UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

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 (State or other jurisdiction of incorporation or organization)		71-6013989 (I.R.S. Employer Identification Number)

8500 Freeport Parkway South, Suite 600 Irving, TX (Address of principal executive offices)		75063-2547 (Zip Code)

Registrant’s telephone number, including area code: (214) 441-8500

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

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

The registrant’s capital stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value ($100 per share), subject to certain regulatory and statutory requirements. At February 28, 2011, the registrant had 14,952,080 shares of its capital stock outstanding. As of June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate par value of the registrant’s capital stock outstanding was approximately $2.269 billion.

Documents Incorporated by Reference: None.

 

 

FEDERAL HOME LOAN BANK OF DALLAS
TABLE OF CONTENTS

		Page
PART I
Item 1. Business			1
Item 1A. Risk Factors			30
Item 1B. Unresolved Staff Comments			39
Item 2. Properties			39
Item 3. Legal Proceedings			39
Item 4. Reserved			39
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			40
Item 6. Selected Financial Data			43
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			44
Forward-Looking Information			44
Overview			44
Financial Market Conditions			47
2010 In Summary			48
Financial Condition			50
Results of Operations			74
Liquidity and Capital Resources			84
Risk-Based Capital Rules and Other Capital Requirements			88
Critical Accounting Policies and Estimates			90
Recently Issued Accounting Guidance			95
Statistical Financial Information			96
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			100
Item 8. Financial Statements and Supplementary Data			106
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			109
Item 9A. Controls and Procedures			109
PART III
Item 10. Directors, Executive Officers and Corporate Governance			110
Item 11. Executive Compensation			120
Compensation Discussion and Analysis			120
Compensation Committee Report			133
Summary Compensation Table			134
Grants of Plan-Based Awards			135
Pension Benefits			138
Nonqualified Deferred Compensation			140
Potential Payments upon Termination or Change in Control			144
Director Compensation			149
Compensation Committee Interlocks and Insider Participation			151
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			152
Item 13. Certain Relationships and Related Transactions, and Director Independence			154
Item 14. Principal Accounting Fees and Services			158
PART IV
Item 15. Exhibits, Financial Statement Schedules			159
Signatures			S-1
Index to Financial Statements			F-1
EX-10.9
EX-12.1
EX-31.1
EX-31.2
EX-32.1
EX-99.1
EX-99.2

PART I

ITEM 1. BUSINESS

Background

The Federal Home Loan Bank of Dallas (the “Bank”) is one of 12 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,” or the “System”) that were created by the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”). Each of the 12 FHLBanks is a member-owned cooperative that operates as a separate federally chartered corporation with its own management, employees and board of directors. Each FHLBank helps finance housing, community lending, and community development needs in the specified states in its respective district. Federally insured commercial banks, savings banks, savings and loan associations, and credit unions, as well as insurance companies, are all eligible for membership in the FHLBank of the district in which the institution’s principal place of business is located. Effective with the enactment of the Housing and Economic Recovery Act of 2008 (the “HER Act”) on July 30, 2008, 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. State and local housing authorities that meet certain statutory and regulatory criteria may also borrow from the FHLBanks.

The public purpose of the Bank is to promote housing, jobs and general prosperity through products and services that assist its members in providing affordable credit in their communities. The Bank’s primary business is to serve as a financial intermediary between the capital markets and its members. In its most basic form, this intermediation process involves raising funds by issuing debt in the capital markets and lending the proceeds to member institutions (in the form of loans known as advances) at rates that are slightly higher than the cost of the debt. The interest spread between the cost of the Bank’s liabilities and the yield on its assets, combined with the earnings on its invested capital, are the Bank’s primary sources of earnings. The Bank endeavors to manage its assets and liabilities in such a way that its net interest spread is consistent across a wide range of interest rate environments. The intermediation 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. These agreements, commonly referred to as derivatives or derivative instruments, are discussed below in the section entitled “Use of Interest Rate Exchange Agreements.”

The Bank’s principal source of funds is debt issued in the capital markets. All 12 FHLBanks issue debt in the form of consolidated obligations through the Office of Finance as their agent, and each FHLBank uses these funds to make loans to its members, invest in debt securities, or for other business purposes. All 12 FHLBanks are jointly and severally liable for the repayment of all consolidated obligations. Although consolidated obligations are not obligations of or guaranteed by the United States Government, FHLBanks are considered to be government-sponsored enterprises (“GSEs”) and thus have historically been able to borrow at the favorable rates generally available to GSEs. The FHLBanks’ consolidated debt 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. Individually, the Bank has received a deposit rating of Aaa/P-1 from Moody’s and a long-term counterparty credit rating of AAA/A-1+ from S&P. Shareholders, debtholders and prospective shareholders and debtholders should understand that these ratings are not a recommendation to buy, sell or hold securities and they may be revised or withdrawn at any time by the NRSRO. The ratings from each of the NRSROs should be evaluated independently.

All members of the Bank are required to purchase capital stock in the Bank as a condition of membership and in proportion to their asset size and borrowing activity with the Bank. The Bank’s capital stock is not publicly traded and all stock is owned by the Bank’s members, former members (including a federal or state agency or insurer acting as a receiver of a closed institution) that retain the stock as provided in the Bank’s capital plan, or by non-member institutions that have acquired a member and must retain the stock to support advances or other extensions of credit.

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 HER Act, 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.

The Bank’s debt and equity securities are exempt from registration under the Securities Act of 1933 and are “exempted securities” under the Securities Exchange Act of 1934 (the “Exchange Act”). On June 23, 2004, the Finance Board adopted a rule requiring each FHLBank to voluntarily register a class of its equity securities with the Securities and Exchange Commission (“SEC”) under Section 12(g) of the Exchange Act. The Bank’s registration with the SEC became effective on April 17, 2006. As a registrant, the Bank is subject to the periodic disclosure regime as administered and interpreted by the SEC. Materials that the Bank files with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains reports and other information filed with the SEC. Reports and other information that the Bank files with the SEC are also available free of charge through the Bank’s website at www.fhlb.com. To access these reports and other information through the Bank’s website, click on “About FHLB Dallas,” then “Financial Reports” and then “SEC Filings.”

Membership

The Bank’s members are financial institutions with their principal place of business in the Ninth Federal Home Loan Bank District, which includes Arkansas, Louisiana, Mississippi, New Mexico and Texas. The following table summarizes the Bank’s membership, by type of institution, as of December 31, 2010, 2009 and 2008.

MEMBERSHIP SUMMARY

		December 31,
		2010				2009				2008
Commercial banks			741				753				759
Thrifts			83				85				85
Credit unions			73				65				60
Insurance companies			21				20				19
Total members			918				923				923
Housing associates			8				8				8
Non-member borrowers			12				12				13
Total			938				943				944
Community Financial Institutions (“CFIs”) (1)			768				788				796

As of December 31, 2010, approximately 83 percent of the Bank’s members were CFIs, which are defined by the HER Act to include all institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) with average total assets over the three-year period preceding measurement of less than $1.0 billion, as adjusted annually for inflation. Prior to enactment of the HER Act on July 30, 2008, CFIs were defined by the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) to include all FDIC-insured institutions with average total assets over the three prior years of less than $500 million, as adjusted annually for inflation since 1999. For 2010, CFIs were FDIC-insured institutions with average total assets as of December 31, 2009, 2008 and 2007 of less than $1.029 billion. For 2009, CFIs were FDIC-insured institutions with average total assets as of December 31, 2008, 2007 and 2006 of less than $1.011 billion. For the period from January 1, 2008 through July 29, 2008, CFIs were FDIC-insured institutions with average total assets as of December 31, 2007, 2006 and 2005 of less than $625 million. For the period from July 30, 2008 through December 31, 2008, CFIs were FDIC-insured institutions with average total assets as of December 31, 2007, 2006 and 2005 of less than $1.0 billion. For 2011, CFIs are FDIC-insured institutions with average total assets as of December 31, 2010, 2009 and 2008 of less than $1.040 billion.

As of December 31, 2010, 2009 and 2008, approximately 58.3 percent, 63.5 percent and 67.9 percent, respectively, of the Bank’s members had outstanding advances from the Bank. These usage rates are calculated excluding housing associates and non-member borrowers. While eligible to borrow, housing associates are not members of the Bank and, as such, are not required to hold capital stock. Non-member borrowers consist of institutions that have acquired former members and assumed the advances held by those former members and former members who have withdrawn from membership but that continue to have advances or other extensions of credit outstanding. Non-member borrowers are required to hold capital stock to support outstanding advances until the time when those advances have been repaid. The Bank may elect to repurchase excess stock of non-members before the applicable stock redemption period has expired. During the period that their obligations remain outstanding, non-member borrowers may not request new extensions of credit, nor are they permitted to extend or renew the assumed advances.

The Bank’s membership includes the majority of institutions in its district that are eligible to become members. Eligible non-members are primarily smaller institutions that have thus far elected not to join the Bank. For this reason, the Bank does not currently anticipate that a substantial number of additional institutions will become members. Institutions can, and sometimes do, relocate their charters from one FHLBank district to another FHLBank district. In February 2008, Comerica Bank, which had recently relocated its charter to the Ninth District, became a member of the Bank. As of December 31, 2010 and 2009, Comerica Bank had outstanding advances of $2.5 billion and $6.0 billion, respectively, and was the Bank’s second largest borrower and shareholder at both of those dates.

As a cooperative, the Bank is managed with the primary objectives of enhancing the value of membership for member institutions and fulfilling its public purpose. The value of membership includes access to readily available credit and other services from the Bank, the value of the cost differential between Bank advances and other potential sources of funds, and the dividends paid on members’ investment in the Bank’s capital stock.

Business Segments

The Bank manages its operations as one business segment. Management and the Bank’s Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance. All of the Bank’s revenues are derived from U.S. operations.

Interest Income

The Bank’s interest income is derived primarily from advances and investment activities. Each of these revenue sources is more fully described below. During the years ended December 31, 2010, 2009 and 2008, interest income derived from each of these sources (expressed as a percentage of the Bank’s total interest income) was as follows:

		Year Ended December 31,
		2010				2009				2008
Advances (including prepayment fees)			67.9	%			79.4	%			79.2	%
Investments			29.3				18.6				19.8
Mortgage loans held for portfolio and other			2.8				2.0				1.0
Total			100.0	%			100.0	%			100.0	%
Total interest income (in thousands)		$	479,909			$	837,464			$	2,294,736

Substantially all of the Bank’s interest income from advances is derived from financial institutions domiciled in the Bank’s five-state district.

Products and Services

Advances. The Bank’s primary function is to provide its members with a reliable source of secured credit in the form of loans known as advances. The Bank offers advances to its members with a wide variety of terms designed to meet members’ business and risk management needs. Standard offerings include the following types of advances:

Fixed rate, fixed term advances. The Bank offers fixed rate, fixed term advances with maturities ranging from overnight to 20 years, and with maturities as long as 30 years for Community Investment advances. Interest is generally paid monthly and principal repaid at maturity for fixed rate, fixed term advances.

Fixed rate, amortizing advances. The Bank offers fixed rate advances with a variety of final maturities and fixed amortization schedules. Standard advances offerings include fully amortizing advances with final maturities of 5, 7, 10, 15 or 20 years, and advances with amortization schedules based on those maturities but with shorter final maturities accompanied by balloon payments of the remaining outstanding principal balance. Borrowers may also request alternative amortization schedules and maturities. Interest is generally paid monthly and principal is repaid in accordance with the specified amortization schedule. Although these advances have fixed amortization schedules, borrowers may elect to pay a higher interest rate and have an option to prepay the advance without a fee after a specified lockout period (typically five years). Otherwise, early repayments are subject to the Bank’s standard prepayment fees.

Floating rate advances. The Bank offers term floating rate advances with maturities between one and ten years. Floating rate advances are typically indexed to either one-month LIBOR or three-month LIBOR, and are priced at a constant spread to the relevant index. In addition to longer term floating rate advances, the Bank offers short term floating rate advances (maturities of 30 days or less) indexed to the daily federal funds rate. Floating rate advances may also include embedded features such as caps, floors, provisions for the conversion of the advances to a fixed rate, or non-LIBOR indices.

Putable advances. The Bank also makes advances that include a put feature that allows the Bank to terminate the advance at specified points in time. If the Bank exercises its option to terminate the putable advance, the Bank offers replacement funding to the member for a period selected by the member up to the remaining term to maturity of the putable advance, provided the Bank determines that the member is able to satisfy the normal credit and collateral requirements of the Bank for the replacement funding requested.

The Bank manages the interest rate and option risk of advances through the use of a variety of debt and derivative instruments. Members are required by statute and regulation to use the proceeds of advances with an original term to maturity of greater than five years to purchase or fund new or existing residential housing finance assets which, for CFIs, are defined by statute and regulation to include small business, small farm and small agribusiness loans, loans for community development activities (subject to the Finance Agency’s requirements as described below) and securities representing a whole interest in such loans. Community Investment Cash Advances (described below) are exempt from these requirements.

The Bank prices its credit products with the objective of providing benefits of membership that are greatest for those members that use the Bank’s products most actively, while maintaining sufficient profitability to pay dividends at a rate that makes members financially indifferent to holding the Bank’s capital stock and that will allow the Bank to increase its retained earnings over time. Generally, that set of objectives results in small mark-ups over the Bank’s cost of funds for its advances and dividends on capital stock at rates that have for the last several years been at or slightly above either the periodic average effective federal funds rate or the upper end of the Federal Reserve’s target for the federal funds rate. In keeping with its cooperative philosophy, the Bank provides equal pricing for advances to all members regardless of asset or transaction size, charter type, or geographic location.

The Bank is required by the FHLB Act to obtain collateral that is sufficient, in the judgment of the Bank, to fully secure advances and other extensions of credit. The Bank has not suffered any credit losses on advances in its 78-year history. In accordance with the Bank’s capital plan, members and former members must hold Class B capital stock in proportion to their outstanding advances. Pursuant to the FHLB Act, the Bank has a lien upon and holds the Bank’s Class B capital stock owned by each of its shareholders as additional collateral for all of the respective shareholder’s obligations to the Bank.

In order to comply with the requirement to fully secure advances and other extensions of credit, the Bank and each of its members/borrowers execute a written security agreement that establishes the Bank’s security interest in a variety of the members’/borrowers’ assets. The Bank, pursuant to the FHLB Act and Finance Agency regulations, originates, renews, or extends advances only if it has obtained and is maintaining a security interest in sufficient eligible collateral at the time such advance is made, renewed, or extended. Eligible collateral includes whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages; securities issued, insured, or guaranteed by the United States Government or any of its agencies, including mortgage-backed and other debt securities issued or guaranteed by the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or the Government National Mortgage Association; term deposits in the Bank; and other real estate-related collateral acceptable to the Bank, provided that such collateral has a readily ascertainable value and the Bank can perfect a security interest in such property.

In the case of CFIs, the Bank may also accept as eligible collateral secured small business, small farm, and small agribusiness loans, secured loans for community development activities, and securities representing a whole interest in such loans, provided the collateral has a readily ascertainable value and the Bank can perfect a security interest in such collateral. The HER Act added secured loans for community development activities as a new type of eligible collateral for CFIs. To the extent secured loans for community development activities represent a new class of collateral that the Bank has not previously accepted, the Bank is required to seek the Finance Agency’s approval prior to accepting that collateral. At December 31, 2010 and 2009, total CFI obligations secured by these types of collateral, including commercial real estate, totaled approximately $2.3 billion and $3.8 billion, respectively, which represented approximately 7.9 percent and 7.3 percent, respectively, of the total advances and letters of credit outstanding as of those dates.

Except as set forth in the next sentence, the FHLB Act affords any security interest granted to the Bank by any member/borrower of the Bank, or any affiliate of any such member/borrower, priority over the claims and rights of any party, including any receiver, conservator, trustee, or similar party having rights of a lien creditor. The Bank’s security interest is not entitled to priority over the claims and rights of a party that (i) would be entitled to priority under otherwise applicable law or (ii) is an actual bona fide purchaser for value or is a secured party who has a perfected security interest in such collateral in accordance with applicable law (e.g., a prior perfected security interest under the Uniform Commercial Code or other applicable law). For example, as discussed further below, the Bank usually perfects its security interest in collateral by filing a Uniform Commercial Code financing statement

against the borrower. If another secured party perfected its security interest in that same collateral by taking possession of the collateral, rather than or in addition to filing a Uniform Commercial Code financing statement against the borrower, then that secured party’s security interest that was perfected by possession may be entitled to priority over the Bank’s security interest that was perfected by filing a Uniform Commercial Code financing statement.

From time to time, the Bank agrees to subordinate its security interest in certain assets or categories of assets granted by a member/borrower of the Bank to the security interest of another creditor (typically, a Federal Reserve Bank or another FHLBank). If the Bank agrees to subordinate its security interest in certain assets or categories of assets granted by a member/borrower of the Bank to the security interest of another creditor, the Bank will not extend credit against those assets or categories of assets.

As stated above, each member/borrower of the Bank executes a security agreement pursuant to which such member/borrower grants a security interest in favor of the Bank in certain assets of such member/borrower. The assets in which a member grants a security interest fall into one of two general structures. In the first structure, the member grants a security interest in all of its assets that are included in the eligible collateral categories, as described above, which the Bank refers to as a “blanket lien.” If a member has an investment grade credit rating from an NRSRO, the member may request that its blanket lien be modified, such that the member grants in favor of the Bank a security interest limited to certain of the eligible collateral categories (i.e., whole first residential mortgages, securities, term deposits in the Bank and other real estate-related collateral). In the second structure, the member grants a security interest in specifically identified assets rather than in the broad categories of eligible collateral covered by the blanket lien and the Bank identifies such members as being on “specific collateral only status.”

The basis upon which the Bank will lend to a member that has granted the Bank a blanket lien depends on numerous factors, including, among others, that member’s financial condition and general creditworthiness. Generally, and subject to certain limitations, a member that has granted the Bank a blanket lien may borrow up to a specified percentage of the value of eligible collateral categories, as determined from such member’s financial reports filed with its federal regulator, without specifically identifying each item of collateral or delivering the collateral to the Bank. Under certain circumstances, including, among others, a deterioration of a member’s financial condition or general creditworthiness, the amount a member may borrow is determined on the basis of only that portion of the collateral subject to the blanket lien that such member delivers to the Bank. Under these circumstances, the Bank places the member on “custody status.” In addition, members on blanket lien status may choose to deliver some or all of the collateral to the Bank.

The members/borrowers that are granted specific collateral only status by the Bank are generally either insurance companies or members/borrowers with an investment grade credit rating from an NRSRO that have requested this type of structure. Insurance companies are permitted to borrow only against the eligible collateral that is delivered to the Bank, and insurance companies generally grant a security interest only in collateral they have delivered. Members/borrowers with an investment grade credit rating from an NRSRO may grant a security interest in, and would be permitted to borrow only against, delivered eligible securities and specifically identified, eligible first-lien mortgage loans. Such loans must be delivered to the Bank or a third-party custodian approved by the Bank, or the Bank and such member/borrower must otherwise take actions that ensure the priority of the Bank’s security interest in such loans. Investment grade rated members/borrowers that choose this option are subject to fewer provisions that allow the Bank to demand additional collateral or exercise other remedies based on the Bank’s discretion.

As of December 31, 2010, 682 of the Bank’s borrowers/potential borrowers with a total of $16.1 billion in outstanding advances were on blanket lien status, 19 borrowers/potential borrowers with $4.4 billion in outstanding advances were on specific collateral only status and 236 borrowers/potential borrowers with $4.6 billion in outstanding advances were on custody status.

The Bank perfects its security interests in borrowers’ collateral in a number of ways. The Bank usually perfects its security interest in collateral by filing a Uniform Commercial Code financing statement against the borrower. In the case of certain borrowers, the Bank perfects its security interest by taking possession or control of the collateral, which may be in addition to the filing of a financing statement. In these cases, the Bank also generally takes assignments of most of the mortgages and deeds of trust that are designated as collateral. Instead of requiring delivery of the collateral to the Bank, the Bank may allow certain borrowers to deliver specific collateral to a third-

party custodian approved by the Bank or otherwise take actions that ensure the priority of the Bank’s security interest in such collateral.

On at least a quarterly basis, the Bank obtains updated information relating to collateral pledged to the Bank by members on blanket lien status. This information is either obtained directly from the borrower or accessed by the Bank from appropriate regulatory filings. On a monthly basis or as otherwise requested by the Bank, members on custody status and members on specific collateral only status must update information relating to collateral pledged to the Bank. Bank personnel regularly verify the existence and eligibility of collateral securing advances to members on blanket lien status and members on specific collateral only status with respect to any collateral not delivered to the Bank. The frequency and the extent of these collateral verifications depend on the average amount by which a member’s outstanding obligations to the Bank during the year exceed the collateral value of its securities, loans and term deposits held by the Bank. Collateral verifications are not required for members that have had no, or only a de minimis amount of, outstanding obligations to the Bank secured by a blanket lien during the prior calendar year, are on custody status, or are on blanket lien status but at all times have delivered to the Bank eligible loans, securities and term deposits with a collateral value in excess of the member’s advances and other extensions of credit.

