Federal Home Loan Bank of Pittsburgh - FORM 10-Q

Attached files

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EX-31.2 - Federal Home Loan Bank of Pittsburgh	ex31210q1q11.htm
EX-32.2 - Federal Home Loan Bank of Pittsburgh	ex32210q1q11.htm
EX-32.1 - Federal Home Loan Bank of Pittsburgh	ex32110q1q11.htm
EX-31.1 - Federal Home Loan Bank of Pittsburgh	ex31110q1q11.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended March 31, 2011



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

For the transition period from __________ to __________

Commission File Number: 000-51395

FEDERAL HOME LOAN BANK OF PITTSBURGH

(Exact name of registrant as specified in its charter)



Federally Chartered Corporation		25-6001324
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

601 Grant Street Pittsburgh, PA 15219		15219
(Address of principal executive offices)		(Zip Code)

(412) 288-3400

(Registrant’s telephone number, including area code)

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

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 £ No

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



£ Large accelerated filer	£ Accelerated filer	S Non-accelerated filer	£ Smaller reporting company
		(Do not check if smaller reporting company)

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

There were 36,593,181 shares of common stock with a par value of $100 per share outstanding at April 30, 2011.

FEDERAL HOME LOAN BANK OF PITTSBURGH

TABLE OF CONTENTS



Part I - FINANCIAL INFORMATION		1
Item 1: Financial Statements (unaudited)		54
Notes to Financial Statements (unaudited)		60
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations		0
Risk Management		29
Item 3: Quantitative and Qualitative Disclosures about Market Risk		97
Item 4: Controls and Procedures		97
Part II - OTHER INFORMATION		98
Item 1: Legal Proceedings		98
Item 1A: Risk Factors		99
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		100
Item 3: Defaults upon Senior Securities		100
Item 4: (Removed and Reserved)		100
Item 5: Other Information		100
Item 6: Exhibits		100
Signature		101

PART I – FINANCIAL INFORMATION

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Executive Summary should be read in conjunction with the Bank’s unaudited financial statements and footnotes to the financial statements in the quarterly report filed on this Form 10-Q as well as the Bank’s 2010 Form 10-K.

Executive Summary

Overview. The Bank's financial condition and results of operation are influenced by the interest rate environment, global and national economies, local economies within its three-state district, and the conditions in the financial, housing and credit markets. During first quarter 2011, the Bank continued to face challenges with respect to the decreasing advance portfolio, runoff of higher-yielding assets, including MBS and mortgage loans, and the ongoing impact of other-than-temporary impairment (OTTI) credit losses on the private label mortgage-backed securities (MBS) portfolio.

The interest rate environment significantly impacts the Bank's profitability as net interest income is affected by several external factors, including market interest rate levels and volatility, credit spreads and the general state of the economy. To manage interest rate risk, a portion of the Bank's advances and debt have been hedged with interest-rate exchange agreements in which 3-month LIBOR is received (advances) or paid (debt). Short term interest rates also directly affect the Bank through earnings on invested capital. Finally, the Bank has a large percentage of mortgage-related assets on the balance sheet thus making it sensitive to changes in mortgage rates. Generally, due to the Bank's cooperative structure, the Bank earns relatively narrow net spreads between yield on assets (particularly advances, its largest asset) and the cost of corresponding liabilities.

The Bank expects its near-term ability to generate significant earnings on short term investments will be limited as it appears likely that, given current economic conditions, the Federal Open Market Committee (FOMC) will maintain the target range for the Federal funds rate of 0 percent to 0.25 percent for some time. Effective April 1, 2011 the FDIC, as previously announced, implemented a change, required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), to the basis on which FDIC-insured institutions are assessed insurance premiums. Specifically, the FDIC changed the insurance premium assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity. Prior to this change, FDIC-insured institutions could borrow overnight Federal funds, primarily from the GSEs, leave these borrowed funds in their Federal Reserve Bank (FRB) accounts, and earn a positive spread. With the FDIC now effectively assessing a fee on those assets, leveraging with overnight funds has become less attractive and, as a result, demand for overnight Federal funds from domestic banks has declined. As a result, the effective rate on Federal funds dropped to a range of 0.08 percent to 0.10 percent, down from a range of 0.14 percent to 0.15 percent in March 2011. If the Fed funds effective rate remains in this lower range, Bank earnings on capital will be negatively impacted.

The following table presents key market interest rates for the periods indicated (obtained from Bloomberg L.P.).



	1st Quarter 2011				4th Quarter 2010				1st Quarter 2010
	Average		Ending		Average		Ending		Average		Ending
Target overnight Federal funds rate	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%
3-month LIBOR ⁽¹⁾	0.31	%	0.30	%	0.29	%	0.30	%	0.26	%	0.29	%
2-year U.S. Treasury	0.68	%	0.83	%	0.48	%	0.60	%	0.91	%	1.02	%
5-year U.S. Treasury	2.11	%	2.28	%	1.49	%	2.00	%	2.41	%	2.55	%
10-year U.S. Treasury	3.44	%	3.47	%	2.86	%	3.30	%	3.70	%	3.83	%
15-year mortgage current coupon ⁽²⁾	3.46	%	3.48	%	2.89	%	3.43	%	3.54	%	3.62	%
30-year mortgage current coupon ⁽²⁾	4.26	%	4.33	%	3.73	%	4.15	%	4.40	%	4.52	%

Notes:

⁽¹⁾LIBOR - London Interbank Offered Rate

⁽²⁾Simple average of Fannie Mae and Freddie Mac MBS current coupon rates.

The U.S. Treasury has projected that the statutory limit on the total amount of U.S. debt will be reached no later than May 16, 2011. Although the U.S. Treasury has authority to take certain extraordinary measures to temporarily postpone the date the debt limit will be reached, the U.S. Treasury currently projects that such measures would be exhausted by August 2, 2011. If Congress does not increase the debt limit, the U.S. Treasury would have no remaining borrowing authority once the debt limit is

reached and a broad range of government payments would have to be stopped. If the U.S. Treasury is not able to make interest payments on U.S. debt and meet other obligations, disruptions may occur in the capital markets which could result in higher interest rates and borrowing costs for the Bank. To the extent that the Bank cannot access funding when needed on acceptable terms to effectively manage its cost of funds, its financial condition and results of operations may be negatively impacted.

Interest Rates and Yield Curve Shifts. The Bank's earnings are affected not only by rising or falling interest rates, but also by the particular path and volatility of changes in market interest rates and the prevailing shape of the yield curve. Theoretically, flattening of the yield curve tends to compress the Bank's net interest margin, while steepening of the curve offers better opportunities to purchase assets with wider net interest spreads. During first quarter 2011, the U.S. Treasury yield curve displayed volatility with short-term interest rates holding steady to decreasing slightly and long-term interest rates increasing slightly from year-end 2010. The spread between 2-year and 10-year Treasuries remained steep, reflecting the uncertain path of the economic expansion as the economy continued to recover following its emergence from the recession of 2007-08. Unfortunately, the Bank's ability to significantly capitalize on the steep yield curve was restricted due to continuing private label MBS credit concerns and tight spreads which limited the accumulation of MBS assets.

The performance of the Bank's portfolios of mortgage assets is particularly affected by shifts in the 10-year maturity range of the yield curve, which is the point that heavily influences mortgage rates and potential refinancings. Yield curve shape can also influence the pace at which borrowers refinance to prepay their existing loans, as borrowers may select shorter duration mortgage products. Under normal circumstances, when rates decline, prepayments increase, resulting in accelerated accretion/amortization of any associated premiums/discounts. In addition, when higher coupon mortgage loans prepay, the unscheduled return of principal cannot be invested in assets with a comparable yield resulting in a decline in the aggregate yield on the remaining loan portfolio and a possible decrease in the net interest margin. Given the unique circumstances of the current economic environment, shifts in the yield curve and the level of interest rates have not had these typical results.

The volatility of yield curve shifts may also have an effect on the Bank's duration of equity and the cost of maintaining duration within limits. Volatility in interest rates may cause management to take action in order to maintain compliance with these limits, even though a subsequent, sudden reversal in rates may make such hedges unnecessary. Volatility in interest rate levels and in the shape of the yield curve may increase the cost of compliance with the Bank's duration limits. In the past few years, the typical cash flow variability of mortgage assets has become less pronounced as the combination of declining residential housing values and reduced credit availability has diminished refinancing activity. If this trend continues, the duration of assets could be extended and the cost to fund these assets could increase.

Market and Housing Trends. Financial institution lending continues to be weak and small businesses remain reluctant to add to payrolls due to concerns about the strength of the economic recovery. Commercial real estate activity has also been restrained by high vacancy rates, low property prices, and strained credit conditions. The financial markets have reflected this uncertainty, as both equity and fixed income markets have experienced volatility.

Housing starts and building permits both came in above market expectations in March 2010. While this news is definitely encouraging, the March level of housing starts was the tenth lowest on record since 1959 and building permits are at the eighteenth lowest level on record since 1980. New home sales rose in March from record low levels in February but continue to face significant hurdles in 2011 as distressed sales continue to hamper the market and accounted for forty percent of existing home sales in March, the most since April 2009. High unemployment combined with distressed sales has softened prices throughout the country. Median home prices are down twelve percent since the end of the recession, compared to a thirteen percent average gain during the same time period of the prior six recession recoveries.

The recent natural disaster in Japan combined with uncertainty in the Middle East has impacted oil prices and costs of goods imported from Japan, including electronics and automobiles. Economies with large exports to Japan should not necessarily be negatively impacted. The political revolution and turmoil in the Middle East has increased fuel and food prices in the United States, causing some to question the strength and stability of the current recovery.

The labor market has been hit particularly hard by the recession. The current pace of private sector job growth will take years to replace the 8.5 million jobs lost during the recession and unemployment is expected to remain at elevated levels throughout 2011.

The Bank's members' demand for advances has continued to decline due to some of the factors described above. Additionally, members have historically high deposit levels which provide them with funding for the loan demand that they have. As an example of the volatility in advance demand, during the height of the credit crisis in September 2008 when the FHLBanks continued to provide funding for members, the Bank's advances were $72.5 billion. However, now that the credit crisis has eased and members have excess deposits, demand for advances declined to $26.7 billion at March 31, 2011. By comparison, the Bank's advance

portfolio was most recently at a similar level at December 31, 2002, when advances totaled $29.3 billion.

Results of Operations. The overall economic conditions discussed above have significantly impacted the Bank in terms of advance volume and credit losses on its private label MBS. Those items are discussed below, along with other items which significantly impacted the Bank.

During the three months ended March 31, 2011, the Bank recorded net income of $2.5 million compared to $9.9 million for the three months ended March 31, 2010. First quarter 2011 and 2010 results were both impacted by OTTI credit losses taken on the Bank's private label MBS portfolio. The Bank recorded $20.5 million and $27.6 million of OTTI credit losses during the first quarters of 2011 and 2010, respectively.

OTTI. Deterioration in the mortgage market originated in the subprime sector but subsequently moved into the Alt-A and Prime sectors. The Alt-A sector includes borrowers who have characteristics of both subprime and Prime borrowers. A significant portion of the Bank's private label MBS portfolio is Alt-A, although the majority of the portfolio continues to be comprised of MBS backed by Prime loans. The Bank was not significantly impacted by the deterioration in the subprime market, as there was very little subprime private label MBS in its portfolio.

The Alt-A portfolio experienced additional deterioration in the first quarter of 2011. Assumptions related to both the Prime and Alt-A portfolios worsened in the same three-month span. The loss severity increased for both Prime and Alt-A due to the recent issues related to loan service foreclosure procedures and the resulting increases to foreclosure/liquidation timelines. Additionally, the default frequency roll rates on Prime bonds were increased based on market data. For first quarter 2011, the Bank experienced Alt-A and Prime OTTI credit charges of $12.9 million and $7.3 million, respectively, compared to $14.1 million and $13.2 million, respectively, in first quarter 2010. The first quarter 2011 assumptions were adjusted to increase cumulative lifetime loss rates.

The OTTI credit losses reflect the impact of projected credit losses on loan collateral underlying certain private label MBS in the Bank's portfolio. All FHLBanks use the same systems and key modeling assumptions for purposes of cash flow analyses for measurement of OTTI. These assumptions are for the life of the underlying loan collateral and are adjusted quarterly based on actual performance and future expectations. These assumptions include: (1) default frequency, which is based on who will default and is affected by local and national economic conditions; (2) loss severities, which reflects the expected severity of the loss incurred upon selling the home which varies by geographic location and servicer foreclosure practices; (3) changes in housing prices in varying regions of the country; and (4) prepayment assumptions on the underlying collateral.

Many factors could influence future modeling assumptions including economic, financial market and housing conditions. If performance of the underlying loan collateral deteriorates further and/or the Bank's modeling assumptions become more pessimistic, the Bank could experience further losses on the portfolio. At the present time, the Bank cannot estimate the future amount of any additional OTTI charges but they could be material.

On April 8, 2011, the Bank sold an available-for-sale (AFS) private label MBS with a par value of $163 million. The sale will result in a gain that will be recorded in the second quarter of 2011. This sale was consistent with management's desire to reduce the Bank's exposure to private label MBS, which may include opportunistic sales of select bonds.

Net Interest Income. Net interest income was $39.2 million and $59.0 million for the first quarter 2011 and 2010, respectively. Volume for both interest-earning assets and interest-bearing liabilities decreased in first quarter 2011, while yields on assets and rates paid on debt both increased. Debt costs rose more than yields on advances and other earning assets, resulting in the year-over-year decline in net interest income. In addition, the Bank's net interest income has been impacted by the continued runoff of the higher-yielding assets in the portfolio, including MBS and mortgage loans. As private label MBS, which are generally higher-coupon assets, are paying down and otherwise declining, the Bank is replacing these investments with lower-yielding agency MBS. With respect to the mortgage loan portfolio, the availability of high-quality mortgage loans for purchase has continued to decline. The net interest margin for first quarter 2011 decreased 7 basis points to 30 basis points, due primarily to lower yields on and volume of interest-earning assets, as well as higher rates paid on interest-bearing liabilities.. These were partially offset by lower volume of interest-bearing liabilities. The net interest income results for 2010 also included higher prepayment fees, which increased the net interest margin in that period.

