10-12G

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934

FEDERAL HOME LOAN BANK OF DALLAS

(Exact name of registrant as specified in its charter)

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

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

Securities to be registered pursuant to Section 12(b) of the Act:
None

Securities to be registered pursuant to Section 12(g) of the Act:
Class B Capital Stock, $100 par value per share

FEDERAL HOME LOAN BANK OF DALLAS

TABLE OF CONTENTS

	Page
Item 1. Business		1
Item 2. Financial Information		19
Item 3. Properties		77
Item 4. Security Ownership of Certain Beneficial Owners and Management		77
Item 5. Directors and Executive Officers		79
Item 6. Executive Compensation		85
Item 7. Certain Relationships and Related Transactions		87
Item 8. Legal Proceedings		88
Item 9. Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters		88
Item 10. Recent Sales of Unregistered Securities		89
Item 11. Description of Registrant’s Securities to be Registered		89
Item 12. Indemnification of Directors and Officers		97
Item 13. Financial Statements and Supplementary Data		99
Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		101
Item 15. Financial Statements and Exhibits		102
Signatures		103
Index to Financial Statements		F-1
Organization Certificate
By-Laws
Amended and Revised Capital Plan
Deferred Compensation Plan
Non-Qualified Deferred Compensation Plan
Form of Special Non-Qualified Deferred Compensation Plan
Computation of Ratio of Earnings to Fixed Charges

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 (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. State and local housing authorities that meet certain statutory 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 slightly higher rates. The interest spread between the cost of the Bank’s liabilities and the yield on its assets is the Bank’s primary source of earnings. The Bank endeavors to manage its assets and liabilities in such a way that its aggregate 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 through the Office of Finance. All 12 FHLBanks issue debt through the Office of Finance in the form of consolidated obligations, and 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 are 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 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 counterparty credit rating of AAA/A-1+ from S&P. Shareholders, bondholders and prospective members 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 the ratings from 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 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 or certain mortgage loans acquired and retained by the Bank on its balance sheet.

The Bank is supervised and regulated by the Federal Housing Finance Board (“Finance Board”), which is an independent agency in the executive branch of the United States Government. The Finance Board 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 Board has an additional responsibility to ensure the FHLBanks are able to

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raise funds in the capital markets and carry out their housing and community development finance mission. In order to carry out those responsibilities, the Finance Board establishes regulations governing the operations of the FHLBanks, conducts ongoing off-site supervision and monitoring of the FHLBanks, and performs annual on-site examinations of each FHLBank.

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 no later than August 29, 2005. Registration under Section 12(g) of the Exchange Act will bring the Bank into the periodic disclosure regime as administered and interpreted by the SEC. Materials that the Bank will file with the SEC may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, 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. Once registration of the Bank’s equity securities under Section 12(g) is effective, copies of recent reports and other information filed with the SEC will also be available free of charge on the Bank’s website at www.fhlb.com.

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 March 31, 2005 and December 31, 2004, 2003 and 2002.

MEMBERSHIP SUMMARY

	March 31,		December 31,
	2005		2004		2003		2002
Commercial banks		738		742		719		717
Thrifts		94		96		100		101
Credit unions		36		37		33		30
Insurance companies		15		15		15		12
Total members		883		890		867		860
Housing associates		8		8		8		8
Non-member borrowers		13		11		14		12
Total		904		909		889		880
Community Financial Institutions		761		769		761		761

As of March 31, 2005 and December 31, 2004, 2003 and 2002, approximately 67.0 percent, 66.4 percent, 64.5 percent and 61.9 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. As discussed in more detail in Item 11 - Description of Registrant’s Securities to be Registered, non-member borrowers are required to hold capital stock to support outstanding advances or certain mortgage loans acquired by the Bank and held on the Bank’s balance sheet (see “Acquired Member Assets” under “Products and Services” below) until those activities have concluded or the applicable stock redemption period has expired, at which time the non-member borrower’s affiliation with the Bank is terminated. During the period that the advances or mortgage loans remain outstanding, non-member borrowers may not request new advances or submit additional mortgage loans for purchase, nor are they permitted to extend or renew the assumed advances.

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Approximately 86 percent of the Bank’s members are Community Financial Institutions (“CFIs”), which are 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 equal to or less than $500 million, as adjusted annually for inflation since 1999. For 2005, CFIs are FDIC-insured institutions with average total assets as of December 31, 2004, 2003, and 2002 equal to or less than $567 million. In 2004, 2003 and 2002, the average total asset ceiling for CFI designation was $548 million, $538 million and $527 million, respectively. The GLB Act expanded the eligibility for membership of CFIs in the FHLBanks and authorized the FHLBanks to accept expanded types of assets as collateral for advances to CFIs.

The Bank’s membership currently 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, or that additional members will have a significant impact on the Bank’s future business.

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 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 from three primary sources: advances, investment activities and, to a lesser extent, mortgage loans held for portfolio. Each of these revenue sources is more fully described below. During the three months ended March 31, 2005 and the years ended December 31, 2004, 2003 and 2002, interest income derived from each of these sources (expressed as a percentage of the Bank’s total interest income) was as follows:

	Three Months Ended			Year Ended December 31,
	March 31, 2005			2004			2003			2002
Advances (including prepayment fees)		71.2	%		70.5	%		67.6	%		66.9	%
Investment activities		25.8			25.2			25.2			25.4
Mortgage loans held for portfolio		2.1			3.8			6.6			7.3
Other		0.9			0.5			0.6			0.4
Total		100.0	%		100.0	%		100.0	%		100.0	%
Total interest income (in thousands)	$	459,578		$	1,242,511		$	1,088,887		$	1,262,628

With the exception of interest earned on advances to Washington Mutual Bank, a non-member borrower, 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 Washington Mutual Bank (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:

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• 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 Program advances. Interest is generally collected 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 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 1 and 5 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. Borrowers may elect to pay a higher interest rate and have an option to prepay the advance on any reset date without an additional fee. 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 special indices.

• Putable and convertible advances. The Bank also makes advances that include put or conversion features that allow the Bank to terminate the advance or convert the advance from a fixed rate to a floating rate at specified points in time.

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, include small business loans, small farm loans and small agribusiness 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. 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 above the periodic average 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 73-year history. In accordance with the Bank’s capital plan, members must purchase capital stock in proportion to their outstanding advances (see Item 11 – Description of Registrant’s Securities to be Registered). 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 stockholders as additional collateral for all of the respective stockholder’s obligations to the Bank.

In order to comply with the requirement to fully secure advances 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 regardless of whether or not such assets will conform to the requirements for eligible collateral. However, the Bank, pursuant to the FHLB Act and the regulations issued by the Finance Board, only originates, renews, or extends advances to its members 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

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by the United States Government or any of its agencies, including mortgage-backed 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; cash or 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 small business loans, small farm loans, or small agribusiness loans fully secured by collateral other than real estate or 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. At March 31, 2005 and December 31, 2004, 2003, and 2002, advances secured by these types of collateral totaled approximately $1.9 billion, $2.1 billion, $2.2 billion, and $1.0 billion, respectively, which represented approximately 4.1 percent, 4.6 percent, 5.4 percent and 2.8 percent, respectively, of the total advances outstanding as of those dates.

The FHLB Act affords any security interest granted to the Bank by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party, including any receiver, conservator, trustee, or similar party having rights of a lien creditor. However, 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).

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.

The Bank allows most of its members that are depository institutions to retain possession of documents evidencing collateral pledged to the Bank. The Bank designates such members as being on “blanket lien status,” while members required to deliver documents evidencing collateral pledged to the Bank are designated as being on “custody status.” Members on blanket lien status can become members on custody status if there are circumstances that in the Bank’s discretion warrant such a change, such as a deterioration of the member’s general creditworthiness. Alternatively, members can move from being on custody status to being on blanket lien status at the Bank’s discretion. Members that are insurance companies cannot be on blanket lien status. As of March 31, 2005, 760 of the Bank’s borrowers/potential borrowers with a total of $33.8 billion in outstanding advances were on blanket lien status and 144 borrowers/potential borrowers with $12.4 billion in outstanding advances were on custody status.

On a quarterly basis or as otherwise requested by the Bank, members on blanket lien status must update information relating to collateral pledged to the Bank. This information is accessed by the Bank from appropriate regulatory filings. In accordance with written procedures similar to those established by the Auditing Standards Board of the American Institute of Certified Public Accountants, the Bank regularly verifies the existence of collateral securing its advances to members on blanket lien status. These collateral verifications are required annually utilizing procedures determined by the Bank. Some members engage an appropriately licensed accountant or independent auditor to verify the collateral while other members’ collateral is verified by the Bank, in either case at the member’s expense. Collateral verifications are not required for members that have not borrowed from the Bank during the prior calendar year, are on custody status, or are on blanket lien status but whose loans, securities, and deposits held at the Bank have had collateral maintenance levels in excess of their advance balances at all times.

Finance Board 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. 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 on a permissible investment for the remaining term to maturity of the repaid advance. During the three months ended March 31, 2005 and the years ended December 31, 2004, 2003 and 2002, the Bank collected prepayment fees of $0.4 million, $7.4 million, $10.5 million and $4.3 million, respectively.

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As of March 31, 2005, the Bank’s outstanding advances (at par value) totaled $46.2 billion. As of that date, advances outstanding to the Bank’s ten largest borrowers represented 65.6 percent of the Bank’s total outstanding advances. Advances to the Bank’s three largest borrowers represented 49.3 percent of the Bank’s total outstanding advances. Individually, advances to the Bank’s three largest borrowers represented 23.8 percent (World Savings Bank, FSB Texas), 16.2 percent (Washington Mutual Bank) and 9.3 percent (Guaranty Bank) of the total advances outstanding as of March 31, 2005.

Currently, the Bank’s second largest borrower is Washington Mutual Bank, a California-based institution with approximately $7.5 billion of advances outstanding as of March 31, 2005. On February 13, 2001, Washington Mutual Bank acquired Bank United, then the Bank’s largest stockholder and borrower, and dissolved Bank United’s Ninth District charter. Washington Mutual Bank assumed Bank United’s advances, which mature between 2006 and 2008, and in so doing became a non-member borrower. The Bank currently anticipates that Washington Mutual’s advances will remain fully collaterized until repaid. During the three months ended March 31, 2005 and the years ended December 31, 2004, 2003 and 2002, Washington Mutual Bank accounted for 14.3 percent, 12.4 percent, 12.7 percent and 16.8 percent, respectively, of the Bank’s total interest income from advances.

