UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended December 31, 2009

or

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

For the transition period from                      to                     .

Commission File No. 000-51399

FEDERAL HOME LOAN BANK OF CINCINNATI

Federally chartered corporation		31-6000228
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
1000 Atrium Two, P.O. Box 598,
Cincinnati, Ohio		45201-0598
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code
(513) 852-7500

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
(Title of class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes   þ No

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d).

o Yes   þ No

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

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

     Indicate by check mark 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 the 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.      þ

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

o Yes   þ No

     As of February 28, 2010, the registrant had 30,601,985 shares of capital stock outstanding. The capital stock of the Federal Home Loan Bank of Cincinnati is not listed on any securities exchange or quoted on any automated quotation system, only may be owned by members and former members and is transferable only at its par value of $100 per share.

Documents Incorporated by Reference: None

Page 1 of 183

 

 

Table of Contents

PART I
Item 1.		Business			3
Item 1A.		Risk Factors			19
Item 1B.		Unresolved Staff Comments			23
Item 2.		Properties			23
Item 3.		Legal Proceedings			23
Item 4.		[Reserved]
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			24
Item 6.		Selected Financial Data			25
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			93
Item 8.		Financial Statements and Supplemental Data
		Financial Statements for the Years Ended 2009, 2008 and 2007			94
		Notes to Financial Statements			100
		Supplemental Financial Data			151
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			151
Item 9A.		Controls and Procedures			152
Item 9B.		Other Information			153
PART III
Item 10.		Directors, Executive Officers and Corporate Governance			155
Item 11.		Executive Compensation			160
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			177
Item 13.		Certain Relationships and Related Transactions, and Director Independence			177
Item 14.		Principal Accountant Fees and Services			179
PART IV
Item 15.		Exhibits and Financial Statement Schedules			180
Signatures					181
EX-3.2
EX-4
EX-10.7
EX-10.8
EX-12
EX-24
EX-31.1
EX-31.2
EX-32
ex-99.1
EX-99.2

PART I

Special Cautionary Notice Regarding Forward Looking Information

This document contains forward-looking statements that describe the objectives, expectations, estimates, and assessments of the Federal Home Loan Bank of Cincinnati (FHLBank). These statements use words such as “anticipates,” “expects,” “believes,” “could,” “estimates,” “may,” and “should.” By their nature, forward-looking statements relate to matters involving risks or uncertainties, some of which we may not be able to know, control, or completely manage. Actual future results could differ materially from those expressed or implied in forward-looking statements or could affect the extent to which we are able to realize an objective, expectation, estimate, or assessment. Some of the risks and uncertainties that could affect our forward-looking statements include the following:

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the effects of economic, financial, credit, market, and member conditions on our financial condition and results of operations, including changes in economic growth, general liquidity conditions, inflation and deflation, interest rates, interest rate spreads, interest rate volatility, mortgage originations, prepayment activity, housing prices, asset delinquencies, and members’ mergers and consolidations, deposit flows, liquidity needs, and loan demand;

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political events, including legislative, regulatory, federal government, judicial or other developments that could affect us, our members, our counterparties, other FHLBanks and other government-sponsored enterprises, and/or investors in the Federal Home Loan Bank System’s (FHLBank System) debt securities, which are called Consolidated Obligations or Obligations;

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competitive forces, including those related to other sources of funding available to members, to purchases of mortgage loans, and to our issuance of Consolidated Obligations;

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the financial results and actions of other FHLBanks that could affect our ability, in relation to the System’s joint and several liability for Consolidated Obligations, to access the capital markets on favorable terms or preserve our profitability, or could alter the regulations and legislation to which we are subject;

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changes in investor demand for Consolidated Obligations;

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the volatility of market prices, interest rates, credit quality, and other indices that could affect the value of investments and collateral we hold as security for member obligations and/or for counterparty obligations;

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the ability to attract and retain skilled individuals;

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the ability to develop and support technology and information systems that effectively manage the risks we face;

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the ability to successfully manage new products and services; and

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the risk of loss arising from litigation filed against us or one or more other FHLBanks.

We do not undertake any obligation to update any forward-looking statements made in this document.

In this filing, the interrelated disruptions in the financial, credit, housing, capital, and mortgage markets during 2008 and 2009 are referred to generally as the “financial crisis.”

Item 1.   Business.

COMPANY INFORMATION

Organizational Structure

The FHLBank is a regional wholesale bank that provides financial products and services to our member financial institutions. We are one of 12 District Banks in the FHLBank System; our region, known as the Fifth District, comprises Kentucky, Ohio and Tennessee. The U.S. Congress created the FHLBank System in the Federal Home Loan Bank Act of 1932 (the FHLBank Act) to improve liquidity in the U.S. housing market. Each District Bank is a government-sponsored

enterprise (GSE) of the United States of America and operates as a separate entity with its own stockholders, employees, and Board of Directors. A GSE combines private sector ownership with public sector sponsorship. The FHLBanks are not government agencies and are exempt from federal, state, and local taxation (except real property taxes). The U.S. government does not guarantee, directly or indirectly, the debt securities or other obligations of the FHLBank System.

The FHLBank System also includes the Federal Housing Finance Agency (Finance Agency) and the Office of Finance. The Finance Agency is an independent agency in the executive branch of the U.S. government that regulates the FHLBanks, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The Finance Agency also oversees the conservatorships of Fannie Mae and Freddie Mac. The Office of Finance is a joint office of the District Banks established and regulated by the Finance Agency to facilitate the issuing and servicing of the FHLBank System’s Consolidated Obligations.

In addition to being GSEs, the FHLBanks are cooperative institutions. Our stockholders are also our primary customers. Private-sector financial institutions voluntarily become members of our FHLBank and purchase capital stock in order to gain access to products and services. Only members can purchase capital stock. All Fifth District federally insured depository institutions, insurance companies that engage in residential housing finance, and community development financial institutions that meet standard eligibility requirements are permitted to apply for membership. By law, an institution is permitted to be a member of only one Federal Home Loan Bank, although a holding company through its subsidiaries may have memberships in more than one District Bank.

We require each member to purchase capital stock as a condition of membership and may require a member to purchase stock above the membership stock amount when utilizing products or services. We issue, redeem, repurchase, and exchange capital stock only at its stated par value of $100 per share. By law, our stock is not publicly traded. Our Capital Plan enables us to efficiently expand and contract capital needed to capitalize assets in response to changes in the membership base and their credit needs.

The combination of public sponsorship and private ownership that drives our business model is reflected in the composition of our 17-member Board of Directors, all of whom our members elect. Ten directors are executives and/or directors of our member institutions, while the remaining directors are independent directors who represent the public interest.

The number and composition of our members have been relatively stable in the last 10 years, between 720 and 760, with the number of new members generally offset by a similar number of exiting members due to mergers and acquisitions. At the end of 2009, we had 735 members.

As of December 31, 2009, we had 196 full-time employees and 5 part-time employees. Our employees are not represented by a collective bargaining unit.

Mission and Corporate Objectives

The FHLBank’s mission is to provide financial intermediation between our member stockholders and the capital markets in order to facilitate and expand the availability of financing and flow of credit for housing and community lending throughout the Fifth District. We achieve our mission through a cooperative business model. We raise private-sector capital from member stockholders and issue high-quality debt in the capital markets with other FHLBanks to provide members with competitive services—primarily a reliable, readily available, low-cost source of funds called Advances—and a competitive return on their FHLBank capital investment through quarterly dividend payments. An important component of our mission related to public sector sponsorship is providing affordable housing programs and activities to support members in their efforts to assist lower-income housing markets.

Our corporate objectives are to:

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operate safely and soundly, remain able to raise funds in the capital markets, and optimize our counterparty and deposit ratings;

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expand business activity with members;

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earn and pay a stable long-term competitive return on members’ capital stock;

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maximize the effectiveness of contributions to Housing and Community Investment programs; and

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maintain effective corporate governance processes.

To accomplish these objectives, we operate under a philosophy of risk aversion. We strive to maintain modest exposure to business, market, credit, and operational risks and to operate with ample liquidity and capitalization. We believe our business is financially sound, conservatively managed, and well capitalized on a risk-adjusted basis.

Our company’s cooperative ownership structure and the constant par value of stockholders’ capital investment mean that member stockholders derive value from two sources:

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the competitive prices, terms, and characteristics of our products; and

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a competitive dividend return on their capital investment.

In order to maximize these two sources of membership value, we must strike a balance between offering more attractively priced products, which tend to decrease profitability and therefore dividend payments, and paying attractive dividends, which tends to result from higher priced products. We believe members’ investment in our capital stock is comparable to investing in high-grade short-term, or adjustable-rate, money market instruments or in adjustable-rate preferred equity instruments. We structure our risk exposure so that earnings tend to move in the same direction as changes in short-term market rates. Having relatively stable earnings measured against short-term market rates furnishes member stockholders a degree of predictability on their future dividend returns. There is normally a tradeoff between the level and stability of our stock returns, both in the near term and long term. One measure of our successful resolution of this tradeoff is that relatively few member stockholders have historically chosen, absent mergers and consolidations, to withdraw from membership or to request redemption of their stock held in excess of minimum requirements.

Business Activities

Our principal activity is making readily available, competitively priced and fully collateralized Advances to members. Together with the issuance of collateralized Letters of Credit, Advances constitute our “Credit Services” business. As a secondary business line, we purchase qualifying residential mortgages through the Mortgage Purchase Program and hold them as portfolio investments. This program offers members a competitive alternative to the traditional secondary mortgage market. Together, these product offerings constitute our “Mission Asset Activity.”

In addition, through various Housing and Community Investment programs, we assist members in serving very- low-, low-, and moderate-income housing markets and community economic development. These programs provide Advances at below-market rates of interest, as well as direct grants and subsidies, and can help members satisfy their regulatory requirements under the Community Reinvestment Act. In contrast to Mission Asset Activity, these programs normally generate no profits.

To a more limited extent, we also offer members various correspondent services that assist them in their administration of operations.

To help us achieve our mission, we invest in highly-rated debt instruments of financial institutions and the U.S. government and in mortgage-related securities. In practice, these investments normally include short-term money market instruments and longer-term mortgage-backed securities. Investments furnish additional liquidity, help us manage market risk exposure, enhance earnings, and (through the purchase of mortgage-related securities) support the housing market.

Our primary source of funding and liquidity is through participating in the issuance of the FHLBank System’s unsecured debt securities—Consolidated Obligations—in the capital markets. Obligations are the joint and several obligations of all

12 District Banks, backed only by the financial resources of the 12 FHLBanks. A secondary source of funding is our capital. A critical component to the success of our operations is the ability to regularly issue Obligations under a wide range of maturities, structures, and amounts, and at relatively favorable spreads to benchmark market interest rates (represented by U.S. Treasury securities and the London InterBank Offered Rate (LIBOR)) compared with many other financial institutions. We also execute cost-effective derivative transactions to help hedge market risk exposure. These capabilities enable us to offer members a wide range of Mission Asset Activity and enable members to access the capital markets, through their activities with the FHLBank, in ways that they may be unable to do without our services.

The System’s comparative advantage in funding is due largely to its GSE status, which is acknowledged in its excellent credit ratings from nationally recognized statistical rating organizations (NRSROs). Moody’s Investors Service (Moody’s) and Standard & Poor’s currently assign, and historically have assigned, the System’s Obligations the highest ratings available: long-term debt is rated Aaa by Moody’s and AAA by Standard & Poor’s, and short-term debt is rated P-1 by Moody’s and A-1+ by Standard & Poor’s. These two rating agencies also assign the highest counterparty and deposit ratings available (triple-A) to our FHLBank. These ratings indicate a belief that the FHLBanks have an extremely strong capacity to meet their commitments to pay timely principal and interest on their debt and that the debt is considered to be of the highest quality with minimal credit risk. Maintaining these ratings is vital to fulfilling our mission. No FHLBank has ever defaulted on repayment of, or delayed return of principal or interest on, any Obligation.

The agencies’ rationales for the System’s and our ratings include:

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the FHLBank System’s status as a GSE;

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the joint and several liability for Obligations;

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excellent overall asset quality;

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strong liquidity;

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conservative use of derivatives;

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adequate capitalization relative to our risk profile; and

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a permanent capital structure.

A credit rating is not a recommendation to buy, sell or hold securities. A rating organization may revise or withdraw its ratings at any time, and each rating should be evaluated independently of any other rating. We cannot predict what future actions, if any, a rating organization may take regarding the System’s and our ratings.