Financial Condition. Advances. The Bank's advance portfolio continued to decline, down 10.3 percent from December 31, 2010 to March 31, 2011. Demand for advances has decreased as members have reduced their balance sheets and experienced high levels of retail deposits relative to historical levels, due in part to the factors noted above. Although the advance portfolio has declined, its average life has been extended as certain members have replaced their short-term advances with long-term advances; this is evidenced in the swing of short-term advance balances from year-end. At March 31, 2011, only 29.1 percent of

the par value of loans in the portfolio had a remaining maturity of one year or less, compared to 38.5 percent at December 31, 2010. A large portion of these types of short-term advances have historically been rolled over upon maturity.

The ability to grow and/or maintain the advance portfolio may be affected by, among other things, the following: (1) the liquidity demands of the Bank's borrowers; (2) the composition of the Bank's membership; (3) member reaction to the Bank's voluntary decision to temporarily suspend dividend payments and to execute only partial excess stock repurchases; (4) the Bank's liquidity position and how management chooses to fund the Bank; (5) current, as well as future, credit market conditions; (6) housing market trends; and (7) the shape of the yield curve. In the current market environment, the Bank believes that there may be an increased probability of extensions in maturities of members' advances.

Investments. At March 31, 2011, the Bank held $20.8 billion of total investment securities, including trading, AFS and held-to-maturity (HTM) securities as well as interest-bearing deposits and Federal funds sold. This total included $4.2 billion of private label MBS, of which $1.7 billion was "investment grade" and $2.5 billion was "below investment grade". The majority of the deterioration between "investment grade" and "below investment grade" occurred in the first nine months of 2009. Since then there has been some stabilization between "investment grade" and "below investment grade". However, during the first quarter of 2011, $116.9 million of investments were downgraded to "below investment grade". The Bank has continued to see improvement in the fair value, or price, of its private label MBS portfolio since the low point at the end of 2008. Prices can appreciate or depreciate for many reasons; the Bank is unable to predict where prices on these investments may go in the future. The overall balance of the par value of the private label MBS continues to decline, primarily due to paydowns.

Consolidated Obligations of the FHLBanks. The Bank's ability to operate its business, meet its obligations and generate net interest income depends primarily on the ability to issue large amounts of various debt structures at attractive rates. During first quarter 2011, rates paid on FHLB debt increased in conjunction with Treasury yields. Spreads relative to LIBOR have traded in fairly narrow ranges, improving since the U.S. Treasury published its "Reforming America's Housing Finance Market: A Report to Congress" White Paper in mid-February. This White Paper outlined the current U.S. housing finance system and broad steps to move to a new housing finance regime. While the publication focused more on the other GSEs, it did suggest some changes to the FHLBank System. Initial market reaction has been positive for Agency debt, and FHLBank bond funding costs have generally improved since mid-February 2011.

On a total FHLBank System basis, consolidated obligations outstanding continued to shrink during the first quarter of 2011, dropping an additional $30 billion from December 31, 2010 to $766 billion. This reduction was in both bonds and discount notes, which fell $20 billion and $10 billion, respectively during first quarter 2011. On a period-end basis, this is the lowest level of consolidated obligations outstanding since December 31, 2003.

The Bank's total consolidated obligations declined $1.0 billion, or 2.2 percent, since year-end 2010. Discount notes increased $75.5 million, or 0.6 percent, from December 31, 2010 to March 31, 2011 and accounted for 28.5 percent and 27.7 percent of the Bank's total consolidated obligations at March 31, 2011 and December 31, 2010, respectively. Total bonds decreased $1.1 billion, or 3.3 percent, from December 31, 2010 to March 31, 2011, and comprised a smaller percentage of the total debt portfolio, decreasing from 72.3 percent at December 31, 2010 to 71.5 percent at March 31, 2011.

On April 18, 2011, Standard & Poor's (S&P) affirmed its AAA rating on long-term U.S. debt, although S&P revised its outlook to negative from stable based on the overall U.S. debt burden and related fiscal challenges in reducing the deficit. As a result, on April 20, 2011, S&P affirmed the AAA rating on FHLBank System consolidated obligations, but revised its outlook on FHLBank System debt issues to negative from stable. In addition, on April 20, 2011, S&P affirmed its unsecured long-term AAA rating on the Bank and nine of the other FHLBanks but revised its outlook for the Bank and such other FHLBanks from stable to negative. While to date this rating action has not increased cost of funds or affected business, a negative watch action or credit downgrade could increase the Bank's cost of funds or affect the Bank's ability to enter into derivative contracts or issue letters of credit, which could adversely impact its results of operations and financial condition.

Capital Position and Regulatory Requirements. Retained earnings at March 31, 2011 were $399.8 million, up $2.5 million from year-end 2010 reflecting the impact of first quarter 2011 net income. Accumulated other comprehensive income (loss) (AOCI) related to the noncredit portion of OTTI losses on AFS securities improved from $(222.5) million at December 31, 2010 to $(143.1) million at March 31, 2011 due to paydowns in the private label MBS portfolio, certain OTTI noncredit losses being reclassified as credit losses, and price appreciation.

The Bank was deemed "adequately capitalized" as of December 31, 2010. In its determination, the Finance Agency maintained its concerns regarding the Bank's capital position and earnings prospects. The Finance Agency believes that the Bank's retained earnings levels are insufficient and the poor quality of its private label MBS portfolio has created uncertainties about its ability to maintain sufficient capital. The Finance Agency continues to monitor the Bank's capital adequacy. As provided for under the

Finance Agency's final rule on FHLBank capital classification and critical capital levels, the Director of the Finance Agency has discretion to reclassify the Bank's capital classification even if the Bank meets or exceeds the regulatory requirements established. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended March 31, 2011. The Bank exceeded its risk-based, total and leverage capital requirements at March 31, 2011, as presented in the Capital Resources section in this Item 2. Management's Discussion and Analysis.

Effective July 1, 2010, changes to the Bank's Capital Plan were implemented. The amended Capital Plan replaced the unused borrowing capacity membership stock purchase requirement with an annual Membership Asset Value (MAV) stock purchase requirement. This calculation is not affected by the amount the member borrows from the Bank. All members fully transitioned to the amended Capital Plan effective April 8, 2011.

Beginning in first quarter 2010, the Bank began measuring capital adequacy with a key risk indicator - Market Value of Equity to Par Value of Capital Stock (MV/CS). An initial floor of 85 percent was established by the Board of Directors (Board), representing the estimated level from which the MV/CS would recover to par through the retention of earnings over the 5-year redemption period of the Bank's capital stock. When MV/CS is below the established floor, excess capital stock repurchases and dividend payouts are required to be restricted. See the "Risk Governance" section of Risk Management in Item 7. Management's Discussion and Analysis in the Bank's 2010 Form 10-K for additional details on the calculation of MV/CS. In April 2011, the Board increased the 85 percent floor to 87.5 percent, effective for the second quarter of 2011. This increase demonstrates the Board's commitment to move the Bank toward par value capital stock. The Board will re-evaluate the floor at least annually, with the objective of moving it to 95 percent over time. Additional updates, including the use of the Bank's retained earnings framework discussed below, to the Bank's Retained Earnings and Dividend Policy were made by the Board in April 2011. See the "Capital and Retained Earnings" discussion in Financial Condition in Item 2. Management's Discussion and Analysis in the quarterly report filed on this Form 10-Q for additional details.

Because the MV/CS ratio was above 85 percent at September 30, 2010, December 31, 2010 and March 31, 2011, the Bank performed additional analysis of the adequacy of capital taking into consideration the impact of potential excess capital stock repurchases and/or dividend payouts. As a result of this analysis, the Bank executed a partial repurchase of excess capital stock on October 29, 2010, February 23, 2011 and April 29, 2011. The amount repurchased on April 29, 2011 was approximately $185 million. In all instances, the amount of excess capital stock repurchased from any member was the lesser of 5 percent of the member's total capital stock outstanding or its excess capital stock outstanding on October 28, 2010, February 22, 2011, and April 28, 2011, respectively.

During the first quarter of 2011, management developed and adopted a revised framework for evaluating retained earnings adequacy, Retained earnings are intended to cover unexpected losses and protect members' par value of capital stock. The retained earnings target generated from this framework will be sensitive to changes in the Bank's risk profile, whether favorable or unfavorable. The framework will also assist management in their overall analysis of the level of future excess stock repurchases and dividends. See the "Capital and Retained Earnings" discussion in Financial Condition in this Item 2. Management's Discussion and Analysis in the quarterly report filed on this Form 10-Q for additional details regarding the newly implemented retained earnings framework.

Decisions regarding any future repurchases of excess capital stock will be made on a quarterly basis. The Bank will continue to monitor the condition of its private label MBS portfolio, its overall financial performance and retained earnings (including analysis based on the framework noted above), developments in the mortgage and credit markets and other relevant information as the basis for determining the status of dividends and excess capital stock repurchases in future quarters.

During the first quarter of 2011, the 12 FHLBanks, including the Bank, entered into a Joint Capital Enhancement Agreement (JCEA) intended to enhance the capital position of each FHLBank. The FHLBanks' REFCORP obligations are expected to be fully satisfied during 2011. The intent of the Agreement is to allocate that portion of each FHLBank's earnings historically paid to satisfy its REFCORP obligation to a separate restricted retained earnings account at that FHLBank.

Each FHLBank is currently required to contribute 20 percent of its earnings toward payment of the interest on REFCORP bonds. The JCEA provides that, upon full satisfaction of the REFCORP obligation, each FHLBank will contribute 20 percent of its net income each quarter to a separate restricted retained earnings account until the balance of that account equals at least 1 percent of that FHLBank's average balance of outstanding consolidated obligations for the previous quarter. These restricted retained earnings will not be available to pay dividends. For more information on the JCEA, see Item 1. Business in the Bank's 2010 Form 10-K.

The JCEA 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 Agreement. Under the JCEA, if the FHLBanks'

REFCORP obligation terminates before the Finance Agency has approved all proposed capital plan amendments submitted pursuant to the JCEA, each FHLBank will nevertheless be required to commence the required allocation to its separate restricted retained earnings account beginning as of the end of the calendar quarter in which the final payments are made by the FHLBanks with respect to their REFCORP obligations. Depending on the earnings of the FHLBanks, the REFCORP obligation could be satisfied as of the end of the second quarter of 2011, although the exact date is not known and is dependent on the future earnings of all FHLBanks and interest rates. As of the date of this report, the Bank is considering amending its capital plan to incorporate the terms of the JCEA which could result in amendments to the JCEA, including, among other things, possible revisions to the termination provisions and related provisions affecting restrictions on the separate restricted retained earnings account.

Financial Highlights

The Statement of Operations data for the three months ended March 31, 2011 and the Condensed Statement of Condition data as of March 31, 2011 are unaudited and were derived from the financial statements included in the quarterly report filed on this Form 10-Q. The Statement of Operations and Condensed Statement of Condition data for all other interim quarterly periods is unaudited and was derived from the applicable quarterly reports filed on Form 10-Q. The Condensed Statement of Condition data as of December 31, 2010 was derived from the audited financial statements in the Bank's 2010 Form 10-K. The Statement of Operations data for the three months ended December 31, 2010 is unaudited and was derived from the Bank's 2010 Form 10-K.

Statement of Operations



	Three Months Ended
(in millions, except per share data)	March 31, 2011			December 31, 2010			September 30, 2010			June 30, 2010			March 31, 2010
Net interest income before provision (benefit) for credit losses	$	39.2		$	64.6		$	50.6		$	59.1		$	59.0
Provision (benefit) for credit losses	2.8			0.3			(1.3		)	(1.3		)	(0.1		)
Other income (loss):
Net OTTI credit losses ⁽¹⁾	(20.5		)	(13.1		)	(7.0		)	(110.7		)	(27.6		)
Net gains (losses) on derivatives and hedging activities	0.8			3.0			4.9			(8.0		)	(4.6		)
Net realized gains (losses) on AFS securities	—			—			8.4			(0.1		)	—
Loss on extinguishment of debt	—			(12.3		)	—			—			—
All other income	3.1			3.8			2.7			1.8			2.7
Total other income (loss)	(16.6		)	(18.6		)	9.0			(117.0		)	(29.5		)
Other expense	16.4			21.2			15.8			15.1			16.2
Income (loss) before assessments	3.4			24.5			45.1			(71.7		)	13.4
Assessments ⁽²⁾	0.9			3.0			—			(3.5		)	3.5
Net income (loss)	$	2.5		$	21.5		$	45.1		$	(68.2	)	$	9.9
Earnings (loss) per share ⁽³⁾	$	0.06		$	0.53		$	1.11		$	(1.70	)	$	0.25



Return on average equity	0.25	%	2.04	%	4.39	%	(7.01	)%	1.07	%
Return on average assets	0.02	%	0.16	%	0.31	%	(0.45	)%	0.06	%
Net interest margin ⁽⁴⁾	0.30	%	0.47	%	0.35	%	0.39	%	0.37	%
Regulatory capital ratio ⁽⁵⁾	8.12	%	8.28	%	8.27	%	7.22	%	7.57	%
Total capital ratio (at period-end) ⁽⁶⁾	7.78	%	7.79	%	7.73	%	6.54	%	6.54	%
Total average equity to average assets	7.76	%	7.61	%	7.01	%	6.38	%	5.88	%

Notes:

⁽¹⁾Represents the credit-related portion of OTTI losses on private label MBS portfolio.

⁽²⁾Includes REFCORP and Affordable Housing Programs (AHP) assessments.

⁽³⁾Earnings (loss) per share calculated based on net income (loss).

⁽⁴⁾Net interest margin is net interest income before provision (benefit) for credit losses as a percentage of average interest-earning assets.

⁽⁵⁾Regulatory capital ratio is the sum of period-end capital stock, mandatorily redeemable capital stock, retained earnings and off-balance sheet credit reserves as a percentage of total assets at period-end.

⁽⁶⁾Total capital ratio is capital stock plus retained earnings and accumulated other comprehensive income (loss), in total at period-end, as a percentage of total assets at period-end.

