of Operations – an analysis of material changes in our operating results, including disclosures about the sustainability of our earnings;

§   Financial Condition – an analysis of material changes in our financial position;

§   Liquidity and Capital Resources – an analysis of our cash flows and capital position;

§   Risk Management – a discussion of our risk management strategies;

§   Recently Issued Accounting Standards; and

§   Recent Regulatory and Legislative Developments.

Executive Level Overview

We are a regional wholesale bank that makes advances (loans) to, purchases mortgages from, and provides other financial services to our member institutions. We are one of 12 district FHLBanks which, together with the Office of Finance, a joint office of the FHLBanks, make up the FHLBank System. As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. The FHLBanks are supervised and regulated by the Federal Housing Finance Agency (Finance Agency), an independent agency in the executive branch of the U.S. government. The Finance Agency’s mission with respect to the FHLBanks is to provide effective supervision, regulation and housing mission oversight of the FHLBanks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market.

We serve eligible financial institutions in Colorado, Kansas, Nebraska and Oklahoma (collectively, the Tenth District of the FHLBank System). Initially, members are required to purchase shares of Class A Common Stock to give them access to advance borrowings or to enable them to sell mortgage loans to us under the MPF Program. Our capital increases when members are required to purchase additional capital stock in the form of Class B Common Stock to support an increase in advance borrowings or when members sell additional mortgage loans to us. At our discretion, we may repurchase excess capital stock from time to time if a member’s advances or mortgage loan balances decline. Even through the severe financial market disruptions in the past few years, we have continued to: (1) achieve our liquidity, housing finance and community development missions by meeting member credit needs through the offering of advances, supporting residential mortgage lending through the MPF Program and through other products; (2) repurchase excess capital stock in order to appropriately manage the size of our balance sheet; and (3) pay market-rate dividends.

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Table 1 summarizes selected financial data for the periods indicated.

Table 1

Selected Financial Data (dollar amounts in thousands):

	09/30/2011			06/30/2011			03/31/2011			12/31/2010			09/30/2010
Statement of Condition(as of period end):
Total assets	$	36,089,351		$	35,825,690		$	38,015,855		$	38,706,067		$	38,001,292
Investments1		12,301,924			13,100,219			15,543,828			14,845,941			13,370,975
Advances		17,017,649			17,632,682			17,778,883			19,368,329			20,506,458
Mortgage loans, net2		4,794,443			4,571,115			4,481,129			4,293,431			3,937,391
Total liabilities		34,378,282			34,083,725			36,275,603			36,922,589			36,225,772
Deposits		2,201,013			1,747,580			1,960,477			1,209,952			1,776,269
Consolidated obligation bonds, net3		20,380,300			22,105,848			21,302,171			21,521,435			23,291,703
Consolidated obligation discount notes, net3		11,505,916			9,785,708			12,558,285			13,704,542			10,538,259
Total consolidated obligations, net3		31,886,216			31,891,556			33,860,456			35,225,977			33,829,962
Mandatorily redeemable capital stock		10,768			13,535			16,866			19,550			25,506
Total capital		1,711,069			1,741,965			1,740,252			1,783,478			1,775,520
Capital stock		1,359,051			1,377,615			1,391,971			1,454,396			1,471,004
Retained earnings		376,863			386,529			369,212			351,754			327,235
Accumulated other comprehensive income (loss)		(24,845	)		(22,179	)		(20,931	)		(22,672	)		(22,719	)
Statement of Income (for the quarterly period ended):
Net interest income		60,442			54,899			59,431			58,540			57,053
Provision for credit losses on mortgage loans		327			344			565			421			205
Other income (loss)		(49,615	)		(7,190	)		(12,685	)		(1,013	)		(23,492	)
Other expenses		13,051			15,081			13,343			14,235			10,994
Income (loss) before assessments		(2,551	)		32,284			32,838			42,871			22,362
Assessments		(250	)		8,447			8,716			11,382			771
Net income (loss)		(2,301	)		23,837			24,122			31,489			21,591
Selected Financial Ratios and Other Financial Data (for the quarterly period ended):
Dividends paid in cash4		87			68			138			69			81
Dividends paid in stock4		7,278			6,452			6,526			6,901			9,045
Class A Stock dividend rate		0.25	%		0.40	%		0.40	%		0.40	%		0.75	%
Class B Stock dividend rate		3.50	%		3.00	%		3.00	%		3.00	%		3.00	%
Weighted average dividend rate5		2.10	%		1.87	%		1.89	%		1.91	%		2.33	%
Dividend payout ratio6		N/A			27.36	%		27.63	%		22.13	%		42.27	%
Return on average equity		(0.52	)%		5.43	%		5.52	%		7.04	%		4.62	%
Return on average assets		(0.02	)%		0.25	%		0.25	%		0.31	%		0.21	%
Average equity to average assets		4.76	%		4.68	%		4.58	%		4.47	%		4.53	%
Net interest margin7		0.66	%		0.59	%		0.63	%		0.59	%		0.56	%
Total capital ratio8		4.74	%		4.86	%		4.58	%		4.61	%		4.67	%
Regulatory capital ratio9		4.84	%		4.96	%		4.68	%		4.72	%		4.80	%
Ratio of earnings to fixed charges10		0.97			1.40			1.39			1.47			1.23

__________

1	Includes trading securities, held-to-maturity securities, interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold.
2	Includes mortgage loans held for portfolio and held for sale. The allowance for credit losses on mortgage loans held for portfolio was $3,613,000, $3,420,000, $3,099,000, $2,911,000 and $2,613,000 as of September 30, 2011, June 30, 2011, March 31, 2011, December 31, 2010 and September 30, 2010, respectively.
3	Consolidated obligations are bonds and discount notes that we are primarily liable to repay. See Note 9 to the financial statements for a description of the total consolidated obligations of all 12 FHLBanks for which we are jointly and severally liable under the requirements of the Finance Agency which governs the issuance of debt for the 12 FHLBanks.
4	Dividends reclassified as interest expense on mandatorily redeemable capital stock and not included as GAAP dividends were $48,000, $50,000, $54,000, $100,000 and $125,000 as of September 30, 2011, June 30, 2011, March 31, 2011, December 31, 2010 and September 30, 2010, respectively.
5	Dividends paid in cash and stock on both classes of stock as a percentage of average capital stock eligible for dividends.
6	Dividends declared as a percentage of net income. The dividend payout ratio for the quarterly period ended September 30, 2011 is not meaningful.
7	Net interest income as a percentage of average earning assets.
8	GAAP capital stock, which excludes mandatorily redeemable capital stock, plus retained earnings and accumulated other comprehensive income (loss) as a percentage of total assets.
9	Regulatory capital (i.e., permanent capital and Class A capital stock) as a percentage of total assets.
10	Total earnings divided by fixed charges (interest expense including amortization/accretion of premiums, discounts and capitalized expenses related to indebtedness).

52

Net income (loss) for the three-month period ended September 30, 2011 was $(2.3) million compared to $21.6 million for the three-month period ended September 30, 2010. The decrease was primarily attributable to the following:

§	$3.4 million increase in net interest income (increase income);
§	$1.9 million increase in net other-than-temporary impairment losses on held-to-maturity securities (decrease income);
§	$2.0 million decrease related to net gain (loss) on trading securities (decrease income);
§	$22.2 million decrease related to net gain (loss) on derivatives and hedging activities (decrease income); and
§	$2.1 increase in other expenses (decrease income).

Net income for the nine-month period ended September 30, 2011 was $45.7 million compared to $2.1 million for the nine-month period ended September 30, 2010. The increase was primarily attributable to the following:

§	$16.6 million decrease in net interest income (decrease income);
§	$46.6 million decrease related to net gain (loss) on trading securities (decrease income);
§	$127.1 million increase related to net gain (loss) on derivatives and hedging activities (increase income);
§	$16.1 million increase in assessments (decrease income); and
§	$7.6 million increase in other expenses (decrease income).

As indicated above, the largest factor affecting net income for both the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010 was the change in market value of derivatives, primarily interest rate caps. Our cap portfolio produces gains when long-term interest rates rise and losses when they decline. In the periods presented, long-term rates fell resulting in market value losses of varying degrees. The magnitude of the rate changes combined with varying levels of general interest rate volatility in the different periods resulted in fluctuations in the gain/(loss) on derivative and hedging activities in the various periods. These same factors also affected the market value volatility of our other derivatives as well as our trading securities. Tables 10 through 14 and the discussion in both “Net Gain (Loss) on Derivative and Hedging Activities” and “Net Gain (Loss) on Trading Securities” in this Item 2 demonstrate and explain in more detail the fluctuations in Other Income (Loss).

Net interest income, which does not include the above mentioned market value fluctuations, has proven to be relatively stable over the past five quarters even with the market interest rate volatility during this time. Net interest income for the three months ended September 30, 2011 was slightly higher than it was for the same period of 2010 even though total assets decreased $1.9 billion since September 30, 2010. This is due to wider net interest spreads resulting from the refinancing of much of our unswapped callable debt and from a $3.2 million increase in advance prepayment fees, which are recorded in interest income on the Statements of Income. For the nine-month periods ended September 30, 2011 and 2010, net interest income declined as the impact of a smaller balance sheet over this period outweighed the benefit of a slightly better net interest margin.

During the first nine months of 2011, total assets declined 6.8 percent (see Table 15), primarily as a result of a $2.5 billion decrease in investments and a $2.4 billion decrease in advance balances, which were partially offset by a $1.8 billion increase in cash balances. Advance balances decreased due to: (1) a reduction in advances by two of our largest borrowers (see Table 17); (2) the prepayment of advances related to the failure of member institutions; and (3) a general de-leveraging trend among financial institutions. See “Financial Condition – Advances” under this Item 2 for additional discussion. Our investment securities decreased 17.1 percent due primarily to a decline in held-to-maturity securities, which was driven by prepayments in our fixed and variable rate MBS/CMO portfolios. As of September 30, 2011, we had a large balance in our Federal Reserve cash account as we began minimizing our unsecured investments with European counterparties. See “Liquidity and Capital Resources – Liquidity” under this Item 2 for additional discussion. As a result of the overall decline in investments and advances, the balances of our consolidated obligation bonds and discount notes also decreased from December 31, 2010 to September 30, 2011. See “Financial Condition – Consolidated Obligations” under this Item 2 for additional discussion.

Dividend rates for the third quarter of 2011 for Class A Common Stock were lower than dividend rates for the third quarter of 2010 as management lowered the rate to be comparable to short-term market yields. For Class B Common Stock, however, dividends were increased. The current level of dividends paid in a period is normally determined based upon a spread to the average overnight Federal funds effective rate (see Table 2) and may not correlate with the amount of net income (loss) during the period because of fluctuations in derivative values and trading securities gains (losses) for the period, which are typically not considered during the determination of dividend rates. However, because the adequacy of retained earnings, as reported in accordance with accounting principles generally accepted in the United States of America (GAAP), is considered in setting the level of our quarterly dividends, gain (loss) on derivatives and trading securities do play a factor in setting the level of our quarterly dividends. Refer to this Item 2 – “Liquidity and Capital Resources – Capital Distributions” for further information regarding dividend payments.

The REFCORP obligation was fully satisfied based upon income reported by the FHLBanks through June 30, 2011, and accordingly, we will no longer be assessed for REFCORP (see Note 11 of the Notes to the Financial Statements under Item 1). The FHLBank entered into a Joint Capital Enhancement Agreement (JCE Agreement) with the intent of allocating that portion of the FHLBank’s earnings historically paid to satisfy its REFCORP obligation to a separate Restricted Retained Earnings Account (RRE Account). See further discussion of the JCE under Item 2 - "Liquidity and Capital Resources - Capital" and in Note 12 of the Notes to the Financial Statements under Item 1.

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Financial Market Trends

The primary external factors that affect our net interest income are market interest rates and the general state of the economy.

General discussion of the level of market interest rates:

Table 2 presents selected market interest rates as of the dates or periods shown.

Table 2

Market Instrument	09/30/2011 Three-month Average			09/30/2010 Three-month Average			09/30/2011 Nine-month  Average			09/30/2010 Nine-month Average
Overnight Federal funds effective/target rate1		0.08	%		0.19	%		0.11	%		0.17	%
Federal Open Market Committee (FOMC) target rate for overnight Federal funds1	0.00 to 0.25			0.00 to 0.25			0.00 to 0.25			0.00 to 0.25
3-month Treasury bill1		0.02			0.15			0.06			0.13
3-month LIBOR1		0.30			0.39			0.29			0.36
2-year U.S. Treasury note1		0.27			0.54			0.50			0.77
5-year U.S. Treasury note1		1.14			1.54			1.69			2.06
10-year U.S. Treasury note1		2.41			2.77			3.01			3.31
30-year residential mortgage note rate2		4.38			4.54			4.64			4.83

Market Instrument	09/30/2011 Ending Rate			12/31/2010 Ending Rate			09/30/2010 Ending Rate
Overnight Federal funds effective/target rate1	0.0 to 0.25		%	0.0 to 0.25		%	0.0 to 0.25		%
FOMC target rate for overnight Federal funds1	0.0 to 0.25			0.0 to 0.25			0.0 to 0.25
3-month Treasury bill1		0.02			0.12			0.16
3-month LIBOR1		0.37			0.30			0.29
2-year U.S. Treasury note1		0.26			0.60			0.43
5-year U.S. Treasury note1		0.97			2.01			1.30
10-year U.S. Treasury note1		1.93			3.31			2.53
30-year residential mortgage note rate2		4.18			4.85			4.37

_________

1	Source is Bloomberg (Overnight Federal funds rate is the effective rate for the quarterly averages and the target rate for the ending rates).
2	Mortgage Bankers Association weekly 30-year fixed rate mortgage contract rate obtained from Bloomberg.

At its November 2, 2011 meeting, the FOMC maintained the Federal funds target rate at a range of zero to 0.25 percent and in its monetary policy statement, its assessment of the economic recovery was less dour than in its September 21, 2011 statement, but reiterated its September warning of significant downside risks to the economic outlook and noted weakness in employment and housing. The FOMC positively noted that “...economic growth had strengthened somewhat in the third quarter.” Other items of significance from the FOMC policy statement include: (1) the FOMC still anticipates that rates will stay on hold “at least through mid-2013;” and (2) the FOMC appeared to signal an easing bias by saying that it is prepared to employ additional easing steps as appropriate. The FOMC did not announce any new operations but will continue both “Operation Twist” (see additional discussion below) and its previous policies of reinvesting principal payments from its Agency debt and Agency MBS back into Agency MBS and of rolling maturing Treasury securities at auction. In November 2011 economic projections, released concurrently with the FOMC statement, Federal Reserve Board Members and Federal Reserve Bank Presidents significantly reduced their projections of economic growth through 2013 and significantly increased its projections for the unemployment rate from its June 2011 projections.

Average one- and three-month LIBOR have decreased 7.9 and 9.0 basis points (bps), respectively, from the third quarter of 2010 to the third quarter 2011. While these rates remained relatively steady from approximately December 2010 through March 2011, they began decreasing during the second quarter of 2011 until reaching their lows in late June and early July 2011. Important factors driving this decline include: (1) high levels of investable cash balances; (2) a reduction in the supply of collateral available for repurchase agreements that drove the rates on repurchase agreements down; and (3) the market’s response to changes in how the Federal Deposit Insurance Corporation (FDIC) assesses premiums on insured depository institutions (discussed below). However, these rates began steadily increasing, albeit in relatively small increments, in the third quarter of 2011 likely reflecting the financial turmoil in Europe. From June 30, 2011 to September 30, 2011, one-month and three-month LIBOR have increased 5.4 and 12.9 bps, respectively, representing the highest setting of 2011 for the three-month rate. The September 30, 2011 one-month rate is still below the highest setting in 2011 which occurred in the first quarter of 2011. Changes in LIBOR rates have an impact on interest income and expense because a considerable portion of our assets and liabilities are either directly or indirectly tied to LIBOR.Imbalances in the mix of these assets and liabilities results in exposure to basis risk which can negatively or positively impact net interest income. Other short-term rates such as those for U.S. Treasury bills and our discount notes have remained extremely low throughout 2011 as the Federal Reserve has maintained its monetary easing policy and as investors have sought the relative safety of Treasury investments.

The long-term portion of the U.S. Treasury rate curve (two-year and beyond) increased significantly in the fourth quarter of 2010, but has decreased significantly during the first nine months of 2011. Much of this decline in rates, especially for terms of five years or greater, took place in the third quarter of 2011. The decrease in longer-term U.S. Treasury rates appears to be in response to economic data that shows a slowdown in economic growth, continued deterioration in housing markets, persistently high unemployment and flight-to-quality demand resulting from the European sovereign debt crisis and other international economic and geopolitical events. The shape of the yield curve has flattened significantly from December 31, 2010 to September 30, 2011. During this period of time the spread between the two-year U.S. Treasury note and the ten-year U.S. Treasury note and the two-year U.S. Treasury note and the thirty-year U.S. Treasury bond declined by 104 basis points and 108 basis points, respectively, likely reflecting the market’s deteriorating outlook for economic growth. A portion of the flattening in the third quarter of 2011 might be attributable to market anticipation of potential Federal Reserve Bank purchase operations that would target long-term U.S. Treasury bonds and be funded through the sale of short-term U.S. Treasury bonds. When the economy improves and the Federal Reserve ends its purchases of U.S. Treasuries, the inflationary impact of large budget deficits and the current and anticipated volumes of U.S. Treasury issuance will likely result in increasing interest rates.Because we issue debt at a spread above U.S. Treasuries, higher interest rates increase the cost of issuing FHLBank consolidated obligations and increase the cost of long-term advances to our members.

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Other factors impacting FHLBank consolidated obligations:

Standard & Poor’s (S&P) lowered the long-term issuer credit ratings and related issue ratings on 10 of the 12 FHLBanks and the senior unsecured debt issued by the FHLBanks to AA+ from AAA on August 8, 2011 (the Federal Home Loan Banks of Chicago and Seattle were already rated AA+ prior to that date). However, investors continued to view short-term FHLBank consolidated obligations as carrying a relatively strong credit profile during the first nine months of 2011, even after the ratings downgrade, at least partially due to the implicit support from the U.S. government. This has resulted in strong investor demand for FHLBank discount notes and short-term bonds in the first nine months of 2011. Because of this strong demand and other factors (some of which are listed below), the overall cost to issue short-term consolidated obligations remained extremely low throughout the first nine months of 2011. Yields on discount notes decreased from December 31, 2010 to September 30, 2011 due to: (1) a decrease in supply of competing instruments, such as U.S. Treasury bills and repurchase agreements; (2) flight to quality from international economic and geopolitical events, particularly the European sovereign debt crisis; (3) renewed concerns about the U.S. economy; and (4) strong support of GSE obligations in the U.S. Treasury Department’s white paper on GSE reform.

Spreads of FHLBank debt relative to similar term U.S. Treasury instruments have increased from December 31, 2010 to September 30, 2011 for most tenors of two years or greater. For example, the spread between the on-the-run FHLBank two-year bullet debt and the two-year U.S. Treasury note increased from 11 bps on December 31, 2010 to 21 bps on September 30, 2011. The spread between the on-the-run FHLBank five-year bullet debt and the five-year U.S. Treasury note increased from 24 bps on December 31, 2010 to 37 bps as of September 30, 2011. Indicative three-month lockout callable bond spreads to U.S. Treasuries for intermediate-term tenors (three to seven years) decreased from December 31, 2010 to September 30, 2011 while the indicative three-month lockout callable bond spreads to U.S. Treasury for short-term (two years and less) and long-term (ten years and greater) increased over the same period. We fund a large portion of our fixed rate mortgage assets and amortizing advances with unswapped callable bonds. We also occasionally fund a smaller portion of fixed rate advances with unswapped callable bonds. For further discussion, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Consolidated Obligations” under this Item 2. The spreads on FHLBank fixed-rate, noncallable debt relative to the LIBOR swap curve was either stable or improved for most tenors out to seven years from December 31, 2010 to September 30, 2011. Theoretical spreads relative to LIBOR for tenors seven years or greater deteriorated during the same period of time. The theoretical swap level of the on-the-run FHLBank two-year bullet improved from three-month LIBOR minus 5.7 bps on December 31, 2010 to three-month LIBOR minus 11.1 bps on September 30, 2011. The theoretical swap level of the on-the-run FHLBank five-year bullet improved slightly from three-month LIBOR plus 10.1 bps on December 31, 2010 to three-month LIBOR plus 9.1 bps on September 30, 2011.

As mentioned previously, the FOMC plans to continue Operation Twist as initially introduced in its September 21, 2011 statement. Under Operation Twist, the Federal Reserve will purchase $400 billion par amount of U.S. Treasuries with remaining terms of 6 to 30 years and sell $400 billion par amount of U.S. Treasuries with remaining maturities of three years or less by the end of June 2012. Operation Twist could result in a flatter yield curve, which might result in relatively lower costs to issue our longer-term consolidated obligations; however, shorter-term costs, including discount notes, could increase due to the sale of shorter-term U.S. Treasuries. The flatter curve could also result in increasing prepayments on our MBS/CMO and mortgage loan holdings, which could result in lower yielding assets.

Foreign investor holdings of U.S. Agencies (both debt and MBS), as reported by the Federal Reserve System, decreased on a daily average basis for the week ended December 29, 2010 to the week ended September 28, 2011. Foreign investor holdings of U.S. Treasury securities increased over the same period. Foreign investors are significant buyers of FHLBank debt and decreasing demand from this investor segment can negatively impact our cost of funds. Both total taxable money market fund assets and the percentage of money market fund assets allocated to the category that includes our discount notes reversed the decline that had continued from 2010 throughout much of the first half of 2011 and continued increasing steadily through the third quarter of 2011, likely reflecting a flight-to-quality response to European credit concerns. Because money market funds are such a large and important investor base for FHLBank short-term obligations, lower demand from money market funds for FHLBank discount notes, variable rate consolidated obligation bonds and short-term consolidated obligation bonds might result in higher costs to issue these instruments, which would typically increase the cost of advances for our members.

Economic and other factors potentially impacting net interest income:

Effective April 1, 2011, the FDIC changed the method used for determining the base on which insurance premiums are assessed from deposits to total assets less tangible capital. While the long-term implications of this assessment change on the investment and funding behavior of insured depositories are unknown, this change resulted in the depositories’ reassessment of marginal arbitrage opportunities that are now subject to premium assessment. One arbitrage strategy that insured depositories have focused on recently is acquiring overnight Federal funds and leaving the cash at the Federal Reserve where they receive interest income on their excess reserves. In order to preserve the arbitrage spread that they have been receiving on this transaction, insured depositories must reduce the rate at which they are willing to purchase Federal funds. This is likely an important factor driving the decline in the overnight Federal funds rate and in short-term investment securities that occurred surrounding the change in the assessment base. Initially, this change had a significant downward impact on money market yields including those for Federal funds, short-term investment securities, repurchase agreements, LIBOR and, to some extent, consolidated obligation discount notes. Other than the increases in LIBOR rates discussed above, yields on these instruments have remained relatively low. Unless the cost to issue our consolidated obligation discount notes also remains low, declining returns on our overnight Federal funds investments could result in a decline in net interest income and/or a reduction in balances of liquid assets.