Sources of Earnings

Our major source of revenue is interest income earned on Advances, Mortgage Purchase Program notes, and investments. Major items of expense are:

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interest paid on Consolidated Obligations and deposits to fund assets;

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the requirement to pay 20 percent of annual net earnings to the Resolution Funding Corporation (REFCORP) fund;

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costs of providing below-market-cost Advances and direct grants and subsidies under the Affordable Housing Program; and

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non-interest expenses (i.e., other expenses on the Statements of Income).

The largest component of earnings is net interest income, which equals interest income minus interest expense. We derive net interest income from three elements, each of which can vary over time with changes in market conditions, including most importantly interest rates, business conditions and our risk management activities:

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the interest rate spread, being the difference between the interest we earn on assets and the interest we pay on liabilities;

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funding a portion of interest-earning assets with capital on which we do not pay interest; and

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leverage of capital with interest-earning assets.

Regulatory Oversight

The Finance Agency is headed by a director (the Director) who has sole authority to promulgate Agency regulations and to make other Agency decisions. The Finance Agency is charged with ensuring that each FHLBank:

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carries out its housing and community development finance mission;

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remains adequately capitalized;

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operates in a safe and sound manner; and

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complies with Finance Agency Regulations.

To carry out these responsibilities, the Finance Agency conducts on-site examinations at least annually of each FHLBank, as well as periodic on- and off-site reviews. Regulations prohibit the public disclosure of examination results. Each FHLBank must submit monthly information to the Agency on its financial condition and operating results. Penalties for non-compliance with Finance Agency Regulations are at the discretion of the Agency. While each FHLBank has substantial discretion in governance and operational structure, the Finance Agency maintains broad supervisory and regulatory authority. In addition, the Comptroller General has authority to audit or examine the Finance Agency and the FHLBanks, to decide the extent to which the FHLBanks fairly and effectively fulfill the purposes of the FHLBank Act, and to review any audit, or conduct its own audit, of the financial statements of an FHLBank.

BUSINESS SEGMENTS

We manage the development, resource allocation, product delivery, pricing, credit risk management, and operational administration of our Mission Asset Activity in two business segments: Traditional Member Finance and the Mortgage Purchase Program. Traditional Member Finance includes Credit Services, Housing and Community Investment, Investments, some correspondent and deposit services, and other financial products of the FHLBank. See the “Segment Information” section of “Results of Operations” in Item 7 and Note 18 of the Notes to Financial Statements for more information on our business segments including their results of operations.

Traditional Member Finance

Features. Advances provide members competitively priced sources of funding to manage their asset/liability and liquidity needs. Advances can both complement and be alternatives to retail deposits, other wholesale funding sources, and corporate debt issuance. We strive to facilitate efficient, fast, and continual access to funds for our members, which we believe provides substantial benefit to members. Because of our normally ample liquidity and because a member must have in place approved applications and processes—including adequate collateral—before it can borrow from us, in most cases members can access funds on a same-day basis.

Each member must supply us with a security interest in eligible collateral with total estimated market value of more than 100 percent of its borrowings outstanding. Collateral is composed primarily of high quality performing loans—primarily one- to four-family residential mortgages. We believe that the combination of conservative collateral policies and risk-based credit underwriting activities effectively mitigate credit risk associated with Advances. We have never experienced a credit loss on Advances, nor have we ever determined it necessary to establish a loss reserve. Item 7’s “Qualitative and

Quantitative Disclosures About Risk Management” has more detail on our credit risk management of member borrowings.

Letters of Credit are collateralized contractual commitments we issue on our members’ behalves to guarantee their performance to third parties. A Letter of Credit may obligate us to make direct payments to a third party, in which case it is treated as an Advance to the member. The most popular use of Letters of Credit is as collateral supporting public unit deposits. Public unit deposits are deposits held by governmental units at financial institutions. Our Letters of Credit have a triple-A rating because of our triple-A long-term credit ratings. We earn fees on Letters of Credit based on the actual notional amount of the Letters utilized.

We price 13 standard Advance programs every business day and several other standard programs on demand. We also offer customized, non-standard Advances that fall under one of the standard programs. Having diverse programs gives members the flexibility to choose and customize their borrowings according to the features listed below (among others).

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size: from $1 to a maximum amount limited by a member’s collateral requirements and borrowing capacity, by our capital leverage requirements, and by our available liquidity;

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final maturity: from overnight to 30 years;

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interest rate: fixed-rate or adjustable-rate coupons;

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coupon payment frequency;

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interest rate index on adjustable-rate coupons;

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rate reset for adjustable-rate Advances: monthly, quarterly, or other;

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prepayment ability: no, partial, or full prepayment options, some of which involve a fee;

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principal paydown: with no, partial, or full amortization of principal; and

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interest rate options, or other options, embedded in Advances.

Advance Programs. Repurchase based (REPO) Advances are structured similarly to repurchase agreements from investment banks, with one principal difference. Members collateralize their REPO Advances through our normal collateralization process, instead of being required to pledge specific securities as they do in a repurchase agreement. REPO Advances have fixed rates of interest and short-term maturities from one day up to one year, with principal and interest paid at maturity. A majority of REPO Advances outstanding tend to have overnight maturities.

LIBOR Advances have adjustable interest rates typically priced off 1- or 3-month LIBOR indices. Generally, any prepayment is permitted without a fee if it is made on a repricing date.

Regular Fixed Rate Advances have terms of three months to 30 years, with interest normally paid monthly and principal repayment normally at maturity. They have no call or put options.

Putable and Convertible Advances are fixed or adjustable-rate Advances that provide us an option to terminate the Advance (for the Putable) or an option to convert it to a LIBOR Advance (for the Convertible), usually after an initial “lockout” period. Selling us these options enables members to secure lower rates on Putable/Convertible Advances compared to Regular Fixed Rate Advances with the same final maturity. Although we stopped offering Convertible Advances at the beginning of 2006, we still have a substantial amount outstanding.

Mortgage-Related Advances are fixed rate, amortizing Advances with final maturities of 5 to 30 years. Members structure amortization and prepayment schedules that may be similar to those of residential mortgage loans. We offer two basic prepayment structures for which we do not charge prepayment fees. The first structure is an annual constant prepayment rate, which establishes a fixed and required principal paydown schedule. The second structure permits the member, at its option, to repay principal, once annually, in excess of the scheduled amortization based on actual annualized prepayment speeds experienced on 15-year or 30-year current-coupon mortgage-backed securities from Fannie Mae and Freddie Mac specified on the Advance’s trade date. For each structure, members can prepay additional principal subject to our standard applicable prepayment fees.

We also offer several other Advance programs that have smaller outstanding balances.

Advance Prepayment Fees. For many Advance programs, Finance Agency Regulations require us to charge members prepayment fees for early termination of principal when the early termination results in an economic loss to us. We do not charge prepayment fees for certain short-term Advance programs or under the prepayment structures described above for Mortgage-Related Advances. Certain Advance programs are structured as non-prepayable, such as REPO Advances.

We determine prepayment fees using standard present-value calculations that make us economically indifferent to the prepayment. The prepayment fee equals the present value of the estimated profit that we would have earned over the remaining life of the prepaid Advance. If a member prepays principal on an Advance that we have hedged with an interest rate swap, we may also assess the member a fee to compensate us for the cost we incur for terminating the swap before its stated final maturity.

Our Housing and Community Investment Programs include the Affordable Housing Program and various housing and community economic development-related Advance programs. We fund the Affordable Housing Program with an accrual equal to 10 percent of our previous year’s regulatory income. See Note 14 of the Notes to Financial Statements for a complete description of the Affordable Housing calculation. This assessment is mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).

The Affordable Housing Program consists of the Competitive Program and two homeownership set-aside programs: the Welcome Home Program and the Mortgage Refinancing Assistance Program. Under the Competitive Program, we distribute funds in the form of either grants or below-market rate Advances to members that apply and successfully compete in semiannual offerings. Under the Welcome Home Program, funds are normally available beginning in March until they have been fully committed. Members use Welcome Home to assist very low-, low-, and moderate-income families with the down payment and closing costs associated with home purchases. Under the Mortgage Refinancing Assistance Program, funds were first available beginning October 1, 2009, and remain available until the funds are fully committed or until July 30, 2010. Members may use the Mortgage Refinancing Assistance Program to assist homeowners in refinancing mortgages under qualified mortgage refinancing programs. Under both the competitive and set-aside programs, the income of qualifying individuals or households must be 80 percent or less of the area median income. For 2010, up to 35 percent of the Affordable Housing accrual will be set aside for the Welcome Home Program and the Mortgage Refinancing Assistance Program and the remainder allocated to the Competitive Program.

Two other housing programs that fall outside the auspices of the Affordable Housing Program are the Community Investment Program and the smaller Economic Development Advance Program. Advances under the former program have rates equal to our cost of funds, while Advances under the latter program have rates equal to our cost of funds plus three basis points. Members use the Community Investment Program primarily to fund housing and, under certain conditions, community economic development projects, while they use Economic Development Advances exclusively for economic development projects.

Finally, the Board may allocate funds to two voluntary programs: the American Dream Homeownership Challenge program and the Preserving the American Dream program. Both programs are funded with voluntary contributions over and above any regulatory mandated programs. The American Dream Homeownership Challenge grant program provides funds through our members to increase homeownership by minorities and those with special needs. The Preserving the American Dream program provides grant funds through members to non-profit agencies to assist households facing delinquency and default. The Board reviews these programs annually to determine the amount to fund, if any.

We invest in short-term unsecured money market instruments and longer-term mortgage-related securities. There are five ways the investment portfolio helps us achieve our corporate objectives:

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Liquidity management. Investments, especially money market investments, help us manage liquidity. We can structure our short-term debt issuances so that money market investments mature sooner than this debt, providing a source of contingent liquidity when Advance demand spikes or in periods of market stresses when it may not be advantageous or possible to participate in new debt issuance. We also may be able to transform certain investments to cash without a significant loss of value. Money market investments also support our ability to issue most Advances on the same day members request them.

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Earnings enhancement. The investments portfolio assists with earning a competitive return on capital, which enhances the value of membership, members’ preferences to hold excess capital stock to support Mission Asset Activity, and our commitment to Housing and Community Investment programs.

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Market risk management. Short-term money market investments help stabilize earnings because they typically earn a “locked in” match-funded spread with little market risk.

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Debt issuance management. Maintaining a money market investment portfolio can help us participate in attractively priced debt issuance, on an opportunistic basis. We can temporarily invest proceeds from debt issuances in short-term liquid assets and quickly access them to fund demand for Mission Asset Activity, rather than having debt issuances dictated solely by the timing of member demand.

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Support of housing market. Investment in mortgage-backed securities and state housing finance agency bonds directly supports the residential mortgage market by providing capital and financing for mortgages.

We strive to ensure our investment purchases have a moderate degree of market risk and credit risk, which tends to limit the returns we expect to earn on these securities. We believe that a philosophy of purchasing investments with a high degree of market or credit risk would be inconsistent with our public sponsorship and GSE status. Finance Agency Regulations and our internal policies specify general guidelines for, and relatively tight constraints on, the types, amounts, and risk profile of investments we are permitted to hold and the maximum amount of credit risk exposure we are permitted to have with eligible counterparties. We are permitted to invest only in the instruments of counterparties with high credit ratings, and because of our prudent investment policies and practices, we believe all of our investments have high credit quality. We have never had a credit loss or credit-related write down of any investment security. Item 7’s “Qualitative and Quantitative Disclosures About Risk Management” has more detail on our credit risk management of investments.

For short-term money market instruments, we are permitted to purchase overnight and term Federal funds, certificates of deposit, bank notes, bankers’ acceptances, and commercial paper. We may also place deposits at the Federal Reserve Bank. For longer-term investments, we are permitted to purchase:

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debt securities issued by the U.S. government or its agencies;

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mortgage-backed securities and collateralized mortgage obligations supported by mortgage securities (together, mortgage-backed securities) and issued by GSEs or private issuers;

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asset-backed securities collateralized by manufactured housing loans or home equity loans and issued by government-sponsored enterprises or private issuers; and

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marketable direct obligations of certain government units or agencies (such as state housing finance agencies) that supply needed funding for housing or community lending and that do not exceed 20 percent of our regulatory capital.

Each security in the last three categories, except those issued by GSEs, must be rated triple-A by Moody’s or Standard & Poor’s on its purchase date. We are not permitted to purchase most common stocks, instruments issued by non-U.S. entities, debt instruments that are non-investment grade on their trade dates, and interest-only and principal-only stripped securities, among other securities. We have never purchased any asset-backed security, have not purchased any adjustable-rate mortgage-backed security in the last fifteen years, and historically have limited our purchases of private-issued mortgage-backed securities to a small percentage of our total investments. We believe these types of securities historically have tended to provide a less favorable risk/return tradeoff, including credit risk, than fixed-rate and GSE mortgage-backed securities.

