UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

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

Commission File Number 000-51405

FEDERAL HOME LOAN BANK OF DALLAS

(Exact name of registrant as specified in its charter)

Federally chartered corporation (State or other jurisdiction of incorporation or organization)		71-6013989 (I.R.S. Employer Identification Number)
8500 Freeport Parkway South, Suite 600
Irving, TX		75063-2547
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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

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

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		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 Act). Yes o No þ

The registrant’s capital stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value ($100 per share), subject to certain regulatory and statutory requirements. At February 28, 2010, the registrant had 24,894,275 shares of its capital stock outstanding. As of June 30, 2009 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate par value of the registrant’s capital stock outstanding was approximately $2.907 billion.

Documents Incorporated by Reference: None.

 

 

FEDERAL HOME LOAN BANK OF DALLAS
TABLE OF CONTENTS

		Page
PART I
Item 1. Business			1
Item 1A. Risk Factors			32
Item 1B. Unresolved Staff Comments			41
Item 2. Properties			41
Item 3. Legal Proceedings			41
Item 4. Reserved			41
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			42
Item 6. Selected Financial Data			44
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			45
Forward-Looking Information			45
Overview			45
Financial Market Conditions			48
2009 In Summary			49
Financial Condition			51
Results of Operations			79
Liquidity and Capital Resources			88
Risk-Based Capital Rules and Other Capital Requirements			92
Critical Accounting Policies and Estimates			94
Recently Issued Accounting Guidance			99
Statistical Financial Information			99
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			103
Item 8. Financial Statements and Supplementary Data			110
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			113
Item 9A. Controls and Procedures			113
Item 9B. Other Information			113
Director Elections			113
Amendment of Bylaws			115
PART III
Item 10. Directors, Executive Officers and Corporate Governance			116
Item 11. Executive Compensation			127
Compensation Discussion and Analysis			127
Compensation Committee Report			139
Summary Compensation Table			140
Grants of Plan-Based Awards			141
Pension Benefits			142
Nonqualified Deferred Compensation			144
Potential Payments upon Termination or Change in Control			148
Director Compensation			151
Compensation Committee Interlocks and Insider Participation			153
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			154
Item 13. Certain Relationships and Related Transactions, and Director Independence			156
Item 14. Principal Accounting Fees and Services			160
PART IV
Item 15. Exhibits, Financial Statement Schedules			161
Signatures			S-1
Index to Financial Statements			F-1
EX-3.2
EX-12.1
EX-14.1
EX-31.1
EX-31.2
EX-32.1
EX-99.1
EX-99.2

PART I

ITEM 1.		BUSINESS

Background

The Federal Home Loan Bank of Dallas (the “Bank”) is one of 12 Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System,” or the “System”) that were created by the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”). Each of the 12 FHLBanks is a member-owned cooperative that operates as a separate federally chartered corporation with its own management, employees and board of directors. Each FHLBank helps finance housing, community lending, and community development needs in the specified states in its respective district. Federally insured commercial banks, savings banks, savings and loan associations, and credit unions, as well as insurance companies, are all eligible for membership in the FHLBank of the district in which the institution’s principal place of business is located. Effective with the enactment of the Housing and Economic Recovery Act of 2008 (the “HER Act”) on July 30, 2008, Community Development Financial Institutions (“CDFIs”) that are certified under the Community Development Banking and Financial Institutions Act of 1994 are also eligible for membership in the Bank (for a discussion of the HER Act, see the section below entitled “Legislative and Regulatory Developments”). State and local housing authorities that meet certain statutory and regulatory criteria may also borrow from the FHLBanks.

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

The Bank’s principal source of funds is debt issued in the capital markets. All 12 FHLBanks issue debt in the form of consolidated obligations through the Office of Finance as their agent, and each FHLBank uses these funds to make loans to its members, invest in debt securities, or for other business purposes. All 12 FHLBanks are jointly and severally liable for the repayment of all consolidated obligations. Although consolidated obligations are not obligations of or guaranteed by the United States Government, FHLBanks are considered to be government-sponsored enterprises (“GSEs”) and thus have historically been able to borrow at the favorable rates generally available to GSEs. The FHLBanks’ consolidated debt obligations are rated Aaa/P-1 by Moody’s Investors Service (“Moody’s”) and AAA/A-1+ by Standard & Poor’s (“S&P”), which are the highest ratings available from these nationally recognized statistical rating organizations (“NRSROs”). These ratings indicate that Moody’s and S&P have concluded that the FHLBanks have an extremely strong capacity to meet their commitments to pay principal and interest on consolidated obligations, and that consolidated obligations are judged to be of the highest quality, with minimal credit risk. The ratings also reflect the FHLBank System’s status as a GSE. Individually, the Bank has received a deposit rating of Aaa/P-1 from Moody’s and a long-term counterparty credit rating of AAA/A-1+ from S&P. Shareholders, bondholders and prospective shareholders and bondholders should understand that these ratings are not a recommendation to buy, sell or hold 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.

All members of the Bank are required to purchase capital stock in the Bank as a condition of membership and in proportion to their asset size and borrowing activity with the Bank. The Bank’s capital stock is not publicly traded and all stock is owned by the Bank’s members, former members that retain the stock as provided in the Bank’s capital plan, or by non-member institutions that have acquired a member and must retain the stock to support advances.

Prior to July 30, 2008, the Federal Housing Finance Board (“Finance Board”) was responsible for the supervision and regulation of the FHLBanks and the Office of Finance. Effective with the enactment of the HER Act, the Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the United States Government, assumed responsibility for supervising and regulating the FHLBanks and the Office of Finance. The Finance Agency 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’s debt and equity securities are exempt from registration under the Securities Act of 1933 and are “exempted securities” under the Securities Exchange Act of 1934 (the “Exchange Act”). On June 23, 2004, the Finance Board adopted a rule requiring each FHLBank to voluntarily register a class of its equity securities with the Securities and Exchange Commission (“SEC”) under Section 12(g) of the Exchange Act. The Bank’s registration with the SEC became effective on April 17, 2006. As a registrant, the Bank is subject to the periodic disclosure regime as administered and interpreted by the SEC. Materials that the Bank files with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains reports and other information filed with the SEC. Reports and other information that the Bank files with the SEC are also available free of charge through the Bank’s website at www.fhlb.com. To access these reports and other information through the Bank’s website, click on “About FHLB Dallas,” then “Financial Reports” and then “SEC Filings.”

Membership

The Bank’s members are financial institutions with their principal place of business in the Ninth Federal Home Loan Bank District, which includes Arkansas, Louisiana, Mississippi, New Mexico and Texas. The following table summarizes the Bank’s membership, by type of institution, as of December 31, 2009, 2008 and 2007.

MEMBERSHIP SUMMARY

		December 31,
		2009				2008				2007
Commercial banks			753				759				736
Thrifts			85				85				86
Credit unions			65				60				48
Insurance companies			20				19				16
Total members			923				923				886
Housing associates			8				8				8
Non-member borrowers			12				13				15
Total			943				944				909
Community Financial Institutions (“CFIs”) (1)			788				796				742

As of December 31, 2009, approximately 85 percent of the Bank’s members were CFIs, which are defined by the HER Act to include all institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) with average total assets over the three-year period preceding measurement of less than $1.0 billion, as adjusted annually for inflation. Prior to enactment of the HER Act on July 30, 2008, CFIs were defined by the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) to include all FDIC-insured institutions with average total assets over the three prior years of less than $500 million, as adjusted annually for inflation since 1999. For 2009, CFIs were FDIC-insured institutions with average total assets as of December 31, 2008, 2007 and 2006 of less than $1.011 billion. For the period from January 1, 2008 through July 29, 2008, CFIs were FDIC-insured institutions with average total assets as of December 31, 2007, 2006 and 2005 of less than $625 million. For the period from July 30, 2008 through December 31, 2008, CFIs were FDIC-insured institutions with average total assets as of December 31, 2007, 2006 and 2005 of less than $1.0 billion. In 2007, the average total asset ceiling for CFI designation was $599 million. For 2010, CFIs are FDIC-insured institutions with average total assets as of December 31, 2009, 2008 and 2007 of less than $1.029 billion.

As of December 31, 2009, 2008 and 2007, approximately 63.5 percent, 67.9 percent and 64.9 percent, respectively, of the Bank’s members had outstanding advances from the Bank. These usage rates are calculated excluding housing associates and non-member borrowers. While eligible to borrow, housing associates are not members of the Bank and, as such, are not required to hold capital stock. Non-member borrowers consist of institutions that have acquired former members and assumed the advances held by those former members and former members who have withdrawn from membership but that continue to have advances outstanding. Non-member borrowers are required to hold capital stock to support outstanding advances until the time when those advances have been repaid. The Bank may elect to repurchase excess stock of non-members before the applicable stock redemption period has expired. During the period that their advances remain outstanding, non-member borrowers may not request new advances, nor are they permitted to extend or renew the assumed advances.

The Bank’s membership includes the majority of institutions in its district that are eligible to become members. Eligible non-members are primarily smaller institutions that have thus far elected not to join the Bank. For this reason, the Bank does not currently anticipate that a substantial number of additional institutions will become members. Institutions can, and sometimes do, relocate their charters from one FHLBank district to another FHLBank district. In February 2008, Comerica Bank, which had recently relocated its charter to the Ninth District, became a member of the Bank. As of December 31, 2009 and 2008, Comerica Bank had outstanding advances of $6.0 billion and $8.0 billion, respectively, and was the Bank’s second largest borrower and shareholder at both of those dates.

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

Business Segments

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

Interest Income

The Bank’s interest income is derived primarily from advances and investment activities. Each of these revenue sources is more fully described below. During the years ended December 31, 2009, 2008 and 2007, interest income derived from each of these sources (expressed as a percentage of the Bank’s total interest income) was as follows:

		Year Ended December 31,
		2009				2008				2007
Advances (including prepayment fees)			79.4	%			79.2	%			73.2	%
Investments			18.6				19.8				25.7
Mortgage loans held for portfolio and other			2.0				1.0				1.1
Total			100.0	%			100.0	%			100.0	%
Total interest income (in thousands)		$	837,464			$	2,294,736			$	2,886,482

With the exception of interest earned on advances to non-member borrowers, substantially all of the Bank’s interest income from advances is derived from financial institutions domiciled in the Bank’s five-state district. Advances to non-members (and the related interest income) are described below in the “Products and Services” section.

Products and Services

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

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

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

Floating rate advances. The Bank’s standard advances offerings include term floating rate advances with maturities between one and five years. Borrowers may also request floating rate advances with maturities up to 10 years. Floating rate advances are typically indexed to either one-month LIBOR or three-month LIBOR, and are priced at a constant spread to the relevant index. In addition to longer term floating rate advances, the Bank offers short term floating rate advances (maturities of 30 days or less) indexed to the daily federal funds rate. Floating rate advances may also include embedded features such as caps, floors, provisions for the conversion of the advances to a fixed rate, or non-LIBOR indices.

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

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

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

The Bank is required by the FHLB Act to obtain collateral that is sufficient, in the judgment of the Bank, to fully secure members’ advances and other extensions of credit. The Bank has not suffered any credit losses on advances in its 77-year history. In accordance with the Bank’s capital plan, members and former members must hold Class B capital stock in proportion to their outstanding advances. Pursuant to the FHLB Act, the Bank has a lien upon and holds the Bank’s Class B capital stock owned by each of its shareholders as additional collateral for all of the respective shareholder’s obligations to the Bank.

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

In the case of CFIs, the Bank may also accept as eligible collateral secured small business, small farm, and small agribusiness loans, secured loans for community development activities, and securities representing a whole interest in such loans, provided the collateral has a readily ascertainable value and the Bank can perfect a security interest in such collateral. The HER Act added secured loans for community development activities as a new type of eligible collateral for CFIs. To the extent secured loans for community development activities represent a new class of collateral that the Bank has not previously accepted, the Bank is required to seek the Finance Agency’s approval prior to accepting that collateral. At December 31, 2009 and 2008, total CFI obligations secured by these types of collateral, including commercial real estate, totaled approximately $3.8 billion and $4.6 billion, respectively, which represented approximately 7.3 percent and 7.0 percent, respectively, of the total advances and letters of credit outstanding as of those dates.

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

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

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

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

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

As of December 31, 2009, 699 of the Bank’s borrowers/potential borrowers with a total of $23.8 billion in outstanding advances were on blanket lien status, 26 borrowers/potential borrowers with $18.6 billion in outstanding advances were on specific collateral only status and 218 borrowers/potential borrowers with $4.5 billion in outstanding advances were on custody status.

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

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

Finance Agency regulations require the Bank to establish a formula for and to charge a prepayment fee on an advance that is repaid prior to maturity in an amount sufficient to make the Bank financially indifferent to the borrower’s decision to repay the advance prior to its scheduled maturity date. Currently, these fees are generally calculated as the present value of the difference (if positive) between the interest rate on the prepaid advance and the then-current market yield for a U.S. agency security for the remaining term to maturity of the repaid advance. During the years ended December 31, 2009, 2008 and 2007, the Bank collected net prepayment fees of $14.2 million, $6.8 million and $2.3 million, respectively.

As of December 31, 2009, the Bank’s outstanding advances (at par value) totaled $46.9 billion. As of that date, advances outstanding to the Bank’s ten largest borrowers represented 64.2 percent of the Bank’s total outstanding advances. Advances to the Bank’s two largest borrowers represented 51.7 percent of the Bank’s total outstanding advances. Individually, advances to the Bank’s two largest borrowers represented 38.9 percent (Wells Fargo Bank South Central, National Association) and 12.8 percent (Comerica Bank) of the total advances outstanding as of December 31, 2009.

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. Wells Fargo & Company (“Wells Fargo”) is headquartered in the Eleventh District of the FHLBank System and affiliates of Wells Fargo have historically maintained 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. On November 1, 2009, Wachovia’s thrift charter was converted to a national bank charter with the name Wells Fargo Bank South, National Association (“Wells Fargo Bank South”). Wells Fargo then merged Wells Fargo Bank South into an out-of-district national bank affiliate, Wells Fargo Bank South Central, National Association (“WFSC”). WFSC retained the main office of Wells Fargo Bank South in Houston, Texas as its main office. On November 2, 2009, WFSC applied for membership in the Bank and its application was approved on December 30, 2009. During the years ended December 31, 2009, 2008 and 2007, Wachovia/WFSC accounted for 29.7 percent, 38.6 percent and 37.2 percent, respectively, of the Bank’s total interest income from advances.

For additional information regarding the composition and concentration of the Bank’s advances, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Advances.

Community Investment Cash Advances. The Bank also offers a Community Investment Cash Advances (“CICA”) program as authorized by Finance Agency regulations. Advances made under the CICA program benefit low- to moderate-income households by providing funds for housing or economic development projects. CICA advances are made at rates below the rates the Bank charges on standard advances, and may be made at the Bank’s cost of funds or, in certain circumstances for specified purposes, below its cost of funds. The Bank currently prices CICA advances at interest rates that are approximately 15 basis points lower than rates on comparable advances made outside the program. CICA advances are provided separately from and do not count toward the Bank’s statutory obligations under the Affordable Housing Program, through which the Bank provides grants to support projects that benefit low-income households (see the “Affordable Housing Program” section below). As of December 31, 2009,

advances outstanding under the CICA program totaled approximately $703 million, representing approximately 1.5 percent of the Bank’s total advances outstanding as of that date.