Condensed Statement of Condition



	March 31,			December 31,			September 30,			June 30,			March 31,
(in millions)	2011			2010			2010			2010			2010
Cash and due from banks	$	190.2		$	143.4		$	161.5		$	79.9		$	251.6
Investments⁽¹⁾	20,812.9			18,751.7			18,298.7			19,246.0			16,241.0
Advances	26,658.7			29,708.4			31,594.9			36,058.4			36,823.8
Mortgage loans held for portfolio, net⁽²⁾	4,254.3			4,483.0			4,740.8			4,895.7			4,991.2
Prepaid REFCORP assessment	36.9			37.6			39.6			39.6			37.2
Total assets	52,199.4			53,386.7			55,139.5			60,629.7			58,656.0
Consolidated obligations, net:
Discount notes	13,157.6			13,082.1			12,251.9			12,118.1			9,990.4
Bonds	33,017.8			34,129.3			36,401.2			42,325.8			42,477.1
Total consolidated obligations, net⁽³⁾	46,175.4			47,211.4			48,653.1			54,443.9			52,467.5
Deposits and other borrowings	1,108.7			1,167.0			1,164.3			1,146.5			1,418.4
Mandatorily redeemable capital stock	33.1			34.2			36.0			36.3			8.3
AHP payable	12.4			13.6			15.1			17.2			22.1
Capital stock - putable	3,804.6			3,986.9			4,146.8			4,012.2			4,035.1
Retained earnings	399.8			397.3			375.8			330.7			398.9
AOCI	(143.5		)	(223.3		)	(258.9		)	(375.0		)	(596.0		)
Total capital	4,060.9			4,160.9			4,263.7			3,967.9			3,838.0

Notes:

⁽¹⁾Includes trading, AFS and HTM investment securities, Federal funds sold, and interest-bearing deposits. None of these securities were purchased under agreements to resell.

⁽²⁾ Includes allowance for loan losses of $8.3 million, $3.2 million, $3.2 million, $2.9 million, and $2.9 million at March 31, 2011, December 31, 2010, September 30, 2010, June 30, 2010 and March 31, 2010, respectively.

⁽³⁾ Aggregate FHLBank System-wide consolidated obligations (at par) were $766.0 billion, $796.4 billion, $806.0 billion, $846.5 billion and $870.9 billion, at March 31, 2011, December 31, 2010, September 30, 2010, June 30, 2010 and March 31, 2010, respectively.

Core Earnings. Because of the nature of (1) OTTI charges, (2) the gains (losses) on sales of OTTI securities and (3) the contingency reserve and gains on derivatives and hedging activities resulting from the Lehman-related activities, the Bank believes that adjusting net income for these items and evaluating results as adjusted (which the Bank defines as "core earnings") is important in order to understand how the Bank is performing with respect to its primary business operations and to provide meaningful comparisons to prior periods. Core earnings are considered to be a non-GAAP measurement. Results based on this definition of core earnings are presented below. For first quarter 2011 and 2010, there were no adjustments for Lehman-related activities.

Statement of Operations

Reconciliation of GAAP Earnings to Non-GAAP Core Earnings



	Three Months Ended March 31, 2011
(in millions)	GAAP Earnings			Private Label MBS-OTTI Activity			Non-GAAP Core Earnings
Net interest income before benefit for credit losses	$	39.2		$	—		$	39.2
Provision for credit losses	2.8			—			2.8
Other income (loss):
Net OTTI losses	(20.5		)	20.5			—
Net gains on derivatives and hedging activities	0.8			—			0.8
All other income	3.1			—			3.1
Total other income (loss)	(16.6		)	20.5			3.9
Other expense	16.4			—			16.4
Income before assessments	3.4			20.5			23.9
Assessments	0.9			5.4			6.3
Net income	$	2.5		$	15.1		$	17.6
Earnings per share	$	0.06		$	0.39		$	0.45

Return on average equity	0.25		%	1.48		%	1.73		%
Return on average assets	0.02		%	0.11		%	0.13		%



	Three Months Ended March 31, 2010
(in millions)	GAAP Earnings			Private Label MBS-OTTI Activity			Non-GAAP Core Earnings
Net interest income before benefit for credit losses	$	59.0		$	—		$	59.0
Benefit for credit losses	(0.1		)	—			(0.1		)
Other income (loss):
Net OTTI losses	(27.6		)	27.6			—
Net losses on derivatives and hedging activities	(4.6		)	—			(4.6		)
All other income	2.7			—			2.7
Total other income (loss)	(29.5		)	27.6			(1.9		)
Other expense	16.2			—			16.2
Income before assessments	13.4			27.6			41.0
Assessments	3.5			7.4			10.9
Net income	$	9.9		$	20.2		$	30.1
Earnings per share	$	0.25		$	0.50		$	0.75

Return on average equity	1.07		%	2.18		%	3.25		%
Return on average assets	0.06		%	0.13		%	0.19		%

Forward-Looking Information

Statements contained in the quarterly report on this Form 10-Q, including statements describing the objectives, projections, estimates, or predictions of the future of the Bank, may be “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: economic and market conditions, including, but not limited to, real estate, credit and mortgage markets; volatility of market prices, rates, and indices; political, legislative, regulatory, litigation, or judicial events or actions; changes in assumptions used in the quarterly OTTI process; changes in the Bank's capital structure; changes in the Bank's capital requirements; membership changes; changes in the demand by Bank members for Bank advances; an increase in advances' prepayments; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; changes in the System's debt rating or the Bank's rating; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; applicable Bank policy requirements for retained earnings and the ratio of the market value of equity to par value of capital stock; the Bank's ability to maintain adequate capital levels (including meeting applicable regulatory capital requirements); business and capital plan adjustments and amendments; and timing and volume of market activity. This Management's Discussion and Analysis should be read in conjunction with the Bank's unaudited interim financial statements and notes and Risk Factors included in Part II, Item 1A of the quarterly report filed on this Form 10-Q, as well as Risk Factors in Item 1A of the Bank's 2010 Form 10-K.

Earnings Performance

The following is Management's Discussion and Analysis of the Bank's earnings performance for the three months ended March 31, 2011 and 2010, which should be read in conjunction with the Bank's unaudited interim financial statements and notes included in the quarterly report filed on this Form 10-Q as well as the audited financial statements and notes included in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2010 Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank recorded net income of $2.5 million for first quarter 2011, compared to net income of $9.9 million for first quarter 2010. This decline was driven primarily by lower net interest income. For the three months ended March 31, 2011 and 2010, net OTTI credit losses on the Bank's private label MBS were $20.5 million and $27.6 million, respectively. The Bank's return on average equity for first quarter 2011 was 0.25 percent, compared to 1.07 percent for first quarter 2010. Details of the Statement of Operations, including the impact of net interest income and derivatives and hedging activities on the results of operations, are presented more fully below.

Core Earnings. As presented in Financial Highlights, core earnings for the three months ended March 31, 2011 and 2010 exclude the impact of OTTI charges and related assessments, as applicable. For first quarter 2011, the Bank's core earnings totaled $17.6 million, a decrease of $12.5 million over first quarter 2010 core earnings. This decrease was due to lower net interest income in 2011. The Bank's core return on average equity was 1.73 percent for first quarter 2011, compared to 3.25 percent for first quarter 2010.

Net Interest Income

The following table summarizes the yields and rates paid on interest-earning assets and interest-bearing liabilities, respectively, the average balance for each of the primary balance sheet classifications and the net interest margin for the three months ended March 31, 2011 and 2010.

Average Balances and Interest Yields/Rates Paid



	Three Months Ended March 31,
	2011						2010
(dollars in millions)	Average Balance			Interest Income/ Expense		Avg. Yield/ Rate (%)	Average Balance			Interest Income/ Expense		Avg. Yield/ Rate (%)
Assets:
Federal funds sold⁽¹⁾	$	4,941.3		$	1.7	0.14	$	4,722.1		$	1.3	0.11
Interest-bearing deposits⁽²⁾	333.0			0.1		0.16	514.8			0.2		0.13
Investment securities⁽³⁾	15,560.3			87.9		2.29	13,661.8			106.5		3.16
Advances⁽⁴⁾	27,611.0			64.2		0.94	40,143.2			74.3		0.75
Mortgage loans held for portfolio⁽⁵⁾	4,372.4			52.6		4.88	5,070.4			63.7		5.10
Total interest-earning assets	52,818.0			206.5		1.58	64,112.3			246.0		1.55
Allowance for credit losses	(8.9		)				(12.0		)
Other assets⁽⁵⁾⁽⁶⁾	403.2						(131.4		)
Total assets	$	53,212.3					$	63,968.9
Liabilities and capital:
Deposits ⁽²⁾	$	1,148.7		$	0.2	0.06	$	1,363.5		$	0.2	0.06
Consolidated obligation discount notes	12,598.8			5.2		0.17	9,921.5			2.6		0.11
Consolidated obligation bonds⁽⁷⁾	33,950.8			161.9		1.93	47,326.6			184.2		1.58
Other borrowings	37.4			—		0.13	11.0			—		0.55
Total interest-bearing liabilities	47,735.7			167.3		1.42	58,622.6			187.0		1.29
Other liabilities	1,345.0						1,583.5
Total capital	4,131.6						3,762.8
Total liabilities and capital	$	53,212.3					$	63,968.9
Net interest spread						0.16						0.26
Impact of noninterest-bearing funds						0.14						0.11
Net interest income/net interest margin				$	39.2	0.30				$	59.0	0.37

Notes:

⁽¹⁾The average balance of Federal funds sold, related interest income and average yield calculations may include loans to other FHLBanks.

⁽²⁾Average balances of deposits (assets and liabilities) include cash collateral received from/paid to counterparties which are reflected in the Statement of Condition as derivative assets/liabilities.

⁽³⁾Investment securities include trading, AFS and HTM securities. The average balances of available-for-sale and held-to-maturity securities are reflected at amortized cost; therefore, the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized OTTI reflected in AOCI.

⁽⁴⁾Average balances reflect noninterest-earning hedge accounting adjustments of $1.2 billion and $1.5 billion in 2011 and 2010, respectively.

⁽⁵⁾Nonaccrual mortgage loans are included in average balances in determining the average rate.

⁽⁶⁾The noncredit portion of OTTI losses on investment securities is reflected in other assets for purposes of the average balance sheet presentation.

⁽⁷⁾Average balances reflect noninterest-bearing hedge accounting adjustments of $259.2 million and $310.2 million in 2011 and 2010, respectively.

Average Advances Portfolio Detail

The following table presents the average par balances of the Bank's advance portfolio for the three months ended March 31, 2011 and 2010. These balances do not reflect any hedge accounting adjustments.



(in millions)	Three months Ended March 31,
Product ⁽¹⁾	2011		2010
Repo/Mid-Term Repo	$	7,764.8	$	19,112.2
Core (Term)	13,546.0		12,923.0
Convertible Select	5,042.1		6,596.3
Total par value	$	26,352.9	$	38,631.5

Note:

⁽¹⁾See the Bank's 2010 Form 10-K for descriptions of the Bank's advance products.

Net interest income for first quarter 2011 declined $19.8 million year-over-year due to both volume and interest rate changes. Yields on interest-earning assets increased 3 basis points, which was due to a slightly higher yield on advances, the Bank's largest asset, offsetting lower yields on investments and mortgage loans. The rates paid on interest-bearing liabilities increased 13 basis points resulting in a compression of net interest spread. Higher funding costs on both discount notes and bonds drove the increase. Average interest-earning assets declined 17.6 percent driven primarily by the lower demand for advances. The decline was partially offset by an increase in average investment securities primarily driven by a higher level of certificates of deposit. Additional details and analysis regarding the shift in the mix of these categories is included in the “Rate/Volume Analysis” discussion below.

Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between March 31 2011 and 2010.



	2011 compared to 2010
	Increase (Decrease) in Interest Income/Expense Due to Changes in:
(in millions)	Volume			Rate			Total
Federal funds sold	$	0.1		$	0.3		$	0.4
Interest-bearing deposits	(0.1		)	—			(0.1		)
Investment securities	13.4			(32.0		)	(18.6		)
Advances	(26.4		)	16.3			(10.1		)
Mortgage loans held for portfolio	(8.5		)	(2.6		)	(11.1		)
Total interest-earning assets	$	(21.5	)	$	(18.0	)	$	(39.5	)

Consolidated obligation discount notes	$	0.8		$	1.8		$	2.6
Consolidated obligation bonds	(58.6		)	36.3			(22.3		)
Total interest-bearing liabilities	$	(57.8	)	$	38.1		$	(19.7	)

Total increase (decrease) in net interest income	$	36.3		$	(56.1	)	$	(19.8	)

The average balance sheet shrunk considerably from first quarter 2010 to first quarter 2011. Interest income declined in the comparison driven by both rate and volume declines while the interest expense decline was driven by volume and partially offset by a rate increase.

The decline in interest income was primarily related to the advances portfolio, the investment securities portfolio and the mortgage loans held for portfolio. The advances portfolio decline was due to a decrease in volume which was partially offset by a rate increase, while the investment portfolio declined due to a rate decrease which was partially offset by an increase in volume. The decline related to the mortgage loans held for portfolio was due to a decrease in yields as well as continued runoff in the portfolio. The decline in interest expense was due to a decrease in volume of consolidated obligation bonds partially offset by an increase in rates paid.

The investment securities portfolio includes trading, AFS and HTM securities. The increase in the average investment balance from first quarter 2010 to first quarter 2011 was primarily due to increases in certificates of deposit, Agency notes and Agency MBS balances. Agency MBS balances increased as purchases exceeded the runoff of the existing MBS portfolio. The decrease in interest income was rate driven, primarily related to the MBS portfolio as lower-yielding Agency MBS have replaced the runoff of private label MBS. The Bank has not purchased any private label MBS since late 2007, purchasing only Agency and GSE MBS since 2008, including $657.0 million in first quarter 2011.

The average advances portfolio decreased significantly in first quarter 2011 compared to first quarter 2010. This decline in volume resulted in a decline in interest income for the comparison period despite an increase in the yield. Advance demand began to decline in the fourth quarter of 2008, and continued through the first quarter 2011, as members have grown core deposits and gained access to additional liquidity from the Federal Reserve and other government programs that initially became available in the second half of 2008. These government programs ended in first quarter 2010; however, member demand has remained low. In addition, members have also reduced the size of their balance sheets during the credit crisis.

The interest income on this portfolio primarily was impacted by the different product mix of advances in the comparison period. As presented in the Average Advances Portfolio Detail table, the decrease in average balances for the Repo product reflected the impact of members' high levels of retail deposits, members' reactions to the Bank's increased pricing of short-term advance products and the shift of some members' advances to longer-term structures within the Core (Term) product. The composition of advances in first quarter 2011 compared to first quarter 2010 was weighted more to longer term products that have higher yields relative to short-term products. In addition, average 3-month LIBOR for first quarter 2011 was 5 basis points higher than first quarter 2010.