Per regulation, our total investment in mortgage-backed securities and asset-backed securities normally may not exceed, on a book value basis, 300 percent of previous month-end regulatory capital on the day we purchase the securities. (See the “Capital Resources” section below for the definition of regulatory capital.)

We provide a variety of deposit programs, including demand, overnight, term and Federal funds, which enable depositors to invest idle funds in short-term liquid assets. We accept deposits from members, other FHLBanks, any institution to which we offer correspondent services, and other government instrumentalities. The rates of interest we pay on deposits

are subject to change daily based on comparable money market interest rates. The balances in deposit programs tend to vary positively with the amount of idle funds members have available to invest as well as the level of short-term interest rates. Deposits have represented a small component of our funding in recent years, typically between one and two percent of our funding sources.

Mortgage Purchase Program (Mortgage Loans Held for Portfolio)

Finance Agency Regulations permit the FHLBanks to purchase and hold specified mortgage loans from their members. We offer the Mortgage Purchase Program, which purchases two types of loans: qualifying conforming fixed-rate conventional 1-4 family residential loans and residential mortgages fully guaranteed by the Federal Housing Administration (FHA). Members approved to sell us loans are referred to as Participating Financial Institutions (PFIs).We hold purchased mortgage loans on our balance sheet and account for them as Mortgage Loans Held for Portfolio. We do not securitize mortgage loans. Although we are permitted to purchase qualifying mortgage loans originated within any state or territory of the United States, we currently do not purchase loans originated in New York, Massachusetts, Maine, Rhode Island or New Jersey due to features of those states’ Anti-Predatory Lending laws that are less restrictive than we prefer. We do not use any trust or intermediary to purchase mortgage loans from members.

A “conventional” mortgage refers to a non-government-guaranteed mortgage. A “conforming” mortgage refers to the maximum amount permissible to be lent as a regular prime (i.e., non-jumbo, non-subprime) mortgage. For 2010, the Finance Agency established that limit at $417,000, the same as 2006-2009, with loans originated in a limited number of high-cost cities and counties receiving higher conforming limits. However, our policies prohibit us from purchasing conforming mortgages subject to these higher amounts.

The Mortgage Purchase Program directly supports our public policy mission of supporting housing finance. By selling mortgage loans to us, members can increase their balance sheet liquidity and reduce their interest rate risk and mortgage prepayment risk. Our Program, along with similar programs at other FHLBanks, promotes a greater degree of competition among mortgage investors. It also enables small- and medium-sized community-based financial institutions to use their existing relationship with us to participate more effectively in the secondary mortgage market. Finally, the Program enhances our long-term profitability on a risk-adjusted basis, which augments the return on member stockholders’ capital investment.

We negotiate a Master Commitment Contract with each PFI, in which the PFI agrees to make a best efforts attempt to sell us a specific dollar amount of loans over a nine-month period. We purchase loans pursuant to a Mandatory Delivery Contract, which is a legal commitment we make to purchase, and a PFI makes to deliver, a specified dollar amount of mortgage loans, with a forward settlement date, at a specified range of mortgage note rates and prices. Shortly before delivering the loans that will fill the Mandatory Delivery Contract, the PFI must submit loan level detail including underwriting information. We apply procedures through the automated Loan Acquisition System designed to screen out loans that do not comply with our policies. Our underwriting guidelines generally mirror those of Fannie Mae and Freddie Mac for conforming conventional loans, although our guidelines and pool composition requirements are more conservative in a number of ways in order to further limit credit risk exposure. If the loan information satisfies the Master Commitment Contract, the Mandatory Delivery Contract and our underwriting guidelines, we purchase the loans for cash on the settlement date by placing funds into the PFI’s demand deposit account at our FHLBank.

PFIs are required to make certain representations and warranties against our underwriting guidelines on the loans they sell to us. If loans are sold in breach of those representations and warranties, we have the contractual right to require the PFI to repurchase those loans.

Because of the FHA guarantee, we bear no credit risk on purchased FHA loans.

A unique feature of the Mortgage Purchase Program is that it separates the various activities and risks associated with residential mortgage lending for conventional loans. We manage the funding of the loans, interest rate risk (including prepayment risk), and liquidity risk. PFIs manage marketing, originating and, in most cases, servicing. PFIs may either retain servicing or sell it to a qualified and approved third-party servicer (also referred to as a PFI). Because PFIs manage

and bear most of the credit risk, they do not pay us a guarantee fee to transfer credit risk. The conventional Program has a feature, the Lender Risk Account, that helps us manage residual credit risk. The Lender Risk Account is a purchase-price holdback that PFIs may receive back from the FHLBank for managing credit risk to pre-defined acceptable levels of exposure. Actual loan losses are deducted against the amount we ultimately pay the PFI. The Lender Risk Account provides PFIs a strong incentive to sell us high quality performing mortgage loans.

Credit risk exposure is mitigated for conventional loans through conservative underwriting and pool composition requirements and by applying several layers of credit enhancements. These enhancements include the collateral supporting the mortgage loan assets (i.e., homeowners’ equity) and several layers of credit enhancements including (in order of priority) primary mortgage insurance (when applicable), the Lender Risk Account, and Supplemental Mortgage Insurance that the PFI purchases from one of our approved third-party providers naming us as the beneficiary. Item 7’s “Qualitative and Quantitative Disclosures About Risk Management” has more detail on our credit risk management of the Mortgage Purchase Program.

The totality of these credit enhancements protects us against credit risk exposure on each conventional loan down to approximately a 50 percent “loan-to-value” level at the time of origination, subject, in certain cases, to an aggregate stop-loss feature in the Supplemental Mortgage Insurance policy. Because of these credit enhancements, our actual and expected exposure to credit risk on conventional loans purchased in the Mortgage Purchase Program is de minimis.

We generate earnings in the Program from monthly interest payments minus the cost of funding and the cost of hedging the Program’s interest rate risk. Interest income on each loan is computed as the mortgage note rate multiplied by the loan’s principal balance:

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minus servicing costs (0.25 percent for conventional loans and 0.44 percent for FHA loans);

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minus the cost of Supplemental Mortgage Insurance (required for conventional loans only);

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adjusted for the amortization of purchase premiums or the accretion of purchase discounts; and

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adjusted for the amortization or the accretion of fair value adjustments on commitments.

We consider the cost of the Lender Risk Account and Supplemental Mortgage Insurance when we set conventional loan prices and evaluate the Program’s expected return. The pricing of each structure depends on a number of factors and is PFI specific. We do not receive fees or income for retaining the risk of losses in excess of the credit enhancements.

CONSOLIDATED OBLIGATIONS

Features

Our primary source of funding is through participation in the sale of FHLBank System debt securities, called Consolidated Obligations. There are two types of Obligations: Consolidated Bonds (Bonds) and Consolidated Discount Notes (Discount Notes). We participate in the issuance of Bonds for three purposes:

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to finance and hedge intermediate- and long-term fixed-rate Advances and mortgage assets;

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to finance and hedge short-term, LIBOR-indexed adjustable-rate Advances, and swapped Advances, typically by synthetically transforming fixed-rate Bonds to adjustable-rate LIBOR funding through the execution of interest rate swaps; and

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to acquire liquidity.

Bonds may have fixed or adjustable (i.e., variable) rates of interest. Fixed-rate Bonds are either noncallable or callable. Generally, our adjustable-rate Bonds use LIBOR for interest rate resets. In the last three years, we have not issued step-up Bonds, range Bonds, zero coupon Bonds or other similarly complex instruments.

The maturity of Bonds typically ranges from one year to 20 years, although there is no statutory or regulatory limit. Bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or

selling group members. The FHLBanks also have a TAP Issue Program for fixed-rate, noncallable (bullet) Bonds using specific maturities that may be reopened daily during a 3-month period through competitive auctions. The goal of the TAP Issue Program is to aggregate frequent smaller issues into a larger bond issue that may have greater market liquidity.

We participate in the issuance of Discount Notes to fund short-term Advances, adjustable-rate Advances, swapped Advances, short-term money market investments, and a portion of longer-term fixed-rate assets, as well as to acquire liquidity. Discount Notes have maturities from one day to one year, with most of ours normally maturing within three months. Discount Notes are offered daily through a selling group or regularly scheduled competitive auctions. After issuance, Discount Notes are often traded in a liquid secondary market through securities dealers and banks.

Many Obligations are issued with the participating FHLBank(s) concurrently entering into interest rate exchange agreements with approved counterparties. No underwriter has a large concentration of issuance volume.

Pricing of Consolidated Obligations

There are frequent changes in the interest rates and prices of Obligations and in their interest cost relationship to other products such as U.S. Treasury securities and LIBOR. Interest costs are affected by a multitude of factors including (but not limited to) the following:

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overall economic and credit conditions;

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credit ratings of the FHLBank System;

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investor demand and preferences for our debt securities;

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the level of interest rates and the shape of the U.S. Treasury curve and the LIBOR swap curve;

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the supply, volume, timing, and characteristics of debt issuances by the FHLBanks, other GSEs, and other highly rated issuers;

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actions by the federal government, including the Federal Reserve Board, U.S. Treasury Department, Federal Deposit Insurance Corporation (FDIC), and legislative and executive branches to affect the economy, financial system, and/or debt or mortgage markets;

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political events, including legislation and regulatory actions;

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the volatility of market prices and interest rates;

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interpretations of market events and issuer news;

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the presence of inflation or deflation; and

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currency exchange rates.

Regulatory Aspects

Finance Agency Regulations govern the issuance of Consolidated Obligations. The Office of Finance services Obligations, prepares the FHLBank System’s quarterly and annual combined financial statements, serves as a source of information for the FHLBanks on capital market developments, and administers REFCORP and the Financing Corporation. REFCORP and the Financing Corporation are separate corporations established by Congress to provide funding for the resolution and disposition of insolvent savings institutions.

We have the primary liability for our portion of Obligations, i.e., those issued on our behalf for which we receive the proceeds. However, we also are jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all Obligations. If we do not pay the principal or interest in full when due on any Obligation issued on our FHLBank’s behalf, we are prohibited from paying dividends or redeeming or repurchasing shares of capital stock. If an FHLBank were unable to repay its participation in an Obligation for which it is the primary obligor, the Finance Agency could call on each of the other FHLBanks to repay all or part of the Obligation.

The Finance Agency has never invoked this authority. If it did, the paying FHLBank(s) would be entitled to reimbursement from the non-complying FHLBank. If the Finance Agency were to determine that the non-complying

FHLBank was unable to satisfy its reimbursement obligations, the Finance Agency could allocate the outstanding liability among the remaining FHLBanks on any basis it might determine.

An FHLBank may not issue individual debt securities without Finance Agency approval.

LIQUIDITY

The FHLBank’s operations require a continual and substantial amount of liquidity to provide members access to timely Advance funding and mortgage loan sales in all financial environments and to meet financial obligations (primarily maturing Consolidated Obligations) as they come due in a timely and cost-efficient manner. Our liquidity requirements are significant because Advance balances can be highly volatile, many have short-term maturities, and we strive to offer access to Advances on the same day members request them. We regularly monitor liquidity risks and the investment and cash resources available to meet liquidity needs, as well as statutory and regulatory liquidity requirements.

Our primary long-term source of liquidity under most operating environments is participation in the issuance of Consolidated Obligations. Because Obligations are triple-A rated and because the FHLBank System is one of the largest sellers of debt in the worldwide capital markets, the System historically has been able to satisfy its liquidity needs through flexible debt issuance across a wide range of structures at relatively favorable spreads to benchmark market interest rates. During the recent financial crisis, the System had a reduced ability to issue long-term Obligations, especially noncallable Bonds. However, the System continued to be able to issue shorter-term Discount Notes and callable Bonds in adequate amounts and at cost effective rates to maintain sufficient liquidity and funding for our operations. This is discussed further in Item 1A’s “Risk Factors.”

Besides proceeds from debt issuances, our sources of liquidity include cash, maturing Advances, maturing investments, principal paydowns of mortgage assets, the ability to sell certain investments, and interest payments received. Additionally, under certain circumstances, the U.S. Treasury historically has had the ability to acquire up to $4 billion of the FHLBank System’s Obligations. Although this has never happened, if it did, the terms, conditions, and interest rates would be determined by the Secretary of the Treasury. As noted above in the “Investments” section, money market investments and, to a lesser extent, mortgage-backed securities are sources of liquidity to fund ongoing operations.