Letters of Credit. The Bank’s credit services also include letters of credit issued or confirmed on behalf of members to facilitate business transactions with third parties that support residential housing finance, community lending, or asset/liability management or to provide liquidity to members. Letters of credit are also issued on behalf of members to secure the deposits of public entities that are held by such members. Letters of credit must be fully collateralized as though they were funded advances. During the years ended December 31, 2009, 2008 and 2007, letter of credit fees earned by the Bank totaled approximately $6.1 million, $6.0 million and $4.1 million, respectively.

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

Correspondent Banking and Collateral Services. The Bank provides its members with a variety of correspondent banking and collateral services. These services include overnight and term deposit accounts, wire transfer services, reserve pass-through and settlement services, securities safekeeping and securities pledging services. In the aggregate, correspondent banking and collateral services generated fee income for the Bank of $3.1 million, $3.5 million and $3.7 million during the years ended December 31, 2009, 2008 and 2007, respectively.

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

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

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

Interest Rate Swaps, Caps and Floors. On July 1, 2008, the Bank began offering interest rate swaps, caps and floors to its member institutions. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties. In order to be eligible, a member must have executed a master swap agreement with the Bank. The Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value

is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. At December 31, 2009 and 2008, the total notional amount of interest rate exchange agreements with members totaled $12.1 million and $3.5 million, respectively.

Standby Bond Purchase Agreements. In October 2009, the Bank received approval from the Finance Agency to begin offering standby bond purchase services to state housing finance agencies within its district. In these transactions, in order to enhance the liquidity of bonds issued by a state housing finance agency, the Bank, for a fee, agrees to stand ready to purchase, in certain circumstances specified in the standby agreement, a housing authority’s bonds that the remarketing agent for the bonds is unable to sell. The specific terms for any bonds purchased by the Bank would be specified in the standby bond purchase agreement entered into by the Bank and the state housing finance agency. The Bank would reserve the right to sell any bonds it purchased at any time, subject to any conditions the Bank might agree to in the standby bond purchase agreement. To date, the Bank has not entered into any standby bond purchase agreements.

Investment Activities

The Bank maintains a portfolio of investments to enhance interest income and meet liquidity needs. In addition, as discussed in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources, the Bank is required to meet certain regulatory liquidity requirements. To ensure the availability of funds to meet members’ credit needs and its other general and regulatory liquidity requirements, the Bank maintains a portfolio of short-term, unsecured investments issued by highly rated institutions, including overnight federal funds and, on occasion, short-term commercial paper. At December 31, 2009, the Bank’s short-term investments were comprised solely of $2.1 billion of overnight federal funds sold to domestic counterparties.

To enhance interest income, the Bank maintains a long-term investment portfolio, which currently includes mortgage-backed securities (“MBS”) issued by United States government agencies or government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac), non-agency (or private label) residential and commercial MBS, and non-MBS investments either guaranteed by the United States government or issued by state housing agencies. The interest rate and prepayment risk inherent in the MBS is managed though a variety of debt and interest rate derivative instruments. As of December 31, 2009 and 2008, the composition of the Bank’s long-term investment portfolio was as follows (dollars in millions):

		December 31,
		2009								2008
		Amortized								Amortized
		Cost				Percentage				Cost				Percentage
Government-sponsored enterprise MBS		$	10,838				94.3	%		$	10,729				90.7	%
Non-agency residential MBS			511				4.5				677				5.7
Non-agency commercial MBS			56				0.5				327				2.8
Other			86				0.7				98				0.8
Total		$	11,491				100.0	%		$	11,831				100.0	%

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

In addition to purchasing securities that were structured to provide the type of credit enhancement discussed above, the Bank further attempted to reduce the credit risk of its non-agency MBS by purchasing securities with other risk-reducing attributes. For instance, the Bank purchased RMBS backed by loan pools that featured a high percentage of relatively small loans, a high percentage of owner-occupied properties, and relatively low loan-to-value ratios. When purchasing CMBS, the Bank generally acquired securities backed by relatively small and geographically diverse loans, diverse loan types and high debt service coverage ratios. None of the Bank’s investments in non-agency MBS are insured by third party bond insurers. The risk of future credit losses is also mitigated to some extent by the seasoning of the loans underlying the Bank’s non-agency securities. Except for a single security issued in 2006, all of the Bank’s RMBS were issued in 2005 or before. All of the Bank’s CMBS were issued in 2000. Despite the recent deterioration in the real estate markets, these risk mitigation strategies have to date helped limit the number of non-agency MBS the Bank has classified as other-than-temporarily impaired and the amount of credit losses associated with those securities. For further discussion and analysis of the Bank’s non-agency MBS, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Long-Term Investments.

Prior to June 30, 2008, the Bank was precluded from purchasing additional MBS if such purchase would cause the aggregate book value of its MBS holdings to exceed 300 percent of the Bank’s total regulatory capital as of the prior month end. On March 24, 2008, the Board of Directors of the Finance Board authorized each FHLBank to temporarily invest up to an additional 300 percent of its total capital in agency mortgage securities. The authorization required, among other things, that a FHLBank notify the Finance Board (now Finance Agency) prior to its first acquisition under the expanded authority and include in its notification a description of the risk management practices underlying its purchases. The expanded authority is limited to MBS issued by, or backed by pools of mortgages guaranteed by, Fannie Mae or Freddie Mac, including collateralized mortgage obligations (“CMOs”) or real estate mortgage investment conduits backed by such MBS. The mortgage loans underlying any securities that 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.

On April 23, 2008, the Bank’s Board of Directors authorized an increase in the Bank’s MBS investment authority of 100 percent of its total regulatory capital. In accordance with the provisions of the resolution and Advisory Bulletin 2008-AB-01, “Temporary Increase in Mortgage-Backed Securities Investment Authority” dated April 3, 2008 (“AB 2008-01”), the Bank notified the Finance Board’s Office of Supervision on April 29, 2008 of its intent to exercise the new investment authority in an amount up to an additional 100 percent of capital. On June 30, 2008, the Office of Supervision approved the Bank’s submission, thereby raising the Bank’s MBS investment authority from 300 percent to 400 percent of its total regulatory capital.

The Bank’s expanded investment authority granted by this authorization is scheduled to expire on March 31, 2010, after which the Bank may not purchase additional mortgage securities if such purchases would cause the aggregate book value of its MBS holdings to exceed an amount equal to 300 percent of its total capital provided, however, that the expiration of the expanded investment authority will not require the Bank to sell any agency mortgage securities it had purchased in accordance with the terms of the resolution. The Bank has submitted a request to the Finance Agency seeking to maintain its investment authority at an amount equal to 400 percent of its total regulatory capital for a period up to an additional three years. The Bank is unable to predict whether the Finance Agency will approve this request.

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

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

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

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

•

instruments, such as common stock, that represent an ownership interest in an entity, other than stock in small business investment companies, or certain investments targeted to low-income persons or communities;

•

instruments issued by non-United States entities, other than those issued by United States branches and agency offices of foreign commercial banks;

•

non-investment grade debt instruments, other than certain investments targeted to low-income persons or communities and instruments that were downgraded after purchase by the Bank;

•

whole mortgages or other whole loans, other than 1) those acquired by the Bank through a duly authorized Acquired Member Assets program such as the Mortgage Partnership Finance® Program; 2) certain investments targeted to low-income persons or communities; 3) certain marketable direct obligations of state, local, or tribal government units or agencies, having at least the second highest credit rating from an NRSRO; 4) MBS or asset-backed securities backed by manufactured housing loans or home equity loans; and 5) certain foreign housing loans authorized under Section 12(b) of the FHLB Act;

•

non-U.S. dollar denominated securities;

•

interest-only or principal-only stripped MBS;

•

residual-interest or interest-accrual classes of CMOs and real estate mortgage investment conduits; and

•

fixed rate MBS or floating rate MBS that, on trade date, are at rates equal to their contractual cap and that have average lives that vary by more than 6 years under an assumed instantaneous interest rate change of 300 basis points.

Acquired Member Assets (“AMA”)

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

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

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

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

As of December 31, 2009, MPF loans held for portfolio (net of allowance for credit losses) were $260 million, representing approximately 0.4 percent of the Bank’s total assets. As of December 31, 2008 and 2007, MPF loans held for portfolio (net of allowance for credit losses) represented approximately 0.4 percent and 0.6 percent, respectively, of the Bank’s total assets.

Funding Sources

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

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

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

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

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

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

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

Twice weekly, the Bank may also request that specific amounts of consolidated obligation discount notes with fixed maturity dates ranging from 4 to 26 weeks be offered by the Office of Finance through competitive auctions conducted with underwriters in the discount note selling group. One or more other FHLBanks may also request that amounts of those same discount notes be offered for sale for their benefit through the same auction. The discount notes offered for sale through competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. The FHLBanks receive funding based on their requests at a weighted average rate of the winning bids from the dealers. If the bids submitted are less than the total of the FHLBanks’ requests, the Bank receives funding based on the ratio of the Bank’s regulatory capital (defined on page 92 of this report) relative to the regulatory capital of the other FHLBanks offering discount notes. The majority of the Bank’s discount note issuance in maturities of four weeks or longer is conducted through the auction process. Regardless of the method of issuance, as with consolidated obligation bonds, the Bank is the primary obligor for the portion of discount notes issued for which it has received the proceeds.

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

The Bank participates in such transfers of funding from other FHLBanks when the transfer represents favorable pricing relative to a new issue of consolidated obligations with similar features. The Bank did not assume any consolidated obligations from other FHLBanks during the year ended December 31, 2009. During the years ended December 31, 2008 and 2007, the Bank assumed consolidated obligations from other FHLBanks with par amounts of $136 million and $323 million, respectively.

In addition, the Bank occasionally transfers debt that it no longer needs to other FHLBanks. The Bank did not transfer any consolidated obligations to other FHLBanks during the year ended December 31, 2009. During the years ended December 31, 2008 and 2007, the Bank transferred consolidated obligations with an aggregate par amount of $465 million and $461 million, respectively, to other FHLBanks.

At December 31, 2009, the Bank was the primary obligor on $59.9 billion of consolidated obligations (at par value), of which $51.2 billion were consolidated obligation bonds and $8.7 billion were consolidated obligation discount notes.

Joint and Several Liability. Although the Bank is primarily liable only for its portion of consolidated obligations (i.e., those consolidated obligations issued on its behalf and those that have been transferred/assumed from other FHLBanks), it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank with primary liability. The FHLBank with primary liability would have a corresponding liability to reimburse the FHLBank providing assistance to the extent of such payment and other associated costs (including interest to be determined by the Finance Agency). However, if the Finance Agency determines that the primarily liable FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. Consequently, the Bank has no means to determine how the Finance Agency might allocate among the other FHLBanks the obligations of a FHLBank that is unable to pay consolidated obligations for which such FHLBank is primarily liable. In the event the Bank is holding a consolidated obligation as an investment for which the Finance Agency would allocate liability among the 12 FHLBanks, the Bank might be exposed to a credit loss to the extent of its share of the assigned liability for that particular consolidated obligation (the Bank did not hold any consolidated obligations of other FHLBanks as investments at December 31, 2009). If principal or interest on any consolidated obligation issued by the FHLBank System is not paid in full when due, the Bank may not pay dividends to, or repurchase shares of stock from, any shareholder of the Bank.

To facilitate the timely funding of principal and interest payments on FHLBank System consolidated obligations in the event that a FHLBank is not able to meet its funding obligations in a timely manner, the FHLBanks and the Office of Finance entered into the Federal Home Loan Banks P&I Funding and Contingency Plan Agreement on June 23, 2006. For additional information regarding this agreement, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.

According to the Office of Finance, the 12 FHLBanks had (at par value) approximately $931 billion, $1.252 trillion and $1.190 trillion in consolidated obligations outstanding at December 31, 2009, 2008 and 2007, respectively. The Bank was the primary obligor on $59.9 billion, $72.9 billion and $57.0 billion (at par value), respectively, of these consolidated obligations.

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

A FHLBank must file a consolidated obligation payment plan for Finance Agency approval if (i) the FHLBank becomes a non-complying FHLBank as a result of failing to provide the required certification, (ii) the FHLBank becomes a non-complying FHLBank as a result of being required to provide the notice described above to the Finance Agency, except in the case of a failure to make a payment on a consolidated obligation caused solely by an external event such as a power failure, or (iii) the Finance Agency determines that the FHLBank will cease to be in compliance with its liquidity requirements or will lack the capacity to meet all of its current obligations due during the quarter.

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

Negative Pledge Requirements. Each FHLBank must maintain specified assets free from any lien or pledge in an amount at least equal to its participation in outstanding consolidated obligations. Eligible assets for this purpose include (i) cash; (ii) obligations of, or fully guaranteed by, the United States Government; (iii) secured advances; (iv) mortgages having any guaranty, insurance, or commitment from the United States Government or any related agency; (v) investments described in Section 16(a) of the FHLB Act, which, among other items, include securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located; and (vi) other securities that are assigned a rating or assessment by an NRSRO that is equivalent to or higher than the rating on the FHLBanks’ consolidated obligations. At December 31, 2009, 2008 and 2007, the Bank had eligible assets free from pledge of $64.7 billion, $78.8 billion and $62.9 billion, respectively, compared to its participation in outstanding consolidated obligations of $59.9 billion, $72.9 billion and $57.0 billion, respectively. In addition, the Bank was in compliance with its negative pledge requirements at all times during the years ended December 31, 2009, 2008 and 2007.

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

The Office of Finance is currently overseen by a board of directors that consists of three part-time members appointed by the Finance Agency. Under current Finance Agency regulations, two of these members are presidents of FHLBanks and the third is a private citizen of the United States with a demonstrated expertise in financial markets. The private citizen member of the board also serves as its Chairman. The Bank’s President and Chief

Executive Officer has served as a director of the Office of Finance since April 1, 2003 and is currently serving a third three-year term that is scheduled to expire on March 31, 2012. (For a discussion of proposed changes to the composition of the Board of Directors of the Office of Finance and certain of its duties and responsibilities, see the section below entitled “Legislative and Regulatory Developments — Other Regulatory Developments — Office of Finance.”)

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

The Finance Agency has regulatory oversight and enforcement authority over the Office of Finance and its directors and officers generally to the same extent as it has such authority over a FHLBank and its respective directors and officers. The FHLBanks are responsible for jointly funding the expenses of the 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).

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

Use of Interest Rate Exchange Agreements

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

In general, the Bank uses interest rate exchange agreements in two ways: either by designating them as a fair value hedge of an underlying financial instrument or by designating them as a hedge of some defined risk in the course of its balance sheet management. For example, the Bank uses interest rate exchange agreements in its overall interest rate risk management activities to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets, including advances and investments, and/or to adjust the interest rate sensitivity of advances and investments to approximate more closely the interest rate sensitivity of its liabilities. In addition to using interest rate exchange agreements to manage mismatches between the coupon features of its assets and liabilities, the Bank also uses interest rate exchange agreements to manage embedded options in assets and liabilities, to preserve the market value of existing assets and liabilities and to reduce funding costs.

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

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

intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties.

