Federal Home Loan Bank of Dallas 10-Q 2010 Q1 Quarterly report

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 March 31, 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	(I.R.S. Employer
or organization)	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.

Yesþ            Noo

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).

Yeso            Noo

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 filero	Accelerated filero	Non-accelerated filerþ	Smaller reporting companyo
		(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).

Yeso            Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At April 30, 2010 the registrant had outstanding 22,121,919 shares of its Class B Capital Stock, $100 par value per share.

FEDERAL HOME LOAN BANK OF DALLAS

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		1
Statements of Condition as of March 31, 2010 and December 31, 2009		1
Statements of Income for the Three Months Ended March 31, 2010 and 2009		2
Statements of Capital for the Three Months Ended March 31, 2010 and 2009		3
Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009		4
Notes to Interim Unaudited Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Forward-Looking Information		29
Overview		29
Selected Financial Data		35
Legislative and Regulatory Developments		36
Financial Condition		38
Results of Operations		53
Critical Accounting Policies and Estimates		62
Liquidity and Capital Resources		62
Risk-Based Capital Rules and Other Capital Requirements		64
Recently Issued Accounting Guidance		65
Item 3. Quantitative and Qualitative Disclosures About Market Risk		65
Item 4. Controls and Procedures		68
PART II. OTHER INFORMATION
Item 1A. Risk Factors		69
Item 6. Exhibits		71
Signatures		72
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CONDITION
(Unaudited; in thousands, except share data)

	March 31,			December 31,
	2010			2009
ASSETS
Cash and due from banks	$	835,045		$	3,908,242
Interest-bearing deposits		245			233
Federal funds sold		3,502,000			2,063,000
Trading securities (Note 10)		4,169			4,034
Held-to-maturity securities (a) (Notes 3 and 10)		11,348,566			11,424,552
Advances (Note 4)		42,627,506			47,262,574
Mortgage loans held for portfolio, net of allowance for credit losses of $234 and $240 at March 31, 2010 and December 31, 2009, respectively		248,487			259,617
Accrued interest receivable		55,817			60,890
Premises and equipment, net		24,576			24,789
Derivative assets (Notes 7 and 10)		29,755			64,984
Other assets		20,631			19,161
TOTAL ASSETS	$	58,696,797		$	65,092,076
LIABILITIES AND CAPITAL
Deposits
Interest-bearing	$	1,570,914		$	1,462,554
Non-interest bearing		24			37
Total deposits		1,570,938			1,462,591
Consolidated obligations, net (Note 5)
Discount notes		5,626,659			8,762,028
Bonds		48,269,095			51,515,856
Total consolidated obligations, net		53,895,754			60,277,884
Mandatorily redeemable capital stock		7,579			9,165
Accrued interest payable		191,148			179,248
Affordable Housing Program (Note 6)		41,744			43,714
Payable to REFCORP		3,932			9,912
Derivative liabilities (Notes 7 and 10)		544			486
Other liabilities		372,638			287,044
Total liabilities		56,084,277			62,270,044
Commitments and contingencies (Note 11)
CAPITAL (Note 8)
Capital stock – Class B putable ($100 par value) issued and outstanding shares: 23,112,115 and 25,317,146 shares at March 31, 2010 and December 31, 2009, respectively		2,311,212			2,531,715
Retained earnings		369,485			356,282
Accumulated other comprehensive income (loss)
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities (Note 3)		(68,781	)		(66,584	)
Postretirement benefits		604			619
Total accumulated other comprehensive income (loss)		(68,177	)		(65,965	)
Total capital		2,612,520			2,822,032
TOTAL LIABILITIES AND CAPITAL	$	58,696,797		$	65,092,076

(a) Fair values: $11,390,074 and $11,381,786 at March 31, 2010 and December 31, 2009, respectively.

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

1

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF INCOME
(Unaudited, in thousands)

	For the Three Months Ended
	March 31,
	2010			2009
INTEREST INCOME
Advances	$	81,537		$	255,879
Prepayment fees on advances, net		2,673			804
Interest-bearing deposits		42			96
Federal funds sold		1,143			1,486
Available-for-sale securities		—			456
Held-to-maturity securities		38,217			40,816
Mortgage loans held for portfolio		3,523			4,438
Other		3			113
Total interest income		127,138			304,088
INTEREST EXPENSE
Consolidated obligations
Bonds		59,104			227,052
Discount notes		3,679			99,080
Deposits		156			761
Mandatorily redeemable capital stock		13			21
Other borrowings		1			1
Total interest expense		62,953			326,915
NET INTEREST INCOME (EXPENSE)		64,185			(22,827	)
OTHER INCOME (LOSS)
Total other-than-temporary impairment losses on held-to-maturity securities		(7,031	)		(26,215	)
Net non-credit portion of impairment losses recognized in other comprehensive income		6,463			26,198
Credit component of other-than-temporary impairment losses on held-to-maturity securities		(568	)		(17	)
Service fees		563			628
Net gain (loss) on trading securities		119			(79	)
Realized gain on sale of available-for-sale security		—			843
Net gains (losses) on derivatives and hedging activities		(26,706	)		126,831
Other, net		1,459			1,676
Total other income (loss)		(25,133	)		129,882
OTHER EXPENSE
Compensation and benefits		9,997			9,753
Other operating expenses		6,591			7,503
Finance Agency		706			602
Office of Finance		538			534
Total other expense		17,832			18,392
INCOME BEFORE ASSESSMENTS		21,220			88,663
Affordable Housing Program		1,734			7,239
REFCORP		3,897			16,285
Total assessments		5,631			23,524
NET INCOME	$	15,589		$	65,139

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

2

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 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		993			99,291			—			—			99,291
Repurchase/redemption of capital stock		(3,221	)		(322,132	)		—			—			(322,132	)
Comprehensive income
Net income		—			—			15,589			—			15,589
Other comprehensive income (loss)(a)		—			—			—			(2,212	)		(2,212	)
Total comprehensive income		—			—			—			—			13,377
Dividends on capital stock (at 0.375 percent annualized rate)
Cash		—			—			(46	)		—			(46	)
Mandatorily redeemable capital stock		—			—			(2	)		—			(2	)
Stock		23			2,338			(2,338	)		—			—
BALANCE, MARCH 31, 2010		23,112		$	2,311,212		$	369,485		$	(68,177	)	$	2,612,520
BALANCE, JANUARY 1, 2009		32,238		$	3,223,830		$	216,025		$	(1,435	)	$	3,438,420
Proceeds from sale of capital stock		1,345			134,498			—			—			134,498
Repurchase/redemption of capital stock		(4,835	)		(483,503	)		—			—			(483,503	)
Shares reclassified to mandatorily redeemable capital stock		(9	)		(877	)		—			—			(877	)
Comprehensive income
Net income		—			—			65,139			—			65,139
Other comprehensive income (loss) (a)		—			—			—			(24,834	)		(24,834	)
Total comprehensive income		—			—			—			—			40,305
Dividends on capital stock (at 0.50 percent annualized rate)
Cash		—			—			(46	)		—			(46	)
Mandatorily redeemable capital stock		—			—			(54	)		—			(54	)
Stock		41			4,043			(4,043	)		—			—
BALANCE, MARCH 31, 2009		28,780		$	2,877,991		$	277,021		$	(26,269	)	$	3,128,743

^(a)  For the components of other comprehensive income (loss) for the three months ended March 31, 2010 and 2009, see Note 14.

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

3

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

	For the Three Months Ended
	March 31,
	2010			2009
OPERATING ACTIVITIES
Net income	$	15,589		$	65,139
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		(33,358	)		29,596
Concessions on consolidated obligation bonds		2,400			2,624
Premises, equipment and computer software costs		1,473			1,140
Non-cash interest on mandatorily redeemable capital stock		8			61
Realized gain on sale of available-for-sale security		—			(843	)
Credit component of other-than-temporary impairment losses on held-to-maturity securities		568			17
Net decrease (increase) in trading securities		(135	)		262
Loss due to change in net fair value adjustment on derivative and hedging activities		49,421			20,538
Decrease in accrued interest receivable		5,069			45,756
Decrease (increase) in other assets		(1,630	)		318
Increase (decrease) in Affordable Housing Program (AHP) liability		(1,970	)		4,200
Increase (decrease) in accrued interest payable		11,905			(242,430	)
Decrease in excess REFCORP contributions		—			16,285
Decrease in payable to REFCORP		(5,980	)		—
Decrease in other liabilities		(821	)		(4,096	)
Total adjustments		26,950			(126,572	)
Net cash provided by (used in) operating activities		42,539			(61,433	)
INVESTING ACTIVITIES
Net decrease in interest-bearing deposits		6,921			3,512,995
Net decrease (increase) in federal funds sold		(1,439,000	)		1,381,000
Proceeds from maturities of long-term held-to-maturity securities		1,167,308			589,828
Purchases of long-term held-to-maturity securities		(953,810	)		—
Proceeds from maturities of available-for-sale securities		—			32,113
Proceeds from sale of available-for-sale security		—			87,019
Principal collected on advances		67,226,627			170,243,093
Advances made		(62,571,465	)		(165,789,049	)
Principal collected on mortgage loans held for portfolio		10,790			16,592
Purchases of premises, equipment and computer software		(1,207	)		(1,800	)
Net cash provided by investing activities		3,446,164			10,071,791
FINANCING ACTIVITIES
Net increase (decrease) in deposits and pass-through reserves		50,807			(115,256	)
Net payments on derivative contracts with financing elements		(5,054	)		(136	)
Net proceeds from issuance of consolidated obligations
Discount notes		29,212,208			95,115,979
Bonds		11,581,406			10,641,925
Debt issuance costs		(2,053	)		(706	)
Payments for maturing and retiring consolidated obligations
Discount notes		(32,337,577	)		(90,872,779	)
Bonds		(14,837,155	)		(24,415,769	)
Proceeds from issuance of capital stock		99,291			134,498
Payments for redemption of mandatorily redeemable capital stock		(1,595	)		(13,527	)
Payments for repurchase/redemption of capital stock		(322,132	)		(483,503	)
Cash dividends paid		(46	)		(46	)
Net cash used in financing activities		(6,561,900	)		(10,009,320	)
Net increase (decrease) in cash and cash equivalents		(3,073,197	)		1,038
Cash and cash equivalents at beginning of the period		3,908,242			20,765
Cash and cash equivalents at end of the period	$	835,045		$	21,803
Supplemental Disclosures:
Interest paid	$	65,883		$	463,887
AHP payments, net	$	3,704		$	3,039
REFCORP payments	$	9,877		$	—
Stock dividends issued	$	2,338		$	4,043
Dividends paid through issuance of mandatorily redeemable capital stock	$	2		$	54
Capital stock reclassified to mandatorily redeemable capital stock	$	—		$	877

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

4

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.

5

     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 as of January 1, 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 did not have 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 adoption of this guidance is not expected to have any impact on the Bank’s results of operations or financial condition.

6

Note 3—Held-to-Maturity Securities

     Major Security Types.Held-to-maturity securities as of March 31, 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	$	56,706	$	—	$	56,706	$	406	$	128	$	56,984
State housing agency obligation		2,620		—		2,620		—		85		2,535
		59,326		—		59,326		406		213		59,519
Mortgage-backed securities
U.S. government guaranteed obligations		23,003		—		23,003		52		7		23,048
Government-sponsored enterprises		10,805,749		—		10,805,749		109,810		21,005		10,894,554
Non-agency residential mortgage-backed securities		483,497		68,781		414,716		—		48,442		366,274
Non-agency commercial mortgage-backed securities		45,772		—		45,772		907		—		46,679
		11,358,021		68,781		11,289,240		110,769		69,454		11,330,555
Total	$	11,417,347	$	68,781	$	11,348,566	$	111,175	$	69,667	$	11,390,074

     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 March 31, 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.

	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	$	10,765	$	26		1	$	11,864	$	102		2	$	22,629	$	128
State housing agency obligation		—		—		—		1		2,535		85		1		2,535		85
		1		10,765		26		2		14,399		187		3		25,164		213
Mortgage-backed securities
U.S. government guaranteed obligations		3		5,606		6		1		702		1		4		6,308		7
Government-sponsored enterprises		30		1,345,729		3,960		131		3,070,673		17,045		161		4,416,402		21,005
Non-agency residential
mortgage-backed securities		—		—		—		40		366,274		117,223		40		366,274		117,223
		33		1,351,335		3,966		172		3,437,649		134,269		205		4,788,984		138,235
Total		34	$	1,362,100	$	3,992		174	$	3,452,048	$	134,456		208	$	4,814,148	$	138,448

7

     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
Totals		64	$	2,689,803	$	15,422		202	$	4,582,311	$	173,616		266	$	7,272,114	$	189,038

     At March 31, 2010, the gross unrealized losses on the Bank’s held-to-maturity securities were $138,448,000, of which $117,223,000 was attributable to its holdings of non-agency (i.e., private label) residential mortgage-backed securities and $21,225,000 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 Fitch Ratings, Ltd. (“Fitch”). With the exception of 20 non-agency residential mortgage-backed securities with an aggregate carrying value of $227,911,000, none of these organizations had rated any of the securities held by the Bank lower than the highest investment grade credit rating at March 31, 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 March 31, 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 March 31, 2010.

     As of March 31, 2010, the gross unrealized losses on the Bank’s holdings of non-agency residential MBS (“RMBS”) totaled $117,223,000, 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 might 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 March 31, 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.

     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 March 31, 2010 using two third party models. The first model

8

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 March 31, 2010 assumed current-to-trough home price declines ranging from 0 percent to 12 percent over the 6- to 12-month period beginning January 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 that it is likely that it will not fully recover the amortized cost bases of five of its non-agency RMBS and, accordingly, these securities were deemed to be other-than-temporarily impaired as of March 31, 2010. These securities included three securities, with an aggregate unpaid principal balance of $70.8 million at March 31, 2010, that had previously been identified as other-than-temporarily impaired in 2009 and which were determined to be further impaired as of March 31, 2010, and two securities, with an aggregate unpaid principal balance of $16.5 million at March 31, 2010, that were initially determined to be other-than-temporarily impaired as of March 31, 2010. The difference between the present value of the cash flows expected to be collected from these five securities and their amortized cost bases (i.e., the credit losses) totaled $568,000 as of March 31, 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.

     In addition to the five securities that were determined to be other-than-temporarily impaired at March 31, 2010, four other securities were deemed to be other-than-temporarily impaired during 2009. The following tables set forth additional information for each of the Bank’s securities that were other-than-temporarily impaired as of March 31, 2010, including those securities that were deemed to be other-than-temporarily impaired in 2009 but which were not further impaired as of March 31, 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 March 31, 2010.

			Three Months Ended March 31, 2010
	Period of				Credit		Non-Credit
	Initial	Credit	Total		Component		Component
	Impairment	Rating	OTTI		of OTTI		of OTTI
Security #1	Q1 2009	Single-B	$	—	$	49	$	(49	)
Security #2	Q1 2009	Double-B		—		—		—
Security #3	Q2 2009	Triple-C		—		446		(446	)
Security #4	Q2 2009	Triple-B		—		—		—
Security #5	Q3 2009	Single-B		—		—		—
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		1,929		3		1,926
Totals			$	7,031	$	568	$	6,463

9

			Cumulative from Period of Initial
			Impairment Through March 31, 2010				March 31, 2010
	Amortized		Non-Credit		Accretion of				Estimated
	Cost as of		Component of		Non-Credit		Carrying		Fair
	March 31, 2010		OTTI		Component		Value		Value
Security #1	$	16,049	$	11,721	$	2,728	$	7,056	$	9,781
Security #2		19,566		13,060		2,825		9,331		11,996
Security #3		43,474		16,934		3,130		29,670		34,277
Security #4		13,478		8,508		1,600		6,570		7,812
Security #5		22,199		11,454		1,523		12,268		13,365
Security #6		18,856		10,225		1,375		10,006		10,570
Security #7		7,321		3,575		421		4,167		4,167
Security #8		11,489		4,980		—		6,509		6,509
Security #9		5,017		1,926		—		3,091		3,091
Totals	$	157,449	$	82,383	$	13,602	$	88,668	$	101,568

     For those securities for which an other-than-temporary impairment was determined to have occurred as of March 31, 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 March 31, 2010 (dollars in thousands).

