News Column

FEDERAL HOME LOAN BANK OF BOSTON - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 9, 2014

Forward-Looking Statements

This report includes statements describing anticipated developments, projections, estimates, or future predictions of ours that are "forward-looking statements." These statements may use forward-looking terminology such as, but not limited to, "anticipates," "believes," "expects," "plans," "intends," "may," "could," "estimates," "assumes," "should," "will," "likely," or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1A - Risk Factors in the 2013 Annual Report and Part II -Item 1A - Risk Factors of this quarterly report, and the risks set forth below. Accordingly, we caution that actual results could differ materially from those expressed or implied in these forward-looking statements or could impact the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. We do not undertake to update any forward-looking statement herein or that may be made from time to time on our behalf.



Forward-looking statements in this report may include, among others, our expectations for:

• income, retained earnings, and dividend payouts;

• repurchases of excess stock;

• credit losses on advances and investments in mortgage loans and ABS,

particularly private-label MBS;

• balance-sheet changes and components thereof, such as changes in advances

balances and the size of our portfolio of investments in mortgage loans;

• our minimum retained earnings target; and

• the interest-rate environment in which we do business.

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

• changes in interest rates, the rate of inflation (or deflation), housing

prices, employment rates, and the general economy, including changes

resulting from changes in U.S. fiscal policy or ratings of the U.S. federal

government;

• changes in demand for our advances and other products;

• the willingness of our members to do business with us despite continuing

limited repurchases of excess stock;

• changes in the financial health of our members;

• insolvencies of our members;

• changes in borrower defaults on mortgage loans;

• changes in the credit performance and loss severities of our investments;

• changes in prepayment rates on advances and investments;

• the value of collateral we hold as security for obligations of our members

and counterparties;

• issues and events across the FHLBank System and in the political arena that

may lead to legislative, regulatory, judicial, or other developments

impacting demand for COs, our financial obligations with respect to COs, our

ability to access the capital markets, our members, the manner in which we

operate, or the organization and structure of the FHLBank System;

• competitive forces including, without limitation, other sources of funding

available to our members, other entities borrowing funds in the capital

markets, and our ability to attract and retain skilled employees;

• the pace of technological change and our ability to develop and support

technology and information systems sufficient to manage the risks of our

business effectively;

• the loss of members due to, among other ways, member withdrawals, mergers and

acquisitions;

• changes in investor demand for COs;

• changes in the terms or availability of derivatives and other agreements we

enter into in support of our business operations;

• the timing and volume of market activity;

• the volatility of reported results due to changes in the fair value of

certain assets and liabilities, including, but not limited to, private-label

MBS;

• our ability to introduce new (or adequately adapt current) products and

services and successfully manage the risks associated with our products and

services, including new types of collateral used to secure advances; 39



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• losses arising from litigation filed against us or one or more of the other

FHLBanks;

• gains resulting from legal claims we have;

• losses arising from our joint and several liability on COs;

• significant business disruptions resulting from natural or other disasters,

acts of war, or terrorism; and

• new accounting standards, including the development of supporting systems.

These risk factors are not exhaustive. We operate in a changing economic and regulatory environment, and new risk factors will emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements. The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim financial statements and notes, which begin on page three, and the 2013 Annual Report.



EXECUTIVE SUMMARY

Our net income was $36.1 million for the three months ended March 31, 2014, compared with net income of $53.3 million for the same period in 2013. Our net income for the quarter was impacted by a $12.0 million decrease in net prepayment fees from investments and advances. We also experienced compression in net interest margin and net interest spread, as we have been anticipating given the prolonged low interest-rate environment. Nonetheless, we continue to experience growth in advances balances and are optimistic about our ability to continue to satisfy our mission. Additionally:



• retained earnings increased from $788.8 million at December 31, 2013, to

$815.6 million at March 31, 2014;

• accumulated other comprehensive loss related to the noncredit portion of

other-than-temporary impairment losses on held-to-maturity securities

improved from an accumulated other comprehensive loss of $324.9 million at

December 31, 2013, to an accumulated other comprehensive loss of $312.3

million at March 31, 2014;

• we are in compliance with all regulatory and internal capital requirements as

of March 31, 2014;

• the board of directors approved the repurchase of $500.0 million of excess

capital stock to be completed on May 1, 2014, and has announced that it may

approve a second partial repurchase of excess stock later in 2014, although a

quarterly loss or a significant adverse event or trend could cause such an

additional repurchase to be suspended; and

• on April 24, 2014, our board of directors declared a cash dividend that was

equivalent to an annual yield of 1.49 percent.

The principal challenges we face are the continuing, prolonged low interest-rate environment and uncertain demand for continued growth of advances, each as discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2013 Annual Report. We continue to believe that these factors are likely to negatively impact future earnings, absent unpredictable events such as prepayment fee income and litigation settlements. We do note, however, that advances balances continue to grow with the outstanding par balance of advances growing to $29.4 billion at March 31, 2014, from $27.2 billion at December 31, 2013. Growth in advances balances continues to be concentrated in short-term advances. We cannot predict whether advances balances will continue to grow and note that our members continue to experience high levels of deposits with limited loan growth. Deposits serve as liquidity alternatives to advances, and without a stronger economic recovery, growth in advances balances could remain a challenge.



Other significant trends and developments include the following:

• Income from Increased Accretable Yields on Certain Investments. For the three

months ended March 31, 2014, we recognized $8.7 million in interest income

resulting from the increased accretable yields of certain private-label MBS

for which we had previously recognized other-than temporary impairment credit

losses. For a discussion of this accounting treatment, see Item 8 - Financial

Statements and Supplementary Data - Note 1 - Notes to the Financial

Statements - Summary of Significant Accounting Policies - Investment

Securities - Other-than-Temporary Impairment - Interest Income Recognition in

the 2013 Annual Report.

• Legislative and Regulatory Developments. We continue to operate in an

uncertain legislative and regulatory environment undergoing profound change.

For additional information on such developments during the period covered by

this report, see - Legislative and Regulatory Developments.

• Net Interest Margin. Despite the historically low interest-rate environment,

we continue to achieve a favorable, but declining, net interest margin. Net

interest margin is expressed as the percentage of net interest income to

average earning 40



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assets. Net interest margin for the three months ended March 31, 2014, was 0.46 percent, a 34 basis point decrease from net interest margin for the three months ended March 31, 2013. The decline in prepayment fee income represented 13 basis points of the 34 basis point decline in net interest margin. We have been expecting this compression in net interest margin and net interest spread due to the prolonged low interest-rate environment and the gradual replacement of higher-yielding assets with lower-yielding, short-term assets, and we expect such compression to continue. For additional information on net interest income, see Results of Operations - Net Interest Income.



ECONOMIC CONDITIONS

Economic Environment

The pattern of modest economic growth continued into early 2014 for both New England and the United States. Employment inched closer to prerecession levels, but gains in the New England region lagged those experienced nationwide. Unemployment rates continued to decline, but levels varied considerably across the region. Growth in prices remained fairly low, though a particularly cold winter pushed up heating costs. House-price growth, as monitored by the FHFA, slowed somewhat since mid-2013, but remains quite strong in New England, despite adverse winter weather conditions. Lagging residential construction in New England is also adding to upward price pressure; single-family completions have increased over the past two years but are still significantly less than prerecession rates.



Interest-Rate Environment

We note that on April 30, 2014, the Federal Reserve issued a press release reaffirming its view that a highly accommodative stance of monetary policy remains appropriate and that when it decides to take a less accommodative stance, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of two percent.

The following chart illustrates the interest-rate environment.

[[Image Removed]]

The federal funds target rate has remained constant at 0.25 percent during the time periods displayed in the chart above.

SELECTED FINANCIAL DATA

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The following financial highlights for the statement of condition for December 31, 2013, have been derived from our audited financial statements. Financial highlights for the quarter-ends have been derived from our unaudited financial statements. SELECTED FINANCIAL DATA STATEMENT OF CONDITION (dollars in thousands) March 31, 2014 December 31, 2013 September 30, 2013 June 30, 2013 March 31, 2013 Statement of Condition Data at Quarter End Total assets $ 50,061,243$ 44,638,076$ 39,720,660$ 39,341,066$ 36,934,925 Investments(1) 16,878,224 12,981,340 10,471,910 13,897,870 13,028,738 Advances 29,699,600 27,516,678 22,555,122 21,463,205 19,900,367 Mortgage loans held for portfolio, net(2) 3,347,987 3,368,476 3,401,111 3,474,211 3,504,394 Deposits and other borrowings 522,003 517,565 570,356 604,130 662,625



Consolidated obligations:

Bonds 24,477,903 23,465,906 24,201,697 24,420,970 25,722,481 Discount notes 20,247,904 16,060,781 10,475,911 9,875,566 5,980,709 Total consolidated obligations 44,725,807 39,526,687 34,677,608 34,296,536 31,703,190 Mandatorily redeemable capital stock 977,685 977,348 977,390 977,390 190,889 Class B capital stock outstanding-putable(3) 2,562,857 2,530,471 2,441,028 2,401,209 3,202,211 Unrestricted retained earnings 701,567 681,978 615,993 587,786 562,671 Restricted retained earnings 114,026 106,812 89,752 82,136 75,018 Total retained earnings 815,593 788,790 705,745 669,922 637,689 Accumulated other comprehensive loss (469,991 ) (481,516 ) (482,085 ) (474,102 ) (467,570 ) Total capital 2,908,459 2,837,745 2,664,688 2,597,029 3,372,330 Other Information Total regulatory capital ratio(4) 8.70 % 9.63 % 10.38 % 10.29 % 10.91 % _____________________



(1) Investments include available-for-sale securities, held-to-maturity

securities, trading securities, interest-bearing deposits, securities

purchased under agreements to resell and federal funds sold.

(2) The allowance for credit losses amounted to $1.8 million, $2.2 million, $2.0

million, $2.0 million, and $3.4 million for the quarters ended March 31,

2014, December 31, 2013, September 30, 2013, June 30, 2013, and March 31,

2013, respectively.

(3) Capital stock is putable at the option of a member, subject to applicable

restrictions.

