e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2009


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

Commission File Number 000-51405

FEDERAL HOME LOAN BANK OF DALLAS

(Exact name of registrant as specified in its charter)


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

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

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

Indicate by check mark whether the registrant [1] has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and [2] has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (17 C.F.R. §232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

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

At July 31, 2009, the registrant had outstanding 27,270,958 shares of its Class B Capital Stock, $100 par value per share.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CONDITION

(Unaudited; in thousands, except share data)


	June 30,			December 31,
	2009			2008
ASSETS
Cash and due from banks	$	22,053		$	20,765
Interest-bearing deposits		2,233,650			3,683,609
Federal funds sold		3,336,000			1,872,000
Trading securities (Note 11)		3,454			3,370
Available-for-sale securities (Notes 3 and 11)		3,037			127,532
Held-to-maturity securities (a) (Notes 4 and 11)		12,586,121			11,701,504
Advances (Notes 5 and 12)		53,469,938			60,919,883
Mortgage loans held for portfolio, net of allowance for credit losses of $258 and $261 at June 30, 2009 and December 31, 2008, respectively		289,521			327,059
Accrued interest receivable		82,512			145,284
Premises and equipment, net		23,576			20,488
Derivative assets (Notes 8 and 11)		29,738			77,137
Excess REFCORP contributions		—			16,881
Other assets		16,073			17,386

TOTAL ASSETS	$	72,095,673		$	78,932,898


LIABILITIES AND CAPITAL
Deposits
Interest-bearing	$	1,172,549		$	1,424,991
Non-interest bearing		75			75

Total deposits		1,172,624			1,425,066


Consolidated obligations, net (Note 6)
Discount notes		14,961,653			16,745,420
Bonds		52,492,151			56,613,595

Total consolidated obligations, net		67,453,804			73,359,015


Mandatorily redeemable capital stock		78,806			90,353
Accrued interest payable		181,597			514,086
Affordable Housing Program (Note 7)		46,444			43,067
Payable to REFCORP		5,836			—
Derivative liabilities (Notes 8 and 11)		5,151			2,326
Other liabilities		71,548			60,565

Total liabilities		69,015,810			75,494,478


Commitments and contingencies (Note 12)

CAPITAL (Note 9)
Capital stock — Class B putable ($100 par value) issued and outstanding shares:
28,277,641 and 32,238,300 shares at June 30, 2009 and December 31, 2008, respectively		2,827,764			3,223,830
Retained earnings		301,442			216,025
Accumulated other comprehensive income (loss)
Net unrealized losses on available-for-sale securities, net of unrealized gains and losses relating to hedged interest rate risk included in net income		(1	)		(1,661	)
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities (Note 4)		(49,549	)		—
Postretirement benefits		207			226

Total accumulated other comprehensive income (loss)		(49,343	)		(1,435	)

Total capital		3,079,863			3,438,420

TOTAL LIABILITIES AND CAPITAL	$	72,095,673		$	78,932,898


(a)		Fair values: $12,318,846 and $11,169,862 at June 30, 2009 and December 31, 2008, respectively.

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

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF INCOME

(Unaudited, in thousands)


	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2009			2008		2009			2008
INTEREST INCOME
Advances	$	178,904		$	415,349	$	434,783		$	903,443
Prepayment fees on advances, net		9,850			967		10,654			1,295
Interest-bearing deposits		83			705		179			1,849
Federal funds sold		1,363			24,698		2,849			72,107
Available-for-sale securities		12			2,205		468			5,569
Held-to-maturity securities		37,836			80,361		78,652			171,609
Mortgage loans held for portfolio		4,109			5,025		8,547			10,272
Other		157			83		270			221

Total interest income		232,314			529,393		536,402			1,166,365


INTEREST EXPENSE
Consolidated obligations
Bonds		148,836			341,432		375,888			730,732
Discount notes		68,384			119,501		167,464			292,806
Deposits		305			15,641		1,066			41,991
Mandatorily redeemable capital stock		35			361		56			902
Other borrowings		1			81		2			108

Total interest expense		217,561			477,016		544,476			1,066,539


NET INTEREST INCOME (EXPENSE)		14,753			52,377		(8,074	)		99,826

OTHER INCOME (LOSS)
Total other-than-temporary impairment losses on held-to-maturity securities		(25,570	)		—		(51,785	)		—
Net non-credit impairment losses recognized in other comprehensive income		24,916			—		51,114			—

Credit component of other-than-temporary impairment losses on held-to-maturity securities		(654	)		—		(671	)		—


Service fees		854			1,016		1,482			1,871
Net gain (loss) on trading securities		257			—		178			(133	)
Realized gains on sales of available-for-sale securities		—			2,794		843			2,794
Net gains on derivatives and hedging activities		33,903			9,826		160,734			14,730
Gains on early extinguishment of debt		176			1,910		176			7,566
Other, net		1,565			1,468		3,241			2,917

Total other income		36,101			17,014		165,983			29,745


OTHER EXPENSE
Compensation and benefits		8,546			8,258		18,299			17,131
Other operating expenses		6,220			5,007		13,723			12,860
Finance Agency/Finance Board		561			433		1,163			865
Office of Finance		505			427		1,039			848

Total other expense		15,832			14,125		34,224			31,704


INCOME BEFORE ASSESSMENTS		35,022			55,266		123,685			97,867


Affordable Housing Program		2,863			4,548		10,102			8,081
REFCORP		6,432			10,143		22,717			17,957

Total assessments		9,295			14,691		32,819			26,038


NET INCOME	$	25,727		$	40,575	$	90,866		$	71,829

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

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CAPITAL

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(Unaudited, in thousands)


										Accumulated
	Capital Stock									Other
	Class B - Putable						Retained			Comprehensive			Total
	Shares			Par Value			Earnings			Income (Loss)			Capital
BALANCE, JANUARY 1, 2009		32,238		$	3,223,830		$	216,025		$	(1,435	)	$	3,438,420

Proceeds from sale of capital stock		3,080			308,018			—			—			308,018
Repurchase/redemption of capital stock		(7,075	)		(707,542	)		—			—			(707,542	)
Shares reclassified to mandatorily redeemable capital stock		(18	)		(1,845	)		—			—			(1,845	)
Comprehensive income
Net income		—			—			90,866			—			90,866
Other comprehensive income (loss)
Net unrealized gains on available-for-sale securities		—			—			—			2,503			2,503
Reclassification adjustment for realized gain on sale of available-for-sale security included in net income		—			—			—			(843	)		(843	)
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities		—			—			—			(51,266	)		(51,266	)
Reclassification adjustment for non-credit portion of other-than-temporary impairment losses recognized as credit losses in net income		—			—			—			152			152
Accretion of non-credit portion of other-than- temporary impairment losses to the carrying value of held-to-maturity securities		—			—			—			1,565			1,565
Postretirement benefit plan
Amortization of prior service credit included in net periodic benefit cost		—			—			—			(17	)		(17	)
Amortization of net actuarial gain included in net periodic benefit cost		—			—			—			(2	)		(2	)


Total comprehensive income ^(a)		—			—			—			—			42,958


Dividends on capital stock (at 0.34 percent annualized rate)
Cash		—			—			(92	)		—			(92	)
Mandatorily redeemable capital stock		—			—			(54	)		—			(54	)
Stock		53			5,303			(5,303	)		—			—


BALANCE, JUNE 30, 2009		28,278		$	2,827,764		$	301,442		$	(49,343	)	$	3,079,863

FEDERAL HOME LOAN BANK OF DALLAS
STATEMENTS OF CAPITAL (continued)
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(Unaudited, in thousands)


										Accumulated
	Capital Stock									Other
	Class B - Putable						Retained			Comprehensive			Total
	Shares			Par Value			Earnings			Income (Loss)			Capital
BALANCE, JANUARY 1, 2008		23,940		$	2,393,980		$	211,762		$	(570	)	$	2,605,172

Proceeds from sale of capital stock		10,324			1,032,449			—			—			1,032,449
Repurchase/redemption of capital stock		(3,967	)		(396,676	)		—			—			(396,676	)
Shares reclassified to mandatorily redeemable capital stock		(149	)		(14,951	)		—			—			(14,951	)
Comprehensive income
Net income		—			—			71,829			—			71,829
Other comprehensive income (loss)
Net unrealized gains on available-for-sale securities		—			—			—			2,050			2,050
Reclassification adjustment for realized gains on sales of available-for-sale securities included in net income		—			—			—			(2,794	)		(2,794	)
Postretirement benefit plan
Amortization of prior service credit included in net periodic benefit cost		—			—			—			(17	)		(17	)
Amortization of net actuarial gain included in net periodic benefit cost		—			—			—			(2	)		(2	)


Total comprehensive income ^(a)		—			—			—			—			71,066


Dividends on capital stock (at 3.84 percent annualized rate)
Cash		—			—			(90	)		—			(90	)
Mandatorily redeemable capital stock		—			—			(214	)		—			(214	)
Stock		451			45,058			(45,058	)		—			—


BALANCE, JUNE 30, 2008		30,599		$	3,059,860		$	238,229		$	(1,333	)	$	3,296,756


^(a)		For the three months ended June 30, 2009 and 2008, total comprehensive income of $2,653 and $44,586, respectively, includes net income of $25,727 and $40,575, respectively, net unrealized gains on available-for-sale securities of $287 and $6,815, respectively, reclassification adjustments for realized gains on sales of available-for-sale securities included in net income of $0 and ($2,794), respectively, non-credit portion of other-than-temporary impairment losses on held-to-maturity securities of ($25,068) and $0, respectively, reclassification adjustment for non-credit portion of other-than-temporary impairment losses recognized as credit losses in net income of $152 and $0, respectively, accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities of $1,565 and $0, respectively, amortization of prior service credit included in net periodic benefit cost of ($9) and ($9), respectively, and amortization of net actuarial gain included in net periodic benefit cost of ($1) and ($1), respectively.

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

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	For the Six Months Ended
	June 30,
	2009			2008
OPERATING ACTIVITIES
Net income	$	90,866		$	71,829
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization
Net premiums and discounts on advances, consolidated obligations, investments and mortgage loans		(28,675	)		(34,070	)
Concessions on consolidated obligation bonds		4,071			10,275
Premises, equipment and computer software costs		2,333			2,070
Non-cash interest on mandatorily redeemable capital stock		98			1,469
Realized gains on sales of available-for-sale securities		(843	)		(2,794	)
Credit component of other-than-temporary impairment losses on held-to-maturity securities		671			—
Gains on early extinguishment of debt		(176	)		(7,566	)
Net increase in trading securities		(84	)		(724	)
Loss (gain) due to change in net fair value adjustment on derivative and hedging activities		108,480			(40,531	)
Decrease in accrued interest receivable		62,769			35,886
Decrease in other assets		1,598			4,034
Increase in Affordable Housing Program (AHP) liability		3,377			1,457
Increase (decrease) in accrued interest payable		(332,489	)		38,351
Decrease in excess REFCORP contributions		16,881			—
Increase in payable to REFCORP		5,836			1,490
Increase (decrease) in other liabilities		(3,598	)		348

Total adjustments		(159,751	)		9,695

Net cash provided by (used in) operating activities		(68,885	)		81,524


INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing deposits		1,526,967			(14,122	)
Net decrease (increase) in federal funds sold		(1,464,000	)		1,893,000
Net decrease in loans to other FHLBanks		—			400,000
Net decrease in short-term held-to-maturity securities		—			592,255
Proceeds from maturities of long-term held-to-maturity securities		1,398,690			742,126
Purchases of long-term held-to-maturity securities		(2,316,353	)		(2,792,115	)
Proceeds from maturities of available-for-sale securities		39,471			50,103
Proceeds from sales of available-for-sale securities		87,019			257,646
Purchases of available-for-sale securities		—			(350,466	)
Principal collected on advances		255,601,047			397,588,103
Advances made		(248,401,858	)		(411,478,955	)
Principal collected on mortgage loans held for portfolio		37,270			29,341
Purchases of premises, equipment and computer software		(5,998	)		(1,313	)

Net cash provided by (used in) investing activities		6,502,255			(13,084,397	)


FINANCING ACTIVITIES
Net decrease in deposits and pass-through reserves		(346,933	)		(612,239	)
Net increase in federal funds purchased		—			185,000
Net proceeds from derivative contracts with financing elements		4,507			1,620
Net proceeds from issuance of consolidated obligations
Discount notes		170,832,385			481,460,341
Bonds		29,062,088			39,823,538
Debt issuance costs		(3,862	)		(3,344	)
Proceeds from assumption of debt from other FHLBanks		—			139,354
Payments for maturing and retiring consolidated obligations
Discount notes		(172,610,643	)		(486,885,352	)
Bonds		(32,956,464	)		(21,269,093	)
Payments to other FHLBanks for assumption of debt		—			(487,154	)
Proceeds from issuance of capital stock		308,018			1,032,449
Proceeds from issuance of mandatorily redeemable capital stock		73			—
Payments for redemption of mandatorily redeemable capital stock		(13,617	)		(28,468	)
Payments for repurchase/redemption of capital stock		(707,542	)		(396,676	)
Cash dividends paid		(92	)		(90	)

Net cash provided by (used in) financing activities		(6,432,082	)		12,959,886

Net increase (decrease) in cash and cash equivalents		1,288			(42,987	)
Cash and cash equivalents at beginning of the period		20,765			74,699


Cash and cash equivalents at end of the period	$	22,053		$	31,712


Supplemental Disclosures:
Interest paid	$	749,472		$	1,082,446

AHP payments, net	$	6,725		$	6,624

REFCORP payments	$	—		$	16,467

Stock dividends issued	$	5,303		$	45,058

Dividends paid through issuance of mandatorily redeemable capital stock	$	54		$	214

Capital stock reclassified to mandatorily redeemable capital stock	$	1,845		$	14,951

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

FEDERAL HOME LOAN BANK OF DALLAS

NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS

Note 1—Basis of Presentation

The accompanying interim financial statements of the Federal Home Loan Bank of Dallas (the “Bank”) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The financial statements contain all adjustments which are, in the opinion of management, necessary for a fair statement of the Bank’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

The Bank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2008. The interim financial statements presented herein should be read in conjunction with the Bank’s audited financial statements and notes thereto, which are included in the Bank’s Annual Report on Form 10-K filed with the SEC on March 27, 2009 (the “2008 10-K”). The notes to the interim financial statements update and/or highlight significant changes to the notes included in the 2008 10-K.

The Bank is one of 12 district Federal Home Loan Banks, each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System.” The Office of Finance manages the sale and servicing of the FHLBanks’ consolidated obligations. Effective July 30, 2008, the Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the United States Government, supervises and regulates the FHLBanks and the Office of Finance. Prior to July 30, 2008, the Federal Housing Finance Board (“Finance Board”) had responsibility for the supervision and regulation of the FHLBanks and the Office of Finance.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make assumptions and estimates. These assumptions and estimates may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Significant assumptions include those that are used by the Bank in its periodic evaluation of its holdings of non-agency mortgage-backed securities for other-than-temporary impairment. Significant estimates include the valuations of the Bank’s investment securities, as well as its derivative instruments and any associated hedged items. Actual results could differ from these estimates.

Subsequent Events. The Bank has evaluated subsequent events for potential recognition or disclosure in these financial statements through the time of their issuance on August 12, 2009.

Note 2—Recently Issued Accounting Standards and Interpretations

Statement of Financial Accounting Standards (“SFAS”) 161. On March 19, 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative instruments and hedging activities including: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with earlier application encouraged. The Bank adopted SFAS 161 on January 1, 2009. The additional disclosures required by SFAS 161 are included in Note 8. The adoption of SFAS 161 did not have any impact on the Bank’s results of operations or financial condition.

FASB Staff Position (“FSP”) FAS 115-2 and FAS 124-2. On April 9, 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”). FSP FAS 115-2 revises the recognition and reporting requirements for other-than-temporary impairments of debt securities classified as available-for-sale and held-to-maturity and expands, and increases the frequency of, disclosures for both debt and equity securities. FSP FAS 115-2 is intended to bring greater consistency to the timing of impairment recognition, and to provide greater clarity to investors about the credit and non-credit components of other-than-temporarily impaired debt securities that are not expected to be sold. For debt securities, impairment is considered to be other than temporary if an entity (i) intends to sell the security, (ii) more likely than not will be required to sell the security before recovering its amortized cost basis, or (iii) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell the security). Under the provisions of FSP FAS 115-2, an impairment is considered to be other than temporary if the entity’s best estimate of the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security (any such shortfall is referred to as a “credit loss”). Previously, an other-than-temporary impairment was deemed to have occurred if it was probable that an investor would be unable to collect all amounts due according to the contractual terms of a debt security.

If an other-than-temporary impairment (“OTTI”) has occurred because an entity intends to sell an impaired debt security, or more likely than not will be required to sell the security before recovery of its amortized cost basis, the impairment must be recognized currently in earnings in an amount equal to the entire difference between fair value and amortized cost.

In instances in which a determination is made that a credit loss exists but an entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis, the other-than-temporary impairment (i.e., the difference between the security’s then-current carrying amount and its estimated fair value) is separated into (i) the amount of the total impairment related to the credit loss (i.e., the credit component) and (ii) the amount of the total impairment related to all other factors (i.e., the non-credit component). The credit component is recognized in earnings and the non-credit component is recognized in other comprehensive income. The total other-than-temporary impairment is required to be presented in the statement of income with an offset for the amount of the total other-than-temporary impairment that is recognized in other comprehensive income. Previously, in all cases, if an impairment was determined to be other than temporary, then an impairment loss was recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date of the reporting period for which the assessment was made.

The non-credit component of any other-than-temporary impairment losses recognized in other comprehensive income for debt securities classified as held-to-maturity is accreted over the remaining life of the debt security (in a prospective manner based on the amount and timing of future estimated cash flows) as an increase in the carrying value of the security unless and until the security is sold, the security matures, or there is an additional other-than-temporary impairment that is recognized in earnings. In instances in which an additional other-than-temporary impairment is recognized in earnings, the amount of the credit loss is reclassified from accumulated other comprehensive income to earnings. Further, if an additional other-than-temporary impairment is recognized in earnings and the held-to-maturity security’s then-current carrying amount exceeds its fair value, an additional non-credit impairment is concurrently recognized in other comprehensive income. Conversely, if an additional other-than-temporary impairment is recognized in earnings and the held-to-maturity security’s then-current carrying value is less than its fair value, the carrying value of the security is not increased. In periods subsequent to the recognition of an other-than-temporary impairment loss, the other-than-temporarily impaired debt security is accounted for as if it had been purchased on the measurement date of the other-than-temporary impairment at an amount equal to the previous amortized cost basis less the other-than-temporary impairment recognized in earnings. The difference between the new amortized cost basis and the cash flows expected to be collected is accreted as interest income over the remaining life of the security in a prospective manner based on the amount and timing of future estimated cash flows.

FSP FAS 115-2 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The FSP is to be applied to existing and new

investments held by an entity as of the beginning of the interim period in which it is adopted. For debt securities held at the beginning of the interim period of adoption for which an other-than-temporary impairment was previously recognized, if an entity does not intend to sell and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, the entity shall recognize the cumulative effect of initially applying this FSP as an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other comprehensive income. If an entity elects to early adopt FSP FAS 115-2, it must also concurrently adopt FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). The Bank elected to early adopt FSP FAS 115-2 effective January 1, 2009. As the Bank did not hold any debt securities as of January 1, 2009 for which an other-than-temporary impairment had previously been recognized, no cumulative effect transition adjustment was required. The impact of the adoption of FSP FAS 115-2 was to increase the Bank’s net income by $26,463,000 and $36,104,000 for the three and six months ended June 30, 2009, respectively.

FSP FAS 157-4. On April 9, 2009, the FASB issued FSP FAS 157-4, which clarifies the approach to, and provides additional factors to consider in, measuring fair value when there has been a significant decrease in the volume and level of activity for an asset or liability or price quotations are associated with transactions that are not orderly. The FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement under SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current conditions. In addition, FSP FAS 157-4 requires enhanced disclosures regarding fair value measurements. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. If an entity elects to early adopt FSP FAS 157-4, it must also concurrently adopt FSP FAS 115-2. The Bank elected to early adopt FSP FAS 157-4 effective January 1, 2009 and the adoption did not have any impact on the Bank’s results of operations or financial condition. The enhanced disclosures required by FSP FAS 157-4 are presented in Note 11.

FSP FAS 107-1 and APB 28-1. On April 9, 2009, the FASB issued FSP FAS 107-1 and APB 28-1 "Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”). FSP FAS 107-1 amends the disclosure requirements in SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” (“SFAS 107”) and APB Opinion No. 28, “Interim Financial Reporting” to require disclosures about the fair value of financial instruments within the scope of SFAS 107, including disclosure of the method(s) and significant assumptions used to estimate the fair value of financial instruments, in interim financial statements. Previously, these disclosures were required only in annual financial statements. In addition, FSP FAS 107-1 amends SFAS 107 to require disclosure in interim and annual financial statements of any changes in the method(s) and significant assumptions used to estimate the fair value of financial instruments. FSP FAS 107-1 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also concurrently adopts FSP FAS 157-4 and FSP FAS 115-2. The Bank elected to early adopt FSP FAS 107-1 effective January 1, 2009 and the adoption did not have any impact on the Bank’s results of operations or financial condition. The interim period disclosures required by FSP FAS 107-1 are presented in Note 11.

SFAS 165. On May 28, 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 sets forth: (1) the period after the balance sheet date during which management must evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity must recognize events or transactions occurring after the balance sheet date in its financial statements, and (3) the disclosures that an entity must make about events or transactions that occurred after the balance sheet date. In addition, SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date (that is, whether that date represents the date the financial statements were issued or were available to be issued). SFAS 165 does not apply to subsequent events or transactions that are specifically addressed in other applicable GAAP. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The

Bank adopted SFAS 165 for the interim period ended June 30, 2009. The disclosures required by SFAS 165 are presented in Note 1.

SFAS 166. On June 12, 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 amends SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” to change how entities account for transfers of financial assets by (1) eliminating the concept of a qualifying special-purpose entity, (2) defining the term “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale, (3) clarifying the isolation analysis to ensure that an entity considers all of its continuing involvements with transferred financial assets to determine whether a transfer may be accounted for as a sale, (4) eliminating an exception that currently permits an entity to derecognize certain transferred mortgage loans when that entity has not surrendered control over those loans, and (5) requiring enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement with transfers of financial assets accounted for as sales. SFAS 166 is effective as of the beginning of the first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the Bank), for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of SFAS 166 is not expected to have a material impact on the Bank’s results of operations or financial condition.

SFAS 168. On June 29, 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Codification is not intended to change current GAAP; rather, its intent is to organize all accounting literature by topic in one place in order to enable users to quickly identify appropriate GAAP. SFAS 168 modifies the GAAP hierarchy to include only two levels of GAAP: authoritative and nonauthoritative. Rules and interpretive releases of the SEC will continue to be sources of authoritative GAAP for SEC registrants. Following the issuance of SFAS 168, the FASB will not issue new standards in the form of Statements, FSPs or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right. Rather, Accounting Standards Updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions regarding the changes to the Codification. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009 (September 30, 2009 for the Bank). As SFAS 168 is not intended to change or alter existing GAAP, its adoption is not expected to have any impact on the Bank’s results of operations or financial condition.

Note 3—Available-for-Sale Securities

Major Security Types. Available-for-sale securities as of June 30, 2009 consisted of one government-sponsored enterprise mortgage-backed security with an amortized cost of $3,038,000 and an estimated fair value of $3,037,000. The security was paid in full in July 2009.

Available-for-sale securities as of December 31, 2008 were as follows (in thousands):


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Mortgage-backed securities
Government-sponsored enterprises	$	99,770	$	—	$	886	$	98,884
Non-agency commercial mortgage-backed security		29,423		—		775		28,648


Total	$	129,193	$	—	$	1,661	$	127,532

The amortized cost of the Bank’s available-for-sale securities includes hedging adjustments. In addition, at December 31, 2008, the amortized cost of the Bank’s mortgage-backed securities classified as available-for-sale included net discounts of $4,159,000.

The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of December 31, 2008. The unrealized losses are aggregated by major security type and length of time that individual securities had been in a continuous unrealized loss position.


	Less than 12 Months						12 Months or More						Total
			Estimated		Gross				Estimated		Gross				Estimated		Gross
	Number of		Fair		Unrealized		Number of		Fair		Unrealized		Number of		Fair		Unrealized
	Positions		Value		Losses		Positions		Value		Losses		Positions		Value		Losses
Mortgage-backed securities
Government-sponsored enterprises		1	$	88,495	$	603		1	$	10,389	$	283		2	$	98,884	$	886
Non-agency commercial mortgage-backed security		—		—		—		1		28,648		775		1		28,648		775


Totals		1	$	88,495	$	603		2	$	39,037	$	1,058		3	$	127,532	$	1,661

Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as available-for-sale at June 30, 2009 and December 31, 2008 (in thousands):


	June 30, 2009		December 31, 2008
Amortized cost of available-for-sale mortgage-backed securities:
Fixed-rate pass-through securities	$	3,038	$	40,096
Variable-rate collateralized mortgage obligation		—		89,097

Total	$	3,038	$	129,193

Gains on Sale. In March 2009, the Bank sold an available-for-sale security (specifically, a government-sponsored enterprise mortgage-backed security) with an amortized cost (determined by the specific identification method) of $86,176,000. Proceeds from the sale totaled $87,019,000, resulting in a gross realized gain of $843,000.

In April 2008, the Bank sold available-for-sale securities with an amortized cost (determined by the specific identification method) of $254,852,000. Proceeds from the sales totaled $257,646,000, resulting in gross realized gains of $2,794,000. There were no other sales of available-for-sale securities during the six months ended June 30, 2009 or 2008.

Note 4—Held-to-Maturity Securities

Major Security Types. Held-to-maturity securities as of June 30, 2009 were as follows (in thousands):


			OTTI Recorded in				Gross		Gross
			Accumulated Other				Unrecognized		Unrecognized		Estimated
	Amortized		Comprehensive		Carrying		Holding		Holding		Fair
	Cost		Income (Loss)		Value		Gains		Losses		Value
Debentures
U.S. government guaranteed obligations	$	62,354	$	—	$	62,354	$	454	$	238	$	62,570
State or local housing agency obligations		3,265		—		3,265		—		338		2,927

		65,619		—		65,619		454		576		65,497

Mortgage-backed securities
U.S. government guaranteed obligations		26,513		—		26,513		2		148		26,367
Government-sponsored enterprises		11,817,048		—		11,817,048		36,636		137,805		11,715,879
Non-agency residential mortgage-backed securities		590,052		49,549		540,503		—		167,336		373,167
Non-agency commercial mortgage-backed securities		136,438		—		136,438		1,498		—		137,936

		12,570,051		49,549		12,520,502		38,136		305,289		12,253,349


Total	$	12,635,670	$	49,549	$	12,586,121	$	38,590	$	305,865	$	12,318,846

Held-to-maturity securities as of December 31, 2008 were as follows (in thousands):


			Gross		Gross
	Amortized		Unrecognized		Unrecognized
	Cost/Carrying		Holding		Holding		Estimated
	Value		Gains		Losses		Fair Value
Debentures
U.S. government guaranteed obligations	$	65,888	$	581	$	935	$	65,534
State or local housing agency obligations		3,785		—		357		3,428

		69,673		581		1,292		68,962

Mortgage-backed securities
U.S. government guaranteed obligations		28,632		—		804		27,828
Government-sponsored enterprises		10,629,290		26,025		268,756		10,386,559
Non-agency residential mortgage-backed securities		676,804		—		277,040		399,764
Non-agency commercial mortgage-backed securities		297,105		—		10,356		286,749

		11,631,831		26,025		556,956		11,100,900


Total	$	11,701,504	$	26,606	$	558,248	$	11,169,862

The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of June 30, 2009. The unrealized losses include other-than-temporary impairments recorded in accumulated other comprehensive income and gross unrecognized holding losses and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.


	Less than 12 Months						12 Months or More						Total
			Estimated		Gross				Estimated		Gross				Estimated		Gross
	Number of		Fair		Unrealized		Number of		Fair		Unrealized		Number of		Fair		Unrealized
	Positions		Value		Losses		Positions		Value		Losses		Positions		Value		Losses
Debentures
U.S. government guaranteed obligations		1	$	11,050	$	106		1	$	12,826	$	132		2	$	23,876	$	238
State or local housing agency obligations		—		—		—		1		2,927		338		1		2,927		338

		1		11,050		106		2		15,753		470		3		26,803		576

Mortgage-backed securities
U.S. government guaranteed obligations		3		8,082		24		6		15,054		124		9		23,136		148
Government-sponsored enterprises		51		4,211,431		28,806		176		4,665,735		108,999		227		8,877,166		137,805
Non-agency residential mortgage-backed securities		—		—		—		42		373,167		216,885		42		373,167		216,885

		54		4,219,513		28,830		224		5,053,956		326,008		278		9,273,469		354,838


Total		55	$	4,230,563	$	28,936		226	$	5,069,709	$	326,478		281	$	9,300,272	$	355,414

The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of December 31, 2008.


	Less than 12 Months						12 Months or More						Total
			Estimated		Gross				Estimated		Gross				Estimated		Gross
	Number of		Fair		Unrealized		Number of		Fair		Unrealized		Number of		Fair		Unrealized
	Positions		Value		Losses		Positions		Value		Losses		Positions		Value		Losses
Debentures
U.S. government guaranteed obligations		4	$	35,620	$	935		—	$	—	$	—		4	$	35,620	$	935
State or local housing agency obligations		1		3,428		357		—		—		—		1		3,428		357

		5		39,048		1,292		—		—		—		5		39,048		1,292

Mortgage-backed securities
U.S. government guaranteed obligations		9		26,746		764		2		1,082		40		11		27,828		804
Government-sponsored enterprises		130		5,116,293		108,241		115		3,695,248		160,515		245		8,811,541		268,756
Non-agency residential mortgage-backed securities		—		—		—		42		399,764		277,040		42		399,764		277,040
Non-agency commercial mortgage-backed securities		10		286,749		10,356		—		—		—		10		286,749		10,356

		149		5,429,788		119,361		159		4,096,094		437,595		308		9,525,882		556,956


Totals		154	$	5,468,836	$	120,653		159	$	4,096,094	$	437,595		313	$	9,564,930	$	558,248

The unrealized losses on the Bank’s held-to-maturity securities portfolio as of June 30, 2009 were generally attributable to the widespread deterioration in credit market conditions over the last 21 to 24 months. All of the Bank’s held-to-maturity securities are rated by one or more of the following nationally recognized statistical ratings organizations (“NRSROs”): Moody’s Investors Service (“Moody’s”), Standard and Poor’s (“S&P”) and/or Fitch Ratings, Ltd. (“Fitch”). With the exception of 20 non-agency (i.e., private label) residential mortgage-backed securities, as presented below, none of these organizations had rated any of the securities held by the Bank lower than the highest investment grade credit rating at June 30, 2009. Based upon the Bank’s assessment of the creditworthiness of the issuers of the debentures held by the Bank, the credit ratings assigned by the NRSROs, the strength of the government-sponsored enterprises’ guarantees of the Bank’s holdings of agency mortgage-backed securities (“MBS”) and, in the case of its non-agency commercial MBS (“CMBS”), the performance of the underlying loans and the credit support provided by the subordinate securities, the Bank expects that its holdings of U.S. government guaranteed debentures, state or local housing agency debentures, U.S. government guaranteed MBS, government-sponsored enterprise MBS and non-agency CMBS would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the declines in market value are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at June 30, 2009.

As of June 30, 2009, the gross unrealized losses on the Bank’s holdings of non-agency residential MBS (“RMBS”) totaled $216,885,000, which represented 36.8 percent of the securities’ amortized cost at that date. The deterioration in the U.S. housing markets, as reflected by declines in the values of residential real estate and increasing levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency RMBS, has generally elevated the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. Despite the elevated risk, based on its analysis of the securities in this portfolio, the Bank believes that the unrealized losses noted above were principally the result of diminished liquidity and significant risk premiums in the non-agency RMBS market and do not accurately reflect the actual historical or currently likely future credit performance of the securities.