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

Competition

Demand for the Bank’s advances is affected by, among other things, the cost of other available sources of funds for its members, including deposits. The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including investment banking concerns, commercial banks and, in certain circumstances, other FHLBanks. Historically, sources of wholesale funds for its members have included unsecured long-term debt, unsecured short-term debt such as federal funds, repurchase agreements and deposits issued into the brokered certificate of deposits market. The availability of funds through these wholesale funding sources can vary from time to time as a result of a variety of factors including, among others, market conditions, members’ creditworthiness and availability of collateral. The availability of these alternative private funding sources could significantly influence the demand for the Bank’s advances. More recently, the Bank’s members have also had access to an expanded range of liquidity facilities initiated by the Federal Reserve Board, the United States Department of the Treasury (“the Treasury”) and the FDIC as part of their efforts to support the financial markets during the recent period of market disruption. These liquidity facilities included the Term Auction Facility (TAF), the Temporary Liquidity Guarantee Program (TLGP), which included both the Debt Guarantee Program and the Transaction Account Guarantee Program, and the increase in the FDIC deposit insurance limit. The availability of these programs to members contributed to a decline in members’ demand for advances from the Bank, particularly in the early part of 2009. TLGP and TAF are currently scheduled to expire in 2010. The increase in the FDIC deposit insurance limit is scheduled to expire on most accounts in 2013. Prior to their expiration and depending upon factors such as their relative cost, these programs could continue to influence demand for the Bank’s advances. The Bank competes against other financing sources on the basis of cost, the relative ease by which the members can access the various sources of funds, collateral requirements, and the flexibility desired by the member when structuring the liability.

As a debt issuer, the Bank competes with Fannie Mae, Freddie Mac and other GSEs, as well as corporate, sovereign and supranational entities for funds raised in the national and global debt markets. In the second half of 2008 and early 2009 when the credit market disruption was particularly acute, certain events combined to limit investor demand for longer term debt securities, including FHLBank consolidated obligation bonds, and to stimulate demand for high quality short-term debt instruments such as U.S. Treasury Bills and FHLBank consolidated obligation discount notes. These events included, but were not limited to, combinations of large commercial banking and investment banking firms and initiatives by the U.S. and other governments to provide at least temporary support for the credit markets. Since none of the Bank’s debt is, directly or indirectly, guaranteed by the U.S. government, investor preferences for securities other entities may issue that are guaranteed by the U.S. government could materially limit their demand for the Bank’s debt. In this case, increases in the supply of such competing debt products could, in the absence of increases in demand, result in higher debt costs for the FHLBanks. Although investor demand for FHLBank debt was sufficient to meet the Bank’s funding needs throughout the recent credit market disruption and the Bank’s access to debt with a wider range of maturities, and the pricing of those bonds, improved somewhat during the second half of 2009 and early 2010, there can be no assurance that this will continue to be the case.

Capital

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

a new capital plan to replace the previous statutory capital structure. The Bank implemented its capital plan and converted to its new capital structure on September 2, 2003.

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

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

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

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

The Bank defines its “core earnings” as earnings exclusive of: (1) gains or losses on the sales of investment securities, if any; (2) gains or losses on the retirement or transfer of debt, if any; (3) prepayment fees on advances; (4) fair value adjustments related to derivatives and hedging activities (except for net interest payments associated with the derivatives); and (5) realized gains and losses associated with early terminations of derivative transactions. Because the Bank’s core earnings generally track short-term interest rates, the Bank has had a long-standing practice of benchmarking the dividend rate that it pays on capital stock to the average federal funds rate. The Bank generally pays dividends in the form of capital stock. When dividends are paid, capital stock is issued in full shares and any fractional shares are paid in cash. For a more detailed discussion of the Bank’s dividend policy and the restrictions relating to its payment of dividends, see Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities and Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Legislative and Regulatory Developments

Housing and Economic Recovery Act

On July 30, 2008, the President of the United States signed into law the Housing and Economic Recovery Act of 2008. As more fully discussed below, among other things, this legislation:

•

established the Finance Agency effective on the date of enactment of the HER Act to regulate (i) Fannie Mae and Freddie Mac (collectively, the “Enterprises”), (ii) the FHLBanks (together with the Enterprises, the “Regulated Entities”) and (iii) the Office of Finance;

•

eliminated the Office of Federal Housing Enterprise Oversight (“OFHEO”) and the Finance Board no later than one year after enactment and restricted their activities during such period to those necessary to wind up their affairs (on October 27, 2008, the Finance Agency announced that the formal integration of OFHEO and the Finance Board into the Finance Agency had been completed);

•

established a director (“Director”) of the Finance Agency with broad authority over the Regulated Entities;

•

amended certain aspects of the FHLBanks’ corporate governance;

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authorizes voluntary mergers of FHLBanks with the approval of the Director and permits the Director to liquidate a FHLBank;

•

made, or requires the Director to study and report on, other changes regarding the membership and activities of the FHLBanks;

•

provides that all regulations, orders, directives and determinations issued by the Finance Board and OFHEO prior to enactment of the HER Act immediately transfer to the Finance Agency and remain in force unless modified, terminated, or set aside by the Director; and

•

granted the Secretary of the Treasury the temporary authority (through December 31, 2009 and subject to certain conditions) to purchase obligations and other securities issued by Fannie Mae, Freddie Mac, and the FHLBanks.

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 issued certain of these regulations, orders and reports, some of which have not yet been finalized. Some of the more significant provisions of the HER Act, and the status of any actions required to be taken by the Finance Agency with respect thereto, are summarized below. The full effect of this legislation on the Bank and its activities will become known only after all of the required regulations, orders, and reports are issued and finalized.

Structure of the Finance Agency

The Director of the Finance Agency is appointed by the President of the United States and confirmed by the Senate, and serves a five-year term. He or she may be removed only for cause. The HER Act provided that the Director of OFHEO at the time of enactment would serve as the Director of the Finance Agency until a permanent Director was appointed and confirmed. James Lockhart, the Director of OFHEO at the time of enactment of the HER Act, served as Director of the Finance Agency until his resignation in August 2009. Currently, Edward DeMarco, formerly Chief Operating Officer and Senior Deputy Director for Housing Mission and Goals for the Finance Agency, is serving as the Acting Director. At the date of this report, a permanent Director has not yet been appointed and confirmed.

The HER Act provides for three Deputy Directors of the Finance Agency. The Deputy Director of the Division of Enterprise Regulation is responsible for the safety and soundness regulation of Fannie Mae and Freddie Mac. The Deputy Director of the Division of FHLBank Regulation is responsible for the safety and soundness regulation of the FHLBanks. Finally, the Deputy Director for Housing Mission and Goals oversees the housing mission and goals of the Enterprises and the community and economic development mission of the FHLBanks.

The Director of the Finance Agency, the Secretary of the Treasury, the Secretary of the Department of Housing and Urban Development, and the Chairman of the SEC constitute the Federal Housing Finance Oversight Board, and the Director serves as the chair of and consults with this board, which has no executive authority.

Finance Agency Assessments

The Finance Agency is funded entirely by assessments from the Regulated Entities. On September 30, 2008, the Finance Agency adopted a final rule establishing policy and procedures for the Finance Agency to impose assessments on the Regulated Entities (the “Assessments Rule”). Pursuant to the Assessments Rule, the Director allocates the annual assessment between the Enterprises and the FHLBanks, with the FHLBanks paying proportional shares of the assessment sufficient to provide for payment of the costs and expenses relating to the FHLBanks, as

determined by the Director. Each FHLBank is required to pay a pro rata share of the annual assessment allocated to the FHLBanks based on the ratio between the FHLBank’s minimum required regulatory capital and the aggregate minimum required regulatory capital of all FHLBanks. A FHLBank’s minimum required regulatory capital is the highest amount of capital necessary for a FHLBank to comply with any of the capital requirements established by the Director and applicable to the FHLBank.

The Director may, at his or her discretion, increase the amount of a Regulated Entity’s assessment (i) if the Regulated Entity is not classified as adequately capitalized (to pay additional estimated costs of regulation of that Regulated Entity) or (ii) to cover costs of enforcement activities related to that Regulated Entity. The Director may also, at any time, collect an additional assessment from a Regulated Entity to otherwise cover the estimated amount of any deficiency as a result of increased costs of regulation of a Regulated Entity. The Director may require the Regulated Entity to pay such additional assessment immediately, rather than through an increase of the Regulated Entity’s next required payment. The Director may assess interest and penalties on any delinquent assessment payment and may enforce an assessment payment through a cease-and-desist proceeding or through civil money penalties.

Authority of the Director

The Director has broad authority to regulate the Regulated Entities, including the authority to set capital requirements, seek prompt corrective action, bring enforcement actions, put a Regulated Entity into receivership, and levy fines against the Regulated Entities and entity-affiliated parties. The HER Act defines an “entity-affiliated party” to include (i) officers, directors, employees, agents, and controlling shareholders of a Regulated Entity; (ii) any shareholder, affiliate, consultant, joint venture partner, and any other person that the Director determines participates in the conduct of the Regulated Entity’s affairs; (iii) any independent contractor of a Regulated Entity that knowingly or recklessly participates in any violation of law or regulation, any breach of fiduciary duty, or any unsafe or unsound practice; (iv) any not-for-profit corporation that receives its principal funding, on an ongoing basis, from any Regulated Entity; and (v) the Office of Finance.

In connection with this authority, on January 30, 2009, the Finance Agency adopted an interim final rule establishing capital classifications and critical capital levels for the FHLBanks (the “Capital Classification Regulation”). On August 4, 2009, the Finance Agency adopted the interim final rule as a final regulation, subject to amendments meant to clarify certain provisions. On February 8, 2010, the Finance Agency issued a proposed rule with request for comment setting forth standards and procedures that the Director would apply in determining whether to impose a temporary increase in the minimum capital level of a FHLBank. Comments on the proposed rule may be submitted to the Finance Agency through April 9, 2010. For additional information regarding the Capital Classification Regulation and the Bank’s capital requirements, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk-Based Capital Rules and Other Capital Requirements.

Executive Compensation

The HER Act requires the Director to prohibit a FHLBank from providing compensation to its executive officers that is not reasonable and comparable with compensation for employees in similar businesses involving similar duties and responsibilities. Through December 31, 2009, the Director had additional authority in certain circumstances to approve, disapprove or modify the compensation of executives of the Regulated Entities. Pursuant to the Capital Classification Regulation, if a FHLBank is undercapitalized, the Director may also restrict executive officer compensation. The Capital Classification Regulation defines “executive officer” to include (i) the named executive officers identified in a FHLBank’s Annual Report on Form 10-K, (ii) other executives of a FHLBank who occupy certain positions or who are in charge of certain subject areas and (iii) any other individual, without regard to title, who is in charge of a principal business unit, division or function or who reports directly to a FHLBank’s chairman, vice chairman, president or chief operating officer.

On June 5, 2009, the Finance Agency issued a proposed rule to set forth requirements and processes with respect to compensation provided to executive officers by a FHLBank. Comments on the proposed rule could be submitted to the Finance Agency through August 4, 2009.

If adopted as proposed, the proposed rule would allow the Director to review the compensation arrangements for any executive officer of a FHLBank at any time. The proposed rule would define “executive officer” as the Capital Classification Regulation does (as set forth above). The Director could prohibit the FHLBank, and the FHLBank would be prohibited, from providing compensation to any such executive officer that is not reasonable and comparable with compensation for employees in other similar businesses involving similar duties and responsibilities. In determining whether such compensation is reasonable and comparable, the Director could consider any factors the Director considered relevant (including any wrongdoing on the part of the executive officer). However, the Director would not be able to prescribe or set a specified level or range of compensation.

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

On October 27, 2009, the Finance Agency issued Advisory Bulletin 2009-AB-02, “Principles for Executive Compensation at the Federal Home Loan Banks and the Office of Finance” (“AB 2009-02”). In AB 2009-02, the Finance Agency outlines several principles for sound incentive compensation practices to which the FHLBanks should adhere in setting executive compensation policies and practices. Those principles are (i) executive compensation must be reasonable and comparable to that offered to executives in similar positions at other comparable financial institutions, (ii) executive incentive compensation should be consistent with sound risk management and preservation of the par value of a FHLBank’s capital stock, (iii) a significant percentage of an executive’s incentive-based compensation should be tied to longer-term performance and outcome-indicators, (iv) a significant percentage of an executive’s incentive-based compensation should be deferred and made contingent upon performance over several years and (v) the board of directors of each FHLBank and the Office of Finance should promote accountability and transparency in the process of setting compensation. In evaluating compensation at the FHLBanks, the Director will consider the extent to which an executive’s compensation is consistent with the above principles.

Indemnification Payments and Golden Parachute Payments

The Director may also prohibit or limit, by regulation or order, any indemnification payment or golden parachute payment. In September 2008, the Finance Agency issued an interim final regulation relating to golden parachute payments (the “Golden Parachute Regulation”) and indicated it would publish a separate rulemaking relating to indemnification payments in the future. On January 29, 2009, the Finance Agency issued a final rule setting forth the factors to be considered by the Director in carrying out his or her authority to limit golden parachute payments to entity-affiliated parties (which factors are discussed below).

The Golden Parachute Regulation defines a “golden parachute payment” as any payment (or any agreement to make any payment) in the nature of compensation by any Regulated Entity for the benefit of any current entity-affiliated party that (i) is contingent on, or by its terms is payable on or after, the termination of such party’s primary employment or affiliation with the Regulated Entity and (ii) is received on or after the date on which one of the following events occurs (a “triggering event”): (a) the Regulated Entity became insolvent; (b) any conservator or receiver is appointed for the Regulated Entity; or (c) the Director determines that the Regulated Entity is in a troubled condition. Additionally, any payment that would be a golden parachute payment but for the fact that such payment was made before the date that a triggering event occurred will be treated as a golden parachute payment if the payment was made in contemplation of the triggering event.

The following types of payments are excluded from the definition of “golden parachute payment” under the Golden Parachute Regulation: (i) any payment made pursuant to a 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 bona fide deferred compensation plan or arrangement that the Director determines, by regulation or order, to be permissible; or (iii) any payment made by reason of death or by reason of termination caused by the disability of an entity-affiliated party.

In determining whether to prohibit or limit a golden parachute payment, the Golden Parachute Regulation requires the Director to consider the following factors: (i) whether there is a reasonable basis to believe that an entity-affiliated party has committed any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the Regulated Entity that has had a material effect on the financial condition of the Regulated Entity; (ii) whether there is a reasonable basis to believe that the entity-affiliated party is substantially responsible for the insolvency of the Regulated Entity, or the troubled condition of the Regulated Entity; (iii) whether there is a reasonable basis to believe that the entity-affiliated party has materially violated any applicable provision of Federal or State law or regulation that has had a material effect on the financial condition of the Regulated Entity; (iv) whether the entity-affiliated party was in a position of managerial or fiduciary responsibility; (v) the length of time that the party was affiliated with the Regulated Entity, and the degree to which the payment reasonably reflects compensation earned over the period of employment and the compensation involved represents a reasonable payment for services rendered; and (vi) any other factor the Director determines is relevant to the facts and circumstances surrounding the golden parachute payment, including any fraudulent act or omission, breach of fiduciary duty, violation of law, rule, regulation, order or written agreement, and the level of willful misconduct, breach of fiduciary duty, and malfeasance on the part of an entity-affiliated party.

On November 14, 2008, the Finance Agency proposed to amend the Golden Parachute Regulation to include provisions addressing prohibited and permissible indemnification payments in the event the Finance Agency were to institute an administrative proceeding or civil action through issuance of a notice of charges under regulations issued by the Director. The Finance Agency accepted comments on these proposed amendments that were received on or before December 29, 2008.

