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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-51405
FEDERAL HOME LOAN BANK OF DALLAS
(Exact name of registrant as specified in its charter)
     
Federally chartered corporation   71-6013989
(State or other jurisdiction of incorporation
or organization)
  (I.R.S. Employer
Identification Number)
     
8500 Freeport Parkway South, Suite 600
Irving, TX
  75063-2547
(Address of principal executive offices)   (Zip code)
(214) 441-8500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant [1] has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and [2] has been subject to such filing requirements for the past 90 days.
Yes þ      No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (17 C.F.R. §232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o      No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At July 31, 2010, the registrant had outstanding 22,076,722 shares of its Class B Capital Stock, $100 par value per share.
 
 

 


 

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 EX-31.1
 EX-31.2
 EX-32.1

 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CONDITION
(Unaudited; in thousands, except share data)
                 
    June 30,     December 31,  
    2010     2009  
ASSETS
               
Cash and due from banks
  $ 2,449,204     $ 3,908,242  
Interest-bearing deposits
    218       233  
Federal funds sold
    2,712,000       2,063,000  
Trading securities (Note 10)
    4,517       4,034  
Held-to-maturity securities (a) (Notes 3 and 10)
    10,096,619       11,424,552  
Advances (Note 4)
    41,453,540       47,262,574  
Mortgage loans held for portfolio, net of allowance for credit losses of $234 and $240 at June 30, 2010 and December 31, 2009, respectively
    235,235       259,617  
Accrued interest receivable
    54,179       60,890  
Premises and equipment, net
    24,803       24,789  
Derivative assets (Notes 7 and 10)
    14,354       64,984  
Other assets
    18,673       19,161  
 
           
TOTAL ASSETS
  $ 57,063,342     $ 65,092,076  
 
           
 
               
LIABILITIES AND CAPITAL
               
Deposits
               
Interest-bearing
  $ 961,264     $ 1,462,554  
Non-interest bearing
    24       37  
 
           
Total deposits
    961,288       1,462,591  
 
           
 
               
Consolidated obligations, net (Note 5)
               
Discount notes
    6,070,294       8,762,028  
Bonds
    46,956,288       51,515,856  
 
           
Total consolidated obligations, net
    53,026,582       60,277,884  
 
           
 
               
Mandatorily redeemable capital stock
    7,787       9,165  
Accrued interest payable
    123,048       179,248  
Affordable Housing Program (Note 6)
    40,537       43,714  
Payable to REFCORP
    9,847       9,912  
Derivative liabilities (Notes 7 and 10)
    9,035       486  
Other liabilities
    279,872       287,044  
 
           
Total liabilities
    54,457,996       62,270,044  
 
           
 
               
Commitments and contingencies (Note 11)
               
 
               
CAPITAL (Note 8)
               
Capital stock — Class B putable ($100 par value) issued and outstanding shares:
               
22,609,456 and 25,317,146 shares at June 30, 2010 and December 31, 2009, respectively
    2,260,945       2,531,715  
Retained earnings
    406,608       356,282  
Accumulated other comprehensive income (loss)
               
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities (Note 3)
    (62,797 )     (66,584 )
Postretirement benefits
    590       619  
 
           
Total accumulated other comprehensive income (loss)
    (62,207 )     (65,965 )
 
           
Total capital
    2,605,346       2,822,032  
 
           
TOTAL LIABILITIES AND CAPITAL
  $ 57,063,342     $ 65,092,076  
 
           
 
(a)   Fair values: $10,170,605 and $11,381,786 at June 30, 2010 and December 31, 2009, respectively.
The accompanying notes are an integral part of these financial statements.

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Table of Contents

FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF INCOME
(Unaudited, in thousands)
                                 
    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
INTEREST INCOME
                               
Advances
  $ 80,833     $ 178,904     $ 162,370     $ 434,783  
Prepayment fees on advances, net
    3,682       9,850       6,355       10,654  
Interest-bearing deposits
    75       83       117       179  
Federal funds sold
    1,468       1,363       2,611       2,849  
Available-for-sale securities
          12             468  
Held-to-maturity securities
    39,620       37,836       77,837       78,652  
Mortgage loans held for portfolio
    3,336       4,109       6,859       8,547  
Other
    5       157       8       270  
 
                       
Total interest income
    129,019       232,314       256,157       536,402  
 
                       
 
                               
INTEREST EXPENSE
                               
Consolidated obligations
                               
Bonds
    57,939       148,836       117,043       375,888  
Discount notes
    2,432       68,384       6,111       167,464  
Deposits
    231       305       387       1,066  
Mandatorily redeemable capital stock
    7       35       20       56  
Other borrowings
    1       1       2       2  
 
                       
Total interest expense
    60,610       217,561       123,563       544,476  
 
                       
 
                               
NET INTEREST INCOME (EXPENSE)
    68,409       14,753       132,594       (8,074 )
 
                               
OTHER INCOME (LOSS)
                               
Total other-than-temporary impairment losses on held-to-maturity securities
          (25,570 )     (7,031 )     (51,785 )
Net non-credit portion of impairment losses recognized in other comprehensive income
    (1,103 )     24,916       5,360       51,114  
 
                       
Credit component of other-than-temporary impairment losses on held-to-maturity securities
    (1,103 )     (654 )     (1,671 )     (671 )
 
                               
Service fees
    794       854       1,357       1,482  
Net gain (loss) on trading securities
    (235 )     257       (116 )     178  
Realized gain on sale of available-for-sale security
                      843  
Net gains (losses) on derivatives and hedging activities
    1,288       33,903       (25,418 )     160,734  
Gains on early extinguishment of debt
          176             176  
Other, net
    1,480       1,565       2,939       3,241  
 
                       
Total other income (loss)
    2,224       36,101       (22,909 )     165,983  
 
                       
 
                               
OTHER EXPENSE
                               
Compensation and benefits
    9,623       8,546       19,620       18,299  
Other operating expenses
    6,409       6,220       13,000       13,723  
Finance Agency
    622       561       1,328       1,163  
Office of Finance
    369       505       907       1,039  
 
                       
Total other expense
    17,023       15,832       34,855       34,224  
 
                       
 
                               
INCOME BEFORE ASSESSMENTS
    53,610       35,022       74,830       123,685  
 
                       
 
                               
Affordable Housing Program
    4,376       2,863       6,110       10,102  
REFCORP
    9,847       6,432       13,744       22,717  
 
                       
Total assessments
    14,223       9,295       19,854       32,819  
 
                       
 
                               
NET INCOME
  $ 39,387     $ 25,727     $ 54,976     $ 90,866  
 
                       
The accompanying notes are an integral part of these financial statements.

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Table of Contents

FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited, in thousands)
                                         
                            Accumulated        
    Capital Stock             Other        
    Class B - Putable     Retained     Comprehensive     Total  
    Shares     Par Value     Earnings     Income (Loss)     Capital  
BALANCE, JANUARY 1, 2010
    25,317     $ 2,531,715     $ 356,282     $ (65,965 )   $ 2,822,032  
 
                                       
Proceeds from sale of capital stock
    2,398       239,830                   239,830  
Repurchase/redemption of capital stock
    (5,150 )     (515,048 )                 (515,048 )
Shares reclassified to mandatorily redeemable capital stock
    (1 )     (109 )                 (109 )
Comprehensive income
                                       
Net income
                54,976             54,976  
Other comprehensive income (loss) (a)
                      3,758       3,758  
 
                                     
 
                                       
Total comprehensive income
                            58,734  
 
                                     
 
                                       
Dividends on capital stock (at 0.375 percent annualized rate)
                                       
Cash
                (91 )           (91 )
Mandatorily redeemable capital stock
                (2 )           (2 )
Stock
    45       4,557       (4,557 )            
 
                             
 
                                       
BALANCE, JUNE 30, 2010
    22,609     $ 2,260,945     $ 406,608     $ (62,207 )   $ 2,605,346  
 
                             
 
                                       
BALANCE, JANUARY 1, 2009
    32,238     $ 3,223,830     $ 216,025     $ (1,435 )   $ 3,438,420  
 
                                       
Proceeds from sale of capital stock
    3,080       308,018                   308,018  
Repurchase/redemption of capital stock
    (7,075 )     (707,542 )                 (707,542 )
Shares reclassified to mandatorily redeemable capital stock
    (18 )     (1,845 )                 (1,845 )
Comprehensive income
                                       
Net income
                90,866             90,866  
Other comprehensive income (loss) (a)
                      (47,908 )     (47,908 )
 
                                     
 
                                       
Total comprehensive income
                            42,958  
 
                                     
 
                                       
Dividends on capital stock (at 0.34 percent annualized rate)
                                       
Cash
                (92 )           (92 )
Mandatorily redeemable capital stock
                (54 )           (54 )
Stock
    53       5,303       (5,303 )            
 
                             
 
                                       
BALANCE, JUNE 30, 2009
    28,278     $ 2,827,764     $ 301,442     $ (49,343 )   $ 3,079,863  
 
                             
 
(a)   For the three months ended June 30, 2010 and 2009, total comprehensive income of $45,357 and $2,653, respectively, includes net income of $39,387 and $25,727, respectively, and other comprehensive income (loss) of $5,970 and ($23,074), respectively. For the components of other comprehensive income (loss) for the three and six months ended June 30, 2010 and 2009, see Note 14.
The accompanying notes are an integral part of these financial statements.

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Table of Contents

FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
                 
    For the Six Months Ended  
    June 30,  
    2010     2009  
OPERATING ACTIVITIES
               
Net income
  $ 54,976     $ 90,866  
Adjustments to reconcile net income to net cash provided by (used in) operating activities
               
Depreciation and amortization
               
Net premiums and discounts on advances, consolidated obligations, investments and mortgage loans
    (56,923 )     (28,675 )
Concessions on consolidated obligation bonds
    4,845       4,071  
Premises, equipment and computer software costs
    3,001       2,333  
Non-cash interest on mandatorily redeemable capital stock
    14       98  
Realized gain on sale of available-for-sale security
          (843 )
Credit component of other-than-temporary impairment losses on held-to-maturity securities
    1,671       671  
Gains on early extinguishment of debt
          (176 )
Net increase in trading securities
    (483 )     (84 )
Loss due to change in net fair value adjustment on derivative and hedging activities
    109,561       108,480  
Decrease in accrued interest receivable
    6,700       62,769  
Decrease (increase) in other assets
    (837 )     1,598  
Increase (decrease) in Affordable Housing Program (AHP) liability
    (3,177 )     3,377  
Decrease in accrued interest payable
    (56,206 )     (332,489 )
Decrease in excess REFCORP contributions
          16,881  
Increase (decrease) in payable to REFCORP
    (65 )     5,836  
Increase (decrease) in other liabilities
    1,235       (3,598 )
 
           
Total adjustments
    9,336       (159,751 )
 
           
Net cash provided by (used in) operating activities
    64,312       (68,885 )
 
           
 
               
INVESTING ACTIVITIES
               
Net decrease (increase) in interest-bearing deposits
    (54,757 )     1,526,967  
Net increase in federal funds sold
    (649,000 )     (1,464,000 )
Proceeds from maturities of long-term held-to-maturity securities
    2,440,730       1,398,690  
Purchases of long-term held-to-maturity securities
    (1,078,810 )     (2,316,353 )
Proceeds from maturities of available-for-sale securities
          39,471  
Proceeds from sale of available-for-sale security
          87,019  
Principal collected on advances
    112,947,658       255,601,047  
Advances made
    (106,990,959 )     (248,401,858 )
Principal collected on mortgage loans held for portfolio
    24,085       37,270  
Purchases of premises, equipment and computer software
    (2,959 )     (5,998 )
 
           
Net cash provided by investing activities
    6,635,988       6,502,255  
 
           
 
               
FINANCING ACTIVITIES
               
Net decrease in deposits and pass-through reserves
    (619,683 )     (346,933 )
Net proceeds from (payments on) derivative contracts with financing elements
    (9,670 )     4,507  
Net proceeds from issuance of consolidated obligations
               
Discount notes
    66,500,234       170,832,385  
Bonds
    21,769,842       29,062,088  
Debt issuance costs
    (3,504 )     (3,862 )
Payments for maturing and retiring consolidated obligations
               
Discount notes
    (69,181,852 )     (172,610,643 )
Bonds
    (26,337,895 )     (32,956,464 )
Proceeds from issuance of capital stock
    239,830       308,018  
Proceeds from issuance of mandatorily redeemable capital stock
    97       73  
Payments for redemption of mandatorily redeemable capital stock
    (1,598 )     (13,617 )
Payments for repurchase/redemption of capital stock
    (515,048 )     (707,542 )
Cash dividends paid
    (91 )     (92 )
 
           
Net cash used in financing activities
    (8,159,338 )     (6,432,082 )
 
           
Net increase (decrease) in cash and cash equivalents
    (1,459,038 )     1,288  
Cash and cash equivalents at beginning of the period
    3,908,242       20,765  
 
           
 
               
Cash and cash equivalents at end of the period
  $ 2,449,204     $ 22,053  
 
           
 
               
Supplemental Disclosures:
               
Interest paid
  $ 144,712     $ 749,472  
 
           
AHP payments, net
  $ 9,287     $ 6,725  
 
           
REFCORP payments
  $ 13,809     $  
 
           
Stock dividends issued
  $ 4,557     $ 5,303  
 
           
Dividends paid through issuance of mandatorily redeemable capital stock
  $ 2     $ 54  
 
           
Capital stock reclassified to mandatorily redeemable capital stock
  $ 109     $ 1,845  
 
           
The accompanying notes are an integral part of these financial statements.

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Table of Contents

FEDERAL HOME LOAN BANK OF DALLAS
NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS
Note 1—Basis of Presentation
     The accompanying interim financial statements of the Federal Home Loan Bank of Dallas (the “Bank”) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The financial statements contain all adjustments which are, in the opinion of management, necessary for a fair statement of the Bank’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.
     The Bank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2009. The interim financial statements presented herein should be read in conjunction with the Bank’s audited financial statements and notes thereto, which are included in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 25, 2010 (the “2009 10-K”). The notes to the interim financial statements update and/or highlight significant changes to the notes included in the 2009 10-K.
     The Bank is one of 12 district Federal Home Loan Banks, each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System.” The Office of Finance manages the sale and servicing of the FHLBanks’ consolidated obligations. The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the United States Government, supervises and regulates the FHLBanks and the Office of Finance.
     Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make assumptions and estimates. These assumptions and estimates may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Significant assumptions include those that are used by the Bank in its periodic evaluation of its holdings of non-agency mortgage-backed securities for other-than-temporary impairment (“OTTI”). Significant estimates include the valuations of the Bank’s investment securities, as well as its derivative instruments and any associated hedged items. Actual results could differ from these estimates.
Note 2—Recently Issued Accounting Guidance
     Accounting for Transfers of Financial Assets. On June 12, 2009, the Financial Accounting Standards Board (“FASB”) issued guidance that changes how entities account for transfers of financial assets by (1) eliminating the concept of a qualifying special-purpose entity, (2) defining the term “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale, (3) clarifying the isolation analysis to ensure that an entity considers all of its continuing involvements with transferred financial assets to determine whether a transfer may be accounted for as a sale, (4) eliminating an exception that permitted an entity to derecognize certain transferred mortgage loans when that entity had not surrendered control over those loans, and (5) requiring enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement with transfers of financial assets accounted for as sales. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the Bank), for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter, with earlier application prohibited. The recognition and measurement provisions of the guidance must be applied to transfers that occur on or after the effective date. The Bank adopted this guidance on January 1, 2010. The adoption of this guidance has not had any impact on the Bank’s results of operations or financial condition.

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     Consolidation of Variable Interest Entities. On June 12, 2009, the FASB issued guidance that amends the consolidation guidance for variable interest entities (“VIEs”). This guidance eliminates the exemption for qualifying special purpose entities, establishes a more qualitative evaluation to determine the primary beneficiary based on power and the obligation to absorb losses or right to receive benefits, and requires ongoing reassessments to determine if an entity must consolidate a VIE. The guidance also requires enhanced disclosures about how an entity’s involvement with a VIE affects its financial statements and its exposure to risks. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the Bank), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter, with earlier application prohibited. The Bank’s investment in VIEs is limited to senior interests in mortgage-backed securities. The Bank evaluated its investments in VIEs during the six months ended June 30, 2010 and determined that consolidation accounting is not required under the new accounting guidance because the Bank is not the primary beneficiary. The Bank does not have the power to significantly affect the economic performance of any of these investments because it does not act as a key decision-maker nor does it have the unilateral ability to replace a key decision-maker. Additionally, because the Bank holds the senior interest, rather than the residual interest, in these investments, the Bank does not have either the obligation to absorb losses of, or the right to receive benefits from, any of its investments in VIEs that could potentially be significant to the VIEs. Furthermore, the Bank does not design, sponsor, transfer, service, or provide credit or liquidity support in any of its investments in VIEs. Therefore, the Bank’s adoption of this guidance on January 1, 2010 has not had any impact on its results of operations or financial condition.
     Fair Value Measurements and Disclosures—Improving Disclosures about Fair Value Measurements. On January 21, 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06 “Improving Disclosures About Fair Value Measurements” (“ASU 2010-06”), which amends the guidance for fair value measurements and disclosures. The guidance in ASU 2010-06 requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. Furthermore, ASU 2010-06 requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs; clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3; and amends guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009 (January 1, 2010 for the Bank), except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 (January 1, 2011 for the Bank), and for interim periods within those fiscal years. In the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The Bank adopted this guidance on January 1, 2010. The adoption of this guidance did not significantly impact the Bank’s financial statement footnote disclosures and it did not have any impact on the Bank’s results of operations or financial condition.
     Scope Exception Related to Embedded Credit Derivatives. On March 5, 2010, the FASB issued amended guidance to clarify that the only type of embedded credit derivative feature related to the transfer of credit risk that is exempt from derivative bifurcation requirements is one that is in the form of subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination will need to assess those embedded credit derivatives to determine if bifurcation and separate accounting as a derivative is required. This guidance is effective at the beginning of the first interim reporting period beginning after June 15, 2010 (July 1, 2010 for the Bank). Early adoption is permitted at the beginning of an entity’s first interim reporting period beginning after issuance of this guidance. The Bank adopted this guidance on July 1, 2010 and the adoption did not have any impact on the Bank’s results of operations or financial condition.
     Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. On July 21, 2010, the FASB issued ASU 2010-20 “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which amends the existing disclosure requirements to require a greater level of disaggregated information about the credit quality of financing receivables and the allowance for credit losses. The requirements are intended to enhance transparency regarding the nature of

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an entity’s credit risk associated with its financing receivables and an entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The disclosures that relate to information as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010 (December 31, 2010 for the Bank). The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010 (January 1, 2011 for the Bank). The adoption of this ASU will not have any impact on the Bank’s results of operations or financial condition. The Bank has not yet assessed the impact that this guidance will have on its financial statement footnote disclosures.
Note 3—Held-to-Maturity Securities
     Major Security Types. Held-to-maturity securities as of June 30, 2010 were as follows (in thousands):
                                                 
            OTTI Recorded in             Gross     Gross        
            Accumulated Other             Unrecognized     Unrecognized     Estimated  
    Amortized     Comprehensive     Carrying     Holding     Holding     Fair  
    Cost     Income (Loss)     Value     Gains     Losses     Value  
Debentures
                                               
U.S. government guaranteed obligations
  $ 55,251     $     $ 55,251     $ 441     $ 150     $ 55,542  
State housing agency obligation
    2,620             2,620             130       2,490  
 
                                   
 
    57,871             57,871       441       280       58,032  
 
                                   
Mortgage-backed securities
                                               
U.S. government guaranteed obligations
    22,001             22,001       59       2       22,058  
Government-sponsored enterprises
    9,588,712             9,588,712       126,178       5,611       9,709,279  
Non-agency residential mortgage-backed securities
    454,681       62,797       391,884             47,215       344,669  
Non-agency commercial mortgage-backed security
    36,151             36,151       416             36,567  
 
                                   
 
    10,101,545       62,797       10,038,748       126,653       52,828       10,112,573  
 
                                   
 
                                               
Total
  $ 10,159,416     $ 62,797     $ 10,096,619     $ 127,094     $ 53,108     $ 10,170,605  
 
                                   
     Held-to-maturity securities as of December 31, 2009 were as follows (in thousands):
                                                 
            OTTI Recorded in             Gross     Gross        
            Accumulated Other             Unrecognized     Unrecognized     Estimated  
    Amortized     Comprehensive     Carrying     Holding     Holding     Fair  
    Cost     Income (Loss)     Value     Gains     Losses     Value  
Debentures
                                               
U.S. government guaranteed obligations
  $ 58,812     $     $ 58,812     $ 425     $ 174     $ 59,063  
State housing agency obligation
    2,945             2,945             230       2,715  
 
                                   
 
    61,757             61,757       425       404       61,778  
 
                                   
Mortgage-backed securities
                                               
U.S. government guaranteed obligations
    24,075             24,075       8       73       24,010  
Government-sponsored enterprises
    10,837,865             10,837,865       78,135       53,295       10,862,705  
Non-agency residential mortgage-backed securities
    511,382       66,584       444,798             68,682       376,116  
Non-agency commercial mortgage-backed securities
    56,057             56,057       1,120             57,177  
 
                                   
 
    11,429,379       66,584       11,362,795       79,263       122,050       11,320,008  
 
                                   
 
                                               
Total
  $ 11,491,136     $ 66,584     $ 11,424,552     $ 79,688     $ 122,454     $ 11,381,786  
 
                                   
     The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of June 30, 2010. The unrealized losses include other-than-temporary impairments recognized in accumulated other comprehensive income and gross unrecognized holding losses and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.

