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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                          TO                           .

Commission file number: 000-51402

FEDERAL HOME LOAN BANK OF BOSTON
(Exact name of registrant as specified in its charter)

Federally chartered corporation (State or other jurisdiction of incorporation or organization)	04-6002575 (I.R.S. Employer Identification Number)
111 Huntington Avenue Boston, Massachusetts (Address of principal executive offices)	02199 (Zip Code)

(617) 292-9600
(Registrant's telephone number, including area code)

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

         Securities registered pursuant to Section 12(g) of the Act:
Class B Stock, par value $100 per share

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         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. Yes ý    No o

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer ý Smaller reporting company o

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

         Registrant's stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. At June 30, 2008 the aggregate par value of the stock held by members of the registrant was $3,473,554,400. As of February 28, 2009, we had 36,868,981outstanding shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

None

Table of Contents

Description
PART I
ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	27
ITEM 1B.	UNRESOLVED STAFF COMMENTS	38
ITEM 2.	PROPERTIES	38
ITEM 3.	LEGAL PROCEEDINGS	39
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	39
PART II
ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	41
ITEM 6.	SELECTED FINANCIAL DATA	43
ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	44
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	115
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	147
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	148
ITEM 9A.	CONTROLS AND PROCEDURES	148
ITEM 9B.	OTHER INFORMATION	149
PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	149
ITEM 11.	EXECUTIVE COMPENSATION	158
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	175
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	178
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	180
PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	181

PART I

ITEM 1.    BUSINESS

General

        The Federal Home Loan Bank of Boston (the Bank) is a federally chartered corporation organized by Congress in 1932 and is a government-sponsored enterprise (GSE). The Bank is privately capitalized and its mission is to serve the residential-mortgage and community-development lending activities of its member institutions and housing associates located in the New England region. Altogether, there are 12 district Federal Home Loan Banks (FHLBanks) located across the United States (U.S.), each supporting the lending activities of member financial institutions within their specific regions. Each FHLBank is a separate entity with its own board of directors, management, and employees.

        Unless otherwise indicated or unless the context requires otherwise, all references in this discussion to "the Bank," "we," "us," "our" or similar references mean the Federal Home Loan Bank of Boston.

        The Bank combines private capital and public sponsorship that enables its member institutions and housing associates to assure the flow of credit and other services for housing and community development. The Bank serves the public through its member institutions and housing associates by providing these institutions with a readily available, low-cost source of funds, thereby enhancing the availability of residential-mortgage and community-investment credit. In addition, the Bank provides members a means of liquidity through a mortgage-purchase program. Under this program, members are offered the opportunity to originate mortgage loans for sale to the Bank. The Bank's primary source of income is derived from the spread between interest-earning assets and interest-bearing liabilities. The Bank borrows funds at favorable rates due to its GSE status.

        The Bank's members and housing associates are comprised of institutions located throughout the New England region. The region is comprised of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. Institutions eligible for membership include thrift institutions (savings banks, savings and loan associations, and cooperative banks), commercial banks, credit unions, and insurance companies that are active in housing finance. The Bank is also authorized to lend to certain nonmember institutions (called housing associates) such as state housing-finance agencies located in New England. Members are required to purchase and hold the Bank's capital stock for advances and certain other activities transacted with the Bank. The par value of the Bank's capital stock is $100 and is not publicly traded on any stock exchange. In addition, the U.S. government guarantees neither the member's investment in nor any dividend on the Bank's stock. The Bank is capitalized by the capital stock purchased by its members and by retained earnings. Members may receive dividends, which are determined by the Bank's board of directors, and may redeem their capital stock at par value after satisfying certain requirements discussed further in the Capital section in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The Federal Housing Finance Board (Finance Board), an independent agency in the executive branch of the U.S. government, supervised and regulated the FHLBanks through July 29, 2008. With the passage of the Housing and Economic Recovery Act of 2008 (HERA), the newly-established, independent Federal Housing Finance Agency (Finance Agency) became the new regulator of the FHLBanks, effective July 30, 2008. All existing regulations, orders, and decisions of the Finance Board remain in effect until modified or superseded. The Finance Board will be abolished one year after the date of enactment of HERA.

        The Office of Finance was established by the Finance Board to facilitate the issuing and servicing of consolidated obligations (COs) of the FHLBanks. These COs are issued on a joint basis. The FHLBanks, through the Office of Finance as their agent, are the issuers of COs for which they are jointly and severally liable. The Office of Finance also provides the FHLBanks with credit and market

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data and maintains the FHLBanks' joint relationships with credit-rating agencies. The Office of Finance manages the Resolution Funding Corporation (REFCorp) and Financing Corporation programs.

Available Information

        The Bank's web site (www.fhlbboston.com) provides a link to the section of the Electronic Data Gathering and Reporting (EDGAR) web site, as maintained by the Securities and Exchange Commission (SEC), containing all reports electronically filed, or furnished, including the Bank's annual report on Form 10-K, the Bank's quarterly reports on Form 10-Q, and current reports on Form 8-K as well as any amendments. These reports are made available free of charge on the Bank's web site as soon as reasonably practicable after electronically filing or being furnished to the SEC. These reports may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Further information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. In addition, the SEC maintains a web site that contains reports and other information regarding the Bank's electronic filings located at (http://www.sec.gov). The web site addresses of the SEC and the Bank have been included as inactive textual references only. Information on those web sites is not part of this report.

Employees

        As of February 28, 2009, the Bank had 206 full-time and two part-time employees.

Membership

        The Bank's members are financial institutions with their principal places of business located in the six New England states. The following table summarizes the Bank's membership, by type of institution, as of December 31, 2008, 2007, and 2006.

Membership Summary
Number of Members by Institution Type

	December 31,
	2008		2007		2006
Commercial banks		72		77		86
Thrift institutions		225		225		234
Credit unions		145		142		134
Insurance companies		19		13		11
Total members		461		457		465

        As of December 31, 2008, 2007, and 2006, approximately 80.3 percent, 77.2 percent, and 78.3 percent, respectively, of the Bank's members had outstanding advances from the Bank. These usage rates are calculated excluding housing associates and nonmember borrowers. While eligible to borrow, housing associates are not members of the Bank and, as such, are not required to hold capital stock. Nonmember borrowers consist of institutions that are former members or that have acquired former members and assumed the advances held by those former members. Nonmember borrowers are required to hold capital stock to support outstanding advances with the Bank until those advances either mature or are paid off, at which time the nonmember borrower's affiliation with the Bank is terminated. In addition, nonmember borrowers are required to deliver all required collateral to the Bank or the Bank's safekeeping agent until all outstanding advances either mature or are paid off. During the period that the advances remain outstanding, nonmember borrowers may not request new advances and are not permitted to extend or renew the assumed advances.

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        The Bank's membership includes the majority of Federal Deposit Insurance Company (FDIC)-insured institutions and large credit unions in its district that are eligible to become members. The Bank does not anticipate that a substantial number of additional FDIC-insured institutions will become members. Most other eligible nonmembers, such as insurance companies and smaller credit unions, have thus far elected not to join the Bank.

        The Bank is managed with the primary objectives of enhancing the value of membership for member institutions and fulfilling its public purpose. The value of membership includes access to readily available credit from the Bank, the value of the cost differential between Bank advances and other potential sources of funds, and the dividends paid on members' investment in the Bank's capital stock.

        Community Financial Institutions (CFIs) are defined in HERA as those institutions that have, as of the date of the transaction at issue, less than $1.0 billion in average total assets over the three years preceding that date (subject to annual adjustment by the Finance Agency director based on the consumer price index). CFIs are eligible, under expanded statutory collateral rules, to pledge as collateral for advances small business, small farm, and small agriculture loans fully secured by collateral other than real estate, or securities representing a whole interest in such secured loans. HERA also adds secured loans for community development activities as a permitted purpose, and as eligible collateral, for advances to CFIs.

Business Segments

        The Bank has identified two main operating business segments: traditional business activities and mortgage-loan finance, which are further described below. The products and services provided reflect the manner in which financial information is evaluated by management. Refer to Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 17—Segment Information for additional financial information related to the Bank's business segments.

Traditional Business Activities

        The Bank's traditional business segment includes products such as advances and investments and their related funding. Income from this segment is derived primarily from the difference, or spread, between the yield on advances and investments and the borrowing and hedging costs related to those assets. Capital is allocated to the segments based upon asset size.

        Advances.    The Bank serves as a source of liquidity and makes loans, called advances, to its members and eligible housing associates on the security of mortgages and other collateral that members pledge. The Bank had 370 members, four eligible housing associates, and four nonmember institutions with advances outstanding as of December 31, 2008.

        The Bank establishes either a blanket lien on all financial assets of the member that may be eligible to be pledged as collateral or, for insurance company members in some instances and subject to the Bank's receipt of additional safeguards from such a member, a specific lien on assets specifically pledged as collateral to the Bank to secure outstanding advances. The Bank also reserves the right to require either specific listing of eligible collateral or specific delivery of eligible collateral to secure a member's outstanding advances obligations. All advances, at the time of issuance, must be secured by eligible collateral. Eligible collateral for Bank advances includes: fully disbursed whole first mortgage loans on improved residential real estate; debt instruments issued or guaranteed by the U.S. or any agency thereof; mortgage-backed securities (MBS) issued or guaranteed by the U.S. or any agency thereof; certain private-label MBS representing an interest in whole first mortgage loans on improved residential real estate; and cash on deposit at the Bank that is specifically pledged to the Bank as collateral. The Bank also accepts secured small-business, small agri-business, and small-farm loans from member CFIs. In certain circumstances, other real-estate-related collateral may be considered by the

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Bank. Such real-estate-related collateral must have a readily ascertainable value, and the Bank must be able to perfect a security interest in it. In accordance with Finance Agency regulations, the Bank accepts home-equity loans, home-equity lines of credit, and first mortgage loans on commercial real estate as well as other real-estate-related collateral. The Bank applies a collateral discount to all eligible collateral, based on the Bank's analysis of the risk factors inherent in the collateral. The Bank reserves the right, in its sole discretion, to refuse certain collateral, or to adjust collateral discounts applied. Qualified loan collateral must not have been in default within the most recent 12-month period, except that whole first-mortgage collateral on one- to four-family residential property is acceptable collateral provided that no payment is overdue by more than 45 days. In addition, mortgages and other loans are considered qualified collateral, regardless of delinquency status, to the extent that the mortgages or loans are insured or guaranteed by the U.S. or any agency thereof. The Bank's collateral policy complies with all applicable regulatory requirements.

        All parties that pledge collateral to the Bank are required to execute a representations and warranties document with respect to any mortgage loans and MBS pledged as collateral to the Bank. This document requires the pledging party to certify to knowledge of the Bank's anti-predatory lending policies, and to their compliance with those policies. In the event that any loan in a collateral pool or MBS that is pledged as collateral is (1) found not to comply in all material respects with applicable local, state, and federal laws, or (2) not accepted as qualified collateral as defined by the Bank, the pledging party must immediately remove said loan or MBS and replace it with qualified collateral of equivalent value. The pledging party also agrees to indemnify and hold the Bank harmless for any and all claims of any kind relating to the loans and MBS pledged to the Bank as collateral.

        Insurance company members may borrow from the Bank pursuant to a structure that either uses the Bank's ordinary advance agreements or a funding agreement. From the Bank's perspective, advances provided pursuant to funding agreements are generally treated in the same manner as advances under the Bank's ordinary advances agreement. As of December 31, 2008, the Bank had approximately $525.0 million of advances outstanding to Metlife Insurance Company of Connecticut pursuant to a funding agreement structure.

        Members that have an approved line of credit with the Bank may from time to time overdraw their demand-deposit account. These overdrawn demand-deposit accounts are reported as advances in the statements of condition. These line of credit advances are fully secured by eligible collateral pledged by the member to the Bank. In cases where the member overdraws its demand-deposit account by an amount that exceeds its approved line of credit, the Bank may assess a penalty fee to the member.

        In addition to member institutions, the Bank is permitted under the Federal Home Loan Bank Act of 1932 (FHLBank Act) to make advances to eligible housing associates that are approved mortgagees under Title II of the National Housing Act. These eligible housing associates must be chartered under law and have succession, be subject to inspection and supervision by a governmental agency, and lend their own funds as their principal activity in the mortgage field. Housing associates are not subject to capital-stock-purchase requirements; however, they are subject to the same underwriting standards as members, but may be more limited in the forms of collateral that they may pledge to secure advances.

        Advances support the Bank's members' and housing associates' short-term and long-term borrowing needs, including their liquidity and funding requirements as well as funding mortgage loans and other assets retained in their portfolios. Advances may also be used to provide funds to any member CFIs. Because members may originate loans that they are unwilling or unable to sell in the secondary mortgage market, the Bank's advances can serve as a funding source for a variety of conforming and nonconforming mortgages. Thus, advances support important housing markets, including those focused on low- and moderate-income households. For those members and housing associates that choose to sell or securitize their mortgages, the Bank's advances can provide interim funding.

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        Additionally, the Bank's advances can provide funding to smaller members that lack diverse funding sources. Smaller members often do not have access to many of the funding alternatives available to larger financial entities. The Bank gives these smaller members access to competitively priced wholesale funding.

        Through a variety of specialized advance programs, the Bank provides funding for targeted initiatives that meet defined criteria for providing assistance either to very low- or moderate-income households or for economic development of areas that are economically disadvantaged. As such, these programs help members meet their Community Reinvestment Act (CRA) responsibilities. Through programs such as the Affordable Housing Program (AHP) and the Community Development advance (CDA), members have access to subsidized and other low-cost funding to create affordable rental and homeownership opportunities, and for commercial and economic-development activities that benefit low- and moderate-income neighborhoods, thus contributing to the revitalization of these communities.

        The Bank's advances products can also help members in their asset-liability management. The Bank offers advances that members can use to match the cash-flow patterns of their mortgage loans. Such advances can reduce a member's interest-rate risk associated with holding long-term, fixed-rate mortgages. Principal repayment terms may be structured as 1) interest-only to maturity (sometimes referred to as bullet advances) or to an optional early termination date (see putable and callable advances as described below) or 2) as amortizing advances, which are fixed-rate and term structures with equal monthly payments of interest and principal. Repayment terms are offered up to 20 years. Amortizing advances are also offered with partial principal repayment and a balloon payment at maturity. At December 31, 2008, the Bank held $2.6 billion in amortizing advances.

        Advances with original fixed maturities of greater than six months may be prepaid at any time, subject to a prepayment fee that makes the Bank economically indifferent to the member's decision to prepay the advance. Certain advances contain provisions that allow the member to receive a prepayment fee in the event that interest rates have increased. Advances with original maturities of six months or less may not be prepaid. Adjustable-rate advances are prepayable at rate-reset dates with a fee equal to the present value of a predetermined spread for the remaining life of the advance, or without a fee. The formulas for the calculation of prepayment fees for the Bank's advances products are included in the advance application for each product. The formulas are standard for each product and apply to all members.

        The Bank's advances program includes products with embedded caps and floors, amortizing advances, callable advances, and putable advances where the Bank holds the option to cancel without fee.

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Putable advances are intermediate- and long-term advances for which the Bank holds the option to cancel the advance on certain specified dates after an initial lockout period. Putable advances are offered with fixed rates, with an adjustable rate to the first put date, or with a capped floating rate. Members may also choose a structure that will be terminated automatically if the London Interbank Offered Rate (LIBOR) hits or exceeds a predetermined strike rate on specified dates. At December 31, 2008, the Bank held $9.3 billion in putable advances.

•

LIBOR-indexed collared floating-rate advances adjust monthly or quarterly and are capped and floored at strike levels chosen by the member. At December 31, 2008, the Bank had no outstanding collared floating-rate advances.

•

LIBOR-indexed capped floating-rate advances adjust monthly or quarterly and are capped at a strike level chosen by the member. At December 31, 2008, the Bank held $20.0 million in outstanding capped floating-rate advances.

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•

Callable advances are fixed-rate and term structures that include a provision whereby the member may prepay the advance prior to maturity on certain specified call dates without fee. At December 31, 2008, the Bank held $5.5 million in callable advances.

•

Symmetrical prepayment-fee advances allow the member to receive a fee when prepaying an advance in a rising interest-rate environment. At December 31, 2008, the Bank held $58.0 million in outstanding symmetrical prepayment-fee advances.

•

Slider advances are floating-rate advances with a defined strike rate, below which the advance's rate changes at twice the rate at which its LIBOR index changes (to a minimum rate of zero). At December 31, 2008, the Bank held $15.5 million in outstanding Slider advances.

        Advances that have embedded options and advances with coupon structures containing derivatives are usually hedged in order to offset the embedded derivative feature. See the Interest-Rate-Exchange Agreements discussion below for additional information.

        Because advances are a wholesale funding source for the Bank's members that must be competitively priced relative to other potential sources of wholesale funds to the Bank's members, and because they are fully secured and possess very little credit risk, advances are priced at profit margins that are much smaller than those realized by most banking institutions. By regulation, the Bank may not price advances at rates that are less than the Bank's cost of funds for the same maturity, inclusive of the cost of hedging any embedded call or put options in the advance.

        Investments.    The Bank maintains a portfolio of investments for liquidity purposes and to provide additional earnings. To better meet potential member credit needs at times when access to the CO debt market is unavailable (either due to requests that follow the end of daily debt issuance activities or due to a market disruption event impacting CO issuance), the Bank maintains a portfolio of short-term investments issued by highly rated institutions, including overnight federal funds, term federal funds, interest-bearing certificates of deposits, and securities purchased under agreements to resell (secured by securities that have the highest rating from a nationally recognized statistical-rating organization (NRSRO)). The Bank endeavors to enhance interest income and further support its contingent liquidity needs and mission by maintaining a longer-term investment portfolio, which includes debentures issued by U.S. government agencies and instrumentalities, supranational banks, MBS, and asset-backed securities (ABS) that are issued either by GSE mortgage agencies or by other private-sector entities provided that they carried the highest ratings from an NRSRO as of the date of purchase. The Bank's ABS holdings are limited to securities backed by loans secured by real estate. The Bank has also purchased bonds issued by housing-finance agencies that have at least the second-highest generic rating from an NRSRO as of the date of purchase. The long-term investment portfolio is intended to provide the Bank with higher returns than those available in the short-term money markets.

        Under Finance Agency regulations, the Bank is prohibited from investing in certain types of securities, including:

•

instruments, such as common stock, that represent ownership in an entity, other than stock in small-business investment companies, or certain investments targeted to low-income persons or communities;

•

instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks;

•

non-investment-grade debt instruments, other than certain investments targeted to low-income persons or communities and instruments that were downgraded after purchase by the Bank;

•

non-U.S. dollar-denominated securities; and

•

whole mortgages or other whole loans, or other interests in mortgages or loans, other than 1) those acquired under the Bank's mortgage-purchase program; 2) certain investments targeted

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to low-income persons or communities; 3) certain marketable direct obligations of state, local, or tribal-government units or agencies, having at least the second-highest credit rating from an NRSRO; 4) MBS or ABS backed by manufactured-housing loans or home-equity loans; and 5) certain foreign housing loans authorized under Section 12(b) of the FHLBank Act.

        The Finance Agency's requirements limit the Bank's investment in MBS and ABS to 300 percent of the Bank's previous monthend capital on the day it purchases the securities. In addition, the Bank is prohibited from purchasing:

•

interest-only or principal-only stripped MBS;

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residual-interest or interest-accrual classes of collateralized mortgage obligations and real-estate mortgage-investment conduits; or

•

fixed-rate MBS or floating-rate MBS that on the trade date are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest-rate change of plus or minus 300 basis points.

        On March 24, 2008, the board of directors of the Finance Board passed a resolution that authorizes each FHLBank to temporarily invest up to an additional 300 percent of its total capital in agency mortgage securities. The resolution requires, among other things, that the FHLBank notify the Finance Agency prior to its first acquisition under the expanded authority and include in its notification a description of the risk-management practices underlying its purchases. The expanded authority is limited to MBS issued by, or backed by pools of mortgages guaranteed by, The Federal National Mortgage Association (Fannie Mae) or The Federal Home Loan Mortgage Corporation (Freddie Mac), including collateralized mortgage obligations or real estate mortgage-investment conduits backed by such MBS. The mortgage loans underlying any securities that are purchased under this expanded authority must be originated after January 1, 2008, and underwritten to conform to standards imposed by the federal banking agencies in the Interagency Guidance on Nontraditional Mortgage Product Risks, dated October 4, 2006, and the Statement on Subprime Mortgage Lending, dated July 10, 2007. On July 18, 2008, the board of directors of the Bank authorized the Bank to invest up to an additional 100 percent of its capital in agency MBS pursuant to the Finance Agency's resolution. At this time the Bank does not intend to use this expanded authority.

        Other Banking Activities.    The Bank offers standby letters of credit (LOC), which are financial instruments issued by the Bank at the request of a member, promising payment to a third party (beneficiary) on behalf of a member. The Bank agrees to honor drafts or other payment demands made by the beneficiary in the event the member cannot fulfill its obligations. In guaranteeing the obligations of the member, the Bank assists the member in facilitating its transaction with the beneficiary and receives a fee in return. The Bank evaluates a member for eligibility, collateral requirements, limits on maturity, and other credit standards required by the Bank before entering into any LOC transactions. Members must fully collateralize LOCs to the same extent that they are required to collateralize advances. The Bank may also issue LOCs on behalf of housing associates such as state and local housing agencies upon approval by the Bank. For the years ended December 31, 2008 and 2007, the fee income earned in connection with the issuance of LOC totaled $2.0 million and $2.3 million, respectively. During those two years, the Bank did not make any payment to any beneficiary to satisfy its obligation for the guarantee.

        The Bank enters into standby bond-purchase agreements with state-housing authorities whereby the Bank, for a fee, agrees to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the Bank to purchase the bond. Each of the outstanding bond-purchase commitments entered into by the Bank expires either three or five years following the start of the commitment. For

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the years ended December 31, 2008 and 2007, the fee income earned in connection with standby bond-purchase agreements totaled $759,000 and $536,000, respectively.

        The Bank provides correspondent services, such as the purchase, sale, and safekeeping of securities on behalf of and solely at the direction of its members.

Mortgage-Loan Finance

Introduction

        The Bank invests or facilitates investments by Fannie Mae in mortgage loans through the Mortgage Partnership Finance®(MPF®) program, which is a secondary mortgage market structure under which the Bank either purchases or facilitates Fannie Mae's purchase of eligible mortgage loans from participating financial institution members (PFIs) (collectively, MPF loans). MPF loans are conforming conventional and government mortgage loans that are 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), or the Department of Housing and Urban Development (HUD) fixed-rate mortgage loans secured by one- to-four family residential properties with maturities ranging from five years to 30 years or participations in such mortgage loans. MPF loans that are government loans are called MPF Government loans.

        The Bank offers five MPF loan products from which PFIs may choose. These products (Original MPF, MPF 125, MPF Plus, MPF Government, and MPF Xtra) are closed-loan products in which either the Bank, or Fannie Mae in the case of MPF Xtra, purchases loans that have been acquired or have already been closed by the PFI with its own funds. The PFI performs all the traditional retail loan origination functions under these MPF products.

        The FHLBank of Chicago developed the MPF program in order to help fulfill the housing mission of the FHLBanks, to diversify assets beyond the traditional member finance segment, and to provide an additional source of liquidity to our members that choose to sell mortgage loans into the secondary market rather than holding them in their own portfolio. Finance Agency regulations define the acquisition of acquired member assets (AMA regulation) as a core mission activity of the FHLBanks. In order for MPF loans to meet the AMA regulation requirements, purchases are structured so that the credit risk associated with MPF loans is shared with PFIs.

        The MPF program is designed to allocate the risks of MPF loans among the MPF Banks and PFIs and to take advantage of their respective strengths. PFIs have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing PFIs to originate MPF loans, whether through retail or wholesale operations, and to retain or acquire servicing of MPF loans, the MPF program gives control of those functions that most impact credit quality to PFIs. The MPF Banks are responsible for managing the interest-rate risk, prepayment risk, and liquidity risk associated with owning MPF loans.

        For conventional MPF loan products, PFIs assume or retain a portion of the credit risk on the MPF loans they sell to an MPF Bank by providing credit enhancement (CE amount) either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide supplemental mortgage guaranty insurance (SMI). The PFI's CE amount covers losses for MPF loans under a master commitment in excess of the MPF Bank's first loss account (FLA). PFIs are paid a credit enhancement fee (CE fee) for managing credit risk and in some instances all or a portion of the CE fee may be performance based. See the MPF Credit Enhancement Structure section, below, for a detailed discussion of the credit enhancement and risk-sharing arrangements for the MPF program.

®

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

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        On March 4, 2009, the Bank began offering the MPF Xtra product which provides the Bank's PFIs with the ability to sell certain fixed-rate loans to Fannie Mae, as a third-party investor. Loans sold under MPF Xtra are first sold to the MPF Provider who concurrently sells them to Fannie Mae. The MPF Provider is the master servicer for such loans. Such loans are not held on the Bank's balance sheet and the related credit and market risk are transferred to Fannie Mae. Unlike other MPF products, PFIs under the MPF Xtra product do not provide any CE amount and do not receive CE fees because the credit risk of such loans is transferred to Fannie Mae. The MPF Provider receives a transaction fee for its master servicing, and custodial and administrative activities for such loans from the PFIs, and the MPF Provider pays the Bank a counterparty fee for the costs and expenses of marketing activities for these loans. The Bank indemnifies the MPF Provider for certain retained risks, including the risk of the MPF Provider's required repurchase of loans in the event of fraudulent or inaccurate representations and warranties from the PFI regarding the sold loans. The Bank may, in turn, seek reimbursement from the related PFI in any such circumstance, however the value of such a reimbursement right may be limited in the event of the related PFI's insolvency. See Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Credit Risk—Mortgage Loans for additional discussion of such credit risk.

MPF Provider

        The term MPF Provider refers to FHLBank of Chicago, which establishes the eligibility standards under which an MPF Bank member may become a PFI, the structure of MPF loan products and the eligibility rules for MPF loans. In addition, the MPF Provider manages the pricing and delivery mechanism for MPF loans and the back-office processing of MPF loans as master servicer and master custodian. The MPF Provider has engaged Wells Fargo Bank N.A. as the vendor for master servicing and as the primary custodian for the MPF program. They have also contracted with other custodians meeting MPF program eligibility standards at the request of certain PFIs. These other custodians are typically affiliates of PFIs, and in some cases a PFI acts as self-custodian.

        The MPF Provider publishes and maintains the MPF Origination Guide and MPF Servicing Guide (together, MPF guides), which detail the requirements PFIs must follow in originating or selling and servicing MPF loans. They maintain the infrastructure through which MPF Banks may purchase MPF loans through their PFIs. This infrastructure includes both a telephonic delivery system and a web-based delivery system accessed through the eMPF® web site. In exchange for providing these services, the MPF Provider receives a fee from each of the MPF Banks.

PFI Eligibility

        Members and eligible housing associates may apply to become a PFI of their respective MPF Bank. If a member is an affiliate of a holding company, which has another affiliate that is an active PFI, the member is only eligible to become a PFI if it is a member of the same MPF Bank as the existing PFI. The MPF Bank reviews the general eligibility of the member, its servicing qualifications and ability to supply documents, data, and reports required to be delivered by PFIs under the MPF program. The member and its MPF Bank sign an MPF Program Participating Financial Institution Agreement (PFI Agreement) that provides the terms and conditions for the sale of MPF loans, including required credit enhancement, and establishes the terms and conditions for servicing MPF loans. All of the PFI's obligations under the PFI Agreement are secured in the same manner as the other obligations of the PFI under its regular advances agreement with the MPF Bank. The MPF Bank has the right under the advances agreement to request additional collateral to secure the PFI's obligations.

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Mortgage Standards

        Mortgage loans delivered under the MPF program must meet the underwriting and eligibility requirements in the MPF guides, as amended by any waiver granted to a PFI exempting it from complying with specified provisions of the MPF guides. PFIs may utilize an approved automated underwriting system or underwrite MPF loans manually. The current underwriting and eligibility guidelines under the MPF guides with respect to MPF loans are broadly summarized as follows:

•

Mortgage characteristics.  MPF loans must be qualifying five-year to 30-year conforming conventional or government fixed-rate, fully amortizing mortgage loans, secured by first liens on owner-occupied one- to - -four unit single-family residential properties, and single unit second homes. Conforming loan size is established annually as required by Finance Agency regulations. Condominium, planned unit development, and manufactured homes are acceptable property types as are mortgages on leasehold estates (though manufactured homes must be on land owned in fee simple by the borrower). Loans secured by manufactured homes are subject to additional restrictions as set forth in the MPF Underwriting Guides.

•

Loan-to-Value Ratio and Primary Mortgage Insurance.  The maximum loan-to-value ratio (LTV) for conventional MPF loans must not exceed 95 percent, or 90 percent for loans sold under MPF Xtra that are for amounts in excess of generally applicable agency loan limits but are within agency requirements for high-cost areas, while FHLBank AHP mortgage loans may have LTVs up to 100 percent (but may not exceed 105 percent total LTV, which compares the property value with the total amount of all mortgages outstanding against a property). Government MPF loans may not exceed the LTV limits set by the applicable federal agency. Conventional MPF loans with LTVs greater than 80 percent require certain amounts of mortgage guaranty insurance (MI), called primary MI, from an MI company that is rated at least triple-B by Standard & Poor's Ratings Services (S&P) and is acceptable to S&P.

•

Documentation and Compliance with Applicable Law.  The mortgage documents and mortgage transaction must comply with all applicable laws and mortgage loans must be documented using standard Fannie Mae/Freddie Mac Uniform Instruments.

•

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

        PFIs are required to comply with the MPF program policies contained in the MPF guides which include anti-predatory lending policies, eligibility requirements for PFIs such as insurance requirements and annual certification requirements, loan documentation, and custodian requirements, as well as detailing the PFI's servicing duties and responsibilities for reporting, remittances, default management, and disposition of properties acquired by foreclosure or deed in lieu of foreclosure.

        A majority of the states, and some municipalities, have enacted laws against mortgage loans considered predatory or abusive. Some of these laws impose liability for violations not only on the originator, but also upon purchasers and assignees of mortgage loans. We take measures that we consider reasonable and appropriate to reduce our exposure to potential liability under these laws and are not aware of any claim, action, or proceeding asserting that we are liable under these laws. However, we cannot assure that we will never have any liability under predatory or abusive lending laws.

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MPF Loan Delivery Process

        In order to deliver mortgage loans under the MPF program, the PFI and MPF Bank will enter into a best efforts master commitment (master commitment), which provides the general terms under which the PFI will deliver mortgage loans to either an MPF Bank or the MPF Provider for concurrent transfers to Fannie Mae in the case of MPF Xtra, including a maximum loan delivery amount, maximum CE amount, if applicable, and expiration date. For MPF Xtra, the Bank assigns each master commitment entered into with its PFIs to the MPF Provider. PFIs may then request to enter into one or more mandatory purchase commitments (each, a delivery commitment), which is a mandatory commitment of the PFI to sell or originate eligible mortgage loans. Each MPF loan delivered must conform to specified ranges of interest rates, maturity terms, and business days for delivery (which may be extended for a fee) detailed in the delivery commitment or it will be rejected by the MPF Provider. Each MPF loan under a delivery commitment is linked to a master commitment so that the cumulative credit enhancement level can be determined for each master commitment.

        The sum of MPF loans delivered by the PFI under a specific delivery commitment cannot exceed the amount specified in the delivery commitment without the assessment of a price adjustment fee. Delivery commitments that are not fully funded by their expiration dates are subject to pair-off fees (fees charged to a PFI for failing to deliver the amount of loans specified in a delivery commitment) or extension fees (fees charged to a PFI for extending the time deadline to deliver loans on a delivery commitment), which protect the MPF Bank, or Fannie Mae in the case of MPF Xtra, against changes in market prices.

        In connection with each sale to an MPF Bank, or the MPF Provider for concurrent transfer to Fannie Mae in the case of MPF Xtra, the PFI makes customary representations and warranties in the PFI agreement and under the MPF guides. These include eligibility and conformance of the MPF loans with the requirements in the MPF guides, compliance with predatory lending laws, and the integrity of the data transmitted to the MPF Provider. In addition, the MPF guides require each PFI to maintain errors and omissions insurance and a fidelity bond and to provide an annual certification with respect to its insurance and its compliance with the MPF program requirements. Once an MPF loan is purchased, the PFI must deliver a qualifying promissory note and certain other required documents to the designated custodian, who reports to the MPF Provider whether the documentation package meets MPF program requirements.

        The MPF Provider conducts an initial quality assurance review of a selected sample of MPF loans from each PFI's initial MPF loan delivery. The MPF Provider also performs periodic reviews of a sample of MPF loans to determine whether the reviewed MPF loans complied with the MPF program requirements at the time of acquisition. Any exception that indicates a negative trend is discussed with the PFI and can result in the suspension or termination of a PFI's ability to deliver new MPF loans if the concern is not adequately addressed.

        Reasons for which a PFI could be required to repurchase an MPF loan include but are not limited to, MPF loan ineligibility, breach of representation or warranty under the PFI agreement or the MPF guides, failure to deliver the required MPF loan document package to an approved custodian, servicing breach, or fraud.

        The Bank does not currently conduct any quality assurance reviews of MPF Government loans. However, the Bank does allow its PFIs to repurchase delinquent MPF Government loans so that they may comply with loss-mitigation requirements of the applicable government agency in order to preserve the insurance or guaranty coverage. The repurchase price for each such delinquent loan is equal to the current scheduled principal balance and accrued interest on the MPF Government loan. In addition, just as for conventional MPF loans, if a PFI fails to comply with the requirements of the PFI agreement, MPF guides, applicable laws, or terms of mortgage documents, the PFI may be required to repurchase the affected MPF Government loans.

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MPF Products

        A variety of MPF loan products have been developed to meet the differing needs of PFIs. The Bank offers five MPF products that its PFIs may choose from: Original MPF, MPF 125, MPF Plus, MPF Government, and MPF Xtra. The products have different credit-risk-sharing characteristics based upon the different levels for the FLA and CE amount and the types of CE fees (performance-based, fixed amount or none). There is no FLA, CE amount, or CE fees for MPF Xtra because the credit risk for such loans is transferred to Fannie Mae. The table below provides a comparison of the MPF products.

MPF Product Comparison Chart

Product Name	Bank's First-Loss Account Size	PFI Credit- Enhancement Size Description	Credit- Enhancement Fee Paid to the Member	Credit- Enhancement Fee Offset(1)	Servicing Fee to Servicer
Original MPF	4 to 7 basis points/added each year	Equivalent to double-A rating.	7 to 10 basis points/year paid monthly	No	25 basis points/year
MPF Government	N/A	N/A Unreimbursed servicing expenses.	N/A	N/A	44 basis points/year plus 2 basis points/year(2)
MPF 125	100 basis points fixed based on the size of loan pool at closing	After first-loss account, up to double-A rating.	7-10 basis points/year paid monthly; performance based	Yes	25 basis points/year
MPF Plus	35 basis points fixed	0 to 20 basis points, after first-loss account and supplemental mortgage insurance, up to double-A rating.	7 basis points/year fixed plus 6 to 7 basis points/year performance based (delayed for 1 year) all fees paid monthly	Yes	25 basis points/year
MPF Xtra	N/A	N/A	None	N/A	25 basis points/year

(1)

Future payouts of performance-based CE fees are reduced when losses are allocated to the FLA.

(2)

For master commitments issued prior to February 2, 2007, the PFI is paid a monthly government loan fee equal to 0.02 percent (two basis points) per annum based on the month end outstanding aggregate principal balance of the master commitment which is in addition to the customary 0.44 percent (44 basis points) per annum servicing fee that continues to apply for master commitments issued after February 2, 2007, and that is retained by the PFI on a monthly basis based on the outstanding aggregate principal balance of the MPF Government loans.

MPF Loan Participations

        The Bank previously sold participation interests to other MPF Banks at the time MPF loans were acquired, although it is the Bank's intent to hold all MPF loans for investment, excluding loans sold by

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PFIs under MPF Xtra because such loans are sold to Fannie Mae rather than to the Bank. The participation percentages in such loans varied by each master commitment, by agreement of the MPF Bank selling the participation interests (the Owner Bank), and the MPF Provider. To date, the Bank has only sold participation interests to the MPF Provider. The MPF Provider has ceased purchasing participation interests from the Bank. Loans sold pursuant to MPF Xtra cannot be participated.

        The Bank is responsible for evaluating, monitoring, and certifying to any participant MPF Bank the creditworthiness of each PFI initially, and at least annually thereafter. The Bank is responsible for ensuring that adequate collateral is available from each of its PFIs to secure any direct obligation portion of the PFI's CE amount. The Bank is also responsible for enforcing the PFI's obligations under its PFI agreement.

        Participation percentages for MPF loans (excluding those originated under the MPF Xtra program) range from 100 percent to be retained by the Owner Bank to 100 percent participated to another MPF Bank. The participation percentages do not change during the period that a master commitment is open unless the MPF Banks contractually agree to change their respective shares or the Owner Bank exercises the right to require the MPF Provider to acquire a 100 percent participation for delivery commitments for a particular day. If the specified participation percentage in a master commitment never changes, then the percentage for risk-sharing of losses remains unchanged throughout the life of the master commitment.

        The risk-sharing and rights of the Owner Bank and participating MPF Bank(s) were as follows:

•

each paid its pro rata share of each MPF loan acquired under a delivery commitment and related master commitment based upon the participation percentage in effect at the time;

•

each receives its pro rata share of principal and interest payments and is responsible for CE fees based upon its participation percentage for each MPF loan under the related delivery commitment;

•

each is responsible for its pro rata share of FLA exposure and losses incurred with respect to the master commitment based upon the overall risk-sharing percentage for the master commitment; and

•

each may economically hedge its share of the delivery commitments as they are issued during the open period.

        Other than for the MPF Xtra for which there is no FLA or CE amount, the FLA and CE amount apply to all the MPF loans in a master commitment regardless of participation arrangements, so an MPF Bank's share of credit losses is based on its respective participation interest in the entire master commitment. For example, assume an MPF Bank's specified participation percentage was 25 percent under a $100 million master commitment and that no changes were made to the master commitment. The MPF Bank risk-sharing percentage of credit losses would be 25 percent. In the case where an MPF Bank changed its initial percentage in the master commitment, the risk-sharing percentage will also change. For example, if an MPF Bank were to acquire 25 percent of the first $50 million and 50 percent of the second $50 million of MPF loans delivered under a master commitment, the MPF Bank would share in 37.5 percent of the credit losses in that $100 million master commitment, while it would receive principal and interest payments on the individual MPF loans that remain outstanding in a given month, some in which it may own a 25 percent interest and the others in which it may own a 50 percent interest.

MPF Servicing

        The PFI or its servicing affiliate generally retains the right and responsibility for servicing MPF loans it delivers. The PFI is responsible for collecting the borrower's monthly payments and otherwise

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managing the relationship with the borrower with respect to the MPF loan and the mortgaged property. Based on monthly reports the PFI is required to provide the master servicer, appropriate withdrawals are made from the PFI's deposit account with the applicable MPF Bank. In some cases, the PFI has agreed to advance principal and interest payments on the scheduled remittance date when the borrower has failed to pay, provided that the collateral securing the MPF loan is sufficient to reimburse the PFI for advanced amounts. The PFI recovers the advanced amounts either from future collections or upon the liquidation of the collateral securing the MPF loans.

        If an MPF loan becomes delinquent, the PFI is required to contact the borrower to determine the cause of the delinquency and whether the borrower will be able to cure the default. The MPF guides permit certain types of forbearance plans. Upon any MPF loan becoming 90 days or more delinquent, the master servicer monitors and reviews the PFI's default management activities for that MPF loan, including timeliness of notices to the mortgagor, forbearance proposals, property protection activities, and foreclosure referrals, all in accordance with the MPF guides. Upon liquidation of any MPF loan and submission of each realized loss calculation from the PFI, the master servicer reviews the realized loss calculation for conformity with the primary mortgage insurance (MI) requirements, if applicable, and conformity to the cost and timeliness standards of the MPF guides. The master servicer disallows the reimbursement to the PFI of any servicing advances related to the PFI's failure to perform in accordance with the MPF guides. If there is a loss on a conventional MPF loan, the loss is allocated to the master commitment and shared in accordance with the risk-sharing structure for that particular master commitment. The servicer pays any gain on sale of real-estate-owned property to the MPF Bank, or in the case of a participation, to the MPF Banks based upon their respective interest in the MPF loan. However, the amount of the gain is available to reduce subsequent losses incurred under the master commitment before such losses are allocated between the MPF Bank and the PFI.

        The MPF Provider monitors the PFI's compliance with MPF program requirements throughout the servicing process and brings any material concerns to the attention of the MPF Bank. Minor lapses in servicing are charged to the PFI. Major lapses in servicing could result in a PFI's servicing rights being terminated for cause and the servicing of the particular MPF loans being transferred to a new, qualified servicing PFI.

        Although PFIs or their servicing affiliates generally service the MPF loans delivered by the PFI, certain PFIs choose to sell the servicing rights on a concurrent basis (servicing released) or in a bulk transfer to another PFI which is permitted with the consent of the MPF Banks involved. One PFI has been designated to acquire servicing under the MPF program's concurrent sale of servicing option. In addition, several PFIs have acquired servicing rights on a concurrent servicing-released basis or bulk transfer basis without the direct support from the MPF program.

MPF Credit Enhancement Structure

Overview

        Other than for MPF Xtra under which all credit and market risk is transferred to Fannie Mae, the MPF Bank and PFI share the risk of credit losses on MPF loans under the MPF programs by structuring potential losses on conventional MPF loans into layers with respect to each master commitment. The first layer or portion of credit losses that an MPF Bank is potentially obligated to incur is determined based upon the MPF product selected by the PFI and is referred to as the FLA. The FLA functions as a tracking mechanism for determining the point after which the PFI, in its role as credit enhancer, would be required to cover losses. The FLA is not a cash collateral account, and does not give an MPF Bank any right or obligation to receive or pay cash or any other collateral. For MPF products with performance-based CE fees, the MPF Bank may withhold CE fees to recover losses at the FLA level, essentially transferring a portion of the first layer risk of credit loss to the PFI.

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        The portion of credit losses that a PFI is potentially obligated to incur is referred to as its CE amount. The PFI's CE amount represents a direct liability to pay credit losses incurred with respect to a master commitment or the requirement of the PFI to obtain and pay for a supplemental mortgage guaranty insurance (SMI) policy insuring the MPF Bank for a portion of the credit losses arising from the master commitment. The PFI may procure SMI to cover losses equal to all or a portion of the CE amount. SMI does not cover special hazard losses, which are the direct liability of the PFI or the MPF Bank. The final CE amount is determined once the master commitment is closed (that is, when the maximum amount of MPF loans are delivered or the expiration date has occurred). For a description of how the PFI's CE amount is determined, see Mortgage-Loan Finance—Setting Credit Enhancement Levels below.

        The PFI receives a CE fee in exchange for providing the CE amount which may be used to pay for SMI. CE fees are paid monthly and are determined based on the remaining unpaid principal balance of the MPF loans under the master commitment. The CE fee and CE amount may vary depending on the MPF product selected. CE fees payable to a PFI as compensation for assuming credit risk are recorded as an offset to MPF loan interest income when paid by us. We also pay performance CE fees which are based on actual performance of the pool of MPF loans in each master commitment. For the Original MPF product, the CE fee is a fixed payment to the PFI. For the MPF 125 product, the CE fee is performance-based and losses to the MPF Bank can be reimbursed by the MPF Bank withholding the performance-based CE fee. Under the MPF Plus product, we also pay performance-based and fixed CE fees. For the MPF Government product, the PFI is paid a CE fee equal to 0.02 percent (two basis points) per annum for master commitments issued prior to February 2, 2007 but no CE fee for master commitments issued after that date. There are no CE fees for MPF Xtra product. Losses experienced by the MPF Bank in this product can be reimbursed by the MPF Bank withholding the performance-based CE fee. The fixed fee can be used to pay the SMI premium. To the extent that losses in the current month exceed performance CE fees accrued, the remaining losses may be recovered from withholding future performance CE fees payable to the PFI.

Loss Allocation

        Other than MPF Xtra, credit losses on conventional MPF loans not absorbed by the borrower's equity in the mortgaged property, property insurance, or primary mortgage insurance are allocated between the MPF Bank and PFI as follows:

•

First, to the MPF Bank, up to an agreed-upon amount, called an FLA.

Original MPF.    The FLA starts out at zero on the day the first MPF loan under a master commitment is purchased but increases monthly over the life of the master commitment at a rate that ranges from 0.04 percent to 0.07 percent (four to seven basis points) per annum based on the monthend outstanding aggregate principal balance of the master commitment. The FLA is structured so that over time, it should cover expected losses on a master commitment, though losses early in the life of the master commitment could exceed the FLA and be charged in part to the PFI's CE amount.

MPF 125.    The FLA is equal to 1.00 percent (100 basis points) of the aggregate principal balance of the MPF loans funded under the master commitment. Once the master commitment is fully funded, the FLA is expected to cover expected losses on that master commitment, although the MPF Bank may economically recover a portion of losses incurred under the FLA by withholding performance CE fees payable to the PFI.

MPF Plus.    The FLA is equal to an agreed-upon number of basis points of the aggregate principal balance of the MPF loans funded under the master commitment that is not less than the amount of expected losses on the master commitment. Once the master commitment is fully funded, the FLA is expected to cover expected losses on that master commitment, although the

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MPF Bank may economically recover a portion of losses incurred under the FLA by withholding performance CE fees payable to the PFI.

•

Second, to the PFI under its CE obligation, losses for each master commitment in excess of the FLA, if any, up to the CE amount. The CE amount may consist of a direct liability of the PFI to pay credit losses up to a specified amount, a contractual obligation of the PFI to provide SMI or a combination of both. For a description of the CE amount calculation see Mortgage-Loan Finance—Setting Credit Enhancement Levels below.

•

Third, any remaining unallocated losses are absorbed by the MPF Bank.

        With respect to participation interests, MPF loan losses allocable to the MPF Bank are allocated among the participating MPF Banks pro rata based upon their respective participation interests in the related master commitment. For a description of the risk sharing by participant MPF Banks see Mortgage-Loan Finance—MPF Loan Participations.

Setting Credit Enhancement Levels

        Other than for MPF Xtra under which all credit and market risk is transferred to Fannie Mae, Finance Agency regulations require that MPF loans be sufficiently credit enhanced at the time of purchase so that the Bank's risk of loss is limited to the losses of an investor in a double-A-rated MBS. In cases where the Bank's risk of loss is greater than that of an investor in a double-A-rated MBS, the Bank holds additional credit risk-based capital in accordance with Finance Agency regulations based on the putative credit rating of the pool. The MPF Provider analyzes the risk characteristics of each MPF loan (as provided by the PFI) using S&P's LEVELS® model in order to determine the required CE amount for a loan or group of loans to be acquired by an MPF Bank (MPF program methodology). The PFI's CE amount (including the SMI policy for MPF Plus) is calculated using the MPF program methodology to equal the difference between the amount needed for the master commitment to have a rating equivalent to a double-A-rated MBS and our initial FLA exposure (which is zero for the Original MPF product).

        For MPF Plus, the PFI is required to provide an SMI policy covering the MPF loans in the master commitment and having a deductible initially equal to the FLA. Depending upon the amount of the SMI policy (determined in part by the amount of the CE fees paid to the PFI), the PFI may or may not have any direct liability on the CE amount.

        The Bank is required to recalculate the estimated credit rating of a master commitment if there is evidence of a decline in credit quality of the related MPF loans.

Credit Enhancement Fees

        The structure of the CE fee payable to the PFI depends upon the product type selected. There is no CE amount and accordingly no CE fee payable to the PFI for MPF Xtra. For Original MPF, the PFI is paid a monthly CE fee between 0.07 percent and 0.10 percent (seven to 10 basis points) per annum and paid monthly based on the aggregate outstanding principal balance of the MPF loans in the master commitment.

        For MPF 125, the PFI is paid a monthly CE fee between 0.07 percent and 0.10 percent (seven and 10 basis points) per annum and paid monthly on the aggregate outstanding principal balance of the MPF loans in the master commitment. The PFI's monthly CE fee is performance-based in that it is reduced by losses charged to the FLA. For MPF 125, the CE fee is performance-based for the entire life of the master commitment.

®

"Standard & Poor's LEVELS" and "LEVELS" are registered trademarks of Standard & Poor's, a division of the McGraw-Hill Companies, Inc.

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        For MPF Plus, the performance-based portion of the CE fee is typically 0.06 percent (six basis points) per annum and paid monthly on the aggregate outstanding balance of the MPF loans in the master commitment. The performance-based CE fee is reduced by losses charged to the FLA and is paid one year after accrued, based on monthly outstanding balances. The fixed portion of the CE fee is typically 0.07 percent (seven basis points) per annum and paid monthly on the aggregate outstanding principal balance of the MPF loans in the master commitment. The lower performance CE fee is for master commitments without a direct PFI CE amount.

        Only MPF Government loans are eligible for sale under the MPF Government product. The PFI provides and maintains insurance or a guaranty from the applicable federal agency (that is, the FHA, VA, RHS, or HUD) for MPF Government loans and the PFI is responsible for compliance with all federal agency requirements and for obtaining the benefit of the applicable insurance or guaranty with respect to defaulted MPF Government loans. Only PFIs that are licensed or qualified to originate and service government loans by the applicable federal agency or agencies and that maintain a mortgage loan delinquency ratio that is acceptable to the Bank and that is comparable to the national average and/or regional delinquency rates as published by the Mortgage Bankers Association are eligible to sell and service MPF Government loans under the MPF program.

        The table below summarizes the average PFI CE fee of all master commitments:

Average PFI CE Fee as a Percent of Master Commitments

	December 31,
Loan Type	2008			2007
Original MPF		0.10	%		0.10	%
MPF 125		0.10			0.10
MPF Plus		0.13			0.13
MPF Government		0.02			0.02
MPF Xtra		N/A			N/A

Credit Risk Exposure on MPF Loans

        The Bank's credit risk from MPF loans is the potential for financial loss due to borrower default or depreciation in the value of the real estate collateral securing the MPF loan, offset by the PFI's CE amount, other than for MPF Xtra under which there is no CE amount because the credit risk of the loans is transferred to Fannie Mae. Under the MPF program, the PFI's CE amount may take the form of a contingent performance-based CE fee whereby such fees are reduced by losses up to a certain amount arising under the master commitment and the CE amount (which represents a direct liability to pay credit losses incurred with respect to that master commitment or may require the PFI to obtain and pay for an SMI policy insuring the MPF Bank for a portion of the credit losses arising from the master commitment). Under the AMA regulation, any portion of the CE amount that is a PFI's direct liability must be collateralized by the PFI in the same way that advances are collateralized. The PFI agreement provides that the PFI's obligations under the PFI agreement are secured along with other obligations of the PFI under its regular advances agreement and further, that we may request additional collateral to secure the PFI's obligations.

        The Bank also has credit risk of loss on MPF loans to the extent such losses are not recoverable from the PFI either directly or indirectly through performance-based CE fees, or from an SMI insurer, as applicable. See Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Credit Risk—Mortgage Loans.

        The risk sharing of credit losses between MPF Banks for participations is based on each MPF Banks' percentage interest in the master commitment. Accordingly, the credit risk assumed by the Bank

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is driven by its percentage interest in each master commitment. See Mortgage-Loan Finance—MPF Loan Participations in this Item.

Deposits

        The Bank offers demand and overnight-deposit programs to its members and housing associates. Term deposit programs are also offered to members. The Bank cannot predict the timing and amount of deposits that it receives from members and therefore does not rely on deposits as a funding source for advances and loan purchases. Proceeds from deposit issuance are generally invested in short-term investments to ensure that the Bank can liquidate deposits on request.

        The Bank must maintain compliance with statutory liquidity requirements that require the Bank to hold cash, obligations of the U.S., and advances with a maturity of less than five years in an amount not less than the amount of deposits of members. The following table provides the Bank's liquidity position with respect to this requirement.

Liquidity Reserves for Deposits
(dollars in thousands)

		December 31,
		2008		2007
Liquid assets
	Cash and due from banks	$	5,735	$	6,823
	Interest-bearing deposits		3,279,075		50
	Advances maturing within five years		50,390,148		50,433,452
Total liquid assets			53,674,958		50,440,325
Total deposits			611,070		713,126
Excess liquid assets		$	54,286,028	$	51,153,451

        Refer to the Liquidity Risk section in Item 7A—Quantitative and Qualitative Disclosures about Market Risk for further information regarding the Bank's liquidity requirements.

Consolidated Obligations

        The Bank funds its assets primarily through the sale of debt securities known as consolidated obligations, and referred to herein as COs. The Bank's ability to access the money and capital markets—across a wide maturity spectrum, in a variety of debt structures through the sale of COs—has historically allowed the Bank to manage its balance sheet effectively and efficiently. The FHLBanks compete with Fannie Mae, Freddie Mac, and other GSEs for funds raised through the issuance of unsecured debt in the agency debt market.

        COs, consisting of bonds and discount notes, represent the primary source of debt used by the Bank to fund advances, mortgage loans, and investments. All COs are issued on behalf of an FHLBank (as the primary obligor) through the Office of Finance, but all COs are the joint and several obligation of each of the 12 FHLBanks. COs are not obligations of the U.S. government and the U.S. government does not guarantee them. Moody's Investors Service (Moody's) currently rates COs Aaa/P-1, and S&P currently rates them AAA/A-1+. These ratings measure the predicted likelihood of timely payment of principal and interest on the COs. The GSE status of the FHLBanks and the ratings of the COs have historically provided the FHLBanks with excellent capital-market access. However, the Bank's funding environment remains stressed as the impact of the financial market turmoil persists. There has been a wide array of both intended and unintended consequences from the wide variety of governmental actions intended to support credit markets. During the fourth quarter, spreads on FHLBank term debt

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widened due in part to continued institutional investor de-levering, increasing competition for funds including competition with FDIC-guaranteed paper through the Temporary Liquidity Guarantee Program, and continuing flight to quality with investors seeking the most liquid on-the-run Treasury investments. However, the Federal Reserve Board has recently initiated a program to purchase GSE debt, which has offset somewhat the widening spreads. See Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity for more information.

        CO Bonds.    CO bonds may be issued with either fixed-rate coupon-payment terms, zero-coupon terms, or variable-rate coupon-payment terms that use a variety of indices for interest-rate resets including LIBOR, Constant Maturity Treasury (CMT), and others. CO bonds may also contain embedded options that affect the term or yield structure of the bond. Such options include call options under which the Bank can redeem bonds prior to maturity, specified interest-rate-related trigger events under which the bonds would be automatically redeemed prior to maturity, and coupon caps or floors for floating-rate coupon debt.

        CO bonds are traditionally issued to raise intermediate and long-term funds for the Bank. The FHLBanks are among the world's most active issuers of debt, issuing on a near-daily basis. The Bank frequently participates in these issuances, sometimes engaging in several issuances in a single day. The Bank places orders through the Office of Finance or responds to inquiries by authorized underwriters. The Office of Finance endeavors to issue the requested bonds and allocate proceeds in accordance with each FHLBank's requested amount. In some cases, proceeds from partially fulfilled offerings must be allocated in accordance with predefined rules that apply to particular issuance programs. The Office of Finance also prorates the amounts paid to dealers in connection with the sale of COs to the Bank based upon the percentage of debt issued that is assumed by the Bank.

        Discount Notes.    CO discount notes are short-term obligations issued at a discount to par with no coupon. Terms range from overnight up to 365 days (or 366 in a leap year). The Bank generally participates in CO discount note issuance on a daily basis as a means of funding short-term assets and managing its short-term funding gaps. During 2008, the Bank also periodically funded longer-term assets through the issuance of CO discount notes rather than CO bonds when CO discount notes could be issued at more favorable pricing than CO bonds, as further discussed under Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Liquidity. Each FHLBank submits commitments to issue CO discount notes in specific amounts with specific terms to the Office of Finance, which in turn, aggregates these commitments into offerings to securities dealers. Such commitments may specify yield limits that the Bank has specified in its commitment, above which the Bank will not accept funding. CO discount notes are sold either at auction on a scheduled basis or through a direct bidding process on an as-needed basis through a group of dealers known as the selling group, who may turn to other dealers to assist in the ultimate distribution of the securities to investors. The selling group dealers receive no selling concession if the bonds are sold at auction. Otherwise, the Bank pays them a selling concession.

        Finance Agency regulations require that each FHLBank maintain the following types of assets, free from any lien or pledge, in an amount at least equal to the amount of that FHLBank's participation in the total COs outstanding:

•

Cash;

•

Obligations of, or fully guaranteed by, the U.S. government;

•

Secured advances;

•

Mortgages, which have any guaranty, insurance, or commitment from the U.S. government or any agency of the U.S.;

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•

Investments described in Section 16(a) of the FHLBank Act, which, among other items, includes securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located; and

•

Other securities that are assigned a rating or assessment by an NRSRO that is equivalent or higher than the rating or assessment assigned by that NRSRO to COs.

        The following table illustrates the Bank's compliance with this regulatory requirement:

Ratio of Non-Pledged Assets to Total Consolidated Obligations
(dollars in thousands)

		December 31,
		2008			2007
Non-pledged asset totals
	Cash and due from banks	$	5,735		$	6,823
	Advances		56,926,267			55,679,740
	Investments(1)		18,864,899			17,862,559
	Mortgage loans, net		4,153,537			4,091,314
	Accrued interest receivable		288,753			457,407
	Less: pledged assets		(916,068	)		(88,844	)
Total non-pledged assets		$	79,323,123		$	78,008,999
Total consolidated obligations		$	74,726,268		$	73,410,156
Ratio of non-pledged assets to consolidated obligations			1.06			1.06

(1)

Investments include interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities.

        Although each FHLBank is primarily liable for the portion of COs corresponding to the proceeds received by that FHLBank, each FHLBank is also jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all COs. Under Finance Agency regulations, if the principal or interest on any CO issued on behalf of one of the FHLBanks is not paid in full when due, then the FHLBank responsible for the payment may not pay dividends to, or redeem or repurchase shares of stock from, any member of the FHLBank. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any COs, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation.

        To the extent that an FHLBank makes any payment on a CO on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank otherwise responsible for the payment. However, if the Finance Agency determines that an FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all COs outstanding, or on any other basis the Finance Agency may determine.

        Neither the Finance Agency nor any predecessor regulator of the Bank has ever required the Bank to repay obligations in excess of the Bank's participation nor have they allocated to the Bank any outstanding liability of any other FHLBank's COs.

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Capital Resources

        Capital Plan.    The Bank's Class B stock may be issued, redeemed, and repurchased by the Bank only at its par value of $100 per share. Capital stock outstanding is redeemable by a withdrawing member on five years' notice. At the end of the five-year stock-redemption period, the Bank must comply with the redemption request unless doing so would cause the Bank to fail to comply with its minimum regulatory capital requirements, or would violate any other regulatory prohibitions. Members that withdraw from membership may not reapply for membership in any FHLBank for five years. At the Bank's discretion, members may redeem at par value any capital stock greater than their minimum investment requirement or sell it to other Bank members at par value. The Bank's Class B stock is exempt from registration under the Securities Act of 1933. The Bank's capital plan is provided as Exhibit 4 to this Form 10-K.

        Activity-Based Stock-Investment Requirement (ABSIR).    Members must hold Class B stock based on outstanding activity with the Bank. The ABSIR for advances is as follows:

For advances with a term of:	The ABSIR is the following portion of outstanding balances
Overnight (one business day)		3.0	%
More than one business day through three months		4.0
Greater than three months		4.5

        For standby letters of credit, the ABSIR is 4.5 percent of the credit equivalent amount of the standby letter of credit as defined in Finance Agency regulations (currently 50 percent of the face amount of the standby letter of credit). For outstanding member-intermediated derivatives, the ABSIR is 4.5 percent of the sum of 1) the current credit exposure of the derivative, and 2) the potential future exposure as defined in Finance Agency regulations.

        Membership Stock-Investment Requirement (MSIR).    In addition to the ABSIR, members must hold the MSIR. The MSIR is equal to 0.35 percent of the value of certain member assets eligible to secure advances subject to a current minimum balance of $10,000 and a current maximum balance of $25 million.

        Total Stock-Investment Requirement (TSIR).    The sum of the ABSIR and the MSIR is the TSIR. Any stock held by a member in excess of its TSIR is considered excess capital stock. At December 31, 2008, members and nonmembers with capital stock outstanding held excess capital stock totaling $677.3 million, representing approximately 18.4 percent of total capital stock outstanding.

        Members may submit a written request for redemption of excess capital stock. The stock subject to the request will be redeemed at par value by the Bank upon expiration of a five-year stock-redemption period. Also subject to a five-year redemption period are shares of stock held by a member that (1) gives notice of intent to withdraw from membership, or (2) becomes a nonmember due to merger or acquisition, charter termination, or involuntary termination of membership. At the end of the five-year stock-redemption period, the Bank must comply with the redemption request unless doing so would cause the Bank to fail to comply with its minimum regulatory capital requirements, would cause the member to fail to comply with its total stock-investment requirements, or would violate any other regulatory prohibitions.

        Repurchases of Excess Capital Stock.    The Bank may, at its sole discretion, repurchase excess capital stock from any member at par value upon 15 days prior written notice to the member, unless a shorter notice period is agreed to in writing by the member, if the repurchase will not cause the Bank to fail to meet any of its regulatory capital requirements or violate any other regulatory prohibitions.

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        The Bank has implemented an Excess Stock Repurchase Program (ESRP) that is intended to enhance the Bank's ability to manage the level of excess stock and, therefore, more efficiently utilize its capital. Under the ESRP, on a monthly basis, management determines available capital required to support incremental business activity and determines the desired amount of stock, if any, to repurchase from members. Under the ESRP, the Bank may unilaterally repurchase this amount of excess capital stock from members of the Bank whose ratio of total capital stock held to their minimum TSIR amount exceeds a periodically defined level in accordance with timing and notice provisions established by the plan. This program is intended to enable the Bank to manage its capital and financial leverage in order to address asset fluctuations. In some months, management may decide not to exercise its discretion to initiate repurchases under the ESRP. Under the program the Bank will not repurchase any excess capital stock from a member if such repurchase would result in that member's capital-stock balance being less than the member's TSIR amount plus $200,000. For the year ended December 31, 2008, the Bank did not repurchase excess capital stock under the ESRP. Without regard to the ESRP, members who hold shares in excess of their TSIR may submit written requests for the Bank to repurchase excess stock at any time. The Bank, at its sole discretion, can approve these requests, in whole or in part, based on an assessment of the Bank's business interests and its current and projected capital position. During 2008, the Bank repurchased $455.6 million in excess capital stock in response to members' requests.

        Effective December 8, 2008, the Bank placed a moratorium on all excess stock repurchases to help preserve the Bank's capital in the light of certain liquidity challenges for the Bank that have arisen during 2008 and continue to develop into 2009. These liquidity challenges are discussed under Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Liquidity.

        The Bank's board of directors has a right and an obligation to call for additional capital-stock purchases by the Bank's members, as a condition of membership, as needed to satisfy statutory and regulatory capital requirements. These requirements include the maintenance of a stand-alone credit rating of no lower than double-A from an NRSRO.

        Mandatorily Redeemable Capital Stock.    In compliance with Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150), the Bank reclassifies stock subject to redemption from equity to a liability once a member exercises a written redemption right, gives notice of intent to withdraw from membership, or attains a nonmember status by merger or acquisition, charter termination, or involuntary termination from membership, since the member shares will then meet the definition of a mandatorily redeemable financial instrument. We do not take into consideration our members' right to cancel a redemption request in determining when shares of capital stock should be classified as a liability, because such cancellation would be subject to a cancellation fee equal to two percent of the par amount of the shares of Class B stock that is the subject of the redemption notice. Member shares meeting this definition are reclassified to a liability at fair value. Dividends declared on member shares classified as a liability in accordance with SFAS 150 are accrued at the expected dividend rate and reflected as interest expense in the statement of income. The repayment of these mandatorily redeemable financial instruments is reflected as financing cash outflows in the statement of cash flows once settled. At December 31, 2008, the Bank had $93.4 million in capital stock subject to mandatory redemption from eight former members or withdrawing members. This amount has been classified as a liability for mandatorily redeemable capital stock in the statement of condition in accordance with SFAS 150. The Bank is not required to redeem or repurchase activity-based stock until the later of the expiration of the five-year notice of redemption or until the activity no longer remains outstanding. If activity-based stock becomes excess capital stock as a result of an activity no longer outstanding, the Bank may, at its sole discretion, repurchase the excess activity-based stock as described above.

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        Retained Earnings.    The Bank's methodology for determining retained earnings adequacy incorporates the Bank's assessment of the various risks that could potentially adversely affect retained earnings if trigger stress scenario conditions occurred. Principal elements of this risk are market risk and credit risk. Market risk is represented through the Bank's value-at-risk (VaR) market-risk measurement which captures 99 percent of potential changes in the Bank's market value of equity due to potential parallel and nonparallel shifts in yield curves applicable to the Banks' assets, liabilities, and off-balance-sheet transactions. Credit risk is represented through incorporation of valuation deterioration due to but not limited to potential adverse ratings migrations for the Bank's assets and potential defaults.

        On December 14, 2008, the Bank's board of directors adopted a retained earnings target of $600.0 million. See Item 5—Management's Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for a discussion of the Bank's retained earnings target and the quarterly dividend payout restriction. The Bank's retained earnings target could be revised in response to potential Finance Agency mandates or due to potential changes in the Bank's risk profile. See Item 1A—Risk Factors. At December 31, 2008, the Bank had an accumulated deficit of $19.7 million.

        Dividends.    The Bank may pay dividends from current net earnings or previously retained earnings, subject to certain limitations and conditions. Refer to Item 5—Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The Bank's board of directors may declare and pay dividends in either cash or capital stock. In no event may the Bank pay a dividend if, having done so, the Bank's retained earnings level would be less than zero. On December 14, 2008, the Bank's board of directors adopted a policy under which the Bank may pay up to 50 percent of the prior quarter's net income while the Bank's retained earnings are less than its targeted retained earnings level. On February 26, 2009, the Bank announced that dividend payments for 2009 are unlikely. At December 31, 2008, the Bank had an accumulated deficit of $19.7 million and became prohibited from paying dividends until the Bank generates sufficient net income to eliminate the accumulated deficit.

Interest-Rate-Exchange Agreements

        Finance Agency regulations establish guidelines for interest-rate-exchange agreements. The Bank can use interest-rate swaps, swaptions, interest-rate-cap and floor agreements, calls, puts, futures, and forward contracts as part of its interest-rate-risk management and funding strategies. Finance Agency regulations require the documentation of non-speculative use of these instruments and the establishment of limits to credit risk arising from these instruments.

        In general, the Bank uses interest-rate-exchange agreements in three ways: 1) by designating them as a fair-value or cash-flow hedge of a hedged financial instrument, firm commitments, or a forecasted transaction, 2) economic hedges in asset-liability management that are not designated as hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), or, 3) by acting as an intermediary between members and the capital markets. For example, the Bank uses interest-rate-exchange agreements in its overall interest-rate-risk management to adjust the interest-rate sensitivity of COs to approximate more closely the interest-rate sensitivity of assets, including advances, investments, and mortgage loans, and/or to adjust the interest-rate sensitivity of advances, investments, and mortgage loans to approximate more closely the interest-rate sensitivity of liabilities. In addition to using interest-rate-exchange agreements to manage mismatches of interest rates between assets and liabilities, the Bank also uses interest-rate-exchange agreements to manage embedded options in assets and liabilities; to hedge the market value of existing assets, liabilities, and anticipated transactions; to hedge the duration risk of prepayable instruments; and to reduce funding costs.

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        The Bank may enter into interest-rate-exchange agreements concurrently with the issuance of COs to reduce funding costs. This allows the Bank to create synthetic floating-rate debt at a cost that is lower than the cost of a floating-rate cash instrument issued directly by the Bank. This strategy of issuing bonds while simultaneously entering into interest-rate-exchange agreements enables the Bank to offer a wider range of attractively priced advances to its members. The attractiveness of the debt depends on price relationships in both the bond market and interest-rate-exchange markets. When conditions in these markets change, the Bank may alter the types or terms of COs issued.

        The most common ways in which the Bank uses derivatives are:

•

To reduce funding costs by combining a derivative and a CO. The combined funding structure can be lower in cost than a comparable CO bond;

•

To preserve a favorable interest-rate spread between the yield of an asset (for example, an advance) and the cost of the supporting liability (for example, the CO bond used to fund the advance). Without the use of derivatives, this interest-rate spread could be reduced or eliminated when the interest rate on the advance and/or the interest rate on the bond change differently or change at different times;

•

To mitigate the adverse earnings effects of the shortening or extension of certain assets (for example, advances or mortgage assets) and liabilities; and

•

To protect the value of existing asset or liability positions or of anticipated transactions.

        Advances that have embedded options allowing the Bank to accelerate repayment on or after certain dates (for example, putable advances) and advances with coupon structures containing derivatives (for example, a floating-rate advance with an embedded cap) are usually hedged in a manner that offsets the embedded derivative feature and creates a synthetic floating-rate advance. For example, a putable advance is hedged with an interest-rate swap that pays a fixed rate and receives a variable LIBOR rate, and can be terminated by the swap counterparty on the same dates that the Bank can accelerate repayment of the hedged advance. The Bank can hedge a LIBOR floating-rate advance with an embedded cap by purchasing an interest-rate cap that accrues interest when LIBOR exceeds the cap strike rate (inclusive of any coupon-spread adjustment to LIBOR) embedded in the advance. The hedge is structured so that the Bank maintains a net neutral derivative position, meaning that the effects of the embedded derivative of the hedged item are offset by the hedging derivative. Derivative instruments discussed above affect both net interest income and other income (loss). In most cases, the Bank opts to hedge these advances, but may choose not to hedge in cases when the advance's embedded optionality creates an offset to risks elsewhere in the Bank's balance sheet. In this case, the Bank would likely not hedge these advances.

        For fixed-rate bullet advances that receive only interest payments until maturity and that do not contain an option for the member to accelerate repayment without a make-whole prepayment fee, the Bank may decide to enter into an interest-rate swap that effectively converts the fixed rate to a floating rate. The Bank funds these synthetic floating-rate advances with synthetic floating-rate debt or discount notes. In deciding whether to swap fixed-rate bullet advances, the Bank analyzes the disparity between the cost of funds/swap-curve spread and the three-month discount note/LIBOR spread. In the case where this disparity is large, the Bank would likely swap the advance and pass the savings in the form of lower advance rates to our members.

Competition

        Advances.    Demand for the Bank's advances is affected by, among other things, the cost of other available sources of liquidity for its members, including deposits. The Bank competes with other suppliers of wholesale funding, both secured and unsecured. Such other suppliers may include investment-banking concerns, commercial banks, and, in certain circumstances, other FHLBanks.

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Smaller members may have access to alternative funding sources, including sales of securities under agreements to repurchase and brokered certificates of deposit, while larger members may also have access to federal funds, negotiable certificates of deposit, bankers' acceptances, and medium-term notes, and may also have independent access to the national and global credit markets and the Federal Reserve Discount Window. Additionally, some large commercial banks that have memberships in the FHLBanks have issued covered bonds in the European bond market and may issue covered bonds in the nascent U.S. covered bond market, each of which are funding strategies that may be adopted by other members of FHLBanks. More recently members have accessed the myriad of liquidity programs established in response to the continuing volatility in the global capital markets and the U.S. economic and housing recession, including the Troubled Assets Relief Program's (the TARP's) capital injections which directly increases each recipient's ability to lend, favorable changes to the Federal Reserve Board's requirements for borrowing directly from the Federal Reserve Banks, the Federal Reserve Board's commercial paper facility, and the FDIC's Temporary Liquidity Guarantee Program as surrogates to the Bank's traditional advance products, each as described under Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Legislative and Regulatory Developments. The availability of alternative funding sources to members can significantly influence the demand for the Bank's advances and can vary as a result of other factors including, among others, market conditions, members' creditworthiness, and availability of collateral. Further, demand for the Bank's advances may be adversely impacted by certain legislative and regulatory developments. For example, on February 27, 2009, the FDIC approved a final rule to increase deposit insurance premium assessments based on secured liabilities, including the Bank's advances, to the extent that the institution's ratio of secured liabilities to domestic deposits exceeds 25 percent as further described under Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Legislative and Regulatory Developments. The demand for advances from Bank members impacted by this final rule may decrease due to the increased all-in cost from their increased premium assessments.

        Mortgage Loans Held for Portfolio.    The activities of the Bank's MPF portfolio are subject to significant competition in purchasing conventional, conforming fixed-rate mortgage and government-insured loans. The Bank faces competition in customer service, the prices paid for these assets, and in ancillary services such as automated underwriting. Historically, the most direct competition for mortgages came from other housing GSEs that also purchase conventional, conforming fixed-rate mortgage loans, specifically Fannie Mae and Freddie Mac. The recently announced Federal Reserve Board agency MBS purchase program, as described in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Legislation and Regulatory Developments, may dramatically alter the market for fixed-rate mortgage loans. This program, initiated to drive mortgage rates lower, make housing more affordable, and help stabilize home prices, may lead to continued artificially low agency mortgage pricing. Comparative MPF price execution, which is a function of the FHLBank debt issuance costs, may not be competitive as a result. This trend could continue and member demand for MPF products could diminish.

        Debt Issuance and Interest-Rate Exchange Agreements.    The Bank competes with corporate, sovereign, and supranational entities for funds raised in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs or lesser amounts of debt issued at the same cost than otherwise would be the case. In addition, the availability and cost of funds raised through the issuance of certain types of unsecured debt may be adversely affected by regulatory initiatives that discourage investments by certain institutions in unsecured debt with certain volatility or interest-rate-sensitivity characteristics. More recently, the FHLBanks have faced competition in their funding operations from debt issued by banks under the Temporary Liquidity Guarantee Program, as more fully discussed in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity. These factors may adversely impact the Bank's ability to effectively complete

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transactions in the swap market. Because the Bank uses interest-rate-exchange agreements to modify the terms of many of its CO bond issues, conditions in the swap market may affect the Bank's cost of funds.

        In addition, the sale of callable debt and the simultaneous execution of callable interest-rate-exchange agreements that mirror the debt have been important sources of competitive funding for the Bank. As such, the availability of markets for callable debt and interest-rate-exchange agreements may be an important determinant of the Bank's relative cost of funds. There is considerable competition among high-credit-quality issuers in the markets for callable debt and for interest-rate-exchange agreements. There can be no assurance that the current breadth and depth of these markets will be sustained.

Assessments

        REFCorp Assessment.    Although the Bank is exempt from all federal, state, and local taxation, except for property taxes, it is obligated to make payments to REFCorp in the amount of 20 percent of net earnings after AHP expenses. There is no REFCorp payment obligation when net earnings are zero or less, as was the case for 2008. The REFCorp contribution requirement was established by Congress in 1989 to provide funds to pay a portion of the interest on debt issued by the Resolution Trust Corporation that was used to assist failed savings and loan institutions. These interest payments totaled $300 million per year, or $75 million per quarter for the 12 FHLBanks through 1999. In 1999, the Gramm-Leach-Bliley Act of 1999 (GLB Act) changed the annual assessment to a flat rate of 20 percent of net earnings (defined as net income determined in accordance with accounting principles generally accepted in the United States of America (GAAP)) after AHP expense. Since 2000, the FHLBanks have been required to make payments to REFCorp until the total amount of payments made is equivalent to a $300 million annual annuity with a final maturity date of April 15, 2030. The expiration of the obligation is shortened as the 12 FHLBanks make payments in excess of $75 million per quarter.

        Because the FHLBanks contribute a fixed percentage of their net earnings to REFCorp, the aggregate amounts paid have exceeded the required $75 million per quarter for the past several years. As specified in the Finance Agency regulation that implements Section 607 of the GLB Act, the payment amount in excess of the $75 million required quarterly payment is used to simulate the purchase of zero-coupon Treasury bonds to defease all or a portion of the most distant remaining $75 million quarterly payment. The Finance Agency, in consultation with the Secretary of the Treasury, selects the appropriate zero-coupon yields used in this calculation. Through December 31, 2008, the FHLBanks' aggregate payments have satisfied $42.5 million of the $75 million requirement for April 15, 2013 and all scheduled payments thereafter. These defeased payments, or portions thereof, could be restored in the future if actual REFCorp payments of the 12 FHLBanks fall short of $75 million in any given quarter. Contributions to REFCorp will be discontinued once all obligations have been fulfilled. However, due to the interrelationships of all future earnings of the 12 FHLBanks, the total cumulative amount to be paid by the Bank to REFCorp is not determinable.

        If the Bank experienced a net loss during a quarter, but still had net income for the year, the Bank's obligation to the REFCorp would be calculated based on the Bank's year-to-date GAAP net income. The Bank would be able to reduce future assessment payments by the amounts paid in excess of its calculated annual obligation. If the Bank experienced a net loss for a full year, the Bank would have no obligation to the REFCorp for the year.

        During the fourth quarter of 2008, the Bank recorded a loss before assessments of $331.5 million which resulted in an overpayment of the Bank's 2008 REFCorp obligation. The amount of the overpayment is recorded as a prepaid asset on the statement of condition and will be used towards future assessments.

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        AHP Assessment.    Annually, the FHLBanks must set aside for the AHP the greater of $100 million or 10 percent of the current year's net income before charges for AHP and interest expense associated with mandatorily redeemable capital stock (regulatory net income). This definition of regulatory net income for purposes of calculating the AHP assessment has been determined by the Finance Agency.

        In annual periods where the Bank's regulatory net income is zero or less, as was the case for 2008, the AHP assessment for the Bank is zero. However, if the annual 10 percent contribution provided by each individual FHLBank is less than the minimum $100 million contribution required for FHLBanks as a whole, the shortfall is allocated among the FHLBanks based upon the ratio of each FHLBank's income before AHP and REFCorp to the sum of the income before AHP and REFCorp of the 12 FHLBanks combined, except that the required annual AHP contribution for an FHLBank shall not exceed its net earnings for the year. REFCorp determines allocation of this shortfall. There was no such shortfall in any of the preceding three years.

        The actual amount of the AHP contribution is dependent upon both the Bank's regulatory net income minus payments to REFCorp, and the income of the other FHLBanks; thus future contributions are not determinable.

        Through the AHP, the Bank is able to address some of the affordable-housing needs of the communities served by its members. The Bank partners with member financial institutions to work with housing organizations to apply for funds to support initiatives that serve very low- to moderate-income households. The Bank uses funds contributed to the AHP program to award grants and low-interest-rate advances to its member financial institutions that make application for such funds for eligible, largely nonprofit, affordable housing development organizations in their respective communities. Such funds are awarded on the basis of an AHP Implementation Plan adopted by the Bank's board of directors, which implements a nationally based scoring methodology mandated by the Finance Agency.

        The AHP and REFCorp assessments are calculated simultaneously due to their interdependence. The REFCorp has been designated as the calculation agent for AHP and REFCorp assessments. Each FHLBank provides its net income before AHP and REFCorp assessments to the REFCorp, which then performs the calculations at each quarterend date.

ITEM 1A.    RISK FACTORS

        The following discussion summarizes some of the more important risks that the Bank faces. This discussion is not exhaustive, and there may be other risks that the Bank faces, which are not described below. The risks described below, if realized, could adversely impact the Bank's business operations, financial condition, and future results of operations, and, among other things, could result in the Bank being prohibited from paying dividends and/or repurchasing and redeeming its common stock.

The Bank May Become Liable for All or a Portion of the Consolidated Obligations of the FHLBanks, Which Could Adversely Impact the Bank's Financial Condition and Results of Operations.

        Each of the FHLBanks relies upon the issuance of COs as a primary source of funds. COs are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, the Bank is jointly and severally liable with the other FHLBanks for the COs issued by the FHLBanks through the Office of Finance, regardless of whether the Bank receives all or any portion of the proceeds from any particular issuance of COs.

        The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any COs, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. Accordingly, the Bank could incur significant liability beyond its primary obligation under COs due to the failure of other FHLBanks to meet their obligations, which could adversely impact the Bank's financial condition and results of operations.

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The Bank is Subject to Increased Credit Risk Exposures Related to Subprime and Alt-A Mortgage Loans that Back its MBS Investments, and Any Increased Delinquency Rates and Credit Losses Could Adversely Affect the Yield on or Value of These Investments.

        The Bank invests in private-label MBS, some of which are backed by subprime and Alt-A mortgage loans. While there is no universally accepted definition for prime and Alt-A underwriting standards, in general, prime underwriting implies a borrower without a history of delinquent payments and documented income and a loan amount that is at or less than 80 percent of the market value of the house, while Alt-A underwriting implies a prime borrower with limited income documentation and/or a loan-to-value ratio of higher than 80 percent. Although the Bank only invested in senior tranches with the highest long-term debt rating when purchasing those securities, some of those securities have subsequently been downgraded. See Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Credit Risk—Investments for a description of the Bank's portfolio of investments in these securities. Throughout 2008, MBS backed by subprime and Alt-A mortgage loans experienced increased delinquencies and loss severities.

        In addition, market prices for the privately issued subprime and Alt-A securities the Bank holds have deteriorated since yearend December 31, 2007, due to market uncertainty and illiquidity. The significant widening of credit spreads that has occurred since December 31, 2007, could further reduce the fair value of the Bank's portfolio of MBS. As a result, the Bank could experience additional other-than-temporary impairment charges on those investment securities in the future, which could result in significant losses. See Item 7A Quantitative and Qualitative Disclosures About Market Risk—Credit Risk—Investments for more information on values of the Bank's subprime and Alt-A MBS.

        As described in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates, other-than-temporary-impairment assessment is a subjective and complex assessment by management. The Bank incurred a charge of $381.7 million for MBS that management determined were other other-than-temporarily impaired as of December 31, 2008, which represented the aggregate difference between the fair value and current book value of the affected MBS at that date. If loan credit performance of the Bank's private-label MBS portfolio deteriorates beyond the forecasted assumptions concerning loan default rates, loss severities, and prepayment speeds, it may be determined that other private-label securities in the portfolio are other-than-temporarily impaired, and the Bank would recognize an impairment loss equal to the aggregate difference between each affected security's then-current carrying amounts and its fair value. For example, when loss severities are increased by five percentage points, potential principal and interest shortfall is $62.8 million, or 1.48 percent of par value as of December 31, 2008; the unrealized loss in fair value associated with the securities impacted in this scenario is $313.6 million as of December 31, 2008. When default rates are increased by 10 percentage points, projected principal and interest shortfall, according to the stress test scenario results, is $62.5 million, or 1.48 percent of par value as of December 31, 2008, while the unrealized loss in fair value is $327.5 million as of December 31, 2008. When voluntary prepayment rates are decreased by a proportional 15 percent, according to the stress test scenario results, the potential principal and interest shortfall is $42.3 million, or 1.00 percent of par value as of December 31, 2008, while the unrealized loss in fair value for the affected securities is $134.2 million as of December 31, 2008. Under each of these three stress test scenarios, the Bank would recognize substantial losses. At December 31, 2008, the Bank had an accumulated deficit of $19.7 million. The Bank is subject to certain minimum capitalization requirements, as described in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Requirements, and, if the Bank experienced losses that resulted in the Bank not meeting required capitalization levels, the Bank would be subject to certain capital restoration requirements and prohibited from redeeming or repurchasing capital stock without the prior approval of the Finance Agency which could adversely impact a member's investment in the Bank's capital stock.

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Other FHLBank Determinations of Other-Than-Temporary-Impairment of Investments Commonly Held with the Bank May Cause the Bank to Recognize Other-Than-Temporary-Impairment Charges on Those Same Investments.

        As described in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates, OTTI assessment is a subjective and complex assessment. The Bank qualitatively considers all available information when assessing whether an impairment is other than temporary. Such information can include information the Bank has concerning whether another FHLBank has determined that the security being assessed is other than temporarily impaired. Since the Bank's financial statements are combined and published with the other FHLBanks in connection with the debt issuance process of the FHLBank System, the Bank from time to time may consider this qualitative factor in its assessment of OTTI.

        During the process of completing the Bank's other-than-temporary assessment of its investments for yearend 2008, the Bank was informed that there were three private-label MBS in the Bank's portfolio that were also owned by other FHLBanks which had concluded that these securities were other-than-temporarily impaired. While the Bank's quantitative assessment of the cash flows project no credit loss for these three securities, the Bank recognized these securities to be other-than-temporarily impaired and recorded an associated impairment charge of $42.7 million. While the Bank cannot provide any assurance that all results of its OTTI assessment are or will be consistent with all other FHLBanks, this action was taken to provide consistent reporting on these securities in the FHLBanks' Combined Financial Report and is reflective of a qualitative factor in our OTTI assessment.

Ratings Downgrades and Decreases in the Fair Value of the Bank's Investments May Increase the Bank's Risk-Based Capital Requirement.

        The Bank is subject to certain minimum capital requirements including a risk-based capital requirement, as described in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Capital. The risk-based capital requirement is the sum of credit-risk, market-risk, and operations-risk capital requirements. Only permanent capital, defined as retained earnings plus Class B stock, can satisfy the risk-based capital requirement. Each of the Bank's investments carries a credit-risk capital requirement that is based on the rating of the investment, and for non-mortgage investments and advances, based on tenor, and the total credit-risk capital requirement is the sum of each investment's credit-risk capital requirement. Accordingly, ratings downgrades on individual investments cause the total credit-risk-based capital requirement to rise. Declines in the fair value of the Bank's investments below 85 percent of book value of equity increase the Bank's market-risk capital requirement. The operations-risk capital requirement is impacted by increases in credit-risk and market-risk capital requirements, because the operations-risk capital requirement is 30 percent of the sum of the credit-risk and market-risk capital requirements.

        At December 31, 2008, the Bank's total risk-based capital requirement was approximately $2.1 billion in comparison with approximately $363.5 million at December 31, 2007, which primarily resulted from the sharp decline in the market value of MBS during the first half of 2008. At December 31, 2008, the Bank had permanent capital of $3.6 billion and so was in excess of its risk-based capital requirement by $1.5 billion. The credit rating of several of the Bank's investments have been downgraded since yearend 2008, in some cases to below investment grade ratings, and the total risk-based capital requirement at February 28, 2009, was $2.4 billion. At February 28, 2009, the Bank had permanent capital of $3.7 billion and so was in excess of its risk-based capital requirement by $1.3 billion. However, further ratings downgrades on the Bank's investments or decreases in the fair value of the Bank's investments may further increase the Bank's risk-based capital requirement. If the Bank is unable to satisfy its risk-based capital requirement, the Bank would be subject to certain capital restoration requirements and prohibited from paying dividends, irrespective of whether the Bank has retained earnings or current net income, and redeeming or repurchasing capital stock without the prior

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approval of the Finance Agency which could adversely impact a member's investment in the Bank's capital stock.

Proposed Legislation in Response to the U.S. Housing and Economic Recession May Adversely Impact the Bank's Investments in MBS and Loans and Member Borrowing Capacity.

        Certain proposed federal legislation in responses to the continuing U.S. housing and economic recession may adversely impact the Bank's investments in MBS and loans and member borrowing capacity. For example, federal legislation has been proposed that would allow bankruptcy cramdowns on first mortgages of owner-occupied homes as a response to the U.S. economic recession and attendant U.S. housing recession. The proposed legislation would allow a bankruptcy judge to reduce the principal amount of such mortgages to the current market value of the property, such reduction currently being prohibited by the Bankruptcy Reform Act of 1994. Some of the private-label MBS in which the Bank has invested contains a cap on bankruptcy losses, and when such cap is exceeded, bankruptcy losses are allocated among all classes of such MBS on a pro-rata basis among the classes of such MBS rather than by seniority. In the event that this legislation is enacted so as to apply to all existing mortgage debt (including first mortgages of owner-occupied homes), then the Bank could face increased risk of credit losses on its private-label MBS that include such bankruptcy caps due to the erosion of its credit protection it would have otherwise had via its senior class of such MBS and any such credit losses may lead to other-than-temporary impairment charges for affected private-label MBS in the Bank's held-to-maturity portfolio. Additionally, bankruptcy cramdowns could adversely impact the value of the collateral held in support of the Bank's loans to members, resulting in reduction of member borrowing capacity, and could adversely impact value of the MPF mortgage loans held by the Bank. See Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operation—Recent Legislative and Regulatory Developments for additional discussion of this proposed legislation and its possible impact on the Bank.

The Bank is Subject to a Complex Body of Laws and Regulations, Which Could Change in a Manner Detrimental to the Bank's Operations.

        The FHLBanks are GSEs, organized under the authority of the FHLBank Act, and, as such, are governed by federal laws and regulations promulgated, adopted, and applied by the Finance Agency, an independent agency in the executive branch of the federal government, that regulates the Bank. Congress may amend the FHLBank Act or other statutes in ways that significantly affect (1) the rights and obligations of the FHLBanks, and (2) the manner in which the FHLBanks carry out their housing-finance mission and business operations. New or modified legislation enacted by Congress or regulations adopted by the Finance Agency or other financial services regulators could adversely impact the Bank's ability to conduct business, or on the cost of doing business.

        The enactment of the HERA on July 31, 2008, and subsequent actions by the Bank's new regulator, the Finance Agency, to adopt or modify regulations, orders or policies, including interpretations or applications by the Bank's prior regulator, the Finance Board, could adversely impact the Bank's business, operations, and/or financial condition. See Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Legislative and Regulatory Developments for a description of HERA. The Bank cannot predict how HERA or subsequent actions by the Finance Agency involving the adoption or modification of regulations, orders or policies, including interpretations or applications by the Finance Agency, may adversely impact the Bank's business, operations, and/or financial condition.

        In accordance with HERA, effective January 30, 2009, the Finance Agency promulgated an interim final rule on capital classifications and critical capital levels for the FHLBanks, described in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Capital. The interim rule has a comment deadline of May 15, 2009, following which the Finance Agency is expected to promulgate a final rule on capital classifications and critical capital

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levels for the FHLBanks. The interim final rule, among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Finance Agency has discretion to re-classify an FHLBank and to modify or add to corrective action requirements for a particular capital classification. If the Bank becomes classified into a capital classification other than adequately capitalized, the Bank may be adversely impacted by the corrective action requirements for that capital classification. Although the Bank cannot predict the content of the final capital classification rule, such final rule may include additional requirements that could adversely impact the Bank.

        The Bank cannot predict whether additional regulations will be promulgated or whether additional legislation will be enacted, and the Bank cannot predict the effect of any such additional regulations or legislation on the Bank's operations. Additional changes in regulatory or statutory requirements could result in, for example, an increase in the FHLBanks' cost of funding, a change in permissible business activities, or a decrease in the size, scope, or nature of the FHLBanks' lending, investment, or mortgage-purchase-program activities, which could adversely impact the Bank's financial condition and results of operations. The enactment of legislation and regulations may also have an indirect, adverse impact on the Bank. See "The Bank Faces Competition for Loan Demand and Loan Purchases, Which Could Adversely Impact Earnings" in this Item for discussion of the enactment of certain federal legislation and regulations that have increased competition to the Bank as a supplier of advances, which may adversely impact the Bank's earnings. See "Proposed Legislation in Response to the U.S. Housing and Economic Recession May Adversely Impact the Bank's Investments in MBS and Loans and Member Borrowing Capacity" in this Item for a discussion of proposed legislation that may adversely impact the Bank's investments and member borrowing capacity.

The Loss of Significant Members May Adversely Impact the Bank's Capital and Result in Lower Demand for the Bank's Products and Services.

        At December 31, 2008, the Bank's five largest members held 51.6 percent of the Bank's stock. The loss of significant members or a significant reduction in the level of business they conduct with the Bank could result in a reduction of the Bank's capital and lower demand for the Bank's products and services in the future. Effective December 8, 2008, the Bank placed a moratorium on all excess stock repurchases, and on February 26, 2009, the Bank announced that dividend payments for 2009 are unlikely. At December 31, 2008, the Bank recorded a net loss of $274.2 million for the quarter ended December 31, 2008, resulting in an accumulated deficit of $19.7 million and became prohibited from paying dividends until the Bank generates sufficient net income to have retained earnings. The inability to pay dividends and the moratorium on all excess stock purchases may be an incentive for members to either withdraw from membership or reduce demand for the Bank's products and services.

        Also, consolidations within the financial services industry may reduce the number of current and potential members in the Bank's district. A financial institution acquiring a member of the Bank would be precluded from becoming a member unless it maintained a charter in one of the New England states. Industry consolidation of large members could lead to the concentration of large members in some FHLBank districts and a related decrease in membership and significant loss of business for some FHLBanks. Industry consolidation could also cause the Bank to lose members whose business and stock investments are so substantial that their loss could threaten the viability of the Bank. In turn, the Bank might be forced to seek a merger with another FHLBank district.

        A decrease in demand for the Bank's products and services and an increase in redemptions of the Bank's capital stock due to the loss of significant members may adversely impact the Bank's results of operations and financial condition, the impact of which may be greater during periods when the Bank is experiencing losses or reduced net income.

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Changes in Interest Rates Could Significantly Affect the Bank's Earnings.

        Like many financial institutions, the Bank realizes income primarily from the spread between interest earned on the Bank's outstanding loans and investments and interest paid on the Bank's borrowings and other liabilities, as measured by its net interest spread. Although the Bank uses various methods and procedures to monitor and manage exposures due to changes in interest rates, the Bank may experience instances when either the Bank's interest-bearing liabilities will be more sensitive to changes in interest rates than its interest-earning assets, or vice versa. These impacts could be exacerbated by prepayment and extension risk, which is the risk that mortgage-related assets will be refinanced in low-interest-rate environments, or will remain outstanding at below-market yields when interest rates increase. In any case, interest rate moves contrary to the Bank's position could adversely impact the Bank's financial condition and results of operations.

The Bank Relies Upon Derivative Instruments to Reduce its Interest-Rate Risk, and the Bank May Not Be Able to Enter Into Effective Derivative Instruments on Acceptable Terms.

        The Bank uses derivative instruments to reduce its interest-rate risk and mortgage-prepayment risk. The Bank's management determines the nature and quantity of hedging transactions based on various factors, including market conditions and the expected volume and terms of advances. As a result, the Bank's effective use of these instruments depends upon the ability of the Bank's management to determine the appropriate hedging positions in light of the Bank's assets, liabilities, and prevailing and anticipated market conditions. In addition, the effectiveness of the Bank's hedging strategy depends upon the Bank's ability to enter into these instruments with acceptable parties, upon terms satisfactory to the Bank, and in the quantities necessary to hedge the Bank's corresponding obligations. If the Bank is unable to manage its hedging positions properly, or is unable to enter into hedging instruments upon acceptable terms, the Bank may be unable to effectively manage its interest-rate and other risks, which could adversely impact the Bank's financial condition and results of operations.

Counterparty Credit Risk Could Adversely Affect the Bank.

        The Bank assumes unsecured credit risk when entering into money-market transactions and financial derivatives transactions with counterparties. The insolvency or other inability of a significant counterparty to perform its obligations under such transactions or other agreement could have an adverse effect on the Bank's financial condition and results of operations. For example, the Bank had engaged in certain derivatives transactions with Lehman Brothers Special Financing, Inc., and the petition for bankruptcy by Lehman Brothers Holdings, its parent, in the third quarter of 2008 precipitated the terminations of those derivative transactions. Although the Bank experienced no loss based on those terminations, no assurance can be made that the Bank will not experience a loss in the event of the insolvency of another counterparty in the future.

Changes in the Bank's or Other FHLBanks' Credit Ratings or Other Negative News May Adversely Impact the Bank's Ability to Issue Consolidated Obligations on Acceptable Terms.

        The Bank currently has the highest credit rating from Moody's and S&P. In addition, the COs of the FHLBanks have been rated Aaa/P-1 by Moody's and AAA/A-1+ by S&P. These ratings are subject to revision or withdrawal at any time by the rating agencies; therefore, the Bank may not be able to maintain these credit ratings. S&P has assigned two FHLBanks a stable rating with long-term ratings of AA and AA+ as of February 28, 2009. Although the credit ratings of the COs of the FHLBanks have not been affected by these ratings, similar ratings actions or negative guidance may adversely affect the Bank's cost of funds and ability to issue COs on acceptable terms, which could adversely impact the Bank's financial condition and results of operations. Similarly, in the absence of rating-agency actions, the revelation of negative news affecting any FHLBank, such as material losses or increased risk of losses, may also adversely impact the Bank's cost of funds.

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The Bank's Funding Depends upon its Ability to Access the Capital Markets.

        The Bank's primary source of funds is the sale of COs in the capital markets. The Bank's ability to obtain funds through the sale of COs depends in part on prevailing conditions in the capital markets at that time, which are beyond the Bank's control. Accordingly, the Bank cannot make any assurance that it will be able to obtain funding on terms acceptable to the Bank, if at all. If the Bank cannot access funding when needed, the Bank's ability to support and continue its operations would be adversely impacted, which would, in turn, adversely impact the Bank's financial condition and results of operations.