On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including those utilized by the FHLBank to hedge our interest rate and other risks. As a result of these requirements, certain derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or new swap execution facilities. The new statutory and regulatory requirements for derivative transactions will result in higher operating costs, likely increase funding costs, and may limit the availability of, or alter the structure of, certain advance products. Derivative market participants were originally expected to comply with the Dodd-Frank Act by July 16, 2011. However, the CFTC has acknowledged that it will fail to meet deadlines for rulemaking and as a result, certain provisions of the Dodd-Frank Act that require a CFTC rulemaking may not become effective until early next year at the earliest.

On July 21, 2011, Regulation Q, which prohibits Federal Reserve Bank members from paying interest on demand deposits, was repealed. It is possible that the repeal might allow commercial banks to compete directly with money market funds and could result in reductions in money market fund assets and increases in bank deposits. Because money market funds are important investors in our discount notes, the repeal might adversely impact demand (and costs) for our discount notes. Additionally, increases in deposits at commercial banks might result in declining demand for advances. Other possible impacts of the repeal include higher LIBOR rates and less supply on short-term, money market investments (commercial paper and certificates of deposit). Each of these potential impacts of the repeal of Regulation Q would affect our profitability and liquidity.

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Several rating agencies took action during the third quarter of 2011 in response to steps taken by the U.S. government to address the U.S. government’s borrowing limit and overall U.S. debt burden. Because of the credit rating agencies’ methodology and their assumption of the U.S. government’s implicit support of FHLBank debt, changes to the credit rating of U.S. Treasuries were passed through to the credit ratings of FHLBank debentures and to the ratings of individual FHLBanks. On August 2, 2011, Moody’s confirmed the Aaa rating of U.S. debt. However, Moody’s revised the U.S. government’s rating outlook to negative. On the same date, Moody’s confirmed the rating of FHLBank debt and put FHLBank debt on negative outlook. Moody’s has also confirmed the ratings of each individual FHLBank and revised its outlooks to negative. On August 5, 2011, S&P lowered the United States’ long-term sovereign credit rating to AA+ with a negative outlook from AAA with stable outlook, and affirmed the A-1+ short-term rating. S&P indicated that the downgrade reflected its opinion that the fiscal consolidation plan to which Congress and the Administration recently agreed fell short of what it believed would be necessary to stabilize the government’s medium-term debt dynamics. As mentioned previously, on August 8, 2011, S&P then lowered the long-term issuer credit ratings and related issue ratings on 10 of the 12 FHLBanks and the senior unsecured debt issues of the FHLBanks to AA+ from AAA. Credit ratings downgrades can adversely impact us in the following ways: (1) increase the funding cost of FHLBank debt issues; (2) have negative liquidity implications; (3) increase collateral posting requirements under certain of our derivatives agreements (see Note 7 of the Notes to the Financial Statements under Item 1 for additional information regarding derivative collateral requirements); and (4) impact our ability to offer certain member credit products such as letters of credit, which are generally dependent upon our credit rating. Following the downgrade by S&P, we observed some minor and temporary impacts in several of these areas; however, we did not consider any of them to be significant or material. It is possible that the United States’ long-term sovereign credit rating will be further downgraded or downgraded by additional credit rating agencies in the next several months as deadlines for establishing deficit reduction near. Additional downgrades could increase the likelihood and/or the severity of the impacts detailed above.

On October 24, 2011, the Federal Housing Finance Agency (FHFA) announced significant changes to the Home Affordable Refinance Program (HARP) that are designed to spark refinancing among borrowers with current loan-to-value (LTV) ratios above 80 percent who have had their loans sold to Fannie Mae or Freddie Mac on or before May 31, 2009. For these borrowers the changes include: (1) eliminating some risk-based fees for borrowers who refinance into shorter-term mortgages and lower fees for other borrowers; (2) removing the current 125 percent LTV ceiling; (3) waiving some lender representations and warranties for loans owned or guaranteed by Freddie Mac and Fannie Mae; (4) eliminating the need for property appraisals in some instances; and (5) extending the end date for HARP to December 31, 2013 for eligible loans. We anticipate that these changes to HARP could result in increased prepayments on our Agency variable rate MBS/CMO portfolio which are backed by higher coupon fixed-rate mortgages issued by Fannie Mae and Freddie Mac.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires us to make a number of judgments and assumptions that affect reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to our results. These assumptions and assessments include the following:

§   Accounting related to derivatives;

§   Fair value determinations;

§   Accounting for OTTI of investments;

§   Accounting for deferred premiums/discounts associated with MBS; and

§   Determining the adequacy of the allowance for credit losses.

Changes in any of the estimates and assumptions underlying our critical accounting policies could have a material effect on our financial statements.

The accounting policies that we believe are the most critical to an understanding of our financial results and condition and require complex management judgment are described under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in the annual report on Form 10-K, incorporated by reference herein. There were no material changes to our critical accounting policies and estimates during the quarter ended September 30, 2011.

Results of Operations

The primary source of our earnings is net interest income, which is interest earned on advances, mortgage loans, and investments less interest paid on consolidated obligations, deposits, and other borrowings. The increase in net interest income from the third quarter of 2010 to the third quarter of 2011 can be primarily attributed to an improvement in our net interest margin despite the decrease in total assets. Approximately half of the net interest margin improvement is due to an increase in prepayment fees, primarily from advances to former members placed in receivership that were prepaid by the FDIC or the acquirer, and is not expected to be repeated in subsequent quarters. The decrease in net interest income from the first nine months of 2010 to the nine months of 2011 can be primarily attributed to a decrease in average interest-earning assets despite a small increase in our net interest margin. See Tables 6 through 9 under this Item 2 for further information.

Despite the increase in net interest income for the third quarter of 2011, net income decreased largely due to the net change in the market value of derivatives not qualifying for hedge accounting under GAAP. Conversely, the decrease in net interest income from the first nine months of 2010 to the first nine months of 2011 was more than offset by the net positive change in the market value of derivatives resulting in an increase in net income. See “Net Gain (Loss) on Derivatives and Hedging Activities” in this Item 2 for a discussion of the impact of this activity by period.

We fulfill our mission by: (1) providing liquidity to our members through the offering of advances to finance housing, economic development and community lending; (2) supporting residential mortgage lending through the MPF Program; and (3) providing regional affordable housing programs that create housing opportunities for low- and moderate-income families. In order to effectively accomplish our mission, we must obtain adequate funding amounts at acceptable rate levels. We use derivatives as tools to reduce our funding costs and manage interest rate risk and prepayment risk. We acquire and classify certain investments as trading investments for liquidity and asset-liability management purposes. Although we manage the risks mentioned and utilize these transactions for asset-liability tools, we do not manage the fluctuations in fair value of our derivatives or trading securities. We are essentially a “hold-to-maturity” investor and transact derivatives only for hedging purposes.

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Adjusted income is a non-GAAP measure used by management to evaluate the quality of our ongoing earnings. We believe that the presentation of income as measured for management purposes enhances the understanding of our performance by highlighting our underlying results and profitability. By removing volatility created by market value fluctuations and items such as prepayment fees, we can compare longer-term trends in earnings that might otherwise be indeterminable. Therefore as part of evaluating our financial performance, we adjust net income reported in accordance with GAAP for the impact of: (1) Affordable Housing Program (AHP) and Resolution Funding Corporation (REFCORP) assessments (assessments for AHP and REFCORP through June 30, 2011 were equivalent to an effective minimum income tax rate of 26 percent; and, upon satisfaction of the REFCORP obligation as of June 30, 2011, the assessment for AHP for the third quarter of 2011 was equivalent to an effective minimum income tax rate of 10 percent); (2) items related to derivatives and hedging activities; and (3) other items excluded because they are not considered a part of our routine operations or ongoing business model, such as prepayment fees, gain/loss on retirement of debt, gain/loss on sale of mortgage loans held for sale and gain/loss on securities. The result is referred to as “adjusted income,” which is a non-GAAP measure of income. Adjusted income is used to compute an adjusted return on equity (ROE) that is then compared to the average overnight Federal funds effective rate, with the difference referred to as adjusted ROE spread. Adjusted income and adjusted ROE spread are used: (1) to measure performance under our incentive compensation plans; (2) as a key measure in determining the level of quarterly dividends; and (3) in strategic planning. While we utilize adjusted income as a key measure in determining the level of dividends, we consider GAAP income volatility caused by gain (loss) on derivatives and trading securities in determining the adequacy of our retained earnings as determined under GAAP. Because the adequacy of GAAP retained earnings is considered in setting the level of our quarterly dividends, gain (loss) on derivatives and trading securities can play a factor in setting the level of our quarterly dividends. Because we are primarily a “hold-to-maturity” investor and do not trade derivatives, we believe that adjusted income, adjusted ROE and adjusted ROE spread are helpful in understanding our operating results and provide a meaningful period-to-period comparison in contrast to GAAP income and ROE based on GAAP income, which can vary significantly from period to period because of derivatives and hedging activities and certain other items that management excludes when evaluating operational performance because the added volatility does not provide a consistent measurement analysis. Derivative and hedge accounting affects the timing of income or expense from derivatives, but not the economic income or expense from these derivatives when held to maturity or call date. For example, interest rate caps are purchased with an upfront fixed cost to provide protection against the risk of rising interest rates. Under derivative accounting guidance, these instruments are then marked to market each month, which can result in having to recognize significant gains and losses from quarter to quarter, producing volatility in our GAAP income. However, the sum of such gains and losses over the term of a derivative will equal its original purchase price if held to maturity. Table 3 presents a reconciliation of GAAP income to adjusted income for the three- and nine-month periods ended September 30, 2011 and 2010 (in thousands):

Table 3

	Three-month Period Ended					Nine-month Period Ended
	09/30/2011			09/30/2010		09/30/2011		09/30/2010
Net income, as reported under GAAP	$	(2,301	)	$	21,591	$	45,658	$	2,059
Total assessments		(250	)		771		16,913		771
Income (loss) before assessments		(2,551	)		22,362		62,571		2,830
Derivative-related and other excluded items1		43,004			21,983		63,313		145,449
Adjusted income (a non-GAAP measure)2	$	40,453		$	44,345	$	125,884	$	148,279

__________

1

The 2011 and 2010 excluded items are “Prepayment fees on terminated advances,” “Net gain (loss) on trading securities,” “Net gain (loss) on derivatives and hedging activities” and “Net realized gain (loss) on sale of mortgage loans held for sale” directly from our Statements of Income.

2

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, we have procedures in place to calculate these measures using the appropriate GAAP components. Although these non-GAAP measures are frequently used by our stakeholders in the evaluation of our performance, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

Table 4 presents adjusted ROE (a non-GAAP measure) compared to the average Federal funds rate, which we use as a key measure of effective use and management of members’ capital (amounts in thousands):

Table 4

	Three-month Period Ended						Nine-month Period Ended
	09/30/2011			09/30/2010			09/30/2011			09/30/2010
Average GAAP total capital for the period	$	1,757,917		$	1,853,205		$	1,763,262		$	1,906,752
ROE, based upon GAAP income before assessments		(0.58	)%		4.79	%		4.74	%		0.20	%
Adjusted ROE, based upon adjusted income 1		9.13	%		9.49	%		9.55	%		10.40	%
Average overnight Federal funds effective rate		0.08	%		0.19	%		0.11	%		0.17	%
Adjusted ROE as a spread to average Federal funds rate1		9.05	%		9.30	%		9.44	%		10.23	%

__________

1 Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, we have procedures in place to calculate these measures using the appropriate GAAP components. Although these non-GAAP measures are frequently used by our stakeholders in the evaluation of our performance, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

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Earnings Analysis: Table 5 presents changes in the major components of our earnings for the third quarter of 2011 compared to the third quarter of 2010 and the first nine months of 2011 compared to the first nine months of 2010 (in thousands):

Table 5

	Increase (Decrease) in Earnings Components
	Three-month Periods Ended 09/30/2011 vs. 09/30/2010						Nine-month Periods Ended 09/30/2011 vs. 09/30/2010
	Dollar Change			Percent Change			Dollar Change			Percent Change
Total interest income	$	(18,210	)		(11.7	)%	$	(64,576	)		(13.4	)%
Total interest expense		(21,599	)		(21.9	)		(48,012	)		(16.6	)
Net interest income		3,389			5.9			(16,564	)		(8.7	)
Provision for credit losses on mortgage loans		122			59.5			75			6.5
Net interest income after mortgage loan loss provision		3,267			5.7			(16,639	)		(8.7	)
Net gain (loss) on trading securities		(2,036	)		(7.6	)		(46,588	)		(62.2	)
Net gain (loss) on derivatives and hedging activities		(22,178	)		(42.2	)		127,116			54.8
Other non-interest income		(1,909	)		(81.6	)		3,472			92.3
Total non-interest income (loss)		(26,123	)		(111.2	)		84,000			54.7
Operating expenses		237			2.4			3,617			12.5
Other non-interest expenses		1,820			151.3			4,003			79.6
Total other expenses		2,057			18.7			7,620			22.5
AHP assessments		(506	)		(197.7	)		4,835			1,888.7
REFCORP assessments		(515	)		(100.0	)		11,307			2,195.5
Total assessments		(1,021	)		(132.4	)		16,142			2,093.6
Net income (loss)	$	(23,892	)		(110.7	)%	$	43,599			2,117.5	%

Net Interest Income: As mentioned previously, the increase in net interest income for the three-month period ended September 30, 2011 compared to the same period in 2010 was primarily due to an increase in our net interest spread and net interest margin despite a decrease in average interest-earning assets. Conversely, net interest income for the nine-month period ended September 30, 2011 compared to the same period in 2010 decreased despite a slight increase in our net interest spread and net interest margin, due primarily to the decrease in average interest-earning assets. Tables 6 through 9 present the average balances and yields of our interest-earning assets and interest-bearing liabilities for the three- and nine-month periods ended September 30, 2011 and 2010.

The decreases in average yields on advances for both the three-month and nine-month periods ended September 30, 2011 compared to the same periods in 2010 are primarily attributable to the decline in short-term rates combined with the relative short-term nature of our advance portfolio. As discussed under this Item 2 – “Financial Condition – Advances,” a significant portion of our advance portfolio either matures or effectively re-prices within three months by product design or through the use of derivatives. Because of the relatively short nature of the advance portfolio, including the impact of any interest rate swaps qualifying as fair value hedges, the average yield in this portfolio typically responds quickly to changes in the general level of short-term interest rates.

The average yields on investments for both the three-month and nine-month periods ended September 30, 2011 compared to the same periods in 2010 decreased due to a decline in market rates and compositional changes in our investment portfolio as balances of higher yielding long-term investments, both fixed and variable rate, declined.

We expanded our MBS/CMO portfolio in the first quarter of 2010 by $2.4 billion in Agency variable rate CMOs with embedded caps under temporary MBS authority granted by the Finance Agency. See additional discussion of this temporary MBS authority under this Item 2 – “Investments.” We have not purchased any additional MBS since that time and our variable rate MBS investments, both Agency and private-label, have declined approximately 24 percent over the last twelve months. For the last several years, our investment strategy focused more on the purchase of Agency variable rate CMOs with embedded interest rate caps because these securities generally had a higher overall risk-adjusted return relative to our cost of funds than comparable fixed rate CMOs. Included in this strategy was the purchase of interest rate caps that effectively offset a portion of the negative effect of the caps embedded in the CMOs. See additional discussion on the impact of interest rate caps under this Item 2 – “Net Gain (Loss) on Derivatives and Hedging Activities.”

The average yields on the MPF portfolio for both the three-month and nine-month periods ended September 30, 2011 compared to the same periods in 2010 declined due to several factors including: (1) borrowers refinancing their mortgages in order to take advantage of lower average residential mortgage rates experienced during the latter part of 2010 and the first nine months of 2011; (2) the growth in MPF balances with new mortgage loans placed into our portfolio at average rates below existing mortgage loans in the portfolio; and (3) increased write-offs of premiums associated with mortgage loan prepayments.

An important factor in the decreases in the average yields on discounts notes for both the three-month and nine-month periods ended September 30, 2011 compared to the same periods in 2010 was the decrease in short-term market interest rates, including repo rates caused by a reduced supply of alternative short-term investments, and increased flight-to-quality demand for Agency discount notes in response to the European debt crisis and other geopolitical events.

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Some important factors in the decrease in bond yields for both the three-month and nine-month periods ended September 30, 2011 compared to the same periods in 2010 were: (1) generally lower short-term market interest rates, including LIBOR, since a significant portion of our bonds are swapped to LIBOR; (2) generally lower intermediate and longer-term term market interest rates; and (3) refinancing of a portion of longer-term callable debt funding our fixed rate mortgage loan, MBS and fixed rate advance portfolios.

As discussed above, throughout much of 2010 and most of 2011, we have been able to lower our long-term, consolidated obligation funding costs by calling previously issued callable debt and replacing it with new lower-cost fixed rate, callable, and to a lesser extent, non-callable bonds. Over the past several years, callable debt with short lockouts (primarily three to six months) has been used as a primary funding tool for fixed rate mortgage assets and a secondary funding tool for amortizing and other fixed rate advances, which provided an opportunity to take advantage of lower debt costs in 2010 and during periods of time in 2011, particularly in the third quarter. We continued to maintain a sizable portfolio of unswapped callable bonds in the first nine months of 2011. Unswapped callable bonds increased from $3.7 billion as of December 31, 2010 to $3.9 billion as of September 30, 2011. Callable bonds are an effective instrument for funding fixed rate mortgage-related assets because they provide a way to offset the prepayment risk.

Additionally, a significant portion of our bonds are comprised of long-term callable bonds swapped to LIBOR which are used to fund LIBOR-based and other short-term assets. When assets and liabilities are based upon different indices, such as when the discount note curve is used to set rates for some advances and LIBOR-based debt is used to fund those advances, we are exposed to basis risk. We maintained a relatively balanced basis position throughout much of 2010 and 2011. However, during certain times over these periods, we increased our allocation to LIBOR-based debt or discount notes in order to take advantage of market opportunities to issue debt at more advantageous rates. At times we also increase our position in LIBOR-based debt in preparation for large maturities of liabilities funding LIBOR-based assets (assets adjusting to and swapped to LIBOR) and/or to enhance liquidity.

Derivative and hedging activities impacted our net interest spread as well. The assets and liabilities hedged with derivative instruments designated under fair value hedging relationships are adjusted for changes in fair values even as other assets and liabilities continue to be carried on a historical cost basis. The result is that positive basis adjustments on: (1) advances reduce the average annualized yield; and (2) consolidated obligations decrease the average annualized cost. The positive basis adjustments on advances have exceeded those on consolidated obligations over the last five quarters. Therefore, the average net interest spread has been negatively affected by the basis adjustments included in the asset and liability balances and is not necessarily comparable between quarters. Additionally, the differentials between accruals of interest receivables and payables on derivatives designated as fair value hedges as well as the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the designated underlying hedged item. However, net interest payments or receipts on derivatives that do not qualify for hedge accounting (economic hedges) flow through Net Gain (Loss) on Derivatives and Hedging Activities and not Net Interest Income (net interest received/paid on economic derivatives is identified in Tables 10 through 13 under this Item 2), which distorts yields especially for trading investments that are swapped.

As explained in more detail in Item 3 – “Quantitative and Qualitative Disclosure About Market Risk – Interest Rate Risk Management – Duration of Equity,” our duration of equity (DOE) is relatively short. The historically short DOE is the result of the short maturities (or short reset periods) of the majority of our assets and liabilities. Accordingly, our net interest income is quite sensitive to the level of short-term interest rates. The fact that the yield on assets and the cost of liabilities can change quickly makes it crucial for management to tightly control and minimize any duration mismatch of short-term assets and liabilities to lessen or eliminate any adverse impact on net interest income from changes in short-term rates.

59

Table 6 presents average balances and yields of major earning asset categories and the sources funding those earning assets (in thousands):

Table 6

	For the Three-month Period Ended
	09/30/2011							09/30/2010
	Average Balance		Interest Income/ Expense		Yield			Average Balance		Interest Income/ Expense		Yield
Interest-earning assets:
Interest-bearing deposits	$	273,454	$	65		0.09	%	$	155,662	$	78		0.20	%
Federal funds sold		1,741,283		412		0.09			2,419,548		1,281		0.21
Investments1		12,029,709		42,417		1.40			13,665,441		55,078		1.60
Advances2,3		17,852,383		44,106		0.98			20,739,789		54,580		1.04
Mortgage loans2,4,5		4,673,735		50,082		4.25			3,722,534		44,176		4.71
Other interest-earning assets		34,427		545		6.27			39,514		644		6.47
Total earning assets		36,604,991		137,627		1.49			40,742,488		155,837		1.52
Other non-interest-earning assets		327,510							187,242
Total assets	$	36,932,501						$	40,929,730
Interest-bearing liabilities:
Deposits	$	2,233,914	$	804		0.14	%	$	2,309,004	$	849		0.15	%
Consolidated obligations2:
Discount Notes		10,018,089		1,589		0.06			13,215,133		5,793		0.17
Bonds		22,236,941		74,647		1.33			22,839,856		91,822		1.59
Other borrowings		22,413		145		2.56			51,786		320		2.45
Total interest-bearing liabilities		34,511,357		77,185		0.89			38,415,779		98,784		1.02
Capital and other non-interest-bearing funds		2,421,144							2,513,951
Total funding	$	36,932,501						$	40,929,730
Net interest income and net interest spread6			$	60,442		0.60	%			$	57,053		0.50	%
Net interest margin7						0.66	%						0.56	%

 __________

1	The non-credit portion of the OTTI discount on held-to-maturity securities is excluded from the average balance for calculations of yield since the change runs through equity.
2	Interest income/expense and average rates include the effect of associated derivatives.
3	Advance income includes prepayment fees on terminated advances.
4	CE fee payments are netted against interest earnings on the mortgage loans held for portfolio. The expense related to CE fee payments to participating financial institutions (PFI) was $895,000 and $743,000 for the quarters ended September 30, 2011 and 2010, respectively.
5	Mortgage loans average balance includes outstanding principal for non-performing loans. However, these loans no longer accrue interest.
6	Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
7	Net interest margin is net interest income as a percentage of average interest-earning assets.