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    Less than 12 Months     12 Months or More     Total  
            Estimated     Gross             Estimated     Gross             Estimated     Gross  
    Number of     Fair     Unrealized     Number of     Fair     Unrealized     Number of     Fair     Unrealized  
    Positions     Value     Losses     Positions     Value     Losses     Positions     Value     Losses  
Debentures
                                                                       
U.S. government guaranteed obligations
    1     $ 10,355     $ 64       1     $ 11,881     $ 86       2     $ 22,236     $ 150  
State housing agency obligation
                      1       2,490       130       1       2,490       130  
 
                                                     
 
    1       10,355       64       2       14,371       216       3       24,726       280  
 
                                                     
Mortgage-backed securities
                                                                       
U.S. government guaranteed obligations
    3       3,701       2                         3       3,701       2  
Government-sponsored enterprises
    15       178,339       105       80       4,321,128       5,506       95       4,499,467       5,611  
Non-agency residential mortgage-backed securities
                      40       344,669       110,012       40       344,669       110,012  
 
                                                     
 
    18       182,040       107       120       4,665,797       115,518       138       4,847,837       115,625  
 
                                                     
 
                                                                       
Total
    19     $ 192,395     $ 171       122     $ 4,680,168     $ 115,734       141     $ 4,872,563     $ 115,905  
 
                                                     
     The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of December 31, 2009.
                                                                         
    Less than 12 Months     12 Months or More     Total  
            Estimated     Gross             Estimated     Gross             Estimated     Gross  
    Number of     Fair     Unrealized     Number of     Fair     Unrealized     Number of     Fair     Unrealized  
    Positions     Value     Losses     Positions     Value     Losses     Positions     Value     Losses  
Debentures
                                                                       
U.S. government guaranteed obligations
        $     $       2     $ 23,079     $ 174       2     $ 23,079     $ 174  
State housing agency obligation
                      1       2,715       230       1       2,715       230  
 
                                                     
 
                      3       25,794       404       3       25,794       404  
 
                                                     
Mortgage-backed securities
                                                                       
U.S. government guaranteed obligations
    7       15,854       63       2       3,956       10       9       19,810       73  
Government-sponsored enterprises
    57       2,673,949       15,359       157       4,176,445       37,936       214       6,850,394       53,295  
Non-agency residential mortgage-backed securities
                      40       376,116       135,266       40       376,116       135,266  
 
                                                     
 
    64       2,689,803       15,422       199       4,556,517       173,212       263       7,246,320       188,634  
 
                                                     
 
                                                                       
Total
    64     $ 2,689,803     $ 15,422       202     $ 4,582,311     $ 173,616       266     $ 7,272,114     $ 189,038  
 
                                                     
     At June 30, 2010, the gross unrealized losses on the Bank’s held-to-maturity securities were $115,905,000, of which $110,012,000 was attributable to its holdings of non-agency (i.e., private-label) residential mortgage-backed securities and $5,893,000 was attributable to other securities. All of the Bank’s held-to-maturity securities are rated by one or more of the following nationally recognized statistical ratings organizations (“NRSROs”): (1) Moody’s Investors Service (“Moody’s”), (2) Standard and Poor’s (“S&P”) and/or (3) Fitch Ratings, Ltd. (“Fitch”). With the exception of 20 non-agency residential mortgage-backed securities with an aggregate carrying value of $221,907,000, none of these organizations had rated any of the securities held by the Bank lower than the highest investment grade credit rating at June 30, 2010. Based upon the Bank’s assessment of the creditworthiness of the issuers of the debentures held by the Bank, the credit ratings assigned by the NRSROs and the strength of the government-sponsored enterprises’ guarantees of the Bank’s holdings of agency mortgage-backed securities (“MBS”), the Bank expects that its holdings of U.S. government guaranteed debentures, state housing agency debentures, U.S. government guaranteed MBS and government-sponsored enterprise MBS that were in an unrealized loss position at June 30, 2010 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the current market value deficits associated with these securities are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at June 30, 2010.
     As of June 30, 2010, the gross unrealized losses on the Bank’s holdings of non-agency residential MBS (“RMBS”) totaled $110,012,000, which represented 24 percent of the securities’ amortized cost at that date. The deterioration in the U.S. housing markets that began in 2007, as reflected by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency RMBS, has generally elevated the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. Although this risk remains somewhat elevated, based on its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of June 30, 2010 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the actual historical or currently likely future credit performance of the securities.

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     Because the ultimate receipt of contractual payments on the Bank’s non-agency RMBS will depend upon the credit and prepayment performance of the underlying loans and the credit enhancements for the senior securities owned by the Bank, the Bank closely monitors these investments in an effort to determine whether the credit enhancement associated with each security is sufficient to protect against potential losses of principal and interest on the underlying mortgage loans. The credit enhancement for each of the Bank’s non-agency RMBS is provided by a senior/subordinate structure, and none of the securities owned by the Bank are insured by third-party bond insurers. More specifically, each of the Bank’s non-agency RMBS represents a single security class within a securitization that has multiple classes of securities. Each security class has a distinct claim on the cash flows from the underlying mortgage loans, with the subordinate securities having a junior claim relative to the more senior securities. The Bank’s non-agency RMBS have a senior claim on the cash flows from the underlying mortgage loans.
     To assess whether the entire amortized cost bases of its non-agency RMBS will be recovered, the Bank performed a cash flow analysis for each security as of June 30, 2010 using two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which are based upon an assessment of the individual housing markets. (The term “CBSA” refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people.) The Bank’s housing price forecast as of June 30, 2010 assumed current-to-trough home price declines ranging from 0 percent to 12 percent over the 3- to 9-month period beginning April 1, 2010. Thereafter, home prices are projected to increase 0 percent in the first six months, 0.5 percent in the next six months, 3 percent in the second year and 4 percent in each subsequent year. The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.
     Based on the results of its cash flow analyses, the Bank determined it is likely that it will not fully recover the amortized cost bases of four of its non-agency RMBS and, accordingly, these securities were deemed to be other-than-temporarily impaired as of June 30, 2010. All of these securities had previously been identified as other-than-temporarily impaired in prior periods. The difference between the present value of the cash flows expected to be collected from these four securities and their amortized cost bases (i.e., the credit losses) totaled $1,103,000 as of June 30, 2010. Because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their remaining amortized cost bases (that is, their previous amortized cost basis less the current-period credit loss), only the amounts related to the credit losses were recognized in earnings. All of the credit losses associated with these four securities were reclassified from accumulated other comprehensive income to earnings during the three months ended June 30, 2010 as the estimated fair values of these securities were greater than their carrying amounts at that date.
     In addition to the four securities that were determined to be other-than-temporarily impaired at June 30, 2010, five other securities were deemed to be other-than-temporarily impaired during 2009 or the first quarter of 2010. The following tables set forth additional information for each of the securities that were other-than-temporarily impaired as of June 30, 2010, including those securities that were deemed to be other-than-temporarily impaired in a prior period but which were not further impaired as of June 30, 2010 (in thousands). The credit ratings presented in the first table represent the lowest rating assigned to the security by Moody’s, S&P or Fitch as of June 30, 2010.

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                    Three Months Ended June 30, 2010     Six Months Ended June 30, 2010  
    Period of                     Credit     Non-Credit             Credit     Non-Credit  
    Initial     Credit     Total     Component     Component     Total     Component     Component  
    Impairment     Rating     OTTI     of OTTI     of OTTI     OTTI     of OTTI     of OTTI  
Security #1
    Q1 2009     Single-B   $     $ 379     $ (379 )   $     $ 428     $ (428 )
Security #2
    Q1 2009     Double-B                                    
Security #3
    Q2 2009     Triple-C           681       (681 )           1,127       (1,127 )
Security #4
    Q2 2009     Triple-B                                    
Security #5
    Q3 2009     Single-B           39       (39 )           39       (39 )
Security #6
    Q3 2009     Single-B                                    
Security #7
    Q3 2009     Triple-B                       112       60       52  
Security #8
    Q1 2010     Triple-B                       4,990       10       4,980  
Security #9
    Q1 2010     Double-B           4       (4 )     1,929       7       1,922  
 
                                                   
Totals
                  $     $ 1,103     $ (1,103 )   $ 7,031     $ 1,671     $ 5,360  
 
                                                   
                                         
            Cumulative from Period of Initial        
            Impairment Through June 30, 2010     June 30, 2010  
    Amortized     Non-Credit     Accretion of             Estimated  
    Cost as of     Component of     Non-Credit     Carrying     Fair  
    June 30, 2010     OTTI     Component     Value     Value  
Security #1
  $ 15,249     $ 11,342     $ 3,386     $ 7,293     $ 9,818  
Security #2
    19,166       13,060       3,395       9,501       10,702  
Security #3
    41,749       16,253       4,193       29,689       33,603  
Security #4
    13,115       8,508       2,056       6,663       7,593  
Security #5
    21,598       11,415       2,274       12,457       13,111  
Security #6
    18,225       10,225       2,011       10,011       10,279  
Security #7
    7,144       3,575       622       4,191       4,191  
Security #8
    10,883       4,980       399       6,302       6,292  
Security #9
    4,782       1,922       147       3,007       3,008  
 
                             
Totals
  $ 151,911     $ 81,280     $ 18,483     $ 89,114     $ 98,597  
 
                             
     For those securities for which an other-than-temporary impairment was determined to have occurred as of June 30, 2010, the following table presents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings during the three months ended June 30, 2010 (dollars in thousands):

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                            Significant Inputs(2)     Current Credit  
                    Unpaid Principal     Projected     Projected     Projected     Enhancement  
    Year of     Collateral     Balance as of     Prepayment     Default     Loss     as of  
    Securitization     Type(1)     June 30, 2010     Rate     Rate     Severity     June 30, 2010(3)  
Security #1
  2005     Alt-A/Option ARM   $ 17,055       7.1%       75.0%       51.9%       35.9%  
Security #3
  2006     Alt-A/Fixed Rate     44,864       13.8%       34.6%       44.4%       7.8%  
Security #5
  2005     Alt-A/Option ARM     21,924       8.6%       72.7%       51.0%       47.3%  
Security #9
  2005     Alt-A/Option ARM     4,788       8.2%       55.8%       37.0%       46.6%  
 
                                                     
Total
                  $ 88,631                                  
 
                                                     
 
(1)   Security #1 and Security #5 are the only securities presented in the table above that were labeled as Alt-A at the time of issuance; however, based upon their current collateral or performance characteristics, all of the other-than-temporarily impaired securities presented in the table above were analyzed using Alt-A assumptions.
 
(2)   Prepayment rates reflect the weighted average of projected future voluntary prepayments. Default rates reflect the total balance of loans projected to default as a percentage of the current unpaid principal balance of the underlying loan pool. Loss severities reflect the total projected loan losses as a percentage of the total balance of loans that are projected to default.
 
(3)   Current credit enhancement percentages reflect the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior class held by the Bank is impacted (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pool before the security held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pool, it is possible that the senior classes held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.
     The following table presents a rollforward for the three and six months ended June 30, 2010 and 2009 of the amount related to credit losses on the Bank’s non-agency RMBS holdings for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (in thousands).
                                 
    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
    2010     2009     2010     2009  
Balance of credit losses, beginning of period
  $ 4,590     $ 17     $ 4,022     $  
Credit losses on securities for which an other-than-temporary impairment was not previously recognized
          502       17       671  
Credit losses on securities for which an other-than-temporary impairment was previously recognized
    1,103       152       1,654        
 
                       
 
                               
Balance of credit losses, end of period
  $ 5,693     $ 671     $ 5,693     $ 671  
 
                       
     Because the Bank currently expects to recover the entire amortized cost basis of each of its other non-agency RMBS holdings, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of its other non-agency RMBS to be other-than-temporarily impaired at June 30, 2010.

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     Redemption Terms. The amortized cost, carrying value and estimated fair value of held-to-maturity securities by contractual maturity at June 30, 2010 and December 31, 2009 are presented below (in thousands). The expected maturities of some debentures could differ from the contractual maturities presented because issuers may have the right to call such debentures prior to their final stated maturities.
                                                 
    June 30, 2010     December 31, 2009  
                    Estimated                     Estimated  
    Amortized     Carrying     Fair     Amortized     Carrying     Fair  
Maturity   Cost     Value     Value     Cost     Value     Value  
Debentures
                                               
Due in one year or less
  $     $     $     $ 249     $ 249     $ 250  
Due after one year through five years
    3,079       3,079       3,139       3,607       3,607       3,689  
Due after five years through ten years
    29,785       29,785       30,167       31,703       31,703       32,046  
Due after ten years
    25,007       25,007       24,726       26,198       26,198       25,793  
 
                                   
 
    57,871       57,871       58,032       61,757       61,757       61,778  
Mortgage-backed securities
    10,101,545       10,038,748       10,112,573       11,429,379       11,362,795       11,320,008  
 
                                   
Total
  $ 10,159,416     $ 10,096,619     $ 10,170,605     $ 11,491,136     $ 11,424,552     $ 11,381,786  
 
                                   
     The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net purchase discounts of $122,757,000 and $150,047,000 at June 30, 2010 and December 31, 2009, respectively.
     Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as held-to-maturity at June 30, 2010 and December 31, 2009 (in thousands):
                 
    June 30, 2010     December 31, 2009  
Amortized cost of variable-rate held-to-maturity securities other than mortgage-backed securities
  $ 57,871     $ 61,757  
 
               
Amortized cost of held-to-maturity mortgage-backed securities
               
Fixed-rate pass-through securities
    866       937  
Collateralized mortgage obligations
               
Fixed-rate
    37,958       58,033  
Variable-rate
    10,062,721       11,370,409  
 
           
 
    10,101,545       11,429,379  
 
           
 
               
Total
  $ 10,159,416     $ 11,491,136  
 
           
     All of the Bank’s variable-rate collateralized mortgage obligations classified as held-to-maturity securities have coupon rates that are subject to interest rate caps, none of which were reached during 2009 or the six months ended June 30, 2010.

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Note 4—Advances
     Redemption Terms. At June 30, 2010 and December 31, 2009, the Bank had advances outstanding at interest rates ranging from 0.05 percent to 8.61 percent and 0.03 percent to 8.61 percent, respectively, as summarized below (in thousands).
                                 
    June 30, 2010     December 31, 2009  
            Weighted             Weighted  
            Average             Average  
Contractual Maturity   Amount     Interest Rate     Amount     Interest Rate  
Overdrawn demand deposit accounts
  $ 18       4.08 %   $ 181       4.05 %
 
                               
Due in one year or less
    14,228,980       0.87       14,909,262       0.98  
Due after one year through two years
    6,831,693       1.23       7,059,173       1.27  
Due after two years through three years
    11,221,249       0.87       8,163,416       0.80  
Due after three years through four years
    1,759,675       1.67       8,637,127       0.86  
Due after four years through five years
    464,926       3.47       1,262,879       0.99  
Due after five years
    3,387,518       3.83       3,593,166       3.84  
Amortizing advances
    3,056,815       4.51       3,282,368       4.53  
 
                           
Total par value
    40,950,874       1.51 %     46,907,572       1.44 %
 
                               
Deferred prepayment fees
    (7,563 )             (1,935 )        
Commitment fees
    (108 )             (110 )        
Hedging adjustments
    510,337               357,047          
 
                           
 
                               
Total
  $ 41,453,540             $ 47,262,574          
 
                           
     Amortizing advances require repayment according to predetermined amortization schedules.
     The Bank offers advances to members that may be prepaid on specified dates without the member incurring prepayment or termination fees (prepayable and callable advances). The prepayment of other advances requires the payment of a fee to the Bank (prepayment fee) if necessary to make the Bank financially indifferent to the prepayment of the advance. At June 30, 2010 and December 31, 2009, the Bank had aggregate prepayable and callable advances totaling $195,939,000 and $210,151,000, respectively.
     The following table summarizes advances at June 30, 2010 and December 31, 2009, by the earliest of contractual maturity, next call date, or the first date on which prepayable advances can be repaid without a prepayment fee (in thousands):
                 
Contractual Maturity or Next Call Date   June 30, 2010     December 31, 2009  
Overdrawn demand deposit accounts
  $ 18     $ 181  
 
               
Due in one year or less
    14,331,493       14,975,701  
Due after one year through two years
    6,829,702       7,082,672  
Due after two years through three years
    11,238,889       8,187,107  
Due after three years through four years
    1,783,246       8,664,137  
Due after four years through five years
    477,056       1,277,606  
Due after five years
    3,233,655       3,437,800  
Amortizing advances
    3,056,815       3,282,368  
 
           
Total par value
  $ 40,950,874     $ 46,907,572  
 
           
     The Bank also offers putable advances. With a putable advance, the Bank purchases a put option from the member that allows the Bank to terminate the fixed rate advance on specified dates and offer, subject to certain conditions, replacement funding at prevailing market rates. At June 30, 2010 and December 31, 2009, the Bank had putable advances outstanding totaling $3,726,921,000 and $4,037,221,000, respectively.

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     The following table summarizes advances at June 30, 2010 and December 31, 2009, by the earlier of contractual maturity or next possible put date (in thousands):
                 
Contractual Maturity or Next Put Date   June 30, 2010     December 31, 2009  
Overdrawn demand deposit accounts
  $ 18     $ 181  
 
               
Due in one year or less
    17,039,300       17,653,132  
Due after one year through two years
    6,991,943       7,288,623  
Due after two years through three years
    10,881,149       8,149,166  
Due after three years through four years
    1,617,675       8,166,527  
Due after four years through five years
    372,526       1,252,479  
Due after five years
    991,448       1,115,096  
Amortizing advances
    3,056,815       3,282,368  
 
           
Total par value
  $ 40,950,874     $ 46,907,572  
 
           
     Interest Rate Payment Terms. The following table provides interest rate payment terms for advances at June 30, 2010 and December 31, 2009 (in thousands, based upon par amount):
                 
    June 30, 2010     December 31, 2009  
Fixed-rate
  $ 19,343,223     $ 22,316,659  
Variable-rate
    21,607,651       24,590,913  
 
           
Total par value
  $ 40,950,874     $ 46,907,572  
 
           
     Prepayment Fees. When a member/borrower prepays an advance, the Bank could suffer lower future income if the principal portion of the prepaid advance is reinvested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, the Bank generally charges a prepayment fee that makes it financially indifferent to a borrower’s decision to prepay an advance. The Bank records prepayment fees received from members/borrowers on prepaid advances net of any associated hedging adjustments on those advances. These fees are reflected as interest income in the statements of income either immediately (as prepayment fees on advances) or over time (as interest income on advances) as further described below. In cases in which the Bank funds a new advance concurrent with or within a short period of time before or after the prepayment of an existing advance and the advance meets the accounting criteria to qualify as a modification of the prepaid advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized into interest income over the life of the modified advance using the level-yield method. Gross advance prepayment fees received from members/borrowers were $8,821,000 and $9,370,000 during the three months ended June 30, 2010 and 2009, respectively, and were $13,956,000 and $10,343,000 during the six months ended June 30, 2010 and 2009, respectively. The Bank deferred $4,573,000 and $6,188,000 of the gross advance prepayment fees during the three and six months ended June 30, 2010, respectively. None of the gross advance prepayment fees were deferred during the six months ended June 30, 2009.
Note 5—Consolidated Obligations
     Consolidated obligations are the joint and several obligations of the FHLBanks and consist of consolidated obligation bonds and discount notes. Consolidated obligations are backed only by the financial resources of the 12 FHLBanks. Consolidated obligations are not obligations of, nor are they guaranteed by, the United States Government. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. In connection with each debt issuance, one or more of the FHLBanks specifies the amount of debt it wants issued on its behalf; the Bank receives the proceeds only of the debt issued on its behalf and is the primary obligor only for the portion of bonds and discount notes for which it has received the proceeds. The Bank records on its balance sheet only that portion of the consolidated obligations for which it is the primary obligor. Consolidated obligation bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated obligation discount notes are issued to raise short-term funds and have maturities of one year or less. These notes are issued at a price that is less than their face amount and are redeemed at par value when they mature. For additional information regarding the FHLBanks’ joint and several liability on consolidated obligations, see Note 11.

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     The par amounts of the 12 FHLBanks’ outstanding consolidated obligations, including consolidated obligations held as investments by other FHLBanks, were approximately $846 billion and $931 billion at June 30, 2010 and December 31, 2009, respectively. The Bank was the primary obligor on $52.7 billion and $59.9 billion (at par value), respectively, of these consolidated obligations.
     Interest Rate Payment Terms. The following table summarizes the Bank’s consolidated obligation bonds outstanding by interest rate payment terms at June 30, 2010 and December 31, 2009 (in thousands, at par value).
                 
    June 30, 2010     December 31, 2009  
Simple variable-rate
  $ 23,170,000     $ 20,560,000  
Fixed-rate
    20,470,025       26,648,455  
Step-up
    2,401,500       3,473,000  
Step-down
    350,000       125,000  
Variable that converts to fixed
    205,000       365,000  
 
           
Total par value
  $ 46,596,525     $ 51,171,455  
 
           
     Redemption Terms. The following is a summary of the Bank’s consolidated obligation bonds outstanding at June 30, 2010 and December 31, 2009, by contractual maturity (in thousands):
                                 
    June 30, 2010     December 31, 2009  
            Weighted             Weighted  
            Average             Average  
            Interest             Interest  
Contractual Maturity   Amount     Rate     Amount     Rate  
Due in one year or less
  $ 21,462,920       0.72 %   $ 30,951,315       1.18 %
Due after one year through two years
    15,930,590       1.21       9,163,685       1.52  
Due after two years through three years
    4,612,500       2.32       5,569,440       2.40  
Due after three years through four years
    1,415,940       3.62       1,085,000       3.39  
Due after four years through five years
    926,255       3.86       1,191,440       3.39  
Thereafter
    2,248,320       3.87       3,210,575       4.04  
 
                           
Total par value
    46,596,525       1.35 %     51,171,455       1.65 %
 
                               
Premiums
    70,926               85,618          
Discounts
    (12,679 )             (15,451 )        
Hedging adjustments
    301,516               274,234          
 
                           
Total
  $ 46,956,288             $ 51,515,856          
 
                           
     At June 30, 2010 and December 31, 2009, the Bank’s consolidated obligation bonds outstanding included the following (in thousands, at par value):
                 
    June 30, 2010     December 31, 2009  
Non-callable bonds
  $ 40,655,310     $ 44,056,715  
Callable bonds
    5,941,215       7,114,740  
 
           
Total par value
  $ 46,596,525     $ 51,171,455  
 
           

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     The following table summarizes the Bank’s consolidated obligation bonds outstanding at June 30, 2010 and December 31, 2009, by the earlier of contractual maturity or next possible call date (in thousands, at par value):
                 
Contractual Maturity or Next Call Date   June 30, 2010     December 31, 2009  
Due in one year or less
  $ 24,985,420     $ 35,970,315  
Due after one year through two years
    15,432,410       8,743,005  
Due after two years through three years
    4,409,500       4,358,440  
Due after three years through four years
    760,940       890,000  
Due after four years through five years
    201,255       216,440  
Thereafter
    807,000       993,255  
 
           
Total par value
  $ 46,596,525     $ 51,171,455  
 
           
     Discount Notes. At June 30, 2010 and December 31, 2009, the Bank’s consolidated obligation discount notes, all of which are due within one year, were as follows (in thousands):
                         
                    Weighted  
                    Average Implied  
    Book Value     Par Value     Interest Rate  
 
June 30, 2010
  $ 6,070,294     $ 6,073,923       0.17 %
 
                 
 
                       
December 31, 2009
  $ 8,762,028     $ 8,764,942       0.27 %
 
                 
Note 6—Affordable Housing Program (“AHP”)
     The following table summarizes the changes in the Bank’s AHP liability during the six months ended June 30, 2010 and 2009 (in thousands):
                 
    Six Months Ended June 30,  
    2010     2009  
Balance, beginning of period
  $ 43,714     $ 43,067  
AHP assessment
    6,110       10,102  
Grants funded, net of recaptured amounts
    (9,287 )     (6,725 )
 
           
Balance, end of period
  $ 40,537     $ 46,444  
 
           
Note 7—Derivatives and Hedging Activities
     Hedging Activities. As a financial intermediary, the Bank is exposed to interest rate risk. This risk arises from a variety of financial instruments that the Bank enters into on a regular basis in the normal course of its business. The Bank enters into interest rate swap, cap and forward rate agreements (collectively, interest rate exchange agreements) to manage its exposure to changes in interest rates. The Bank may use these instruments to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The Bank has not entered into any credit default swaps or foreign exchange-related derivatives.
     The Bank uses interest rate exchange agreements in two ways: either by designating the agreement as a fair value hedge of a specific financial instrument or firm commitment or by designating the agreement as a hedge of some defined risk in the course of its balance sheet management (referred to as an “economic hedge”). For example, the Bank uses interest rate exchange agreements in its overall interest rate risk management activities to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets (both advances and investments), and/or to adjust the interest rate sensitivity of advances or investments to approximate more closely the interest rate sensitivity of its liabilities. In addition to using interest rate exchange agreements to manage mismatches between the coupon features of its assets and liabilities, the Bank also uses interest rate exchange agreements to manage embedded options in assets and liabilities, to preserve the market value of existing assets and liabilities, to hedge the duration risk of prepayable instruments, to offset interest rate exchange agreements entered into with members (the Bank serves as an intermediary in these transactions), and to reduce funding costs.