The Bank believes that the repayment of the advances currently held by Washington Mutual Bank (and the loss of the related interest income), which will occur no later than the maturity of the advances, will have a modestly negative economic impact on the Bank’s members. The Bank estimates that the loss of those advances from the Bank’s portfolio could reduce its annual return on total capital stock by approximately five to seven basis points. A larger balance of advances helps provide a critical mass of advances and capital over which to spread the Bank’s overhead, which helps maintain dividends and relatively lower advance pricing. The magnitude of the actual economic impact will depend on the size and profitability of the Bank at the time that the advances are repaid. A similar outcome would result in the event that one or more of the Bank’s other large borrowers repays its advances and ceases to be a member of the Bank.

For additional information regarding the composition and concentration of the Bank’s advances, see Item 2 – Financial Information.

Community Investment Cash Advances. The Bank also offers a Community Investment Cash Advances (“CICA”) program as authorized by Finance Board 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 15 basis points lower than rates on comparable advances outside the program. CICA advances are provided separately from and do not count toward the Bank’s statutory obligations under the Affordable Housing Program (AHP), through which the Bank provides grants to support projects that benefit low-income households (see the “Affordable Housing Program” section below). As of March 31, 2005, advances outstanding under the CICA program totaled approximately $455 million, representing approximately 1.0 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 that provide liquidity. Letters of credit must be fully collateralized as though they were funded advances. During the three months ended March 31, 2005 and the years ended December 31, 2004, 2003 and 2002, letter of credit fees earned by the Bank totaled approximately $0.5 million, $1.6 million, $1.1 million and $0.3 million, respectively.

Acquired Member Assets (“AMA”). The Bank offers 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 acquire fixed rate, conforming mortgage loans originated by their member institutions that participate 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

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portfolio as well as a portion of the credit risk. PFIs deliver 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 may either deliver loans that the PFI has already closed in its own name and transfers 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 (the “First Bank MPF Agreement”). Under the First Bank MPF 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 First Bank MPF Agreement permitted the Bank to retain a beneficial interest in Program Loans ranging from 1 percent to 49 percent, as the Bank in its discretion determined, and required the FHLBank of Chicago to purchase a participation interest in the Program Loans equal to the amount of interest in such loans that the Bank chose not to retain. In any case where the FHLBank of Chicago’s participation interest was less than 51 percent, the Bank would have been required to pay a transaction services fee to the FHLBank of Chicago. 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. Because the FHLBank of Chicago’s interest in the Program Loans was always equal to or greater than 51 percent, the Bank was never required to pay a transaction services fee to the FHLBank of Chicago. 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. 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.

On December 5, 2002, the Bank and the FHLBank of Chicago entered into a new investment and services agreement (the “Second Bank MPF Agreement”) to replace the First Bank MPF Agreement with respect to Program Loans delivered under MCs entered into on or after December 5, 2002. The agreement has an initial term of three years, after which it continues indefinitely unless terminated by either party upon 90 days’ prior notice. The Second Bank MPF Agreement provides that the FHLBank of Chicago will assume all rights and obligations of the Bank under each MC with the Bank’s PFIs and will acquire directly from such PFIs the Program Loans. The FHLBank of Chicago, the Bank, and the applicable PFI execute a written assignment and assumption agreement with respect to each MC that documents the rights and obligations of the FHLBank of Chicago as the assignee of the Bank’s rights and obligations under such MC. The Bank has no obligation to its PFIs to purchase Program Loans or perform any other obligation under an MC that has been assumed by the FHLBank of Chicago. Under such MCs, the FHLBank of Chicago purchases Program Loans directly from the Bank’s PFIs. All substantive terms of the MCs issued under the Second Bank MPF Agreement are unchanged from the terms of MCs issued under the First Bank MPF Agreement. Under the Second Bank MPF Agreement, the FHLBank of Chicago is 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.

Under the terms of the Second Bank MPF Agreement, the Bank retains the option to purchase up to a 50 percent interest in Program Loans delivered by its PFIs in lieu of receiving participation fees and provided that the Bank pays to the FHLBank of Chicago a monthly transaction service fee. Pursuant to an amendment to the First Bank MPF Agreement entered into on June 23, 2003, the Bank and the FHLBank of Chicago agreed to extend the terms of the Second Bank MPF Agreement to Program Loans delivered pursuant to MCs entered into prior to December 5, 2002. The Bank has not exercised its option under the Second Bank MPF Agreement to purchase any interest in Program Loans and currently anticipates that all future Program Loans delivered by its PFIs will be subject to the fee arrangement and will not be held on the Bank’s balance sheet. During the three months ended March 31, 2005 and the years ended December 31, 2004 and 2003, fees earned by the Bank under this arrangement totaled $0.1 million, $0.7 million and $1.7 million, respectively. These fees are included in “other income (loss)” under the caption “other, net” in the statements of income.

As of March 31, 2005, MPF loans held for portfolio (net of allowance for credit losses) were $662 million, representing approximately 1.0 percent of the Bank’s total assets. As of December 31, 2004, 2003 and 2002, MPF loans held for portfolio (net of allowance for credit losses) represented approximately 1.1 percent, 1.7 percent and

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2.5 percent, respectively, of the Bank’s total assets. Because the Bank does not expect to exercise its option to purchase interests in MPF loans in the future, the Bank currently anticipates that its balance of retained MPF loans will continue to decline over time. For more information regarding the Bank’s MPF loans, see Item 2 – Financial Information.

Affordable Housing Program (“AHP”). The Bank offers an AHP as required by the FHLB Act and in accordance with Finance Board 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 “Taxation.” Each year, the Bank conducts two competitive application processes to allocate the AHP funds set aside from the prior year’s earnings. Applications submitted by Bank members and their community partners during these funding rounds are scored in accordance with Finance Board 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.

Correspondent Banking Services. The Bank provides its members with a variety of correspondent banking services. These services include overnight and term deposit accounts, wire transfer services, reserve pass-through and settlement services, securities safekeeping and securities pledging services. These services are offered on a fee-for-service basis. In the aggregate, correspondent banking services generated fee income for the Bank of $0.7 million, $2.5 million, $2.1 million and $2.5 million during the three months ended March 31, 2005 and the years ended December 31, 2004, 2003 and 2002, respectively.

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

AssetConnection®. The Bank has also introduced AssetConnection®, an electronic communications system 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 Finance Board approved the development of this system in November 2002 under its new business activity regulations, and the Bank introduced it to its members in October 2003. 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.

In its initial phase, 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. Since its introduction, 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.

Investment Activities

The Bank maintains a portfolio of investments to enhance interest income and meet liquidity needs. To ensure the availability of funds to meet members’ credit needs and its other general 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 commercial paper. At March 31, 2005, the Bank’s short-term investments, which were comprised entirely of overnight federal funds sold to domestic counterparties, totaled $4.6 billion.

The goal of increasing interest income is met by the Bank’s long-term investment portfolio, which includes securities issued by United States Government agencies or government-sponsored agencies (e.g., Fannie Mae, Freddie Mac, and the Tennessee Valley Authority), mortgage-backed securities (“MBS”) issued by government-

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sponsored mortgage agencies (e.g., Fannie Mae and Freddie Mac), and non-agency residential and commercial MBS that carry the highest ratings from Moody’s or S&P. The interest rate and prepayment risk inherent in the MBS is managed though a variety of debt and interest rate derivative instruments. The majority of the United States Government and government-sponsored agency securities carry fixed rates, most of which have been converted for the Bank’s purpose to floating rates with interest rate derivatives. As of March 31, 2005, the Bank’s long-term investment portfolio was comprised of $8.3 billion of MBS and $4.7 billion of United States Government and government-sponsored agency securities.

The Bank’s non-agency residential MBS (“RMBS”) are collateralized by whole mortgage loans that generally do not conform to government 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 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. The credit support provided by the subordinate securities is typically expressed as a percentage of the entire structure. As of March 31, 2005, the credit support for the Bank’s non-agency securities ranged from 23 percent to 44 percent (in the case of the CMBS) and from 4 percent to 21 percent (in the case of the RMBS).

The Bank further reduces the credit risk of its non-agency MBS by purchasing securities with other risk-reducing attributes. For instance, the Bank purchases RMBS backed by loan pools that feature a high percentage of relatively small and geographically dispersed loans, a high percentage of owner-occupied properties, and low loan-to-value ratios. When purchasing CMBS, the Bank generally acquires securities backed by relatively small and geographically diverse loans, diverse loan types and high debt service coverage ratios. At March 31, 2005, all of the Bank’s holdings of privately issued mortgage-backed securities retained the highest investment grade rating.

Finance Board policy and regulations limit the Bank’s MBS investments to 300 percent of its total capital, as of the prior month end at the time new investments are made, and non-MBS obligations of a 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 Board regulations, total capital for these purposes excludes accumulated other comprehensive income (loss) and includes all amounts paid in for the Bank’s capital stock regardless of accounting classification (see Item 2 – Financial Information). 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. As the Bank’s total capital grows through additional capital stock investments, 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 attempts to maintain its investments in MBS close to the regulatory limit of 300 percent of total capital. While the Finance Board sets limits on the risks that may be taken with MBS investments, the Bank has generally adopted 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 in 30-year whole mortgages. The Bank uses debt instruments with call features as well as interest rate derivatives to manage prepayment risks and other options embedded in the MBS that it acquires.

Finance Board regulations include a variety of restrictions and limitations on the FHLBank’s investment activities, including limits on the types, amounts, and maturities of unsecured investments in private issuers (see Item 2 – Financial Information). In addition, the Bank is prohibited 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;

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• 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 AMA program such as the MPF 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 FHLBank Act;

• non-U.S. dollar denominated securities;

• interest-only or principal-only stripped MBS;

• residual-interest or interest-accrual classes of Collateralized Mortgage Obligations 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.