        Throughout 2008 and continuing into 2009, the Bank's funding costs associated with issuing long-term CO bonds became more volatile and rose sharply compared to LIBOR and U.S. Treasury securities, reflecting dealers' reluctance to sponsor, and investors' continuing reluctance to buy longer-term GSE debt, coupled with strong investor demand for high-quality, short-term debt instruments, such as U.S. Treasury securities and discount notes. As a result, the Bank has also become more reliant on the issuance of discount notes for funding. Any significant disruption in the short-term debt markets could have an adverse impact on the Bank. If any such disruption was prolonged the Bank may not be able to obtain funding on acceptable terms and the higher cost of longer-term liabilities would likely cause the Bank to increase advance rates, which could adversely impact demand for advances and, in turn, the Bank's results of operations. Alternatively, continuing to fund longer-term assets with very short-term liabilities, such as discount notes, could adversely impact the Bank's results of operations if the cost of those short-term liabilities rises to levels above the yields on the assets being funded. If the Bank cannot access funding when needed on acceptable terms, its ability to support and continue its operations could be adversely impacted, which could adversely impact its financial condition and results of operations, and the value of membership in the Bank.

        The rise in the Bank's long-term funding costs has been offset somewhat by a Federal Reserve Board initiative to purchase GSE debt, including FHLBank debts, as further discussed in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Liquidity. The Bank could be adversely impacted if this support were removed and resulted in a rise in the Bank's long-term funding costs.

Compliance with Regulatory Contingency Liquidity Guidance Could Adversely Impact the Bank's Earnings.

        On March 6, 2009, the Bank received final guidance from the Finance Agency requiring the Bank to maintain sufficient liquidity through short-term investments in an amount at least equal to the Bank's cash outflows under two different scenarios, as discussed in Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Liquidity Risk. Prior to this time, regulations required the Bank to maintain five calendar days of contingent liquidity. The new requirement revises and formalizes guidance provided to the FHLBanks in the third quarter of 2008 and is designed to enhance the Bank's protection against temporary disruptions in access to the FHLBank debt markets in response to a rise in capital markets volatility. To satisfy this additional requirement, the Bank maintains balances in shorter-term investments, which may earn lower interest rates than alternate investment options and may, in turn, adversely impact net interest income. In certain circumstances, the Bank may need to fund overnight or shorter-term advances with short-term discount notes that have maturities beyond the maturities of the related advances, thus increasing the Bank's short-term advance pricing or reducing net income through lower net interest spread. To the extent these increased prices make the Bank's advances less competitive, advance levels and, therefore, the Bank's net interest income may be adversely impacted.

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The Bank Faces Competition for Loan Demand and Loan Purchases, Which Could Adversely Impact Earnings.

        The Bank's primary business is providing liquidity to its member primarily by making advances to, and purchasing mortgage loans from, its members. The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks, and, in certain circumstances, other FHLBanks. Many of the Bank's competitors are not subject to the same body of regulation applicable to the Bank. This is one factor among several that may enable them to offer wholesale funding on terms that the Bank is not able to offer and that members deem more desirable than the terms offered by the Bank on its advances.

        Certain of the federal government's responses to the continuing U.S. economic recession, such as the Emergency Economic Stabilization Act of 2008 (the EESA), including the TARP which is part of the EESA, changes to the Federal Reserve Board's borrowing requirements, the Federal Reserve Board's commercial paper funding facility, the FDIC's Temporary Liquidity Guarantee Program, and a final rule by the FDIC to increase premium assessments on secured liabilities in some instances, including FHLBank advances, each as described in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operation—Recent Legislative and Regulatory Developments, have increased competition to the Bank as a supplier of advances, which may have an adverse impact on the Bank's earnings. The TARP's direct investments in financial institutions improve each recipient's capitalization, which directly increases each recipient's ability to lend. Any such lending may be made to the Bank's members and such lending would be in direct competition with the Bank's advances. Certain changes to the Federal Reserve Board's borrowing requirements, such as a reduction on the required discount on pledged collateral and lowered interest rates, have increased the attractiveness of Federal Reserve Bank loans, which are in direct competition with the Bank's advances. The Federal Reserve Board's commercial paper funding facility provides eligible institutions with the ability to raise funds and therefore directly competes with the Bank's advances. The Temporary Liquidity Guarantee Program may decrease the funding costs of any Bank member that participates in the program which, in turn, may reduce member demand for advances from the Bank. The final rule by the FDIC to increase premium assessments on secured liabilities, including FHLBank advances, may decrease demand for advances by affected members due to the increase in the effective all-in cost of FHLBank advances for such members.

        Similarly, certain federal government responses to the continuing U.S. economic recession have increased competition to the Bank's purchases of loans through the MPF Program which may have an adverse impact on the Bank's earnings. For example, beginning in November 2008, deterioration in FHLBank funding levels combined with a dramatic increase in mortgage prices, due in part to recent moves by the U.S. Treasury and Federal Reserve Board to initiate agency MBS purchase programs, as described in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Legislative and Regulatory Developments, adversely impacted prospective MPF volume estimates. To offset this dislocation, enhancements to MPF pricing were adopted in December 2008 to better incorporate the Bank's cost of funding and hedging MPF loans. The immediate impact of the changes was to make MPF pricing less competitive compared with Fannie Mae's and Freddie Mac's pricing. So long as pricing remains less competitive than Fannie Mae's and Freddie Mac's pricing, the Bank expects member demand for MPF products to be weak.

        The availability to the Bank's members of different products from alternative funding sources, the terms of which may be more desirable than the terms of products offered by the Bank, may significantly decrease the demand for the Bank's advances and/or loan purchases. Further, any change made by the Bank in the pricing of its advances in an effort to compete effectively with these competitive funding sources may decrease the profitability on advances, may reduce earnings, and, in turn, the Bank's available funds to pay dividends. More generally, a decrease in the demand for

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advances and/or loan purchases, or a decrease in the Bank's profitability on advances and/or loan purchases may adversely impact the Bank's financial condition and results of operations.

Increased AHP Contribution Rates by the Bank Could Decrease Available Funds to Pay as Dividends to Members.

        If the total annual net income before AHP expenses of the 12 FHLBanks were to fall below $1 billion, each FHLBank would be required to contribute more than 10 percent of its net income after REFCorp expenses to its AHP to meet the minimum $100 million annual contribution. Increasing the Bank's AHP contribution in such a scenario would reduce the Bank's net income after AHP charges and, in turn, reduce available funds to pay as dividends.

The Bank Relies Heavily Upon Information Systems and Other Technology.

        The Bank relies heavily upon information systems and other technology to conduct and manage its business. To the extent that the Bank experiences a failure or interruption in any of these systems or other technology, the Bank may be unable to conduct and manage its business effectively, including, without limitation, its hedging and advances activities. While the Bank has implemented a Disaster Recovery and Business Continuity Plan, the Bank can make no assurance that it will be able to prevent, timely and adequately address, or mitigate the negative effects of any such failure or interruption. Any failure or interruption could significantly harm the Bank's customer relations, risk management, and profitability, which could adversely impact the Bank's financial condition and results of operations.

The Bank May Not Be Able to Pay Dividends at Rates Consistent with Past Practices.

        The Bank's board of directors may declare dividends on the Bank's capital stock, payable to members, from the Bank's previously retained earnings and current net income. On December 14, 2008, the Bank's board of directors adopted a quarterly dividend payout restriction that limits the quarterly dividend payout to no more than 50 percent of quarterly earnings in the event that the retained earnings target exceeds the Bank's current level of retained earnings, although the Bank's board of directors retains full discretion over the amount, if any, and timing of any dividend payout, subject to this payout restriction. The Bank's retained earnings target is $600.0 million. At December 31, 2008, the Bank recorded a net loss of $274.2 million for the quarter ended December 31, 2008, resulting in an accumulated deficit of $19.7 million. Accordingly, the Bank was prohibited from paying a dividend for the quarter, and the Bank will continue to be prohibited from paying dividends until the Bank generates sufficient net income to eliminate the accumulated deficit. On February 26, 2009, the Bank announced that dividend payments for 2009 are unlikely.

        The Bank's ability to pay dividends is also subject to statutory and regulatory requirements. For example, potential promulgation of regulations requiring higher levels of retained earnings or mandated revisions to the Bank's retained earnings model could lead to higher required levels of retained earnings, and thus, lower amounts of net income available to be paid out as dividends.

        Further, events such as changes in the Bank's market-risk profile, credit quality of assets held, and increased volatility of net income effects of the application of certain GAAP may affect the adequacy of the Bank's retained earnings. This in turn may require the Bank to increase its target level of retained earnings and concomitantly reduce its dividends from historical dividend levels in order to achieve and maintain the future targeted amounts of retained earnings.

The Bank May Not Be Able to Repurchase or Redeem Members' Capital Stock Consistent with Past Practices.

        The Bank must meet its minimum regulatory capital requirements at all times. If the Bank were to fail to maintain an adequate level of total capital to comply with minimum regulatory capital

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requirements, it would be precluded from repurchasing excess capital stock or from redeeming capital stock until it restored compliance, which could cause members to withdraw from membership.

        Effective December 8, 2008, the Bank placed a moratorium on all excess stock repurchases in the light of certain liquidity challenges for the Bank that have arisen during 2008 and continue to develop into 2009. These liquidity challenges are discussed under Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Liquidity. This moratorium may be an incentive for members to withdraw from membership and a disincentive to prospective members from becoming members, either of which could have an adverse impact on the Bank.

The Public Perception of Government-Sponsored Enterprises May Adversely Impact the Bank's Business Activities, Future Advance Balances, and the Cost of Raising Capital.

        The housing-related GSEs, Fannie Mae, Freddie Mac, and the FHLBank System, issue triple-A-rated agency debt to fund their operations. From time to time negative announcements by Fannie Mae and Freddie Mac concerning accounting problems, risk-management issues, and regulatory enforcement actions have created pressure on debt pricing for all GSEs, as investors have perceived such instruments as bearing increased risk. Similar announcements by the FHLBanks may contribute to this pressure on debt pricing.

        The FHLBank System may have to pay a higher rate of interest on its COs to make them attractive to investors. If the Bank maintains its existing pricing on advances, the resulting increased costs of issuing COs may adversely impact the Bank's financial condition and results of operations and could cause advances to be less profitable for the Bank. If, in response to this decrease in spreads, the Bank changes the pricing of its advances, the advances may be less attractive to members, and the amount of new advances and the Bank's outstanding advance balances may decrease. In either case, the increased cost of issuing COs may adversely impact the Bank's financial condition and results of operations.

The Bank Relies on the FHLBank of Chicago in Participating in the MPF Program in that FHLBank's Capacity as MPF Provider and Could Be Adversely Impacted if the FHLBank of Chicago Changed or Ceased to Operate the MPF Program, or Experienced Information Systems, Technological Interruptions, or Failures in its Capacity as MPF Provider.

        As part of its business, the Bank participates in the MPF program with the FHLBank of Chicago, which accounts for 5.2 percent of the Bank's total assets as of December 31, 2008, and 7.7 percent of interest income. The Bank relies on the FHLBank of Chicago as the MPF provider to operate and administer the MPF program. If the FHLBank of Chicago changes, or ceases to operate the MPF program or experiences a failure or interruption in its information systems and other technology in its operation of the MPF program, the Bank's mortgage-purchase business could be adversely affected, and the Bank could experience a related decrease in its net interest margin, financial condition, and profitability. In the same way, the Bank could be adversely affected if any of the FHLBank of Chicago's third-party vendors it engages in the operation of the MPF program were to experience operational or technological difficulties.

The Bank Could Be Adversely Impacted from its Exposure to SMI Providers through the MPF Program.

        PFIs that sell mortgage loans to the Bank under the MPF Plus product provide required credit enhancement to the Bank for such mortgage loans by providing SMI purchased for the benefit of the Bank. Any such required SMI must be provided by mortgage insurers with a credit rating of AA- or better. At December 31, 2008, only one SMI provider satisfied this ratings requirement. Credit ratings indicate the assessments of nationally recognized statistical-rating organizations of the rated agencies to

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satisfy their obligations. The Bank had credit exposure to downgraded SMI providers of $563,000 at December 31, 2008. If an SMI provider fails to fulfill its obligations, the Bank may bear the full loss of the borrower default on the related mortgage loans, subject to any other credit-risk-sharing arrangements with the related PFIs. Any such losses could have an adverse impact on the Bank.

        See Item 1—Business—Mortgage Loan Finance and Item 7A—Quantitative and Qualitative Disclosures about Market Risk—Credit Risk—Mortgage Loans for additional discussion of the MPF Program.

The Bank Relies on Models to Value Financial Instruments and the Assumptions Used May have a Significant Effect on the Bank's Financial Position and Results of Operations.

        The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that are actively traded and have quoted market prices or parameters readily available, there is little to no subjectivity in determining fair value. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. Pricing models and their underlying assumptions are based on management's best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the related income and expense. The use of different models and assumptions, as well as changes in market conditions, could significantly affect the Bank's financial position and results of operations.

A Continuing or Broader Decline in U.S. Home Prices or in Activity in the U.S. Housing Market Could Adversely Impact the Bank's Earnings and Financial Condition.

        The deterioration of the U.S. housing market and national decline in home prices that began in 2007 continued and accelerated throughout 2008 and continues into 2009, and may adversely impact the financial condition of a number of the Bank's members, particularly those whose businesses are concentrated in the mortgage industry. One or more of the Bank's members may default on its obligations to the Bank for a number of reasons, such as changes in financial condition, a reduction in liquidity, operational failures, or insolvency. In addition, the value of residential mortgage loans pledged by the Bank's members to the Bank as collateral may decrease. If a member defaulted, and the Bank were unable to obtain additional collateral to make up for the reduced value of such residential mortgage loan collateral, the Bank could incur losses. A default by a member with significant obligations to the Bank could result in significant financial losses, which would adversely impact the Bank's results of operations and financial condition.

Declines in the Value of Subprime or Nontraditional Residential Mortgage Loans that Serve as Collateral May Negatively Impact the Bank's Business Operations, Financial Condition, and Future Results of Operations.

        To secure advances, the Bank accepts collateral from members that includes some amounts of subprime and nontraditional residential mortgage loans, as well as MBS that may be backed by subprime and nontraditional residential mortgage loans. The Bank also invests in private-label MBS backed by some amounts of subprime and nontraditional mortgage loans, including securities backed by Alt-A loans and pay option adjustable-rate mortgages. During 2008, delinquencies and losses with respect to residential mortgage loans generally have increased, particularly in the subprime and nontraditional sectors. In addition, residential property values in many states have declined or remained stable after extended periods during which those values had appreciated. As recent market conditions have continued to exhibit ongoing deterioration in the mortgage market, if delinquency and loss rates on subprime and nontraditional mortgages continue to increase, or if there is a further rapid decline in

37

residential real estate values continues, the Bank could be exposed to a greater risk that the collateral that has been pledged to secure advances would be inadequate in the event of default on an outstanding advance. Additionally, reduced collateral values could result in lower yields, lower fair values, or losses on MBS investments.

The Bank has Geographic Concentration Risks Related to its Private-Label MBS Portfolio that May Adversely Impact its Financial Condition and Performance.

        The Bank has geographic concentrations of private-label MBS secured by mortgage properties. See Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Credit Risk—Investments for additional information. To the extent that any of these geographic areas experiences significant further declines in the local housing markets, declining economic conditions, or a natural disaster, the Bank could experience increased losses on these investments.

The Bank has Geographic Concentration Risks Related to Collateral that May Negatively Impact its Financial Condition and Performance.

        The Bank has geographic concentrations of loans secured by mortgage properties that are pledged as collateral for advances. See Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Credit Risk—Advances for additional information. To the extent that any of these geographic areas experience significant further declines in the local housing markets, declining economic conditions, or a natural disaster, the Bank could be exposed to a greater risk that the collateral that has been pledged to secure advances would be inadequate in the event of default on an outstanding advance.

As Mortgage Servicers Continue Their Loan Modification and Liquidation Efforts, the Yield on or Value of the Bank's MBS Investments May Be Adversely Impacted.

        As mortgage loans continue to experience increased delinquencies and loss severities, mortgage servicers continue their efforts to modify these loans in order to mitigate losses. Such loan modifications increasingly may include reductions in interest rate and/or principal on these loans. Losses from such loan modifications may be allocated to investors in MBS backed by these loans in the form of lower interest payments and/or reductions in future principal amounts received.

        In addition, many servicers are contractually required to advance principal and interest payments on delinquent loans backing MBS investments, regardless of whether the servicer has received payment from the borrower; provided that the servicer believes it will be able to recoup the advanced funds from the underlying property securing the mortgage loan. Once the related property is liquidated, the servicer is entitled to reimbursement for these advances and other expenses incurred while the loan was delinquent. Such reimbursements, combined with decreasing property values in many areas, may result in higher losses being allocated to the Bank's MBS investments backed by such loans than the Bank may have expected or experienced to date.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        The Bank occupies 60,744 square feet of leased office space at 111 Huntington Avenue, Boston, Massachusetts 02199. The Bank also maintains 9,969 square feet of leased property for an off-site back-up facility in Westborough, Massachusetts. The Bank believes its properties are adequate to meet its requirements for the foreseeable future.

38

ITEM 3.    LEGAL PROCEEDINGS

        The Bank from time to time is 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 the Bank's financial condition or results of operations.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        The Bank held elections for two member and two independent directorships during the fourth quarter of 2008. See Item 10—Directors, Executive Officers, and Corporate Governance for information regarding member directors and independent directors and the directors' terms of office.

Election of Member Directorships

        The elections for the two member directorships were for Rhode Island directorships and voting was limited to the Bank's Rhode Island voting members. Members were required to submit written ballots for the election by November 28, 2008. The results of the voting were as follows:

State	Members Voting		Members Not Voting		Total Votes Cast		Total Votes Not Cast
Rhode Island		16		6		2,914,150		1,402,502

Nominee Name	Member	Votes Received
Edward T. Novakoff	RBS Citizens, N.A. Providence, Rhode Island 02903		1,787,828
Kevin M. McCarthy	Newport Federal Savings Bank Newport, Rhode Island 02719		826,062
William A. White	Coastway Credit Union Cranston, Rhode Island 02910		287,682
Richard L. Shaw, II	Union Federal Savings Bank North Providence, Rhode Island 02904		12,578

Election of Independent Directorships

        All of the Bank's voting members were eligible to vote for the Bank's two independent directorships open for election in 2008. Members were required to submit written ballots for the election by December 8, 2008. The results of the voting were as follows:

Members Voting(1)		Members Not Voting		Total Votes Cast(2)		20% Threshold Requirement
	296		159		12,984,665		1,833,365

(1)

Although 298 members cast votes two members' ballots were disqualified due to those ballots' failure to comply with technical requirements.



(2)

The Finance Agency's interim final regulation regarding eligibility and elections of members of the board of directors requires each independent director to receive at least 20 percent of all eligible votes to be cast in order to be elected as an independent

39

director. See Item 10—Directors, Executive Officers, and Corporate Governance for further discussion.

Nominee Name	Votes Received
Jay F. Malcynsky		4,938,800
Andrew J. Calamare		4,034,034
Cornelius K. Hurley		4,011,831

        The following individuals were elected as independent directors, effective January 1, 2009, for four-year terms:

•

Jay F. Malcynsky; and

•

Andrew J. Calamare

        The term of office as a director for the following individuals continued following the elections:

•

Andrew J. Calamare*

•

Joan Carty*

•

Stephen F. Christy

•

Patrick E. Clancy*

•

Steven A. Closson

•

Arthur R. Connelly

•

Peter F. Crosby

•

John T. Eller*

•

John H. Goldsmith*

•

Cornelius K. Hurley*^

•

A. James Lavoie

•

Mark E. Macomber

•

Jay F. Malcynsky*

•

Kevin M. McCarthy

•

Jan A. Miller

•

Helen F. Peters*

•

R. David Rosato

•

Robert F. Verdonck^

*

Independent directorship

^

Term expired on December 31, 2008

40

PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Bank capital stock is issued and redeemed at its par value of $100 per share. The Bank's stock is not publicly traded and can be purchased only by the Bank's members. As of February 28, 2009, 462 members and four nonmembers held a total of 36.9 million shares of the Bank's Class B stock, which is the only class of stock outstanding.

        During 2008, 2007, and 2006, the Bank declared quarterly cash dividends as outlined in the following table. Dividend rates are quoted in the form of an interest rate, which is then applied to each member's average capital-stock-balance outstanding during the quarter to determine the dollar amount of the dividend that each member will receive. Dividends are solely within the discretion of the Bank's board of directors. Generally, the dividend rate is based upon a spread to average short-term interest rates experienced during the quarter.

Quarterly Dividends Declared
(dollars in thousands)

	2008							2007							2006
Dividends Declared in the Quarter Ending	Average Capital Stock(1)		Dividend Amount(2)		Annualized Dividend Rate			Average Capital Stock(1)		Dividend Amount(2)		Annualized Dividend Rate			Average Capital Stock(1)		Dividend Amount(2)		Annualized Dividend Rate
March 31	$	3,281,473	$	49,627		6.00	%	$	2,338,828	$	39,792		6.75	%	$	2,637,911	$	34,148		5.25	%
June 30		3,263,508		32,456		4.00			2,323,418		38,671		6.75			—		—		—
September 30		3,356,801		25,456		3.05			2,403,980		38,958		6.50			2,627,716		72,467		11.06
December 31		3,549,547		22,306		2.50			2,575,484		42,195		6.50			2,550,066		36,958		5.75

(1)

Average capital stock amounts do not include average balances of mandatorily redeemable stock.

(2)

The dividend amounts do not include the interest expense on mandatorily redeemable stock.

        On December 14, 2008, the Bank's board of directors adopted a quarterly dividend payout restriction that limits the quarterly dividend payout to no more than 50 percent of quarterly earnings in the event that the retained earnings target exceeds the Bank's current level of retained earnings. Based on the Bank's fourth quarter net loss for 2008, the Bank had an accumulated deficit of $19.7 million at December 31, 2008, and the Bank became prohibited from paying dividends until the Bank generates sufficient net income to eliminate the accumulated deficit. On February 26, 2009, the Bank announced that dividend payments for 2009 are unlikely.

        Dividends may be paid only from current net earnings or previously retained earnings. In accordance with the FHLBank Act and Finance Agency regulations, the Bank may not declare a dividend if the Bank is not in compliance with its minimum capital requirements, if the Bank would fall below its minimum capital requirements, or if the Bank would not be adequately capitalized as a result of a dividend except, in this latter case, with the Director of the Finance Agency's (the Director's) permission. Further, the Bank may not pay dividends to its members if the principal and interest due on any CO issued through the Office of Finance on which it is the primary obligor has not been paid in full, or under certain circumstances, if the Bank becomes a noncomplying FHLBank as that term is defined in Finance Agency regulations as a result of its inability to either comply with regulatory liquidity requirements or satisfy its current obligations.

        In February 2006, the board of directors of the Bank approved a transition plan for the schedule under which dividends are declared and paid. The board of directors subsequently amended this transition plan in May of 2006. The change in schedule enabled the Bank's board of directors to

41

declare each quarterly dividend after net income is known, rather than basing the dividend on estimated net income. Under the transition plan, dividends for the first quarter of 2006 were declared in March 2006 and paid on the second business day of April 2006. Beginning with the second quarter of 2006, dividends were not declared until the quarter had ended and net income for the quarter was known. In keeping with this transition plan, in August 2006, the board of directors declared the dividend for the second quarter of 2006 that would previously have been declared in June 2006. Since only three dividends were to be declared in 2006, the second quarter dividend was calculated based on a 183-day period, representing the number of days in the second and third quarters of 2006, effectively providing shareholders the equivalent of a two-quarter dividend. This dividend totaled $72.5 million, which is equivalent to an annual rate of 5.50 percent, and was paid on September 5, 2006. The dividend for the third quarter of 2006 was declared in November and paid in December 2006. In 2008 and 2007, quarterly dividends were declared in February, May, August, and November and paid on the second business day of the month that followed.

42

ITEM 6.    SELECTED FINANCIAL DATA

        The following selected financial data for each of the five years ended December 31, 2008, 2007, 2006, 2005, and 2004, have been derived from the Bank's audited financial statements. Financial information is included elsewhere in this report in regards to the Bank's financial condition as of December 31, 2008 and 2007, and the Bank's results of operations for the years ended December 31, 2008, 2007, and 2006. This selected financial data should be read in conjunction with the Bank's financial statements and the related notes thereto appearing in this report.

SELECTED FINANCIAL DATA
(dollars in thousands)

	December 31,
	2008			2007			2006			2005			2004
Statement of Condition(1)
Total assets	$	80,353,167		$	78,200,338		$	57,387,952		$	57,675,766		$	51,735,634
Investments(2)		16,364,899			17,362,559			11,992,161			14,466,788			15,796,108
Securities purchased under agreements to resell		2,500,000			500,000			3,250,000			—			1,500,000
Advances		56,926,267			55,679,740			37,342,125			38,067,896			30,208,753
Mortgage loans held for portfolio, net		4,153,537			4,091,314			4,502,182			4,886,494			4,011,981
Deposits and other borrowings		611,070			713,126			1,040,560			577,305			869,980
Consolidated obligations, net		74,726,268			73,410,156			53,241,957			53,781,976			47,770,395
Mandatorily redeemable capital stock		93,406			31,808			12,354			8,296			57,882
Class B capital stock outstanding—putable(3)		3,584,720			3,163,793			2,342,517			2,531,145			2,085,814
Total capital		3,430,225			3,387,514			2,532,514			2,677,749			2,178,964
Results of Operations
Net interest income	$	332,667		$	312,446		$	302,188		$	253,607		$	215,192
Realized loss on held-to-maturity securities		(381,745	)		—			—			—			—
Other (loss) income		(10,215	)		11,137			11,750			(29,734	)		(53,430	)
Other expense		56,308			53,618			49,055			46,184			39,645
AHP and REFCorp assessments		—			71,740			70,796			49,045			32,472
Net (loss) income		(115,826	)		198,234			195,791			135,260			89,522
Other Information
Dividends declared	$	129,845		$	159,616		$	143,573		$	96,040		$	55,425
Dividend payout ratio(4)		N/A			80.52	%		73.33	%		71.00	%		61.91	%
Weighted-average dividend rate(5)		3.86	%		6.62			5.51			4.36			2.75
Return on average equity(6)		(3.13	)		6.97			7.23			5.81			4.25
Return on average assets		(0.14	)		0.30			0.33			0.27			0.22
Net interest margin(7)		0.41			0.48			0.51			0.51			0.52
Total capital ratio(8)		4.55			4.37			4.42			4.64			4.33

(1)

The statements of condition for years 2007, 2006, 2005, and 2004 have been revised to recognize the effects of adopting FSP FIN 39-1. See Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 1—Summary of Significant Accounting Policies for additional information.

(2)

Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, and federal funds sold.

(3)

Capital stock is putable at the option of a member.

(4)

The dividend payout ratio for 2008 is not meaningful.

(5)

Weighted-average dividend rate is dividend amount declared divided by the average daily balance of capital stock eligible for dividends.

(6)

Return on average equity is net income divided by the total of the average daily balance of outstanding Class B capital stock and retained earnings. The average daily balance of accumulated other comprehensive income is not included in the calculation.

(7)

Net interest margin is net interest income before mortgage-loan-loss provision as a percentage of average earning assets.

(8)

Total capital ratio is capital stock (including mandatorily redeemable capital stock) plus retained earnings as a percentage of total assets. See Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Capital regarding the Bank's regulatory capital ratios.

43

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

        This document includes statements describing anticipated developments, projections, estimates, or future predictions of the Bank. These statements may use forward-looking terminology, such as "anticipates," "believes," "could," "estimates," "may," "should," "will," or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the Risk Factors set forth in Item 1A and the risks set forth below, and that actual results could differ materially from those expressed or implied in these forward-looking statements. As a result, you are cautioned not to place undue reliance on such statements. The Bank does not undertake to update any forward-looking statement herein or that may be made from time to time on behalf of the Bank.

        Forward-looking statements in this annual report include, among others, the following:

•

the Bank's projections regarding income, retained earnings, and dividend payouts;

•

the Bank's projections regarding credit losses on advances, purchased whole mortgages and mortgage-related securities;

•

the Bank's expectations relating to future balance-sheet growth;

•

the Bank's targets under the Bank's retained earnings plan; and

•

the Bank's expectations regarding the size of its mortgage-loan portfolio, particularly as compared to prior periods.

        Actual results may differ from forward-looking statements for many reasons, including but not limited to:

•

changes in economic and market conditions;

•

changes in demand for Bank advances and other products resulting from changes in members' deposit flows and credit demands or otherwise;

•

changes in the financial health of the Bank's members;

•

an increase in borrower defaults on mortgage loans and fluctuations in the housing market;

•

deterioration in the loan credit performance of the Bank's private-label MBS portfolio beyond forecasted assumptions concerning loan default rates, loss severities, and prepayment speeds resulting in the realization of additional other-than-temporary impairment charges;

•

an increase in advance prepayments as a result of changes in interest rates or other factors;

•

the volatility of market prices, rates, and indices that could affect the value of collateral held by the Bank as security for obligations of Bank members and counterparties to interest-rate-exchange agreements and similar agreements;

•

political events, including legislative developments that affect the Bank, its members, counterparties, and/or investors in the COs of the FHLBanks;

•

competitive forces including, without limitation, other sources of funding available to Bank members, other entities borrowing funds in the capital markets, and the ability to attract and retain skilled employees;

•

the pace of technological change and the ability of the Bank to develop and support technology and information systems sufficient to manage the risks of the Bank's business effectively;

44

•

changes in investor demand for COs and/or the terms of interest-rate-exchange-agreements and similar agreements;

•

timing and volume of market activity;

•

ability to introduce new—or adequately adapt current—Bank products and services and successfully manage the risks associated with those products and services, including new types of collateral used to secure advances;

•

realization of losses arising from litigation filed against one or more of the FHLBanks;

•

realization of losses arising from the Bank's joint and several liability on COs;

•

inflation or deflation; and

•

issues and events within the FHLBank System and in the political arena that may lead to regulatory, judicial, or other developments may affect the marketability of the COs, the Bank's financial obligations with respect to COs, and the Bank's ability to access the capital markets.

        Risks and other factors could cause actual results of the Bank to differ materially from those implied by any forward-looking statements. Our risk factors are not exhaustive. The Bank operates in a changing economic and regulatory environment, and new risk factors will emerge from time to time. Management cannot predict such new risk factors nor can it assess the impact, if any, of such new risk factors on the business of the Bank or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements.

Overview and Executive Summary

Financial Market Conditions

        The Bank's primary source of revenues is derived from net interest income from advances, investments, and mortgage loans. These interest-earning asset volumes and yields are primarily impacted by economic conditions, market-interest rates, and other factors such as competition.

        During 2008 the Federal Reserve Board reduced the target overnight federal finds rate seven times to a targeted range of between 0.00 percent and 0.25 percent at yearend.

        The following table provides a summary of key market interest rates for 2008 and 2007.

	Average Rate for the Year Ended December 31,						Ending Rate as of December 31,
												Average Rate 2008 vs. 2007 Variance			Ending Rate 2008 vs. 2007 Variance
	2008			2007			2008		2007
Target Overnight Federal Funds Rate		2.08	%		5.05	%	0.00 - 0.25	%		4.25	%		(2.97	)%	(4.25) - (4.00)	%
3-month LIBOR		2.93			5.30		1.43			4.70			(2.37	)	(3.27)
2-year U.S. Treasury		2.01			4.36		0.76			3.05			(2.35	)	(2.29)
5-year U.S. Treasury		2.80			4.42		1.55			3.44			(1.62	)	(1.89)
10-year U.S. Treasury		3.66			4.63		2.25			4.03			(0.97	)	(1.78)
15-year residential mortgage note rate		5.59			5.94		4.80			5.60			(0.35	)	(0.80)
30-year residential mortgage note rate		6.02			6.27		5.03			6.05			(0.25	)	(1.02)

        The level of interest rates during a reporting period impacts the Bank's profitability, primarily due to the short-term structure of earning assets and the impact of interest rates on invested shareholder capital. As of December 31, 2008, the majority of our investments, excluding MBS, and approximately 45.9 percent of the outstanding advances, had stated original maturities of less than one year. As of December 31, 2007, 55.7 percent of outstanding advances had original maturities of less than one year. Additionally, a significant portion of the Bank's assets either has floating-rate coupons or has been hedged with interest-rate-exchange agreements in which a short-term rate is received.

45

        The level of interest rates also directly affects the Bank's earnings on invested shareholder capital. Because the Bank operates at relatively low, but stable, net spreads between the yield earned on assets and the cost of liabilities, a relatively high proportion of net interest income is generated from the investment of member-supplied capital at the average asset yield. Because a high proportion of the Bank's assets are short-term, have variable coupons, or are hedged with interest-rate swaps on which the Bank receives a floating rate, changes in asset yields tend to have a relatively significant effect on the Bank's net income.

        Advance balances in the first half of 2008 continued to grow as the Bank's yield spread to funding cost on short-term advances remained competitive as the Bank's cost of borrowing CO discount notes relative to interbank borrowing interest rates, such as overnight and term federal funds rates, remained attractive. This trend diminished in the latter half of 2008, as the yield spreads available from the issuance of CO discount notes compressed during the third quarter of 2008 toward long-term historical averages. Due in part to this trend, advance balances correspondingly declined over the latter half of the year. Additionally, due to stresses in the agency debt market and concerns over capital markets access, the Bank increased its on-balance sheet structural liquidity early in the fourth quarter via term discount note issuance. Subsequently, interest rates sharply declined resulting in net interest margin compression as yields on overnight money market assets trailed short-term CO discount note pricing.

        The broad-based deterioration of credit performance of residential mortgage loans and the accompanying decline in residential real estate values in many parts of the nation increase the level of credit risk to which the Bank is exposed due to three of our activities:

•

making advances to members

•

purchasing whole mortgage loans through the MPF program, and

•

investing in mortgage-related securities

        These risks are discussed in the Credit Risk section of Item 7A—Quantitative and Qualitative Disclosures about Market Risk. The Bank's risk exposure to these areas is elevated in the current environment and is likely to remain so in 2009.

Results for the year ended December 31, 2008, versus the year ended December 31, 2007

        Net loss for the year ended December 31, 2008, was $115.8 million, compared with net income of $198.2 million for the year ended December 31, 2007. This $314.1 million decrease was primarily due to an other-than-temporary impairment charge of $381.7 million on held-to-maturity securities which was partially offset by a reduction in assessments of $71.7 million and an increase in net interest income of $20.2 million.

        Net interest income for the year ended December 31, 2008, was $332.7 million, compared with $312.4 million for the year ended December 31, 2007. This $20.2 million increase was primarily attributable to strong asset and capital growth during 2008 resulting from continued growth in advances due to the liquidity shortage that impacted the U.S. banking system throughout the year that was partially offset by:

•

a sharp drop in interest rates associated with deepening weakness in the economy,

•

an increasing cost of maintaining short-term liquidity as the short-term yield curve steepened,

•

higher relative borrowing costs associated with long-term debt through much of the year, and

•

an increased cost arising from the Bank's contingency-liquidity plans, which were modified in accordance with Finance Agency guidance in the second half of 2008 to add a requirement that the Bank maintain sufficient liquidity, through short-term investments, in an amount at least equal to our anticipated cash outflows under two different scenarios, as discussed in

46

Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Liquidity Risk. This modification was made to enhance the Bank's protection against temporary disruptions in access to the CO debt markets in response to a rise in capital markets volatility at that time, as further discussed in Liquidity and Capital Resources-Liquidity in this Item. To satisfy this additional requirement, the Bank has had to maintain significantly higher balances in shorter-term investments, earning a much lower interest rate than alternate investment options and, in turn, negatively impacting net interest income. The Bank's contingency-liquidity plans are discussed in Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Liquidity Risk.

        Additionally, prepayment-fee income recognized during 2008 compared with 2007 increased modestly by $2.5 million.

        For the years ended December 31, 2008 and 2007, average total assets were $82.5 billion and $65.4 billion, respectively. Return on average assets and return on average equity were (0.14) percent and (3.13) percent, respectively, for the year ended December 31, 2008, compared with 0.30 percent and 6.97 percent, respectively, for the year ended December 31, 2007. The return on average assets and the return on average equity declined due to the net loss in 2008 primarily resulting from the other-than-temporary impairment of held-to-maturity securities.

        Net interest spread was 0.26 percent for both 2008 and 2007. Net interest margin for 2008 was 0.41 percent, a seven-basis-point decline from net interest margin for 2007. See Results of Operations—Net Interest Spread and Net Interest Margin for additional discussion of these topics.

Financial Condition at December 31, 2008, versus December 31, 2007

        The composition of the Bank's total assets changed during the year ended December 31, 2008, as follows:

•

Advances decreased to 70.8 percent of total assets at December 31, 2008, down from 71.2 percent of total assets at December 31, 2007. This decrease in the proportion of advances to assets reflects an increase in investments and cash outstanding at December 31, 2008, as the Bank increased its liquid investments to satisfy its modified contingent-liquidity plans, as discussed above, as well as to maintain an adequate capital to asset ratio based on the Bank's growth in excess capital stock resulting from the Bank's moratorium on the repurchase of excess stock. During 2008, advances balances increased by approximately $1.2 billion, ending the year at $56.9 billion.

•

Short-term money-market investments increased to 10.4 percent of total assets at December 31, 2008, up from 4.4 percent of total assets at December 31, 2007. As of December 31, 2008, interest-bearing deposits had increased by $3.3 billion due to the increase in the Bank's account with the Federal Reserve Bank of Boston, and securities purchased under agreements to resell increased by $2.0 billion while federal funds sold decreased by $368.0 million from December 31, 2007, to December 31, 2008.

•

Investment securities declined to 13.1 percent of total assets at December 31, 2008, down from 18.5 percent of total assets at December 31, 2007. From December 31, 2007, to December 31, 2008, investment securities decreased by $3.9 billion. The decrease is due to a $4.8 billion decline in held-to-maturity certificates of deposits, which was partially offset by a $788.5 million increase in held-to-maturity MBS. The increase in held-to-maturity MBS was due to increased purchases of GSE MBS of $3.4 billion during 2008. These purchases were made under the Bank's ongoing authority to purchase MBS up to 300 percent of capital. The Bank has not used the temporary increase in MBS investment authority granted to the FHLBanks by the Finance Board at its March 24, 2008, board meeting. At December 31, 2008, and December 31, 2007, the

47

Bank's MBS and Small Business Administration (SBA) holdings represented 225 percent and 226 percent of capital, respectively.

•

Net mortgage loans remained consistent at 5.2 percent of total assets at December 31, 2007, and December 31, 2008.

RESULTS OF OPERATIONS

Comparison of the year ended December 31, 2008, versus the year ended December 31, 2007

Net Interest Spread and Net Interest Margin

        Net interest income for the year ended December 31, 2008, was $332.7 million, compared with $312.4 million for the year ended December 31, 2007, increasing 6.5 percent from the previous year. However, net interest margin for 2008 in comparison with 2007 decreased from 48 basis points to 41 basis points, and net interest spread remained consistent at 26 basis points.

        The increase in net interest income was largely attributable to a significant increase in the average size of the balance sheet in 2008 as compared to 2007. Average total earning assets were $17.1 billion higher in 2008 than in 2007, which was largely attributable to the $17.0 billion increase in average advances balances.

        Net interest margin for 2008 was 0.41 percent, a seven-basis-point decline from net interest margin for 2007 which is attributable to the following factors:

•

The average yield on interest-bearing assets funded by non-interest-bearing equity capital dropped in 2008 as a result of lower interest rates; and

•

the amount of low-margin money-market investments and short-term advances has increased. In particular, as the yield curve steepened in the second half of the year, it became more costly for the Bank to carry a significant portfolio of overnight funds placements that are used as a source of liquidity to fund potential intraday advance demand, as these assets are funded by longer-term debt and capital.

        Both of the above factors have contributed to lower net interest spreads, despite the fact that CO debt funding costs have declined relative to broader market interest rates, such as U.S. dollar interest-rate-swap yields.

        For the year ended December 31, 2008, the average yields on total interest-earning assets decreased 188 basis points and yields on total interest-bearing liabilities decreased 188 basis points, compared with the year ended December 31, 2007.

        Prepayment-fee income recognized on advances and investments increased $2.5 million to $8.6 million for the year ended December 31, 2008, from $6.0 million for the year ended December 31, 2007. Excluding the impact of prepayment-fee income, net interest spread remained at 25 basis points and net interest margin declined seven basis points to 40 basis points from December 31, 2007, to December 31, 2008.

        The following table presents major categories of average balances, related interest income/expense, and average yields for interest-earning assets and interest-bearing liabilities. The primary source of earnings for the Bank is net interest income, which is the interest earned on advances, mortgage loans, and investments less interest paid on COs, deposits, and other borrowings. Net interest spread is the difference between the yields on interest-earning assets and interest-bearing liabilities. Net interest margin is expressed as the percentage of net interest income to average earning assets.

48

Net Interest Spread and Margin
(dollars in thousands)

		For the Years Ended December 31,
		2008							2007							2006
		Average Balance		Interest Income / Expense		Average Yield			Average Balance		Interest Income / Expense		Average Yield			Average Balance		Interest Income / Expense		Average Yield
Assets
Advances		$	61,578,072	$	1,984,347		3.22	%	$	44,623,835	$	2,307,079		5.17	%	$	40,072,931	$	1,991,339		4.97	%
Interest-bearing deposits			69,137		178		0.26			55		3		5.45			50		2		4.00
Securities purchased under agreements to resell			719,331		12,035		1.67			1,133,904		59,496		5.25			1,267,878		66,307		5.23
Federal funds sold			2,427,441		34,593		1.43			3,913,636		204,688		5.23			3,206,919		160,109		4.99
Investment securities(1)			12,857,390		480,170		3.73			10,635,415		576,894		5.42			9,605,061		510,405		5.31
Mortgage loans			4,065,776		208,841		5.14			4,273,757		217,675		5.09			4,720,061		237,602		5.03
Other earning assets			—		—		—			274		12		4.38			178		9		5.06
Total interest-earning assets			81,717,147		2,720,164		3.33	%		64,580,876		3,365,847		5.21	%		58,873,078		2,965,773		5.04	%
Other non-interest-earning assets			787,377							844,075							711,870
Total assets		$	82,504,524	$	2,720,164		3.30	%	$	65,424,951	$	3,365,847		5.14	%	$	59,584,948	$	2,965,773		4.98	%
Liabilities and capital
Consolidated obligations
	Discount notes	$	43,506,235	$	1,154,405		2.65	%	$	25,777,636	$	1,280,158		4.97	%	$	23,987,400	$	1,177,028		4.91	%
	Bonds		33,199,670		1,214,031		3.66			34,953,730		1,730,553		4.95			31,301,707		1,457,402		4.66
Deposits			970,153		17,171		1.77			866,926		40,984		4.73			610,154		27,889		4.57
Mandatorily redeemable capital stock			65,063		1,189		1.83			21,044		1,400		6.65			11,903		841		7.07
Other borrowings			37,775		701		1.86			8,770		306		3.49			9,707		425		4.38
Total interest-bearing liabilities			77,778,896		2,387,497		3.07	%		61,628,106		3,053,401		4.95	%		55,920,871		2,663,585		4.76	%
Other non-interest-bearing liabilities			1,075,120							948,562							942,560
Total capital			3,650,508							2,848,283							2,721,517
Total liabilities and capital		$	82,504,524	$	2,387,497		2.89	%	$	65,424,951	$	3,053,401		4.67	%	$	59,584,948	$	2,663,585		4.47	%
Net interest income				$	332,667						$	312,446						$	302,188
Net interest spread							0.26	%						0.26	%						0.28	%
Net interest margin							0.41	%						0.48	%						0.51	%

(1)

The average balances of available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value.

        The average balance of total advances increased $17.0 billion, or 38.0 percent, for the year ended December 31, 2008, compared with the same period in 2007. The increase in average advances was attributable to strong member demand for short-term advances, while long-term fixed-rate and variable-rate advances showed only a moderate increase during 2008 as compared to 2007. The following table summarizes average balances of advances outstanding during 2008, 2007, and 2006 by product type.

49

Average Balances of Advances Outstanding
By Product Type
(dollars in thousands)

		2008 Average Balance			2007 Average Balance			2006 Average Balance
Overnight advances—par value		$	2,795,805		$	1,035,782		$	2,059,377
Fixed-rate advances—par value
	Short-term		29,510,796			20,822,525			18,479,117
	Long-term		12,116,430			8,904,897			8,011,772
	Amortizing		2,485,658			2,406,454			2,574,303
	Putable		9,103,145			6,483,049			5,322,454
	Callable		11,779			30,000			30,000
			53,227,808			38,646,925			34,417,646
Variable-rate indexed advances—par value
	Simple variable		5,093,352			4,885,727			3,627,411
	Putable, convertible to fixed		12,000			24,474			—
			5,105,352			4,910,201			3,627,411
Total average par value			61,128,965			44,592,908			40,104,434
Premiums and discounts			(13,385	)		(12,137	)		(7,164	)
SFAS 133 hedging adjustments			462,492			43,064			(24,339	)
Total average advances		$	61,578,072		$	44,623,835		$	40,072,931

        As displayed in the above table, the total average advances increased by $17.0 billion from the year ended December 31, 2007, to the same period in 2008. The increase reflects a continued increase in member demand caused by recent market conditions and was attributable to the following product types:

•

The average balance of short-term fixed-rate advances increased by approximately $8.7 billion during the year ended December 31, 2008. All short-term fixed-rate advances have a maturity of one year or less, with interest rates that closely follow short-term market interest-rate trends. The yield spread to the Bank's funding cost for these advances is generally narrower for short-term products than for other products with longer terms to maturity.

•

The average balance of long-term fixed-rate advances increased by approximately $3.2 billion during the year ended December 31, 2008.

•

Average fixed-rate putable advances increased by $2.6 billion from the year ended December 31, 2007, to the same period in 2008. Putable advances are intermediate and long-term advances for which the Bank holds the option to cancel the advance on certain specified dates after an initial lockout period.

•

The average balance of variable-rate indexed advances increased $195.2 million from the year ended December 31, 2007, to the same period in 2008. These advances have coupon rates that reset on a predetermined basis due to changes in an index, typically one- or three-month LIBOR, or on the offered yield on three-month FHLBank discount notes, as determined by the Office of Finance.

•

Average overnight advances increased $1.8 billion from the year ended December 31, 2007, to the same period in 2008. The interest rate on overnight advances changes on a daily basis and is based on market indications each day.

50

        Putable advances that are classified as fixed-rate advances in the table above are typically hedged with interest-rate-exchange agreements in which a short-term rate is received, typically three-month LIBOR. In addition, 52.5 percent of average long-term fixed rate advances were similarly hedged with interest rate swaps. Therefore, a significant portion of the Bank's advances, including overnight advances, short-term fixed-rate advances, fixed-rate putable advances, certain fixed rate bullet advances, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market-interest-rate trends. The average balance of these advances totaled $46.5 billion for 2008, representing 76.1 percent of the total average balance of advances outstanding during 2008. For 2007, the average balance of these advances totaled $33.3 billion, representing 74.6 percent of total average advances outstanding during 2007.

        Included in net interest income are prepayment fees related to advances and investment securities. Prepayment fees make the Bank financially indifferent to the prepayment of advances or investments and are net of any hedging fair-value adjustments associated with SFAS 133. For the years ended December 31, 2008 and 2007, net prepayment fees on advances were $4.7 million and $3.0 million, respectively, and prepayment fees on investments were $3.9 million and $3.1 million, respectively. Prepayment-fee income is unpredictable and inconsistent from period to period, occurring only when advances and investments are prepaid prior to the scheduled maturity or repricing dates. Because prepayment-fee income recognized during these periods does not necessarily represent a trend that will continue in future periods, and due to the fact that prepayment-fee income represents a one-time fee recognized in the period in which the corresponding advance or investment security is prepaid, we believe it is important to review the results of net interest spread and net interest margin excluding the impact of prepayment-fee income. These results are presented in the following table.

Net Interest Spread and Margin without Prepayment-Fee Income
(dollars in thousands)

	For the Years Ended December 31,
	2008					2007					2006
	Interest Income		Average Yield			Interest Income		Average Yield			Interest Income		Average Yield
Advances	$	1,979,653		3.21	%	$	2,304,104		5.16	%	$	1,990,430		4.97	%
Investment securities		476,286		3.70			573,836		5.40			506,173		5.27
Total interest-earning assets		2,711,586		3.32			3,359,814		5.20			2,960,632		5.03
Net interest income		324,089					306,413					297,047
Net interest spread				0.25	%				0.25	%				0.27	%
Net interest margin				0.40	%				0.47	%				0.50	%

        Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, decreased $1.8 billion, or 36.3 percent, for the year ended December 31, 2008 from the average balances for the year ended December 31, 2007. The lower average balances in the year ended December 31, 2008, resulted from the decreased activity in federal funds sold and securities purchased under agreements to resell. The yield earned on short-term money-market investments is tied directly to short-term market-interest rates. These investments are used for liquidity management and to manage the Bank's leverage ratio in response to fluctuations in other asset balances.

        Average investment-securities balances increased $2.2 billion or 20.9 percent for the year ended December 31, 2008, compared with the year ended December 31, 2007. The growth in average investments is the result of the increase in average held-to-maturity MBS of $1.7 billion, which is mainly due to the increase in purchases of agency MBS. The increase was attributable to the Bank's expanded capacity to purchase MBS due to the increase in capital that occurred during the first half of 2008. The Bank typically strives to maintain a level of MBS investments near the 300 percent of capital

51

limitation established by Finance Agency regulation. Average total capital increased by $802.2 million during the year ended December 31, 2008, in comparison with the same period in 2007. Furthermore, due to decreased global demand for agency MBS stemming from recent turmoil in the mortgage market, net interest spread opportunities with respect to agency MBS improved over the course of 2007 and 2008, as compared with prior periods. Accordingly, the Bank was able to purchase agency MBS at more favorable risk-adjusted net interest spreads during the first half of 2008 than during prior periods. After September 2008, the Bank did not purchase MBS due to reduced investor demand for CO debt which reduced funding volumes and increased relative cost of CO debt that would be used to fund MBS.

        Average mortgage-loan balances for the year ended December 31, 2008, were $208.0 million lower than the average balance for the year ended December 31, 2007, representing a decrease of 4.9 percent, although year-ending balances increased $62.2 million or 1.5 percent, from December 31, 2007, to December 31, 2008. The decline in average mortgage-loan balances reflects the fact that balances had been declining steadily through 2007 and the first three quarters of 2008, before beginning to trend modestly upward.

        Overall, the yield on the mortgage-loan portfolio increased five basis points for the year ended December 31, 2008, compared with the year ended December 31, 2007. This increase is attributable to the following factors:

•

The average stated coupon rate of the mortgage-loan portfolio increased two basis points due to the acquisition of loans at higher interest rates in the latter half of 2007 and into 2008 relative to the coupons on pre-existing loans; and

•

Premium/discount amortization expense has declined $1.2 million, or 19.7 percent, representing an improvement in the average yield of two basis points, due to a reduced volume of loan prepayments in the year ended December 31, 2008, versus the same period in 2007.

Composition of the Yields of Mortgage Loans
(dollars in thousands)

	For the Years Ended December 31,
	2008						2007						2006
	Interest Income			Average Yield			Interest Income			Average Yield			Interest Income			Average Yield
Coupon accrual	$	217,975			5.36	%	$	228,255			5.34	%	$	250,819			5.31	%
Premium/discount amortization		(4,770	)		(0.12	)		(5,938	)		(0.14	)		(8,164	)		(0.17	)
Credit-enhancement fees		(4,364	)		(0.10	)		(4,642	)		(0.11	)		(5,053	)		(0.11	)
Total interest income	$	208,841			5.14	%	$	217,675			5.09	%	$	237,602			5.03	%

        Average CO balances increased $16.0 billion, or 26.3 percent, from the year ended December 31, 2007, to the year ended December 31, 2008. This increase was due to an increase of $17.7 billion in CO discount notes offset by a decline of $1.8 billion in CO bonds. This increase funded the growth of the advances portfolio.

        Net interest income includes interest paid and received on interest-rate-exchange agreements that are associated with advances, investments, deposits, and debt instruments that qualify for hedge accounting under SFAS 133. The Bank generally utilizes derivative instruments that qualify for hedge accounting as an interest-rate-risk management tool. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of the Bank's

52

risk-management strategy. The following table provides a summary of the impact of derivative instruments on interest income and interest expense.

Impact of Derivatives on Gross Interest Income and Gross Interest Expense
(dollars in thousands)

	For the Years Ended December 31,
	2008			2007		2006
Gross interest income before effect of derivatives	$	2,891,406		$	3,299,936	$	2,924,474
Net interest adjustment for derivatives		(171,242	)		65,911		41,299
Total interest income reported	$	2,720,164		$	3,365,847	$	2,965,773
Gross interest expense before effect of derivatives	$	2,510,106		$	3,015,620	$	2,546,744
Net interest adjustment for derivatives		(122,609	)		37,781		116,841
Total interest expense reported	$	2,387,497		$	3,053,401	$	2,663,585

        Reported net interest margin for the years ended December 31, 2008 and 2007, was 0.41 percent and 0.48 percent, respectively. If derivative instruments had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.47 percent and 0.44 percent, respectively.

        Interest paid and received on interest-rate-exchange agreements that are used by the Bank in its asset and liability management, but which do not meet hedge-accounting requirements of SFAS 133 (economic hedges), are classified as net gain (loss) on derivatives and hedging activities in other income. As shown in the Other Income (Loss) and Operating Expenses section below, interest accruals on derivatives classified as economic hedges totaled a loss of $2.2 million and $2.9 million for the years ended December 31, 2008 and 2007, respectively.

        For more information about the Bank's use of derivative instruments to manage interest-rate risk, see Item 7A—Quantitative and Qualitative Disclosures about Market Risk—Market and Interest-Rate Risk.

Rate and Volume Analysis

        Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. The increase in net interest income is due primarily to higher average capital levels that are invested in earning assets without corresponding interest cost and an increase in average advance balances. The following table summarizes changes in interest income and interest expense between the years ended December 31, 2008 and 2007. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but rather equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the volume and rate changes.

53

Rate and Volume Analysis
(dollars in thousands)

		For the Years Ended December 31, 2008 vs. 2007									For the Years Ended December 31, 2007 vs. 2006
		Increase (decrease) due to									Increase (decrease) due to
		Volume			Rate			Total			Volume			Rate			Total
Interest income
Advances		$	876,544		$	(1,199,276	)	$	(322,732	)	$	226,147		$	89,593		$	315,740
Interest-bearing deposits			3,768			(3,593	)		175			—			1			1
Securities purchased under agreements to resell			(21,753	)		(25,708	)		(47,461	)		(7,007	)		196			(6,811	)
Federal funds sold			(77,730	)		(92,365	)		(170,095	)		35,284			9,295			44,579
Investment securities			120,526			(217,250	)		(96,724	)		54,752			11,737			66,489
Mortgage loans			(10,593	)		1,759			(8,834	)		(22,466	)		2,539			(19,927	)
Other earning assets			(12	)		—			(12	)		5			(2	)		3
Total interest income			890,750			(1,536,433	)		(645,683	)		286,715			113,359			400,074
Interest expense
Consolidated obligations
	Discount notes		880,430			(1,006,183	)		(125,753	)		87,844			15,286			103,130
	Bonds		(86,843	)		(429,679	)		(516,522	)		170,038			103,113			273,151
Deposits			4,880			(28,693	)		(23,813	)		11,737			1,358			13,095
Mandatorily redeemable capital stock			2,928			(3,139	)		(211	)		646			(87	)		559
Other borrowings			1,012			(617	)		395			(41	)		(78	)		(119	)
Total interest expense			802,407			(1,468,311	)		(665,904	)		270,224			119,592			389,816
Change in net interest income		$	88,343		$	(68,122	)	$	20,221		$	16,491		$	(6,233	)	$	10,258

Other Income (Loss) and Operating Expenses

        The following table presents a summary of other (loss) income for the years ended December 31, 2008, 2007, and 2006. Additionally, detail on the components of net gain (loss) on derivatives and hedging activities is provided, indicating the source of these gains and losses by type of hedging relationship and hedge accounting treatment.

54

Other Income (Loss)
(dollars in thousands)

			For the Years Ended December 31,
			2008			2007			2006
Gains (losses) on derivatives and hedging activities:
	Net gains (losses) related to fair-value hedge ineffectiveness		$	1,210		$	8,367		$	10,417
	Net unrealized gains (losses) related to derivatives not receiving hedge accounting under SFAS 133 associated with:
		Advances		(4,997	)		3,281			(126	)
		Trading securities		(855	)		(1,695	)		343
		Consolidated obligations		(3,375	)		—			—
		Mortgage delivery commitments		(945	)		601			(1,248	)
	Net interest-accruals related to derivatives not receiving hedge accounting under SFAS 133			(2,183	)		(2,939	)		1,154
Net (losses) gains on derivatives and hedging activities				(11,145	)		7,615			10,540
Realized loss on held-to-maturity securities				(381,745	)		—			—
Loss on early extinguishment of debt				(2,699	)		(641	)		(215	)
Service-fee income				4,564			4,336			3,116
Net unrealized losses on trading securities				(937	)		(267	)		(1,626	)
Realized loss from sale of available-for-sale securities				(80	)		—			—
Realized loss from sale of held-to-maturity securities				(52	)		—			—
Other				134			94			(65	)
Total other (loss) income			$	(391,960	)	$	11,137		$	11,750

        As noted in the Other Income (Loss) table above, SFAS 133 introduces the potential for considerable timing differences between income recognition from assets or liabilities and income effects of hedging instruments entered into to mitigate interest-rate risk and cash-flow activity.

        The current market pricing of private-label MBS, which reflects a significant discount to cost, has been adversely impacted by a significant reduction in the liquidity of these securities and market perceptions that defaults on the mortgages underlying these securities will increase significantly. As a result, the current fair value of some of these securities is substantially less than what we believe is indicated by the performance of the collateral underlying the securities and our calculation of the expected cash flows of the securities.

        During the fourth quarter of 2008, it was determined that 19 of the Bank's private-label MBS had become other-than-temporarily impaired. Although we have recognized other-than-temporary impairment equal to the difference between the amortized cost basis and the fair value of these securities, we anticipate at this time, based on the expected cash flows of the securities, that we will recover some of these impairment amounts. For 16 of these Alt-A securities classified as held-to-maturity for which we recognized other-than-temporary impairment during 2008, the average credit enhancement was not sufficient to cover projected expected economic losses. The average credit enhancement as of December 31, 2008, was approximately 15.8 percent and the expected average collateral loss was approximately 24.5 percent, resulting in a principal and interest shortfall of $38.7 million. The estimated credit loss for these securities, which is the difference between the amortized cost basis and the present value of the cash flows expected to be collected, discounted at the effective yield of each security, is $30.3 million. However, the other-than-temporary impairment charge recorded

55

on these Alt-A securities totaled $339.1 million for 2008, reflected in the statement of income as a realized loss on held-to-maturity securities.

        In addition, we were informed that there were three other private-label MBS in our portfolio that were also owned by other FHLBanks which had concluded that these securities were other-than-temporarily impaired. While the Bank's quantitative assessment of the cash flows project no credit loss for these three securities, we have recognized that these securities are other-than-temporarily impaired and recorded an associated impairment charge of $42.7 million. While the Bank cannot provide any assurance that all results of its OTTI assessment are or will be consistent with all other FHLBanks, this action was taken to provide consistent reporting on these securities in the FHLBanks' Combined Financial Report and is reflective of a qualitative factor in our OTTI assessment. The Bank's process for OTTI evaluation of its securities portfolio is described in Critical Accounting Estimates—Other-Than-Temporary Impairment of Investment Securities in this Item.

        In subsequent periods we will account for the other-than-temporarily impaired securities as if the securities had been purchased on the measurement date of the other-than-temporary impairment. We will accrete into interest income the portion of the amounts we expect to recover that exceeds the cost basis of these securities over the remaining life of the securities.

        We will continue to monitor and analyze the performance of these securities to assess the collectability of principal and interest as of each balance sheet date. As conditions in the housing and mortgage markets continue to change over time, the amount of projected credit losses could also change. Additionally, if there is further deterioration in the housing and mortgage markets and the decline in home prices exceeds our current expectations, we may recognize significant other-than-temporary impairment amounts in the future. See Item 1A—Risk Factors for a discussion of the risks related to potential future write-downs of our investment securities.

        The following table summarizes other-than-temporary impairment charges recorded by the Bank at December 31, 2008.

Other-Than-Temporarily Impaired Securities
As of December 31, 2008
(dollars in thousands)

	Duration of Unrealized Losses Prior to Impairment
									Other-Than- Temporary Impairment Charge
Held-to-Maturity Private-label MBS backed by:	Less than 12 Months		12 Months or Greater		Amortized Cost Prior to Impairment		Fair Value
Prime	$	—	$	—	$	—	$	—	$	—
Alt-A		—		381,425		727,270		345,845		381,425
Subprime		—		320		714		394		320
	$	—	$	381,745	$	727,984	$	346,239	$	381,745

        Losses on early extinguishment of debt totaled $2.7 million and $641,000 for the years ended December 31, 2008 and 2007, respectively. Early extinguishment of debt is primarily driven by the prepayment of advances and investments, which generate fee income to the Bank in the form of make-whole prepayment penalties. The Bank may use a portion of the fees of prepaid advances and investments to retire higher-costing debt and to manage the relative interest-rate sensitivities of assets and liabilities. However, the Bank is constrained in its ability to employ this strategy due to the limited availability of specific bonds for purchase and retirement. In this manner, the Bank endeavors to preserve its asset-liability repricing balance and stabilize the net interest margin. During the years ended December 31, 2008 and 2007, the Bank extinguished debt with book values totaling $84.0 million and $22.3 million, respectively.

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        Changes in the fair value of trading securities are recorded in other (loss) income. For the years ended December 31, 2008 and 2007, the Bank recorded net unrealized losses on trading securities of $937,000 and $267,000, respectively. These securities are economically hedged with interest-rate-exchange agreements that do not qualify for hedge accounting under SFAS 133, but are acceptable hedging strategies under the Bank's risk-management program. Changes in the fair value of these economic hedges are recorded in current-period earnings and amounted to a loss of $855,000 and $1.7 million for the years ended December 31, 2008 and 2007, respectively. Also included in other (loss) income are interest accruals on these economic hedges, which resulted in (losses) gains of ($1.9) million and $616,000 for the years ended December 31, 2008 and 2007, respectively.

        During the third quarter of 2008, the Bank sold available-for-sale MBS with a book value of $2.7 million and recognized a loss of $80,000 on the sale of these securities. These MBS had been pledged as collateral to Lehman Brothers Special Financing, Inc. (Lehman) on out-of-the-money derivatives transactions. See Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 6—Available-for-Sale Securities for additional information regarding the transaction. This event was determined by the Bank to be isolated, nonrecurring, and unusual and could not have been reasonably anticipated. As such, management determined that the sale does not impact the Bank's ability and intent to hold the remaining available-for-sale securities that are in an unrealized loss position through to a recovery of fair value, which may be maturity. The Bank did not have any other sales of available-for-sale investment securities during the years ended December 31, 2008 and 2007.

        During the third quarter of 2008, the Bank sold held-to-maturity MBS with a book value of $5.7 million and recognized a loss of $52,000 on the sale of these securities. These MBS had been pledged as collateral to Lehman on out-of-the-money derivatives transactions. See Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 7—Held-to-Maturity Securities for additional information regarding the transaction. Management determined that the sale does not impact the Bank's ability and intent to hold the remaining investments classified as held-to-maturity through their stated maturity dates. The Bank did not have any other sales of held-to-maturity investment securities during the years ended December 31, 2008 and 2007.

        Operating expenses for the years ended December 31, 2008, 2007, and 2006, are summarized in the following table:

Operating Expenses
(dollars in thousands)

	For the Years Ended December 31,
	2008			2007			2006
Salaries, incentive compensation, and benefits	$	30,595		$	30,214		$	26,931
Occupancy costs		4,251			4,142			4,287
Other operating expenses		15,811			14,145			13,345
Total operating expenses	$	50,657		$	48,501		$	44,563
Ratio of operating expenses to average assets		0.06	%		0.07	%		0.07	%

        For the year ended December 31, 2008, total operating expenses increased $2.2 million from the same period in 2007. This increase was mainly due to a $381,000 increase in salaries and benefits and a $1.7 million increase in other operating expenses. The $381,000 increase in salaries and benefits is due primarily to a $2.1 million increase in salary expenses attributable to planned staffing increase and annual merit increases, an increase of $162,000 in employee benefits, and an increase of $133,000 in employee training. These increases were offset by a decline of $2.1 million in incentive compensation, which was impacted by the large growth in unrealized losses in the Bank's portfolio of held-to-maturity private-label MBS and related need to preserve and build capital in 2008. At December 31, 2008,

57

staffing levels increased 3.5 percent to 206.0 full-time equivalent positions compared with 199.0 full-time equivalent positions at December 31, 2007.

        The $1.7 million increase in other operating expenses is largely attributable to a $342,000 increase legal expenses in connection with a review of regulatory compliance matters, a $641,000 increase in contractual services, a $353,000 increase in equipment expenses, and a $277,000 increase in director fees due to the board eliminating the cap on fees. See Item 11—Executive Compensation—Director Compensation for additional information regarding the elimination on director fee caps.

        The Bank, together with the other FHLBanks, is charged for the cost of operating the Finance Board, Finance Agency, and the Office of Finance. The Finance Agency's operating costs are also shared by Fannie Mae and Freddie Mac, and HERA prohibits assessments on the FHLBanks for such costs in excess of the costs and expenses related to the FHLBanks. See Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Recent Legislative and Regulatory Developments. These expenses totaled $4.5 million and $4.0 million for the years ended December 31, 2008 and 2007, respectively, and are included in other expense.

Comparison of the year ended December 31, 2007, versus the year ended December 31, 2006

Overview

        Net income for the year ended December 31, 2007, was $198.2 million, compared with $195.8 million for the year ended December 31, 2006. This $2.4 million increase was primarily due to an increase of $10.3 million in net interest income and a $1.4 million reduction in net unrealized losses on trading securities. These increases to income were offset by a $1.7 million change in the provision for credit losses, a $3.9 million increase in operating expenses, a $2.9 million reduction in net gains on derivatives and hedging activities, and a $944,000 increase in assessments.

        Net interest income for the year ended December 31, 2007, was $312.4 million, compared with $302.2 million for the year ended December 31, 2006. This $10.3 million increase was primarily attributable to strong asset and capital growth in the latter half of 2007 resulting from the liquidity shortage impacting the U.S. banking system, that was partially offset by:

•

the impact of margin compression resulting from aggressive advances pricing in the first half of 2007 intended to stimulate member demand for advances,

•

an increasing cost of maintaining short-term liquidity as the short-term yield curve steepened, and

•

lower year-to-date average MPF balances.

        Prepayment-fee income recognized during 2007 compared with 2006 increased modestly by $892,000.

        For the years ended December 31, 2007 and 2006, average total assets were $65.4 billion and $59.6 billion, respectively. Return on average assets and return on average equity were 0.30 percent and 6.97 percent, respectively, for the year ended December 31, 2007, compared with 0.33 percent and 7.23 percent, respectively, for the year ended December 31, 2006. The return on average assets and the return on average equity declined due to the increases in total average assets and average total capital of 9.8 percent and 4.7 percent, respectively, during 2007 as compared to 2006, in comparison to the smaller increase in net income which increased by only 1.2 percent from 2006 to 2007.

        Net interest spread for 2007 was 0.26 percent, a two-basis-point decline from the net interest spread for 2006. Net interest margin for 2007 was 0.48 percent, a three-basis-point decline from net interest margin for 2006. See Results of Operations—Net Interest Spread and Net Interest Margin for additional discussion of these topics.

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Financial Condition at December 31, 2007, versus December 31, 2006

        The composition of the Bank's total assets changed during the year ended December 31, 2007, as compared to the year ended December 31, 2006, as follows:

•

Advances increased to 71.2 percent of total assets at December 31, 2007, up from 65.1 percent of total assets at December 31, 2006. This increase in advances reflects an increase in member demand caused by market conditions in 2007. During 2007, advances balances increased by approximately $18.3 billion, ending the year at $55.7 billion. The majority of this increase was in short-term advances.

•

Short-term money-market investments decreased to 4.4 percent of total assets at December 31, 2007, down from 10.2 percent of total assets at December 31, 2006. As of December 31, 2007, securities purchased under agreements to resell decreased by $2.8 billion which was offset by an increase in federal funds sold of $301.5 million as compared to December 31, 2006.

•

Investment securities increased to 18.5 percent of total assets at December 31, 2007, up from 16.4 percent of total assets at December 31, 2006. The increase is a result of the increase in held-to-maturity certificates of deposit of $4.4 billion. Investment securities increased by $5.1 billion from December 31, 2006, to December 31, 2007.

•

Net mortgage loans decreased to 5.2 percent of total assets at December 31, 2007, down from 7.8 percent of total assets at December 31, 2006. The decrease primarily reflects the higher proportion of advances to total assets described above, and to a lesser extent a decline in mortgage loan balances outstanding, as mortgage loan principal repayments outpaced loan-purchase activity during the year ended December 31, 2007. As of December 31, 2006, mortgage loans outstanding totaled $4.5 billion and decreased throughout 2007 to a balance of $4.1 billion as of December 31, 2007.

Net Interest Spread and Net Interest Margin

        Net interest income for the year ended December 31, 2007, was $312.4 million, compared with $302.2 million for the year ended December 31, 2006, increasing 3.4 percent from the previous year. However, net interest margin for 2007 in comparison with 2006 decreased from 51 basis points to 48 basis points, and net interest spread declined from 28 basis points to 26 basis points.

        The increase in net interest income was largely attributable to a significant increase in the average size of the balance sheet in 2007 as compared to 2006. Average total earning assets were $5.7 billion higher in 2007 than in 2006, which was largely attributable to the $4.6 billion increase in average advances balances.

        Net interest spread for 2007 was 0.26 percent, a two-basis-point decline from the net interest spread for 2006. Net interest margin for 2007 was 0.48 percent, a three-basis-point decline from net interest margin for 2006. The decline in net interest spread was attributable to the following factors:

•

The amount of low-margin money-market investments and short-term advances had increased. In particular, as the yield curve steepened in the second half of 2007, it became more costly for the Bank to carry a significant portfolio of overnight funds placements that were used as a source of liquidity to fund potential intraday advance demand, as these assets were funded by longer-term debt and capital.

•

The net interest spread to funding cost on MBS and MPF loans had been narrower on new transactions relative to expiring transactions, so that over time, average net interest spread to these portfolios had declined.

•

The Bank's MPF portfolio has aged, and low-cost shorter-term debt assigned to the portfolio had expired, narrowing the Bank's overall net interest spread.

        All of the above factors contributed to lower net interest spreads in 2007, despite the fact that CO debt funding costs had declined relative to broader market interest rates, such as U.S. dollar interest-rate-swap yields.

59

        For the year ended December 31, 2007, the average yields on total interest-earning assets increased 17 basis points and yields on total interest-bearing liabilities increased 19 basis points, compared with the year ended December 31, 2006.

        Prepayment-fee income recognized on advances and investments increased $892,000 to $6.0 million for the year ended December 31, 2007, from $5.1 million for the year ended December 31, 2006. Excluding the impact of prepayment-fee income, net interest spread declined two basis points, from 27 to 25 basis points.

        The average balance of total advances increased $4.6 billion, or 11.4 percent, for the year ended December 31, 2007, compared with the same period in 2006. The increase in average advances was attributable to strong member demand for short-term advances, while long-term fixed-rate and variable-rate advances showed only a moderate increase during 2007 as compared to 2006. Total average advances increased by $4.6 billion from the year ended December 31, 2006, to the same period in 2007. The increase was attributable to the following components:

•

The average balance of short-term fixed-rate advances increased by approximately $2.3 billion during the year ended December 31, 2007.

•

Average fixed-rate putable advances increased by $1.2 billion from the year ended December 31, 2006, to the same period in 2007.

•

The average balance of variable-rate indexed advances increased $1.3 billion from the year ended December 31, 2006, to the same period in 2007.

•

The above factors were offset by a decline in average overnight advances of $1.0 billion for the year ended December 31, 2007, as compared to the year ended December 31, 2006.

        Putable advances that are classified as fixed-rate advances are typically hedged with interest-rate-exchange agreements in which a short-term rate is received, typically three-month LIBOR. Therefore, a significant portion of the Bank's advances, including overnight advances, short-term fixed-rate advances, fixed-rate putable advances, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market-interest-rate trends. The average balance of these advances totaled $33.3 billion for 2007, representing 74.6 percent of the total average balance of advances outstanding during 2007. For 2006, the average balance of these advances totaled $29.5 billion, representing 73.5 percent of total average advances outstanding during 2006.

        In the past, the foregoing trend toward a higher proportion of short-term advances would generally lead to declining net interest spreads to funding costs for the overall advances portfolio. Additionally, due to reduced advance demand that the Bank had experienced in the first half of 2007, the Bank offered advances at net interest spreads that were lower than historical averages for longer-term products, further diminishing the favorable impact of long-term advances upon the Bank's net interest spread. However, in the latter half of 2007, the Bank's typical yield spread to funding cost on short-term advances increased as the Bank's cost of borrowing discount notes decreased relative to interbank borrowing interest rates, such as overnight and term federal funds rates. This led to an overall increase in income on advances for the year.

        Included in net interest income are prepayment fees related to advances and investment securities. For the years ended December 31, 2007 and 2006, net prepayment fees on advances were $3.0 million and $909,000, and prepayment fees on investments were $3.1 million and $4.2 million, respectively.

        Average short-term money-market investments for the year ended December 31, 2007, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, increased $572.7 million, or 12.8 percent, from the average balances for the year ended December 31, 2006. The higher average balances in the year ended December 31, 2007, resulted from the increased

60

activity in federal funds sold. These investments are used for liquidity management and to manage the Bank's leverage ratio in response to fluctuations in other asset balances.

        Average investment-securities balances increased $1.0 billion or 10.7 percent for the year ended December 31, 2007, compared with 2006. The growth in average investments was due to the increase in average held-to-maturity MBS of $643.4 million. The increase was attributable to the Bank's expanded capacity to purchase MBS due to the increase in capital that occurred during 2007. Average total capital increased by $126.8 million during the year ended December 31, 2007, compared with the same period in 2006. Furthermore, due to decreased global demand for MBS stemming from recent turmoil in the mortgage market, net interest spread opportunities with respect to all types of MBS improved over the course of 2007, as compared with 2006. Accordingly, during the latter half of 2007 the Bank was able to purchase MBS at more favorable risk-adjusted net interest spreads than during 2006.

        Average mortgage-loan balances for the year ended December 31, 2007, were $446.3 million lower than the average balance for the year ended December 31, 2006, representing a decrease of 9.5 percent. This continuing decline in average mortgage-loan balances was attributable to the following:

•

Mortgage-loan purchases during the year ended December 31, 2007 and 2006, amounted to $174.4 million and $260.8 million, respectively, which were substantially less than the amount of mortgage-loan repayments and prepayments occurring during the same time periods. The decline in purchases was due to the fact that the Bank had not participated in any loan purchases from Balboa Reinsurance Co. since April 2006. Prior to April 2006, Balboa Reinsurance Co. had been the Bank's largest source of mortgage-loan purchases.

•

The FHLBank of Chicago has not purchased any participation interests in MPF loans acquired by the Bank since April 2006. See Financial Condition—Mortgage Loans for additional information regarding the FHLBank of Chicago's participation in MPF loan purchases. As a result, the Bank avoided entering into large master commitments to purchase large volumes of mortgage loans.

        Overall, the yield on the mortgage-loan portfolio had increased six basis points for the year ended December 31, 2007, compared with the year ended December 31, 2006. This increase was attributable to the following factors:

•

The average stated coupon rate of the mortgage-loan portfolio increased three basis points due to the acquisition of loans at higher interest rates in the latter half of 2006 and into 2007 relative to the coupons on pre-existing loans; and

•

Premium/discount amortization expense has declined $2.2 million, or 27.3 percent, representing an improvement in the average yield of three basis points, due to a reduced volume of loan prepayments in the year ended December 31, 2007, versus the same period in 2006.

        Average CO balances increased $5.4 billion, or 9.8 percent, from the year ended December 31, 2006, to the year ended December 31, 2007. This increase was due to an increase of $3.7 billion in CO bonds and $1.8 billion in CO discount notes. This increase funded the growth of the advances portfolio.

        Reported net interest margin for the years ended December 31, 2007 and 2006, was 0.48 percent and 0.51 percent, respectively. If derivative instruments had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.44 percent and 0.64 percent, respectively.

        Interest paid and received on interest-rate-exchange agreements that are used by the Bank in its asset and liability management, but which do not meet hedge-accounting requirements of SFAS 133 (economic hedges), are classified as net gain (loss) on derivatives and hedging activities in other

61

income. As shown in the Other Income (Loss) and Other Expense section below, interest accruals on derivatives classified as economic hedges totaled a loss of $2.9 million and a gain of $1.2 million for the years ended December 31, 2007 and 2006, respectively.

Other Income (Loss) and Operating Expenses

        Losses on early extinguishment of debt totaled $641,000 and $215,000 for the years ended December 31, 2007 and 2006, respectively. During the years ended December 31, 2007 and 2006, the Bank extinguished debt with book values totaling $22.3 million and $2.0 million, respectively.

        For the years ended December 31, 2007 and 2006, the Bank recorded net unrealized losses on trading securities of $267,000 and $1.6 million, respectively. These securities are economically hedged with interest-rate-exchange agreements that do not qualify for hedge accounting under SFAS 133, but are acceptable hedging strategies under the Bank's risk-management program. Changes in the fair value of these economic hedges are recorded in current-period earnings and amounted to a loss of $1.7 million and a gain of $343,000 for the years ended December 31, 2007 and 2006, respectively. Also included in other income (loss) are interest accruals on these economic hedges, which resulted in gains of $616,000 and $1.2 million for the years ended December 31, 2007 and 2006, respectively.

        For the year ended December 31, 2007, total operating expenses increased $3.9 million from the same period in 2006. This increase was mainly due to a $3.3 million increase in salaries and benefits and an $800,000 increase in other operating expenses. The $3.3 million increase in salaries and benefits was due primarily to a $1.2 million increase in salary expenses attributable to planned staffing increases and annual merit increases, an increase in incentive compensation and employee award programs of $934,000, and an increase of $1.2 million in employee benefits. The increase in employee benefits was primarily attributable to an increase in costs associated with the Bank's pension plans. At December 31, 2007, staffing levels increased 4.7 percent to 199.0 full-time equivalent positions compared with 190.0 full-time equivalent positions at December 31, 2006.

        The $800,000 increase in other operating expenses was largely attributable to a $286,000 increase in data processing maintenance fees, a $138,000 increase in contractual services related to information security expenses and the licensing of additional credit-monitoring products, and a $144,000 increase in employee search expenses to fill vacant positions.

        The Bank, together with the other FHLBanks, is charged for the cost of operating the Finance Board and the Office of Finance. These expenses totaled $4.0 million and $3.3 million for the years ended December 31, 2007 and 2006, respectively, and are included in other expense.

FINANCIAL CONDITION

Advances

        At December 31, 2008, the advances portfolio totaled $56.9 billion, an increase of $1.2 billion compared with a total of $55.7 billion at December 31, 2007. This increase was primarily the result of a $1.7 billion increase in floating-rate advances, a $987.0 million increase in overnight advances, a $799.4 million increase in FAS 133 hedging adjustments offset by a $2.2 billion decline in fixed-rate advances. The decline in fixed-rate advances was due to the decrease in short-term advances of $6.5 billion offset by an increase in long-term advances of $2.8 billion and putable advances of $1.3 billion. At December 31, 2008, 54.1 percent of total advances outstanding had original maturities of greater than one year, compared with 44.3 percent as of December 31, 2007.

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        The following table summarizes advances outstanding at December 31, 2008 and 2007, by year of contractual maturity.

Advances Outstanding by Year of Contractual Maturity
(dollars in thousands)

	December 31,
	2008						2007
Year of Contractual Maturity	Amount			Weighted Average Rate			Amount			Weighted Average Rate
Overdrawn demand-deposit accounts	$	28,444			0.46	%	$	61,496			4.64	%
2008		—			—			35,745,494			4.65
2009		32,363,291			2.42			6,801,904			4.59
2010		5,418,310			4.23			3,883,697			4.89
2011		4,953,624			3.27			1,974,447			4.88
2012		2,507,092			4.30			1,966,414			4.54
2013		5,119,387			2.43			865,192			4.83
Thereafter		5,439,874			4.13			4,086,235			4.37
Total par value		55,830,022			2.92	%		55,384,879			4.65	%
Premium		9,279						4,278
Discount		(20,883	)					(17,861	)
SFAS 133 hedging adjustments		1,107,849						308,444
Total	$	56,926,267					$	55,679,740

        Advances originated by the Bank are recorded at par. However, the Bank may record premiums or discounts on advances in the following cases:

•

Advances may be acquired from another FHLBank when a member of the Bank acquires a member of another FHLBank. In these cases, the Bank may purchase the advance from the other FHLBank at a price that results in a fair market yield for the acquired advance.

•

In the event that a hedge of an advance is discontinued, the cumulative basis adjustment is recorded as a premium or discount and amortized over the remaining life of the advance.

•

When the prepayment of an advance is followed by disbursement of a new advance and the transactions effectively represent a modification of the previous advance under SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases (SFAS 91), the prepayment fee received is deferred, recorded as a discount to the modified advance, and accreted over the life of the new advance.

•

When the Bank makes an AHP advance, the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP advance rate and the Bank's related cost of funds for comparable maturity funding is charged against the AHP liability and recorded as a discount on the AHP advance.

        There were no transfers of advances between the Bank and other FHLBanks during the years ended December 31, 2008 and 2007.

        As of December 31, 2008, SFAS 133 hedging adjustments increased $799.4 million from December 31, 2007. Lower market-interest rates at the end of 2008 as compared to the end of 2007 have resulted in a higher estimated fair value of the hedged advances.

63

        The Bank offers advances to members that may be prepaid on pertinent dates (call dates) without incurring prepayment or termination fees (callable advances). At December 31, 2008, and December 31, 2007, the Bank had outstanding callable advances of $5.5 million and $30.0 million, respectively. The following table summarizes advances outstanding at December 31, 2008 and 2007, by year of contractual maturity or next call date for callable advances.

Advances Outstanding by Year of Contractual Maturity or Next Call Date
(dollars in thousands)

	December 31,
	2008					2007
Year of Contractual Maturity or Next Call Date	Par Value		Percentage of Total			Par Value		Percentage of Total
Overdrawn demand-deposit accounts	$	28,444		—	%	$	61,496		0.1	%
2008		—		—			35,775,494		64.6
2009		32,368,791		58.0			6,801,904		12.3
2010		5,418,310		9.7			3,883,697		7.0
2011		4,948,124		8.9			1,944,447		3.5
2012		2,507,092		4.5			1,966,414		3.5
2013		5,119,387		9.2			865,192		1.6
Thereafter		5,439,874		9.7			4,086,235		7.4
Total par value	$	55,830,022		100.0	%	$	55,384,879		100.0	%

        The Bank also offers putable advances, in which the Bank purchases a put option from the member that allows the Bank to terminate the related advance on specific dates through its term. At December 31, 2008 and 2007, the Bank had putable advances outstanding totaling $9.3 billion and $8.0 billion, respectively. The following table summarizes advances outstanding at December 31, 2008, and December 31, 2007, by year of contractual maturity or next put date for putable advances.

Advances Outstanding by Year of Contractual Maturity or Next Put Date
(dollars in thousands)

	December 31,
	2008					2007
Year of Contractual Maturity or Next Put Date	Par Value		Percentage of Total			Par Value		Percentage of Total
Overdrawn demand-deposit accounts	$	28,444		—	%	$	61,496		0.1	%
2008		—		—			41,613,769		75.1
2009		39,061,566		70.0			7,260,154		13.1
2010		4,529,960		8.1			2,681,797		4.8
2011		4,906,824		8.8			1,336,647		2.4
2012		1,599,042		2.9			987,864		1.8
2013		4,277,587		7.7			476,592		0.9
Thereafter		1,426,599		2.5			966,560		1.8
Total par value	$	55,830,022		100.0	%	$	55,384,879		100.0	%

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        The following table summarizes advances outstanding by product type at December 31, 2008 and 2007.

Advances Outstanding by Product Type
(dollars in thousands)

		December 31, 2008					December 31, 2007
		Balance		Percent of Total			Balance		Percent of Total
Overnight advances		$	2,350,846		4.2	%	$	1,363,868		2.5	%
Fixed-rate advances
	Short-term		22,893,070		41.0			29,377,410		53.0
	Long-term		12,866,170		23.1			10,088,175		18.2
	Amortizing		2,565,761		4.6			2,381,301		4.3
	Putable		9,273,175		16.6			7,939,325		14.3
	Callable		5,500		—			30,000		0.1
			47,603,676		85.3			49,816,211		89.9
Variable-rate advances
	Simple variable		5,875,500		10.5			4,158,800		7.5
	Putable, convertible to fixed		—		—			46,000		0.1
			5,875,500		10.5			4,204,800		7.6
Total par value		$	55,830,022		100.0	%	$	55,384,879		100.0	%

        The Bank lends to member financial institutions within the six New England states. Advances are diversified across the Bank's member institutions. At December 31, 2008, the Bank had advances outstanding to 370, or 80.3 percent, of its 461 members. At December 31, 2007, the Bank had advances outstanding to 353, or 77.2 percent, of its 457 members.

        The Bank's advances are concentrated to institutions in the financial services industry. The following table provides a summary of advances outstanding to the Bank's members by member institution type for each of the last five fiscal years.

Advances Outstanding by Member Type
(dollars in millions)

	Commercial Banks		Thrifts		Credit Unions		Insurance Companies		Other(1)		Total Par Value
December 31, 2008	$	32,151.1	$	18,930.7	$	3,751.8	$	857.1	$	139.3	$	55,830.0
December 31, 2007		35,692.0		16,286.0		2,518.1		757.8		131.0		55,384.9
December 31, 2006		18,585.7		15,834.0		1,773.3		938.4		227.4		37,358.8
December 31, 2005		20,582.6		14,233.3		1,802.7		1,134.8		295.2		38,048.6
December 31, 2004		14,564.0		11,814.9		1,427.6		1,079.8		1,060.0		29,946.3

(1)

"Other" includes advances of former members involved in mergers with nonmembers where the resulting institution is not a member of the Bank, as well as advances outstanding to eligible nonmember housing associates.

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Top Five Advance-Holding Members
(dollars in thousands)

				As of December 31, 2008
												Advances Interest Income for the Year Ended December 31, 2008
Name	City	State		Par Value of Advances		Percent of Total Advances			Weighted-Average Rate(1)
Bank of America Rhode Island, N.A.	Providence		RI	$	14,200,378		25.4	%		2.59	%	$	693,776
RBS Citizens, N.A.	Providence		RI		11,409,138		20.4			1.72			284,099
NewAlliance Bank	New Haven		CT		2,185,118		3.9			4.47			102,698
Webster Bank	Waterbury		CT		1,331,197		2.4			2.36			42,795
Washington Trust Company	Westerly		RI		829,616		1.5			3.63			30,923

(1)

Weighted-average rates are based on the contract rate of each advance without taking into consideration the effects of interest-rate-exchange agreements that may be used by the Bank as a hedging instrument.

        The Bank prices advances based on the marginal cost of funding with a similar maturity profile, as well as market rates for comparable funding alternatives. In accordance with regulations, the Bank prices its advance products in a consistent and nondiscriminatory manner to all members. However, the Bank may price its products on a differential basis, which is based on the creditworthiness of the member, volume, or other reasonable criteria applied consistently to all members. Differences in the weighted-average rates of advances outstanding to the five largest members noted in the table above result from several factors, including the disbursement date of the advances, the product type selected, and the term to maturity.

        Prepayment Fees.    Advances with a maturity of six months or less may not be prepaid, whereas advances with a term to maturity greater than six months generally require a fee to make the Bank financially indifferent should a member decide to prepay an advance. During the year ended December 31, 2008, advances totaling $1.0 billion were prepaid, resulting in gross prepayment-fee income of $6.5 million, which was partially offset by a $1.8 million loss related to fair-value hedging adjustments and a $7,000 premium write-off on those prepaid advances. During the year ended December 31, 2007, advances totaling $938.3 million were prepaid, resulting in gross prepayment-fee income of $4.4 million, which was partially offset by a $1.4 million loss related to fair-value hedging adjustments. Advance prepayments may increase as a result of changes in interest rates or other factors. A declining interest-rate environment may result in an increase in prepayment fees but also a reduced rate of return on the Bank's interest-earning assets. Thus, the amount of future advance prepayments and the impact of such prepayments on the Bank's future earnings is unpredictable.

Investments

        At December 31, 2008, investment securities and short-term money-market instruments totaled $18.9 billion, compared with $17.9 billion at December 31, 2007. The growth in investments was due to an increase of $3.3 billion in interest-bearing deposits, and a $2.0 billion increase in securities purchased under agreements to resell. These were partially offset by a $4.0 billion decline in held-to-maturity securities. Under the Bank's pre-existing authority to purchase MBS, additional investments in MBS and certain securities issued by the Small Business Administration (SBA) are prohibited if the Bank's investments in such securities exceed 300 percent of capital as measured at the previous monthend. At December 31, 2008 and 2007, the Bank's MBS and SBA holdings represented 225 percent and 226 percent of capital, respectively.

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Held-to-Maturity Securities

        The Bank classifies most of its investments as held-to-maturity. The following table provides a summary of the Bank's held-to-maturity securities.

Investment Securities Classified as Held-to-Maturity
(dollars in thousands)

		December 31,
		2008				2007				2006
		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Certificates of deposit		$	565,000	$	565,157	$	5,330,000	$	5,332,096	$	940,000	$	939,993
U.S. agency obligations			39,995		41,259		51,634		53,465		62,823		63,702
State or local housing-finance-agency obligations			278,128		196,122		299,653		287,228		315,545		317,914
			883,123		802,538		5,681,287		5,672,789		1,318,368		1,321,609
Mortgage-backed securities:
	U.S. government guaranteed		11,870		12,515		13,661		14,297		16,226		16,669
	Government-sponsored enterprises		4,384,215		4,359,784		1,658,407		1,682,370		1,022,039		1,020,801
	Other		3,989,016		2,409,945		5,924,526		5,748,175		5,889,558		5,888,922
			8,385,101		6,782,244		7,596,594		7,444,842		6,927,823		6,926,392
Total		$	9,268,224	$	7,584,782	$	13,277,881	$	13,117,631	$	8,246,191	$	8,248,001

        State or Local Housing-Finance-Agency Obligations.    Within this category of investment securities in the held-to-maturity portfolio are gross unrealized losses totaling $82.7 million as of December 31, 2008. Management has reviewed the state or local housing-finance-agency obligations and has determined that the unrealized losses in this category of investments are the result of the current interest-rate environment and illiquidity in the credit markets. The Bank has determined that all unrealized losses are temporary given the creditworthiness of the issuers and the underlying collateral. As of December 31, 2008, none of the Bank's held-to-maturity investments in state or local housing-finance-agency obligations were rated below investment grade by a nationally recognized statistical ratings organization (NRSRO). Because the decline in market value is attributable to changes in interest rates and credit spreads and illiquidity in the credit markets, and not to a deterioration in the fundamental credit quality of these obligations, and because the Bank has the ability and intent to hold these investments through to a recovery of fair value, which may be maturity, the Bank does not consider these investments to be other-than-temporarily impaired at December 31, 2008.

        Mortgage-Backed Securities.    Within this category of investment securities in the held-to-maturity portfolio are gross unrealized losses totaling $1.7 billion as of December 31, 2008. Due to the loan credit performance of the Bank's private-label MBS portfolio deteriorating beyond the forecast assumptions concerning loan default rates, loss severities, and prepayment speeds, 19 of the Bank's securities became other-than-temporarily impaired. An other-than-temporary impairment loss of $381.7 million was recorded in the statement of income as realized loss on held-to-maturity securities which was equal to the entire difference between the impaired investments' carrying amount of $728.0 million and their fair value of $346.2 million. The fair value of these investments became the new cost basis of these investments at the time of impairment. In subsequent periods the Bank will account for the other-than-temporarily impaired debt securities as if the debt securities had been purchased on the measurement date of the other-than-temporary impairment. We will accrete into interest income the portion of the amounts we expect to recover that exceeds the cost basis of these securities over the remaining life of the securities.

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        The maturities, amortized cost, and weighted-average yields of non-MBS classified as held-to-maturity as of December 31, 2008, are provided in the following table.

Redemption Terms of Held-to-Maturity Securities
(dollars in thousands)

		Due in one year or less					Due after one year through five years					Due after five years through 10 years					Due after 10 years
		Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Total
Certificates of deposit		$	565,000		2.10	%	$	—		—	%	$	—		—	%	$	—		—	%	$	565,000
U.S. agency obligations			—		—			—		—			12,645		5.94			27,350		6.10			39,995
State or local housing-finance-agency obligations			—		—			6,653		7.18			30,126		6.31			241,349		2.48			278,128
	Total	$	565,000		2.10	%	$	6,653		7.18	%	$	42,771		6.20	%	$	268,699		2.85	%	$	883,123

Available-for-Sale Securities

        From time to time, the Bank invests in certain securities and simultaneously enters into matched-term interest-rate swaps to achieve a LIBOR-based variable yield, particularly when the Bank can earn a wider interest spread between the swapped yield on the investment and short-term debt instruments than it can earn between the bond's fixed yield and comparable-term fixed-rate debt. Because an interest-rate swap can only be designated as a hedge of an available-for-sale investment security, the Bank classifies these investments as available-for-sale. The following table provides a summary of the Bank's available-for-sale securities.

Investment Securities Classified as Available-for-Sale
(dollars in thousands)

		December 31,
		2008				2007				2006
		Adjusted Cost(1)		Fair Value		Adjusted Cost(1)		Fair Value		Adjusted Cost(1)		Fair Value
Supranational banks		$	501,890	$	458,984	$	394,678	$	396,341	$	380,262	$	382,484
U.S. government corporations			334,345		275,856		235,200		237,204		225,482		225,615
Government-sponsored enterprises			164,478		143,130		156,221		156,064		191,724		191,547
State or local housing-finance-agency obligations			21,685		21,685		—		—		—		—
Other FHLBanks' bonds			—		—		—		—		14,700		14,716
			1,022,398		899,655		786,099		789,609		812,168		814,362
Mortgage-backed securities
	Government-sponsored enterprises		322,486		314,749		277,749		274,150		172,600		173,696
Total		$	1,344,884	$	1,214,404	$	1,063,848	$	1,063,759	$	984,768	$	988,058

(1)

Includes amortized cost and SFAS 133 carrying value adjustments

        Unrealized Losses—Supranational Banks, U.S Government Corporations, and Government-Sponsored Enterprises.    Within the supranational banks, U.S. government corporations, and GSE categories of investment securities held in the available-for-sale portfolio are gross unrealized losses totaling $42.9 million, $58.5 million, and $21.5 million, respectively, as of December 31, 2008. Management believes that the unrealized losses on non MBS are the result of the current interest-rate environment, elevated investor yield requirements arising from perceived credit risk, and illiquidity in the credit markets. Investments in GSE securities, specifically debentures issued by Fannie Mae and Freddie Mac,

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were negatively impacted by investor credit concerns during most of the year ended December 31, 2008. However, the Federal Reserve Board's commitment to purchase GSE debt, as discussed in Recent Legislative and Regulatory Developments, may provide some support to the Bank's investments in senior debt non MBS issued by those entities. Management has reviewed its available-for-sale investments and has determined that all unrealized losses are temporary given the creditworthiness of the issuers. Because the decline in market value is largely attributable to illiquidity in the credit markets and not to deterioration in the fundamental credit quality of these securities, and because the Bank has the ability and intent to hold these investments through to a recovery of fair value, which may be maturity, the Bank does not consider these investments to be other-than-temporarily impaired at December 31, 2008.

        Mortgage-Backed Securities.    Within the GSE category of investment securities held in the available-for-sale portfolio are gross unrealized losses totaling $7.7 million as of December 31, 2008. Management believes that the unrealized losses on the Bank's investment in MBS are the result of the current interest-rate environment, elevated investor yield requirements arising from perceived credit risk, and illiquidity in the credit markets. All of these MBS are issued and guaranteed by a GSE. Investments in GSE-issued MBS, specifically Fannie Mae and Freddie Mac, were impacted by investor credit concerns during most of the year ending December 31, 2008. However, the Federal Reserve Board's commitment to purchase up to $500 billion in GSE-issued MBS, as discussed in Recent Legislative and Regulatory Developments, may provide some support to the Bank's investments in MBS issued by those entities. Management has determined that all unrealized losses in this category of investments are temporary given the creditworthiness of the issuers and the underlying collateral. In addition, for GSE securities, the issuer guarantees the timely payment of principal and interest of these investments. Because the decline in market value is attributable to illiquidity in the credit markets and not solely to deterioration in the fundamental credit quality of these securities, and because the Bank has the ability and intent to hold these investments through to a recovery of fair value, which may be maturity, the Bank does not consider these investments to be other-than-temporarily impaired at December 31, 2008.