On June 29, 2009, the Finance Agency issued a proposed rule to amend further the Golden Parachute 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 the November 14, 2008 amendments to the Golden Parachute Regulation. The proposed rule would delete one provision contained in the earlier 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 Regulated Entity, including any contingency for termination of employment, would not be provable claims or actual, direct compensatory damage claims against such receiver.

In addition to the payments described above that are excluded from the definition of “golden parachute payment,” the proposed rule would specify that “golden parachute payment” also does not include (i) 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); (ii) 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; (iii) 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 (iv) any other payment that the Director determines to be permissible. The proposed rule would also define “bona fide deferred compensation plan or arrangement” to clarify when a payment made pursuant to a deferred compensation plan or arrangement would be excluded from the definition of “golden parachute payment.”

The proposed rule would extend the prohibition against certain golden parachute payments to former entity-affiliated parties. With respect to potentially prohibited golden parachute payments, a Regulated Entity could agree to make or could make a golden parachute payment if (i) the Director determined that such a payment or agreement was permissible; (ii) such an agreement was made in order to hire a person to become an entity-affiliated party when the Regulated Entity was insolvent, had a conservator or receiver appointed for it, or was in a troubled condition (or the person was being hired in an effort to prevent one of these conditions from occurring), and the Director consented in writing to the amount and terms of the golden parachute payment; or (iii) with the Director’s consent, such a payment was made pursuant to an agreement that provided 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 Regulated Entity.

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 Regulated Entity with an entity-affiliated party on or after the date the regulation is effective. As discussed in Item 11 — Executive Compensation, the Bank has entered into employment agreements with each of its named executive officers. If the Finance Agency issued a final rule that applied the provisions of the proposed amendments to agreements in existence before the date the final rule was effective (which would include the Bank’s existing employment agreements), the effect of the proposed amendments would be to reduce payments that might otherwise be payable to those named executive officers.

Differences between the Enterprises and FHLBanks

The HER Act requires the Director, before issuing any new regulation or taking other agency action of general applicability and future effect relating to the FHLBanks, to take into account the differences between the Enterprises and the FHLBanks with respect to the FHLBanks’ (i) cooperative ownership structure, (ii) mission of providing liquidity to members, (iii) affordable housing and community development mission, (iv) capital structure and (v) joint and several liability, as well as any other differences that the Director considers appropriate.

Corporate Governance of the FHLBanks

Under the HER Act, each FHLBank is governed by a board of directors of 13 persons or so many persons as the Director may determine. The HER Act divides directors of FHLBanks into two classes. The first class is comprised of “member” directors who are elected by the member institutions of each state in the FHLBank’s district to represent that state. The second class is comprised of “independent” directors who are nominated by a FHLBank’s board of directors, after consultation with its affordable housing Advisory Council, and elected by the FHLBank’s members at-large.

On September 26, 2008, the Finance Agency issued an interim final rule with request for comments regarding the eligibility and election of individuals to serve on the boards of directors of the FHLBanks. On October 7, 2009, the Finance Agency issued a final rule, effective November 6, 2009, regarding the eligibility and election of FHLBank directors. For information regarding the eligibility and election of the Bank’s Board of Directors, see Item 10 — Directors, Executive Officers and Corporate Governance.

FHLBank Directors’ Compensation and Expenses

The HER Act repealed the prior statutory limits on compensation of directors of FHLBanks. As a result, FHLBank director fees are to be determined at the discretion of a FHLBank’s board of directors, provided such fees are required to be reasonable.

On October 23, 2009, the Finance Agency published a notice of proposed rulemaking, with a request for comments, regarding payment by FHLBanks of their directors’ compensation and expenses. Comments on the proposed rule could be submitted to the Finance Agency through December 7, 2009.

If adopted, the proposed rule would specify that each FHLBank may pay its directors reasonable compensation for the time required of them, and their necessary expenses, in the performance of their duties, as determined by the FHLBank’s board of directors. The compensation paid by a FHLBank to a director would be required to reflect the amount of time the director spent on official FHLBank business, subject to reduction as necessary to reflect lesser attendance or performance at board or committee meetings during a given year.

Pursuant to the proposed rule, the Director would review compensation paid by a FHLBank to its directors. The Director could determine that the compensation and/or expenses to be paid to the directors are not reasonable. In such case, the Director could order the FHLBank to refrain from making any further payments; provided, however, that such order would only be applied prospectively and would not affect any compensation or expense payments made prior to the date of the Director’s determination and order. To assist the Director in reviewing the compensation and expenses of FHLBank directors, each FHLBank would be required to submit to the Director by specified deadlines (i) the compensation anticipated to be paid to its directors for the following calendar year, (ii) the amount of compensation and expenses paid to each director for the immediately preceding calendar year and (iii) a

copy of the FHLBank’s written compensation policy, along with all studies or other supporting materials upon which the board of directors relied in determining the level of compensation and expenses to pay to its directors.

For information regarding the compensation of the Bank’s directors, see Item 11 — Executive Compensation.

Community Development Financial Institutions

The HER Act makes 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. On January 5, 2010, the Finance Agency issued a final rule establishing the eligibility and procedural requirements for CDFIs that wish to become FHLBank members. The newly-eligible CDFIs include community development loan funds, venture capital funds and state-chartered credit unions without federal insurance.

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.

Housing Goals

The HER Act requires the Director to establish housing goals with respect to the purchase of mortgages, if any, by the FHLBanks and to report annually to the United States Congress (“Congress”) on the FHLBanks’ performance in meeting such goals. In establishing the housing goals, the Director is required to consider the unique mission and ownership structure of the FHLBanks. To facilitate an orderly transition, the Director is charged with establishing interim housing goals for each of the two calendar years following the date of enactment of the HER Act.

Sharing of Information Regarding the FHLBanks

The HER Act requires the Director to promulgate regulations under which he or she will make available to each FHLBank information regarding the other FHLBanks in order to enable the FHLBanks to assess their risk under their joint and several liability with respect to consolidated obligations and to comply with their disclosure obligations under the Exchange Act. Exceptions to such disclosure are provided with respect to information that is proprietary.

Exemptions from Certain SEC Laws and Regulations

The HER Act exempts the FHLBanks from certain requirements under the Federal securities laws, including the Exchange Act, and the SEC’s related regulations. These exemptions arise from the distinctive nature and the cooperative ownership structure of the FHLBanks and parallel relief granted by the SEC to the FHLBanks in no-action letters issued at the time the FHLBanks registered with the SEC under the Exchange Act. In issuing future regulations, the SEC is directed by the HER Act to take account of the distinctive characteristics of the FHLBanks when evaluating (i) the accounting treatment with respect to payments to the Resolution Funding Corporation, (ii) the role of the combined financial statements of the FHLBanks, (iii) the accounting classification of redeemable capital stock, and (iv) the accounting treatment related to the joint and several nature of the obligations of the FHLBanks.

Liquidations, Voluntary Mergers, and Reduction in the Number of FHLBank Districts

The HER Act permits any FHLBank to voluntarily merge with another FHLBank with the approval of the Director and the boards of directors of the FHLBanks involved. The Director is required to promulgate regulations establishing the conditions and procedures for the consideration and approval of any voluntary merger, including the procedures for FHLBank member approval.

The Director is authorized on 30 days’ prior notice to liquidate or reorganize any FHLBank. A FHLBank that the Director proposes to liquidate or reorganize is entitled to contest the Director’s determination in a hearing on the record in accordance with the provisions of the Administrative Procedure Act.

The Director is authorized to reduce the number of FHLBank districts to fewer than eight as a result of the merger of FHLBanks or the Director’s decision to liquidate a FHLBank. Prior law required that there be no fewer than eight and no more than 12 FHLBanks.

CFIs

CFIs are redefined by the HER Act as FDIC-insured institutions with average total assets over the three-year period preceding measurement of less than $1.0 billion (up from the statutory amount of $500 million, inflation adjusted to $625 million immediately prior to enactment of the HER Act). The $1.0 billion amount will continue to be adjusted annually based on any increase in the Consumer Price Index.

Loans for community development activities were added to loans for small business, small farm, and small agri-business as permissible purposes for advances to CFIs (including long-term advances). On February 23, 2010, the Finance Agency issued a proposed rule with request for comments to define certain terms and provide guidance necessary to assist the FHLBanks in accepting this type of collateral. Comments on the proposed rule may be submitted to the Finance Agency through April 26, 2010. The Bank has not yet determined the effect on the Bank of the inclusion of loans for community development activities by CFIs as loans eligible to support advances.

Public Use Data Base and Reporting to Congress

The HER Act requires the FHLBanks to report to the Director census tract level data regarding mortgages they purchase, if any. Such data are to be reported in a form consistent with other Federal laws, including the Home Mortgage Disclosure Act, and any other requirements that the Director imposes. The Director is required to report such data to Congress and, except with respect to proprietary information and personally identifiable information, to make the data available to the public.

Study of Securitization of Home Mortgage Loans by the FHLBanks

Within one year of enactment of the HER Act, the Director was to provide to Congress a report on a study of securitization of home mortgage loans purchased from member financial institutions under the 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. 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 could 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. This interim final rule amended the 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 under the HOPE for Homeowners Program of the Federal Housing Administration (“FHA”).

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 second interim final rule could be submitted to the Finance Agency through October 5, 2009.

The second interim final rule amended 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, the loan is refinanced under a program offered by the United States Department of Agriculture, Fannie Mae, Freddie Mac, a state or local government, or a state or local housing finance agency (an “eligible targeted refinancing program”) and the loan meets certain other conditions.

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

Letters of Credit to Guarantee Bonds

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

The HER Act authorizes FHLBanks, subject to certain conditions, to issue a letter of credit or confirmation in connection with the original issuance of tax-exempt bonds during the period from enactment of the HER Act to December 31, 2010, and to renew or extend any such letter of credit or confirmation, without the bonds potentially losing their tax-exempt status. A FHLBank may issue such letter of credit or confirmation without regard to the purpose of the issuance of the bonds (i.e., the bonds do not have to be issued solely to support certain housing programs).

Minorities, Women, and Diversity in the Workforce

The HER Act requires each Regulated Entity to establish or designate an Office of Minority and Women Inclusion that is responsible for carrying out all matters relating to diversity in management, employment, and business practices. On January 11, 2010, the Finance Agency issued a proposed rule to effect this provision of the HER Act. Comments on the proposed rule may be submitted to the Finance Agency through April 26, 2010.

Joint Offices

The HER Act repeals the provision in prior law that prohibited the FHLBanks from establishing any joint offices other than the Office of Finance. At the present time, the Bank does not plan to establish any joint office with one or more FHLBanks.

Temporary Authority of the Secretary of the Treasury

The HER Act granted the Secretary of the Treasury the temporary authority (through December 31, 2009) to purchase any obligations and other securities issued by the Regulated Entities, if he or she determined that such purchase was necessary to provide stability to financial markets, to prevent disruptions in the availability of mortgage finance, and to protect the taxpayers. For the FHLBanks, this temporary authorization supplemented the existing authority of the Secretary of the Treasury under the FHLB Act to purchase up to $4.0 billion of FHLBank obligations. Since 1977, the Treasury has not owned any of the FHLBanks’ consolidated obligations under this previous authority.

In connection with the Secretary of the Treasury’s authority under the HER Act, on September 9, 2008, the Bank entered into a Lending Agreement (the “Agreement”) with the Treasury. Each of the other 11 FHLBanks also entered into its own Lending Agreement with the Treasury that was identical to the Agreement entered into by the Bank (collectively, the “Agreements”). The FHLBanks entered into these Agreements in connection with the Treasury’s establishment of a Government Sponsored Enterprise Credit Facility that was designed to serve as a contingent source of liquidity for the Regulated Entities.

The Agreements terminated on December 31, 2009 when the temporary authority of the Secretary of the Treasury expired. None of the FHLBanks ever borrowed under the Agreements.

Reporting of Fraudulent Financial Instruments

On June 17, 2009, the Finance Agency issued a proposed regulation 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. On January 27, 2010, the Finance Agency issued a final regulation, effective February 26, 2010, regarding reporting by the FHLBanks of fraudulent financial instruments.

The final regulation requires a FHLBank to submit to the Director a timely written report upon discovery by the FHLBank that it has purchased or sold a fraudulent loan or financial instrument, or suspects a possible fraud relating to the purchase or sale of any loan or financial instrument. “Purchased or sold or relating to the purchase or sale” means any transaction involving a financial instrument including, but not limited to, any purchase, sale, other acquisition, or creation of a financial instrument by the member of a FHLBank to be pledged as collateral to the FHLBank to secure an advance by the FHLBank to that member, the pledging by a member to a FHLBank of such financial instrument to secure such an advance, the making of a grant by a FHLBank under its affordable housing program or community investment program, and the effecting of a wire transfer or other form of electronic payments transaction by the FHLBank. “Financial instrument” means any legally enforceable agreement, certificate, or other writing, in hard copy or electronic form, having monetary value including, but not limited to, any agreement, certificate, or other writing evidencing an asset pledged as collateral to a FHLBank by a member to secure an advance by the FHLBank to that member. “Fraud” means a misstatement, misrepresentation or omission that cannot be corrected and that was relied upon by a FHLBank to purchase or sell a loan or financial instrument.

The final regulation requires each FHLBank to establish and maintain adequate and efficient internal controls, policies and procedures and an operational training program to discover and report fraud or possible fraud in connection with the purchase or sale of any loan or financial instrument. In the preamble to the final regulation, the Finance Agency stated it would provide additional guidance regarding the implementation of this regulation.

Pending issuance of the Finance Agency’s guidance, the Finance Agency has instructed the FHLBanks to begin planning for implementation of the final regulation, notably, looking to determine the best approaches for training programs for the discovery of fraud or possible fraud; planning policy, procedures and internal controls on reporting of discovered fraud to their boards of directors; and planning for fraud reporting to the Finance Agency. The Finance Agency also provided the FHLBanks with a sample fraud report that each FHLBank would be required to complete to report a fraud or possible fraud.

Other Regulatory Developments

Nontraditional and Subprime Residential Mortgage Loans

On July 1, 2008, the Finance Board issued Advisory Bulletin 2008-AB-02: “Application of Guidance on Nontraditional and Subprime Residential Mortgage Loans to Specific FHLBank Assets” (AB 2008-02), which supplements an earlier Finance Board directive (Advisory Bulletin 2007-AB-01: “Nontraditional and Subprime Residential Mortgage Loans”) by providing written guidance regarding mortgages purchased under the AMA programs, investments in private-label (non-agency) MBS and collateral securing advances. AB 2008-02 relies in part on the standards imposed by the Federal banking agencies in the Interagency Guidance. Effective upon issuance, AB 2008-02 requires the following: (i) mortgage loan commitments entered into by the FHLBanks under the AMA programs must comply with all aspects of the Interagency Guidance, (ii) purchases of private-label MBS issued after July 10, 2007 by the FHLBanks must be limited to securities in which the underlying mortgage loans comply with all aspects of the Interagency Guidance, and (iii) mortgages (and securities representing an interest in mortgage loans) that were originated or acquired by a member after July 10, 2007 may be included in calculating the amount of advances that can be made to that member only if those mortgages comply with all aspects of the Interagency Guidance; similarly, private-label MBS that were issued after July 10, 2007 may be included in calculating the amount of advances that can be made to a member only if the underlying mortgages comply with all aspects of the Interagency Guidance.