Uses of liquidity include repayments of Obligations, issuances of new Advances, purchases of loans under the Mortgage Purchase Program, purchases of investments, and payments of interest.

CAPITAL RESOURCES

Capital Plan

We are authorized by law (the Gramm-Leach-Bliley Act of 1999 (GLB Act)) to have either one or two classes of stock. Class A stock is conditionally redeemable with a member’s six-month written notice, and Class B stock is conditionally redeemable with a member’s five-year written notice. We have always offered only Class B stock. In accordance with the GLB Act, our Capital Plan permits us to issue shares of capital stock only under the following circumstances:

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as required for an institution to become a member or maintain membership;

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as required for a member to capitalize Mission Asset Activity; and

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to pay stock dividends.

Under Finance Agency Regulations, regulatory capital is composed of all capital stock (including stock classified as mandatorily redeemable), retained earnings, general loss allowances, and other amounts from sources the Finance Agency determines are available to absorb losses. Currently, our regulatory capital consists of capital stock and retained earnings. Under the GLB Act, permanent capital equals Class B stock plus retained earnings and is available to absorb financial losses.

GAAP capital excludes mandatorily redeemable capital stock, while regulatory capital includes it. We account for mandatorily redeemable capital stock as a liability on our Statements of Condition and account for related dividend payments as interest expense. The classification of some capital stock as a liability has no effect on our safety and soundness, liquidity position, market risk exposure, or ability to meet interest payments on our participation in Obligations. Mandatorily redeemable capital stock is fully available to absorb losses until the stock is redeemed or repurchased. See Note 16 of the Notes to Financial Statements for more discussion of mandatorily redeemable capital stock.

The GLB Act also requires us to satisfy three capital requirements. The most important of these is a minimum 4.00 percent regulatory capital-to-assets ratio. Our capital requirements are further discussed in the “Capital Adequacy” section of Item 7’s “Quantitative and Qualitative Disclosures About Risk Management.”

Our Capital Plan ties the amount of each member’s required capital stock to both the amount of the member’s assets (membership stock) and the amount and type of its Mission Asset Activity with us (activity stock). Membership stock is required to become a member and maintain membership. The amount required currently ranges from 0.15 percent to 0.03 percent of each member’s total assets, with a current minimum of $1 thousand and a current maximum of $100 million for each member. Each member’s asset information is updated at least annually.

In addition to its membership stock, a member may be required to purchase and hold activity stock to capitalize its Mission Asset Activity. For purposes of the Capital Plan, Mission Asset Activity includes the principal balance of Advances, guaranteed funds and rate Advance commitments (GFR), and the principal balance of loans and commitments in the Mortgage Purchase Program that occurred after implementation of the Capital Plan.

The FHLBank must capitalize all Mission Asset Activity with capital stock at a rate of at least four percent. By contrast, each member must maintain an amount of Class B activity stock within the range of minimum and maximum percentages for each type of Mission Asset Activity. We can modify these percentages for new Mission Asset Activity based on our business needs. The current percentages, which have been in effect since the implementation of the Capital Plan, are as follows:

Mission Asset Activity		Minimum Activity Percentage				Maximum Activity Percentage
Advances			2	%			4	%
Advance Commitments			2				4
Mortgage Purchase Program			0				4

If a member’s capitalization of Mission Asset Activity falls to the minimum percentage, it must purchase additional stock to capitalize further Mission Asset Activity. If a member owns more stock than is needed to satisfy its membership stock requirement and the maximum activity stock percentage for its Mission Asset Activity, we designate the remaining stock as the member’s excess capital stock. The Capital Plan permits each member, within constraints, to use its own excess capital stock to capitalize additional Mission Asset Activity. In this case, the excess stock is re-allocated to activity stock for that member, at the maximum percentage rate in effect at the time. We are permitted to repurchase excess capital stock at any time, subject to the terms and conditions of the Capital Plan.

After a member’s excess stock falls to zero, the Capital Plan normally permits the member to capitalize additional Mission Asset Activity with excess stock owned by other members (at the maximum percentage rate), instead of having to purchase new stock. This essential feature, called “cooperative capital,” enables us to more efficiently utilize our capital stock. A member’s use of cooperative capital reduces the ratio of its activity stock to its Mission Asset Activity for each type of Mission Asset Activity. The Capital Plan currently has two limits on each member’s maximum use of cooperative capital.

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The member must maintain a ratio of activity stock to Mission Asset Activity at least equal to the minimum allocation percentage identified in the table above.

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It cannot use more than $100 million of cooperative capital.

When a member reaches one of these limits through either growth in its Mission Asset Activity or reduction in its capital stock balance, it must capitalize additional Mission Asset Activity with a purchase of new capital stock.

The Capital Plan enables us to efficiently obtain new stock to capitalize asset growth, thus maintaining a prudent amount of financial leverage. It also enables us to deploy excess capital into Mission Assets. When Mission Asset Activity contracts, it permits us, at our option, to repurchase capital stock in a timely and prudent manner, thus maintaining an adequate level of profitability. Additionally, the concept of “cooperative capital” better aligns the interests of heavy users of our products with light users by enhancing the dividend return.

Prior to 2007, the “cooperative capital” feature of our Capital Plan enabled us to continue our long historical practice of paying dividends with additional shares of stock rather than in cash. We believe that paying stock dividends enables members to have more flexibility in managing the amount of their capital investment in our FHLBank in the context of their business needs and that it also is the most efficient and cost effective tool available to raise capital. However, under a Finance Agency capital rule effective in January 2007, if the sum of each member’s excess capital stock exceeds one percent of our total assets, we are not permitted to pay dividends in the form of additional shares of stock. In accordance with this rule, we paid cash dividends in the fourth quarter of 2008 and each quarter of 2009.

Retained Earnings

Retained earnings are important to protect members’ capital stock investment against the risk of impairment and to enhance our ability to pay stable and competitive dividends when current earnings are volatile. Impairment risk is the risk that members would have to write down the par value of their capital stock investment in our FHLBank as a result of their analysis of ultimate recoverability. An extreme situation of earnings instability, in which losses exceeded the amount of our retained earnings for a period of time determined to be other-than-temporary, could result in a determination that the value of our capital stock was impaired.

Our Retained Earnings Policy establishes a range for the amount of retained earnings needed to mitigate impairment risk and augment dividend stability in light of all the material risks we face. The current Retained Earnings Policy establishes a range of adequate retained earnings of $140 million to $285 million, with a target level of $170 million. At the end of 2009, our retained earnings were $412 million. We believe the current amount of retained earnings is sufficient to protect our capital stock against impairment risk and to provide the opportunity for dividend stability.

RISK MANAGEMENT

Our FHLBank faces various risks that could affect the ability to achieve our mission and corporate objectives. We categorize risks into 1) business/strategic risk (including regulatory/legislative), 2) market risk (also referred to as interest rate risk), 3) capital adequacy, 4) credit risk 5) funding/liquidity risk, 6) accounting risk, and 7) operational risk (including fraud risk). Our Board of Directors is required to monitor, oversee, and control all risks and to establish corporate objectives regarding risk philosophy, risk tolerances, and financial performance expectations. We have numerous Board-adopted policies and processes that address risk management. These policies establish risk tolerances, limits, and guidelines, must comply with all Finance Agency Regulations, and are designed to achieve continual safe and sound operations. The Board delegates day-to-day responsibility for managing and controlling most of these risks to senior management. Our cooperative business model, corporate objectives, and strong regulatory oversight provide us clear incentives to minimize risk exposures, and risk management practices are infused throughout all of our business activities.

Our policies and operating practices are designed to limit risk exposures from ongoing operations in the following broad ways:

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by anticipating potential business risks and appropriate responses;

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by defining permissible lines of business;

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by limiting the kinds of assets we are permitted to hold and the kinds of hedging and financing arrangements we are permitted to use;

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by limiting the amount of market risk to which we are permitted to be exposed; and

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by requiring strict adherence to internal controls, adequate insurance coverage, and comprehensive Human Resources policies, procedures, and strategies.

The FHLBank actively manages risk exposures on an enterprise-wide basis through regular formal meetings of several groups and committees. These include, among others, the Asset/Liability Management Committee, the Credit Risk Committee, the Information Technology Steering Committee, the Disclosure Committee, the Business Resumption and Contingency Planning Committee, the End User Computing Committee, the Financial and Correspondent Services Committee, and senior staff meetings. We also manage risk via regular reporting to and discussion with the Board of Directors and its committees, particularly the Financial and Risk Management Committee and the Audit Committee, as well as by continuous discussion and decision-making among key personnel across the FHLBank.

USE OF DERIVATIVES

Finance Agency Regulations and policies establish guidelines for the execution and use of derivative transactions. Permissible derivatives include interest rate swaps, swaptions, interest rate cap and floor agreements, calls, puts, and futures and forward contracts executed as part of our market risk management and financing. We are prohibited from trading in or the speculative use of these instruments and have limits on the amount of credit risk to which we may be exposed from derivatives. Most of our derivatives activity involves interest rate swaps. We account for all derivatives at their fair values.

Similar to our participation in debt issuances, derivatives help us hedge market risk created by Advances and mortgage commitments. Derivatives related to Advances most commonly hedge either:

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below-market rates and/or the market risk exposure on Putable and Convertible Advances for which members have sold us options embedded within the Advances;

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the market risk exposure of options we have sold that are embedded with Advances; or

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Regular Fixed Rate Advances when it may not be as advantageous to issue Obligations or when it may improve our market risk management.

We also use derivatives to hedge the market risk created by commitment periods of Mandatory Delivery Contracts in the Mortgage Purchase Program.

Derivatives help us intermediate between the normal preferences of capital market investors for intermediate-and- long-term fixed-rate debt securities and the normal preferences of our members for shorter-term or adjustable-rate Advances. We can satisfy the preferences of both groups by issuing long-term fixed-rate Bonds and entering into an interest rate swap that synthetically converts the Bonds to an adjustable-rate LIBOR funding basis that matches up with the short-term and adjustable-rate Advances, thereby preserving a favorable interest rate spread.

Because we have a cooperative business model, our Board of Directors has emphasized the importance of minimizing earnings volatility, including volatility from the use of derivatives. Accordingly, our strategy is to execute derivatives that we expect both to be highly effective hedges of market risk exposure and to receive fair value hedge accounting treatment. Therefore, the volatility in the market value of equity and earnings from our use of derivatives has historically tended to be moderate.

In this context, we have not executed derivatives, nor do we currently plan to do so, to hedge market risk exposure outside of specifically identified assets or liabilities or to hedge the market risk of mortgage assets, except for the commitment period of loans in the Mortgage Purchase Program. We believe that the economic benefits of using derivatives to hedge at the level of the entire balance sheet instead of individual instruments, or to hedge mortgage assets (except commitment periods), would generally be less than the increased hedging costs and risks, which include potentially higher earnings volatility.

COMPETITION

Numerous economic and financial factors influence the competition for Advance lending to members. The most important factor that affects Advance demand is the general availability of competitively-priced local retail deposits, which most members view as their primary funding source, in amounts and maturity structures that satisfy members’ funding needs. In addition, both small and large members typically have access to brokered deposits, repurchase agreements and public unit deposits, each of which presents competitive alternatives to Advances. Larger members typically have greater access to other competitive sources of funding and asset/liability management facilitated via the national and global credit markets. These sources include subordinated debt, interbank loans, covered bonds, interest rate swaps, options, bank notes, and commercial paper. An important new source of competition for Advances beginning in the fourth quarter of 2008 and continuing in 2009 was the combined effects of the various fiscal and monetary stimuli and financial guarantees initiated by the federal government to combat the financial crisis and recession. These recent government actions are discussed further in Item 1A’s “Risk Factors” and in Item 7’s “Executive Overview.”

The holding companies of some of our large asset members have membership(s) in other FHLBanks through affiliates chartered in other FHLBank Districts. Others could initiate memberships in other FHLBank Districts. The competition among FHLBanks for the business of multiple-membership institutions is similar to the FHLBanks’ competition with other wholesale lenders and other mortgage investors. We compete with other FHLBanks on the offerings and pricing of Mission Asset Activity, earnings and dividend performance, collateral policies, capital plans, and members’ perceptions of our relative safety and soundness. Some members may also evaluate the actual or perceived benefits of diversifying business relationships among FHLBank memberships. We regularly monitor, to the extent possible, these competitive forces among the FHLBanks.

