UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

OR

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

Commission File Number: 000-51845

FEDERAL HOME LOAN BANK OF ATLANTA

(Exact name of registrant as specified in its charter)

Federally chartered corporation	56-6000442
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1475 Peachtree Street, NE, Atlanta, Ga.	30309
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (404) 888-8000

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 for the past 90 days.

x  Yes    ¨  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  ¨	Non-accelerated filer  x	Smaller reporting company  ¨
		(Do not check if a smaller reporting company)

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

The number of shares outstanding of the registrant’s Class B Stock, par value $100, as of October 31, 2008, was 90,134,877.

Table of Contents

PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
	Statements of Condition	1
	Statements of Income	2
	Statements of Capital	3
	Statements of Cash Flows	4
	Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	62
Item 4T.	Controls and Procedures	62
PART II.	OTHER INFORMATION	63
Item 1.	Legal Proceedings	63
Item 1A.	Risk Factors	63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3.	Defaults Upon Senior Securities	65
Item 4.	Submission of Matters to a Vote of Security Holders	65
Item 5.	Other Information	67
Item 6.	Exhibits	68
SIGNATURES		69

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CONDITION

(Unaudited)

(In thousands, except par value)

	As of
	September 30, 2008		December 31, 2007
ASSETS
Cash and due from banks	$	7,961	$	18,927
Interest-bearing deposits		3,059		3,403
Federal funds sold		16,775,100		14,835,000
Trading securities (includes $439,725 and $592,065 pledged as collateral as of September 30, 2008 and December 31, 2007, respectively, that may be repledged and includes other FHLBanks’ bonds of $280,853 and $284,542 as of September 30, 2008 and December 31, 2007, respectively)		4,233,093		4,627,545
Held-to-maturity securities, net (fair value of $21,179,270 and $21,577,379 as of September 30, 2008 and December 31, 2007, respectively)		23,893,355		22,060,517
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $861 and $846 as of September 30, 2008 and December 31, 2007, respectively		3,337,109		3,526,582
Advances, net		164,285,082		142,867,373
Accrued interest receivable		757,799		824,815
Premises and equipment, net		28,771		30,652
Derivative assets		248,663		43,039
Other assets		148,628		99,911
TOTAL ASSETS	$	213,718,620	$	188,937,764
LIABILITIES
Deposits:
Interest-bearing	$	7,946,985	$	7,115,183
Noninterest-bearing		—		19,844
Total deposits		7,946,985		7,135,027
Securities sold under agreements to repurchase		259,414		—
Consolidated obligations, net:
Discount notes		55,512,638		28,347,939
Bonds		138,634,570		142,237,042
Total consolidated obligations, net		194,147,208		170,584,981
Mandatorily redeemable capital stock		35,454		55,538
Accrued interest payable		1,171,472		1,460,113
Affordable Housing Program		138,299		156,184
Payable to REFCORP		—		30,681
Derivative liabilities		828,641		1,305,132
Other liabilities		133,064		187,872
Total liabilities		204,660,537		180,915,528
Commitments and contingencies (Note 11)
CAPITAL
Capital stock Class B putable ($100 par value) issued and outstanding shares:
Subclass B1 issued and outstanding shares: 14,661 and 12,900 as of September 30, 2008 and December 31, 2007, respectively		1,466,138		1,289,973
Subclass B2 issued and outstanding shares: 72,342 and 62,660 as of September 30, 2008 and December 31, 2007, respectively		7,234,192		6,266,043
Total capital stock Class B putable		8,700,330		7,556,016
Retained earnings		360,307		468,779
Accumulated other comprehensive loss		(2,554)		(2,559)
Total capital		9,058,083		8,022,236
TOTAL LIABILITIES AND CAPITAL	$	213,718,620	$	188,937,764

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

1

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF INCOME

(Unaudited)

(In thousands)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008			2007		2008		2007
INTEREST INCOME
Advances	$	1,040,858		$	1,669,241	$	3,566,369	$	4,419,063
Prepayment fees on advances, net		714			169		3,428		1,209
Interest-bearing deposits		1,846			1,007		24,753		2,808
Federal funds sold		76,584			222,679		216,959		532,451
Trading securities		80,073			66,461		226,567		199,269
Held-to-maturity securities		303,680			248,055		877,774		730,725
Mortgage loans held for portfolio		45,331			45,514		138,540		128,000
Loans to other FHLBanks		27			44		77		47
Total interest income		1,549,113			2,253,170		5,054,467		6,013,572
INTEREST EXPENSE
Consolidated obligations:
Discount notes		237,442			202,660		687,187		357,494
Bonds		1,049,116			1,779,371		3,575,479		4,918,100
Deposits		23,051			78,043		102,694		208,671
Loans from other FHLBanks		1			4		13		33
Securities sold under agreements to repurchase		1,324			2,242		1,324		14,550
Mandatorily redeemable capital stock		268			3,450		1,391		10,196
Other borrowings		50			155		179		449
Total interest expense		1,311,252			2,065,925		4,368,267		5,509,493
NET INTEREST INCOME		237,861			187,245		686,200		504,079
(Reversal) provision for credit losses on mortgage loans held for portfolio		(135)			161		15		72
NET INTEREST INCOME AFTER (REVERSAL) PROVISION FOR CREDIT LOSSES		237,996			187,084		686,185		504,007
OTHER INCOME (LOSS)
Service fees		539			562		1,799		1,892
Net gains (losses) on trading securities		31,070			92,538		(50,968)		19,723
Realized loss on held-to-maturity securities		(87,344)			—		(87,344)		—
Net losses on derivatives and hedging activities		(45,299)			(72,816)		(51,219)		(9,898)
Other		(129)			(8)		(73)		571
Total other (loss) income		(101,163)			20,276		(187,805)		12,288
OTHER EXPENSE
Compensation and benefits		15,668			14,525		47,966		44,519
Other operating expenses		10,751			8,351		27,100		23,407
Finance Agency		1,480			1,252		4,665		3,755
Office of Finance		852			814		3,090		2,601
Provision for credit losses on receivable		170,486			—		170,486		—
Other		321			814		1,001		2,356
Total other expense		199,558			25,756		254,308		76,638
(LOSS) INCOME BEFORE ASSESSMENTS		(62,725	)		181,604		244,072		439,657
Affordable Housing Program		(5,093	)		15,177		20,066		36,931
REFCORP		(11,526	)		33,285		44,801		80,545
Total assessments		(16,619	)		48,462		64,867		117,476
NET (LOSS) INCOME	$	(46,106	)	$	133,142	$	179,205	$	322,181

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

2

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CAPITAL

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

(In thousands)

	Capital Stock Class B Putable			Retained Earnings		Accumulated Other Comprehensive Loss		Total Capital
	Shares	Par Value
BALANCE, DECEMBER 31, 2006	57,718	$	5,771,798	$	406,376	$	(4,537)	$	6,173,637
Issuance of capital stock	46,211		4,621,099		—		—		4,621,099
Repurchase/redemption of capital stock	(29,028)		(2,902,824)		—		—		(2,902,824)
Net shares reclassified to mandatorily redeemable capital stock	(774)		(77,356)		—		—		(77,356)
Comprehensive income:
Net income	—		—		322,181		—		322,181
Other comprehensive loss:
Benefit plans:
Amortization of net loss	—		—		—		780		780
Amortization of net prior service credit	—		—		—		(544)		(544)
Amortization of net transition obligation	—		—		—		30		30
Total comprehensive income	—		—		—		—		322,447
Cash dividends on capital stock	—		—		(268,572)		—		(268,572)
BALANCE, SEPTEMBER 30, 2007	74,127	$	7,412,717	$	459,985	$	(4,271)	$	7,868,431
BALANCE, DECEMBER 31, 2007	75,560	$	7,556,016	$	468,779	$	(2,559)	$	8,022,236
Issuance of capital stock	46,112		4,611,210		—		—		4,611,210
Repurchase/redemption of capital stock	(34,434)		(3,443,391)		—		—		(3,443,391)
Net shares reclassified to mandatorily redeemable capital stock	(235)		(23,505)		—		—		(23,505)
Comprehensive income:
Net income	—		—		179,205		—		179,205
Other comprehensive loss:
Benefit plans:
Amortization of net loss	—		—		—		515		515
Amortization of net prior service credit	—		—		—		(542)		(542)
Amortization of net transition obligation	—		—		—		32		32
Total comprehensive income	—		—		—		—		179,210
Cash dividends on capital stock	—		—		(287,677)		—		(287,677)
BALANCE, SEPTEMBER 30, 2008	87,003	$	8,700,330	$	360,307	$	(2,554)	$	9,058,083

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

3

FEDERAL HOME LOAN BANK OF ATLANTA

STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2008		2007
OPERATING ACTIVITIES
Net income	$	179,205	$	322,181
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization:
Net premiums and discounts on consolidated obligations		153,977		118,691
Net premiums and discounts on investments		(9,575)		(3,986)
Net premiums and discounts on mortgage loans		744		(669)
Concessions on consolidated obligations		39,388		23,526
Net deferred loss on derivatives		247		231
Premises and equipment		2,202		1,847
Capitalized software		3,522		3,384
Other		6,457		(8,664)
Provision for credit losses on mortgage loans held for the portfolio		15		72
Provision for credit losses on receivable		170,486		—
Net realized gains from redemption of held-to-maturity securities		(401)		—
Realized loss on held-to-maturity securities		87,344		—
Gain due to early extinguishment of debt		—		(234)
Loss on disposal of capitalized software		322		—
Gain due to change in net fair value adjustment on derivative and hedging activities		(853,825)		(316,585)
Fair value adjustment on trading securities		87,161		(19,723)
Settlement of derivative transactions with trading securities		840,589		—
Net change in:
Accrued interest receivable (excluding derivative accrued interest)		69,285		(84,372)
Other assets		(217,353)		(8,322)
Affordable Housing Program liability		(18,167)		16,646
Accrued interest payable (excluding derivative accrued interest)		(288,644)		256,377
Payable to REFCORP*		(42,207)		9,679
Other liabilities		184		16,150
Total adjustments		31,751		4,048
Net cash provided by operating activities		210,956		326,229
INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits		(1,251,151)		(36,878)
Federal funds sold		(1,940,100)		(10,520,000)
Deposits with other FHLBanks		344		1,458
Trading Securities:
Proceeds from sales		1,900,000		—
Proceeds from maturities		550,000		—
Purchases		(2,978,941)		—
Held-to-maturity securities:
Net change in short-term		800,000		8,000
Proceeds		2,690,512		2,173,219
Purchases		(5,405,075)		(3,123,199)
Advances:
Proceeds from principal collected		135,095,543		130,542,484
Made		(156,253,231)		(167,285,569)
Mortgage loans held for portfolio:
Proceeds from principal collected		354,417		292,794
Purchases		(165,290)		(794,094)
Capital expenditures:
Purchase of premises and equipment		(372)		(1,177)
Purchase of software		(3,900)		(2,307)
Net cash used in investing activities		(26,607,244)		(48,745,269)

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

4

	Nine Months Ended September 30,
	2008		2007
FINANCING ACTIVITIES
Net change in:
Deposits		811,958		1,092,011
Securities sold under agreement to repurchase		259,414		(500,000)
Net proceeds on derivative contracts with financing element		945,338		—
Proceeds from issuance of consolidated obligations:
Discount notes		269,256,294		601,880,639
Bonds		95,512,887		81,327,796
Payments for debt issuance costs		(29,614)		(20,368)
Payments for maturing and retiring consolidated obligations:
Discount notes		(242,112,421)		(576,251,056)
Bonds		(99,040,105)		(60,465,616)
Proceeds from issuance of capital stock		4,611,210		4,621,099
Payments for repurchase/redemption of capital stock		(3,443,391)		(2,902,824)
Payments for repurchase/redemption of mandatorily redeemable capital stock		(43,589)		(122,483)
Cash dividends paid		(342,659)		(256,762)
Net cash provided by financing activities		26,385,322		48,402,436
Net decrease in cash and cash equivalents		(10,966)		(16,604)
Cash and cash equivalents at beginning of the period		18,927		28,671
Cash and cash equivalents at end of the period	$	7,961	$	12,067
Supplemental disclosures of cash flow information:
Cash paid for:
Interest paid	$	3,947,579	$	4,853,316
AHP assessments paid, net	$	37,951	$	20,410
REFCORP assessments paid	$	87,008	$	70,866
Noncash investing and financing activities:
Dividends declared but not paid	$	58,946	$	99,019
Net shares reclassified to mandatorily redeemable capital stock	$	23,505	$	77,356
Held-to-maturity securities acquired with accrued liabilities	$	—	$	149,997

* Payable to REFCORP includes the net change in the REFCORP receivable/payable.

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

5

FEDERAL HOME LOAN BANK OF ATLANTA

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1—Basis of Presentation

The accompanying unaudited interim financial statements of the Federal Home Loan Bank of Atlanta (the “Bank”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could be different from these estimates. The foregoing interim financial statements are unaudited; however, in the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods, have been included. The results of operations for interim periods are not necessarily indicative of results to be expected for the year ending December 31, 2008, or for other interim periods. The unaudited interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2007, which are contained in the Bank’s 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 27, 2008 (“Form 10-K”).

Descriptions of the significant accounting policies of the Bank are included in Note 1 to the 2007 audited financial statements. There have been no material changes to these policies as of September 30, 2008.

Reclassifications. Certain amounts in the prior-year financial statements have been reclassified to conform to the current presentation.

In particular, in accordance with FASB Staff Position (“FSP”) No. FIN 39-1, Amendment of FASB Interpretation No. 39 (“FSP FIN 39-1”), the Bank recognized the effects of applying FSP FIN 39-1 as a change in accounting principle through retrospective application for all financial statement periods presented. For more information related to FSP FIN 39-1, see Note 2 to these financial statements.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (“SFAS 159”), which amends SFAS No. 95, Statement of Cash Flows (“SFAS 95”), and SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, (“SFAS 115”), cash flows from trading securities (which include securities for which an entity has elected the fair value option) should be classified in the statement of cash flows based on the nature of and purpose for which the securities were acquired. Prior to this amendment, SFAS 95 and SFAS 115 specified that all cash flows from trading securities must be classified as cash flows from operating activities. On a retroactive basis, beginning in the first quarter of 2008, the Bank classifies purchases, sales and maturities of trading securities held for investment purposes as cash flows from investing activities. Cash flows related to trading securities held for trading purposes continue to be reported as cash flows from operating activities. Previously, all cash flows associated with trading securities were reflected in the statement of cash flows as operating activities. For more information on SFAS 159, see Note 2 to these financial statements.

During the third quarter of 2008, on a retrospective basis, the Bank reclassified its investments in certificates of deposit, previously reported as interest-bearing deposits, to present them appropriately as held-to-maturity securities in its statements of condition and income based on the definition of a security under SFAS 115. These financial instruments have been classified as held-to-maturity securities based on their short-term nature and the Bank’s history of holding them until maturity. This reclassification had no effect on total assets or net interest income and net income and was not material to the previously issued financial statements.

6

The effects of the above reclassifications on the Bank’s prior year financial statements were as follows (in thousands):

	Statement of Condition As of December 31, 2007
	As Originally Reported		FSP FIN 39-1 Reclassification		SFAS 159 Reclassification		Certificates of Deposit Reclassification		As Currently Reported
Assets:
Interest-bearing deposits (a)	$	1,608,573	$	(805,170)	$	—	$	(800,000)	$	3,403
Held-to-maturity securities		21,260,517		—		—		800,000		22,060,517
Accrued interest receivable		828,004		(3,189)		—		—		824,815
Derivative assets		43,048		(9)		—		—		43,039
Total assets		189,746,132		(808,368)		—		—		188,937,764
Liabilities:
Accrued interest payable		1,460,122		(9)		—		—		1,460,113
Derivative liabilities		2,113,491		(808,359)		—		—		1,305,132
Total liabilities		181,723,896		(808,368)		—		—		180,915,528
Total liabilities and capital		189,746,132		(808,368)		—		—		188,937,764
(a)    “As adjusted” amount represents deposits with other FHLBanks.
	Statement of Income Three Months Ended September 30, 2007
	As Originally Reported		FSP FIN 39-1 Reclassification		SFAS 159 Reclassification		Certificates of Deposit Reclassification		As Currently Reported
Interest Income:
Interest-bearing deposits	$	13,720	$	—	$	—	$	(12,713)	$	1,007
Held-to-maturity securities		235,342		—		—		12,713		248,055
	Statement of Income Nine Months Ended September 30, 2007
	As Originally Reported		FSP FIN 39-1 Reclassification		SFAS 159 Reclassification		Certificates of Deposit Reclassification		As Currently Reported
Interest Income:
Interest-bearing deposits	$	38,129	$	—	$	—	$	(35,321)	$	2,808
Held-to-maturity securities		695,404		—		—		35,321		730,725

7

	Statement of Cash Flows Nine Months Ended September 30, 2007
	As Originally Reported		FSP FIN 39-1 Reclassification		SFAS 159 Reclassification		Certificates of Deposit Reclassification		As Currently Reported
Operating Activities:
Net change in trading securities	$	(19,723)	$	—	$	19,723	$	—	$	—
Fair value adjustment on trading securities		—		—		(19,723)		—		(19,723)
Investing Activities:
Net change in interest-bearing deposits		(28,878)		—		—		(8,000)		(36,878)
Held-to-maturity securities:
Net change in short-term		—		—		—		8,000		8,000

Note 2—Recently Adopted and Issued Accounting Standards

SFAS No. 157, Fair Value Measurements (“SFAS 157”) was issued in September 2006. In defining fair value, SFAS 157 retains the exchange price notion in earlier definitions of fair value. However, the definition of fair value under SFAS 157 focuses on the price that would be received to sell an asset or paid to transfer a liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not expand the use of fair value in any new circumstances. SFAS 157 also establishes a fair value hierarchy that prioritizes the information used to develop assumptions used to determine the exit price. Under this standard, fair value measurements would be disclosed separately by level within the fair value hierarchy. The Bank adopted SFAS 157 effective January 1, 2008. The adoption of SFAS 157 had no effect on the Bank’s financial condition or results of operations. For additional information on the fair value of certain financial assets and liabilities, see Note 10 to the financial statements.

SFAS 159, issued in February 2007, creates a fair value option allowing an entity irrevocably to elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities, with changes in fair value recognized in earnings as they occur. SFAS 159 requires an entity to report those financial assets and financial liabilities measured at fair value in a manner that separates those reported fair values from the carrying amounts of assets and liabilities measured using another measurement attribute on the face of the statement of financial position. SFAS 159 also requires an entity to provide information that would allow users to understand the effect on earnings of changes in the fair value on those instruments selected for the fair value election. The Bank adopted SFAS 159 effective January 1, 2008. There was no initial effect of adoption since the Bank did not elect the fair value option for any existing asset or liability. In addition, the Bank did not elect the fair value option for any financial assets originated or purchased, or for liabilities issued, through September 30, 2008.

FSP FIN 39-1, issued in April 2007, permits an entity to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instruments recognized at fair value executed with the same counterparty under a master netting arrangement. Under FSP FIN 39-1, the receivable or payable related to cash collateral may not be offset if the amount recognized does not represent or approximate fair value or arises from instruments in a master netting arrangement that are not eligible to be offset. The decision whether to offset such fair value amounts

8

represents an elective accounting policy decision that, once elected, must be applied consistently. An entity should recognize the effects of applying FSP FIN 39-1 as a change in accounting principle through retrospective application for all financial statements presented unless it is impracticable to do so. Upon adoption of FSP FIN 39-1, an entity is permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements. The Bank adopted FSP FIN 39-1 effective January 1, 2008 and retroactively applied its requirements to all prior periods. The Bank has not changed its accounting policy of offsetting fair value amounts recognized for derivative instruments under the same master netting arrangement. As a result of the adoption of FSP FIN 39-1, certain amounts on the Bank’s Statements of Condition as of December 31, 2007, were modified to conform to the 2008 presentation, as summarized in Note 1 to the financial statements.

Statement 133 Implementation Issue No. 23 (“Issue E23”), Issues Involving Application of the Shortcut Method under Paragraph 68, issued in January 2008 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), explicitly to permit the use of the shortcut method for those hedging relationships in which (a) the interest rate swap has a nonzero fair value at the inception of the hedging relationship, attributable solely to differing prices within the bid-ask spread; and/or (b) the hedged item has a trade date that differs from its settlement date because of generally established conventions in the marketplace in which the transaction to acquire or issue the hedged item is executed. Issue E23 is effective for hedging relationships designated on or after January 1, 2008. At adoption, preexisting hedging relationships utilizing the shortcut method that did not meet the requirements of Issue E23 as of the inception of the hedging relationship must be dedesignated prospectively. The effects of applying hedge accounting prior to the effective date may not be reversed. A hedging relationship that does not qualify for the shortcut method based on Issue E23 could be redesignated without the application of the shortcut method if that hedging relationship meets the applicable requirements of SFAS 133. The Bank adopted Issue E23 effective January 1, 2008. The Bank concluded that no dedesignations were required as a result of the adoption of Issue E23. In addition, since May 31, 2005, the Bank no longer applies the short-cut method to new hedging relationships. Therefore the adoption of Issue E23 had no effect on the Bank’s financial condition or results of operations.

