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

FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 2010

OR

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission File Number 000-52004

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

Federally chartered corporation48-0561319
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
One Security Benefit Pl. Suite 100
Topeka, KS
66606
(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code: 785.233.0507
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o  Yes  o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. ¨ Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨ Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ¨ Yes  x No
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Shares outstanding
as of August 11, 2010
Class A Stock, par value $100  3,207,848
Class B Stock, par value $100  12,844,985
FEDERAL HOME LOAN BANK OF TOPEKA

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
3
Item 1.
Financial Statements
3
Statements of Condition
4
Statements of Income
5
Statements of Capital
6
Statements of Cash Flows
8
Notes to Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Selected Financial Data
40
Quarterly Overview
40
Financial Market Trends
42
Results of Operations
44
Financial Condition
52
Liquidity and Capital Resources
69
Risk Management
71
Critical Accounting Policies and Estimates
73
Recently Issued Accounting Standards
73
Recent Developments
73
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
75
Item 4.
Controls and Procedures
81
PART II
OTHER INFORMATION
82
Item 1.
Legal Proceedings
82
Item 1A.
Risk Factors
82
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
82
Item 3.
Defaults Upon Senior Securities
82
Item 4.
(Removed and Reserved)
82
Item 5.
Other Information
82
Item 6.
Exhibits
82
Exhibit 31.1
Certification of President and CEO Pursuant to Section 302 
Exhibit 31.2
Certification of First VP and CAO Pursuant to Section 302
Exhibit 32
Certification of President and CEO and First VP and CAO Pursuant to Section 906 

2
Important Notice about Information in this Quarterly Report

In this quarterly report, unless the context suggests otherwise, references to the “FHLBank,” “FHLBank Topeka,” “we,” “us” and “our” mean the Federal Home Loan Bank of Topeka, and “FHLBanks” mean the 12 Federal Home Loan Banks, including the FHLBank Topeka.
The information contained in this quarterly report is accurate only as of the date of this quarterly report and as of the dates specified herein.
The product and service names used in this quarterly report are the property of the FHLBank, and in some cases, the other FHLBanks. Where the context suggests otherwise, the products, services and company names mentioned in this quarterly report are the property of their respective owners.
Special Cautionary Notice Regarding Forward-looking Statements

The information contained in this Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements describing the objectives, projections, estimates or future predictions of the FHLBank’s operations. These statements may be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “is likely,” “could,” “estimate,” “expect,” “will,” or other variations of these terms. The FHLBank cautions that by their nature forward-looking statements involve risk or uncertainty and that actual results may differ materially from those expressed in any forward-looking statements as a result of such risks and uncertainties, including but not limited to: legislative and regulatory actions or changes; future economic and market conditions; changes in demand for advances or consolidated obligations of the FHLBank and/or of the FHLBank System; effects of derivative accounting treatment, other-than-temporary impairment (OTTI) accounting treatment and other accounting rule requirements; the effects of amortization/accretion; gains/losses on derivatives or on trading investments; the volume of eligible mortgage loans originated and sold by participating members to the FHLBank through its various mortgage finance products (Mortgage Partnership Finance® (MPF®) Program1); pricing of various mortgage finance products under the MPF Program by the MPF Provider since the FHLBank has only limited input on pricing through our participation on the MPF Governance Committee; and adverse developments or events affecting or involving other FHLBanks, housing government sponsored enterprises (GSE) or the FHLBank System in general. For additional information regarding these and other risks, see Item 1A – “Risk Factors” in our annual report on Form 10-K, incorporated by reference herein.
All forward-looking statements contained in this Form 10-Q are expressly qualified in their entirety by this cautionary notice. The reader should not place undue reliance on such forward-looking statements, since the statements speak only as of the date that they are made and the FHLBank has no obligation and does not undertake publicly to update, revise or correct any forward-looking statement for any reason.

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements
1   "Mortgage Partnership Finance," "MPF" and "eMPF" are registered trademarks of the Federal Home Loan Bank of Chicago. 
3
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CONDITION – Unaudited
(In thousands, except par value)
  
June 30,
2010
  
December 31,
2009
 
ASSETS      
Cash and due from banks $28,428  $494,553 
Interest-bearing deposits  43   54 
Federal funds sold  2,984,000   945,000 
Trading securities (Note 3)  7,312,844   8,012,676 
Held-to-maturity securities1 (Note 4)
  8,095,983   7,390,211 
Advances (Note 5)  21,016,485   22,253,629 
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $2,536 and $1,897 (Note 6)  3,567,489   3,333,784 
Accrued interest receivable  96,765   103,057 
Premises, software and equipment, net  13,173   14,575 
Derivative assets (Note 7)  41,137   15,946 
Other assets (Note 10)  63,647   68,126 
         
TOTAL ASSETS $43,219,994  $42,631,611 
         
LIABILITIES AND CAPITAL        
Liabilities:        
Deposits:        
Interest-bearing:        
Demand $139,991  $135,719 
Overnight  1,854,100   885,400 
Term  0   32,250 
Non-interest-bearing:        
Demand  3   0 
Other  23,944   15,388 
Total deposits  2,018,038   1,068,757 
         
Consolidated obligations, net (Note 8):  ��     
Discount notes  15,607,220   11,586,835 
Bonds  23,216,506   27,524,799 
Total consolidated obligations, net  38,823,726   39,111,634 
         
Mandatorily redeemable capital stock (Note 11)  28,227   22,437 
Accrued interest payable  145,905   153,710 
Affordable Housing Program (Note 9)  40,337   44,117 
Payable to Resolution Funding Corp. (REFCORP) (Note 10)  0   11,556 
Derivative liabilities (Note 7)  256,222   240,630 
Other liabilities  31,674   32,860 
         
TOTAL LIABILITIES  41,344,129   40,685,701 
         
Commitments and contingencies (Note 14)        
         
Capital (Note 11):        
Capital stock outstanding – putable:        
Class A ($100 par value; 3,074 and 2,936 shares issued and outstanding)  307,391   293,554 
Class B ($100 par value; 12,780 and 13,091 shares issued and outstanding)  1,278,002   1,309,142 
Total capital stock  1,585,393   1,602,696 
Retained earnings  314,770   355,075 
Accumulated other comprehensive income (loss):        
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities (Note 4)  (22,244)  (9,719)
Defined benefit pension plan – prior service cost  3   6 
Defined benefit pension plan – net loss  (2,057)  (2,148)
         
TOTAL CAPITAL  1,875,865   1,945,910 
         
TOTAL LIABILITIES AND CAPITAL $43,219,994  $42,631,611 
__________
1    Fair value: $8,023,932 and $7,192,957 as of June 30, 2010 and December 31, 2009, respectively.
The accompanying notes are an integral part of these financial statements. 
4
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF INCOME – Unaudited
(In thousands)
  
For the Three Months Ended
June 30,
  
For the Six Months Ended
June 30,
 
  2010  2009  2010  2009 
INTEREST INCOME:            
Interest-bearing deposits $39  $3,910  $70  $7,003 
Federal funds sold  1,155   704   2,172   1,987 
Trading securities  23,324   26,043   46,361   57,246 
Held-to-maturity securities  42,652   53,572   83,655   115,598 
Advances  49,672   88,980   99,082   212,144 
Prepayment fees on terminated advances  7,586   9,133   7,955   9,886 
Mortgage loans held for portfolio  42,529   39,439   84,173   79,147 
Overnight loans to other Federal Home Loan Banks  0   0   1   3 
Other  652   750   1,357   1,554 
Total interest income  167,609   222,531   324,826   484,568 
                 
INTEREST EXPENSE:                
Deposits  728   1,066   1,272   3,588 
Consolidated obligations:                
Discount notes  6,436   15,347   10,070   63,274 
Bonds  88,862   131,008   178,660   280,217 
Overnight loans from other Federal Home Loan Banks  3   0   3   0 
Mandatorily redeemable capital stock (Note 11)  59   79   121   373 
Other  185   239   417   531 
Total interest expense  96,273   147,739   190,543   347,983 
                 
NET INTEREST INCOME  71,336   74,792   134,283   136,585 
Provision for credit losses on mortgage loans  197   104   956   114 
NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION  71,139   74,688   133,327   136,471 
                 
OTHER INCOME (LOSS):                
Total other-than-temporary impairment losses on held-to-maturity securities (Note 4)  (2,398)  (18)  (19,783)  (1,077)
Portion of other-than-temporary impairment losses on held-to-maturity securities recognized in other comprehensive income (loss)  445   0   16,398   1,018 
Net other-than-temporary impairment losses on held-to-maturity securities  (1,953)  (18)  (3,385)  (59)
Net gain (loss) on trading securities (Note 3)  44,794   (25,718)  48,119   (15,845)
Net gain (loss) on derivatives and hedging activities (Note 7)  (94,157)  102,443   (179,540)  122,213 
Service fees  1,371   1,562   2,697   3,086 
Other  1,266   837   2,111   1,472 
Total other income (loss)  (48,679)  79,106   (129,998)  110,867 
                 
OTHER EXPENSES:                
Compensation and benefits  6,482   5,377   12,486   11,117 
Other operating  3,510   2,916   6,552   6,527 
Finance Agency  358   412   779   864 
Office of Finance  369   515   960   992 
Other  1,683   1,338   2,084   1,726 
Total other expenses  12,402   10,558   22,861   21,226 
                 
INCOME (LOSS) BEFORE ASSESSMENTS  10,058   143,236   (19,532)  226,112 
                 
Affordable Housing Program (Note 9)  0   11,700   0   18,496 
REFCORP (Note 10)  0   26,307   0   41,523 
Total assessments  0   38,007   0   60,019 
                 
NET INCOME (LOSS) $10,058  $105,229  $(19,532) $166,093 

The accompanying notes are an integral part of these financial statements.   
5
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CAPITAL FOR PERIODS ENDED JUNE 30, 2010 AND 2009 – Unaudited
(In thousands)
  
Capital Stock Class A1
  
Capital Stock Class B1
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Total
Capital
 
  Shares  
Par
Value
  Shares  
Par
Value
 
                      
BALANCE – DECEMBER 31, 2008  6,339  $633,941   16,064  $1,606,394  $156,922  $(2,012) $2,395,245 
Cumulative effect of adjustments to opening balance relating to non-credit portion of other-than-temporary impairment losses on held-to-maturity securities as of January 1, 2009                  3,349   (3,349)  0 
Proceeds from issuance of capital stock  44   4,390   1,803   180,329           184,719 
Repurchase/redemption of capital stock  (1,181)  (118,135)  (137)  (13,722)          (131,857)
Comprehensive income (loss):                            
Net income (loss)                  166,093         
Other comprehensive income (loss):                            
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities                      (1,018)    
Reclassification adjustment of non-credit portion of other-than-temporary impairment losses included in net income relating to held-to-maturity securities                      4     
Accretion of non-credit portion of other-than-temporary impairment losses on held-to-maturity securities                      481     
Amortization of prior service cost on defined benefit pension plan                      (5)    
Amortization of net loss on defined benefit pension plan                      99     
Total comprehensive income (loss)                          165,654 
Net reclassification of shares to mandatorily redeemable capital stock  (954)  (95,367)  (5,205)  (520,481)          (615,848)
Net transfer of shares between Class A and Class B  (1,320)  (132,004)  1,320   132,004           0 
Dividends on capital stock (Class A – 0.8%, Class B – 2.5%):                            
Cash payment                  (172)      (172)
Stock issued          200   19,963   (19,963)      0 
BALANCE – JUNE 30, 2009  2,928  $292,825   14,045  $1,404,487  $306,229  $(5,800) $1,997,741 
__________
1    Putable
The accompanying notes are an integral part of these financial statements.   
6
FEDERAL HOME LOAN BANK OF TOPEKA
(Exact name of registrant as specified in its charter)

Federally chartered corporation48-0561319
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
One Security Benefit Pl. Suite 100
Topeka, KS
66606
(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code: 785.233.0507
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o  Yes  o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. ¨ Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨ Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ¨ Yes  x No
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Shares outstanding
as of November 10, 2010
Class A Stock, par value $100  6,449,744
Class B Stock, par value $100  8,208,103
FEDERAL HOME LOAN BANK OF TOPEKA

TABLE OF CONTENTS

PART IFINANCIAL INFORMATION  3
Item 1.Financial Statements  3
Statements of Condition  4
Statements of Income  5
Statements of Capital  6
Statements of Cash Flows  8
Notes to Financial Statements  10
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations  37
Executive Level Overview  37
Financial Market Trends  40
Critical Accounting Policies and Estimates  41
Results of Operations  41
Financial Condition  50
Liquidity and Capital Resources  67
Risk Management  68
Recently Issued Accounting Standards  70
Recent Developments  70
Item 3.Quantitative and Qualitative Disclosures About Market Risk  72
Item 4.Controls and Procedures  78
PART IIOTHER INFORMATION  79
Item 1.Legal Proceedings  79
Item 1A.Risk Factors  79
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds  79
Item 3.Defaults Upon Senior Securities  79
Item 4.(Removed and Reserved)  79
Item 5.Other Information  79
Item 6.Exhibits  79
Exhibit 31.1Certification of President and CEO Pursuant to Section 302 
Exhibit 31.2Certification of First VP and CAO Pursuant to Section 302
Exhibit 32Certification of President and CEO and First VP and CAO Pursuant to Section 906 

2
Important Notice about Information in this Quarterly Report

In this quarterly report, unless the context suggests otherwise, references to the “FHLBank,” “FHLBank Topeka,” “we,” “us” and “our” mean the Federal Home Loan Bank of Topeka, and “FHLBanks” mean the 12 Federal Home Loan Banks, including the FHLBank Topeka.
The information contained in this quarterly report is accurate only as of the date of this quarterly report and as of the dates specified herein.
The product and service names used in this quarterly report are the property of the FHLBank, and in some cases, the other FHLBanks. Where the context suggests otherwise, the products, services and company names mentioned in this quarterly report are the property of their respective owners.

Special Cautionary Notice Regarding Forward-looking Statements

The information contained in this Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements describing the objectives, projections, estimates or future predictions of the FHLBank’s operations. These statements may be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “is likely,” “could,” “estimate,” “expect,” “will,” “intend,” “probable,” “project,” “should,” or their negat ives or other variations of these terms. The FHLBank cautions that by their nature forward-looking statements involve risk or uncertainty and that actual results may differ materially from those expressed in any forward-looking statements as a result of such risks and uncertainties, including but not limited to:
§Governmental actions, including legislative, regulatory or other developments that affect the FHLBank, its members, counterparties, or investors;
§Changes in economic and market conditions, including conditions in the mortgage, housing and capital markets;
§Changes in demand for advances or consolidated obligations of the FHLBank and/or of the FHLBank System;
§Effects of derivative accounting treatment, other-than-temporary impairment (OTTI) accounting treatment and other accounting rule requirements;
§The effects of amortization/accretion;
§Gains/losses on derivatives or on trading investments and the ability to enter into effective derivative instruments on acceptable terms;
§Volatility of market prices, rates and indices and the timing and volume of market activity;
§Membership changes, including changes resulting from member failures, mergers or changes in the principal place of business of members;
§Our ability to declare dividends or to pay dividends at rates consistent with past practices;
§Soundness of other financial institutions, including FHLBank members, nonmember borrowers, and the other FHLBanks;
§Changes in the value or liquidity of collateral underlying advances to FHLBank members or nonmember borrowers or collateral pledged by derivative counterparties;
§Competitive forces, including competition for loan demand, purchases of mortgage loans and access to funding;
§The ability of the FHLBank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services;
§The ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the FHLBank has joint and several liability;
§Changes in the credit standing at other FHLBanks, including the credit ratings assigned to those FHLBanks;
§Changes in the fair value and economic value of, impairments of, and risks associated with, the FHLBank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and related credit enhancement (CE) protections;
§
The volume of eligible mortgage loans originated and sold by participating members to the FHLBank through its various mortgage finance products (Mortgage Partnership Finance® (MPF®) Program1); and
§Adverse developments or events, including but not limited to legislative and regulatory developments, affecting or involving other FHLBanks, housing government sponsored enterprises (GSE) or the FHLBank System in general.

Readers of this report should not rely solely on the forward-looking statements and should consider all risks and uncertainties addressed throughout this report, as well as those discussed under Item 1A – “Risk Factors” in our annual report on Form 10-K, incorporated by reference herein.
All forward-looking statements contained in this Form 10-Q are expressly qualified in their entirety by this cautionary notice. The reader should not place undue reliance on such forward-looking statements, since the statements speak only as of the date that they are made and the FHLBank has no obligation and does not undertake publicly to update, revise or correct any forward-looking statement for any reason.
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

1  "Mortgage Partnership Finance," "MPF" and "eMPF" are registered trademarks of the Federal Home Loan Bank of Chicago. 
3
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CONDITION – Unaudited
(In thousands, except par value)
  
September 30,
2010
  
December 31,
2009
 
ASSETS      
Cash and due from banks $745  $494,553 
Interest-bearing deposits  78   54 
Federal funds sold  1,869,000   945,000 
Trading securities (Note 3)  4,009,897   8,012,676 
Held-to-maturity securities1 (Note 4)
  7,492,000   7,390,211 
Advances (Note 5)  20,506,458   22,253,629 
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $2,613 and $1,897 (Note 6)  3,937,391   3,333,784 
Accrued interest receivable  81,203   103,057 
Premises, software and equipment, net  12,776   14,575 
Derivative assets (Note 7)  27,859   15,946 
Other assets (Note 10)  63,885   68,126 
         
TOTAL ASSETS $38,001,292  $42,631,611 
         
LIABILITIES AND CAPITAL        
Liabilities:        
Deposits:        
Interest-bearing:        
Demand $176,864  $135,719 
Overnight  1,552,000   885,400 
Term  4,000   32,250 
Non-interest-bearing:        
Demand  47   0 
Other  43,358   15,388 
Total deposits  1,776,269   1,068,757 
         
Consolidated obligations, net (Note 8):        
Discount notes  10,538,259   11,586,835 
Bonds  23,291,703   27,524,799 
Total consolidated obligations, net  33,829,962   39,111,634 
         
Overnight loans from other Federal Home Loan Banks  120,000   0 
Mandatorily redeemable capital stock (Note 11)  25,506   22,437 
Accrued interest payable  131,876   153,710 
Affordable Housing Program (Note 9)  38,332   44,117 
Payable to Resolution Funding Corp. (REFCORP) (Note 10)  515   11,556 
Derivative liabilities (Note 7)  269,810   240,630 
Other liabilities  33,502   32,860 
         
TOTAL LIABILITIES  36,225,772   40,685,701 
         
Commitments and contingencies (Note 14)        
         
Capital (Note 11):        
Capital stock outstanding – putable:        
Class A ($100 par value; 5,815 and 2,936 shares issued and outstanding)  581,459   293,554 
Class B ($100 par value; 8,895 and 13,091 shares issued and outstanding)  889,545   1,309,142 
Total capital stock  1,471,004   1,602,696 
Retained earnings  327,235   355,075 
Accumulated other comprehensive income (loss):        
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities (Note 4)  (20,777)  (9,719)
Defined benefit pension plan – prior service cost  1   6 
Defined benefit pension plan – net loss  (1,943)  (2,148)
         
TOTAL CAPITAL  1,775,520   1,945,910 
         
TOTAL LIABILITIES AND CAPITAL $38,001,292  $42,631,611 
__________
1    Fair value: $7,459,047 and $7,192,957 as of September 30, 2010 and December 31, 2009, respectively.
The accompanying notes are an integral part of these financial statements. 
4
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF INCOME – Unaudited
(In thousands)
  
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
 
  2010  2009  2010  2009 
INTEREST INCOME:            
Interest-bearing deposits $78  $49  $148  $7,052 
Federal funds sold  1,281   1,214   3,453   3,201 
Trading securities  22,415   25,329   68,776   82,575 
Held-to-maturity securities  32,663   45,841   116,318   161,439 
Advances  50,731   68,310   149,813   280,454 
Prepayment fees on terminated advances  3,849   236   11,804   10,122 
Mortgage loans held for portfolio  44,176   40,259   128,349   119,406 
Overnight loans to other Federal Home Loan Banks  0   1   1   4 
Other  644   742   2,001   2,296 
Total interest income  155,837   181,981   480,663   666,549 
                 
INTEREST EXPENSE:                
Deposits  849   679   2,121   4,267 
Consolidated obligations:                
Discount notes  5,793   6,871   15,863   70,145 
Bonds  91,822   114,377   270,482   394,594 
Overnight loans from other Federal Home Loan Banks  4   0   7   0 
Securities sold under agreements to repurchase  3   0   3   0 
Mandatorily redeemable capital stock (Note 11)  125   66   246   439 
Other  188   238   605   769 
Total interest expense  98,784   122,231   289,327   470,214 
                 
NET INTEREST INCOME  57,053   59,750   191,336   196,335 
Provision for credit losses on mortgage loans  205   872   1,161   986 
NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION  56,848   58,878   190,175   195,349 
                 
OTHER INCOME (LOSS):                
Total other-than-temporary impairment losses on held-to-maturity securities (Note 4)  0   (7,014)  (17,482)  (8,091)
Net amount of other-than-temporary impairment losses on held-to-maturity securities reclassified to/(from) accumulated other comprehensive income (loss)  (165)  6,961   13,932   7,979 
Net other-than-temporary impairment losses on held-to-maturity securities  (165)  (53)  (3,550)  (112)
Net gain (loss) on trading securities (Note 3)  26,768   18,852   74,887   3,007 
Net gain (loss) on derivatives and hedging activities (Note 7)  (52,600)  (36,932)  (232,140)  85,281 
Service fees  1,276   1,558   3,973   4,644 
Other  1,229   962   3,340   2,434 
Total other income (loss)  (23,492)  (15,613)  (153,490)  95,254 
                 
OTHER EXPENSES:                
Compensation and benefits  6,226   5,459   18,712   16,576 
Other operating  3,565   3,337   10,117   9,864 
Finance Agency  358   412   1,137   1,276 
Office of Finance  382   278   1,342   1,270 
Other  463   420   2,547   2,146 
Total other expenses  10,994   9,906   33,855   31,132 
                 
INCOME BEFORE ASSESSMENTS  22,362   33,359   2,830   259,471 
                 
Affordable Housing Program (Note 9)  256   2,730   256   21,226 
REFCORP (Note 10)  515   6,126   515   47,649 
Total assessments  771   8,856   771   68,875 
                 
NET INCOME $21,591  $24,503  $2,059  $190,596 

The accompanying notes are an integral part of these financial statements.   
5
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CAPITAL FOR PERIODS ENDED JUNESEPTEMBER 30, 2010 AND 2009 – Unaudited
(In thousands)
  
Capital Stock Class A1
  
Capital Stock Class B1
  
Retained
Earnings
  
Accumulated Other
Comprehensive
Income (Loss)
  
Total
Capital
 
  Shares  Par Value  Shares  Par Value 
                      
BALANCE – DECEMBER 31, 2008  6,339  $633,941   16,064  $1,606,394  $156,922  $(2,012) $2,395,245 
Cumulative effect of adjustments to opening balance relating to non-credit portion of other-than-temporary impairment losses on held-to-maturity securities as of January 1, 2009                  3,349   (3,349)  0 
Proceeds from issuance of capital stock  57   5,697   3,030   302,968           308,665 
Repurchase/redemption of capital stock  (1,181)  (118,135)  (137)  (13,722)          (131,857)
Comprehensive income (loss):                            
Net income                  190,596         
Other comprehensive income (loss):                            
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities                      (7,979)    
Reclassification adjustment of non-credit portion of other-than-temporary impairment losses included in net income relating to held-to-maturity securities                      4     
Accretion of non-credit portion of other-than-temporary impairment losses on held-to-maturity securities                      594     
Amortization of prior service cost on defined benefit pension plan                      (7)    
Amortization of net loss on defined benefit pension plan                      120     
Total comprehensive income (loss)                          183,328 
Net reclassification of shares to mandatorily redeemable capital stock  (949)  (94,905)  (7,369)  (736,940)          (831,845)
Net transfer of shares between Class A and Class B  (1,320)  (132,004)  1,320   132,004           0 
Dividends on capital stock (Class A – 0.8%, Class B – 2.7%):                            
Cash payment                  (259)      (259)
Stock issued          309   30,968   (30,968)      0 
BALANCE – SEPTEMBER 30, 2009  2,946  $294,594   13,217  $1,321,672  $319,640  $(12,629) $1,923,277 
__________
1    Putable
The accompanying notes are an integral part of these financial statements.   
6
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CAPITAL FOR PERIODS ENDED SEPTEMBER 30, 2010 AND 2009 – Unaudited (continued)
(In thousands)
 
Capital Stock Class A1
  
Capital Stock Class B1
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Total
Capital
  
Capital Stock Class A1
  
Capital Stock Class B1
  
Retained
Earnings
  
Accumulated Other
Comprehensive
Income (Loss)
  
Total
Capital
 
 Shares  
Par
Value
  Shares  
Par
Value
  Shares  Par Value  Shares  Par Value 
                                          
BALANCE – DECEMBER 31, 2009  2,936  $293,554   13,091  $1,309,142  $355,075  $(11,861) $1,945,910   2,936  $293,554   13,091  $1,309,142  $355,075  $(11,861) $1,945,910 
Proceeds from issuance of capital stock
  32   3,229   540   53,990           57,219   36   3,593   619   61,910           65,503 
Repurchase/redemption of capital stock          (113)  (11,301)          (11,301)
Comprehensive income (loss):                                                        
Net income (loss)                  (19,532)        
Net income                  2,059         
Other comprehensive income (loss):                                                        
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities                      (16,398)                          (16,398)    
Reclassification adjustment of non-credit portion of other-than-temporary impairment losses included in net income relating to held-to-maturity securities                      2,301                           2,466     
Accretion of non-credit portion of other-than-temporary impairment losses on held-to-maturity securities                      1,572                           2,874     
Amortization of prior service cost on defined benefit pension plan                      (3)                          (5)    
Amortization of net loss on defined benefit pension plan                      91                           205     
Total comprehensive income (loss)                          (31,969)                          (8,799)
Net reclassification of shares to mandatorily redeemable capital stock  (10)  (1,025)  (941)  (94,104)          (95,129)  (795)  (79,504)  (1,360)  (136,042)          (215,546)
Net transfer of shares between Class A and Class B  116   11,633   (116)  (11,633)          0   3,638   363,816   (3,638)  (363,816)          0 
Dividends on capital stock (Class A – 0.8%, Class B – 3.0%):                                                        
Cash payment                  (166)      (166)                  (247)      (247)
Stock issued          206   20,607   (20,607)      0           296   29,652   (29,652)      0 
BALANCE – JUNE 30, 2010  3,074  $307,391   12,780  $1,278,002  $314,770  $(24,298) $1,875,865 
BALANCE – SEPTEMBER 30, 2010  5,815  $581,459   8,895  $889,545  $327,235  $(22,719) $1,775,520 
__________
1    Putable
 
The accompanying notes are an integral part of these financial statements.   
7
 
FEDERALFEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS – Unaudited
(In thousands)
 
For the Six Months Ended
June 30,
  
For the Nine Months Ended
September 30,
 
 2010  2009  2010  2009 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income (loss) $(19,532) $166,093  $2,059  $190,596 
                
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:                
Depreciation and amortization:                
Premiums and discounts on consolidated obligations, net  (7,703)  (65,517)  (14,371)  (74,653)
Concessions on consolidated obligation bonds  7,876   7,235   12,486   9,677 
Premiums and discounts on investments, net  (1,633)  (635)  (2,423)  (1,067)
Premiums, discounts and commitment fees on advances, net  (7,996)  (10,981)  (10,741)  (14,156)
Discounts on Housing and Community Development advances  (2)  (2)  (3)  (3)
Premiums, discounts and deferred loan costs on mortgage loans, net  946   1,943   1,936   2,506 
Fair value adjustments on hedged assets or liabilities  8,089   11,486   10,804   14,760 
Premises, software and equipment  2,090   1,994   2,947   3,044 
Other  88   94   200   113 
Provision for credit losses on mortgage loans  956   114   1,161   986 
Non-cash interest on mandatorily redeemable capital stock  119   364   243   429 
Net loss on other-than-temporarily impaired held-to-maturity securities  3,385   59 
Net other-than-temporary impairment losses on held-to-maturity securities  3,550   112 
Net realized (gain) loss on disposals of premises, software and equipment  20   3   50   3 
Other (gains) losses  (67)  (28)  (81)  (48)
Net (gain) loss on trading securities  (48,119)  15,845   (74,887)  (3,007)
(Gain) loss due to change in net fair value adjustment on derivative and hedging activities  72,411   (153,554)  140,114   (99,668)
(Increase) decrease in accrued interest receivable  6,293   29,622   21,840   47,887 
Change in net accrued interest included in derivative assets  (2,091)  479   (9,048)  (17,529)
(Increase) decrease in other assets  (1,513)  886   (1,946)  1,226 
Increase (decrease) in accrued interest payable  (7,800)  (80,591)  (21,828)  (81,805)
Change in net accrued interest included in derivative liabilities  (2,100)  52,867   (1,048)  47,905 
Increase (decrease) in Affordable Housing Program liability  (3,780)  13,706   (5,785)  14,017 
Increase (decrease) in REFCORP liability  (11,556)  41,523   (11,041)  22,141 
Increase (decrease) in other liabilities  3,042   (18,322)  4,112   (18,137)
Total adjustments  10,955   (151,410)  46,241   (145,267)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES  (8,577)  14,683   48,300   45,329 
                
CASH FLOWS FROM INVESTING ACTIVITIES:                
Net (increase) decrease in interest-bearing deposits  (12,090)  3,022,379   (108,425)  3,482,582 
Net (increase) decrease in Federal funds sold  (2,039,000)  (1,301,000)  (924,000)  (2,151,000)
Net (increase) decrease in short-term trading securities  510,884   (3,200,282)  3,809,480   (2,801,046)
Proceeds from maturities of and principal repayments on long-term trading securities  84,990   95,121   115,579   141,402 
Proceeds from sale of long-term trading securities  152,435   0   152,435   0 
Net (increase) decrease in short-term held-to-maturity securities  0   1,495,836   0   1,495,835 
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities  1,659,704   1,163,539   2,266,309   1,778,116 
Purchases of long-term held-to-maturity securities  (2,375,111)  0   (2,375,111)  0 
Principal collected on advances  22,990,689   155,100,915   32,428,470   226,586,265 
Advances made  (21,639,456)  (144,141,481)  (30,453,010)  (213,656,727)
Principal collected on mortgage loans held for portfolio  246,141   563,125   472,944   750,533 
Purchase or origination of mortgage loans held for portfolio  (482,212)  (758,275)  (1,077,396)  (970,620)
Proceeds from sale of foreclosed assets  3,754   0   6,550   0 
Principal collected on other loans made  795   743   1,202   1,124 
Proceeds from sale of premises, software and equipment  55   13   56   13 
Purchases of premises, software and equipment  (763)  (1,177)  (1,254)  (1,433)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES  (899,185)  12,039,456   4,313,829   14,655,044 
 
The accompanying notes are an integral part of these financial statements.   
8
 
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS (continued) – Unaudited
(In thousands)
 
For the Six Months Ended
June 30,
  
For the Nine Months Ended
September 30,
 
 2010  2009  2010  2009 
CASH FLOWS FROM FINANCING ACTIVITIES:            
Net increase (decrease) in deposits $947,981  $(408,571) $710,612  $(527,647)
Net proceeds from issuance of consolidated obligations:                
Discount notes  57,112,589   185,433,333   74,033,688   280,982,742 
Bonds  9,686,390   10,153,213   15,598,129   14,013,218 
Payments for maturing and retired consolidated obligations:                
Discount notes  (53,092,837)  (196,017,556)  (75,085,080)  (294,379,680)
Bonds  (14,122,577)  (10,598,235)  (19,989,252)  (14,003,635)
Net increase (decrease) in overnight loans from other FHLBanks  120,000   0 
Net increase (decrease) in other borrowings  (5,000)  (5,000)  (5,000)  (5,000)
Proceeds from financing derivatives  142   62   142   61 
Net interest payments received (paid) for financing derivatives  (52,646)  (38,820)  (80,411)  (70,745)
Proceeds from issuance of capital stock  57,219   184,719   65,503   308,665 
Payments for repurchase/redemption of capital stock  0   (131,857)  (11,301)  (131,857)
Payments for repurchase of mandatorily redeemable capital stock  (89,458)  (625,243)  (212,720)  (844,053)
Cash dividends paid  (166)  (172)  (247)  (259)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES  441,637   (12,054,127)  (4,855,937)  (14,658,190)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  (466,125)  12   (493,808)  42,183 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  494,553   75   494,553   75 
CASH AND CASH EQUIVALENTS AT END OF PERIOD $28,428  $87  $745  $42,258 
                
                
Supplemental disclosures:                
Interest paid $197,172  $460,197  $301,880  $603,213 
                
Affordable Housing Program payments $3,895  $4,958  $6,236  $7,471 
                
REFCORP payments $11,556  $0  $11,556  $25,508 
                
Net transfers of mortgage loans to real estate owned $3,599  $0  $5,257  $0 

The accompanying notes are an integral part of these financial statements.   
9
 
FEDERALFEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements (Unaudited)
JuneSeptember 30, 2010


NOTE 1 – FINANCIAL STATEMENT PRESENTATION

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

The FHLBank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2009. The interim financial statements presented herein should be read in conjunction with the FHLBank’s audited financial statements and notes thereto, which are included in the FHLBank’s annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 25, 2010 (annual report on Form 10-K). The notes to the interim financial statements highlight significant changes to the notes included in the annual report on Form 10-K.

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

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


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

Receivables–Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the Financial Accountings Standards Board (FASB) issued guidance expanding the disclosure requirements associated with receivables. In addition, the guidance introduced the concepts of financing receivables, portfolio segment and class of financing receivable.
§Financing receivables, as defined by this guidance, are financing arrangements that represent a contractual right to receive money on demand or on fixed or determinable dates and is recognized as an asset in the FHLBank’s statement of condition excluding: (1) receivables measured at fair value with changes in fair value reported in earnings; (2) receivables measured at lower of cost or fair value; (3) trade accounts receivable that have a contractual maturity of one year or less and that have arose from the sale of goods or services; (4) debt securities within the scope of the guidance for Investments-Debt and Equity Securities; or (5) a transferor’s interests in securitization transactions that are accounted for as sales and purchased beneficial interests in securitized financial assets within the scope of the guidance for Investme nts-Other.
§Portfolio segment represents the level at which the FHLBank develops and documents a systematic method for determining the allowance for credit losses. This guidance will require the FHLBank to expand its disclosures by portfolio segment to include: (1) a description of the FHLBank’s accounting policies and methodology used to estimate the allowance for credit loss and charging off of uncollectible financing receivables; (2) a roll-forward of the allowance for credit losses; (3) disclosures quantifying the effects of changes in the method of estimating the allowance for credit loss; (4) disclosure of the amount of significant purchases and sales of financing receivables during each reporting period;(5) disclosure of the balance of the allowance for credit loss by impairment method at the end of each period; and (6) the recorded investmentinvestmen t in financing receivables at the end of each period related to each balance in the allowance for credit loss disaggregated on the basis of impairment method.
§Class of financing receivable represents a subset of the portfolio segment that is determined on the basis of initial measurement attribute, risk characteristics and the FHLBank’s method of monitoring and assessing credit risk. In addition to the portfolio disclosures, the guidance will require the FHLBank to provide disclosures by class of financing receivable that include: (1) the recorded investment in impaired loans and the amount of recorded investment in which there is a related allowance for credit losses determined on an individual loan impairment basis; (2) the recorded investment in impaired loans for which there is no related allowance for credit losses determined on an individual loan impairment basis; (3) the total unpaid principal balance of the impaired loans along with the FHLBank’s policy for determining which loans are assessed for impairment on an individual loan basis; (4) the factors considered in determining if a loan is impaired; (5) qualitative and quantitative information about troubled debt restructurings; and (6) qualitative and quantitative information related to modified loans that have defaulted within 12 months of the modification.
The disclosure guidance that is applicable to activity that occurs during a reporting period is effective for the first interim or annual period beginning on or after December 15, 2010 (January 1, 2011 for the FHLBank) and the remaining disclosures shall be effective for the first interim or annual period ending on or after December 15, 2010 (December 31, 2010 for the FHLBank). Comparative disclosures are not required in the period of initial adoption for any previous period presented. The FHLBank has determined that adoption of this guidance will increase the FHLBank’s financial statement disclosures but will not affect the FHLBank’s financial condition, results of operations or cash flows.

10
Scope Exception Related to Embedded Credit Derivatives.Derivatives. In March 2010, the FASB issued amended guidance to clarify that the only type of embedded derivative feature related to the transfer of credit risk that is exempt from derivative bifurcation requirements is one that is in the form of subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination will need to assess those embedded credit derivatives to determine if bifurcation and separate accounting as a derivative is required. This g uidanceguidance is effective at the beginning of the first interim reporting period beginning after June 15, 2010 (July 1, 2010 for the FHLBank). Early adoption is permitted at the beginning of an entity’s first interim reporting period beginning after issuance of this guidance. The FHLBank has determined that adoption of this guidance willon July 1, 2010 did not impact the FHLBank’s financial condition, results of operations or cash flows.

10
Fair Value Measurements and Disclosures–Improving Disclosures about Fair Value Measurements. In January 2010, the FASB issued guidance amending existing fair value measurement and disclosure guidance. The amended guidance will require the FHLBank to: (1) disclose separately the transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; (2) present the purchases, sales, issuances, and settlements disclosed in the Level 3 roll forward on a gross basis, instead of net; (3) disaggregate the statement of condition assets and liabilities by class for disclosing the recurring and non-recurring fair value measurements; and (4) disclose the valuation technique used and inputs used in determining the fair value of each class of asset or liability that is classified as a Level 2 or Level 3 fair value measurement. The guidance related to the new disclosures and clarifications of existing disclosures was effective for interim and annual reporting periods beginning after December 15, 2009 (January 1, 2010 for the FHLBank) and the guidance related to the presentation of the Level 3 reconciling items at gross values is effective for interim and annual periods beginning after December 15, 2010 (January 1, 2011 for the FHLBank). Comparative disclosures are not required in the period of initial adoption for any previous periods presented. The adoption of this guidance increased the FHLBank’s financial statement disclosures but did not affect the FHLBank’s financial condition, results of operations or cash flows.

Accounting for Transfers of Financial Assets. In June 2009, the FASB issued guidance which is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. Key provisions of the guidance include: (1) the removal of the concept of qualifying special purpose entities; (2) the introduction of the concept of a participating interest, in circumstances in which a portion of a financial asset has been transferred; and (3) the requirement that to quali fy for sale accounting, the transferor must evaluate whether it maintains effective control over transferred financial assets either directly or indirectly. The guidance also requires enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement. This guidance was effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the FHLBank), for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The FHLBank adopted this guidance as of January 1, 2010. Its adoption did not have a material effect on the FHLBank’s financial condition, results of operations or cash flows.

Consolidation of Variable Interest Entities. In June 2009, the FASB issued guidance that amends the consolidation guidance for variable interest entities (VIEs). This guidance eliminates the exemption for qualifying special purpose entities, establishes a more qualitative evaluation to determine the primary beneficiary based on power and the obligation to absorb losses or right to receive benefits, and requires ongoing reassessments to determine if an entity must consolidate a VIE. The guidance also requires enhanced disclosures about how an entity’s involvement with a VIE affects its financial statements and its exposure to risks. The FHLBank’s investment in VIEs is limited to senior interests in mor tgage-backed securities. The FHLBank evaluated its investments in VIEs as of January 1, 2010 and determined that consolidation accounting is not required under the new accounting guidance because the FHLBank is not the primary beneficiary. The FHLBank does not have the power to significantly affect the economic performance of any of these investments because it does not act as a key decision-maker nor does it have the unilateral ability to replace a key decision-maker. Additionally, because the FHLBank holds the senior interest, rather than the residual interest, in these investments, the FHLBank does not have either the obligation to absorb losses of, or the right to receive benefits from, any of its investments in VIEs that could potentially be significant to the VIEs. Furthermore, the FHLBank does not design, sponsor, transfer, service, or provide credit or liquidity support in any of its investments in VIEs. This guidance is effective as of the beginning of the first annual reporting period that beg ins after November 15, 2009 (January 1, 2010 for the FHLBank), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter, with earlier application prohibited. The adoption of this guidance on January 1, 2010 did not have any impact on the FHLBank’s financial condition, results of operations or cash flows.


NOTE 3 – TRADING SECURITIES

Major Security Types: Trading securities as of JuneSeptember 30, 2010 and December 31, 2009 are summarized in the following table (in thousands):

 Fair Value  Fair Value 
 
June 30,
2010
  
December 31,
2009
  
September 30,
2010
  
December 31,
2009
 
Commercial paper $809,873  $2,589,560 
Certificates of deposit $2,450,126  $3,109,967   1,170,046   3,109,967 
Bank notes  0   89,996   0   89,996 
Commercial paper  2,829,015   2,589,560 
FHLBank1 obligations
  122,135   280,761   125,717   280,761 
Fannie Mae2 obligations
  401,525   390,559   409,133   390,559 
Freddie Mac2 obligations
  1,000,829   979,243   1,015,128   979,243 
Subtotal  6,803,630   7,440,086   3,529,897   7,440,086 
Mortgage-backed securities:                
Fannie Mae residential2
  298,132   337,902   282,072   337,902 
Freddie Mac residential2
  209,452   232,984   196,344   232,984 
Ginnie Mae residential3
  1,630   1,704   1,584   1,704 
Mortgage-backed securities  509,214   572,590   480,000   572,590 
TOTAL $7,312,844  $8,012,676  $4,009,897  $8,012,676 
__________
1See Note 16 for transactions with other FHLBanks.
2Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) are GSEs.government sponsored enterprises (GSEs). Both entities were placed into conservatorship by the Federal Housing Finance Agency (Finance Agency) on September 7, 2008 with the Finance Agency named as conservator.
3Government National Mortgage Association (Ginnie Mae) securities are guaranteed by the U.S. government.

 
11
 
Redemption Terms: The fair values of trading securities by contractual maturity as of JuneSeptember 30, 2010 and December 31, 2009 are shown in the following table (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

 
June 30,
2010
  
December 31,
2009
  
September 30,
2010
  
December 31,
2009
 
Due in one year or less $5,435,282  $5,789,523  $2,239,074  $5,789,523 
Due after one year through five years  384,479   707,338   278,485   707,338 
Due after five years through 10 years  983,869   943,225   1,012,338   943,225 
Due after 10 years  0   0   0   0 
Subtotal  6,803,630   7,440,086   3,529,897   7,440,086 
Mortgage-backed securities  509,214   572,590   480,000   572,590 
TOTAL $7,312,844  $8,012,676  $4,009,897  $8,012,676 

Net realized and unrealized net gains (losses) on trading securities during the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009 were as follows (in thousands):

  Three-month Period Ended  Six-month Period Ended 
  
June 30,
2010
  
June 30,
2009
  
June 30,
2010
  
June 30,
2009
 
Net unrealized gains (losses) on trading securities held at June 30, 2010 $41,667  $(25,363) $45,650  $(18,040)
Net realized and unrealized gains (losses) on trading securities sold or matured prior to June 30, 2010  3,127   (355)  2,469   2,195 
NET GAINS (LOSSES) ON TRADING SECURITIES RECORDED IN OTHER INCOME (LOSS) $44,794  $(25,718) $48,119  $(15,845)
  Three-month Period Ended  Nine-month Period Ended 
  
September 30,
2010
  
September 30,
2009
  
September 30,
2010
  
September 30,
2009
 
Net unrealized gains (losses) on trading securities held at September 30, 2010 $26,939  $17,679  $72,418  $(361)
Net realized and unrealized gains (losses) on trading securities sold or matured prior to September 30, 2010  (171)  1,173   2,469   3,368 
NET GAINS (LOSSES) ON TRADING SECURITIES RECORDED IN OTHER INCOME (LOSS) $26,768  $18,852  $74,887  $3,007 


NOTE 4 – HELD-TO-MATURITY SECURITIES

Major Security Types: Held-to-maturity securities as of JuneSeptember 30, 2010 are summarized in the following table (in thousands):

 
Carrying
Value
  
OTTI
Recognized
in AOCI
  
Amortized
Cost
  
Gross
Unrecognized
Gains
  
Gross
Unrecognized
Losses
  
Fair
Value
  
Carrying
Value
  
OTTI
Recognized
in AOCI
  
Amortized
Cost
  
Gross
Unrecognized
Gains
  
Gross
Unrecognized
Losses
  
Fair
Value
 
State or local housing agency obligations $104,669  $0  $104,669  $237  $22,487  $82,419  $101,864  $0  $101,864  $87  $10,159  $91,792 
Subtotal  104,669   0   104,669   237   22,487   82,419   101,864   0   101,864   87   10,159   91,792 
Mortgage-backed securities:                                                
Fannie Mae residential1
  3,157,027   0   3,157,027   31,323   3,321   3,185,029   2,920,051   0   2,920,051   27,272   1,612   2,945,711 
Freddie Mac residential1
  3,208,041   0   3,208,041   30,197   2,764   3,235,474   2,992,864   0   2,992,864   25,752   1,538   3,017,078 
Ginnie Mae residential2
  26,456   0   26,456   1,688   0   28,144   25,233   0   25,233   1,130   1   26,362 
Private-label mortgage-backed securities:                                                
Residential loans  1,557,579   21,288   1,578,867   4,341   134,834   1,448,374   1,410,003   19,981   1,429,984   8,169   104,827   1,333,326 
Commercial loans  40,064   0   40,064   1,822   0   41,886   40,044   0   40,044   2,226   0   42,270 
Home equity loans  1,930   956   2,886   85   577   2,394   1,795   796   2,591   205   432   2,364 
Manufactured housing loans  217   0   217   0   5   212   146   0   146   0   2   144 
Mortgage-backed securities  7,991,314   22,244   8,013,558   69,456   141,501   7,941,513   7,390,136   20,777   7,410,913   64,754   108,412   7,367,255 
TOTAL $8,095,983  $22,244  $8,118,227  $69,693  $163,988  $8,023,932  $7,492,000  $20,777  $7,512,777  $64,841  $118,571  $7,459,047 
__________
1Fannie Mae and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency on September 7, 2008.
2Ginnie Mae securities are guaranteed by the U.S. government.

 
12
 
Held-to-maturity securities as of December 31, 2009 are summarized in the following table (in thousands):

  
Carrying
Value
  
OTTI
Recognized
in AOCI
  
Amortized
Cost
  
Gross
Unrecognized
Gains
  
Gross
Unrecognized
Losses
  
Fair
Value
 
State or local housing agency obligations $115,858  $0  $115,858  $205  $152  $115,911 
Subtotal  115,858   0   115,858   205   152   115,911 
Mortgage-backed securities:                        
Fannie Mae residential1
  2,693,071   0   2,693,071   10,465   18,214   2,685,322 
Freddie Mac residential1
  2,690,569   0   2,690,569   13,711   16,995   2,687,285 
Ginnie Mae residential2
  29,876   0   29,876   1,479   33   31,322 
Private-label mortgage-backed securities:                        
Residential loans  1,818,370   7,616   1,825,986   930   197,325   1,629,591 
Commercial loans  40,108   0   40,108   645   0   40,753 
Home equity loans  2,025   2,103   4,128   0   1,674   2,454 
Manufactured housing loans  334   0   334   0   15   319 
Mortgage-backed securities  7,274,353   9,719   7,284,072   27,230   234,256   7,077,046 
TOTAL $7,390,211  $9,719  $7,399,930  $27,435  $234,408  $7,192,957 
__________
1Fannie Mae and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency on September 7, 2008.
2Ginnie Mae securities are guaranteed by the U.S. government.

The following table summarizes (in thousands) the held-to-maturity securities with unrecognized losses as of JuneSeptember 30, 2010. The unrecognized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrecognized loss position.

 Less Than 12 Months  12 Months or More  Total  Less Than 12 Months  12 Months or More  Total 
 
Fair
Value
  
Unrecognized
Losses
  
Fair
Value
  
Unrecognized
Losses
  
Fair
Value
  
Unrecognized
Losses
  
Fair
Value
  
Unrecognized
Losses
  
Fair
Value
  
Unrecognized
Losses
  
Fair
Value
  
Unrecognized
Losses
 
State or local housing agency obligations $40,988  $22,487  $0  $0  $40,988  $22,487  $43,225  $10,159  $0  $0  $43,225  $10,159 
Subtotal  40,988   22,487   0   0   40,988   22,487   43,225   10,159   0   0   43,225   10,159 
Mortgage-backed securities:                                                
Fannie Mae residential1
  17,473   1   630,704   3,320   648,177   3,321   34,867   18   487,058   1,594   521,925   1,612 
Freddie Mac residential1
  12,469   8   536,623   2,756   549,092   2,764   17,159   2   440,428   1,536   457,587   1,538 
Ginnie Mae residential2
  503   1   0   0   503   1 
Private-label mortgage-backed securities:                                                
Residential loans  8,821   20   1,088,862   134,814   1,097,683   134,834   38,294   185   784,593   104,642   822,887   104,827 
Home equity loans  0   0   1,537   577   1,537   577   0   0   1,535   432   1,535   432 
Manufactured housing loans  0   0   212   5   212   5   0   0   144   2   144   2 
Mortgage-backed securities  38,763   29   2,257,938   141,472   2,296,701   141,501   90,823   206   1,713,758   108,206   1,804,581   108,412 
TOTAL TEMPORARILY IMPAIRED SECURITIES $79,751  $22,516  $2,257,938  $141,472  $2,337,689  $163,988  $134,048  $10,365  $1,713,758  $108,206  $1,847,806  $118,571 
__________
1Fannie Mae and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency on September 7, 2008.
2Ginnie Mae securities are guaranteed by the U.S. government.
 
The following table summarizes (in thousands) the held-to-maturity securities with unrecognized losses as of December 31, 2009. The unrecognized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrecognized loss position.

  Less Than 12 Months  12 Months or More  Total 
  
Fair
Value
  
Unrecognized
Losses
  
Fair
Value
  
Unrecognized
Losses
  
Fair
Value
  
Unrecognized
Losses
 
State or local housing agency obligations $16,080  $151  $323  $1  $16,403  $152 
Subtotal  16,080   151   323   1   16,403   152 
Mortgage-backed securities:                        
Fannie Mae residential1
  95,574   457   1,829,590   17,757   1,925,164   18,214 
Freddie Mac residential1
  104,583   938   1,765,266   16,057   1,869,849   16,995 
Ginnie Mae residential2
  0   0   8,259   33   8,259   33 
Private-label mortgage-backed securities:                        
Residential loans  130,388   4,200   1,384,071   193,125   1,514,459   197,325 
Home equity loans  0   0   2,454   1,674   2,454   1,674 
Manufactured housing loans  0   0   319   15   319   15 
Mortgage-backed securities  330,545   5,595   4,989,959   228,661   5,320,504   234,256 
TOTAL TEMPORARILY IMPAIRED SECURITIES $346,625  $5,746  $4,990,282  $228,662  $5,336,907  $234,408 
__________
1Fannie Mae and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency on September 7, 2008.
2Ginnie Mae securities are guaranteed by the U.S. government.