Finance Agency regulations require the Bank to establish a formula for and to charge a prepayment fee on an advance that is repaid prior to maturity in an amount sufficient to make the Bank financially indifferent to the borrower’s decision to repay the advance prior to its scheduled maturity date. Currently, these fees are generally calculated as the present value of the difference (if positive) between the interest rate on the prepaid advance and the then-current market yield for a U.S. agency security for the remaining term to maturity of the repaid advance.

As of December 31, 2010, the Bank’s outstanding advances (at par value) totaled $25.1 billion. As of that date, advances outstanding to the Bank’s five largest borrowers represented 37.8 percent of the Bank’s total outstanding advances. Advances to the Bank’s two largest borrowers represented 26.0 percent of the Bank’s total outstanding advances. Individually, advances to the Bank’s two largest borrowers represented 16.0 percent (Wells Fargo Bank South Central, National Association) and 10.0 percent (Comerica Bank) of the total advances outstanding as of December 31, 2010. For additional information regarding the composition and concentration of the Bank’s advances, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Advances.

Community Investment Cash Advances. The Bank also offers a Community Investment Cash Advances (“CICA”) program as authorized by Finance Agency regulations. Advances made under the CICA program benefit low- to moderate-income households by providing funds for housing or economic development projects. CICA advances are made at rates below the rates the Bank charges on standard advances. The Bank currently prices CICA advances at interest rates that are approximately 3 to 5 basis points above the Bank’s matched maturity cost of funds. CICA advances are provided separately from and do not count toward the Bank’s statutory obligations under the Affordable Housing Program, through which the Bank provides grants to support projects that benefit low-income households (see the “Affordable Housing Program” section below). As of December 31, 2010, advances outstanding under the CICA program totaled approximately $675 million, representing approximately 2.7 percent of the Bank’s total advances outstanding as of that date.

Letters of Credit. The Bank’s credit services also include letters of credit issued or confirmed on behalf of members to facilitate business transactions with third parties that support residential housing finance, community lending, or asset/liability management or to provide liquidity to members. Letters of credit are also issued on behalf of members to secure the deposits of public entities that are held by such members. Letters of credit that facilitate projects under the Bank’s CICA program are available to members at a lower cost than the Bank’s standard letters of credit. All letters of credit must be fully collateralized as though they were funded advances. At both December 31, 2010 and 2009, outstanding letters of credit totaled $4.6 billion, of which $1.0 billion had been issued or confirmed under the Bank’s CICA program. During the years ended December 31, 2010, 2009 and 2008, letter of credit fees earned by the Bank totaled approximately $5.8 million, $6.1 million and $6.0 million, respectively.

Affordable Housing Program (“AHP”). The Bank offers an AHP as required by the FHLB Act and in accordance with Finance Agency regulations. The Bank sets aside 10 percent of each year’s earnings (as adjusted for interest expense on mandatorily redeemable capital stock) for its AHP, which provides grants for projects that facilitate development of rental and owner-occupied housing for low-income households. The calculation of the amount to be set aside is further discussed below in the section entitled “REFCORP and AHP Assessments.” Prior to 2010, the Bank conducted two competitive application processes each year to allocate the AHP funds set aside from the prior year’s earnings; beginning in 2010, the Bank conducts one competitive application process each year. Applications submitted by Bank members and their community partners during these funding rounds are scored in accordance with Finance Agency regulations and the Bank’s AHP Implementation Plan. The highest scoring proposals are approved to receive funds, which are disbursed upon receipt of documentation that the projects are progressing as specified in the original applications or in approved modifications thereto.

Correspondent Banking and Collateral Services. The Bank provides its members with a variety of correspondent banking and collateral services. These services include overnight and term deposit accounts, wire transfer services, reserve pass-through and settlement services (which were discontinued on December 31, 2010), securities safekeeping, and securities pledging services. In the aggregate, correspondent banking and collateral services generated fee income for the Bank of $2.8 million, $3.1 million and $3.5 million during the years ended December 31, 2010, 2009 and 2008, respectively.

SecureConnect. The Bank provides secure on-line access to many of its products, services and reports through SecureConnect, a proprietary secure on-line product delivery system. A substantial portion of the Bank’s advances and wire transfers are initiated by members through SecureConnect. In addition, a large proportion of account statements and other reports are made available through SecureConnect. Further, members may manage securities held in safekeeping by the Bank and participate in auctions for Bank advances and deposits through SecureConnect.

AssetConnection^®. The Bank has an electronic communications system, known as AssetConnection^®, that was developed to facilitate the transfer of financial and other assets among member institutions. “AssetConnection” is a registered trademark of the Bank. Types of assets that may be transferred include mortgage and other secured loans or loan participations. The purpose of this system is to enhance the liquidity of mortgage loans and other assets by providing a mechanism to balance the needs of those member institutions with excess loan capacity and those with more asset demand than capacity.

AssetConnection is a listing service that allows member institutions to list assets available for sale or interests in assets to purchase. In this form, the Bank does not take a position in any of the assets listed, nor does the Bank offer any form of endorsement or guarantee related to the assets being listed. All transactions must be negotiated and consummated between principals. To date, a limited number of assets have been listed for sale through AssetConnection and several members have accessed the system in search of assets to purchase. If members ultimately find the services available through AssetConnection to be of value to their institutions, it could provide an additional source of fee income for the Bank.

Interest Rate Swaps, Caps and Floors. In July 2008, the Bank began offering interest rate swaps, caps and floors to its member institutions. 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. In order to be eligible, a member must have executed a master swap agreement with the Bank. 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 December 31, 2010 and 2009, the total notional amount of interest rate exchange agreements with members totaled $22.1 million and $12.1 million, respectively.

Standby Bond Purchase Agreements. In October 2009, the Bank received approval from the Finance Agency to begin offering standby bond purchase services to state housing finance agencies within its district. In these transactions, in order to enhance the liquidity of bonds issued by a state housing finance agency, the Bank, for a fee, agrees to stand ready to purchase, in certain circumstances specified in the standby agreement, a housing authority’s bonds that the remarketing agent for the bonds is unable to sell. The specific terms for any bonds purchased by the Bank would be specified in the standby bond purchase agreement entered into by the Bank and the state housing

finance agency. The Bank would reserve the right to sell any bonds it purchased at any time, subject to any conditions the Bank might agree to in the standby bond purchase agreement. To date, the Bank has not entered into any standby bond purchase agreements.

Investment Activities

The Bank maintains a portfolio of investments to enhance interest income and meet liquidity needs, including, as discussed in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources, certain regulatory liquidity requirements. To ensure the availability of funds to meet members’ credit needs, the Bank’s operating needs, and its other general and regulatory liquidity requirements, the Bank maintains a portfolio of short-term, unsecured investments issued by highly rated institutions, including overnight federal funds and, on occasion, short-term commercial paper and/or U.S. Treasury Bills. At December 31, 2010, the Bank’s short-term investments were comprised of $3.8 billion of overnight federal funds sold to domestic bank counterparties and $1.6 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas.

To enhance interest income, the Bank maintains a long-term investment portfolio, which currently includes mortgage-backed securities (“MBS”) issued by United States government agencies or government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac), non-agency (i.e., private label) residential MBS, and non-MBS investments guaranteed by the United States government. The interest rate and prepayment risk inherent in the MBS is managed though a variety of debt and interest rate derivative instruments. As of December 31, 2010 and 2009, the composition of the Bank’s long-term investment portfolio was as follows (dollars in millions):

		December 31,
		2010								2009
		Amortized								Amortized
		Cost				Percentage				Cost				Percentage
Government-sponsored enterprise MBS		$	8,097				94.6	%		$	10,838				94.3	%
Non-agency residential MBS			391				4.6				511				4.5
Non-agency commercial MBS			—				—				56				0.5
Other			72				0.8				86				0.7
Total		$	8,560				100.0	%		$	11,491				100.0	%

The Bank’s non-agency residential MBS (“RMBS”) are collateralized by whole mortgage loans that generally do not conform to government-sponsored agency pooling requirements. The Bank’s non-agency RMBS investments are all self-insured by a senior/subordinate structure in which the subordinate classes of securities provide credit support for the most senior class of securities, an interest in which is owned by the Bank. Losses in the underlying loan pool would generally have to exceed the credit support provided by the subordinate classes of securities before the most senior class of securities would experience any credit losses. If the Bank’s cash flow analyses indicate that it is likely to incur a credit loss on a security, the Bank records an other-than-temporary impairment loss in the period in which the expected credit loss is identified. For discussion of the accounting for other-than-temporary impairments of debt securities, see Note 1 to the Bank’s audited financial statements included in this report.

In addition to purchasing securities that were structured to provide the type of credit enhancement discussed above, the Bank further attempted to reduce the credit risk of its non-agency RMBS by purchasing securities with other risk-reducing attributes. For instance, the Bank purchased RMBS backed by loan pools that featured a high percentage of relatively small loans, a high percentage of owner-occupied properties, and relatively low loan-to-value ratios. None of the Bank’s investments in RMBS are insured by third party bond insurers. The risk of future credit losses is also mitigated to some extent by the seasoning of the loans underlying the Bank’s non-agency RMBS. Except for a single security issued in 2006, all of the Bank’s RMBS were issued in 2005 or before. Despite the deterioration in the residential real estate markets, these risk mitigation strategies have to date helped limit the

amount of credit losses associated with the Bank’s non-agency RMBS holdings. For further discussion and analysis of the Bank’s non-agency RMBS, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Long-Term Investments.

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 as of the prior month end. On March 24, 2008, the Board of Directors of the Finance Board authorized each FHLBank to temporarily invest up to an additional 300 percent of its total capital in agency mortgage securities. The authorization required, among other things, that a FHLBank notify the Finance Board (now Finance Agency) prior to its first acquisition under the expanded authority and include in its notification a description of the risk management practices underlying its purchases. The expanded authority was limited to MBS issued by, or backed by pools of mortgages guaranteed by, Fannie Mae or Freddie Mac, including collateralized mortgage obligations (“CMOs”) or real estate mortgage investment conduits backed by such MBS. The mortgage loans underlying any securities that were purchased under this expanded authority must have been originated after January 1, 2008, and underwritten to conform to standards imposed by the federal banking agencies in the Interagency Guidance on Nontraditional Mortgage Product Risks dated October 4, 2006, and the Statement on Subprime Mortgage Lending dated July 10, 2007.

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.

In addition, Finance Agency policy and regulations limit non-MBS obligations of any single government-sponsored agency to 100 percent of the Bank’s total capital as of the prior month end at the time new investments are made.

In accordance with Finance Agency policy and regulations, total capital for purposes of determining the Bank’s MBS and non-MBS investment limitations excludes accumulated other comprehensive income (loss) and includes all amounts paid in for the Bank’s capital stock regardless of accounting classification (see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations). The Bank is not required to sell or otherwise reduce any investments that exceed these regulatory limits due to reductions in capital or changes in value after the investments are made, but it is precluded from making additional investments that exceed these limits.

The Bank has historically attempted to maintain its investments in MBS close to the regulatory dollar limit. While the Finance Agency has established limits with respect to the types and structural characteristics of the FHLBanks’ MBS investments, the Bank has generally adhered to a more conservative set of guidelines. The Bank uses interest rate derivatives to manage the risks associated with the options embedded in the MBS that it acquires.

Finance Agency regulations include a variety of restrictions and limitations on the FHLBanks’ investment activities, including limits on the types, amounts, and maturities of unsecured investments in private issuers. Finance Agency rules and regulations also prohibit the Bank from investing in certain types of securities, including:

	•		instruments, such as common stock, that represent an ownership interest in an entity, other than stock in small business investment companies, or certain investments targeted to low-income persons or communities;
	•		instruments issued by non-United States entities, other than those issued by United States branches and agency offices of foreign commercial banks;

	•		non-investment grade debt instruments, other than certain investments targeted to low-income persons or communities and instruments that were downgraded after purchase by the Bank;
	•		whole mortgages or other whole loans, other than 1) those acquired by the Bank through a duly authorized Acquired Member Assets program such as the Mortgage Partnership Finance® Program; 2) certain investments targeted to low-income persons or communities; 3) certain marketable direct obligations of state, local, or tribal government units or agencies, having at least the second highest credit rating from an NRSRO; 4) MBS or asset-backed securities backed by manufactured housing loans or home equity loans; and 5) certain foreign housing loans authorized under Section 12(b) of the FHLB Act;
	•		non-U.S. dollar denominated securities;
	•		interest-only or principal-only stripped MBS;
	•		residual-interest or interest-accrual classes of CMOs and real estate mortgage investment conduits; and
	•		fixed rate MBS or floating rate MBS that, on trade date, are at rates equal to their contractual cap and that have average lives that vary by more than 6 years under an assumed instantaneous interest rate change of 300 basis points.

On July 23, 2010, the Bank’s Board of Directors approved an amendment to the Bank’s Risk Management Policy that removed the Bank’s authority to purchase non-agency MBS. With the exception of one security acquired in October 2006, the Bank has not acquired any non-agency MBS since 2005.

Acquired Member Assets (“AMA”)

Through July 31, 2008, the Bank offered its members the ability to participate in the Mortgage Partnership Finance^® (MPF^®) Program developed and managed by the Federal Home Loan Bank of Chicago (the “FHLBank of Chicago”). “Mortgage Partnership Finance” and “MPF” are registered trademarks of the FHLBank of Chicago. Under the MPF Program, one or more FHLBanks acquired fixed rate, conforming mortgage loans originated by their member institutions that participated in the MPF Program (“Participating Financial Institutions” or “PFIs”). As further described below, PFIs are paid a fee by the purchasing FHLBank for assuming a portion of the credit risk of the mortgages delivered to the FHLBank, while the FHLBank assumes the interest rate risk of holding the mortgages in its portfolio as well as a portion of the credit risk. PFIs delivered loans pursuant to the terms of master commitment agreements (“MCs”) entered into by the FHLBank and the PFI and acknowledged and approved by the FHLBank of Chicago. Under the terms of the MCs, a PFI could either deliver loans that the PFI had already closed in its own name and transferred to the FHLBank or, as agent for the FHLBank, close loans directly in the name of the FHLBank (collectively, “Program Loans”). Program Loans are owned directly by the FHLBank and are not held through a trust or any other conduit entity. Title to Program Loans is in the name of the purchasing FHLBank, subject to the participation interests in such loans that the FHLBank may have sold to the FHLBank of Chicago.

From 1998 to mid-2003, the Bank generally retained an interest in the Program Loans it acquired from its PFIs under the MPF Program pursuant to the terms of an investment and services agreement between the FHLBank of Chicago and the Bank. Under this agreement, the Bank retained title to the Program Loans, subject to any participation interest in such loans that was sold to the FHLBank of Chicago. The FHLBank of Chicago’s participation interest in Program Loans reduced the Bank’s beneficial interest in such loans. The Bank’s purchase of Program Loans from PFIs and its sale of participation interests to the FHLBank of Chicago occurred simultaneously and at the same price. The interest in the Program Loans retained by the Bank during this period ranged from a low of 1 percent to a maximum of 49 percent. During the period from 1998 to 2000, the Bank also acquired from the FHLBank of Chicago a percentage interest (ranging up to 75 percent) in certain MPF loans originated by PFIs of other FHLBanks.

On December 5, 2002, the Bank and the FHLBank of Chicago entered into a new investment and services agreement with respect to Program Loans delivered under MCs entered into on or after December 5, 2002. The new agreement provided that the FHLBank of Chicago would assume all rights and obligations of the Bank under each

MC with the Bank’s PFIs and would acquire directly from such PFIs the Program Loans. The Bank had no obligation to its PFIs to purchase Program Loans or perform any other obligation under an MC that had been assumed by the FHLBank of Chicago. Under such MCs, the FHLBank of Chicago purchased Program Loans directly from the Bank’s PFIs. Under the new agreement, the FHLBank of Chicago was obligated to pay to the Bank a participation fee equal to a percentage of the dollar volume of Program Loans delivered by the Bank’s PFIs. Pursuant to an amendment to the original agreement entered into on June 23, 2003, the Bank and the FHLBank of Chicago agreed to extend the terms of the new agreement to Program Loans delivered pursuant to MCs entered into prior to December 5, 2002.

On April 23, 2008, the FHLBank of Chicago announced that it would no longer enter into new MCs or renew existing MCs to purchase mortgage loans from FHLBank members under the MPF Program. In its announcement, the FHLBank of Chicago indicated that it would acquire loans through July 31, 2008 and, as a result, it would only enter into new delivery commitments under existing MCs that funded no later than that date. In addition, the FHLBank of Chicago indicated that it would continue to provide programmatic and operational support for loans already purchased through the program. As a result of this action and the Bank’s decision not to acquire any of the mortgage loans that would have been delivered to the FHLBank of Chicago under the terms of its previous arrangement, the Bank expects the balance of its mortgage loan portfolio to continue to decline as a result of principal amortization and loan payoffs. In addition, after July 31, 2008, the Bank no longer receives participation fees from the FHLBank of Chicago.

For those loans in which the Bank has a retained interest, the Bank and the PFIs share in the credit risk of the retained portion of such loans with the Bank assuming the first loss obligation limited by the First Loss Account (“FLA”), and the PFIs assuming credit losses in excess of the FLA, up to the amount of the credit enhancement obligation as specified in the master agreement (“Second Loss Credit Enhancement”). The Bank assumes all losses in excess of the Second Loss Credit Enhancement.

The PFI’s credit enhancement obligation (“CE Amount”) arises under its PFI Agreement while the amount and nature of the obligation are determined with respect to each master commitment. Under the Finance Agency’s Acquired Member Asset regulation (12 C.F.R. part 955) (“AMA Regulation”), the PFI must “bear the economic consequences” of certain credit losses with respect to a master commitment based upon the MPF product and other criteria. Under the MPF program, the PFI’s credit enhancement protection (“CEP Amount”) may take the form of the CE Amount, which represents the direct liability to pay credit losses incurred with respect to that master commitment, or may require the PFI to obtain and pay for a supplemental mortgage insurance (“SMI”) policy insuring the Bank for a portion of the credit losses arising from the master commitment, and/or the PFI may contract for a contingent performance-based credit enhancement fee whereby such fees are reduced by losses up to a certain amount arising under the master commitment. Under the AMA Regulation, any portion of the CE Amount that is a PFI’s direct liability must be collateralized by the PFI in the same way that advances are collateralized. The PFI Agreement provides that the PFI’s obligations under the PFI Agreement are secured along with other obligations of the PFI under its regular advances agreement with the Bank and, further, that the Bank may request additional collateral to secure the PFI’s obligations. PFIs are paid a credit enhancement fee (“CE fee”) as an incentive to minimize credit losses, to share in the risk of loss on MPF loans and to pay for SMI, rather than paying a guaranty fee to other secondary market purchasers. CE fees are paid monthly and are determined based on the remaining unpaid principal balance of the MPF loans. The required CE Amount may vary depending on the MPF product alternatives selected. The Bank also pays performance-based CE fees that are based on the actual performance of the pool of MPF loans under each individual master commitment. To the extent that losses in the current month exceed accrued performance-based CE fees, the remaining losses may be recovered from future performance-based CE fees payable to the PFI. During the years ended December 31, 2010, 2009 and 2008, the Bank paid CE fees totaling $127,000, $120,000 and $174,000, respectively. During these same periods, performance-based credit enhancement fees that were forgone and not paid to the Bank’s PFIs totaled $30,000, $80,000 and $85,000, respectively.

In some cases, a portion of the credit support for MPF loans is provided under a primary and/or supplemental mortgage insurance policy. Given the small amount of its mortgage loans held for portfolio that are insured by mortgage insurance companies and the historical performance of those loans, the Bank believes its credit exposure to these insurance companies, both individually and in the aggregate, was not significant as of December 31, 2010.

PFIs must comply with the requirements of the PFI agreement, MPF guides, applicable law and the terms of mortgage documents. If a PFI fails to comply with any of these requirements, it may be required to repurchase the MPF loans that are impacted by such failure. The reasons that a PFI could be required to repurchase an MPF loan include, but are not limited to, the failure of the loan to meet underwriting standards, the PFI’s failure to deliver a qualifying promissory note and certain other relevant documents to an approved custodian, a servicing breach, fraud or other misrepresentations by the PFI. In addition, a PFI may, under the terms of the MPF servicing guide, elect to repurchase any government-guaranteed loan for an amount equal to the loan’s then current scheduled principal balance and accrued interest thereon, provided no payment has been made by the borrower for three consecutive months. This policy allows PFIs to comply with loss mitigation requirements of the applicable government agency in order to preserve the insurance guaranty coverage. During the years ended December 31, 2010, 2009 and 2008, the principal amount of mortgage loans held by the Bank that were repurchased by the Bank’s PFIs totaled $4.1 million, $1.8 million and $1.6 million, respectively.

As of December 31, 2010, MPF loans held for portfolio (net of allowance for credit losses) were $207 million, representing approximately 0.5 percent of the Bank’s total assets. As of both December 31, 2009 and 2008, MPF loans held for portfolio (net of allowance for credit losses) represented approximately 0.4 percent of the Bank’s total assets. As of December 31, 2010, loans 90 or more days past due that are not government guaranteed/insured approximated 0.6 percent of the Bank’s mortgage portfolio, including loans in foreclosure. Loans in foreclosure represented 0.3 percent of the Bank’s mortgage portfolio.