As noted above, all of the Bank’s held-to-maturity securities are rated by one or more NRSROs. The following table presents the credit ratings assigned to the Bank’s non-agency RMBS as of June 30, 2009 (dollars in thousands). The credit ratings presented in the table represent the lowest rating assigned to the security by Moody’s, S&P or Fitch. As of June 30, 2009, 18 of the 20 securities with credit ratings below triple-A from either Moody’s or Fitch continued to be rated triple-A by S&P (at that date, S&P had six of these securities on ratings watch negative). One security that is rated triple-B by Moody’s is rated single-A by S&P and the remaining security is not rated by S&P.


	Number of		Amortized		Carrying		Estimated		Unrealized
Credit Rating	Securities		Cost		Value		Fair Value		Losses
Triple-A		22	$	257,024	$	257,024	$	212,457	$	44,567
Double-A		6		65,827		65,827		34,647		31,180
Single-A		1		34,677		34,677		19,037		15,640
Triple-B		8		120,355		111,789		51,666		68,689
Double-B		3		45,064		20,583		18,634		26,430
Single-B		2		67,105		50,603		36,726		30,379

Total		42	$	590,052	$	540,503	$	373,167	$	216,885

Because the ultimate receipt of contractual payments on the Bank’s non-agency RMBS will depend upon the credit and prepayment performance of the underlying loans and the credit enhancements for the senior securities owned by the Bank, the Bank closely monitors these investments in an effort to determine whether the credit enhancement associated with each security is sufficient to protect against potential losses of principal and interest on the underlying mortgage loans. The credit enhancement for each of the Bank’s non-agency RMBS is provided by a senior/subordinate structure, and none of the securities owned by the Bank are insured by third party bond insurers. More specifically, each of the Bank’s non-agency RMBS represents a single security class within a securitization that has multiple classes of securities. Each security class has a distinct claim on the cash flows from the underlying

mortgage loans, with the subordinate securities having a junior claim relative to the more senior securities. The Bank’s non-agency RMBS have a senior claim on the cash flows from the underlying mortgage loans.

To assess whether the entire amortized cost bases of its non-agency RMBS will be recovered, the Bank performed a cash flow analysis for each of its non-agency RMBS that was determined to be other-than-temporarily impaired in a previous reporting period as well as those with adverse risk characteristics as of June 30, 2009. The adverse risk characteristics used to select securities for cash flow analysis included: the duration and magnitude of the unrealized loss, NRSRO credit ratings below investment grade, and criteria related to the credit performance of the underlying collateral, including the ratio of credit enhancement to expected collateral losses and the ratio of seriously delinquent loans to credit enhancement. For these purposes, expected collateral losses are those that are implied by current delinquencies taking into account an assumed default probability based on the state of delinquency and a loss severity assumption based on product and vintage; seriously delinquent loans are those that are 60 or more days past due, including loans in foreclosure and real estate owned. In performing the cash flow analysis for each of these securities, the Bank used two third party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which are based upon an assessment of the individual housing markets. (The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people.) The Bank’s housing price forecast assumed current-to-trough home price declines ranging from 0 percent to 20 percent over the next 9 to 15 months (resulting in peak-to-trough home price declines of up to 51 percent). Thereafter, home prices are projected to increase 1 percent in the first year, 3 percent in the second year and 4 percent in each subsequent year. The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.

Based on the results of its cash flow analyses, the Bank determined that it is likely that it will not fully recover the amortized cost bases of four of its non-agency RMBS and, accordingly, these securities were deemed to be other-than-temporarily impaired as of June 30, 2009. These securities included two securities, with an aggregate unpaid principal balance of $39.4 million at June 30, 2009, that had previously been identified as other-than-temporarily impaired at March 31, 2009 and two securities, with an aggregate unpaid principal balance of $61.1 million at June 30, 2009, that were determined to be other-than-temporarily impaired as of June 30, 2009. The difference between the present value of the cash flows expected to be collected from these securities and their amortized cost bases (i.e., the credit losses) totaled $654,000 as of June 30, 2009. Because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their remaining amortized cost bases (that is, their previous amortized cost basis less the current-period credit loss), only the amounts related to the credit losses were recognized in earnings. Because the estimated fair values of the two previously impaired securities increased by an amount greater than the accretion of the non-credit portion of the other-than-temporary impairment charge recorded in accumulated other comprehensive income as of March 31, 2009, the additional credit losses associated with these previously impaired securities, totaling $152,000, were reclassified from accumulated other comprehensive income to earnings during the three months ended June 30, 2009. No additional impairment was recorded for these securities in other comprehensive income during the three months ended June 30, 2009. At June 30, 2009, the difference between the two newly impaired securities’ amortized cost bases (after recognition of the current-period credit losses totaling $502,000) and their estimated fair values totaled $25,068,000, which was recognized in other comprehensive income.

The following tables set forth additional information for each of the securities that were deemed to be other-than-temporarily impaired as of June 30, 2009 (in thousands). The information is as of and for the six months ended June 30, 2009. The credit ratings presented in the first table represent the lowest rating assigned to the security by Moody’s, S&P or Fitch as of June 30, 2009.


	Period of				Credit		Non-Credit
	Initial	Credit	Total		Component		Component
	Impairment	Rating	OTTI		of OTTI		of OTTI
Security #1	Q1 2009	Double-B	$	13,139	$	155	$	12,984
Security #2	Q1 2009	Double-B		13,076		14		13,062
Security #3	Q2 2009	Single-B		16,985		482		16,503
Security #4	Q2 2009	Triple-B		8,585		20		8,565

Totals			$	51,785	$	671	$	51,114


	Amortized		Non-Credit		Accretion of				Estimated
	Cost		Component		Non-Credit		Carrying		Fair
	After OTTI		of OTTI		Component		Value		Value
Security #1	$	18,190	$	12,984	$	780	$	5,986	$	6,973
Security #2		21,016		13,062		785		8,739		9,142
Security #3		45,423		16,503		—		28,920		28,920
Security #4		15,143		8,565		—		6,578		6,578

Totals	$	99,772	$	51,114	$	1,565	$	50,223	$	51,613

For those securities for which an other-than-temporary impairment was determined to have occurred as of June 30, 2009, the following table presents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings during the three months ended June 30, 2009 (dollars in thousands):


					Significant Inputs
			Unpaid		Projected			Projected			Projected			Current
	Year of	Collateral	Principal		Prepayment			Default			Loss			Credit
	Securitization	Type	Balance		Rate			Rate			Severity			Enhancement
Security #1	2005	Alt-A/Option ARM	$	18,346		10.3	%		70.0	%		40.1	%		38.6	%
Security #2	2005	Alt-A/Option ARM		21,030		12.2	%		58.8	%		43.9	%		51.1	%
Security #3	2006	Alt-A/Fixed Rate		45,905		19.6	%		22.8	%		39.2	%		9.4	%
Security #4	2005	Alt-A/Option ARM		15,163		11.4	%		67.7	%		41.2	%		52.5	%

Total			$	100,444

The following table presents a rollforward for the three and six months ended June 30, 2009 of the amount related to credit losses on the Bank’s non-agency RMBS holdings for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (in thousands).


	Three Months		Six Months
	Ended		Ended
	June 30, 2009		June 30, 2009
Balance of credit losses, beginning of period	$	17	$	—
Credit losses for which an other-than-temporary impairment was not previously recognized		502		671
Additional other-than-temporary impairment credit losses for which an other-than-temporary impairment charge was previously recognized		152		—


Balance of credit losses, end of period	$	671	$	671

Because the Bank currently expects to recover the entire amortized cost basis of each of its other non-agency RMBS holdings, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of its other non-agency RMBS to be other-than-temporarily impaired at June 30, 2009.

Redemption Terms. The amortized cost, carrying value and estimated fair value of held-to-maturity securities by contractual maturity at June 30, 2009 and December 31, 2008 are presented below (in thousands). The expected maturities of some securities could differ from the contractual maturities presented because issuers may have the right to call such securities prior to their final stated maturities.


	June 30, 2009						December 31, 2008
					Estimated						Estimated
	Amortized		Carrying		Fair		Amortized		Carrying		Fair
Maturity	Cost		Value		Value		Cost		Value		Value
Due in one year or less	$	484	$	484	$	487	$	—	$	—	$	—
Due after one year through five years		4,141		4,141		4,253		5,386		5,386		5,565
Due after five years through ten years		33,616		33,616		33,954		35,527		35,527		35,768
Due after ten years		27,378		27,378		26,803		28,760		28,760		27,629

		65,619		65,619		65,497		69,673		69,673		68,962
Mortgage-backed securities		12,570,051		12,520,502		12,253,349		11,631,831		11,631,831		11,100,900

Total	$	12,635,670	$	12,586,121	$	12,318,846	$	11,701,504	$	11,701,504	$	11,169,862

The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net discounts of $158,292,000 and $161,711,000 at June 30, 2009 and December 31, 2008, respectively, of which $671,000 and $0, respectively, represent the credit component associated with four other-than-temporarily impaired securities.

Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as held-to-maturity at June 30, 2009 and December 31, 2008 (in thousands):


	June 30, 2009		December 31, 2008
Amortized cost of variable-rate held-to-maturity securities other than mortgage-backed securities	$	65,619	$	69,673

Amortized cost of held-to-maturity mortgage-backed securities
Fixed-rate pass-through securities		1,138		1,253
Collateralized mortgage obligations
Fixed-rate		138,644		299,528
Variable-rate		12,430,269		11,331,050

		12,570,051		11,631,831


Total	$	12,635,670	$	11,701,504

All of the Bank’s variable-rate collateralized mortgage obligations classified as held-to-maturity securities have coupon rates that are subject to interest rate caps, none of which were reached during 2008 or the six months ended June 30, 2009.

Note 5—Advances

Redemption Terms. At June 30, 2009 and December 31, 2008, the Bank had advances outstanding at interest rates ranging from 0.06 percent to 8.66 percent and 0.05 percent to 8.66 percent, respectively, as summarized below (in thousands).


	June 30, 2009						December 31, 2008
				Weighted						Weighted
				Average						Average
				Interest						Interest
Contractual Maturity	Amount			Rate			Amount			Rate
Overdrawn demand deposit accounts	$	2,274			4.08	%	$	99			4.08	%

Due in one year or less		16,944,728			1.20			20,465,819			1.69
Due after one year through two years		8,892,724			1.58			8,346,234			2.41
Due after two years through three years		6,742,835			1.48			6,912,931			2.83
Due after three years through four years		11,005,410			1.00			7,916,643			2.40
Due after four years through five years		2,194,977			1.54			8,489,391			2.52
Due after five years		3,758,240			3.67			4,459,565			3.45
Amortizing advances		3,504,486			4.58			3,654,181			4.62

Total par value		53,045,674			1.67	%		60,244,863			2.44	%

Deferred prepayment fees		(898	)					(937	)
Commitment fees		(45	)					(28	)
Hedging adjustments		425,207						675,985


Total	$	53,469,938					$	60,919,883

The balance of overdrawn demand deposit accounts was fully collateralized at June 30, 2009 and was repaid on July 1, 2009.

Amortizing advances require repayment according to predetermined amortization schedules.

The Bank offers advances to members that may be prepaid on specified dates without the member incurring prepayment or termination fees (prepayable and callable advances). The prepayment of other advances requires the payment of a fee to the Bank (prepayment fee) if necessary to make the Bank financially indifferent to the prepayment of the advance. At June 30, 2009 and December 31, 2008, the Bank had aggregate prepayable and callable advances totaling $220,442,000 and $204,543,000, respectively.

The following table summarizes advances at June 30, 2009 and December 31, 2008, by the earlier of contractual maturity, next call date, or the first date on which prepayable advances can be repaid without a prepayment fee (in thousands):


Contractual Maturity or Next Call Date	June 30, 2009		December 31, 2008
Overdrawn demand deposit accounts	$	2,274	$	99

Due in one year or less		16,989,752		20,528,616
Due after one year through two years		8,933,744		8,382,703
Due after two years through three years		6,775,051		6,943,915
Due after three years through four years		11,024,769		7,943,468
Due after four years through five years		2,212,954		8,486,971
Due after five years		3,602,644		4,304,910
Amortizing advances		3,504,486		3,654,181

Total par value	$	53,045,674	$	60,244,863

The Bank also offers putable advances. With a putable advance, the Bank purchases a put option from the member that allows the Bank to terminate the fixed rate advance on specified dates and offer, subject to certain conditions, replacement funding at prevailing market rates. At June 30, 2009 and December 31, 2008, the Bank had putable advances outstanding totaling $4,236,521,000 and $4,200,521,000, respectively.

The following table summarizes advances at June 30, 2009 and December 31, 2008, by the earlier of contractual maturity or next possible put date (in thousands):


Contractual Maturity or Next Put Date	June 30, 2009		December 31, 2008
Overdrawn demand deposit accounts	$	2,274	$	99

Due in one year or less		19,559,599		23,095,889
Due after one year through two years		9,120,174		8,457,034
Due after two years through three years		6,918,084		7,119,881
Due after three years through four years		10,650,310		7,887,393
Due after four years through five years		2,062,977		8,033,791
Due after five years		1,227,770		1,996,595
Amortizing advances		3,504,486		3,654,181

Total par value	$	53,045,674	$	60,244,863

Interest Rate Payment Terms. The following table provides interest rate payment terms for advances at June 30, 2009 and December 31, 2008 (in thousands, based upon par amount):


	June 30, 2009		December 31, 2008
Fixed-rate	$	24,337,116	$	29,449,463
Variable-rate		28,708,558		30,795,400

Total par value	$	53,045,674	$	60,244,863

Prepayment Fees. The Bank records prepayment fees received from members/borrowers on prepaid advances net of any associated hedging adjustments on those advances. These fees are reflected as interest income in the statements of income either immediately (as prepayment fees on advances) or over time (as interest income on advances) as further described below. In cases in which the Bank funds a new advance concurrent with or within a short period of time before or after the prepayment of an existing advance and the advance meets the accounting criteria to qualify as a modification of the prepaid advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized into interest income over the life of the modified advance using the level-yield method. Gross advance prepayment fees received from members/borrowers were $9,370,000 and $1,042,000 during the three months ended June 30, 2009 and 2008, respectively, and were $10,343,000 and $1,319,000 during the six months ended June 30, 2009 and 2008, respectively. None of the gross advance prepayment fees were deferred during the six months ended June 30, 2009. The Bank deferred $88,000 of the gross advance prepayment fees during both the three and six months ended June 30, 2008.

Note 6—Consolidated Obligations

Consolidated obligations are the joint and several obligations of the FHLBanks and consist of consolidated obligation bonds and discount notes. Consolidated obligations are backed only by the financial resources of the 12 FHLBanks. Consolidated obligations are not obligations of, nor are they guaranteed by, the United States Government. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. In connection with each debt issuance, one or more of the FHLBanks specifies the amount of debt it wants issued on its behalf; the Bank receives the proceeds only of the debt issued on its behalf and is the primary obligor only for the portion of bonds and discount notes for which it has received the proceeds. The Bank records on its balance sheet only that portion of the consolidated obligations for which it is the primary obligor. Consolidated obligation bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated obligation discount notes are issued to raise short-term funds and have maturities of one year or less. These notes are issued at a price that is less than their face amount and are redeemed at par value when they mature. For additional information regarding the FHLBanks’ joint and several liability on consolidated obligations, see Note 12.

The par amounts of the 12 FHLBanks’ outstanding consolidated obligations, including consolidated obligations held as investments by other FHLBanks, were approximately $1.056 trillion and $1.252 trillion at June 30, 2009 and December 31, 2008, respectively. The Bank was the primary obligor on $67.1 billion and $72.9 billion (at par value), respectively, of these consolidated obligations.

Interest Rate Payment Terms. The following table summarizes the Bank’s consolidated obligation bonds outstanding by interest rate payment terms at June 30, 2009 and December 31, 2008 (in thousands, at par value).


	June 30, 2009		December 31, 2008
Fixed-rate	$	22,428,569	$	42,821,181
Simple variable-rate		28,285,000		13,093,000
Step-up		1,230,000		77,635
Variable that converts to fixed		170,000		—
Step-down		—		15,000

Total par value	$	52,113,569	$	56,006,816

Redemption Terms. The following is a summary of the Bank’s consolidated obligation bonds outstanding at June 30, 2009 and December 31, 2008, by contractual maturity (in thousands):


	June 30, 2009						December 31, 2008
				Weighted						Weighted
				Average						Average
				Interest						Interest
Contractual Maturity	Amount			Rate			Amount			Rate
Due in one year or less	$	28,934,009			1.50	%	$	37,685,991			2.88	%
Due after one year through two years		15,477,920			1.30			9,783,835			3.56
Due after two years through three years		2,798,625			3.56			2,238,685			4.18
Due after three years through four years		1,462,500			4.10			1,688,940			4.71
Due after four years through five years		1,086,940			4.43			944,015			4.39
Thereafter		2,353,575			4.88			3,665,350			5.52

Total par value		52,113,569			1.84	%		56,006,816			3.31	%

Premiums		45,553						55,546
Discounts		(16,137	)					(19,352	)
Hedging adjustments		349,166						570,585

Total	$	52,492,151					$	56,613,595

At June 30, 2009 and December 31, 2008, the Bank’s consolidated obligation bonds outstanding included the following (in thousands, at par value):


	June 30, 2009		December 31, 2008
Non-callable bonds	$	47,552,529	$	44,704,926
Callable bonds		4,561,040		11,301,890

Total par value	$	52,113,569	$	56,006,816

The following table summarizes the Bank’s consolidated obligation bonds outstanding at June 30, 2009 and December 31, 2008, by the earlier of contractual maturity or next possible call date (in thousands, at par value):


Contractual Maturity or Next Call Date	June 30, 2009		December 31, 2008
Due in one year or less	$	31,737,009	$	43,907,096
Due after one year through two years		15,392,920		7,201,835
Due after two years through three years		2,240,945		1,766,005
Due after three years through four years		1,052,500		1,267,440
Due after four years through five years		681,940		645,000
Thereafter		1,008,255		1,219,440

Total par value	$	52,113,569	$	56,006,816

Discount Notes. At June 30, 2009 and December 31, 2008, the Bank’s consolidated obligation discount notes, all of which are due within one year, were as follows (in thousands):


					Weighted
					Average
	Book Value		Par Value		Interest Rate

June 30, 2009	$	14,961,653	$	14,995,403		1.27	%


December 31, 2008	$	16,745,420	$	16,923,982		2.65	%

Government-Sponsored Enterprise Credit Facility. On September 9, 2008, the Bank and each of the other 11 FHLBanks entered into separate but identical Lending Agreements with the United States Department of the Treasury (the “Treasury”) in connection with the Treasury’s establishment of a Government-Sponsored Enterprise Credit Facility. The facility was authorized by the Housing and Economic Recovery Act of 2008 and is designed to serve as a contingent source of liquidity for the housing government-sponsored enterprises, including each of the FHLBanks. For additional information regarding this contingent source of liquidity, see Note 12.

Note 7—Affordable Housing Program (“AHP”)

The following table summarizes the changes in the Bank’s AHP liability during the six months ended June 30, 2009 and 2008 (in thousands):


	Six Months Ended June 30,
	2009			2008
Balance, beginning of period	$	43,067		$	47,440
AHP assessment		10,102			8,081
Grants funded, net of recaptured amounts		(6,725	)		(6,624	)

Balance, end of period	$	46,444		$	48,897

Note 8—Derivatives and Hedging Activities

Hedging Activities. As a financial intermediary, the Bank is exposed to interest rate risk. This risk arises from a variety of financial instruments that the Bank enters into on a regular basis in the normal course of its business. The Bank enters into interest rate swap, cap and forward rate agreements (collectively, interest rate exchange agreements) to manage its exposure to changes in interest rates. The Bank may use these instruments to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The Bank uses interest rate exchange agreements in two ways: either by designating the agreement as a fair value hedge of a specific financial instrument or firm commitment or by designating the agreement as a hedge of some defined risk in the course of its balance sheet management (referred to as an “economic hedge”). For example, the Bank uses interest rate exchange agreements in its overall interest rate risk management activities to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets (both advances and investments), and/or to adjust the interest rate sensitivity of advances or investments to approximate more closely the interest rate sensitivity of its liabilities. In addition to using interest rate exchange agreements to manage mismatches between the coupon features of its assets and liabilities, the Bank also uses interest rate exchange agreements to manage embedded options in assets and liabilities, to preserve the market value of existing assets and liabilities, to hedge the duration risk of prepayable instruments, to offset interest rate exchange agreements entered into with members (the Bank serves as an intermediary in these transactions), and to reduce funding costs.

The Bank, consistent with Finance Agency regulations, enters into interest rate exchange agreements only to reduce potential market risk exposures inherent in otherwise unhedged assets and liabilities or to act as an intermediary between its members and the Bank’s derivative counterparties. The Bank is not a derivatives dealer and it does not trade derivatives for short-term profit.

At inception, the Bank formally documents the relationships between derivatives designated as hedging instruments and their hedged items, its risk management objectives and strategies for undertaking the hedge transactions, and its method for assessing the effectiveness of the hedging relationships. This process includes linking all derivatives that are designated as fair value hedges to: (1) specific assets and liabilities on the statement of condition or (2) firm commitments. The Bank also formally assesses (both at the inception of the hedging relationship and on a monthly basis thereafter) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of hedged items and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges.

Investments - The Bank has invested in agency and non-agency mortgage-backed securities. The interest rate and prepayment risk associated with these investment securities is managed through consolidated obligations and/or derivatives. The Bank may manage prepayment and duration risk presented by some investment securities with either callable or non-callable consolidated obligations or interest rate exchange agreements, including caps and interest rate swaps. These investment securities are classified as either “held-to-maturity” or “available-for-sale.”

A substantial portion of the Bank’s held-to-maturity securities are variable-rate mortgage-backed securities that include caps that would limit the variable-rate coupons if short-term interest rates rise dramatically. To hedge a portion of the potential cap risk embedded in these securities, the Bank enters into interest rate cap agreements. These derivatives are treated as economic hedges.

For available-for-sale securities that have been hedged (with fixed-for-floating interest rate swaps) and qualify as a fair value hedge, as described below, the Bank records the portion of the change in value related to the risk being hedged in other income (loss) as “net gains (losses) on derivatives and hedging activities” together with the related change in the fair value of the interest rate exchange agreement, and the remainder of the change in value of the securities in other comprehensive income as “net unrealized gains (losses) on available-for-sale securities.”

Advances — The Bank issues both fixed-rate and variable-rate advances. When appropriate, the Bank uses interest rate exchange agreements to adjust the interest rate sensitivity of its fixed-rate advances to more closely approximate the interest rate sensitivity of its liabilities. With issuances of putable advances, the Bank purchases from the member a put option that enables the Bank to terminate a fixed-rate advance on specified future dates. This embedded option is clearly and closely related to the host advance contract. The Bank typically hedges a putable advance by entering into a cancelable interest rate exchange agreement where the Bank pays a fixed coupon and receives a variable coupon, and sells an option to cancel the swap to the swap counterparty. This type of hedge is treated as a fair value hedge. The swap counterparty can cancel the interest rate exchange agreement on the call date and the Bank can cancel the putable advance and offer, subject to certain conditions, replacement funding at prevailing market rates.

The optionality embedded in certain financial instruments held by the Bank can create interest rate risk. When a member prepays an advance, the Bank could suffer lower future income if the principal portion of the prepaid advance was invested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, the Bank generally charges a prepayment fee that makes it financially indifferent to a borrower’s decision to prepay an advance.

The Bank may hedge a firm commitment for a forward-starting advance through the use of an interest rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent advance. The carrying value of the firm commitment will be included in the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.

Consolidated Obligations — While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank has consolidated obligations for which it is the primary obligor. The Bank generally enters into derivative contracts to hedge the interest rate risk associated with its specific debt issuances.

To manage the interest rate risk of certain of its consolidated obligations, the Bank will match the cash outflow on a consolidated obligation with the cash inflow of an interest rate exchange agreement. With issuances of fixed-rate consolidated obligation bonds, the Bank typically enters into a matching interest rate exchange agreement in which the counterparty pays fixed cash flows to the Bank that are designed to mirror in timing and amount the cash outflows the Bank pays on the consolidated obligation. In this transaction, the Bank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate assets, typically one-month or three-month LIBOR. Such transactions are treated as fair value hedges. On occasion, the Bank may enter into fixed-for-floating interest rate exchange agreements to hedge the interest rate risk associated with certain of its consolidated obligation discount notes. The derivatives associated with the Bank’s discount note hedging are treated as economic hedges. The Bank may also use interest rate exchange agreements to convert variable-rate consolidated obligation bonds from one index rate (e.g., the daily federal funds rate) to another index rate (e.g., one- or three-month LIBOR); these transactions are treated as economic hedges.

The Bank has not issued consolidated obligations denominated in currencies other than U.S. dollars.

Balance Sheet Management — From time to time, the Bank may enter into interest rate basis swaps to reduce its exposure to widening spreads between one-month and three-month LIBOR. In addition, to reduce its exposure to reset risk, the Bank may occasionally enter into forward rate agreements. These derivatives are treated as economic hedges.

Intermediation — The Bank offers interest rate swaps, caps and floors to its members to assist them in meeting their hedging needs. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties. All interest rate exchange agreements related to the Bank’s intermediary activities with its members are accounted for as economic hedges.

Accounting for Derivatives and Hedging Activities. In accordance with the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities—Deferral of Effective Date of FASB Statement No. 133,” SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140,” and SFAS 161 and as interpreted by the Derivatives Implementation Group and the staff of the FASB (hereinafter collectively referred to as “SFAS 133”), all derivatives are recognized on the statements of condition at their fair values, including accrued interest receivable and payable. Pursuant to the provisions of FASB Staff Position FIN 39-1, “Amendment of FASB Interpretation No. 39,” derivative assets and derivative liabilities reported on the statements of condition also include the net cash collateral remitted to or received from counterparties.

Changes in the fair value of a derivative that is effective as — and that is designated and qualifies as — a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect gains or losses on firm commitments), are recorded in current period earnings. Any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item) is recorded in other income (loss) as “net gains (losses) on derivatives and hedging activities.” Net interest income/expense associated with derivatives that qualify for fair value hedge accounting under SFAS 133 is recorded as a component of net interest income. An economic hedge is defined as a derivative hedging specific or non-specific assets or liabilities that does not qualify or was not designated for hedge accounting under SFAS 133, but is an acceptable hedging strategy under the Bank’s Risk Management Policy. These hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative hedge transactions. An economic hedge by definition introduces the potential for earnings variability as changes in the fair value of a derivative designated as an economic hedge are recorded in current period earnings with no offsetting fair value adjustment to an asset or liability. Both the net interest income/expense and the fair value adjustments associated with derivatives in economic hedging relationships are recorded in other income (loss) as “net gains (losses) on derivatives and hedging activities.” Cash flows associated with derivatives are reflected as cash flows from operating activities in the statements of cash flows, unless the derivatives contain an other-than-insignificant financing element, in which case the cash flows are reported as cash flows from financing activities.

If hedging relationships meet certain criteria specified in SFAS 133, they are eligible for hedge accounting and the offsetting changes in fair value of the hedged items may be recorded in earnings. The application of hedge accounting generally requires the Bank to evaluate the effectiveness of the hedging relationships on an ongoing basis and to calculate the changes in fair value of the derivatives and related hedged items independently. This is commonly known as the “long-haul” method of accounting. Transactions that meet more stringent criteria qualify for the “short-cut” method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in value of the related derivative. The Bank considers hedges of committed advances and consolidated obligations to be eligible for the short-cut method of accounting as long as the settlement of the committed advance or consolidated obligation occurs within the shortest period possible for that type of instrument based on market settlement conventions, the fair value of the swap is zero at the inception of the hedging relationship, and the transaction meets all of the other criteria for short-cut accounting specified in SFAS 133. The Bank has defined the market settlement conventions to be 5 business days or less for advances and 30 calendar days or less using a next business day convention for consolidated obligations. The Bank records the changes in fair value of the derivative and the hedged item beginning on the trade date.

The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument is “embedded” and the financial instrument that embodies the embedded derivative instrument is not remeasured at fair value with changes in fair value reported in earnings as they occur. Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as either (1) a hedging instrument in a fair value hedge or (2) a stand-alone derivative instrument pursuant to an economic hedge. However, if the entire contract were to be measured at fair value, with changes in fair value reported in current earnings, or if the Bank could not reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the statement of condition at fair value and no portion of the contract would be separately accounted for as a derivative.

The Bank discontinues hedge accounting prospectively when: (1) it determines that the derivative is no longer effective in offsetting changes in the fair value of a hedged item; (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (3) a hedged firm commitment no longer meets the definition of a firm commitment; or (4) management determines that designating the derivative as a hedging instrument in accordance with SFAS 133 is no longer appropriate.

When fair value hedge accounting for a specific derivative is discontinued due to the Bank’s determination that such derivative no longer qualifies for SFAS 133 hedge accounting treatment, the Bank will continue to carry the derivative on the statement of condition at its fair value, cease to adjust the hedged asset or liability for changes in fair value, and amortize the cumulative basis adjustment on the formerly hedged item into earnings over its remaining term using the level-yield method. In all cases in which hedge accounting is discontinued and the derivative remains outstanding, the Bank will carry the derivative at its fair value on the statement of condition, recognizing changes in the fair value of the derivative in current period earnings.

When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank continues to carry the derivative on the statement of condition at its fair value, removing from the statement of condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.

Impact of Derivatives and Hedging Activities. The following table summarizes the notional balances and estimated fair values of the Bank’s outstanding derivatives at June 30, 2009 (in thousands).


	Notional		Estimated Fair Value
	Amount of		Derivative			Derivative
	Derivatives		Assets			Liabilities
Derivatives designated as hedging instruments under SFAS 133
Interest rate swaps
Advances	$	11,396,729	$	34,333		$	492,143
Available-for-sale securities		3,035		—			20
Consolidated obligation bonds		20,090,384		466,908			6,174
Interest rate caps related to advances		76,000		199			—


Total derivatives designated as hedging instruments under SFAS 133		31,566,148		501,440			498,337


Derivatives not designated as hedging instruments under SFAS 133
Interest rate swaps
Advances		5,000		—			80
Consolidated obligation bonds		8,045,000		20,360			41
Consolidated obligation discount notes		5,342,288		19,619			—
Basis swaps		11,200,000		32,391			83
Intermediary transactions		24,200		412			363
Interest rate caps related to advances		20,000		21			—
Interest rate caps related to held-to-maturity securities		1,750,000		11,897			—


Total derivatives not designated as hedging instruments under SFAS 133		26,386,488		84,700			567


Total derivatives before netting and collateral adjustments	$	57,952,636		586,140			498,904


Cash collateral and related accrued interest				(225,857	)		(163,208	)
Netting adjustments				(330,545	)		(330,545	)

Total collateral and netting adjustments ⁽¹⁾				(556,402	)		(493,753	)


Net derivative balances reported in statement of condition			$	29,738		$	5,151


⁽¹⁾		Amounts represent the effect of legally enforceable master netting agreements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.

The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the statements of income for the three and six months ended June 30, 2009 (in thousands).


	Gain (Loss)			Gain (Loss)
	Recognized in			Recognized in
	Earnings for			Earnings for
	the Three			the Six
	Months Ended			Months Ended
	June 30, 2009			June 30, 2009
Derivatives and hedged items in SFAS 133 fair value hedging relationships
Interest rate swaps	$	2,813		$	57,110
Interest rate caps		123			100

Total net gain related to fair value hedge ineffectiveness		2,936			57,210


Derivatives not designated as hedging instruments under SFAS 133
Net interest income on interest rate swaps		27,221			73,336
Interest rate swaps
Advances		12			(7	)
Consolidated obligation bonds		16,759			15,922
Consolidated obligation discount notes		5,207			(3,761	)
Basis swaps		(26,737	)		9,367
Forward rate agreements		223			—
Intermediary transactions		22			32
Interest rate caps
Advances		14			14
Held-to-maturity securities		8,246			8,621

Total net gain related to derivatives not designated as hedging instruments under SFAS 133		30,967			103,524


Net gains on derivatives and hedging activities reported in the statement of income	$	33,903		$	160,734

The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in SFAS 133 fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the three months ended June 30, 2009 (in thousands).