        The maturities, fair value, and weighted-average yields of non-MBS classified as available-for-sale as of December 31, 2008, are provided in the following table.

Redemption Terms of Available-for-Sale Securities
(dollars in thousands)

	Due in one year or less					Due after one year through five years					Due after five years through 10 years					Due after 10 years
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Total
Supranational banks	$	—		—	%	$	—		—	%	$	—		—	%	$	349,865		6.79	%	$	349,865
U.S. government corporations		—		—			—		—			—		—			213,308		6.15			213,308
Government-sponsored enterprises		24,995		4.25			—		—			—		—			88,641		6.11			113,636
State or local housing-finance-agency obligations		—		—			21,685		2.60			—		—			—		—			21,685
Total	$	24,995		4.25	%	$	21,685		2.60	%	$	—		—	%	$	651,814		6.49	%	$	698,494

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Trading Securities

        The Bank also classifies certain investments acquired for purposes of meeting short-term contingency liquidity needs and asset/liability management as trading securities and carries them at fair value. However, the Bank does not participate in speculative trading practices and holds these investments indefinitely as management periodically evaluates the Bank's liquidity needs. The following table provides a summary of the Bank's trading securities.

Trading Securities
(dollars in thousands)

		December 31,
		2008		2007		2006
Mortgage-backed securities
	U.S. government guaranteed	$	26,533	$	32,827	$	42,677
	Government-sponsored enterprises		36,663		47,754		63,685
	Other		—		32,288		45,000
Total		$	63,196	$	112,869	$	151,362

        At December 31, 2008, the Bank held securities from the following issuers with total book values greater than 10 percent of total capital, as follows:

Issuers with Total Book Value Greater than 10% of Total Capital
(dollars in thousands)

Name of Issuer		Book Value(1)		Fair Value
Non-Mortgage-backed securities:
	Inter-American Development Bank	$	458,983	$	458,983
	Federal National Mortgage Association		143,130		143,130
Mortgage-backed securities:
	Federal National Mortgage Association	$	3,529,954	$	3,531,202
	Federal Home Loan Mortgage Corporation		1,205,673		1,179,995

(1)

Book value for trading securities and available-for-sale securities represents fair value. Book value for held-to-maturity securities represents amortized cost.

        The Bank's MBS investment portfolio consists of the following categories of securities as of December 31, 2008 and 2007.

Mortgage-Backed Securities

	December 31,
	2008			2007
Private-label residential mortgage-backed securities		43.4	%		68.6	%
U.S. government-guaranteed and GSE residential mortgage-backed securities		54.5			25.4
Private-label commercial mortgage-backed securities		1.6			5.4
Home-equity loans		0.5			0.6
Total mortgage-backed securities		100.0	%		100.0	%

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Mortgage Loans

        Under the MPF program (other than MPF Xtra), the Bank invests in fixed-rate mortgages that are purchased from members that are PFIs. In the case of MPF Xtra the Bank facilitates Fannie Mae's investment in certain mortgages purchased from PFIs, as further described in Item 1—Business—Mortgage Loan Finance and Item 7A—Quantitative and Qualitative Disclosures about Market Risk—Credit Risk—Mortgage Loans. The Bank manages the liquidity, interest-rate, and prepayment-option risks of the mortgages it purchases, while the member retains the marketing and servicing activities. PFIs provide a measure of credit-loss protection to the Bank on loans the Bank purchases, for which PFIs receive a CE fee.

        Mortgage loans as of December 31, 2008, totaled $4.2 billion, an increase of $62.2 million from the December 31, 2007, balance of $4.1 billion. As of December 31, 2008, 134 of the Bank's 461 members have been approved to participate in the MPF program. Mortgage-loan purchases amounted to $620.3 million par value, for the year ending December 31, 2008, and $173.8 million par value for the year ending December 31, 2007. The increase in mortgage-loan purchases was due to the Bank increasing its marketing of the MPF program and adding additional PFIs during 2008.

        Notwithstanding the increase in the Bank's purchases of mortgage loans in 2008 through the MPF program, the recently announced agency Federal Reserve Board MBS purchase programs, as described in Recent Legislative and Regulatory Developments in this Item, may adversely impact member demand for MPF products. These programs, initiated to drive mortgage rates lower, make housing more affordable, and help stabilize home prices, may lead to continued artificially low agency mortgage pricing. Comparative MPF price execution, which is a function of the FHLBank debt issuance costs, may not be competitive as a result. This trend could continue and member demand for MPF products could diminish.

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        The following table presents information relating to the Bank's mortgage portfolio for the five-year period ended December 31, 2008.

Mortgage Loans Held for Investment
(dollars in thousands)

		December 31,
		2008			2007			2006			2005			2004
Real estate
Fixed-rate 15-year single-family mortgages		$	1,027,058		$	1,129,572		$	1,321,762		$	1,480,555		$	1,267,861
Fixed-rate 20- and 30-year single-family mortgages			3,107,424			2,938,886			3,152,175			3,370,391			2,697,010
Premiums			32,476			35,252			42,274			51,501			52,365
Discounts			(11,576	)		(11,270	)		(12,758	)		(13,051	)		(4,138	)
Deferred derivative gains and losses			(1,495	)		(1,001	)		(1,146	)		(1,059	)		262
Total mortgage loans held for investment			4,153,887			4,091,439			4,502,307			4,888,337			4,013,360
Less: allowance for credit losses			(350	)		(125	)		(125	)		(1,843	)		(1,379	)
Total mortgage loans, net of allowance for credit losses		$	4,153,537		$	4,091,314		$	4,502,182		$	4,886,494		$	4,011,981
Volume of mortgage-loan purchases
Conventional loans
	Original MPF	$	479,766		$	122,487		$	109,905		$	220,823		$	215,469
	MPF 125		74,264			51,293			41,473			56,474			35,346
	MPF Plus		60,684			—			110,032			1,477,647			217,400
Total conventional loans			614,714			173,780			261,410			1,754,944			468,215
Government-insured or guaranteed loans
	MPF Government		5,567			—			—			—			—
Total par value purchased		$	620,281		$	173,780		$	261,410		$	1,754,944		$	468,215
Mortgage loans outstanding
Conventional loans
	Original MPF	$	1,120,573		$	735,629		$	684,482		$	642,015		$	498,945
	MPF 125		403,016			377,046			361,937			361,050			370,663
	MPF Plus		2,231,626			2,524,915			2,914,273			3,219,238			2,235,531
Total conventional loans			3,755,215			3,637,590			3,960,692			4,222,303			3,105,139
Government-insured or guaranteed loans
	MPF Government		379,267			430,868			513,245			628,643			859,732
Total par value outstanding		$	4,134,482		$	4,068,458		$	4,473,937		$	4,850,946		$	3,964,871

        The FHLBank of Chicago, which acts as the MPF provider and provides operational support to the MPF Banks and their PFIs, calculates and publishes daily prices, rates, and fees associated with the various MPF products. The Bank has the option, on a daily basis, to opt out of participation in the MPF program. To date, the Bank has never opted out of daily participation. The FHLBank of Chicago had advised the Bank that, until further notice, it would no longer purchase participation interests in MPF loans acquired by other MPF Banks including the Bank. As a result, (1) the FHLBank of Chicago will not purchase participation interests in loans originated by the Bank's PFIs, and (2) in the event that the Bank elects to opt out of purchasing MPF loans on a given day, the FHLBank of Chicago will forgo its option to purchase 100 percent of the loans originated by the Bank's PFIs on that date. Given currently available information, market conditions, and the Bank's financial management strategies for the MPF loan portfolio, the Bank's management does not believe that this business decision by the FHLBank of Chicago will have any material impact on the Bank's results of operations or financial

72

condition, although it could from time to time require the Bank to restrict the volume of loans that it purchases from its PFIs. However, under different business conditions, the decision could have a material impact on the Bank's results of operations and financial condition. For example, if the Bank elected to opt out of purchasing MPF loans, it could adversely affect customer relationships and future business flows.

        The following table presents the Bank's retained mortgage-loan purchases from PFIs that represent greater than 10 percent of total mortgage-loan purchases.

Mortgage-Loan Purchases from PFIs
(dollars in thousands)

		December 31,
		2008			2007			2006			2005			2004
Cape Cod Cooperative Bank
	Dollar amount purchased	$	75,316		$	11,030			—			—			—
	Percent of total mortgage-loan purchases		12	%		6	%		—			—			—
Newtown Savings Bank
	Dollar amount purchased	$	67,692		$	42,106		$	34,786		$	46,846		$	1,558
	Percent of total mortgage-loan purchases		11	%		24	%		13	%		3	%		—	%
First Southeast Reinsurance Co. Inc
	Dollar amount purchased	$	62,942			—			—			—			—
	Percent of total mortgage-loan purchases		10	%		—			—			—			—
Balboa Reinsurance Company, a subsidiary of Countrywide Financial Corporation(1)
	Dollar amount purchased		—			—		$	110,032		$	1,448,995		$	402,097
	Percent of total mortgage-loan purchases		—			—			42	%		83	%		86	%

(1)

Countrywide Financial Corporation became a subsidiary of Bank of America Corporation in the third quarter of 2008.

        As of December 31, 2008, Countrywide Home Loans Servicing L.P, a subsidiary of Bank of America Corporation holding company that also owns Balboa Reinsurance Company, and Webster Bank individually service more than five percent of the Bank's outstanding mortgage loans. As of December 31, 2008, Countrywide Home Loans Servicing LP serviced approximately 55.5 percent of the Bank's mortgage loans and Webster Bank services approximately 5.9 percent. Webster Bank is also one of the Bank's five largest advance borrowers. Neither of these members has received preferential pricing on the mortgage loans the Bank purchased from them as compared to any other member.

        When a PFI fails to comply with its representations and warranties concerning its duties and obligations described within the PFI agreement and the MPF Origination and Servicing Guides, applicable laws, or terms of mortgage documents, the PFI may be required to repurchase the MPF loans which are impacted by such failure. Reasons for which a PFI could be required to repurchase an MPF loan may include, but are not limited to, MPF loan ineligibility, failure to deliver documentation to an approved custodian, a servicing breach, fraud, or other misrepresentation. The following table provides a summary of MPF loans that have been repurchased by our PFIs.

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Summary of MPF Loan Repurchases
(dollars in thousands)

	For The Years Ended December 31,
	2008		2007		2006		2005		2004
Conventional loans	$	3,107	$	963	$	2,903	$	689	$	5,931
Government-insured or guaranteed loans		106		2,373		2,743		276		1,901
Total	$	3,213	$	3,336	$	5,646	$	965	$	7,832

        The increase in loan repurchases during 2006 noted in the above table resulted from a large increase in volume of repurchases by Countrywide Financial Corporation.

        The following tables present the scheduled repayments for mortgage loans outstanding at December 31, 2008 and 2007.

Redemption Terms of Mortgage Loans
As of December 31, 2008
(dollars in thousands)

	Due in one year or less		Due after one year through five years		Due after five years		Total
Fixed-rate conventional loans	$	136,123	$	624,771	$	2,994,321	$	3,755,215
Fixed-rate government-insured or guaranteed loans		8,702		40,450		330,115		379,267
Total par value	$	144,825	$	665,221	$	3,324,436	$	4,134,482

Redemption Terms of Mortgage Loans
As of December 31, 2007
(dollars in thousands)

	Due in one year or less		Due after one year through five years		Due after five years		Total
Fixed-rate conventional loans	$	122,337	$	606,062	$	2,909,191	$	3,637,590
Fixed-rate government-insured or guaranteed loans		9,258		43,073		378,537		430,868
Total par value	$	131,595	$	649,135	$	3,287,728	$	4,068,458

        Allowance for Credit Losses on Mortgage Loans.    The allowance for credit losses on mortgage loans was $350,000 and $125,000 at December 31, 2008 and 2007, respectively. See Critical Accounting Estimates—Allowance for Loan Losses for a description of the Bank's methodology for estimating the allowance for loan losses. The Bank did not recognize any recoveries during 2008. The Bank recognized a total of $9,000 in net recoveries for 2007. The ratio of net charge-offs to average loans outstanding was less than one basis point for the years ended December 31, 2008 and 2007.

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        The following table presents the Bank's allowance for credit losses activity.

Allowance for Credit Losses Activity
(dollars in thousands)

	As of and for the Year Ended December 31,
	2008		2007			2006			2005			2004
Balance at January 1	$	125	$	125		$	1,843		$	1,379		$	1,317
Charge-offs		—		—			(14	)		(38	)		(91	)
Recoveries		—		9			—			—			30
Net recoveries (charge-offs)		—		9			(14	)		(38	)		(61	)
Provision for credit losses		225		(9	)		(1,704	)		502			123
Balance at December 31	$	350	$	125		$	125		$	1,843		$	1,379

        The following table presents the Bank's allocation of allowance for credit losses activity.

Allocation of Allowance for Credit Losses
(dollars in thousands)

		December 31,
		2008					2007					2006					2005					2004
		Amount		Percent of Total Loans			Amount		Percent of Total Loans			Amount		Percent of Total Loans			Amount		Percent of Total Loans			Amount		Percent of Total Loans
Conventional loans		$	350		90.8	%	$	125		89.4	%	$	125		88.5	%	$	1,843		87.0	%	$	1,379		78.3	%
Government-insured or guaranteed loans			—		9.2			—		10.6			—		11.5			—		13.0			—		21.7
	Total	$	350		100.0	%	$	125		100.0	%	$	125		100.0	%	$	1,843		100.0	%	$	1,379		100.0	%

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        The Bank places conventional mortgage loans on nonaccrual when the collection of the contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is reversed against interest income. The Bank monitors the delinquency levels of the mortgage-loan portfolio on a monthly basis. A summary of mortgage-loan delinquencies at December 31, 2008, and December 31, 2007, are provided in the following tables.

Summary of Delinquent Mortgage Loans
As of December 31, 2008
(dollars in thousands)

Days Delinquent	Conventional			Government(1)			Total
30 days	$	37,101		$	17,709		$	54,810
60 days		10,354			7,130			17,484
90 days or more and accruing		—			14,207			14,207
90 days or more and nonaccruing		21,325			—			21,325
Total delinquencies	$	68,780		$	39,046		$	107,826
Total par value of mortgage loans outstanding	$	3,755,215		$	379,267		$	4,134,482
Total delinquencies as a percentage of total par value of mortgage loans outstanding		1.83	%		10.30	%		2.61	%
Delinquencies 90 days or more as a percentage of total par value of mortgage loans outstanding		0.57	%		3.75	%		0.86	%

(1)

Government loans continue to accrue interest after 90 or more days delinquent since the U.S. government insures or guarantees the repayment of principal and interest.

Summary of Delinquent Mortgage Loans
As of December 31, 2007
(dollars in thousands)

Days Delinquent	Conventional			Government(1)			Total
30 days	$	37,231		$	18,074		$	55,305
60 days		6,333			6,902			13,235
90 days or more and accruing		—			10,723			10,723
90 days or more and nonaccruing		7,982			—			7,982
Total delinquencies	$	51,546		$	35,699		$	87,245
Total par value of mortgage loans outstanding	$	3,637,590		$	430,868		$	4,068,458
Total delinquencies as a percentage of total par value of mortgage loans outstanding		1.42	%		8.29	%		2.14	%
Delinquencies 90 days or more as a percentage of total par value of mortgage loans outstanding		0.22	%		2.49	%		0.46	%

(1)

Government loans continue to accrue interest after 90 or more days delinquent since the U.S. government insures or guarantees the repayment of principal and interest.

        The Bank's mortgage-loan portfolio is geographically diversified across all 50 states and Washington, D.C., and no single zip code represented more than one percent of outstanding mortgage loans at either December 31, 2008 or December 31, 2007. The Bank observes little correlation between

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the geographic locations of loans and delinquency and there is no concentration of delinquent loans in any particular geographic area.

        Loan-Portfolio Analysis.    The Bank's par value of outstanding mortgage loans, nonperforming loans, and loans 90 days or more past due and accruing interest for the five-year period ended December 31, 2008, are provided in the following table.

Loan-Portfolio Analysis
(dollars in thousands)

		As of December 31,
		2008		2007		2006		2005		2004
Real-estate mortgages		$	4,134,482	$	4,068,458	$	4,473,937	$	4,850,946	$	3,964,871
Nonperforming real-estate mortgages		$	21,325	$	7,982	$	4,796	$	6,387	$	2,708
Real-estate mortgages past due 90 days or more and still accruing(1)		$	14,207	$	10,723	$	8,544	$	6,788	$	663
Interest contractually due during the period		$	1,120	$	442	$	294	$	388	$	205
Interest actually received during the period			1,041		420		278		349		177
	Shortfall	$	79	$	22	$	16	$	39	$	28

(1)

Only government-guaranteed loans (for example, FHA, VA) continue to accrue interest after 90 or more days delinquent.

        As of December 31, 2008 and 2007, loans in foreclosure were $12.0 million and $5.3 million, respectively, and real-estate owned (REO) was $3.9 million and $2.2 million, respectively. REO is recorded on the statement of condition in other assets.

        Sale of REO Assets.    During the years ended December 31, 2008, 2007, and 2006, the Bank sold REO assets with a recorded book value of $5.3 million, $3.7 million, and $932,000, respectively. Upon sale of these properties, and inclusive of any proceeds received from primary mortgage-insurance coverage, the Bank recognized net gains (losses) totaling $122,000, $112,000, and $(19,000) on the sale of REO assets during the years ended December 31, 2008, 2007, and 2006, respectively. Gains and losses on the sale of REO assets are recorded in other income.

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        The following tables provide the portfolio characteristics of mortgage loans held by the Bank.

Characteristics of the Bank's Mortgage-Loan Portfolio(1)

	December 31,
	2008			2007
Loan-to-value ratio at origination
£ 60.00%		46	%		47	%
60.01% to 70.00%		14			13
70.01% to 80.00%		17			18
80.01% to 90.00%		13			12
Greater than 90.00%		10			10
Total		100	%		100	%
Weighted average loan-to-value ratio		63	%		62	%
FICO score(2)
< 620		3	%		4	%
620 to < 660		7			7
660 to < 700		13			14
700 to < 740		20			20
³ 740		56			54
Not available		1			1
Total		100	%		100	%
Weighted average FICO score		738			735

(1)

Percentages calculated based on unpaid principal balance at the end of each period.



(2)

FICO® is a widely used credit-industry model developed by Fair Isaac, and Company, Inc. to assess borrower credit quality with scores ranging from a low of 300 to a high of 850.

        Government MPF loans may not exceed the LTV limits set by the applicable federal agency. Conventional MPF loans with LTVs greater than 80 percent require certain amounts of primary MI, from an MI company rated at least triple-B (or equivalent rating).

Regional Concentration of Mortgage Loans Outstanding(1)

	December 31,
	2008			2007
Regional concentration(2)
Midwest		8	%		9	%
Northeast		49			41
Southeast		12			12
Southwest		10			13
West		21			25
Total		100	%		100	%
State concentration(3)
Massachusetts		25	%		21	%
California		16			18

(1)

Percentages calculated based on unpaid principal balance at the end of each period.

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(2)

Midwest includes IA, IL, IN, MI, MN, ND, NE, OH, SD, and WI.
Northeast includes CT, DE, MA, ME, NH, NJ, NY, PA, RI, and VT.
Southeast includes AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, and WV.
Southwest includes AR, AZ, CO, KS, LA, MO, NM, OK, TX, and UT.
West includes AK, CA, HI, ID, MT, NV, OR, WA, and WY.



(3)

State concentrations are provided for any individual state in which the Bank has a concentration of 10 percent or more.

        First-Loss Account.    The Bank's conventional mortgage-loan portfolio currently consists of four MPF products: Original MPF, MPF 125, MPF Government, and MPF Plus, which differ from each other in the way the first-loss account is determined, as described in Item 1—Business—Mortgage-Loan Finance.

        The aggregated amount of the first-loss account is memorialized and tracked but is neither recorded nor reported as a loan-loss reserve in the Bank's financial statements. As credit and special hazard losses are realized that are not covered by the liquidation value of the real property or primary mortgage insurance, they are first charged to the Bank, with a corresponding reduction of the first-loss account for that master commitment up to the amount accumulated in the first-loss account at that time. Over time, the first-loss account may cover the expected credit losses on a master commitment, although losses that are greater than expected or that occur early in the life of the master commitment could exceed the amount accumulated in the first-loss account. In that case, the excess losses would be charged next to the member's CE, then to the Bank after the member's CE obligation has been met. At December 31, 2008 and 2007, the amount of FLA remaining for losses was $30.6 million and $29.9 million, respectively. Except with respect to Original MPF, our losses incurred under the FLA can be recovered by withholding future performance CE fees otherwise paid to our PFIs.

Debt Financing—Consolidated Obligations

        At December 31, 2008 and 2007, outstanding COs, including both CO bonds and CO discount notes, totaled $74.7 billion and $73.4 billion, respectively. CO bonds have an initial maturity of greater than one year and are generally issued with either fixed-rate coupon-payment terms or variable-rate coupon-payment terms that use a variety of indices for interest-rate resets. In addition, to meet the needs of the Bank and of certain investors in COs, fixed-rate bonds and variable-rate bonds may also contain certain provisions that may result in complex coupon-payment terms and call or amortization features. When such COs (structured bonds) are issued, the Bank either enters into interest-rate-exchange agreements containing offsetting features, which effectively change the characteristics of the bond to those of a simple variable-rate bond, or use the bond to fund assets with characteristics similar to those of the bond.

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        The following is a summary of the Bank's CO bonds outstanding at December 31, 2008 and 2007, by the year of contractual maturity, for which the Bank is primarily liable.

Consolidated Obligation Bonds Outstanding
by Year of Contractual Maturity
(dollars in thousands)

	December 31,
	2008						2007
	Amount			Weighted Average Rate			Amount			Weighted Average Rate
2008	$	—			—	%	$	11,247,010			4.39	%
2009		15,200,275			2.85			6,335,475			4.63
2010		5,338,110			3.49			3,218,350			4.57
2011		2,598,350			3.87			1,705,500			4.86
2012		1,735,580			4.70			1,836,080			5.03
2013		2,454,000			4.06			1,759,000			4.82
Thereafter		6,005,000			5.58			7,551,000			5.96
Total par value		33,331,315			3.71	%		33,652,415			4.89	%
Premium		80,586						29,577
Discount		(1,481,762	)					(3,329,419	)
SFAS 133 hedging adjustments		323,863						69,414
Total	$	32,254,002					$	30,421,987

        CO bonds outstanding at December 31, 2008 and 2007, include issued callable bonds totaling $9.4 billion, and $18.5 billion, respectively. The Bank may also enter into an interest-rate swap (in which the Bank pays variable and receives fixed) with structural characteristics that directly offset the coupon and any embedded call options or other termination features of the bond. The combined sold callable swap and callable debt effectively creates floating-rate funding at rates that are more attractive than other available alternatives.

        The discount associated with CO bonds is primarily attributable to zero-coupon callable bonds. The zero-coupon callable bonds are issued at substantial discounts to their par amounts because they have very long terms with no coupon. The Bank has hedged these bonds with interest-rate swaps, resulting in a LIBOR-based funding rate on the original bond proceeds over the life of the bonds.

        SFAS 133 hedging adjustments on CO bonds increased by $254.4 million during 2008. Lower market-interest rates at the end of 2008, as compared to the end of 2007, resulted in a higher estimated fair value of the hedged CO bonds.

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        The following table summarizes CO bonds outstanding at December 31, 2008 and 2007, by the earlier of the year of contractual maturity or next call date.

Consolidated Obligation Bonds Outstanding
by Year of Contractual Maturity or Next Call Date
(dollars in thousands)

	December 31,
	2008		2007
2008	$	—	$	23,076,710
2009		19,800,275		4,140,475
2010		5,959,110		2,293,350
2011		2,258,350		671,800
2012		1,230,580		956,080
2013		1,878,000		654,000
Thereafter		2,205,000		1,860,000
Total par value	$	33,331,315	$	33,652,415

        Interest-Rate-Payment Terms.    The following table details interest-rate-payment terms for CO bonds at December 31, 2008 and 2007.

Consolidated Obligation Bonds by
Interest-Rate-Payment Terms
(dollars in thousands)

	December 31,
	2008		2007
Fixed-rate bonds	$	28,151,315	$	28,377,715
Simple variable-rate bonds		3,050,000		1,000,000
Zero-coupon bonds		1,780,000		4,209,700
Step-up bonds		350,000		65,000
Total par value	$	33,331,315	$	33,652,415

        CO discount notes are also a significant funding source for the Bank. CO discount notes are short-term instruments with maturities ranging from overnight to one year. The Bank uses CO discount notes primarily to fund short-term advances and investments and longer-term advances and investments with short repricing intervals. CO discount notes comprised 56.8 percent and 58.6 percent of outstanding COs at December 31, 2008 and 2007, respectively, but accounted for 98.1 percent and 97.8 percent of the proceeds from the issuance of COs during the years ended December 31, 2008 and 2007, respectively, due, in particular, to the Bank's frequent overnight CO discount note issuances. Much of the CO discount note activity reflects the refinancing of overnight CO discount notes, which averaged $4.0 billion during the year ended December 31, 2008, up from an average of $3.8 billion during the year ended December 31, 2007.

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        The Bank's outstanding CO discount notes, all of which are due within one year, were as follows:

CO Discount Notes Outstanding
(dollars in thousands)

	Book Value		Par Value		Weighted Average Rate
December 31, 2008	$	42,472,266	$	42,567,305		1.59	%
December 31, 2007		42,988,169		43,264,750		4.33

Average Consolidated Obligations Outstanding
(dollars in thousands)

		For the Year Ended December 31,
		2008					2007					2006
		Average Balance		Yield			Average Balance		Yield			Average Balance		Yield
Overnight discount notes		$	4,019,432		2.04	%	$	3,764,623		4.79	%	$	2,399,834		4.91	%
Term discount notes			39,486,803		2.72			22,013,013		5.00			21,587,566		4.91
	Total discount notes		43,506,235		2.65			25,777,636		4.97			23,987,400		4.91
Bonds			33,199,670		3.66			34,953,730		4.95			31,301,707		4.66
	Total consolidated obligations	$	76,705,905		3.09	%	$	60,731,366		4.96	%	$	55,289,107		4.76	%

        The average balances of COs for the year ended December 31, 2008, were higher than the average balances for the year ended December 31, 2007, which is consistent with the increase in total average assets, primarily short-term advances. The average balance of term CO discount notes and overnight CO discount notes for the year ended December 31, 2008 increased $17.5 billion and $254.8 million, respectively, from the prior year. Average balances of CO bonds decreased $1.8 billion from the prior year. The average balance of CO discount notes represented approximately 56.7 percent of total average COs during the year ended December 31, 2008, as compared with 42.4 percent of total average COs during the year ended December 31, 2007, and the average balance of bonds represented 43.3 percent and 57.6 percent of total average COs outstanding during the years ended December 31, 2008 and 2007, respectively.

        Although the Bank is primarily liable for its portion of COs, that is, those issued on its behalf, the Bank is also jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on COs issued by all of the FHLBanks. The par amounts of the FHLBank's outstanding COs, including COs held by other FHLBanks, was $1.3 trillion and $1.2 trillion at December 31, 2008 and 2007, respectively. COs are backed only by the combined financial resources of the 12 FHLBanks. COs are not obligations of the U.S. government, and the U.S. government does not guarantee them. The Bank has not paid any obligations on behalf of the other FHLBanks during the years ended December 31, 2008 and 2007.

        The FHLBank Act authorizes the Secretary of the Treasury, at his or her discretion, to purchase COs of the FHLBanks aggregating not more than $4.0 billion under certain conditions. The terms, conditions, and interest rates are determined by the Secretary of the Treasury. There were no such purchases by the U.S. Treasury during the year ended December 31, 2008.

        On November 25, 2008, the Federal Reserve Board announced an initiative to purchase GSE debt, including FHLBank debt. See Item 7—Liquidity and Capital Resources—Liquidity for a discussion of this initiative's impact on the Bank.

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Deposits

        The Bank offers demand and overnight deposits, custodial mortgage accounts, and term deposits to its members. Deposit programs are intended to provide members a low-risk earning asset that satisfies liquidity requirements. Deposit balances depend on members' need to place excess liquidity and can fluctuate significantly. Due to the relatively small size of the Bank's deposit base and the unpredictable nature of member demand for deposits, the Bank does not rely on deposits as a core component of its funding.

        As of December 31, 2008, deposits totaled $611.1 million compared with $713.1 million at December 31, 2007, a decrease of $102.1 million. This decrease was mainly the result of a lower level of member deposits in the Bank's overnight and demand-deposit accounts, which provide members with a short-term liquid investment.

        For the years ended December 31, 2008, and December 31, 2007, average demand- and overnight-deposit balances were $923.2 million and $836.1 million, respectively, and the average rate paid was 1.74 percent and 4.75 percent, respectively.

        The following table presents term deposits issued in amounts of $100,000 or greater at December 31, 2008 and 2007.

Term Deposits Greater than $100,000
(dollars in thousands)

	December 31,
	2008					2007
Term Deposits by Maturity	Amount		Weighted Average Rate			Amount		Weighted Average Rate
Three months or less	$	37,000		1.96	%	$	3,950		4.98	%
Over three months through six months		1,000		2.98			—		—
Over six months through 12 months		—		—			—		—
Greater than 12 months(1)		26,250		4.19			26,250		4.19
Total par value	$	64,250		2.89	%	$	30,200		4.29	%

(1)

Represents eight term deposit accounts totaling $6.3 million with maturity dates of August 31, 2011, and one term deposit totaling $20.0 million with a maturity date of September 22, 2014.

Capital

        The board of directors of the Bank may, but is not required to, declare and pay noncumulative dividends in cash, stock, or a combination thereof. Dividends may only be paid from current net earnings or previously retained earnings. Further, on December 14, 2008, the Bank's board of directors adopted a quarterly dividend payout restriction that limits the quarterly dividend payout to no more than 50 percent of quarterly earnings in the event that the retained earnings target exceeds the Bank's current level of retained earnings, although the Bank's board of directors retains full discretion over the amount, if any, and timing of any dividend payout, subject to this payout restriction. See Item 5—Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for additional information regarding the Bank's dividends. At December 31, 2008, the Bank had an accumulated deficit of $19.7 million and became prohibited from paying dividends until the Bank generates sufficient net income to eliminate the accumulated deficit.

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        Regulatory Capital Requirements.    The Bank is subject to risk-based capital rules established by the Finance Agency. Only permanent capital, defined as retained earnings plus Class B stock, can satisfy the risk-based capital requirement. The Bank has remained in compliance with these requirements through December 31, 2008, as noted in the following table.

Risk-Based Capital Requirements
(dollars in thousands)

	December 31,
	2008			2007
Permanent capital
Class B capital stock	$	3,584,720		$	3,163,793
Mandatorily redeemable capital stock		93,406			31,808
(Accumulated deficit) retained earnings		(19,749	)		225,922
Permanent capital	$	3,658,377		$	3,421,523
Risk-based capital requirement
Credit-risk capital	$	215,514		$	167,538
Market-risk capital		1,425,551			112,106
Operations-risk capital		492,319			83,893
Total risk-based capital requirement	$	2,133,384		$	363,537

        The Bank's credit-risk-based capital requirement, as defined by the Finance Agency's risk-based capital rules whereby assets are assigned risk-adjusted weightings based on asset type and, for advances and non-mortgage assets, tenor, increased by $48.0 million due to downgrades of the credit ratings of private-label MBS assets and the growth in advance balances and money-market investments from December 31, 2007 to December 31, 2008.

        The increase in the Bank's market-risk capital requirement reflects the sharp decline in the ratio of the Bank's market value of equity to its book value of equity from 95.9 percent at December 31, 2007, to 48.3 percent at December 31, 2008, which primarily resulted from the sharp decline in the market value of MBS during the first half of 2008. See Item 7A—Quantitative and Qualitative Disclosures about Market Risk—Measurement of Market and Interest Rate Risk for further discussion. Under Finance Agency regulations, the dollar amount by which the Bank's market value of equity is less than 85 percent of its book value of equity must be added to the market risk component of its risk-based capital requirement. As of December 31, 2008, this incremental risk-based capital total was $1.3 billion, and was the principal driver behind the increase in the Bank's market risk component from $112.1 million at December 31, 2007, to $1.4 billion at December 31, 2008. This increase was due to the decline in the market value of the Bank's portfolio of privatelabel MBS as well as downgrades in the credit ratings of many of these securities. Management believes that the decline in the ratio of the Bank's market value of equity to its book value of equity is temporary and will recover as liquidity returns to the MBS market. However, management cannot predict how long MBS prices will remain depressed, and the current situation could persist for an extended period of time. Further, in the event of further credit deterioration in excess of the Bank's expectations, realized credit losses in the Bank's private-label MBS investments would serve to limit the recovery of capital ratios including the risk-based capital ratio. To date, though, the Bank has not realized any loss of contractual principal and interest in these holdings.

        Subsequent to December 31, 2008, and through February 28, 2009, the credit risk-based capital requirement for MBS investments increased $352.2 million due to downgrades in the ratings of private-label MBS. In particular, the downgrade of several private-label MBS with a book value of $983.4 million to CCC has had a significant upward impact on the credit-risk-based capital requirement

84

for the MBS portfolio. Finance Agency regulations require the Bank to hold credit-risk-based capital for CCC rated assets equal to 34 percent of their book value. In additional to the increase in credit-risk-based capital due to the recent downgrades, Finance Agency regulations require an additional 30 percent of that amount be added for operations-risk-based capital, which equals $105.7 million. Further declines in credit ratings of private-label MBS will further increase the Bank's risk-based capital requirement.

        In addition to the risk-based capital requirements, the GLB Act specifies a five percent minimum leverage ratio based on total capital using a 1.5 weighting factor applied to permanent capital, and a four percent minimum capital ratio that does not include a weighting factor applicable to permanent capital. The Bank was in compliance with these requirements throughout 2007 and 2008, and remained in compliance at December 31, 2008.

        The following table provides the Bank's capital ratios as of December 31, 2008 and 2007.

Capital Ratio Requirements
(dollars in thousands)

	December 31,
	2008			2007
Capital ratio
Minimum capital (4% of total assets)	$	3,214,127		$	3,128,014
Actual capital (capital stock plus retained earnings)		3,658,377			3,421,523
Total assets		80,353,167			78,200,338
Capital ratio (permanent capital as a percentage of total assets)		4.6	%		4.4	%
Leverage ratio
Minimum leverage capital (5% of total assets)	$	4,017,658		$	3,910,017
Leverage capital (permanent capital multiplied by a 1.5 weighting factor)		5,487,565			5,132,284
Leverage ratio (leverage capital as a percentage of total assets)		6.8	%		6.6	%

        The Bank targets an operating range of 4.0 percent to 5.5 percent for the capital ratio. In general, due to the member stock-purchase requirements, which are based on member activity with the Bank, as member assets increase and decrease, the Bank's capital stock will increase and decrease by a proportionate amount.

Derivative Instruments

        SFAS 133 requires all derivative instruments be recorded on the statement of condition at fair value, while FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts, allows derivative instruments to be classified as assets or liabilities according to the net fair value of derivatives aggregated by counterparty. Derivative assets' net fair value net of cash collateral and accrued interest totaled $28.9 million and $67.0 million as of December 31, 2008 and 2007, respectively. Derivative liabilities' net fair value net of cash collateral and accrued interest totaled $1.2 billion and $286.8 million as of December 31, 2008 and 2007, respectively.

        Effective January 1, 2008, the Bank implemented FSP FIN 39-1, which permits the Bank to offset fair-value amounts recognized for derivative instruments and fair-value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instruments recognized at fair value executed with the same counterparty under a master-netting arrangement. Upon the adoption of FSP FIN 39-1, the Bank recognized the effects of applying FSP FIN 39-1 as a change in accounting principle through retrospective application for all financial statements presented. At December 31, 2007, the Bank held cash collateral, including accrued interest from derivative counterparties totaling $61.2 million classified as deposits and accrued interest

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payable in the statement of condition. Upon adoption of FSP FIN 39-1 on January 1, 2008, this amount was reclassified to derivative assets or derivative liabilities.

        The Bank bases the estimated fair values of these agreements on the cost of interest-rate-exchange agreements with similar terms or available market prices. Consequently, fair values for these instruments must be estimated using techniques such as discounted cash-flow analysis and comparison to similar instruments. Estimates developed using these methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. The Bank formally establishes hedging relationships associated with balance-sheet items to obtain economic results. These hedge relationships may include fair-value and cash-flow hedges, as designated under SFAS 133, as well as economic hedges.

        The Bank had commitments for which it was obligated to purchase mortgage loans with par values totaling $32.7 million and $9.6 million at December 31, 2008, and December 31, 2007, respectively. Under Statement of Financial Accounting Standard No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149), all mortgage-loan-purchase commitments are recorded at fair value on the statement of condition as derivative instruments. Upon fulfillment of the commitment, the recorded fair value is then reclassified as a basis adjustment of the purchased mortgage assets.

        The following table presents a summary of the notional amounts and estimated fair values of the Bank's outstanding derivative financial instruments, excluding accrued interest, and related hedged item by product and type of accounting treatment as of December 31, 2008, and December 31, 2007. The hedge designation "fair value" represents the hedge classification for transactions that qualify for hedge-accounting treatment in accordance with SFAS 133 and are hedged with the benchmark interest rate. The hedge designation "economic" represents hedge strategies that do not qualify for hedge accounting under the guidelines of SFAS 133, but are acceptable hedging strategies under the Bank's risk-management policy.

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Hedged Item and Hedge-Accounting Treatment
As of December 31, 2008 and 2007
(dollars in thousands)

				December 31, 2008					December 31, 2007
Hedged Item		Derivative	SFAS 133 Hedge Designation	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Advances		Swaps	Fair value	$	15,401,359	$	(1,113,240	)	$	12,535,860	$	(310,871	)
		Swaps	Economic		111,250		(5,716	)		29,000		(756	)
		Caps and floors	Economic		66,500		294			409,800		586
	Total associated with advances				15,579,109		(1,118,662	)		12,974,660		(311,041	)
Available-for-sale securities		Swaps	Fair value		932,131		(394,526	)		936,031		(129,834	)
Trading securities		Swaps	Economic		46,500		(2,413	)		126,500		(1,559	)
Consolidated obligations		Swaps	Fair value		14,190,223		321,139			15,016,827		60,840
		Swaps	Economic		—		—			25,000		(4	)
	Total associated with consolidated obligations				14,190,223		321,139			15,041,827		60,836
Deposits		Swaps	Fair value		20,000		6,414			20,000		4,410
Member intermediated		Caps and floors	Not applicable		15,000		—			20,000		—
	Total				30,782,963		(1,188,048	)		29,119,018		(377,188	)
Mortgage delivery commitments(1)					32,672		(365	)		9,600		27
Forward contracts					10,000		(133	)		—		—
	Total derivatives			$	30,825,635		(1,188,546	)	$	29,128,618		(377,161	)
	Accrued interest						89,788					218,569
	Cash collateral						(46,101	)				(61,150	)
	Net derivatives					$	(1,144,859	)			$	(219,742	)
	Derivative asset					$	28,935				$	67,047
	Derivative liability						(1,173,794	)				(286,789	)
	Net derivatives					$	(1,144,859	)			$	(219,742	)

(1)

Mortgage delivery commitments are classified as derivatives pursuant to SFAS 149, with changes in their fair value recorded in other income.

        The following four tables provide a summary of the Bank's hedging relationships for fair value hedges of advances and COs which qualify for hedge accounting under SFAS 133, by year of contractual maturity, next put date for putable advances, next call date for callable COs. Interest accruals on interest-rate exchange agreements in SFAS 133-qualifying hedge relationships are recorded as interest income on advances and interest expense on COs in the statement of income. The notional amount of derivatives in SFAS 133-qualifying hedge relationships of advances and COs totals $29.6 billion, representing 96.0 percent of all derivatives outstanding as of December 31, 2008. Economic hedges are not included within the four tables below.

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SFAS 133 Fair Value Hedge Relationships of Advances
By Year of Contractual Maturity
As of December 31, 2008
(dollars in thousands)

										Weighted-Average Yield(2)
	Derivatives					Advances							Derivatives
Year of Maturity	Notional		Fair Value			Hedged Amount		SFAS 133 Fair Value Adjustment(1)		Advances			Receive Floating Rate			Pay Fixed Rate			Net Receive Result
2009	$	2,692,500	$	(40,181	)	$	2,692,500	$	40,454		4.32	%		3.08	%		4.28	%		3.12	%
2010		3,098,324		(144,154	)		3,098,324		143,270		4.58			2.54			4.50			2.62
2011		2,127,750		(117,385	)		2,127,750		117,209		4.08			2.74			3.99			2.83
2012		1,703,550		(140,618	)		1,703,550		140,423		4.34			2.39			4.25			2.48
2013		1,593,760		(125,224	)		1,593,760		124,992		3.83			2.96			3.73			3.06
Thereafter		4,185,475		(545,678	)		4,185,475		541,501		4.02			2.79			3.89			2.92
Total	$	15,401,359	$	(1,113,240	)	$	15,401,359	$	1,107,849		4.21	%		2.76	%		4.12	%		2.85	%

(1)

The SFAS 133 fair value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.

(2)

The yield for floating-rate instruments and the floating leg of interest-rate swaps is the coupon rate in effect as of December 31, 2008.

SFAS 133 Fair Value Hedge Relationships of Advances
By Year of Contractual Maturity or Next Put Date for Putable Advances
As of December 31, 2008
(dollars in thousands)

										Weighted-Average Yield(2)
	Derivatives					Advances							Derivatives
Year of Maturity or Next Put Date	Notional		Fair Value			Hedged Amount		SFAS 133 Fair Value Adjustment(1)		Advances			Receive Floating Rate			Pay Fixed Rate			Net Receive Result
2009	$	9,350,525	$	(692,503	)	$	9,350,525	$	687,495		4.39	%		2.78	%		4.26	%		2.91	%
2010		2,220,474		(107,227	)		2,220,474		106,858		3.92			2.57			3.90			2.59
2011		2,106,950		(135,974	)		2,106,950		135,832		3.72			2.89			3.65			2.96
2012		806,250		(78,550	)		806,250		78,717		4.25			2.38			4.21			2.42
2013		744,960		(70,812	)		744,960		70,868		4.05			3.16			4.02			3.19
Thereafter		172,200		(28,174	)		172,200		28,079		4.97			2.34			4.99			2.32
Total	$	15,401,359	$	(1,113,240	)	$	15,401,359	$	1,107,849		4.21	%		2.76	%		4.12	%		2.85	%

(1)

The SFAS 133 fair value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.

(2)

The yield for floating-rate instruments and the floating leg of interest-rate swaps is the coupon rate in effect as of December 31, 2008.

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SFAS 133 Fair Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity
As of December 31, 2008
(dollars in thousands)

										Weighted-Average Yield(2)
	Derivatives				CO Bonds & Discount Notes								Derivatives
Year of Maturity	Notional		Fair Value		Hedged Amount		SFAS 133 Fair Value Adjustment(1)			CO Bonds & DNs			Receive Fixed Rate			Pay Floating Rate			Net Pay Result
2009	$	9,431,671	$	26,948	$	9,431,671	$	(28,512	)		2.66	%		2.65	%		2.26	%		2.27	%
2010		1,566,260		36,070		1,566,260		(36,084	)		2.99			3.08			2.66			2.57
2011		535,000		15,012		535,000		(15,075	)		4.14			3.91			2.04			2.27
2012		430,000		22,848		430,000		(23,172	)		4.74			4.74			3.34			3.34
2013		1,086,000		63,798		1,086,000		(64,265	)		3.95			3.82			2.37			2.50
Thereafter		1,141,292		156,462		1,141,292		(158,020	)		5.46			5.47			2.53			2.52
Total	$	14,190,223	$	321,138	$	14,190,223	$	(325,128	)		3.14	%		3.12	%		2.36	%		2.38	%

(1)

The SFAS 133 fair value adjustment of hedged CO bonds and discount notes represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.

(2)

The yield for floating-rate instruments and the floating leg of interest-rate swaps is the coupon rate in effect as of December 31, 2008. For discount notes and zero coupon bonds, the yield represents the yield to maturity.

SFAS 133 Fair Value Hedge Relationships of Consolidated Obligations
By Year of Contractual Maturity or Next Call Date for Callable Consolidated Obligations
As of December 31, 2008
(dollars in thousands)

										Weighted-Average Yield(2)
	Derivatives				CO Bonds & Discount Notes								Derivatives
Year of Maturity or Next Call Date	Notional		Fair Value		Hedged Amount		SFAS 133 Fair Value Adjustment(1)			CO Bonds & DNs			Receive Fixed Rate			Pay Floating Rate			Net Pay Result
2009	$	10,350,530	$	44,957	$	10,350,530	$	(47,673	)		2.89	%		2.88	%		2.27	%		2.28	%
2010		1,658,693		45,462		1,658,693		(45,160	)		3.23			3.32			2.58			2.49
2011		325,000		11,443		325,000		(11,472	)		3.64			3.25			2.16			2.55
2012		150,000		15,968		150,000		(15,968	)		4.63			4.62			4.55			4.56
2013		971,000		60,925		971,000		(61,233	)		3.80			3.65			2.31			2.46
Thereafter		735,000		142,383		735,000		(143,622	)		5.07			5.08			2.79			2.78
Total	$	14,190,223	$	321,138	$	14,190,223	$	(325,128	)		3.14	%		3.12	%		2.36	%		2.38	%

(1)

The SFAS 133 fair value adjustment of hedged CO bonds and discount notes represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.

(2)

The yield for floating-rate instruments and the floating leg of interest-rate swaps is the coupon rate in effect as of December 31, 2008. For discount notes and zero coupon bonds, the yield represents the yield to maturity.

        The Bank has entered into derivative contracts with its members in which the Bank acts as an intermediary between the member and a derivative counterparty. Effective March 2007, the Bank discontinued this program and no longer offers derivatives to its members on an intermediated basis, but will allow existing transactions to remain outstanding until expiration. The Bank also engages in derivatives directly with affiliates of certain of the Bank's members, which act as derivatives dealers to the Bank. These derivative contracts are entered into for the Bank's own risk-management purposes and are not related to requests from the Bank's members to enter into such contracts.

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Outstanding Derivative Contracts with Members and Affiliates of Members
(dollars in thousands)

			December 31, 2008
Derivatives Counterparty	Affiliate Member	Primary Relationship	Notional Outstanding		Percent of Total Derivatives Outstanding(1)
Bank of America, N.A.	Bank of America Rhode Island, N.A.	Dealer	$	3,083,587		10.01	%
Royal Bank of Scotland, PLC	RBS Citizens, N.A.	Dealer		1,451,760		4.71
Auburn Savings Bank	Auburn Savings Bank	Member		10,000		0.03

(1)

The percent of total derivatives outstanding is based on the stated notional amount of all derivative contracts outstanding.

LIQUIDITY AND CAPITAL RESOURCES

        The Bank's financial strategies are designed to enable the Bank to expand and contract its assets, liabilities, and capital in response to changes in membership composition and member credit needs. The Bank's liquidity and capital resources are designed to support these financial strategies. The Bank's primary source of liquidity is its access to the capital markets through CO issuance, which is described in Item 1—Business—Consolidated Obligations. The Bank's equity capital resources are governed by the capital plan, which is described in the following Capital section.

Liquidity

        The Bank strives to maintain the liquidity necessary to meet member credit demands, repay maturing COs, meet other obligations and commitments, and respond to changes in membership composition. The Bank monitors its financial position in an effort to ensure that it has ready access to sufficient liquid funds to meet normal transaction requirements, take advantage of investment opportunities, and cover unforeseen liquidity demands.

        The Bank is not able to predict future trends in member credit needs since they are driven by complex interactions among a number of factors, including, but not limited to: mortgage originations, other loan portfolio growth, deposit growth, and the attractiveness of the pricing and availability of advances versus other wholesale borrowing alternatives. However, the Bank regularly monitors current trends and anticipates future debt-issuance needs in an effort to be prepared to fund its members' credit needs and its investment opportunities.

        Short-term liquidity management practices are described in Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Liquidity Risk. The Bank manages its liquidity needs to ensure that it is able to meet all of its contractual obligations and operating expenditures as they come due and to support its members' daily liquidity needs. Through the Bank's contingency liquidity plans, the Bank attempts to ensure that it is able to meet its obligations and the liquidity needs of members in the event of operational disruptions at the Bank or the Office of Finance or short-term disruptions of the capital markets. For further information and discussion of the Bank's guarantees and other commitments, see Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, and for further information and discussion of the Bank's joint and several liability for FHLBank COs, see Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Debt Financing-Consolidated Obligations.

        Under the Federal Home Loan Banks P&I Funding Contingency Plan Agreement (the Agreement) which became effective in 2006, in the event the Bank does not fund its principal and interest payments under a CO by deadlines established in the Agreement, the 11 other FHLBanks will be obligated to fund any shortfall in funding to the extent that any of the 11 other FHLBanks have a net positive settlement balance (that is, the amount by which end-of-day proceeds received by such FHLBank from

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the sale of COs on one day exceeds payments by such FHLBank on COs on the same day) in its account with the Office of Finance on the day the shortfall occurs. The Bank would then be required to repay the funding FHLBanks.

        As further discussed below, during the second half of 2008, the CO debt market became volatile. In response to this volatility and as additional protection against temporary disruptions in access to the CO debt markets and in accordance with related Finance Agency guidance, the Bank strengthened its contingency-liquidity plans to add a requirement that the Bank maintain sufficient liquidity, through short-term investments, in an amount at least equal to our anticipated cash outflows under certain scenarios, as more fully described in Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Liquidity Risk. The Bank also has contingent liquidity through a lending agreement the Bank entered in the third quarter of 2008 with the U.S. Treasury in connection with the U.S. Treasury's establishment of the Government Sponsored Enterprise Credit Facility (GSECF). The GSECF is a lending facility that is an additional source of liquidity for the FHLBanks, Freddie Mac, and Fannie Mae. Funding thereunder would be provided directly by the U.S. Treasury in exchange for eligible collateral, which is limited to guaranteed MBS issued by Freddie Mac and Fannie Mae as well as advances by the Bank to its members. Loans will be for short-term durations and no loans will be made with a maturity date beyond December 31, 2009. Any borrowings by the Bank under the GSECF are COs with the same joint and several liability as all other COs. The terms of the borrowings are agreed to at the time of issuance. The maximum borrowings under the lending agreement are based on eligible collateral. As of December 31, 2008, the Bank had not drawn on the GSECF. The Bank's contingency-liquidity plans are further described in Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Liquidity Risk. During 2008, the first full year of an ongoing credit crisis that began in mid-2007, the Bank's funding market access and funding costs varied greatly as the credit crisis deepened and a U.S. economic recession commenced, as determined by the National Bureau of Economic Research.

        During the first half of 2008, investor demand increased for short-term, high-quality debt, including discount notes resulting from an increase in investor risk aversion due to deterioration in the capital markets, and a sharp decline in world equity markets

        Throughout the second half of 2008, the Bank's funding costs associated with issuing long-term CO bonds became increasingly volatile, and, for maturities longer than one year, rose sharply compared with similar term U.S. dollar interest-rate swap rates and U.S. Treasury security yields, reflecting dealers' reluctance to sponsor, and investors' continuing reluctance to buy longer-term GSE debt, coupled with strong investor demand for high-quality, short-term debt instruments such as U.S. Treasury securities and discount notes. The growth in investor demand for high-quality, short-term debt instruments coincided with various shocks to the global capital markets, including the conservatorship of Fannie Mae and Freddie Mac, Lehman Brothers Holding Inc.'s petition for bankruptcy; the U.S. Treasury's multi-billion dollar loan to American International Group Inc. so it could avoid bankruptcy, Bank of America Corporation's acquisition of Merrill Lynch & Co.; the petition for bankruptcy by IndyMac Bancorp Inc., and the mergers of Washington Mutual, Inc. into JPMorgan Chase & Co. and Wachovia Corporation into Wells Fargo & Company.

        The increase in the Bank's funding costs associated with issuing long-term CO bonds in the second half of 2008 also coincided with a deepening and broadening U.S. economic recession and certain U.S. federal government responses to the U.S. economic recession and the shocks to the global capital markets, including the FDIC's Temporary Liquidity Guarantee Program, which is described in this Item under Recent Legislative and Regulatory Developments. The FDIC's Temporary Liquidity Guarantee Program, under which the FDIC guarantees certain unsecured obligations of banks and other financial institutions and is backed by the full faith and credit of the United States, has reduced the perceived relative value of CO debt in the marketplace, causing yield spreads for CO debt with maturities of greater than six months to widen significantly. Also in October 2008, the FDIC proposed a rule to

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lower a banking institution's risk weight for certain Fannie Mae and Freddie Mac claims, including debentures and MBS, from 20 percent to 10 percent, which is described in this Item under Recent Legislative and Regulatory Developments. The proposal excluded FHLBank debt obligations which may have added to the market perception that FHLBank debt would have a lesser degree of government support if the FHLBanks were unable to honor their debt obligations, which adversely impacted FHLBank System term debt pricing. This rule has not yet been finalized.

        As a result of the rise in funding costs for long-term CO bonds, the Bank has decreased its term money-market holdings and maintained a significant portion of its liquidity in overnight investments. The Bank has also become more reliant on the issuance of discount notes for funding. Any significant disruption in the short-term debt markets could have an adverse impact on the Bank. If any such disruption were prolonged the Bank may not be able to obtain funding on acceptable terms and the higher cost of longer-term liabilities would likely cause the Bank to increase advance rates, which could adversely impact demand for advances and, in turn, the Bank's results of operations. Alternatively, continuing to fund longer-term assets with very short-term liabilities, such as discount notes, could adversely impact the Bank's results of operations if the cost of those short-term liabilities rises to levels above the yields on the assets being funded.

        The rise in the Bank's long-term funding costs has been offset somewhat by a Federal Reserve Board initiative for the Federal Reserve Bank of New York to purchase GSE debt, including FHLBank debt, announced November 25, 2008. Following this announcement, FHLBank long-term CO bond pricing improved somewhat relative to U.S. Treasury securities and interest rate swaps, a trend which continued into 2009. Through March 20, 2009, the Federal Reserve Bank of New York has purchased approximately $46.8 billion in such term debt, of which approximately $11.1 billion was FHLBank term debt.

Capital

        Total capital as of December 31, 2008, was $3.4 billion, which was substantially unchanged from the balance as of December 31, 2007. Total capital as of December 31, 2007, at $3.4 billion, was a 33.8 percent increase from $2.5 billion as of December 31, 2006.

        The Bank's ability to expand in response to member-credit needs is based primarily on the capital-stock requirements for advances. Members are required to increase their capital-stock investment in the Bank as their outstanding advances increase. The capital-stock requirement for advances is currently based on the original term to maturity of the advances, as follows:

•

3.0 percent for overnight advances;

•

4.0 percent for advances with an original maturity greater than overnight and up to three months; and

•

4.5 percent for all other advances.

        On April 17, 2008, the board of directors of the Bank voted to adjust the activity-based stock-investment requirement for mortgage loans that members sell to the Bank under the MPF program to 4.5 percent. The adjustment to the activity-based stock-investment requirement will support any future growth in the Bank's MPF portfolio. Effective June 1, 2008, the 4.5 percent activity-based stock-investment requirement affects outstanding balances for loans funded under MPF master commitments entered into, or amended, from April 18, 2008, forward. Loans funded pursuant to MPF master commitments prior to April 18, 2008, will continue to be subject to the activity-based stock-investment requirement that applied prior to April 18, 2008, if any.

        The Bank's minimum capital-to-assets leverage limit is currently 4.0 percent based on Finance Agency requirements. The additional capital stock from higher balances of advances expands the

92

Bank's capacity to issue COs, which are used not only to support the increase in these balances but also to increase the Bank's purchases of mortgage loans, MBS, and other investments.

        The Bank can also contract its balance-sheet and liquidity requirements in response to members' reduced credit needs. Member-credit needs that result in reduced advance and mortgage-loan balances will result in capital stock in excess of the amount required by the Bank's capital plan. The Bank's capital-stock policies allow the Bank to repurchase excess capital stock if a member reduces its advance balances. In May 2006, the Bank implemented its Excess Stock Repurchase Program to help it manage its capital by reducing the amount of excess capital stock held by members. See Item 1—Business—Capital Resources for a discussion on the program. The Bank may also, at its sole discretion, repurchase shares of excess stock upon request by members. During the year ended December 31, 2008, the Bank did not complete any repurchases of excess capital stock under this program.

        Members may submit a written request for redemption of excess capital stock. The shares of capital stock subject to the redemption request will be redeemed at par value by the Bank upon expiration of a five-year stock-redemption period, provided that the member continues to meet its total stock-investment requirement at that time and that the Bank would remain in compliance with its minimum capital requirements. While historically the Bank has repurchased excess capital stock at a member's request prior to the expiration of the redemption period, the decision to repurchase remains at the Bank's discretion at all times. Further, effective December 8, 2008, the Bank placed a moratorium on all excess stock repurchases to help preserve the Bank's capital in the light of the various challenges to the Bank, including the growth in unrealized losses on the Bank's portfolio of held to maturity private-label MBS, discussed in Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Credit Risk—Investments, as well as growth in competition for advances based on certain U.S. federal government responses to the shocks to the global capital markets and the broadening and deepening U.S. economic recession, including the responses discussed in this Item under Recent Legislative and Regulatory Developments.

        During the year ended December 31, 2008, the Bank repurchased capital stock totaling $455.6 million. Also subject to a five-year stock-redemption period are shares of capital stock held by a member that either gives notice of intent to withdraw from membership, or becomes a nonmember due to merger or acquisition, charter termination, or involuntary termination of membership. Capital stock subject to the five-year stock-redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock totaled $93.4 million and $31.8 million at December 31, 2008, and December 31, 2007, respectively. The following table summarizes the anticipated stock-redemption period for these shares of capital stock as of December 31, 2008, and December 31, 2007 (dollars in thousands):

Anticipated Stock-Redemption Period	December 31, 2008		December 31, 2007
Due less than one year	$	4,185	$	—
Due after one year through two years		103		4,185
Due after two years through three years		—		103
Due after three years through four years		2,520		—
Due after four years through five years		86,598		27,520
Total mandatorily redeemable capital stock	$	93,406	$	31,808

        The Bank is not required to redeem or repurchase activity-based stock until the later of the expiration of the five-year notice of redemption or until the termination of the related activity. If activity-based stock becomes excess capital stock as a result of the termination of the related activity, the Bank may, in its sole discretion, repurchase the excess activity-based stock prior to the expiration of the five-year redemption notice period, provided that it would continue to meet its minimum regulatory capital requirements after the redemption.

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        A member may cancel or revoke its written notice of redemption or its notice of withdrawal from membership prior to the end of the five-year stock-redemption period. The Bank's capital plan provides that the Bank will charge the member a cancellation fee equal to two percent of the par amount of the shares of Class B stock that is the subject of the redemption notice. The Bank will assess a redemption-cancellation fee unless the board of directors decides that it has a bona fide business purpose for waiving the imposition of the fee, and the waiver is consistent with Section 7(j) of the FHLBank Act.

        At December 31, 2008 and 2007, members and nonmembers with capital stock outstanding held $677.3 million and $233.8 million, respectively, in excess capital stock. The following table summarizes member capital stock requirements as of December 31, 2008 and 2007 (dollars in thousands):

	Membership Stock Investment Requirement		Activity-Based Stock Requirement		Total Stock Investment Requirement(1)		Outstanding Class B Capital Stock(2)		Excess Class B Capital Stock
December 31, 2008	$	530,263	$	2,470,559	$	3,000,843	$	3,678,126	$	677,283
December 31, 2007		489,501		2,472,449		2,961,830		3,195,601		233,771

(1)

Total stock-investment requirement is rounded up to the nearest hundredth on an individual member basis.

(2)

Class B capital stock outstanding includes mandatorily redeemable capital stock.

        Provisions of the Bank's capital plan are also discussed in Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 15—Capital.

        Retained Earnings Target.    On December 14, 2008, the Bank's board of directors adopted a retained earnings target of $600.0 million (the retained earnings target was $213.0 million at December 31, 2007) in connection with the Bank's efforts to preserve capital in light of the various challenges to the Bank, including the growth in unrealized losses on the Bank's portfolio of held to maturity private-label MBS, discussed in Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Credit Risk—Investments, as well as growth in competition for advances based on certain U.S. federal government responses to the shocks to the global capital markets and the broadening and deepening U.S. economic recession, including such responses discussed in this Item under Recent Legislative and Regulatory Developments. While no specific date has been set for reaching this level of retained earnings, it is expected that the increase of retained earnings will occur over the next several years. At December 31, 2008, the Bank had an accumulated deficit of $19.7 million.

        The Bank's retained earnings target could be superseded by Finance Agency mandates, either in the form of an order specific to the Bank or by promulgation of new regulations requiring a level of retained earnings that is different from the Bank's currently targeted level. Moreover, management and the board of directors of the Bank may, at any time, change the Bank's methodology or assumptions for modeling the Bank's retained earnings requirement. Either of these could result in the Bank further increasing its retained earnings target or reducing the dividend payout, as necessary.

Capital Requirements

        The FHLBank Act and Finance Agency regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank must maintain (1) total capital in an amount equal to at least 4.0 percent of its total assets, (2) leverage capital in an amount equal to at least 5.0 percent of its total assets, and (3) permanent capital in an amount equal to at least its regulatory risk-based capital requirement. In addition, the Finance Agency has indicated that mandatorily redeemable capital stock is considered capital for regulatory purposes. At December 31, 2008, the Bank had a total capital

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to assets ratio of 4.6 percent, a leverage capital to assets ratio of 6.8 percent, and a risk-based capital requirement of $2.1 billion, which was satisfied by the Bank's permanent capital of $3.6 billion. Permanent capital is defined as total capital stock outstanding, including mandatorily redeemable capital stock, plus retained earnings. At December 31, 2007, the Bank had a total capital to assets ratio of 4.4 percent, a leverage capital to assets ratio of 6.6 percent, and a risk-based capital requirement of $363.5 million, which was satisfied by the Bank's permanent capital of $3.4 billion. See Financial Condition—Capital in this Item for discussion concerning the increase in the Bank's risk-based capital requirement.

        Effective January 30, 2009, the Finance Agency promulgated an interim final rule on capital classifications and critical capital levels for the FHLBanks (the Interim Capital Rule). The Interim Capital Rule, among other things, established criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Interim Capital Rule requires the Director to determine on no less than a quarterly basis the capital classification of each FHLBank. The Director has not yet made this determination for the Bank. Each FHLBank is required to notify the Director within 10 calendar days of any event or development that has caused or is likely to cause its permanent or total capital to fall below the level necessary to maintain its assigned capital classification. The following describes each capital classification and its related corrective action requirements, if any.

•

Adequately capitalized.  An FHLBank is adequately capitalized if it has sufficient permanent and total capital to meet or exceed its risk-based and minimum capital requirements. FHLBanks that are adequately capitalized have no corrective action requirements.

•

Undercapitalized.  An FHLBank is undercapitalized if it does not have sufficient permanent or total capital to meet one or more of its risk-based and minimum capital requirements, but such deficiency is not large enough to classify the FHLBank as significantly undercapitalized or critically undercapitalized. An FHLBank classified as undercapitalized must submit a capital restoration plan that conforms with regulatory requirements to the Director for approval, execute the approved plan, suspend dividend payments and excess stock redemptions or repurchases, and not permit growth of its average total assets in any calendar quarter beyond the average total assets of the preceding quarter unless otherwise approved by the Director.

•

Significantly undercapitalized.  An FHLBank is significantly undercapitalized if either (i) the amount of permanent or total capital held by the FHLBank is less than 75 percent of any one of its risk-based or minimum capital requirements, but such deficiency is not large enough to classify the FHLBank as critically undercapitalized or (ii) an undercapitalized FHLBank fails to submit or adhere to a Director-approved capital restoration plan in conformance with regulatory requirements. An FHLBank classified as significantly undercapitalized must submit a capital restoration plan that conforms with regulatory requirements to the Director for approval, execute the approved plan, suspend dividend payments and excess stock redemptions or repurchases, and is prohibited from paying a bonus to or increasing the compensation of its executive officers without prior approval of the Director.

•

Critically undercapitalized.  An FHLBank is critically undercapitalized if either (i) the amount of total capital held by the FHLBank is less than two percent of the Bank's total assets or (ii) a significantly undercapitalized FHLBank fails to submit or adhere to a Director-approved capital restoration plan in conformance with regulatory requirements. The Director may place an FHLBank in conservatorship or receivership. An FHLBank will be placed in mandatory receivership if (1) the assets of an FHLBank are less than its obligations during a 60-day period or (2) the FHLBank is not, and during a 60-day period has not, been paying its debts on a regular basis. Until such time the Finance Agency is appointed as conservator or receiver for a

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critically undercapitalized FHLBank, the FHLBank is subject to all mandatory restrictions and obligations applicable to a significantly undercapitalized FHLBank.

•

Each required capital restoration plan must be submitted within 10 calendar days following notice from the Director unless an extension is granted and is subject to the Director's review and must set forth a plan to restore permanent and total capital levels to levels sufficient to fulfill its risk-based and minimum capital requirements.

        The Director has discretion to add to or modify the corrective action requirements for each capital classification other than adequately capitalized if the Director determines that such action is necessary to ensure the safe and sound operation of the FHLBank and the FHLBank's compliance with its risk-based and minimum capital requirements. Further, the Interim Capital Rule provides the Director discretion to reclassify an FHLBank's capital classification if the Director determines that:

•

the FHLBank is engaging in conduct that could result in the rapid depletion of permanent or total capital;

•

the value of collateral pledged to the FHLBank has decreased significantly;

•

the value of property subject to mortgages owned by the FHLBank has decreased significantly;

•

the FHLBank is in an unsafe and unsound condition following notice to the FHLBank and an informal hearing before the Director; or

•

the FHLBank is engaging in an unsafe and unsound practice because the FHLBank's asset quality, management, earnings, or liquidity were found to be less than satisfactory during the most recent examination, and such deficiency has not been corrected.

        The Bank's capital requirements are more fully discussed in Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 15—Capital.

Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations

        The Bank's significant off-balance-sheet arrangements consist of the following:

•

commitments that legally bind and obligate the Bank for additional advances;

•

standby letters of credit;

•

commitments for unused lines-of-credit advances;

•

standby bond-purchase agreements with state housing authorities; and

•

unsettled COs.

        Off-balance-sheet arrangements are more fully discussed in Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 19—Commitments and Contingencies.

        The Bank is required to pay 20 percent of its net earnings (after its AHP obligation) to REFCorp to support payment of part of the interest on bonds issued by REFCorp. The Bank must make these payments to REFCorp until the total amount of payments made by all FHLBanks is equivalent to a $300 million annual annuity with a final maturity date of April 15, 2030. Additionally, the FHLBanks must annually set aside for the AHP the greater of an aggregate of $100 million or 10 percent of the current year's income before charges for AHP (but after expenses for REFCorp). See Item 1—Business—Assessments for additional information regarding REFCorp and AHP assessments.

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        Contractual Obligations.    The following table presents contractual obligations of the Bank as of December 31, 2008.

Contractual Obligations as of December 31, 2008
(dollars in thousands)

	Payment Due By Period
Contractual Obligations	Total		Less than one year		One to three years		Three to five years		More than five years
Long-term debt obligations(1)	$	33,331,315	$	15,200,275	$	7,936,460	$	4,189,580	$	6,005,000
Estimated interest payments on long-term debt(2)		5,461,118		1,018,622		1,131,662		713,585		2,597,249
Operating lease obligations		14,763		3,671		7,360		3,732		—
Purchase obligations(3)		1,686,669		1,686,669		—		—		—
Members' unused lines of credit(4)		1,460,340		1,460,340		—		—		—
Mandatorily redeemable capital stock		93,406		4,185		103		89,118		—
Consolidated obligations traded not settled(5)		1,018,000		123,000		430,000		225,000		240,000
Total contractual obligations	$	43,065,611	$	19,496,762	$	9,505,585	$	5,221,015	$	8,842,249

(1)

Includes CO bonds outstanding at December 31, 2008, at par value, based on contractual maturity date of the CO bonds. No effect for call dates on callable CO bonds has been considered in determining these amounts.

(2)

Includes estimated interest payments for CO bonds. For floating-rate CO bonds, the forward interest-rate curve of the underlying index as of December 31, 2008, has been used to project future interest payments. No effect for call dates on callable CO bonds has been considered in determining these amounts.

(3)

Includes standby letters of credit, unconditional commitments for advances, standby bond-purchase agreements, and commitments to fund/purchase mortgage loans.

(4)

Many of the members' unused lines of credit are not expected to be drawn upon, and therefore the commitment amount does not necessarily represent future cash requirements.

(5)

Payments due by period for COs, which were traded but not settled as of December 31, 2008, represent the eventual maturity of the COs.

CRITICAL ACCOUNTING ESTIMATES

        The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.

        The Bank has identified five accounting estimates that it believes are critical because they require management to make subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates include accounting for derivatives, the use of fair-value estimates, accounting for deferred premiums and discounts on prepayable assets, the allowance for loan losses, and other-than-temporary-impairment of investment securities. The Bank's audit committee of the board of directors has reviewed these estimates.

Accounting for Derivatives

        Derivative instruments are required to be carried at fair value on the statement of condition. Any change in the fair value of a derivative is required to be recorded each period in current period earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. All of the Bank's derivatives are either: 1) inherent to another activity, such as forward commitments to purchase mortgage loans under the

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MPF program, or 2) derivative contracts structured to offset some or all of the risk exposure inherent in its member-lending, mortgage-purchase, investment, and funding activities. Under SFAS 133, the Bank is required to recognize unrealized losses or gains on derivative positions, regardless of whether offsetting gains or losses on the associated assets or liabilities being hedged are permitted to be recognized in a symmetrical manner. Therefore, the accounting framework imposed by SFAS 133 can introduce the potential for considerable income variability. Specifically, a mismatch can exist between the timing of income and expense recognition from assets or liabilities and the income effects of derivative instruments positioned to mitigate market risk and cash-flow variability. Therefore, during periods of significant changes in interest rates and other market factors, the Bank's reported earnings may exhibit considerable variability. The Bank generally employs hedging techniques that are effective under the hedge-accounting requirements of SFAS 133. However, not all of the Bank's hedging relationships meet the hedge-accounting requirements of SFAS 133. In some cases, the Bank has elected to retain or enter into derivatives that are economically effective at reducing risk but do not meet the hedge-accounting requirements of SFAS 133, either because the cost of the hedge was economically superior to nonderivative hedging alternatives or because no nonderivative hedging alternative was available. As required by Finance Agency regulation and Bank policy, derivative instruments that do not qualify as hedging instruments pursuant to GAAP may be used only if the Bank documents a nonspeculative purpose.

        A hedging relationship is created from the designation of a derivative financial instrument as either hedging the Bank's exposure to changes in the fair value of a recognized asset, liability, or unrecognized firm commitment, or changes in future variable cash flows attributable to a recognized asset or liability or forecasted transaction. Fair-value hedge accounting allows for the offsetting changes in the fair value of the hedged risk in the hedged item to also be recorded in current period earnings. In many hedging relationships that use the shortcut method, the Bank may designate the hedging relationship upon its commitment to disburse an advance or trade a CO bond provided that the period of time between the trade date and the settlement date of the hedged item is within established conventions for the advances and CO bond markets. The Bank defines these market-settlement conventions to be five business days or less for advances and 30 calendar days or less, using a next business day convention, for CO bonds. In such circumstances, although the advance or CO bond will not be recognized in the financial statements until settlement date, the hedge relationship qualifies for applying the shortcut method. We then record changes in the fair value of the derivative and hedged item beginning on the trade date.

        If the hedge does not meet the criteria for shortcut accounting, it is treated as a long-haul fair-value hedge, where the change in the value of the hedged item attributable to changes in the benchmark interest rate must be measured separately from the derivative and effectiveness testing must be performed with results falling within established tolerances. If the hedge fails effectiveness testing, the hedge no longer qualifies for hedge accounting and the derivative is marked through current-period earnings without any offset related to the hedged item.

        For derivative transactions that potentially qualify for long-haul fair-value hedge-accounting treatment, management must assess how effective the derivatives have been, and are expected to be, in hedging changes in the estimated fair values of the hedged items attributable to the risks being hedged. Hedge-effectiveness testing is performed at the inception of the hedging relationship and on an ongoing basis. The Bank performs testing at hedge inception based on regression analysis of the hypothetical performance of the hedge relationship using historical market data. The Bank then performs regression testing on an ongoing basis using accumulated actual values in conjunction with hypothetical values. Specifically, each month the Bank uses a consistently applied statistical methodology that uses a sample of at least 31 historical interest-rate environments and includes an R-square test, a slope test, and an F-statistic test. These tests measure the degree of correlation of movements in estimated fair values between the derivative and the related hedged item. For the hedging relationship to be considered

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effective, the R-square must be greater than 0.8, the slope must be between -0.8 and -1.25, and the computed F-statistic test significance must be less than 0.05.

        Given that a derivative qualifies for long-haul fair-value hedge-accounting treatment, the most important element of effectiveness testing is the price sensitivity of the derivative and the hedged item in response to changes in interest rates and volatility as expressed by their effective durations. The effective duration will be affected mostly by the final maturity and any option characteristics. In general, the shorter the effective duration, the more likely it is that effectiveness testing would fail. This is because, given a relatively short duration, the floating-rate leg of the swap is a relatively important component of the monthly change in the derivative's estimated fair value, and there is no offsetting floating-rate leg in the hedged item. In this circumstance, the slope criterion is the more likely factor to cause the effectiveness test to fail.

        The fair values of the derivatives and hedged items do not have any cumulative economic effect if the derivative and the hedged item are held to maturity, or mutual optional termination at par. Since these fair values fluctuate throughout the hedge period and eventually return to par value on the maturity date, the effect of fair values is normally only a timing issue.

        For derivative instruments and hedged items that meet the requirement of SFAS 133 as described above, the Bank does not anticipate any significant impact on its financial condition or operating performance. For derivative instruments where no identified hedged item qualifies for hedge accounting under SFAS 133, changes in the market value of the derivative are reflected in earnings. As of December 31, 2008, the Bank held derivatives that are marked to market with no offsetting SFAS 133-qualifying hedged item including $81.5 million notional of interest-rate caps and floors, $157.8 million notional of interest-rate swaps, $10.0 million notional of forward contracts and $32.7 million notional of mortgage-delivery commitments. The total fair value of these positions as of December 31, 2008, was an unrealized loss of $8.3 million. The following table shows the estimated changes in the fair value of these derivatives under alternative parallel interest-rate shifts:

Change in Fair Value of Undesignated Derivatives
As of December 31, 2008
(dollars in thousands)

	-100 basis points			-50 basis points			+50 basis points		+100 basis points
Change from base case
Interest-rate caps, floors, and swaps(1)	$	—		$	(1,773	)	$	1,693	$	3,287
Forward contracts		(313	)		(165	)		185		395
Total change from base case	$	(313	)	$	(1,938	)	$	1,878	$	3,682

(1)

Given the low interest-rate environment experienced as a result of central banks' responses to the ongoing credit crisis, the Bank does not believe that technical valuations generated through a down 100 basis point rate shock is representative of potential shifts in the instruments' values.

        These derivatives economically hedge certain advances, CO bonds, and the trading securities portfolio. Although these economic hedges do not qualify or were not designated for hedge accounting under SFAS 133, they are an acceptable hedging strategy under the Bank's risk-management program. The Bank's projections of changes in value of the derivatives have been consistent with actual experience.

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Fair-Value Estimates

        The Bank measures certain assets and liabilities, including investment securities classified as available-for-sale and trading, as well as all derivatives and mandatorily redeemable capital stock at fair value on a recurring basis. Additionally, certain held-to-maturity securities are measured at fair value on a non-recurring basis due to the recognition of other-than-temporary impairment. Management also estimates the fair value of collateral that borrowers pledge against advance borrowings to confirm that collateral is sufficient to meet regulatory requirements and to protect against losses. Fair values play an important role in the valuation of certain Bank assets, liabilities, and derivative transactions. As discussed more fully in Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 2—Accounting Adjustments and Recently Issued Accounting Standards, the Bank adopted SFAS 157, Fair Value Measurements, on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes fair-value hierarchy based on the inputs used to measure fair value, and enhances disclosure requirements for fair-value measurements. The book values and fair values of our financial assets and liabilities, along with a description of the valuation techniques used to determine the fair values of these financial instruments, is disclosed in Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 18—Estimated Fair Values.

        In September 2008, the SEC and FASB issued joint guidance providing clarification of issues surrounding the determination of fair value measurements under the provisions of SFAS 157 in the current market environment. In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, which amended SFAS 157 to provide an illustrative example of how to determine the fair value of a financial asset when the market for that financial asset is not active. The SEC and FASB guidance did not have an impact on the Bank's application of SFAS 157.

        We generally consider a market to be inactive if the following conditions exist: (1) there are few transactions for the financial instruments; (2) the prices in the market are not current; (3) the price quotes we receive vary significantly either over time or among independent pricing services or dealers; and (4) there is a limited availability of public market information.

        SFAS 157 defines "fair value" as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date, or an exit price. In general, the transaction price will equal the exit price and, therefore, represent 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 transaction and the asset or liability. 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.

        Fair values are based on quoted market prices or market-based prices, if such prices are available. If quoted market prices or market-based prices are not available, fair values are determined based on valuation models that use either:

•

discounted cash flows, using market estimates of interest rates and volatility; or

•

dealer prices and prices of similar instruments.

        Pricing models and their underlying assumptions are based on management's best estimate with respect to:

•

discount rates;

•

prepayments;

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•

market volatility; and

•

other factors.

        These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the income and expense related thereto. The use of different assumptions, as well as changes in market conditions, could result in materially different net income and retained earnings.

        SFAS 157 establishes a three-level fair value hierarchy for classifying financial instruments that is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. The three levels of the SFAS 157 fair value hierarchy are described below:

•

Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.

•

Level 2—Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities.

•

Level 3—Unobservable inputs.

        Each asset or liability is assigned to a level based on the lowest level of any input that is significant to the fair value measurement. The majority of our financial instruments carried at fair value fall within the level 2 category and are valued primarily using inputs and assumptions that are observable in the market, that can be derived from observable market data or that can be corroborated by recent trading activity of similar instruments with similar characteristics.

        The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that are actively traded and have quoted market prices or parameters readily available, there is little to no subjectivity in determining fair value. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. Pricing models and their underlying assumptions are based on management's best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the related income and expense. The use of different models and assumptions as well as changes in market conditions could significantly affect the Bank's financial position and results of operations.

        For purposes of estimating the fair value of derivatives and items for which the Bank is hedging the changes in fair value attributable to changes in the designated benchmark interest rate, the Bank employs a valuation model that uses market data from the Eurodollar futures, cash LIBOR, U.S. Treasury obligations, and the U.S. dollar interest-rate-swap markets to construct discount and forward-yield curves using standard bootstrapping and smoothing techniques. "Bootstrapping" is the name given to the methodology of constructing a yield curve using shorter-dated instruments to obtain near-term discount factors progressing to longer-dated instruments to obtain the longer-dated discount factors. "Smoothing techniques" refer to the use of parametric equations to estimate a continuous series of discount factors by fitting an equation (representing a curve or line) to discount factors directly observed from market data. The model also calibrates an implied volatility surface from the at-the-money LIBOR cap/floor prices and the at-the-money swaptions prices. The application uses a modified Black-Karasinski process to model the term structure of interest rates.

        The SFAS 133 valuation adjustments for the Bank's hedged items in which the designated risk is the risk of changes in fair value attributable to changes in the benchmark LIBOR interest rate are calculated using the same model that is used to calculate the fair values of the associated hedging derivatives.

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        Certain held-to-maturity private-label MBS carried at amortized cost that have been written down to fair value during the fourth quarter of 2008 due to impairment are classified as non-recurring. The fair value of these level 3 non-recurring financial assets totaled $346.2 million at December 31, 2008.

Deferred Premium/Discount Associated with Prepayable Assets

        When the Bank purchases MBS, it often pays an amount that is different than the unpaid principal balance. The difference between the purchase price and the contractual note amount is a premium if the purchase price is higher, and a discount if the purchase price is lower. SFAS 91 establishes accounting guidance that permits the Bank to amortize (or accrete) these premiums (or discounts) in a manner such that the yield recognized on the underlying asset is constant over the asset's estimated life.

        The Bank typically pays more than the unpaid principal balances when the interest rates on the purchased mortgages are greater than prevailing market rates for similar mortgages on the transaction date. The net purchase premiums paid in accordance with SFAS 91 are then amortized using the constant-effective-yield method over the expected lives of the mortgages as a reduction in their book yields (that is, interest income). Similarly, if the Bank pays less than the unpaid principal balances due to interest rates on the purchased mortgages being lower than prevailing market rates on similar mortgages on the transaction date, the net discount is accreted in the same manner as the premiums, resulting in an increase in the mortgages' book yields. The constant-effective-yield amortization method is applied using expected cash flows that incorporate prepayment projections that are based on mathematical models that describe the likely rate of consumer refinancing activity in response to incentives created (or removed) by changes in interest rates. Changes in interest rates have the greatest effect on the extent to which mortgages may prepay. When interest rates decline, prepayment speeds are likely to increase, which accelerates the amortization of premiums and the accretion of discounts. The opposite occurs when interest rates rise.

        The Bank estimates prepayment speeds on each individual security using the most recent three months of historical constant prepayment rates, as available, or may subscribe to third-party data services that provide estimates of cash flows, from which the Bank determines expected asset lives. The constant-effective-yield method uses actual historical prepayments received and projected future prepayment speeds, as well as scheduled principal payments, to determine the amount of premium/discount that should be recognized so that the book yield of each MBS is constant for each month until maturity.

        Amortization of mortgage premiums could accelerate in falling interest-rate environments or decelerate in rising interest-rate environments. Exact trends will depend on the relationship between market interest rates and coupon rates on outstanding mortgage assets, the historical evolution of mortgage interest rates, the age of the mortgage loans, demographic and population trends, and other market factors. Changes in amortization will also depend on the accuracy of prepayment projections compared with actual experience. Prepayment projections are inherently subject to uncertainty because it is difficult to accurately predict future market conditions and the response of borrowing consumers in terms of refinancing activity to future market conditions even if the market conditions were known. In general, lower interest rates are expected to result in the acceleration of premium and discount amortization and accretion, compared with the effect of higher interest rates that would tend to decelerate the amortization and accretion of premiums and discounts.

        The effect on net income from the amortization and accretion of premiums and discounts on MBS, including MBS in both the held-to-maturity and available-for-sale portfolios, for the years ended December 31, 2008, 2007, and 2006, was a net reduction of income of $8.4 million, $1.3 million, and $3.3 million, respectively.

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Allowance for Loan Losses

        Advances.    The Bank has experienced no credit losses on advances and management currently does not anticipate any credit losses on advances. Based on the collateral held as security for advances, management's credit analyses, and prior repayment history, no allowance for losses on advances is deemed necessary. The Bank is required by statute to obtain sufficient collateral on advances to protect against losses, and to accept as collateral on such advances only certain types of qualified collateral, which are primarily U.S. government or government-agency securities, residential mortgage loans, deposits in the Bank, and other real-estate-related assets.

        At December 31, 2008, and December 31, 2007, the Bank had rights to collateral, either loans or securities, on a member-by-member basis, with an estimated fair value in excess of outstanding advances. Management believes that policies and procedures are in place to appropriately manage the credit risk associated with advances.

        Mortgage Loans.    The Bank purchases both conventional mortgage loans and government-guaranteed or - insured mortgage loans under the MPF program. Management has determined that no allowance for losses is necessary for government-guaranteed or -insured loans. Conventional loans, in addition to having the related real estate as collateral, are also credit enhanced either by qualified collateral pledged by the member, or by SMI purchased by the member. The CE is the PFI's potential loss in the second-loss position. It absorbs a percentage of realized losses prior to the Bank having to incur an additional credit loss in the third-loss position.

        The Bank's allowance for loan-losses methodology estimates the amount of probable incurred losses that are inherent in the portfolio, but have not yet been realized. The allowance for the Bank's conventional loan pools is based on an analysis of the migration of the Bank's delinquent loans to default since the inception of the MPF program. The Bank then analyzes the probable loss severity on that portion of the delinquent loans that the migration analysis indicates will default within one year. The combination of these factors, as well as an additional judgmental amount determined by management due to uncertainties inherent in the estimation process, represents the estimated losses from conventional MPF loans. The Bank then applies the risk-mitigating features of the MPF program to the estimated loss. The allowance is derived from the estimated loss on defaulting MPF loans, net of the risk-mitigating features of the MPF program.

        The process of determining the allowance for loan losses requires judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions. Due to variability in the data underlying the assumptions made in the process of determining the allowance for loan losses, estimates of the portfolio's inherent risks will adjust as warranted by changes in the level of delinquency in the portfolio and changes in the economy, particularly the residential mortgage market and fluctuations in house prices. The Bank periodically reviews general economic conditions to determine if the loan-loss reserve is adequate in view of economic or other risk factors that may affect markets in which the Bank's mortgage loans are located. The degree to which any particular change would affect the allowance for loan losses would depend on the severity of the change.

        As of December 31, 2008 and 2007, the allowance for loan losses on the conventional mortgage-loan portfolio was $350,000 and $125,000, respectively. The allowance reflects the Bank's estimate of probable incurred losses inherent in the MPF portfolio as of December 31, 2008 and 2007.

Other-Than-Temporary Impairment of Investment Securities

        The Bank evaluates held-to-maturity and available-for-sale investment securities in an unrealized loss position as of the end of each quarter for other-than-temporary impairment. This evaluation is based on an assessment of whether it is probable that the Bank will collect all of the contractual

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amounts due and the Bank's ability and intent to hold the securities in an unrealized loss position until they recover in value. This evaluation requires management judgment and a consideration of many factors, including but not limited to, the severity and duration of the impairment, recent events specific to the issuer and/or the industry to which the issuer belongs, an analysis of cash flows based on default and prepayment assumptions, and external credit ratings. Although external rating agency action or a change in a security's external rating is one criterion in our assessment of other-than-temporary impairment, a rating action alone is not necessarily indicative of other-than-temporary impairment.

        The Bank invests in senior-class securities that at the time of purchase are high quality and have the highest long-term debt rating that achieve their ratings through either guarantee of timely payment of principal and interest or credit enhancement, primarily over collateralization and senior-subordinated shifting interest features, the latter resulting in the prioritization of payments to senior classes over junior classes. The Bank tests its MBS investments on an ongoing basis to determine whether the credit enhancement associated with each security is sufficient to protect against losses of principal and interest on the underlying mortgage loans. As part of its analysis of other-than-temporary impairment of residential MBS issued by entities other than GSEs, the Bank employs third-party models to project expected losses associated with the underlying loan collateral and to model the resultant lifetime cash flows as to how they would pass through the deal structures underlying the Bank's MBS investments. These models use expected borrower default rates, projected loss severities, and forecasted voluntary prepayment speeds, all tailored to individual security product type. The Bank performs analysis based on expected behavior of the loans, whereby these loan performance scenarios are applied against each security's credit-support structure to monitor credit-enhancement sufficiency to protect the Bank's investment. The model output includes projected cash flows, including any shortfalls in the capacity of the underlying collateral to fully return all contractual cash flows. Any changes to management's assumptions for other-than-temporary impairment analysis as set forth in this section could result in materially different outcomes to this analysis including the realization of additional other-than-temporary impairment charges which may be substantial.

        Implicit in the cash-flow analysis is information relevant to expected cash flows (such as default and prepayment assumptions) that also underlies the other impairment factors mentioned above, and the Bank qualitatively considers all available information when assessing whether an impairment is other than temporary. Such information can include information the Bank has concerning whether another FHLBank has determined that the security being assessed is other-than-temporarily impaired. Since the Bank's financial statements are combined and published with the other FHLBanks in connection with the debt issuance process of the FHLBank System, the Bank from time to time may consider this qualitative factor in its assessment of OTTI. The relative importance of the other qualitative information varies based on the facts and circumstances surrounding each security, as well as the economic environment at the time of assessment. Based on the results of this evaluation, if it is determined that the impairment is other than temporary, the amount of the other-than-temporary impairment is determined by reference to the security's current fair value, rather than the expected cash flows of the security. The other-than-temporarily impaired security is written down to its current fair value, a loss is recognized through earnings, and a new cost basis for the security is established based on the current fair value. The fair value measurement used to determine the amount of the other-than-temporary impairment may be less than the actual amount that we expect to realize by holding the security to maturity. Accordingly, the difference between the current fair value and the estimated credit loss on the security is accreted into interest income over the remaining life of the security based on the amount and timing of future estimated cash flows.

        See Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 7—Held-to-Maturity Securities and Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations for additional information related to management's other-than-temporary impairment analysis for the current period.

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RECENT ACCOUNTING DEVELOPMENTS

        SFAS No. 157, Fair Value Measurements (SFAS 157). Effective January 1, 2008, the Bank adopted SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair-value hierarchy based on the inputs used to measure fair value and enhances disclosure requirements for fair-value measurements. SFAS 157 defines "fair value" as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The effect of adopting SFAS 157 was immaterial to the Bank's financial condition at January 1, 2008. For additional information on the fair value of certain financial assets and financial liabilities, see Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 18—Estimated Fair Values.

        FASB Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP FAS 157-3). On October 10, 2008, the FASB issued FSP FAS 157-3, which clarifies, but does not change, the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. Key existing principles of SFAS 157 illustrated in the example include:

•

A fair-value measurement represents the price at which a transaction would occur between market participants at the measurement date.

•

In determining a financial asset's fair value, use of a reporting entity's own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are unavailable.

•

Broker or pricing service quotes may be an appropriate input when measuring fair value, but they are not necessarily determinative if an active market does not exist for the financial asset.

        FSP FAS 157-3 was effective upon issuance and has retroactive application for prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application will be accounted for as a change in accounting estimate consistent with FASB Statement No. 154, Accounting Changes and Error Corrections (SFAS 154). The disclosure provisions of SFAS 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The Bank's adoption of FSP FAS 157-3 upon its issuance on October 10, 2008, did not have a material effect on the Bank's financial condition, results of operations, or cash flows.

        SFAS 159. On February 15, 2007, the FASB issued SFAS 159, which creates a fair-value option allowing, but not requiring, an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. It requires entities to display separately the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the statement of condition. Additionally, SFAS 159 requires an entity to provide information that would allow users to understand the effect on earnings of changes in the fair value of those instruments selected for the fair value election. Upon the adoption of SFAS 159 on January 1, 2008, the Bank did not elect to record any additional financial assets and liabilities at fair value. For additional information on the fair value of certain financial assets and liabilities, see Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 18—Estimated Fair Values.

        FSP No. FIN 39-1, Amendment of FASB Interpretation No. 39 (FSP FIN 39-1). On April 30, 2007, FASB issued FSP FIN 39-1, which permits an entity to offset fair-value amounts recognized for derivative instruments and fair-value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instruments recognized at fair value executed with the same counterparty under a master-netting arrangement.

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Under FSP FIN 39-1, the receivable or payable related to cash collateral may not be offset if the amount recognized does not represent or approximate fair value or arises from instruments in a master-netting arrangement that are not eligible to be offset. See Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 1—Summary of Significant Accounting Policies for the revised statement of condition as of December 31, 2007, as a result of the Bank's adoption and retrospective application of FSP FIN 39-1.

        Derivatives Implementation Group (DIG) Issue No. E23, Issues Involving the Application of the Shortcut Method Under Paragraph 68 (DIG Issue E23). On December 20, 2007, the FASB issued DIG Issue E23, which amends paragraph 68 of SFAS 133 with respect to the conditions that must be satisfied in order to apply the shortcut method for assessing hedge effectiveness. The Bank's adoption of DIG Issue E23 at January 1, 2008, did not have a material effect on its financial condition, results of operations, or cash flows.

        SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133 (SFAS 161). On March 19, 2008, the FASB issued SFAS 161 which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (January 1, 2009, for the Bank), with early adoption allowed. The adoption of SFAS 161 is not expected to have a material effect on the Bank's financial statement disclosures.

EITF Issue No. 08-5. On September 24, 2008, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) on Issue No. 08-5, Issuer's Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement (EITF 08-5). The objective of EITF 08-5 is to determine the issuer's unit of accounting for a liability that is issued with an inseparable third-party credit enhancement when it is recognized or disclosed at fair value on a recurring basis. EITF 08-5 should be applied prospectively and is effective in the first reporting period beginning on or after December 15, 2008 (January 1, 2009, for the Bank). The Bank does not believe the adoption of EITF 08-5 will have a material effect on its financial condition, results of operations, or cash flows.

        FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (FSP FAS 133-1 and FIN 45-4). On September 12, 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, which amends SFAS 133 and FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 (FIN 45) to improve disclosures about credit derivatives and guarantees and clarify the effective date of SFAS 161. FSP FAS 133-1 and FIN 45-4 also amends FAS 133 to require entities to disclose sufficient information to allow users to assess the potential effect of credit derivatives, including their nature, maximum payment, fair-value, and recourse provisions. Additionally, FSP FAS 133-1 and FIN 45-4 amends FIN 45 to require a disclosure about the current status of the payment/performance risk of a guarantee, which could be indicated by external credit ratings or categories by which the Bank measures risk. While the Bank does not currently enter into credit derivatives, it does, however, have guarantees, the FHLBanks' joint and several liability on COs, and letters of credit. The adoption of FSP FAS 133-1 and FIN 45-4 did not have a material effect on the Bank's financial statement disclosures. The provisions of FSP FAS 133-1 and FIN 45-4 that amend SFAS 133 and FIN 45 are effective for fiscal years and interim periods ending after November 15, 2008 (December 31, 2008, for the Bank). Additionally, FSP FAS 133-1 and FIN 45-4 clarify that the disclosures required by SFAS 161 should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008 (January 1, 2009, for the Bank).

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        FASB Staff Position No. EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (FSP EITF 99-20-1). On January 12, 2009, the FASB issued FSP EITF 99-20-1, which amends the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets (EITF 99-20) to achieve more consistent determination of whether an other-than-temporary impairment has occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS 115 and other related guidance. FSP EITF 99-20-1 is effective and should be applied prospectively for financial statements issued for fiscal years and interim periods ending after December 15, 2008 (December 31, 2008, for the Bank). The Bank's adoption of FSP EITF 99-20-1 at December 31, 2008, did not have a material effect on its financial condition, results of operations, or cash flows.

        FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). On April 9, 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 which is intended to provide greater clarity to investors about the credit and noncredit component of an OTTI event and to more effectively communicate when an OTTI event has occurred. The FSP applies to debt securities and requires that the total OTTI be presented in the statement of income with an offset for the amount of impairment that is recognized in other comprehensive income, which is the noncredit component. Noncredit component losses are to be recorded in other comprehensive income if an investor can assess that (a) it does not have the intent to sell or (b) it is not more likely than not that it will have to sell the security prior to its anticipated recovery. The FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The FSP will be applied prospectively with a cumulative effect transition adjustment as of the beginning of the period in which it is adopted (January 1, 2009 if the Bank early adopts). An entity early adopting this FSP must also early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. The adoption of FSP FAS 115-2 and FAS 124-2 could have a material effect on the Bank's results of operations to the extent that the Bank has material other-than-temporary impairment charges in the future.

        The Bank is currently evaluating whether or not the FSP will be adopted in the first quarter or second quarter of 2009. If the FSP is adopted in the first quarter of 2009, a cumulative effect adjustment will be recorded to the opening balance of (accumulated deficit) retained earnings and accumulated other comprehensive income as of January 1, 2009, which we estimate would have the following effect:

Impact of Adopting FSP FAS 115-2 and FAS 124-2
As of January 1, 2009
(dollars in thousands)

		Amount prior to Adoption			Effect of Adoption			Amount after Adoption
CAPITAL
Capital stock—Class B—putable ($100 par value), 35,847 shares and 31,638 shares issued and outstanding at December 31, 2008 and 2007, respectively		$	3,584,720		$	—		$	3,584,720
(Accumulated deficit) retained earnings			(19,749	)		351,408			331,659
Accumulated other comprehensive loss:
	Net unrealized loss on held-to-maturity securities		—			(351,408	)		(351,408	)
	Net unrealized loss on available-for-sale securities		(130,480	)		—			(130,480	)
	Net unrealized loss relating to hedging activities		(379	)		—			(379	)
	Pension and postretirement benefits		(3,887	)		—			(3,887	)
Total Capital		$	3,430,225		$	—		$	3,430,225

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        FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). On April 9, 2009, FASB issued FSP FAS 157-4 which provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements under FASB Statement No. 157, Fair Value Measurements. The FSP will be applied prospectively and retrospective application will not be permitted. The FSP will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting this FSP must also early adopt FSP FAS 115-2 and FAS 124-2. The Bank has not yet determined the impact of adopting FSP FAS 157-4, and is currently evaluating whether FSP FAS 157-4 will be adopted in the first quarter or second quarter of 2009.

        FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). On April 9, 2009, FASB issued FSP FAS 107-1 and APB 28-1 which will amend FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments. The FSP will require an entity to provide disclosures about the fair value of financial instruments in interim financial information. The FSP would apply to all financial instruments within the scope of Statement 107 and will require entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements. The FSP will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. The adoption of FSP FAS 107-1 and APB 28-1 is not expected to have a material effect on the Bank's financial statement disclosures.

RECENT LEGISLATIVE AND REGULATORY DEVELOPMENTS

Enactment of the Housing and Economic Recovery Act of 2008

        On July 30, 2008, the President signed into law the Housing and Economic Recovery Act of 2008 (HERA), which is designed to strengthen the regulation of Fannie Mae, Freddie Mac, and the FHLBanks and to address other GSE reform issues. The legislation will eliminate the Finance Board within one year of the date of enactment and immediately creates a new regulator, the Finance Agency, which began overseeing the FHLBanks, Fannie Mae, and Freddie Mac upon enactment. The Finance Agency assumed the existing regulatory authorities previously held by the Finance Board. The Bank will be responsible for its share of the operating expenses for both the Finance Agency and the Finance Board.

        Key provisions of HERA:

•

require the Director to consider the differences between the FHLBanks and FannieMae/Freddie Mac before taking supervisory, regulatory, or enforcement action;

•

allocate responsibility to the Director for setting risk-based capital standards for the FHLBanks and other capital standards and reserve requirements for FHLBank activities and products;

•

require independent directors be nominated by the FHLBanks' boards of directors and elected by an FHLBank's members;

•

repeal the statutory limits on the compensation of FHLBank directors;

•

require the Director to prohibit excessive executive officer compensation and authorize the Director to prohibit or limit golden parachute payments and indemnification payments;

•

eliminate the prohibition on the FHLBanks establishing joint offices;

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•

require assessments collected from the FHLBanks by the Finance Agency not exceed the costs and expenses related to the FHLBanks;

•

authorize voluntary mergers of FHLBanks, subject to regulatory and member approval;

•

provide the Director broad conservatorship and receivership authority over the FHLBanks;

•

allow the Director to liquidate an FHLBank upon notice and hearing;

•

make community development banking institutions eligible for FHLBank membership;

•

increase to $1 billion in assets institutions that may meet the definition of a community financial institution;

•

authorize the FHLBanks on behalf of members to issue letters of credit to support tax-exempt bond issuances; and

•

temporarily authorize the Secretary of the Treasury to purchase the obligations of any FHLBank.

        The Finance Agency is charged with implementing much of HERA and has implemented certain of its provisions as discussed in this Item. However, certain of the provisions are not yet implemented, and the Bank is unable to predict what effect the new law will ultimately have on it in the absence of regulatory guidance.

Interim Capital Rule

        In accordance with HERA, effective January 30, 2009, the Finance Agency promulgated an interim final rule on capital classifications and critical capital levels for the FHLBanks (the Interim Capital Rule). The Interim Capital Rule is more fully described in this Item under—Liquidity and Capital Resources—Capital. The Interim Capital Rule has a comment deadline of May 15, 2009, following which the Finance Agency is expected to promulgate a final rule on capital classifications and critical capital levels for the FHLBanks (the Final Capital Rule). The Interim Capital Rule, among other things, established criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Finance Agency has discretion to reclassify an FHLBank and to modify or add to corrective action requirements for a particular capital classification so the Bank cannot predict the impact of the Interim Capital Rule on the Bank. Further, the Final Capital Rule is subject to comment and so the Bank cannot predict what impact the Final Capital Rule will have on the Bank.

Regulation Regarding Golden Parachute Payments

        In accordance with HERA, the Finance Agency promulgated an interim final regulation effective September 16, 2008, and amended on each of September 19, 2008, and September 23, 2008, which provides regulatory guidance on the Director's authority under HERA to prohibit or limit golden parachute payments by an FHLBank that is insolvent, in conservatorship or receivership, or is in a troubled condition as determined by the Director. The final regulation includes a list of factors the Director must consider in determining whether to prohibit or limit any "golden parachute payment." Such factors primarily relate to the relative culpability of the proposed recipient of the payment in such FHLBank's becoming insolvent, entering into conservatorship or receivership, or being in a troubled condition. Effective January 29, 2009, the Finance Agency promulgated a final regulation regarding golden parachute payments that adopted the interim final regulation's requirements as originally promulgated in all material respects. The Bank cannot predict what impact this regulation will have on it.

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Proposed Regulation Regarding Prohibited Indemnification Payments

        In accordance with HERA, the Finance Agency promulgated a proposed regulation regarding prohibited indemnification payments on November 14, 2008, with a comment deadline of December 29, 2008. If adopted as proposed, the regulation would generally prohibit payments to entity-affiliated parties for any civil money penalty or judgment resulting from any administrative or civil action instituted by the Finance Agency that results in a final order or settlement pursuant to which such person is assessed a civil money penalty, removed from office or prohibited from participating in the conduct of the affairs of the related FHLBank, or required to cease and desist from an action or take any affirmative action pursuant to a notice of charges or an order from the Director. Entity-affiliated parties include, among others, any Bank director, officer, employee, agent, certain independent contractors, and the Office of Finance. The proposed regulation does permit certain payments to entity-affiliated parties for commercial insurance policies, fidelity bonds, legal expenses, and civil penalties in some limited circumstances. The Bank cannot predict what impact this proposed regulation will have on it.

Finance Agency Order Regarding Eligibility and Elections of Board of Directors

        On September 8, 2008, the Director issued an order to implement the provisions of HERA that address the size and composition of the FHLBanks' boards of directors. The order:

•

rescinds the Finance Board's prior designation of directorships for the 2008 elections;

•

designates the number of independent directors and member directors for each FHLBank's board in 2009, which for the Bank has been designated to be seven (a reduction of one independent directorship) and 10, respectively;

•

specifies the number of member and independent directors to be elected by each FHLBank in 2008, including the minimum number of independent directors to be elected, which for the Bank is two;

•

specifies the terms of office for each directorship to be elected in 2008, some of which are less than four years;

•

deems current elective directorships to be member directorships; and

•

deems current appointive directorships to be independent directorships.

Interim Final Regulation Regarding Eligibility and Elections of Board of Directors

        The Director promulgated an interim final regulation to implement the provisions of HERA concerning the nomination and election of directors effective September 26, 2008, with a request for comments thereon for a final regulation. The interim final regulation generally continues the prior rules governing elected director nominations, balloting, voting, and reporting of results, while making certain modifications for the election of independent directors, including the addition of a requirement that each independent director nominee receive at least 20 percent of the votes eligible to be cast in the election. The Bank must identify additional nominees and conduct additional elections until each independent directorship is filled with an independent director that has received at least 20 percent of the eligible votes. In addition, and among other provisions, the interim final regulation:

•

provides that the Director annually will determine the size of the board for each FHLBank, with the designation of member directorships based on the number of shares of FHLBank stock required to be held by members in each state using the method of equal proportions, which for the Bank beginning in 2009 will be two for Connecticut, one for Maine, three for Massachusetts (a reduction of one directorship), one for New Hampshire, two for Rhode Island (an increase of one directorship), and one for Vermont;

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•

sets terms for each directorship commencing after January 1, 2009, at four years; and

•

modifies related conflict-of-interest rules to:

•

prohibit independent directors from serving as officers, employees, or directors of any member of the FHLBank on whose board the director serves, or of any recipient of advances from that FHLBank, consistent with HERA;

•

create a safe harbor for serving as an officer, employee, or director of a holding company that controls a member or a recipient of advances if the assets of the member or recipient of advances are less than 35 percent of the holding company's assets;

•

attribute to independent directors any officer, employee, or director positions held by the director's spouse;

•

remove the safe harbor for gifts of token value and for reasonable and customary entertainment;

•

permit officers, attorneys, employees, agents, the board, the Bank's advisory council, and directors to support the candidacy of the board's nominees for independent directorships; and

•

permit directors, officers, employees, attorneys, and agents, acting in their personal capacity, to support the nomination or election of candidates for member directorships.

        This interim final regulation together with the Finance Agency's order regarding eligibility and elections of board of directors have changed the Bank's governance structure in accordance therewith as further described in Item 4—Submission of Matters to a Vote of Security Holders and Item 10—Directors, Executive Officers, and Corporate Governance.

Emergency Economic Stabilization Act of 2008

        On October 2, 2008, the President signed into law the Emergency Economic Stabilization Act (the EESA). Among other things, the EESA established the Troubled Asset Relief Program (the TARP) under which the U.S. Treasury is authorized to purchase up to $700 billion of assets, including mortgage loans and MBS, from financial institutions. However, the U.S. Treasury has also determined that it can use authority under the TARP to make direct investments in financial institutions in connection with its stabilization activities, and these funds have not yet been applied to the purchase of assets. The TARP's direct investments in financial institutions increase each recipient's capitalization, directly increasing each recipient's ability to lend, which may include lending to the Bank's members. Because any such lending would be in direct competition with the Bank's advances, the TARP may materially adversely impact the Bank. However, if the TARP is used to purchase assets, such as through the Public-Private Investment Program described under U.S. Treasury Department's Financial Stability Plan, the fair value of the classes of such assets, including such assets in the Bank's investment portfolio, may rise, which would likely benefit the Bank.

U.S. Treasury Department's Financial Stability Plan

        On February 10, 2009, the U.S. Treasury announced a Financial Stability Plan (the Financial Stability Plan) to address the global capital markets crisis and U.S. economic recession that continues into 2009. The plan consists of comprehensive stress tests of certain financial institutions, the provision of capital injections to certain financial institutions, controls on the use of capital injections, a purchase program for certain illiquid assets, limits on executive compensation, antiforeclosure and housing support requirements, and small-business and community-lending initiatives. Although some details have been provided such details are insufficient to enable the Bank to predict what impact the plan is likely to have on it

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        On March 23, 2009, in accordance with the Financial Stability Plan's initiative to purchase illiquid assets, the U.S. Treasury announced the Public-Private Investment Program (the Public-Private Investment Program), which is a program designed to attract private investors to purchase certain real estate loans and illiquid MBS (originally rated triple-A) owned by financial institutions using up to $100 billion in TARP capital funds. These funds could be levered with debt funding also provided by the U.S. Treasury to expand the capacity of the program. If this program is used to purchase classes of assets the same as, or similar to, assets in the Bank's investment portfolio, the fair value of such assets may rise, which would likely benefit the Bank.

Federal Reserve Board GSE Debt Purchase Initiative

        On November 25, 2008, the Federal Reserve Board announced an initiative for the Federal Reserve Bank of New York to purchase up to $100 billion of the debt of Freddie Mac, Fannie Mae, and the FHLBanks. On March 18, 2009, the Federal Reserve Board committed to purchase up to an additional $100 billion of such debt. Through March 20, 2009, the Federal Reserve Bank of New York has purchased approximately $46.8 billion in such term debt, of which approximately $11.1 billion was FHLBank term debt. See Liquidity and Capital Resources—Liquidity in this Item for a discussion of this initiative's impact on the Bank.

Federal Reserve Board Program to Purchase MBS Issued by Housing GSEs.

        On November 25, 2008, the Federal Reserve Board announced it will initiate a program to purchase up to $500 billion in MBS backed by Fannie Mae, Freddie Mac, and the Government National Mortgage Association to reduce the cost and increase the availability of credit for the purchase of houses. On March 18, 2009, the Federal Reserve Board committed to purchase up to an additional $750 billion of such MBS. This program, initiated to drive mortgage rates lower, make housing more affordable, and help stabilize home prices, may lead to continued artificially low agency mortgage pricing. Comparative MPF price execution, which is a function of the FHLBank debt issuance costs, may not be competitive as a result. This trend could continue and member demand for MPF products could diminish.

Changes to Federal Reserve Borrowing Requirements

        During the second half of 2008, the Federal Reserve Board (the Federal Reserve) lowered the interest rate on borrowing directly from the Federal Reserve Banks and reduced the required discount on collateral that increased the attractiveness of borrowing from the Federal Reserve Banks for eligible financial institutions. Such lending is in direct competition with the Bank's advances and so these changes may adversely impact the Bank.

Commercial Paper Funding Facility

        On October 7, 2008, the Federal Reserve Board announced the creation of a commercial paper funding facility that would fund purchases of commercial paper of three-month maturity from eligible issuers in an effort to provide additional liquidity to the short-term debt markets. The ability to raise funds via this facility directly competes with the Bank's advances and so this facility may adversely impact the Bank.

FDIC Temporary Liquidity Guarantee Program

        On October 14, 2008, the FDIC announced an immediately effective program known as the Temporary Liquidity Guarantee Program, and promulgated an interim rule for this program effective October 23, 2008, to guarantee newly issued senior unsecured debt and the unsecured portion of any secured debt issued by participating nonforeign-insured institutions, participating U.S. bank holding

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companies, and U.S. savings and loan holding companies that have at least one operating, nonforeign-insured depository institution within its holding company structure, as well as certain affiliates of nonforeign-insured institutions as permitted by the FDIC where such debt is issued on or before June 30, 2009, for a fee of 75 basis points on new debt issues by each participating institution. The amount of debt covered by the guarantee is 125 percent of debt that was outstanding as of September 30, 2008, that was scheduled to mature before June 30, 2009. For eligible debt issued on or before June 30, 2009, coverage would only be provided for three years beyond that date, even if the liability has not matured. Additionally, the FDIC has agreed to guarantee all funds in noninterest-bearing transaction-deposit accounts held by participating FDIC-insured banks until December 31, 2009, subject to certain increased surcharges. On November 26, 2008, the FDIC promulgated a final rule for this program that adopted the interim rule's program as originally promulgated in all material respects and also provided that debt guaranteed by the Temporary Liquidity Guarantee Program is backed by the full faith and credit of the U.S. On February 10, 2009, the FDIC announced an extension to the guarantee of eligible debt under this program from June 30, 2009, to October 31, 2009, in exchange for an additional premium for the guarantee. The Temporary Liquidity Guarantee Program is believed to have caused yield spreads for CO debt with maturities of greater than six months to widen. See Liquidity and Capital Resources—Liquidity, in this Item for additional discussion of the Temporary Liquidity Guarantee Program's possible impact on the Bank.

FDIC Rulemaking on Deposit Insurance Assessments

        On February 27, 2009, the FDIC adopted a final rule on increases in deposit insurance premium assessments to restore the Deposit Insurance Fund. The final rule is effective April 1, 2009. The assessments adopted by the FDIC are higher for institutions that use secured liabilities in excess of 25 percent of deposits. Secured liabilities are defined to include FHLBank advances. The rule may tend to decrease demand for advances from Bank members affected by the rule due to the increase in the effective all-in cost from the increased premium assessments.

Federal Banking Agencies Proposal to Lower Capital Risk Weightings for Fannie Mae and Freddie Mac

        The federal banking agencies (FDIC, Comptroller of the Currency, Federal Reserve, and Office of Thrift Supervision) on October 27, 2008, promulgated a proposed a rule that would lower the capital risk weighting that banks assign to Fannie Mae and Freddie Mac debt from 20 to 10 percent. The proposal specifically requested comments on the potential effects of the proposal on FHLBank debt. The Bank is unable to predict what effect adoption of the proposed rule would ultimately have on it, but it may tend to increase FHLBank debt pricing because FHLBank debt-risk weighting would remain at 20 percent.

Proposed Federal Legislation Permitting Bankruptcy Cramdowns on First Mortgages of Owner-Occupied Homes

        Federal legislation has been proposed that would allow bankruptcy cramdowns on first mortgages of owner-occupied homes as a response to the U.S. economic recession and attendant U.S. housing recession. The proposed legislation would allow a bankruptcy judge to reduce the principal amount of such mortgages to the current market value of the property, which is prohibited by the Bankruptcy Reform Act of 1994. Some of the private-label MBS in which the Bank has invested contain a cap on bankruptcy losses, and when such cap is exceeded, bankruptcy losses are allocated among all classes of such MBS on a pro-rata basis among the classes of such MBS rather than by seniority. The Bank only invests in senior classes of private-label MBS. In the event that this legislation is enacted so as to apply to all existing mortgage debt (including first mortgages of owner-occupied homes), then the Bank could face increased risk of credit losses on its private-label MBS that include such bankruptcy caps due to the erosion of the credit protection it would have otherwise had via its senior class of such MBS. Any

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such credit losses may also lead to other-than-temporary impairment charges for affected private-label MBS in the Bank's held-to-maturity portfolio. As of December 31, 2008, the Bank had a book value $499.4 million in MBS with such bankruptcy caps. Additionally, bankruptcy cramdowns could adversely impact the value of the collateral held in support of the Bank's loans to members, resulting in further reduction of member borrowing capacity, and could adversely impact the value of MPF mortgage loans held by the Bank. However, some iterations of this proposed legislation could make any such bankruptcy caps in MBS unenforceable as contrary to public policy, which, if included in any enacted legislation and legally effective, would mitigate or eliminate the potential adverse impacts of this proposed legislation on the Bank.

RECENT REGULATORY ACTIONS AND CREDIT RATING AGENCY ACTIONS

        All FHLBanks have joint and several liability for FHLBank COs. The joint and several liability regulation of the Finance Agency authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal or interest on COs for which another FHLBank is the primary obligor. The Bank has never been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. The par amount of the outstanding COs of all 12 FHLBanks was $1.3 trillion at December 31, 2008, and $1.2 trillion at December 31, 2007.

        Some of the FHLBanks have been the subject of regulatory actions pursuant to which their boards of directors and/or management have agreed with the Office of Supervision of the Finance Agency to, among other things, maintain higher levels of capital. While supervisory agreements generally are publicly announced by the Finance Agency, the Bank cannot provide assurance that it has been informed or will be informed of regulatory actions taken at other FHLBanks. In addition, the Bank or any other FHLBank may be the subject of regulatory actions in the future.

        The following table provides credit ratings of each of the FHLBanks as of February 28, 2009, from S&P and Moody's.

Federal Home Loan Banks
Long-Term and Short-Term Credit Ratings
As of February 28, 2009

	S&P		Moody's
	Long-Term/ Short-Term Rating	Outlook	Long-Term/ Short-Term Rating	Outlook
FHLBank of Atlanta	AAA/A-1+	Stable	Aaa/P-1	Stable
FHLBank of Boston	AAA/A-1+	Stable	Aaa/P-1	Stable
FHLBank of Chicago	AA/A-1+	Stable	Aaa/P-1	Stable
FHLBank of Cincinnati	AAA/A-1+	Stable	Aaa/P-1	Stable
FHLBank of Dallas	AAA/A-1+	Stable	Aaa/P-1	Stable
FHLBank of Des Moines	AAA/A-1+	Stable	Aaa/P-1	Stable
FHLBank of Indianapolis	AAA/A-1+	Stable	Aaa/P-1	Stable
FHLBank of New York	AAA/A-1+	Stable	Aaa/P-1	Stable
FHLBank of Pittsburgh	AAA/A-1+	Stable	Aaa/P-1	Stable
FHLBank of San Francisco	AAA/A-1+	Stable	Aaa/P-1	Stable
FHLBank of Seattle	AA+/A-1+	Stable	Aaa/P-1	Stable
FHLBank of Topeka	AAA/A-1+	Stable	Aaa/P-1	Stable

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        On June 12, 2008, S&P lowered the counterparty credit rating of the FHLBank of Chicago to double-A, with a stable outlook. At the request of the FHLBank of Chicago, on July 24, 2008, the Finance Board amended a cease and desist order it had entered into with the FHLBank of Chicago which required prior Finance Board approval for capital stock repurchases and redemption, as well as payments of dividends. This amendment allows the FHLBank of Chicago, under certain conditions, to repurchase or redeem any capital stock issued to support new advances after repayment of those new advances.

        The Bank has evaluated the financial condition of the other FHLBanks based on known regulatory actions, publicly available financial information, and individual long-term credit-rating downgrades as of each period-end presented. Management believes that the probability that the Bank will be required by the Finance Agency to repay any principal or interest associated with COs for which the Bank is not the primary obligor has not materially increased.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Bank has a comprehensive risk-governance structure. The Bank's Risk-Management Policy identifies seven major risk categories relevant to business activities:

•

Credit risk is the risk to earnings or capital of an obligor's failure to meet the terms of any contract with the Bank or otherwise perform as agreed. The Credit Committee oversees credit risk primarily through ongoing oversight and limits on credit exposure.

•

Market risk is the risk to earnings or market value of equity (MVE) due to adverse movements in interest rates, market prices, or interest-rate spreads. Market risk is primarily overseen by the Asset-Liability Committee through ongoing review of VaR and the economic value of capital. The Asset-Liability Committee also reviews income simulations to oversee potential exposure to future earnings volatility.

•

Liquidity risk is the risk that the Bank may be unable to meet its funding requirements, or meet the credit needs of members, at a reasonable cost and in a timely manner. The Asset-Liability Committee, through its regular reviews of funding and liquidity, oversees liquidity risk.

•

Leverage risk is the risk that the capital of the Bank is not sufficient to support the level of assets. The risk results from a deterioration of the Bank's capital base, a deterioration of the assets, or from overbooking assets. The Bank's treasurer, under the direction of the chief financial officer, provides primary oversight of leverage activity.

•

Business risk is the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions, or from external factors as may occur in both the short- and long-run. Business risk is overseen by the Management Committee through the development of the strategic business plan.

•

Operational risk is the risk of loss resulting from inadequate or failed internal processes and systems, human error, or from internal or external events, inclusive of exposure to potential litigation resulting from inappropriate conduct of Bank personnel. The Operational Risk Committee primarily oversees operational risk.

•

Reputation risk is the risk to earnings or capital arising from negative public opinion, which can affect the Bank's ability to establish new business relationships or to maintain existing business relationships. The Management Committee oversees reputation risk.

        The board of directors defines the desired risk profile of the Bank and provides risk oversight through the review and approval of the Bank's Risk-Management Policy. The Risk and Finance Committees of the board of directors provide additional oversight for market risk and credit risk. The board of director's Audit Committee provides additional oversight for operational risk. The board of

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directors also reviews the result of an annual risk assessment conducted by management for its major business processes.

        Management further delineates the Bank's risk appetite for specific business activities and provides risk oversight through the following committees:

•

Management Committee is the Bank's overall risk-governance, strategic-planning, and policymaking group. The committee, which is comprised of the Bank's senior officers, reviews and recommends to the board of directors for approval all revisions to major policies of the organization. All decisions by this committee are subject to final approval by the president of the Bank.

•

Asset-Liability Committee is responsible for approving policies and risk limits for the management of market risk, including liquidity and options risks. The Asset-Liability Committee also conducts monitoring and oversight of these risks on an ongoing basis, and promulgates strategies to enhance the Bank's financial performance within established risk limits consistent with the strategic business plan.

•

Credit Committee oversees the Bank's credit-underwriting functions and collateral eligibility standards. The committee also reviews the creditworthiness of the Bank's investments, including purchased mortgage assets, and oversees the classification of the Bank's assets and the adequacy of its loan-loss reserves.

•

Operational Risk Committee reviews and assesses the Bank's exposure to operational risks and determines tolerances for potential operational threats that may arise from new products and services. The committee may also discuss operational exceptions and assess appropriate control actions to mitigate reoccurrence and improve future detection.

•

Information Technology and Security Oversight Committee provides senior management oversight and governance of the information technology, information security, and business-continuity functions of the Bank. The committee approves the major priorities and overall level of funding for these functions, within the context of the Bank's strategic business priorities and established risk-management objectives.

        This list of internal management committees or their respective missions may change from time to time based on new business or regulatory requirements.

Credit Risk

        Credit Risk—Advances.    The Bank endeavors to minimize credit risk on advances by monitoring the financial condition of its borrowing entities and by holding sufficient collateral to protect itself from losses. The Bank is prohibited by Section 10(a) of the FHLBank Act from making advances without sufficient collateral to secure the advance. The Bank has never experienced a credit loss on an advance.

        The Bank closely monitors the financial condition of all members and nonmember borrowers by reviewing available financial data, such as regulatory call reports filed by depository institution members, regulatory financial statements filed with the appropriate state insurance department by insurance company members, audited financial statements of housing associates, SEC filings, and rating-agency reports to ensure that potentially troubled members are identified as soon as possible. In addition, the Bank has access to most members' regulatory examination reports. The Bank analyzes this information on a regular basis. Based upon the financial condition of the member, the Bank classifies each member into one of three collateral categories: blanket-lien status, listing-collateral status, or delivery-collateral status.

        The Bank assigns members that it has determined are in good financial condition to blanket-lien status. Members that demonstrate characteristics that evidence potential weakness in their financial

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condition are assigned to listing-collateral status. The Bank may also assign members with a high level of borrowings as a percentage of their assets to listing-collateral status regardless of their financial condition. The Bank has established an advances borrowing limit of 50 percent of the member's assets. This limit may be waived by the president of the Bank after considering factors such as, the member's credit rating, collateral quality, and earnings stability. Members whose total advances exceed 50 percent of assets are placed in listing-collateral status or, if necessary, delivery-collateral status with the Bank. The Bank assigns members that it has determined are financially weak to delivery-collateral status. The Bank also assigns all insurance company members that have a NRSRO long-term debt rating lower than BBB- or its equivalent, insurance company members that do not have an NRSRO long-term debt rating, all nonmember borrowers, and housing associates to delivery-collateral status.

        The assignment of a member to a collateral status category reflects the Bank's increasing level of control over the collateral pledged by the member as a member's financial condition deteriorates. When the Bank classifies a member as being in blanket-lien status, the member retains possession of eligible one- to four-family mortgage-loan collateral pledged to the Bank, provided the member executes a written security agreement and agrees to hold such collateral for the benefit of the Bank. Members in blanket-lien status must specifically list with the Bank all mortgage-loan collateral other than loans secured by first-mortgage loans on owner-occupied one- to four-family residential property. Under listing-collateral status, the member retains possession of eligible mortgage-loan collateral, however, the Bank requires the member to specifically list all mortgage-loan collateral with the Bank. Securities pledged to the Bank by members in either blanket-lien or listing-collateral status must be delivered to the Bank, the Bank's approved safekeeping agent, or held by a member's securities corporation. For members in delivery-collateral status, the Bank requires the member to place physical possession of all pledged eligible collateral with the Bank or the Bank's approved safekeeping agent.

        The Bank's agreements with its borrowers require each borrowing entity to pledge sufficient eligible collateral to the Bank to fully secure all outstanding extensions of credit, including cash advances, accrued interest receivable, standby letters of credit, MPF credit- enhancement obligations, and lines of credit (collectively, extensions of credit) at all times. The assets that constitute eligible collateral to secure extensions of credit are set forth in Section 10(a) of the FHLBank Act. In accordance with the FHLBank Act, the Bank accepts the following assets as collateral:

•

Fully disbursed, whole first mortgages on improved residential property (not more than 45 days delinquent), or securities representing a whole interest in such mortgages;

•

Securities issued, insured, or guaranteed by the U.S. government or any agency thereof (including without limitation, MBS issued or guaranteed by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Government National Mortgage Association);

•

Cash or deposits of an FHLBank; and

•

Other real-estate-related collateral acceptable to the Bank if such collateral has a readily ascertainable value and the Bank can perfect its interest in the collateral.

        In addition, in the case of any community financial institution, as defined in accordance with the FHLBank Act, the Bank may accept secured loans for small business and agriculture, or securities representing a whole interest in such secured loans.

        In order to mitigate the credit risk, market risk, liquidity risk, and operational risk associated with collateral, the Bank applies a discount to the book value or market value of pledged collateral to establish the lending value of the collateral to the Bank. Collateral that the Bank has determined to contain a low level of risk, such as U.S. government obligations, is discounted at a lower rate than collateral that carries a higher level of risk, such as commercial real estate mortgage loans. The Bank has analyzed the discounts applied to all eligible collateral types and concluded that the current

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discounts are sufficient to fully secure the Bank against losses in the event of a borrower default. The Bank's agreements with its members and borrowers grant the Bank authority, in its sole discretion, to adjust the discounts applied to collateral at any time based on the Bank's assessment of the member's financial condition, the quality of collateral pledged, or the overall volatility of the value of the collateral.

        The Bank generally requires all borrowing members and housing associates to execute a security agreement that grants the Bank a blanket lien on all assets of such borrower that consist of, among other types of collateral: fully disbursed whole first mortgages and deeds of trust constituting first liens against real property, U.S. federal, state, and municipal obligations, GSE securities, corporate debt obligations, commercial paper, funds placed in deposit accounts at the Bank, FHLBank COs, such other items or property of the borrower that are offered to the Bank by the borrower as collateral, and all proceeds of all of the foregoing. In the case of insurance companies in some instances, the Bank establishes a specific lien instead of a blanket lien subject to the Bank's receipt of additional safeguards from such members. The Bank protects its security interest in these assets by filing a Uniform Commercial Code (UCC) financing statement in the appropriate jurisdiction. The Bank also requires that borrowers in blanket-lien and listing-collateral status submit to the Bank, on at least an annual basis, an audit opinion that confirms that the borrower is maintaining sufficient amounts of qualified collateral in accordance with the Bank's policies. However, blanket-lien and listing-collateral status members that have voluntarily delivered all of their collateral to the Bank may not be required, at the Bank's discretion, to submit such an audit opinion. Bank employees conduct onsite reviews of collateral pledged by borrowers to confirm the existence of the pledged collateral and to determine that the pledged collateral conforms to the Bank's eligibility requirements. The Bank may conduct an onsite collateral review at any time.

        The Bank's agreements with borrowers allow the Bank, in its sole discretion, to refuse to make extensions of credit against any collateral, require substitution of collateral, or adjust the discounts applied to collateral at any time. The Bank also may require members to pledge additional collateral regardless of whether the collateral would be eligible to originate a new extension of credit. The Bank's agreements with its borrowers also afford the Bank the right, in its sole discretion, to declare any borrower to be in default if the Bank deems itself to be insecure.

        Beyond these provisions, Section 10(e) of the FHLBank Act affords any security interest granted by a federally insured depository institution member or such a member's affiliate to the Bank priority over the claims or rights of any other party, including any receiver, conservator, trustee, or similar entity that has the rights of a lien creditor, unless these claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that are secured by actual perfected security interests. In this regard, the priority granted to the security interests of the Bank under Section 10(e) may not apply when lending to insurance company members. This is due to the anti-preemption provision contained in the McCarran-Ferguson Act in which Congress declared that federal law would not preempt state insurance law unless the federal law expressly regulates the business of insurance. Thus, if state law conflicts with Section 10(e) of the FHLBank Act, the protection afforded by this provision may not be available to the Bank. However, the Bank protects its security interests in the collateral pledged by its borrowers, including insurance company members, by filing UCC-1 financing statements, or by taking possession or control of such collateral, or by taking other appropriate steps.

        Advances outstanding to borrowers in blanket-lien status at December 31, 2008, totaled $40.7 billion. For these advances, the Bank had access to collateral through security agreements, where the borrower agrees to hold such collateral for the benefit of the Bank, totaling $72.4 billion as of December 31, 2008. Of this total, $5.7 billion of securities have been delivered to the Bank or to a third-party custodian, an additional $3.8 billion of securities are held by borrowers' securities

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corporations, and $32.0 billion of residential mortgage loans have been pledged by borrowers' real-estate-investment trusts.

        The following table shows the asset quality of the one-to-four family mortgage loan portfolios held on the balance sheets of the Bank's borrower institutions. One- to four-family mortgage loans constitute the largest asset type pledged as collateral to the Bank. Note that these figures include all one- to four-family mortgage loans on borrowers' balance sheets. The figures in this table include some loans that are not pledged as collateral to the Bank. Qualified collateral does not include loans that have not been in default within the most recent 12-month period, except that whole first-mortgage collateral on one- to four-family residential property is acceptable provided no payment is overdue by more than 45 days, unless the collateral is insured or guaranteed by the U.S. or any agency thereof.

2008 Quarterly Borrower Asset Quality
(dollars in thousands)

	2008—Quarter Ended
	March 31			June 30			September 30			December 31
Total borrower assets	$	545,678,671		$	506,257,758		$	500,718,831		$	620,041,142
Total 1-4 family mortgage loans	$	178,280,180		$	172,937,077		$	175,348,283		$	173,288,373
1-4 family mortgage loans as a percent of borrower assets		32.67	%		34.16	%		35.02	%		27.95	%
1-4 family mortgage loans delinquent 30-89 days as a percentage of 1-4 family mortgage loans		0.66	%		0.60	%		0.71	%		1.15	%
1-4 family mortgage loans delinquent 90 days as a percentage of 1-4 family mortgage loans		0.44	%		0.52	%		0.64	%		0.88	%
REO as a percentage of 1-4 family mortgage loans		0.02	%		0.06	%		0.08	%		0.11	%

        The following table provides information regarding advances outstanding with members and nonmember borrowers in listing- and delivery-collateral status at December 31, 2008, along with their corresponding collateral balances.

Advances Outstanding by Borrower
Collateral Status
As of December 31, 2008
(dollars in thousands)

	Number of Borrowers		Advances Outstanding		Discounted Collateral(1)		Ratio of Collateral to Advances
Listing-collateral status		24	$	14,678,795	$	24,490,556		166.8	%
Delivery-collateral status		18		490,772		2,059,526		419.7
Total par value		42	$	15,169,567	$	26,550,082		175.0	%

(1)

In accordance with the Bank's collateral policies, qualified collateral includes only collateral that has not been in default within the most recent 12-month period, except that whole first-mortgage collateral on one- to four-family residential property is acceptable provided no payment is overdue

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by more than 45 days, unless the collateral is insured or guaranteed by the U.S. or any agency thereof.

        The Bank allows borrowers in blanket-lien status to pledge owner-occupied one- to four-family mortgage loans to the Bank under a blanket pledge without specific loan-level information. The Bank requires borrowers in blanket-lien status to provide a listing of all other loan collateral pledged to the Bank. Borrowers in listing-collateral status must provide a listing of all loan collateral that they pledge to the Bank. All securities pledged as collateral by all borrowers must be delivered to the Bank or to a Bank-approved third-party custodian. Borrowers in delivery-collateral status must deliver all loan and securities collateral to the Bank or a Bank-approved third-party custodian.

        The Bank assigns borrowers to blanket-lien status, listing-collateral status, and delivery-collateral status based on the Bank's assessment of the financial condition of the borrower. The method by which a borrower pledges collateral is dependent upon the collateral status to which it is assigned based on its financial condition and on the type of collateral that the borrower pledges. For example, securities collateral pledged by a borrower that is in blanket-lien status based on its financial condition appears in the table below as being in collateral delivered to the Bank, since all securities collateral must be delivered to the Bank or to a Bank-approved third-party custodian. Based upon the method by which borrowers pledge collateral to the Bank, the following table shows the total potential lending value of the collateral that borrowers have pledged to the Bank, net of the Bank's collateral valuation discounts.

Collateral by Pledge Type
As of December 31, 2008
(dollars in thousands)

	Amount of Collateral
Collateral pledged under blanket lien	$	59,545,853
Collateral specifically listed and identified		9,118,115
Collateral delivered to the Bank		35,582,816

        Based upon the collateral held as security on advances, the Bank's prior repayment history, and the protections provided by Section 10(e) of the FHLBank Act, the Bank does not believe that an allowance for losses on advances is necessary at this time.

        Credit Risk—Investments.    The Bank is also subject to credit risk on unsecured investments consisting primarily of money-market instruments issued by high-quality counterparties and debentures issued by U.S. agencies and instrumentalities. The Bank places money-market funds with large, high-quality financial institutions with long-term credit ratings no lower than single-A (or its equivalent rating) on an unsecured basis for terms of up to 275 days; most such placements expire within 35 days. Management actively monitors the credit quality of these counterparties. At December 31, 2008, the Bank's unsecured credit exposure, including accrued interest related to money-market instruments and debentures, was $4.0 billion to 11 counterparties and issuers, of which $566.3 million was for certificates of deposit, $2.5 billion was for overnight federal funds sold, and $932.5 million was for debentures. As of December 31, 2008, there were six counterparties or issuers which individually accounted for more than 10 percent of the Bank's total unsecured credit exposure of $4.0 billion. These counterparties accounted for a total of 87.3 percent of total unsecured credit exposure.

        The Bank also invests in and is subject to secured credit risk related to MBS, ABS, and state and local housing-finance-agency obligations (HFA) that are directly or indirectly supported by underlying mortgage loans. Investments in MBS and ABS may be purchased as long as the balance of outstanding MBS/ABS is equal to or less than 300 percent of the Bank's total capital, and must be rated the highest long-term debt rating at the time of purchase. HFA bonds must carry a credit rating of double-A (or its equivalent rating) or higher as of the date of purchase.

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        Credit ratings on these investments as of December 31, 2008, are provided in the following table.

Credit Ratings of Investments at Book Value
As of December 31, 2008
(dollars in thousands)

		Long-Term Credit Rating(1)
Investment Category		Triple-A		Double-A		Single-A		Triple-B		Below Triple-B		Unrated
Money-market instruments(2):
	Interest-bearing deposits	$	3,279,075	$	—	$	—	$	—	$	—	$	—
	Certificates of deposit		565,000		—		—		—		—		—
	Federal funds sold		—		700,000		1,840,000		—		—		—
	Securities purchased under agreements to resell		—		1,000,000		1,000,000		—		—		500,000
Investment securities:
	U.S. agency obligations		39,995		—		—		—		—		—
	U.S. government corporations		275,856		—		—		—		—		—
	Government-sponsored enterprises		143,130		—		—		—		—		—
	Supranational banks		458,984		—		—		—		—		—
	State or local housing-finance-agency obligations		52,577		189,108		—		58,128		—		—
	GSE MBS		4,774,030		—		—		—		—		—
	Private-label MBS		2,342,667		475,667		181,021		414,482		535,947		—
	ABS backed by home-equity loans		21,468		7,472		5,770		4,522		—		—
Total investments		$	11,952,782	$	2,372,247	$	3,026,791	$	477,132	$	535,947	$	500,000

(1)

Ratings are obtained from Moody's, Fitch, and S&P. If there is a split rating, the lowest rating is used.

(2)

The issuer rating is used, and if a rating is on negative credit watch, the rating in the next lower rating category is used and then the lowest rating is determined.

        Of the Bank's $9.2 billion in par value of MBS and ABS investments at December 31, 2008, $4.4 billion in par value are private-label MBS. Of this amount, $3.6 billion in par value are securities backed primarily by Alt-A loans, while $750.5 million in par value are backed primarily by prime loans. Only $35.2 million in par value of these investments are backed primarily by subprime mortgages. While there is no universally accepted definition for prime and Alt-A underwriting standards, in general, prime underwriting implies a borrower without a history of delinquent payments and documented income and a loan amount that is at or less than 80 percent of the market value of the house, while Alt-A underwriting implies a prime borrower with limited income documentation and/or a loan-to-value ratio of higher than 80 percent. The Bank does not hold any collateralized debt obligations.

        The following table stratifies the Bank's private-label MBS by credit rating.

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Credit Ratings of Private-label MBS at Book Value
As of December 31, 2008
(dollars in thousands)

Investment Grade	Book Value		Net Unrealized Losses			Weighted Average Collateral Delinquency %
Home equity loans:
Prime AA	$	4,341	$	(1,262	)		2.45	%
Subprime AAA		21,468		(4,944	)		24.95
Subprime AA		3,131		(1,318	)		34.57
Subprime A		5,770		(1,314	)		18.15
Subprime BBB		4,522		(1,972	)		28.52
Total Home Equity Loans		39,232		(10,810	)		22.68
Private-label residential MBS:
Prime AAA		485,041		(126,647	)		6.30
Prime AA		28,296		(9,117	)		2.12
Prime A		64,208		(12,398	)		5.82
Prime BBB		22,793		(4,356	)		3.53
Alt-A AAA		1,713,398		(812,448	)		26.60
Alt-A AA		447,371		(189,509	)		28.49
Alt-A A		116,813		(57,555	)		38.07
Alt-A BBB		391,689		(184,159	)		38.78
Alt-A below investment grade		535,947		(147,316	)		36.13
Total private-label residential MBS		3,805,556		(1,543,505	)		27.25
Private-label commercial MBS:
Prime AAA		144,228		(24,756	)		2.18
Total private-label MBS	$	3,989,016	$	(1,579,071	)		26.38	%

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        The following two tables provide a summary of credit ratings downgrades that have occurred during the period from January 1, 2009, through March 20, 2009, for the Bank's private-label MBS.

Private-label MBS Ratings Downgrades
During the Period from January 1, 2009, through March 20, 2009
(dollars in thousands)

	To AA				To A				To BBB				To Below Investment Grade				Total
	Book Value		Fair Value		Book Value		Fair Value		Book Value		Fair Value		Book Value		Fair Value		Book Value		Fair Value
Downgraded from AAA
Private-label RMBS	$	138,961	$	68,317	$	117,212	$	70,752	$	266,006	$	141,810	$	968,213	$	451,769	$	1,490,392	$	732,648
Downgraded from AA
Private-label RMBS						22,006		19,863		45,358		38,424		284,380		142,634		351,744		200,921
Home equity loans						4,341		3,079		—		—		—		—		4,341		3,079
Downgraded from A
Private-label RMBS										—		—		116,813		59,258		116,813		59,258
Downgraded from BBB
Private-label RMBS														287,557		142,007		287,557		142,007
Home equity loans														480		263		480		263
Total	$	138,961	$	68,317	$	143,559	$	93,694	$	311,364	$	180,234	$	1,657,443	$	795,931	$	2,251,327	$	1,138,176

Investment Securities
Downgraded and/or Placed on Negative Watch
from January 1, 2009 through March 20, 2009
(dollars in thousands)

	Based on Book Values as of December 31, 2008
	Downgraded and Stable			Downgraded and Placed on Negative Watch			Not Downgraded but Placed on Negative Watch
Private-label residential MBS:
Amount of private-label residential MBS rated below investment grade	$	1,656,963		$	—		$	—
Percentage of total private-label residential MBS		43.5	%		—	%		—	%
Home equity loan investments:
Amount of home equity loan investments rated below investment grade	$	480		$	—		$	—
Percentage of total home equity loan investments		1.2	%		—	%		—	%
Total private-label residential MBS and home equity loan investments:
Amount of total private-label RMBS and home equity loan investments rated below investment grade	$	1,657,443		$	—		$	—
Percentage of total investment securities		15.7	%		—	%		—	%

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        The following table stratifies the Bank's private-label MBS by collateral type at December 31, 2008 and 2007.

Characteristics of Private-Label MBS by Type of Collateral
Par Values as of December 31, 2008 and 2007
(dollars in thousands)

	December 31, 2008						December 31, 2007
Private-label MBS	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Private-label residential MBS
Prime	$	38,662	$	563,229	$	601,891	$	50,435	$	942,977	$	993,412
Alt-A		121,315		3,471,077		3,592,392		155,543		4,337,201		4,492,744
Subprime		—		—		—		—		—		—
Total PL RMBS		159,977		4,034,306		4,194,283		205,978		5,280,178		5,486,156
Private-label commercial MBS
Prime		144,311		—		144,311		431,400		—		431,400
Home equity loans
Prime		—		4,341		4,341		—		6,071		6,071
Alt-A		—		—		—		—		—		—
Subprime		16,495		18,717		35,212		18,810		20,527		39,337
Total home equity loans		16,495		23,058		39,553		18,810		26,598		45,408
Total par value of private-label MBS	$	320,783	$	4,057,364	$	4,378,147	$	656,188	$	5,306,776	$	5,962,964

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        The following table provides additional information related to the Bank's MBS issued by private trusts and ABS backed by home-equity loans, indicating whether the underlying mortgage collateral is considered to be prime, Alt-A, or subprime at the time of issuance. Additionally, the amounts outstanding as of December 31, 2008, are stratified by year of issuance of the security, including private-label commercial MBS.

Par Value of Private-Label Mortgage-Backed Securities and
Home Equity Loan Investments by Year of Securitization
At December 31, 2008
(dollars in thousands)

	Triple-A		Double-A		Single-A		Triple-B		Below Investment Grade		Total
Private-label residential MBS
Prime
2007	$	102,708	$	28,296	$	—	$	22,793	$	—	$	153,797
2006		50,459		—		64,307		—		—		114,766
2005		87,283		—		—		—		—		87,283
2004		107,593		—		—		—		—		107,593
2003 and prior		138,452		—		—		—		—		138,452
Total residential MBS prime		486,495		28,296		64,307		22,793		—		601,891
Alt-A
2007		328,892		58,874		23,124		176,377		420,933		1,008,200
2006		667,901		291,813		72,295		217,605		315,734		1,565,348
2005		672,535		125,265		21,398		50,798		48,903		918,899
2004		78,670		—		—		—		—		78,670
2003 and prior		21,275		—		—		—		—		21,275
Total residential MBS Alt-A		1,769,273		475,952		116,817		444,780		785,570		3,592,392
Total Private-label residential MBS		2,255,768		504,248		181,124		467,573		785,570		4,194,283
Home equity loans
Prime
2003 and prior		—		4,341		—		—		—		4,341
Subprime
2004		—		—		5,770		—		—		5,770
2003 and prior		21,469		3,131		—		4,842		—		29,442
Total subprime		21,469		3,131		5,770		4,842		—		35,212
Total home equity		21,469		7,472		5,770		4,842		—		39,553
Private-label commercial MBS
Prime
2003 and prior		144,311		—		—		—		—		144,311
Total Prime		630,806		32,637		64,307		22,793		—		750,543
Total Alt-A		1,769,273		475,952		116,817		444,780		785,570		3,592,392
Total Subprime		21,469		3,131		5,770		4,842		—		35,212
Total private-label MBS	$	2,421,548	$	511,720	$	186,894	$	472,415	$	785,570	$	4,378,147

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        The following table stratifies the Bank's private-label MBS by fair value as a percent of par value through 2008.

Fair Value as a Percent of Par Value by Year of Securitization

	December 31, 2008			September 30, 2008			June 30, 2008			March 31, 2008			December 31, 2007
Private-label residential MBS
Prime
2007		79	%		92	%		92	%		91	%		99	%
2006		82			92			97			96			99
2005		54			81			89			85			99
2004		68			87			91			94			98
2003 and prior		81			93			97			97			99
Total prime		74			90			94			94			99
Alt-A
2007		52			68			75			78			98
2006		47			63			71			72			96
2005		54			73			81			80			97
2004		53			76			87			93			98
2003 and prior		79			91			91			91			98
Total Alt-A		51			67			75			76			97
Total Private-label residential MBS		54	%		71	%		78	%		79	%		97	%
Home equity loans
Prime
2003 and prior		71	%		76	%		75	%		81	%		98	%
Subprime
2004		77			77			78			70			98
2003 and Prior		71			84			89			91			97
Total subprime		72			83			87			87			97
Total home equity		72	%		82	%		85	%		86	%		97	%
Private-label commercial MBS
Prime
2003 and prior		83	%		96	%		98	%		98	%		100	%
Total Prime		76	%		91	%		95	%		95	%		99	%
Total Alt-A		51	%		67	%		75	%		76	%		97	%
Total Subprime		72	%		83	%		87	%		87	%		97	%
Total private-label MBS		55	%		72	%		79	%		80	%		97	%

        The following table shows the summary credit enhancements associated with the Bank's residential MBS issued by entities other than GSEs, with detail by collateral type and vintage. Average current credit enhancements as of December 31, 2008, reflect the percentage of subordinated class outstanding balance as of December 31, 2008, to the Bank's senior class holding outstanding balances as of December 31, 2008, weighted by the par value of the Bank's respective senior class securities, and shown by underlying loan collateral type and issuance vintage. Average current credit enhancements as

126

of December 31, 2008, are indicative of the ability of subordinated classes to absorb loan collateral, lost principal, and interest shortfall before senior classes are impacted. The average current credit enhancements do not fully reflect the Bank's credit protection in its private-label MBS holdings as prioritization in the timing of receipt of cash flows and credit event triggers accelerate return of the Bank's investment before losses can no longer be absorbed by subordinate classes.

Private-Label Mortgage- and Asset-Backed Securities
Summary Credit Enhancements
As of December 31, 2008
(dollars in thousands)

	Par Value		Book Value		Fair Value		Weighted Average Market Price			Original Weighted Average			Current Weighted Average			Minimum Current Credit Support			Weighted Average Collateral Delinquency(1)
Private-label residential MBS:
Prime
2007	$	153,797	$	152,836	$	121,571		79.05	%		10.55	%		11.44	%		4.79	%		2.58	%
2006		114,766		114,668		93,623		81.58			8.89			10.27			4.67			4.28
2005		87,283		86,661		46,703		53.51			20.78			24.91			12.38			12.27
2004		107,593		107,638		73,279		68.11			10.42			19.07			4.08			9.53
2003 and prior		138,452		138,535		112,643		81.36			3.64			11.56			4.50			4.29
Total prime		601,891		600,338		447,819		74.40			10.10			14.56			4.08			5.94
Alt-A
2007		1,008,200		934,179		524,535		52.13			23.81			24.04			8.10			32.41
2006		1,565,348		1,254,466		736,130		47.03			26.50			27.79			4.79			35.36
2005		918,899		916,636		494,867		53.87			27.15			32.63			10.06			22.68
2004		78,670		78,670		41,844		53.19			14.39			22.66			10.30			14.44
2003 and prior		21,275		21,267		16,853		79.22			4.19			18.91			6.99			3.06
Total Alt-A		3,592,392		3,205,218		1,814,229		50.50			25.45			27.65			4.79			30.82
Total private-label RMBS		4,194,283		3,805,556		2,262,048		53.93			23.25			25.78			4.08			27.25
Home equity loans:
Prime
2003 and prior		4,341		4,341		3,079		70.93			1.50			4.69			4.69			2.45
Subprime
2004		5,770		5,770		4,456		77.22			7.35			22.84			22.84			18.15
2003 and prior		29,442		29,121		20,891		70.96			9.45			43.70			—			26.56
Total subprime		35,212		34,891		25,347		71.98			9.11			40.28			—			25.18
Total home equity		39,553		39,232		28,426		71.87			8.27			36.37			—			22.68
Private-label commercial MBS
Prime
2003 and prior		144,311		144,228		119,471		82.79			21.47			26.34			13.79			2.18
Total Prime		750,543		748,907		570,369		75.99			12.24			16.77			4.08			5.20
Total Alt-A		3,592,392		3,205,218		1,814,229		50.50			25.45			27.65			4.79			30.82
Total Subprime		35,212		34,891		25,347		71.98			8.27			36.35			—			22.68
Total private-label MBS	$	4,378,147	$	3,989,016	$	2,409,945		55.04	%		23.06	%		25.89	%		—	%		26.38	%

(1)

Represents loans that are 60 days or more delinquent.

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Characteristics of Private-label MBS in a Gross Unrealized Loss Position
As of December 31, 2008
(dollars in thousands)

	Par Value		Amortized Cost		Gross Unrealized Losses			Weighted Average Collateral Delinquency Rates			December 31, 2008 % AAA			March 20, 2009 % AAA			March 20, 2009 % Investment Grade			March 20, 2009 % Below Investment Grade			March 20, 2009 % Watch List
Private-label residential MBS backed by:
Prime first lien	$	601,891	$	600,338	$	(152,519	)		5.94	%		80.8	%		68.2	%		89.1	%		10.9	%		45.5	%
Alt-A option ARM		1,207,284		1,162,091		(624,248	)		28.97			93.7			0.5			32.3			67.7			3.7
Alt-A Other		1,732,007		1,729,356		(766,740	)		28.73			35.6			17.0			39.8			60.2			13.6
Total PL RMBS		3,541,182		3,491,785		(1,543,507	)		24.94			63.1			20.0			45.6			54.4			15.6
PL commercial MBS backed by:
Prime first lien		144,311		144,228		(24,757	)		2.18			100.0			100.0			100.0			—			—
Home equity loans backed by:
Prime first lien		4,341		4,341		(1,262	)		2.45			—			—			100.0			—			—
Subprime first lien		30,656		30,336		(9,549	)		24.54			55.2			55.2			98.4			1.6			21.0
Total home equity		34,997		34,677		(10,811	)		21.80			48.3			48.3			98.6			1.4			18.4
Total private-label MBS	$	3,720,490	$	3,670,690	$	(1,579,075	)		24.03	%		64.4	%		23.4	%		48.3	%		51.7	%		15.1	%

         The following table shows the FHLBanks' private-label MBS and home equity loan investments covered by monoline insurance and related gross unrealized losses.

Par Value of Monoline Insurance Coverage and Related Unrealized Losses
of Private-Label Mortgage-Backed Securities and
Home Equity Loan Investments by Year of Securitization
At December 31, 2008
(dollars in thousands)

	AMBAC Assurance Corp					Financial Security Assurance Inc					MBIA Insurance Corp					XL Capital Insurance Inc.					Financial Guaranty Insurance
	Monoline Insurance Coverage		Unrealized Losses			Monoline Insurance Coverage		Unrealized Losses			Monoline Insurance Coverage		Unrealized Losses			Monoline Insurance Coverage		Unrealized Losses			Monoline Insurance Coverage		Unrealized Losses
Private-label MBS by year of securitization
Prime
2003 and prior	$	4,341	$	(1,262	)	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—
Alt-A
2007		107,869		(34,161	)		41,701		(7,927	)		—		—			—		—			—		—
2006		20,714		(3,781	)		—		—			—		—			—		—			—		—
2005		43,899		(19,214	)		—		—			—		—			—		—			—		—
2003 and prior		2,111		(81	)		—		—			—		—			—		—			—		—
Total Alt-A		174,593		(57,237	)		41,701		(7,927	)		—		—			—		—			—		—
Subprime
2004		—		—			—		—			—		—			5,770		(1,315	)		—		—
2003 and prior		3,042		(1,397	)		7,768		(3,307	)		17,312		(3,172	)		—		—			1,320		(358	)
Total subprime		3,042		(1,397	)		7,768		(3,307	)		17,312		(3,172	)		5,770		(1,315	)		1,320		(358	)
Total private-label MBS	$	181,976	$	(59,896	)	$	49,469	$	(11,234	)	$	17,312	$	(3,172	)	$	5,770	$	(1,315	)	$	1,320	$	(358	)

128

        The following table provides the credit ratings of the third-party insurers.

Monoline Insurance of Private-Label Mortgage-Backed Securities and
Home Equity Loan Investments: Credit Ratings and Outlook
As of March 20, 2009

	Moody's		S&P		Fitch
	Credit Rating	Outlook	Credit Rating	Outlook	Credit Rating	Outlook
AMBAC Assurance Corporation	Baa1	Negative Watch	A	Negative	Not Rated	Not Rated
Financial Security Assurance, Inc.	Aa3	Developing	AAA	Negative Watch	AAA	Negative Watch
MBIA Insurance Corporation	B3	Developing	BBB+	Negative	Not Rated	Not Rated
Syncora Guarantee Inc. (formerly XL Capital Assurance, Inc.)	Ca	Developing	CC	Negative	Not Rated	Not Rated
Financial Guaranty Insurance Company (FGIC)	Caa1	Negative	CCC	Negative	Not Rated	Not Rated
Fannie Mae	Aaa	Stable	AAA	Stable	AAA	Stable
Freddie Mac	Aaa	Stable	AAA	Stable	AAA	Stable

        The following table provides the geographic concentration by state and by metropolitan statistical area of the Bank's private-label MBS and ABS as of December 31, 2008.

Geographic Concentration of Private-Label Mortgage and Asset-Backed Securities

	December 31, 2008
State concentration
California		39.6	%
Florida		12.4
New York		4.3
Arizona		4.3
Nevada		4.2
All Other		35.2
		100.0	%
Metropolitan Statistical Area
Los Angeles—Long Beach, CA		9.3	%
Washington, D.C.-MD-VA-WV		5.7
Riverside—San Bernardino, CA		4.5
Orange County, CA		3.9
San Diego, CA		3.9
All Other		72.7
		100.0	%

        The top five geographic areas represented in each of the two tables above have experienced mortgage loan default rates and home price depreciation rates that are significantly higher than national averages over the last two years.

129

        In 2007 and 2008, delinquency and foreclosure rates for subprime and Alt-A mortgages increased significantly nationwide, a trend that has continued through the date of this report and may continue through 2009. Moreover, home prices have fallen in many areas, increasing the likelihood and magnitude of potential losses to lenders on foreclosed real estate. The widespread impact of these trends has led to the recognition of significant losses by financial institutions, including commercial banks, investment banks, and financial guaranty providers. Uncertainty as to the depth and duration of these trends has led to a significant reduction in the market values of securities backed by subprime and Alt-A mortgages, and has elevated the potential for other-than-temporary impairment of some of these securities.

        Prices of many of the Bank's private-label MBS dropped dramatically during the year ended December 31, 2008, as delinquencies and foreclosures affecting the loans underlying these securities continued to worsen and as credit markets became highly illiquid beginning in late February and March 2008. This illiquidity has increased the amount of management judgment required to value its private-label MBS. The following graph demonstrates how average prices declined with respect to various asset classes in the Bank's MBS portfolio during the year ended December 31, 2008:

Average Month end MBS Prices by Category

        The following table provides further information regarding the Bank's private-label MBS through disclosure of pro forma impacts associated with stress-test scenarios applied to the private-label MBS holdings. In addition to the other-than-temporary impairment testing, described in Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 7—Held-to-Maturity Securities, the Bank also performs stress tests of key variable assumptions to assess potential exposure of the Bank's private-label MBS to changes in assumptions. The Bank assumes instantaneous adverse shifts to its conservative base-case other-than-temporary-impairment assumptions, and measures potential principal and interest shortfall. Similar to the methodology described in Note 5 of the Notes to the Financial Statements, the Bank uses third-party models to project expected losses associated with the underlying loan collateral and to model the resultant lifetime cash flows as to how they would pass through the deal structures underlying the Bank's MBS investments. For its key variable stress testing, the Bank assumes that the key variable is instantly shocked above the other-than-temporary-impairment testing level while all other assumptions are held constant.

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        The following table indicates potential principal and interest shortfall resulting from increases in securities' default rates, loss severities, or voluntary prepayment rates.

•

Base-case other-than-temporary-impairment loss severity assumptions, as described in Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 7—Held-to-Maturity Securities, are shocked by an additive five percentage points through final maturity to determine the impact of increased collateral loan losses realized at final disposition of defaulted pool loans.

•

The Bank's base-case other-than-temporary-impairment assumption for each individual security in respect to default rates, as described in Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 7—Held-to-Maturity Securities, is shocked by an additive 10 percentage points through final maturity to determine the impact of increases in the unpaid principal balances on the mortgage loans underlying each individual security that is defaulted upon by borrowers.

•

Voluntary prepayment rates were adjusted downward by a proportional 15 percent through final maturity to estimate the impact on the Bank's holdings if cash flows slowed, potentially exposing the Bank to risk if the subordinate classes eroded prior to the Bank's receipt of its principal and interest due.

        All principal and interest shortfall are presented in nondiscounted dollars. Similar to the table above, the following table indicates whether the underlying residential mortgage collateral is considered to be prime, Alt-A, or subprime at the time of issuance. Additionally, the amounts outstanding as of December 31, 2008, are stratified by year of issuance.

Private-Label Mortgage Backed Securities
Stress-Test Scenarios
As of December 31, 2008
(dollars in thousands)

							Stress Test Scenarios: Principal and Interest Shortfall
	Par Value		Book Value		Fair Value		5 Percentage Point Increase in Loss Severities		10 Percentage Point Increase in Conditional Default Rates		15 Percent Proportional Decrease in Voluntary Prepayment Rates
Prime
2007	$	153,797	$	152,836	$	121,571	$	—	$	—	$	—
2006		114,766		114,668		93,623		—		—		—
2005		87,283		86,661		46,703		—		—		—
2004		107,593		107,638		73,279		—		—		—
2003 and prior		142,793		142,876		115,722		—		—		—
Total prime		606,232		604,679		450,898		—		—		—
Alt-A
2007		1,008,200		934,179		524,535		16,641		15,291		9,990
2006		1,565,348		1,254,466		736,130		44,870		45,610		32,216
2005		918,899		916,636		494,867		451		214		108
2004		78,670		78,670		41,844		—		—		—
2003 and prior		21,275		21,267		16,853		—		—		—
Total Alt-A		3,592,392		3,205,218		1,814,229		61,962		61,115		42,314
Subprime
2004		5,770		5,770		4,456		—		—		—
2003 and prior		29,442		29,121		20,891		880		1,420		—
Total subprime		35,212		34,891		25,347		880		1,420		—
Total private-label MBS	$	4,233,836	$	3,844,788	$	2,290,474	$	62,842	$	62,535	$	42,314

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        The scenarios and associated results presented in the table above do not represent the Bank's current expectations for performance in its private-label MBS portfolio, but rather an indicative measure if assumptions used in its other-than-temporary-impairment assessment described in Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 7—Held-to-Maturity Securities change under further deterioration within U.S. housing markets. The differential between potential losses under stress-test scenarios and unrealized fair-value losses as of December 31, 2008, are representative of the Bank's assertion that the depressed market values associated with its private-label MBS holdings are due to illiquidity currently experienced in MBS markets, and not reflective of other-than-temporary-impairment due to credit.

        When loss severities are increased by five percentage points, potential principal and interest shortfall is $62.8 million, or 1.48 percent of par value as of December 31, 2008; the unrealized loss in fair value associated with the securities impacted in this scenario is $313.6 million as of December 31, 2008. When default rates are increased by 10 percentage points, projected principal and interest shortfall, according to the stress test scenario results, is $62.5 million, or 1.48 percent of par value as of December 31, 2008, while the unrealized loss in fair value is $327.5 million as of December 31, 2008. When voluntary prepayment rates are decreased by a proportional 15 percent, according to the stress test scenario results, the potential principal and interest shortfall is $42.3 million, or 1.00 percent of par value as of December 31, 2008, while the unrealized loss in fair value for the affected securities is $134.2 million as of December 31, 2008. If it is determined that an impairment is other than temporary, an impairment loss will be recognized in earnings equal to the entire difference between the investment's then current carrying amount and its fair value. The fair value of the investment would then become the new cost basis of the investment. In periods subsequent to the recognition of an other-than-temporary-impairment loss, the Bank would account for the other than temporarily impaired debt security as if the debt security had been purchased on the measurement date of the impairment. We will accrete into interest income the portion of the amounts we expect to recover that exceeds the cost basis of these securities over the remaining life of the securities.

        Certain of the Bank's investments in HFA bonds and MBS/ABS are insured by a third-party bond insurer. The bond insurance on these investments guarantees the timely payments of principal and interest if these payments cannot be satisfied from the cash flows of the underlying mortgage pool. For MBS/ABS that are protected by such third-party insurance, the Bank looks first to the performance of the underlying security, considering its embedded credit enhancements in the form of excess spread, overcollateralization, and credit subordination, to determine the collectability of all amounts due. If these protections are deemed insufficient to make probable the timely payment of all amounts due, then the Bank considers the capacity of the third-party bond insurer to cover any shortfalls. In the case that 1) it is probable that the underlying security will experience shortfalls in the timely repayment of principal or interest, and 2) the third-party bond insurer is deemed unlikely to be able to cover any such shortfalls, the security will be deemed other-than-temporarily impaired. For the Bank's other-than-temporary impairment analysis as of December 31, 2008, the Bank determined that none of its investments in HFA bonds or MBS/ABS were reliant upon a third-party bond insurer for purposes of returning contractual payment of principal and interest.

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        The following table provides the credit ratings of these third-party bond insurers, along with the amount of investment securities outstanding as of December 31, 2008.

Investments Insured by Financial Guarantors
Book Values as of December 31, 2008
(dollars in thousands)

Financial Guarantors	Insurer Financial Strength Ratings (Fitch/Moody's/S&P) As of March 20, 2009	HFA Bonds		MBS/ABS		Total Insured Investments
Ambac Assurance Corp.(1)	wd/Baa1*/A	$	52,128	$	181,243	$	233,371
Financial Security Assurance, Inc.	AAA*/Aa3/AAA*		125,289		49,469		174,758
MBIA Insurance Corp.(1)(2)	wd/B3/BBB+		—		17,312		17,312
MBIA Insurance Corp. of Illinois(2)	NR/Baa1/AA-		53,320		—		53,320
Syncora Guarantee Inc. (formerly XL Capital Assurance, Inc.)(1)	wd/Ca/CC		—		5,770		5,770
Financial Guaranty Insurance Company	wd/Caa1/CCC		—		1,000		1,000
Total		$	230,737	$	254,794	$	485,531

*

Rating is on negative watch for possible downgrade / on Credit Watch Negative

(1)

Fitch rating withdrawn

(2)

The existing domestic public finance portfolio of MBIA Insurance Corp was transferred to MBIA Insurance Corp of Illinois on February 18, 2009.

        Credit Risk—Mortgage Loans.    The Bank is subject to credit risk on purchased mortgage loans acquired through the MPF program. All mortgage loans acquired under the MPF program are fixed-rate, fully amortizing mortgage loans. While Bank management believes that credit risk on this portfolio is appropriately managed through underwriting standards (the MPF program requires full documentation to conform to standards established by Fannie Mae and Freddie Mac) and member CE obligations, the Bank also maintains an allowance for credit losses. The Bank's allowance for credit losses pertaining to mortgage loans was $350,000 and $125,000 at December 31, 2008 and 2007. As of December 31, 2008, nonaccrual loans amounted to $21.3 million and consisted of 228 loans out of a total of approximately 43,400 loans. See Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Mortgage Loans for additional information regarding the Bank's delinquent loans. The Bank had no charge-offs related to mortgage loans foreclosed upon during 2008. The Bank had no recoveries during 2008 from the resolution of loans previously charged off.

        The Bank is also subject to credit risk through MPF Xtra, even though it does not acquire mortgage loans through this program. For MPF Xtra, the Bank indemnifies the MPF Provider for certain retained risks, including the risk of the MPF Provider's required repurchase of loans in the event of fraudulent or inaccurate representations and warranties from the PFI regarding the sold loans. The Bank may, in turn, seek reimbursement from the related PFI in any such circumstance, at which point it is exposed to the credit risk of the PFI. The PFI's reimbursement obligation in such a circumstance would become an obligation under such PFI's advances agreement with the Bank. However, in the event that such a PFI became insolvent and the Bank lacked sufficient collateral under the advances agreement to satisfy the obligation the Bank would sustain a loss in the amount of such collateral shortfall.

        The Bank is exposed to credit risk from MI companies that provide CE in place of the PFI, as well as primary MI coverage on individual loans. As of December 31, 2008, the Bank was the

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beneficiary of primary MI coverage on $266.3 million of conventional mortgage loans, and the Bank was the beneficiary of SMI coverage on mortgage pools with a total unpaid principal balance of $59.7 million. Eight MI companies provide all of the coverage under these policies.

        As of February 28, 2009, seven of these MI companies have been downgraded to a rating lower than double-A minus (or its equivalent) by at least one NRSRO, citing poor results for 2008 and the continued deterioration in key variables that influence claims for mortgage insurance. The table below shows the ratings of these companies as of February 28, 2009.

        The Bank has analyzed its potential loss exposure to all of the MI companies and does not expect incremental losses due to these rating actions. This expectation is based on the CE features of the Bank's master commitments (exclusive of MI), the underwriting characteristics of the loans that back the Bank's master commitments, the seasoning of the loans that back these master commitments, and the strong performance of the loans to date. The Bank closely monitors the financial conditions of these MI companies. The Bank has established limits on exposure to individual MI companies to ensure that the insurance coverage is sufficiently diversified. The following table shows MI companies as of December 31, 2008.

Mortgage-Insurance Companies That Provide MI Coverage
As of December 31, 2008
(dollars in thousands)

Mortgage Insurance Company	Mortgage-Insurance Company Ratings (Fitch/Moody's/S&P) As of March 20, 2009	Balance of Loans with Primary MI		Primary MI		SMI		MI Coverage		Percent of Total MI Coverage
United Guaranty Residential Insurance Corporation	AA-/A3/A-*	$	21,234	$	4,381	$	—	$	4,381		7.6	%
Mortgage Guaranty Insurance Corporation	BBB/Ba2/BB*		76,691		16,348		—		16,348		28.5
Genworth Mortgage Insurance Corporation	NR/Baa2/A+*		68,420		15,685		—		15,685		27.3
PMI Mortgage Insurance Company	BB/Ba3/A-*		27,332		5,601		—		5,601		9.8
Radian Guaranty Incorporated	NR/Ba3/BBB+*		19,931		3,647		—		3,647		6.4
Republic Mortgage Insurance Company	A+/Baa2/A		17,727		3,489		563		4,052		7.1
CMG Mortgage Insurance Company	AA*/NR/AA-		28,202		6,411		—		6,411		11.2
Triad Guaranty Insurance Corporation	NR/NR/NR		6,783		1,221		—		1,221		2.1
		$	266,320	$	56,783	$	563	$	57,346		100.0	%

*

Rating is on watch for possible downgrade.

        Credit Risk—Derivative Instruments.    The Bank is subject to credit risk on derivative instruments. Credit exposure from derivatives arises from the risk of counterparty default on the derivative contract. The amount of loss created by default is the replacement cost, or current positive fair value, of the defaulted contract, net of any collateral held by or pledged out to counterparties by the Bank. The credit risk to the Bank arising from unsecured credit exposure on derivatives is mitigated by the credit

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quality of the counterparties, and by the early termination ratings triggers contained in all master derivatives agreements. The Bank enters into derivatives only with nonmember institutions that have long-term senior unsecured credit ratings that are at or above single-A (or its equivalent) by S&P and Moody's. Also, the Bank uses master-netting agreements to reduce its credit exposure from counterparty defaults. The master agreements contain bilateral-collateral-exchange provisions that require credit exposures beyond a defined amount be secured by U.S. government or GSE-issued securities or cash. Exposures are measured daily, and adjustments to collateral positions are made as necessary to minimize the Bank's exposure to credit risk. The master agreements generally provide for smaller amounts of unsecured exposure to lower-rated counterparties. The Bank does not currently enter into standalone interest-rate-exchange agreements with members. However as of December 31, 2008, the Bank had two legacy derivative contracts outstanding with one member institution which involved no credit exposure since they were interest-rate options sold to the member. The Bank does not enter into interest-rate-exchange agreements with other FHLBanks, and had no such agreements as of December 31, 2008.

        As illustrated in the following table, the Bank's maximum credit exposure on interest-rate-exchange agreements is much less than the notional amount of the agreements. Additionally, mortgage-loan-purchase commitments are reflected in the following table as derivative instruments, in accordance with the provisions of SFAS 149. The Bank does not collateralize mortgage-loan-purchase commitments. However, should the PFI fail to deliver the mortgage loans as agreed, the member institution is charged a fee to compensate the Bank for nonperformance of the agreement.

Derivative Instruments
(dollars in thousands)

		Notional Amount		Number of Counterparties		Total Net Exposure at Fair Value(4)		Net Exposure after Collateral
As of December 31, 2008
Interest-rate-exchange agreements:(1)
	Double-A	$	10,829,574		7	$	19,201	$	19,201
	Single-A		19,943,389		10		9,730		9,730
	Unrated(2)		10,000		1		—		—
Total interest-rate-exchange agreements			30,782,963		18		28,931		28,931
Mortgage-loan-purchase commitments(3)			32,672		—		4		—
Forward Contracts			10,000		1		—		—
Total derivatives		$	30,825,635		19	$	28,935	$	28,931
As of December 31, 2007
	Interest-rate-exchange agreements:(1)
	Double-A	$	20,151,961		13	$	65,016	$	8,661
	Single-A		8,957,057		5		2,002		2,002
	Unrated(2)		10,000		1		—		—
Total interest-rate-exchange agreements			29,119,018		19		67,018		10,663
Mortgage-loan-purchase commitments(3)			9,600		—		29		—
Total derivatives		$	29,128,618		19	$	67,047	$	10,663

(1)

Ratings are obtained from Moody's, Fitch, and S&P. If there is a split rating, the lowest rating is used.

(2)

This represents two contracts with a member institution.

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(3)

Total fair-value exposures related to mortgage-loan-purchase commitments are offset by pair-off fees from the Bank's members.

(4)

Total net exposure at fair value has been netted with cash collateral received from derivative counterparties.

        As of December 31, 2008 and 2007, the following counterparties accounted for more than 10 percent of the total notional amount of interest-rate-exchange agreements outstanding (dollars in thousands):

	December 31, 2008
Counterparty	Notional Amount Outstanding		Percent of Total Notional Outstanding
Deutsche Bank AG	$	4,914,103		16.0	%
Barclays Bank PLC		3,806,575		12.4
Credit Suisse First Boston International		3,373,005		11.0
Bank of America, N.A		3,083,587		10.0

	December 31, 2007
Counterparty	Notional Amount Outstanding		Percent of Total Notional Outstanding
Deutsche Bank AG	$	4,010,358		13.8	%
JP Morgan Chase Bank		3,772,555		13.0
Goldman Sachs Capital Markets LP		3,364,616		11.6
Morgan Stanley Capital Services Inc.		3,204,350		11.0

        The Bank may deposit funds with these counterparties and their affiliates for short-term money-market investments, including overnight federal funds, term federal funds, and interest-bearing certificates of deposit. Terms for such investments are overnight to 275 days. The Bank also engages in short-term secured reverse-repurchase agreements with affiliates of these counterparties. All of these counterparties and/or their affiliates buy, sell, and distribute the Bank's COs and discount notes.

        Contingent Credit Risk—Standby Bond Purchase Agreements.    The Bank has entered into standby bond-purchase agreements with two state-housing finance agencies whereby the Bank, for a fee, agrees to purchase and hold the agencies' unremarketed bonds until the designated remarketing agent can find a new investor or the housing agency repurchases the bonds according to a schedule established by the agreement. Each commitment agreement contains termination provisions in the event of a rating downgrade of the subject bond. All of the subject bonds are rated the highest long-term debt rating by at least two rating agencies. Total commitments for bond purchases were $333.4 million at December 31, 2008, of which $327.7 million were to one in-district housing finance agency. All of the bonds underlying the commitments to this housing finance agency maintain standalone ratings of triple-A from two rating agencies, even though their financial guarantor AMBAC Assurance Corporation has been downgraded below triple-A. The bonds underlying an additional $5.7 million to another in-district housing finance agency are split rated triple-A- negative watch /AA which ratings reflect those of the bonds' financial guarantor, Financial Security Assurance, Inc.

        During the year ended December 31, 2008, one housing finance agency had drawn upon $61.1 million of the Bank's standby bond-purchase agreements causing the Bank to purchase the related bonds. As of December 31, 2008 the Bank held $21.7 million as available-for-sale investments. The related agreements require the related remarketing agents to use their best efforts to remarket these bonds on behalf of the Bank. If these bonds are not fully remarketed within 60 days of the Bank's purchase of them, the housing finance agency must purchase the bonds in four equal and

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consecutive semiannual principal installments commencing on a certain repurchase date following such sixtieth day in accordance with the related standby bond-purchase agreement at a price of 100 percent of the outstanding principal balance plus accrued interest thereon. Notwithstanding the immediately prior sentence, upon the effective date of any event of default or upon the related commitment's expiry date, the housing finance agency is required to immediately purchase the related bonds owned by the Bank. At December 31, 2008, the housing finance agency was rated the highest long-term debt rating by each of the major rating agencies then rating it.

Market and Interest-Rate Risk

Sources of Market and Interest-Rate Risk

        The Bank's balance sheet is a collection of different portfolios that require different types of market and interest-rate-risk-management strategies. The majority of the Bank's balance sheet is comprised of assets that can be funded individually or collectively without imposing significant residual interest-rate risk on the Bank.

        However, the Bank's mortgage-related assets, including the portfolio of whole loans acquired through the MPF program, its portfolio of MBS and ABS, and its portfolio of bonds issued by HFAs, represent more complex cash-flow structures and contain more risk of prepayment and/or call options. Because many of these assets are backed by residential mortgages that allow the borrower to prepay and refinance at any time, the behavior of these portfolios is asymmetric based on the movement of interest rates. If rates fall, borrowers have an incentive to refinance mortgages without penalty, which could leave the Bank with lower-yielding replacement assets against existing debt assigned to the portfolio. If rates rise, borrowers will tend to hold existing loans longer than they otherwise would, imposing on the Bank the risk of having to refinance maturing debt assigned to these portfolios at a higher rate, thereby narrowing the interest-rate spread generated by the assets.

        These risks cannot be profitably managed with a strategy in which each asset is offset by a liability with a substantially identical cash-flow structure. Therefore, the Bank views each portfolio as a whole and allocates funding and hedging to these portfolios based on an evaluation of the collective market and interest-rate risks posed by these portfolios. The Bank measures the estimated impact to fair values of these portfolios as well as the potential for income to decline due to movements in interest rates, and makes adjustments to the funding and hedge instruments assigned as necessary to keep the portfolios within established risk limits.

Types of Market and Interest-Rate Risk

        Interest-rate and market risk can be divided into several categories, including repricing risk, yield-curve risk, basis risk, and options risk. Repricing risk refers to differences in the average sensitivities of asset and liability yields attributable to differences in the average timing of maturities and/or coupon resets between assets and liabilities. In isolation, repricing risk assumes that all rates may change by the same magnitude. However, differences in the timing of repricing of assets and liabilities can cause spreads between assets and liabilities to decline.

        Yield-curve risk reflects the sensitivity of net income to changes in the shape or slope of the yield curve that could impact the performance of assets and liabilities differently, even though average sensitivities are the same.

        When assets and liabilities are affected by yield changes in different markets, basis risk can result. For example, if the Bank invests in LIBOR-based floating-rate assets and funds those assets with short-term discount notes, potential compression in the spread between LIBOR and discount note rates could adversely affect the Bank's net income.

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        The Bank also faces options risk, particularly in its portfolios of advances, mortgage loans, MBS, and HFA bonds. When a member prepays an advance, the Bank could suffer lower future income if the principal portion of the prepaid advance is reinvested in lower-yielding assets that continue to be funded by higher-cost debt. In the mortgage loan, MBS, and HFA-bond portfolios, borrowers or issuers often have the right to redeem their obligations prior to maturity without penalty, potentially requiring the Bank to reinvest the returned principal at lower yields. If interest rates decline, borrowers may be able to refinance existing mortgage loans at lower interest rates, resulting in the prepayment of these existing mortgages and forcing the Bank to reinvest the proceeds in lower-yielding assets. If interest rates rise, borrowers may avoid refinancing mortgage loans for periods longer than the average term of liabilities funding the mortgage loans, causing the Bank to have to refinance the assets at higher cost. This right of redemption is effectively a call option that the Bank has written to the obligor. Another less prominent form of options risk includes coupon-cap risk, which may be embedded into certain MBS and limit the amount by which asset coupons may increase.

Strategies to Manage Market and Interest-Rate Risk

General

        The Bank uses various strategies and techniques to manage its market and interest-rate risk. Principal among its tools for interest-rate-risk management is the issuance of debt that is used to match interest-rate-risk exposures of the Bank's assets. The Bank can issue COs with maturities ranging from overnight to 20 years or more. The debt may be noncallable until maturity or callable on and/or after a certain date.

        To reduce the earnings exposure to rising interest rates caused by long-term, fixed-rate assets, the Bank may issue long-term, fixed-rate bonds. These bonds may be issued to fund specific assets or to generally manage the overall exposure of a portfolio or the balance sheet. At December 31, 2008, fixed-rate noncallable debt, not hedged by interest-rate-exchange agreements amounted to $11.8 billion, compared with $11.2 billion at December 31, 2007. Fixed-rate callable debt, not hedged by interest-rate-exchange agreements amounted to $3.0 billion and $3.7 billion at December 31, 2008 and 2007, respectively.

        To achieve certain risk-management objectives, the Bank also uses interest-rate derivatives that alter the effective maturities, repricing frequencies, or option-related characteristics of financial instruments. These may include swaps, swaptions, caps, collars, and floors; futures and forward contracts; and exchange-traded options. For example, as an alternative to issuing a fixed-rate bond to fund a fixed-rate advance, the Bank might enter into an interest-rate swap that receives a floating-rate coupon and pays a fixed-rate coupon, thereby effectively converting the fixed-rate advance to a floating-rate advance.

Advances

        In addition to the general strategies described above, one tool that the Bank uses to reduce the interest-rate risk associated with advances is a contractual provision that requires members to pay prepayment fees for advances that, if prepaid prior to maturity, might expose the Bank to a loss of income under certain interest-rate environments. In accordance with applicable regulations, the Bank has an established policy to charge fees sufficient to make the Bank financially indifferent to a member's decision to repay an advance prior to its maturity. Prepayment fees are recorded as income for the period in which they are received.

        Prepayment-fee income can be used to offset the cost of purchasing and retiring high-cost debt in order to maintain the Bank's asset-liability sensitivity profile. In cases where derivatives are used to hedge prepaid advances, prepayment-fee income can be used to offset the cost of terminating the associated hedge.

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Investments

        The Bank holds certain long-term bonds issued by U.S. agencies, U.S. government corporations and instrumentalities, state or local housing-finance-agencies, and supranational banks as available-for-sale. To hedge the market and interest-rate risk associated with these assets, the Bank has entered into interest-rate swaps with matching terms to those of the bonds in order to create synthetic floating-rate assets. At December 31, 2008 and 2007, this portfolio had an amortized cost of $698.5 million and $707.7 million, respectively.

        The Bank also manages the market and interest-rate risk in its MBS portfolio in several ways. For MBS classified as held-to-maturity, the Bank uses debt that matches the characteristics of the portfolio assets. For example, for floating-rate ABS, the Bank uses debt that reprices on a short-term basis, such as CO discount notes or CO bonds that are swapped to a LIBOR-based floating-rate. For commercial MBS that are nonprepayable or prepayable for a fee for an initial period, the Bank may use fixed-rate debt. For MBS that are classified as trading securities, the Bank uses interest-rate swaps to economically hedge the duration characteristics and interest-rate caps to economically hedge the option risk in these assets.

Mortgage Loans

        The Bank manages the interest-rate and prepayment risk associated with mortgages through a combination of debt issuance and derivatives. The Bank issues both callable and noncallable debt to achieve cash-flow patterns and liability durations similar to those expected on the mortgage loans.

        The Bank mitigates much of its exposure to changes in interest rates by funding a significant portion of its mortgage portfolio with callable debt. When interest rates change, the Bank's option to redeem this debt offsets a large portion of the fair-value change driven by the mortgage-prepayment option. These bonds are effective in managing prepayment risk by allowing the Bank to respond in kind to prepayment activity. Conversely, if interest rates increase the debt may remain outstanding until maturity. The Bank uses various cash instruments including shorter-term debt, callable, and non-callable long-term debt in order to reprice debt when mortgages prepay faster or slower than expected. The Bank's debt repricing capacity depends on market demand for callable and noncallable debt, which fluctuates from time to time. Additionally, because the mortgage-prepayment option is not fully hedged by callable debt, the combined market value of our mortgage assets and debt will be affected by changes in interest rates. As such, the Bank has enacted a more comprehensive strategy incorporating the use of derivatives. Derivatives provide a flexible, liquid, efficient, and cost-effective method to hedge interest rate and prepayment risks.

        To hedge the interest-rate-sensitivity risk due to potentially high prepayment speeds in the event of a drop in interest rates, the Bank has periodically purchased options to receive fixed rates on interest-rate swaps exercisable on specific future dates (receiver swaptions). These derivatives are structured to increase in value as interest rates decline, and provide an offset to the loss of market value that might result from rapid prepayments in the event of a downturn in interest rates. With the addition of these option-based derivatives, the market value of the portfolio becomes more stable because a greater portion of prepayment risk is covered. At December 31, 2008, the Bank had no receiver swaptions.

        Interest-rate-risk management activities can significantly affect the level and timing of net income due to a variety of factors. As receiver swaptions are accounted for on a standalone basis and not as part of a hedge relationship under SFAS 133, changes in their fair values are recorded through net income each month. This may increase net income volatility if the offsetting periodic change in the MPF prepayment activity is markedly different from the fair-value change in the receiver swaptions. Additionally, performance of the MPF portfolio is interest-rate-path dependent, while receiver swaptions values are solely based on forward-looking rate expectations.

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        When the Bank executes transactions to purchase mortgage loans, in some cases the Bank may be exposed to significant market risk until permanent hedging and funding can be obtained in the market. In these cases, the Bank may enter into a forward sale of MBS to be announced (TBA) or other derivatives for forward settlement. As of December 31, 2008, the Bank had $10.0 million of outstanding TBA hedges. The total fair value of these hedges as of December 31, 2008, was an unrealized loss of $133,000.

Swapped Consolidated Obligation Debt

        The Bank may also issue bonds in conjunction with interest-rate swaps that receive a coupon that offsets the bond coupon, and that offset any optionality embedded in the bond, thereby effectively creating a floating-rate liability. The Bank employs this strategy to achieve a lower cost of funds than may be available from the issuance of short-term consolidated discount notes. Total CO bond debt used in conjunction with interest-rate-exchange agreements was $15.5 billion, or 46.4 percent of the Bank's total outstanding CO bonds at December 31, 2008, down from $17.8 billion, or 53.0 percent of total outstanding CO bonds, at December 31, 2007. Total CO discount note debt used in conjunction with interest-rate-exchange agreements was $249.4 million, or 0.6 percent of the Bank's total outstanding CO discount notes, at December 31, 2008. Total CO discount note debt used in conjunction with interest-rate-exchange agreements was $700.0 million, or 1.6 percent of the Bank's total outstanding CO discount notes, at December 31, 2007. Because the interest-rate swaps and hedged CO bonds trade in different markets, they are subject to basis risk that is reflected in the Bank's VaR calculations, but that is not reflected in hedge ineffectiveness as measured in accordance with SFAS 133, because these interest-rate swaps are designed to hedge changes in fair values of the CO bonds that are attributable to changes in the benchmark LIBOR interest rate.

        The Bank also uses interest-rate swaps, caps, and floors to manage the fair-value sensitivity of the portion of its MBS portfolio that is classified as trading securities. These interest-rate-exchange agreements provide an economic offset to the duration and convexity risks arising from these assets.

Measurement of Market and Interest-Rate Risk

        The Bank measures its exposure to market and interest-rate risk using several techniques applied to the balance sheet and to certain portfolios within the balance sheet. Principal among these measurements as applied to the balance sheet is the potential future change in MVE and interest income due to potential changes in interest rates, spreads, and market prices. For purposes of measuring interest-income sensitivity over time, the Bank measures the repricing gaps between its assets and liabilities. The Bank also measures the duration gap of its mortgage-loan portfolio, including all assigned funding and hedging transactions.

        The Bank uses sophisticated information systems to evaluate its financial position. These systems are capable of employing various interest-rate term-structure models and valuation techniques to determine the values and sensitivities of complex or option-embedded instruments such as mortgage loans; MBS; callable bonds and swaps; and adjustable-rate instruments with embedded caps and floors, among others. These models require the following:

•

Specification of the contractual and behavioral features of each instrument;

•

Determination and specification of appropriate market data, such as yield curves and implied volatilities;

•

Utilization of appropriate term-structure and prepayment models to reasonably describe the potential evolution of interest rates over time and the expected behavior of financial instruments in response;

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•

For option-free instruments, the expected cash flows are specified in accordance with the term structure of interest rates and discounted using spot rates derived from the same term structure;

•

For option-embedded instruments that are path-independent, such as callable bonds and swaps, a backward-induction process is used to evaluate each node on a lattice that captures the variety of scenarios specified by the term-structure model; and

•

For option-embedded instruments that are path-dependent, such as mortgage-related instruments, a Monte Carlo simulation process is used to specify a large number of potential interest-rate scenarios that are randomly generated in accordance with the term structure of interest rates.

        Market Value of Equity Estimation and Risk Limit.    MVE is the net economic value (or net present value) of total assets and liabilities, including any off-balance-sheet items. In contrast to the GAAP-based shareholder's equity account, MVE represents the shareholder's equity account in present-value terms. Specifically, MVE equals the difference between the theoretical market value of assets and the theoretical market value of liabilities. MVE, and in particular, the ratio of MVE to the book value of equity (BVE), can be an indicator of future net income to the extent that it demonstrates the impact of prior interest-rate movements on the capacity of the current balance sheet to generate net interest income. For example, a liability-sensitive bank that has a lower MVE following an increase in interest rates can be expected to earn less net interest income in the future, as the increase in interest rates would have reduced the market value of assets to a greater extent than the market value of liabilities. However, MVE does not always provide an accurate indication of future net income. Even a bank with perfectly matched asset and liability repricing characteristics might experience fluctuations in its MVE if the discount rates used to evaluate assets and liabilities change differentially due to basis risk. For example, if yields used to discount assets increase more rapidly than yields used to discount liabilities, MVE will decline, despite the fact that the change in interest rates does not affect yields on current balance-sheet items. As another example, an entity whose debt securities decline in value due to credit concerns about the entity will show an increase in MVE if asset values do not fall by as much. Therefore, care must be taken to properly interpret the results of the MVE analysis.

        The ratio of the MVE to the BVE is one of the metrics used to track the Bank's potential future exposure to losses or reduced net income. At December 31, 2007, the Bank's MVE was $3.3 billion and its BVE was $3.4 billion. At December 31, 2008, the Bank's MVE had declined to $1.8 billion while its BVE had increased to $3.7 billion. Therefore, the Bank's ratio of MVE to BVE was 48.3 percent at December 31, 2008, down from 95.9 percent at December 31, 2007. The decline in this ratio is almost fully attributable to the decline in market values of the Bank's MBS portfolio. In turn, the decline in the market values of the Bank's MBS was attributable to investor concerns about credit risk associated primarily with private-label MBS that have experienced unprecedented high rates of loan delinquencies and foreclosures, which have been exacerbated by the illiquidity attending the ongoing credit crisis. As noted previously, management believes that this impairment is temporary.

        Interest-rate-risk analysis using MVE involves evaluating the potential changes in fair values of assets and liabilities and off-balance-sheet items under different potential future interest-rate scenarios and determining the potential impact on MVE according to each scenario and the scenario's likelihood.

        Value at risk (VaR) is defined to equal the ninety-ninth percentile potential reduction in MVE based on historical simulation of interest-rate scenarios. These scenarios correspond to interest-rate changes historically observed over 120-business-day periods starting at the most recent monthend and going back monthly to the beginning of 1978. This approach is useful in establishing risk-tolerance limits and is commonly used in asset/liability management; however, it does not imply a forecast of future interest-rate behavior. The Bank's risk-management policy requires that VaR not exceed the latest quarterend dividend-adjusted level of retained earnings plus the Bank's most recent quarterly estimate of net income over the next six months.

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        The table below presents the historical simulation VaR estimate as of December 31, 2008, and December 31, 2007, which represents the estimates of potential reduction to the Bank's MVE from potential future changes in interest rates and other market factors. Estimated potential risk exposures are expressed as a percentage of then current MVE and are based on historical behavior of interest rates and other market factors over a 120-business-day time horizon.

	Value-at-Risk (Gain) Loss Exposure December 31,
	2008						2007
Confidence Level	% of MVE(1)			$ million			% of MVE(1)			$ million
50%		0.18	%	$	3.2			(0.15	)%	$	(4.8	)
75%		(0.84	)		(14.8	)		0.85			28.0
95%		(2.52	)		(44.6	)		2.10			68.9
99%		5.05			84.6			3.42			112.1

(1)

Loss exposure is expressed as a percentage of base MVE.

        The following table outlines the Bank's VaR exposure to the 99th percentile, consistent with FHFA regulations, over 2008 and 2007. As noted, the primary driver underlying the lower VaR's experienced throughout 2008 from the prior year was the overall decline in market rates resultant from Federal Reserve initiatives to resolve the U.S. financial crisis.

Value-at-Risk
99^th Percentile
(dollars in millions)

	2008		2007
Year ending December 31	$	84.6	$	112.1
Average VaR for year ending December 31		91.6		132.6
Maximum VaR for year ending December 31		134.1		171.4
Minimum VaR for year ending December 31		57.3		96.1

        As measured by VaR, the Bank's potential losses to MVE due to changes in interest rates and other market factors decreased by $27.5 million to $84.6 million as of December 31, 2008, from $112.1 million as of December 31, 2007. The primary driver behind the decrease in VaR from December 31, 2007, was a lower market-rate environment experienced at December 31, 2008, from the prior yearend. Commencing in September 2007, the Federal Reserve Board of Governors sought to address perceived liquidity and recessionary concerns by lowering the targeted Fed funds rate; the target was lowered 100 basis points between September and December 2007 and a further 400 to 425 basis points during the year ended December 31, 2008. In turn, other market rates moved lower as well, as three-month LIBOR was 327 basis points lower, and the two-year swap rate had declined by 233 basis points at December 31, 2008, from its December 31, 2007, level. VaR incorporates the impact of changes in market rates and volatility on the value of the Bank's assets, liabilities, and derivative positions, and does not include further potential price deterioration that is due to market illiquidity and is independent of rate changes.

        While the Bank seeks to manage interest-rate risk through matching the tenor, interest-rate-reset characteristics, and optionality of its assets and liabilities, mismatches may occur, primarily between the Bank's MPF mortgage-loan portfolio and associated liabilities. As a result, the Bank has a residual exposure to interest-rate movements, as illustrated by its duration of equity. Duration of equity, as measured by the Bank, represents the net percentage change in value between the Bank's assets and liabilities for parallel +/- 50 basis point shifts in interest rates. A negative duration of equity indicates

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that the Bank's MVE depreciates in declining rate scenarios, and the converse holds true for rising rate environments. As of December 31, 2008, the Bank's duration of equity was - -2.4 years, indicating that the Bank depreciates in value in those VaR scenarios that incorporate declining rate environments.

        The negative duration of equity observed by the Bank as of December 31, 2008, reflected a pronounced rise in market yields for the Bank's debt relative to yields on assets and interest-rate swaps held by the Bank. The increase in yields on the Bank's outstanding debt caused an increase in the duration of callable debt reflecting the reduced likelihood of redemption on call exercise dates. The lengthening of the Bank's duration of liabilities was not matched by an attendant lengthening of the duration of the Bank's mortgage loans, as projected mortgage current coupon yields declined, implying a higher probability of prepayments. This increased mortgage prepayment sensitivity is conditioned on normal functioning mortgage markets, and may not be realized if current housing market issues continue to impede mortgage refinancing for an extended period of time.

        Income Simulation and Repricing Gaps.    To provide an additional perspective on market and interest-rate risks, the Bank has an income-simulation model that projects net interest income over a range of potential interest-rate scenarios, including parallel interest-rate shocks, nonparallel interest-rate shocks, and nonlinear changes to the Bank's funding curve and LIBOR. The Bank measures simulated 12-month net income and return on equity (with an assumption of no prepayment-fee income or related hedge or debt-retirement expense) under these scenarios. Management has put in place escalation-action triggers whereby senior management is explicitly informed of instances where the Bank's projected return on equity would fall below three-month LIBOR in any of the assumed interest-rate scenarios. The results of this analysis for December 31, 2008, showed that in the worst-case scenario, the Bank's return on equity would fall to 175 basis points above the average yield on three-month LIBOR under a yield curve scenario wherein interest rates instantaneously rise by 300 basis points in a parallel fashion across all yield curves.

Liquidity Risk

        The Bank maintains operational liquidity in order to ensure that it meets its day-to-day business needs as well as its contractual obligations with normal sources of funding. The Bank's risk-management policy has established a metric and policy limit within which the Bank operates. The Bank defines structural liquidity as the difference between contractual sources and uses of funds adjusted to assume that all maturing advances are renewed; member overnight deposits are withdrawn at a rate of 50 percent per day; and commitments (MPF and other commitments) are taken down at a conservatively projected pace. The Bank defines available liquidity as the sources of funds available to the Bank through its access to the capital markets, subject to leverage, line, and collateral constraints. The risk management policy requires the Bank to maintain structural liquidity each day so that any excess of uses over sources is covered by available liquidity for a four-week forecast period and 50 percent of the excess of uses over sources is covered by available liquidity over eight- and 12-week forecast periods. In addition to these minimum requirements, management measures structural liquidity over a three-month forecast period. If the Bank's excess of uses over sources is not fully covered by available liquidity over a two-month or three-month forecast period, senior management will be immediately notified so that a decision can be made as to whether immediate remedial action is necessary. The following table shows the Bank's structural liquidity as of December 31, 2008.