 
13
 
Other-than-temporary Impairment: The FHLBank evaluates its individual held-to-maturity investment securities holdings in an unrealized loss position for other-than-temporary impairment (OTTI) at least quarterly, or more frequently if events or changes in circumstances indicate that these investments may be other-than-temporarily impaired. As part of this process, if the fair value of a security is less than its amortized cost basis, the FHLBank considers its intent to sell the debt security and whether it is more likely than not that the FHLBank will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, the FHLBank recognizes an OTTI charge in earnings equal to the entire difference between the debt security’ ;s amortized cost and its fair value as of the balance sheet date. For securities in unrealized loss positions that meet neither of these conditions, the FHLBank performs an analysis to determine if any of these securities are other-than-temporarily impaired.

For Agency mortgage-backed securities (MBS), the FHLBank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLBank from losses based on current expectations. As a result, the FHLBank has determined that, as of JuneSeptember 30, 2010, all of the gross unrealized losses on its Agency MBS are temporary.

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

For private-label commercial MBS, consistent with the other FHLBanks, the FHLBank assesses the creditworthiness of the issuer, the credit ratings assigned by the Nationally-Recognized Statistical Rating Organizations (NRSRO), the performance of the underlying loans and the credit support provided by the subordinate securities to make a conclusion as to whether the commercial MBS will be settled at an amount less than the amortized cost basis. The FHLBank had only one private-label commercial MBS as of JuneSeptember 30, 2010, and its fair value was higher than its amortized cost, so it was not reviewed for impairment.

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

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

To assess whether the entire amortized cost basis of securities will be recovered, the FHLBank of San Francisco, on behalf of the FHLBank, performed a cash flow analysis using two third-party models. The first third-party model considers borrower characteristics and the particular attributes of the loans underlying the FHLBank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which are based upon an assessment of the individual housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of ManagementManageme nt and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people. The FHLBank’s housing price forecast assumed current-to-trough home price declines ranging from 0 percent to 1210 percent over the three- to nine-month period beginning AprilJuly 1, 2010. Thereafter, home prices are projected to increase 0 percent in the first six months, 0.5year, 1 percent in the next six months,second year, 3 percent in the secondthird year, 4 percent in the fourth year, 5 percent in the fifth year, 6 percent in the sixth year and 4 percent in each subsequent year.

The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balances are reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cashcas h flows determined based on model approach reflects a best estimate scenario and includes a base case current-to-trough housing price forecast and a base case housing price recovery p ath.
path.

As a result of these security-level evaluations, the projected cash flows as of JuneSeptember 30, 2010 on six private-label MBS indicated that the FHLBank would not receive all principal and interest payments throughout the remaining lives of these securities. On four of these securities, the evaluation also resulted in additional credit losses recognized in earnings because the present value of the expected cash flows was less than the amortized cost. An additional four securities that have been previously identified as other-than-temporarily impaired have had improvements in their cash flows such that neither principal nor interest shortfalls are currently projected. Consequently, the FHLBank expects to recover the entire amortized cost of these securities and to amortize the entire OTTI balance through to maturity. The ten securitiessecuri ties on which OTTI charges have been recorded include eight private-label MBS that were identified as other-than-temporarily impaired prior to 2010 and two private-label MBS that were first identified as other-than-temporarily impaired in the first quarter of 2010. The OTTI amount related to non-credit losses represents the difference between the current fair value of the security and the present value of the FHLBank’s best estimate of the cash flows expected to be collected, which is calculated as described previously. The OTTI amount recognized in accumulated other comprehensive income (loss) (AOCI) is accreted to the carrying value of the security on a prospective basis over the remaining life of the security. That accretion increases the carrying value of the security and continues until the security is sold or matures, or there is an additional OTTI that is recognized in earnings. The FHLBank does not intend to sell any of these securities, nor is it more likely than not that the FHLBank will be requiredr equired to sell these securities before its anticipated recovery of the remaining amortized cost basis of the 10 OTTI securities.

 
14
 
For those securities for which an OTTI was determined to have occurred as of JuneSeptember 30, 2010 (that is, securities for which the FHLBank determined that it was more likely than not that the amortized cost basis would not be recovered), the following table presents a summary of the significant inputs used to measure the amount of credit loss recognized in earnings during this period as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before the FHLBank will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the private-label MBS investments in each category shown. The classification (prime, Alt-A and subprime) is based o nba sed on the model used to run the estimated cash flows for the CUSIP, which may not necessarily be the same as the classification at the time of origination.

Private-label Residential MBSPrivate-label Residential MBS Private-label Residential MBS
Year of
Securitization
 Significant Inputs  
Current Credit
Enhancement
 Significant Inputs
Current Credit
Enhancement
Prepayment Rates  Default Rates  Loss Severities Prepayment RatesDefault RatesLoss Severities
Weighted
Average
  
Rates/
Range
  
Weighted
Average
  
Rates/
Range
  
Weighted
Average
  
Rates/
Range
  
Weighted
Average
  
Rates/
Range
 
Weighted
Average
Rates/
Range
Weighted
Average
Rates/
Range
Weighted
Average
Rates/
Range
Weighted
Average
Rates/
Range
Prime:                        
Alt A: 
2005  6.8%  6.8%  13.9%  13.9%  41.6%  41.6%  3.3%  3.3%13.9%12.9%38.9%3.5%
                                
Alt-A:                                
2005  11.1   10.1-11.4   21.4   11.5-60.4   43.7   43.1-43.8   7.6   3.7-23.1 
                                
TOTAL  10.3%  6.8-11.4%  20.0%  11.5-60.4%  43.3%  41.6-43.8%  6.8%  3.3-23.1%

Home Equity Loans1
Home Equity Loans1
 
Home Equity Loans1
Year of Securitization Significant Inputs Significant Inputs
Prepayment Rates  Default Rates  Loss Severities Prepayment RatesDefault RatesLoss Severities
Weighted
Average
  
Rates/
Range
  
Weighted
Average
  
Rates/
Range
  
Weighted
Average
  
Rates/
Range
 
Weighted
Average
Rates/
Range
Weighted
Average
Rates/
Range
Weighted
Average
Rates/
Range
Subprime:                     
2003 and earlier  3.6%  3.3-3.8%  9.6%  8.4-11.5%  89.3%  84.2-92.6%2.5%1.7-4.2%8.5%6.5-11.3%85.5%81.4-96.4%
__________
1Current credit enhancement weighted average and range percentages are not considered meaningful for home equity loan investments, as the majority of these investments are third-party insured.

For the fivefour private-label securities on which OTTI charges were recognized during the three-month period ended JuneSeptember 30, 2010, the FHLBank’s reported balances as of JuneSeptember 30, 2010 are as follows (in thousands):

 
Unpaid
Principal
Balance
  
Amortized
Cost
  
Carrying
Value
  
Fair
Value
  
Unpaid
Principal
Balance
  
Amortized
Cost
  
Carrying
Value
  
Fair
Value
 
Private-label residential MBS:                        
Prime $9,563  $9,403  $9,045  $9,091 
Alt-A  41,205   38,496   20,256   20,256  $32,059  $31,708  $17,033  $17,397 
Total private-label residential MBS  50,768   47,899   29,301   29,347 
                                
Home equity loans:                                
Subprime  2,417   1,357   729   1,075   3,115   1,881   1,129   1,492 
                                
TOTAL $53,185  $49,256  $30,030  $30,422  $35,174  $33,589  $18,162  $18,889 

15
For the 10 private-label securities identified as other-than-temporarily impaired, the FHLBank’s reported balances as of JuneSeptember 30, 2010 are as follows (in thousands):

  
Unpaid
Principal
Balance
  
Amortized
Cost
  
Carrying
Value
  
Fair
Value
 
Private-label residential MBS:            
Prime $19,089  $18,756  $17,353  $18,216 
Alt-A  43,018   40,261   21,683   22,062 
Total private-label residential MBS  62,107   59,017   39,036   40,278 
                 
Home equity loans                
Subprime  5,081   2,591   1,795   2,364 
                 
TOTAL $67,188  $61,608  $40,831  $42,642 

  
Unpaid
Principal
Balance
  
Amortized
Cost
  
Carrying
Value
  
Fair
Value
 
Private-label residential MBS:            
Prime $21,220  $20,989  $19,413  $19,394 
Alt-A  44,001   41,292   21,580   21,749 
Total private-label residential MBS  65,221   62,281   40,993   41,143 
                 
Home equity loans:                
Subprime  5,202   2,886   1,930   2,394 
                 
TOTAL $70,423  $65,167  $42,923  $43,537 

15
The FHLBank recognized OTTI on its held-to-maturity securities portfolio for the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009 based on the FHLBank’s impairment analysis of its investment portfolio, as follows (in thousands):

  Three-month Period Ended 
  June 30, 2010  June 30, 2009 
  
OTTI
Related to
Credit
Losses
  
OTTI
Related to
Non-credit
Losses
  
Total
OTTI
Losses
  
OTTI
Related to
Credit
Losses
  
OTTI
Related to
Non-credit
Losses
  
Total
OTTI
Losses
 
Private-label residential MBS:                  
Prime $133  $0  $133  $0  $0  $0 
Alt-A  1,548   445   1,993   0   0   0 
Total private-label residential MBS  1,681   445   2,126   0   0   0 
                         
Home equity loans:                        
Subprime  272   0   272   18   0   18 
                         
TOTAL $1,953  $445  $2,398  $18  $0  $18 
 Six-month Period Ended  Three-month Period Ended 
 June 30, 2010  June 30, 2009  September 30, 2010  September 30, 2009 
 
OTTI
Related to
Credit
Losses
  
OTTI
Related to
Non-credit
Losses
  
Total
OTTI
Losses
  
OTTI
Related to
Credit
Losses
  
OTTI
Related to
Non-credit
Losses
  
Total
OTTI
Losses
  
OTTI
Related to
Credit
Losses
  
OTTI
Related to
Non-credit
Losses
  
Total
OTTI
Losses
  
OTTI
Related to
Credit
Losses
  
OTTI
Related to
Non-credit
Losses
  
Total
OTTI
Losses
 
Private-label residential MBS:                                    
Prime $256  $386  $642  $0  $0  $0  $0  $0  $0  $53  $6,961  $7,014 
Alt-A  2,131   16,012   18,143   0   0   0   59   (59)  0   0   0   0 
Total private-label residential MBS  2,387   16,398   18,785   0   0   0   59   (59)  0   53   6,961   7,014 
                                                
Home equity loans:                                                
Subprime  998   0   998   59   1,018   1,077   106   (106)  0   0   0   0 
                                                
TOTAL $3,385  $16,398  $19,783  $59  $1,018  $1,077  $165  $(165) $0  $53  $6,961  $7,014 


16
  Nine-month Period Ended 
  September 30, 2010  September 30, 2009 
  
OTTI
Related to
Credit
Losses
  
OTTI
Related to
Non-credit
Losses
  
Total
OTTI
Losses
  
OTTI
Related to
Credit
Losses
  
OTTI
Related to
Non-credit
Losses
  
Total
OTTI
Losses
 
Private-label residential MBS:                  
Prime $256  $254  $510  $53  $6,961  $7,014 
Alt-A  2,190   14,782   16,972   0   0   0 
Total private-label residential MBS  2,446   15,036   17,482   53   6,961   7,014 
                         
Home equity loans:                        
Subprime  1,104   (1,104)  0   59   1,018   1,077 
                         
TOTAL $3,550  $13,932  $17,482  $112  $7,979  $8,091 

The following table presents a roll-forward of OTTI activity for the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009 related to credit losses recognized in earnings and OTTI activity related to all other factors recognized in AOCI (in thousands):

 Three-month Period Ended  Three-month Period Ended 
 June 30, 2010  June 30, 2009  September 30, 2010  September 30, 2009 
 
OTTI
Related to
Credit Loss
  
OTTI
Related to
Other Factors
  
Total
OTTI
  
OTTI
Related to
Credit Loss
  
OTTI
Related to
Other Factors
  
Total
OTTI
  
OTTI
Related to
Credit Loss
  
OTTI
Related to
Other Factors
  
Total
OTTI
  
OTTI
Related to
Credit Loss
  
OTTI
Related to
Other Factors
  
Total
OTTI
 
Balance, beginning of period $3,140  $24,042  $27,182  $1,439  $4,034  $5,473  $5,158  $22,244  $27,402  $1,502  $3,882  $5,384 
Additional charge on securities for which OTTI was previously recognized1
  949   445   1,394   14   0   14 
Additional charge on securities for which OTTI was not previously recognized1
  0   0   0   53   6,961   7,014 
Reclassification adjustment of non-credit portion of OTTI included in net income  1,004   (1,004)  0   4   (4)  0   165   (165)  0   0   0   0 
Amortization of credit component of OTTI2
  65   0   65   45   0   45   188   0   188   (26)  0   (26)
Accretion of OTTI related to all other factors  0   (1,239)  (1,239)  0   (148)  (148)  0   (1,302)  (1,302)  0   (113)  (113)
Balance, end of period $5,158  $22,244  $27,402  $1,502  $3,882  $5,384  $5,511  $20,777  $26,288  $1,529  $10,730  $12,259 
__________
1For the three-month period ended JuneSeptember 30, 2010, securities previously impaired represent all securities that were impaired prior to AprilJuly 1, 2010. For the three-month period ended JuneSeptember 30, 2009, securities previously impaired represent all securities that were impaired prior to AprilJuly 1, 2009.
2The FHLBank amortizes the credit component based on estimated cash flows prospectively up to the amount of expected principal to be recovered. The discounted cash flows will move from the discounted loss value to the ultimate principal to be written off at the projected date of loss. If the expected cash flows improve, the amount of expected loss decreases which causes a corresponding decrease in the calculated amortization. Based on the level of improvement in the cash flows, the amortization could become a positive adjustment to income.

  Six-month Period Ended 
  June 30, 2010  June 30, 2009 
  
OTTI
Related to
Credit Loss
  
OTTI
Related to
Other Factors
  
Total
OTTI
  
OTTI
Related to
Credit Loss
  
OTTI
Related to
Other Factors
  
Total
OTTI
 
Balance, beginning of period1
 $2,034  $9,719  $11,753  $1,424  $3,349  $4,773 
Additional charge on securities for which OTTI was not previously recognized2
  426   16,398   16,824   41   1,018   1,059 
Additional charge on securities for which OTTI was previously recognized2
  658   0   658   14   0   14 
Reclassification adjustment of non-credit portion of OTTI included in net income  2,301   (2,301)  0   4   (4)  0 
Amortization of credit component of OTTI3
  (261)  0   (261)  19   0   19 
Accretion of OTTI related to all other factors  0   (1,572)  (1,572)  0   (481)  (481)
Balance, end of period $5,158  $22,244  $27,402  $1,502  $3,882  $5,384 
16
  Nine-month Period Ended 
  September 30, 2010  September 30, 2009 
  
OTTI
Related to
Credit Loss
  
OTTI
Related to
Other Factors
  
Total
OTTI
  
OTTI
Related to
Credit Loss
  
OTTI
Related to
Other Factors
  
Total
OTTI
 
Balance, beginning of period1
 $2,034  $9,719  $11,753  $1,424  $3,349  $4,773 
Additional charge on securities for which OTTI was not previously recognized2
  426   16,398   16,824   108   7,979   8,087 
Additional charge on securities for which OTTI was previously recognized2
  658   0   658   0   0   0 
Reclassification adjustment of non-credit portion of OTTI included in net income  2,466   (2,466)  0   4   (4)  0 
Amortization of credit component of OTTI3
  (73)  0   (73)  (7)  0   (7)
Accretion of OTTI related to all other factors  0   (2,874)  (2,874)  0   (594)  (594)
Balance, end of period $5,511  $20,777  $26,288  $1,529  $10,730  $12,259 
__________
1The FHLBank adopted the new OTTI guidance as of January 1, 2009 and recognized the cumulative effect of initial application totaling $3,349,000 as an adjustment to the retained earnings balance at January 1, 2009 with a corresponding adjustment to accumulated other comprehensive income (loss).AOCI.
2For the six-monthnine-month period ended JuneSeptember 30, 2010, securities previously impaired represent all securities that were impaired prior to January 1, 2010. For the six-monthnine-month period ended JuneSeptember 30, 2009, securities previously impaired represent all securities that were impaired prior to January 1, 2009.
3The FHLBank amortizes the credit component based on estimated cash flows prospectively up to the amount of expected principal to be recovered. The discounted cash flows will move from the discounted loss value to the ultimate principal to be written off at the projected date of loss. If the expected cash flows improve, the amount of expected loss decreases which causes a corresponding decrease in the calculated amortization. Based on the level of improvement in the cash flows, the amortization could become a positive adjustment to income.

Although there has been improvement in the fair value of the FHLBank’s held-to-maturity securities portfolio during 2010, the fair value of almost one-thirdapproximately one-fourth of this portfolio remains below the amortized cost of the securities due to interest rate volatility, illiquidity in the marketplace and credit deterioration in the U.S. mortgage markets since early 2008. However, the decline in fair value of these securities is considered temporary as the FHLBank expects to recover the entire amortized cost basis on the remaining held-to-maturity securities in unrecognized loss positions and neither intends to sell these securities nor is it more likely than not that the FHLBank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis.

Redemption Terms: The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of JuneSeptember 30, 2010 and December 31, 2009 are shown in the following table (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

 June 30, 2010  December 31, 2009  September 30, 2010  December 31, 2009 
 
Amortized
Cost
  
Carrying
Value
  
Fair
Value
  
Amortized
Cost
  
Carrying
Value
  
Fair
Value
  
Amortized
Cost
  
Carrying
Value
  
Fair
Value
  
Amortized
Cost
  
Carrying
Value
  
Fair
Value
 
Due in one year or less $0  $0  $0  $0  $0  $0  $0  $0  $0  $0  $0  $0 
Due after one year through five years  0   0   0   35   35   35   0   0   0   35   35   35 
Due after five years through 10 years  0   0   0   875   875   888   0   0   0   875   875   888 
Due after 10 years  104,669   104,669   82,419   114,948   114,948   114,988   101,864   101,864   91,792   114,948   114,948   114,988 
Subtotal  104,669   104,669   82,419   115,858   115,858   115,911   101,864   101,864   91,792   115,858   115,858   115,911 
Mortgage-backed securities  8,013,558   7,991,314   7,941,513   7,284,072   7,274,353   7,077,046   7,410,913   7,390,136   7,367,255   7,284,072   7,274,353   7,077,046 
TOTAL $8,118,227  $8,095,983  $8,023,932  $7,399,930  $7,390,211  $7,192,957  $7,512,777  $7,492,000  $7,459,047  $7,399,930  $7,390,211  $7,192,957 
17

The carrying value of the FHLBank’s MBS included net discounts of $34,235,000,$31,613,000, of which $5,158,000$5,511,000 represented credit related impairment discount and $22,244,000$20,777,000 represented non-credit related impairment discount, as of JuneSeptember 30, 2010. The carrying value of the FHLBank’s MBS included net discounts of $19,531,000, of which $2,034,000 represented credit related impairment discount and $9,719,000 represented non-credit related impairment discount, as of December 31, 2009. No premiums or discounts were recorded on other held-to-maturity securities as of JuneSeptember 30, 2010 and December 31, 2009.
 
17
Interest Rate Payment Terms: The following table details interest rate payment terms for held-to-maturity securities as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands):
 
June 30,
2010
  
December 31,
2009
  
September 30,
2010
  
December 31,
2009
 
Amortized cost of held-to-maturity securities other than mortgage-backed securities:            
Fixed rate $29,899  $36,838  $29,399  $36,838 
Variable rate  74,770   79,020   72,465   79,020 
Subtotal  104,669   115,858   101,864   115,858 
                
Amortized cost of held-to-maturity mortgage-backed securities:                
Pass-through securities:                
Fixed rate  551   619   488   619 
Variable rate  6,674   7,179   5,664   7,179 
Collateralized mortgage obligations:                
Fixed rate  1,614,055   1,924,420   1,438,530   1,924,420 
Variable rate  6,392,278   5,351,854   5,966,231   5,351,854 
Subtotal  8,013,558   7,284,072   7,410,913   7,284,072 
TOTAL $8,118,227  $7,399,930  $7,512,777  $7,399,930 
NOTE 5 – ADVANCES

Redemption Terms: As of JuneSeptember 30, 2010 and December 31, 2009, the FHLBank had advances outstanding at interest rates ranging from zero percent to 8.01 percent as of both period ends as summarized in the following table (in thousands):

 June 30, 2010  December 31, 2009  September 30, 2010  December 31, 2009 
Year of Maturity Amount  
Weighted
Average
Interest Rate
  Amount  
Weighted
Average
Interest Rate
  Amount  
Weighted
Average
Interest Rate
  Amount  
Weighted
Average
Interest Rate
 
Due in one year or less $4,314,185   2.02% $4,324,971   2.53% $4,063,805   2.00% $4,324,971   2.53%
Due after one year through two years  1,656,462   3.17   1,855,344   3.43   1,569,122   3.13   1,855,344   3.43 
Due after two years through three years  1,870,083   3.11   1,978,012   2.66   1,646,822   2.95   1,978,012   2.66 
Due after three years through four years  1,170,492   3.17   2,584,300   2.05   1,306,408   3.27   2,584,300   2.05 
Due after four years through five years  1,806,701   2.59   2,561,556   1.97   1,771,415   2.46   2,561,556   1.97 
Thereafter  9,676,459   1.82   8,525,486   2.25   9,518,039   1.81   8,525,486   2.25 
Total par value  20,494,382   2.23   21,829,669   2.39%  19,875,611   2.20%  21,829,669   2.39%
Discounts on HCD advances  (32)      (33)      (31)      (33)    
Discounts on other advances  (44,314)      (36,364)      (47,023)      (36,364)    
Hedging adjustments1
  566,449       460,357       677,901       460,357     
TOTAL $21,016,485      $22,253,629      $20,506,458      $22,253,629     
__________
1See Note 7 for a discussion of: (1) the FHLBank’s objectives for using derivatives; (2) the types of assets and liabilities hedged; and (3) the accounting for derivatives and the related assets and liabilities hedged.

In general, a borrower is charged a prepayment fee when an advance is repaid before its stated maturity. Prepayment fees are calculated using methods that make the FHLBank financially indifferent to the advance prepayments. The FHLBank’s advances outstanding include advances that contain call options that may be exercised with or without prepayment fees at the borrower’s discretion on specific dates (call dates) before the stated advance maturities (callable advances). The borrowers normally exercise their call options on these advances when interest rates decline (fixed rate advances) or spreads change (adjustable rate advances). The FHLBank’s advances as of JuneSeptember 30, 2010 and December 31, 2009 include callable advances totaling $6,882,013,000$6,859,126,000 and $7,318,356,000, respectively. Of these callable advances, theret here were $6,854,089,000$6,836,229,000 and $7,287,717,000 of variable rate advances as of JuneSeptember 30, 2010 and December 31, 2009, respectively. The following table summarizes the FHLBank’s advances by year of maturity, or by the next call date for callable advances (in thousands):

Year of Maturity or Next Call Date 
June 30,
2010
  
December 31,
2009
  
September 30,
2010
  
December 31,
2009
 
Due in one year or less $10,882,409  $11,388,149  $10,556,189  $11,388,149 
Due after one year through two years  1,421,183   1,653,166   1,384,171   1,653,166 
Due after two years through three years  1,618,036   1,455,504   1,389,775   1,455,504 
Due after three years through four years  1,038,326   1,465,523   1,190,227   1,465,523 
Due after four years through five years  1,303,882   1,189,298   1,263,097   1,189,298 
Thereafter  4,230,546   4,678,029   4,092,152   4,678,029 
TOTAL PAR VALUE $20,494,382  $21,829,669  $19,875,611  $21,829,669 

 
18
 
The FHLBank’s advances outstanding also include advances that contain conversion options that may be exercised at the FHLBank’s discretion on specific dates (conversion dates) before the stated advance maturities (convertible advances). With convertible advances, the FHLBank effectively purchases put options from the borrowers that allow the FHLBank to convert the fixed rate advances to variable rate advances. In exchange for the options, borrowers are charged interest rates that are below those for fixed rate advances with comparable maturities. The FHLBank normally exercises its conversion options on these advances when interest rates increase. The FHLBank’s advances as of JuneSeptember 30, 2010 and December 31, 2009 included convertible advances totaling $4,238,732,000$3,870,282,000 and $5,060,772,000, respectively. The followingfollo wing table summarizes the FHLBank’s advances by year of maturity, or by the next conversion or put date for convertible advances (in thousands):

Year of Maturity or Next Conversion or Put Date 
June 30,
2010
  
December 31,
2009
  
September 30,
2010
  
December 31,
2009
 
Due in one year or less $7,281,902  $7,902,839  $6,934,487  $7,902,839 
Due after one year through two years  1,499,001   1,658,833   1,362,697   1,658,833 
Due after two years through three years  1,714,158   1,603,212   1,594,847   1,603,212 
Due after three years through four years  1,217,017   2,595,225   1,345,433   2,595,225 
Due after four years through five years  1,544,601   2,505,681   1,435,815   2,505,681 
Thereafter  7,237,703   5,563,879   7,202,332   5,563,879 
TOTAL PAR VALUE $20,494,382  $21,829,669  $19,875,611  $21,829,669 

Interest Rate Payment Terms: The following table details additional interest rate payment terms for advances as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands):

 June 30, 2010  December 31, 2009  September 30, 2010  December 31, 2009 
 Amount  Percentage  Amount  Percentage  Amount  Percentage  Amount  Percentage 
Par value of advances:                        
Fixed rate $12,565,832   61.3% $13,401,295   61.4% $11,839,303   59.6% $13,401,295   61.4%
Variable rate  7,928,550   38.7   8,428,374   38.6   8,036,308   40.4   8,428,374   38.6 
TOTAL PAR VALUE $20,494,382   100.0% $21,829,669   100.0% $19,875,611   100.0% $21,829,669   100.0%


NOTE 6 – MORTGAGE LOANS HELD FOR PORTFOLIO

The Mortgage Partnership Finance® (MPF®) Program involves the FHLBank investing in mortgage loans, which are either funded by the FHLBank through or purchased from its participating members. The total loans represent held-for-portfolio loans under the MPF Program whereby participating FHLBank members originate and credit enhance home mortgage loans that are owned by the FHLBank. Depending upon a member’s product selection, however, the servicing rights can be retained or sold by the participating member. The FHLBank does not buy or own any mortgage servicing rights.

The following table presents information as of JuneSeptember 30, 2010 and December 31, 2009 on mortgage loans held for portfolio (in thousands):

 
June 30,
2010
  
December 31,
2009
  
September 30,
2010
  
December 31,
2009
 
Real Estate            
Fixed rate, medium-term1, single-family mortgages
 $865,731  $852,298  $1,011,002  $852,298 
Fixed rate, long-term, single-family mortgages  2,688,688   2,477,167   2,896,451   2,477,167 
Total par value  3,554,419   3,329,465   3,907,453   3,329,465 
Premiums  22,503   18,045   33,683   18,045 
Discounts  (8,949)  (9,798)  (8,283)  (9,798)
Deferred loan costs, net  1,419   1,145   2,075   1,145 
Hedging adjustments2
  633   (3,176)  5,076   (3,176)
Total before Allowance for Credit Losses on Mortgage Loans  3,570,025   3,335,681   3,940,004   3,335,681 
Allowance for Credit Losses on Mortgage Loans  (2,536)  (1,897)  (2,613)  (1,897)
MORTGAGE LOANS, NET $3,567,489  $3,333,784  $3,937,391  $3,333,784 
__________
1Medium-term defined as a term of 15 years or less.
2See Note 7 for a discussion of: (1) the FHLBank’s objectives for using derivatives; (2) the types of assets and liabilities hedged; and (3) the accounting for derivatives and the related assets and liabilities hedged.

The par value of mortgage loans held for portfolio outstanding as of JuneSeptember 30, 2010 and December 31, 2009 was comprised of government-insured or guaranteed (by the Federal Housing Administration, the Department of Veterans Affairs, the Rural Housing Service of the Department of Agriculture and the Department of Housing and Urban Development) loans totaling $386,031,000$425,745,000 and $322,245,000, respectively, and conventional, size-conforming mortgage loans totaling $3,168,388,000$3,481,708,000 and $3,007,220,000, respectively.

 
19
 
The FHLBank bases its allowance on management’s estimate of probable credit losses inherent in the FHLBank’s mortgage loan portfolio as of the Statement of Condition date. The estimate is based on an analysis of past and current performance of the FHLBank’s portfolio. The allowance for credit losses on mortgage loans for the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009 was as follows (in thousands):

 Three-month Period Ended  Six-month Period Ended  Three-month Period Ended  Nine-month Period Ended 
 
June 30,
2010
  
June 30,
2009
  
June 30,
2010
  
June 30,
2009
  
September 30,
2010
  
September 30,
2009
  
September 30,
2010
  
September 30,
2009
 
Balance, beginning of period $2,553  $889  $1,897  $884  $2,536  $882  $1,897  $884 
Provision for credit losses on mortgage loans  197   104   956   114   205   872   1,161   986 
Charge-offs  (214)  (111)  (317)  (116)  (128)  (68)  (445)  (184)
Balance, end of period $2,536  $882  $2,536  $882  $2,613  $1,686  $2,613  $1,686 

Mortgage loans are considered impaired when, based on current information and events, it is probable that the FHLBank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement. The FHLBank considers the mortgage loans to be collateral dependent, and thus measures impairment based on the fair value of the collateral. As of JuneSeptember 30, 2010 and December 31, 2009, the FHLBank had no recorded investments in impaired mortgage loans.

The credit enhancement is an obligation on the part of the participating member that ensures the retention of credit risk on loans it originates on behalf of or sells to the FHLBank. The FHLBank pays the participating member a credit enhancement fee for managing this portion of the credit risk in the pool of loans. These fees are paid monthly based upon the remaining unpaid principal balance for the pool of loans. Credit enhancement fees paid by the FHLBank to participating members for assuming the credit enhancement obligation are netted against interest income when paid. During the three-month periods ended JuneSeptember 30, 2010 and 2009, credit enhancement fees paid by the FHLBank to participating members totaled $704,000$743,000 and $703,000,$668,000, respectively. Credit enhancement fees paid by the FHLBank to participating members totaled $1,236,0 00$ 1 ,979,000 and $1,177,000$1,845,000 for the six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009, respectively.


NOTE 7 – DERIVATIVES AND HEDGING ACTIVITIES

Nature of Business Activity: The FHLBank enters into various types of derivatives to manage its exposure to changes in interest rates. The FHLBank may utilize derivatives to adjust the effective maturity, re-pricing frequency or option characteristics of financial instruments to achieve risk management objectives. The FHLBank uses derivatives in three ways: (1) by designating them as either a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction; (2) by acting as an intermediary; or (3) in asset/liability management (i.e., an economic hedge). For example, the FHLBank uses derivatives in its overall interest rate risk management to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the inter est rate sensitivity of assets (advances, investments and/or mortgage loans), and/or to adjust the interest rate sensitivity of advances, investments or mortgage loans to approximate more closely the interest rate sensitivity of liabilities.

Consistent with Finance Agency regulation, the FHLBank enters into derivatives only to reduce the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve risk management objectives and to act as an intermediary between its members and counterparties. Derivatives are used when they represent the most cost-effective alternative to achieve the FHLBank’s financial and risk management objectives. Accordingly, the FHLBank may enter into derivatives that do not necessarily qualify for hedge accounting (economic hedges as discussed above)hedges).

Common ways in which the FHLBank uses derivatives are to:
§Reduce funding costs by combining an interest rate swap with a consolidated obligation, as the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation;
§Reduce the interest rate sensitivity and repricingre-pricing gaps of assets and liabilities;
§Preserve a favorable interest rate spread between the yield of an asset (e.g., an advance) and the cost of the related liability (e.g., the consolidated obligation used to fund the advance). Without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the advance does not match a change in the interest rate on the consolidated obligation;
§Mitigate the adverse earnings effects of the shortening or extension of certain assets (e.g., advances or mortgage assets) and liabilities; and
§Manage embedded options in assets and liabilities.

Types of Derivatives: The FHLBank’s Risk Management Policy (RMP) establishes guidelines for its use of derivatives. The FHLBank commonly enters into interest rate swaps (including callable and putable swaps), swaptions and interest rate cap and floor agreements (collectively, derivatives) to manage its exposure to changes in interest rates.

Interest Rate Swaps – An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable interest rate index for the same period of time. The variable interest rate received by the FHLBank in most derivative agreements is the London Interbank Offered Rate ( LIBOR). Interest rate swaps are recorded at fair value and reported in derivative assets or derivative liabilities on the Statements of Condition.

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Swaptions – A swaption is an option on a swap that gives the buyer the right to enter into a specified interest rate swap at a certain time in the future. When used as a hedge, a swaption can protect the FHLBank against future interest rate changes. The FHLBank purchases both payer swaptions and receiver swaptions to decrease its interest rate risk exposure related to the prepayment of certain assets. A payer swaption is the option to make fixed interest payments at a later date and a receiver swaption is the option to receive fixed interest payments at a later date. Premiums paid to acquire swaptions are accounted for as the fair value of the derivative at inception of the hedge. Swaptions are reported at fair value and reported in derivative assets or deriv ative liabilities on the Statements of Condition.

Interest Rate Caps and Floors – In an interest rate cap agreement, a cash flow is generated if the price or interest rate of an underlying variable rises above a certain threshold (or “cap”) price or interest rate. In an interest rate floor agreement, a cash flow is generated if the price or interest rate of an underlying variable falls below a certain threshold (or “floor”) price or interest rate. The FHLBank purchases interest rate caps and floors to hedge option risk on the MBS held in the FHLBank’s trading and held-to-maturity portfolios and to hedge embedded caps or floors in the FHLBank’s advances. Premiums paid to acquire caps or floors are accounted for as the fair value of the derivative at inception of the hedge. Interest rate caps and floors are recorded at fair value and reported in derivative assets or derivative liabilities on the Statements of Condition.
Effectiveness Measurements: Highly effective hedges that use interest rate swaps as the hedging instrument and that meet certain stringent criteria can qualify for “shortcut” fair value hedge accounting. Shortcut hedge accounting allows for the assumption of no ineffectiveness, which means that the change in fair value of the hedged item can be assumed to be equal to the change in fair value of the derivative. This is in contrast to fair value hedges designated under the “long haul” hedge accounting method, where the change in fair value of the hedged item must be measured separately from the derivative, and for which effectiveness testing must be performed regularly with results falling within established tolerances. As of July 1, 2008, the FHLBank discontinued using shortcut hedge accounting for all new derivative transactions.

Long haul hedge accounting method – For hedge transactions that are not designated under the shortcut hedge accounting method, the FHLBank completes effectiveness testing at inception and on a monthly basis thereafter. The rolling regression method and the dollar offset method are used by the FHLBank to assess hedge effectiveness.
§Under the rolling regression method, the FHLBank models a series of 30 data points (market values) for the hedged item and the hedge instrument, using market data from the previous 30 calendar month-ends. A regression analysis is performed comparing the values of the hedged financial item and the hedge instrument. The hedge is deemed highly effective if: (1) the slope of the regression line is between or equal to -0.80 and -1.20, meaning that on average the change in value of the hedged financial instrument is offset by the change in value of the hedge instrument; (2) the correlation is 0.80 or higher; and (3) the calculated F statistic is 4 or higher. For new hedge transactions, the 30 data points (market values) are generated using historical market data.
§The dollar-offset method measures the change in fair value between periods on the hedge instrument versus the change in the fair value between periods on the hedged item. Under this methodology, at inception, the FHLBank evaluates effectiveness of the hedging relationship using interest rate scenario stress testing (interest rate shock scenarios). Thereafter on a monthly basis, the FHLBank compares the change in cumulative fair value of the hedging instrument to the change in cumulative fair value of the hedged item. The amount of dollar-offset between the two items must fall into a range of between 80 percent and 120 percent in order for the hedge to be deemed effective.

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

§Consolidated obligations;
Consolidated Obligations – While consolidated obligations are the joint and several obligations of the 12 FHLBanks, each FHLBank is individually a counterparty to derivatives associated with specific debt issues. For instance, in a typical transaction involving more than one FHLBank, fixed rate consolidated obligation bonds are issued for one or more FHLBanks, including FHLBank Topeka. In connection with its share of the bond issuance, FHLBank Topeka simultaneously enters into a matching derivative in which the counterparty pays fixed cash flows to FHLBank Topeka designed to mirror in timing and amount the cash outflows FHLBank Topeka pays on the consolidated obligation. Such transactions are designated as fair value hedges. In this type of transaction, FHLBank Topeka typically pays the derivative counterparty a variable cash flow that closely matches the interest payments it receives on short-term or variable rate advances. Note, though, that most of the FHLBank’s swapped consolidated obligation bonds are fixed rate, callable bonds where the FHLBank is the sole issuer of the particular debt issue. The swap transaction with a counterparty for debt upon which the FHLBank is the sole issuer follows the same process reflected above (simultaneous, matching terms, etc.). This intermediation between the capital and derivatives markets permits the FHLBank to raise funds at costs lower than would otherwise be available through the issuance of simple fixed or variable rate consolidated obligations in the capital markets.
§Advances;

§Mortgage loans;
Advances – With the issuance of a convertible advance, the FHLBank purchases from the member an option that enables the FHLBank to convert an advance from a fixed rate to a variable rate if interest rates increase. Once the FHLBank exercises its option to convert an advance to an at-the-market variable rate, the member then owns the option to terminate the converted advance without fee or penalty on the conversion date and each interest rate reset date thereafter. The FHLBank hedges a convertible advance by entering into a cancelable derivative with a non-member counterparty where the FHLBank pays a fixed rate and receives a variable rate. The derivative counterparty may cancel the derivative on a put d ate. This type of hedge is designated as a fair value hedge. The counterparty’s decision to cancel the derivative would normally occur in a rising rate environment. If the option is in-the-money, the derivative is cancelled by the derivative counterparty at par (i.e., without any premium or other payment to the FHLBank). When the derivative is cancelled, the FHLBank exercises its option to convert the advance to a variable rate. If a convertible advance is not prepaid by the member upon conversion to an at-the-market variable rate advance (i.e., callable variable rate advance), any hedge-related unamortized basis adjustment is amortized as a yield adjustment.
§Firm commitment strategies;
§Investments; and
§Anticipated debt issuance.

 
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When fixed rate advances are issued to one or more borrowers, the FHLBank can either fund the advances with fixed rate consolidated obligations with the same tenor or simultaneously enter into a matching derivative in which the counterparty receives fixed cash flows from the FHLBank designed to mirror in timing and amount the cash inflows the FHLBank receives on the advance. Such transactions are designated as fair value hedges. In this type of transaction, the FHLBank typically receives from the derivative counterparty a variable cash flow that closely matches the interest payments on short-term discount notes or swapped consolidated obligation bonds.

The optionality embedded in certain financial instruments held by the FHLBank can create interest rate risk. For example, when a member prepays an advance, the FHLBank could suffer lower future income if the principal portion of the prepaid advance were invested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, the FHLBank generally charges a prepayment fee on an advance that makes it financially indifferent to a member’s decision to prepay the advance. When the FHLBank offers advances (other than short-term advances) that a member may prepay without a prepayment fee, it usually finances such advances with callable debt or otherwise hedges the option being sold to the member.
Mortgage Loans – The FHLBank invests in fixed rate mortgage loans through the MPF Program. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected lives of these investments, depending on changes in estimated future cash flows, which usually occur as a result of interest rate changes. The FHLBank may manage the interest rate and prepayment risk associated with mortgages through a combination of debt issuance and derivatives. The FHLBank issues both callable and non-callable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLBank may use derivatives in conjunction with debt issuance to bette r match the expected prepayment characteristics of its mortgage loan portfolio.

Interest rate caps and floors, swaptions and callable swaps may also be used to hedge prepayment risk on the mortgage loans. Although these derivatives are valid economic hedges against the prepayment risk of the portfolio of mortgage loans, they are not specifically linked to individual loans and, therefore, do not receive either fair value or cash flow hedge accounting. The derivatives are marked-to-market through earnings.
Firm Commitment Strategies – Commitments that obligate the FHLBank to purchase closed fixed rate mortgage loans from its members are considered derivatives. Accordingly, each mortgage purchase commitment is recorded as a derivative asset or derivative liability at fair value, with changes in fair value recognized in current period earnings. When a mortgage purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan and amortized accordingly.

The FHLBank may also hedge a firm commitment for a forward starting advance or consolidated obligation bond through the use of an interest rate swap. In this case, the swap functions as the hedging instrument for both the hedging relationship involving the firm commitment and the subsequent hedging relationship involving the advance or bond. The basis movement associated with the firm commitment is rolled into the basis of the advance or bond at the time the commitment is terminated and the advance or bond is issued. The basis adjustment is then amortized into interest income or expense over the life of the advance or bond.

Investments – The FHLBank invests in U.S. Treasury securities, U.S. Agency securities, GSE securities, MBS and the taxable portion of state or local housing finance agency securities. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The FHLBank may manage against prepayment and duration risks by funding investment securities with consolidated obligations that have call features. The FHLBank may also manage the risk arising from changing market prices and volatility of investment securities by entering into derivatives (economic hedges) that offset the changes in fair value or cash flows of the securities. The FHLBank’s derivatives currently associated wit h investment securities (currently includes interest rate caps, floors and swaps) are designated as economic hedges with the changes in fair values of the derivatives being recorded as “Net gain (loss) on derivatives and hedging activities” in other income (loss) on the Statements of Income. The investment securities hedged with interest rate swaps are classified as “trading” with the changes in fair values recorded as “Net gain (loss) on trading securities” in other income (loss) on the Statements of Income.

Interest rate caps and floors, swaptions and callable swaps may also be used to hedge prepayment and option risk on the MBS held in the FHLBank’s trading and held-to-maturity portfolios. Most of these derivatives are purchased interest rate caps that hedge interest rate caps embedded in the FHLBank’s trading and held-to-maturity variable rate Agency MBS. Although these derivatives are valid economic hedges against the prepayment and option risk of the portfolio of MBS, they are not specifically linked to individual investment securities and, therefore, do not receive either fair value or cash flow hedge accounting. The derivatives are marked-to-market through earnings.

Anticipated Debt Issuance – The FHLBank may enter into interest rate swaps for the anticipated issuance of fixed rate consolidated obligation bonds to hedge the variability in forecasted interest payments associated with fixed rate debt that has not yet been issued. The interest rate swap is terminated upon issuance of the fixed rate bond, with the realized gain or loss on the interest rate swap recorded in AOCI. Realized gains and losses reported in AOCI are recognized as earnings in the periods in which earnings are affected by the cash flows of the fixed rate bonds.

Managing Credit Risk on Derivatives: The FHLBank is subject to credit risk due to nonperformance by counterparties to the derivative agreements. The degree of counterparty risk on derivative agreements depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The FHLBank manages counterparty credit risk through credit analyses and collateral requirements and by following the requirements set forth in its RMP. Based on credit analyses and collateral requirements, FHLBank management does not anticipate any credit losses on its derivative agreements and therefore, there is no adjustment to the derivatives for nonperformance risk as of JuneSeptember 30, 2010.

The contractual or notional amount of derivatives reflects the involvement of the FHLBank in the various classes of financial instruments. The notional amount of derivatives does not measure the credit risk exposure of the FHLBank, and the maximum credit exposure of the FHLBank is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing favorable derivatives if the counterparty defaults, and the related collateral, if any, is of less value to the FHLBank.
 
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As of JuneSeptember 30, 2010 and December 31, 2009, the FHLBank’s maximum credit risk, as defined above, was approximately $102,513,000$95,408,000 and $81,162,000, respectively. These totals include $20,916,000$27,873,000 and $18,825,000, respectively, of net accrued interest receivable. In determining its maximum credit risk, the FHLBank considers accrued interest receivables and payables and the legal right to offset derivative assets and liabilities by counterparty. The FHLBank held cash with a fair value of $63,925,000$68,327,000 and $65,221,000 as collateral as of JuneSeptember 30, 2010 and December 31, 2009, respectively. Additionally, collateral with respect to derivatives with member institutions includes collateral assigned to the FHLBank, as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBank. The maximum credit risk reflected above applicable to a single counterparty was $34,167,000$32,206,000 and $38,604,000 as of JuneSeptember 30, 2010 and December 31, 2009, respectively. The counterparty was different each period. Counterparty credit exposure by rating (lower of Moody’s Investors Service or Standard & Poor’s) as of JuneSeptember 30, 2010, is indicated in the following table (in thousands):

 AAA  AA   A  
Member1
  Total  AAA  AA   A  
Member1
  Total 
Total net exposure at fair value $2,100  $37,319  $58,257  $4,837  $102,513  $1,657  $32,869  $56,809  $4,073  $95,408 
Cash collateral held  0   14,502   46,874   0   61,376   0   17,504   50,045   0   67,549 
Net positive exposure after cash collateral  2,100   22,817   11,383   4,837   41,137   1,657   15,365   6,764   4,073   27,859 
Other collateral  0   0   0   4,837   4,837   0   0   0   4,073   4,073 
Net exposure after collateral $2,100  $22,817  $11,383  $0  $36,300  $1,657  $15,365  $6,764  $0  $23,786 
                                        
Notional amount $36,000  $10,368,023  $20,965,533  $247,689  $31,617,245  $36,000  $9,951,848  $20,499,213  $390,095  $30,877,156 
__________
1Collateral held with respect to derivatives with members represents either collateral physically held by or on behalf of the FHLBank or collateral assigned to the FHLBank as evidenced by a written security agreement and held by the member for the benefit of the FHLBank.

Counterparty credit exposure by rating (lower of Moody’s Investors Service or Standard & Poor’s) as of December 31, 2009, is indicated in the following table (in thousands):

  AA   A  
Member1
  Total 
Total net exposure at fair value $7,552  $70,123  $3,487  $81,162 
Cash collateral held  0   65,216   0   65,216 
Net positive exposure after cash collateral  7,552   4,907   3,487   15,946 
Other collateral  0   0   3,487   3,487 
Net exposure after collateral $7,552  $4,907  $0  $12,459 
                 
Notional amount $11,960,704  $21,339,770  $186,237  $33,486,711 
__________
1Collateral held with respect to derivatives with members represents either collateral physically held by or on behalf of the FHLBank or collateral assigned to the FHLBank as evidenced by a written security agreement and held by the member for the benefit of the FHLBank.

Certain of the FHLBank’s derivative instruments contain provisions that require the FHLBank to post additional collateral with its counterparties if there is deterioration in the FHLBank’s credit rating. If the FHLBank’s credit rating is lowered by an NRSRO, the FHLBank would be required to deliver additional collateral on derivative instruments in which the FHLBank has a net derivative liability recorded on its Statements of Condition. The aggregate fair value of all derivative instruments with derivative counterparties containing credit-risk-related contingent features that were classified as net derivative liabilities as of JuneSeptember 30, 2010 and December 31, 2009 was $358,078,000$469,872,000 and $331,756,000, respectively, for which the FHLBank had posted collateral with a fair value of $105,164,000$201,480,000 and $93,064,000, respect ively,re spectively, in the normal course of business. If the FHLBank’s credit rating had been lowered one level (e.g., from AAA to AA), the FHLBank would have been required to deliver an additional $151,440,000$154,469,000 and $140,703,000 of collateral to its derivative counterparties as of JuneSeptember 30, 2010 and December 31, 2009, respectively. The FHLBank’s credit rating has not changed in the previous twelve months.

The FHLBank transacts a significant portion of its derivatives with major banks and primary broker/dealers. Some of these banks and broker/dealers or their affiliates buy, sell and distribute consolidated obligations. No single entity dominates the FHLBank’s derivatives business. Assets pledged as collateral by the FHLBank to these counterparties are discussed more fully in Note 14. The FHLBank is not a derivatives dealer and thus does not trade derivatives for short-term profit.

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Intermediary DerivativesDerivatives: – To assist its members in meeting their hedging needs, the FHLBank acts as an intermediary between the members and other counterparties by entering into offsetting derivatives. This intermediation allows smaller members access to the derivatives market. The derivatives used in intermediary activities do not qualify for hedge accounting treatment and are separately marked-to-market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the FHLBank. Gains and losses are recorded in other income (loss) and presented as “Net gain (loss) on derivatives and hedging activities.”

As of JuneSeptember 30, 2010 and December 31, 2009, the notional principal of derivative agreements in which the FHLBank is an intermediary was $276,000,000 and $306,000,000, respectively.

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

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

The following table represents outstanding notional balances and fair values (includes net accrued interest receivable or payable on the derivatives) of the derivatives outstanding by type of derivative and by hedge designation as of JuneSeptember 30, 2010 (in thousands):

 June 30, 2010  September 30, 2010 
 
Asset
Positions
  
Liability
Positions
  
Derivative
Assets
  
Derivative
Liabilities
  
Asset
Positions
  
Liability
Positions
  
Derivative
Assets
  
Derivative
Liabilities
 
 Notional  Fair Value  Notional  Fair Value  Notional  Fair Value  Notional  Fair Value  Notional  Fair Value  Notional  Fair Value  Notional  Fair Value  Notional  Fair Value 
Fair value hedges:                                                
Interest rate swaps $12,390,134  $384,130  $8,845,569  $(555,294) $5,957,678  $36,976  $15,278,025  $(208,140) $10,356,899  $411,825  $8,642,809  $(667,317) $5,492,678  $30,307  $13,507,030  $(285,799)
Interest rate caps/floors  25,000   0   169,000   (2,150)  72,000   (478)  122,000   (1,672)  0   0   189,000   (3,117)  47,000   (820)  142,000   (2,297)
Total fair value hedges  12,415,134   384,130   9,014,569   (557,444)  6,029,678   36,498   15,400,025   (209,812)  10,356,899   411,825   8,831,809   (670,434)  5,539,678   29,487   13,649,030   (288,096)
                                                                
Economic hedges:                                                                
Interest rate swaps  806,000   8,719   1,542,320   (205,437)  776,000   (63)  1,572,320   (196,655)  2,031,000   9,873   1,700,820   (215,114)  1,191,000   993   2,540,820   (206,234)
Interest rate caps/floors  7,457,533   113,114   272,000   (756)  3,115,500   40,291   4,614,033   72,067   7,163,533   88,902   541,000   (438)  3,118,500   32,237   4,586,033   56,227 
Mortgage delivery commitments  97,853   1,352   11,836   (2)  97,853   1,352   11,836   (2)  142,093   484   110,002   (202)  142,093   484   110,002   (202)
Total economic hedges  8,361,386   123,185   1,826,156   (206,195)  3,989,353   41,580   6,198,189   (124,590)  9,336,626   99,259   2,351,822   (215,754)  4,451,593   33,714   7,236,855   (150,209)
                                                                
TOTAL $20,776,520  $507,315  $10,840,725  $(763,639) $10,019,031  $78,078  $21,598,214  $(334,402) $19,693,525  $511,084  $11,183,631  $(886,188) $9,991,271  $63,201  $20,885,885  $(438,305)
                                                                
Total derivative fair value                     $78,078      $(334,402)                     $63,201      $(438,305)
Fair value of cash collateral delivered to counterparties                      0       105,164                       0       201,480 
Fair value of cash collateral received from counterparties1
                      (36,941)      (26,984)                      (35,342)      (32,985)
NET DERIVATIVE FAIR VALUE                     $41,137      $(256,222)                     $27,859      $(269,810)
__________
1The FHLBank held cash with a fair value of $63,925,000$68,327,000 as collateral as of JuneSeptember 30, 2010. Derivative fair values are netted by counterparty where such legal right exists and offset against fair value recognized for the obligation to return cash collateral held or the right to reclaim cash collateral pledged to the particular counterparty. If these netted amounts are positive, they are classified as a derivative asset and, if negative, a derivative liability. Exposure can change on a daily basis; and thus, there is often a short lag time between the date the exposure is identified, collateral is requested and when the collateral is actually received. Likewise, there is a lag time for excess collateral to be returned. Excess collateral held by the FHLBank as of JuneSeptember 30, 2010 resulted in positive exposure (fair value plus net accrue daccrued interest) with one counterparty being recorded as a derivative liability.