(4) Total regulatory capital ratio is capital stock (including mandatorily

redeemable capital stock) plus total retained earnings as a percentage of

total assets. See Item 1 - Notes to the Financial Statements - Note 14 -

Capital. 42



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Table of Contents SELECTED FINANCIAL DATA RESULTS OF OPERATIONS AND OTHER INFORMATION (dollars in thousands) Results of Operations



for the Three Months Ended

September 30,

March 31, 2014 December 31, 2013 2013 June 30, 2013 March 31, 2013 Net interest income $ 54,569 $ 60,394 $ 58,403$ 60,710$ 76,348 (Reduction of) provision for credit losses (322 ) 240 83 (1,190 ) (1,087 ) Net impairment losses on held-to-maturity securities recognized in earnings (458 ) (223 ) (1,528 ) (394 ) (421 ) Litigation settlements 4,310 52,493 812 - - Other (loss) income (1,318 ) 855 592 (6,466 ) (2,276 ) Other expense 16,954 18,088 15,784 15,390 15,455 AHP assessments 4,406 9,886 4,333 4,061 5,949 Net income $ 36,065 $ 85,305 $ 38,079$ 35,589$ 53,334 Other Information Dividends declared $ 9,262 $ 2,260 $ 2,256$ 3,357$ 3,199 Dividend payout ratio 25.68 % 2.65 % 5.92 % 9.43 % 6.00 % Weighted-average dividend rate(1) 1.49 0.37 0.38 0.40 0.37 Return on average equity(2) 5.10 12.39 5.73 5.55 6.10 Return on average assets 0.31 0.84 0.37 0.38 0.56 Net interest margin(3) 0.46 0.59 0.57 0.65 0.80 Average equity to average assets 5.99 6.76 6.44 6.81 9.10



_______________________

(1) Weighted-average dividend rate is the dividend amount declared divided by the

average daily balance of capital stock eligible for dividends during the

preceding quarter.

(2) Return on average equity is net income divided by the total of the average

daily balance of outstanding Class B capital stock, accumulated other

comprehensive loss and total retained earnings.

(3) Net interest margin is net interest income before provision for credit losses

as a percentage of average earning assets.

RESULTS OF OPERATIONS

For the three months ended March 31, 2014 and 2013, we recognized net income of $36.1 million and $53.3 million, respectively. This $17.3 million decrease was driven by a decline of $21.8 million in net interest income of which $12.0 million relates to net prepayment fees. Net prepayment fees declined from $14.6 million in the first quarter of 2013 to $2.7 million during the same period in 2014. In addition, there was an increase of $2.5 million in net losses on derivatives and hedging activities. Partially offsetting these decreases was income of $4.3 million resulting from private-label MBS litigation settlements and a $3.1 million increase in the net unrealized gain on trading securities.



Net Interest Income

Net interest income after provision for credit losses for the quarter ending March 31, 2014, was $54.9 million, compared with $77.4 million for the same period in 2013. Contributing to the $22.5 million decrease in net interest income after provision for credit losses was a decrease in net prepayment fees of $12.0 million, from $14.6 million in 2013 to $2.7 million in 2014, as well as a narrowing of the spread between interest earned on assets and interest paid on liabilities. Partially offsetting these decreases to net interest income after provision for credit losses was an increase in interest income resulting from an increase in average earning assets, which increased $9.1 billion from $38.6 billion for 2013, to $47.7 billion for 2014. The increase in average earning assets was driven by a $7.6 billion increase in average advances. For additional information see - Rate and Volume Analysis. However, growth in these asset categories was concentrated in low-margin, short-term maturities, which, together with the ongoing decline in higher-yielding, long-term assets, such as MBS and mortgage loans held for portfolio, is a primary contributing factor to the decline in net interest income. 43



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Additionally, $8.7 million of the Bank's interest income for the quarter ended March 31, 2014, was from the accretion of discount on securities that were other-than-temporarily impaired in prior quarters, but for which a significant improvement in projected cash flows has subsequently been recognized. This represents an increase of $5.8 million from $2.9 million of accretion recorded in the first quarter of 2013. Net interest spread was 0.41 percent for the quarter ended March 31, 2014, a 28 basis point decrease from the same period in 2013, and net interest margin was 0.46 percent, a 34 basis point decrease from the same period in 2013. The decrease in net interest spread reflects a 53 basis point decrease in the average yield on earning assets and a 25 basis point decrease in the average yield on interest-bearing liabilities. Approximately half of the decline in net interest spread is attributable to the decline of prepayment fees and the remainder is attributable to a narrowing of the spread between interest earned on assets and interest paid on liabilities. We have been expecting this compression as discussed under - Executive Summary. The following table presents major categories of average balances, related interest income/expense, and average yields for interest-earning assets and interest-bearing liabilities. Our primary source of earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments less interest paid on COs, deposits, and other sources of funds. Net Interest Spread and Margin (dollars in thousands) For the Three Months Ended March 31, 2014 2013 Interest Interest Average Income / Average Average Income / Average Balance Expense Yield(1) Balance Expense Yield(1) Assets Advances $ 28,170,424$ 58,365 0.84 % $ 20,600,152$ 71,026 1.40 % Securities purchased under agreements to resell 4,920,555 593 0.05 2,441,000 888 0.15 Federal funds sold 3,114,778 485 0.06 1,208,333 436 0.15 Investment securities(2) 8,182,319 45,499 2.26 10,845,524 55,828 2.09 Mortgage loans 3,354,013 31,759 3.84 3,494,525 32,397 3.76 Other earning assets 1,409 - 0.04 258 2 3.14 Total interest-earning assets 47,743,498 136,701 1.16 % 38,589,792 160,577 1.69 % Other non-interest-earning assets 352,491 446,128 Fair-value adjustments on investment securities (211,071 ) (100,807 ) Total assets $ 47,884,918$ 136,701 1.16 % $ 38,935,113$ 160,577 1.67 % Liabilities and capital Consolidated obligations Discount notes $ 18,458,535$ 3,022 0.07 % $ 7,114,904$ 1,787 0.10 % Bonds 24,182,322 75,511 1.27 26,286,098 82,224 1.27 Deposits 527,760 7 0.01 629,284 11 0.01 Mandatorily redeemable capital stock 977,393 3,591 1.49 210,035 207 0.40 Other borrowings 1,842 1 0.22 960 - 0.23 Total interest-bearing liabilities 44,147,852 82,132 0.75 % 34,241,281 84,229 1.00 % Other non-interest-bearing liabilities 867,269 1,148,818 Total capital 2,869,797 3,545,014 Total liabilities and capital $ 47,884,918$ 82,132 0.70 % $ 38,935,113$ 84,229 0.88 % Net interest income $ 54,569$ 76,348 Net interest spread 0.41 % 0.69 % Net interest margin 0.46 % 0.80 % _________________________ (1) Yields are annualized. 44



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(2) The average balances of held-to-maturity securities and available-for-sale

securities are reflected at amortized cost; therefore the resulting yields do

not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.



Rate and Volume Analysis

Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense for the three months ended March 31, 2014 and 2013. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes. Rate and Volume Analysis (dollars in thousands) For the Three Months



Ended March 31, 2014 vs. 2013

Increase (Decrease) due to Volume Rate Total Interest income Advances $ 21,108$ (33,769 )$ (12,661 ) Securities purchased under agreements to resell 538 (833 ) (295 ) Federal funds sold 400 (351 ) 49 Investment securities (14,538 ) 4,209 (10,329 ) Mortgage loans (1,321 ) 683 (638 ) Other earning assets 2 (4 ) (2 ) Total interest income 6,189 (30,065 ) (23,876 ) Interest expense Consolidated obligations Discount notes 2,035 (800 ) 1,235 Bonds (6,569 ) (144 ) (6,713 ) Deposits (2 ) (2 ) (4 ) Mandatorily redeemable capital stock 1,937 1,447 3,384 Other borrowings 1 - 1 Total interest expense (2,598 ) 501 (2,097 ) Change in net interest income $ 8,787 $



(30,566 ) $ (21,779 )

Average Balance of Advances Outstanding

The average balance of total advances increased $7.6 billion, or 36.7 percent, for the three months ended March 31, 2014, compared with the same period in 2013. We experienced a rise in advances balances during the quarter concentrated in short-term advances, as discussed under - Executive Summary. The following table summarizes average balances of advances outstanding during the three months ended March 31, 2014 and 2013, by product type. 45



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Table of Contents Average Balance of Advances Outstanding by Product Type (dollars in thousands) For the Three Months Ended March 31, 2014 2013 Fixed-rate advances-par value Long-term $ 10,378,904$ 9,713,035 Short-term 9,903,664 4,824,006 Putable 2,463,048 3,124,292 Overnight 887,160 465,666 Amortizing 873,881 918,616 All other fixed-rate advances 72,000 76,633 24,578,657 19,122,248 Variable-rate indexed advances-par value Simple variable 3,133,444



819,444

Putable 116,000



143,500

All other variable-rate indexed advances 33,615 18,653 3,283,059 981,597 Total average par value 27,861,716 20,103,845 Net premiums 26,600 31,275 Market value of bifurcated derivatives 1,256



1,111

Hedging adjustments 280,852



463,921

Total average balance of advances $ 28,170,424



$ 20,600,152

Putable advances that are classified as fixed-rate advances in the table above are typically hedged with interest-rate-exchange agreements in which a short-term rate is received, typically three-month London Interbank Offered Rate (LIBOR). In addition, approximately 19.9 percent of average long-term fixed-rate advances were similarly hedged with interest-rate swaps. Therefore, a significant portion of our advances, including overnight advances, short-term fixed-rate advances, fixed-rate putable advances, certain fixed-rate bullet advances, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market interest-rate trends. The average balance of all such advances totaled $18.6 billion for the three months ended March 31, 2014, representing 66.0 percent of the total average balance of advances outstanding during the three months ended March 31, 2014. The average balance of all such advances totaled $11.5 billion for the three months ended March 31, 2013, representing 55.7 percent of the total average balance of advances outstanding during the three months ended March 31, 2013. For the three months ended March 31, 2014 and 2013, net prepayment fees on advances were $2.5 million and $11.9 million, respectively. For the three months ended March 31, 2014 and 2013, prepayment fees on investments were $179,000 and $2.7 million, respectively. Prepayment-fee income is unpredictable and inconsistent from period to period, occurring only when advances and investments are prepaid prior to the scheduled maturity or repricing dates, and generally when prevailing reinvestment yields are lower than those of the prepaid advances.



Average Balance of Investments

Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, increased $4.4 billion, or 120.2 percent, for the three months ended March 31, 2014, compared with the same period in 2013. The yield earned on short-term money market investments is highly correlated to short-term market interest rates. These investments are used for liquidity management and to manage our leverage ratio in response to fluctuations in other asset balances. For the three months ended March 31, 2014, average balances of securities purchased under agreements to resell increased $2.5 billion and average balances of federal funds sold increased $1.9 billion in comparison to the three months ended March 31, 2013. 46



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Average investment securities balances decreased $2.7 billion, or 24.6 percent for the three months ended March 31, 2014, compared with the same period in 2013, a decrease consisting primarily of a $1.5 billion decline in agency and supranational institutions' debentures and a $1.1 billion decline in MBS. The average aggregate balance of our investments in mortgage loans for the three months ended March 31, 2014, was $140.5 million lower than the average aggregate balance of these investments for the three months ended March 31, 2013, representing a decrease of 4.0 percent.