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 bonds and consolidated discount notes. Generally, discount notes are consolidated obligations with maturities up to 360 days, and consolidated bonds have maturities of one year or longer.

The Bank determines its participation in the issuance of consolidated obligations based on, 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 Board. In addition, the Government Corporation Control Act provides that, before a government corporation issues and offers obligations to the public, the 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. The FHLB Act authorizes the Secretary of the Treasury in specified circumstances to purchase consolidated obligations up to an aggregate principal amount of $4 billion.

Consolidated bonds satisfy term funding requirements. Typically, the maturities of these securities range from one to 15 years, but their maturities are not subject to any statutory or regulatory limit. Consolidated bonds can be fixed or adjustable rate and may be callable or non-callable.

Consolidated 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 negotiation and is the sole FHLBank that is primary obligor on consolidated obligation bonds issued under those circumstances. When the Bank and one or more other FHLBanks jointly negotiate the issuance of bonds directly 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 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 is conducted through direct negotiation with underwriters of System debt, and a majority of that issuance is 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

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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 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 discount notes selling group and through other authorized securities dealers.

On a daily basis, the Bank may request that specific amounts of 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.

Twice weekly, the Bank may also request that specific amounts of discount notes with fixed maturity dates ranging from 4 to 26 weeks be offered by the Office of Finance through competitive auction 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 capital relative to the capital of the other FHLBanks offering discount notes. The majority of the Bank’s discount note issuance is conducted through the auction process.

Regardless of the method of issuance, as with consolidated bonds, the Bank is primary obligor for the portion of discount notes issued for which it has received the proceeds. At March 31, 2005, the Bank was primary obligor on $59.9 billion of consolidated obligations (at par value), of which $1.6 billion were consolidated discount notes and $58.3 billion were consolidated bonds.

Joint and Several Liability. Although the Bank is primarily liable only for its portion of consolidated obligations (i.e., those issued on its behalf), 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, 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). However, if the Finance Board determines that the primarily liable FHLBank is unable to satisfy its obligations, then the Finance Board 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 Board 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

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Bank has no means to determine how the Finance Board 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 Board 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. 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 member of the Bank.

According to the Office of Finance, the 12 FHLBanks had (at par value) approximately $873 billion, $869 billion, $760 billion and $681 billion in consolidated obligations outstanding at March 31, 2005 and December 31, 2004, 2003 and 2002, respectively. The Bank was the primary obligor on $59.9 billion, $58.7 billion, $52.3 billion and $48.2 billion (at par value), respectively, of these consolidated obligations.

Certification and Reporting Obligations. Under Finance Board regulations, before the end of each calendar quarter and before paying any dividends for that quarter, the President of the Bank must certify to the Finance Board that, based upon known current facts and financial information, the Bank will remain in compliance with applicable 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 Board 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 Board 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 Board, 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 Board 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 Board 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 March 31, 2005 and December 31, 2004, 2003 and 2002, the Bank had eligible assets free from pledge of $64.9 billion, $64.5 billion, $57.9 billion and $54.7 billion, respectively, compared to its participation in outstanding consolidated obligations of $59.9 billion, $58.7 billion, $52.3 billion and $48.2 billion, respectively. In addition, the Bank was in compliance with its negative pledge requirements at all times during the three months ended March 31, 2005 and the three years ended December 31, 2004.

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, provides the FHLBanks with credit information,

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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 managed by a board of directors which consists of three part-time members appointed by the Finance Board. Under current Finance Board 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 was appointed as a director of the Office of Finance by the Finance Board and is currently serving a three-year term that began April 1, 2003.

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 Board has regulatory oversight and enforcement authority over the Office of Finance and its directors and officers 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 outstanding capital stock (as of the prior month-end), 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 has determined that the same rules governing joint and several liability should apply whether consolidated obligations are issued by the Finance Board under Section 11(c) or by the FHLBanks under Section 11(a). No FHLBank is currently permitted to issue individual debt under Section 11(a) of the FHLB Act without Finance Board approval.

Use of Interest Rate Exchange Agreements

Finance Board 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, investments and mortgage loans to approximate more closely the interest rate sensitivity of its liabilities. In addition to using interest rate exchange agreements to manage mismatches between the coupon features of its assets and liabilities, the Bank also uses interest rate exchange agreements to manage embedded options in assets and liabilities, to preserve the market value of existing assets and liabilities, to hedge the duration risk of prepayable instruments, and to reduce funding costs.

To reduce funding costs, the Bank may enter 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 continued attractiveness of such debt depends on yield relationships between the bond and interest rate exchange markets. If

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conditions in these markets change, the Bank may alter the types or terms of the bonds that it issues.

For further discussion of interest rate exchange agreements, see Item 2 – Financial Information.

Competition

Demand for the Bank’s advances is affected by, among other things, the cost of other available sources of liquidity 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. Sources of wholesale funds for its members include 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 alternative funding sources to members can significantly influence the demand for the Bank’s advances and can vary as a result of a variety of factors including, among others, market conditions, members’ creditworthiness and availability of collateral. The Bank competes against these other financing sources on the basis of cost, the relative ease by which the members can access the various sources of funds, and the flexibility desired by the member when structuring the liability.

The MPF Program competes primarily with Fannie Mae and Freddie Mac. While the Bank no longer expects to acquire interests in mortgage loans through this program, its ability to generate fee income from loans that are sold by its members to the FHLBank of Chicago is affected by competitive factors. These competitive factors include price, products, structures, and services offered, all of which are established by the FHLBank of Chicago.

The Bank also competes with Fannie Mae, Freddie Mac and other GSEs, as well as corporate, sovereign and supranational entities for funds raised through the issuance of consolidated obligations in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs or lesser amounts of debt issued at the same cost than otherwise would be the case. Although the available supply of funds has kept pace with the funding needs of the Bank’s members as expressed through Bank debt issuance, there can be no assurance that this will continue to be the case indefinitely.

In addition, the sale of callable debt and the simultaneous execution of callable interest rate exchange agreements that mirror the debt has been an important source of competitive funding for the Bank. As such, the Bank’s access to interest rate exchange agreements has been, and will continue to be, an important determinant of the Bank’s relative cost of funds. Given that the trend has been towards increased concentration in the number of providers of interest rate exchange agreements, there can be no assurance that the current breadth and depth of these markets will be sustained.

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.

On January 30, 2001, the Finance Board published a final rule implementing the required new capital structure for the FHLBanks. As required by the new capital regulations, the Bank submitted its proposed capital plan to the Finance Board on October 29, 2001 for review and approval. The Finance Board approved the Bank’s capital plan on June 12, 2002 and the Bank 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

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activity-based stock requirement. The new capital plan is similar to the former capital structure in that it requires members to hold capital stock in proportion to their 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 (with the prior approval of the Bank) 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. For more information about the Bank’s minimum capital requirements, see Item 2 – Financial Information.

Retained Earnings. In August 2003, the Finance Board 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 that is designed to build retained earnings over a number of years in order to protect the par value of members’ capital stock investments from potential economic losses and fluctuations in earnings. The Bank’s Board of Directors will review 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 revise the targets as appropriate. In accordance with that process, the Board of Directors revised the Bank’s retained earnings targets in October 2004.

The Bank’s current retained earnings targets call for the Bank to build retained earnings from $145.5 million at March 31, 2005 to approximately $160 million by the end of 2005. Thereafter, the Bank will endeavor to build retained earnings at an average rate of $19 million to $22 million per year over the next 10 to 12 years. With certain exceptions, the Bank’s policy calls for the Bank to retain earnings in line with its targets prior to determining the amount of funds available to pay dividends.

Dividends. The Bank pays dividends to holders of its capital stock quarterly or as otherwise determined by its Board of Directors. The Bank is permitted by statute and regulation to pay dividends on members’ capital stock only from current or previously retained earnings. 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. Because the Bank’s returns 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, see Item 2 – Financial Information and Item 9 – Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.

Strategic Business Plan

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.

Regulatory Oversight and Corporate Governance

The Bank is supervised and regulated by the Finance Board. The Finance Board 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 Board 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 fulfill those responsibilities, the Finance Board establishes regulations governing the entire range of operations of the FHLBanks, assesses the safety and soundness of the FHLBanks through annual on-site examinations, conducts ongoing off-site monitoring and supervisory reviews, and requires the FHLBanks to submit monthly information regarding their financial condition and results of operations.

The Finance Board is comprised of a five-member board. Four board members are appointed by the President 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

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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 outstanding capital stock as of August 31 of each year by the total outstanding capital stock of all FHLBanks as of that date.

The Government Corporation Control Act provides that, before a government corporation issues and offers obligations to the public, the 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. The FHLB Act also authorizes the Secretary of the Treasury, at his or her discretion, to purchase consolidated obligations up to an aggregate principal amount of $4 billion. No borrowings under this authority have been outstanding since 1977. The U.S. Department of the Treasury receives the Finance Board’s annual report to the United States Congress (the “Congress”), monthly reports reflecting securities transactions of the FHLBanks, and other reports reflecting the operations of the FHLBanks.

In accordance with the FHLB Act, the Bank’s Board of Directors is comprised of a combination of industry directors elected by the Bank’s member institutions and public interest directors appointed by the Finance Board. No members of the Bank’s management may serve as directors of a FHLBank. The Bank’s Board of Directors currently includes 11 industry directors and 5 public interest directors. Three public interest directorships are currently vacant. For additional information regarding the Bank’s Board of Directors, see Item 5 – Directors and Executive Officers.

The Bank’s Board of Directors has an Audit Committee, which is currently comprised of seven directors, two of whom are public interest directors and five of whom are industry directors. The Audit Committee oversees the Bank’s financial reporting processes; reviews compliance with laws, regulations, policies and procedures; and evaluates the adequacy of administrative, operating, and internal accounting controls. All Audit Committee members are independent, as defined by the Finance Board; however, the elected directors serving on the committee do not meet the SEC’s criteria for independence as a result of their affiliation with members of the Bank. The Bank also has an internal audit department that independently assesses the effectiveness of internal controls and recommends possible improvements thereto. The Bank’s Director of Internal Audit reports directly to the Audit Committee.