										Derivative
	Gain (Loss)			Gain (Loss)			Net Fair Value			Net Interest
	on			on Hedged			Hedge			Income
Hedged Item	Derivatives			Items			Ineffectiveness ⁽¹⁾			(Expense) ⁽²⁾
Advances	$	185,129		$	(185,334	)	$	(205	)	$	(71,759	)
Available-for-sale securities		36			(264	)		(228	)		(108	)
Consolidated obligation bonds		(81,901	)		85,270			3,369			97,847

Total	$	103,264		$	(100,328	)	$	2,936		$	25,980


⁽¹⁾		Reported as net gains (losses) on derivatives and hedging activities in the statement of income.

⁽²⁾		The net interest income (expense) associated with derivatives in SFAS 133 fair value hedging relationships is reported in the statement of income in the interest income/expense line item for the indicated hedged item.


										Derivative
	Gain (Loss)			Gain (Loss)			Net Fair Value			Net Interest
	on			on Hedged			Hedge			Income
Hedged Item	Derivatives			Items			Ineffectiveness ⁽¹⁾			(Expense) ⁽²⁾
Advances	$	245,329		$	(246,919	)	$	(1,590	)	$	(129,475	)
Available-for-sale securities		499			(601	)		(102	)		(325	)
Consolidated obligation bonds		(158,043	)		216,945			58,902			207,598

Total	$	87,785		$	(30,575	)	$	57,210		$	77,798


⁽¹⁾		Reported as net gains (losses) on derivatives and hedging activities in the statement of income.

⁽²⁾		The net interest income (expense) associated with derivatives in SFAS 133 fair value hedging relationships is reported in the statement of income in the interest income/expense line item for the indicated hedged item.

Credit Risk. The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative agreements. To mitigate this risk, the Bank has entered into master swap and credit support agreements with all of its derivatives counterparties. These agreements provide for the netting of all transactions with a derivative counterparty and the delivery of collateral when certain thresholds (generally ranging from $100,000 to $500,000) are met. The Bank manages derivative counterparty credit risk through the use of these agreements, credit analysis, and adherence to the requirements set forth in the Bank’s Risk Management Policy and Finance Agency regulations. Based on the netting provisions and collateral requirements of its master swap and credit support agreements and the creditworthiness of its derivative counterparties, Bank management does not currently anticipate any credit losses on its derivative agreements.

The notional amount of its interest rate exchange agreements does not measure the Bank’s credit risk exposure, and the maximum credit exposure for the Bank is substantially less than the notional amount. The maximum credit risk exposure is the estimated cost, on a present value basis, of replacing at current market rates all interest rate exchange agreements with a counterparty with whom the Bank is in a net gain position, if the counterparty were to default. In determining its maximum credit exposure to a counterparty, the Bank, as permitted under master netting provisions of its interest rate exchange agreements, nets its obligations to the counterparty (i.e., derivative liabilities) against the counterparty’s obligations to the Bank (i.e., derivative assets). Maximum credit risk, as defined above, does not consider the existence of any collateral held or remitted by the Bank.

At June 30, 2009 and December 31, 2008, the Bank’s maximum credit risk, as defined above, was approximately $244,280,000 and $404,925,000, respectively. These totals include $63,185,000 and $250,222,000, respectively, of net accrued interest receivable. The Bank held as collateral cash balances of $225,814,000 and $334,868,000 as of June 30, 2009 and December 31, 2008, respectively. In early July 2009 and early January 2009, additional cash collateral of $19,397,000 and $68,497,000, respectively, was delivered to the Bank pursuant to counterparty credit arrangements. The cash collateral held is reported in derivative assets/liabilities in the statements of condition.

The Bank transacts most of its interest rate exchange agreements with large banks and major broker-dealers. Some of these banks and broker-dealers (or their affiliates) buy, sell, and distribute consolidated obligations. Assets pledged by the Bank to these counterparties are further described in Note 12.

When entering into interest rate exchange agreements with its members, the Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. At June 30, 2009 and December 31, 2008, the net market value of the Bank’s derivatives with its members totaled ($363,000) and $4,000, respectively.

The Bank has an agreement with one of its derivative counterparties that contains provisions that may require the Bank to deliver collateral to the counterparty if there is a deterioration in the Bank’s long-term credit rating to AA+

or below by S&P or Aa1 or below by Moody’s and the Bank loses its status as a government-sponsored enterprise. If this were to occur, the counterparty to the agreement would be entitled to collateral equal to its exposure to the extent such exposure exceeded $1,000,000. However, the Bank would not be required to deliver collateral unless the amount to be delivered is at least $500,000. The derivative instruments subject to this agreement were in a net asset position on June 30, 2009.

Note 9—Capital

At all times during the six months ended June 30, 2009, the Bank was in compliance with all applicable statutory and regulatory capital requirements. The following table summarizes the Bank’s compliance with those capital requirements as of June 30, 2009 and December 31, 2008 (dollars in thousands):


	June 30, 2009						December 31, 2008
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	528,575		$	3,208,012		$	930,061		$	3,530,208

Total capital	$	2,883,827		$	3,208,012		$	3,157,316		$	3,530,208
Total capital-to-assets ratio		4.00	%		4.45	%		4.00	%		4.47	%

Leverage capital	$	3,604,784		$	4,812,018		$	3,946,645		$	5,295,312
Leverage capital-to-assets ratio		5.00	%		6.67	%		5.00	%		6.71	%

Shareholders are required to maintain an investment in Class B stock equal to the sum of a membership investment requirement and an activity-based investment requirement. Currently, the membership investment requirement is 0.06 percent of each member’s total assets as of the previous calendar year-end, subject to a minimum of $1,000 and a maximum of $25,000,000. The activity-based investment requirement is currently 4.10 percent of outstanding advances.

The Bank generally repurchases surplus stock at the end of the month following the end of each calendar quarter (e.g., January 31, April 30, July 31 and October 31). For the repurchases that occurred on January 30, 2009, April 30, 2009 and July 31, 2009, surplus stock was defined as the amount of stock held by a member in excess of 120 percent of the member’s minimum investment requirement. The Bank’s practice has been that a member’s surplus stock will not be repurchased if the amount of that member’s surplus stock is $250,000 or less. On January 30, 2009, April 30, 2009 and July 31, 2009, the Bank repurchased surplus stock totaling $168,324,000, $101,605,000 and $136,840,000, respectively, of which $7,602,000, $0 and $0, respectively, had been classified as mandatorily redeemable capital stock as of those dates.

Note 10—Employee Retirement Plans

The Bank sponsors a retirement benefits program that includes health care and life insurance benefits for eligible retirees. Components of net periodic benefit cost related to this program for the three and six months ended June 30, 2009 and 2008 were as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Service cost	$	5		$	7		$	10		$	14
Interest cost		36			40			73			80
Amortization of prior service cost (credit)		(9	)		(9	)		(17	)		(17	)
Amortization of net actuarial gain		(1	)		(1	)		(2	)		(2	)

Net periodic benefit cost	$	31		$	37		$	64		$	75

Note 11—Estimated Fair Values

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In addition, SFAS 157 requires the disclosure of the level within the fair value hierarchy in which the measurements fall for assets and liabilities that are carried at fair value (that is, those assets and liabilities that are measured at fair value on a recurring basis). The Bank carries its trading securities, available-for-sale securities and derivative assets/liabilities at fair value. Further, SFAS 157 requires the disclosure of the level within the fair value hierarchy in which the measurements fall for assets and liabilities that are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition (for example, impaired assets). The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:

Level 1 Inputs - Quoted prices (unadjusted) in active markets for identical assets and liabilities. The fair values of the Bank’s trading securities are determined using Level 1 inputs.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active or in which little information is released publicly; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, volatilities and prepayment speeds); and (4) inputs that are derived principally from or corroborated by observable market data (e.g., implied spreads). Level 2 inputs are used to determine the estimated fair values of the Bank’s derivative contracts and investment securities classified as available-for-sale.

Level 3 Inputs - Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair value measurement of such asset or liability. None of the Bank’s assets that are measured at fair value on a recurring basis are measured using Level 3 inputs. Other than its derivative contracts (which are measured using Level 2 inputs), the Bank does not carry any of its liabilities at fair value.

The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of June 30, 2009 and December 31, 2008. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for many of the Bank’s financial instruments (e.g., advances, non-agency RMBS and mortgage loans held for portfolio), in certain cases, their fair values are not subject to precise quantification or verification. Therefore, the estimated fair values presented below in the Fair Value Summary Table may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. Further, the fair values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities.

The valuation techniques used to measure the fair values of the Bank’s financial instruments are described below.

Cash and due from banks. The estimated fair value equals the carrying value.

Interest-bearing deposit assets. Interest-bearing deposit assets earn interest at floating market rates; therefore, the estimated fair value of the deposits approximates their carrying value.

Federal funds sold. All federal funds sold represent overnight balances. Accordingly, the estimated fair value approximates the carrying value.

Trading securities. The Bank obtains quoted prices for identical securities.

Available-for-sale securities. The Bank estimates the fair values of its available-for-sale securities using either a pricing model or dealer estimates. For those mortgage-backed securities for which a pricing model is used, the interest rate swap curve is used as the discount curve in the calculations; additional inputs (e.g., implied swaption volatility, estimated prepayment speeds and credit spreads) are also used in the fair value determinations. The Bank compares these fair values to non-binding dealer estimates to ensure that its fair values are reasonable. For the one available-for-sale security (a government-sponsored enterprise MBS) for which the Bank relied upon a dealer estimate as of December 31, 2008, the estimate was analyzed for reasonableness using a pricing model and market inputs.

Held-to-maturity securities. The Bank obtains non-binding fair value estimates from various dealers (for each security, one dealer estimate is received). These dealer estimates are reviewed for reasonableness using the Bank’s pricing model and/or by comparing the dealer estimates to pricing service quotations or dealer estimates for similar securities.

Advances. The Bank determines the estimated fair value of advances by calculating the present value of expected future cash flows from the advances and reducing this amount for accrued interest receivable. The discount rates used in these calculations are the replacement advance rates for advances with similar terms.

Mortgage loans held for portfolio. The Bank estimates the fair values of mortgage loans held for portfolio based on observed market prices for agency mortgage-backed securities. Individual mortgage loans are pooled based on certain criteria such as loan type, weighted average coupon, weighted average maturity, and origination year and matched to reference securities with a similar collateral composition to derive benchmark pricing. The prices for agency mortgage-backed securities used as a benchmark are subject to certain market conditions including, but not limited to, the market’s expectations of future prepayments, the current and expected level of interest rates, and liquidity.

Accrued interest receivable and payable. The estimated fair value approximates the carrying value due to their short-term nature.

Derivative assets/liabilities. With the exception of its interest rate basis swaps, the fair values of the Bank’s interest rate swap and forward rate agreements are estimated using a pricing model with inputs that are observable in the market (e.g., the relevant interest rate swap curve and, for agreements containing options, implied swaption volatility). As the provisions of the Bank’s master netting and collateral exchange agreements with its derivative counterparties significantly reduce the risk from nonperformance (see Note 8), the Bank does not consider its own nonperformance risk or the nonperformance risk associated with each of its counterparties to be a significant factor in the valuation of its derivative assets and liabilities. The Bank compares the fair values obtained from its pricing model to non-binding dealer estimates and may also compare its fair values to those of similar instruments to ensure that such fair values are reasonable. For the Bank’s interest rate basis swaps, fair values are obtained from dealers; these non-binding fair value estimates are corroborated using a pricing model and observable market data (i.e., the interest rate swap curve).

For the Bank’s interest rate caps, fair values are obtained from dealers. These non-binding fair value estimates are corroborated using a pricing model and observable market data (e.g., the interest rate swap curve, implied swaption volatility and volatility skew).

The fair values of the Bank’s derivative instruments include accrued interest receivable/payable and cash collateral remitted to/received from counterparties; the estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. The fair values of derivatives are netted by counterparty pursuant to the provisions of the Bank’s master swap and credit support agreements. If these netted amounts are positive, they are classified as an asset and, if negative, as a liability.

Deposit liabilities. The Bank determines the estimated fair values of its deposit liabilities with fixed rates and more than three months to maturity by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms. The estimated fair value approximates the carrying value for deposits with floating rates and fixed rates with three months or less to their maturity or repricing date.

Consolidated obligations. The Bank estimates the fair values of consolidated obligations by calculating the present value of expected future cash flows using discount rates that are based on replacement funding rates for liabilities with similar terms and reducing this amount for accrued interest payable.

Mandatorily redeemable capital stock. The fair value of capital stock subject to mandatory redemption is generally equal to its par value ($100 per share), as adjusted for any estimated dividend earned but unpaid at the time of reclassification from equity to liabilities. The Bank’s capital stock cannot, by statute or implementing regulation, be purchased, redeemed, repurchased or transferred at any amount other than its par value.

Commitments. The estimated fair value of the Bank’s commitments to extend credit, including advances and letters of credit, was not material at June 30, 2009 or December 31, 2008.

The carrying values and estimated fair values of the Bank’s financial instruments at June 30, 2009 and December 31, 2008, were as follows (in thousands):

FAIR VALUE SUMMARY TABLE


	June 30, 2009				December 31, 2008
	Carrying		Estimated		Carrying		Estimated
Financial Instruments	Value		Fair Value		Value		Fair Value
Assets:
Cash and due from banks	$	22,053	$	22,053	$	20,765	$	20,765
Interest-bearing deposits		2,233,650		2,233,650		3,683,609		3,683,609
Federal funds sold		3,336,000		3,336,000		1,872,000		1,872,000
Trading securities		3,454		3,454		3,370		3,370
Available-for-sale securities		3,037		3,037		127,532		127,532
Held-to-maturity securities		12,586,121		12,318,846		11,701,504		11,169,862
Advances		53,469,938		53,006,154		60,919,883		60,362,576
Mortgage loans held for portfolio, net		289,521		301,705		327,059		328,064
Accrued interest receivable		82,512		82,512		145,284		145,284
Derivative assets		29,738		29,738		77,137		77,137

Liabilities:
Deposits		1,172,624		1,172,635		1,425,066		1,425,274
Consolidated obligations:
Discount notes		14,961,653		14,987,881		16,745,420		16,897,389
Bonds		52,492,151		52,717,447		56,613,595		56,946,934
Mandatorily redeemable capital stock		78,806		78,806		90,353		90,353
Accrued interest payable		181,597		181,597		514,086		514,086
Derivative liabilities		5,151		5,151		2,326		2,326

The following table summarizes the Bank’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2009 by their level within the fair value hierarchy (in thousands). As required by SFAS 157, financial assets and liabilities are classified in their entirety based on the lowest level input that is significant to the fair value measurement.


							Netting
	Level 1		Level 2		Level 3		Adjustment⁽¹⁾			Total
Assets
Trading securities	$	3,454	$	—	$	—	$	—		$	3,454
Available-for-sale securities		—		3,037		—		—			3,037
Derivative assets		—		586,140		—		(556,402	)		29,738


Total assets at fair value	$	3,454	$	589,177	$	—	$	(556,402	)	$	36,229


Liabilities
Derivative liabilities	$	—	$	498,904	$	—	$	(493,753	)	$	5,151


Total liabilities at fair value	$	—	$	498,904	$	—	$	(493,753	)	$	5,151


⁽¹⁾		Amounts represent the impact of legally enforceable master netting agreements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.

During the six months ended June 30, 2009, the Bank recorded other-than-temporary impairments on four of its non-agency RMBS classified as held-to-maturity (see Note 4). Consistent with the valuation technique described above, the fair value measurements for these securities were obtained from non-binding dealer estimates (for each impaired security, one dealer estimate was received). Based on the reduced level of market activity for non-agency RMBS, these nonrecurring fair value measurements fall within Level 3 of the fair value hierarchy.

The following table summarizes the Bank’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2008 by their level within the fair value hierarchy (in thousands).


							Netting
	Level 1		Level 2		Level 3		Adjustment⁽¹⁾			Total
Assets
Trading securities	$	3,370	$	—	$	—	$	—		$	3,370
Available-for-sale securities		—		127,532		—		—			127,532
Derivative assets		—		849,571		—		(772,434	)		77,137


Total assets at fair value	$	3,370	$	977,103	$	—	$	(772,434	)	$	208,039


Liabilities
Derivative liabilities	$	—	$	680,064	$	—	$	(677,738	)	$	2,326


Total liabilities at fair value	$	—	$	680,064	$	—	$	(677,738	)	$	2,326


⁽¹⁾		Amounts represent the impact of legally enforceable master netting agreements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.

Note 12—Commitments and Contingencies

Joint and several liability. The Bank is jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the 12 FHLBanks. At June 30, 2009, the par amount of the other 11 FHLBanks’ outstanding consolidated obligations was approximately $988.8 billion. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Agency determines that the primary obligor is unable to satisfy its obligations, then the Finance Agency

may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. If the Bank were to determine that a loss was probable under its joint and several liability and the amount of such loss could be reasonably estimated, the Bank would charge to income the amount of the expected loss under the provisions of SFAS No. 5, “Accounting for Contingencies.” Based upon the creditworthiness of the other FHLBanks, the Bank currently believes that the likelihood of a loss arising from its joint and several liability is remote.

On September 9, 2008, the Bank and each of the other 11 FHLBanks entered into separate but identical Lending Agreements (the “Agreements”) with the Treasury in connection with the Treasury’s establishment of a Government Sponsored Enterprise Credit Facility (“GSECF”). The GSECF is designed to serve as a contingent source of liquidity for the housing government-sponsored enterprises, including each of the FHLBanks.

The Agreements set forth the terms under which a FHLBank may borrow from and pledge collateral to the Treasury. Under the Agreements, any extensions of credit by the Treasury to one or more of the FHLBanks would be the joint and several obligations of all 12 of the FHLBanks and would be consolidated obligations (issued through the Office of Finance) pursuant to part 966 of the rules of the Finance Agency (12 C.F.R. part 966), as successor to the Finance Board. Loans under the Agreements, if any, are to be secured by collateral acceptable to the Treasury, which consists of FHLBank advances to members that have been collateralized in accordance with regulatory standards and mortgage-backed securities issued by the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Each FHLBank grants a security interest to the Treasury only in collateral that is identified on a listing of collateral, identified on the books or records of a Federal Reserve Bank as pledged by the FHLBank to the Treasury, or in the possession or control of the Treasury. On a weekly basis, regardless of whether there have been any borrowings under the Agreements, the FHLBanks are required to submit to the Federal Reserve Bank of New York, acting as fiscal agent for the Treasury, a schedule listing the collateral pledged to the Treasury. Each week, the FHLBanks must pledge collateral in an amount at least equal to the par value of consolidated obligation bonds and discount notes maturing in the next 15 days. In the case of advances collateral, a 13 percent haircut is applied to the outstanding principal balance of the assets in determining the amount that must be pledged to the Treasury. As of June 30, 2009, the Bank had pledged advances with an outstanding principal balance of $5,000,000,000 to the Treasury. At that same date, the Bank had not pledged any mortgage-backed securities to the Treasury.

The Agreements terminate on December 31, 2009 but will remain in effect as to any loan outstanding on that date. A FHLBank may terminate its consent to be bound by the Agreement prior to that time so long as no loan is then outstanding to the Treasury.

To date, none of the FHLBanks have borrowed under the GSECF.

Other commitments and contingencies. At June 30, 2009 and December 31, 2008, the Bank had commitments to make additional advances totaling approximately $78,618,000 and $81,435,000, respectively. In addition, outstanding standby letters of credit totaled $4,694,383,000 and $5,174,019,000 at June 30, 2009 and December 31, 2008, respectively.

At June 30, 2009, the Bank had commitments to issue $460,000,000 of consolidated obligation bonds/discount notes, all of which were hedged with associated interest rate swaps. The Bank had no commitments to issue consolidated obligations at December 31, 2008.

The Bank executes interest rate exchange agreements with major banks and broker-dealers with whom it has bilateral collateral exchange agreements. As of June 30, 2009 and December 31, 2008, the Bank had pledged cash collateral of $163,184,000 and $240,192,000, respectively, to broker-dealers who had credit risk exposure to the Bank related to interest rate exchange agreements; at those dates, the Bank had not pledged any securities as collateral. The pledged cash collateral (i.e., interest-bearing deposit asset) is netted against derivative assets and liabilities in the statements of condition.

In the ordinary course of its business, the Bank is subject to the risk that litigation may arise. Currently, the Bank is not a party to any material pending legal proceedings.

Note 13— Transactions with Shareholders

Affiliates of two of the Bank’s derivative counterparties (Citigroup and Wachovia) acquired member institutions on March 31, 2005 and October 1, 2006, respectively. Since the acquisitions were completed, the Bank has continued to enter into interest rate exchange agreements with Citigroup and Wachovia in the normal course of business and under the same terms and conditions as before. Effective October 1, 2006, Citigroup terminated the Ninth District charter of the affiliate that acquired the member institution and, as a result, an affiliate of Citigroup became a non-member shareholder of the Bank.

The Bank did not purchase any investment securities issued by any of its shareholders or their affiliates during the six months ended June 30, 2009 or 2008.

Note 14 — Transactions with Other FHLBanks

Occasionally, the Bank loans (or borrows) short-term federal funds to (from) other FHLBanks. There were no loans to other FHLBanks during the six months ended June 30, 2009. During the six months ended June 30, 2008, interest income from loans to other FHLBanks totaled $143,000. The following table summarizes the Bank’s loans to other FHLBanks during the six months ended June 30, 2008 (in thousands).


Balance at January 1, 2008	$	400,000
Loans to:
FHLBank of San Francisco		1,015,000
FHLBank of Boston		418,000
Collections from:
FHLBank of San Francisco		(1,415,000	)
FHLBank of Boston		(418,000	)

Balance at June 30, 2008	$	—

During the six months ended June 30, 2009 and 2008, interest expense on borrowings from other FHLBanks totaled $97 and $22,000, respectively. The following table summarizes the Bank’s borrowings from other FHLBanks during the six months ended June 30, 2009 and 2008 (in thousands).


	Six Months Ended June 30,
	2009			2008
Balance at January 1,	$	—		$	—
Borrowings from:
FHLBank of San Francisco		50,000			240,000
FHLBank of Seattle		—			25,000
FHLBank of Atlanta		—			70,000
Repayments to:
FHLBank of San Francisco		(50,000	)		(240,000	)
FHLBank of Seattle		—			(25,000	)
FHLBank of Atlanta		—			(70,000	)

Balance at June 30,	$	—		$	—

During the six months ended June 30, 2008, the Bank’s available-for-sale securities portfolio included consolidated obligations for which other FHLBanks were the primary obligors and for which the Bank was jointly and severally liable. All of these consolidated obligations were purchased in the open market from third parties and were accounted for in the same manner as other similarly classified investments. Interest income earned on these consolidated obligations of other FHLBanks totaled $656,000 and $1,304,000 for the three and six months ended June 30, 2008, respectively. These investments matured and were fully repaid during the fourth quarter of 2008.

The Bank has, from time to time, assumed the outstanding debt of another FHLBank rather than issue new debt. In connection with these transactions, the Bank becomes the primary obligor for the transferred debt. There were no such transfers during the six months ended June 30, 2009 or the three months ended March 31, 2008. During the three months ended June 30, 2008, the Bank assumed a total of $135,880,000 (par value) of consolidated obligations from the FHLBank of Seattle. The net premium associated with these transactions totaled $3,474,000.

Occasionally, the Bank transfers debt that it no longer needs to other FHLBanks. The Bank did not transfer any debt to other FHLBanks during the six months ended June 30, 2009. During the three months ended March 31, 2008, the Bank transferred $300,000,000 and $150,000,000 (par values) of its consolidated obligations to the FHLBanks of Pittsburgh and Cincinnati, respectively. In addition, during the three months ended June 30, 2008, the Bank transferred $15,000,000 (par value) of its consolidated obligations to the FHLBank of San Francisco. In connection with these transactions, the assuming FHLBanks became the primary obligors for the transferred debt. The aggregate gains realized on these debt transfers totaled $266,000 and $4,546,000 during the three and six months ended June 30, 2008, respectively.

Through July 31, 2008, the Bank received participation fees from the FHLBank of Chicago for mortgage loans that were originated by certain of the Bank’s members (participating financial institutions) and purchased by the FHLBank of Chicago through its Mortgage Partnership Finance^® program. These fees totaled $97,000 and $163,000 during the three and six months ended June 30, 2008, respectively. No participation fees were received during the six months ended June 30, 2009.


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and notes thereto included in “Item 1. Financial Statements.”

Forward-Looking Information

This quarterly report contains forward-looking statements that reflect current beliefs and expectations of the Federal Home Loan Bank of Dallas (the “Bank”) about its future results, performance, liquidity, financial condition, prospects and opportunities, including prospects for the payment of dividends. These statements are identified by the use of forward-looking terminology, such as “anticipates,” “plans,” “believes,” “could,” “estimates,” “may,” “should,” “would,” “will,” “expects,” “intends” or their negatives or other similar terms. The Bank cautions that forward-looking statements involve risks or uncertainties that could cause the Bank’s actual results to differ materially from those expressed or implied in these forward-looking statements, or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, undue reliance should not be placed on such statements.

These risks and uncertainties include, without limitation, evolving economic and market conditions, political events, and the impact of competitive business forces. The risks and uncertainties related to evolving economic and market conditions include, but are not limited to, changes in interest rates, changes in the Bank’s access to the capital markets, changes in the cost of the Bank’s debt, adverse consequences resulting from a significant regional or national economic downturn, credit and prepayment risks, or changes in the financial health of the Bank’s members or non-member borrowers. Among other things, political events could possibly lead to changes in the Bank’s regulatory environment or its status as a government-sponsored enterprise (“GSE”), or to changes in the regulatory environment for the Bank’s members or non-member borrowers. Risks and uncertainties related to competitive business forces include, but are not limited to, the potential loss of large members or large borrowers through acquisitions or other means or changes in the relative competitiveness of the Bank’s products and services for member institutions. For a more detailed discussion of the risk factors applicable to the Bank, see “Item 1A — Risk Factors” in the Bank’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 27, 2009 (the “2008 10-K”) and “Item 1A — Risk Factors” in Part II of this quarterly report. The Bank undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason.

Overview

Business

The Bank is one of 12 district Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System”) that were created by the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages, community lending, and targeted community development. As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. Prior to July 30, 2008, the Federal Housing Finance Board (“Finance Board”) was responsible for the supervision and regulation of the FHLBanks and the Office of Finance. Effective with the enactment of the Housing and Economic Recovery Act of 2008 (the “HER Act”) on July 30, 2008, the Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the United States Government, assumed responsibility for supervising and regulating the FHLBanks and the Office of Finance. The Finance Agency has responsibility to ensure that the FHLBanks: (i) operate in a safe and sound manner (including the maintenance of adequate capital and internal controls); (ii) foster liquid, efficient, competitive and resilient national housing finance markets; (iii) comply with applicable laws, rules, regulations, guidelines and orders (including the HER Act and the FHLB Act); (iv) carry out their statutory mission only through authorized activities; and (v) operate and conduct their activities in a manner that is consistent with the public interest. Consistent with these responsibilities, the Finance Agency establishes policies and regulations covering the operations of the FHLBanks. The HER Act provided that all regulations, orders, directives and determinations issued by the Finance Board prior to enactment of the HER Act

immediately transferred to the Finance Agency and remain in force unless modified, terminated, or set aside by the Director of the Finance Agency.

The Bank serves eligible financial institutions in Arkansas, Louisiana, Mississippi, New Mexico and Texas (collectively, the Ninth District of the FHLBank System). The Bank’s primary business is lending relatively low cost funds (known as advances) to its member institutions, which include commercial banks, thrifts, insurance companies and credit unions. While not members of the Bank, state and local housing authorities that meet certain statutory criteria may also borrow from the Bank. The Bank also maintains a portfolio of highly rated investments for liquidity purposes and to provide additional earnings. Additionally, the Bank holds interests in a portfolio of government-guaranteed/insured and conventional mortgage loans that were acquired through the Mortgage Partnership Finance^® (“MPF”^®) Program offered by the FHLBank of Chicago. Shareholders’ return on their investment includes dividends (which are typically paid quarterly in the form of capital stock) and the value derived from access to the Bank’s products and services. The Bank balances the financial rewards to shareholders by seeking to pay a dividend that meets or exceeds the return on alternative short-term money market investments available to shareholders, while lending funds at the lowest rates expected to be compatible with that objective and its objective to build retained earnings over time.

The Bank’s capital stock is not publicly traded and can be held only by members of the Bank, by non-member institutions that acquire stock by virtue of acquiring member institutions, or by former members of the Bank that retain capital stock to support advances or other activity that remains outstanding or until any applicable stock redemption or withdrawal notice period expires. All members must purchase stock in the Bank. The Bank’s capital stock has a par value of $100 per share and is purchased, redeemed, repurchased and transferred (with the prior approval of the Bank) only at its par value. Members may redeem excess stock, or withdraw from membership and redeem all outstanding capital stock, with five years’ written notice to the Bank.

The FHLBanks’ debt instruments (known as consolidated obligations) are their primary source of funds and are the joint and several obligations of all 12 FHLBanks. Consolidated obligations are issued through the Office of Finance acting as agent for the FHLBanks and generally are publicly traded in the over-the-counter market. The Bank records on its balance sheet only those consolidated obligations for which it is the primary obligor. Consolidated obligations are not obligations of the United States Government and the United States Government does not guarantee them. Consolidated obligations are rated Aaa/P-1 by Moody’s Investors Service (“Moody’s”) and AAA/A-1+ by Standard & Poors (“S&P”), which are the highest ratings available from these nationally recognized statistical rating organizations (“NRSROs”). These ratings indicate that Moody’s and S&P have concluded that the FHLBanks have an extremely strong capacity to meet their commitments to pay principal and interest on consolidated obligations, and that consolidated obligations are judged to be of the highest quality, with minimal credit risk. The ratings also reflect the FHLBank System’s status as a GSE. Historically, the FHLBanks’ GSE status and highest available credit ratings on consolidated obligations have provided the FHLBanks with excellent capital markets access. Deposits, other borrowings and the proceeds from capital stock issued to members are also sources of funds for the Bank.

In addition to ratings on the FHLBanks’ consolidated obligations, each FHLBank is rated individually by both S&P and Moody’s. These individual FHLBank ratings apply to obligations of the respective FHLBanks, such as interest rate derivatives, deposits, and letters of credit. As of August 1, 2009, Moody’s had assigned a deposit rating of Aaa/P-1 to the Bank. At that same date, the Bank was rated AAA/A-1+ by S&P.

Shareholders, bondholders and prospective shareholders and bondholders should understand that these ratings are not a recommendation to buy, hold or sell securities and they may be subject to revision or withdrawal at any time by the NRSRO. The ratings from each of the NRSROs should be evaluated independently.

The Bank conducts its business and fulfills its public purpose primarily by acting as a financial intermediary between its members and the capital markets. The intermediation of the timing, structure, and amount of its members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements, including interest rate swaps and caps. The Bank’s interest rate exchange agreements are accounted for in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement

No. 133,” SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140” and SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” and as interpreted by the Derivatives Implementation Group and the staff of the Financial Accounting Standards Board (hereinafter collectively referred to as “SFAS 133”).

The Bank’s earnings, exclusive of gains on the sales of investment securities and the retirement or transfer of debt, if any, and fair value adjustments required by SFAS 133, are generated primarily from net interest income and tend to rise and fall with the overall level of interest rates, particularly short-term money market rates. Because the Bank is a cooperatively owned, wholesale institution operating on aggregate net interest spreads typically in the 15 to 20 basis point range (including the effect of net interest payments on interest rate exchange agreements that hedge identified portfolio risks but that do not qualify for hedge accounting under SFAS 133 and excluding the effects of interest expense on mandatorily redeemable capital stock and fair value adjustments required by SFAS 133), the spread component of its net interest income is much smaller than a typical commercial bank, and a relatively larger portion of its net interest income is derived from the investment of its capital. The Bank’s interest rate risk profile is typically fairly neutral. As a result, the Bank’s capital is effectively invested in shorter-term assets and its earnings and returns on capital (exclusive of gains on the sales of investment securities and the retirement or transfer of debt, if any, and fair value adjustments required by SFAS 133) generally tend to follow short-term interest rates. The Bank’s profitability objective is to achieve a rate of return on members’ capital stock investment sufficient to allow the Bank to meet its retained earnings growth objectives and pay dividends on capital stock at rates that approximate or exceed the average effective federal funds rate. The following table summarizes the Bank’s return on average capital stock, the average effective federal funds rate and the Bank’s dividend payment rate for the three months ended March 31, 2009 and 2008, the three months ended June 30, 2009 and 2008 and the six months ended June 30, 2009 and 2008 (all percentages are annualized figures; percentages for the six-month periods represent weighted average rates).