The guidance relating to asset purchases is not expected to have an impact on the Bank in the foreseeable future as it has no current intentions to purchase mortgage loans or private-label MBS. The Bank has implemented policies to ensure it is in compliance with the remaining portion of the guidance, including: (1) requiring members who pledge subprime and nontraditional mortgage loans as collateral on advances to execute a confirmation that all subprime and nontraditional residential mortgage loans originated after July 10, 2007 comply with all aspects of the Interagency Guidance and (2) requiring all members who pledge private label RMBS issued after July 10, 2007 as collateral to provide a copy of enforceable representations and warranties from the issuer of the security that the loans underlying the security were underwritten in conformance with all aspects of the Interagency Guidance or to

otherwise assert and demonstrate (based on the security’s prospectus or other related documentation) that the underlying loans were underwritten in conformance with the Interagency Guidance. The implementation of these policies resulted in a reduction of borrowing capacity for some members and required some members to provide substitute collateral for pledged collateral that did not comply with this guidance. However, these new regulatory requirements have not had a significant impact on the level of advances outstanding.

Other-Than-Temporary Impairment

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 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 the OTTI accounting guidance issued by the Financial Accounting Standards Board in April 2009, the Finance Agency guidance required all FHLBanks to early adopt the OTTI accounting guidance 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 the OTTI accounting guidance, see the audited financial statements accompanying this report (specifically, Note 1 beginning on page F-9).

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, third and fourth quarter 2009 OTTI assessments.

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.

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. Initially, comments on the proposed rule could be submitted to the Finance Agency through October 5, 2009. On October 2, 2009, the Finance Agency extended the comment period until November 4, 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 would be required to be a United States citizen and the independent directors, as a group, would be required

to have substantial experience in financial and accounting matters. An independent director could 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 of the Office of Finance, in consultation with the Finance Agency, could 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. The Audit Committee would also have the exclusive authority to employ and contract for the services of an independent, external auditor for the FHLBanks’ annual and quarterly combined financial statements.

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.

Regulatory Oversight

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

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

As an SEC registrant, the Bank is subject to the periodic disclosure regime as administered and interpreted by the SEC. The Bank must also submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General; these reports include a statement of financial condition, a statement of operations, a statement of cash flows, a statement of internal accounting and administrative

control systems, and the report of the independent registered public accounting firm on the financial statements. In addition, the Treasury receives the Finance Agency’s annual report to Congress, weekly reports reflecting securities transactions of the FHLBanks, and other reports reflecting the operations of the FHLBanks.

Employees

As of December 31, 2009, the Bank employed 194 people, all of whom were located in one office in Irving, Texas. None of the Bank’s employees are subject to a collective bargaining agreement and the Bank believes its relationship with its employees is good.

REFCORP and AHP Assessments

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

As part of the GLB Act of 1999, the FHLBanks’ $300 million annual obligation to REFCORP was modified to 20 percent of their annual net earnings before charges for REFCORP (but after expenses for AHP). The FHLBanks will have this obligation until the aggregate amounts actually paid by all 12 FHLBanks are equivalent to a $300 million annual annuity whose final maturity date is April 15, 2030, at which point the required payment of each FHLBank to REFCORP will be fully satisfied. As specified in the Finance Agency regulation that implements section 607 of the GLB Act, the amount by which the combined REFCORP payments of all of the FHLBanks for any quarter exceeds the $75 million benchmark payment is used to simulate the purchase of zero-coupon Treasury bonds to “defease” all or a portion of the most-distant remaining quarterly benchmark payment. Because the FHLBanks’ recent REFCORP payments have exceeded $300 million per year, those extra payments have defeased $2 million of the $75 million benchmark payment for the first quarter of 2012 and all scheduled payments thereafter. The defeased benchmark payments (or portions thereof) can be reinstated if future actual REFCORP payments fall short of the $75 million benchmark in any quarter. For additional discussion, see the audited financial statements accompanying this report (specifically, Note 12 on page F-31). Cumulative amounts to be paid by the Bank to REFCORP cannot be determined at this time because the amount is dependent upon the future earnings of each FHLBank and interest rates.

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

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

Business Strategy and Outlook

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

As described in its Strategic Business Plan, the Bank operates under a cooperative business model that is intended to maximize the overall value of membership in the Bank. This business model envisions that the Bank will limit and carefully manage its risk profile while generating sufficient profitability to maintain an appropriate level of retained

earnings and pay dividends at or slightly above the average federal funds rate. Consistent with this business model, the Bank has placed the highest priority on being able to meet its members’ liquidity and funding needs throughout the recent period of credit market disruption.

The Bank intends to continue to operate under its cooperative business model for the foreseeable future. The Bank’s core earnings are expected to rise and fall with the general level of market interest rates, particularly short-term money market rates. While there can be no assurance about 2010 earnings, dividends, or regulatory actions regarding the Bank’s dividend payments, the Bank currently anticipates that its 2010 earnings will be sufficient both to pay dividends at a target rate equal to or slightly above the average federal funds rate for the applicable quarterly periods of 2010 and to continue building retained earnings.

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

Due primarily to credit market disruptions, demand for advances from all segments of the Bank’s membership base was elevated from the third quarter of 2007 through the third quarter of 2008. Since the fourth quarter of 2008, aggregate advances have declined from their highest levels, but remain above pre-credit crisis levels. As the credit markets return to more normal conditions, and particularly if general economic weakness reduces member lending opportunities and creates financial stress for the Bank’s members, then demand for advances may continue to fall somewhat from recent levels. In the longer term, however, the Bank believes that there remains potential to sustain a substantial portion of the recent advances growth from among its CFIs and other small and intermediate-sized institutions. There remains uncertainty about the extent to which the Bank’s future membership base will include larger institutions that will borrow in sufficient quantity to provide economies of scale that will sustain the current economics of the Bank’s business model over the long term.

While the Bank’s primary focus will continue to be prudently meeting the liquidity and funding needs of its members, in order to become a more valuable resource to its members, the Bank intends to continue to evaluate opportunities as they arise to diversify its product offerings and its income stream. In particular, the Bank began offering interest rate derivatives to its members in mid-2008. In addition, in late 2009 the Bank received approval from the Finance Agency to begin offering standby bond purchase services to state housing finance agencies within its district. In the future, the Bank intends to expand the services that it can provide electronically through the secure electronic delivery channel currently used extensively by members to execute advances, initiate wire transfers, provide securities safekeeping instructions, and obtain a wide variety of reports and information about their business relationship with the Bank. The FHLB Act and Finance Agency regulations limit the products and services that the Bank can offer to its members and govern many of the terms of the products and services that the Bank offers. The Bank is also required by regulation to file new business activity notices with the Finance Agency for any new products or services it wants to offer its members, and will have to assess any potential new products or services offerings in light of these statutory and regulatory restrictions.

ITEM 1A.		RISK FACTORS

Our profitability is vulnerable to interest rate fluctuations.

We are subject to significant risks from changes in interest rates because most of our assets and liabilities are financial instruments. Our profitability depends significantly on our net interest income and is impacted by changes in the fair value of interest rate derivatives and any associated hedged items. Changes in interest rates can impact our net interest income as well as the values of our derivatives and certain other assets and liabilities. Changes in overall market interest rates, changes in the relationships between short-term and long-term market interest rates, changes in the relationship between different interest rate indices, or differences in the timing of rate resets for assets and liabilities or related interest rate derivatives with interest rates tied to those indices, can affect the interest rates

received from our interest-earning assets differently than those paid on our interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income, which would result in a decrease in our net interest spread, or a net decrease in earnings related to the relationship between changes in the valuation of our derivatives and any associated hedged items.

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

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

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

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

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

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

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

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

On December 31, 2008, Wells Fargo & Company (“Wells Fargo”) acquired Wachovia Corporation, the holding company for Wachovia Bank, FSB (“Wachovia”), our largest borrower and shareholder as of that date. On November 1, 2009, Wells Fargo converted Wachovia’s thrift charter to a national bank charter and then merged it into an out-of-district national bank affiliate, Wells Fargo Bank South Central, National Association (“WFSC”), which retained the former main office of Wachovia in Houston, Texas as its main office. On November 2, 2009, WFSC applied for membership in the Bank and its application was approved on December 30, 2009. We are currently unable to predict whether WFSC will alter its predecessor’s borrowing relationship with us. Outstanding advances to WFSC were $18.2 billion at December 31, 2009, which represented 38.9 percent of our total outstanding advances as of that date.

The loss of WFSC or one or more other borrowers that represent a significant proportion of our business, or a significant reduction in the borrowing levels of one or more of these borrowers, could, depending on the magnitude of the impact, cause us to lower dividend rates, raise advances rates, attempt to reduce operating expenses (which could cause a reduction in service levels), or undertake some combination of these actions. The magnitude of the impact would depend, in part, on our size and profitability at the time such institution repays its advances to us.

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

Market factors could reduce loan demand from our member institutions, which could adversely affect our earnings. Demand for advances from all segments of our membership increased throughout the period of credit market disruption that began in the third quarter of 2007, peaked at the beginning of the fourth quarter of 2008 and declined thereafter. As markets return to more normal conditions, whether as a result of the various initiatives undertaken by the government or otherwise, demand for advances may continue to decline. Continued weakness in general economic conditions may also reduce members’ needs for funding. A further decline in the demand for advances, if significant, could negatively affect our results of operations.

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

Our primary business is making advances to our members. We compete with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks and, in certain circumstances, other FHLBanks. Our members have access to alternative funding sources, which may provide more favorable terms than we do on our advances, including more flexible credit or collateral standards. More recently, our members have had access to an expanded range of liquidity facilities initiated by the Federal Reserve Board, the United States Department of the Treasury (the “Treasury”) and the FDIC as part of their efforts to support the financial markets during the recent period of market disruption. While some of these programs are scheduled to be discontinued, other programs may continue to be available for some period into the future.

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

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

We currently have the highest credit rating from Moody’s and S&P, the consolidated obligations issued by the FHLBanks are rated Aaa/P-1 by Moody’s and AAA/A-1+ by S&P, and the other FHLBanks have each been assigned high individual credit ratings as well. As of February 28, 2010, Moody’s had assigned its highest rating to each individual FHLBank, and S&P had assigned individual long-term counterparty credit ratings of AAA/A-1+ to ten FHLBanks and ratings of AA+/A-1+ to the remaining two FHLBanks.

Currently, the FHLBank of Chicago is operating under a consensual cease and desist order, which states that the Finance Board (now Finance Agency) has determined that requiring the FHLBank of Chicago to take the actions specified in the order will “improve the condition and practices of the [FHLBank of Chicago], stabilize its capital, and provide the [FHLBank of Chicago] an opportunity to address the principal supervisory concerns identified by

the Finance Board.” In addition, the Director of the Finance Agency recently classified the FHLBank of Seattle as undercapitalized. Further, several FHLBanks incurred net losses for individual quarters or all of 2009 that were primarily the result of other-than-temporary impairment charges on non-agency residential mortgage-backed securities, and these FHLBanks have taken actions to preserve capital in light of these results, such as the suspension of quarterly dividends or repurchases or redemptions of capital stock. These regulatory actions, financial results and/or subsequent actions could cause the rating agencies to downgrade the ratings assigned either to any of the affected FHLBanks or to the FHLBanks’ consolidated obligations. Unfavorable ratings actions, negative guidance from the rating agencies, or negative announcements by one or more of the FHLBanks may adversely affect our cost of funds and ability to issue consolidated obligations on favorable terms, which could negatively affect our financial condition and results of operations.

Competition for funding may adversely affect our cost of funds and our access to the capital markets.

We compete with Fannie Mae, Freddie Mac and other GSEs, as well as commercial banking, corporate, sovereign and supranational entities for funds raised through the issuance of unsecured debt in the global debt markets. As a result of the U.S. and other national governments’ recent efforts to support the credit markets, some portion of the debt of some of these issuers is now supported by various forms of government guarantees. During late 2008 and the early part of 2009, such government guarantees affected investors’ preferences for, and increased the cost of, longer-term FHLBank debt relative to the debt of some of these issuers. While the impact of these events on our cost of funds began to lessen in the second half of 2009, similar increases in the relative cost of our debt due to these or other forms of increased debt market competition that might develop, could adversely affect our financial condition and results of operations.

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

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

If investor preferences for securities other entities may issue materially limit their demand for our debt which is not, directly or indirectly, guaranteed by the U.S. government, our ability to fund our operations and to meet the credit and liquidity needs of our members by accessing the capital markets could eventually be compromised.

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

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

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

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

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

We are exposed to credit risk from our secured and unsecured investment portfolio and our MPF loans held in portfolio. A worsening of the current economic downturn, further declines in 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 MPF loans or additional losses on our investment portfolio.

In particular, during 2009, delinquencies and losses with respect to residential mortgage loans generally increased and residential property values declined in many states. Due to these deteriorating conditions, including the adverse change in actual and expected future home prices, 7 of our 40 non-agency residential mortgage-backed securities were deemed to be other-than-temporarily impaired during 2009. The credit losses associated with these seven securities totaled $4.0 million during the year ended December 31, 2009. As of December 31, 2009, the unpaid principal balance of the 40 securities totaled $515 million.

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

On May 20, 2009, legislation was enacted that allows 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. 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. We are unable to predict what impact, if any, that this legislation may have on the ultimate recoverability of our investments in non-agency residential mortgage-backed securities.

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

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

We actively use derivative instruments to manage interest rate risk. The effectiveness of our interest rate risk management strategy depends to a significant extent upon our ability to enter into these instruments with acceptable counterparties in the necessary quantities and under satisfactory terms to hedge our corresponding assets and liabilities. We currently enjoy ready access to the interest rate derivatives market through a diverse group of highly rated counterparties. Several factors could have an adverse impact on our access to the derivatives market, including changes in our credit rating, changes in the current counterparties’ credit ratings, reductions in our counterparties’ allocation of resources to the interest rate derivatives business, and changes in the liquidity of that market created by a variety of regulatory or market factors. In addition, recent financial market disruptions have resulted in mergers of several of our derivatives counterparties. The increasing consolidation of the financial services industry, if it

continues, will increase our concentration risk with respect to counterparties in this industry. Further, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry in general, could lead to market-wide disruptions in which it may be difficult for us to find counterparties for such transactions. If such changes in our access to the derivatives market result in our inability to manage our hedging activities efficiently and economically, we may be unable to find economical alternative means to manage our interest rate risk effectively, which could adversely affect our financial condition and results of operations.

In December 2009, the House of Representatives approved the Over-the-Counter Derivatives Markets Act of 2009 (the “Act”), which would regulate the over-the-counter (“OTC”) derivatives market. Among other things, the Act requires all standardized swap transactions entered into by dealers or “major swap participants” to be cleared and traded on an exchange or electronic platform. Rulemaking authority would be held jointly by the Commodity Futures Trading Commission and the Securities and Exchange Commission. The Act defines a major swap participant as anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposure to others that it requires monitoring. Currently, all of the derivatives we use to manage our interest rate risk are negotiated in the OTC market. With the exception of interest rate swaps transacted with members, we enter into swaps only to hedge interest rate risk (a commercial risk to us). In March 2010, the Senate Committee on Banking, Housing and Urban Affairs approved draft legislation, the “Restoring American Financial Stability Act,” which also contains provisions that would regulate the OTC derivatives market. This legislation has not yet been formally introduced in the Senate. The content of any legislation that might be enacted into law (and therefore its impact on us) cannot be determined at this time.