					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)	March 31, 2010		Rate			Rate			Severity			March 31, 2010(3)
Security #1	2005	Alt-A/Option ARM	$	17,473		7.3	%		76.0	%		49.3	%		37.2	%
Security #3	2006	Alt-A/Fixed Rate		45,905		12.6	%		31.8	%		44.0	%		8.3	%
Security #7	2004	Alt-A/Option ARM		7,395		8.5	%		60.3	%		51.0	%		33.8	%
Security #8	2005	Alt-A/Option ARM		11,499		11.5	%		60.5	%		42.1	%		47.7	%
Security #9	2005	Alt-A/Option ARM		5,020		7.9	%		56.5	%		36.1	%		47.6	%
Total			$	87,292

(1)	Security #1 is the only security presented in the table above that was 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.

10

     The following table presents a rollforward for the three months ended March 31, 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 Ended March 31,
	2010		2009
Balance of credit losses, beginning of period	$	4,022	$	—
Credit losses on securities for which an other-than-temporary impairment was not previously recognized		13		17
Credit losses on securities for which an other-than-temporary impairment was previously recognized		555		—
Balance of credit losses, end of period	$	4,590	$	17

     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 March 31, 2010.

     Redemption Terms.The amortized cost, carrying value and estimated fair value of held-to-maturity securities by contractual maturity at March 31, 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.

	March 31, 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	$	249	$	249	$	250
Due after one year through five years		3,600		3,600		3,660		3,607		3,607		3,689
Due after five years through ten years		30,099		30,099		30,445		31,703		31,703		32,046
Due after ten years		25,378		25,378		25,164		26,198		26,198		25,793
		59,326		59,326		59,519		61,757		61,757		61,778
Mortgage-backed securities	��	11,358,021		11,289,240		11,330,555		11,429,379		11,362,795		11,320,008
Total	$	11,417,347	$	11,348,566	$	11,390,074	$	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 $139,376,000 and $150,047,000 at March 31, 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 March 31, 2010 and December 31, 2009 (in thousands):

	March 31, 2010		December 31, 2009
Amortized cost of variable-rate held-to-maturity securities other than mortgage-backed securities	$	59,326	$	61,757
Amortized cost of held-to-maturity mortgage-backed securities
Fixed-rate pass-through securities		912		937
Collateralized mortgage obligations
Fixed-rate		47,682		58,033
Variable-rate		11,309,427		11,370,409
		11,358,021		11,429,379
Total	$	11,417,347	$	11,491,136

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     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 three months ended March 31, 2010.

Note 4—Advances

     Redemption Terms.At March 31, 2010 and December 31, 2009, the Bank had advances outstanding at interest rates ranging from 0.10 percent to 8.61 percent and 0.03 percent to 8.61 percent, respectively, as summarized below (in thousands).

	March 31, 2010						December 31, 2009
				Weighted						Weighted
				Average						Average
Contractual Maturity	Amount			Interest Rate			Amount			Interest Rate
Overdrawn demand deposit accounts	$	3,106			4.08	%	$	181			4.05	%
Due in one year or less		12,210,603			1.07			14,909,262			0.98
Due after one year through two years		8,750,265			0.88			7,059,173			1.27
Due after two years through three years		8,707,662			0.86			8,163,416			0.80
Due after three years through four years		4,626,506			1.04			8,637,127			0.86
Due after four years through five years		1,331,540			1.11			1,262,879			0.99
Due after five years		3,459,781			3.85			3,593,166			3.84
Amortizing advances		3,162,947			4.52			3,282,368			4.53
Total par value		42,252,410			1.47	%		46,907,572			1.44	%
Deferred prepayment fees		(3,370	)					(1,935	)
Commitment fees		(109	)					(110	)
Hedging adjustments		378,575						357,047
Total	$	42,627,506					$	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 March 31, 2010 and December 31, 2009, the Bank had aggregate prepayable and callable advances totaling $196,010,000 and $210,151,000, respectively.

     The following table summarizes advances at March 31, 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	March 31, 2010		December 31, 2009
Overdrawn demand deposit accounts	$	3,106	$	181
Due in one year or less		12,280,619		14,975,701
Due after one year through two years		8,776,135		7,082,672
Due after two years through three years		8,728,473		8,187,107
Due after three years through four years		4,651,714		8,664,137
Due after four years through five years		1,342,179		1,277,606
Due after five years		3,307,237		3,437,800
Amortizing advances		3,162,947		3,282,368
Total par value	$	42,252,410	$	46,907,572

12

     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 March 31, 2010 and December 31, 2009, the Bank had putable advances outstanding totaling $4,000,921,000 and $4,037,221,000, respectively.

     The following table summarizes advances at March 31, 2010 and December 31, 2009, by the earlier of contractual maturity or next possible put date (in thousands):

Contractual Maturity or Next Put Date	March 31, 2010		December 31, 2009
Overdrawn demand deposit accounts	$	3,106	$	181
Due in one year or less		15,001,424		17,653,132
Due after one year through two years		8,965,765		7,288,623
Due after two years through three years		8,413,812		8,149,166
Due after three years through four years		4,417,506		8,166,527
Due after four years through five years		1,239,140		1,252,479
Due after five years		1,048,710		1,115,096
Amortizing advances		3,162,947		3,282,368
Total par value	$	42,252,410	$	46,907,572

     Interest Rate Payment Terms.The following table provides interest rate payment terms for advances at March 31, 2010 and December 31, 2009 (in thousands, based upon par amount):

	March 31, 2010		December 31, 2009
Fixed-rate	$	19,171,797	$	22,316,659
Variable-rate		23,080,613		24,590,913
Total par value	$	42,252,410	$	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 during the three months ended March 31, 2010 and 2009 were $5,135,000 and $973,000, respectively. The Bank deferred $1,615,000 of the gross advance prepayment fees during the three months ended March 31, 2010. None of the gross advance prepayment fees were deferred during the three months ended March 31, 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

13

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.

     The par amounts of the 12 FHLBanks’ outstanding consolidated obligations, including consolidated obligations held as investments by other FHLBanks, were approximately $871 billion and $931 billion at March 31, 2010 and December 31, 2009, respectively. The Bank was the primary obligor on $53.5 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 March 31, 2010 and December 31, 2009 (in thousands, at par value).

	March 31, 2010		December 31, 2009
Fixed-rate	$	22,437,300	$	26,648,455
Simple variable-rate		21,715,000		20,560,000
Step-up		3,197,500		3,473,000
Step-down		300,000		125,000
Variable that converts to fixed		265,000		365,000
Total par value	$	47,914,800	$	51,171,455

     Redemption Terms.The following is a summary of the Bank’s consolidated obligation bonds outstanding at March 31, 2010 and December 31, 2009, by contractual maturity (in thousands):

	March 31, 2010						December 31, 2009
				Weighted						Weighted
				Average						Average
				Interest						Interest
Contractual Maturity	Amount			Rate			Amount			Rate
Due in one year or less	$	22,414,410			1.10	%	$	30,951,315			1.18	%
Due after one year through two years		14,437,625			1.04			9,163,685			1.52
Due after two years through three years		5,459,000			2.37			5,569,440			2.40
Due after three years through four years		1,339,000			3.02			1,085,000			3.39
Due after four years through five years		1,372,190			3.77			1,191,440			3.39
Thereafter		2,892,575			3.89			3,210,575			4.04
Total par value		47,914,800			1.52	%		51,171,455			1.65	%
Premiums		75,083						85,618
Discounts		(13,687	)					(15,451	)
Hedging adjustments		292,899						274,234
Total	$	48,269,095					$	51,515,856

     At March 31, 2010 and December 31, 2009, the Bank’s consolidated obligation bonds outstanding included the following (in thousands, at par value):

	March 31, 2010		December 31, 2009
Non-callable bonds	$	41,409,585	$	44,056,715
Callable bonds		6,505,215		7,114,740
Total par value	$	47,914,800	$	51,171,455

14

     The following table summarizes the Bank’s consolidated obligation bonds outstanding at March 31, 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	March 31, 2010		December 31, 2009
Due in one year or less	$	27,040,910	$	35,970,315
Due after one year through two years		14,154,445		8,743,005
Due after two years through three years		4,835,000		4,358,440
Due after three years through four years		679,000		890,000
Due after four years through five years		287,190		216,440
Thereafter		918,255		993,255
Total par value	$	47,914,800	$	51,171,455

     Discount Notes.At March 31, 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
March 31, 2010	$	5,626,659	$	5,627,993		0.16	%
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 three months ended March 31, 2010 and 2009 (in thousands):

	Three Months Ended March 31,
	2010			2009
Balance, beginning of period	$	43,714		$	43,067
AHP assessment		1,734			7,239
Grants funded, net of recaptured amounts		(3,704	)		(3,039	)
Balance, end of period	$	41,744		$	47,267

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 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 committed

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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) it 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 March 31, 2010 and December 31, 2009 (in thousands).

	March 31, 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 underASC 815
Interest rate swaps
Advances	$	9,983,669	$	27,572		$	483,227		$	10,877,414	$	35,442		$	481,486
Consolidated obligation bonds		22,992,315		489,159			1,867			27,613,970		487,664			17,743
Interest rate caps related to advances		76,000		16			—			76,000		69			—
Total derivatives designated as hedging instruments under ASC 815		33,051,984		516,747			485,094			38,567,384		523,175			499,229
Derivatives not designated as hedging instruments under ASC 815
Interest rate swaps
Advances		5,000		—			103			5,000		—			103
Consolidated obligation bonds		2,575,000		5,938			—			8,195,000		16,611			129
Consolidated obligation discount notes		642,766		1,172			—			6,413,343		12,766			—
Basis swaps(1)		8,700,000		18,712			1,038			9,700,000		22,868			1,290
Intermediary transactions		24,200		384			339			24,200		474			428
Interest rate caps related to advances		10,000		1			—			10,000		6			—
Interest rate caps related to held-to-maturity securities		3,750,000		22,194			—			3,750,000		51,147			—
Total derivatives not designated as hedging instruments under ASC 815		15,706,966		48,401			1,480			28,097,543		103,872			1,950
Total derivatives before netting and collateral adjustments	$	48,758,950		565,148			486,574		$	66,664,927		627,047			501,179
Cash collateral and related accrued interest				(185,813	)		(136,450	)				(204,748	)		(143,378	)
Netting adjustments				(349,580	)		(349,580	)				(357,315	)		(357,315	)
Total collateral and netting adjustments(2)				(535,393	)		(486,030	)				(562,063	)		(500,693	)
Net derivative balances reported in statements of condition			$	29,755		$	544				$	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 months ended March 31, 2010 and 2009 (in thousands).

	Gain (Loss) Recognized in Earnings
	for the Three Months Ended March 31,
	2010			2009
Derivatives and hedged items in ASC 815 fair value hedging relationships
Interest rate swaps	$	2,508		$	54,297
Interest rate caps		(54	)		(23	)
Total net gain related to fair value hedge ineffectiveness		2,454			54,274
Derivatives not designated as hedging instruments under ASC 815
Net interest income on interest rate swaps		8,495			46,115
Interest rate swaps
Advances		(1	)		(19	)
Consolidated obligation bonds		(6,520	)		(837	)
Consolidated obligation discount notes		(1,622	)		(8,968	)
Basis swaps(1)		(554	)		36,104
Forward rate agreements		—			(223	)
Intermediary transactions		—			10
Interest rate caps
Advances		(5	)		—
Held-to-maturity securities		(28,953	)		375
Total net gain (loss) related to derivatives not designated as hedging instruments under ASC 815		(29,160	)		72,557
Net gains (losses) on derivatives and hedging activities reported in the statements of income	$	(26,706	)	$	126,831

⁽¹⁾ The Bank’s basis swaps are used to reduce its exposure to changing spreads between one-month and three-month LIBOR.

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     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 months ended March 31, 2010 and 2009 (in thousands).

										Derivative
	Gain (Loss)			Gain (Loss)			Net Fair Value			Net Interest
	on			on Hedged			Hedge			Income
Hedged Item	Derivatives			Items			Ineffectiveness(1)			(Expense)(2)
Three months ended March 31, 2010
Advances	$	(23,849	)	$	24,073		$	224		$	(78,614	)
Consolidated obligation bonds		21,570			(19,340	)		2,230			132,597
Total	$	(2,279	)	$	4,733		$	2,454		$	53,983
Three months ended March 31, 2009
Advances	$	60,200		$	(61,585	)	$	(1,385	)	$	(57,716	)
Available-for-sale securities		463			(337	)		126			(217	)
Consolidated obligation bonds		(76,142	)		131,675			55,533			109,751
Total	$	(15,479	)	$	69,753		$	54,274		$	51,818

(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.

     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 derivatives 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 March 31, 2010 and December 31, 2009, the Bank’s maximum credit risk, as defined above, was approximately $199,126,000 and $223,871,000, respectively. These totals consist of $86,481,000 and $85,031,000, respectively, of net accrued interest receivable and $112,645,000 and $138,840,000, respectively, of other fair value amounts. The Bank held as collateral cash balances of $185,784,000 and $204,724,000 as of March 31, 2010 and December 31, 2009, respectively. In early April 2010 and early January 2010, additional cash collateral of $12,170,000 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.

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     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 March 31, 2010 and December 31, 2009, the net market value of the Bank’s derivatives with its members totaled ($312,000) 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 March 31, 2010.

Note 8—Capital

     At all times during the three months ended March 31, 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 March 31, 2010 and December 31, 2009 (dollars in thousands):

	March 31, 2010						December 31, 2009
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	517,217		$	2,688,276		$	507,287		$	2,897,162
Total capital	$	2,347,872		$	2,688,276		$	2,603,683		$	2,897,162
Total capital-to-assets ratio		4.00	%		4.58	%		4.00	%		4.45	%
Leverage capital	$	2,934,840		$	4,032,414		$	3,254,604		$	4,345,743
Leverage capital-to-assets ratio		5.00	%		6.87	%		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 and April 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, the Bank repurchased surplus stock totaling $106,560,000, none of which was classified as mandatorily redeemable capital stock at that date. On April 30, 2010, the Bank repurchased surplus stock totaling $70,431,000, none of which was classified as mandatorily redeemable capital stock.

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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 months ended March 31, 2010 and 2009 were as follows (in thousands):

	Three Months Ended March 31,
	2010			2009
Service cost	$	3		$	5
Interest cost		29			37
Amortization of prior service credit		(9	)		(8	)
Amortization of net actuarial gain		(6	)		(1	)
Net periodic benefit cost	$	17		$	33

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 March 31, 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

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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.

     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 the established 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 March 31, 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 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-

24

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.

     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 March 31, 2010 or December 31, 2009.

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     The carrying values and estimated fair values of the Bank’s financial instruments at March 31, 2010 and December 31, 2009, were as follows (in thousands):

FAIR VALUE SUMMARY TABLE

	March 31, 2010				December 31, 2009
	Carrying		Estimated		Carrying		Estimated
Financial Instruments	Value		Fair Value		Value		Fair Value
Assets:
Cash and due from banks	$	835,045	$	835,045	$	3,908,242	$	3,908,242
Interest-bearing deposits		245		245		233		233
Federal funds sold		3,502,000		3,502,000		2,063,000		2,063,000
Trading securities		4,169		4,169		4,034		4,034
Held-to-maturity securities		11,348,566		11,390,074		11,424,552		11,381,786
Advances		42,627,506		42,696,573		47,262,574		47,279,403
Mortgage loans held for portfolio, net		248,487		264,929		259,617		274,044
Accrued interest receivable		55,817		55,817		60,890		60,890
Derivative assets		29,755		29,755		64,984		64,984
Liabilities:
Deposits		1,570,938		1,570,931		1,462,591		1,462,589
Consolidated obligations:
Discount notes		5,626,659		5,626,567		8,762,028		8,763,983
Bonds		48,269,095		48,418,725		51,515,856		51,684,542
Mandatorily redeemable capital stock		7,579		7,579		9,165		9,165
Accrued interest payable		191,148		191,148		179,248		179,248
Derivative liabilities		544		544		486		486

     The following table summarizes the Bank’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 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.