Funding Sources

General. The principal funding source for the Bank is consolidated obligations issued in the capital markets through the Office of Finance. Member deposits and the proceeds from the issuance of capital stock are also funding sources for the Bank. Consolidated obligations consist of consolidated obligation bonds and consolidated obligation discount notes. Generally, discount notes are consolidated obligations with maturities of one year or less, and consolidated obligation bonds have maturities in excess of one year.

The Bank determines its participation in the issuance of consolidated obligations based upon, among other things, its own funding and operating requirements and the amounts, maturities, rates of interest and other terms available in the marketplace. The issuance terms for consolidated obligations are established by the Office of Finance, subject to policies established by its board of directors and the regulations of the Finance Agency. In addition, the Government Corporation Control Act provides that, before a government corporation issues and offers obligations to the public, the U.S. Secretary of the Treasury shall prescribe the form, denomination, maturity, interest rate, and conditions of the obligations, the way and time issued, and the selling price.

Consolidated obligation bonds generally satisfy long-term funding needs. Typically, the maturities of these securities range from 1 to 20 years, but their maturities are not subject to any statutory or regulatory limit. Consolidated obligation bonds can be fixed or variable rate and may be callable or non-callable.

Consolidated obligation bonds are issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. The Bank receives 100 percent of the proceeds of bonds issued through direct negotiation with underwriters of System debt when it is the sole primary obligor on consolidated obligation bonds. When the Bank and one or more other FHLBanks jointly agree to the issuance of bonds directly negotiated with underwriters, the Bank receives the portion of the proceeds of the bonds agreed upon with the other FHLBanks; in those cases, the Bank is the primary obligor for a pro rata portion of the bonds based on the proceeds it receives. In these cases, the Bank records on its balance sheet only that portion of the bonds for which it is the primary obligor. The majority of the Bank’s consolidated obligation bond issuance has been conducted through direct negotiation with underwriters of System debt, and a majority of that issuance has been without participation by the other FHLBanks.

The Bank may also request that specific amounts of specific bonds be offered by the Office of Finance for sale through competitive auction conducted with underwriters in a bond selling group. One or more other FHLBanks may also request that amounts of these same bonds be offered for sale for their benefit through the same auction. The Bank may receive from zero to 100 percent of the proceeds of the bonds issued through competitive auction depending on the amounts and costs for the bonds bid by underwriters, the maximum costs the Bank or other

FHLBanks, if any, participating in the same issue are willing to pay for the bonds, and Office of Finance guidelines for allocation of bond proceeds among multiple participating FHLBanks.

Consolidated obligation discount notes are a significant funding source for money market instruments and for advances with short-term maturities or repricing frequencies of less than one year. Discount notes are sold at a discount and mature at par, and are offered daily through a consolidated obligation discount notes selling group and through other authorized underwriters.

On a daily basis, the Bank may request that specific amounts of consolidated obligation discount notes with specific maturity dates be offered by the Office of Finance at a specific cost for sale to underwriters in the discount note selling group. One or more other FHLBanks may also request that amounts of discount notes with the same maturities be offered for sale for their benefit on the same day. The Office of Finance commits to issue discount notes on behalf of the participating FHLBanks when underwriters in the selling group submit orders for the specific discount notes offered for sale. The Bank may receive from zero to 100 percent of the proceeds of the discount notes issued through this sales process depending on the maximum costs the Bank or other FHLBanks, if any, participating in the same discount notes are willing to pay for the discount notes, the amounts of orders for the discount notes submitted by underwriters, and Office of Finance guidelines for allocation of discount notes proceeds among multiple participating FHLBanks. Under the Office of Finance guidelines, FHLBanks generally receive funding on a first-come-first-serve basis subject to threshold limits within each category of discount notes. For overnight discount notes, sales are allocated to the FHLBanks in lots of $250 million. For all other discount note maturities, sales are allocated in lots of $50 million. Within each category of discount notes, the allocation process is repeated until all orders are filled or canceled.

Twice weekly, the Bank may also request that specific amounts of consolidated obligation discount notes with fixed maturity dates ranging from 4 to 26 weeks be offered by the Office of Finance through competitive auctions conducted with underwriters in the discount note selling group. One or more other FHLBanks may also request that amounts of those same discount notes be offered for sale for their benefit through the same auction. The discount notes offered for sale through competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. The FHLBanks receive funding based on their requests at a weighted average rate of the winning bids from the dealers. If the bids submitted are less than the total of the FHLBanks’ requests, the Bank receives funding based on the ratio of the Bank’s regulatory capital (defined on page 88 of this report) relative to the regulatory capital of the other FHLBanks offering discount notes. The majority of the Bank’s discount note issuance in maturities of four weeks or longer is conducted through the auction process. Regardless of the method of issuance, as with consolidated obligation bonds, the Bank is the primary obligor for the portion of discount notes issued for which it has received the proceeds.

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 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. In connection with these transactions, the Bank becomes the primary obligor for the transferred debt.

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 years ended December 31, 2010 or 2009. During the year ended December 31, 2008, the Bank assumed consolidated obligations from other FHLBanks with an aggregate par amount of $136 million.

In addition, the Bank occasionally transfers debt that it no longer needs to other FHLBanks. The Bank did not transfer any consolidated obligations to other FHLBanks during the years ended December 31, 2010 or 2009. During the year ended December 31, 2008, the Bank transferred consolidated obligations with an aggregate par amount of $465 million to other FHLBanks.

Joint and Several Liability. Although the Bank is primarily liable only for its portion of consolidated obligations (i.e., those consolidated obligations issued on its behalf and those that have been assumed from other FHLBanks), it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. 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 payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank with primary liability. The FHLBank with primary liability would have a corresponding liability to reimburse the FHLBank providing assistance to the extent of such payment and other associated costs (including interest to be determined by the Finance Agency). However, if the Finance Agency determines that the primarily liable FHLBank 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. Consequently, the Bank has no means to determine how the Finance Agency might allocate among the other FHLBanks the obligations of a FHLBank that is unable to pay consolidated obligations for which such FHLBank is primarily liable. In the event the Bank is holding a consolidated obligation as an investment for which the Finance Agency would allocate liability among the FHLBanks, the Bank might be exposed to a credit loss to the extent of its share of the assigned liability for that particular consolidated obligation (the Bank did not hold any consolidated obligations of other FHLBanks as investments at December 31, 2010). If principal or interest on any consolidated obligation issued by the FHLBank System is not paid in full when due, the Bank may not pay dividends to, or repurchase shares of stock from, any shareholder of the Bank.

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 FHLBanks and the Office of Finance entered into the Federal Home Loan Banks P&I Funding and Contingency Plan Agreement on June 23, 2006. For additional information regarding this agreement, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.

According to the Office of Finance, the 12 FHLBanks had (at par value) approximately $796 billion, $931 billion and $1.252 trillion in consolidated obligations outstanding at December 31, 2010, 2009 and 2008, respectively. The Bank was the primary obligor on $36.2 billion, $59.9 billion and $72.9 billion (at par value), respectively, of these consolidated obligations.

Certification and Reporting Obligations. Under Finance Agency regulations, before the end of each calendar quarter and before paying any dividends for that quarter, the President and Chief Executive Officer of the Bank must certify to the Finance Agency that, based upon known current facts and financial information, the Bank will remain in compliance with its depository and contingent liquidity requirements and will remain capable of making full and timely payment of all current obligations (which includes the Bank’s obligation to pay principal and interest on consolidated obligations) coming due during the next quarter. The Bank is required to provide notice to the Finance Agency if it (i) is unable to provide the required certification, (ii) projects at any time that it will fail to comply with its liquidity requirements or will be unable to meet all of its current obligations due during the quarter, (iii) actually fails to comply with its liquidity requirements or to meet all of its current obligations due during the quarter, or (iv) negotiates to enter into or enters into an agreement with one or more other FHLBanks to obtain financial assistance to meet its current obligations due during the quarter. The Bank has been in compliance with the applicable reporting requirements at all times since they became effective in 1999.

A FHLBank must file a consolidated obligation payment plan for the Finance Agency’s approval if (i) the FHLBank becomes a non-complying FHLBank as a result of failing to provide the required certification, (ii) the FHLBank becomes a non-complying FHLBank as a result of being required to provide the notice described above to the Finance Agency, except in the case of a failure to make a payment on a consolidated obligation caused solely by an external event such as a power failure, or (iii) the Finance Agency determines that the FHLBank will cease to be in

compliance with its liquidity requirements or will lack the capacity to meet all of its current obligations due during the quarter.

A non-complying FHLBank is permitted to continue to incur and pay normal operating expenses in the regular course of business, but may not incur or pay any extraordinary expenses, or declare or pay dividends, or redeem any capital stock, until such time as the Finance Agency has approved the FHLBank’s consolidated obligation payment plan or inter-FHLBank assistance agreement, or ordered another remedy, and all of the non-complying FHLBank’s direct obligations have been paid.

Negative Pledge Requirements. Each FHLBank must maintain specified assets free from any lien or pledge in an amount at least equal to its participation in outstanding consolidated obligations. Eligible assets for this purpose include (i) cash; (ii) obligations of, or fully guaranteed by, the United States Government; (iii) secured advances; (iv) mortgages having any guaranty, insurance, or commitment from the United States Government or any related agency; (v) investments described in Section 16(a) of the FHLB Act, which, among other items, include securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located; and (vi) other securities that are assigned a rating or assessment by an NRSRO that is equivalent to or higher than the rating on the FHLBanks’ consolidated obligations. At December 31, 2010, 2009 and 2008, the Bank had eligible assets free from pledge of $39.6 billion, $64.7 billion and $78.8 billion, respectively, compared to its participation in outstanding consolidated obligations of $36.2 billion, $59.9 billion and $72.9 billion, respectively. In addition, the Bank was in compliance with its negative pledge requirements at all times during the years ended December 31, 2010, 2009 and 2008.

Office of Finance. The Office of Finance (“OF”) is a joint office of the 12 FHLBanks that executes the issuance of consolidated obligations, as agent, on behalf of the FHLBanks. Established by the Finance Board, the OF also services all outstanding consolidated obligation debt, serves as a source of information for the FHLBanks on capital market developments, manages the FHLBank System’s relationship with rating agencies as it pertains to the consolidated obligations, and prepares and distributes the annual and quarterly combined financial reports for the FHLBanks.

Prior to July 20, 2010, the OF was overseen by a board of directors that consisted of three part-time members appointed by the Finance Agency. Under the previous Finance Agency regulations, two of these members were presidents of FHLBanks and the third was a private citizen of the United States with a demonstrated expertise in financial markets. The private citizen member of the board also served as its Chairman. Under the previous regulations, the Bank’s President and Chief Executive Officer had served as a director of the OF since April 1, 2003.

On May 3, 2010, the Finance Agency promulgated a new regulation that restructured the composition of the OF’s board of directors. In accordance with the new regulation, the OF’s board of directors is now comprised of 17 directors: the 12 FHLBank presidents, who serve ex officio, and 5 independent directors, who each serve five-year terms that are staggered so that not more than one independent directorship is scheduled to become vacant in any one year. Independent directors are limited to two consecutive full terms. Independent directors must be United States citizens. As a group, the independent directors must have substantial experience in financial and accounting matters and they must not have any material relationship with any FHLBank or the OF. The OF board of directors was reconstituted at an initial organizational meeting held on July 20, 2010 at which time the Bank’s President and Chief Executive Officer was chosen to serve as the initial vice chair.

One of the responsibilities of the board of directors of the OF is to establish policies regarding consolidated obligations to ensure that, among other things, such obligations are issued efficiently and at the lowest all-in funding costs for the FHLBanks over time consistent with prudent risk management practices and other market and regulatory factors.

The Finance Agency has regulatory oversight and enforcement authority over the OF and its directors and officers generally to the same extent as it has such authority over a FHLBank and its respective directors and officers. The FHLBanks are responsible for jointly funding the expenses of the OF. Prior to January 1, 2011, these expenses were shared on a pro rata basis with one-third based on each FHLBank’s total outstanding capital stock (as of the prior month-end, excluding those amounts classified as mandatorily redeemable), one-third based on each FHLBank’s total debt issuance (during the current month), and one-third based on each FHLBank’s total consolidated

obligations outstanding (as of the current month-end). Beginning January 1, 2011, the expenses of the OF are shared on a pro rata basis with two-thirds based on each FHLBank’s total consolidated obligations outstanding (as of each month end) and one-third divided equally among the 12 FHLBanks.

Through December 31, 2000, consolidated obligations were issued by the Finance Board through the Office of Finance under the authority of Section 11(c) of the FHLB Act, which provides that debt so issued is the joint and several obligation of the FHLBanks. Since January 2, 2001, the FHLBanks have issued consolidated obligations in the name of the FHLBanks through the Office of Finance under Section 11(a) of the FHLB Act. While the FHLB Act does not impose joint and several liability on the FHLBanks for debt issued under Section 11(a), the Finance Board determined that the same rules governing joint and several liability should apply whether consolidated obligations are issued under Section 11(c) or under Section 11(a). No FHLBank is currently permitted to issue individual debt under Section 11(a) of the FHLB Act without Finance Agency approval.

Use of Interest Rate Exchange Agreements

Finance Agency regulations authorize and establish general guidelines for the FHLBanks’ use of derivative instruments, and the Bank’s Risk Management Policy establishes specific guidelines for their use. The Bank can use interest rate swaps, swaptions, cap and floor agreements, calls, puts, and futures and forward contracts as part of its interest rate risk management and funding strategies. Regulations prohibit derivative instruments that do not qualify as hedging instruments pursuant to generally accepted accounting principles unless a non-speculative use is documented.

In general, the Bank uses interest rate exchange agreements in two ways: either by designating them as a fair value hedge of an underlying financial instrument or by designating them as a hedge of some defined risk in the course of its balance sheet management. 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, including advances and investments, and/or to adjust the interest rate sensitivity of advances and 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 and to reduce funding costs.

The Bank frequently enters into interest rate exchange agreements concurrently with the issuance of consolidated obligations. This strategy of issuing bonds while simultaneously entering into interest rate exchange agreements enables the Bank to offer a wider range of attractively priced advances to its members. The attractiveness of such debt depends on yield relationships between the bond and interest rate exchange markets. As conditions in these markets change, the Bank may alter the types or terms of the bonds that it issues.

In addition, as discussed in the section above entitled “Products and Services,” in 2008 the Bank began offering interest rate swaps, caps and floors to its member institutions. 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.

For further discussion of interest rate exchange agreements, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Derivatives and Hedging Activities.

Competition

Demand for the Bank’s advances is affected by, among other things, the cost of other available sources of funds for its members, including deposits. The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including investment banking concerns, commercial banks and, in certain circumstances, other FHLBanks. Historically, sources of wholesale funds for its members have included unsecured long-term debt, unsecured short-term debt such as federal funds, repurchase agreements and deposits issued into the brokered certificate of deposits market. The availability of funds through these wholesale funding sources can vary from time to time as a result of a variety of factors including, among others, market conditions, members’ creditworthiness and availability of collateral. The availability of these alternative private funding sources could significantly influence

the demand for the Bank’s advances. More recently, the Bank’s members also had access to an expanded range of liquidity facilities initiated by the Federal Reserve Board, the United States Department of the Treasury (the “Treasury”) and the FDIC as part of their efforts to support the financial markets during the credit crisis. These liquidity facilities included the Term Auction Facility (“TAF”) and the Temporary Liquidity Guarantee Program (“TLGP”), which included both the Debt Guarantee Program and the Transaction Account Guarantee Program. In addition, the FDIC increased its deposit insurance limit from $100,000 to $250,000. The availability of these programs to members and the increase in the FDIC deposit insurance limit contributed to a decline in members’ demand for advances from the Bank, particularly in the early part of 2009. The TLGP and the TAF expired in 2010. The Bank competes against other financing sources on the basis of cost, the relative ease by which the members can access the various sources of funds, collateral requirements, and the flexibility desired by the member when structuring the liability.

As a debt issuer, the Bank competes with Fannie Mae, Freddie Mac and other GSEs, as well as corporate, sovereign and supranational entities for funds raised in the national and global debt markets. Increases in the supply of competing debt products could, in the absence of increases in demand, result in higher debt costs for the FHLBanks. Although investor demand for FHLBank debt has historically been sufficient to meet the Bank’s funding needs, there can be no assurance that this will always be the case.

Capital

The Bank’s capital consists of capital stock owned by its members (and, in some cases, non-member borrowers or former members as described below), plus retained earnings and accumulated other comprehensive income (loss). From its enactment in 1932, the FHLB Act provided for a subscription-based capital structure for the FHLBanks that required every member of a FHLBank to own that FHLBank’s capital stock in an amount in proportion to the member’s mortgage assets and its borrowing activity with the FHLBank pursuant to a statutory formula. In 1999, the GLB Act replaced the former subscription capital structure with requirements for total capital, leverage capital and risk-based capital for the FHLBanks, authorized the issuance of two new classes of capital stock redeemable with six months’ notice (Class A stock) or five years’ notice (Class B stock), and required each FHLBank to develop a new capital plan to replace the previous statutory capital structure. The Bank implemented its capital plan and converted to its new capital structure on September 2, 2003.

In general, the Bank’s capital plan requires each member to own Class B stock (redeemable with five years’ written notice subject to certain restrictions) in an amount equal to the sum of a membership stock requirement and an activity-based stock requirement. Specifically, the Bank’s capital plan requires members to hold capital stock in proportion to their total asset size and borrowing activity with the Bank.

The Bank’s capital stock is not publicly traded and it may be issued, repurchased, redeemed and, with the prior approval of the Bank, transferred only at its par value. In addition, the Bank’s capital stock may only be issued to and held by members of the Bank or by former members of the Bank or institutions that acquire members of the Bank and that retain stock in accordance with the Bank’s capital plan. For more information about the Bank’s capital stock, see Item 11 - Description of Registrant’s Securities to be Registered in the Bank’s Amended Registration Statement on Form 10 filed with the SEC on April 14, 2006 (the “Amended Form 10”). For more information about the Bank’s minimum capital requirements, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk-Based Capital Rules and Other Capital Requirements.

Retained Earnings. In August 2003, the Finance Board issued a directive that encouraged all 12 FHLBanks to establish retained earnings targets and to specify the priority for increasing retained earnings relative to paying dividends. On February 27, 2004, the Bank’s Board of Directors adopted a retained earnings policy. Currently, the policy calls for the Bank to maintain retained earnings in an amount sufficient to protect against potential identified accounting or economic losses due to specified interest rate, credit and operations risks. The Bank’s Board of Directors reviews the Bank’s retained earnings targets at least annually under an analytic framework that takes into account sources of potential realized and unrealized losses, including potential loss distributions for each, and revises the targets as appropriate. The Bank’s current retained earnings policy target is described in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Retained Earnings and Dividends.

Effective February 28, 2011, the Bank entered into a Joint Capital Enhancement Agreement (the “JCE Agreement”) with the other 11 FHLBanks. The JCE Agreement provides that upon satisfaction of the FHLBanks’ obligations to the Resolution Funding Corporation (“REFCORP”), as further described below in the section entitled “REFCORP and AHP Assessments,” each FHLBank (including the Bank) will, on a quarterly basis, allocate at least 20 percent of its net income to a separate restricted retained earnings account (“RRE Account”). Currently, the FHLBanks’ REFCORP obligations are expected to be fully satisfied during the 2011 calendar year. Under the JCE Agreement, each FHLBank will be required to build its RRE Account to an amount equal to one percent of its total outstanding consolidated obligations, which for this purpose is based on the most recent quarter’s average carrying value of all consolidated obligations for which that FHLBank is the primary obligor, excluding any fair value option and hedging adjustments (“Total Consolidated Obligations”).

The JCE Agreement further requires each FHLBank to submit an application to the Finance Agency for approval to amend its capital plan or capital plan submission, as applicable, consistent with the terms of the JCE Agreement. Under the JCE Agreement, if the FHLBanks’ REFCORP obligation terminates before the Finance Agency has approved all proposed capital plan amendments, each FHLBank will nevertheless be required to commence the required allocation to its RRE Account beginning as of the end of the calendar quarter in which the final REFCORP payments are made by the FHLBanks.

The JCE Agreement provides that any quarterly net losses of a FHLBank may be netted against its net income, if any, for other quarters during the same calendar year to determine the minimum required year-to-date or annual allocation to its RRE Account. In the event a FHLBank incurs a net loss for a cumulative year-to-date or annual period that results in a decrease to the balance of its RRE Account as of the beginning of that calendar year, such FHLBank’s quarterly allocation requirement will thereafter increase to 50 percent of quarterly net income until the cumulative difference between the allocations made at the 50 percent rate and the allocations that would have been made at the regular 20 percent rate is equal to the amount of the decrease to the balance of its RRE Account at the beginning of that calendar year. Any year-to-date or annual losses must first be allocated to retained earnings that are not restricted in the FHLBank’s RRE Account until such retained earnings are reduced to a zero balance. Thereafter, any remaining losses may be applied to reduce the balance of the FHLBank’s RRE Account, but not below a zero balance.