60

Changes in the volume of interest-earning assets and the level of interest rates influence changes in net interest income, net interest spread and net interest margin. Table 7 summarizes changes in interest income and interest expense between the third quarters of 2011 and 2010 (in thousands):

Table 7

	Three-month Periods Ended 09/30/2011 vs. 09/30/2010
	Increase (Decrease) Due to
	Volume1.2			Rate1.2			Total
Interest Income:
Interest-bearing deposits	$	40		$	(53	)	$	(13	)
Federal funds sold		(292	)		(577	)		(869	)
Investments		(6,190	)		(6,471	)		(12,661	)
Advances		(7,275	)		(3,199	)		(10,474	)
Mortgage loans		10,494			(4,588	)		5,906
Other assets		(80	)		(19	)		(99	)
Total earning assets		(3,303	)		(14,907	)		(18,210	)
Interest Expense:
Deposits		(27	)		(18	)		(45	)
Consolidated obligations:
Discount notes		(1,156	)		(3,048	)		(4,204	)
Bonds		(2,369	)		(14,806	)		(17,175	)
Other borrowings		(189	)		14			(175	)
Total interest-bearing liabilities		(3,741	)		(17,858	)		(21,599	)
Change in net interest income	$	438		$	2,951		$	3,389

__________

1	Changes in interest income and interest expense not identifiable as either volume-related or rate-related have been allocated to volume and rate based upon the proportion of the absolute value of the volume and rate changes.
2	Amounts used to calculate volume and rate changes are based on numbers in dollars. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same results.

61

Table 8 presents average balances and annualized yields of major earning asset categories and the sources funding those earning assets for the nine months ended September 30, 2011 and 2010 (in thousands):

Table 8

	For the Nine-month Period Ended
	09/30/2011							09/30/2010
	Average Balance		Interest Income/ Expense		Yield			Average Balance		Interest Income/ Expense		Yield
Interest-earning assets:
Interest-bearing deposits	$	158,235	$	126		0.11	%	$	107,876	$	148		0.18	%
Federal funds sold		2,190,859		2,031		0.12			2,491,813		3,453		0.19
Investments1		12,479,333		138,451		1.48			14,755,452		185,094		1.68
Advances2,3		18,094,080		126,500		0.93			21,735,109		161,617		0.99
Mortgage loans2,4,5		4,525,443		147,276		4.35			3,503,258		128,349		4.90
Other interest-earning assets		35,971		1,703		6.33			41,544		2,002		6.44
Total earning assets		37,483,921		416,087		1.48			42,635,052		480,663		1.51
Other non-interest-earning assets		239,530							198,014
Total assets	$	37,723,451						$	42,833,066
Interest-bearing liabilities:
Deposits	$	1,917,572	$	2,047		0.14	%	$	1,945,227	$	2,121		0.15	%
Consolidated obligations2:
Discount Notes		11,558,326		8,642		0.10			14,117,244		15,863		0.15
Bonds		21,844,455		230,135		1.41			24,015,795		270,482		1.51
Other borrowings		28,475		491		2.31			42,291		861		2.72
Total interest-bearing liabilities		35,348,828		241,315		0.91			40,120,557		289,327		0.96
Capital and other non-interest-bearing funds		2,374,623							2,712,509
Total funding	$	37,723,451						$	42,833,066
Net interest income and net interest spread6			$	174,772		0.57	%			$	191,336		0.55	%
Net interest margin7						0.62	%						0.60	%

 __________

1	The non-credit portion of the OTTI discount on held-to-maturity securities is excluded from the average balance for calculations of yield since the change runs through equity.
2	Interest income/expense and average rates include the effect of associated derivatives.
3	Advance income includes prepayment fees on terminated advances.
4	CE fee payments are netted against interest earnings on the mortgage loans held for portfolio. The expense related to CE fee payments to participating financial institutions (PFI) was $2,614,000 and $1,979,000 for the nine months ended September 30, 2011 and 2010, respectively.
5	Mortgage loans average balance includes outstanding principal for non-performing loans. However, these loans no longer accrue interest.
6	Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
7	Net interest margin is net interest income as a percentage of average interest-earning assets.

62

Changes in the volume of interest-earning assets and the level of interest rates influence changes in net interest income, net interest spread and net interest margin. Table 9 summarizes changes in interest income and interest expense between the first nine months of 2011 and 2010 (in thousands):

Table 9

	Nine-month Periods Ended 09/30/2011 vs. 09/30/2010
	Volume1,2			Rate1,2			Total
Interest Income:
Interest-bearing deposits	$	54		$	(76	)	$	(22	)
Federal funds sold		(380	)		(1,042	)		(1,422	)
Investments		(26,666	)		(19,977	)		(46,643	)
Advances		(25,881	)		(9,236	)		(35,117	)
Mortgage loans		34,425			(15,498	)		18,927
Other assets		(264	)		(35	)		(299	)
Total earning assets		(18,712	)		(45,864	)		(64,576	)
Interest Expense:
Deposits		(30	)		(44	)		(74	)
Consolidated obligations:
Discount notes		(2,537	)		(4,684	)		(7,221	)
Bonds		(23,534	)		(16,813	)		(40,347	)
Other borrowings		(252	)		(118	)		(370	)
Total interest-bearing liabilities		(26,353	)		(21,659	)		(48,012	)
Change in net interest income	$	7,641		$	(24,205	)	$	(16,564	)

__________

1	Changes in interest income and interest expense not identifiable as either volume-related or rate-related have been allocated to volume and rate based upon the proportion of the absolute value of the volume and rate changes.
2	Amounts used to calculate volume and rate changes are based on numbers in dollars. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same results.

Net Gain (Loss) on Derivatives and Hedging Activities: The volatility in other income (loss) is predominately driven by market value fluctuations on derivative and hedging transactions, which include interest rate swaps, caps and floors. Net gain (loss) from derivative and hedging activities is sensitive to several factors, including: (1) the general level of interest rates; (2) the shape of the term structure of interest rates; and (3) implied price volatilities. The market value of options, in particular interest rate caps and floors, are also impacted by the time value decay that occurs as the options approach maturity, but this factor represents the normal amortization of the cost of these options and flows through income irrespective of any changes in the other factors impacting the market value of the options (level of rates, shape of curve and implied volatility).

The majority of our derivative gains and losses are related to economic hedges, such as interest rate swaps matched to GSE debentures classified as trading securities and interest rate caps and floors, which do not qualify for hedge accounting treatment under GAAP. Because of the mix of these economic hedges, we generally record gains on derivatives when the general level of interest rates rise over the period and record losses when the general level of interest rates fall over the period. During the first nine months of 2010 as interest rates generally declined, we recorded sizeable losses on our economic hedges. The largest portion of this loss was attributable to our interest rate cap portfolio, which is an economic hedge of caps embedded in our variable rate MBS/CMO investment portfolio. The primary reasons for the decrease in value of our interest rate cap portfolio during the first nine months of 2010, in addition to the decrease in interest rates discussed above, were: (1) a flattening in the yield curve; and (2) a decline in implied price volatility. During the fourth quarter of 2010, we experienced a reversal of these negative trends as interest rates rose and the yield curve steepened resulting in a fairly substantial gain in both our interest rate cap portfolio and in the interest rate swaps matched to the GSE debentures. Subsequently during the first nine months of 2011, particularly the third quarter, we again recorded losses on our economic hedges as long-term interest rates declined sharply and the shape of the yield curve flattened more significantly. The impact of the decrease in long-term interest rates and the shape of the yield curve on cap values were partially offset by an increase in implied price volatilities throughout 2011. The larger loss experienced in the third quarter of 2011 compared to the same period in 2010 is primarily the result of a larger magnitude decline in long-term interest rates and a significantly larger magnitude flattening in interest rate yield curves in the third quarter of 2011 compared with the same period in 2010. Important factors contributing to the reduction in net losses on derivatives and hedging activities for the nine-month period ended September 30, 2011 from the nine-month period ended September 30, 2010 include: (1) larger relative declines in long-term interest rates in the first nine months of 2011 versus 2010; and (2) increases in implied price volatilities in the first nine months of 2011 compared with significant declines in the first nine months of 2010.

The absolute levels of interest rates, the shape of the interest rate curve, passage of time and implied volatility are all critical components in valuing options such as interest rate caps. While the absolute level of interest rates is an intuitive factor in valuing interest rate caps, the shape of the interest rate curve is also an important component as a steeper curve implies higher future short-term interest rates than does a flatter interest rate curve. Higher future short-term rates implied by a steepening interest rate curve would generally result in higher cap values while lower future short-term rates implied by a flattening interest rate curve would generally result in lower cap values. Generally, the greater the implied price volatility of the interest rate cap, the higher the value and the lower the implied price volatility of the interest rate caps, the lower the value.

63

Table 10 categorizes the earnings impact by product for derivative hedging activities and trading securities for the third quarter of 2011 (in thousands):

Table 10

	Advances			Investments			Mortgage Loans			Consolidated Obligation Discount Notes		Consolidated Obligation Bonds			Intermediary Positions			Total
Impact of derivatives and hedging activities in net interest income:
Amortization/accretion of hedging activities	$	(2,254	)	$	0		$	(123	)	$	0	$	(278	)	$	0		$	(2,655	)
Net interest settlements		(54,203	)		0			0			25		56,286			0			2,108
Subtotal		(56,457	)		0			(123	)		25		56,008			0			(547	)
Net gain (loss) on derivatives and hedging activities:
Fair value hedges		(2,085	)		0			0			1		(2,180	)		0			(4,264	)
Economic hedges – unrealized gain (loss) due to fair value changes		0			(72,441	)		6,059			0		5,740			(5	)		(60,647	)
Economic hedges – net interest received (paid)		0			(12,325	)		0			0		2,452			6			(9,867	)
Subtotal		(2,085	)		(84,766	)		6,059			1		6,012			1			(74,778	)
Net impact of derivatives and hedging activities		(58,542	)		(84,766	)		5,936			26		62,020			1			(75,325	)
Net gain (loss) on trading securities hedged on an economic basis with derivatives		0			26,722			0			0		0			0			26,722
TOTAL	$	(58,542	)	$	(58,044	)	$	5,936		$	26	$	62,020		$	1		$	(48,603	)

64

Table 11 categorizes the earnings impact by product for derivative hedging activities and trading securities for the third quarter of 2010 (in thousands):

Table 11

	Advances			Investments			Mortgage Loans		Consolidated Obligation Discount Notes			Consolidated Obligation Bonds			Intermediary Positions			Total
Impact of derivatives and hedging activities in net interest income:
Amortization/accretion of hedging activities	$	(2,530	)	$	0		$	132	$	0		$	(309	)	$	0		$	(2,707	)
Net interest settlements		(64,007	)		0			0		701			63,962						656
Subtotal		(66,537	)		0			132		701			63,653			0			(2,051	)
Net gain (loss) on derivatives and hedging activities:
Fair value hedges		(1,115	)		0			0		(66	)		(788	)		0			(1,969	)
Economic hedges – unrealized gain (loss) due to fair value changes		0			(47,158	)		3,242		0			726			(10	)		(43,200	)
Economic hedges – net interest received (paid)		0			(8,004	)		0		0			562			11			(7,431	)
Subtotal		(1,115	)		(55,162	)		3,242		(66	)		500			1			(52,600	)
Net impact of derivatives and hedging activities		(67,652	)		(55,162	)		3,374		635			64,153			1			(54,651	)
Net gain (loss) on trading securities hedged on an economic basis with derivatives		0			25,489			0		0			0			0			25,489
TOTAL	$	(67,652	)	$	(29,673	)	$	3,374	$	635		$	64,153		$	1		$	(29,162	)

65

Table 12 categorizes the earnings impact by product for derivative hedging activities and trading securities for the first nine months of 2011 (in thousands):

Table 12

	Advances			Investments			Mortgage Loans			Consolidated Obligation Discount Notes			Consolidated Obligation Bonds			Intermediary Positions			Total
Impact of derivatives and hedging activities in net interest income:
Amortization/accretion of hedging activities	$	(15,747	)	$	0		$	(191	)	$	0		$	(848	)	$	0		$	(16,786	)
Net interest settlements		(165,663	)		0			0			1,244			169,818			0			5,399
Subtotal		(181,410	)		0			(191	)		1,244			168,970			0			(11,387	)
Net gain (loss) on derivatives and hedging activities:
Fair value hedges		(2,472	)		0			0			(335	)		3,628			0			821
Economic hedges – unrealized gain (loss) due to fair value changes		0			(91,996	)		7,961			0			9,418			(11	)		(74,628	)
Economic hedges – net interest received (paid)		0			(38,362	)		0			0			7,121			24			(31,217	)
Subtotal		(2,472	)		(130,358	)		7,961			(335	)		20,167			13			(105,024	)
Net impact of derivatives and hedging activities		(183,882	)		(130,358	)		7,770			909			189,137			13			(116,411	)
Net gain (loss) on trading securities hedged on an economic basis with derivatives		0			29,258			0			0			0			0			29,258
TOTAL	$	(183,882	)	$	(101,100	)	$	7,770		$	909		$	189,137		$	13		$	(87,153	)

 

66

Table 13 categorizes the earnings impact by product for derivative hedging activities and trading securities for the first nine months of 2010 (in thousands):

Table 13

	Advances			Investments			Mortgage Loans		Consolidated Obligation Discount Notes		Consolidated Obligation Bonds			Intermediary Positions			Total
Impact of derivatives and hedging activities in net interest income:
Amortization/accretion of hedging activities	$	(10,208	)	$	0		$	314	$	0	$	(892	)	$	0		$	(10,786	)
Net interest settlements		(215,260	)		0			0		964		236,413			0			22,117
Subtotal		(225,468	)		0			314		964		235,521			0			11,331
Net gain (loss) on derivatives and hedging activities:
Fair value hedges		(2,858	)		0			0		249		(1,517	)		0			(4,126	)
Economic hedges – unrealized gain (loss) due to fair value changes		0			(193,254	)		8,531		0		(1,903	)		(30	)		(186,656	)
Economic hedges – net interest received (paid)		0			(44,570	)		0		0		3,178			34			(41,358	)
Subtotal		(2,858	)		(237,824	)		8,531		249		(242	)		4			(232,140	)
Net impact of derivatives and hedging activities		(228,326	)		(237,824	)		8,845		1,213		235,279			4			(220,809	)
Net gain (loss) on trading securities hedged on an economic basis with derivatives		0			65,885			0		0		0			0			65,885
TOTAL	$	(228,326	)	$	(171,939	)	$	8,845	$	1,213	$	235,279		$	4		$	(154,924	)

Net Gain (Loss) on Trading Securities: All gains and losses related to trading securities are recorded in other income (loss) as net gain (loss) on trading securities; however, only gains and losses relating to trading securities that are hedged with economic interest rate swaps are included in Tables 10 through 13 above. Unrealized gains (losses) fluctuate as the fair value of our trading portfolio fluctuates. There are a number of factors that can impact the value of a trading security including the movement in absolute interest rates, changes in credit spreads, the passage of time and changes in volatility.

Table 14 presents the major components of the net gain (loss) on trading securities for the three- and nine-month periods ended September 30, 2011 and 2010 (in thousands):

Table 14

	Three-month Period Ended						Nine-month Period Ended
	09/30/2011			09/30/2010			09/30/2011			09/30/2010
GSE debentures	$	25,915		$	25,489		$	28,451		$	65,885
U.S. Treasury note		0			0			1,449			0
Agency MBS/CMO		(143	)		1,375			(435	)		8,954
U.S. Government guaranteed debentures		(1,063	)		0			(1,063	)		0
Short-term money market securities		23			(96	)		(103	)		48
TOTAL	$	24,732		$	26,768		$	28,299		$	74,887

67

Short-term money market securities are by far the largest component of our trading portfolio. However, because of the short-term nature of these money market securities they account for only a fraction of the net gain/loss on trading securities.

The next largest component of our trading portfolio is comprised of fixed rate GSE debentures, most of which are related to economic hedges. The fair values of these securities are more affected by changes in longer term interest rates than by changes in short-term interest rates. These securities experienced similar gains for the three-month period ended September 30, 2011 compared to the same period in 2010. However, for the nine-month period ended September 30, 2011 compared to the same period in 2010, the gain was substantially smaller because of a smaller magnitude decline in interest rates experienced in 2011 compared to 2010.

The next largest section of our trading portfolio is comprised of U.S. Government guaranteed (by the FDIC or National Credit Union Administration (NUCA)) debentures. Approximately $1 billion of these bonds were purchased in September 2011. All of these notes mature on or before December 2012. Because these bonds have fairly short remaining maturities, their values are not expected to possess the same level of price volatility experienced in the GSE debentures.

The smallest portion of our trading portfolio is comprised of variable rate Agency MBS/CMOs that we have designated as trading securities for asset-liability management purposes. These securities increased in value during the third quarter and first nine months of 2010, despite a decrease in interest rates, a flattening of the yield curve and a decline in implied price volatility as market liquidity for these transactions continued to improve from the depths of the financial crisis in 2008 and 2009. During the third quarter and the first nine months of 2011, these securities declined marginally in value as interest rates declined over the period and the yield curve flattened.

Other Non-Interest Income: Included in other non-interest income are net losses on other-than-temporarily impaired held-to-maturity securities. See Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Investments” for additional information on OTTI.

Controllable Operating Expenses: Controllable operating expenses include compensation and benefits and other operating expenses. The compensation and benefits expense increased for the nine-month period ended September 30, 2011 compared to the same period of 2010. The increase is primarily attributable to an increase in employee benefits for normal retirement and health insurance. We contributed an additional $2 million to the pension plan in June 2011 in order to increase the funding position for the pension plan year that ended June 30, 2011.

Financial Condition

Overall: Table 15 presents changes in the major components of our Statements of Condition from December 31, 2010 to September 30, 2011 (in thousands):

Table 15

	Increase (Decrease) in Components
	09/30/2011 vs. 12/31/2010
	Dollar Change			Percent Change
Assets:
Cash and due from banks	$	1,797,247			691,248.8	%
Investments1		(2,544,017	)		(17.1	)
Advances		(2,350,680	)		(12.1	)
Mortgage loans, net		501,012			11.7
Derivative assets		2,969			11.4
Other assets		(23,247	)		(13.5	)
Total assets	$	(2,616,716	)		(6.8	)%
Liabilities:
Deposits	$	991,061			81.9	%
Consolidated obligations, net		(3,339,761	)		(9.5	)
Derivative liabilities		(142,106	)		(55.6	)
Other liabilities		(53,501	)		(23.2	)
Total liabilities		(2,544,307	)		(6.9	)
Capital:
Capital stock outstanding		(95,345	)		(6.6	)
Retained earnings		25,109			7.1
Accumulated other comprehensive income (loss)		(2,173	)		(9.6	)
Total capital		(72,409	)		(4.1	)
Total liabilities and capital	$	(2,616,716	)		(6.8	)%

 __________

1 Investments also include interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell.

68

Advances: The overall decrease in advances during the first nine months of 2011 (see Table 15) can be attributed to a reduction in advances to two of our largest borrowers (see Table 17) and to advance prepayments resulting from member failures. The fairly widespread repayment of advances due to deleveraging occurring in the financial services industry also contributed. Member institutions continue to experience growth in deposit funding that exceeds the demand for loans in their communities. In addition, many members continue to hold higher levels of on-balance-sheet liquidity and conserve capital as pressure on asset quality persists in many areas in the Tenth District of the FHLBank System. We do not believe that advances will increase until there is an improvement in U.S. economic activity that results in increased loan demand at our member financial institutions. When member advance demand does begin to increase, we believe a few larger members could have a significant impact on the amount of our total outstanding advances.

Table 16 summarizes advances outstanding by product as of September 30, 2011 and December 31, 2010 (in thousands).

Table 16

	09/30/2011					12/31/2010
	Dollar		Percent			Dollar		Percent
Adjustable rate:
Standard advance products:
Line of credit	$	710,570		4.3	%	$	1,083,754		5.7	%
Regular adjustable rate advances		0		0.0			200,000		1.1
Adjustable rate callable advances		5,909,730		36.0			7,008,330		37.1
Customized advances:
Adjustable rate advances with embedded caps or floors		127,000		0.8			99,000		0.5
Standard housing and community development advances:
Adjustable rate callable advances		21,974		0.1			18,154		0.1
Total adjustable rate advances		6,769,274		41.2			8,409,238		44.5
Fixed rate:
Standard advance products:
Short-term fixed rate advances		301,084		1.8			337,080		1.8
Regular fixed rate advances		5,325,286		32.4			5,379,671		28.4
Standard housing and community development advances:
Regular fixed rate advances		251,562		1.5			285,254		1.5
Fixed rate callable advances		11,300		0.1			11,300		0.1
Total fixed rate advances		5,889,232		35.8			6,013,305		31.8
Convertible:
Standard advance products:
Fixed rate convertible advances		2,822,517		17.2			3,560,332		18.8
Amortizing:
Standard advance products:
Fixed rate amortizing advances		537,442		3.3			532,816		2.8
Fixed rate callable amortizing advances		6,084		0.0			6,321		0.0
Standard housing and community development advances:
Fixed rate amortizing advances		417,545		2.5			400,688		2.1
Fixed rate callable amortizing advances		449		0.0			553		0.0
Fixed rate amortizing advances funded through the AHP		2		0.0			6		0.0
Total amortizing advances		961,522		5.8			940,384		4.9
TOTAL PAR VALUE	$	16,442,545		100.0	%	$	18,923,259		100.0	%

Note that an individual advance may be reclassified to a different product type between periods due to the occurrence of a triggering event such as the passing of a call date (i.e., from fixed rate callable advance to regular fixed rate advance) or conversion of an advance (i.e., from fixed rate convertible advance to adjustable rate callable advance).

The fairly widespread pay downs of advances by members, as mentioned previously, included a decrease of $1.1 billion in advances attributable to two of our largest borrowers (see Table 17). A portion of the decrease in advances from year-end can also be attributed to $0.6 billion in advance prepayments during the first nine months of 2011 resulting from the failure of seven members.

69

Table 17 presents information on our five largest borrowers as of September 30, 2011 and December 31, 2010 (in thousands):

Table 17

	09/30/2011					12/31/2010
Borrower Name	Advance Par Value		Percent of Total Advance Par			Advance Par Value		Percent of Total Advance Par
Capitol Federal Savings Bank	$	2,400,000		14.6	%	$	2,376,000		12.6	%
MidFirst Bank		2,255,000		13.7			3,088,000		16.3
Security Life of Denver Ins. Co.		1,350,000		8.2			1,350,000		7.1
Security Benefit Life Insurance Co.		1,259,330		7.7			1,259,330		6.7
Pacific Life Insurance Co.		1,220,000		7.4			1,500,000		7.9
TOTAL	$	8,484,330		51.6	%	$	9,573,330		50.6	%

Table 18 presents the interest income associated with our five borrowers with the highest interest income for the three-month periods ended September 30, 2011 and 2010 (in thousands). If a borrower was not one of the five borrowers representing the highest interest income for one of the periods presented, the applicable columns are left blank.

Table 18

	Three-month Period Ended
	09/30/2011					09/30/2010
Borrower Name	Advance Income		Percent of Total Advance Income1			Advance Income		Percent of Total Advance Income1
Capitol Federal Savings Bank	$	20,860		22.9	%	$	21,963		19.1	%
Pacific Life Insurance Co.		6,727		7.4			6,925		6.0
American Fidelity Assurance Co.		4,478		4.9			4,623		4.0
Security Benefit Life Insurance Co.		2,640		2.9			2,731		2.4
United of Omaha		2,048		2.2
MidFirst Bank							2,395		2.2
TOTAL	$	36,753		40.3	%	$	38,637		33.7	%

__________

1 Total advance income by borrower excludes net interest settlements on derivatives hedging the advances.

Table 19 presents the interest income associated with the five borrowers with the highest interest income for the nine-month periods ended September 30, 2011 and 2010 (in thousands). If the borrower was not one of the five borrowers representing the highest interest income for one of the periods presented, the applicable column is left blank.