	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2009			2008			2009			2008			2009			2008
Return on average capital stock		8.96	%		5.11	%		3.66	%		5.71	%		6.35	%		5.43	%

Average effective federal funds rate		0.18	%		3.18	%		0.18	%		2.09	%		0.18	%		2.63	%

Dividend rate paid		0.50	%		4.50	%		0.18	%		3.18	%		0.34	%		3.84	%

Reference average effective federal funds rate (reference rate) ⁽¹⁾		0.51	%		4.50	%		0.18	%		3.18	%		0.34	%		3.84	%


⁽¹⁾		See discussion below for a description of the reference rate.

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

The Bank’s quarterly dividends are based upon the Bank’s operating results, shareholders’ average capital stock holdings and the average effective federal funds rate for the immediately preceding quarter. While the Bank has had a long-standing practice of paying quarterly dividends, future dividend payments cannot be assured.

To provide more meaningful comparisons between the average effective federal funds rate and the Bank’s dividend rate, the above table sets forth a “reference average effective federal funds rate.” For the three months ended March 31, 2009 and 2008, the reference average effective federal funds rate reflects the average effective federal funds rate for the fourth quarter of 2008 and the fourth quarter of 2007, respectively. For the three months ended June 30, 2009 and 2008, the reference average effective federal funds rate reflects the average effective federal funds rate for the first quarter of 2009 and the first quarter of 2008, respectively. For the six months ended June 30, 2009 and

2008, the reference average effective federal funds rate reflects the average effective federal funds rate for the six months ended March 31, 2009 and 2008, respectively.

The Bank operates in only one reportable segment as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” All of the Bank’s revenues are derived from U.S. operations.

The following table summarizes the Bank’s membership, by type of institution, as of June 30, 2009 and December 31, 2008.

MEMBERSHIP SUMMARY


	June 30,		December 31,
	2009		2008
Commercial banks		757		759
Thrifts		86		85
Credit unions		64		60
Insurance companies		19		19


Total members		926		923

Housing associates		8		8
Non-member borrowers		12		13


Total		946		944


Community Financial Institutions (CFIs)		791		796

Financial Market Conditions

Although capital market participants remained somewhat cautious about the creditworthiness and liquidity of their investments and counterparties during the second quarter of 2009, credit market conditions during the period continued the trend of noticeable improvement that began in late 2008 and has now extended through mid-year 2009. While significant uncertainty remains regarding the future course of economic conditions and the credit markets, and a continuation of market caution and somewhat reduced market liquidity for some period seems likely, the second quarter of 2009 showed significant signs of improvement compared particularly with the early part of the fourth quarter of 2008 and even compared with conditions during the first quarter of 2009.

The ongoing impact of several government programs that were either introduced or expanded during the fourth quarter of 2008 appears to have supported a greater degree of stability in the capital markets. Those programs include the United States Department of the Treasury’s (the “Treasury”) implementation of the Troubled Asset Relief Program (“TARP”) authorized by Congress in October 2008 and the Federal Reserve’s purchases of commercial paper, agency debt securities (including FHLBank debt) and mortgage-backed securities. In addition, the Federal Reserve’s discount window lending and Term Auction Facility (“TAF”) for auctions of short-term liquidity and the expansion of insured deposit limits and the Temporary Liquidity Guarantee Program (“TLGP”) provided by the Federal Deposit Insurance Corporation (“FDIC”) have provided additional liquidity support for depository institutions.

Direct lending by the Federal Reserve to depository institutions reached approximately $530 billion by December 31, 2008 and remained at about that level through April 2009 before declining to about $320 billion at the end of June 2009. Otherwise unsecured debt issued by commercial banks and guaranteed by the FDIC reached approximately $330 billion by March 31, 2009 and remained near that level at June 30, 2009. In addition, the increase in the FDIC insured deposit limit to $250,000 for all types of accounts and to an unlimited level for

transaction accounts covered by the TLGP have encouraged depositors to leave larger balances in bank deposit accounts.

In addition to those actions to provide liquidity directly to the markets, the Federal Open Market Committee of the Federal Reserve Board reduced its target for the federal funds rate first from 2.0 percent to 1.0 percent in October 2008, and then in December 2008 reduced the target to a range between 0 and 0.25 percent, a target range reaffirmed at its April and June 2009 meetings. Overnight inter-bank lending rates stabilized within that range in January 2009 and have remained at similar levels since that time.

In addition, one- and three-month LIBOR rates continued to decline and the spread between one- and three-month LIBOR continued to shrink during the second quarter of 2009. Those two rates fell dramatically from 3.93 percent and 4.05 percent, respectively, at September 30, 2008 to 0.44 percent and 1.43 percent, respectively, as of December 31, 2008, stabilized near those levels during the first quarter of 2009 and ended that period at 0.50 percent and 1.19 percent, respectively. Those rates continued to stabilize and the spread between them declined further in the second quarter of 2009, ending the period at 0.31 percent and 0.60 percent, respectively. More stable one- and three-month LIBOR rates, combined with smaller spreads between those two indices and between those indices and overnight lending rates, suggest general improvement and more confidence in inter-bank lending markets.

Along with these general, if gradual, credit market improvements over recent months, the FHLBanks’ access to debt with a wider range of maturities has also improved somewhat. The FHLBanks’ cost of issuing one- to three-year debt compared to three-month LIBOR on a swapped cash flow basis continued the improvement in the second quarter of 2009 that began in the first quarter of 2009. Meanwhile, the relative cost of FHLBank debt compared to three-month LIBOR across maturities has become somewhat more consistent. While there are still investor preferences for relatively shorter maturity assets, investor interest in and the pricing of longer-dated securities has improved.

Economic conditions also appear to be showing some early signs of eventual improvement. While the significant deterioration in economic conditions that followed the disruptive financial market events of September 2008 has not reversed, and the economy has remained weak since that time, economists and policy makers have interpreted recent data to indicate that the pace of economic decline has begun to slow. There are also signs that the financial condition of large financial institutions has begun to stabilize. Those early signs of improvement notwithstanding, the prospects for and potential timing of renewed economic growth (employment growth in particular) remain very uncertain. The ongoing weak economic outlook, along with continued uncertainty regarding the extent that weak economic conditions will extend future losses at large financial institutions to a wider range of asset classes, and the nature and extent of the ongoing need for the government to support the banking industry, have combined to maintain market participants’ somewhat cautious approach to the credit markets.

The following table presents information on key market interest rates at June 30, 2009 and December 31, 2008 and key average market interest rates for the three- and six-month periods ended June 30, 2009 and 2008.


	June 30,			December 31,			Second			Second			Average for the			Average for the
	2009			2008			Quarter			Quarter			Six Months			Six Months
	Ending			Ending			2009			2008			Ended			Ended
	Rate			Rate			Average			Average			June 30, 2009			June 30, 2008
Federal Funds Target ⁽¹⁾		0.25	%		0.25	%		0.25	%		2.08	%		0.25	%		2.63	%
Average Effective Federal Funds Rate ⁽²⁾		0.22	%		0.14	%		0.18	%		2.09	%		0.18	%		2.63	%
1-month LIBOR ⁽¹⁾		0.31	%		0.44	%		0.37	%		2.59	%		0.42	%		2.95	%
3-month LIBOR⁽¹⁾		0.60	%		1.43	%		0.84	%		2.75	%		1.04	%		3.02	%
2-year LIBOR⁽¹⁾		1.53	%		1.48	%		1.49	%		3.26	%		1.52	%		3.05	%
5-year LIBOR⁽¹⁾		2.97	%		2.13	%		2.73	%		3.99	%		2.55	%		3.78	%
10-year LIBOR⁽¹⁾		3.78	%		2.56	%		3.50	%		4.52	%		3.22	%		4.42	%
3-month U.S. Treasury⁽¹⁾		0.19	%		0.08	%		0.17	%		1.65	%		0.19	%		1.87	%
2-year U.S. Treasury ⁽¹⁾		1.11	%		0.77	%		1.02	%		2.42	%		0.96	%		2.23	%
5-year U.S. Treasury ⁽¹⁾		2.54	%		1.55	%		2.24	%		3.16	%		2.01	%		2.96	%
10-year U.S. Treasury ⁽¹⁾		3.53	%		2.21	%		3.32	%		3.88	%		3.03	%		3.78	%


⁽¹⁾		Source: Bloomberg

⁽²⁾		Source: Federal Reserve Statistical Release

Year-to-Date 2009 Summary

	•		The Bank ended the second quarter of 2009 with total assets of $72.1 billion and total advances of $53.5 billion, a decrease from $78.9 billion and $60.9 billion, respectively, at the end of 2008. The decline in advances during the six months ended June 30, 2009 appears to have been attributable in large part to a combination of modest improvements in credit market conditions, the impact of efforts by the Federal Reserve and the FDIC to support and provide liquidity to the financial markets in general and to depository institutions in particular, and an increase in deposit flows related in part to a shift in consumers’ investment preferences and weaker economic conditions.

	•		The Bank’s net income for the three and six months ended June 30, 2009 was $25.7 million and $90.9 million, respectively, including $33.9 million and $160.7 million, respectively, in net gains on derivatives and hedging activities and net interest income (expense) of $14.8 million and ($8.1 million), respectively. The Bank’s net interest income (expense) excludes net interest payments associated with economic hedge derivatives, which contributed significantly to the Bank’s overall income before assessments of $35.0 million and $123.7 million for the three and six months ended June 30, 2009, respectively. Had the interest income on economic hedge derivatives been included in net interest income (expense), the Bank’s net interest income would have been higher (and its net gains on derivatives and hedging activities would have been lower) by $27.2 million and $73.3 million for the three and six months ended June 30, 2009, respectively.

	•		The Bank’s net interest income for the first half of 2009 was adversely impacted by actions the Bank took in late 2008 to ensure its ability to provide liquidity to its members during a period of unusual market disruption. At the height of the credit market disruptions in the early part of the fourth quarter of 2008, and in order to ensure that the Bank would have sufficient liquidity on hand to fund member advances throughout the year-end period, the Bank replaced short-term liabilities with new issues of debt with maturities that extended into 2009. As yields subsequently declined sharply on the Bank’s short-term assets, including overnight federal funds sold and short-term advances to members, this debt was carried at a negative spread. The negative spread associated with the investment of the remaining portion of this debt in low-yielding short-term assets was a significant contributor to the Bank’s negative net interest income for the six months ended June 30, 2009, most of which occurred early in the first quarter. The negative impact of this debt was minimal in the second quarter of 2009 as much of the debt issued in late 2008 was replaced with lower cost debt issued in 2009.

	•		For the three and six months ended June 30, 2009, the $33.9 million and $160.7 million, respectively, in net gains on derivatives and hedging activities included $27.2 million and $73.3 million, respectively, of net interest income on interest rate swaps accounted for as economic hedge derivatives, $3.4 million and $58.9 million, respectively, of net ineffectiveness-related gains on SFAS 133 hedges related to consolidated obligation bonds and $3.7 million and $30.2 million, respectively, of net gains on economic hedge derivatives (excluding net interest settlements). As more fully described in the Bank’s 2008 10-K, during 2008 the Bank recognized $55.4 million of net ineffectiveness-related losses related to hedge ineffectiveness on interest rate swaps used to convert most of its fixed rate consolidated obligation bonds to LIBOR floating rates. Those losses were largely attributable to the unusual (and significant) decrease in three-month LIBOR rates during the fourth quarter of 2008. With relatively stable three-month LIBOR rates during the first quarter of 2009, these previous ineffectiveness-related losses reversed (in the form of ineffectiveness-related gains) during the three months ended March 31, 2009. Three-month LIBOR rates remained relatively stable during the second quarter of 2009, resulting in significantly lower ineffectiveness-related gains during that period. The net gains on the Bank’s economic hedge derivatives during the three and six months ended June 30, 2009 were due largely to gains on interest rate swaps used to hedge the risk of changes in spreads between the daily Federal funds rate and three-month LIBOR. These gains, totaling $16.8 million and $15.9 million for the three and six months ended June 30, 2009, respectively, were due to the tightening of the spread between the two indices and changes in the future expectations for such spread during the three months ended June 30, 2009. The net gains on economic hedge derivatives were also significantly impacted by gains and losses on the Bank’s portfolio of interest rate basis swaps that are used to hedge the risk of changes in spreads between one- and three-month LIBOR. Net gains of $36.1 million were recognized on this portfolio during the first quarter of 2009, while $26.7 million of net losses were recognized during the second quarter of 2009.

	•		The Bank held $24.6 billion (notional) of interest rate swaps recorded as economic hedge derivatives with a net positive fair value of $45.6 million (excluding accrued interest) at June 30, 2009. Assuming that these swaps are held to maturity, these net unrealized gains will reverse in future periods. The timing of this reversal will depend on the relative level and volatility of future interest rates. In addition, as of June 30, 2009, the Bank held $1.75 billion (notional) of stand-alone interest rate cap agreements with a fair value of $11.9 million that hedge embedded caps in held-to-maturity securities. Assuming these agreements are held to maturity, the value of the caps will be charged to income in future periods.

	•		Unrealized losses on the Bank’s holdings of non-agency (i.e., private label) residential mortgage-backed securities classified as held-to-maturity totaled $216.9 million (36.8 percent of amortized cost) at June 30, 2009, as compared to $277.0 million (40.9 percent of amortized cost) at December 31, 2008. Based on projections developed as part of its quarter-end analysis of the securities in this portfolio, the Bank continues to believe that these unrealized losses are principally the result of diminished liquidity and significant risk premiums in the non-agency residential mortgage-backed securities market and do not accurately reflect the actual historical or currently expected future credit performance of the securities. In assessing the expected credit performance of these securities, the Bank determined that it is likely that it will not fully recover the amortized cost basis of four of its non-agency residential mortgage-backed securities and, accordingly, these securities (with an aggregate unpaid principal balance of $100.4 million) were deemed to be other-than-temporarily impaired at June 30, 2009 (two of these four securities had previously been identified as other-than-temporarily impaired at March 31, 2009). In accordance with the requirements of FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”), which the Bank elected to early adopt effective January 1, 2009, the credit components of the impairment losses (aggregate amounts of $654,000 and $671,000) were recognized in earnings while the non-credit components of the impairment losses ($24.9 million and $51.1 million) were recognized in other comprehensive income during the three and six months ended June 30, 2009, respectively. Prospects for future housing market conditions, which will influence whether the Bank will record any additional other-than-temporary impairment charges on these or any other securities in the future, remain uncertain.

	•		At all times during the first half of 2009, the Bank was in compliance with all of its regulatory capital requirements. The Bank’s retained earnings increased to $301.4 million at June 30, 2009 from $216.0 million at December 31, 2008.

	•		During the first half of 2009, the Bank paid dividends totaling $5.4 million; the Bank’s first and second quarter dividends were paid at rates that approximated the benchmark average effective federal funds rates for the preceding quarters. While there can be no assurances about earnings, dividends, or regulatory actions for the remainder of 2009, the Bank currently anticipates that its recurring earnings will be sufficient both to continue paying dividends at a target rate that approximates the average effective federal funds rate for the applicable quarterly periods of 2009 and to continue building retained earnings. In addition, the Bank currently expects to continue its quarterly repurchases of surplus stock.

Regulatory Developments

Activities Pursuant to the Housing and Economic Recovery Act

As discussed in the Bank’s 2008 10-K, the HER Act requires the Finance Agency to issue a number of regulations, orders and reports. Since the enactment of the HER Act, the Finance Agency has promulgated proposed and final regulations regarding several provisions of the HER Act, some of which are discussed in the Bank’s 2008 10-K. The sections below describe the more significant regulations that have been proposed or finalized by the Finance Agency since the filing of the Bank’s 2008 10-K. The full effect of this legislation on the Bank and its activities will become known only after all of these required regulations, orders, and reports are issued and finalized.

Community Development Financial Institutions

The HER Act makes community development financial institutions (“CDFIs”) that are certified under the Community Development Banking and Financial Institutions Act of 1994 eligible for membership in a FHLBank. A certified CDFI is a person (other than an individual) that (i) has a primary mission of promoting community development, (ii) serves an investment area or targeted population, (iii) provides development services in connection with equity investment or loans, (iv) maintains, through representation on its governing board or otherwise, accountability to residents of its investment area or targeted population, and (v) is not an agency or instrumentality of the United States or of any state or political subdivision of a state.

On May 15, 2009, the Finance Agency issued a proposed rule to amend its membership regulations to authorize non-federally insured, CDFI Fund-certified CDFIs to become members of a FHLBank. The newly eligible CDFIs would include community development loan funds, venture capital funds and state-chartered credit unions without federal insurance. The proposed rule sets out the eligibility and procedural requirements for these CDFIs that wish to become FHLBank members. Comments on the proposed rule could be submitted to the Finance Agency through July 14, 2009.

The Bank has not yet determined the number of CDFIs in its district, how many of them might seek to become members of the Bank, or the effect on the Bank of their becoming members.

Executive Compensation

The HER Act requires the Director of the Finance Agency (the “Director”) to prohibit a FHLBank from providing compensation to its executive officers that is not reasonable and comparable with compensation for employment in similar businesses involving similar duties and responsibilities. Additionally, through December 31, 2009, the Director has authority to approve, disapprove or modify the existing compensation of executive officers of FHLBanks.

On June 5, 2009, the Finance Agency issued a proposed rule to effect the above provisions of the HER Act. Comments on the proposed rule could be submitted to the Finance Agency through August 4, 2009.

Pursuant to the proposed rule, the Director may review the compensation arrangements for any executive officer of a FHLBank at any time. The Director shall prohibit the FHLBank, and the FHLBank is prohibited, from providing

compensation to any such executive officer that is not reasonable and comparable with compensation for employment in other similar businesses involving similar duties and responsibilities. In determining whether such compensation is reasonable and comparable, the Director may consider any factors the Director considers relevant (including any wrongdoing on the part of the executive officer). The Director may not, however, prescribe or set a specified level or range of compensation.

With respect to compensation under review by the Director, the Director’s prior approval is required for (1) a written arrangement that provides an executive officer a term of employment of more than six months or that provides compensation in connection with termination of employment, (2) annual compensation, bonuses and other incentive pay of a FHLBank’s president and (3) compensation paid to an executive officer, if the Director has provided notice that the compensation of such executive officer is subject to a specific review by the Director.

The proposed rule defines “executive officer” to include (1) named executive officers identified in a FHLBank’s Annual Report on Form 10-K, (2) other executives who occupy specified positions or are in charge of specified subject areas and (3) any other individual, regardless of title, who is in charge of a principal business unit, division or function, or who reports directly to the FHLBank’s chairman of the board of directors, vice chairman, president or chief operating officer.

With respect to the Director’s temporary authority to approve, disapprove or modify existing compensation of an executive officer, the proposed rule defines “executive compensation” as compensation paid to a FHLBank’s named executive officers (within the meaning of the SEC’s rules) identified in a FHLBank’s Annual Report on Form 10-K.

Reporting of Fraudulent Financial Instruments

On June 17, 2009, the Finance Agency issued a proposed rule to effect the provisions of the HER Act that require the FHLBanks to report to the Finance Agency any fraudulent loans or other financial instruments that they purchased or sold. Comments on the proposed rule may be submitted to the Finance Agency through August 17, 2009.

The proposed rule requires a FHLBank to notify the Director of any fraud or possible fraud occurring in connection with a loan, a series of loans or other financial instruments that the FHLBank has purchased or sold. The FHLBank must notify the Director promptly after identifying such fraud or after the FHLBank is notified about such fraud by law enforcement or other government authority. The proposed rule also requires each FHLBank to establish and maintain internal controls and procedures and an operational training program to assure the FHLBank has an effective system to detect and report such fraud. The proposed rule defines “fraud” broadly as a material misstatement, misrepresentation, or omission relied upon by a FHLBank and does not require that the party making the misstatement, misrepresentation or omission had any intent to defraud.

Indemnification Payments and Golden Parachute Payments

The Director may prohibit or limit, by regulation or order, any indemnification payment or golden parachute payment. The Finance Agency has promulgated a number of interim final and proposed regulations regarding indemnification payments and golden parachute payments since the enactment of the HER Act (collectively, the “Golden Parachute Payments Regulation”), a discussion of which is provided in the Bank’s 2008 10-K.

On June 29, 2009, the Finance Agency issued a proposed rule to amend further the Golden Parachute Payments Regulation to address in more detail prohibited and permissible indemnification payments and golden parachute payments. Comments on the proposed rule could be submitted to the Finance Agency through July 29, 2009.

With respect to indemnification payments, the proposed rule essentially re-proposed amendments to the Golden Parachute Payments Regulation that were issued by the Finance Agency on November 14, 2008, a discussion of which is provided in the Bank’s 2008 10-K. The proposed rule deletes one provision contained in the November 14, 2008 proposed amendments, which provided that claims for employee welfare benefits or other benefits that are contingent, even if otherwise vested, when a receiver is appointed for any FHLBank, including any contingency for termination of employment, are not provable claims or actual, direct compensatory damage claims against such receiver.

With respect to golden parachute payments, the proposed rule describes more specifically benefits included or excluded from the term “golden parachute payment.” Under the proposed rule, the term “golden parachute payment” does not include (i) any payment made pursuant to a pension or retirement plan that is qualified (or is intended within a reasonable period of time to be qualified) under section 401 of the Internal Revenue Code of 1986 or pursuant to a pension or other retirement plan that is governed by the laws of any foreign country; (ii) any payment made pursuant to a benefit plan as defined in the proposed rule (which includes employee welfare benefit plans as defined in section 3(1) of the Employee Retirement Income Security Act of 1974); (iii) any payment made pursuant to a bona fide deferred compensation plan or arrangement as defined in the proposed rule; (iv) any payment made by reason of death or by reason of termination caused by the disability of an entity-affiliated party; (v) any payment made pursuant to a nondiscriminatory severance pay plan or arrangement that provides for payment of severance benefits of generally no more than 12 months’ prior base compensation to all eligible employees upon involuntary termination other than for cause, voluntary resignation, or early retirement, subject to certain exceptions; (vi) any severance or similar payment that is required to be made pursuant to a State statute or foreign law that is applicable to all employers within the appropriate jurisdiction (with the exception of employers that may be exempt due to their small number of employees or other similar criteria); or (vii) any other payment that the Director determines to be permissible.

The proposed rule extends the prohibition against certain golden parachute payments to former entity-affiliated parties. With respect to potentially prohibited golden parachute payments, a FHLBank may agree to make or may make a golden parachute payment if (i) the Director determines that such a payment or agreement is permissible; (ii) such an agreement is made in order to hire a person to become an entity-affiliated party when the FHLBank is insolvent, has a conservator or receiver appointed for it, or is in a troubled condition (or the person is being hired in an effort to prevent one of these conditions from occurring), and the Director consents in writing to the amount and terms of the golden parachute payment; or (iii) with the Director’s consent, such a payment is made pursuant to an agreement that provides for a reasonable severance payment, not to exceed 12 months’ salary, to an entity-affiliated party in the event of a change in control of the FHLBank.

In the preamble to the proposed rule, the Finance Agency stated that it intends that the proposed amendments would apply to agreements entered into by a FHLBank with an entity-affiliated party on or after the date the regulation is effective. As discussed in the Bank’s 2008 10-K, the Bank has entered into employment agreements with each of its named executive officers. If the proposed amendments were applied to these existing employment agreements, the effect of the proposed amendments would be to reduce payments that might otherwise be payable to those named executive officers.

Study of Securitization of Home Mortgage Loans by the FHLBanks

Within one year of enactment of the HER Act, the Director was required to provide to Congress a report on a study of securitization of home mortgage loans purchased from member financial institutions under the Acquired Member Assets (“AMA”) programs of the FHLBanks. In conducting this study, the Director was required to consider (i) the benefits and risks associated with securitization of AMA, (ii) the potential impact of securitization upon the liquidity in the mortgage and broader credit markets, (iii) the ability of the FHLBanks to manage the risks associated with securitization, (iv) the impact of such securitization on the existing activities of the FHLBanks, including their mortgage portfolios and advances, and (v) the joint and several liability of the FHLBanks and the cooperative structure of the FHLBank System. In conducting the study, the Director was required to consult with the FHLBanks, the Office of Finance, representatives of the mortgage lending industry, practitioners in the structured finance field, and other experts as needed.

On February 27, 2009, the Finance Agency published a Notice of Concept Release with request for comments to garner information from the public for use in its study (the “Concept Release”). The Concept Release did not alter current requirements, restrictions or prohibitions on the FHLBanks with respect to either the purchase or sale of mortgages or the AMA programs. Comments on the Concept Release could be submitted to the Finance Agency through April 28, 2009.

On July 30, 2009, the Director provided to Congress the results of the Finance Agency’s study, including policy recommendations based on the Finance Agency’s analysis of the feasibility of the FHLBanks’ issuing mortgage-

backed securities and of the benefits and risks associated with such a program. Based on the Finance Agency’s study and findings regarding FHLBank securitization, the Director did not recommend permitting the FHLBanks to securitize mortgages at this time.

Study of FHLBank Advances

Within one year of enactment of the HER Act, the Director was required to conduct a study and submit a report to Congress regarding the extent to which loans and securities used as collateral to support FHLBank advances are consistent with the Interagency Guidance on Nontraditional Mortgage Product Risks dated October 4, 2006 and the Statement on Subprime Mortgage Lending dated July 10, 2007 (collectively, the “Interagency Guidance”). The study was also required to consider and recommend any additional regulations, guidance, advisory bulletins or other administrative actions necessary to ensure that the FHLBanks are not supporting loans with predatory characteristics.

On August 4, 2009, the Finance Agency published the notice of study and recommendations required by the HER Act with respect to FHLBank collateral for advances and the Interagency Guidance. Comments on the notice of study and recommendations may be submitted to the Finance Agency through October 5, 2009.

AHP Funds to Support Refinancing of Certain Residential Mortgage Loans

For a period of two years following enactment of the HER Act, FHLBanks are authorized to use a portion of their AHP funds to support the refinancing of residential mortgage loans owed by families with incomes at or below 80 percent of the median income for the areas in which they reside.

As required by the HER Act, on October 17, 2008, the Finance Agency issued an interim final rule with request for comments regarding the FHLBanks’ mortgage refinancing authority, a discussion of which is provided in the Bank’s 2008 10-K. The interim final rule authorized the FHLBanks to provide AHP grants under their homeownership set-aside programs to low- or moderate-income households that qualify for refinancing assistance under the Hope for Homeowners Program established by the Federal Housing Administration under Title IV of the HER Act. Comments on the interim final rule could be submitted to the Finance Agency through December 16, 2008.

Based on the comments received on the interim final rule and the continuing adverse conditions of the mortgage market, on August 4, 2009, the Finance Agency issued a second interim final rule, with a request for comments, to broaden the scope of the FHLBanks’ mortgage refinancing authority and to allow the FHLBanks greater flexibility in implementing their mortgage refinancing authority. Comments on the interim final rule may be submitted to the Finance Agency through October 5, 2009.

The interim final rule amends the current AHP regulation to allow a FHLBank to temporarily establish a homeownership set-aside program for the use of AHP grants by the FHLBank’s members to assist in the refinancing of a household’s mortgage loan in order to prevent foreclosure. A loan is eligible to be refinanced with an AHP grant if the loan is secured by a first mortgage on the household’s primary residence and the loan is refinanced under a program offered by the United States Department of Agriculture, the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), a state or local government, or a state or local housing finance agency (an “eligible targeted refinancing program”).

To be eligible for an AHP grant, the household must not be able to afford or must be at risk of not being able to afford its monthly payments, as defined by the eligible targeted refinancing program. The household must also obtain counseling for foreclosure mitigation and for qualification for refinancing by an eligible refinancing program through the National Foreclosure Mitigation Counseling program or other counseling program used by a state or local government or housing finance agency.

A FHLBank’s member may provide the AHP grant to reduce the outstanding principal balance of the loan by no more than the amount necessary for the new loan to qualify under both the maximum loan-to-value ratio and the maximum household mortgage debt-to-income ratio required by the eligible refinancing program. Alternatively, or in addition to the use of an AHP grant to reduce the outstanding principal balance of the loan, a FHLBank’s member may provide the AHP grant to pay loan closing costs.

The interim final rule authorizes a FHLBank, in its discretion, to set aside annually up to the greater of $4.5 million or 35 percent of the FHLBank’s annual required AHP contribution to provide funds to members participating in homeownership set-aside programs, including a mortgage refinancing set-aside program, provided that at least one-third of this set-aside amount is allocated to programs to assist first-time homebuyers. A FHLBank may accelerate to its current year’s AHP program (including its set-aside programs) from future annual required AHP contributions an amount up to the greater of $5 million or 20 percent of the FHLBank’s annual required AHP contribution for the current year. The FHLBank may credit the amount of the accelerated contribution against required AHP contributions over one or more of the subsequent five years.

The FHLBanks’ authority under the interim final rule to establish and provide AHP grants under a mortgage refinancing homeownership set-aside program expires on July 30, 2010.

Capital Classifications and Critical Capital Levels

On January 30, 2009, the Finance Agency adopted an interim final rule establishing capital classifications and critical capital levels for the FHLBanks, a discussion of which is provided in the Bank’s 2008 10-K. Comments on the interim final rule could be submitted to the Finance Agency through May 15, 2009. On August 4, 2009, the Finance Agency adopted the interim final rule as a final regulation, subject to amendments meant to clarify certain provisions.

Office of Finance

Effective with the enactment of the HER Act, the Finance Agency assumed responsibility from the Finance Board for supervising and regulating the Office of Finance. On August 4, 2009, the Finance Agency published a notice of proposed rulemaking, with a request for comments, regarding the Board of Directors of the Office of Finance. Comments on the proposed rule may be submitted to the Finance Agency through October 5, 2009.

The proposed rule would expand the Board of Directors of the Office of Finance to include all of the FHLBank presidents (currently, only two of the FHLBank presidents serve on the Office of Finance’s Board of Directors, including the Bank’s President and Chief Executive Officer). The Board of Directors of the Office of Finance would also include three to five independent directors (currently, the third director of the Office of Finance is required to be a private United States citizen with demonstrated expertise in financial markets). Each independent director must be a United States citizen and the independent directors, as a group, must have substantial experience in financial and accounting matters. An independent director may not (i) be an officer, director or employee of any FHLBank or any member of a FHLBank; (ii) be affiliated with any consolidated obligations selling or dealer group member under contract with the Office of Finance; (iii) hold shares or any financial interest in any FHLBank member or in any such dealer group member in an amount greater than the lesser of (A) $250,000 or (B) 0.01 percent of the market capitalization of the member or dealer (except that a holding company of a FHLBank member or a dealer group member will be deemed to be a member if the assets of the holding company’s member subsidiaries constitute 35 percent or more of the consolidated assets of the holding company). The Chair of the Board of Directors of the Office of Finance would be selected from among the independent directors.

The independent directors of the Office of Finance would serve as the Audit Committee. Among other duties, the Audit Committee would be responsible for overseeing the audit function of the Office of Finance and the preparation and accuracy of the FHLBank System’s combined financial reports. For purposes of the combined financial reports, the Audit Committee would be responsible for ensuring that the FHLBanks adopt consistent accounting policies and procedures, such that the information submitted by the FHLBanks to the Office of Finance may be combined to create accurate and meaningful combined reports. The Audit Committee, in consultation with the Finance Agency, may establish common accounting policies and procedures for the information submitted by the FHLBanks to the Office of Finance for the combined financial reports where the Audit Committee determines such information provided by the FHLBanks is inconsistent and that consistent policies and procedures regarding that information are necessary to create accurate and meaningful combined financial reports.

Currently, the FHLBanks are responsible for jointly funding the expenses of the Office of Finance, which are shared on a pro rata basis with one-third based on each FHLBank’s total outstanding capital stock (as of the prior month-

end, excluding those amounts classified as mandatorily redeemable), one-third based on each FHLBank’s total debt issuance (during the current month), and one-third based on each FHLBank’s total consolidated obligations outstanding (as of the current month-end). The proposed rule would retain the FHLBanks’ responsibility for jointly funding the expenses of the Office of Finance, but each FHLBank’s respective pro rata share would be based on a reasonable formula approved by the Board of Directors of the Office of Finance, subject to review by the Finance Agency.