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133 (“SFAS 161”), issued in March 2008, requires enhanced disclosures about an entity’s derivative and hedging activities. These enhanced disclosures will discuss (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS 133, and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008 with earlier adoption allowed. The Bank does not believe that the adoption of SFAS 161 will have a material effect on its financial condition or results of operations.

SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”), issued in May 2008, identifies the sources of accounting principles and the framework, or hierarchy, for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 is effective November 15, 2008. The Bank does not believe that the adoption of SFAS 162 will have a material effect on its financial condition or results of operations.

FSP No. 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (“FSP 133-1 and FIN 45-4”) was issued in September 2008. FSP 133-1 and FIN 45-4 amended

9

SFAS 133 and FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 (“FIN 45”), to improve disclosures about credit derivatives and guarantees and clarify the effective date of SFAS No. 161. FSP 133-1 and FIN 45-4 amended SFAS 133 to require entities to disclose sufficient information to allow users to assess the potential effect of credit derivatives, including their nature, maximum payment, fair value, and recourse provisions. FSP 133-1 and FIN 45-4 amended FIN 45 to require a disclosure about the current status of the payment/performance risk of a guarantee, which could be indicated by external credit ratings or categories by which the Bank measures risk. The Bank does not currently enter into credit derivatives, but does have guarantees: letters of credit and the joint and several liability on consolidated obligations of the 12 Federal Home Loan Banks (“FHLBanks”). FSP 133-1 and FIN 45-4 is effective for periods ending after November 15, 2008. The Bank does not believe that the adoption of adoption of FSP 133-1 and FIN 45-4 will have a material effect on its financial statements or results of operations.

FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP FAS 157-3”), issued in October 2008, clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate following the guidance in SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154”). However, the disclosure provisions in SFAS 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. As FSP FAS 157-3 clarified but did not change the application of SFAS 157, the adoption of FSP FAS 157-3 had no effect on the Bank’s financial condition or results of operations.

Note 3—Trading Securities

Major Security Types. Trading securities were as follows (in thousands):

	As of September 30, 2008		As of December 31, 2007
Government-sponsored enterprises debt obligations	$	3,938,084	$	4,283,519
Other FHLBanks’ bonds		280,853		284,542
State or local housing agency obligations		14,156		59,484
Total	$	4,233,093	$	4,627,545

Net gains (losses) on trading securities during the three- and nine-month periods ended September 30, 2008 included net unrealized holding gains of $11.7 million and net unrealized holding losses of $40.7 million, respectively, compared to net unrealized holding gains of $92.5 million and $19.7 million for the same periods ended September 30, 2007, respectively.

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Other FHLBanks’ Consolidated Obligation Bonds. The following table details the Bank’s investment in other FHLBanks’ consolidated obligation bonds by primary obligor (in thousands):

	As of September 30, 2008		As of December 31, 2007
Other FHLBanks’ bonds:
FHLBank Dallas	$	81,947	$	83,525
FHLBank Chicago		69,605		70,345
		151,552		153,870
FHLBank TAP Program*		129,301		130,672
Total	$	280,853	$	284,542

* Under this program, the FHLBanks can offer debt obligations representing aggregations of smaller bond issues into larger bond issues that may have greater market liquidity. Because of the aggregation of smaller issues, there is more than one primary obligor.

Note 4—Held-to-maturity Securities

Major Security Types. Held-to-maturity securities were as follows (in thousands):

	As of September 30, 2008								As of December 31, 2007
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Certificates of deposit	$	—	$	—	$	—	$	—	$	800,000	$	70	$	30	$	800,040
State or local housing agency obligations		109,397		1,651		591		110,457		117,988		4,933		65		122,856
Mortgage-backed securities:
U.S. agency obligations-guaranteed		40,297		349		89		40,557		47,460		779		—		48,239
Government-sponsored enterprises		7,203,990		7,712		105,480		7,106,222		2,968,441		8,591		37,260		2,939,772
Private label		16,539,671		—		2,617,637		13,922,034		18,126,628		2,068		462,224		17,666,472
Total	$	23,893,355	$	9,712	$	2,723,797	$	21,179,270	$	22,060,517	$	16,441	$	499,579	$	21,577,379

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The following tables summarize the held-to-maturity securities with unrealized losses (in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

	As of September 30, 2008
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
State or local housing agency obligations	$	31,109	$	591	$	—	$	—	$	31,109	$	591
Mortgage-backed securities:
U.S. agency obligations-guaranteed		16,278		89		—		—		16,278		89
Government-sponsored enterprises		5,323,241		71,215		1,011,652		34,265		6,334,893		105,480
Private label		6,444,807		1,269,940		7,275,213		1,347,697		13,720,020		2,617,637
Total	$	11,815,435	$	1,341,835	$	8,286,865	$	1,381,962	$	20,102,300	$	2,723,797
	As of December 31, 2007
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Certificates of deposit	$	499,970	$	30	$	—	$	—	$	499,970	$	30
State or local housing agency obligations		—		—		5,125		65		5,125		65
Mortgage-backed securities:
Government-sponsored enterprises		250,137		707		1,609,791		36,553		1,859,928		37,260
Private label		6,762,719		126,604		10,392,842		335,620		17,155,561		462,224
Total	$	7,512,826	$	127,341	$	12,007,758	$	372,238	$	19,520,584	$	499,579

Mortgage-Backed Securities. The Bank’s investments in mortgage-backed securities (“MBS”) consist of agency guaranteed securities and senior tranches of private label prime or Alt-A residential MBS. The Bank has increased exposure to the risk of loss on its investments in MBS when the loans backing the MBS exhibit high rates of delinquency and foreclosures, as well as losses on the sale of foreclosed properties. The Bank regularly requires high levels of credit enhancements from the structure of the collateralized mortgage obligation to reduce its risk of loss on such securities. Credit enhancements are defined as the percentage of subordinate tranches, overcollateralization, or excess spread, or the support of monoline insurance, if any, in a security structure that will absorb the losses before the security the Bank purchased will take a loss. The Bank does not purchase credit enhancements for its MBS from monoline insurance companies.

The Bank’s investments in private label MBS were rated “AAA” (or its equivalent) by a nationally recognized statistical rating organization (“NRSRO”), such as Moody’s Investors Service (“Moody’s”) and Standard & Poor’s Rating Services (“S&P”), at purchase date. The “AAA”-rated securities achieve their ratings through credit enhancement, over-collateralization and senior-subordinated shifting interest features; the latter results in subordination of payments to junior classes to ensure cash flows to the senior classes.

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Other Than Temporary Impairment. The Bank had a total of 442 securities in an unrealized loss position, with total gross unrealized losses of $2.7 billion as of September 30, 2008. The Bank evaluates its individual held-to-maturity investment securities holdings for other-than-temporary impairment on a quarterly basis, or more frequently if events or changes in circumstances indicate that these investments may be temporarily impaired.

To determine which individual securities are at risk for other-than-temporary impairment, the Bank considers various characteristics of each security including, but not limited to, the following: the credit rating and related outlook or status; the underlying type of collateral; the duration and amount of the unrealized loss; and any credit enhancements or insurance. The relative importance of this information varies based on the facts and circumstances surrounding each security, as well as the economic environment at the time of assessment. As a result of this security-level review, the Bank identifies individual securities believed to be at risk for other-than-temporary impairment, which are evaluated further by analyzing the performance of the security. Securities with weaker performance measures are evaluated by estimating projected cash flows based on the structure of the security and certain assumptions, such as prepayments, default rates and loss severity, to determine whether the Bank expects to receive all of the contractual cash flows as scheduled.

Based on the Bank’s impairment analysis as of September 30, 2008, the Bank recognized an other-than-temporary impairment loss of $87.3 million related to three private label MBS in its held-to-maturity securities portfolio. This other-than-temporary impairment loss is reported in the Statements of Income as “Realized loss on held-to-maturity securities.” These securities had a total amortized cost of $289.2 million and a fair value of $201.9 million at the time of impairment.

The remainder of the Bank’s held-to-maturity portfolio that has not been designated as other-than-temporarily impaired has experienced unrealized losses and decreases in fair value due to interest rate volatility, illiquidity in the marketplace, and credit deterioration in the U.S. mortgage markets. This decline in fair value is considered temporary as the Bank expects to collect all contractual cash flows and the Bank has the ability and intent to hold these investments to maturity and expects to collect all contractual cash flows as scheduled. The ability and intent of the Bank is demonstrated by the fact that the Bank is well capitalized, has sufficient liquidity and has no need to sell these securities, nor has the Bank entered into any contractual constraints that would impact such intent and ability.

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Note 5—Advances

Redemption Terms. The Bank had advances outstanding, as summarized below (in thousands):

	As of September 30, 2008		As of December 31, 2007
Year of contractual maturity:
Overdrawn demand deposit accounts	$	56	$	18,219
Due in one year or less		42,861,883		34,062,503
Due after one year through two years		33,120,548		19,356,806
Due after two years through three years		27,359,984		22,684,160
Due after three years through four years		15,715,800		18,326,931
Due after four years through five years		10,418,757		16,430,434
Due after five years		31,901,023		29,350,652
Total par value		161,378,051		140,229,705
Discount on AHP advances		(14,023)		(13,461)
Discount on EDGE* advances		(13,249)		(14,091)
SFAS 133 hedging adjustments		2,937,901		2,667,120
Deferred commitment fees		(3,598)		(1,900)
Total	$	164,285,082	$	142,867,373

* The Economic Development and Growth Enhancement Program

The following table summarizes advances by year of contractual maturity or, for convertible advances, next conversion date (in thousands):

	As of September 30, 2008
Year of contractual maturity or next convert date:
Overdrawn demand deposit accounts	$	56
Due or convertible in one year or less		64,128,659
Due or convertible after one year through two years		34,873,489
Due or convertible after two years through three years		27,426,313
Due or convertible after three years through four years		11,855,955
Due or convertible after four years through five years		9,072,106
Due or convertible after five years		14,021,473
Total par value	$	161,378,051

The Bank has never experienced a credit loss on advances. Based on the collateral pledged as security for advances, management’s credit analysis of members’ financial conditions, and prior repayment history, management believes no allowance for credit losses on advances is necessary. No advance was past due as of September 30, 2008 or December 31, 2007.

Interest-rate Payment Terms. The following table details interest-rate payment terms for advances (in thousands):

	As of September 30, 2008		As of December 31, 2007
Par value of advances:
Fixed-rate	$	125,606,676	$	115,846,392
Variable-rate		35,771,375		24,383,313
Total	$	161,378,051	$	140,229,705

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Note 6—Consolidated Obligations

Consolidated obligations, consisting of consolidated obligation bonds and discount notes, are the joint and several obligations of the FHLBanks and are backed only by the financial resources of the FHLBanks. The FHLBanks Office of Finance (“Office of Finance”) tracks the amount of debt issued on behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its specific portion of consolidated obligations for which it is the primary obligor.

Interest-rate Payment Terms. The following table details consolidated obligation bonds by interest-rate payment type (in thousands):

	As of September 30, 2008		As of December 31, 2007
Par value of consolidated bonds:
Fixed-rate	$	102,829,750	$	112,134,915
Simple variable-rate		32,316,900		18,311,900
Step		2,328,000		8,951,550
Zero-coupon		434,060		659,060
Variable-rate that converts to fixed-rate		325,000		670,000
Variable-rate capped floater		120,000		908,000
Fixed-rate that converts to variable-rate		15,000		259,950
Inverse floating-rate		—		24,500
Total	$	138,368,710	$	141,919,875

Redemption Terms. The following is a summary of the Bank’s participation in consolidated obligation bonds outstanding, by year of contractual maturity (dollar amounts in thousands):

	As of September 30, 2008			As of December 31, 2007
	Amount		Weighted Average Interest Rate	Amount		Weighted Average Interest Rate
Year of contractual maturity:
Due in one year or less	$	72,931,765	2.91%	$	62,826,705	4.56%
Due after one year through two years		23,309,145	3.53%		29,721,925	4.64%
Due after two years through three years		9,407,400	3.99%		14,448,245	4.63%
Due after three years through four years		4,549,850	4.50%		4,665,400	4.93%
Due after four years through five years		14,315,500	4.34%		7,851,500	5.06%
Due after five years		13,855,050	4.99%		22,406,100	5.08%
Total par value		138,368,710	3.49%		141,919,875	4.70%
Premiums		25,013			19,479
Discounts		(259,204)			(375,211)
SFAS 133 hedging adjustments		500,870			673,965
Deferred net losses on terminated hedges		(819)			(1,066)
Total	$	138,634,570		$	142,237,042

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The Bank’s consolidated obligation bonds outstanding included (in thousands):

	As of September 30, 2008		As of December 31, 2007
Par value of consolidated bonds:
Noncallable	$	100,836,660	$	71,188,475
Callable		37,532,050		70,731,400
Total	$	138,368,710	$	141,919,875

The following table summarizes consolidated obligation bonds outstanding, by year of contractual maturity or, for callable consolidated obligation bonds, next call date (in thousands):

	As of September 30, 2008
Year of contractual maturity or next call date:
Due or callable in one year or less	$	93,030,315
Due or callable after one year through two years		23,036,645
Due or callable after two years through three years		6,814,400
Due or callable after three years through four years		854,350
Due or callable after four years through five years		5,675,500
Due or callable after five years		8,957,500
Total par value	$	138,368,710

Consolidated Obligation Discount Notes. The Bank’s participation in consolidated obligation discount notes, all of which are due within one year, was as follows (dollar amounts in thousands):

	Book Value		Par Value		Average Interest Rate
As of September 30, 2008	$	55,512,638	$	55,699,802	2.38%
As of December 31, 2007	$	28,347,939	$	28,514,466	4.23%

Note 7—Capital and Mandatorily Redeemable Capital Stock

Capital. The Bank was in compliance with the regulatory capital rules and requirements of the Federal Housing Finance Agency (“Finance Agency”), successor to the Federal Housing Finance Board effective on July 30, 2008 (collectively, the “Regulator”), as shown in the following table (dollar amounts in thousands):

	As of September 30, 2008				As of December 31, 2007
	Required		Actual		Required		Actual
Regulatory capital requirements:
Risk based capital	$	2,733,723	$	9,096,091	$	981,647	$	8,080,333
Total capital-to-assets ratio		4.00%		4.26%		4.00%		4.28%
Total regulatory capital*	$	8,548,745	$	9,096,091	$	7,557,511	$	8,080,333
Leverage ratio		5.00%		6.38%		5.00%		6.42%
Leverage capital	$	10,685,931	$	13,644,137	$	9,446,888	$	12,120,499

* The Regulator has determined that mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $35.5 million and $55.5 million in mandatorily redeemable capital stock at September 30, 2008 and December 31, 2007, respectively.

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Mandatorily Redeemable Capital Stock. The following table provides the number of members that attained nonmember status and the number of nonmembers for which the Bank has completed the repurchase/redemption of mandatorily redeemable capital stock:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2008	2007	2008	2007
Beginning of period	10	11	11	9
Attainment of nonmember status	4	12	6	16
Repurchase/redemption during the period	(3)	(1)	(6)	(3)
End of period	11	22	11	22

The Bank’s activity for mandatorily redeemable capital stock was as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008			2007
Balance, beginning of period	$	35,382	$	226,511	$	55,538		$	215,705
Capital stock subject to mandatory redemption reclassified from equity during the period due to attainment of nonmember status		6,720		31,416		24,073			77,356
Capital stock no longer subject to redemption due to a nonmember becoming a member		—		—		(568	)		—
Repurchase/redemption of mandatorily redeemable capital stock during the period		(6,648)		(87,349)		(43,589)			(122,483)
Balance, end of period	$	35,454	$	170,578	$	35,454		$	170,578

The following table shows the amount of mandatorily redeemable capital stock by year of redemption (in thousands). The year of redemption in the table is the end of the five-year redemption period, or with respect to activity-based stock, the later of the expiration of the five-year redemption period or the activity’s maturity date:

	As of September 30, 2008		As of December 31, 2007
Contractual year of redemption:
Due in one year or less	$	4,322	$	28,758
Due after one year through two years		1,462		786
Due after two years through three years		1,350		625
Due after three years through four years		8,499		3,600
Due after four years through five years		2,250		4,727
Due after five years		17,571		17,042
Total	$	35,454	$	55,538

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Note 8—Employee Retirement Plans

Components of the net periodic benefit cost for the Bank’s supplemental defined benefit pension plan were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Service cost	$	111	$	200	$	346	$	600
Interest cost		141		150		421		450
Amortization of prior service credit		(34)		(32)		(90)		(94)
Amortization of net loss		93		150		288		450
Net periodic benefit cost	$	311	$	468	$	965	$	1,406

Components of the net periodic benefit cost for the Bank’s postretirement health benefit plan were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Service cost	$	70	$	147	$	213	$	441
Interest cost		96		133		291		399
Amortization of net transition obligation		9		10		32		30
Amortization of prior service credit		(151)		(150)		(452)		(450)
Amortization of net loss		76		110		227		330
Net periodic benefit cost	$	100	$	250	$	311	$	750

Note 9—Derivatives and Hedging Activities

For accounting policies and additional information concerning derivatives and hedging activities, see Note 14 to the 2007 audited financial statements included in the Bank’s Form 10-K.

Net losses on derivatives and hedging activities were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
(Losses) gains related to fair-value hedge ineffectiveness	$	(226,972)	$	19,180	$	(234,054)	$	25,528
Gains (losses) on SFAS 133 non-qualifying hedges and other		181,673		(91,996)		182,835		(35,426)
Net losses on derivatives and hedging activities	$	(45,299)	$	(72,816)	$	(51,219)	$	(9,898)

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The following table provides outstanding notional balances and estimated fair values of the derivatives outstanding used for fair value hedges and stand alone derivatives that are SFAS 133 non-qualifying hedges (in thousands):

	As of September 30, 2008				As of December 31, 2007
	Notional		Estimated Fair Value		Notional		Estimated Fair Value
Interest-rate swaps:
Fair value hedges	$	196,758,098	$	(2,536,256)	$	207,143,643	$	(2,031,901)
SFAS 133 non-qualifying hedges		21,117,688		(287,634)		12,338,065		(263,429)
Interest-rate swaptions:
SFAS 133 non-qualifying hedges		500,000		25		115,000		10,823
Interest-rate caps/floors:
SFAS 133 non-qualifying hedges		2,820,000		10,778		3,260,000		25,980
Interest-rate futures/forwards:
SFAS 133 non-qualifying hedges		1,500		102		1,500		109
Mortgage delivery commitments:
SFAS 133 non-qualifying hedges		—		—		9,309		41
Total	$	221,197,286	$	(2,812,985)	$	222,867,517	$	(2,258,377)
Total derivatives excluding accrued interest			$	(2,812,985)			$	(2,258,377)
Accrued interest				175,773				187,934
Cash collateral held by counterparty - assets				968,683				808,359
Cash collateral held from counterparty - liabilities				1,088,551				(9)
Net derivative balances			$	(579,978)			$	(1,262,093)
Net derivative assets balance			$	248,663			$	43,039
Net derivative liabilities balance				(828,641)				(1,305,132)
Net derivative balances			$	(579,978)			$	(1,262,093)

The fair values of bifurcated embedded derivatives presented on a combined basis with the host contract and not included in the above table are as follows (in thousands):

	As of September 30, 2008		As of December 31, 2007
Host contract:
Advances	$	4,366	$	8,459
Callable bonds		—		408
Total	$	4,366	$	8,867

Based on credit analyses and collateral requirements, Bank management presently does not anticipate any credit losses on its existing derivative agreements with counterparties as of September 30, 2008. The contractual or notional amount of derivatives reflects the involvement of the Bank in the various classes of financial instruments. The notional amount of derivatives does not measure the credit risk exposure of the Bank, and the maximum credit exposure of the Bank is substantially less than the notional amount. The Bank is subject to credit risk due to the risk of nonperformance by counterparties to the derivative agreements. The Bank requires collateral agreements that establish collateral delivery thresholds for all

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derivatives and master netting arrangements to mitigate the risk. The Bank manages counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in Bank policy and Regulator regulations. The maximum credit risk is the estimated cost of replacing interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors that have a net positive market value, if the counterparty defaults and the related collateral pledged to the Bank, if any, is of no value to the Bank. As of September 30, 2008, the Bank has not sold or repledged any such collateral.