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

We regularly enter into derivative transactions with major banks. Recently, some of our derivative counterparties have experienced various degrees of financial stress including, in the case of one counterparty, bankruptcy. During 2008, Lehman Brothers Holdings, Inc. and its affiliate Lehman Brothers Special Financing, Inc. (which was our counterparty on 302 derivative contracts with a total notional amount of approximately $5.6 billion) filed for bankruptcy protection. While we did not incur a material loss related to these bankruptcies, our financial condition and results of operations could be adversely affected if other derivative counterparties to whom we have exposure fail, and any collateral that we have in place is insufficient to cover their obligations to us.

We enter into collateral exchange agreements with all of our derivative counterparties that include minimum collateral thresholds. The collateral exchange agreements require the delivery of collateral consisting of cash or very liquid, highly rated securities if credit risk exposures rise above the minimum thresholds. These agreements generally establish a maximum unsecured credit exposure threshold of $1 million that one party may have to the other. Upon a request made by the unsecured counterparty, the party that has the unsecured obligation to the counterparty bearing the risk of the unsecured credit exposure must deliver sufficient collateral to reduce the unsecured credit exposure to zero. In addition, excess collateral must be returned by a party in an oversecured position. Delivery or return of the collateral generally occurs within one business day and, until such delivery or return, we may be in an undersecured position, which could result in a loss in the event of a default by the counterparty, or we may be due excess collateral, which could result in a loss in the event that the counterparty is unable to return the collateral. Since derivative valuations are determined based on market conditions at particular points in time, they can change quickly. Even after the delivery or return of collateral, we may be in an undersecured position, or be due the return of excess collateral, as the values upon which the delivery or return was based may have changed since the valuation was performed. Further, we may incur additional losses if collateral held by us cannot be readily liquidated at prices that are sufficient to fully recover the value of the derivatives.

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

On July 30, 2008, the President of the United States signed into law the Housing and Economic Recovery Act of 2008. This legislation established the Finance Agency, a new independent agency in the executive branch of the United States Government with responsibility for regulating us. In addition, the legislation made a number of other changes that will affect our activities. Immediately upon enactment of the legislation, all regulations, orders, directives and determinations issued by the Finance Board transferred to the Finance Agency and remain in force

unless modified, terminated or set aside by the new regulatory agency. Additionally, the Finance Agency succeeded to all of the discretionary authority possessed by the Finance Board. The legislation calls for the Finance Agency to issue a number of regulations, orders and reports. The Finance Agency has issued regulations regarding certain provisions of the legislation, some of which are subject to public comments and may change. As a result, the full effect of this legislation on our activities will become known only after the Finance Agency’s required regulations, orders and reports are issued and finalized. For a more complete discussion of this legislation and its impact on us, see Item 1 — Business — Legislative and Regulatory Developments.

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

On August 4, 2009, the Finance Agency published a notice of proposed rulemaking regarding the composition, duties and responsibilities of the Board of Directors of the Office of Finance and its Audit Committee. As proposed and as currently exists, no FHLBank shareholders would be represented on the Board of Directors of the Office of Finance. Further, the proposed rule would give the Office of Finance Audit Committee the authority to establish common accounting policies for the information submitted by the FHLBanks to the Office of Finance for inclusion in the combined financial reports, which could potentially have an adverse impact on us. For a more complete discussion of this proposed regulation, see Item 1 — Business — Legislative and Regulatory Developments.

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

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

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

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

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

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

We rely heavily upon information systems and other technology to conduct and manage our business and deliver a very large portion of our services to members on an automated basis. To the extent that we experience a failure or interruption in any of these systems or other technology, we may be unable to conduct and manage our business

effectively, including, without limitation, our hedging and advances activities. We can make no assurance that we will be able to prevent or timely and adequately address any such failure or interruption. Any failure or interruption could significantly harm our customer relations, risk management, and profitability, which could negatively affect our financial condition and results of operations.

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

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

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

We may also suspend the redemption of stock if we reasonably believe that the redemption would prevent us from maintaining adequate capital against a potential risk, or would otherwise prevent us from operating in a safe and sound manner. In addition, approval from the Finance Agency for redemptions or repurchases would be required if the Finance Agency or our Board of Directors were to determine that we have incurred, or are likely to incur, losses that result in, or are likely to result in, charges against our capital. Under such circumstances, there can be no assurance that the Finance Agency would grant such approval or, if it did, upon what terms it might do so. Redemption and repurchase of our stock would also be prohibited if the principal and interest due on any consolidated obligations issued on behalf of any FHLBank through the Office of Finance have not been paid in full or if we become unable to comply with regulatory liquidity requirements or satisfy our current obligations.

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

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

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

The GLB Act requires members to “comply promptly” with any increase in the minimum investment requirement to ensure that we continue to satisfy our minimum capital requirements. However, the Finance Board stated, when it published the final regulation implementing this provision of the GLB Act, that it did not believe this provision

provides the FHLBanks with an unlimited call on the assets of their members. According to the Finance Board, it is not clear whether we or our regulator would have the legal authority to compel a member to invest additional amounts in our capital stock.

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

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

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

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

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

Moreover, the Finance Agency has significant supervisory authority over us and may impose various limitations and restrictions on us, our operations, and our capital management as it deems appropriate to ensure our safety and soundness, and the safety and soundness of the FHLBank System. Among other things, the Finance Agency may impose higher capital requirements on us that might include, but not be limited to, the imposition of a minimum retained earnings requirement, and may suspend or otherwise limit stock repurchases, redemptions and dividends.

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

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

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

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

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

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

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

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

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

ITEM 1B.		UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.		PROPERTIES

The Bank owns a 159,000 square foot office building located at 8500 Freeport Parkway South, Irving, Texas. The Bank occupies approximately 88,000 square feet of space in this building.

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

ITEM 3.		LEGAL PROCEEDINGS

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

ITEM 4.		RESERVED

PART II

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

The Bank is a cooperative and all of its outstanding capital stock, which is known as Class B stock, is owned by its members or, in some cases, by non-member institutions that have acquired stock by virtue of acquiring a member institution, or by former members that retain capital stock to support advances or other activity that remains outstanding or until any applicable stock redemption or withdrawal notice period expires. All of the Bank’s shareholders are financial institutions; no individual may own any of the Bank’s capital stock. The Bank’s capital stock is not publicly traded, nor is there an established market for the stock. The Bank’s capital stock has a par value of $100 per share and it may be purchased, redeemed, repurchased and transferred only at its par value. By regulation, the parties to a transaction involving the Bank’s stock can include only the Bank and its member institutions (or non-member institutions or former members, as described above). While a member could transfer stock to another member of the Bank, such a transfer could occur only upon approval of the Bank and then only at par value. The Bank does not issue options, warrants or rights relating to its capital stock, nor does it provide any type of equity compensation plan. As of February 28, 2010, the Bank had 940 shareholders and 24,894,275 shares of capital stock outstanding.

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

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

The following table sets forth certain information regarding the quarterly dividends that were declared and paid by the Bank during the years ended December 31, 2009 and 2008. In those years, the Bank paid dividends based on the average effective federal funds rate. All dividends were paid in the form of capital stock except for fractional shares, which were paid in cash.

DIVIDENDS PAID
(dollars in thousands)

		2009								2008
						Annualized								Annualized
		Amount(1)				Rate(3)				Amount(2)				Rate(3)
First Quarter		$	4,204				0.50	%		$	26,787				4.50	%
Second Quarter			1,343				0.18				20,043				3.18
Third Quarter			1,302				0.18				15,253				2.09
Fourth Quarter			1,116				0.16				15,043				1.94

The Bank has a retained earnings policy that calls for the Bank to maintain retained earnings in an amount sufficient to protect against potential identified economic or accounting losses due to specified interest rate, credit or operations risks. With certain exceptions, the Bank’s policy calls for the Bank to maintain its retained earnings balance at or above its policy target when determining the amount of funds available to pay dividends. Taking into consideration its current retained earnings policy target, as well as its current earnings expectations and anticipated market conditions, the Bank currently expects to pay dividends in 2010 at or slightly above the average federal funds rate for the period from October 1, 2009 through September 30, 2010. For a discussion of the Bank’s current retained earnings policy target, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Retained Earnings and Dividends.

The Bank’s Board of Directors recently approved a dividend in the form of capital stock for the first quarter of 2010 at an annualized rate of 0.375 percent (which exceeds the upper end of the Federal Reserve’s target for the federal funds rate for the fourth quarter of 2009 by 12.5 basis points). The first quarter 2010 dividend, to be applied to average capital stock held during the period from October 1, 2009 through December 31, 2009, is payable on March 31, 2010.

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

ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA
(dollars in thousands)

		Year Ended December 31,
		2009				2008				2007				2006				2005
Balance sheet (at year end)
Advances		$	47,262,574			$	60,919,883			$	46,298,158			$	41,168,141			$	46,456,958
Investments (1)(2)			13,491,819				17,388,015				16,400,655				13,429,450				17,161,557
Mortgage loans(3)			259,857				327,320				381,731				449,893				542,772
Allowance for credit losses on mortgage loans			240				261				263				267				294
Total assets (2)			65,092,076				78,932,898				63,458,256				55,457,966				64,519,215
Consolidated obligations — discount notes			8,762,028				16,745,420				24,119,433				8,225,787				11,219,806
Consolidated obligations — bonds			51,515,856				56,613,595				32,855,379				41,684,138				46,121,709
Total consolidated obligations(4)			60,277,884				73,359,015				56,974,812				49,909,925				57,341,515
Mandatorily redeemable capital stock(5)			9,165				90,353				82,501				159,567				319,335
Capital stock — putable			2,531,715				3,223,830				2,393,980				2,248,147				2,298,622
Retained earnings			356,282				216,025				211,762				190,625				178,494
Accumulated other comprehensive income (loss)			(65,965	)			(1,435	)			(570	)			748				(2,677	)
Total capital			2,822,032				3,438,420				2,605,172				2,439,520				2,474,439
Dividends paid(5)			7,807				75,078				108,641				110,049				89,813
Income statement
Net interest income (6)		$	76,476			$	150,358			$	223,026			$	216,292			$	222,559
Provision (release of allowance) for credit losses			—				—				—				—				(56	)
Other income			200,355				22,580				9,505				1,279				157,585
Other expense			75,290				64,813				55,296				49,820				50,223
Assessments			53,477				28,784				47,457				45,571				88,498
Income before cumulative effect of change in accounting principle (3)			148,064				79,341				129,778				122,180				241,479
Net income (3)			148,064				79,341				129,778				122,180				242,387
Performance ratios
Net interest margin(7)			0.11	%			0.20	%			0.40	%			0.37	%			0.34	%
Return on average assets (2)(3)			0.21				0.11				0.24				0.21				0.37
Return on average equity (3)			4.92				2.52				5.58				4.98				8.90
Return on average capital stock (3)(8)			5.39				2.73				6.18				5.42				9.66
Total average equity to average assets(2)			4.30				4.23				4.22				4.29				4.20
Regulatory capital ratio(2)(9)			4.45				4.47				4.24				4.69				4.33
Dividend payout ratio (5)(10)			5.27				94.63				83.71				90.07				37.05
Ratio of earnings to fixed charges			1.26	X			1.05	X			1.07	X			1.06	X			1.16	X
Average effective federal funds rate (11)			0.16	%			1.92	%			5.02	%			4.97	%			3.22	%

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the annual audited financial statements and notes thereto for the years ended December 31, 2009, 2008 and 2007 beginning on page F-1 of this Annual Report on Form 10-K.

Forward-Looking Information

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

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

Overview

The Bank is one of 12 district Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks” and, together with the Federal Home Loan Banks Office of Finance, a joint office of the FHLBanks, the “FHLBank System”) that were created by the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages, community lending, and targeted community development. As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. Prior to July 30, 2008, the Federal Housing Finance Board (“Finance Board”) was responsible for the supervision and regulation of the FHLBanks and the Office of Finance. Effective with the enactment of the Housing and Economic Recovery Act of 2008 (the “HER Act”) on July 30, 2008, the Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the United States Government, assumed responsibility for supervising and regulating the FHLBanks and the Office of Finance. The Finance Agency 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. For additional discussion regarding the Finance Agency, see Item 1 — Business — Legislative and Regulatory Developments.

The Bank serves eligible financial institutions in Arkansas, Louisiana, Mississippi, New Mexico and Texas (collectively, the Ninth District of the FHLBank System). The Bank’s primary business is lending relatively low cost funds (known as advances) to its member institutions, which include commercial banks, thrifts, insurance companies and credit unions. Effective with the enactment of the HER Act, Community Development Financial Institutions that are certified under the Community Development Banking and Financial Institutions Act of 1994 are also eligible for membership in the Bank. While not members of the Bank, state and local housing authorities that meet certain statutory criteria may also borrow from the Bank. The Bank also maintains a portfolio of highly rated investments for liquidity purposes and to provide additional earnings. Additionally, the Bank holds interests in a portfolio of government-guaranteed/insured and conventional mortgage loans that were acquired through the Mortgage Partnership Finance^® (“MPF”^®) Program offered by the FHLBank of Chicago. Shareholders’ return on their investment includes dividends (which are typically paid quarterly in the form of capital stock) and the value derived from access to the Bank’s products and services. Historically, the Bank has balanced the financial rewards to shareholders by seeking to pay a dividend that generally meets or exceeds the return on alternative short-term money market investments available to shareholders, while lending funds at the lowest rates expected to be compatible with that objective and its objective to build retained earnings over time. During each quarter of 2009, the Bank paid dividends at the average effective federal funds rate for the immediately preceding quarter. The average effective federal funds rate of 0.51 percent for the fourth quarter of 2008 was below the Federal Reserve’s average federal funds target rate of 1.06 percent, while the average effective federal funds rate for each of the first three quarters of 2009 was below the upper end of the Federal Reserve’s target range of 0.25 percent for the federal funds rate for those periods, which was also the rate that depository institutions could earn on both required and excess reserves maintained at the Federal Reserve during those periods.

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

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

In addition to ratings on the FHLBanks’ consolidated obligations, each FHLBank is rated individually by both S&P and Moody’s. These individual FHLBank ratings apply to obligations of the respective FHLBanks, such as interest rate derivatives, deposits, and letters of credit. As of February 28, 2010, Moody’s had assigned a deposit rating of Aaa/P-1 to each individual FHLBank and none of the FHLBanks were on its Watchlist. At that same date, S&P had assigned long-term counterparty credit ratings of AAA/A-1+ to 10 of the FHLBanks (including the Bank) and AA+/A-1+ to the FHLBanks of Seattle and Chicago. In addition, as of February 28, 2010, S&P had assigned stable outlooks to all 12 of the FHLBanks.

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

The Bank conducts its business and fulfills its public purpose primarily by acting as a financial intermediary between its members and the capital markets. The intermediation of the timing, structure, and amount of its members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements, including interest rate swaps and caps. The Bank’s interest rate exchange agreements are accounted for in accordance with the provisions of Topic 815 of the Financial Accounting Standards Board Accounting Standards Codification entitled “Derivatives and Hedging” (“ASC 815”). For a discussion of ASC 815, see the sections below entitled “Financial Condition — Derivatives and Hedging Activities” and “Critical Accounting Policies and Estimates.”