Average Balance of COs

Average CO balances increased $9.2 billion, or 27.7 percent, for the three months ended March 31, 2014, compared with the same period in 2013, resulting from our increased funding needs principally due to the increase in our average advances and short-term money market investment balances. This overall increase consisted of an increase of $11.3 billion in CO discount notes offset by a decrease of $2.1 billion in CO bonds. The average balance of term CO discount notes increased $11.3 billion and overnight CO discount notes increased $1.1 million for the three months ended March 31, 2014, in comparison with the same period in 2013. The average balance of CO discount notes represented approximately 43.3 percent of total average COs during the three months ended March 31, 2014, as compared with 21.3 percent of total average COs during the three months ended March 31, 2013. The average balance of CO bonds represented 56.7 percent and 78.7 percent of total average COs outstanding during the three months ended March 31, 2014 and 2013, respectively.



Impact of Derivatives and Hedging Activities

Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, deposits, and debt instruments that qualify for hedge accounting. We generally use derivative instruments that qualify for hedge accounting as interest rate risk-management tools. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of our risk-management strategy. The following tables show the net effect of derivatives and hedging activities on net interest income, net gains (losses) on derivatives and hedging activities, and net unrealized gains (losses) on trading securities for the three months ended March 31, 2014 and 2013 (dollars in thousands). 47



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Table of Contents For the Three Months Ended March 31, 2014 Net Effect of Derivatives and Hedging Activities Advances Investments Mortgage Loans Deposits CO Bonds Total Net interest income Amortization / accretion of hedging activities in net interest income (1) $ (2,054 ) $ - $ (59 ) $ - $ 5,182$ 3,069 Net interest settlements included in net interest income (2) (33,411 ) (9,494 ) - 397 10,671 (31,837 ) Total net interest income (35,465 ) (9,494 ) (59 )



397 15,853 (28,768 )

Net gains (losses) on derivatives and hedging activities Gains on fair-value hedges 144 231 - - 119 494 Losses on cash-flow hedges - - - - (135 ) (135 ) Losses on derivatives not receiving hedge accounting - (1,836 ) - - (17 ) (1,853 ) Mortgage delivery commitments - - 111 - - 111 Net gains (losses) on derivatives and hedging activities 144 (1,605 ) 111 - (33 ) (1,383 ) Subtotal (35,321 ) (11,099 ) 52 397 15,820 (30,151 ) Net gains on trading securities - 754 - - - 754 Total net effect of derivatives and hedging activities $ (35,321 )$ (10,345 ) $ 52



$ 397$ 15,820$ (29,397 )

_____________________

(1) Represents the amortization/accretion of hedging fair-value adjustments for

closed hedge positions.

(2) Represents interest income/expense on derivatives included in net interest

income. 48



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Table of Contents For the Three Months Ended March 31, 2013 Net Effect of Derivatives and Hedging Activities Advances Investments Mortgage Loans Deposits CO Bonds Total Net interest income Amortization / accretion of hedging activities in net interest income (1) $ (2,804 ) $ - $ (138 ) $ - $ 6,692$ 3,750 Net interest settlements included in net interest income (2) (39,760 ) (10,140 ) - 394 21,122 (28,384 ) Total net interest income (42,564 ) (10,140 ) (138



) 394 27,814 (24,634 )

Net (losses) gains on derivatives and hedging activities Gains on fair-value hedges 215 165 - - 75 455 Gains on cash-flow hedges - - - - 4 4 (Losses) gains on derivatives not receiving hedge accounting (2 ) 838 - - 78 914 Mortgage delivery commitments - - (285 ) - - (285 ) Net gains (losses) on derivatives and hedging activities 213 1,003 (285 ) - 157 1,088 Subtotal (42,351 ) (9,137 ) (423 ) 394 27,971 (23,546 ) Net losses on trading securities - (2,312 ) - - - (2,312 ) Total net effect of derivatives and hedging activities $ (42,351 )$ (11,449 ) $ (423



) $ 394$ 27,971$ (25,858 )

_____________________

(1) Represents the amortization/accretion of hedging fair-value adjustments for

closed hedge positions.

(2) Represents interest income/expense on derivatives included in net interest

income. Net interest margin for the three months ended March 31, 2014 and 2013, was 0.46 percent and 0.80 percent, respectively. If derivatives had not been used as hedges to mitigate the impact of interest-rate fluctuations, net interest margin would have been 0.73 percent and 1.10 percent, respectively. Interest paid and received on interest-rate-exchange agreements that are economic hedges, is classified as net losses on derivatives and hedging activities in other income. As shown under - Other Income (Loss) and Operating Expenses below, interest accruals on derivatives classified as economic hedges totaled a net expense of $1.7 million and $1.6 million, respectively for the three months ended March 31, 2014 and 2013.



For more information about our use of derivatives to manage interest-rate risk, see Item 3 - Quantitative and Qualitative Disclosures about Market Risk - Strategies to Manage Market and Interest-Rate Risk.

Other Income (Loss) and Operating Expenses

The following table presents a summary of other income (loss) for the three months ended March 31, 2014 and 2013. Additionally, detail on the components of net gains (losses) on derivatives and hedging activities is provided, indicating the source of these gains and losses by type of hedging relationship and hedge accounting treatment. 49



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Table of Contents Other Income (Loss) (dollars in thousands) For the Three Months Ended March 31, 2014 2013 Gains (losses) on derivatives and hedging activities: Net gains related to fair-value hedge ineffectiveness $ 494 $ 455 Net (losses) gains related to cash-flow hedge ineffectiveness (135 ) 4



Net unrealized (losses) gains related to derivatives not receiving hedge accounting associated with: Advances

(121 ) (92 ) Trading securities (17 ) 2,642 Mortgage delivery commitments 111 (285 ) Net interest-accruals related to derivatives not receiving hedge accounting (1,715 ) (1,636 ) Net (losses) gains on derivatives and hedging activities (1,383 ) 1,088



Net other-than-temporary impairment credit losses on held-to-maturity securities recognized in income

(458 ) (421 ) Litigation settlements 4,310 - Loss on early extinguishment of debt (2,223 ) (2,567 ) Service-fee income 1,670 1,417 Net unrealized gains (losses) on trading securities 754 (2,312 ) Other (136 ) 98 Total other income (loss) $ 2,534 $ (2,697 ) As noted in the Other Income (Loss) table above, accounting for derivatives and hedged items results in the potential for considerable timing differences between income recognition from assets or liabilities and income effects of hedging instruments entered into to mitigate interest-rate risk and cash-flow activity.



See Item 1 - Notes to the Financial Statements - Note 6 - Other-Than-Temporary Impairment, for additional detail and analysis of the portfolio of held-to-maturity investments in private-label MBS.

For the three months ended March 31, 2014, compensation and benefits expense and other operating expenses totaled $14.9 million, representing an increase of $1.9 million from the total of $13.0 million for the three months ended March 31, 2013. This increase was due to a $1.3 million increase in compensation and benefits expense resulting from annual merit increases and planned staffing increases along with an increase of $577,000 in other operating expenses.



Our share of the costs and expenses of operating the FHFA and the Office of Finance totaled $1.5 million and $1.7 million for the three months ended March 31, 2014 and 2013, respectively.

FINANCIAL CONDITION

Advances

At March 31, 2014, the advances portfolio totaled $29.7 billion, an increase of $2.2 billion compared with $27.5 billion at December 31, 2013.

The following table summarizes advances outstanding by product type at March 31, 2014, and December 31, 2013.

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Table of Contents Advances Outstanding by Product Type (dollars in thousands) March 31, 2014 December 31, 2013 Percent of Percent of Par Value Total Par Value Total Fixed-rate advances Long-term $ 10,323,078 35.1 % $ 10,331,903 38.0 % Short-term 9,942,489 33.8 10,340,279 38.0 Putable 2,435,675 8.3 2,492,175 9.1 Overnight 1,001,590 3.4 1,473,251 5.4 Amortizing 881,111 3.0 868,869 3.2 All other fixed-rate advances 72,000 0.2 72,500 0.3 24,655,943 83.8 25,578,977 94.0 Variable-rate advances Simple variable 4,615,000 15.7 1,485,000 5.5 Putable 116,000 0.4 116,000 0.4 All other variable-rate indexed advances 35,288 0.1 31,287 0.1 4,766,288 16.2 1,632,287 6.0 Total par value $ 29,422,231 100.0 % $ 27,211,264 100.0 %



See Item 1 - Notes to the Financial Statements - Note 7 - Advances for disclosures relating to redemption terms of the advances portfolio.

We lend to members and housing associates with principal places of business within our district, which consists of the six New England states. At March 31, 2014, we had advances outstanding to 304, or 68.6 percent, of our 443 members. At December 31, 2013, we had advances outstanding to 302, or 68.2 percent, of our 443 members.



The following table presents the top five advance-borrowing institutions at March 31, 2014, and the interest earned on outstanding advances to such institutions for the three months ended March 31, 2014.

Top Five Advance-Borrowing Institutions (dollars in thousands) March 31, 2014 Percent of Advances Interest Total Par Income for the Par Value of Value of Weighted-Average Three Months Ended Name Advances Advances Rate (1) March 31, 2014 RBS Citizens N.A. $ 4,969,000 16.9 % 0.25 % $ 2,158 People's United Bank 2,355,979 8.0 0.20 1,486 Webster Bank, N.A. 2,203,551 7.5 0.51 2,500 Berkshire Bank 936,529 3.2 0.30 732 MetLife Insurance Company of Connecticut 725,000 2.4 1.03 2,220 Total of top five advance-borrowing institutions $ 11,190,059 38.0 % $ 9,096 _______________________



(1) Weighted-average rates are based on the contract rate of each advance without

taking into consideration the effects of interest-rate-exchange agreements

that we may use as hedging instruments.

Advances Credit Risk 51



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We endeavor to minimize credit risk on advances by monitoring the financial condition of our borrowers and by holding sufficient collateral to protect the Bank from credit losses. Our approaches to credit risk on advances are described under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Advances Credit Risk in the 2013 Annual Report. We have never experienced a credit loss on an advance.



We assign each non-insurance company borrower to one of the following three credit status categories based primarily on our assessment of the borrower's overall financial condition and other factors:

• Category-1: members that are generally in satisfactory financial condition;

• Category-2: members that show weakening financial trends in key financial

indices and/or regulatory findings; and

• Category-3: members with financial weaknesses that present an elevated level

of concern. We also place housing associates in Category-3.