Table 19

	Nine-month Period Ended
	09/30/2011					09/30/2010
Borrower Name	Advance Income		Percent of Total Advance Income1			Advance Income		Percent of Total Advance Income1
Capitol Federal Savings Bank	$	61,892		21.9	%	$	67,464		18.5	%
Pacific Life Insurance Co.		20,137		7.1			20,256		5.6
American Fidelity Assurance Co.		13,145		4.6			13,955		3.8
Security Benefit Life Insurance Co.		7,783		2.7			7,654		2.1
United of Omaha		6,179		2.2
TierOne Bank2							9,954		2.7
TOTAL	$	109,136		38.5	%	$	119,283		32.7	%

__________

1	Total advance income by borrower excludes net interest settlements on derivatives hedging the advances.
2	On June 4, 2010, TierOne Bank was placed into receivership by the FDIC and acquired through a Purchase and Assumption Agreement by Great Western Bank, a member of the Federal Home Loan Bank of Des Moines. All outstanding advances were subsequently prepaid.

Advances as a percentage of total assets decreased from 50.0 percent as of December 31, 2010 to 47.2 percent as of September 30, 2011. If advances continue to decline, we expect to: (1) repurchase excess capital stock in order to manage our balance sheet; and (2) leverage capital in the range of 20:1 to 22:1 as conditions dictate.

70

A significant portion of our advance portfolio either re-prices within three months or is swapped to shorter-term indices (one- or three-month LIBOR) to synthetically create adjustable rate advances. As a result, 83.4 percent and 85.4 percent of the total advance portfolio as of September 30, 2011 and December 31, 2010, respectively, effectively re-price at least every three months. Because of the relatively short nature of the advance portfolio, including the impact of any interest rate swaps qualifying as fair value hedges, the average yield in this portfolio typically responds quickly to changes in the general level of short-term interest rates. The level of short-term interest rates is primarily driven by FOMC decisions on the level of its overnight Federal funds target, but is also influenced by the expectations of capital market participants related to the strength of the economy, future inflationary pressures and other factors. See Tables 6 through 9 under “Results of Operations – Net Interest Income” in this Item 2 for further information regarding average balances, average yields/rates and changes in interest income.

Potential credit risk from advances is concentrated in commercial banks, thrift institutions, insurance companies and credit unions, but also includes potential credit risk exposure to three housing associates. We have rights to collateral with an estimated fair value in excess of the book value of these advances and, therefore, do not expect to incur any credit losses on advances. See Item 1 – “Business – Advances” in the annual report on Form 10-K for additional discussion on collateral securing all advance borrowers.

MPF Program: The MPF Program is an attractive secondary market alternative for our members, especially the smaller institutions in our district. We participate in the MPF Program through the MPF Provider, a division of the Federal Home Loan Bank of Chicago. Under the MPF Program, participating members can sell fixed rate, size-conforming, single-family mortgage loans to us (closed loans) and/or originate loans on our behalf (table funded loans).

The amount of new loans originated by and acquired from in-district PFIs during the nine-month period ended September 30, 2011 was $1.1 billion. These new originations and acquisitions, net of loan payments received, resulted in a sizable increase in the outstanding balance of the MPF portfolio from December 31, 2010 to September 30, 2011 (see Table 15). With total assets declining this quarter, mortgage loans as a percentage of total assets increased from 11.1 percent as of December 31, 2010 to 13.3 percent as of September 30, 2011. Primary factors that may influence future growth in mortgage loans held in portfolio include: (1) the number of new and delivering PFIs; (2) the mortgage loan origination volume of current PFIs; (3) refinancing activity; (4) the level of interest rates and the shape of the yield curve; and (5) the relative competitiveness of MPF pricing to the prices offered by other buyers of mortgage loans, primarily Fannie Mae and Freddie Mac.

The number of active PFIs increased from 191 as of December 31, 2010 to 213 as of September 30, 2011. Although there is no guarantee, we anticipate that the number of PFIs delivering loans will continue to increase during 2011 and beyond as we strive to increase the number of active PFIs.

Table 20 presents our top five PFIs, the outstanding balances as of September 30, 2011 and December 31, 2010 (in thousands) and the percentage of those loans to total MPF loans outstanding on those dates. The outstanding balances for Bank of America, Bank of the West and Security Savings Bank (non-members that do not have the ability to sell loans to us under the MPF Program) were obtained by those institutions through the acquisition of former PFIs and have declined with the prepayment of loans held in those portfolios. Most of our MPF portfolio growth came from smaller PFIs that are not set up to sell directly to Fannie Mae or Freddie Mac. If a PFI was not one of the five PFIs representing the highest MPF loan balance for one of the periods presented, the applicable columns are left blank.

Table 20

	MPF Loan Balance as of 09/30/2011		Percent of Total MPF Loans			MPF Loan Balance as of 12/31/2010		Percent of Total MPF Loans
Mutual of Omaha Bank1	$	433,274		9.1	%	$	448,239		10.5	%
Bank of America, NA2		251,931		5.3			302,313		7.1
Farmers Bank & Trust, NA		202,359		4.3			179,351		4.2
Bank of the West3		194,617		4.1			233,171		5.5
West Gate Bank4		134,493		2.9
Security Savings Bank, FSB4							130,216		3.1
TOTAL	$	1,216,674		25.7	%	$	1,293,290		30.4	%

__________

1	On June 4, 2010, TierOne Bank (a former top five PFI) was placed into receivership by the FDIC and a portion of TierOne Bank, including the CE obligation for the MPF loans sold to us, was subsequently acquired through a Purchase and Assumption Agreement by Great Western Bank, a member of the FHLBank of Des Moines. Great Western Bank subsequently sold originating representations and warrants, servicing and CE obligations to Mutual of Omaha Bank through a Purchase and Sale Agreement as of November 1, 2010. Mutual of Omaha Bank is an active PFI selling loans under the MPF Program.
2	Formerly La Salle National Bank, N.A., an out-of-district PFI in which we previously participated in mortgage loans with the Federal Home Loan Bank of Chicago.
3	Formerly Commercial Federal Bank, FSB headquartered in Omaha, NE. Bank of the West acquired Commercial Federal Bank, FSB on December 2, 2005. Bank of the West is a member of the Federal Home Loan Bank of San Francisco.
4	On October 15, 2010, Security Savings Bank, FSB was placed into receivership by the FDIC and a portion of Security Savings Bank, FSB, not including the CE obligation or servicing for the MPF loans sold to us, was subsequently acquired through a Purchase and Assumption Agreement by Simmons First National Bank, a member of the Federal Home Loan Bank of Dallas. The servicing and CE obligations were subsequently purchased from the FDIC by West Gate Bank, Lincoln, NE. On August 26, 2011, we entered into a settlement agreement with the FDIC to satisfy the originating representations and warranties.

Two indications of credit quality are credit scores provided by Fair Isaac Corporation (FICO®) and LTV. FICO is a widely used credit industry model to assess borrower credit quality with scores typically ranging from 300 to 850 with the low end of the scale indicating a poor credit risk. In February 2010, the MPF Program instituted a minimum FICO score of 620 for all conventional loans. LTV is a primary variable in credit performance. Generally speaking, higher LTV means greater risk of loss in the event of a default and also means higher loss severity. The weighted average FICO score and LTV recorded at origination for conventional mortgage loans outstanding as of September 30, 2011 was 748 FICO and 72.1 percent LTV. See Note 6 of the Notes to the Financial Statements under Item 1 for additional information regarding credit quality indicators.

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MPF Allowance for Credit Losses on Mortgage Loans: We base the allowance for credit losses on our estimate of probable credit losses inherent in our mortgage loan portfolio as of the Statement of Condition date. The estimate is based on an analysis of our historical loss experience. We believe that policies and procedures are in place to effectively manage the credit risk on MPF mortgage loans. See Note 6 of the Notes to the Financial Statements included under Item 1 for a summary of the allowance for credit losses on mortgage loans.

Investments: Investments are generally used for liquidity purposes as well as to leverage capital during periods when advances decline and capital stock is not reduced in proportion to the decline in advances.

Short-term investments used for liquidity purposes consisted primarily of deposits in banks, overnight Federal funds, certificates of deposit, bank notes and commercial paper. Short-term investments, which include longer-term investments that can have remaining maturities of up to one year, were $4.8 billion and $6.1 billion as of September 30, 2011 and December 31, 2010, respectively. This decrease in short-term investments is primarily attributable to a reduction in our leverage ratio combined with a decrease in capital stock associated with the pay down in advances. In response to the ongoing sovereign debt crisis in Europe and the continuing deterioration in the credit profile of many European financial institutions, we initiated a realignment of our unsecured money market investment portfolio during the latter part of September 2011 to reduce our exposure to European counterparties and improve the overall credit profile of this portfolio. This portfolio realignment resulted in an increase in the cash balance of our Federal Reserve account. We anticipate reducing and maintaining a lower cash balance over the next three months. To enhance our liquidity position, we classify our short-term investment securities as Trading, which allows us to sell these securities if necessary.

Our long-term investment portfolio, consisting of Agency debentures, debentures guaranteed by the FDIC or the NCUA (collectively, U.S. guaranteed debentures), MBS/ABS, and taxable state or local housing finance agency securities, was $7.5 billion and $8.7 billion as of September 30, 2011 and December 31, 2010, respectively. This decrease in the long-term investment portfolio can be primarily attributed to MBS prepayments but was also reduced by maturities in Agency debentures and pay downs on housing finance agency securities. The Agency debentures that we hold in our long-term investment portfolio provide attractive returns, can serve as excellent collateral (e.g., repos and net derivatives exposure) and qualify for regulatory liquidity once their remaining term to maturity decreases to 36 months or less. Most of our unsecured Agency debentures are fixed rate bonds, which are swapped from fixed to variable rates. The swaps do not qualify for hedge accounting, which results in the net interest payments or receipts on these economic hedges flowing through Net Gain (Loss) on Derivatives and Hedging Activities and not Net Interest Income. All swapped Agency debentures are classified as trading securities. The U.S. guaranteed debentures were added as management sought out investments that possessed maturities beyond those available in unsecured money market investments. This extension in maturities was intended to guard against the potential collapse in short-term investment yields that management believed could have occurred had the Federal Reserve decreased the interest rate paid on excess reserves. All of the U.S. guaranteed debentures mature no later than December 2012 and were classified as Trading to enhance our liquidity position.

Currently, pay downs in our MBS/CMO portfolios cannot be reinvested in new MBS/CMOs because of regulatory limitations. On March 24, 2008, the Finance Board issued Resolution 2008-08, “Temporary Authorization to Invest in Additional Agency Mortgage Securities” (Resolution). This Resolution waived the restrictions defined in 12 C.F.R. 1267.3 that limit an FHLBank’s amortized cost of mortgage securities to 300 percent of its regulatory capital and restrict quarterly increases in holdings of mortgage securities to no more than 50 percent of capital so that an FHLBank could temporarily invest in Agency mortgage securities up to an additional 300 percent of its capital, subject to specified conditions. Since the introduction of the Resolution, we submitted two requests to the Finance Agency to increase our MBS/CMO holdings. In April 2008, we requested an increase in the portfolio up to 400 percent of capital through the purchase of variable rate Agency MBS/CMOs. In December 2009, we requested an increase in our portfolio up to 500 percent of capital, again through the purchase of variable rate Agency MBS/CMOs. The temporary authority to expand our MBS/CMO portfolio ended on March 31, 2010, and we will not be allowed to make further purchases of MBS/CMOs until our current portfolio declines below 300 percent of capital. As of September 30, 2011, the amortized cost of our MBS/CMO portfolio represented 327 percent of our regulatory capital.

Our Risk Management Policy (RMP) restricts the acquisition of investments to high-quality, short-term money market instruments and highly rated long-term securities. We use the short-term portfolio to sustain the liquidity necessary to meet member credit needs, to provide a reasonable return on member deposits and to manage our leverage ratio. Long-term securities are used to provide a reliable income flow and to achieve a desired maturity structure. The majority of these long-term securities are MBS/CMOs, which provide an alternative means to promote liquidity in the mortgage finance markets while providing attractive returns. As of September 30, 2011, we held $370.8 million of par value in MBS/CMOs in our trading portfolio for liquidity purposes and to provide additional balance sheet flexibility. All of the MBS/CMOs in the trading portfolio are variable rate Agency securities, which were acquired and classified as such with the intent of minimizing the volatility of price changes over time. Note, however, that even variable rate Agency MBS were subject to a significant amount of price volatility during the financial market credit crisis with the widening of the option adjusted spreads (OAS) of these instruments during 2007 and 2008, followed by a tightening of the OAS of these instruments during 2009, 2010 and into 2011.

Our participation in the market for taxable state housing finance agency (HFA) securities remains low and focused on HFAs within our district. We maintain our level of participation in standby bond purchase agreements (SBPA) for HFAs in our district, but are not adding new SBPAs for in-district HFAs because of internal policy limitations. State or local HFAs provide funds for low-income housing and other similar initiatives. By purchasing state or local HFA securities in the primary market, we not only receive competitive returns but also provide necessary liquidity to traditionally underserved segments of the housing market. We provide SBPAs to two state HFAs within the Tenth District. For a predetermined fee, we accept an obligation to purchase the authorities’ bonds if the remarketing agent is unable to resell the bonds to suitable investors, and to hold the bonds until the designated marketing agent can find a suitable investor or the HFA repurchases the bonds according to a schedule established by the SBPA. Currently, our standby bond purchase commitments expire no later than 2014, though all are renewable upon request of the HFA and at our option. Total commitments for bond purchases under the SBPAs were $1.5 billion as of September 30, 2011 and $1.6 billion as of December 31, 2010. We were not required to purchase any bonds under these agreements during the three- or nine-month periods ended September 30, 2011 or 2010. We plan to continue support of the state HFAs in our district by continuing to renew or execute new SBPAs where appropriate and when allowed by our internal policy.

72

Major Security Types – Securities for which we have the ability and intent to hold to maturity are classified as held-to-maturity securities and recorded at carrying value, which is the net total of par, premiums, discounts and credit and non-credit OTTI. Certain investments are classified as trading securities and are carried at fair value. Changes in the fair values of these investments are recorded through other income and original premiums/discounts on these investments are not amortized. We do not practice active trading, but hold trading securities for asset/liability management purposes, including liquidity. Certain investments that we may sell before maturity are classified as available-for-sale and carried at fair value. If fixed rate securities are hedged with interest rate swaps, the securities are classified as trading securities so that the changes in fair values of both the derivatives hedging the securities and the trading securities are recorded in other income. Securities acquired as asset-liability management tools to manage duration risk, which are likely to be sold when the duration risk is no longer present, are also classified as trading securities. See Note 3 in the Notes to Financial Statements included in Item 1 to this report for additional information on our different investment classifications including what types of securities are held under each classification. The carrying values of our investments as of September 30, 2011 and December 31, 2010 are summarized by security type in Table 21 (in thousands).

Table 21

	09/30/2011		12/31/2010
Trading securities:
Commercial paper	$	1,969,549	$	2,349,565
Certificates of deposit		1,544,954		1,755,013
U.S. guaranteed debentures		738,767		0
U.S. Treasury notes		0		282,996
GSE debentures		1,569,610		1,505,723
Mortgage-backed securities:
Other U.S. obligation residential MBS		1,413		1,534
GSE residential MBS		368,556		440,108
Total trading securities		6,192,849		6,334,939
Held-to-maturity securities:
State and local housing agency obligations		87,294		99,012
Mortgage-backed or asset-backed securities (ABS):
Other U.S. obligation residential MBS		19,449		23,048
GSE residential MBS		4,398,891		5,374,220
Private-label residential MBS		861,960		1,217,904
Private-label commercial MBS		39,880		40,022
Manufactured housing loan ABS		0		88
Home equity loan ABS		1,495		1,684
Total held-to-maturity securities		5,408,969		6,755,978
Total securities		11,601,818		13,090,917
Interest-bearing deposits		106		24
Federal funds sold		700,000		1,755,000
TOTAL INVESTMENTS	$	12,301,924	$	14,845,941

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The contractual maturities of our investments as of September 30, 2011 are summarized by security type in Table 22 (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 22

	09/30/2011
	Due in one year or less			Due after one year through five years			Due after five years through 10 years			Due after 10 years			Carrying Value
Trading securities:
Commercial paper	$	1,969,549		$	0		$	0		$	0		$	1,969,549
Certificates of deposit		1,544,954			0			0			0			1,544,954
Guaranteed debentures		533,715			205,052			0			0			738,767
GSE debentures		101,602			1,218,621			249,387			0			1,569,610
Mortgage-backed securities:
Other U.S. obligation residential MBS		0			0			0			1,413			1,413
GSE residential MBS		0			0			0			368,556			368,556
Total trading securities		4,149,820			1,423,673			249,387			369,969			6,192,849
Yield on trading securities		0.57	%		3.84	%		5.37	%		2.39	%
Held-to-maturity securities:
State and local housing agency obligations		0			0			5,450			81,844			87,294
Mortgage-backed or asset-backed securities:
Other U.S. obligation residential MBS		0			338			0			19,111			19,449
GSE residential MBS		0			0			39,074			4,359,817			4,398,891
Private-label residential MBS		0			0			137,211			724,749			861,960
Private-label commercial MBS		0			0			0			39,880			39,880
Home equity loans ABS		0			0			0			1,495			1,495
Total held-to-maturity securities		0			338			181,735			5,226,896			5,408,969
Yield on held-to-maturity securities		-	%		6.99	%		4.33	%		2.83	%
Total securities		4,149,820			1,424,011			431,122			5,596,865			11,601,818
Yield on total securities		0.57	%		3.84	%		4.88	%		2.80	%
Interest-bearing deposits		106			0			0			0			106
Federal funds sold		700,000			0			0			0			700,000
TOTAL INVESTMENTS	$	4,849,926		$	1,424,011		$	431,122		$	5,596,865		$	12,301,924

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Securities Ratings – Our portfolio of investments is limited to securities that are highly-rated at the time of acquisition. We monitor credit ratings of our investment portfolio throughout the lives of the securities. Although individual Agency MBS and debentures are not rated, we classify all Agency MBS and debentures based on NRSRO rating action relative to the issuers of the applicable securities. Table 23 presents the carrying value of our investments by rating as of September 30, 2011 (in thousands):

Table 23

Investment Ratings 09/30/2011 Carrying Value1
	Long-term Rating2																Short-term Rating2		Total
	Investment Grade								Below Investment Grade								Investment Grade
	Triple-A		Double-A		Single-A		Triple-B		Double-B		Single-B		Triple-C		Double-C		A-1 or higher/ P-1/ F1
Interest-bearing deposits	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	106	$	106
Federal funds sold3		0		0		0		0		0		0		0		0		700,000		700,000
Investment securities:
Non-mortgage-backed securities:
Commercial paper3		0		0		0		0		0		0		0		0		1,969,549		1,969,549
Certificates of deposit3		0		0		0		0		0		0		0		0		1,544,954		1,544,954
U.S. guaranteed debentures		0		738,767		0		0		0		0		0		0		0		738,767
GSE debentures		0		1,569,610		0		0		0		0		0		0		0		1,569,610
State or local housing agency obligations		28,814		37,040		0		21,440		0		0		0		0		0		87,294
Total non-mortgage-backed securities		28,814		2,345,417		0		21,440		0		0		0		0		3,514,503		5,910,174
Mortgage-backed or asset-backed securities:
Other U.S. obligations residential MBS		0		20,862		0		0		0		0		0		0		0		20,862
GSE residential MBS		0		4,767,447		0		0		0		0		0		0		0		4,767,447
Private label residential MBS		205,457		63,254		127,850		176,963		53,428		161,594		42,260		31,154		0		861,960
Private label commercial MBS		39,880		0		0		0		0		0		0		0		0		39,880
Home equity loan ABS		0		0		0		0		0		598		362		535		0		1,495
Total mortgage-backed securities		245,337		4,851,563		127,850		176,963		53,428		162,192		42,622		31,689		0		5,691,644
TOTAL INVESTMENTS	$	274,151	$	7,196,980	$	127,850		198,403	$	53,428	$	162,192	$	42,622	$	31,689	$	4,214,609	$	12,301,924

__________

1	Investment amounts represent the carrying value and do not include related accrued interest receivable of $23.2 million as of September 30, 2011.
2	Represents the lowest ratings available for each security based on Nationally-Recognized Statistical Rating Organizations (NRSRO).
3	Amounts represent unsecured credit exposure with original maturities ranging from overnight to 96 days.

75

Table 24 presents the carrying value of our investments by rating as of December 31, 2010 (in thousands):

Table 24

Investment Ratings 12/31/2010 Carrying Value1
	Long-term Rating2																Short-term Rating2				Total
	Investment Grade								Below Investment Grade								Investment Grade
	Triple-A		Double-A		Single-A		Triple-B		Double-B		Single-B		Triple-C		Double-C		A-1 or higher/ P-1/ F1		A-2/ P-2/ F23
Interest-bearing deposits	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	24	$	0	$	24
Federal funds sold4		0		0		0		0		0		0		0		0		1,555,000		200,000		1,755,000
Investment securities:
Non-mortgage-backed securities:
Commercial paper4		0		0		0		0		0		0		0		0		2,349,565		0		2,349,565
Certificates of deposit,4		0		0		0		0		0		0		0		0		1,755,013		0		1,755,013
US Treasury notes		282,996		0		0		0		0		0		0		0		0		0		282,996
GSE debentures		1,505,723		0		0		0		0		0		0		0		0		0		1,505,723
State or local housing agency obligations		38,977		36,275		23,760		0		0		0		0		0		0		0		99,012
Total non mortgage-backed securities		1,827,696		36,275		23,760		0		0		0		0		0		4,104,578		0		5,992,309
Mortgage-backed securities or asset-backed securities:
Other U.S. obligations residential MBS		24,582		0		0		0		0		0		0		0		0		0		24,582
GSE residential MBS		5,814,328		0		0		0		0		0		0		0		0		0		5,814,328
Private label residential MBS		607,458		126,060		98,181		42,023		60,124		211,032		45,419		27,607		0		0		1,217,904
Private label commercial MBS		40,022		0		0		0		0		0		0		0		0		0		40,022
Manufactured housing loan ABS		88		0		0		0		0		0		0		0		0		0		88
Home equity loan ABS		0		0		0		0		571		0		411		702		0		0		1,684
Total mortgage-backed securities		6,486,478		126,060		98,181		42,023		60,695		211,032		45,830		28,309		0		0		7,098,608
TOTAL INVESTMENTS	$	8,314,174	$	162,335	$	121,941	$	42,023	$	60,695	$	211,032	$	45,830	$	28,309	$	5,659,602	$	200,000	$	14,845,941

__________

1	Investment amounts represent the carrying value and do not include related accrued interest receivable of $35.0 million at December 31, 2010.
2	Represents the lowest ratings available for each security based on NRSROs.
3	This Federal funds sold transaction was invested with an eligible member. In the normal course of our business, we do not invest in A-2/P-2/F-2 short-term investments with non-member institutions.
4	Amounts represent unsecured credit exposure with original maturities ranging between overnight and 97 days.