The average mortgage loans held for portfolio balance declined from first quarter 2010 to first quarter 2011. The related interest income on the portfolio also declined. The decrease in the portfolio balance was due to the continued run-off of the existing portfolio, which more than offset new portfolio activity. The decrease in interest income was due to the lower average portfolio balances and a lower yield on the portfolio. The yield decrease was impacted by new lower yielding mortgage loans replacing the runoff of higher yielding loans, greater premium amortization and an increase in nonperforming loans in first quarter 2011 compared to first quarter 2010.

The consolidated obligations portfolio balance declined from first quarter 2011 compared to the same period in 2010. A decrease in the average bonds balance more than offset an increase in the average discount note balance.

Interest expense on bonds likewise declined as the volume decrease more than offset the increase in rates paid. The rate increase was due to higher 3-month LIBOR rates in the comparison period and longer term debt comprising a greater percentage of the average bond balances. This resulted in higher rates paid on bonds since a smaller percentage of the balance was comprised of lower rate short-term debt. A portion of the bond portfolio is currently swapped to 3-month LIBOR; therefore, as the LIBOR rate (decreases) increases, interest expense on swapped bonds, including the impact of swaps, (decreases) increases. See details regarding the impact of swaps on the quarterly rates paid in the “Net Interest Income Derivatives Effects” discussion below.

Interest expense on discount notes increased from first quarter 2010 to first quarter 2011. The increase was driven primarily by an increase in rates paid from first quarter 2010 to first quarter 2011. The increase in rates paid was consistent with the general increase in short-term rates for the comparison period.

Market conditions continued to impact spreads on the Bank's consolidated obligations. During the second quarter of 2010, funding levels improved as the European sovereign debt crisis led to increased investor demand for GSE debt. Early in the third quarter, concerns regarding Europe subsided somewhat after the release of the European bank stress test results. As a result, spreads migrated to more customary levels and remained there for the remainder of the 2010 and into first quarter 2011. For additional information, see the “Liquidity and Funding Risk” discussion in Risk Management in this Item 2. Management's Discussion and Analysis in the quarterly report filed on this Form 10-Q. Concerns also remain regarding the effects of the recent natural disaster in Japan and unrest in the Middle East. In addition, in April 2011, S&P revised the outlook on U.S. debt as well as FHLBank System debt and certain individual FHLBanks. See the Executive Summary section in Item 2. Management's Discussion and Analysis in the quarterly report filed on this Form 10-Q for additional discussion.

Interest Income Derivative Effects. The following tables separately quantify the effects of the Bank's derivative activities on its interest income and interest expense for the three months ended March 31, 2011 and 2010. Derivative and hedging activities are discussed below.



Three Months Ended March 31, 2011 (dollars in millions)	Average Balance		Interest Inc./ Exp. with Derivatives		Avg. Yield/ Rate (%)	Interest Inc./ Exp. without Derivatives		Avg. Yield/ Rate (%)	Impact of Derivatives⁽¹⁾			Incr./ (Decr.) (%)
Assets:
Advances	$	27,611.0	$	64.2	0.94	$	207.3	3.04	$	(143.1	)	(2.10	)
Mortgage loans held for portfolio	4,372.4		52.6		4.88	53.5		4.96	(0.9		)	(0.08	)
All other interest-earning assets	20,834.6		89.7		1.75	89.7		1.75	—			—
Total interest-earning assets	$	52,818.0	$	206.5	1.58	$	350.5	2.69	$	(144.0	)	(1.11	)
Liabilities and capital:
Consolidated obligation bonds	$	33,950.8	$	161.9	1.93	$	230.0	2.75	$	(68.1	)	(0.82	)
All other interest-bearing liabilities	13,784.9		5.4		0.16	5.4		0.16	—			—
Total interest-bearing liabilities	$	47,735.7	$	167.3	1.42	$	235.4	2.00	$	(68.1	)	(0.58	)
Net interest income/net interest spread			$	39.2	0.16	$	115.1	0.69	$	(75.9	)	(0.53	)

Note:

⁽¹⁾Impact of Derivatives includes net interest settlements, amortization of basis adjustments resulting from previously terminated hedging relationships and the amortization of the market value of mortgage purchase commitments classified as derivatives at the time the commitment settled.



Three Months Ended March 31, 2010 (dollars in millions)	Average Balance		Interest Inc./ Exp. with Derivatives		Avg. Yield/ Rate (%)	Interest Inc./ Exp. without Derivatives		Avg. Yield/ Rate (%)	Impact of Derivatives⁽¹⁾			Incr./ (Decr.) (%)
Assets:
Advances	$	40,143.2	$	74.3	0.75	$	323.0	3.26	$	(248.7	)	(2.51	)
Mortgage loans held for portfolio	5,070.4		63.7		5.10	64.4		5.15	(0.7		)	(0.05	)
All other interest-earning assets	18,898.7		108		2.32	108.0		2.32	—			—
Total interest-earning assets	$	64,112.3	$	246.0	1.55	$	495.4	3.13	$	(249.4	)	(1.58	)
Liabilities and capital:
Consolidated obligation bonds	$	47,326.6	$	184.2	1.58	$	305.7	2.62	$	(121.5	)	(1.04	)
All other interest-bearing liabilities	11,296.0		2.8		0.10	2.8		0.10	—			—
Total interest-bearing liabilities	$	58,622.6	$	187.0	1.29	$	308.5	2.13	$	(121.5	)	(0.84	)
Net interest income/net interest spread			$	59.0	0.26	$	186.9	1.00	$	(127.9	)	(0.74	)

Note:

The Bank uses derivatives to hedge the fair market value changes attributable to the change in the LIBOR benchmark interest rate. The Bank generally uses interest rate swaps to hedge a portion of advances and consolidated obligations which convert the interest rates on those instruments from a fixed rate to a LIBOR-based variable rate. The purpose of this strategy is to protect the interest rate spread. Using derivatives to convert interest rates from fixed to variable can increase or decrease net interest income. The variances in the advances and consolidated obligation derivative impacts from period to period are driven by the change in the average LIBOR-based variable rate, the timing of interest rate resets and the average hedged portfolio balances outstanding during any given period.

The impact of derivatives reduced both net interest income and net interest spread for the quarter ended March 31, 2011 and 2010. The impact to net interest income was less in 2011 compared to 2010 primarily due to the lower overall volume of hedged instruments year-over-year.

The Bank uses many different funding and hedging strategies, one of which involves closely match-funding bullet advances with bullet debt which is designed in part to (1) avoid the use of derivatives where prudent, (2) restrain growth in the size of the Bank's derivatives portfolio, and (3) reduce the Bank's reliance on short-term funding.

In addition, the Bank initiated a program to lower derivative counterparty credit exposure by reducing the number of derivatives outstanding without materially impacting the Bank's risk or earnings profiles. Basis adjustments (BAs) that are created as a result of the discontinuation of fair value hedge accounting upon termination of the swaps are accreted or amortized over the remaining lives of the advances or debt. This strategy will result in additional accretion and amortization of BAs which will be reflected in the Statement of Operations within net interest income. If there are significant prepayments of advances that have associated BAs, there will be an acceleration of the amortization of the related BA, which may or may not be offset by prepayment fees. If a significant number of instruments prepay, this will result in volatility within interest income in the Statement of Operations.

The mortgage loans held for portfolio derivative impact for all periods presented was affected by the amortization of basis adjustments resulting from hedges of commitments to purchase mortgage loans through the MPF Program.

The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions. The Bank, together with the other FHLBanks, is actively participating in the development of the regulations under the Dodd-Frank Act. These requirements have the potential of making derivative transactions more costly for the Bank and the other FHLBanks. See Legislative and Regulatory Developments in Item 2. Management's Discussion and Analysis in the quarterly report filed on this Form 10-Q for detailed discussion regarding the new requirements.

Gains (Losses) on Derivatives and Hedging Activities

The Bank enters into interest rate swaps, caps, floors and swaption agreements, referred to collectively as interest rate exchange agreements and more broadly as derivative transactions. The Bank enters into derivatives transactions to offset all or portions of the financial risk exposures inherent in its member lending, investment and funding activities. All derivatives are recorded on the balance sheet at fair value. Changes in derivatives fair values are either recorded in the Statement of Operations or accumulated other comprehensive income within the capital section of the Statement of Condition depending on the hedge strategy.

The Bank's hedging strategies consist of fair value and cash flow accounting hedges as well as economic hedges. Fair value and other hedges are discussed in more detail below. Economic hedges address specific risks inherent in the Bank's balance sheet, but they do not qualify for hedge accounting. As a result, income recognition on the derivatives in economic hedges may vary considerably compared to the timing of income recognition on the underlying asset or liability. The Bank does not enter into derivatives for speculative purposes to generate profits.

Regardless of the hedge strategy employed, the Bank's predominant hedging instrument is an interest rate swap. At the time of inception, the fair market value of an interest rate swap generally equals or is close to zero. Notwithstanding the exchange of interest payments made during the life of the swap, which are recorded as either interest income/expense or as a gain (loss) on derivative, depending upon the accounting classification of the hedging instrument, the fair value of an interest rate swap returns to zero at the end of its contractual term. Therefore, although the fair value of an interest rate swap is likely to change over the course of its full term, upon maturity any unrealized gains and losses generally net to zero.

The following tables detail the net effect of derivatives and hedging activities in other income for the three months ended March 31, 2011 and 2010.



	Three Months Ended March 31, 2011
(in millions)	Advances			Investments			Mortgage Loans		Bonds			Total
Net interest income:
Amortization/accretion of hedging activities in net interest income ⁽¹⁾	$	(14.7	)	$	—		$	—	$	7.3		$	(7.4	)
Net interest settlements included in net interest income ⁽²⁾	(128.4		)	—			—		60.8			(67.6		)
Total net interest income	$	(143.1	)	$	—		$	—	$	68.1		$	(75.0	)
Net gains (losses) on derivatives and hedging activities:
Gains (losses) on fair value hedges	$	1.5		$	—		$	—	$	(0.7	)	$	0.8
Gains (losses) on derivatives not receiving hedge accounting	0.2			(0.4		)	0.1		(0.1		)	(0.2		)
Other	—			0.2			—		—			0.2
Total net gains (losses) on derivatives and hedging activities	$	1.7		$	(0.2	)	$	0.1	$	(0.8	)	$	0.8
Total net effect of derivatives and hedging activities	$	(141.4	)	$	(0.2	)	$	0.1	$	67.3		$	(74.2	)



	Three Months Ended March 31, 2010
(in millions)	Advances			Investments			Mortgage Loans		Bonds		Total
Net interest income:
Amortization/accretion of hedging activities in net interest income ⁽¹⁾	$	(4.3	)	$	—		$	—	$	0.7	$	(3.6	)
Net interest settlements included in net interest income ⁽²⁾	(244.4		)	—			—		120.8		(123.6		)
Total net interest income	$	(248.7	)	$	—		$	—	$	121.5	$	(127.2	)
Net gains (losses) on derivatives and hedging activities:
Gains (losses) on fair value hedges	$	(1.7	)	$	—		$	—	$	0.9	$	(0.8	)
Gains (losses) on derivatives not receiving hedge accounting	(0.1		)	(4.4		)	0.4		—		(4.1		)
Other	—			0.3			—		—		0.3
Total net gains (losses) on derivatives and hedging activities	$	(1.8	)	$	(4.1	)	$	0.4	$	0.9	$	(4.6	)
Total net effect of derivatives and hedging activities	$	(250.5	)	$	(4.1	)	$	0.4	$	122.4	$	(131.8	)

Notes:

⁽¹⁾Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.

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

Fair Value Hedges. The Bank uses fair value hedge accounting treatment for some of its fixed-rate advances and consolidated obligations using interest rate swaps. The interest rate swaps convert these fixed-rate instruments to a variable-rate (i.e. LIBOR). For first quarter 2011, total ineffectiveness related to these fair value hedges resulted in a gain compared to a loss in first quarter 2010. During the same period, the overall notional amount decreased from $42.8 billion at March 31, 2010 to $23.8 billion at March 31, 2011. Fair value hedge ineffectiveness represents the difference between the change in the fair value of the derivative compared to the change in the fair value of the underlying asset/liability hedged. Fair value hedge ineffectiveness is generated by movement in the benchmark interest rate being hedged and by other structural characteristics of the transaction involved. For example, the presence of an upfront fee associated with a structured debt hedge will introduce valuation differences between the hedge and hedged item that will fluctuate through time.

Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting, also referred to as “economic hedges,” the Bank includes the net interest income and the changes in the fair value of the hedges in net gains (losses) on derivatives and hedging activities. For economic hedges, the Bank recorded a loss in both first quarter 2011 and 2010. The overall notional amount of economic hedges was $1.9 billion and $1.5 billion at March 31, 2011 and 2010, respectively.

Affordable Housing Program (AHP) and Resolution Funding Corp. (REFCORP) Assessments

Although the FHLBanks are not subject to federal or state income taxes, the combined financial obligations of making payments to REFCORP (20 percent) and AHP contributions (10 percent) equate to a proportion of the Bank's net income comparable to that paid in income tax by fully taxable entities. The FHLBanks' aggregate payments through 2010 exceeded the scheduled payments, effectively accelerating payment of the REFCORP obligation and shortening its remaining term to a final scheduled payment on July 15, 2011. This date assumes that the FHLBanks pay exactly $300 million annually through 2011. The cumulative amount to be paid to REFCORP by the FHLBank is not determinable at this time due to the interrelationships of the future earnings of all FHLBanks and interest rates.

In 2008, the Bank overpaid its 2008 REFCORP assessment as a result of the loss recognized in fourth quarter 2008. As instructed by the U.S. Treasury, the Bank will use its overpayment as a credit against future REFCORP assessments (to the extent the Bank has positive net income in the future). This overpayment was recorded as a prepaid asset and reported as “prepaid REFCORP assessment” on the Statement of Condition at December 31, 2008. A balance related to this asset remained on the Bank's Statement of Condition at December 31, 2010 and March 31, 2011. For first quarter 2011, $636 thousand of REFCORP assessment expense was credited against the asset balance, leaving a prepaid asset of $36.9 million at March 31, 2011. In April 2011, the Bank received $36.9 million from REFCORP, reducing the prepaid asset to zero.