Other Regulatory Developments

On April 28, 2009 and May 7, 2009, the Finance Agency provided the Bank and the other 11 FHLBanks with guidance regarding the process for determining other-than-temporary impairment (“OTTI”) with respect to non-agency residential mortgage-backed securities (“RMBS”). The goal of the guidance is to promote consistency among all FHLBanks in making such determinations, based on the Finance Agency’s understanding that investors in the FHLBanks’ consolidated obligations can better understand and utilize the information in the FHLBanks’ combined financial reports if it is prepared on a consistent basis. In order to achieve this goal and move to a common analytical framework, and recognizing that several FHLBanks (including the Bank) intended to early adopt FSP FAS 115-2, the Finance Agency guidance required all FHLBanks to early adopt FSP FAS 115-2 effective January 1, 2009 and, for purposes of making OTTI determinations, to use a consistent set of key modeling assumptions and specified third party models. For a discussion of FSP FAS 115-2, see “Item 1. Financial Statements” (specifically, Note 2 beginning on page 6 of this report).

Under the Finance Agency guidance, each FHLBank continues to identify, in a manner consistent with its internal policies and other Finance Agency requirements, non-agency RMBS it holds that should be subject to a cash flow analysis to determine whether those individual securities are other-than-temporarily impaired. For the first quarter of 2009, the Finance Agency guidance required that the FHLBank of San Francisco develop, in consultation with the other FHLBanks and the Finance Agency, FHLBank System-wide modeling assumptions to be used by all FHLBanks for purposes of producing cash flow analyses used in the OTTI assessment for non-agency RMBS other than securities backed by subprime and home equity loans. (The Bank does not own any securities that are designated as subprime or home equity RMBS.)

Beginning with the second quarter of 2009, the 12 FHLBanks formed an OTTI Governance Committee (the “OTTI Committee”) consisting of one representative from each FHLBank. The OTTI Committee has responsibility for reviewing and approving the key modeling assumptions, inputs and methodologies to be used by all FHLBanks in their OTTI assessment process. The OTTI Committee provides a more formal process by which the FHLBanks can provide input on and approve the assumptions, inputs and methodologies that are developed initially by the FHLBank of San Francisco. Based on its review, the Bank concurred with and adopted the FHLBank System-wide assumptions, inputs and methodologies that were approved by the OTTI Committee for use in the second quarter 2009 OTTI assessment.

In addition to using the FHLBank System-wide modeling assumptions, the Finance Agency guidance requires that each FHLBank conduct its OTTI analysis using two specified third party models, subject to certain limited exceptions. Since the Bank’s existing OTTI process already incorporated the use of the specified models, the Bank has continued to perform its own cash flow analyses and, accordingly, the Finance Agency guidance did not require any significant change in the Bank’s processes or internal controls.

Financial Condition

The following table provides selected period-end balances as of June 30, 2009 and December 31, 2008, as well as selected average balances for the six-month period ended June 30, 2009 and the year ended December 31, 2008. In addition, the table provides the percentage increase or decrease in each of these balances from period-end to period-end or period-to-period, as appropriate. As shown in the table, the Bank’s total assets decreased by 8.7 percent (or $6.8 billion) during the six months ended June 30, 2009, due primarily to a $7.5 billion decrease in advances, offset by a $0.8 billion increase in long-term investments during the period. As the Bank’s assets decreased, the funding for those assets also decreased. During the six months ended June 30, 2009, total consolidated obligations decreased by $5.9 billion as consolidated obligation bonds and discount notes declined by $4.1 billion and $1.8 billion, respectively.

The activity in each of the major balance sheet captions is discussed in the sections following the table.

SUMMARY OF CHANGES IN FINANCIAL CONDITION
(dollars in millions)


	June 30, 2009
			Percentage			Balance at
			Increase			December 31,
	Balance		(Decrease)			2008
Advances	$	53,470		(12.2)	%	$	60,920
Short-term liquidity holdings
Interest-bearing deposits		2,234		(39.4	)		3,684
Federal funds sold		3,336		78.2			1,872
Long-term investments ⁽¹⁾		12,589		6.4			11,829
Mortgage loans, net		290		(11.3	)		327
Total assets		72,096		(8.7	)		78,933
Consolidated obligations — bonds		52,492		(7.3	)		56,614
Consolidated obligations — discount notes		14,962		(10.6	)		16,745
Total consolidated obligations		67,454		(8.0	)		73,359
Mandatorily redeemable capital stock		79		(12.2	)		90
Capital stock		2,828		(12.3	)		3,224
Retained earnings		301		39.4			216
Average total assets		72,793		(2.5	)		74,641
Average capital stock		2,885		(0.9	)		2,911
Average mandatorily redeemable capital stock		77		35.1			57


⁽¹⁾		Consists of securities classified as held-to-maturity and available-for-sale.

Advances

The following table presents advances outstanding, by type of institution, as of June 30, 2009 and December 31, 2008.

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


	June 30, 2009					December 31, 2008
	Amount		Percent			Amount		Percent
Commercial banks	$	26,352		50	%	$	29,889		50	%
Thrift institutions		24,632		46			27,687		46
Credit unions		1,377		3			1,565		3
Insurance companies		261		—			243		—


Total member advances		52,622		99			59,384		99

Housing associates		6		—			131		—
Non-member borrowers		418		1			730		1


Total par value of advances	$	53,046		100	%	$	60,245		100	%


Total par value of advances outstanding to CFIs	$	10,363		20	%	$	11,530		19	%

At June 30, 2009 and December 31, 2008, the carrying value of the Bank’s advances portfolio totaled $53.5 billion and $60.9 billion, respectively. The par value of outstanding advances at those dates was $53.0 billion and $60.2 billion, respectively.

Advances to members grew steadily over the course of the first three quarters of 2008, peaking near the end of the third quarter when conditions in the financial markets were particularly unsettled. Advances growth during the first three quarters of 2008 was generally spread across all segments of the Bank’s membership base, as prevailing credit market conditions in 2008 appeared to lead members to increase their borrowings in order to increase their liquidity, to take advantage of borrowing rates that were relatively attractive compared with alternative wholesale funding sources, to take advantage of investment opportunities and/or to lengthen the maturity of their liabilities at a relatively low cost.

Advances subsequently declined during the fourth quarter of 2008 and the first half of 2009 as market conditions calmed somewhat. The $7.2 billion decline in the par value of outstanding advances during the first six months of 2009 appears to have been attributable in large part to a combination of modest improvements in credit market conditions, the impact of the Federal Reserve’s and the FDIC’s efforts to support and provide liquidity to the financial markets in general and to depository institutions in particular, and an increase in deposit flows related in part to a shift in consumers’ investment preferences and weaker economic conditions.

Advances to the Bank’s ten largest borrowers decreased by $5.2 billion during the first half of 2009, contributing significantly to the overall decline in advances balances during that period. The remaining decline in advances during the period was broad based across the Bank’s members; the majority of the decline occurred in fixed rate advances with maturities of less than one month.

At June 30, 2009, advances outstanding to the Bank’s ten largest borrowers totaled $34.0 billion, representing 64.1 percent of the Bank’s total outstanding advances as of that date. In comparison, advances outstanding to the Bank’s ten largest borrowers totaled $39.2 billion at December 31, 2008, representing 65.1 percent of the total outstanding balances at that date. The following table presents the Bank’s ten largest borrowers as of June 30, 2009.

TEN LARGEST BORROWERS AS OF JUNE 30, 2009
(Par value, dollars in millions)


					Percent of
Name	City	State	Advances		Total Advances
Wachovia Bank, FSB⁽¹⁾	Houston	TX	$	19,747		37.2	%
Comerica Bank	Dallas	TX		8,000		15.1
Guaranty Bank	Austin	TX		1,509		2.8
International Bank of Commerce	Laredo	TX		1,220		2.3
Southside Bank	Tyler	TX		690		1.3
Bank of Texas, N.A.	Dallas	TX		676		1.3
First National Bank	Edinburg	TX		635		1.2
Arvest Bank	Rogers	AR		586		1.1
First Community Bank	Taos	NM		498		0.9
Renasant Bank	Tupelo	MS		488		0.9


			$	34,049		64.1	%


⁽¹⁾		Previously known as World Savings Bank, FSB (Texas)

Effective December 31, 2008, Wells Fargo & Company (NYSE:WFC) acquired Wachovia Corporation, the holding company for Wachovia Bank, FSB (“Wachovia”), the Bank’s largest borrower and shareholder. As indicated in the table above, Wachovia had $19.7 billion of advances outstanding as of June 30, 2009, which represented 37.2 percent of the Bank’s total outstanding advances at that date. During the second quarter of 2009, Wachovia repaid $0.5 billion of maturing advances and prepaid an additional $2.0 billion of its advances. Wachovia’s remaining advances are scheduled to mature between September 2009 and October 2013.

Wells Fargo & Company (“Wells Fargo”) is headquartered in the Eleventh District of the FHLBank System and affiliates of Wells Fargo maintain charters in the Fourth, Eighth, Eleventh and Twelfth Districts of the FHLBank System, which are served by the FHLBanks of Atlanta, Des Moines, San Francisco and Seattle, respectively. The Bank is currently unable to predict whether Wells Fargo will maintain Wachovia’s Ninth District charter and, if so, to what extent, if any, it may alter Wachovia’s relationship with the Bank. For instance, Wells Fargo might retain Wachovia’s Ninth District charter, maintain Wachovia’s membership in the Bank, and continue to borrow from the Bank in the normal course of business, in which case Wells Fargo’s acquisition of Wachovia Corporation would not be expected to have a negative impact on the Bank. Alternatively, Wells Fargo might elect to dissolve Wachovia’s Ninth District charter and terminate its membership with the Bank, in which case it might elect to leave the existing advances outstanding until their scheduled maturities, or prepay some or all of the advances along with any prepayment fees that might be due under the Bank’s normal prepayment fee policies.

The loss of advances to one or more large borrowers, if not offset by growth in advances to other institutions, could have a negative impact on the Bank’s return on capital stock. A larger balance of advances helps to provide a critical mass of advances and capital to support the fixed component of the Bank’s cost structure, which helps maintain returns on capital stock, dividends and relatively lower advances pricing. In the event the Bank were to lose one or more large borrowers that represent a significant proportion of its business, it could, depending upon the magnitude of the impact, lower dividend rates, raise advances rates, attempt to reduce operating expenses (which could cause a reduction in service levels), or undertake some combination of these actions.

For the reasons cited above, the Bank would expect the impact of a termination of Wachovia’s membership in the Bank and the resulting repayment of its advances to be negative. However, the Bank believes its ability to adjust its capital levels in response to any reduction in advances outstanding would mitigate to some extent the negative impact on the Bank’s shareholders. In addition, the net growth in advances to other members since August 2007, if substantially sustained, would also mitigate to some extent the negative impact that the loss of Wachovia’s advances would have on the Bank.

The following table presents information regarding the composition of the Bank’s advances by remaining term to maturity as of June 30, 2009 and December 31, 2008.

COMPOSITION OF ADVANCES
(Dollars in millions)


	June 30, 2009					December 31, 2008
			Percentage					Percentage
	Balance		of Total			Balance		of Total
Fixed rate advances
Maturity less than one month	$	5,756		10.9	%	$	10,745		17.8	%
Maturity 1 month to 12 months		4,311		8.1			3,404		5.6
Maturity greater than 1 year		6,529		12.3			7,446		12.4
Fixed rate, amortizing		3,504		6.6			3,654		6.1
Fixed rate, putable		4,237		8.0			4,201		7.0

Total fixed rate advances		24,337		45.9			29,450		48.9

Floating rate advances
Maturity less than one month		9		—			390		0.6
Maturity 1 month to 12 months		6,419		12.1			5,695		9.5
Maturity greater than 1 year		22,281		42.0			24,710		41.0

Total floating rate advances		28,709		54.1			30,795		51.1

Total par value	$	53,046		100.0	%	$	60,245		100.0	%

The Bank is required by statute and regulation to obtain sufficient collateral from members to fully secure all advances. The Bank’s collateral arrangements with its members and the types of collateral it accepts to secure advances are described in the 2008 10-K. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances, the Bank applies various haircuts, or discounts, to determine the value of the collateral against which members may borrow. From time to time, the Bank reevaluates the adequacy of its collateral haircuts under a range of stress scenarios to ensure that its collateral haircuts are sufficient to protect the Bank from credit losses on advances. In addition, as described in the 2008 10-K, the Bank reviews its members’ financial condition on at least a quarterly basis to identify any members whose financial condition indicates they might pose an increased credit risk and, as needed, takes appropriate action. The Bank has not experienced any credit losses on advances since it was founded in 1932 and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on advances. Accordingly, the Bank has not provided any allowance for losses on advances.

On July 23, 2009, Guaranty Financial Group Inc. (“GFG”), the holding company for Guaranty Bank (“Guaranty”), the Bank’s third largest borrower and stockholder as of June 30, 2009, announced that Guaranty had filed, at the direction of the Office of Thrift Supervision (“OTS”), an amended Thrift Financial Report as of and for the three months ended March 31, 2009 reflecting substantial write-downs that resulted in Guaranty having negative capital as of that date. GFG is working with the OTS and the FDIC as they pursue potential alternatives for the business of Guaranty; however, GFG believes it is probable that it will not be able to continue as a going concern. In connection with this process, the OTS has directed that Guaranty’s Board of Directors consent to the OTS exercising its statutory authority to appoint the FDIC as receiver or conservator for Guaranty. Guaranty’s Board of Directors has complied with the OTS demand for such consent, but the appointment of a receiver or conservator has not yet occurred. As of June 30, 2009, Guaranty had advances outstanding totaling $1.5 billion. Guaranty’s obligations to the Bank are fully secured by collateral with estimated values in excess of the amounts borrowed.

Short-Term Liquidity Portfolio

At June 30, 2009, the Bank’s short-term liquidity portfolio was comprised of $3.3 billion of overnight federal funds sold to domestic counterparties and $2.2 billion of interest-bearing deposits at the Federal Reserve Bank of Dallas. At December 31, 2008, the Bank’s short-term liquidity portfolio was comprised of $1.9 billion of overnight federal funds sold to domestic counterparties and $3.6 billion of interest-bearing deposits at the Federal Reserve Bank of Dallas. The amount of the Bank’s short-term liquidity portfolio fluctuates in response to several factors, including the projected demand for advances, changes in the Bank’s deposit balances, the Bank’s pre-funding activities, and changes in the returns provided by short-term investment alternatives relative to the Bank’s discount note funding costs.

Long-Term Investments

At June 30, 2009, the Bank’s long-term investment portfolio was comprised of $12.5 billion of mortgage-backed securities (“MBS”) and $0.1 billion of U.S. agency debentures. As of year-end 2008, the Bank’s long-term investment portfolio was comprised of $11.7 billion of MBS and $0.1 billion of U.S. agency debentures. The Bank’s long-term investment portfolio at June 30, 2009 and December 31, 2008 includes securities that are classified for balance sheet purposes as either held-to-maturity or available-for-sale as set forth in the following tables.

COMPOSITION OF LONG-TERM INVESTMENT PORTFOLIO
(In millions of dollars)


	Balance Sheet Classification				Total Long-Term
	Held-to-Maturity		Available-for-Sale		Investments		Held-to-Maturity
June 30, 2009	(at carrying value)		(at fair value)		(at carrying value)		(at fair value)
U.S. agency debentures
U.S. government guaranteed obligations	$	62	$	—	$	62	$	63

MBS portfolio
U.S. government guaranteed obligations		27		—		27		26
Government-sponsored enterprises		11,817		3		11,820		11,716
Non-agency residential MBS		541		—		541		373
Non-agency commercial MBS		136		—		136		138


Total MBS		12,521		3		12,524		12,253


State or local housing agency debentures		3		—		3		3


Total long-term investments	$	12,586	$	3	$	12,589	$	12,319


	Balance Sheet Classification				Total Long-Term
	Held-to-Maturity		Available-for-Sale		Investments		Held-to-Maturity
December 31, 2008	(at carrying value)		(at fair value)		(at carrying value)		(at fair value)
U.S. agency debentures
U.S. government guaranteed obligations	$	66	$	—	$	66	$	66

MBS portfolio
U.S. government guaranteed obligations		29		—		29		28
Government-sponsored enterprises		10,629		99		10,728		10,386
Non-agency residential MBS		677		—		677		400
Non-agency commercial MBS		297		28		325		287


Total MBS		11,632		127		11,759		11,101


State or local housing agency debentures		4		—		4		3


Total long-term investments	$	11,702	$	127	$	11,829	$	11,170

During the six months ended June 30, 2009, the Bank acquired $2.3 billion of LIBOR-indexed floating rate collateralized mortgage obligations (“CMOs”) issued by either Fannie Mae or Freddie Mac, all of which had settled as of June 30, 2009. As further described below, the floating rate coupons of these securities, which the Bank designated as held-to-maturity, are subject to interest rate caps. During this same six-month period, the proceeds from maturities of long-term securities designated as held-to-maturity and available-for-sale totaled approximately $1.4 billion and $39.5 million, respectively. In March 2009, the Bank sold an available-for-sale security (specifically, a government-sponsored enterprise MBS) with an amortized cost of $86.2 million. Proceeds from the sale totaled $87.0 million, resulting in a gross realized gain of $0.8 million. There were no other sales of available-for-sale securities during the six months ended June 30, 2009.

Prior to June 30, 2008, the Bank was precluded from purchasing additional MBS if such purchase would cause the aggregate book value of its MBS holdings to exceed 300 percent of the Bank’s total regulatory capital (an amount equal to the Bank’s retained earnings plus amounts paid in for Class B stock, regardless of its classification as equity or liabilities for financial reporting purposes). On March 24, 2008, the Board of Directors of the Finance Board passed a resolution that authorizes each FHLBank to temporarily invest up to an additional 300 percent of its total capital in agency mortgage securities. The resolution requires, among other things, that a FHLBank notify the Finance Board (now Finance Agency) prior to its first acquisition under the expanded authority and include in its notification a description of the risk management practices underlying its purchases. The expanded authority is limited to MBS issued by, or backed by pools of mortgages guaranteed by, Fannie Mae or Freddie Mac, including CMOs or real estate mortgage investment conduits backed by such MBS. The mortgage loans underlying any

securities that are purchased under this expanded authority must be originated after January 1, 2008, and underwritten to conform to standards imposed by the federal banking agencies in the Interagency Guidance on Nontraditional Mortgage Product Risks dated October 4, 2006, and the Statement on Subprime Mortgage Lending dated July 10, 2007.

The expanded investment authority granted by this resolution will expire on March 31, 2010, after which a FHLBank may not purchase additional mortgage securities if such purchases would exceed an amount equal to 300 percent of its total capital provided, however, that the expiration of the expanded investment authority will not require any FHLBank to sell any agency mortgage securities it purchased in accordance with the terms of the resolution.

On April 23, 2008, the Bank’s Board of Directors authorized an increase in the Bank’s MBS investment authority of 100 percent of its total regulatory capital. In accordance with the provisions of the resolution and Advisory Bulletin 2008-AB-01, “Temporary Increase in Mortgage-Backed Securities Investment Authority” dated April 3, 2008 (“AB 2008-01”), the Bank notified the Finance Board’s Office of Supervision on April 29, 2008 of its intent to exercise the new investment authority in an amount up to an additional 100 percent of capital. On June 30, 2008, the Office of Supervision approved the Bank’s submission. The Bank’s Board of Directors may subsequently expand the Bank’s incremental MBS investment authority by some amount up to the entire additional 300 percent of capital authorized by the Finance Board. Any such increase authorized by the Bank’s Board of Directors would require approval from the Finance Agency. At June 30, 2009, the Bank held $12.5 billion (carrying value) of MBS, which represented 390 percent of its total regulatory capital.

The following table provides the par amounts and carrying values of the Bank’s MBS portfolio as of June 30, 2009 and December 31, 2008.

COMPOSITION OF MBS PORTFOLIO
(In millions of dollars)


	June 30, 2009				December 31, 2008
	Par⁽¹⁾		Carrying Value		Par⁽¹⁾		Carrying Value
Floating rate MBS
Floating rate CMOs
U.S. government guaranteed	$	27	$	27	$	29	$	29
Government-sponsored enterprises		11,971		11,814		10,880		10,714
Non-agency RMBS		591		541		677		677

Total floating rate CMOs		12,589		12,382		11,586		11,420


Interest rate swapped MBS⁽²⁾
Triple-A rated non-agency CMBS⁽³⁾		—		—		29		28
Government-sponsored enterprise DUS⁽⁴⁾		3		3		10		10

Total swapped MBS		3		3		39		38

Total floating rate MBS		12,592		12,385		11,625		11,458


Fixed rate MBS
Government-sponsored enterprises		3		3		4		4
Triple-A rated non-agency CMBS⁽⁵⁾		136		136		297		297

Total fixed rate MBS		139		139		301		301


Total MBS	$	12,731	$	12,524	$	11,926	$	11,759


⁽¹⁾		Balances represent the principal amounts of the securities.

⁽²⁾		In the interest rate swapped MBS transactions, the Bank has entered into balance-guaranteed interest rate swaps in which it pays the swap counterparty the coupon payments of the underlying security in exchange for LIBOR-indexed coupons.

⁽³⁾		CMBS = Commercial mortgage-backed securities.

⁽⁴⁾		DUS = Designated Underwriter Servicer.

⁽⁵⁾		The Bank match funded these CMBS at the time of purchase with fixed rate debt securities.

Unrealized losses on the Bank’s MBS classified as available-for-sale and held-to-maturity decreased from $1.7 million and $557.0 million, respectively, at December 31, 2008 to $1,000 and $354.8 million, respectively, at June 30, 2009.

The following table sets forth the unrealized losses on the Bank’s MBS portfolio as of June 30, 2009 and December 31, 2008.

UNREALIZED LOSSES ON MBS PORTFOLIO
(dollars in millions)


	June 30, 2009					December 31, 2008
			Unrealized					Unrealized
	Gross Unrealized		Losses as Percentage of			Gross Unrealized		Losses as Percentage of
	Losses		Amortized Cost			Losses		Amortized Cost
Government guaranteed	$	—		0.6	%	$	1		2.8	%
Government-sponsored enterprises		138		1.2	%		270		2.5	%
Non-agency RMBS		217		36.8	%		277		40.9	%
Non-agency CMBS		—		0.0	%		11		3.4	%


	$	355				$	559

The Bank evaluates outstanding available-for-sale and held-to-maturity securities in an unrealized loss position as of the end of each quarter for other-than-temporary impairment. An investment security is impaired if the fair value of the investment is less than its amortized cost. The unrealized losses on the Bank’s held-to-maturity securities portfolio as of June 30, 2009 were generally attributable to the widespread deterioration in credit market conditions over the last 21 to 24 months. All of the Bank’s held-to-maturity securities are rated by one or more of the following NRSROs: Moody’s, S&P and/or Fitch Ratings, Ltd. (“Fitch”). With the exception of 20 non-agency RMBS, as presented below, none of these organizations had rated any of the securities held by the Bank lower than the highest investment grade credit rating at June 30, 2009. Based upon the Bank’s assessment of the creditworthiness of the issuers of the debentures held by the Bank, the credit ratings assigned by the NRSROs, the strength of the government-sponsored enterprises’ guarantees of the Bank’s holdings of agency MBS and, in the case of its non-agency commercial MBS (“CMBS”), the performance of the underlying loans and the credit support provided by the subordinate securities as further discussed below, the Bank expects that its holdings of U.S. government guaranteed debentures, state or local housing agency debentures, U.S. government guaranteed MBS, government-sponsored enterprise MBS and non-agency CMBS would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the declines in market value are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at June 30, 2009.

As of June 30, 2009, the gross unrealized losses on the Bank’s holdings of non-agency RMBS totaled $217 million, which represented 36.8 percent of the securities’ amortized cost at that date. The deterioration in the U.S. housing markets, as reflected by declines in the values of residential real estate and increasing levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency RMBS, has generally elevated the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. Despite the elevated risk, based on its analysis of the securities in this portfolio, the Bank believes that the unrealized losses noted above were principally the result of diminished liquidity and significant risk premiums in the non-agency RMBS market and do not accurately reflect the actual historical or currently likely future credit performance of the securities.

One security that is rated triple-B by Moody’s is rated single-A by S&P and the remaining security is not rated by S&P.

NON-AGENCY RMBS CREDIT RATINGS
(dollars in thousands)


	Number of		Amortized		Carrying		Estimated		Unrealized
Credit Rating	Securities		Cost		Value		Fair Value		Losses
Triple-A		22	$	257,024	$	257,024	$	212,457	$	44,567
Double-A		6		65,827		65,827		34,647		31,180
Single-A		1		34,677		34,677		19,037		15,640
Triple-B		8		120,355		111,789		51,666		68,689
Double-B		3		45,064		20,583		18,634		26,430
Single-B		2		67,105		50,603		36,726		30,379

Total		42	$	590,052	$	540,503	$	373,167	$	216,885

During the period from July 1, 2009 through August 7, 2009, S&P lowered its credit rating on one of the Bank’s non-agency RMBS from triple-A to single-A (the security had previously been on ratings watch negative); as of June 30, 2009, this security had an amortized cost and estimated fair value of $21.7 million and $9.1 million, respectively. This security is not rated by Fitch and was rated triple-B by Moody’s as of June 30, 2009. During this same period, Fitch lowered its credit rating on one of the Bank’s non-agency RMBS from triple-B to triple-C; as of June 30, 2009, this security had an amortized cost (inclusive of OTTI) and estimated fair value of $45.4 million and $28.9 million, respectively. This security is not rated by S&P and was rated single-B by Moody’s as of June 30, 2009. None of the Bank’s other non-agency RMBS were downgraded during this period.

At June 30, 2009, the Bank’s portfolio of non-agency RMBS was comprised of 42 securities with an aggregate unpaid principal balance of $591 million: 23 securities with an aggregate unpaid principal balance of $323 million are backed by fixed rate loans and 19 securities with an aggregate unpaid principal balance of $268 million are backed by option adjustable-rate mortgage (“option ARM”) loans. In comparison, the aggregate unpaid principal balance of these securities was $677 million as of December 31, 2008 (those securities that are backed by fixed rate loans had an aggregate unpaid principal balance of $395 million while those securities that are backed by option ARM loans had an aggregate unpaid principal balance of $282 million). All of these investments are classified as held-to-maturity securities. The following table provides a summary of the Bank’s non-agency RMBS as of June 30, 2009 by collateral type and year of securitization.

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


														Credit Enhancement Statistics
			Unpaid								Weighted Average			Current			Original
	Number of		Principal		Amortized		Estimated		Unrealized		Collateral			Weighted			Weighted			Minimum
Year of Securitization	Securities		Balance		Cost		Fair Value		Losses		Delinquency ⁽¹⁾⁽²⁾			Average ⁽¹⁾⁽³⁾			Average ⁽¹⁾			Current ⁽⁴⁾
Fixed Rate Collateral

2006		1	$	46	$	46	$	30	$	16		7.81	%		9.37	%		8.89	%		9.37	%
2005		1		35		35		19		16		5.82	%		10.17	%		6.84	%		10.17	%
2004		5		49		49		38		11		2.95	%		15.31	%		5.99	%		12.20	%
2003		13		179		179		159		20		0.60	%		6.61	%		4.00	%		4.82	%
2002 and prior		3		14		14		11		3		4.70	%		20.57	%		4.48	%		16.46	%

		23		323		323		257		66		2.72	%		9.33	%		5.33	%		4.82	%


Option ARM Collateral

2005		17		253		252		110		142		31.26	%		49.49	%		42.58	%		33.53	%
2004		2		15		15		6		9		33.73	%		39.39	%		30.15	%		35.97	%

		19		268		267		116		151		31.40	%		48.92	%		41.87	%		33.53	%


Total non-agency RMBS		42	$	591	$	590	$	373	$	217		15.71	%		27.26	%		21.88	%		4.82	%


⁽¹⁾		Weighted average percentages are computed based upon unpaid principal balances.

⁽²⁾		Collateral delinquency reflects the percentage of underlying loans that are 60 or more days past due, including loans in foreclosure and real estate owned; as of June 30, 2009, actual cumulative loan losses underlying the Bank’s non-agency RMBS portfolio ranged from 0 percent to 4.11 percent.

⁽³⁾		Current credit enhancement percentages reflect the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior classes held by the Bank are impacted (i.e., the losses, expressed as a percentage, that could be incurred in the underlying loan pools before the securities held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pool, it is possible that the senior classes held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.

⁽⁴⁾		Minimum credit enhancement reflects the security in each vintage year with the lowest current credit enhancement.

The geographic concentration by state of the loans underlying the Bank’s non-agency RMBS as of December 31, 2008 is provided in the Bank’s 2008 10-K. There were no substantial changes in these concentrations during the six months ended June 30, 2009.

As of June 30, 2009, the Bank held six non-agency RMBS with an aggregate unpaid principal balance of $102 million that were classified as Alt-A at the time of issuance. Four of the six Alt-A securities (with an aggregate unpaid principal balance of $60 million) are backed by fixed rate loans while the other two securities (with an aggregate unpaid principal balance of $42 million) are backed by option ARM loans. The Bank does not hold any MBS that were classified as subprime at the time of issuance. The following table provides a summary as of June 30, 2009 of the Bank’s non-agency RMBS that were classified as Alt-A at the time of issuance.

SECURITIES CLASSIFIED AS ALT-A AT THE TIME OF ISSUANCE
(dollars in millions)


														Credit Enhancement Statistics
			Unpaid								Weighted Average			Current			Original
	Number of		Principal		Amortized		Estimated		Unrealized		Collateral			Weighted			Weighted			Minimum
Year of Securitization	Securities		Balance		Cost		Fair Value		Losses		Delinquency ⁽¹⁾⁽²⁾			Average ⁽¹⁾⁽³⁾			Average			Current ⁽⁴⁾
2005		3	$	77	$	77	$	37	$	40		23.36	%		29.60	%		24.97	%		10.17	%
2004		1		11		11		9		2		6.50	%		20.05	%		6.85	%		20.05	%
2002 and prior		2		14		14		11		3		4.86	%		19.94	%		4.56	%		16.46	%

Total		6	$	102	$	102	$	57	$	45		18.98	%		27.23	%		20.20	%		10.17	%


⁽¹⁾		Weighted average percentages are computed based upon unpaid principal balances.

⁽²⁾		Collateral delinquency reflects the percentage of underlying loans that are 60 or more days past due, including loans in foreclosure and real estate owned; as of June 30, 2009, actual cumulative loan losses underlying the securities presented in the table ranged from 0.17 percent to 2.10 percent.

⁽³⁾		Current credit enhancement percentages reflect the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior classes held by the Bank are impacted (i.e., the losses, expressed as a percentage, that could be incurred in the underlying loan pools before the securities held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pool, it is possible that the senior classes held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.

⁽⁴⁾		Minimum credit enhancement reflects the security in each vintage year with the lowest current credit enhancement.

To assess whether the entire amortized cost bases of its non-agency RMBS will be recovered, the Bank performed a cash flow analysis for each of its non-agency RMBS that was determined to be other-than-temporarily impaired in a previous reporting period as well as those with adverse risk characteristics as of June 30, 2009. The adverse risk characteristics used to select securities for cash flow analysis included: the duration and magnitude of the unrealized loss, NRSRO credit ratings below investment grade, and criteria related to the credit performance of the underlying collateral, including the ratio of credit enhancement to expected collateral losses and the ratio of seriously delinquent loans to credit enhancement. For these purposes, expected collateral losses are those that are implied by current delinquencies taking into account an assumed default probability based on the state of delinquency and a loss severity assumption based on product and vintage; seriously delinquent loans are those that are 60 or more days past due, including loans in foreclosure and real estate owned. In performing the cash flow analysis for each of these securities, the Bank used two third party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which are based upon an assessment of the various housing markets. (The term CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people.) The Bank’s housing price forecast assumed current-to-trough home price declines ranging from 0 percent to 20 percent over the next 9 to 15 months (resulting in peak-to-trough home price declines of up to 51 percent). Thereafter, home prices are projected to increase 1 percent in the first year, 3 percent in the second year and 4 percent in each subsequent year. The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.

amortized cost bases (after recognition of the current-period credit losses totaling $502,000) and their estimated fair values totaled $25,068,000, which was recognized in other comprehensive income.