 
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The following table represents outstanding notional balances and fair values (includes net accrued interest receivable or payable on the derivatives) of the derivatives outstanding by type of derivative and by hedge designation as of December 31, 2009 (in thousands):

  December 31, 2009 
  
Asset
Positions
  
Liability
Positions
  
Derivative
Assets
  
Derivative
Liabilities
 
  Notional  Fair Value  Notional  Fair Value  Notional  Fair Value  Notional  Fair Value 
Fair value hedges:                        
Interest rate swaps $10,308,282  $293,155  $11,198,806  $(520,682) $9,594,108  $75,442  $11,912,980  $(302,969)
Interest rate caps/floors  92,000   688   17,000   (87)  42,000   130   67,000   471 
Total fair value hedges  10,400,282   293,843   11,215,806   (520,769)  9,636,108   75,572   11,979,980   (302,498)
                                 
Economic hedges:                                
Interest rate swaps  3,421,000   15,964   1,716,654   (169,152)  2,410,000   (61,227)  2,727,654   (91,961)
Interest rate caps/floors  6,270,733   129,516   429,000   (1,617)  3,311,000   60,717   3,388,733   67,182 
Mortgage delivery commitments  2,307   5   30,929   (317)  2,307   5   30,929   (317)
Total economic hedges  9,694,040   145,485   2,176,583   (171,086)  5,723,307   (505)  6,147,316   (25,096)
                                 
TOTAL $20,094,322  $439,328  $13,392,389  $(691,855) $15,359,415  $75,067  $18,127,296  $(327,594)
                                 
Total derivative fair value                     $75,067      $(327,594)
Fair value of cash collateral delivered to counterparties                      0       93,064 
Fair value of cash collateral received from counterparties1
                      (59,121)      (6,100)
NET DERIVATIVE FAIR VALUE                     $15,946      $(240,630)
__________
1The FHLBank held cash with a fair value of $65,221,000 as collateral as of December 31, 2009. Derivative fair values are netted by counterparty where such legal right exists and offset against fair value recognized for the obligation to return cash collateral held or the right to reclaim cash collateral pledged to the particular counterparty. If these netted amounts are positive, they are classified as a derivative asset and, if negative, a derivative liability. Exposure can change on a daily basis; and thus, there is often a short lag time between the date the exposure is identified, collateral is requested and when the collateral is actually received. Likewise, there is a lag time for excess collateral to be returned. Excess collateral held by the FHLBank as of December 31, 2009 resulted in positive exposure (fair value plus ne t accrued interest) with one counterparty being recorded as a derivative liability.

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

For the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009, the FHLBank recorded net gain (loss) on derivatives and hedging activities as follows (in thousands):

 Three-month Period Ended  Six-month Period Ended  Three-month Period Ended  Nine-month Period Ended 
 
June 30,
2010
  
June 30,
2009
  
June 30,
2010
  
June 30,
2009
  
September 30,
2010
  
September 30,
2009
  
September 30,
2010
  
September 30,
2009
 
Derivatives and hedge items in fair value hedging relationships:                        
Interest rate swaps $(3,025) $2,802  $(2,112) $5,805  $(1,950) $232  $(4,062) $6,037 
Interest rate caps/floors  (13)  3   (45)  0   (19)  0   (64)  0 
Total net gain (loss) related to fair value hedge ineffectiveness  (3,038)  2,805   (2,157)  5,805   (1,969)  232   (4,126)  6,037 
                                
Derivatives not designated as hedging instruments:                                
Economic hedges:                                
Interest rate swaps  (40,943)  69,937   (53,478)  100,761   (22,538)  (23,684)  (76,016)  77,077 
Interest rate caps/floors  (37,153)  47,892   (95,247)  47,696   (23,894)  967   (119,141)  48,663 
Net interest settlements  (17,091)  (16,202)  (33,927)  (30,577)  (7,431)  (15,687)  (41,358)  (46,264)
Mortgage delivery commitments  4,081   (1,988)  5,289   (1,471)  3,242   1,250   8,531   (221)
Intermediary transactions:                                
Interest rate swaps  (13)  (12)  (23)  (19)  (10)  (15)  (33)  (34)
Interest rate caps/floors  0   11   3   18   0   5   3   23 
Total net gain (loss) related to derivatives not designated as hedging instruments  (91,119)  99,638   (177,383)  116,408   (50,631)  (37,164)  (228,014)  79,244 
                                
Net gains (losses) on derivatives and hedging activities $(94,157) $102,443  $(179,540) $122,213  $(52,600) $(36,932) $(232,140) $85,281 

 
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The FHLBank carries derivative instruments at fair value on its Statements of Condition. Any change in the fair value of derivatives designated under a fair value hedging relationship is recorded each period in current period earnings. Fair value hedge accounting allows for the offsetting fair value of the hedged risk in the hedged item to also be recorded in current period earnings. For the three-month periods ended JuneSeptember 30, 2010 and 2009, the FHLBank recorded net gain (loss) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank’s net interest income as follows (in thousands):

 Three-month Period Ended  Three-month Period Ended 
 June 30, 2010  June 30, 2009  September 30, 2010  September 30, 2009 
 
Gain (Loss) on
Derivatives
  
Gain (Loss) on
Hedged Items
  
Net Fair
Value Hedge
Ineffectiveness
  
Effect of
Derivatives
on Net
Interest
Income1
  
Gain (Loss) On
Derivatives
  
Gain (Loss) On
Hedged Items
  
Net Fair
Value Hedge
Ineffectiveness
  
Effect of
Derivatives
on Net
Interest
Income1
  
Gain (Loss) on
Derivatives
  
Gain (Loss) on
Hedged Items
  
Net Fair
Value Hedge
Ineffectiveness
  
Effect of
Derivatives
on Net
Interest
Income1
  
Gain (Loss) On
Derivatives
  
Gain (Loss) On
Hedged Items
  
Net Fair
Value Hedge
Ineffectiveness
  
Effect of
Derivatives
on Net
Interest
Income1
 
Advances $(138,994) $137,750  $(1,244) $(77,575) $220,535  $(217,362) $3,173  $(72,087) $(114,719) $113,604  $(1,115) $(66,537) $(76,296) $73,290  $(3,006) $(78,345)
Consolidated obligation bonds  72,589   (74,733)  (2,144)  83,138   (89,299)  89,572   273   65,479   30,850   (31,638)  (788)  63,653   32,952   (29,839)  3,113   71,485 
Consolidated obligation discount notes  (193)  543   350   221   3,643   (4,284)  (641)  2,388   1,849   (1,915)  (66)  701   (1,226)  1,351   125   2,213 
TOTAL $(66,598) $63,560  $(3,038) $5,784  $134,879  $(132,074) $2,805  $(4,220) $(82,020) $80,051  $(1,969) $(2,183) $(44,570) $44,802  $232  $(4,647)
__________
1The differentials between accruals of interest receivables and payables on derivatives designated as fair value hedges as well as the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the designated underlying hedged item.

For the six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009, the FHLBank recorded net gain (loss) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank’s net interest income as follows (in thousands):

 Six-month Period Ended  Nine-month Period Ended 
 June 30, 2010  June 30, 2009  September 30, 2010  September 30, 2009 
 
Gain (Loss) on
Derivatives
  
Gain (Loss) on
Hedged Items
  
Net Fair
Value Hedge
Ineffectiveness
  
Effect of
Derivatives
on Net
Interest
Income1
  
Gain (Loss) On
Derivatives
  
Gain (Loss) On
Hedged Items
  
Net Fair
Value Hedge
Ineffectiveness
  
Effect of
Derivatives
on Net
Interest
Income1
  
Gain (Loss) on
Derivatives
  
Gain (Loss) on
Hedged Items
  
Net Fair
Value Hedge
Ineffectiveness
  
Effect of
Derivatives
on Net
Interest
Income1
  
Gain (Loss) On
Derivatives
  
Gain (Loss) On
Hedged Items
  
Net Fair
Value Hedge
Ineffectiveness
  
Effect of
Derivatives
on Net
Interest
Income1
 
Advances $(167,103) $165,360  $(1,743) $(158,931) $322,093  $(325,031) $(2,938) $(134,433) $(281,822) $278,964  $(2,858) $(225,468) $245,797  $(251,741) $(5,944) $(212,778)
Consolidated obligation bonds  129,147   (129,876)  (729)  171,868   (157,535)  165,776   8,241   149,610   159,997   (161,514)  (1,517)  235,521   (124,583)  135,937   11,354   221,095 
Consolidated obligation discount notes  (235)  550   315   263   3,529   (3,027)  502   4,168   1,614   (1,365)  249   964   2,303   (1,676)  627   6,381 
TOTAL $(38,191) $36,034  $(2,157) $13,200  $168,087  $(162,282) $5,805  $19,345  $(120,211) $116,085  $(4,126) $11,017  $123,517  $(117,480) $6,037  $14,698 
__________
1The differentials between accruals of interest receivables and payables on derivatives designated as fair value hedges as well as the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the designated underlying hedged item.

There were no amounts for the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009 that were reclassified into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two-month period thereafter. As of JuneSeptember 30, 2010, no amounts relating to hedging activities remain in AOCI.


NOTE 8 – CONSOLIDATED OBLIGATIONS

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

The Finance Agency and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance. The FHLBanks can, however, pass on any scheduled calendar slot and not issue any global bullet consolidated obligation bonds upon agreement of 8 of the 12 FHLBanks. Consolidated obligation bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits as to maturities. Consolidated obligation discount notes, which are issued to raise short-term funds, are issued at less than their face amounts and redeemed at par when they mature.

 
2624
 
Redemption Terms: Following is a summary of the FHLBank’s participation in consolidated obligation bonds outstanding as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands):

 June 30, 2010  December 31, 2009  September 30, 2010  December 31, 2009 
Year of Maturity Amount  
Weighted
Average
Interest Rate
  Amount  
Weighted
Average
Interest Rate
  Amount  
Weighted
Average
Interest Rate
  Amount  
Weighted
Average
Interest Rate
 
Due in one year or less $6,360,900   2.07% $10,874,777   1.34% $7,121,400   1.86% $10,874,777   1.34%
Due after one year through two years  4,236,420   2.03   3,650,320   2.38   3,848,720   1.32   3,650,320   2.38 
Due after two years through three years  2,642,300   2.42   2,494,300   2.76   2,568,000   2.83   2,494,300   2.76 
Due after three years through four years  2,110,000   3.56   2,465,000   3.32   1,937,500   3.35   2,465,000   3.32 
Due after four years through five years  1,532,500   2.88   1,875,000   3.26   918,500   2.39   1,875,000   3.26 
Thereafter  5,999,175   4.45   6,002,400   4.50   6,532,000   3.83   6,002,400   4.50 
Total par value  22,881,295   2.92%  27,361,797   2.61%  22,926,120   2.59%  27,361,797   2.61%
Premium  59,471       19,403       56,930       19,403     
Discount  (11,651)      (13,332)      (10,686)      (13,332)    
Hedging adjustments1
  287,391       156,931       319,339       156,931     
TOTAL $23,216,506      $27,524,799      $23,291,703      $27,524,799     
__________
1
See Note 7 for a discussion of: (1) the FHLBank’s objectives for using derivatives; (2) the types of assets and liabilities hedged; and (3) the accounting for derivatives and the related assets and liabilities hedged.

The FHLBank’s participation in consolidated obligation bonds outstanding as of JuneSeptember 30, 2010 and December 31, 2009 includes callable bonds totaling $8,504,175,000$7,768,000,000 and $8,630,400,000, respectively. The FHLBank uses the unswapped callable bonds for financing its callable advances (Note 5), mortgage-backed securities (Notes 3 and 4) and MPF mortgage loans (Note 6). Contemporaneous with a majority of its fixed rate callable bond issues, the FHLBank will also enter into interest rate swap agreements (in which the FHLBank generally pays a variable rate and receives a fixed rate) with call features that mirror the options in the callable bonds (a sold callable swap). The combined sold callable swap and callable debt transaction allows the FHLBank to obtain attractively priced variable rate financing.

The following table summarizes the FHLBank’s participation in consolidated obligation bonds outstanding by year of maturity, or by the next call date for callable bonds as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands):

Year of Maturity or Next Call Date 
June 30,
2010
  
December 31,
2009
 
Year of Maturity of Next Call Date 
September 30,
2010
  
December 31,
2009
 
Due in one year or less $12,253,075  $17,648,177  $12,862,400  $17,648,177 
Due after one year through two years  4,581,420   3,625,320   4,735,720   3,625,320 
Due after two years through three years  2,777,300   2,306,300   2,653,000   2,306,300 
Due after three years through four years  1,545,000   1,850,000   1,172,500   1,850,000 
Due after four years through five years  407,500   550,000   216,500   550,000 
Thereafter  1,317,000   1,382,000   1,286,000   1,382,000 
TOTAL PAR VALUE $22,881,295  $27,361,797  $22,926,120  $27,361,797 

Interest Rate Payment Terms: The following table summarizes interest rate payment terms for consolidated obligation bonds as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands):

 
June 30,
2010
  
December 31,
2009
  
September 30,
2010
  
December 31,
2009
 
Fixed rate $16,867,120  $16,377,525  $16,259,620  $16,377,525 
Variable rate  3,983,500   6,567,500 
Step ups  3,010,000   3,622,000   2,613,000   3,622,000 
Variable rate  2,250,000   6,567,500 
Range bonds  654,175   693,400   70,000   693,400 
Step downs  100,000   100,000   0   100,000 
Zero coupon  0   1,372   0   1,372 
TOTAL PAR VALUE $22,881,295  $27,361,797  $22,926,120  $27,361,797 

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

 Book Value  Par Value  
Weighted
Average
Interest Rates
  Book Value  Par Value  
Weighted
Average
Interest Rates
 
June 30, 2010 $15,607,220  $15,613,655   0.17%
September 30, 2010 $10,538,259  $10,540,897   0.19%
                        
December 31, 2009 $11,586,835  $11,588,284   0.08% $11,586,835  $11,588,284   0.08%
 
 
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NOTE 9 – AFFORDABLE HOUSING PROGRAM

The Bank Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, requires each FHLBank to establish an Affordable Housing Program (AHP). As a part of its AHP, the FHLBank provides subsidies in the form of direct grants or below-market interest rate advances to members that use the funds to assist in the purchase, construction or rehabilitation of housing for very low-, low- and moderate-income households. By regulation, to fund the AHP, the 12 district FHLBanks as a group must annually set aside the greater of $100,000,000 or 10 percent of the current year’s net earnings after the assessment for Resolution Funding Corporation (REFCORP). For purposes of the AHP calculation, the term “net earnings” is defined as income before interest expense related to mandatorily redeemable c apital stock and the assessment for AHP, but after the assessment to REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory calculation determined by the Finance Agency. The AHP and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The FHLBank accrues this expense monthly based on its net earnings. Calculation of the REFCORP assessment is discussed in Note 10.

The amount set aside for AHP is charged to expense and recognized as a liability. As subsidies are provided through the disbursement of grants or issuance of subsidized advances, the AHP liability is reduced accordingly. If the FHLBank’s net earnings before AHP and REFCORP would ever be zero or less, the amount of AHP liability would generally be equal to zero. However, if the result of the aggregate 10 percent calculation described above is less than the $100,000,000 minimum for all 12 FHLBanks for a calendar year, then the Bank Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income for the previous year. If an FHLBank determines that its required AHP contributions are exacerbating any financial instability of that FHLBank, it may apply to the Finance Agency for a t emporary suspension of its AHP contributions. The FHLBank has never applied to the Finance Agency for a temporary suspension of its AHP contributions.

The following table details the change in the AHP liability for the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009 (in thousands):

 Three-month period ended  Six-month period ended ��Three-month Period Ended  Nine-month Period Ended 
 
June 30,
2010
  
June 30,
2009
  
June 30,
2010
  
June 30,
2009
  September 30, 2010  September 30, 2009  September 30, 2010  
September 30,
2009
 
Appropriated and reserved AHP funds as of the beginning of the period $42,044  $32,731  $44,117  $27,707  $40,337  $41,413  $44,117  $27,707 
AHP set aside based on current year income  0   11,700   0   18,496   256   2,730   256   21,226 
Direct grants disbursed  (1,771)  (3,115)  (3,895)  (4,958)  (2,341)  (2,513)  (6,236)  (7,471)
Recaptured funds1
  64   97   115   168   80   94   195   262 
Appropriated and reserved AHP funds as of the end of the period $40,337  $41,413  $40,337  $41,413  $38,332  $41,724  $38,332  $41,724 
__________
1Recaptured funds are direct grants returned to the FHLBank in those instances where the commitments associated with the approved use of funds are not met and repayment to the FHLBank is required by regulation. Recaptured funds are returned as a result of: (1) AHP-assisted homeowner’s transfer or sale of property within the five-year retention period that the assisted homeowner is required to occupy the property; (2) homeowner’s failure to acquire sufficient loan funding (funds previously approved and disbursed cannot be used); or (3) unused grants. Recaptured funds are reallocated to future periods.


NOTE 10 – RESOLUTION FUNDING CORPORATION

Each FHLBank is required to pay 20 percent of income calculated in accordance with GAAP after the assessment for AHP, but before the assessment for REFCORP. The AHP and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The FHLBank accrues its REFCORP assessment on a monthly basis. Calculation of the AHP assessment is discussed in Note 9. The Resolution Funding Corporation has been designated as the calculation agent for AHP and REFCORP assessments. Each FHLBank provides its interest expense related to mandatorily redeemable capital stock and net income before AHP and REFCORP assessments to the Resolution Funding Corporation, which then performs the calculations for each quarter end and levies the assessments to the FHLBanks for the quarter.

The FHLBanks will continue to expense these amounts until the aggregate amounts actually paid by all 12 FHLBanks are equivalent to a $300,000,000 annual annuity (or a scheduled payment of $75,000,000 per quarter) whose final maturity date is April 15, 2030, at which point the required payment of each FHLBank to REFCORP will be fully satisfied. The Finance Agency in consultation with the Secretary of the Treasury selects the appropriate discounting factors to be used in this annuity calculation. The FHLBanks use the actual payments made to determine the amount of the future obligation that has been defeased. The cumulative amount to be paid to REFCORP by FHLBank Topeka cannot be determined at this time because of the interrelationships of all future FHLBanks’ earnings and interest rates. If the FHLBank experienced a net los s during a quarter, but still had net income for the year, the FHLBank’s obligation to REFCORP would be calculated based on the FHLBank’s year-to-date net income. The FHLBank would be entitled to a credit against future REFCORP assessments, without any time constraints, if amounts paid for the full year were in excess of its calculated annual obligation that would be recorded in other assets on the FHLBank’s Statements of Condition. If the FHLBank had net income in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the FHLBank experienced a net loss for a full year, the FHLBank would have no obligation to REFCORP for the year.

The following table details the change in the REFCORP liability for the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009 (in thousands):

 Three-month period ended  Six-month period ended  Three-month Period Ended  Nine-month Period Ended 
 
June 30,
2010
  
June 30,
2009
  
June 30,
2010
  
June 30,
2009
  September 30, 2010  September 30, 2009  
September 30,
2010
  
September 30,
2009
 
REFCORP (receivable) obligation as of the beginning of the period $0  $(799) $11,556  $(16,015) $0  $25,508  $11,556  $(16,015)
REFCORP assessments  0   26,307   0   41,523   515   6,126   515   47,649 
REFCORP payments  0   0   (11,556)  0   0   (25,508)  (11,556)  (25,508)
REFCORP (receivable) obligation as of the end of the period $0  $25,508  $0  $25,508  $515  $6,126  $515  $6,126 
 
 
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NOTE 11 – CAPITAL

The FHLBank is subject to three capital requirements (i.e., risk-based capital, total capital-to-asset ratio and leverage capital ratio) under the provisions of the Gramm-Leach-Bliley Act (GLB Act) and the Finance Agency’s capital structure regulation. The following table illustrates that the FHLBank was in compliance with its regulatory capital requirements as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands):

 June 30, 2010  December 31, 2009  September 30, 2010  December 31, 2009 
 Required  Actual  Required  Actual  Required  Actual  Required  Actual 
Regulatory capital requirements:                        
Risk-based capital $360,414  $1,607,324  $646,501  $1,668,140  $355,981  $1,229,323  $646,501  $1,668,140 
Total capital-to-asset ratio  4.0%  4.5%  4.0%  4.6%  4.0%  4.8%  4.0%  4.6%
Total capital $1,728,800  $1,928,390  $1,705,264  $1,980,208  $1,520,052  $1,823,745  $1,705,264  $1,980,208 
Leverage capital ratio  5.0%  6.3%  5.0%  6.6%  5.0%  6.4%  5.0%  6.6%
Leverage capital $2,161,000  $2,732,053  $2,131,581  $2,814,278  $1,900,065  $2,438,406  $2,131,581  $2,814,278 

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

Mandatorily Redeemable Capital Stock: The FHLBank’s activity for mandatorily redeemable capital stock was as follows for the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009 (in thousands).

 Three-month period ended  
Six-month period
ended
  Three-month Period Ended  Nine-month Period Ended 
 
June 30,
2010
  
June 30,
2009
  
June 30,
2010
  
June 30,
2009
  September 30, 2010  September 30, 2009  
September 30,
2010
  
September 30,
2009
 
Balance at beginning of period $16,961  $29,703  $22,437  $34,806  $28,227  $25,775  $22,437  $34,806 
Capital stock subject to mandatory redemption reclassified from equity during the period  74,683   168,961   95,129   615,848   120,417   215,997   215,546   831,845 
Redemption or repurchase of mandatorily redeemable capital stock during the period  (63,474)  (172,962)  (89,458)  (625,243)  (123,262)  (218,810)  (212,720)  (844,053)
Stock dividend classified as mandatorily redeemable capital stock during the period  57   73   119   364   124   65   243   429 
Balance at end of period $28,227  $25,775  $28,227  $25,775  $25,506  $23,027  $25,506  $23,027 


NOTE 12 – EMPLOYEE RETIREMENT PLANS

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

Components of the net periodic pension cost for the defined benefit portion of the FHLBank’s BEP for the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009, were (in thousands):

 Three-month Period Ended  Six-month Period Ended  Three-month Period Ended  Nine-month Period Ended 
 
June 30,
2010
  
June 30,
2009
  
June 30,
2010
  
June 30,
2009
  
September 30,
2010
  
September 30,
2009
  
September 30,
2010
  
September 30,
2009
 
Service cost $66  $60  $132  $120  $102  $61  $234  $181 
Interest cost  98   99   196   197   126   90   322   287 
Amortization of prior service cost  (2)  (3)  (3)  (5)  (2)  (2)  (5)  (7)
Amortization of net loss  46   49   91   99   114   21   205   120 
NET PERIODIC POSTRETIREMENT BENEFIT COST $208  $205  $416  $411  $340  $170  $756  $581 
 

29
NOTE 13 – FAIR VALUES

The FHLBank determines fair values using available market information and the FHLBank’s best judgment of appropriate valuation methodologies. These fair values are based on pertinent information available to the FHLBank as of JuneSeptember 30, 2010 and December 31, 2009. Although the FHLBank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the FHLBank’s financial instruments, fair values in certain cases are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect the FHLBank’s judgment of how a market participant would estimate the fair values. The Fair Value Summary Tables do not represent an estimate of the overall market value of the FHLBank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.

27
Subjectivity of Estimates. Estimates of the fair value of advances with options, mortgage instruments, derivatives with embedded options and consolidated obligation bonds with options using the methods described below and other methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, methods to determine possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on fair values. Since these fair values are determined as of a specific point in time, they are susceptible to material near term changes.

The carrying value, net unrealized gains (losses) and fair values of the FHLBank’s financial instruments as of JuneSeptember 30, 2010 are summarized in the following table (in thousands):

 
Carrying
Value
  
Net Unrealized
Gains (Losses)
  
Fair
Value
  
Carrying
Value
  
Net Unrealized
Gains (Losses)
  
Fair
Value
 
Assets:                  
Cash and due from banks $28,428  $0  $28,428  $745  $0  $745 
                        
Interest-bearing deposits  43   0   43   78   0   78 
                        
Federal funds sold  2,984,000   0   2,984,000   1,869,000   0   1,869,000 
                        
Trading securities  7,312,844   0   7,312,844   4,009,897   0   4,009,897 
                        
Held-to-maturity securities  8,095,983   (72,051)  8,023,932   7,492,000   (32,953)  7,459,047 
                        
Advances  21,016,485   185,911   21,202,396   20,506,458   167,765   20,674,223 
                        
Mortgage loans held for portfolio, net of allowance  3,567,489   181,395   3,748,884   3,937,391   175,757   4,113,148 
                        
Accrued interest receivable  96,765   0   96,765   81,203   0   81,203 
                        
Derivative assets  41,137   0   41,137   27,859   0   27,859 
                        
Liabilities:                        
Deposits  2,018,038   0   2,018,038   1,776,269   0   1,776,269 
                        
Consolidated obligation discount notes  15,607,220   713   15,606,507   10,538,259   2,194   10,536,065 
                        
Consolidated obligation bonds  23,216,506   (370,428)  23,586,934   23,291,703   (369,897)  23,661,600 
                        
Overnight loans from other FHLBanks  120,000   0   120,000 
            
Mandatorily redeemable capital stock  28,227   0   28,227   25,506   0   25,506 
                        
Accrued interest payable  145,905   0   145,905   131,876   0   131,876 
                        
Derivative liabilities  256,222   0   256,222   269,810   0   269,810 
                        
Other Asset (Liability):                        
Standby letters of credit  (1,141)  0   (1,141)  (1,335)  0   (1,335)
                        
Standby bond purchase agreements  383   3,289   3,672   226   3,195   3,421 

 
3028
 
The carrying value, net unrealized gains (losses) and fair values of the FHLBank’s financial instruments as of December 31, 2009 are summarized in the following table (in thousands):

  
Carrying
Value
  
Net Unrealized
Gains (Losses)
  
Fair
Value
 
Assets:         
Cash and due from banks $494,553  $0  $494,553 
             
Interest-bearing deposits  54   0   54 
             
Federal funds sold  945,000   0   945,000 
             
Trading securities  8,012,676   0   8,012,676 
             
Held-to-maturity securities  7,390,211   (197,254)  7,192,957 
             
Advances  22,253,629   169,709   22,423,338 
             
Mortgage loans held for portfolio, net of allowance  3,333,784   93,405   3,427,189 
             
Accrued interest receivable  103,057   0   103,057 
             
Derivative assets  15,946   0   15,946 
             
Liabilities:            
Deposits  1,068,757   0   1,068,757 
             
Consolidated obligation discount notes  11,586,835   5,037   11,581,798 
             
Consolidated obligation bonds  27,524,799   (223,638)  27,748,437 
             
Mandatorily redeemable capital stock  22,437   0   22,437 
             
Accrued interest payable  153,710   0   153,710 
             
Derivative liabilities  240,630   0   240,630 
             
Other Asset (Liability):            
Standby letters of credit  (1,213)  0   (1,213)
             
Standby bond purchase agreements  386   3,830   4,216 

Fair Value Methodologies and Techniques and Significant Inputs.

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

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

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

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Investment securities – non-MBS: The fair values of non-MBS short-term investments are determined based on quoted prices, excluding accrued interest, as of the last business day of each period. Certain investments for which quoted prices are not readily available are valued by third parties or by using internal pricing models. The significant input associated with all classes of non-MBS short-term investment securities is a market-observable interest rate curve adjusted for a spread, if applicable. Differing spreads may be applied to distinct term points along the discount curve in determining the fair value of instruments with varying maturities; therefore, the spread adjustment is presented as a range. The following table presents the inputs used for each non-MBSn on-MBS short-term investment secu ritysecurity class as of JuneSeptember 30, 2010:

 Interest Rate CurveSpread Range
Certificates of depositLIBOR swap0.1-0.7 to -6.8-2.3 basis points
Commercial paperLIBOR swap-5.7-2.7 to -8.3-7.3 basis points

Non-MBS Agency securities are priced using third-party pricing services.
 
Investment securities – MBS:
29
For MBSnon-MBS long-term securities, the FHLBank’s valuation technique incorporates prices from up to four designated third-party pricing vendors when available. These pricing vendors use methods that generally employ, but are not limited to, benchmark tranche yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing. The FHLBank established a price for each of its MBSnon-MBS long-term securities using a formula that is based upon the number of prices received. If four prices are received, the average of the middle two prices is used. If three prices are received, the middle price is used. If two prices are received, the average of the two prices is used. If one price is received, it is used subj ectsubject to some type of validation as described below. The computed prices are tested for reasonablenessr easonableness using specified tolerance thresholds. Prices within the established thresholds are generally accepted unless strong evidence suggests that using the formula-driven price would not be appropriate. Preliminary fair values that are outside the tolerance thresholds, or that management believes may not be appropriate based on all available information (including those limited instances in which only one price is received), are subject to further analysis including but not limited to a comparison to the prices for similar securities and/or to non-binding dealer estimates or use of an internal model that is deemed most appropriate after consideration of all relevant facts and circumstances that a market participant would consider. As of JuneSeptember 30, 2010, vendor prices were received for substantially all of the FHLBank’s non-MBS long-term holdings and substantially all of those prices fell within the specified thresholds. The relative proximity of the prices received supports the FHLBank’ s conclusion that the final computed prices are reasonable estimates of fair value.

Investment securities – MBS: For MBS securities, the FHLBank’s valuation technique incorporates prices from up to four designated third-party pricing vendors when available. These pricing vendors use methods that generally employ, but are not limited to, benchmark tranche yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing. The FHLBank established a price for each of its MBS using the same formula described above for non-MBS long-term securities. As of September 30, 2010, vendor prices were received for substantially all of the FHLBank’s MBS holdings and substantially all of those prices fell within the specified thresholds. The r elativerelative proximity of the prices receivedreceive d supports the FHLBank’s conclusion that the final computed prices are reasonable estimates of fair value. Based on the current lack of significant market activity for certain private-label MBS, the non-recurring fair value measurements for OTTI securities as of JuneSeptember 30, 2010 fell within Level 3 of the fair value hierarchy.

Advances: The fair values of advances are determined by calculating the present values of the expected future cash flows from the advances. The calculated present values are reduced by the accrued interest receivable. The discount rate used in the variable rate advance calculations was current LIBOR. When setting interest rates on the FHLBank’s advances, volume discounts are applied according to the appropriate level or tier for the advance par value. The discount rates usedappropriate replacement rate based on the tier is reflected in the fixed ratedetermination of the fair values of applicable advance calculations were the replacement advance rates with no distinction for volume discounts.products.

Advance TypeMethod of Valuation
Fixed rate non-callable and fixed rate callable advancesValued using discounted cash flows incorporating estimates of future interest rate volatility, if applicable, and discounted using weighted average advance replacement rates with no distinction for volume discounts.rates.
Fixed rate convertible and step-up advancesValued using discounted cash flows incorporating estimates of future interest rate volatility and discounted using LIBOR adjusted for spread to LIBOR on advanceusing the tier specific replacement rates with no distinction for volume discounts.spread.
All other advancesValued using discounted cash flows incorporating estimates of future interest rate volatility, if applicable, and discounted using LIBOR.

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

Commitments to Extend Credit: The fair values of the FHLBank’s commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate mortgage loan commitments, fair value also considers any difference between current levels of interest rates and the committed rates. Certain mortgage loan purchase commitments are recorded as derivatives at their fair values. With one particular MPF product, the member originates mortgage loans as an agent for the FHLBank, and the FHLBank funds to close the mortgage loans. The commitments that unconditionally obligate the FHLBank to fund the mortgage loans relat ed to this product are not considered derivatives. Their fair values were negligible as of JuneSeptember 30, 2010 and December 31, 2009.

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

32
Derivative assets/liabilities: The FHLBank bases the fair values of derivatives on instruments with similar terms or available market prices including accrued interest receivable and payable. The fair values use standard valuation techniques for derivatives, such as discounted cash flow analysis and comparisons to similar instruments. The FHLBank is subject to credit risk in derivative transactions because of the potential nonperformance by the derivative counterparties. To mitigate this risk, the FHLBank enters into master netting agreements for derivative agreements with highly-rated institutions. In addition, the FHLBank has entered into bilateral security agreements with all active derivative dealer counterparties. These agreements provide for delivery of collateral at specified levels tied to counterparty credit ratings to limit the FHLBank’s net unsecured credit exposure to these counterparties. The FHLBank has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements of derivatives. The derivative fair values are netted by counterparty where such legal right exists and offset against fair value amounts recognized for the obligation to return cash collateral held or the right to reclaim cash collateral pledged to the particular counterparty. If these netted amounts are positive, they are classified as an asset and, if negative, a liability.

30
The discounted cash flow model uses an income approach based on market-observable inputs (inputs that are actively quoted and can be validated to external sources). Inputs by class of derivative are as follows:
§Interest-rate related derivatives:
 o●LIBOR swap curve;
 o●Volatility assumptions - market-based expectations of future interest rate volatility implied from current market prices for similar options; and
 o●Prepayment assumptions.
§Mortgage delivery commitments:
 o●To be announced (TBA) price - market-based prices of TBAs by coupon class and expected term until settlement.

Deposits: The fair values of deposits are determined by calculating the present values of the expected future cash flows from the deposits. The calculated present values are reduced by the accrued interest payable. The discount rates used in these calculations were the cost of deposits with similar terms.
 
Consolidated Obligations: The fair values for consolidated obligation bonds and discount notes are determined based on projected future cash flows. Fixed rate consolidated obligations that do not contain options are discounted using a replacement rate. Variable rate consolidated obligations that do not contain options are discounted using LIBOR. Consolidated obligations that contain optionality are valued using estimates of future interest rate volatility and discounted using LIBOR.

Overnight Loans From Other FHLBanks: The fair values approximate the recorded book balances.

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

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

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

Fair Value Hierarchy. The FHLBank records trading securities, derivative assets and derivative liabilities at fair value. Fair value is a market-based measurement and is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. In general, the transaction price will equal the exit price and, therefore, represents the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in that market.

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

33
Outlined below is the application of the fair value hierarchy to the FHLBank’s financial assets and financial liabilities that are carried at fair value.
§Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
§Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The types of assets and liabilities carried at Level 2 fair value generally include trading investment securities and derivative contracts.
§Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. A significant portion of the unobservable inputs are supported by little or no market activity and reflect the entity’s own assumptions. The types of assets and liabilities carried at Level 3 fair value generally include private-label MBS that the FHLBank has determined to be OTTI.

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

31
For instruments carried at fair value, the FHLBank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications, if any, are reported as transfers in/out at fair value in the quarter in which the changes occur. The FHLBank had no financial assets or liabilities measured on a recurring basis for which the fair value classification changed during the six-monthsnine-months ended JuneSeptember 30, 2010.

Fair Value on a Recurring Basis. The following table presents, for each hierarchy level, the FHLBank’s assets and liabilities that are measured at fair value on a recurring basis on the Statement of Condition as of JuneSeptember 30, 2010 (in thousands):

 Total  Level 1  Level 2  Level 3  
Net Accrued
Interest on
Derivatives
and Cash
Collateral
  Total  Level 1  Level 2  Level 3  
Net Accrued
Interest on
Derivatives
and Cash
Collateral
 
Commercial paper $809,873  $0  $809,873  $0  $0 
Certificates of deposit $2,450,126  $0  $2,450,126  $0  $0   1,170,046   0   1,170,046   0   0 
Commercial paper  2,829,015   0   2,829,015   0   0 
FHLBank1 obligations
  122,135   0   122,135   0   0   125,717   0   125,717   0   0 
Fannie Mae2 obligations
  401,525   0   401,525   0   0   409,133   0   409,133   0   0 
Freddie Mac2 obligations
  1,000,829   0   1,000,829   0   0   1,015,128   0   1,015,128   0   0 
Subtotal  6,803,630   0   6,803,630   0   0   3,529,897   0   3,529,897   0   0 
Mortgage-backed securities:                                        
Fannie Mae residential2
  298,132   0   298,132   0   0   282,072   0   282,072   0   0 
Freddie Mac residential2
  209,452   0   209,452   0   0   196,344   0   196,344   0   0 
Ginnie Mae residential3
  1,630   0   1,630   0   0   1,584   0   1,584   0   0 
Mortgage-backed securities  509,214   0   509,214   0   0   480,000   0   480,000   0   0 
Trading securities  7,312,844   0   7,312,844   0   0   4,009,897   0   4,009,897   0   0 
                                        
Derivative fair value:                                        
Interest-rate related  101,161   0   80,245   0   20,916   94,924   0   67,051   0   27,873 
Mortgage delivery commitments  1,352   0   1,352   0   0   484   0   484   0   0 
Subtotal  102,513   0   81,597   0   20,916   95,408   0   67,535   0   27,873 
Net cash collateral (received) delivered  (61,376)  0   0   0   (61,376)  (67,549)  0   0   0   (67,549)
Derivative assets  41,137   0   81,597   0   (40,460)  27,859   0   67,535   0   (39,676)
                                        
TOTAL ASSETS MEASURED AT FAIR VALUE $7,353,981  $0  $7,394,441  $0  $(40,460) $4,037,756  $0  $4,077,432  $0  $(39,676)
                                        
Derivative fair value:                                        
Interest-rate related $358,835  $0  $353,511  $0  $5,324  $470,310  $0  $463,933  $0  $6,377 
Mortgage delivery commitments  2   0   2   0   0   202   0   202   0   0 
Subtotal  358,837   0   353,513   0   5,324   470,512   0   464,135   0   6,377 
Net cash collateral received (delivered)  (102,615)  0   0   0   (102,615)  (200,702)  0   0   0   (200,702)
Derivative liabilities  256,222   0   353,513   0   (97,291)  269,810   0   464,135   0   (194,325)
                                        
TOTAL LIABILITIES MEASURED AT FAIR VALUE $256,222  $0  $353,513  $0  $(97,291) $269,810  $0  $464,135  $0  $(194,325)
__________
1See Note 16 for transactions with other FHLBanks.
2Fannie Mae and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency on September 7, 2008.
3Ginnie Mae securities are guaranteed by the U.S. government.

 
3432
 
The following table presents, for each hierarchy level, the FHLBank’s assets and liabilities that are measured at fair value on a recurring basis on the Statement of Condition as of December 31, 2009 (in thousands):

 Total  Level 1  Level 2  Level 3  
Net Accrued
Interest on
Derivatives
and Cash
Collateral
  Total  Level 1  Level 2  Level 3  
Net Accrued
Interest on
Derivatives
and Cash
Collateral
 
Commercial paper $2,589,560  $0  $2,589,560  $0  $0 
Certificates of deposit $3,109,967  $0  $3,109,967  $0  $0   3,109,967   0   3,109,967   0   0 
Bank notes  89,996   0   89,996   0   0   89,996   0   89,996   0   0 
Commercial paper  2,589,560   0   2,589,560   0   0 
FHLBank1 obligations
  280,761   0   280,761   0   0   280,761   0   280,761   0   0 
Fannie Mae2 obligations
  390,559   0   390,559   0   0   390,559   0   390,559   0   0 
Freddie Mac2 obligations
  979,243   0   979,243   0   0   979,243   0   979,243   0   0 
Subtotal  7,440,086   0   7,440,086   0   0   7,440,086   0   7,440,086   0   0 
Residential mortgage-backed securities:                                        
Fannie Mae2
  337,902   0   337,902   0   0   337,902   0   337,902   0   0 
Freddie Mac2
  232,984   0   232,984   0   0   232,984   0   232,984   0   0 
Ginnie Mae3
  1,704   0   1,704   0   0   1,704   0   1,704   0   0 
Residential mortgage-backed securities  572,590   0   572,590   0   0   572,590   0   572,590   0   0 
Trading securities  8,012,676   0   8,012,676   0   0   8,012,676   0   8,012,676   0   0 
                                        
Derivative fair value  81,162   0   62,337   0   18,825   81,162   0   62,337   0   18,825 
Net cash collateral (received) delivered  (65,216)  0   0   0   (65,216)  (65,216)  0   0   0   (65,216)
Derivative assets  15,946   0   62,337   0   (46,391)  15,946   0   62,337   0   (46,391)
                                        
TOTAL ASSETS MEASURED AT FAIR VALUE $8,028,622  $0  $8,075,013  $0  $(46,391) $8,028,622  $0  $8,075,013  $0  $(46,391)
                                        
Derivative fair value $333,689  $0  $326,264  $0  $7,425  $333,689  $0  $326,264  $0  $7,425 
Net cash collateral received (delivered)  (93,059)  0   0   0   (93,059)  (93,059)  0   0   0   (93,059)
Derivative liabilities  240,630   0   326,264   0   (85,634)  240,630   0   326,264   0   (85,634)
                                        
TOTAL LIABILITIES MEASURED AT FAIR VALUE $240,630  $0  $326,264  $0  $(85,634) $240,630  $0  $326,264  $0  $(85,634)
__________
1See Note 16 for transactions with other FHLBanks.
2Fannie Mae and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency on September 7, 2008.
3Ginnie Mae securities are guaranteed by the U.S. government.

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

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The following table presents assets by level within the valuation hierarchy for which a nonrecurring change in fair value has been recorded during the six-monthnine-month period ended JuneSeptember 30, 2010 (in thousands):

 Fair Value Measurements for the Six-month Period Ended June 30, 2010  Fair Value Measurements for the Nine-month Period Ended September 30, 2010 
 Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
Held-to-maturity securities1,2:
                        
Private-label residential MBS3
 $47,951  $0  $0  $47,951  $47,951  $0  $0  $47,951 
                                
Real estate owned4
  795   0   795   0   1,235   0   1,235   0 
                                
TOTAL $48,746  $0  $795  $47,951  $49,186  $0  $1,235  $47,951 
__________
1Excludes impaired securities with carrying values less than their fair values at date of impairment.
2A security will be included in the fair value total each time it is written down, which could be multiple times throughout the time period presented.
3As of March 31, 2010, private-label residential MBS classified as held-to-maturity securities with a carrying value prior to write-down of $43,783,000 were written down to a fair value of $27,695,000. As of June 30, 2010, private-label residential MBS classified as held-to-maturity securities with a carrying value prior to write-down of $21,650,000 were written down to a fair value of $20,256,000. As of September 30, 2010, no private-label MBS classified as held-to-maturity securities were written down to fair value. These write-downs resulted in OTTI charges of $1,394,000$0 and $17,482,000 for the three- and six-monthnine-month periods ended JuneSeptember 30, 2010, respectively.
4During the six-monthnine-month period ended JuneSeptember 30, 2010, mortgage loans with a book value of $1,033,000$1,562,000 were transferred to real estate owned at a fair value of $795,000$1,235,000 less estimated cost to sell of $79,000,$118,000, resulting in a $317,000$445,000 charge-off to the allowance for credit losses on mortgage loans.

35
The following table presents assets by level within the valuation hierarchy, for which a nonrecurring change in fair value was recorded as of December 31, 2009 (in thousands):

  Fair Value Measurements as of December 31, 2009 
  Total  Level 1  Level 2  Level 3 
Real estate owned $368  $0  $368  $0 


NOTE 14 – COMMITMENTS AND CONTINGENCIES

Joint and several liability.As provided by the Bank Act or Finance Agency regulation and as described in Note 8, consolidated obligations are backed only by the financial resources of the FHLBanks. FHLBank Topeka is jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. The par amounts for which FHLBank Topeka is jointly and severally liable were approximately $807,986,006,000$772,539,483,000 and $891,666,741,000 as of JuneSeptember 30, 2010 and December 31, 2009, respectively. To the extent that an FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the FinanceFinanc e Agency determines that the primary obligor is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor. As a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked.

The joint and several obligations are mandated by Finance Agency regulations and are not the result of arms-length transactions among the FHLBanks. As described above, the FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several liability. Because the FHLBanks are subject to the authority of the Finance Agency as it relates to decisions involving the allocation of the joint and several liability for the FHLBank’s consolidated obligations, FHLBank Topeka regularly monitors the financial condition of the other 11 FHLBanks to determine whether it should expect a loss to arise from its joint and several obligations. If the FHLBank were to determine that a loss was probable and the amount of such loss could be reasonably estimated, the FHLBank wo uld charge to income the amount of the expected loss. Based upon the creditworthiness of the other 11 FHLBanks as of JuneSeptember 30, 2010, FHLBank Topeka believes that a loss accrual is not necessary at this time.

Commitments to Extend Credit.Standby letters of credit are executed for members for a fee. A standby letter of credit is a short-term financing arrangement between the FHLBank and its member or non-member housing associate. If the FHLBank is required to make payment for a beneficiary’s draw, these amounts are converted into a collateralized advance to the member. As of JuneSeptember 30, 2010, outstanding standby letters of credit totaled $2,604,605,000$2,435,118,000 and had original terms of threeeight days to ten years with a final expiration in 2020. As of December 31, 2009, outstanding standby letters of credit totaled $3,093,204,000 and had original terms of six days to seven years with a final expiration in 2013. Unearned fees as well as the value of the guarantees related to standby letters of credit are recorded in other liabilities and amounted to $1,141,000$1,335,000 and $1,213,0 00$1,213,000 as of JuneSeptember 30, 2010 and December 31, 2009, respectively. The standby letters of credit are fully collateralized with assets allowed by the FHLBank’s Member Products Policy (MPP). Based upon management’s credit analysis of members and collateral requirements under the MPP, the FHLBank does not expect to incur any credit losses on the letters of credit.

Commitments that unconditionally obligate the FHLBank to fund/purchase mortgage loans from participating FHLBank Topeka members in the MPF Program totaled $112,716,000$262,206,000 and $35,364,000 as of JuneSeptember 30, 2010 and December 31, 2009, respectively. Commitments are generally for periods not to exceed 60 calendar days. Certain commitments are recorded as derivatives at their fair values on the Statement of Condition. The FHLBank recorded mortgage delivery commitment derivative asset (liability) balances of $1,350,000$282,000 and $(312,000) as of JuneSeptember 30, 2010 and December 31, 2009, respectively.

34
Standby Bond-Purchase Agreements.The FHLBank has entered into standby bond purchase agreements with state housing authorities within its four-state district whereby the FHLBank, for a fee, agrees to purchase and hold the authorities’ bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLBank to purchase the bond. The bond purchase commitments entered into by the FHLBank expire no later than 2015, though some are renewable at the option of the FHLBank. Total commitments for bond purchases with two state housing authorities were $1,570,587,000$1,566,652,000 and $1,617,134,000 as of JuneSeptember 30, 2010 and December 31, 2009, respectively. The FHLBank was not required to pur chasepurchase any bonds under these agreements during the three- or six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009.

Unsettled Consolidated Obligations. The FHLBank committed to issue $508,000,000 par value of consolidated bonds of which $340,000,000 were hedged with associated interest rate swaps, and $1,202,000,000 par value of consolidated discount notes that had traded but not settled as of September 30, 2010.

Collateral Delivered to Derivative Counterparties.The FHLBank generally executes derivatives with counterparties having ratings of single-A or better by either Standard & Poor’s or Moody’s. These agreements are generally covered under bilateral collateral agreements between the FHLBank and the counterparties. As of JuneSeptember 30, 2010 and December 31, 2009, the FHLBank had delivered cash with a book value of $105,150,000$201,450,000 and $93,050,000, respectively, as collateral to broker/dealers that have market-risk exposure to the FHLBank. The delivered collateral is netted against derivative liabilities on the Statements of Condition.

Legal Proceedings. In 2009 and 2010, the FHLBank was advised by representatives of the Lehman Brothers Holdings, Inc. bankruptcy estate that they believed that the FHLBank had been unjustly enriched in connection with the close out of its interest rate swap transactions with Lehman at the time of the Lehman bankruptcy in 2008. In August 2010, the FHLBank received a Derivatives Alternative Dispute Resolution Notice from the Lehman bankruptcy estate stating disagreement with how the settlement was calculated in connection with the early termination of the swap transactions and the amounts the FHLBank received when replacing the swaps with new swaps transacted with other counterparties. The FHLBank believes that it correctly calculated and fully satisfied its obligation to Le hman, and the FHLBank intends to dispute any claim for additional amounts. The FHLBank does not believe that the resolution of this dispute will have a material impact on its financial condition or results of operations.


NOTE 15 – TRANSACTIONS WITH STOCKHOLDERS AND HOUSING ASSOCIATES

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

36
Transactions with members are entered into in the ordinary course of business. In instances where members also have officers or directors who are directors of the FHLBank, transactions with those members are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as other transactions with members. For financial reporting and disclosure purposes, the FHLBank defines related parties as FHLBank directors’ financial institutions and members with capital stock investments in excess of 10 percent of the FHLBank’s total regulatory capital stock outstanding, which includes mandatorily redeemable capital stock.

Activity with Members that Exceed a 10 Percent Ownership in FHLBank Capital Stock: The following tables present information as of JuneSeptember 30, 2010 and December 31, 2009 on members that owned more than 10 percent of outstanding FHLBank regulatory capital stock at either date (in thousands). None of the officers or directors of this member currently serve on the FHLBank’s board of directors.