Financial Condition

The following is Management's Discussion and Analysis of the Bank's financial condition at March 31, 2011 compared to December 31, 2010. This should be read in conjunction with the Bank's unaudited interim financial statements and notes in this quarterly report and the audited Financial Statements in the Bank's 2010 Form 10-K.

Assets

Primarily due to declining advance demand by members, the Bank's total assets decreased from December 31, 2010 to March 31, 2011. Total housing finance-related assets, which include MPF Program loans, advances, MBS and other mission-related investments, decreased during the year as well.

Advances and Mortgage Loans Held for Portfolio. Advances. At March 31, 2011, the Bank had advances to 195 borrowing members, compared to 202 borrowing members at December 31, 2010. A significant concentration of the advances continued to be from the Bank's five largest borrowers. Total advances outstanding to the Bank's five largest members decreased as of March 31, 2011 compared to December 31, 2010. Overall decreases in advances reflect a stronger deposit market and low member demand. This is evidenced by a decline of $3.4 billion in the Repo/Mid-Term Repo product, the Bank's shorter term advance product, as presented below.

The following table provides information on advances by different product type at March 31, 2011 and December 31, 2010 .



	March 31,		December 31,
in millions	2011		2010
Adjustable/variable-rate indexed:
Repo/Mid-Term Repo	$	22.0	$	1,020.0
Core (Term)	1,746.0		998.0
Total adjustable/variable-rate indexed	$	1,768.0	$	2,018.0
Fixed rate:
Repo/Mid-Term Repo	$	7,242.2	$	9,691.9
Core (Term)	11,036.1		10,898.7
Total fixed rate	$	18,278.3	$	20,590.6
Convertible	$	4,928.8	$	5,197.2
Amortizing/mortgage-matched:
Core (Term)	$	545.7	$	591.2
Total par balance	$	25,520.8	$	28,397.0
Total callable advances	$	2.0	$	22.0

The following table provides a distribution of the number of members, categorized by individual member asset size, that had an outstanding average balance during the three months ended March 31, 2011 and the year ended December 31, 2010.



	March 31,		December 31,
Member Asset Size	2011		2010
Less than $100 million	26		32
Between $100 million and $500 million	109		121
Between $500 million and $1 billion	39		45
Between $1 billion and $5 billion	27		29
Greater than $5 billion	15		15
Total borrowing members during the year	216		242
Total membership	306		308
Percent of members borrowing during the period	70.6	%	78.6	%
Total borrowing members with outstanding loan balances at period-end	195		202
Percent of members borrowing at period-end	63.7	%	65.6	%

During first quarter 2011, changes in the Bank's membership resulted in a net decrease of two members. This activity included one out-of-district merger and one member which merged within the Bank's district.

See the “Credit and Counterparty Risk - TCP and Collateral” discussion in the Risk Management section of Item 2. Management's Discussion and Analysis in this quarterly report filed on Form 10-Q for further information on collateral policies and practices and details regarding eligible collateral, including amounts and percentages of eligible collateral securing member advances as of March 31, 2011.

Mortgage Loans Held for Portfolio. The Bank's net mortgage loans held for portfolio under the MPF Program decreased from December 31, 2010 to March 31, 2011, driven primarily by the continued runoff of the existing portfolio, which more than offset new portfolio purchase activity. New portfolio activity has been negatively impacted by: (1) the current economic environment, which has resulted in fewer mortgage loan originations; (2) the Bank's 4.0 percent capital stock requirement on new MPF loans, which was previously 0 percent; and (3) the Bank's business decision to focus on purchasing MPF loans from community banks rather than higher-volume national banks.

The Bank currently has a loan modification plan in place for participating financial institutions (PFIs) under the MPF program. As of March 31, 2011, there had been few requests for loan modifications.

The Bank's outstanding advances, mortgage loans, nonaccrual mortgage loans, mortgage loans 90 days or more delinquent and accruing interest, and Banking on Business (BOB) loans are presented in the following table.



	March 31,		December 31,
(in millions)	2011		2010
Advances⁽¹⁾	$	26,658.7	$	29,708.4
Mortgage loans held for portfolio, net⁽²⁾	4,254.3		4,483.0
Nonaccrual mortgage loans, net⁽³⁾	82.5		80.9
Mortgage loans 90 days or more delinquent and still accruing interest⁽⁴⁾	10.0		10.4
BOB loans, net⁽⁵⁾	16.0		14.1
Nonaccrual BOB loans ⁽⁵⁾	1.4		19.9

Notes:

⁽¹⁾There are no advances which are past due or on nonaccrual status.

⁽²⁾All of the real estate mortgages held in portfolio by the Bank are fixed-rate. Balances are reflected net of allowance for credit losses.

⁽³⁾All nonaccrual mortgage loans are reported net of interest applied to principal.

⁽⁴⁾Only government-insured or -guaranteed loans (e.g., FHA, VA, HUD or RHS) continue to accrue interest after becoming 90 days or more delinquent.

⁽⁵⁾Prior to January 1, 2011, due to the nature of the program, all BOB loans were considered nonaccrual loans. Effective January 1, 2011, BOB loans that were not delinquent or deferred were placed on accrual status.

The Bank has experienced an increase in its conventional MPF Program's nonaccrual mortgage loans held for portfolio due to continuing deterioration in the mortgage market. However, this balance reflects only 2.1 percent of the portfolio, continuing to outperform the national average of 4.6 percent. The Bank permits PFI's to repurchase loans that meet certain pre-established criteria (i.e., government-guaranteed loans) at the time of the sale of the loans to the Bank.

Investments. At March 31, 2011, the Bank's total interest-bearing deposits and Federal funds sold increased from December 31, 2010. The Bank's strategy is to maintain its short-term liquidity position in part to be able to meet members' loan demand and regulatory liquidity requirements.

The increase in investment securities from December 31, 2010 to March 31, 2011 was primarily due to purchases of certificates of deposit. This activity was partially offset by MBS paydowns during first quarter 2011. The Bank has not purchased any private label MBS since late 2007.

The following tables summarize key investment securities portfolio statistics.



	Carrying Value
(in millions)	March 31, 2011		December 31, 2010
Trading securities:
U.S. Treasury bills	$	879.9	879.9
TLGP investments	250.1		250.1
Other: Mutual funds offsetting deferred compensation	4.5		6.0
Total trading securities	$	1,134.5	$	1,136.0
AFS securities:
MBS:
Government-sponsored enterprises residential	$	140.8	$	—
Private label residential MBS	$	2,184.6	$	2,200.4
HELOCs	16.6		15.4
Other: Mutual funds partially securing supplemental retirement plan	2.0		2.0
Total AFS securities	$	2,344.0	$	2,217.8
HTM securities:
Certificates of deposit	$	4,450.0	$	3,550.0
State or local agency obligations	367.6		369.7
U.S. government-sponsored enterprises	798.6		803.7
MBS:
U.S. agency	2,569.5		2,396.0
Government-sponsored enterprises residential	2,707.2		2,646.5
Private label residential MBS	1,964.4		2,242.6
HELOCs	21.8		23.5
MPF Shared Funding Program	23.7		25.8
Total HTM securities	$	12,902.8	$	12,057.8
Total investment securities	$	16,381.3	$	15,411.6

The following table presents the maturity and yield characteristics for the investment securities portfolio, assuming no principal prepayments, as of March 31, 2011. Contractual maturity of MBS is not a reliable indicator of their expected life because borrowers generally have the right to prepay their obligation at any time.



(dollars in millions)	Due in 1 year or less			Due after 1 year through 5 years			Due after 5 years through 10 years			Due after 10 years			Carrying Value
Trading securities:
U.S. Treasury bills	$	879.9		$	—		$	—		$	—		$	879.9
TLGP investments	—			250.1			—			—			250.1
Mutual funds offsetting deferred compensation	4.5			—			—			—			4.5
Total trading securities	$	884.4		$	250.1		$	—		$	—		$	1,134.5
Yield on trading securities	0.12		%	1.95		%	n/a			n/a			0.52		%

AFS securities:
MBS:
GSE MBS	$	—		$	—		$	—		$	140.8		$	140.8
Private label residential MBS	—			—			—			2,184.6			2,184.6
HELOCs	—			—			—			16.6			16.6
Mutual funds partially securing supplemental retirement plan	2.0			—			—			—			2.0
Total AFS securities	$	2.0		$	—		$	—		$	2,342.0		$	2,344.0
Yield on AFS Securities	n/a			n/a			n/a			5.29		%	5.29		%

HTM securities:
Certificates of deposit	$	4,450.0		$	—		$	—		$	—		$	4,450.0
State or local agency obligations	72.2			4.8			8.7			281.9			367.6
U.S. GSE	—			798.6			—			—			798.6
MBS:
U.S. Agency	—			—			389.8			2,179.7			2,569.5
GSE residential MBS	—			—			853.1			1,854.1			2,707.2
Private label residential MBS	—			—			126.3			1,838.1			1,964.4
Private label HELOCs	—			—			—			21.8			21.8
MPF Shared Funding Program	—			—			—			23.7			23.7
Total HTM securities	$	4,522.2		$	803.4		$	1,377.9		$	6,199.3		$	12,902.8
Yield on HTM securities	0.39		%	0.89		%	2.72		%	2.17		%	1.53		%

Total investment securities	$	5,408.6		$	1,053.5		$	1,377.9		$	8,541.3		$	16,381.3
Yield on securities	0.34		%	1.14		%	2.72		%	3.15		%	2.09		%

Interest-bearing deposits	$	11.6		$	—		$	—		$	—		$	11.6
Federal funds sold	4,420.0			—			—			—			4,420.0
Total investments	$	9,840.2		$	1,053.5		$	1,377.9		$	8,541.3		$	20,812.9

As of March 31, 2011, the Bank held securities from the following issuers with a book value greater than 10 percent of Bank total capital.



	Total Book Value		Total Fair Value
(in millions)	Total Book Value		Total Fair Value
Government National Mortgage Association	$	2,179.7	$	2,183.2
Federal Home Loan Mortgage Corp	2,021.4		2,028.8
Federal National Mortgage Association	1,625.3		1,622.8
U.S. Treasury	879.9		879.9
J.P. Morgan Mortgage Trust	858.3		849.8
Wells Fargo Mortgage Backed Securities Trust	523.7		513.9
BNP Paribas	450.0		450
Structured Adjustable Rate Mtg Loan Trust	410.6		403.1
Total	$	8,948.9	$	8,931.5

During the third quarter of 2009, Taylor, Bean & Whitaker (TBW), a servicer on one of the Bank's private label MBS filed for bankruptcy. There is now a replacement servicer on this security. The replacement servicer has provided monthly remittances related to 2010 and subsequent activity. However, final remittances related to certain months in 2009, which had various reconciliation items because of issues with the original servicer, have not yet been determined by the replacement servicer.

For additional information on the credit risk of the investment portfolio, see “Credit and Counterparty Risk-Investments” discussion in the Risk Management section of this Item 2. Management's Discussion and Analysis in the quarterly report filed on this Form 10-Q.

Liabilities and Capital

Commitments and Off-Balance Sheet Items. At March 31, 2011, the Bank was obligated to fund approximately $405.4 million in additional advances, $13.6 million of mortgage loans and $6.2 billion in outstanding standby letters of credit, and to issue $890.8 million in consolidated obligations. The Bank does not consolidate any off-balance sheet special purpose entities or other off-balance sheet conduits.

Capital and Retained Earnings. The Finance Agency has issued regulatory guidance to the FHLBanks relating to capital management and retained earnings. The guidance directs each FHLBank to assess, at least annually, the adequacy of its retained earnings with consideration given to future possible financial and economic scenarios. The guidance also outlines the considerations that each FHLBank should undertake in assessing the adequacy of its retained earnings.

Management monitors capital adequacy, including the level of retained earnings, through the evaluation of MV/CS as well as other risk metrics. Details regarding these metrics are discussed in Risk Management in Item 7. Management's Discussion and Analysis in the Bank's 2010 Form 10-K.

During the first quarter of 2011, management developed and adopted a revised framework for evaluating retained earnings adequacy, consistent with regulatory guidance and requirements. Retained earnings are intended to cover unexpected losses and protect members' par value of capital stock. The new framework includes five risk elements that comprise the Bank's total retained earnings target: (1) AFS private label MBS risk (HTM is included in market risk); (2) market risk; (3) credit risk; (4) operational risk; and (5) accounting risk. The retained earnings target generated from this framework will be sensitive to changes in the Bank's risk profile, whether favorable or unfavorable. For example, a further sharp deterioration in expected performance of loans underlying private-label MBS would likely cause the Bank to adopt a higher target, whereas stabilization or improvement of the performance of these loans may lead to a reduction in the retained earnings target. This framework generates a retained earnings target of $939 million as of March 31, 2011, which is projected to decline to $505 million over a five-year time horizon, based on runoff of the private label MBS portfolio as well as the Bank's risk management actions. The framework will also assist management in its overall analysis of the level of future excess stock repurchases and dividends.

In April 2011, the Board updated its Retained Earnings and Dividend policy. The significant provisions were as follows:


•	The Board increased the floor on the MV/CS from 85 percent to 87.5 percent; and


•	The Excess Capital Stock Repurchase and Dividend Payment section of the policy was changed to include the following:


◦	Prior to and including any excess capital stock repurchases or dividend payouts under consideration, the Bank must meet all regulatory capital requirements;


◦	Excess capital stock repurchase and dividend payouts will be restricted when MV/CS measures below the

established floor. When MV/CS measures above the established floor and the current level of retained earnings falls below the established target (as discussed above), management will assess the ability to reach the target level within the 5 year put redemption period on capital stock. Such assessment will incorporate the effect of any excess stock repurchase and/or dividend payout under consideration. Any excess capital stock repurchases or dividend payouts must maintain MV/CS above the established floor; and


◦	When MV/CS is at or above par and retained earnings meet or exceed the target level, any excess capital stock repurchase will not be restricted. In this condition, dividends can be paid from the most recently completed quarter's GAAP net income, as well as previous retained earnings, provided that retained earnings are maintained at or above target levels.

The following table presents a rollforward of retained earnings for the three months ended March 31, 2011 and 2010.