The following tables set forth additional information for each of the securities that was deemed to be other-than-temporarily impaired as of June 30, 2009 (in thousands). The information is as of and for the six months ended June 30, 2009. The credit ratings presented in the first table represent the lowest rating assigned to the security by Moody’s, S&P or Fitch as of June 30, 2009.


	Period of				Credit		Non-Credit
	Initial	Credit	Total		Component		Component
	Impairment	Rating	OTTI		of OTTI		of OTTI
Security #1	Q1 2009	Double-B	$	13,139	$	155	$	12,984
Security #2	Q1 2009	Double-B		13,076		14		13,062
Security #3	Q2 2009	Single-B		16,985		482		16,503
Security #4	Q2 2009	Triple-B		8,585		20		8,565

Totals			$	51,785	$	671	$	51,114


	Amortized		Non-Credit		Accretion of				Estimated
	Cost		Component		Non-Credit		Carrying		Fair
	After OTTI		of OTTI		Component		Value		Value
Security #1	$	18,190	$	12,984	$	780	$	5,986	$	6,973
Security #2		21,016		13,062		785		8,739		9,142
Security #3		45,423		16,503		—		28,920		28,920
Security #4		15,143		8,565		—		6,578		6,578

Totals	$	99,772	$	51,114	$	1,565	$	50,223	$	51,613


					Significant Inputs ⁽²⁾
			Unpaid		Projected			Projected			Projected			Current
	Year of	Collateral	Principal		Prepayment			Default			Loss			Credit
	Securitization	Type⁽¹⁾	Balance		Rate			Rate			Severity			Enhancement
Security #1	2005	Alt-A/Option ARM	$	18,346		10.3	%		70.0	%		40.1	%		38.6	%
Security #2	2005	Alt-A/Option ARM		21,030		12.2	%		58.8	%		43.9	%		51.1	%
Security #3	2006	Alt-A/Fixed Rate		45,905		19.6	%		22.8	%		39.2	%		9.4	%
Security #4	2005	Alt-A/Option ARM		15,163		11.4	%		67.7	%		41.2	%		52.5	%

Total			$	100,444


⁽¹⁾ ⁽²⁾		Security #1 is the only security that was classified as Alt-A at the time of issuance; however, based upon their current collateral or performance characteristics, all of the other-than-temporarily impaired securities presented in the table above were analyzed using Alt-A assumptions. Prepayment rates reflect the weighted average of projected future voluntary prepayments. Default rates reflect the total balance of loans projected to default as a percentage of the current unpaid principal balance of the underlying loan pool. Loss severities reflect the total projected loan losses as a percentage of the total balance of loans that are projected to default.

In addition to evaluating the risk-based selection of its non-agency RMBS under a base case (or best estimate) scenario, a cash flow analysis was also performed for each of these securities under a more stressful housing price scenario. The more stressful scenario was based on a housing price forecast that was 5 percentage points lower at the trough than the base case scenario followed by a flatter recovery path. Under the more stressful scenario, current-to-trough home price declines were projected to range from 5 percent to 25 percent over the next 9 to 15 months. Thereafter, home prices were projected to increase 0 percent in the first year, 1 percent in the second year, 2 percent in the third year and 3 percent in each subsequent year.

As set forth in the table below, under the more stressful housing price scenario, nine of the Bank’s non-agency RMBS would have been deemed to be other-than-temporarily impaired as of June 30, 2009 (including the four securities that were determined to be other-than-temporarily impaired as of that date). The stress test scenario and associated results do not represent the Bank’s current expectations and therefore should not be construed as a prediction of the Bank’s future results, market conditions or the actual performance of these securities. Rather, the results from this hypothetical stress test scenario provide an indicative measure of the credit losses that the Bank might incur if home price declines (and subsequent recoveries) are more adverse than those projected in its OTTI assessment.

NON-AGENCY RMBS STRESS-TEST SCENARIO
(dollars in thousands)


							Credit Losses		Hypothetical
							Recorded		Credit
							in Earnings		Losses Under					Current
	Year of	Collateral	Carrying		Fair		During the		Stress-Test		Collateral			Credit
	Securitization	Type ⁽¹⁾	Value		Value		Second Quarter		Scenario ⁽²⁾		Delinquency ⁽³⁾			Enhancement ⁽⁴⁾
Security #1	2005	Alt-A/Option ARM	$	5,986	$	6,973	$	140	$	861		34.8	%		38.6	%
Security #2	2005	Alt-A/Option ARM		8,739		9,142		12		6		32.0	%		51.1	%
Security #3	2006	Alt-A/Fixed Rate		28,920		28,920		482		1,750		7.8	%		9.4	%
Security #4	2005	Alt-A/Option ARM		6,578		6,578		20		96		31.3	%		52.5	%
Security #5	2005	Alt-A/Option ARM		24,290		10,938		—		169		39.8	%		50.6	%
Security #6	2005	Alt-A/Option ARM		21,682		7,806		—		114		34.3	%		33.5	%
Security #7	2004	Alt-A/Option ARM		8,094		2,668		—		27		25.0	%		36.0	%
Security #8	2004	Alt-A/Option ARM		7,057		3,035		—		8		43.7	%		43.3	%
Security #9	2005	Alt-A/Option ARM		8,067		3,872		—		3		37.7	%		51.3	%

			$	119,413	$	79,932	$	654	$	3,034


⁽¹⁾		Security #1 and Security #5 are the only securities that were classified as Alt-A at the time of issuance; however, based upon their current collateral or performance characteristics, all of the securities presented in the table above were analyzed using Alt-A assumptions.

⁽²⁾		Represents the credit losses that would have been recorded in earnings during the three months ended June 30, 2009 if the more stressful housing price scenario had been used in the Bank’s OTTI assessment.

⁽³⁾		Collateral delinquency reflects the percentage of underlying loans that are 60 or more days past due, including loans in foreclosure and real estate owned; as of June 30, 2009, actual cumulative loan losses underlying the securities presented in the table ranged from 0.59 percent to 2.10 percent.

⁽⁴⁾		Current credit enhancement percentages reflect the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior classes held by the Bank are impacted (i.e., the losses, expressed as a percentage, that could be incurred in the underlying loan pools before the securities held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pool, it is possible that the senior classes held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.

In addition to its holdings of non-agency RMBS, as of June 30, 2009, the Bank held four non-agency CMBS with an aggregate unpaid principal balance, amortized cost and estimated fair value of $136.4 million, $136.4 million and $137.9 million, respectively. All of these securities were issued in either 1999 or 2000 and are classified as held-to-maturity. As of June 30, 2009, the portfolio’s weighted average collateral delinquency was 3.44 percent; at this same date, the current weighted average credit enhancement approximated 36.10 percent.

While most of its MBS portfolio is comprised of floating rate CMOs ($12.6 billion par value at June 30, 2009) that do not expose the Bank to interest rate risk if interest rates rise moderately, such securities include caps that would limit increases in the floating rate coupons if short-term interest rates rise dramatically. In addition, if interest rates rise, prepayments on the mortgage loans underlying the securities would likely decline, thus lengthening the time that the securities would remain outstanding with their coupon rates capped. As of June 30, 2009, the effective interest rate caps on one-month LIBOR (the interest cap rate minus the stated spread on the coupon) embedded in the CMO floaters ranged from 6.0 percent to 15.3 percent. The largest concentration of embedded effective caps ($10.3 billion) was between 6.0 percent and 7.0 percent. As of June 30, 2009, one-month LIBOR rates were

approximately 570 basis points below the lowest effective interest rate cap embedded in the CMO floaters. To hedge a portion of the potential cap risk embedded in these securities, the Bank held (i) $1.25 billion of interest rate caps with remaining maturities ranging from 21 months to 45 months as of June 30, 2009, and strike rates ranging from 6.25 percent to 6.75 percent and (ii) two forward-starting interest rate caps with terms commencing in June 2012, each of which has a notional amount of $250 million. The forward-starting caps mature in June 2015 and June 2016 and have strike rates of 6.50 percent and 7.00 percent, respectively. In July 2009, the Bank purchased two additional interest rate caps, each of which has a notional amount of $250 million and a strike rate of 6.5 percent. The premiums paid for these caps, which expire in the third quarter of 2014, totaled $7.3 million. If interest rates rise above the strike rates specified in these interest rate cap agreements, the Bank will be entitled to receive interest payments according to the terms and conditions of such agreements. Such payments would be based upon the notional amounts of those agreements and the difference between the specified strike rate and one-month LIBOR.

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

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


Expiration	Notional Amount		Strike Rate
Second quarter 2011	$	500		6.75	%
Second quarter 2013		500		6.25	%
Second quarter 2013		250		6.50	%
Third quarter 2014 ⁽¹⁾		500		6.50	%
Second quarter 2015 ⁽²⁾		250		6.50	%
Second quarter 2016⁽²⁾		250		7.00	%


	$	2,250


⁽¹⁾		These caps were purchased in July 2009.

⁽²⁾		These caps are effective beginning in June 2012.

Consolidated Obligations and Deposits

As of June 30, 2009, the carrying values of the Bank’s consolidated obligation bonds and discount notes totaled $52.5 billion and $15.0 billion, respectively. At that date, the par value of the Bank’s outstanding bonds was $52.1 billion and the par value of the Bank’s outstanding discount notes was $15.0 billion. In comparison, at December 31, 2008, the carrying values of consolidated obligation bonds and discount notes totaled $56.6 billion and $16.7 billion, respectively, and the par values of the Bank’s outstanding bonds and discount notes totaled $56.0 billion and $16.9 billion, respectively.

During the six months ended June 30, 2009, the Bank’s outstanding consolidated obligation bonds decreased by $3.9 billion due primarily to decreases in the Bank’s outstanding advances. The Bank relied in large part on the issuance of short-term bullet and floating rate bonds, as well as discount notes to meet its funding needs during the first half of 2009, as these funding sources were generally more attractively priced and more readily available in large volumes than long-term bullet and/or callable debt. The following table presents the composition of the Bank’s outstanding bonds at June 30, 2009 and December 31, 2008.

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


	June 30, 2009					December 31, 2008
			Percentage					Percentage
	Balance		of Total			Balance		of Total
Single-index floating rate	$	28,285		54.3	%	$	13,093		23.4	%
Fixed rate, non-callable		19,143		36.7			31,767		56.7
Fixed rate, callable		3,286		6.3			11,054		19.8
Callable step-up		1,230		2.4			78		0.1
Conversion		170		0.3			—		—
Callable step-down		—		—			15		—

Total par value	$	52,114		100.0	%	$	56,007		100.0	%

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

As discussed in the 2008 10-K, market developments during the second half of 2008 stimulated investors’ demand for short-term GSE debt and limited their demand for longer term debt. As a result, during the second half of 2008, the Bank’s funding costs associated with issuing long-maturity debt, as compared to three-month LIBOR on a swapped cash flow basis, rose sharply relative to short-term debt. These costs improved somewhat during the first half of 2009.

During the first half of 2009, the proportion of outstanding callable bonds decreased due to the combination of the slope of the FHLBank funding curve and continued investor preferences for short-term, high-quality assets, while the proportion of floating-rate bonds increased. The FHLBanks’ access to debt with a wider range of maturities, and the pricing of those bonds, improved somewhat during the second quarter of 2009. Accordingly, the Bank has gradually increased its issuance of callable and longer-dated bonds during recent months. The weighted-average maturity of the Bank’s outstanding consolidated obligations extended somewhat during the second quarter of 2009; at June 30, 2009, 65.4 percent of the Bank’s consolidated obligations were due in one year or less, as compared to 74.9 percent at December 31, 2008.

The following table is a summary of the Bank’s consolidated obligation bonds and discount notes outstanding at June 30, 2009 and December 31, 2008, by contractual maturity (at par value):

CONSOLIDATED OBLIGATION BONDS AND DISCOUNT NOTES BY CONTRACTUAL MATURITY
(dollars in millions)


	June 30, 2009					December 31, 2008
Contractual Maturity	Amount		Percentage			Amount		Percentage
Due in one year or less	$	43,929		65.4	%	$	54,610		74.9	%
Due after one year through two years		15,478		23.1			9,784		13.4
Due after two years through three years		2,799		4.2			2,239		3.1
Due after three years through four years		1,463		2.2			1,689		2.3
Due after four years through five years		1,087		1.6			944		1.3
Thereafter		2,353		3.5			3,665		5.0


Total	$	67,109		100.0	%	$	72,931		100.0	%

Demand and term deposits were $1.2 billion and $1.4 billion at June 30, 2009 and December 31, 2008, respectively. The size of the Bank’s deposit base varies as market factors change, including the attractiveness of the Bank’s deposit pricing relative to the rates available to members on alternative money market investments, members’ investment preferences with respect to the maturity of their investments, and member liquidity.

Capital Stock

The Bank’s outstanding capital stock (for financial reporting purposes) was approximately $2.828 billion and $3.224 billion at June 30, 2009 and December 31, 2008, respectively. The Bank’s average outstanding capital stock (for financial reporting purposes) decreased from $2.911 billion for the year ended December 31, 2008 to $2.885 billion for the six months ended June 30, 2009. The decrease in outstanding capital stock from December 31, 2008 to June 30, 2009 was attributable primarily to the decline in members’ activity-based investment requirements resulting from the decline in outstanding advances balances.

Members are required to maintain an investment in Class B stock equal to the sum of a membership investment requirement and an activity-based investment requirement. There were no changes in the investment requirement percentages during the six months ended June 30, 2009.

Periodically, the Bank repurchases a portion of members’ excess capital stock. Excess stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum investment requirement. The portion of members’ excess capital stock subject to repurchase is known as surplus stock. The Bank generally repurchases surplus stock on the last business day of the month following the end of each calendar quarter (e.g., January 31, April 30, July 31 and October 31). For the repurchases that occurred on January 30, 2009, April 30, 2009 and July 31, 2009, surplus stock was defined as the amount of stock held by a member in excess of 120 percent of the member’s minimum investment requirement. The Bank’s practice has been that a member’s surplus stock will not be repurchased if the amount of that member’s surplus stock is $250,000 or less. From time to time, the Bank may modify the definition of surplus stock or the timing and/or frequency of surplus stock repurchases.

The following table sets forth the repurchases of surplus stock that have occurred since December 31, 2008.

REPURCHASES OF SURPLUS STOCK
(dollars in thousands)


					Amount Classified as
					Mandatorily Redeemable
Date of Repurchase	Shares		Amount of		Capital Stock at Date of
by the Bank	Repurchased		Repurchase		Repurchase
January 30, 2009		1,683,239	$	168,324	$	7,602
April 30, 2009		1,016,045		101,605		—
July 31, 2009		1,368,402		136,840		—

Mandatorily redeemable capital stock outstanding at June 30, 2009 and December 31, 2008 was $78.8 million and $90.4 million, respectively. The following table presents mandatorily redeemable capital stock outstanding, by reason for classification as a liability, as of June 30, 2009 and December 31, 2008.

HOLDINGS OF MANDATORILY REDEEMABLE CAPITAL STOCK
(dollars in thousands)


	June 30, 2009				December 31, 2008
	Number of				Number of
Capital Stock Status	Institutions		Amount		Institutions		Amount
Held by the FDIC, as receiver of Franklin Bank, S.S.B.		1	$	57,529		1	$	57,432
Held by Capital One, National Association		1		13,380		1		26,350
Held by Washington Mutual Bank		—		—		1		103
Subject to withdrawal notice		7		1,819		5		1,198
Held by other non-members		11		6,078		10		5,270


Total		20	$	78,806		18	$	90,353

Although mandatorily redeemable capital stock is excluded from capital (equity) for financial reporting purposes, such stock is considered capital for regulatory purposes (see the section below entitled “Risk-Based Capital Rules and Other Capital Requirements” for further information). Total outstanding capital stock for regulatory purposes (i.e., capital stock classified as equity for financial reporting purposes plus mandatorily redeemable capital stock) decreased from $3.314 billion at the end of 2008 to $2.907 billion at June 30, 2009.

At June 30, 2009 and December 31, 2008, the Bank’s ten largest shareholders held $1.6 billion and $1.9 billion, respectively, of capital stock (including mandatorily redeemable capital stock), which represented 55.3 percent and 57.4 percent, respectively, of the Bank’s total outstanding capital stock (including mandatorily redeemable capital stock) as of those dates. The following table presents the Bank’s ten largest shareholders as of June 30, 2009.

TEN LARGEST SHAREHOLDERS AS OF JUNE 30, 2009
(Dollars in thousands)


					Percent of
			Capital		Total
Name	City	State	Stock		Capital Stock
Wachovia Bank, FSB⁽¹⁾	Houston	TX	$	828,381		28.5	%
Comerica Bank	Dallas	TX		353,157		12.2
Guaranty Bank	Austin	TX		102,723		3.5
International Bank of Commerce	Laredo	TX		100,203		3.4
FDIC, as receiver of Franklin Bank, S.S.B.	Houston	TX		57,529		2.0
Southside Bank	Tyler	TX		39,476		1.4
BancorpSouth Bank	Tupelo	MS		33,496		1.2
Texas Capital Bank, N.A.	Dallas	TX		31,789		1.1
Bank of Texas, N.A.	Dallas	TX		30,308		1.0
Arvest Bank	Rogers	AR		30,204		1.0


			$	1,607,266		55.3	%


⁽¹⁾		Previously known as World Savings Bank, FSB (Texas)

As of June 30, 2009, all of the stock held by the FDIC, as receiver of Franklin Bank, S.S.B., was classified as mandatorily redeemable capital stock (a liability) in the statement of condition. The stock held by the other nine institutions shown in the table above was classified as capital in the statement of condition at June 30, 2009. In July 2009, the Bank repurchased all of the capital stock held by the FDIC, as receiver of Franklin Bank, S.S.B.

At June 30, 2009, the Bank’s excess stock totaled $401.4 million, which represented 0.6 percent of the Bank’s total assets as of that date.

Retained Earnings and Dividends

During the six months ended June 30, 2009, the Bank’s retained earnings increased by $85.4 million, from $216.0 million to $301.4 million. During this same period, the Bank paid dividends on capital stock totaling $5.4 million, which represented an annualized dividend rate of 0.34 percent. The Bank’s first and second quarter 2009 dividend rates approximated the average effective federal funds rates for the quarters ended December 31, 2008 and March 31, 2009, respectively. In addition, the Bank paid dividends totaling $98,000 on capital stock classified as mandatorily redeemable capital stock. These dividends, which were also paid at an annualized rate of 0.34 percent, are treated as interest expense for financial reporting purposes. The Bank pays dividends on all outstanding capital stock at the same rate regardless of the accounting classification of the stock. The first quarter dividend, applied to average capital stock held during the period from October 1, 2008 through December 31, 2008, was paid on March 31, 2009. The second quarter dividend, applied to average capital stock held during the period from January 1, 2009 through March 31, 2009, was paid on June 30, 2009.

The Bank has had a long-standing practice of benchmarking the dividend rate that it pays on capital stock to the average effective federal funds rate. Consistent with that practice, the Bank manages its balance sheet so that its returns (exclusive of gains on the sales of investment securities and the retirement or transfer of debt, if any, and fair value adjustments required by SFAS 133) generally track short-term interest rates.

While there can be no assurances, taking into consideration its current earnings expectations and anticipated market conditions, the Bank currently expects to pay dividends for the remainder of 2009 at the reference average effective federal funds rate for the applicable dividend periods (i.e., for each calendar quarter during this period, the average effective federal funds rate for the preceding quarter). Consistent with its long-standing practice, the Bank expects to pay these dividends in the form of capital stock with any fractional shares paid in cash.

Derivatives and Hedging Activities

The Bank enters into interest rate swap, cap and forward agreements (collectively, interest rate exchange agreements) with highly rated financial institutions to manage its exposure to changes in interest rates and/or to adjust the effective maturity, repricing index and/or frequency or option characteristics of financial instruments. This use of derivatives is integral to the Bank’s financial management strategy, and the impact of these interest rate exchange agreements permeates the Bank’s financial statements. For additional discussion, see “Item 1. Financial Statements” (specifically, Note 8 beginning on page 20 of this report). As a result of using interest rate exchange agreements extensively to fulfill its role as a financial intermediary, the Bank has a large notional amount of interest rate exchange agreements relative to its size. As of June 30, 2009 and December 31, 2008, the Bank’s notional balance of interest rate exchange agreements was $58.0 billion and $70.1 billion, respectively, while its total assets were $72.1 billion and $78.9 billion, respectively.

The following table provides the notional balances of the Bank’s derivative instruments, by balance sheet category, as of June 30, 2009 and December 31, 2008, and the net fair value changes recorded in earnings for each of those categories during the three and six months ended June 30, 2009 and 2008.

COMPOSITION OF DERIVATIVES


					Net Change in Fair Value ⁽⁸⁾						Net Change in Fair Value ⁽⁸⁾
	Total Notional at				Three Months Ended June 30,						Six Months Ended June 30,
	June 30, 2009		December 31, 2008		2009			2008			2009			2008
	(In millions of dollars)				(In thousands of dollars)						(In thousands of dollars)
Advances
Short-cut method⁽¹⁾	$	10,448	$	9,959	$	—		$	—		$	—		$	—
Long-haul method⁽²⁾		1,026		1,164		(205	)		(54	)		(1,590	)		179
Economic hedges⁽³⁾		25		5		26			261			7			215

Total		11,499		11,128		(179	)		207			(1,583	)		394

Investments
Long-haul method⁽²⁾		3		40		(228	)		527			(102	)		890
Economic hedges⁽⁴⁾		—		—		—			75			—			(10	)

Total		3		40		(228	)		602			(102	)		880

Consolidated obligation bonds
Short-cut method⁽¹⁾		95		95		—			—			—			—
Long-haul method⁽²⁾		19,995		37,795		3,369			5,170			58,902			6,099
Economic hedges⁽³⁾		8,045		110		16,759			(766	)		15,922			74

Total		28,135		38,000		20,128			4,404			74,824			6,173

Consolidated obligation discount notes
Economic hedges⁽³⁾		5,342		5,270		5,207			(8,909	)		(3,761	)		(2,756	)

Other economic hedges
Interest rate caps⁽⁵⁾		1,750		3,500		8,246			8,111			8,621			6,515
Basis swaps⁽⁶⁾		11,200		12,200		(26,737	)		3,187			9,367			3,187
Forward rate agreement ⁽⁷⁾		—		—		223			—			—			—
Member swaps (including offsetting swaps)		24		7		22			—			32			—

Total		12,974		15,707		(18,246	)		11,298			18,020			9,702


Total derivatives	$	57,953	$	70,145	$	6,682		$	7,602		$	87,398		$	14,393


Total short-cut method	$	10,543	$	10,054	$	—		$	—		$	—		$	—
Total long-haul method		21,024		38,999		2,936			5,643			57,210			7,168
Total economic hedges		26,386		21,092		3,746			1,959			30,188			7,225


Total derivatives	$	57,953	$	70,145	$	6,682		$	7,602		$	87,398		$	14,393


⁽¹⁾		The short-cut method allows the assumption of no ineffectiveness in the hedging relationship.

⁽²⁾		The long-haul method requires the hedge and hedged item to be marked to fair value independently.

⁽³⁾		Interest rate derivatives that are matched to advances or consolidated obligations, but that either do not qualify for hedge accounting under SFAS 133 or were not designated in a SFAS 133 hedging relationship.

⁽⁴⁾		Interest rate derivatives that were matched to investment securities designated as available-for-sale, but that did not qualify for hedge accounting under SFAS 133.

⁽⁵⁾		Interest rate derivatives that hedge identified portfolio risks, but that do not qualify for hedge accounting under SFAS 133. The Bank’s interest rate caps hedge embedded caps in floating rate CMOs designated as held-to-maturity.

⁽⁶⁾		At June 30, 2009, the Bank held $11.2 billion (notional) of interest rate basis swaps that were entered into to reduce the Bank’s exposure to changes in spreads between one-month and three-month LIBOR; $1.0 billion, $3.0 billion, $1.0 billion, $5.2 billion, and $1.0 billion of these agreements expire in the first quarter of 2011, the second quarter of 2013, the second quarter of 2014, the fourth quarter of 2018, and the first quarter of 2024, respectively.

⁽⁷⁾		The Bank’s forward rate agreement hedged exposure to reset risk and expired in the second quarter of 2009.

⁽⁸⁾		Represents the difference in fair value adjustments for the derivatives and their hedged items. In cases involving economic hedges, the net change in fair value reflected in this table represents a one-sided mark, meaning that the net change in fair value represents the change in fair value of the derivative only. Gains and losses in the form of net interest payments on economic hedge derivatives are excluded from the amounts reflected above.

By entering into interest rate exchange agreements with highly rated financial institutions (with which it has in place master swap agreements and credit support addendums), the Bank generally exchanges a defined market risk for the risk that the counterparty will not be able to fulfill its obligation in the future. The Bank manages this credit risk by spreading its transactions among as many highly rated counterparties as is practicable, by entering into collateral exchange agreements with all counterparties that include minimum collateral thresholds, and by monitoring its exposure to each counterparty at least monthly and as often as daily. In addition, all of the Bank’s collateral exchange agreements include master netting arrangements whereby the fair values of all interest rate derivatives (including accrued interest receivables and payables) with each counterparty are offset for purposes of measuring credit exposure. The collateral exchange agreements require the delivery of collateral consisting of cash or very liquid, highly rated securities (generally consisting of U.S. government guaranteed or agency debt securities) if credit risk exposures rise above the minimum thresholds.

The notional amount of interest rate exchange agreements does not reflect the Bank’s credit risk exposure, which is much less than the notional amount. The maximum credit risk exposure is the estimated cost, on a present value

basis, of replacing at current market rates all interest rate exchange agreements with a counterparty with which the Bank is in a net gain position, if the counterparty were to default. Maximum credit risk exposure, as defined in the preceding sentence, does not consider the existence of any collateral held by the Bank. The Bank’s collateral exchange agreements with its counterparties generally establish maximum unsecured credit exposure thresholds (typically ranging from $100,000 to $500,000) that one party may have to the other. Once the counterparties agree to the valuations of the interest rate exchange agreements, and it is determined that the unsecured credit exposure exceeds the threshold, then, upon a request made by the unsecured counterparty, the party that has the unsecured obligation to the counterparty bearing the risk of the unsecured credit exposure generally must deliver sufficient collateral to reduce the unsecured credit exposure to zero. The following table provides information regarding the Bank’s derivative counterparty credit exposure as of June 30, 2009 and December 31, 2008.

DERIVATIVES COUNTERPARTY CREDIT EXPOSURE
(Dollars in millions)


						Maximum		Cash		Cash
Credit	Number of		Notional			Credit		Collateral		Collateral		Net Exposure
Rating⁽¹⁾	Counterparties		Principal⁽²⁾			Exposure		Held		Due⁽³⁾		After Collateral
June 30, 2009
Aaa		1	$	275.0		$	—	$	—	$	—	$	—
Aa⁽⁴⁾		11		48,221.6			222.8		206.4		15.0		1.4
A⁽⁵⁾		4		9,444.0			21.5		17.1		4.4		—
Excess collateral		—		—			—		2.3		—		—

Total		16	$	57,940.6	⁽⁶⁾	$	244.3	$	225.8	$	19.4	$	1.4


December 31, 2008
Aaa		3	$	17,099.2		$	35.2	$	27.3	$	7.9	$	—
Aa⁽⁴⁾		9		43,239.8			341.9		288.5		52.4		1.0
A⁽⁵⁾		4		9,802.8			27.8		19.1		8.7		—

Total		16	$	70,141.8	⁽⁶⁾	$	404.9	$	334.9	$	69.0	$	1.0


⁽¹⁾		Credit ratings shown in the table are provided by Moody’s and are as of June 30, 2009 and December 31, 2008, respectively.

⁽²⁾		Includes amounts that had not settled as of June 30, 2009 and December 31, 2008.

⁽³⁾		Amount of collateral to which the Bank had contractual rights under counterparty credit agreements based on June 30, 2009 and December 31, 2008 credit exposures. Cash collateral totaling $19.4 million and $68.5 million was delivered under these agreements in early July 2009 and early January 2009, respectively.

⁽⁴⁾		The figures for Aa-rated counterparties as of June 30, 2009 and December 31, 2008 include transactions with a counterparty that is affiliated with a member institution. Transactions with this counterparty had an aggregate notional principal of $94 million and $128 million as of June 30, 2009 and December 31, 2008, respectively. These transactions represented a credit exposure of $1.9 million and $3.7 million to the Bank as of June 30, 2009 and December 31, 2008, respectively.

⁽⁵⁾		The figures for A-rated counterparties as of June 30, 2009 and December 31, 2008 include transactions with one counterparty that is affiliated with a non-member shareholder of the Bank. Transactions with that counterparty had an aggregate notional principal of $1.5 billion and $1.4 billion as of June 30, 2009 and December 31, 2008, respectively, and did not represent a credit exposure to the Bank at either of those dates.

⁽⁶⁾		Excludes $12.1 million and $3.5 million (notional amounts) of interest rate derivatives with members at June 30, 2009 and December 31, 2008, respectively. This product offering is discussed in the paragraph below.

In addition to the activities described above, the Bank offers interest rate swaps, caps and floors to its members to assist them in meeting their risk management objectives. In derivative transactions with its members, the Bank acts as an intermediary by entering into an interest rate exchange agreement with the member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s derivative counterparties discussed above. When entering into interest rate exchange agreements with its members, the Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. Eligible collateral for derivative transactions consists of collateral that is eligible to secure advances and other obligations under the member’s Advances and Security Agreement with the Bank.

Market Value of Equity

The ratio of the Bank’s estimated market value of equity to its book value of equity was 86 percent at June 30, 2009. In comparison, this ratio was 75 percent as of December 31, 2008. The improvement in the Bank’s market value to book value of equity ratio was due in large part to higher values for its agency and, to a lesser extent, non-agency MBS. The increase in fair value of these securities was due primarily to reduced liquidity premiums in the MBS market. For additional discussion, see “Part I / Item 3 — Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.”

Results of Operations

Net Income

Net income for the three months ended June 30, 2009 and 2008 was $25.7 million and $40.6 million, respectively. The Bank’s net income for the three months ended June 30, 2009 represented an annualized return on average capital stock (ROCS) of 3.66 percent, which was 348 basis points above the average effective federal funds rate for the quarter. In comparison, the Bank’s ROCS was 5.71 percent for the three months ended June 30, 2008, which exceeded the average effective federal funds rate for that quarter by 362 basis points. Net income for the six months ended June 30, 2009 and 2008 was $90.9 million and $71.8 million, respectively. The Bank’s net income for the six months ended June 30, 2009 represented an ROCS of 6.35 percent, which was 617 basis points above the average effective federal funds rate for the period. In comparison, the Bank’s ROCS was 5.43 percent for the six months ended June 30, 2008, which was 280 basis points above the average effective federal funds rate for that period. To derive the Bank’s ROCS, net income is divided by average capital stock outstanding excluding stock that is classified as mandatorily redeemable capital stock. The factors contributing to the changes in ROCS compared to the average effective federal funds rate are discussed below.

While the Bank is exempt from all Federal, State and local taxation (except for real property taxes), it is obligated to set aside amounts for its Affordable Housing Program (“AHP”) and generally to make quarterly payments to the Resolution Funding Corporation (“REFCORP”). Assessments for AHP and REFCORP, which are more fully described below, equate to a minimum 26.5 percent effective assessment rate for the Bank. Because interest expense on mandatorily redeemable capital stock is not deductible for purposes of computing the Bank’s AHP assessment, the effective rate may exceed 26.5 percent. During the three months ended June 30, 2009 and 2008, the effective rates were 26.5 percent and 26.6 percent, respectively. During these periods, the combined AHP and REFCORP assessments were $9.3 million and $14.7 million, respectively. During the six months ended June 30, 2009 and 2008, the effective rates were 26.5 percent and 26.6 percent, respectively, and the combined AHP and REFCORP assessments were $32.8 million and $26.0 million, respectively.

Income Before Assessments

During the three months ended June 30, 2009 and 2008, the Bank’s income before assessments was $35.0 million and $55.2 million, respectively. The $20.2 million decrease in income before assessments from period to period was attributable to a $37.6 million decrease in net interest income and a $1.7 million increase in other expense, offset by a $19.1 million increase in other income. The increase in other income was due primarily to a $24.1 million increase in net gains on derivatives and hedging activities.