An independent registered public accounting firm audits the annual financial statements of the Bank. The independent registered public accounting firm conducts these audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). The FHLBanks, the Finance Board, and the Congress all receive the audit reports. The Bank must submit annual management reports to the 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 auditor on the financial statements. The Comptroller General has authority under the FHLB Act to audit or examine the Finance Board 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 the financial statements conducted by an independent 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 the Congress, the Office of Management and Budget, and the FHLBank in question. The Comptroller General may also conduct his or her own audit of any financial statements of the Bank.

Both houses of the Congress considered legislative proposals in 2004 that would have modified the structure of the regulatory oversight of the housing GSEs, including the FHLBanks. While those legislative proposals were not enacted into law in 2004, similar legislation has been introduced in both houses of Congress in early 2005, and the relevant committees of jurisdiction in both houses of Congress have begun holding hearings on the issues. In May 2005, the House Committee on Financial Services passed its version of this legislation. Although it does not appear that the current legislative proposals would alter the charter of the FHLBanks, the content of any legislation that might be enacted into law cannot be predicted at this time. Since neither the timing nor outcome of the legislative debate, nor the structure for a new regulatory body that might be created, is known at this time, the impact on the Bank’s operations, if any, cannot be determined.

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The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) was signed into law by the President of the United States on July 30, 2002. The Sarbanes-Oxley Act includes measures that impact financial reporting, disclosure controls, conflicts of interest, corporate ethics, oversight of the accounting profession, and composition of boards of directors. Furthermore, it establishes new civil and criminal penalties. Once the registration of the Bank’s equity securities is effective, it will become subject to the provisions of the Sarbanes-Oxley Act and the related implementing regulations promulgated by the SEC.

In September 2004, the Federal Reserve Board announced that it had revised its Policy Statement on Payments System Risk concerning interest and principal payments on securities issued by GSEs and certain international organizations. The Federal Reserve Banks currently process and post these payments to depository institutions’ Federal Reserve accounts by 9:15 a.m., Eastern Time, the same posting time as for U.S. Treasury securities’ interest and principal payments, even if the issuer has not fully funded these payments. The revised policy requires that, beginning July 20, 2006, Federal Reserve Banks will release these interest and principal payments as directed by the issuer only if the issuer’s Federal Reserve account contains sufficient funds to cover the payments. While the issuer will determine the timing of these payments during the day, each issuer will be required to fund its interest and principal payments by 4 p.m. Eastern Time, in order for the payments to be processed that day. The Bank does not expect this change to have a significant impact on its operations.

Employees

As of March 31, 2005, the Bank employed 135 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.

Taxation

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 $2.2 billion of their accumulated retained earnings 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 Board 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 $782,000 of the $75 million benchmark payment due on October 15, 2018 and all 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. 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 mandatorily redeemable capital stock is added back to income for purposes of computing the Bank’s AHP

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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.

The combined assessments for REFCORP and AHP are the equivalent of a minimum 26.5 percent effective income tax rate for the Bank. This rate is increased by the impact of non-deductible interest on mandatorily redeemable capital stock.

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ITEM 2. FINANCIAL INFORMATION

SELECTED FINANCIAL DATA
(dollars in thousands)

	Three Months Ended
	March 31,						Year Ended December 31,
	2005			2004			2004			2003(5)			2002(5)			2001(5)			2000(5)
Balance sheet (at period end)
Advances	$	46,161,537		$	44,440,156		$	47,111,154		$	40,595,029		$	36,869,652		$	32,490,541		$	30,194,459
Investments (1)		17,654,333			15,761,710			15,808,508			16,060,275			15,589,454			11,535,018			11,260,736
Mortgage loans, net		662,147			903,586			706,203			971,500			1,395,913			1,438,472			1,382,493
Total assets		65,651,129			62,216,363			64,586,313			58,396,001			55,135,614			46,148,472			43,852,357
Consolidated obligations — discount notes		1,598,531			7,784,906			7,084,765			11,627,325			12,872,681			6,586,995			7,605,852
Consolidated obligations — bonds		57,880,185			47,727,751			51,463,738			40,702,899			35,920,894			33,949,008			31,689,749
Total consolidated obligations(10)		59,478,716			55,512,657			58,548,503			52,330,224			48,793,575			40,536,003			39,295,601
Mandatorily redeemable capital stock(9)		329,556			400,629			327,121			—			—			—			—
Capital stock — putable		2,558,693			2,382,842			2,492,789			2,661,133			2,470,518			2,142,596			2,126,826
Retained earnings		145,511			121,085			143,897			108,612			77,560			70,883			39,178
Dividends paid(4)(9)		18,200			8,531			43,961			58,740			68,648			83,387			152,284
Income statement
Interest income	$	459,578		$	266,299		$	1,242,511		$	1,088,887		$	1,262,628		$	1,983,737		$	2,564,056
Net interest income		45,398			47,016			177,375			174,639			182,479			181,527			205,059
Income before cumulative effect of change in accounting principle (2)		19,814			21,004			79,246			89,792			75,325			115,997			128,578
Net income(2)		19,814			21,004			79,246			89,792			75,325			115,092			128,578
Performance ratios(9)
Net interest margin(3)(11)		0.28	%		0.32	%		0.29	%		0.31	%		0.37	%		0.42	%		0.52	%
Return on average assets (2)(11)		0.12			0.14			0.13			0.16			0.15			0.26			0.32
Return on average equity (2)(11)		3.03			3.56			3.20			3.34			3.10			5.54			6.54
Return on average capital stock (2)(6)(11)		3.22			3.70			3.35			3.42			3.22			5.70			6.74
Total average equity to average assets		4.09			4.00			4.01			4.81			4.89			4.72			4.91
Weighted average dividend rate (4)(11)		2.95			1.50			1.86			2.24			2.93			4.13			7.94
Dividend payout ratio (7)		91.85			40.62			55.47			65.42			91.14			72.45			118.44
Ratio of earnings to fixed charges		1.07	X		1.13	X		1.10	X		1.13	X		1.10	X		1.09	X		1.07	X
Average federal funds rate (8)		2.47	%		1.00	%		1.35	%		1.13	%		1.67	%		3.88	%		6.24	%

(1)	Investments consist of federal funds sold and securities classified as held-to-maturity, available-for-sale and trading.
(2)	The Bank adopted Statement of Financial Accounting Standards No. 133 on January 1, 2001. At transition, the Bank recorded a net unrealized gain of $73.4 million on trading securities and a $74.3 million net unrealized loss on derivatives and hedging activities. These factors combined to result in a net loss at transition of $0.9 million.
(3)	Net interest margin is net interest income as a percentage of average earning assets.
(4)	Weighted average dividend rates are dividends paid in cash and stock divided by average capital stock outstanding excluding mandatorily redeemable capital stock. The weighted average dividend rate for 2000 is calculated including a $30 million special dividend that was paid during that year. If the special dividend had been excluded from the calculation, the weighted average dividend rate for 2000 would have been 6.36 percent. The special dividend is also included in dividends paid for 2000. The Bank paid the special dividend in 2000 in light of uncertainties created by regulatory proposals relating to the FHLBanks’ new capital structure and as a means to ensure that those shareholders that had contributed to the accumulation of retained earnings by accepting lower dividend payments on their capital stock (since the enactment of FIRREA) would benefit from that accumulation.
(5)	Certain amounts in 2003, 2002, 2001 and 2000 were reclassified to conform with the 2004 and 2005 presentation.
(6)	Return on average capital stock is derived by dividing net income by average capital stock balances excluding mandatorily redeemable capital stock.
(7)	Dividend payout ratio is computed by dividing dividends paid by net income for the period. The dividend payout ratio for 2000 is calculated including a $30 million special dividend that was paid during that year. If the special dividend had been excluded from the calculation, the dividend payout ratio would have been 95.10 percent.
(8)	Rates obtained from the Federal Reserve Statistical Release.
(9)	The Bank adopted Statement of Financial Accounting Standards No. 150 (“SFAS 150”) as of January 1, 2004. In accordance with the provisions of that standard, $329.6 million, $327.1 million and $400.6 million of the Bank’s capital stock was classified as a liability (“mandatorily redeemable capital stock”) at March 31, 2005, December 31, 2004 and March 31, 2004, respectively. In addition, $2.4 million, $1.5 million and $6.6 million of dividends paid on mandatorily redeemable capital stock were recorded as interest expense during the three months ended March 31, 2005 and 2004 and the year ended December 31, 2004, respectively. These amounts are excluded from dividends paid in those periods. Due to the adoption of SFAS 150, the Bank’s performance ratios for the three months ended March 31, 2005 and 2004 and the year ended December 31, 2004 are not comparable to prior periods.
(10)	The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all of the FHLBanks. At March 31, 2005 and 2004 and at December 31, 2004, 2003, 2002, 2001 and 2000, the outstanding consolidated obligations (at par value) of all 12 FHLBanks totaled approximately $873 billion, $781 billion, $869 billion, $760 billion, $681 billion, $637 billion and $614 billion, respectively. As of those dates, the Bank’s outstanding consolidated obligations (at par value) were $59.9 billion, $55.3 billion, $58.7 billion, $52.3 billion, $48.2 billion, $40.4 billion and $39.4 billion, respectively.
(11)	These percentages are annualized for the three months ended March 31, 2005 and 2004.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and notes thereto beginning on page F-1 of this registration statement. Specifically, the annual audited financial statements and notes thereto for the years ended December 31, 2004, 2003 and 2002 are located on pages F-1 through F-45. The interim unaudited financial statements and notes thereto for the three months ended March 31, 2005 and 2004 are located on pages F-46 through F-57.

Forward-Looking Information

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

These risks and uncertainties include, without limitation, evolving economic and market conditions, political events, and the impact of competitive business forces. The risks and uncertainties related to evolving economic and market conditions include, but are not limited to, potentially adverse changes in interest rates, adverse changes in the Bank’s access to the capital markets, material adverse 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 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. 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 FHLBanks. 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. The Finance Board, an independent agency in the executive branch of the United States Government, supervises and regulates the FHLBanks and the Office of Finance, a joint office of the FHLBanks. The Finance Board ensures that the FHLBanks operate in a safe and sound manner, carry out their housing finance mission, remain adequately capitalized, and are able to raise funds in the capital markets.