76

Table 25 presents the carrying value and fair values of our investments by the lowest rated NRSRO credit rating as of September 30, 2011 and October 31, 2011 for securities that have been downgraded during that period (in thousands).

Table 25

Investment Ratings		Downgrades – Balances Based on Values as of 09/30/20111
As of 09/30/2011	As of 10/31/2011	Private-label Residential MBS
From	To	Carrying Value		Fair Value
Triple-A	Single-A	$	28	$	25
Triple-A	Double-B		2,058		2,057
Single-A	Triple-B		2,614		2,233
Single-B	Triple-C		18,376		19,034
Double-C	Single-C		5,765		5,937
TOTAL		$	28,841	$	29,286

 __________

1 Investments that matured subsequent to September 30, 2011 and on or before October 31, 2011 are excluded from this table.

Table 26 presents the carrying value and fair value by NRSRO credit rating (as of October 31, 2011) of our investment portfolio for non-Agency securities on negative watch with the lowest rated NRSRO as of October 31, 2011 (in thousands):

Table 26

On Negative Watch – Balances Based on Values at 09/30/20111
Investment Ratings	Non-Mortgage-backed Investments
	Carrying Value		Fair Value
Short-term ratings:
A-1 or higher/P-1/F1	$	80,005	$	80,005

 __________

1 Investments that matured subsequent to September 30, 2011 and on or before October 31, 2011 are excluded from this table.

Private-label Mortgage-backed and Asset-backed Securities – We have not purchased a private-label MBS or ABS investment since June 2006, and on March 24, 2011, our Board of Directors approved management’s recommendation to remove our authority to purchase these types of investments from our RMP. All of our prior acquisitions of private-label MBS/ABS investments carried the highest ratings from Moody’s, Fitch or S&P when acquired. Only private-label residential MBS investments with weighted average FICO scores of 700 or above and weighted average LTVs of 80 percent or lower at the time of acquisition were purchased. We classify private-label MBS/ABS as prime, Alt-A and subprime based on the originator’s classification at the time of origination or based on classification by an NRSRO upon issuance of the MBS/ABS.

Table 27 presents a summary of the unpaid principal balance (UPB) of private-label MBS/ABS by interest rate type and by type of collateral as of September 30, 2011 and December 31, 2010 (in thousands):

Table 27

	09/30/2011						12/31/2010
	Fixed Rate1		Variable Rate1		Total		Fixed Rate1		Variable Rate1		Total
Private-label residential MBS:
Prime	$	383,946	$	181,891	$	565,837	$	638,979	$	211,745	$	850,724
Alt-A		192,524		134,042		326,566		235,658		155,759		391,417
Total private-label residential MBS		576,470		315,933		892,403		874,637		367,504		1,242,141
Private-label commercial MBS:
Prime		39,865		0		39,865		39,940		0		39,940
Manufactured housing loan ABS:
Prime		0		0		0		0		88		88
Home equity loan ABS:
Subprime		0		4,486		4,486		0		4,924		4,924
TOTAL	$	616,335	$	320,419	$	936,754	$	914,577	$	372,516	$	1,287,093

__________

1 The determination of fixed or variable rate is based upon the contractual coupon type of the security.

77

During 2008, we experienced a significant decline in the estimated fair values of our private-label MBS/ABS due to interest rate volatility, illiquidity in the market place and credit deterioration in the U.S. mortgage markets. Beginning in the second quarter of 2009, the pace of this decline slowed appreciably and the fair value of many of our prime, early vintage private-label MBS/ABS has actually improved from year-end 2008. Fair values continued to improve, although only slightly through the first nine months of 2011. The declines in fair values were particularly evident across the market for private-label MBS/ABS securitized in 2006 and 2007 due to less stringent underwriting standards used by mortgage originators during those years. Over 95 percent of our private-label MBS/ABS were securitized prior to 2006, and there are no securities in the portfolio issued after June 2006. As a result of this higher quality, well-seasoned portfolio, we have not experienced significant losses in our private-label MBS/ABS portfolio from OTTI. While some of the most significant declines in fair values have been in the late 2006, 2007 and 2008 vintage MBS/ABS, earlier vintages have not been immune to the declines in fair value. Tables 28 through 30 present statistical information for our private-label MBS/ABS by year of securitization and collateral type as of September 30, 2011 (dollar amounts in thousands):

Table 28

Private-Label Mortgage-Backed Securities and Home Equity Loan Asset-Backed Securities By Year of Securitization – Prime
	Total			2006			2005			2004 and Prior
Private-label residential MBS:
UPB by credit rating:
Triple-A	$	164,170		$	0		$	2,058		$	162,112
Double-A		48,957			0			0			48,957
Single-A		68,554			0			0			68,554
Triple-B		104,392			0			25,104			79,288
Below investment grade:
Double-B		41,905			0			29,914			11,991
Single-B		111,326			22,671			84,101			4,554
Triple-C		13,584			10,826			2,758			0
Double-C		12,949			6,757			6,192			0
TOTAL	$	565,837		$	40,254		$	150,127		$	375,456
Amortized cost	$	563,642		$	39,970		$	148,920		$	374,752
Gross unrealized losses		(33,812	)		(895	)		(2,504	)		(30,413	)
Fair value		533,334			39,075			146,784			347,475
OTTI:
Credit-related OTTI charge taken year-to-date	$	687		$	0		$	547		$	140
Non-credit-related OTTI charge taken year-to-date		2,938			0			756			2,182
TOTAL	$	3,625		$	0		$	1,303		$	2,322
Weighted average percentage of fair value to UPB		94.3	%		97.1	%		97.8	%		92.5	%
Original weighted average credit support1		3.2			3.0			3.0			3.3
Weighted average credit support1		7.7			4.4			5.3			9.0
Weighted average collateral delinquency2		6.2			8.2			7.2			5.5
Private-label commercial MBS:
UPB by credit rating:
Triple-A	$	39,865		$	0		$	0		$	39,865
Amortized cost	$	39,880		$	0		$	0		$	39,880
Gross unrealized losses		0			0			0			0
Fair value		40,625			0			0			40,625
Weighted average percentage of fair value to UPB		101.9	%		-	%		-	%		101.9	%
Original weighted average credit support1		21.5			-			-			21.5
Weighted average credit support1		27.2			-			-			27.2
Weighted average collateral delinquency2		3.5			-			-			3.5

__________

1	Credit support is defined as the percentage of subordinate tranches and over-collateralization, if any, in a security structure that will absorb losses before the holders of the security will incur losses.
2	Collateral delinquency is based on the sum of loans greater than 60 days delinquent plus loans in foreclosure plus loans in bankruptcy plus REO.

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Table 29

Private-Label Mortgage-Backed Securities and Home Equity Loan Asset-Backed Securities By Year of Securitization - Alt-A
	Total			2005			2004 and Prior
Private-label residential MBS:
UPB by credit rating:
Triple-A	$	41,656		$	0		$	41,656
Double-A		14,427			0			14,427
Single-A		59,385			2,399			56,986
Triple-B		74,865			0			74,865
Below investment grade:
Double-B		11,898			0			11,898
Single-B		55,816			30,609			25,207
Triple-C		32,649			26,703			5,946
Double-C		35,870			35,870			0
TOTAL	$	326,566		$	95,581		$	230,985
Amortized cost	$	319,683		$	89,227		$	230,456
Gross unrealized losses		(33,398	)		(18,512	)		(14,886	)
Fair value		288,830			70,715			218,115
OTTI:
Credit-related OTTI charge taken year-to-date	$	3,517		$	3,266		$	251
Non-credit-related OTTI charge taken year-to-date		2,932			(680	)		3,612
TOTAL	$	6,449		$	2,586		$	3,863
Weighted average percentage of fair value to UPB		88.4	%		74.0	%		94.4	%
Original weighted average credit support1		4.8			5.5			4.6
Weighted average credit support1		10.9			7.1			12.4
Weighted average collateral delinquency2		10.4			13.3			9.2

__________

1	Credit support is defined as the percentage of subordinate tranches and over-collateralization, if any, in a security structure that will absorb losses before the holders of the security will incur losses.
2	Collateral delinquency is based on the sum of loans greater than 60 days delinquent plus loans in foreclosure plus loans in bankruptcy plus REO.

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Table 30

Private-Label Mortgage-Backed Securities and Home Equity Loan Asset-Backed Securities By Year of Securitization – Subprime
	Total1
Home equity loan ABS:
UPB by credit rating:
Below investment grade:
Single-B	$	1,386
Triple-C		665
Double-C		2,435
TOTAL	$	4,486
Amortized cost	$	1,851
Gross unrealized losses		(100	)
Fair value		2,199
OTTI:
Credit-related OTTI charge taken year-to-date	$	273
Non-credit-related OTTI charge taken year-to-date		(273	)
TOTAL	$	0
Weighted average percentage of fair value to UPB		49.0	%
Original weighted average credit support2		35.1
Weighted average credit support2		2.3
Weighted average collateral delinquency3		28.4

__________

1	All subprime investments were securitized prior to 2005.
2	Credit support is defined as the percentage of subordinate tranches and over-collateralization, if any, in a security structure that will absorb losses before the holders of the security will incur losses.
3	Collateral delinquency is based on the sum of loans greater than 60 days delinquent plus loans in foreclosure plus loans in bankruptcy plus REO.

All of our private-label MBS/ABS securities were limited by our RMP at the time of acquisition to securities where the geographic concentration of loans collateralizing the security was such that no single state represented more than 50 percent of the total by dollar amount. As the structure of the underlying collateral shifts because of prepayments, the concentration shifts. Thus, we continue to monitor concentration of the underlying collateral for our private-label MBS/ABS portfolio for risk management purposes. Geographic concentration of collateral securing private-label MBS/ABS is provided in the annual report on Form 10-K. There were no material changes in these concentrations during the period ended September 30, 2011.

As of September 30, 2011, we held private-label ABS covered by monoline insurance companies, which provide credit support for these securities. Other types of credit support for private-label ABS include subordinate tranches and over-collateralization, if any, in a security structure that can absorb losses before the holders of the security incur losses. Table 31 presents coverage amounts and unrealized losses as of September 30, 2011 (in thousands) on the private-label ABS covered by monoline bond insurers on which we are placing reliance:

Table 31

	MBIA Insurance Corp.
Year of Securitization	Insurance Coverage		Gross Unrealized Losses
Home equity loan ABS:
2004 and prior	$	1,386	$	0

Table 32 presents the NRSRO credit ratings as of September 30, 2011 for all monoline insurance companies that provide credit support for our home equity loan ABS (in thousands):

Table 32

	Moody’s Credit Rating	S&P Credit Rating	Fitch Credit Rating
MBIA Insurance Corp.	B	B	NR1
Financial Guaranty Insurance Company	NR1	NR1	NR1

__________

1 Not rated.

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As of September 30, 2011, the amortized cost of private-label securities with unrealized losses was $536.7 million. (See Note 3 of the Notes to the Financial Statements included under Item 1 for a summary of held-to-maturity securities with unrealized losses aggregated by major security type and length of time that the individual securities have been in a continuous unrealized loss position.) Table 33 presents characteristics of our private-label MBS/ABS in a gross unrealized loss position (in thousands). The underlying collateral for all prime loans is first lien mortgages, and the underlying collateral for all subprime loans is second lien mortgages.

Table 33

	09/30/2011												10/31/2011 MBS Ratings Based on 09/30/2011 UPB2,3
	Unpaid Principal Balance		Amortized Cost		Gross Unrecognized Losses		Weighted- Average Collateral Delinquency Rate1			Percentage Rated Triple-A			Percentage Rated Triple-A			Percentage Rated Investment Grade			Percentage Rated Below Investment Grade			Percentage on Watchlist
Private-label residential MBS:
Prime	$	349,234	$	348,206	$	33,812		7.2	%		9.2	%		8.5	%		45.6	%		45.9	%		0.0	%
Alt-A:
Alt-A other		179,114		176,718		30,350		10.9			2.3			2.3			41.7			56.0			0.0
Alt-A option arm		15,480		11,242		3,048		34.5			0.0			0.0			0.0			100.0			0.0
Total Alt-A		194,594		187,960		33,398		12.8			2.1			2.1			38.4			59.5			0.0
Home equity loan ABS:
Subprime		665		552		100		27.1			0.0			0.0			0.0			100.0			0.0
TOTAL	$	544,493	$	536,718	$	67,310		9.2	%		6.7	%		6.2	%		42.9	%		50.9	%		0.0	%

__________

1	Weighted-average collateral delinquency is based on the sum of loans greater than 60 days delinquent plus loans in foreclosure plus loans in bankruptcy as of September 30, 2011. The reported collateral delinquency percentage represents the weighted-average based on the UPB of the individual securities in the category and their respective collateral delinquency as of September 30, 2011.
2	Represents the lowest ratings available for each security based on NRSROs.
3	Excludes investments held as of September 30, 2011 that have been paid down in full as of October 31, 2011.

Other-than-temporary Impairment – As mentioned previously, we experienced a significant decline in the estimated fair values of our private-label MBS/ABS due to interest rate volatility, illiquidity in the marketplace and credit deterioration in the U.S. mortgage markets beginning in early 2008. Despite the improvement in the fair value of our private-label MBS/ABS during the last nine months of 2009, all of 2010 and the first nine months of 2011, the fair values of the majority of the private-label MBS/ABS in our held-to-maturity portfolio remain below amortized cost as of September 30, 2011. However, based upon the OTTI evaluation process that results in a conclusion as to whether a credit loss exists (present value of our best estimate of the cash flows expected to be collected is less than the amortized cost basis of each individual security), we have concluded that, except for 26 private-label MBS/ABS upon which we have recognized OTTI, there is no evidence of a likely credit loss in our other 177 private-label MBS/ABS; there is no intent to sell, nor is there any requirement to sell; and, thus, there is no OTTI for the remaining private-label MBS/ABS that have declined in value.

See Note 3 of the Notes to Financial Statements under Item 1 for additional information on our OTTI evaluation process. We utilize a process for the determination of OTTI under an approach that is consistent with the other 11 FHLBanks in accordance with guidance issued by the Finance Agency. Each FHLBank performs its OTTI analysis primarily using key modeling assumptions provided and approved by the FHLBanks’ OTTI Governance Committee, of which we are an active member, for the majority of our private-label residential MBS and home equity loan ABS. Certain private-label MBS/ABS backed by multi-family and commercial real estate loans, home equity lines of credit, manufactured housing loans and other securities that were not able to be cash flow tested were outside of the scope of the OTTI Governance Committee. We analyzed these private-label MBS/ABS for OTTI using other methods. The dollar amount of private-label MBS/ABS analyzed for OTTI using other methods represents 8.0 percent of our total private-label MBS/ABS.

We perform OTTI analysis on 100 percent of our private-label residential MBS/ABS portfolio, excluding private-label commercial MBS. To the extent underlying collateral data is available in the loan information data source for our private-label MBS/ABS, we perform OTTI cash flow analysis using the FHLBanks’ common platform and approved assumptions. The FHLBank of San Francisco, for quality control purposes, provides the expected cash flows for us utilizing the key modeling assumptions developed and approved by the FHLBanks’ OTTI Governance Committee. For certain private-label MBS/ABS where underlying collateral data was not available, we used other methods to assess these securities for OTTI. The risk models and loan information data sources used in 2011 were the same as in 2010.

81

Tables 34 and 35 present a summary of the significant inputs used to evaluate all non-Agency MBS/ABS for OTTI for the quarter ended September 30, 2011 as well as related current credit enhancement. The calculated averages represent the dollar-weighted averages of all the private-label MBS/ABS in each category shown. The classification (prime, Alt-A and subprime) is based on the model used to run the estimated cash flows for the CUSIP, which may not necessarily be the same as the classification at the time of origination.

Table 34

Private-label residential MBS
Year of Securitization	Significant Inputs						Current Credit Support
	Projected Prepayment Rates		Projected Default Rates		Projected Loss Severities
	Weighted Average	Rates/ Range	Weighted Average	Rates/ Range	Weighted Average	Rates/ Range	Weighted Average	Rates/ Range
Prime:
2006	9.1%	7.7 - 10.1%	12.5%	7.9 - 24.7%	38.0%	32.1 - 44.5%	4.4%	3.5 - 4.9%
2005	9.3	6.6 - 14.0	13.5	4.1 - 21.2	34.9	28.5 - 40.9	5.3	2.3 - 12.3
2004 and prior	16.4	4.9 - 40.9	7.3	0.0 - 30.7	29.6	0.0 - 97.9	8.8	2.3 - 51.7
Total prime	14.0	4.9 - 40.9	9.3	0.0 - 30.7	31.6	0.0 - 97.9	7.6	2.3 - 51.7
Alt-A:
2005	8.8	4.8 - 10.7	23.4	14.7 - 59.6	42.0	32.3 - 47.5	7.1	2.4 - 28.3
2004 and prior	10.9	6.4 - 15.6	11.5	0.0 - 41.0	34.7	0.0 - 48.8	12.4	4.6 - 66.0
Total Alt-A	10.3	4.8 - 15.6	15.0	0.0 - 59.6	36.8	0.0 - 48.8	10.9	2.4 - 66.0
TOTAL	12.6%	4.8 - 40.9%	11.4%	0.0 - 59.6%	33.6%	0.0 - 97.9%	8.8%	2.3 - 66.0%

Table 35

Home Equity Loan ABS
Year of Securitization	Significant Inputs						Current Credit Support
	Projected Prepayment Rates		Projected Default Rates		Projected Loss Severities
	Weighted Average	Rates/ Range	Weighted Average	Rates/ Range	Weighted Average	Rates/ Range	Weighted Average	Rates/ Range
Subprime:
2004 and prior	4.4%	1.2 - 7.0%	6.4%	5.0 - 7.2%	102.4%	85.9 - 126.8%	2.3%	0.0 - 16.3%

The FHLBank also evaluates other non-mortgage related investment securities, primarily consisting of municipal bonds issued by housing finance authorities, for potential impairment. During the quarter ended September 30, 2011, we did not identify any non-MBS/ABS securities as having impairment.

The 26 private-label MBS/ABS upon which we have recognized OTTI include 5 securities that were identified as other-than-temporarily impaired in 2008, 3 securities that were first identified as other-than-temporarily impaired in 2009, 2 securities that were first identified as other-than-temporarily impaired in 2010 and 16 securities that were initially identified in the first nine months of 2011. We expect to recover the amortized cost on the rest of our held-to-maturity securities portfolio that are in an unrealized loss position based on individual security evaluations. See Note 3 of the Notes to the Financial Statements under Item 1 for additional information regarding OTTI losses recognized.

In addition to evaluating all of our private-label MBS/ABS under a base case (or best estimate) scenario for generating expected cash flows, a cash flow analysis is also performed for each security under a more stressful housing price scenario. The more stressful scenario is designed to provide an indication of the sensitivity of our private-label MBS/ABS to deterioration in housing prices beyond our base case estimates. The more stressful housing price scenario assumes a housing price forecast that is 5 percentage points lower at the trough than the base case scenario followed by a flatter recovery path. Under this scenario, current-to-trough home price declines are projected to range from 5.0 percent to 13.0 percent over the 3- to 9-month period beginning July 1, 2011. Thereafter, home prices are projected to increase within a range of 0 percent to 1.9 percent in the first year, 0 percent to 2.0 percent in the second year, 1.0 percent to 2.7 percent the third year, 1.3 percent to 3.4 percent the fourth year, 1.3 percent to 4.0 percent in each of the fifth and sixth years, and 1.5 percent to 3.8 percent in each subsequent year. (See Note 3 of the Notes to the Financial Statements included under Item 1 – “Financial Statements” for a description of the assumptions used to determine actual credit-related OTTI.) Table 36 represents the impact on credit-related OTTI in the more stressful housing price scenario compared to actual credit-related OTTI recorded during the quarter ended September 30, 2011 using base-case housing price index assumptions by collateral type, which is based on the originator’s classification at the time of origination or based on classification by an NRSRO upon issuance of the MBS/ABS (dollar amounts in thousands). The stress test scenario and associated results do not represent our current expectations and therefore, should not be construed as a prediction of future results, market conditions or the actual performance of these securities. Rather, the results from the hypothetical stress test scenario provide a measure of the credit losses that we might incur if home price declines (and subsequent recoveries) are more adverse than those projected as our best estimate in our OTTI assessment.

82

Table 36

Housing Price Scenarios As of 09/30/2011
Security Type	Base Case1						Results Under Hypothetical Stress Test Scenario2
	# of Securities		Unpaid Principal Balance		OTTI Related to Credit Loss		# of Securities		Unpaid Principal Balance		OTTI Related to Credit Loss
Private-label RMBS:
Prime		3	$	17,142	$	140		9	$	59,619	$	1,118
Alt-A		8		80,185		1,685		11		102,692		3,018
Total private-label RMBS		11		97,327		1,825		20		162,311		4,136
Home equity loan ABS:
Subprime		1		1,386		198		1		1,386		232
Total		12	$	98,713	$	2,023		21	$	163,697	$	4,368

__________

1	Represents OTTI credit losses for the quarter ended September 30, 2011 that were recognized on 12 of our 26 OTTI securities. No additional OTTI credit losses were recognized on the other 14 OTTI securities.
2	Represents OTTI credit losses that would have been recognized for the quarter ended September 30, 2011 and includes OTTI credit losses on 16 of our 26 OTTI securities.

Deposits: We offer deposit programs for the benefit of our members and certain other qualifying non-members. Deposit products offered include demand and overnight deposits and short-term certificates of deposit. Most deposits are very short-term and the majority of the deposits are in overnight or demand accounts that generally re-price daily based upon a market index such as overnight Federal funds. However, because of the low interest rate environment, management has established a floor of 5 bps on demand deposits and 15 bps on overnight deposits. The level of deposits is driven by member demand for deposit products, which in turn is a function of the liquidity position of members. Factors that influence deposit levels include turnover in member investment and loan portfolios, changes in members’ customer deposit balances, changes in members’ demand for liquidity, our deposit pricing as compared to other short-term market rates and members’ desire to pledge overnight deposits as collateral. The majority of the increase in deposit balances during the first nine months of 2011 (see Table 15) can be attributed to several institutions with significant increases in their overnight deposit accounts related to the pledging of these deposits to us as collateral for credit obligations. Overall deposits could decline during the fourth quarter of 2011 if demand for loans at member institutions increase, if members continue to reduce their leverage or if decreases in the general level of liquidity of members should occur. Because of our ready access to the capital markets through consolidated obligations, however, we expect to be able to replace any reduction in deposits with similarly priced or lower cost borrowings.