As of September 30, 2008 and December 31, 2007, the Bank’s maximum credit risk, as defined above, was approximately $56.9 million and $43.0 million, respectively. These totals include $19.2 million and $11.0 million, respectively, of net accrued interest receivable. In determining maximum credit risk, the Bank considers accrued interest receivables and payables, and the legal right to offset derivative assets and liabilities by counterparty. Cash and securities held and pledged to the Bank as collateral for derivatives were $23.6 million and $0 as of September 30, 2008 and December 31, 2007, respectively. Additionally, collateral with respect to derivatives with member institutions included collateral pledged to the Bank, as evidenced by a written security agreement and held by the member institution for the benefit of the Bank.

Lehman Brothers Special Financing Inc. (“LBSF”) was a counterparty to the Bank on multiple derivative transactions documented under an International Swap Dealers Association, Inc. master agreement (the “Master Agreement”). Lehman Brothers Holdings Inc. (“Lehman”), the parent company of LBSF, is a credit support provider for these obligations of LBSF under such transactions. On September 15, 2008, Lehman filed for protection under Chapter 11 of the federal Bankruptcy Code in the United States Bankruptcy Court in the Southern District of New York, which is an event of default under the Master Agreement. On September 18, 2008, the Bank sent LBSF a notice identifying the occurrence of an event of default and designating September 19, 2008 as the early termination date in respect of all outstanding derivative transactions. On October 3, 2008, the Bank sent a settlement statement to LBSF notifying it of all amounts payable if, as permitted under the Master Agreement, the value of the collateral due to be returned to the Bank were netted against all other amounts due between the parties as a result of unwinding the derivative transactions, and demanding payment for that amount. See Note 13 for a discussion of the October 3, 2008 bankruptcy filing by LBSF.

In accordance with the Master Agreement, the net amount due to the Bank as a result of such excess collateral held by LBSF is approximately $189.4 million. Management evaluated this receivable in accordance with the guidance provided by SFAS No. 5, Accounting for Contingencies (“SFAS 5”), and related pronouncements. The Bank recorded a $170.5 million reserve based on management’s estimate of the probable amount that will be realized. The net receivable of $18.9 million is recorded in “Other assets” on the Statements of Condition. Determining the reserve amount requires management to use considerable judgment and is based on the facts currently available. As additional relevant facts become available in future periods, the amount of the reserve may be adjusted accordingly.

Note 10—Estimated Fair Values

As discussed in Note 2 to the financial statements, the Bank adopted SFAS 157 and SFAS 159 on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS 157

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does not expand the use of fair value in any new circumstances. SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. As of September 30, 2008, the Bank had not elected to measure any financial assets or liabilities using the fair value option under SFAS 159; therefore the adoption of SFAS 159 had no effect on the Bank’s financial condition or results of operations.

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

SFAS 157 establishes a fair value hierarchy to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of how market-observable the fair value measurement is and defines the level of disclosure. SFAS 157 clarifies fair value in terms of the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability at the measurement date (an exit price). In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.

Outlined below is the application of the fair value hierarchy established by SFAS 157 to the Bank’s financial assets and financial liabilities that are carried at fair value.

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. As of September 30, 2008, the Bank did not carry any financial assets and liabilities at fair value hierarchy Level 1.

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. As of September 30, 2008, the types of financial assets and liabilities the Bank carried at fair value hierarchy Level 2 included trading securities and derivatives.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity or by the entity’s own assumptions. As of September 30, 2008, while the Bank did not carry any financial assets or liabilities, measured on a recurring basis, at fair value hierarchy Level 3, the Bank did value certain financial assets, measured on a non-recurring basis, at fair value hierarchy Level 3.

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The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

Fair Value on a Recurring Basis. The following table presents for each SFAS 157 hierarchy level, the Bank’s financial assets and financial liabilities that are measured at fair value on a recurring basis on its Statements of Condition (in thousands):

	As of September 30, 2008
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Netting Adjustment*		Total
Assets
Trading securities	$	—	$	4,233,093	$	—	$	—	$	4,233,093
Derivative assets		—		(839,888)		—		1,088,551		248,663
Total assets at fair value	$	—	$	3,393,205	$	—	$	1,088,551	$	4,481,756
Liabilities
Derivative liabilities	$	—	$	(1,797,324)	$	—	$	968,683	$	(828,641)
Total liabilities at fair value	$	—	$	(1,797,324)	$	—	$	968,683	$	(828,641)

* Amounts represent the effect of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and also cash collateral held or placed with the same counterparties.

For financial instruments carried at fair value, the Bank reviews the fair value hierarchy classification of financial assets and liabilities 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 are reported as transfers in and/or out of Level 3 at fair value in the quarter in which the changes occur. There were no transfers of financial instruments carried at fair value, on a recurring basis, in or out of the Level 3 category during the nine months ended September 30, 2008.

Fair Value on a Nonrecurring Basis. The Bank measures certain held-to-maturity securities at fair value on a nonrecurring basis. These held-to-maturity securities 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 other-than-temporary impairment). For the three- and nine-month periods ended September 30, 2008, the Bank recorded an other-than-temporary impairment loss of $87.3 million related to its held-to-maturity securities.

The following table presents these investment securities by level within the SFAS 157 valuation hierarchy, for which a nonrecurring change in fair value has been recorded, and the total change in value of these investment securities for which a fair value adjustment has been included in the Statements of Income (in thousands):

	As of September 30, 2008						Total (Loss) for the Three and Nine Months Ended September 30, 2008
	Fair Value Measurements Using
	Level 1		Level 2		Level 3
Held-to-maturity securities	$	—	$	—	$	201,893	$	(87,344	)

Described below are the Bank’s fair value measurement methodologies for financial assets and liabilities measured or disclosed at fair value.

Cash and due from banks and interest-bearing deposits. The estimated fair value approximates the recorded book balance.

Trading securities. The estimated fair value of trading securities is determined based on independent market-based prices received from a third party pricing service, excluding accrued interest. The Bank’s principal markets for securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in that market.

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When prices are not available, the estimated fair value is determined by calculating the present value of the expected future cash flows based on market observable inputs obtained from an outside source that are input into the Bank’s valuation model.

Held-to-maturity securities. Certain held-to-maturity private label MBS whose fair values previously were determined by reference to prices obtained from third-party broker/dealers or pricing services were changed from a Level 2 classification to a Level 3 classification in the third quarter of 2008. Previously, these valuations relied on observed trades, as evidenced by both activity observed in the market, and similar prices obtained from multiple sources. Beginning in late 2007 and continuing into 2008, the divergence among prices obtained from these sources increased, and became significant in the third quarter of 2008. The significant reduction in transaction volumes and widening credit spreads led the Bank to conclude that the prices received from pricing services, which were derived from the third party’s proprietary models, were reflective of significant unobservable inputs. Because of the significant unobservable inputs used by the pricing services, the Bank considered these to be Level 3 inputs.

Due to the reduced market activity for certain of the Bank’s held-to-maturity private label MBS, during the third quarter of 2008 the Bank also determined prices for these securities using a discounted cash flow approach. This discounted cash flow model used cash flows adjusted for credit factors calculated by a third party model and discounted at a rate incorporating interest-rate and market liquidity factors. Other significant inputs include loan default rates, prepayment speeds, and loss severity rates. Due to the unobservable nature of the inputs, the discounted cash flow model is classified as Level 3.

The Bank evaluated the reasonableness of the two above Level 3 indicators of prices for certain of its held-to-maturity MBS and determined that multiple inputs from different pricing sources would collectively provide the best evidence of fair value as of September 30, 2008. Therefore, the Bank determined fair value based on a weighted average of a third party pricing service and the internal discounted cash flow model. The Bank’s determination of fair value was primarily weighted towards the independent pricing service inputs due to the Bank’s historical use of such pricing service.

The estimated fair value of agency MBS and other held-to-maturity securities is determined based on market-based prices received from a third party pricing service, excluding accrued interest. The prices received from the third-party pricing service are generally non-binding. The Bank’s principal markets for securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in that market. In obtaining such valuation information from third parties, the Bank generally evaluates the prices for reasonableness in order to determine whether such valuations are representative of an exit price in the Bank’s principal markets.

Federal funds sold. The estimated fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for federal funds with similar terms and represent market observable rates.

Advances. The Bank determines the estimated fair values of advances by calculating the present value of expected future cash flows from the advances and excluding the amount of the accrued interest receivable. The discount rates used in these calculations are the replacement advance rates based on the market observable LIBOR curve for advances with similar terms as of September 30, 2008 and December 31, 2007. In accordance with the Regulator’s advances regulations, advances with a maturity or repricing period greater than six months require a prepayment fee sufficient to make the Bank financially indifferent to the borrower’s decision to prepay the advances, thereby removing prepayment risk from the fair value calculation.

Mortgage loans held for portfolio. The estimated fair values for mortgage loans are determined based on quoted market prices of similar mortgage loans available in the pass-through securities market.

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These prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions.

Accrued interest receivable and payable. The estimated fair value approximates the recorded book value.

Derivative assets and liabilities. The Bank calculates the fair value of derivatives using a present value of future cash flows discounted by a market observable rate, predominately LIBOR. The fair values are based on a AA credit rating, which is maintained through the use of collateral agreements.

Derivative instruments are primarily transacted in the institutional dealer market and priced with observable market assumptions at a mid-market valuation point. The Bank does not provide a credit valuation adjustment based on aggregate exposure by derivative counterparty when measuring the fair value of its derivatives. This is because the collateral provisions pertaining to the Bank’s derivatives obviate the need to provide such a credit valuation adjustment. The fair values of the Bank’s derivatives take into consideration the effects of legally enforceable master netting agreements that allow the Bank to settle positive and negative positions and offset cash collateral with the same counterparty on a net basis. The Bank, and each derivative counterparty, have bilateral collateral thresholds that take into account both the Bank’s and the Bank’s counterparty’s credit ratings. As a result of these practices and agreements, the Bank has concluded that the impact of the credit differential between it and its derivative counterparties was sufficiently mitigated to an immaterial level and no further adjustments were deemed necessary to the recorded fair values of derivative assets and liabilities in the Statements of Condition at September 30, 2008 and December 31, 2007.

Deposits. The Bank determines estimated fair values of Bank deposits by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are based on LIBOR.

Borrowings. The Bank determines the estimated fair value of borrowings by calculating the present value of expected future cash flows from the borrowings and reducing this amount for accrued interest payable. The discount rates used in these calculations are based on market observable rates, predominantly LIBOR.

Consolidated obligations. The Bank calculates the fair value of consolidated obligation bonds and discount notes by using the present value of future cash flows using a cost of funds as the discount rate. The cost of funds discount curves are based primarily on the market observable LIBOR rate and to some extent on the Office of Finance cost of funds curve that also is market observable.

Mandatorily redeemable capital stock. The fair value of mandatorily redeemable capital stock is par value, including estimated dividends earned at the time of reclassification from equity to liabilities, until such amount is paid. Capital stock can be acquired by members only at par value and redeemed by the Bank at par value. Capital stock is not traded and no market mechanism exists for the exchange of capital stock outside the cooperative structure.

Commitments to extend credit for mortgage loans. Mortgage loan purchase commitments are recorded as derivatives at their fair values.

The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank at September 30, 2008 and December 31, 2007. Although the Bank uses its best judgment in estimating the fair values of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology.

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For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions. The Fair Value Summary Tables do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.

The carrying values and estimated fair values of the Bank’s financial instruments as of September 30, 2008 were as follows (in thousands):

2008 FAIR VALUE SUMMARY TABLE

Financial Instruments	Carrying Value		Net Unrealized Gains (Losses)		Estimated Fair Value
Assets:
Cash and due from banks	$	7,961	$	—	$	7,961
Interest-bearing deposits		3,059		—		3,059
Federal funds sold		16,775,100		43		16,775,143
Trading securities		4,233,093		—		4,233,093
Held-to-maturity securities		23,893,355		(2,714,085)		21,179,270
Mortgage loans held for portfolio, net		3,337,109		(15,905)		3,321,204
Advances, net		164,285,082		(614,424)		163,670,658
Accrued interest receivable		757,799		—		757,799
Derivative assets		248,663		—		248,663
Liabilities:
Deposits		(7,946,985)		371		(7,946,614)
Securities sold under agreements to repurchase		(259,414)		180		(259,234)
Consolidated obligations, net:
Discount notes		(55,512,638)		(4,250)		(55,516,888)
Bonds		(138,634,570)		1,129,321		(137,505,249)
Mandatorily redeemable capital stock		(35,454)		—		(35,454)
Accrued interest payable		(1,171,472)		—		(1,171,472)
Derivative liabilities		(828,641)		—		(828,641)

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The carrying values and estimated fair values of the Bank’s financial instruments as of December 31, 2007 were as follows (in thousands):

2007 FAIR VALUE SUMMARY TABLE

Financial Instruments	Carrying Value		Net Unrealized Gains (Losses)		Estimated Fair Value
Assets:
Cash and due from banks	$	18,927	$	—	$	18,927
Interest-bearing deposits		3,403		—		3,403
Federal funds sold		14,835,000		955		14,835,955
Trading securities		4,627,545		—		4,627,545
Held-to-maturity securities		22,060,517		(483,138)		21,577,379
Mortgage loans held for portfolio, net		3,526,582		(11,961)		3,514,621
Advances, net		142,867,373		14,669		142,882,042
Accrued interest receivable		824,815		—		824,815
Derivative assets		43,039		—		43,039
Liabilities:
Deposits		(7,135,027)		80		(7,134,947)
Consolidated obligations, net:
Discount notes		(28,347,939)		14,989		(28,332,950)
Bonds		(142,237,042)		(194,267)		(142,431,309)
Mandatorily redeemable capital stock		(55,538)		—		(55,538)
Accrued interest payable		(1,460,113)		—		(1,460,113)
Derivative liabilities		(1,305,132)		—		(1,305,132)

Note 11—Commitments and Contingencies

As described in Note 6, consolidated obligations are backed only by the financial resources of the 12 FHLBanks. The Regulator, under 12 CFR Section 966.9(d), may at any time require any FHLBank to make principal or interest payments due on any consolidated obligations, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. No FHLBank has had to assume or pay the consolidated obligation of another FHLBank.

The par value of the FHLBanks’ outstanding consolidated obligations for which the Bank is jointly and severally liable was approximately $1.1 trillion and $1.0 trillion as of September 30, 2008 and December 31, 2007, respectively, exclusive of the Bank’s own outstanding consolidated obligations.

During the third quarter of 2008, each FHLBank entered into a Lending Agreement with the U.S. Treasury in connection with the U.S. Treasury’s establishment of the Government Sponsored Enterprise Credit Facility (“GSECF”), as authorized by the Housing and Economic Recovery Act of 2008 (“Housing Act”). The GSECF is designed to serve as a contingent source of liquidity for the housing government-sponsored enterprises, including each of the 12 FHLBanks. Any borrowings by one or more of the FHLBanks under the GSECF are considered consolidated obligations with the same joint and several liability as all other consolidated obligations. The terms of any borrowings are agreed to at the time of issuance. Loans under the Lending Agreement are to be secured by collateral acceptable to the U.S. Treasury, which consists of FHLBank advances to members that have been collateralized in accordance with regulatory standards and MBS issued by Fannie Mae or Freddie Mac. Each FHLBank is required to submit to the Federal Reserve Bank of New York, acting as fiscal agent of the U.S. Treasury, a list of eligible collateral, updated on a weekly basis. As of September 30, 2008, the Bank has provided the U.S. Treasury with a listing of collateral amounting to $24.8 billion, which provides for maximum borrowings of $21.5 billion.

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The amount of collateral available can be increased or decreased (subject to the approval of the U.S. Treasury) at any time through the delivery of an updated listing of collateral. As of September 30, 2008, the Bank has not drawn on this available source of liquidity.

The Bank’s outstanding standby letters of credit were as follows:

	As of September 30, 2008	As of December 31, 2007
Outstanding notional (in thousands)	$    7,441,307	$    6,443,273
Original terms	Less than three months to 15 years	Less than three months to 15 years
Final expiration year	2023	2022

The value of the guarantees related to standby letters of credit is recorded in other liabilities and amounted to $23.2 million and $23.1 million as of September 30, 2008 and December 31, 2007, respectively. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to record any additional liability on these commitments.

Commitments that unconditionally obligate the Bank to purchase closed mortgage loans totaled $0 and $9.3 million as of September 30, 2008 and December 31, 2007, respectively. Commitments are generally for periods not to exceed 45 days. Such commitments are recorded as derivatives at their fair values under SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS 149”).

The Bank executes derivatives with major banks and broker-dealers and generally enters into bilateral collateral agreements. As of September 30, 2008 and December 31, 2007, the Bank had pledged, as collateral to broker-dealers who have market risk exposure from the Bank related to derivatives, securities with a carrying value of $439.7 million and $592.1 million, respectively, which can be sold or repledged by those counterparties.

At September 30, 2008, the Bank had committed to the issuance of $3.7 billion (par value) in consolidated obligation bonds, of which $3.7 billion were hedged with associated interest rate swaps, and $136.0 million (par value) in consolidated obligation discount notes. At December 31, 2007, the Bank had committed to the issuance of $50.0 million (par value) in consolidated obligation bonds and $1.7 billion (par value) in consolidated obligation discount notes. There were no related interest rate swaps associated with the issuance of these consolidated obligations.

The Bank is subject to legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate, as of the date of the financial statements, that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition or results of operations.

For a discussion of the loan loss reserve taken by the Bank related to the LBSF receivable, see Note 9.

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Note 12—Transactions with Members and their Affiliates and with Housing Associates

The Bank is a cooperative whose member institutions own almost all of the capital stock of the Bank. Former members own the remaining capital stock to support business transactions still carried on the Bank’s Statements of Condition. All holders of the Bank’s capital stock are able to receive dividends on their investments, to the extent declared by the Bank’s board of directors. All advances are issued to members and eligible “housing associates” under the Federal Home Loan Bank Act of 1932, as amended (“FHLBank Act”), and mortgage loans held for portfolio are purchased from members. The Bank also maintains demand deposit accounts primarily to facilitate settlement activities that are related directly to advances and mortgage loan purchases. All transactions with members are entered into in the ordinary course of the Bank’s business. Transactions with any member that has an officer or director who also is a director of the Bank are subject to the same Bank policies as transactions with other members.

The Bank defines related parties as each of the other FHLBanks and those members with regulatory capital stock outstanding in excess of 10 percent of total regulatory capital stock. Based on this definition, one member institution, Countrywide Bank, FSB (“Countrywide”), which held 22.7 percent of the Bank’s total regulatory capital stock as of September 30, 2008, was considered a related party. Total advances outstanding to Countrywide were $43.5 billion and $47.7 billion as of September 30, 2008 and December 31, 2007, respectively. Total deposits held in the name of Countrywide were $24.2 million and $2.5 billion as of September 30, 2008 and December 31, 2007, respectively. No mortgage loans were acquired from Countrywide during the nine-month periods ended September 30, 2008 and 2007. No mortgage-backed securities were acquired from Countrywide during the nine-month period ended September 30, 2008, compared to $860.2 million and $1.3 billion, respectively, during the three- and nine-month periods ended September 30, 2007.

Note 13—Subsequent Events

On October 3, 2008, the Bank filed suit in New York State Court against LBSF with respect to certain terminated derivative transactions. Later that same day, LBSF filed for bankruptcy protection, and the Bank’s action has now been stayed pursuant to applicable bankruptcy law.

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

Forward-Looking Information

Some of the statements made in this quarterly report on Form 10-Q may be “forward-looking statements,” which include statements with respect to the plans, objectives, expectations, estimates and future performance of the Bank and involve known and unknown risks, uncertainties, and other factors, many of which may be beyond the Bank’s control and which may cause the Bank’s actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. The reader can identify these forward-looking statements through the Bank’s use of words such as “may,” “will,” “anticipate,” “hope,” “project,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “could,” “intend,” “seek,” “target,” and other similar words and expressions of the future. Such forward-looking statements include statements regarding any one or more of the following topics:

• The Bank’s business strategy and changes in operations, including, without limitation, product growth and change in product mix

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• Future performance, including profitability, developments, or market forecasts

• Forward-looking accounting and financial statement effects.