The Bank serves eligible financial institutions in Arkansas, Louisiana, Mississippi, New Mexico and Texas (collectively, the Ninth District of the Federal Home Loan Bank System). The Bank’s primary business is lending low cost funds (known as advances) to its member institutions, which include commercial banks, thrifts, insurance companies and credit unions. The Bank also maintains a portfolio of highly rated investments for liquidity purposes and to provide additional earnings. Shareholders’ return on their investment includes dividends (which are typically paid quarterly in the form of capital stock) and the value derived from access to the Bank’s products and services. The Bank balances the financial rewards to shareholders by paying a dividend that meets or exceeds the return on alternative short-term money market investments available to shareholders, while lending funds at the lowest rates expected to be compatible with that objective and its recently established objective to build retained earnings over time.

The Bank’s capital stock is not publicly traded and can only be held by members of the Bank, or by non-member institutions that acquire stock by virtue of acquiring member institutions and former members of the Bank that retain

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capital stock either to support advances or other activity that remain outstanding or until any applicable stock redemption or withdrawal notice period expires. All members must purchase stock in the Bank. The Bank’s capital stock has a par value of $100 per share and is purchased, redeemed, repurchased and transferred (with the prior approval of the Bank) only at its par value. Members may redeem excess stock, or withdraw from membership and redeem all outstanding capital stock, with five years’ written notice to the Bank.

The FHLBanks’ debt instruments (known as consolidated obligations) are their primary source of funds and are the joint and several obligations of all 12 FHLBanks (see Item 1 – Business). Consolidated obligations are issued on a continuous basis through the Office of Finance acting as agent for the FHLBanks, and 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 enjoy GSE status; however, they 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 and AAA/A-1+ by S&P, which are the highest ratings available from these NRSROs. These ratings indicate 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. Shareholders, bondholders and prospective members 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. Each of the ratings from the NRSROs should be evaluated independently. Historically, the FHLBanks’ GSE status and highest available credit ratings have provided the FHLBanks with excellent capital markets access. Deposits, other borrowings and the proceeds from capital stock issued to members provide other funds to the Bank.

The Bank conducts its business and fulfills its public purpose primarily by acting as a financial intermediary between its members and the capital markets. The intermediation of the timing, structure, and amount of its members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements, including interest rate swaps, caps and floors. The Bank’s interest rate exchange agreements are accounted for in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement No. 133, SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (hereinafter collectively referred to as “SFAS 133”). The adoption of SFAS 133 on January 1, 2001 introduced more periodic earnings volatility than existed previously.

The Bank’s earnings, exclusive of unrealized fair value adjustments required by SFAS 133, are generated almost entirely from net interest income and tend to rise and fall with the overall level of interest rates, particularly short-term money market rates. Because the Bank is a cooperatively owned, wholesale institution operating on aggregate net interest spreads typically in the 15 to 25 basis point range, the spread component of its interest income is much smaller than a typical commercial bank, and a much larger portion of its net interest income is derived from the investment of its capital. Because the Bank’s interest rate risk profile is typically fairly neutral, which means that its capital is effectively invested in shorter-term assets, the Bank’s earnings and returns on capital tend to follow short-term interest rates. As a result, the Bank’s profitability objective has been to achieve a rate of return on members’ capital stock investment sufficient to allow the Bank to meet its retained earnings targets and pay dividends on capital stock at rates that equal or exceed the average federal funds rate. For the three months ended March 31, 2005 and 2004 and the years ended December 31, 2004, 2003 and 2002, the average federal funds rate was 2.47 percent, 1.00 percent, 1.35 percent, 1.13 percent and 1.67 percent, respectively. During these periods, the Bank declared and paid dividends at weighted average rates of 2.95 percent, 1.50 percent, 1.86 percent, 2.24 percent and 2.93 percent, respectively. The Bank exceeded its retained earnings target for 2004, the first year for which a target had been established.

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

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Financial Intermediation and Interest Rate Exchange Agreements

The Bank functions as a financial intermediary by channeling funds provided by investors in its consolidated obligations to member institutions. During the course of a business day, all member institutions may obtain advances through a variety of product types that include features as diverse as variable and fixed coupons, overnight to 30-year maturities, and bullet or amortizing redemption schedules. With bullet advances, all principal is due at maturity. The Bank funds advances primarily through the issuance of consolidated obligation bonds and discount notes. The terms and amounts of these consolidated obligation bonds and discount notes and the timing of their issuance is determined by the Bank and is subject to investor demand as well as FHLBank System debt issuance policies.

The intermediation of the timing, structure, and amount of Bank members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements. The Bank’s general practice is to contemporaneously execute interest rate exchange agreements when acquiring assets and/or issuing liabilities in order to convert the instruments’ cash flows to a floating rate that is indexed to the London Interbank Offered Rate (“LIBOR”). By doing so, the Bank reduces its interest rate risk exposure and preserves the value of, and earns more stable returns on, its members’ capital investment.

Management has put in place a risk management framework that outlines the permitted uses of interest rate derivatives and that requires frequent reporting of their values and impact on the statement of condition. All interest rate derivatives employed by the Bank hedge identifiable risks and none are used for speculative purposes. All of the Bank’s derivative instruments hedge the Bank’s exposure to changes in fair value due to changes in benchmark interest rates. Since the adoption of SFAS 133, the Bank has not had any derivative instruments classified as cash flow hedges.

As a result of using interest rate exchange agreements extensively to fulfill its role as a financial intermediary, the Bank has a large notional principal of interest rate exchange agreements relative to its size. As of March 31, 2005, December 31, 2004 and December 31, 2003, the Bank’s notional balance of interest rate exchange agreements was $61.3 billion, $64.1 billion and $54.5 billion, respectively, while its total assets were $65.7 billion, $64.6 billion and $58.4 billion, respectively. The notional amount of interest rate exchange agreements does not reflect the Bank’s credit risk exposure, which is much less than the notional amount. See discussion of credit risk below in the section entitled “Counterparty Credit Risk.”

As discussed above and elsewhere in this registration statement, the Bank uses interest rate exchange agreements extensively to convert fixed rate liabilities to floating rates, and to convert fixed rate advances and investment securities to floating rates. This use of derivatives is integral to the Bank’s financial management strategy, and the impact of these interest rate exchange agreements permeates the Bank’s financial statements.

The following table illustrates the impact that derivatives have had on the Bank’s operating results and capital for the three months ended March 31, 2005 and 2004 and the years ended December 31, 2004, 2003 and 2002. Readers should understand that this table cannot be used to determine what the Bank’s financial results would have been in the absence of the availability of interest rate exchange agreements. In that event, the Bank would have made different funding and investment decisions in order to minimize interest rate risk through the use of cash instruments. For instance, without derivatives, the Bank would have attempted to match fund fixed rate advances with fixed rate debt.

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IMPACT OF INTEREST RATE EXCHANGE AGREEMENTS
(dollars in thousands)

	Three Months Ended March 31,						Year ended December 31,
	2005			2004			2004			2003			2002
Net increase (decrease) in interest income	$	(55,219	)	$	(100,058	)	$	(364,938	)	$	(391,353	)	$	(327,952	)
Net decrease (increase) in interest expense		31,018			166,471			509,051			707,970			815,596
Net increase (decrease) in net interest income		(24,201	)		66,413			144,113			316,617			487,644
Net increase (decrease) in other income		(8,026	)		(7,135	)		(28,604	)		(11,702	)		(59,029	)
Net increase (decrease) in income before assessments		(32,227	)		59,278			115,509			304,915			428,615
Decrease (increase) in assessments		8,550			(15,727	)		(30,645	)		(80,896	)		(113,714	)
Increase (decrease) in net income		(23,677	)		43,551			84,864			224,019			314,901
Net increase (decrease) in other comprehensive income		118,340			(167,345	)		41,958			177,976			(394,434	)
Net increase (decrease) in capital	$	94,663		$	(123,794	)	$	126,822		$	401,995		$	(79,533	)

Statement of Financial Accounting Standards No. 133

The Bank adopted SFAS 133 on January 1, 2001. SFAS 133 requires that all derivative instruments be recorded in the statements of condition at their fair values. Changes in the fair values of the Bank’s derivatives are recorded each period in current earnings. SFAS 133 also sets forth conditions that must exist in order for balance sheet items to qualify for hedge accounting. If an asset or liability qualifies for hedge accounting, changes in the fair value of the hedged item are also recorded in earnings. As a result, the net effect is that only the “ineffective” portion of a qualifying hedge has an impact on current earnings.

Implementation of SFAS 133 introduced more periodic earnings variability than existed previously. This variability occurs in the form of the net difference between changes in the fair values of the hedge (the derivative instrument) and the hedged item (the asset or liability), if any, for accounting purposes. For the Bank, two types of hedging relationships are primarily responsible for creating earnings volatility.

The first type involves transactions in which the Bank enters into interest rate swaps with coupon cash flows identical or nearly identical to the cash flows of the hedged item (e.g., an advance, investment security or consolidated obligation). In some cases involving hedges of this type, an assumption of “no ineffectiveness” can be made and the changes in the fair values of the hedge and the hedged item are considered identical and offsetting (hereinafter referred to as the short-cut method). However, if the hedge or the hedged item fails to have certain characteristics defined in SFAS 133, the assumption of “no ineffectiveness” cannot be made, and the hedge and the hedged item must be marked to fair value independently (hereinafter referred to as the long-haul method). Under the long-haul method, the two components of the hedging relationship are marked to fair value using different discount rates, and the resulting changes in fair value are generally slightly different from one another. Even though these differences are generally relatively small when expressed as prices, their impact can become more significant when multiplied by the principal amount of the transaction and then evaluated in the context of the Bank’s net income. Nonetheless, the impact of these types of ineffectiveness-related adjustments on earnings is transitory as the net earnings impact will be zero over the life of the hedging relationship if the derivative and hedged item are held to maturity or their call dates, which is generally the case for the Bank.