We lend to insurance company members upon a review of an updated statement of their financial condition and their pledge of sufficient amounts of eligible collateral and they are not included in any category. Advances outstanding to borrowers in Category-1 status at March 31, 2014, totaled $21.6 billion. For these advances, we have access to collateral through security agreements, where the borrower agrees to hold such collateral for our benefit, totaling $52.8 billion as of March 31, 2014. Of this total, $7.9 billion of securities have been delivered to us or to an approved third-party custodian, an additional $2.2 billion of securities are held by borrowers' securities corporations, and $6.8 billion of residential mortgage loans have been pledged by borrowers' real-estate-investment trusts. The following table provides information regarding advances outstanding with our borrowers in Category-1, Category-2, Category-3, and insurance company members, at March 31, 2014, along with their corresponding collateral balances. Advances Outstanding by Borrower Credit Status Category As of March 31, 2014 (dollars in thousands) Ratio of Par Value of Discounted Number of Advances Discounted Collateral Borrowers Outstanding Collateral to Advances Category-1 266 $ 21,606,099$ 52,837,777 244.6 % Category-2 18 5,401,559 10,320,466 191.1 Category-3 15 517,918 930,130 179.6 Insurance companies 11 1,896,655 2,192,181 115.6 Total 310 $ 29,422,231$ 66,280,554 225.3 % The method by which a borrower pledges collateral is dependent upon the category to which it is assigned and on the type of collateral that the borrower pledges. Based upon the method by which borrowers pledge collateral to us, the following table shows the total potential lending value of the collateral that borrowers have pledged to us, net of our collateral valuation discounts as of March 31, 2014. Collateral by Pledge Type (dollars in thousands) Discounted Collateral Collateral not specifically listed and identified $ 37,044,359 Collateral specifically listed and identified 25,592,557 Collateral delivered to us 11,571,996 We accept nontraditional and subprime loans that are underwritten in accordance with applicable regulatory guidance as eligible collateral for our advances as discussed under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Advances Credit Risk in the 2013 Annual Report. At both March 31, 52



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2014, and December 31, 2013, the amount of pledged nontraditional and subprime loan collateral was nine percent of total member borrowing capacity.

We have not recorded any allowance for credit losses on credit products at March 31, 2014, and December 31, 2013, for the reasons discussed in Item 1 - Notes to the Financial Statements - Note 9 - Allowance for Credit Losses.

Investments

At March 31, 2014, investment securities and short-term money market instruments totaled $16.9 billion, compared with $13.0 billion at December 31, 2013.

Short-term money market investments totaled $8.7 billion and $4.6 billion at March 31, 2014, and December 31, 2013, respectively.

Investment securities declined $203.2 million to $8.2 billion at March 31, 2014, compared with December 31, 2013. The decline was attributable to a net decrease of $671.2 million in agency and supranational institutions' debentures offset by an increase of $470.1 million in MBS. Our MBS investment portfolio consists of the following categories of securities as of March 31, 2014, and December 31, 2013. The percentages in the table below are based on carrying value. Mortgage-Backed Securities March 31, 2014 December 31, 2013 Residential MBS - U.S. government-guaranteed and GSE 59.2 % 60.2 % Commercial MBS - U.S. government-guaranteed and GSE 24.6



22.1

Private-label residential MBS 15.9



17.4

ABS backed by home-equity loans 0.3 0.3 Total MBS 100.0 % 100.0 % See Item 1 - Notes to the Financial Statements - Note 3 - Trading Securities, Note 4 - Available-for-Sale Securities, Note 5 - Held-to-Maturity Securities, and Note 6 - Other-Than-Temporary Impairment for additional information on our investment securities. Investments Credit Risk We are subject to credit risk on unsecured investments consisting primarily of short-term (meaning under one year to maturity and currently consisting of overnight risk only) money-market instruments issued by high-quality financial institutions and long-term (original maturity in excess of one year) debentures issued or guaranteed by U.S. agencies, U.S government-owned corporations, GSEs, and supranational institutions. We place short-term funds with large, high-quality financial institutions with long-term credit ratings no lower than single-A (or equivalent) on an unsecured basis; currently all such placements expire within one day. In addition to these unsecured short-term investments, we also make secured investments in the form of securities purchased under agreements to resell secured by U.S. Treasury and agency obligations, with terms to maturity of up to 35 days. We have also invested in and are subject to secured credit risk related to MBS, ABS, and HFA securities that are directly or indirectly supported by underlying mortgage loans. FHFA regulations require our investments in MBS and ABS to be rated triple-A (or equivalent) at the time of purchase and our investments in HFA securities are to be rated double-A (or equivalent) or higher as of the date of purchase. However, following the S&P downgrade of the U.S. Government to AA+ in August 2011, the FHFA has stated that our investments in agency MBS and ABS can be rated double-A (or equivalent) at the time of purchase even though regulations require a triple-A rating (or equivalent).



Credit ratings of our investments are provided in the following table.

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Table of Contents Credit Ratings of Investments at Carrying Value As of March 31, 2014 (dollars in thousands) Long-Term Credit Rating (1) Below Investment Category Triple-A Double-A Single-A Triple-B Triple-B Unrated Money market instruments: (2) Interest-bearing deposits $ - $ 259 $ - $ - $ - $ - Securities purchased under agreements to resell - 1,600,000 3,750,000 - - - Federal funds sold - 2,100,000 1,250,000 - - - Total money market instruments - 3,700,259 5,000,000 - - - Investment securities: Non-MBS: U.S. agency obligations - 7,881 - - - - U.S. government-owned corporations - 254,052 - - - - GSEs - 259,826 - - - - Supranational institutions 424,823 - - - - - HFA securities 23,010 40,725 76,461 39,835 - 2,115 Total non-MBS 447,833 562,484 76,461 39,835 - 2,115 MBS: U.S. government guaranteed - residential (2) - 295,744 - - - - U.S. government guaranteed - commercial (2) - 818,676 - - - - GSE - residential (2) - 3,879,940 - - - - GSE - commercial (2) - 913,636 - - - - Private-label - residential 9,066 - 44,465 98,137 967,451 9 ABS backed by home-equity loans 2,252 1,136 9,178 2,352 4,579 2,616 Total MBS 11,318 5,909,132 53,643 100,489 972,030 2,625 Total investment securities 459,151 6,471,616 130,104 140,324 972,030 4,740 Total investments $ 459,151$ 10,171,875$ 5,130,104$ 140,324$ 972,030$ 4,740 _______________________



(1) Ratings are obtained from Moody's, Fitch Ratings Inc. (Fitch), and S&P and

are as of March 31, 2014. If there is a split rating, the lowest rating is

used.

(2) The issuer rating is used for these investments, and if a rating is on

negative credit watch, the rating in the next lower rating category is used

and then the lowest rating is determined.

At March 31, 2014, our unsecured credit exposure related to money market instruments and debentures, including accrued interest, was $4.3 billion to 11 counterparties and issuers, of which $3.3 billion was for federal funds sold, and $955.3 million was for debentures issued by GSEs and supranational institutions. The following issuers/counterparties individually accounted for greater than 10 percent of total unsecured credit exposure as of March 31, 2014: 54



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Issuers / Counterparties Representing Greater Than 10 Percent of Total Unsecured Credit Related to Money-Market Instruments and to Debentures As of March 31, 2014 Issuer / counterparty Percent Nordea Bank Finland PLC (1) 19.7 % Rabobank Nederland (1) 19.7 HSBC Bank USA NA (1) 11.6 Erste Group Bank AG (1) 11.6 Inter-American Development Bank (a supranational institution) 10.0 _______________________



(1) Overnight federal funds sold

The following table presents a summary of the average projected values over the remaining lives of the securities for the significant inputs relating to our cash flow analysis of private-label MBS during the quarter ended March 31, 2014, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, over-collateralization, and other accounts or cash flows that provide additional credit support such as reserve funds, insurance policies, and/or excess interest, if any, in a security structure that will generally absorb losses before we will experience a loss on the security. Subordinated tranches can serve as credit enhancement, because losses are generally allocated to the subordinate tranches until their principal balances have been reduced to zero before senior tranches are allocated losses. Over-collateralization means available collateral in excess of the principal balance of the related security. The calculated averages represent the dollar-weighted averages of all the private-label residential MBS and home-equity loan investments in each category shown, regardless of whether or not the securities have incurred an other-than-temporary impairment credit loss. Significant Inputs to Cash-flow Analysis of Private-label MBS For the Quarter Ended March 31, 2014 (dollars in thousands) Current Credit Significant Inputs - Weighted Average Enhancement Projected Private-label MBS by Projected Projected Loss Weighted Average Year of Securitization Par Value (1) Prepayment Rates Default Rates Severities Percent Private-label residential MBS Prime (2) 2007 $ 17,962 8.8 % 4.0 % 32.2 % 7.4 % 2006 11,219 11.3 14.0 37.2 0.0 2005 6,596 11.0 10.5 33.0 21.6 2004 and prior 87,015 13.0 6.7 31.1 14.1 Total $ 122,792 12.1 % 7.2 % 31.9 % 12.2 % Alt-A (2) 2007 $ 422,963 6.7 % 51.8 % 45.3 % 7.2 % 2006 731,751 7.3 46.7 45.4 7.4 2005 519,581 9.8 27.6 40.0 16.7 2004 and prior 59,524 12.0 21.1 35.6 26.7 Total $ 1,733,819 8.0 % 41.3 % 43.4 % 10.8 % ABS backed by home equity loans Subprime (2) 2004 and prior $ 23,535 7.5 % 23.4 % 65.1 % 32.9 % _______________________



(1) A private-label residential MBS with a par value of $2.8 million, consisting

of loans that are backed by the Federal Housing Administration and the U.S.

Department of Veterans Affairs, is not included in this table.