The JCE Agreement also provides that if a FHLBank’s RRE Account exceeds 1.5 percent of its Total Consolidated Obligations, such FHLBank may transfer amounts from its RRE Account to its unrestricted retained earnings account, but only to the extent that the balance of its RRE Account remains at least equal to 1.5 percent of the FHLBank’s Total Consolidated Obligations immediately following such transfer.

Finally, the JCE Agreement provides that during periods in which a FHLBank’s RRE Account is less than one percent of its Total Consolidated Obligations, such FHLBank may pay dividends only from retained earnings that are not restricted in its RRE Account or from the portion of quarterly net income that exceeds the amount required to be allocated to its RRE Account.

The JCE Agreement can be voluntarily terminated by an affirmative vote of two-thirds of the boards of directors of the FHLBanks; or automatically, if a change in the FHLB Act, Finance Agency regulations, or other applicable law has the effect of: (i) creating any new or higher assessment or taxation on the net income or capital of any FHLBank, or requiring the FHLBanks to retain a higher level of restricted retained earnings than the amount that is required under the JCE Agreement; or (ii) establishing general restrictions applicable to the payment of dividends by FHLBanks that satisfy all relevant capital standards by either (a) requiring a new or higher mandatory allocation of a FHLBank’s net income to any retained earnings account other than the amount specified in the JCE Agreement, or (b) prohibiting dividend payments from any portion of a FHLBank’s retained earnings that are not held in its RRE Account.

In the event the JCE Agreement is voluntarily terminated, each FHLBank’s obligation to allocate earnings to its RRE Account would cease (with Finance Agency consent for those FHLBanks for which a capital plan amendment has been approved), but the restrictions on the use of amounts then in that account would continue unless and until an automatic termination event occurs or the FHLBanks unanimously agree to remove such restriction (and the Finance Agency approves of such removal, for those FHLBanks for which a capital plan amendment has been

approved). If the JCE Agreement is automatically terminated, each FHLBank’s obligation to make allocations to its RRE Account and the restrictions on the use of amounts in its RRE Account would terminate.

Dividends. Subject to the FHLB Act, Finance Agency regulations and other Finance Agency directives, the Bank pays dividends to holders of its capital stock quarterly or as otherwise determined by its Board of Directors. Dividends may be paid in the form of cash or capital stock as authorized by the Bank’s Board of Directors, and are paid at the same rate on all shares of the Bank’s capital stock regardless of their classification for accounting purposes. The Bank is permitted by statute and regulation to pay dividends only from previously retained earnings or current net earnings.

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 (except for net interest payments) associated with derivatives and hedging activities and assets and liabilities carried at fair value; and (5) realized gains and losses associated with early terminations of derivative transactions. Because the Bank’s returns from core earnings generally track short-term interest rates, 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. The Bank generally pays dividends in the form of capital stock. When dividends are paid, capital stock is issued in full shares and any fractional shares are paid in cash. For a more detailed discussion of the Bank’s dividend policy and the restrictions relating to its payment of dividends, see Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities and Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Legislative and Regulatory Developments

Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, the President of the United States signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd Frank-Act makes significant changes to a number of aspects of the regulation of financial institutions. Among other things, the Dodd-Frank Act: (1) establishes an interagency oversight council (the Financial Stability Oversight Council, hereinafter referred to as the “Oversight Council”) that is charged with identifying and regulating systemically important financial institutions; (2) regulates the over-the-counter derivatives market; (3) imposes new executive compensation proxy and disclosure requirements; (4) establishes new requirements for MBS, including a risk-retention requirement; (5) reforms the credit rating agencies; (6) makes a number of changes to the federal deposit insurance system, including making permanent the increase in the deposit insurance limit from $100,000 to $250,000; and (7) creates a consumer financial protection bureau. Although the FHLBanks were exempted from several provisions of the Dodd-Frank Act, the Bank’s business operations, funding costs, rights, obligations, and/or the environment in which it carries out its housing finance mission are likely to be affected by the Dodd-Frank Act. Certain regulatory actions resulting from the Dodd-Frank Act that may have a significant impact on the Bank are summarized below. Because the Dodd-Frank Act requires the issuance of numerous regulations, orders and reports, the full effect of this legislation on the Bank and its activities will become known only after the required regulations, orders and reports are issued.

New Requirements for Derivative Transactions

The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including those used by the Bank to hedge its interest rate risk. As a result of these requirements, certain derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or swap execution facilities. Cleared trades are expected to be subject to initial and variation margin requirements established by the clearinghouse and its clearing members. While clearing derivatives may or may not reduce the counterparty credit risk associated with bilateral transactions, the margin requirements for cleared trades have the potential to make derivative transactions more costly for the Bank.

The Dodd-Frank Act will also change the regulatory landscape for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While the Bank expects to be able to continue to enter into uncleared trades on a bilateral basis, those trades are expected to be subject to new regulatory requirements, including mandatory reporting requirements and minimum margin and capital requirements imposed by regulators.

Any changes to the margin or capital requirements associated with uncleared swaps could adversely affect the pricing of certain uncleared derivative transactions entered into by the Bank, thereby increasing the costs of managing the Bank’s interest rate risk.

The Dodd-Frank Act will require swap dealers and certain other large users of derivatives to register as “swap dealers” or “major swap participants” with the Commodity Futures Trading Commission (the “CFTC”) and/or the SEC. Based on the definitions in the proposed rules jointly issued by the CFTC and SEC, it currently appears unlikely that the Bank will be required to register as a major swap participant, although this remains a possibility. It also appears unlikely that the Bank will be required to register as a swap dealer with respect to the derivative transactions it enters into for the purpose of hedging and managing its interest rate risk. However, based on recently proposed rules, it is possible that the Bank could be required to register with the CFTC as a swap dealer as a result of the derivative transactions it enters into with its members.

It is also unclear how the final rule will treat the derivatives embedded in the Bank’s advances to its members (e.g., interest rate caps), as the scope of the term “swap” has not yet been addressed in proposed rules. Accordingly, it is not known at this time whether certain transactions between the Bank and its members will be treated as “swaps.” Depending on the final definitions of the terms “swap” and “swap dealer,” the Bank may be faced with the business decision of whether to continue to offer interest rate swaps, caps and floors to its members if those transactions would require the Bank to register as a swap dealer.

Designation as a swap dealer would subject the Bank to significant additional regulation and costs, including without limitation, registration with the CFTC, new internal and external business conduct standards, additional reporting requirements and additional capital and margin requirements. If the Bank is designated as a swap dealer, the proposed rule may permit the Bank to apply to the CFTC to limit such designation to those specified activities as to which the Bank is acting as a swap dealer (i.e., the derivative transactions it enters into with its members). Thus, the Bank’s hedging-related derivatives activities, which represent most of its derivatives activities, may not be subject to the full requirements that may generally be imposed on traditional swap dealers.

Currently, the Bank expects some but not all of the final rules implementing the Dodd-Frank Act to become effective in the second half of 2011, although delays beyond that time are possible.

Regulation of Certain Nonbank Financial Companies

Oversight Council Recommendations on Implementing the Volcker Rule. In January 2011, the Oversight Council issued recommendations for implementing certain prohibitions on proprietary trading, commonly referred to as the Volcker Rule. Institutions subject to the Volcker Rule may be subject to various limits with regard to their proprietary trading activities and various regulatory requirements to ensure compliance with the Volcker Rule. While the Bank does not engage in proprietary trading, it may nonetheless be subject to the Volcker Rule and, if so, may be subject to additional limitations on the composition of its investment portfolio beyond existing Finance Agency regulations. Any such limitations could potentially result in less profitable investment alternatives. The FHLBank System’s consolidated obligations are generally exempt from the operation of this rule, subject to certain limitations.

Oversight Council Notice of Proposed Rulemaking on Authority to Supervise and Regulate Certain Nonbank Financial Companies. On January 26, 2011, the Oversight Council issued a proposed rule that would implement its authority to subject nonbank financial companies to the supervision of the Federal Reserve Board and certain prudential standards. The proposed rule defines “nonbank financial company” broadly enough that it would likely include the FHLBanks. Also, under the proposed rule, the Oversight Council will consider certain factors in determining whether to subject a nonbank financial company to supervision and prudential standards. Some factors identified include: the availability of substitutes for the financial services and products the entity provides as well as the entity’s size; interconnectedness with other financial firms; leverage; liquidity risk; maturity mismatch; and existing regulatory oversight. If the Bank is determined to be a nonbank financial company subject to the Oversight Council’s regulatory requirements, then its business and operations are likely to be impacted in some way, although the Bank is unable to predict at this time what the nature or scope of such impact might be. Comments on this proposed rule were due by February 25, 2011.

Federal Reserve Board Proposed Rule on Regulatory Oversight of Nonbank Financial Companies. On February 11, 2011, the Federal Reserve Board issued a proposed rule that would define certain key terms to determine which nonbank financial companies will be subject to the Federal Reserve’s regulatory oversight. The proposed rule provides that a company is “predominantly engaged in financial activities” if:

	•		the annual gross financial revenue of the company represents 85 percent or more of the company’s gross revenue in either of its two most recent completed fiscal years; or
	•		the company’s total financial assets represent 85 percent or more of the company’s total assets as of the end of either of its two most recently completed fiscal years.

The FHLBanks would be predominantly engaged in financial activities under either of the above criteria. The proposed rule also defines “significant nonbank financial company” to mean a nonbank financial company that had $50 billion or more in total assets as of the end of its most recently completed fiscal year. If the Bank is determined to be a nonbank financial company subject to the Federal Reserve’s regulatory oversight, then its operations and business could be adversely affected by such oversight. Comments on this proposed rule are due by March 30, 2011.

FDIC Actions

Final Rule on Unlimited Deposit Insurance for Non-Interest-Bearing Transaction Accounts. On November 15, 2010, the FDIC issued a final rule providing for unlimited deposit insurance for non-interest-bearing transaction accounts during the period from December 31, 2010 through December 31, 2012. Deposits are a source of funds for the Bank’s members and an increase in members’ deposits, which may occur as a result of this rule, could diminish member demand for the Bank’s advances.

Interim Final Rule on Dodd-Frank Orderly Liquidation Resolution Authority. On January 25, 2011, the FDIC issued an interim final rule on how the FDIC would treat certain creditor claims under the new orderly liquidation authority established by the Dodd-Frank Act. The Dodd-Frank Act provides for the appointment of the FDIC as receiver for a financial company, other than FDIC-insured depository institutions, in instances where the failure of the company and its liquidation under other insolvency procedures (such as bankruptcy) would pose a significant risk to the financial stability of the United States. Among other things, the interim final rule provides:

	•		a valuation standard for collateral on secured claims;
	•		that all unsecured creditors must expect to absorb losses in any liquidation and that secured creditors will only be protected to the extent of the fair value of their collateral;
	•		a clarification of the treatment for contingent claims; and
	•		that secured obligations collateralized with U.S. government obligations will be valued at fair market value.

Comments on this interim final rule are due by March 28, 2011.

Final Rule on Assessment System. On February 7, 2011, the FDIC approved a final rule that revises the assessment system applicable to FDIC-insured financial institutions. The rule, among other things, implements a provision in the Dodd-Frank Act to redefine the assessment base used for calculating deposit insurance assessments. Specifically, the rule changes the assessment base for most institutions from adjusted domestic deposits to average consolidated total assets minus average tangible equity. Once this rule takes effect on April 1, 2011, each member’s assessment base will include the Bank’s advances. The rule also eliminates an adjustment to the base assessment rate paid for secured liabilities, including the Bank’s advances, in excess of 25 percent of an institution’s domestic deposits because these liabilities are now part of the assessment base. This rule may negatively affect demand for the Bank’s advances to the extent the assessments increase the cost of advances for some of its members.

GSE Housing Reform

On February 11, 2011, the U.S Department of the Treasury and the U.S. Department of Housing and Urban Development issued jointly a report to Congress on Reforming America’s Housing Finance Market. The primary focus of the report is to provide options for the long-term structure of housing finance. In the report, the Obama Administration noted it would work, in consultation with the Finance Agency and Congress, to restrict the areas of mortgage finance in which Fannie Mae, Freddie Mac and the FHLBanks operate, so that overall government support of the mortgage market is substantially reduced over time.

Although the FHLBanks are not the primary focus of this report, they were recognized as playing a vital role in the housing finance system by helping smaller financial institutions effectively access liquidity to compete in an increasingly competitive marketplace. The report sets forth the following possible reforms for the FHLBanks:

	•		focus the FHLBanks’ membership on small- and medium-sized financial institutions;
	•		restrict membership by allowing each institution that is eligible for membership to be an active member in only one FHLBank;
	•		limit the level of outstanding advances to individual FHLBank members; and
	•		reduce FHLBank investment portfolios and alter their composition to better serve the FHLBanks’ mission of providing liquidity and access to capital for insured depository institutions.

If housing GSE legislation is enacted that incorporates these reforms, the FHLBanks could be significantly limited in their ability to make advances to their members and subject to additional limitations on their investment authority.

The report also supports exploring additional means to provide funding to residential mortgage lenders, including potentially the development of a covered bond market which, if developed, could compete with FHLBank advances.

Further, the report sets forth various reforms for Fannie Mae and Freddie Mac, each of which would ultimately lead to the wind down of both institutions. The Obama Administration noted that it would work with the Finance Agency to determine the best way to responsibly reduce Fannie Mae’s and Freddie Mac’s role in the mortgage market and ultimately wind down both institutions, creating the conditions for private capital to play the predominant role in housing finance. The Bank has traditionally allocated a substantial portion of its investment portfolio to investments in Fannie Mae and Freddie Mac debt securities, most of which have been MBS. Accordingly, the Bank’s investment strategies would likely be affected by the wind down of these entities. If Fannie Mae and Freddie Mac are ultimately wound down, the Bank’s members may determine to increase their mortgage loans held for portfolio which could potentially increase demand for the Bank’s advances.

The potential effect of GSE reform on the agency debt market is unknown at this time. In any event, the effect on the Bank of housing GSE reform will depend on the content of legislation, if any, that is ultimately enacted.

Finance Agency Actions

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 (“AB 2010-01”) in order to clarify the guidance in Advisory Bulletin 2008-AB-02 (“AB 2008-02”) that limits the FHLBanks’ authority to purchase or to accept as collateral for advances certain nontraditional and subprime residential mortgage loans and mortgage-backed securities representing an interest in such loans unless such loans comply with the Interagency Guidance. “Interagency Guidance” means collectively the Interagency Guidance on Nontraditional Mortgage Product Risks, dated October 4, 2006, and Statement on Subprime Mortgage Lending, dated July 10, 2007, issued by the federal banking regulatory agencies. In AB 2010-01, the Finance Agency clarified a number of specific points with respect to the applicability of AB 2008-02.

AB 2008-02 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. AB 2010-01 states that private-label mortgage-backed securities that were “either issued or acquired by a member after July 10, 2007 may be considered eligible collateral in calculating the amount of advances that can be made to a member only if the underlying mortgages comply with all aspects of the [I]nteragency [G]uidance” (emphasis added). AB 2010-01 would appear to make the eligibility of securities issued on or before July 10, 2007 to serve as collateral for advances dependent upon the date the securities were acquired by the member. The Bank does not in all cases know the dates on which members acquired securities pledged to the Bank and, therefore, is unable to estimate the effect that the clarification in AB 2010-01 regarding eligible mortgage-backed securities might have on members’ future borrowing capacity.

In AB 2010-01, the Finance Agency also addressed private-label mortgage-backed securities that are acquired by a member through a merger with another financial institution. AB 2010-01 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 AB 2010-01, 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 AB 2008-02 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

As discussed previously, the OF is a joint office of the FHLBanks and, among other things, serves as their fiscal and servicing agent in connection with the issuance of consolidated obligations and prepares the combined financial reports (“CFRs”) of the FHLBank System. Until recently, the OF was governed by a board of directors that was comprised of two FHLBank presidents (one of whom was the Bank’s President and Chief Executive Officer) and one independent director. These three directors also served as the audit committee of the OF’s board of directors with the independent director serving as the chairman of such committee.

On May 3, 2010, the Finance Agency promulgated a new regulation that restructures the composition of the OF’s board of directors and audit committee, establishes certain other corporate governance requirements, and directs the OF in preparing the CFRs to employ consistent accounting policies and procedures. Under the new regulation, the OF’s board of directors is now comprised of 17 directors: the 12 FHLBank presidents, who serve ex officio, and 5 independent directors, who each serve five-year terms that are staggered so that not more than one independent directorship is scheduled to become vacant in any one year. Independent directors are limited to two consecutive full terms. Independent directors must be United States citizens. As a group, the independent directors must have substantial experience in financial and accounting matters and they must not have any material relationship with any FHLBank or the OF. The chair of the board of directors of the OF is chosen from among its independent directors

and the vice chair is chosen from among all the directors of the OF. The Bank’s President and Chief Executive Officer was chosen to serve as the initial vice chair of the reconstituted OF board of directors.

The audit committee of the OF is comprised exclusively of the independent directors and has responsibility for overseeing the audit function of the OF and the preparation of the CFRs. For purposes of the CFRs, the audit committee shall ensure that the FHLBanks adopt consistent accounting policies and procedures to the extent necessary for the information submitted by the FHLBanks to the OF to be combined to create accurate and meaningful CFRs. The audit committee, in consultation with the Finance Agency, may establish common accounting policies and procedures for the information submitted by the FHLBanks to the OF for inclusion in the CFRs where it determines such information provided by the FHLBanks is inconsistent and that common accounting policies and procedures regarding that information are necessary to create accurate and meaningful CFRs.

Finance Agency Statement on Certain Energy Retrofit Loan Programs

On July 6, 2010, the Finance Agency issued a statement regarding certain energy retrofit lending programs. Specifically, the statement addressed programs that grant the lien securing the retrofit loan priority over existing liens on the retrofitted property. The statement directed the FHLBanks to review their collateral policies in order to assure that pledged collateral is not adversely affected by energy retrofit lending programs where liens securing loans made under such programs are granted priority over existing liens on the retrofitted property.

Acceptance of FDIC Guarantee as Collateral for Advances

On August 23, 2010, the Finance Agency issued Regulatory Interpretation 2010-RI-03 (“RI 2010-03”) to address whether a FHLBank may accept a guarantee from the FDIC as collateral to secure advances outstanding to a member for which the FDIC has been appointed as receiver. RI 2010-03 concludes that a FHLBank may accept a FDIC guarantee of the timely repayment in full of all principal and interest due on particular advances as collateral for the outstanding advances, and that the FHLBank could release its lien on the collateral securing those advances and relinquish that collateral to the FDIC, acting in its capacity as the receiver for the member of the FHLBank.

Bridge Depository Institution as Member of a FHLBank

On August 23, 2010, the Finance Agency issued Regulatory Interpretation 2010-RI-04 (“RI 2010-04”) to address the FHLBank membership status of a bridge depository institution that is organized by the FDIC to temporarily carry on the business of a failed FHLBank member. RI 2010-04 concludes that a FHLBank may treat a bridge depository institution as continuing the membership of the failed member in order to facilitate the FDIC’s resolution of a failed member of the FHLBank.

FHLBank Acceptance of FDIC or National Credit Union Administration Guaranteed Notes as Collateral and as Investments

On October 14, 2010, the Finance Agency issued guidance to the FHLBanks regarding their ability to accept FDIC or National Credit Union Administration (“NCUA”) guaranteed notes as collateral and as investments. Both the FDIC and the NCUA have issued a series of notes collateralized by various assets where timely payment of the principal and interest due on the notes is guaranteed by the FDIC or the NCUA, respectively. Both the FDIC and the NCUA represent that the guarantees supporting the notes are backed by the full faith and credit of the United States. The Finance Agency advised the FHLBanks that they could invest in the FDIC and NCUA guaranteed notes and accept the notes as collateral without filing a new business activity notice with the Finance Agency.

Use of Community Development Loans by CFIs to Secure Advances and Secured Lending to FHLBank Members and their Affiliates

On December 9, 2010, the Finance Agency issued a final rule that: (1) provides the FHLBanks with regulatory authority to accept community development loans as collateral for advances to CFIs, subject to other regulatory requirements; and (2) codifies the Finance Agency’s position that secured lending to a member by an FHLBank in any form is an “advance” and is, therefore, subject to all requirements applicable to an advance, including stock investment requirements. This rule became effective on January 10, 2011.

FHLBank Investments

On May 4, 2010, the Finance Agency issued a proposed regulation that, among other things, requested comment on whether additional limitations on a FHLBank’s MBS investments, including its private-label MBS investments, should be adopted as part of a final regulation and whether, for private-label MBS investments, such limitations should be based on a FHLBank’s level of retained earnings. Comments on this proposed rule were due by July 6, 2010.