The second type of hedging relationship that creates earnings volatility involves transactions in which the Bank enters into interest rate exchange agreements to hedge identifiable portfolio risks that do not qualify for hedge accounting under SFAS 133 (hereinafter referred to as a “non-SFAS 133” or “economic” hedge). For instance, as further described below, the Bank holds interest rate caps as a hedge against embedded caps in its floating rate Collateralized Mortgage Obligations (“CMOs”) classified as held-to-maturity securities. The changes in fair value of the interest rate caps flow through current earnings without an offsetting change in the fair value of the hedged items (i.e., the capped variable rate CMOs), which increases the volatility of the Bank’s earnings. The impact of

23

these changes in value on earnings over the life of the transactions will equal the purchase price of the caps, assuming these instruments are held until their maturity. Because the use of interest rate derivatives enables the Bank to better manage its economic risks, and thus run its business more effectively and efficiently, the Bank will continue to use them during the normal course of its balance sheet management. The Bank views the accounting consequences of using interest rate derivatives as being an important, but secondary, consideration. The following table provides the notional balances of the Bank’s derivative instruments, by balance sheet category, as of March 31, 2005, and the net fair value changes recorded in earnings for each of those categories during the three months ended March 31, 2005 and 2004.

24

COMPOSITION OF DERIVATIVES

			Net Change in Fair Value(6)
	Total Notional at		Three Months Ended March 31,
	March 31, 2005		2005			2004
	(In millions of dollars)		(In thousands of dollars)
Advances
Short-cut method(1)	$	8,143	$	—		$	—
Long-haul method(2)		1,080		120			(88	)
Economic hedges(3)		3		10			2
Total		9,226		130			(86	)
Investments
Short-cut method(1)		3,826		—			—
Long-haul method(2)		1,392		(859	)		(345	)
Economic hedges(4)		50		54			(23	)
Total		5,268		(805	)		(368	)
Consolidated obligations(7)
Short-cut method(1)		14,955		—			—
Long-haul method(2)		27,887		(5,502	)		(1,625	)
Economic hedges(3)		38		380			(57	)
Total		42,880		(5,122	)		(1,682	)
Other economic
Caps/floors(5)		3,915		(1,164	)		(2,171	)
Basis swaps(8)		—		48			—
Total		3,915		(1,116	)		(2,171	)
Total derivatives	$	61,289	$	(6,913	)	$	(4,307	)

(1)	The short-cut method allows the assumption of no ineffectiveness in the hedging relationship.
(2)	The long-haul method requires the hedge and hedged item to be marked to fair value independently.
(3)	Interest rate derivatives that hedge identified portfolio risks, but that do not qualify for hedge accounting under SFAS 133.
(4)	Interest rate derivatives that are matched to investment securities designated as trading, but that do not qualify for hedge accounting under SFAS 133.
(5)	Interest rate derivatives that hedge identified portfolio risks, but that do not qualify for hedge accounting under SFAS 133. The Bank’s interest rate caps hedge embedded caps in floating rate CMOs. Prior to their sale, the Bank’s interest rate floors hedged fixed rate mortgage loan prepayment risk.
(6)	Represents the difference in realized and unrealized fair value adjustments for the derivatives and their hedged items. In cases involving economic hedges (other than those relating to trading securities), the net change in fair value reflected above represents the change in fair value of the derivative only.
(7)	Effective January 1, 2004, the Bank changed the manner in which it assesses effectiveness for certain highly effective hedging relationships. As a result of this change, $12.7 billion (notional) of interest rate derivatives relating to the Bank’s consolidated obligations were converted from the short-cut method to the long-haul method of accounting. The adjustment resulting from this change totaled ($3.4 million) and is included in the net change in fair value for the three months ended March 31, 2004.
(8)	In June 2004, the Bank entered into $4.7 billion (notional) of interest rate basis swaps to reduce the Bank’s exposure to widening spreads between one-month and three-month LIBOR. The agreements expired in March 2005.

The following table provides the notional balances of the Bank’s derivative instruments, by balance sheet category, as of December 31, 2004 and 2003, and the net fair value changes recorded in earnings for each of those categories during the years ended December 31, 2004, 2003 and 2002.

25

COMPOSITION OF DERIVATIVES

	Total Notional at December 31,				Net Change in Fair Value(6)
	2004		2003		2004			2003			2002
	(In millions of dollars)				(In thousands of dollars)
Advances
Short-cut method(1)	$	7,815	$	7,467	$	—		$	—		$	—
Long-haul method(2)		1,505		1,248		257			573			(1,361	)
Economic hedges(3)		—		—		27			207			—
Total		9,320		8,715		284			780			(1,361	)
Investments
Short-cut method(1)		3,826		3,845		—			—			—
Long-haul method(2)		1,475		1,597		(2,008	)		(2,280	)		(1,195	)
Economic hedges(4)		56		106		266			650			508
Total		5,357		5,548		(1,742	)		(1,630	)		(687	)
Consolidated obligations(7)
Short-cut method(1)		13,105		25,895		—			—			—
Long-haul method(2)		27,702		11,194		(3,974	)		3,289			5,112
Economic hedges(3)		26		22		814			403			(1,448	)
Total		40,833		37,111		(3,160	)		3,692			3,664
Other economic
Caps/floors(5)		3,915		3,165		(16,560	)		(4,745	)		(19,489	)
Basis swaps(8)		4,710		—		(48	)		—			—
Total		8,625		3,165		(16,608	)		(4,745	)		(19,489	)
Total derivatives	$	64,135	$	54,539	$	(21,226	)	$	(1,903	)	$	(17,873	)

(1)	The short-cut method allows the assumption of no ineffectiveness in the hedging relationship.
(2)	The long-haul method requires the hedge and hedged item to be marked to fair value independently.
(3)	Interest rate derivatives that hedge identified portfolio risks, but that do not qualify for hedge accounting under SFAS 133.
(4)	Interest rate derivatives that are matched to investment securities designated as trading, but that do not qualify for hedge accounting under SFAS 133.
(5)	Interest rate derivatives that hedge identified portfolio risks, but that do not qualify for hedge accounting under SFAS 133. The Bank’s interest rate caps hedge embedded caps in floating rate CMOs. Prior to their sale, the Bank’s interest rate floors hedged fixed rate mortgage loan prepayment risk.
(6)	Represents the difference in realized and unrealized fair value adjustments for the derivatives and their hedged items. In cases involving economic hedges (other than those relating to trading securities), the net change in fair value reflected above represents the change in fair value of the derivative only.
(7)	Effective January 1, 2004, the Bank changed the manner in which it assesses effectiveness for certain highly effective hedging relationships. As a result of this change, $12.7 billion (notional) of interest rate derivatives relating to the Bank’s consolidated obligations were converted from the short-cut method to the long-haul method of accounting. The adjustment resulting from this change totaled ($3.4 million) and is included in the net change in fair value for the year ended December 31, 2004.
(8)	In June 2004, the Bank entered into $4.7 billion (notional) of interest rate basis swaps to reduce the Bank’s exposure to widening spreads between one-month and three-month LIBOR. The agreements expired in March 2005.

Financial Condition

The following table provides selected period-end balances as of March 31, 2005 and December 31, 2004 and 2003, as well as selected average balances for the three-month period ended March 31, 2005 and the years ended December 31, 2004 and 2003. In addition, the table provides the percentage increase or decrease in each of these balances from period-to-period. As shown in the table, the Bank’s advance balances declined by 2.0 percent during the three months ended March 31, 2005 after growing by 16.1 percent during the year ended December 31, 2004. During these same periods, total assets increased by 1.7 percent and 10.6 percent, respectively. During the three months ended March 31, 2005, total assets increased due primarily to a $1.9 billion increase in the Bank’s short-term investments. The Bank funded its asset growth primarily through increases in its consolidated obligations. Capital stock increased in each period due primarily to purchases that were made by members to support new advances. While the total advances balance declined during the three months ended March 31, 2005, some members who reduced their borrowing levels did not reduce their capital stock holdings proportionately. In 2004, the increase

26

in outstanding capital stock was offset, for financial reporting purposes, by the impact of the Bank’s adoption of Statement of Financial Accounting Standards No. 150 (see the section below entitled “Capital Stock” for further discussion). As of December 31, 2004, under the provisions of this new accounting standard, $327 million of the Bank’s total outstanding capital stock of $2.82 billion was classified as a liability, resulting in a net decrease in the reported balance of the Bank’s capital stock of 6.3 percent for the year ended December 31, 2004. Stock classified as a liability is reported in the Bank’s statement of condition (and in the table below) as mandatorily redeemable capital stock.

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)

	March 31,					December 31,
	2005					2004					2003
			Percentage					Percentage
			Increase					Increase
	Balance		(Decrease)			Balance		(Decrease)			Balance
Advances	$	46,162		(2.0	)%	$	47,111		16.1	%	$	40,595
Long-term investments (1)		13,070		(0.4	)		13,129		0.2			13,102
Mortgage loans, net		662		(6.2	)		706		(27.4	)		972
Total assets		65,651		1.7			64,586		10.6			58,396
Consolidated obligations — bonds		57,880		12.5			51,464		26.4			40,703
Consolidated obligations — discount notes		1,599		(77.4	)		7,085		(39.1	)		11,627
Total consolidated obligations		59,479		1.6			58,549		11.9			52,330
Mandatorily redeemable capital stock		330		0.9			327		100.0			—
Capital stock		2,559		2.6			2,493		(6.3	)		2,661
Retained earnings		146		1.4			144		32.1			109
Average total assets		64,833		5.0			61,736		10.4			55,931
Average capital stock		2,499		5.7			2,365		(9.8	)		2,622
Average mandatorily redeemable capital stock		327		(10.7	)		366		100.0			—

⁽¹⁾ Includes securities classified as held-to-maturity, available-for-sale and trading.

Advances

The following table presents advances outstanding, by type of institution, as of March 31, 2005 and December 31, 2004, 2003 and 2002.