(2) Securities are classified in the table above based upon the current

performance characteristics of the underlying pool and therefore the manner

in which the collateral pool group backing the security has been modeled (as

prime, Alt-A, or subprime), rather than the classification of the security at the time of issuance. 55



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For purposes of the tables below we classify private-label residential and commercial MBS and ABS backed by home-equity loans as prime, Alt-A, or subprime based on the originator's classification at the time of origination or based on the classification by an NRSRO upon issuance of the MBS. In some instances, the NRSROs may have changed their classification subsequent to origination, which would not necessarily be reflected in the following tables. Of our $7.8 billion in par value of MBS and ABS investments at March 31, 2014, $1.9 billion in par value are private-label MBS. These private-label MBS are comprised of the following:



• $1.7 billion in par value are securities backed primarily by Alt-A loans;

• $185.6 million in par value are backed primarily by prime residential and/or

commercial loans; and

• $23.5 million in par value of these investments are backed primarily by

subprime mortgages. While there are no universally accepted classifications of mortgage loans based on underwriting standards, in general, subprime underwriting implies a credit-impaired borrower with a FICOฎ score below 660; prime underwriting implies a borrower without a history of delinquent payments as well as documented income and a loan amount that is at or less than 80 percent of the market value of the house; while Alt-A underwriting implies a prime borrower with limited income documentation and/or a loan-to-value ratio of higher than 80 percent. FICOฎ is a widely used credit-industry model developed by Fair Isaac and Company, Inc. to assess borrower credit quality with scores ranging from a low of 300 to a high of 850. While we generally follow the collateral type definitions provided by S&P, we do review the credit performance of the underlying collateral and revise the classification where appropriate, an approach that is likewise incorporated into the modeling assumptions provided by the OTTI Governance Committee. For additional information on the OTTI Governance Committee, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Other-Than-Temporary Impairment of Investment Securities in the 2013 Annual Report. The third-party collateral loan performance platform used by the FHLBank of San Francisco, with whom we have contracted to perform these analyses, assesses eight bonds that we own, totaling $63.6 million in par value as of March 31, 2014, to have collateral that is Alt-A in nature, while that same collateral is classified as prime by S&P. Accordingly, these bonds have been modeled using the same credit assumptions applied to Alt-A collateral. However, these bonds are reported as prime in the various tables below in this section. Additionally, one bond classified as Alt-A collateral by S&P, of which we held $3.7 million in par value as of March 31, 2014, is classified and modeled as prime by the third-party modeling software. However this bond is reported as Alt-A in the various tables below in this section in accordance with S&P's classification. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Other-Than-Temporary Impairment of Investment Securities in the 2013 Annual Report for information on our key inputs, assumptions, and modeling employed by us in our other-than-temporary impairment assessments. Unpaid Principal Balance of Private-Label MBS and ABS Backed by Home Equity Loans by Fixed Rate or Variable Rate (dollars in thousands) March 31, 2014 December 31, 2013 Fixed Variable Fixed Variable Private-label MBS Rate (1) Rate (1) Total Rate (1) Rate (1) Total Private-label residential MBS Prime $ 14,305$ 171,250$ 185,555$ 15,585$ 176,416$ 192,001 Alt-A 30,234 1,643,678 1,673,912 31,040 1,684,971 1,716,011 Total private-label residential MBS 44,539 1,814,928 1,859,467 46,625 1,861,387 1,908,012 ABS backed by home equity loans Subprime - 23,535 23,535 - 23,980 23,980 Total par value of private-label MBS $ 44,539$ 1,838,463$ 1,883,002$ 46,625$ 1,885,367$ 1,931,992



_______________________

(1) The determination of fixed or variable rate is based upon the contractual

coupon type of the security. 56



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The following table provides additional information related to our investments in MBS issued by private trusts and ABS backed by home equity loans. The amounts outstanding as of March 31, 2014, are stratified by year of issuance of the security. The tables also set forth the credit ratings and summary credit enhancements associated with our private-label MBS and ABS, stratified by year of securitization. Average current credit enhancements as of March 31, 2014, reflect the percentage of subordinated class outstanding balances as of March 31, 2014, to our senior class outstanding balances as of March 31, 2014, weighted by the par value of our respective senior class securities, and shown by year of securitization. Average current credit enhancements as of March 31, 2014, are indicative of the ability of subordinated classes to absorb loan collateral lost principal and interest shortfall before senior classes are impacted. Private-Label MBS and ABS Backed by Home Equity Loans by Year of Securitization At March 31, 2014 (dollars in thousands) Year of Securitization Total 2007 2006 2005 2004 and prior Par value by credit rating Triple-A $ 11,345 $ - $ - $ 9,066$ 2,279 Double-A 1,136 - - - 1,136 Single-A 53,643 - - 28,646 24,997 Triple-B 101,037 - - 20,200 80,837



Below Investment Grade

Double-B 44,259 - - 16,816 27,443 Single-B 97,106 17,962 - 63,126 16,018 Triple-C 895,230 210,015 488,189 180,229 16,797 Double-C 312,435 127,808 143,703 40,924 - Single-C 75,496 7,578 32,477 35,441 - Single-D 288,690 77,562 78,601 131,729 798 Unrated 2,625 - - - 2,625 Total $ 1,883,002$ 440,925$ 742,970$ 526,177$ 172,930 Amortized cost $ 1,453,576$ 309,418$ 515,655$ 456,646$ 171,857 Gross unrealized losses (59,254 ) (10,381 ) (18,547 ) (21,838 ) (8,488 ) Fair value 1,447,262 317,029 521,487 445,166 163,580 Other-than-temporary impairment for the three months ended March 31, 2014 Total other-than-temporary impairment losses on held-to-maturity securities $ - $ - $ - $ - $ - Net amount of impairment losses reclassified from accumulated other comprehensive loss (458 ) - (393 ) (65 ) - Net impairment losses on held-to-maturity securities recognized in income $ (458 ) $ - $ (393 )$ (65 ) $ - Weighted average percentage of fair value to par value 76.86 % 71.90 % 70.19 % 84.60 % 94.59 % Original weighted average credit support 26.24 28.48 28.71 26.17 10.08



Weighted average credit support 11.17 7.22 7.29

16.77 20.87 Weighted average collateral delinquency (1) 28.33 35.07 32.42 21.53 14.26



_______________________

(1) Represents loans that are 60 days or more delinquent.

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Certain private-label MBS that we own are insured by monoline insurers, that guarantee the timely payment of principal and interest on such MBS if such payments cannot be satisfied from the cash flows of the underlying mortgage pool. The assessment for other-than-temporary impairment of the MBS protected by such third-party insurance is described in Item 1 - Notes to the Financial Statements - Note 6 - Other-Than-Temporary Impairment. The monoline bond insurers continue to be subject to adverse ratings, rating downgrades, and weak financial performance measures. Below investment-grade ratings or rating downgrades imply an increased risk that the monoline bond insurer will fail to fulfill its obligations to reimburse the insured investor for claims made under the related insurance policies. There are five monoline bond insurers that insure our investment securities. Of the five monoline bond insurers, only the financial guarantee from Assured Guaranty Municipal Corp. is considered sufficient to cover all future claims and therefore is excluded from a burnout period analysis. Conversely, the key burnout period for monoline bond insurer Financial Guaranty Insurance Company is not considered applicable due to regulatory intervention that has suspended all claims, and we have placed no reliance on this monoline insurer. Syncora Guarantee Inc. is currently paying claims after previous regulatory intervention, although the burnout period is indeterminate, and therefore we have placed no reliance on this monoline insurer. For the remaining monoline bond insurers, MBIA Insurance Corporation and Ambac Assurance Corp., we have established a burnout period ending March 31, 2015. In addition, Ambac Assurance Corp. reimbursements during the burnout period are currently limited to 25 percent of claims. We monitor the financial condition of these monoline bond insurers on an ongoing basis and as facts and circumstances change, the burnout period could significantly change. As of March 31, 2014, our private-label MBS and ABS backed by home equity loan investments covered by monoline insurance was $100.7 million, of which $97.3 million represents private-label MBS covered by the monoline bond insurance for some period of time in the cash flow modeling. Of the $97.3 million, 79.3 percent represents Alt-A MBS and 20.7 percent represents subprime ABS backed by home equity loan investments. Mortgage Loans



As of March 31, 2014, our mortgage loan investment portfolio totaled $3.3 billion, a decrease of $20.5 million from December 31, 2013.

References to our investments in mortgage loans throughout this report include the 100 percent participation interests in mortgage loans purchased under a participation facility we have with the FHLBank of Chicago. The expiration date of this facility has been extended to June 30, 2015, and may be extended again. As of March 31, 2014, we had $487.8 million in 100 percent participation interests outstanding that had been purchased under this facility. For additional information on this facility, see Item 1 - Business - Business Lines - Mortgage Loan Finance - MPF Loan Participations in the 2013 Annual Report.



Mortgage Loans Credit Risk

We are subject to credit risk from the mortgage loans in which we invest due to our exposure to the credit risk of the underlying borrowers and the credit risk of the participating financial institutions when the participating financial institutions retain credit-enhancement and/or servicing obligations. For additional information on the credit risks arising from our participation in the MPF program, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Mortgage Loans - Mortgage Loans Credit Risk in the 2013 Annual Report.



Although our mortgage loan portfolio includes loans throughout the U.S., concentrations of five percent or greater of the outstanding principal balance of our conventional mortgage loan portfolio are shown in the following table:

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State Concentrations by Outstanding Principal Balance Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans March 31, 2014 December 31, 2013 Massachusetts 41 % 41 % Maine 12 11 Wisconsin 8 8 Connecticut 7 7 California 6 7 All others 26 26 Total 100 % 100 % Allowance for Credit Losses on Mortgage Loans. The allowance for credit losses on mortgage loans was $1.8 million at March 31, 2014, compared with $2.2 million at December 31, 2013. For information on the determination of the allowance at March 31, 2014, see Item 1 - Notes to the Financial Statements - Note 9 - Allowance for Credit Losses, and for information on our methodology for estimating the allowance, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Allowance for Loan Losses in the 2013 Annual Report. We place conventional mortgage loans on nonaccrual status when the contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is reversed against interest income. We monitor the delinquency levels of the mortgage loan portfolio on a monthly basis. Our investments in conventional mortgage loans that are delinquent are shown in the following table: Delinquent Mortgage Loans (dollars in thousands) March 31, 2014



December 31, 2013 Total par value past due 90 days or more and still accruing interest

$ 19,279 $ 19,450 Nonaccrual loans, par value 43,695 46,012 Troubled debt restructurings (not included above) 2,345 2,589 Higher-Risk Loans. Our portfolio includes certain higher-risk conventional mortgage loans. These include high loan-to-value ratio mortgage loans and subprime mortgage loans. The higher-risk loans represent a relatively small portion of our conventional mortgage loan portfolio (6.0 percent by outstanding principal balance), but a disproportionately higher portion of the conventional mortgage loan portfolio delinquencies (38.2 percent by outstanding principal balance). The table below shows the balance of higher-risk conventional mortgage loans and their delinquency rates as of March 31, 2014. Summary of Higher-Risk Conventional Mortgage Loans As of March 31, 2014 (dollars in thousands) Percent Delinquent Percent 90 Days or Total Par Delinquent 30 Percent More and High-Risk Loan Type Value Days Delinquent 60 Days Nonaccruing Subprime loans (1) $ 153,025 6.71 % 2.80 % 8.86 % High loan-to-value loans (2) 16,528 2.97 0.87 14.34 Subprime and high loan-to-value loans (3) 1,953 - - 8.46 Total high-risk loans $ 171,506 6.27 % 2.58 % 9.38 %



_______________________

(1) Subprime loans are loans to borrowers with FICOฎ credit scores of 660 or

lower.

(2) High loan-to-value loans have an estimated current loan-to-value ratio

greater than 100 percent based on movements in property values in the

core-based statistical areas where the property securing the loan is located.

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(3) These loans are subprime and also have a current estimated loan-to-value

ratio greater than 100 percent.