							Netting
	Level 1		Level 2		Level 3		Adjustment(1)			Total
Assets
Trading securities	$	4,169	$	—	$	—	$	—		$	4,169
Derivative assets		—		565,148		—		(535,393	)		29,755
Total assets at fair value	$	4,169	$	565,148	$	—	$	(535,393	)	$	33,924
Liabilities
Derivative liabilities	$	—	$	486,574	$	—	$	(486,030	)	$	544
Total liabilities at fair value	$	—	$	486,574	$	—	$	(486,030	)	$	544

⁽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.

     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 (see Note 3). 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 current 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.

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     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 March 31, 2010, the par amount of the other 11 FHLBanks’ outstanding consolidated obligations was approximately $817 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 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 March 31, 2010 and December 31, 2009, the Bank had commitments to make additional advances totaling approximately $35,697,000 and $37,996,000, respectively. In addition, outstanding standby letters of credit totaled $4,391,727,000 and $4,648,413,000 at March 31, 2010 and December 31, 2009, respectively.

     At March 31, 2010 and December 31, 2009, the Bank had commitments to issue $220,000,000 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 March 31, 2010 and December 31, 2009, the Bank had pledged cash collateral of $136,432,000 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.

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     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.

     The Bank did not purchase any investment securities issued by any of its shareholders or their affiliates during the three months ended March 31, 2010 or 2009.

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 three months ended March 31, 2010 or 2009 and no borrowings from other FHLBanks during the three months ended March 31, 2010. During the three months ended March 31, 2009, interest expense on borrowings from other FHLBanks totaled $97. The following table summarizes the Bank’s borrowings from other FHLBanks during the three months ended March 31, 2009 (in thousands).

	Three Months Ended March 31, 2009
Balance at January 1, 2009	$	—
Borrowing from FHLBank of San Francisco		50,000
Repayment to FHLBank of San Francisco		(50,000	)
Balance at March 31, 2009	$	—

Note 14 — Other Comprehensive Income (Loss)

     The following table presents the components of other comprehensive income (loss) for the three months ended March 31, 2010 and 2009 (in thousands).

	Three Months Ended March 31,
	2010				2009
Net unrealized gains on available-for-sale securities	$	—			$	2,216
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		(6,958	)			(26,198	)
Reclassification adjustment for non-credit portion of other-than-temporary impairment losses recognized as credit losses in net income		495				—
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities		4,266				—
Postretirement benefit plan
Amortization of prior service credit included in net periodic benefit cost		(9	)			(8	)
Amortization of net actuarial gain included in net periodic benefit cost		(6	)			(1	)
Total other comprehensive income (loss)	$	(2,212	)		$	(24,834	)

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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 future 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 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.

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 “FHLB Act”). 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 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.

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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 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 obligations of the respective FHLBanks, such as interest rate derivatives, deposits, and letters of credit. As of May 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.

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”).

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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 March 31, 2010 and December 31, 2009.

MEMBERSHIP SUMMARY
	March 31,		December 31,
	2010		2009
Commercial banks		754		753
Thrifts		85		85
Credit unions		70		65
Insurance companies		20		20
Total members		929		923
Housing associates		8		8
Non-member borrowers		11		12
Total		948		943
Community Financial Institutions		788		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

Although capital markets have 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.

In 2008, the U.S. and other governments and their central banks developed and implemented aggressive initiatives in an effort to provide support for and to restore the functioning of the global credit markets. Those programs included the implementation by the United States Department of the Treasury (the “Treasury”) of the Troubled Asset Relief Program (“TARP”) authorized by Congress in October 2008 and the Federal Reserve’s purchases of commercial paper, agency debt securities (including FHLBank debt) and agency mortgage-backed securities (“MBS”). In addition, the Federal Reserve’s discount window lending and Term Auction Facility (“TAF”) for auctions of short-term liquidity, the expansion of insured deposit limits and the FDIC’s Temporary Liquidity Guarantee Program (“TLGP”) provided additional liquidity support for depository institutions. As financial market conditions improved in 2009, the level of support provided by some of these government programs stabilized or contracted. For instance, direct lending by the Federal Reserve to depository institutions, which had reached approximately $530 billion by December 31, 2008, declined to about $96 billion at December 31, 2009 and $12 billion at March 31, 2010. Otherwise unsecured debt issued by commercial banks and guaranteed by the FDIC, which had reached approximately $330 billion by March 31, 2009, declined to approximately $305 billion at March 31, 2010. The Federal Reserve conducted its final auction under the TAF in March 2010 and the TARP is scheduled to expire in October 2010. The Federal Reserve’s agency debt and agency MBS purchase programs ended on March 31, 2010, with purchases totaling $172 billion and $1.25 trillion, respectively.

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 quarter 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. The government programs discussed above significantly increased the amount of reserves in the banking system, thereby reducing the demand for federal funds and the rate of interest paid on federal funds, which contributed to an effective federal funds rate that was below the upper end of the targeted range for all of 2009 and the first quarter of 2010. As a result, most commercial banks have retained their excess liquidity at the Federal Reserve rather than selling federal funds in the market, and in doing so have limited the volume of overnight federal funds trading. Because GSEs cannot earn interest on their reserves at the Federal Reserve, these institutions have continued to sell their excess liquidity in the federal funds market. However, the lack of demand for such funds has resulted in the effective federal funds rate remaining below the upper end of the target range for the federal funds rate.

One- and three-month LIBOR rates remained relatively stable during the first three months of 2010, with one- and three-month LIBOR ending the quarter at 0.25 percent and 0.29 percent, respectively, as compared to 0.23 percent and 0.25 percent, respectively, at the end of 2009. Stable one- and three-month LIBOR rates, combined with the small spreads between those two indices and between those indices and overnight lending rates, suggest the inter-bank lending markets are relatively stable. As of April 30, 2010, one- and three-month LIBOR rates had increased slightly to 0.29 percent and 0.35 percent, respectively.

The following table presents information on various market interest rates at March 31, 2010 and December 31, 2009 and various average market interest rates for the quarters ended March 31, 2010 and 2009.

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	Ending Rate						Average Rate
	March 31,			December 31,			First Quarter			First Quarter
	2010			2009			2010			2009
Federal Funds Target(1)		0.25	%		0.25	%		0.25	%		0.25	%
Average Effective Federal Funds Rate(2)		0.09	%		0.05	%		0.13	%		0.18	%
1-month LIBOR(1)		0.25	%		0.23	%		0.23	%		0.46	%
3-month LIBOR (1)		0.29	%		0.25	%		0.26	%		1.24	%
2-year LIBOR (1)		1.19	%		1.42	%		1.15	%		1.54	%
5-year LIBOR (1)		2.73	%		2.98	%		2.70	%		2.37	%
10-year LIBOR (1)		3.82	%		3.97	%		3.78	%		2.93	%
3-month U.S. Treasury (1)		0.16	%		0.06	%		0.11	%		0.21	%
2-year U.S. Treasury (1)		1.02	%		1.14	%		0.92	%		0.90	%
5-year U.S. Treasury (1)		2.55	%		2.69	%		2.43	%		1.76	%
10-year U.S. Treasury (1)		3.84	%		3.85	%		3.72	%		2.74	%

(1)	Source: Bloomberg
(2)	Source: Federal Reserve Statistical Release

Economic conditions continued to show signs of improvement during the first quarter of 2010, including positive growth in the gross domestic product for the third consecutive quarter, a year-over-year increase in national average housing prices in February 2010, employment gains, and increases in manufacturing activity and consumer spending. Policy makers have cautiously interpreted recent data to indicate that certain aspects of the economy are improving. These early signs of economic improvement notwithstanding, 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.

First Quarter 2010 Summary

•	The Bank ended the first quarter of 2010 with total assets of $58.7 billion and total advances of $42.6 billion, a decrease from $65.1 billion and $47.3 billion, respectively, at the end of 2009. The $4.7 billion decline in advances during the quarter was attributable in large part to the maturity of approximately $2.7 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 quarter was attributable to a general decline in member demand which 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 first quarter of 2010 was $15.6 million, including net interest income of $64.2 million partially offset by $26.7 million of net losses on derivatives and hedging activities. The Bank’s net interest income excludes net interest payments associated with economic hedge derivatives, which contributed significantly to the Bank’s overall income before assessments of $21.2 million for the first quarter of 2010. 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 losses on derivatives and hedging activities would have been higher) by $8.5 million.
	The Bank’s net interest income for the first quarter of 2010 was positively impacted by higher yields on the Bank’s portfolio of collateralized mortgage obligations (“CMOs”). During the quarter, the Federal Home Loan Mortgage Corporation (“Freddie Mac”) repurchased delinquent loans from the mortgage pools underlying its CMOs that are owned by the Bank. The repayments resulting from these repurchases resulted in approximately $6.6 million of accelerated accretion of the purchase discounts associated with the investments.
•	The $26.7 million in net losses on derivatives and hedging activities for the quarter included $37.7 million of net losses on economic hedge derivatives (excluding net interest settlements), $8.5 million of net interest income on interest rate swaps accounted for as economic hedge derivatives and $2.5 million of net

33

	ineffectiveness-related gains on fair value hedges. The net losses on the Bank’s economic hedge derivatives were due largely to losses of $29.0 million on its stand-alone interest rate caps and $6.5 million on interest rate swaps that convert floating rate debt indexed to the daily federal funds rate to floating rates indexed to LIBOR.
•	The Bank held $11.9 billion (notional) of interest rate swaps recorded as economic hedge derivatives with a net positive fair value of $20.3 million (excluding accrued interest) at March 31, 2010. If these swaps are held to maturity, these net unrealized gains will ultimately reverse in future periods in the form of unrealized losses, which will negatively impact the Bank’s earning in those periods. The timing of this reversal will depend on the relative level and volatility of future interest rates. In addition, as of March 31, 2010, the Bank held $3.75 billion (notional) of stand-alone interest rate cap agreements with a fair value of $22.2 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.
•	Unrealized fair value losses on the Bank’s holdings of non-agency residential mortgage-backed securities classified as held-to-maturity totaled $117.2 million (24 percent of amortized cost) at March 31, 2010, as compared to $135.3 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. In assessing the expected credit performance of these securities as of March 31, 2010, the Bank determined it is likely that it will not fully recover the amortized cost basis of five of its non-agency residential mortgage-backed securities and, accordingly, these securities were deemed to be other-than-temporarily impaired at that date. These securities included three securities, with an aggregate unpaid principal balance of $70.8 million at March 31, 2010, that had previously been identified as other-than-temporarily impaired in 2009 and which were determined to be further impaired as of March 31, 2010, and two securities, with an aggregate unpaid principal balance of $16.5 million at March 31, 2010, that were initially determined to be other-than-temporarily impaired as of March 31, 2010. The credit component of the impairment losses (an aggregate amount of $568,000) was recognized in earnings while the net non-credit component of the impairment losses ($6.5 million) was recognized in other comprehensive income. 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 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.
•	At all times during the first quarter of 2010, the Bank was in compliance with all of its regulatory capital requirements. In addition, the Bank’s retained earnings increased to $369.5 million at March 31, 2010 from $356.3 million at December 31, 2009.
•	During the first quarter of 2010, the Bank paid dividends totaling $2.4 million; the dividend was 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 the preceding quarter 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)

	First Quarter			2009
	2010			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Balance sheet(at quarter end)
Advances	$	42,627,506		$	47,262,574		$	50,034,613		$	53,469,938		$	56,402,319
Investments(1)		14,854,980			13,491,819			15,511,389			18,162,262			11,782,687
Mortgage loans		248,721			259,857			272,533			289,779			310,599
Allowance for credit losses on mortgage loans		234			240			241			258			261
Total assets		58,696,797			65,092,076			67,261,344			72,095,673			68,663,831
Consolidated obligations — discount notes		5,626,659			8,762,028			10,727,576			14,961,653			21,029,495
Consolidated obligations — bonds		48,269,095			51,515,856			52,082,770			52,492,151			42,702,700
Total consolidated obligations(2)		53,895,754			60,277,884			62,810,346			67,453,804			63,732,195
Mandatorily redeemable capital stock(3)		7,579			9,165			8,646			78,806			77,818
Capital stock — putable		2,311,212			2,531,715			2,608,848			2,827,764			2,877,991
Retained earnings		369,485			356,282			317,818			301,442			277,021
Accumulated other comprehensive income (loss)		(68,177	)		(65,965	)		(72,019	)		(49,343	)		(26,269	)
Total capital		2,612,520			2,822,032			2,854,647			3,079,863			3,128,743
Dividends paid(3)		2,386			1,091			1,267			1,306			4,143
Income statement(for the quarter)
Net interest income (expense)(4)	$	64,185		$	51,040		$	33,510		$	14,753		$	(22,827	)
Other income (loss)		(25,133	)		19,986			14,386			36,101			129,882
Other expense		17,832			17,186			23,880			15,832			18,392
Assessments		5,631			14,285			6,373			9,295			23,524
Net income		15,589			39,555			17,643			25,727			65,139
Performance ratios
Net interest margin(5)		0.41	%		0.31	%		0.19	%		0.08	%		(0.12)	%
Return on average assets		0.10			0.24			0.10			0.14			0.36
Return on average equity		2.30			5.61			2.35			3.34			8.28
Return on average capital stock(6)		2.58			6.22			2.59			3.66			8.96
Total average equity to average assets		4.42			4.29			4.28			4.33			4.30
Regulatory capital ratio(7)		4.58			4.45			4.36			4.45			4.71
Dividend payout ratio(3)(8)		15.31			2.76			7.18			5.08			6.36
Average effective federal funds rate(9)		0.13	%		0.12	%		0.16	%		0.18	%		0.18	%

(1)	Investments consist of federal funds sold, loans to other FHLBanks, 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 March 31, 2010, December 31, 2009, September 30, 2009, June 30, 2009 and March 31, 2009, the outstanding consolidated obligations (at par value) of all 12 FHLBanks totaled approximately $0.871 trillion, $0.931 trillion, $0.974 trillion, $1.056 trillion and $1.135 trillion, respectively. As of those dates, the Bank’s outstanding consolidated obligations (at par value) were $53.5 billion, $59.9 billion, $62.4 billion, $67.1 billion and $63.4 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 $8,000, $25,000, $35,000, $37,000 and $61,000 for the quarters ended March 31, 2010, December 31, 2009, September 30, 2009, June 30, 2009 and March 31, 2009, respectively.
(4)	Net interest income (expense) 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 $8.5 million, $14.6 million, $19.7 million, $27.2 million and $46.1 million for the quarters ended March 31, 2010, December 31, 2009, September 30, 2009, June 30, 2009 and March 31, 2009, respectively.
(5)	Net interest margin is net interest income (expense) 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 and Regulatory Developments

Legislative Developments

The United States Senate is currently considering a bill, the “Restoring American Financial Stability Act,” that, if enacted in its current form, would make significant changes to a number of aspects of the regulation of financial institutions. In particular, the proposed legislation would affect the Bank in the following four areas: (1) the amount it could lend to a single entity and its affiliates; (2) the status of the Bank’s obligations in connection with restrictions on proprietary trading activities of banks and bank holding companies; (3) the regulation of the over-the-counter derivatives market; and (4) the regime governing the resolution of an insolvent FHLBank. These proposed changes in the law and their potential effects on the Bank are more fully discussed below in “Part II. Other Information — Item 1A. Risk Factors.”