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

						December 31,
	March 31, 2005					2004					2003					2002
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Commercial banks	$	15,350		33	%	$	15,593		33	%	$	11,832		29	%	$	10,465		29	%
Thrift institutions		21,803		47			22,476		48			19,579		49			16,752		46
Credit unions		1,056		2			1,032		2			952		2			795		2
Insurance companies		251		1			237		1			232		1			286		1
Total member advances		38,460		83			39,338		84			32,595		81			28,298		78
Housing associates		21		—			11		—			45		—			102		—
Non-member borrowers		7,680		17			7,668		16			7,708		19			8,090		22
Total par value of advances	$	46,161		100	%	$	47,017		100	%	$	40,348		100	%	$	36,490		100	%
Total par value of advances outstanding to CFIs	$	7,265		16	%	$	7,695		16	%	$	7,889		20	%	$	6,383		17	%

At March 31, 2005, the carrying value of the Bank’s advances portfolio totaled $46.2 billion, compared to $47.1 billion, $40.6 billion and $36.9 billion at December 31, 2004, 2003 and 2002, respectively. The par value of advances outstanding at March 31, 2005 and December 31, 2004, 2003 and 2002 was $46.2 billion, $47.0 billion, $40.3 billion and $36.5 billion, respectively. The decline in advances during the three months ended March 31, 2005 was due primarily to a reduction in advances outstanding to World Savings Bank, FSB Texas and Guaranty Bank, two of the Bank’s largest borrowers.

Advances growth during 2004 was attributable in large part to increased borrowing by the Bank’s ten largest borrowers. During the year ended December 31, 2004, advances to this group increased by approximately $4.5 billion. In 2004, advances also increased for all other segments of the Bank’s membership as institutions chose, at least in part, to use Bank advances to fund a portion of their balance sheet growth.

During 2003, Bank advances also increased for all segments of the Bank’s membership. Advances growth was particularly strong (in percentage terms) among the Bank’s 2003 CFIs, whose outstanding (par value) advances grew from $6.0 billion to $7.9 billion during the year, accounting for approximately 49 percent of the Bank’s overall growth in outstanding advances. For purposes of this determination, the balance of CFI advances as of December 31, 2002 was adjusted to exclude advances to those institutions that no longer met the criteria for designation as a CFI in 2003 based on their asset growth. Including a similar adjustment, advances to CFIs grew from $6.5 billion to $7.7 billion in 2004.

During the three months ended March 31, 2005 and the years ended December 31, 2004, 2003 and 2002, demand for the Bank’s advances products remained relatively constant with variable rate and fixed rate advances comprising approximately 47 to 48 percent and 52 to 53 percent, respectively, of the advances portfolio. Within the Bank’s fixed rate product offerings, there was a slight decline in the amortizing and putable advances in favor of simple fixed rate, fixed term structures.

At March 31, 2005, advances outstanding to the Bank’s ten largest borrowers totaled $30.3 billion, representing 65.6 percent of the Bank’s total outstanding advances as of that date. The following table presents the Bank’s ten largest borrowers as of March 31, 2005.

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TEN LARGEST BORROWERS AS OF MARCH 31, 2005
(Par value, dollars in millions)

					Percent of
Name	City	State	Advances		Total Advances
World Savings Bank, FSB Texas	Houston	TX	$	11,000		23.8	%
Washington Mutual Bank	Stockton	CA		7,472		16.2
Guaranty Bank	Austin	TX		4,278		9.3
Franklin Bank, SSB	Austin	TX		1,742		3.8
Hibernia National Bank	New Orleans	LA		1,660		3.6
International Bank of Commerce	Laredo	TX		1,495		3.2
Beal Savings Bank	Plano	TX		884		1.9
Trustmark National Bank	Jackson	MS		775		1.7
Southside Bank	Tyler	TX		540		1.1
Amegy Bank, N.A.*	Houston	TX		457		1.0
			$	30,303		65.6	%

*Previously known as Southwest Bank of Texas, N.A.

At December 31, 2004, advances outstanding to the Bank’s ten largest borrowers totaled $31.2 billion, representing 66.4 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, 2004.

TEN LARGEST BORROWERS AS OF DECEMBER 31, 2004
(Par value, dollars in millions)

					Percent of
Name	City	State	Advances		Total Advances
World Savings Bank, FSB Texas	Houston	TX	$	11,500		24.5	%
Washington Mutual Bank	Stockton	CA		7,472		15.9
Guaranty Bank	Austin	TX		4,717		10.0
Hibernia National Bank	New Orleans	LA		1,745		3.7
Franklin Bank, SSB	Austin	TX		1,653		3.5
International Bank of Commerce	Laredo	TX		1,375		2.9
Beal Bank	Plano	TX		845		1.8
Trustmark National Bank	Jackson	MS		825		1.8
Southwest Bank of Texas, N.A.	Houston	TX		557		1.2
Southside Bank	Tyler	TX		530		1.1
			$	31,219		66.4	%

As of December 31, 2003 and 2002, advances outstanding to the Bank’s ten largest borrowers comprised $26.7 billion (66.2 percent) and $24.2 billion (66.2 percent), respectively, of the total advances portfolio.

At March 31, 2005, the Bank’s second largest borrower was Washington Mutual Bank, a California-based institution with $7.5 billion of advances outstanding. On February 13, 2001, Washington Mutual Bank acquired Bank United, then the Bank’s largest stockholder and borrower, and dissolved Bank United’s Ninth District charter. Washington Mutual Bank assumed Bank United’s advances, which mature between 2006 and 2008, and in so doing became a non-member borrower. Advances to non-member borrowers may not be renewed at maturity.

The Bank believes that the loss of the advances currently held by Washington Mutual Bank will have a modestly negative economic impact on the Bank’s members. The Bank estimates that the loss of those advances from the

29

Bank’s portfolio, accompanied by the repurchase and retirement of the capital stock held to support those advances, could reduce its return on total capital stock by approximately five to seven basis points. A larger balance of advances helps provide a critical mass of advances and capital over which to spread the Bank’s overhead, which helps maintain dividends and relatively lower advance pricing. The magnitude of the actual economic impact will depend on the size and profitability of the Bank at the time that the advances are repaid.

A similar outcome would result in the event that one or more of the Bank’s other large borrowers repays its advances and ceases to be a member of the Bank. Recently, Capital One Financial Corp. (domiciled in the Fourth District of the FHLBank System) announced that it plans to acquire Hibernia National Bank (the Bank’s fifth largest borrower at March 31, 2005) in 2005. Capital One has not yet indicated whether it will maintain Hibernia National Bank’s Ninth District charter. The Bank cannot predict the impact, if any, that this acquisition (or any future acquisitions) will have on the Bank’s earnings.

The following table presents information regarding the composition of the Bank’s advances by remaining term to maturity as of March 31, 2005 and December 31, 2004 and 2003.

COMPOSITION OF ADVANCES
(Dollars in millions)

	March 31,					December 31,
	2005					2004					2003
			Percentage					Percentage					Percentage
	Balance		of Total			Balance		of Total			Balance		of Total
Fixed rate advances
Maturity less than one month	$	7,993		17.3	%	$	8,049		17.1	%	$	5,596		13.9	%
Maturity 1 month to 12 months		3,312		7.2			3,160		6.7			2,390		5.9
Maturity greater than 1 year		4,243		9.2			4,374		9.3			4,059		10.1
Fixed rate, amortizing		6,382		13.8			6,516		13.9			6,943		17.2
Fixed rate, putable		2,240		4.9			2,256		4.8			2,507		6.2
Total fixed rate advances		24,170		52.4			24,355		51.8			21,495		53.3
Floating rate advances
Maturity less than one month		616		1.3			104		0.2			302		0.7
Maturity 1 month to 12 months		5,916		12.8			3,812		8.1			1,716		4.3
Maturity greater than 1 year		15,459		33.5			18,746		39.9			16,835		41.7
Total floating rate advances		21,991		47.6			22,662		48.2			18,853		46.7
Total par value	$	46,161		100.0	%	$	47,017		100.0	%	$	40,348		100.0	%

The Bank is required by statute and regulation to obtain sufficient collateral from members to fully secure all advances. Due in large part to these collateral requirements, the Bank has not experienced any credit losses on advances since it was founded in 1932, nor does management currently anticipate any credit losses on advances. Accordingly, the Bank has not provided any allowance for losses on advances.

Investment Securities

At March 31, 2005, December 31, 2004 and December 31, 2003, the Bank’s short-term investments, which were comprised entirely of overnight federal funds sold to domestic counterparties, totaled $4.6 billion, $2.7 billion and $3.0 billion, respectively. At March 31, 2005, the Bank’s long-term investment portfolio was comprised of $8.3 billion of MBS and $4.7 billion of U.S. agency debentures. At December 31, 2004, the Bank’s long-term investment portfolio was comprised of $8.3 billion of MBS and $4.8 billion of U.S. agency debentures. At December 31, 2003, the Bank’s long-term investment portfolio was comprised of $8.2 billion of MBS and $4.9 billion 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, available-for-sale or trading as set forth in the following tables and as further described below.