Our portfolio consists solely of fixed-rate conventionally amortizing first-lien mortgage loans. The portfolio does not include adjustable-rate mortgage loans, pay-option adjustable-rate mortgage loans, interest-only mortgage loans, junior lien mortgage loans, or loans with initial teaser rates. Mortgage Insurance Companies. We are exposed to credit risk from mortgage insurance companies that provide credit enhancement in place of the participating financial institution and for primary mortgage insurance coverage on individual loans. As of March 31, 2014, we were the beneficiary of primary mortgage insurance coverage on $214.0 million of conventional mortgage loans, and we were the beneficiary of supplemental mortgage insurance coverage on mortgage pools with a total unpaid principal balance of $21.4 million. Eight mortgage insurance companies that we have approved provide all of the coverage under these policies. Mortgage Insurance Companies that



Provide Mortgage Insurance Coverage

(dollars in thousands) April 30, 2014 March 31, 2014 Mortgage Insurance Balance of Percent of Company Loans with Total Ratings Credit Primary Primary Total Mortgage Mortgage Mortgage Insurance (S&P/ Rating Mortgage Mortgage Supplemental Insurance Insurance Company Moody's/Fitch) Outlook Insurance Insurance Mortgage Insurance Coverage Coverage United Guaranty Residential Insurance Corporation A-/Baa1/NR Stable $ 171,615$ 41,102 $ 16,195 $ 57,297 76.2 % Genworth Mortgage Insurance Corporation BB-/Ba1/NR Positive 19,808 5,264 - 5,264 7.0 Mortgage Guaranty Insurance Corporation BB/Ba3/NR Stable 11,534 2,727 3,966 6,693 8.9 Arch Mortgage Insurance Company BBB+/NR/NR Stable 5,417 1,370 - 1,370 1.8 PMI Mortgage Insurance Company (1) NR/NR/NR N/A 2,680 639 - 639 0.8 Republic Mortgage Insurance Company (2) NR/NR/NR N/A 1,988 429 649 1,078 1.4 Radian Guaranty Incorporated BB-/Ba3/NR Positive 794 164 2,657 2,821 3.8 Triad Guaranty Insurance Corporation (3) NR/NR/NR N/A 208 40 - 40 0.1 $ 214,044$ 51,735 $ 23,467 $ 75,202 100.0 %



_______________________

(1) On October 20, 2011, the Arizona Department of Insurance took possession and

control of PMI Mortgage Insurance Company and beginning October 24, 2011, PMI

Mortgage Insurance Company has been directed to pay only 50 percent of the

claim amounts with the remaining claim amounts being deferred until the

company is liquidated. Since that time, the cash and deferred percentages

have been changed, and on March 7, 2014, the cash percentage of the partial

claim payment plan increased to 67 percent. The remaining 33 percent will be

deferred based upon PMI Mortgage Insurance Company's ability to pay additional amounts in the future. Additionally, all claims that have previously been settled at a lower cash percentage were trued up (in a one-time payment) to the increased level of 67 percent.



(2) On January 19, 2012, the North Carolina Department of Insurance issued an

Order of Supervision providing for immediate

administrative supervision of Republic Mortgage Insurance Co. (RMIC), with the primary effect that RMIC was not permitted to pay more than 50 percent of any claims allowed under any policy of insurance it has issued. The remaining 50 percent was deferred and credited to a temporary surplus account on the books of RMIC during an initial period not to exceed one year. On November 29, 2012, the North Carolina Department of Insurance approved a corrective plan submitted by RMIC to make partial initial payments on all settled claims at the rate of 60 percent in cash, with the remaining 40 percent deferred and retained in cash reserves. The corrective plan is subject to at least an annual review by the North Carolina Department of Insurance, and the upward change in the initial cash payment percentage from 50 percent to 60 percent was retroactive to January 19, 2012. 60



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(3) On December 11, 2012, the Illinois Department of Insurance placed Triad

Guaranty Insurance Corporation in rehabilitation. On October 29, 2013, the

Supervising Court approved the rehabilitator's plan of rehabilitation for

Triad Guaranty Insurance Corporation. Under the terms of the plan of

rehabilitation, claims for loss, unearned premium, and return of premium will

be paid at the rate of 75 percent of the amount determined to be due, and a

deferred payment obligation will be recorded for the remaining 25 percent of

the amount due. Outstanding deferred payment obligations, which were recorded

by Triad Guaranty Insurance Corporation prior to approval of the plan of rehabilitation on loss claims that were previously paid at the rate of 60



percent of the amount due, will receive 37.5 percent of the deferred amount

in order to equalize those prior claim payments with the new 75 percent claim

payment rate called for under the plan of rehabilitation.

Deposits

At March 31, 2014, and December 31, 2013, deposits totaled $522.0 million and $517.6 million, respectively.

Term deposits issued in amounts of $100,000 or greater at both March 31, 2014, and December 31, 2013, amounted to a par amount of $20.0 million, with a maturity date in 2014, and a weighted average rate of 4.71 percent.

Consolidated Obligations

See - Liquidity and Capital Resources for information regarding our COs.

Derivatives

All derivatives are recorded on the statement of condition at fair value and classified as either derivative assets or derivative liabilities. Derivatives outstanding with counterparties with which we have an enforceable master-netting agreement are classified as assets or liabilities according to the net fair value of derivatives aggregated by each counterparty. Derivatives that have been cleared through a clearing member with a DCO are classified as assets or liabilities according to the net fair value of those derivatives which have been transacted through a particular clearing member with a particular DCO. Derivative assets' net fair value, net of cash collateral and accrued interest, totaled $7.9 million and $4.3 million as of March 31, 2014, and December 31, 2013, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $599.4 million and $608.2 million as of March 31, 2014, and December 31, 2013, respectively. The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as of March 31, 2014, and December 31, 2013. The notional amount is a factor in determining periodic interest payments or cash flows received and paid. Accordingly, the notional amount does not represent actual amounts exchanged or our overall exposure to credit and market risk. The hedge designation "fair value" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge changes in fair value attributable to changes in the designated benchmark interest rate, which is LIBOR. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation "economic" represents hedge strategies that do not qualify for hedge accounting, but are acceptable hedging strategies under our risk-management policy. 61



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Table of Contents Hedged Item and Hedge-Accounting Treatment (dollars in thousands) March 31, 2014 December 31, 2013 Notional Fair Notional Fair Hedged Item Derivative Designation Amount Value Amount Value Advances (1) Swaps Fair value $ 4,875,230$ (255,075 )$ 4,962,980$ (277,060 ) Swaps Economic 154,500 (1,117 ) 154,500 (893 ) Total associated with advances 5,029,730 (256,192 ) 5,117,480 (277,953 ) Available-for-sale securities Swaps Fair value 611,915 (250,541 ) 611,915 (218,658 ) Caps and floors Economic 300,000 26 300,000 43 Total associated with available-for-sale securities 911,915 (250,515 ) 911,915 (218,615 ) Trading securities Swaps Economic 210,000 (18,619 ) 215,000 (18,602 ) COs Swaps Fair value 6,402,695 (5,243 ) 6,112,695 (14,453 ) Swaps Economic 722,500 16 904,000 120 Forward starting swaps Cash Flow 1,558,800 (57,616 ) 1,410,800 (51,466 ) Total associated with COs 8,683,995 (62,843 ) 8,427,495 (65,799 ) Deposits Swaps Fair value 20,000 753 20,000 1,143 Total 14,855,640 (587,416 ) 14,691,890 (579,826 ) Mortgage delivery commitments 15,795 (53 ) 11,056 (35 ) Total derivatives $ 14,871,435 (587,469 ) $ 14,702,946 (579,861 ) Accrued interest (13,009 ) (26,249 ) Cash collateral and accrued interest 8,933 2,276 Net derivatives $ (591,545 )$ (603,834 ) Derivative asset $ 7,902$ 4,318 Derivative liability (599,447 ) (608,152 ) Net derivatives $ (591,545 )$ (603,834 ) _______________________



(1) Embedded advance derivatives separated from the host contract with a notional

amount of $154.5 million as of both March 31, 2014, and December 31, 2013,

and fair values of $1.1 million and $892,000, respectively, are not included

in the table. The following tables provide a summary of our hedging relationships for fair-value hedges of advances and COs that qualify for hedge accounting by year of contractual maturity. Interest accruals on interest-rate-exchange agreements in qualifying hedge relationships are recorded as interest income on advances and interest expense on COs in the statement of operations. The notional amount of derivatives in qualifying fair-value hedge relationships of advances and COs totals $11.3 billion, representing 75.8 percent of all derivatives outstanding as of March 31, 2014. Economic hedges and cash-flow hedges are not included within the two tables below. 62



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Table of Contents Fair-Value Hedge Relationships of Advances By Year of Contractual Maturity As of March 31, 2014 (dollars in thousands) Weighted-Average Yield (3) Derivatives Advances(1) Derivatives Receive Pay Hedged Fair-Value Floating Fixed Net Receive Maturity Notional Fair Value Amount Adjustment(2) Advances Rate Rate Result Due in one year or less $ 502,250$ (5,343 )$ 502,250 $ 5,328 3.11 % 0.24 % 2.89 % 0.46 % Due after one year through two years 546,560 (16,196 ) 546,560



16,255 2.76 0.24 2.43 0.57 Due after two years through three years 1,274,530 (70,632 ) 1,274,530

69,707 3.17 0.24 2.90 0.51 Due after three years through four years 1,591,750 (131,870 ) 1,591,750

131,206 3.65 0.24 3.53 0.36 Due after four years through five years 584,850 (28,526 ) 584,850 28,516 3.06 0.24 2.67 0.63 Thereafter 375,290 (2,508 ) 375,290 2,512 2.62 0.24 2.26 0.60 Total $ 4,875,230$ (255,075 )$ 4,875,230$ 253,524 3.22 % 0.24 % 2.97 % 0.49 %



_______________________

(1) Included in the advances hedged amount are $2.5 billion of putable advances,

which would accelerate the termination date of the derivative and the hedged

item if the put option is exercised.

(2) The fair-value adjustment of hedged advances represents the amounts recorded

for changes in the fair value attributable to changes in the designated

benchmark interest rate, LIBOR.