Conservatorship and Receivership

On July 9, 2010, the Finance Agency issued a proposed rule that would set forth the basic authorities of the Finance Agency when acting as conservator or receiver for any of the entities it regulates, including the FHLBanks. The basic authorities set forth in the proposed rule include the authority to: (1) enforce and repudiate contracts; (2) establish procedures for conservators and receivers and priorities of claims for contract parties and other claimants; and (3) address whether and to what extent claims by current and former holders of equity interests in the regulated entities will be paid. Comments on this proposed rule were due by September 7, 2010.

Voluntary FHLBank Mergers

On November 26, 2010, the Finance Agency issued a proposed rule that would establish the conditions and procedures for the consideration and approval of voluntary mergers between FHLBanks. Among other things, the proposed rule provides that two or more FHLBanks may merge if the FHLBanks have jointly filed a merger application with the Finance Agency to obtain the approval of its Director, the members of each such FHLBank ratify the merger agreement, and the Director of the Finance Agency grants final approval of the merger agreement. Comments on this proposed rule were due by January 25, 2011.

FHLBank Membership

On December 27, 2010, the Finance Agency issued an advance notice of proposed rulemaking to address its regulations on FHLBank membership to ensure such regulations are consistent with maintaining a nexus between FHLBank membership and the housing and community development mission of the FHLBanks. The notice provides certain alternatives designed to strengthen that nexus including, among other things:

	•		requiring compliance with membership standards on a continuous basis rather than only at the time of admission to membership; and
	•		creating additional quantifiable standards for membership.

The Bank could be adversely affected if the Finance Agency ultimately issues a regulation that excludes prospective institutions from becoming a member or precludes existing members from continuing their membership. Comments on this advance notice of proposed rulemaking are due by March 28, 2011.

Use of NRSRO Credit Ratings

On January 31, 2011, the Finance Agency issued an advance notice of a proposed rule that would implement a provision in the Dodd-Frank Act that requires all federal agencies to remove regulations that require use of NRSRO credit ratings in the assessment of a security. The notice seeks comment regarding certain specific Finance Agency regulations applicable to the FHLBanks, including risk-based capital requirements, prudential requirements, investments and consolidated obligations. Comments on this advance notice of rulemaking were due by March 17, 2011.

Private Transfer Fee Covenants

On February 8, 2011, the Finance Agency issued a proposed rule that would restrict the FHLBanks from acquiring, or taking security interests in, mortgages on properties encumbered by certain private transfer fee covenants and related securities. The proposed rule prohibits the FHLBanks from purchasing or investing in any mortgages on

properties encumbered by private transfer fee covenants, securities backed by such mortgages or securities backed by the income stream from such covenants, unless such covenants are excepted transfer fee covenants. Excepted transfer fee covenants are covenants to pay a private transfer fee to a homeowner association, condominium, cooperative or certain other tax-exempt organizations that use the private transfer fees for the direct benefit of the property. The proposed rule also prohibits the FHLBanks from accepting such mortgages or securities as collateral unless such covenants are excepted transfer fee covenants. Pursuant to the proposed rule, the foregoing restrictions would apply only to mortgages on properties encumbered by private transfer fee covenants created on or after February 8, 2011, to securities backed by such mortgages, and to securities issued after that date and backed by revenue from private transfer fees regardless of when the covenants were created. The FHLBanks would be required to comply with the regulation within 120 days of its publication as a final rule. Comments on the proposed rule are due by April 11, 2011.

Other Developments

Basel Committee on Banking Supervision Capital Framework

In September 2010, the Basel Committee on Banking Supervision (the “Basel Committee”) approved a new capital framework for internationally active banks. Institutions that are subject to the new regime will be required to have increased amounts of capital with core capital being more strictly defined to include only common equity and other capital assets that are able to fully absorb losses. While it is uncertain how the new capital regime or other standards being developed by the Basel Committee, such as liquidity standards, will be implemented by U.S. regulatory authorities, the new regime could require some of the Bank’s members to divest assets in order to comply with the more stringent capital requirements, thereby potentially decreasing their need for advances. Likewise, any new liquidity requirements may also adversely affect member demand for advances and/or investor demand for consolidated obligations.

Expiration of Authority to Issue Tax-Exempt Letters of Credit

The Bank’s credit services include letters of credit issued or confirmed on behalf of members for a variety of purposes, including as credit support for bonds or other debt instruments. The Bank’s letters of credit and confirmations are generally considered federal guarantees under the Internal Revenue Code, with an exception for guarantees in connection with debt issuances to support certain housing programs. Before enactment of the HER Act, the Bank did not typically issue or confirm letters of credit to support bonds or other debt instruments where the interest on such instruments was purportedly exempt from federal income taxes, because such tax-exempt status could be lost if the instruments were “federally guaranteed” under the Internal Revenue Code.

The HER Act authorized FHLBanks, subject to certain conditions, to issue a letter of credit or confirmation in connection with the original issuance of tax-exempt bonds during the period from enactment of the HER Act to December 31, 2010, and to renew or extend any such letter of credit or confirmation, without the bonds potentially losing their tax-exempt status. A FHLBank could issue such letter of credit or confirmation without regard to the purpose of the issuance of the bonds (i.e., the bonds did not have to be issued solely to support certain housing programs). In accordance with the provisions of the HER Act, this authority expired on December 31, 2010, although a FHLBank may renew letters of credit that were issued under this authority between the date of enactment of that act and December 31, 2010.

Covered Bond Legislation

On March 8, 2011, legislation was introduced in the House of Representatives that would establish standards for covered bond programs and a covered bond regulatory oversight program. Similar legislation has yet to be introduced in the Senate. As previously noted, the development of a covered bond market could create an alternative source of funds that would compete with the Bank’s advances. In addition, covered bond programs established by the Bank’s members could also have an impact on the amount and/or quality of collateral that would be available for those members to pledge to the Bank to secure advances and other extensions of credit. Since neither the timing nor outcome of the legislative debate is known at this time, the effect on the Bank, if any, cannot be determined.

Regulatory Oversight

As discussed above, the Finance Agency supervises and regulates the FHLBanks and the OF. The Finance Agency has a statutory responsibility and corresponding authority to ensure that the FHLBanks operate in a safe and sound manner. Consistent with that duty, the Finance Agency has an additional responsibility to ensure the FHLBanks carry out their housing and community development finance mission. In order to carry out those responsibilities, the Finance Agency establishes regulations governing the entire range of operations of the FHLBanks, conducts ongoing off-site monitoring and supervisory reviews, performs annual on-site examinations and periodic interim on-site reviews, and requires the FHLBanks to submit monthly and quarterly information regarding their financial condition, results of operations and risk metrics.

The Comptroller General of the United States (the “Comptroller General”) has authority under the FHLB Act to audit or examine the Finance Agency and the Bank and to decide the extent to which they fairly and effectively fulfill the purposes of the FHLB Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of a FHLBank’s financial statements conducted by an independent registered public accounting firm. If the Comptroller General conducts such a review, then he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget, and the FHLBank in question. The Comptroller General may also conduct his or her own audit of the financial statements of any FHLBank.

As an SEC registrant, the Bank is subject to the periodic disclosure regime as administered and interpreted by the SEC. The Bank must also submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General; these reports include a statement of financial condition, a statement of operations, a statement of cash flows, a statement of internal accounting and administrative control systems, and the report of the independent registered public accounting firm on the financial statements. In addition, the Treasury receives the Finance Agency’s annual report to Congress, weekly reports reflecting securities transactions of the FHLBanks, and other reports reflecting the operations of the FHLBanks.

Employees

As of December 31, 2010, the Bank employed 200 people, all of whom were located in one office in Irving, Texas. None of the Bank’s employees are subject to a collective bargaining agreement and the Bank believes its relationship with its employees is good.

REFCORP and AHP Assessments

Although the Bank is exempt from all federal, state, and local taxation (except for real property taxes), all FHLBanks are obligated to make contributions to REFCORP in the amount of 20 percent of their net earnings (after deducting the AHP assessment). REFCORP was created by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 solely for the purpose of issuing $30 billion of long-term bonds to provide funds for the resolution of insolvent thrift institutions. The FHLBanks were initially required to contribute approximately $2.5 billion to defease the principal repayments of those bonds in 2030, and thereafter to contribute $300 million per year toward the interest payments on those bonds.

As part of the GLB Act of 1999, the FHLBanks’ $300 million annual obligation to REFCORP was modified to 20 percent of their annual net earnings before charges for REFCORP (but after expenses for AHP). The FHLBanks will have this obligation until the aggregate amounts actually paid by all 12 FHLBanks are equivalent to a $300 million annual annuity whose final maturity date is April 15, 2030, at which point the required payment of each FHLBank to REFCORP will be fully satisfied. As specified in the Finance Agency regulation that implements section 607 of the GLB Act, the amount by which the combined REFCORP payments of all of the FHLBanks for any quarter exceeds the $75 million benchmark payment is used to simulate the purchase of zero-coupon Treasury bonds to “defease” all or a portion of the most-distant remaining quarterly benchmark payment. Because the FHLBanks’ recent REFCORP payments have exceeded $300 million per year, those extra payments have defeased $64 million of the $75 million benchmark payment for the third quarter of 2011 and all scheduled payments thereafter. The defeased benchmark payments (or portions thereof) can be reinstated if future actual REFCORP payments fall short of the $75 million benchmark in any quarter. For additional discussion, see the audited financial

statements accompanying this report (specifically, Note 13 on page F-33). While the remaining amounts to be paid by the Bank to REFCORP cannot be determined at this time because the amount is dependent upon the future earnings of each FHLBank and interest rates, the Bank expects that its obligations to REFCORP will be fully satisfied in 2011.

In addition, the FHLB Act requires each FHLBank to establish and fund an AHP. Annually, the FHLBanks must collectively set aside for the AHP the greater of $100 million or 10 percent of their current year’s income before charges for AHP (but after expenses for REFCORP). Interest expense on capital stock that is classified as a liability (i.e., mandatorily redeemable capital stock) is added back to income for purposes of computing the Bank’s AHP assessment. The Bank’s AHP funds are made available to members in the form of direct grants to assist in the purchase, construction, or rehabilitation of housing for very low-, low- and moderate-income households.

Assessments for REFCORP and AHP equate to a minimum 26.5 percent effective assessment rate for the Bank. This rate is increased by the impact of non-deductible interest on mandatorily redeemable capital stock.

Business Strategy and Outlook

The Bank maintains a Strategic Business Plan that provides the framework for its future business direction. The goals and strategies for the Bank’s major business activities are encompassed in this plan, which is updated and approved by the Board of Directors at least annually and at any other time that revisions are deemed necessary.

As described in its Strategic Business Plan, the Bank operates under a cooperative business model that is intended to maximize the overall value of membership in the Bank. This business model envisions that the Bank will limit and carefully manage its risk profile while generating sufficient profitability to maintain an appropriate level of retained earnings and pay dividends at or slightly above the average federal funds rate. Consistent with this business model, the Bank places the highest priority on being able to meet its members’ liquidity and funding needs.

The Bank intends to continue to operate under its cooperative business model for the foreseeable future. The Bank’s core earnings are expected to rise and fall with the general level of market interest rates, particularly short-term money market rates. Developments that may have an effect on the extent to which the Bank’s return on average capital stock (based on core earnings) exceeds the federal funds rate benchmark include general economic and credit market conditions; the level, volatility of and relationships between short-term money market rates such as federal funds and one- and three-month LIBOR; the future availability and cost of the Bank’s long-term debt relative to benchmark rates such as LIBOR; the availability of interest rate exchange agreements at competitive prices; whether the Bank’s larger borrowers continue to be members of the Bank and the level at which they maintain their borrowing activity; the impact of any future credit market disruptions; and the impact of ongoing economic conditions on demand for the Bank’s credit products from its members.

Due primarily to credit market disruptions, demand for advances from all segments of the Bank’s membership base was elevated from the third quarter of 2007 through the third quarter of 2008. Since that time, the credit markets have stabilized and general economic weakness has persisted, both of which have contributed to a reduction in demand for the Bank’s advances. From September 30, 2008 to December 31, 2010, advances declined approximately 63 percent, due in large part to declines in advances to the Bank’s two largest borrowers. If general economic weakness continues to reduce member lending opportunities, then demand for advances may continue to fall. In the longer term, however, the Bank believes that there remains potential to sustain a substantial portion of the outstanding advances to its CFIs and other small and intermediate-sized institutions. There remains uncertainty about the extent to which the Bank’s future membership base will include larger institutions that will borrow in sufficient quantity to provide economies of scale that will sustain the current economics of the Bank’s business model over the long term.

While the Bank cannot predict how long the current economic conditions will continue, it expects that its lending activities may be reduced for some period of time. As advances are reduced, the Bank’s general practice is to repurchase capital stock in proportion to the reduction in the advances. As a result of the decrease in the Bank’s advances, total assets and capital stock, its future core earnings will likely be lower than they would have been otherwise. However, the Bank expects that its ability to adjust its capital levels in response to reductions in advances outstanding and the accumulation of retained earnings in recent years will help to mitigate the negative

impact that these reductions would otherwise have on the Bank’s shareholders. While there can be no assurances, based on its current expectations the Bank anticipates that its earnings will be sufficient both to continue paying quarterly dividends at a rate equal to or slightly above either the average effective federal funds rate or the upper end of the Federal Reserve’s target for the federal funds rate and to continue building retained earnings for the foreseeable future.

While the Bank’s primary focus will continue to be prudently meeting the liquidity and funding needs of its members, in order to become a more valuable resource to its members, the Bank intends to continue to evaluate opportunities as they arise to diversify its product offerings and its income stream. In particular, the Bank began offering interest rate derivatives to its members in mid-2008. In addition, in late 2009 the Bank received approval from the Finance Agency to begin offering standby bond purchase services to state housing finance agencies within its district. The FHLB Act and Finance Agency regulations limit the products and services that the Bank can offer to its members and govern many of the terms of the products and services that the Bank offers. The Bank is also required by regulation to file new business activity notices with the Finance Agency for any new products or services it wants to offer its members, and will have to assess any potential new products or services offerings in light of these statutory and regulatory restrictions.

ITEM 1A. RISK FACTORS

Our profitability is vulnerable to interest rate fluctuations.

We are subject to significant risks from changes in interest rates because most of our assets and liabilities are financial instruments. Our profitability depends significantly on our net interest income and is impacted by changes in the fair value of interest rate derivatives and any associated hedged items. Changes in interest rates can impact our net interest income as well as the values of our derivatives and certain other assets and liabilities. Changes in overall market interest rates, changes in the relationships between short-term and long-term market interest rates, changes in the relationship between different interest rate indices, or differences in the timing of rate resets for assets and liabilities or related interest rate derivatives with interest rates tied to those indices, can affect the interest rates received from our interest-earning assets differently than those paid on our interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income, which would result in a decrease in our net interest spread, or a net decrease in earnings related to the relationship between changes in the valuation of our derivatives and any associated hedged items.

Our profitability may be adversely affected if we are not successful in managing our interest rate risk.

Like most financial institutions, our results of operations are significantly affected by our ability to manage interest rate risk. We use a number of tools to monitor and manage interest rate risk, including income simulations and duration/market value sensitivity analyses. Given the unpredictability of the financial markets, capturing all potential outcomes in these analyses is extremely difficult. Key assumptions used in our market value sensitivity analyses include interest rate volatility, mortgage prepayment projections and the future direction of interest rates, among other factors. Key assumptions used in our income simulations include advances volumes and pricing, market conditions for our debt, prepayment speeds and cash flows on mortgage-related assets, and other factors. These assumptions are inherently uncertain and, as a result, the measures cannot precisely estimate net interest income or the market value of our equity nor can they precisely predict the effect of higher or lower interest rates or changes in other market factors on net interest income or the market value of our equity. Actual results will most likely differ from simulated results due to the timing, magnitude, and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. Our ability to maintain a positive spread between the interest earned on our earning assets and the interest paid on our interest-bearing liabilities may be affected by the unpredictability of changes in interest rates.

Exposure to credit risk from our customers could have a negative impact on our profitability and financial condition.

We are subject to credit risk from advances and other extensions of credit to members, non-member borrowers and housing associates (collectively, our customers). Other extensions of credit include letters of credit issued or confirmed on behalf of customers, customers’ credit enhancement obligations associated with MPF loans held in portfolio, and interest rate exchange agreements we enter into with our customers.

We require that all outstanding advances and other extensions of credit to our customers be fully collateralized. We evaluate the types of collateral pledged by our customers and assign a borrowing capacity to the collateral, generally based on either a percentage of its book value or estimated market value. During the current economic downturn, the number of our member institutions exhibiting significant financial stress has increased. In 2010 and 2009, four and five, respectively, of our members failed and their advances and other extensions of credit were either repaid in full by the Federal Deposit Insurance Corporation (“FDIC”) or assumed by either the FDIC or an acquiring institution. If more member institutions fail, and if the FDIC (or other receiver or acquiror) does not promptly repay all of the failed institution’s obligations to us or assume the outstanding extensions of credit, we might be required to liquidate the collateral pledged by the failed institution in order to satisfy its obligations to us. A devaluation of or our inability to liquidate collateral in the event of a default by the obligor, due to a reduction in liquidity in the financial markets or otherwise, could cause us to incur a credit loss and adversely affect our financial condition or results of operations.

Loss of members or borrowers could adversely affect our earnings, which could result in lower investment returns and/or higher borrowing rates for remaining members.

One or more members or borrowers could withdraw their membership or decrease their business levels as a result of a merger with an institution that is not one of our members, or for other reasons, which could lead to a significant decrease in our total assets and capital.

As the financial services industry has consolidated, acquisitions involving some of our members have resulted in membership withdrawals or business level decreases. Additional acquisitions that lead to similar results are possible, including acquisitions in which the acquired institutions are merged into institutions located outside our district with which we cannot do business. We could also be adversely impacted by the reduction in business volume that would arise from the failure of one or more of our members.

The loss of one or more borrowers that represent a significant proportion of our business, or a significant reduction in the borrowing levels of one or more of these borrowers, could, depending on the magnitude of the impact, cause us to lower dividend rates, raise advances rates, attempt to reduce operating expenses (which could 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 institution repays its advances to us.

Members’ funding needs may decline, which could reduce loan demand and adversely affect our earnings.

Market factors could reduce loan demand from our member institutions, which could adversely affect our earnings. Demand for advances from all segments of our membership increased throughout the period of credit market disruption that began in the third quarter of 2007, peaked at the beginning of the fourth quarter of 2008 and declined thereafter. From September 30, 2008 through December 31, 2010, our outstanding advances have declined approximately 63 percent. Continued weakness in general economic conditions could further reduce members’ needs for funding. A further decline in the demand for advances, if significant, could negatively affect our results of operations.

We face competition for loan demand, which could adversely affect our earnings.

Our primary business is making advances to our members. We compete with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks and, in certain circumstances, other FHLBanks. Our members have access to alternative funding sources, which may provide more favorable terms than we do on our advances, including more flexible credit or collateral standards. During recent years, our members

have had access to an expanded range of liquidity facilities initiated by the Federal Reserve Board, the United States Department of the Treasury (the “Treasury”) and the FDIC as part of their efforts to support the financial markets during the recent period of market disruption. While most of these programs have expired or been discontinued, certain programs may continue to impact the demand for advances for some period into the future.

The availability to our members of alternative funding sources that are more attractive than the funding products offered by us may significantly decrease the demand for our advances. Any change made by us in the pricing of our advances in an effort to compete more effectively with these competitive funding sources may decrease the profitability on advances. A decrease in the demand for advances or a decrease in our profitability on advances would negatively affect our financial condition and results of operations.

Changes in investors’ perceptions of the creditworthiness of the FHLBanks may adversely affect our ability to issue consolidated obligations on favorable terms.

We currently have the highest credit rating from Moody’s and S&P, the consolidated obligations issued by the FHLBanks are rated Aaa/P-1 by Moody’s and AAA/A-1+ by S&P, and the other FHLBanks have each been assigned high individual credit ratings as well. As of February 28, 2011, Moody’s had assigned its highest rating to each individual FHLBank, and S&P had assigned individual long-term counterparty credit ratings of AAA/A-1+ to ten FHLBanks and ratings of AA+/A-1+ to the remaining two FHLBanks.

Currently, the FHLBank of Chicago is operating under a consensual cease and desist order, which states that the Finance Board (now Finance Agency) has determined that requiring the FHLBank of Chicago to take the actions specified in the order will “improve the condition and practices of the [FHLBank of Chicago], stabilize its capital, and provide the [FHLBank of Chicago] an opportunity to address the principal supervisory concerns identified by the Finance Board.” In addition, the Director of the Finance Agency has classified the FHLBank of Seattle as undercapitalized and the FHLBank of Seattle is operating under a consent arrangement with the Finance Agency that sets forth requirements for capital management, asset composition and other operational and risk management improvements. Further, several FHLBanks incurred net losses for individual quarters in 2010 and/or 2009 that were primarily the result of other-than-temporary impairment charges on non-agency residential mortgage-backed securities, and these FHLBanks have taken actions to preserve capital in light of these results, such as the suspension of quarterly dividends or repurchases or redemptions of capital stock. These regulatory actions, financial results and/or subsequent actions could cause the rating agencies to downgrade the ratings assigned either to any of the affected FHLBanks or to the FHLBanks’ consolidated obligations. Unfavorable ratings actions, negative guidance from the rating agencies, or negative announcements by one or more of the FHLBanks may adversely affect our cost of funds and ability to issue consolidated obligations on favorable terms, which could negatively affect our financial condition and results of operations.