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     The Bank, consistent with Finance Agency regulations, enters into interest rate exchange agreements only to reduce potential market risk exposures inherent in otherwise unhedged assets and liabilities or to act as an intermediary between its members and the Bank’s derivative counterparties. The Bank is not a derivatives dealer and it does not trade derivatives for short-term profit.
     At inception, the Bank formally documents the relationships between derivatives designated as hedging instruments and their hedged items, its risk management objectives and strategies for undertaking the hedge transactions, and its method for assessing the effectiveness of the hedging relationships. This process includes linking all derivatives that are designated as fair value hedges to: (1) specific assets and liabilities on the statement of condition or (2) firm commitments. The Bank also formally assesses (both at the inception of the hedging relationship and on a monthly basis thereafter) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of hedged items and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges.
     Investments – The Bank has invested in agency and non-agency mortgage-backed securities. The interest rate and prepayment risk associated with these investment securities is managed through consolidated obligations and/or derivatives. The Bank may manage prepayment and duration risk presented by some investment securities with either callable or non-callable consolidated obligations or interest rate exchange agreements, including caps and interest rate swaps.
     A substantial portion of the Bank’s held-to-maturity securities are variable-rate mortgage-backed securities that include caps that would limit the variable-rate coupons if short-term interest rates rise dramatically. To hedge a portion of the potential cap risk embedded in these securities, the Bank enters into interest rate cap agreements. These derivatives are treated as economic hedges.
     Advances – The Bank issues both fixed-rate and variable-rate advances. When appropriate, the Bank uses interest rate exchange agreements to adjust the interest rate sensitivity of its fixed-rate advances to more closely approximate the interest rate sensitivity of its liabilities. With issuances of putable advances, the Bank purchases from the member a put option that enables the Bank to terminate a fixed-rate advance on specified future dates. This embedded option is clearly and closely related to the host advance contract. The Bank typically hedges a putable advance by entering into a cancelable interest rate exchange agreement where the Bank pays a fixed coupon and receives a variable coupon, and sells an option to cancel the swap to the swap counterparty. This type of hedge is treated as a fair value hedge. The swap counterparty can cancel the interest rate exchange agreement on the call date and the Bank can cancel the putable advance and offer, subject to certain conditions, replacement funding at prevailing market rates.
     A small portion of the Bank’s variable-rate advances are subject to interest rate caps that would limit the variable-rate coupons if short-term interest rates rise above a predetermined level. To hedge the cap risk embedded in these advances, the Bank generally enters into interest rate cap agreements. This type of hedge is treated as a fair value hedge.
     The Bank may hedge a firm commitment for a forward-starting advance through the use of an interest rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent advance. The carrying value of the firm commitment will be included in the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.
     Consolidated Obligations - While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank is the primary obligor for the consolidated obligations it has issued or assumed from another FHLBank. The Bank generally enters into derivative contracts to hedge the interest rate risk associated with its specific debt issuances.
     To manage the interest rate risk of certain of its consolidated obligations, the Bank will match the cash outflow on a consolidated obligation with the cash inflow of an interest rate exchange agreement. With issuances of fixed-rate consolidated obligation bonds, the Bank typically enters into a matching interest rate exchange agreement in which the counterparty pays fixed cash flows to the Bank that are designed to mirror in timing and amount the cash

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outflows the Bank pays on the consolidated obligation. In this transaction, the Bank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate assets, typically one-month or three-month LIBOR. Such transactions are treated as fair value hedges. On occasion, the Bank may enter into fixed-for-floating interest rate exchange agreements to hedge the interest rate risk associated with certain of its consolidated obligation discount notes. The derivatives associated with the Bank’s discount note hedging are treated as economic hedges. The Bank may also use interest rate exchange agreements to convert variable-rate consolidated obligation bonds from one index rate (e.g., the daily federal funds rate) to another index rate (e.g., one- or three-month LIBOR); these transactions are treated as economic hedges.
     The Bank has not issued consolidated obligations denominated in currencies other than U.S. dollars.
     Balance Sheet Management — From time to time, the Bank may enter into interest rate basis swaps to reduce its exposure to changing spreads between one-month and three-month LIBOR. In addition, to reduce its exposure to reset risk, the Bank may occasionally enter into forward rate agreements. These derivatives are treated as economic hedges.
     Intermediation — The Bank offers interest rate swaps, caps and floors to its members to assist them in meeting their hedging needs. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties. All interest rate exchange agreements related to the Bank’s intermediary activities with its members are accounted for as economic hedges.
     Accounting for Derivatives and Hedging Activities. The Bank accounts for derivatives and hedging activities in accordance with the guidance in Topic 815 of the FASB’s Accounting Standards Codification (“ASC”) entitled “Derivatives and Hedging” (“ASC 815”). All derivatives are recognized on the statements of condition at their fair values, including accrued interest receivable and payable. For purposes of reporting derivative assets and derivative liabilities, the Bank offsets the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement (including any cash collateral remitted to or received from the counterparty).
     Changes in the fair value of a derivative that is effective as — and that is designated and qualifies as — a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect gains or losses on firm commitments), are recorded in current period earnings. Any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item) is recorded in other income (loss) as “net gains (losses) on derivatives and hedging activities.” Net interest income/expense associated with derivatives that qualify for fair value hedge accounting under ASC 815 is recorded as a component of net interest income. An economic hedge is defined as a derivative hedging specific or non-specific assets or liabilities that does not qualify or was not designated for hedge accounting under ASC 815, but is an acceptable hedging strategy under the Bank’s Risk Management Policy. These hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative hedge transactions. An economic hedge by definition introduces the potential for earnings variability as changes in the fair value of a derivative designated as an economic hedge are recorded in current period earnings with no offsetting fair value adjustment to an asset or liability. Both the net interest income/expense and the fair value adjustments associated with derivatives in economic hedging relationships are recorded in other income (loss) as “net gains (losses) on derivatives and hedging activities.” Cash flows associated with derivatives are reflected as cash flows from operating activities in the statements of cash flows, unless the derivatives contain an other-than-insignificant financing element, in which case the cash flows are reported as cash flows from financing activities.
     If hedging relationships meet certain criteria specified in ASC 815, they are eligible for hedge accounting and the offsetting changes in fair value of the hedged items may be recorded in earnings. The application of hedge accounting generally requires the Bank to evaluate the effectiveness of the hedging relationships on an ongoing basis and to calculate the changes in fair value of the derivatives and related hedged items independently. This is commonly known as the “long-haul” method of hedge accounting. Transactions that meet more stringent criteria qualify for the “short-cut” method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in value of the related derivative. The Bank considers hedges of

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committed advances and consolidated obligations to be eligible for the short-cut method of accounting as long as the settlement of the committed advance or consolidated obligation occurs within the shortest period possible for that type of instrument based on market settlement conventions, the fair value of the swap is zero at the inception of the hedging relationship, and the transaction meets all of the other criteria for short-cut accounting specified in ASC 815. The Bank has defined the market settlement conventions to be 5 business days or less for advances and 30 calendar days or less using a next business day convention for consolidated obligations. The Bank records the changes in fair value of the derivative and the hedged item beginning on the trade date.
     The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument is “embedded” and the financial instrument that embodies the embedded derivative instrument is not remeasured at fair value with changes in fair value reported in earnings as they occur. Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as either (1) a hedging instrument in a fair value hedge or (2) a stand-alone derivative instrument pursuant to an economic hedge. However, if the entire contract were to be measured at fair value, with changes in fair value reported in current earnings, or if the Bank could not reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the statement of condition at fair value and no portion of the contract would be separately accounted for as a derivative.
     The Bank discontinues hedge accounting prospectively when: (1) management determines that the derivative is no longer effective in offsetting changes in the fair value of a hedged item; (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (3) a hedged firm commitment no longer meets the definition of a firm commitment; or (4) management determines that designating the derivative as a hedging instrument in accordance with ASC 815 is no longer appropriate.
     When fair value hedge accounting for a specific derivative is discontinued due to the Bank’s determination that such derivative no longer qualifies for hedge accounting treatment, the Bank will continue to carry the derivative on the statement of condition at its fair value, cease to adjust the hedged asset or liability for changes in fair value, and amortize the cumulative basis adjustment on the formerly hedged item into earnings over its remaining term using the level-yield method. In all cases in which hedge accounting is discontinued and the derivative remains outstanding, the Bank will carry the derivative at its fair value on the statement of condition, recognizing changes in the fair value of the derivative in current period earnings.
     When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank continues to carry the derivative on the statement of condition at its fair value, removing from the statement of condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.

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     Impact of Derivatives and Hedging Activities. The following table summarizes the notional balances and estimated fair values of the Bank’s outstanding derivatives at June 30, 2010 and December 31, 2009 (in thousands).
                                                 
    June 30, 2010     December 31, 2009  
    Notional     Estimated Fair Value     Notional     Estimated Fair Value  
    Amount of     Derivative     Derivative     Amount of     Derivative     Derivative  
    Derivatives     Assets     Liabilities     Derivatives     Assets     Liabilities  
Derivatives designated as hedging instruments under ASC 815
                                               
Interest rate swaps
                                               
Advances
  $ 9,372,797     $ 11,467     $ 591,295     $ 10,877,414     $ 35,442     $ 481,486  
Consolidated obligation bonds
    20,429,040       436,094       809       27,613,970       487,664       17,743  
Interest rate caps related to advances
    86,000       690             76,000       69        
 
                                   
 
                                               
Total derivatives designated as hedging instruments under ASC 815
    29,887,837       448,251       592,104       38,567,384       523,175       499,229  
 
                                   
 
                                               
Derivatives not designated as hedging instruments under ASC 815
                                               
Interest rate swaps
                                               
Advances
    7,500             123       5,000             103  
Consolidated obligation bonds
    2,475,000       2,318       842       8,195,000       16,611       129  
Consolidated obligation discount notes
    2,397,745       2,002       4       6,413,343       12,766        
Basis swaps (1)
    7,700,000       28,320             9,700,000       22,868       1,290  
Intermediary transactions
    24,200       282       235       24,200       474       428  
Interest rate caps related to advances
    10,000                   10,000       6        
Interest rate caps related to held-to-maturity securities
    3,000,000       14,091             3,750,000       51,147        
 
                                   
 
                                               
Total derivatives not designated as hedging instruments under ASC 815
    15,614,445       47,013       1,204       28,097,543       103,872       1,950  
 
                                   
 
                                               
Total derivatives before netting and collateral adjustments
  $ 45,502,282       495,264       593,308     $ 66,664,927       627,047       501,179  
 
                                   
 
                                               
Cash collateral and related accrued interest
            (94,799 )     (198,162 )             (204,748 )     (143,378 )
Netting adjustments
            (386,111 )     (386,111 )             (357,315 )     (357,315 )
 
                                       
Total collateral and netting adjustments (2)
            (480,910 )     (584,273 )             (562,063 )     (500,693 )
 
                                       
 
                                               
Net derivative balances reported in statements of condition
          $ 14,354     $ 9,035             $ 64,984     $ 486  
 
                                       
 
(1)   The Bank’s basis swaps are used to reduce its exposure to changing spreads between one-month and three-month LIBOR.
 
(2)   Amounts represent the effect of legally enforceable master netting agreements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.

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     The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the statements of income for the three and six months ended June 30, 2010 and 2009 (in thousands).
                                 
    Gain (Loss) Recognized in Earnings     Gain (Loss) Recognized in Earnings  
    for the Three Months Ended June 30,     for the Six Months Ended June 30,  
    2010     2009     2010     2009  
Derivatives and hedged items in ASC 815 fair value hedging relationships
                               
Interest rate swaps
  $ (2,373 )   $ 2,813     $ 135     $ 57,110  
Interest rate caps
    (473 )     123       (527 )     100  
 
                       
Total net gain (loss) related to fair value hedge ineffectiveness
    (2,846 )     2,936       (392 )     57,210  
 
                       
 
                               
Derivatives not designated as hedging instruments under ASC 815
                               
Net interest income on interest rate swaps
    2,068       27,221       10,563       73,336  
Interest rate swaps
                               
Advances
    27       12       26       (7 )
Consolidated obligation bonds
    (2,866 )     16,759       (9,386 )     15,922  
Consolidated obligation discount notes
    862       5,207       (760 )     (3,761 )
Basis swaps (1)
    10,798       (26,737 )     10,244       9,367  
Forward rate agreements
          223              
Intermediary transactions
    1       22       1       32  
Interest rate caps
                               
Advances
    (1 )     14       (6 )     14  
Held-to-maturity securities
    (6,755 )     8,246       (35,708 )     8,621  
 
                       
Total net gain (loss) related to derivatives not designated as hedging instruments under ASC 815
    4,134       30,967       (25,026 )     103,524  
 
                       
 
                               
Net gains (losses) on derivatives and hedging activities reported in the statements of income
  $ 1,288     $ 33,903     $ (25,418 )   $ 160,734  
 
                       
 
(1)   The Bank’s basis swaps are used to reduce its exposure to changing spreads between one-month and three-month LIBOR.
     The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in ASC 815 fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the three and six months ended June 30, 2010 and 2009 (in thousands).
                                 
                          Derivative Net  
    Gain (Loss) on     Gain (Loss) on     Net Fair Value Hedge     Interest Income  
Hedged Item   Derivatives     Hedged Items     Ineffectiveness(1)     (Expense)(2)  
Three months ended June 30, 2010
                               
Advances
  $ (134,581 )   $ 134,256     $ (325 )   $ (70,860 )
Consolidated obligation bonds
    6,925       (9,446 )     (2,521 )     109,886  
 
                       
Total
  $ (127,656 )   $ 124,810     $ (2,846 )   $ 39,026  
 
                       
 
                               
Three months ended June 30, 2009
                               
Advances
  $ 185,129     $ (185,334 )   $ (205 )   $ (71,759 )
Available-for-sale securities
    36       (264 )     (228 )     (108 )
Consolidated obligation bonds
    (81,901 )     85,270       3,369       97,847  
 
                       
Total
  $ 103,264     $ (100,328 )   $ 2,936     $ 25,980  
 
                       
 
                               
Six months ended June 30, 2010
                               
Advances
  $ (158,430 )   $ 158,329     $ (101 )   $ (149,474 )
Consolidated obligation bonds
    28,495       (28,786 )     (291 )     242,483  
 
                       
Total
  $ (129,935 )   $ 129,543     $ (392 )   $ 93,009  
 
                       
 
                               
Six months ended June 30, 2009
                               
Advances
  $ 245,329     $ (246,919 )   $ (1,590 )   $ (129,475 )
Available-for-sale securities
    499       (601 )     (102 )     (325 )
Consolidated obligation bonds
    (158,043 )     216,945       58,902       207,598  
 
                       
Total
  $ 87,785     $ (30,575 )   $ 57,210     $ 77,798  
 
                       
 
(1)   Reported as net gains (losses) on derivatives and hedging activities in the statements of income.
 
(2)   The net interest income (expense) associated with derivatives in ASC 815 fair value hedging relationships is reported in the statements of income in the interest income/expense line item for the indicated hedged item.

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     Credit Risk Related to Derivatives. The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative agreements. To mitigate this risk, the Bank has entered into master swap and credit support agreements with all of its derivative counterparties. These agreements provide for the netting of all transactions with a derivative counterparty and the delivery of collateral when certain thresholds (generally ranging from $100,000 to $500,000) are met. The Bank manages derivative counterparty credit risk through the use of these agreements, credit analysis, and adherence to the requirements set forth in the Bank’s Risk Management Policy and Finance Agency regulations. Based on the netting provisions and collateral requirements of its master swap and credit support agreements and the creditworthiness of its derivative counterparties, Bank management does not currently anticipate any credit losses on its derivative agreements.
     The notional amount of its interest rate exchange agreements does not measure the Bank’s credit risk exposure, and the maximum credit exposure for the Bank is substantially less than the notional amount. The maximum credit risk exposure is the estimated cost, on a present value basis, of replacing at current market rates all interest rate exchange agreements with a counterparty with whom the Bank is in a net gain position, if the counterparty were to default. In determining its maximum credit exposure to a counterparty, the Bank, as permitted under master netting provisions of its interest rate exchange agreements, nets its obligations to the counterparty (i.e., derivative liabilities) against the counterparty’s obligations to the Bank (i.e., derivative assets). Maximum credit risk, as defined above, does not consider the existence of any collateral held or remitted by the Bank.
     At June 30, 2010 and December 31, 2009, the Bank’s maximum credit risk, as defined above, was approximately $99,593,000 and $223,871,000, respectively. These totals consist of $30,107,000 and $85,031,000, respectively, of net accrued interest receivable and $69,486,000 and $138,840,000, respectively, of other fair value amounts. The Bank held as collateral cash balances of $94,781,000 and $204,724,000 as of June 30, 2010 and December 31, 2009, respectively. In early July 2010 and early January 2010, additional cash collateral of $7,943,000 and $17,591,000, respectively, was delivered to the Bank pursuant to counterparty credit arrangements. The cash collateral held is reported in derivative assets/liabilities in the statements of condition.
     The Bank transacts most of its interest rate exchange agreements with large banks. Some of these banks (or their affiliates) buy, sell, and distribute consolidated obligations. Assets pledged by the Bank to these counterparties are further described in Note 11.
     When entering into interest rate exchange agreements with its members, the Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. At June 30, 2010 and December 31, 2009, the net market value of the Bank’s derivatives with its members totaled $276,000 and ($432,000), respectively.
     The Bank has an agreement with one of its derivative counterparties that contains provisions that may require the Bank to deliver collateral to the counterparty if there is a deterioration in the Bank’s long-term credit rating to AA+ or below by S&P or Aa1 or below by Moody’s and the Bank loses its status as a government-sponsored enterprise. If this were to occur, the counterparty to the agreement would be entitled to collateral equal to its exposure to the extent such exposure exceeded $1,000,000. However, the Bank would not be required to deliver collateral unless the amount to be delivered is at least $500,000. The derivative instruments subject to this agreement were in a net asset position for the Bank on June 30, 2010.

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Note 8—Capital
     At all times during the six months ended June 30, 2010, the Bank was in compliance with all applicable statutory and regulatory capital requirements. The following table summarizes the Bank’s compliance with those capital requirements as of June 30, 2010 and December 31, 2009 (dollars in thousands):
                                 
    June 30, 2010     December 31, 2009  
    Required     Actual     Required     Actual  
Regulatory capital requirements:
                               
Risk-based capital
  $ 390,507     $ 2,675,340     $ 507,287     $ 2,897,162  
 
                               
Total capital
  $ 2,282,534     $ 2,675,340     $ 2,603,683     $ 2,897,162  
Total capital-to-assets ratio
    4.00 %     4.69 %     4.00 %     4.45 %
 
                               
Leverage capital
  $ 2,853,167     $ 4,013,010     $ 3,254,604     $ 4,345,743  
Leverage capital-to-assets ratio
    5.00 %     7.03 %     5.00 %     6.68 %
     Shareholders are required to maintain an investment in Class B stock equal to the sum of a membership investment requirement and an activity-based investment requirement. Currently, the membership investment requirement is 0.06 percent of each member’s total assets as of the previous calendar year-end, subject to a minimum of $1,000 and a maximum of $25,000,000. The activity-based investment requirement is currently 4.10 percent of outstanding advances.
     The Bank generally repurchases surplus stock at the end of the month following the end of each calendar quarter (e.g., January 31, April 30, July 31 and October 31). For the repurchases that occurred on January 29, 2010, April 30, 2010 and July 30, 2010, surplus stock was defined as the amount of stock held by a member in excess of 120 percent of the member’s minimum investment requirement. The Bank’s practice has been that a member’s surplus stock will not be repurchased if the amount of that member’s surplus stock is $250,000 or less or if, subject to certain exceptions, the member is on restricted collateral status. On January 29, 2010, April 30, 2010 and July 30, 2010, the Bank repurchased surplus stock totaling $106,560,000, $70,431,000 and $51,371,000, respectively, none of which was classified as mandatorily redeemable capital stock as of those dates.
Note 9—Employee Retirement Plans
     The Bank sponsors a retirement benefits program that includes health care and life insurance benefits for eligible retirees. Components of net periodic benefit cost related to this program for the three and six months ended June 30, 2010 and 2009 were as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Service cost
  $ 3     $ 5     $ 6     $ 10  
Interest cost
    28       36       57       73  
Amortization of prior service credit
    (8 )     (9 )     (17 )     (17 )
Amortization of net actuarial gain
    (6 )     (1 )     (12 )     (2 )
 
                       
Net periodic benefit cost
  $ 17     $ 31     $ 34     $ 64  
 
                       

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Note 10—Estimated Fair Values
     Fair value is defined under GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP also requires an entity to disclose the level within the fair value hierarchy in which the measurements fall for assets and liabilities that are carried at fair value (that is, those assets and liabilities that are measured at fair value on a recurring basis) and for assets and liabilities that are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition (for example, impaired assets). The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
     Level 1 Inputs – Quoted prices (unadjusted) in active markets for identical assets and liabilities. The fair values of the Bank’s trading securities were determined using Level 1 inputs.
     Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active or in which little information is released publicly; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, volatilities and prepayment speeds); and (4) inputs that are derived principally from or corroborated by observable market data (e.g., implied spreads). Level 2 inputs were used to determine the estimated fair values of the Bank’s derivative contracts.
     Level 3 Inputs – Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair value measurement of such asset or liability. None of the Bank’s assets that are recorded at fair value on a recurring basis are measured using Level 3 inputs. Other than its derivative contracts (which were measured using Level 2 inputs), the Bank does not carry any of its liabilities at fair value.
     The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of June 30, 2010 and December 31, 2009. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for many of the Bank’s financial instruments (e.g., advances, non-agency RMBS and mortgage loans held for portfolio), in certain cases, their fair values are not subject to precise quantification or verification. Therefore, the estimated fair values presented below in the Fair Value Summary Table may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. Further, the fair values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities.
     The valuation techniques used to measure the fair values of the Bank’s financial instruments are described below.
     Cash and due from banks. The estimated fair value equals the carrying value.
     Interest-bearing deposit assets. Interest-bearing deposit assets earn interest at floating market rates; therefore, the estimated fair value of the deposits approximates their carrying value.
     Federal funds sold. All federal funds sold represent overnight balances. Accordingly, the estimated fair value approximates the carrying value.
     Trading securities. The Bank obtains quoted prices for identical securities.