June 30, 2010 
September 30, 2010September 30, 2010 
Member NameState 
Total
Class A
Stock
Par Value
  
Percent
of Total
Class A
  
Total
Class B
Stock
Par Value
  
Percent
of Total
Class B
  
Total
Capital
Stock
Par Value
  
Percent
of Total
Capital
Stock
 State 
Total
Class A
Stock
Par Value
  
Percent
of Total
Class A
  
Total
Class B
Stock
Par Value
  
Percent
of Total
Class B
  
Total
Capital
Stock
Par Value
  
Percent
of Total
Capital
Stock
 
MidFirst BankOK $1,000   0.3% $174,354   13.5% $175,354   10.9%OK $1,000   0.2% $158,529   17.6% $159,529   10.7%

December 31, 2009 
Member NameState 
Total
Class A
Stock
Par Value
  
Percent
of Total
Class A
  
Total
Class B
Stock
Par Value
  
Percent
of Total
Class B
  
Total
Capital
Stock
Par Value
  
Percent
of Total
Capital
Stock
 
MidFirst BankOK $1,000   0.3% $177,943   13.6% $178,943   11.0%

35
Advance and deposit balances with members that owned more than 10 percent of outstanding FHLBank regulatory capital stock as of JuneSeptember 30, 2010 and December 31, 2009 are summarized in the following table (in thousands).

 June 30, 2010  December 31, 2009  June 30, 2010  December 31, 2009  September 30, 2010  December 31, 2009  September 30, 2010  December 31, 2009 
Member Name 
Outstanding
Advances
  
Percent
of Total
  
Outstanding
Advances
  
Percent
Of Total
  
Outstanding
Deposits1
  
Percent
of Total
  
Outstanding
Deposits1
  
Percent
of Total
  
Outstanding
Advances
  
Percent
of Total
  
Outstanding
Advances
  
Percent
Of Total
  
Outstanding
Deposits1
  
Percent
of Total
  
Outstanding
Deposits1
  
Percent
of Total
 
MidFirst Bank $3,175,000   15.5% $3,500,000   16.0% $1,422   0.1% $798   0.1% $3,160,000   15.9% $3,500,000   16.0% $1,549   0.1% $798   0.1%
__________
1Excludes cash pledged as collateral by derivative counterparties, netted against derivative liabilities, and Member Pass-through Deposit Reserves, classified as non-interest-bearing deposits.

MidFirst Bank did not originate any mortgage loans for or sell mortgage loans into the MPF program during the three- or six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009.

Transactions with FHLBank Directors’ Financial Institutions: The following tables present information as of JuneSeptember 30, 2010 and December 31, 2009 for members that had an officer or director serving on the FHLBank’s board of directors (in thousands). Information is only listed for the period in which the officer or director served on the FHLBank’s board of directors. Capital stock listed is regulatory capital stock, which includes mandatorily redeemable capital stock.

 June 30, 2010  December 31, 2009  September 30, 2010  December 31, 2009 
 Outstanding Amount  
Percent
of Total
  Outstanding Amount  
Percent
of Total
  Outstanding Amount  
Percent
of Total
  Outstanding Amount  
Percent
of Total
 
Advances $80,205   0.4% $90,841   0.4% $67,476   0.3% $90,841   0.4%
                                
Deposits $13,693   0.7% $7,573   0.7% $11,623   0.7% $7,573   0.7%
                                
Class A Common Stock $3,179   1.0% $3,071   1.0% $6,653   1.1% $3,071   1.0%
Class B Common Stock  8,306   0.6   8,300   0.6   3,659   0.4   8,300   0.6 
Total Capital Stock $11,485   0.7% $11,371   0.7% $10,312   0.7% $11,371   0.7%

The following table presents mortgage loans funded or acquired during the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009 for members that had an officer or director serving on the FHLBank’s board of directors as of JuneSeptember 30, 2010 or 2009 (in thousands).

Three-month Period EndedThree-month Period Ended  Six-month Period Ended Three-month Period Ended  Nine-month Period Ended 
June 30, 2010  June 30, 2009  June 30, 2010  June 30, 2009 
September 30, 2010September 30, 2010  September 30, 2009  September 30, 2010  September 30, 2009 
Mortgage Loans AcquiredMortgage Loans Acquired  
Percent
of Total
  Mortgage Loans Acquired  
Percent
of Total
  Mortgage Loans Acquired  
Percent
of Total
  Mortgage Loans Acquired  
Percent
of Total
 Mortgage Loans Acquired  
Percent
of Total
  Mortgage Loans Acquired  
Percent
of Total
  Mortgage Loans Acquired  
Percent
of Total
  Mortgage Loans Acquired  
Percent
of Total
 
$9,414   2.9% $9,439   2.3% $13,457   2.8% $18,873   2.4%22,602   3.9% $6,102   2.9% $34,612   3.3% $24,975   2.6%

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NOTE 16 – TRANSACTIONS WITH OTHER FHLBANKS

FHLBank Topeka had the following business transactions with other FHLBanks during the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009 (in thousands). All transactions occurred at market prices.

 Three-month Period Ended  Six-month Period Ended  Three-month Period Ended  Nine-month Period Ended 
Business Activity 
June 30,
2010
  
June 30,
2009
  
June 30,
2010
  
June 30,
2009
  
September 30,
2010
  
September 30,
2009
  
September 30,
2010
  
September 30,
2009
 
Average overnight interbank loan balances to other FHLBanks1
 $0  $0  $829  $2,746  $0  $402  $549  $1,956 
Average overnight interbank loan balances from other FHLBanks1
  7,088   0   3,840   0   7,609   217   5,110   73 
Average deposit balance with FHLBank of Chicago for shared expense transactions2
  36   54   42   53   57   76   47   61 
Average deposit balance with FHLBank of Chicago for MPF transactions2
  24   25   25   28   30   25   27   27 
Transaction charges paid to FHLBank of Chicago for transaction service fees3
  408   354   795   698   453   380   1,248   1,078 
Par amount of purchases of consolidated obligations issued on behalf of other FHLBanks4
  0   0   0   0   0   0   0   0 
__________
1Occasionally, the FHLBank loans (or borrows) short-term funds to (from) other FHLBanks. Interest income on loans to other FHLBanks and interest expense on borrowings from other FHLBanks are separately identified on the Statements of Income.
2Balance is interest bearing and is classified on the Statements of Condition as interest-bearing deposits.
3Fees are calculated monthly based on 5.5 basis points per annum of outstanding loans originated since January 1, 2010 and are recorded in other expense. For outstanding loans originated since January 1, 2004 and through December 31, 2009, fees are calculated monthly based on 5.0 basis points per annum.
4Purchases of consolidated obligations issued on behalf of one FHLBank and purchased by the FHLBank occur at market prices with third parties and are accounted for in the same manner as similarly classified investments. Outstanding balances are presented in Note 3. Interest income earned on these securities totaled $2,642,000$1,395,000 and $3,868,000$3,702,000 for the three-month periods ended JuneSeptember 30, 2010 and 2009, respectively. For the six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009, interest income earned on these securities totaled $6,153,000$7,548,000 and $7,873,000,$11,575,000, respectively.

 
3836
 
ItemItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ThisThe following Management’s Discussion and Analysis of Financial Condition and Results of Operations reviews(MD&A) is intended to assist the financial condition of the FHLBank as of June 30, 2010reader in understanding our business and December 31, 2009assessing our operations both historically and results of operations for the three- and six-month periods ended June 30, 2010 and 2009.prospectively. This discussion should be read in conjunction with the interim financial statements and notes presented under Part I Item 1 of this quarterly report on Form 10-Q and the annual report on Form 10-K, which includes audited financial statements and related notes for the year ended December 31, 2009. Our MD&A includes the following sections:
§Executive Level Overview – a general description of our business and financial highlights;
§Financial Market Trends – a discussion of current trends in the financial markets and overall economic environment, including the related impact on our operations;
§Critical Accounting Policies and Estimates – a discussion of accounting policies that require critical estimates and assumptions;
§Results of Operations – an analysis of our operating results, including disclosures about the sustainability of our earnings;
§Financial Condition – an analysis of our financial position;
§Liquidity and Capital Resources – an analysis of our cash flows and capital position;
§Risk Management – a discussion of our risk management strategies;
§Recently Issued Accounting Standards; and
§Recent Developments.

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

The FHLBank servesWe serve eligible financial institutions in Colorado, Kansas, Nebraska and Oklahoma (collectively, the Tenth District of the FHLBank System). Initially, members are required to purchase shares of Class A Common Stock to give them access to advance borrowings or to enable them to sell mortgage loans to the FHLBankus under the MPF Program. The FHLBank’sOur capital increases when its members are required to purchase additional capital stock in the form of Class B Common Stock to support an increase in advance borrowings from the FHLBank or the sale ofwhen members sell additional mortgage loans to the FHLBank.us. At itsour discretion, the FHLBankwe may repurchase excess capital stock from time to time if a member’s advances or mortgage loan balances decline. Despite the financial market disruptions during 2008 and 2009 that created signific antsignificant fluctuations in the FHLBank’sour total assets, liabilities and capital, the FHLBank haswe ha ve continued to: (1) achieve itsour liquidity, housing finance and community development missions by meeting member credit needs through the offering of advances, supporting residential mortgage lending through the MPF Program and through other products; (2) repurchase excess capital stock in order to appropriately manage the size of itsour balance sheetsheet; and (3) pay market-rate dividends.

 
3937
 
Table 1 summarizes selected financial data for the periods indicated.

TableTable 1

Selected Financial Data (dollar amounts in thousands):

 06/30/2010  03/31/2010  12/31/2009  09/30/2009  06/30/2009  09/30/2010  06/30/2010  03/31/2010  12/31/2009  09/30/2009 
Statement of Condition (as of period end)
                              
Total assets $43,219,994  $42,458,391  $42,631,611  $43,741,619  $46,273,877  $38,001,292  $43,219,994  $42,458,391  $42,631,611  $43,741,619 
Investments1
  18,392,870   16,652,463   16,347,941   17,625,950   18,310,864   13,370,975   18,392,870   16,652,463   16,347,941   17,625,950 
Advances  21,016,485   22,210,991   22,253,629   22,633,110   24,529,745   20,506,458   21,016,485   22,210,991   22,253,629   22,633,110 
Mortgage loans held for portfolio, net2
  3,567,489   3,363,446   3,333,784   3,237,953   3,213,794   3,937,391   3,567,489   3,363,446   3,333,784   3,237,953 
Total liabilities   41,344,129   40,542,705   40,685,701   41,818,342   44,276,136   36,225,772   41,344,129   40,542,705   40,685,701   41,818,342 
Deposits  2,018,038   1,779,805   1,068,757   1,154,479   1,278,155   1,776,269   2,018,038   1,779,805   1,068,757   1,154,479 
Consolidated obligation bonds, net3
  23,216,506   23,469,731   27,524,799   27,301,576   26,815,219   23,291,703   23,216,506   23,469,731   27,524,799   27,301,576 
Consolidated obligation discount notes, net3
  15,607,220   14,625,721   11,586,835   12,795,584   15,617,443   10,538,259   15,607,220   14,625,721   11,586,835   12,795,584 
Total consolidated obligations, net3
  38,823,726   38,095,452   39,111,634   40,097,160   42,432,662   33,829,962   38,823,726   38,095,452   39,111,634   40,097,160 
Mandatorily redeemable capital stock  28,227   16,961   22,437   23,027   25,775   25,506   28,227   16,961   22,437   23,027 
Total capital  1,875,865   1,915,686   1,945,910   1,923,277   1,997,741   1,775,520   1,875,865   1,915,686   1,945,910   1,923,277 
Capital stock  1,585,393   1,626,688   1,602,696   1,616,266   1,697,312   1,471,004   1,585,393   1,626,688   1,602,696   1,616,266 
Retained earnings  314,770   315,138   355,075   319,640   306,229   327,235   314,770   315,138   355,075   319,640 
Accumulated other comprehensive income (loss)  (24,298)  (26,140)  (11,861)  (12,629)  (5,800)  (22,719)  (24,298)  (26,140)  (11,861)  (12,629)
                                        
Statement of Income (for the quarterly period ended)
                                        
Net interest income  71,336   62,947   62,676   59,750   74,792   57,053   71,336   62,947   62,676   59,750 
Provision for credit losses on mortgage loans  197   759   268   872   104   205   197   759   268   872 
Other income (loss)  (48,679)  (81,319)  12,767   (15,613)  79,106   (23,492)  (48,679)  (81,319)  12,767   (15,613)
Other expenses  12,402   10,459   12,454   9,906   10,558   10,994   12,402   10,459   12,454   9,906 
Income (loss) before assessments  10,058   (29,590)  62,721   33,359   143,236   22,362   10,058   (29,590)  62,721   33,359 
Assessments  0   0   16,646   8,856   38,007   771   0   0   16,646   8,856 
Net income (loss)  10,058   (29,590)  46,075   24,503   105,229   21,591   10,058   (29,590)  46,075   24,503 
                                        
Ratios and Other Financial Data (for the quarterly period ended)
                                        
Dividends paid in cash4
  82   84   108   87   90   81   82   84   108   87 
Dividends paid in stock4
  10,344   10,263   10,532   11,005   9,554   9,045   10,344   10,263   10,532   11,005 
Class A Stock dividend rate  0.75%  0.75%  0.75%  0.75%  0.75%  0.75%  0.75%  0.75%  0.75%  0.75%
Class B Stock dividend rate  3.00%  3.00%  3.00%  3.00%  2.50%  3.00%  3.00%  3.00%  3.00%  3.00%
Weighted average dividend rate5
  2.87%  2.88%  2.88%  2.89%  2.33%  2.78%  2.87%  2.88%  2.88%  2.89%
Dividend payout ratio6
  103.66%  N/A   23.09%  45.27%  9.16%  42.27%  103.66%  N/A   23.09%  45.27%
Return on average equity  2.10%  (6.16)%  9.36%  4.86%  19.63%  4.62%  2.10%  (6.16)%  9.36%  4.86%
Return on average assets  0.09%  (0.27)%  0.42%  0.21%  0.85%  0.21%  0.09%  (0.27)%  0.42%  0.21%
Average equity to average assets  4.44%  4.39%  4.45%  4.40%  4.31%  4.53%  4.44%  4.39%  4.45%  4.40%
Net interest margin7
  0.66%  0.58%  0.57%  0.52%  0.60%  0.56%  0.66%  0.58%  0.57%  0.52%
Total capital ratio8
  4.34%  4.51%  4.56%  4.40%  4.32%  4.67%  4.34%  4.51%  4.56%  4.40%
Regulatory capital ratio9
  4.46%  4.61%  4.64%  4.48%  4.39%  4.80%  4.46%  4.61%  4.64%  4.48%
Ratio of earnings to fixed charges10
  1.10   0.69   1.60   1.27   1.97   1.23   1.10   0.69   1.60   1.27 
__________
1Includes trading securities, available-for-sale securities, held-to-maturity securities, interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold.
2Allowance for credit losses on mortgage loans was $2,613,000, $2,536,000, $2,553,000, $1,897,000 $1,686,000 and $882,000$1,686,000 as of September 30, 2010, June 30, 2010, March 31, 2010, December 31, 2009 September 30, 2009 and JuneSeptember 30, 2009, respectively.
3Consolidated obligations are bonds and discount notes that the FHLBank iswe are primarily liable to repay. See Note 8 to the financial statements for a description of the total consolidated obligations of all 12 FHLBanks for which the FHLBank iswe are jointly and severally liable under the requirements of the Finance Agency which governs the issuance of debt for the 12 FHLBanks.
4Dividends reclassified as interest expense on mandatorily redeemable capital stock and not included as GAAP dividends were $125,000, $59,000, $62,000, $65,000 $66,000 and $79,000$66,000 as of September 30, 2010, June 30, 2010, March 31, 2010, December 31, 2009 September 30, 2009 and JuneSeptember 30, 2009, respectively.
5Dividends paid in cash and stock on both classes of stock as a percentage of average capital stock eligible for dividends.
6Dividends declared as a percentage of net income. The dividend payout ratio for the quarterly period ended March 31, 2010 is not meaningful.
7Net interest income as a percentage of average earning assets.
8GAAP capital stock, which excludes mandatorily redeemable capital stock, plus retained earnings and accumulated other comprehensive income (loss) as a percentage of total assets.
9Regulatory capital (i.e., permanent capital and Class A capital stock) as a percentage of total assets.
10Total earnings divided by fixed charges (interest expense including amortization/accretion of premiums, discounts and capitalized expenses related to indebtedness).

Quarterly Overview
Total assets increased during the first six months of 2010 to $43.2 billion as of June 30, 2010 from $42.6 billion as of December 31, 2009. While the change in total assets was relatively small, the balance sheet experienced larger compositional changes in both assets and liabilities during the six-month period ended June 30, 2010.

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During the first six months of 2010, the FHLBank’s investment portfolio increased from $16.3 billion as of December 31, 2009 to $18.4 billion as of June 30, 2010 primarily due to a small increase in leverage combined with the reduction of a relatively large cash balance in its Federal Reserve account as of December 31, 2009 and investing these funds in unsecured money market investments as of June 30, 2010. The composition of the FHLBank’s investment portfolio also changed significantly as the FHLBank, under its temporary expansion in mortgage authority under Finance Agency Resolution 2008-08, increased its investment in Agency variable rate collateralized mortgage obligations (CMO) by $1.0 billion (new investment purchases in the first quarter of 2010 net of pay downs during the first six months of 2010).

Advance balances decreased from $22.3 billion as of December 31, 2009 to $21.0 billion as of June 30, 2010 and also experienced some compositional changes. A decrease of $475.0 million can be attributed to the reduction in advances by two of the FHLBank’s five largest borrowers. An additional decrease of $528.3 million is the result of the sale of a member to a non-member that subsequently prepaid all outstanding advances in June 2010. The remainder is related to a general de-leveraging trend among financial institutions.
The FHLBank’s liability composition also changed as consolidated obligation bonds decreased $4.3 billion, consolidated obligation discount notes increased $4.0 billion and member deposits increased $0.9 billion. The change in composition between bonds and discount notes was initially the result of significant terminations of swapped consolidated obligation bonds that were called faster than the FHLBank could replace them. However, as the year progressed and LIBOR began to rise in response to the sovereign debt crisis in Europe, management made a conscious decision to increase the use of discount notes and reduce its reliance on LIBOR-based funding. To a lesser degree, the compositional changes also reflected the FHLBank’s desire to enhance its ability to shrink its balance sheet to address the pay downs expected in the first six months of 2010 associated with the loan buy-outs by Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) of all 120 days or more delinquencies from their respective mortgage-backed securities (MBS)/CMO securities (see additional discussion under this Item 2 – “Financial Market Trends”).

The FHLBank’s netNet income for the three-month period ended JuneSeptember 30, 2010 was $10.1$21.6 million compared to $105.2$24.5 million for the three-month period ended JuneSeptember 30, 2009. The decrease was primarily attributable to the following:
§$3.52.7 million decrease in net interest income (decrease income);
§$1.9 million increase in net other-than-temporary impairment losses on held-to-maturity securities (decrease income);
§$70.57.9 million increase related to net gain (loss) on trading securities (increase income);
§$196.615.7 million decrease related to net gain (loss) on derivatives and hedging activities (decrease income); and
§$38.08.1 million decrease in assessments (increase income).

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Net income (loss) for the six-monthnine-month period ended JuneSeptember 30, 2010 was $(19.5)$2.1 million compared to $166.1$190.6 million for the six-monthnine-month period ended JuneSeptember 30, 2009. The decrease was primarily attributable to the following:
§$2.35.0 million decrease in net interest income (decrease income);
§$3.33.4 million increase in net other-than-temporary impairment losses on held-to-maturity securities (decrease income);
§$64.071.9 million increase related to net gain (loss) on trading securities (increase income);
§$301.8317.4 million decrease related to net gain (loss) on derivatives and hedging activities (decrease income); and
§$60.068.1 million decrease in assessments (increase income).

As indicated above, the decrease in net income (loss) for both the secondthird quarter of 2010 and the first sixnine months of 2010 compared to the same periods in 2009 was mainly due to decreased market values of derivatives and hedging activities that were only partially offset by market value changes in trading securities. These items include derivatives (interest rate swaps, caps and floors) and trading securities (Agency debentures and MBS). A majority of the losses on derivatives and hedging activities are related to the interest rate cap portfolio purchased to hedge the short cap position embedded in the FHLBank’sour variable rate mortgage investment portfolio. The positive impact of market value changes in trading securities can be primarily attributed to the decline in market interest rates over the periods. See “N et Gain (Loss) on Derivative and Hedging Activities” and “Net Gain (Loss) on Trading Securities” in this Item 2 for additional discussion.

The significant fluctuations that have occurred in the FHLBank’s net income (loss) over the past five quarters can primarily be attributed to market value changes on derivatives and hedging activities as well as the mark-to-market revaluations of trading securities. Because derivative valuations are sensitive to both the general level of interest ratesTables 10 through 13 and the instruments’ implied price volatilities, the recorded amounts of derivative gains (losses) have varied considerably from June 30, 2009 to June 30, 2010 as interest rates have fluctuated (note the longer-term Treasury rates in Table 2) and the implied price volatility of certain derivative instruments has also varied considerably. Similarly, the changes in investment prices caused by changes in interest rates have affected the gains (losses) recorded on tra ding securities. These fluctuations in other income (loss) have had a significant impact on the FHLBank’s results of operations and corresponding key ratios. Tables 8 through 11 and the discussiondiscus sion in both “Net Gain (Loss) on Derivative and Hedging Activities” and “Net Gain (Loss) on Trading Securities” in this Item 2 demonstrate and explain the fluctuations in Other Income (Loss) for the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009.

The FHLBank’s return Return on average equity (ROE) decreased to 2.10 percent for the second quarter of 2010 compared to 19.63 percent for the same period of 2009. The FHLBank’s ROE for the first six months of 2010 decreased to (2.04) percent compared to 14.98 percent for the same period of 2009. The decreases in ROE for the three- and six-monthnine-month periods can be primarily attributedended September 30, 2010 compared to the same periods of 2009 (see Table 1) due to the net negative impact of market value changes on derivatives and hedging activities as well as on trading securities as discussed above.securities.

Dividends paidThe significant fluctuations that have occurred in net income (loss) over the past five quarters can also primarily be attributed to market value changes on derivatives and hedging activities which were partially offset by increased market values on trading securities. Because derivative valuations are sensitive to the general level of interest rates, the instruments’ implied price volatilities and the shape of the interest rate curve, the recorded amounts of derivative gains (losses) have varied considerably as: (1) interest rates have fluctuated (note the longer-term Treasury rates in Table 2); (2) the implied price volatility of certain derivative instruments has varied considerably; and (3) interest rate curves have flattened. Similarly, the changes in investment prices caused by changes in interest rates have affected the gains (losses) recorded on trading securities. These fluctuations in other income (loss) have had a significant impact on results of operations and corresponding key ratios.

During the first nine months of 2010, total assets declined by more than 10 percent (see Table 14), and the balance sheet experienced significant compositional changes in assets and relatively minor changes in the composition of liabilities.

Advance balances decreased due to: (1) a reduction in advances by three of our five largest borrowers (see Table 16); (2) the sale of a member to a non-member that subsequently prepaid all outstanding advances in June 2010; and (3) a general de-leveraging trend among financial institutions. See “Financial Condition – Advances” under this Item 2 for additional discussion.
Our investment portfolio decreased due to a small decline in our leverage combined with the repurchase of excess capital stock (see “Liquidity and Capital Resources” under this Item 2). The decrease in investments primarily occurred in our trading securities portfolio, which is comprised mainly of short-term marketable certificates of deposit and commercial paper. The composition of our investment portfolio also changed significantly as we increased our investment in Agency variable rate collateralized mortgage obligations (CMO) under the temporary expansion in mortgage authority granted under Finance Agency Resolution 2008-08. For further discussion, see “Results of Operations” and “Financial Condition – Investments” under this Item 2.

Although the composition of consolidated obligation bonds and discount notes remained relatively stable, total consolidated obligation balances have decreased as a result of the decline in our capital leverage combined with a decline in capital stock. See “Financial Condition – Consolidated Obligations” under this Item 2 for additional discussion.

Dividend rates for the secondthird quarter of 2010 wereof 0.75 percent and 3.00 percent per annum for Class A Common Stock and Class B Common Stock, respectively. This dividend is slightly higher than dividends paid for the second quarter 2009 of 0.75 percent and 2.503.00 percent per annum for Class B Common Stock were unchanged from dividend rates for the third quarter of 2009. We anticipate lowering the Class A Common Stock anddividend rate to 0.40 percent per annum for the fourth quarter of 2010 to better align this dividend with 3-month LIBOR, but anticipate paying the same 3.00 percent per annum dividend rate on Class B Common Stock, respectively. Stock.

The current level of dividends paid in a period is normally determined based upon a spread to the average overnight Federal funds effective rate (see Table 2) and may not correlate with the amount of net income (loss) during the period because of fluctuations in the net gain (loss) on derivativesderivative values and hedging activities and the net gain (loss) on trading securities gains (losses) for the period, which are typically not considered during the determination of dividend rates for a period.rates. However, because the adequacy of GAAP retained earnings as reported in accordance with accounting principles generally accepted in the United States of America (GAAP) is considered in setting the level of our quarterly dividends, gain (loss) on derivatives and trading securities do play a factor in setting the level of our quarterly dividends. The average overnight Federal funds effective rate for the three-month periods ended June 30, 2010 and 2009 was 0.19 percent and 0.18 percent, respectively (see Table 2). Refer to this Item 2 – “Liquidity and Capital Resources – CapitalCapi tal Distributions” for further information regarding FHLBank dividend payments.

 
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FinancialFinancial Market Trends
The primary external factors that affect net interest income are market interest rates and the general state of the economy. Table 2 presents selected market interest rates as of the dates or periods shown.

Table 2

Market Instrument 
June 30, 2010
Three-month
Average
  
June 30, 2009
Three-month
Average
  June 30, 2010 Six-month Average  June 30, 2009 Six-month Average  
September 30,
2010
Three-month
Average
  
September 30,
2009
Three-month
Average
  
September 30,
2010
Nine-month Average
  
September 30,
2009
Nine-month Average
 
Overnight Federal funds effective/target rate1
  0.19%  0.18%  0.16%  0.18%  0.19%  0.15%  0.17%  0.17%
Federal Open Market Committee (FOMC) target rate for overnight Federal funds1
 0.00 to 0.25  0.00 to 0.25  0.00 to 0.25  0.00 to 0.25  0.00 to 0.25  0.00 to 0.25  0.00 to 0.25  0.00 to 0.25 
3-month Treasury bill1
  0.14   0.16   0.12   0.18   0.15   0.15   0.13   0.17 
3-month LIBOR1
  0.44   0.84   0.35   1.04   0.39   0.41   0.36   0.83 
2-year U.S. Treasury note1
  0.86   1.00   0.88   0.95   0.54   1.01   0.77   0.97 
5-year U.S. Treasury note1
  2.24   2.23   2.33   1.99   1.54   2.45   2.06   2.15 
10-year U.S. Treasury note1
  3.48   3.30   3.59   3.00   2.77   3.50   3.31   3.17 
30-year residential mortgage note rate2
  4.93   4.99   4.97   5.01   4.54   5.17   4.83   5.06 

Market Instrument 
June 30, 2010
Ending Rate
  
December 31, 2009
Ending Rate
  
June 30, 2009
Ending Rate
  
September 30,
2010
Ending Rate
  
December 31,
2009
Ending Rate
  
September 30,
2009
Ending Rate
 
Overnight Federal funds effective/target rate1
  0.0 to 0.25% 0.0 to 0.25%  0.0 to 0.25%   0.00 to 0.25% 0.0 to 0.25%  0.00 to 0.25% 
FOMC target rate for overnight Federal funds1
 
0.0 to 0.25
  
0.0 to 0.25
  
0.0 to 0.25
  
0.00 to 0.25
  
0.00 to 0.25
  0.00 to 0.25 
3-month Treasury bill1
  0.18   0.06   0.19   0.16   0.06   0.11 
3-month LIBOR1
  0.53   0.25   0.60   0.29   0.25   0.29 
2-year U.S. Treasury note1
  0.63   1.16   1.11   0.43   1.16   0.95 
5-year U.S. Treasury note1
  1.81   2.70   2.56   1.30   2.70   2.31 
10-year U.S. Treasury note1
  2.97   3.85   3.54   2.53   3.85   3.31 
30-year residential mortgage note rate2
  4.67   4.92   5.34   4.37   4.92   4.94 
__________
1Source is Bloomberg (Overnight Federal funds rate is the effective rate for the quarterly averages and the target rate for the ending rates).
2Mortgage Bankers Association weekly 30-year fixed rate mortgage contract rate obtained from Bloomberg.

At its August 10,November 3, 2010 meeting, the FOMC maintained the Federal funds target rate at a range of zero to 0.25 percent and statedformally announced the further expansion of its balance sheet by stating that it continuesin addition to anticipate that economic conditions, including low ratesmaintaining “…its existing policy of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the Federal funds rate for an extended period. The FOMC stated that a gradual return to higher levels of resource utilization in the context of price stability is anticipated, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated. The FOMC also indicated it will: (1) keep constant the Federal Reserve's holdings of securities at current levels by reinvesting principal payments from Agency debt and Agency MBS intoits securities holdings” it “intends to purchase a further $600 billion of longer-term Trea sury securities; and (2) continue to roll over the Federal Reserve's holdings of Treasury securities as they mature. Due primarily to concerns onby the stabilityend of the second quarter of 2011…” In addition, the FOMC stated that it would “...regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability .” In making this announcement, the FOMC expressed concern over decelerating economic recoverygrowth and subdued inflation outlooks, marketdecreasing “underlying inflation” trends. Market expectations are for the FOMC to maintain the current range for the Federal funds target rate for the remainder of 2010 and well into 2011.

While short-term LIBOR rates fell significantly during 2009, they have increased in early 2010 due primarily to concern of the credit quality of several European Union countries and the health of financial institutions within those countries. The 3-month LIBOR rate increased to 0.53 percent as of June 30, 2010 from 0.25 percent as of December 31, 2009 (see Table 2), with the majority of this increase occurring during the second quarter of 2010. The decrease in the short-term portion of the LIBOR/swap curve in 2009 was primarily the result of excess demand from investors with larger amounts of cash to invest than the supply of eligible money market investments. Additionally, the extension of sovereign guarantees to some of the financial institutions participating in these markets probably contributed to the decline in LIBOR rates. Howe ver, as the financial markets began focusing more on the creditworthiness of certain countries’ sovereign debt obligations in the second quarter of 2010, concerns about these countries, their sovereign guarantees, and individual bank’s exposure to them began to increase. The 3-month LIBOR rate peaked on June 17, 2010 at 0.54 percent. As European debt concerns ebbed in July 2010, the LIBOR ratesrate began a steady, gradual decline.decline, with the September 30, 2010 rate only slightly higher than it was on December 31, 2009 (see Table 2). Changes in LIBOR rates have an impact on interest income and expense because a considerable portion of the FHLBank’sour assets and liabilities are either directly or indirectly tied to LIBOR.

Short-term U.S. Treasury rates remained relativelyat extremely low levels in the secondthird quarter of 2010, while the long-term portion of the U.S. Treasury rate curve (one-year and beyond) declined significantly from the end of 2009. The low short-term rate environment experienced in 2009 and through the secondthird quarter of 2010 is likely due to reducedvery low inflationary expectations and persistently strong demand for U.S. Treasury debt. The demand for safer U.S. Treasury investments increased in 2010 primarilypartly due to growing credit concerns surrounding the debt of certain European countries and financial institutions.institutions but also by the Federal Reserve’s completed and planned purchases of U.S. Treasuries through its quantitative easing initiatives. As a result of relativelyre latively stable short-term interest rates and decreasing long-term interest rates, interest rate curves have flattened but remain steep withsince September 2009. As the difference between short-termeconomy improves and long-term rates remaining historically w ide. While significantly higher rates are unlikely for the second half of 2010, the FHLBank continues to expect higher short-term and long-term interest rates in the future due to economic improvement,Federal Reserve ends its quantitative easing initiatives, the inflationary impact of large budget deficits and the current and anticipated volumes of U.S. Treasury issuance.issuance will likely result in increasing interest rates.

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SpreadsThe Federal Reserve initiated its first round of fixed rate, non-callable FHLBank debt as of June 30, 2010 relative to similar term U.S. Treasury instruments were mixed (some narrowing and some widening) from spreads as of December 31, 2009. For example, the spread between the on-the-run FHLBank two-year bullet debt and the two-year U.S. Treasury note widened from 11 basis points (bps) as of December 31, 2009 to 16 bps as of June 30, 2010. The spread between the on-the-run FHLBank three-year bullet debt and the three-year U.S. Treasury note narrowed from 27 bps as of December 31, 2009 to 19 bps as of June 30, 2010. The spread between the on-the-run FHLBank five-year bullet debt and the five-year U.S. Treasury note widened from 25 bps as of December 31, 2009 to 31 bps as of June 30, 2010. However, the theoretical swap level of the on-the-run FHLBank two-year bullet i mproved from 3-month LIBOR minus 10 bps on December 31, 2009 to 3-month LIBOR minus 17 bps on June 30, 2010. The theoretical swap level of the on-the-run FHLBank three-year bullet improved from 3-month LIBOR minus 6 bps on December 31, 2009 to 3-month LIBOR minus 14 bps on June 30, 2010. The theoretical swap level of the on-the-run FHLBank five-year bullet deteriorated from 3-month LIBOR minus 2 bps on December 31, 2009 to 3-month LIBOR plus 7 bps on June 30, 2010. We believe that the improvementquantitative easing in the FHLBank’s relative LIBOR levels in the front-end of the debt curve (3-year final maturity or less) is primarily due to: (1) increased demand for Agency securities, which kept yields low; (2) widening swap spreads; and (3) increases in LIBOR rates resulting from the European sovereign debt crisis. For many of the same reasons, swapped LIBOR funding spreads also substantially improved during the second quarter of 2010 for other structures including callable consolidated obligation bonds (primarily those w ith fixed-rate coupons, step-up or step-down coupons and complex coupons), floating rate consolidated obligation bonds and term discount notes. As many European nations put in place tighter budgets in an attempt to reduce their debt outstanding relative to gross domestic product, sovereign debt concerns should continue to ebb and relative LIBOR funding levels for consolidated obligation bonds and discount notes can be expected to deteriorate as LIBOR re-sets down.

In November 2008 the Federal Reserve announced that it would begin purchasingby announcing its intention to purchase U.S. Treasuries, Agency MBS and the direct obligations of the housing-related GSEs, including the FHLBank,FHLBanks, in order to reduce the cost and increase the availability of credit for the purchase of homes. Under the programs, the Federal Reserve Bank purchased a cumulative total of approximately $300 billion in U.S. Treasury debt, $1.25 trillion in Agency MBS and $172 billion in Agency debentures by the expirations of the programs on March 31, 2010. These purchases by the Federal Reserve helped stabilize the U.S. Treasury, Agency debenture and Agency MBS markets in December of 2008 and throughout 2009 and were a significantsignific ant factor in the improvements in FHLBank consolidated obligation spreads to U.S. Treasury and relative LIBOR levels. The end of the Federal Reserve Bank’s purchases of GSE direc tdirect obligations in March 2010 does not appear to have negatively impacted the demand for or market perception of FHLBank consolidated obligations. Approximately one-thirdAs of October 20, 2010, the outstanding balance of the Agency debentures purchasedheld by the Federal Reserve Bankwas $151 billion, of which $54 billion will mature inby the next 18 months, and itend of March 2012. It is possible that the cost to issue FHLBank consolidated obligations might increase as new debt is needed to replace these maturities. It is also possible that a sustained economic recovery will lead the Federal Reserve Bank to begin selling these assets. Sale of these instruments would also likely result in an increase in the cost to issue FHLBank consolidated obligations due to the increased supply of Agency debentures and mortgage-backed securitiesMBS in the market.

40
Spreads of fixed rate, non-callable FHLBank debt as of September 30, 2010 relative to similar term U.S. Treasury instruments were mixed (some narrowing and some widening) from spreads as of December 31, 2009 but remained relatively tight to U.S. Treasuries. However, interest rate swap spreads, which are also quoted on a spread to U.S. Treasury, generally narrowed more than FHLBank debt spreads across the maturity spectrum resulting in the deterioration in our achievable swapped funding spread to 3-month LIBOR. The narrowing in interest rate swap spreads was generally a function of a flatter yield curve combined with significant demand for receive fixed/pay float swaps in association with record levels of corporate debt issuance.

Primarily due to the implicit support from the U.S. government, investors continue to view short-term FHLBank consolidated obligations as carrying a strong credit profile. This has resulted in strong investor demand for FHLBank discount notes and short-term bonds throughout the secondthird quarter of 2010 as other parts of the world reacted to the European sovereign debt crisis.2010. Because of this strong demand, the overall cost to issue short-term consolidated obligations remained relatively low throughout the second quarter of 2010. However, yields on discount notes increased somewhat near the very end of the second quarter of 2010. Some of the factors likely responsible for these increases are discussed below.

One important factor in this increase in discount note yields is the decrease in demand from money market funds, an important investor in FHLBank consolidated obligations (especially discount notes and floating rate bonds). Money market fund outflows increased sharply in the first half of 2010, albeit at a slower pace during the second quarter of 2010. The second quarter of 2010 also saw the implementation of many of the money market fund reforms adopted by the Securities and Exchange Commission (SEC) in February 2010 (effective May 2010), including more stringent liquidity and credit quality requirements, provisions that reduce the weighted average maturity of money market funds to 60 days (from 90 days) and limit the weighted average lif e of money market funds to 120 days. The demand for discount notes will likely benefit from some of these changes, especially discount notes with maturities of 60 days or less. However, the new weighted average maturity restrictions might result in less demand for discount notes and consolidated obligation bonds greater than two months, and the new weighted average life restriction might result in less demand for consolidated obligation floating rate bonds from money market funds. Additionally, some investors have continued to move into other comparable assets, such as repurchase agreements, that currently have higher yields than discount notes. Further competition is also expected within the next several months from the Federal Reserve Bank’s reverse repo and term deposit programs which were established to help the Federal Reserve Bank remove excess reserves from the financial system. Tests of the reverse repo and term deposit programs were completed in the first half of 2010. Full-scale rollout of th ese programs, in addition to other tools employed by the Federal Reserve, will likely increase discount note costs as reverse repos, term deposits and Treasury bills might compete with discount notes for inclusion in money market funds. However, because of European sovereign debt concerns and concerns over potential international and domestic economic weakness, the timing of the Federal Reserve’s rollout of programs to remove excess reserves from the financial system is uncertain. On February 12, 2010, a $1.9 trillion increase to the U.S. debt ceiling became law which allowed for an increase in supply of U.S. Treasury bills. The increase in supply was also a likely contributor to the increased discount note costs experienced by the FHLBank late in the firstthird quarter of 2010.

ForeignWhile foreign demand for Agency securities (debt and mortgage-backed securities)MBS) increased in the second quarter of 2010 to levels that have not been reached since December 2008.2008, it declined significantly in the third quarter of 2010 and into the fourth quarter of 2010. Foreign investor holdings of Agency debentures and MBS, as reported by the Federal Reserve Bank’s H.4.1 report, increased from $769.6 billion on December 30, 2009 to $773.2 billion on March 24, 2010 to $824.2$830.2 billion on June 30,23, 2010. However, foreign investor holdings of Agency debentures and MBS declined to $752.5 billion on September 29, 2010 and continued to decline to $733.0 billion on October 20, 2010. Additionally, the U.S. Treasury’s International Capital data reports have shown that the improvements and, in recent months, increases in both private andan d official foreign acquisition of long-term Agency bonds.bonds from earlier in 2010 are decelerating or reversing course. To date, this trend has not materially impacted our cost of funds likely because of the significant decrease in the FHLBank System’s balance sheet since December 31, 2009. However, our cost of funds could be negatively affected if this trend continues and the FHLBank System’s balance sheet stabilizes or begins to grow.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires us to make a number of judgments and assumptions that affect reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to our results. These assumptions and assessments include the following:
§   Accounting related to derivatives;
§   Fair-value determinations;
§   Accounting for OTTI of investments;
§   Accounting for deferred premiums/discounts associated with MBS; and
§   Determining the adequacy of the allowance for credit losses.

On February 10, 2010, Freddie MacChanges in any of the estimates and Fannie Mae announcedassumptions underlying our critical accounting policies could have a material effect on our financial statements.

The accounting policies that they would buy back loans thatwe believe are delinquent by 120 days or more outthe most critical to an understanding of their guaranteed MBS. Both Agencies completed mostour financial results and condition and require complex management judgment are described under Item 7 – “Management’s Discussion and Analysis of their initial roundsFinancial Condition and Results of these buyoutsOperations – Critical Accounting Policies and Estimates” in the secondannual report on Form 10-K, incorporated by reference herein. There were no material changes to our critical accounting policies and estimates during the quarter ofended September 30, 2010. Any additional smaller buyouts of delinquent loans by Freddie Mac and Fannie Mae will likely reduce the increased funding needs from these Agencies which should limit the upward pressure on FHLBank funding costs resulting from competitive supply.

43
AsResults of February 1, 2010, the Federal Reserve closed most of its special liquidity facilities, which were initiated as a result of the severe financial market turmoil in the fall of 2008. Those facilities that were closed include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility and the Term Securities Lending Facility. Additionally, the Federal Reserve held the last Term Auction Facility (TAF) auction on March 8, 2010 (after several previous announcements regarding reductions in auction sizes) due to improvements in the short-term funding markets. TAF funds were an alternative to FHLBank advances for certain FHLBank members, and therefore, these actions may increase demand for advances from these members. The Federal Reserve als o announced on February 18, 2010 that it was increasing the spread of the primary credit discount window rate over the FOMC’s target federal funds rate to 50 basis points from 25 basis points. Effective March 18, 2010, the Federal Reserve reduced the maximum maturity of primary credit loans from 28 days to overnight.

Results of Operations
The primary source of the FHLBank’sour earnings is net interest income, which is interest earned on advances, mortgage loans, and investments less interest paid on consolidated obligations, deposits, and other borrowings. The decrease in the FHLBank’s net interest income from the secondthird quarter of 2009 to the secondthird quarter of 2010 and from the first halfnine months of 2009 to the first halfnine months of 2010 can be primarily attributed to a decrease in average interest-earning assets despite an increase in net interest spreads. See Tables 46 through 79 under this Item 2 for further information.

In addition to the relatively minor decrease in net interest income, net income decreased significantly due to changesthe net change in the market value of derivatives and trading securities. See “Net Gain (Loss) on Derivatives and Hedging Activities” and “Net Gain (Loss) on Trading Securities” in this Item 2 for a discussion of the impact of these activities by period.

As part of evaluating its financial performance, the FHLBank adjustswe adjust net income reported in accordance with accounting principles generally accepted in the United States of America (GAAP)GAAP for the impact of: (1) Affordable Housing Program (AHP) and Resolution Funding Corporation (REFCORP) assessments; (2) items related to derivatives and hedging activities; and (3) other irregularitems excluded because they are not considered a part of our routine operations or non-recurring itemscore business such as prepayment fees, gain/loss on retirement of debt and gain/loss on securities. The result is referred to as core income, which is a non-GAAP measure of income. Core income is used to compute a core ROE that is then compared to the average overnight Federal funds effective rate, with the net referred to as core ROE spread. Because the FHLBank is primarily a “hold-to-maturity” investor, management believes that core income, core ROE and core ROE spread are helpful in understanding its operating results and provide a meaningful period-to-period comparison in contrast to GAAP income, and ROE based on GAAP income, which can vary significantly because of derivatives and hedging activities or other items that may not recur. Derivative accounting affects the timing of income or expense from derivatives and their related assets and liabilities hedged, but not the economic income or expense from these derivatives. Core income and core ROE spread are used by the FHLBankused: (1) to measure performance under our incentive compensation plans,plans; (2) as a key measure in determining the level of quarterly dividendsdividends; and (3) in strategic planning. While we utilize core income as a key measure in determining the level of dividends,div idends, we consider GAAP income volatility caused by gain (loss) on derivatives and trading securities in determining the adequacy of our retained earnings as determined under GAAP. Because the adequacy of GAAP retained earnings is consi deredconsidered in setting the level of our quarterly dividends, gain (loss) on derivatives and trading securities do play a factor in setting the level of our quarterly dividends. Core income is used to compute a core ROE that is then compared to the average overnight Federal funds effective rate, with the net referred to as core ROE spread. Because we are primarily a “hold-to-maturity” investor, we believe that core income, core ROE and core ROE spread are helpful in understanding our operating results and provide a meaningful period-to-period comparison in contrast to GAAP income, and ROE based on GAAP income, which can vary significantly because of the volatility in derivatives and hedging activities and other items that may be unpredictable or unusual. Derivative accounting affects the timing of income or expense from derivatives and their related assets and liabilities hedged, but not the economic income or expense from these derivatives. For example, interest rate caps are purchased with an upfront fixed cost to provide protection against the risk of rising interest rates. Under derivative accounting guidance, these instruments are then marked to market each month, which can result in having to recognize significant gains and losses from quarter to quarter, producing volatility in our GAAP income. However, the sum of such gains and losses over the term of a derivative will still equal its original purchase price. Table 3 presents a reconciliation of GAAP income to core income for the three- and nine-month periods ended September 30, 2010 and 2009 (in thousands):

41
Table 3

  
Three-month Period Ended
September 30,
  
Nine-month Period Ended
September 30,
 
  2010  2009  2010  2009 
Net income, as reported under GAAP $21,591  $24,503  $2,059  $190,596 
AHP/REFCORP assessments  771   8,856   771   68,875 
Income before AHP/REFCORP assessments  22,362   33,359   2,830   259,471 
Hedging-related and other excluded items1
  21,983   17,844   145,449   (98,410)
Non-GAAP core income before assessments2
 $44,345  $51,203  $148,279  $161,061 
__________
1Includes “Prepayment fees on terminated advances,” “Net gain (loss) on trading securities,” and “Net gain (loss) on derivatives and hedging activities” directly from our Statements of Income.
2Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, we have procedures in place to calculate these measures using the appropriate GAAP components. Although these non-GAAP measures are frequently used by our stakeholders in the evaluation of our performance, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

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

Table 4

  
Three-month Period Ended
September 30,
  
Nine-month Period Ended
September 30,
 
  2010  2009  2010  2009 
Average GAAP capital for the period $1,853,205  $2,000,886  $1,906,752  $2,156,957 
ROE, based upon GAAP income before assessments  4.79%  6.61%  0.20%  16.08%
Core ROE, based upon core income before assessments1
  9.49%  10.15%  10.40%  9.98%
Average overnight Federal funds effective rate  0.19%  0.15%  0.17%  0.17%
Core ROE income as a spread to average Federal funds rate1
  9.30%  10.00%  10.23%  9.81%
__________
1Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, we have procedures in place to calculate these measures using the appropriate GAAP components. Although these non-GAAP measures are frequently used by our stakeholders in the evaluation of our performance, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

Earnings Analysis – Table 35 presents changes in the major components of the FHLBank’sour earnings for the secondthird quarter of 2010 compared to the secondthird quarter of 2009 and the first sixnine months of 2010 compared to the first sixnine months of 2009 (in thousands):

Table 35

 Increase (Decrease) in Earnings Components  Increase (Decrease) in Earnings Components 
 Three-month Periods Ended June 30, 2010 vs. 2009  
Six-month Periods Ended
June 30, 2010 vs. 2009
  Three-month Periods Ended September 30, 2010 vs. 2009  
Nine-month Periods Ended
September 30, 2010 vs. 2009
 
 
Dollar
Change
  
Percent
Change
  
Dollar
Change
  
Percent
Change
  
Dollar
Change
  
Percent
Change
  
Dollar
Change
  
Percent
Change
 
Total interest income $(54,922)  (24.7)% $(159,742)  (33.0)% $(26,144)  (14.4)% $(185,886)  (27.9)%
Total interest expense  (51,466)  (34.8)  (157,440)  (45.2)  (23,447)  (19.2)  (180,887)  (38.5)
Net interest income  (3,456)  (4.6)  (2,302)  (1.7)  (2,697)  (4.5)  (4,999)  (2.5)
Provision for credit losses on mortgage loans  93   89.4   842   738.6   (667)  (76.5)  175   17.7 
Net interest income after mortgage loan loss provision  (3,549)  (4.8)  (3,144)  (2.3)  (2,030)  (3.4)  (5,174)  (2.6)
Net gain (loss) on trading securities  70,512   274.2   63,964   403.7   7,916   42.0   71,880   2,390.4 
Net gain (loss) on derivatives and hedging activities  (196,600)  (191.9)  (301,753)  (246.9)  (15,668)  (42.4)  (317,421)  (372.2)
Other non-interest income  (1,697)  (71.3)  (3,076)  (68.4)  (127)  (5.1)  (3,203)  (46.0)
Total non-interest income (loss)  (127,785)  (161.5)  (240,865)  (217.3)  (7,879)  (50.5)  (248,744)  (261.1)
Operating expenses  1,699   20.5   1,394   7.9   995   11.3   2,389   9.0 
Other non-interest expenses  145   6.4   241   6.7   93   8.4   334   7.1 
Total other expenses  1,844   17.5   1,635   7.7   1,088   11.0   2,723   8.7 
AHP assessments  (11,700)  (100.0)  (18,496)  (100.0)  (2,474)  (90.6)  (20,970)  (98.8)
REFCORP assessments  (26,307)  (100.0)  (41,523)  (100.0)  (5,611)  (91.6)  (47,134)  (98.9)
Total assessments  (38,007)  (100.0)  (60,019)  (100.0)  (8,085)  (91.3)  (68,104)  (98.9)
Net income (loss) $(95,171)  (90.4)% $(185,625)  (111.8)% $(2,912)  (11.9)% $(188,537)  (98.9)%

42
Net Interest Income – As mentioned previously, the decreases in the FHLBank’s net interest income for the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 compared to the same periods in 2009 were primarily due to the decreases in average interest-earning assets, which were partially offset by improvements in net interest spread and net interest margin. Some key factors in these improvements were: (1) improvements in the funding cost of consolidated obligation discount notes and consolidated obligation bonds; (2) active management of the debt used to fund long-term assets (calling higher cost callable debt and replacing with lower cost callable debt); and (3) an increase in the proportion of higher earning assets (primarily MBS investments and mortgage loans) t oto total assets as advance balances, on average, declined.

44
The average yieldAverage yields on advances was 1.05 percentdecreased for the three and nine months ended JuneSeptember 30, 2010 compared to 1.54 percent for the three months ended June 30, 2009. Additionally, the average yield on advances was 0.97 percent for the six months ended June 30, 2010 compared to 1.55 percent for the six months ended June 30, 2009. The decreases in average yields on advances are attributable tosame periods of 2009 (see Tables 6 and 8) as a result of the decline in short-term rates combined with the relative short-term nature of the FHLBank’sour advance portfolio. As discussed under this Item 2 – “Financial Condition – Advances,” a significant portion of the FHLBank’sour advance portfolio either re-prices within three months or is swapped to shorter-term indices (1- or 3-month LIBOR) to synthetically create adjustable rate advances that effectively re-price at least ev eryevery three months. Because of the relatively short nature of the FHLBank’s advance portfolio, including the impact of any interest rate swaps qualifying as fair value hedges, the average yield in this portfolio typically responds quickly to changes in the generalgenera l level of short-term interest rates. The level of short-term interest rates is determined by numerous factors including, but not limited to, the FOMC overnight Federal funds target rate and FOMC policy statements, Treasury bill rates, Agency spreads to Treasury bills, and by the expectations of capital market participants related to the strength of the economy, future inflationary pressures, international financial issues and other factors.