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Structural Liquidity
(dollars in thousands)

	Month 1			Month 2			Month 3
Contractual sources of funds	$	5,781,996		$	7,340,695		$	(1,629,844	)
Less: Contractual uses of funds		(4,663,451	)		(13,994,018	)		(8,292,159	)
Equals: Net cash flow		1,118,545			(6,653,323	)		(9,922,003	)
Less: Cumulative contingent obligations		(16,509,974	)		(22,944,930	)		(28,001,757	)
Equals: Net structural liquidity		(15,391,429	)		(29,598,253	)		(37,923,760	)
Available borrowing capacity	$	31,726,312		$	45,159,623		$	52,855,341
Ratio of available borrowing capacity to net structural liquidity need		2.06			1.53			1.39
Required ratio		1.00			0.50			0.50
Management action trigger		—			1.00			1.00

        The Bank also maintains contingency-liquidity plans designed to enable it to meet its obligations in the event of operational disruption at the Bank, the Office of Finance, or the capital markets. The Bank maintains highly liquid assets at all times in an amount equal to or greater than the aggregate amount of all of its anticipated maturing advances over the following five days. As of December 31, 2008, and December 31, 2007, the Bank held a surplus of $10.7 billion and $9.8 billion, respectively, of liquidity for the following five days, exclusive of access to the proceeds of CO debt issuance. In addition, on March 6, 2009, the Finance Agency provided final guidance revising and formalizing requests made for additional increases in liquidity that were provided to the FHLBanks in the third quarter of 2008. This final guidance requires the Bank to maintain sufficient liquidity, through short-term investments, in an amount at least equal to the Bank's anticipated cash outflows under two different scenarios. One scenario assumes that the Bank cannot access the capital markets for a period of 15 days and that during that time members do not renew any maturing, prepaid, and called advances. The second scenario assumes that the Bank cannot access the capital markets for five days and that during that period the Bank will automatically renew maturing and called advances for all members except very large, highly rated members. The new requirement is designed to enhance the Bank's protection against temporary disruptions in access to the FHLBank debt markets in response to a rise in capital markets volatility. For further discussion of how this may impact the Bank, see Item 1A—Risk Factors—Compliance with Regulatory Contingency Liquidity Guidance Could Adversely Impact the Bank's Earnings. Management measures liquidity on a daily basis and maintains an adequate base of operating and contingency liquidity by investing in short-term, high-quality, money-market investments and also has access to the GSECF, described in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity, each of which can provide a ready source of liquidity during stressed market conditions. As

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of December 31, 2008, the Bank's contingency liquidity, as measured in accordance with Finance Agency regulations, was determined as follows:

Contingency Liquidity
(dollars in thousands)

	Cumulative Fifth Business Day
Contractual sources of funds	$	6,783,301
Less: contractual uses of funds		(9,369,522	)
Equals: net cash flow		(2,586,221	)
Contingency borrowing capacity (exclusive of CO debt issuance)		13,310,209
Net contingency borrowing capacity	$	10,723,988

        Additional information regarding liquidity is provided in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.

Leverage Risk

        The Bank has controls in place in an effort to ensure that capital is maintained within regulatory limitations. Accordingly, the Bank maintains at all times unweighted total regulatory capital in an amount equal to at least 4.0 percent of total assets and weighted regulatory capital, wherein permanent capital is weighted at 1.5 times its face amount, in an amount equal to at least 5.0 percent of total assets. Because all of the Bank's regulatory capital is permanent capital, compliance with the unweighted total capital ratio requirement ensures compliance with the weighted regulatory capital ratio requirement. In order to balance the need to maintain compliance with these regulatory requirements against the need to adequately lever shareholder equity to provide an efficient return to shareholders, the Bank maintains its ratio of total capital to total assets between 4.0 percent and 5.5 percent measured at the end of each calendar month. Leverage limits are included in the Banks board-approved risk-management policy and ratios are reported to the board of directors monthly.

        The Bank's ratio of unweighted total regulatory capital to assets was 4.6 percent at December 31, 2008. If the Bank experiences significant losses due to other-than-temporary impairments of investment securities, the Bank might fail to comply with its minimum required ratio of total regulatory capital to total assets. In such a scenario the Bank would be subject to the capital restoration plan requirements, as described in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Resources, and be prohibited from paying dividends, irrespective of whether the Bank has eliminated its accumulated deficit, and either repurchasing or redeeming the Bank's stock.

Business Risk

        Management's strategies for mitigating business risk include annual and long-term strategic planning exercises; continually monitoring key economic indicators, projections, and the Bank's external environment; and developing contingency plans where appropriate. The Bank's risk-assessment process also considers business risk, where appropriate, for each of the Bank's major business activities.

Operational Risk

        The Bank has instituted policies and procedures to mitigate operational risks. The Bank ensures that employees are properly trained for their roles and that written policies and procedures exist to support the key functions of the Bank. The Bank maintains a system of internal controls to ensure that

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responsibilities are adequately segregated and that the activities of the Bank are appropriately monitored and reported to management and the board of directors. Annual risk assessments review these risks and related controls for efficacy and potential opportunities for enhancement. Additionally, the Bank's Operational Risk Committee oversees the Bank's exposure to operational risk and reviews the following: new products, new processes, annual risk assessments, exceptions and related reports, new regulations affecting products and operations, and staff turnover. The Bank's Internal Audit Department, which reports directly to the Audit Committee of the board of directors, regularly monitors the Bank's adherence to established policies and procedures. However, some operational risks are beyond the Bank's control, and the failure of other parties to adequately address their operational risks could adversely affect the Bank.

        Disaster-Recovery/Business Continuity Provisions.    The Bank maintains a disaster-recovery site in Westborough, Massachusetts to provide continuity of operations in the event that its Boston headquarters becomes unavailable. Data for critical computer systems is backed up regularly and stored offsite to avoid disruption in the event of a computer failure. The Bank also has a reciprocal back-up agreement in place with the FHLBank of Topeka to provide short-term liquidity advances in the event that both of the Massachusetts facilities are inoperable. In the event that the FHLBank of Topeka's facilities are inoperable, the Bank will provide short-term liquidity advances to their members.

        Insurance Coverage.    The Bank has insurance coverage for employee fraud, forgery, alteration, and embezzlement, as well as director and officer liability protection for breach of duty, misappropriation of funds, negligence, and acts of omission. Additionally, comprehensive insurance coverage is currently in place for electronic data-processing equipment and software, personal property, leasehold improvements, fire/explosion/water damage, and personal injury including slander and libelous actions. The Bank maintains additional insurance protection as deemed appropriate, which covers automobiles, company credit cards, and business-travel accident and supplemental traveler's coverage for both directors and staff. The Bank uses the services of an insurance consultant who periodically conducts a comprehensive review of insurance coverage levels.

Reputation Risk

        The Bank has established a code of conduct and operational risk-management procedures to ensure ethical behavior among its staff and directors, and provides training to employees about its code of conduct. The Bank works to ensure that all communications are presented accurately, consistently, and in a timely way to multiple audiences and stakeholders. In particular, the Bank regularly conducts outreach efforts with its membership and with housing and economic-development advocacy organizations throughout New England. The Bank also cultivates relationships with government officials at the federal, state, and municipal levels; key media outlets; nonprofit housing and community-development organizations; and regional and national trade and business associations to foster awareness of the Bank's mission, activities, and value to members. The Bank works closely with the Council of Federal Home Loan Banks and the Office of Finance to coordinate communications on a broader scale.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements

        The following financial statements and accompanying notes, including the Report of Management on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm, are set forth on pages F-1 to F-78 of this Form 10-K.

Report of Management on Internal Control over Financial Reporting		F-1
Audited Financial Statements
	Report of Independent Registered Public Accounting Firm—PricewaterhouseCoopers,  LLP	F-2
	Statements of Condition as of December 31, 2008 and 2007	F-3
	Statements of Income for the Years Ended December 31, 2008, 2007, and 2006	F-4
	Statements of Capital for the Years Ended December 31, 2008, 2007, and 2006	F-5
	Statements of Cash Flows for the Years Ended December 31, 2008, 2007, and 2006	F-6
	Notes to the Financial Statements	F-8

Supplementary Financial Data

        Supplementary financial data for the years ended December 31, 2008 and 2007, are included in the following tables. The following unaudited results of operations include, in the opinion of management, all adjustments necessary for a fair presentation of the results of operations for each quarterly period presented below.

2008 Quarterly Results of Operations—Unaudited
(dollars in thousands)

		2008—Quarter Ended
		December 31			September 30			June 30		March 31
Total interest income		$	605,423		$	637,704		$	638,332	$	838,705
Total interest expense			537,903			553,554			553,816		742,224
	Net interest income before provision for credit losses		67,520			84,150			84,516		96,481
Provision for credit losses on mortgage loans			125			100			—		—
	Net interest income after provision for credit losses		67,395			84,050			84,516		96,481
Non-interest (loss) income			(385,076	)		(2,074	)		799		(5,609	)
Non-interest expense			13,829			14,213			13,862		14,404
	(Loss) Income before assessments		(331,510	)		67,763			71,453		76,468
Assessments			(57,310	)		18,014			18,983		20,313
Net (loss) income		$	(274,200	)	$	49,749		$	52,470	$	56,155

        Included in non-interest (loss) income for the quarter ended December 31, 2008, is a realized loss on held-to-maturity securities totaling $381.7 million related to other-than-temporary impairment charges. See additional discussion in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.

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2007 Quarterly Results of Operations—Unaudited
(dollars in thousands)

		2007—Quarter Ended
		December 31		September 30		June 30			March 31
Total interest income		$	994,607	$	846,505	$	782,528		$	742,207
Total interest expense			898,780		772,169		710,212			672,240
	Net interest income before provision for credit losses		95,827		74,336		72,316			69,967
Provision for credit losses on mortgage loans			—		—		(9	)		—
	Net interest income after provision for credit losses		95,827		74,336		72,325			69,967
Non-interest income (loss)			6,739		6,867		(4,459	)		1,990
Non-interest expense			14,740		12,763		13,216			12,899
	Income before assessments		87,826		68,440		54,650			59,058
Assessments			23,341		18,196		14,514			15,689
Net income		$	64,485	$	50,244	$	40,136		$	43,369

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

ITEM 9A.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

        The Bank's senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Bank's disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Bank's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the Bank's disclosure controls and procedures, the Bank's management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Bank's management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

        Management of the Bank has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with the participation of the president and chief executive officer and chief financial officer as of the end of the period covered by this report. Based on that evaluation, the Bank's president and chief executive officer and chief financial officer have concluded that the Bank's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal year covered by this report.

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Internal Control over Financial Reporting

        The management of the Bank is responsible for establishing and maintaining adequate internal control over financial reporting. See Report of Management on Internal Control over Financial Reporting on page F-1.

        During the quarter ended December 31, 2008, there were no changes in the Bank's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank's internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

        On April 10, 2009, the Bank received notification from Dr. Helen F. Peters that she is resigning from the board of directors. Dr. Peters has indicated to the Bank that her decision to resign is based on competing professional commitments. The Bank is grateful to Dr. Peters for her service.

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Composition of the Board of Directors

        The Bank's board of directors is currently comprised of 10 member directors and six independent directors. Two of the independent directors are public interest directors. Member directors are elected by the members located in the state where a member directorship is to be filled, and independent directors are elected by the Bank's members irrespective of the state in which each member is located, as further described in this item under Election Process and Director Nominee Requirements. Public interest directors are independent directors who have at least four years of service representing consumer or community interests.

        Until September 8, 2008, however, the Bank's board of directors was comprised of eight appointive directors appointed by the Finance Board and 10 elective directors elected by the Bank's members. On September 8, 2008, the Director issued an order deeming each elective directorship to be a member directorship and each appointive director to be an independent directorship, as discussed in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Recent Legislative and Regulatory Developments—Finance Agency Order Regarding Eligibility and Elections of Board of Directors. Effective September 26, 2008, the Director promulgated an interim final regulation concerning the eligibility and election of FHLBank directors (the Election Interim Regulation), which, among other things, gives members the ability to vote on independent directors, as discussed in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Recent Legislative and Regulatory Developments—Interim Final Regulation Regarding Eligibility and Elections of Board of Directors.

        Until the creation of the Finance Agency upon the enactment of HERA on July 30, 2008, the Finance Board determined each fiscal year the number of elective and appointive directorships, and the number of elective directorships to be allocated among the states in the Bank's district. The Finance Board based the allocation of the 10 elective directorships on the number of shares required to be held by members in each state in the district as of the preceding yearend, except that by statute, Massachusetts was entitled to three elective directorships.

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        For 2008, the 10 elective directorships were allocated among the six New England states as follows:

State	Number of Elective Directorships
Connecticut		2
Maine		1
Massachusetts		4
New Hampshire		1
Rhode Island		1
Vermont		1
Total		10

        The Election Interim Regulation gives the Director the annual responsibility to determine the size of the board of directors for each FHLBank. For 2009, the Director has determined that a 17-member board of directors will govern the Bank, comprised of 10 member directors and seven independent directors, two of the independent directors being public interest directors. The Election Interim Regulation also gives the Director the annual responsibility to designate the number of member directorships among each FHLBank's district's states based on the number of shares of FHLBank stock required to be held by members in each state using the method of equal proportions, as discussed in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Recent Legislative and Regulatory Developments—Interim Final Regulation Regarding Eligibility and Elections of Board of Directors. Based on this method, the Director allocated the 10 member directorships among the six New England states for 2009 as follows:

State	Number of Elected Directorships
Connecticut		2
Maine		1
Massachusetts		3
New Hampshire		1
Rhode Island		2
Vermont		1
Total		10

        The elections were held in the fourth quarter of fiscal year 2008 and involved elections for two Rhode Island member directorships and two independent directorships, as discussed in greater detail in Item 4—Submission of Matters to a Vote of Security Holders.

Election Process and Director Nominee Requirements

        For member directorships, each member located within each state that has vacancies may nominate individuals to fill any membership directorship vacancies in its state and then may vote for the directors to fill those seats. The Bank's board of directors has no nominating committee for either member directorships or independent directorships. The Election Interim Requirement permits any of the Bank's directors, Advisory Council, officers, employees, attorneys, and agents to support the nomination or election of a candidate for any member directorship provided that no such person may purport to represent the views of the Bank, the Finance Agency, or of any other officer, employee, or agent of the Bank or the Finance Agency. Members may nominate member directors and vote only for member directors in the state where they are located. Each nominee's member institution is required to have met all of its minimum capital requirements established by its appropriate federal banking agency or

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appropriate state regulator. Each nominee must also be a U.S. citizen and an officer or director of a member of the Bank.

        For independent directorships, the Election Interim Regulation requires the Bank to nominate candidates for independent directorships to be filled after consultation with the Bank's Advisory Council. The Bank must submit potential nominees to the Finance Agency prior to nomination for the Finance Agency's review. Candidates for independent directorships must receive at least 20 percent of the number of votes eligible to be cast in the election and are elected by a plurality of the vote of the Bank's membership. If no nominee receives at least 20 percent of the eligible votes, the Election Interim Regulation requires the Bank to identify additional nominees and conduct elections until the directorship is filled. The Election Interim Regulation permits the Bank's officers, attorneys, employees, agents, Advisory Council, and directors to support the candidacy of the Bank's nominees for independent directorships in either a personal or official capacity.

        The Election Interim Regulation requires each director to be a U.S. citizen, each independent director to be a bona fide resident of the Bank's district, and each member director to be an officer or director of a member of the Bank. No member of the Bank's management is permitted to serve on the board of directors. Eligibility for appointment or election to the board and continuing service on the board is determined in accordance with the Finance Agency's regulations.

        For additional discussion of the Election Interim Regulation, refer to Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Recent Legislative and Regulatory Developments—Interim Final Regulation Regarding Eligibility and Elections of Board of Directors.

        The Bank does not solicit proxies, nor are member institutions permitted to solicit or use proxies to cast their votes in the election. Members are permitted to vote all their eligible shares for one candidate for each open member directorship in the state in which the member is located and for each open independent directorship. A member may not split its votes among multiple nominees for a single directorship. Eligible shares consist of those shares a member was required to hold as of the preceding December 31 subject to the limitation that no member may cast more votes than the average number of shares of Bank stock that are required to be held by all members located in the state to be represented.

        There are no family relationships between any current director (or any of the nominees from the most recent election), any executive officer, and any proposed executive officer. No director or executive officer has an involvement in any legal proceeding required to be disclosed pursuant to Item 401(f) of Regulation S-K.

Directors

        All directors of the Bank serve either a three-year term, in the case of directors elected prior to the Bank's election in the fourth quarter of 2008, or a four-year term, in the case of all other directors, ending on the last day of the third or fourth calendar year, as applicable (including the first full or partial year of service), following the effective date of his or her election or appointment as a director. None of the Bank's directors serve as an executive officer of the Bank.

Member Directors

        The 10 member directors currently serving on the board, who were elected by the Bank's members or were appointed by the board of directors to fill a vacancy among elected directorships, provided the information set forth below regarding their principal occupation, business experience, and other matters.

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Stephen F. Christy, age 59, president and chief executive officer of Mascoma Savings Bank, FSB located in Lebanon, New Hampshire. Mr. Christy has served as a director since January 1, 2002, and his current term as a director expires on December 31, 2010. Mr. Christy has been president and chief executive officer of Mascoma Savings Bank, FSB for the past 18 years.

Steven A. Closson, age 59, president and chief executive officer of Androscoggin Savings Bank, located in Lewiston, Maine. Mr. Closson has served as a director since January 1, 2004, and his current term as a director expires on December 31, 2009. Mr. Closson joined Androscoggin Savings Bank as a senior vice president and treasurer in 1987. He was promoted to president and chief executive officer and elected to the board of directors in 1991.

Arthur R. Connelly, age 64, chairman and chief executive officer of South Shore Savings Bank, located in South Weymouth, Massachusetts. Mr. Connelly has served as a director since January 1, 1997, and his current term as a director expires on December 31, 2009. Mr. Connelly became chairman and chief executive officer of South Shore Savings Bank at its creation in 1997. He also serves as a director of The Savings Bank Life Insurance Company of Massachusetts, a member of the Bank. Mr. Connelly currently serves as chairman of the American Bankers Association. He also served as first vice chairman of America's Community Bankers; and was formerly the chairman of the Government Affairs Steering Committee of America's Community Bankers.

Peter F. Crosby, age 58, president, chief executive officer, and trustee of Passumpsic Savings Bank and president, chief executive officer, and director of Passumpsic Bancorp, located in St. Johnsbury, Vermont. Mr. Crosby joined Passumpsic in 1973. He has served as a director of the Bank since January 1, 2005, and his current term as a director expires on December 31, 2010.

A. James Lavoie, age 62, trustee of Middlesex Savings Bank, located in Natick, Massachusetts. Mr. Lavoie retired from Middlesex Savings Bank after a 32-year career where he had most recently served as chairman, president and chief executive officer from 1996 to 2007. His term as a director commenced on January 1, 2008, and expires on December 31, 2010. Mr. Lavoie also serves as a director of The Savings Bank Life Insurance Company of Massachusetts, which is a member of the Bank. He is the former chair of the Massachusetts Bankers Association and served on the board of the American Bankers Association where he was also chair of the Government Relations Council. He also served for three years as chairman of the Depositors Insurance Fund of Massachusetts.

Mark E. Macomber, age 62, president, chief executive officer and director of Litchfield Bancorp, located in Litchfield, Connecticut. He also serves as a nonvoting, ex-officio director of Northwest Community Bank located in Winsted, Connecticut; and as president and chief executive officer of Connecticut Mutual Holding Company, the mutual holding company for Litchfield Bancorp and Northwest Community Bank. Mr. Macomber became president and chief executive officer of Litchfield Bancorp in March 1994. In addition, Mr. Macomber served as chairman of America's Community Bankers (ACB) through November 2007, and served as director, co-chairman of the nominating committee and member of the executive committee of the American Bankers Association, which was merged with ACB effective December 1, 2007. Mr. Macomber has served as a director since April 16, 2004, and his current term as a director expires on December 31, 2009.

Kevin M. McCarthy, age 61, president and chief executive officer of Newport Federal Savings Bank, located in Newport, Rhode Island. Mr. McCarthy became president and chief executive officer of Newport Federal Savings Bank in June 1993 and has served as a director of Newport Bancorp since its formation in 2006. Mr. McCarthy has served as a director since January 1, 2004, and his term as a director expires on December 31, 2012.

Jan A. Miller, age 58, president, chief executive officer and director of Wainwright Bank & Trust Company, located in Boston, Massachusetts. Mr. Miller is also a director of Heritage Capital Management, Inc., a wholly owned subsidiary of Wainwright Bank & Trust Company. Mr. Miller became president and chief executive officer of Wainwright Bank & Trust Company in 1997. Prior to

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joining Wainwright Bank in 1994, Mr. Miller spent 19 years in various senior management positions at Shawmut Bank, N.A. Mr. Miller has served as a director since January 1, 2004, and his term as a director expires on December 31, 2009. Mr. Miller is a past chairman of the Massachusetts Bankers Association and a member of the American Bankers Association Government Relations Council Administration Committee. Mr. Miller has been elected to serve as chair of the board in 2009.

Edward T. Novakoff, age 45, senior vice president and treasury executive of RBS Citizens, N.A., located in Providence, Rhode Island. Prior to joining RBS Citizens, N.A., in 2006, Mr. Novakoff was senior vice president-treasury and manager of wholesale funding at FleetBoston Financial. His term as a director commenced on January 1, 2009, and expires on December 31, 2012.

R. David Rosato, age 47, senior vice president and treasurer of People's United Bank, located in Bridgeport, Connecticut. His current term as director commenced on April 19, 2007, and will expire on December 31, 2009. Previously, Mr. Rosato was selected by a majority vote to fill a vacancy and served as a director from April 20, 2006, to December 31, 2006. Mr. Rosato joined People's United Bank in November 2007, and was previously the senior vice president and treasurer of Webster Bank, N.A. located in Waterbury, Connecticut, and Webster Financial Corporation, the holding company for Webster Bank. Mr. Rosato joined Webster Bank, predecessor to Webster Bank, N.A., in 1999 as senior vice president and treasurer.

Independent Directors

        Six of the Bank's directors are independent directors, which are directors that are approved by the Finance Agency and elected by plurality vote of eligible shares of the Bank's membership, whose names and similar information are provided below. The independent directors provided the following information about their principal occupation, business experience, and other matters.

Andrew J. Calamare, age 53, has served as president and chief executive officer of the Life Insurance Association of Massachusetts since 2000. Previously, he served as of counsel with the law firm Quinn and Morris, as special counsel to the Rhode Island General Assembly, and as Commissioner of Banks for the Commonwealth of Massachusetts. Mr. Calamare has served as a director since March 30, 2007, and his current term as a director expires on December 31, 2012.

Joan Carty, age 57, of Bridgeport, Connecticut, has served as president and chief executive officer of Housing Development Fund in Stamford, Connecticut, since 1994. She has also served as executive director of Bridgeport Neighborhood Fund, of Bridgeport, Connecticut; Neighborhood Preservation Program, of Stamford, Connecticut; and Neighborhood Housing Services, of Brooklyn, New York. Ms. Carty was appointed to the board for a three-year term commencing on January 1, 2008, and her term as a director expires on December 31, 2010.

Patrick E. Clancy, age 62, has served as president and chief executive officer of the Boston-based nonprofit corporation, The Community Builders, since 1977. Mr. Clancy was previously appointed as a director of the Bank on March 30, 2007 to fill the remainder of a three-year term which expired on December 31, 2007. Mr. Clancy was subsequently reappointed to serve a three-year term commencing on January 1, 2008, and his current term as a director will expire on December 31, 2010.

John T. Eller, age 66, of Newbury, New Hampshire, has served as a director of the New Hampshire Housing Finance Authority since 2007. He is also a principal in the firm NickersonEller LLC, consulting on issues of affordable housing. Previously, he served as senior vice president/director, housing and community investment at the Bank, where he managed the Affordable Housing Program. Mr. Eller's tenure at the Bank was from January of 1991 through July of 2006. Before joining the Bank, he operated an independent consulting firm, and prior to that, served as executive director of the Massachusetts Housing Finance Agency. Mr. Eller was appointed to the board for a three-year term commencing on January 1, 2008, and his term as a director will expire on December 31, 2010.

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John H. Goldsmith, age 67, has been a partner with the Boston-based banking and advisory firm The Roseview Group since 2003. Mr. Goldsmith also serves on the board of directors of Quodd Financial Information Services, and as chairman of the board of directors of AVTV Networks, Inc. He previously served as chairman and chief executive officer of Tucker Anthony Sutro, and as chairman and chief executive officer of Prescott, Ball and Turbin, a Cleveland-based regional financial services firm. Mr. Goldsmith was appointed to the board on March 30, 2007, to fill the remainder of a three-year term which expires on December 31, 2009.

Jay F. Malcynsky, age 55, serves as president and managing partner of Gaffney, Bennett and Associates, Inc., a Connecticut-based corporation specializing in government relations and political consulting. Mr. Malcynsky is also a practicing lawyer in Connecticut and Washington D.C., specializing in administrative law and regulatory compliance. He previously served as a director of the Bank from 2002 to 2004. Mr. Malcynsky has served as a director since March 30, 2007, and his current term as a director expires on December 31, 2012. Mr. Malcynsky has been elected to serve as vice chair of the board in 2009.

Audit Committee Financial Expert

        The Bank has a standing Audit Committee that satisfies the "Audit Committee" definition under Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Andrew J. Calamare, Stephen F. Christy, Patrick E. Clancy, Kevin M. McCarthy, R. David Rosato, and Jan A. Miller, ex officio. The board has determined that Director R. David Rosato is the "audit committee financial expert" within the meaning of the SEC rules. Mr. Rosato is not an auditor or accountant for the Bank, does not perform fieldwork, and is not an employee of the Bank. In accordance with the SEC's safe harbor relating to audit committee financial experts, a person designated or identified as an audit committee financial expert will not be deemed an "expert" for purposes of federal securities laws. In addition, such a designation or identification does not impose on any such person any duties, obligations, or liabilities that are greater than those imposed on such persons as a member of the Audit Committee and board of directors in the absence of such designation or identification and does not affect the duties, obligations, or liabilities of any other member of the Audit Committee or board of directors. See Item 13—Certain Relationships and Related Transactions, and Director Independence for additional information regarding Mr. Rosato's independence.

Report of the Audit Committee

        The Audit Committee assists the board in fulfilling its oversight responsibilities for (1) the integrity of the Bank's financial reporting, (2) the establishment of an adequate administrative, operating, and internal accounting control system, (3) the Bank's compliance with legal and regulatory requirements, (4) the external auditor's independence, qualifications, and performance, (5) the independence and performance of the Bank's internal audit function, and (6) the Bank's compliance with internal policies and procedures. The Audit Committee has adopted, and annually reviews, a charter outlining the practices it follows.

        The Audit Committee has reviewed and discussed the audited financial statements with management, including a discussion of the quality, not just the acceptability, of the accounting principles used, the reasonableness of significant accounting judgments and estimates, and the clarity of disclosures in the financial statements. In addressing the quality of management's accounting judgments, members of the Audit Committee asked for representations and reviewed certifications prepared by the chief executive officer and chief financial officer that the audited financial statements of the Bank present, in all material respects, the financial condition and results of operations of the Bank, and have expressed to both management and auditors their general preference for conservative policies when a range of accounting options is available. In meeting with the independent auditors, the

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Audit Committee asked them to address and discuss their responses to several questions that the Audit Committee believes are particularly relevant to its oversight. These questions include:

•

Are there significant judgments or estimates made by management in preparing the financial statements that would have been made differently had the auditors themselves prepared and been responsible for the financial statements?

•

Based on the auditor's experience, and their knowledge of the Bank, do the Bank's financial statements present fairly, with clarity and completeness, the Bank's financial position and performance for the reporting period in accordance with GAAP and SEC disclosure requirements?

•

Based on the auditor's experience, and their knowledge of the Bank, has the Bank implemented internal controls and internal audit procedures that are appropriate for the Bank?

        The Audit Committee believes that by focusing its discussions with the independent auditors, it promotes a meaningful discussion that provides a basis for its oversight judgments.

        The Audit Committee also discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standard (SAS) No. 114, The Auditors Communication with Those Charged with Governance. The Audit Committee has also received the written disclosures and the letter from the independent auditors required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant's communications with the Audit Committee concerning independence.

        In performing all of these functions, the Audit Committee acts in an oversight role. It relies on the work and assurances of the Bank's management, which has primary responsibility for the financial statements and reports, and of the independent auditors, who, in their report, express an opinion on the conformity of the Bank's annual financial statements to GAAP.

        In reliance on these reviews and discussions, and the report of the independent auditors, the Audit Committee has recommended to the board of directors, and the board has approved, that the audited financial statements be included in the Bank's annual report on Form 10-K for the year ended December 31, 2008, for filing with the SEC.

Audit Committee

Stephen F. Christy, Chair
Andrew J. Calamare*
Patrick E. Clancy*
Kevin M. McCarthy
R. David Rosato
Jan A. Miller (ex officio)

*

Independent Director

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Executive Officers

        The following table sets forth the names, titles, and ages of the executive officers of the Bank:

Name	Title	Age
Michael A. Jessee	President and Chief Executive Officer		62
M. Susan Elliott	Executive Vice President, Member Services		54
Frank Nitkiewicz	Executive Vice President and Chief Financial Officer		48
William L. Oakley	Executive Vice President, Chief Administrative Officer, and Chief Information Officer		59
Janelle K. Authur	Senior Vice President and Executive Director of Human Resources		60
Earl W. Baucom	Senior Vice President and Chief Accounting Officer		62
George H. Collins	Senior Vice President and Chief Risk Officer		49
William P. Hamilton	Senior Vice President, Director of Public Affairs		53
Ellen M. McLaughlin	Senior Vice President, General Counsel, and Corporate Secretary		57

Michael A. Jessee has been president and chief executive officer of the Bank since May 1989. Before that, he served 12 years with the FHLBank of San Francisco as executive vice president and chief operating officer; executive vice president, economics and corporate policy; senior vice president and chief economist; and assistant vice president and director of research. Mr. Jessee also worked as an economist with the Federal Reserve Bank of New York and in corporate planning and correspondent banking with the Bank of Virginia. He currently serves as chairman, board of trustees, State Street Navigator Securities Lending Trust; trustee, Randolph-Macon College; and director, Pentegra Defined Benefit Plan for Financial Institutions. He holds a Ph.D., M.A., and M.B.A. from the Wharton School at the University of Pennsylvania, and a B.A. from Randolph-Macon College.

M. Susan Elliott has been executive vice president of member services of the Bank since January 1994. She previously served as senior vice president and director of marketing from August 1992 to January 1994. Ms. Elliott joined the Bank in 1981. Ms. Elliott holds a B.S. from the University of New Hampshire and an M.B.A. from Babson College.

Frank Nitkiewicz has served as executive vice president and chief financial officer since January 1, 2006. Prior to this position, he was senior vice president, chief financial officer, and treasurer of the Bank from August 1999 until December 31, 2005, and senior vice president and treasurer from October 1997 to August 1999. Mr. Nitkiewicz joined the Bank in 1991. He holds an M.B.A. from the Kellogg Graduate School of Management at Northwestern University and a B.S. and a B.A. from the University of Maryland.

William L. Oakley has served as executive vice president, chief administrative officer, and chief information officer of the Bank since November 1, 2006, and was hired as senior vice president and chief information officer in May 2004. Mr. Oakley came to the Bank from John Hancock Financial Services, Inc., where he served as vice president and chief technology officer from November 1996 to April 2004. Prior to his employment with John Hancock, he served as vice president, treasurer, and founding manager of American Business Insurors Corporation; vice president of technology services at United States Fidelity & Guaranty Company; senior vice president with Fidelity Investments; and vice president at American Fletcher National Bank. Mr. Oakley received his B.S. in computer technology from Purdue University.

Janelle K. Authur has served as senior vice president and executive director of human resources since November 1, 2006, and was hired as first vice president and executive director of human resources in September 2005. Prior to employment at the Bank, Ms. Authur served as a consultant and principal of The Ledgefield Group, LLC, and was director of labor and employee relations for the

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University of Massachusetts Medical School from April 2000 to April 2004. Ms. Authur also served as human resources manager and director of human resources for The Blade Newspaper. Ms. Authur holds a B. S. in education from the University of Texas at Austin. She has been certified as a Professional in Human Resources (PHR) since 1996.

Earl W. Baucom has served as senior vice president and chief accounting officer since November 1, 2006, and was hired as first vice president and chief accounting officer in October 2005. Prior to joining the Bank, he worked for six years as senior vice president and controller for John Hancock Financial Services, Inc. Prior to John Hancock, he served as senior vice president and chief financial officer of Franklin Life Insurance Company; senior vice president and chief financial officer of National Liberty Corporation; and senior manager with Ernst & Young. Mr. Baucom is a certified public accountant and earned a B.S. in Accounting from the University of North Carolina-Charlotte.

George H. Collins has served as senior vice president and chief risk officer since November 1, 2006. He previously served as first vice president, director of market risk management from 2005 to 2006. Mr. Collins joined the Bank in July 2000 as vice president and assistant treasurer. He holds a B.S. in applied mathematics and economics from the State University of New York at Stony Brook.

William P. Hamilton has been senior vice president and director of public affairs of the Bank since June 2000. Prior to his employment with the Bank, he served for seven years as vice president and director of external affairs for the FHLBank of Seattle. Mr. Hamilton holds a J.D. from George Washington University's National Law Center and a B.A. from Washington State University. He is also a member of the Washington State Bar Association.

Ellen M. McLaughlin has been senior vice president, general counsel, and corporate secretary of the Bank since August 2004. She previously served as vice president, associate general counsel from 2000 to July 2004. Ms. McLaughlin joined the Bank in 1990. She earned a J.D. from Suffolk University Law School and an L.L.M. from Boston University School of Law. She is a member of the Massachusetts Bar Association.

Employment Arrangements

        The Bank has no employment arrangements with any executive officer or director.

Code of Ethics and Business Conduct

        The Bank has adopted a Code of Ethics and Business Conduct that sets forth the guiding principles and rules of behavior by which we operate the Bank and conduct our daily business with our customers, vendors, shareholders and with its employees. The Code of Ethics and Business Conduct applies to all of the directors and employees of the Bank, including the chief executive officer, chief financial officer, and chief accounting officer of the Bank and to all other professionals serving in a finance, accounting, treasury, or investor-relations role. The purpose of the Code of Ethics and Business Conduct is to promote honest and ethical conduct and compliance with the law, particularly as related to the maintenance of the Bank's financial books and records and the preparation of its financial statements. The Code of Ethics and Business Conduct can be found on our web site (www.fhlbboston.com). All future amendments to, or waivers from, the Code of Ethics and Business Conduct will be posted on our web site. The information contained within or connected to our web site is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this or any report filed with the SEC.

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ITEM 11.    EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Executive Summary

        The Bank attracts, rewards, and retains senior managers, including its president, chief financial officer, and three other most highly-compensated executive officers (the Named Executive Officers), by offering a total rewards package that includes base salary as a core component, annual cash incentives, qualified and nonqualified retirement plans, and certain perquisites. Compensation program objectives are defined in the Bank's Total Rewards Philosophy which was used to determine total rewards packages for the Named Executive Officers for 2008. Total rewards packages, including base salary, cash incentives, and retirement plans, were set comparable to the median total rewards package for matched positions in the appropriate peer group, with flexibility to pay above or below the market median for tenure, performance, and experience. Cash incentive compensation, an element of total compensation providing the Personnel Committee flexibility to adjust total compensation based on the Personnel Committee's assessment of the Bank's and each Named Executive Officer's final goal achievement, is determined in accordance with the 2008 Executive Incentive Plan. As discussed later in this Item under Determination of 2008 Awards, the Personnel Committee awarded no or low amounts of cash incentive compensation compared with the potential cash payouts under the 2008 Executive Incentive Plan to the Named Executive Officers primarily based on the large growth throughout 2008 in unrealized losses on the Bank's held-to-maturity portfolio of private-label MBS and related need to preserve and build capital, each as further discussed in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A—Quantitative and Qualitative Disclosures about Market Risk.

The Bank's Compensation Committee

        Pursuant to a charter approved by the Bank's board of directors, the Personnel Committee (the Committee) assists the board of directors in developing and maintaining personnel and compensation policies that support the Bank's business objectives. The Committee sets the compensation philosophy for the Bank, including that of the Named Executive Officers. The Committee also reviews and recommends to the board of directors, for its approval, human resources policies and plans applicable to the compensation philosophy, such as compensation, benefits, and incentive plans and including plans in which the Named Executive Officers participate.

Personnel Committee

Mark E. Macomber, Chair
A. James Lavoie, Vice Chair
Joan Carty
Steven A. Closson
Arthur R. Connelly
Jay F. Malcynsky
Jan A. Miller (ex officio)

Compensation Committee Interlocks and Insider Participation

        No member of the Committee has at any time been an officer or employee of the Bank. None of the Bank's executive officers has served or is serving on the Bank's board of directors or the compensation committee of any entity whose executive officers served on the Committee or the Bank's board of directors.

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Objectives of the Bank's Compensation Program and What it is Designed to Reward

        The Bank is committed to attracting, rewarding, motivating, and retaining highly skilled executive officers, including the Named Executive Officers, who make significant contributions to the success of the business of the Bank.

        In 2006, the Bank, with the approval of the Committee and board of directors, retained McLagan Partners (McLagan), a compensation consulting firm specializing in the financial services industry, to assist with a comprehensive total rewards study. A major outcome of the study was the adoption of a "Total Rewards Philosophy" for the Bank. The board approved the Total Rewards Philosophy in November 2006, and its principles were used in determining 2007 and 2008 total compensation for the Named Executive Officers.

        The Total Rewards Philosophy defines goals, the Bank's competitive market and peer groups, components and comparability of the total rewards package, performance evaluation and compensation, and responsibility for administration and oversight of the Bank's compensation and benefits programs. The Committee and board of directors are responsible for periodically reviewing the Total Rewards Philosophy to ensure consistency with the Bank's overall business objectives, the competitive market, and the Bank's financial condition.

        The Bank's Total Rewards Philosophy is designed to provide a total compensation and benefits package for employees, including the Named Executive Officers, that:

•

directly links total rewards opportunities to the Bank's mission, annual and long-term business strategies, and a combination of Bank, business unit/team and individual performance objectives;

•

is competitive in the marketplace in which the Bank competes and therefore enables the Bank to attract, retain, motivate, and reward talent,

•

delivers an optimal mix of compensation and benefits to maximize the total value derived and perceived by different employee groups while maximizing the cost-effectiveness to the Bank; and

•

is tailored to the unique cooperative structure of the Bank and the FHLBank System.

        The labor market in which the Bank competes for senior managers, including the Named Executive Officers, is far broader in scope than only the FHLBank System or other GSEs, such as Fannie Mae and Freddie Mac. In fact, the local financial services labor market is dominated by high-paying asset-management firms as many of the sizeable northeastern U.S. banks, a traditional source of senior management, have been acquired by larger financial institutions. The Bank recognizes that it must be positioned to offer a nationally competitive compensation package to Named Executive Officers to ensure that it can acquire and retain talent with the specialized skills needed to maintain profitable growth while managing the complex risks of a wholesale lending and mortgage-purchase operation. When setting compensation levels, the Bank is also cognizant of the high cost of living in the Boston area.

        The Total Rewards Philosophy defines two primary competitive peer groups for the Named Executive Officers, including commercial/regional banks and the FHLBank System. Both peer groups are considered in setting the total rewards package, with the FHLBanks as the primary peer group for determining the proportionate mix of pay and benefits. While all of the FHLBanks share the same mission, they may differ in their relative mix of services and are scattered among urban and smaller-city locations, which impacts labor-market competition and compensation by individual FHLBank. However, due to the FHLBank System's unique cooperative structure, all of the FHLBanks in the FHLBank System must rely on a total rewards package for Named Executive Officers of base salary, cash incentives, and benefits only, since none can offer equity-based compensation opportunities such as those offered at their non-FHLBank competitors.

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        The second primary peer group, commercial/regional banks, serves as a relevant comparator group for competitive positioning of the total rewards package for those Bank positions requiring financial services experience, including the Named Executive Officers. The commercial/regional bank peer group focuses on large and mid-sized commercial/regional banks but excludes large global investment banks and securities firms. The Bank and commercial banks engage in wholesale lending and share similarities in several functional areas, particularly middle-office and support areas, but with a marked difference between the two in capital-market activities and market risk. The commercial bank peer group consists mostly of banks with multiple product lines/offerings and significant assets. Regional banks are most similar to the Bank in terms of product offerings, complexity, and assets and most closely align with the size and scope of responsibility at the Bank.

Elements of the Bank's Compensation Plan and Why Each Element is Selected

        The Bank provides total compensation to the Named Executive Officers through a package that consists of a mix of base salary, awards under annual cash incentive plans, qualified and nonqualified retirement plans, and various other health and welfare benefits, that is, total rewards. Due to its cooperative structure, the Bank cannot offer equity-based compensation programs, so it has used higher base salaries, an annual cash award, and strong retirement benefits to keep its compensation packages competitive relative to the market and to replace some of the value of compensation that competitors might offer through equity-based compensation programs. The Named Executive Officers may also be provided with certain additional perquisites.

        The Total Rewards Philosophy states that the Bank's total rewards package, including that for Named Executive Officers, should be comparable to the median total rewards package for matched positions in the appropriate peer group, with flexibility to pay above or below the market median for tenure, performance, and experience. In general, the Committee set 2008 base salaries for each of the Named Executive Officers so that their total rewards package of base salary, cash incentives, and retirement plans would be comparable to the median total rewards package at the commercial/regional bank peer group, including base salary and short- and long-term incentives, and so that their total cash compensation, that is, base salary plus short-term incentives, would be comparable to the median total cash compensation of the Named Executive Officer's peers at other FHLBanks, particularly the Atlanta, Chicago, Dallas, New York, and San Francisco FHLBanks since these FHLBanks are also located in high cost of living urban areas. The Committee considered median total cash compensation at the other FHLBanks as the comparator since it includes base salaries and short- and long-term cash incentives, but does not consider the value of retirement plans since they are generally of similar value across the FHLBank System.

Base Salary

        Base salary is the core component of the compensation program. Base salary adjustments for all Named Executive Officers are considered at least annually as part of the yearend annual performance review process and more often if considered necessary by the Committee during the year, such as in recognition of a promotion or to ensure internal equity.

        In 2007, the Bank participated in the 2007 Federal Home Loan Bank Survey, a proprietary survey conducted by McLagan, on behalf of the FHLBanks. The Bank also worked with McLagan to match several of the positions held by the Named Executive Officers to comparable positions in the commercial/regional banks peer group of McLagan's proprietary 2007 Finance and Business Services Survey. Named Executive Officer positions were matched to those survey positions which represented realistic job opportunities based on scope, similarity of positions, experience, complexity, and responsibilities. Realistic job opportunities included positions that the Named Executive Officers would be qualified for at the external firm as well as positions at the firm that the Bank would consider when recruiting for experienced executives. This approach generally resulted in the Bank comparing the Named Executive Officers to divisional rather than overall heads of businesses and functions.

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        In addition to the McLagan survey data, the Committee reviewed market data from the annual FHLBank System survey of key positions in determining and recommending 2008 base salaries for all of the Named Executive Officers, including Mr. Jessee. The Committee also considered Mr. Jessee's recommendation for his direct reports, individual performance, tenure, experience, and complexity of the Named Executive Officer's position in setting 2008 base salaries. In 2007, Mr. Jessee recommended, and several of the other Named Executive Officers received, significant adjustments to base salary as a result of the Bank's re-organization and promotions that increased each such Named Executive Officer's responsibility and authority. Mr. Jessee only recommended merit increases for the other Named Executive Officers for 2008. Adjustments to base salary for all Named Executive Officers were effective January 1, 2008.

        The following is a representative, consolidated list of survey participants that were included by McLagan in the commercial/regional banks peer group.

Aareal Capital Corporation	Credit Industriel et Commercial	Nord/LB
Australia & New Zealand Banking Group	Dexia	Nordea Bank
Banco Bilbao Vizcaya Argentaria	DVB Bank	PNC Bank
Bank Hapoalim	DZ Bank	Rabobank Nederland
Bank of America	Eurohypo AG	Regions Financial Corporation
Bank of China	Fannie Mae	Royal Bank of Canada
Bank of Ireland Corporate Banking	Fifth Third Bank	Royal Bank of Scotland (Including ABN Amro)
Bank of Scotland	First Tennessee Bank/ First Horizon	Skandinaviska Enskilda Banken
Bank of the West	Fortis Financial Services LLC	Societe Generale
Bank of Tokyo - Mitsubishi UFJ	Freddie Mac	Sovereign Bank
Bayerische Landesbank	GE Commercial Finance	Standard Bank
BMO Financial Group	Glitnir	Standard Chartered Bank
BNP Paribas	GMAC	State Street Bank & Trust Company
BOK Financial Corporation	HSBC Bank	Sumitomo Mitsui Banking Corporation
Branch Banking & Trust Co.	HSBC Global Banking and Markets	SunTrust Banks
Brown Brothers Harriman & Co.	Hypo Vereinsbank	TD Securities
Calyon	ING	The Bank Of New York Mellon
Capital One	JP Morgan Chase	The Bank of Nova Scotia
CIBC World Markets	KBC Bank	The CIT Group
Citigroup	KeyCorp	The Northern Trust Corporation
Citizens Bank	Landesbank Baden-Wuerttemberg	The Sumitomo Trust & Banking Co., Ltd.
City National Bank	Lloyds TSB	U.S. Bancorp
Cohen & Steers	M&T Bank Corporation	Union Bank of California
Colonial Savings, FA	Marshall & Ilsley Corporation	Wachovia Corporation
Comerica	Mitsubishi UFJ Trust & Banking Corporation (USA)	Washington Mutual
Commerzbank	Mizuho Corporate Bank, Ltd.	Wells Fargo Bank
Compass Bancshares, Inc.	National Australia Bank	Westpac Banking Corporation
Countrywide Financial Corp.	Natixis

        Benchmarking data from international banks only contained results from their U.S. operations.

Executive Incentive Program (EIP)

Plan Design

        The EIP is an annual cash-incentive plan designed to promote achievement of the Bank's financial plan and strategic objectives by aligning annual cash incentive opportunities for the Bank's corporate officers, including the Named Executive Officers, with the Bank's short-term financial performance and strategic direction. The level of awards made under the EIP is intended to provide, when considered together with the Named Executive Officer's base salary and other components of the total rewards

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package, a total annual compensation amount for the Named Executive Officers that is competitive with other financial institutions, including other FHLBanks, in the employment markets in which the Bank competes. Awards under the EIP are also designed to facilitate retention and commitment of key executives.

        The EIP is subject to annual review and approval by the board of directors, including determination of its plan design, specific goals, achievement level, and weighting of each, participation, administration, and payout opportunities. The Committee administers the EIP and has full power and binding authority to construe, interpret, and administer and adjust the EIP during or at the end of the plan year for extraordinary circumstances. Extraordinary circumstances may include changes in business strategy, termination or commencement of business lines, impact of severe economic fluctuations, significant growth or consolidation of the membership base, or significant regulatory or other changes impacting the Bank or FHLBank System.

        Annual financial and nonfinancial goals are derived from the Bank's strategic business plan and are generally weighted by tier based on desired business outcomes and/or the Named Executive Officer's ability to impact the achievement of the goal. The goal achievement levels are generally set to ensure that the relative difficulty of achieving the target (that is, middle achievement level) is consistent from year to year. Specific threshold, target, and excess goal achievement levels are developed during the annual strategic planning and forecasting process. During this process, management assesses the external and internal outlook for the upcoming year, including scenario analysis of environmental factors, member needs and expectations, advances growth trends, return on equity, income forecasts, and operating expenses. Depending on the annual plan design, management also identifies Bank-wide operational initiatives that are key in the Bank's growth, profitability, and risk management, and in member service, trust, and confidence, or individual, department-specific operational initiatives and projects that contribute to the success of the Bank. Target growth and financial performance levels reflect an underlying assumption that management executes the Bank's business plan as approved by the board, and are assumed to be dependent on management's decisions and actions relative to the business plan. Goals may be modified during the plan year with the approval of the Committee.

        All participants are grouped into one of three tiers based on position within the organization. Participants are eligible to receive differing levels of incentive award payouts based on their assigned tier. The chief executive officer is in the president's tier and all other Named Executive Officers are in tier I.

Incentive Goals and Payouts

        In December 2007, the board appointed a six-member subcommittee to review the design of the EIP and retained McLagan to advise them. Representatives from McLagan interviewed members of the subcommittee and provided a written analysis of the plan and recommendations to the group and the Committee. The Committee subsequently requested that management make certain revisions to the EIP for 2008 (the 2008 EIP), including revisions to the profitability goal and the weight of certain other goals.

        The 2008 EIP includes annualized goals for the Named Executive Officers, including goals for profitability, business growth, and regulatory examination results, and a discretionary component.

•

The profitability goal is based on the spread by which the Bank's return on average equity exceeds the daily average of the bond-equivalent yield of three-month LIBOR. However, no payout based on this goal is awarded unless the Bank achieves at least 85 percent of projected net income as per the Bank's 2008 strategic business plan, which amounted to $148.6 million. This goal was not achieved in 2008. The profitability goal metric is based on a non-GAAP measure of profitability. This goal's profitability metric is the spread by which the Bank's return on average equity exceeds the daily average of the bond-equivalent yield of three-month LIBOR,

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excluding the impact of REFCorp and AHP payments, gains (losses) on debt retirement, net prepayment fees, net unrealized gains (or losses) attributable to hedges, and net gains (or losses) on trading securities. The difference between GAAP return on equity and this profitability metric is that GAAP return on equity does not provide for the exclusions described in the immediately prior sentence. The weight of this goal is 25 percent of yearend 2008 base salary for the president tier and 20 percent of yearend 2008 base salary for tier I participants, which includes the other Named Executive Officers.

•

The business growth goals included growth targets in average credit extensions to members and advances to community development organizations. The weight of this goal is 30 percent of yearend 2008 base salary for the president tier and 25 percent of yearend 2008 base salary for tier I participants, which includes the other Named Executive Officers.

•

The regulatory examination results goal is based on the Finance Agency's examination report of the Bank and provides the Committee flexibility to reduce or eliminate payout under the 2008 EIP based on adverse findings in that report occurring in the individual participant's areas of responsibility. The weight of this goal is 15 percent for all Named Executive Officers.

        The 2008 EIP also includes a discretionary component, which gives the Committee the opportunity to differentiate compensation awards among the Named Executive Officers. The discretionary component's weight is 30 percent of yearend 2008 base salary for the president tier and 40 percent of yearend 2008 base salary for tier I participants, which includes the other Named Executive Officers. The discretionary component considers the participant's contributions in areas such as the achievement of the individual and department-specific operational initiatives established at the beginning of the plan year, expense control and operational efficiency, risk management and control, board of directors communication, and succession planning. Further, the discretionary component considers the participant's leadership, work ethic, attitude, or other such similar intangible attributes that contribute to the Bank's success. The 2008 EIP allows pro rata incentive awards for participants who terminate during the plan year and are eligible to retire at that time, subject to the discretion of the Bank's chief executive officer and the Committee, achievement of plan goals, and certain service criteria.

        Potential cash payouts under the 2008 EIP, expressed as a percentage of yearend 2008 base salary of the Named Executive Officers, were as follows:

Name	Tier	Threshold			Target			Excess
Michael A. Jessee	President		25.00	%		50.00	%		75.00	%
Frank Nitkiewicz	I		18.75	%		37.50	%		56.25	%
M. Susan Elliott	I		18.75	%		37.50	%		56.25	%
William L. Oakley	I		18.75	%		37.50	%		56.25	%
Earl W. Baucom	I		18.75	%		37.50	%		56.25	%

Determination of 2008 Awards under 2008 EIP

        At the end of the plan year, the final profitability and business-growth results are calculated by the Bank's staff and approved by management. Mr. Jessee reviews supporting documentation and (except in the case of his own award) determines the Named Executive Officer's appropriate discretionary award recommendation. Mr. Jessee bases his recommendation for the discretionary component of the 2008 EIP based on his evaluation of the Named Executive Officer's individual and department-specific goals and review of the factors considered for the discretionary component, as described earlier in this Item under Incentive Goals and Payouts. Finally, Mr. Jessee prepares a self-evaluation of the Bank's and his personal annual achievements and submits it to the Committee for consideration in determining his award. The final award amount is approved by the Committee and board of directors after the end of the plan year, based on their evaluation of the Bank's and the Named Executive Officer's

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achievement of the stated goals. As part of this process, the Bank's internal auditor confirms final financial results and reviews supporting documentation for the nonfinancial discretionary component.

        For 2008, the Committee exercised its authority to interpret and adjust the plan at the end of the plan year for extraordinary circumstances as permitted under the 2008 EIP, as described earlier in this Item under Plan Design, and determined that individual 2008 EIP awards for all participants, including the Named Executive Officers would be capped at 10 percent of yearend 2008 base salary. The Committee further determined that Mr. Jessee and Mr. Nitkiewicz would receive no 2008 EIP award. The Committee primarily based these determinations on the large growth throughout 2008 in unrealized losses on the Bank's held-to-maturity portfolio of private-label MBS and related need to preserve and build capital, each as further discussed in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A—Quantitative and Qualitative Disclosures about Market Risk.

        In connection with the Finance Agency's requirements, as described in this Item under Finance Agency Oversight—Executive Compensation, the Bank submits proposed incentive awards to the Finance Agency for a four-week review period prior to final action by the board of directors approving any awards. Awards were paid at the expiration of the four-week period and following final approval by the board of directors.

Retirement and Deferred Compensation Plans

        The Bank offers participation in qualified and nonqualified retirement plans to the Named Executive Officers as key elements of its total rewards package. The benefits received under these plans are intended to enhance the competitiveness of the Bank's total compensation and benefits relative to the market by complementing the Named Executive Officers' base salary and annual cash incentive awards. The Bank maintains four retirement plans in which the Named Executive Officers participate, including:

•

Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra Defined Benefit Plan), a funded, tax-qualified, noncontributory plan that provides retirement benefits for all eligible Bank employees;

•

Pension Benefit Equalization Plan (the Pension BEP), a nonqualified, unfunded defined benefit plan covering certain senior officers, as defined in the plan, and in which participation is approved by the Committee and board of directors and includes the Named Executive Officers;

•

Pentegra Defined Contribution Plan for Financial Institutions (the Pentegra Defined Contribution Plan), a 401(k) thrift plan, under which the Bank matches employee contributions for all eligible employees; and

•

Thrift Benefit Equalization Plan (the Thrift BEP), a nonqualified, unfunded defined contribution plan with a deferred compensation feature, which is available to the Named Executive Officers, other senior officers, and directors of the Bank.

        The Committee believes that the Thrift BEP, together with the Pension BEP, provide additional retirement benefits that are necessary for the Bank's total rewards package to remain competitive, particularly compared with competitors who may offer equity-based compensation and/or long-term incentives. Additional information regarding these plans can be found with the Pension Benefits and Nonqualified Deferred Compensation tables below.

Perquisites

        Taxable fringe benefits and perquisites for the Named Executive Officers may include the value of financial planning services, supplemental life insurance (all but Mr. Baucom), automobile and airline

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memberships, employee use of Bank automobiles, spouse travel during Bank business, and parking. Mr. Jessee is also eligible for club memberships and the personal use of a Bank automobile. Mr. Jessee was also eligible for medical expenses reimbursement until March 14, 2008, when the board of directors standardized health benefits for the Bank's officers, including the Named Executive Officers, by eliminating the payment of such reimbursements. The Committee believes that the perquisites offered to the Named Executive Officers are reasonable and are necessary for the Bank's total compensation package to remain competitive.

How the Bank Determines the Amount for Each Element of the Bank's Compensation Plan

        In the case of the chief executive officer, the Committee sets annual goals and objectives. At the end of the year, the chief executive officer provides the Committee with a self-assessment of his corporate and individual achievements. Based on the Committee's evaluation of his performance and review of competitive market data for defined peer groups, the Committee determines and recommends an appropriate total compensation and benefits package to the board of directors for approval. In the case of other Named Executive Officers, the chief executive officer reviews the individual's performance and submits market data and recommendations to the Committee regarding appropriate compensation. The Committee reviews these recommendations and submits its recommendations to the full board of directors. The board of directors reviews the recommendations and approves the compensation it considers appropriate.

        The Committee does not set specific, predetermined targets for the allocation of total rewards between base salary, annual cash incentives, and benefits, including retirement and other health and welfare plans and perquisites. Rather, the Committee considers the value and mix of the total rewards package offered to each Named Executive Officer compared with the total rewards package for positions of comparable scope, responsibility, and complexity at the two defined peer groups, the incumbent's experience, tenure, performance, and internal equity.

Finance Agency Oversight—Executive Compensation

        Section 1113 of HERA requires that the Director prevent an FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. In October 2008, the Finance Agency directed the FHLBanks to submit all compensation actions involving a Named Executive Officer to the Finance Agency for review at least four weeks in advance of any planned board of director decision with respect to those actions. Compensation decisions for all of the Bank's Named Executive Officers require board of director action. Accordingly, in December 2008 and January 2009 the Bank submitted proposed 2009 base salary increases and 2008 incentive awards, respectively, to the Finance Agency for the four-week review period prior to final action by the board of directors. Base salary increases were implemented retroactive to January 1, 2009, and incentive awards were paid at the expiration of the four-week period and following final approval by the board of directors. At this time, the Bank does not expect Section 1113 of HERA or related Finance Agency actions to have a material impact on the Bank's executive compensation plans. In addition to Section 1113 of HERA, the Finance Agency has promulgated certain regulations that may impact Named Executive Officer compensation, including a regulation regarding golden parachute payments and a proposed regulation on indemnification payments, each of which are discussed in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Recent Legislative and Regulatory Developments.

Employment Status and Severance Benefits

        Pursuant to the FHLBank Act, the Bank's employees, including the Named Executive Officers as of December 31, 2008, are "at will" employees. Each may resign his or her employment at any time

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and the Bank may terminate his or her employment at any time for any reason or no reason, with or without cause and with or without notice. Under the Bank's severance policy, as revised and approved by the board of directors in February 1997, all regular full- and part-time Bank employees who work at least 1,000 hours per year whose employment is terminated involuntarily, or by mutual agreement for reasons other than "cause," are provided with severance packages reflecting their status in the organization and tenure with the Bank. The severance policy does not constitute a contractual relationship between the Bank and the Named Executive Officers, and the Bank reserves the right to modify, revoke, suspend, terminate, or change the severance policy at any time without notice.

        In consideration of this benefit, individuals agree to execute a general release of the Bank. In addition and at its sole discretion, the Bank may provide outplacement, extended benefits, counseling, and/or such other services as may assist in ensuring a smooth career transition. Any of these variations would require the approval of the chief executive officer.

        As chief executive officer, Mr. Jessee is eligible for 12 months of base pay under the severance policy. Based on their status as executive officers of the Bank, Mr. Nitkiewicz, Ms. Elliott, Mr. Oakley, and Mr. Baucom are eligible for a minimum of six months and a maximum of 12 months, of base pay under the severance policy, depending on tenure of employment at the Bank. All severance packages for executive officers, including the Named Executive Officers, must have the approval of the chief executive officer and the Committee prior to making any award under the severance policy.

        On January 7, 2009, the Bank announced that Mr. Jessee would retire effective April 30, 2009, and the board and Mr. Jessee entered into an agreement, attached as Exhibit 10.8 to this annual report on Form 10-K, which provided for 18 months of salary continuation at his 2008 rate of base pay (an extension of six months more than Mr. Jessee is already entitled under the severance policy) following his resignation. This agreement provided additional perquisites aggregating $51,000, which includes the board's agreement to continue to either pay Mr. Jessee or pay on Mr. Jessee's behalf an amount equal to the same percentage of the insurance premium for the Bank's group health plan for coverage equivalent to that provided at yearend 2008 until Mr. Jessee reaches age 65, a benefit worth approximately $44,000. Mr. Jessee was also provided with a new computer and a payment to partially defray professional fees incurred in the review of the agreement. The agreement also contains standard confidentiality obligations and a non-disparagement agreement on behalf of both Mr. Jessee and the Bank.

Compensation Committee Report

        The Committee serves as the Bank's Compensation Committee. As such, we have reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K and based on our review and discussion, we recommended to the board of directors that the Compensation Discussion and Analysis be included in the Bank's annual report on the Form 10-K for the fiscal year ending December 31, 2008.

Executive Compensation

        The following table sets forth all compensation received from the Bank for the year ended December 31, 2008, 2007, and 2006, by the Bank's Named Executive Officers.

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Summary Compensation Table for 2008, 2007 and 2006

Name and Principal Position		Year		Salary(1)		Bonus		Non-equity Incentive Plan compensation(2)		Change in Pension Value and Nonqualified Deferred Compensation Earnings(3)		All Other Compensation(4)		Total
Michael A. Jessee			2008	$	630,000	$	—	$	—	$	1,437,000	$	110,847	$	2,177,847
	President and		2007		600,000		22,500		350,880		742,000		100,646		1,816,026
	Chief Executive Officer		2006		569,250		38,045		261,955		539,000		98,043		1,506,293
Frank Nitkiewicz			2008		305,000		—		—		210,000		27,453		542,453
	Executive Vice President		2007		290,000		—		119,761		77,000		24,175		510,936
	and Chief Financial		2006		250,000		—		83,000		57,000		22,610		412,610
	Officer
M. Susan Elliott			2008		284,000		—		28,400		359,000		28,637		700,037
	Executive Vice President		2007		270,000		—		127,281		151,000		24,293		572,574
	Member Services		2006		229,667		—		77,024		91,000		25,588		423,279
William L. Oakley			2008		284,000		—		28,400		135,000		34,693		482,093
	Executive Vice President,		2007		270,000		—		111,502		76,000		31,149		488,651
	Chief Administrative		2006		224,900		—		74,667		54,000		15,026		368,593
	Officer and Chief Information Officer
Earl W. Baucom			2008		246,500		—		22,979		93,000		11,231		373,710
	Senior Vice President and		2007		235,000		—		97,048		112,000		8,680		452,728
	Chief Accounting Officer		2006		213,333		—		54,341		6,000		6,642		280,316

(1)

Amounts shown are not reduced to reflect the Named Executive Officers' elections, if any, to defer receipt of salary into a defined contribution plan or the Thrift BEP.

(2)

Represents amounts paid under the Bank's Executive Incentive Plan during 2009 in respect of service performed in 2008, during 2008 in respect of service performed in 2007, and during 2007 in respect of service performed in 2006. Amounts shown are not reduced to reflect the Named Executive Officers' elections, if any, to defer receipt of compensation into the Thrift BEP. In 2006, Mr. Baucom was a Tier II participant as a first vice president. With Mr. Baucom's promotion to senior vice president in November 2006, the board of directors approved his participation in Tier I for the 2007 plan year. His increased incentive compensation amounts reflect this tier change. In 2007, the annual cash payout potential was increased to maintain a competitive total rewards package based on a recommendation from McLagan.

(3)

The amounts shown reflect the actuarial increase in the present value of the Named Executive Officer's benefits under all pension plans established by the Bank determined using interest-rate and mortality-rate assumptions consistent with those used in the Bank's financial statements and includes amounts which the Named Executive Officer may not currently be entitled to receive because such amounts are not vested. No amount of above market earnings on nonqualified deferred compensation is reported because above market rates are not possible under the Thrift BEP, the only such plan offered by the Bank.

(4)

See the Other Compensation Table below for amounts, which include the Bank match on employee contributions to the Thrift BEP and 401(k) plans, insurance premiums paid by the Bank with respect to term-life insurance, and perquisites. All other compensation for the year ending December 31, 2006, includes the Bank match on voided deferrals.

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Other Compensation Table

Name	Year		Contributions to Defined Contribution Plans(a)(c)		Insurance Premiums		Perquisites(b)		Bank Match on Voided Deferrals(d)		Total
Michael A. Jessee		2008	$	60,203	$	7,960	$	42,684	$	—	$	110,847
		2007		54,000		7,110		39,536		—		100,646
		2006		38,634		6,510		39,279		13,620		98,043
Frank Nitkiewicz		2008		25,486		1,967		—		—		27,453
		2007		22,380		1,795		—		—		24,175
		2006		16,382		1,645		—		4,583		22,610
M. Susan Elliott		2008		24,677		3,960		—		—		28,637
		2007		20,821		3,472		—		—		24,293
		2006		18,183		3,049		—		4,356		25,588
William L. Oakley		2008		17,798		6,363		10,532		—		34,693
		2007		13,040		5,943		12,166		—		31,149
		2006		7,378		5,460		—		2,188		15,026
Earl W. Baucom		2008		11,231		—		—		—		11,231
		2007		8,680		—		—		—		8,680
		2006		6,492		—		—		150		6,642

(a)

Amounts include Bank contributions to the 401(k) plan, as well as contributions to the Thrift BEP. Contributions to the Thrift BEP are also shown in the Nonqualified Deferred Compensation Table below.

The Pentegra Defined Contribution Plan, a 401(k) thrift plan, excludes hourly, flex staff, and short-term employees from participation, but continues to include all other Bank employees. Employees may elect to defer one percent to 50 percent of their plan salary, as defined in the plan document. The Bank makes contributions based on the amount the employee contributes, up to the first three percent of plan salary, multiplied by the following factors:

•

100 percent during the second and third years of employment.

•

150 percent during the fourth and fifth years of employment.

•

200 percent upon completion of five or more years of employment.

Participant deferrals are limited on an annual basis by Internal Revenue Code (IRC) rules. For 2008, the maximum elective deferral amount was $15,500 (or $20,500 per year for participants who attain age 50 in 2008), and the maximum matching contribution under the terms of the Pentegra Defined Contribution Plan was $13,800 (three percent multiplied by two multiplied by the $230,000 compensation limit). As of the date of the Form 10-K, all of the Named Executive Officers participate in the Pentegra Defined Contribution Plan.

A description of the Thrift BEP follows the Nonqualified Deferred Compensation Table.

(b)

Amount for Mr. Jessee includes the following perquisites: financial planning services, personal use of Bank-provided vehicles, club membership dues, medical expense reimbursements until March 24, 2008, and spousal travel expenses. Amount for Mr. Oakley includes the following perquisites: financial planning services, parking, and spousal travel expenses. In March 2008, the board of directors agreed to standardize health benefits for the Bank's officers, including the Named Executive Officers, by eliminating the reimbursement of medical expenses.

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(c)

In early 2006, the Bank was advised by outside legal counsel that participant elective deferrals of 2005 performance-based incentive compensation to the Thrift BEP, otherwise payable in February 2006, were ineffective, because elections were not made within the time required by IRC Section 409A. Accordingly, the Bank voided the deferral elections and returned the incentive compensation that was subject to the untimely deferral election to participants in late June 2006. The Bank also credited the participant's Thrift BEP accounts with amounts intended to make up for investment losses incurred on the voided deferrals during the second quarter of 2006. These losses are reflected in the contributions to defined contribution plans column above.

(d)

Amount consists of the matching contributions noted in footnote (c) above that would otherwise have been accrued with respect to the untimely deferral elections were paid to executives as current income in late June 2006.

        The following table shows the potential payouts for the Bank's non-equity incentive plan awards for the fiscal year ended December 31, 2008, for the Bank's Named Executive Officers.

Grants of Plan-Based Awards for Fiscal Year 2008

	Estimated Possible Payouts Under Non-equity Incentive Plan Awards(1)
Name	Threshold		Target		Excess
Michael A. Jessee	$	157,500	$	315,000	$	472,500
Frank Nitkiewicz		57,188		114,375		171,563
M. Susan Elliott		53,250		106,500		159,750
William L. Oakley		53,250		106,500		159,750
Earl W. Baucom		46,219		92,438		138,656

(1)

Amounts represent potential awards under the 2008 Executive Incentive Plan; actual amounts awarded were substantially reduced or eliminated at the board of directors' discretion and are reflected in the Summary Compensation Table above. See the description of the 2008 EIP in the Compensation Discussion and Analysis for further discussion of performance goals and plan payouts. Additionally, the 2008 Executive Incentive Plan has been filed as Exhibit 10.3.3 with the Bank's annual report on Form 10-K for fiscal year 2007, filed with the SEC on March 20, 2008.

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Retirement Plan

        The following table sets forth the pension benefits for the fiscal year ended December 31, 2008, for the Bank's Named Executive Officers.

Pension Benefits Table

Name	Plan Name	No. of Years of Credited Service(1)			Present Value of Accumulated Benefit(2)		Payments During Year Ended December 31, 2008
Michael A. Jessee	Pentegra Defined Benefit Plan		31.33	(3)	$	1,440,000	$	—
	Pension BEP		31.92	(4)		5,712,000		—
Frank Nitkiewicz	Pentegra Defined Benefit Plan		16.83			303,000		—
	Pension BEP		17.83			366,000		—
M. Susan Elliott	Pentegra Defined Benefit Plan		26.58			740,000		—
	Pension BEP		27.08			731,000		—
William L. Oakley	Pentegra Defined Benefit Plan		3.58			136,000		—
	Pension BEP		4.58			191,000		—
Earl W. Baucom	Pentegra Defined Benefit Plan		2.17			95,000		—
	Pension BEP		3.17			116,000		—

(1)

Equals number of years of credited service as of December 31, 2008.

(2)

Includes amounts which the Named Executive Officer may not currently be entitled to receive because such amounts are not vested. See Item 8—Financial Statements and Supplementary Data—Financial Statements—Note 16—Employee Retirement Plans for a description of valuation methods and assumptions.

(3)

Number of years of credited service for the Pentegra Defined Benefit Plan includes 11.83 years of service at the FHLBank of San Francisco.

(4)

Number of years of credited service for the Pension BEP includes 12.42 years of service at the FHLBank of San Francisco.

        The Bank participates in the Pentegra Defined Benefit Plan to provide retirement benefits for eligible employees, including the Named Executive Officers. Employees become eligible to participate in the Pentegra Defined Benefit Plan the first day of the month following satisfaction of the Bank's waiting period, which is one year of service with the Bank. The Pentegra Defined Benefit Plan excludes hourly paid employees and, as of December 1, 2007, also excludes flex staff and short-term employees from participation. Participants are 20 percent vested in their retirement benefit after the completion of two years of employment and vest at an additional 20 percent per year thereafter until they are fully vested after the completion of six years of employment. Participants who have reached age 65 are automatically 100 percent vested, regardless of completed years of employment. All of the Named Executive Officers are participants in the Pentegra Defined Benefit Plan and are vested in their benefits pursuant to the plan's provisions.

        Benefits under the Pentegra Defined Benefit Plan are based on the participant's years of service and earnings, defined as base salary, subject to the applicable IRC limits on annual earnings ($230,000 for 2008). The benefit is calculated as 2.00 percent multiplied by the participant's years of benefit service multiplied by the high three-year average salary. Annual benefits provided under the plan are subject to IRC limits, which vary by age and benefit option selected. The regular form of benefit is a straight life annuity with a 12 times initial death benefit feature. Lump sum and other additional payout options are also available. Participants are eligible for a lump sum option beginning at age 45. Benefits are payable in the event of retirement, death, disability, or termination of employment if vested.

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Normal retirement is age 65, but a participant may elect early retirement as early as age 45. However, if a participant elects early retirement, the normal retirement benefit is reduced by an early retirement factor based on the participant's age when beginning early retirement. If the sum of the participant's age and vesting service at the time of termination of employment is at least 70, that is, the "Rule of 70", then the benefit is reduced by an early retirement factor of one and a half percent per year for each year that payments commence before age 65. If age and vesting service do not equal at least 70, then the benefit is reduced by an early retirement factor of three percent per year for each year that payments commence before age 65.

        In October 2006 the board of directors approved certain revisions to the Pentegra Defined Benefit Plan for those employees hired on or after January 9, 2006, including Named Executive Officers hired on or after that date. Benefits payable to these employees will be computed as one and a half percent of a participant's highest five-year average earnings, multiplied by the participant's years of benefit service. Further, retirement benefits for those participants hired on or after January 9, 2006, who retire prior to age 65 and whose age and vesting service do not total at least 70 at termination of employment, will be calculated based on actuarial equivalency instead of the three percent per year early retirement reduction factor for those employees hired prior to January 9, 2006. None of the Named Executive Officers are impacted by these revisions.

        The amount of pension payable from the Pension BEP to a Named Executive Officer is the amount that would be payable to the executive under the Pentegra Defined Benefit Plan:

•

ignoring the limits on benefit levels imposed by the IRC (including the limit on annual compensation discussed above);

•

including in the definition of salary any amounts deferred by a participant under the Thrift BEP in the year deferred and any incentive compensation in the year paid;

•

recognizing the participant's full tenure with the Bank or any other employer participating in the Pentegra Defined Benefit Plan from initial date of employment to the date of membership in the Pentegra Defined Benefit Plan;

•

applying an increased benefit accrual rate of 2.375 percent of the participant's highest three-year average salary multiplied by the participant's total benefit service; and

•

reducing the participant's actual accrued benefit from the Pentegra Defined Benefit Plan. As in the Pentegra Defined Benefit Plan for those employees hired before January 9, 2006, benefits from the Pension BEP are reduced by an early retirement factor if payments commence before the participant's normal retirement date, at the rate of three percent per year, or one and a half percent if the participant meets the Rule of 70.

        Total benefits payable under both the Pentegra Defined Benefit Plan and the Pension BEP are subject to an overall maximum annual benefit amount not to exceed a specified percentage of high three-year average salary as follows: Mr. Jessee, 80 percent as president; Mr. Nitkiewicz, Mr. Oakley, and Ms. Elliott, 70 percent as executive vice presidents; and Mr. Baucom, 65 percent as senior vice president. All benefits payable under the Pension BEP are paid solely from either the general assets of the Bank or from a "rabbi trust" subject to the claims of the creditors of the Bank in the event of the Bank's insolvency. Retirement benefits from the Pentegra Defined Benefit Plan and the Pension BEP are not subject to any offset provision for Social Security benefits.

        In July 2008, the board approved certain revisions to the Pension BEP to comply with IRC Section 409(A) and to modify the plan so that a participant appointed as an executive officer, including as a Named Executive Officer, after January 1, 2008, is not eligible for the increased accrual rate but instead is eligible for the same accrual rate as in the Pentegra Defined Benefit Plan.

171

        In 2008, the Bank offered a transition election as permitted under IRC Section 409(A) to all Pension BEP participants, including the Named Executive Officers. The transition election allowed participants to make an election regarding the time and form of distribution of all benefits earned and vested on or after January 1, 2005, provided the election did not affect payments that the participant would otherwise receive in 2008 or cause payments to be made in 2008. All of the Named Executive Officers completed a transition election

Nonqualified Deferred Compensation

        The following table sets forth the nonqualified deferred compensation for the fiscal year ended December 31, 2008, for the Bank's Named Executive Officers.

Nonqualified Deferred Compensation Table

Name	Executive Contributions in Last Year(1)		Bank Contributions in Year Ended December 31, 2008(2)		Aggregate Earnings in Year Ended December 31, 2008			Aggregate Withdrawals/ Distributions		Aggregate Balance at December 31, 2008
Michael A. Jessee	$	264,528	$	46,403	$	(451,397	)	$	—	$	1,230,389
Frank Nitkiewicz		19,279		11,686		(68,287	)		—		456,025
M. Susan Elliott		41,128		10,877		(320,560	)		—		541,147
William L. Oakley		12,271		7,448		(23,629	)		—		43,296
Earl W. Baucom		61,301		3,515		(18,448	)		—		79,199

(1)

Amounts are also reported as salary in the Summary Compensation Table above.

(2)

Amounts are also reported as contributions to defined contribution plans in the Other Compensation Table above.

        Thrift BEP participants may elect to defer receipt of up to 100 percent of base salary and/or incentive compensation into the Thrift BEP. The Bank matches participant contributions based on the amount the employee contributes, up to the first three percent of compensation beginning with the initial date of membership in the Thrift BEP, and then according to the same schedule as the Pentegra Defined Contribution Plan after the first year of service. The Bank's match is vested at 100 percent, as in the Pentegra Defined Contribution Plan. Participants may defer their contributions into one or more investment funds as elected by the participant. Participants may elect to receive distributions in a lump sum or in semi-annual installments over a period that does not exceed 11 years. Participants may withdraw contributions under the plan's hardship provisions and may also begin to receive distributions while still employed through scheduled distribution accounts.

        The Thrift BEP provides participants an opportunity to defer taxation on income and to make-up for benefits that would have been provided under the Pentegra Defined Contribution Plan except for IRC limitations on annual contributions under 401(k) thrift plans. It also provides participants with an opportunity for incentive compensation to be deferred and matched. The Committee and board of directors approve participation in the Thrift BEP. All of the Named Executive Officers are current participants. All benefits payable under the Thrift BEP are paid solely from the general assets of the Bank.

        In 2008, the Bank offered a final transition election as permitted under Internal Revenue Code Section 409(A) to all Thrift BEP participants, including the Named Executive Officers. The transition election allowed participants to change the time and form of payment for all existing fund balances provided the election did not cause payments to be made in 2008 or affect payments otherwise scheduled to be made in 2008. All of the Named Executive Officers elected to receive distribution of

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all existing balances in January 2009 and two elected to receive in-service distributions of 2008 EIP compensation payouts in 2009.

Post-Termination Payment

        The following table represents the amount that would be payable to the Named Executive Officers as of December 31, 2008, had their employment been terminated, either involuntarily or by mutual agreement, for reasons other than "cause" (for example poor performance, poor attendance, insubordination), on that date. Under the Bank's severance policy and based on tenure for Mr. Jessee, Mr. Nitkiewicz, and Ms. Elliott, the amount is equal to 12 months' base salary, based on annual salary in effect as of December 31, 2008, and for Mr. Oakley and Mr. Baucom, the amount is equal to six months' base salary, based on annual salary in effect on that date.

Name	Cash Severance(1)
Michael A. Jessee	$	630,000
Frank Nitkiewicz		305,000
M. Susan Elliott		284,000
William L. Oakley		142,000
Earl W. Baucom		123,250

(1)

Severance payments do not result in an acceleration of retirement or other benefit plans as described above.

Director Compensation

        The Bank pays members of the board of directors' fees for each board and committee meeting that they attend. The amounts paid to the members of the board of directors for attendance at board and committee meetings during 2008 and 2007, along with the annual maximum compensation amounts for those years, are detailed in the following table:

Director Fees

		2008		2007
Fee per board meeting
	Chair of the board	$	3,650	$	3,500
	Vice chair of the board		2,850		2,750
	All other board members		2,075		2,000
Fee per committee meeting			750		750
Fee per telephonic conference call			500		500
Annual maximum compensation amounts
	Chair of the board		*		29,944
	Vice chair of the board		*		23,955
	All other board members		*		17,967

*

In accordance with the FHLBank Act, under the 2008 Director Compensation Policy, filed as Exhibit 10.7.1 with the Bank's annual report on Form 10-K for fiscal year 2007, filed with the SEC on March 20, 2008, director fees were subject to annual caps. These caps were $31,232 for Mr. Verdonck, the chair of the board, $24,986 for Mr. Malcynsky, the vice-chair of the board, and $18,739 for each other director. However, HERA, which was enacted July 30, 2008, removed the statutory caps on FHLBank director compensation and required a standard of reasonableness in setting compensation for

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directors. In September 2008, McLagan reviewed the results of a study of director compensation at financial services firms with the FHLB System chairs and vice chairs. The study included analysis of director compensation at commercial banks, Farm Credit Banks, the 10 largest Farm Credit Associations, and S&P 1500 firms. McLagan recommended that the FHLBanks use a straight annual retainer at the low-end of the commercial bank benchmarks, inline with Farm Credit Bank benchmarks, and on the high-end of Top 10 Farm Credit Associations. McLagan further recommended additional retainers of $5,000 to $10,000 per year for certain committee chairs and the chair of the board commensurate with additional responsibilities and meeting time. The additional retainers would be less than commercial banks and S&P 1500 firms but greater than Farm Credit Banks and the Farm Credit Associations. Based on this study and consistent with the intent of the majority of the other FHLBanks, the 2008 Director Compensation Policy was revised October 17, 2008, to remove all caps on director compensation. On December 12, 2008, the 2008 Director Compensation Policy was revised to add a cap on annual director compensation of $60,000 per director to ensure that the chair's compensation did not exceed $60,000 in 2008. Concurrent with the revisions of the 2008 Director Compensation Policy, directors were paid fees that would have been paid but for the original caps under the 2008 Director Compensation Policy but subject to the $60,000 cap imposed on December 12, 2008. Given the per meeting fees in the 2008 Director Compensation Policy, directors approved removal of the caps with the expectation that 2008 fees would not exceed $45,000 per director, $50,000 to $55,000 for committee chairs, $55,000 for the vice chair and $60,000 for the chair. As illustrated in the 2008 Director Compensation chart below, no director exceeded these expected caps.

        In January 2009 the 2009 Director Compensation policy, included as Exhibit 10.7.4, was approved including caps of $60,000 for the chair, $55,000 for the vice chair and the Audit Committee chair, $50,000 for all other committee chairs and $45,000 for directors.

174

        The aggregate amounts earned or paid to individual members of the board of directors for attendance at board and committee meetings during 2008 are detailed in the following table:

2008 Director Compensation

	Fees Earned or Paid in Cash
Robert F. Verdonck	$	60,000
Andrew J. Calamare		33,000
Joan Carty		33,000
Stephen F. Christy		28,600
Patrick E. Clancy		30,175
Steven A. Closson		35,825
Arthur R. Connelly		24,925
Peter F. Crosby		32,575
John T. Eller		33,575
John H. Goldsmith		35,825
Cornelius K. Hurley		34,325
A. James Lavoie		33,500
Mark E. Macomber		34,325
Jay F. Malcynsky		40,350
Kevin M. McCarthy		31,675
Jan A. Miller		31,325
Helen F. Peters		30,675
R. David Rosato		34,750
	$	618,425

        Directors may elect to defer the receipt of meeting fees pursuant to the Bank's Thrift BEP. Please see discussion of Retirement and Deferred Compensation Plans above. In accordance with Finance Agency regulations and the FHLBank Act, the Bank has adopted a policy governing the payment or reimbursement of certain expenses incurred by members of the Bank's board of directors. Such paid and reimbursed board of director expenses aggregated to $426,000 for the year ended December 31, 2008.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        The Bank is a cooperative, its members or former members own all of the outstanding capital stock of the Bank, and the directors of the Bank are elected by and a majority are from the Bank's membership. Each member is eligible to vote for the open member directorships in the state in which its principal place of business is located and for each open independent directorship. See Item 4—Submission of Matters to a Vote of Security Holders and Item 10—Directors, Executive Officers, and Corporate Governance for additional information on the election of the Bank's directors. Membership is voluntary, and members must give notice of their intent to withdraw from membership. Members that withdraw from membership may not be readmitted to membership for five years.

        The Bank does not offer any compensation plan under which equity securities of the Bank are authorized for issuance.

        Member institutions, including affiliated institutions under common control of a single holding company, holding five percent or more of the outstanding capital stock of the Bank as of February 28, 2009, are noted in the following table.

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Members Holding Five Percent or More of
Outstanding Capital Stock
(dollars in thousands)

Member Name and Address	Capital Stock		Percent of Total Capital Stock
Bank of America Rhode Island, N.A.	$	1,082,548		29.36	%
111 Westminster Street Providence, Rhode Island 02903
RBS Citizens, N.A.		515,748		13.99
One Citizens Plaza Providence, Rhode Island 02903

        Additionally, due to the fact that a majority of the board of directors of the Bank is elected from the membership of the Bank, these elected directors serve as officers or directors of member institutions that own the Bank's capital stock. The following table provides capital stock outstanding to

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member institutions whose officers or directors were serving as directors of the Bank as of February 28, 2009 (dollars in thousands):

Member Name and Address	Capital Stock		Percent of Total Capital Stock
RBS Citizens, N.A.	$	515,748		13.99	%
One Citizens Plaza Providence, Rhode Island 02903
People's United Bank		31,130		0.84
850 Main Street Bridgeport, Connecticut 06604
Middlesex Savings Bank		18,215		0.49
6 Main Street Natick, Massachusetts 01760
Wainwright Bank & Trust Company		12,081		0.33
63 Franklin Street Boston, Massachusetts 02110
South Shore Savings Bank		11,072		0.30
1530 Main Street South Weymouth, Massachusetts 02190
Androscoggin Savings Bank		6,884		0.19
30 Lisbon Street Lewiston, Maine 04240
Mascoma Savings Bank, FSB		6,544		0.18
67 North Park Street Lebanon, New Hampshire 03766
Newport Federal Savings Bank		5,730		0.16
100 Bellevue Avenue Newport, Rhode Island 02840
The Savings Bank Life Insurance Company of Massachusetts		5,578		0.15
1 Linscott Road Woburn, Massachusetts 01801
Passumpsic Savings Bank		3,793		0.10
124 Railroad Street St. Johnsbury, Vermont 05819
Northwest Community Bank*		3,633		0.10
86 Main Street Winsted, Connecticut 06098
Litchfield Bancorp*		2,679		0.07
294 West Street Litchfield, Connecticut 06759
Total stock ownership by members whose officers or directors serve as directors of the Bank	$	623,087		16.90	%

*

Northwest Community Bank and Litchfield Bancorp are subsidiaries of the same holding company.

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ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

        The Bank is structured as a cooperative association. As such, capital stock ownership in the Bank is a prerequisite to transacting any member business with the Bank. Our members and certain former members or their successors own all of the stock of the Bank, the majority of the directors of the Bank are elected by and from the membership, and the Bank conducts its advances and mortgage-loan business almost exclusively with members. Therefore, in the normal course of business, the Bank extends credit to members whose officers and directors may serve as directors of the Bank, as well as to members who hold five percent or more of our capital stock. It is the Bank's policy that such extensions of credit are effected on market terms that are no more favorable to a member than the terms of comparable transactions with other members. In addition, the Bank may purchase short-term investments, federal funds, and MBS from, and enter into interest-rate-exchange agreements with, members or their affiliates whose officers or directors serve as directors of the Bank, as well as from members or their affiliates who hold five percent or more of our capital stock. All such purchase transactions are effected at the then-current market rate and all MBS are purchased through securities brokers or dealers, also at the then-current market rate.

        For the year ended December 31, 2008, the review and approval of transactions with related persons was governed by our Conflict of Interest Policy for Bank Directors (Conflict Policy) and our Code of Ethics and Business Conduct (Code of Ethics), both of which are in writing. Under the Conflict Policy, each director is required to disclose to the board of directors all actual or potential conflicts of interest, including any personal financial interest that he or she has, as well as such interests of any immediate family member or business associate of the director known to the director, in any matter to be considered by the board of directors or in which another person does, or proposes to do, business with the Bank. Following such disclosure, the board is empowered to determine whether an actual conflict exists. In the event the board determines the existence of a conflict with respect to any matter, the affected director is required to be recused from all further considerations relating to that matter. The Conflict Policy is administered by the Governance Committee of the board of directors.

        The Code of Ethics requires that all directors and executive officers (as well as all other Bank employees) avoid conflicts of interest, or the appearance of conflicts of interest. In particular, subject to limited exceptions for interests arising through ownership of mutual funds and certain financial interests acquired prior to employment by the Bank, no employee of the Bank may have a financial interest in any member of the Bank that is not transacted in the ordinary course of the member's business and, in the case of an extension of credit, involves more than the normal risk of repayment or of loss to the member. Employees are required to disclose annually all financial interests and financial relationships with members. Employees are also required to disclose annually certain financial interests or financial relationships with any other person or in any entity doing business with the Bank. These disclosures are reviewed by the Bank's ethics officer, who is principally responsible for enforcing the Code of Ethics on a day-to day basis. The ethics officer is charged with attempting to resolve any apparent conflict involving an employee other than the president of the Bank and, if an apparent conflict has not been resolved within 60 days, to report it to the president of the Bank for resolution. The ethics officer is charged with reporting any apparent conflict involving a director or the Bank president to the Governance Committee of the board for resolution. The Bank's ethics officer presently is Ellen M. McLaughlin, senior vice president, general counsel and corporate secretary of the Bank.

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Director Independence

General

        The board of directors of the Bank is required to evaluate and report on the independence of the directors of the Bank under two distinct director independence standards. First, Finance Agency regulations establish independence criteria for directors who serve as members of the Bank's Audit Committee. Second, SEC rules require that the Bank's board of directors apply the independence criteria of a national securities exchange or automated quotation system in assessing the independence of its directors.

        As of the date of this report, the Bank's board of directors is comprised of 10 member directors and six independent directors, each of whom are elected by the Bank's member institutions as discussed in Item 4—Submission of Matters to a Vote of Security Holders, and Item 10—Directors, Executive Officers, and Corporate Governance. None of the Bank's directors is an "inside" director. That is, none of the Bank's directors is a Bank employee or officer. Further, the Bank's directors are prohibited from personally owning stock or stock options in the Bank. Each of the member directors, however, is a senior officer, director, or trustee of an institution that is a member of the Bank that is encouraged to engage in transactions with the Bank on a regular basis, and some of the independent directors also engage in transactions either directly or indirectly with the Bank from time to time in the ordinary course of the Bank's business.

Finance Agency Regulations Regarding Independence

        The Finance Agency regulations on director independence standards prohibit an individual from serving as a member of the Bank's Audit Committee if he or she has one or more disqualifying relationships with the Bank or its management that would interfere with the exercise of that individual's independent judgment. Disqualifying relationships considered by the board are: employment with the Bank at any time during the last five years; acceptance of compensation from the Bank other than for service as a director; being a consultant, advisor, promoter, underwriter, or legal counsel for the Bank at any time within the last five years; and being an immediate family member of an individual who is or who has been within the past five years, a Bank executive officer. The board assesses the independence of each director who serves on the Audit Committee under the Finance Agency's regulations on these independence standards. As of March 20, 2009 each of the Bank's directors who serve on the Audit Committee was independent under these criteria.

SEC Rule Regarding Independence

        SEC rules require the Bank's board of directors to adopt a standard of independence to evaluate its directors. Pursuant thereto, the board adopted the independence standards of the New York Stock Exchange (the NYSE) to determine which of its directors are independent, which members of its Audit Committee are not independent, and whether the Bank's Audit Committee's financial expert is independent.

        After applying the NYSE independence standards, the board determined that, as of March 20, 2009, with the exception of John T. Eller, the Bank's independent directors are independent, including Andrew J. Calamare, Joan Carty, Patrick E. Clancy, John H. Goldsmith, and Jay F. Malcynsky. Based upon the fact that each member director is a senior official of an institution that is a member of the Bank (and thus is an equity holder in the Bank), that each such institution routinely engages in transactions with the Bank, and that such transactions occur frequently and are encouraged, the board of directors has determined that for the present time it would conclude that none of the member directors meets the independence criteria under the NYSE independence standards.

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        It is possible that under a strict reading of the NYSE objective criteria for independence (particularly the criterion regarding the amount of business conducted with the Bank by the director's institution), a member director could meet the independence standard on a particular day. However, because the amount of business conducted by a member director's institution may change frequently, and because the Bank generally desires to increase the amount of business it conducts with each member, the directors deemed it inappropriate to draw distinctions among the member directors based upon the amount of business conducted with the Bank by any director's institution at a specific time.

        The board has a standing Audit Committee. For the reasons noted above, the board determined that none of the current member directors on the Bank's Audit Committee, including Stephen F. Christy, Kevin M. McCarthy, R. David Rosato, and Jan A. Miller, ex officio, are independent under the NYSE standards for audit committee members. The board determined that both of the independent Directors on the Bank's Audit Committee Andrew J. Calamare and Patrick E. Clancy, are independent under the NYSE independence standards for audit committee members. The board also determined that Director R. David Rosato is the "audit committee financial expert" within the meaning of the SEC rules, and further determined that as of March 20, 2009, is not independent under NYSE standards. As stated above, the board determined that each director on the audit committee is independent under the Finance Agency's standards applicable to the Bank's Audit Committee.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

        The following table sets forth the aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered in connection with the audit of the Bank's financial statements for 2008 and 2007, as well as the fees billed by PricewaterhouseCoopers LLP for audit-related services rendered by PricewaterhouseCoopers to us during 2008 and 2007.

Audit Fees
(dollars in thousands)

	Year Ended December 31,
	2008		2007
Audit fees(1)	$	1,194	$	997
Audit-related fees(2)		28		72
All other fees(3)		77		15
Tax fees		—		—
Total	$	1,299	$	1,084

(1)

Audit fees consist of fees incurred in connection with the audit of the Bank's financial statements, review of quarterly or annual management's discussion and analysis, and participation and review of financial information filed with the SEC.



(2)

Audit-related fees consist of fees related to accounting research and consultations, internal control reviews, participation and presentations at conferences, review of capital plans, and operations reviews of new products and supporting processes.



(3)

All other fees consist of fees related to participation in conferences and REFCorp assessment analysis.

        The Audit Committee selects the Bank's independent registered public accounting firm and preapproves all audit services to be provided by it to the Bank. The Audit Committee also reviews and preapproves all audit-related and nonaudit-related services rendered by the independent registered

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public accounting firm in accordance with the Audit Committee's charter. In its review of these services and related fees and terms, the Audit Committee considers, among other things, the possible effect of the performance of such services on the independence of our independent registered public accounting firm.

PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

a)    Financial Statements

        The Bank's financial statements are set forth under Item 8—Financial Statements and Supplementary Data of this report on Form 10-K.

b)    Financial Statement Schedules

        None.

c)     Exhibits

Number		Exhibit Description	Reference
	3.1	Restated Organization Certificate of the Federal Home Loan Bank of Boston	Exhibit 3.1 to our Registration Statement on Form 10 filed with the Commission on October 31, 2005
	3.2	By-laws of the Federal Home Loan Bank of Boston	Exhibit 3.2 to our Registration Statement on Form 10 filed with the Commission on October 31, 2005
	4	Capital Plan of the Federal Home Loan Bank of Boston	Exhibit 4 to our Registration Statement on Form 10 filed with the Commission on October 31, 2005
	10.1	The Federal Home Loan Bank of Boston Pension Benefit Equalization Plan as amended and restated as of October 1, 1997*	Exhibit 10.1 to our Registration Statement on Form 10 filed with the Commission on October 31, 2005
	10.1.1	First Amendment to the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan as amended and restated as of October 1, 1997*	Exhibit 10.1.1 to our 2007 Form 10-K filed with the Commission on March 20, 2008
	10.1.2	The Federal Home Loan Bank of Boston Pension Benefit Equalization Plan as amended and restated on July 25, 2008 effective January 1, 2008*	Exhibit 10.2.4 to our Third Quarter 2008 Form 10-Q/A filed with the Commission on December 17, 2008
	10.1.3	The Federal Home Loan Bank of Boston Pension Benefit Equalization Plan as amended and restated on December 30, 2008 effective January 1, 2009*	Filed within this Form 10-K
	10.1.4	United States Department of the Treasury Lending Agreement, dated September 9, 2008	Exhibit 10.1 to our Third Quarter 2008 Form 10-Q filed with the Commission on November 12, 2008

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Number		Exhibit Description	Reference
	10.2.1	The Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan as amended and restated on July 19, 2007 effective January 1, 2008*	Exhibit 10.2.2 to our 2007 Form 10-K filed with the Commission on March 20, 2008
	10.2.2	The Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan as amended and restated on July 18, 2008 effective January 1, 2008*	Exhibit 10.2.3 to our Third Quarter 2008 Form 10-Q/A filed with the Commission on December 17, 2008
	10.2.3	The Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan as amended and restated on December 30, 2008 effective January 1, 2009*	Filed within this Form 10-K
	10.3.1	The Federal Home Loan Bank of Boston 2007 Executive Incentive Plan, revised as of May 18, 2007*	Exhibit 99.1 to Form 8-K filed with the Commission on May 24, 2007
	10.3.2	The Federal Home Loan Bank of Boston 2008 Executive Incentive Plan *	Exhibit 10.3.3 to our 2007 Form 10-K filed with the Commission on March 20, 2008
	10.4	Lease between BP 111 Huntington Ave LLC and the Federal Home Loan Bank of Boston	Exhibit 10.4 to our Registration Statement on Form 10 filed with the Commission on October 31, 2005
	10.5	Mortgage Partnership Finance Services Agreement dated August 15, 2007 between the Federal Home Loan Bank of Boston and the Federal Home Loan Bank of Chicago	Exhibit 10 to our Third Quarter 2007 Form 10-Q filed with the Commission on November 9, 2007
	10.6	Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, effective as of July 20, 2006, by and among the Office of Finance and each of the Federal Home Loan Banks	Exhibit 10.1 to Form 8-K filed with the Commission on June 23, 2006
	10.7	The Federal Home Loan Bank of Boston 2007 Director Compensation Policy*	Exhibit 10.7 to our 2006 Form 10-K filed with the Commission on March 23, 2007
	10.7.1	The Federal Home Loan Bank of Boston 2008 Director Compensation Policy*	Exhibit 10.7.1 to our 2007 Form 10-K filed with the Commission on March 20, 2008
	10.7.2	Federal Home Loan Bank of Boston 2008 Director Compensation Plan revised as of October 17, 2008*	Exhibit 10.2 to our Third Quarter 2008 Form 10-Q filed with the Commission on November 12, 2008
	10.7.3	Federal Home Loan Bank of Boston 2008 Director Compensation Plan revised as of December 12, 2008*	Filed within this Form 10-K
	10.7.4	The Federal Home Loan Bank of Boston 2009 Director Compensation Policy*	Filed within this Form 10-K

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Number		Exhibit Description	Reference
	10.8	Severance Agreement and General Release between Michael A. Jessee and the Federal Home Loan Bank of Boston dated December 31, 2008*	Filed within this Form 10-K
	12	Computation of ratios of earnings to fixed charges	Filed within this Form 10-K
	31.1	Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed within this Form 10-K
	31.2	Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed within this Form 10-K
	32.1	Certification of the president and chief executive officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed within this Form 10-K
	32.2	Certification of the chief financial officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed within this Form 10-K

*

Management contract or compensatory plan.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date	FEDERAL HOME LOAN BANK OF BOSTON (Registrant)
April 10, 2009	By:	/s/ MICHAEL A. JESSEE Michael A. Jessee President and Chief Executive Officer
April 10, 2009	By:	/s/ FRANK NITKIEWICZ Frank Nitkiewicz Executive Vice President and Chief Financial Officer
April 10, 2009	By:	/s/ EARL W. BAUCOM Earl W. Baucom Senior Vice President and Chief Accounting Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

April 10, 2009	By:	/s/ ANDREW J. CALAMARE Andrew J. Calamare Director
April 10, 2009	By:	/s/ JOAN CARTY Joan Carty Director
April 10, 2009	By:	/s/ STEPHEN F. CHRISTY Stephen F. Christy Director
April 10, 2009	By:	/s/ PATRICK E. CLANCY Patrick E. Clancy Director
April 10, 2009	By:	/s/ STEVEN A. CLOSSON Steven A. Closson Director

184

April 10, 2009	By:	/s/ ARTHUR R. CONNELLY Arthur R. Connelly Director
April 10, 2009	By:	/s/ PETER F. CROSBY Peter F. Crosby Director
April 10, 2009	By:	/s/ JOHN T. ELLER John T. Eller Director
April 10, 2009	By:	/s/ JOHN H. GOLDSMITH John H. Goldsmith Director
April 10, 2009	By:	/s/ A. JAMES LAVOIE A. James Lavoie Director
April 10, 2009	By:	/s/ MARK E. MACOMBER Mark E. Macomber Director
April 10, 2009	By:	/s/ JAY F. MALCYNSKY Jay F. Malcynsky Director
April 10, 2009	By:	/s/ KEVIN M. MCCARTHY Kevin M. McCarthy Director
April 10, 2009	By:	/s/ JAN A. MILLER Jan A. Miller Director
April 10, 2009	By:	/s/ EDWARD T. NOVAKOFF Edward T. Novakoff Director
April 10, 2009	By:	/s/ R. DAVID ROSATO R. David Rosato Director

185

Report of Management on Internal Control over Financial Reporting

        The management of the Federal Home Loan Bank of Boston (the Bank) is responsible for establishing and maintaining adequate internal control over financial reporting.