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     Held-to-maturity securities. To value its MBS holdings, the Bank obtains prices from up to four designated third-party pricing vendors when available. These pricing vendors use methods that generally employ, but are not limited to, benchmark yields, recent trades, dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing. A price is established for each MBS using a formula that is based upon the number of prices received. If four prices are received, the average of the middle two prices is used; if three prices are received, the middle price is used; if two prices are received, the average of the two prices is used; and if one price is received, it is used subject to some type of validation as described below. The computed prices are tested for reasonableness using specified tolerance thresholds. Computed prices within these thresholds are generally accepted unless strong evidence suggests that using the formula-driven price would not be appropriate. Preliminary estimated fair values that are outside the tolerance thresholds, or that management believes may not be appropriate based on all available information (including those limited instances in which only one price is received), are subject to further analysis including, but not limited to, comparison to the prices for similar securities and/or to non-binding dealer estimates. As of June 30, 2010, four vendor prices were received for substantially all of the Bank’s MBS holdings and all of the computed prices fell within the specified tolerance thresholds. The relative lack of dispersion among the vendor prices received for each of the securities supports the Bank’s conclusion that the final computed prices are reasonable estimates of fair value. The Bank estimates the fair values of debentures using a pricing model.
     Advances. The Bank determines the estimated fair value of advances by calculating the present value of expected future cash flows from the advances and reducing this amount for accrued interest receivable. The discount rates used in these calculations are the replacement advance rates for advances with similar terms.
     Mortgage loans held for portfolio. The Bank estimates the fair values of mortgage loans held for portfolio based on observed market prices for agency mortgage-backed securities. Individual mortgage loans are pooled based on certain criteria such as loan type, weighted average coupon, weighted average maturity, and origination year and matched to reference securities with a similar collateral composition to derive benchmark pricing. The prices for agency mortgage-backed securities used as a benchmark are subject to certain market conditions including, but not limited to, the market’s expectations of future prepayments, the current and expected level of interest rates, and investor demand.
     Accrued interest receivable and payable. The estimated fair value approximates the carrying value due to their short-term nature.
     Derivative assets/liabilities. With the exception of its interest rate basis swaps, the fair values of the Bank’s interest rate swap agreements are estimated using a pricing model with inputs that are observable in the market (e.g., the relevant interest rate swap curve and, for agreements containing options, implied swaption volatility). As the provisions of the Bank’s master netting and collateral exchange agreements with its derivative counterparties significantly reduce the risk from nonperformance (see Note 7), the Bank does not consider its own nonperformance risk or the nonperformance risk associated with each of its counterparties to be a significant factor in the valuation of its derivative assets and liabilities. The Bank compares the fair values obtained from its pricing model to non-binding dealer estimates and may also compare its fair values to those of similar instruments to ensure that such fair values are reasonable. For the Bank’s interest rate basis swaps, fair values are obtained from dealers (for each basis swap, one dealer estimate is received); these non-binding fair value estimates are corroborated using a pricing model and observable market data (i.e., the interest rate swap curve).
     For the Bank’s interest rate caps, fair values are obtained from dealers (for each interest rate cap, one dealer estimate is received). These non-binding fair value estimates are corroborated using a pricing model and observable market data (e.g., the interest rate swap curve and cap volatility).
     The fair values of the Bank’s derivative assets and liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties; the estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. The fair values of derivatives are netted by counterparty pursuant to the provisions of the Bank’s master swap and credit support agreements. If these netted amounts are positive, they are classified as an asset and, if negative, as a liability.

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     Deposit liabilities. The Bank determines the estimated fair values of its deposit liabilities with fixed rates and more than three months to maturity by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are based on replacement funding rates for liabilities with similar terms. The estimated fair value approximates the carrying value for deposits with floating rates and fixed rates with three months or less to their maturity or repricing date.
     Consolidated obligations. The Bank estimates the fair values of consolidated obligations by calculating the present value of expected future cash flows using discount rates that are based on replacement funding rates for liabilities with similar terms and reducing this amount for accrued interest payable.
     Mandatorily redeemable capital stock. The fair value of capital stock subject to mandatory redemption is generally equal to its par value ($100 per share), as adjusted for any estimated dividend earned but unpaid at the time of reclassification from equity to liabilities. The Bank’s capital stock cannot, by statute or implementing regulation, be purchased, redeemed, repurchased or transferred at any amount other than its par value.
     Commitments. The estimated fair value of the Bank’s commitments to extend credit, including advances and letters of credit, was not material at June 30, 2010 or December 31, 2009.
     The carrying values and estimated fair values of the Bank’s financial instruments at June 30, 2010 and December 31, 2009, were as follows (in thousands):
FAIR VALUE SUMMARY TABLE
                                 
    June 30, 2010     December 31, 2009  
    Carrying     Estimated     Carrying     Estimated  
Financial Instruments   Value     Fair Value     Value     Fair Value  
Assets:
                               
Cash and due from banks
  $ 2,449,204     $ 2,449,204     $ 3,908,242     $ 3,908,242  
Interest-bearing deposits
    218       218       233       233  
Federal funds sold
    2,712,000       2,712,000       2,063,000       2,063,000  
Trading securities
    4,517       4,517       4,034       4,034  
Held-to-maturity securities
    10,096,619       10,170,605       11,424,552       11,381,786  
Advances
    41,453,540       41,673,842       47,262,574       47,279,403  
Mortgage loans held for portfolio, net
    235,235       254,678       259,617       274,044  
Accrued interest receivable
    54,179       54,179       60,890       60,890  
Derivative assets
    14,354       14,354       64,984       64,984  
 
                               
Liabilities:
                               
Deposits
    961,288       961,290       1,462,591       1,462,589  
Consolidated obligations:
                               
Discount notes
    6,070,294       6,070,695       8,762,028       8,763,983  
Bonds
    46,956,288       47,236,305       51,515,856       51,684,542  
Mandatorily redeemable capital stock
    7,787       7,787       9,165       9,165  
Accrued interest payable
    123,048       123,048       179,248       179,248  
Derivative liabilities
    9,035       9,035       486       486  
     The following table summarizes the Bank’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2010 by their level within the fair value hierarchy (in thousands). Financial assets and liabilities are classified in their entirety based on the lowest level input that is significant to the fair value measurement.

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                            Netting        
    Level 1     Level 2     Level 3     Adjustment(1)     Total  
Assets
                                       
Trading securities
  $ 4,517     $     $     $     $ 4,517  
Derivative assets
          495,264             (480,910 )     14,354  
 
                             
 
                                       
Total assets at fair value
  $ 4,517     $ 495,264     $     $ (480,910 )   $ 18,871  
 
                             
 
                                       
Liabilities
                                       
Derivative liabilities
  $     $ 593,308     $     $ (584,273 )   $ 9,035  
 
                             
 
                                       
Total liabilities at fair value
  $     $ 593,308     $     $ (584,273 )   $ 9,035  
 
                             
 
(1)   Amounts represent the effect of legally enforceable master netting agreements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.
     The Bank did not record any non-credit other-than-temporary impairment losses during the three months ended June 30, 2010. During the three months ended March 31, 2010, the Bank recorded non-credit other-than-temporary impairment losses on three of its non-agency RMBS classified as held-to-maturity. At March 31, 2010, the three securities had an aggregate unpaid principal balance and estimated fair value of $23.9 million and $13.8 million, respectively. Based on the lack of significant market activity for non-agency RMBS, the nonrecurring fair value measurements for these impaired securities fell within Level 3 of the fair value hierarchy. Four third-party vendor prices were received for each of these securities and, as described above, the average of the middle two prices was used to determine the final fair value measurements.
     The following table summarizes the Bank’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2009 by their level within the fair value hierarchy (in thousands).
                                         
                            Netting        
    Level 1     Level 2     Level 3     Adjustment(1)     Total  
Assets
                                       
Trading securities
  $ 4,034     $     $     $     $ 4,034  
Derivative assets
          627,047             (562,063 )     64,984  
 
                             
 
                                       
Total assets at fair value
  $ 4,034     $ 627,047     $     $ (562,063 )   $ 69,018  
 
                             
 
                                       
Liabilities
                                       
Derivative liabilities
  $     $ 501,179     $     $ (500,693 )   $ 486  
 
                             
 
                                       
Total liabilities at fair value
  $     $ 501,179     $     $ (500,693 )   $ 486  
 
                             
 
                                       
 
(1)   Amounts represent the effect of legally enforceable master netting agreements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.
Note 11—Commitments and Contingencies
     Joint and several liability. The Bank is jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the 12 FHLBanks. At June 30, 2010, the par amount of the other 11 FHLBanks’ outstanding consolidated obligations was approximately $794 billion. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Agency determines that the primary obligor is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each

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FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. If the Bank were to determine that a loss was probable under its joint and several liability and the amount of such loss could be reasonably estimated, the Bank would charge to income the amount of the expected loss. Based upon the creditworthiness of the other FHLBanks, the Bank currently believes that the likelihood of a loss arising from its joint and several liability is remote.
     Other commitments and contingencies. At June 30, 2010 and December 31, 2009, the Bank had commitments to make additional advances totaling approximately $68,037,000 and $37,996,000, respectively. In addition, outstanding standby letters of credit totaled $4,599,568,000 and $4,648,413,000 at June 30, 2010 and December 31, 2009, respectively.
     At June 30, 2010 and December 31, 2009, the Bank had commitments to issue $240,000,000 and $295,000,000, respectively, of consolidated obligation bonds, all of which were hedged with associated interest rate swaps.
     The Bank executes interest rate exchange agreements with major banks with which it has bilateral collateral exchange agreements. As of June 30, 2010 and December 31, 2009, the Bank had pledged cash collateral of $198,137,000 and $143,364,000, respectively, to institutions that had credit risk exposure to the Bank related to interest rate exchange agreements; at those dates, the Bank had not pledged any securities as collateral. The pledged cash collateral (i.e., interest-bearing deposit asset) is netted against derivative assets and liabilities in the statements of condition.
     In the ordinary course of its business, the Bank is subject to the risk that litigation may arise. Currently, the Bank is not a party to any material pending legal proceedings.
Note 12— Transactions with Shareholders
     Affiliates of two of the Bank’s derivative counterparties (Citigroup and Wells Fargo) acquired member institutions on March 31, 2005 and October 1, 2006, respectively. Since the acquisitions were completed, the Bank has continued to enter into interest rate exchange agreements with Citigroup and Wells Fargo in the normal course of business and under the same terms and conditions as before. Effective October 1, 2006, Citigroup terminated the Ninth District charter of the affiliate that acquired the member institution and, as a result, an affiliate of Citigroup became a non-member shareholder of the Bank.
Note 13 — Transactions with Other FHLBanks
     Occasionally, the Bank loans (or borrows) short-term federal funds to (from) other FHLBanks. There were no loans to other FHLBanks during the six months ended June 30, 2010 or 2009, and no borrowings from other FHLBanks during the six months ended June 30, 2010 or the three months ended June 30, 2009. During the six months ended June 30, 2009, interest expense on borrowings from other FHLBanks totaled $97. The following table summarizes the Bank’s borrowings from other FHLBanks during the six months ended June 30, 2009 (in thousands).
         
    Six Months Ended  
    June 30, 2009  
Balance at January 1, 2009
  $  
Borrowing from FHLBank of San Francisco
    50,000  
Repayment to FHLBank of San Francisco
    (50,000 )
 
     
Balance at June 30, 2009
  $  
 
     

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Note 14 – Other Comprehensive Income (Loss)
     The following table presents the components of other comprehensive income (loss) for the three and six months ended June 30, 2010 and 2009 (in thousands).
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Net unrealized gains on available-for-sale securities
  $     $ 287     $     $ 2,503  
Reclassification adjustment for realized gain on sale of available-for-sale security included in net income
                      (843 )
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
          (25,068 )     (6,958 )     (51,266 )
Reclassification adjustment for non-credit portion of other-than-temporary impairment losses recognized as credit losses in net income
    1,103       152       1,598       152  
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities
    4,881       1,565       9,147       1,565  
Postretirement benefit plan
                               
Amortization of prior service credit included in net periodic benefit cost
    (8 )     (9 )     (17 )     (17 )
Amortization of net actuarial gain included in net periodic benefit cost
    (6 )     (1 )     (12 )     (2 )
 
                       
 
                               
Total other comprehensive income (loss)
  $ 5,970     $ (23,074 )   $ 3,758     $ (47,908 )
 
                       

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and notes thereto included in “Item 1. Financial Statements.”
Forward-Looking Information
This quarterly report contains forward-looking statements that reflect current beliefs and expectations of the Federal Home Loan Bank of Dallas (the “Bank”) about its future results, performance, liquidity, financial condition, prospects and opportunities, including the prospects for the payment of dividends. These statements are identified by the use of forward-looking terminology, such as “anticipates,” “plans,” “believes,” “could,” “estimates,” “may,” “should,” “would,” “will,” “might,” “expects,” “intends” or their negatives or other similar terms. The Bank cautions that forward-looking statements involve risks or uncertainties that could cause the Bank’s actual results to 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. As a result, undue reliance should not be placed on such statements.
These risks and uncertainties include, without limitation, evolving economic and market conditions, political events, and the impact of competitive business forces. The risks and uncertainties related to evolving economic and market conditions include, but are not limited to, changes in interest rates, changes in the Bank’s access to the capital markets, changes in the cost of the Bank’s debt, adverse consequences resulting from a significant regional or national economic downturn, credit and prepayment risks, or changes in the financial health of the Bank’s members or non-member borrowers. Among other things, political events could possibly lead to changes in the Bank’s regulatory environment or its status as a government-sponsored enterprise (“GSE”), or to changes in the regulatory environment for the Bank’s members or non-member borrowers. Risks and uncertainties related to competitive business forces include, but are not limited to, the potential loss of large members or large borrowers through acquisitions or other means or changes in the relative competitiveness of the Bank’s products and services for member institutions. For a more detailed discussion of the risk factors applicable to the Bank, see “Item 1A — Risk Factors” in the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 25, 2010 (the “2009 10-K”) and “Item 1A — Risk Factors” in Part II of this quarterly report. The Bank undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason.
As discussed below under the heading “Legislative Developments,” recently enacted federal legislation makes significant changes to a number of aspects of the regulation of financial institutions. The legislation affects, or could affect, the Bank and/or its members in a number of areas. Because the legislation requires several regulatory agencies to issue a number of regulations, orders and reports, the full effect of this legislation on the Bank and its activities will become known only after those regulations, orders and reports are issued and implemented.
Overview
Business
The Bank is one of 12 district Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System”) that were created by the Federal Home Loan Bank Act of 1932, as amended. The FHLBanks serve the public by enhancing the availability of credit for residential mortgages, community lending, and targeted community development. As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. Prior to July 30, 2008, the Federal Housing Finance Board (“Finance Board”) was responsible for the supervision and regulation of the FHLBanks and the Office of Finance. Effective with the enactment of the Housing and Economic Recovery Act of 2008 (the “HER Act”) on July 30, 2008, the Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the United States Government, assumed responsibility for supervising and regulating the FHLBanks and the Office of Finance. The Finance Agency’s stated mission is to provide effective supervision, regulation and housing mission oversight of the FHLBanks to promote their safety

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and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market. Consistent with this mission, the Finance Agency establishes policies and regulations covering the operations of the FHLBanks. The HER Act provided that all regulations, orders, directives and determinations issued by the Finance Board prior to enactment of the HER Act immediately transferred to the Finance Agency and remain in force unless modified, terminated, or set aside by the Director of the Finance Agency.
The Bank serves eligible financial institutions in Arkansas, Louisiana, Mississippi, New Mexico and Texas (collectively, the Ninth District of the FHLBank System). The Bank’s primary business is lending relatively low cost funds (known as advances) to its member institutions, which include commercial banks, thrifts, insurance companies and credit unions. Effective with the enactment of the HER Act, Community Development Financial Institutions that are certified under the Community Development Banking and Financial Institutions Act of 1994 are also eligible for membership in the Bank. While not members of the Bank, state and local housing authorities that meet certain statutory criteria may also borrow from the Bank. The Bank also maintains a portfolio of highly rated investments for liquidity purposes and to provide additional earnings. Additionally, the Bank holds interests in a portfolio of government-guaranteed/insured and conventional mortgage loans that were acquired through the Mortgage Partnership Finance® (“MPF”®) Program offered by the FHLBank of Chicago. Shareholders’ return on their investment includes dividends (which are typically paid quarterly in the form of capital stock) and the value derived from access to the Bank’s products and services. Historically, the Bank has balanced the financial rewards to shareholders by seeking to pay a dividend that meets or exceeds the return on alternative short-term money market investments available to shareholders, while lending funds at the lowest rates expected to be compatible with that objective and its objective to build retained earnings over time.
The Bank’s capital stock is not publicly traded and can be held only by members of the Bank, by non-member institutions that acquire stock by virtue of acquiring member institutions, or by former members of the Bank (including a federal or state agency or insurer acting as a receiver of a closed institution) that retain capital stock to support advances or other activity that remains outstanding or until any applicable stock redemption or withdrawal notice period expires. All members must purchase stock in the Bank. The Bank’s capital stock has a par value of $100 per share and is purchased, redeemed, repurchased and, with the prior approval of the Bank, transferred only at its par value. Members may redeem excess stock, or withdraw from membership and redeem all outstanding capital stock, with five years’ written notice to the Bank.
The FHLBanks’ debt instruments (known as consolidated obligations) are their primary source of funds and are the joint and several obligations of all 12 FHLBanks. Consolidated obligations are issued through the Office of Finance acting as agent for the FHLBanks and generally are publicly traded in the over-the-counter market. The Bank records on its balance sheet only those consolidated obligations for which it is the primary obligor. Consolidated obligations are not obligations of the United States Government and the United States Government does not guarantee them. Consolidated obligations are rated Aaa/P-1 by Moody’s Investors Service (“Moody’s”) and AAA/A-1+ by Standard & Poor’s (“S&P”), which are the highest ratings available from these nationally recognized statistical rating organizations (“NRSROs”). These ratings indicate that Moody’s and S&P have concluded that the FHLBanks have an extremely strong capacity to meet their commitments to pay principal and interest on consolidated obligations, and that consolidated obligations are judged to be of the highest quality, with minimal credit risk. The ratings also reflect the FHLBank System’s status as a GSE. Historically, the FHLBanks’ GSE status and highest available credit ratings on consolidated obligations have provided the FHLBanks with excellent capital markets access. Deposits, other borrowings and the proceeds from capital stock issued to members are also sources of funds for the Bank.
In addition to ratings on the FHLBanks’ consolidated obligations, each FHLBank is rated individually by both S&P and Moody’s. These individual FHLBank ratings apply to the individual obligations of the respective FHLBanks, such as interest rate derivatives, deposits, and letters of credit. As of August 1, 2010, Moody’s had assigned a deposit rating of Aaa/P-1 to the Bank. At that same date, the Bank was rated AAA/A-1+ by S&P.
Shareholders, bondholders and prospective shareholders and bondholders should understand that these ratings are not a recommendation to buy, hold or sell securities and they may be subject to revision or withdrawal at any time by the NRSRO. The ratings from each of the NRSROs should be evaluated independently.

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The Bank conducts its business and fulfills its public purpose primarily by acting as a financial intermediary between its members and the capital markets. The intermediation of the timing, structure, and amount of its members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements, including interest rate swaps and caps. The Bank’s interest rate exchange agreements are accounted for in accordance with the provisions of Topic 815 of the Financial Accounting Standards Board Accounting Standards Codification entitled “Derivatives and Hedging” (“ASC 815”).
The Bank considers its “core earnings” to be net earnings exclusive of: (1) gains or losses on the sales of investment securities, if any; (2) gains or losses on the retirement or transfer of debt, if any; (3) prepayment fees on advances; (4) fair value adjustments required by ASC 815 (except for net interest payments associated with derivatives); and (5) realized gains and losses associated with early terminations of derivative transactions. The Bank’s core earnings are generated primarily from net interest income and typically tend to rise and fall with the overall level of interest rates, particularly short-term money market rates. Because the Bank is a cooperatively owned wholesale institution, the spread component of its net interest income is much smaller than a typical commercial bank, and a relatively larger portion of its net interest income is derived from the investment of its capital. The Bank endeavors to maintain a fairly neutral interest rate risk profile. As a result, the Bank’s capital is effectively invested in shorter-term assets and its core earnings and returns on capital stock (based on core earnings) generally tend to follow short-term interest rates.
The Bank’s profitability objective is to achieve a rate of return on members’ capital stock investment sufficient to allow the Bank to meet its retained earnings growth objectives and pay dividends on capital stock at rates that equal or exceed the average federal funds rate. The Bank’s quarterly dividends are based upon its operating results, shareholders’ average capital stock holdings and the average federal funds rate for the immediately preceding quarter. While the Bank has had a long-standing practice of paying quarterly dividends, future dividend payments cannot be assured.
The Bank operates in only one reportable segment. All of the Bank’s revenues are derived from U.S. operations.
The following table summarizes the Bank’s membership, by type of institution, as of June 30, 2010 and December 31, 2009.
MEMBERSHIP SUMMARY
                 
    June 30,     December 31,  
    2010     2009  
Commercial banks
    750       753  
Thrifts
    84       85  
Credit unions
    70       65  
Insurance companies
    21       20  
 
           
 
               
Total members
    925       923  
 
               
Housing associates
    8       8  
Non-member borrowers
    11       12  
 
           
 
               
Total
    944       943  
 
           
 
               
Community Financial Institutions
    779       788  
 
           
For 2010, Community Financial Institutions (“CFIs”) are defined by the HER Act to include all institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) with average total assets as of December 31, 2009, 2008 and 2007 of less than $1.029 billion. For 2009, CFIs were defined as FDIC-insured institutions with average total assets as of December 31, 2008, 2007 and 2006 of less than $1.011 billion.

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Financial Market Conditions
Capital markets have still not returned to pre-credit crisis conditions. Credit market conditions during the first three months of 2010 continued the trend of noticeable improvement observed during 2009. Volatility remained subdued in the equity and bond markets, interest rates remained relatively stable and risk spreads contracted slightly. However, in the second quarter volatility increased somewhat in the equity and bond markets and risk spreads widened, primarily in response to concerns regarding the extent of sovereign debt-related risks in several European countries.
Economic conditions in the United States continued to show moderate signs of improvement during the first half of 2010, although there were also signs in the second quarter that the momentum of the economic recovery was stalling. While positive, the rate of growth in the gross domestic product declined from the fourth quarter of 2009 to the first quarter of 2010 and again in the second quarter of 2010. Increases in business investment in equipment and software, and increases in manufacturing activity and consumer spending, were also mixed. Month-over-month home sales increased leading up to the expiration on April 30, 2010 of a federal tax credit available to homebuyers, then declined in May and increased again in June. Policy makers have cautiously interpreted some recent economic data to indicate that certain aspects of the economy are continuing to improve but at a modest pace. Despite early signs of economic improvement, the sustainability and extent of the improved economic conditions, and the prospects for and potential timing of further improvements (in particular, employment growth), remain very uncertain.
The Federal Open Market Committee maintained its target for the federal funds rate at a range between 0 and 0.25 percent throughout 2009 and the first half of 2010. During these periods, the Federal Reserve paid interest on required and excess reserves held by depository institutions at a rate of 0.25 percent, equivalent to the upper boundary of the target range for federal funds. A significant and sustained increase in bank reserves during the past few years combined with the rate of interest being paid on those reserves has contributed to a decline in the volume of transactions taking place in the overnight federal funds market and an effective federal funds rate that has generally been below the upper end of the targeted range for most of 2010.
After a period of relative stability during the first quarter of 2010, one- and three-month LIBOR rates increased in April and May as concerns arose about the economic health of several European countries. These rates subsequently stabilized as those concerns subsided, with one- and three-month LIBOR ending the second quarter at 0.35 percent and 0.53 percent, respectively, as compared to 0.23 percent and 0.25 percent, respectively, at the end of 2009 and 0.25 percent and 0.29 percent, respectively, at the end of the first quarter of 2010. The increase in LIBOR rates and the widening of the spread between one- and three-month LIBOR corresponded to concerns regarding the extent of sovereign debt related risks in Greece and several other European countries.
The following table presents information on various market interest rates at June 30, 2010 and December 31, 2009 and various average market interest rates for the three- and six-month periods ended June 30, 2010 and 2009.
                                                 
    Ending Rate     Average Rate     Average Rate  
    June 30,     December 31,     Second Quarter     Second Quarter     Six Months Ended     Six Months Ended  
    2010     2009     2010     2009     June 30, 2010     June 30, 2009  
Federal Funds Target (1)
  0.25%   0.25%   0.25%   0.25%   0.25%   0.25%
Average Effective Federal Funds Rate (2)
  0.09%   0.05%   0.19%   0.18%   0.16%   0.18%
1-month LIBOR (1)
  0.35%   0.23%   0.32%   0.37%   0.27%   0.42%
3-month LIBOR (1)
  0.53%   0.25%   0.44%   0.84%   0.35%   1.04%
2-year LIBOR (1)
  0.97%   1.42%   1.16%   1.49%   1.16%   1.52%
5-year LIBOR (1)
  2.05%   2.98%   2.49%   2.73%   2.59%   2.55%
10-year LIBOR (1)
  3.00%   3.97%   3.51%   3.50%   3.64%   3.22%
3-month U.S. Treasury (1)
  0.18%   0.06%   0.15%   0.17%   0.13%   0.19%
2-year U.S. Treasury (1)
  0.61%   1.14%   0.87%   1.02%   0.89%   0.96%
5-year U.S. Treasury (1)
  1.79%   2.69%   2.25%   2.24%   2.34%   2.01%
10-year U.S. Treasury (1)
  2.97%   3.85%   3.49%   3.32%   3.60%   3.03%
 
(1)   Source: Bloomberg
 
(2)   Source: Federal Reserve Statistical Release

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Year-to-Date 2010 Summary
    The Bank ended the second quarter of 2010 with total assets of $57.1 billion and total advances of $41.5 billion, a decrease from $65.1 billion and $47.3 billion, respectively, at the end of 2009. The $5.8 billion decline in advances during the six months ended June 30, 2010 was attributable in large part to the maturity of approximately $3.7 billion of advances to three large borrowers, as further discussed in the section below entitled “Financial Condition — Advances.” The remaining decline in advances during the six-month period was attributable to a general decline in member demand that the Bank believes was due, at least in part, to increases in members’ deposit levels and reduced lending activity due to weak economic conditions.
 