The average yield on investments was 1.52 percentdecreased for the secondthird quarter of 2010 compared to 1.62 percentthe third quarter of 2009 (see Table 6) and for the second quarter of 2009. For the sixnine months ended JuneSeptember 30, 2010 andcompared to the nine months ended September 30, 2009 the average yield on investments was 1.49 percent and 1.76 percent, respectively. Average yields on investments declined(see Table 8) due primarily to declining interest rates as LIBOR, which remainedwas somewhat dislocated in the first quarter 2009, returned to a more normalized relationship with other market interest rates. Throughout the last half of 2009, the spread differential between the overnight Federal funds target rate and LIBOR narrowed asnarrowed. We believe the narrowing spread was the result of market participants becamebecoming less concerned about the creditworthiness of their counterparts. This spread increased somewhat in the second quarter of 2010 as a result of the European sovereign debt crisis. However, as concern over the cr isis abated in the third quarter, the spread returned to levels similar to those prior to the crisis. The average rate on FHLBankour investments rises and falls in conjunction with the level of short-term interest rates primar ilyprimarily because of the short-term nature of the FHLBank’sour investment portfolio and aour large position in LIBOR-based variable rate MBS.MBS/CMOs.

The FHLBank began purchasing new Agency variable rate CMOs with embedded capsAs discussed under this Item 2 – “Financial Condition – Investments,” we expanded our MBS/CMO portfolio in December 2009 and continued these purchases inunder temporary authority granted by Finance Agency Resolution 2008-08. In the first quarter of 2010. The FHLBank purchased a total of2010, we further expanded our MBS/CMO portfolio by $2.5 billion in Agency variable rate CMOs with embedded caps during this period.caps. Over the last several years, the FHLBank’sour investment strategy focused more on the purchase of Agency variable rate CMOs with embedded interest rate caps because these securities generally had a higher overall risk-adjusted return relative to the FHLBank’sour cost of funds than comparable fixed rate CMOs. Included in this strategy was the purchase of interest rate caps that effectively offset a portion of the negative effect of the caps embedded in the CMOs. See additional discussion on the impact of interestint erest rate caps under this Item 2 – “Net Gain (Loss) on Derivatives and Hedging Activities.” All Agency MBS/CMOs held in the FHLBank’sour trading portfolio during the first nine months of 2010 were also variable rate instruments with embedded caps, the majority of which were acquired in 2007.

The annualized average rate paid on all interest-bearing deposits was 0.15 percent forunchanged from the secondthird quarter of 2009 to the third quarter of 2010 (see Table 6) and 0.26 percent fordecreased from the second quarter of 2009. For the sixnine months ended JuneSeptember 30, 2009 to the nine months ended September 30, 2010 and 2009, the annualized average rate paid on deposits was 0.15 percent and 0.42 percent, respectively.(see Table 8). The average rate paid on deposits fluctuatedgenerally fluctuates in tandem with the movement in short-term interest rates. The level of short-term interest rates is primarily driven by the FOMC decisions on the target rate for overnight Federal funds, but is also influenced by the expectations of capital market participants. However, because of the current extremely low interest rate environment, we established a floor of 5 basis points (bps) on demand deposits and 15 bps on overnight deposits in June 2009.

TheWhile the average yield on consolidated obligation discount notes declined from 0.33 percent to 0.17 percentonly slightly from the secondthird quarter of 2009 to the secondthird quarter of 2010 and(see Table 6), the average yield declined from 0.60 percent to 0.14 percentsignificantly from the first halfnine months of 2009 to the first halfnine months of 2010.2010 (see Table 8). Some key factors in the significant decline were: (1) a significant reduction in market interest rates both between the first halfnine months of 2009 and the first half of 2010, and between the second quarter of 2009 and the second quarternine months of 2010; and (2) consistently strong demand for FHLBank discount notes. In the third and fourth quarter of 2008, the FHLBank secured a significant amount of relatively long-term discount notes to bolster its liquidity position in response to the financial market disruptions during these periods. These actions created an asset-liability mismatch (assets r e-pricing more quickly than liabilities) on the short end of the FHLBank’s balance sheet. As short-term interest rates fell, this mismatch resulted in a decrease in the FHLBank’s net interest income in the fourth quarter of 2008 (and continued to provide a drag on net interest income into the first quarter of 2009). While this asset-liability mismatch continued into early 2009, the FHLBank was able to replace most of these relatively high cost discount notes with new discount notes at significantly lower costs by the end of the first quarter of 2009. Therefore, as the relatively expensive term discount notes issued in the third and fourth quarters of 2008 matured in 2009, the FHLBank was able to maintain sufficient liquidity with much less of a negative impact to net interest income.

The average yield on consolidated obligation bonds declined from 1.99 percent to 1.50 percent from the secondthird quarter of 2009 to the secondthird quarter of 2010 (see Table 6) and declined from 2.10 percent to 1.46 percent from the first halfnine months of 2009 to the first halfnine months of 2010.2010 (see Table 8). Some important factors in the decline in consolidated obligation bond yieldyields were: (1) generally lower market interest rates, especiallyincluding LIBOR since a significant portion of the FHLBank’sour consolidated obligation bonds are swapped to LIBOR; and (2) active management of the debt used to fund long-term assets (replacing called or maturing consolidated obligations with lower cost callable or fixed rate debt).

The FHLBankWe actively managed itsour long-term funding costs to a lower level by calling previously issued unswapped, callable debt and replacing it with new lower-cost fixed rate, callable, and to a lesser extent, non-callable, consolidated obligation bonds. Over the past several years, the FHLBank has used callable debt with short lockouts (primarily three to six months) has been used as a primary funding tool for mortgage assets and a secondary funding tool for amortizing advances, which provided an opportunity to take advantage of lower debt costs in 2009 and throughout the first sixnine months of 2010. During this same time period,Generally, from the third quarter of 2009 to the third quarter of 2010 and from the first nine months of 2009 to the first nine months of 2010, the average yields of the unswapped, callable debt has fallen more than the average yield on our fixed-rate mortgage a ssets and amortizing advances. This has been an important factor in improvements in the FHLBank's mortgage assets have remained relatively unchanged. The FHLBanknet interest spread in these asset categories. We continued to maintain a sizable portfolio of unswapped callable bonds in the secondthird quarter of 2010. Unswapped callab lecallable bonds declinedincreased from $3.6 billion onas of December 31, 2009 to $3.3$4.0 billion on Juneas of September 30, 2010. Callable bonds are an effective instrument for funding fixed rate mortgage-related assets and amortizing advances because they provide a way to offset the prepayment risk.

A significant portion of the FHLBank’sour consolidated obligation bonds is comprised of long-term callable bonds swapped to LIBOR which is used to fund LIBOR-based and other short-term assets. When assets and liabilities are based upon different indices, the FHLBank iswe are exposed to basis risk. While the FHLBankwe maintained a reduced level of LIBOR basis risk exposure through much of the first half of 2009, itwe did increase itsour LIBOR basis risk in the third and fourth quarters of 2009 by increasing LIBOR-based liabilities beyond the level of LIBOR-based assets in order to take advantage of significant market opportunities. This opportunity allowed the FHLBankus to issue debt at rates less than overnight consolidated obligation discount notes and, in some cases, near or below zero percent. The FHLBankWe transitioned to a more matchedbalanced basis p ositionposition in 2010 as this opportunity dissipateddissipat ed and other LIBOR debt matured. Additionally,However, in the first half of 2010 the FHLBankwe added a significant amount of 6- to 21-month fixed rate debt to fund LIBOR-based floating rate CMOs assets. The fixed rate funding was used to lock in relatively low fixed rates in anticipation of increasing short-term rates.

 
4543
 
Derivative and hedging activities impacted the FHLBank’sour net interest spread as well. The assets and liabilities hedged with derivative instruments designated under fair value hedging relationships are adjusted for changes in fair values even as other assets and liabilities continue to be carried on a historical cost basis. The result is that positive basis adjustments on: (1) advances reduce the average annualized yield; and (2) consolidated obligations decrease the average annualized cost. The positive basis adjustments on advances have exceeded those on consolidated obligations over the last five quarters. Therefore, the average net interest spread has been negatively affected by the basis adjustments included in the asset and liability balances and is not necessarily comparable between quarters. Additionally, the diffe rentialsdifferentials between accruals of interest receivables and payables on derivatives designated as fair value hedges as well as the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the designated underlying hedged item. However, net interest payments or receipts on derivatives that do not qualify for hedge accounting (economic hedges) flow through Net Gain (Loss) on Derivatives and Hedging Activities and not Net Interest Income (net interest received/paid on economic derivatives is identified in Tables 810 through 1113 under this Item 2), which distorts yields especially for trading investments that are swapped.

As explained in more detail in Item 3 – “Quantitative and Qualitative Disclosure About Market Risk – Interest Rate Risk Management – Duration of Equity,” the FHLBank’sour duration of equity (DOE) is relatively short. The historically short DOE is the result of the short maturities (or short reset periods) of the majority of the FHLBank’sour assets and liabilities. Accordingly, the FHLBank’sour net interest income is quite sensitive to the level of short-term interest rates, all else being equal. The fact that the yield on assets and the cost of liabilities can change quickly makes it crucial for management to tightly control and minimize any duration mismatch of short-term assets and liabilities so that changes in short-term rates will not adversely impact net interest income.

Table 46 presents average balances and yields of major earning asset categories and the sources funding those earning assets (in thousands):

Table 46

 For the Three-month Period Ended  For the Three-month Period Ended 
 June 30, 2010  June 30, 2009  September 30, 2010  September 30, 2009 
 
Average
Balance
  
Interest
Income/
Expense
  Yield  
Average
Balance
  
Interest
Income/
Expense
  Yield  
Average
Balance
  
Interest
Income/
Expense
  Yield  
Average
Balance
  
Interest
Income/
Expense
  Yield 
Interest-earning assets:                                    
Interest-bearing deposits8
 $79,733  $39   0.20% $6,215,643  $3,910   0.25%
Interest-bearing deposits $155,662  $78   0.20% $104,629  $49   0.18%
Federal funds sold  2,203,358   1,155   0.21   527,187   704   0.54   2,419,548   1,281   0.21   2,769,637   1,214   0.17 
Investments6
  15,409,301   65,976   1.72   14,163,762   79,615   2.25   13,665,441   55,078   1.60   15,351,913   71,170   1.84 
Advances1,7
  21,916,040   57,258   1.05   25,605,459   98,113   1.54   20,739,789   54,580   1.04   23,781,615   68,546   1.14 
Mortgage loans held for portfolio1,4,5
  3,445,973   42,529   4.95   3,193,282   39,439   4.95   3,722,534   44,176   4.71   3,219,503   40,259   4.96 
Other interest-earning assets  39,919   652   6.54   46,470   750   6.47   39,514   644   6.47   46,497   743   6.34 
Total earning assets  43,094,324   167,609   1.56   49,751,803   222,531   1.79   40,742,488   155,837   1.52   45,273,794   181,981   1.59 
Other non-interest-earning assets  178,256           192,165           187,242           238,983         
Total assets $43,272,580          $49,943,968          $40,929,730          $45,512,777         
                        
Interest-bearing liabilities:                                                
Deposits $1,982,721   728   0.15  $1,667,023   1,066   0.26  $2,309,004   849   0.15  $1,809,163   679   0.15 
Consolidated obligations1:
                                                
Discount Notes  14,898,884   6,436   0.17   18,885,338   15,347   0.33   13,215,133   5,793   0.17   14,722,615   6,871   0.19 
Bonds  23,806,717   88,862   1.50   26,460,921   131,008   1.99   22,839,856   91,822   1.59   26,293,582   114,377   1.73 
Other borrowings  36,839   247   2.68   47,599   318   2.68   51,786   320   2.45   40,694   304   2.97 
Total interest-bearing liabilities  40,725,161   96,273   0.95   47,060,881   147,739   1.26   38,415,779   98,784   1.02   42,866,054   122,231   1.13 
Capital and other non-interest-bearing funds  2,547,419           2,883,087           2,513,951           2,646,723         
Total funding $43,272,580          $49,943,968          $40,929,730          $45,512,777         
                                                
Net interest income and net interest spread2
     $71,336   0.61%     $74,792   0.53%     $57,053   0.50%     $59,750   0.46%
                                                
Net interest margin3
          0.66%          0.60%          0.56%          0.52%
__________
1Interest income/expense and average rates include the effect of associated derivatives.
2Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
3Net interest margin is net interest income as a percentage of average interest-earning assets.
4The FHLBank nets credit enhancement (CE)CE fee payments are netted against interest earnings on the mortgage loans held for portfolio. The expense related to CE fee payments to participating financial institutions (PFI) was $704,000$743,000 and $703,000$668,000 for the quarters ended JuneSeptember 30, 2010 and 2009, respectively.
5Mortgage loans held for portfolio average balance includes outstanding principal for non-performing loans. However, these loans no longer accrue interest.
6The non-credit portion of the other-than-temporary impairmentOTTI discount on held-to-maturity securities is excluded from the average balance for calculations of yield since the change runs through equity.
7Advance income includes prepayment fees on terminated advances.

44
Changes in the volume of interest-earning assets and the level of interest rates influence changes in net interest income, net interest spread and net interest margin. Table 7 summarizes changes in interest income and interest expense between the third quarters of 2010 and 2009 (in thousands):

Table 7

  
Three-month Periods Ended
September 30, 2010 vs. 2009
 
  Increase (Decrease) Due to 
  
Volume1,2
  
Rate1,2
  Total 
Interest Income:         
Interest-bearing deposits $25  $4  $29 
Federal funds sold  (165)  232   67 
Investments  (7,351)  (8,741)  (16,092)
Advances  (8,314)  (5,652)  (13,966)
Mortgage loans held for portfolio  6,048   (2,131)  3,917 
Other assets  (114)  15   (99)
Total earning assets  (9,871)  (16,273)  (26,144)
Interest Expense:            
Deposits  184   (14)  170 
Consolidated obligations:            
Discount notes  (677)  (401)  (1,078)
Bonds  (14,302)  (8,253)  (22,555)
Other borrowings  75   (59)  16 
Total interest-bearing liabilities  (14,720)  (8,727)  (23,447)
Change in net interest income $4,849  $(7,546) $(2,697)
__________
1Changes in interest income and interest expense not identifiable as either volume-related or rate-related have been allocated to volume and rate based upon the proportion of the absolute value of the volume and rate changes.
2Amounts used to calculate volume and rate changes are based on numbers in dollars. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same results.

45
Table 8 presents average balances and annualized yields of major earning asset categories and the sources funding those earning assets for the nine months ended September 30, 2010 and 2009 (in thousands):

Table 8

  For the Nine-month Period Ended 
  September 30, 2010  September 30, 2009 
  
Average
Balance
  
Interest
Income/
Expense
  Yield  
Average
Balance
  
Interest
Income/
Expense
  Yield 
Interest-earning assets:                  
Interest-bearing deposits8
 $107,876  $148   0.18% $3,751,401  $7,052   0.25%
Federal funds sold  2,491,813   3,453   0.19   1,270,039   3,201   0.34 
Investments6
  14,755,452   185,094   1.68   14,911,873   244,014   2.19 
Advances1,7
  21,735,109   161,617   0.99   27,120,165   290,576   1.43 
Mortgage loans held for portfolio1,4,5
  3,503,258   128,349   4.90   3,175,793   119,406   5.03 
Other interest-earning assets  41,544   2,002   6.44   49,523   2,300   6.21 
Total earning assets  42,635,052   480,663   1.51   50,278,794   666,549   1.77 
Other non-interest-earning assets  198,014           207,501         
Total assets $42,833,066          $50,486,295         
Interest-bearing liabilities:                        
Deposits $1,945,227   2,121   0.15  $1,742,359   4,267   0.33 
Consolidated obligations1:
                        
Discount Notes  14,117,244   15,863   0.15   19,101,257   70,145   0.49 
Bonds  24,015,795   270,482   1.51   26,695,945   394,594   1.98 
Other borrowings  42,291   861   2.72   60,041   1,208   2.69 
Total interest-bearing liabilities  40,120,557   289,327   0.96   47,599,602   470,214   1.32 
Capital and other non-interest-bearing funds  2,712,509           2,886,693         
Total funding $42,833,066          $50,486,295         
                         
Net interest income and net interest spread2
     $191,336   0.55%     $196,335   0.45%
                         
Net interest margin3
          0.60%          0.52%
__________
1Interest income/expense and average rates include the effect of associated derivatives.
2Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
3Net interest margin is net interest income as a percentage of average interest-earning assets.
4CE fee payments are netted against interest earnings on the mortgage loans held for portfolio. The expense related to CE fee payments to PFIs was $1,979,000 and $1,845,000 for the nine months ended September 30, 2010 and 2009, respectively.
5Mortgage loans held for portfolio average balance includes outstanding principal for non-performing loans. However, these loans no longer accrue interest.
6The non-credit portion of the OTTI discount on held-to-maturity securities is excluded from the average balance for calculations of yield since the change runs through equity.
7Advance income includes prepayment fees on terminated advances.
8As of June 30, 2009, interest bearing deposits included deposits at the Federal Reserve. On May 20, 2009, the Federal Reserve Board issued a final rule amending Regulation D, which resulted in the elimination of interest paid on excess reserves held at the FHLBank's Federal Reserve account effective July 2, 2009. As a result, in the third quarter of 2009, the FHLBank decreased its excess reserves at the Federal Reserve and increased its investment in short-term money market instruments, predominately in the form of commercial paper, certificates of deposit and overnight Federal funds transactions. 

 
46
 
Changes in the volume of interest-earning assets and the level of interest rates influence changes in net interest income, net interest spread and net interest margin. Table 5 summarizes changes in interest income and interest expense between the second quarters of 2010 and 2009 (in thousands):

Table 5

  
Three-month Periods Ended
June 30, 2010 vs. 2009
 
  Increase (Decrease) Due to 
  
Volume1
  
Rate2
  Total 
Interest Income:         
Interest-bearing deposits $(3,174) $(697) $(3,871)
Federal funds sold  1,096   (645)  451 
Investments  6,552   (20,191)  (13,639)
Advances  (12,735)  (28,120)  (40,855)
Mortgage loans held for portfolio  3,119   (29)  3,090 
Other assets  (106)  8   (98)
Total earning assets  (5,248)  (49,674)  (54,922)
Interest Expense:            
Deposits  175   (513)  (338)
Consolidated obligations:            
Discount notes  (2,768)  (6,143)  (8,911)
Bonds  (12,204)  (29,942)  (42,146)
Other borrowings  (72)  1   (71)
Total interest-bearing liabilities  (14,869)  (36,597)  (51,466)
Change in net interest income $9,621  $(13,077) $(3,456)
1Changes in interest income and interest expense not identifiable as either volume-related or rate-related have been allocated to volume and rate based upon the proportion of the absolute value of the volume and rate changes.
2Amounts used to calculate volume and rate changes are based on numbers in dollars. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same results.
47
Table 6 presents average balances and annualized yields of major earning asset categories and the sources funding those earning assets for the six months ended June 30, 2010 and 2009 (in thousands):

Table 6

  For the Six-month Period Ended 
  June 30, 2010  June 30, 2009 
  
Average
Balance
  
Interest
Income/
Expense
  Yield  
Average
Balance
  
Interest
Income/
Expense
  Yield 
Interest-earning assets:                  
Interest-bearing deposits8
 $83,586  $70   0.17% $5,605,008  $7,003   0.25%
Federal funds sold  2,528,544   2,172   0.17   507,812   1,987   0.79 
Investments6
  15,309,490   130,016   1.71   14,688,206   172,844   2.37 
Advances1,7
  22,241,017   107,037   0.97   28,817,108   222,030   1.55 
Mortgage loans held for portfolio1,4,5
  3,391,803   84,173   5.00   3,153,576   79,147   5.06 
Other interest-earning assets  42,576   1,358   6.43   51,060   1,557   6.15 
Total earning assets  43,597,016   324,826   1.50   52,822,770   484,568   1.85 
Other non-interest-earning assets  203,491           191,501         
Total assets $43,800,507          $53,014,271         
                         
Interest-bearing liabilities:                        
Deposits $1,760,324   1,272   0.15  $1,708,403   3,588   0.42 
Consolidated obligations1:
                        
Discount Notes  14,575,775   10,070   0.14   21,326,865   63,274   0.60 
Bonds  24,613,510   178,660   1.46   26,900,461   280,217   2.10 
Other borrowings  37,465   541   2.91   69,875   904   2.61 
Total interest-bearing liabilities  40,987,074   190,543   0.94   50,005,604   347,983   1.40 
Capital and other non-interest-bearing funds  2,813,433           3,008,667         
Total funding $43,800,507          $53,014,271         
                         
Net interest income and net interest spread2
     $134,283   0.56%     $136,585   0.45%
                         
Net interest margin3
          0.62%          0.52%
1Interest income/expense and average rates include the effect of associated derivatives.
2Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
3Net interest margin is net interest income as a percentage of average interest-earning assets.
4The FHLBank nets CE fee payments against interest earnings on the mortgage loans held for portfolio. The expense related to CE fee payments to PFIs was $1,236,000 and $1,177,000 for the six months ended June 30, 2010 and 2009, respectively.
5Mortgage loans held for portfolio average balance includes outstanding principal for non-performing loans. However, these loans no longer accrue interest.
6The non-credit portion of the other-than-temporary impairment discount on held-to-maturity securities is excluded from the average balance for calculations of yield since the change runs through equity.
7Advance income includes prepayment fees on terminated advances.
8As of June 30, 2009, interest bearing deposits included deposits at the Federal Reserve. On May 20, 2009, the Federal Reserve Board issued a final rule amending Regulation D, which resulted in the elimination of interest paid on excess reserves held at the FHLBank's Federal Reserve account effective July 2, 2009. As a result, in the third quarter of 2009, the FHLBank decreased its excess reserves at the Federal Reserve and increased its investment in short-term money market instruments, predominately in the form of commercial paper, certificates of deposit and overnight Federal funds transactions. 

48
Changes in the volume of interest-earning assets and the level of short-term interest rates influence changes in net interest income, net interest spread and net interest margin. Table 79 summarizes changes in interest income and interest expense between the first sixnine months of 2010 and 2009 (in thousands):

Table 79

 
Six-month Periods Ended
June 30, 2010 vs. 2009
  
Nine-month Periods Ended
September 30, 2010 vs. 2009
 
 Increase (Decrease) Due to  Increase (Decrease) Due to 
 
Volume1
  
Rate2
  Total  
Volume1,2
  
Rate1,2
  Total 
Interest Income:                  
Interest-bearing deposits $(5,200) $(1,733) $(6,933) $(5,399) $(1,505) $(6,904)
Federal funds sold  2,748   (2,563)  185   2,135   (1,883)  252 
Investments  7,041   (49,869)  (42,828)  (2,534)  (56,386)  (58,920)
Advances  (43,477)  (71,516)  (114,993)  (50,750)  (78,209)  (128,959)
Mortgage loans held for portfolio  5,921   (895)  5,026   12,060   (3,117)  8,943 
Other assets  (267)  68   (199)  (381)  83   (298)
Total earning assets  (33,234)  (126,508)  (159,742)  (44,869)  (141,017)  (185,886)
Interest Expense:                        
Deposits  105   (2,421)  (2,316)  449   (2,595)  (2,146)
Consolidated obligations:                        
Discount notes  (15,541)  (37,663)  (53,204)  (14,832)  (39,450)  (54,282)
Bonds  (22,241)  (79,316)  (101,557)  (36,818)  (87,294)  (124,112)
Other borrowings  (458)  95   (363)  (361)  14   (347)
Total interest-bearing liabilities  (38,135)  (119,305)  (157,440)  (51,562)  (129,325)  (180,887)
Change in net interest income $4,901  $(7,203) $(2,302) $6,693  $(11,692) $(4,999)
__________
1Changes in interest income and interest expense not identifiable as either volume-related or rate-related have been allocated to volume and rate based upon the proportion of the absolute value of the volume and rate changes.
2Amounts used to calculate volume and rate changes are based on numbers in dollars. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same results.

Net Gain (Loss) on Derivatives and Hedging Activities – The volatility in other income (loss) is predominately driven by market value fluctuations on derivative and hedging transactions, which include interest rate swaps, caps and swaps. The FHLBank reported a net gain (loss) on derivatives and hedging activities of $(94.2) million and $102.4 million in the quarters ended June 30, 2010 and 2009, respectively. For the six-month periods ended June 30, 2010 and 2009, the net gain (loss) on derivatives and hedging activities was $(179.5) million and $122.2 million, respectively. The FHLBank’s netfloors. Net gain (loss) from derivative and hedging activities is sensitive to several factors, including: (1) the general level of interest rates. rates; (2) the shape of the term structure of interest rates; and (3) implied price volatilities.

The majority of theour derivative gains and losses are related to econom iceconomic hedges, such as interest rate swaps matched to trading securities and interest rate caps and floors. Because of the mix of these economic hedges, the FHLBankwe generally recordsrecord gains on its derivatives when the general level of interest rates risesrise over the period and recordsrecord losses when the general level of interest rates fallsfall over the period. A majority of the loss on derivatives and hedging activities in the first halfnine months of 2010 is due to losses on interest rate caps that arewere economic hedges of caps embedded in the FHLBank’sour variable rate MBS/CMO investment portfolio. The primary reasons for the decrease in value of the FHLBank’sour interest rate cap portfolio were decreases in interest rates and implied price volatilityvolatilities as well as a flattening in interest rate curves fromin the first half of 2009 to the first halfnine months of 2010. The absolute levels of interest rates, the shape of the interest rate curve and implied volatility are all critical components in valuing options such as interest rate caps. Wh ileWhile the absolute level of interest rates is an intuitive factor in valuing interest rate caps, the shape of the interest rate curve is also a criticalan important component as a steeper curve implies higher future short-term interest rates than does a flatter interest rate curve. Higher future short-term rates implied by a steepening interest rate curve would generally result in higher cap values while lower future short-term rates implied by a flattening interest rate curve would generally result in lower cap values. Generally, the greater the implied price volatility of the interest rate cap, the higher the value and the lower the implied price volatility of the interest rate caps, the lower the value. Therefore, the decline in implied price volatility fromduring the first half of 2009 to the first halfnine months of 2010 has also reduced the market value of the FHLBank’sou r interest rate cap portfolio.

The FHLBank’s loss on the value of itsour interest rate caps was larger than it otherwise would have been because the cap portfolio grew during the firs tfirst quarter of 2010 in conjunction with the growth in Agency variable rate CMOs with embedded caps. As of JuneSeptember 30, 2010, the FHLBankwe owned $6.9$6.5 billion current par amount of variable rate CMO investments with embedded caps and an interest rate cap portfolio with a notional amount of $7.3 billion. The notional amount of the interest rate caps exceeded the investments being hedged asprimarily because of prepayments on the investments during the first nine months of 2010. Prepayments have been driven by record low mortgage rates but were also significantly impacted by a result of the large volume of buyouts of 120 day or more delinquent loans from Fannie Mae and Freddie Mac guaranteed MBS during the first and second quarters of 2010. Both Agencies completed most of their initial rounds of these buyouts in the second quarter of 2010 and the volume of future buyouts is expected to decline. ManagementWe periodically assessesassess derivative strategies to ensure that overall balance sheet risk is appropriately hedged and makesmake adjustments to the derivative portfolio as needed. This evaluation is completed considering not only the par value of the variable rate CMO investments with embedded caps being hedged with purchased caps, but the composition of the purchased cap portfolio and expected prepayments of the variable rate CMO investment with embedded caps. With $1.2$1.5 billion of the purchased cap portfolio having termination dates in two years or less and the value of those caps being almost zero as of JuneSeptember 30, 2010, the FHLBankwe determined no adjustment of itsour purchased cap portfolio was necessary at this time. As of JuneSeptember 30, 2009, the FHLBankwe owned $6.6$6.2 billion par amount of variable rate CMO investments with embedded caps, which were hedged with a $6.3 billion interest rate cap portfolio. See Tables 4044 through 4347 under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk”RiskR 21; for additional detail regarding notional and fair value amounts of the FHLBank’s derivative instruments.

 
4947
 
Table 810 categorizes the secondthird quarter 2010 earnings impact by product for hedging activities (in thousands):

Table 8

  Advances  Investments  
Mortgage
Loans
  
Consolidated
Obligation
Discount
Notes
  
Consolidated
Obligation
Bonds
  
Intermediary
Positions
  Total 
Amortization/accretion of hedging activities in net margin
 $(4,104) $0  $116  $0  $(305) $0  $(4,293)
Net gain (loss) on derivative and hedging activities:                            
Fair value hedges  (1,244)  0   0   350   (2,144)  0   (3,038)
Economic hedges – unrealized gain (loss) due to fair value changes  0   (77,157)  4,081   0   (939)  (13)  (74,028)
Economic hedges – net interest received (paid)  0   (17,777)  0   0   675   11   (17,091)
Subtotal  (1,244)  (94,934)  4,081   350   (2,408)  (2)  (94,157)
                             
Net gain (loss) on trading securities hedged on an economic basis with interest rate swaps  0   41,912   0   0   0   0   41,912 
TOTAL $(5,348) $(53,022) $4,197  $350  $(2,713) $(2) $(56,538)

Table 9 categorizes the earnings impact by product for derivative hedging activities and trading securities for the second quarter of 2009 (in thousands):

Table 9

  Advances  Investments  
Mortgage
Loans
  
Consolidated
Obligation
Discount
Notes
  
Consolidated
Obligation
Bonds
  
Intermediary
Positions
  Total 
Amortization/accretion of hedging activities in net margin $(5,513) $0  $75  $0  $(564) $0  $(6,002)
Net gain (loss) on derivative and hedging activities:                            
Fair value hedges  3,173   0   0   (641)  273   0   2,805 
Economic hedges – unrealized gain (loss) due to fair value changes  0   113,735   (1,988)  0   4,094   (1)  115,840 
Economic hedges – net interest received (paid)  0   (16,057)  0   0   (159)  14   (16,202)
Subtotal  3,173   97,678   (1,988)  (641)  4,208   13   102,443 
                             
Net gain (loss) on trading securities hedged on an economic basis with interest rate swaps  0   (25,177)  0   0   0   0   (25,177)
TOTAL $(2,340) $72,501  $(1,913) $(641) $3,644  $13  $71,264 

50
Table 10 categorizes the earnings impact by product for derivative hedging activities and trading securities for the first six months of 2010 (in thousands):

Table 10

 Advances  Investments  
Mortgage
Loans
  
Consolidated
Obligation
Discount
Notes
  
Consolidated
Obligation
Bonds
  
Intermediary
Positions
  Total  Advances  Investments  
Mortgage
Loans
  
Consolidated
Obligation
Discount
Notes
  
Consolidated
Obligation
Bonds
  
Intermediary
Positions
  Total 
Amortization/accretion of hedging activities in net margin $(7,678) $0  $182  $0  $(583) $0  $(8,079) $(2,530) $0  $132  $0  $(309) $0  $(2,707)
Net gain (loss) on derivative and hedging activities:                                                        
Fair value hedges  (1,743)  0   0   315   (729)  0   (2,157)  (1,115)  0   0   (66)  (788)  0   (1,969)
Economic hedges – unrealized gain (loss) due to fair value changes  0   (146,096)  5,289   0   (2,629)  (20)  (143,456)  0   (47,158)  3,242   0   726   (10)  (43,200)
Economic hedges – net interest received (paid)  0   (36,566)  0   0   2,616   23   (33,927)  0   (8,004)  0   0   562   11   (7,431)
Subtotal  (1,743)  (182,662)  5,289   315   (742)  3   (179,540)  (1,115)  (55,162)  3,242   (66)  500   1   (52,600)
                                                        
Net gain (loss) on trading securities hedged on an economic basis with interest rate swaps  0   40,396   0   0   0   0   40,396   0   25,489   0   0   0   0   25,489 
TOTAL $(9,421) $(142,266) $5,471  $315  $(1,325) $3  $(147,223) $(3,645) $(29,673) $3,374  $(66) $191  $1  $(29,818)

Table 11 categorizes the earnings impact by product for derivative hedging activities and trading securities for the first six monthsthird quarter of 2009 (in thousands):

Table 11

 Advances  Investments  
Mortgage
Loans
  
Consolidated
Obligation
Discount
Notes
  
Consolidated
Obligation
Bonds
  
Intermediary
Positions
  Total  Advances  Investments  
Mortgage
Loans
  
Consolidated
Obligation
Discount
Notes
  
Consolidated
Obligation
Bonds
  
Intermediary
Positions
  Total 
Amortization/accretion of hedging activities in net margin $(10,396) $0  $138  $0  $(1,190) $0  $(11,448) $(2,926) $0  $86  $0  $(423) $0  $(3,263)
Net gain (loss) on derivative and hedging activities:                                                        
Fair value hedges  (2,938)  0   0   502   8,241   0   5,805   (3,006)  0   0   125   3,113   0   232 
Economic hedges – unrealized gain (loss) due to fair value changes  0   139,898   (1,471)  0   8,559   (1)  146,985   0   (20,162)  1,250   0   (2,555)  (10)  (21,477)
Economic hedges – net interest received (paid)  0   (29,953)  0   0   (653)  29   (30,577)  (2)  (17,724)  0   0   2,026   13   (15,687)
Subtotal  (2,938)  109,945   (1,471)  502   16,147   28   122,213   (3,008)  (37,886)  1,250   125   2,584   3   (36,932)
                                                        
Net gain (loss) on trading securities hedged on an economic basis with interest rate swaps  0   (41,158)  0   0   0   0   (41,158)  0   17,699   0   0   0   0   17,699 
TOTAL $(13,334) $68,787  $(1,333) $502  $14,957  $28  $69,607  $(5,934) $(20,187) $1,336  $125  $2,161  $3  $(22,496)

48
Table 12 categorizes the earnings impact by product for derivative hedging activities and trading securities for the first nine months of 2010 (in thousands):

Table 12

  Advances  Investments  
Mortgage
Loans
  
Consolidated
Obligation
Discount
Notes
  
Consolidated
Obligation
Bonds
  
Intermediary
Positions
  Total 
Amortization/accretion of hedging activities in net margin $(10,208) $0  $314  $0  $(892) $0  $(10,786)
Net gain (loss) on derivative and hedging activities:                            
Fair value hedges  (2,858)  0   0   249   (1,517)  0   (4,126)
Economic hedges – unrealized gain (loss) due to fair value changes  0   (193,254)  8,531   0   (1,903)  (30)  (186,656)
Economic hedges – net interest received (paid)  0   (44,570)  0   0   3,178   34   (41,358)
Subtotal  (2,858)  (237,824)  8,531   249   (242)  4   (232,140)
                             
Net gain (loss) on trading securities hedged on an economic basis with interest rate swaps  0   65,885   0   0   0   0   65,885 
TOTAL $(13,066) $(171,939) $8,845  $249  $(1,134) $4  $(177,041)

Table 13 categorizes the earnings impact by product for derivative hedging activities and trading securities for the first nine months of 2009 (in thousands):

Table 13

  Advances  Investments  
Mortgage
Loans
  
Consolidated
Obligation
Discount
Notes
  
Consolidated
Obligation
Bonds
  
Intermediary
Positions
  Total 
Amortization/accretion of hedging activities in net margin $(13,322) $0  $224  $0  $(1,613) $0  $(14,711)
Net gain (loss) on derivative and hedging activities:                            
Fair value hedges  (5,944)  0   0   627   11,354   0   6,037 
Economic hedges – unrealized gain (loss) due to fair value changes  0   119,736   (221)  0   6,004   (11)  125,508 
Economic hedges – net interest received (paid)  (2)  (47,677)  0   0   1,373   42   (46,264)
Subtotal  (5,946)  72,059   (221)  627   18,731   31   85,281 
                             
Net gain (loss) on trading securities hedged on an economic basis with interest rate swaps  0   (23,459)  0   0   0   0   (23,459)
TOTAL $(19,268) $48,600  $3  $627  $17,118  $31  $47,111 

Net Gain (Loss) on Trading Securities – All gains and losses related to trading securities are recorded in other income (loss) as net gain (loss) on trading securities; however, only gains and losses relating to trading securities that are hedged with economic interest rate swaps are included in Tables 810 through 11.13. Unrealized gains (losses) fluctuate as the fair value of our trading portfolio fluctuates. There are a number of factors that can impact the value of a trading security including the movement in absolute interest rates, changes in credit spreads, the passage of time and changes in volatility. Securities in this portfolio that are related to economic hedges, for the most part, are longer dated fixed rate Agency debentures and their fair values are mor emo re affected by changes in long-term interest rates (e.g., 5- and 10-year rates) than by changes in short-term interest rates. While there has been recent improvement in the fair value of the MBS/CMOs in this portfolio, which are Agency variable rate CMOs with embedded caps that re-price monthly, their fair values over the last two years have been more impacted by liquidity in the mortgage markets rather than the general level of interest rates. In general, however, because of the influence of the fixed rate bonds in the FHLBank’sour trading portfolio, as interest rates rise the value of this portfolio will decrease, causing an unrealized loss to be recorded. Conversely as interest rates decline, the value of this portfolio will increase, causing an unrealized gain to be recorded. The FHLBank realized net gains (losses) on trading securities of $44.8 million and $(25.7) million for the quarters ended June 30, 2010 and 2009 and $48.1 million and $(15.8) million for the six-month periods ended June 30, 2010 and 2009, respectively.

 
5149
 
Other Non-Interest Income – Included in other non-interest income are net losses on other-than-temporarily impaired (OTTI)  held-to-maturity securities. See Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Balance Sheet Analysis – Investments” for additional information on OTTI.

Controllable Operating Expenses – Controllable operating expenses include compensation and benefits and other operating expenses. These expenses increased for the three- and six-month periods ended June 30, 2010 compared to the same periods of 2009. The increases are primarily attributable to increases in employee benefits for normal retirement and health insurance. FHLBank management expects operating expenses to increase in future quarters due to: (1) annual salary increases effective in April; (2) anticipated costs associated with enhancing the FHLBank’s enterprise risk management function; and (3) anticipated costs related to independent third party model validations required by recently issued regulatory guidance.

Return on Equity – Return on average equity was 2.10 percent (annualized) for the second quarter of 2010 compared to 19.63 percent (annualized) for the second quarter of 2009. Return on average equity was (2.04) percent (annualized) in the first six months of 2010, a decrease from 14.98 percent for the first six months of 2009. As discussed previously, the decrease is attributable to the FHLBank's net loss for the six months ended June 30, 2010 due to mark-to-market losses on its derivatives, primarily losses on interest rate caps that are economic hedges of caps embedded in the FHLBank’s variable rate MBS/CMO investment portfolio.

FinancialFinancial Condition
Overall – Table 1214 presents changes in the major components of the FHLBank’sour Statements of Condition from December 31, 2009 to JuneSeptember 30, 2010 (in thousands):

Table 1214

 Increase (Decrease) in Components  
Increase (Decrease)
in Components
 
 
June 30, 2010 vs.
December 31, 2009
  
September 30, 2010 vs.
December 31, 2009
 
 
Dollar
Change
  
Percent
Change
  
Dollar
Change
  
Percent
Change
 
Assets:            
Cash and due from banks $(466,125)  (94.3)% $(493,808)  (99.8)%
Investments1
  2,044,929   12.5   (2,976,966)  (18.2)
Advances  (1,237,144)  (5.6)  (1,747,171)  (7.9)
Mortgage loans held for portfolio, net  233,705   7.0   603,607   18.1 
Derivative assets  25,191   158.0   11,913   74.7 
Other assets  (12,173)  (6.6)  (27,894)  (15.0)
Total assets $588,383   1.4% $(4,630,319)  (10.9)%
                
Liabilities:                
Deposits $949,281   88.8% $707,512   66.2%
Consolidated obligations, net  (287,908)  (0.7)  (5,281,672)  (13.5)
Derivative liabilities  15,592   6.5   29,180   12.1 
Other liabilities  (18,537)  (7.0)  85,051   32.1 
Total liabilities  658,428   1.6   (4,459,929)  (11.0)
                
Capital:                
Capital stock outstanding  (17,303)  (1.1)  (131,692)  (8.2)
Retained earnings  (40,305)  (11.4)  (27,840)  (7.8)
Accumulated other comprehensive income  (12,437)  104.9   (10,858)  (91.5)
Total capital  (70,045)  (3.6)  (170,390)  (8.8)
Total liabilities and capital $588,383   1.4% $(4,630,319)  (10.9)%
__________
1Investments also include interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell.

Advances – OutstandingThe decrease in advances decreased from $22.3 billion as of December 31, 2009 to $21.0 billion as of June 30, 2010 (see Table 1). The decrease of $1.2 billion, or 5.6 percent (see Table 12),14) can be attributed to fairly widespread repayment of advances combined with the membership loss of TierOne Bank of Lincoln, Nebraska. TierOne Bank was placed into receivership on June 4, 2010 and was sold under a Purchase and Assumption Agreementdue to a non-member. TierOne Bank held $528.3 million in advances which were prepaid in full in June 2010. This advance prepayment accounts for over a third of the total reduction in advance balances so far this year. The additional widespread decline in advances is mostly the result of deleveraging that is taking place in the financia lfinancial services industry. Member institutions continue to experience growth in deposit funding that exceeds the demand for loans in their communities. In addition, many members continue to increase on-balance-sheet liquidity and conserve capital as pressure on asset quality persists in many areas in the Tenth District of the FHLBank System. Currently, there is nothingno evidence to indicate to FHLBank management that advances will increase until there is an improvement in U.S. economic activity that results in increased loan demand at our member financial institutions. While we cannot predict how much more, if any, FHLBank advancesour advance ba lances will decline, we do not expect the rate of decline duringany additional repayments in 2010 to beresult in an annualized decrease anywhere near the 37.9 percent decline experienced in 2009. In addition, when member advance demand does begin to increase, a few larger members could have a significant impact on the amount of total outstanding advances.
 
 
5250
 
Table 1315 summarizes the FHLBank’s advances outstanding by product as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands):.

Table 1315

 June 30, 2010  December 31, 2009  September 30, 2010  December 31, 2009 
 Dollar  Percent  Dollar  Percent  Dollar  Percent  Dollar  Percent 
Standard advance products:                        
Line of credit $740,461   3.6% $861,657   4.0% $801,079   4.0% $861,657   4.0%
Short-term fixed rate advances  1,205,140   5.9   663,951   3.0   967,676   4.9   663,951   3.0 
Regular fixed rate advances  5,745,222   28.0   6,204,777   28.4   5,695,411   28.7   6,204,777   28.4 
Fixed rate callable advances  9,600   0.0   12,100   0.1   4,600   0.0   12,100   0.1 
Fixed rate amortizing advances  589,743   2.9   654,896   3.0   543,534   2.7   654,896   3.0 
Fixed rate callable amortizing advances  6,430   0.0   6,645   0.0   6,409   0.0   6,645   0.0 
Fixed rate convertible advances  4,238,732   20.7   5,060,772   23.2   3,870,282   19.5   5,060,772   23.2 
Adjustable rate advances  215,000   1.0   170,000   0.7   300,000   1.5   170,000   0.7 
Adjustable rate callable advances  6,841,500   33.4   7,275,800   33.3   6,823,460   34.3   7,275,800   33.3 
Customized advances:                                
Advances with embedded caps or floors  119,000   0.6   109,000   0.5   99,000   0.5   109,000   0.5 
Standard housing and community development advances:                                
Regular fixed rate advances  358,813   1.7   391,461   1.8   337,581   1.7   391,461   1.8 
Fixed rate callable advances  11,300   0.1   11,300   0.1   11,300   0.1   11,300   0.1 
Fixed rate amortizing advances  400,250   2.0   394,789   1.8   401,916   2.0   394,789   1.8 
Fixed rate callable amortizing advances  594   0.0   594   0.0   588   0.0   594   0.0 
Adjustable rate callable advances  12,589   0.1   11,917   0.1   12,769   0.1   11,917   0.1 
Fixed rate amortizing advances funded through AHP  8   0.0   10   0.0   6   0.0   10   0.0 
TOTAL PAR VALUE $20,494,382   100.0% $21,829,669   100.0% $19,875,611   100.0% $21,829,669   100.0%

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

AsThe widespread pay downs by members, as mentioned previously, overall advance balances decreased duringincluded a decrease of $540.0 million in advances attributable to three of our largest borrowers (see Table 16). A portion of the first half of 2010 by $1.2 billion. Excluding thedecrease in advances from year-end can also be attributed to a $528.3 million in prepayments (primarily fixed rate convertible advances)prepayment resulting from the member loss of TierOne Bank as a member during the FHLBank experienced a net decline in advancessecond quarter of $708.8 million. This net decline includes fairly widespread pay downs including a decrease of $475.0 million in advances with two of the FHLBank’s large borrowers (see Table 14).2010. Decreases in advances were partially offset by advance growth with one member of more than $500$300.4 million (short-term fixed rate advances) with one larger member during the six-monthnine-month period. This overall decline in advances is reflected in the changing balances and composition of our standard advance products (see Table 13). The noteworthy changes from December 31, 2009 to J une 30, 2010 include:
§$121.2 million (14.1 percent) decrease in line of credit advances;
§$541.2 million (81.5 percent) increase in short-term, fixed rate advances;
§$459.6 million (7.4 percent) decrease in regular fixed rate advances;
§$65.2 million (9.9 percent) decrease in fixed rate amortizing advances;
§$822.0 million (16.2 percent) decrease in fixed rate convertible advances; and
§$434.3 million (6.0 percent) decrease in adjustable rate callable advances.

Table 1416 presents information on the FHLBank’sour five largest borrowers as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands). Because the widespread decline in advances to all other members exceeded the decline in advances to the five largest borrowers, the portion of total advances outstanding to the five largest borrowers increased slightly in the first half of 2010.:

Table 1416

  June 30, 2010  December 31, 2009    September 30, 2010  December 31, 2009 
Borrower NameCityState 
Advance
Par Value
  
Percent of
Total
Advance Par
  
Advance
Par Value
  
Percent of
Total
Advance Par
 CityState 
Advance
Par Value
  
Percent of
Total
Advance Par
  
Advance
Par Value
  
Percent of
Total
Advance Par
 
MidFirst BankOklahoma CityOK $3,175,000   15.5% $3,500,000   16.0%Oklahoma CityOK $3,160,000   15.9% $3,500,000   16.0%
Capitol Federal Savings BankTopekaKS  2,426,000   11.8   2,426,000   11.1 TopekaKS  2,376,000   12.0   2,426,000   11.1 
Pacific Life Insurance Co.OmahaNE  1,500,000   7.3   1,500,000   6.9 OmahaNE  1,500,000   7.5   1,500,000   6.9 
Security Life of Denver Ins. Co.DenverCO  1,350,000   6.6   1,500,000   6.9 DenverCO  1,350,000   6.8   1,500,000   6.9 
Security Benefit Life Insurance Co.1
TopekaKS  1,259,330   6.2   1,259,330   5.8 TopekaKS  1,259,330   6.3   1,259,330   5.8 
TOTAL   $9,710,330   47.4% $10,185,330   46.7%   $9,645,330   48.5% $10,185,330   46.7%
__________
1Security Benefit Life Insurance Co. had the following ratings as of July 31, 2010: CCC by Fitch Ratings (Fitch) on Rating Watch Positive; B by A.M. Best Company under review with positive implications; and BB by Standard & Poor’s (S&P) on CreditWatch Positive. Moody’s Investors Service (Moody’s) has withdrawn its rating. On August 2, 2010, Guggenheim Partners, LLC announced the completion of the acquisition of Security Benefit Corporation, the holding company for Security Benefit Life Insurance Co., following regulatory, policyholder and shareholder approval of an agreement that was announced in February 2010. Security Benefit Life Insurance Co. continues to be domiciled in Kansas and remains a member of FHLBank Topeka. On August 4, 2010, following the close of the company's acquisition, Fitch withdrew its rating of Security Benefit Life Insurance Co.

 
5351
 
Table 1517 presents the interest income associated with theour five borrowers with the highest interest income for the three-month periods ended JuneSeptember 30, 2010 and 2009 (in thousands). If thea borrower was not one of the five borrowers representing the highest interest income for one of the periods presented, the applicable columns are left blank.

Table 1517

  Three-month Period Ended    Three-month Period Ended 
  June 30, 2010  June 30, 2009    September 30, 2010  September 30, 2009 
Borrower Name
 
City
 
State
 
Advance
Income
  
Percent of
Total
Advance
Income1
  
Advance
Income
  
Percent of
Total
Advance
Income1
  
City
 
State
 
Advance
Income
  
Percent of
Total
Advance
Income1
  
Advance
Income
  
Percent of
Total
Advance
Income1
 
Capitol Federal Savings BankTopekaKS $22,792   18.5% $23,758   15.3%TopekaKS $21,963   19.1% $23,463   16.3%
Pacific Life Insurance Co.OmahaNE  6,787   5.5   7,147   4.6 OmahaNE  6,925   6.0   6,779   4.7 
American Fidelity Assurance Co.Oklahoma CityOK  4,785   3.9   4,834   3.1 Oklahoma CityOK  4,623   4.0   4,787   3.3 
Security Benefit Life Insurance Co.TopekaKS  2,731   2.4   3,248   2.3 
Mid First BankOklahoma CityOK  2,395   2.2         
TierOne Bank2
LincolnNE  4,319   3.5   6,465   4.1 LincolnNE          5,761   4.0 
Security Benefit Life InsuranceTopekaKS  2,542   2.1         
Security Life of Denver Ins. Co.DenverCO          5,266   3.4 
TOTAL   $41,225   33.5% $47,470   30.5%   $38,637   33.7% $44,038   30.6%
__________
1Total advance income excludes net interest settlements on derivatives hedging the advances.
2On June 4, 2010, TierOne Bank was placed into receivership by the Federal Deposit Insurance Corporation (FDIC) and acquired through a Purchase and Assumption Agreement by Great Western Bank, a member of the Federal Home Loan Bank of Des Moines. All outstanding advances were subsequently prepaid.

Table 18 presents the interest income associated with our five borrowers with the highest interest income for the nine-month periods ended September 30, 2010 and 2009 (in thousands). If a borrower was not one of the five borrowers representing the highest interest income for one of the periods presented, the applicable column is left blank.