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

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

        Management assessed the effectiveness of the Bank's internal control over financial reporting as of December 31, 2008, based on the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that, as of December 31, 2008, the Bank's internal control over financial reporting is effective based on the criteria established in Internal Control—Integrated Framework.

        Additionally, the Bank's internal control over financial reporting as of December 31, 2008, has been audited by PricewaterhouseCoopers, LLP, an independent registered public accounting firm, as stated in their report which appears herein.

/s/ MICHAEL A. JESSEE
Michael A. Jessee
President and Chief Executive Officer /s/ FRANK NITKIEWICZ
Frank Nitkiewicz
Executive Vice President and Chief Financial Officer

F-1

Report of Independent Registered Public Accounting Firm

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

        In our opinion, the accompanying statement of condition and the related statements of income, capital, and cash flows, present fairly, in all material respects, the financial position of the Federal Home Loan Bank of Boston (the Bank) at December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bank's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Bank's internal control over financial reporting based on our audits (which were integrated audits in 2008 and 2007). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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

/s/ PricewaterhouseCoopers LLP

April 10, 2009

F-2

FEDERAL HOME LOAN BANK OF BOSTON

STATEMENTS OF CONDITION

(dollars and shares in thousands, except par value)

		December 31,
		2008			2007
ASSETS
Cash and due from banks		$	5,735		$	6,823
Interest-bearing deposits			3,279,075			50
Securities purchased under agreements to resell			2,500,000			500,000
Federal funds sold			2,540,000			2,908,000
Investments:
	Trading securities		63,196			112,869
	Available-for-sale securities—includes $143,624 and $88,844 pledged as collateral in 2008 and 2007, respectively that may be repledged		1,214,404			1,063,759
	Held-to-maturity securities includes $170,436 pledged as collateral in 2008 that may be repledged(a)		9,268,224			13,277,881
Advances			56,926,267			55,679,740
Mortgage loans held for portfolio, net of allowance for credit losses of $350 and $125 at December 31, 2008 and 2007, respectively			4,153,537			4,091,314
Accrued interest receivable			288,753			457,407
Resolution Funding Corporation (REFCorp) prepaid assessment			40,236			—
Premises, software, and equipment, net			5,841			6,349
Derivative assets			28,935			67,047
Other assets			38,964			29,099
Total Assets		$	80,353,167		$	78,200,338
LIABILITIES
Deposits:
	Interest-bearing	$	600,481		$	707,056
	Non-interest-bearing		10,589			6,070
Total deposits			611,070			713,126
Consolidated obligations, net:
	Bonds		32,254,002			30,421,987
	Discount notes		42,472,266			42,988,169
Total consolidated obligations, net			74,726,268			73,410,156
Mandatorily redeemable capital stock			93,406			31,808
Accrued interest payable			258,530			280,452
Affordable Housing Program (AHP)			34,815			48,451
Payable to REFCorp			—			16,318
Derivative liabilities			1,173,794			286,789
Other liabilities			25,059			25,724
Total liabilities			76,922,942			74,812,824
Commitments and contingencies (Note 19)
CAPITAL
Capital stock—Class B—putable ($100 par value), 35,847 shares and 31,638 shares issued and outstanding at December 31, 2008 and 2007, respectively			3,584,720			3,163,793
(Accumulated deficit) retained earnings			(19,749	)		225,922
Accumulated other comprehensive loss:
	Net unrealized loss on available-for-sale securities		(130,480	)		(89	)
	Net unrealized (loss) gain relating to hedging activities		(379	)		558
	Pension and postretirement benefits		(3,887	)		(2,670	)
Total capital			3,430,225			3,387,514
Total Liabilities and Capital		$	80,353,167		$	78,200,338

(a)

Fair values of held-to-maturity securities were $7,584,782 and $13,117,631 at December 31, 2008 and 2007, respectively.

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

F-3

FEDERAL HOME LOAN BANK OF BOSTON

STATEMENTS OF INCOME

(dollars in thousands)

		For the Years Ended December 31,
		2008			2007			2006
INTEREST INCOME
Advances		$	1,979,653		$	2,304,104		$	1,990,430
Prepayment fees on advances, net			4,694			2,975			909
Interest-bearing deposits			178			3			2
Securities purchased under agreements to resell			12,035			59,496			66,307
Federal funds sold			34,593			204,688			160,109
Investments:
	Trading securities		4,843			7,598			10,708
	Available-for-sale securities		31,693			46,909			45,152
	Held-to-maturity securities		439,750			519,329			450,313
Prepayment fees on investments			3,884			3,058			4,232
Mortgage loans held for portfolio			208,841			217,675			237,602
Other			—			12			9
	Total interest income		2,720,164			3,365,847			2,965,773
INTEREST EXPENSE
Consolidated obligations:
	Bonds		1,214,031			1,730,553			1,457,402
	Discount notes		1,154,405			1,280,158			1,177,028
Deposits			17,171			40,984			27,889
Mandatorily redeemable capital stock			1,189			1,400			841
Other borrowings			701			306			425
	Total interest expense		2,387,497			3,053,401			2,663,585
NET INTEREST INCOME			332,667			312,446			302,188
Provision for credit losses			225			(9	)		(1,704	)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES			332,442			312,455			303,892
OTHER INCOME (LOSS)
Loss on early extinguishment of debt			(2,699	)		(641	)		(215	)
Service fees			4,564			4,336			3,116
Net unrealized losses on trading securities			(937	)		(267	)		(1,626	)
Net (losses) gains on derivatives and hedging activities			(11,145	)		7,615			10,540
Realized loss from sale of available-for-sale securities			(80	)		—			—
Realized loss from sale of held-to-maturity securities			(52	)		—			—
Realized loss on held-to-maturity securities			(381,745	)		—			—
Other			134			94			(65	)
	Total other (loss) income		(391,960	)		11,137			11,750
OTHER EXPENSE
Operating			50,657			48,501			44,563
Finance Board, Finance Agency and Office of Finance			4,534			4,035			3,340
Other			1,117			1,082			1,152
	Total other expense		56,308			53,618			49,055
(LOSS) INCOME BEFORE ASSESSMENTS			(115,826	)		269,974			266,587
AHP			—			22,182			21,848
REFCorp			—			49,558			48,948
	Total assessments		—			71,740			70,796
NET (LOSS) INCOME		$	(115,826	)	$	198,234		$	195,791

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

F-4

FEDERAL HOME LOAN BANK OF BOSTON

STATEMENTS OF CAPITAL

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

(dollars and shares in thousands)

			Capital Stock Class B—Putable
												Accumulated Other Comprehensive Income (Loss)
									Retained Earnings						Total Capital
			Shares			Par Value
BALANCE, DECEMBER 31, 2005				25,311		$	2,531,145		$	135,086		$	11,518		$	2,677,749
Proceeds from sale of capital stock				5,401			540,097									540,097
Repurchase/redemption of capital stock				(7,218	)		(721,797	)								(721,797	)
Reclassification of shares to mandatorily redeemable capital stock				(69	)		(6,928	)								(6,928	)
Comprehensive income:
	Net income									195,791						195,791
Other comprehensive income:
	Net unrealized losses on available-for-sale securities												(5,214	)		(5,214	)
	Reclassification adjustment for previously deferred hedging gains and losses included in income												(1,887	)		(1,887	)
	Minimum pension liability adjustment												104			104
Total comprehensive income																188,794
Adjustment to initially apply SFAS 158													(1,828	)		(1,828	)
Cash dividends on capital stock (5.51%)										(143,573	)					(143,573	)
BALANCE, DECEMBER 31, 2006				23,425			2,342,517			187,304			2,693			2,532,514
Proceeds from sale of capital stock				11,304			1,130,352									1,130,352
Repurchase/redemption of capital stock				(2,730	)		(273,005	)								(273,005	)
Reclassification of shares to mandatorily redeemable capital stock				(361	)		(36,071	)								(36,071	)
Comprehensive income:
	Net income									198,234						198,234
Other comprehensive income:
	Net unrealized losses on available-for-sale securities												(3,379	)		(3,379	)
	Reclassification adjustment for previously deferred hedging gains and losses included in income												(1,326	)		(1,326	)
	Pension and postretirement benefits												(189	)		(189	)
Total comprehensive income																193,340
Cash dividends on capital stock (6.62%)										(159,616	)					(159,616	)
BALANCE, DECEMBER 31, 2007				31,638			3,163,793			225,922			(2,201	)		3,387,514
Proceeds from sale of capital stock				9,646			964,587									964,587
Repurchase/redemption of capital stock				(4,557	)		(455,641	)								(455,641	)
Reclassification of shares to mandatorily redeemable capital stock				(880	)		(88,019	)								(88,019	)
Comprehensive loss:
	Net loss									(115,826	)					(115,826	)
Other comprehensive income:
	Net unrealized losses on available-for-sale securities												(130,471	)		(130,471	)
		Less: reclassification adjustment for realized net losses included in net income relating to available-for-sale securities											80			80
	Reclassification adjustment for previously deferred hedging gains and losses included in income												(937	)		(937	)
	Pension and postretirement benefits												(1,217	)		(1,217	)
Total comprehensive loss																(248,371	)
Cash dividends on capital stock (3.86%)										(129,845	)					(129,845	)
BALANCE, DECEMBER 31, 2008				35,847		$	3,584,720		$	(19,749	)	$	(134,746	)	$	3,430,225

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

F-5

FEDERAL HOME LOAN BANK OF BOSTON

STATEMENTS OF CASH FLOWS

(dollars in thousands)

			For the Years Ended December 31,
			2008			2007			2006
OPERATING ACTIVITIES
	Net (loss) income		$	(115,826	)	$	198,234		$	195,791
	Adjustments to reconcile net (loss) income to net cash provided by operating activities:
		Depreciation and amortization		(216,091	)		290,488			100,109
		Provision for credit losses on mortgage loans		225			(9	)		(1,704	)
		Change in net fair-value adjustments on derivatives and hedging activities		(9,122	)		(7,973	)		(13,827	)
		Realized loss on held-to-maturity securities		381,745			—			—
		Other adjustments		2,564			529			287
		Realized loss from sale of available-for-sale securities		80			—			—
		Realized loss from sale of held-to-maturity securities		52			—			—
	Net change in:
		Market value of trading securities		937			267			1,626
		Accrued interest receivable		168,654			(243,473	)		(23,878	)
		Other assets		(7,552	)		(3,108	)		2,298
		Net derivative accrued interest		128,781			5,493			(87,578	)
		Accrued interest payable		(22,151	)		(76,913	)		81,173
		Other liabilities		(71,655	)		13,813			12,475
	Total adjustments			356,467			(20,886	)		70,981
	Net cash provided by operating activities			240,641			177,348			266,772
INVESTING ACTIVITIES
	Net change in:
		Interest-bearing deposits		(3,279,025	)		—			—
		Securities purchased under agreements to resell		(2,000,000	)		2,750,000			(3,250,000	)
		Federal funds sold		368,000			(301,500	)		2,168,500
		Premises, software, and equipment		(1,463	)		(1,911	)		(2,118	)
	Trading securities:
		Proceeds		48,735			38,226			63,590
	Available-for-sale securities:
		Proceeds from maturity		30,558			54,725			—
		Proceeds from sales		41,512			—			—
		Purchases		(91,666	)		(97,332	)		—
	Held-to-maturity securities:
		Net decrease (increase) in short-term		4,765,000			(4,390,000	)		1,190,000
		Proceeds from maturity		2,287,669			2,382,271			2,460,358
		Proceeds from sales		5,648			—			—
		Purchases		(3,437,748	)		(3,024,498	)		(3,440,239	)
	Advances to members:
		Proceeds		955,149,820			725,395,321			695,115,410
		Disbursements		(955,594,963	)		(743,421,441	)		(694,424,672	)
	Mortgage loans held for portfolio:
		Proceeds		546,766			574,547			636,639
		Purchases		(622,230	)		(174,408	)		(260,773	)
	Proceeds from sale of foreclosed assets			5,472			3,764			874
	Net cash (used in) provided by investing activities			(1,777,915	)		(20,212,236	)		257,569

F-6

FEDERAL HOME LOAN BANK OF BOSTON

STATEMENTS OF CASH FLOWS (Continued)

(dollars in thousands)

			For the Years Ended December 31,
			2008			2007			2006
FINANCING ACTIVITIES
	Net change in deposits			(118,882	)		(350,540	)		522,664
	Net proceeds on derivative contracts with a financing element			35,062			—			—
	Net proceeds from issuance of consolidated obligations:
		Discount notes		1,221,133,927			1,091,339,247			729,038,937
		Bonds		23,756,634			24,816,651			17,116,107
		Bonds transferred from other FHLBanks		—			—			19,872
	Payments for maturing and retiring consolidated obligations:
		Discount notes		(1,221,517,211	)		(1,066,286,091	)		(735,686,223	)
		Bonds		(22,106,023	)		(30,166,647	)		(11,179,053	)
	Proceeds from issuance of capital stock			964,587			1,130,352			540,097
	Payments for redemption of mandatorily redeemable capital stock			(26,421	)		(16,617	)		(2,870	)
	Payments for repurchase/redemption of capital stock			(455,641	)		(273,005	)		(721,797	)
	Cash dividends paid			(129,846	)		(159,836	)		(173,561	)
	Net cash provided by (used in) financing activities			1,536,186			20,033,514			(525,827	)
	Net decrease in cash and cash equivalents			(1,088	)		(1,374	)		(1,486	)
	Cash and cash equivalents at beginning of the year			6,823			8,197			9,683
	Cash and cash equivalents at yearend		$	5,735		$	6,823		$	8,197
	Supplemental disclosures:
		Interest paid	$	2,553,254		$	2,851,474		$	2,583,601
		AHP payments	$	11,400		$	13,410		$	11,142
		REFCorp assessments paid	$	56,554		$	46,516		$	49,038
		Non-cash transfers of mortgage loans held for portfolio to real estate owned (REO)	$	7,601		$	4,735		$	1,949

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

F-7

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS

Background Information

        The Federal Home Loan Bank of Boston (the Bank), a federally chartered corporation, is one of 12 district Federal Home Loan Banks (the FHLBanks). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages and targeted community development. Each FHLBank operates in a specifically defined geographic territory, or district. The Bank provides a readily available, competitively-priced source of funds to its member institutions and housing associates located within the six New England states which are Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, and Connecticut. Certain regulated financial institutions and insurance companies with their principal places of business in the New England states and engaged in residential housing finance may apply for membership. State and local housing authorities (housing associates) that meet certain statutory criteria may also borrow from the Bank. While eligible to borrow, housing associates are not members of the Bank and, as such, are not required to hold capital stock. The Bank is a cooperative; current and former members own all of the outstanding capital stock of the Bank and may receive dividends on their investment. The Bank does not have any wholly or partially owned subsidiaries, and the Bank does not have an equity position in any partnerships, corporations, or off-balance-sheet special-purpose entities. Regulated financial depositories and insurance companies engaged in residential housing finance may apply for membership.

        All members must purchase stock in the Bank as a condition of membership, as well as a condition of engaging in certain business activities with the Bank. Capital stock of former members will remain outstanding as long as business activities with those former members exists. See Note 15—Capital for a complete description of the capital-stock-purchase requirements. As a result of these requirements, the Bank conducts business with related parties on a regular basis. The Bank considers related parties to be those members with capital stock outstanding in excess of 10 percent of the Bank's total capital stock outstanding. See Note 20—Transactions with Related Parties and Other FHLBanks for additional information related to transactions with related parties.

        The Federal Housing Finance Board (the Finance Board), an independent agency in the executive branch of the U.S. government, supervised and regulated the FHLBanks and the Federal Home Loan Banks' Office of Finance (Office of Finance) through July 29, 2008. With the passage of the Housing and Economic Recovery Act of 2008 (HERA), the Federal Housing Finance Agency (the Finance Agency) was established and became the new independent Federal regulator of the FHLBanks, effective July 30, 2008. All existing regulations, orders, and decisions of the Finance Board remain in effect until modified or superseded.

        The Office of Finance is the FHLBanks' fiscal agent and is a joint office of the FHLBanks established by the Finance Board to facilitate the issuance and servicing of the debt instruments of the FHLBanks, known as consolidated obligations (COs) and to prepare the combined quarterly and annual financial reports of all 12 FHLBanks. The Finance Agency's principal purpose is to ensure that the FHLBanks operate in a safe and sound manner, including maintenance of adequate capital and internal controls. In addition, the Finance Agency is responsible for ensuring that the operations and activities of each FHLBank foster liquid, efficient, competitive, and resilient national housing finance markets, each FHLBank complies with the title and the rules, regulations, guidelines, and orders issued under the HERA and the authorizing statutes, and each FHLBank carries out its statutory mission only through activities that are authorized under and consistent with the HERA and the authorizing statutes and the activities of each FHLBank and the manner in which such regulated entity is operated are consistent with the public interest. Each FHLBank operates as a separate entity with its own management, employees, and board of directors. The FHLBanks do not have any special-purpose entities or any other type of off-balance sheet conduits.

F-8

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

        As provided by the Federal Home Loan Bank Act of 1932 (the FHLBank Act), as amended, and applicable regulations, COs are backed only by the financial resources of all 12 FHLBanks and are the primary source of funds for the FHLBanks. Deposits, other borrowings, and the issuance of capital stock—which is owned by the FHLBanks' current and former members—provide other funds. Each FHLBank primarily uses these funds to provide advances to members and also to fund other investments used for liquidity and leverage management. Certain FHLBanks also use these funds to purchase mortgage loans from members. In addition, some FHLBanks offer their member institutions correspondent services, such as wire transfer, security safekeeping and settlement services.

Note 1—Summary of Significant Accounting Policies

        Use of Estimates.    These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make subjective assumptions and estimates which include but are not limited to, fair value estimates, other-than-temporary impairment analysis, the allowance for loan losses, and deferred premium/discounts associated with prepayable assets. These assumptions and estimates affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ from these estimates.

        Interest-Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold.    These investments provide short-term liquidity and are carried at cost. The Bank treats securities purchased under agreements to resell as collateralized financings.

        Investment Securities.    The Bank classifies certain investments acquired for purposes of meeting short-term contingency liquidity needs and asset/liability management as trading securities and carries them at fair value. The Bank records changes in the fair value of these investments through other income as net unrealized losses on trading securities. However, the Bank does not participate in speculative trading practices and holds these investments indefinitely as management periodically evaluates its liquidity needs.

        The Bank classifies certain investments that it may sell before maturity as available-for-sale and carries them at fair value. The change in fair value of the available-for-sale securities not being hedged by derivative instruments is recorded in accumulated other comprehensive income as a net unrealized loss on available-for-sale securities. For available-for-sale securities that have been hedged and qualify as a fair-value hedge, the Bank records the portion of the change in value related to the risk being hedged in other income as net (losses) gains on derivatives and hedging activities together with the related change in the fair value of the derivative. The remainder of the change in the fair value of the investment is recorded in accumulated other comprehensive income as net unrealized loss on available-for-sale securities.

        The Bank carries, at cost, certain investments for which it has both the ability and intent to hold to maturity, adjusted for periodic principal repayments and amortization of premiums and accretion of discounts using the level-yield method.

        The Bank also invests in certain certificates of deposit (CDs) that meet the definition of a security under Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115) and are recorded as held-to-maturity.

        Under SFAS 115, changes in circumstances may cause the Bank to change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to

F-9

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

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

        In addition, in accordance with SFAS 115, sales of debt securities that meet either of the following two conditions may be considered as maturities for purposes of the classification of securities: 1) the sale occurs near enough to its maturity date (or call date if exercise of the call is probable) that interest-rate risk is substantially eliminated as a pricing factor and the changes in market-interest rates would not have a significant effect on the security's fair value, or 2) the sale of a security occurs after the Bank has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments (both principal and interest) over its term.

        The Bank amortizes premiums and accretes discounts on mortgage-backed securities (MBS) using the level-yield method over the estimated lives of the securities. This method requires a retrospective adjustment of the effective yield each time the Bank changes the estimated life, based on actual prepayments received and changes in expected prepayments, as if the new estimate had been known since the original acquisition date of the securities. The Bank amortizes premiums and accretes discounts on other investments using the level-yield method to the contractual maturity of the securities.

        The Bank computes gains and losses on sales of investment securities using the specific identification method and includes these gains and losses in other (loss) income.

        Investment securities issued by government-sponsored enterprises (GSEs) and U.S. government corporations are not guaranteed by the U.S. government.

        The Bank evaluates its individual available-for-sale and held-to-maturity investment securities holdings for other-than-temporary impairment on at least a quarterly basis. The evaluation is based on an assessment of whether it is probable that the Bank will collect all of the contractual amounts due and the Bank's intent and ability to hold the securities until recovery of any unrealized losses. These evaluations are inherently subjective and consider a number of qualitative factors. In addition to monitoring the credit ratings of these securities for downgrades, as well as placement on negative outlook or credit watch, management evaluates other factors that may be indicative of other-than-temporary impairment. These include, but are not limited to, an evaluation of the type of security including structural credit protections such as subordination of other classes of investors, the length of time and extent to which the fair value of a security has been less than its cost, any credit enhancement or insurance, and certain other collateral-related characteristics such as FICO® credit scores, loan-to-value ratios, delinquency and foreclosure rates, geographic concentrations, and the security's performance. If the Bank determines that an other-than-temporary impairment exists, it accounts for the investment security as if it had been purchased on the measurement date of the other-than-temporary impairment. The investment security is written down to fair value (its new cost basis), any deferred amounts related to the investment security are written off, and a realized loss is recognized in non-interest income. The Bank will accrete into interest income, the portion of the amounts we expect to recover that exceeds the cost basis of the security over the remaining life of the

F-10

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

investment security based on the amount and timing of future expected cash flows. In subsequent periods, if the fair value of an investment security has further declined below its then-current carrying value and there has been a decrease in the estimated cash flows the Bank expects to receive, then the Bank will review the security for further impairment charges.

        When there is an other-than-temporary impairment in the value of an investment, the decline in value is recognized as a loss and presented in the statement of income as realized loss on held-to-maturity securities. The Bank recognized an other-than-temporary impairment loss of $381.7 million during 2008 related to private-label MBS in the held-to-maturity portfolio. The Bank did not experience any other-than-temporary impairment in value of investments during 2007 or 2006. See Note 7—Held-to-Maturity Securities for more information.

        Advances.    The Bank reports advances (loans to members or housing associates), net of premiums and discounts, as discussed in Note 8—Advances. The Bank amortizes the premiums and accretes the discounts on advances to interest income using the level-yield method. The Bank records interest on advances to income as earned. In accordance with the requirements of the FHLBank Act, the Bank obtains eligible collateral on advances sufficient to protect it from losses. The FHLBank Act generally limits eligible collateral to certain investment securities, residential mortgage loans, cash or deposits with the Bank, and other eligible real-estate-related assets. However, as Note 8—Advances more fully describes, Community Financial Institutions (CFIs) which were redefined by the HERA to also include community development activities, are eligible to utilize expanded statutory collateral rules. The Bank has not incurred any credit losses on advances since its inception. Based upon management's analysis of the credit standing of its members and the collateral held as security for its advances and the repayment history of the Bank's advances, management believes that an allowance for credit losses on advances is unnecessary at December 31, 2008.

        Mortgage Loans Held for Portfolio.    The Bank participates in the Mortgage Partnership Finance® (MPF®) program under which the Bank invests in government mortgage loans that are 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), or the Department of Housing and Urban Development (HUD) and conventional residential fixed-rate mortgage loans that are purchased from participating members (see Note 9—Mortgage Loans). The Bank manages the liquidity, interest-rate, and options risks of the loans, while the participating member retains the marketing and servicing activities. The Bank and the member share in the credit risk of the loans, with the Bank assuming the first-loss obligation limited by the first-loss account (FLA), and the member or a third-party insurer assuming credit losses in excess of the FLA (that is, the second-loss credit enhancement), up to the amount of the credit-enhancement obligation as specified in the master agreement. All losses in excess of the second-loss credit enhancement are assumed by the Bank.

        The Bank's investments in MPF loans are held for portfolio and, accordingly, the Bank reports them at their principal amount outstanding net of unamortized premiums, discounts, and unrealized gains and losses from loans initially classified as mortgage loan commitments. The Bank has the intent and ability to hold these mortgage loans to maturity.

        Each of the Bank's members selling MPF loans, referred to as participating financial institution's (PFI's) has a credit-enhancement obligation (CE amount) that arises under its PFI agreement and the amount and nature of the obligation are determined with respect to each master commitment. Under

F-11

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

the Acquired Member Asset regulation (12 C.F.R. §955) (the AMA regulation) the PFI must "bear the economic consequences" of certain credit losses with respect to a master commitment based upon the MPF product and other criteria. Under the MPF program, the PFI's credit-enhancement protection may take the form of the CE amount, which represents the direct liability to pay credit losses incurred with respect to that master commitment or may require the PFI to obtain and pay for a supplemental mortgage insurance (SMI) policy insuring the Bank for a portion of the credit losses arising from the master commitment, and/or the PFI may contract for a contingent performance-based credit-enhancement fee (CE fee) whereby such fees are reduced by losses up to a certain amount arising under the master commitment. Under the AMA regulation, any portion of the CE amount that is a PFI's direct liability must be collateralized by the PFI in the same way that advances from the Bank are collateralized. The PFI agreement provides that the PFI's obligations under the PFI agreement are secured along with other obligations of the PFI under its regular advances agreement with the Bank and further, that the Bank may request additional collateral to secure the PFI's obligations. PFIs are paid a CE fee as an incentive to minimize credit losses, to share in the risk of loss on MPF loans, and to pay for SMI, rather than paying a guaranty fee to other secondary market purchasers. CE fees are paid monthly and are determined based on the remaining unpaid principal balance of the MPF loans. The required CE amount may vary depending on the MPF product alternatives selected. CE fees are recorded as an offset to mortgage-loan-interest income. The Bank also pays performance-based CE fees, which are based on actual performance of the pool of MPF loans under each individual master commitment. To the extent that losses in the current month exceed performance-based CE fees accrued, the remaining losses may be recovered from future performance-based CE fees payable to the PFI.

        The Bank's REO includes assets that have been received in satisfaction of debt or as a result of actual foreclosures. REO is initially recorded as other assets in the statements of condition and is carried at the lower of cost or fair value less estimated selling costs. Fair value is defined as the amount that a willing seller could expect from a willing buyer in an arm's-length transaction. If the fair value of the REO is less than the recorded investment in the MPF loan at the date of transfer, the Bank recognizes a charge-off to the allowance for loan losses. Subsequent realized gains and realized or unrealized losses are included in other income.

        Mortgage-Loan Participations.    The Bank has sold participations in mortgage loans acquired under the MPF program to the FHLBank of Chicago. Under certain master commitments, the Bank entered into a participation arrangement with the FHLBank of Chicago that specified an agreed upon ownership percentage for the mortgage loans that were acquired from participating members under the master commitment and related delivery commitments. Funding of mortgage loans under these master commitments ended in April 2006. The Bank and the FHLBank of Chicago both share in the pro rata purchase amounts for each respective loan acquired from the participating member; the relevant pro rata share of principal and interest payments; responsibility for their pro rata share of CE fees and credit losses; and each may hedge its share of the delivery commitments. These participations to the FHLBank of Chicago were transacted contemporaneously with and at the same price as the loan purchases by the Bank, resulting in no gain or loss on the transaction. Based on the terms of the participation agreement between the Bank and the FHLBank of Chicago, these participations were accounted for as sales under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140).

F-12

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

        The Bank computes the amortization of mortgage-loan-origination fees (premiums and discounts) paid to and received from the Bank's PFIs as interest income using the level-yield method over the contractual term to maturity of each individual loan, which results in income recognition in a manner that is effectively proportionate to the actual repayment behavior of the underlying assets and reflects the contractual terms of the assets without regard to changes in estimated prepayments based on assumptions about future borrower behavior.

        The Bank records CE fees paid to PFIs as a reduction to mortgage-loan-interest income. The Bank may receive and record other non-origination fees, such as delivery-commitment-extension fees, pair-off fees, and price adjustment fees, in other income. Delivery-commitment-extension fees are charged when a member requests to extend the period of the delivery commitment beyond the original stated maturity. Pair-off fees represent a make-whole provision and are received when the amount funded under a delivery commitment is less than 95 percent (that is, under-delivery) of the delivery-commitment amount. Price adjustment fees are received when the amount funded is greater than 105 percent (that is, over-delivery) of the delivery-commitment amount. To the extent that pair-off fees relate to under-deliveries of loans, they are recorded in service fee income. Fees related to over-deliveries represent purchase-price adjustments to the related loans acquired and are recorded as part of the loan basis.

        The Bank places certain conventional mortgage loans on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due. When a conventional mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income. The Bank generally records cash payments received on nonaccrual 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. Government-insured and guaranteed loans are not placed on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due because of (1) the U.S. government guarantee of the loan, and (2) the contractual obligation of the loan servicer.

        The Bank purchases both conventional mortgage loans and government insured or guaranteed mortgage loans under the MPF program. FHA/VA/RHS/HUD loans are government insured or guaranteed and as such, management has determined that no allowance for losses is necessary for such loans. Conventional loans, in addition to having the related real estate as collateral, are also credit enhanced either by qualified collateral pledged by the member, or by secondary mortgage insurance purchased by the member. The credit enhancement is the PFI's potential loss in the second-loss position. It absorbs a percentage of realized losses prior to the Bank having to incur an additional credit loss in the third-loss position.

        The estimation methodology used for the allowance for loan losses considers probable incurred losses that are inherent in the portfolio, but have not yet been realized. The allowance for the Bank's conventional loan pools is based on an analysis of the migration of the Bank's delinquent loans to default since the inception of the MPF program. The Bank then analyzes the probable loss severity on that portion of the delinquent loans that the migration analysis indicates will default within one year. The combination of these factors represents the estimated losses from conventional MPF loans. The Bank then applies the risk-mitigating features of the MPF program to the estimated loss. The allowance is derived from the estimated loss on defaulting MPF loans, net of the risk-mitigating features of the MPF program. The allowance also includes an uncertainty factor. The uncertainty factor

F-13

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

is necessary due to the fact that the migration figures used by the Bank to estimate the amount of defaulting loans are from a period characterized by very strong performance in GSE-conforming residential mortgage loan portfolios, such as the MPF portfolio and the inherent uncertainty associated with using past performance to predict future events. The Bank notes that it is probable that the migration rates for delinquent loans may be worse in the future than the Bank's experience to date with the MPF portfolio indicates.

        At December 31, 2008 and 2007, the allowance for loan losses on the conventional mortgage-loan portfolio was $350,000 and $125,000, respectively. The allowance reflects the Bank's estimate of probable incurred losses inherent in the MPF portfolio.

        Premises, Software, and Equipment.    The Bank records premises, software, and equipment at cost less accumulated depreciation and amortization. The Bank's accumulated depreciation and amortization related to premises, software, and equipment was $13.4 million and $11.6 million at December 31, 2008 and 2007, respectively. The Bank computes depreciation on a straight-line basis over estimated useful lives ranging from three to 10 years. The Bank amortizes leasehold improvements on a straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The Bank capitalizes improvements and major renewals but expenses ordinary maintenance and repairs when incurred. Depreciation and amortization expense for premises, software, and equipment was $2.0 million, $1.9 million, and $1.8 million for the years ended December 31, 2008, 2007, and 2006, respectively. The Bank includes gains and losses on disposal of premises, software, and equipment in other income. The net realized gain (loss) on disposal of premises, software, and equipment for the years ended December 31, 2008 and 2006 was $2,000 and ($11,000), respectively. There were no realized gains or losses on disposal of premises, software, and equipment in 2007.

        The cost of computer software developed or obtained for internal use is accounted for in accordance with Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires the cost of purchased software and certain costs incurred in developing computer software for internal use to be capitalized and amortized over future periods. At both December 31, 2008 and 2007, the Bank had $2.7 million in unamortized computer software costs. Amortization of computer software costs charged to expense was $1.2 million, $1.0 million, and $1.1 million for the years ended December 31, 2008, 2007, and 2006, respectively.

        Derivatives.    Accounting for derivatives is addressed in the SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivatives Instruments and Hedging Activities—Deferral of Effective Date of FASB Statement No. 133, SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 133). All derivatives are recognized on the statement of condition at their fair values. Due to the application of the Financial Accounting Standards Board (FASB) Staff Position (FSP) No. FIN 39-1, Amendment of FASB Interpretation No. 39 (FSP FIN 39-1), derivative assets and derivative liabilities reported on the statement of condition include the net cash collateral and accrued interest from counterparties. See Note 2—Accounting Adjustments and Recently Issued Accounting Standards for more information on the effect of adopting FSP FIN 39-1.

F-14

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

        In accordance with SFAS 133 each derivative is designated as one of the following:

(1)

a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a fair-value hedge);



(2)

a hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a cash-flow hedge);



(3)

a nonqualifying hedge of an asset or liability (economic hedge) for asset-liability-management purposes; or



(4)

a nonqualifying hedge of another derivative (an intermediation hedge) that is offered as a product to members or used to offset other derivatives with nonmember counterparties.

        Changes in the fair value of a derivative that is designated and qualifies as a fair-value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in other income as net (losses) gains on derivatives and hedging activities.

        Changes in the fair value of a derivative that is designated and qualifies as a cash-flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income, a component of capital, until earnings are affected by the variability of the cash flows of the hedged transaction.

        For both fair-value and cash-flow hedges, any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative differ from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction) is recorded in other income as net (losses) gains on derivatives and hedging activities.

        An economic hedge is defined as a derivative hedging specific or nonspecific assets, liabilities, or firm commitments that does not qualify or was not designated for hedge accounting, but is an acceptable hedging strategy under the Bank's risk management policy. These economic hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative hedge transactions. An economic hedge by definition introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in income but not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. As a result, the Bank recognizes only the net interest and the change in fair value of these derivatives in other income as net (losses) gains on derivatives and hedging activities with no offsetting fair-value adjustments for the assets, liabilities, or firm commitments. Cash flows associated with such stand-alone derivatives (derivatives not qualifying as a hedge) are reflected as cash flows from operating activities in the statement of cash flows.

        The derivatives used in intermediary activities do not qualify for SFAS 133 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 Bank. These amounts are recorded in other income as net (losses) gains on derivatives and hedging activities.

        The differentials between accruals of interest receivables and payables on derivatives designated as fair-value or cash-flow hedges are recognized as adjustments to the interest income or interest expense of the designated hedged investment securities, advances, COs or other financial instruments. The differentials between accruals of interest receivables and payables on intermediated derivatives for

F-15

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

members and other economic hedges are recognized in other income. Therefore, both the net interest on the stand-alone derivative and the fair-value changes are recorded in other income as net (losses) gains on derivatives and hedging activities.

        The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument is embedded. Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance or debt (the host contract) and whether a separate, nonembedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When the Bank determines that (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument pursuant to an economic hedge. The Bank has determined that all embedded derivatives in currently outstanding transactions as of December 31, 2008, are clearly and closely related to the host contracts, and therefore no embedded derivatives have been bifurcated. However, if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current earnings (for example, an investment security classified as trading under SFAS 115, as well as hybrid financial instruments accounted for under SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140 [SFAS 155]), or if the Bank cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract is carried on the statement of condition at fair value and no portion of the contract is designated as a hedging instrument.

        If hedging relationships meet certain criteria specified in SFAS 133, they are eligible for hedge accounting and the offsetting changes in fair value of the hedged items may be recorded in earnings. The application of hedge accounting generally requires the Bank to evaluate the effectiveness of the hedging relationships on an ongoing basis and to calculate the changes in fair value of the derivatives and related hedged items independently. This is known as the long-haul method of accounting. Transactions that meet more stringent criteria qualify for the shortcut method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in value of the related derivative.

        Derivatives are typically executed at the same time as the hedged advances or COs and the Bank designates the hedged item in a qualifying hedge relationship as of the trade date. In many hedging relationships that use the shortcut method, the Bank may designate the hedging relationship upon its commitment to disburse an advance or trade a CO bond that settles within the shortest period of time possible for the type of instrument based on market settlement conventions. In such circumstances, although the advance or CO bond will not be recognized in the financial statements until settlement date, the hedge meets the criteria within SFAS 133 for applying the shortcut method provided all the other criteria of SFAS 133 paragraph 68 are also met. The Bank then records the changes in fair value of the derivative and the hedged item beginning on the trade date.

        The Bank may discontinue hedge accounting prospectively when: (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative and/or

F-16

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

the hedged item expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur in the originally expected period; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging instrument in accordance with SFAS 133 is no longer appropriate.

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

        When hedge accounting is discontinued because the Bank determines that the derivative no longer qualifies as an effective cash-flow hedge of an existing hedged item, the Bank continues to carry the derivative on the statement of condition at its fair value and amortizes the cumulative other comprehensive income adjustment to earnings when earnings are affected by the existing hedged item, which is the original forecasted transaction.

        Under limited circumstances, when the Bank discontinues cash-flow hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period plus the following two months, but it is probable that the transaction will still occur in the future, the gain or loss on the derivative remains in accumulated other comprehensive income and is recognized in earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within two months after that, the gains and losses that were accumulated in other comprehensive income are recognized immediately in earnings.

        When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank continues to carry the derivative on the statement of condition at its fair value, removing from the statement of condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.

        Mandatorily Redeemable Capital Stock.    In accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150), the Bank will reclassify stock subject to redemption from equity to a liability after a member exercises a written redemption request, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or other involuntary termination from membership, since the member shares will then meet the definition of a mandatorily redeemable financial instrument. We do not take into consideration our members' right to cancel a redemption request in determining when shares of capital stock should be classified as a liability because such cancellation would be subject to a cancellation fee equal to two percent of the par amount of the shares of Class B stock that is the subject of the redemption notice. Member shares meeting this definition are reclassified to a liability at fair value. Dividends declared on member shares classified as a liability in accordance with SFAS 150 are accrued at the expected dividend rate and reflected as interest expense in the statement of income. The repayment of these mandatorily redeemable financial instruments is reflected as cash outflows in the financing activities section of the statement of cash flows once settled.

F-17

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

        If a member cancels its written notice of redemption or notice of withdrawal, the Bank will reclassify mandatorily redeemable capital stock from a liability to equity in compliance with SFAS 150. After the reclassification, dividends on the capital stock will no longer be classified as interest expense.

        Prepayment Fees.    The Bank charges members a prepayment fee when they prepay certain advances before the original maturity. The Bank records prepayment fees net of SFAS 133 hedging fair-value adjustments included in the book basis of the advance as "prepayment fees on advances, net" in the interest income section of the statement of income.

        In cases in which the Bank funds a new advance concurrent with or within a short period of time of the prepayment of an existing advance by the same member, the Bank applies the guidance provided in Emerging Issues Task Force Issue No. 01-07, Creditor's Accounting for a Modification or Exchange of Debt Instruments (EITF 01-07) and SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating and Acquiring Loans and Initial Direct Costs of Leases (SFAS 91), and evaluates whether the new advance meets the accounting criteria to qualify as a modification of the existing advance or whether it constitutes a new advance.

        If the new advance qualifies as a modification of the existing advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized to interest income over the life of the modified advance using the level-yield method. This amortization is recorded in advance interest income. If the Bank determines that the advance should be treated as a new advance, it records the prepayment fee as prepayment fees on advances, net in the interest income section of the statement of income. If the modified advance is hedged, it is marked to fair value after the amortization of the basis adjustment. This amortization results in offsetting amounts being recorded in net interest income and net (losses) gains on derivatives and hedging activities in other income.

        For prepaid advances that were hedged and met the hedge-accounting requirements of SFAS 133, the Bank terminates the hedging relationship upon prepayment and records the prepayment fee net of the SFAS 133 hedging fair-value adjustment in the book basis of the advance as prepayment fees on advances, net in interest income. If the Bank funds a new advance to a member concurrent with or within a short period of time after the prepayment of a previous advance to that member, the Bank evaluates whether the new advance qualifies as a modification of the original hedged advance. If the new advance qualifies as a modification of the original hedged advance, the SFAS 133 hedging fair-value adjustment and the prepayment fee are included in the carrying amount of the modified advance and are amortized in interest income over the life of the modified advance using the level-yield method. If the modified advance is also hedged and the hedge meets the hedging criteria in accordance with SFAS 133, the modified advance is marked to fair value after the modification, and subsequent fair-value changes are recorded in other income as net (losses) gains on derivatives and hedging activities.

        Commitment Fees.    The Bank records commitment fees for standby letters of credit as a deferred credit when received, and amortizes these fees on a straight-line basis to service-fee income in other income over the term of the standby letter of credit. The Bank believes the likelihood of standby letters of credit being drawn upon is remote based upon past experience.

        Concessions on Consolidated Obligations.    The Office of Finance prorates the amounts paid to dealers in connection with the issuance of certain COs to the Bank based upon the percentage of debt issued that is assumed by the Bank. The Bank defers and amortizes these dealer concessions using the

F-18

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

level-yield method over the contractual term to maturity of the COs. Unamortized concessions were $9.3 million and $9.2 million at December 31, 2008 and 2007, respectively, and are included in other assets on the statement of condition. Amortization of such concessions is included in CO interest expense and totaled $7.6 million, $6.9 million, and $4.6 million in 2008, 2007, and 2006, respectively.

        Discounts and Premiums on Consolidated Obligations.    The Bank accretes discounts and amortizes premiums on COs to interest expense using the level-yield method over the contractual term to maturity of the CO.

        Operating Expenses.    Included in operating expenses are compensation and employee benefits totaling $30.6 million, $30.2 million, and $26.9 million for the years ended December 31, 2008, 2007, and 2006, respectively.

        Finance Board, Finance Agency and Office of Finance Expenses.    The Bank funded its proportionate share of the costs of operating the Finance Board and fund a portion of the costs of operating the Finance Agency. The Finance Board had allocated its operating and capital expenditures to the FHLBanks based on each FHLBank's percentage of total combined capital through July 29, 2008. The portion of the Finance Agency's expenses and working capital fund paid by the FHLBanks are allocated among the FHLBanks based on the pro rata share of the annual assessments based on the ratio between each FHLBank's minimum required regulatory capital and the aggregate minimum required regulatory capital of every FHLBank. The Bank must pay an amount equal to one-half of its annual assessment twice each year. The Bank is also assessed for the costs of operating the Office of Finance. The Office of Finance allocates its operating and capital expenditures based on each FHLBank's percentage of capital stock, percentage of COs issued, and percentage of COs outstanding.

        Affordable Housing Program.    The FHLBank Act requires each FHLBank to establish and fund an AHP based on positive annual net earnings. The Bank charges the required funding for AHP to earnings and establishes a liability, except when annual net earnings are negative in which case there is no requirement to fund an AHP. The AHP funds provide grants to members to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. The Bank also issues AHP advances at interest rates below the customary interest rate for nonsubsidized advances. When the Bank makes an AHP advance, the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP advance rate and the Bank's related cost of funds for comparable maturity funding is charged against the AHP liability and recorded as a discount on the AHP advance. The discount on AHP advances is accreted to interest income on advances using the level-yield method over the life of the advance See Note 13—Affordable Housing Program for more information.

        Resolution Funding Corporation.    Although the Bank is exempt from ordinary federal, state, and local taxation except for local real-estate tax, it is required to make payments to REFCorp. Each FHLBank is required to make quarterly payments equal to 20 percent of net income before REFCorp assessments but after AHP assessments to REFCorp to pay toward interest on bonds issued by REFCorp. REFCorp is a corporation established by Congress in 1989 to provide funding for the resolution and disposition of insolvent savings institutions. The bonds issued by REFCorp have maturity dates ranging from 2019 to 2030. Officers, employees, and agents of the Office of Finance are authorized to act for and on behalf of REFCorp to carry out the functions of REFCorp. See Note 14—Resolution Funding Corporation for more information.

F-19

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

        Estimated Fair Values.    Some of the Bank's financial instruments lack an available trading market characterized by transactions between a willing buyer and a willing seller engaging in an exchange transaction. Therefore, the Bank uses pricing services and internal models employing significant estimates and present-value calculations when disclosing estimated fair values. Note 18—Estimated Fair Values details the estimated fair values of the Bank's financial instruments.

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

        Reclassification.    Certain amounts in the 2007 and 2006 financial statements have been reclassified to conform to the 2008 presentation. In particular, during the third quarter of 2008, on a retrospective basis, the Bank reclassified its investments in negotiable certificates of deposit, previously reported as interest-bearing deposits, as held-to-maturity securities in the statements of condition and income as they meet the definition of a security under SFAS 115. These financial instruments have been classified as held-to-maturity securities based on their short-term nature and the Bank's history of holding them until maturity. This reclassification had no effect on total assets, net interest income, or net income. The certificates of deposit that do not meet the definition of a security will continue to be classified as interest-bearing deposits on the statements of condition and income. As a result of the Bank's reclassification of certificates of deposit during the third quarter of 2008, the statement of condition at December 31, 2007 and the statements of income for the years ended December 31, 2007 and 2006 were revised as follows (dollars in thousands).

	Before Reclassification December 31, 2007		Reclassification			After Reclassification December 31, 2007
Statement of Condition
Interest-bearing deposits	$	5,330,050	$	(5,330,000	)	$	50
Held-to-maturity securities		7,947,881		5,330,000			13,277,881
Cumulative effect of reclassification on total assets			$	—

	Before Reclassification For the Year Ended December 31, 2007		Reclassification			After Reclassification For the Year Ended December 31, 2007
Statement of Income
Interest-bearing deposits	$	113,934	$	(113,931	)	$	3
Held-to-maturity securities		405,398		113,931			519,329
Cumulative effect of reclassification on total interest income			$	—

F-20

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

	Before Reclassification For the Year Ended December 31, 2006		Reclassification			After Reclassification For the Year Ended December 31, 2006
Statement of Income
Interest-bearing deposits	$	84,820	$	(84,818	)	$	2
Held-to-maturity securities		365,495		84,818			450,313
Cumulative effect of reclassification on total interest income			$	—

        In addition on January 1, 2008, the Bank adopted FSP FIN 39-1. The Bank recognized the effects of applying FSP FIN 39-1 as a change in accounting principle through retrospective application and as a result, the statement of condition at December 31, 2007 was revised as follows (dollars in thousands).

	As Originally Presented		FSP FIN 39-1 Adjustments			Revised
Derivative assets	$	117,823	$	(50,776	)	$	67,047
Total assets		78,251,114		(50,776	)		78,200,338
Deposits		774,041		(60,915	)		713,126
Accrued interest payable		280,687		(235	)		280,452
Derivative liabilities		276,415		10,374			286,789
Total liabilities		74,863,600		(50,776	)		74,812,824

        For more information related to FSP FIN 39-1, see Note 2—Accounting Adjustments and Recently Issued Accounting Standards.

        Furthermore, SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (SFAS 159) amends SFAS No. 95, Statement of Cash Flows (as amended) (SFAS 95), and SFAS 115, to specify that cash flows from trading securities (which include securities for which an entity has elected the fair-value option) should be classified in the statement of cash flows based on the nature of and purpose for which the securities were acquired. Prior to this statement, SFAS 95 and SFAS 115 specified that all cash flows from trading securities must be classified as cash flows from operating activities. On a retroactive basis, beginning in the first quarter of 2008, the Bank classifies purchases, sales, and maturities of trading securities held for investment purposes as cash flows from investing activities. Cash flows related to trading securities held for trading purposes continue to be reported as cash flows from operating activities. Previously, all cash flows associated with trading securities were reflected in the statement of cash flows as operating activities. The net decrease in trading securities of $38.5 million for the year ended December 31, 2007, as previously reported, has been reclassified as a net decrease in fair value adjustment on trading securities of $267,000 in the net cash provided by operating activities section and trading securities proceeds of $38.2 million in the net cash used in investing activities section of the statement of cash flows.

F-21

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 2—Accounting Adjustments and Recently Issued Accounting Standards

Accounting Adjustments.

        During the fourth quarter of 2006, the Bank identified and corrected an error in the accounting for certain hedged available-for-sale investment securities. As a result of this error, certain amounts of hedge ineffectiveness had been incorrectly deferred in other comprehensive income rather than being recorded in the income statement each period. The cumulative amount of the error through the end of the third quarter of 2006 was $6.4 million or $4.7 million after assessments. Management has determined that the effect of this error is immaterial to prior periods, and as such, the cumulative effect of this error has been recorded in the income statement during the fourth quarter of 2006. The correction has resulted in an increase of $6.4 million to net (losses) gains on derivatives and hedging activities in other income.

Recently Issued Accounting Standards and Interpretations.

        SFAS No. 157, Fair Value Measurements (SFAS 157). Effective January 1, 2008, the Bank adopted SFAS 157 . SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair-value hierarchy based on the inputs used to measure fair value and enhances disclosure requirements for fair-value measurements. SFAS 157 defines "fair value" as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The effect of adopting SFAS 157 was immaterial to the Bank's financial condition at January 1, 2008. For additional information on the fair value of certain financial assets and financial liabilities, see Note 18—Estimated Fair Values.

        FASB Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP FAS 157-3). On October 10, 2008, the FASB issued FSP FAS 157-3, which clarifies, but does not change, the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. Key existing principles of SFAS 157 illustrated in the example include:

•

A fair value measurement represents the price at which a transaction would occur between market participants at the measurement date.

•

In determining a financial asset's fair value, use of a reporting entity's own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are unavailable.

•

Broker or pricing service quotes may be an appropriate input when measuring fair value, but they are not necessarily determinative if an active market does not exist for the financial asset.

        FSP FAS 157-3 was effective upon issuance and has retroactive application for prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application will be accounted for as a change in accounting estimate consistent with FASB Statement No. 154, Accounting Changes and Error Corrections (SFAS 154). The disclosure provisions of SFAS 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The Bank's adoption of FSP FAS 157-3 upon its issuance on October 10, 2008, did not have a material effect on the Bank's financial condition, results of operations, or cash flows.

F-22

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 2—Accounting Adjustments and Recently Issued Accounting Standards (Continued)

        SFAS 159. On February 15, 2007, the FASB issued SFAS 159 which creates a fair value option allowing, but not requiring, an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. It requires entities to display separately the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the statement of condition. Additionally, SFAS 159 requires an entity to provide information that would allow users to understand the effect on earnings of changes in the fair value of those instruments selected for the fair value election. Upon the adoption of SFAS 159 on January 1, 2008, the Bank did not elect to record any additional financial assets and liabilities at fair value. For additional information on the fair value of certain financial assets and liabilities, see Note 18—Estimated Fair Values.

        FSP No. FIN 39-1, Amendment of FASB Interpretation No. 39 (FSP FIN 39-1). On April 30, 2007, FASB issued FSP FIN 39-1which permits an entity to offset fair-value amounts recognized for derivative instruments and fair-value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instruments recognized at fair value executed with the same counterparty under a master-netting arrangement. Under FSP FIN 39-1, the receivable or payable related to cash collateral may not be offset if the amount recognized does not represent or approximate fair value or arises from instruments in a master-netting arrangement that are not eligible to be offset. See Note 1—Summary of Significant Accounting Policies for the revised statement of condition as of December 31, 2007 as a result of the Bank's adoption and retrospective application of FSP FIN 39-1.

        Derivatives Implementation Group (DIG) Issue No. E23, Issues Involving the Application of the Shortcut Method Under Paragraph 68 (DIG Issue E23). On December 20, 2007, the FASB issued DIG Issue E23 which amends paragraph 68 of SFAS 133 with respect to the conditions that must be satisfied in order to apply the shortcut method for assessing hedge effectiveness. The Bank's adoption of DIG Issue E23 at January 1, 2008, did not have a material effect on its financial condition, results of operations, or cash flows.

        SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133 (SFAS 161). On March 19, 2008, the FASB issued SFAS 161 which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entities' financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (January 1, 2009, for the Bank), with early adoption allowed. The adoption of SFAS 161 is not expected to have a material effect on the Bank's financial statement disclosures.

        EITF Issue No. 08-5.    On September 24, 2008, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) on Issue No. 08-5, Issuer's Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement (EITF 08-5). The objective of EITF 08-5 is to determine the issuer's unit of accounting for a liability that is issued with an inseparable third-party credit enhancement when it is recognized or disclosed at fair value on a recurring basis. EITF 08-5 should be applied prospectively and is effective in the first reporting period beginning on or after December 15, 2008 (January 1, 2009, for the Bank). The Bank does not believe the adoption of EITF 08-5 will have a material effect on its financial condition, results of operations, or cash flows.

F-23

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 2—Accounting Adjustments and Recently Issued Accounting Standards (Continued)

        FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (FSP FAS 133-1 and FIN 45-4). On September 12, 2008, the FASB issued FSP FAS 133-1 and FIN 45-4 which amends SFAS 133 and FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 (FIN 45) to improve disclosures about credit derivatives and guarantees and clarify the effective date of SFAS 161. FSP FAS 133-1 and FIN 45-4 also amends FAS 133 to require entities to disclose sufficient information to allow users to assess the potential effect of credit derivatives, including their nature, maximum payment, fair-value, and recourse provisions. Additionally, FSP FAS 133-1 and FIN 45-4 amends FIN 45 to require a disclosure about the current status of the payment/performance risk of a guarantee, which could be indicated by external credit ratings or categories by which the Bank measures risk. While the Bank does not currently enter into credit derivatives, it does however have guarantees, the FHLBanks' joint and several liability on COs, and letters of credit. The adoption of FSP FAS 133-1 and FIN 45-4 did not have a material effect on the Bank's financial statement disclosures. The provisions of FSP FAS 133-1 and FIN 45-4 that amend SFAS 133 and FIN 45 are effective for fiscal years and interim periods ending after November 15, 2008 (December 31, 2008, for the Bank). Additionally, FSP FAS 133-1 and FIN 45-4 clarify that the disclosures required by SFAS 161 should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008 (January 1, 2009, for the Bank).

        FASB Staff Position No. EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (FSP EITF 99-20-1). On January 12, 2009, the FASB issued FSP EITF 99-20-1 which amends the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets (EITF 99-20) to achieve more consistent determination of whether an other-than-temporary impairment has occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS 115 and other related guidance. FSP EITF 99-20-1 is effective and should be applied prospectively for financial statements issued for fiscal years and interim periods ending after December 15, 2008 (December 31, 2008, for the Bank). The Bank's adoption of FSP EITF 99-20-1 at December 31, 2008 did not have a material effect on its financial condition, results of operations or cash flows.

        FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). On April 9, 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 which is intended to provide greater clarity to investors about the credit and noncredit component of an OTTI event and to more effectively communicate when an OTTI event has occurred. The FSP applies to debt securities and requires that the total OTTI be presented in the statement of income with an offset for the amount of impairment that is recognized in other comprehensive income, which is the noncredit component. Noncredit component losses are to be recorded in other comprehensive income if an investor can assess that (a) it does not have the intent to sell or (b) it is not more likely than not that it will have to sell the security prior to its anticipated recovery. The FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The FSP will be applied prospectively with a cumulative effect transition adjustment as of the beginning of the period in which it is adopted (January 1, 2009 if the Bank early

F-24

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 2—Accounting Adjustments and Recently Issued Accounting Standards (Continued)

adopts). An entity early adopting this FSP must also early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. The adoption of FSP FAS 115-2 and FAS 124-2 could have a material effect on the Bank's results of operations to the extent that the Bank has material other-than-temporary impairment charges in the future.

        The Bank is currently evaluating whether or not the FSP will be adopted in the first quarter or second quarter of 2009. If the FSP is adopted in the first quarter of 2009, a cumulative effect adjustment will be recorded to the opening balance of (accumulated deficit) retained earnings and accumulated other comprehensive income as of January 1, 2009, which we estimate would have the following effect:

Impact of Adopting FSP FAS 115-2 and FAS 124-2
As of January 1, 2009
(dollars in thousands)

		Amount prior to Adoption			Effect of Adoption			Amount after Adoption
CAPITAL
Capital stock—Class B—putable ($100 par value), 35,847 shares and 31,638 shares issued and outstanding at December 31, 2008 and 2007, respectively		$	3,584,720		$	—		$	3,584,720
(Accumulated deficit) retained earnings			(19,749	)		351,408			331,659
Accumulated other comprehensive loss:
	Net unrealized loss on held-to-maturity securities		—			(351,408	)		(351,408	)
	Net unrealized loss on available-for-sale securities		(130,480	)		—			(130,480	)
	Net unrealized loss relating to hedging activities		(379	)		—			(379	)
	Pension and postretirement benefits		(3,887	)		—			(3,887	)
Total Capital		$	3,430,225		$	—		$	3,430,225

        FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). On April 9, 2009, FASB issued FSP FAS 157-4 which provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements under FASB Statement No. 157, Fair Value Measurements. The FSP will be applied prospectively and retrospective application will not be permitted. The FSP will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting this FSP must also early adopt FSP FAS 115-2 and FAS 124-2. The Bank has not yet determined the impact of adopting FSP FAS 157-4, and is currently evaluating whether FSP FAS 157-4 will be adopted in the first quarter or second quarter of 2009.

F-25

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 2—Accounting Adjustments and Recently Issued Accounting Standards (Continued)

        FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). On April 9, 2009, FASB issued FSP FAS 107-1 and APB 28-1 which will amend FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments. The FSP will require an entity to provide disclosures about the fair value of financial instruments in interim financial information. The FSP would apply to all financial instruments within the scope of Statement 107 and will require entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements. The FSP will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. The adoption of FSP FAS 107-1 and APB 28-1 is not expected to have a material effect on the Bank's financial statement disclosures.

Note 3—Cash and Due from Banks

        Cash Balances.    The Bank maintains collected cash balances with various commercial banks in return for certain services. These agreements contain no legal restrictions on the withdrawal of funds. The average collected cash balances for the years ended December 31, 2008 and 2007, were approximately $503,000 and $899,000, respectively.

        Restricted Balances.    In addition, the Bank maintained average required balances with the Federal Reserve Bank of Boston of approximately $5.5 million for the years ended December 31, 2008 and 2007. These represent average balances required to be maintained over each 14-day reporting cycle; however, the Bank may use earnings credits on these balances to pay for services received from the Federal Reserve Bank.

        Pass-Through Deposit Reserves.    The Bank acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. Pass-through reserves deposited with the Federal Reserve Bank of Boston would be shown as cash and due from banks on the statement of condition. However, there were no pass-through reserves deposited at December 31, 2008 and 2007.

Note 4—Securities Purchased Under Agreements to Resell

        The Bank periodically holds securities purchased under agreements to resell those securities. These amounts represent short-term loans and are assets on the statement of condition. The securities purchased under agreements to resell are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. Should the market value of the underlying securities decrease below the market value required as collateral, the counterparty must place an equivalent amount of additional securities in safekeeping in the name of the Bank or the dollar value of the resale agreement will be decreased accordingly. The collateral received on securities purchased under agreements to resell has not been sold or repledged by the Bank. Securities purchased under agreements to resell averaged $719.3 million and $1.1 billion during 2008 and 2007, respectively, and the maximum amount outstanding at any month end during 2008 and 2007 was $3.3 billion and $3.0 billion, respectively.

F-26

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 5—Trading Securities

        Major Security Types.    Trading securities as of December 31, 2008 and 2007, were as follows (dollars in thousands):

			2008		2007
Mortgage-backed securities
	U.S. government guaranteed		$	26,533	$	32,827
	Government-sponsored enterprises			36,663		47,754
	Other			—		32,288
		Total	$	63,196	$	112,869

        Net losses on trading securities for the years ended December 31, 2008 and 2007, consist of a change in net unrealized holding losses of $937,000 and $267,000 for securities held on December 31, 2008 and 2007, respectively.

        The Bank does not participate in speculative trading practices and holds these investments over a longer time horizon as management periodically evaluates its liquidity needs.

Note 6—Available-for-Sale Securities

        Major Security Types.    Available-for-sale securities as of December 31, 2008, were as follows (dollars in thousands):

						Amounts Recorded in Accumulated Other Comprehensive Income
				SFAS 133 Carrying Value Adjustments
		Amortized Cost				Unrealized Gains		Unrealized Losses			Estimated Fair Value
Supranational banks		$	349,865	$	152,025	$	—	$	(42,906	)	$	458,984
U.S. government corporations			213,308		121,037		—		(58,489	)		275,856
Government-sponsored enterprises			113,636		50,842		102		(21,450	)		143,130
State or local housing-finance-agency obligations			21,685		—		—		—			21,685
			698,494		323,904		102		(122,845	)		899,655
Mortgage-backed securities
	Government-sponsored enterprises		296,113		26,373		—		(7,737	)		314,749
Total		$	994,607	$	350,277	$	102	$	(130,582	)	$	1,214,404

F-27

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 6—Available-for-Sale Securities (Continued)

        Available-for-sale securities as of December 31, 2007, were as follows (dollars in thousands):

						Amounts Recorded in Accumulated Other Comprehensive Income
				SFAS 133 Carrying Value Adjustments
		Amortized Cost				Unrealized Gains		Unrealized Losses			Estimated Fair Value
Supranational banks		$	350,603	$	44,075	$	1,964	$	(301	)	$	396,341
U.S. government corporations			213,485		21,715		2,004		—			237,204
Government-sponsored enterprises			143,586		12,635		424		(581	)		156,064
			707,674		78,425		4,392		(882	)		789,609
Mortgage-backed securities
	Government-sponsored enterprises		269,248		8,501		—		(3,599	)		274,150
Total		$	976,922	$	86,926	$	4,392	$	(4,481	)	$	1,063,759

        During the year ended December 31, 2008, the Bank purchased $61.1 million of bonds in its role as the standby-bond purchaser pursuant to certain standby-bond-purchase agreements with a state-housing authority. Of the bonds purchased, $38.8 million were subsequently remarketed by the state housing authority. In accordance with the standby-bond-purchase agreements, the state-housing authority has authorized the remarketing agent to continue to pursue a resale of these bonds to other investors. If the bonds cannot be successfully remarketed after 60 days, the standby-purchase agreements obligate the state-housing authority to repurchase the bonds from the Bank within a term-out period of two years or, if earlier, upon the effective date of any event of default or the relevant commitment expiry date. There were no purchases of bonds under standby-bond-purchase agreements during the year ended December 31, 2007.

        The following table summarizes available-for-sale securities with unrealized losses as of December 31, 2008, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands).

		Less than 12 Months					12 Months or More					Total
		Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
Supranational banks		$	410,348	$	(38,231	)	$	48,636	$	(4,675	)	$	458,984	$	(42,906	)
U.S. government corporations			275,856		(58,489	)		—		—			275,856		(58,489	)
Government-sponsored enterprises			47,669		(5,433	)		70,110		(16,017	)		117,779		(21,450	)
			733,873		(102,153	)		118,746		(20,692	)		852,619		(122,845	)
Mortgage-backed securities
	Government-sponsored enterprises		—		—			314,749		(7,737	)		314,749		(7,737	)
Total temporarily impaired		$	733,873	$	(102,153	)	$	433,495	$	(28,429	)	$	1,167,368	$	(130,582	)

        Non-Mortgage-Backed Securities.    Management believes that the unrealized losses on non-mortgage-backed securities are the result of the current interest-rate environment, elevated

F-28

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 6—Available-for-Sale Securities (Continued)

investor yield requirements arising from perceived credit risk, and illiquidity in the credit markets. Investments in government-sponsored enterprise (GSE) securities, specifically debentures issued by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) were negatively impacted by investor credit concerns during most of the year ended December 31, 2008. However, the Federal Reserve Board's commitment to purchase up to $200.0 billion in GSE debt may provide some support to the Bank's investments in senior debt non-mortgage-backed securities issued by those entities. Management has reviewed these available-for-sale securities and has determined that all unrealized losses reflected above are temporary given the creditworthiness of the issuers. Because the decline in market value is largely attributable to illiquidity in the credit markets and not to deterioration in the fundamental credit quality of these securities, and because the Bank has the ability and intent to hold these investments through to a recovery of fair value, which may be maturity, the Bank does not consider these investments to be other-than-temporarily impaired at December 31, 2008.

        Mortgage-Backed Securities.    Management believes that the unrealized losses on the Bank's investment in mortgage-backed securities (MBS) are the result of the current interest-rate environment, elevated investor yield requirements arising from perceived credit risk, and illiquidity in the credit markets. All of these MBS are issued and guaranteed by a GSE. Investments in GSE-issued MBS, specifically Fannie Mae and Freddie Mac, were impacted by investor credit concerns during most of the year ending December 31, 2008. However, the Federal Reserve Board's commitment to purchase up to $1.25 trillion in GSE-issued MBS may provide some support to the Bank's investments in MBS issued by those entities. Management has determined that all unrealized losses reflected above are temporary given the creditworthiness of the issuers and the underlying collateral. In addition, for GSE securities, the issuer guarantees the timely payment of principal and interest of these investments. Because the decline in market value is largely attributable to illiquidity in the credit markets and not solely to deterioration in the fundamental credit quality of these securities, and because the Bank has the ability and intent to hold these investments through to a recovery of fair value, which may be maturity, the Bank does not consider these investments to be other-than-temporarily impaired at December 31, 2008.

        The following table summarizes available-for-sale securities with unrealized losses as of December 31, 2007. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands).

		Less than 12 Months					12 Months or More					Total
		Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
Supranational banks		$	80,441	$	(301	)	$	—	$	—		$	80,441	$	(301	)
Government-sponsored enterprises			—		—			59,665		(581	)		59,665		(581	)
			80,441		(301	)		59,665		(581	)		140,106		(882	)
Mortgage-backed securities
	Government-sponsored enterprises		274,150		(3,599	)		—		—			274,150		(3,599	)
Total temporarily impaired		$	354,591	$	(3,900	)	$	59,665	$	(581	)	$	414,256	$	(4,481	)

F-29

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 6—Available-for-Sale Securities (Continued)

        Redemption Terms.    The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at December 31, 2008 and 2007, are shown below (dollars in thousands). Expected maturities of some securities and MBS may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

		2008				2007
Year of Maturity		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less		$	24,995	$	25,352	$	29,913	$	30,315
Due after one year through five years			21,685		21,685		24,984		25,206
Due after five years through 10 years			—		—		—		—
Due after 10 years			651,814		852,618		652,777		734,088
			698,494		899,655		707,674		789,609
Mortgage-backed securities			296,113		314,749		269,248		274,150
	Total	$	994,607	$	1,214,404	$	976,922	$	1,063,759

        As of December 31, 2008, the amortized cost of the Bank's available-for-sale securities includes net premiums of $40.8 million. Of that amount, $39.9 million relate to non-MBS and $897,000 relate to MBS. As of December 31, 2007, the amortized cost of the Bank's available-for-sale securities includes net premiums of $40.9 million. Of that amount, $40.9 million relate to non-MBS and $32,000 relate to MBS.

        Interest-Rate-Payment Terms.    The following table details additional interest-rate-payment terms for investment securities classified as available-for-sale at December 31, 2008 and 2007 (dollars in thousands):

			2008		2007
Amortized cost of available-for-sale securities other than mortgage-backed securities:
	Fixed-rate		$	676,809	$	707,674
	Variable-rate			21,685		—
				698,494		707,674
Amortized cost of available-for-sale mortgage-backed securities:
	Fixed-rate collateralized mortgage obligations			296,113		269,248
		Total	$	994,607	$	976,922

        Loss on Sale.    During the third quarter of 2008, the Bank sold available-for-sale MBS with a carrying value of $2.7 million and recognized a loss of $80,000 on the sale of these securities. These MBS had been pledged as collateral to Lehman Brothers Special Financing, Inc. (Lehman) on out-of-the-money derivative transactions. On September 15, 2008, Lehman Brothers Holdings, Inc. announced it had filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court. This petition precipitated the termination of the Bank's derivative transactions with Lehman, and in connection with those terminations, the Bank requested a return of

F-30

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 6—Available-for-Sale Securities (Continued)

the related collateral from Lehman. However, Lehman did not honor this request. Accordingly, the Bank netted the value of the collateral with the amounts due to Lehman on those outstanding derivative transactions. See Note 10—Derivative and Hedging Activities for additional information regarding the derivative transactions and Note 7—Held to Maturity Securities for information regarding other securities affected by this event. This event was determined by the Bank to be isolated, nonrecurring, and unusual and could not have been reasonably anticipated. As such, the sale does not impact the Bank's ability and intent to hold remaining available-for-sale securities that are in an unrealized loss position through to a recovery of fair value, which may be maturity. The Bank did not have any other sales of available-for-sale investment securities during the years ended December 31, 2008 and 2007.

Note 7—Held-to-Maturity Securities

        Major Security Types.    Held-to-maturity securities as of December 31, 2008, were as follows (dollars in thousands):

			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Certificates of deposit			$	565,000	$	157	$	—		$	565,157
U.S. agency obligations				39,995		1,264		—			41,259
State or local housing-finance-agency obligations				278,128		735		(82,741	)		196,122
				883,123		2,156		(82,741	)		802,538
Mortgage-backed securities
	U.S. government guaranteed			11,870		680		(35	)		12,515
	Government-sponsored enterprises			4,384,215		62,576		(87,007	)		4,359,784
	Other			3,989,016		4		(1,579,075	)		2,409,945
				8,385,101		63,260		(1,666,117	)		6,782,244
		Total	$	9,268,224	$	65,416	$	(1,748,858	)	$	7,584,782

F-31

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 7—Held-to-Maturity Securities (Continued)

        Held-to-maturity securities as of December 31, 2007, were as follows (dollars in thousands):

			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Certificates of deposit			$	5,330,000	$	2,096	$	—		$	5,332,096
U.S. agency obligations				51,634		1,831		—			53,465
State or local housing-finance-agency obligations				299,653		2,396		(14,821	)		287,228
				5,681,287		6,323		(14,821	)		5,672,789
Mortgage-backed securities
	U.S. government guaranteed			13,661		636		—			14,297
	Government-sponsored enterprises			1,658,407		26,305		(2,342	)		1,682,370
	Other			5,924,526		2,789		(179,140	)		5,748,175
				7,596,594		29,730		(181,482	)		7,444,842
		Total	$	13,277,881	$	36,053	$	(196,303	)	$	13,117,631

        The following table summarizes the held-to-maturity securities with unrealized losses as of December 31, 2008, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands).

			Less than 12 Months					12 Months or More					Total
			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
State or local housing-finance-agency obligations			$	41,075	$	(1,151	)	$	121,475	$	(81,590	)	$	162,550	$	(82,741	)
Mortgage-backed securities
	U.S. government guaranteed			1,366		(35	)		—		—			1,366		(35	)
	Government-sponsored enterprises			1,820,254		(84,509	)		25,132		(2,498	)		1,845,386		(87,007	)
	Other			166,552		(121,625	)		1,892,594		(1,457,450	)		2,059,146		(1,579,075	)
				1,988,172		(206,169	)		1,917,726		(1,459,948	)		3,905,898		(1,666,117	)
		Total temporarily impaired	$	2,029,247	$	(207,320	)	$	2,039,201	$	(1,541,538	)	$	4,068,448	$	(1,748,858	)

        Impairment Analysis on Held-to-Maturity Securities.    The ongoing deterioration in U.S. housing markets, as reflected in declines in values of residential real estate and high levels of delinquencies on loans underlying MBS, poses risks to the Bank with respect to the ultimate collection of principal and interest due on its private-label collateralized mortgage obligation holdings. Although management believes that illiquidity in the capital markets due to the turmoil in housing credit has been the principal driver behind the decline in the fair value of the Bank's private-label collateralized mortgage obligation securities since December 31, 2007, rising delinquencies on underlying loans are likely during 2009 if the current economic recession should deepen or persist, which may result in credit losses on

F-32

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 7—Held-to-Maturity Securities (Continued)

these securities. The Bank closely monitors the performance of its securities to evaluate its exposure to the risk of loss on these investments to determine if a loss is other than temporary.

        State or Local Housing-Finance-Agency Obligations.    Management has reviewed the state or local housing-finance-agency obligations and has determined that the unrealized losses shown are the result of the current interest-rate environment and illiquidity in the credit markets. The Bank has determined that all unrealized losses reflected above are temporary given the creditworthiness of the issuers and the underlying collateral. As of December 31, 2008, none of the Bank's held-to-maturity investments in state or local housing-finance-agency obligations were rated below investment grade by a nationally recognized statistical ratings organization. Because the decline in market value is attributable to changes in interest rates and credit spreads and illiquidity in the credit markets and not to a deterioration in the fundamental credit quality of these obligations, and because the Bank has the ability and intent to hold these investments through to a recovery of fair value, which may be maturity, the Bank does not consider these investments to be other-than-temporarily impaired at December 31, 2008.

        Mortgage-Backed Securities.    The Bank invests in securities, which must be rated the highest long-term debt rating at the time of purchase. Each of the securities contains one or more of the following forms of credit protection:

•

Guarantee of principal and interest—The issuer guarantees the timely payment of principal and interest.

•

Excess spread—The average coupon rate of the underlying mortgage loans in the pool is higher than the coupon rate on the MBS note. The spread differential may be used to offset any losses that may be realized.

•

Overcollateralization—The total outstanding balance on the underlying mortgage loans in the pool is greater than the outstanding MBS note balance. The excess collateral is available to offset any losses that may be realized.

•

Subordination—The structure of classes of the security, where subordinated classes absorb any credit losses before the senior classes.

•

Insurance wrap—A third-party bond insurance company guarantees payment of principal and interest to certain classes of the security.

        Credit safeguards for the Bank's MBS consist of either guarantee of principal and interest in the case of U.S. government-guaranteed MBS and GSE MBS, or credit enhancement for residential MBS issued by entities other than GSEs (private-label MBS). Credit enhancements for private-label MBS primarily consist of overcollateralization and senior-subordinated shifting interest features; the latter results in the prioritization of payments to senior classes over junior classes. For its investments in MBS, the Bank solely invests in senior classes of GSE and private-label MBS.

        The Bank has higher exposure to the risk of loss on its investments in MBS when the loans backing the MBS exhibit high rates of delinquency and foreclosure and high losses on the sale of foreclosed properties. With respect to its GSE MBS holdings, the Bank has concluded that despite the ongoing deterioration in the nation's housing markets, the guarantee of principal and interest on the Bank's GSE MBS by Fannie Mae and Freddie Mac is still assured, and therefore the securities are not other-than-temporarily impaired. This position is further bolstered by the equity investments of up to

F-33

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 7—Held-to-Maturity Securities (Continued)

$200 billion for each of Fannie Mae and Freddie Mac that have been pledged in conjunction with the conservatorship of these two GSEs. No U.S. government-guaranteed or GSE MBS is considered by the Bank to be other-than-temporarily impaired at December 31, 2008.

        Since the surety of the Bank's private-label MBS holdings relies on credit enhancements and the quality and performance of the underlying loan collateral, the Bank tests these MBS investments on an ongoing basis in an effort to determine whether the credit enhancement associated with each security is sufficient to protect against losses of principal and interest on the underlying mortgage loans. As part of its analysis of private-label MBS, the Bank employs a third-party model to project expected loan collateral losses and the lifetime cash flows that would be passed through to its MBS investments. Factors such as interest rates and housing-price changes are used by the third-party model to derive resultant voluntary and involuntary prepayments and attendant loss severities as the basis of collateral loss projections.

        After collateral cash flows are modeled, the Bank determines whether each security's credit-support structure is sufficient to absorb projected principal losses and interest shortfall, if any. A second third-party model is used to monitor the sufficiency of each security's credit-support structure to fully return the Bank's original investment plus accrued interest. Based on the loan-collateral-loss forecast, the Bank creates a default projection that is unique for each security that takes into account the vintage, collateral type, and historical default experience of the particular MBS. Loss severities, also known as losses given default (LGD), are modeled in order to project the actual loss to individual loans after defaults occur, based on projected realized value net of servicing costs. The Bank uses a third-party model to forecast expected housing price changes at state and metropolitan statistical area (MSA) levels, which are combined with severities to date to construct LGD projections. In addition, the LGD projections incorporate collateral type and vintage to refine loss assumptions further. The Bank additionally compares its loss severity assumptions as derived above against consensus economic forecasts and third-party research to validate the reasonability of its assumptions. The Bank uses voluntary prepayment speeds that are derived from combining recent voluntary prepayment speeds experienced with a consensus of research opinions from major MBS dealers to model the impact of prepayments to its MBS holdings' senior class position within the respective deal structures. Generally, faster voluntary prepayments benefit the Bank as principal and interest are first applied towards the senior classes the Bank owns prior to application to subordinated classes, which the Bank does not own, allowing the Bank's holdings to be paid off before subordinated classes are eroded to a point wherein the subordinated classes cannot absorb collateral losses. However, the Bank's private-label MBS holdings have largely experienced substantially slower voluntary prepayments in recent months, reflecting factors including, but not limited to declining home values, deteriorating borrower credit conditions, and lender and investor risk aversion. The Bank does not model on a prospective basis any potential impacts of the burgeoning government and private sector efforts to improve the housing and mortgage markets, and therefore the Bank's short-term voluntary prepayment assumptions are largely reflective of recent experience.

        These factors are modeled through the third-party model to determine the sufficiency of credit support to absorb the expected cash flows. The third-party model applies the collateral cash flows to the deal structure waterfalls, applying shifting interest triggers where applicable. For those securities whose performance is further enhanced by third-party financial guarantors, the third-party model incorporates that credit enhancement into its analysis.

F-34

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 7—Held-to-Maturity Securities (Continued)

        Under the base-case scenario described above, the Bank's private-label MBS may show a projected loss of principal and interest, from which the Bank will determine whether or not those securities are other-than-temporarily impaired.

        Due to the loan credit performance of the Bank's private-label MBS portfolio deteriorating beyond the forecast assumptions concerning loan default rates, loss severities, and prepayment speeds, 16 of the Bank's Alt-A securities became other-than-temporarily impaired during 2008. In addition, we were informed that there were three other private-label MBS in our portfolio that were also owned by other FHLBanks which had concluded that these securities were other-than-temporarily impaired. While the Bank's quantitative assessment of the cash flows project no credit loss for these three securities, we have recognized that these securities are other-than-temporarily impaired and recorded an associated impairment charge. The total other-than-temporary impairment loss of $381.7 million was recorded in the statement of income as realized loss on held-to-maturity securities which was equal to the entire difference between the impaired investment's carrying amount of $728.0 million and its fair value of $346.2 million. The fair value of the investments became the new cost basis of the investments at the time of impairment. In subsequent periods the Bank will account for the other-than-temporarily impaired debt security as if the debt security had been purchased on the measurement date of the other-than-temporary impairment. The Bank will accrete into interest income, the portion of the amounts we expect to recover that exceeds the cost basis of the security over the remaining life of the investment security based on the amount and timing of future expected cash flows. As of December 31, 2008, the lowest ratings (S&P, Moody's, or Fitch) on these other-than-temporarily impaired securities ranged from triple-C to triple-A. The following table shows details of the Bank's other-than-temporarily impaired securities for the year ended December 31, 2008.

		Unpaid Principal Balance		Amortized Cost Prior to Impairment		Fair Value		Other-Than- Temporary Impairment Charge
Alt-A:
	Private-label MBS	$	727,512	$	727,270	$	345,845	$	(381,425	)
Subprime:
	Private-label MBS		714		714		394		(320	)
Total private-label MBS		$	728,226	$	727,984	$	346,239	$	(381,745	)

F-35

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 7—Held-to-Maturity Securities (Continued)

        The following table summarizes the held-to-maturity securities with unrealized losses as of December 31, 2007, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands).

			Less than 12 Months					12 Months or More					Total
			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
State or local housing-finance-agency obligations			$	211,242	$	(14,313	)	$	13,695	$	(508	)	$	224,937	$	(14,821	)
Mortgage-backed securities
	Government-sponsored enterprises			210,227		(285	)		57,489		(2,058	)		267,716		(2,343	)
	Other			4,371,330		(157,055	)		911,997		(22,084	)		5,283,327		(179,139	)
				4,581,557		(157,340	)		969,486		(24,142	)		5,551,043		(181,482	)
		Total temporarily impaired	$	4,792,799	$	(171,653	)	$	983,181	$	(24,650	)	$	5,775,980	$	(196,303	)

        Redemption Terms.    The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at December 31, 2008 and 2007, are shown below (dollars in thousands). Expected maturities of some securities and MBS may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

	2008				2007
Year of Maturity	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	565,000	$	565,157	$	5,331,020	$	5,333,135
Due after one year through five years		6,653		6,834		7,793		8,099
Due after five years through 10 years		42,771		42,612		3,743		3,927
Due after 10 years		268,699		187,935		338,731		327,628
		883,123		802,538		5,681,287		5,672,789
Mortgage-backed securities		8,385,101		6,782,244		7,596,594		7,444,842
Total	$	9,268,224	$	7,584,782	$	13,277,881	$	13,117,631

F-36

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 7—Held-to-Maturity Securities (Continued)

        As of December 31, 2008, the amortized cost of the Bank's held-to-maturity securities includes net discounts of $408.5 million. Of that amount, $258,000 relate to non-MBS and $408.2 million relate to MBS. The net discount on MBS includes the other-than-temporary impairment loss recorded on December 31, 2008 totaling $381.7 million. As of December 31, 2007, the amortized cost of the Bank's held-to-maturity securities includes net discounts of $18.7 million. Of that amount, $420,000 relate to non-MBS and $18.3 million relate to MBS.

        Interest-Rate-Payment Terms.    The following table details additional interest-rate-payment terms for investment securities classified as held-to-maturity at December 31, 2008 and 2007 (dollars in thousands):

			2008		2007
Amortized cost of held-to-maturity securities other than mortgage-backed securities:
	Fixed-rate		$	689,613	$	5,485,447
	Variable-rate			193,510		195,840
				883,123		5,681,287
Amortized cost of held-to-maturity mortgage-backed securities
	Pass-through securities:
		Fixed-rate		1,557,932		1,173,205
		Variable-rate		12,993		15,900
	Collateralized mortgage obligations:
		Fixed-rate		786,265		706,477
		Variable-rate		6,027,911		5,701,012
				8,385,101		7,596,594
Total			$	9,268,224	$	13,277,881

        Loss on Sale.    During 2008, the Bank sold held-to-maturity MBS with a carrying value of $5.7 million and recognized a loss of $52,000 on the sale of these securities. These MBS sold had been pledged as collateral to Lehman on out-of-the-money derivatives transactions. On September 15, 2008, Lehman Brothers Holdings, Inc. announced it had filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court. This petition precipitated the termination of the Bank's derivative transactions with Lehman, and in connection with those terminations the Bank requested a return of the related collateral. However, Lehman did not honor this request. Accordingly, the Bank netted the value of the collateral with the amounts due to Lehman on those outstanding derivative transactions. See Note 10—Derivative and Hedging Activities for additional information regarding the derivative transactions and Note 6—Available for Sale Securities for additional information regarding other securities affected in this event. This event was determined by the Bank to be isolated, nonrecurring, and unusual and could not have been reasonably anticipated. As such, the sale does not impact the Bank's ability and intent to hold the remaining investments classified as held-to-maturity through their stated maturity dates. The Bank did not have any other sales of held-to-maturity investment securities during the years ended December 31, 2008 and 2007.

F-37

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 8—Advances

        Redemption Terms.    At December 31, 2008 and 2007, the Bank had advances outstanding, including AHP advances (see Note 13 - -Affordable Housing Program), at interest rates ranging from zero percent to 8.44 percent, as summarized below (dollars in thousands). Advances with interest rates of zero percent are AHP-subsidized advances.

	2008						2007
Year of Contractual Maturity	Amount			Weighted Average Rate			Amount			Weighted Average Rate
Overdrawn demand-deposit accounts	$	28,444			0.46	%	$	61,496			4.64	%
2008		—			—			35,745,494			4.65
2009		32,363,291			2.42			6,801,904			4.59
2010		5,418,310			4.23			3,883,697			4.89
2011		4,953,624			3.27			1,974,447			4.88
2012		2,507,092			4.30			1,966,414			4.54
2013		5,119,387			2.43			865,192			4.83
Thereafter		5,439,874			4.13			4,086,235			4.37
Total par value		55,830,022			2.92	%		55,384,879			4.65	%
Premiums		9,279						4,278
Discounts		(20,883	)					(17,861	)
SFAS 133 hedging adjustments		1,107,849						308,444
Total	$	56,926,267					$	55,679,740

        The Bank offers advances to members that may be prepaid on pertinent dates (call dates) without incurring prepayment or termination fees (callable advances). Other advances may only be prepaid by paying a fee to the Bank (prepayment fee) that makes the Bank financially indifferent to the prepayment of the advance. At December 31, 2008 and 2007, the Bank had callable advances outstanding totaling $5.5 million and $30.0 million, respectively.

        The following table summarizes advances at December 31, 2008 and 2007, by year of contractual maturity or next call date for callable advances (dollars in thousands):

	2008					2007
Year of Contractual Maturity or Next Call Date	Par Value		Percentage of Total			Par Value		Percentage of Total
Overdrawn demand-deposit accounts	$	28,444		—	%	$	61,496		0.1	%
2008		—		—			35,775,494		64.6
2009		32,368,791		58.0			6,801,904		12.3
2010		5,418,310		9.7			3,883,697		7.0
2011		4,948,124		8.9			1,944,447		3.5
2012		2,507,092		4.5			1,966,414		3.5
2013		5,119,387		9.2			865,192		1.6
Thereafter		5,439,874		9.7			4,086,235		7.4
Total par value	$	55,830,022		100.0	%	$	55,384,879		100.0	%

F-38

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 8—Advances (Continued)

        The Bank also offers putable advances. With a putable advance, the Bank has the right to terminate the advance at predetermined exercise dates, which the Bank typically would exercise when interest rates increase, and the borrower may then apply for a new advance at the prevailing market rate. At December 31, 2008 and 2007, the Bank had putable advances outstanding totaling $9.3 billion and $8.0 billion, respectively.

        The following table summarizes advances outstanding at December 31, 2008 and 2007, by year of contractual maturity or next put date for putable advances (dollars in thousands):

	2008					2007
Year of Contractual Maturity or Next Call Date	Par Value		Percentage of Total			Par Value		Percentage of Total
Overdrawn demand-deposit accounts	$	28,444		—	%	$	61,496		0.1	%
2008		—		—			41,613,769		75.1
2009		39,061,566		70.0			7,260,154		13.1
2010		4,529,960		8.1			2,681,797		4.8
2011		4,906,824		8.8			1,336,647		2.4
2012		1,599,042		2.9			987,864		1.8
2013		4,277,587		7.7			476,592		0.9
Thereafter		1,426,599		2.5			966,560		1.8
Total par value	$	55,830,022		100.0	%	$	55,384,879		100.0	%

        Security Terms.    The Bank lends to eligible financial institutions chartered within the six New England states in accordance with federal statutes, including the FHLBank Act. The FHLBank Act generally requires the Bank to obtain eligible collateral on advances sufficient to protect against losses and permits the Bank to accept the following as eligible collateral on such advances: residential mortgage loans; certain U.S. government or government-agency securities; cash or deposits, and other eligible real-estate-related assets. The capital stock of the Bank owned by each borrowing member is pledged as additional collateral for the member's indebtedness to the Bank. Notwithstanding the FHLBank Act's general requirements regarding the eligibility of collateral, CFIs are eligible, under expanded statutory collateral rules, to pledge as collateral for advances small business, small farm, and small agriculture loans fully secured by collateral other than real estate, or securities representing a whole interest in such secured loans. CFIs are defined to be institutions that have, as of the date of the transaction at issue, less than $1.0 billion in average total assets over the three years preceding that date (subject to annual adjustment by the Finance Agency director based on the consumer price index). At December 31, 2008 and 2007, the Bank had rights to collateral, on a member-by-member basis, with an estimated value greater than outstanding advances. The estimated value of the collateral required to secure each member's obligations is calculated by applying collateral discounts or haircuts. Based upon the financial condition of the borrower, the type of security agreement, and other factors, the Bank requires the borrower to:

1.

Retain possession of the collateral assigned to the Bank and the borrower agrees to hold such collateral for the benefit of the Bank; or



2.

Specifically assign or place physical possession of such loan collateral with the Bank or a third-party custodian approved by the Bank; or

F-39

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 8—Advances (Continued)

3.

Place physical possession of such securities collateral with the Bank's safekeeping agent or the borrower's securities corporation, subject to a control agreement giving the Bank appropriate control over such collateral.

        The Bank is provided an additional safeguard for its security interests by Section 10(e) of the FHLBank Act affords any security interest granted by a member or borrower to the Bank priority over the claims and rights of any other party. The exceptions to this prioritization are limited to claims that would be entitled to priority under otherwise applicable law and are held by bona fide purchasers for value or by secured parties with higher priority perfected security interests. However, the priority granted to the security interests of the Bank under Section 10(e) may not apply when lending to insurance company members. This is due to the anti-preemption provision contained in the McCarran-Ferguson Act in which Congress declared that federal law would not preempt state insurance law unless the federal law expressly regulates the business of insurance. Thus, if state law conflicts with Section 10(e) of the FHLBank Act, the protection afforded by this provision may not be available to the Bank. However, the Bank perfects its security interests in the collateral pledged by its members, including insurance company members, by filing UCC-1 financing statements, or by taking possession or control of such collateral, or by taking other appropriate steps.

        Credit Risk.    While the Bank has never experienced a credit loss on an advance to a member or borrower, weakening economic conditions, severe credit market conditions along with the expanded statutory collateral rules for CFIs and housing associates provides the potential for additional credit risk for the Bank. Management of the Bank has policies and procedures in place to manage this credit risk. Based on these policies and procedures, the Bank does not expect any losses on advances. Therefore, the Bank has not provided any allowance for losses on advances. The Bank's credit risk from advances is concentrated in commercial banks, savings institutions, and credit unions.

        Related-Party Activities.    The Bank defines related parties as those members whose ownership of the Bank's capital stock is in excess of 10 percent of the Bank's total capital stock outstanding. The following table presents advances outstanding to related parties and total accrued interest receivable from those advances as of December 31, 2008 and 2007 (dollars in thousands):

		Par Value of Advances		Percent of Total Advances			Total Accrued Interest Receivable		Percent of Total Accrued Interest Receivable on Advances
As of December 31, 2008
	Bank of America Rhode Island, N.A., Providence, RI	$	14,200,378		25.4	%	$	117,316		52.0	%
	RBS Citizens N.A., Providence, RI		11,409,138		20.4			15,422		6.8
As of December 31, 2007
	Bank of America Rhode Island, N.A., Providence, RI	$	23,772,544		42.9	%	$	260,666		70.1	%
	RBS Citizens N.A., Providence, RI		6,241,960		11.3			22,661		6.1

        The Bank held sufficient collateral to cover the advances to the above institutions such that the Bank does not expect to incur any credit losses on these advances.

F-40

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 8—Advances (Continued)

        The Bank recognized interest income on outstanding advances with the above members during the years ended December 31, 2008, 2007, and 2006, as follows (dollars in thousands):

Name	2008		2007		2006
Bank of America Rhode Island, N.A., Providence, RI	$	693,776	$	698,874	$	481,468
RBS Citizens N.A., Providence, RI (1)		284,099		177,603		—
Citizens Financial Group, Providence, RI (1)		—		255,019		328,532

(1)

During 2007, five of the Bank's members: Citizens Bank of Connecticut, Citizens Bank of Massachusetts, Citizens Bank of New Hampshire, Citizens Bank of Rhode Island, and RBS National Bank, were merged into Citizens Bank, N.A. Following the consolidation, Citizens Bank, N.A. was renamed RBS Citizens, N.A. Prior to the merger, these five members were independent subsidiaries of Citizens Financial Group, Inc.

        The following table presents an analysis of advances activity with related parties for the year ended December 31, 2008 (dollars in thousands):

			For the Year Ended December 31, 2008
	Balance at December 31, 2007		Disbursements to Members		Payments from Members			Balance at December 31, 2008
Bank of America Rhode Island, N.A., Providence, RI	$	23,772,544	$	60,158,081	$	(69,730,247	)	$	14,200,378
RBS Citizens N.A., Providence, RI		6,241,960		407,271,176		(402,103,998	)		11,409,138

        Interest-Rate-Payment Terms.    The following table details additional interest-rate-payment terms for advances at December 31, 2008 and 2007 (dollars in thousands):

		2008		2007
Par amount of advances
	Fixed-rate	$	49,880,620	$	51,044,476
	Variable-rate		5,949,402		4,340,403
Total		$	55,830,022	$	55,384,879

        Variable-rate advances noted in the above table include advances outstanding at December 31, 2008 and 2007, totaling $223.5 million and $378.8 million, respectively, which contain embedded interest-rate caps or floors.

        Prepayment Fees.    The Bank records prepayment fees received from members on prepaid advances net of any associated SFAS 133 hedging fair-value adjustments on those advances. Additionally, under certain advances programs, the prepayment-fee provisions of the advance agreement could result in either a payment from the member or to the member when such an advance is prepaid, based upon market conditions at the time of prepayment (referred to as a symmetrical prepayment fee). Advances with a symmetrical prepayment-fee provision are hedged with derivatives containing offsetting terms, so that the Bank is financially indifferent to the members' decision to prepay such advances. The net amount of prepayment fees is reflected as interest income in the statement of income. For the three

F-41

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 8—Advances (Continued)

years ended December 31, 2008, 2007, and 2006, advance prepayment fees received from members, the associated hedging fair-value adjustments, and premium write-offs associated with prepaid advances are reflected in the following table (dollars in thousands):

	2008			2007			2006
Prepayment fees received from members	$	6,513		$	4,368		$	1,804
Hedging fair-value adjustments		(1,812	)		(1,393	)		(117	)
Premium write-off		(7	)		—			(778	)
Net prepayment fees	$	4,694		$	2,975		$	909

        The Bank did not receive any prepayment fees from Bank of America Rhode Island, N.A. or RBS Citizens N.A. during 2008. During 2007, the Bank received prepayment fees of $8,000 and $3,000 from Bank of America Rhode Island, N.A. and RBS Citizens N.A., respectively. The corresponding principal amount prepaid to the Bank during 2007 was $264,000 and $31,000 from Bank of America Rhode Island, N.A. and RBS Citizens N.A., respectively. The Bank did not pay or receive any prepayment fees from these members or their predecessors who were former members of the Bank during 2006.

Note 9—Mortgage Loans Held for Portfolio

        Under the Bank's MPF program, the Bank invests in fixed-rate single-family mortgages that are purchased from participating members. All mortgages are held-for-portfolio. Under the MPF program, the Bank's members originate, service, and credit-enhance residential real estate mortgages that are sold to the Bank.