    The Bank’s net income for the three and six months ended June 30, 2010 was $39.4 million and $55.0 million, respectively, including net interest income of $68.4 million and $132.6 million, respectively, and $1.3 million and ($25.4 million) in net gains (losses) on derivatives and hedging activities, respectively. The Bank’s net interest income excludes net interest payments associated with economic hedge derivatives, which also contributed to the Bank’s overall income before assessments of $53.6 million and $74.8 million for the three and six months ended June 30, 2010, respectively. Had the interest income on economic hedge derivatives been included in net interest income, the Bank’s net interest income would have been higher (and its net gains/losses on derivatives and hedging activities would have been lower/higher) by $2.1 million and $10.6 million for the three and six months ended June 30, 2010, respectively.
 
    The Bank’s net interest income for the three and six months ended June 30, 2010 was positively impacted by higher yields on the Bank’s portfolio of collateralized mortgage obligations (“CMOs”). During the first half of 2010, the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”) repurchased delinquent loans from the mortgage pools underlying their guaranteed CMOs. The repayments resulting from these repurchases resulted in approximately $6.9 million and $13.5 million of accelerated accretion of the purchase discounts associated with the Bank’s investments in certain of these securities during the three and six months ended June 30, 2010, respectively. The impact of these repurchases by Fannie Mae and Freddie Mac are expected to have a less significant effect on the Bank’s net interest income during the second half of 2010.
 
    For the three and six months ended June 30, 2010, the $1.3 million and ($25.4 million), respectively, in net gains (losses) on derivatives and hedging activities included $2.1 million and $10.6 million, respectively, of net interest income on interest rate swaps accounted for as economic hedge derivatives, $2.0 million and ($35.6 million), respectively, of net gains (losses) on economic hedge derivatives (excluding net interest settlements) and net ineffectiveness-related losses on fair value hedges of $2.8 million and $0.4 million, respectively. The net losses on the Bank’s economic hedge derivatives during the six months ended June 30, 2010 were due largely to fair value losses of $35.7 million on its stand-alone interest rate caps.
 
    The Bank held $12.6 billion (notional) of interest rate swaps recorded as economic hedge derivatives with a net positive fair value of $28.2 million (excluding accrued interest) at June 30, 2010. If these swaps are held to maturity, these net unrealized gains will ultimately reverse in future periods in the form of unrealized losses. The timing of this reversal will depend on the relative level and volatility of future interest rates. In addition, as of June 30, 2010, the Bank held $3.0 billion (notional) of stand-alone interest rate cap agreements with a fair value of $14.1 million that hedge a portion of the interest rate risk posed by interest rate caps embedded in its CMO LIBOR floaters. If these agreements are held to maturity, the value of the caps will ultimately decline to zero and be recorded as a loss in net gains (losses) on derivatives and hedging activities in future periods.
 
    The Bank’s operating results for the three and six months ended June 30, 2010 included credit-related other-than-temporary impairment charges of $1.1 million and $1.7 million, respectively, on certain of its investments in non-agency residential mortgage-backed securities. For a discussion of the Bank’s analysis, see “Item 1. Financial Statements” (specifically, Note 3 beginning on page 7 of this report). If the actual and/or projected performance of the loans underlying the Bank’s holdings of non-agency residential mortgage-backed securities deteriorates beyond its current expectations, the Bank could recognize further

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      losses on the securities that it has already determined to be other-than-temporarily impaired and/or losses on its other investments in non-agency residential mortgage-backed securities.
 
    The unpaid principal balance of the Bank’s investments in non-agency residential mortgage-backed securities, all of which are classified as held-to-maturity, totaled $461 million at June 30, 2010, compared with $515 million at December 31, 2009. The unrealized losses on these securities totaled $110 million (24 percent of amortized cost) at June 30, 2010, as compared to $135 million (26 percent of amortized cost) at December 31, 2009. Based on its quarter-end analysis of the 40 securities in this portfolio, the Bank believes that the unrealized losses were principally the result of liquidity risk related discounts in the non-agency residential mortgage-backed securities market and do not accurately reflect the actual historical or currently expected future credit performance of the securities.
 
    At all times during the first half of 2010, the Bank was in compliance with all of its regulatory capital requirements. In addition, the Bank’s retained earnings increased to $406.6 million at June 30, 2010 from $356.3 million at December 31, 2009.
 
    During the first half of 2010, the Bank paid dividends totaling $4.7 million; the Bank’s first and second quarter dividends were paid at an annualized rate of 0.375 percent, which exceeded the upper end of the Federal Reserve’s target for the federal funds rate of 0.25 percent for each of the preceding quarters by 12.5 basis points. While there can be no assurances about earnings, dividends, or regulatory actions for the remainder of 2010, the Bank currently anticipates that its earnings will be sufficient both to continue paying dividends at a rate equal to or slightly above the average federal funds rate for the applicable quarterly periods of 2010 and to continue building retained earnings. In addition, the Bank currently expects to continue its quarterly repurchases of surplus stock.

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Selected Financial Data
SELECTED FINANCIAL DATA
(dollars in thousands)
                                         
    2010     2009  
    Second Quarter     First Quarter     Fourth Quarter     Third Quarter     Second Quarter  
Balance sheet (at quarter end)
                                       
Advances
  $ 41,453,540     $ 42,627,506     $ 47,262,574     $ 50,034,613     $ 53,469,938  
Investments (1)
    12,813,354       14,854,980       13,491,819       15,511,389       18,162,262  
Mortgage loans
    235,469       248,721       259,857       272,533       289,779  
Allowance for credit losses on mortgage loans
    234       234       240       241       258  
Total assets
    57,063,342       58,696,797       65,092,076       67,261,344       72,095,673  
Consolidated obligations — discount notes
    6,070,294       5,626,659       8,762,028       10,727,576       14,961,653  
Consolidated obligations — bonds
    46,956,288       48,269,095       51,515,856       52,082,770       52,492,151  
Total consolidated obligations(2)
    53,026,582       53,895,754       60,277,884       62,810,346       67,453,804  
Mandatorily redeemable capital stock(3)
    7,787       7,579       9,165       8,646       78,806  
Capital stock — putable
    2,260,945       2,311,212       2,531,715       2,608,848       2,827,764  
Retained earnings
    406,608       369,485       356,282       317,818       301,442  
Accumulated other comprehensive loss
    (62,207 )     (68,177 )     (65,965 )     (72,019 )     (49,343 )
Total capital
    2,605,346       2,612,520       2,822,032       2,854,647       3,079,863  
Dividends paid(3)
    2,264       2,386       1,091       1,267       1,306  
 
                                       
Income statement (for the quarter)
                                       
Net interest income (4)
  $ 68,409     $ 64,185     $ 51,040     $ 33,510     $ 14,753  
Other income (loss)
    2,224       (25,133 )     19,986       14,386       36,101  
Other expense
    17,023       17,832       17,186       23,880       15,832  
Assessments
    14,223       5,631       14,285       6,373       9,295  
Net income
    39,387       15,589       39,555       17,643       25,727  
 
                                       
Performance ratios
                                       
Net interest margin(5)
    0.48 %     0.41 %     0.31 %     0.19 %     0.08 %
Return on average assets
    0.28       0.10       0.24       0.10       0.14  
Return on average equity
    6.11       2.30       5.61       2.35       3.34  
Return on average capital stock (6)
    7.00       2.58       6.22       2.59       3.66  
Total average equity to average assets
    4.57       4.42       4.29       4.28       4.33  
Regulatory capital ratio(7)
    4.69       4.58       4.45       4.36       4.45  
Dividend payout ratio (3)(8)
    5.75       15.31       2.76       7.18       5.08  
 
                                       
Average effective federal funds rate (9)
    0.19 %     0.13 %     0.12 %     0.16 %     0.18 %
 
(1)   Investments consist of federal funds sold, interest-bearing deposits and securities classified as held-to-maturity, available-for-sale and trading.
 
(2)   The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all of the FHLBanks. At June 30, 2010, March 31, 2010, December 31, 2009, September 30, 2009, and June 30, 2009, the outstanding consolidated obligations (at par value) of all 12 FHLBanks totaled approximately $0.846 trillion, $0.871 trillion, $0.931 trillion, $0.974 trillion and $1.056 trillion, respectively. As of those dates, the Bank’s outstanding consolidated obligations (at par value) were $52.7 billion, $53.5 billion, $59.9 billion, $62.4 billion and $67.1 billion, respectively.
 
(3)   Mandatorily redeemable capital stock represents capital stock that is classified as a liability under generally accepted accounting principles. Dividends on mandatorily redeemable capital stock are recorded as interest expense and excluded from dividends paid. Dividends paid on mandatorily redeemable capital stock totaled $6,000, $8,000, $25,000, $35,000 and $37,000 for the quarters ended June 30, 2010, March 31, 2010, December 31, 2009, September 30, 2009 and June 30, 2009, respectively.
 
(4)   Net interest income excludes the net interest income/expense associated with interest rate exchange agreements that do not qualify for hedge accounting. The net interest income associated with such agreements totaled $2.1 million, $8.5 million, $14.6 million, $19.7 million and $27.2 million for the quarters ended June 30, 2010, March 31, 2010, December 31, 2009, September 30, 2009 and June 30, 2009, respectively.
 
(5)   Net interest margin is net interest income as a percentage of average earning assets.
 
(6)   Return on average capital stock is derived by dividing net income by average capital stock balances excluding mandatorily redeemable capital stock.
 
(7)   The regulatory capital ratio is computed by dividing regulatory capital (the sum of capital stock — putable, mandatorily redeemable capital stock and retained earnings) by total assets at each quarter-end.
 
(8)   Dividend payout ratio is computed by dividing dividends paid by net income for each quarter.
 
(9)   Rates obtained from the Federal Reserve Statistical Release.

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Legislative Developments
On July 21, 2010, the President of the United States signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act makes significant changes to a number of aspects of the regulation of financial institutions. As discussed below, the legislation affects or could affect the Bank and/or its members in a number of areas. Because the Dodd-Frank Act requires several entities (including the Board of Governors of the Federal Reserve System (the “Board of Governors”) and the SEC) to issue a number of regulations, orders and reports, the full effect of this legislation on the Bank and its activities will become known only after the required regulations, orders, and reports are issued and implemented.
Financial Stability
The Dodd-Frank Act establishes the Financial Stability Oversight Council (the “Council”). The voting members of the Council include the Director of the Finance Agency, the Secretary of the Treasury, the Chairman of the Board of Governors, the Comptroller of the Currency, the Director of the Bureau of Consumer Financial Protection (an entity established by the Dodd-Frank Act), the Chairman of the SEC, the Chairperson of the FDIC, the Chairperson of the Commodity Futures Trading Commission (the “CFTC”), the Chairman of the National Credit Union Administration Board, and an independent member appointed by the President of the United States (by and with the advice and consent of the Senate) having insurance expertise.
The Council may determine that a United States nonbank financial company shall be supervised by the Board of Governors, and be subject to prudential standards recommended by the Council and imposed by the Board of Governors, if the Council determines that material financial distress at the company, or the nature of the activities of the company, could pose a threat to the financial stability of the United States. A “United States nonbank financial company” is a company that is incorporated or organized under the laws of the United States or any state and predominantly engaged in financial activities (the legislation specifically exempts certain entities from the definition). The Council may also recommend to a bank holding company’s or nonbank financial company’s primary financial regulatory agency new or heightened standards and safeguards for a financial activity or practice conducted by the bank holding company or nonbank financial company if the Council determines that such activity or practice could create significant risk to the United States financial markets. The Dodd-Frank Act requires the Board of Governors to issue regulations to implement the above provisions of the legislation.
The Bank qualifies as a “United States nonbank financial company” as defined by the Dodd-Frank Act and, therefore, could be subject to the above provisions of the Dodd-Frank Act if the Council determines that the Bank or its activities could pose a threat to the financial stability of the United States. The Dodd-Frank Act specifically exempts FHLBanks from any concentration limits imposed by the Board of Governors with respect to a nonbank financial company’s credit exposure to any unaffiliated company that exceeds 25 percent of the capital stock and surplus of the company. The FHLBanks are also exempt from limitations on a company’s debt to equity ratio and certain leverage and risk-based capital requirements that the Board of Governors could potentially apply to a nonbank financial company.
The above provisions of the Dodd-Frank Act could also apply to members of the Bank that qualify as United States nonbank financial companies.
Orderly Liquidation Authority
The Dodd-Frank Act creates a special insolvency regime to address the failure of a financial company that could have serious adverse effects on the United States economy. The Dodd-Frank Act specifically exempts FHLBanks from the application of this provision. The provision could, however, be applied to certain of the Bank’s members.

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Elimination of Office of Thrift Supervision
Effective one year after the date of enactment of the Dodd-Frank Act (unless the Secretary of the Treasury extends such date), the Dodd-Frank Act eliminates the Office of Thrift Supervision (the “OTS”). The Board of Governors will assume responsibility for regulating savings and loan holding companies, the Office of the Controller of the Currency will assume responsibility for regulating Federal savings associations and the FDIC will assume responsibility for regulating State savings associations. This provision will affect the regulation of the Bank’s members that are currently regulated by the OTS.
Federal Insurance Office
The Dodd-Frank Act establishes the Federal Insurance Office within the Department of the Treasury. The Federal Insurance Office shall have the authority, among other things, to monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the United States financial system, and to consult with the states (including state insurance regulators) regarding insurance matters of national importance. The activities of the Federal Insurance Office could have an effect on the Bank’s members that are insurance companies to the extent that the recommendations of the Federal Insurance Office lead to further legislation applicable to insurance companies that are members of the Bank.
Prohibitions on Proprietary Trading
The Dodd-Frank Act prohibits certain banking entities from engaging in proprietary trading. The legislation also requires that a nonbank financial company that is supervised by the Board of Governors be subject to additional capital requirements and additional quantitative limits with respect to proprietary trading. The legislation allows the SEC and the CFTC to determine that the purchase, sale, acquisition or disposition of certain obligations, participations or other instruments, including those issued by a FHLBank, are permitted activities of a nonbank financial company and not subject to the additional capital and quantitative limits.
Regulation of Over-the Counter Swaps Markets
The Dodd-Frank Act authorizes the SEC and the CFTC to require designated swaps to be cleared through an exchange or regulated trading facility (unless there is none), with a limited exception for certain end users using swaps to hedge or mitigate commercial risk. A swap is defined very broadly in the legislation and includes all of the types of derivatives that the Bank uses to manage its interest rate risk. Swaps subject to the mandatory clearing requirement will also be required to be traded on an exchange or regulated trading facility, unless no exchange or regulated trading facility makes the swap available to trade. The Dodd-Frank Act also requires swap dealers and most major swap participants to register with the SEC or the CFTC. The SEC and the CFTC are required to promulgate regulations to implement these provisions of the legislation, including regulations to define further “major swap participant.” Until these regulations are issued and implemented, the Bank will be unable to determine whether it qualifies as a “major swap participant,” which would require it to register with the CFTC.
Investor Protections and Improvements to the Regulation of Securities
The Dodd-Frank Act establishes within the SEC the Investor Advisory Committee, which is charged with advising and consulting with the SEC on regulation of securities and initiatives to protect investor interest and promote investor confidence. The legislation increases the SEC’s enforcement authority in a number of areas. The Dodd-Frank Act also imposes a number of additional requirements on certain public companies with respect to corporate governance and executive compensation, some of which could apply to the Bank. The SEC is required to issue regulations to implement these provisions of the Dodd-Frank Act.
Bureau of Consumer Financial Protection
The Dodd-Frank Act establishes the Bureau of Consumer Financial Protection (the “Bureau”). The Bureau will regulate the offering and provision of consumer financial products or services under designated Federal consumer financial laws. Although the Bank will not be subject to regulation by the Bureau, the Bank’s members could be subject to the authority of the Bureau with respect to consumer financial products or services they offer.

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Mortgage Reform and Anti-Predatory Lending
The Dodd-Frank Act imposes additional regulation on mortgage originators and residential mortgage loans, which could impact the Bank’s members that originate mortgages and the collateral that is pledged to the Bank by its members.
Regulatory Developments
Directors’ Eligibility, Election, Compensation, and Expenses
On April 5, 2010, the Finance Agency promulgated a new regulation regarding FHLBank Directors’ eligibility, election, compensation, and expenses. The new regulation, which became effective on May 5, 2010, makes changes in two areas.
The first change amends the process by which successor FHLBank directors are chosen after a directorship is redesignated to a new state prior to the end of its term as a result of the annual designation of FHLBank directorships. Under the new regulation, the redesignation causes the original directorship to terminate and creates a new directorship to be filled by an election of the member institutions located in that state. The prior regulation deemed the redesignation to create a vacancy on the FHLBank’s board of directors, which would be filled by the FHLBank’s board of directors.
Second, the new regulation implements section 1202 of the HER Act by repealing the caps on annual compensation that can be paid to FHLBank directors and allowing each FHLBank to pay its directors reasonable compensation and expenses, subject to the authority of the Finance Agency’s Director to object to, and to prohibit prospectively, compensation and/or expenses that the Director determines are not reasonable.
Advisory Bulletin 2010-AB-01
On April 6, 2010, the Finance Agency issued Advisory Bulletin 2010-AB-01 (“2010-AB-01”) in order to clarify the guidance in Advisory Bulletin 2008-AB-02 (“2008-AB-02”) that limits the FHLBanks’ authority to purchase or to accept as collateral for advances certain nontraditional and subprime residential mortgage loans and mortgage-backed securities representing an interest in such loans unless such loans comply with the Interagency Guidance. “Interagency Guidance” means collectively the Interagency Guidance on Nontraditional Mortgage Product Risks, dated October 4, 2006, and Statement on Subprime Mortgage Lending, dated July 10, 2007, issued by the federal banking regulatory agencies. In 2010-AB-01, the Finance Agency clarified a number of specific points with respect to the applicability of 2008-AB-02.
2008-AB-02 provides that private-label mortgage-backed securities that were issued after July 10, 2007 can be included in calculating the amount of collateral available to secure advances to a member only if the underlying mortgages comply with all aspects of the Interagency Guidance. 2010-AB-01 states that private-label mortgage-backed securities that were “either issued or acquired by a member after July 10, 2007 may be considered eligible collateral in calculating the amount of advances that can be made to a member only if the underlying mortgages comply with all aspects of the [I]nteragency [G]uidance” (emphasis added). 2010-AB-01 would appear to make the eligibility of securities issued on or before July 10, 2007 to serve as collateral for advances dependent upon the date the securities were acquired by the member. The Bank does not in all cases know the dates on which members acquired securities pledged to the Bank and, therefore, is unable to estimate the effect that the clarification in 2010-AB-01 regarding eligible mortgage-backed securities might have on members’ borrowing capacity.
In 2010-AB-01, the Finance Agency also addressed private-label mortgage-backed securities that are acquired through a merger with another financial institution. 2010-AB-01 advises that eligible collateral obtained by a FHLBank member from another member through merger or acquisition will generally continue to qualify as eligible collateral, subject to consultation with the Finance Agency regarding the specific circumstances of the transaction.
In 2010-AB-01, the Finance Agency also clarified that the issuance or acquisition date of a re-securitization of private-label mortgage-backed securities should generally be used to determine compliance with 2008-AB-02 and

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the requirements regarding the underlying mortgages. An exception would be the re-securitizations of private-label mortgage-backed securities with a federal agency guaranty backed by the full faith and credit of the United States government, which would require a FHLBank to submit to the Finance Agency a new business activity notice that describes the structure and guaranty of the re-securitized securities.
Board of Directors of the Office of Finance
The Office of Finance (“OF”) is a joint office of the FHLBanks and, among other things, serves as their fiscal and servicing agent in connection with the issuance of consolidated obligations and prepares the combined financial reports (“CFRs”) of the FHLBank System. Until recently, the OF was governed by a board of directors that was comprised of two FHLBank presidents and one independent director. These three directors also served as the audit committee of the OF’s board of directors with the independent director serving as the chairman of such committee.
On May 3, 2010, the Finance Agency promulgated a new regulation that restructures the composition of the OF’s board of directors and audit committee, establishes certain other corporate governance requirements, directs the OF in preparing the CFRs to employ consistent accounting policies and procedures, and grants the OF’s audit committee authority under certain circumstances to require the FHLBanks to establish common accounting policies and procedures with respect to information submitted to the OF for preparation of the CFRs.
Under the new regulation, the OF’s board of directors is now comprised of 17 directors: the 12 FHLBank presidents, who serve ex officio, and 5 independent directors, who each serve five-year terms that are staggered so that not more than one independent directorship is scheduled to become vacant in any one year. Independent directors are limited to two consecutive full terms. Independent directors must be United States citizens; as a group, they must have substantial experience in financial and accounting matters; and they must not have any material relationship with any FHLBank or the OF.
The initial independent directors were nominated by the three members of the OF board of directors as it existed prior to the effective date of the regulation, after consultation with the FHLBanks, and appointed by the Finance Agency. The chair of the board of directors of the OF is chosen from among its independent directors and the vice chair is chosen from among all the directors of the OF. The initial chair and vice chair of the reconstituted OF board of directors were nominated by the three members of the OF board of directors as it existed prior to the effective date of the regulation, after consultation with the FHLBanks, and were appointed by the Finance Agency (the Bank’s President and Chief Executive Officer was appointed by the Finance Agency to serve as the initial vice chair). Following these appointments, the new OF board of directors was constituted at an initial organizational meeting held on July 20, 2010.
Once the initial terms of the independent directors expire or otherwise become vacant, independent directors will be elected by a majority vote of members of the OF board of directors, subject to the Finance Agency’s review of, and non-objection to, each candidate. The Finance Agency reserves the right to appoint a person as an independent director if it determines that the person intended to be elected as an independent director by the board of directors of the OF is not (in the Finance Agency’s opinion) suitably qualified. When the terms of the persons initially appointed as chair and vice chair expire or otherwise become vacant, subsequent chairs and vice chairs will be chosen in each case by a majority vote of the board of directors of the OF, subject to the Finance Agency’s right to reject any proposed chair or vice chair and to require the board of directors of the OF to select a replacement chair or vice chair.
The audit committee of the OF is comprised exclusively of the independent directors and has responsibility for overseeing the audit function of the OF and the preparation of the CFRs. For purposes of the CFRs, the audit committee shall ensure that the FHLBanks adopt consistent accounting policies and procedures to the extent necessary for the information submitted by the FHLBanks to the OF to be combined to create accurate and meaningful CFRs. The audit committee, in consultation with the Finance Agency, may establish common accounting policies and procedures for the information submitted by the FHLBanks to the OF for inclusion in the CFRs where it determines such information provided by the FHLBanks is inconsistent and that common accounting policies and procedures regarding that information are necessary to create accurate and meaningful CFRs. As permitted by the new regulation, the board of directors of the OF in place prior to the effective date of the new