Changes in overall credit market conditions and/or competition for funding may adversely affect our cost of funds and our access to the capital markets.

The cost of our consolidated obligations depends in part on prevailing conditions in the capital markets at the time of issuance, which are generally beyond our control. For instance, a decline in overall investor demand for debt issued by the FHLBanks and similar issuers could adversely affect our ability to issue consolidated obligations on favorable terms. Investor demand is influenced by many factors including changes or perceived changes in general economic conditions, changes in investors’ risk tolerances or balance sheet capacity, or, in the case of overseas investors, changes in preferences for holding dollar-denominated assets. Credit market disruptions similar to those that occurred during the period from late 2007 through early 2009 and which dampened investor demand for longer-term debt, including longer-term FHLBank consolidated obligations, could occur again, making it more difficult for us to match the maturities of our assets and liabilities.

We compete with Fannie Mae, Freddie Mac and other GSEs, as well as commercial banking, corporate, sovereign and supranational entities for funds raised through the issuance of unsecured debt in the global debt markets. Increases in the supply of competing debt products may, in the absence of increased demand, result in higher debt costs, which could negatively affect our financial condition and results of operations. Further, if investors limit their demand for our debt, our ability to fund our operations and to meet the credit and liquidity needs of our members by accessing the capital markets could eventually be compromised.

Our joint and several liability for all consolidated obligations may adversely impact our earnings, our ability to pay dividends, and our ability to redeem or repurchase capital stock.

Under the FHLB Act and Finance Agency regulations, we are jointly and severally liable with the other FHLBanks for the consolidated obligations issued by the FHLBanks through the Office of Finance regardless of whether we receive all or any portion of the proceeds from any particular issuance of consolidated obligations.

If another FHLBank were to default on its obligation to pay principal or interest on any consolidated obligations, the Finance Agency may allocate the outstanding liability among one or more of the remaining FHLBanks on a pro rata basis or on any other basis the Finance Agency may determine. In addition, the Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. Accordingly, we could incur significant liability beyond our primary obligation under consolidated obligations due to the failure of other FHLBanks to meet their payment obligations, which could negatively affect our financial condition and results of operations.

Further, the FHLBanks may not pay any dividends to members or redeem or repurchase any shares of stock unless the principal and interest due on all consolidated obligations has been paid in full. Accordingly, our ability to pay dividends or to redeem or repurchase stock could be affected not only by our own financial condition but also by the financial condition of one or more of the other FHLBanks.

Exposure to credit risk on our investments and MPF loans could have a negative impact on our profitability and financial condition.

We are exposed to credit risk from our secured and unsecured investment portfolio and our MPF loans held in portfolio. A worsening of the current economic downturn, further declines in residential real estate values, changes in monetary policy or other events that could negatively impact the economy and the markets as a whole could lead to increased borrower defaults, which in turn could cause us to incur losses on our MPF loans or additional losses on our investment portfolio.

In particular, during 2009 and 2010, delinquencies and losses with respect to residential mortgage loans generally increased and residential property values declined in many states. Due to these deteriorating conditions, 13 of our 39 non-agency residential mortgage-backed securities were deemed to be other-than-temporarily impaired during 2009 and/or 2010. The credit losses associated with these securities totaled $2.6 million and $4.0 million for the years ended December 31, 2010 and 2009, respectively. As of December 31, 2010, the unpaid principal balance of the 39 securities totaled $398 million.

If the actual and/or projected performance of the loans underlying our non-agency residential mortgage-backed securities deteriorates beyond our current expectations, we could recognize further losses on these 13 securities as well as losses on our other investments in residential mortgage-backed securities, which would negatively impact our results of operations and financial condition.

In addition, if delinquencies, default rates and loss severities on residential mortgage loans continue to increase, and/or there is a continued decline in residential real estate values, we could experience losses on our MPF loans held in portfolio.

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

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.

On July 21, 2010, the President of the United States signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act makes significant changes to a number of aspects of the regulation of financial institutions. This legislation contains several provisions that could impact us and/or our members.

Under the Dodd-Frank Act, if the Financial Stability Oversight Council (the “Council”) established by the legislation decides that we are a nonbank financial company whose material financial distress could pose a threat to the financial stability of the United States, then we would be subject to supervision and examination by the Board of Governors of the Federal Reserve System (the “Board of Governors”). Additionally, if our financial activities were determined to have the potential to create significant financial risk to the United States markets, the Council could recommend that the Finance Agency impose new or heightened standards and safeguards on us. Further, the legislation also contains provisions that will regulate the over-the-counter derivatives market as further discussed in the next risk factor.

The Dodd-Frank Act also contains a number of provisions that, while they may not directly affect us, could affect our members. For example, the legislation establishes a special insolvency regime to address the failure of a financial company, eliminates the Office of Thrift Supervision, establishes a Federal Insurance Office to monitor and identify issues with respect to the insurance industry, establishes certain entities charged with investor and consumer protection, and imposes additional regulation on mortgage originators and residential mortgage loans.

Because the Dodd-Frank Act requires several entities (among them, the Council, the Board of Governors, and the Securities and Exchange Commission) to issue a number of regulations, orders, determinations, and reports, the full effect of this legislation on us and our activities, and on our members and their activities, will become known only after the required regulations, orders, determinations, and reports are issued and implemented.

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. Pursuant to the rule, the Board of Directors of the Office of Finance now consists of the presidents of each of the 12 FHLBanks, plus five independent directors. The five independent directors now comprise the Audit Committee. Under the final rule, and as previously existed, no FHLBank shareholders are 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, which could potentially have an adverse impact on us.

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. For instance, legislation was recently introduced in the House of Representatives that would establish standards for covered bond programs and a covered bond regulatory oversight program. Among other things, the development of a covered bond market could create an alternative source of funds that would compete with our advances.

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.

Finally, the role and structure of the housing GSEs is 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.

For a more complete discussion of recent legislative and regulatory developments, see Item 1 — Business — Legislative and Regulatory Developments beginning on page 20 of this report.

Changes in our access to the interest rate derivatives market under acceptable terms may adversely affect our ability to maintain our current hedging strategies.

We actively use derivative instruments to manage interest rate risk. The effectiveness of our interest rate risk management strategy depends to a significant extent upon our ability to enter into these instruments with acceptable counterparties in the necessary quantities and under satisfactory terms to hedge our corresponding assets and liabilities. We currently enjoy ready access to the interest rate derivatives market through a diverse group of highly rated counterparties. Several factors could have an adverse impact on our access to the derivatives market, including changes in our credit rating, changes in the current counterparties’ credit ratings, reductions in our counterparties’ allocation of resources to the interest rate derivatives business, and changes in the liquidity of that market created by a variety of regulatory or market factors. In addition, the financial market disruptions that occurred during the period from late 2007 through early 2009 resulted in mergers of several of our derivatives counterparties. The consolidation of the financial services industry, if it continues, will increase our concentration risk with respect to counterparties in this industry. Further, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry in general, could lead to market-wide disruptions in which it may be difficult for us to find counterparties for such transactions. If such changes in our access to the derivatives market result in our inability to manage our hedging activities efficiently and economically, we may be unable to find economical alternative means to manage our interest rate risk effectively, which could adversely affect our financial condition and results of operations.

Currently, all of the derivatives we use to manage our interest rate risk are negotiated in the over-the-counter (“OTC”) derivatives market. As noted in the immediately preceding risk factor, the Dodd-Frank Act contains provisions that will increase the regulation of the OTC derivatives market. These provisions, when finalized, could impede our ability to use appropriate derivatives products to hedge our interest rate risk. The legislation generally provides for increased margin and capital requirements for derivatives users that would, if applicable to us, increase our hedging costs, which could negatively impact our results of operations. Many of the derivatives that are currently traded in the OTC market could eventually be subject to central clearing and exchange trading in regulated trading systems. The structure for clearing derivatives may expose us to early termination risk and/or liquidity risk to an extent that we generally do not have under our existing arrangements with our derivative counterparties. Further, the structure for clearing derivatives may expose us to credit risk to other parties that we do not currently have under our existing derivative counterparty arrangements. If we are determined to be a major swap participant or a swap dealer within the meaning of the Dodd-Frank Act, we will be required to register with the Commodity Futures Trading Commission (“CFTC”), which would then subject us to a number of requirements prescribed by the CFTC, including internal and external business conduct standards, and certain recordkeeping and reporting responsibilities. The requirements imposed by the CFTC could increase our costs of operation and therefore could negatively impact our results of operations. As the Dodd-Frank Act calls for a number of regulations, orders, determinations and reports to be issued, the impact of this legislation on our hedging activities and the costs associated with those activities will become known only after the required regulations, orders, determinations, and reports are issued and implemented.

Defaults by or the insolvency of one or more of our derivative counterparties could adversely affect our profitability and financial condition.

We regularly enter into derivative transactions with major banks. Our financial condition and results of operations could be adversely affected if derivative counterparties to whom we have exposure fail, and any collateral that we have in place is insufficient to cover their obligations to us.

We enter into collateral exchange agreements with all of our derivative counterparties that include minimum collateral thresholds. The collateral exchange agreements require the delivery of collateral consisting of cash or very liquid, highly rated securities if credit risk exposures rise above the minimum thresholds. These agreements generally establish a maximum unsecured credit exposure threshold of $1 million that one party may have to the other. 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 must deliver sufficient collateral to reduce the

unsecured credit exposure to zero. In addition, excess collateral must be returned by a party in an oversecured position. Delivery or return of the collateral generally occurs within one business day and, until such delivery or return, we may be in an undersecured position, which could result in a loss in the event of a default by the counterparty, or we may be due excess collateral, which could result in a loss in the event that the counterparty is unable to return the collateral. Because derivative valuations are determined based on market conditions at particular points in time, they can change quickly. Even after the delivery or return of collateral, we may be in an undersecured position, or be due the return of excess collateral, as the values upon which the delivery or return was based may have changed since the valuation was performed. Further, we may incur additional losses if collateral held by us cannot be readily liquidated at prices that are sufficient to fully recover the value of the derivatives.

An interruption in our access to the capital markets would limit our ability to obtain funds.

We conduct our business and fulfill our public purpose primarily by acting as an intermediary between our members and the capital markets. Certain events, such as a natural disaster or terrorist act, could limit or prevent us from accessing the capital markets in order to issue consolidated obligations for some period of time. An event that precludes us from accessing the capital markets may also limit our ability to enter into transactions to obtain funds from other sources. External forces are difficult to predict or prevent, but can have a significant impact on our ability to manage our financial needs and to meet the credit and liquidity needs of our members.

A failure or interruption in our information systems or other technology may adversely affect our ability to conduct and manage our business effectively.

We rely heavily upon information systems and other technology to conduct and manage our business and deliver a very large portion of our services to members on an automated basis. To the extent that we experience a failure or interruption in any of these systems or other technology, we may be unable to conduct and manage our business effectively, including, without limitation, our hedging and advances activities. We can make no assurance that we will be able to prevent or timely and adequately address any such failure or interruption. Any failure or interruption could significantly harm our customer relations, risk management, and profitability, which could negatively affect our financial condition and results of operations.

Lack of a public market and restrictions on transferring our stock could result in an illiquid investment for the holder.

Under the GLB Act, Finance Agency regulations, and our capital plan, our stock may be redeemed upon the expiration of a five-year redemption period following a redemption request. Only stock in excess of a member’s minimum investment requirement, stock held by a member that has submitted a notice to withdraw from membership, or stock held by a member whose membership has been terminated may be redeemed at the end of the redemption period. Further, we may elect to repurchase excess stock of a member at any time at our sole discretion.

There is no guarantee, however, that we will be able to redeem stock held by an investor even at the end of the redemption period. If the redemption or repurchase of the stock would cause us to fail to meet our minimum capital requirements, then the redemption or repurchase is prohibited by Finance Agency regulations and our capital plan. Likewise, under such regulations and the terms of our capital plan, we could not honor a member’s capital stock redemption notice if the redemption would cause the member to fail to maintain its minimum investment requirement. Moreover, since our stock may only be owned by our members (or, under certain circumstances, former members and certain successor institutions), and our capital plan requires our approval before a member may transfer any of its stock to another member, there can be no assurance that a member would be allowed to sell or transfer any excess stock to another member at any point in time.

We may also suspend the redemption of stock if we reasonably believe that the redemption would prevent us from maintaining adequate capital against a potential risk, or would otherwise prevent us from operating in a safe and sound manner. In addition, approval from the Finance Agency for redemptions or repurchases would be required if the Finance Agency or our Board of Directors were to determine that we have incurred, or are likely to incur, losses that result in, or are likely to result in, charges against our capital. Under such circumstances, there can be no assurance that the Finance Agency would grant such approval or, if it did, upon what terms it might do so. Redemption and repurchase of our stock would also be prohibited if the principal and interest due on any

consolidated obligations issued on behalf of any FHLBank through the Office of Finance have not been paid in full or if we become unable to comply with regulatory liquidity requirements or satisfy our current obligations.

Accordingly, there are a variety of circumstances that would preclude us from redeeming or repurchasing our stock that is held by a member. Since there is no public market for our stock and transfers require our approval, there can be no assurance that a member’s purchase of our stock would not effectively become an illiquid investment.

Failure by a member to comply with our minimum investment requirement could result in substantial penalties to that member and could cause us to fail to meet our capital requirements.

Members must comply with our minimum investment requirement at all times. Our Board of Directors may increase the members’ minimum investment requirement within certain ranges specified in our capital plan. The minimum investment requirement may also be increased beyond such ranges pursuant to an amendment to the capital plan, which would have to be adopted by our Board of Directors and approved by the Finance Agency. We would provide members with 30 days’ notice prior to the effective date of any increase in their minimum investment requirement. Under the capital plan, members are required to purchase an additional amount of our stock as necessary to comply with any new requirements or, alternatively, they may reduce their outstanding advances activity (subject to any prepayment fees applicable to the reduction in activity) on or prior to the effective date of the increase. To facilitate the purchase of additional stock to satisfy an increase in the minimum investment requirement, the capital plan authorizes us to issue stock in the name of the member and to correspondingly debit the member’s demand deposit account maintained with us.

The GLB Act requires members to “comply promptly” with any increase in the minimum investment requirement to ensure that we continue to satisfy our minimum capital requirements. However, the Finance Board stated, when it published the final regulation implementing this provision of the GLB Act, that it did not believe this provision provides the FHLBanks with an unlimited call on the assets of their members. According to the Finance Board, it is not clear whether we or our regulator would have the legal authority to compel a member to invest additional amounts in our capital stock.

Thus, while the GLB Act and our capital plan contemplate that members would be required to purchase whatever amounts of stock are necessary to ensure that we continue to satisfy our capital requirements, and while we may seek to enforce this aspect of the capital plan which was approved by the Finance Board, our ability ultimately to compel a member, either through automatic deductions from a member’s demand deposit account or otherwise, to purchase an additional amount of our stock is not free from doubt.

Nevertheless, even if a member could not be compelled to make additional stock purchases, the failure by a member to comply with the stock purchase requirements of our capital plan could subject it to substantial penalties, including the possible termination of its membership. In the event of termination for this reason, we may call any outstanding advances to the member prior to their maturity and the member would be subject to any fees applicable to the prepayment.

Furthermore, if our members fail to comply with the minimum investment requirement, we may not be able to satisfy our capital requirements, which could adversely affect our operations and financial condition.

Finance Agency authority to approve changes to our capital plan and to impose other restrictions and limitations on us and our capital management may adversely affect members.

Under Finance Agency regulations and our capital plan, amendments to the capital plan must be approved by the Finance Agency. However, amendments to our capital plan are not subject to member consent or approval. While amendments to our capital plan must be consistent with the FHLB Act and Finance Agency regulations, it is possible that they could result in changes to the capital plan that could adversely affect the rights and obligations of members.

Moreover, the Finance Agency has significant supervisory authority over us and may impose various limitations and restrictions on us, our operations, and our capital management as it deems appropriate to ensure our safety and soundness, and the safety and soundness of the FHLBank System. Among other things, the Finance Agency may

impose higher capital requirements on us that might include, but not be limited to, the imposition of a minimum retained earnings requirement, and may suspend or otherwise limit stock repurchases, redemptions and dividends.

Regulatory limitations on our ability to pay dividends could result in lower investment returns for members.

Under Finance Agency regulations, we may pay dividends on our stock only out of previously retained earnings or current net earnings. However, if we are not in compliance with our minimum capital requirements or if the payment of dividends would make us noncompliant, we are precluded from paying dividends. In addition, we may not declare or pay a dividend if the par value of our stock is impaired or is projected to become impaired after paying such dividend. Further, we may not declare or pay any dividends in the form of capital stock if our excess stock is greater than one percent of our total assets or if, after the issuance of such shares, our outstanding excess stock would be greater than one percent of our total assets. Payment of dividends would also be suspended if the principal and interest due on any consolidated obligations issued on behalf of any FHLBank through the Office of Finance have not been paid in full or if we become unable to comply with regulatory liquidity requirements or satisfy our current obligations. In addition to these explicit limitations, it is also possible that the Finance Agency could restrict our ability to pay a dividend even if we have sufficient retained earnings to make the payment and are otherwise in compliance with the requirements for payment of dividends.

The terms of any liquidation, merger or consolidation involving us may have an adverse impact on members’ investments in us.

Under the GLB Act, holders of Class B Stock own our retained earnings, if any. With respect to liquidation, our capital plan provides that, after payment of creditors, all Class B Stock will be redeemed at par, or pro rata if liquidation proceeds are insufficient to redeem all of the stock in full. Any remaining assets will be distributed to the shareholders in proportion to their stock holdings relative to the total outstanding Class B Stock.

Our capital plan also stipulates that its provisions governing liquidation are subject to the Finance Agency’s statutory authority to prescribe regulations or orders governing liquidations of a FHLBank, and that consolidations and mergers may be subject to any lawful order of the Finance Agency. We cannot predict how the Finance Agency might exercise its authority with respect to liquidations or reorganizations or whether any actions taken by the Finance Agency in this regard would be inconsistent with the provisions of our capital plan or the rights of holders of our Class B Stock. Consequently, there can be no assurance that any liquidation, merger or consolidation involving us will be consummated on terms that do not adversely affect our members’ investment in us.

An increase in our AHP contribution rate could adversely affect our ability to pay dividends to our shareholders.

The FHLB Act requires each FHLBank to establish and fund an AHP. Annually, the FHLBanks are required to set aside, in the aggregate, the greater of $100 million or ten percent of their current year’s income (before charges for AHP, as adjusted for interest expense on mandatorily redeemable capital stock, but after the assessment for REFCORP) for their AHPs. If the FHLBanks’ combined income does not result in an aggregate AHP contribution of at least $100 million in a given year, we could be required to contribute more than ten percent of our income to the AHP. An increase in our AHP contribution would reduce our net income and could adversely affect our ability to pay dividends to our shareholders.

A natural or man-made disaster, especially one affecting our region, could adversely affect our profitability or financial condition.

Portions of our district are subject to risks from hurricanes, tornadoes, floods and other natural disasters. In addition to natural disasters, our business could be negatively impacted by man-made disasters. Such natural or man-made disasters may damage or dislocate our members’ facilities, may damage or destroy collateral pledged to secure advances or other extensions of credit, may adversely affect the livelihood of MPF borrowers or members’ customers or otherwise cause significant economic dislocation in the affected areas. If this were to occur, our business could be negatively impacted.

During the second quarter of 2010, the Deepwater Horizon offshore drilling rig exploded in the Gulf of Mexico, causing the largest oil spill in U.S. history. While a final determination of the extent of the environmental damage and negative economic impact to gulf coast areas cannot be made at this time, the oil spill has already had an adverse impact on several industries in the region. In addition, the U.S. Government imposed a moratorium on certain offshore drilling activities that was in effect until October 12, 2010. These events have had and are likely to continue to have a negative impact on the economies in those areas within our district that are heavily dependent on the oil and gas, fishing and tourism industries.

While BP p.l.c., the majority owner of the well, has committed to fund an escrow account of $20 billion that is available to reimburse losses resulting from the oil spill, and BP p.l.c. and others may be liable if qualifying losses exceed $20 billion, we are uncertain to what extent direct and/or indirect losses incurred by businesses in our district will qualify for reimbursement from the escrow account or other sources.

Member financial institutions in the affected areas may be adversely affected in a variety of ways by the oil spill, including the inability of their borrowers to repay loans made by the institutions, damage to the borrowers’ properties that serve as collateral for the loans made by the institutions, and a reduction in customer demand for loans as a result of weakened economic conditions. We are unable to determine the timing or extent of recovery of the local economies in which affected members operate and what impact reimbursements from BP p.l.c. or other parties will have on borrowers’ ability to rebuild their businesses and repay outstanding loans. Accordingly, the degree to which our members in the affected areas will be impacted is uncertain.