The forward-looking statements may not be realized due to a variety of factors, including, without limitation, those risk factors provided under Item 1A of the Bank’s Form 10-K and those risk factors presented under Item 1A in Part II of this quarterly report on Form 10-Q.

All written or oral statements that are made by or are attributable to the Bank are expressly qualified in their entirety by this cautionary notice. The reader should not place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made. The Bank has no obligation and does not undertake publicly to update, revise, or correct any of the forward-looking statements after the date of this quarterly report, or after the respective dates on which these statements otherwise are made, whether as a result of new information, future events, or otherwise.

The discussion presented below provides an analysis of the Bank’s results of operations and financial condition for the third quarter and first nine months of 2008 and 2007. Management’s discussion and analysis should be read in conjunction with the financial statements and accompanying notes presented elsewhere in the report, as well as the Bank’s audited financial statements for the year ended December 31, 2007.

Executive Summary

General Overview

The Bank is a cooperative whose primary business activity is providing loans, which the Bank refers to as “advances,” to its members and eligible housing associates. The Bank also purchases one-to-four family residential mortgage loans from members, makes grants and subsidized advances under the Affordable Housing Program (“AHP”), and provides certain cash management services to members and eligible nonmembers. The consolidated obligations (“COs”) issued by the Office of Finance on behalf of the FHLBanks are the principal funding source for Bank assets. The Bank is primarily liable for repayment of COs issued on its behalf and is jointly and severally liable for the COs issued on behalf of the other FHLBanks. Deposits, other borrowings, and the issuance of capital stock provide additional funding to the Bank. The Bank delivers competitively-priced credit to help its members meet the credit needs of their communities while historically paying members a competitive dividend.

Financial Condition

As of September 30, 2008, total assets were $213.7 billion, an increase of $24.8 billion, or 13.1 percent, from December 31, 2007. This increase was due primarily to an increase in advances, federal funds sold, and held-to-maturity securities. Advances, the largest asset on the Bank’s balance sheet, increased $21.4 billion, or 15.0 percent, during this same period due to increased demand for advances during the last month of the third quarter of 2008. Also during this period, federal funds sold increased by $1.9 billion, or 13.1 percent, in an effort by the Bank to increase its liquidity position and held-to-maturity securities increased by $1.8 billion, or 8.31 percent, due to the Bank’s purchase of agency MBS.

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As of September 30, 2008, total liabilities were $204.7 billion, an increase of $23.7 billion, or 13.1 percent, from December 31, 2007. This increase was due primarily to a $23.6 billion, or 13.8 percent, increase in consolidated obligations. Consolidated obligation discount notes increased by $27.2 billion, or 95.8 percent, and consolidated obligation bonds decreased by $3.6 billion, or 2.53 percent, during this same period. Due to investors’ reluctance to buy longer-term debt obligations during the third quarter of 2008, the Bank issued large quantities of discount notes.

As of September 30, 2008, total capital was $9.1 billion, an increase of $1.0 billion, or 12.9 percent, from December 31, 2007, primarily as a result of an increase in the Bank’s capital stock. The Bank’s retained earnings were $360.3 million, a decrease of $108.5 million, or 23.1 percent, from December 31, 2007. The reduction in retained earning was due to the establishment of a $170.5 million reserve for a credit loss on a receivable due from Lehman Brothers Special Financing Inc. (“LBSF”), which declared bankruptcy on October 3, 2008, a $87.3 million other-than-temporary impairment loss on the Bank’s private label MBS, and a dividend of $58.9 million for the third quarter of 2008. The Bank continues to meet regulatory capital-to-assets ratios and liquidity requirements.

Results of Operations

The Bank recorded a net loss of $46.1 million for the third quarter of 2008, a decrease of $179.2 million from net income of $133.1 million for the third quarter of 2007. The Bank’s net income for the first nine months of 2008 was $179.2 million, a decrease of $143.0 million from net income of $322.2 million for the same period in 2007. The decrease in net income during the periods was due primarily to the establishment of a $170.5 million reserve for a credit loss on a receivable due from LBSF, with a corresponding charge to other expense, and the recording of an other-than-temporary impairment loss of $87.3 million on the Bank’s private label MBS. The reserve for credit loss on the receivable represents 90.0 percent of the outstanding receivable, which is management’s best estimate of collectability. These amounts were offset partially by a $50.6 million and $182.1 million increase in net interest income during the third quarter and first nine months of 2008, respectively, resulting from higher average advances and MBS balances, and an increase in interest rate spread, during the periods.

The Bank attempts to provide a return on investment which, when combined with providing members access to competitively-priced funding, will be competitive with comparable investments. The Bank assesses the effectiveness of its dividend goal by comparing the dividend rate on its capital stock to three-month average LIBOR. This benchmark is consistent with the Bank’s interest rate risk and capital management goals.

The Bank’s annualized return on equity (“ROE”) was (2.13) percent for the third quarter of 2008, compared to 7.52 percent for the third quarter of 2007. ROE spread to three-month average LIBOR decreased between the periods, equaling (5.04) percent for the third quarter of 2008 as compared to 2.08 percent for the third quarter of 2007. The decrease in this spread was due primarily to a $179.2 million decrease in net income during the period, resulting in a decrease in ROE and ROE spread to three-month average LIBOR.

The Bank’s annualized ROE was 2.84 percent for the first nine months of 2008, compared to 6.65 percent for the first nine months of 2007. ROE spread to three-month average LIBOR decreased between the periods, equaling (0.14) percent for the first nine months of 2008 as compared to 1.26 percent for the first nine months of 2007. The decrease in this spread was due primarily to a $143.0 million decrease in net income during the period, resulting in a decrease in ROE and ROE spread to three-month average LIBOR.

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The Bank’s interest rate spread increased by 12 basis points and eight basis points for the third quarter and first nine months of 2008, respectively, compared to the same periods in 2007. The increase in interest rate spread during the periods was due to an increase in the use of short-term, lower rate funding. Short-term funding rates decreased by more than long-term funding rates during the period. In addition, there was a slight increase in the amount of interest expense reclassified to other income for interest on stand-alone derivatives relating to trading securities as required under GAAP.

Business Outlook

During the quarter ended September 30, 2008, unprecedented instability in the financial markets affecting financial institutions, including government-sponsored enterprises (“GSEs”), significantly increased the volatility in GSE debt pricing, funding and demand. On September 7, 2008, the Federal Housing Finance Agency (the “Finance Agency”), successor to the Federal Housing Finance Board effective on July 30, 2008 (collectively, the “Regulator”), announced that it had placed both Fannie Mae and Freddie Mac into conservatorship. Over the course of the third quarter, FHLBank funding costs associated with issuing long-maturity senior debt, as compared to three-month LIBOR on a swapped cash flow basis, rose sharply relative to short-term debt. This change in the slope of the funding curve reflected general investor reluctance to buy longer-term obligations of the GSEs, coupled with strong investor demand for short-term, high-quality assets. As long-term investors struggled with price declines of longer-term GSE debt, money market funds provided a strong bid for short-term GSE debt. As such, during the quarter, the FHLBanks issued large quantities of discount notes, floating-rate notes, short-term callable bonds and short-term bullet bonds in order to meet this demand. As of September 30, 2008, discount notes comprised 28.6 percent of the Bank’s consolidated obligations, as compared to 16.6 percent as of December 31, 2007.

As a result of the instability in the financial markets:

• On September 9, 2008, the U.S. Department of Treasury (the “Treasury”) entered into a Lending Agreement (the “Lending Agreement”) with the Bank and with each of the other 11 FHLBanks that is identical to the Lending Agreement entered into by the Bank. The FHLBanks entered into these Lending Agreements in connection with the Treasury’s establishment of a Government Sponsored Enterprise Credit Facility that is designed to serve as a contingent source of liquidity for the housing GSEs, including the FHLBanks.

• On September 19, 2008, the Federal Reserve Board announced that to further support market functioning, the Federal Reserve plans to purchase from primary dealers federal agency discount notes, which are short-term debt obligations issued by Fannie Mae, Freddie Mac, and the FHLBanks.

• On October 4, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”).

• On October 7, 2008, federal bank and thrift regulatory agencies announced they would request public comment on proposed regulatory action to lower the risk weight for select obligations of Fannie Mae and Freddie Mac from 20 percent to 10 percent (the “Risk Weighting Proposal”). The agencies also requested comment on whether to reduce the risk weight for FHLBank debt in the same manner.

• On October 14, 2008, the Treasury announced that from the $700 billion EESA, Treasury will make $250 billion in capital available to U.S. financial institutions in the form of preferred stock.

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• On October 14, 2008, the Federal Deposit Insurance Corporation (the “FDIC”) announced its commitment to guarantee new senior unsecured debt issued prior to June 30, 2009 by domestic banks and thrift institutions.

Commencing with the initiation of the rescue of Fannie Mae and Freddie Mac, followed by the conservatorship and subsequent U.S. government actions to address the general credit crisis, investors and dealers became cautious about buying or trading longer-term GSE debt, which increased funding costs and reduced demand. In addition, investors and dealers have exercised caution with respect to longer-term debt of the FHLBanks due to confusion about the level of government support for Fannie Mae and Freddie Mac relative to the FHLBanks. According to the press release announcing the Risk Weighting Proposal, the proposed change in regulation is reflective of the level of financial support the Treasury announced in September 2008 to Fannie Mae and Freddie Mac. This regulation, if adopted without a corresponding change in the risk weight for FHLBank debt, could result in higher investor demand for Fannie Mae and Freddie Mac debt securities relative to similar FHLBank debt securities. Further, in response to the FDIC announcement discussed above, the spreads on agency debt widened significantly as investors anticipate the development and sale of a new debt security that features an explicit guarantee of the FDIC.

These developments have continued into the fourth quarter of 2008. To the extent that the FHLBanks’ cost of funds increase, member institutions may, in turn, experience higher costs for advance borrowings. The continued inability of the Bank to issue long-term debt at attractive pricing could have a material adverse effect on the Bank’s results of operations. To the extent that the Bank’s cost of funds or liquidity is affected negatively for an extended period of time, the Bank’s business and ability to offer advances could be materially adversely affected.

On October 7, 2008, the FDIC issued a proposed rule to raise an insured institution’s base assessment rate based upon its ratio of secured liabilities to domestic deposits. Under the proposed rule, an institution’s ratio of secured liabilities to domestic deposits (if greater than 15 percent) would increase its assessment rate, but the resulting base assessment rate after any such increase could be no more than 50 percent greater than it was before the adjustment. Because all of the Bank’s advances are secured liabilities, the proposed rule, if adopted, could affect negatively member demand for advances. In addition, the FDIC guarantee of certain debt of domestic banks and thrift institutions discussed above may provide members with alternative sources of funding, which could affect negatively member demand for advances. While advance demand increased significantly during the last month of the third quarter of 2008 as a result of the general illiquidity of markets, the Bank does not expect that new advance activity will increase at this rate during the fourth quarter.

On October 9, 2008, the Bank filed a current report on Form 8-K related to certain actions it has taken related to the multiple interest rate swap transactions it had with LBSF, in light of the bankruptcy filings of LBSF and its parent, Lehman Brothers Holdings Inc. (“Lehman”), which is a credit support provider for these obligations of LBSF under such transactions. Due to extreme market volatility at the time the Bank terminated these swap transactions with LBSF, LBSF held collateral of the Bank in excess of the termination payments that may be owed under certain circumstances by the Bank to LBSF under the swap transactions in an amount currently estimated to be approximately $189.4 million. The Bank intends to file proofs of claim, and otherwise pursue its claims, as permitted by law, against LBSF and Lehman in the relevant bankruptcy proceedings. Management evaluated this receivable in accordance with the guidance provided by SFAS 5 and related pronouncements. The Bank recorded a $170.5 million reserve based on management’s estimate of the probable amount that will be realized. The net receivable of $18.9 million is recorded in “Other assets” on the Statements of Condition. Determining the reserve amount requires management to use considerable judgment and is based on the facts currently available. As additional relevant facts become available in future periods, the amount of the reserve may be adjusted accordingly.

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As a result of the recent market conditions, delinquency and foreclosure rates have increased significantly nationwide. Additionally, home prices have fallen in many areas, increasing the likelihood and magnitude of potential losses to lenders of foreclosed real estate. These trends may continue through the end of the year and into the foreseeable future. The uncertainty as to the depth and duration of these trends has led to a significant reduction in the market values of MBS. During the third quarter and first nine months of 2008, the Bank recorded an other-than-temporary impairment charge of $87.3 million related to three private label MBS in its held-to-maturity securities portfolio. Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and that the Bank may record additional material other-than-temporary impairments in future periods, which could affect the Bank’s earnings and retained earnings. See “Risk Management—Credit Risk—Investments” and “Critical Accounting Policies—Fair Values” below for a full discussion of the other-than-temporary impairment.

According to the FDIC, during the third quarter of 2008 eight banks were closed and the FDIC was named receiver, compared to three banks during 2007. Two of the banks that were closed during the third quarter of 2008 were members of the Bank. All outstanding advances to these two banks were paid in full and there was no material effect to the Bank’s financial condition or results of operations. At the time of their closure, these two banks were assigned a credit risk rating of 10 by the Bank (10 being the greatest amount of credit risk). As of September 30, 2008, 29 Bank members were assigned a credit risk rating of 10 by the Bank, compared to 30 at June 30, 2008.

On October 3, 2008, Wells Fargo & Company (“Wells Fargo”) and Wachovia Corporation (“Wachovia”), the parent of Wachovia Bank, National Association, one of the Bank’s 10 largest borrowers as of September 30, 2008, announced they had signed an agreement and plan of merger dated October 3, 2008. The announcement stated that the merger agreement has been approved by the board of directors of Wells Fargo and Wachovia and is subject to customary closing conditions, including regulatory and Wachovia shareholder approval. Wells Fargo is not a member of the Bank. The effects of this merger on the Bank’s financial condition or results of operation cannot be determined at this time.

For the third quarter of 2008, the Bank’s board of directors approved an annualized dividend rate of 2.89 percent. This rate equaled the average three-month LIBOR (London Interbank Offered Rate) for the first nine months of 2008. The annualized dividend rate for the first and second quarter of 2008 was 6.00 percent and 5.75 percent, respectively. The third quarter 2008 annualized dividend rate is lower than previous quarters because of recent volatility in the financial markets and a more conservative financial management approach in light of these conditions. In addition, the Bank will change its dividend declaration and payment schedule beginning in the fourth quarter of 2008 so a dividend can be declared and paid to members after net income is calculated for the preceding quarter. To accommodate this change, the Bank will declare and pay to members any fourth quarter dividend at the end of January 2009.

Management expects to continue to use interest-rate derivatives to hedge the Bank’s MBS and mortgage portfolios. These derivatives assist in mitigating interest-rate and prepayment risk. However, to the extent that they do not qualify for hedge accounting treatment under GAAP, their use could result in earnings volatility. Management also uses derivative instruments to hedge other macro-level risks that do not qualify for hedge accounting treatment under GAAP. However, management seeks to contain the magnitude of mark-to-market adjustments by limiting the use of derivative instruments to hedge macro-level risks.

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Financial Condition

The Bank’s principal assets consist of advances, short- and long-term investments, and mortgage loans held for portfolio. The Bank obtains funding to support its business primarily through the issuance by the Office of Finance on the Bank’s behalf of debt securities in the form of consolidated obligations.

The following table presents the distribution of the Bank’s total assets, liabilities, and capital by major class as of the dates indicated (dollar amounts in thousands). These items are discussed in more detail below:

	As of September 30, 2008			As of December 31, 2007			Increase/(Decrease)
	Amount		Percent of Total	Amount		Percent of Total	Amount		Percent
Interest-bearing deposits	$	3,059	—	$	3,403	—	$	(344)	(10.11)
Federal funds sold		16,775,100	7.85		14,835,000	7.85		1,940,100	13.08
Certificates of deposit		—	—		800,000	0.42		(800,000)	(100.00)
Long-term investments		28,126,448	13.16		25,888,062	13.70		2,238,386	8.65
Mortgage loans, net		3,337,109	1.56		3,526,582	1.87		(189,473)	(5.37)
Advances, net		164,285,082	76.87		142,867,373	75.62		21,417,709	14.99
Other assets		1,191,822	0.56		1,017,344	0.54		174,478	17.15
Total assets	$	213,718,620	100.00	$	188,937,764	100.00	$	24,780,856	13.12
Deposits	$	7,946,985	3.88	$	7,135,027	3.94	$	811,958	11.38
Securities sold under agreements to repurchase		259,414	0.13		—	—		259,414	100.00
Consolidated obligations, net:
Discount notes		55,512,638	27.12		28,347,939	15.67		27,164,699	95.83
Bonds		138,634,570	67.74		142,237,042	78.62		(3,602,472)	(2.53)
Other liabilities		2,306,930	1.13		3,195,520	1.77		(888,590)	(27.81)
Total liabilities	$	204,660,537	100.00	$	180,915,528	100.00	$	23,745,009	13.12
Capital stock	$	8,700,330	96.05	$	7,556,016	94.19	$	1,144,314	15.14
Retained earnings		360,307	3.98		468,779	5.84		(108,472)	(23.14)
Accumulated other comprehensive loss		(2,554)	(0.03)		(2,559)	(0.03)		5	0.20
Total capital	$	9,058,083	100.00	$	8,022,236	100.00	$	1,035,847	12.91

Advances

Advances were $164.3 billion at September 30, 2008, an increase of $21.4 billion, or 15.0 percent, from December 31, 2007. This increase was due to a significant increase in member demand for advances during the last month of the third quarter of 2008 as a result of the general illiquidity of markets. During the third quarter of 2008, advances made totaled $60.9 billion and advances repaid totaled $42.1 billion, resulting in a net increase of $18.8 billion during the period. At September 30, 2008, 77.8 percent of the Bank’s advances were fixed-rate and the majority of the Bank’s variable-rate advances were indexed primarily to LIBOR. The Bank also offers variable-rate advances tied to the federal funds rate, prime rate and CMS (constant maturity swap) rates.

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The concentration of the Bank’s advances to its 10 largest borrowing member institutions was as follows:

	Advances to 10 largest borrowing member institutions		Percent of total advances outstanding
September 30, 2008	$	104.7 billion	64.9%
December 31, 2007		97.6 billion	69.6%

Investments

The Bank maintains a portfolio of investments for liquidity purposes, to provide for the availability of funds to meet member credit needs and to provide additional earnings. Investment income also enhances the Bank’s capacity to meet its commitment to affordable housing and community investment, to cover operating expenses, and to satisfy the Bank’s annual Resolution Funding Corporation (“REFCORP”) assessment.

The Bank’s short-term investments generally consist of interest-bearing deposits, certificates of deposit, and overnight and term federal funds. The Bank’s long-term investments consist of MBS issued by GSEs or private securities that carry the highest rating from Moody’s or S&P when purchased, securities issued by the U.S. government or U.S. government agencies, and consolidated obligations issued by other FHLBanks. The long-term investment portfolio generally provides the Bank with higher returns than those available in the short-term money markets. The following table sets forth more detailed information regarding short- and long-term investments held by the Bank (dollar amounts in thousands):

					Increase/ (Decrease)
	As of September 30, 2008		As of December 31, 2007		Amount		Percent
Short-term investments:
Interest-bearing deposits	$	3,059	$	3,403	$	(344)	(10.11)
Held-to-maturity-Certificates of deposit		—		800,000		(800,000)	(100.00)
Federal funds sold		16,775,100		14,835,000		1,940,100	13.08
Total short-term investments	$	16,778,159	$	15,638,403	$	1,139,756	7.29
Long-term investments:
Trading securities:
Government-sponsored enterprises debt obligations	$	3,938,084	$	4,283,519	$	(345,435)	(8.06)
Other FHLBanks’ bonds		280,853		284,542		(3,689)	(1.30)
State or local housing agency obligations		14,156		59,484		(45,328)	(76.20)
Held-to-maturity securities:
State or local housing agency obligations		109,397		117,988		(8,591)	(7.28)
Mortgage-backed securities:
U.S. agency obligations-guaranteed		40,297		47,460		(7,163)	(15.09)
Government-sponsored enterprises		7,203,990		2,968,441		4,235,549	142.69
Private label		16,539,671		18,126,628		(1,586,957)	(8.75)
Total long-term investments	$	28,126,448	$	25,888,062	$	2,238,386	8.65

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Short-term investments were $16.8 billion at September 30, 2008, an increase of $1.1 billion, or 7.29 percent, from December 31, 2007. During this period, the Bank’s investment in overnight federal funds increased $4.9 billion and its investment in term federal funds decreased by $3.0 billion, resulting in a net increase in federal funds of $1.9 billion. The Bank’s focus on overnight federal funds, and less on term federal funds, was primarily to increase its liquidity position in light of increased advance demand. The increase in federal funds was offset by $800.0 million in maturing certificates of deposit during this same period.

