Presentation

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our 2011 Form 10-K and the financial statements and related footnotes contained in Item 1. Financial Statements.

As used in this Form 10-Q, unless the context otherwise requires, the terms "we," "us," and "our" refer to the Federal Home Loan Bank of Indianapolis. We use certain acronyms and terms throughout this Form 10-Q, which are included in the Glossary of Terms located in Item 1. Financial Statements.

Unless otherwise stated, amounts are rounded to the nearest million; therefore, dollar amounts of less than one million may not be reflected in this report and, due to rounding, may not appear to agree to the amounts presented in thousands in the Financial Statements and Notes to Financial Statements. Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.

Special Note Regarding Forward-Looking Statements

Statements in this Form 10-Q, including statements describing our objectives, projections, estimates or future predictions, may be "forward-looking statements." These statements may use forward-looking terminology, such as "anticipates," "believes," "could," "estimates," "may," "should," "expects," "will," or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements involve risk or uncertainty and that actual results either could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following:

• economic and market conditions, including the timing and volume of market activity, inflation or deflation, changes in the value of global currencies, and changes in the financial condition of market participants;

• volatility of market prices, rates, and indices that could affect the value of collateral we hold as security for the obligations of our members and counterparties;

• demand for our Advances and purchases of mortgage loans under our MPP or participation interests in mortgage loans purchased from other FHLBanks under the MPF program resulting from:

? changes in our members' deposit flows and credit demands;

?            membership changes, including, but not limited to, mergers,
             acquisitions and consolidations of charters;


?            changes in the general level of housing activity in the United
             States, the level of refinancing activity and consumer product
             preferences; and


?            competitive forces, including, without limitation, other sources of
             funding available to our members;


•      changes in mortgage asset prepayment patterns, delinquency rates and
       housing values;


•      our ability to introduce new products and services and successfully manage
       the risks associated with our products and services, including new types
       of collateral securing Advances;


•      political events, including legislative, regulatory, or other
       developments, and judicial rulings that affect us, our status as a secured
       creditor, our members, counterparties, one or more of the FHLBanks and/or
       investors in the Consolidated Obligations of the 12 FHLBanks;


•      changes in our ability to raise capital market funding, including changes
       in credit ratings and the level of government guarantees provided to other
       United States and international financial institutions; and competition
       from other entities borrowing funds in the capital markets;


•      negative adjustments in the FHLBanks' credit ratings that could adversely
       impact the pricing and marketability of our Consolidated Obligations,
       products, or services;


•      risk of loss should one or more of the FHLBanks be unable to repay its
       participation in the Consolidated Obligations, or otherwise be unable to
       meet its financial obligations;

• ability to attract and retain skilled individuals;

• ability to develop and support technology and information systems sufficient to effectively manage the risks of our business;

• changes in terms of interest-rate exchange agreements and similar agreements;

• risk of loss arising from natural disasters, acts of war or acts of terrorism; and

• changes in or differing interpretations of accounting guidance.

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Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make through reports filed with the SEC in the future, including our Forms 10-K, 10-Q and 8-K.

Executive Summary

Overview. We are a regional wholesale bank that makes Advances; purchases whole mortgages from our member financial institutions; purchases participation interests in mortgage loans from other FHLBanks; purchases other investments; and provides other financial services to our member financial institutions. These member financial institutions can consist of federally-insured depository institutions (including commercial banks, thrifts, and credit unions), insurance companies and community development financial institutions. All member financial institutions are required to purchase shares of our Class B Capital Stock as a condition of membership. Our public policy mission is to facilitate and expand the availability of financing for housing and community development. We seek to achieve our mission by providing products and services to our members in a safe, sound, and profitable manner, and by generating a competitive return on their capital investment. See Item 1. Business - Background Information in our 2011 Form 10-K for more information.

We group our products and services within two business segments:

• Traditional, which includes credit services (such as Advances, letters of credit, and lines of credit), investments (including Federal Funds Sold, Securities Purchased Under Agreements to Resell, AFS securities, and HTM securities), correspondent services and deposits; and

• Mortgage Loans, which consists of (i) mortgage loans purchased from our members through our MPP and (ii) participation interests purchased from other FHLBanks in mortgage loans that were purchased by those FHLBanks from their respective PFI members under the MPF program. See Analysis of Financial Condition - Mortgage Loans Held for Portfolio - Reactivation of our Participation in the MPF Program for more information.

Our principal source of funding is the proceeds from the sale to the public of FHLBank debt instruments, called Consolidated Obligations, which are the joint and several obligation of all 12 FHLBanks. We obtain additional funds from deposits, other borrowings, and the sale of capital stock to our members.

Our primary source of revenue is interest earned on Advances, long- and short-term investments, and mortgage loans.

Our Net Interest Income is primarily determined by the interest-rate spread between the interest rate earned on our assets and the interest rate paid on our share of the Consolidated Obligations. We use funding and hedging strategies to manage the related interest-rate risk.