        The following table presents mortgage loans held for portfolio as of December 31, 2008 and 2007 (dollars in thousands):

		2008			2007
Real estate
	Fixed-rate 15-year single-family mortgages	$	1,027,058		$	1,129,572
	Fixed-rate 20- and 30-year single-family mortgages		3,107,424			2,938,886
	Premiums		32,476			35,252
	Discounts		(11,576	)		(11,270	)
	Deferred derivative gains and losses, net		(1,495	)		(1,001	)
Total mortgage loans held for portfolio			4,153,887			4,091,439
	Less: allowance for credit losses		(350	)		(125	)
Total mortgage loans, net of allowance for credit losses		$	4,153,537		$	4,091,314

F-42

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 9—Mortgage Loans Held for Portfolio (Continued)

        The following table details the par value of mortgage loans held for portfolio at December 31, 2008 and 2007 (dollars in thousands):

	2008		2007
Conventional loans	$	3,755,215	$	3,637,590
Government-insured or guaranteed loans		379,267		430,868
Total par value	$	4,134,482	$	4,068,458

        An analysis of the allowance for credit losses at December 31, 2008, 2007, and 2006, follows (dollars in thousands):

	2008		2007			2006
Balance at beginning of year	$	125	$	125		$	1,843
Charge-offs		—		—			(14	)
Recoveries		—		9			—
Net recoveries (charge-offs)		—		9			(14	)
Provision for credit losses		225		(9	)		(1,704	)
Balance at end of year	$	350	$	125		$	125

        Mortgage loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage-loan agreement. At December 31, 2008 and 2007, the Bank had no recorded investments in impaired mortgage loans. Mortgage loans on nonaccrual status at December 31, 2008 and 2007, totaled $21.3 million and $8.0 million, respectively. The Bank's mortgage-loan portfolio is geographically diversified on a national basis. There is no material concentration of delinquent loans in any geographic region. REO at December 31, 2008 and 2007, totaled $3.9 million and $2.2 million, respectively. REO is recorded on the statement of condition in other assets.

        Sale of REO Assets.    During the years ended December 31, 2008, 2007, and 2006 the Bank sold REO assets with a recorded carrying value of $5.3 million, $3.7 million, and $932,000, respectively. Upon sale of these properties, and inclusive of any proceeds received from primary mortgage-insurance coverage, the Bank recognized net gains (losses) totaling $122,000, $112,000, and $(19,000) on the sale of REO assets during the years ended December 31, 2008, 2007, and 2006, respectively. Gains and losses on the sale of REO assets are recorded in other income.

        The Bank records CE fees as a reduction to mortgage-loan-interest income. CE fees totaled $4.4 million, $4.6 million, and $5.1 million for the years ended December 31, 2008, 2007, and 2006, respectively.

Note 10—Derivatives and Hedging Activities

        Nature of Business Activity.    The Bank may enter into interest-rate swaps (including callable and putable swaps), swaptions, interest-rate cap and floor agreements, calls, puts, and futures and forward contracts (collectively, derivatives) to manage its exposure to changes in interest rates.

F-43

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 10—Derivatives and Hedging Activities (Continued)

        The Bank may adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk-management objectives. The Bank uses derivatives in several ways: by designating them as either a fair-value or cash-flow hedge of a financial instrument or a forecasted transaction; by acting as an intermediary; or in general asset-liability management where derivatives serve a documented risk-mitigation purpose but do not qualify for hedge accounting (that is, an economic hedge). For example, the Bank uses derivatives in its overall interest-rate-risk management to adjust the interest-rate sensitivity of COs to approximate more closely the interest-rate sensitivity of assets (both advances and investments), and/or to adjust the interest-rate sensitivity of advances, investments, or mortgage loans to approximate more closely the interest-rate sensitivity of liabilities.

        In addition to using derivatives for general asset-liability management, the Bank also uses derivatives as follows: (1) to manage embedded options in assets and liabilities, (2) to hedge the market value of existing assets, liabilities, and anticipated transactions, (3) to hedge the duration risk of prepayable instruments, (4) to exactly offset other derivatives executed with members (when the Bank serves as an intermediary), and (5) to reduce funding costs.

        Consistent with Finance Agency regulations, the Bank enters into derivatives to manage the interest-rate-risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the Bank's risk-management objectives, and to act as an intermediary between its members and counterparties. Bank management uses derivatives when they are considered to be the most cost-efficient alternative to achieve the Bank's financial and risk-management objectives. Accordingly, the Bank may enter into derivatives that do not necessarily qualify for hedge accounting.

        Types of Assets and Liabilities Hedged.    The Bank formally documents at inception all relationships between derivatives designated as hedging instruments and hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions and its method of assessing ineffectiveness. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to (1) assets and liabilities on the statement of condition, (2) firm commitments, or (3) forecasted transactions. The Bank also formally assesses (both at the hedge's inception and monthly on an ongoing basis) whether the derivatives that are used in hedging transactions 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 Bank typically uses regression analyses or other statistical or scenario-based analyses to assess the effectiveness of its hedges. For hedges that are deemed highly effective that meet the hedge-accounting requirements of SFAS 133, the Bank applies hedge accounting. When it is determined that a derivative has not been or is not expected to be effective as a hedge, the Bank discontinues hedge accounting prospectively, as discussed below.

        Consolidated Obligations.    While COs are the joint and several obligations of the FHLBanks, each FHLBank has COs for which it is the primary obligor. The Bank enters into derivatives to hedge the interest-rate risk associated with its specific debt issuances.

        In a typical transaction, fixed-rate COs are issued, and the Bank simultaneously enters into a matching derivative in which the counterparty pays fixed-interest cash flows to the Bank designed to mirror in timing and amount the interest cash outflows the Bank pays on the CO. At the same time, the Bank may pay a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate assets. These transactions are treated as fair-value hedges under SFAS 133. The Bank may issue variable-rate COs, bonds indexed to LIBOR, the U.S. prime rate, or the federal

F-44

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 10—Derivatives and Hedging Activities (Continued)

funds rate and simultaneously execute interest-rate swaps to hedge the basis risk of the variable rate debt. The intermediation between the capital and derivatives markets permits the Bank to raise funds at lower costs than would otherwise be available through the issuance of simple fixed- or floating-rate COs in the capital markets.

        In a typical cash-flow or economic hedge of anticipated CO issuance, the Bank enters into a hedge upon the execution of an asset transaction that is expected to be funded by a CO with similar interest-rate risk. The hedge transaction is monitored until the anticipated COs are issued, at which time the hedge is terminated at its fair value. If the hedge is designated as a cash-flow hedge and is highly effective, the gain or loss is recorded as a basis adjustment to the hedged CO. If the hedge is designated as an economic hedge or if the hedge is less than highly effective, the fair value of the hedge at termination is recorded in current period net income.

        Advances.    The Bank may use interest-rate swaps to adjust the repricing and/or options characteristics of advances in order to more closely match the characteristics of the Bank's funding liabilities. Typically, the Bank hedges fixed-rate advances with interest-rate swaps where the Bank pays a fixed-rate coupon and receives a variable-rate coupon, effectively converting the advance to a floating-rate advance. This type of hedge is treated as a fair-value hedge under SFAS 133. Alternatively, the advance might have a floating-rate coupon based on an interest-rate index other than LIBOR, in which case the Bank would receive a coupon based on the non-LIBOR index and pay a LIBOR-based coupon. This type of hedge is treated as a cash-flow hedge under SFAS 133.

        With issuances of putable advances, the Bank purchases from the member a put option that enables the Bank to terminate a fixed-rate advance and extend additional credit on new terms. The Bank may hedge a putable advance by entering into a derivative that is cancelable by the derivative counterparty, where the Bank pays a fixed-rate coupon and receives a variable-rate coupon. This type of hedge is treated as a fair-value hedge under SFAS 133. The swap counterparty would normally exercise its option to cancel the derivative at par on any defined exercise date if interest rates had risen, and at that time, the Bank could, at its option, require immediate repayment of the advance.

        The member's ability to prepay can create interest-rate risk. When a member prepays an advance, the Bank could suffer lower future income if the principal portion of the prepaid advance were invested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, the Bank generally charges a prepayment fee that makes it financially indifferent to a member's decision to prepay an advance. If the advance is hedged with a derivative instrument, the prepayment fee will generally offset the cost of terminating the designated hedge. When the Bank offers advances (other than short-term advances) that a member may prepay without a prepayment fee, it usually finances such advances with callable debt or otherwise hedges this option.

        Mortgage Loans.    The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected lives of these investments, depending on changes in estimated prepayment behavior. The Bank addresses a portion of the interest-rate risk inherent in mortgage loans by duration-matching mortgage loans and the funding liabilities. As interest rates change, the portfolio is rebalanced to maintain the targeted duration level. The Bank may also manage against prepayment, or convexity, risk by funding some mortgage loans with COs that have redemption features. In addition, the Bank may use derivatives to manage the prepayment and duration variability of mortgage loans.

F-45

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 10—Derivatives and Hedging Activities (Continued)

Net income could be reduced if the Bank replaces mortgage loans with lower-yielding assets and if the Bank's higher funding costs are not reduced concomitantly.

        Swaptions, which are options to enter into specified interest-rate swaps at a future date, may also be used to hedge prepayment risk on mortgage loans, many of which are not designated to specific mortgage loans and, therefore, do not receive fair-value or cash-flow hedge-accounting treatment. The options are marked to market through current period earnings and presented on the statement of income as net (losses) gains on derivatives and hedging activities. The Bank may also purchase interest-rate caps and floors, swaptions, callable swaps, calls, and puts to minimize the prepayment risk embedded in the mortgage loans. Although these derivatives are valid economic hedges against the prepayment risk of the loans, they are not specifically linked to individual loans and, therefore, do not receive either fair-value or cash-flow hedge accounting. The derivatives are marked to market through current period earnings.

        Firm Commitment Strategies.    In accordance with SFAS No. 149, Amendment of Statement 133 on Derivative and Hedging Activities (SFAS 149), certain mortgage-purchase commitments entered into after June 30, 2003, are considered derivatives. The Bank may hedge these commitments by selling MBS to be announced (TBA) or other derivatives for forward settlement. A TBA represents a forward contract for the sale of MBS at a future agreed-upon date for an established price. These hedges do not qualify for hedge accounting treatment under SFAS 133. The mortgage-purchase commitment and the TBA used in the economic hedging strategy are recorded on the statement of condition at fair value, with changes in fair value recognized in current period earnings. When the mortgage-purchase-commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan. The basis adjustments on the resulting performing loans are then amortized into net interest income over the life of the loans.

        Commitments to originate advances are not derivatives under SFAS 149. The Bank may also hedge a firm commitment for a forward-starting advance through the use of an interest-rate swap. In this case, the swap functions as the hedging instrument for both the firm commitment and the subsequent advance. The basis movement associated with the firm commitment will be rolled into the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.

        Investments.    The Bank invests in U.S. agency obligations, MBS, asset-backed securities, and the taxable portion of state or local housing-finance-agency obligations, which may be classified as held-to-maturity, available-for-sale, or trading securities. The interest-rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The Finance Agency guidance and the Bank's policies limit this source of interest-rate risk by restricting the types of mortgage assets the Bank may own to those with limited average life changes under certain interest-rate-shock scenarios and establishing limitations on duration of equity and changes to market value of equity. The Bank may manage its prepayment and duration risk by funding investment securities with COs that have call features or by hedging the prepayment risk with caps or floors, callable swaps, or swaptions.

        For long-term securities that are classified as held-to-maturity, the Bank manages its interest-rate-risk exposure by issuing funding instruments with offsetting market-risk characteristics. For example, the Bank typically funds floating-rate MBS whose coupons reset monthly with short-term

F-46

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 10—Derivatives and Hedging Activities (Continued)

discount notes or with other CO bonds with fixed rates that have been converted to a floating rate with an interest-rate swap, while it might use long-term CO bonds to fund fixed-rate commercial MBS.

        For available-for-sale securities that have been hedged and qualify as a fair-value hedge, the Bank records the portion of the change in fair value related to the risk being hedged in other income as net (losses) gains on derivatives and hedging activities together with the related change in the fair value of the derivative, and the remainder of the change in value is recorded in other comprehensive income as net unrealized (loss) gain on available-for-sale securities. For available-for-sale securities that have been hedged and qualify as a cash-flow hedge, the Bank records the effective portion of the change in value of the derivative related to the risk being hedged in other comprehensive income as net unrealized loss relating to hedging activities. The ineffective portion is recorded in other income as net (losses) gains on derivatives and hedging activities.

        The Bank may also manage the risk arising from changing market prices or cash flows of investment securities classified as trading by entering into derivatives (economic hedges) that offset the changes in fair value or cash flows of the securities. These derivatives are not specifically designated as hedges of individual assets, but rather are collectively managed to provide an offset to the changes in the fair values of the assets. The market-value changes of trading securities are included in net unrealized losses on trading securities in the statement of income, while the changes in fair value of the associated derivatives are included in other income as net (losses) gains on derivatives and hedging activities.

        Anticipated Debt Issuance.    The Bank may enter into interest-rate swaps for the anticipated issuance of fixed-rate CO bonds to lock in a spread between an earning asset and the cost of funding. The interest-rate swap is terminated upon issuance of the fixed-rate CO bond, with the realized gain or loss reported on the interest-rate swap recorded in accumulated other comprehensive income. Realized gains and losses reported in accumulated other comprehensive income are recognized as earnings in the periods in which earnings are affected by the cash flows of the fixed-rate CO bonds.

        Managing Credit Risk on Derivatives.    The Bank is subject to credit risk on its hedging activities due to the risk of nonperformance by counterparties to the derivative agreements. The amount of potential counterparty risk depends on the extent to which master-netting arrangements are included in such contracts to mitigate the risk. The Bank manages counterparty credit risk through its ongoing monitoring of counterparty creditworthiness and adherence to the requirements set forth in Bank policies and regulations. All counterparties must execute master-netting agreements prior to entering into any interest-rate-exchange agreement with the Bank. These master-netting agreements contain bilateral-collateral exchange agreements that require that credit exposure beyond a defined threshold amount be secured by readily marketable, investment-grade U.S. Treasury or GSE securities, or cash. The level of these collateral threshold amounts varies according to the counterparty's Standard & Poor's Rating Service (S&P) or Moody's Investor Service (Moody's) long-term credit ratings. Credit exposures are then measured daily and adjustments to collateral positions are made as necessary to minimize the Bank's exposure to credit risk. These master-netting agreements also contain bilateral ratings-tied termination events permitting the Bank to terminate all outstanding agreements with a counterparty in the event of a specified rating downgrade by Moody's or S&P. Based on credit analyses and collateral requirements, Bank management does not anticipate any credit losses on its derivative agreements.

F-47

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 10—Derivatives and Hedging Activities (Continued)

        The contractual or notional amount of derivatives reflects the involvement of the Bank in the various classes of financial instruments. The notional amount of derivatives does not measure the credit-risk exposure of the Bank, and the maximum credit exposure of the Bank is substantially less than the notional amount. The Bank requires collateral agreements on all derivatives that establish collateral delivery thresholds. The maximum credit risk is the estimated cost of replacing favorable interest-rate swaps, forward interest-rate agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors that have a net positive market value, assuming the counterparty defaults and the related non-cash collateral, if any, is of no value to the Bank. The maximum credit risk does not include instances where the Bank's pledged collateral to counterparties exceeds the Bank's net position.

        At December 31, 2008 and 2007, the Bank's credit risk on derivatives as measured by current replacement cost net of cash collateral and accrued interest was approximately $28.9 million and $67.0 million, respectively. These totals include $5.1 million and $92.6 million of net accrued interest receivable, respectively. In determining current replacement cost, the Bank considers accrued interest receivable and payable, and the legal right to offset derivative assets and liabilities by counterparty. The Bank held cash of $46.1 million as collateral as of December 31, 2008. The Bank held cash and securities, including accrued interest, with a fair value of $127.0 million as collateral as of December 31, 2007. The securities collateral held on December 31, 2007, had not been sold or repledged. Additionally, collateral related to derivatives with member institutions include collateral assigned to the Bank, as evidenced by a written security agreement and held by the member institution for the benefit of the Bank.

        The Bank executes derivatives with counterparties with long-term ratings of single-A (or equivalent) or better by S&P and Moody's at the time of the transaction. Some of these counterparties or their affiliates buy, sell, and distribute COs. See Note 12—Consolidated Obligations for additional information. Also Note 19—Commitments and Contingencies discusses assets pledged by the Bank to these counterparties. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.

        The Bank has not issued COs denominated in currencies other than U.S. dollars.

        Intermediation.    In the past, the Bank has acted as an intermediary between members and other counterparties by entering into derivatives with members and into offsetting derivatives with other counterparties to meet the needs of its members. The notional amount of derivatives in which the Bank was an intermediary was $15.0 million at December 31, 2008 and $20.0 million at December 31, 2007.

        Financial Statement Impact and Additional Financial Information.    For the years ended December 31, 2008, 2007, and 2006, the Bank recorded net (losses) gains on derivatives and hedging activities totaling ($11.1) million, $7.6 million, and $10.5 million, respectively, in other income. Net

F-48

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 10—Derivatives and Hedging Activities (Continued)

(losses) gains on derivatives and hedging activities for the years ended December 31, 2008, 2007, and 2006, were as follows (dollars in thousands):

	2008			2007			2006
Net gains related to fair-value hedge ineffectiveness	$	1,210		$	8,367		$	10,417
Net (losses) gains resulting from economic hedges not receiving hedge accounting		(12,355	)		(752	)		123
Net (losses) gains on derivatives and hedging activities	$	(11,145	)	$	7,615		$	10,540

        There were no amounts for the years ended December 31, 2008, 2007, and 2006, 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 December 31, 2008, the amount of deferred net losses on derivative instruments accumulated in other comprehensive income expected to be reclassified to earnings during the next 12 months is $4,000.

F-49

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 10—Derivatives and Hedging Activities (Continued)

        The following table presents outstanding notional balances and estimated fair values of derivatives outstanding excluding collateral and accrued interest by category at December 31, 2008 and 2007 (dollars in thousands):

		December 31, 2008					December 31, 2007
		Notional		Estimated Fair Value			Notional		Estimated Fair Value
Interest-rate swaps:
	Fair value	$	30,543,713	$	(1,180,213	)	$	28,508,718	$	(375,455	)
	Economic		157,750		(8,129	)		180,500		(2,319	)
Interest-rate caps/floors:
	Economic		66,500		294			409,800		586
	Member intermediated		15,000		—			20,000		—
Forward Contracts:
	Economic		10,000		(133	)		—		—
Total			30,792,963		(1,188,181	)		29,119,018		(377,188	)
Mortgage-delivery commitments(1)			32,672		(365	)		9,600		27
Total derivatives		$	30,825,635		(1,188,546	)	$	29,128,618		(377,161	)
Accrued interest					89,788					218,569
Cash collateral					(46,101	)				(61,150	)
Net derivatives fair value				$	(1,144,859	)			$	(219,742	)
Derivative assets				$	28,935				$	67,047
Derivative liabilities					(1,173,794	)				(286,789	)
Net derivatives fair value				$	(1,144,859	)			$	(219,742	)

(1)

Mortgage-delivery commitments are classified as derivatives pursuant to SFAS 149 with changes in fair value recorded in other income.

        On September 15, 2008, Lehman Brothers Holdings, Inc. announced it had filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court. This petition precipitated the termination of the Bank's derivative transactions with Lehman on September 19, 2008, which had a total notional amount of $3.0 billion and a net fair value of $14.0 million owed to Lehman. The payment made to Lehman was netted against the fair value of MBS that had been pledged as collateral to Lehman. See Note 6—Available for Sale Securities and Note 7—Held-to-Maturity Securities for a description of the sales of collateral to Lehman. The Bank then replaced $1.6 billion (notional amount) of the terminated derivative transactions with new derivative counterparties. Management determined that the remaining $1.4 billion (notional amount) of previously hedged transactions would not be re-hedged.

F-50

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 10—Derivatives and Hedging Activities (Continued)

        Related-Party Activities.    The following table presents an analysis of outstanding derivative contracts with related parties and affiliates of related parties at December 31, 2008 and 2007 (dollars in thousands):

			December 31, 2008					December 31, 2007
Derivatives Counterparty	Affiliate Member	Primary Relationship	Notional Amount		Percent of total Derivatives			Notional Amount		Percent of total Derivatives
Bank of America, N.A.	Bank of America Rhode Island, N.A.	Dealer	$	3,083,587		10.01	%	$	1,305,910		4.48	%
Royal Bank of Scotland, PLC	RBS Citizens, N.A.	Dealer		1,451,760		4.71			896,500		3.08
Bank of America Securities, LLC	Bank of America Rhode Island, N.A.	Dealer		10,000		0.03			—		—

Note 11—Deposits

        The Bank offers demand and overnight deposits for members and qualifying nonmembers. In addition, the Bank offers short-term interest-bearing deposit programs to members. Members that service mortgage loans may deposit in the Bank funds collected in connection with mortgage loans pending disbursement of such funds to the owners of the mortgage loans; the Bank classifies these items as other in the following table.

        Deposits classified as demand, overnight, and other pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit. Deposits at December 31, 2008 and 2007, include SFAS 133 hedging adjustments of $6.4 million and $4.4 million, respectively. The average interest rates paid on average deposits during 2008 and 2007 were 1.77 percent and 4.73 percent, respectively.

        The following table details interest-bearing and non-interest-bearing deposits as of December 31, 2008 and 2007 (dollars in thousands):

		2008		2007
Interest bearing
	Demand and overnight	$	529,516	$	672,893
	Term		67,353		30,770
	Other		3,612		3,393
Non-interest bearing
	Other		10,589		6,070
	Total deposits	$	611,070	$	713,126

        The aggregate amount of time deposits with a denomination of $100,000 or more was $64.3 million and $30.2 million as of December 31, 2008 and 2007, respectively.

Note 12—Consolidated Obligations

        COs consist of CO bonds and CO discount notes. The FHLBanks issue COs through the Office of Finance, which serves as their fiscal agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a

F-51

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 12—Consolidated Obligations (Continued)

liability its specific portion of COs for which it is the primary obligor. The Finance Agency and the U.S. Treasury have oversight over the issuance of FHLBank debt through the Office of Finance. CO bonds are issued primarily to raise intermediate and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. CO discount notes are issued to raise short-term funds. These notes sell at less than their face amount and are redeemed at par value when they mature. See Note 19—Commitments and Contingencies for discussion of the U.S. Treasury's establishment of the Government Sponsored Enterprise Credit Facility (GSECF), which is designed to serve as a contingent source of liquidity for the 12 FHLBanks through issuance of COs to the U.S. Treasury.

        Although the Bank is primarily liable for its portion of COs (that is, those issued on its behalf), the Bank is also jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all COs of each of the FHLBanks. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any CO whether or not the CO represents a primary liability of such FHLBank. Although this has never occurred, to the extent that an FHLBank makes any payment on a CO on behalf of another FHLBank that has primary liability for such CO, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement from the noncomplying FHLBank for any payments made on its behalf and other associated costs (including interest to be determined by the Finance Agency). If, however, the Finance Agency determines that the noncomplying FHLBank is unable to satisfy its repayment obligations, the Finance Agency may allocate the outstanding liabilities of the noncomplying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBanks' participation in all COs outstanding or in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner.

        The par amounts of the 12 FHLBanks' outstanding COs, including COs held by other FHLBanks, were approximately $1.3 trillion and $1.2 trillion at December 31, 2008 and 2007, respectively. Regulations require each FHLBank to maintain unpledged qualifying assets equal to its participation in the COs outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the COs; obligations of or fully guaranteed by the U.S.; obligations, participations, or other instruments of or issued by Fannie Mae or the Government National Mortgage Association; mortgages, obligations, or other securities which are or have ever been sold by Freddie Mac under the FHLBank Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBank is located. Any asset subject to a lien or pledge for the benefit of holders of any issue of COs are treated as if they were free from lien or pledge for purposes of compliance with these regulations.

        To provide holders of COs issued prior to January 29, 1993 (prior bondholders), the protection equivalent to that provided under the FHLBanks' previous leverage limit of 12 times the FHLBanks' capital stock, prior bondholders have a claim on a certain amount of the qualifying assets (Special Asset Account [SAA]) if capital stock is less than 8.33 percent of COs. Mandatorily redeemable capital stock is considered capital stock for determining the Bank's compliance with this requirement. At December 31, 2008 and 2007, the FHLBanks' regulatory capital stock was 4.4 percent and 4.3 percent, respectively, of the par value of COs outstanding. Further, the resolution requiring the establishment of the SAA also requires each FHLBank to transfer qualifying assets in the amount of its allocated share of the FHLBanks' SAA to a trust for the benefit of the prior bondholders if its capital-to-assets ratio falls below two percent. As of December 31, 2008 and 2007, no FHLBank had a capital-to-assets ratio

F-52

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 12—Consolidated Obligations (Continued)

of less than two percent; therefore no assets were being held in a trust. In addition, no trust has ever been established as a result of this regulation, as the ratio has never fallen below two percent.

        General Terms.    COs are issued with either fixed-rate coupon-payment terms or variable-rate interest-payment terms that use a variety of indices for interest-rate resets, including LIBOR, Constant Maturity Treasury (CMT), Treasury Bills (T-Bills), the prime rate, Eleventh District Cost of Funds Index (COFI), and others. To meet the expected specific needs of certain investors in COs, both fixed-rate CO bonds and variable-rate CO bonds may contain features, which may result in complex coupon-payment terms and call options. When such COs are issued, the Bank enters into derivatives containing offsetting features that effectively convert the terms of the bond to those of a simple variable-rate bond or a fixed-rate bond.

        These COs, beyond having fixed-rate or simple variable-rate coupon-payment terms, may also have the following broad terms regarding principal repayment terms:

Optional Principal Redemption Bonds (callable bonds) that the Bank may redeem in whole or in part at its discretion on predetermined call dates according to the terms of the bond offerings.

With respect to interest payments, CO bonds may also have the following terms:

Zero-Coupon Bonds are long-term discounted instruments that earn a fixed yield to maturity or the optional principal-redemption date. All principal and interest are paid at maturity or on the optional principal redemption date, if exercised prior to maturity.

Step-Up Bonds pay interest at increasing fixed rates for specified intervals over the life of the bond and can be called at the Bank's option on the step-up dates.

        Interest-Rate-Payment Terms.    The following table details CO bonds by interest-rate-payment type at December 31, 2008 and 2007 (dollars in thousands):

		2008		2007
Par value of CO bonds
	Fixed-rate bonds	$	28,151,315	$	28,377,715
	Simple variable-rate bonds		3,050,000		1,000,000
	Zero-coupon bonds		1,780,000		4,209,700
	Step-up bonds		350,000		65,000
Total par value		$	33,331,315	$	33,652,415

F-53

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 12—Consolidated Obligations (Continued)

        Redemption Terms.    The following is a summary of the Bank's participation in CO bonds outstanding at December 31, 2008 and 2007, by year of contractual maturity (dollars in thousands):

	2008						2007
Year of Contractual Maturity	Amount			Weighted Average Rate			Amount			Weighted Average Rate
2008	$	—			—	%	$	11,247,010			4.39	%
2009		15,200,275			2.85			6,335,475			4.63
2010		5,338,110			3.49			3,218,350			4.57
2011		2,598,350			3.87			1,705,500			4.86
2012		1,735,580			4.70			1,836,080			5.03
2013		2,454,000			4.06			1,759,000			4.82
Thereafter		6,005,000			5.58			7,551,000			5.96
Total par value		33,331,315			3.71	%		33,652,415			4.89	%
Premiums		80,586						29,577
Discounts		(1,481,762	)					(3,329,419	)
SFAS 133 hedging adjustments		323,863						69,414
Total	$	32,254,002					$	30,421,987

        The Bank's CO bonds outstanding at December 31, 2008 and 2007, included (dollars in thousands):

		2008		2007
Par value of CO bonds
	Noncallable or non-putable	$	23,940,315	$	15,137,715
	Callable		9,391,000		18,514,700
Total par value		$	33,331,315	$	33,652,415

        The following table summarizes CO bonds outstanding at December 31, 2008 and 2007, by year of contractual maturity or next call date (dollars in thousands):

Year of Contractual Maturity or Next Call Date	2008		2007
2008	$	—	$	23,076,710
2009		19,800,275		4,140,475
2010		5,959,110		2,293,350
2011		2,258,350		671,800
2012		1,230,580		956,080
2013		1,878,000		654,000
Thereafter		2,205,000		1,860,000
Total par value	$	33,331,315	$	33,652,415

F-54

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 12—Consolidated Obligations (Continued)

        Consolidated Obligation Discount Notes.    CO discount notes are issued to raise short-term funds. Discount notes are COs with original maturities up to 365 days. These notes are issued at less than their par value and redeemed at par value when they mature.

        The Bank's participation in CO discount notes, all of which are due within one year, was as follows (dollars in thousands):

	Book Value		Par Value		Weighted Average Rate(1)
December 31, 2008	$	42,472,266	$	42,567,305		1.59	%
December 31, 2007	$	42,988,169	$	43,264,750		4.33	%

(1)

The CO discount notes weighted-average rate represents a yield to maturity.

Note 13—Affordable Housing Program

        The FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and below-market-rate advances to members, who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the AHP the greater of $100 million or 10 percent of regulatory income. Regulatory income is defined as GAAP income before interest expense associated with mandatorily redeemable capital stock under SFAS 150 and the assessment for AHP, but after the assessment for REFCorp. The exclusion of interest expense related to mandatorily redeemable capital stock is based on an advisory bulletin issued by the Finance Board. The AHP and REFCorp assessments are calculated simultaneously due to their interdependence. The Bank accrues this expense monthly based on its income before assessments. Calculation of the REFCorp assessment is discussed in Note 14—Resolution Funding Corporation.

        If the Bank experienced a regulatory loss during a quarter, but still had regulatory income for the year, the Bank's obligation to the AHP would be calculated based on the Bank's regulatory income for that calendar year. In annual periods where the Bank's regulatory income is zero or less, the AHP assessment for the Bank is zero since the Bank's required annual contribution is limited to its annual net earnings. However, if the result of the aggregate 10 percent calculation described above was less than $100 million for all 12 FHLBanks, then each FHLBank would be required to contribute such prorated sums as may be required to assure that the aggregate contributions of the FHLBanks equals $100 million. The proration would be made on the basis of the income of the FHLBanks for the year, except that the required annual AHP contribution for an FHLBank shall not exceed its net earnings for the year. Each FHLBank's required annual AHP contribution is limited to its annual net earnings. Due to the net loss in 2008, the Bank has recorded no AHP expense for 2008. There was no shortfall in either 2008, 2007, or 2006. If an FHLBank is experiencing financial instability and finds that its required AHP contributions are contributing to the financial instability, the FHLBank may apply to the Finance Agency for a temporary suspension of its contributions. The Bank did not make such an application in either 2008, 2007, or 2006.

F-55

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 13—Affordable Housing Program (Continued)

        The Bank charges the amount set aside for AHP to income and recognizes it as a liability. The Bank then reduces the AHP liability as members use subsidies. The Bank had outstanding principal in AHP-related advances of $86.2 million and $80.9 million at December 31, 2008 and 2007, respectively.

        The following table is an analysis of the AHP liability for the years ended December 31, 2008 and 2007, follows (dollars in thousands):

Roll-forward of the AHP Liability	2008			2007
Balance at beginning of year	$	48,451		$	44,971
AHP expense for the year		—			22,182
AHP direct grant disbursements		(11,400	)		(13,410	)
AHP subsidy for below-market-rate advance disbursements		(2,479	)		(5,409	)
Return of previously disbursed grants and subsidies		243			117
Balance at end of year	$	34,815		$	48,451

Note 14—Resolution Funding Corporation

        Each FHLBank is required to pay to REFCorp 20 percent of income calculated in accordance with GAAP after the assessment for AHP, but before the assessment for the REFCorp. The AHP and REFCorp assessments are calculated simultaneously due to their interdependence. The Bank accrues its REFCorp assessment on a monthly basis. Calculation of the AHP assessment is discussed in Note 13—Affordable Housing Program. The REFCorp has been designated as the calculation agent for AHP and REFCorp assessments. Each FHLBank provides their net income before AHP and REFCorp to the REFCorp, which then performs the calculations for each quarter-end.

        The FHLBanks will continue to be obligated to these amounts until the aggregate amounts actually paid by all 12 FHLBanks are equivalent to a $300 million annual annuity (or a scheduled payment of $75 million per quarter) with a final maturity date of April 15, 2030, at which point the required payment of each FHLBank to REFCorp will be fully satisfied. The cumulative amount to be paid to REFCorp by the Bank is not determinable at this time because it depends on the future earnings of all FHLBanks and interest rates. If the Bank experienced a net loss during a quarter, but still had net income for the year, the Bank's obligation to the REFCorp would be calculated based on the Bank's year-to-date GAAP net income. The Bank would be able to reduce future assessments by the amounts paid in excess of its calculated annual obligation. If the Bank experienced a net loss for a full year, the Bank would have no obligation to the REFCorp for the year.

        During the fourth quarter of 2008, the Bank recorded a loss before assessments of $331.5 million which resulted in an overpayment of the Bank's 2008 REFCorp obligation. The amount of the overpayment is recorded as a prepaid asset on the statement of condition and will be used towards

F-56

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 14—Resolution Funding Corporation (Continued)

future assessments. The following table is an analysis of the REFCorp assessment for the year ended December 31, 2008 (dollars in thousands):

	2008
Payment for first quarter	$	14,039
Payment for second quarter		13,121
Payment for third quarter		13,076
Payment for fourth quarter		—
Total 2008 REFCorp payments		40,236
2008 REFCorp annual assessment		—
REFCorp prepaid assessment	$	40,236

        Due to the overpayment of the Bank's 2008 REFCorp assessment, the Bank has established a prepaid assessment asset which it will use as a credit against future REFCorp assessments over an indefinite period of time. As the prepaid REFCorp assessment is applied against future assessment payments, the prepaid amount will be reduced until it has been exhausted. If any amount of the Bank's prepaid REFCorp assessment remains at the time that the REFCorp obligation for the FHLBank System as a whole is fully satisfied, as discussed below, REFCorp, in consultation with the U.S. Treasury, will implement a procedure so that the Bank would be able to collect on its remaining prepaid assessment.

        The FHLBanks' aggregate payments through 2008 have exceeded the scheduled payments, effectively accelerating payment of the REFCorp obligation and shortening its remaining term to April 15, 2013, effective December 31, 2008. The FHLBanks' aggregate payments through 2008 have satisfied $42.5 million of the $75 million scheduled payment due on April 15, 2013 and all scheduled payments thereafter. This date assumes that the FHLBanks will pay exactly $300 million annually after December 31, 2008, until the annuity is satisfied.

        The benchmark payments or portions of them could be reinstated if the actual REFCorp payments of the FHLBanks fall short of $75 million in a quarter. The maturity date of the REFCorp obligation may be extended beyond April 15, 2030, if such extension is necessary to ensure that the value of the aggregate amounts paid by the FHLBanks exactly equals a $300 million annual annuity. Any payment beyond April 15, 2030, will be paid to the U.S. Treasury.

Note 15—Capital

        The Bank is subject to three capital requirements under its capital structure plan and Finance Agency rules and regulations. The Bank must maintain at all times:

1.

Permanent capital in an amount at least equal to the sum of its credit-risk capital requirement, its market-risk capital requirement, and its operations-risk capital requirement, calculated in accordance with Bank policy and Finance Agency rules and regulations. Only permanent capital, defined as Class B stock and retained earnings, satisfies this risk-based capital requirement. The Finance Agency may require the Bank to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements.

F-57

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 15—Capital (Continued)

2.

At least a four percent total capital-to-assets ratio. Total capital is the sum of permanent capital, any general loss allowance, if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the Finance Agency as available to absorb losses.



3.

At least a five percent leverage capital-to-assets ratio. A leverage capital-to-assets ratio is defined as permanent capital weighted 1.5 times divided by total assets.

        The Bank was in compliance with these capital rules and requirements throughout 2008 and 2007. The following table demonstrates the Bank's compliance with these capital requirements at December 31, 2008 and 2007 (dollars in thousands).

	December 31, 2008						December 31, 2007
	Required			Actual			Required			Actual
Regulatory Capital Requirements
Risk-based capital	$	2,133,384		$	3,658,377		$	363,537		$	3,421,523
Total regulatory capital	$	3,214,127		$	3,658,377		$	3,128,014		$	3,421,523
Total capital-to-asset ratio		4.0	%		4.6	%		4.0	%		4.4	%
Leverage capital	$	4,017,658		$	5,487,565		$	3,910,017		$	5,132,284
Leverage capital-to-assets ratio		5.0	%		6.8	%		5.0	%		6.6	%

        Mandatorily redeemable capital stock, which is classified as a liability under GAAP, is considered capital for determining the Bank's compliance with these regulatory requirements.

        The Bank offers only Class B stock and members are required to purchase Class B stock equal to the sum of 0.35 percent of certain member assets eligible to secure advances under the FHLBank Act, 3.0 percent for overnight advances, 4.0 percent for advances with an original maturity greater than overnight and up to three months, and 4.5 percent for all other advances and other specified assets related to activity between the Bank and the member. Members may redeem Class B stock by giving five years' notice. In accordance with its capital plan, the Bank, in its discretion, can repurchase stock from the member at par value if that stock is not required by the member to meet its total stock-investment requirement (excess capital stock) and the repurchase will not cause the Bank to fail to meet any of its capital requirements. The Bank may also allow the member to sell the excess capital stock at par value to another member of the Bank. During 2007 and until December 5, 2008, the Bank honored all excess capital stock-repurchase requests from members after determining that the Bank would remain in compliance with its capital requirements after making such repurchases. However, effective December 8, 2008, the Bank placed a moratorium on all excess capital stock repurchases to help preserve the Bank's capital in the light of certain liquidity challenges for the Bank that have arisen during 2008 and continue to develop into 2009. At December 31, 2008 and 2007, members and nonmembers with capital stock outstanding held excess capital stock totaling $677.3 million and $233.8 million, representing approximately 18.4 percent and 7.3 percent of total capital stock outstanding, respectively.

        The Gramm-Leach-Bliley Act of 1999 (GLB Act) made membership voluntary for all members. Any member that withdraws from membership may not be readmitted to membership in any FHLBank until five years from the divestiture date for all capital stock that is held as a condition of membership,

F-58

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 15—Capital (Continued)

as that requirement is set out in the Bank's capital plan, unless the institution has cancelled its notice of withdrawal prior to that date, before being readmitted to membership in any FHLBank. This restriction does not apply if the member is transferring its membership from one FHLBank to another on an uninterrupted basis. A five-year redemption-notice period can also be triggered by the involuntary termination of membership of a member by the Bank's board of directors or by the Finance Agency, the merger or acquisition of a member into a nonmember institution, or the relocation of a member to a principal location outside the six New England states. At the end of the five-year redemption-notice period, if the former member's activity-based stock-investment requirement is greater than zero, the Bank may require the associated remaining obligations to the Bank to be satisfied in full prior to allowing the member to redeem the remaining shares.

        Because the Bank's Class B shares are redeemable, the Bank can experience a reduction in its capitalization, particularly due to membership terminations due to merger and acquisition activity. However, there are several mitigants to this potential risk, including the following:

•

First, the activity-based portion of the stock-investment requirement allows the Bank to retain stock beyond the five-year redemption-notice period if the associated member-related activity is still outstanding, until the obligations are paid in full.

•

Second, the five-year redemption notice period allows for a significant period in which the Bank can restructure its balance sheet to accommodate a reduction in capital.

•

Third, the Bank's concentration of ownership is limited by the $25 million maximum membership stock-investment requirement.

•

Fourth, the Bank's board of directors may modify the membership stock-investment requirement or the activity-based stock-investment requirement, or both, to address expected shortfalls in capitalization due to membership termination.

•

Fifth, the Bank's board of directors or the Finance Agency may suspend redemptions in the event that such redemptions would cause the Bank not to meet its minimum regulatory capital requirements.

        The Bank's board of directors may declare and pay dividends in either cash or capital stock.

        Mandatorily Redeemable Capital Stock.    The Bank is a cooperative whose members and former members own all of the Bank's capital stock. Member shares cannot be purchased or sold except between the Bank and its members at $100 per share par value. At December 31, 2008 and 2007, the Bank had $93.4 million and $31.8 million, respectively in capital stock subject to mandatory redemption. Payment of capital stock subject to mandatory redemption is subject to a five-year waiting period and the Bank continuing to meet its minimum capital requirements. This amount has been classified as mandatorily redeemable capital stock in the liability section of the statement of condition in accordance with SFAS 150. For the years ended December 31, 2008, 2007, and 2006, dividends on mandatorily redeemable capital stock of $1.2 million, $1.4 million, and $841,000, respectively, were recorded as interest expense. The following table provides the number of stockholders and the related

F-59

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 15—Capital (Continued)

dollar amounts for activities recorded as mandatorily redeemable capital stock during 2008, 2007, and 2006.

	2008						2007						2006
	Number of Stockholders			Amount			Number of Stockholders			Amount			Number of Stockholders			Amount
Balance, beginning of year		6		$	31,808			5		$	12,354			5		$	8,296
Capital stock subject to mandatory redemption reclassified from equity during the year due to membership terminations		4			88,019			3			36,070			2			6,928
Repurchase of mandatorily redeemable capital stock		(2	)		(26,421	)		(2	)		(16,616	)		(2	)		(2,870	)
Balance at end of year		8		$	93,406			6		$	31,808			5		$	12,354

        Consistent with the capital plan currently in effect, the Bank is not required to redeem membership stock until five years after the membership is terminated or the Bank receives notice of withdrawal. Furthermore, the Bank is not required to redeem activity-based stock until the later of the expiration of the notice of redemption or until the activity to which the capital stock relates no longer remains outstanding. If activity-based stock becomes excess stock as a result of an activity no longer outstanding, the Bank may repurchase such shares, in its sole discretion, subject to the statutory and regulatory restrictions on capital-stock redemption discussed below. The year of redemption in the following table represents the end of the five-year redemption period. However, as discussed above, if activity to which the capital stock relates remains outstanding beyond the five-year redemption period, the activity-based stock associated with this activity will remain outstanding until the activity no longer remains outstanding. The following table shows the amount of mandatorily redeemable capital stock by year of redemption at December 31, 2008 and 2007 (dollars in thousands).

	December 31,
Contractual Year of Redemption	2008		2007
2008	$	—	$	—
2009		4,185		4,185
2010		103		103
2011		—		—
2012		2,520		27,520
2013		86,598		—
Total	$	93,406	$	31,808

        A member may cancel or revoke its written notice of redemption or its notice of withdrawal from membership prior to the end of the five-year redemption period. The Bank's capital plan provides that the Bank will charge the member a cancellation fee equal to two percent of the par amount of the shares of Class B stock that is the subject of the redemption notice. The Bank will assess a redemption-cancellation fee unless the board of directors decides that it has a bona fide business

F-60

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 15—Capital (Continued)

purpose for waiving the imposition of the fee, and the waiver is consistent with section 7(j) of the FHLBank Act.

        Statutory and Regulatory Restrictions on Capital-Stock Redemption.    In accordance with the GLB Act, Bank stock is putable by the member. However, there are significant statutory and regulatory restrictions on the obligation or right to redeem outstanding stock, including the following.

•

The Bank may decide to suspend redemptions if it reasonably believes that such redemptions would cause the Bank to fail to meet any of its minimum capital requirements, would prevent the Bank from maintaining adequate capital against potential risks that are not adequately reflected in its minimum capital requirements, or would otherwise prevent the Bank from operating in a safe and sound manner.

•

If, during the period between receipt of a stock-redemption notification from a member and the actual redemption (which lasts indefinitely if the Bank is undercapitalized, does not have the required credit rating, etc.), the Bank becomes insolvent and is either liquidated or forced to merge with another FHLBank, the redemption value of the stock will be established either through the market-liquidation process or through negotiation with a merger partner. In either case all senior claims must first be settled, and there are no claims which are subordinated to the rights of FHLBank stockholders.

•

Under the GLB Act, the Bank may only redeem stock investments that exceed the members' required minimum investment in Bank stock.

•

If the Bank is liquidated, after payment in full to the Bank's creditors, the Bank's stockholders will be entitled to receive the par value of their capital stock as well as any retained earnings in an amount proportional to the stockholder's share of the total shares of capital stock. In the event of a merger or consolidation, the Bank's board of directors shall determine the rights and preferences of the Bank's stockholders, subject to any terms and conditions imposed by the Finance Agency.

        Additionally, the Bank cannot redeem or repurchase shares of capital stock from any member of the Bank if any of the following conditions are present:

•

If, following such redemption, the Bank would fail to satisfy its minimum capital requirements. By law, no Bank stock may be redeemed if the Bank becomes undercapitalized or the Bank's capital would be insufficient to maintain a classification of adequately capitalized after doing so, except, in this latter case, with the Director of the Finance Agency's permission.

•

If either the Bank's board of directors or the Finance Agency determines that it has incurred, or is likely to incur, losses resulting, or expected to result, in a charge against capital.

•

If the principal or interest due on any CO issued through the Office of Finance on which the Bank is the primary obligor has not been paid in full when due;

•

If the Bank fails to provide the Finance Agency quarterly certification required by section 966.9(b)(1) of the Finance Agency's rules prior to declaring or paying dividends for a quarter;

F-61

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 15—Capital (Continued)

•

If the Bank fails to certify in writing to the Finance Agency that it will remain in compliance with its liquidity requirements and will remain capable of making full and timely payment of all of its current obligations;

•

If the Bank notifies the Finance Agency that it cannot provide the required certification, projects it will fail to comply with statutory or regulatory liquidity requirements, or will be unable to timely and fully meet all of its current obligations; or

•

If the Bank actually fails to comply with statutory or regulatory liquidity requirements or to timely and fully meet all of its current obligations, or negotiates to enter or enters into an agreement with one or more other FHLBanks to obtain financial assistance to meet its current obligations.

        In addition to possessing the authority to suspend stock redemptions, the Bank's board of directors also has a statutory obligation to review and adjust member capital stock purchase requirements in order to comply with the Bank's minimum capital requirements, and each member must comply promptly with any such requirement. However, a member may be able to reduce its outstanding business with the Bank as an alternative to purchasing additional capital stock.

        Related-Party Activities.    The Bank defines related parties as those members whose capital stock outstanding was in excess of 10 percent of the Bank's total capital stock outstanding. The following table presents member holdings of 10 percent or more of the Bank's total capital stock outstanding at December 31, 2008 and 2007 (dollars in thousands):

	December 31, 2008					December 31, 2007
Name	Capital Stock Outstanding		Percent of Total			Capital Stock Outstanding		Percent of Total
Bank of America Rhode Island, N.A., Providence, RI	$	1,082,548		29.4	%	$	1,057,094		33.1	%
RBS Citizens N.A., Providence, RI		515,043		14.0			344,634		10.8

Note 16—Employee Retirement Plans

        Employee Retirement Plans.    The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a funded, tax-qualified, non-contributory defined-benefit pension plan. The plan covers substantially all officers and employees of the Bank. Funding and administrative costs of the Pentegra Defined Benefit Plan charged to operating expenses were $3.1 million, $3.5 million, and $2.8 million in the years ended December 31, 2008, 2007, and 2006, respectively. The Pentegra Defined Benefit Plan is a multi-employer plan in which assets contributed by one participating employer may be used to provide benefits to employees of other participating employers since assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. As a result, disclosure of the accumulated benefit obligations, plan assets, and the components of annual pension expense attributable to the Bank is not made.

        Supplemental Retirement Benefits.    The Bank also maintains a nonqualified, unfunded defined benefit plan covering certain senior officers, as defined in the plan.

F-62

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 16—Employee Retirement Plans (Continued)

        Postretirement Benefits.    The Bank sponsors a fully insured retirement benefit program that includes life insurance benefits for eligible retirees. The Bank provides life insurance to all employees who retire on or after age 55 after completing six years of service. No contributions are required from the retirees.

        In connection with the supplemental retirement and postretirement benefit plans, the Bank recorded the following amounts for the years ended December 31, 2008 and 2007 (dollars in thousands):

		Supplemental Retirement Plan						Postretirement Benefit Plan
		2008			2007			2008			2007
Change in benefit obligation(1)
Benefit obligation at beginning of year		$	9,982		$	8,330		$	333		$	344
	Service cost		511			431			20			20
	Interest cost		703			554			21			14
	Actuarial loss (gain)		1,622			667			50			(31	)
	Benefits paid		—			—			(13	)		(14	)
Benefit obligation at end of year			12,818			9,982			411			333
Change in plan assets
Fair value of plan assets at beginning of year			—			—			—			—
	Employer contribution		—			—			13			14
	Benefits paid		—			—			(13	)		(14	)
Fair value of plan assets at end of year			—			—			—			—
Funded status at end of year		$	(12,818	)	$	(9,982	)	$	(411	)	$	(333	)

(1)

Represents projected benefit obligation for the supplemental retirement plan and accumulated postretirement benefit obligation for the postretirement benefit plan.

        Amounts recognized in other liabilities on the statement of condition for the Bank's supplemental retirement and postretirement benefit plans at December 31, 2008 and 2007, were $13.2 million and $10.3 million, respectively.

        Amounts recognized in accumulated other comprehensive income for the Bank's supplemental retirement and postretirement benefit plans as of December 31, 2008 and 2007, were (dollars in thousands):

	Supplemental Retirement Plan						Postretirement Benefit Plan
	2008			2007			2008		2007
Net actuarial loss	$	3,841		$	2,691		$	81	$	31
Prior service benefit		(35	)		(52	)		—		—
Net amount recognized	$	3,806		$	2,639		$	81	$	31

F-63

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 16—Employee Retirement Plans (Continued)

        The accumulated benefit obligation for the supplemental retirement plan was $9.9 million and $7.6 million at December 31, 2008 and 2007, respectively.

        The following table presents the components of net periodic benefit cost and other amounts recognized in accumulated other comprehensive income for the Bank's supplemental retirement and postretirement benefit plans for the years ended December 31, 2008, 2007, and 2006 (dollars in thousands):

	Supplemental Retirement Plan								Postretirement Benefit Plan
	2008			2007			2006		2008		2007			2006
Net Periodic Benefit Cost
Service cost	$	511		$	431		$	458	$	20	$	20		$	24
Interest cost		703			554			475		21		14			22
Amortization of prior service cost		(17	)		21			29		—		—			—
Amortization of net actuarial loss		472			393			347		—		3			3
Amortization of transition obligation		—			19			20		—		—			—
Net periodic benefit cost		1,669			1,418			1,329		41		37			49
Other Changes in Benefit Obligations Recognized in Accumulated Other Comprehensive Income
Amortization of prior service cost		17			(21	)		—		—		—			—
Amortization of net actuarial loss		(472	)		(393	)		—		—		(3	)		—
Amortization of transition obligation		—			(19	)		—		—		—			—
Net actuarial loss (gain)		1,622			667			—		50		(42	)		—
Total recognized in accumulated other comprehensive income		1,167			234			—		50		(45	)		—
Total recognized in net periodic benefit cost and accumulated other comprehensive income	$	2,836		$	1,652		$	1,329	$	91	$	(8	)	$	49

        The estimated net actuarial loss and prior service benefit that will be amortized from accumulated other comprehensive income into net periodic benefit costs for the Bank's supplemental retirement and postretirement benefit plans over the next fiscal year are (dollars in thousands):

	Supplemental Retirement Plan			Postretirement Benefit Plan
	2008			2008
Net actuarial loss	$	512		$	3
Prior service benefit		(17	)		—
Net estimated amount to be amortized	$	495		$	3

        The measurement date used to determine current year's benefit obligation was December 31, 2008.

F-64

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 16—Employee Retirement Plans (Continued)

        Key assumptions used for the actuarial calculations to determine benefit obligations and net periodic benefit cost for the Bank's supplemental retirement and postretirement benefit plans at December 31, 2008 and 2007, were:

		Supplemental Retirement Plan						Postretirement Benefit Plan
		2008			2007			2008			2007
Benefit obligation
	Discount rate		6.25	%		6.25	%		5.75	%		6.50	%
	Salary increases		5.50	%		5.50	%		—			—
Net periodic benefit cost
	Discount rate		6.25	%		5.75	%		6.50	%		5.75	%
	Salary increases		5.50	%		5.50	%		—			—

        The discount rate for the supplemental retirement plan as of December 31, 2008, was determined by using a discounted cash-flow approach, which incorporates the timing of each expected future benefit payment. The estimate of the future benefit payments is based on the plan's census data, benefit formula and provisions, and valuation assumptions reflecting the probability of decrement and survival. The present value of the future benefit payments is then determined by using duration-based interest-rate yields from the Citigroup Pension Discount Curve as of December 31, 2008, and solving for the single discount rate that produces the same present value.

        The Bank's supplemental retirement and postretirement benefit plans are not funded; therefore, no contributions will be made in 2009.

        Estimated future benefit payments for the Bank's supplemental retirement and postretirement benefit plans, reflecting expected future services, for the years ending December 31 are (dollars in thousands):

Years	Supplemental Retirement Plan Payments		Postretirement Benefit Plan Payments
2009	$	8,137	$	14
2010		65		14
2011		105		15
2012		220		15
2013		266		16
2014-2018		2,303		97

        Defined Contribution Plan.    The Bank also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified defined contribution plan. The plan covers substantially all officers and employees of the Bank. The Bank's contributions are equal to a percentage of participants' compensation and a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The Bank's matching contributions were $770,000, $689,000, and $602,000 in the years ended December 31, 2008, 2007, and 2006, respectively.

        The Bank also maintains the Thrift Benefit Equalization Plan (Thrift BEP), a nonqualified, unfunded deferred compensation plan covering certain senior officers and directors of the Bank, as

F-65

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 16—Employee Retirement Plans (Continued)

defined in the plan. The Director's Nonqualified Deferred Compensation Program, a deferred compensation plan that was available to all directors prior to 2007, was merged into the Thrift BEP effective on the close of business December 31, 2006. Since January 1, 2007, directors of the Bank have had the option to defer receipt of meeting fees to the Thrift BEP. The plan's liability consists of the accumulated compensation deferrals and the accumulated earnings on these deferrals. The Bank's contribution to these plans totaled $145,000, $106,000, and $156,000 in the years ended December 31, 2008, 2007, and 2006, respectively. The Bank's obligation from this plan, was $4.7 million and $5.6 million at December 31, 2008 and 2007, respectively.

Note 17—Segment Information

        As part of its method of internal reporting, the Bank analyzes its financial performance based on the net interest income of two operating segments: mortgage-loan finance and all other business activities. The products and services provided reflect the manner in which financial information is evaluated by management. The mortgage-loan-finance segment includes mortgage loans acquired through the MPF program and the related funding of those mortgage loans. Income from the mortgage-loan-finance segment is derived primarily from the difference, or spread, between the yield on mortgage loans and the borrowing and hedging costs related to those assets. The remaining business segment includes products such as advances and investments and their related funding and hedging costs. Income from this segment is derived primarily from the difference, or spread, between the yield on advances and investments and the borrowing and hedging costs related to those assets. Regulatory capital is allocated to the segments based upon asset size.

        The following table presents net interest income after provision for credit losses on mortgage loans by business segment, other (loss)/income, other expense, and income before assessments for the years ended December 31, 2008, 2007, and 2006 (dollars in thousands):

	Net Interest Income after Provision for Credit Losses on Mortgage Loans by Segment
	Mortgage Loan Finance		Other Business Activities		Total		Other (Loss)/ Income			Other Expense		(Loss) Income Before Assessments
2008	$	28,186	$	304,256	$	332,442	$	(391,960	)	$	56,308	$	(115,826	)
2007	$	29,096	$	283,359	$	312,455	$	11,137		$	53,618	$	269,974
2006	$	37,195	$	266,697	$	303,892	$	11,750		$	49,055	$	266,587

        The following table presents total assets by business segment as of December 31, 2008, 2007, and 2006, and average-earning assets by business segment for the years ended December 31, 2008, 2007, and 2006 (dollars in thousands):

	Total Assets by Segment						Total Average-Earning Assets by Segment
	Mortgage Loan Finance		Other Business Activities		Total		Mortgage Loan Finance		Other Business Activities		Total
2008	$	4,177,313	$	76,175,854	$	80,353,167	$	4,065,776	$	77,725,685	$	81,791,461
2007	$	4,112,988	$	74,087,350	$	78,200,338	$	4,273,757	$	60,351,358	$	64,625,115
2006	$	4,525,354	$	52,862,598	$	57,387,952	$	4,720,061	$	54,198,642	$	58,918,703

F-66

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 18—Estimated Fair Values

        As discussed in Note 2—Accounting Adjustments and Recently Issued Accounting Standards, the Bank adopted SFAS 157 on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair-value measurements. SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not expand the use of fair value in any new circumstances.

        The Bank records trading securities, available-for-sale 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.

        SFAS 157 establishes a fair-value hierarchy to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated and an overall level within the fair-value hierarchy for the fair-value measurement is determined. This overall level is an indication of how market observable the fair- value measurement is and defines the level of disclosure. SFAS 157 clarifies fair value in terms of 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. The objective of a fair-value measurement is to determine the price that would be received to sell the asset or paid to transfer the 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 established by SFAS 157 to the Bank'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. The types of assets and liabilities carried at Level 1 fair value generally include certain types of derivative contracts that are that are traded in an open exchange market and investments such as U.S. Treasury securities.

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 investment securities, including U.S. government and agency securities, and derivative contracts.

F-67

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 18—Estimated Fair Values (Continued)

Level 3 Inputs to the valuation methodology are unobservable and significant to the fair-value measurement. Unobservable inputs are supported by little or no market activity and reflect the Bank's own assumptions. The types of assets and liabilities carried at Level 3 fair value generally include certain private-label MBS and state or local agency obligations.

        The Bank 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 Bank as inputs to the models.

        The following table presents the Bank's assets and liabilities that are measured at fair value on its statement of condition at December 31, 2008 (dollars in thousands), by SFAS 157 fair-value hierarchy level:

	Level 1			Level 2			Level 3		Netting Adjustment(1)			Total
Assets:
Trading securities	$	—		$	63,196		$	—	$	—		$	63,196
Available-for-sale securities		—			1,214,404			—		—			1,214,404
Derivative assets		—			484,080			—		(455,145	)		28,935
Total assets at fair value	$	—		$	1,761,680		$	—	$	(455,145	)	$	1,306,535
Liabilities:
Derivative liabilities	$	(133	)	$	(1,582,706	)	$	—	$	409,045		$	(1,173,794	)
Total liabilities at fair value	$	(133	)	$	(1,582,706	)	$	—	$	409,045		$	(1,173,794	)

(1)

Amounts represent the effect of legally enforceable master-netting agreements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same counterparties. Net cash collateral associated with derivative contracts, including accrued interest, as of December 31, 2008, totaled $46.1 million.

        For instruments carried at fair-value, the Bank reviews the fair-value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. If a change in classification results in an item moving into or out of the Level 3 fair-value hierarchy, such reclassification will be reported as a transfer in/out of Level 3 at fair value in the quarter in which the change occurs.

Fair Value on a Nonrecurring Basis.

        Certain held-to-maturity investment securities are measured at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments in certain circumstances (for example, when there is evidence of other-than-temporary impairment).

F-68

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 18—Estimated Fair Values (Continued)

        In accordance with the provisions of SFAS 115, as amended by FSP No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its application to certain investments (FSP 115-1), the Bank's held-to-maturity securities with a carrying amount of $728.0 million prior to write-down were written down to their fair value of $346.2 million, resulting in an other-than-temporary impairment charge of $381.7 million, which is included in other income (loss) for the year ended December 31, 2008.

        The following table presents these impaired investment securities by level within the SFAS 157 valuation hierarchy, for which a nonrecurring change in fair value has been recorded in the statement of income for the year ended December 31, 2008 (dollars in thousands).

	Level 1		Level 2		Level 3		Loss
Assets:
Impaired held-to-maturity securities	$	—	$	—	$	346,239	$	(381,745	)

        Described below are the Bank's fair-value-measurement methodologies for assets and liabilities measured or disclosed at fair value.

        Cash and Due from Banks.    The estimated fair value approximates the recorded book balance.

        Interest-Bearing Deposits.    The estimated fair value is determined by calculating the present value of expected future cash flows. The discount rates used in these calculations are the rates for interest-bearing deposits with similar terms.

        Investment Securities.    Fair values of investment securities that are actively traded in orderly transactions by market participants in the secondary market are determined based on independent market-based prices received from a third-party pricing service. The Bank's principal markets for securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid-level pricing in that market. Two factors may be used to determine the fair value of investment securities when the security is not actively traded in orderly transactions, (1) dealer quotes or (2) estimated fair value determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest receivable. In obtaining such valuation information from third parties, the Bank generally reviews the valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit price in the Bank's principal markets. Further, the Bank performs an internal, independent price verification function that tests valuations received from third parties. Available-for-sale securities and trading securities are carried on the statement of condition at fair value.

        Securities Purchased under Agreements to Resell.    The estimated fair value is determined by calculating the present value of expected future cash flows. The discount rates used in these calculations are the rates for securities with similar terms.

        Federal Funds Sold.    The estimated fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for federal funds with similar terms.

        Advances.    The Bank determines the estimated fair value of advances by calculating the present value of expected future cash flows from the advances and excluding the amount of the accrued interest receivable. The discount rates used in these calculations are the current replacement rates for

F-69

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 18—Estimated Fair Values (Continued)

advances with similar terms. In accordance with the Finance Agency's advances regulations, except in cases where advances are funded by callable debt or otherwise hedged so as to be financially indifferent to prepayments, advances with a maturity or repricing period greater than six months require a prepayment fee sufficient to make the Bank financially indifferent to the borrower's decision to prepay the advances. Therefore, the estimated fair value of advances does not assume prepayment risk.

        Credit risk related to advances does not have an impact on the estimated fair values of the Bank's advances. Collateral requirements for advances provide a measure of additional credit enhancement to make credit losses remote. The Bank enjoys certain unique advantages as a creditor to its members. The Bank has the ability to establish a blanket lien on assets of members, and in the case of FDIC-insured institutions, the ability to establish priority above all other creditors with respect to collateral that has not been perfected by other parties. All of these factors serve to mitigate credit risk on advances.

        Mortgage Loans.    The estimated fair values for mortgage loans are determined based on quoted market prices of similar mortgage loan pools available in the market or modeled prices. The modeled prices start with prices for new and seasoned MBS issued by GSEs. Prices are then adjusted for differences in coupon, average loan rate, seasoning, and cash-flow remittance between the Bank's mortgage loans and the MBS. The prices of the referenced MBS and the mortgage loans are highly dependent upon the underlying prepayment assumptions priced in the secondary market. Changes in the prepayment rates could have a material effect on the estimated fair value. Since these underlying prepayment assumptions are made at a specific point in time, they are susceptible to material changes in the near term.

        Accrued Interest Receivable and Payable.    The estimated fair value is the recorded book value.

        Derivative Assets/Liabilities—Interest-Rate Exchange Agreements.    The Bank bases the estimated fair values of interest-rate-exchange agreements on available market prices of derivatives having similar terms, including accrued interest receivable and payable. The estimated fair value is based on the London Inter-Bank Offered Rate (LIBOR) swap curve and forward rates at period-end and, for agreements containing options, the market's expectations of future interest-rate volatility implied from current market prices of similar options. The estimated fair value uses standard valuation techniques for derivatives such as discounted cash-flow analysis and comparisons with similar instruments. The fair values are netted by counterparty, including cash collateral received or delivered from/to the counterparty, where such legal right of offset exists. If these netted amounts are positive, they are classified as an asset, and if negative, they are classified as a liability. The Bank enters into master-netting agreements for interest-rate-exchange agreements with institutions that have long-term senior unsecured credit ratings that are at or above single-A by S&P and Moody's, establishes master-netting agreements to reduce its exposure from counterparty defaults, and enters into bilateral-collateral-exchange agreements that require credit exposures beyond a defined amount to be secured by U.S. government or GSE-issued securities or cash. All of these factors serve to mitigate credit and nonperformance risk to the Bank. The Bank has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and nonperformance risk and has determined that no adjustments were necessary.

        Derivative Assets/Liabilities—Mortgage-Loan-Purchase Commitments.    Mortgage-loan-purchase commitments are recorded as derivatives in the statement of condition. The estimated fair values of

F-70

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 18—Estimated Fair Values (Continued)

mortgage-loan-purchase commitments are based on the end-of-day delivery commitment prices provided by the FHLBank of Chicago, which are derived from MBS to be announced (TBA) delivery-commitment prices with adjustment for the contractual features of the MPF program, such as servicing and credit-enhancement features.

        Deposits.    The Bank determines fair values of deposits by calculating the present value of expected future cash flows from the deposits and reducing this amount by any accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.

        Consolidated Obligations.    The Bank estimates fair values based on the cost of issuing comparable term debt, excluding noninterest selling costs. Fair values of CO bonds and CO discount notes without embedded options are determined based on internal valuation models which use market-based yield curve (CO curve) inputs obtained from the Office of Finance. Fair values of COs with embedded options are determined based on internal valuation models with market-based inputs obtained from the Office of Finance and derivative dealers.

        Mandatorily Redeemable Capital Stock.    The fair value of capital stock subject to mandatory redemption is generally at par. Capital stock can only be acquired by the Bank's members at par value and redeemed at par value. The Bank's capital stock is not traded and no market mechanism exists for the exchange of capital stock outside the cooperative structure.

        Commitments.    The estimated fair value of the Bank's standby bond-purchase agreements is based on the present value of the estimated fees the Bank is to receive for providing these agreements, taking into account the remaining terms of such agreements. For fixed-rate advance commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

        The following estimated fair-value amounts have been determined by the Bank using available market information and the Bank's best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of December 31, 2008 and 2007. Although the Bank 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 Bank's financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the Bank's judgment of how a market participant would estimate the fair value. The fair-value summary tables do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.

        Estimates of the fair value of advances with options, mortgage instruments, derivatives with embedded options, and CO bonds with options using methods described above and other methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, methods to determine possible distributions of future interest rate used to value options, and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have

F-71

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 18—Estimated Fair Values (Continued)

a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near term changes.

        The carrying values and estimated fair values of the Bank's financial instruments at December 31, 2008, were as follows (dollars in thousands):

		Carrying Value			Net Unrealized Gain/(Loss)			Estimated Fair Value
Financial instruments
Assets:
Cash and due from banks		$	5,735		$	—		$	5,735
Interest-bearing deposits			3,279,075			—			3,279,075
Securities purchased under agreements to resell			2,500,000			(50	)		2,499,950
Federal funds sold			2,540,000			(55	)		2,539,945
Trading securities			63,196			—			63,196
Available-for-sale securities			1,214,404			—			1,214,404
Held-to-maturity securities			9,268,224			(1,683,442	)		7,584,782
Advances			56,926,267			421,186			57,347,453
Mortgage loans, net			4,153,537			81,478			4,235,015
Accrued interest receivable			288,753			—			288,753
Derivative assets			28,935			—			28,935
Liabilities:
Deposits			(611,070	)		1,232			(609,838	)
Consolidated obligations:
	Bonds		(32,254,002	)		(425,714	)		(32,679,716	)
	Discount notes		(42,472,266	)		(87,196	)		(42,559,462	)
Mandatorily redeemable capital stock			(93,406	)		—			(93,406	)
Accrued interest payable			(258,530	)		—			(258,530	)
Derivative liabilities			(1,173,794	)		—			(1,173,794	)
Other:
Commitments to extend credit for advances			—			(525	)		(525	)
Standby bond-purchase agreements			—			976			976
Standby letters of credit			(366	)		—			(366	)

F-72

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 18—Estimated Fair Values (Continued)

        The carrying values and estimated fair values of the Bank's financial instruments at December 31, 2007, were as follows (dollars in thousands):

		Carrying Value			Net Unrealized Gain/(Loss)			Estimated Fair Value
Financial instruments
Assets:
Cash and due from banks		$	6,823		$	—		$	6,823
Interest-bearing deposits			50			—			50
Securities purchased under agreements to resell			500,000			(3	)		499,997
Federal funds sold			2,908,000			(184	)		2,907,816
Trading securities			112,869			—			112,869
Available-for-sale securities			1,063,759			—			1,063,759
Held-to-maturity securities			13,277,881			(160,250	)		13,117,631
Advances			55,679,740			186,075			55,865,815
Mortgage loans, net			4,091,314			(30,553	)		4,060,761
Accrued interest receivable			457,407			—			457,407
Derivative assets			67,047			—			67,047
Liabilities:
Deposits			(713,126	)		435			(712,691	)
Consolidated obligations:
	Bonds		(30,421,987	)		(83,778	)		(30,505,765	)
	Discount notes		(42,988,169	)		(10,236	)		(42,998,405	)
Mandatorily redeemable capital stock			(31,808	)		—			(31,808	)
Accrued interest payable			(280,452	)		—			(280,452	)
Derivative liabilities			(286,789	)		—			(286,789	)
Other:
Commitments to extend credit for advances			—			(681	)		(681	)
Standby bond-purchase agreements			—			1,752			1,752
Standby letters of credit			(773	)		—			(773	)

Note 19—Commitments and Contingencies

        As described in Note 12—Consolidated Obligations, as provided by both the FHLBank Act and Finance Agency regulation, COs are backed by the financial resources of the FHLBanks. The joint and several liability regulation of the Finance Agency authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal and interest on COs for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any CO on behalf of another FHLBank, and as of December 31, 2008, and through the filing of this report, the Bank does not believe that it is probable that it will be asked to do so.

        The Bank considered the guidance under FIN 45, and determined it was not necessary to recognize a liability for the fair value of the Bank's joint and several liability for all of the COs. The

F-73

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 19—Commitments and Contingencies (Continued)

joint and several obligation is mandated by Finance Agency regulations and is not the result of an arms-length transaction among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation. 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 FHLBanks' COs, the FHLBanks' joint and several obligation is excluded from the initial recognition and measurement provisions of FIN 45. Accordingly, the Bank has not recognized a liability for its joint and several obligation related to other FHLBanks' COs at December 31, 2008 and 2007. The par amounts of other FHLBanks' outstanding COs for which the Bank is jointly and severally liable aggregated to approximately $1.2 trillion and $1.1 trillion at December 31, 2008 and 2007, respectively.

        Commitments to Extend Credit.    Commitments that legally bind and unconditionally obligate the Bank for additional advances totaled approximately $172.1 million and $873.5 million at December 31, 2008 and 2007, respectively. Commitments generally are for periods up to 12 months. Standby letters of credit are executed with members or housing associates for a fee. A standby letter of credit is a financing arrangement between the Bank and a member or housing associate. If the Bank is required to make payment for a beneficiary's draw, the payment amount is converted into a collateralized advance to the member or housing associate. Outstanding standby letters of credit as of December 31, 2008 and 2007, were as follows (dollars in thousands):

	2008		2007
Outstanding notional		$1,148,442		$2,578,743
Original terms		One month to 20 years		Three months to 20 years
Final expiration year		2024		2024

        Unearned fees for the value of the guarantees related to standby letters of credit entered into after 2002 are recorded in other liabilities and totaled $366,000 and $773,000 at December 31, 2008 and 2007, respectively. Based on management's credit analyses and collateral requirements, the Bank has not deemed it necessary to record any additional liability on these commitments. Commitments are fully collateralized at the time of issuance. See Note 8—Advances for additional information. The estimated fair value of commitments as of December 31, 2008 and 2007, is reported in Note 18—Estimated Fair Values.

        The Bank monitors the creditworthiness of its members which have standby letter of credit agreements outstanding based on an evaluation of the financial condition of the member. The Bank reviews available financial data, such as regulatory call reports filed by depository institution members, regulatory financial statements filed with the appropriate state insurance department by insurance company members, audited financial statements of housing associates, Securities and Exchange Commission (SEC) filings, and rating-agency reports to ensure that potentially troubled members are identified as soon as possible. In addition, the Bank has access to most members' regulatory examination reports. The Bank analyzes this information on a regular basis.

        Commitments for unused line-of-credit advances totaled approximately $1.5 billion and $1.4 billion at December 31, 2008 and 2007, respectively. Commitments are generally for periods of up to 12 months. Since many of these commitments are not expected to be drawn upon, the total commitment amount does not necessarily represent future cash requirements.

F-74

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 19—Commitments and Contingencies (Continued)

        Mortgage Loans.    Commitments that obligate the Bank to purchase mortgage loans totaled $32.7 million and $9.6 million at December 31, 2008 and 2007, respectively. Commitments are generally for periods not to exceed 45 business days. Such commitments are recorded as derivatives at their fair values on the statement of condition.

        Standby Bond-Purchase Agreements.    The Bank has entered into standby bond-purchase agreements with state-housing authorities whereby the Bank, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the Bank to purchase the bond. The standby bond-purchase commitments entered into by the Bank expire after three years, currently no later than 2011. Total commitments for bond purchases were $333.4 million and $501.5 million at December 31, 2008 and 2007, respectively with two state-housing authorities. The estimated fair value of standby bond-purchase agreements as of December 31, 2008 and 2007, is reported in Note 18—Estimated Fair Values. At December 31, 2008, the Bank held $21.7 million of bonds purchased under these agreements. These bonds are classified as available-for-sale in the statement of condition. See Note 6—Available-for-Sale Securities for additional information regarding the purchase of these securities. If the bonds are subsequently remarketed by the state-housing authority, the commitment amount of standby bond-purchase agreements will increase by the amount of the remarketed bonds, as long as the standby bond-purchase agreement has not expired. After a specified holding period, unremarketed bonds are subject to accelerated redemption and must be repurchased by the state-housing authority. During 2007, the Bank was not required to purchase any bonds under these agreements.

        Counterparty Credit Exposure.    The Bank executes derivatives with counterparties with long-term ratings of single-A (or equivalent) or better by either S&P or Moody's, and enters into bilateral-collateral agreements. As of December 31, 2008 and 2007, the Bank had pledged as collateral securities with a carrying value, including accrued interest, of $920.1 million and $90.0 million, respectively, to counterparties that have credit-risk exposure to the Bank related to derivatives. These amounts pledged as collateral were subject to contractual agreements whereby some counterparties had the right to sell or repledge the collateral.

        Unsettled Consolidated Obligations.    The Bank had $895.0 million and $89.0 million par value of CO bonds that had traded but not settled as of December 31, 2008 and 2007, respectively. Additionally, the Bank had $123.0 million and $730.0 million par value of CO discount notes that had been traded but not settled as of December 31, 2008 and 2007, respectively.

F-75

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 19—Commitments and Contingencies (Continued)

        Lease Commitments.    The Bank charged to operating expense net rental costs of approximately $3.8 million, $3.7 million and $3.8 million for the years ended December 31, 2008, 2007 and 2006, respectively. Future minimum rentals at December 31, 2008, were as follows (dollars in thousands):

Year	Premises		Equipment		Total
2009	$	3,665	$	6	$	3,671
2010		3,675		—		3,675
2011		3,685		—		3,685
2012		3,694		—		3,694
2013		38		—		38
Total	$	14,757	$	6	$	14,763

        Lease agreements for Bank premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the Bank.

        Lending Agreement Collateral.    On September 9, 2008, the Bank entered into a lending agreement with the U.S. Treasury in connection with the U.S. Treasury's establishment of the GSECF, which is an additional source of liquidity for the FHLBanks, Fannie Mae, and Freddie Mac. Any borrowings by the Bank under the GSECF are COs with the same joint and several liability as all other COs. The terms of the borrowings are agreed to at the time of issuance. The maximum borrowings under the lending agreement are based on eligible collateral. The Bank has agreed to submit to the U.S. Treasury a weekly list of eligible collateral based on the lending agreement. As of December 31, 2008, the Bank had provided the U.S. Treasury with a listing of eligible collateral amounting to $23.5 billion. The amount of collateral can be increased or decreased (subject to the approval of the U.S. Treasury) at any time through the delivery of an updated listing of collateral. As of December 31, 2008, the Bank had not drawn on this available source of liquidity.

        Legal Proceedings.    The Bank is subject to various pending legal proceedings arising in the normal course of business. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank's financial condition or results of operations.

        Other commitments and contingencies are discussed in Notes 8—Advances, 10—Derivatives and Hedging Activities, 12—Consolidated Obligations, 13—Affordable Housing Program, 14—Resolution Funding Corporation, 15—Capital, and 16—Employee Retirement Plans.

Note 20—Transactions with Related Parties and Other FHLBanks

        Transactions with Related Parties.    The Bank is a cooperative whose member institutions own the capital stock of the Bank and may receive dividends on their investment in the Bank. In addition, certain former members and nonmembers that still have outstanding transactions with the Bank are also required to maintain their investment in the Bank's capital stock until the transactions mature or are paid off. All advances are issued to members or housing associates, and all mortgage loans held for portfolio are purchased from members. The Bank also maintains demand-deposit accounts for members and housing associates primarily to facilitate settlement activities that are directly related to advances, mortgage-loan purchases, and other transactions between the Bank and the member or housing

F-76

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 20—Transactions with Related Parties and Other FHLBanks (Continued)

associate. In instances where the member has an officer who serves as a director of the Bank, those transactions are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as transactions with all other members. The Bank defines related parties as those members whose capital stock outstanding was in excess of 10 percent of the Bank's total capital stock outstanding. As discussed in Note 15—Capital, Bank of America Rhode Island, N.A. and RBS Citizens N.A. held more than 10 percent of the Bank's total capital stock outstanding as of December 31, 2008. Advances, derivative contracts, and capital stock activity with Bank of America Rhode Island, N.A. and RBS Citizens N.A. are discussed in Notes 8—Advances, 10—Derivatives and Hedging Activities, and 15—Capital.

        Transactions with Other FHLBanks.    The Bank may occasionally enter into transactions with other FHLBanks. These transactions are summarized below.

        Investments in Consolidated Obligations.    As of December 31, 2008 and 2007, the Bank did not hold any investments in other FHLBank COs. For the year ended December 31, 2008, the Bank did not record any interest income from investments in other FHLBank COs. The Bank recorded interest income of $598,000, and $817,000 from these investment securities for the years ended December 31, 2007 and 2006, respectively. Purchases of COs issued for other FHLBanks occur at market prices through third-party securities dealers.

        Overnight Funds.    The Bank may borrow or lend unsecured overnight funds from or to other FHLBanks. All such transactions are at current market rates. Interest income and interest expense related to these transactions with other FHLBanks are included within other interest income and interest expense from other borrowings in the statements of income.

        The Bank did not have any loans to other FHLBanks outstanding at December 31, 2008 and 2007. Interest income from loans to other FHLBanks during the years ended December 31, 2008, 2007, and 2006, is shown in the following table, by FHLBank (dollars in thousands):

Interest Income from Loans to Other FHLBanks	2008		2007		2006
FHLBank of Dallas	$	—	$	—	$	7
FHLBank of Cincinnati		—		—		2
FHLBank of Topeka		—		12		—
Total	$	—	$	12	$	9

F-77

FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS (Continued)

Note 20—Transactions with Related Parties and Other FHLBanks (Continued)

        The Bank did not have any borrowings from other FHLBanks outstanding at December 31, 2008 and 2007. Interest expense on borrowings from other FHLBanks for the years ended December 31, 2008, 2007, and 2006, is shown in the following table, by FHLBank (dollars in thousands):

Interest Expense on Borrowings from Other FHLBanks	2008		2007		2006
FHLBank of Atlanta	$	31	$	13	$	—
FHLBank of Chicago		15		—		7
FHLBank of Cincinnati		210		113		258
FHLBank of Dallas		51		32		17
FHLBank of Des Moines		24		—		—
FHLBank of Indianapolis		27		—		—
FHLBank of New York		19		—		—
FHLBank of Pittsburgh		4		—		—
FHLBank of San Francisco		130		43		14
FHLBank of Seattle		5		—		—
FHLBank of Topeka		47		87		2
Total	$	563	$	288	$	298

        MPF Mortgage Loans.    Prior to 2007, the Bank sold to the FHLBank of Chicago participations in mortgage assets that the Bank purchased from its members. During the year ended December 31, 2006, the Bank sold to the FHLBank of Chicago approximately $109.0 million in such mortgage-loan participations.

        The Bank pays a transaction-services fee to the FHLBank of Chicago for the Bank's participation in the MPF program. This fee is assessed monthly, and is based upon the amount of MPF loans purchased after January 1, 2004, and which remain outstanding on the Bank's statement of condition. The Bank recorded $1.1 million, $1.0 million, and $1.1 million in MPF transaction-services fee expense to the FHLBank of Chicago during the years ended December 31, 2008, 2007, and 2006, respectively, which has been recorded in the statements of income as other expense.

        Consolidated Obligations.    From time to time, another FHLBank may transfer to the Bank debt obligations in which the other FHLBank was the primary obligor and, upon transfer, we became the primary obligor. There were no transfers of debt obligations between the Bank and other FHLBanks during the years ended December 31, 2008 and 2007. During the year ended December 31, 2006, the Bank assumed a debt obligation with a par amount of $20.0 million and a fair value of approximately $19.9 million, which had been the obligation of the FHLBank of Chicago.

F-78

EX-10.1.3

EXHIBIT 10.1.3

THE FEDERAL HOME LOAN BANK OF BOSTON
PENSION BENEFIT EQUALIZATION PLAN

(effective January 1, 2009)

Federal Home Loan Bank of Boston (the “Bank”) adopted the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan (the “Plan”), as a component of the Federal Home Loan Bank of Boston Benefit Equalization Plan, effective January 1, 1993.  The Plan is herein amended and restated in order to comply with Code Section 409A, as enacted by the American Jobs Creation Act of 2004 and applicable regulations thereunder.  This amendment and restatement shall be effective January 1, 2009; provided, however, that any provision required to be effective on and after January 1, 2005 in order for the Plan to comply with Code Section 409A shall become effective as of January 1, 2005 (or such later date as shall be permitted under applicable Code Section 409A transition rules); and provided further, that if the application of any amended or restated provision below to a Member’s Grandfathered Supplemental Benefit (as defined below) would constitute a “material modification” for purposes of Treasury Regulation Section 1.409A-6(a)(4), the corresponding provision of the Prior Plan shall apply in lieu of such amended or restated provision.

The Plan is established and maintained by the Bank in order to provide designated Eligible Executives with the benefits which would have been provided under the Pentegra Defined Benefit Plan for Financial Institutions (the “Qualified Plan”) if (a) their benefits under the Qualified Plan were not limited by certain limitations imposed by the Internal Revenue Code applicable to the Qualified Plan; (b) “Salary” as defined in the Qualified Plan took into account amounts paid under the Bank’s incentive compensation plan(s) and elective deferrals to the Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan; and (c) certain benefit adjustments were provided to Executive Officers as described herein.

The Plan is a governmental plan under Section 4(b) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and is therefore exempt from coverage under ERISA.  The Plan is unfunded and maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees, and is not intended to be qualified under Section 401(a) of the Internal Revenue Code.

SECTION 1 - DEFINITIONS

Each word used herein not defined below that begins with a capital letter and is defined in the Qualified Plan shall have the same definition as the definition given to that word in the Qualified Plan.  Wherever used herein, the following terms shall have the meanings hereinafter set forth:

1.1           “Administrator” means the Committee or such person or persons as may be appointed by the Committee to be responsible for those functions assigned to the Administrator under the Plan.

1.2           “Affiliate” means any entity that is a member of a “controlled group” of corporations with the Bank under Code Section 414(b) or a trade or business under common control with the Bank under Code Section 414(c); provided, however, that in applying Code

Sections 1563(a)(1), (2) and (3) for purposes of Code Section 414(b), the language “at least 50 percent” will be used instead of “at least 80 percent” each place it appears, and in applying Treasury Regulation Section 1.414(c)-2 for purposes of Code Section 414(c), the language “at least 50 percent” will be used instead of “at least 80 percent” each place it appears.  In addition, to the extent that the Administrator determines that legitimate business criteria exist to use a reduced ownership percentage to determine whether an entity is an Affiliate for purposes of determining whether a Termination of Employment has occurred, the Administrator may designate an entity that would meet the definition of “Affiliate” substituting 20 percent in place of 50 percent in the preceding sentence as an Affiliate in Appendix A hereto.  Such designation shall be made by December 31, 2008 or, if later, at the time a 20 percent or more ownership interest in such entity is acquired.

1.3           “Bank” means the Federal Home Loan Bank of Boston.

1.4           “Beneficiary” means the person, persons or trust designated by a Member as direct or contingent beneficiary in the manner prescribed by the Administrator.  The Beneficiary of a Member who has not effectively designated a beneficiary shall be his or her estate.

1.5           “Board of Directors” means the Board of Directors of the Bank.

1.6           “Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto.

1.7           “Code Limitations” means (a) the cap on compensation taken into account by the Qualified Plan under Code Section 401(a)(17); and (b) the overall limitation on benefits imposed by Code Section 415(b), as such provisions may be amended from time to time, and any similar successor provisions of federal tax law.

1.8           “Committee” means the Personnel Committee of the Board of Directors, which is authorized to perform the functions described in Article V.

1.9           “Disability” means that the Member (a) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; (b) is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Bank; or (c) has been determined to be totally disabled by the Social Security Administration.  Notwithstanding the foregoing,

2

whether a Member has incurred a Disability with respect to his or her Grandfathered Supplemental Benefit shall be determined under the provisions of the Prior Plan.

1.10         “Effective Date” means January 1, 2009.  The Plan was initially effective January 1, 1993 and was restated effective January 1, 1997.  Any provision of this amendment and restatement required to be effective on and after January 1, 2005 in order for the Plan to comply with Code Section 409A shall become effective as of January 1, 2005 (or such later date up to January 1, 2008 as shall be permitted under applicable Code Section 409A transition rules).

1.11         “Eligible Executive” or “Executive” means an employee of the Bank who is a corporate officer and (a) is eligible to participate in the Thrift BEP, or (b) has been selected to be an Eligible Executive by the Committee.

1.12         “Executive Officer” means an Eligible Executive who is designated as an Executive Officer by the Board of Directors or the Committee.

1.13         “Grandfathered Supplemental Benefit” means, for any Member in the Plan on or before December 31, 2004, the present value of the amount to which the Member would have been entitled under the Plan if he or she had voluntarily terminated service without cause on December 31, 2004 (or his or her earlier termination of employment), and received a payment of the benefits available from the Plan on the earliest possible date allowed under the Plan in the form with the maximum value.  Notwithstanding the foregoing, for any subsequent Plan Year, the Grandfathered Supplemental Benefit may increase to equal the present value of the benefit the Member actually becomes entitled to, in the form and at the time actually paid, determined under the terms of the Plan (including applicable Code limits), as in effect on October 3, 2004, without regard to any further services rendered by the service provider after December 31, 2004, or any other events affecting the amount of or the entitlement to benefits (other than the Member’s election with respect to the time or form of an available benefit).  For purposes of calculating the present value of the Grandfathered Supplemental Benefit, reasonable actuarial assumptions and methods must be used.  The Grandfathered Supplemental Benefit shall be calculated in accordance with the rules and regulations promulgated under Code Section 409A in order to treat the greatest proportion of accrued benefit possible as not subject to Section 409A because it was vested and accrued prior to January 1, 2005.

1.14         “Incentive Compensation” means annual bonus under the Bank’s Executive Incentive Plan and, if applicable, any long-term incentive compensation payable to a Member under the Bank’s incentive compensation plan(s).

1.15         “Member” means a participant in this Plan, unless it is clear from the context that participation in the Qualified Plan is referenced.

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1.16         “Non-Grandfathered Supplemental Benefit” means the amount of the Member’s accrued benefit under the Plan, other than his or her Grandfathered Supplemental Benefit, if any.

1.17         “Pension Commencement Date” means the first day of the first period for which a Supplemental Benefit is paid as an annuity or lump sum.  The Pension Commencement Date is determined separately for Grandfathered and Non-Grandfathered Supplemental Benefits.

1.18         “Plan” means The Federal Home Loan Bank of Boston Pension Benefit Equalization Plan, as set forth herein or as it may be amended or restated from time to time.

1.19         “Plan Year” means the calendar year.

1.20         “Prior Plan” means the Plan as in effect on October 3, 2004.

1.21         “Qualified Plan” means the Pentegra Defined Benefit Plan for Financial Institutions, as from time to time amended.  Any reference to a section of the Qualified Plan herein shall be deemed to refer to any successor provision of the Qualified Plan which may govern the subject matter of the referenced section in the future.

1.22         “Qualified Plan Retirement Benefit” means the benefit payable to a Member pursuant to the Qualified Plan.

1.23         “Qualified Plan Survivor Benefit” means the death benefit payable under the Qualified Plan upon the death of a Member prior to his or her Pension Commencement Date, including (if applicable) any “Active Service Death Benefit” (as described in Article V, Section 4, of the Qualified Plan).

1.24         “Supplemental Benefit” means a Supplemental Retirement Benefit or Supplemental Survivor Benefit payable under the terms of the Plan.

1.25         “Supplemental Retirement Benefit” means the benefit payable to a Plan Member pursuant to the Plan.

1.26         “Supplemental Survivor Benefit” means the benefit payable under the Plan with respect to the death of a Member prior to the Pension Commencement Date.

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1.27         “Thrift BEP” means the Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan, as it may be amended or restated from time to time.

1.28         “Termination of Employment” means the severing of employment with the Bank and any Affiliates, voluntarily or involuntarily, for any reason.  A Termination of Employment will be deemed to have occurred if the facts and circumstances indicate that the Bank and the Member reasonably anticipate that no further services will be performed after a certain date or that the level of bona fide services the Member will perform for the Bank and its Affiliates after such date (whether as an employee or as an independent contractor) will permanently decrease to no more than 20% of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the employer if the Member has been providing services to the Bank and its Affiliates less than 36 months).  A Member will not be deemed to have incurred a Termination of Employment while he or she is on military leave, sick leave, or other bona fide leave of absence (such as temporary employment by the government) if the period of such leave does not exceed six months or such longer period as the Member’s right to reemployment with the Bank is provided either by statute or by contract.  For this purpose, a leave of absence is bona fide only if there is a reasonable expectation that the Member will return to employment at the conclusion of the leave.  If the period of leave exceeds six months and the Member’s right to reemployment is not provided either by statute or by contract, the Termination of Employment will be deemed to occur on the first date immediately following such six-month period.  Whether a Member incurs a Termination of Employment will be determined in accordance with the requirements of Code Section 409A.

Words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless qualified by the context.  Any headings used herein are included for ease of reference only and are not to be construed so as to alter the terms hereof.

SECTION 2 - ELIGIBILITY AND PARTICIPATION

2.1           Participation.  Each Member of the Plan on December 31, 2007 will continue as a Member on the effective date of the amendment and restatement of this Plan and thereafter to the extent eligible.  Each other Eligible Executive who is a participant in the Qualified Plan shall become a Member on the earlier of (a) the effective date of the Eligible Executive’s election to participate in the Thrift BEP or January 1, 2008, if later; or (b) the effective date as of which he or she is designated as a Member in the Plan by the Committee.  Within thirty (30) days of becoming a Member (or a participant in any similar non-account balance, non-qualified deferred compensation plan maintained by the Bank), the Member shall file an election with the Administrator designating how his or her Supplemental Benefit shall be paid.  If an Eligible Executive became a Member under clause (a) above and is subsequently designated as eligible for enhanced benefits under clause (b) above, the distribution election made in connection with his or her initial participation shall continue to apply.  The Surviving Spouse of a Member

5

described above who dies prior to the Member’s Pension Commencement Date shall be eligible to receive a Supplemental Survivor Benefit, as set forth below.

2.2           Elections under Section 409A Transition Rules.  Pursuant to Internal Revenue Service (“IRS”) Notice 2005-1, Q&A-19(c), as extended by Notice of Proposed Rulemaking REG-158080-04 and IRS Notice 2007—86, a Member who (a) has not incurred a Termination of Employment or (b) has incurred a Termination of Employment but has neither entered pay status under the Plan nor had an annuity purchased in connection with his or her benefits under the Plan, may, in 2008, modify or make a new election regarding distribution of his or her Non-Grandfathered Supplemental Benefit at such time and in such form as the Administrator shall designate; provided, however, that no such distribution election made in 2008 may affect payments that the Member would otherwise receive in 2008 or cause payments to be made in 2008.  In addition, pursuant to Internal Revenue Service Notice 2005-1, Q&A-23, as extended, in the case of a distribution commencing on or before December 31, 2008 (or such later date as shall be permitted by the Administrator consistent with Code Section 409A and regulations thereunder), an election as to the time and form of payment of the Member’s benefit under the Qualified Plan shall govern distribution of the Member’s Non-Grandfathered Supplemental Benefit under this Plan, to the extent provided under the terms of the Prior Plan.

2.3           Cessation of Participation.  An Executive shall cease to be a Member in the Plan if (a) he or she incurs a Termination of Employment for any reason, (b) he or she remains in the service of a Bank but ceases to be an Eligible Executive as described in Section 1.11 due to a change in employment status, except to the extent that the Committee determines otherwise, or (c) the Plan is terminated or otherwise amended so that the Executive ceases to be eligible for participation; provided, however, that such individual shall continue to be a Member solely with respect to his or her benefits accrued through the date of such cessation, to the extent that such benefits are or become vested prior to the Member’s Termination of Employment.  Such cessation of participation shall be effective upon the date of the change in status described in clause (a) or (b) above, or upon the effective date of an amendment or termination of the Plan described in clause (c) above.

2.4           Vesting.  A Member (or his or her Beneficiary, as the case may be) shall be or become vested in his or her Supplemental Benefit as and to the same extent that he or she is vested under the terms of the Qualified Plan.

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SECTION 3 - SUPPLEMENTAL RETIREMENT BENEFIT

3.1Amount.  The Supplemental Retirement Benefit payable to a Member on or after his or her Normal Retirement Date shall be a monthly amount equal to the difference between either (a) or (b) below, as applicable, minus (c) below, adjusted as determined in accordance with Section 3.2 or 3.3, as applicable, where:

(a)in the case of an Eligible Executive described in clause (a) of Section 1.11 who becomes a Member under clause (a) of Section 2.1 as a result of participation in the Thrift BEP, the monthly amount of the Qualified Plan Retirement Benefit to which the Member would have been entitled under the terms of the Qualified Plan if such benefit were computed by including in the definition of “Salary” any amounts voluntarily deferred by the Member under the Thrift BEP; or

(b)in the case of an Eligible Executive described in clause (b) of Section 1.11 who becomes a Member under clause (b) of Section 2.1, the monthly amount of the Qualified Plan Retirement Benefit to which the Member would have been entitled under the terms of the Qualified Plan if such benefit were computed:

(i)            including in the definition of “Salary” any amounts voluntarily deferred by the Member under the Thrift BEP;

(ii)           without regard to Code Limitations;

(iii)          including in the definition of “Salary” any Incentive Compensation paid during the applicable Plan Year (determined prior to any deferral under the Thrift BEP);

(iv)          by recognizing the Member’s years of service from his or her initial date of employment with any employer participating in the Qualified Plan to his or her date of membership in the Qualified Plan as benefit service under the Qualified Plan; and

(v)           solely with respect to Executive Officers hired by the Bank prior to January 9, 2006 and appointed as an Executive Officer effective on or prior to January 1, 2008, by applying an increased annual pension accrual rate of two and three-eighths percent (2.375%); provided, however, that aggregate pension benefits payable to such Executive Officers (taking into account benefits determined under this Plan and the Qualified Plan, and from any other defined benefit pension plan in which the Member participated during any period of service taken into account in calculating the Member’s benefit hereunder) shall not exceed a percentage of the Member’s “High-3 Salary” (taking into account compensation described in clauses (i), (ii) and (iii) above) equal to sixty-five

7

percent (65%) for Senior Vice Presidents, seventy percent (70%) for Executive Vice Presidents and eighty percent (80%) for the President;

MINUS

(c)the monthly amount of the Qualified Plan Retirement Benefit payable to the Plan Member under the terms of the Qualified Plan.

Notwithstanding the foregoing, the amount of a Member’s Supplemental Retirement Benefit shall not be less than zero.  Subject to Section 6.1 and the provisions of Code Section 409A, the method for calculating a Member’s Non-Grandfathered Supplemental Benefit may be modified from time to time in an offer letter or employment agreement approved by the Committee and accepted by the Member, or other writing specifically approved by the Committee and making specific reference to this Plan.

3.2Adjustment and Payment of Grandfathered Supplemental Retirement Benefits.  The amount of Grandfathered Supplemental Retirement Benefit to which a Member may be entitled, if any, shall be determined under the terms of the Prior Plan, and shall be subject to such adjustments to reflect the time and method of payment, and any “Active Service Death Benefit” (as defined in Article V, Section 4 (or successor provision) of the Qualified Plan), “Retirement Adjustment Payment” (as defined in Article V, Section 5 (or successor provision) of the Qualified Plan), or “Annual Increment” (as defined in Article V, Section 6(A) (or successor provision) of the Qualified Plan) as may apply under the terms of the Prior Plan and are both earned and vested prior to January 1, 2005.  An ad hoc cost of living adjustment (referred to as a “Single Purchase Fixed Percentage Adjustment” as defined in Article V, Section 6(B) (or successor provision) of the Qualified Plan) applicable under the Qualified Plan shall be taken into account solely to the extent provided by the Administrator consistent with Code Section 409A.  Under Section 3.02(a) of the Prior Plan, if a Member’s Grandfathered Supplemental Retirement Benefit is not paid in the “Regular Form” under the Qualified Plan, the benefit payable in an optional form shall be of equivalent actuarial value to the benefit otherwise payable in the Regular Form, determined using the same actuarial factors and assumptions then used to determine actuarial equivalence under the Qualified Plan.  Except as otherwise provided in Section 7.3, Grandfathered Supplemental Retirement Benefits to which a Member may be entitled, if any, shall be paid in accordance with the terms of the Prior Plan.  Under Section 3.02(a) of the Prior Plan, such benefit shall be paid in the same form as elected by the Member under the Qualified Plan; provided, however, that an election to receive a lump sum payment

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under the Plan must be filed at least twelve (12) calendar months prior to the Member’s retirement.

