Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþ

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

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

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 non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act:

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

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, 2007,2010, the registrant had 22,484,26824,894,275 shares of its capital stock outstanding. As of June 30, 20062009 (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 $2.496$2.907 billion.

Documents Incorporated by Reference:None.

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 urban and rural 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 rates.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 aggregatenet 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 throughin the Office of Finance.capital markets. All 12 FHLBanks issue debt through the Office of Finance in the form of consolidated obligations through the Office of Finance as their agent, and alleach 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. Each FHLBank loans the funds it raises through this process to its members or uses them for other business purposes. 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 arehave 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 membersshareholders 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. Each of theThe 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”), which is an independent agency in the executive branch of the United States Government.Government, assumed responsibility for supervising and regulating the FHLBanks and the Office of Finance. The Finance BoardAgency has a statutory responsibility and corresponding authority to ensure that the FHLBanksFHLBanks: (i) operate in a safe and sound manner.

As of December 31, 2006, 20052009, 2008 and 2004,2007, approximately 63.163.5 percent, 66.567.9 percent and 66.464.9 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.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 later of the time when those advances have been repaid orrepaid. The Bank may elect to repurchase excess stock of non-members before the applicable stock redemption period has expired, at which time the non-member borrower’s affiliation with the Bank is terminated.expired. During the period that thetheir 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 interest income is derived primarily from advances and investment activities and, to a far lesser extent, mortgage loans held for portfolio.activities. Each of these revenue sources is more fully described below. During the years ended December 31, 2006, 20052009, 2008 and 2004,2007, interest income derived from each of these sources (expressed as a percentage of the Bank’s total interest income) was as follows:

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. Thatstock and that will allow the Bank to increase its retained earnings over time. Generally, that set of objectives results in relatively small mark-ups over the Bank’s cost of funds for its advances and dividends on capital stock at rates targeted at or slightly abovethat 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 74-year77-year history. In accordance with the Bank’s capital plan, members and former members must purchasehold 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

As stated above, each membermember/borrower of the Bank executes a security agreement pursuant to which such membermember/borrower grants a security interest in favor of the Bank in certain assets of such member.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 statementsreports 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 membersmembers/borrowers that are granted specific collateral only status by the Bank are generally either insurance companies or membersmembers/borrowers with an investment grade credit rating from an NRSRO that have requested this type of structure. Insurance companies grant a security interest in, and are only permitted to borrow against the eligible collateral that is delivered to the Bank. MembersBank, 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 membermember/borrower must otherwise agree on an arrangement to assuretake 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, 2006, 7482009, 699 of the Bank’s borrowers/potential borrowers with a total of $24.3$23.8 billion in outstanding advances were on blanket lien status, 2026 borrowers/potential borrowers with $12.8$18.6 billion in outstanding

On a quarterly basis, or as otherwise requested by the Bank members on blanket lien status must updateobtains updated information relating to collateral pledged to the Bank.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 borrowings fromoutstanding 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 ade minimisamount 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 maintained atdelivered to the Bank eligible loans, securities and term deposits with a collateral maintenance levelvalue in excess of the member’s advances and other extensions of credit.

Finance BoardAgency 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. TheseCurrently, these fees are generally calculated as the present value of the difference (if positive) between the interest rate on the prepaid advance and the current rate onthen-current market yield for a permissible investmentU.S. agency security for the remaining term to maturity of the repaid advance. During the years ended December 31, 2006, 20052009, 2008 and 2004,2007, the Bank collected net prepayment fees of $2.2$14.2 million, $2.7$6.8 million and $7.4$2.3 million, respectively.

As of December 31, 2006,2009, the Bank’s outstanding advances (at par value) totaled $41.2$46.9 billion. As of that date, advances outstanding to the Bank’s ten largest borrowers represented 69.564.2 percent of the Bank’s total outstanding advances. Advances to the Bank’s threetwo largest borrowers represented 49.451.7 percent of the Bank’s total outstanding advances. Individually, advances to the Bank’s threetwo largest borrowers represented 28.638.9 percent (World Savings(Wells Fargo Bank FSB Texas), 12.3South Central, National Association) and 12.8 percent (Guaranty Bank) and 8.5 percent (Washington Mutual(Comerica Bank) of the total advances outstanding as of December 31, 2006.2009.