Long-term investments were $28.1 billion at September 30, 2008, an increase of $2.2 billion, or 8.65 percent, from December 31, 2007. The increase in long-term investments during the period was due primarily to activity in the Bank’s MBS portfolio. The Bank purchased $3.3 billion, $1.5 billion and $147.8 million in agency MBS during the first, second and third quarter of 2008, respectively. These purchases of agency MBS were offset partially by a $1.6 billion decrease in the Bank’s private label MBS portfolio during the first nine months of 2008 due primarily to principal repayments and maturities. The Bank’s continuing decline in its purchase of MBS was due primarily to its inability to issue long-term debt at attractive pricing and increased customer demand for advances.

The Regulator limits an FHLBank’s investment in MBS and asset-backed securities by requiring that the total book value of MBS owned by the FHLBank generally may not exceed 300 percent or, in certain circumstances 600 percent, of the FHLBank’s previous month-end capital plus its mandatorily redeemable capital stock on the day it purchases the securities. The Bank attempts to maintain MBS investments at 295 percent to 300 percent of total capital. Management believes that these investment amounts help to maximize and stabilize earnings. These investments amounted to 262 percent of total capital plus mandatorily redeemable capital stock at both September 30, 2008 and December 31, 2007. The amount of MBS investments has been lower than management’s target due to the lack of attractive MBS securities available for purchase as well as the Bank’s efforts to increase its liquidity position in light of increased advance demand.

The Bank’s held-to-maturity portfolio had a total of 442 securities in an unrealized loss position, with total gross unrealized losses of $2.7 billion as of September 30, 2008. The Bank evaluates its individual held-to-maturity investment securities holdings for other-than-temporary impairment on a quarterly basis, or more frequently if events or changes in circumstances indicate that these investments may be other-than-temporarily impaired. As part of its impairment analysis, the Bank considers its ability and intent to hold each security for a sufficient time to allow for any anticipated recovery of unrealized losses.

To determine which individual securities are at risk for other-than-temporary impairment, the Bank considers various characteristics of each security including, but not limited to, the following: the credit rating and related outlook or status; the underlying type of collateral; the duration and amount of the unrealized loss; and any credit enhancements or insurance. The relative importance of this information varies based on the facts and circumstances surrounding each security, as well as the economic environment at the time of assessment. As a result of this security-level review, the Bank identifies individual securities believed to be at risk for other-than-temporary impairment, which are evaluated further by analyzing the performance of the security. Securities with weaker performance measures are evaluated by estimating projected cash flows based on the structure of the security and certain assumptions, such as prepayments, default rates and loss severity, to determine whether the Bank expects to receive all of the contractual cash flows as scheduled.

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Based on the Bank’s impairment analysis at September 30, 2008, the Bank recognized an other-than-temporary impairment loss of $87.3 million related to three private label MBS in its held-to-maturity securities portfolio (the “OTTI Charge”). The Bank recognizes an other-than-temporary impairment when it is probable that the Bank will not collect all scheduled contractual cash flows. The amount of other-than-temporary impairment is calculated as the difference between the current carrying value and the securities’ fair value.

The following table presents the indicated loss of contractual cash flows, the estimated date of first loss of contractual cash flows, and the impairment charge recognized for each of the securities for which an other-than-temporary impairment charge was recognized (in thousands):

Security	Indicated Loss of Contractual Cash Flows		Date of First Indicated Loss	OTTI Charge Recognized
#1	$	28	2025	$	40,992
#2		12	2032		32,995
#3		4	2027		13,357
Total	$	44		$	87,344

The losses noted above were based upon expected losses from prime based collateral, which is consistent with the originator’s original classification, adjusted for actual performance to date. However, each of these bonds has at least one NRSRO that considers the collateral to be Alt-A. In the event these bonds have performance more closely aligned with Alt-A collateral expectations, the indicated losses noted above could be different.

The remainder of the Bank’s held-to-maturity securities portfolio that has not been designated as other-than-temporarily impaired has experienced unrealized losses and decreases in fair value due to interest rate volatility, illiquidity in the marketplace, and credit deterioration in the U.S. mortgage markets. This decline in fair value is considered temporary as the Bank expects to collect all contractual cash flows and the Bank has the ability and intent to hold these investments to maturity. The ability and intent of the Bank is demonstrated by the fact that the Bank is well capitalized, has sufficient liquidity and has no need to sell these securities, nor has the Bank entered into any contractual constraints that would impact such intent and ability.

Mortgage Loans Held for Portfolio

Mortgage loans held for portfolio were $3.3 billion, a decrease of $189.5 million, or 5.37 percent, from December 31, 2007. Mortgage loans comprised 1.56 percent of the Bank’s total assets as of September 30, 2008 compared to 1.87 percent as of December 31, 2007. Mortgage loans purchased under the Mortgage Purchase Program (“MPP”) increased by $49.7 million from December 31, 2007 to September 30, 2008. Mortgage loans purchased under the Mortgage Partnership Finance^® Program (“MPF^® Program”) and the Affordable Multifamily Participation Program (“AMPP”) decreased by $238.7 million and $459.0 thousand, respectively, during this same period due to the maturity of assets purchased. In 2006, the Bank ceased purchasing assets under AMPP, and in 2008 the Bank ceased purchasing assets under the MPF Program. Early in the third quarter of 2008, the Bank suspended acquisitions of mortgage loans under MPP and the increase in the MPP balance for the period is attributable primarily to purchases during the first quarter of 2008.

As of September 30, 2008 and December 31, 2007, the Bank’s mortgage loan portfolio was concentrated in the Southeast because those members selling loans to the Bank were located primarily in the Southeast.

Consolidated Obligations

The Bank funds its assets primarily through the issuance of consolidated obligation bonds and, to a lesser extent, consolidated obligation discount notes.

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Consolidated obligation issuances financed 90.8 percent of the $213.8 billion in total assets at September 30, 2008, remaining relatively stable from the financing ratio of 90.3 percent as of December 31, 2007.

Consolidated obligation bonds were $138.6 billion at September 30, 2008, a decrease of $3.6 billion, or 2.53 percent, from December 31, 2007. Consolidated obligation bonds outstanding at September 30, 2008 and December 31, 2007 were primarily fixed-rate debt. However, the Bank often enters into derivatives simultaneously with the issuance of consolidated obligation bonds to convert the rates on them, in effect, into a short-term interest rate, usually based on LIBOR. Of the par value of $138.4 billion of consolidated obligation bonds outstanding as of September 30, 2008, $92.8 billion, or 67.1 percent, had their terms reconfigured through the use of interest rate exchange agreements. The comparable notional amount of such outstanding derivatives at December 31, 2007 was $102.7 billion, or 72.4 percent, of the par value of consolidated obligation bonds.

Consolidated obligation discount notes were $55.5 billion at September 30, 2008, an increase of $27.2 billion, or 95.8 percent, from December 31, 2007. The increase in consolidated obligation discount notes during the period was due to increased demand in the marketplace for short-term debt and a corresponding decrease in demand for longer-term debt in light of market conditions. As such, during the third quarter of 2008, the Bank issued large quantities of discount notes.

Deposits

The Bank offers demand and overnight deposit programs to members primarily as a liquidity management service. In addition, a member that services mortgage loans may deposit in the Bank funds collected in connection with the mortgage loans, pending disbursement of those funds to the owners of the mortgage loan. For demand deposits, the Bank pays interest at the overnight rate.

Most of these deposits represent member liquidity investments, which members may withdraw on demand. Therefore, the total account balance of the Bank’s deposits may be quite volatile. As a matter of prudence, the Bank typically invests deposit funds in liquid short-term assets. Member loan demand, deposit flows, and liquidity management strategies influence the amount and volatility of deposit balances carried at the Bank. Deposits totaled $7.9 billion as of September 30, 2008, compared to $7.1 billion as of December 31, 2007.

To support its member deposits, the FHLBank Act requires the Bank to have as a reserve an amount equal to or greater than the current deposits received from members. These reserves are required to be invested in obligations of the United States, deposits in eligible banks or trust companies, or advances with maturities not exceeding five years. The Bank was in compliance with this depository liquidity requirement as of September 30, 2008.

Other Liabilities

Other liabilities were $2.3 billion at September 30, 2008, a decrease of $888.6 million, or 27.8 percent, from December 31, 2007. This decrease was due primarily to a $476.5 million decrease in derivative liabilities due to the interaction of interest rates on associated derivatives and the early termination of derivative agreements with LBSF, and a $288.6 million decrease in accrued interest payable related to the decrease in consolidated obligation bonds.

Capital and Retained Earnings

Total capital was $9.1 billion at September 30, 2008, an increase of $1.0 billion, or 12.9 percent, from December 31, 2007. An increase in the Bank’s membership and advance balances that resulted in an increase in the Bank’s membership stock and activity-based stock was the primary factor causing the increase in the Bank’s total capital.

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The Bank’s retained earnings were $360.3 million, a decrease of $108.5 million, or 23.1 percent, from December 31, 2007. The reduction in retained earnings was due to the establishment of a $170.5 million reserve for a credit loss on the LBSF receivable, the $87.3 million other-than-temporary impairment charge, and a dividend of $58.9 million for the third quarter of 2008.

The FHLBank Act and Regulator regulations specify that each FHLBank must meet certain minimum regulatory capital standards. The Bank was in compliance with the Regulator’s regulatory capital rules and requirements as shown in the following table (dollar amounts in thousands):

	As of September 30, 2008				As of December 31, 2007
	Required		Actual		Required		Actual
Regulatory capital requirements:
Risk based capital	$	2,733,723	$	9,096,091	$	981,647	$	8,080,333
Total capital-to-assets ratio		4.00%		4.26%		4.00%		4.28%
Total regulatory capital*	$	8,548,745	$	9,096,091	$	7,557,511	$	8,080,333
Leverage ratio		5.00%		6.38%		5.00%		6.42%
Leverage capital	$	10,685,931	$	13,644,137	$	9,446,888	$	12,120,499

* The Regulator has determined that mandatorily redeemable capital stock is considered capital for regulatory purposes, and “total regulatory capital” includes the Bank’s $35.5 million and $55.5 million in mandatorily redeemable capital stock at September 30, 2008 and December 31, 2007, respectively.

As of September 30, 2008, the Bank had capital stock subject to mandatory redemption from 11 former members, consisting of B2 activity-based stock. The Bank is not required to redeem or repurchase such activity-based stock until the later of the expiration of the five-year redemption period or the activity’s maturity date. In accordance with the Bank’s current practice, if activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding, the Bank will repurchase the excess activity-based stock if the dollar amount of excess stock exceeds the threshold specified by the Bank, which is currently $100 thousand. As of September 30, 2008 and December 31, 2007, the Bank’s activity-based stock included $13.0 million and $12.4 million, respectively, of excess shares subject to repurchase by the Bank at its discretion. The Bank’s excess stock threshold and standard repurchase practice may be changed at the Bank’s discretion with proper notice to members.

Results of Operations

Net Income

The following table sets forth the Bank’s significant income items for the third quarter and first nine months of 2008 and 2007, and provides information regarding the changes during the periods (dollar amounts in thousands):

	Three Months Ended September 30,				Increase/ (Decrease)		Increase/ (Decrease) %	Nine Months Ended September 30,				Increase/ (Decrease)		Increase/ (Decrease) %
	2008		2007					2008		2007
Net interest income	$	237,861	$	187,245	$	50,616	27.03	$	686,200	$	504,079	$	182,121	36.13
Other (loss) income		(101,163)		20,276		(121,439)	(598.93)		(187,805)		12,288		(200,093)	(1,628.36)
Other expense		199,558		25,756		173,802	674.80		254,308		76,638		177,670	231.83
Total assessments		(16,619)		48,462		(65,081)	(134.29)		64,867		117,476		(52,609)	(44.78)
Net (loss) income		(46,106)		133,142		(179,248)	(134.63)		179,205		322,181		(142,976)	(44.38)

The Bank recorded a net loss of $46.1 million for the third quarter of 2008, a decrease of $179.2 million from net income of $133.1 million for the third quarter of 2007. The Bank’s net income for the first nine months of 2008 was $179.2 million, a decrease of $143.0 million from net income of $322.2 million for the same period in 2007.

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The decrease in net income during the periods was due primarily to the establishment of a $170.5 million reserve for a credit loss on a receivable due from LBSF, which declared bankruptcy on October 3, 2008, with a corresponding charge to other expense, and the $87.3 million other-than-temporary impairment charge.

Net Interest Income

The primary source of the Bank’s earnings is net interest income. Net interest income equals interest earned on assets (including member advances, mortgage loans, MBS held in portfolio, and other investments), less the interest expense incurred on consolidated obligations, deposits, and other borrowings. Also included in net interest income are miscellaneous related items such as prepayment fees earned and the amortization of debt issuance discounts, concession fees and SFAS 133-related adjustments.

The following table presents spreads between the average yield on total interest-earning assets and the average cost of interest-bearing liabilities for the third quarter and first nine months of 2008 and 2007 (dollar amounts in thousands). The interest rate spread is affected by the inclusion or exclusion of net interest income/expense associated with the Bank’s derivatives. For example, if the derivatives qualify for fair-value hedge accounting under SFAS 133, the net interest income/expense associated with the derivative is included in the calculation of interest rate spread. If the derivatives do not qualify for fair-value hedge accounting under SFAS 133 (“SFAS 133 non-qualifying hedges”), the net interest income/expense associated with the derivatives is excluded from the calculation of the interest rate spread. There are also numerous amortizations associated with SFAS 133 basis adjustments that are reflected in net interest income, which affect interest rate spread. As noted in the tables below, during the third quarter and first nine months of 2008, compared to the same periods in 2007, the interest rate spread increased by 12 basis points and eight basis points, respectively. This increase was due to:

• an increase in the use of short-term, lower rate funding. Short-term funding rates also decreased by more than long-term funding rates during the period

• a slight increase in the amount of interest expense reclassified to other income for interest on stand-alone derivatives relating to trading securities as required under GAAP.

40

Spread and Yield Analysis

	Three Months Ended September 30,
	2008					2007
	Average Balance		Interest		Yield/ Rate	Average Balance		Interest		Yield/ Rate
Assets
Federal funds sold	$	13,493,273	$	76,584	2.26%	$	16,714,860	$	222,679	5.29%
Interest-bearing deposits (1)		355,859		1,846	2.06%		73,512		1,007	5.43%
Certificates of deposit		959,783		6,738	2.79%		926,420		12,713	5.44%
Long-term investments (2)		30,075,105		377,015	4.99%		23,476,592		301,803	5.10%
Advances		151,194,235		1,041,572	2.74%		120,384,709		1,669,410	5.50%
Mortgage loans held for portfolio (3)		3,382,666		45,331	5.33%		3,402,034		45,514	5.31%
Loans to other FHLBanks		6,565		27	1.64%		3,261		44	5.35%
Total interest-earning assets		199,467,486		1,549,113	3.09%		164,981,388		2,253,170	5.42%
Allowance for credit losses on mortgage loans		(892)					(687)
Other assets		2,567,581					2,928,316
Total assets	$	202,034,175				$	167,909,017
Liabilities and Capital
Demand and overnight deposits	$	4,903,822		23,029	1.87%	$	5,934,648		76,736	5.13%
Term deposits		—		—	—		4,811		65	5.36%
Other interest-bearing deposits (4)		4,125		22	2.12%		92,844		1,242	5.31%
Short-term borrowings		38,894,650		237,493	2.43%		15,833,877		202,819	5.08%
Long-term debt		144,158,159		1,049,116	2.90%		134,736,227		1,779,371	5.24%
Other borrowings		248,299		1,592	2.55%		407,465		5,692	5.54%
Total interest-bearing liabilities		188,209,055		1,311,252	2.77%		157,009,872		2,065,925	5.22%
Noninterest-bearing deposits		—					28,353
Other liabilities		5,225,413					3,844,012
Total capital		8,599,707					7,026,780
Total liabilities and capital	$	202,034,175				$	167,909,017
Net interest income and net yield on interest-earning assets			$	237,861	0.47%			$	187,245	0.45%
Interest rate spread					0.32%					0.20%
Average interest-earning assets to interest-bearing liabilities					105.98%					105.08%

Notes

(1) Interest-bearing deposits includes amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.

(2) Trading securities are included in the Long-term investments line at fair value.

(3) Nonperforming loans are included in average balances used to determine average rate.

(4) Other interest-bearing deposits includes amounts recognized for the right to return cash collateral received under master netting agreements with derivative counterparties.

41

Spread and Yield Analysis

	Nine Months Ended September 30,
	2008					2007
	Average Balance		Interest		Yield/ Rate	Average Balance		Interest		Yield/ Rate
Assets
Federal funds sold	$	11,080,022	$	216,959	2.62%	$	13,377,382	$	532,451	5.32%
Interest-bearing deposits (1)		1,180,710		24,753	2.80%		66,746		2,808	5.62%
Certificates of deposit		738,960		17,383	3.14%		874,295		35,321	5.40%
Long-term investments (2)		28,702,241		1,086,958	5.06%		23,372,356		894,673	5.12%
Advances		149,412,973		3,569,797	3.19%		108,310,633		4,420,272	5.46%
Mortgage loans held for portfolio (3)		3,463,163		138,540	5.34%		3,224,818		128,000	5.31%
Loans to other FHLBanks		4,814		77	2.14%		1,172		47	5.36%
Total interest-earning assets		194,582,883		5,054,467	3.47%		149,227,402		6,013,572	5.39%
Allowance for credit losses on mortgage loans		(947)					(701)
Other assets		2,684,963					2,725,939
Total assets	$	197,266,899				$	151,952,640
Liabilities and Capital
Demand and overnight deposits	$	5,811,046		102,310	2.35%	$	5,216,957		202,777	5.20%
Term deposits		—		—	—		8,161		322	5.28%
Other interest-bearing deposits (4)		19,599		384	2.62%		139,979		5,572	5.32%
Short-term borrowings		32,964,362		687,379	2.79%		9,315,066		357,976	5.14%
Long-term debt		143,953,644		3,575,479	3.32%		126,623,067		4,918,100	5.19%
Other borrowings		108,902		2,715	3.33%		620,331		24,746	5.33%
Total interest-bearing liabilities		182,857,553		4,368,267	3.19%		141,923,561		5,509,493	5.19%
Noninterest-bearing deposits		7,968					27,905
Other liabilities		5,959,934					3,521,240
Total capital		8,441,444					6,479,934
Total liabilities and capital	$	197,266,899				$	151,952,640
Net interest income and net yield on interest-earning assets			$	686,200	0.47%			$	504,079	0.45%
Interest rate spread					0.28%					0.20%
Average interest-earning assets to interest-bearing liabilities					106.41%					105.15%

Notes

(1) Interest-bearing deposits includes amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.

(2) Trading securities are included in the Long-term investments line at fair value.

(3) Nonperforming loans are included in average balances used to determine average rate.

(4) Other interest-bearing deposits includes amounts recognized for the right to return cash collateral received under master netting agreements with derivative counterparties.

Net interest income for the periods presented was affected by changes in average balances (volume change) and changes in average rates (rate change) of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected the Bank’s interest income and interest expense (in thousands). As noted in the table, the overall change in net interest income during the third quarter and first nine months of 2008, compared to the same periods in 2007, was primarily volume related.

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Volume and Rate Table*

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008 vs. 2007						2008 vs. 2007
	Volume		Rate		Increase (Decrease)		Volume		Rate		Increase (Decrease)
Increase (decrease) in interest income:
Federal funds sold	$	(36,726)	$	(109,369)	$	(146,095)	$	(79,704)	$	(235,788)	$	(315,492)
Interest-bearing deposits		1,799		(960)		839		24,040		(2,095)		21,945
Certificates of deposit		442		(6,417)		(5,975)		(4,850)		(13,088)		(17,938)
Long-term investments		82,890		(7,678)		75,212		201,941		(9,656)		192,285
Advances		354,764		(982,602)		(627,838)		1,345,088		(2,195,563)		(850,475)
Mortgage loans held for portfolio		(260)		77		(183)		9,528		1,012		10,540
Loans to other FHLBanks		26		(43)		(17)		72		(42)		30
Total		402,935		(1,106,992)		(704,057)		1,496,115		(2,455,220)		(959,105)
Increase (decrease) in interest expense:
Demand and overnight deposits		(11,510)		(42,197)		(53,707)		20,915		(121,382)		(100,467)
Term deposits		(32)		(33)		(65)		(161)		(161)		(322)
Other interest-bearing deposits		(749)		(471)		(1,220)		(3,262)		(1,926)		(5,188)
Short-term borrowings		181,671		(146,997)		34,674		556,599		(227,196)		329,403
Long-term debt		116,901		(847,156)		(730,255)		606,350		(1,948,971)		(1,342,621)
Other borrowings		(1,719)		(2,381)		(4,100)		(15,143)		(6,888)		(22,031)
Total		284,562		(1,039,235)		(754,673)		1,165,298		(2,306,524)		(1,141,226)
Increase (decrease) in net interest income	$	118,373	$	(67,757)	$	50,616	$	330,817	$	(148,696)	$	182,121

* Volume change is calculated as the change in volume multiplied by the previous rate, while rate change is the change in rate multiplied by the previous volume. The rate/volume change, change in rate multiplied by change in volume, is allocated between volume change and rate change at the ratio each component bears to the absolute value of its total.