Economic Conditions. Our financial condition and results of operations are influenced by the general state of the global and national economies; the conditions in the financial, credit and mortgage markets; the prevailing level of interest rates; and the local economies in our district states of Indiana and Michigan and their impact on our member financial institutions.

The United States economy entered a recession in December 2007, which ended in June 2009. Although the United States economy has begun to show signs of improvement, many of the effects of the recession and the world-wide financial crisis continued in the United States during the first six months of 2012, including serious pressures on earnings and capital at many financial institutions, high unemployment rates, high levels of mortgage delinquencies and foreclosures, and a depressed housing market. Home prices continue to be depressed as housing supply remains very high, housing demand is weak and loan originations and sales volumes remain low. Sales of distressed properties, such as foreclosures, real estate owned by financial institutions, and short sales by borrowers behind on their mortgage payments, have adversely affected the housing market. Foreclosure times have increased, and the current outlook for resolving the backlog of foreclosed properties remains uncertain.

Many of the effects of the world-wide financial crisis have also continued to affect the global economy during the first six months of 2012. During the first quarter of 2012, all three of the major NRSROs announced ratings downgrades on some of the Eurozone countries, or have placed them on review for possible downgrade. According to a report issued by Fitch on June 27, 2012, the severity of the economic crisis in Europe intensified in the second quarter of 2012. Europe's financial markets and economy remain under significant stress, which is likely to continue to negatively affect the global economy.

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The FOMC indicated that it will maintain the target range for the federal funds rate at 0.00-0.25%, as it continues to anticipate that economic conditions, including low rates of resource utilization and subdued inflation trends, are likely to warrant exceptionally low levels of the federal funds rate at least through late 2014. Although not possible to predict, the continued abnormally low rates in the near-term may cause more interest rate volatility and ultimately higher rates in the future than would normally be anticipated.

The Bureau of Labor Statistics reported that Michigan's preliminary unemployment rate equaled 8.6% for June 2012, while Indiana's preliminary rate was 8.0% compared to the United States rate of 8.2%. According to information provided by LPS Applied Analytics for May 2012, Indiana had a non-current mortgage rate (loans past due 30 days or more) of 13.2%, and Michigan had a non-current mortgage rate of 10.4%, compared to the national rate of 11.3%.

In its most recent forecast, the Center for Econometric Research at Indiana University predicts that the Indiana economy will achieve positive, but sluggish, economic growth, with rising employment and personal income and a decline in the unemployment rate. The most recent forecast published by the Research Seminar in Quantitative Economics at the University of Michigan states that the Michigan economy is beginning its third year of recovery after exiting a debilitating recession at the end of 2009, driven mainly by job growth in the higher-wage segment of the economy. University of Michigan economists expect a moderate rate of state job growth for 2012. Although the overall economic outlook for our district is showing some signs of improvement, we believe it will continue to trail the overall United States economy.

The Capital Markets. The Office of Finance, our fiscal agent, issues debt in the global capital markets on behalf of the 12 FHLBanks in the form of Consolidated Obligations, which include CO Bonds and Discount Notes. Our funding operations are dependent on debt issued by the Office of Finance, and the issuance of our debt is affected by events in the capital markets.

Overall, the capital markets continued to experience volatility in the first six months of 2012, mainly driven by concerns about European sovereigns and the impact of a European recession on other national economies. Other concerns included continued high unemployment and depressed housing prices in the United States.

The FOMC decided to continue its program to extend the average maturity of its holdings of securities as announced in June. To help support conditions in the mortgage markets, the FOMC will maintain its existing policy of reinvesting principal payments from its holdings of agency MBS and agency debt in agency MBS. The FOMC will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery in a context of price stability.

During the second quarter of 2012, investment in taxable money market funds, which purchase a significant portion of the Discount Notes and short maturity CO Bonds issued by the FHLBanks, continued to fall as low rates and better economic data likely led investors to seek increased returns in riskier asset classes. As a subset of those assets, taxable money market fund investments allocated to the "U.S. Other Agency" category also decreased.

Impact on Operating Results. Events in the capital and housing markets in the last several years have created opportunities to generate spreads well above historical levels on certain types of transactions. Although we expected the frequency and level of higher-spread investment opportunities to continue to diminish in 2012, the current Eurozone crisis has led to very low costs for our Consolidated Obligations, causing spreads to be wider than expected across all asset classes. During the second quarter of 2012, spreads to LIBOR on our swapped debt increased compared to the first quarter of 2012. We expect Net Interest Income to decline if the cost of our debt increases to pre-crisis levels and the spreads on our assets revert to historical levels. Moreover, these spreads could be affected by unexpected changes in the economic environment.