The Bank considers its “core earnings” to be net earnings exclusive of: (1) gains or losses on the sales of investment securities, if any; (2) gains or losses on the retirement or transfer of debt, if any; (3) prepayment fees on advances; (4) fair value adjustments required by ASC 815 (except for net interest payments associated with derivatives); and (5) realized gains and losses associated with early terminations of derivative transactions. The Bank’s core earnings are generated primarily from net interest income and typically tend to rise and fall with the overall level of interest rates, particularly short-term money market rates. Because the Bank is a cooperatively owned wholesale institution, the spread component of its net interest income is much smaller than a typical commercial bank, and a relatively larger portion of its net interest income is derived from the investment of its capital. The Bank endeavors to maintain a fairly neutral interest rate risk profile. As a result, the Bank’s capital is effectively invested in shorter-term assets and its core earnings and returns on capital stock (based on core earnings) generally tend to follow short-term interest rates. The Bank’s profitability objective is to achieve a rate of return on members’ capital stock investment sufficient to allow the Bank to meet its retained earnings growth objectives and pay dividends on capital stock at rates that equal or exceed the average federal funds rate. The following table summarizes the Bank’s return on average capital stock (based on reported results), the average effective federal funds rate and the Bank’s dividend payment rate for the years ended December 31, 2009, 2008 and 2007.

		Year Ended December 31,
		2009				2008				2007
Earnings
Return on average capital stock			5.39	%			2.73	%			6.18	%
Average effective federal funds rate			0.16	%			1.92	%			5.02	%
Dividends
Weighted average of dividend rates paid (1)			0.25	%			2.92	%			5.21	%
Reference average effective federal funds rate (reference rate) (2)			0.25	%			2.92	%			5.21	%

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

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

To provide more meaningful comparisons between the average effective federal funds rate and the Bank’s dividend rate, the above table sets forth a “reference average effective federal funds rate.” For the years ended December 31,

2009, 2008 and 2007, the reference average effective federal funds rate reflects the average effective federal funds rate for the periods from October 1, 2008 through September 30, 2009, from October 1, 2007 through September 30, 2008 and from October 1, 2006 through September 30, 2007, respectively. For additional discussion regarding the Bank’s dividend declaration and payment process, see the section entitled “Financial Condition — Retained Earnings and Dividends.”

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

Financial Market Conditions

Although capital markets have not returned to pre-credit crisis conditions, credit market conditions during 2009 continued the trend of noticeable improvement that began in late 2008. Capital market participants were cautious throughout 2008 about the creditworthiness and liquidity of their investments, which curtailed overall market liquidity throughout most of that year. The impact of this caution was particularly acute during the last half of the third quarter and the first half of the fourth quarter of 2008.

In 2008, the U.S. and other governments and their central banks developed and implemented aggressive initiatives in an effort to provide support for and to restore the functioning of the global credit markets. Those programs included the implementation by the United States Department of the Treasury (the “Treasury”) of the Troubled Asset Relief Program (“TARP”) authorized by Congress in October 2008 and the Federal Reserve’s purchases of commercial paper, agency debt securities (including FHLBank debt) and mortgage-backed securities. In addition, the Federal Reserve’s discount window lending and Term Auction Facility (“TAF”) for auctions of short-term liquidity, the expansion of insured deposit limits and the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program (“TLGP”) provided additional liquidity support for depository institutions. As conditions improved in 2009, the level of support provided by some of these government programs stabilized or contracted. For instance, 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, $206 billion at September 30, 2009 and $96 billion at December 31, 2009. Otherwise unsecured debt issued by commercial banks and guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) reached approximately $330 billion by March 31, 2009, remained near that level at June 30, 2009 and declined to approximately $309 billion at both September 30, 2009 and December 31, 2009. The TARP, TLGP and TAF programs are scheduled to expire in 2010.

In addition to those actions to provide additional direct liquidity to the markets, the Federal Reserve Board, through its Federal Open Market Committee, reduced its target for the federal funds rate first from 2.00 percent to 1.00 percent in two steps during October 2008, and then subsequently reduced the target to a range between 0 and 0.25 percent. The Federal Open Market Committee maintained its target for the federal funds rate at a range between 0 and 0.25 percent throughout 2009.

The government programs discussed above increased the amount of liquidity in the market, thereby reducing the demand for federal funds which in turn resulted in an effective federal funds rate below the upper end of the targeted range for all of 2009 (the targeted rate was zero to 25 basis points). In October 2008, the Federal Reserve began paying interest on required and excess reserves held by depository institutions, and throughout 2009 the rate was equivalent to the upper boundary of the targeted range for federal funds. As a result, most commercial banks began to retain their excess liquidity at the Federal Reserve rather than selling federal funds in the market, substantially reducing the volume of overnight federal funds trading. Because GSEs cannot earn interest on their reserves at the Federal Reserve, these institutions have continued to sell their excess liquidity in the federal funds market. However, the lack of demand for such funds has resulted in the effective funds rate remaining below the upper end of the target range for the federal funds rate.

One- and three-month LIBOR rates fell from 3.93 percent and 4.05 percent, respectively, at September 30, 2008 to 0.44 percent and 1.43 percent, respectively, as of December 31, 2008. One- and three-month LIBOR rates stabilized and the spread between those rates shrank during 2009, with one- and three-month LIBOR ending the year at 0.23 percent and 0.25 percent, respectively. More stable one- and three-month LIBOR rates, combined with smaller spreads between those two indices and between those indices and overnight lending rates, suggest some degree of general improvement in the inter-bank lending markets.

The following table presents information on various market interest rates at December 31, 2009 and 2008 and various average market interest rates for the years ended December 31, 2009, 2008 and 2007.

			Ending Rate							Average Rate
			December 31,				December 31,				For the Year Ended December 31,
			2009				2008				2009				2008				2007
Federal Funds Target (1)			0.25%				0.25%				0.25%				2.08%				5.05%
Average Effective Federal Funds Rate (2)			0.05%				0.14%				0.16%				1.92%				5.02%
1-month LIBOR (1)			0.23%				0.44%				0.33%				2.68%				5.25%
3-month LIBOR (1)			0.25%				1.43%				0.69%				2.93%				5.30%
2-year LIBOR (1)			1.42%				1.48%				1.41%				2.94%				4.91%
5-year LIBOR (1)			2.98%				2.13%				2.65%				3.69%				5.01%
10-year LIBOR (1)			3.97%				2.56%				3.44%				4.24%				5.24%
3-month U.S. Treasury (1)			0.06%				0.08%				0.15%				1.45%				4.46%
2-year U.S. Treasury (1)			1.14%				0.77%				0.96%				2.00%				4.36%
5-year U.S. Treasury (1)			2.69%				1.55%				2.20%				2.79%				4.42%
10-year U.S. Treasury (1)			3.85%				2.21%				3.26%				3.64%				4.63%

During late 2008 and early 2009, the variety of government initiatives, the different types of support those initiatives provided the markets, and the announced sunset dates for those support mechanisms also had the effect of creating uncertainty around the appropriate relationship of prices for different types of financial instruments issued by different types of institutions. Pricing uncertainty, in combination with volatile conditions in the credit markets, motivated many investors to substantially limit their exposure to credit and liquidity risk. This led to increased demand for U.S. Treasury securities and short-term agency investments and diminished investors’ demand for any longer term investments, including callable and non-callable debt issued by the FHLBanks and the secondary market housing GSEs. These market dynamics were reflected in a variety of yield relationships between different benchmark market yields, including increases in the spreads between yields on short-term Treasury securities and other short-term rates such as one- and three-month LIBOR.

Economic conditions appear to be showing some early signs of eventual improvement, including positive growth in the gross domestic product (“GDP”) for the third and fourth quarters of 2009. While much of the significant deterioration in economic conditions that followed the disruptive financial market events of September 2008, including unemployment rates, has not reversed, and the economy has remained weak since that time, policy makers have interpreted recent data and the third and fourth quarter GDP data to indicate that the pace of economic decline has begun to reverse itself. Those early signs of improvement notwithstanding, the prospects for and potential timing of renewed economic growth (and employment growth in particular) remain very uncertain.

2009 In Summary

•

The Bank ended 2009 with total assets of $65.1 billion and total advances of $47.3 billion, a decrease from $78.9 billion and $60.9 billion, respectively, at the end of 2008. The decrease in advances for 2009 was attributable in large part to the repayment of approximately $8.2 billion of advances by three large borrowers, as further discussed in the section below entitled “Financial Condition — Advances.” The remaining decline in advances during 2009 was attributable to a decline in member demand which the Bank believes was due, at least in part, to increases in members’ deposit levels and reduced lending activity due to the economic recession, as well as the availability of federal government programs that provided members with more attractively priced sources of funding and liquidity than were available earlier in the credit crisis.

•

The Bank’s net income for 2009 was $148.1 million. Net interest income was $76.5 million and net gains on derivatives and hedging activities were $193.1 million.

	•		The Bank’s net interest income excludes net interest payments associated with economic hedge derivatives, which contributed significantly to the Bank’s income before assessments of $201.5 million for 2009. Had the net interest income on economic hedge derivatives been included in net interest income, the Bank’s net interest income would have been higher (and its net gains on derivatives and hedging activities would have been lower) by $107.6 million for the year ended December 31, 2009.
			The Bank’s net interest income for 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 issued debt with maturities that extended into 2009 instead of issuing very short-maturity debt. 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. Due in large part to the negative spread associated with the investment of the remaining portion of this debt in low-yielding short-term assets, the Bank’s net interest income was negative in the first quarter of 2009. The negative impact of this debt was minimal during the remainder of 2009 as much of the relatively high cost debt issued in late 2008 matured in the first quarter of 2009.
	•		The $193.1 million in net gains on derivatives and hedging activities for the year included $107.6 million of net interest income on interest rate swaps accounted for as economic hedge derivatives, $62.5 million of net ineffectiveness-related gains on fair value hedges related to consolidated obligation bonds and $26.2 million of net gains on economic hedge derivatives (excluding net interest settlements).
			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 remainder of 2009, resulting in significantly lower ineffectiveness-related gains and losses during those periods.
			The net gains on the Bank’s economic hedge derivatives during 2009 included 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 $10.3 million, were due to the tightening of the spread between the two indices and changes in the future expectations for such spread. The net gains on economic hedge derivatives were also significantly impacted by net gains 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 and net gains on interest rate caps that are used to hedge the impact that rising rates would have on its portfolio of collateralized mortgage obligation (“CMO”) LIBOR floaters with embedded caps. During 2009, net gains of $9.0 million and $14.3 million were recognized on interest rate basis swaps and interest rate caps, respectively.
			The Bank held $24.3 billion (notional) of interest rate swaps recorded as economic hedge derivatives with a net positive fair value of $32.1 million (excluding accrued interest) at December 31, 2009. If these swaps are held to maturity, these net unrealized gains will ultimately reverse in future periods in the form of unrealized losses, which will negatively impact the Bank’s earnings in those periods. The timing of this reversal will depend on the relative level and volatility of future interest rates. In addition, as of December 31, 2009, the Bank held $3.75 billion (notional) of stand-alone interest rate cap agreements with a fair value of $51.1 million that hedge CMO LIBOR floaters with embedded caps. If these agreements are held to

maturity, the value of the caps will ultimately decline to zero and be recorded as a loss in net gains (losses) on derivatives and hedging activities in future periods.

	•		During 2009, unrealized losses on the Bank’s holdings of non-agency residential mortgage-backed securities classified as held-to-maturity decreased from $277.0 million (40.9 percent of amortized cost) to $135.3 million (26.5 percent of amortized cost). Based on its year-end 2009 analysis of the securities in this portfolio, the Bank believes that the unrealized losses were principally the result of significant (albeit reduced) liquidity risk-related discounts in the non-agency mortgage-backed securities market and do not accurately reflect the actual historical or currently likely 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 seven of its non-agency residential mortgage-backed securities and, accordingly, these securities (with an aggregate unpaid principal balance of $148.0 million as of December 31, 2009) were deemed to be other-than-temporarily impaired during 2009. In accordance with guidance issued by the Financial Accounting Standards Board (“FASB”) in April 2009, which the Bank early adopted effective January 1, 2009, the credit components of the impairment losses ($4.0 million) were recognized in earnings while the non-credit components of the impairment losses ($75.9 million) were recognized in other comprehensive income. 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 2009, the Bank was in compliance with all of its regulatory capital requirements. In addition, the Bank’s retained earnings increased to $356.3 million at December 31, 2009 from $216.0 million at December 31, 2008.
	•		During 2009, the Bank paid dividends totaling $7.8 million; the quarterly dividends during the year were paid at rates that equaled the benchmark average effective federal funds rate for the applicable reference periods. While there can be no assurances about 2010 earnings, dividends, or regulatory actions, the Bank currently anticipates that its 2010 earnings will be sufficient both to pay quarterly dividends at a rate equal to or slightly above the average federal funds rate and to continue building retained earnings. In addition, the Bank currently expects to continue its quarterly repurchases of surplus stock.

Financial Condition

The following table provides selected period-end balances as of December 31, 2009, 2008 and 2007, as well as selected average balances for the years ended December 31, 2009, 2008 and 2007. As shown in the table, the Bank’s total assets decreased by 17.5 percent (or $13.8 billion) during the year ended December 31, 2009 after increasing by 24.4 percent (or $15.5 billion) during the year ended December 31, 2008. The decrease in total assets during the year ended December 31, 2009 was primarily attributable to a $13.7 billion decrease in advances. As the Bank’s assets decreased, the funding for those assets also decreased. During the year ended December 31, 2009, total consolidated obligations decreased by $13.1 billion, as consolidated obligation bonds decreased by $5.1 billion and consolidated obligation discount notes declined by $8.0 billion.

During the year ended December 31, 2008, total assets increased by $15.5 billion, due largely to a $14.6 billion increase in advances. The funding for those assets also increased during the year ended December 31, 2008, as consolidated obligation bonds increased by $23.8 billion and consolidated obligation discount notes declined by $7.4 billion.

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

SUMMARY OF CHANGES IN FINANCIAL CONDITION
(dollars in millions)

		December 31,
		2009								2008								2007
						Percentage								Percentage
						Increase								Increase
		Balance				(Decrease)				Balance				(Decrease)				Balance
Advances		$	47,263				(22.4)	%		$	60,920				31.6	%		$	46,298
Short-term liquidity holdings
Non-interest bearing excess cash balances (1)			3,600				*				—				—				—
Interest-bearing deposits			—				(100.0	)			3,684				*				1
Federal funds sold (2)			2,063				10.2				1,872				(75.0	)			7,500
Commercial paper			—				—				—				(100.0	)			994
Long-term investments (3)			11,425				(3.4	)			11,829				49.7				7,902
Mortgage loans, net			260				(20.5	)			327				(14.2	)			381
Total assets			65,092				(17.5	)			78,933				24.4				63,458
Consolidated obligations — bonds			51,516				(9.0	)			56,614				72.3				32,855
Consolidated obligations — discount notes			8,762				(47.7	)			16,745				(30.6	)			24,120
Total consolidated obligations			60,278				(17.8	)			73,359				28.8				56,975
Mandatorily redeemable capital stock			9				(90.0	)			90				8.4				83
Capital stock			2,532				(21.5	)			3,224				34.7				2,394
Retained earnings			356				64.8				216				1.9				212
Average total assets			70,018				(6.2	)			74,641				35.6				55,056
Average capital stock			2,749				(5.6	)			2,911				38.6				2,101
Average mandatorily redeemable capital stock			56				(1.8	)			57				(45.2	)			104

Advances

The following table presents advances outstanding, by type of institution, as of December 31, 2009, 2008 and 2007.

