Capital

6 Months Ended

Jun. 30, 2011

Capital

Capital

NOTE 12 – CAPITAL

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

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

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

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

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

	06/30/2011		12/31/2010
	Required	Actual	Required	Actual
Regulatory capital requirements:
Risk-based capital	$245,980	$1,177,525	$268,569	$1,218,503
Total capital-to-asset ratio	4.0%	5.0%	4.0%	4.7%
Total capital	$1,433,028	$1,777,679	$1,548,243	$1,825,700
Leverage capital ratio	5.0%	6.6%	5.0%	6.3%
Leverage capital	$1,791,284	$2,366,441	$1,935,303	$2,434,951

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

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

	Three-month Period Ended		Six-month Period Ended
	06/30/2011	06/30/2010	06/30/2011	06/30/2010
Balance as of the beginning of period	$16,866	$16,961	$19,550	$22,437
Capital stock subject to mandatory redemption reclassified from equity during the period	54,991	74,683	133,109	95,129
Redemption or repurchase of mandatorily redeemable capital stock during the period	(58,370)	(63,474)	(139,224)	(89,458)
Stock dividend classified as mandatorily redeemable capital stock during the period	48	57	100	119
Balance as of the end of period	$13,535	$28,227	$13,535	$28,227

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

Contractual Year of Repurchase	06/30/2011	12/31/2010
Year 1	$1	$2,396
Year 2	0	1
Year 3	2,777	0
Year 4	0	2,779
Year 5	2,719	2,950
Past contractual redemption date due to remaining activity1	8,038	11,424
TOTAL	$13,535	$19,550

__________

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

Joint Capital Enhancement Agreement (JCE Agreement) – Effective February 28, 2011, the FHLBank entered into a JCE Agreement with the other 11 FHLBanks. The JCE Agreement provides that upon satisfaction of the FHLBanks' obligations to REFCORP, each FHLBank will, on a quarterly basis, allocate at least 20 percent of its net income to a separate restricted retained earnings account (RRE Account). See Note 11 for a discussion of the calculation of the REFCORP assessment and satisfaction of that liability. Under the JCE Agreement, each FHLBank is required to commence the required allocation to its RRE Account beginning as of the end of the calendar quarter in which the final payments are made by the FHLBanks with respect to their REFCORP obligations. The REFCORP obligations were satisfied as of the end of the second quarter of 2011 with the final payments made in July 2011. Thus, each FHLBank will begin allocating 20 percent of its net income to a RRE Account beginning in the third quarter 2011.

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

Key provisions under the JCE Agreement are as follows:

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

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

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

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