Consolidated Obligations: Consolidated obligations are the joint and several debt obligations of the 12 FHLBanks and consist of bonds and discount notes. Consolidated obligations represent the primary source of liabilities we use to fund advances, mortgage loans and investments. As noted under “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk Management” under Item 3, we use debt with a variety of maturities and option characteristics to manage interest rate risk profile. We make extensive use of derivative transactions, executed in conjunction with specific consolidated obligation debt issues, to synthetically structure funding terms and costs.

Bonds are primarily used to fund longer-term (one year or greater) advances, mortgage loans and investments. To the extent that the bond is funding variable rate assets or assets swapped to synthetically create variable rate assets, we typically either issue a bond that has a variable rate matching the asset index or swap a fixed rate, variable rate or a complex bond to match that index. Additionally, we sometimes use fixed rate, variable rate or complex bonds that are swapped to LIBOR to fund short-term advances and money market investments. Discount notes are primarily used to fund shorter-term advances and investments (maturities and/or index resets of twelve months or less) and are the primary funding instrument used to manage our leverage within the target range.

While total consolidated obligations decreased from December 31, 2010 to September 30, 2011, the composition between discount notes and bonds also changed over the period. Discount notes as a percentage of total consolidated obligations decreased from 38.9 percent as of the end of 2010 to 36.1 percent as of the end of the third quarter of 2011. This compositional decrease in discount notes was primarily a function of the decline in total assets, specifically short-term advances during the period. Bonds as a percentage of total consolidated obligations increased from 61.1 percent as of the end of 2010 to 63.9 percent as of the end of the third quarter of 2011 primarily reflecting the growth in our unswapped callable bond portfolio mainly used to fund our fixed-rate mortgage loan portfolio.

During the first nine months of 2011, the spread between one-month LIBOR to the overnight Federal funds target rate declined while the spread between three-month LIBOR to the overnight Federal funds target rate increased. At the end of the third quarter of 2011, the spread for three-month LIBOR to the Federal funds target rate increased to positive 12.4 bps from a positive 5.3 bps at December 31, 2010 and the one-month LIBOR spread declined to a negative 1.1 bps at September 30, 2011 from a positive 1.1 bps at December 31, 2010. The LIBOR/Federal funds target rate spread is of significance because we have occasionally used bonds swapped to LIBOR at favorable sub-LIBOR rates to fund a portion of our short-term fixed rate advance, short-term money market investment and variable rate MBS portfolios. For additional information on changes in LIBOR rates, see Item 2 – “Financial Market Trends.” However, because of concerns of risk contagion surrounding the European sovereign debt crisis and its possible impact on LIBOR rates, we currently intend to minimize our LIBOR basis risk and in general maintain balances of liabilities that are indexed or swapped to LIBOR proportionate to our assets that are indexed or swapped to LIBOR.

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We continued to issue unswapped callable debt in the liability portfolios funding fixed rate assets with prepayment characteristics and some fixed rate advances to help manage the optionality contained in these assets. During the first nine months of 2011, $3.1 billion of unswapped callable consolidated obligation bonds were called and $3.3 billion of unswapped callable consolidated obligation bonds were issued. Of this total, $2.3 billion was called and $2.0 billion was issued in the third quarter of 2011 as a result of the significant decline in longer-term market interest rates during this time. In order to increase the optionality in our funding and better match the options in our assets, we primarily utilize callable debt with relatively short lockout periods (three months to one year). Refinancing unswapped callable bonds has an impact on portfolio spreads by reducing funding costs due to the issuance of new debt at a lower cost. For a discussion on yields and spreads, see Tables 6 through 9 under Item 2 – “Financial Review – Results of Operations” for further information.While most of the issuances of unswapped callable debt in the first nine months of 2011 were used to refinance debt that was called, they were also used to fund growth in our mortgage loan portfolio and to fund a certain portion of fixed rate advances. The issuance of these unswapped callable bonds also had an impact on our interest rate risk profile during the first nine months of 2011 because a substantial amount of the unswapped callable bonds issued had short lockout periods and relatively long terms to maturity, which helps protect against the possibility of both faster prepayment speeds (short locks) and slower prepayment speeds (long final maturities) on mortgage assets. For a further discussion of how our portfolio of unswapped callable bonds impacted interest rate risk, see Item 3 – “Quantitative and Qualitative Disclosures About Market Risk.”

Several recent developments have the potential to impact the demand for FHLBank consolidated obligations in the coming months. For a discussion of the impact of these recent developments, U.S. government programs and the financial markets on the cost of FHLBank consolidated obligations, see “Financial Market Trends” under this Item 2.

While we have had relatively stable access to funding markets for the first nine months of 2011, future developments could impact the cost of replacing outstanding debt. Some of these include, but are not limited to, a large increase in call volume, significant increases in advance demand, legislative and regulatory changes, proposals addressing GSEs, derivative and financial market reform, a decline in investor demand for consolidated obligations, further rating agency downgrades of U.S. Treasury obligations which will in turn impact the rating on FHLBank consolidated obligations and changes in Federal Reserve policies and outlooks.

Derivatives: All derivatives are marked to fair value, netted by counterparty with any associated accrued interest, offset by the fair value of any cash collateral received or delivered and included on the Statements of Condition as an asset when there is a net fair value gain or as a liability when there is a net fair value loss. Fair values of our derivatives primarily fluctuate as the LIBOR/Swap interest rate curve fluctuates. Other factors such as market participant expectations, implied volatility and the shape of the curve can also drive the market price for derivatives.

We use derivatives in three ways: (1) by designating them as either a fair value or cash flow hedge of an underlying financial instrument, firm commitment or a forecasted transaction; (2) by acting as an intermediary; and (3) in asset/liability management (i.e., economic hedge). Economic hedges are defined as derivatives hedging specific or non-specific underlying assets, liabilities or firm commitments that do not qualify for hedge accounting, but are acceptable hedging strategies under our RMP. To meet the hedging needs of our members, we enter into offsetting derivatives, acting as an intermediary between members and other counterparties. This intermediation allows smaller members indirect access to the derivatives market. The derivatives used in intermediary activities do not receive hedge accounting and are separately marked to market through earnings (classified as economic hedges).

For additional information regarding the types of derivative instruments and risks hedged, see Item 3 – “Quantitative and Qualitative Disclosures About Market Risk,” specifically Tables 44 and 45, which quantify the notional and fair value amounts as September 30, 2011 and December 31, 2010.

Liquidity and Capital Resources

Liquidity: To meet our mission of serving as an economical funding source for our members and housing associates, we must maintain high levels of liquidity. We are required to maintain liquidity in accordance with certain Finance Agency regulations and guidelines and with policies established by management and the Board of Directors. We need liquidity to repay maturing consolidated obligations and other borrowings, to meet other financial obligations, to meet advance needs of our members, to make payments of dividends to our members and to repurchase excess capital stock at our discretion, whether upon the submission of a redemption request by a member or at our own initiative (mandatory stock repurchases).

A primary source of our liquidity is the issuance of consolidated obligations. The capital markets traditionally have treated FHLBank obligations as U.S. government agency debt. As a result, even though the U.S. government does not guarantee FHLBank debt, the FHLBank generally has comparatively stable access to funding at relatively favorable spreads to U.S. Treasury rates.

We are primarily and directly liable for our portion of consolidated obligations (i.e., those obligations issued on our behalf). In addition, we are jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on the consolidated obligations of all 12 FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations for which that FHLBank is not the primary obligor. Although it has never occurred, to the extent that an FHLBank would be required to make a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Agency determines that the non-complying FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the non-complying FHLBank’s outstanding consolidated obligation debt among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Agency may determine. This provides an emergency source of liquidity should an FHLBank have trouble meeting its debt payments.

Our other sources of liquidity include deposit inflows, repayments of advances or mortgage loans, maturing investments, interest income and proceeds from repurchase agreements or the sale of unencumbered assets. Uses of liquidity include issuing advances, funding or purchasing mortgage loans, purchasing investments, deposit withdrawals, capital repurchases, maturing or called consolidated obligations, interest expense, dividend payments to members, other contractual payments and contingent funding or purchase obligations including letters of credit and standby bond purchase agreements.

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Total cash and short-term investments, including commercial paper, certificates of deposit, bank notes and overnight Federal funds sold, were mostly unchanged from $5.9 billion as of December 31, 2010 to $6.0 billion as of September 30, 2011. Total cash and short-term investments remained relatively stable in spite of deleveraging primarily as a result of fairly significant pay downs in advances where a portion of the supporting capital was redeemed and from prepayments in our Agency variable rate CMO investment portfolio. The maturities of short-term investments are structured to provide periodic cash flows to support ongoing liquidity needs. To enhance our liquidity position, short-term investment securities (i.e., commercial paper, marketable certificates of deposit and bank notes) and certain long-term investment securities (i.e., U.S. Government guaranteed debentures) are also classified as “Trading” for accounting purposes so that they can be readily sold should liquidity be needed immediately. We also maintain a portfolio of GSE debentures that can be pledged as collateral for financing in the securities repurchase agreement market.

In order to assure that we can take advantage of those sources of liquidity that will affect our leverage capital requirements, we manage our average capital ratio to stay sufficiently above minimum regulatory and RMP requirements so that we can utilize the excess capital capacity should the need arise. While the minimum regulatory total capital requirement is 4.00 percent (25:1 asset to capital leverage) and our RMP minimum is 4.04 percent (24.75:1 asset to capital leverage), we manage assets, liabilities and capital in such a way as to maintain our total regulatory capital ratio in a target range of 5.0 percent (20:1 asset to capital leverage) to 4.55 percent (22:1 asset to capital leverage). We increased the upper end of our target range of our total regulatory capital ratio to 5.0 percent (20:1 asset to capital leverage) from 4.76 percent (21:1 asset to capital leverage) this quarter to reduce our unsecured short-term money market investment portfolio. We plan to continue operating in this target range and manage our excess stock position so that we can reduce the absolute size of our money market investment portfolio. As a result of managing leverage within this target range, we have the capacity, should the need arise, to borrow an amount approximately equal to three to five times our current capital position before we reach any leverage limitation as a result of the minimum regulatory or RMP capital requirements. Our operating capital ratio target helps ensure our ability to meet the liquidity needs of our members and to increase our ability to repurchase excess stock at our discretion either: (1) mandatorily to adjust our balance sheet size; or (2) upon the submission of a redemption request by a member. While we target a specific range for our asset to capital leverage ratio, our actual performance relative to that target may vary in response to market conditions and/or investment opportunities.

We are subject to five metrics for measuring liquidity, and we have remained in compliance with each of these liquidity requirements throughout the first nine months of 2011. In order to ensure a sufficient liquidity cushion, we are required to maintain a relatively longer weighted-average remaining maturity on our consolidated obligation discount notes than the weighted average maturity of some short-term assets. The weighted average original days to maturity of discount notes outstanding increased to 97 days as of September 30, 2011 from 85 days as of December 31, 2010. The weighted average original maturity of our money market investment portfolio (Federal funds sold, marketable certificates of deposit, bank notes and commercial paper) and non-earning cash left in our Federal Reserve account decreased to 42 days as of September 30, 2011 from 52 days as of December 31, 2010. The mismatch of discount notes and our money market investment portfolio increased from 33 days on December 31, 2010 to 55 days on September 30, 2011. We sometimes leave cash in our non-earning Federal Reserve account at the end of the day if the money cannot be sold in the overnight Federal funds market to approved counterparties at an adequate return. However, the average and ending balances in this account were higher than typical this quarter as we held cash from maturing investments until the underlying liabilities matured in order to reduce our level of unsecured credit risk especially to European counterparties.

As a precautionary measure against potential capital market disruptions resulting from Congressional debt ceiling negotiations and the potential downgrade of U.S. sovereign debt, during July, management increased this mismatch by increasing the weighted average original days to maturity of discount notes outstanding and decreasing the weighted average original maturity of our money market investment portfolio and non-earning cash left in our Federal Reserve account. Later in the third quarter of 2011, management further restricted approved counterparties for unsecured investments by minimizing the amount of unsecured investments in European counterparties and all counterparties with a single-A credit rating or below. This realignment resulted in a significant short term increase in our cash balance as we left $1.8 billion in our Federal Reserve account on September 30, 2011 compared to $0.2 million on December 31, 2010. Over time, especially as the yield curve steepens on the short end, maintaining the differential between the weighted average original maturity between discount notes and money market investments will marginally increase our cost of funds, which could negatively impact earnings.

In addition to the balance sheet sources of liquidity discussed previously, we have established lines of credit with numerous counterparties in the Federal funds market as well as with the other 11 FHLBanks. We expect to maintain a sufficient level of liquidity for the foreseeable future.

For additional discussion relating to liquidity, see “Financial Condition – Investments” and “Risk Management – Liquidity Risk Management” under this Item 2.

Capital: We are subject to three capital requirements under provisions of the Gramm-Leach-Bliley (GLB) Act, the Finance Agency’s capital structure regulation and our capital plan: (1) a risk-based capital requirement; (2) a total capital requirement; and (3) a leverage capital requirement. As of September 30, 2011, we were in compliance with all three capital requirements (see Note 12 in the Notes to Financial Statements under Item 1).

Excess stock represents the amount of stock held by a member in excess of that institution’s minimum stock purchase requirement. As member advance activity or participation in the MPF Program declines, excess stock is created since the member no longer needs the same level of activity-based capital stock. If our excess stock exceeds 1.0 percent of our assets before or after the payment of a dividend in the form of stock, we would be prohibited by Finance Agency regulation from paying dividends in the form of stock. The amount of excess stock held by members was relatively unchanged from December 31, 2010 to September 30, 2011 in spite of the fact that we pay our quarterly dividends in the form of Class B Common Stock. This is attributable to capital management practices initiated and a common practice by some of our members to request redemptions of excess stock and our subsequent repurchase.

JCE Agreement – Effective February 28, 2011, we, along with the other 11 FHLBanks, entered into a JCE Agreement intended to enhance the capital position of each FHLBank. On August 5, 2011, the FHLBanks also amended the JCE Agreement to reflect differences between the original agreement and capital plan amendments.

The intent of the JCE Agreement is to allocate that portion of each FHLBank’s earnings historically paid to satisfy its REFCORP obligation to a separate RRE Account at that FHLBank. Each FHLBank was required to contribute 20 percent of its earnings toward payment of the interest on REFCORP bonds until the REFCORP obligation was satisfied. The Finance Agency certified on August 5, 2011 that the FHLBanks’ payments to the U.S. Department of the Treasury resulted in full satisfaction of the FHLBanks’ REFCORP obligation.

Thus, in accordance with the JCE Agreement, starting in the third quarter of 2011, each FHLBank began allocating 20 percent of its net income to a RRE Account and will do so until the balance of the account equals at least 1 percent of that FHLBank’s average balance of outstanding consolidated obligations for the previous quarter. However, we recorded a net loss for the quarter ended September 30, 2011; therefore, no allocation has been made to date.

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For additional information regarding the JCE Agreement, see Note 12 of the Notes to the Financial Statements included under Item 1 – “Financial Statements.”

Capital Distributions: Dividends may be paid in cash or capital stock as authorized by our Board of Directors. Quarterly dividends can be paid out of current and previously retained earnings, subject to Finance Agency regulation and our capital plan.

Within our capital plan, we have the ability to pay different dividend rates to the holders of Class A Common Stock and Class B Common Stock. This differential is implemented through a mechanism referred to as the dividend parity threshold. The current dividend parity threshold is equal to the average effective overnight Federal funds rate for a dividend period minus 100 bps. With the overnight Federal funds target rate range of zero to 0.25 percent, the dividend parity threshold is effectively floored at zero percent at this time.

We anticipate that dividend rates on Class A Common Stock will be at or above the upper end of the current overnight Federal funds target rate range for future dividend periods until such time as the dividend parity threshold calculation results in a positive number. While there is no assurance that our Board of Directors will not change the dividend parity threshold in the future, the capital plan requires that we provide members with 90 days notice prior to the end of a dividend period in which a different dividend parity threshold is utilized in the payment of a dividend. We also expect that the differential between the two classes of stock for the remainder of 2011 will remain close to the differential for the first nine months of 2011, subject to suitable investment opportunities and sufficient earnings to meet retained earnings targets.

We expect to continue paying dividends primarily in the form of capital stock (cash dividends are paid for partial shares and for all dividends to former members) for the remainder of 2011, but this may change depending on any future impact of the Finance Agency rule on excess stock that became effective January 29, 2007. Under the rule, any FHLBank with excess stock greater than one percent of its total assets will be prohibited from further increasing member excess stock by paying stock dividends or otherwise issuing new excess stock. Excess stock was 0.96 percent of total assets at September 30, 2011. If we were to change our prior practice and pay dividends in the form of cash, we would utilize liquidity resources. However, payment of cash dividends would not have a significant impact on our liquidity position.

Risk Management

Proper identification, assessment and management of risks, complemented by adequate internal controls, enable stakeholders to have confidence in our ability to meet our housing finance mission, serve our members, earn a profit, compete in our market and prosper over the long term. Active risk management continues to be an essential part of operations and a key determinant of our ability to maintain earnings in order to meet retained earnings thresholds and return a reasonable dividend to our members. We maintain a comprehensive enterprise risk management (ERM) process to facilitate, control and monitor risk taking. Periodic reviews by internal auditors, Finance Agency examiners, independent accountants and external consultants subject our practices to additional scrutiny, further strengthening the process.

We maintain an enterprise-wide risk management program in an effort to facilitate the identification of all significant risks to the FHLBank and institute the prompt and effective management of any major risk exposures, including any new or emerging risks. Under this program, we perform annual risk assessments designed to identify and evaluate all material risks that could adversely affect the achievement of our performance objectives and compliance requirements. ERM is a structured and disciplined approach that aligns strategy, processes, people, technology and knowledge with the purpose of identifying, evaluating and managing the uncertainties we face as we create value. Our ERM program is a continuous process of identifying, prioritizing, assessing and managing inherent enterprise risks (i.e., business, compliance, credit, liquidity, market and operations) before they become realized risk events.

Effective risk management programs include not only conformance to risk management best practices by management but also incorporate board of director oversight. Our Board of Directors plays an active role in the ERM process by establishing a risk philosophy and risk appetite for the FHLBank as well as regularly reviewing risk management policies and reports on controls. A Risk Oversight Committee of the Board of Directors assists the Board in fulfilling its fiduciary responsibilities by providing oversight of our ERM program, including monitoring and evaluating our enterprise risk exposure. In addition to the annual and periodic business unit risk assessment reports, the Board of Directors reviews both the RMP and Member Products Policy at least annually. Various management committees, including the Strategic Risk Management Committee, the Asset/Liability Committee, the Credit Underwriting Committee, the Disclosure Committee, the Market Risk Analysis Committee and the Operations Risk Committee oversee our risk management process. For more detailed information, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in the annual report on Form 10-K, incorporated by reference herein.

Credit Risk Management: Credit risk is defined as the risk that counterparties to our transactions will not meet their contractual obligations. We manage credit risk by following established policies, evaluating the creditworthiness of our counterparties and utilizing collateral agreements and settlement netting for derivative transactions. The most important step in the management of credit risk is the initial decision to extend credit. Continuous monitoring of counterparties is completed for all areas where we are exposed to credit risk, whether that is through lending, investing or derivative activities.

Credit risk arises partly as a result of lending and Acquired Member Assets (AMA) activities (members’ CE obligations on mortgage loans acquired through the MPF Program). We manage our exposure to credit risk on advances, letters of credit and members’ CE obligations on mortgage loans through a combined approach that provides ongoing review of the financial condition of our members coupled with prudent collateralization.

As provided in the Federal Home Loan Bank Act of 1932, as amended (Bank Act), a member’s investment in our capital stock is pledged as additional collateral for the member’s advances and other credit obligations (e.g., letters of credit, CE obligations, etc.). We can also call for additional collateral or substitute collateral during the life of an advance or other credit obligation to protect our security interest.

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Credit risk arising from AMA activities under our MPF Program falls into three categories: (1) the risk of credit losses on the mortgage loans represented in the First Loss Account (FLA) and last loss positions; (2) the risk that a member or non-member PFI will not perform as promised with respect to its loss position provided through its CE obligations on mortgage pools, which are covered by the same collateral arrangements as those described for advances; and (3) the risk that a third-party insurer (obligated under primary mortgage insurance (PMI) or supplemental mortgage insurance (SMI) arrangements) will fail to perform as expected. See Item 1 – “Business – Mortgage Loans” in the annual report on Form 10-K for additional discussion on the FLA, PMI and SMI. Should a PMI third-party insurer fail to perform, it would increase our credit risk exposure because the FLA is the next layer to absorb credit losses on mortgage loan pools. Likewise, if an SMI third-party insurer fails to perform, it would increase our credit risk exposure because it would reduce the participating member’s CE obligation loss layer since SMI is purchased by PFIs to cover all or a portion of their CE obligation exposure for mortgage pools. Credit risk exposure to third-party insurers to which we have PMI and/or SMI exposure is monitored on a monthly basis and regularly reported to the Board of Directors. We perform credit analysis of third-party PMI and SMI insurers on at least an annual basis. On a monthly basis, trends that could identify risks with our mortgage loan portfolio are reviewed, including borrower payment history, low FICO scores and high LTV ratios. Based on the credit underwriting standards under the MPF Program and this monthly review, we have concluded that we hold no mortgage loans that would be considered subprime at origination. Table 37 presents the unpaid principal balance and maximum coverage outstanding with third-party PMI for seriously delinquent loans as of September 30, 2011 (in thousands):

Table 37

Insurance Provider	Credit Rating1	Unpaid Principal Balance2		Maximum Coverage Outstanding3
Mortgage Guaranty Insurance Co.	Single-B	$	2,420	$	669
United Guaranty Residential Insurance Co.	Triple-B		1,019		196
Radian Guaranty, Inc.	Single-B		590		183
Genworth Mortgage Insurance Corp.	Double-B		660		174
CMG Mortgage Insurance Co.	Triple-B		537		139
All others4			18,798		160
TOTAL		$	24,024	$	1,521

__________

1	Represents the lowest credit ratings of S&P, Moody’s or Fitch as of October 31, 2011.
2	Represents the unpaid principal balance of conventional loans 90 days or more delinquent or in the process of foreclosure. Assumes PMI in effect at time of origination. Insurance coverage may be discontinued once a certain LTV ratio is met.
3	Represents the estimated contractual limit for reimbursement of principal losses (i.e., risk in force) assuming the PMI at origination is still in effect. The amount of expected claims under these insurance contracts is substantially less than the contractual limit for reimbursement.
4	Includes seriously delinquent mortgage loans without third-party PMI.