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 theInteragency Guidance on Nontraditional Mortgage Product Risks, dated October 4, 2006, andStatement 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. Under 2008-AB-02, private-label mortgage-backed securitiesissuedon or before July 10, 2007 remained as eligible collateral even if the mortgage loans underlying such securities did not comply with the Interagency Guidance. 2010-AB-01 states that private-label mortgage-backed securities that were “either issued or acquiredby 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). This clarification 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 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.

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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 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. Currently, the OF is governed by a board of directors that is comprised of two FHLBank presidents and one independent director. These three directors also serve 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 published a new regulation that will restructure the composition of the OF’s board of directors and audit committee, establish certain other corporate governance requirements, direct the OF in preparing the CFRs to employ consistent accounting policies and procedures, and grant 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 will have 17 directors: the 12 FHLBank presidents, who will serveex officio, and 5 independent directors, who will each serve five-year terms that will be staggered so that not more than one independent directorship shall be scheduled to become vacant in any one year. Independent directors will be limited to two consecutive full terms. The new OF board of directors will be constituted at an initial organizational meeting to be held within 45 days of the appointment of an independent director by the Finance Agency under the new regulation. 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 as determined under criteria established pursuant to the new regulation. At a minimum, these criteria, which will ultimately be embodied in a policy adopted by the reconstituted OF board of directors, will disqualify from serving as an independent director any person who (i) currently is or during the preceding three years has served as an officer, director, or employee of any FHLBank or member of a FHLBank; (ii) currently is or during the preceding three years has served as an officer or employee of the OF; or (iii) is affiliated with, or has a financial interest beyond a specified level in, an entity that is part of a selling or dealer group under contract with the OF with respect to consolidated obligations.

The initial independent directors will be appointed by the Finance Agency from among no fewer than five candidates nominated by the three-member board of directors of the OF existing prior to the effective date of the regulation. 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 suitably qualified.

The Finance Agency shall appoint the initial chair of the board of directors of the OF from among its independent directors and its initial vice chair from among all the directors of the OF. When the terms of the persons initially appointed as chair and vice chair expire or otherwise become vacant, subsequent chairs will be chosen from among the independent directors and subsequent vice chairs will be chosen from among all directors of the OF, 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.

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The audit committee of the OF shall be comprised exclusively of the independent directors and shall oversee the audit function of the OF. The audit committee shall have authority to require the FHLBanks to adopt common accounting policies and procedures to the extent it determines such common policies and procedures are necessary to create accurate and meaningful CFRs. The new regulation permits a transition period whereby the board of directors of the OF in place prior to the effective date of the new regulation may continue to perform the duties of the audit committee with respect to the CFRs covering any interim reporting period that ends prior to July 1, 2010.

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 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), Delaware corporate law, or the Revised Model Business Corporation Act, as amended.

Financial Condition

The following table provides selected period-end balances as of March 31, 2010 and December 31, 2009, as well as selected average balances for the three-month period ended March 31, 2010 and the year ended December 31, 2009. As shown in the table, the Bank’s total assets decreased by 9.8 percent (or $6.4 billion) during the three months ended March 31, 2010, due primarily to a $4.6 billion decrease in advances and a $1.4 billion decrease in its short-term liquidity holdings. As the Bank’s assets decreased, the funding for those assets also decreased. During the three months ended March 31, 2010, total consolidated obligations decreased by $6.3 billion as consolidated obligation bonds decreased by $3.2 billion and consolidated obligation discount notes increased by $3.1 billion.

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)

	March 31, 2010
			Percentage			Balance at
			Increase			December 31,
	Balance		(Decrease)			2009
Advances	$	42,628		(9.8	)%	$	47,263
Short-term liquidity holdings
Non-interest bearing excess cash balances(1)		800		(77.8	)		3,600
Federal funds sold		3,502		69.8			2,063
Held-to-maturity securities		11,349		(0.7	)		11,425
Mortgage loans, net		248		(4.6	)		260
Total assets		58,697		(9.8	)		65,092
Consolidated obligations — bonds		48,269		(6.3	)		51,516
Consolidated obligations — discount notes		5,627		(35.8	)		8,762
Total consolidated obligations		53,896		(10.6	)		60,278
Mandatorily redeemable capital stock		8		(11.1	)		9
Capital stock		2,311		(8.7	)		2,532
Retained earnings		369		3.7			356
Average total assets		62,166		(11.2	)		70,018
Average capital stock		2,449		(10.9	)		2,749
Average mandatorily redeemable capital stock		8		(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 March 31, 2010 and December 31, 2009.

ADVANCES OUTSTANDING BY BORROWER TYPE
(par value, dollars in millions)

	March 31, 2010					December 31, 2009
	Amount		Percent			Amount		Percent
Commercial banks	$	37,068		88	%	$	41,924		89	%
Thrift institutions		3,608		9			3,249		7
Credit unions		1,189		3			1,347		3
Insurance companies		310		—			301		1
Total member advances		42,175		100			46,821		100
Housing associates		6		—			11		—
Non-member borrowers		71		—			76		—
Total par value of advances	$	42,252		100	%	$	46,908		100	%
Total par value of advances outstanding to CFIs	$	8,875		21	%	$	9,758		21	%

At March 31, 2010 and December 31, 2009, the carrying value of the Bank’s advances portfolio totaled $42.6 billion and $47.3 billion, respectively. The par value of outstanding advances at those dates was $42.3 billion and $46.9 billion, respectively.

During the first three months of 2010, advances outstanding to the Bank’s ten largest borrowers decreased by $2.3 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 $0.5 billion, $1.0 billion and $1.2 billion, respectively. The remaining decline in outstanding advances of $2.3 billion during the first quarter 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 due to the economic recession.

At March 31, 2010, advances outstanding to the Bank’s ten largest borrowers totaled $27.8 billion, representing 65.8 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 March 31, 2010.

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TEN LARGEST BORROWERS AS OF MARCH 31, 2010
(Par value, dollars in millions)

					Percent of
Name	City	State	Advances		Total Advances
Wells Fargo Bank South Central, National Association(1)	Houston	TX	$	17,747		42.0	%
Comerica Bank	Dallas	TX		5,000		11.8
Beal Bank Nevada (2)	Las Vegas	NV		1,245		3.0
Southside Bank	Tyler	TX		784		1.9
Bank of Texas, N.A.	Dallas	TX		651		1.5
First National Bank	Edinburg	TX		593		1.4
Arvest Bank	Rogers	AR		582		1.4
First Community Bank	Taos	NM		496		1.2
PlainsCapital Bank	Lubbock	TX		352		0.8
Bank of the Ozarks	Little Rock	AR		341		0.8
			$	27,791		65.8	%

(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 March 31, 2010 and December 31, 2009.

COMPOSITION OF ADVANCES
(Dollars in millions)

	March 31, 2010					December 31, 2009
			Percentage					Percentage
	Balance		of Total			Balance		of Total
Fixed rate advances
Maturity less than one month	$	3,688		8.7	%	$	5,164		11.0	%
Maturity 1 month to 12 months		3,411		8.1			4,232		9.0
Maturity greater than 1 year		4,909		11.6			5,602		12.0
Fixed rate, amortizing		3,163		7.5			3,282		7.0
Fixed rate, putable		4,001		9.5			4,037		8.6
Total fixed rate advances		19,172		45.4			22,317		47.6
Floating rate advances
Maturity less than one month		1,008		2.4			11		—
Maturity 1 month to 12 months		3,562		8.4			5,052		10.8
Maturity greater than 1 year		18,510		43.8			19,528		41.6
Total floating rate advances		23,080		54.6			24,591		52.4
Total par value	$	42,252		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 March 31, 2010, the Bank’s short-term liquidity portfolio was comprised of $3.5 billion of overnight federal funds sold to domestic counterparties and $800 million 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 March 31, 2010 and December 31, 2009, the Bank’s long-term investment portfolio (at carrying value) was comprised of approximately $11.3 billion and $11.4 billion, respectively, of 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 three months ended March 31, 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 the Federal National Mortgage Association (“Fannie Mae”) or Freddie Mac. During this same period, the proceeds from maturities and paydowns of long-term securities totaled approximately $1.2 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 (“AB 2008-01”), 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 March 31, 2010, the Bank held $11.3 billion of MBS, which represented 420 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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The following table provides the par amounts and carrying values of the Bank’s MBS portfolio as of March 31, 2010 and December 31, 2009.

COMPOSITION OF MBS PORTFOLIO
(In millions of dollars)

	March 31, 2010				December 31, 2009
	Par(1)		Carrying Value		Par(1)		Carrying Value
Floating rate CMOs
U.S. government guaranteed	$	23	$	23	$	24	$	24
Government-sponsored enterprises		10,942		10,803		10,985		10,835
Non-agency RMBS		488		414		515		445
Total floating rate CMOs		11,453		11,240		11,524		11,304
Fixed rate MBS
Government-sponsored enterprises		3		3		3		3
Triple-A rated non-agency CMBS(2)		46		46		56		56
Total fixed rate MBS		49		49		59		59
Total MBS	$	11,502	$	11,289	$	11,583	$	11,363

(1)	Balances represent the principal amounts of the securities.
(2)	CMBS = Commercial mortgage-backed securities. The Bank match funded these CMBS at the time of purchase with fixed rate debt securities.

Gross unrealized losses on the Bank’s MBS investments decreased from $188 million at December 31, 2009 to $138 million at March 31, 2010. The following table sets forth the unrealized losses on the Bank’s MBS portfolio as of March 31, 2010 and December 31, 2009.

GROSS UNREALIZED LOSSES ON MBS PORTFOLIO
(dollars in millions)

	March 31, 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 guaranteed	$	—		0.0	%	$	—		0.3	%
Government-sponsored enterprises		21		0.2	%		53		0.5	%
Non-agency residential MBS		117		24.2	%		135		26.5	%
	$	138				$	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 March 31, 2010, the gross unrealized losses on the Bank’s holdings of non-agency (i.e., private label) residential MBS (“RMBS”) totaled $117 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 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 March 31, 2010 were principally the result of liquidity risk related discounts in the non-agency RMBS market and

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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 March 31, 2010. The following table presents the credit ratings assigned to the Bank’s non-agency RMBS as of March 31, 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.

	Number of		Amortized		Carrying		Estimated		Unrealized
Credit Rating	Securities		Cost		Value		Fair Value		Losses
Triple-A		20	$	186,805	$	186,805	$	169,068	$	17,737
Double-A		5		49,572		49,572		37,195		12,377
Single-A		2		37,191		37,191		26,309		10,882
Triple-B		5		69,988		54,945		41,702		28,286
Double-B		4		39,364		27,203		24,007		15,357
Single-B		3		57,103		29,330		33,716		23,387
Triple-C		1		43,474		29,670		34,277		9,197
Total		40	$	483,497	$	414,716	$	366,274	$	117,223

During the period from April 1, 2010 through May 7, 2010, one security rated single-A in the table above had its credit rating lowered to single-B by one of the NRSROs; as of March 31, 2010, this security had an amortized cost and estimated fair value of $30.1 million and $21.2 million, respectively. In addition, during this same period, one security rated double-A in the table above had its credit rating lowered to triple-B; as of March 31, 2010, this security had an amortized cost and estimated fair value of $11.1 million and $7.2 million, respectively. None of the Bank’s other non-agency RMBS holdings were downgraded during this period.

At March 31, 2010, the Bank’s portfolio of non-agency RMBS was comprised of 40 securities with an aggregate unpaid principal balance of $488 million: 21 securities with an aggregate unpaid principal balance of $247 million are backed by fixed rate loans and 19 securities with an aggregate unpaid principal balance of $241 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 March 31, 2010 by collateral type and year of securitization.

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NON-AGENCY RMBS BY UNDERLYING COLLATERAL TYPE
(dollars in millions)

														Credit Enhancement Statistics
			Unpaid								Weighted 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	$	46	$	43	$	34	$	9		13.42	%		8.34	%		8.89	%		8.34	%
2005		1		30		30		22		8		9.22	%		10.21	%		6.84	%		10.21	%
2004		5		32		32		30		2		4.33	%		19.69	%		6.01	%		16.81	%
2003		11		127		127		117		10		1.11	%		6.80	%		3.96	%		5.09	%
2002 and prior		3		12		12		11		1		6.31	%		21.17	%		4.45	%		16.97	%
		21		247		244		214		30		5.05	%		9.84	%		5.52	%		5.09	%
Option ARM Collateral
2005		17		228		226		144		82		33.21	%		47.40	%		42.57	%		29.07	%
2004		2		13		13		8		5		31.76	%		36.81	%		30.01	%		33.76	%
		19		241		239		152		87		33.13	%		46.81	%		41.87	%		29.07	%
Total non-agency RMBS		40	$	488	$	483	$	366	$	117		18.94	%		28.13	%		23.50	%		5.09	%

(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 March 31, 2010, actual cumulative loan losses in the pools of loans underlying the Bank’s non-agency RMBS portfolio ranged from 0 percent to 6.03 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 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.
(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 three months ended March 31, 2010.

As of March 31, 2010, the Bank held six non-agency RMBS with an aggregate unpaid principal balance of $88 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 $48 million) are backed by fixed rate loans while the other two securities (with an aggregate unpaid principal balance of $40 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 March 31, 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)

														Credit Enhancement Statistics
			Unpaid								Weighted 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	$	70	$	68	$	45	$	23		29.05	%		29.16	%		25.55	%		10.21	%
2004		1		7		7		7		—		9.27	%		25.28	%		6.85	%		25.28	%
2002 and prior		2		11		11		10		1		6.58	%		20.42	%		4.55	%		16.97	%
Total		6	$	88	$	86	$	62	$	24		24.66	%		27.76	%		21.43	%		10.21	%

(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 March 31, 2010, actual cumulative loan losses in the pools of loans underlying the securities presented in the table ranged from 0.18 percent to 3.74 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 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.
(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 March 31, 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 6- to 12-month period beginning January 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, 10 of the Bank’s non-agency RMBS would have been deemed to be other-than-temporarily impaired as of March 31, 2010 (as compared to 5 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		First Quarter		Scenario(2)		Delinquency(3)			Enhancement (4)
Security #1		2005	Alt-A/Option ARM	$	7,056	$	9,781	$	49	$	1,072		42.0	%		37.2	%
Security #2		2005	Alt-A/Option ARM		9,331		11,996		—		44		43.5	%		50.7	%
Security #3		2006	Alt-A/Fixed Rate		29,670		34,277		446		1,951		13.4	%		8.3	%
Security #4		2005	Alt-A/Option ARM		6,570		7,812		—		79		20.9	%		48.8	%
Security #5		2005	Alt-A/Option ARM		12,268		13,365		—		790		45.5	%		48.2	%
Security #6		2005	Alt-A/Option ARM		10,006		10,570		—		851		27.3	%		29.1	%
Security #7		2004	Alt-A/Option ARM		4,167		4,167		60		354		24.0	%		33.8	%
Security #8		2005	Alt-A/Option ARM		6,509		6,509		10		100		30.9	%		47.7	%
Security #9		2005	Alt-A/Option ARM		3,091		3,091		3		—		32.5	%		47.6	%
Security #10		2005	Alt-A/Option ARM		8,705		5,260		—		26		42.2	%		46.4	%
Security #11		2004	Alt-A/Option ARM		6,077		3,661		—		37		41.2	%		40.5	%
				$	103,450	$	110,489	$	568	$	5,304

(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 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 March 31, 2010 if the more stressful housing price scenario had been used in the Bank’s OTTI assessment as of March 31, 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 March 31, 2010, actual cumulative loan losses in the pools of loans underlying the securities presented in the table ranged from 1.65 percent to 6.03 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 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.