Table 18

    Nine-month Period Ended 
    September 30, 2010  September 30, 2009 
 
Borrower Name
 
City
 
State
 
Advance
Income
  
Percent of
Total
Advance
Income1
  
Advance
Income
  
Percent of
Total
Advance
Income1
 
Capitol Federal Savings BankTopekaKS $67,464   18.5% $73,192   15.3%
Pacific Life Insurance Co.OmahaNE  20,256   5.6   21,641   4.5 
American Fidelity Assurance Co.Oklahoma CityOK  13,955   3.8   14,578   3.0 
TierOne Bank2
LincolnNE  9,954   2.7   18,962   3.9 
Security Benefit Life Insurance Co.TopekaKS  7,654   2.1         
Security Life of Denver Ins. Co.DenverCO          15,509   3.2 
TOTAL   $119,283   32.7% $143,882   29.9%
__________
1Total advance income excludes net interest settlements on derivatives hedging the advances.
2On June 4, 2010, TierOne Bank was placed into receivership by the FDIC and acquired through a Purchase and Assumption Agreement by Great Western Bank, a member of the Federal Home Loan Bank of Des Moines. All outstanding advances were subsequently prepaid.

Table 16 presentsWith the interest income associated withdecline in total assets outpacing the five borrowers with the highest interest income for the six-month periods ended June 30, 2010 and 2009 (in thousands). If the borrower was not one of the five borrowers representing the highest interest income for one of the periods presented, the applicable column is left blank.

Table 16

    Six-month Period Ended 
    June 30, 2010  June 30, 2009 
 
Borrower Name
 
City
 
State
 
Advance
Income
  
Percent of
Total
Advance
Income1
  
Advance
Income
  
Percent of
Total
Advance
Income1
 
Capitol Federal Savings BankTopekaKS $45,501   18.2% $49,729   14.8%
Pacific Life Insurance Co.OmahaNE  13,331   5.3   14,862   4.4 
TierOne Bank2
LincolnNE  9,954   4.0   13,201   3.9 
American Fidelity Assurance Co.Oklahoma CityOK  9,332   3.7         
Security Benefit Life InsuranceTopekaKS  4,923   2.0   10,665   3.2 
Security Life of Denver Ins. Co.DenverCO          13,147   3.9 
TOTAL   $83,041   33.2% $101,604   30.2%
___________
1Total advance income excludes net interest settlements on derivatives hedging the advances.
2On June 4, 2010, TierOne Bank was placed into receivership by the FDIC and acquired through a Purchase and Assumption Agreement by Great Western Bank, a member of the Federal Home Loan Bank of Des Moines. All outstandingdecline in total advances, were subsequently prepaid.

Total advances as a percentage of total assets declinedincreased from 52.2 percent as of December 31, 2009 to 48.654.0 percent as of JuneSeptember 30, 2010. If advances continue to decline, we expect to: (1) repurchase excess capital stock in order to manage our balance sheet; and (2) leverage capital in the range of 21:1 to 23:1 as conditions dictate.

A significant portion of the FHLBank’sour advance portfolio either re-prices within three months or is swapped to shorter-term indices (1- or 3-month LIBOR) to synthetically create adjustable rate advances. As a result, 85.085.3 percent and 83.1 percent of the FHLBank’s total advance portfolio as of JuneSeptember 30, 2010 and December 31, 2009, respectively, effectively re-price at least every three months. Because of the relatively short nature of the FHLBank’s advance portfolio, including the impact of any interest rate swaps qualifying as fair value hedges, the average yield in this portfolio typically responds quickly to changes in the general level of short-term interest rates. The level of short-term interest rates is primarily driven by FOMC decisions on the level of its overnight Federal funds target, but is also influ encedinfluenced by the expectations of capital market participants related to the strength of the economy, future inflationary pressures and other factors. See Tables 46 through 79 under “Results of Operations – Net Interest Income” in this Item 2 for further information regarding average balances, average yields/rates and changes in interest income.

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

 
5452
 
MPF Program – The FHLBank participatesMPF Program is an attractive secondary market alternative for our members, especially the smaller institutions in our district. We participate in the MPF Program through the MPF Provider, a division of the FHLBankFederal Home Loan Bank of Chicago. Under this program,the MPF Program, participating members of an FHLBank can sell fixed rate, size-conforming, single-family mortgage loans to the FHLBankus (closed loans) and/or originate loans on our behalf of the FHLBank (table funded loans).

The amount of new loans originated by or acquired from in-district PFIs during the six-monthnine-month period ended JuneSeptember 30, 2010 was $475.7 million.$1.1 billion. These new originations/originations and acquisitions, net of loan payments received, resulted in a 7.0 percentsizable increase in the outstanding balance of the MPF portfolio from December 31, 2009 to $3.6 billion as of JuneSeptember 30, 2010 (see Table 1). With total assets declining this quarter, mortgage loans as a percentage of total assets increased from $3.3 billion7.8 percent as of December 31, 2009.

The MPF Program continues2009 to be an attractive secondary market alternative for smaller institutions10.4 percent as of September 30, 2010. Primary factors that may influence future growth in FHLBank Topeka’s district. Future volume growth for mortgage loans held in portfolio will depend on a number of factors, including:include: (1) the number of new and delivering PFIs; (2) the mortgage loan origination volume of PFIs in 2010;current PFIs; (3) refinancing activity; (4) the level of interest rates and the shape of the yield curve; and (5) the relativerela tive competitiveness of MPF pricing to the prices offered by other buyers of mortgage loans. The relative pricing of the MPF Program improved toward the end of the first quarter 2010 as the U.S. Government discontinued direct purchases of Fannie Mae and Freddie Mac MBS. Despite the improved competitiveness in pricing, immediate volume growth will most likely be less considering the loss of the MPF Program’s largest originator, TierOne Bank. TierOne Bank was placed in receivership by the FDIC on June 4, 2010, and subsequently acquired by an out-of-district financial institution. TierOne Bank has sold more than 17 percent of the total volume of mortgage loans purchased by FHLBank since the inception of the MPF Program. The amount of new loans purchased from TierOne during the six-month period ended June 30, 2010 was 13 percent of total MPF loan purchases made in 2010. 

The number of active PFIs increased from 169 as of December 31, 2009 to 182187 PFIs as of JuneSeptember 30, 2010. Although there is no guarantee, we anticipate that the number of PFIs delivering loans to the FHLBank will continue to increase during 2010 and beyond as we strive to increase the number of active PFIs. Table 1719 presents the FHLBank’sour top five PFIs, the outstanding balances as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands) and the percentage of those loans to total MPF loans outstanding on those dates. The outstanding balances for La Salle NationalGreat Western Bank, Bank of America and Bank of the West (nonmembers(non-members that do not have the ability to actively sell loans to FHLBank Topekaus under the MPF Program) have declined with the prepayment of loans held in those portfolios. Most of the FHLBank’sour MPF portfolio growth was primarily comi ngcame from smaller PFIs that are not set up to sell directlydi rectly to Fannie Mae or Freddie Mac. However, some larger PFIs have begun to sell mortgages under the MPF Program because of the pricing improvement that began towardstoward the end of the first quarter of 2010.2010 as the U.S. Government discontinued direct purchases of Fannie Mae and Freddie Mac MBS.

Table 1719

 
MPF Loan
Balance as of
June 30,
 2010
  
Percent
of Total
MPF Loans
  
MPF Loan
Balance as of
December 31, 2009
  
Percent
of Total
MPF Loans
  
MPF Loan
Balance as of
September 30,
 2010
  
Percent
of Total
MPF Loans
  
MPF Loan
Balance as of
December 31, 2009
  
Percent
of Total
MPF Loans
 
TierOne Bank1
 $524,002   14.8% $504,390   15.2%
La Salle National Bank, N.A.2
  348,268   9.8   383,307   11.5 
Great Western Bank1
 $498,176   12.7% $504,390   15.2%
Bank of America, NA2
  327,129   8.4   383,307   11.5 
Bank of the West3
  277,859   7.8   302,869   9.1   258,959   6.6   302,869   9.1 
Security Saving Bank, FSB  143,005   4.0   138,838   4.2 
Security Saving Bank, FSB4
  140,317   3.6   138,838   4.2 
Farmers Bank & Trust, NA  123,542   3.2         
Girard National Bank  92,856   2.6   87,249   2.6           87,249   2.6 
TOTAL $1,385,990   39.0% $1,416,653   42.6% $1,348,123   34.5% $1,416,653   42.6%
__________
1Formerly TierOne Bank. On June 4, 2010, TierOne Bank was placed into receivership by the FDIC. ItFDIC and was subsequently acquired through a Purchase and Assumption Agreement by Great Western Bank, a member of the Federal Home Loan Bank of Des Moines.
2Formerly La Salle National Bank, N.A. is, an out-of-district PFI in which we previously participated in mortgage loans with the Federal Home Loan Bank of Chicago.
3Formerly Commercial Federal Bank, FSB headquartered in Omaha, NE. Bank of the West acquired Commercial Federal Bank, FSB on December 2, 2005. Bank of the West is a member of the Federal Home Loan Bank of San Francisco.
4On October 15, 2010, Security Savings Bank, FSB was placed into receivership by the FDIC and was subsequently acquired through a Purchase and Assumption Agreement by Simmons First National Bank, a member of the Federal Home Loan Bank of Dallas. However, the mortgage loans were not included in that Purchase and Assumption Agreement. As a result, the CE obligations are currently the obligation of the FDIC.

Asset Quality: The FHLBank classifies conventionalConventional real estate mortgage loans are classified as “non-performing” when they are contractually past due 90 days or more at which time interest is no longer accrued. Interest continues to accrue on government-insured real estate mortgage loans (e.g., Federal Housing Administration, Department of Veterans’ Affairs, Rural Housing Service of the Department of Agriculture and Department of Housing and Urban Development loans) that are contractually past due 90 days or more. The weighted average FICO®2 score and loan-to-value ratio3 ( LTV)(LTV) recorded at origination for conventional mortgage loans held in portfolio as of JuneSeptember 30, 2010 was 748751 FICO and 73.072.4 percent LTV.

Table 1820 presents the unpaid principal for conventional and government-insured mortgage loans as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands):

Table 1820

 
June 30,
2010
  
December 31,
2009
  
September 30,
2010
  
December 31,
2009
 
Conventional mortgage loans $3,168,388  $3,007,220  $3,481,708  $3,007,220 
Government-insured mortgage loans  386,031   322,245   425,745   322,245 
Total outstanding mortgage loans $3,554,419  $3,329,465  $3,907,453  $3,329,465 

2  FICO® is a widely used credit industry model developed by Fair Isaac Corporation to assess credit quality with scores typically ranging from 300 andto 850 with the low end of the scale indicating a poor credit risk. A credit score of 620 is frequently cited as a cutoff point, with credit scores below that typically considered "subprime."
3  LTV is a primary variable in credit performance. Generally speaking, higher loan-to-value means greater risk generating a default and also meansmean higher loss severity.
5553
 
Table 1921 presents the unpaid principal for performing mortgage loans, non-performing mortgage loans and mortgage loans 90 or more days past due and accruing as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands):

Table 1921

 
June 30,
2010
  
December 31,
2009
  
September 30,
2010
  
December 31,
2009
 
Performing mortgage loans $3,522,713  $3,301,935  $3,872,763  $3,301,935 
Non-performing mortgage loans  25,110   22,730   26,524   22,730 
Mortgage loans 90 days or more past due and accruing  6,596   4,800   8,166   4,800 
Total outstanding mortgage loans $3,554,419  $3,329,465  $3,907,453  $3,329,465 

Table 2022 presents the interest income shortfall on the non-performing loans during the six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009 (in thousands):

Table 2022

 Six-month Period Ended  Nine-month Period Ended 
 
June 30,
2010
  
June 30,
2009
  
September 30,
2010
  
September 30,
2009
 
Interest contractually due during the year on non-performing mortgage loans $807  $559  $1,249  $873 
Interest income received during the year on non-performing mortgage loans  553   418   932   664 
SHORTFALL $254  $141  $317  $209 

The serious delinquency rate of the MPF portfolio has decreasedis unchanged from 0.7 percent as of December 31, 2009 to 0.6 percent as of JuneSeptember 30, 2010 (see Table 21)23). According to the JuneSeptember 30, 2010 Mortgage Bankers Association National Delinquency survey, 4.74.4 percent of all conventional mortgage loans are 90 days or more past due. This is more than six times the level of seriously delinquent loans in the FHLBank’sour mortgage loan portfolio. Table 2123 presents delinquency information for the unpaid principal of conventional loans as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands):

Table 2123

 
June 30,
2010
  
December 31,
2009
  
September 30,
2010
  
December 31,
2009
 
30 to 59 days delinquent and not in foreclosure $28,881  $ 27,498  $29,882  $27,498 
60 to 89 days delinquent and not in foreclosure  12,597   9,154   7,927   9,154 
90 days or more delinquent and not in foreclosure  7,298   12,895   10,167   12,895 
In process of foreclosure1
  10,574   7,686   13,080   7,686 
Total conventional mortgage loans delinquent or in process of foreclosure $59,350  $57,233  $61,056  $57,233 
                
Real estate owned $4,161  $2,656  $3,794  $2,656 
                
Serious delinquency rate2
  0.6%  0.7%  0.7%  0.7%
_____________________
1Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported.
2Conventional loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total conventional loan portfolio principal balance. The FHLBank only holdsOnly fixed rate prime conventional mortgage loans.loans are held in the MPF portfolio.

MPF Allowance for Credit Losses on Mortgage Loans: As of June 30, 2010 and December 31, 2009,We base the FHLBank had recorded an allowance for credit losses of $2,536,000 and $1,897,000, respectively. The FHLBank bases its allowance on management’sour estimate of probable credit losses inherent in the FHLBank’sour mortgage loan portfolio as of the Statement of Condition date. The estimate is based on an analysis of the FHLBank’sour historical loss experience. Management believesWe believe that policies and procedures are in place to effectively manage the credit risk on MPF mortgage loans.

Table 22 presents See Note 6 of the Notes to the Financial Statements included under Item 1 for a summary of the allowance for credit losses on mortgage loan losses for the three- and six-month periods ended June 30, 2010 and 2009 (in thousands):

Table 22

  Three-month Period Ended  Six-month Period Ended 
  
June 30,
2010
  
June 30,
2009
  
June 30,
2010
  
June 30,
2009
 
Balance, beginning of period $2,553  $889  $1,897  $884 
Provision for credit losses on mortgage loans  197   104   956   114 
Charge-offs  (214)  (111)  (317)  (116)
Balance, end of period $2,536  $882  $2,536  $882 
loans.

The provision for mortgage loan losses has increased with an increase in the number of delinquencies. However, the ratio of net charge-offs/recoveries to average loans outstanding was less than threetwo bps for the three- and six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009.

 
5654
 
Investments – Investments increased 12.5 percent from $16.3 billion as of December 31, 2009 to $18.4 billion as of June 30, 2010, while the FHLBank’s assets increased by 1.4 percent for the same period (see Table 12). Investments are generally used by the FHLBank for liquidity purposes as well as to leverage capital during periods when advances decline and capital stock is not reduced in proportion to the decline in advances.

Short-term investments used for liquidity purposes consisted primarily of deposits in banks, overnight and term Federal funds, certificates of deposit, bank notes and commercial paper. Short-term investments, which include investments with remaining maturities of one year or less, were $8.4$4.1 billion and $6.7 billion as of JuneSeptember 30, 2010 and December 31, 2009, respectively. This increasedecrease in short-term investments is primarily attributable to an increasea slight decrease in our leverage ratio combined with a decrease in our capital stock position. This decrease in capital stock was related to the FHLBank’s leverage on a decreasedrepurchase of excess capital position. The FHLBank holds itsstock generally associated with our recent exchange of excess Class B shares for excess Class A shares. We hold short-term investment securities as trading in order to enhance itsour liquidity position. The FHLBank’s

Our long-term investment portfolio, consisting of Agency debentures, MBS, and taxable state or local housing finance agency securities, was $10.0$9.3 billion and $9.6 billion as of JuneSeptember 30, 2010 and December 31, 2009, respectively. This increasedecrease in the long-term investment portfolio can be primarily attributed to increasing balances inprepayments and maturities over the FHLBank’s MBS/CMO portfolio in conjunction withfirst nine months of 2010 which more than offset purchases of $2.5 billion par value of variable rate CMOs that occurred during the Boardfirst quarter of Directors’ approval to increase mortgage investments2010 under Resolution 2008-08 (discussed below). The Agency debentures that the FHLBank holdswe hold in itsour long-term investment portfolio provide attractive returns, can serve as excellent collateral (e.g., repos and net derivatives exposure) and qualify for regulatory liquidity once their remaining term to maturity decreases to 36 months or less. All of the FHLBank’sour unsecured Agency debentures are fixed rate bonds, which are swapped from fixed to variable rates. The swaps do not qualify for hedge accounting, which results in the net interest payments or receipts on these economic hedges flowing through Net Gain (Loss) on Derivatives and Hedging Activities and not Net Interest Income. All swapped Agency debentures are classified as trading securit ies.securities.

On March 24, 2008, the Finance Board issued Resolution 2008-08, “Temporary Authorization to Invest in Additional Agency Mortgage Securities” (Resolution). InThis Resolution waived the Resolution, the Finance Board stated that the FHLBanks “can address difficulties and liquidity constraints in the housing finance market if the current investment limitrestrictions in the Financial Management Policy (FMP) is increased so the FHLBanks may invest in MBS issued by, or backed by pools of mortgages guaranteed by, Freddie Mac or Fannie Mae.” Consequently, in the Resolution the Finance Board waived the restrictions in the FMP that limit an FHLBank’s investment in mortgage securities to 300 percent of its capital and restrict quarterly increases in holdings of mortgage securities to no more than 50 percent of capital so that an FHLBa nkFHLBank can temporarily invest in Agency mortgage securities up to an additional 300 percent of its capital, subject to specified conditions. By allowingSince the FHLBanksintroduction of the Resolution, we have submitted two requests to purchase additional Agency MBS, the Finance Board intended to further its statutory housing finance mission. To the extent the Resolution could increase the demand for Agency MBS, the added liquidity could help to restore the market for these securities and could, in turn, lead to lower liquidity premiums, lower mortgage rates, and increased home purchases. In 2008, the FHLBank submitted and received approval from the Finance Board to increase itsour MBS/CMO holdingsholdings. In April 2008, we requested an increase in the portfolio up to 400 percent of capital and subsequently acquiredthrough the purchase of variable rate Agency MBS/CMOs under the expanded authority. OnCMOs. In December 18, 2009, the FHLBank submitted to the Finance Agency a notice required by the Resolution towe requested an increase its MBS/CMO holdings to 500 percent of capital. The Finance Agency was not required to approve the FHLBank’s notice, but required a 10 business day advance- notice period before an FHLBank could begin purchasing under the expanded authority. The Resolution provides that if an FHLBank does not hear from its examiner-in-charge within 10 business days after having received the acknowledgement, it may proceed with its purchases. The FHLBank began purchasing additional MBS in January 2010 under the expansion of this limitour portfolio up to 500 percent of capital, and utilized this expanded investmentagain through the purchase of variable rate Agency MBS/CMOs. The temporary authority throughto expand our MBS/CMO portfolio ended on March 31, 2010, when the expanded authority ended.and we will not be allowed to make further purchases of MBS/CMOs until our current portfolio declines below 300 percent of capital.

The FHLBank’sOur Risk Management Policy (RMP) restricts the acquisition of investments to high-quality, short-term money market instruments and highly rated long-term securities. The FHLBank usesWe use the short-term portfolio to sustain the liquidity necessary to meet member credit needs, to provide a reasonable return on member deposits and to manage the FHLBank’sour leverage ratio. Long-term securities are used to provide a reliable income flow and to achieve a desired maturity structure. The majority of these long-term securities are MBS,MBS/CMOs, which provide an alternative means to promote liquidity in the mortgage finance markets while providing attractive returns to the FHLBank.returns. As of JuneSeptember 30, 2010, the FHLBankwe held $511.3$480.8 million of par value in MBS/CMOs in itsour trading portfolio for liquidity purposes and to provide additional balance sheet flexibility. All of the MBSMBS/CMOs in the tradingtr ading portfolio are variable rate Agency securities, which were acquired and classified as such with the intent of minimizing the volatility of price changes over time. Note, however, that even variable rate Agency MBS have been subject to a significant amount of price volatility during the financial market credit crisis with the widening of the option-adjusted spreads of these instruments during 2007 and 2008, followed by a tightening of the option-adjusted spreads of these instruments during 2009 and into 2010.

The FHLBank hasWe have reduced itsour participation in the market for taxable state housing finance agency (HFA) securities but has increased itshave maintained our participation in standby bond purchase agreements (SBPA). State or local HFAs provide funds for low-income housing and other similar initiatives. By purchasing state or local HFA securities in the primary market, the FHLBankwe not only receivesreceive competitive returns but also providesprovide necessary liquidity to traditionally underserved segments of the housing market. The FHLBank also providesWe provide SBPAs to two state HFAs within the Tenth District. For a predetermined fee, the FHLBank acceptswe accept an obligation to purchase the authorities’ bonds if the remarketing agent is unable to resell the bonds to suitable investors, and to hold the bonds until the designated marketing agent can find a suitable investor or the HFA repurchases the bonds accordingaccordin g to a schedule established by the SBPA. The FHLBank increased its participationParticipation in this market increased in 2009 as the financial crisis took its toll on other liquidity providers of SBPAs supporting bonds issued by the Colorado Housing and Finance Authority (CHFA). Currently, theour standby bond purchase commitments executed by the FHLBank expire no later than 2015, though some are renewable upon request of the HFA and at the option of the FHLBank.our option. Total commitments for bond purchases under the SBPAs were $1.6 billion as of JuneSeptember 30, 2010 and December 31, 2009. The FHLBank wasWe were not required to purchase any bonds under these agreements during 2009 or 2010. The FHLBank plansWe plan to continue to support of the state HFAs in itsour district by continuing to execute SBPAs where appropriate and when allowed by policy.

 
5755
 
Major Security Types: Securities for which the FHLBank haswe have the ability and intent to hold to maturity are classified as held-to-maturity securities and recorded at carrying value, which is the net total of par, premiums, discounts and credit and non-credit OTTI. The FHLBank classifies certainCertain investments are classified as trading securities and carries themare carried at fair value. The FHLBank records changesChanges in the fair values of these investments are recorded through other income and original premiums/discounts on these investments are not amortized. The FHLBank doesWe do not practice active trading, but holdshold trading securities for asset/liability management purposes, including liquidity. The FHLBankWe also classifiesclassify certain investments that itwe may sell before maturity as available-for-sale and carriescarry them at fa irfair value. If fixed rate securities are hedged withwit h interest rate swaps, the FHLBank classifies the securities are classified as trading securities so that the changes in fair values of both the derivatives hedging the securities and the trading securities are recorded in other income. Securities acquired to hedge against duration risk, which are likely to be sold when the duration risk is no longer present, are also classified as available-for-sale securities. The carrying value and contractual maturityvalues of the FHLBank’sour investments as of JuneSeptember 30, 2010 and December 31, 2009 are summarized by security type in Tables 23 andTable 24 (in thousands).

Table 24

  
September 30,
2010
  
December 31,
2009
 
Trading securities:      
Commercial paper $809,873  $2,589,560 
Certificates of deposit and bank notes  1,170,046   3,199,963 
Government-sponsored enterprises  1,549,978   1,650,563 
Mortgage-backed securities:        
Other U.S. obligation residential MBS  1,584   1,704 
Government-sponsored enterprises residential MBS  478,416   570,886 
Total trading securities  4,009,897   8,012,676 
         
Held-to-maturity securities:        
State and local housing agency obligations  101,864   115,858 
Mortgage-backed securities:        
Other U.S. obligation residential MBS  25,233   29,876 
Government-sponsored enterprises residential MBS  5,912,915   5,383,640 
Private-label residential MBS  1,410,003   1,818,370 
Private-label commercial MBS  40,044   40,108 
Manufactured housing loans  146   334 
Home equity loans  1,795   2,025 
Total held-to-maturity securities  7,492,000   7,390,211 
Total securities  11,501,897   15,402,887 
         
Interest-bearing deposits  78   54 
         
Federal funds sold  1,869,000   945,000 
         
TOTAL INVESTMENTS $13,370,975  $16,347,941 

56
The contractual maturities of our investments as of September 30, 2010 are summarized by security type in Table 25 (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 2325

June 30, 2010 
Security Type 
Carrying
Value3
  
Due in one
year or less
  
Due after one
year through
five years
  
Due after five
years through
10 years
  
Due after
10 years
 
Interest-bearing deposits:               
MPF deposits $25  $25  $0  $0  $0 
Shared expense deposits  18   18   0   0   0 
Total interest-bearing deposits  43   43   0   0   0 
                     
Federal funds sold  2,984,000   2,984,000   0   0   0 
                     
Trading securities:                    
Non-mortgage-backed securities:                    
Certificates of deposit  2,450,126   2,450,126   0   0   0 
Commercial paper  2,829,015   2,829,015   0   0   0 
FHLBank obligations  122,135   0   0   122,135   0 
Fannie Mae obligations1
  401,525   52,453   60,260   288,812   0 
Freddie Mac obligations1
  1,000,829   103,688   324,219   572,922   0 
Mortgage-backed securities:                    
Fannie Mae obligations1
  298,132   0   0   0   298,132 
Freddie Mac obligations1
  209,452   0   0   0   209,452 
Ginnie Mae obligations2
  1,630   0   0   0   1,630 
Total trading securities  7,312,844   5,435,282   384,479   983,869   509,214 
                     
Held-to-maturity securities:                    
Non-mortgage-backed securities:                    
State or local housing agencies  104,669   0   0   0   104,669 
Mortgage-backed securities:                    
Fannie Mae obligations1
  3,157,027   0   0   67,973   3,089,054 
Freddie Mac obligations1
  3,208,041   0   0   10,976   3,197,065 
Ginnie Mae obligations2
  26,456   0   314   238   25,904 
Private-label mortgage-backed securities4
  1,599,790   0   0   204,728   1,395,062 
Total held-to-maturity securities  8,095,983   0   314   283,915   7,811,754 
                     
Total $18,392,870  $8,419,325  $384,793  $1,267,784  $8,320,968 
  
Due in one
year or less
  
Due after one
year through
five years
  
Due after five
years through
10 years
  
Due after
10 years
  Carrying Value 
Trading securities:               
Commercial paper $809,873  $0  $0  $0  $809,873 
Certificates of deposit and bank notes  1,170,046   0   0   0   1,170,046 
Government-sponsored enterprises  259,155   278,485   1,012,338   0   1,549,978 
Mortgage-backed securities:                    
Other U.S. obligation residential MBS  0   0   0   1,584   1,584 
Government-sponsored enterprises residential MBS  0   0   0   478,416   478,416 
Total trading securities  2,239,074   278,485   1,012,338   480,000   4,009,897 
Yield on trading securities  0.93%  5.04%  5.20%  2.17%    
                     
Held-to-maturity securities:                    
State and local housing agency obligations  0   0   0   101,864   101,864 
Mortgage-backed securities:                    
Other U.S. obligation residential MBS  0   343   145   24,745   25,233 
Government-sponsored enterprises residential MBS  0   0   70,229   5,842,686   5,912,915 
Private-label residential MBS  0   0   185,148   1,224,855   1,410,003 
Private-label commercial MBS  0   0   0   40,044   40,044 
Manufactured housing loans  0   0   0   146   146 
Home equity loans  0   0   0   1,795   1,795 
Total held-to-maturity securities  0   343   255,522   7,236,135   7,492,000 
Yield on held-to-maturity securities  -%  7.00%  4.30%  3.00%    
                     
Total securities  2,239,074   278,828   1,267,860   7,716,135   11,501,897 
Yield on total securities  0.93%  5.05%  4.99%  2.95%    
                     
Interest-bearing deposits  78   0   0   0   78 
                     
Federal funds sold  1,869,000   0   0   0   1,869,000 
                     
TOTAL INVESTMENTS $4,108,152  $278,828  $1,267,860  $7,716,135  $13,370,975 

57
Securities Ratings: Table 26 presents the carrying value of our investments by rating as of September 30, 2010 (in thousands):
Table 26
Investment Ratings
September 30, 2010
Carrying Value1
 
  Long-term Rating  Short-term Rating    
  Investment Grade  Below Investment Grade  Investment Grade    
  Triple-A  Double-A  Single-A  Triple-B  Double-B  Single-B  Triple-C  Double-C  
A-1 or
higher/
P-1/
F1
  
A-2/
P-2/
F2
  Total 
Interest-bearing deposits $0  $0  $0  $0  $0  $0  $0  $0  $78  $0  $78 
                                             
Federal funds sold2
  0   0   0   0   0   0   0   0   1,666,000   203,000   1,869,000 
                                             
Investment securities:                                            
Non-mortgage-backed securities:                                            
Commercial paper2
  0   0   0   0   0   0   0   0   809,873   0   809,873 
Certificates of deposit and bank notes2,.3
  0   0   0   0   0   0   0   0   1,170,046   0   1,170,046 
Government-sponsored enterprises  1,549,978   0   0   0   0   0   0   0   0   0   1,549,978 
State or local housing agency obligations  41,759   36,345   23,760   0   0   0   0   0   0   0   101,864 
Total non-mortgage-backed securities  1,591,737   36,345   23,760   0   0   0   0   0   1,979,919   0   3,631,761 
Mortgage-backed securities:                                            
Other U.S. obligations residential MBS  26,817   0   0   0   0   0   0   0   0   0   26,817 
Government-sponsored enterprises residential MBS  6,391,331   0   0   0   0   0   0   0   0   0   6,391,331 
Private label residential MBS  716,678   136,569   108,183   64,202   73,627   241,978   43,199   25,567   0   0   1,410,003 
Private label commercial MBS  40,044   0   0   0   0   0   0   0   0   0   40,044 
Manufactured housing loans  146   0   0   0   0   0   0   0   0   0   146 
Home equity loans  0   0   0   0   586   0   430   779   0   0   1,795 
Total mortgage-backed securities  7,175,016   136,569   108,183   64,202   74,213   241,978   43,629   26,346   0   0   7,870,136 
                                             
TOTAL INVESTMENTS $8,766,753  $172,914  $131,943  $64,202  $74,213  $241,978  $43,629  $26,346  $3,645,997  $203,000  $13,370,975 
__________
1Fannie MaeInvestment amounts represent the carrying value and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency ondo not include related accrued interest receivable of $21.9 million at September 7, 2008.30, 2010.
2Ginnie Mae securities are guaranteed by the U.S. government.Amounts represent unsecured credit exposure with original maturities ranging between overnight and 95 days.
3Carrying value has been adjusted byCertificates of deposit and bank notes were classified based upon short-term ratings beginning with the credit and non-credit componentsthird quarter of OTTI charges on private-label MBS.
4Primarily consists of private-label MBS backed by residential loans.2010.

 
58
 
Table 2427 presents the carrying value of our investments by rating as of December 31, 2009 (in thousands):

December 31, 2009 
Security Type 
Carrying
Value3
  
Due in one
year or less
  
Due after one
year through
five years
  
Due after five
years through
10 years
  
Due after
10 years
 
Interest-bearing deposits:               
MPF deposits $25  $25  $0  $0  $0 
Shared expense deposits  29   29   0   0   0 
Total interest-bearing deposits  54   54   0   0   0 
                     
Federal funds sold  945,000   945,000   0   0   0 
                     
Trading securities:                    
Non-mortgage-backed securities:                    
Certificates of deposit  3,109,967   3,109,967   0   0   0 
Bank notes  89,996   89,996   0   0   0 
Commercial paper  2,589,560   2,589,560   0   0   0 
FHLBank obligations  280,761   0   163,975   116,786   0 
Fannie Mae obligations1
  390,559   0   113,074   277,485   0 
Freddie Mac obligations1
  979,243   0   430,289   548,954   0 
Mortgage-backed securities:                    
Fannie Mae obligations1
  337,902   0   0   0   337,902 
Freddie Mac obligations1
  232,984   0   0   0   232,984 
Ginnie Mae obligations2
  1,704   0   0   0   1,704 
Total trading securities  8,012,676   5,789,523   707,338   943,225   572,590 
                     
Held-to-maturity securities:                    
Non-mortgage-backed securities:                    
State or local housing agencies  115,858   0   35   875   114,948 
Mortgage-backed securities:                    
Fannie Mae obligations1
  2,693,071   0   0   74,531   2,618,540 
Freddie Mac obligations1
  2,690,569   0   0   13,403   2,677,166 
Ginnie Mae obligations2
  29,876   0   337   282   29,257 
Private-label mortgage-backed securities4
  1,860,837   0   0   236,928   1,623,909 
Total held-to-maturity securities  7,390,211   0   372   326,019   7,063,820 
                     
Total $16,347,941  $6,734,577  $707,710  $1,269,244  $7,636,410 
Table 27
Investment Ratings
December 31, 2009
Carrying Value1
 
  Long-term Rating  Short-term Rating    
  Investment Grade  Below Investment Grade  Investment Grade    
  Triple-A  Double-A  Single-A  Triple-B  Double-B  Single-B  Triple-C  Double-C  
A-1 or
higher/
P-1/
F1
  
A-2/
P-2/
F2
  Total 
Interest-bearing deposits $0  $0  $0  $0  $0  $0  $0  $0  $54  $0  $54 
                                             
Federal funds sold2
  0   0   0   0   0   0   0   0   760,000   185,000   945,000 
                                             
Investment securities:                                            
Non-mortgage-backed securities:                                            
Commercial paper2
  0   0   0   0   0   0   0   0   2,589,560   0   2,589,560 
Certificates of deposit and bank notes2,3
  0   2,419,970   779,993   0   0   0   0   0   0   0   3,199,963 
Government-sponsored enterprises  1,650,563   0   0   0   0   0   0   0   0   0   1,650,563 
State or local housing agency obligations  52,263   63,595   0   0   0   0   0   0   0   0   115,858 
Total non mortgage-backed securities  1,702,826   2,483,565   779,993   0   0   0   0   0   2,589,560   0   7,555,944 
Mortgage-backed securities:                                            
Other U.S. obligations residential MBS  31,580   0   0   0   0   0   0   0   0   0   31,580 
Government-sponsored enterprises residential MBS  5,954,526   0   0   0   0   0   0   0   0   0   5,954,526 
Private label residential MBS  979,556   187,583   189,844   169,735   137,657   100,391   53,604   0   0   0   1,818,370 
Private label commercial MBS  40,108   0   0   0   0   0   0   0   0   0   40,108 
Manufactured housing loans  334   0   0   0   0   0   0   0   0   0   334 
Home equity loans  0   0   0   0   0   566   451   1,008   0   0   2,025 
Total mortgage-backed securities  7,006,104   187,583   189,844   169,735   137,657   100,957   54,055   1,008   0   0   7,846,943 
                                             
TOTAL INVESTMENTS $8,708,930  $2,671,148  $969,837  $169,735  $137,657  $100,957  $54,055  $1,008  $3,349,614  $185,000  $16,347,941 
__________
1Fannie MaeInvestment amounts represent the carrying value and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency on September 7, 2008.do not include related accrued interest receivable of $37.4 million at December 31, 2009.
2Ginnie Mae securities are guaranteed by the U.S. government.Amounts represent unsecured credit exposure with original maturities ranging between overnight and 98 days.
3Carrying value has been adjusted by the creditCertificates of deposit and non-credit componentsbank notes were classified based upon long-term ratings as of OTTI charges on private-label MBS.
4Primarily consists of private-label MBS backed by residential loans.December 31, 2009.

Table 28 presents the carrying value and fair values of our investments by credit rating as of September 30, 2010 and October 31, 2010 for securities that have been downgraded during that period (in thousands).

Table 28
Investment Ratings 
Downgrades – Balances Based on
Values as of September 30, 2010
 
As of September 30, 2010As of October 31, 2010 Private-label Residential MBS 
FromTo Carrying Value  Fair Value 
Triple-BTriple-C $8,483  $7,724 
59
Table 29 presents the carrying value and fair value by credit rating (as of October 31, 2010) of our investment portfolio for securities on negative watch with the lowest rated NRSRO as of October 31, 2010 (in thousands):

Table 29
On Negative Watch – Balances Based on Values at September 30, 2010 
  
Private-label
Residential MBS
  
Non-Mortgage-backed
Investments
 
Investment Ratings Carrying Value  Fair Value  Carrying Value  Fair Value 
Long-term ratings:            
Triple-A $241,028  $229,040  $0  $0 
Double-A  88,928   82,635   0   0 
Single-A  33,629   29,186   0   0 
Triple-B  34,575   25,538   0   0 
Short-term ratings:                
A-1 or higher/P-1/F1  0   0   49,985   49,985 
TOTAL $398,160  $366,399  $49,985  $49,985 

Private-label mortgage-backed securities.The FHLBank has We have not purchased a private-label MBS since June 2006. All of the FHLBank’sour acquisitions of private-label MBS investments carried the highest ratings from Moody’s, Fitch or S&P when acquired. The FHLBank only purchasedOnly private-label residential MBS investments with weighted average FICO scores of 700 or above and weighted average LTVs of 80 percent or lower at the time of acquisition. The FHLBank classifiesacquisition were purchased. We classify private-label MBS as prime, Alt-A and subprime based on the originator’s classification at the time of origination or based on classification by a Nationally-Recognized Statistical Rating Organization (NRSRO) upon issuance of the MBS.

59
Table 2530 presents a summary of the par valueunpaid principal balance (UPB) of private-label MBS by interest rate type and by type of collateral as of JuneSeptember 30, 2010 and December 31, 2009 (in thousands):

Table 2530

 June 30, 2010  December 31, 2009  September 30, 2010  December 31, 2009 
 Fixed Rate  Variable Rate  Total  Fixed Rate  Variable Rate  Total  
Fixed
 Rate1
  
Variable Rate1
  Total  
Fixed
 Rate1
  
Variable Rate1
  Total 
Private-label residential MBS:                                    
Prime $896,771  $241,263  $1,138,034  $1,075,084  $267,239  $1,342,323  $787,839  $226,883  $1,014,722  $1,075,084  $267,239  $1,342,323 
Alt-A  273,097   173,681   446,778   298,391   189,550   487,941   255,090   165,849   420,939   298,391   189,550   487,941 
Total private-label residential MBS  1,169,868   414,944   1,584,812   1,373,475   456,789   1,830,264   1,042,929   392,732   1,435,661   1,373,475   456,789   1,830,264 
                                                
Manufactured housing loans:                        
Private-label commercial MBS:                        
Prime  0   217   217   0   334   334   39,940   0   39,940   39,940   0   39,940 
                                                
Private-label commercial MBS:                        
Manufactured housing loans:                        
Prime  39,940   0   39,940   39,940   0   39,940   0   146   146   0   334   334 
                                                
Home equity loans:                                                
Subprime  0   5,202   5,202   0   5,537   5,537   0   5,081   5,081   0   5,537   5,537 
                        
TOTAL $1,209,808  $420,363  $1,630,171  $1,413,415  $462,660  $1,876,075  $1,082,869  $397,959  $1,480,828  $1,413,415  $462,660  $1,876,075 
__________
1The determination of fixed or variable rate is based upon the contractual coupon type of the security.

During 2008, the FHLBankwe experienced a significant decline in the estimated fair values of itsour private-label MBS due to interest rate volatility, illiquidity in the market place and credit deterioration in the U.S. mortgage markets. This decline continued into the first quarter of 2009; however, during the second quarter of 2009, the pace of the decline slowed appreciably and the fair value of many of the FHLBank’sour prime, early vintage private-label MBS actually improved from year-end 2008. Fair values continued to improve, although only slightly, into the third and fourth quarters of 2009 and into 2010. Declines in fair values have been particularly evident across the market for private-label MBS securitized in 2006 and 2007 primarily because ofdue to less stringent underwriting standards used by mortgage originators during tho sethose years. Ninety-five percent of the FHLBank’s private-labelour pr ivate-label MBS were securitized prior to 2006, and there are no 2007 vintage securities in the portfolio.portfolio issued after June 2006. As a result of this higher quality, well-seasoned portfolio, we have not experienced significant losses in our private-label MBS portfolio from OTTI. While some of the most significant declines in fair values have been in the late 2006, 2007 and 20072008 vintage MBS, the earlier vintages owned by the FHLBank have not been immune to the declines in fair value. Table 26 presents the fair value as a percentage of par value of the FHLBank’sTables 31 through 33 present statistical information for our private-label MBS by year of securitization and collateral type as of JuneSeptember 30, 2010 March 31, 2010, December 31, 2009, September 30, 2009 and June 30, 2009:

Table 26

Year of
Securitization
 
June 30,
2010
  
March 31,
2010
  
December 31,
2009
  
September 30,
2009
  
June 30,
2009
 
Private-label residential MBS:               
Prime:               
2006  89.5%  87.7%  87.0%  86.4%  77.7%
2005  92.9   92.1   90.9   88.5   84.5 
2004  90.7   89.9   88.6   86.6   85.3 
2003 and earlier  97.1   95.6   94.5   94.6   92.7 
Total prime  94.0   92.8   91.6   90.4   87.7 
                     
Alt-A:                    
2005  71.8   70.8   69.0   65.6   64.8 
2004  82.3   80.8   78.2   72.3   71.0 
2003 and earlier  93.5   92.0   91.1   90.2   89.1 
Total Alt-A  84.9   83.5   82.0   82.2   81.1 
                     
Total private-label residential MBS  91.4   90.2   89.0   89.0   86.6 
                     
Manufactured housing loans:                    
Prime:                    
2003 and earlier  97.4   96.9   95.5   93.7   98.6 
                     
Private-label commercial MBS:                    
Prime:                    
2003 and earlier  104.9   103.5   102.0   101.9   97.0 
                     
Home equity loans:                    
Subprime:                    
2003 and earlier  46.0   44.7   44.3   41.5   39.1 
                     
TOTAL  91.6%  90.4%  89.2%  89.1%  86.7%
(dollar amounts in thousands):

 
60
 
Table 27 presents the par value of the FHLBank’s private-label MBS by rating and by year of collateralization as of June 30, 2010 (in thousands):31

Table 27

Year of
Securitization
 AAA  AA   A  BBB  BB   B  CCC  CC  
Total
Par Value
 
Private-label residential MBS:                             
Prime:                             
2006 $0  $0  $0  $0  $0  $59,265  $19,122  $0  $78,387 
2005  9,165   0   41,372   24,748   66,352   173,094   19,230   0   333,961 
2004  177,663   49,477   14,224   0   5,938   0   0   0   247,302 
2003 and earlier  464,706   13,678   0   0   0   0   0   0   478,384 
Total prime  651,534   63,155   55,596   24,748   72,290   232,359   38,352   0   1,138,034 
                                     
Alt-A:                                    
2005  0   0   12,396   27,388   2,796   28,016   49,046   0   119,642 
2004  16,885   33,572   36,597   9,396   8,157   0   7,843   0   112,450 
2003 and earlier  156,849   57,837   0   0   0   0   0   0   214,686 
Total Alt-A  173,734   91,409   48,993   36,784   10,953   28,016   56,889   0   446,778 
                                     
Total private-label residential MBS  825,268   154,564   104,589   61,532   83,243   260,375   95,241   0   1,584,812 
                                     
Manufactured housing loans:                                    
Prime:                                    
2003 and earlier  217   0   0   0   0   0   0   0   217 
                                     
Private-label commercial MBS:                                    
Prime:                                    
2003 and earlier  39,940   0   0   0   0   0   0   0   39,940 
                                     
Home equity loans:                                    
Subprime:                                    
2003 and earlier  0   0   0   0   1,464   0   834   2,904   5,202 
                                     
TOTAL $865,425  $154,564  $104,589  $61,532  $84,707  $260,375  $96,075  $2,904  $1,630,171 
Private-Label Mortgage-Backed Securities, Manufactured Housing Loans and
Home Equity Loan Investments
By Year of Securitization - Prime
 
  Total  2006  2005  2004 and Prior 
Private-label residential MBS:            
UPB by credit rating:            
Triple-A $576,789  $0  $7,980  $568,809 
Double-A  59,172   0   0   59,172 
Single-A  51,134   0   37,161   13,973 
Triple-B  20,927   0   20,927   0 
Below investment grade:                
Double-B  64,526   0   58,951   5,575 
Single-B  208,037   54,356   153,681   0 
Triple-C  25,102   17,691   7,411   0 
Double-C  9,035   0   9,035   0 
TOTAL $1,014,722  $72,047  $295,146  $647,529 
                 
Amortized cost $1,012,176  $71,487  $294,251  $646,438 
Gross unrealized losses  51,690   5,538   13,686   32,466 
Fair value  967,151   65,949   280,744   620,458 
                 
OTTI:                
Credit-related OTTI charge taken year-to-date $256  $0  $256  $0 
Non-credit-related OTTI charge taken year-to-date  254   0   254   0 
TOTAL $510  $0  $510  $0 
                 
Weighted average percentage of fair value to UPB  95.3%  91.5%  95.1%  95.8%
Original weighted average credit support  2.9   3.1   3.0   2.9 
Weighted average credit support  6.4   4.1   4.5   7.5 
Weighted average collateral delinquency  4.3   6.9   5.0   3.8 
                 
Private-label commercial MBS:                
UPB by credit rating:                
Triple-A $39,940  $0  $0  $39,940 
                 
Amortized cost $40,044  $0  $0  $40,044 
Gross unrealized losses  0   0   0   0 
Fair value  42,270   0   0   42,270 
                 
Weighted average percentage of fair value to UPB  105.8%  0%  0%  105.8%
Original weighted average credit support  21.5   0   0   21.5 
Weighted average credit support  26.1   0   0   26.1 
Weighted average collateral delinquency  3.1   0   0   3.1 
                 
Manufactured housing loans:                
UPB by credit rating:                
Triple-A $146  $0  $0  $146 
                 
Amortized cost $146  $0  $0  $146 
Gross unrealized losses  2   0   0   2 
Fair value  144   0   0   144 
                 
Weighted average percentage of fair value to UPB  98.3%  0% 0%  98.3%
Original weighted average credit support  22.0   0   0   22.0 
Weighted average credit support  93.1   0   0   93.1 
Weighted average collateral delinquency  2.2   0   0   2.2 

 
61
 
Table 28 presents the underlying collateral performance and credit enhancement statistics of the FHLBank’s private-label MBS as of June 30, 2010 (in thousands):32

Private-Label Mortgage-Backed Securities, Manufactured Housing Loans and
Home Equity Loan Investments
By Year of Securitization - Alt-A
 
  Total  2005  2004 and Prior 
Private-label residential MBS:         
UPB by credit rating:         
Triple-A $140,984  $0  $140,984 
Double-A  77,615   0   77,615 
Single-A  57,207   2,485   54,722 
Triple-B  43,333   25,848   17,485 
Below investment grade:            
Double-B  10,583   2,729   7,854 
Single-B  35,991   35,991   0 
Triple-C  23,168   15,624   7,544 
Double-C  32,058   32,058   0 
TOTAL $420,939  $114,735  $306,204 
             
Amortized cost $417,808  $111,914  $305,894 
Gross unrealized losses  53,137   30,105   23,032 
Fair value  366,175   81,809   284,366 
             
OTTI:            
Credit-related OTTI charge taken year-to-date $2,190  $2,190  $0 
Non-credit-related OTTI charge taken year-to-date  14,782   14,782   0 
TOTAL $16,972  $16,972  $0 
             
Weighted average percentage of fair value to UPB  87.0%  71.3%  92.9%
Original weighted average credit support  4.8   5.3   4.5 
Weighted average credit support  10.6   7.6   11.8 
Weighted average collateral delinquency  8.7   11.3   7.7 

Table 2833

Year of Securitization 
Weighted
Average
Original
Credit
Support
  
Weighted
Average
Current
Credit
Support
  
Weighted
Average
Collateral
Delinquency1
 
Private-label residential MBS:         
Prime:         
2006  3.1%  4.2%  7.1%
2005  3.0   4.4   4.9 
2004  3.5   8.1   5.3 
2003 and earlier  2.5   6.7   2.4 
Total prime  2.9   6.2   4.1 
             
Alt-A:            
2005  5.3   6.9   12.3 
2004  5.0   11.5   10.6 
2003 and earlier  4.3   11.7   5.6 
Total Alt-A  4.7   10.4   8.6 
             
Total private-label residential MBS:  3.4   7.3   5.4 
             
Manufactured housing loans:            
Prime:            
2003 and earlier  22.0   90.1   1.9 
             
Private-label commercial MBS:            
Prime:            
2003 and earlier  21.5   26.5   2.9 
             
Home equity loans:            
Subprime:            
2003 and earlier  36.3   33.3   37.1 
             
TOTAL  4.0%  7.9%  5.4%
Private-Label Mortgage-Backed Securities, Manufactured Housing Loans and
Home Equity Loan Investments
By Year of Securitization - Subprime
 
  
Total1
 
Home equity loan investments:   
UPB by credit rating:   
Below investment grade:   
Double-B $1,456 
Triple-C  811 
Double-C  2,814 
TOTAL $5,081 
     
Amortized cost $2,591 
Gross unrealized losses  432 
Fair value  2,364 
     
OTTI:    
Credit-related OTTI charge taken year-to-date $1,104 
Non-credit-related OTTI charge taken year-to-date  (1,104)
TOTAL $0 
     
Weighted average percentage of fair value to UPB  46.5%
Original weighted average credit support  36.1 
Weighted average credit support  33.1 
Weighted average collateral delinquency  37.0 
__________
1Determined based on underlying loans that are 60 days or more past due, including bankruptcies, foreclosures and REO. Collateral delinquency percentages are calculated based on information available from third-party financial data providers.All subprime investments were securitized prior to 2005.

 
62
 
Under the FHLBank’sour RMP, acquisitions of private-label MBS are limited to securities where the geographic concentration of loans collateralizing the security areis such that no single state represents more than 50 percent of the total by dollar amount. As the structure of the underlying collateral shifts because of prepayments, the concentration shifts. Thus, FHLBank management continueswe continue to monitor concentration of the underlying collateral for itsour private-label MBS portfolio for risk management purposes. The FHLBank’s geographicGeographic concentration of collateral securing private-label MBS is provided in the annual report on Form 10-K. There were no substantialmaterial changes in these concentrations during the period ended JuneSeptember 30, 2010.