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Summary of Selected Financial Data

The following table presents a summary of certain financial information as of
and for the three-month periods indicated ($ amounts in millions):
                                                As of and for the Three Months Ended
                             June 30,      March 31,      December 31,      September 30,       June 30,
                               2012           2012            2011               2011             2011
Statement of Condition:
Total Assets               $   40,165     $   39,469     $      40,375     $       40,950     $   40,059
Advances                       18,814         18,042            18,568             18,564         17,476
Investments (1)                15,239         15,149            15,203             15,828         14,624
Mortgage Loans Held for
Portfolio                       5,785          5,843             5,958              6,110          6,283
Allowance for loan
losses                             (5 )           (3 )              (3 )               (3 )           (2 )
Discount Notes                  7,557          5,969             6,536              6,981          9,993
CO Bonds                       28,720         29,337            30,358             29,855         26,068
Total Consolidated
Obligations                    36,277         35,306            36,894             36,836         36,061
MRCS                              451            457               454                483            515
Capital Stock, Class B
Putable                         1,608          1,565             1,563              1,553          1,490
Retained Earnings                 549            527               498                472            451
AOCI                              (80 )          (82 )            (114 )              (85 )          (57 )
Total Capital                   2,077          2,010             1,947              1,940          1,884

Statement of Income:
Net Interest Income                60             62                59                 56             56
Provision for Credit
Losses                              2              -                 1                  2              1
Net OTTI credit losses              -             (3 )              (1 )               (5 )           (3 )
Other Income (Loss),
excluding net OTTI
credit losses                      (5 )            2                (1 )                -             (5 )
Other Expenses                     15             15                15                 16             14
Total Assessments                   4              5                 5                  3              9
Net Income                         34             41                36                 30             24

Selected Financial
Ratios:
Return on average equity
(2)                              6.53 %         8.42 %            7.27 %             6.19 %         4.96 %
Return on average assets         0.33 %         0.41 %            0.34 %             0.29 %         0.23 %
Dividend payout ratio
(3)                             35.05 %        28.37 %           26.90 %            32.76 %        40.72 %
Net interest margin (4)          0.59 %         0.62 %            0.57 %             0.54 %         0.53 %
Total capital ratio (5)          5.17 %         5.09 %            4.82 %             4.74 %         4.70 %
Total regulatory capital
ratio (6)                        6.49 %         6.46 %            6.23 %             6.12 %         6.13 %
Average equity to
average assets                   5.02 %         4.83 %            4.65 %             4.67 %         4.63 %
Weighted average
dividend rate, Class B
stock (7)                        3.00 %         3.00 %            2.50 %             2.50 %         2.50 %
Par amount of
outstanding Consolidated
Obligations for all 12
FHLBanks                   $  685,195     $  658,015     $     691,868     $      696,606     $  727,475

(1) Investments consist of Interest-Bearing Deposits, Securities Purchased Under Agreements to Resell, Federal Funds Sold, AFS securities, HTM securities, and loans to other FHLBanks.

(2) Return on average equity is Net Income expressed as a percentage of average total capital.

(3) The dividend payout ratio is calculated by dividing dividends paid in cash during the period by Net Income for the period.

(4) Net interest margin is Net Interest Income expressed as a percentage of average interest-earning assets.

(5) Total capital ratio is Capital Stock plus Retained Earnings and AOCI expressed as a percentage of Total Assets.

(6) Total regulatory capital ratio is Capital Stock plus Retained Earnings and MRCS expressed as a percentage of Total Assets.

(7) The weighted average dividend rate is calculated by dividing dividends paid in cash during the period by the average of Class B Capital Stock eligible for dividends (i.e., excludes MRCS).

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Results of Operations and Changes in Financial Condition

Net Income for the Three and Six Months Ended June 30, 2012 and 2011. Net Income for the three months ended June 30, 2012 was $33.2 million. The increase of $8.8 million compared to the same period in 2011 was primarily due to higher Net Interest Income, lower OTTI credit losses on our private-label mortgage-backed securities and a decrease in Total Assessments as a result of satisfying our obligation to REFCORP as of June 30, 2011. Net Interest Income After Provision for Credit Losses increased by $2.8 million or 5% in the second quarter of 2012, compared to the same period in 2011, primarily due to wider spreads on our interest-earning assets and an increase in Prepayment Fees on Advances, partially offset by lower levels of certain interest-earning assets.

Net Income for the first six months of 2012 was $74.7 million. The increase of $30.4 million compared to the same period in 2011 was primarily due to lower OTTI credit losses on our private-label mortgage-backed securities, higher Net Interest Income and a decrease in Total Assessments as a result of satisfying our obligation to REFCORP as of June 30, 2011. Net Interest Income After Provision for Credit Losses increased by $5.9 million or 5% in the first six months of 2012, compared to the same period in 2011, primarily due to wider spreads on our interest-earning assets, partially offset by lower levels of certain interest-earning assets.

The following table presents the comparative highlights of our results of operations ($ amounts in millions, as rounded):