In addition to its holdings of non-agency RMBS, as of March 31, 2010, the Bank held two non-agency commercial MBS with an aggregate unpaid principal balance, amortized cost and estimated fair value of $45.8 million, $45.8 million and $46.7 million, respectively. Both of these securities were issued in 2000. As of March 31, 2010, the weighted average collateral delinquency (the percentage of underlying loans that are 60 or more days past due, including loans in foreclosure and real estate owned) for these two securities was 3.72 percent; at this same date, the current weighted average credit enhancement approximated 29.57 percent.

While substantially all of its MBS portfolio is comprised of CMOs with floating rate coupons ($11.5 billion par value at March 31, 2010) that do not expose the Bank to interest rate risk if interest rates rise moderately, such

45

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 March 31, 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 ($9.5 billion) was between 6.0 percent and 7.0 percent. As of March 31, 2010, one-month LIBOR rates were approximately 575 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) $2.5 billion of interest rate caps with remaining maturities ranging from 36 months to 56 months as of March 31, 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 three months ended March 31, 2010.

The following table provides a summary of the notional amounts, strike rates and expiration periods of the Bank’s current portfolio of stand-alone CMO-related interest rate cap agreements.

SUMMARY OF CMO-RELATED INTEREST RATE CAP AGREEMENTS
(dollars in millions)

Expiration	Notional Amount		Strike Rate
Second quarter 2013	$	500		6.25	%
Second quarter 2013		250		6.50	%
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	%
	$	3,750

(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 March 31, 2010, the carrying values of consolidated obligation bonds and discount notes totaled $48.3 billion and $5.6 billion, respectively. At that date, the par value of the Bank’s outstanding bonds was $47.9 billion and the par value of the Bank’s outstanding discount notes was $5.6 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 three months ended March 31, 2010, the Bank’s outstanding consolidated obligation bonds (at par value) decreased by $3.3 billion due primarily to decreases in the Bank’s outstanding advances. The following table presents the composition of the Bank’s outstanding bonds at March 31, 2010 and December 31, 2009.

COMPOSITION OF BONDS OUTSTANDING
(Par value, dollars in millions)

	March 31, 2010					December 31, 2009
			Percentage					Percentage
	Balance		of Total			Balance		of Total
Single-index floating rate	$	21,715		45.3	%	$	20,560		40.2	%
Fixed rate, non-callable		19,739		41.2			23,371		45.7
Callable step-up		3,198		6.7			3,473		6.8
Fixed rate, callable		2,698		5.6			3,277		6.4
Callable step-down		300		0.6			125		0.2
Conversion		265		0.6			365		0.7
Total par value	$	47,915		100.0	%	$	51,171		100.0	%

Fixed rate bonds have coupons that are fixed over the life of the bond. Some fixed rate bonds contain provisions that enable the Bank to call the bonds at its option on predetermined call dates. Single-index floating rate bonds have variable rate coupons that generally reset based on either one-month or three-month LIBOR or the daily federal funds rate; these bonds may contain caps that limit the increases in the floating rate coupons. Conversion bonds have coupons that convert from floating to fixed on predetermined dates. Callable step-up bonds pay interest at increasing fixed rates for specified intervals over the life of the bond and contain provisions enabling the Bank to call the bonds at its option on predetermined dates. Callable step-down bonds pay interest at decreasing fixed rates for specified intervals over the life of the bond and contain provisions enabling the Bank to call the bonds at its option on predetermined dates.

During the first quarter, 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 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 bullet 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.

The average LIBOR cost of the consolidated obligation bonds issued during the first quarter was higher than the average LIBOR cost of consolidated obligation bonds issued during the immediately preceding quarter. The weighted average cost of consolidated obligation bonds issued by the Bank increased from approximately LIBOR minus 19 basis points in the fourth quarter of 2009 to approximately LIBOR minus 16 basis points in the first quarter of 2010. A variety of 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 contributed to the increased LIBOR costs during the period. The

47

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 quarter.

As discussed in the 2009 10-K, on March 4, 2010, the Securities and Exchange Commission issued amendments to its rules promulgated under the Investment Company Act of 1940, which govern money market funds. These amendments will 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 become effective on various dates during the second quarter of 2010. Traditionally, money market funds have been significant investors in FHLBank consolidated obligations. The Bank expects these amendments to result in an increase in money market funds’ demand for FHLBank discount notes with maturities of 60 days or less and a reduction in money market funds’ demand for longer-term discount notes, short-term callable debt and floating rate bonds.

Demand and term deposits were $1.6 billion and $1.5 billion at March 31, 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 Stock

The Bank’s outstanding capital stock (excluding mandatorily redeemable capital stock) was approximately $2.3 billion and $2.5 billion at March 31, 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 three months ended March 31, 2010. The decrease in outstanding capital stock from December 31, 2009 to March 31, 2010 was attributable primarily to a decline in members’ activity-based investment requirements resulting from the decline in outstanding advances balances.

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 three months ended March 31, 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 and April 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.

The following table sets forth the repurchases of surplus stock that have occurred since December 31, 2009.

SURPLUS STOCK REPURCHASED UNDER QUARTERLY REPURCHASE PROGRAM
(dollars in thousands)

					Amount Classified as
					Mandatorily Redeemable
Date of Repurchase	Shares		Amount of		Capital Stock at Date of
by the Bank	Repurchased		Repurchase		Repurchase
January 29, 2010		1,065,595	$	106,560	$	—
April 30, 2010		704,308		70,431		—

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Mandatorily redeemable capital stock outstanding at March 31, 2010 and December 31, 2009 was $7.6 million and $9.2 million, respectively. The following table presents mandatorily redeemable capital stock outstanding, by reason for classification as a liability, as of March 31, 2010 and December 31, 2009.

HOLDINGS OF MANDATORILY REDEEMABLE CAPITAL STOCK
(dollars in thousands)

	March 31, 2010				December 31, 2009
	Number of				Number of
Capital Stock Status	Institutions		Amount		Institutions		Amount
Held by the FDIC, as receiver of Franklin Bank, S.S.B.		1	$	29		1	$	29
Subject to withdrawal notice		8		1,901		8		1,900
Held by other non-members		12		5,649		15		7,236
Total		21	$	7,579		24	$	9,165

Although mandatorily redeemable capital stock is excluded from capital (equity) for financial reporting purposes, such stock is considered capital for regulatory purposes (see the section below entitled “Risk-Based Capital Rules and Other Capital Requirements” for further information).

At March 31, 2010 and December 31, 2009, the Bank’s ten largest shareholders held $1.2 billion and $1.4 billion, respectively, of capital stock (including mandatorily redeemable capital stock), which represented 52.3 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 March 31, 2010.

TEN LARGEST SHAREHOLDERS AS OF MARCH 31, 2010
(Dollars in thousands)

					Percent of
			Capital		Total
Name	City	State	Stock		Capital Stock
Wells Fargo Bank South Central, National Association (1)	Houston	TX	$	746,153		32.2	%
Comerica Bank	Dallas	TX		230,256		9.9
Beal Bank Nevada(2)	Las Vegas	NV		52,928		2.3
Southside Bank	Tyler	TX		36,306		1.5
Arvest Bank	Rogers	AR		30,267		1.3
Bank of Texas, N.A.	Dallas	TX		29,317		1.3
First National Bank	Edinburg	TX		26,899		1.2
First Community Bank	Taos	NM		23,125		1.0
USAA Federal Savings Bank	San Antonio	TX		19,594		0.8
International Bank of Commerce	Laredo	TX		18,967		0.8
			$	1,213,812		52.3	%

(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 March 31, 2010.

At March 31, 2010, the Bank’s excess stock totaled $259.9 million, which represented 0.4 percent of the Bank’s total assets as of that date.

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Retained Earnings and Dividends

During the three months ended March 31, 2010, the Bank’s retained earnings increased by $13.2 million, from $356.3 million to $369.5 million. During this same period, the Bank paid dividends on capital stock totaling $2.4 million, which represented an annualized dividend rate of 0.375 percent. The Bank’s first quarter 2010 dividend rate exceeded the upper end of the Federal Reserve’s target for the federal funds rate for the fourth quarter of 2009 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 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.

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 15 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 March 31, 2010 and December 31, 2009, the Bank’s notional balance of interest rate exchange agreements was $48.8 billion and $66.7 billion, respectively, while its total assets were $58.7 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 March 31, 2010 and December 31, 2009, and the net fair value changes recorded in earnings for each of those categories during the three months ended March 31, 2010 and 2009.

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COMPOSITION OF DERIVATIVES

					Net Change in Fair Value(7)
	Total Notional at				Three Months Ended March 31,
	March 31, 2010		December 31, 2009		2010			2009
	(In millions of dollars)				(In thousands of dollars)
Advances
Short-cut method(1)	$	8,573	$	9,397	$	—		$	—
Long-haul method(2)		1,486		1,556		224			(1,385	)
Economic hedges(3)		15		15		(6	)		(19	)
Total		10,074		10,968		218			(1,404	)
Investments
Long-haul method(2)		—		—		—			126
Consolidated obligation bonds
Short-cut method(1)		—		95		—			—
Long-haul method(2)		22,993		27,519		2,230			55,533
Economic hedges(3)		2,575		8,195		(6,520	)		(837	)
Total		25,568		35,809		(4,290	)		54,696
Consolidated obligation discount notes
Economic hedges(3)		643		6,414		(1,622	)		(8,968	)
Other economic hedges
Interest rate caps(4)		3,750		3,750		(28,953	)		375
Basis swaps(5)		8,700		9,700		(554	)		36,104
Forward rate agreement(6)		—		—		—			(223	)
Member swaps (including offsetting swaps)		24		24		—			10
Total		12,474		13,474		(29,507	)		36,266
Total derivatives	$	48,759	$	66,665	$	(35,201	)	$	80,716
Total short-cut method	$	8,573	$	9,492	$	—		$	—
Total long-haul method		24,479		29,075		2,454			54,274
Total economic hedges		15,707		28,098		(37,655	)		26,442
Total derivatives	$	48,759	$	66,665	$	(35,201	)	$	80,716

(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 March 31, 2010, the Bank held $8.7 billion (notional) of interest rate basis swaps that were entered into to reduce the Bank’s exposure to changing spreads between one-month and three-month LIBOR; $1.0 billion, $2.0 billion, $1.0 billion, $3.7 billion and $1.0 billion of these agreements expire in the first quarter of 2011, the second quarter of 2013, the second quarter of 2014, the fourth quarter of 2018, and the first quarter of 2024, 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

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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 March 31, 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 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 March 31, 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
March 31, 2010
Aaa		1	$	459.0		$	—	$	—	$	—	$	—
Aa(4)		10		38,865.7			177.0		166.8		9.0		1.2
A(5)		4		9,422.1			22.1		18.9		3.2		—
Excess collateral		—		—			—		0.1		—		—
Total		15	$	48,746.8	(6)	$	199.1	$	185.8	$	12.2	$	1.2
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 March 31, 2010 and December 31, 2009, respectively.
(2)	Includes amounts that had not settled as of March 31, 2010 and December 31, 2009.
(3)	Amount of collateral to which the Bank had contractual rights under counterparty credit agreements based on March 31, 2010 and December 31, 2009 credit exposures. Cash collateral totaling $12.2 million and $17.6 million was delivered under these agreements in early April 2010 and early January 2010, respectively.
(4)	The figures for Aa-rated counterparties as of March 31, 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 $512 million and $753 million as of March 31, 2010 and December 31, 2009, respectively. These transactions represented a credit exposure of $2.2 million and $1.9 million to the Bank as of March 31, 2010 and December 31, 2009, respectively.
(5)	The figures for A-rated counterparties as of March 31, 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 $3.1 billion and $3.2 billion as of March 31, 2010 and December 31, 2009, respectively. These transactions did not represent a credit exposure to the Bank as of March 31, 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 March 31, 2010 and December 31, 2009, respectively. This product offering is discussed in the paragraph below.

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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.

Market Value of Equity

The ratio of the Bank’s estimated market value of equity to its book value of equity was approximately 105 percent at March 31, 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 March 31, 2010 and 2009 was $15.6 million and $65.1 million, respectively. The Bank’s net income for the three months ended March 31, 2010 represented an annualized return on average capital stock (“ROCS”) of 2.58 percent, which was 245 basis points above the average effective federal funds rate for the quarter. In comparison, the Bank’s ROCS was 8.96 percent for the three months ended March 31, 2009, which exceeded the average effective federal funds rate for that quarter by 878 basis points. 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 decrease 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 months ended March 31, 2010 and 2009, the effective rates were 26.5 percent. During these periods, the combined AHP and REFCORP assessments were $5.6 million and $23.5 million, respectively.

Income Before Assessments

During the three months ended March 31, 2010 and 2009, the Bank’s income before assessments was $21.2 million and $88.7 million, respectively. As discussed in more detail below, the $67.5 million decrease in income before assessments from period to period was attributable to a $155.0 million decrease in other income, offset by an $87.0 million improvement in net interest income/expense and a $0.5 million decrease in other expense. The negative swing in other income (loss) was due primarily to a $153.5 million adverse change in net gains (losses) on derivatives and hedging activities, from a gain of $126.8 million in the three months ended March 31, 2009 to a loss of $26.7 million in the three months ended March 31, 2010.

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 March 31, 2010 and 2009, the Bank’s net interest income (expense) was $64.2 million and ($22.8 million), respectively. As described further below, the Bank’s net interest income does not include net interest payments on economic hedge derivatives, which contributed significantly to the Bank’s overall income before assessments for both periods. If these net interest payments had been included, net interest income would have improved by $49.4 million period to period. The increase in net interest income was due primarily to an increase in the Bank’s net interest spread. This increase was partially offset by a decrease in the average balance of earning assets from $74.3 billion for the three months ended March 31, 2009 to $61.7 billion for the corresponding period in 2010 and, to a lesser extent, by lower short-term interest rates (the average effective federal funds rate declined from 0.18 percent for the three months ended March 31, 2009 to 0.13 percent for the three months ended March 31, 2010).

For the three months ended March 31, 2010 and 2009, the Bank’s net interest margin was 41 basis points and (12) basis points, 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. Due to lower short-term interest rates period-to-period, the contribution of earnings from the Bank’s invested capital to the net interest margin (the impact of non-interest bearing funds) decreased from 8 basis points for the three months ended March 31, 2009 to 2 basis points for the comparable period in 2010. The Bank’s net interest spread improved from (20) basis points during the first three months of 2009 to 39 basis points during the first three months of 2010.

As noted above, the Bank’s net interest income excludes net interest payments on economic hedge derivatives. During the three months ended March 31, 2010, the Bank used approximately $9.5 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 $3.4 billion (average notional balance) of fixed-for-floating interest rate swaps to hedge some of its longer-term discount notes and approximately $5.3 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 $12.9 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 $5.8 billion (average notional balance) of fixed-for-floating interest rate swaps to hedge some of its longer-term discount notes and approximately $3.7 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 $8.5 million and $46.1 million for the three months ended March 31, 2010 and 2009, respectively. Had this interest income on economic hedge derivatives been included in net interest income, the Bank’s net interest income for the three months ended March 31, 2010 and 2009 would have been $8.5 million and $46.1 million higher, respectively, which would have made its net interest income positive for the three months ended March 31, 2009. For the three months ended March 31, 2010 and 2009, the Bank’s net interest margin would have been 47 basis points and 13 basis points, respectively, and its net interest spread would have been 45 basis points and 5 basis points, respectively.

The Bank’s net interest income for the first quarter of 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 purchase loans that are at least 120 days delinquent from the mortgage pools underlying the CMOs guaranteed by those institutions. The initial purchases were scheduled to occur from February 2010 through May 2010, with additional purchases of delinquent loans occurring thereafter as needed. During the first quarter of 2010, Freddie Mac repurchased delinquent loans from the pools underlying its guaranteed CMOs that are owned by the Bank. The repayments resulting from these repurchases resulted in approximately $6.6 million of accelerated accretion of the purchase discounts associated with the investments. The Bank expects the yields on its CMO portfolio to remain somewhat elevated during the second quarter of 2010, as Fannie Mae is expected to repurchase the delinquent loans from the mortgage pools underlying its guaranteed CMOs that are owned by the Bank. Subsequent to the second quarter of

54

2010, the impact of these repurchases by Fannie Mae and Freddie Mac is not expected to significantly affect the Bank’s net interest income.