The primary competitors for loans we purchase in the Mortgage Purchase Program are other housing GSEs, government agencies (Ginnie Mae), other FHLBanks, private issuers, and, beginning in 2009, the federal government. We compete primarily based on price, products, and services. Fannie Mae and Freddie Mac in particular have long-established and efficient programs and are the dominant purchasers of residential conforming fixed-rate conventional mortgages. In addition, a number of private financial institutions have well-established securitization programs, although they may not currently be active. The Program also may compete indirectly with the U.S. government to the extent it purchases mortgage-backed securities.

For debt issuance, the FHLBank System competes with issuers in the national and global debt markets, including most importantly the U.S. government and other GSEs. Competitive factors include, but are not limited to, the following:

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interest rates offered;

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the amount of debt offered;

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the market’s perception of the credit quality of the issuing institutions and the liquidity of the debt;

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the types of debt structures offered; and

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the effectiveness of marketing.

TAX STATUS

We are exempt from all federal, state, and local taxation other than real property taxes. However, we are obligated to make payments to REFCORP equal to 20 percent of net earnings after operating expenses and the Affordable Housing Program expense, but before charges for REFCORP. Currently, the combined assessments for REFCORP and the Affordable Housing Program are the equivalent of a 26.7 percent annualized net tax rate. Despite our tax exempt status, any cash dividends we issue are taxable to members and do not benefit from the corporate dividends received exclusion. Notes 1, 14, and 15 of the Notes to Financial Statements have additional details regarding the assessments for the Affordable Housing Program and REFCORP.

Item 1A. Risk Factors.

The following are the most important risks we currently face. The realization of one or more of the risks could negatively affect our results of operations, financial condition, and, at the extreme, the viability of our business franchise. The effects could include reductions in Mission Asset Activity, lower dividends, and, in extreme situations, an inability to participate in issuances of Consolidated Obligations. Many of the risks are directly related to the residual effects from the financial crisis and the economic recession. The risks identified below are not the only risks we face. Additional risks not presently known or which we currently deem immaterial may also impact our business, and even the risks identified may adversely affect our business in ways not anticipated.

Another economic recession could further reduce Mission Asset Activity and could lower profitability.

Member demand for Mission Asset Activity depends in part on the general health of the economy and business conditions. A recessionary economy, or an economy characterized by stagflation in which growth is weak but inflation high, normally lowers the amount of Mission Asset Activity, could decrease profitability and could cause stockholders to request redemption of a portion of their capital or request withdrawal from membership (both referred to here as “request withdrawal of capital”). These unfavorable effects are more likely to occur and be more severe if a weak economy is accompanied by significant changes in interest rates, stresses in the housing market, elevated competitive forces, or changes in the legislative and regulatory environment relative to the FHLBank System. All of these changes occurred in 2009. The recession in 2008 and 2009 substantially decreased our Advances and Letters of Credit activity. Although our profitability relative to short-term interest rates increased and there was no unfavorable impact on our capitalization, we are concerned that another recession or a weak recovery from the recent recession could further decrease Advance balances and ultimately erode profitability. As discussed in another risk factor, an extremely severe economic downturn, especially if combined with significant disruptions in housing conditions or other external events, could result in credit losses on our assets.

Continuation of the recently elevated competitive environment could further decrease Mission Asset Activity and lower earnings and capitalization.

We operate in a highly competitive environment for our Mission Asset Activity and debt issuance. Increased competition can decrease the amount of Mission Asset Activity and narrow net spreads on that activity, both of which can reduce profitability and cause stockholders to request withdrawal of capital. Historically, our chief competition has been from other wholesale lenders and debt issuers, including other GSEs. A new and intense source of competition arose in the fourth quarter of 2008 and in 2009 from the federal government’s actions to stimulate the economy. These actions significantly expanded funding and liquidity available to members and provided various forms of additional government guarantees of financial institution liabilities, which lowered our Advance demand. We cannot predict how long these negative effects will continue or how much more severe the effects could be. However, we expect overall Advance demand will remain weak until the government reduces these initiatives, in particular the liquidity stimulus, by tightening monetary policy and winding down its purchases of mortgage-backed securities.

Congressional legislation to resolve the financial issues and reform the business models of Fannie Mae and Freddie Mac, combined with the heightened regulatory environment, could unfavorably affect our business model, financial condition, and results of operations.

The federal government put Fannie Mae and Freddie Mac into conservatorship in September 2008, after their financial condition, capital position, and actual and expected earnings losses worsened dramatically due to the financial crisis. These two GSEs and the FHLBank System have the same regulator, the Finance Agency, which is charged with helping resolve the current housing finance crisis and with addressing reform of Fannie Mae and Freddie Mac. While there is agreement that a permanent financial and political solution for Fannie Mae and Freddie Mac must be implemented, no consensus has evolved around any of the various options proposed to date and no legislation has been proposed. Fannie Mae and Freddie Mac, which are publicly traded, stockholder-owned companies, have a different business model than the FHLBanks, which are cooperatives owned by their member financial institutions and which have no publicly traded stock. However, because all these GSEs share a common regulator and housing mission, the FHLBanks could be subject to legislation related to the ultimate disposition of Fannie Mae and Freddie Mac. Such legislation could inadequately account for the significant differences between

those GSEs and the FHLBanks and, therefore, could imperil the ability of the FHLBanks to continue operating effectively within their current business model or could change the business model. Also, because of the financial crisis and financial challenges at Fannie Mae, Freddie Mac, and some FHLBanks discussed below, the FHLBanks have faced heightened regulatory scrutiny in the last several years, thereby imparting additional uncertainty regarding the political and regulatory environment in which the FHLBanks will ultimately operate in the future.

We believe the legislative and regulatory uncertainty has negatively impacted Mission Asset Activity and made some members less willing to hold a capital investment in our company. At this time, we are unable to predict what effects GSE reform and the related heightened regulatory environment will have on the FHLBanks’ business model, financial condition, or results of operations, or whether the effects will be positive or negative.

In addition, related to the housing crisis, in early February 2010, Fannie Mae and Freddie Mac announced plans to purchase loans that are 120 days or more delinquent out of mortgage pools. The initial purchases were slated to occur from February 2010 through May 2010, with additional delinquency purchases as needed thereafter. As Fannie Mae and Freddie Mac may need to raise additional funds for these loan purchases, funding costs in the short-end of the agency debt market may be affected. At this time, we cannot predict what effect this event will have on our financial condition or results of operation.

Impaired access to the capital markets for debt issuance could deteriorate our liquidity, decrease the amount of Mission Asset Activity, lower earnings by raising debt costs and, at the extreme, prevent the System from meeting its financial obligations.

Our principal long-term source of funding, liquidity, and market risk management is through access to the capital markets for participation in the issuance of debt securities and for execution of derivative transactions at attractive prices and yields. This is the fundamental source of the FHLBank System’s business franchise. The System’s triple-A debt ratings, the implicit U.S. government backing of our debt, and our effective funding management are instrumental in ensuring satisfactory access to the capital markets. However, our ability to access the capital markets could be affected by external events (such as general economic and financial instabilities, political instability, wars, and natural disasters) and by our joint and several liability along with other FHLBanks for Consolidated Obligations (which exposes us to events at other FHLBanks).If our access were to be impaired for any extended period, the effect on our financial condition and results of operations could be material. At the extreme, the System’s ability to achieve its mission and satisfy its financial obligations could be threatened.

During 2008 and the early part of 2009, the financial crisis and economic recession, and the federal government’s significant measures enacted to mitigate their effects, changed the traditional bases on which market participants valued GSE debt securities and consequently affected our funding costs and practices. Particularly in 2008, funding costs associated with issuing long-term Consolidated Obligations rose sharply and were more volatile compared to LIBOR and U.S. Treasury securities. We believe this reflected dealers’ reluctance to sponsor, and investors’ reluctance to buy, as much long-term GSE debt as they previously did, coupled with strong investor demand for short-term, high-quality assets. At various times in 2008 and early 2009 the System had a reduced ability to issue long-term noncallable debt Obligations at acceptable rates. As 2009 progressed, funding costs began to return to more normal levels relative to other market rates.

Although we believe that events to date have not materially or permanently raised debt costs or impeded access to the capital markets, and that the chance of a liquidity or funding crisis in the FHLBank System or external event that would impair access to the capital markets currently is remote, we can provide no assurance that this will remain true.

Financial difficulties at other FHLBanks could require us to provide financial assistance to another FHLBank and/or increase the System’s debt costs. Either of these events could materially and adversely affect our results of operations or our financial condition.

Each FHLBank has a joint and several liability for principal and interest payments on Consolidated Obligations, which are backed only the financial resources of the FHLBanks. Although, no FHLBank has ever defaulted on its principal or interest share of an Obligation and the Finance Agency has never required an FHLBank to make principal or interest payments based on another FHLBank’s Consolidated Obligation liability, there can be no

assurance that this will continue to be the case. In 2009, as in 2008, several FHLBanks reported, and are expected to continue reporting, issues with capital adequacy and profitability. These issues could require our FHLBank to provide financial assistance to one or more other FHLBanks, for example, by making a payment on an Obligation on behalf of another FHLBank. Such assistance could, at the extreme, adversely affect our financial condition, earnings, ability to pay dividends, or redeem or repurchase capital stock.

Capital and earnings at other FHLBanks have been pressured due primarily to impairment charges taken on private-label mortgage-backed securities. These issues could raise investors’ and rating agencies’ concern regarding the credit risk of FHLBank System debt securities, which could result in higher and more volatile debt costs, lower debt ratings, and impaired ability to issue debt. As a result, our financial condition and results of operations could be adversely affected.

We are exposed to credit risk that, if realized, could materially and adversely affect our financial condition and results of operations.

We believe that residual credit risk exposure to Advance collateral, loans in the Mortgage Purchase Program, investments, and derivatives, including exposure to loans that may have “subprime” and “alternative/nontraditional” characteristics, continues to be minimal. In general, however, and especially given the residual effects of the recent financial crisis and recession, we cannot make any assurances that credit losses will continue to be minimal. Most members are on a blanket lien status for Advances which, because it does not require specific loan collateral to be delivered, imparts a degree of uncertainty as to what types of loans members have pledged to collateralize their Advances. Also, in 2009, as in 2008, there was a significant downward trend in the internal credit ratings assigned to members. During the year, for certain members, it became necessary for us to reduce their borrowing capacity, increase their collateral requirements and/or require them to deliver collateral or provide greater detail on pledged assets. Regarding the Mortgage Purchase Program, although loans have strong credit enhancements, continuing substantial reductions in home prices could increase delinquencies and foreclosures sufficiently to result in credit losses. Money market investments and the uncollateralized portion of interest rate swaps are unsecured; we collateralize most credit risk exposure of swaps by exchanging cash or high-grade securities (daily, if necessary) with the counterparties based on the net market value positions of the swaps. Although we make investments in the securities of, and execute derivatives with, highly rated institutions, failure of a counterparty with which we have a large unsecured position could have a material adverse affect on our financial conditions and results of operations.

An extremely severe and prolonged economic downturn, especially if combined with significant disruptions in housing conditions, could result in credit losses on our assets that could materially impair our financial condition or results of operations.

Changes in interest rates and mortgage prepayment speeds could significantly reduce our ability to pay members a competitive dividend from current earnings.

Sharp increases in interest rates, especially short-term rates, or sharp decreases in long-term interest rates could threaten the competitiveness of dividend rates relative to member stockholders’ alternative investment choices. A major way that interest rate movements could lower profitability is by changes in mortgage prepayment speeds that we have not hedged appropriately with Consolidated Obligations. Exposure to unhedged changes in mortgage prepayment speeds is one of our largest ongoing risks. In some extremely stressful scenarios, changes in interest rates and prepayment speeds could result in dividends being below stockholders’ expectations for an extended period of time. In such a situation, members could engage in less Mission Asset Activity and could request withdrawal of capital.

Spreads on assets to funding costs may narrow because of changes in market conditions and competitive factors, resulting in lower profitability.

Spreads on many of our assets tend to be narrow compared to those of many other financial institutions due to our cooperative business model, resulting in relatively lower profitability. Market conditions could cause asset spreads, and therefore our profitability, to decrease substantially. This could result in lower dividends, reductions in Mission Asset Activity, and members’ requests to withdraw their capital.

Members face increased regulatory scrutiny, especially from the FDIC, which could further decrease Mission Asset Activity and lower profitability.

In response to the financial crisis and ongoing elevations in financial institution failures, members’ regulators have appeared to heighten regulatory requirements and scrutiny, especially in the areas of capitalization, assessments of asset classifications, reliance on Advances for funding and interest rate risk management. We believe these activities have resulted in members’ decreased use of Advances. The Federal Deposit Insurance Corporation (FDIC) has made changes, or has proposed to make changes, in several of its practices that has reduced or could reduce members’ ability or preferences to engage in Mission Asset Activity. These practices include raising deposit insurance coverage levels; providing guarantees to unsecured debt issuance of insured depository institutions; and requiring certain depository institutions to include Advances when calculating their deposit insurance premiums.