As ofEffective December 31, 2006,2008, Wells Fargo & Company (NYSE:WFC) acquired Wachovia Corporation, the Bank’s third largest borrower was Washington Mutualholding company for Wachovia Bank, a California-based institution with approximately $3.5 billion of advances outstanding. On February 13, 2001, Washington Mutual Bank acquired Bank United, thenFSB (“Wachovia”), the Bank’s largest shareholder and borrower and dissolvedshareholder. 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 United’s Ninth District charter. Washington MutualSouth, National Association (“Wells Fargo Bank assumedSouth”). Wells Fargo then merged Wells Fargo Bank United’s advancesSouth 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 in so doing became a non-member borrower. Washington Mutual’s remaining advances mature in 2007 and 2008.its application was approved on December 30, 2009. During the years ended December 31, 2006, 20052009, 2008 and 2004, Washington Mutual Bank2007, Wachovia/WFSC accounted for 11.129.7 percent, 14.938.6 percent and 12.437.2 percent, respectively, of the Bank’s total interest income from advances. As of March 29, 2007, advances outstanding to Washington Mutual Bank had declined to approximately $2.6 billion.

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.Operations — Financial Condition — Advances.

Community Investment Cash Advances. The Bank also offers a Community Investment Cash Advances (“CICA”) program as authorized by Finance BoardAgency 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

advances outstanding under the CICA program totaled approximately $599$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.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, 2006, 20052009, 2008 and 2004,2007, letter of credit fees earned by the Bank totaled approximately $2.8$6.1 million, $2.0$6.0 million and $1.6$4.1 million, respectively.

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 term federal funds and, overnight andon occasion, short-term commercial paper. At December 31, 2006,2009, the Bank’s short-term investments which were comprised entirelysolely of $2.1 billion of overnight federal funds sold to domestic counterparties, totaled $5.5 billion.counterparties.

To enhance interest income, the Bank maintains a long-term investment portfolio, which currently includes mortgage-backed securities (“MBS”) issued by United States Governmentgovernment agencies or government-sponsored agenciesenterprises (e.g., Fannie Mae and Freddie Mac), mortgage-backed securities (“MBS”) issued by government-sponsored agencies, and non-agency (or private label) residential and commercial MBS, that carryand non-MBS investments either guaranteed by the highest ratings from Moody’sUnited States government or S&P.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, 2006,2009 and 2008, the composition of the Bank’s long-term investment portfolio was comprised of approximately $7.7 billion of MBS and $0.2 billion of United States Government and government-sponsored agency securities. As further describedas follows (dollars in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Bank sold $4.1 billion (par value) of investment securities during the year ended December 31, 2005. Substantially all of these investments were government-sponsored agency securities.millions):

The Bank’s non-agency residential MBS (“RMBS”) are collateralized by whole mortgage loans that generally do not conform to governmentgovernment-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. TheIf the Bank’s cash flow analyses indicate that it is likely to incur a credit support provided byloss on a security, the subordinate securitiesBank records an other-than-temporary impairment loss in the period in which the expected credit loss is typically expressed as a percentageidentified. For discussion of the entire structure. Asaccounting for other-than-temporary impairments of December 31, 2006, the credit support fordebt securities, see Note 1 to the Bank’s non-agencyaudited financial statements included in this report.

In addition to purchasing securities ranged from 25 percentthat were structured to 45 percent (inprovide the casetype of credit enhancement discussed above, the CMBS) and from 5 percent to 60 percent (in the case of the RMBS).

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 privately issued mortgage-backed securities retained the highest investment grade rating.

On April 23, 2008, the Bank’s Board of Directors authorized an increase in the Bank’s MBS investmentsinvestment 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 asprovided, however, that the expiration of the prior month endexpanded 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 time new investments are made,Finance Agency will approve this request.

In addition, Finance Agency policy and regulations limit non-MBS obligations of aany 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 BoardAgency policy and regulations, total capital for these 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. To the extent the Bank’s total capital grows through additional capital stock investments, distributions of earnings in the form of stock dividends, and increases in retained earnings, the Bank may increase its MBS investments if opportunities to purchase securities at favorable spreads exist in the marketplace.