The Bank’s net interest spread for the first quarter of 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 debt was carried at a negative spread. The negative spread associated with the investment of this debt in low-yielding short-term assets was a significant contributor to the Bank’s negative net interest income for the three months ended March 31, 2009, most of which occurred early in that period. The negative impact of this debt on the Bank’s net interest income, net interest margin and net interest spread was minimal in subsequent periods, as much of the relatively high cost debt issued in late 2008 matured 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 March 31, 2010 and 2009.

55

YIELD AND SPREAD ANALYSIS

(Dollars in millions)

	Three Months Ended March 31,
	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)	$	125		$	—		0.15	%	$	398		$	1			0.21	%
Federal funds sold		4,256			1		0.11	%		3,683			1			0.16	%
Investments
Trading		4			—		—			3			—			—
Available-for-sale(d)		—			—		—			104			—			1.76	%
Held-to-maturity(d)		11,433			38		1.34	%		11,470			41			1.42	%
Advances(e)		45,653			84		0.74	%		58,304			257			1.76	%
Mortgage loans held for portfolio		254			4		5.55	%		320			4			5.54	%
Total earning assets		61,725			127		0.82	%		74,282			304			1.64	%
Cash and due from banks		509								21
Other assets		332								526
Derivatives netting adjustment(b)		(335	)							(585	)
Adjustment for net non-credit portion of other-than-temporary impairments on held-to-maturity securities(d)		(65	)							—
Total assets	$	62,166			127		0.82	%	$	74,244			304			1.64	%
Liabilities and Capital
Interest-bearing deposits (b)	$	1,607			—		0.04	%	$	1,719			1			0.18	%
Consolidated obligations
Bonds		50,713			59		0.47	%		49,032			227			1.85	%
Discount notes		6,603			4		0.22	%		20,094			99			1.97	%
Mandatorily redeemable capital stock and other borrowings		9			—		0.60	%		78			—			0.12	%
Total interest-bearing liabilities		58,932			63		0.43	%		70,923			327			1.84	%
Other liabilities		819								715
Derivatives netting adjustment(b)		(335	)							(585	)
Total liabilities		59,416			63		0.42	%		71,053			327			1.84	%
Total capital		2,750								3,191
Total liabilities and capital	$	62,166					0.41	%	$	74,244						1.76	%
Net interest income				$	64							$	(23	)
Net interest margin							0.41	%								(0.12	%)
Net interest spread							0.39	%								(0.20	%)
Impact of non-interest bearing funds							0.02	%								0.08	%

(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 quarters ended March 31, 2010 and 2009 in the table above include $125 million and $210 million, respectively, which are classified as derivative assets/liabilities on the statements of condition. In addition, interest-bearing deposit liabilities for the quarters ended March 31, 2010 and 2009 in the table above include $210 million and $375 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 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 $8.5 million and $46.1 million for the three months ended March 31, 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.

Changes in both volume (i.e., average balances) and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between the three-month periods in 2010 and 2009 and excludes net interest income on economic hedge derivatives, as discussed above. Changes in interest income and interest expense that cannot be attributed to either volume or rate have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.

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RATE AND VOLUME ANALYSIS
(In millions of dollars)

			Three Months Ended
	March 31, 2010 vs. 2009
	Volume			Rate			Total
Interest income:
Interest-bearing deposits	$	(1	)	$	—		$	(1	)
Federal funds sold		1			(1	)		—
Investments
Available-for-sale		—			—			—
Held-to-maturity		—			(3	)		(3	)
Advances		(47	)		(126	)		(173	)
Mortgage loans held for portfolio		(1	)		1			—
Total interest income		(48	)		(129	)		(177	)
Interest expense:
Interest-bearing deposits		—			(1	)		(1	)
Consolidated obligations
Bonds		8			(176	)		(168	)
Discount notes		(42	)		(53	)		(95	)
Total interest expense		(34	)		(230	)		(264	)
Changes in net interest income	$	(14	)	$	101		$	87

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Other Income (Loss)

The following table presents the various components of other income (loss) for the three months ended March 31, 2010 and 2009. The significant components are discussed in the narrative following the table.

OTHER INCOME (LOSS)
(In thousands of dollars)

	Three Months Ended March 31,
	2010			2009
Net interest income (expense) associated with:
Economic hedge derivatives related to consolidated obligation federal funds floater bonds	$	7,049		$	(575	)
Economic hedge derivatives related to consolidated obligation discount notes		1,746			8,233
Stand-alone economic hedge derivatives (basisswaps)		(278	)		38,544
Stand-alone economic hedge derivatives (forward rate agreement)		—			(84	)
Member/offsetting swaps		1			—
Economic hedge derivatives related to advances		(23	)		(3	)
Total net interest income associated with economic hedge derivatives		8,495			46,115
Gains (losses) related to economic hedge derivatives
Gains (losses) related to stand-alone derivatives (basis swaps)		(554	)		36,104
Losses on forward rate agreement		—			(223	)
Losses on federal funds floater swaps		(6,520	)		(837	)
Gains (losses) on interest rate caps related to held-to-maturity securities		(28,953	)		375
Losses on discount note swaps		(1,622	)		(8,968	)
Net gains on member/offsetting swaps		—			10
Losses related to other economic hedge derivatives (advance swaps and caps)		(6	)		(19	)
Total fair value gains (losses) related to economic hedge derivatives		(37,655	)		26,442
Gains (losses) related to fair value hedge ineffectiveness
Net gains (losses) on advances and associated hedges		224			(1,385	)
Net gains on CO(1)bonds and associated hedges		2,230			55,533
Net gains on AFS(2) securities and associated hedges		—			126
Total fair value hedge ineffectiveness		2,454			54,274
Net gains (losses) on unhedged trading securities (3)		119			(79	)
Credit component of other-than-temporary impairment losses on held-to-maturity securities		(568	)		(17	)
Realized gain on sale of AFS(2) security		—			843
Service fees		563			628
Other, net		1,459			1,676
Total other		1,573			3,051
Total other income (loss)	$	(25,133	)	$	129,882

(1)	Consolidated obligations
(2)	Available-for-sale
(3)	Unhedged trading securities consist solely of mutual fund investments associated with the Bank’s non-qualified deferred compensation plans.

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During the fourth quarter of 2008 and the year ended December 31, 2009, the Bank issued a number of consolidated obligation bonds that are indexed to the daily federal funds rate, some of which have since matured. The Bank uses federal funds floater swaps to convert its interest payments with respect to these bonds from the daily federal funds rate to three-month LIBOR. As of March 31, 2010, the Bank’s federal funds floater swaps had an aggregate notional amount of $2.6 billion. Net interest income (expense) associated with these interest rate swaps totaled $7.0 million and ($0.6 million) during the three months ended March 31, 2010 and 2009, respectively. As economic hedge derivatives, the changes in the fair values of the federal funds floater swaps are recorded in earnings with no offsetting changes in the fair values of the hedged items (i.e., the consolidated obligation bonds) and therefore can be a source of volatility in the Bank’s earnings. The fair values of federal funds floater swaps generally fluctuate based on the timing of the interest rate reset dates, the relationship between the federal funds rate and three-month LIBOR at the time of measurement, the projected relationship between the federal funds rate and three-month LIBOR for the remaining term of the interest rate swap and the relationship between the current coupons for the interest rate swap and the prevailing market rates at the valuation date. The recorded fair value losses associated with these interest rate swaps totaled $6.5 million and $0.8 million for the quarters ended March 31, 2010 and 2009, respectively. At March 31, 2010, the carrying values of the Bank’s federal funds floater swaps totaled $3.6 million, excluding net accrued interest receivable.

The Bank hedges some of its longer-term consolidated obligation discount notes using fixed-for-floating interest rate swaps. Net interest income associated with these interest rate swaps totaled $1.7 million and $8.2 million during the three months ended March 31, 2010 and 2009, respectively. As stand-alone derivatives, the changes in the fair values of the Bank’s discount note swaps are recorded in earnings with no offsetting changes in the fair values of the hedged items (i.e., the consolidated obligation discount notes) and therefore can be a source of volatility in the Bank’s earnings. During the three months ended March 31, 2010 and 2009, the recorded fair value losses in the Bank’s discount note swaps were $1.6 million and $9.0 million, respectively. At March 31, 2010, the carrying values of the Bank’s stand-alone discount note swaps totaled $0.2 million, excluding net accrued interest receivable.

From time to time, the Bank enters into interest rate basis swaps to reduce its exposure to changing spreads between one-month and three-month LIBOR. Under these agreements, the Bank generally receives three-month LIBOR and pays one-month LIBOR. As of March 31, 2010, the Bank was a party to 11 interest rate basis swaps with an aggregate notional amount of $8.7 billion. The Bank accounts for interest rate basis swaps as stand-alone derivatives and, as such, the fair value changes associated with these instruments can be a source of considerable volatility in the Bank’s earnings, particularly when one-month and/or three-month LIBOR, or the spreads between these two indices, are or are projected to be volatile. The fair values of one-month LIBOR to three-month LIBOR basis swaps generally fluctuate based on the timing of the interest rate reset dates, the relationship between one-month LIBOR and three-month LIBOR at the time of measurement, the projected relationship between one-month LIBOR and three-month LIBOR for the remaining term of the interest rate basis swap and the relationship between the current coupons for the interest rate swap and the prevailing LIBOR rates at the valuation date. The recorded fair value changes in the Bank’s interest rate basis swaps were net gains (losses) of ($0.6 million) and $36.1 million for the three months ended March 31, 2010 and 2009, respectively. During the three months ended March 31, 2010, the Bank sold a portion of an interest rate basis swap ($1.0 billion notional balance); proceeds from this sale totaled $3.1 million, which reflected the cumulative life-to-date gain (excluding net interest settlements) realized on this transaction. Net interest income (expense) associated with the Bank’s interest rate basis swaps totaled ($0.3 million) and $38.5 million for the three months ended March 31, 2010 and 2009, respectively. At March 31, 2010, the carrying values of the Bank’s stand-alone interest rate basis swaps totaled $16.5 million, excluding net accrued interest receivable.

If the Bank holds its federal funds floater swaps, discount note swaps and interest rate basis swaps to maturity, the cumulative life-to-date unrealized gains associated with these instruments will ultimately reverse in future periods in the form of unrealized losses, which will negatively impact the Bank’s earnings in those periods. The timing of this reversal will depend upon a number of factors including, but not limited to, the level and volatility of short-term interest rates. Occasionally, in response to changing balance sheet and market conditions, the Bank may terminate one or more interest rate basis swaps (or portions thereof) prior to their scheduled maturity. The Bank typically holds its federal funds floater swaps and discount note swaps to maturity.

As discussed previously in the section entitled “Financial Condition – Long-Term Investments,” to hedge a portion of the risk associated with a significant increase in interest rates, the Bank had (as of March 31, 2010) entered into

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13 interest rate cap agreements having a total notional amount of $3.75 billion. The premiums paid for these caps totaled $42.7 million. The fair values of interest rate cap agreements are dependent upon the level of interest rates, volatilities and remaining term to maturity. In general (assuming constant volatilities and no erosion in value attributable to the passage of time), interest rate caps will increase in value as market interest rates rise and will diminish in value as market interest rates decline. The value of interest rate caps will increase as volatilities increase and will decline as volatilities decrease. Absent changes in volatilities or interest rates, the value of interest rate caps will decline with the passage of time. As stand-alone derivatives, the changes in the fair values of the Bank’s interest rate cap agreements are recorded in earnings with no offsetting changes in the fair values of the hedged items (i.e., the CMO LIBOR floaters with embedded caps) and therefore can also be a source of considerable volatility in the Bank’s earnings.

At March 31, 2010, the carrying values of the Bank’s stand-alone interest rate cap agreements totaled $22.2 million. 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 recorded fair value change in the Bank’s stand-alone caps was a loss of $29.0 million for the three months ended March 31, 2010, compared to a gain of $0.4 million for the corresponding period in 2009. The loss on the caps was primarily attributable to a decline in volatility.

The Bank uses interest rate swaps to hedge the risk of changes in the fair value of some of its advances and consolidated obligation bonds. Prior to their sale or maturity, substantially all of the Bank’s available-for-sale securities were also hedged with interest rate swaps. These hedging relationships are (or were in the case of the Bank’s available-for-sale securities) designated as fair value hedges. To the extent these relationships qualify for hedge accounting, changes in the fair values of both the derivative (the interest rate swap) and the hedged item (limited to changes attributable to the hedged risk) are recorded in earnings. For those relationships that qualified for hedge accounting, the differences between the change in fair value of the hedged items and the change in fair value of the associated interest rate swaps (representing hedge ineffectiveness) were net gains of $2.5 million and $54.3 million for the three months ended March 31, 2010 and 2009, respectively. To the extent these hedging relationships do not qualify for hedge accounting, or cease to qualify because they are determined to be ineffective, only the change in fair value of the derivative is recorded in earnings (in this case, there is no offsetting change in fair value of the hedged item). During the three months ended March 31, 2010 and 2009, the net losses relating to derivatives associated with specific advances that were not in qualifying hedging relationships totaled $6,000 and $19,000, respectively.

As set forth in the table on page 58, the Bank’s fair value hedge ineffectiveness gains associated with its consolidated obligation bonds were significantly higher in the first quarter of 2009 as compared to the first quarter of 2010. A substantial portion of the Bank’s fixed rate consolidated obligation bonds are hedged with fixed-for-floating interest rate swaps in long-haul hedging relationships. The floating legs of most of these interest rate swaps reset every three months and are then fixed until the next reset date. These hedging relationships have been, and are expected to continue to be, highly effective in achieving offsetting changes in fair values attributable to the hedged risk. However, during periods in which short-term rates are volatile (as they were in the latter part of 2008), the Bank can experience increased earnings variability related to differences in the timing between changes in short-term rates and interest rate resets on the floating legs of its interest rate swaps. While changes in the values of the fixed rate leg of the interest rate swap and the fixed rate bond being hedged substantially offset each other, when three-month LIBOR rates decrease dramatically between the reset date and the valuation date (as they did during the fourth quarter of 2008), discounting the higher coupon rate cash flows being paid on the floating rate leg at the prevailing lower rate until the swap’s next reset date can result in ineffectiveness-related losses that, while relatively small when expressed as prices, can be significant when evaluated in the context of the Bank’s net income. Because the Bank typically holds its consolidated obligation bond interest rate swaps to call or maturity, the impact of these ineffectiveness-related adjustments on earnings are generally transitory, as they were in this case. As a result of the unusual (and significant) decrease in three-month LIBOR rates during the fourth quarter of 2008, the Bank recognized ineffectiveness-related losses during the year ended December 31, 2008 of $55.4 million. With relatively stable three-month LIBOR rates during the first quarter of 2009, these ineffectiveness-related losses substantially reversed (in the form of ineffectiveness-related gains) during the three months ended March 31, 2009. Three-month LIBOR rates remained relatively stable during the remainder of 2009 and the first quarter of 2010, resulting in significantly lower ineffectiveness-related gains during the three months ended March 31, 2010.

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Because the Bank has a much smaller balance of swapped assets than liabilities and a significant portion of those assets qualify for and are designated in short-cut hedging relationships, the Bank did not experience similar offsetting variability from its asset hedging activities during the three months ended March 31, 2009.

For a discussion of the other-than-temporary impairment losses on certain of the Bank’s held-to-maturity securities, see “Item 1. Financial Statements” (specifically, Note 3 beginning on page 7 of this report).