As of JuneSeptember 30, 2010, the FHLBankwe held private-label MBS covered by monoline insurance companies, which provide credit support for these securities. Credit support is defined as the percentage of subordinate tranches and over-collateralization, if any, in a security structure that will absorb losses before the holders of the security will incur losses. Table 2934 presents coverage amounts and unrecognizedunrealized losses as of September 30, 2010 (in thousands) on the private-label MBS covered by monoline bond insuranceinsurers on which we are placing reliance:

Table 34

  MBIA Insurance Corp. 
Year of Securitization Insurance Coverage  Gross Unrealized Losses 
Home equity loans:      
2004 and prior $1,456  $159 

Table 35 presents the NRSRO credit ratings as of JuneSeptember 30, 2010 for all monoline insurance companies that provide credit support for our home equity loans (in thousands):

Table 2935

  
MBIA
Insurance Corp.1
  
Financial Guaranty
Insurance Company2
  Total 
Year of
Securitization
 
Monoline
Insurance
Coverage
  
Total
Unrecognized
Losses3
  
Monoline
Insurance
Coverage
  
Total
Unrecognized
Losses4
  
Monoline
Insurance
Coverage
  
Total
Unrecognized
Losses
 
Home equity loans:                  
Subprime:                  
2003 and earlier $1,464  $229  $3,738  $348  $5,202  $577 
Moody’s Credit RatingS&P Credit RatingFitch Credit Rating
MBIA Insurance Corp.B3BB+
NR1
Financial Guaranty Insurance Company
NR1
NR1
NR1
__________
1MBIA Insurance Corp. was rated B (in the event of a split rating the FHLBank uses the lowest rating published by an NRSRO) as of July 31, 2010. 
2Financial Guaranty Insurance Company was not rated as of July 31, 2010. Ratings were withdrawn by S&P and Moody's on April 22, 2009 and March 24, 2009, respectively. On November 24, 2009, the Insurance Commissioner of the State of New York issued an order to cease payment of claims against this issuer. On August 4, 2010, FGIC Corporation, the holding company for Financial Guaranty Insurance Company, filed for Chapter 11 bankruptcy.
3The one private-label MBS covered by MBIA Insurance Corp. was initially determined to be other-than-temporarily impaired as of March 31, 2009 with additional credit and non-credit impairment recorded at June 30, 2009 and additional credit impairment recorded at March 31, 2010 and June 30, 2010.
4All private-label MBS covered by Financial Guaranty Insurance Company were determined to be other-than-temporarily impaired as of December 31, 2008. Additional credit impairment was recorded on three of the four securities at March 31, 2010 and on one of the four securities at June 30, 2010.Not rated.

63
As noted previously, the FHLBank only acquired private-label MBS investments that carried the highest ratings from Moody’s, Fitch or S&P on the acquisition dates, and the FHLBank has not purchased a private-label MBS since 2006. With the continued disruption in the U.S. housing market, falling home prices and historically high levels of mortgage delinquencies, almost 47 percent of the par value of the FHLBank’s private-label MBS has been downgraded below triple-A. Table 30 presents a summary of private-label MBS by credit rating as of June 30, 2010 (in thousands):

Table 30
Credit Rating 
Par
Value
  
Amortized
Cost
  
Gross
Unrecognized
Losses
  
Weighted Average
Collateral
Delinquency1
 
Private-label residential MBS:            
Prime:            
AAA $651,534  $650,451  $26,218   2.6%
AA  63,155   63,110   9,216   7.6 
A  55,596   55,477   4,983   5.5 
BBB  24,748   24,700   1,154   2.8 
BB  72,290   72,156   5,811   8.2 
B  232,359   231,178   17,472   5.3 
CCC  38,352   37,972   4,986   7.9 
Total prime  1,138,034   1,135,044   69,840   4.1 
                 
Alt-A:                
AAA  173,734   173,762   12,044   5.5 
AA  91,409   91,257   7,184   6.7 
A  48,993   48,860   7,550   11.0 
BBB  36,784   36,770   9,396   14.6 
BB  10,953   10,953   4,575   16.9 
B  28,016   28,061   3,040   7.2 
CCC  56,889   54,160   21,205   14.7 
Total Alt-A  446,778   443,823   64,994   8.6 
                 
Total private-label residential MBS  1,584,812   1,578,867   134,834   5.4 
                 
Manufactured housing loans:                
Prime:                
AAA  217   217   5   1.9 
                 
Private-label commercial MBS:                
Prime:                
AAA  39,940   40,064   0   2.9 
                 
Home equity loans:                
Subprime:                
BB  1,464   954   229   30.6 
CCC  834   757   295   35.9 
CC  2,904   1,175   53   40.8 
Total home equity loans  5,202   2,886   577   37.1 
                 
TOTAL $1,630,171  $1,622,034  $135,416   5.4%
__________
1Determined based on underlying loans that are 60 days or more past due, including bankruptcies, foreclosures and REO. Collateral delinquency percentages are calculated based on information available from third-party financial data providers.

64
As of JuneSeptember 30, 2010, the FHLBank had amortized cost of $1.2 billion of private-label securities with unrecognized losses.unrealized losses was $0.9 billion. (See Note 4 of the Notes to the Financial Statements included under Item 1 for a summary of held-to-maturity securities with unrecognizedunrealized losses aggregated by major security type and length of time that the individual securities have been in a continuous unrecognizedunrealized loss position.) Table 3136 presents characteristics of the FHLBank’sour private-label MBS in a gross unrecognizedunrealized loss position (in thousands). The underlying collateral for all prime loans is first lien mortgages, and the underlying collateral for all subprime loans is second lien mortgages.

Table 3136

Security
Type
 
Par
Value
  
Amortized
Cost
  
Gross
Unrecognized
Losses
  
Weighted-
Average
Collateral
Delinquency
Rate
  
Percentage
AAA at
06/30/2010
  
Percentage
AAA at
07/31/2010
  
Percentage
Investment
Grade
(other than
AAA) at
07/31/2010
  
Percentage
Below
Investment
Grade at
07/31/2010
  
Percentage
on Negative
Watch at
07/31/2010
 
Private-label residential MBS:                           
Prime $813,226  $811,489  $69,840   5.1%  41.8%  41.8%  16.0%  42.2%  20.8%
Alt-A  423,909   421,028   64,994   8.9   35.6   30.1   47.3   22.6   49.1 
Total private-label residential MBS  1,237,135   1,232,517   134,834   6.4   39.7   37.8   26.7   35.5   30.5 
                                     
Manufactured Housing Loans  217   217   5   1.9   100.0   100.0   0.0   0.0   0.0 
                                     
Home Equity Loans  3,251   2,114   577   34.0   0.0   0.0   0.0   100.0   0.0 
                                     
TOTAL $1,240,603  $1,234,848  $135,416   6.4%  39.6%  37.7%  26.7%  35.6%  30.4%
  September 30, 2010  
October 31, 2010 MBS Ratings
Based on September 30, 2010 UPB2
 
  
Unpaid
Principal
Balance
  
Amortized
Cost
  
Gross
Unrecognized
Losses
  
Weighted-
Average
Collateral
Delinquency
Rate1
  
Percentage
Rated
Triple-A3
  
Percentage
Rated
Triple-A
  
Percentage
Rated
Investment
Grade
  
Percentage
Rated
Below
Investment
Grade
  
Percentage
on Watchlist
 
Private-label residential MBS:                           
Prime $634,443  $633,130  $51,690   5.5%  34.1%  34.1%  19.0%  46.9%  20.0%
                                     
Alt-A:                                    
Alt-A option arm  17,438   15,031   5,373   33.5   0.0   0.0   52.8   47.2   52.8 
Alt-A other  280,136   279,553   47,764   8.5   28.5   28.5   35.1   36.4   44.1 
Total Alt-A  297,574   294,584   53,137   9.9   26.8   26.8   36.1   37.1   44.6 
                                     
Manufactured housing loans:                                    
Prime  146   146   2   2.2   100.0   100.0   0.0   0.0   0.0 
                                     
Home equity loans:                                    
Subprime  3,201   1,967   432   33.3   0.0   0.0   0.0   100.0   0.0 
                                     
TOTAL $935,364  $929,827  $105,261   7.0%  31.7%  31.7%  24.3%  44.0%  27.8%
__________
1Weighted-average collateral delinquency is based on the sum of loans greater than 60 days delinquent plus loans in non-accrual plus loans in foreclosure plus loans in bankruptcy as of September 30, 2010. The reported collateral delinquency percentage represents the weighted-average based on the UPB of the individual securities in the category and their respective collateral delinquency as of September 30, 2010.
2
Represents the lowest ratings available for each security based on NRSROs.

Table 32 presents the amortized cost and fair values of the FHLBank’s private-label MBS by credit rating as of June 30, 2010 and July 31, 2010 for securities that have been downgraded during that period (in thousands). There were no downgrades on the FHLBank’s private-label MBS backed by manufactured housing loans, home equity loans or commercial loans.

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Table 32

Credit Rating      
June 30, 2010July 31, 2010 
Amortized
Cost
  
Fair
Value
 
Private-label residential MBS:       
Alt-A:       
AAA    A $20,659  $19,078 
AAA    BBB  2,838   2,824 
AA    BBB  5,875   4,447 
CCC    CC  32,580   17,165 
          
TOTAL   $61,952  $43,514 

Table 33 presents the amortized cost and credit rating (as of July 31, 2010) of the FHLBank’s private-label MBS portfolio for securities on negative watch with the lowest rated NRSRO as of July 31, 2010 (in thousands):

Table 33

Security Type Rated AAA  Rated AA  Rated A  Rated BBB  Total 
Private-label residential MBS:               
Prime $188,052  $32,076  $6,093  $9,520  $235,741 
Alt-A  76,620   65,871   28,682   36,770   207,943 
                     
TOTAL $264,672  $97,947  $34,775  $46,290  $443,684 

Other-than-temporary Impairment. As mentioned previously, the FHLBankwe experienced a significant decline in the estimated fair values of itsour private-label MBS due to interest rate volatility, illiquidity in the marketplace and credit deterioration in the U.S. mortgage markets during 2008, which continued to some extent into the first quarter of 2009 but improved throughout the remainder of 2009 and into 2010.beginning in early 2008. Despite the improvement in the fair value of itsour private-label MBS over the last nine months of 2009 and the first halfnine months of 2010, the fair values of the majority of the FHLBank’s private-label MBS in itsour held-to-maturity portfolio remain below amortized cost as of JuneSeptember 30, 2010. However, based upon the FHLBank’s OTTI evaluation process that results in a conc lusionconclusion as to whether a credit loss exists (present value of the FHLBank’sour best estimate of the cash flows expected to be collected is less than the amortizedam ortized cost basis of each individual security), we have concluded that, except for ten private-label MBS upon which we have recognized OTTI, there is no evidence of a likely credit loss; there is no intent to sell, nor is there any requirement to sell; and, thus, there is no OTTI for the remaining private-label MBS that have declined in value.

65
See Note 4 of the Notes to Financial Statements under Item 1 for additional information on the FHLBank’sour OTTI evaluation process. The FHLBank utilizesWe utilize a process for the determination of OTTI under an approach that is consistent with the other 11 FHLBanks in accordance with guidance issued by the Finance Agency. Each FHLBank performs its OTTI analysis primarily using key modeling assumptions provided and approved by the FHLBanks’ OTTI Governance Committee, of which FHLBank Topeka iswe are an active member, for the majority of its private-label residential MBS and home equity loan investments. Certain private-label MBS backed by multi-family and commercial real estate loans, home equity lines of credit, manufactured housing loans and other securities that were not able to be cash flow tested were outside of the scope of the OTTI Governance Committee and werewe re analyzed for OTTI by the FHLBank.FHLBank using other methods.

The ten securities upon which we recognized OTTI included eight private-label MBS that were identified as other-than-temporarily impaired prior to 2010 and two private label MBS that were initially identified in the first quarter of 2010. While the remainder of the FHLBank’sour held-to-maturity securities portfolio has also seen some decline in fair value, the decline is considered temporary because: (1) the FHLBank doeswe do not have the intent to sell the securities; (2) it is not likely that the FHLBankwe will be required to sell the securities before anticipated recovery; and (3) the amortized cost of the securities is expected to be recovered.

Table 37

  
Three-month Period Ended
September 30, 2010
  
Nine-month Period Ended
September 30, 2010
 
  
Credit
Losses
  
Net
Noncredit Losses
  
Total
Losses
  
Credit
Losses
  
Net
Noncredit Losses
  
Total
Losses
 
Securities newly impaired during the period $0  $0  $0  $617  $16,207  $16,824 
Securities previously impaired prior to current period1
  165   (165)  0   2,933   (2,275)  658 
TOTAL $165  $(165) $0  $3,550  $13,932  $17,482 
__________
1For the three-month period ended September 30, 2010, securities previously impaired prior to current period represents all securities that were also previously impaired prior to June 30, 2010. For the nine-month period ended September 30, 2010, securities previously impaired prior to current period represents all securities that were also previously impaired prior to January 1, 2010.

In addition to evaluating all of our private-label MBS under a base case (or best estimate) scenario for generating expected cash flows, a cash flow analysis was also performed for each security under a more stressful housing price scenario. The more stressful, or stress test, scenario was designed to provide an indication of the sensitivity of the FHLBank’sour private-label MBS to the deterioration in housing prices beyond our base case estimates. The more stressful housing price scenario assumes a housing price forecast that is 5 percentage points lower at the trough than the base case scenario followed by a flatter recovery pathpath. Under this scenario, current-to-trough home price declines were projected to range from 5 percent to 15 percent over the three- to nine-month period beginning AprilJuly 1, 2010. Continued housing price declines vary dependingd epending upon the property location with some hitting the trough sooner and beginning the recovery sooner. After hitting the trough, home prices were projected to increase zero percentremain unchanged from trough levels in each of the first year,and second years, and to increase one percent in the secondthird year, two percent in each of the thirdfourth and fourthfifth years and three percent in each subsequent year. (See Note 4 of the Notes to the Financial Statements included under Item 1 for a description of the assumptions used to determine actual credit-related OTTI.) Table 3438 represents the impact on credit-related OTTI in the more stressful housing price scenario compared to actual credit-related OTTI recorded using base-case housing price index (HPI) assumptions by collateral type, which is based on the originator’s classification at the time of origination or based on classification by an NRSRO upon issuance of the MBS (dollar amounts in thousands). The stress testmore stressful scenario and associated results do not represent the FHLBank’sour current expectationsexpecta tions and therefore, should not be construed as a prediction of the FHLBank’s future results, market conditions or the actual performance of these sec urities.securities. Rather, the results from the hypothetical stress test scenario provide a measure of the credit losses that the FHLBankwe might incur if home prices decline further and subsequent recoveries are more adverse than those projected as our best estimate in our OTTI assessment.

Table 3438

Housing Price Scenarios
At September 30, 2010
Housing Price Scenarios
At September 30, 2010
 
 Base-case HPI Scenario  Adverse HPI Scenario  
Base Case1
  Hypothetical Results Under Stress Test Scenario 
 
Number of
Securities
  
Par Value
as of
June 30,
2010
  
Credit-related
OTTI for the
Three-month
Period Ended
June 30,
2010
  
Number of
Securities
  
Par Value
as of
June 30,
2010
  
Credit-related
OTTI for the
Three-month
Period Ended
June 30,
2010
  
# of
Securities
  Unpaid Principal Balance  OTTI Related to Credit Loss  
# of
Securities
  Unpaid Principal Balance  OTTI Related to Credit Loss 
Private-label residential MBS:                  
Total private-label residential MBS:                  
Prime  1  $9,563  $133   6  $96,194  $2,027   0  $0  $0   6  $91,567  $373 
Alt-A  2   41,205   1,548   4   58,757��  3,108   1   32,058   59   4   57,351   1,064 
Total private-label residential MBS  3   50,768   1,681   10   154,951   5,135   1   32,058   59   10   148,918   1,437 
                                                
Home equity loans:                                                
Subprime  2   2,417   272   5   5,202   339   3   3,115   106   5   5,081   202 
TOTAL  5  $53,185  $1,953   15  $160,153  $5,474   4  $35,173  $165   15  $153,999  $1,639 
__________
1Represent securities and related OTTI credit losses for the quarter ended September 30, 2010.

64
Deposits – The FHLBank offersWe offer deposit programs for the benefit of itsour members and certain other qualifying non-members. Deposit products offered include demand and overnight deposits and short-term certificates of deposit and a limited number of non-interest bearing products.deposit. Most deposits are very short-term and the FHLBank, as a matter of prudence, holds short-term assets with maturities similar to the deposits. The majority of the FHLBank’s deposits are in overnight or demand accounts that generally re-price daily based upon a market index such as overnight Federal funds. However, because of the extremely low interest rate environment, management has established a floor of 5 bps on demand deposits and 15 bps on overnight deposits. The level of deposits at the FHLBank is driven by member demand for FHLBank deposit products, which in turn is a function of the liquidity position of members. Factors that influence deposit levels inc ludeinclude turnover in member investment anda nd loan portfolios, changes in members’ customer deposit balances, changes in members’ demand for liquidity, and the FHLBank’sour deposit pricing as compared to other short-term market rates.rates and members' desire to pledge overnight deposits as collateral. The majority of the 88.8 percent increase in deposit balances (see Table 12)14) can be attributed to several institutions with significant increases in their overnight deposit accounts.accounts related to the pledging of these deposits as collateral. Deposits could decline during the second halffourth quarter of 2010 if demand for loans at member institutions increase, if members continue to reduce their leverage or if decreases in the general level of liquidity of members should occur. Because of itsour ready access to the capital markets through consolidated obligations, however, the FHLBank expectswe expect to be able to replace any reduction in deposits with similarly priced borrowings.

66
Consolidated Obligations – Consolidated obligations are the joint and several debt obligations of the 12 FHLBanks and consist of bonds and discount notes. Consolidated obligations represent the primary source of liabilities used by the FHLBankwe use to fund advances, mortgage loans and investments. As noted under “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk Management” under Item 3, the FHLBank useswe use debt with a variety of maturities and option characteristics to manage itsour DOE and interest rate risk profile. The FHLBank makesWe make extensive use of derivative transactions, executed in conjunction with specific consolidated obligation debt issues, to synthetically structure funding terms and costs.

During the first six months of 2010, the FHLBank’s total net consolidated obligation balances decreased by 0.7 percent from $39.1 billion as of December 31, 2009 to $38.8 billion as of June 30, 2010. While total consolidated obligations decreased slightly from December 31, 2009 to June 30, 2010, the mix between discount notes and bonds changed over the period, due to factors discussed previously. On an absolute basis, discount notes increased by $4.0 billion and bonds decreased by $4.3 billion from December 31, 2009 to June 30, 2010.
The FHLBank primarily uses consolidatedConsolidated obligation bonds are primarily used to fund longer-term (one year or greater) advances, mortgage loans and investments. To the extent that the bond is funding variable rate assets or assets swapped to synthetically create variable rate assets, the FHLBankwe typically either issuesissue a consolidated obligation bond that has variable rates matching the asset index or it swapsswap a fixed rate, variable rate or a complex consolidated obligation bond to match that index. Additionally, the FHLBankwe sometimes usesuse fixed rate, variable rate or complex consolidated obligation bonds that are swapped to LIBOR to fund short-term advances and money market investments.

The FHLBank primarily uses consolidatedConsolidated obligation discount notes are primarily used to fund shorter-term advances and investments (maturities of three months or less). However, the FHLBankwe sometimes usesuse shorter-term, fixed rate consolidated obligations, including discount notes, to fund longer-term variable rate assets or assets swapped to synthetically create variable rate assets. This occurred in the first half of 2010 as the FHLBank increased its issuance of fixed rate consolidated obligation bonds with maturities of 15 to 21 months and term consolidated obligation discount notes used to fund a portion of its variable rate CMO portfolio: (1) to provide balance sheet flexibility necessary to address the buyouts of 120 days or more delinquent loans by Fannie Mae and Freddie Mac from March through June 2010; and (2) to lock in relative ly low fixed rates in anticipation of increasing short-term rates. Discount notes as a percentage of total consolidated obligations increased from 29.6 percent as of December 31, 2009 to 40.2 percent as of June 30, 2010. This increase was initially the result of a significant amount of the swapped, callable, fixed rate consolidated obligation bonds with step-up couponsAdditionally, we have issued during the third and fourth quarters of 2009 being called in the fourth quarter of 2009 and the first quarter of 2010. A portion of these bonds were used to fund short-term advances and money market investments. The funding level for bonds with step-up coupons swapped to LIBOR deteriorated in the first quarter of 2010 so that replacing the calls with swapped bonds with step-up coupons offered less of a funding cost advantage over discount notes, thereby making discount notes a relatively more attractive and dependable funding option. As LIBOR began to rise in the second quarter of 2010 in response to the sovereign debt crisis in Europe, management made a conscious decision to increase the use of discount notes and reduce its reliance on LIBOR-based funding used to fund assets that were not indexed to LIBOR. The FHLBank also increased its cash and short-term investments in the first half of 2010 which resulted in an increase in the amount of discount notes used to fund the investments. Additionally, the FHLBank issued $983.9 million in term discount notes (approximately nine months to one year tenors), which itthat were swapped to one-month1- or three-month3-month LIBOR at relatively advantageous swapped funding levels to fund a portion of itsour variable rate CMO, investment and advance portfolio. Funding levels for discount notes improved in the second quarter of 2010 because of the increase in demand for the safety of short-term Agency debt, widening swap spreads, and an increase in LIBOR rates as a result of the sovereign debt crisis.portfolios.
 
The spread between 1- and 3-month LIBOR and the overnight Federal funds target rate abnormally exceeded 1.0 percent at times during the first quarter of 2009. This spread decreased throughout 2009 to essentially zero by December 31, 2009. At the end of the secondthird quarter of 2010, the spread had increased slightly from December 31, 2009 to a positive 0.280.04 percent for 3-month LIBOR and a positive 0.100.01 percent for 1-month LIBOR. The LIBOR/Federal funds target rate spread is of significance because: (1) the FHLBank hasbecause we have occasionally used consolidated obligation bonds swapped to LIBOR at favorable sub-LIBOR rates to fund a portion of itsour non-LIBOR short-term fixed rate advance and short-term money market investment and variable rate MBS portfolios; (2) the cost of FHLBank short-term consolidated obligation discount notes has been favorable relative to LIBOR, especially when the LIBOR/Federal funds target rate spread was at its widest levels; and (3) the FHLBank generally prices its short-term fixed rate advances at a spread over its marginal cost of short-term consolidated obligation discount notes.investments.

The FHLBankWe continued to utilize optionality in the liability portfolios funding assets with prepayment characteristics and some fixed rate advances by issuing callable debt to manage the optionality contained in these assets. During the first sixnine months of 2010, the FHLBank called $2.5$4.0 billion of unswapped callable consolidated obligation bonds were called and issued $2.2$4.4 billion of unswapped callable consolidated obligation bonds.bonds were issued. In order to increase the optionality in itsour funding and better match the options in theour assets, being funded, the FHLBankwe primarily utilizesutilize callable debt with short lockout periods (three to six months). This portfolio refinancing has an impact on portfolio spreads by reducing funding costs due to the issuance of new debt at a lower cost. For a discussion on yields and spreads see Tables 46 through 7 un der9 under Item 2 – “Financial ReviewRe view – Results of Operations” for further information.

Several recent developments have the potential to impact the demand for FHLBank short-term consolidated obligations including discount notes, floating rate consolidated obligations and short-term consolidated obligation bonds in the coming months. For a discussion of the impact of these recent developments, U.S. government programs and the financial markets on the cost of FHLBank consolidated obligations, see “Financial Market Trends” and “Recent Developments” under this Item 2.

67
While the FHLBank haswe have had relatively stable access to funding markets for the first halfnine months of 2010, future developments could impact the FHLBank’sour ability to replace outstanding debt. Some of these include, but are not limited to, a large increase in call volume, significant increases in advance demand, legislative and regulatory proposals addressing GSE reform, decline in investor demand for consolidated obligations and changes in Federal Reserve policies and outlooks.

Derivatives –All derivatives are marked to fair value, netted by counterparty with any associated accrued interest, offset by the fair value of any cash collateral received or delivered and included on the Statements of Condition as an asset when there is a net fair value gain or as a liability when there is a net fair value loss. The FHLBank recorded derivative assets of $41.1 million and $15.9 million and derivative liabilities of $256.2 million and $240.6 million as of June 30, 2010 and December 31, 2009, respectively. Fair values of the FHLBank’sour derivatives fluctuate as the LIBOR interest rate curve fluctuates. The LIBOR curve generally reflects the demand for and supply of derivative products, but other factors such as market participant expectations, imp liedimplied volatility, and the shape of the curve can drive the market price for derivatives.

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

65
The notional amount of total derivatives outstanding decreased by $1.9$2.6 billion from $33.5 billion as of December 31, 2009 to $31.6 billion as of JuneSeptember 30, 2010.2010 (see Table 39). Large changes in the types of hedged items during the first sixnine months of 2010 were as follows:
§A $1.2 billion decrease in interest rate swaps associated with duration and cost of funds (from $3.4 billion as of December 31, 2009 to $0.8 billion as of June 30, 2010)(see Table 44 and Table 46). The decrease in this type of interest rate swaps,swap, which wereare primarily interest rate swaps used to swap floating rate consolidated obligations indexed to the Federal funds effective or Prime rates and also interest rate swaps used to swap floating or more complex fixed-to-floating rate callable capped consolidated obligation bonds to 1- or 3-month LIBOR, was primarily the result of the maturity of a significant amount ofcounterparties exercising their option to call these consolidated obligations.swaps.
§A $1.1 billion decrease in interest rate swaps used to swap fixed rate callable step-up or step-down consolidated obligations (from $3.7 billion as of December 31, 2009 to $3.1 billion as of June 30, 2010)(see Table 44 and Table 46). The decline in this type of interest rate swapsswap was primarily the result of a net increase (called swaps greater than new swaps) in counterparties exercising their options to call these swaps in the first six months of 2010. When a counterparty calls the swap used to hedge consolidated obligation bonds, including fixed rate callable step-up or step-down fixed rate bonds, the FHLBank typically exercises its right to call the associated bond.swaps.
§A $0.9 billion decrease in interest rate swaps used to swap fixed rate convertible advances (from $5.4 billion as of December 31, 2009 to $4.7 billion as of June 30, 2010)(see Table 44 and Table 46). The decline in this type of interest rate swapsswap was primarily the result of thematurities or prepayment of the related convertible advances. When the advances underlying these swaps are prepaid, the FHLBank typically terminates the swaps associated with the advances.advance.
§A $0.7 billion decrease in interest rate swaps used to swap fixed rate non-callable consolidated obligations (from $6.9 billion as of December 31, 2009 to $6.3 billion as of June 30, 2010)(see Table 44 and Table 46). The decline in this type of interest rate swapsswap was primarily the result of a greater number of maturities in this portfolio in the first six months of 2010 than new interest rate swaps added during this period. See the previous discussion on more favorable funding levels obtained through the issuance of consolidated discount notes.portfolio.
§AnA $0.6 billion decrease in interest rate swaps used to swap complex fixed rate consolidated obligations (see Table 44 and Table 46). The decline in this type of interest rate swap was primarily the result of counterparties exercising their option to call these swaps.
§A $1.0 billion increase in interest rate caps executed to hedge the risk of changes in interest rates associated with the FHLBank’sour portfolio of variable rate Agency MBS/CMOs with embedded caps (purchased caps increased from $6.3 billion as of December 31, 2009 to $7.3 billion as of June 30, 2010)(see Table 44 and Table 46). The increase in interest rate caps is associated with the increase in variable rate Agency CMOs with embedded caps that were purchased in the first quarter of 2010. The interest rate caps are used to reduce the duration of these assets and protect net interest income should rates increase to the point that the variable rate CMOs areCMO coupons become capped.
§An increase in interest rate swaps used to swap fixed rate callable consolidated obligations (from $1.1A $0.9 billion as of December 31, 2009 to $1.9 billion as of June 30, 2010). The increase in interest rate swaps was the result of a large net issuance (new issuance less calls and maturities) of fixed rate callable consolidated obligation structures during the first six months of 2010. The increase in these structures was the result of increased market demand for these structures and the comparative attractiveness of the funding levels of the structures.
§An increase in interest rate swaps used to swap fixed rate non-callable discount notes (from $54.6 million as of December 31, 2009 to $979.9 million as of June 30, 2010)(see Table 44 and Table 46). The increase in this type of interest rate swapsswap was due to the comparative attractiveness of the funding level of these structures. This was primarily the resultthis type of increased demand for Agency securities, which kept yields low and widened swap spreads, and increases in LIBOR rates resulting from the European sovereign debt crisis.transaction.

For additional information regarding the types of derivative instruments and risks hedged, see Tables 4044 through 4347 under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk.”

68
The notional amount serves as a factor in determining periodic interest payments or cash flows received and paid, but does not represent the actual amount exchanged or the FHLBank’sour exposure to credit and market risk. The amount potentially subject to credit loss is much less and is based upon the current market value of the derivative transaction. Table 3539 categorizes the notional amount and the fair value of derivatives (includes net accrued interest receivable or payable on the derivatives) by product to which the derivative is associated and type of accounting treatment. The “Fair Value” category represents hedge strategies qualifying for preferable hedge accounting treatment. The “Economic” category represents hedge strategies not qualifying for preferable hedge accounting treatment. See Note 7 in the Notes to Financial Statements includeincluded in Item 1 for additional discussion regarding fair value and economic hedges. Amounts as of JuneSeptember 30, 2010 and December 31, 2009 are as follows (in thousands):

Table 3539

 June 30, 2010  December 31, 2009  September 30, 2010  December 31, 2009 
Product and Hedge Designation Notional  Fair Value  Notional  Fair Value  Notional  Fair Value  Notional  Fair Value 
Advances:                        
Fair value $8,475,629  $(556,587) $9,151,106  $(462,195) $8,145,809  $(666,292) $9,151,106  $(462,195)
                                
Investments:                                
Economic  8,976,853   (85,197)  8,111,387   (31,316)  8,951,853   (118,468)  8,111,387   (31,316)
                                
Mortgage loans:                                
Stand-alone delivery commitments  109,689   1,350   33,236   (312)  252,095   282   33,236   (312)
                                
Consolidated obligation discount notes:                                
Fair value  979,899   55   54,582   533   979,899   3,036   54,582   533 
                                
Consolidated obligation bonds:                                
Fair value  11,974,175   383,217   12,410,400   234,736   10,063,000   404,646   12,410,400   234,736 
Economic  825,000   768   3,420,000   5,933   2,208,500   1,631   3,420,000   5,933 
Subtotal  12,799,175   383,985   15,830,400   240,669   12,271,500   406,277   15,830,400   240,669 
                                
Intermediary:                                
Economic  276,000   70   306,000   94   276,000   61   306,000   94 
                                
TOTAL $31,617,245  $(256,324) $33,486,711  $(252,527) $30,877,156  $(375,104) $33,486,711  $(252,527)
                                
Total derivative fair value     $(256,324)     $(252,527)     $(375,104)     $(252,527)
Fair value of cash collateral delivered to counterparty      105,164       93,064       201,480       93,064 
Fair value of cash collateral received from counterparty      (63,925)      (65,221)      (68,327)      (65,221)
NET DERIVATIVE FAIR VALUE     $(215,085)     $(224,684)     $(241,951)     $(224,684)
                                
Net derivative assets balance     $41,137      $15,946      $27,859      $15,946 
Net derivative liabilities balance      (256,222)      (240,630)      (269,810)      (240,630)
NET DERIVATIVE FAIR VALUE     $(215,085)     $(224,684)     $(241,951)     $(224,684)

Liquidity
66
Liquidity and Capital Resources
Liquidity – To meet itsour mission of serving as an economical funding source for itsour members and housing associates, the FHLBankwe must maintain high levels of liquidity. The FHLBank isWe are required to maintain liquidity in accordance with certain Finance Agency regulations and guidelines and with policies established by management and the Board of Directors. The FHLBankLiquidity is also needs liquidityneeded to repay maturing consolidated obligations and other borrowings, meet advance needs of our members, make payments of dividends to meet other financial obligationsour members, and to repurchase excess capital stock at itsour discretion, whether upon the request of a member or at itsour own initiative (mandatory stock repurchases).

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

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

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The FHLBank’sOur other primary sources of liquidity include deposit inflows, repayments of advances or mortgage loans, maturing investments, interest income, and proceeds from repurchase agreements or the sale of the FHLBank's unencumbered assets. Primary uses of liquidity include issuing advances, funding or purchasing mortgage loans, purchasing investments, deposit withdrawals, capital repurchases, maturing or called consolidated obligations, interest expense, dividend payments to members, and interest expense. other contractual payment, funding or purchase obligations including letters of credit and stand-by bond purchase agreements.

During the first six months of 2010, cashCash and short-term investments, including commercial paper, increasedcertificates of deposit and bank notes, decreased from $7.2 billion at December 31, 2009 to $8.4$3.8 billion at JuneSeptember 30, 2010. The increase wasdecrease is primarily duea result of a small decrease in our leverage ratio combined with a decrease in our capital stock position. The decrease in capital stock related to increased leverage as the FHLBank increased short-term investmentsrepurchase of excess capital stock generally associated with the exchange of all excess Class B shares for excess Class A shares in order to take advantagethe third quarter of investment opportunities in money market investments towards the end of the second quarter.2010. The maturities of the FHLBank’s short-term investments are structured to provide periodic cash flows to support its ongoing liquidity needs. These short-term investments are also classified as “Trading” for accounting purposes so that they can be readily sold should liquidity be needed immediately. The FHLBankWe also maintainsmaintain a portfoliop ortfolio of Agency debentures that can be pledged as collateral for financing in the sec uritiessecurities repurchase agreement market. Agency investments decreased in par value from $1.5 billion at December 31, 2009 to $1.4 billion at June 30, 2010.

In order to assure that the FHLBankwe can take advantage of those sources of liquidity that will affect itsour leverage capital requirements, the FHLBank manages itswe manage our average capital ratio to stay sufficiently above its minimum regulatory and RMP requirements so that itwe can utilize the excess capital capacity should the need arise. While the minimum regulatory total capital requirement is 4.00 percent (25:1 asset to capital leverage) and itsour RMP minimum is 4.04 percent (24.75:1 asset to capital leverage), during 2009 the FHLBankwe began to manage assets, liabilities and capital in such a way as to maintain itsour total regulatory capital ratio target at or above 4.35 percent (23:1 asset to capital leverage). This target was increased to 4.60 percent (21.75:1 asset to capital leverage) for March 31, 2010. During the second quarter of 2010, the target was changed to a rangerang e of 4.76 percent (21:1 asset to capital leverage) to 4.35 percent (23:1 asset to capital leverage), which is more reflective of how the FHLBank manages its balance sheet.sheet is managed. We maintained this target range in the third quarter of 2010 and anticipate this will likely remain the target range through the remainder of 2010. As a result, should the need arise, the FHLBank haswe have the capacity to borrow an amount approximately equal to at least threetwo to four times itsour current capital position before it reacheswe reach any leverage limitation as a result of the minimum regulatory or RMP capital requirements. This targeted operating capital ratio was increased in order to help ensure our ability to meet the liquidity needs of our members and to increase our ability to repurchase excess stock either: (1) mandatorily at the FHLBank’sour discretion to adjust itsour balance sheet; or (2) upon the submission of a redemption request by a member. While the FHLBank doeswe do target a specific range for our asset to capital leverage ratio, itsour actual performance relative to that target may vary in response tot o market conditions and/or investment opportunities. Toward the end of t he second quarter of 2010, the FHLBank increased short-term investments, which then resulted in the FHLBank’s actual asset to capital leverage ratio at the end of the quarter being higher than the FHLBank’s target. Management anticipates returning to an actual leverage ratio that is more consistent with the FHLBank’s target ratio as short-term investments mature in the third quarter of 2010.

The FHLBank isWe are subject to five metrics for measuring liquidity, two of which were added by the Finance Agency on March 6, 2009 in response to turmoil in the financial markets. The FHLBank hasand we have remained in compliance with each of these liquidity requirements throughout the first sixnine months of 2010. Under the Finance Agency’s measures, liquidity is calculated as the number of calendar days before cash balances would turn negative without issuing any consolidated obligations. The FHLBank monitors and manages its liquidity position to exceed thresholds under the two scenarios defined by the Finance Agency as described below:
§10 to 20 days (initial target of 15 days) of positive cash balances assuming that maturing member advances are not renewed; and
§Three to seven days (initial target of five days) of positive cash balances assuming that all maturing advances are renewed.
The FHLBank has been in compliance with these measures since they were put into place at the beginning of March 2009.

During the heightened liquidity concerns in the financial markets due to the market disruptions and uncertainty, the FHLBank took steps beginning in the third quarter of 2008 and continuing into the fourth quarter of 2008 to increase and manage its short-term liquidity in order to ensure that it could meet member advance demands and other obligations on an ongoing basis without access to the consolidated obligations market and without the sale of trading securities for a minimum of five calendar days. This measure was in addition to its statutory, operational and contingency liquidity requirements and in addition to the liquidity metrics added by the Finance Agency referred to previously. The FHLBank continued to closely monitor and manage these measures in 2009 and the first six months of 2010.

In order to ensure a sufficient liquidity cushion, the FHLBank iswe are required to maintain a relatively longer weighted-average remaining maturity on itsour consolidated obligation discount notes than the weighted average maturity of some short-term assets. The weighted average original days to maturity of discount notes outstanding increased to 93103 days as of JuneSeptember 30, 2010 from 80 days as of December 31, 2009. The weighted average original maturity of itsour money market investment portfolio (cash at the Federal Reserve, Federal funds sold, marketable certificates of deposit, bank notes and commercial paper) decreased to 4538 days as of JuneSeptember 30, 2010 from 65 days as of December 31, 2009. The increase in the mismatch of discount notes and money market investment portfolio from December 31, 2009 (15 day mismatch) to JuneSeptember 30, 2010 (48(65 day mism atch)mismatch) was the result of an increase in the weighted average original days to maturity of discount notes and a decrease in the original terms to maturity of the FHLBank’sour money market investment portfolio. The original days to maturity of discount notes increased primarily due to increased issuance of term discount notes, some of which were swapped used to fund longer term investments and advances.at advantageous funding levels. The original terms to maturity of the FHLBank’sour money market investment portfolio decreased as a result of the significant decline in ordershort-term money market instruments in response to allow for additional flexibility in managing liquidity needs indecreasing leverage and declining capital discussed previously. As these short-term investments declined overnight Federal funds sold became a larger percentage of the first half of 2010.total.

In addition to the balance sheet sources of liquidity discussed previously, the FHLBank haswe have established lines of credit with numerous counterparties in the Federal funds market as well as with the other 11 FHLBanks. The FHLBank expectsWe expect to maintain a sufficient level of liquidity for the foreseeable future.
For additional discussion relating to liquidity, see “Financial Condition – Investments” and “Risk Management – Liquidity Risk Management” under this Item 2.

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Capital – Total capital consists of capital stock, accumulated other comprehensive income (loss) and retained earnings. Capital remained relatively unchanged from December 31, 2009 to June 30, 2010 (see Table 12).

The FHLBank isWe are subject to three capital requirements under provisions of the Gramm-Leach-Bliley (GLB) Act, the Finance Agency’s capital structure regulation and the FHLBank’sour capital plan: (1) a risk-based capital requirement; (2) a total capital requirement; and (3) a leverage capital requirement. The FHLBank wasAs of September 30, 2010, we were in compliance with all three capital requirements as of June 30, 2010 (see Note 11 in the Notes to Financial Statements under Item 1).

On August 18, 2010, all excess Class B Common Stock was exchanged for Class A Common Stock, as we began to re-institute capital management practices that were temporarily discontinued in 2009. On September 14, 2010, members were notified that a regular sweep of all Class B common Stock in excess of $50,000 to Class A Common Stock will occur weekly beginning October 20, 2010. Excess stock represents the amount of stock held by a member (or former member) in excess of that institution’s minimum stock purchase requirement. As member advance activity or participation in the MPF Program declines, excess stock is created since the member no longer needs the same level of activity-based capital stock.

Capital Distributions – Dividends may be paid in cash or capital stock as authorized by the FHLBank’sour Board of Directors. Quarterly dividends can be paid out of current and previously retained earnings, subject to Finance Agency regulation and the FHLBank’sour capital plan. Dividends were paid at average annualized rates of 2.33 percent and 2.87 percent for the quarters ended June 30, 2009 and 2010, respectively.

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

FHLBank management anticipatesWe anticipate that dividend rates on Class A Common Stock will be at or above the upper end of the current overnight Federal funds target rate range for future dividend periods until such time as the dividend parity threshold calculation results in a positive number. We also expect that the differential between the two classes of stock for the remainder of 2010 will remain close to the differential for the first sixnine months of 2010, subject to sufficient FHLBank earnings to meet retained earnings targets and still pay such dividends. While there is no assurance that the FHLBank’sour Board of Directors will not change the dividend parity threshold in the future, the capital plan requires that the FHLBankwe provide members with 90 days notice prior to the end of a dividend period in which a different dividend pari typarity threshold is utilized in the payment of a dividend.divi dend.

The FHLBank expectsWe expect to continue paying dividends primarily in the form of capital stock (cash dividends are paid for partial shares and for all dividends to former members) for the remainder of 2010, but this may change depending on any future impact of the Finance Agency rule on excess stock that became effective January 29, 2007. Under the rule, any FHLBank with excess stock greater than one percent of its total assets will be prohibited from further increasing member excess stock by paying stock dividends or otherwise issuing new excess stock. The FHLBank’s excessExcess stock was 0.950.84 percent of total assets at JuneSeptember 30, 2010. If the FHLBankwe were to change itsour prior practice and pay dividends in the form of cash, itwe would utilize liquidity resources. Payment of cash dividends would not have a significant impact on the FHL Bank’sour liquidity position.

RiskRisk Management
Proper identification, assessment and management of risks, complemented by adequate internal controls, enable stakeholders to have confidence in the FHLBank’sour ability to meet itsour housing finance mission, serve itsour stockholders, earn a profit, compete in the industry and prosper over the long term. Active risk management continues to be an essential part of the FHLBank’s operations and a key determinant of itsour ability to maintain earnings to meet retained earnings targets and return a reasonable dividend to itsour members. The FHLBank maintainsWe maintain comprehensive risk management processes to facilitate, control and monitor risk taking. Periodic reviews by internal auditors, Finance Agency examiners, and independent accountants and external consultants subject the FHLBank’sour practices to additional scrutiny, further strengthening the process.

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

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

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

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

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

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Credit risk also arises from investment and derivative activities. As noted previously, the RMP restricts the acquisition of investments to high-quality, short-term money market instruments and highly rated long-term securities. The short-term investment portfolio primarily represents unsecured credit. Therefore, counterparty ratings are monitored daily while performance and capital adequacy are monitored on at least a monthlyquarterly basis in an effort to mitigate unsecured credit risk on the short-term investments. MBS represent the majority of the FHLBank’sour long-term investments. The FHLBank holdsWe hold MBS issued by Agencies, CMOs securitized by Agencies, AAA-rated private-issue MBS at the time of purchase and CMOs securitized by whole loans. Some of the FHLBank’sour private-issue MBS have been downgraded below triple-A subsequent to purchase (see Table 27)26), but all of the downgraded securities have been and are currently paying as expected. As of JuneSeptember 30, 2010, approximately 81 percent of the FHLBank’sour MBS/CMO portfolio is securitized by Fannie Mae or Freddie Mac. The MBS held by the FHLBank classified as being backed by subprime mortgage loans are private-labelprivate-issue home equity asset-backed securities. The FHLBank doesWe do have potential credit risk exposure to MBS/CMO securities that are insured by two of the monoline mortgage insurance companies should one or more of the companies fail to meet their insurance obligation in the event of significant mortgage defaults in the supporting collateral. Under the FHLBank'sour RMP, the insurer should be rated no lower than AA at the time of acquisition. The FHLBank monitorsWe monitor the credit ratings daily, performance at least annually and capital adequacy monthlyquarterly for all primary mortgage insurers, secondary mortgage insurers and master servicers to which it haswe have potential credit risk exposure. See Table 29 und er34 under this Item 2 – “Financial Condition – Investments” 0;for coverage amounts and unrecognized losses on private-labelprivate-issue MBS covered by monoline mortgage insurance companies.companies on which we are placing reliance. Other long-term investments include unsecured triple-A rated GSE and collateralized state and local housing finance agency securities.

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

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

The contractual or notional amount of derivatives reflects the FHLBank’sour involvement in various classes of financial instruments and does not measure the FHLBank’s credit risk. The maximum credit exposure is significantly less than the notional amount. The maximum credit exposure is the estimated cost of replacing the net receivable positions for individual counterparties on interest rate swaps and forward agreements, purchased interest rate caps, and interest rate floors and swaptions,the derivatives, net of the value of any related collateral, in the event of a counterparty default. See Note 7 of the Notes to the Financial Statements under Item 1 for additional information on the FHLBank’s derivative counterparty credit exposure.

Table 3640 presents the derivative counterparties that represent five percent or more of net exposure after collateral and their ratings (in the event of a split rating, the FHLBank uses the lowest rating published by Moody’s or S&P)&P is used) as of JuneSeptember 30, 2010:

Table 3640

Counterparty Name Counterparty Rating  
Percent of Total
Net Exposure
at Fair Value1
  
Percent of
Net Exposure
After Collateral
  Counterparty Rating  
Percent of Total
Net Exposure
at Fair Value1
  
Percent of
Net Exposure
After Collateral
 
JP Morgan Chase Bank
 AA-   33.3%  54.2% AA-   31.8%  53.8%
Bank of America NA A+   20.2   25.4  A+   22.2   14.3 
UBS AG A+   12.8   6.0  A+   3.6   14.1 
Citi Swapco Inc. Aa1   2.0   8.1 
Rabobank International AAA   2.1   5.8  AAA   1.7   7.0 
All other counterparties      31.6   8.6       38.7   2.7 
__________
1Fair value includes net accrued interest receivable or payable on the derivatives.

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Table 3741 presents the derivative counterparties that represent five percent or more of net exposure after collateral and their ratings (in the event of a split rating the FHLBank uses the lowest rating published by Moody’s or S&P)&P is used) as of December 31, 2009:

Table 3741

Counterparty Name Counterparty Rating  
Percent of Total
Net Exposure
at Fair Value1
  
Percent of
Net Exposure
After Collateral
  Counterparty Rating  
Percent of Total
Net Exposure
at Fair Value1
  
Percent of
Net Exposure
After Collateral
 
JP Morgan Chase Bank AA-   7.5%  48.7% AA-  $7.5%  48.7%
Bank of America NA A+   7.3   27.3  A+   7.3   27.3 
Citi Swapco Inc. Aa1   1.3   8.2  Aa1   1.3   8.2 
UBS AG A+   47.6   6.1  A+   47.6   6.1 
Deutsche Bank AG A+   24.1   6.0  A+   24.1   6.0 
All other counterparties      12.2   3.7       12.2   3.7 
__________
1Fair value includes net accrued interest receivable or payable on the derivatives.

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

Operational liquidity, or the ability to meet operational requirements in the normal course of business, is defined as sources of cash from both the FHLBank’sour ongoing access to the capital markets and itsour holding of liquid assets. The FHLBank manages itsWe manage exposure to operational liquidity risk by maintaining appropriate daily average liquidity levels above the thresholds established by itsour RMP. The FHLBank isWe are also required to manage liquidity in order to meet statutory and contingency liquidity requirements and FHFAFinance Agency liquidity guidelines by maintaining a daily liquidity level above certain thresholds also outlined in the RMP, in federal statutes, and by Finance Agency regulations and other Finance Agency guidance not issued in the form of regulations. The FHLBank hasWe have remained in compliance with each of these liquidity requirements throughout the first sixnine months of 2010.201 0.

Despite the liquidity/credit crisis in the financial markets, the FHLBankwe generally maintained stable access to the capital markets during the majority of 2009 at very favorable rates. The FHLBankrates, and continued to have stable access to the capital markets throughout the first sixnine months of 2010. However, the FHLBankwe did begin to experience slightly higher rates in short-term discount notes and deteriorating LIBOR spreads on swapped consolidated obligation bonds in the first quarter.quarter of 2010. The increase in discount note rates was primarily due to an increase in the U.S. debt level, which resulted in a substantial increase in competing debt issues. The deterioration in LIBOR spreads on swapped consolidated obligation bonds was primarily the result of a large issuance of swapped corporate debt, which resulted in a significant tightening in the LIBOR swap curve rel ative to our funding curve. As the European sovereign debt crisis began to unfold in the second quarter of 2010, the deterioration in the LIBOR swap curve relative to the FHLBank’sour funding curve resulted in improved relative LIBOR spreads on swapped consolidated obligations (bonds and discount notes) and the flight to quality experienced during this crisis resulted in lower rates on short-term discount notes. However, as concerns over Euro peanEuropean sovereign debt contagion ebbed toward the end of the second quarter of 2010 and into the third quarter of 2010, the LIBOR swap curve once again tightened relative to our funding curve resulting in a deterioration of relative LIBOR spreads on swapped consolidated obligations (bonds and term discount notes) began to deteriorateand an increase in the cost of discount notes, erasing some of the improvement experienced in the second quarter of 2010. While our funding costs increased slightly during this period, we maintained stable and uninterrupted access to the capital markets. For additional discussiondiscussi on of the overall financial market environment affecting liquidity, see this Item 2 – “Financial Market Trends.”

As discussed previously, in response to the heightened liquidity concerns in the financial markets due to the market disruptions in the latter part of 2008 and the first six months of 2009, the FHLBank took steps to increase and manage its short-term liquidity in order to ensure that it could meet member advance demands and other obligations on an ongoing basis without access to the consolidated obligations market for a minimum of five calendar days without the sale of trading securities. See additional discussion under this Item 2 – “Financial Condition – Liquidity and Capital Resources – Liquidity.”

Critical Accounting Policies and Estimates
The preparation of the FHLBank’s financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect the FHLBank’s reported results and disclosures. Several of the FHLBank’s accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to the FHLBank’s results. These assumptions and assessments include the following:
§   Accounting related to derivatives;
§   Fair-value determinations;
§   Accounting for other-than-temporary impairment of investments;
§   Accounting for deferred premiums/discounts associated with MBS; and
§   Determining the adequacy of the allowance for credit losses.

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

The FHLBank’s accounting policies that management believes are the most critical to an understanding of the FHLBank’s financial results and condition and require complex management judgment are described under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in the annual report on Form 10-K, incorporated by reference herein. There were no substantial changes to the FHLBank’s critical accounting policies and estimates during the quarter ended June 30, 2010.

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

RecentRecent Developments
Finance Agency Publishes Notice of Proposed Rulemaking on FHLBank Housing Goals: On May 28, 2010, the Finance Agency published a notice of proposed rulemaking implementing section 10C of the Bank Act, which requires the Director of the Finance Agency to establish housing goals with respect to the FHLBanks. The proposed rule would establish a low-income families housing goal, a low-income areas housing goal, a very low-income families housing goal, and a single-family refinancing mortgage goal applicable to the FHLBanks’ purchases of single-family owner-occupied mortgages under their AMA programs, consistent with the Finance Agency’s proposed single-family housing goals for Fannie Mae and Freddie Mac. The proposed rule would measure the FHLBanks’ single-fa mily housing goals performance relative to the actual goals-qualifying shares of the primary mortgage market during the year in each FHLBank’s district. An FHLBank would be subject to the proposed housing goals if its AMA-approved mortgage purchases in a given year exceed a volume threshold of $2.5 billion. Comments on the proposed rule were due by July 12, 2010.