(3) The yield for floating-rate instruments and the floating-rate leg of

interest-rate swaps is the coupon rate in effect as of March 31, 2014. Fair-Value Hedge Relationships of Consolidated Obligations By Year of Contractual Maturity As of March 31, 2014 (dollars in thousands) Weighted-Average Yield (3) Derivatives CO Bonds (1) Derivatives Pay Fair-Value Receive Floating Net Pay



Year of Maturity Notional Fair Value Hedged Amount Adjustment(2) CO Bonds Fixed Rate Rate Result Due in one year or less

$ 2,642,695$ 4,285$ 2,642,695 $



(4,286 ) 0.46 % 0.48 % 0.12 % 0.10 % Due after one year through two years 1,190,000 12,781

1,190,000 (12,848 ) 0.96 0.99 0.15 0.12 Due after two years through three years 610,000 (1,092 ) 610,000 956 0.73 0.75 0.10 0.08 Due after three years through four years 465,000 (573 ) 465,000 1,360 1.09 1.09 0.04 0.04 Due after four years through five years 395,000 (176 ) 395,000 621 1.62 1.62 0.13 0.13 Thereafter 1,100,000 (20,468 ) 1,100,000 19,850 1.48 1.48 0.01 0.01 Total $ 6,402,695$ (5,243 )$ 6,402,695$ 5,653 0.87 % 0.89 % 0.10 % 0.08 %



_______________________

(1) Included in the CO Bonds hedged amount are $2.4 billion of callable CO bonds,

which would accelerate the termination date of the derivative and the hedged

item if the call option is exercised.

(2) The fair-value adjustment of hedged CO bonds represents the amounts recorded

for changes in the fair value attributable to changes in the designated

benchmark interest rate, LIBOR.

(3) The yield for floating-rate instruments and the floating-rate leg of

interest-rate swaps is the coupon rate in effect as of March 31, 2014.

We may engage in derivatives directly with affiliates of certain of our members that act as derivatives dealers to us. These derivatives are entered into for our own risk-management purposes and are not related to requests from our members to enter into such contracts. Derivatives. We are required to use DCOs to clear certain derivatives that the U.S. Commodity Futures Trading Commission (CFTC) has designated to be subject to a mandatory clearing requirement and may choose to clear other derivatives through DCOs (in each case, cleared derivatives), pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). Cleared derivatives are governed by futures account agreements in accordance with requirements of the Dodd-Frank Act. Under this framework, immediately after we execute a derivative transaction with an executing broker, 63



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we and the executing broker assign our respective sides of the derivative transactions to a DCO through a clearing member of that DCO that acts as our agent. The DCO requires that we collateralize current derivatives exposures with variation margin and that we provide the DCO with initial margin separate from the variation margin to provide the DCO additional protection against loss in the event of our default. Derivatives Credit Risk. We are subject to credit risk on derivatives. This risk arises from the risk of counterparty default on the derivative. The amount of loss created by default is the replacement cost of the defaulted contract, net of any collateral held by us or pledged by us to counterparties (unsecured derivatives exposure). We currently are receiving only cash collateral from counterparties with whom we are in a current positive fair-value position (i.e., we are in-the-money). The resulting net exposure at fair value is reflected in the derivatives table below. We presently pledge securities collateral for bilateral derivatives to counterparties with whom we are in a current negative fair-value position (i.e., we would owe the counterparty a net settlement amount if our derivatives were liquidated) by an amount that exceeds an exposure threshold defined in our master netting agreement with the counterparty. We may also pledge cash collateral, including, for cleared derivatives, initial and variation margin as required by the applicable DCO. From time to time, due to timing differences or derivatives valuation differences between our calculated derivatives values and those of our counterparties, and to the contractual haircuts applied, we pledge to counterparties securities collateral whose fair value exceeds the current negative fair-value positions with them. The table below details our counterparty credit exposure as of March 31, 2014. Derivatives Counterparty Current Credit Exposure As of March 31, 2014 (dollars in thousands) Cash Collateral Net Derivatives Fair Pledged To Non-cash Collateral Value Before /(From) Pledged To Net Credit Exposure Credit Rating (1) Notional Amount Collateral Counterparty Counterparty to Counterparties Asset positions with credit exposure: Bilateral derivatives Double-A $ 390,000 $ 200 $ - $ - $ 200 Cleared derivatives 2,585,800 (1,232 ) 8,933 - 7,701 Liability positions with credit exposure: Bilateral derivatives Single-A 1,583,750 (62,316 ) - 65,391 3,075 Triple-B 1,210,310 (61,735 ) - 64,621 2,886 Total derivative positions with nonmember counterparties to which we had credit exposure 5,769,860 (125,083 ) 8,933 130,012 13,862 Mortgage delivery commitments (2) 15,795 1 - - 1 Total $ 5,785,655$ (125,082 )$ 8,933 $ 130,012 $ 13,863

Derivative positions without credit exposure: (3) Double-A $ 297,000 Single-A 7,138,240 Triple-B 1,650,540 Total derivative positions without credit exposure $ 9,085,780 _______________________



(1) Ratings are obtained from Moody's, Fitch, and S&P. If there is a split

rating, the lowest rating is used. In the case where the obligations are

unconditionally and irrevocably guaranteed, the rating of the guarantor is

used.

(2) Total fair-value exposures related to commitments to invest in mortgage loans

are offset by certain pair-off fees. Commitments to invest in mortgage loans

are reflected as derivatives. We do not collateralize these commitments.

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However, should the participating financial institution fail to deliver the mortgage loans as agreed, the participating financial institution is charged a fee to compensate us for the nonperformance. (3) Represents derivatives positions with counterparties for which we are in a



net liability position, and for which we have delivered securities collateral

to the counterparty in an amount equal to or less than the net derivative

liability, or represents derivative positions with counterparties for which

we are in a net asset position, and for which the counterparty has delivered

collateral to us in an amount which exceeds our net derivative asset.

For information on our approach to the credit risks arising from our use of derivatives, see Item 7 - Management's Discussion and Analysis and Results of Operations - Financial Condition - Derivative Instruments - Derivative Instruments Credit Risks in the 2013 Annual Report.

LIQUIDITY AND CAPITAL RESOURCES

Our financial structure is designed to enable us to expand and contract our assets, liabilities, and capital in response to changes in membership composition and member credit needs. Our primary source of liquidity is our access to the capital markets through CO issuance, which is described in Item 1 - Business - Consolidated Obligations in the 2013 Annual Report. Outstanding COs and the condition of the market for COs are discussed below under - External Sources of Liquidity. Our equity capital resources are governed by our capital plan, certain portions of which are described under - Capital below as well as by applicable legal and regulatory requirements.



Liquidity

Internal Sources of Liquidity

We maintain structural liquidity to ensure we meet our day-to-day business needs and our contractual obligations. We define structural liquidity as projected net cash flow adjusted to assume all maturing advances are renewed, member overnight deposits are withdrawn at a rate of 50 percent per day, and loan investment commitments are taken down at a rate in excess of our ordinary experience (such adjustments are collectively referred to as our secondary uses of funds). We define projected net cash flow as projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, as applicable. We have a management action trigger based on our structural liquidity, which is a five business day test that is triggered if structural liquidity is less than negative $1.0 billion. We complied with this management action trigger at all times during the quarter ended March 31, 2014.



The following table shows our structural liquidity as of March 31, 2014.

Structural Liquidity As of March 31, 2014 (dollars in thousands) 5 Days Projected net cash flow $ 7,736,587 Less: Secondary uses of funds (3,775,691 ) Structural liquidity $ 3,960,896 We also have a management action trigger based on projected net cash flow. This is a 21 business day test which is triggered if projected net cash flow is negative at or before day 21. We complied with this management action trigger at all times during the quarter ended March 31, 2014. At March 31, 2014, projected net cash flow at day 21 was $7.1 billion. FHFA regulations require us to hold contingency liquidity in an amount sufficient to enable us to cover our liquidity requirements for a minimum of five business days without access to the CO debt markets. For contingency liquidity, we define adjusted net cash flow as projected sources of funds less uses of funds excluding reliance on access to the CO debt markets and including funding a portion of outstanding letters of credit. We complied with this requirement at all times during the three months ended March 31, 2014. As of March 31, 2014, and December 31, 2013, we held a surplus of $12.6 billion and $10.9 billion, respectively, of contingency liquidity for the following five days, exclusive of access to the proceeds of CO debt issuance. The following table demonstrates our contingency liquidity as of March 31, 2014. 65



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Table of Contents Contingency Liquidity As of March 31, 2014 (dollars in thousands) Cumulative Fifth Business Day Adjusted net cash flow $ 660,156



Contingency borrowing capacity (exclusive of CO issuances) 11,986,469 Net contingency liquidity

$ 12,646,625 In addition, certain FHFA guidance requires us to maintain sufficient liquidity, through short-term investments, in an amount at least equal to our anticipated cash outflows under two different scenarios. One scenario assumes that we cannot borrow funds from the capital markets for a period of 15 business days and that during that time we do not renew any maturing, prepaid, and put or called advances. The second scenario assumes that we cannot borrow funds from the capital markets for five business days and that during that period we will renew maturing and called advances for all members except very large, highly rated members. We were in compliance with these liquidity requirements at all times during the three months ended March 31, 2014. Further, we are sensitive to maintaining an appropriate funding balance between our assets and liabilities and have an established policy that limits the potential gap between assets inclusive of projected prepayments, funded by liabilities, inclusive of projected calls, maturing in less than one year. The established policy limits this imbalance to a gap of 20 percent of total assets. We maintained compliance with this limit at all times during the three months ended March 31, 2014. During the three months ended March 31, 2014, this gap averaged 0.5 percent (maximum level 1.0 percent and minimum level 0.2 percent). As of March 31, 2014, this gap was 1.0 percent, compared with 2.1 percent at December 31, 2013.



External Sources of Liquidity

FHLBank P&I Funding Contingency Plan Agreement

We have a source of emergency external liquidity through the FHLBank P&I Funding Contingency Plan Agreement, as discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - External Sources of Liquidity in the 2013 Annual Report. None of the FHLBanks have ever drawn funding under this agreement.



Debt Financing - Consolidated Obligations

At March 31, 2014, and December 31, 2013, outstanding COs, including both CO bonds and CO discount notes, totaled $44.7 billion and $39.5 billion, respectively.

CO bonds outstanding for which we are primarily liable at March 31, 2014, and December 31, 2013, include issued callable bonds totaling $3.7 billion and $2.5 billion, respectively. CO discount notes comprised 45.3 percent and 40.6 percent of the outstanding COs for which we are primarily liable at March 31, 2014, and December 31, 2013, respectively, but accounted for 90.9 percent and 88.2 percent of the proceeds from the issuance of such COs during the three months ended March 31, 2014 and 2013, respectively, due, in particular, to our frequent overnight CO discount note issuances.



See Item 1 - Notes to the Financial Statements - Note 12 - Consolidated Obligations for additional information on the COs for which we are primarily liable.

Financial Conditions for Consolidated Obligations

We have experienced relatively favorable CO issuance costs and stable market access during the period covered by this report. Further, financial markets have remained generally calm. Due to diminished issuance by the other GSEs, our relative cost of issuing long-term debt has modestly improved.