There were no sales of long-term investments during the three months ended March 31, 2010. In March 2009, the Bank sold an available-for-sale security (specifically, a government-sponsored enterprise MBS) with an amortized cost (determined by the specific identification method) of $86.2 million. Proceeds from the sale totaled $87.0 million, resulting in a gross realized gain of $0.8 million. There were no other sales of long-term investments during the three months ended March 31, 2009.

In the table on page 58, the caption entitled “Other, net” (consistent with the term used in the statements of income) is comprised principally of letter of credit fees. During the three months ended March 31, 2010 and 2009, letter of credit fees totaled $1.4 million and $1.6 million, respectively. At March 31, 2010, outstanding letters of credit totaled $4.4 billion.

Other Expense

Total other expense, which includes the Bank’s compensation and benefits, other operating expenses and its proportionate share of the costs of operating the Finance Agency and the Office of Finance, totaled $17.8 million and $18.4 million for the three months ended March 31, 2010 and 2009, respectively.

Compensation and benefits were $10.0 million for the three months ended March 31, 2010, compared to $9.8 million for the corresponding period in 2009. Other operating expenses for the three months ended March 31, 2010 were $6.6 million compared to $7.5 million for the corresponding period in 2009. The decrease in other operating expenses was attributable to the costs associated with the Bank’s financial support of the relief efforts relating to Hurricanes Gustav and Ike in 2009. In late September 2008, the Bank announced that it would make $5 million in funds available for special disaster relief grants for homes and businesses affected by Hurricanes Gustav and Ike. Approximately $2.3 million of these funds were disbursed during the first quarter of 2009. Similar disbursements were not made during the first quarter of 2010. Absent the impact of the hurricane relief program, other operating expenses increased $1.4 million quarter over quarter. This increase was attributable to general increases in many of the Bank’s other operating expenses, none of which were individually significant.

The Bank, together with the other FHLBanks, is assessed for the cost of operating the Finance Agency and the Office of Finance. The Bank’s share of these expenses totaled $1.2 million and $1.1 million for the three months ended March 31, 2010 and 2009, respectively.

AHP and REFCORP Assessments

As required by statute, each year the Bank contributes 10 percent of its earnings (after the REFCORP assessment discussed below and as adjusted for interest expense on mandatorily redeemable capital stock) to its AHP. The AHP provides grants that members can use to support affordable housing projects in their communities. Generally, the Bank’s AHP assessment is derived by adding interest expense on mandatorily redeemable capital stock to income before assessments and then subtracting the REFCORP assessment; the result of this calculation is then multiplied by 10 percent. For the three months ended March 31, 2010 and 2009, the Bank’s AHP assessments totaled $1.7 million and $7.2 million, respectively.

Also as required by statute, the Bank contributes 20 percent of its reported earnings (after its AHP contribution) toward the payment of interest on REFCORP bonds that were issued to provide funding for the resolution of failed thrifts following the savings and loan crisis in the 1980s. To compute the REFCORP assessment, the Bank’s AHP assessment is subtracted from reported income before assessments and the result is multiplied by 20 percent. During the three months ended March 31, 2010 and 2009, the Bank charged $3.9 million and $16.3 million, respectively, of REFCORP assessments to earnings.

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Critical Accounting Policies and Estimates

A discussion of the Bank’s critical accounting policies and the extent to which management uses judgment and estimates in applying those policies is provided in the Bank’s 2009 10-K. There were no substantial changes to the Bank’s critical accounting policies, or the extent to which management uses judgment and estimates in applying those policies, during the three months ended March 31, 2010.

Liquidity and Capital Resources

In order to meet members’ credit needs and the Bank’s financial obligations, the Bank maintains a portfolio of money market instruments consisting of overnight federal funds and, from time-to-time, short-term commercial paper, all of which are issued by highly rated entities. Beyond those amounts that are required to meet members’ credit needs and its own obligations, the Bank typically holds additional balances of short-term investments that fluctuate as the Bank invests the proceeds of debt issued to replace maturing and called liabilities, as the balance of deposits changes, as the returns provided by short-term investments vary relative to the costs of the Bank’s discount notes, and as the level of liquidity needed to satisfy Finance Agency requirements changes. Overnight federal funds typically comprise the large majority of the portfolio. At March 31, 2010, the Bank’s short-term liquidity portfolio was comprised of $3.5 billion of overnight federal funds sold to domestic counterparties and $800 million of non-interest bearing deposits maintained at the Federal Reserve Bank of Dallas.

The Bank’s primary source of funds is the proceeds it receives from the issuance of consolidated obligation bonds and discount notes in the capital markets. Historically, the FHLBanks have issued debt throughout the business day in the form of discount notes and bonds with a wide variety of maturities and structures. Generally, the Bank has access to this market as needed during the business day to acquire funds to meet its needs.

In addition to the liquidity provided from the proceeds of the issuance of consolidated obligations, the Bank also maintains access to wholesale funding sources such as federal funds purchased and securities sold under agreements to repurchase (e.g., borrowings secured by its MBS investments). Furthermore, the Bank has access to borrowings (typically short-term) from the other FHLBanks.

As discussed more fully in the Bank’s 2009 10-K, the 12 FHLBanks and the Office of Finance entered into the Federal Home Loan Banks P&I Funding and Contingency Plan Agreement (the “Contingency Agreement”) on June 23, 2006. The Contingency Agreement and related procedures were entered into in order to facilitate the timely funding of principal and interest payments on FHLBank System consolidated obligations in the event that a FHLBank is not able to meet its funding obligations in a timely manner. The Contingency Agreement and related procedures provide for the issuance of overnight consolidated obligations directly to one or more FHLBanks that provide funds to avoid a shortfall in the timely payment of principal and interest on any consolidated obligations for which another FHLBank is the primary obligor. Specifically, in the event that one or more FHLBanks does not fund its principal and interest payments under a consolidated obligation by deadlines agreed upon by the FHLBanks and the Office of Finance (for purposes of the Contingency Agreement, a “Delinquent Bank”), the non-Delinquent Banks will be obligated to fund any shortfall in funding to the extent that any of the non-Delinquent Banks has a net positive settlement balance (i.e., the amount by which end-of-day proceeds received by such non-Delinquent Bank from the sale of consolidated obligations on one day exceeds payments by such non-Delinquent Bank on consolidated obligations on the same day) in its account with the Office of Finance on the day the shortfall occurs. A FHLBank that funds the shortfall of a Delinquent Bank is referred to in the Contingency Agreement as a “Contingency Bank.” The non-Delinquent Banks would fund the shortfall of the Delinquent Bank sequentially in accordance with an agreed-upon funding matrix as provided in the Contingency Agreement. Additionally, a non-Delinquent Bank could choose to voluntarily fund any shortfall not funded on a mandatory basis by another non-Delinquent Bank. To fund the shortfall of a Delinquent Bank, the Office of Finance will issue to the Contingency Bank on behalf of the Delinquent Bank a consolidated obligation with a maturity of one business day in the amount of the shortfall funded by the Contingency Bank (a “Plan CO”). Through the date of this report, no Plan COs have been issued pursuant to the terms of the Contingency Agreement.

On occasion, and as an alternative to issuing new debt, the Bank may assume the outstanding consolidated obligations for which other FHLBanks are the original primary obligors. This occurs in cases where the original primary obligor may have participated in a large consolidated obligation issue to an extent that exceeded its

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immediate funding needs in order to facilitate better market execution for the issue. The original primary obligor might then warehouse the funds until they were needed, or make the funds available to other FHLBanks. Transfers may also occur when the original primary obligor’s funding needs change, and that FHLBank offers to transfer debt that is no longer needed to other FHLBanks. Transferred debt is typically fixed rate, fixed term, non-callable debt, and may be in the form of discount notes or bonds.

The Bank participates in such transfers of funding from other FHLBanks when the transfer represents favorable pricing relative to a new issue of consolidated obligations with similar features. The Bank did not assume any consolidated obligations from other FHLBanks during the three months ended March 31, 2010 or 2009.

The Bank manages its liquidity to ensure that, at a minimum, it has sufficient funds to meet operational and contingent liquidity requirements. When measuring its liquidity for these purposes, the Bank includes only contractual cash flows and the amount of funds it estimates would be available in the event the Bank were to use securities held in its long-term investment portfolio as collateral for repurchase agreements. While it believes purchased federal funds might be available as a source of funds, it does not include this potential source of funds in its calculations of available liquidity.

The Bank’s operational liquidity requirement stipulates that it have sufficient funds to meet its obligations due on any given day plus an amount equal to the statistically estimated (at the 99-percent confidence level) cash and credit needs of its members and associates for one business day without accessing the capital markets for the sale of consolidated obligations. As of March 31, 2010, the Bank’s estimated operational liquidity requirement was $2.7 billion. At that date, the Bank estimated that its operational liquidity exceeded this requirement by approximately $10.5 billion.

The Bank’s contingent liquidity requirement further requires that it maintain adequate balance sheet liquidity and access to other funding sources should it be unable to issue consolidated obligations for five business days. The combination of funds available from these sources must be sufficient for the Bank to meet its obligations as they come due and the cash and credit needs of its members, with the potential needs of members statistically estimated at the 99-percent confidence level. As of March 31, 2010, the Bank’s estimated contingent liquidity requirement was $4.4 billion. At that date, the Bank estimated that its contingent liquidity exceeded this requirement by approximately $8.9 billion.

In addition to the liquidity measures described above, the Bank is required, pursuant to guidance issued by the Finance Agency on March 6, 2009, to meet two daily liquidity standards, each of which assumes that the Bank is unable to access the market for consolidated obligations during a prescribed period. The first standard requires the Bank to maintain sufficient funds to meet its obligations for 15 days under a scenario in which it is assumed that members do not renew any maturing, prepaid or called advances. The second standard requires the Bank to maintain sufficient funds to meet its obligations for 5 days under a scenario in which it is assumed that members renew all maturing and called advances, with certain exceptions for very large, highly rated members. These requirements are more stringent than the 5-day contingent liquidity requirement discussed above. The Bank has been in compliance with both of these liquidity requirements since March 6, 2009.

The Bank’s access to the capital markets has never been interrupted to an extent that the Bank’s ability to meet its obligations was compromised and the Bank does not currently believe that its ability to issue consolidated obligations will be impeded to that extent in the future. If, however, the Bank were unable to issue consolidated obligations for an extended period of time, the Bank would eventually exhaust the availability of purchased federal funds (including borrowings from other FHLBanks) and repurchase agreements as sources of funds. It is also possible that an event (such as a natural disaster) that might impede the Bank’s ability to raise funds by issuing consolidated obligations would also limit the Bank’s ability to access the markets for federal funds purchased and/or repurchase agreements.

Under those circumstances, to the extent that the balance of principal and interest that came due on the Bank’s debt obligations and the funds needed to pay its operating expenses exceeded the cash inflows from its interest-earning assets and proceeds from maturing assets, and if access to the market for consolidated obligations was not again available, the Bank would seek to access funding under the Contingency Agreement to repay any principal and interest due on its consolidated obligations. However, if the Bank were unable to raise funds by issuing

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consolidated obligations, it is likely that the other FHLBanks would have similar difficulties issuing debt. If funds were not available under the Contingency Agreement, the Bank’s ability to conduct its operations would be compromised even earlier than if this funding source was available.

A summary of the Bank’s contractual cash obligations and off-balance-sheet lending-related financial commitments by due date or remaining maturity as of December 31, 2009 is provided in the Bank’s 2009 10-K. There have been no substantial changes in the Bank’s contractual obligations outside the normal course of business during the three months ended March 31, 2010.

Risk-Based Capital Rules and Other Capital Requirements

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, as further described above in the section entitled “Financial Condition — Capital Stock”) 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 March 31, 2010, the Bank’s total risk-based capital requirement was $517 million, comprised of credit risk, market risk and operations risk capital requirements of $145 million, $253 million and $119 million, respectively.

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 March 31, 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 three months ended March 31, 2010, the Bank was in compliance with all of its regulatory capital requirements. The following table summarizes the Bank’s compliance with the Finance Agency’s capital requirements as of March 31, 2010 and December 31, 2009.

REGULATORY CAPITAL REQUIREMENTS
(In millions of dollars, except percentages)

	March 31, 2010						December 31, 2009
	Required			Actual			Required			Actual
Risk-based capital	$	517		$	2,688		$	507		$	2,897
Total capital	$	2,348		$	2,688		$	2,604		$	2,897
Total capital-to-assets ratio		4.00	%		4.58	%		4.00	%		4.45	%
Leverage capital	$	2,935		$	4,032		$	3,255		$	4,346
Leverage capital-to-assets ratio		5.00	%		6.87	%		5.00	%		6.68	%

The Bank’s Risk Management Policy contains a minimum total regulatory capital-to-assets target ratio of 4.1 percent, higher than the 4.0 percent ratio required under the Finance Agency’s capital rules. At all times during the three months ended March 31, 2010, the Bank was in compliance with its operating target capital ratio.

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Recently Issued Accounting Guidance

For a discussion of recently issued accounting guidance, see “Item 1. Financial Statements” (specifically, Note 2 beginning on page 5 of this report).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following quantitative and qualitative disclosures about market risk should be read in conjunction with the quantitative and qualitative disclosures about market risk that are included in the Bank’s 2009 10-K. The information provided herein is intended to update the disclosures made in the Bank’s 2009 10-K.

As a financial intermediary, the Bank is subject to interest rate risk. Changes in the level of interest rates, the slope of the interest rate yield curve, and/or the relationships (or spreads) between interest yields for different instruments have an impact on the Bank’s estimated market value of equity and its net earnings. This risk arises from a variety of instruments that the Bank enters into on a regular basis in the normal course of its business.

The terms of member advances, investment securities and consolidated obligations may present interest rate risk and/or embedded option risk. As discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Bank makes extensive use of interest rate derivative instruments, primarily interest rate swaps and caps, to manage the risk arising from these sources.

The Bank has investments in residential mortgage-related assets, primarily CMOs and, to a much smaller extent, MPF mortgage loans, both of which present prepayment risk. This risk arises from the mortgagors’ option to prepay their mortgages, making the effective maturities of these mortgage-based assets relatively more sensitive to changes in interest rates and other factors that affect the mortgagors’ decisions to repay their mortgages as compared to other long-term investment securities that do not have prepayment features. Historically, a decline in interest rates has generally resulted in accelerated mortgage refinancing activity, thus increasing prepayments and thereby shortening the effective maturity of the mortgage-related assets. Conversely, rising rates generally slow prepayment activity and lengthen a mortgage-related asset’s effective maturity. Current economic and credit market conditions appear to have had an impact on mortgage prepayment activity, as borrowers whose mortgage rates are above current market rates and who might otherwise refinance or repay their mortgages more rapidly may not be able to obtain new mortgage loans at current lower rates due to reductions in their incomes, declines in the values of their homes, tighter lending standards, a general lack of credit availability, and/or delays in obtaining approval of new loans.

The Bank has managed the potential prepayment risk embedded in mortgage assets by purchasing almost exclusively floating rate securities, by purchasing highly structured tranches of mortgage securities that substantially limit the effects of prepayment risk, and/or by using interest rate derivative instruments to offset prepayment risk specific both to particular securities and to the overall mortgage portfolio. Because the Bank generally purchases mortgage-backed securities with the intent and expectation of holding them to maturity, the Bank’s risk management activities related to these securities are focused on those interest rate factors that pose a risk to the Bank’s future earnings. As recent liquidity discounts in the prices for some of these securities have indicated, these interest rate factors may not necessarily be the same factors that are driving the market prices of the securities.

The Bank’s Risk Management Policy provides a risk management framework for the financial management of the Bank consistent with the strategic principles outlined in its Strategic Business Plan. The Bank develops its funding and hedging strategies to manage its interest rate risk within the risk limits established in its Risk Management Policy.

The Risk Management Policy articulates the Bank’s tolerance for the amount of overall interest rate risk the Bank will assume by limiting the maximum estimated loss in market value of equity that the Bank would incur under simulated 200 basis point changes in interest rates to 15 percent of the estimated base case market value. As reflected in the table below, the Bank was in compliance with this limit at each month end during the quarter ended March 31, 2010.