The table below outlines the overall effect of hedging activities on net interest income and other income (loss) related results (in thousands). For a description regarding the individual interest components discussed below, see the Bank’s Form 10-K.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Net interest income	$	237,861	$	187,245	$	686,200	$	504,079
Interest components of hedging activities included in net interest income:
Hedging advances	$	(470,166)	$	176,930	$	(1,005,827)	$	491,647
Hedging consolidated obligations		241,721		(106,076)		650,793		(324,401)
Hedging related amortization		(16,016)		(320)		(2,919)		(15,093)
Net (decrease) increase in net interest income	$	(244,461)	$	70,534	$	(357,953)	$	152,153
Interest components of derivative activity included in other income (loss):
Purchased options	$	6,990	$	327	$	16,578	$	981
Synthetic macro funding		(11,297)		(2,794)		(25,117)		(7,360)
Trading securities		(36,514)		(2,998)		(88,528)		(12,033)
Other		—		25		41		77
Net decrease in other (loss) income	$	(40,821)	$	(5,440)	$	(97,026)	$	(18,335)

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Other Income (Loss)

The Bank’s other income (loss) is composed primarily of net gains (losses) on trading securities and net losses on derivatives and hedging activities. The following table presents the components of other income (loss) (in thousands):

	Three Months Ended September 30,				Increase (Decrease)		Nine Months Ended September 30,				Increase (Decrease)
	2008		2007				2008		2007
Other Income (Loss):
Service fees	$	539	$	562	$	(23)	$	1,799	$	1,892	$	(93)
Net gains (losses) on trading securities		31,070		92,538		(61,468)		(50,968)		19,723		(70,691)
Realized loss on held-to-maturity securities		(87,344)		—		(87,344)		(87,344)		—		(87,344)
Net losses on derivatives and hedging activities		(45,299)		(72,816)		27,517		(51,219)		(9,898)		(41,321)
Other		(129)		(8)		(121)		(73)		571		(644)
Total other (loss) income	$	(101,163)	$	20,276	$	(121,439)	$	(187,805)	$	12,288	$	(200,093)

The Bank hedges trading securities with derivative transactions, and the income effect of the market-value change for these securities under SFAS 115 during the third quarter and the first nine months of 2008 and 2007 was offset by market-value changes in the related derivatives. The overall changes in other income (loss) for the third quarter and first nine months of 2008, compared to the same periods in 2007, were caused primarily by the OTTI Charge and by adjustments required to report trading securities at fair value, as required by GAAP, and hedging-related adjustments, which are reported in the overall hedging activities (including those related to trading securities).

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The Bank also records all gains or losses, comprising changes in fair value and interest paid or received, of SFAS 133 non-qualifying hedges in the net losses on derivatives and hedging activities classification. The following table details each of the components of net losses on derivatives and hedging activities (in thousands):

Net Losses on Derivatives and Hedging Activities
	Advances		Purchased Options, Macro Hedging and Synthetic Macro Funding		Investments		MPF/MPP Loans		Consolidated Obligations Bonds		Consolidated Obligations Discount Notes		Intermediary Positions and Other		Total
Three Months Ended September 30, 2008
Interest-related	$	—	$	(4,307)	$	(36,514)	$	—	$	—	$	—	$	—	$	(40,821)
SFAS 133 qualifying fair value hedges		(283,440)		—		—		—		56,683		(215)		—		(226,972)
SFAS 133 non-qualifying hedges and other		—		(25,943)		(76,318)		(59)		—		—		324,814		222,494
Total (losses) gains	$	(283,440)	$	(30,250)	$	(112,832)	$	(59)	$	56,683	$	(215)	$	324,814	$	(45,299)
Three Months Ended September 30, 2007
Interest-related	$	—	$	(2,467)	$	(2,998)	$	—	$	—	$	—	$	25	$	(5,440)
SFAS 133 qualifying fair value hedges		9,740		—		5		—		9,204		231		—		19,180
SFAS 133 non-qualifying hedges and other		—		2,217		(89,493)		739		—		—		(19)		(86,556)
Total gains (losses)	$	9,740	$	(250)	$	(92,486)	$	739	$	9,204	$	231	$	6	$	(72,816)
Nine Months Ended September 30, 2008
Interest-related	$	—	$	(8,539)	$	(88,528)	$	—	$	—	$	—	$	41	$	(97,026)
SFAS 133 qualifying fair value hedges		(293,603)		—		—		—		60,994		(1,445)		—		(234,054)
SFAS 133 non-qualifying hedges and other		—		(31,001)		(13,760)		(205)		—		—		324,827		279,861
Total (losses) gains	$	(293,603)	$	(39,540)	$	(102,288)	$	(205)	$	60,994	$	(1,445)	$	324,868	$	(51,219)
Nine Months Ended September 30, 2007
Interest-related	$	—	$	(6,379)	$	(12,033)	$	—	$	—	$	—	$	77	$	(18,335)
SFAS 133 qualifying fair value hedges		19,664		—		5		—		5,628		231		—		25,528
SFAS 133 non-qualifying hedges and other		—		3,213		(20,669)		446		—		—		(81)		(17,091)
Total gains (losses)	$	19,664	$	(3,166)	$	(32,697)	$	446	$	5,628	$	231	$	(4)	$	(9,898)

The amounts reported for SFAS 133 non-qualifying hedges and other, included in the column titled “Intermediary Positions and Other,” increased during the third quarter and first nine months of 2008, compared to the same periods in 2007. These increases are due to an adjustment to a payable amount due to LBSF, which the Bank declared in default. The adjustment represents the difference between the payable amount due as of the event of default date and the payable amount due as of the settlement date. In this instance, there were considerable market swings that account for the change in value between the two dates. The adjustment amount was offset partially by amounts reported in the SFAS 133 qualifying fair value hedges component of Advances and Consolidated Obligation Bonds in the table above; which represent ineffectiveness in SFAS 133 fair value hedges.

45

Management generally uses derivative instruments to hedge net interest income, with a primary goal of stabilizing the interest-rate spread over time and mitigating interest-rate risk and cash-flow variability.

Non-interest Expense

Non-interest expense during the third quarter and first nine months of 2008 increased 178.6 percent and 76.7 percent, respectively, compared to the same periods in 2007. The increase during the periods was due to the $170.5 million provision for credit losses on the LBSF receivable recorded in other expense during the third quarter of 2008.

Liquidity and Capital Resources

Liquidity is necessary to satisfy members’ borrowing needs on a timely basis, repay maturing and called consolidated obligations, and meet other obligations and operating requirements. Many members rely on the Bank as a source of standby liquidity, and the Bank attempts to be in a position to meet member funding needs on a timely basis.

The Regulator’s regulations and Bank policy require the Bank to maintain contingent liquidity in an amount sufficient to meet its liquidity needs for five business days if it is unable to access the capital markets. In addition, the Bank attempts to maintain sufficient liquidity to service debt obligations for at least 90 days, assuming restricted debt market access. At times, the Bank did not meet its 90-day debt service goal during the quarter ended September 30, 2008 due to an increased reliance on discount notes and other short-term debt because of their attractive pricing.

The Bank’s principal source of liquidity is consolidated obligation debt instruments, which carry GSE status and are rated Aaa/P-1 by Moody’s and AAA/A-1+ by S&P. To provide liquidity, the Bank also may use other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks. These funding sources depend on the Bank’s ability to access the capital markets at competitive market rates. Although the Bank maintains secured and unsecured lines of credit with money market counterparties, the Bank’s income and liquidity would be affected adversely if it were not able to access the capital markets at competitive rates for an extended period. Historically, the FHLBanks have had excellent capital market access, although the FHLBanks have experienced a decrease in investor demand for consolidated obligation bonds since mid- July 2008, and this decrease in demand has intensified, particularly with respect to long-term COs, since September 2008. However, during this time, the Bank has increased its issuance of short-term discount notes as an alternative source of funding.

During the third quarter of 2008, each FHLBank entered into a Lending Agreement with the U.S. Treasury in connection with the U.S. Treasury’s establishment of the Government Sponsored Enterprise Credit Facility (“GSECF”), as authorized by the Housing Act. The GSECF is designed to serve as a contingent source of liquidity for the housing government-sponsored enterprises, including each of the 12 FHLBanks. Any borrowings by one or more of the FHLBanks under the GSECF are considered consolidated obligations with the same joint and several liability as all other consolidated obligations. The terms of any borrowings are agreed to at the time of issuance. Loans under the Lending Agreement are to be secured by collateral acceptable to the U.S. Treasury, which consists of FHLBank advances to members that have been collateralized in accordance with regulatory standards and MBS issued by Fannie Mae or Freddie Mac. The maximum borrowings under the Lending Agreement are subject to the federal debt ceiling limits and are based upon eligible collateral. Each FHLBank is required to submit to the Federal Reserve Bank of New York, acting as fiscal agent of the U.S. Treasury, a list of eligible collateral, updated on a weekly basis. As of September 30, 2008, the Bank has provided the U.S. Treasury with a listing of advance collateral amounting to $24.8 billion, which provides for maximum borrowings of $21.5 billion.

46

The amount of collateral can be increased or decreased (subject to the approval of the U.S. Treasury) at any time through the delivery of an updated listing of collateral. As of September 30, 2008, the Bank has not drawn on this available source of liquidity.

Contingency plans are in place that prioritize the allocation of liquidity resources in the event of operational disruptions at the Bank or the Office of Finance, as well as systemic Federal Reserve wire transfer system disruptions. Under the Housing Act, the Secretary of Treasury has the authority, at his or her discretion, to purchase consolidated obligations, subject to the general federal debt ceiling limits. Previously, the FHLBank Act had authorized the Secretary of Treasury, at his or her discretion, to purchase consolidated obligations up to an aggregate principal amount of $4 billion. No borrowings under this latter authority have been outstanding since 1977 and the Bank has no immediate plans to request the Treasury to exercise the authority under the Housing Act.

Off-balance Sheet Commitments

The Bank’s primary off-balance sheet commitments are as follows:

• The Bank has joint and several liability for all FHLBank consolidated obligations

• The Bank has outstanding commitments arising from standby letters of credit.

Should an FHLBank be unable to satisfy its payment obligation under a consolidated obligation for which it is the primary obligor, any of the other FHLBanks, including the Bank, could be called upon to repay all or any part of such payment obligation, as determined or approved by the Regulator. The Bank considers the joint and several liability as a related party guarantee. These related party guarantees meet the scope exceptions in FIN 45. Accordingly, the Bank has not recognized a liability for its joint and several obligations related to other FHLBanks’ consolidated obligations at September 30, 2008 or December 31, 2007. As of September 30, 2008, the FHLBanks had $1.3 trillion in aggregate par value of consolidated obligations issued and outstanding, $194.1 billion of which was attributable to the Bank.

As of September 30, 2008, the Bank had outstanding standby letters of credit of approximately $7.4 billion with original terms of less than three months to 15 years, with the longest final expiration in 2023. Commitments to extend credit, including standby letters of credit, are agreements to lend. The Bank issues a standby letter of credit for the account of a member in exchange for a fee. A member may use these standby letters of credit to facilitate a financing arrangement. The Bank requires its borrowers, upon the effective date of the letter of credit through its expiration, to collateralize fully the face amount of any letter of credit issued by the Bank, as if such face amount were an advance to the borrower. If the Bank is required to make payment for a beneficiary’s draw, the Bank converts such paid amount to an advance to the member. The Bank’s underwriting and collateral requirements for standby letters of credit are the same as those requirements for advances. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have an allowance for credit losses for these unfunded letters of credit as of September 30, 2008.

Contractual Obligations

As of September 30, 2008, there has not been a material change in the Bank’s contractual obligations reported in the Bank’s Form 10-K.

47

Risk Management

The Bank’s lending, investment, and funding activities and the use of derivative hedge instruments expose the Bank to a number of risks, including any one or more of the following:

• Market risk, which is the risk that the market value, or estimated fair value, of the Bank’s portfolio will decline as a result of changes in interest rates

• Liquidity risk, which is the risk that the Bank will be unable to meet its obligations as they come due or meet the credit needs of its members and associates in a timely and cost-efficient manner

• Credit risk, which is the risk that the market value of an obligation will decline as a result of deterioration in creditworthiness, or that the amount will not be realized

• Operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events, as well as reputation and legal risks associated with business practices or market conduct that the Bank may undertake

• Business risk, which is the risk of an adverse effect on the Bank’s profitability resulting from external factors that may occur in both the short term and long term.

A detailed discussion of the Bank’s management of these risks is contained in the Bank’s Form 10-K and under “Item 3. Quantitative and Qualitative Disclosure About Market Risk” below.

Credit Risk

Credit risk is defined as the risk of loss due to defaults on principal and interest payments on advances, mortgage-backed securities and other investments, derivatives, mortgage loans and unsecured extensions of credit.

Advances

Secured advances to member financial institutions account for the largest category of Bank assets; thus, advances are the Bank’s principal source of credit risk exposure. The Bank uses a risk-focused approach to credit and collateral underwriting. The Bank attempts to reduce credit risk on advances by monitoring the financial condition of borrowers and the quality and value of the assets members pledge as eligible collateral.

The Bank utilizes a credit risk rating system for its members, which focuses primarily on an institution’s overall financial health and takes into account quality of assets, earnings, and capital position. The Bank assigns each borrower that is an insured depository institution a credit risk rating from one to 10 according to the relative amount of credit risk such borrower poses to the Bank (one being the least amount of credit risk and 10 the greatest amount of credit risk). In general, borrowers in categories eight through 10 may have more restrictions on the types of collateral they may use to secure advances, may be required to maintain higher collateral maintenance levels and deliver loan collateral, may be restricted from obtaining convertible advances and may face more stringent collateral reporting requirements. At times, the Bank may place more restrictive requirements on a borrower than those generally applicable to borrowers with the same rating based upon management’s assessment of the borrower and its collateral.

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The following table sets forth the number of borrowers and the par amount of advances outstanding to borrowers with the specified ratings as of the specified dates (dollar amounts in thousands). The Bank began utilizing this credit risk rating system during the quarter ended June 30, 2008:

	As of September 30, 2008			As of June 30, 2008
Rating	Number of Borrowers	Outstanding Advances		Number of Borrowers	Outstanding Advances
1-4	215	$	9,305,740	203	$	8,699,040
5-7	444		81,212,322	427		62,919,884
8	140		15,477,349	139		16,369,958
9	89		51,406,751	90		51,379,489
10	29		1,275,276	30		1,152,768

The Bank establishes a credit limit for each borrower. The credit limit is not a committed line of credit, but rather an indication of the borrower’s general borrowing capacity with the Bank. The Bank determines the credit limit in its sole and absolute discretion, by evaluating a wide variety of factors indicating the borrower’s overall creditworthiness. The credit limit is expressed as a percentage equal to the ratio of the borrower’s total liabilities to the Bank, including the face amount of outstanding letters of credit, the principal amount of outstanding advances and the total exposure of the Bank to the borrower under any derivative contract, to the borrower’s total assets. Generally, borrowers are held to a credit limit of no more than 30.0 percent. Credit limits in excess of 30.0 percent must be approved by the Bank’s Credit and Collateral Committee. The Bank’s maximum allowable credit limit is 50.0 percent. However, the Bank’s board of directors, or a relevant committee thereof, may approve a higher limit at its discretion.

Each borrower must maintain a collateral maintenance level of qualifying collateral that, when discounted to the lendable collateral value (“LCV”), is equal to at least 100 percent of the outstanding principal amount of all advances and other liabilities of the borrower to the Bank. Borrowers with a credit risk rating of nine or 10 currently must maintain higher collateral maintenance levels. The LCV is the value that the Bank assigns to each type of qualifying collateral for purposes of determining the amount of credit that such qualifying collateral will support. For each type of qualifying collateral, the Bank discounts the unpaid principal balance, market value, or other value of the qualifying collateral, to calculate the LCV. The following table provides information about the types of collateral held for the Bank’s advances (dollar amounts in thousands):

	Total Par Value of Outstanding Advances		Discounted Value of Collateral Pledged by Members		First Mortgage Collateral (%)	Securities Collateral (%)	Other Real Estate Related Collateral (%)
As of September 30, 2008	$	161,378,051	$	271,816,256	57.5	12.5	30.0
As of December 31, 2007		140,229,705		227,230,433	67.4	11.8	20.8

In its history, the Bank has never experienced a credit loss on an advance. In consideration of this, and the Bank’s policies and practices detailed above, the Bank has not established an allowance for credit losses on advances as of September 30, 2008.

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Investments

While the Bank faces what it believes to be minimal credit risk on advances to members, it is subject to credit risk on certain unsecured investments, including federal funds sold and MBS.

The Bank follows guidelines approved by its board of directors regarding unsecured extensions of credit, in addition to Regulator regulations with respect to term limits and eligible counterparties. The Bank’s Risk Management Policy (“RMP”) permits the Bank to invest in agency (Fannie Mae, Freddie Mac and Ginnie Mae) and private label MBS, including collateralized mortgage obligations and real estate mortgage-investment conduits, rated AAA by S&P or Aaa by Moody’s at the time of purchase. The table below provides the credit ratings for the Bank’s investment portfolio (in thousands).

	As of September 30, 2008
	AAA				AA				A-
	Book Value		Estimated Fair Value		Book Value		Estimated Fair Value		Book Value		Estimated Fair Value
Trading securities:
Government-sponsored enterprises debt obligations	$	3,938,084	$	3,938,084	$	—	$	—	$	—	$	—
Other FHLBanks’ bonds		280,853		280,853		—		—		—		—
State or local housing agency obligations		14,156		14,156		—		—		—		—
Total trading securities		4,233,093		4,233,093		—		—		—		—
Held-to-maturity securities:
State or local housing agency obligations		93,362		93,971		16,035		16,486		—		—
Mortgage-backed securities:
U.S. agency obligations-guaranteed		40,297		40,557		—		—		—		—
Government-sponsored enterprises		7,203,990		7,106,222		—		—		—		—
Private label		16,266,788		13,694,514		169,381		124,018		103,502		103,502
Total held-to-maturity		23,604,437		20,935,264		185,416		140,504		103,502		103,502
Total investment securities	$	27,837,530	$	25,168,357	$	185,416	$	140,504	$	103,502	$	103,502

As of September 30, 2008, a substantial portion of the Bank’s MBS portfolio consisted of private label MBS. The MBS purchased by the Bank attain triple-A ratings through credit enhancements, which primarily consist of the subordination of the claims of the other tranches of these securities.

Consistent with its practice with respect to members, the Bank monitors the financial condition of investment counterparties to ensure that they are in compliance with the Bank’s RMP and the Regulator’s regulations. Unsecured credit exposure to any counterparty is limited by the credit quality and capital of the counterparty and by the capital of the Bank. On a monthly basis, management produces financial monitoring reports regarding the financial condition of the Bank’s counterparties. These reports are reviewed by the Bank’s board of directors.

The Bank experienced an increase in the market value of unsecured credit exposure in its investment portfolio related to counterparties other than the U.S. government or U.S. government agencies and instrumentalities from $10.6 billion at December 31, 2007 to $13.5 billion as of September 30, 2008. As of September 30, 2008, the Bank had unsecured credit exposure to four non-U.S. government counterparties that was greater than 10 percent of total unsecured credit exposure. The Bank did not have any unsecured credit exposure to counterparties in excess of five percent but less than 10 percent of total unsecured credit exposure.

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The following table summarizes, by investment rating, the unpaid principal balance of the Bank’s private label MBS by year of issuance, as well as the gross unrealized losses and the weighted-average credit enhancement on the applicable securities (dollar amounts in thousands). The weighted-average credit enhancement is the percent of protection in place to absorb losses of principal that could occur on the securities’ combined outstanding principal balances of the relevant senior and subordinate tranches.