The Bank’s income before assessments was $123.7 million and $97.9 million for the six months ended June 30, 2009 and 2008, respectively. This $25.8 million increase in income before assessments from period to period was attributable to a $136.2 million increase in other income, offset by a $107.9 million decrease in net interest income and a $2.5 million increase in other expense. The increase in other income was due largely to a $146.0 million increase in net gains on derivatives and hedging activities, partially offset by a $7.4 million decrease in debt extinguishment gains.

The components of income before assessments (net interest income, other income and other expense) are discussed in more detail in the following sections.

Net Interest Income (Expense)

For the three months ended June 30, 2009 and 2008, the Bank’s net interest income was $14.8 million and $52.4 million, respectively. The Bank’s net interest income (expense) was ($8.1 million) and $99.8 million for the six months ended June 30, 2009 and 2008, respectively. As described further below, the Bank’s net interest income does not include net interest payments on economic hedge derivatives (including, but not limited to, interest rate basis swaps), which contributed significantly to the Bank’s overall income before assessments for the first half of 2009. The decreases in net interest income were due in large part to lower short-term interest rates (the average effective federal funds rate declined from 2.09 percent and 2.63 percent for the three and six months ended June 30, 2008, respectively, to 0.18 percent for both the three and six months ended June 30, 2009) and to the much wider prevailing spread between one- and three-month LIBOR. As further discussed below, the Bank utilizes interest rate basis swaps to mitigate the impact of these wider spreads. Net interest income was also impacted (albeit to a far lesser extent) by changes in the average balances of earning assets from $73.3 billion and $68.9 billion for the three and six months ended June 30, 2008 to $71.4 billion and $72.8 billion for the corresponding periods in 2009.

For the three months ended June 30, 2009 and 2008, the Bank’s net interest margin was 8 basis points and 28 basis points, respectively. The Bank’s net interest margin was (3) basis points and 29 basis points for the six months ended June 30, 2009 and 2008, respectively. Net interest margin, or net interest income as a percent of average earning assets, is a function of net interest spread and the rates of return on assets funded by the investment of the Bank’s capital. Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Due to lower short-term interest rates in 2009, the contribution of earnings from the Bank’s invested capital to the net interest margin (the impact of non-interest bearing funds) decreased from 12 basis points and 15 basis points for the three and six months ended June 30, 2008, respectively, to 7 basis points for both of the comparable periods in 2009. In addition, the Bank’s net interest spread decreased from 16 basis points and 14 basis points for the three and six months ended June 30, 2008, respectively, to 1 basis point and (10) basis points during the three and six months ended June 30, 2009, respectively.

As noted above, the Bank’s net interest income excludes net interest payments on economic hedge derivatives. During the six months ended June 30, 2009, the Bank used approximately $12.4 billion (average notional balance) of interest rate basis swaps to hedge the risk of changes in spreads between one-month and three-month LIBOR and approximately $6.1 billion (average notional balance) of fixed-for-floating interest rate swaps to hedge some of its longer-term discount notes. During the comparable period in 2008, the Bank was a party to approximately $1.7 billion (average notional balance) of interest rate basis swaps and it used approximately $5.1 billion (average notional balance) of fixed-for-floating interest rate swaps to hedge some of its longer-term discount notes. These swaps are accounted for as economic hedges. Net interest income associated with economic hedge derivatives is recorded in other income in the statements of income and therefore excluded from net interest income, net interest margin and net interest spread. Net interest income on the Bank’s economic hedge derivatives totaled $27.2 million and $73.3 million for the three and six months ended June 30, 2009, respectively, compared to $2.2 million and $0.3 million for the corresponding periods in 2008. Had this interest income on economic hedge derivatives been included in net interest income, the Bank’s net interest margin would have been 23 basis points and 18 basis points for the three and six months ended June 30, 2009, respectively, compared to 30 basis points and 29 basis points for the comparable periods in 2008 and its net interest spread would have been 17 basis points and 11 basis points for the three and six months ended June 30, 2009, respectively, compared to 18 basis points and 14 basis points for the three and six months ended June 30, 2008, respectively.

The Bank’s net interest spread for the first quarter of 2009 (and therefore its net interest spread for the six months ended June 30, 2009) was adversely impacted by actions the Bank took in late 2008 to ensure its ability to provide liquidity to its members during a period of unusual market disruption. At the height of the credit market disruptions in the early part of the fourth quarter of 2008, and in order to ensure that the Bank would have sufficient liquidity on hand to fund member advances throughout the year-end period, the Bank replaced short-term liabilities with new issues of debt with maturities that extended into 2009. As yields subsequently declined sharply on the Bank’s short-term assets, including overnight federal funds sold and short-term advances to members, this debt was carried at a negative spread. The negative spread associated with the investment of the remaining portion of this debt in low-yielding short-term assets was a significant contributor to the Bank’s negative net interest income for the six months ended June 30, 2009, most of which occurred early in the first quarter. The negative impact of this debt on the Bank’s net interest income, net interest margin and net interest spread was minimal in the second quarter of 2009, as much of the debt issued in late 2008 had been replaced with lower cost debt issued in the first quarter of 2009.

The following table presents average balance sheet amounts together with the total dollar amounts of interest income and expense and the weighted average interest rates of major earning asset categories and the funding sources for those earning assets for the three months ended June 30, 2009 and 2008.

YIELD AND SPREAD ANALYSIS
(Dollars in millions)


	Three Months Ended June 30,
	2009								2008
	Average			Interest Income/		Average			Average			Interest Income/		Average
	Balance			Expense^(d)		Rate^(a)(d)			Balance			Expense^(d)		Rate^(a)(d)
Assets
Interest-bearing deposits ^(b)	$	631		$	—		0.15	%	$	132		$	1		2.39	%
Federal funds sold ^(c)		3,485			1		0.16	%		4,670			25		2.13	%
Investments
Trading		3			—		—			4			—		—
Available-for-sale^(e)		8			—		0.60	%		344			2		2.57	%
Held-to-maturity^(e)		11,716			38		1.29	%		9,473			80		3.39	%
Advances ^(f)		55,288			189		1.37	%		58,320			416		2.86	%
Mortgage loans held for portfolio		301			4		5.47	%		360			5		5.59	%

Total earning assets		71,432			232		1.30	%		73,303			529		2.89	%
Cash and due from banks		19								92
Other assets		405								355
Derivatives netting adjustment ^(b)		(473	)							(258	)
Fair value adjustment on available-for-sale securities ^(e)		—								(3	)
Adjustment for non-credit portion of other-than-temporary impairments on held-to-maturity securities^(e)		(26	)							—

Total assets	$	71,357			232		1.30	%	$	73,489			529		2.88	%


Liabilities and Capital
Interest-bearing deposits^(b)	$	1,425			—		0.09	%	$	3,197			16		1.97	%
Consolidated obligations
Bonds		48,559			149		1.23	%		47,502			341		2.88	%
Discount notes		17,431			68		1.57	%		19,213			120		2.49	%
Mandatorily redeemable capital stock and other borrowings		80			—		0.18	%		83			—		2.13	%

Total interest-bearing liabilities		67,495			217		1.29	%		69,995			477		2.73	%
Other liabilities		1,244								657
Derivatives netting adjustment ^(b)		(473	)							(258	)

Total liabilities		68,266			217		1.27	%		70,394			477		2.71	%

Total capital		3,091								3,095

Total liabilities and capital	$	71,357					1.22	%	$	73,489					2.60	%



Net interest income				$	15							$	52

Net interest margin							0.08	%							0.28	%
Net interest spread							0.01	%							0.16	%

Impact of non-interest bearing funds							0.07	%							0.12	%


^(a)		Percentages are annualized figures. Amounts used to calculate average rates are based on whole dollars. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.

^(b)		In accordance with FSP FIN 39-1, the Bank offsets the fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. The average balances of interest-bearing deposit assets for the three months ended June 30, 2009 and 2008 in the table above include $188 million and $131 million, respectively, which are classified in derivative assets/liabilities on the statements of condition. In addition, interest-bearing deposit liabilities for the three months ended June 30, 2009 and 2008 in the table above include $285 million and $127 million, respectively, which are classified in derivative assets/liabilities on the statements of condition.

^(c)		Includes overnight federal funds sold to other FHLBanks.

^(d)		Interest income/expense and average rates include the effects of interest rate exchange agreements to the extent such agreements qualify for SFAS 133 fair value hedge accounting. If the agreements do not qualify for hedge accounting or were not designated in a SFAS 133 hedging relationship, the net interest income/expense associated with such agreements is recorded in other income (loss) in the statements of income and therefore excluded from the Yield and Spread Analysis. Net interest income on economic hedge derivatives totaled $27.2 million and $2.2 million for the three months ended June 30, 2009 and 2008, respectively. The net interest income on economic hedge derivatives is presented below in the section entitled “Other Income (Loss).”

^(e)		Average balances for available-for-sale and held-to-maturity securities are calculated based upon amortized cost.

^(f)		Interest income and average rates include prepayment fees on advances.

YIELD AND SPREAD ANALYSIS
(Dollars in millions)


	Six Months Ended June 30,
	2009									2008
				Interest									Interest
	Average			Income/			Average			Average			Income/		Average
	Balance			Expense^(d)			Rate^(a)(d)			Balance			Expense^(d)		Rate^(a)(d)
Assets
Interest-bearing deposits ^(b)	$	515		$	—			0.18	%	$	141		$	2		2.95	%
Federal funds sold ^(c)		3,584			3			0.16	%		5,255			72		2.76	%
Investments
Trading		3			—			—			3			—		—
Available-for-sale^(e)		55			—			1.69	%		369			6		3.02	%
Held-to-maturity^(e)		11,593			79			1.36	%		9,058			172		3.79	%
Advances ^(f)		56,788			446			1.57	%		53,671			905		3.37	%
Mortgage loans held for portfolio		310			8			5.51	%		367			10		5.59	%

Total earning assets		72,848			536			1.47	%		68,864			1,167		3.39	%
Cash and due from banks		20									101
Other assets		465									374
Derivatives netting adjustment ^(b)		(527	)								(291	)
Fair value adjustment on available-for-sale securities ^(e)		—									(3	)
Adjustment for non-credit portion of other-than-temporary impairments on held-to-maturity securities^(e)		(13	)								—

Total assets	$	72,793			536			1.47	%	$	69,045			1,167		3.38	%


Liabilities and Capital
Interest-bearing deposits^(b)	$	1,571			1			0.14	%	$	3,331			42		2.54	%
Consolidated obligations
Bonds		48,794			376			1.54	%		42,561			731		3.43	%
Discount notes		18,755			167			1.79	%		19,761			293		2.96	%
Mandatorily redeemable capital stock and other borrowings		79			—			0.15	%		78			1		2.62	%

Total interest-bearing liabilities		69,199			544			1.57	%		65,731			1,067		3.25	%
Other liabilities		980									715
Derivatives netting adjustment ^(b)		(527	)								(291	)

Total liabilities		69,652			544			1.56	%		66,155			1,067		3.22	%

Total capital		3,141									2,890

Total liabilities and capital	$	72,793						1.50	%	$	69,045					3.09	%



Net interest income (expense)				$	(8	)							$	100

Net interest margin								(0.03	%)							0.29	%
Net interest spread								(0.10	%)							0.14	%

Impact of non-interest bearing funds								0.07	%							0.15	%


^(a)		Percentages are annualized figures. Amounts used to calculate average rates are based on whole dollars. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.

^(b)		In accordance with FSP FIN 39-1, the Bank offsets the fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. The average balances of interest-bearing deposit assets for the six months ended June 30, 2009 and 2008 in the table above include $199 million and $140 million, respectively, which are classified in derivative assets/liabilities on the statements of condition. In addition, interest-bearing deposit liabilities for the six months ended June 30, 2009 and 2008 in the table above include $330 million and $151 million, respectively, which are classified in derivative assets/liabilities on the statements of condition.

^(c)		Includes overnight federal funds sold to other FHLBanks.

^(d)		Interest income/expense and average rates include the effects of interest rate exchange agreements to the extent such agreements qualify for SFAS 133 fair value hedge accounting. If the agreements do not qualify for hedge accounting or were not designated in a SFAS 133 hedging relationship, the net interest income/expense associated with such agreements is recorded in other income (loss) in the statements of income and therefore excluded from the Yield and Spread Analysis. Net interest income on economic hedge derivatives totaled $73.3 million and $0.3 million for the six months ended June 30, 2009 and 2008, respectively. The net interest income on economic hedge derivatives is presented below in the section entitled “Other Income (Loss).”

^(e)		Average balances for available-for-sale and held-to-maturity securities are calculated based upon amortized cost.

^(f)		Interest income and average rates include prepayment fees on advances.

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 the three-month and six-month periods in 2009 and 2008 and excludes net interest income (expense) on economic hedge derivatives, as discussed above. Changes in interest income and interest expense that cannot be attributed to either volume or rate have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.

RATE AND VOLUME ANALYSIS
(In millions of dollars)


	Three Months Ended									Six Months Ended
	June 30, 2009 vs. 2008									June 30, 2009 vs. 2008
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Interest-bearing deposits	$	1		$	(2	)	$	(1	)	$	1		$	(3	)	$	(2	)
Federal funds sold		(5	)		(19	)		(24	)		(17	)		(52	)		(69	)
Investments
Trading		—			—			—			—			—			—
Available-for-sale		(1	)		(1	)		(2	)		(4	)		(2	)		(6	)
Held-to-maturity		16			(58	)		(42	)		38			(131	)		(93	)
Advances		(20	)		(207	)		(227	)		51			(510	)		(459	)
Mortgage loans held for portfolio		(1	)		—			(1	)		(2)			—			(2	)

Total interest income		(10	)		(287	)		(297	)		67			(698	)		(631	)

Interest expense:
Interest-bearing deposits		(6	)		(10	)		(16	)		(15	)		(26	)		(41	)
Consolidated obligations:
Bonds		8			(200	)		(192	)		95			(450	)		(355	)
Discount notes		(10	)		(42	)		(52	)		(14	)		(112	)		(126	)
Mandatorily redeemable capital stock and other borrowings		—			—			—			—			(1	)		(1	)

Total interest expense		(8	)		(252	)		(260	)		66			(589	)		(523	)

Changes in net interest income	$	(2	)	$	(35	)	$	(37	)	$	1		$	(109	)	$	(108	)

Other Income (Loss)

The following table presents the various components of other income (loss) for the three and six months ended June 30, 2009 and 2008.

OTHER INCOME (LOSS)
(In thousands of dollars)


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Net gains (losses) on trading securities	$	257		$	—		$	178		$	(133	)

Net interest expense associated with economic hedge derivatives related to available-for-sale securities		—			(42	)		—			(63	)
Net interest expense associated with economic hedge derivatives related to consolidated obligation Federal funds floater bonds		(59	)		—			(634	)		—
Net interest income associated with economic hedge derivatives related to other consolidated obligation bonds		—			666			—			701
Net interest income (expense) associated with economic hedge derivatives related to consolidated obligation discount notes		8,770			283			17,003			(1,487	)
Net interest income associated with stand-alone economic hedge derivatives (basisswaps)		18,743			1,563			57,287			1,563
Net interest expense associated with stand-alone economic hedge derivatives (forward rate agreement)		(220	)		—			(304	)		—
Net interest expense associated with economic hedge derivatives related to advances		(13	)		(246	)		(16	)		(377	)

Total net interest income associated with economic hedge derivatives		27,221			2,224			73,336			337


Gains (losses) related to economic hedge derivatives
Gains (losses) related to stand-alone derivatives (basis swaps)		(26,737	)		3,187			9,367			3,187
Gains related to stand-alone derivatives (forward rate agreement)		223			—			—			—
Gains on Federal funds floater swaps		16,759			—			15,922			—
Gains on interest rate caps related to held-to-maturity securities		8,246			8,111			8,621			6,515
Gains (losses) on discount note swaps		5,207			(8,909	)		(3,761	)		(2,756	)
Net gains on member/offsetting swaps		22			—			32			—
Gains (losses) related to other economic hedge derivatives (advance / AFS⁽¹⁾/ CO⁽²⁾swaps)		26			(430	)		7			279

Total fair value gains related to economic hedge derivatives		3,746			1,959			30,188			7,225


Gains (losses) related to SFAS 133 fair value hedge ineffectiveness
Net gains (losses) on advances and associated hedges		(205	)		(54	)		(1,590	)		179
Net gains on debt and associated hedges		3,369			5,170			58,902			6,099
Net gains (losses) on AFS⁽¹⁾ securities and associated hedges		(228	)		527			(102	)		890

Total SFAS 133 fair value hedge ineffectiveness		2,936			5,643			57,210			7,168


Credit component of other-than-temporary impairment losses on held-to-maturity securities		(654	)		—			(671	)		—
Gains on early extinguishment of debt		176			1,910			176			7,566
Realized gains on sales of AFS⁽¹⁾ securities		—			2,794			843			2,794
Service fees		854			1,016			1,482			1,871
Other, net		1,565			1,468			3,241			2,917

Total other		1,941			7,188			5,071			15,148

Total other income	$	36,101		$	17,014		$	165,983		$	29,745


⁽¹⁾		Available-for-sale

⁽²⁾		Consolidated obligations

The Bank’s trading securities consisted solely of mutual fund investments associated with the Bank’s non-qualified deferred compensation plans. The value of these investments increased during the three and six months ended June 30, 2009 due largely to increasing stock prices.

The Bank hedges some of its longer-term consolidated obligation discount notes using fixed-for-floating interest rate swaps. Net interest income (expense) associated with these interest rate swaps totaled $8.8 million and $0.3 million during the three months ended June 30, 2009 and 2008, respectively, and $17.0 million and ($1.5 million) during the six months ended June 30, 2009 and 2008, respectively. As stand-alone derivatives, the changes in the fair values of the Bank’s discount note swaps are recorded in earnings with no offsetting changes in the fair values of the hedged items (i.e., the consolidated obligation discount notes) and therefore can be a source of volatility in the Bank’s earnings. During the three months ended June 30, 2009 and 2008, the recorded fair value gains (losses) in the Bank’s discount note swaps were $5.2 million and ($8.9 million), respectively. The recorded fair value losses in the Bank’s discount note swaps were $3.8 million and $2.8 million during the six months ended June 30, 2009 and 2008, respectively. At June 30, 2009, the carrying values of the Bank’s stand-alone discount note swaps totaled $4.0 million, excluding net accrued interest receivable.

From time to time, the Bank enters into interest rate basis swaps to reduce its exposure to changing spreads between one-month and three-month LIBOR. As of June 30, 2009, the Bank was a party to 13 interest rate basis swaps with an aggregate notional amount of $11.2 billion. The Bank accounts for interest rate basis swaps as stand-alone derivatives and, as such, the fair value changes associated with these instruments can be a source of considerable volatility in the Bank’s earnings, particularly when short-term interest rates or spreads between one-month and three-month LIBOR are volatile. The fair values of one-month LIBOR to three-month LIBOR basis swaps generally fluctuate based on the timing of the interest rate reset dates, the relationship between one-month LIBOR and three-month LIBOR at the time of measurement, the projected relationship between one-month LIBOR and three-month LIBOR for the remaining term of the interest rate basis swap and the relationship between the current coupon and the prevailing LIBOR rates at the valuation date. The recorded fair value changes in the Bank’s interest rate basis swaps were net gains (losses) of ($26.7 million) and $3.2 million for the three months ended June 30, 2009 and 2008, respectively, and $9.4 million and $3.2 million for the six months ended June 30, 2009 and 2008, respectively. Net interest income associated with the Bank’s interest rate basis swaps totaled $18.7 million and $1.6 million for the three months ended June 30, 2009 and 2008, respectively, and $57.3 million and $1.6 million for the six months ended June 30, 2009 and 2008, respectively. At June 30, 2009, the carrying values of the Bank’s stand-alone interest rate basis swaps totaled $24.4 million, excluding net accrued interest receivable.

Since the fourth quarter of 2008, the Bank has issued some consolidated obligation bonds that are indexed to the daily Federal funds rate. The Bank uses interest rate basis swaps (“Federal funds floater swaps”) to convert its interest payments with respect to these bonds from the daily Federal funds rate to three-month LIBOR. As of June 30, 2009, the Bank’s Federal funds floater swaps had an aggregate notional amount of $8.0 billion. The Bank accounts for these interest rate swaps as economic hedge derivatives. The fair values of Federal funds floater swaps generally fluctuate based on the timing of the interest rate reset dates, the relationship between the Federal funds rate and three-month LIBOR at the time of measurement, the projected relationship between the Federal funds rate and three-month LIBOR for the remaining term of the interest rate swap and the relationship between the current coupon and the prevailing rates at the valuation date. The recorded fair value changes in the Federal funds floater swaps were net gains of $16.8 million and $15.9 million for the three and six months ended June 30, 2009, respectively. Net interest expense associated with these interest rate swaps totaled $59,000 and $634,000 for the three and six months ended June 30, 2009, respectively. At June 30, 2009, the carrying values of the Bank’s Federal funds floater swaps totaled $17.2 million, excluding net accrued interest receivable.

Because the Bank typically holds its discount note swaps, interest rate basis swaps and Federal funds floater swaps to maturity, the cumulative life-to-date unrealized gains associated with these instruments are expected to be transitory, meaning that they will reverse in future periods in the form of unrealized losses, which will negatively impact the Bank’s earnings in those periods. The timing of this reversal will depend upon a number of factors including, but not limited to, the level and volatility of short-term interest rates.

As discussed previously, to reduce the impact that rising rates would have on its portfolio of CMO LIBOR floaters with embedded caps, the Bank had (as of June 30, 2009) entered into six interest rate cap agreements having a total

notional amount of $1.75 billion. The premiums paid for these caps totaled $12.0 million. No stand-alone interest rate caps were purchased or terminated during the six months ended June 30, 2009 (during this period, six interest rate cap agreements with a notional amount of $1.75 billion expired). At June 30, 2009, the carrying values of the Bank’s stand-alone interest rate cap agreements totaled $11.9 million. The fair values of interest rate cap agreements are dependent upon the level of interest rates, volatilities and remaining term to maturity. In general (assuming constant volatilities and no erosion in value attributable to the passage of time), interest rate caps will increase in value as market interest rates rise and will diminish in value as market interest rates decline. The value of interest rate caps will increase as volatilities increase and will decline as volatilities decrease. Absent changes in volatilities or interest rates, the value of interest rate caps will decline with the passage of time. As stand-alone derivatives, the changes in the fair values of the Bank’s interest rate cap agreements are recorded in earnings with no offsetting changes in the fair values of the hedged items (i.e., the CMO LIBOR floaters with embedded caps) and therefore can also be a source of volatility in the Bank’s earnings. The recorded fair value changes in the Bank’s stand-alone caps were gains of $8.2 million and $8.6 million for the three and six months ended June 30, 2009, respectively, compared to gains of $8.1 million and $6.5 million for the corresponding periods in 2008.

During the first six months of 2009 and 2008, market conditions were such from time to time that the Bank was able to extinguish certain consolidated obligation bonds and simultaneously terminate the associated interest rate exchange agreements at net amounts that were profitable for the Bank, while new consolidated obligations could be issued and then converted (through the use of interest rate exchange agreements) to a floating rate that approximated the cost of the extinguished debt including any associated interest rate swaps. As a result, during the three months ended June 30, 2009 and 2008, the Bank repurchased $8.7 million and $3.3 billion, respectively, of its consolidated obligations in the secondary market and terminated the related interest rate exchange agreements. The gains on these debt extinguishments totaled $176,000 and $1,644,000 for the three months ended June 30, 2009 and 2008, respectively. The Bank repurchased $8.7 million and $3.6 billion of its consolidated obligations during the six months ended June 30, 2009 and 2008, respectively, and the gains on these debt extinguishments totaled $176,000 and $3,020,000, respectively. In addition, during the three months ended March 31, 2008, the Bank transferred consolidated obligations with an aggregate par value of $450 million to two of the other FHLBanks. Additional consolidated obligations with a par value of $15 million were transferred to another FHLBank during the three months ended June 30, 2008. In connection with these transfers (i.e., debt extinguishments), the assuming FHLBanks became the primary obligors for the transferred debt. The gains on these transactions with the other FHLBanks totaled $266,000 and $4,546,000 during the three and six months ended June 30, 2008, respectively. No consolidated obligations were transferred to other FHLBanks during the six months ended June 30, 2009.

The Bank uses interest rate swaps to hedge the risk of changes in the fair value of substantially all of its available-for-sale securities, as well as some of its advances and consolidated obligation bonds. These hedging relationships are designated as fair value hedges. To the extent these relationships qualify for hedge accounting under SFAS 133, changes in the fair values of both the derivative (the interest rate swap) and the hedged item (limited to changes attributable to the hedged risk) are recorded in earnings. For those relationships that qualified as SFAS 133 hedges, the differences between the change in fair value of the hedged items and the change in fair value of the associated interest rate swaps (representing hedge ineffectiveness) were net gains (losses) of $2.9 million and $5.6 million for the three months ended June 30, 2009 and 2008, respectively, and net gains of $57.2 million and $7.2 million for the six months ended June 30, 2009 and 2008, respectively. To the extent these hedging relationships do not qualify for SFAS 133 hedge accounting, or cease to qualify because they are determined to be ineffective, only the change in fair value of the derivative is recorded in earnings (in this case, there is no offsetting change in fair value of the hedged item). During the three months ended June 30, 2009 and 2008, the change in fair value of derivatives associated with specific advances, available-for-sale securities and consolidated obligation bonds that were not in SFAS 133 hedging relationships (excluding consolidated obligation bonds indexed to the daily Federal funds rate) was $26,000 and ($430,000), respectively. The change in fair value of these derivatives totaled $7,000 and $279,000 for the six months ended June 30, 2009 and 2008, respectively.

As set forth in the table on page 73, the Bank’s fair value hedge ineffectiveness gains associated with its consolidated obligation bonds were significantly higher in the first half of 2009 as compared to the first half of 2008. A substantial portion of the Bank’s fixed rate consolidated obligation bonds are hedged with fixed-for-floating interest rate swaps in long-haul hedging relationships. The floating legs of most of these interest rate swaps reset every three months and are then fixed until the next reset date. These hedging relationships have been, and are expected to continue to be, highly effective in achieving offsetting changes in fair values attributable to the hedged

risk. However, during periods in which short-term rates are volatile (as they were in the latter part of 2008), the Bank can experience increased earnings variability related to differences in the timing between changes in short-term rates and interest rate resets on the floating legs of its interest rate swaps. While changes in the values of the fixed rate leg of the interest rate swap and the fixed rate bond being hedged substantially offset each other, when three-month LIBOR rates decrease dramatically between the reset date and the valuation date (as they did during the fourth quarter of 2008), discounting the higher coupon rate cash flows being paid on the floating rate leg at the prevailing lower rate until the swap’s next reset date can result in ineffectiveness-related losses that, while relatively small when expressed as prices, can be significant when evaluated in the context of the Bank’s net income. Because the Bank typically holds its interest rate swaps to call or maturity, the impact of these ineffectiveness-related adjustments on earnings are generally transitory. As a result of the unusual (and significant) decrease in three-month LIBOR rates during the fourth quarter of 2008, the Bank recognized ineffectiveness-related losses during the year ended December 31, 2008 of $55.4 million. With relatively stable three-month LIBOR rates during the first quarter of 2009, these ineffectiveness-related losses reversed (in the form of ineffectiveness-related gains) during the three months ended March 31, 2009. Three-month LIBOR rates remained relatively stable during the second quarter of 2009, resulting in significantly lower ineffectiveness-related gains during that period. As of December 31, 2008, the Bank had $37.8 billion of its consolidated obligation bonds in long-haul fair value hedging relationships. As a result of calls and maturities, the Bank’s consolidated obligation bonds in long-haul fair value hedging relationships declined to $20.0 billion as of June 30, 2009.

Because the Bank has a much smaller balance of swapped assets than liabilities and a substantial portion of those assets qualify for and are designated in short-cut hedging relationships, the Bank did not experience similar offsetting variability from its asset hedging activities. As of June 30, 2009, the Bank had approximately $11.5 billion of its assets in fair value hedge relationships, of which $10.4 billion qualified for the short-cut method of accounting, in which an assumption can be made that the change in fair value of the hedged item exactly offsets the change in value of the related derivative.

For a discussion of the sale of an available-for-sale security and the other-than-temporary impairment losses on four of the Bank’s held-to-maturity securities during the six months ended June 30, 2009, see the section above entitled “Financial Condition — Long-Term Investments.”

In the table on page 73, the caption entitled “Other, net” (consistent with the term used in the statements of income) is comprised principally of letter of credit fees. Letter of credit fees totaled $1.6 million and $1.4 million for the three months ended June 30, 2009 and 2008, respectively. During the six months ended June 30, 2009 and 2008, letter of credit fees totaled $3.1 million and $2.8 million, respectively. At June 30, 2009, outstanding letters of credit totaled $4.7 billion.

Other Expense

Total other expense, which includes the Bank’s compensation and benefits, other operating expenses and its proportionate share of the costs of operating the Finance Agency (previously the Finance Board) and the Office of Finance, totaled $15.8 million and $34.2 million for the three and six months ended June 30, 2009, respectively, compared to $14.1 million and $31.7 million for the corresponding periods in 2008.

Compensation and benefits were $8.5 million and $18.3 million for the three and six months ended June 30, 2009, respectively, compared to $8.3 million and $17.1 million for the corresponding periods in 2008. The increases of $0.2 million and $1.2 million, respectively, were due primarily to increases in the Bank’s average headcount and cost-of-living and merit increases, partially offset by reductions in expenses associated with the Bank’s short-term incentive compensation plan. The Bank’s average headcount increased from 179 and 178 employees during the three and six months ended June 30, 2008, respectively, to 192 and 191 employees during the corresponding periods in 2009. At June 30, 2009, the Bank employed 191 people. The decrease in short-term incentive compensation expense is attributable to lower anticipated goal achievement.

Other operating expenses for the three and six months ended June 30, 2009 were $6.2 million and $13.7 million, respectively, compared to $5.0 million and $12.9 million, respectively, for the corresponding periods in 2008. The Bank’s financial support of the relief efforts relating to Hurricanes Gustav and Ike was the largest component of this increase. In late September 2008, the Bank announced that it would make $5 million in funds available for special

disaster relief grants for homes and businesses affected by Hurricanes Gustav and Ike. Approximately $0.3 million, $2.3 million and $2.4 million of these funds were disbursed during the second quarter of 2009, the first quarter of 2009 and the fourth quarter of 2008, respectively.

The change in other operating expenses for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008 was also impacted by costs associated with the Bank’s potential merger with the FHLBank of Chicago. From mid-2007 to April 2008, the Bank and the FHLBank of Chicago were engaged in discussions to determine the possible benefits and feasibility of combining their business operations. On April 4, 2008, those discussions were terminated. As a result, during the three months ended March 31, 2008, the Bank expensed $3.1 million of direct costs associated with the potential combination.

The remaining net increases of $0.9 million and $1.3 million for the three- and six-month periods, respectively, were attributable to general increases in many of the Bank’s other operating expenses, none of which were individually significant.

The Bank, together with the other FHLBanks, is assessed for the cost of operating the Finance Agency (previously the Finance Board) and the Office of Finance. The Bank’s share of these expenses totaled $1.1 million and $2.2 million for the three and six months ended June 30, 2009, respectively, compared to $0.9 million and $1.7 million for the corresponding periods in 2008.

AHP and REFCORP Assessments

As required by statute, each year the Bank contributes 10 percent of its earnings (after the REFCORP assessment discussed below and as adjusted for interest expense on mandatorily redeemable capital stock) to its AHP. The AHP provides grants that members can use to support affordable housing projects in their communities. Generally, the Bank’s AHP assessment is derived by adding interest expense on mandatorily redeemable capital stock to income before assessments and then subtracting the REFCORP assessment; the result of this calculation is then multiplied by 10 percent. For the three months ended June 30, 2009 and 2008, the Bank’s AHP assessments totaled $2.9 million and $4.5 million, respectively. The Bank’s AHP assessments totaled $10.1 million and $8.1 million for the six months ended June 30, 2009 and 2008, respectively.