As part of its ongoing risk management process, the Bank calculates an estimated market value of equity for a base case interest rate scenario and for interest rate scenarios that reflect parallel interest rate shocks. These calculations

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are made primarily for the purpose of analyzing and managing the Bank’s interest rate risk and, accordingly, have been designed for that purpose rather than for purposes of fair value disclosure under generally accepted accounting principles. The base case market value of equity is calculated by determining the estimated fair value of each instrument on the Bank’s balance sheet, and subtracting the estimated aggregate fair value of the Bank’s liabilities from the estimated aggregate fair value of the Bank’s assets. For purposes of these calculations, mandatorily redeemable capital stock is treated as equity rather than as a liability. The fair values of the Bank’s financial instruments (both assets and liabilities) are determined using vendor prices, dealer estimates or a pricing model. These calculations include values for MBS based on current estimated market prices, some of which have recently reflected discounts that the Bank believes are largely related to credit concerns and a lack of market liquidity rather than the level of interest rates. For those instruments for which a pricing model is used, the calculations are based upon parameters derived from market conditions existing at the time of measurement, and are generally determined by discounting estimated future cash flows at the replacement (or similar) rate for new instruments of the same type with the same or very similar characteristics. The market value of equity calculations include non-financial assets and liabilities, such as premises and equipment, other assets, payables for AHP and REFCORP, and other liabilities at their recorded carrying amounts.

For purposes of compliance with the Bank’s Risk Management Policy limit on estimated losses in market value, market value of equity losses are defined as the estimated net sensitivity of the value of the Bank’s equity (the net value of its portfolio of assets, liabilities and interest rate derivatives) to 200 basis point parallel shifts in interest rates. The following table provides the Bank’s estimated base case market value of equity and its estimated market value of equity under up and down 200 basis point interest rate shock scenarios (and, for comparative purposes, its estimated market value of equity under up and down 100 basis point interest rate shock scenarios) for each month-end during the period from December 2009 through March 2010. In addition, the table provides the percentage change in estimated market value of equity under each of these shock scenarios for the indicated periods.

MARKET VALUE OF EQUITY
(dollars in billions)

			Up 200 Basis Points (1)					Down 200 Basis Points (2)					Up 100 Basis Points(1)					Down 100 Basis Points (2)
	Base Case		Estimated		Percentage			Estimated		Percentage			Estimated		Percentage			Estimated		Percentage
	Market		Market		Change			Market		Change			Market		Change			Market		Change
	Value		Value		from			Value		from Base			Value		from			Value		from
	of Equity		of Equity		Base Case(3)			of Equity		Case(3)			of Equity		Base Case(3)			of Equity		Base Case(3)
December 2009		2.836		2.520		-11.14	%		2.947		3.91	%		2.700		-4.80	%		2.908		2.54	%
January 2010		2.727		2.466		-9.57	%		2.829		3.74	%		2.620		-3.92	%		2.795		2.49	%
February 2010		2.828		2.528		-10.61	%		2.967		4.92	%		2.697		-4.63	%		2.920		3.25	%
March 2010		2.743		2.433		-11.30	%		2.873		4.74	%		2.608		-4.92	%		2.827		3.06	%

(1)	In the up 100 and 200 scenarios, the estimated market value of equity is calculated under assumed instantaneous +100 and +200 basis point parallel shifts in interest rates.
(2)	Pursuant to guidance issued by the Finance Agency, the estimated market value of equity is calculated under assumed instantaneous -100 and -200 basis point parallel shifts in interest rates, subject to a floor of 0.35 percent.
(3)	Amounts used to calculate percentage changes are based on numbers in the thousands. Accordingly, recalculations based upon the disclosed amounts (billions) may not produce the same results.

A related measure of interest rate risk is duration of equity. Duration is the weighted average maturity (typically measured in months or years) of an instrument’s cash flows, weighted by the present value of those cash flows. As such, duration provides an estimate of an instrument’s sensitivity to small changes in market interest rates. The duration of assets is generally expressed as a positive figure, while the duration of liabilities is generally expressed as a negative number. The change in value of a specific instrument for given changes in interest rates will generally vary in inverse proportion to the instrument’s duration. As market interest rates decline, instruments with a positive duration are expected to increase in value, while instruments with a negative duration are expected to decrease in value. Conversely, as interest rates rise, instruments with a positive duration are expected to decline in value, while instruments with a negative duration are expected to increase in value.

The values of instruments having relatively longer (or higher) durations are more sensitive to a given interest rate movement than instruments having shorter durations; that is, risk increases as the absolute value of duration

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lengthens. For instance, the value of an instrument with a duration of three years will theoretically change by three percent for every one percentage point change in interest rates, while the value of an instrument with a duration of five years will theoretically change by five percent for every one percentage point change in interest rates.

The duration of individual instruments may be easily combined to determine the duration of a portfolio of assets or liabilities by calculating a weighted average duration of the instruments in the portfolio. Such combinations provide a single straightforward metric that describes the portfolio’s sensitivity to interest rate movements. These additive properties can be applied to the assets and liabilities on the Bank’s balance sheet. The difference between the combined durations of the Bank’s assets and the combined durations of its liabilities is sometimes referred to as duration gap and provides a measure of the relative interest rate sensitivities of the Bank’s assets and liabilities.

Duration gap is a useful measure of interest rate sensitivity but does not account for the effect of leverage, or the effect of the absolute duration of the Bank’s assets and liabilities, on the sensitivity of its estimated market value of equity to changes in interest rates. The inclusion of these factors results in a measure of the sensitivity of the value of the Bank’s equity to changes in market interest rates referred to as the duration of equity. Duration of equity is the market value weighted duration of assets minus the market value weighted duration of liabilities divided by the market value of equity.

The significance of an entity’s duration of equity is that it can be used to describe the sensitivity of the entity’s market value of equity to movements in interest rates. A duration of equity equal to zero would mean, within a narrow range of interest rate movements, that the Bank had neutralized the impact of changes in interest rates on the market value of its equity.

A positive duration of equity would mean, within a narrow range of interest rate movements, that for each one year of duration the estimated market value of the Bank’s equity would be expected to decline by about 0.01 percent for every positive 0.01 percent change in the level of interest rates. A positive duration generally indicates that the value of the Bank’s assets is more sensitive to changes in interest rates than the value of its liabilities (i.e., that the duration of its assets is greater than the duration of its liabilities).

Conversely, a negative duration of equity would mean, within a narrow range of interest rate movements, that for each one year of negative duration the estimated market value of the Bank’s equity would be expected to increase by about 0.01 percent for every positive 0.01 percent change in the level of interest rates. A negative duration generally indicates that the value of the Bank’s liabilities is more sensitive to changes in interest rates than the value of its assets (i.e., that the duration of its liabilities is greater than the duration of its assets).

The following table provides information regarding the Bank’s base case duration of equity as well as its duration of equity in up and down 100 and 200 basis point interest rate shock scenarios for each month-end during the period from December 2009 through March 2010.

DURATION ANALYSIS
(Expressed in Years)

	Base Case Interest Rates
	Asset		Liability			Duration		Duration		Duration of Equity
	Duration		Duration			Gap		of Equity		Up 100 (1)		Up 200(1)		Down 100(2)		Down 200(2)
December 2009		0.46		(0.31	)		0.15		3.65		6.04		7.90		2.49		1.73
January 2010		0.44		(0.33	)		0.11		2.93		5.34		7.00		1.86		0.98
February 2010		0.49		(0.33	)		0.16		3.75		5.86		7.20		2.58		1.19
March 2010		0.50		(0.33	)		0.17		4.09		6.22		7.86		3.02		1.81

(1)	In the up 100 and 200 scenarios, the duration of equity is calculated under assumed instantaneous +100 and +200 basis point parallel shifts in interest rates.
(2)	Pursuant to guidance issued by the Finance Agency, the duration of equity was calculated under assumed instantaneous -100 and -200 basis point parallel shifts in interest rates, subject to a floor of 0.35 percent.

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Duration of equity measures the impact of a parallel shift in interest rates on an entity’s market value of equity but may not be a good metric for measuring changes in value related to non-parallel rate shifts. An alternative measure for that purpose uses key rate durations, which measure portfolio sensitivity to changes in interest rates at particular points on a yield curve. Key rate duration is a specialized form of duration. It is calculated by estimating the change in value due to changing the market rate for one specific maturity point on the yield curve while holding all other variables constant. The sum of the key rate durations across an applicable yield curve is approximately equal to the overall portfolio duration.

The duration of equity measure represents the expected percentage change in the Bank’s market value of equity for a one percentage point (100 basis point) parallel change in interest rates. The key rate duration measure represents the expected percentage change in the Bank’s market value of equity for a one percentage point (100 basis point) parallel change in interest rates for a given maturity point on the yield curve, holding all other rates constant. The Bank has established a key rate duration limit of 7.5 years, measured as the difference between the maximum and minimum key rate durations calculated for seven defined individual maturity points on the yield curve. In addition, for the 10-year maturity point key rate duration, the Bank has established a separate limit of 15 years. The Bank calculates these metrics monthly and was in compliance with these policy limits at each month end during the first quarter of 2010.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Bank’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Bank’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, the Bank’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Bank’s disclosure controls and procedures were effective in: (1) recording, processing, summarizing and reporting information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act within the time periods specified in the SEC’s rules and forms and (2) ensuring that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bank’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There were no changes in the Bank’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

The following is intended to provide updated information with regard to a specific risk factor included in our 2009 10-K filed with the Securities and Exchange Commission on March 25, 2010. The balance of the risk factors contained in our 2009 10-K also remain applicable to our business.

Changes in the regulatory environment could negatively impact our operations and financial results and condition.

Disclosure Provided in Our 2009 10-K

On July 30, 2008, the President of the United States signed into law the Housing and Economic Recovery Act of 2008. This legislation established the Finance Agency, a new independent agency in the executive branch of the United States Government with responsibility for regulating us. In addition, the legislation made a number of other changes that will affect our activities. Immediately upon enactment of the legislation, all regulations, orders, directives and determinations issued by the Finance Board transferred to the Finance Agency and remain in force unless modified, terminated or set aside by the new regulatory agency. Additionally, the Finance Agency succeeded to all of the discretionary authority possessed by the Finance Board. The legislation calls for the Finance Agency to issue a number of regulations, orders and reports. The Finance Agency has issued regulations regarding certain provisions of the legislation, some of which are subject to public comments and may change. As a result, the full effect of this legislation on our activities will become known only after the Finance Agency’s required regulations, orders and reports are issued and finalized. For a more complete discussion of this legislation and its impact on us, see Item 1 — Business — Legislative and Regulatory Developments in our 2009 10-K.

We could be materially adversely affected by the adoption of new laws, policies or regulations or changes in existing laws, policies or regulations, including, but not limited to, changes in the interpretations or applications by the Finance Agency or as the result of judicial reviews that modify the present regulatory environment.

On August 4, 2009, the Finance Agency published a notice of proposed rulemaking regarding the composition, duties and responsibilities of the Board of Directors of the Office of Finance and its Audit Committee. As proposed and as currently exists, no FHLBank shareholders would be represented on the Board of Directors of the Office of Finance. Further, the proposed rule would give the Office of Finance Audit Committee the authority to establish common accounting policies for the information submitted by the FHLBanks to the Office of Finance for inclusion in the combined financial reports, which could potentially have an adverse impact on us.

In addition, the regulatory environment affecting our members could change in a manner that could have a negative impact on their ability to own our stock or take advantage of our products and services. Further, legislation affecting residential real estate and mortgage lending, including legislation regarding bankruptcy and mortgage modification programs, could negatively affect the recoverability of our non-agency residential mortgage-backed securities.

Changes to the regulatory framework for the financial services industry, including the role and structure of the housing GSEs, are currently and will likely continue to be under consideration. Since neither the timing nor outcome of the debate is known at this time, the impact on us, if any, cannot be determined.

On March 4, 2010, the Securities and Exchange Commission issued amendments to its rules promulgated under the Investment Company Act of 1940, which govern money market funds. The amendments, among other things, require money market funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reduce the weighted average maturity of their portfolio holdings, impose a new weighted average life maturity limit, and limit such funds to investing in the highest quality portfolio securities. These amendments will limit the amount of FHLBank consolidated obligations with remaining maturities greater than 60 days that a money market fund can hold and, therefore, could reduce money market funds’ demand for FHLBank consolidated obligations. The requirements imposed by the amendments become effective on various dates during the second quarter of 2010. Traditionally, money market funds have been significant investors in FHLBank consolidated obligations. At this

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time, we are unable to determine whether the amendments will have an adverse effect on our ability to issue consolidated obligations on favorable terms.

Update to Disclosure in Our 2009 10-K

In late March 2010, the Senate Committee on Banking, Housing and Urban Affairs approved draft legislation, the “Restoring American Financial Stability Act.” This legislation, a modified version of which is currently being debated by the Senate, contains several provisions that could impact us.

The proposed legislation contains a “concentration limit” that could prohibit us from making advances to any institution in an amount that exceeds 25 percent of our capital. As of March 31, 2010, over 50 percent of our advances exceeded this limit. A larger balance of advances helps to provide a critical mass of advances to support the fixed component of the Bank’s cost structure, which helps maintain returns on capital stock, dividend paying capacity and relatively low advances rates. If this legislation is enacted as proposed, the resulting decline in advances could cause us to lower dividend rates, raise advances rates, attempt to reduce operating expenses (which could, depending upon the magnitude of the reductions, cause a reduction in service levels), or undertake some combination of these actions. The magnitude of the impact would depend, in part, on our size and profitability at the time such reductions in advances occur.

The proposed legislation would also impose prohibitions on proprietary trading related activities of banks and bank holding companies, from which it excludes obligations of Fannie Mae and Freddie Mac, but not of the FHLBanks. Because the legislation does not clearly define the nature of the activities that would constitute “proprietary trading,” banks and bank holding companies may elect to hold only the types of obligations that are specifically exempted by the legislation and, accordingly, may become reluctant to purchase FHLBank debt. If this provision results in a decrease in demand for consolidated obligations, it could lead to an increase in the cost of our debt, which would negatively impact our results of operations.

Further, the proposed legislation contains provisions that would regulate the over-the-counter derivatives market. These provisions could impede our ability to use appropriate derivatives products as interest rate hedging tools. Increased margin, collateral and capital requirements on derivatives that are included in the proposed legislation could increase the necessary cost of hedging our balance sheet risk, and therefore could negatively impact our results of operations.

Any legislation approved by the Senate would have to be reconciled with legislation adopted by the House of Representatives in November 2009 before becoming law. The content of any legislation that might ultimately become law (and therefore its impact on us) cannot be determined at this time.

On May 3, 2010, the Finance Agency published a final rule regarding the composition, duties and responsibilities of the Board of Directors of the Office of Finance and its Audit Committee. The final rule provides that the Board of Directors of the Office of Finance will consist of the presidents of each of the 12 Federal Home Loan Banks, plus 5 independent directors. The 5 independent directors will comprise the Audit Committee. Under the final rule, and as currently exists, no FHLBank shareholders will be represented on the Board of Directors of the Office of Finance. Further, the final rule gives the Office of Finance Audit Committee the authority under certain circumstances to establish common accounting policies for the information submitted by the FHLBanks to the Office of Finance for inclusion in the combined financial reports. For a more complete discussion of this rule, see “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments.”

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ITEM 6. EXHIBITS

31.1	Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	Federal Home Loan Bank of Dallas
May 13, 2010	By	/s/ Michael Sims
Date		Michael Sims
		Chief Operating Officer, Executive Vice President - Finance and Chief Financial Officer (Principal Financial Officer)
May 13, 2010	By	/s/ Tom Lewis
Date		Tom Lewis
		Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit No.

31.1	Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.