Significant borrower defaults on loans made by our members could cause members to fail. If one or more member institutions fail, and if the value of the collateral pledged to secure advances from us has declined below the amount borrowed, we could incur a credit loss that would adversely affect our financial condition and results of operations. A decline in the local economies in which our members operate could reduce members’ needs for funding, which could reduce demand for our advances. We could be adversely impacted by the reduction in business volume that would arise either from the failure of one or more of our members or from a decline in member funding needs.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

The Bank owns a 157,000 square foot office building located at 8500 Freeport Parkway South, Irving, Texas. The Bank occupies approximately 86,000 square feet of space in this building.

The Bank also maintains leased off-site business resumption and storage facilities comprising approximately 18,000 and 5,000 square feet of space, respectively.

ITEM 3. LEGAL PROCEEDINGS

The Bank is not a party to any material pending legal proceedings.

ITEM 4. RESERVED

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Bank is a cooperative and all of its outstanding capital stock, which is known as Class B stock, is owned by its members or, in some cases, by non-member institutions that have acquired stock by virtue of acquiring a member institution, or by former members 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 of the Bank’s shareholders are financial institutions; no individual may own any of the Bank’s capital stock. The Bank’s capital stock is not publicly traded, nor is there an established market for the stock. The Bank’s capital stock has a par value of $100 per share and it may be purchased, redeemed, repurchased and transferred only at its par value. By regulation, the parties to a transaction involving the Bank’s stock can include only the Bank and its member institutions (or non-member institutions or former members, as described above). While a member could transfer stock to another member of the Bank, such a transfer could occur only upon approval of the Bank and then only at par value. The Bank does not issue options, warrants or rights relating to its capital stock, nor does it provide any type of equity compensation plan. As of February 28, 2011, the Bank had 935 shareholders and 14,952,080 shares of capital stock outstanding.

Subject to Finance Agency directives, the Bank is permitted by statute and regulation to pay dividends on members’ capital stock in either cash or capital stock only from previously retained earnings or current net earnings. The Bank’s Board of Directors may not declare or pay a dividend based on projected or anticipated earnings, nor may it declare or pay a dividend if the Bank is not in compliance with its minimum capital requirements or if the Bank would fail to meet its minimum capital requirements after paying such dividend (for a discussion of the Bank’s minimum capital requirements, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk-Based Capital Rules and Other Capital Requirements). Further, the Bank may not declare or pay any dividends in the form of capital stock if excess stock held by its shareholders is greater than one percent of the Bank’s total assets or if, after the issuance of such shares, excess stock held by its shareholders would be greater than one percent of the Bank’s total assets. Shares of Class B stock issued as dividend payments have the same rights, obligations, and restrictions as all other shares of Class B stock, including rights, privileges, and restrictions related to the repurchase and redemption of Class B stock. To the extent such shares represent excess stock, they may be repurchased or redeemed by the Bank in accordance with the provisions of the Bank’s capital plan.

The Bank has had a long-standing practice of paying quarterly dividends in the form of capital stock. The Bank has also had a long-standing practice of benchmarking the dividend rate that it pays on its capital stock to the average federal funds rate. When stock dividends are paid, capital stock is issued in full shares and any fractional shares are paid in cash. Dividends are typically paid on the last business day of each quarter and are based upon the Bank’s operating results, shareholders’ average capital stock holdings and the average federal funds rate for the preceding calendar quarter.

The following table sets forth certain information regarding the quarterly dividends that were declared and paid by the Bank during the years ended December 31, 2010 and 2009. During each quarter of 2010, the Bank paid dividends at a rate equal to the upper end of the Federal Reserve’s target for the federal funds rate for the immediately preceding quarter plus 12.5 basis points. During each quarter of 2009, the Bank paid dividends at the average effective federal funds rate for the immediately preceding quarter. The average effective federal funds rate of 0.51 percent for the fourth quarter of 2008 was below the Federal Reserve’s average federal funds target rate of 1.06 percent, while the average effective federal funds rate for each of the first three quarters of 2009 was below the upper end of the Federal Reserve’s target range of 0.25 percent for the federal funds rate for those periods, which was also the rate that depository institutions could earn on both required and excess reserves maintained at the Federal Reserve during those periods. As a result of this disparity, which continued to be the case in the fourth quarter of 2009 and the first three quarters of 2010, the Bank elected to benchmark its dividends in 2010 to the upper end of the Federal Reserve’s target range for the federal funds rate. All dividends were paid in the form of capital stock except for fractional shares, which were paid in cash.

DIVIDENDS PAID
(dollars in thousands)

		2010								2009
						Annualized								Annualized
		Amount(1)				Rate(3)				Amount(2)				Rate(3)
First Quarter		$	2,386				0.375	%		$	4,143				0.500	%
Second Quarter			2,264				0.375				1,306				0.180
Third Quarter			2,109				0.375				1,267				0.180
Fourth Quarter			2,057				0.375				1,091				0.160

The Bank has a retained earnings policy that calls for the Bank to maintain retained earnings in an amount sufficient to protect against potential identified economic or accounting losses due to specified interest rate, credit or operations risks. With certain exceptions, the Bank’s policy calls for the Bank to maintain its retained earnings balance at or above its policy target when determining the amount of funds available to pay dividends. Taking into consideration its current retained earnings policy target, as well as its current earnings expectations and anticipated market conditions, the Bank currently expects to pay dividends in 2011 at or slightly above the upper end of the Federal Reserve’s target for the federal funds rate for the period from October 1, 2010 through September 30, 2011. For a discussion of the Bank’s current retained earnings policy target, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Retained Earnings and Dividends.

The Bank’s Board of Directors recently approved a dividend in the form of capital stock for the first quarter of 2011 at an annualized rate of 0.375 percent (which exceeds the upper end of the Federal Reserve’s target for the federal funds rate for the fourth quarter of 2010 by 12.5 basis points). The first quarter 2011 dividend, to be applied to average capital stock held during the period from October 1, 2010 through December 31, 2010, is payable on March 31, 2011.

Effective February 28, 2011, the Bank entered into the JCE Agreement with the other 11 FHLBanks. The JCE Agreement provides that upon satisfaction of the FHLBanks’ obligations to REFCORP, which are currently expected to occur in 2011, the Bank (and each of the other FHLBanks) will, on a quarterly basis, allocate at least 20 percent of its net income to a restricted retained earnings account. Pursuant to the provisions of the JCE Agreement, the Bank will be required to build its restricted retained earnings account to an amount equal to one percent of its total outstanding consolidated obligations, which for this purpose is based on the most recent quarter’s average carrying value of all outstanding consolidated obligations, excluding hedging adjustments. The JCE Agreement provides that during periods in which the Bank’s restricted retained earnings account is less than the amount prescribed in the preceding sentence, it may pay dividends only from unrestricted retained earnings or from the

portion of its quarterly net income that exceeds the amount required to be allocated to its restricted retained earnings account. The provisions of the JCE Agreement are not currently expected to have an effect on the Bank’s dividend payment practices. For additional information regarding the JCE Agreement, see Item 1 — Business — Capital — Retained Earnings.

Pursuant to the terms of an SEC no-action letter dated September 13, 2005, the Bank is exempt from the requirements to report: (1) sales of its equity securities under Item 701 of Regulation S-K and (2) repurchases of its equity securities under Item 703 of Regulation S-K. In addition, the HER Act specifically exempts the Bank from periodic reporting requirements under the securities laws pertaining to the disclosure of unregistered sales of equity securities.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA
(dollars in thousands)

		Year Ended December 31,
		2010				2009				2008				2007				2006
Balance sheet (at year end)
Advances		$	25,455,656			$	47,262,574			$	60,919,883			$	46,298,158			$	41,168,141
Investments (1)(2)			12,268,954				13,491,819				17,388,015				16,400,655				13,429,450
Mortgage loans			207,393				259,857				327,320				381,731				449,893
Allowance for credit losses on mortgage loans			225				240				261				263				267
Total assets (2)			39,690,070				65,092,076				78,932,898				63,458,256				55,457,966
Consolidated obligations — discount notes			5,131,978				8,762,028				16,745,420				24,119,433				8,225,787
Consolidated obligations — bonds			31,315,605				51,515,856				56,613,595				32,855,379				41,684,138
Total consolidated obligations(3)			36,447,583				60,277,884				73,359,015				56,974,812				49,909,925
Mandatorily redeemable capital stock(4)			8,076				9,165				90,353				82,501				159,567
Capital stock — putable			1,600,909				2,531,715				3,223,830				2,393,980				2,248,147
Retained earnings			452,205				356,282				216,025				211,762				190,625
Accumulated other comprehensive income (loss)			(62,702	)			(65,965	)			(1,435	)			(570	)			748
Total capital			1,990,412				2,822,032				3,438,420				2,605,172				2,439,520
Dividends paid(4)			8,816				7,807				75,078				108,641				110,049
Income statement
Net interest income (5)		$	234,366			$	76,476			$	150,358			$	223,026			$	216,292
Other income (loss)			(14,259	)			200,355				22,580				9,505				1,279
Other expense			77,542				75,290				64,813				55,296				49,820
Assessments			37,826				53,477				28,784				47,457				45,571
Net income			104,739				148,064				79,341				129,778				122,180
Performance ratios
Net interest margin(6)			0.44	%			0.11	%			0.20	%			0.40	%			0.37	%
Return on average assets (2)			0.20				0.21				0.11				0.24				0.21
Return on average equity			4.23				4.92				2.52				5.58				4.98
Return on average capital stock (7)			4.92				5.39				2.73				6.18				5.42
Total average equity to average assets(2)			4.65				4.30				4.23				4.22				4.29
Regulatory capital ratio(2)(8)			5.19				4.45				4.47				4.24				4.69
Dividend payout ratio (4)(9)			8.42				5.27				94.63				83.71				90.07
Ratio of earnings to fixed charges			1.58	X			1.26	X			1.05	X			1.07	X			1.06	X
Average effective federal funds rate (10)			0.18	%			0.16	%			1.92	%			5.02	%			4.97	%

ITEM 7. 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 annual audited financial statements and notes thereto for the years ended December 31, 2010, 2009 and 2008 beginning on page F-1 of this Annual Report on Form 10-K.

Forward-Looking Information

This annual report contains forward-looking statements that reflect current beliefs and expectations of the Bank about its future results, performance, liquidity, financial condition, prospects and opportunities, including the prospects for the payment of future 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. 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

The Bank is one of 12 district Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks” and, together with the Federal Home Loan Banks 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. For a discussion regarding the Finance Agency’s recent rulemaking activities, see Item 1 — Business — Legislative and Regulatory Developments.

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 generally 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 only be held by members of the Bank, by non-member institutions that acquire stock by virtue of acquiring member institutions, or by former members of the Bank (including a federal or state agency or insurer acting as a receiver of a closed institution) that retain capital stock to support advances or other activity that remains outstanding or until any applicable stock redemption or withdrawal notice period expires. All members must hold stock in the Bank. The Bank’s capital stock has a par value of $100 per share and is purchased, redeemed, repurchased and transferred only at its par value. By regulation, the parties to a transaction involving the Bank’s stock can include only the Bank and its member institutions (or non-member institutions or former members, as described above). While a member could transfer stock to another member of the Bank, that transfer could occur only upon approval of the Bank and then only at 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 (see Item 1 — Business). 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 and 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 February 28, 2011, Moody’s had assigned a deposit rating of Aaa/P-1 to each individual FHLBank and none of the FHLBanks were on its Watchlist. At that same date, S&P had assigned long-term counterparty credit ratings of AAA/A-1+ to 10 of the FHLBanks (including the Bank) and AA+/A-1+ to the FHLBanks of Seattle and Chicago. In addition, as of February 28, 2011, S&P had assigned stable outlooks to 11 of the FHLBanks and a negative outlook to the FHLBank of Seattle.

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, caps and swaptions. 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”). For a discussion of ASC 815, see the sections below entitled “Financial Condition — Derivatives and Hedging Activities” and “Critical Accounting Policies and Estimates.”

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 (except for net interest payments) associated with derivatives and hedging activities and assets and liabilities carried at fair value; 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 track 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 following table summarizes the Bank’s return on average capital stock (based on reported results), the average effective federal funds rate and the Bank’s dividend payment rate for the years ended December 31, 2010, 2009 and 2008.

		Year Ended December 31,
		2010				2009				2008
Earnings
Return on average capital stock			4.92	%			5.39	%			2.73	%
Average effective federal funds rate			0.18	%			0.16	%			1.92	%
Dividends
Weighted average of dividend rates paid (1)			0.375	%			0.25	%			2.92	%
Reference average effective federal funds rate (reference rate) (2)			0.16	%			0.25	%			2.92	%
Reference average target federal funds rate (reference target rate) (2)			0.25	%			0.46	%			2.95	%

For a discussion of the Bank’s annual returns on capital stock and the reasons for the variability in those returns from year to year, see the section below entitled “Results of Operations.”

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.

To provide more meaningful comparisons between the average effective federal funds rate, the average target federal funds rate and the Bank’s dividend rate, the above table sets forth a “reference average effective federal funds rate” and a “reference average target federal funds rate.” For the years ended December 31, 2010, 2009 and 2008, the reference average effective federal funds rate reflects the average effective federal funds rate for the periods from October 1, 2009 through September 30, 2010, from October 1, 2008 through September 30, 2009 and from October 1, 2007 through September 30, 2008, respectively, and the average target federal funds rate reflects the average of the upper end of the Federal Reserve’s target for the federal funds rate for those same periods. For additional discussion regarding the Bank’s dividend declaration and payment process, see the section entitled “Financial Condition — Retained Earnings and Dividends.”

The Bank operates in only one reportable segment. All of the Bank’s revenues are derived from U.S. operations.

Financial Market Conditions

Credit market conditions during 2010 continued the trend of noticeable improvement that began in late 2008 and continued throughout 2009. Short-term interest rates remained relatively stable throughout 2010, while long-term rates declined. The economy continued to expand in 2010, with credit spreads tightening and equity markets improving following the European sovereign debt concerns in the second quarter and the announcement of the Federal Reserve actions discussed below.

On November 3, 2010, the Federal Reserve announced that it intends to purchase $600 billion of longer-term U.S. Government bonds by the end of the second quarter of 2011 (a pace of about $75 billion per month) in an effort to promote a stronger pace of economic recovery and foster maximum employment and price stability. The Federal Reserve left open the possibility of taking additional actions if economic growth does not accelerate in the coming months.

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 mortgage-backed securities. 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 Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program (“TLGP”) provided additional liquidity support for depository institutions. As conditions improved in 2009, the level of support provided by some of these government programs stabilized or contracted. The TARP, TLGP and TAF programs expired in 2010.

In addition to those actions to provide additional direct liquidity to the markets, the Federal Reserve Board, through its Federal Open Market Committee, reduced its target for the federal funds rate first from 2.00 percent to 1.00 percent in two steps during October 2008, and then subsequently reduced the target to a range between 0 and 0.25 percent. 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 2010. In October 2008, the Federal Reserve began paying interest on required and excess reserves held by depository institutions. During 2009 and 2010, this interest was paid at a rate equivalent to the upper boundary of the target range for federal funds. A significant and sustained increase in bank reserves during those years combined with the rate of interest being paid on those reserves has contributed to a decline in the volume of transactions taking place in the overnight federal funds market and an effective federal funds rate that has generally been below the upper end of the targeted range for most of 2009 and 2010.

One- and three-month LIBOR rates fell from 3.93 percent and 4.05 percent, respectively, at September 30, 2008 to 0.44 percent and 1.43 percent, respectively, as of December 31, 2008. One- and three-month LIBOR rates stabilized and the spread between those rates shrank during 2009, with one- and three-month LIBOR ending the year at 0.23 percent and 0.25 percent, respectively. One- and three-month LIBOR were 0.26 percent and 0.30 percent,

respectively, at the end of 2010. More stable one- and three-month LIBOR rates, combined with smaller spreads between those two indices and between those indices and overnight lending rates, suggest some degree of general improvement in the inter-bank lending markets.

The following table presents information on various market interest rates at December 31, 2010 and 2009 and various average market interest rates for the years ended December 31, 2010, 2009 and 2008.

		Ending Rate								Average Rate
		December 31,				December 31,				For the Year Ended December 31,
		2010				2009				2010				2009				2008
Federal Funds Target (1)			0.25	%			0.25	%			0.25	%			0.25	%			2.08	%
Average Effective Federal Funds Rate (2)			0.13	%			0.05	%			0.18	%			0.16	%			1.92	%
1-month LIBOR (1)			0.26	%			0.23	%			0.27	%			0.33	%			2.68	%
3-month LIBOR (1)			0.30	%			0.25	%			0.34	%			0.69	%			2.93	%
2-year LIBOR (1)			0.80	%			1.42	%			0.93	%			1.41	%			2.94	%
5-year LIBOR (1)			2.17	%			2.98	%			2.16	%			2.65	%			3.69	%
10-year LIBOR (1)			3.38	%			3.97	%			3.25	%			3.44	%			4.24	%
3-month U.S. Treasury (1)			0.12	%			0.06	%			0.14	%			0.15	%			1.45	%
2-year U.S. Treasury (1)			0.61	%			1.14	%			0.70	%			0.96	%			2.00	%
5-year U.S. Treasury (1)			2.01	%			2.69	%			1.93	%			2.20	%			2.79	%
10-year U.S. Treasury (1)			3.30	%			3.85	%			3.22	%			3.26	%			3.64	%

Economic conditions in the United States continued to show moderate signs of improvement during 2010. The gross domestic product increased 2.8 percent in 2010, in contrast to a 2.6 percent decrease in 2009. The unemployment rate fell 0.5 percent during 2010, but remained high at 9.4 percent at the end of the year. Month-over-month home sales increased leading up to the expiration on April 30, 2010 of a federal tax credit available to homebuyers, then declined in May and remained relatively low throughout the remainder of the year. Policy makers have cautiously interpreted recent economic data to indicate that certain aspects of the economy are continuing to improve but at a slow pace. Despite early signs of economic improvement, the sustainability and extent of the improved economic conditions, and the prospects for and potential timing of further improvements (in particular, employment growth and housing market conditions), remain uncertain.

2010 In Summary

	•		The Bank ended 2010 with total assets of $39.7 billion and total advances of $25.5 billion, a decrease from $65.1 billion and $47.3 billion, respectively, at the end of 2009. The decrease in advances for 2010 was attributable in large part to the repayment of approximately $17.7 billion of advances by the Bank’s two largest borrowers, as further discussed in the section below entitled “Financial Condition — Advances.” The remaining decline in advances during 2010 was attributable to a general decline in member demand that the Bank believes was due largely to increases in members’ liquidity levels and reduced lending activity due to weak economic conditions.
	•		The Bank’s net income for 2010 was $104.7 million. Net interest income was $234.4 million and net losses on derivatives and hedging activities were $17.7 million. The Bank’s net interest income excludes net interest payments associated with economic hedge derivatives, which also contributed to the Bank’s income before assessments of $142.6 million for 2010. Had the net interest income on economic hedge derivatives been included in net interest income, both the Bank’s net interest income and its net losses on derivatives and hedging activities would have been higher by $18.7 million for the year ended December 31, 2010.

	•		The Bank’s net interest income for 2010 was positively impacted by higher yields on the Bank’s portfolio of collateralized mortgage obligations (“CMOs”). During the year, the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”) repurchased delinquent loans from the mortgage pools underlying their guaranteed CMOs. The repayments resulting from these repurchases resulted in approximately $13.5 million of accelerated accretion of the purchase discounts associated with the Bank’s investments in certain of these securities during the first half of 2010. Such repurchases by Fannie Mae and Freddie Mac did not have a significant impact on the Bank’s net interest income during the second half of 2010, nor are they expected to have a significant impact on the Bank’s net interest income in future periods.
	•		The $17.7 million in net losses on derivatives and hedging activities for the year included $18.7 million of net interest income on interest rate swaps accounted for as economic hedge derivatives, $0.4 million of net ineffectiveness-related losses on fair value hedges and $36.0 million of net losses on economic hedge derivatives (excluding net interest settlements), which were attributable primarily to the Bank’s stand-alone interest rate caps.
			The Bank held $9.3 billion (notional) of interest rate swaps recorded as economic hedge derivatives with a net positive fair value of $16.2 million (excluding accrued interest) at December 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 as the values of these derivatives decline to zero. The timing of this reversal will depend on the future estimated values of these derivatives, which will generally depend on the level and volatility of then-current and projected interest rates over the remaining lives of the derivatives. In addition, as of December 31, 2010, the Bank held $3.7 billion (notional) of stand-alone interest rate cap agreements with a fair value of $19.6 million that hedge CMO LIBOR floaters with embedded caps. If these agreements are held to maturity, the value of the caps will ultimately decline to zero and be recorded as a loss in net gains (losses) on derivatives and hedging activities in future periods.
	•		The Bank’s operating results for 2010 included credit-related other-than-temporary impairment charges of $2.6 million on certain of its investments in non-agency residential mortgage-backed securities. For a discussion of the Bank’s analysis, see Note 6 to the Bank’s audited financial statements included in 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 management’s current expectations, the Bank could recognize additional losses on the securities that it has already determined to be other-than-temporarily impaired and/or losses on its investments in non-agency residential mortgage-backed securities that have not previously been determined to be other-than-temporarily impaired. The Bank is currently unable to predict the impact, if any, that recent foreclosure moratoriums may have on the collectibility of its investments in non-agency residential mortgage-backed securities.
	•		At all times during 2010, the Bank was in compliance with all of its regulatory capital requirements. In addition, the Bank’s retained earnings increased to $452.2 million at December 31, 2010 from $356.3 million at December 31, 2009.
	•		During 2010, the Bank paid dividends totaling $8.8 million; the quarterly dividends during the year were paid at rates equal to the upper end of the Federal Reserve’s target for the federal funds rate plus 12.5 basis points for the applicable reference periods. While there can be no assurances about 2011 earnings, dividends, or regulatory actions, the Bank currently anticipates that its 2011 earnings will be sufficient both to pay quarterly dividends at a rate equal to or slightly above the upper end of the Federal Reserve’s target for the federal funds rate and to continue building retained earnings. In addition, the Bank currently expects to continue its quarterly repurchases of surplus stock.