3.3           Adjustment of Non-Grandfathered Supplemental Retirement Benefits.  The amount of Non-Grandfathered Supplemental Retirement Benefit described in Section 3.1 above shall be calculated based upon the Member’s Qualified Plan Retirement Benefit determined as of the earlier of (a) the Member’s actual “Commencement Date” under the Qualified Plan, or (b) the Member’s Pension Commencement Date under this Plan (including the Pension Commencement Date of any Grandfathered Supplemental Benefit).  To the extent that the Member’s Commencement Date under the Qualified Plan is used as the calculation date, the Member’s Non-Grandfathered Supplemental Retirement Benefit payable upon the Pension Commencement Date shall be (i) the amount determined under Section 3.1 (including for this purpose any Grandfathered Supplemental Retirement Benefit) with regard to any early retirement factors applied at such calculation date under the Qualified Plan, (ii) reduced by any Grandfathered Supplemental Retirement Benefit (calculated under Section 3.2 assuming payment commencement as of the same date), (iii) with such resulting Non-Grandfathered Supplemental Retirement Benefit converted to the Qualified Plan normal form of benefit commencing at the Member’s Normal Retirement Date based upon the early retirement factors set forth in the Qualified Plan.  The Member’s resulting Non-Grandfathered Supplemental Retirement Benefit calculated under the preceding sentence shall be adjusted as determined by the Administrator through the Pension Commencement Date to take into account an allocable portion of any Retirement Adjustment Payment (as defined in Article V, Section 5 (or successor provision) of the Qualified Plan) or Post-Retirement Supplement (as defined in Article V, Section 6 (or successor provision) of the Qualified Plan) applicable under the Qualified Plan between the “Commencement Date” and the Pension Commencement Date under this Plan.

To the extent that the Member’s Pension Commencement Date under this Plan is used as the calculation date (i.e., the Pension Commencement Date under this Plan is prior to the Qualified Plan Commencement Date), the Member’s Non-Grandfathered Supplemental Retirement Benefit payable upon the Pension Commencement Date shall be the amount determined under Section 3.1 as though the Member has elected to receive payment of his or her Qualified Plan benefit as of the same date, reduced by any Grandfathered Supplemental Retirement Benefit (calculated as described in Section 3.2 assuming payment commencement as of the same date).

The Member’s Non-Grandfathered Supplemental Retirement Benefit shall be adjusted as provided under the terms of the Qualified Plan, to the extent applicable, to reflect commencement of payments prior to the Member’s Normal Retirement Date or payment in a form of benefit other than a life annuity (as described in Article VII, Section 1 (or successor provision) of the Qualified Plan, with regard to “Additional Death Benefits” applicable under Article V, Section 4 (or successor provision) of the Qualified Plan).  In determining the amount of any optional form of benefit, the factors set forth in the Qualified Plan shall apply.  The Member’s Non-Grandfathered Supplemental Retirement Benefit in pay status in annuity form shall be further adjusted to reflect any Retirement Adjustment Payment and/or Annual Increment

9

which becomes effective after the Pension Commencement Date.  A Single Purchase Fixed Percentage Adjustment after the Pension Commencement Date shall apply to Non-Grandfathered Supplemental Retirement Benefits in pay status solely to the extent provided by the Board of Directors consistent with Code Section 409A.  If a Member elects a lump sum distribution hereunder, no Single Purchase Fixed Percentage Adjustment shall apply.

3.4Payment of Non-Grandfathered Supplemental Retirement Benefits.  Except as otherwise provided in Section 7.3 or in the last sentence of Section 2.2, a Member may elect to receive payment of his or her Non-Grandfathered Supplemental Retirement Benefit in such distribution form as is then available to the Member under the Qualified Plan upon Termination of Employment.  An election under this Section 3.4 shall be made in a writing acceptable to the Administrator and filed with the Administrator within the thirty (30) day period set forth in Section 2.1 or, if later, within the transition election period set forth in Section 2.2.  Notwithstanding the foregoing, if any portion of the Member’s “High-3 Salary” (or “High-5 Salary, if applicable) that is used to determine the Member’s Non-Grandfathered Benefit was earned prior to the date of the Member’s election, such election shall not be effective with respect to any portion of his or her Non-Grandfathered Supplemental Retirement Benefit.

The Member’s election may specify a payment commencement date which is no earlier than as soon as practicable following the later of Termination of Employment or attainment of age forty-five (45) (except in the case of a Disability Retirement Benefit described below), and no later than the Member’s Normal Retirement Date (or his or her actual retirement date, if later).  To the extent permitted by the Administrator consistent with Code Section 409A and regulations thereunder, a Member may elect a different available method of distribution with respect to different events resulting in Termination of Employment (e.g., retirement, death or Disability).

If a Member fails to file an election of method of distribution for his or her Non-Grandfathered Supplemental Retirement Benefit within the time provided in Section 2.1 or 2.2 or the Member’s election is not effective for any reason, he or she shall be deemed to have elected to have such benefit paid in a single lump sum payment as soon as practicable after the first day of the month following the later of the Member’s Termination of Employment or, if later, his or her attainment of age forty-five (45).  Notwithstanding the foregoing, the following rules apply to Non-Grandfathered Supplemental Retirement Benefit distribution elections under the Plan:

(a)If the Member’s Termination of Employment is due to Disability, the Member shall be deemed to have elected to have annuity payments commence on the first day of the month following the Administrator’s determination of such Disability.

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(i)            If the Member ceases to be entitled to a Disability Retirement Benefit under the Qualified Plan prior to age 45, his or her Non-Grandfathered Supplemental Retirement Pension shall cease if and when the Member ceases to be eligible for a Disability Retirement Benefit under the terms of the Qualified Plan and shall recommence in annuity form (as described above) upon the Member’s attainment of age forty-five (45), reduced to the Non-Grandfathered Supplemental Retirement Benefit amount that would otherwise have been payable as of such Pension Commencement Date.

(ii)           If the Member ceases to be entitled to a Disability Retirement Benefit under the Qualified Plan at or after age 45, the Member’s Non-Grandfathered Supplemental Retirement Benefit shall be reduced to the Non-Grandfathered Supplemental Retirement Benefit amount that would otherwise have been payable to the Member, assuming that the Member’s Pension Commencement Date is the date of such cessation of disability.

(iii)          If the Member returns to employment with the Bank upon or after cessation of his or her disability, any additional benefit that may become payable under the Plan shall be determined and paid upon the Member’s subsequent Termination of Employment in accordance with Section 3.5(b) below.

(b)If a Member is reemployed by the Bank while receiving annuity benefits under the Plan, the Member’s Non-Grandfathered Supplemental Retirement Benefit shall not be suspended hereunder.  Upon the Member’s subsequent Termination of Employment, the Member’s Non-Grandfathered Supplemental Retirement Benefit then in pay status shall be adjusted to reflect any additional benefit accruals that the Member earns under the terms of the Plan during his period of reemployment, with such additional benefit accruals reduced (but not below zero) by the value of any benefit payments made during the period of reemployment.  Any increase in Non-Grandfathered Supplemental Retirement Benefit shall be paid in accordance with the distribution method then in effect for the Member commencing as soon as practicable after the Member’s subsequent Termination of Employment.

(c)The entitlement to a life annuity (including any joint and survivor annuity or annuity with term certain) is treated as the entitlement to a single payment for purposes of Code Section 409A.  To the extent permitted under Code Section 409A and permitted by the Administrator, a Member may change the form of distribution  from one type of life annuity to another type of life annuity before the Pension Commencement Date, provided that the annuities are actuarially equivalent applying reasonable actuarial assumptions.  A payment required to be made under the Plan upon or as soon as practicable after a designated payment date shall be deemed to be made upon the date specified if it is made within the same taxable year of the Member (i.e., the calendar year) or, if later, by the 15th day of the third month after such designated payment date, provided that the

11

Member is not permitted, directly or indirectly, to designate the taxable year of payment.

3.5Change in Distribution Election for Non-Grandfathered Supplemental Benefits.  To the extent permitted by the Administrator and consistent with Code Section 409A and regulations thereunder, a Member may elect to change the method or time of distribution of his or her Non-Grandfathered Supplemental Retirement Benefit after the initial deferral election and before the Pension Commencement Date by filing a written request with the Administrator.  Except in the case of a transition election permitted under Section 2.2 above, such a change election shall not take effect until at least twelve months after the date on which it is made and shall be effective only if (a) the election is filed with the Administrator before the Member’s Termination of Employment; (b) the election does not accelerate the timing or payment schedule of any distribution; (c) the payment commencement date in the change election is not less than five years after the date the distribution would otherwise have commenced for the event resulting in Termination of Employment without regard to such election, and not later than five years after his or her Normal Retirement Date or Postponed Retirement Date, as applicable; and (d) the Administrator approves such election.  A Member’s distribution election shall become irrevocable upon the Member’s Termination of Employment.  Notwithstanding the foregoing, a  Member may not elect a distribution date later than (a) April 1 of the calendar year after the year in which the Member attains age 70½, or (b) five years after the Member’s Termination of Employment, if later.

3.6General Conditions of Payment.  All terms and conditions of the Prior Plan applicable to the payment of Supplemental Retirement Benefits shall govern the payment of Grandfathered Supplemental Retirement Benefits, including the suspension of benefits provisions in Section 3.04 of the Prior Plan.  Except as otherwise expressly provided herein or as required by Code Section 409A, all terms and conditions of the Qualified Plan applicable to payment of a Qualified Plan Retirement Benefit or a Qualified Plan Survivor Benefit shall also be applicable to a Non-Grandfathered Supplemental Benefit payable hereunder.  Any Qualified Plan Retirement Benefit, Qualified Plan Survivor Benefit or other benefit payable under the Qualified Plan shall be paid solely in accordance with the terms and conditions of the Qualified Plan, and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Qualified Plan.

3.7Death after Pension Commencement Date of Supplemental Retirement Benefits.  If a Member dies after the date the Pension Commencement Date of Supplemental

12

Retirement Benefits, the only death benefit payable under the Plan in respect of such Member shall be the amount, if any, payable under the form of payment which the Participant had elected.

3.8Acceleration of Payment Date.  Notwithstanding the foregoing,  the distribution of Non-Grandfathered Supplemental Benefits hereunder may be accelerated, with the consent of the Administrator, under the following circumstances:

(a)Compliance with Domestic Relations Order.  To permit payment to an individual other than the Member as necessary to comply with the provisions of a domestic relations order (as defined in Code Section 414(p)(1)(B));

(b)Conflicts of Interest.  To permit payment as necessary to comply with the provisions of a Federal government ethics agreement or to avoid violation of an applicable Federal, state, local or foreign ethics law or conflicts of interest law;

(c)Payment of Employment Taxes.  To permit payment of federal employment taxes under Code Sections 3101, 3121(a) or 3121(v)(2), or to comply with any federal tax withholding provisions or corresponding withholding provisions of applicable state, local, or foreign tax laws as a result of the payment of federal employment taxes, and to pay the additional income tax at source on wages attributable to the pyramiding Code Section 3401 wages and taxes; or

(d)Tax Event.  Upon a good faith, reasonable determination by the Administrator, and upon advice of counsel, that the Plan fails to meet the requirements of Code Section 409A and regulations thereunder.  Such payment may not exceed the amount required to be included in income as a result of the failure to comply with the requirements of Code Section 409A.

3.9Delay of Payments.  A payment of Non-Grandfathered Supplemental Benefits otherwise required to be made under the terms of the Plan may be delayed solely to the extent necessary under the following circumstances, provided that payment is made as soon as possible within the first calendar year after the reason for delay no longer applies:

(a)Payments Subject to the Deduction Limitation.  The Bank reasonably anticipates that such payment would otherwise violate Code Section 162(m);

(b)Violation of Law.  The Administrator reasonably determines that making the payment will violate Federal securities or other applicable laws; or

(c)Other Permitted Event. Upon such other events and conditions as the Commissioner of Internal Revenue shall prescribe in generally applicable guidance.

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This Section 3.9 shall be applied to similarly-situated Members in a reasonably consistent basis.

SECTION 4 - - SUPPLEMENTAL SURVIVOR BENEFIT

4.1Amount.  If a Member dies prior to his or her Pension Commencement Date under circumstances in which a Qualified Plan Survivor Benefit is payable, then a Supplemental Survivor Benefit may be payable to his or her Beneficiary as hereinafter provided.  The monthly amount of the Supplemental Survivor Benefit shall be equal to the difference between either (a) or (b) below, as applicable, minus (c) below, where:

(a)in the case of an Eligible Executive described in Section 1.11(a) who becomes a Member under Section 2.1(a) as a result of participation in the Thrift BEP, the monthly amount of the Qualified Plan Survivor Benefit to which the Member would have been entitled under the terms of the Qualified Plan if such benefit were computed by including in the definition of “Salary” any amounts voluntarily deferred by the Member under the Thrift BEP; or

(b)in the case of an Eligible Executive described in Section 1.11(b) who becomes a Member under Section 2.1(b), the monthly amount of the Qualified Plan Survivor Benefit to which the Member would have been entitled under the terms of the Qualified Plan if such benefit were computed:

(i)            including in the definition of “Salary” any amounts voluntarily deferred by the Member under the Thrift BEP;

(ii)           without regard to Code Limitations;

(iii)          including in the definition of “Salary” any Incentive Compensation paid during the applicable Plan Year (determined prior to any deferral under the Thrift BEP);

(iv)          by recognizing the Member’s years of service from his or her initial date of employment with any employer participating in the Qualified Plan to his or her date of membership in the Qualified Plan as benefit service under the Qualified Plan; and

(v)           solely with respect to Executive Officers hired by the Bank prior to January 9, 2006 and appointed as an Executive Officer effective on or prior to

14

January 1, 2008, by applying an increased annual pension accrual rate of two and three-eighths percent (2.375%); provided, however, that aggregate pension benefits payable to such Executive Officers (taking into account benefits determined under this Plan and the Qualified Plan, and from any other defined benefit pension plan in which the Member participated during any period of service taken into account in calculating the Member’s benefit hereunder) shall not exceed a percentage of the Member’s “High-3 Salary” (taking into account compensation described in clauses (i), (ii) and (iii) above) equal to sixty-five percent (65%) for Senior Vice Presidents, seventy percent (70%) for Executive Vice Presidents and eighty percent (80%) for the President;

MINUS

(c)the monthly amount of the Qualified Plan Survivor Benefit that is or would be payable to the Plan Member under the terms of the Qualified Plan, determined assuming that the Member’s death has occurred prior to his or her actual “Commencement Date” under the Qualified Plan.

Notwithstanding the foregoing, the amount of a Member’s Supplemental Survivor Benefit shall not be less than zero.  The amount described above shall be adjusted as provided in the Qualified Plan to reflect the identity of the Beneficiary, the form of benefit, and commencement of payments prior to the Member’s Normal Retirement Date.  If a Member dies after his or her Pension Commencement Date, the amount of survivor benefit then payable, if any, shall be determined based upon the method of distribution of benefits in effect at the time of the Member’s death.

4.2Adjustment and Payment of Grandfathered Supplemental Survivor Benefits.  The amount of Grandfathered Supplemental Retirement Benefit to which a Member may be entitled, if any, shall be determined and paid under the terms of the Prior Plan, and shall be subject to adjustment to reflect the time and method of payment as described in Section 3.2.

4.3Non-Grandfathered Supplemental Survivor Benefits.  The amount of Non-Grandfathered Supplemental Survivor Benefit described in Section 4.1 above shall be calculated based upon the Member’s Qualified Plan Retirement Benefit determined assuming that the Commencement Date under the Qualified Plan is the same as the Pension Commencement Date under this Plan (regardless of whether the Member (or his or her surviving spouse) entered pay status under the Qualified Plan prior to his or her death or has elected to defer commencement of his or her Qualified Plan Survivor Benefit to a later Commencement Date), reduced by any Grandfathered Supplemental Survivor Benefit (calculated under Section 4.2 assuming payment commencement as of the same date).  In calculating the amount of the Non-Grandfathered Supplemental Survivor Benefit under Section 4.1, any Retirement Adjustment Payment, Post-Retirement Supplement or Single Purchase Fixed Percentage Adjustment under the Qualified Plan prior to the Pension Commencement Date under this Plan shall not be taken into account.

15

The Member’s Non-Grandfathered Supplemental Survivor Benefit shall be adjusted as provided under the terms of the Qualified Plan, to the extent applicable, to reflect commencement of payments prior to the Member’s Normal Retirement Date or payment in a form of benefit other than a single-life annuity.  In determining the amount of any optional form of benefit, the factors set forth in the Qualified Plan shall apply.

4.4           Payment of Non-Grandfathered Supplemental Survivor Benefits.  The Non-Grandfathered Supplemental Survivor Benefit shall be paid to the Member’s Beneficiary in a single lump sum as soon as practicable after the Member’s death.

4.5Other Payment Rules.  Sections 3.6 through 3.9 shall apply to the payment of Non-Grandfathered Supplemental Survivor Benefits.

SECTION 5 - - ADMINISTRATION OF THE PLAN

5.1Administration by the Bank.  The Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof.  The Committee may appoint such person or persons as it deems appropriate to perform all or any of the functions of the Administrator under the terms of the Plan.  To the extent that no such person or persons are appointed, the Committee shall serve as Administrator.

5.2General Powers of Administration.  The Committee shall have authority and discretion to control and manage the operation and administration of the Plan, including all rights and powers necessary or convenient to the carrying out of its functions hereunder, whether or not such rights and powers are specifically enumerated herein.  The Committee may, in its discretion, delegate authority with regard to the administration of the Plan to any individual, officer or committee in accordance with Section 5.2(g) below.  Notwithstanding any other provision of the Plan, if an action or direction of any person to whom authority hereunder has been delegated conflicts with an action or direction of the Committee, then the authority of the Committee shall supersede that of the delegate with respect to such action or direction.

Without limiting the generality of the foregoing, and in addition to the other powers set forth in this Section 5.2, the Committee or its delegate shall have the following express authorities:

(a)To construe and interpret the provisions of the Plan; to decide all questions arising thereunder, including, without limitation, questions of eligibility for participation, eligibility for benefits, the validity of any election or designation made under the Plan, and the amount, manner and time of payment of any benefits hereunder; and

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to make factual determinations necessary or appropriate for such decisions or determination;

(b)To prescribe procedures to be followed by Members, Beneficiaries or alternate payees in filing applications for benefits and any other elections, designations and forms required or permitted under the Plan;

(c)To prepare and distribute information explaining the Plan;

(d)To receive from the Bank and from Members, Beneficiaries and alternate payees such information as shall be necessary for the proper administration of the Plan;

(e)To furnish the Bank or the Board of Directors, upon request, such reports with respect to the administration of the Plan as are reasonable and appropriate;

(f)To appoint or employ advisors, including legal and actuarial counsel (who may also be counsel to the Bank) to render advice with regard to any responsibility of the Committee under the Plan or to assist in the administration of the Plan;

(g)To designate in writing other persons to carry out a specified part or parts of its responsibilities hereunder (including this power to designate other persons to carry out a part of such designated responsibility). Any such person may be removed by the Committee at any time with or without cause;

(h)To rule on claims, and to determine the validity of domestic relations orders and comply with such orders; and

(i)All rules, actions, interpretations and decisions of the Committee are conclusive and binding on all persons, and shall be given the maximum possible deference allowed by law.

5.3Rules of the Administrator.  The Administrator may adopt such rules as it deems necessary, desirable or appropriate. When making a determination or calculation, the Administrator shall be entitled to rely upon information furnished by a Member or Beneficiary, the Bank, the legal counsel of the Bank, or such other person as it deems appropriate, and shall further be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Bank with respect to the Plan.

5.4Claims Procedure.  Any person who believes that he or she is then entitled to receive a benefit under the Plan may file a claim in writing with the Administrator.  Except to the extent the Committee adopts an alternate procedure for the review of claims, the procedures in this Section 5.4 shall apply.  The Administrator shall, within ninety (90) days of the receipt of a claim, either allow or deny the claim in writing.  A denial of a claim shall be written in a manner calculated to be understood by the claimant and shall include: (a) the specific reason or reasons

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for the denial; (b) specific references to pertinent Plan provisions on which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (d) an explanation of the Plan’s claim review procedure.  A claimant whose claim is denied (or his or her duly authorized representative) may, within sixty (60) days after receipt of denial of the claim: (1) submit a written request for review to the Committee; (2) review pertinent documents; and (3) submit issues and comments in writing.  The Administrator shall notify the claimant of the decision of the Committee on review within sixty (60) days of receipt of a request.  No legal action may be commenced by a Member or Beneficiary with respect to a benefit under this Plan without first exhausting the Plan’s administrative claims procedures, and any legal action with respect to a claim that has been finally denied must be commenced no later than one year after the date of the Plan’s final denial of such claim upon appeal.

SECTION 6 - - AMENDMENT OR TERMINATION

6.1Amendment or Termination.  The Board of Directors may amend or terminate, in whole or in part, the Plan without the consent of any Member, Beneficiary or other person; provided, however, that no amendment or termination of the Plan shall retroactively impair or otherwise adversely affect the rights of any Member or Beneficiary to benefits under the Plan which have accrued prior to the date of such action; and provided further, that an accrued benefit may be decreased as a result of equivalent increases in the Member’s Qualified Plan Retirement Benefit due to increases in applicable Code Limitations.  Notwithstanding the foregoing, the Board of Directors may amend the Plan as it deems necessary to comply with applicable law, including Code Section 409A and regulations thereunder.

SECTION 7 - - GENERAL PROVISIONS

7.1Member’s Rights Unsecured.  The right of any Member to receive future payments under the provisions of the Plan shall be an unsecured claim against the general assets of the Bank.  The Bank shall be under no obligation to establish any separate fund, purchase any annuity contract, or in any other way make any special provision or specifically earmark any funds for the payment of amounts called for under the Plan.  If the Bank chooses to establish such a fund, or purchase such an annuity contract or make any other agreement to provide for such payments, that fund, contract or arrangement shall remain part of the Bank’s general assets and no person claiming payments under the Plan shall have any right, title or interest in or to any such fund, contract or arrangement.

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7.2Non-assignability.  None of the benefits, payments, proceeds or claims of any Member or Beneficiary shall be subject to any claim of any creditor of any Member or Beneficiary and, in particular, the same shall not be subject to attachment or garnishment or other legal process by any creditor of such Member or Beneficiary, nor shall any Member or Beneficiary have any right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments or proceeds which he or she may expect to receive, contingently or otherwise, under the Plan.  Notwithstanding the foregoing, the Bank shall comply with the terms of a domestic relations order applicable to a Member’s interest in the Plan, provided that such order does not require the payment of benefits in a manner or amount, or at a time, inconsistent with the terms of the Plan.  The Bank shall have no liability to any Member or Beneficiary to the extent that his or her benefit is reduced in accordance with the terms of a domestic relations order that the Bank applies in good faith.  In determining the amount of any Supplemental Benefit under Section 3.1 or 4.1 of the Plan, the amount of Qualified Plan Benefit taken into account under Section 3.1(c) or 4.1(c), respectively, shall be determined prior to reduction for any award under a qualified domestic relations order relating to such Benefit.

7.3Small Benefits.  If the present value of aggregate Supplemental Benefit as of the Pension Commencement Date is less than the dollar limitation on elective deferrals as then in effect under Code Section 402(g), the Bank shall pay the present value of such benefit to the Member or Beneficiary, as applicable, in a single lump sum in lieu of any further benefit payments hereunder.  Present value shall be calculated as provided in the Qualified Plan.

7.4Taxes.  The Administrator shall withhold all federal, state or local taxes that it reasonably believes are required to be withheld from any payments under the Plan.

7.5Limitation of Member’s Rights.  Nothing contained in the Plan shall confer upon any person a right to be employed or to continue in the employ of the Bank, or interfere in any way with the right of the Bank to terminate the employment of a Member at any time, with or without cause.

7.6Receipt and Release.  Any payment to any Participant or Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Bank or the Plan, and the Administrator may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect.  If requested, such receipt and release shall be executed by the Participant or Beneficiary no later than 90 days after the Participant’s scheduled payment commencement date.  If any Participant or Beneficiary is determined by the Administrator to be incompetent by reason of physical or mental disability (including minority) to give a valid receipt and release, the Administrator may cause the payment or payments becoming due to such person to be made to another person for his or her benefit without responsibility on the part of the Administrator or the Bank to follow the application of such funds.

7.7Unclaimed Benefit.  Each Member shall keep the Company informed of his or her current address and the current address of his or her spouse.  The Company shall not be

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obligated to search for the whereabouts of any person.  In the event any person who is entitled to a benefit from the Plan cannot be located and such benefit remains unpaid for one year after the date payment was due, the amount required to pay such benefit shall remain in the rabbi trust (if applicable) or else retained by the Company; provided, however, that if the person who is entitled to the benefit is subsequently located, the benefit shall be restored and paid to such person without provision for interest.

7.8Governing Law.  The Plan shall be construed, administered, and governed in all respects under and by the laws of the Commonwealth of Massachusetts.  If any provision shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective.

7.9Designation of Beneficiary.  Each Member may file with the Administrator a written designation of one or more persons as the Beneficiary who shall be entitled to receive the amount, if any, payable under the Plan upon the Member’s death.  The Member may, from time to time, revoke or change his or her Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Administrator.  The last such designation received by the Administrator shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Administrator prior to the Member’s death, and in no event shall it be effective as of a date prior to such receipt.  If the Administrator is in doubt as to the right of any person to receive such amount, the Administrator may retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Administrator may pay such amount into any court of competent jurisdiction and such payment shall be a complete discharge of the liability of the Plan and the Bank therefor.  If no Beneficiary is designated or no designated Beneficiary survives the Member, payment shall be made in a single lump sum to the Member’s estate.

7.10Successorship.  The Plan shall be binding upon and inure to the benefit of the Bank and its successors and assigns, and the Members, and the successors, assigns, designees and estates of the Members.  The Plan shall also be binding upon and inure to the benefit of any successor bank or organization succeeding to substantially all of the assets and business of the Bank, but nothing in the Plan shall preclude the Bank from merging or consolidating into or with, or transferring all or substantially all of its assets to, another bank which assumes the Plan and all obligations of the Bank hereunder.  The Bank agrees that it will make appropriate provision for the preservation of Members’ rights under the Plan in any agreement or plan which it may enter into to effect any such merger, consolidation, reorganization or transfer of assets.  In such a merger, consolidation, reorganization, or transfer of assets and assumption of Plan obligations of

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the Bank, the term Bank shall refer to such other bank and the Plan shall continue in full force and effect.

7.11Indemnification.  No Committee member shall be personally liable by reason of any instrument executed by him or on his behalf, or action taken by him, in his capacity as a Committee member nor for any mistake of judgment made in good faith.  The Bank shall indemnify and hold harmless the Plan and each Committee member and each employee, officer or director of the Bank or the Plan, to whom any duty, power, function or action in respect of the Plan may be delegated or assigned, or from whom any information is requested for Plan purposes, against any cost or expense (including fees of legal counsel) and liability (including any sum paid in settlement of a claim or legal action with the approval of the Bank) arising out of anything done or omitted to be done in connection with the Plan, unless arising out of such person’s fraud or bad faith.

7.12Headings and Subheadings.  Headings and subheading in this Plan are inserted for convenience only and are not to be considered in the construction of the provisions hereof.

IN WITNESS WHEREOF, and pursuant to adoption of this Plan Document by the Board of Directors of the Bank has caused this Plan Document to be executed this 30 day of December, 2008 by:

/s/ Ellen McLaughlin	/s/ Janelle K. Authur
Ellen McLaughlin	Janelle K. Authur
Senior Vice President and General Counsel	Senior Vice President and Executive
	Director of Human Resources

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EX-10.2.3

EXHIBIT 10.2.3

THE FEDERAL HOME LOAN BANK OF BOSTON
THRIFT BENEFIT EQUALIZATION PLAN
(effective January 1, 2009)

Federal Home Loan Bank of Boston (the “Bank”) adopted the Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan (the “Plan”), as a component of the Federal Home Loan Bank of Boston Benefit Equalization Plan, effective January 1, 1993.  The Nonqualified Deferred Compensation Program for the Directors of the Bank was merged into the Plan effective on the close of business December 31, 2006, and the Plan was amended and restated to comply with Code Section 409A, as enacted by the American Jobs Creation Act of 2004 and applicable regulations thereunder, effective January 1, 2007 (or such earlier date as may be required by law).  The Plan is hereby further amended and restated to comply with final regulations issued under Code Section 409A effective January 1, 2009; provided, however, that any provision required to be effective on and after January 1, 2005 in order for the Plan to comply with Code Section 409A shall become effective as of January 1, 2005 (or such later date as shall be permitted under applicable Code Section 409A transition rules).

The Plan is established and maintained by the Bank in order to provide Eligible Executives and Directors an opportunity to defer taxation on income and to provide Eligible Executives with the benefits which would have been provided under the Pentegra Defined Contribution Plan for Financial Institutions (the “Qualified Plan”) if (a) their benefits under the Qualified Plan were not limited by certain limitations imposed by the Internal Revenue Code applicable to the Qualified Plan, and (b) “Base Salary” as defined in the Qualified Plan took into account amounts paid under the Bank’s incentive compensation plan(s), as well as elective deferrals hereunder.

The Plan is a governmental plan under Section 4(b) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and is therefore exempt from coverage under ERISA.  The Plan is unfunded and maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees, and Bank directors, and is not intended to be qualified under Section 401(a) of the Internal Revenue Code.

ARTICLE I
DEFINITIONS

Each word used herein not defined below that begins with a capital letter and is defined in the Qualified Plan shall have the same definition as the definition given to that word in the Qualified Plan.  Wherever used herein, the following terms shall have the meanings hereinafter set forth:

1.1           “Account” or “Deferred Compensation Account” means the separate account established under the Plan for each Participant, as described in Section 5.1.

1.2           “Administrator” means the Committee or such person or persons as may be appointed by the Committee to be responsible for those functions assigned to the Administrator under the Plan.

1.3           “Affiliate” means any entity that is a member of a “controlled group” of corporations with the Bank under Code Section 414(b) or a trade or business under common control with the Bank under Code Section 414(c); provided, however, that in applying Code Sections 1563(a)(1), (2) and (3) for purposes of Code Section 414(b), the language “at least 50 percent” will be used instead of “at least 80 percent” each place it appears, and in applying Treasury Regulation Section 1.414(c)-2 for purposes of Code Section 414(c), the language “at least 50 percent” will be used instead of “at least 80 percent” each place it appears.  In addition, to the extent that the Administrator determines that legitimate business criteria exist to use a reduced ownership percentage to determine whether an entity is an Affiliate for purposes of determining whether a Termination of Service has occurred, the Administrator may designate an entity that would meet the definition of “Affiliate” substituting 20 percent in place of 50 percent in the preceding sentence as an Affiliate in Appendix A hereto.  Such designation shall be made by December 31, 2007 or, if later, at the time a 20 percent or more ownership interest in such entity is acquired.

1.4           “Bank” means the Federal Home Loan Bank of Boston.

1.5           “Base Salary” means “Salary” as defined for purposes of the Qualified Plan.

1.6           “Beneficiary” means the person, persons or trust designated by a Participant as direct or contingent beneficiary in the manner prescribed by the Administrator.  The Beneficiary of a Participant who has not effectively designated a beneficiary shall be the Participant’s estate.

1.7           “Board of Directors” means the Board of Directors of the Bank.

1.8           “Code Limitations” means the cap on compensation taken into account by the Qualified Plan under Code Section 401(a)(17); the limitations on Section 401(k) contributions necessary to meet the average deferral percentage (“ADP”) test under Code Section 401(k)(3); the limitations on employee and matching contributions necessary to meet the average contribution percentage (“ACP”) test under Code Section 401(m); the dollar limitations on elective deferrals under Code Section 402(g); and the overall limitation on contributions imposed by Code Section 415(c), as such provisions may be amended from time to time, and any similar successor provisions of federal tax law.

1.9           “Committee” means the Personnel Committee of the Board of Directors, which is authorized to administer the Plan and to perform the functions described in Article VII.

1.10         “Compensation” means (a) with respect to an Executive, Base Salary and/or Incentive Compensation, as applicable; and (b) with respect to a Director, the meeting fees paid by the Bank to the Director.

1.11         “Deferral Period” means the period described in Section 3.3 of the Plan.

1.12         “Director” means a member of the Board of Directors of the Bank, other than an Employee.

1.13         “Disability” means that the Participant (a) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than

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12 months; (b) is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Bank; or (c) has been determined to be totally disabled by the Social Security Administration.

1.14         “Effective Date” means January 1, 2009.  The Plan was initially effective January 1, 1993 and was most recently restated effective January 1, 2007.  Any provision of this amendment and restatement required to be effective on and after January 1, 2005 in order for the Plan to comply with Code Section 409A shall become effective as of January 1, 2005 (or such later date up to January 1, 2009 as shall be permitted under applicable Code Section 409A transition rules).

1.15         “Elective Deferral” means the amount of Compensation a Participant elects to defer pursuant to Article III of the Plan.

1.16         “Eligible Executive” or “Executive” means an employee of the Bank who is a corporate officer and who has been selected to be a Participant in the Plan by the Committee.

1.17         “Hardship” means an unforeseeable emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (a) a sudden and unexpected illness or accident of the Participant or the spouse or a dependent of the Participant (as defined in Code Section 152(a)), (b) a loss of the Participant’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance, for example, not as a result of a natural disaster), or (c) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Administrator.  In addition, the need to pay for medical expenses, including non-refundable deductibles, as well as for the costs of prescription drug medication, or the need to pay for the funeral expenses of a spouse or a dependent may also constitute a Hardship event.  The Administrator shall determine whether the circumstances presented by the Participant constitute an unanticipated emergency.  Such circumstances and the Administrator’s determination will depend on the facts of each case, but, in any case, payment may not be made to the extent that such hardship is or may be relieved as described in Sections 6.1.1 through 6.1.4 below.

1.18         “Incentive Compensation” means bonuses under the Bank’s Executive Incentive Plan and, if applicable, any long-term incentive compensation payable to a Participant under the Bank’s incentive compensation plan(s).

1.19         “Matching Contribution” means the amounts credited to a Participant’s Account under Article IV of the Plan with respect to Elective Deferrals.

1.20         “Participant” means (a) an Executive or former Executive who elects to participate in the Plan in accordance with the terms and conditions of the Plan or who has an Account in the Plan that has not been fully distributed; and (b) any Director who elects to participate in the Plan or who has an Account in the Plan that has not been fully distributed.

1.21         “Plan” means The Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan, as set forth herein or as it may be amended or restated from time to time.

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1.22         “Plan Year” means the calendar year.

1.23         “Qualified Plan” means the Pentegra Defined Contribution Plan for Financial Institutions, as from time to time amended.

1.24         “Required Withholdings” means the federal, state or local employment taxes, including applicable FICA taxes required to be withheld under Section 3101 of the Code from any (a) Elective Deferrals, (b) elective deferrals on behalf of the Participant to the Qualified Plan, (c) contributions by the Participant to any welfare benefit plan maintained by the Bank, and/or (d) any other compensation not paid to the Participant in cash, and all federal, state or local income taxes attributable thereto required to be withheld from income, and any additional federal, state or local income or employment taxes attributable to such withholdings.  The Administrator shall determine Required Withholdings in its discretion.

1.25         “Scheduled Distribution” means a distribution from a Participant’s Scheduled Distribution Sub-Account in accordance with Section 6.3.

1.26         “Scheduled Distribution Sub-Accounts” or “Sub-Accounts” means the separate bookkeeping accounts established by the Administrator under Section 5.1 to record the portion(s) of a Participant’s Account subject to separate Scheduled Distribution elections.

1.27         “Termination of Service” means, with respect to an Executive, the severing of employment with the Bank and any Affiliates, voluntarily or involuntarily, for any reason.  A Termination of Service will be deemed to have occurred if the facts and circumstances indicate that the Bank and the Participant reasonably anticipate that no further services will be performed after a certain date or that the level of bona fide services the Participant will perform for the Bank and its Affiliates after such date (whether as an employee or as an independent contractor) will permanently decrease to no more than 20% of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the employer if the Participant has been providing services to the Bank and its Affiliates less than 36 months).  A Participant will not be deemed to have incurred a Termination of Service while he or she is on military leave, sick leave, or other bona fide leave of absence (such as temporary employment by the government) if the period of such leave does not exceed six months or such longer period as the Participant’s right to reemployment with the Bank is provided either by statute or by contract.  For this purpose, a leave of absence is bona fide only if there is a reasonable expectation that the Participant will return to employment at the conclusion of the leave.  If the period of leave exceeds six months and the Participant’s right to reemployment is not provided either by statute or by contract, the Termination of Service will be deemed to occur on the first date immediately following such six-month period.  With respect to a Director, the term “Termination of Service” means that the Director has ceased to be a member of the Board of Directors of the Bank, and does not otherwise provide services (as determined under this paragraph) as an employee or independent contractor of the Bank or any Affiliate.  Whether an individual has incurred a Termination of Service shall be determined in accordance with the provisions of Section 409A.

1.28         “Valuation Date” means the close of business of each business day, or such other valuation date or dates established by the Administrator.

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ARTICLE II
PARTICIPATION

2.1Eligibility.  Each Executive may become a Participant upon the effective date of his or her designation as an Executive eligible for participation in the Plan by the Board of Directors or the Committee. Each Director may become a Participant upon his or her becoming a member of the Board of Directors of the Bank.

2.2Participation in the Plan.  An Eligible Executive or Director may elect to participate in the Plan for any Plan Year by delivering to the Administrator a properly executed election at the time and in the form provided by the Administrator, pursuant to which the Eligible Executive or Director elects to defer receipt of a specified portion of the Compensation that would otherwise be payable to such Executive for the Plan Year, as described in Article III hereof.

2.3Cessation of Participation.  An Executive shall cease to be a Participant in the Plan if (a) he or she incurs a Termination of Service for any reason, (b) he or she remains in the service of a Bank but ceases to be an Eligible Executive as described in Section 1.16 due to a change in employment status, except to the extent that the Committee determines otherwise, or (c) the Plan is terminated or otherwise amended so that the Executive ceases to be eligible for participation; provided, however, that such individual shall continue to be a Participant solely with respect to his or her vested Account balance until such Account balance is distributed from the Plan.  Such cessation of participation shall be effective upon the date of the change in status described in clause (a) above, upon the end of the Deferral Period for a change in status described in (b) above, or upon the effective date of an amendment or termination of the Plan described in clause (c) above.  A Director shall cease to be a Participant in the Plan if he or she ceases to be a member of the Board of Directors for any reason; provided, however, that such individual shall continue to be a Participant solely with respect to his or her vested Account balance until such Account balance is distributed from the Plan.

ARTICLE III
DEFERRAL OF COMPENSATION

3.1Election to Defer.  A Participant may elect to defer receipt of a portion of his or her Compensation for a Plan Year by delivering a properly executed election to the Administrator within the time specified in Section 3.2.  The Participant’s election shall be in a written form acceptable to the Administrator and shall specify:

3.1.1.       the whole percentage of Salary, other than Incentive Compensation, for the Plan Year to be deferred to the Plan, which percentage may not exceed 100%, reduced to the extent necessary to provide for any Required Withholdings;

3.1.2.       the whole percentage of Incentive Compensation for the Plan Year to be deferred to the Plan, which percentage may not exceed 100%, reduced to the extent necessary to provide for any Required Withholdings;

3.1.3.       if applicable, the investment fund or funds in which the Participant’s Elective Deferrals, and Matching Contributions attributable to such Elective Deferrals, will be deemed to be invested pursuant to Section 5.2;

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3.1.4.       if applicable, the specific Scheduled Distribution Sub-Account or Sub-Accounts into which all or a portion of such Elective Deferrals and/or Matching Contributions will be directed, as described in Section 6.3; and

3.1.5.       to the extent permitted by the Administrator under Section 6.4.1, the payment commencement date and method of distribution to apply to benefits distributable upon the Participant’s Termination of Service.

An Executive who elects not to participate in the Plan at the time he or she first becomes eligible to do so may elect to become a Participant in any subsequent Plan Year by filing an election to defer Compensation as described above within the time provided in Section 3.2, provided that he or she is then eligible to participate in the Plan.

3.2Date for Filing Election.

3.2.1.       Except as provided below, an election to defer Compensation to be earned in a Plan Year shall be filed by the Participant with the Administrator as of a date established by the Administrator which is no later than December 31 of the Plan Year preceding the year in which such Compensation is earned.

3.2.2.       In the case of an individual first employed as an Executive or becoming a Director, or first becoming eligible for this Plan (and any similar account-based deferred compensation plan of the Bank) during a Plan Year, an election to defer Compensation (which may include Incentive Compensation) earned subsequent to the initial date of employment or eligibility and subsequent to the date of such election may be filed by such Executive or Director with the Administrator within thirty (30) days of such initial date of service or eligibility.

3.2.3.       An election to defer Incentive Compensation meeting the requirements for “performance-based” compensation under Treasury Regulation Section 1.409A-1(e) shall be filed with the Administrator as of a date established by the Administrator which is at least six months prior to the end of the performance period in which such Incentive Compensation is earned, provided that (a) performance criteria have been established in writing by not later than 90 days after the commencement of the applicable performance period and the outcome is substantially uncertain at the time the criteria are established, (b) the Participant is in employment with the Bank continuously from the later of the beginning of the performance period or the date such performance criteria are set, and (c) the election is made before such performance-based compensation has become readily ascertainable (i.e., is both calculable in amount and substantially certain to be paid).

3.3Deferral Period.  The Deferral Period for a Participant’s Compensation earned during any Plan Year shall begin on the first day of such Plan Year, provided that the Participant has filed an election to defer Compensation prior thereto, as described in Section 3.2.1.  Notwithstanding the foregoing, in the case of an individual who is first employed as an Executive or first becomes a Director, or who first becomes eligible for participation during a Plan Year, the Deferral Period shall begin as of the first day of the payroll period (or, in the case of a Director, the first day of the month) beginning after the filing of a timely election by the

6

Participant in such Plan Year, as described in Section 3.2.2.  In each case, such Deferral Period shall end on the last day of the Plan Year.

The Deferral Period for Incentive Compensation meeting the requirements for “performance-based” compensation under Treasury Regulation Section 1.409A-1(e) shall be the performance period (which shall not be shorter than a Plan Year) to which such Incentive Compensation relates.  Notwithstanding the foregoing, an election to defer Incentive Compensation shall be deemed to be an election to defer such amount (1) to the date specified in such election, or, if earlier, (2) solely in the event of the Participant’s Termination of Service during the Deferral Period or within 31 days after the end of the Deferral Period, to the calendar quarter following the end of the Deferral Period for payment in an immediate lump sum (assuming the Participant is otherwise entitled to such Incentive Compensation).

3.4Revocation or Change of Deferral Election.

3.4.1.       A Participant may not voluntarily revoke or amend an election to defer Compensation under Section 3.1.1 after commencement of the Deferral Period.  Such election shall automatically expire at the conclusion of the applicable Deferral Period, unless renewed within the time provided in Section 3.2.

3.4.2.       A Participant may not revoke or amend an election to defer Incentive Compensation meeting the requirements for “performance-based” compensation under Treasury Regulation Section 1.409A-1(e) after the date which is six months prior to the end of the performance period in which such Incentive Compensation is earned; except that an election to defer Incentive Compensation under Section 3.2.2 may not be revoked during the Deferral Period.

3.4.3.       Notwithstanding the above, if a Participant incurs a Hardship, the Participant’s Elective Deferrals under this Plan may, upon the request of the Participant and with the consent of the Administrator, be permanently suspended for a period of six (6) months (the “suspension period”).  At the end of the suspension period, the Participant’s Elective Deferrals shall automatically resume, provided that the Participant has timely filed a deferral election under Sections 3.1 and 3.2 with respect to the Deferral Period in effect when the suspension period ends.

3.4.4.       If a Participant ceases to be an Eligible Executive during a Deferral Period because of a change in his or her employment status (except for a Termination of Service) as described in Section 2.3(b), the Participant’s deferral election shall remain effective for the remainder of the Deferral Period for which the election relates.

3.5Vesting of Elective Deferrals.  A Participant shall be 100% vested in the balance of his or her Deferred Compensation Account attributable to Elective Deferrals at all times.

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ARTICLE IV
BANK MATCHING CONTRIBUTIONS

4.1Matching Contributions for Eligible Executive Participants.

4.1.1.       Except as provided in Section 4.1.3 below, for each Elective Deferral credited to a Participant’s Deferred Compensation Account under Section 3.1.1, such Participant’s Account shall also be credited with a Matching Contribution under this Plan equal to (a) the matching contribution, if any, that would have been credited under the terms of the Qualified Plan with respect to such amount if contributed to the Qualified Plan, determined without regard to the Code Limitations, minus (b) the maximum matching contribution available to the Participant under the terms of the Qualified Plan with respect to the period to which such Elective Deferral relates, with regard to the Code Limitations and assuming that the Participant has made the largest elective deferral to the Qualified Plan for such period (and preceding periods during the Deferral Period) for which a matching contribution is available under the Qualified Plan; provided, however, that no Matching Contribution shall be made under Sections 4.1.1 and 4.1.2 with respect to Elective Deferrals under Section 3.1.1 exceeding 3% of Base Salary.  To the extent that a Participant has not met applicable service requirements for participation in matching contributions under the terms of the Qualified Plan, clause (a) of the preceding sentence shall be applied as though the Participant is eligible for matching contributions under the Qualified Plan; and no reduction under clause (b) of the preceding sentence shall apply until the Participant is actually eligible for such matching contributions.

4.1.2.       If, for any Plan Year beginning on or after January 1, 2007, a Participant (a) has contributed to the Qualified Plan the maximum amount of elective deferrals permitted under the terms of the Qualified Plan (including “catch-up” contributions, if available to the Participant and eligible for matching contributions); but (b) was credited with an amount of matching contributions under the Qualified Plan which is less than the amount set forth in Section 4.1.1(b) above, then the Participant shall be credited with an additional Matching Contribution under this Plan equal to the amount set forth in Section 4.1.1(b) above for such Plan Year minus the amount of matching contributions actually credited to the Participant under the Qualified Plan for such Plan Year.  Notwithstanding the foregoing, a Participant shall be eligible for a Matching Contribution under this Section 4.1.2 only if he or she is an Employee on the last day of the applicable Plan Year.

4.1.3.       For each Incentive Compensation Elective Deferral credited to a Participant’s Deferred Compensation Account under Section 3.1.2, such Participant’s Account shall also be credited with a Matching Contribution under this Plan equal to the matching contribution, if any, that would be credited under the Qualified Plan with respect to such amount if contributed to the Qualified Plan, determined without regard to the Code Limitations and on the basis that such Incentive Compensation is Salary under the Qualified Plan in the year payable; provided, however, that no Matching Contribution shall be made hereunder with respect to Elective Deferrals under Section 3.1.2 exceeding 3% of Incentive Compensation.

4.1.4.       No Matching Contribution shall be made with respect to a participating Director.

4.2Vesting of Matching Deferrals.  A Participant shall be 100% vested in the balance of his or her Deferred Compensation Account attributable to Matching Deferrals at all times.

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ARTICLE V
INVESTMENT OF DEFERRED COMPENSATION

5.1Deferred Compensation Account.  The Administrator shall establish a Deferred Compensation Account on the books of the Plan for each Participant, reflecting Elective Deferrals and Matching Contributions made for the Participant’s benefit, together with any adjustments for income, gain or loss attributable thereto under Section 5.2, and any payments, distributions, transfers or forfeitures therefrom.  The opening balance of the Participant’s Deferred Compensation Account as of January 1, 2007 shall equal the balance of such Account as of the close of the preceding business day.

5.2Time for Crediting Contributions.  Elective Deferrals to the Plan with respect to any pay period, and Matching Contributions attributable to such Elective Deferrals, shall normally be credited to the Participant’s Account within five (5) business days of the date that corresponding contributions attributable to Compensation earned in such pay period are credited under the Qualified Plan or would otherwise be paid to the Participant; provided, however, that no adjustment of earnings or losses shall be made with respect to Elective Deferrals or Matching Contributions under Section 5.3 prior to the earlier of (a) the 15th business day of the calendar month following the calendar month in which the Elective Deferral would otherwise have been paid to the Participant but for the Participant’s deferral election, or (b) the date such amounts are actually credited to the Participant’s Account on the books of the Plan; provided, however, that clause (a) shall not apply to any Matching Contribution made under Section 4.1.2 or as a result of Code Limitation testing (such as ADP testing) normally conducted on an annual basis.  The Administrator shall establish on the books of the Plan one or more Sub-Accounts in each Participant’s Deferred Compensation Account to reflect such Participant’s Scheduled Distribution elections and such additional accounts or sub-accounts as he deems necessary or advisable.

5.3Hypothetical Investment of Accounts.  The Deferred Compensation Account of a Participant, including each Sub-Account thereof, shall be adjusted as of each Valuation Date to reflect the income, gain or loss that would accrue to such Account, if assets in the Account were invested as described in this Section 5.3.  Each Participant shall direct the hypothetical investment of the Elective Deferrals and Matching Contributions credited to the Plan on his or her behalf among such investment funds as are from time to time made available by the Committee.  A Participant may, as of any Valuation Date, change the investment allocation of future Elective Deferrals or Matching Contributions, and may elect to transfer all or a portion of the balance of his or her Account hypothetically invested in one investment fund to any other investment fund or funds then available under the Plan, by directing the Administrator in such form and at such time as the Administrator shall require.

The hypothetical investment fund options available under the Plan shall be those designated by the Committee from time to time in its discretion.  The Administrator may promulgate uniform and nondiscriminatory rules and procedures governing investment elections under the Plan, including rules governing how credits or debits to an Account or Sub-Account shall be allocated among investment funds in the absence of a valid election.

5.4Statement of Account.  A statement shall be sent to each Participant as to the balance of his or her Deferred Compensation Account at least once each Plan Year.  Electronic

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distribution (including a reminder that such statement is available electronically) will satisfy this requirement.

ARTICLE VI
PAYMENT OF DEFERRED COMPENSATION

6.1Hardship Distributions.  A Participant may request that all or a portion of his or her vested Account balance be distributed at any time by submitting a written request to the Administrator, provided that the Participant has incurred a Hardship, and the distribution is necessary to alleviate such Hardship.  In determining whether the Hardship distribution request should be approved, the Administrator may rely on the Participant’s representation that the Hardship cannot be alleviated:

6.1.1.       through reimbursement or compensation by insurance or otherwise;

6.1.2.       by the Participant taking any withdrawals then available to him or her under the terms of the Qualified Plan;

6.1.3.       by reasonable liquidation of the Participant’s assets, including amounts available for withdrawal from the Qualified Plan, to the extent such liquidation would not itself cause a severe financial hardship; or

6.1.4.       by cessation of his or her elective deferrals under Section 3.4.3 of this Plan or a similar deferred compensation plan to the extent available.

6.2Administration of Hardship Distributions.  The Administrator shall deem a distribution to be necessary to alleviate a Hardship if the distribution does not exceed the amounts necessary to satisfy the Participant’s Hardship, plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution.  The Account balance that is not distributed pursuant to the Hardship request shall remain in the Plan.  Distributions to alleviate a Hardship will be made as soon as administratively feasible after the Administrator has reviewed and approved the request.  An amount to be distributed for Hardship shall be debited from the Participant’s Deferred Compensation Account not held in a Scheduled Distribution Sub-Account, or (if such amount is not sufficient) from the Sub-Account(s) having the latest scheduled distribution date.

6.3Scheduled Distribution.  A Participant may elect to receive a Scheduled Distribution with respect to an Elective Deferral and Matching Contributions, if applicable, at the time he or she files the applicable deferral election under Section 3.1.  A Participant may elect in accordance with Section 3.1.4 to direct all or a portion of his or her Elective Deferrals and/or Matching Contributions for the Plan Year into one or more Sub-Account(s), provided that any such Sub-Account has a scheduled distribution date which is not earlier than twelve (12) months after the end of the Deferral Period to which the Elective Deferral and/or Matching Contribution relates.  The Administrator may establish uniform and nondiscriminatory rules and procedures governing Scheduled Distribution Sub-Accounts, including establishing limitations on the number of Sub-Accounts available to Participants for any Deferral Period or in the aggregate, and the minimum length of deferral to be provided under any newly-established Sub-Account, as the Administrator deems appropriate.

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Except to the extent the Participant elects otherwise in accordance with Section 6.7, any “Post-Secondary Education Subaccounts” of the Participant as in effect under the terms of the Plan immediately prior to January 1, 2007 shall be redesignated as Scheduled Distribution Sub-Accounts hereunder, having the same scheduled distribution date(s) and method of distribution.

To the extent permitted by the Administrator at the time of election, such election may designate whether the elected Scheduled Distribution date shall continue to apply notwithstanding the Participant’s intervening retirement, death, Disability or Termination of Service.  Except as otherwise elected by a Participant under the preceding sentence, an election of a Scheduled Distribution shall automatically terminate upon the Participant’s retirement, death, Disability or Termination of Service, at which time the provisions of Sections 6.4, 6.5 and 6.6 shall govern distribution of the Participant’s Account.

A Participant may, with the consent of the Administrator and to the extent permitted under Code Section 409A and regulations thereunder, elect to (a) revoke a Scheduled Distribution (provided that the Participant’s Scheduled Distribution election would otherwise automatically terminate upon the Participant’s Termination of Service for any reason), in which case the balance of the applicable Sub-Account will be restored to the Participant’s Deferred Compensation Account, or (b) extend to a later date the date on which a Scheduled Distribution will occur, in which case the applicable Sub-Account will be redesignated or merged with another existing Sub-Account having the same designated distribution date.  A Participant may make an election under the preceding sentence by filing a new election prior to his or her Termination of Service at such time and in such form as the Administrator shall designate.  Any election to revoke or extend the date of a Scheduled Distribution shall not take effect until at least twelve months after the date on which it is made and must provide for a deferred distribution date not earlier than five years after the date such Scheduled Distribution was otherwise scheduled to be made and not later than the date set forth in Section 6.6.

A Scheduled Distribution may be made in a single lump sum payment or in installments over two to eleven years (as described in Section 6.5.1 or 6.5.2, respectively).  If a Participant who has elected to receive a Scheduled Distribution in installment payments incurs a Termination of Service after payments have commenced but before all amounts held in the Scheduled Distribution Sub-Account have been distributed, the remaining Scheduled Distribution Account balance shall continue be paid to the Participant over the then remaining installment period, or if the Participant has so elected, in a single lump sum payment as soon as practicable following the Participant’s Termination of Service.

6.4Retirement, Death or Other Separation from Service.

6.4.1.       Initial Distribution Election.  A Participant who has incurred a Termination of Service, whether by reason of retirement, voluntary or involuntary termination, death or Disability (each a “Distribution Event”), shall receive distribution of his or her Account (other than a Scheduled Distribution Sub-Account having a Scheduled Distribution date prior to the date of Termination of Service or a Scheduled Distribution Sub-Account subject to a later Scheduled Distribution date with respect to which the Participant has elected under Section 6.3 that no intervening Distribution Date shall apply) in a single lump sum payment as soon as practicable following the Termination of Service.  Notwithstanding the foregoing, the Administrator may permit a

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Participant to elect a later payment commencement date permitted under Section 6.6, or an alternate method of distribution permitted under Section 6.5, by filing a written request with the Administrator at the time the Participant files an initial deferral election under Section 3.2.  To the extent permitted under rules established by the Administrator at the time of election, such an election may separately specify different times or available methods of payment for different Distribution Events.

6.4.2.       Changes in Distribution Election.  The Administrator may permit a Participant to defer the commencement of his or her distribution to a date permitted under Section 6.6, or select an alternative method of distribution permitted under Section 6.5, after the initial deferral election by filing a written request with the Administrator.  Such a change election shall not take effect until at least twelve months after the date on which it is made and shall be effective only if (a) the election is filed with the Administrator before the Participant’s Termination of Service; (b) the election does not accelerate the timing or payment schedule of any distribution; (c) the payment commencement date in the change election is not less than five years after the date the distribution would otherwise have commenced for the Distribution Event without regard to such election; and (d) the Administrator approves such election.  Except as otherwise provided in Section 6.7, a Participant’s distribution election shall become irrevocable upon the Participant’s Termination of Service.

6.4.3.       Death.  If a Participant dies before distribution of his or her Account has commenced, the Participant’s benefit under the Plan shall be paid to his or her Beneficiary in a single lump sum payment as soon as practicable following the Participant’s death.

6.4.4.       Distribution Event.  Whether a Participant has incurred a Distribution Event shall be determined by the Administrator in a manner consistent with the requirements of Section 409A and regulations thereunder.

6.5Method of Payment.

6.5.1.       Lump Sum Payment.  Distribution of a Participant’s Account pursuant to Section 6.1, 6.3 or 6.4, may be made in a cash lump sum.

6.5.2.       Installment Distribution.  A Participant requesting distribution of an Account pursuant to Sections 6.3 or 6.4 may, with the approval of the Administrator, receive distribution in periodic payments in lieu of a lump sum.  Periodic payments shall be paid on a semi-annual basis, in January and July of each year, over a period that does not exceed twenty-two (22) installments (eleven (11) years).  Each installment payment shall be determined by dividing the Participant’s then-current Account balance by the number of semi-annual payments remaining to be paid. The Administrator may establish uniform and nondiscriminatory rules and procedures governing the payment of installment distributions, including the maximum period over which installment distributions shall be made and the minimum amount which must be distributed each Plan Year, as the Administrator deems appropriate consistent with Section 409A.  The entitlement to installment distributions is treated as the entitlement to a single payment for purposes of Treasury Regulation Section 1.409A-2(b)(2)(iii).

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6.5.3.       Death of Participant or Beneficiary During Installment Distribution Period.  If a Participant who has elected installment payments under Section 6.5.2 dies after payments have commenced but before all amounts held in the Account have been distributed, the remaining Account balance shall be paid to the Beneficiary or Beneficiaries designated by the Participant over the then remaining installment period, or if the Participant has so elected, in a single lump sum payment as soon as practicable following the Participant’s death.  If the designated Beneficiary dies after the Participant but before all amounts held in the Account have been distributed, the then remaining installments shall be distributed to the Beneficiary’s estate as provided in Section 6.5.2 (except to the extent that the Participant has designated one or more contingent Beneficiaries).

6.5.4.       Limit on Distribution Method.  Notwithstanding the foregoing, to the extent permitted under Section 409A, if the Participant’s aggregate Deferred Compensation Account does not exceed the dollar limitation on elective deferrals as then in effect under Code Section 402(g) at the time of his or her Termination of Service or earlier Distribution Event, distribution shall be made to the Participant (or his or her Beneficiary in the case of the Participant’s death) in a single lump-sum payment within ninety (90) days after such Termination of Service or earlier Distribution Event.

6.5.5.       General Payment Rules.  A payment required to be made under any provision of this Plan upon or as soon as practicable after a designated payment date (e.g., date of death or Termination of Service) shall be deemed to be made upon the date specified if it is made within the same taxable year of the Participant (i.e., the calendar year) or, if later, by the 15th day of the third month after such designated payment date, provided that the Participant is not permitted, directly or indirectly, to designate the taxable year of payment.

6.6Payment Commencement Date.   A Participant may not elect a distribution date later than (a) April 1 of the calendar year after the year in which the Participant attains age 70½, or (b) five years after the Participant’s Termination of Service, if later.

6.7Transition Rule Election.  Pursuant to Internal Revenue Service Notice 2005-1, Q&A-19(c), as extended by Notice of Proposed Rulemaking REG-158080-04, a Participant may, prior to December 31, 2008 or such later date as shall be permitted by the Administrator in accordance with Code Section 409A, modify or make new elections regarding distribution of his or her Account(s) under Sections 6.3, 6.4 and 6.5, at such time and in such form as the Administrator shall designate; provided, however, that no such distribution election made in 2007 may affect payments that the Participant would otherwise receive in 2007 or cause payments to be made in 2007, and that no such distribution election made in 2008 may affect payments that the Participant would otherwise receive in 2008 or cause payments to be made in 2008.

6.8Acceleration of Payment Date.  Notwithstanding the foregoing,  the distribution of benefits hereunder may be accelerated, with the consent of the Administrator, under the following circumstances:

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6.8.1.       Compliance with Domestic Relations Order.  To permit payment to an individual other than the Participant as necessary to comply with the provisions of a domestic relations order (as defined in Code Section 414(p)(1)(B));

6.8.2.       Conflicts of Interest.  To permit payment as necessary to comply with the provisions of a Federal government ethics agreement or to avoid violation of an applicable Federal, state, local or foreign ethics law or conflicts of interest law;

6.8.3.       Payment of Employment Taxes.  To permit payment of federal employment taxes under Code Sections 3101, 3121(a) or 3121(v)(2), or to comply with any federal tax withholding provisions or corresponding withholding provisions of applicable state, local, or foreign tax laws as a result of the payment of federal employment taxes, and to pay the additional income tax at source on wages attributable to the pyramiding Code Section 3401 wages and taxes; or

6.8.4.       Tax Event.  Upon a good faith, reasonable determination by the Administrator, and upon advice of counsel, that the Plan fails to meet the requirements of Code Section 409A and regulations thereunder.  Such payment may not exceed the amount required to be included in income as a result of the failure to comply with the requirements of Code Section 409A.

6.9Delay of Payments.  A payment otherwise required to be made under the terms of the Plan may be delayed solely to the extent necessary under the following circumstances, provided that payment is made as soon as possible within the first calendar year after the reason for delay no longer applies:

6.9.1.       Payments Subject to the Deduction Limitation.  The Bank reasonably anticipates that such payment would otherwise violate Code Section 162(m);

6.9.2.       Violation of Law.  The Administrator reasonably determines that making the payment will violate Federal securities or other applicable laws; or

6.9.3.       Other Permitted Event. Upon such other events and conditions as the Commissioner of Internal Revenue shall prescribe in generally applicable guidance.

ARTICLE VII
ADMINISTRATION OF THE PLAN

7.1Administration by the Bank.  The Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof.  The Committee may appoint such person or persons as it deems appropriate to perform all or any of the functions of the Administrator under the terms of the Plan.  To the extent that no such person or persons are appointed, the Committee shall serve as Administrator.

7.2General Powers of Administration.  The Committee shall have authority and discretion to control and manage the operation and administration of the Plan, including all rights and powers necessary or convenient to the carrying out of its functions hereunder, whether or not such rights and powers are specifically enumerated herein.  The Committee may, in its discretion, delegate authority with regard to the administration of the Plan to any individual,

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officer or committee in accordance with Section 7.2.7 below.  Notwithstanding any other provision of the Plan, if an action or direction of any person to whom authority hereunder has been delegated conflicts with an action or direction of the Committee, then the authority of the Committee shall supersede that of the delegate with respect to such action or direction.

Without limiting the generality of the foregoing, and in addition to the other powers set forth in this Section 7.2, the Committee or its delegate shall have the following express authorities:

7.2.1.       To construe and interpret the provisions of the Plan; to decide all questions arising thereunder, including, without limitation, questions of eligibility for participation, eligibility for benefits, the validity of any election or designation made under the Plan, and the amount, manner and time of payment of any benefits hereunder; and to make factual determinations necessary or appropriate for such decisions or determination;

7.2.2.       To prescribe procedures to be followed by Participants, Beneficiaries or alternate payees in filing applications for benefits and any other elections, designations and forms required or permitted under the Plan;

7.2.3.       To prepare and distribute information explaining the Plan;

7.2.4.       To receive from the Bank and from Participants, Beneficiaries and alternate payees such information as shall be necessary for the proper administration of the Plan;

7.2.5.       To furnish the Bank or the Board of Directors, upon request, such reports with respect to the administration of the Plan as are reasonable and appropriate;

7.2.6.       To appoint or employ advisors, including legal and actuarial counsel (who may also be counsel to the Bank) to render advice with regard to any responsibility of the Committee under the Plan or to assist in the administration of the Plan;

7.2.7.       To designate in writing other persons to carry out a specified part or parts of its responsibilities hereunder (including this power to designate other persons to carry out a part of such designated responsibility). Any such person may be removed by the Committee at any time with or without cause;

7.2.8.       To rule on claims, and to determine the validity of domestic relations orders and comply with such orders; and

7.2.9.       All rules, actions, interpretations and decisions of the Committee are conclusive and binding on all persons, and shall be given the maximum possible deference allowed by law.

7.3Rules of the Administrator.  The Administrator may adopt such rules as it deems necessary, desirable or appropriate. When making a determination or calculation, the Administrator shall be entitled to rely upon information furnished by a Participant or Beneficiary, the Bank, the legal counsel of the Bank, or such other person as it deems appropriate, and shall further be entitled to rely conclusively upon all tables, valuations,

15

certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Bank with respect to the Plan.

7.4Claims Procedure.  Any person who believes that he or she is then entitled to receive a benefit under the Plan may file a claim in writing with the Administrator.  Except to the extent the Committee adopts an alternate procedure for the review of claims, the procedures in this Section 7.4 shall apply.  The Administrator shall, within ninety (90) days of the receipt of a claim, either allow or deny the claim in writing.  A denial of a claim shall be written in a manner calculated to be understood by the claimant and shall include: (a) the specific reason or reasons for the denial; (b) specific references to pertinent Plan provisions on which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (d) an explanation of the Plan’s claim review procedure.  A claimant whose claim is denied (or his or her duly authorized representative) may, within sixty (60) days after receipt of denial of the claim: (1) submit a written request for review to the Committee; (2) review pertinent documents; and (3) submit issues and comments in writing.  The Administrator shall notify the claimant of the decision of the Committee on review within sixty (60) days of receipt of a request.  No legal action may be commenced by a Participant or Beneficiary with respect to a benefit under this Plan without first exhausting the Plan’s administrative claims procedures, and any legal action with respect to a claim that has been finally denied must be commenced no later than one year after the date of the Plan’s final denial of such claim upon appeal.

ARTICLE VIII
GENERAL PROVISIONS

8.1Participant’s Rights Unsecured.  The right of any Participant to receive future payments under the provisions of the Plan shall be an unsecured claim against the general assets of the Bank.  The Bank shall be under no obligation to establish any separate fund, purchase any annuity contract, or in any other way make any special provision or specifically earmark any funds for the payment of amounts called for under the Plan.  If the Bank chooses to establish such a fund, or purchase such an annuity contract or make any other agreement to provide for such payments, that fund, contract or arrangement shall remain part of the Bank’s general assets and no person claiming payments under the Plan shall have any right, title or interest in or to any such fund, contract or arrangement.

8.2Non-assignability.  None of the benefits, payments, proceeds or claims of any Participant or Beneficiary shall be subject to any claim of any creditor of any Participant or Beneficiary and, in particular, the same shall not be subject to attachment or garnishment or other legal process by any creditor of such Participant or Beneficiary, nor shall any Participant or Beneficiary have any right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments or proceeds which he or she may expect to receive, contingently or otherwise, under the Plan. Notwithstanding the foregoing, the Bank shall comply with the terms of a domestic relations order applicable to a Participant’s interest in the Plan, provided that such order does not require the payment of benefits in a manner or amount, or at a time, inconsistent with the terms of the Plan.  The Bank shall have no liability to any Participant or Beneficiary to the extent that his or her benefit is reduced in accordance with the terms of a domestic relations order that the Bank applies in good faith.

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8.3Taxes.  The Administrator shall withhold all federal, state or local taxes that it reasonably believes are required to be withheld from any payments under the Plan.

8.4Limitation of Participant’s Rights.  Nothing contained in the Plan shall confer upon any person a right to be employed or to continue in the employ of the Bank, or interfere in any way with the right of the Bank to terminate the employment of a Participant at any time, with or without cause.

8.5Receipt and Release.  Any payment to any Participant or Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Bank or the Plan, and the Administrator may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect.  If requested, such receipt and release shall be executed by the Participant or Beneficiary no later than 90 days after the Participant’s scheduled payment commencement date.  If any Participant or Beneficiary is determined by the Administrator to be incompetent by reason of physical or mental disability (including minority) to give a valid receipt and release, the Administrator may cause the payment or payments becoming due to such person to be made to another person for his or her benefit without responsibility on the part of the Administrator or the Bank to follow the application of such funds.

8.6Governing Law.  The Plan shall be construed, administered, and governed in all respects under and by the laws of the Commonwealth of Massachusetts.  If any provision shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective.

8.7Designation of Beneficiary.  A Participant may designate a Beneficiary by so notifying the Administrator in writing, in a form acceptable to the Administrator, at any time before the Participant’s death.  A Participant may revoke any Beneficiary designation or designate a new Beneficiary at any time without the consent of a beneficiary or any other person.  If no Beneficiary is designated or no designated Beneficiary survives the Participant, payment shall be made in a single lump sum to the Participant’s estate.

8.8Successorship.  The Plan shall be binding upon and inure to the benefit of the Bank and its successors and assigns, and the Participants, and the successors, assigns, designees and estates of the Participants.  The Plan shall also be binding upon and inure to the benefit of any successor bank or organization succeeding to substantially all of the assets and business of the Bank, but nothing in the Plan shall preclude the Bank from merging or consolidating into or with, or transferring all or substantially all of its assets to, another bank which assumes the Plan and all obligations of the Bank hereunder.  The Bank agrees that it will make appropriate provision for the preservation of Participants’ rights under the Plan in any agreement or plan which it may enter into to effect any such merger, consolidation, reorganization or transfer of assets.  In such a merger, consolidation, reorganization, or transfer of assets and assumption of Plan obligations of the Bank, the term Bank shall refer to such other bank and the Plan shall continue in full force and effect.

8.9Indemnification.  No Committee member shall be personally liable by reason of any instrument executed by him or on his behalf, or action taken by him, in his capacity as a Committee member nor for any mistake of judgment made in good faith.  The Bank shall

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indemnify and hold harmless the Plan and each Committee member and each employee, officer or director of the Bank or the Plan, to whom any duty, power, function or action in respect of the Plan may be delegated or assigned, or from whom any information is requested for Plan purposes, against any cost or expense (including fees of legal counsel) and liability (including any sum paid in settlement of a claim or legal action with the approval of the Bank) arising out of anything done or omitted to be done in connection with the Plan, unless arising out of such person’s fraud or bad faith.

8.10Headings and Subheadings.  Headings and subheading in this Plan are inserted for convenience only and are not to be considered in the construction of the provisions hereof.

8.11Amendment and Termination.  The Plan may at any time or from time to time be amended, modified, or terminated by the Board of Directors.  No amendment, modification, or termination shall, without the consent of a Participant, adversely affect the Participant’s Deferred Compensation Account at that time.  Upon termination of the Plan, the Board of Directors may elect to (a) pay benefits hereunder as they become due as if the Plan had not terminated or (b) to extent permitted by Code Section 409A and regulations thereunder, direct that all payments remaining to be made under the Plan be made in a single lump sum to Participants (or their Beneficiaries).

8.12Effective Date.  Except as otherwise provided herein, the effective date of this Plan shall be January 1, 2009.

IN WITNESS WHEREOF, and pursuant to adoption of this Plan Document by the Board of Directors of the Bank has caused this Plan Document to be executed this 30th day of December, 2008 by:

/s/ Ellen McLaughlin	/s/ Janelle K. Authur
Ellen McLaughlin	Janelle K. Authur
Senior Vice President and General Counsel	Senior Vice President and Executive
	Director of Human Resources

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EX-10.7.3

EXHIBIT 10.7.3

FEDERAL HOME LOAN BANK OF BOSTON

2008 DIRECTOR COMPENSATION POLICY

As Revised December 12, 2008

A fee of $2,075 per meeting shall be paid to all Directors that attend all or part of a meeting of the Board of Directors.  A fee of $2,850 per meeting shall be paid to the vice chair of the Board.  A fee of $3,650 per meeting shall be paid to the chair of the Board.  This fee shall also be provided to any person elected by the Board to serve as chairman pro tempore or to the vice chair if the vice chair presides for an entire meeting of the Board.  There are nine regularly scheduled meetings in 2008.

A fee of $750 per meeting shall be paid to all committee members, including ex officio members, who attend all or any part of any meeting of a committee of the Board.  A fee of $750 shall be paid to any Director who attends all or part of the annual shareholders meeting.

A fee of $500 per meeting shall be paid to any Director for participation in telephonic conference calls or when participating by telephone for all or any part of a meeting in which the Director would be entitled to receive a meeting fee for in-person attendance at such meeting.

Fees shall be paid per meeting.  For example, if a Board meeting and committee meeting occur on the same day, a separate fee shall be payable for attendance at each meeting.  Additionally, in the case of a multi-day meeting, a separate fee shall be payable for each day’s attendance at the same meeting.

In the event that inclement weather prevents the occurrence of a planned meeting of the Board or one of its committees, the Directors shall be entitled to receive the applicable meeting fee called for in the Statement of Policy, minus any fees received if an in-person meeting is changed to a telephonic meeting.

Maximum Fees

Notwithstanding the foregoing, no Director shall be paid fees in excess of $60,000 in a single fiscal year.

Administrative Matters

The Personnel Committee shall annually review this policy and shall submit its recommendation to the Board.  The Board shall consider the recommendations of the Personnel Committee and shall approve the policy no later than the first regularly scheduled meeting of the Board in which the policy shall apply.  The Board is authorized, in its sole discretion, to interpret the provisions of the policy and to address situations not anticipated by the policy, consistent with the requirements set forth in the regulations promulgated by the Federal Housing Finance Agency, if any.

EX-10.7.4

EXHIBIT 10.7.4

FEDERAL HOME LOAN BANK OF BOSTON

2009 DIRECTOR COMPENSATION POLICY

A fee of $4,875 per meeting shall be paid to all Directors that attend all or part of a meeting of the Board of Directors.  A fee of $5,500 per meeting shall be paid to the chair of all committees except for the chair of the Audit Committee which shall be $6,125 per meeting.  A fee of $6,125 per meeting shall be paid to the vice chair of the Board.  A fee of $6,750 per meeting shall be paid to the chair of the Board.  This fee shall also be provided to any person elected by the Board to serve as chairman pro tempore or to the vice chair if the vice chair presides for an entire meeting of the Board.  There are ten regularly scheduled meetings in 2009.

A fee of $2,000 per meeting shall be paid to all committee members, including ex officio members, who attend all or any part of any meeting of a committee of the Board.  A fee of $2,000 shall be paid to any director who attends all or part of the annual shareholders meeting.

A fee of $1,325 per meeting shall be paid to any Director for participation in telephonic conference calls or when participating by telephone for all or any part of a meeting in which the Director would be entitled to receive a meeting fee for in-person attendance at such meeting.

Fees shall be paid per meeting.  For example, if a Board meeting and committee meeting occur on the same day, a separate fee shall be payable for attendance at each meeting.  Additionally, in the case of a multi-day meeting, a separate fee shall be payable for each day’s attendance at the same meeting.

In the event that inclement weather prevents the occurrence of a planned meeting of the Board or one of its committees, the Directors shall be entitled to receive the applicable meeting fee called for in the Statement of Policy, minus any fees received if an in-person meeting is changed to a telephonic meeting.

Maximum Fees

The maximum fees for 2009 for the Chair shall be $60,000, for the Vice Chair $55,000, for the Chair of the Audit Committee $55,000, for all other Committee Chairs $50,000, and for Directors $45,000.

Administrative Matters

The Personnel Committee shall annually review this policy and shall submit its recommendation to the Board.  The Board shall consider the recommendations of the Personnel Committee and shall approve the policy no later than the first regularly scheduled meeting of the Board in which the policy shall apply.  The Board is authorized, in its sole discretion, to interpret the provisions of the policy and to address situations not anticipated or covered by this policy, consistent with the requirements set forth in the regulations promulgated by the Federal Housing Finance Agency, if any.

The following projections assume attendance at eight board meetings and three committee meetings.

Director cap:		$45,000
	8 board meetings	x	$4,875	=	$39,000
	3 committee meetings	x	2,000	=	6,000
					$45,000
Committee Chair cap:		$50,000
	8 board meetings	x	$5,500	=	$44,000
	3 committee meetings	x	2,000	=	6,000
					$50,000
Audit Committee Chair cap		$55,000
	8 board meetings	x	$6,125	=	$49,000
	3 committee meetings	x	2,000	=	6,000
					$55,000
Vice Chair cap:		$55,000
	8 board meetings	x	$6,125	=	$49,000
	3 committee meetings	x	2,000	=	6,000
					$55,000
Chair cap:		$60,000
	8 board meetings	x	$6,750	=	$54,000
	3 committee meetings	x	2,000	=	6,000
					$60,000

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EX-10.8

EXHIBIT 10.8

SEVERANCE AGREEMENT AND GENERAL RELEASE

The Severance Agreement and General Release (hereinafter “Agreement” or “Severance Agreement”) is made and entered into this 31st day of December, 2008 by and between Michael A. Jessee (“Mr. Jessee”) and Federal Home Loan Bank of Boston (“FHLBB” or “the Employer”).

WHEREAS, Mr. Jessee presently serves as the President of FHLBB; and

WHEREAS FHLBB and Mr. Jessee have reached an agreement pursuant to which Mr. Jessee will resign his employment with FHLBB in exchange for certain considerations;

NOW, therefore, in consideration of the severance compensation provided to Mr. Jessee, the mutual covenants herein set forth,  and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Mr. Jessee, and FHLBB hereby agree as follows:

1.             Termination of Employment:    Mr. Jessee agrees that he will execute the resignation letter attached hereto as Exhibit A effective April 30, 2009 (the “Termination Date”) upon execution of this Agreement.  This Agreement confirms that as of the Termination Date Mr. Jessee will have resigned from his position as President of FHLBB and any and all other positions that he may hold as an officer or director of FHLBB, and any industry committees, panels or forum for which he represents FHLBB.  A form of resignation is attached hereto as Exhibit A.

2.             Continuing Responsibilities:    Mr. Jessee agrees that from the date of the execution of this Agreement through April 30, 2009 he will work diligently and in good faith to (a) perform his duties as President of FHLBB, (b) comply with all federal and state laws, rules, regulations and guidelines governing the operations of FHLBB, (c) comply with all policies, regulations, and practices of FHLBB and (d) comply with all directives from the Board of Directors of FHLBB.  Mr. Jessee further agrees (a) to work diligently and in good faith to effect a smooth transition with his successor as President of FHLBB and (b) not to approve any expenses for the 2009 year without the approval of the Chairman of the Board of Directors or the Chair of the Compensation Committee.

3.             Return of Property:    Mr. Jessee agrees that by the end of the work day on April 30, 2009 he will return to FHLBB all FHLBB property in his possession

1

including a laptop computer, cell phone, all FHLBB documents, and keys.  Mr. Jessee further agrees that he will not delete any FHLBB information on the laptop computer or his desk top computer at work and will provide FHLBB with any pass words necessary for FHLBB to access all FHLBB information on the computers, including emails.

4.             Workers Compensation Statement:    Mr. Jessee agrees that by the end of the work day on April 30, 2009 he will execute the Workers Compensation statement attached hereto as Exhibit B as part of this Agreement.

5.             Execution of General Release:    Mr. Jessee agrees that at the end of the work day on April 30, 2009 he will re-execute the General Release attached hereto as Exhibit C.

6.             No Filings:    Mr. Jessee confirms that he has filed no charge, complaint, or action in any forum against FHLBB or its officers, directors or employees, including in any city, state or federal court or administrative agency.

7.             Confidential Information:    Mr. Jessee acknowledges that during the term of his employment with FHLBB, he has had access to proprietary information of FHLBB.  Mr. Jessee understands and agrees that he is bound to keep said information confidential after his termination of employment.

8.             Consideration and Benefits to Mr. Jessee:    Mr. Jessee will be provided with the following benefits:

(a)  During the transition period from the execution of this Agreement through April 30, 2009 (“Transition Period”), Mr. Jessee will receive his present salary and benefits, minus his normal deductions for taxes.  He will continue during the transition period to accrue benefits and to be subject to the benefit plans to which he is entitled according to the terms of the respective benefit plan documents of FHLBB including the Pentegra Defined Benefit Plan, Pension Benefit Equalization Plan, Pentegra Defined Contribution Plan, and Thrift Benefit Equalization Plan.

(b)  On April 30, 2009, Mr. Jessee will be paid for all vacation time that he has accrued to that date but has not used, minus normal tax withholdings.

(c)  During the eighteen (18) months from May 1, 2009 through October 31, 2010 (the “severance pay period”), FHLBB shall provide Mr. Jessee with salary continuation at his current base rate of pay.  The severance payments shall be paid through FHLBB’s normal payroll, minus normal deductions for taxes.  Should Mr. Jessee die during the severance pay period, all unpaid amounts shall be paid to his estate.  Mr. Jessee shall not accrue any benefits during the severance pay period.

(d)  FHLBB shall continue to provide Mr. Jessee with the same coverage that he presently is provided under FHLBB’s group health plan until Mr. Jessee reaches 65 years of age.  FHLBB shall continue to pay the same percentage of the insurance premium for the coverage as presently provided to Mr. Jessee.  The coverage will be provided under COBRA for the first eighteen (18) months after the termination of Mr. Jessee’s employment.  Thereafter, FHLBB shall use its good faith efforts to have Mr. Jessee

2

continue the same coverage under FHLBB’s group health plan.  If the carrier for FHLBB’s group health plan does not permit Mr. Jessee to continue his coverage under the group health plan, Mr. Jessee will be responsible for obtaining replacement coverage and FHLBB shall pay as a contribution to Mr. Jessee’s premiums on a monthly basis an amount equal to the net after tax premium presently paid by FHLBB for Mr. Jessee’s current coverage until Mr. Jessee reaches 65 years of age.

(e)  Mr. Jessee will be eligible for a potential bonus under the 2008 Executive Incentive Plan.

(f)   During the transition period, Mr. Jessee will be entitled to participate in the benefits provided to him under the personnel policies of the FHLBB including medical and life insurance coverage according to the terms of the policies.

(g)  FHLBB shall provide Mr. Jesse with a new computer of his choice, not to exceed $ 2,500.00  in cost.

(h)  FHLBB shall provide to Mr. Jesse a payment of $5,000 to defray any professional fees incurred in the review of this Agreement.  Payment will be made within five days following expiration of the revocation period referenced in Section 15 below provided Mr. Jessee has not revoked this Agreement.

9.             Non-Disparagement.    The FHLBB agrees that it will not, directly or indirectly, disparage Mr. Jessee or to do or say anything that will otherwise harm his personal or professional reputation.  Mr. Jessee agrees that he will not, directly or indirectly, disparage FHLBB or any of the people, products or organizations associated with FHLBB, including without limitation the officers, directors and shareholders of FHLBB, and that he will not, directly or indirectly, otherwise do or say anything that could disrupt the morale of the employees of FHLBB or otherwise harm FHLBB’s business or reputation.  Nothing herein shall preclude Mr. Jessee or FHLBB, however, from responding truthfully as required by lawful process, summons or subpoena or disclosing such information as may be required by any regulatory agency or the securities laws in connection with any disclosure obligations or otherwise as may be required by applicable law.

10.           No Admissions.    This Agreement shall not be construed as any admission by Mr. Jessee or FHLBB that either violated any common law or statutory rights enjoyed by the other party or in any way breached any contractual obligations either had to one another.

11.           Public Announcement.    Mr. Jessee and FHLBB agree that they will draft together a joint announcement regarding the termination of Mr. Jessee’s employment with FHLBB.

11.           Binding Effect.    This Severance Agreement and General Release shall inure to the benefit of, and be binding upon, the parties and their respective representatives, agents, executors, heirs, successors and assigns.

12.           Confidentiality.    Mr. Jessee agrees to keep the terms and amount of

3

severance benefits under the Agreement completely confidential, and not to disclose any such matters to anyone, in words or in substance, except as set forth in the section.  Notwithstanding the foregoing, Mr. Jessee may disclose such matters (a) to his spouse, attorney, financial advisors, and accountant, provided that he shall first obtain any such person’s agreement to keep any such matters completely confidential; and (b) to the extent required by law or to the extent necessary to enforce Mr. Jessee’s rights under the Agreement.  FHLBB agrees that it will not disclose the terms of the Agreement to any person, externally or internally, except on a strict need-to-know basis only to the extent necessary to further a specific and legitimate business interest of FHLBB, or to the extent required by law or to the extent necessary to enforce rights under the Agreement.

13.           Transition; Cooperation.  Mr. Jessee agrees during the severance pay period to be available at mutually convenient times and by telephone or email to answer informational questions FHLBB may have about its business, records, past transactions and other matters, and reasonably to assist FHLBB to transfer business knowledge and to transition to other persons the tasks for which he have been responsible during his employment with the FHLBB.  He also agrees reasonably to assist FHLBB hereafter with respect to all matters arising during or related to his employment, including but not limited to matters in connection with any prosecution of intellectual property rights, litigation or similar process, governmental investigation, or other proceeding or process which may arise following the date of this Agreement.

14.           Entire Agreement.    The Severance Agreement and General Release sets forth the entire agreement between the parties pertaining to the subject matter hereof.   All prior and contemporaneous conversations, negotiations, proposals, representations, covenants, and warranties with respect to the subject matter of this Agreement, whether oral or written, are merged herein and superseded by this Agreement.  Neither party is relying on any statement, representation or understanding not contained herein.  This Agreement may be amended only by a written instrument which is signed by both parties hereto and which specifically states that it is an amendment to this Agreement.  No waiver of any right hereunder shall be valid unless in a writing signed by the waiving party.  No failure or other delay by any party exercising any right, power, or privilege hereunder shall be or operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power, or privilege.

15.           Compliance with OWBPRA.    Mr. Jessee acknowledges that he has been given the opportunity, if he so desires, to consider the Severance Agreement and General Release for twenty-one (21) days before executing it.   In the event that he executes the Severance Agreement and General Release within less than twenty-one (21) days of the date of its delivery to him, Mr. Jessee acknowledges that such decision was entirely voluntary and that he had the opportunity to consider the Severance Agreement and General Release for the entire twenty-one day (21) period.  FHLBB and Mr. Jessee acknowledge that for a period of seven (7) days from the date of the execution of the Severance Agreement and General Release, Mr. Jessee shall retain the right to revoke the Agreement by written notice to Douglas F. Seaver, Esq., Hinckley, Allen & Snyder LLP,

4

28 State Street, Boston, Massachusetts 02109; and that the Severance Agreement and General Release shall not become effective or enforceable until the expiration of such revocation period, and that no payments or actions called for by FHLBB under the Severance Agreement and General Release shall be made until the expiration of such revocation period.

16.           Acknowledgment.Each of the parties specifically acknowledges and certifies that he or it has read each and every term and provision of the Severance Agreement and General Release, that he or it has had the opportunity to thoroughly discuss all aspects of the Severance Agreement and General Release with legal counsel, and that he or it fully understands the terms and conditions of the Severance Agreement and General Release, including but not limited to the Release set forth herein, and that he or it is freely and voluntarily entering into the Severance Agreement and General Release.

17.           Signing of Counterparts.    This Severance Agreement and General Release may be signed in counterparts, each of which will be considered an original and together shall constitute one agreement.

18.           Dispute Resolution.Any and all disputes arising out of or relating to the interpretation and enforcement of this Agreement shall be arbitrated before a single arbitrator in Boston, Massachusetts in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect.  Notwithstanding the foregoing to the contrary, for the purposes of obtaining any preliminary injunction or other equitable relief, either party to this Agreement may file an action in a court of law to seek a stay, injunction or other similar form of equitable relief to preserve the rights and remedies of the parties during the pendency of any arbitration dispute.  The decision of the arbitrator shall be binding upon the parties hereto.  The arbitrator shall be empowered to award any permanent injunction or other form of equitable remedy.  The arbitrator shall also have the power to award the expense of the arbitration, including, without limitation, the award of reasonable attorneys’ fees to the prevailing party or in any other manner as the arbitrator may determine.  The decision of the arbitrator shall be executory and judgment thereon may be entered by any court of competent jurisdiction, and both parties hereby submit to the personal jurisdiction of courts located within Suffolk County of the Commonwealth of Massachusetts, and agree that all such proceedings will be brought exclusively in such courts.  The parties hereby agree to waive their right to have any dispute between them under this Agreement in a court of law by a judge or a jury.

19.           Headings and Captions.The headings and captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement.

20.           Governing Law.    The Agreement shall be construed in accordance with and governed for all purposes by the laws of the State of Massachusetts, without regard to its conflict of laws rules.  The federal and state courts in Massachusetts shall have

5

exclusive jurisdiction and venue for all actions with respect to the Agreement, and each party agrees to service of process by the mails in accordance with applicable court rules.  I UNDERSTAND THAT MY RIGHT TO RECEIVE BENEFITS SET FORTH IN THIS AGREEMENT IS SUBJECT TO MY COMPLIANCE WITH THE TERMS AND CONDITIONS SET FORTH IN THIS AGREEMENT AND THAT I WOULD NOT RECEIVE SEVERANCE PAY BUT FOR MY EXECUTION OF THIS SEPARATION AGREEMENT AND RELEASE.

                21.           Section 409A.    Each payment of salary continuation during the separation pay period shall be treated as a right to receive a series of separate and distinct payments.  As a “Specified Employee”  (as defined in Section 409A), Mr. Jessee acknowledges that if any restrictions imposed upon Specified Employees preclude him from receiving all or any portion of payments hereunder during the six (6) month period following the Termination Date, such payments shall not be paid until the date which is the first business day after said six (6) month period has elapsed, and any amounts so delayed shall be paid in a lump sum immediately upon conclusion of said six (6) month period.

IN WITNESS WHEREOF, the parties have executed the Severance Agreement and General Release as of the day and year first above written, intending the document to take effect as a sealed instrument.

/s/ Michael A. Jessee	/s/ Jan A. Miller
Michael A. Jessee	Federal Home Loan Bank of Boston
	By:	Jan A. Miller
		Director

6

EXHIBIT A

December  , 2009

Chairman

Board of Directors

Federal Home Loan Bank of Boston

111 Huntington Avenue

Boston, MA

RE:          Resignation of Employment

Dear                   :

I hereby resign my employment and all positions with FHLBB effective April 30, 2009.

Sincerely,

Michael A. Jessee

7

EXHIBIT B

ILLNESS/INJURY REPORT

MASSACHUSETTS LAW REQUIRES THAT YOU REPORT ALL ILLNESS OR INJURIES TO THE FHLBB IMMEDIATELY.  THEREFORE, IF YOU HAD A WORK RELATED ILLNESS/INJURY THAT YOU NEGLECTED TO REPORT, PLEASE DO SO NOW SO THAT WE CAN COMPLY WITH THE MASSACHUSETTS LABOR CODE.

PLEASE NOTE THAT ANY MEDICAL TREATMENT YOU RECEIVE PRIOR TO NOTIFYING FEDERAL HOME LOAN BANK OF BOSTON WILL NOT BE PAID BY THE INSURANCE FHLBB AND YOU WILL BE RESPONSIBLE FOR THE BILLS.

o Yes, I have an illness/injury to report.

o No, I do not have an industrial illness/injury to report. Further more, I hereby state that: (a) I am presently not ill, injured, or in need of treatment due to an occupational illness/injury and certify that I have reported all work related illnesses and injuries to you; (b) I have not received or sought medical treatment regarding any work-related activity with the FH LBB; and (c) I am not ill or injured, and am not in need of treatment.

Employee’s

Name:

Employee’s

Signature:

Date:

Witness:

8

EXHIBIT C

GENERAL RELEASE

As a material inducement for FHLBB to enter into this Agreement, Mr. Jessee hereby irrevocably and unconditionally remises, releases and forever discharges FHLBB and its staff, officers, owners, directors, employees and insurers and all of their predecessors, successors, and assigns, both personally and as its agents, (the “Releasees”), of and from any and all debts, demands, actions, causes of actions, suits, accounts, covenants, contracts, agreements, damages, and any and all claim, counterclaims, demands, and liabilities whatsoever of every name and nature, both in law and in equity, which against the said Releasees, Mr. Jessee, now has or ever had from the beginning of the world to the date hereof.  Mr. Jessee hereby acknowledges and agrees that the foregoing Release is intended as a full and complete release of all foregoing claims that he may or might have, and in accepting the payment by FHLBB of the severance pay and benefits as set forth herein above, he does so in full settlement of any and all such claims, and he intends to and does hereby release all of the Releasees of and from any and all liability of any nature whatsoever for all damages or injuries sustained or alleged to have been sustained by him up to this date, specifically including all expenses to which he may have been put, including attorney’s fees, and also including all consequential damages to him, whether the same may be known or unknown to him, expected or unexpected by her, and all claims including but not limited to, any claim under M.G.L. c. 151; Title VII of the Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act, M.G.L. c. 151B, the Americans with Disabilities

9

Act, and claims for misrepresentation, breach of contract, bad-faith termination, and or attorneys’ fees.

This release, however, shall not apply to the following: a) any claim to enforce, or for breach of, the Severance Agreement and General Release; b) any claim for indemnification and defense pursuant to any FHLBB policy, such as its by-laws, or any insurance policy it holds; c) any claim for vested benefits under any Employee Retirement Income Security Act (ERISA) plan, or any employee welfare benefit plan; d) any claim for Workers’ Compensation benefits; e) any claim for unemployment assistance benefits; or f) any claim for extended health insurance benefits under COBRA.  Nothing in the Agreement shall preclude Mr. Jessee from communicating with, or cooperating with any investigation of unfair or illegal employment practices by, the United States Equal Employment Opportunity Commission or any other government agency charged with enforcement of laws pertaining to the regulation of the workplace.

Date:  April 30, 2009

Michael A. Jessee

10

EX-12

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EXHIBIT 12

Federal Home Loan Bank of Boston
Computation of Ratio of Earnings to Fixed Charges
(dollars in thousands)

	For the Year Ended December 31,
	2008			2007		2006		2005		2004
Earnings
(Loss) income before assessments	$	(115,826	)	$	269,974	$	266,587	$	177,187	$	121,994
Fixed charges		2,388,774			3,054,628		2,664,852		1,608,814		964,484
Income before assessments and fixed charges		2,272,948			3,324,602		2,931,439		1,786,001		1,086,478
Fixed Charges
Interest expense		2,387,497			3,053,401		2,663,585		1,607,602		963,299
1/3 of net rent expense(1)		1,277			1,227		1,267		1,212		1,185
Total fixed charges	$	2,388,774		$	3,054,628	$	2,664,852	$	1,608,814	$	964,484
Ratio of earnings to fixed charges		0.95			1.09		1.10		1.11		1.13

(1)

Represents an estimated interest factor.

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EXHIBIT 12

EX-31.1

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EXHIBIT 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
for the President and Chief Executive Officer

I, Michael A. Jessee, certify that:

1.

I have reviewed this annual report on Form 10-K of the Federal Home Loan Bank of Boston;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(f)) for the registrant and have:

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: April 10, 2009
	/s/ MICHAEL A. JESSEE Michael A. Jessee President and Chief Executive Officer

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EXHIBIT 31.1

EX-31.2

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EXHIBIT 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
for the Chief Financial Officer

I, Frank Nitkiewicz, certify that:

1.

I have reviewed this annual report on Form 10-K of the Federal Home Loan Bank of Boston;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(f)) for the registrant and have:

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: April 10, 2009

/s/ FRANK NITKIEWICZ
Frank Nitkiewicz
Executive Vice President and Chief Financial Officer

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EXHIBIT 31.2

EX-32.1

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EXHIBIT 32.1

Certification by the President and Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

        I, Michael A. Jessee, President and Chief Executive Officer of the Federal Home Loan Bank of Boston ("Registrant") certify that, to the best of my knowledge:

1.

The Registrant's Annual Report on Form 10-K for the period ended December 31, 2008 ("Report"), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: April 10, 2009

/s/ MICHAEL A. JESSEE
Michael A. Jessee
President and Chief Executive Officer

        A signed original of this written statement required by Section 906 has been provided to the Federal Home Loan Bank of Boston and will be retained by the Federal Home Loan Bank of Boston and furnished to the Securities and Exchange Commission or its staff upon request.

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EXHIBIT 32.1

EX-32.2

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EXHIBIT 32.2

Certification by the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

        I, Frank Nitkiewicz, Executive Vice President and Chief Financial Officer of the Federal Home Loan Bank of Boston ("Registrant") certify that, to the best of my knowledge:

1.

The Registrant's Annual Report on Form 10-K for the period ended December 31, 2008 ("Report"), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: April 10, 2009

/s/ FRANK NITKIEWICZ
Frank Nitkiewicz
Executive Vice President and Chief Financial Officer

        A signed original of this written statement required by Section 906 has been provided to the Federal Home Loan Bank of Boston and will be retained by the Federal Home Loan Bank of Boston and furnished to the Securities and Exchange Commission or its staff upon request.

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EXHIBIT 32.2