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regulation will perform the duties of the audit committee with respect to the CFR that covers the interim reporting period that ended on June 30, 2010. Thereafter, the new OF audit committee will perform these duties.
The new regulation also includes provisions affecting certain governance matters, including requirements that (i) the Finance Agency must approve the OF’s bylaws and the charter of its audit committee; (ii) the OF’s board of directors must hold at least six in-person meetings each year; and (iii) with respect to indemnification and corporate governance, the OF may select as its applicable law the jurisdiction of the OF’s location (Virginia), the Delaware General Corporation Law, or the Revised Model Business Corporation Act, as amended.
Conservatorship and Receivership
The HER Act allows or requires the Director to appoint the Finance Agency as conservator or receiver for a FHLBank under certain circumstances specified in the HER Act. On July 9, 2010, the Finance Agency published a proposed rule with request for comment to establish a framework for conservatorship and receivership operations for a FHLBank. Comments on the proposed rule may be submitted to the Finance Agency through September 7, 2010.
Financial Condition
The following table provides selected period-end balances as of June 30, 2010 and December 31, 2009, as well as selected average balances for the six-month period ended June 30, 2010 and the year ended December 31, 2009. As shown in the table, the Bank’s total assets decreased by 12.3 percent (or $8.0 billion) between December 31, 2009 and June 30, 2010, due primarily to decreases of $5.8 billion, $1.3 billion and $0.8 billion in advances, held-to-maturity securities and short-term liquidity holdings, respectively. As the Bank’s assets decreased, the funding for those assets also decreased. During the six months ended June 30, 2010, total consolidated obligations decreased by $7.3 billion as consolidated obligation bonds and discount notes declined by $4.6 billion and $2.7 billion, respectively.
The activity in each of the major balance sheet captions is discussed in the sections following the table.
SUMMARY OF CHANGES IN FINANCIAL CONDITION
(dollars in millions)
                                 
    June 30, 2010     Balance at  
            Increase (Decrease)     December 31,  
    Balance     Amount     Percentage     2009  
Advances
  $ 41,454     $ (5,809 )     (12.3) %   $ 47,263  
Short-term liquidity holdings
                               
Non-interest bearing excess cash balances (1)
    2,200       (1,400 )     (38.9 )     3,600  
Federal funds sold
    2,712       649       31.5       2,063  
Held-to-maturity securities
    10,097       (1,328 )     (11.6 )     11,425  
Mortgage loans, net
    235       (25 )     (9.6 )     260  
Total assets
    57,063       (8,029 )     (12.3 )     65,092  
Consolidated obligations — bonds
    46,956       (4,560 )     (8.9 )     51,516  
Consolidated obligations — discount notes
    6,070       (2,692 )     (30.7 )     8,762  
Total consolidated obligations
    53,026       (7,252 )     (12.0 )     60,278  
Mandatorily redeemable capital stock
    8       (1 )     (11.1 )     9  
Capital stock
    2,261       (271 )     (10.7 )     2,532  
Retained earnings
    407       51       14.3       356  
Average total assets
    59,370       (10,648 )     (15.2 )     70,018  
Average capital stock
    2,352       (397 )     (14.4 )     2,749  
Average mandatorily redeemable capital stock
    8       (48 )     (85.7 )     56  
 
(1)   Represents excess cash held at the Federal Reserve Bank of Dallas. These amounts are classified as “Cash and due from banks” in the Bank’s statements of condition.

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Advances
The following table presents advances outstanding, by type of institution, as of June 30, 2010 and December 31, 2009.
ADVANCES OUTSTANDING BY BORROWER TYPE
(par value, dollars in millions)
                                 
    June 30, 2010     December 31, 2009  
    Amount     Percent     Amount     Percent  
Commercial banks
  $ 35,391       87 %   $ 41,924       89 %
Thrift institutions
    3,832       9       3,249       7  
Credit unions
    1,302       3       1,347       3  
Insurance companies
    336       1       301       1  
 
                       
 
                               
Total member advances
    40,861       100       46,821       100  
 
                               
Housing associates
    26             11        
Non-member borrowers
    64             76        
 
                       
 
                               
Total par value of advances
  $ 40,951       100 %   $ 46,908       100 %
 
                       
 
                               
Total par value of advances outstanding to CFIs
  $ 7,967       19 %   $ 9,758       21 %
 
                       
At June 30, 2010 and December 31, 2009, the carrying value of the Bank’s advances portfolio totaled $41.5 billion and $47.3 billion, respectively. The par value of outstanding advances at those dates was $41.0 billion and $46.9 billion, respectively.
During the first six months of 2010, advances outstanding to the Bank’s ten largest borrowers decreased by $3.7 billion. Advances to Wells Fargo Bank South Central, National Association, Comerica Bank and International Bank of Commerce (the Bank’s three largest borrowers as of December 31, 2009) declined $2.0 billion, $1.0 billion and $0.7 billion, respectively. The remaining decline in outstanding advances of $2.2 billion during the first six months of 2010 was spread broadly across the Bank’s members. The Bank believes the decline in advances was due, at least in part, to increases in members’ deposit levels and reduced lending activity by members due to weak economic conditions.
At June 30, 2010, advances outstanding to the Bank’s ten largest borrowers totaled $26.4 billion, representing 64.4 percent of the Bank’s total outstanding advances as of that date. In comparison, advances outstanding to the Bank’s ten largest borrowers totaled $30.1 billion at December 31, 2009, representing 64.2 percent of the total outstanding balances at that date. The following table presents the Bank’s ten largest borrowers as of June 30, 2010.

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TEN LARGEST BORROWERS AS OF JUNE 30, 2010
(Par value, dollars in millions)
                         
                    Percent of  
Name   City   State   Advances     Total Advances  
Wells Fargo Bank South Central, National Association (1)
  Houston   TX   $ 16,247       39.7 %
Comerica Bank
  Dallas   TX     5,000       12.2  
Beal Bank Nevada (2)
  Las Vegas   NV     1,339       3.3  
Southside Bank
  Tyler   TX     729       1.8  
Bank of Texas, N.A.
  Dallas   TX     600       1.5  
First National Bank
  Edinburg   TX     586       1.4  
Arvest Bank
  Rogers   AR     523       1.3  
International Bank of Commerce
  Laredo   TX     500       1.2  
ViewPoint Bank
  Plano   TX     445       1.1  
Bank of Albuquerque, N.A.
  Albuquerque   NM     400       0.9  
 
                   
 
                       
 
          $ 26,369       64.4 %
 
                   
 
(1)   Formerly Wachovia Bank, FSB
 
(2)   Beal Bank Nevada is chartered in Nevada, but maintains its home office in Plano, TX.
The following table presents information regarding the composition of the Bank’s advances by remaining term to maturity as of June 30, 2010 and December 31, 2009.
COMPOSITION OF ADVANCES
(Dollars in millions)
                                 
    June 30, 2010     December 31, 2009  
            Percentage             Percentage  
    Balance     of Total     Balance     of Total  
Fixed rate advances
                               
Maturity less than one month
  $ 4,026       9.8 %   $ 5,164       11.0 %
Maturity 1 month to 12 months
    3,856       9.4       4,232       9.0  
Maturity greater than 1 year
    4,677       11.4       5,602       12.0  
Fixed rate, amortizing
    3,057       7.5       3,282       7.0  
Fixed rate, putable
    3,727       9.1       4,037       8.6  
 
                       
Total fixed rate advances
    19,343       47.2       22,317       47.6  
 
                       
Floating rate advances
                               
Maturity less than one month
    271       0.7       11        
Maturity 1 month to 12 months
    5,728       14.0       5,052       10.8  
Maturity greater than 1 year
    15,609       38.1       19,528       41.6  
 
                       
Total floating rate advances
    21,608       52.8       24,591       52.4  
 
                       
Total par value
  $ 40,951       100.0 %   $ 46,908       100.0 %
 
                       
The Bank is required by statute and regulation to obtain sufficient collateral from members to fully secure all advances. The Bank’s collateral arrangements with its members and the types of collateral it accepts to secure advances are described in the 2009 10-K. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances, the Bank applies various haircuts, or discounts, to determine the value of the collateral against which members may borrow. From time to time, the Bank reevaluates the adequacy of its collateral haircuts under a range of stress scenarios to ensure that its collateral haircuts are sufficient to protect the Bank from credit losses on advances. In addition, as described in the 2009 10-K, the Bank reviews the financial condition of its depository institution members on at least a quarterly basis to identify any members whose financial condition indicates they might pose an increased credit risk and, as needed, takes appropriate action. The Bank has not experienced any credit losses on advances since it was founded in 1932 and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on advances. Accordingly, the Bank has not provided any allowance for losses on advances.

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Short-Term Liquidity Portfolio
At June 30, 2010, the Bank’s short-term liquidity portfolio was comprised of $2.7 billion of overnight federal funds sold to domestic counterparties and $2.2 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas. At December 31, 2009, the Bank’s short-term liquidity portfolio was comprised of $2.1 billion of overnight federal funds sold to domestic counterparties and $3.6 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas. The amount of the Bank’s short-term liquidity portfolio fluctuates in response to several factors, including the projected demand for advances, changes in the Bank’s deposit balances, the Bank’s pre-funding activities, changes in the returns provided by short-term investment alternatives relative to the Bank’s discount note funding costs, and the level of liquidity needed to satisfy Finance Agency requirements. (For a discussion of the Finance Agency’s liquidity requirements, see the section below entitled “Liquidity and Capital Resources.”)
Long-Term Investments
At June 30, 2010 and December 31 2009, the Bank’s long-term investment portfolio (at carrying value) was comprised of approximately $10.0 billion and $11.4 billion, respectively, of mortgage-backed securities (“MBS”), all of which were LIBOR-indexed floating rate CMOs, and approximately $60 million of U.S. agency debentures. All of the Bank’s long-term investments were classified as held-to-maturity at both of these dates.
During the six months ended June 30, 2010, the Bank acquired (based on trade date) $1.1 billion of long-term investments, all of which were LIBOR-indexed floating rate CMOs issued by either Fannie Mae or Freddie Mac. During this same six-month period, the proceeds from maturities and paydowns of long-term securities totaled approximately $2.4 billion.
Prior to June 30, 2008, the Bank was precluded from purchasing additional MBS if such purchase would cause the aggregate book value of its MBS holdings to exceed 300 percent of the Bank’s total regulatory capital (an amount equal to the Bank’s retained earnings plus amounts paid in for Class B stock, regardless of its classification as equity or liabilities for financial reporting purposes). On March 24, 2008, the Board of Directors of the Finance Board passed a resolution that authorized each FHLBank to temporarily invest up to an additional 300 percent of its total regulatory capital in agency mortgage securities, subject to certain restrictions regarding the MBS that could be acquired, as more fully described in the Bank’s 2009 10-K.
On April 23, 2008, the Bank’s Board of Directors authorized an increase in the Bank’s MBS investment authority of 100 percent of its total regulatory capital. In accordance with the provisions of the resolution and Advisory Bulletin 2008-AB-01, “Temporary Increase in Mortgage-Backed Securities Investment Authority” dated April 3, 2008, the Bank notified the Finance Board’s Office of Supervision on April 29, 2008 of its intent to exercise the new investment authority in an amount up to an additional 100 percent of capital. On June 30, 2008, the Office of Supervision approved the Bank’s submission, thereby raising the Bank’s MBS investment authority from 300 percent to 400 percent of its total regulatory capital.
The Bank’s expanded investment authority granted by this authorization expired on March 31, 2010. Accordingly, the Bank may no longer purchase additional mortgage securities if such purchases would cause the aggregate book value of its MBS holdings to exceed an amount equal to 300 percent of its total regulatory capital. However, the Bank is not required to sell any agency mortgage securities it purchased in accordance with the terms of the authorization.
At June 30, 2010, the Bank held $10.0 billion of MBS, which represented 375 percent of its total regulatory capital. Due to the expiration of the incremental MBS investment authority and shrinkage of its capital base due to reductions in member borrowings, the Bank does not currently anticipate that it will have the capacity to purchase additional MBS throughout the remainder of 2010. Additionally, while the Bank currently has capacity under applicable policies and regulations to purchase certain other types of highly rated long-term investments, it does not currently anticipate purchasing such securities in the foreseeable future.

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On July 23, 2010, the Bank’s Board of Directors approved an amendment to the Bank’s Risk Management Policy which removes the Bank’s authority to purchase non-agency (i.e., private-label) MBS. With the exception of one security acquired in October 2006, the Bank has not acquired any non-agency MBS since 2005.
The following table provides the par amounts and carrying values of the Bank’s MBS portfolio as of June 30, 2010 and December 31, 2009.
COMPOSITION OF MBS PORTFOLIO
(In millions of dollars)
                                 
    June 30, 2010     December 31, 2009  
    Par(1)     Carrying Value     Par(1)     Carrying Value  
Floating rate CMOs
                               
U.S. government guaranteed
  $ 22     $ 22     $ 24     $ 24  
Government-sponsored enterprises
    9,708       9,586       10,985       10,835  
Non-agency residential MBS
    461       392       515       445  
 
                       
Total floating rate CMOs
    10,191       10,000       11,524       11,304  
 
                       
 
                               
Fixed rate MBS
                               
Government-sponsored enterprises
    3       3       3       3  
Triple-A rated non-agency CMBS(2)
    36       36       56       56  
 
                       
Total fixed rate MBS
    39       39       59       59  
 
                       
 
                               
Total MBS
  $ 10,230     $ 10,039     $ 11,583     $ 11,363  
 
                       
 
(1)   Balances represent the principal amounts of the securities.
 
(2)   CMBS = Commercial mortgage-backed securities.
Gross unrealized losses on the Bank’s MBS investments decreased from $188 million at December 31, 2009 to $116 million at June 30, 2010. The following table sets forth the unrealized losses on the Bank’s MBS portfolio as of June 30, 2010 and December 31, 2009.
GROSS UNREALIZED LOSSES ON MBS PORTFOLIO
(dollars in millions)
                                 
    June 30, 2010     December 31, 2009  
            Unrealized             Unrealized  
    Gross     Losses as     Gross     Losses as  
    Unrealized     Percentage of     Unrealized     Percentage of  
    Losses     Amortized Cost     Losses     Amortized Cost  
 
                               
Government-sponsored enterprises
  $ 6       0.1 %   $ 53       0.5 %
Non-agency residential MBS
    110       24.2 %     135       26.5 %
 
                           
 
                               
 
  $ 116             $ 188          
 
                           
The Bank evaluates outstanding held-to-maturity securities in an unrealized loss position as of the end of each quarter for other-than-temporary impairment (“OTTI”). An investment security is impaired if the fair value of the investment is less than its amortized cost. For a summary of the Bank’s OTTI evaluation, see “Item 1. Financial Statements” (specifically, Note 3 beginning on page 7 of this report).
As of June 30, 2010, the gross unrealized losses on the Bank’s holdings of non-agency residential MBS (“RMBS”) totaled $110 million, which represented 24.2 percent of the securities’ amortized cost at that date. The deterioration in the U.S. housing markets that began in 2007, as reflected by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency RMBS, has generally elevated the risk that the Bank may not ultimately recover the entire cost

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bases of some of its non-agency RMBS. Although this risk remains somewhat elevated, based on its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of June 30, 2010 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the actual historical or currently likely future credit performance of the securities.
All of the Bank’s held-to-maturity securities are rated by one or more of the following NRSROs: Moody’s, S&P and/or Fitch Ratings, Ltd. (“Fitch”). With the exception of certain of its non-agency RMBS, none of these organizations had rated any of the securities held by the Bank lower than the highest investment grade credit rating at June 30, 2010. The following table presents the credit ratings assigned to the Bank’s non-agency RMBS as of June 30, 2010 (dollars in thousands). The credit ratings presented in the table represent the lowest rating assigned to the security by Moody’s, S&P or Fitch.
NON-AGENCY RMBS CREDIT RATINGS
(dollars in thousands)
                                         
    Number of     Amortized     Carrying     Estimated     Unrealized  
Credit Rating   Securities     Cost     Value     Fair Value     Losses  
Triple-A
    20     $ 169,977     $ 169,977     $ 155,365     $ 14,612  
Double-A
    4       36,217       36,217       28,292       7,925  
Single-A
    1       6,912       6,912       4,176       2,736  
Triple-B
    6       78,125       64,138       48,149       29,976  
Double-B
    4       38,195       26,755       22,382       15,813  
Single-B
    4       83,506       58,196       52,702       30,804  
Triple-C
    1       41,749       29,689       33,603       8,146  
 
                             
Total
    40     $ 454,681     $ 391,884     $ 344,669     $ 110,012  
 
                             
During the period from July 1, 2010 through August 7, 2010, Fitch lowered its credit rating on the one security rated triple-C in the table above to double-C. This security is not rated by S&P and was rated single-B by Moody’s as of June 30, 2010. None of the Bank’s other non-agency RMBS holdings were downgraded during this period.
At June 30, 2010, the Bank’s portfolio of non-agency RMBS was comprised of 40 securities with an aggregate unpaid principal balance of $461 million: 21 securities with an aggregate unpaid principal balance of $227 million are backed by fixed rate loans and 19 securities with an aggregate unpaid principal balance of $234 million are backed by option adjustable-rate mortgage (“option ARM”) loans. In comparison, as of December 31, 2009, the Bank’s non-agency RMBS portfolio had an aggregate unpaid principal balance of $515 million (the securities backed by fixed rate loans had an aggregate unpaid principal balance of $267 million while the securities backed by option ARM loans had an aggregate unpaid principal balance of $248 million). The following table provides a summary of the Bank’s non-agency RMBS as of June 30, 2010 by collateral type and year of securitization.

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NON-AGENCY RMBS BY UNDERLYING COLLATERAL TYPE
(dollars in millions)
                                                                         
                                            Weighted     Credit Enhancement Statistics  
            Unpaid                             Average     Current     Original        
    Number of     Principal     Amortized     Estimated     Unrealized     Collateral     Weighted     Weighted     Minimum  
Year of Securitization   Securities     Balance     Cost     Fair Value     Losses     Delinquency(1)(2)     Average(1)(3)     Average(1)     Current(4)  
Fixed Rate Collateral
                                                                       
2006
    1     $ 45     $ 42     $ 34     $ 8       13.70 %     7.83 %     8.89 %     7.83 %
2005
    1       28       28       19       9       9.77 %     10.09 %     6.84 %     10.09 %
2004
    5       28       28       26       2       3.87 %     21.12 %     6.01 %     17.97 %
2003
    11       115       115       108       7       1.03 %     6.83 %     3.95 %     5.13 %
2002 and prior
    3       11       11       10       1       6.47 %     21.15 %     4.44 %     16.95 %
 
                                                     
 
    21       227       224       197       27       5.24 %     9.87 %     5.57 %     5.13 %
 
                                                     
 
                                                                       
Option ARM Collateral
                                                                       
2005
    17       221       218       140       78       32.62 %     46.64 %     42.56 %     27.82 %
2004
    2       13       13       8       5       29.76 %     35.53 %     29.95 %     32.93 %
 
                                                     
 
    19       234       231       148       83       32.46 %     46.02 %     41.86 %     27.82 %
 
                                                     
 
                                                                       
Total non-agency RMBS
    40     $ 461     $ 455     $ 345     $ 110       19.06 %     28.22 %     23.99 %     5.13 %
 
                                                     
 
(1)   Weighted average percentages are computed based upon unpaid principal balances.
 
(2)   Collateral delinquency reflects the percentage of underlying loans that are 60 or more days past due, including loans in foreclosure and real estate owned; as of June 30, 2010, actual cumulative loan losses in the pools of loans underlying the Bank’s non-agency RMBS portfolio ranged from 0 percent to 6.30 percent.
 
(3)   Current credit enhancement percentages reflect the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior classes held by the Bank are impacted (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pools before the securities held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pools, it is possible that the senior classes held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.
 
(4)   Minimum credit enhancement reflects the security in each vintage year with the lowest current credit enhancement.
The geographic concentration by state of the loans underlying the Bank’s non-agency RMBS as of December 31, 2009 is provided in the Bank’s 2009 10-K. There were no substantial changes in these concentrations during the six months ended June 30, 2010.
As of June 30, 2010, the Bank held six non-agency RMBS with an aggregate unpaid principal balance of $84 million that were labeled as Alt-A at the time of issuance. Four of the six Alt-A securities (with an aggregate unpaid principal balance of $45 million) are backed by fixed rate loans while the other two securities (with an aggregate unpaid principal balance of $39 million) are backed by option ARM loans. The Bank does not hold any MBS that were labeled as subprime at the time of issuance. The following table provides a summary as of June 30, 2010 of the Bank’s non-agency RMBS that were labeled as Alt-A at the time of issuance.
SECURITIES LABELED AS ALT-A AT THE TIME OF ISSUANCE
(dollars in millions)
                                                                         
                                            Weighted     Credit Enhancement Statistics  
            Unpaid                             Average     Current     Original        
    Number of     Principal     Amortized     Estimated     Unrealized     Collateral     Weighted     Weighted     Minimum  
Year of Securitization   Securities     Balance     Cost     Fair Value     Losses     Delinquency(1)(2)     Average(1)(3)     Average(1)     Current(4)  
2005
    3     $ 68     $ 65     $ 42     $ 23       29.47 %     28.71 %     25.80 %     10.09 %
2004
    1       6       6       6             8.98 %     27.50 %     6.85 %     27.50 %
2002 and prior
    2       10       10       9       1       6.75 %     20.36 %     4.55 %     16.95 %
 
                                                     
Total
    6     $ 84     $ 81     $ 57     $ 24       25.23 %     27.61 %     21.85 %     10.09 %
 
                                                     
 
(1)   Weighted average percentages are computed based upon unpaid principal balances.
 
(2)   Collateral delinquency reflects the percentage of underlying loans that are 60 or more days past due, including loans in foreclosure and real estate owned; as of June 30, 2010, actual cumulative loan losses in the pools of loans underlying the securities presented in the table ranged from 0.20 percent to 4.41 percent.
 
(3)   Current credit enhancement percentages reflect the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior classes held by the Bank are impacted (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pools before the securities held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pools, it is possible that the senior classes held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.
 