Finance Agency Publishes Notice of Proposed Rulemaking on Conservatorship and Receivership: On July 9, 2010, the Finance Agency published a notice of proposed rulemaking to implement sectionSection 1367 of the Housing and Economic Recovery Act of 2008 (HERA), which sets forth the Finance Agency’s authority over critically undercapitalized regulated entities. A regulated entity is defined by HERA to include Fannie Mae, Freddie Mac and the FHLBanks. The proposed regulation describes the basic authorities of the Finance Agency when acting as conservator or receiver, including the authority over enforcement and repudiation of contracts. As conservator or receiver of a regulated entity, the proposed regulation provides the Finance Agency may, among other authorities: (1) take ov er the assets of and operate the regulated entity with all of the powers of the shareholders, the directors, and the officers of the regulated entity and conduct all business of the regulated entity; (2) continue the missions of the regulated entity; (3) ensure that the operations and activities of each regulated entity foster liquid, efficient, competitive and resilient national housing finance markets; (4) ensure that each regulated entity operates in a safe and sound manner; and (5) collect all obligations and money due the regulated entity. The proposed regulation establishes procedures for conservators and receiversacting as conservator or receiver and priorities of claims for contract parties and other claimants, which include the order in which various classes of claimants would be paid, partially or in ful l,full, in the event that a regulated entity would be unable to pay all valid claims. Additionally, the proposed regulation addresses whether and to what extent claims against the regulated entities by current or former holders ofo f their equity interests for rescission or damages arising from the purchase, sale, or retention of such equity interests will be paid while those entities are in conservatorship or receivership. Finally, the proposed regulation would clarify that for purposes of priority determinations, claims arising from rescission of a purchase or sale of an equity security of a regulated entity, or for damages arising from the purchase, sale or retention of such a security, will be treated as would the underlying security to which the claim relates. Comments on the proposed regulation arewere due by September 7, 2010.

 
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Finance Agency Publishes Notice of Proposed Rulemaking on Rules of Practice and ProcedureProcedure:. On August 12, 2010, the Finance Agency published a notice of proposed rulemaking to implement the Housing and Economic Recovery Act of 2008 (HERA)HERA amendments to the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act) and the Bank Act pertaining to the civil enforcement powers of the Finance Agency, and the Rules of Practice and Procedure for enforcement proceedings. The Safety and Soundness Act authorizes the Finance Agency to initiate enforcement proceedings against Fannie Mae, Freddie Mac, and the FHLBanks (collectively, Regulated Entities), and entity-affiliated parties, which include directors, officers and employees of the Regulated Entities. The proposed rulemaking would governgove rn the conduct of Finance Agency administrative hearings on the record for enforcement proceedings as provided in the Safety and Soundness Act, including for cease and desist proceedings, proceedings for civil money penalties and removal and suspension proceedings, and would also delineate the specific enforcement authority of the Director of the Finance Agency.
The proposed rulemaking also implements Section 1376 of the Safety and Soundness act governing civil money penalty enforcement proceedings. The proposed rule provides that the Director of the Finance Agency may impose a civil money penalty on any Regulated Entity or any entity-affiliated party in accordance with Section 1376 of the Safety and Soundness Act. The Director of the Finance Agency may assess penalties pursuant to a three-tiered structure.
Under tier 1, a Regulated Entity or entity-affiliated party shall forfeit and pay a civil money penalty of not more than $10,000 for each day during which a violation continues. A tier 1 penalty may be assessed if a Regulated Entity or entity-affiliated party violates (1) any provision of the Safety and Soundness Act, the authorizing statutes, or any order, condition, rule or regulation under the Safety and Soundness Act or authorizing statutes, (2) any final or temporary order issued under the Safety and Soundness Act, (3) any condition imposed by the Director of the Finance Agency in connection with the grant of any application or other request by the Regulated Entity, or (4) any written agreement between the Regulated Entity and the Director of the Finance Agency.
Under tier 2, a Regulated Entity or entity-affiliated party shall forfeit and pay a civil money penalty of not more than $50,000 for each day during which a violation, practice or breach continues if (A) the Regulated Entity or entity-affiliated party: (1) commits any violation described under tier 1, (2) recklessly engages in an unsafe or unsound practice in conducting the affairs of the Regulated Entity, or (3) breaches any fiduciary duty; and (B) the violation, practice or breach: (1) is part of a pattern of misconduct, (2) causes or is likely to cause more than a minimal loss to the Regulated Entity, or (3) results in pecuniary gain or benefit to the Regulated Entity or the entity-affiliated party.
Under tier 3, a Regulated Entity or entity-affiliated party shall forfeit and pay a civil money penalty of not more than $2,000,000 for each day during which a violation, practice or breach continues, if such party knowingly: (1) commits any violation under tier 1, (2) engages in any unsafe or unsound practice in conducting the affairs of the Regulated Entity, or (3) breaches any fiduciary duty, and knowingly or recklessly causes a substantial loss to the Regulated Entity or a substantial pecuniary gain or other benefit to such party by reason of such violation, practice or breach.
Comments on the proposed regulation arewere due by October 12, 2010.

Finance Agency Publishes Notice of Proposed Guidance on Private Transfer Fee Covenants: On August 16, 2010, the Finance Agency published a notice of proposed guidance which would prohibit the FHLBanks from dealing in mortgages on properties encumbered by private transfer fee covenants. Pursuant to the proposed guidance, the FHLBanks would be prohibited from: (1) purchasing or investing in mortgages on properties encumbered by private transfer fee covenants; (2) purchasing or investing in securities backed by mortgages on properties encumbered by private transfer fee covenants; and (3) accepting such mortgages and securities as collateral for advances. Comments on the proposed guidance were due by October 15, 2010.
Finance Agency Publishes Notice of Proposed Rulemaking on Information Sharing Among FHLBanks: On September 30, 2010, the Finance Agency published a notice of proposed rulemaking to implement Section 1207 of HERA which requires the Finance Agency to make available to each FHLBank information relating to the financial condition of all other FHLBanks and to promulgate regulations to facilitate the sharing of such information among the FHLBanks. Pursuant to the proposed regulation, the Finance Agency would distribute final reports of examination and any other supervisory reports that the Finance Agency reports to the board of directors of any FHLBank to each of the other FHLBanks and the Office of Finance. Within ten business days of the Finance Agency’s presentation of the report of examination or other supervisory report to an FHLBank’s board of directors, an FHLBank would have the ability to request in writing that particular information contained in the reports not be shared with the other FHLBanks or the Office of Finance because it is proprietary and the public interest requires that it not be shared. After the expiration of the ten business day period and after the Finance Agency has made a determination on the request to withhold information, the Finance Agency will be required to distribute a copy of the report of examination or other supervisory report to each FHLBank and the Office of Finance. Comments on the proposed rule are due by November 29, 2010.

SEC and Commodity Futures Trading Commission (CFTC) Publish Advance Notice of Proposed Rulemaking on Definitions Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act): On August 20, 2010, the SEC and CFTC published an advance notice of proposed rulemaking requesting comment on the definitions of certain key terms which must be defined to implement the Dodd-Frank Act. Specifically, the SEC and CFTC requested comment on the definitions of “swap,” “swap dealer,” “major swap participant,” “eligible contract participant,” “security-based swap,” “security-based swap dealer,” “major security-based swap participant” and “security-based swap agree ment.” Comments on the advance notice of proposed rulemaking were due by September 20, 2010.

Basel Committee on Banking Supervision (Basel Committee) Agrees to Final Basel III Framework: On September 12, 2010, the Basel Committee announced that the members of the committee had agreed on the outline for a final Basel III capital proposal that would be presented for approval by representatives of the group of 20 countries. The Basel III framework, directed at large, internationally active depository institutions and their holding companies, would require those depository institutions to maintain increased amounts of capital and may require those institutions to maintain additional capital as a capital buffer, to dampen excessive credit growth, and for certain types of credit exposures such as derivative transactions, repurchase agreements, and securities financing a rrangements. Pursuant to the transition period outlined by the Basel Committee, implementing regulations in the United States are to be finalized as of January 1, 2013 and would be phased in over several years.

Also on September 12, 2010, the Basel Committee announced that the members of the committee had agreed on the outline for a final Basel III liquidity framework for a liquidity coverage ratio. The liquidity coverage ratio is the amount of high quality, unencumbered liquid assets a banking organization should have on hand in the event of a liquidity crisis lasting for 30 days. The liquidity coverage ratio would require a bank to have liquid assets to withstand a 30-day runoff of funds. The assets used to meet the liquidity coverage ratio may not be pledged in any way to secure, collateralize, or enhance any transaction, other than assets that have been pledged to the Federal Reserve. Pursuant to the liquidity coverage ratio, risk weights are assigned by asset type, with secured funding backed by assets that do not qualify as liqui d, such as FHLBank advances secured by whole mortgages, being subject to a 25 percent runoff rate. The Basel Committee expects to phase in the liquidity coverage ratio beginning January 1, 2015. The Basel III framework is not directly applicable to FHLBanks, but could result in changes to our capital and liquidity structure at the discretion of the Finance Agency.

Financial Stability Oversight Council (FSOC) Publishes Advance Notice of Proposed Rulemaking Regarding the Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies: On October 6, 2010, the FSOC published an advance notice of proposed rulemaking inviting public comment on the criteria that should be used to inform the FSOC’s designation of nonbank financial companies subject to supervision by the Board of Governors of the Federal Reserve System under Section 113 of the Dodd-Frank Act. Pursuant to the Dodd-Frank Act, in making a determination on whether a company should be subject to supervision by the Board of Governors of the Federal Reserve System, the FSOC must consider: (1) the extent of the leverage of the company; (2) the extent and nature of the off-balance-sheet exposures of the company; (3) the extent and nature of the transactions and relationships of the company with other significant nonbank financial companies and significant bank holding companies; (4) the importance of the company as a source of credit for households, businesses, and State and local governments and as a source of liquidity for the United States financial system; (5) the importance of the company as a source of credit for low-income, minority, or underserved communities, and the impact that the failure of such company would have on the availability of credit in such communities; (6) the extent to which assets are managed rather than owned by the company, and the extent to which ownership of assets under management is not concentrated; (7) the nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company; (8) the degree to which the company is already regulated by one or more primary financial regulatory agencies; (9) th e amount and nature of the financial assets of the company; (10) the amount and types of the liabilities of the company, including the degree of reliance on short-term funding; and (11) any other risk-related factors that the FSOC deems appropriate. Comments on the advance notice of proposed rulemaking were due by November 5, 2010.

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FSOC Publishes a Notice and Request for Information on the Study Regarding the Implementation of the Prohibitions on Proprietary Trading and Certain Relationships with Hedge Funds and Private Equity Funds: On October 6, 2010, the FSOC published a notice and request for comment pursuant to Section 619 of the Dodd-Frank Act which requires the FSOC to study and make recommendations on implementing the Volker Rule, which prohibits banking entities from engaging in proprietary trading and from maintaining certain relationships with hedge funds and private equity funds, and imposes additional capital requirements for, and additional quantitative limits with regard to, proprietary trading. Under Section 619, the Office of the Comptroller of the Currency, the Federal Deposit Insur ance Corporation, the Board of Governors of the Federal Reserve System, the SEC and the CFTC must consider the recommendations of the FSOC study in developing and adopting regulations to implement the Volker Rule. Comments on the notice and request for comment were due by November 5, 2010.

FDIC Extends Transaction Account Guarantee Program:Publishes Notice of Proposed Rulemaking Implementing Certain Orderly Liquidation Authority Provisions of the Dodd-Frank Act: On June 30, 2009,October 19, 2010, the FDIC published a notice of proposed rulemaking that presented alternatives for phasing out the Transaction Account Guarantee (TAG) program, a componentwould implement certain sections of the Temporary Liquidity Guarantee Program, which provides FDIC guarantees for all funds held at participating banks in qualifying non-interest bearing transaction accounts. On September 1, 2009, the FDIC published a final rule extending the TAG program with a modified fee structure, which extended the TAG program for six months until June 30, 2010. On April 19, 2010, the FDIC published an interim rule providing a six-month extension for insured depository institutions currently participating in the TAG program, with the possibilityFDIC’s authority to resolve covered financial companies under Title II of an additional 12-month extension without an additional rulemaking. On June 28, 2010, the FDIC published a final rule, which is substantially similar to the interim rule, extending the TAG program through December 31, 2010, with the possibility of an additional extension of up to 12 months without additional rulemaking, upon a determination by the FDIC’s board of directors that continuing economic difficulties warrant further extension. The final rule became effective June 28, 2010.

In addition, the Dodd-Frank Act (see next paragraph below) requires the FDIC and the National Credit Union Administration to provide unlimited deposit insurance for non-interest bearing transaction accounts. This Dodd-Frank Act requirement is effective for FDIC-insured institutions from December 31, 2010 until January 1, 2013 and for insured credit unions from the effective dateAct. Section 209 of the Dodd-Frank Act until January 1, 2013. These TAG programs provide an alternative sourceauthorizes the FDIC, in consultation with the FSOC, to prescribe rules to implement the liquidation process under Title II of funds for many of our members, which competes with our advance business.

President Obama Signs into Law the Dodd-Frank Wall Street Reform and Consumer Protection Act: On July 21, 2010,Act’s mandate of transparency in the liquidation of failing systemic financial companies. Title II of the Dodd-Frank Wall Street ReformAct provides a process for the appointment of the FDIC as receiver of a failing financial company that poses significant risk to the finan cial stability of the United States (covered financial company). We are not considered a covered financial company pursuant to the Dodd-Frank Act. While ensuring that creditors bear the losses of the company’s failure under a specific claims priority, Title II incorporates procedural and Consumer Protection Act (Dodd-Frank Act) was enacted into law. Theother protections for creditors to ensure they are treated fairly. Pursuant to the Dodd-Frank Act, among other things: (1) creates a consumercreditors are guaranteed that they will receive no less than the amount they would have received if the covered financial protection agency; (2) creates an inter-agency oversight council that will identify and regulate systemically important financial institutions; (3) regulatescompany had been liquidated under Chapter 7 of the over-the-counter derivatives market; (4) reforms the credit rating agencies; (5) provides shareholders with an advisory voteBankruptcy Code. Comments on the compensation practicesnotice of proposed rulemaking are due by November 18, 2010, and comments on the entity in which they invest, including executive compensation and golden parachutes; (6) establishes new requirements, including a risk-retention re quirement, for MBS; (7) makes a number of changes to the federal deposit insurance system; and (8) creates a federal insurance office that will monitor the insurance industry.

The Dodd-Frank Act may also subject the FHLBanks to heightened prudential standards establishedadditional questions posed by the Federal Reserve Board if the FHLBanksFDIC are identified as being systemically important financial institutions. These standards may include risk-based capital requirements, liquidity requirements, risk management and a resolution plan. Other standards could encompass such matters as a requirement to issue contingent capital instruments, additional public disclosures, and limits on short-term debt. The Dodd-Frank Act also requires systemically important financial institutions to report to the Federal Reserve on the nature and extent of their credit exposures to other significant companies and undergo semi-annual stress tests and may subject the FHLBank to higher capital requirements and quantitative limits with regard to their prop rietary trading.due by January 18, 2011.

 
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Item 3:Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management
The FHLBank measuresWe measure interest rate risk exposure by various methods, including the calculation of DOE and market value of equity (MVE).

Duration of Equity: DOE aggregates the estimated sensitivity of market value for each of the FHLBank’sour financial assets and liabilities to changes in interest rates. In essence, DOE indicates the sensitivity of theoretical MVE to changes in interest rates. However, MVE should not be considered indicative of the market value of the FHLBank as a going concern or the value of the FHLBank in a liquidation scenario. A positive DOE results when the duration of assets and designated derivatives is greater than the duration of liabilities and designated derivatives. A positive DOE generally indicates that the FHLBank has a degree of interest rate risk exposure in a rising interest rate environment, and a negative DOE indicates a degree of interest rate risk exposure in a dec liningdeclining interest rate environment. Higher DOE numbers, whether positive or negative,negativ e, indicate greater volatility of MVE in response to changing interest rates. That is, if the FHLBank has a DOE ofis 3.0, a 100-basis-point (one percent) increase in interest rates will cause the FHLBank’s MVE to decline by approximately 3three percent. However, it should be noted that a decline in MVE does not translate directly into a decline in near-term income, especially for entities that do not trade financial instruments. Changes in market value may indicate trends in income over longer periods, and knowing the sensitivity of market value to changes in interest rates givesprovides a measure of the risks being taken by the FHLBank.we take.

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

The DOE parameters established by the FHLBank’s Board of Directors represent one way to establish general limits on the amount of interest rate risk that the FHLBank can accept.we find acceptable. If the FHLBank’sour DOE exceeds the policy limits established by the Board of Directors, managementwe either: (1) takestake asset/liability actions to bring the DOE back within the range established in the FHLBank’sour RMP; or (2) reviewsreview and discussesdiscuss potential asset/liability management actions with the Board of Directors at the next regularly scheduled meeting that could bring the DOE back within the ranges established in the RMP and ascertainsascertain a course of action, which can include a determination that no asset/liability management actions are necessary. A determination that no asset/liability management actions are necessary can be ma demade only with agreement ofif the Board of Directors agrees with management’s recommendations. Even though all of our DOE measurements are inside management’s operating range as of JuneSeptember 30, 2010, active monitoring ofwe continue to actively monitor portfolio relationships and overall DOE dynamics continues as dowell as our evaluation processes for acceptable future asset/liability management actions.

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

 
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Table 3842 presents the DOE in the base case and the up and down 100 and 200 bps interest rate shock scenarios for recent quarter end dates:

Table 3842

Duration of Equity
PeriodUp 200 BpsUp 100 BpsBaseDown 100 BpsDown 200 BpsUp 200 BpsUp 100 BpsBaseDown 100 BpsDown 200 Bps
09/30/2010-1.4-2.5-1.8-0.60.3
06/30/2010-0.2-1.00.3-0.8-0.7-0.2-1.00.3-0.8-0.7
03/31/20101.80.32.21.7-0.71.80.32.21.7-0.7
12/31/20090.1-0.60.10.8-1.30.1-0.60.10.8-1.3
09/30/20091.21.02.61.7-0.91.21.02.61.7-0.9
06/30/2009-1.2-0.23.812.21.0

The DOE as of JuneSeptember 30, 2010 increased slightlydecreased in the base and downup 200 basis point instantaneous shock scenarios and decreased slightlyincreased in the updown 200 basis point instantaneous shock scenario from December 31, 2009. All DOE results continue to remain inside management’sor at our operating range of ±2.5. The primary factors contributing to the changes in duration similar to the first quarter, were the additional purchase of Agency variable rate CMOs with embedded caps during the first quarter of 2010, and, compositional changesthe continued growth in the FHLBank’s funding mixMPF portfolio, and the use of longer callable consolidated obligation bonds with shorter lock-out periods as a considerable amount of swapped callable debt was calledthe long-term interest rate environment continued to trend down and replaced with discount notes.our capital level declined.

As discussed previously, the FHLBankwe submitted a notice to the Finance Agency to increase itsour mortgage investments to five times capital (see Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Investments” for additional information). The weighted average life of the newly acquired Agency variable rate CMOs during the first quarter of 2010 was longer and the embedded effective interest rate caps were lower than the FHLBank’sour existing Agency variable rate CMO portfolio, which resulted in an initial increase in the duration of this portfolio. TheFurther, the continued growth in the MPF portfolio exhibited similar behavior since new production loans generally have a longer duration and should provide a net positive duration impact for the portfolio. However, as the interest rate environment continued to decline, actual and projected prepayments for the MBS/CMO and MPF portfolios increased, causing the duration of these portfolios to shorten. In addition, the shortening of these portfolios was magnified as the capital level declined in response to shrinking advance balances. For instance, as discussed in Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – MPF Program,” the MPF portfolio balance continued to increase throughout the quarter and as rates declined, the duration of the portfolio shortened. This duration shortening was then magnified as the MPF portfolio became a larger portion of the balance sheet, both from the net growth in the portfolio and as the balance sheet shrank. A similar shift occurred on the liability side of the balance sheet as non-swapped callable consolidated obligation bonds were issued in response to the MPF portfolio grow th and a continued issuance of discount notes was sustained to provide adequate liquidity sources to appropriately address potential customer advance and capital stock activity.

As experienced in the first and second quarters, the compositional change in the liability portfolio occurred as the FHLBankwe experienced significant maturities of variable rate liabilities and calls of swapped callable liabilities and replaced them with discount notes. Ge nerally,Generally, the swapped callable liability portfolio has a longer duration profile than the discount note portfolio soportfolio. Consequently, as the FHLBankwe transitioned to discount notes it hadand as rates declined during the period, the net effect of decreasingwas a decrease in the duration of the FHLBank’sour total liability portfolio whichportfolio. However, the decrease in turn contributed toduration of the overallliabilities only partially offset the rather steep decline in duration of the assets as the MBS and MPF portfolios experienced a significant increase in the FHLBank’s DOE in all scenarios. actual and projected cash flows that naturally generates a shortened duration profile.

However, the slight net DOE decreaseincrease in the updown 200 basis point instantaneous shock scenario is generally a function of the compositional changes in the balance sheet as mentioned above and the impact of the purchased interest rate cap portfolio. The FHLBankWe purchased interest rate caps to offset the impact of the embedded caps in the newly acquired Agency variable rate CMOs. As expected, these interest rate caps are an adequatea satisfactory interest rate risk hedge; however, with the increase in projected prepayment speeds of the MBS portfoliosportfolio as the term structure of interest rates declined during the first halfnine months of 2010 and with the absolute balance sheet level decline, the compositional change in the variable Ag encyAgency CMO portfolio was a slight net increase since the portfolio became a much larger proportion of the balance sheet. Further,In addit ion, the liability portfolio duration declined more rapidly than the asset portfolio duration. In other words, the liability portfolio duration was slightly more sensitive to changes in rates than the duration profile of the assets. This sensitivity, or convexity, was partially driven by the compositional changes as described above, and led to a net increase in equity duration. This sensitivity was also heightened by the absolute level of rates and the zero boundary methodology as discussed above. Since the absolute level of interest rates are at or near historic lows, an instantaneous parallel shock of 200 bps will effectively produce a flattened term structure of interest rates near zero. This flattened term structure will produce slight, if any, variations in valuations, which generate near zero duration results.

Our current and past purchases of interest rate caps and floors tend to partially offset the negative convexity of mortgage assets and the effects of the interest rate cap portfolio provided a net duration decrease that was more than adequate sincecaps embedded in the metricsAgency variable rate MBS/CMOs. Convexity is the measure of the MBS portfolio shifted slightly becauseexponential change in prices for a given change in interest rates; or more simply stated, it measures the rate of change in duration as interest rates change. When an instrument is negatively convex, price increases as interest rates decline. When an instrument’s convexity profile decreases, it simply demonstrates that the duration profile is flattening or that the duration is changing at an increasingly slower rate. When an instrument’s convexity profile increases, the duration profile is steepening and is decreasing in price at an increasingly faster rate. Duration is a measure of the compositional change.relative risk of a financial instrument, and the more rapidly duration changes as interest rates change, the riskier the instrument. MBS/CMOs have negative convexity as a result of the embedded caps and prepayment options. All of our mortgage loans are fixed rate, so they have negative convexity only as a result of the prepayment options. We seek to mitigate this negative convexity with purchased options that have positive convexity and callable liabilities that have negative convexity, which offset some or all of the negative convexity risk in our assets.

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When comparing JuneSeptember 30, 2009 with JuneSeptember 30, 2010, the duration profile shifted in large part from the compositional changes mentioned above, as well as the behavior of the balance sheet as the term structure of interest rates declined and a decline in assets and associated capital levels during the period. As discussed above, the respective duration and DOE contribution components of various portfolios, including the investment and funding portfolios, were magnified as assets and associated capital levels declined. These declines cause the respective portfolio equity based weightings to shift, leading to an equity compositional reallocation, similar to the previously mentioned discount note and Agency variable rate Agency CMO shifts.

The FHLBank’s current and past purchases of interest rate caps and floors tend to partially offset the negative convexity of the FHLBank’s mortgage assets and the effects of the interest rate caps embedded in the variable rate MBS/CMOs. Convexity is the measure of the exponential change in prices for a given change in interest rates; or more simply stated, it measures the rate of change in duration as interest rates change. When an instrument is negatively convex, price increases as interest rates decline. When an instrument’s convexity profile decreases, it simply demonstrates that the duration profile is flattening or that the duration is changing at an increasingly slower rate. When an instrument’s convexity profile increases, the duration profile is steepening and is decreasing in price at an increasi ngly faster rate. Duration is a measure of the relative risk of a financial instrument, and the more rapidly duration changes as interest rates change, the riskier the instrument. MBS/CMOs have negative convexity as a result of the embedded caps and prepayment options. All of the FHLBank’s mortgage loans are fixed rate, so they have negative convexity only as a result of the prepayment options. The FHLBank seeks to mitigate this negative convexity with purchased options that have positive convexity and callable liabilities that have negative convexity, which offset some or all of the negative convexity risk in its assets.
While the FHLBank typically monitors and manages to the DOE in the base and ±200 basis point instantaneous shock scenarios for asset/liability and risk management purposes, duration measurements are also computed and reported for the ±100 basis point instantaneous shock scenarios as an additional indication of the FHLBank’s risk profile. The atypical long DOE results in the down 100 basis point instantaneous shock scenario as of June 30, 2009 was isolated to a model assumption within the mortgage valuation model utilized by the FHLBank. During the fourth quarter of 2008, the interest rate environment experienced a significant decline where three-month LIBOR declined 262 bps between September 30, 2008 and December 31, 2008. This market shift caused the interest rate model to generate interest rate scenarios that w ere considerably different from interest rate scenarios generated when rates were more normalized. When deriving valuations using these low market rate driven interest rate paths, the pricing and risk profiles revealed inconsistencies not only in the base scenarios, but also in the downward shock scenarios. This low rate environment is considered a qualifying event that required a modeling assumption change to the speed at which the various interest rate paths generated in the model revert to the mean. This mean reversion adjustment serves to temper the large variations in the derived rate paths and produces a price and risk measurement profile that is considered more reasonable and conforms more consistently with management’s expectations of the overall risk profile of the balance sheet. The mean reversion adjustment was implemented by the FHLBank beginning with the September 30, 2009 DOE calculation process.

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In calculating DOE, the FHLBankwe also calculates itscalculate duration gap, which is the difference between the duration of its assets and the duration of its liabilities. The FHLBank’sOur base duration gap was 0.2-1.0 month and less than 0.1 month as of JuneSeptember 30, 2010 and December 31, 2009, respectively. Again, the increasedecrease in duration gap during the first sixnine months of the year was primarily the result of the Agency variable rate CMO purchases and compositional changes in the FHLBank'sour funding mix as discussed previously. All 12 FHLBanks are required to submit this base duration gap number to the Office of Finance as part of the quarterly reporting process created by the Finance Agency.

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

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

Market Value of Equity: MVE is the net value of the FHLBank’sour assets and liabilities. Estimating sensitivity of the FHLBank’s MVE to changes in interest rates is another measure of interest rate risk. The FHLBankWe generally maintainsmaintain a MVE within limits specified by the Board of Directors in the RMP. As of September 18, 2009, the Board of Directors amended theThe RMP to measure the FHLBank’smeasures our market value risk in terms of the MVE in relation to the FHLBank’s total regulatory capital stock outstanding (TRCS). The RMP previously calculated this metric relative to the book value of equity (BVE) and stipulated that the ratio of MVE to BVE be not less than 85 percent in the base scenario or 80 percent under a ±200 basis point instantaneous shock in inter est rates. TRCS includes all capital stock outstanding, including stock subject to mandatory redemption. As a cooperative, we believe using the TRCS is a more reasonable measure because it reflects the market value of the FHLBank relative to the book value of itsour capital stock. As of December 17, 2009,Currently, the Board of Directors amended the RMP:RMP stipulates that: (1) to revise the stipulation that MVE shall not be less than 8590 percent of the FHLBank’s TRCS under the base case scenario to a 90 percent threshold;scenario; and (2) to revise the stipulation that the MVE/TRCS ratio shall not be less than 8085 percent under a ±200 basis point instantaneous parallel shock in interest rates to an 85 percent threshold.rates. Table 3943 presents MVE as a percent of TRCS as of June 30, 2010 as well as information for previous periods for comparability.recent quarter end reporting periods. As of JuneSeptember 30, 2010, all scenarios are well within the specified limits as described above and much of the improvement in the ratio can be attributed to the continued increase in MBS and mortgage loan market values and the general level of the FHLBank’s retained earnings.decrease in capital levels.

Table 3943

Market Value of Equity as a Percent of Total Regulatory Capital Stock
DateUp 200 BpsUp 100 BpsBaseDown 100 BpsDown 200 BpsUp 200 BpsUp 100 BpsBaseDown 100 BpsDown 200 Bps
09/30/2010125122119119118
06/30/2010119118117117115119118117117115
03/31/2010113117118113117118
12/31/2009113112113113112113
09/30/2009103104107108103104107108
06/30/20099695106113

Detail of Derivative Instruments by Type of Instrument by Type of Risk: VariousWe use various types of derivative instruments are utilized by the FHLBank to mitigate the interest rate risks described in the preceding sections. The FHLBankWe currently employsemploy derivative instruments by designatingutilizing them as either a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction; by acting as an intermediary; or in asset/liability management (i.e., an economic hedge). An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities or firm commitments that either does not qualify for hedge accounting, or for which the FHLBank haswe have not elected hedge accounting, but is an acceptable hedging strategy under the FHLBankR 17;sour RMP. For all new hedging relationships, that are not designated for shortcut hedge accounting, the FHLBankwe formally assessesassess (both at the hedge’s inception and monthly on an ongoing basis) whether the derivatives used have been highly effective in offsetting changes in the fair values or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. The FHLBankWe typically usesuse regression analyses or similar statistical analyses to assess the effectiveness of itsour long haul hedges. See Note 7 – Derivatives and Hedging Activities in the Notes to Financial Statements under Item 1 for information on effectiveness methods used by the FHLBank. The FHLBank determinesWe determine the hedge accounting to be applied when the hedge is entered into by completing detailed documentation, which includes a checklist setting forth criteria that must be met to qualify for hedge accounting.

 
7774
 
Table 4044 presents the notional amount, accounting designation and effectiveness method for derivative instruments by risk and by type of derivative used to address the noted risk as of JuneSeptember 30, 2010 (in thousands):

Table 4044

Notional AmountNotional Amount Notional Amount 
Risk Hedged
Accounting
Designation
Effectiveness
Method
 
Interest Rate
Swaps
  Caps/Floors  
Purchase
Commitments
  Total 
Accounting
Designation
Effectiveness
Method
 
Interest Rate
Swaps
  Caps/Floors  
Purchase
Commitments
  Total 
Advances                          
Interest rate risk associated with embedded caps and floors clearly and closely related
Fair Value
Hedge
Dollar
Offset
 $0  $194,000  $0  $194,000 
Fair Value
Hedge
Dollar
Offset
 $0  $189,000  $0  $189,000 
Interest rate risk associated with fixed rate non-callable advances
Fair Value
Hedge
Shortcut1
  817,000   0   0   817,000 
Fair Value
Hedge
Shortcut1
  767,000   0   0   767,000 
Interest rate risk associated with fixed rate non-callable advances
Fair Value
Hedge
Rolling
Regression
  2,782,298   0   0   2,782,298 
Fair Value
Hedge
Rolling
Regression
  2,757,528   0   0   2,757,528 
Interest rate risk associated with callable fixed rate advances
Fair Value
Hedge
Rolling
Regression
  8,000   0   0   8,000 
Fair Value
Hedge
Rolling
Regression
  3,000   0   0   3,000 
Interest rate risk associated with fixed rate convertible advances
Fair Value
Hedge
Rolling
Regression
  4,674,331   0   0   4,674,331 
Fair Value
Hedge
Rolling
Regression
  4,429,281   0   0   4,429,281 
Investments                                  
Fair value risk associated with fixed rate non-MBS trading investments
Economic
Hedge
Not
Applicable
  1,361,320   0   0   1,361,320 
Economic
Hedge
Not
Applicable
  1,361,320   0   0   1,361,320 
Risk of changes in interest rates associated with variable rate MBS with embedded caps
Economic
Hedge
Not
Applicable
  0   7,315,533   0   7,315,533 
Economic
Hedge
Not
Applicable
  0   7,290,533   0   7,290,533 
Duration of equity risk in a declining interest rate environment
Economic
Hedge
Not
Applicable
  0   300,000   0   300,000 
Economic
Hedge
Not
Applicable
  0   300,000   0   300,000 
Mortgage Loans Held for Portfolio                                  
Fair value risk associated with fixed rate mortgage purchase commitments
Economic
Hedge
Not
Applicable
  0   0   109,689   109,689 
Economic
Hedge
Not
Applicable
  0   0   252,095   252,095 
Consolidated Obligation Discount Notes                                  
Interest rate risk associated with fixed rate non-callable discount notes
Fair Value
Hedge
Rolling
Regression
  979,899   0   0   979,899 
Fair Value
Hedge
Rolling
Regression
  979,899   0   0   979,899 
Consolidated Obligation Bonds                                  
Risk of changes in interest rates creating unacceptable duration changes or increasing costs of funds
Economic
Hedge
Not
Applicable
  825,000   0   0   825,000 
Economic
Hedge
Not
Applicable
  2,208,500   0   0   2,208,500 
Interest rate risk associated with fixed rate callable consolidated obligations
Fair Value
Hedge
Rolling
Regression
  1,695,000   0   0   1,695,000 
Fair Value
Hedge
Rolling
Regression
  1,180,000   0   0   1,180,000 
Interest rate risk associated with fixed rate callable consolidated obligations
Fair Value
Hedge
Shortcut1
  250,000   0   0   250,000 
Interest rate risk associated with fixed rate non-callable consolidated obligations
Fair Value
Hedge
Rolling
Regression
  5,005,000   0   0   5,005,000 
Fair Value
Hedge
Rolling
Regression
  4,940,000   0   0   4,940,000 
Interest rate risk associated with fixed rate non-callable consolidated obligations
Fair Value
Hedge
Shortcut1
  1,260,000   0   0   1,260,000 
Fair Value
Hedge
Shortcut1
  1,260,000   0   0   1,260,000 
Interest rate risk associated with callable step-up or step-down consolidated obligations
Fair Value
Hedge
Rolling
Regression
  3,110,000   0   0   3,110,000 
Fair Value
Hedge
Rolling
Regression
  2,613,000   0   0   2,613,000 
Interest rate risk associated with complex fixed rate consolidated obligations
Fair Value
Hedge
Rolling
Regression
  654,175   0   0   654,175 
Fair Value
Hedge
Rolling
Regression
  70,000   0   0   70,000 
Intermediary Derivatives                                  
Interest rate risk associated with intermediary derivative instruments with members
Economic
Hedge
Not
Applicable
  162,000   114,000   0   276,000 
Economic
Hedge
Not
Applicable
  162,000   114,000   0   276,000 
TOTAL  $23,584,023  $7,923,533  $109,689  $31,617,245   $22,731,528  $7,893,533  $252,095  $30,877,156 
__________
1As of July 1, 2008, the FHLBank discontinued using shortcut hedge accounting for all new derivative transactions. All derivatives in the table with shortcut as the indicated effectiveness method were transacted prior to that date.

 
7875
 
Table 4145 presents the fair value of derivative instruments (fair value includes net accrued interest receivable or payable on the derivative) by risk and by type of instrument used to address the noted risk as of JuneSeptember 30, 2010 (in thousands):

Table 4145

Fair ValueFair Value Fair Value 
Risk Hedged
Accounting
Designation
Effectiveness
Method
 
Interest Rate
Swaps
  Caps/Floors  
Purchase
Commitments
  Total 
Accounting
Designation
Effectiveness
Method
 
Interest Rate
Swaps
  Caps/Floors  
Purchase
Commitments
  Total 
Advances                          
Interest rate risk associated with embedded caps and floors clearly and closely related
Fair Value
Hedge
Dollar
Offset
 $0  $(2,150) $0  $(2,150)
Fair Value
Hedge
Dollar
Offset
 $0  $(3,117) $0  $(3,117)
Interest rate risk associated with fixed rate non-callable advances
Fair Value
Hedge
Shortcut1
  (78,252)  0   0   (78,252)
Fair Value
Hedge
Shortcut1
  (86,582)  0   0   (86,582)
Interest rate risk associated with fixed rate non-callable advances
Fair Value
Hedge
Rolling
Regression
  (125,970)  0   0   (125,970)
Fair Value
Hedge
Rolling
Regression
  (168,714)  0   0   (168,714)
Interest rate risk associated with callable fixed rate advances
Fair Value
Hedge
Rolling
Regression
  (68)  0   0   (68)
Fair Value
Hedge
Rolling
Regression
  (17)  0   0   (17)
Interest rate risk associated with fixed rate convertible advances
Fair Value
Hedge
Rolling
Regression
  (350,147)  0   0   (350,147)
Fair Value
Hedge
Rolling
Regression
  (407,862)  0   0   (407,862)
Investments                                  
Fair value risk associated with fixed rate non-MBS trading investments
Economic
Hedge
Not
Applicable
  (197,555)  0   0   (197,555)
Economic
Hedge
Not
Applicable
  (206,932)  0   0   (206,932)
Risk of changes in interest rates associated with variable rate MBS with embedded caps
Economic
Hedge
Not
Applicable
  0   93,613   0   93,613 
Economic
Hedge
Not
Applicable
  0   69,759   0   69,759 
Duration of equity risk in a declining interest rate environment
Economic
Hedge
Not
Applicable
  0   18,745   0   18,745 
Economic
Hedge
Not
Applicable
  0   18,705   0   18,705 
Mortgage Loans Held for Portfolio                                  
Fair value risk associated with fixed rate mortgage purchase commitments
Economic
Hedge
Not
Applicable
  0   0   1,350   1,350 
Economic
Hedge
Not
Applicable
  0   0   282   282 
Consolidated Obligation Discount Notes                                  
Interest rate risk associated with fixed rate non-callable discount notes
Fair Value
Hedge
Rolling
Regression
  55   0   0   55 
Fair Value
Hedge
Rolling
Regression
  3,036   0   0   3,036 
Consolidated Obligation Bonds                                  
Risk of changes in interest rates creating unacceptable duration changes or increasing costs of funds
Economic
Hedge
Not
Applicable
  768   0   0   768 
Economic
Hedge
Not
Applicable
  1,631   0   0   1,631 
Interest rate risk associated with fixed rate callable consolidated obligations
Fair Value
Hedge
Rolling
Regression
  44,557   0   0   44,557 
Fair Value
Hedge
Rolling
Regression
  42,504   0   0   42,504 
Interest rate risk associated with fixed rate callable consolidated obligations
Fair Value
Hedge
Shortcut1
  6,093   0   0   6,093 
Interest rate risk associated with fixed rate non-callable consolidated obligations
Fair Value
Hedge
Rolling
Regression
  112,189   0   0   112,189 
Fair Value
Hedge
Rolling
Regression
  126,408   0   0   126,408 
Interest rate risk associated with fixed rate non-callable consolidated obligations
Fair Value
Hedge
Shortcut1
  168,337   0   0   168,337 
Fair Value
Hedge
Shortcut1
  192,844   0   0   192,844 
Interest rate risk associated with callable step-up or step-down consolidated obligations
Fair Value
Hedge
Rolling
Regression
  42,958   0   0   42,958 
Fair Value
Hedge
Rolling
Regression
  42,072   0   0   42,072 
Interest rate risk associated with complex fixed rate consolidated obligations
Fair Value
Hedge
Rolling
Regression
  9,083   0   0   9,083 
Fair Value
Hedge
Rolling
Regression
  818   0   0   818 
Intermediary Derivatives                                  
Interest rate risk associated with intermediary derivative instruments with members
Economic
Hedge
Not
Applicable
  70   0   0   70 
Economic
Hedge
Not
Applicable
  61   0   0   61 
TOTAL  $(367,882) $110,208  $1,350  $(256,324)  $(460,733) $85,347  $282  $(375,104)
__________
1As of July 1, 2008, the FHLBank discontinued using shortcut hedge accounting for all new derivative transactions. All derivatives in the table with shortcut as the indicated effectiveness method were transacted prior to that date.

 
7976
 
Table 4246 presents the notional amount, accounting designation and effectiveness method for derivative instruments by risk and by type of derivative used to address the noted risk as of December 31, 2009 (in thousands):

Table 4246

Notional Amount 
Risk Hedged
Accounting
Designation
Effectiveness
Method
 
Interest Rate
Swaps
  Caps/Floors  
Purchase
Commitments
  Total 
Advances              
Interest rate risk associated with embedded caps and floors clearly and closely related
Fair Value
Hedge
Dollar
Offset
 $0  $109,000  $0  $109,000 
Interest rate risk associated with fixed rate non-callable advances
Fair Value
Hedge
Shortcut1
  1,254,000   0   0   1,254,000 
Interest rate risk associated with fixed rate non-callable advances
Fair Value
Hedge
Rolling
Regression
  2,412,134   0   0   2,412,134 
Interest rate risk associated with callable fixed rate advances
Fair Value
Hedge
Rolling
Regression
  12,100   0   0   12,100 
Interest rate risk associated with fixed rate convertible advances
Fair Value
Hedge
Rolling
Regression
  5,363,872   0   0   5,363,872 
Investments                  
Fair value risk associated with fixed rate non-MBS trading investments
Economic
Hedge
Not
Applicable
  1,515,654   0   0   1,515,654 
Risk of changes in interest rates associated with variable rate MBS with embedded caps
Economic
Hedge
Not
Applicable
  0   6,295,733   0   6,295,733 
Duration of equity risk in a declining interest rate environment
Economic
Hedge
Not
Applicable
  0   300,000   0   300,000 
Mortgage Loans Held for Portfolio                  
Fair value risk associated with fixed rate mortgage purchase commitments
Economic
Hedge
Not
Applicable
  0   0   33,236   33,236 
Consolidated Obligation Discount Notes                  
Interest rate risk associated with fixed rate non-callable discount notes
Fair Value
Hedge
Rolling
Regression
  54,582   0   0   54,582 
Consolidated Obligation Bonds                  
Risk of changes in interest rates creating unacceptable duration changes or increasing costs of funds
Economic
Hedge
Not
Applicable
  3,420,000   0   0   3,420,000 
Interest rate risk associated with fixed rate callable consolidated obligations
Fair Value
Hedge
Rolling
Regression
  775,000   0   0   775,000 
Interest rate risk associated with fixed rate callable consolidated obligations
Fair Value
Hedge
Shortcut1
  320,000   0   0   320,000 
Interest rate risk associated with fixed rate non-callable consolidated obligations
Fair Value
Hedge
Rolling
Regression
  5,440,000   0   0   5,440,000 
Interest rate risk associated with fixed rate non-callable consolidated obligations
Fair Value
Hedge
Shortcut1
  1,460,000   0   0   1,460,000 
Interest rate risk associated with callable step-up or step-down consolidated obligations
Fair Value
Hedge
Rolling
Regression
  3,722,000   0   0   3,722,000 
Interest rate risk associated with complex fixed rate consolidated obligations
Fair Value
Hedge
Rolling
Regression
  693,400   0   0   693,400 
Intermediary Derivatives                  
Interest rate risk associated with intermediary derivative instruments with members
Economic
Hedge
Not
Applicable
  202,000   104,000   0   306,000 
TOTAL   $26,644,742  $6,808,733  $33,236  $33,486,711 
__________
1As of July 1, 2008, the FHLBank discontinued using shortcut hedge accounting for all new derivative transactions. All derivatives in the table with shortcut as the indicated effectiveness method were transacted prior to that date.

 
8077
 
Table 4347 presents the fair value of derivative instruments (fair value includes net accrued interest receivable or payable on the derivative) by risk and by type of instrument used to address the noted risk as of December 31, 2009 (in thousands):
 
Table 4347

Fair Value 
Risk Hedged
Accounting
Designation
Effectiveness
Method
 
Interest Rate
Swaps
  Caps/Floors  
Purchase
Commitments
  Total 
Advances              
Interest rate risk associated with embedded caps and floors clearly and closely related
Fair Value
Hedge
Dollar
Offset
 $0  $601  $0  $601 
Interest rate risk associated with fixed rate non-callable advances
Fair Value
Hedge
Shortcut1
  (67,603)  0   0   (67,603)
Interest rate risk associated with fixed rate non-callable advances
Fair Value
Hedge
Rolling
Regression
  (51,608)  0   0   (51,608)
Interest rate risk associated with callable fixed rate advances
Fair Value
Hedge
Rolling
Regression
  (128)  0   0   (128)
Interest rate risk associated with fixed rate convertible advances
Fair Value
Hedge
Rolling
Regression
  (343,457)  0   0   (343,457)
Investments                  
Fair value risk associated with fixed rate non-MBS trading investments
Economic
Hedge
Not
Applicable
  (159,215)  0   0   (159,215)
Risk of changes in interest rates associated with variable rate MBS with embedded caps
Economic
Hedge
Not
Applicable
  0   108,997   0   108,997 
Duration of equity risk in a declining interest rate environment
Economic
Hedge
Not
Applicable
  0   18,902   0   18,902 
Mortgage Loans Held for Portfolio                  
Fair value risk associated with fixed rate mortgage purchase commitments
Economic
Hedge
Not
Applicable
  0   0   (312)  (312)
Consolidated Obligation Discount Notes                  
Interest rate risk associated with fixed rate non-callable discount notes
Fair Value
Hedge
Rolling
Regression
  533   0   0   533 
Consolidated Obligation Bonds                  
Risk of changes in interest rates creating unacceptable duration changes or increasing costs of funds
Economic
Hedge
Not
Applicable
  5,933   0   0   5,933 
Interest rate risk associated with fixed rate callable consolidated obligations
Fair Value
Hedge
Rolling
Regression
  15,434   0   0   15,434 
Interest rate risk associated with fixed rate callable consolidated obligations
Fair Value
Hedge
Shortcut1
  13,733   0   0   13,733 
Interest rate risk associated with fixed rate non-callable consolidated obligations
Fair Value
Hedge
Rolling
Regression
  96,020   0   0   96,020 
Interest rate risk associated with fixed rate non-callable consolidated obligations
Fair Value
Hedge
Shortcut1
  133,211   0   0   133,211 
Interest rate risk associated with callable step-up or step-down consolidated obligations
Fair Value
Hedge
Rolling
Regression
  (6,574)  0   0   (6,574)
Interest rate risk associated with complex fixed rate consolidated obligations
Fair Value
Hedge
Rolling
Regression
  (17,088)  0   0   (17,088)
Intermediary Derivatives                  
Interest rate risk associated with intermediary derivative instruments with members
Economic
Hedge
Not
Applicable
  94   0   0   94 
TOTAL   $(380,715) $128,500  $(312) $(252,527)
__________
1As of July 1, 2008, the FHLBank discontinued using shortcut hedge accounting for all new derivative transactions. All derivatives in the table with shortcut as the indicated effectiveness method were transacted prior to that date.

ItemItem 4: Controls and Procedures

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

78
Changes in Internal Control Over Financial Reporting. There has been no change in the FHLBank’sour internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the last fiscal quarter ended JuneSeptember 30, 2010 that has materially affected, or is reasonably likely to materially affect, the FHLBank’sour internal control over financial reporting.

81
PartPart II. OTHER INFORMATION

ItemItem 1. Legal Proceedings
The FHLBank isWe are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on the FHLBank’sour financial condition or results of operations.

ItemItem 1A. Risk Factors
For a discussion of risks applicable to the FHLBank, see Item 1A – “Risk Factors” in the annual report on Form 10-K, incorporated by reference herein. In addition, the information below is an update and should be read in conjunction with the risk factors identified and included in our annual report on Form 10-K.

Our business has been and may continue to be adversely impacted by recently enacted legislation and other ongoing actions by the U.S. government in response to recent disruptions in the financial markets.

In addition to various legislative proposals for regulatory reform of financial institutions, on July 21, 2010, the President signed into law the Dodd-Frank Act. The Dodd-Frank Act, among other things: (1) creates an inter-agency oversight council that will identify and regulate systemically important financial institutions; (2) regulates the over-the-counter derivatives market; and (3) establishes new requirements, including a risk-retention requirement, for MBS. The FHLBank’sOur business operations, funding costs, rights, obligations, and/or the manner in which FHLBank carrieswe carry out itsour housing-finance mission may be affected by the Dodd-Frank Act.

The Dodd-Frank Act may also subject the FHLBanks to heightened prudential standards established by the Federal Reserve Board if the FHLBanks are identified as being systemically important financial institutions. These standards may include risk-based capital requirements, liquidity requirements, risk management requirements and a resolution plan. Other standards could encompass such matters as a requirement to issue contingent capital instruments, additional public disclosures, and limits on short-term debt. The Dodd-Frank Act also requires systemically important financial institutions to report to the Federal Reserve on the nature and extent of their credit exposures to other significant companies and undergo semi-annual stress tests and may subject the FHLBank, if identified as being a systemically important financial institut ion, to higher capital requirements and quantitative limits with regard to their prop rietaryour proprietary trading.

Finally, the Dodd-Frank Act requires federal regulatory agencies to establish regulations to implement the legislation. For example, regulations on the over-the-counter derivatives market that may be issued under the Dodd-Frank Act could materially affect an FHLBank’sour ability to hedge its interest rate risk exposure from advances and mortgage loan purchases, achieve the FHLBank’sour risk management objectives, and act as an intermediary between itsour members and counterparties. We cannot predict the effect of any new regulations on our operations. Changes in regulatory requirements could result in, among other things, an increase in our cost of funding, an increase in our cost of operations, a change in our permissible business activities, or a decrease in the size, scope or nature of our lending or investments, which could negatively affect our financial cond itioncondition and results of operations.

ItemItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.

ItemItem 3. Defaults Upon Senior Securities
None.

ItemItem 4. (Reserved and removed)

ItemItem 5. Other Information
None.

Item 6:Item 6. Exhibits

Exhibit
No.
Description
3.1Exhibit 3.1 to the FHLBank’s registration statement on Form 10, filed May 15, 2006, and made effective on July 14, 2006 (File No. 000-52004) (the “Form 10 Registration Statement”), Federal Home Loan Bank of Topeka Articles and Organization Certificate, is incorporated herein by reference as Exhibit 3.1.
3.2Exhibit 3.2 to the Current Report on Form 8-K, filed December 18, 2009,September 23, 2010, Amended and Restated Bylaws, is incorporated herein by reference as Exhibit 3.2.
4.1Exhibit 4.1 to the quarterly reportCurrent Report on Form 10-Q,8-K, filed August 12, 2009,September 7, 2010, Federal Home Loan Bank of Topeka Capital Plan, is incorporated herein by reference as Exhibit 4.1.
31.1Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of First Vice President and Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32Certification of President and Chief Executive Officer and First Vice President and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 Federal Home Loan Bank of Topeka
  
  
Date: AugustNovember 12, 2010By: /s/ Andrew J. Jetter
 Andrew J. Jetter
 President and Chief Executive Officer
  
Date: AugustNovember 12, 2010By: /s/ Denise L. Cauthon
 Denise L. Cauthon
 First Vice President and
 Chief Accounting Officer and Principal(Principal Financial OfficerOfficer)


 
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