	Three Months Ended March 31,
(in millions)	2011		2010
Balance, beginning of the period	$	397.3	$	389.0
Net income (loss)	2.5		9.9
Balance, end of the period	$	399.8	$	398.9

During the first quarter of 2011, the 12 FHLBanks, including the Bank, entered into a JCEA intended to enhance the capital position of each FHLBank. For additional information regarding the JCEA, see the Executive Summary discussion in Item 2. Management's Discussion and Analysis in the quarterly report filed on this Form 10-Q.

Capital Resources

The following is Management’s Discussion and Analysis of the Bank’s capital resources as of March 31, 2011, which should be read in conjunction with the unaudited interim financial statements and notes included in this quarterly report filed on Form 10-Q and the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2010 Form 10-K.

Risk-Based Capital (RBC)

The Finance Agency’s RBC regulations require the Bank to maintain sufficient permanent capital, defined as retained earnings plus capital stock, to meet its combined credit risk, market risk and operational risk. Each of these components is computed as specified in regulations and directives issued by the Finance Agency.



	March 31,		December 31,		September 30,		June 30,
(in millions)	2011		2010		2010		2010
Permanent capital:
Capital stock ⁽¹⁾	$	3,837.7	$	4,021.1	$	4,182.8	$	4,048.5
Retained earnings	399.8		397.3		375.8		330.7
Total permanent capital	$	4,237.5	$	4,418.4	$	4,558.6	$	4,379.2

RBC requirement:
Credit risk capital	$	777.4	$	797.6	$	836.3	$	932.5
Market risk capital	484.3		448.7		578.7		649.3
Operations risk capital	378.4		373.9		424.5		474.6
Total RBC requirement	$	1,640.1	$	1,620.2	$	1,839.5	$	2,056.4
Excess permanent capital over RBC requirements	$	2,597.4	$	2,798.2	$	2,719.1	$	2,322.8
Note:
⁽¹⁾Capital stock includes mandatorily redeemable capital stock.

The Bank continues to maintain excess permanent capital over the RBC requirement. However, the total excess decreased slightly from year-end due to the partial repurchase of excess capital stock in February 2011, along with an increase in required market risk capital.

On August 4, 2009, the Finance Agency issued its final Prompt Corrective Action Regulation (PCA Regulation) incorporating the terms of the Interim Final Regulation issued on January 30, 2009. On March 28, 2011, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended December 31, 2010. In its determination, the Finance Agency maintained concerns regarding the Bank's capital position and earnings prospects. The Finance Agency believes that the Bank's retained earnings levels are insufficient and the poor quality of its private label MBS portfolio has created uncertainties about its ability to maintain sufficient capital. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended March 31, 2011.

In April 2011, the Board revised it Retained Earnings and Dividend policy. See details regarding these revisions in the "Capital and Retained Earnings" discussion in Financial Condition in Item 2. Management's Discussion and Analysis in the quarterly report filed on this Form 10-Q.

Capital and Leverage Ratios

In addition to the requirements for RBC, the Finance Agency has mandated maintenance of certain capital and leverage ratios. The Bank must maintain total regulatory capital and leverage ratios of at least 4.0 percent and 5.0 percent of total assets, respectively. Management has an ongoing program to measure and monitor compliance with the ratio requirements. To enhance overall returns, it has been the Bank's practice to utilize leverage within an appropriate operating range when market conditions permit, while maintaining compliance with statutory, regulatory and Bank policy limits. The Bank exceeded all regulatory capital requirements at March 31, 2011.



(dollars in millions)	March 31, 2011			December 31, 2010
Capital Ratio
Regulatory capital (permanent capital plus off-balance sheet credit reserves)	$	4,237.6		$	4,418.6
Capital ratio (regulatory capital as a percent of total assets) ⁽¹⁾	8.1		%	8.3		%
⁽¹⁾The minimum capital ratio requirement is 4.0 percent.

Leverage Ratio
Leverage capital (permanent capital multiplied by a 1.5 weighting factor plus off-balance sheet credit reserves)	$	6,356.4		$	6,627.8
Leverage ratio (leverage capital as a percent of total assets) ⁽²⁾	12.2		%	12.4		%
⁽²⁾The minimum leverage capital ratio requirement is 5.0 percent.

As previously mentioned, the Bank's capital stock is owned by its members. The concentration of the Bank's capital stock is presented in the table below.



(dollars in millions)	March 31, 2011		December 31, 2010
Commercial banks	$	2,096.7	$	2,192.2
Thrifts	1,621.0		1,705.0
Credit unions	52.6		54.9
Insurance companies	34.3		34.8
Total GAAP capital stock	3,804.6		3,986.9
Mandatorily redeemable capital stock	33.1		34.2
Total capital stock	$	3,837.7	$	4,021.1

The composition of the Bank's membership by institution type is presented in the table below.



	March 31, 2011	December 31, 2010
Commercial banks	189	191
Thrifts	90	90
Credit unions	24	24
Insurance companies	3	3
Total	306	308

During the first quarter of 2011, the 12 FHLBanks, including the Bank, entered into a JCEA intended to enhance the capital position of each FHLBank. For additional information regarding possible amendments to the JCEA, see the Executive Summary discussion in Item 2. Management's Discussion and Analysis in the quarterly report filed on this Form 10-Q.

Critical Accounting Policies

The most significant accounting policies followed by the Bank are presented in Note 1 to the audited financial statements in the Bank's 2010 Form 10-K. In addition, the Bank's critical accounting policies are presented in Item 7. Management's Discussion and Analysis in the Bank's 2010 Form 10-K. These policies, along with the disclosures presented in the other notes to the financial statements and in the quarterly report filed on this Form 10-Q, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates or assumptions, and those for which changes in those estimates or assumptions could have a significant impact on the financial statements.

Since January 1, 2011, the Bank has made changes to its allowance for credit losses on mortgage loans held for portfolio and BOB loans as a result of changes in the estimates. In addition, the Bank has provided an update with respect to REFCORP based on changes to circumstances. The impact of the changes on the Bank's Critical Accounting Policies is discussed below.

Allowance for Credit Losses on Banking on Business Loans. The Bank updated its probability of default from national statistics for speculative grade debt to the actual performance of the BOB program. The Bank also eliminated the adjustment to probability of default as a result of trends in gross domestic product. The impact of the change in estimate was immaterial. In addition, as a result of the collection history of BOB loans, the Bank no longer has doubt about the ultimate collection of BOB loans and only considers BOB loans that are delinquent to be nonperforming assets.

Allowance for Credit Losses on Mortgage Loans Held for Portfolio. The Bank updated its probability of default and loss given default from national statistics (adjusted for actual results) for mortgage loans to the actual 12 month historical performance of the Bank's mortgage loans. Actual probability of default was determined by applying migration analysis to categories of mortgage loans (current, 30 days past due, 60 days past due, and 90 days past due). Actual loss given default was determined based on realized losses incurred on the sale of mortgage loan collateral. The change in estimate also includes a more granular Master Commitment analysis of credit enhancements. The impact of the change in estimate was immaterial.

Future REFCORP Payments. In April 2011, the U.S. Treasury repaid the Bank's overpayment of REFCORP, which was reported as a prepaid asset of $36.9 million in the Bank's financial statements at March 31, 2011. It is anticipated that during 2011, there will be full satisfaction of the FHLBank System's REFCORP obligation.

Recently Issued Accounting Standards and Interpretations. The FASB has proposed various changes through multiple exposure drafts related to the accounting for financial instruments and derivatives and hedging activities (collective referred to as the FI ED). Although only proposed at this time, if approved the FI ED is expected to have a material impact on the Bank's Statements of Operations, Condition, and Changes in Capital. In addition, the FI ED, as proposed, is expected to significantly change all of the Bank's Critical Accounting Policies except for Guarantees and Consolidated Obligations and Future REFCORP Payments. The Bank is continuing to monitor the FI ED's status.

See Note 1 to the unaudited financial statements in Item 1. Financial Statements in the quarterly report filed on this Form 10-Q for a discussion of recent accounting pronouncements that are relevant to the Bank's business.

Legislative and Regulatory Developments

The legislative and regulatory environment for the Bank continues to change as financial regulators issue proposed and/or final rules to implement the Dodd-Frank Act enacted in July 2010 and Congress begins to debate proposals for housing finance and GSE reform.

Dodd-Frank Act. The Dodd-Frank Act, among other things: (1) creates an inter-agency oversight council (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; and (7) creates a consumer financial protection bureau. Although the FHLBanks were exempted from several provisions of the Dodd-Frank Act, the FHLBanks' business operations, funding costs, rights, obligations, and/or the environment in which the FHLBanks carry out their housing finance mission are likely to be impacted by the Dodd-Frank Act. Certain regulatory actions during the period covered by this report resulting from the Dodd-Frank Act that may have an important impact on the Bank are summarized below, although the full effect of the Dodd-Frank Act will become known only after the required regulations, studies and reports are issued and finalized.

New Requirements for the Bank's Derivatives Transactions. The Dodd-Frank Act provides for new statutory and regulatory requirements for derivative transactions, including those utilized by the Bank to hedge its interest rate and other risks. 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 new swap execution facilities. Such cleared trades are expected to be subject to initial and variation margin requirements established by the clearinghouse and its clearing members. While clearing swaps may reduce counterparty credit risk, the margin requirements for cleared trades have the potential of making derivative transactions more costly.

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 continue to enter into uncleared trades on a bilateral basis, such trades are expected to be subject to new regulatory requirements, including new mandatory reporting requirements, new documentation requirements and new minimum margin and capital requirements imposed by bank and other federal regulators. Under the proposed margin rules, the Bank will have to post both initial margin and variation margin to the Bank's swap dealer counterparties, subject to thresholds in both instances. Pursuant to additional Finance Agency provisions, the Bank will be required to collect both initial margin and variation margin from the Bank's swap dealer counterparties, without any thresholds. These margin requirements and any related capital requirements could adversely impact the liquidity and pricing of certain uncleared derivative transactions entered into by the Bank and thus also make uncleared trades more costly.

The CFTC has issued a proposed rule requiring that collateral posted by swaps customers to a clearinghouse in connection with cleared swaps, be legally segregated on a customer basis. However, in connection with this proposed rule the CFTC has left open the possibility that customer collateral would not have to be legally segregated but could instead be commingled with all collateral posted by other customers of our clearing member. Such commingling would put the Bank's collateral at risk in the event of a default by another customer of the Bank's clearing member. To the extent the CFTC's final rule places the Bank's posted collateral at greater risk of loss in the clearing structure than under the current over-the-counter market structure, the Bank may be adversely impacted.

The Dodd-Frank Act will require swap dealers and certain other large users of derivatives to register as “swap dealers” or “major swap participants,” as the case may be, with the Commodity Futures Trading Commission (CFTC) and/or the SEC. Based on the definitions in the proposed rules jointly issued by the CFTC and SEC, the Bank may not be required to register as a “major swap participant,” although this remains a possibility. Also, the Bank may not be required to register as a “swap dealer” for the derivative transactions that the Bank enter into with dealer counterparties for the purpose of hedging and managing the Bank's interest rate risk, which constitute the great majority of the Bank's derivative transactions. However, based on the proposed rules, it is possible that the Bank could be required to register with the CFTC as a swap dealer based on the intermediated “swaps” that we have historically entered into with our members.

It is also unclear how the final rule will treat the call and put optionality in certain advances to the Bank's members. The CFTC and SEC have issued joint proposed rules further defining the term “swap” under the Dodd-Frank Act . These proposed rules and accompanying interpretive guidance clarify that certain products will and will not be regulated as “swaps.” However, it is still unknown at this time whether certain transactions between the Bank and the Bank's member customers will be treated as “swaps.” Depending on how the terms “swap” and “swap dealer” are finally defined in the final regulations, the Bank may be faced with the business decision of whether to continue to offer “swaps” to member customers 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 cost including, without limitation, registration with the CFTC, new internal and external business conduct standards, additional reporting requirements and additional swap-based capital and margin requirements. Even if the Bank is designated as a swap dealer, the proposed regulation would permit the Bank to apply to the CFTC to limit such designation to those specified activities for which the Bank is acting as a swap dealer. Upon such designation, the hedging activities of the Bank may not be subject to the full requirements that will generally be imposed on traditional swap dealers.

The Bank, together with the other FHLBanks, are actively participating in the development of the regulations under the Dodd-Frank Act by formally commenting to the regulators regarding a variety of rulemakings that could impact the FHLBanks. It is not expected that final rules implementing the Dodd-Frank Act will become effective until the latter half of 2011 and delays beyond that time are possible.

Regulation of Certain Nonbank Financial Companies

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 the Oversight Council's 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 to likely cover the Bank. 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; and maturity mismatch and existing regulatory scrutiny. If the Bank is determined to be a nonbank financial company subject to the Oversight Council's regulatory requirements, then the Bank's operations and business are likely to be affected.

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 and various regulatory requirements to ensure compliance with the Volcker Rule. If the Bank is subject to the Volcker Rule, then the Bank may be subject to additional limitations on the composition of the Bank's investment portfolio beyond Finance Agency regulations. These limitations may potentially result in less profitable investment alternatives. Further, complying with related regulatory requirements would be likely to increase the Bank's regulatory requirements and incremental costs. The FHLBank System's consolidated obligations generally are exempt from the operation of this rule, subject to certain limitations, including the absence of conflicts of interest and certain financial risks.

FDIC Regulatory Actions

FDIC 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, not including 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. The interim final rule provides, among other things:


•	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.

Valuing most collateral at fair value, rather than par, could adversely impact the value of the Bank's investments with a counterparty (e.g., certificates of deposit) in the event of the counterparty's insolvency.

FDIC Final Rule on Assessment System. On February 25, 2011, the FDIC issued a final rule to revise 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. This rule became effective on April 1, 2011, so FHLBank advances are now included in the Bank's members' assessment base. The rule also eliminates an adjustment to the base assessment rate paid for secured liabilities, including FHLBank advances, in excess of 25 percent of an institution's domestic deposits since these are now part of the assessment base. To the extent that increased assessments increase the cost of advances for some members, it may negatively impact their demand for the Bank's advances.

Joint Regulatory Actions

Proposed Rule on Incentive-Based Compensation Arrangements. On April 14, 2011, seven federal financial regulators, including the Finance Agency, published a proposed rule that would implement Section 956 of the Dodd-Frank Act. Section 956 requires these agencies to issue joint regulations that prohibit “covered financial institutions” from entering into incentive-based compensation arrangements that encourage inappropriate risks.