(4)   Minimum credit enhancement reflects the security in each vintage year with the lowest current credit enhancement.

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The Bank performed a cash flow analysis for each of its non-agency RMBS holdings as of June 30, 2010. The procedures used in this analysis, together with the results thereof, are summarized in “Item 1. Financial Statements” (specifically, Note 3 beginning on page 7 of this report).
In addition to evaluating its non-agency RMBS under a base case (or best estimate) scenario, the Bank also performed a cash flow analysis for each of these securities under a more stressful housing price scenario. The more stressful scenario was based on a housing price forecast that was 5 percentage points lower at the trough than the base case scenario followed by a flatter recovery path. Under the more stressful scenario, current-to-trough home price declines were projected to range from 5 percent to 17 percent over the 3- to 9-month period beginning April 1, 2010. Thereafter, home prices were projected to increase 0 percent in the first year, 1 percent in the second year, 2 percent in each of the third and fourth years and 3 percent in each subsequent year.
As set forth in the table below, under the more stressful housing price scenario, 13 of the Bank’s non-agency RMBS would have been deemed to be other-than-temporarily impaired as of June 30, 2010 (as compared to 4 securities in the Bank’s base case scenario as of that date). The stress test scenario and associated results do not represent the Bank’s current expectations and therefore should not be construed as a prediction of the actual performance of these securities. Rather, the results from this hypothetical stress test scenario provide a measure of the credit losses that the Bank might incur if home price declines (and subsequent recoveries) are more adverse than those projected in its OTTI assessment.
NON-AGENCY RMBS STRESS-TEST SCENARIO
(dollars in thousands)
                                                             
                                Credit Losses     Hypothetical                
                                Recorded     Credit                
                                in Earnings     Losses Under             Current  
    Year of   Collateral     Carrying     Fair     During the     Stress-Test     Collateral     Credit  
    Securitization   Type(1)     Value     Value     Second Quarter     Scenario(2)     Delinquency(3)     Enhancement(4)  
Security #1
  2005   Alt-A/Option ARM   $ 7,293     $ 9,818     $ 379     $ 1,546       40.5 %     35.9 %
Security #2
  2005   Alt-A/Option ARM     9,501       10,702             471       41.9 %     50.2 %
Security #3
  2006   Alt-A/FixedRate     29,689       33,603       681       1,926       13.7 %     7.8 %
Security #4
  2005   Alt-A/Option ARM     6,663       7,593             352       18.9 %     47.9 %
Security #5
  2005   Alt-A/Option ARM     12,457       13,111       39       1,088       46.4 %     47.3 %
Security #6
  2005   Alt-A/Option ARM     10,011       10,279             675       24.9 %     27.8 %
Security #7
  2004   Alt-A/Option ARM     4,191       4,191             246       19.6 %     32.9 %
Security #8
  2005   Alt-A/Option ARM     6,302       6,292             33       26.5 %     46.7 %
Security #9
  2005   Alt-A/Option ARM     3,007       3,008       4             31.5 %     46.6 %
Security #10
  2005   Alt-A/Option ARM     8,489       5,233             48       41.4 %     45.8 %
Security #11
  2005   Alt-A/Option ARM     17,719       11,207             3       28.7 %     45.8 %
Security #12
  2005   Alt-A/Option ARM     10,708       6,931             14       40.9 %     50.3 %
Security #13
  2004   Alt-A/Option ARM     5,757       3,440             107       42.5 %     38.8 %
Security #14
  2005   Alt-A/FixedRate     28,433       19,494             9       9.8 %     10.1 %
 
                                                   
 
              $ 160,220     $ 144,902     $ 1,103     $ 6,518                  
 
                                                   
 
(1)   Security #1, Security #5 and Security #14 are the only securities presented in the table above that were labeled as Alt-A at the time of issuance; however, based upon their current collateral or performance characteristics, all of the securities presented in the table above were analyzed using Alt-A assumptions.
 
(2)   Represents the credit losses that would have been recorded in earnings during the quarter ended June 30, 2010 if the more stressful housing price scenario had been used in the Bank’s OTTI assessment as of June 30, 2010.
 
(3)   Collateral delinquency reflects the percentage of underlying loans that are 60 or more days past due, including loans in foreclosure and real estate owned; as of June 30, 2010, actual cumulative loan losses in the pools of loans underlying the securities presented in the table ranged from 0.85 percent to 6.30 percent.
 
(4)   Current credit enhancement percentages reflect the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior classes held by the Bank are impacted (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pools before the securities held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pools, it is possible that the senior classes held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.
In addition to its holdings of non-agency RMBS, as of June 30, 2010, the Bank held one non-agency commercial MBS with an unpaid principal balance, amortized cost and estimated fair value of $36 million, $36 million and $37 million, respectively. This security was issued in 2000. As of June 30, 2010, the security’s collateral delinquency (the percentage of underlying loans that are 60 or more days past due, including loans in foreclosure and real estate owned) was 2.64 percent; at this same date, the current credit enhancement approximated 30.31 percent.
While substantially all of its MBS portfolio is comprised of CMOs with floating rate coupons ($10.2 billion par value at June 30, 2010) that do not expose the Bank to interest rate risk if interest rates rise moderately, such

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securities include caps that would limit increases in the floating rate coupons if short-term interest rates rise above the caps. In addition, if interest rates rise, prepayments on the mortgage loans underlying the securities would likely decline, thus lengthening the time that the securities would remain outstanding with their coupon rates capped. As of June 30, 2010, the effective interest rate caps on one-month LIBOR (the interest cap rate minus the stated spread on the coupon) embedded in the CMO floaters ranged from 6.0 percent to 15.3 percent. The largest concentration of embedded effective caps ($8.5 billion) was between 6.0 percent and 7.0 percent. As of June 30, 2010, one-month LIBOR rates were approximately 565 basis points below the lowest effective interest rate cap embedded in the CMO floaters. To hedge a portion of the potential cap risk embedded in these securities, the Bank held (i) $1.75 billion of interest rate caps with remaining maturities ranging from 42 months to 53 months as of June 30, 2010, and strike rates ranging from 6.00 percent to 6.50 percent and (ii) five forward-starting interest rate caps, each of which has a notional amount of $250 million. Two of the forward-starting caps have terms that commence in June 2012; these forward-starting caps mature in June 2015 and June 2016 and have strike rates of 6.50 percent and 7.00 percent, respectively. The other three forward-starting caps have terms that commence in October 2012; these forward-starting caps mature in October 2014 and October 2015 and have strike rates ranging from 6.00 percent to 7.00 percent. If interest rates rise above the strike rates specified in these interest rate cap agreements, the Bank will be entitled to receive interest payments according to the terms and conditions of such agreements. Such payments would be based upon the notional amounts of those agreements and the difference between the specified strike rate and one-month LIBOR.
The Bank did not enter into any new stand-alone interest rate cap agreements during the six months ended June 30, 2010. During the three months ended June 30, 2010, the Bank terminated three interest rate caps with an aggregate notional amount of $750 million. The proceeds from these terminations totaled $1.4 million.
The following table provides a summary of the notional amounts, strike rates and expiration periods of the Bank’s portfolio of stand-alone CMO-related interest rate cap agreements as of June 30, 2010.
SUMMARY OF CMO-RELATED INTEREST RATE CAP AGREEMENTS
(dollars in millions)
                 
Expiration   Notional Amount     Strike Rate  
First quarter 2014
  $ 500       6.00 %
First quarter 2014
    500       6.50 %
Third quarter 2014
    500       6.50 %
Fourth quarter 2014
    250       6.00 %
Fourth quarter 2014 (1)
    250       6.50 %
Second quarter 2015 (2)
    250       6.50 %
Fourth quarter 2015 (1)
    250       6.00 %
Fourth quarter 2015 (1)
    250       7.00 %
Second quarter 2016 (2)
    250       7.00 %
 
             
 
               
 
  $ 3,000          
 
             
 
(1)   These caps are effective beginning in October 2012.
 
(2)   These caps are effective beginning in June 2012.

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Consolidated Obligations and Deposits
As of June 30, 2010, the carrying values of the Bank’s consolidated obligation bonds and discount notes totaled $47.0 billion and $6.1 billion, respectively. At that date, the par value of the Bank’s outstanding bonds was $46.6 billion and the par value of the Bank’s outstanding discount notes was $6.1 billion. In comparison, at December 31, 2009, the carrying values of consolidated obligation bonds and discount notes totaled $51.5 billion and $8.8 billion, respectively, and the par values of the Bank’s outstanding bonds and discount notes totaled $51.2 billion and $8.8 billion, respectively.
During the six months ended June 30, 2010, the Bank’s outstanding consolidated obligation bonds (at par value) decreased by $4.6 billion due primarily to decreases in the Bank’s outstanding advances. The following table presents the composition of the Bank’s outstanding bonds at June 30, 2010 and December 31, 2009.
COMPOSITION OF BONDS OUTSTANDING
(Par value, dollars in millions)
                                 
    June 30, 2010     December 31, 2009  
            Percentage             Percentage  
    Balance     of Total     Balance     of Total  
Single-index floating rate
  $ 23,170       49.7 %   $ 20,560       40.2 %
Fixed rate, non-callable
    17,535       37.6       23,371       45.7  
Fixed rate, callable
    2,935       6.3       3,277       6.4  
Callable step-up
    2,402       5.2       3,473       6.8  
Callable step-down
    350       0.8       125       0.2  
Conversion
    205       0.4       365       0.7  
 
                       
Total par value
  $ 46,597       100.0 %   $ 51,171       100.0 %
 
                       
During the first quarter of 2010, a significant portion of the Bank’s funding needs were met through the issuance of discount notes and one-month LIBOR-indexed floating rate bonds. The Bank relied upon floating rate bonds during the first quarter in part because they were more readily available in larger volumes as compared to some of the Bank’s other traditional sources of LIBOR-indexed funds, such as swapped callable debt and short-maturity fixed rate, non-callable debt. Furthermore, through the issuance of the one-month LIBOR floating rate bonds, the Bank was able to maintain (and based on its then existing projections, expected to maintain in the near future) approximately equal balances of one-month LIBOR indexed assets and liabilities (including the effects of LIBOR basis swaps). The proceeds from the issuance of discount notes were generally used to fund shorter maturity assets such as money market investments and short-maturity advances.
During the second quarter of 2010, a significant portion of the Bank’s funding needs were met through the issuance of swapped fixed rate non-callable bonds, LIBOR-indexed floating rate bonds, swapped discount notes, and swapped floating rate bonds indexed to the daily federal funds rate. Due to concerns regarding the extent of the European sovereign debt problems, investors increased their demand for short-maturity high-quality debt, including FHLBank consolidated obligations. These concerns also led to an increase in LIBOR spot rates and a widening of interest rate swap spreads relative to debt spreads tied to high-quality benchmarks, including FHLBank consolidated obligations. The increased demand by investors for short-maturity consolidated obligations coupled with the widening in interest rate swap spreads enabled the Bank to issue two- and three-year fixed rate non-callable debt and convert them to favorable LIBOR-based costs through the use of interest rate swaps. Additionally, the spread between the rates on various money market instruments and LIBOR widened to an extent that the Bank was able to issue and interest rate swap federal fund floater bonds and discount notes at attractive spreads to LIBOR.
The average LIBOR cost (including the impact of associated interest rate swaps) of the consolidated obligation bonds issued by the Bank was approximately LIBOR minus 19 basis points during the fourth quarter of 2009, approximately LIBOR minus 16 basis points during the first quarter of 2010 and approximately LIBOR minus 17 basis points during the second quarter of 2010. The weighted average cost of consolidated obligation bonds issued by the Bank increased in the first quarter of 2010 as compared to the fourth quarter of 2009 due to a variety of

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factors including the availability of other high credit grade debt such as sovereign debt, the compression in interest rate swap spreads relative to high credit grade debt, and the conclusion of the Federal Reserve’s agency debt purchase program. The increased issuance of floating rate bonds, which typically bear a higher LIBOR cost than the LIBOR cost that results from converting structured debt such as callable bonds to LIBOR, also contributed to the Bank’s increased debt costs during the first quarter. The slight improvement in the average LIBOR cost of the consolidated obligation bonds issued by the Bank during the second quarter of 2010 was largely attributable to the increase in investor demand for short-term agency debt and the widening of swap spreads discussed above.
As discussed in the 2009 10-K, on March 4, 2010, the SEC issued amendments to its rules promulgated under the Investment Company Act of 1940, which govern money market funds. These amendments limit the amount of FHLBank consolidated obligations with remaining maturities greater than 60 days that a money market fund can hold. The requirements imposed by the amendments became effective on various dates during the second quarter of 2010. Traditionally, money market funds have been significant investors in FHLBank consolidated obligations. During the second quarter of 2010, the weighted average number of days to maturity of taxable money market funds contracted from 44 days to 36 days, which is the lowest weighted average number of days in 18 months. At this time, the Bank has not yet conclusively determined the effect that the amendments will have on its ability to issue consolidated obligations on favorable terms.
Demand and term deposits were $1.0 billion and $1.5 billion at June 30, 2010 and December 31, 2009, respectively. The size of the Bank’s deposit base varies as market factors change, including the attractiveness of the Bank’s deposit pricing relative to the rates available to members on alternative money market investments, members’ investment preferences with respect to the maturity of their investments, and member liquidity.
Capital
The Bank’s outstanding capital stock (excluding mandatorily redeemable capital stock) was approximately $2.3 billion and $2.5 billion at June 30, 2010 and December 31, 2009, respectively. The Bank’s average outstanding capital stock (excluding mandatorily redeemable capital stock) decreased from $2.7 billion for the year ended December 31, 2009 to $2.4 billion for the six months ended June 30, 2010. The decrease in outstanding capital stock from December 31, 2009 to June 30, 2010 was attributable primarily to a decline in members’ activity-based investment requirements resulting from the decline in outstanding advances balances.
Mandatorily redeemable capital stock outstanding at June 30, 2010 and December 31, 2009 was $7.8 million and $9.2 million, respectively. Although mandatorily redeemable capital stock is excluded from capital (equity) for financial reporting purposes, such stock is considered capital for regulatory purposes.
Members are required to maintain an investment in Class B stock equal to the sum of a membership investment requirement and an activity-based investment requirement. There were no changes in the investment requirement percentages during the six months ended June 30, 2010.
Periodically, the Bank repurchases a portion of members’ excess capital stock. Excess stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum investment requirement. The portion of members’ excess capital stock subject to repurchase is known as surplus stock. The Bank generally repurchases surplus stock on the last business day of the month following the end of each calendar quarter (e.g., January 31, April 30, July 31 and October 31). For the repurchases that occurred on January 29, 2010, April 30, 2010 and July 30, 2010, surplus stock was defined as the amount of stock held by a member in excess of 120 percent of the member’s minimum investment requirement. The Bank’s practice has been that a member’s surplus stock will not be repurchased if the amount of that member’s surplus stock is $250,000 or less or if, subject to certain exceptions, the member is on restricted collateral status. From time to time, the Bank may modify the definition of surplus stock or the timing and/or frequency of surplus stock repurchases.

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The following table sets forth the repurchases of surplus stock that have occurred since December 31, 2009, none of which was classified as mandatorily redeemable capital stock at the dates of repurchase.
                 
Date of Repurchase   Shares   Amount of
by the Bank   Repurchased   Repurchase
January 29, 2010
    1,065,595     $ 106,560  
April 30, 2010
    704,308       70,431  
July 30, 2010
    513,708       51,371  
The following table presents outstanding capital stock, by type of institution, as of June 30, 2010 and December 31, 2009.
CAPITAL STOCK OUTSTANDING BY INSTITUTION TYPE
(dollars in millions)
                                 
    June 30, 2010     December 31, 2009  
    Amount     Percent     Amount     Percent  
Commercial banks
  $ 1,904       84 %   $ 2,200       87 %
Thrifts
    228       10       213       8  
Credit unions
    104       5       96       4  
Insurance companies
    25       1       23       1  
 
                       
 
                               
Total capital stock classified as capital
    2,261       100       2,532       100  
 
                               
Mandatorily redeemable capital stock
    8             9        
 
                       
 
                               
Total regulatory capital stock
  $ 2,269       100 %   $ 2,541       100 %
 
                       
At June 30, 2010 and December 31, 2009, the Bank’s ten largest shareholders held $1.2 billion and $1.4 billion, respectively, of capital stock, which represented 51.8 percent and 53.4 percent, respectively, of the Bank’s total outstanding capital stock (including mandatorily redeemable capital stock) as of those dates. The following table presents the Bank’s ten largest shareholders as of June 30, 2010.

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TEN LARGEST SHAREHOLDERS AS OF JUNE 30, 2010
(Dollars in thousands)
                         
                    Percent of  
            Capital     Total  
Name   City   State   Stock     Capital Stock  
Wells Fargo Bank South Central, National Association (1)
  Houston   TX   $ 691,170       30.5 %
Comerica Bank
  Dallas   TX     230,244       10.1  
Beal Bank Nevada (2)
  Las Vegas   NV     59,394       2.6  
Southside Bank
  Tyler   TX     36,096       1.6  
Arvest Bank
  Rogers   AR     30,747       1.4  
Bank of Texas, N.A.
  Dallas   TX     28,255       1.2  
International Bank of Commerce
  Laredo   TX     26,695       1.2  
First National Bank
  Edinburg   TX     26,424       1.2  
First Community Bank
  Taos   NM     23,146       1.0  
USAA Federal Savings Bank
  San Antonio   TX     22,772       1.0  
 
                   
 
                       
 
          $ 1,174,943       51.8 %
 
                   
 
(1)   Formerly Wachovia Bank, FSB
 
(2)   Beal Bank Nevada is chartered in Nevada, but maintains its home office in Plano, TX.
All of the stock held by the ten institutions shown in the table above was classified as capital in the statement of condition as of June 30, 2010.
At June 30, 2010, the Bank’s excess stock totaled $233.5 million, which represented 0.4 percent of the Bank’s total assets as of that date.
During the six months ended June 30, 2010, the Bank’s retained earnings increased by $50.3 million, from $356.3 million to $406.6 million. During this same period, the Bank paid dividends on capital stock totaling $4.7 million, which represented an annualized dividend rate of 0.375 percent. The Bank’s first and second quarter 2010 dividend rates exceeded the upper end of the Federal Reserve’s target for the federal funds rate for the quarters ended December 31, 2009 and March 31, 2010, respectively, by 12.5 basis points. The first quarter dividend, applied to average capital stock held during the period from October 1, 2009 through December 31, 2009, was paid on March 31, 2010. The second quarter dividend, applied to average capital stock held during the period from January 1, 2010 through March 31, 2010, was paid on June 30, 2010.
The Bank has had a long-standing practice of benchmarking the dividend rate that it pays on capital stock to the average federal funds rate. Consistent with that practice, the Bank manages its balance sheet so that its returns (attributable to core earnings) generally track short-term interest rates.
While there can be no assurances, taking into consideration its current earnings expectations and anticipated market conditions, the Bank currently expects to pay dividends for the remainder of 2010 at or slightly above the reference average federal funds rate for the applicable dividend period (i.e., for each calendar quarter during this period, the average federal funds rate for the preceding quarter). Consistent with its long-standing practice, the Bank expects to pay these dividends in the form of capital stock with any fractional shares paid in cash.
The Bank is required to maintain at all times permanent capital (defined under the Finance Agency’s rules as retained earnings and amounts paid in for Class B stock, regardless of its classification as equity or liabilities for financial reporting purposes) in an amount at least equal to its risk-based capital requirement, which is the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, as further described in the Bank’s 2009 10-K. At June 30, 2010, the Bank’s total risk-based capital requirement was $390.5 million, comprised of credit risk, market risk and operations risk capital requirements of $143.7 million, $156.7 million and $90.1 million, respectively.

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In addition to the risk-based capital requirement, the Bank is subject to two other capital requirements. First, the Bank must, at all times, maintain a minimum total capital-to-assets ratio of 4.0 percent. For this purpose, total capital is defined by Finance Agency rules and regulations as the Bank’s permanent capital and the amount of any general allowance for losses (i.e., those reserves that are not held against specific assets). Second, the Bank is required to maintain at all times a minimum leverage capital-to-assets ratio in an amount at least equal to 5.0 percent of its total assets. In applying this requirement to the Bank, leverage capital includes the Bank’s permanent capital multiplied by a factor of 1.5 plus the amount of any general allowance for losses. The Bank did not have any general reserves at June 30, 2010 or December 31, 2009. Under the regulatory definitions, total capital and permanent capital exclude accumulated other comprehensive income (loss). At all times during the six months ended June 30, 2010, the Bank was in compliance with all of its regulatory capital requirements. For a summary of the Bank’s compliance with the Finance Agency’s capital requirements as of June 30, 2010 and December 31, 2009, see “Item 1. Financial Statements” (specifically, Note 8 on page 23 of this report).
The Bank’s Risk Management Policy contains a minimum total regulatory capital-to-assets target ratio of 4.10 percent, which is higher than the 4.00 percent ratio required under the Finance Agency’s capital rules. At all times during the six months ended June 30, 2010, the Bank was in compliance with its operating target capital ratio.
Derivatives and Hedging Activities
The Bank enters into interest rate swap, cap and forward agreements (collectively, interest rate exchange agreements) with highly rated financial institutions to manage its exposure to changes in interest rates and/or to adjust the effective maturity, repricing index and/or frequency or option characteristics of financial instruments. This use of derivatives is integral to the Bank’s financial management strategy, and the impact of these interest rate exchange agreements permeates the Bank’s financial statements. For additional discussion, see “Item 1. Financial Statements” (specifically, Note 7 beginning on page 16 of this report). As a result of using interest rate exchange agreements extensively to fulfill its role as a financial intermediary, the Bank has a large notional amount of interest rate exchange agreements relative to its size. As of June 30, 2010 and December 31, 2009, the Bank’s notional balance of interest rate exchange agreements was $45.5 billion and $66.7 billion, respectively, while its total assets were $57.1 billion and $65.1 billion, respectively.
The following table provides the notional balances of the Bank’s derivative instruments, by balance sheet category, as of June 30, 2010 and December 31, 2009, and the net fair value changes recorded in earnings for each of those categories during the three and six months ended June 30, 2010 and 2009.

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COMPOSITION OF DERIVATIVES
                                                 
                    Net Change in Fair Value(7)     Net Change in Fair Value(7)  
    Total Notional at     Three Months Ended June 30,     Six Months Ended June 30,  
    June 30, 2010     December 31, 2009     2010     2009     2010     2009  
    (In millions of dollars)     (In thousands of dollars)     (In thousands of dollars)  
Advances
                                               
Short-cut method(1)
  $ 7,960     $ 9,397     $     $     $     $  
Long-haul method(2)
    1,498       1,556       (325 )     (205 )     (101 )     (1,590 )
Economic hedges(3)
    18       15       26       26       20       7  
 
                                   
Total
    9,476       10,968       (299 )     (179 )     (81 )     (1,583 )
 
                                   
Investments
                                               
Long-haul method(2)
                      (228 )           (102 )
 
                                   
Consolidated obligation bonds
                                               
Short-cut method(1)
          95                          
Long-haul method(2)
    20,429       27,519       (2,521 )     3,369       (291 )     58,902  
Economic hedges(3)
    2,475       8,195       (2,866 )     16,759       (9,386 )     15,922  
 
                                   
Total
    22,904       35,809       (5,387 )     20,128       (9,677 )     74,824  
 
                                   
Consolidated obligation discount notes
                                               
Economic hedges(3)
    2,398       6,414       862       5,207       (760 )     (3,761 )
 
                                   
Other economic hedges
                                               
Interest rate caps(4)
    3,000       3,750       (6,755 )     8,246       (35,708 )     8,621  
Basis swaps(5)
    7,700       9,700       10,798       (26,737 )     10,244       9,367  
Forward rate agreement (6)
                      223              
Member swaps (including offsetting swaps)
    24       24       1       22       1       32  
 
                                   
Total
    10,724       13,474       4,044       (18,246 )     (25,463 )     18,020  
 
                                   
 
                                               
Total derivatives
  $ 45,502     $ 66,665     $ (780 )   $ 6,682     $ (35,981 )   $ 87,398  
 
                                   
 
                                               
Total short-cut method
  $ 7,960     $ 9,492     $     $     $     $  
Total long-haul method
    21,927       29,075       (2,846 )     2,936       (392 )     57,210  
Total economic hedges
    15,615       28,098       2,066       3,746       (35,589 )     30,188  
 
                                   
 
                                               
Total derivatives
  $ 45,502     $ 66,665     $ (780 )   $ 6,682     $ (35,981 )   $ 87,398  
 
                                   
 
(1)   The short-cut method allows the assumption of no ineffectiveness in the hedging relationship.
 