The Bank attemptshas historically attempted to maintain its investments in MBS close to the regulatory limit of 300 percent of total capital.dollar limit. While the Finance Board setsAgency has established limits onwith respect to the risks that may be taken withtypes and structural characteristics of the FHLBanks’ MBS investments, the Bank has generally adoptedadhered to a more conservative approach. The Bank acquires securities with expected principal prepayment schedules that are generally more structured, or relatively less volatile, than those present inset of guidelines. In certain cases, the underlying mortgage loans. The Bank uses interest rate derivatives to manage prepayment risks and other options embedded in the MBS that it acquires.

Finance BoardAgency 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 (see Item 7 – Management’s Discussionissuers. Finance Agency rules and Analysis of Financial Condition and Results of Operations). In addition,regulations also prohibit the Bank is prohibited from investing in certain types of securities, including:

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 Boardboard of Directorsdirectors and the regulations of the Finance Board.Agency. In addition, the Government Corporation Control Act provides that, before a government corporation issues and offers obligations to the public,

Consolidated obligation bonds satisfy termlong-term funding requirements.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 adjustablevariable rate and may be callable or non-callable.

Consolidated obligation bonds are issued and distributed daily 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 only FHLBank involved in the issuance and is the sole FHLBank that is the primary obligor on consolidated obligation bonds issued under those circumstances.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 ishas been conducted through direct negotiation with underwriters of System debt, and a majority of that issuance ishas 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 securities dealers.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 auctionauctions 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.

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, 2006.2009. During the years ended December 31, 20052008 and 2004,2007, the Bank assumed consolidated obligations from other FHLBanks with par amounts of $425$136 million and $375$323 million, respectively.

At December 31, 2006,2009, the Bank was the primary obligor on $50.2$59.9 billion of consolidated obligations (at par value), of which $8.3$51.2 billion were consolidated discount notesobligation bonds and $41.9$8.7 billion were consolidated bonds.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 Board,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 Board)Agency). However, if the Finance BoardAgency determines that the primarily liable FHLBank is unable to satisfy its obligations, then the Finance BoardAgency 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 BoardAgency 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 BoardAgency 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 unlikely event the Bank is holding a consolidated obligation as an investment for which the Finance BoardAgency 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.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 membershareholder 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 the section entitled “Liquidity and Capital Resources” in Item 7 –— Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations — Liquidity and Capital Resources.

According to the Office of Finance, the 12 FHLBanks had (at par value) approximately $952$931 billion, $937 billion$1.252 trillion and $869 billion$1.190 trillion in consolidated obligations outstanding at December 31, 2006, 20052009, 2008 and 2004,2007, respectively. The Bank was the primary obligor on $50.2$59.9 billion, $57.8$72.9 billion and $58.7$57.0 billion (at par value), respectively, of these consolidated obligations.

Executive Officer has served as a director of the Office of Finance since April 1, 2003 and is currently serving a secondthird three-year term that willis scheduled to expire on March 31, 2009.2012. (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.”)

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

a new capital plan to replace the previous statutory capital structure.

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 or transferred (withand, with the prior approval of the Bank)Bank, transferred only at its par value. In addition, the Bank’s capital stock may only be issued to and

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 GovernanceGovernance.

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.

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 supervisedrequired to consider the unique mission and regulatedownership 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.

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 Board.Agency.

As discussed above, the Finance Agency supervises and regulates the FHLBanks and the Office of Finance. The Finance BoardAgency 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 BoardAgency has an additional responsibility to ensure the FHLBanks are able to raise funds in the capital markets and carry out their housing and community development finance mission. To fulfillIn order to carry out those responsibilities, the Finance BoardAgency establishes regulations governing the entire range of operations of the FHLBanks, assesses the safetyconducts ongoing off-site monitoring and soundness of the FHLBanks throughsupervisory reviews, performs annual on-site examinations and periodic interim on-site reviews, conducts ongoing off-site monitoring and supervisory reviews, and requires the FHLBanks to submit monthly and quarterly information regarding their financial condition, and results of operations.operations and risk metrics.