	As of September 30, 2008
	AAA				AA				A-
	Outstanding Principal Balance		Gross Unrealized Losses		Outstanding Principal Balance		Gross Unrealized Losses		Outstanding Principal Balance		Gross Unrealized Losses		Subtotal Gross Unrealized Losses		Weighted Average Credit Support Percentage
Prime - Year of Issuance
2003 and prior	$	3,520,569	$	367,266	$	—	$	—	$	—	$	—	$	367,266	4.6
2004		3,482,842		464,077		—		—		—		—		464,077	6.5
2005		3,521,417		572,368		—		—		—		—		572,368	8.5
2006		1,523,649		291,784		—		—						291,784	10.3
2007		2,257,278		464,841		141,215		45,363		—		—		510,204	12.1
2008		382,285		52,669		—		—		—		—		52,669	16.5
Total Prime		14,688,040		2,213,005		141,215		45,363		—		—		2,258,368	8.1
Alt-A- Year of Issuance
2003 and prior		974,138		198,004		—		—		—		—		198,004	9.9
2004		160,209		22,210		—		—		—		—		22,210	12.3
2005		443,478		139,055		—		—		—		—		139,055	27.8
2006		—		—		—		—		—		—		—	—
2007		—		—		—		—		—		—		—	12.3
2008		—		—		—		—		—		—		—	—
Total Alt-A		1,577,825		359,269		—		—		—		—		359,269	15.0
Total	$	16,265,865	$	2,572,274	$	141,215	$	45,363	$	—	$	—	$	2,617,637	8.8

The Bank’s held-to-maturity portfolio as of September 30, 2008 included $16.5 billion of private label MBS. Approximately 89 percent of the underlying mortgages collateralizing the private label MBS are considered prime and the remaining underlying mortgages collateralizing these securities are considered Alt-A, as determined by the originator at the time of origination. None of the underlying mortgages collateralizing the private label MBS portfolio is considered sub-prime. The Bank’s MBS portfolio had gross unrealized losses of $2.7 billion as of September 30, 2008.

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As discussed previously, the Bank recognized an other-than-temporary impairment loss of $87.3 million related to three private label MBS in its held-to-maturity securities portfolio. The Bank evaluates its individual held-to-maturity securities for other-than-temporary impairment on a quarterly basis, or more frequently if events or changes in circumstances indicate these investments may be other-than-temporarily impaired. As a result of this security-level review, the Bank identifies individual securities believed to be at risk for other-than-temporary impairment, which are evaluated further by analyzing the performance of the security. Securities with weaker performance measures are evaluated by estimating projected cash flows based on the structure of the security and certain assumptions, such as prepayments, default rates and loss severity, to determine whether the Bank expects to receive the contractual cash flows as scheduled. For the securities for which an other-than-temporary impairment loss was recorded, the Bank concluded it was not probable that it would receive all contractual cash flows as scheduled.

The remainder of the Bank’s held-to-maturity securities portfolio that has not been designated as other-than-temporarily impaired has experienced unrealized losses and decreases in fair value due to interest rate volatility, illiquidity in the marketplace, and credit deterioration in the U.S. mortgage markets. This decline in fair value is considered temporary as the Bank has the ability and intent to hold these investments to maturity and expects to collect all contractual cash flows as scheduled.

Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and that the Bank may record material other-than-temporary impairments in future periods, which could affect the Bank’s earnings and retained earnings.

During the Bank’s other-than-temporary impairment evaluation, the Bank identified eight securities that the Bank believed had the greatest potential for loss of contractual cash flows. The following table provides further information regarding pro forma impacts associated with stress-test scenarios applied to these eight private label MBS securities. The Bank performs stress tests of key variable assumptions to assess potential exposure to changes in certain assumptions. The Bank assumes instantaneous adverse shifts to its conservative base case cash flow assumptions, and measures potential contractual cash flow shortfalls. The Bank uses a third-party model to project expected losses associated with the underlying loan collateral and to model the resultant lifetime cash flows as to how they would pass through the deal structures underlying these investments. For its key variable stress testing, the Bank assumes that the key variable is instantly shocked, while all other assumptions are held constant.

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The following table indicates potential contractual cash flow shortfalls resulting from stress testing these eight securities’ default rates, loss severities, or voluntary prepayment rates (in thousands):

• Base case loss severity assumptions are shocked by an additional ten percentage points through final maturity to determine the impact of increased collateral loan losses realized at final disposition of defaulted pool loans.

• The Bank’s base case assumptions with respect to default rates are shocked by an additional 10 percentage points through final maturity to determine the impact of increases in the unpaid principal balances on the mortgage loans underlying each individual security which is defaulted upon by borrowers.

• Voluntary prepayment rates were adjusted downward by a proportional 10 percent through final maturity to estimate the impact on the Bank’s holdings if cash flows slowed, potentially exposing the Bank to risk if the subordinate classes eroded prior to the Bank’s receipt of its contractual cash flows.

All contractual cash flow shortfalls are presented in non-discounted dollars.

Selected Private Label Mortgage-Back Securities

Stress Test Scenarios

As of September 30, 2008

							Stress Test Scenarios: Contractual Cash Flow Shortfalls
							10 Percentage		10 Percentage		10 Percentage
							Point Increase		Point Increase in		Point Decrease
					Base Case		in Loss		Conditional Default		in Voluntary
Par Value	Book Value		Fair Value		Losses		Severities		Rates		Prepayment Rates
$ 910,706	$	821,857	$	663,236	$	44	$	286	$	216	$	93

The scenarios and the results presented in the table above do not represent the Bank’s current expectation of performance for these eight securities.

Under the stress-test scenarios for these eight securities, indicated losses are isolated to the three securities for which the Bank has recorded an other-than-temporary impairment. The other five securities show no loss of contractual cash flows under the above stress-test scenarios.

Derivatives

Derivative transactions may subject the Bank to credit risk due to potential nonperformance by counterparties to the agreements. The Bank seeks to limit counterparty risk by collateral requirements and netting procedures that establish collateral requirement thresholds. The Bank also manages counterparty credit risk through credit analysis, collateral management, and other credit enhancements. Additionally, the Bank follows the regulatory requirements of the Regulator, which set forth the eligibility criteria for counterparties (i.e., minimum capital requirements, an NRSRO, dollar and term limits, etc.). The Bank requires collateral agreements with counterparties that establish maximum allowable net unsecured credit exposure before collateral requirements are triggered. Limits are based on the credit rating of the counterparty. Uncollateralized exposures result when credit exposures to specific counterparties fall below collateralization trigger levels.

As of September 30, 2008, the Bank had $221.2 billion in total notional amount of derivatives outstanding compared to $222.9 billion at December 31, 2007. The notional amount serves as a factor in determining periodic interest payments or cash flows received and paid. It does not represent actual amounts exchanged or the Bank’s exposure to credit and market risk. The amount potentially subject to credit loss is based upon the counterparty’s net payment obligations. The credit risk of derivatives is measured on a portfolio basis by netting the market values of all outstanding transactions for each counterparty.

As of September 30, 2008, 99.5 percent of the total notional amount of outstanding derivative transactions was represented by 29 counterparties.

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The remaining amount of derivative transactions were with members of the Bank. Of these 29 counterparties, there were five, Goldman Sachs Group, Inc., JP Morgan Chase Bank N.A., Deutsche Bank AG, Merrill Lynch and Barclays PLC, that each represented more than 10 percent of the Bank’s total notional amount, and four counterparties, Bank of America N.A., Rabobank Nederland, Royal Bank of Canada, and HSBC Bank USA N.A. that each represented more than 10 percent of the Bank’s net exposure. Each of these named counterparties had a credit rating of A or better at September 30, 2008.

The following tables represent the credit ratings of the Bank’s derivative counterparties (in thousands):

Derivative Counterparty Credit Exposure
As of September 30, 2008
Credit Rating	Notional Amount		Total Net Exposure at Fair Value		Collateral Held		Net Exposure After Collateral
AAA	$	2,044,135	$	—	$	—	$	—
AA		181,589,004		54,481		23,598		30,883
A		36,369,880		979		—		979
BBB		—		—		—		—
Member institutions*		1,194,267		1,475		—		—
Delivery commitments*		—		—		—		—
Total derivatives	$	221,197,286	$	56,935	$	23,598	$	31,862

* Collateral held with respect to derivative financial instruments with member institutions represents either collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.

Derivative Counterparty Credit Exposure
As of December 31, 2007
Credit Rating	Notional Amount		Total Net Exposure at Fair Value		Collateral Held		Net Exposure After Collateral
AAA	$	2,043,635	$	38	$	—	$	38
AA		161,453,653		39,859		—		39,859
A		58,771,087		355		—		355
Member institutions*		589,833		2,755		—		—
Delivery commitments*		9,309		41		—		—
Total derivatives	$	222,867,517	$	43,048	$	—	$	40,252

* Collateral held with respect to derivative financial instruments with member institutions represents either collateral physically held by or on behalf of the Bank or collateral assigned to the Bank, as evidenced by a written security agreement, and held by the member institution for the benefit of the Bank.

The maximum credit risk is the estimated cost of replacing interest-rate swaps, forward agreements, mandatory delivery contracts for mortgage loans, and purchased caps and floors that have a net positive market value, if the counterparty defaults and the related collateral pledged to the Bank, if any, is of no value to the Bank.

The net exposure after collateral is treated as unsecured credit consistent with the Bank’s RMP and the Regulator’s regulations if the counterparty has an NRSRO rating. If the counterparty does not have an NRSRO rating, the Bank requires collateral for the full amount of the exposure.

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Mortgage Loan Programs

The Bank seeks to manage the credit risk associated with MPP and the MPF Program by maintaining underwriting and eligibility standards and structuring possible losses into several layers to be shared with the participating financial institution (“PFI”). These risk management practices are described in detail in the Bank’s Form 10-K. In some cases, a portion of the credit support for MPP and MPF loans is provided under a primary and/or supplemental mortgage insurance policy. Currently, eight mortgage insurance companies provide primary and/or supplemental mortgage insurance for loans in which the Bank has a retained interest. As of September 30, 2008, several of the Bank’s mortgage insurance providers have had their ratings for claims paying ability or insurer financial strength downgraded by one or more NRSROs; at that date, six of the eight providers were rated single A or better. Ratings downgrades imply an increased risk that these mortgage insurers may be unable to fulfill their obligations to pay claims that may be made under the insurance policies. Given the amount of loans covered by this insurance, the other credit enhancements and the historical performance of those loans, the Bank believes its credit exposure to these companies, both individually and in the aggregate, was not significant as of September 30, 2008.

Critical Accounting Policies and Estimates

Fair Values

The Bank carries certain assets and liabilities, including investments classified as trading, and all derivatives on the balance sheet at fair value. The Bank adopted SFAS 157 effective January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes fair value hierarchy based on the inputs used to measure fair value and requires additional disclosures for instruments carried at fair value on the balance sheet. SFAS 157 defines “fair value” as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date, or an exit price.

Fair values play an important role in the valuation of certain of the assets, liabilities and hedging transactions of the Bank. Fair values are based on quoted market prices or market-based prices, if such prices are available, even in situations in which trading volume may be low when compared with prior periods as has been the case during the current market disruption. If quoted market prices or market-based prices are not available, the Bank determines fair values based on valuation models that use discounted cash flows, using market estimates of interest rates and volatility.

Valuation models and their underlying assumptions are based on the best estimates of management of the Bank with respect to:

• market indices (primarily LIBOR);

• discount rates;

• prepayments;

• market volatility; and

• other factors, including default and loss rates.

These assumptions, particularly estimates of market indices and discount rates, may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the income and expense related thereto. The use of different assumptions, as well as changes in market conditions, could result in materially different net income and retained earnings. The assumptions used in the model are corroborated by and independently verified against market observable data where possible.

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The Bank categorizes its financial instruments carried at fair value into a three-level classification in accordance with SFAS 157. The valuation hierarchy is based upon the transparency (observable or unobservable) of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions. The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

As of September 30, 2008, the Bank does not carry any financial assets or liabilities, measured on a recurring basis, at fair value based on unobservable inputs. However, as of September 30, 2008, the fair value of the Bank’s private label held-to-maturity investment portfolio is determined using unobservable inputs.

As discussed previously, the Bank recorded an $87.3 million other-than-temporary impairment loss related to three private-label MBS. The Bank’s impairment process includes an evaluation of the securities’ projected cash flows. For the securities for which an other-than-temporary impairment charge was recorded, the Bank has concluded that it was not probable that it would receive all of the scheduled contractual cash flows.

The remainder of the Bank’s held-to-maturity securities portfolio that has not been designated as other-than-temporarily impaired has experienced unrealized losses and decreases in fair value due to interest rate volatility, illiquidity in the marketplace, and credit deterioration in the U.S. mortgage markets. This decline in fair value is considered temporary as the Bank has the ability and intent to hold these investments to maturity and expects to collect all contractual cash flows. The ability and intent of the Bank is demonstrated by the fact that the Bank is well capitalized, has sufficient liquidity and has no need to sell these securities, nor has the Bank entered into any contractual constraints that would impact such intent and ability.

For further discussion regarding how the Bank measures financial assets and financial liabilities at fair value, see Note 10 to the financial statements.

Other-Than-Temporary Impairment Analysis

The fair value of the Bank’s investment security portfolio has been declining as a result of the recent turmoil in the credit markets. Due to these market conditions, the valuation assumptions and other subjective elements, and the potential material effect on the Bank’s financial statements, the Bank has determined its quarterly analysis of other-than-temporary impairment to be a critical accounting estimate.

The Bank applies SFAS 115, as amended by FSP FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, to determine whether the Bank’s investment securities have incurred other-than-temporary impairment. The Bank recognizes an other-than-temporary impairment loss when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the security and the fair value of the security is less than its amortized cost. If it is determined that an impairment loss is other than temporary, the carrying value is written down to fair value, and a loss is recognized through earnings.

To determine which individual securities are at risk for other-than-temporary impairment, the Bank considers various characteristics of each security including, but not limited to, the following: the credit rating and related outlook or status; the underlying type of collateral; the duration and amount of the unrealized loss; and any credit enhancements or insurance. The relative importance of this information varies based on the facts and circumstances surrounding each security, as well as the economic environment at the time of assessment. As a result of this security-level review, the Bank identifies individual securities believed to be at risk for other-than-temporary impairment, which are evaluated further by analyzing the performance of the security. Securities with weaker performance measures are evaluated by estimating projected cash flows based on the structure of the security and certain assumptions.

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Significant assumptions in these cash flow models include default rates, prepayments, and anticipated loan losses based on underlying loan characteristics, expected housing price changes, and interest rate assumptions. The information used in the discounted cash flow model is highly granular, including loan-level performance data for delinquencies, defaults, prepayments and foreclosures. The model incorporates zip-code level home price appreciation data for private label MBS. The Bank also assesses qualitative considerations when determining whether an impairment is other than temporary, including external credit rating agency actions, the composition of underlying collateral, sufficiency of credit enhancements, the length of time and the extent to which the fair value has been less than amortized cost, and the Bank’s ability and intent to hold the security until maturity or a period of time to allow for the recovery in the fair value of the security. The relative importance of this information varies based on the facts and circumstances surrounding each security, as well as the economic environment at the time of the assessment.

In evaluating the Bank’s ability and intent to hold its investment securities in unrealized loss positions until the later of maturity or recovery of fair value, the Bank considers expectations about market conditions, projections of future results, and liquidity needs.

A description of the Bank’s other critical accounting policies and estimates is contained in detail in the Bank’s Form 10-K. There have been no material changes to these policies and estimates during the period reported.

Recently Adopted and Issued Accounting Standards

SFAS 157 was issued in September 2006. In defining fair value, SFAS 157 retains the exchange price notion in earlier definitions of fair value. However, the definition of fair value under SFAS 157 focuses on the price that would be received to sell an asset or paid to transfer a liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not expand the use of fair value in any new circumstances. SFAS 157 also establishes a fair value hierarchy that prioritizes the information used to develop assumptions used to determine the exit price. Under this standard, fair value measurements would be disclosed separately by level within the fair value hierarchy. The Bank adopted SFAS 157 effective January 1, 2008. The adoption of SFAS 157 had no effect on the Bank’s financial condition or results of operations. For additional information on the fair value of certain financial assets and liabilities, see Note 10 to the financial statements.

SFAS 159, issued in February 2007, creates a fair value option allowing an entity irrevocably to elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities, with changes in fair value recognized in earnings as they occur. SFAS 159 requires an entity to report those financial assets and financial liabilities measured at fair value in a manner that separates those reported fair values from the carrying amounts of assets and liabilities measured using another measurement attribute on the face of the statement of financial position. SFAS 159 also requires an entity to provide information that would allow users to understand the effect on earnings of changes in the fair value on those instruments selected for the fair value election. The Bank adopted SFAS 159 effective January 1, 2008. There was no initial effect of adoption since the Bank did not elect the fair value option for any existing asset or liability. In addition, the Bank did not elect the fair value option for any financial assets originated or purchased, or for liabilities issued, through September 30, 2008.

FSP FIN 39-1, issued in April 2007, permits an entity to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instruments recognized at fair value executed with the same counterparty under a master netting arrangement.

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Under FSP FIN 39-1, the receivable or payable related to cash collateral may not be offset if the amount recognized does not represent or approximate fair value or arises from instruments in a master netting arrangement that are not eligible to be offset. The decision whether to offset such fair value amounts represents an elective accounting policy decision that, once elected, must be applied consistently. An entity should recognize the effects of applying FSP FIN 39-1 as a change in accounting principle through retrospective application for all financial statements presented unless it is impracticable to do so. Upon adoption of FSP FIN 39-1, an entity is permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements. The Bank adopted FSP FIN 39-1 effective January 1, 2008 and retroactively applied its requirements to all prior periods. The Bank has not changed its accounting policy of offsetting fair value amounts recognized for derivative instruments under the same master netting arrangement. As a result of the adoption of FSP FIN 39-1, certain amounts on the Bank’s Statements of Condition as of December 31, 2007, were modified to conform to the 2008 presentation, as summarized in Note 1 to the financial statements.

Issue E23, issued in January 2008 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), explicitly to permit the use of the shortcut method for those hedging relationships in which (a) the interest rate swap has a nonzero fair value at the inception of the hedging relationship, attributable solely to differing prices within the bid-ask spread; and/or (b) the hedged item has a trade date that differs from its settlement date because of generally established conventions in the marketplace in which the transaction to acquire or issue the hedged item is executed. Issue E23 is effective for hedging relationships designated on or after January 1, 2008. At adoption, preexisting hedging relationships utilizing the shortcut method that did not meet the requirements of Issue E23 as of the inception of the hedging relationship must be dedesignated prospectively. The effects of applying hedge accounting prior to the effective date may not be reversed. A hedging relationship that does not qualify for the shortcut method based on Issue E23 could be redesignated without the application of the shortcut method if that hedging relationship meets the applicable requirements of SFAS 133. The Bank adopted Issue E23 effective January 1, 2008. The Bank concluded that no dedesignations were required as a result of the adoption of Issue E23. In addition, since May 31, 2005, the Bank no longer applies the short-cut method to new hedging relationships. Therefore, the adoption of Issue E23 had no effect on the Bank’s financial condition or results of operations.

SFAS 161, issued in March 2008, requires enhanced disclosures about an entity’s derivative and hedging activities. These enhanced disclosures will discuss (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS 133, and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008 with earlier adoption allowed. The Bank does not believe that the adoption of SFAS 161 will have a material effect on its financial condition or results of operations.

SFAS 162, issued in May 2008, identifies the sources of accounting principles and the framework, or hierarchy, for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 is effective November 15, 2008. The Bank does not believe that the adoption of SFAS 162 will have a material effect on its financial condition or results of operations.

FSP 133-1 and FIN 45-4, issued in September 2008, amended SFAS 133 and FIN 45 to improve disclosures about credit derivatives and guarantees and clarify the effective date of SFAS No. 161. FSP 133-1 and FIN 45-4 amended SFAS 133 to require entities to disclose sufficient information to allow users to assess the potential effect of credit derivatives, including their nature, maximum payment, fair value, and recourse provisions. FSP 133-1 and FIN 45-4 amended FIN 45 to require a disclosure about the current status of the payment/performance risk of a guarantee, which could be indicated by external credit ratings or categories by which the Bank measures risk.

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The Bank does not currently enter into credit derivatives, but does have guarantees: letters of credit and the joint and several liability on consolidated obligations of the FHLBanks. FSP 133-1 and FIN 45-4 is effective for periods ending after November 15, 2008. The Bank does not believe that the adoption of adoption of FSP 133-1 and FIN 45-4 will have a material effect on its financial statements or results of operations.