The concentration of Mission Asset Activity and capital among a small number of members could reduce dividend rates available if several large members were to withdraw or sharply reduce their activity.

A relatively small number of members provide the bulk of our Mission Asset Activity and capital. These members could decrease their Mission Asset Activity and the amount of their FHLBank capital stock as a result of merger and acquisition activity or their reduced demand for our products. Our business model is structured to be able to absorb sharp changes in our Mission Asset Activity because we can undertake commensurate reductions in our liability balances and capital and because of our low operating expenses. Therefore, although possible, we believe the chance is small that a significant membership withdrawal of large members or a significant reduction in their Mission Asset Activity could negatively affect profitability sufficiently to threaten our ability to satisfy principal and interest payments on Consolidated Obligations or ability to pay competitive dividends to remaining members.

The amount of our retained earnings could become insufficient to preserve a competitive dividend return or protect stockholders’ capital investment against impairment.

If dividend rates paid to stockholders become uncompetitive because of an insufficient amount of current earnings, and/or because of an inability to distribute retained earnings, stockholders may request withdrawal of their capital. At the extreme, if the amount of retained earnings were insufficient to protect stockholders’ capital investment against losses, the value of our capital stock on their books could be written down below its par value and be designated as an impaired asset. Although we believe that we have a sufficient amount of retained earnings to protect against dividend volatility and impairment risk, we can provide no assurance that this will continue to be the case.

Changes in relevant accounting standards could materially increase earnings volatility and consequently reduce the quality of members’ capital investment, the amount of Mission Asset Activity and the amount of capital.

To date, we believe there have been no material effects on our Mission Asset Activity, capitalization, or earnings because of our application of accounting standards, especially those related to accounting for derivatives and hedging activities and accounting for premiums and discounts. Although unlikely to occur, changes in certain accounting standards could increase earnings volatility, causing less demand for Mission Asset Activity and stockholders to request withdrawal of capital. Earnings volatility could also increase if we began to execute more derivatives involving economic or macro hedges or if we significantly increased the amount of mortgage assets with premiums or discounts.

Our financial condition and results of operations could suffer if we are unable to hire and retain skilled key personnel.

The success of our business mission depends, in large part, on the ability to attract and retain key personnel. Competition for qualified people can be intense. Should we be unable to hire or retain effective key personnel, our financial condition and results of operations could be harmed.

Failures or interruptions in our internal controls, information systems and other operating technologies could harm our financial condition, results of operations, reputation, and relations with members.

Control failures, including those over financial reporting, or business interruptions with members and counterparties could occur from human error, fraud, breakdowns in computer systems and operating processes, or natural or man-made disasters. We rely heavily on internal and third-party computer systems. Although we believe there are substantial control processes in place, if a significant credit or operational risk event were to occur, it could materially damage our financial condition and results of operations. We may not be able to foresee, prevent, mitigate, reverse or repair the negative effects of any such failure or interruption.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our offices are located in 70,879 square feet of leased space in downtown Cincinnati, Ohio. We also maintain a leased, fully functioning, back-up facility in suburban Cincinnati. Additionally, we lease a small office in Nashville, Tennessee for the area marketing representative. We believe that our facilities are in good condition, well maintained, and adequate for our current needs.

Item 3. Legal Proceedings.

We are 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 adverse effect on our financial condition or results of operations.

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

By law, only our members (and former members that have outstanding Mission Asset Activity) may own our stock. As a result, there is no public market for our stock. The par value of our capital stock is $100 per share. As of December 31, 2009, we had 735 stockholders and 31 million shares of capital stock outstanding, all of which were Class B Stock.

We paid quarterly dividends in 2009 and 2008 as outlined in the table below.

(Dollars in millions)

		2009												2008
						Percent Per												Percent Per
Quarter		Amount				Annum				Form				Amount				Annum				Form (1)
First		$	45				4.50			Cash				$	47				5.25			Capital Stock
Second			44				4.50			Cash					49				5.50			Capital Stock
Third			50				5.00			Cash					51				5.50			Capital Stock
Fourth			44				4.50			Cash					49				5.00			Cash
Total		$	183				4.63							$	196				5.31

          (1) Fractional share amounts were paid in cash.

Generally, our Board of Directors has discretion to declare or not declare dividends and to determine the rate of any dividend declared. Our dividend declaration policy states that dividends for a quarter are declared and paid from retained earnings after the close of a calendar quarter and are based on average stock balances for the then closed quarter. Thus, any dividend declared during a quarter does not include any actual or projected earnings for the current quarter.

On January 29, 2007, a final Finance Agency Capital Rule became effective that prohibits an FHLBank from issuing new excess capital stock to members, either by paying stock dividends or otherwise, if before or after the issuance the amount of member excess capital stock exceeds or would exceed one percent of the FHLBank’s assets. Excess capital stock for this regulatory purpose is calculated as the aggregate of capital stock owned by all members that is in excess of each member’s membership and Mission Asset Activity requirements (as defined in our Capital Plan). In accordance with this Rule, we paid cash dividends in each quarter of 2009 and in the fourth quarter of 2008 and stock dividends in each of the first three quarters of 2008. Our Board, and we believe our members, continue to have a stated preference for paying dividends in the form of stock.

We may not declare a dividend if, at the time, we are not in compliance with all of our capital requirements. We also may not declare or pay a dividend if, after distributing the dividend, we would fail to meet any of our capital requirements or if we determine that the dividend would create a safety and soundness issue for the FHLBank. We expect to continue to pay dividends at a spread above comparable short-term interest rates. See Note 16 of the Notes to the Financial Statements for additional information regarding our capital stock.

RECENT SALES OF UNREGISTERED SECURITIES

From time-to-time we provide Letters of Credit in the ordinary course of business to support members’ obligations issued in support of unaffiliated, third-party offerings of notes, bonds or other securities. We provided $203 million, $200 million and $10 million of such credit support during 2009, 2008 and 2007, respectively. To the extent that these Letters of Credit are securities for purposes of the Securities Act of 1933, their issuance is exempt from registration pursuant to section 3(a)(2) thereof.

Item 6.  Selected Financial Data.

The following table presents selected Statement of Condition information (based on book balances), statement of income data and financial ratios for the five years ended December 31, 2009.

		Year Ended December 31,
(Dollars in millions)		2009				2008				2007				2006				2005
STATEMENT OF CONDITION DATA:
Total assets		$	71,387			$	98,206			$	87,335			$	81,381			$	77,074
Advances			35,818				53,916				53,310				41,956				40,262
Mortgage loans held for portfolio, net			9,366				8,632				8,928				8,461				8,418
Investments (1)			24,193				35,325				24,678				30,614				28,114
Consolidated Obligations, net:
Discount Notes			23,187				49,336				35,437				21,947				17,578
Bonds			41,222				42,393				46,179				53,239				53,520
Total Consolidated Obligations, net			64,409				91,729				81,616				75,186				71,098
Mandatorily redeemable capital stock			676				111				118				137				418
Capital:
Capital stock – putable			3,063				3,962				3,473				3,658				3,504
Retained earnings			412				326				286				255				208
Accumulated other comprehensive income			(8	)			(6	)			(4	)			(6	)			(3	)
Total capital			3,467				4,282				3,755				3,907				3,709
STATEMENT OF INCOME DATA:
Net interest income		$	387			$	364			$	421			$	386			$	340
Provision for credit losses			-				-				-				-				-
Other income (loss)			38				9				(6	)			6				3
Other expenses			59				51				48				46				42
Assessments			98				86				98				93				81
Net income		$	268			$	236			$	269			$	253			$	220
Dividend payout ratio (2)			68	%			83	%			88	%			81	%			82	%
Weighted average dividend rate (3)			4.63	%			5.31	%			6.59	%			5.81	%			5.00	%
Return on average equity			6.38				5.73				6.87				6.70				5.79
Return on average assets			0.32				0.25				0.32				0.32				0.28
Net interest margin (4)			0.46				0.39				0.50				0.49				0.43
Average equity to average assets			4.96				4.37				4.63				4.76				4.78
Regulatory capital ratio (5)			5.81				4.48				4.44				4.98				5.36
Operating expense to average assets			0.057				0.041				0.046				0.046				0.042

	(1)		Investments include interest bearing deposits in banks, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities.
	(2)		Dividend payout ratio is dividends declared in the period as a percentage of net income.
	(3)		Weighted average dividend rates are dividends paid in stock and cash divided by the average number of shares of capital stock eligible for dividends.
	(4)		Net interest margin is net interest income as a percentage of average earning assets.
	(5)		Regulatory capital ratio is period end regulatory capital (capital stock, mandatorily redeemable capital stock and retained earnings) as a percentage of period end total assets.

Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

EXECUTIVE OVERVIEW

Financial Condition

The following table summarizes our financial condition.

		Year Ended December 31,
		Ending Balances								Average Balances
(Dollars in millions)		2009				2008				2009				2008
Advances (principal)		$	35,123			$	52,799			$	43,624			$	59,973
Mortgage Purchase Program:
Mortgage loans held for portfolio (principal)			9,280				8,590				9,498				8,621
Mandatory Delivery Contracts (notional)			79				917				566				182
Total Mortgage Purchase Program			9,359				9,507				10,064				8,803
Letters of Credit (notional)			4,415				7,917				5,917				7,894
Total Mission Asset Activity		$	48,897			$	70,223			$	59,605			$	76,670
Retained earnings		$	412			$	326			$	405			$	335
Capital-to-assets ratio			4.86%				4.36%				4.96%				4.37%
Regulatory capital-to-assets ratio (1)			5.81				4.48				5.22				4.51

                 (1) See the “Capital Resources” section for further description of regulatory capital.

The trends in our financial condition that began in the fourth quarter of 2008 continued in 2009. Like many financial institutions, our asset balances—especially Advances—have been negatively affected by the economic recession and the residual effects of the financial crisis. The Advance business is cyclical and we normally experience slower growth, if not a decrease in balances, in an economic contraction. The effect of the recession on our financial condition has been exacerbated by the extraordinary liquidity programs and financial guarantees that the federal government continues to provide. We also lost Advances due to mergers, in 2009 and prior years, of former members with financial institutions chartered outside our Fifth District.

Ending and average balances of Mission Asset Activity—comprised of Advances, Letters of Credit, and the Mortgage Purchase Program—decreased in each quarter of 2009. Mission Asset Activity ended the year at $48,897 million, which was a decrease of $21,326 million (30 percent) from year-end 2008. The end-of-year principal balance of Advances fell $17,676 million (33 percent) and the notional principal of Letters of Credit fell $3,502 million (44 percent). Similar decreases were experienced for average balances.

The decrease in Advance balances began during the fourth quarter of 2008, after they had reached a record high in October 2008 as members’ demand for wholesale liquidity increased during the beginnings of the financial crisis before the federal government implemented its liquidity and guarantee programs. The FHLBank System was an early responder in providing additional needed liquidity to its members during this early stage of the financial crisis. The decrease occurred broadly throughout our membership but was disproportionately accounted for by the ten largest members, both

on an absolute and percentage basis. Members having assets below $1 billion reduced their Advances less than ten percent in 2009.

There were three reasons for the decrease in Advance balances from the high point in October 2008.

§

The economic recession lowered demand for members’ consumer, mortgage, and commercial loans. Their loans decreased ten percent from the third quarter of 2008 to the end of 2009 (excluding our two largest members, which had acquisitions that would skew results).

§

There was a substantial increase in many members’ deposit base. Members’ deposit base expanded four percent from the third quarter of 2008 to the end of 2009 (again, excluding the two largest members).

§

The government significantly expanded funding and liquidity stimulus programs made available to members. These activities were implemented to combat the financial crisis and recession and were led by the Federal Reserve System. The most important aspects related to Advance demand were 1) new sources of government-provided liquidity through the Troubled Asset Relief Program (TARP), 2) various forms of additional government guarantees of liabilities of financial institutions, and 3) a dramatic increase in bank reserves created by the Federal Reserve’s expansion of its balance sheet, in particular its quantitative easing programs including massive direct purchases of mortgage-backed securities.

The decrease in the available lines in the Letters of Credit program occurred from the actions of a few large members consistent with their lower need for liquidity and financial guarantees from the FHLBank. This program is more concentrated than Advances.