Applicable to the FHLBanks and the Office of Finance, the rule would:


•	prohibit excessive compensation;


•	prohibit incentive compensation that could lead to material financial loss;


•	require an annual report;


•	require policies and procedures; and


•	require mandatory deferrals of 50 percent of incentive compensation over three years for executive officers.

Covered persons under the rule would include senior management responsible for the oversight of firm wide activities or material business lines, non-executive employees or groups of those employees whose activities may expose the institution to a material loss. For example, covered persons would include traders with large position limits relative to the financial institution's overall risk tolerance and loan officers who, as a group, originate loans that account for a material amount of the financial institution's credit risk.

Under the proposed rule, covered financial institutions would be required to comply with three key risk management principles related to the design and governance of incentive-based compensation: balanced design, independent risk management controls and strong governance.

The proposed rule identifies four methods to balance compensation and make it more sensitive to risk: risk adjustment of awards, deferral of payment, longer performance periods and reduced sensitivity to short-term performance. Larger covered financial institutions, like the Bank, would also be subject to a mandatory 50 percent deferral of incentive-based compensation for executive officers and board oversight of incentive-based compensation for certain risk-taking employees who are not executive officers.

Proposed Rule on Credit Risk Retention for Asset-Backed Securities. On April 29, 2011, the Federal banking agencies, the Finance Agency, the Department of Housing and Urban Development and the SEC jointly issued a notice of proposed rulemaking, which proposes regulations requiring sponsors of asset-backed securities to retain a minimum of a five percent economic interest in a portion of the credit risk of the assets collateralizing asset-backed securities, unless all the assets securitized satisfy specified qualifications. The proposed rule outlines the permissible forms of retention of economic interests (either in the form of retained interests in specified classes of the issued asset-backed securities or in randomly selected assets from the potential pool of underlying assets).

The proposed rule specifies criteria for qualified residential mortgage, commercial real estate, auto and commercial loans that would make them exempt from the risk retention requirement. The criteria for qualified residential mortgages is described in the proposed rulemaking as those underwriting and product features which, based on historical data, are associated with low risk even in periods of decline of housing prices and high unemployment.

Key issues in the proposed rule include: (1) the appropriate terms for treatment as a qualified residential mortgage; (2) the extent to which Fannie Mae and Freddie Mac related securitizations will be exempt from the risk retention rules; and (3) the possibility of creating a category of high quality non-qualified residential mortgage loans that would have less than a five percent risk retention requirement.

The final rule that results from this process is likely to have a significant impact on the structure, operation and financial health of the mortgage finance sector. The final rule will also have implications for FHLBank Acquired Member Asset programs.

Housing Finance and GSE Reform. In the wake of the financial crisis and related housing problems, both Congress and the Obama Administration are considering changes to the U.S. housing finance structure, specifically reforming or eliminating Fannie Mae and Freddie Mac. These efforts may have implications for the FHLBanks.

On February 11, 2011, the Department of the Treasury and the U.S. Department of Housing and Urban Development issued a White Paper report to Congress entitled "Reforming America's Housing Finance Market: A Report to Congress". The report's primary focus is to provide options for Congressional consideration regarding the long-term structure of housing finance, including

reforms specific to Fannie Mae and Freddie Mac. In addition, 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 will be substantially reduced over time.

Although the FHLBanks are not the primary focus of this report, they are recognized as playing a vital role in helping smaller financial institutions access liquidity and capital to compete in an increasingly competitive marketplace. The report suggests the following possible reforms for the FHLBank System:


•	focus the FHLBanks on small- and medium-sized financial institutions;


•	restrict membership by allowing each institution eligible for membership to be an active member in only a single FHLBank;


•	limit the level of outstanding advances to larger members; and


•	reduce FHLBank investment portfolios and their composition, focusing FHLBanks on providing liquidity for insured depository institutions.

The report also supports exploring additional means to provide funding to housing lenders, including potentially the development of a covered bond market.

In response, several bills have been introduced in Congress. On March 17, 2011, a comprehensive reform bill, the GSE Bailout Elimination and Taxpayer Protection Act, was introduced in the House, which seeks wholesale changes and the eventual wind-down of Fannie Mae and Freddie Mac. A companion bill was introduced in the Senate on March 31, 2011.

In early April 2011, eight smaller bills were also introduced in the House, each dealing with a different aspect of the reform effort, that collectively look to achieve the same goal as the comprehensive reform bill. All eight bills were approved by the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises.

While none of this legislation proposes specific changes to the FHLBanks, the Bank could nonetheless be affected in numerous ways by changes to the U.S. housing finance structure and to Fannie Mae and Freddie Mac. For example, the FHLBanks traditionally have allocated a significant portion of their investment portfolio to investments in Fannie Mae and Freddie Mac debt securities. Accordingly, the FHLBanks' investment strategies would likely be affected by winding down those entities. Winding down these two GSEs, or limiting the amount of mortgages they purchase, also could increase demand for FHLBank advances if FHLBank members responded by retaining more of their mortgage loans in portfolio, using advances to fund the loans.

Additionally it is possible that the Finance Agency could consider regulatory actions consistent with the report, including restricting membership by allowing each eligible institution to be an active member of a single FHLBank or limiting the level of advances outstanding to larger members. It is also possible that Congress will consider any or all of the specific changes to the FHLBanks suggested by the Administration's proposal. If regulation or legislation is enacted incorporating these changes, the FHLBanks could be significantly limited in their ability to make advances to their members and subject to additional limitations on their investment authority. Additionally, if Congress enacts legislation encouraging the development of a covered bond market, FHLBank advances could be reduced in time as larger members use covered bonds as an alternative form of wholesale mortgage financing.

The potential effect of housing finance and GSE reform on the FHLBanks is unknown at this time and will depend on the legislation or regulations, if any, that are ultimately enacted.

Finance Agency Regulatory Actions

Final Rule on Temporary Increases in Minimum Capital Levels. On March 3, 2011, the Finance Agency issued a final rule effective April 4, 2011 authorizing the Director of the Finance Agency to increase the minimum capital level for an FHLBank if the Director determines that the current level is insufficient to address such FHLBank's risks. The rule provides the factors that the Director may consider in making this determination including the FHLBank's:


•	current or anticipated declines in the value of assets held by it;


•	ability to access liquidity and funding;


•	credit, market, operational and other risks;


•	current or projected declines in its capital;


•	material compliance with regulations, written orders, or agreements;


•	housing finance market conditions;


•	level of retained earnings;


•	initiatives, operations, products or practices that entail heightened risk;


•	ratio of market value of equity to the par value of capital stock; and/or


•	other conditions as notified by the Director.

The rule provides that the Director shall consider the need to maintain, modify or rescind any such increase no less than every 12 months. If the Bank is required to increase the Bank's minimum capital level, the Bank may need to lower or suspend dividend payments to increase retained earnings to satisfy such increase. Alternatively, the Bank could satisfy an increased capital requirement by disposing of assets to decrease the size of the Bank's balance sheet relative to total outstanding stock, which may adversely impact the Bank's results of operations and financial condition and ability to satisfy the Bank's mission.

Final Rule on FHLBank Liabilities. On April 4, 2011, the Finance Agency issued a final rule that would, among other things:


•	reorganize and re-adopt Finance Agency regulations dealing with consolidated obligations, as well as related regulations addressing other authorized FHLBank liabilities and book entry procedures for consolidated obligations;


•	implement recent statutory amendments that removed authority from the Finance Agency to issue consolidated obligations;


•	specify that the FHLBanks issue consolidated obligations that are the joint and several obligations of the FHLBanks as provided for in the statute rather than as joint and several obligations of the FHLBanks as provided for in the current regulation; and


•	provide that consolidated obligations are issued under Section 11(c) of the FHLBank Act rather than under Section 11(a) of the FHLBank Act.

This rule is not expected to have any adverse impact on the FHLBanks' joint and several liability for the principal and interest payments on consolidated obligations. This rule became effective May 4, 2011.

Regulatory Policy Guidance on Reporting of Fraudulent Financial Instruments. On January 27, 2010, the Finance Agency issued a regulation requiring the FHLBanks to report to the Finance Agency any purchase or sale of fraudulent financial instruments or loans, or financial instruments or loans an FHLBank suspects are possibly fraudulent. On March 29, 2011, the Finance Agency issued immediately effective final guidance which sets forth fraud reporting requirements for the FHLBanks under the regulation. The guidance, among other things, provides examples of fraud that should be reported to the Finance Agency and the Finance Agency's Office of Inspector General. In addition, the guidance requires FHLBanks to establish and maintain effective internal controls, policies, procedures and operational training to discover and report fraud or possible fraud. Although complying with the guidance will increase the Bank's regulatory requirements, the Bank does not expect any material incremental costs or adverse impact to the Bank's business.

Proposed Rule on Private Transfer Fee Covenants. On February 8, 2011, the Finance Agency issued a proposed rule that would restrict the Bank from acquiring, or taking security interests in, mortgage loans and securities with underlying mortgage loans encumbered by private transfer fee covenants, except for certain excepted transfer covenants. Excepted transfer fee covenants would be covenants that 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 foregoing restrictions would apply only to mortgages on properties encumbered by private transfer fee covenants created on or after February 8, 2011, and to such 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 Bank would be required to comply with the regulation within 120 days of the publication of the final rule. To the extent that a final rule limits the type of collateral the Bank accepts for advances and the type of loans eligible for purchase under the MPF Xtra product, the Bank's business may be adversely impacted.

Advance Notice of Proposed Rulemaking on Use of NRSRO Credit Ratings. On January 31, 2011, the Finance Agency issued an advanced notice of proposed rule that would implement a provision in 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 FHLBanks including risk-based capital requirements, prudential requirements, investments, and consolidated obligations.

See the Legislative and Regulatory Developments section in the Bank's 2010 Form 10-K for additional discussion on pending legislative and regulatory developments.

Risk Management

The Bank employs a corporate governance and internal control framework designed to support the effective management of the Bank's business activities and the related inherent risks. As part of this framework, the Bank's Board of Directors has adopted a Risk Management Policy and a Member Products Policy, which are reviewed regularly and re-approved at least annually. The Risk Management Policy establishes risk guidelines, limits (if applicable), and standards for credit risk, market risk, liquidity risk, operations risk, concentration risk, and business risk in accordance with Finance Agency regulations consistent with the Bank's risk profile. The risk profile was established by the Board of Directors, and other applicable guidelines in connection with the Bank's Capital Plan and overall risk management. For more detailed information, see the Risk Management section in Item 7. Management's Discussion and Analysis in the Bank's 2010 Form 10-K.

Risk Governance

The Bank's lending, investment and funding activities and use of derivative hedging instruments expose the Bank to a number of risks that include market and interest rate risk, credit and counterparty risk, liquidity and funding risk, and operating and business risk, among others, including those described in Item 1A. Risk Factors in the Bank's 2010 Form 10-K. The Bank's risks are affected by current and projected financial and residential market trends, which are discussed in the Executive Summary in Item 2. Management's Discussion and Analysis in the quarterly report filed on this Form 10-Q.

Details regarding the Bank's Risk Governance framework and processes are included in the "Risk Governance" discussion in Risk Management in Item 7. Management's Discussion and Analysis in the Bank's 2010 Form 10-K.

Capital Adequacy Measures. Market Value of Equity to Par Value of Capital Stock (MV/CS) provides a current assessment of the liquidation value of the balance sheet and measures the Bank's current ability to honor the par put redemption feature of its capital stock. The risk metric is used to evaluate the adequacy of retained earnings and develop dividend payment and excess capital stock repurchase recommendations.

An initial floor of 85 percent was established for MV/CS. The floor represents the estimated level from which the MV/CS would recover to par, through the retention of earnings over the five-year par put redemption period of the Bank's capital stock. MV/CS will be measured against the floor monthly. When MV/CS is below the established floor, excess capital stock repurchases and dividend payouts will be restricted. When MV/CS is above the established floor, additional analysis of the adequacy of retained earnings will be performed, taking into consideration the impact of excess capital stock repurchases and/or dividend payouts. In April 2011, the Board increased the 85 percent floor to 87.5 percent beginning in the second quarter 2011. See the "Capital and Retained Earnings" section in Financial Condition in Item 2. Management's Discussion and Analysis in the quarterly report filed on this Form 10-Q for details.

The following table presents the MV/CS calculations as of March 31, 2011 and December 31, 2010.



	March 31, 2011		December 31, 2010

Market Value of Equity to Par Value of Capital Stock	97.3	%	93.3	%

The improvement in the MV/CS in first quarter 2011 was primarily due to the narrowing of spreads on the private label MBS portfolio as well as principal paydowns on the portfolio. Because the MV/CS ratio was above 85 percent at December 31, 2010 and March 31, 2011, the Bank performed additional analysis of capital adequacy taking into consideration the impact of excess capital stock repurchases. As a result of this analysis, the Bank executed a partial repurchase of excess capital stock on February 23, 2011 and April 29, 2011. The amount of excess capital stock repurchased from any member was the lesser of 5 percent of the member's total capital stock outstanding or its excess capital stock outstanding on February 22, 2011 and April 28, 2011, respectively. The effect of the repurchases was a minor reduction in the MV/CS ratio, which was more than offset by the factors noted above that drove the overall improvement in the ratio from year-end.

On December 23, 2008, the Bank announced its voluntary decision to temporarily suspend payment of dividends until further notice. There were no dividends declared or paid in 2010 or in first quarter 2011.

Decisions regarding any future repurchase of excess capital stock or dividend payouts will be made on a quarterly basis. The Bank will continue to monitor the MV/CS ratio as well as the condition of its private label MBS portfolio, its overall financial performance and retained earnings (including its newly implemented retained earnings framework), developments in the mortgage

and credit markets and other relevant information as the basis for determining the status of dividends and excess capital stock repurchases in future quarters. See the "Capital and Retained Earnings" discussion in Financial Condition in Item 2. Management's Discussion and Analysis in the quarterly report filed on this Form 10-Q for details regarding the Bank's revised Retained Earnings policy.

Subprime and Nontraditional Loan Exposure. In December 2010, the Board approved various policy revisions, which were effective immediately, pertaining to subprime and nontraditional loan exposure. These revisions included establishment of a Bank-wide limit on these types of exposures and affected existing policies related to collateral, MBS investments and the mortgage loan portfolio.