Capital

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Capital at March 31, 2014, was $2.9 billion, an increase of $70.7 million from $2.8 billion at December 31, 2013. Capital stock increased by $32.4 million and accumulated other comprehensive loss totaled $470.0 million at March 31, 2014, an improvement of $11.5 million from December 31, 2013. Restricted retained earnings totaled $114.0 million at March 31, 2014, and $106.8 million at December 31, 2013. Total retained earnings at March 31, 2014, grew to $815.6 million, an increase of $26.8 million from December 31, 2013. Amounts in our restricted retained earnings account are not available to be paid as dividends. For information on our restricted retained earnings contribution requirement, see Item 8 - Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 16 - Capital in the 2013 Annual Report. The FHLBank Act and FHFA regulations specify that each FHLBank is required to satisfy certain minimum regulatory capital requirements. We were in compliance with these requirements at March 31, 2014, as discussed in Item 1 - Notes to the Financial Statements - Note 14 - Capital. Subject to applicable law following the expiry of the stock redemption period (which is five years for Class B stock), we redeem capital stock for any member that requests redemption of its excess stock, gives notice of intent to withdraw from membership, or becomes a nonmember due to merger, acquisition, charter termination, or involuntary termination of membership. Capital stock subject to a stock redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock totaled $977.7 million and $977.3 million at March 31, 2014, and December 31, 2013, respectively. For additional information on the redemption of our capital stock, see Item 1 - Business - Capital Resources - Redemption of Excess Stock and Item 1 - Business - Capital Resources - Mandatorily Redeemable Capital Stock in the 2013 Annual Report. The following table sets forth the amount of mandatorily redeemable capital stock by year of expiry of redemption period at March 31, 2014, and December 31, 2013 (dollars in thousands). Expiry of Redemption Period March 31, 2014 December 31, 2013 Past redemption date (1) $ 697 $ 697 Due in one year or less - - Due after one year through two years 116,745



-

Due after two years through three years -



116,745

Due after three years through four years 859,905



832

Due after four years through five years 338 859,074 Total $ 977,685 $ 977,348 _______________________



(1) Amount represents mandatorily redeemable capital stock that has reached the

end of the five-year redemption period but the member-related activity

remains outstanding. Accordingly, these shares of stock will not be redeemed

until the activity is no longer outstanding.

Our ability to expand in response to member-credit needs is based primarily on the capital-stock requirements for advances. Members without excess stock are required to increase their capital-stock investment as their outstanding advances increase, as described in Item 1 - Business - Capital Resources in the 2013 Annual Report. As discussed in that Item, we may repurchase excess stock at our sole discretion, although we note our continuing moratorium on repurchases of excess stock other than in limited, former member-related instances of insolvency. Notwithstanding the moratorium, we have conducted and expect to continue to conduct partial repurchases of excess stock as discussed in Item 1 - Business - Capital Resources - Repurchases of Excess Stock in the 2013 Annual Report. As discussed in Item 1 - Notes to the Financial Statements - Note 20 - Subsequent Events, we repurchased $500.0 million of excess stock on May 1, 2014.



At March 31, 2014, and December 31, 2013, excess stock totaled $1.6 billion and $1.7 billion, respectively, as set forth in the following table (dollars in thousands):

Outstanding Membership Stock Activity-Based



Total Stock Class B

Investment Stock



Investment Capital Stock Excess Class B

Requirement Requirement Requirement (1) (2) Capital Stock March 31, 2014 $ 622,664 $ 1,286,950$ 1,909,636$ 3,540,542$ 1,630,906 December 31, 2013 626,354 1,169,536 1,795,913 3,507,819 1,711,906 _______________________ 67



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(1) Total stock-investment requirement is rounded up to the nearest $100 on an

individual member basis.

(2) Class B capital stock outstanding includes mandatorily redeemable capital

stock. Capital Rule The FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule), among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. For additional information on the Capital Rule, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital - Capital Rule in the 2013 Annual Report. By letter dated March 20, 2014, the Director of the FHFA notified us that, based on December 31, 2013, financial information, we met the definition of adequately capitalized under the Capital Rule.



Internal Capital Practices and Policies

We also take steps as we believe prudent beyond legal or regulatory requirements in an effort to protect our capital, reflected in our targeted capital ratio operating range, internal minimum capital requirement in excess of regulatory requirements, minimum retained earnings target, and limitations on dividends.



Targeted Capital Ratio Operating Range

We target an operating capital ratio range as required by FHFA regulations. Currently, this range is set at 4.0 percent to 7.5 percent. Our capital ratio was 8.7 percent at March 31, 2014, a ratio in excess of the targeted operating range. This results principally from our limited repurchases of excess stock accompanied with a significant decline in assets, particularly advances balances since 2008. Our capital increases in connection with required purchases as a condition of membership, which vary based on each member's total assets, and in connection with each member's use of our products that require a purchase of capital stock, such as in connection with our advances products. Our capital can decrease in connection with stock redemptions, any repurchases of excess stock, or if retained earnings are depleted.



Internal Minimum Capital Requirement in Excess of Regulatory Requirements

To provide further protection for our capital base, we maintain an internal minimum capital requirement whereby the amount of paid-in capital stock and retained earnings (together, our actual regulatory capital) must exceed the sum of our regulatory capital requirement plus our minimum retained earnings target (together, our internal minimum capital requirement). As of March 31, 2014, this internal minimum capital requirement equaled $2.7 billion, which was satisfied by our actual regulatory capital of $4.4 billion.



Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations

Our significant off-balance-sheet arrangements consist of the following:

• commitments that obligate us for additional advances;

• standby letters of credit;

• commitments for unused lines-of-credit advances; and

• unsettled COs. Off-balance-sheet arrangements are more fully discussed in Item 8 - Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 20 - Commitments and Contingencies in the 2013 Annual Report. The FHLBanks must annually set aside for the AHP the greater of an aggregate of $100 million or 10 percent of the current year's income before charges for AHP and interest expense on mandatorily redeemable capital stock. Based on our net income of $36.1 million for the three months ended March 31, 2014, our AHP assessment was $4.4 million. See Item 1 - Business - Assessments in the 2013 Annual Report for additional information regarding the AHP assessment. 68



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CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ. We have identified five accounting estimates that we believe are critical because they require us to make subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates include accounting for derivatives, the use of fair-value estimates, accounting for deferred premiums and discounts on prepayable assets, the allowance for loan losses, and other-than-temporary-impairment of investment securities. The Audit Committee of our board of directors has reviewed these estimates. The assumptions involved in applying these policies are discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates in the 2013 Annual Report. As of March 31, 2014, we have not made any significant changes to the estimates and assumptions used in applying our critical accounting policies and estimates from those used to prepare our audited financial statements. Described below are the results of the sensitivity analysis for other-than-temporary impairment of private-label MBS.



Other-Than-Temporary Impairment of Investment Securities

See Item 1 - Notes to the Financial Statements - Note 6 - Other-Than-Temporary Impairment for additional information related to management's other-than-temporary impairment analysis for the current period.

In addition to evaluating our residential private-label MBS under a base-case (or best estimate) scenario, a cash-flow analysis was also performed for each of these securities under a more stressful housing price index scenario that was determined by the OTTI Governance Committee. This more stressful scenario was based on a housing price forecast that was decreased five percentage points followed by a recovery path that is 33.0 percent lower than the base case. The following table represents the impact on credit-related other-than-temporary impairment using the more stressful scenario of the housing price index, described above, compared with actual credit-related other-than-temporary impairment recorded using our base-case housing price index assumptions as of March 31, 2014 (dollars in thousands): Credit Losses as Reported Sensitivity Analysis - Adverse HPI



Scenario

Number of Other-Than-Temporary Impairment Number of



Other-Than-Temporary

For the quarter ended March 31, 2014 Securities Par Value

Credit Loss Securities Par Value Impairment Credit Loss Alt-A 5 $ 87,317 $ (458 ) 13 $ 197,612 $ (4,502 ) Subprime - - - 2 1,327 (42 ) Total private-label MBS 5 $ 87,317 $ (458 ) 15 $ 198,939 $ (4,544 )



RECENT ACCOUNTING DEVELOPMENTS

See Item 1 - Notes to the Financial Statements - Note 2 - Recently Issued Accounting Standards and Interpretations for a discussion of recent accounting developments impacting or that could impact us.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

The legislative and regulatory environment in which we and our members operate continues to evolve as a result of regulations enacted pursuant to the Housing and Economic Recovery Act of 2008, as amended (Housing Act) and the Dodd-Frank Act. Our business operations, funding costs, rights, obligations, and/or the environment in which we carry out our housing finance mission are likely to continue to be significantly impacted by these changes. Significant regulatory actions and developments for the period covered by this report are summarized below. Significant FHFA Developments 69



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Final Rule on Executive Compensation. On January 28, 2014, the FHFA issued a final rule that became effective on February 27, 2014, that sets forth requirements and processes with respect to compensation provided to executive officers by FHLBanks and the Office of Finance. The final rule addresses the authority of the Director of the FHFA to approve, disapprove, modify, prohibit, or withhold compensation of certain executive officers of the FHLBanks and the Office of Finance. The final rule also addresses the Director's authority to approve, in advance, agreements or contracts of executive officers that provide compensation in connection with termination of employment. The final rule implements the statutory prohibition on the FHLBanks' and the Office of Finance's payment of compensation to an executive officer that is not reasonable and comparable with compensation paid by similar businesses for similar duties and responsibilities. Failure by an FHLBank or the Office of Finance to comply with the rule may result in supervisory action by the FHFA. Final Rule on Golden Parachute Payments. On January 28, 2014, the FHFA issued a final rule which became effective on February 27, 2014, that sets forth the standards that the FHFA will take into consideration when limiting or prohibiting golden parachute payments. The primary impact of this final rule is to better conform existing FHFA regulations on golden parachutes with FDIC golden parachute regulations and to further limit golden parachute payments made by an FHLBank or the Office of Finance that is assigned a less than satisfactory composite FHFA examination rating.



FHFA Proposed Rule on Responsibilities of Boards of Directors; Corporate Practices and Corporate Governance Matters. On January 28, 2014, the FHFA published a proposed rule, with an extended comment deadline of May 15, 2014, which would, among other things:

• revise existing risk-management regulations to align them with more recent

proposals of the Federal Reserve, including requirements that we adopt an

enterprise-wide risk-management program and have a chief risk officer with

certain enumerated responsibilities and lines of reporting;

• require each entity to maintain a compliance program headed by a compliance

officer who reports directly to the chief executive officer;

• require each entity's board of directors to include committees specifically

responsible for risk management, audit, compensation, and corporate

governance;

• require each FHLBank to designate in its bylaws a body of law to follow for

its corporate governance practices and governance issues that may arise for

which no federal law controls; and

• subject each FHLBank's indemnification policies to review by the FHFA for

safety and soundness.


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Source: Edgar Glimpses


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