The Mortgage Purchase Program’s principal balance totaled $9,280 million at the end of 2009, an increase of $690 million (eight percent) from the end of 2008. The Program expanded substantially in the fourth quarter of 2008 and the first quarter of 2009, due to increased overall financing activity in the mortgage markets in response to the generally lower mortgage rates. The $917 million of mandatory delivery contracts at the end of 2008 became principal balances in 2009 and contributed to the $3,627 million of principal purchases in 2009. Mortgage rates were on average modestly higher in the last three quarters of 2009, which led to lower volumes after the first quarter. The Program currently has strong member participation and interest. This was evidenced in 2009 by 26 approvals of new sellers to the Program, by a similar number of additional applications currently being processed for approval, and by an over 50 percent increase in regular sellers.

Despite the lower overall Mission Asset Activity, we continued to fulfill our business role as an important provider of reliable and attractively priced wholesale funding to our members. At the end of 2009, members funded on average approximately five percent of their assets with Advances, the penetration rate was relatively stable with almost 80 percent of members holding Mission Asset Activity, and, as noted above, the number of active sellers and participants in the Mortgage Purchase Program increased substantially.

During 2009, we accrued $31 million for future use in the Affordable Housing Program. Since the Program was established 20 years ago, we have set-aside from earnings $332 million of funds for affordable housing initiatives. Since 2003, we also have voluntarily disbursed over $16 million to support affordable housing. The voluntary contributions are over and above the regulatory Affordable Housing Program requirements.

Capital adequacy continued to be strong and exceeded all minimum regulatory and internal capital requirements. GAAP capital stood at $3.5 billion at the end of 2009, including $412 million of retained earnings. The GAAP capital-to-assets ratio ended the year at 4.86 percent. The year-end regulatory capital-to-assets ratio was 5.81 percent, well above the required minimum of 4.00 percent. Regulatory capital includes mandatorily redeemable capital stock accounted for as a liability, which provides the same protections as GAAP capital against losses to holders of our Consolidated Obligations. Financial leverage, as represented by these capital ratios, decreased in 2009, due primarily to the reduction in Advance balances.

Total capital decreased $815 million, or 19 percent, during 2009 due to the reclassification of a substantial amount of capital stock to mandatorily redeemable stock in response to excess stock redemption requests and the membership terminations of a few large members purchased by out-of-district financial institutions.

The difference between earnings generated and dividends paid to stockholders resulted in the change to retained earnings, which grew $86 million, or 26 percent, during all of 2009. The business and market environments allowed us to generate earnings sufficient to pay stockholders a very favorable dividend return in each quarter of 2009 and to increase retained earnings, thereby enhancing protection of future dividends against earnings volatility and members’ capital stock against impairment risk.

The balance of investments at the end of 2009 was $24,193 million, a decrease of $11,132 million (32 percent) from year-end 2008. Total investments included $11,437 million of mortgage-backed securities and $12,746 million of short-term money market instruments. The latter are generally held for liquidity purposes to support members’ funding needs and to protect against the potential inability to access capital markets for debt issuance. We generally decreased short-term money market investment balances after the first quarter of 2009 in response to the decreased Advance demand and the improvement in market and credit conditions.

Results of Operations

The table below summarizes our results for operations.

		Year Ended December 31,
(Dollars in millions)		2009				2008				2007
Net income		$	268			$	236			$	269
Affordable Housing Program accrual			31				27				31
Return on average equity (ROE)			6.38	%			5.73	%			6.87	%
Return on average assets			0.32				0.25				0.32
Weighted average dividend rate			4.63				5.31				6.59
Average 3-month LIBOR			0.69				2.92				5.29
Average overnight Federal Funds effective rate			0.16				1.92				5.02
ROE spread to 3-month LIBOR			5.69				2.81				1.58
Dividend rate spread to 3-month LIBOR			3.94				2.39				1.30
ROE spread to Federal Funds effective rate			6.22				3.81				1.85
Dividend rate spread to Federal Funds effective rate			4.47				3.39				1.57

Net income was $268 million in 2009, up 13 percent from $236 million in 2008, and return on average equity (ROE) was 6.38 percent compared to 5.73 percent in 2008. Earnings continued to represent a competitive level of profitability on stockholders’ capital investment in our company. The ROE spreads to 3-month LIBOR and the Federal funds effective rate are two market benchmarks we believe stockholders use to assess the competitiveness of the return on their capital investment, which, along with access to our products and services, is a key source of membership value. These spreads were significantly above those benchmarks in both 2009 and 2008.

The increase in net income for the full year resulted primarily from the following factors:

§

Beginning in late 2008 and continuing in 2009, in response to the decline in intermediate- and long-term interest rates, we retired before their final maturities approximately $17 billion of relatively high-cost long-term Consolidated Obligation Bonds and replaced them with new Obligations, much of which was at substantially lower interest costs.

§

Until midyear, we earned wider portfolio spreads on many short-term and adjustable-rate assets indexed to LIBOR relative to short-term funding costs.

§

Prepayment speeds of relatively high yielding mortgages did not accelerate sharply despite the lower overall mortgage rates, due to the ongoing difficulties in the housing and mortgage markets.

§

Market yield curves were significantly steeper because short-term interest rates fell to historical lows of close to zero while longer-term rates fell less. This benefited earnings due to use of a modest amount of short-term debt to fund long-term assets.

The wider portfolio spreads earned during the first half of 2009 resulted from the financial market disruptions that began in 2008, which increased the cost of inter-bank lending (represented by LIBOR) relative to other short-term interest costs such as our Discount Notes. We use Discount Notes to fund a large amount of our LIBOR-indexed Advances. In the second half of 2009, as market participants viewed that the financial crisis had subsided, short-term LIBOR decreased and the spread between LIBOR and Discount Notes reverted back to approximately its long-term historical level.

Earnings in 2009 also benefited from the following: increases in net market value gains (primarily unrealized) of almost $16 million in accounting for derivatives; the sale of mortgage-backed securities in the first and fourth quarters, resulting in gains of $12 million; and increases in Advance prepayment fees of $6 million.

Partially offsetting these favorable earnings factors was a significant decrease in earnings generated from funding assets with interest-free capital due to reductions in average interest rates. The benchmark 3-month LIBOR rate, for example, averaged 0.69 percent during 2009, compared to 2.92 percent in 2008. Another offset was the reduction in assets, especially Advances.

Our Board of Directors authorized payment of quarterly cash dividends to stockholders at an annual average rate of 4.63 percent. This was 3.94 percentage points above 2009’s average 3-month LIBOR. The dividend rate was an annualized 4.50 percent in the first, second, and fourth quarters, and 5.00 percent in the third quarter.

Business Outlook

This section outlines what we believe are our major current risk exposures. Item 1A’s “Risk Factors” has a more detailed discussion of risk factors that could affect our corporate objectives, financial condition, and results of operations. “Quantitative and Qualitative Disclosures About Risk Management” provides details on current risk exposures. Many of the issues related to our financial condition, results of operations, and liquidity discussed throughout this document relate directly to the recent financial crisis and economic recession, and to the federal government’s actions to attempt to mitigate their unfavorable effects.

We expect overall Advance demand will remain weak until the Federal Reserve tightens monetary policy, an economic recovery brings an expansion of members’ loan demand, and the government’s funding and liquidity programs and purchases of mortgage-backed securities are wound down.

We expect the Mortgage Purchase Program to grow slowly, if at all, for the foreseeable future because most current sellers and recent new approvals are smaller community-based members. Growth could re-accelerate if mortgage rates fall substantially again for a sustained period, or if one or more larger members decides to sell us a significant volume of loans. We do not currently anticipate the latter event to occur. We continue to emphasize both recruiting community financial institution members to the Program and increasing the number of regular sellers.

Issues with our two Supplemental Mortgage Insurance providers could harm the sustainability of the Mortgage Purchase Program. Due to the deterioration in the mortgage markets over the last two years, the providers currently have ratings below the double-A rating required by a Finance Agency Regulation, which results in a technical violation of this Regulation. In August 2009, the Finance Agency, with certain stipulations, granted a one-year waiver of the double-A rating requirement for existing loans and commitments and a six-month initial waiver for new commitments, which was extended in early 2010. In addition, the insurer we use for new business has continually increased the cost of purchasing the insurance, which threatens to make the Program uncompetitive. We have submitted a proposal to the Finance Agency that, if approved, would replace the current reliance on the credit enhancement provided by these mortgage insurers with

increased use of the primary already-existing credit enhancement feature (the Lender Risk Account). We believe this change in credit enhancement structure would maintain compliance with the Program’s legal, accounting, and other regulatory requirements, preserve the Program’s minimal credit risk profile, and enable the Program to continue as a beneficial business activity for our members. We cannot provide at this time any assurance as to whether or when the Finance Agency will approve the proposal.

We continue to closely monitor several scenarios that could result in further reductions in Mission Asset Activity and lower profitability. The effects from the recession and the financial crisis could result in a longer and more severe reduction in Mission Asset Activity, which could reduce profitability. The scenarios that could unfavorably affect Mission Asset Activity include:

§

a new economic recession, which could further reduce Advance demand;

§

a renewal of the financial crisis;

§

unfavorable effects on the competitiveness of our business model from the continuation of current or from new federal government actions to mitigate the recession and financial crisis; and

§

issues with earnings pressures and capital adequacy at other FHLBanks, primarily resulting from market value losses and expected credit losses on their private-label mortgage-backed securities.

However, we believe that, even if Mission Asset Activity experiences further significant reductions, profitability would remain competitive.

We cannot determine the ultimate impact on our business operations from the issues with earnings and capital at some other FHLBanks. Potential effects could include 1) requiring us to provide financial assistance to one or more other FHLBanks, 2) higher and more volatile debt costs, 3) more difficulty in issuing debt, especially less reliance on FHLBank System issued longer-term debt, and 4) decreases in Mission Asset Activity and profitability.

The FHLBank System currently faces heightened legislative and regulatory risks and uncertainties, which we believe has affected, and could continue to affect, Mission Asset Activity and capitalization. These risks are discussed in Item 1A’s “Risk Factors.”

We believe that in 2009 our liquidity position remained strong and our overall ability to fund operations through debt issuance at acceptable interest costs remained sufficient. Although we can make no assurances, we expect this to continue to be the case, and we believe the possibility of a liquidity or funding crisis in the FHLBank System that would impair our FHLBank’s ability to participate in issuances of new debt, service outstanding debt or pay competitive dividends is remote. The financial crisis significantly elevated our long-term funding costs, compared to U.S. Treasury securities and LIBOR, in the early part of 2009 as in most of 2008. As 2009 progressed, long-term funding costs began to return to more normal spreads relative to other market rates. In 2009, average money market balances were maintained at higher than historical levels because the financial crisis and economic uncertainty prompted us to hold more asset liquidity. Because the financial crisis appeared to subside as 2009 progressed, we determined in the second half of 2009 that it was acceptable from a risk perspective to partially reduce the amount of asset liquidity held from funding short-term (mostly overnight) investments with longer-term Consolidated Obligation Discount Notes. Holding excess liquidity can be at a cost to earnings.

Residual exposure to market risk continued to be moderate and at levels consistent with historical averages. The current level of market risk exposure should ensure that profitability will be competitive across a wide range of stressed interest rate and business environments. However, even under the current market conditions, we expect profitability will decrease in 2010 and beyond compared to the levels of 2009. The level of profitability in 2009 was inconsistent with the sustained fundamental earnings generated by our business model.

The FHLBank has historically emphasized strategies aimed at providing a competitive earnings stream over a multitude of market and business environments and a relative lack of earnings volatility. These strategies include, among others: 1) conservative management of market risk exposure, 2) controlled growth in mortgage assets, 3) holding a nominal amount of riskier types of mortgage-backed securities, 4) accounting and hedging practices that attempt to minimize earnings volatility from use of derivatives, and 5) limiting growth in operating expenses.

The following are major factors that we are experiencing, or could experience in the near-to intermediate-term future, which could decrease profitability:

§

continuation of extremely low short-term interest rates, especially if coupled with reductions in mortgage rates and accelerated mortgage prepayment speeds;

§

the potential for significantly higher interest rates, especially if coupled with a flatter yield curve;

§

replacing expected paydowns of mortgages earning wide net spreads with new mortgages at lower net spreads; and/or

§

continued reductions in Advance balances.

The FHLBank expects to continue to have limited credit risk exposure from offering Advances, purchasing mortgage loans, making investments, and executing derivative transactions. We have robust policies, strategies and processes designed to identify, manage and mitigate credit risk. Advances are overcollateralized and we have a perfected first lien position on all pledged loan collateral, as well as very conservative policies and procedures related to managing Advances’ credit risk. As a result, we do not expect any losses from Advances or Letters of Credit. The Mortgage Purchase Program is comprised only of conforming fixed-rate conventional loans and loans fully insured by the Federal Housing Administration. Multiple layers of credit enhancements on the Program’s loans protect the FHLBank against credit losses down to approximately a 50 percent loan-to-value level (based on value at origination). Actual program delinquencies on conventional loans are well below national averages on similar loans and any losses have been well below the amount of credit enhancements, except for a de minimis loss expected in 2010.