First, the definitions of subprime and nontraditional residential mortgage loans and MBS were updated to be consistent with Federal Financial Institutions Examination Council (FFIEC) and Finance Agency Guidance. Second, the overall risk limits were established for exposure to subprime and nontraditional mortgages. Currently, subprime exposure limits are essentially established at zero. With respect to nontraditional exposure, the Bank has established overall limits and portfolio sublimits. The overall risk limit for nontraditional exposure is 25 percent, that is, the total overall nontraditional exposure cannot exceed 25 percent of the sum of the collateral pool plus MBS investments plus MPF Program mortgage loans. The collateral sublimit has been set at 25 percent, and the MPF mortgage loan sublimit at 5 percent. The private label MBS portfolio includes some subprime and nontraditional assets; however, these legacy assets are excluded from these limits. Third, an enhanced reporting process has been established to aggregate the volume of nontraditional loans and MBS investments which includes any potential exposure. Lastly, with respect to collateral, all members are required to identify subprime and nontraditional loans and MBS and provide periodic certification that they comply with the FFIEC guidance.

Qualitative and Quantitative Disclosures Regarding Market Risk

Managing Market and Interest Rate Risk. The Bank's market and interest rate risk management objective is to protect member/shareholder and bondholder value consistent with the Bank's housing mission and safe and sound operations in all interest-rate environments. Management believes that a disciplined approach to market and interest rate risk management is essential to maintaining a strong capital base and uninterrupted access to the capital markets.

The Bank's Market Risk Model. Significant resources, both in analytical computer models and staff, are devoted to assuring that the level of interest rate risk in the balance sheet is accurately measured, thus allowing management to monitor the risk against policy and regulatory limits. The Bank uses an externally developed market risk model to evaluate its financial position and interest rate risk. Management regularly reviews the major assumptions and methodologies used in the model, as well as available upgrades to the model. One of the most critical market-based model assumptions relates to the prepayment of principal on mortgage-related instruments. Throughout 2010, the Bank upgraded the mortgage prepayment models used within the market risk model to more accurately reflect expected prepayment behavior.

The Bank regularly validates the models used to measure market risk. Such model validations are generally performed by third-party specialists and are supplemented by additional validation processes performed by the Bank, most notably, benchmarking model-derived fair values to those provided by third-party services or alternative internal valuation models.

Duration of Equity. One key risk metric used by the Bank, and which is commonly used throughout the financial services industry, is duration. Duration is a measure of the sensitivity of a financial instrument's value, or the value of a portfolio of instruments, to a 100 basis point parallel shift in interest rates. Duration of equity measures the potential for the market value of the Bank's equity base to change with movements in market interest rates.

The Bank's asset/liability management policy approved by the Board calls for duration of equity to be maintained within a + 4.5 year range in the base case. In addition, the duration of equity exposure limit in an instantaneous parallel interest rate shock of + 200 basis points is + 7 years. Management analyzes the duration of equity exposure against this policy limit on a daily basis and continually evaluates its market risk management strategies.

In response to unprecedented mortgage spread levels, management developed an Alternative Risk Profile to exclude the effects of increases in certain mortgage-related asset credit spreads to better reflect the underlying interest rate risk and accommodate prudent management of the Bank's balance sheet. Approved use of the alternate calculation of duration of equity for monitoring against established limits has been extended through June 30, 2011.

The following table presents the Bank's duration of equity exposure in accordance with the actual and Alternative Risk Profile duration of equity calculation at March 31, 2011 and December 31, 2010.



(in years)	Base Case	Up 100 basis points	Up 200 basis points
Alternative duration of equity:
March 31, 2011	2.2	3.3	4.0
December 31, 2010	1.3	3.2	4.1

Actual duration of equity:
March 31, 2011	3.2	4.0	4.3
December 31, 2010	3.0	4.2	4.5

Note: Given the low level of interest rates, an instantaneous parallel interest rate shock of “down 200 basis points” and “down 100 basis points” cannot be meaningfully measured for these periods and therefore is not presented.

The extension in the base duration of equity from year-end was primarily due to higher longer-term interest rates and prepayment modeling changes to capture primary mortgage spread variability, which lowered the overall sensitivity of mortgage prepayments to rate changes. The effect of these changes had limited impact on duration of equity in the "Up 100" and "Up 200" basis point shock scenarios. The effects of the excess capital stock repurchase in February 2011 and debt calls since year-end 2010 were largely offset by hedging actions taken in first quarter 2011.

The Bank continues to monitor the mortgage and related fixed income markets and the impact that changes in the market may have on duration of equity and other market risk measures and may take actions to reduce market risk exposures as needed. Management believes that the Bank's current market risk profile is reasonable given these market conditions.

Earned Dividend Spread (EDS). The Bank's asset/liability management policy also measures interest rate risk based on an earned dividend spread (EDS). EDS is defined as the Bank's return on average capital stock in excess of the average return of an established benchmark market index, 3-month LIBOR in the Bank's case, for the period measured. The EDS Floor represents the minimum acceptable return under the selected interest rate scenarios, for both Year 1 and Year 2. For both Years 1 and 2, the EDS Floor is 3-month LIBOR plus 15 basis points. EDS Volatility is a measure of the variability of the Bank's EDS in response to shifts in interest rates, specifically the change in EDS for a given time period and interest rate scenario compared to the current base forecasted EDS. See the Qualitative and Quantitative Disclosures Regarding Market Risk discussion in Risk Management in Item 7. Management's Discussion and Analysis in the Bank's 2010 Form 10-K for additional details regarding EDS

The following table presents the Bank's EDS level and EDS Volatility as of March 31, 2011 and December 31, 2010. These metrics are presented as spreads over 3-month LIBOR. The steeper and flatter yield curve shift scenarios shown below are represented by appropriate increases and decreases in short-term and long-term interest rates using the three-year point on the yield curve as the pivot point. Given the current low rate environment, management replaced the “down 200 basis points parallel” rate scenario during the fourth quarter of 2009 with an additional non-parallel rate scenario that reflects a decline in longer term rates. The Bank was in compliance with the EDS Floor and EDS Volatility limits across all selected interest rate shock scenarios at March 31, 2011.



	Earned Dividend Spread Yield Curve Shifts⁽¹⁾ (expressed in basis points)
	Down 100 bps Longer Term Rate Shock			100 bps Steeper			Forward Rates	100 bps Flatter			Up 200 bps Parallel Shock
	EDS	Volatility		EDS	Volatility		EDS	EDS	Volatility		EDS	Volatility
Year 1 Return Volatility
March 31, 2011	147	4		152	9		143	199	56		248	105
December 31, 2010	129	(20	)	154	5		149	164	15		195	46

Year 2 Return Volatility
March 31, 2011	229	(32	)	255	(6	)	261	275	14		263	2
December 31, 2010	145	(50	)	206	11		195	185	(10	)	180	(15	)

Notes:

⁽¹⁾Based on forecasted core earnings, which exclude future potential OTTI charges which could be material, so that earnings movement related to interest rate changes can be isolated.

Year 1 EDS Base declined slightly as lower projected earnings were partially offset by the impact of actual and future projected excess capital stock repurchases and assumed completion of the REFCORP payment obligations in 2011. Some contributing factors to the lower projected earnings included the sale of one private label MBS in April 2011, which is part of the strategic Bank objective to reduce risk exposure in this asset class, as well as higher provision for credit losses on mortgage loans. Year 2 EDS increases in all scenarios were mainly driven by the impact of projected excess capital stock repurchases.

Improvement of EDS volatility was primarily a result of hedging actions to reduce exposure to rising interest rates, prepayment modeling changes to capture primary mortgage spread variability which lowered the overall sensitivity of mortgage prepayments to rate changes and the impact of assumed completion of the REFCORP payment obligations.

Earnings-at-Risk. The Bank employs an Earnings-at-Risk (EaR) framework for certain mark-to-market positions, including economic hedges. This framework establishes a forward-looking, scenario-based exposure limit based on interest rate shocks that would apply to any existing or proposed transaction that is marked to market through the income statement without an offsetting mark arising from a qualifying hedge relationship. The Bank's Capital Markets and Corporate Risk Management departments also monitor actual profit/loss change on a daily, monthly cumulative, and quarterly cumulative basis.

In December 2010, the Board set the daily exposure limit of EaR at $1.5 million effective January 1, 2011. The Bank's Asset/Liability Management Committee (ALCO) established an operating guideline of $1.2 million. The daily forward-looking exposure was below the applicable Board limit and operating guidelines during first quarter 2011. At March 31, 2011, EaR measured $625 thousand.

Credit and Counterparty Risk - Total Credit Products and Collateral

Total Credit Products. The Bank manages the credit risk on a member's exposure on Total Credit Products (TCP), which includes advances, letters of credit, advance commitments, MPF credit enhancement obligations and other credit product exposure by monitoring the financial condition of borrowers and by requiring all borrowers (and, where applicable in connection with member affiliate pledge arrangements approved by the Bank, their affiliates) to pledge sufficient eligible collateral for all member obligations to the Bank. The Bank establishes a Maximum Borrowing Capacity (MBC) for each member based on collateral weightings applied to eligible collateral as described in the Bank's Member Products Policy. Details regarding this Policy are available in the “Advance Products” discussion in Item 1. Business in the Bank's 2010 Form 10-K. According to the Policy, eligible collateral is weighted to help ensure that the collateral value will exceed the amount that may be owed to the Bank in the event of a default. The Bank also has the ability to call for additional or substitute collateral while any indebtedness is outstanding to protect its security position.

The financial condition of all members and housing associates is closely monitored for compliance with financial criteria as set forth in the Bank's credit policies. The Bank has developed an internal credit scoring system that calculates financial scores and rates member institutions on a quarterly basis using a numerical rating scale from one to ten. Scores are objectively calculated based on financial ratios computed from publicly available data. The scoring system gives the highest weighting to the member's asset quality and capitalization. Other key factors include earnings and balance sheet composition. Operating results for the previous four quarters are used, with the most recent quarters' results given a higher weighting. Additionally, a member's credit score can be adjusted for various qualitative factors, such as the financial condition of the member's holding company. While financial scores and resulting ratings are calculations based only upon point-in-time financial data and the resulting ratios, a rating in one of the lowest categories indicates that a member exhibits defined financial weaknesses. Members in these categories are reviewed for potential collateral delivery status. Other uses of the internal credit scoring system include the scheduling of on-site collateral reviews. The scoring system is not used for insurance company members; instead, an independent financial analysis is performed for any insurance company exposure.

During the first quarter of 2011, there were 26 failures of FDIC-insured institutions nationwide. None of these failures were members of the Bank. As of May 9, 2011, the Bank had not experienced any member failures in 2011.

Management believes that it has adequate policies and procedures in place to effectively manage credit risk related to member TCP. These credit and collateral policies balance the Bank's dual goals of meeting members' needs as a reliable source of liquidity and limiting credit loss by adjusting the credit and collateral terms in response to deterioration in creditworthiness. The Bank has never experienced a credit loss on member advances or letters of credit. The Bank's collateral policies and procedures are described below.

The following table presents the Bank's top ten borrowers with respect to their TCP at March 31, 2011 and the corresponding December 31, 2010 balances.



	March 31, 2011				December 31, 2010
(dollars in millions)	Total Credit Products		Percent of Total		Total Credit Products		Percent of Total
Sovereign Bank, PA	$	9,851.3	30.6	%	$	11,101.3	27.7	%
TD Bank, National Association, DE	5,124.5		15.9		8,927.3		22.3
Ally Bank, UT⁽¹⁾	4,761.0		14.8		5,298.0		13.2
Susquehanna Bank, PA	1,298.7		4.0		1,208.7		3.0
Citizens Bank of Pennsylvania, PA	982.2		3.1		1,275.8		3.2
Northwest Savings Bank, PA	732.5		2.3		782.5		2.0
National Penn Bank, PA	625.4		2.0		701.2		1.8
PNC Bank, National Association, DE⁽²⁾	500.6		1.6		1500.9		3.7
Wilmington Savings Fund Society, DE	498.2		1.5		489.0		1.2
Genworth Life Insurance Company, DE	492.9		1.5		492.9		1.2
	24,867.3		77.3		31,777.6		79.3
Other borrowers	7,307.3		22.7		8,287.3		20.7
Total TCP outstanding	$	32,174.6	100.0	%	$	40,064.9	100.0	%

Notes:

⁽¹⁾ For Bank membership purposes, principal place of business is Horsham, PA.

⁽²⁾ For Bank membership purposes, principal place of business is Pittsburgh, PA.

Of the top ten borrowing members in terms of TCP presented above, the total exposure of the majority of those borrowers was primarily due to outstanding advances balances at March 31, 2011, with the exception of TD Bank, whose TCP was comprised entirely of letters of credit. As noted in the table above, the TCP decreased approximately $7.9 billion from December 31, 2010 to March 31, 2011. The majority of this decline was linked to TD Bank due to the expiration of a letter of credit on March 30, 2011, as well as lower outstanding advances as described in the table below.

Member Advance Concentration Risk. The following table lists the Bank's top ten borrowers based on actual advance balances at par as of March 31, 2011, and their corresponding December 31, 2010 advance balances at par.



	March 31, 2011				December 31, 2010
(dollars in millions)	Loan Balance		Percent of total		Loan Balance		Percent of total
Sovereign Bank, PA	$	9,825.0	38.5	%	$	9,825.0	34.6	%
Ally Bank, UT⁽¹⁾	4,761.0		18.7		5,298.0		18.7
Susquehanna Bank, PA	889.2		3.5		899.2		3.2
Northwest Savings Bank, PA	695.6		2.6		745.7		2.6
Citizens Bank of Pennsylvania, PA	650.0		2.5		930.0		3.3
National Penn Bank, PA	625.4		2.5		701.2		2.5
PNC Bank, National Association, DE⁽²⁾	500.2		2.0		1,500.4		5.3
Wilmington Savings Fund Society FSB, DE	498.2		2.0		489.0		1.7
Genworth Life Insurance Company, DE	492.9		1.9		492.9		1.7
Fulton Bank, PA	409.0		1.6		439.0		1.5
	19,346.5		75.8		21,320.4		75.1
Other borrowers	6,174.3		24.2		7,076.6		24.9
Total advances	$	25,520.8	100.0	%	$	28,397.0	100.0	%

Federal Home Loan Bank of Pittsburgh - FORM 10-Q - May 10, 2011

Attached files