FSP FAS 157-3, issued in October 2008, clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate following the guidance in SFAS 154. However, the disclosure provisions in SFAS 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. As FSP FAS 157-3 clarified but did not change the application of SFAS 157, the adoption of FSP FAS 157-3 had no effect on the Bank’s financial condition or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Changes in interest rates and spreads can have a direct effect on the value of the Bank’s assets and liabilities. As a result of the volume of its interest-earning assets and interest-bearing liabilities, the component of market risk having the greatest effect on the Bank’s financial condition and results of operations is interest-rate risk. A description of the Bank’s management of interest-rate risk is contained in the Bank’s Form 10-K.

The Bank uses derivative financial instruments to reduce the interest-rate risk exposure inherent in otherwise unhedged assets and funding positions. These derivatives are used to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives.

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The following table summarizes the fair-value amounts of derivative financial instruments, excluding accrued interest, by product type (in thousands). The categories “Fair value hedges” represent hedge strategies for which hedge accounting is achieved. The category “SFAS 133 non-qualifying hedges” represents hedge strategies for which the derivatives are not in designated hedge relationships that formally meet the hedge accounting requirements under GAAP. The table also includes mandatory delivery commitments for purchased loans under both the MPF Program and MPP, which are accounted for as derivatives in accordance with SFAS 149.

Derivative Financial Instruments Excluding Accrued Interest/By Product
	As of September 30, 2008				As of December 31, 2007
	Total Notional		Estimated Fair Value Gain /(Loss) (excludes accrued interest)		Total Notional		Estimated Fair Value Gain /(Loss) (excludes accrued interest)
Advances:
Fair value hedges	$	116,665,429	$	(2,997,542)	$	108,404,411	$	(2,687,295)
SFAS 133 non-qualifying hedges		1,709,900		(4,877)		789,150		(7,861)
Total		118,375,329		(3,002,419)		109,193,561		(2,695,156)
Investments:
SFAS 133 non-qualifying hedges		6,750,754		(244,232)		8,281,248		(216,207)
Total		6,750,754		(244,232)		8,281,248		(216,207)
MPF/MPP loans:
Stand alone delivery commitments		—		—		9,309		41
Total		—		—		9,309		41
Consolidated obligation bonds:
Fair value hedges		79,157,482		465,015		97,244,433		651,605
SFAS 133 non-qualifying hedges		13,630,000		(27,046)		5,464,500		(2,552)
Total		92,787,482		437,969		102,708,933		649,053
Consolidated obligation discount notes:
Fair value hedges		935,187		(3,729)		1,494,799		3,789
Total		935,187		(3,729)		1,494,799		3,789
Intermediary positions:
Intermediaries		2,348,534		(574)		1,179,667		103
Total		2,348,534		(574)		1,179,667		103
Total notional and fair value	$	221,197,286	$	(2,812,985)	$	222,867,517	$	(2,258,377)
Total derivatives excluding accrued interest			$	(2,812,985)			$	(2,258,377)
Accrued interest				175,773				187,934
Cash collateral held by counterparty—assets				968,683				808,359
Cash collateral held from counterparty—liabilities				1,088,551				(9)
Net derivative balance			$	(579,978)			$	(1,262,093)
Net derivative assets balance			$	248,663			$	43,039
Net derivative liabilities balance				(828,641)				(1,305,132)
Net derivative balance			$	(579,978)			$	(1,262,093)

The Bank measures interest-rate risk exposure by various methods, including calculating the effective duration of assets, liabilities, and equity under various scenarios and calculating the theoretical market value of equity. Effective duration, normally expressed in years or months, measures the price sensitivity of the Bank’s interest-bearing assets and liabilities to changes in interest rates. As effective duration lengthens, market-value changes become more sensitive to interest-rate changes. The Bank employs sophisticated modeling systems to measure effective duration.

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Bank policy requires the Bank to maintain its effective duration of equity within a range of +60 months to –60 months, assuming current interest rates, and within a range of +84 months to –84 months, assuming an instantaneous parallel increase or decrease in market interest rates of 200 basis points. The table below reflects the Bank’s effective duration exposure measurements as calculated in accordance with Bank policy.

Effective Duration Exposure
(In months)
	As of September 30, 2008			As of December 31, 2007
	Up 200 Basis Points	Current	Down 200 Basis Points*	Up 200 Basis Points	Current	Down 200 Basis Points
Assets	6.5	5.7	2.7	5.3	5.6	3.4
Liabilities	5.3	5.3	4.7	5.3	5.2	5.0
Equity	32.4	14.4	(41.8)	4.1	14.6	(36.9)
Effective duration gap	1.2	0.4	(2.0)	0.0	0.4	(1.6)

* The “down 200 basis points” scenarios shown above are considered to be “constrained shocks”; to prevent the possibility of negative interest rates when a designated low rate environment exists, shocked rates are limited to the largest parallel down shock that produces post-shock Treasury rates no lower than 35 basis points. The Regulator requires that the duration of equity be maintained within a range of +78 months to -78 months in such situation.

The Bank uses both sophisticated computer models and an experienced professional staff to measure the level of interest rate risk in the balance sheet, thus allowing management to monitor the risk against policy and regulatory limits. Management regularly reviews the major assumptions and methodologies used in the Bank’s models, and may be required to make adjustments to the Bank’s models in response to rapid changes in economic conditions. Management believes that the use of market spreads calculated from estimates of current market prices (which include large embedded liquidity spreads), as opposed to valuation spreads that existed at the time the Bank acquired the MBS and mortgage loans (acquisition spreads), results in a disconnect between measured risk and the actual risks faced by the Bank. Because the Bank intends to and is able to hold its MBS and mortgage loans to maturity, the risks of value loss implied by current market price of MBS and mortgage loans are not likely to affect the Bank. As a result, management does not believe that the increased sensitivity indicates a fundamental change in interest-rate risk. In light of these conditions, in the third quarter of 2008, management refined its duration model to mirror mortgage asset spreads closer to the historical average and price assets closer to book value. The changes between the Bank’s effective duration of equity and duration gap between September 30, 2008 and December 31, 2007 in the table above are based on this difference in calculation method. If these changes had not been made to the model, management estimates that the Bank’s effective duration of equity would have been calculated at 94.0 months at September 30, 2008.

Management also considers interest-rate movements of a lesser magnitude than +/-200 basis point shifts. The table below shows effective duration exposure to increases and decreases in interest rates in 50 basis-point increments as of September 30, 2008, under the refined assets spreads and prices discussed above.

Additional Duration Exposure Scenarios
(In months)
	As of September 30, 2008
	Up 150 Basis Points	Up 100 Basis Points	Up 50 Basis Points	Current	Down 50 Basis Points	Down 100 Basis Points	Down 150 Basis Points
Assets	6.5	6.5	6.1	5.7	5.0	3.9	2.6
Liabilities	5.4	5.4	5.4	5.3	5.2	5.0	4.7
Equity	31.9	30.4	21.4	14.4	(0.1)	(20.7)	(42.1)
Effective duration gap	1.1	1.1	0.7	0.4	(0.2)	(1.1)	(2.1)

Another way the Bank analyzes its interest-rate risk and market exposure is by evaluating the theoretical market value of equity. The market value of equity represents the net result of the present value of future cash flows discounted to arrive at the theoretical market value of each balance sheet item.

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By using the discounted present value of future cash flows, the Bank is able to factor in the various maturities of assets and liabilities, similar to the effective duration analysis discussed above. The difference between the market value of total assets and the market value of total liabilities is the market value of equity. A more volatile market value of equity under different shock scenarios tends to result in a higher effective duration of equity, indicating increased sensitivity to interest rate changes. Although the Bank’s total capital increased by $1.0 billion from December 31, 2007 to September 30, 2008, the market value of equity remained relatively stable, decreasing by $640.0 million during this same period. The difference is attributable to the decline in MBS prices relative to other fixed-income securities.

Market Value Equity
(In millions)
	As of September 30, 2008						As of December 31, 2007
	Up 200 Basis Points		Current		Down 200 Basis Points*		Up 200 Basis Points		Current		Down 200 Basis Points
Assets	$	207,715	$	210,293	$	212,384	$	186,394	$	188,114	$	189,524
Liabilities		201,701		203,519		204,799		179,075		180,700		182,212
Equity		6,014		6,774		7,585		7,319		7,414		7,312

* The “down 200 basis points” scenario shown above as of September 30, 2008 is considered to be a “constrained non-parallel shock” to prevent the possibility of negative interest rates when a designated low-rate environment exists, as currently recommended by the Regulator.

Item 4. Controls and Procedures

Not applicable.

Item 4T. Controls and Procedures

Disclosure Controls and Procedures

The Bank’s President and Chief Executive Officer and the Bank’s Executive Vice President and Chief Financial Officer (the “Certifying Officers”) are responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

As of September 30, 2008, the Bank’s Certifying Officers have evaluated the effectiveness of the design and operation of the Bank’s disclosure controls and procedures. Based on that evaluation, they have concluded that the Bank’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act (1) is accumulated and communicated to the Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure; and (2) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s Certifying Officers recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Internal Control Over Financial Reporting

During the third quarter of 2008, there were no changes in the Bank’s internal control over financial reporting that have affected materially, or are reasonably likely to affect materially, the Bank’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Bank may be subject to various legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any such proceedings that might result in the Bank’s ultimate liability in an amount that will have a material effect on the Bank’s financial condition or results of operations.

Item 1A. Risk Factors

The Bank is jointly and severally liable for payment of principal and interest on the consolidated obligations issued by the other 11 FHLBanks.

Each of the FHLBanks relies upon the issuance of COs as a primary source of funds. COs are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, the Bank is jointly and severally liable with the other FHLBanks for the COs issued by the FHLBanks through the Office of Finance, regardless of whether the Bank receives all or any portion of the proceeds from any particular issuance of COs. Further, under the Lending Agreement with the Treasury, any extensions of credit by the Treasury to the FHLBanks, or any FHLBank, would be the joint and several obligations of all 12 of the FHLBanks and would be COs pursuant to part 966 of the rules of the Regulator (12 C.F.R. part 966).

The Regulator may by regulation require any FHLBank to make principal or interest payments due on any COs at any time, whether or not the FHLBank that was the primary obligor has defaulted on the payment of that obligation. The Regulator may allocate the liability among one or more FHLBanks on a pro rata basis or on any other basis the Regulator may determine. Accordingly, the Bank could incur significant liability beyond its primary obligation under COs due to the failure of other FHLBanks to meet their obligations, which could affect negatively the Bank’s financial condition and results of operations.

On April 10, 2008, S&P announced that it had placed FHLBank Chicago on credit watch with negative implications. Additionally, on April 8, 2008, Moody’s announced that it had revised its outlook on FHLBank Chicago’s subordinated notes to negative from stable. On October 30, 2008, FHLBank Chicago furnished a Current Report on Form 8-K with the SEC stating that it expected to record a net loss for the first nine months of 2008 equal to $119 million compared to net income of $76 million for the first nine months of 2007. The Bank is continuing to monitor these developments.

To date, no FHLBank has defaulted on its principal or interest payments under any consolidated obligation, and the Bank has never been required to make payments under any consolidated obligation as a result of the failure of another FHLBank to meet its obligations.

The Bank is subject to a complex body of laws and regulations, which could change in a manner detrimental to the Bank’s operations.

The FHLBanks are GSEs, organized under the authority of the FHLBank Act, and, as such, are governed by federal laws and regulations as adopted and applied by the Regulator. From time to time, Congress has amended the FHLBank Act in ways that have affected the rights and obligations of the FHLBanks and the manner in which the FHLBanks carry out their housing finance mission and business operations. New or modified legislation enacted by Congress or regulations adopted by the Regulator could have a negative effect on the Bank’s ability to conduct business or on the cost of doing business.

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On July 30, 2008, President Bush signed into law the Housing Act. The Housing Act is designed to, among other things, address the current housing finance crisis, expand the Federal Housing Administration’s financing authority and address GSE reform issues. The Housing Act abolishes both the Finance Board and the Office of Federal Housing Enterprise Oversight of the Department of Housing and Urban Development (each, one year after the date of enactment) and establishes the Finance Agency as the single regulator of Fannie Mae, Freddie Mac, the FHLBanks and the Office of Finance. The Bank will be responsible for its share of the operating expenses for both the Finance Agency and the Finance Board.

Changes in regulatory requirements could result in, among other things, an increase in the FHLBanks’ cost of funding and regulatory compliance, a change in permissible business activities, or a decrease in the size, scope, or nature of the FHLBanks’ lending activities, which could affect the Bank’s financial condition and results of operations.

On October 7, 2008, the FDIC issued a proposed rule to raise an insured institution’s base assessment rate based upon its ratio of secured liabilities to domestic deposits. Under the proposed rule, an institution’s ratio of secured liabilities to domestic deposits (if greater than 15 percent) would increase its assessment rate, but the resulting base assessment rate after any such increase could be no more than 50 percent greater than it was before the adjustment. Because all of the Bank’s advances are secured liabilities, the proposed rule, if adopted, may affect member demand for advances.

The Bank’s funding depends upon its ability to access the capital markets.

The Bank seeks to be in a position to meet its members’ credit and liquidity needs and pay its obligations without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. The Bank’s primary source of funds is the issuance of consolidated obligations in the capital markets. The Bank’s ability to obtain funds through the issuance of consolidated obligations depends in part on prevailing conditions in the capital markets at that time, which are beyond the Bank’s control. Since the end of the second quarter of 2008, global financial markets have experienced extreme turmoil. This turmoil has affected demand and pricing for the FHLBanks’ consolidated obligations, particularly long-term COs.

On October 14, 2008, the FDIC announced its commitment to guarantee new senior unsecured debt issued prior to June 30, 2009 by domestic banks and thrift institutions. In response to this announcement, the spreads on agency debt widened significantly as investors anticipate the development and sale of a new debt security that features an explicit guarantee of the FDIC. In addition, on October 7, 2008, federal bank and thrift regulatory agencies announced they would request public comment on proposed regulatory action to lower the risk weight for select obligations of Fannie Mae and Freddie Mac from 20 percent to 10 percent (the “Risk Weighting Proposal”). The agencies also requested comment on whether to reduce the risk weight for FHLBank debt in the same manner. A reduced risk weighting for Fannie Mae and Freddie Mac, without commensurate treatment for the FHLBanks, could result in higher investor demand for their debt securities relative to similar FHLBank debt securities. Accordingly, the Bank cannot make any assurance that it will be able to obtain funding on terms acceptable to the Bank, if at all. If the Bank cannot access funding when needed on desirable terms, the Bank’s ability to support and continue its operations would be affected adversely, which would have a negative effect on the Bank’s financial condition and results of operations.

The Bank is exposed to credit risk on its investments.

The Bank invests in agency (Fannie Mae, Freddie Mac and Ginnie Mae) and private label MBS rated AAA by S&P or Fitch or Aaa by Moody’s. As of September 30, 2008, a substantial portion of the Bank’s MBS portfolio consisted of private label MBS.

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As of October 29, 2008, while the majority of MBS owned by the Bank continued to hold a AAA rating, 21 MBS totaling $2.2 billion have been downgraded or placed on rating watch negative by at least one NRSRO. Credit losses in the Bank’s MBS portfolio, if significant, could have an adverse effect on the Bank’s financial condition and results of operations. Given current market conditions and the significant judgments involved, there is a risk that further declines in fair value in the Bank’s MBS portfolio may occur and that the Bank may record additional material other than temporary impairments in future periods, which could affect the Bank’s earnings and retained earnings.

Counterparty credit risk could affect the Bank adversely.

The Bank assumes unsecured credit risk when entering into securities transactions, money market transactions, supplemental mortgage insurance agreements and derivative contracts with counterparties. The insolvency or other inability of a significant counterparty to perform its obligations under a derivative contract or other agreement could have an adverse effect on the Bank’s financial condition and results of operations. As previously discussed in this report, LBSF, a derivative counterparty of the Bank, has filed for bankruptcy court protection and the net amount owed to the Bank by LBSF, as of the early termination date, is approximately $189.4 million. There can be no assurance whether, and to what extent, the Bank will be able to recover this amount.

The Bank uses master derivatives contracts that contain provisions that require the Bank to net the exposure under all transactions with the counterparty to one amount to calculate collateral requirements. At times, the Bank enters into derivative contracts with foreign counterparties in jurisdictions in which it is uncertain whether the netting provisions would be enforceable in the event of insolvency of the foreign counterparty. Although the Bank attempts to monitor the credit rating of all counterparties, it is possible that the Bank may not be able to terminate the agreement with a foreign counterparty before the counterparty would become subject to an insolvency proceeding.

Member failures may affect the Bank’s business adversely.

The financial services industry has seen an increase in the number of failed financial institutions, including four in the Bank’s district since July 1, 2008. If the number of member failures continues to increase, it may reduce the number of potential members in the Bank’s district, resulting in a loss of business for the Bank.

For a further discussion of the Bank’s risk factors, see “Item 1A. Risk Factors” in the Bank’s Form 10-K.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

The only matter on which shareholders are entitled to vote is the election of directors. In the third quarter of 2008, the Bank submitted ballots to its members to elect member directors. Voting and nominating rights with respect to the election of directors are established by 12 U.S.C. §1427 and 12 C.F.R Part 1261.

The record date for the Bank’s 2008 director elections to fill the member directorships becoming available on January 1, 2009 (two in Virginia, one in North Carolina) was December 31, 2007.

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In September 2008, the Director of the Finance Agency issued an order (the “Order”) changing the designation of directors on the Bank’s board of directors by reducing the number of member directors in North Carolina from two to one and by increasing the number of member directors in Virginia from one to two. Accordingly, in the 2008 member director elections, Bank members in Virginia elected two member directors and members in North Carolina elected one member director.

Of the 126 members eligible to vote in the 2008 Virginia member directorship elections, 61 members participated, casting a total of 3,750,047 votes. Of the 119 members eligible to vote in the North Carolina member directorship election, 76 members participated, casting a total of 1,813,394 votes.

On October 22, 2008, the Bank declared elected the below candidates:

Name	Member(s)	Votes Received
Donna Goodrich	BB&T Corporation	835,260
Scott C. Harvard	Shore Bank	1,693,531
Edward J. Woodard	Bank of the Commonwealth	1,048,305

Mr. Harvard, who received the highest number of votes in Virginia, and Ms. Goodrich, who received the highest number of votes in North Carolina, will serve four-year terms beginning on January 1, 2009 and ending on December 31, 2012. Mr. Woodard, who received the second highest number of votes in Virginia, will serve a three-year term beginning on January 1, 2009 and ending on December 31, 2011.

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Because all director terms expire on December 31, all of the directors who were serving on the board before and during the 2008 election of directors continue to serve on the board immediately following the election, although those directors whose terms expire on December 31, 2008 and who were not reelected will no longer serve on the board after that date. Each current director, and his or her term of office, is listed in the table below.

Directors in Member Directorships:		Term Expiration December 31,
Alabama
W. Russell Carothers, II Bedford Kyle Goodwin, III	Citizens Bank of Winfield First Financial Bank	2009 2009
District of Columbia
Thomas H. Webber, III	IDB-IIC Federal Credit Union	2009
Florida
Miriam Lopez	TransAtlantic Bank	2010
Georgia
William F. Easterlin, III	Queensborough National Bank & Trust Co.	2010
Maryland
John M. Bond, Jr.	The Columbia Bank	2010
North Carolina
Donna Goodrich	BB&T Corporation	2008	*
Frederick Willetts, III	Cooperative Bank	2008
South Carolina
J. Thomas Johnson	First Community Bank	2009
Virginia
Scott C. Harvard	Shore Bank	2008	*
Directors in Independent Directorships:
Mary Joy Drass		2008
F. Gary Garczynski		2008
William C. Handorf		2009
Linwood Parker Harrell, Jr.		2010
Jonathan Kislak		2010
LaSalle D. Leffall, III		2008
Henry Gary Pannell		2010
Robert L. Strickland		2009

* Director was reelected and will begin a four-year term beginning January 1, 2009.

Item 5. Other Information

None.

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Item 6. Exhibits

10.1	United States Department of the Treasury Lending Agreement, dated September 9, 2008.*
10.2	2008 Director’s Compensation Policy, as amended September 26, 2008.
31.1	Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed on September 9, 2008 with the Securities and Exchange Commission in the Bank’s Form 8-K and incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

	Federal Home Loan Bank of Atlanta
Date: November 14, 2008	By:	/s/ Richard A. Dorfman
		Name:	Richard A. Dorfman
		Title:	President and Chief Executive Officer
	By:	/s/ Steven J. Goldstein
		Name:	Steven J. Goldstein
		Title:	Executive Vice President and Chief Financial Officer

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