(2)   The long-haul method requires the hedge and hedged item to be marked to fair value independently.
 
(3)   Interest rate derivatives that are matched to advances or consolidated obligations, but that either do not qualify for hedge accounting or were not designated in a hedging relationship for accounting purposes.
 
(4)   Interest rate derivatives that hedge identified portfolio risks, but that do not qualify for hedge accounting. The Bank’s interest rate caps hedge embedded caps in floating rate CMOs designated as held-to-maturity.
 
(5)   At June 30, 2010, the Bank held $7.7 billion (notional) of interest rate basis swaps that were entered into to reduce the Bank’s exposure to changes in spreads between one-month and three-month LIBOR; $1.0 billion, $2.0 billion, $1.0 billion and $3.7 billion of these agreements expire in the first quarter of 2011, the second quarter of 2013, the second quarter of 2014 and the fourth quarter of 2018, respectively.
 
(6)   The Bank’s forward rate agreement hedged exposure to reset risk and expired in the second quarter of 2009.
 
(7)   Represents the difference in fair value adjustments for the derivatives and their hedged items. In cases involving economic hedges, the net change in fair value reflected in this table represents a one-sided mark, meaning that the net change in fair value represents the change in fair value of the derivative only. Gains and losses in the form of net interest payments on economic hedge derivatives are excluded from the amounts reflected above.
By entering into interest rate exchange agreements with highly rated financial institutions (with which it has in place master swap agreements and credit support addendums), the Bank generally exchanges a defined market risk for the risk that the counterparty will not be able to fulfill its obligation in the future. The Bank manages this credit risk by spreading its transactions among as many highly rated counterparties as is practicable, by entering into collateral exchange agreements with all counterparties that include minimum collateral thresholds, and by monitoring its exposure to each counterparty at least monthly and as often as daily. In addition, all of the Bank’s collateral exchange agreements include master netting arrangements whereby the fair values of all interest rate derivatives (including accrued interest receivables and payables) with each counterparty are offset for purposes of measuring credit exposure. The collateral exchange agreements require the delivery of collateral consisting of cash or very liquid, highly rated securities (generally consisting of U.S. government guaranteed or agency debt securities) if credit risk exposures rise above the minimum thresholds. As of June 30, 2010 and December 31, 2009, only cash collateral had been delivered under the terms of these collateral exchange agreements.
The notional amount of interest rate exchange agreements does not reflect the Bank’s credit risk exposure, which is much less than the notional amount. The maximum credit risk exposure is the estimated cost, on a present value basis, of replacing at current market rates all interest rate exchange agreements with a counterparty with which the Bank is in a net gain position, if the counterparty were to default. Maximum credit risk exposure, as defined in the

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preceding sentence, does not consider the existence of any collateral held by the Bank. The Bank’s collateral exchange agreements with its counterparties generally establish maximum unsecured credit exposure thresholds (typically ranging from $100,000 to $500,000) that one party may have to the other party. Once the counterparties agree to the valuations of the interest rate exchange agreements, and if it is determined that the unsecured credit exposure exceeds the threshold, then, upon a request made by the unsecured counterparty, the party that has the unsecured obligation to the counterparty bearing the risk of the unsecured credit exposure generally must deliver sufficient collateral to reduce the unsecured credit exposure to zero.
The following table provides information regarding the Bank’s derivative counterparty credit exposure as of June 30, 2010 and December 31, 2009.
DERIVATIVES COUNTERPARTY CREDIT EXPOSURE
(Dollars in millions)
                                                 
                    Maximum     Cash     Cash        
Credit   Number of     Notional     Credit     Collateral     Collateral     Net Exposure  
Rating(1)   Counterparties     Principal(2)     Exposure     Held     Due(3)     After Collateral  
June 30, 2010
                                               
Aaa
    1     $ 334.0     $ 1.1     $ 0.6     $ 0.5     $  
Aa(4)
    10       36,158.3       84.8       77.8       5.5       1.5  
A(5)
    4       8,997.9       13.7       11.8       1.9        
Excess collateral
                      4.6              
 
                                   
Total
    15     $ 45,490.2 (6)   $ 99.6     $ 94.8     $ 7.9     $ 1.5  
 
                                   
 
                                               
December 31, 2009
                                               
Aaa
    1     $ 543.0     $     $     $     $  
Aa(4)
    10       51,897.1       198.0       187.6       8.7       1.7  
A(5)
    4       14,212.7       25.9       17.0       8.9        
Excess collateral
                      0.1              
 
                                   
Total
    15     $ 66,652.8 (6)   $ 223.9     $ 204.7     $ 17.6     $ 1.7  
 
                                   
 
(1)   Credit ratings shown in the table are obtained from Moody’s and are as of June 30, 2010 and December 31, 2009, respectively.
 
(2)   Includes amounts that had not settled as of June 30, 2010 and December 31, 2009.
 
(3)     Amount of collateral to which the Bank had contractual rights under counterparty credit agreements based on June 30, 2010 and December 31, 2009 credit exposures. Cash collateral totaling $7.9 million and $17.6 million was delivered under these agreements in early July 2010 and early January 2010, respectively.
 
(4)    The figures for Aa-rated counterparties as of June 30, 2010 and December 31, 2009 include transactions with a counterparty that is affiliated with a member institution. Transactions with this counterparty had an aggregate notional principal of $2.2 billion and $753 million as of June 30, 2010 and December 31, 2009, respectively. These transactions represented a credit exposure of $4.9 million and $1.9 million to the Bank as of June 30, 2010 and December 31, 2009, respectively.
 
(5)    The figures for A-rated counterparties as of June 30, 2010 and December 31, 2009 include transactions with one counterparty that is affiliated with a non-member shareholder of the Bank. Transactions with that counterparty had an aggregate notional principal of $3.6 billion and $3.2 billion as of June 30, 2010 and December 31, 2009, respectively. These transactions did not represent a credit exposure to the Bank as of June 30, 2010 and represented a credit exposure of $2.2 million as of December 31, 2009.
 
(6)     Excludes $12.1 million (notional amount) of interest rate derivatives with members at both June 30, 2010 and December 31, 2009, respectively. This product offering is discussed in the paragraph below.
In addition to the activities described above, the Bank offers interest rate swaps, caps and floors to its members to assist them in meeting their risk management objectives. In derivative transactions with its members, the Bank acts as an intermediary by entering into an interest rate exchange agreement with the member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s derivative counterparties discussed above. When entering into interest rate exchange agreements with its members, the Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. Eligible collateral for derivative transactions consists of collateral that is eligible to secure advances and other obligations under the member’s Advances and Security Agreement with the Bank.

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Market Value of Equity
The ratio of the Bank’s estimated market value of equity to its book value of equity was approximately 106 percent at June 30, 2010. In comparison, this ratio was approximately 100 percent as of December 31, 2009. For additional discussion, see “Part I / Item 3 — Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.”
Results of Operations
Net Income
Net income for the three months ended June 30, 2010 and 2009 was $39.4 million and $25.7 million, respectively. The Bank’s net income for the three months ended June 30, 2010 represented an annualized return on average capital stock (“ROCS”) of 7.00 percent, which was 681 basis points above the average effective federal funds rate for the quarter. In comparison, the Bank’s ROCS was 3.66 percent for the three months ended June 30, 2009, which exceeded the average effective federal funds rate for that quarter by 348 basis points. Net income for the six months ended June 30, 2010 and 2009 was $55.0 million and $90.9 million, respectively. The Bank’s net income for the six months ended June 30, 2010 represented an ROCS of 4.71 percent, which was 455 basis points above the average effective federal funds rate for the period. In comparison, the Bank’s ROCS was 6.35 percent for the six months ended June 30, 2009, which was 617 basis points above the average effective federal funds rate for that period. To derive the Bank’s ROCS, net income is divided by average capital stock outstanding excluding stock that is classified as mandatorily redeemable capital stock. The factors contributing to the changes in ROCS compared to the average effective federal funds rate are discussed below.
While the Bank is exempt from all federal, state and local taxation (except for real property taxes), it is obligated to set aside amounts for its Affordable Housing Program (“AHP”) and generally to make quarterly payments to the Resolution Funding Corporation (“REFCORP”). Assessments for AHP and REFCORP, which are more fully described below, equate to a minimum 26.5 percent effective assessment rate for the Bank. Because interest expense on mandatorily redeemable capital stock is not deductible for purposes of computing the Bank’s AHP assessment, the effective rate may exceed 26.5 percent. During the three and six months ended June 30, 2010 and 2009, the effective rates approximated 26.5 percent. During the three months ended June 30, 2010 and 2009, the combined AHP and REFCORP assessments were $14.2 million and $9.3 million, respectively. During the six months ended June 30, 2010 and 2009, the combined AHP and REFCORP assessments were $19.9 million and $32.8 million, respectively.
Income Before Assessments
During the three months ended June 30, 2010 and 2009, the Bank’s income before assessments was $53.6 million and $35.0 million, respectively. As discussed in more detail below, the $18.6 million increase in income before assessments from period to period was attributable to a $53.7 million increase in net interest income, offset by a $33.9 million decrease in other income and a $1.2 million increase in other expense. The decrease in other income was due primarily to a $32.6 million decrease in net gains on derivatives and hedging activities.
The Bank’s income before assessments was $74.8 million and $123.7 million for the six months ended June 30, 2010 and 2009, respectively. As discussed in more detail below, this $48.9 million decrease in income before assessments from period to period was attributable to a $188.9 million decrease in other income (of which $186.2 million related to derivatives and hedging activities) and a $0.7 million increase in other expense, offset by a $140.7 million increase in net interest income.
The components of income before assessments (net interest income/expense, other income/loss and other expense) are discussed in more detail in the following sections.

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Net Interest Income (Expense)
For the three months ended June 30, 2010 and 2009, the Bank’s net interest income was $68.4 million and $14.8 million, respectively. The Bank’s net interest income (expense) was $132.6 million and ($8.1 million) for the six months ended June 30, 2010 and 2009, respectively. As described further below, the Bank’s net interest income (expense) does not include net interest payments on economic hedge derivatives, which contributed significantly to the Bank’s overall income before assessments during the three and six months ended June 30, 2009. If these net interest payments had been included, net interest income would have improved by $28.5 million and $77.9 million for the three and six months ended June 30, 2010, as compared to the corresponding periods in 2009. The increases in net interest income were due in large part to increases in the Bank’s net interest spread. Net interest income was also impacted (albeit to a far lesser extent) by changes in the average balances of earning assets from $71.4 billion and $72.8 billion for the three and six months ended June 30, 2009 to $56.1 billion and $58.9 billion for the corresponding periods in 2010.
For the three months ended June 30, 2010 and 2009, the Bank’s net interest margin was 48 basis points and 8 basis points, respectively. The Bank’s net interest margin was 45 basis points and (3) basis points for the six months ended June 30, 2010 and 2009, respectively. Net interest margin, or net interest income as a percent of average earning assets, is a function of net interest spread and the rates of return on assets funded by the investment of the Bank’s capital. Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. The Bank’s net interest spread increased from 1 basis point and (10) basis points for the three and six months ended June 30, 2009, respectively, to 47 basis points and 43 basis points during the three and six months ended June 30, 2010, respectively. Due to lower short-term interest rates in 2010, the contribution of earnings from the Bank’s invested capital to the net interest margin (the impact of non-interest bearing funds) decreased from 7 basis points for the three and six months ended June 30, 2009 to 1 basis point and 2 basis points for the three and six months ended June 30, 2010.
As noted above, the Bank’s net interest income excludes net interest payments on economic hedge derivatives. During the six months ended June 30, 2010, the Bank used approximately $8.6 billion (average notional balance) of interest rate basis swaps to hedge the risk of changes in spreads between one-month and three-month LIBOR, approximately $2.4 billion (average notional balance) of fixed-for-floating interest rate swaps to hedge some of its longer-term discount notes and approximately $3.6 billion (average notional balance) of interest rate swaps to convert variable-rate consolidated obligations from the daily federal funds rate to three-month LIBOR (“federal funds floater swaps”). During the comparable period in 2009, the Bank used approximately $12.4 billion (average notional balance) of interest rate basis swaps to hedge the risk of changes in spreads between one-month and three-month LIBOR, approximately $6.1 billion (average notional balance) of fixed-for-floating interest rate swaps to hedge some of its longer-term discount notes and approximately $5.6 billion (average notional balance) of federal funds floater swaps to convert variable-rate consolidated obligations from the daily federal funds rate to three-month LIBOR. These swaps are accounted for as economic hedges. Net interest income associated with economic hedge derivatives is recorded in other income (loss) in the statements of income and therefore excluded from net interest income, net interest margin and net interest spread. Net interest income on the Bank’s economic hedge derivatives totaled $2.1 million and $10.6 million for the three and six months ended June 30, 2010, respectively, compared to $27.2 million and $73.3 million, respectively, for the corresponding periods in 2009. Had this interest income on economic hedge derivatives been included in net interest income, the Bank’s net interest income would have been higher by these amounts, which would have made its net interest income positive for the six months ended June 30, 2009. In addition, the Bank’s net interest margin would have been 50 basis points and 48 basis points for the three and six months ended June 30, 2010, respectively, compared to 23 basis points and 18 basis points for the comparable periods in 2009 and its net interest spread would have been 48 basis points and 47 basis points for the three and six months ended June 30, 2010, respectively, compared to 17 basis points and 11 basis points for the three and six months ended June 30, 2009, respectively. The increase in the Bank’s net interest spread for the three- and six-month periods was due largely to lower levels of short-term interest rates that increased the spread between the Bank’s fixed rate assets and its floating rate liabilities, improved debt costs relative to LIBOR, and higher yields on the Bank’s agency CMO portfolio.

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The Bank’s net interest income for the three and six months ended June 30, 2010 was positively impacted by higher yields on the Bank’s CMO portfolio. During the first quarter of 2010, Fannie Mae and Freddie Mac announced plans to repurchase loans that are at least 120 days delinquent from the mortgage pools underlying the CMOs guaranteed by those institutions. The initial repurchases, which included delinquent loans that had accumulated up to that point in time, occurred during the period from February 2010 through May 2010, with additional purchases of delinquent loans expected to occur thereafter as needed. During the first quarter of 2010, Freddie Mac repurchased delinquent loans from the pools underlying its guaranteed CMOs. The repayments resulting from these repurchases resulted in approximately $6.6 million of accelerated accretion of the purchase discounts associated with the Freddie Mac CMOs owned by the Bank. During the second quarter of 2010, Fannie Mae repurchased delinquent loans from the pools underlying its guaranteed CMOs. The repayments resulting from these repurchases resulted in approximately $6.9 million of accelerated accretion of the purchase discounts associated with the Fannie Mae CMOs owned by the Bank. Repurchases by Freddie Mac did not significantly affect the Bank’s net interest income during the second quarter of 2010. Subsequent to the second quarter of 2010, the impact of these repurchases by Fannie Mae and Freddie Mac is expected to have a less significant effect on the Bank’s net interest income.
The Bank’s net interest spread for the first quarter of 2009 (and therefore its net interest spread for the six months ended June 30, 2009) was adversely impacted by actions the Bank took in late 2008 to ensure its ability to provide liquidity to its members during a period of unusual market disruption. At the height of the credit market disruptions in the early part of the fourth quarter of 2008, and in order to ensure that the Bank would have sufficient liquidity on hand to fund member advances throughout the year-end period, the Bank replaced short-term liabilities with new issues of debt with maturities that extended into 2009. As yields subsequently declined sharply on the Bank’s short-term assets, including overnight federal funds sold and short-term advances to members, this fixed rate debt was carried at a negative spread. The negative spread associated with the investment of the remaining portion of this debt in low-yielding short-term assets was a significant contributor to the Bank’s negative net interest income for the six months ended June 30, 2009, much of which occurred early in the first quarter of 2009.
The following table presents average balance sheet amounts together with the total dollar amounts of interest income and expense and the weighted average interest rates of major earning asset categories and the funding sources for those earning assets for the three months ended June 30, 2010 and 2009.

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YIELD AND SPREAD ANALYSIS
(Dollars in millions)
                                                 
    Three Months Ended June 30,  
    2010     2009  
            Interest                     Interest        
    Average     Income/     Average     Average     Income/     Average  
    Balance     Expense(c)     Rate(a)(c)     Balance     Expense(c)     Rate(a)(c)  
Assets
                                               
Interest-bearing deposits (b)
  $ 156     $       0.21 %   $ 631     $       0.15 %
Federal funds sold
    3,509       2       0.17 %     3,485       1       0.16 %
Investments
                                               
Trading
    4                   3              
Available-for-sale (d)
                      8             0.60 %
Held-to-maturity(d)
    10,791       40       1.47 %     11,716       38       1.29 %
Advances (e)
    41,427       84       0.82 %     55,288       189       1.37 %
Mortgage loans held for portfolio
    242       3       5.51 %     301       4       5.47 %
 
                                   
Total earning assets
    56,129       129       0.92 %     71,432       232       1.30 %
Cash and due from banks
    587                       19                  
Other assets
    260                       405                  
Derivatives netting adjustment (b)
    (305 )                     (473 )                
Adjustment for net non-credit portion of other-than-temporary impairments on held-to-maturity securities(d)
    (67 )                     (26 )                
 
                                   
Total assets
  $ 56,604       129       0.91 %   $ 71,357       232       1.30 %
 
                                           
 
                                               
Liabilities and Capital
                                               
Interest-bearing deposits (b)
  $ 1,398             0.07 %   $ 1,425             0.09 %
Consolidated obligations
                                               
Bonds
    47,429       58       0.49 %     48,559       149       1.23 %
Discount notes
    4,788       2       0.20 %     17,431       68       1.57 %
Mandatorily redeemable capital stock and other borrowings
    9             0.36 %     80             0.18 %
 
                                   
Total interest-bearing liabilities
    53,624       60       0.45 %     67,495       217       1.29 %
Other liabilities
    701                       1,244                  
Derivatives netting adjustment (b)
    (305 )                     (473 )                
 
                                   
Total liabilities
    54,020       60       0.45 %     68,266       217       1.27 %
 
                                   
Total capital
    2,584                       3,091                  
 
                                   
Total liabilities and capital
  $ 56,604               0.43 %   $ 71,357               1.22 %
 
                                   
 
                                               
Net interest income
          $ 69                     $ 15          
 
                                           
Net interest margin
                    0.48 %                     0.08 %
Net interest spread
                    0.47 %                     0.01 %
 
                                           
Impact of non-interest bearing funds
                    0.01 %                     0.07 %
 
                                           
 
(a)   Percentages are annualized figures. Amounts used to calculate average rates are based on whole dollars. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
 
(b)   The Bank offsets the fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. The average balances of interest-bearing deposit assets for the three months ended June 30, 2010 and 2009 in the table above include $156 million and $188 million, respectively, which are classified as derivative assets/liabilities on the statements of condition. In addition, interest-bearing deposit liabilities for the three months ended June 30, 2010 and 2009 in the table above include $149 million and $285 million, respectively, which are classified as derivative assets/liabilities on the statements of condition.
 
(c)   Interest income/expense and average rates include the effects of associated interest rate exchange agreements to the extent such agreements qualify for fair value hedge accounting. If the agreements do not qualify for hedge accounting or were not designated in a hedging relationship for accounting purposes, the net interest income/expense associated with such agreements is recorded in other income (loss) in the statements of income and therefore excluded from the Yield and Spread Analysis. Net interest income on economic hedge derivatives totaled $2.1 million and $27.2 million for the three months ended June 30, 2010 and 2009, respectively, the components of which are presented below in the sub-section entitled “Other Income (Loss).”
 
(d)   Average balances for available-for-sale and held-to-maturity securities are calculated based upon amortized cost.
 
(e)   Interest income and average rates include prepayment fees on advances.

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Table of Contents

The following table presents average balance sheet amounts together with the total dollar amounts of interest income and expense and the weighted average interest rates of major earning asset categories and the funding sources for those earning assets for the six months ended June 30, 2010 and 2009.
YIELD AND SPREAD ANALYSIS
(Dollars in millions)
                                                 
    Six Months Ended June 30,  
    2010     2009  
            Interest                     Interest        
    Average     Income/     Average     Average     Income/     Average  
    Balance     Expense(c)     Rate(a)(c)     Balance     Expense(c)     Rate(a)(c)  
Assets
                                               
Interest-bearing deposits (b)
  $ 141     $       0.18 %   $ 515     $       0.18 %
Federal funds sold
    3,880       3       0.14 %     3,584       3       0.16 %
Investments
                                               
Trading
    4                   3              
Available-for-sale (d)
                      55             1.69 %
Held-to-maturity(d)
    11,110       78       1.40 %     11,593       79       1.36 %
Advances (e)
    43,528       168       0.78 %     56,788       446       1.57 %
Mortgage loans held for portfolio
    248       7       5.53 %     310       8       5.51 %
 
                                   
Total earning assets
    58,911       256       0.87 %     72,848       536       1.47 %
Cash and due from banks
    548                       20                  
Other assets
    296                       465                  
Derivatives netting adjustment (b)
    (319 )                     (527 )                
Adjustment for net non-credit portion of other-than-temporary impairments on held-to-maturity securities(d)
    (66 )                     (13 )                
 
                                   
Total assets
  $ 59,370       256       0.87 %   $ 72,793       536       1.47 %
 
                                           
 
                                               
Liabilities and Capital
                                               
Interest-bearing deposits (b)
  $ 1,502             0.05 %   $ 1,571       1       0.14 %
Consolidated obligations
                                               
Bonds
    49,062       117       0.48 %     48,794       376       1.54 %
Discount notes
    5,690       6       0.21 %     18,755       167       1.79 %
Mandatorily redeemable capital stock and other borrowings
    9             0.48 %     79             0.15 %
 
                                   
Total interest-bearing liabilities
    56,263       123       0.44 %     69,199       544       1.57 %
Other liabilities
    759                       980                  
Derivatives netting adjustment (b)
    (319 )                     (527 )                
 
                                   
Total liabilities
    56,703       123       0.44 %     69,652       544       1.56 %
 
                                   
Total capital
    2,667                       3,141                  
 
                                   
Total liabilities and capital
  $ 59,370               0.42 %   $ 72,793               1.50 %
 
                                   
 
                                               
Net interest income (expense)
          $ 133                     $ (8 )