The Finance Board is comprised of a five-member board. Four board members are appointed by the PresidentComptroller General of the United States with the advice and consent of the Senate, to serve seven-year terms, and the President designates one of those appointees as Chairman. The fifth member of the board is the Secretary of the Department of Housing and Urban Development, or the Secretary’s designee. The Finance Board is funded entirely by assessments from the 12 FHLBanks; no tax dollars or other appropriations support the operations of the Finance Board or the FHLBanks. The Finance Board assessments are shared by the FHLBanks on a pro rata basis based on a percentage that is derived by dividing each FHLBank’s total outstanding capital stock as of August 31 of each year by the total outstanding capital stock of all FHLBanks as of that date.

control systems, and the report on internal control over financial reporting until it files its Annual Report on Form 10-K forof the year ending December 31, 2007. Further, the Bank is not required to have its independent registered public accounting firm issue an attestationon the financial statements. In addition, the Treasury receives the Finance Agency’s annual report until it files its Annual Report on Form 10-K forto Congress, weekly reports reflecting securities transactions of the year ending December 31, 2008. At its option,FHLBanks, and other reports reflecting the Bank can elect to have its independent auditor issue an attestation report asoperations of December 31, 2007.the FHLBanks.

As of December 31, 2006,2009, the Bank employed 168194 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.

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)(“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

The Bank intends to continue to operate under its cooperative business model for the foreseeable future. Under this model, theThe Bank’s net income (exclusive of gains on the sales of investment securities, if any, and fair value adjustments required by SFAS 133) iscore earnings are expected to rise and fall with the general level of market interest rates, particularly short-term money market rates. Under that scenario,While there can be no assurance about 2010 earnings, dividends, or regulatory actions regarding the Bank’s return ondividend 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 capital stock (exclusivefederal funds rate for the applicable quarterly periods of gains on the sales of investment securities, if any,2010 and fair value adjustments required by SFAS 133) is expected to continue to track changes in the federal funds rate.building retained earnings.

In addition to changes in the general economic and business environment, developmentsDevelopments that are expected tomay have an impacteffect on the extent to which the Bank’s return on average capital stock (exclusive of gains(based on the sales of investment securities, if any, and fair value adjustments required by SFAS 133)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 the LIBOR index,benchmark rates such as LIBOR; the availability of interest rate exchange agreements at competitive prices,prices; whether the Bank’s larger borrowers continue to be members of the Bank and whetherthe level at which they maintain or increase their borrowing activity,activity; the impact of any future credit market disruptions; and the extent to whichimpact of ongoing economic conditions on demand for the Bank’s smallercredit 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 mid-sizedparticularly if general economic weakness reduces member lending opportunities and creates financial stress for the Bank’s members, then demand for advances may continue to increase their utilization of Bank advances.

In lightWhile the Bank’s primary focus will continue to be prudently meeting the liquidity and funding needs of these factors, andits 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 Bank is, however, limited by the FHLB Act and Finance BoardAgency regulations as tolimit the products and services that itthe Bank can offer to its members. The FHLB Actmembers and Finance Board regulations also govern many of the terms of the

received onfrom 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 fair value forthe valuation of our derivatives and changes in fair value for those assets and liabilities that are carried at fair value.any associated hedged items.

Like most financial institutions, our results of operations and the market value of our equity are significantly affected by our ability to manage interest rate risks.risk. We use a number of measurestools 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 others.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 impacteffect 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 continue 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.

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 members, fromcustomers, customers’ credit enhancement obligations associated with MPF loans held in portfolio, fromand interest rate exchange agreements we enter into with our securedcustomers.

We require that all outstanding advances and unsecured investment portfolioother extensions of credit to our customers be fully collateralized. We evaluate the types of collateral pledged by our customers and from derivative contracts. Severeassign a borrowing capacity to the collateral, generally based on either a percentage of its book value or estimated market value. During the current economic downturns, declining real estate values (both residentialdownturn, the number of our member institutions exhibiting significant financial stress has increased. In 2009, five of our members failed and non-residential), changestheir advances and other extensions of credit were either repaid in monetary policyfull 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 events thatreceiver 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 havecause us to incur a negative impact on the capital markets as a whole could lead to membercredit loss and adversely affect our financial condition or counterparty defaults or losses on our investments and/or MPF loans held in portfolio that could have a negative impact on our income and financial performance.results of operations.