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

		December 31,
		2009								2008								2007
		Amount				Percent				Amount				Percent				Amount				Percent
Commercial banks		$	41,924				89	%(1)		$	29,889				50	%		$	14,797				32	%
Thrift institutions			3,249				7	(1)			27,687				46				27,825				60
Credit unions			1,347				3				1,565				3				1,966				4
Insurance companies			301				1				243				—				208				1
Total member advances			46,821				100				59,384				99				44,796				97
Housing associates			11				—				131				—				5				—
Non-member borrowers			76				—				730				1				1,338				3
Total par value of advances		$	46,908				100	%		$	60,245				100	%		$	46,139				100	%
Total par value of advances outstanding to CFIs (2)		$	9,758				21	%		$	11,530				19	%		$	6,401				14	%

At December 31, 2009, the carrying value of the Bank’s advances portfolio totaled $47.3 billion, compared to $60.9 billion and $46.3 billion at December 31, 2008 and 2007, respectively. The par value of advances outstanding at December 31, 2009, 2008 and 2007 was $46.9 billion, $60.2 billion and $46.1 billion, respectively.

Advances to members grew steadily over the course of the first nine months of 2008, peaking near the end of the third quarter when conditions in the financial markets were particularly unsettled. Advances growth during this period was generally spread across all segments of the Bank’s membership base, as the then prevailing credit market conditions appeared to lead members to increase their borrowings in order to increase their liquidity, to take advantage of borrowing rates that were relatively attractive compared with alternative wholesale funding sources, to take advantage of investment opportunities and/or to lengthen the maturity of their liabilities at a relatively low cost. Advances subsequently declined during the fourth quarter of 2008 and the year ended December 31, 2009 as market conditions calmed and the economy weakened.

During the year ended December 31, 2008, the Bank’s outstanding advances increased by $14.1 billion, a significant portion of which was attributable to increases in advances to two borrowers. In February 2008, Comerica Bank, which had recently relocated its charter to the Ninth District, became a member of the Bank. As of December 31, 2008, Comerica Bank had outstanding advances of $8.0 billion and was the Bank’s second largest borrower. In addition, advances to the Bank’s largest borrower, Wells Fargo Bank South Central, National Association (“WFSC”), formerly Wachovia Bank, FSB, increased by $5.0 billion during 2008. The increase in advances to these borrowers was partially offset by a $2.1 billion decrease in advances to Franklin Bank, S.S.B during 2008. On November 7, 2008, the Texas Department of Savings and Mortgage Lending closed Franklin Bank, S.S.B., and the FDIC was named receiver. At that time, Franklin Bank, S.S.B. had outstanding advances totaling $1.0 billion. On November 12, 2008, these advances were fully repaid.

During 2009, advances to the Bank’s ten largest borrowers decreased by $9.1 billion, contributing significantly to the overall decline in advances balances during the year. Advances to WFSC, Comerica Bank and Guaranty Bank (“Guaranty”) declined by $4.0 billion, $2.0 billion and $2.2 billion, respectively, during 2009. On August 21, 2009, the Office of Thrift Supervision closed Guaranty and the FDIC was named receiver. Guaranty was the Bank’s third largest borrower and shareholder at August 21, 2009, with $2.0 billion of advances outstanding at that date; all of these advances were repaid in August and September 2009. The remaining decline in advances during 2009 was spread broadly across the Bank’s members. The Bank believes the decline in advances was due, at least in part, to increases in members’ deposit levels and reduced lending activity due to the economic recession, as well as the availability of federal government programs that provided members with more attractively priced sources of funding and liquidity than were available earlier in the credit crisis.

At December 31, 2009, advances outstanding to the Bank’s ten largest borrowers totaled $30.1 billion, representing 64.2 percent of the Bank’s total outstanding advances as of that date. The following table presents the Bank’s ten largest borrowers as of December 31, 2009.

TEN LARGEST BORROWERS AS OF DECEMBER 31, 2009
(Par value, dollars in millions)

												Percent of
Name		City		State				Advances				Total Advances
Wells Fargo Bank South Central, National Association (1)		Houston		TX				$	18,247				38.9	%
Comerica Bank		Dallas		TX					6,000				12.8
International Bank of Commerce		Laredo		TX					1,244				2.7
Bank of Texas, N.A.		Dallas		TX					901				1.9
Southside Bank		Tyler		TX					855				1.8
Beal Bank Nevada (2)		Las Vegas		NV					721				1.5
First National Bank		Edinburg		TX					595				1.3
Arvest Bank		Rogers		AR					586				1.2
First Community Bank		Taos		NM					497				1.1
Renasant Bank		Tupelo		MS					458				1.0
								$	30,104				64.2	%

As of December 31, 2008 and 2007, advances outstanding to the Bank’s ten largest borrowers comprised $39.2 billion (65.1 percent) and $30.2 billion (65.3 percent), respectively, of the total advances portfolio.

Effective December 31, 2008, Wells Fargo & Company (“Wells Fargo”) acquired Wachovia Corporation, the holding company for Wachovia Bank, FSB (“Wachovia”), the Bank’s largest borrower and shareholder. Wells Fargo is headquartered in the Eleventh District of the FHLBank System and affiliates of Wells Fargo have historically maintained 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. Following a

reorganization and relocation of charters in the fourth quarter of 2009, Wachovia became part of WFSC, whose charter was relocated to Texas and whose application for membership in the Bank was approved on December 30, 2009. As indicated in the table above, WFSC had $18.2 billion of advances outstanding as of December 31, 2009, which represented 38.9 percent of the Bank’s total outstanding advances at that date. WFSC’s advances are scheduled to mature between March 2010 and October 2013. While Wells Fargo has maintained a membership relationship with the Bank, the Bank is currently unable to predict whether WFSC will alter its predecessor’s borrowing relationship with the Bank.

During the years ended December 31, 2009, 2008 and 2007, Wachovia/WFSC accounted for 29.7 percent, 38.6 percent and 37.2 percent, respectively, of the Bank’s total interest income from advances.

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 significant reduction in advances to WFSC (or any other large borrower) 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.

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

COMPOSITION OF ADVANCES
(Dollars in millions)

		December 31, 2009								December 31, 2008
						Percentage								Percentage
		Balance				of Total				Balance				of Total
Fixed rate advances
Maturity less than one month		$	5,164				11.0	%		$	10,745				17.8	%
Maturity 1 month to 12 months			4,232				9.0				3,404				5.6
Maturity greater than 1 year			5,602				12.0				7,446				12.4
Fixed rate, amortizing			3,282				7.0				3,654				6.1
Fixed rate, putable			4,037				8.6				4,201				7.0
Total fixed rate advances			22,317				47.6				29,450				48.9
Floating rate advances
Maturity less than one month			11				—				390				0.6
Maturity 1 month to 12 months			5,052				10.8				5,695				9.5
Maturity greater than 1 year			19,528				41.6				24,710				41.0
Total floating rate advances			24,591				52.4				30,795				51.1
Total par value		$	46,908				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 Item 1 — Business. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances, the Bank applies various haircuts, or discounts, to determine the value of the collateral against which members may borrow. From time to time, the Bank reevaluates the adequacy of its collateral haircuts under a range of stress scenarios to ensure that its collateral haircuts are sufficient to protect the Bank from credit losses on advances.

In addition, as described in Item 1 — Business, the Bank reviews the financial condition of its depository institution members on at least a quarterly basis to identify any members whose financial condition indicates they might pose

an increased credit risk and, as needed, takes appropriate action. The Bank has not experienced any credit losses on advances since it was founded in 1932 and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on advances. Accordingly, the Bank has not provided any allowance for losses on advances.

Short-Term Liquidity Portfolio

At December 31, 2009, the Bank’s short-term liquidity portfolio was comprised of $2.1 billion of overnight federal funds sold to domestic counterparties and $3.6 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas. 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, changes in the returns provided by short-term investment alternatives relative to the Bank’s discount note funding costs, and the level of liquidity needed to satisfy Finance Agency requirements. (For a discussion of the Finance Agency’s liquidity requirements, see the section below entitled “Liquidity and Capital Resources.”)

Long-Term Investments

At December 31, 2009 and 2008, the Bank’s long-term investment portfolio was comprised of approximately $11.3 billion and $11.7 billion, respectively, of mortgage-backed securities (“MBS”) and $0.1 billion and $0.1 billion, respectively, of U.S. agency debentures. The Bank’s long-term investment portfolio 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
December 31, 2009		(at carrying value)				(at fair value)				(at carrying value)				(at fair value)
U.S. agency debentures
U.S. government guaranteed obligations		$	59			$	—			$	59			$	59
MBS portfolio
U.S. government guaranteed obligations			24				—				24				24
Government-sponsored enterprises			10,838				—				10,838				10,863
Non-agency residential MBS			445				—				445				376
Non-agency commercial MBS			56				—				56				57
Total MBS			11,363				—				11,363				11,320
State housing agency debenture			3				—				3				3
Total long-term investments		$	11,425			$	—			$	11,425			$	11,382
		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 housing agency debenture			4				—				4				3
Total long-term investments		$	11,702			$	127			$	11,829			$	11,170

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 required, among other things, that a FHLBank notify the Finance Board (now Finance Agency) prior to its first acquisition under the expanded authority and include in its notification a description of the risk management practices underlying its purchases. The expanded authority is limited to MBS issued by, or backed by pools of mortgages guaranteed by, the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“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.

On April 23, 2008, the Bank’s Board of Directors authorized an increase in the Bank’s MBS investment authority of 100 percent of its total regulatory capital. In accordance with the provisions of the resolution and Advisory Bulletin 2008-AB-01, “Temporary Increase in Mortgage-Backed Securities Investment Authority” dated April 3, 2008 (“AB 2008-01”), the Bank notified the Finance Board’s Office of Supervision on April 29, 2008 of its intent to exercise the new investment authority in an amount up to an additional 100 percent of capital. On June 30, 2008, the Office of Supervision approved the Bank’s submission, thereby raising the Bank’s MBS investment authority from 300 percent to 400 percent of its total regulatory capital.

The Bank’s expanded investment authority granted by this authorization is scheduled to expire on March 31, 2010, after which the Bank may not purchase additional mortgage securities if such purchases would cause the aggregate book value of its MBS holdings to exceed an amount equal to 300 percent of its total capital provided, however, that the expiration of the expanded investment authority will not require the Bank to sell any agency mortgage securities it had purchased in accordance with the terms of the resolution. The Bank has submitted a request to the Finance Agency seeking to maintain its investment authority at an amount equal to 400 percent of its total regulatory capital for a period up to an additional three years. The Bank is unable to predict whether the Finance Agency will approve this request.

As of December 31, 2009, the Bank held $11.3 billion (carrying value) of MBS, which represented 392 percent of its total regulatory capital at that date. While the Bank currently has capacity under applicable policies and regulations to purchase additional U.S. agency debentures, it does not currently anticipate purchasing such securities in the foreseeable future.

During the year ended December 31, 2009, the Bank acquired $2.9 billion ($3.0 billion par value) of long-term investments, all of which were LIBOR-indexed floating rate CMOs issued by either Fannie Mae or Freddie Mac that the Bank designated as held-to-maturity. As further described below, the floating rate coupons of these securities are subject to interest rate caps. During the year, proceeds from maturities of long-term securities designated as held-to-maturity and available-for-sale totaled approximately $3.2 billion and $42.5 million, respectively. In March 2009, the Bank sold an available-for-sale security (specifically, a government-sponsored enterprise mortgage-backed security) with an amortized cost (determined by the specific identification method) of $86.2 million. Proceeds from the sale totaled $87.0 million, resulting in a gross realized gain of $0.8 million. The Bank did not sell any other long-term investments during the year ended December 31, 2009.

During the year ended December 31, 2008, the Bank acquired (based on trade date) $6.180 billion of long-term investments, all of which had settled as of December 31, 2008. The Bank acquired $5.830 billion ($5.996 billion par value) of LIBOR-indexed floating rate CMOs issued by either Fannie Mae or Freddie Mac that it designated as held-to-maturity and one LIBOR-indexed floating rate CMO issued by Fannie Mae (a $97.7 million par value security that the Bank acquired in June 2008 at a cost of $93.3 million), which the Bank classified as available-for-sale. In addition, during the first quarter of 2008, the Bank purchased $257 million ($250 million par value) of U.S. agency debentures; these investments were classified as available-for-sale and hedged with fixed-for-floating interest rate swaps. In April 2008, the Bank sold all of the U.S. agency debentures that it had acquired during the first quarter of 2008 and terminated the associated interest rate swaps. The realized gains on the sales of these available-for-sale securities totaled $2.8 million. This action was taken in response to favorable opportunities in the market at that time. In addition, on October 29, 2008, the Bank sold a U.S. agency debenture classified as available-for-sale. Proceeds from the sale totaled $56.5 million, resulting in a realized loss at the time of sale of $3.7 million, of which $2.5 million had been recognized in the third quarter of 2008 as an other-than-temporary impairment charge because the Bank no longer had the intent as of September 30, 2008 to hold this security through to recovery of the unrealized loss. At September 30, 2008, the amortized cost of this security exceeded its estimated fair value at that date by $2.5 million.

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

During the year ended December 31, 2007, the Bank acquired (based on trade date) $1.6 billion of long-term investments, all of which were LIBOR-indexed floating rate CMOs issued by either Fannie Mae or Freddie Mac that it designated as held-to-maturity; during this same year, the proceeds from maturities of long-term securities designated as held-to-maturity and available-for-sale totaled approximately $1.2 billion and $354 million, respectively. The Bank did not sell any available-for-sale securities during 2007.

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

COMPOSITION OF MBS PORTFOLIO
(In millions of dollars)

		December 31, 2009								December 31, 2008
		Par(1)				Carrying Value				Par(1)				Carrying Value
Floating rate MBS
Floating rate CMOs
U.S. government guaranteed		$	24			$	24			$	29			$	29
Government-sponsored enterprises			10,985				10,835				10,880				10,714
Non-agency RMBS			515				445				677				677
Total floating rate CMOs			11,524				11,304				11,586				11,420
Interest rate swapped MBS(2)
Triple-A rated non-agency CMBS (3)			—				—				29				28
Government-sponsored enterprise DUS(4)			—				—				10				10
Total swapped MBS			—				—				39				38
Total floating rate MBS			11,524				11,304				11,625				11,458
Fixed rate MBS
Government-sponsored enterprises			3				3				4				4
Triple-A rated non-agency CMBS(5)			56				56				297				297
Total fixed rate MBS			59				59				301				301
Total MBS		$	11,583			$	11,363			$	11,926			$	11,759

Unrealized losses on the Bank’s MBS classified as held-to-maturity decreased from $557 million at December 31, 2008 to $188 million at December 31, 2009. The Bank did not have any securities classified as available-for-sale at December 31, 2009. At December 31, 2008, unrealized losses on the Bank’s MBS classified as available-for-sale totaled $1.7 million. The following table sets forth the unrealized losses on the Bank’s MBS portfolio as of December 31, 2009 and 2008.

UNREALIZED LOSSES ON MBS PORTFOLIO
(dollars in millions)

		December 31, 2009								December 31, 2008
		Gross				Unrealized Losses				Gross				Unrealized Losses
		Unrealized				as Percentage of				Unrealized				as Percentage of
		Losses				Amortized Cost				Losses				Amortized Cost
Government guaranteed		$	—				0.3%			$	1				2.8%
Government-sponsored enterprises			53				0.5%				270				2.5%
Non-agency residential MBS			135				26.5%				277				40.9%
Non-agency commercial MBS			—				0.0%				11				3.4%
		$	188							$	559