Credit risk also arises from investment and derivative activities. As noted previously, the RMP restricts the acquisition of investments to high-quality, short-term money market instruments and highly rated long-term securities. The short-term investment portfolio primarily represents unsecured credit. Therefore, counterparty ratings are monitored daily while performance and capital adequacy are monitored on at least a quarterly basis in an effort to mitigate unsecured credit risk on short-term investments. MBS represent the majority of our long-term investments. We hold MBS issued by Agencies, CMOs securitized by Agencies, private-label MBS/ABS rated triple-A at the time of purchase and CMOs securitized by whole loans. Some of our private-label MBS have been downgraded below triple-A subsequent to purchase (see Table 23), but all of the downgraded securities have been and are currently paying according to contractual agreements. As of September 30, 2011, approximately 83 percent of our MBS/CMO portfolio is securitized by Fannie Mae or Freddie Mac. The securities classified as being backed by subprime mortgage loans are private-label home equity ABS. We have potential credit risk exposure to ABS that are insured by two of the monoline bond insurance companies should one or more of the companies fail to meet their insurance obligation in the event of significant mortgage defaults in the supporting collateral. At the time the securities were purchased, the insurer was required to be rated no lower than double-A. We monitor the credit ratings daily and capital adequacy, financial performance, and relevant market indicators quarterly for all primary mortgage insurers and secondary mortgage insurers. For master servicers to which we have potential credit risk exposure, ratings are monitored monthly and capital adequacy and financial performance are analyzed annually. See Table 31 under this Item 2 – “Financial Condition – Investments” for coverage amounts and unrecognized losses on private-label ABS covered by monoline bond insurance companies on which we are placing reliance. Other long-term investments include unsecured triple-A rated GSE securities, U.S. guaranteed debentures (by FDIC or NCUA) and collateralized state and local housing finance agency securities.

We have never experienced a loss on a derivative transaction because of a credit default by a counterparty. In derivative transactions, credit risk arises when the market value of transactions, such as interest rate swaps, results in the counterparty owing money to us in excess of delivered collateral. This risk is managed by: (1) executing derivative transactions with experienced counterparties with high credit quality (rated single-A or better); (2) requiring netting of individual derivative transactions with the same counterparty; (3) diversifying derivatives across many counterparties; and (4) executing transactions under master agreements that require counterparties to post collateral if we are exposed to a potential credit loss on the related derivatives exceeding an agreed-upon threshold. Our credit risk exposure from derivative transactions with member institutions is fully collateralized under our Advance Pledge and Security Agreement. The exposure on our derivative transactions is regularly monitored by determining the market value of positions using internal pricing models. The market values generated by the pricing model are compared to dealer model results on a monthly basis to ensure that our pricing model is reasonably calibrated to actual market pricing methodologies utilized by the dealers. On an annual basis, our pricing model is validated by an independent third-party by comparing a sample of market values generated from our pricing model to a benchmark pricing model and conducting a comprehensive review of our pricing model’s policies and procedures, methodologies, assumptions and controls to comparable industry practices.

Counterparty credit risk is managed through netting procedures, credit analysis, collateral management and other credit enhancements. We require that derivative counterparties enter into collateral agreements which specify maximum net unsecured credit exposure amounts that may exist before collateral requirements are triggered. The maximum amount of unsecured credit exposure to any counterparty is based upon the counterparty’s credit rating. That is, a counterparty must deliver collateral if the total market value of our exposure to that counterparty rises above a specific level. As a result of these risk mitigation initiatives, we do not anticipate any credit losses on our derivative transactions.

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The contractual or notional amount of derivatives reflects our involvement in various classes of financial instruments and does not measure credit risk. The maximum credit exposure is significantly less than the notional amount. The maximum credit exposure is the estimated cost of replacing the net receivable positions for individual counterparties on the derivatives, net of the value of any related collateral, in the event of a counterparty default. In determining maximum credit exposure, we consider accrued interest receivables and payables as well as the legal right to net swap transactions by counterparty. Derivative notional amounts and counterparty credit exposure, net of collateral, by whole-letter rating (in the event of a split rating, we use the lowest rating published by Moody’s or S&P) as of September 30, 2011 is indicated in Table 38 (in thousands):

Table 38

	Total Notional		Credit Exposure Net of Cash Collateral		Other Collateral Held		Net Credit Exposure
Triple-A	$	36,000	$	1,141	$	0	$	1,141
Double-A		9,559,623		19,774		0		19,774
Single-A		16,330,618		5,750		0		5,750
Subtotal		25,926,241		26,665		0		26,665
Member Institutions1		244,011		2,369		2,369		0
TOTAL	$	26,170,252	$	29,034	$	2,369	$	26,665

1 Collateral held with respect to derivatives with members represents either collateral physically held by or on our behalf or collateral assigned to us as evidenced by a written security agreement and held by the member for our benefit.

Derivative counterparty credit exposure by whole-letter rating (in the event of a split rating, we use the lowest rating published by Moody’s or S&P) as of December 31, 2010 is indicated in Table 39 (in thousands):

Table 39

	Total Notional		Credit Exposure Net of Cash Collateral		Other Collateral Held		Net Credit Exposure
Triple-A	$	36,000	$	2,583	$	0	$	2,583
Double-A		10,523,848		14,136		0		14,136
Single-A		18,447,613		6,394		0		6,394
Subtotal		29,007,461		23,113		0		23,113
Member Institutions1		275,339		2,952		2,952		0
TOTAL	$	29,282,800	$	26,065	$	2,952	$	23,113

1 Collateral held with respect to derivatives with members represents either collateral physically held by or on our behalf or collateral assigned to us as evidenced by a written security agreement and held by the member for our benefit.

See Note 7 of the Notes to the Financial Statements under Item 1 for additional information on derivative counterparty credit exposure.

Table 40 presents the derivative counterparties that represent five percent or more of net exposure after collateral and their ratings (in the event of a split rating, the lowest rating published by Moody’s or S&P is used) as of September 30, 2011:

Table 40

Counterparty Name	Counterparty Rating	Percent of Net Exposure After Collateral
JPMorgan Chase Bank	Double-A	45.1%
Bank of New York Mellon Corp.	Double-A	21.1
Bank of America NA	Single-A	11.6
Deutsche Bank AG	Single-A	9.9
All other counterparties		12.3

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Table 41 presents the derivative counterparties that represent five percent or more of net exposure after collateral and their ratings (in the event of a split rating the lowest rating published by Moody’s or S&P is used) as of December 31, 2010:

Table 41

Counterparty Name	Counterparty Rating	Percent of Net Exposure After Collateral
JP Morgan Chase Bank	Double-A	54.9%
Bank of America NA	Single-A	12.4
Rabobank International	Triple-A	11.2
UBS AG	Single-A	10.4
Citi Swapco Inc.	Double-A	6.3
All other counterparties		4.8

Liquidity Risk Management: Maintaining the ability to meet our obligations as they come due and to meet the credit needs of our members and housing associates in a timely and cost-efficient manner is our primary objective of managing liquidity risk. We seek to be in a position to meet our customers’ credit and liquidity needs without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs.

Operational liquidity, or the ability to meet operational requirements in the normal course of business, is defined in our RMP as sources of cash from both our ongoing access to the capital markets and our holding of liquid assets. We manage exposure to operational liquidity risk by maintaining appropriate daily average liquidity levels above the thresholds established by our RMP. We are also required to manage liquidity in order to meet statutory and contingency liquidity requirements and Finance Agency liquidity guidelines by maintaining a daily liquidity level above certain thresholds also outlined in the RMP, federal statutes, Finance Agency regulations and other Finance Agency guidance not issued in the form of regulations. We have remained in compliance with each of these liquidity requirements throughout the first nine months of 2011.

We generally maintained stable access to the capital markets throughout the first nine months of 2011. Short-term discount note yields declined and LIBOR spreads on most swapped bond structures improved from the end of 2010. Factors in the third quarter of 2011 driving the decline in discount note rates include, but are not limited to: (1) low supply of competing instruments, including U.S. Treasury bills; (2) increased “flight-to-quality” demand in reaction to international geopolitical events, with Europe being the continuing area of focus in the third quarter of 2011; and (3) continued economic weakness in the United States, particularly in employment and housing economic data. An important factor in the extremely low discount note yields is the strong “flight-to-quality” demand from investors avoiding assets that are perceived to be riskier, particularly short-term investments in European financial institutions.

Because the recent debt ceiling agreement only allows for a $400 billion upfront increase in the debt ceiling, we don’t anticipate an immediate significant increase in Supplementary Financing Program (SFP) bills, a competitor to our discount notes. While the resumption of issuance of U.S. Treasuries following the debt ceiling agreement might marginally reduce demand and increase rates for repurchase agreements and rates on other short-term investments including our discount notes, its impact is not expected to be significant. However, part of the Federal Reserve Bank’s “Operation Twist,” announced at its September 20, 2011 meeting, involves selling a significant amount of U.S. Treasury instruments with shorter remaining terms to maturity. The increase in supply of short-term investment alternatives and collateral available for repurchase agreements might result in higher yields for discount notes. For additional discussion of the overall financial market environment affecting liquidity, see this Item 2 – “Financial Market Trends.”

Certain of our derivative instruments contain provisions that require us to post additional collateral with our counterparties if there is deterioration in our credit rating. The aggregate fair value of all derivative instruments with derivative counterparties containing credit-risk-related contingent features that were classified as net derivative liabilities as of September 30, 2011 was $487.3 million, for which we posted collateral with a fair value of $374.2 million in the normal course of business. On August 8, 2011, S&P lowered the long-term issuer credit ratings and related issue ratings on 10 of the 12 FHLBanks and the senior unsecured debt issues of the FHLBanks to AA+ from AAA (the Federal Home Loan Banks of Chicago and Seattle were already rated AA+ prior to the U.S. sovereign downgrade). If our credit rating had been lowered one level (e.g., from double-A to single-A) prior to or on September 30, 2011, we project that we would have been required to deliver approximately $85.0 million in additional collateral to derivative counterparties. For additional information on credit rating changes, see Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Market Trends.” Our liquidity position subsequent to the downgrade continues to be sufficient to satisfy the additional collateral that is required as a result of the downgrade. We also believe that our liquidity position as of September 30, 2011 was sufficient to satisfy the additional collateral that would be required in the event of an additional downgrade from double-A to single-A if the downgrade was effective at that time, and such amounts would not have any material impact to our financial condition or results of operations.

Impact of Recently Issued Accounting Standards

See Note 2 of the Notes to the Financial Statements included under Item 1 – “Financial Statements” for a discussion of recently issued accounting standards.

Recent Regulatory and Legislative Developments

Dodd-Frank Act. As discussed under Legislation and Regulatory Developments in our 2010 Form 10-K, the Dodd-Frank Act will likely impact our business operations, funding costs, rights, obligations, and/or the environment in which the FHLBanks carry out their liquidity and housing finance missions. Certain regulatory actions during the period covered by this report resulting from the Dodd-Frank Act that may have an important impact on us are summarized below, although the full effect of the Dodd-Frank Act will become known only after the required regulations, studies and reports are issued and finalized.

The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including those utilized by us to hedge our interest rate and other risks. As a result of these requirements, certain derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or new swap execution facilities.

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The Commodity Futures Trading Commission (CFTC) has issued a final rule regarding the process to determine which types of swaps will be subject to mandatory clearing, but has not yet made any such determinations. The CFTC has also proposed a rule setting forth an implementation schedule for effectiveness of its mandatory clearing determinations. Pursuant to this proposed rule, regardless of when the CFTC determines that a type of swap is required to be cleared, such mandatory clearing would not take effect until certain rules being promulgated by the CFTC and the SEC under the Dodd-Frank Act have been finalized. In addition, the proposed rule provides that each time the CFTC determines that a type of swap is required to be cleared, the CFTC would have the option to implement such requirement in three phases. Under another proposed rule, we would be a “category 2 entity” and would therefore have to comply with mandatory clearing requirements for a particular swap during phase 2 (within 180 days of the CFTC’s issuance of such requirements). Based on the CFTC’s proposed implementation schedule and the time periods set forth in the rule for CFTC determinations regarding mandatory clearing, it is not expected that any of our swaps will be required to be cleared until the third quarter of 2012, at the earliest.

Cleared swaps will be subject to initial and variation margin requirements established by the clearinghouse and its clearing members. While clearing swaps may reduce counterparty credit risk, the margin requirements for cleared swaps have the potential of making derivative transactions more costly. In addition, mandatory swap clearing will require us to enter into new relationships and accompanying documentation with clearing members (which we are currently negotiating) and additional documentation with our swap counterparties.

The CFTC has issued a proposed rule requiring that collateral posted by swap customers to a clearinghouse in connection with cleared swaps be legally segregated on a customer-by-customer basis. However, in connection with this proposed rule, the CFTC has left open the possibility that customer collateral would not have to be legally segregated but could instead be commingled with all collateral posted by other customers of our clearing member. Such commingling would put our collateral at risk in the event of a default by another customer of our clearing member. To the extent the CFTC’s final rule places our posted collateral at greater risk of loss in the clearing structure than under the current over-the-counter market structure, we may be adversely impacted.

The Dodd-Frank Act will require swap dealers and certain other large users of derivatives to register as “swap dealers” or “major swap participants,” as the case may be, with the CFTC and/or the SEC. Based on the definitions in the proposed rules jointly issued by the CFTC and SEC, it does not appear likely that we will be required to register as a “major swap participant,” although this remains a possibility. Also, based on the definitions in the proposed rules, it does not appear likely that we will be required to register as a “swap dealer” for the derivative transactions that we enter into with dealer counterparties for the purpose of hedging and managing our interest rate risk, which constitute the great majority of our derivative transactions. However, based on the proposed rules, it is possible that we could be required to register with the CFTC as a swap dealer based on the intermediated “swaps” that we have historically entered into with our members.

It is also unclear how the final rule will treat the call and put optionality in certain advances to our members. The CFTC and SEC have issued joint proposed rules further defining the term “swap” under the Dodd-Frank Act. These proposed rules and accompanying interpretive guidance attempt to clarify what products will and will not be regulated as “swaps.” While it is unlikely that advance transactions between us and our members will be treated as “swaps,” the proposed rules and accompanying interpretive guidance are not entirely clear on this issue. Depending on how the terms “swap” and “swap dealer” are defined in the final regulations, we may be faced with the business decision of whether to continue to offer certain types of advance products and intermediated derivatives activity, or both, to members if those transactions would require us to register as a swap dealer. Designation as a swap dealer would subject us to significant additional regulation and cost including, without limitation, registration with the CFTC, new internal and external business conduct standards, additional reporting requirements, and additional swap-based capital and margin requirements. Even if we are designated as a swap dealer as a result of our advance activities or intermediated derivatives activities, or both, the proposed regulations would permit us to apply to the CFTC to limit such designation to those specified activities for which we are acting as a swap dealer. Upon such designation, our hedging activities would not be subject to the full requirements that will generally be imposed on traditional swap dealers.

The Dodd-Frank Act will also change the regulatory landscape for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While we expect to continue to enter into uncleared trades on a bilateral basis, such trades will be subject to new regulatory requirements, including mandatory reporting, documentation, and minimum margin and capital requirements. Under the proposed margin rules, we will have to post both initial margin and variation margin to our swap dealer counterparties, but may be eligible in both instances for modest unsecured thresholds as “low-risk financial end users.” Pursuant to additional Finance Agency proposals, we would be required to collect both initial margin and variation margin from our swap dealer counterparties, without any unsecured thresholds. These margin requirements and any related capital requirements could adversely impact the liquidity and pricing of certain uncleared derivative transactions entered into by us, making such trades more costly.

The CFTC has proposed a rule setting forth an implementation schedule for the effectiveness of the new margin and documentation requirements for uncleared swaps. Pursuant to the proposed rule, regardless of when the final rules regarding these requirements are issued, such rules would not take effect until: (1) certain other rules being promulgated under the Dodd-Frank Act take effect; and (2) a certain additional time period has elapsed. The length of this additional time period depends on the type of entity entering into the uncleared swaps. We believe we would be a “category 2 entity” and would therefore have to comply with the new requirements during phase 2 (within 180 days of the effectiveness of the final applicable rulemaking). Accordingly, it is not likely that we would have to comply with such requirements until the third quarter of 2012, at the earliest.

While certain provisions of the Dodd-Frank Act took effect on July 16, 2011, the CFTC has issued an order temporarily exempting persons or entities with respect to provisions of Title VII of the Dodd-Frank Act that reference “swap dealer,” “major swap participant,” “eligible contract participant,” and “swap.” These exemptions will expire upon the earlier of: (1) the effective date of the applicable final rule further defining the relevant terms; or (2) December 31, 2011. The CFTC has recently proposed an amendment to this order that would extend the exemptions contained in the existing order until the earlier of: (1) the effective date of the applicable final rules further defining the relevant terms; or (2) July 16, 2012. In addition, the provisions of the Dodd-Frank Act that will have the most effect on us did not take effect on July 16, 2011, but will take effect no less than 60 days after the CFTC publishes final regulations implementing such provisions. The CFTC is expected to publish such final regulations during the fourth quarter of 2011 or the first quarter of 2012, but it is not expected that such final regulations will become effective until the first or second quarter of 2012, and delays beyond that time are possible. In addition, as discussed above, mandatory clearing requirements and new margin and documentation requirements for uncleared swaps may be subject to additional implementation schedules, further delaying the effectiveness of such requirements.

Together with the other FHLBanks, we are actively participating in the regulatory process regarding the Dodd-Frank Act by formally commenting to the regulators regarding a variety of rulemakings that could impact the FHLBanks. We are also working with the other FHLBanks to implement the processes and documentation necessary to comply with the Dodd-Frank Act’s new requirements for derivatives.

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Finance Agency Issues Final Rule on Conservatorship and Receivership. On June 20, 2011, the Finance Agency issued a final rule to establish a framework for conservatorship and receivership operations for the Regulated Entities. The final rule implements section 1367 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act) on Authority Over Critically Undercapitalized Regulated Entities. The final rule includes provisions that describe the basic authorities of the Finance Agency when acting as conservator or receiver, including the enforcement and repudiation of contracts, and also establishes procedures for priorities of claims for contract parties and other claimants. Additionally, the final rule sets forth the authority of limited-life regulated entities and provisions regarding capital distributions while in conservatorship. The final rule became effective on July 20, 2011.

Finance Agency Issues Final Rule on Rules of Practice and Procedure. On August 26, 2011, the Finance Agency issued a final rule to implement the Recovery Act amendments to the Safety and Soundness Act and the Bank Act pertaining to the civil enforcement powers of the Finance Agency, and the Rules of Practice and Procedure for enforcement proceedings. The Safety and Soundness Act authorizes the Finance Agency to initiate enforcement proceedings against the Regulated Entities, and entity-affiliated parties, which include directors, officers and employees of the Regulated Entities. The final rule governs the conduct of Finance Agency administrative hearings on the record for enforcement proceedings as provided in the Safety and Soundness Act, including for cease and desist proceedings, proceedings for civil money penalties and removal and suspension proceedings, and also delineates the specific enforcement authority of the Director of the Finance Agency. The final rule became effective on September 26, 2011.

Federal Banking Agencies Issue Final Rules to Permit Payment of Interest on Demand Deposit Accounts. The Dodd-Frank Act repealed the statutory prohibition against the payment of interest on demand deposits effective July 21, 2011. To conform their regulations to such provision, Federal banking regulators rescinded their regulations prohibiting paying interest on demand deposits effective July 21, 2011.

Financial Stability Oversight Council (FSOC) Issues Second Notice of Proposed Rulemaking on Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies. On January 26, 2011, the FSOC published a proposed rule which would implement section 113 of the Dodd-Frank Act, which gives the FSOC the authority to require that a nonbank financial company be supervised by the Board of Governors of the Federal Reserve System (Board of Governors) and be subject to enhanced prudential standards. In response to comments submitted on the first proposed rule, on October 18, 2011, the FSOC issued a second notice of proposed rulemaking and proposed interpretative guidance to provide: (1) additional details regarding the framework that the FSOC intends to use in the process of assessing whether a nonbank financial company could pose a threat to U.S. financial stability; and (2) further opportunity for public comment on the FSOC’s proposed approach. Under the second proposed rule, the FSOC would establish a three-stage process to assist in the determination of whether an entity should be supervised by the Board of Governors. Under the first stage, the FSOC will identify those U.S. nonbank financial companies that have $50 billon or more of total consolidated assets and exceed any one of five threshold indicators of interconnectedness or susceptibility to material financial distress, including whether the company has $20 billion or more of borrowing outstanding. A company that meets the standards identified in the first stage would proceed to the second stage, where the FSOC would conduct a comprehensive analysis of the potential for the identified nonbank financial companies to pose a threat to U.S. financial stability. Stage three would build on the quantitative and qualitative information provided through the first two stages of the review and the FSOC will determine whether to subject a nonbank financial company to Board of Governors supervision and prudential standards based on the results of the analyses conducted during each stage of the review. Comments on the proposed rulemaking are due by December 19, 2011.

HARP Changes. The Finance Agency, with Fannie Mae and Freddie Mac (the Enterprises), have announced a series of changes to HARP that are intended to assist more eligible borrowers who can benefit from refinancing their home mortgages. The changes include: (1) lowering or eliminating certain risk-based fees; (2) removing the current 125 percent LTV ceiling on fixed rate mortgages that are purchased by the Enterprises; (3) waiving certain representations and warranties (4) eliminating the need for a new property appraisal where there is a reliable automated valuation model estimate provided by the Enterprises; and (5) extending the end date for the program until December 31, 2013 for loans originally sold to the Enterprises on or before May 31, 2009. If HARP Program changes result in a significant number of prepayments on mortgage loans underlying our investments in Agency MBS, such investments will be paid off in advance of our expectations subjecting us to associated reinvestment risk.

Financial Crimes Enforcement Network (FinCEN) Issues Notice of Proposed Rulemaking on Anti-Money Laundering and Suspicious Activity Reporting Requirements for Housing GSEs. On November 8, 2011, FinCEN, a bureau of the Department of the Treasury, issued a proposed rule defining certain Housing GSEs, including the FHLBanks, as financial institutions for the purpose of requiring Housing GSEs to establish anti-money laundering programs and report suspicious activities pursuant to the Bank Secrecy Act (BSA). As amended by the USA PATRIOT Act, the BSA requires financial institutions to establish anti-money laundering programs that include, at a minimum: (1) the development of internal policies, procedures, and controls; (2) the designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test programs. The proposed rule would require that each Housing GSE develop and implement an anti-money laundering program reasonably designed to prevent the Housing GSE from being used to facilitate money laundering or the financing of terrorist activities, and other financial crimes, including mortgage fraud. The proposed rule would also require the Housing GSEs to file suspicious activity reports directly with FinCEN in the event certain suspicious transactions are conducted or attempted by, at, or through a Housing GSE. The Housing GSEs are currently subject to Finance Agency regulations and guidance on the Reporting of Fraudulent Financial Instruments. Should FinCEN issue a final rule imposing anti-money laundering and suspicious activity report requirements on the Housing GSEs, the Finance Agency may amend the regulations and/or guidance to avoid any conflicts or duplicative requirements with FinCEN’s regulations. Comments on the proposed rulemaking are due by January 9, 2012.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management

We measure interest rate risk exposure by various methods, including the calculation of DOE and market value of equity (MVE) in different interest rate scenarios.