On December 31, 2008, Wells Fargo & Company (“Wells Fargo”) acquired banks are merged into banks located outside our District. Because under the FHLB Act and the Finance Board’s current rules we can generally only do business with member institutions that have charters in our District, we could be adversely impacted if member institutions are acquired by institutions outside our District and their charters are dissolved or consolidated with the acquiring institution.

The loss of World Savings,WFSC or one or more other large borrowers that represent a significant proportion of our business, might,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.

We currently have the highest credit rating from Moody’s and S&P, and the COsconsolidated obligations issued by the FHLBanks have beenare rated Aaa/P-1 by Moody’s and AAA/A-1+ by S&P. However,&P, and the other FHLBanks have each been assigned high individual credit ratings as well. As of February 28, 2007,2010, Moody’s had assigned its highest rating to each individual FHLBank, and S&P had assigned two FHLBanks a negative outlook and lowered itsindividual long-term counterparty credit rating onratings of AAA/A-1+ to ten FHLBanks and ratings of AA+/A-1+ to the remaining two FHLBanks from AAA/A-1+FHLBanks.

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 AA+/A-1+. Sincepreserve capital in light of these ratings are subject to revisionresults, such as the suspension of quarterly dividends or withdrawal at any time byrepurchases or redemptions of capital stock. These regulatory actions, financial results and/or subsequent actions could cause the rating agencies neither we nor other FHLBanks, individually or collectively, can be assured of maintaining our current credit ratings. Whileto downgrade the credit ratings assigned either to any of the affected FHLBanks or to the FHLBanks’ COs have not been affected by theconsolidated obligations. Unfavorable ratings actions, discussed above, additional similar ratings actionsnegative guidance from the rating agencies, or negative guidanceannouncements by one or more of the FHLBanks may adversely affect our cost of funds and ability to issue COsconsolidated obligations on favorable terms, which could negatively affect our financial condition and results of operations.

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

We compete with Fannie Mae, Freddie MacIf 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 other GSEs, as well as corporate, sovereignto meet the credit and supranational entitiesliquidity needs of our members by accessing the capital markets could eventually be compromised.

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 funds,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.

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 effectively manage our interest rate risk effectively, which could adversely affect our financial condition and results of operations.

We carry outconduct our business and fulfill our public purpose primarily by acting as an intermediary between our members and the capital markets. Certain events, such as the one that occurred on September 11, 2001 or a natural disaster or terrorist act, could limit or prevent us from accessing the capital markets in order to issue COsconsolidated 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.needs and to meet the credit and liquidity needs of our members.

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

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 the Finance Boardour 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 has beenwas 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.

Under Finance BoardAgency regulations and our capital plan, amendments to the capital plan must be approved by the Finance Board.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 BoardAgency 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 BoardAgency 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 BoardAgency 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.

Under Finance BoardAgency 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 1one percent of our total assets or if, after the issuance of such shares, our outstanding excess stock would be greater than 1one 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 hashave not been paid in full or if we become unable to comply with regulatory liquidity requirements or satisfy our current obligations.

Our capital plan also providesstipulates that its provisions governing liquidation are subject to the Finance Board’sAgency’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 Board.Agency. We cannot predict how the Finance BoardAgency might exercise its authority with respect to liquidations or reorganizations or whether any actions taken by the Finance BoardAgency 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.

The FHLB Act requires each FHLBank to establish and our abilityfund an AHP. Annually, the FHLBanks are required to redeemset aside, in the aggregate, the greater of $100 million or repurchaseten percent of their current year’s income (before charges for AHP, as adjusted for interest expense on mandatorily redeemable capital stock,.

Portions of our district are subject to redeemrisks from hurricanes, tornadoes, floods and other natural disasters. Such natural disasters may damage or repurchase stockdislocate 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 affected not only by our own financial condition but also by the financial condition of one or more of the other FHLBanks.