On December 31, 2009, 98 percent, or $11.3 billion, of our mortgage-backed securities’ principal balances were issued and guaranteed by Fannie Mae or Freddie Mac, which we believe have the backing of the United States government. Only $187 million of the holdings were private-label mortgage-backed securities; these securities are comprised of high-quality residential mortgage loans issued and purchased in 2003 and continue to be rated triple-A. The underlying collateral has a de minimis level of delinquencies and foreclosures as reflected in the average serious delinquency rate (loans at least 60 days past due including foreclosures) of 0.54 percent of total principal, while their average credit enhancement stood at 7.6 percent.

Although most of our money market investments are unsecured, we invest in the debt securities of highly rated, investment-grade institutions, have conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices. Finally, we collateralize most of the credit risk exposure resulting from interest rate swap transactions; only the uncollateralized portion of our derivative asset position (which was $9 million at the end of 2009) represents unsecured exposure. We continue to expect no credit losses on this source of unsecured credit exposure.

Overall, we have never experienced a credit-related loss on, nor have we ever established a loss reserve for, any asset other than as noted above. In addition, we have not taken an impairment charge on any investment. Based on our analysis of exposures and application of GAAP we continue to believe no loss reserves are required for Advances or mortgage assets, nor do we consider any investments to be other-than-temporarily impaired. We expect that this will continue to be the case.

CONDITIONS IN THE ECONOMY AND FINANCIAL MARKETS

Economy

The primary external factors that affect our Mission Asset Activity and earnings are the general state and trends of the economy and financial institutions, especially in the states of our District; conditions in the financial, credit, and mortgage markets; and interest rates. The economy entered a sharp recession in the fourth quarter of 2007, which continued through 2008 and into 2009. As measured by real Gross Domestic Product (GDP), the national economy grew slightly by 0.4 percent overall in 2008 but contracted 5.4 percent in the fourth quarter of 2008, contracted 6.4 percent in the first quarter of 2009, and contracted 0.7 percent in the second quarter, before expanding 2.2 percent in the third quarter and by an estimated 5.9 percent in the fourth quarter (all rates are annualized).

Although there are indications—including the recent GDP growth, reduction in credit spreads, unfreezing of some credit markets and some positive signs in housing markets—that the recession has ended and the financial crisis subsided, it is premature to know if the positive indications will be sustained. Contraindications against a robust pickup in economic activity are that lending by financial institutions appears not to have accelerated, bank reserves continue to be at very high levels, unemployment appears to still be increasing or at least not falling (although unemployment is generally a lagging indicator of economic growth), financial institutions continue to have credit difficulties, interest rates remain low, and most stock market indices remain well below their historical highs.

The residual effects of the financial crisis and recession may continue for some time. These effects may include diminished lending activity, credit risk difficulties, strong deposit growth, and the existence of substantial liquidity and funding alternatives from the federal government. To the extent these effects continue to be realized, we expect a continuation of subdued demand for our Advances.

Interest Rates

Trends in market interest rates affect members’ demand for Mission Asset Activity, earnings, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following table presents key market interest rates (obtained from Bloomberg L.P.).

		Year 2009								Year 2008								Year 2007
		Average				Ending				Average				Ending				Ending
Federal Funds Target			0.25	%			0.25	%			2.09	%			0.25	%			4.25	%
Federal Funds Effective			0.16				0.05				1.92				0.14				3.06
3-month LIBOR			0.69				0.25				2.92				1.43				4.70
2-year LIBOR			1.41				1.42				2.95				1.48				3.81
5-year LIBOR			2.66				2.99				3.70				2.13				4.18
10-year LIBOR			3.44				3.97				4.25				2.56				4.67
2-year U.S. Treasury			0.94				1.14				2.00				0.77				3.05
5-year U.S. Treasury			2.19				2.68				2.79				1.55				3.44
10-year U.S. Treasury			3.24				3.84				3.64				2.21				4.03
15-year mortgage current coupon (1)			3.73				3.78				4.97				3.64				4.95
30-year mortgage current coupon (1)			4.31				4.57				5.47				3.93				5.54
15-year mortgage note rate (2)			4.58				4.54				5.63				4.91				5.79
30-year mortgage note rate (2)			5.04				5.14				6.05				5.14				6.17

		Year 2009 by Quarter - Average
		Quarter 1				Quarter 2				Quarter 3				Quarter 4
Federal Funds Target			0.25	%			0.25	%			0.25	%			0.25	%
Federal Funds Effective			0.18				0.18				0.15				0.12
3-month LIBOR			1.24				0.85				0.41				0.27
2-year LIBOR			1.54				1.50				1.40				1.21
5-year LIBOR			2.38				2.74				2.86				2.64
10-year LIBOR			2.94				3.50				3.72				3.59
2-year U.S. Treasury			0.89				1.01				1.01				0.86
5-year U.S. Treasury			1.75				2.23				2.45				2.29
10-year U.S. Treasury			2.71				3.31				3.50				3.45
15-year mortgage current coupon (1)			3.75				3.84				3.82				3.52
30-year mortgage current coupon (1)			4.13				4.31				4.50				4.28
15-year mortgage note rate (2)			4.72				4.63				4.61				4.38
30-year mortgage note rate (2)			5.06				5.01				5.16				4.92

After decreasing sharply in 2008, the overnight Federal funds target and effective rates were relatively stable in 2009. The Federal Reserve maintained the overnight Federal funds target rate at a range of zero to 0.25 percent, which it had established by the end of 2008. Short-term LIBOR decreased at a slower pace. By the third quarter of 2009, short-term LIBOR had decreased to a level consistent with its historical relationship to Federal funds.

In the first three quarters of 2009, average longer-term LIBOR and U.S. Treasury rates tended to rise, with stability in the fourth quarter. However, spreads of our Consolidated Obligation Bonds to these indices narrowed, with the result being relatively stable and even lower Bond rates. The combination of falling short-term rates and more stable longer-term Bond rates resulted in a steeper funding yield curve, which improved earnings. In addition, earnings benefited from the reduction in Bond spreads relative to market indices. Likewise, mortgage note rates were more stable in 2009 than longer-term LIBOR and U.S. Treasuries. This, along with falling home prices, the recession, and difficult mortgage refinancing conditions, resulted in relatively moderate increases in mortgage prepayments.

ANALYSIS OF FINANCIAL CONDITION

Asset Composition Data

Mission Asset Activity includes the following components:

§

the principal balance of Advances;

§

the notional principal amount of available lines in the Letters of Credit program;

§

the principal balance in the Mortgage Purchase Program (Mortgage Loans Held for Portfolio); and

§

the notional principal amount of Mandatory Delivery Contracts.

The following two tables show the composition of total assets, which support the discussions in the “Analysis of Financial Condition” and the “Executive Overview.”

Asset Composition - Ending Balances (Dollars in millions)

		2009																2008																2007
						% of				Change From												% of				Change From												% of				Change From
						Total				Prior Year												Total				Prior Year												Total				Prior Year
		Balance				Assets				Amount				Pct				Balance				Assets				Amount				Pct				Balance				Assets				Amount				Pct
Advances
Principal		$	35,123				49	%		$	(17,676	)			(33	)%		$	52,799				54	%		$	(154	)			-%			$	52,953				61	%		$	11,011				26	%
Other items (1)			695				1				(422	)			(38	)			1,117				1				760				213				357				-				343				2,450
Total book value			35,818				50				(18,098	)			(34	)			53,916				55				606				1				53,310				61				11,354				27
Mortgage Loans Held for Portfolio
Principal			9,280				13				690				8				8,590				9				(272	)			(3	)			8,862				10				483				6
Other items			86				-				44				105				42				-				(24	)			(36	)			66				-				(16	)			(20	)
Total book value			9,366				13				734				9				8,632				9				(296	)			(3	)			8,928				10				467				6
Investments
Mortgage-backed securities
Principal			11,448				16				(1,449	)			(11	)			12,897				13				740				6				12,157				14				93				1
Other items			(11	)			-				17				61				(28	)			-				(5	)			(22	)			(23	)			-				(14	)			(156	)
Total book value			11,437				16				(1,432	)			(11	)			12,869				13				735				6				12,134				14				79				1
Short-term money market			12,746				18				(9,698	)			(43	)			22,444				23				9,917				79				12,527				15				(6,009	)			(32	)
Other long-term investments			10				-				(2	)			(17	)			12				-				(5	)			(29	)			17				-				(7	)			(29	)
Total investments			24,193				34				(11,132	)			(32	)			35,325				36				10,647				43				24,678				29				(5,937	)			(19	)
Loans to other FHLBanks			-				-				-				-				-				-				-				-				-				-				-				-
Total earning assets			69,377				97				(28,496	)			(29	)			97,873				100				10,957				13				86,916				100				5,884				7
Other assets			2,010				3				1,677				504				333				-				(86	)			(21	)			419				-				70				20
Total assets		$	71,387				100	%		$	(26,819	)			(27	)		$	98,206				100	%		$	10,871				12			$	87,335				100	%		$	5,954				7
Other Business Activity (Notional)
Letters of Credit		$	4,415							$	(3,502	)			(44	)		$	7,917							$	994				14			$	6,923							$	425				7
Mandatory Delivery Contracts		$	79							$	(838	)			(91	)		$	917							$	869				1,810			$	48							$	(59	)			(55	)
Total Mission Asset Activity (Principal and Notional)		$	48,897				68	%		$	(21,326	)			(30	)		$	70,223				72	%		$	1,437				2			$	68,786				79	%		$	11,860				21

          (1)     The majority of these balances are hedging related basis adjustments.

Asset Composition - Average Balances (Dollars in millions)

		2009																2008																2007
						% of				Change From												% of				Change From												% of				Change From
						Total				Prior Year												Total				Prior Year												Total				Prior Year
		Balance				Assets				Amount				Pct				Balance				Assets				Amount				Pct				Balance				Assets				Amount				Pct
Advances
Principal		$	43,624				52	%		$	(16,349	)			(27	)%		$	59,973				64	%		$	10,671				22	%		$	49,302				59	%		$	3,528				8	%
Other items (1)			880				1				354				67				526				-				466				777				60				-				33				122
Total book value			44,504				53				(15,995	)			(26	)			60,499				64				11,137				23				49,362				59				3,561				8
Mortgage Loans Held for Portfolio
Principal			9,498				11				877				10				8,621				9				(121	)			(1	)			8,742				10				417				5
Other items			72				-				10				16				62				-				(13	)			(17	)			75				-				(13	)			(15	)
Total book value			9,570				11				887				10				8,683				9				(134	)			(2	)			8,817				10				404				5
Investments
Mortgage-backed securities
Principal			12,135				14				(488	)			(4	)			12,623				14				507				4				12,116				15				289				2
Other items			(17	)			-				13				43				(30	)			-				(14	)			(88	)			(16	)			-				(18	)			(900	)
Total book value			12,118				14				(475	)			(4	)			12,593				14				493				4				12,100				15				271				2
Short-term money market			18,166				22				5,960				49				12,206				13				(1,381	)			(10	)			13,587				16				545				4
Other long-term investments			11				-				(5	)			(31	)			16				-				(3	)			(16	)			19				-				(7	)			(27	)
Total investments			30,295				36				5,480				22				24,815				27				(891	)			(3	)			25,706				31				809				3
Loans to other FHLBanks			19				-				1				6				18				-				11				157				7				-				(3	)			(30	)
Total earning assets			84,388				100				(9,627	)			(10	)			94,015				100				10,123				12				83,892				100				4,771				6
Other assets			282				-				(60	)			(18	)			342				-				(59	)			(15	)			401				-				121				43
Total assets		$	84,670				100	%		$	(9,687	)			(10	)		$	94,357				100	%		$	10,064				12			$	84,293				100	%		$	4,892				6
Other Business Activity (Notional)
Letters of Credit		$	5,917							$	(1,977	)			(25	)		$	7,894							$	2,343				42			$	5,551							$	3,666				194
Mandatory Delivery Contracts		$	566							$	384				211			$	182							$	94				107			$	88							$	12				16
Total Mission Asset Activity (Principal and Notional)		$	59,605				70	%		$	(17,065	)			(22	)		$	76,670				81	%		$	12,987				20			$	63,683				76	%		$	7,623				14