Duration of Equity: DOE aggregates the estimated sensitivity of market value for each of our financial assets and liabilities to changes in interest rates. In essence, DOE indicates the sensitivity of theoretical MVE to changes in interest rates. However, MVE should not be considered indicative of our market value as a going concern or our value in a liquidation scenario. A positive DOE results when the duration of assets and designated derivatives is greater than the duration of liabilities and designated derivatives. A positive DOE generally indicates a degree of interest rate risk exposure in a rising interest rate environment, and a negative DOE indicates a degree of interest rate risk exposure in a declining interest rate environment. Higher DOE numbers, whether positive or negative, indicate greater volatility of MVE in response to changing interest rates. That is, if we have a DOE of 3.0, a 100 basis point (one percent) increase in interest rates would cause our MVE to decline by approximately three percent whereas a 100 basis point decrease in interest rates would cause our MVE to increase by approximately three percent. However, it should be noted that a decline in MVE does not translate directly into a decline in near-term income, especially for entities that do not trade financial instruments. Changes in market value may indicate trends in income over longer periods, and knowing our sensitivity of market value to changes in interest rates provides a measure of the interest rate risk we take.

Under the RMP approved by our Board of Directors, our DOE is generally limited to a range of ±5.0 assuming current interest rates. In addition, our DOE is generally limited to a range of ±7.0 assuming an instantaneous parallel increase or decrease in interest rates of 200 bps. During periods of extremely low interest rates, such as those experienced over the past several years, the Finance Agency requires that FHLBanks employ a constrained down shock analysis to limit the evolution of forward interest rates to positive non-zero values. Since our market risk model imposes a zero boundary on post-shock interest rates, no additional calculations are necessary in order to meet this Finance Agency requirement.

The DOE parameters established by our Board of Directors represent one way to establish general limits on the amount of interest rate risk that we find acceptable. If our DOE exceeds the policy limits established by the Board of Directors, we either: (1) take asset/liability actions to bring the DOE back within the range established in our RMP; or (2) review and discuss potential asset/liability management actions with the Board of Directors at the next regularly scheduled meeting that could bring the DOE back within the ranges established in the RMP and ascertain a course of action, which can include a determination that no asset/liability management actions are necessary. A determination that no asset/liability management actions are necessary can be made only if the Board of Directors agrees with management’s recommendations. Even though all of our DOE measurements were inside Board of Director established operating ranges as of September 30, 2011, we continue to actively monitor portfolio relationships and overall DOE dynamics as a part of our ongoing evaluation processes for determining acceptable future asset/liability management actions.

We typically maintain a DOE within the above ranges through management of the durations of assets, liabilities and derivatives. Significant resources in terms of staffing, software and equipment are continuously devoted to assuring that the level of interest rate risk existing in our balance sheet is properly measured and limited to prudent and reasonable levels. The DOE that management and the Board of Directors consider prudent and reasonable is somewhat lower than the RMP limits mentioned above and can change depending upon market conditions and other factors. As set forth in our Risk Appetite Statement, we typically manage the current base DOE to remain in the range of ±2.5 and DOE in the ±200 basis point interest rate shock scenarios to remain in the range of ±4.0. When DOE exceeds either the limits established by the RMP or the more narrowly-defined ranges to which we manage DOE, corrective actions taken may include: (1) the purchase of interest rate caps, interest rate floors, swaptions or other derivatives; (2) the sale of assets; and/or (3) the addition to the balance sheet of assets or liabilities having characteristics that are such that they counterbalance the excessive duration observed. For example, if DOE has become more positive than desired due to variable rate MBS that have reached cap limits, we may purchase interest rate caps that have the effect of removing those MBS cap limits. We would be short caps in the MBS investments and long caps in the offsetting derivative positions, thus reducing DOE. Further, if an increase in DOE were due to the extension of mortgage loans, MBS or new advances to members, the more appropriate action would be to add new long-term liabilities to the balance sheet to offset the lengthening asset position.

Table 42 presents the DOE in the base case and the up and down 100 and 200 basis point interest rate shock scenarios for recent quarter-end dates:

Table 42

Duration of Equity
Period	Up 200 Bps	Up 100 Bps	Base	Down 100 Bps	Down 200 Bps
09/30/2011	-0.5	-2.7	-0.4	1.1	1.5
06/30/2011	1.3	-0.5	-0.3	1.9	-1.5
03/31/2011	1.8	0.0	-1.0	1.7	-2.9
12/31/2010	1.4	-0.3	-1.7	1.1	-1.0
09/30/2010	-1.4	-2.5	-1.8	-0.6	0.3

The DOE as of September 30, 2011 decreased in the base and up 200 basis point scenarios (became more negative) and increased in the down 200 basis point instantaneous shock scenario from June 30, 2011. All DOE results continue to remain inside or at our operating range of ±2.5 in the base scenario and ±4.0 in the ±200 basis point interest rate shock scenarios. The primary factors contributing to the changes in duration during the third quarter were the continued growth in the MPF portfolio, an increase in the projected prepayments of the MPF portfolio and actions taken by management, primarily the continued issuance of callable consolidated obligation bonds with short lock-out periods.

The continued growth in the MPF portfolio during the third quarter of 2011, as discussed in Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – MPF Program,” typically results in an absolute lengthening of the duration profile of assets since new production loans generally have a longer duration than existing/refinanced assets and typically provide a net positive duration impact for the portfolio. Also, as discussed in Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Advances,” the overall balance of advances during the period again experienced a steady decline, also contributing to the MPF portfolio becoming a larger portion of the balance sheet and generating a magnification of the MPF portfolio lengthening. This magnification occurs when a portfolio weighting as a percent of the overall balance changes based on changes in other portfolios, causing the remaining portfolios to be a larger component of the overall total. In this case, when advances decline, the MPF portfolio effectively increases as a total proportion of total assets, causing the duration of the MPF portfolio to contribute more impact to the overall DOE.

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However, as discussed in Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Market Trends,” the decline and general flattening in the term structure of interest rates significantly impacted the duration profile of the MPF portfolio during the third quarter of 2011. During the period, as interest rates generally declined, prepayment speeds for the MPF portfolio tended to increase as lower rates typically imply a prepayment incentive for outstanding mortgage loans. This increased prepayment incentive translates to more robust refinancing activity leading to a shortening of the overall asset class expected life and duration profile.

To effectively manage the continued growth of the MPF portfolio and related sensitivity to changes in market conditions, a continued issuance of unswapped callable consolidated obligation bonds with shorter lock-out characteristics, as well as a continued issuance of discount notes was sustained to provide adequate liquidity sources to appropriately address potential customer advance and capital stock activity. Further discussion of calling and re-issuing unswapped callable bond in relation to mortgage portfolios is discussed below, as well as found in Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Consolidated Obligations.”

With respect to the down 200 basis point instantaneous shock scenario, the sensitivities of both the assets and liabilities are impacted to a large extent by the absolute level of rates and the zero boundary methodology as discussed above. Since the absolute level of interest rates are at or near historic lows, an instantaneous parallel shock of down 200 bps will effectively produce a flattened term structure of interest rates near zero. This flattened term structure will produce slight, if any, variations in valuations, which generate near zero duration results. These near zero duration results should be viewed in the context of the broader risk profile of the base and up 200 basis point interest rate shock scenarios to establish a sufficient vantage point for helping discern the overall sensitivity of the balance sheet and of DOE. The net DOE increase in the down 200 basis point instantaneous shock scenario is generally a function of the compositional changes in the balance sheet as mentioned above and to the relative level of the term structure of interest rates. As with all scenario changes, the impact from various sensitivities were expected and discussed during our regular risk profile review process.

Our purchases of interest rate caps and floors tend to partially offset the negative convexity of mortgage assets and the effects of the interest rate caps embedded in the Agency variable rate MBS/CMOs. As expected, these interest rate caps are a satisfactory interest rate risk hedge and provide an offsetting risk response to the risk profile changes in the Agency variable rate CMOs. Convexity is the measure of the exponential change in prices for a given change in interest rates; or more simply stated, it measures the rate of change in duration as interest rates change. When an instrument is negatively convex, price increases as interest rates decline. When an instrument’s convexity profile decreases, it simply demonstrates that the duration profile is flattening or that the duration is changing at an increasingly slower rate. When an instrument’s convexity profile increases, the duration profile is steepening and is decreasing in price at an increasingly faster rate. Duration is a measure of the relative risk of a financial instrument, and the more rapidly duration changes as interest rates change, the riskier the instrument. MBS/CMOs have negative convexity as a result of the embedded caps and prepayment options. All of our mortgage loans are fixed rate, so they have negative convexity only as a result of the prepayment options. We seek to mitigate this negative convexity with purchased options that have positive convexity and callable liabilities that have negative convexity, which offset some or all of the negative convexity risk in our assets. While changes in current capital market conditions make it challenging to manage our market risk position, we continue to take measured asset/liability actions to stay within established policy limits.

When comparing September 30, 2010 to September 30, 2011, the duration profile shifted in large part from the changes mentioned above, as well as the behavior of the balance sheet as the term structure of interest rates declined and as assets and associated capital levels declined during the period. These declines caused the respective portfolio equity-based weightings to shift, leading to an equity compositional reallocation, similar to the previously mentioned MPF portfolio shift.

In calculating DOE, we also calculate our duration gap, which is the difference between the duration of our assets and the duration of our liabilities. Our base duration gap was –0.2 months and -1.0 month as of September 30, 2011 and December 31, 2010, respectively. Again, the slight increase (became less negative) in duration gap during the nine months of 2011 was primarily the result of the changes in the MPF portfolio and the funding decisions made by management in response to the declining interest rate environment as discussed previously. All 12 FHLBanks are required to submit this base duration gap number to the Office of Finance as part of the quarterly reporting process created by the Finance Agency.

Matching the duration of assets with the duration of liabilities funding those assets is accomplished through the use of different debt maturities and embedded option characteristics, as well as the use of derivatives, primarily interest rate swaps, caps, floors and swaptions as discussed above. Interest rate swaps increase the flexibility of our funding alternatives by providing desirable cash flows or characteristics that might not be as readily available or cost-effective if obtained in the standard GSE debt market. Finance Agency regulation prohibits the speculative use of derivatives, and we do not engage in derivatives trading for short-term profit. Because we do not engage in the speculative use of derivatives through trading or other activities, the primary risk posed by derivative transactions is credit risk in that a counterparty may fail to meet its contractual obligations on a transaction and thereby force us to replace the derivative at market price (see Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk Management” for additional information).

Another element of interest rate risk management is the funding of mortgage loans and prepayable assets with liabilities that have similar duration or average cash flow patterns over time. To achieve the desired liability durations, we issue debt across a broad spectrum of final maturities. Because the durations of mortgage loans and other prepayable assets change as interest rates change, callable consolidated obligation bonds with similar duration characteristics are frequently issued. The duration of callable bonds shortens when interest rates decrease and lengthens when interest rates increase, allowing the duration of the debt to better match the typical duration of mortgage loans and other prepayable assets as interest rates change. In addition to actively monitoring this relationship, the funding and hedging profile and process are continually measured and reevaluated. We also use purchased interest rate caps, floors and swaptions to manage the duration of assets and liabilities. For example, in rising interest rate environments, we may purchase out-of-the-money caps to help manage the duration extension of mortgage assets, especially variable rate MBS/CMOs with periodic and lifetime embedded interest rate caps. We may also purchase receive-fixed or pay-fixed swaptions (options to enter into receive-fixed rate or pay-fixed rate interest rate swaps) to manage our overall DOE in falling or rising interest rate environments, respectively. During times of falling interest rates, when mortgage assets are prepaying quickly and shortening in duration, we may also synthetically convert fixed rate debt to variable rate using interest rate swaps in order to shorten the duration of our liabilities to more closely match the shortening duration of mortgage assets. As we need to lengthen the liability duration, we terminate selected interest rate swaps to effectively extend the duration of the previously swapped debt.

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Market Value of Equity: MVE is the net value of our assets and liabilities. Estimating sensitivity of MVE to changes in interest rates is another measure of interest rate risk. We generally maintain a MVE within limits specified by the Board of Directors in the RMP. The RMP measures our market value risk in terms of the MVE in relation to total regulatory capital stock outstanding (TRCS). TRCS includes all capital stock outstanding, including stock subject to mandatory redemption. As a cooperative, we believe using the TRCS is a reasonable measure because it reflects our market value relative to the book value of our capital stock. Our RMP stipulates that MVE shall not be less than: (1) 90 percent of TRCS under the base case scenario; and (2) 85 percent of TRCS under a ±200 basis point instantaneous parallel shock in interest rates. Table 43 presents MVE as a percent of TRCS for recent quarter-end reporting periods. As of September 30, 2011, all scenarios are well within the specified limits as described above and much of the relative level in the ratios during the period covered by the table can be attributed to the sustained increase in MBS market values and a decrease in capital levels.

Table 43

Market Value of Equity as a Percent of Total Regulatory Capital Stock
Date	Up 200 Bps	Up 100 Bps	Base	Down 100 Bps	Down 200 Bps
09/30/2011	141	137	132	134	136
06/30/2011	137	138	136	139	137
03/31/2011	135	137	135	135	135
12/31/2010	133	133	132	131	130
09/30/2010	125	122	119	119	118

Detail of Derivative Instruments by Type of Instrument by Type of Risk: We use various types of derivative instruments to mitigate the interest rate risks described in the preceding sections. We currently employ derivative instruments by utilizing them as either a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction; by acting as an intermediary; or in asset/liability management (i.e., an economic hedge). An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities or firm commitments that either does not qualify for hedge accounting, or for which we have not elected hedge accounting, but is an acceptable hedging strategy under our RMP. For all new hedge accounting relationships, we formally assess (both at the hedge’s inception and monthly on an ongoing basis) whether the derivatives used have been highly effective in offsetting changes in the fair values or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. We typically use regression analyses or similar statistical analyses to assess the effectiveness of our hedges receiving hedge accounting. We determine the hedge accounting to be applied when the hedge is entered into by completing detailed documentation, which includes a checklist setting forth criteria that must be met to qualify for hedge accounting.

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Table 44 presents the notional amount and fair value amount (fair value includes net accrued interest receivable or payable on the derivative) for derivative instruments by hedged item, hedging instrument, hedging objective and accounting designation as of September 30, 2011 (in thousands):

Table 44

Hedged Item	Hedging Instrument	Hedging Objective	Accounting Designation	Notional Amount		Fair Value Amount
Advances
Fixed rate non-callable advances	Pay fixed, receive floating interest rate swap	Convert the advance’s fixed rate to a variable rate index	Fair value hedge	$	3,341,828	$	(239,887	)
Fixed rate convertible advances	Pay fixed, receive floating interest rate swap	Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance	Fair value hedge		3,297,757		(361,813	)
Variable rate advances with embedded caps clearly and closely related	Interest rate cap	Offset the interest rate cap embedded in a variable rate advance	Fair value hedge		247,000		(5,104	)
Investments
Fixed rate non-MBS trading investments	Pay fixed, receive floating interest rate swap	Convert the investment’s fixed rate to a variable rate index	Economic hedge		1,111,320		(184,591	)
Adjustable rate MBS with embedded caps	Interest rate cap	Offset the interest rate cap embedded in a variable rate investment	Economic hedge		6,850,533		45,661
Fixed rate private-label MBS	Interest rate floor	Limit duration of equity risk from MBS prepayments in a declining interest rate environment	Economic hedge		200,000		9,174
Mortgage Loans Held for Portfolio
Fixed rate mortgage purchase commitments	Mortgage purchase commitment	Protect against fair value risk	Economic hedge		128,011		850
Consolidated Obligation Discount Notes
Fixed rate non-callable discount notes	Receive fixed, pay floating interest rate swap	Convert the discount note’s fixed rate to a variable rate	Fair value hedge		106,803		(68	)
Consolidated Obligation Bonds
Fixed rate non-callable consolidated obligation bonds	Receive fixed, pay floating interest rate swap	Convert the bond’s fixed rate to a variable rate index	Fair value hedge		4,840,000		264,699
Fixed rate callable consolidated obligation bonds	Receive fixed, pay floating interest rate swap	Convert the bond’s fixed rate to a variable rate index and offset option risk in the bond	Fair value hedge		1,231,000		41,705
Callable step-up or step-down consolidated obligation bonds	Receive float with embedded features, pay floating interest rate swap	Reduce interest rate sensitivity and re-pricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond	Fair value hedge		2,043,000		24,191
Complex consolidated obligation bonds	Receive float with embedded features, pay floating interest rate swap	Reduce interest rate sensitivity and re-pricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond	Fair value hedge		421,000		4,071
Variable rate consolidated obligation bonds	Receive float, pay floating interest rate swap	Reduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate index	Economic hedge		2,120,000		2,144
Intermediary Derivatives
Interest rate swaps executed with members	Pay fixed, receive floating interest rate swap or receive fixed, pay floating interest rate swap	Offset interest rate swaps executed with members by executing interest rate swaps with derivatives counterparties	Economic hedge		90,000		25
Interest rate caps executed with members	Interest rate cap	Offset interest rate caps executed with members by executing interest rate caps with derivatives counterparties	Economic hedge		142,000		0
TOTAL				$	26,170,252	$	(398,943	)

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Table 45 presents the notional amount and fair value amount (fair value includes net accrued interest receivable or payable on the derivative) for derivative instruments by hedged item, hedging instrument, hedging objective and accounting designation as of December 31, 2010 (in thousands):

Table 45

Hedged Item	Hedging Instrument	Hedging Objective	Accounting Designation	Notional Amount		Fair Value Amount
Advances
Fixed rate non-callable advances	Pay fixed, receive floating interest rate swap	Convert the advance’s fixed rate to a variable rate index	Fair value hedge	$	3,460,328	$	(181,429	)
Fixed rate convertible advances	Pay fixed, receive floating interest rate swap	Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance	Fair value hedge		3,952,881		(295,632	)
Variable rate advances with embedded caps clearly and closely related	Interest rate cap	Offset the interest rate cap embedded in a variable rate advance	Fair value hedge		189,000		(1,486	)
Investments
Fixed rate non-MBS trading investments	Pay fixed, receive floating interest rate swap	Convert the investment’s fixed rate to a variable rate index	Economic hedge		1,361,320		(176,166	)
Adjustable rate MBS with embedded caps	Interest rate cap	Offset the interest rate cap embedded in a variable rate investment	Economic hedge		7,175,533		109,076
Fixed rate private-label MBS	Interest rate floor	Limit duration of equity risk in a declining interest rate environment	Economic hedge		300,000		14,823
Mortgage Loans Held for Portfolio
Fixed rate mortgage purchase commitments	Mortgage purchase commitment	Protect against fair value risk	Economic hedge		143,339		(1,233	)
Consolidated Obligation Discount Notes
Fixed rate non-callable discount notes	Receive fixed, pay floating interest rate swap	Convert the discount note’s fixed rate to a variable rate	Fair value hedge		979,899		3,581
Consolidated Obligation Bonds
Fixed rate non-callable consolidated obligation bonds	Receive fixed, pay floating interest rate swap	Convert the bond’s fixed rate to a variable rate index	Fair value hedge		5,275,000		241,432
Fixed rate non-callable consolidated obligation bonds	Receive fixed, pay floating interest rate swap	Convert the bond’s fixed rate to a variable rate index to limit duration of equity risk	Economic hedge		100,000		2,847
Fixed rate callable consolidated obligation bonds	Receive fixed, pay floating interest rate swap	Convert the bond’s fixed rate to a variable rate index and offset option risk in the bond	Fair value hedge		1,050,000		33,651
Callable step-up or step-down consolidated obligation bonds	Receive float with embedded features, pay floating interest rate swap	Reduce interest rate sensitivity and re-pricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond	Fair value hedge		2,773,000		3,609
Complex consolidated obligation bonds	Receive float with embedded features, pay floating interest rate swap	Reduce interest rate sensitivity and re-pricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond	Fair value hedge		220,000		(8,048	)
Variable rate consolidated obligation bonds	Receive float, pay floating interest rate swap	Reduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate index	Economic hedge		2,038,500		(10,095	)
Intermediary Derivatives
Interest rate swaps executed with members	Pay fixed, receive floating interest rate swap or receive fixed, pay floating interest rate swap	Offset interest rate swaps executed with members by executing interest rate swaps with derivatives counterparties	Economic hedge		150,000		50
Interest rate caps executed with members	Interest rate cap	Offset interest rate caps executed with members by executing interest rate caps with derivatives counterparties	Economic hedge		114,000		0
TOTAL				$	29,282,800	$	(265,020	)

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Item 4: Controls and Procedures

Disclosure Controls and Procedures

Management, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Accounting Officer (CAO), conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CAO concluded that, as of the end of the period covered by this report, disclosure controls and procedures were effective in: (1) recording, processing, summarizing and reporting information required to be disclosed in the reports that we file or furnish under the Exchange Act within the time periods specified in the SEC’s rules and forms; and (2) ensuring that information required to be disclosed by the FHLBank in the reports that we file or furnish under the Exchange Act is accumulated and communicated to management, including our CEO and CAO, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the last fiscal quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations. Additionally, management does not believe that we are subject to any material pending legal proceedings outside of ordinary litigation incidental to our business.

Item 1A. Risk Factors

For a discussion of risks applicable to us, see Item 1A – “Risk Factors” in our annual report on Form 10-K filed on March 24, 2011 and in our quarterly report on Form 10-Q for the period ended June 30, 2011, filed on August 11, 2011, incorporated by reference herein.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Reserved and removed)

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.	Description
3.1	Exhibit 3.1 to the FHLBank’s registration statement on Form 10, filed May 15, 2006, and made effective on July 14, 2006 (File No. 000-52004), Federal Home Loan Bank of Topeka Articles and Organization Certificate, is incorporated herein by reference as Exhibit 3.1.
3.2	Exhibit 3.2 to the Current Report on Form 8-K, filed September 23, 2010, Amended and Restated Bylaws, is incorporated herein by reference as Exhibit 3.2.
4.1	Exhibit 99.2 to the Current Report on Form 8-K, filed August 5, 2011, Federal Home Loan Bank of Topeka Capital Plan, is incorporated herein by reference as Exhibit 4.1.
31.1	Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Senior Vice President and Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of President and Chief Executive Officer and Senior Vice President and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from the FHLBank’s quarterly report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Statements of Condition as of September 30, 2011 and December 31, 2010; (ii) Statements of Income for the Three- and Nine-month Periods Ended September 30, 2011 and 2010; (iii) Statements of Capital for the Period Ended September 30, 2011 and 2010; (iv) Statements of Cash Flows for the Nine-month Periods Ended September 30, 2011 and 2010; and (v) Notes to the Financial Statements (Unaudited).1

__________

1 In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 of the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURES

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

	Federal Home Loan Bank of Topeka
Date: November 10, 2011	By: /s/ Andrew J. Jetter
	Andrew J. Jetter
	President and Chief Executive Officer (Principal Executive Officer)
Date: November 10, 2011	By: /s/ Denise L. Cauthon
	Denise L. Cauthon
	Senior Vice President and
	Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer)

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