Also as required by statute, the Bank contributes 20 percent of its reported earnings (after its AHP contribution) toward the payment of interest on REFCORP bonds that were issued to provide funding for the resolution of failed thrifts following the savings and loan crisis in the 1980s. To compute the REFCORP assessment, the Bank’s AHP assessment is subtracted from reported income before assessments and the result is multiplied by 20 percent. During the three months ended June 30, 2009 and 2008, the Bank charged $6.4 million and $10.1 million, respectively, of REFCORP assessments to earnings. The Bank’s REFCORP assessments totaled $22.7 million and $18.0 million for the six months ended June 30, 2009 and 2008, respectively.

Critical Accounting Policies and Estimates

A discussion of the Bank’s critical accounting policies and the extent to which management uses judgment and estimates in applying those policies is provided in the Bank’s 2008 10-K. There were no substantial changes to the Bank’s critical accounting policies, or the extent to which management uses judgment and estimates in applying those policies, during the six months ended June 30, 2009, except as discussed below.

Other-Than-Temporary Impairment Assessments

Effective January 1, 2009, the Bank adopted FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”). Among other things, FSP FAS 115-2 revises the recognition and reporting requirements for other-than-temporary impairments of debt securities classified as available-for-sale and held-to-maturity. The FSP was issued on April 9, 2009 and is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.

For debt securities, the “ability and intent to hold” provision was eliminated in FSP FAS 115-2, and impairment is now considered to be other than temporary if an entity (i) intends to sell the security, (ii) more likely than not will be

required to sell the security before recovering its amortized cost basis, or (iii) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell the security). In addition, the “probability” standard relating to the collectibility of cash flows was eliminated in FSP FAS 115-2, and impairment is now considered to be other than temporary if the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security (any such shortfall is referred to in FSP FAS 115-2 as a “credit loss”).

The Bank evaluates outstanding available-for-sale and held-to-maturity securities in an unrealized loss position (i.e., impaired securities) for other-than-temporary impairment on at least a quarterly basis. In doing so, the Bank considers many factors including, but not limited to: the credit ratings assigned to the securities by the NRSROs; other indicators of the credit quality of the issuer; the strength of the provider of any guarantees; the duration and magnitude of the unrealized loss; and whether the Bank has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. In the case of its non-agency residential and commercial MBS, the Bank also considers prepayment speeds, the historical and projected performance of the underlying loans and the credit support provided by the subordinate securities. These evaluations are inherently subjective and consider a number of quantitative and qualitative factors.

In the case of its non-agency RMBS that exhibit adverse risk characteristics, the Bank employs models to determine the cash flows that it is likely to collect from the securities. These models consider borrower characteristics and the particular attributes of the loans underlying the securities, in conjunction with assumptions about future changes in home prices and interest rates, to predict the likelihood a loan will default and the impact on default frequency, loss severity and remaining credit enhancement. In general, because the ultimate receipt of contractual payments on these securities will depend upon the credit and prepayment performance of the underlying loans and the credit enhancements for the senior securities owned by the Bank, the Bank uses these models to assess whether the credit enhancement associated with each security is sufficient to protect against potential losses of principal and interest on the underlying mortgage loans. The development of the modeling assumptions requires significant judgment and the Bank believes its assumptions are reasonable. However, the use of different assumptions could impact the Bank’s conclusions as to whether an impairment is other than temporary.

In addition to evaluating the risk-based selection of its non-agency RMBS under a base case (or best estimate) scenario, a cash flow analysis was also performed for each of these securities under a more stressful housing price scenario to determine the impact that such a change would have on the credit losses recorded in earnings for the three months ended June 30, 2009. The results of that analysis are presented on page 59 of this report.

If the Bank intends to sell an impaired debt security, or more likely than not will be required to sell the security before recovery of its amortized cost basis, the impairment is other than temporary and is recognized currently in earnings in an amount equal to the entire difference between fair value and amortized cost.

In instances in which the Bank determines that a credit loss exists but the Bank does not intend to sell the security and it is not more likely than not that the Bank will be required to sell the security before the anticipated recovery of its remaining amortized cost basis, the other-than-temporary impairment is separated into (i) the amount of the total impairment related to the credit loss and (ii) the amount of the total impairment related to all other factors (i.e., the non-credit portion). The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. The total other-than-temporary impairment is presented in the statement of income with an offset for the amount of the total other-than-temporary impairment that is recognized in other comprehensive income. If a credit loss does not exist, any impairment is not considered to be other-than-temporary.

Regardless of whether an other-than-temporary impairment is recognized in its entirety in earnings or if the credit portion is recognized in earnings and the non-credit portion is recognized in other comprehensive income, the estimation of fair values has a significant impact on the amount(s) of any impairment that is recorded.

The non-credit portion of any other-than-temporary impairment losses recognized in other comprehensive income for debt securities classified as held-to-maturity is accreted over the remaining life of the debt security (in a prospective manner based on the amount and timing of future estimated cash flows) as an increase in the carrying

value of the security unless and until the security is sold, the security matures, or there is an additional other-than-temporary impairment that is recognized in earnings. In instances in which an additional other-than-temporary impairment is recognized in earnings, the amount of the credit loss is reclassified from accumulated other comprehensive income to earnings. Further, if an additional other-than-temporary impairment is recognized in earnings and the held-to-maturity security’s then-current carrying amount exceeds its fair value, an additional non-credit impairment is concurrently recognized in other comprehensive income. Conversely, if an additional other-than-temporary impairment is recognized in earnings and the held-to-maturity security’s then-current carrying value is less than its fair value, the carrying value of the security is not increased. In periods subsequent to the recognition of an other-than-temporary impairment loss, the other-than-temporarily impaired debt security is accounted for as if it had been purchased on the measurement date of the other-than-temporary impairment at an amount equal to the previous amortized cost basis less the other-than-temporary impairment recognized in earnings. For debt securities for which other-than-temporary impairments are recognized in earnings, the difference between the new cost basis and the cash flows expected to be collected is accreted into interest income over the remaining life of the security in a prospective manner based on the amount and timing of future estimated cash flows.

Liquidity and Capital Resources

In order to meet members’ credit needs and the Bank’s financial obligations, the Bank maintains a portfolio of money market instruments consisting of overnight federal funds and, from time-to-time, short-term commercial paper, all of which are issued by highly rated entities. Beyond those amounts that are required to meet members’ credit needs and its own obligations, the Bank typically holds additional balances of short-term investments that fluctuate as the Bank invests the proceeds of debt issued to replace maturing and called liabilities, as the balance of deposits changes, and as the returns provided by short-term investments vary relative to the costs of the Bank’s discount notes. Overnight federal funds typically comprise the large majority of the portfolio. At June 30, 2009, the Bank’s short-term liquidity portfolio was comprised of $3.3 billion of overnight federal funds sold to domestic counterparties and $2.2 billion of interest-bearing deposits maintained at the Federal Reserve Bank of Dallas.

The Bank’s primary source of funds is the proceeds it receives from the issuance of consolidated obligation bonds and discount notes in the capital markets. Historically, the FHLBanks have issued debt throughout the business day in the form of discount notes and bonds with a wide variety of maturities and structures. Generally, the Bank has access to this market as needed during the business day to acquire funds to meet its needs. However, beginning in the second half of 2008, market conditions reduced investor demand for long-term debt issued by the FHLBanks, which led to substantially increased costs and significantly reduced availability of this funding source. At the same time, demand increased for short-term, high-quality assets such as FHLBank discount notes and short-term bonds. As a result, the Bank relied more heavily on the issuance of discount notes and short-term bullet and floating-rate bonds in order to meet its funding needs during the first half of 2009. The FHLBanks’ access to debt with a wider range of maturities, and the pricing of those bonds, improved somewhat during the second quarter of 2009. Accordingly, the Bank has gradually increased its issuance of callable and longer-dated bonds during recent months.

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

As discussed more fully in the Bank’s 2008 10-K, the 12 FHLBanks and the Office of Finance entered into the Federal Home Loan Banks P&I Funding and Contingency Plan Agreement (the “Contingency Agreement”) on June 23, 2006. The Contingency Agreement and related procedures were entered into in order to facilitate the timely funding of principal and interest payments on FHLBank System consolidated obligations in the event that a FHLBank is not able to meet its funding obligations in a timely manner. The Contingency Agreement and related procedures provide for the issuance of overnight consolidated obligations directly to one or more FHLBanks that provide funds to avoid a shortfall in the timely payment of principal and interest on any consolidated obligations for which another FHLBank is the primary obligor. Specifically, in the event that one or more FHLBanks does not fund its principal and interest payments under a consolidated obligation by deadlines agreed upon by the FHLBanks and the Office of Finance (for purposes of the Contingency Agreement, a “Delinquent Bank”), the non-Delinquent Banks will be obligated to fund any shortfall in funding to the extent that any of the non-Delinquent Banks has a net positive settlement balance (i.e., the amount by which end-of-day proceeds received by such non-Delinquent Bank

from the sale of consolidated obligations on one day exceeds payments by such non-Delinquent Bank on consolidated obligations on the same day) in its account with the Office of Finance on the day the shortfall occurs. A FHLBank that funds the shortfall of a Delinquent Bank is referred to in the Contingency Agreement as a “Contingency Bank.” The non-Delinquent Banks would fund the shortfall of the Delinquent Bank sequentially in accordance with an agreed-upon funding matrix as provided in the Contingency Agreement. Additionally, a non-Delinquent Bank could choose to voluntarily fund any shortfall not funded on a mandatory basis by another non-Delinquent Bank. To fund the shortfall of a Delinquent Bank, the Office of Finance will issue to the Contingency Bank on behalf of the Delinquent Bank a consolidated obligation with a maturity of one business day in the amount of the shortfall funded by the Contingency Bank (a “Plan CO”). Through the date of this report, no Plan COs have been issued pursuant to the terms of the Contingency Agreement.

In addition to the funding sources described above, on September 9, 2008, the Bank and each of the other 11 FHLBanks entered into separate but identical lending agreements with the Treasury in connection with the Treasury’s establishment of a Government Sponsored Enterprise Credit Facility (“GSECF”). The HER Act provided the Treasury with the authority to establish the GSECF, which is designed to serve as a contingent source of liquidity for the housing government-sponsored enterprises, including the FHLBanks. Under these lending agreements, any extensions of credit by the Treasury to one or more of the FHLBanks would be the joint and several obligations of all 12 of the FHLBanks and would be consolidated obligations (issued through the Office of Finance) pursuant to part 966 of the rules of the Finance Agency (12 C.F.R. part 966), as successor to the Finance Board. Loans under the agreements, if any, would be secured by collateral acceptable to the Treasury, which consists of FHLBank advances to members that have been collateralized in accordance with regulatory standards and mortgage-backed securities issued by Fannie Mae or Freddie Mac. The lending agreements terminate on December 31, 2009, but will remain in effect as to any loan outstanding on that date. For more information on the GSECF, see Item 1 – Business – Legislative and Regulatory Developments in the Bank’s 2008 10-K. To date, none of the FHLBanks have borrowed under the GSECF.

On occasion, and as an alternative to issuing new debt, the Bank may assume the outstanding consolidated obligations for which other FHLBanks are the original primary obligors. This occurs in cases where the original primary obligor may have participated in a large consolidated obligation issue to an extent that exceeded its immediate funding needs in order to facilitate better market execution for the issue. The original primary obligor might then warehouse the funds until they were needed, or make the funds available to other FHLBanks. Transfers may also occur when the original primary obligor’s funding needs change, and that FHLBank offers to transfer debt that is no longer needed to other FHLBanks. Transferred debt is typically fixed rate, fixed term, non-callable debt, and may be in the form of discount notes or bonds.

The Bank participates in such transfers of funding from other FHLBanks when the transfer represents favorable pricing relative to a new issue of consolidated obligations with similar features. The Bank did not assume any consolidated obligations from other FHLBanks during the six months ended June 30, 2009. During both the three and six months ended June 30, 2008, the Bank assumed consolidated obligation bonds from the FHLBank of Seattle with a par value of $135.9 million.

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

The Bank’s operational liquidity requirement stipulates that it have sufficient funds to meet its obligations due on any given day plus an amount equal to the statistically estimated (at the 99-percent confidence level) cash and credit needs of its members and associates for one business day without accessing the capital markets for the sale of consolidated obligations. As of June 30, 2009, the Bank’s estimated operational liquidity requirement was $1.8 billion. At that date, the Bank estimated that its operational liquidity exceeded this requirement by approximately $12.3 billion.

The Bank’s contingent liquidity requirement further requires that it maintain adequate balance sheet liquidity and access to other funding sources should it be unable to issue consolidated obligations for five business days. The combination of funds available from these sources must be sufficient for the Bank to meet its obligations as they come due and the cash and credit needs of its members, with the potential needs of members statistically estimated at the 99-percent confidence level. As of June 30, 2009, the Bank’s estimated contingent liquidity requirement was $4.4 billion. At that date, the Bank estimated that its contingent liquidity exceeded this requirement by approximately $9.9 billion.

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

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

Under those circumstances, to the extent that the balance of principal and interest that came due on the Bank’s debt obligations and the funds needed to pay its operating expenses exceeded the cash inflows from its interest-earning assets and proceeds from maturing assets, and if access to the market for consolidated obligations was not again available, the Bank would seek to access funding under the Contingency Agreement to repay any principal and interest due on its consolidated obligations. However, if the Bank were unable to raise funds by issuing consolidated obligations, it is likely that the other FHLBanks would have similar difficulties issuing debt. If funds were not available under the Contingency Agreement, the Bank would be able to finance its operations, through December 31, 2009, only through borrowings under the GSECF. It is not clear if, or to what extent, borrowings under the GSECF would be available to fund growth in member advances. Currently, the Bank has no intention to access funding under the GSECF.

A summary of the Bank’s contractual cash obligations and off-balance-sheet lending-related financial commitments by due date or remaining maturity as of December 31, 2008 is provided in the Bank’s 2008 10-K. There have been no substantial changes in the Bank’s contractual obligations outside the normal course of business during the six months ended June 30, 2009.

Risk-Based Capital Rules and Other Capital Requirements

The Bank is required to maintain at all times permanent capital (defined under the Finance Agency’s rules as retained earnings and amounts paid in for Class B stock, regardless of its classification as equity or liabilities for financial reporting purposes, as further described above in the section entitled “Financial Condition – Capital Stock”) in an amount at least equal to its risk-based capital requirement, which is the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, as further described in the Bank’s 2008 10-K. At June 30, 2009, the Bank’s total risk-based capital requirement was $528.6 million, comprised of credit risk, market risk and operations risk capital requirements of $160.3 million, $246.3 million and $122.0 million, respectively.

In addition to the risk-based capital requirement, the Bank is subject to two other capital requirements. First, the Bank must, at all times, maintain a minimum total capital-to-assets ratio of 4.0 percent. For this purpose, total

capital is defined by Finance Agency rules and regulations as the Bank’s permanent capital and the amount of any general allowance for losses (i.e., those reserves that are not held against specific assets). Second, the Bank is required to maintain at all times a minimum leverage capital-to-assets ratio in an amount at least equal to 5.0 percent of its total assets. In applying this requirement to the Bank, leverage capital includes the Bank’s permanent capital multiplied by a factor of 1.5 plus the amount of any general allowance for losses. The Bank did not have any general reserves at June 30, 2009 or December 31, 2008. Under the regulatory definitions, total capital and permanent capital exclude accumulated other comprehensive income (loss). At all times during the six months ended June 30, 2009, the Bank was in compliance with all of its regulatory capital requirements. The following table summarizes the Bank’s compliance with the Finance Agency’s capital requirements as of June 30, 2009 and December 31, 2008.

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


	June 30, 2009						December 31, 2008
	Required			Actual			Required			Actual
Risk-based capital	$	529		$	3,208		$	930		$	3,530

Total capital	$	2,884		$	3,208		$	3,157		$	3,530
Total capital-to-assets ratio		4.00	%		4.45	%		4.00	%		4.47	%

Leverage capital	$	3,605		$	4,812		$	3,947		$	5,295
Leverage capital-to-assets ratio		5.00	%		6.67	%		5.00	%		6.71	%

The Bank’s Risk Management Policy contains a minimum total regulatory capital-to-assets target ratio of 4.10 percent, higher than the 4.00 percent ratio required under the Finance Agency’s capital rules. At all times during the six months ended June 30, 2009, the Bank was in compliance with its operating target capital ratio.

Recently Issued Accounting Standards and Interpretations

For a discussion of recently issued accounting standards and interpretations, see “Item 1. Financial Statements” (specifically, Note 2 beginning on page 6 of this report).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following quantitative and qualitative disclosures about market risk should be read in conjunction with the quantitative and qualitative disclosures about market risk that are included in the Bank’s 2008 10-K. The information provided herein is intended to update the disclosures made in the Bank’s 2008 10-K.

As a financial intermediary, the Bank is subject to interest rate risk. Changes in the level of interest rates, the slope of the interest rate yield curve, and/or the relationships (or spreads) between interest yields for different instruments have an impact on the Bank’s estimated market value of equity and its net earnings. This risk arises from a variety of instruments that the Bank enters into on a regular basis in the normal course of its business. In addition, discounts in the market prices of securities held by the Bank that are related primarily to credit concerns and a lack of market liquidity rather than interest rates have recently had an impact on the Bank’s estimated market value of equity and related risk metrics.

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

The Bank has investments in residential mortgage-related assets such as CMOs and MPF mortgage loans, both of which present prepayment risk. This risk arises from the mortgagors’ option to prepay their mortgages, making the

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

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

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

The Risk Management Policy articulates the Bank’s tolerance for the amount of overall interest rate risk the Bank will assume by limiting the maximum estimated loss in market value of equity that the Bank would incur under simulated 200 basis point changes in interest rates to 15 percent of the estimated base case market value. As discussed in more detail below, with the exception of March 31, 2009 and April 30, 2009, this risk metric exceeded the Bank’s policy limit at each month-end during the six months ended June 30, 2009 due in part to factors other than interest rate risk.

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

For purposes of compliance with the Bank’s Risk Management Policy limit on estimated losses in market value, market value of equity losses are defined as the estimated net sensitivity of the value of the Bank’s equity (the net value of its portfolio of assets, liabilities and interest rate derivatives) to 200 basis point parallel shifts in interest rates. The following table provides the Bank’s estimated base case market value of equity and its estimated market value of equity under up and down 200 basis point interest rate shock scenarios (and, for comparative purposes, its estimated market value of equity under up and down 100 basis point interest rate shock scenarios) for each month

during the period from December 2008 through June 2009. In addition, the table provides the percentage change in estimated market value of equity under each of these shock scenarios for the indicated periods.

MARKET VALUE OF EQUITY
(dollars in billions)

Up 200 Basis Points⁽¹⁾

Down 200 Basis Points

Up 100 Basis Points ⁽¹⁾

Down 100 Basis Points

Base Case

Estimated

Percentage

Estimated

Percentage

Estimated

Percentage

Estimated

Percentage

Market

Change

Market

Change

Market

Change

Market

Change

Value

from

Value

from

Value

from

Value

from

of Equity

Base Case⁽²⁾

of Equity

Base Case

of Equity

Base Case⁽²⁾

of Equity

Base Case

December 2008

2.635

2.093

-20.57

2.391

-9.26

January 2009

2.525

2.089

-17.27

2.312

-8.44

February 2009

2.552

2.154

-15.60

2.352

-7.84

March 2009

2.685

2.304

-14.19

2.513

-6.41

April 2009

2.606

2.264

-13.12

2.449

-6.02

May 2009

2.558

2.165

-15.36

2.367

-7.47

June 2009

2.713

2.246

-17.21

2.492

-8.15


*		Due to the low interest rate environments that existed during these time periods, the down 100 and 200 basis point parallel shifts in interest rates were not considered meaningful.

⁽¹⁾		In the up 100 and 200 scenarios, the estimated market value of equity is calculated under assumed instantaneous + 100 and + 200 basis point parallel shifts in interest rates.

⁽²⁾		Amounts used to calculate percentage changes are based on numbers in the thousands. Accordingly, recalculations based upon the disclosed amounts (billions) may not produce the same results.

As reflected in the preceding table, the percentage decrease in the estimated market value of equity exceeded the Bank’s policy limit of 15 percent on December 31, 2008, January 31, 2009, February 28, 2009, May 31, 2009 and June 30, 2009, and remained relatively high compared to historical levels, but within the policy limit, as of March 31, 2009 and April 30, 2009. The Bank’s estimated market value of equity was somewhat less sensitive to large changes in interest rates at June 30, 2009 than at December 31, 2008. This reduced sensitivity is primarily attributable to modest improvements in financial market conditions.

The ongoing elevated level of sensitivity of the Bank’s estimated market value of equity to changes in interest rates, which is also reflected by a relatively high estimated duration of equity as shown in the table below, is primarily attributable to a low estimated base case market value of equity due in large part to low estimated values for the Bank’s MBS, and the related sensitivity of the estimated value of the Bank’s MBS portfolio to changes in interest rates. Although the Bank’s MBS portfolio is comprised predominantly of securities with coupons that float at a fixed spread to one-month LIBOR, the estimated market value of these securities remains sensitive to changes in interest rates due to the combination of low estimated base case market values, historically wide market spreads for similar securities versus their repricing index, the low absolute level of short-term interest rates, increases in the sensitivity of estimated prepayments, and the corresponding sensitivity in market value related to the timing of the recapture of discounts in the value of embedded coupon caps to changes in interest rates.

The Bank’s analysis indicates that the elevated level of its market value sensitivity measures is due in large part to ongoing dislocations in the credit markets as opposed to an increase in its interest rate risk. Because the Bank has the intent and ability to hold the securities in its MBS portfolio to maturity, and because the elevated level of sensitivity is generally attributable to non-interest rate risk related factors, the Bank’s management and Board of Directors have determined that the recent exceptions to its policy guidelines are temporary and do not represent a significant change in the Bank’s interest rate risk profile.

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

vary in inverse proportion to the instrument’s duration. As market interest rates decline, instruments with a positive duration are expected to increase in value, while instruments with a negative duration are expected to decrease in value. Conversely, as interest rates rise, instruments with a positive duration are expected to decline in value, while instruments with a negative duration are expected to increase in value.

The values of instruments having relatively longer (or higher) durations are more sensitive to a given interest rate movement than instruments having shorter durations; that is, risk increases as the absolute value of duration lengthens. For instance, the value of an instrument with a duration of three years will theoretically change by three percent for every one percentage point change in interest rates, while the value of an instrument with a duration of five years will theoretically change by five percent for every one percentage point change in interest rates.

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

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

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

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

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

The following table provides information regarding the Bank’s base case duration of equity as well as its duration of equity in up and down 100 and 200 basis point interest rate shock scenarios for each month during the period from December 2008 through June 2009.

DURATION ANALYSIS
(Expressed in Years)


	Base Case Interest Rates
	Asset		Liability			Duration		Duration		Duration of Equity
	Duration		Duration			Gap		of Equity		Up 100⁽¹⁾		Up 200 ⁽¹⁾		Down 100		Down 200
December 2008		0.56		(0.37	)		0.19		6.36		13.42		14.38		*		*

January 2009		0.58		(0.36	)		0.22		7.04		10.31		10.52		*		*
February 2009		0.55		(0.33	)		0.22		6.78		8.89		9.06		*		*
March 2009		0.52		(0.35	)		0.17		4.64		8.42		9.00		*		*

April 2009		0.53		(0.34	)		0.19		5.24		8.31		9.08		*		*
May 2009		0.53		(0.30	)		0.23		6.57		8.87		9.69		*		*
June 2009		0.58		(0.30	)		0.28		7.53		9.76		11.88		*		*


*		Due to the low interest rate environments that existed during these time periods, the down 100 and 200 basis point parallel shifts in interest rates were not considered meaningful.

⁽¹⁾		In the up 100 and 200 scenarios, the duration of equity is calculated under assumed instantaneous + 100 and + 200 basis point parallel shifts in interest rates.

As shown above, the Bank’s duration of equity increased from 6.36 years at December 31, 2008 to 7.53 years at June 30, 2009, indicating that the Bank’s market value of equity is more sensitive to small changes in interest rates at June 30, 2009. This extension is due in part to a change in the relative mix of short- and long-term liabilities and growth in the Bank’s MBS portfolio in combination with the continuing increased sensitivity of its MBS portfolio to changes in interest rates created largely by the non-interest rate related factors discussed above.

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

The duration of equity measure represents the expected percentage change in the Bank’s market value of equity for a one percentage point (100 basis point) parallel change in interest rates. The key rate duration measure represents the expected percentage change in the Bank’s market value of equity for a one percentage point (100 basis point) parallel change in interest rates for a given maturity point on the yield curve, holding all other rates constant. The Bank has established a key rate duration limit of 7.5 years, measured as the difference between the maximum and minimum key rate durations calculated for seven defined individual maturity points on the yield curve. In addition, for the 10-year maturity point key rate duration, the Bank has established a separate limit of 15 years. The Bank calculates these metrics monthly and was in compliance with these policy limits at each month end during the first half of 2009.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Bank’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There were no changes in the Bank’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

The following is intended to provide updated information with regard to specific risk factors included in our 2008 10-K filed with the Securities and Exchange Commission on March 27, 2009. The balance of the risk factors contained in our 2008 10-K also remain applicable to our business.

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

Disclosure Provided in Our 2008 10-K

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

In particular, in recent months, delinquencies and losses with respect to residential mortgage loans have generally increased and residential property values have declined in many states. If delinquencies, default rates and loss severities on residential mortgage loans continue to increase, and/or there is a continued decline in residential real estate values, we could experience losses on our investments in non-agency residential mortgage-backed securities (“RMBS”) and/or MPF loans held in portfolio.

In 2008, market prices for our non-agency RMBS holdings declined dramatically due in part to increasing delinquencies and higher loss severities on mortgage loans such as those underlying our securities and in part to market illiquidity. We do not consider any of our investments in non-agency RMBS to be other-than-temporarily impaired at December 31, 2008. However, if the performance of the loans underlying our non-agency RMBS continues to deteriorate, we may determine in the future that certain of the securities are other-than-temporarily impaired, and we would recognize an impairment loss equal to the difference between any affected security’s then-current carrying amount and its estimated fair value, which would negatively impact our results of operations and financial condition. If we experienced losses that resulted in our not meeting required capitalization levels, we would be prohibited from paying dividends and redeeming or repurchasing capital stock without the prior approval of the Finance Agency, which could have a material adverse impact on a member’s investment in our capital stock.

On March 5, 2009, the United States House of Representatives approved legislation that would allow judges in certain situations to modify the terms of mortgage loans on primary residences during bankruptcy proceedings. Under such judicial modifications of home mortgages, bankruptcy judges would have the authority to reduce mortgage loan balances for the primary residences of consumers who file for bankruptcy. Judges could also lengthen loan terms and reduce interest rates. Currently, bankruptcy judges can reduce or eliminate other types of debt for consumers, but they do not have the authority to modify mortgage debt on a primary residence. The United States Senate is expected to consider similar legislation in the near future.

Our non-agency RMBS holdings are all self-insured by a senior/subordinate structure in which the subordinate classes of securities provide credit support for the most senior class of securities, an interest in which is owned by

us. Notwithstanding this senior/subordinate structure, 16 of our 42 non-agency RMBS, all of which are backed by fixed rate collateral, contain provisions that provide for the allocation of losses resulting from bankruptcies equally among all security holders (both senior and subordinate) after a certain threshold is reached for the underlying loan pool (typically, losses in excess of $100,000). As a result, if this legislation is enacted, we would not necessarily have the same level of credit protection against losses arising from homeowner bankruptcies as we do for all other losses in the loan pools underlying our securities. As of December 31, 2008, the unpaid principal balance of the 16 securities totaled $243.6 million. We are unable at this time to predict whether this legislation will be enacted and, if so, what impact it may have on the ultimate recoverability of our investments.

Update to Disclosure in Our 2008 10-K

Due to the adverse change in actual and expected future home prices during the first six months of 2009, our other-than-temporary impairment analysis as of June 30, 2009 indicated that it is likely that we will not fully recover the amortized cost bases of four of our non-agency RMBS holdings and, accordingly, these securities were deemed to be other-than-temporarily impaired at that date.

On April 9, 2009, the Financial Accounting Standards Board issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”). FSP FAS 115-2, which we elected to early adopt effective January 1, 2009, revises the recognition and reporting requirements for other-than-temporary impairments of debt securities and is applicable to our investments in non-agency RMBS. Under this new guidance, a credit loss exists and an impairment is considered to be other than temporary if the present value of cash flows expected to be collected from a debt security is less than the amortized cost basis of that security. In instances in which a determination is made that a credit loss exists but an entity does not intend to sell an impaired debt security and it is not more likely than not that it will be required to sell the security before recovery of its remaining amortized cost basis, the other-than-temporary impairment (i.e., the difference between the security’s then-current carrying amount and its estimated fair value) is separated into (i) the amount of the total impairment related to the credit loss and (ii) the amount of the total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Because we do not intend to sell these four investments and it is not more likely than not that we will be required to sell the investments before recovery of our remaining amortized cost bases (that is, our previous amortized cost basis less the current period credit loss for each security), the amount of the total other-than-temporary impairments related to the credit losses was recognized in earnings and the amount of the total other-than-temporary impairments related to all other factors (i.e., the non-credit component) was recognized in other comprehensive income for the six months ended June 30, 2009. The credit and non-credit components of the total other-than-temporary impairments recognized during the six months ended June 30, 2009 totaled $671,000 and $51,114,000, respectively.

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

On March 5, 2009, the United States House of Representatives approved legislation that would allow judges in certain situations to modify the terms of mortgage loans on primary residences during bankruptcy proceedings and would allow servicers of residential mortgages in certain situations to modify the terms of those mortgages without threat of monetary damages or other equitable relief from investors or other parties to whom the servicer owes certain duties. Similar legislation was introduced in the United States Senate (the “Senate”) on April 24, 2009. The Senate did not approve the portion of the legislation allowing bankruptcy judges to modify the terms of mortgage loans. The Senate did, however, on May 6, 2009, approve the portion of the legislation regarding modifications of the terms of residential mortgages by servicers. If a servicer of residential mortgages agrees to enter into a residential loan modification, workout, or other loss mitigation plan with respect to a residential mortgage originated before the date of enactment of the legislation, including mortgages held in a securitization or other investment vehicle, to the extent that the servicer owes a duty to investors or other parties to maximize the net present value of such mortgages, the servicer is deemed to have satisfied that duty, and will not be liable to those investors or other parties, if certain criteria are met. Those criteria are (1) default on the mortgage has occurred, is imminent, or is

reasonably foreseeable, (2) the mortgagor occupies the property securing the mortgage as his or her principal residence and (3) the servicer reasonably determined that the application of the loss mitigation plan to the mortgage will likely provide an anticipated recovery on the outstanding principal mortgage debt that will exceed the anticipated recovery through foreclosure. This legislation was enacted on May 20, 2009. We are unable at this time to predict what impact this legislation may have on the ultimate recoverability of our non-agency RMBS investments.

ITEM 6. EXHIBITS


10.1		Form of Special Non-Qualified Deferred Compensation Plan of the Registrant, as amended and restated effective January 1, 2009 and approved by the Registrant’s Board of Directors on May 14, 2009 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 14, 2009 and filed with the SEC on May 20, 2009, which exhibit is incorporated herein by reference).

31.1		Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

SIGNATURES

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


		Federal Home Loan Bank of Dallas

August 12, 2009 Date	By	/s/ Michael Sims Michael Sims
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

August 12, 2009	By	/s/ Tom Lewis

Date		Tom Lewis
		Senior Vice President and Chief Accounting Officer
		(Principal Accounting Officer)


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements		1

Statements of Condition as of June 30, 2009 and December 31, 2008		1

Statements of Income for the Three and Six Months Ended June 30, 2009 and 2008		2

Statements of Capital for the Six Months Ended June 30, 2009 and 2008		3

Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008		5

Notes to Interim Unaudited Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		35

Forward-Looking Information		35

Overview		35

Regulatory Developments		42

Financial Condition		47

Results of Operations		68

Critical Accounting Policies and Estimates		77

Liquidity and Capital Resources		79

Risk-Based Capital Rules and Other Capital Requirements		81

Recently Issued Accounting Standards and Interpretations		82

Item 3. Quantitative and Qualitative Disclosures About Market Risk		82

Item 4. Controls and Procedures		86

PART II. OTHER INFORMATION

Item 1A. Risk Factors		87

Item 6. Exhibits		89

Signatures		89
EX-31.1
EX-31.2
EX-32.1