Financial Condition

The following table provides selected period-end balances as of December 31, 2010, 2009 and 2008, as well as selected average balances for the years ended December 31, 2010, 2009 and 2008. As shown in the table, the Bank’s total assets decreased by 39.0 percent (or $25.4 billion) during the year ended December 31, 2010 after decreasing by 17.5 percent (or $13.8 billion) during the year ended December 31, 2009. The decrease in total assets during the year ended December 31, 2010 was primarily attributable to a $21.8 billion decrease in advances and a $2.9 billion decrease in held-to-maturity securities. As the Bank’s assets decreased, the funding for those assets also decreased. During the year ended December 31, 2010, total consolidated obligations decreased by $23.8 billion, as consolidated obligation bonds decreased by $20.2 billion and consolidated obligation discount notes declined by $3.6 billion.

During the year ended December 31, 2009, the decrease in total assets was due largely to a $13.7 billion decrease in advances. The funding for those assets also decreased during the year ended December 31, 2009, as consolidated obligation bonds decreased by $5.1 billion and consolidated obligation discount notes declined by $8.0 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)

		December 31, 2010												December 31, 2009												Balance at
						Increase (Decrease)												Increase (Decrease)								December 31,
		Balance				Amount				Percentage				Balance				Amount				Percentage				2008
Advances		$	25,456			$	(21,807	)			(46.1)	%		$	47,263			$	(13,657	)			(22.4)	%		$	60,920
Short-term liquidity holdings
Non-interest bearing excess cash balances (1)			1,600				(2,000	)			(55.6	)			3,600				3,600				*				—
Interest-bearing deposits			—				—				—				—				(3,684	)			(100.0	)			3,684
Federal funds sold			3,767				1,704				82.6				2,063				191				10.2				1,872
Long-term investments (2)			8,496				(2,929	)			(25.6	)			11,425				(404	)			(3.4	)			11,829
Mortgage loans, net			207				(53	)			(20.4	)			260				(67	)			(20.5	)			327
Total assets			39,690				(25,402	)			(39.0	)			65,092				(13,841	)			(17.5	)			78,933
Consolidated obligations — bonds			31,316				(20,200	)			(39.2	)			51,516				(5,098	)			(9.0	)			56,614
Consolidated obligations — discount notes			5,132				(3,630	)			(41.4	)			8,762				(7,983	)			(47.7	)			16,745
Total consolidated obligations			36,448				(23,830	)			(39.5	)			60,278				(13,081	)			(17.8	)			73,359
Mandatorily redeemable capital stock			8				(1	)			(11.1	)			9				(81	)			(90.0	)			90
Capital stock			1,601				(931	)			(36.8	)			2,532				(692	)			(21.5	)			3,224
Retained earnings			452				96				27.0				356				140				64.8				216
Average total assets			53,143				(16,875	)			(24.1	)			70,018				(4,623	)			(6.2	)			74,641
Average capital stock			2,128				(621	)			(22.6	)			2,749				(162	)			(5.6	)			2,911
Average mandatorily redeemable capital stock			7				(49	)			(87.5	)			56				(1	)			(1.8	)			57

Advances

The following table presents advances outstanding, by type of institution, as of December 31, 2010, 2009 and 2008.

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

		December 31,
		2010								2009								2008
		Amount				Percent				Amount				Percent				Amount				Percent
Commercial banks		$	19,708				79	%		$	41,924				89	% (1)		$	29,889				50	%
Thrifts			3,686				15				3,249				7	(1)			27,687				46
Credit unions			1,215				5				1,347				3				1,565				3
Insurance companies			336				1				301				1				243				—
Total member advances			24,945				100				46,821				100				59,384				99
Housing associates			60				—				11				—				131				—
Non-member borrowers			56				—				76				—				730				1
Total par value of advances		$	25,061				100	%		$	46,908				100	%		$	60,245				100	%
Total par value of advances outstanding to CFIs (2)		$	6,908				28	%		$	9,758				21	%		$	11,530				19	%

At December 31, 2010, the carrying value of the Bank’s advances portfolio totaled $25.5 billion, compared to $47.3 billion and $60.9 billion at December 31, 2009 and 2008, respectively. The par value of advances outstanding at December 31, 2010, 2009 and 2008 was $25.1 billion, $46.9 billion and $60.2 billion, respectively.

Advances to members grew steadily over the course of the first nine months of 2008, peaking near the end of the third quarter of that year when conditions in the financial markets were particularly unsettled. Advances growth during this period was generally spread across all segments of the Bank’s membership base, as the then prevailing credit market conditions appeared to lead members to increase their borrowings in order to increase their liquidity, to take advantage of borrowing rates that were relatively attractive compared with alternative wholesale funding sources, to take advantage of investment opportunities and/or to lengthen the maturity of their liabilities at a relatively low cost. Advances have subsequently declined as market conditions calmed and the economy weakened. From September 30, 2008 through December 31, 2010, outstanding advances (at par value) declined $42.8 billion or approximately 63 percent.

During 2009, advances to the Bank’s five largest borrowers decreased by $8.3 billion, contributing significantly to the overall decline in advances balances during the year. Advances to Wells Fargo Bank South Central, National Association (“WFSC”), Comerica Bank and Guaranty Bank (“Guaranty”) declined by $4.0 billion, $2.0 billion and $2.2 billion, respectively, during 2009. On August 21, 2009, the Office of Thrift Supervision closed Guaranty and the FDIC was named receiver. Guaranty was the Bank’s third largest borrower and shareholder at August 21, 2009,

with $2.0 billion of advances outstanding at that date; all of these advances were repaid in August and September 2009. The remaining decline in advances during 2009 was spread broadly across the Bank’s members.

During 2010, advances to the Bank’s five largest borrowers decreased by $17.8 billion. Advances to WFSC and Comerica Bank (the Bank’s two largest borrowers as of December 31, 2009 and 2010) declined by $14.2 billion and $3.5 billion, respectively, including prepayments totaling $10.3 billion and $2.0 billion, respectively, during the third quarter of 2010. The remaining decline in outstanding advances of $4.0 billion during 2010 was spread broadly across the Bank’s members. The Bank believes the decline in advances was due largely to increases in members’ liquidity levels, which were primarily the result of recent growth in their deposits and reduced lending activity due to weak economic conditions.

At December 31, 2010, advances outstanding to the Bank’s five largest borrowers totaled $9.5 billion, representing 37.8 percent of the Bank’s total outstanding advances as of that date. The following table presents the Bank’s five largest borrowers as of December 31, 2010.

FIVE LARGEST BORROWERS
(Par value, dollars in millions)

		As of December 31, 2010
						Percent of
		Par Value of				Total Par Value
Name		Advances				of Advances
Wells Fargo Bank South Central, National Association		$	3,998				16.0	%
Comerica Bank			2,500				10.0
Beal Bank Nevada (1)			1,435				5.7
International Bank of Commerce			950				3.8
First National Bank (Edinburg, Texas)			584				2.3
		$	9,467				37.8	%

As of December 31, 2009 and 2008, advances outstanding to the Bank’s five largest borrowers comprised $27.2 billion (58.1 percent) and $35.6 billion (59.2 percent), respectively, of the total advances portfolio.

The following table presents information regarding the composition of the Bank’s advances by product type as of December 31, 2010 and 2009.

ADVANCES OUTSTANDING BY PRODUCT TYPE
(dollars in millions)

		December 31, 2010								December 31, 2009
						Percentage								Percentage
		Balance				of Total				Balance				of Total
Fixed rate		$	15,582				62.2	%		$	19,035				40.6	%
Adjustable/variable rate indexed			6,765				27.0				24,591				52.4
Amortizing			2,714				10.8				3,282				7.0
Total par value		$	25,061				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 and other extensions of credit. The Bank’s collateral arrangements with its members and the types of collateral it accepts to secure advances are described in Item 1 — Business. 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 Item 1 — Business, 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.

Short-Term Liquidity Portfolio

At December 31, 2010, the Bank’s short-term liquidity portfolio was comprised of $3.8 billion of overnight federal funds sold to domestic bank counterparties and $1.6 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas. At December 31, 2009, the Bank’s short-term liquidity portfolio was comprised of $2.1 billion of overnight federal funds sold to domestic bank 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 anticipated demand for advances, the timing and extent of advance prepayments, 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.”)

Finance Agency regulations and Bank policies govern the Bank’s investments in unsecured money market instruments such as overnight and term federal funds and commercial paper. Those regulations and policies establish limits on the amount of unsecured credit that may be extended to borrowers or to affiliated groups of borrowers, and require the Bank to base its investment limits on the long-term credit ratings of its counterparties.

As of December 31, 2010, the Bank’s overnight federal funds sold consisted of $1.7 billion sold to counterparties rated double-A, $1.8 billion sold to counterparties rated single-A and $0.3 billion sold to counterparties rated triple-B. The credit ratings presented in the preceding sentence represent the lowest long-term rating assigned to the counterparty by Moody’s, S&P or Fitch Ratings, Ltd. (“Fitch”).

Long-Term Investments

At December 31, 2010, 2009 and 2008, the Bank’s long-term investment portfolio (at carrying value) was comprised of approximately $8.4 billion, $11.3 billion and $11.7 billion, respectively, of mortgage-backed securities (“MBS”) and $0.1 billion, $0.1 billion and $0.1 billion, respectively, of U.S. agency debentures. At December 31, 2010, all of the Bank’s long-term investments were classified as held-to-maturity.

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 capital in agency mortgage securities. The resolution required, among other things, that a FHLBank notify the Finance Board (now Finance Agency) prior to its first acquisition under the expanded authority and include in its notification a description of the risk management practices underlying its purchases. The expanded authority was limited to MBS issued by, or backed by pools of mortgages guaranteed by, Fannie Mae or Freddie Mac, including CMOs or real estate mortgage investment conduits backed by such MBS. The mortgage loans underlying any securities that were purchased under this expanded authority had to be originated after January 1, 2008, and

underwritten to conform to standards imposed by the federal banking agencies in the Interagency Guidance on Nontraditional Mortgage Product Risks dated October 4, 2006, and the Statement on Subprime Mortgage Lending dated July 10, 2007.

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.

As of December 31, 2010, the Bank held $8.4 billion of MBS (at carrying value), which represented 410 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 any MBS in 2011. Currently, the Bank has capacity under applicable policies and regulations to purchase certain other types of highly rated long-term investments and it may elect to purchase such securities if attractive opportunities to do so are available.

On July 23, 2010, the Bank’s Board of Directors approved an amendment to the Bank’s Risk Management Policy which removes the Bank’s authority to purchase non-agency (i.e., private-label) MBS. With the exception of one security acquired in October 2006, the Bank has not acquired any non-agency MBS since 2005.

During the year ended December 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 Fannie Mae or Freddie Mac that it designated as held-to-maturity. As further described below, the floating rate coupons of these securities are subject to interest rate caps. During this same year, the proceeds from maturities of long-term securities designated as held-to-maturity totaled approximately $4.1 billion. The Bank did not sell any long-term securities during 2010.

During the year ended December 31, 2009, the Bank acquired (based on trade date) $2.9 billion ($3.0 billion par value) of long-term investments, all of which were LIBOR-indexed floating rate CMOs issued by either Fannie Mae or Freddie Mac that the Bank designated as held-to-maturity. As further described below, the floating rate coupons of these securities are also subject to interest rate caps. During the year, proceeds from maturities of long-term securities designated as held-to-maturity and available-for-sale totaled approximately $3.2 billion and $42.5 million, respectively. In March 2009, the Bank sold an available-for-sale security (specifically, a government-sponsored enterprise mortgage-backed security) 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. The Bank did not sell any other long-term investments during the year ended December 31, 2009.

During the year ended December 31, 2008, the Bank acquired (based on trade date) $6.2 billion of long-term investments, all of which had settled as of December 31, 2008. The Bank acquired $5.8 billion ($6.0 billion par value) of LIBOR-indexed floating rate CMOs issued by either Fannie Mae or Freddie Mac that it designated as held-to-maturity and one LIBOR-indexed floating rate CMO issued by Fannie Mae (a $97.7 million par value security that the Bank acquired in June 2008 at a cost of $93.3 million), which the Bank classified as available-for-sale. The floating rate coupons of all of these securities are also subject to interest rate caps. In addition, during the first quarter of 2008, the Bank purchased $257 million ($250 million par value) of U.S. agency debentures; these investments were classified as available-for-sale and hedged with fixed-for-floating interest rate swaps. In April 2008, the Bank sold all of the U.S. agency debentures that it had acquired during the first quarter of 2008 and terminated the associated interest rate swaps. The realized gains on the sales of these available-for-sale securities totaled $2.8 million. This action was taken in response to favorable opportunities in the market at that time. In

addition, on October 29, 2008, the Bank sold a U.S. agency debenture classified as available-for-sale. Proceeds from the sale totaled $56.5 million, resulting in a realized loss at the time of sale of $3.7 million, of which $2.5 million had been recognized in the third quarter of 2008 as an other-than-temporary impairment charge because the Bank no longer had the intent as of September 30, 2008 to hold this security through to recovery of the unrealized loss. At September 30, 2008, the amortized cost of this security exceeded its estimated fair value at that date by $2.5 million.

The Bank did not sell any other long-term investments during the year ended December 31, 2008; during this same period, the proceeds from maturities of long-term securities designated as held-to-maturity and available-for-sale totaled approximately $1.7 billion and $268 million, respectively.

The following table provides the unpaid principal balances of the Bank’s MBS portfolio, by coupon type, as of December 31, 2010 and 2009.

UNPAID PRINCIPAL BALANCE OF MORTGAGE-BACKED SECURITIES BY COUPON TYPE
(In millions of dollars)

		December 31, 2010												December 31, 2009
		Fixed				Variable								Fixed				Variable
		Rate				Rate				Total				Rate				Rate				Total
U.S. government guaranteed obligations		$	—			$	20			$	20			$	—			$	24			$	24
Government-sponsored enterprises			2				8,199				8,201				3				10,985				10,988
Non-agency residential MBS
Prime(1)			—				323				323				—				423				423
Alt-A(1)			—				75				75				—				92				92
Prime non-agency CMBS(1)(2)			—				—				—				56				—				56
Total MBS		$	2			$	8,617			$	8,619			$	59			$	11,524			$	11,583

Gross unrealized losses on the Bank’s MBS investments decreased from $188 million at December 31, 2009 to $86 million at December 31, 2010. The following table sets forth the unrealized losses on the Bank’s MBS portfolio as of December 31, 2010 and 2009.

UNREALIZED LOSSES ON MBS PORTFOLIO
(dollars in millions)

		December 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
U.S. government guaranteed obligations		$	—				0.0	%		$	—				0.3	%
Government-sponsored enterprises			2				0.0	%			53				0.5	%
Non-agency residential MBS			84				21.5	%			135				26.5	%
		$	86							$	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”). As set forth in the table above, the gross unrealized losses on the Bank’s holdings of non-agency residential MBS (“RMBS”) totaled $84 million as of December 31, 2010, which represented 21.5 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, 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 noted above were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the actual historical or currently likely future credit performance of the securities.

All of the Bank’s held-to-maturity securities are rated by one or more of the following NRSROs: Moody’s, S&P and/or Fitch. With the exception of 22 non-agency RMBS, all of these securities carried the highest investment grade credit rating by each of the organizations that rated the respective securities as of December 31, 2010. The following table presents the credit ratings assigned to the Bank’s non-agency RMBS as of December 31, 2010. The credit ratings presented in the table represent the lowest rating assigned to the security by Moody’s, S&P or Fitch.

NON-AGENCY RMBS BY CREDIT RATING
(dollars in thousands)

						Unpaid
Credit		Number of				Principal				Amortized				Carrying				Estimated				Unrealized
Rating		Securities				Balance				Cost				Value				Fair Value				Losses
Triple-A			17			$	108,208			$	108,224			$	108,224			$	103,027			$	5,197
Double-A			1				3,562				3,562				3,562				3,389				173
Triple-B			1				6,891				6,817				4,233				4,429				2,388
Double-B			1				5,220				5,209				3,318				3,318				1,891
Single-B			8				95,091				95,090				93,566				70,249				24,841
Triple-C			10				140,194				137,166				89,763				91,716				45,450
Double-C			1				38,770				35,279				25,418				31,268				4,011
Total			39			$	397,936			$	391,347			$	328,084			$	307,396			$	83,951

The following table presents the securities in the table above that were on negative watch as of December 31, 2010.

NON-AGENCY RMBS ON NEGATIVE WATCH
(dollars in thousands)

		Number of				Carrying				Estimated
Credit Rating		Securities				Value				Fair Value
Triple-A			7			$	25,968			$	24,950
Double-A			1				3,562				3,389
Triple-B			1				4,233				4,429
Total			9			$	33,763			$	32,768

During the period from January 1, 2011 through March 15, 2011, one security rated triple-A in the table above had its credit rating lowered to double-B by one of the NRSROs; as of December 31, 2010, this security had both an amortized cost and estimated fair value of $0.2 million. In addition, during this same period, the security rated triple-B (and on negative watch) in the tables above had its credit rating lowered to single-B; this security was no longer on negative watch at March 15, 2011. None of the Bank’s other non-agency RMBS holdings were downgraded or placed on negative watch during this period.

At December 31, 2010, the Bank’s portfolio of non-agency RMBS was comprised of 39 securities with an aggregate unpaid principal balance of $398 million: 20 securities with an aggregate unpaid principal balance of $177 million

are backed by first lien fixed rate loans and 19 securities with an aggregate unpaid principal balance of $221 million are backed by first lien option adjustable-rate mortgage (“option ARM”) loans. In comparison, as of December 31, 2009, the Bank’s non-agency RMBS portfolio was comprised of 40 securities with 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). All of these investments are classified as held-to-maturity securities. The following table provides a summary of the Bank’s non-agency RMBS as of December 31, 2010 by classification at the time of issuance, collateral type and year of securitization (the Bank does not hold any MBS that were labeled as subprime at the time of issuance).

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
Classification and Year of Securitization		Securities				Balance				Cost				Fair Value				Losses				Delinquency(1)(2)				Average (1)(3)				Average(1)				Current(4)
Prime(5)
Fixed rate collateral
2006			1			$	39			$	35			$	31			$	4				13.71	%			7.21	%			8.89	%			7.21	%
2004			4				12				12				11				1				4.19	%			26.47	%			5.81	%			24.07	%
2003			10				88				88				84				4				1.25	%			6.83	%			3.91	%			5.28	%
2000			1				—				—				—				—				0.00	%			39.17	%			2.00	%			39.17	%
Total fixed rate prime collateral			16				139				135				126				9				4.99	%			8.62	%			5.46	%			5.28	%
Option ARM collateral
2005			15				172				171				119				52				30.42	%			46.30	%			43.15	%			25.89	%
2004			2				12				12				8				4				28.32	%			33.61	%			29.84	%			31.80	%
Total option ARM prime collateral			17				184				183				127				56				30.29	%			45.47	%			42.28	%			25.89	%
Total prime collateral			33				323				318				253				65				19.43	%			29.65	%			26.47	%			5.28	%
Alt-A(5)
Fixed rate collateral
2005			1				26				26				20				6				11.52	%			9.89	%			6.84	%			9.89	%
2004			1				3				3				3				—				11.30	%			36.36	%			6.85	%			36.36	%
2002			2				9				9				8				1				6.37	%			20.44	%			4.54	%			17.17	%
Total fixed rate Alt-A collateral			4				38				38				31				7				10.34	%			14.75	%			6.33	%			9.89	%
Option ARM collateral
2005			2				37				35				23				12				48.50	%			40.54	%			39.58	%			34.34	%
Total Alt-A collateral			6				75				73				54				19				29.32	%			27.58	%			22.87	%			9.89	%
Total non-agency RMBS			39			$	398			$	391			$	307			$	84				21.30	%			29.26	%			25.79	%			5.28	%
Total fixed rate collateral			20			$	177			$	173			$	157			$	16				6.14	%			9.94	%			5.65	%			5.28	%
Total option ARM collateral			19				221				218				150				68				33.37	%			44.63	%			41.82	%			25.89	%
Total non-agency RMBS			39			$	398			$	391			$	307			$	84				21.30	%			29.26	%			25.79	%			5.28	%