30

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

	Balance Sheet Classification
	Held-to-Maturity		Available-for-Sale		Trading		Total Investments		Held-to-Maturity
March 31, 2005	(at amortized cost)		(at fair value)		(at fair value)		(at carrying value)		(at fair value)
U.S. agency debentures
U.S. government guaranteed obligations	$	177	$	79	$	—	$	256	$	177
Government-sponsored enterprises		—		4,409		—		4,409		—
Other FHLBanks’ bonds(1)		—		51		—		51		—
Total U.S. agency debentures		177		4,539		—		4,716		177
MBS portfolio
U.S. government guaranteed obligations		85		—		—		85		86
Government-sponsored enterprises		5,108		803		68		5,979		5,130
Non-agency residential MBS		1,226		—		—		1,226		1,227
Non-agency commercial MBS		802		253		—		1,055		861
Total MBS		7,221		1,056		68		8,345		7,304
State or local housing agency debentures		7		—		—		7		7
Other		—		—		2		2		—
Total long-term investments	$	7,405	$	5,595	$	70	$	13,070	$	7,488

	Balance Sheet Classification
	Held-to-Maturity		Available-for-Sale		Trading		Total Investments		Held-to-Maturity
December 31, 2004	(at amortized cost)		(at fair value)		(at fair value)		(at carrying value)		(at fair value)
U.S. agency debentures
U.S. government guaranteed obligations	$	179	$	81	$	—	$	260	$	179
Government-sponsored enterprises		—		4,488				4,488		—
Other FHLBanks’ bonds(1)		—		52		—		52		—
Total U.S. agency debentures		179		4,621		—		4,800		179
MBS portfolio
U.S. government guaranteed obligations		95		—		—		95		95
Government-sponsored enterprises		5,307		905		77		6,289		5,321
Non-agency residential MBS		872		—		—		872		873
Non-agency commercial MBS		803		260		—		1,063		883
Total MBS		7,077		1,165		77		8,319		7,172
State or local housing agency debentures		8		—		—		8		8
Other		—		—		2		2		—
Total long-term investments	$	7,264	$	5,786	$	79	$	13,129	$	7,359

	Balance Sheet Classification
	Held-to-Maturity		Available-for-Sale		Trading		Total Investments		Held-to-Maturity
December 31, 2003	(at amortized cost)		(at fair value)		(at fair value)		(at carrying value)		(at fair value)
U.S. agency debentures
U.S. government guaranteed obligations	$	228	$	86	$	—	$	314	$	228
Government-sponsored enterprises		—		4,512				4,512		—
Other FHLBanks’ bonds(1)		—		54		24		78		—
Total U.S. agency debentures		228		4,652		24		4,904		228
MBS portfolio
U.S. government guaranteed obligations		170		—		—		170		171
Government-sponsored enterprises		4,842		1,019		117		5,978		4,847
Non-agency residential MBS		956		—		1		957		955
Non-agency commercial MBS		805		279		—		1,084		906
Total MBS		6,773		1,298		118		8,189		6,879
State or local housing agency debentures		9		—		—		9		9
Total long-term investments	$	7,010	$	5,950	$	142	$	13,102	$	7,116

⁽¹⁾Represents consolidated obligations acquired in the secondary market for which one or more other FHLBanks are the primary obligors, and for which the Bank is jointly and severally liable.

31

At March 31, 2005, December 31, 2004 and December 31, 2003, the Bank’s portfolio of U.S. agency debentures included $51 million, $52 million and $78 million, respectively, of FHLBank consolidated obligations, the primary obligors of which are other FHLBanks and for which the Bank is jointly and severally liable (see Item 1 — Business). From time to time, the Bank purchases such consolidated obligations in the secondary market when the returns available on these securities meet the Bank’s investment criteria. Finance Board regulations prohibit the direct placement of consolidated obligations with any FHLBank at issuance, but do not otherwise restrict a FHLBank’s investments in consolidated obligations.

At March 31, 2005, all of the Bank’s holdings of privately issued (i.e., non-agency) mortgage-backed securities retained the highest investment grade rating.

During the three months ended March 31, 2005, the Bank acquired $516 million (par value) of long-term investments ($150 million of which had not settled at March 31, 2005), all of which were capped LIBOR-indexed floating rate CMOs designated as held-to-maturity; during this same period, the proceeds from maturities of securities designated as held-to-maturity totaled approximately $375 million. During the year ended December 31, 2004, the Bank acquired $2.1 billion (par value) of long-term investments, all of which were capped LIBOR-indexed floating rate CMOs designated as held-to-maturity; during this same year, the proceeds from maturities of securities designated as held-to-maturity totaled approximately $1.9 billion. In 2003, the Bank purchased $4.6 billion (par value) of MBS ($75 million of which had not settled as of December 31, 2003) which were designated as held-to-maturity, and $800 million (par value) of government-sponsored agency debt securities which were designated as available-for-sale. The Bank added to its portfolio of government-sponsored agency securities in 2003 as yields on these securities widened to historically attractive levels relative to the interest rate swap curve, the benchmark typically used by the Bank to assess the relative attractiveness of potential investments. All of the 2003, 2004 and year-to-date 2005 additions to the long-term investment portfolio had coupons that were either indexed to LIBOR or were converted to LIBOR through the use of interest rate exchange agreements. The Bank intends to hold these investments to maturity. When purchasing securities to add to its investment portfolio, the Bank generally purchases floating rate CMOs and other floating rate MBS whose coupons are indexed to LIBOR because the repricing characteristics of those securities better match the repricing characteristics of the debt that the Bank issues and then swaps into LIBOR.

The following table provides the par amounts and carrying values of the Bank’s MBS portfolio as of March 31, 2005 and December 31, 2004 and 2003.

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COMPOSITION OF MBS PORTFOLIO
(In millions of dollars)

	March 31, 2005				December 31, 2004				December 31, 2003
	Par(1)		Carrying Value		Par(1)		Carrying Value		Par(1)		Carrying Value
Floating rate MBS
Floating rate CMOs
U.S. government guaranteed	$	85	$	85	$	95	$	95	$	170	$	170
Government-sponsored enterprises		5,097		5,096		5,295		5,294		4,826		4,825
AAA rated non-agency		1,225		1,226		872		872		951		951
Total floating rate CMOs		6,407		6,407		6,262		6,261		5,947		5,946
Interest rate swapped MBS(2)
AAA rated non-agency CMBS		239		253		240		260		250		279
Government-sponsored enterprise DUS(3)		704		730		782		825		855		930
Government-sponsored enterprise CMOs		136		141		146		157		185		206
AAA rated non-agency RMBS		—		—		—		—		1		1
Total swapped MBS		1,079		1,124		1,168		1,242		1,291		1,416
Total floating rate MBS		7,486		7,531		7,430		7,503		7,238		7,362
Fixed rate MBS
Government-sponsored enterprises		12		12		13		13		17		17
AAA rated non-agency RMBS		—		—		—		—		5		5
AAA rated non-agency CMBS(4)		802		802		803		803		805		805
Total fixed rate MBS		814		814		816		816		827		827
Total MBS	$	8,300	$	8,345	$	8,246	$	8,319	$	8,065	$	8,189

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

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

⁽³⁾DUS =Designated Underwriter Servicer.

⁽⁴⁾The Bank matchfunded these CMBS with 10-year debt securities.

The Bank may purchase mortgage-backed securities issued by a shareholder or an affiliate thereof. The Bank did not purchase any mortgage-backed securities issued by shareholders or their affiliates during the three years ended December 31, 2004. The Bank purchased from a third party $130 million of mortgage-backed securities issued by an affiliate of Washington Mutual Bank, a non-member borrower, during the three months ended March 31, 2005. The Bank also held previously acquired mortgage-backed securities with a par value of $40 million that were issued by one or more entities that are now part of Citigroup, and that became affiliated with one of the Bank’s shareholders on March 31, 2005 when Citigroup’s acquisition of First American Bank became effective and First American Bank was renamed Citibank Texas. Decisions relating to the purchase of such securities are made independent of the issuer’s membership status or affiliation with the Bank.

While the MBS portfolio is dominated by floating rate securities that limit the Bank’s interest rate risk, all of the Bank’s floating rate CMOs include caps that will limit increases in the floating rate coupons if short-term interest rates rise dramatically. In addition, if interest rates rise, prepayments on the underlying mortgage loans would likely decline, thus lengthening the time that the securities would remain outstanding with their coupon rates capped. As of March 31, 2005, the effective interest rate caps (the interest cap rate minus the stated spread on the coupon) embedded in the CMO floaters ranged from 6.6 percent to 15.3 percent. The largest concentration of embedded caps ($5.0 billion) fell within the 7.0 to 8.0 percent range. Although LIBOR rates were approximately 380 basis points below the lowest interest rate cap embedded in the CMO floaters as of March 31, 2005, the Bank has offset a substantial amount of this potential cap risk with $3.9 billion of interest rate caps with remaining maturities ranging from 19 months to 50 months as of March 31, 2005, and strike rates of 7.0 percent ($1.2 billion notional/acquired in 2004 as described below), 7.5 percent ($1.2 billion notional) and 8.0 percent ($1.5 billion notional). If interest rates rise above these strike rates, the Bank will be entitled to receive interest payments based upon the notional amounts of the interest rate cap agreements. The Bank entered into five interest rate cap agreements during the year ended December 31, 2004. The premiums paid for these caps totaled $14.0 million. Those agreements have an aggregate notional amount of $1.2 billion, have strike rates of 7.0 percent and expire on various dates in April and May 2009. As stand-alone derivatives, the changes in the fair values of the interest rate caps are recorded in earnings with no offsetting changes in the fair values of the hedged items (i.e., the capped CMO LIBOR floaters)

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and therefore can be and have been a source of considerable earnings volatility. During the three months ended March 31, 2005, the Bank did not enter into any new stand-alone interest rate cap agreements. See further discussion of the impact of the interest rate caps in the section entitled “Results of Operations – Other Income (Loss).”

Prior to the adoption of SFAS 133, it was the Bank’s practice to designate all long-term investment securities as held-to-maturity. This designation reflected the Bank’s ability and management’s intent to hold the instruments until their contractual maturities. For interest rate risk management purposes, the Bank typically entered into interest rate exchange agreements in connection with the purchase of fixed rate investments in order to convert the fixed coupons to a floating rate. Because SFAS 133 does not allow hedge accounting treatment for fair value hedges of investment securities designated as held-to-maturity, the Bank redesignated those securities that had associated interest rate swaps from held-to-maturity to either available-for-sale or trading in conjunction with the implementation of SFAS 133 on January 1, 2001, as permitted under the standard’s transition provisions. Since January 1, 2001, the Bank has continued to enter into interest rate swaps in order to convert the coupons of newly acquired fixed rate investment securities to floating rates and has classified such securities as available-for-sale. Since January 1, 2001, the Bank has not classified any new securities as trading, other than those associated with a grantor trust that was created in October 2004 to hold assets associated with the Bank’s deferred compensation plans. As of March 31, 2005, the carrying value of assets held in the trust (and classified as trading securities) totaled approximated $1.7 million.

Excluding those assets associated with the grantor trust described above, all of the securities that the Bank has classified as available-for-sale or trading are part of specific fair value hedges that were implemented with offsetting interest rate swaps. Under SFAS 133, qualifying hedging relationships related to the Bank’s available-for-sale securities receive fair value hedge accounting treatment, while hedging relationships related to the Bank’s trading securities do not receive fair value hedge accounting treatment.

In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), the entire change in fair value of the Bank’s available-for-sale securities is reported in other comprehensive income/loss (OCI) as a net unrealized gain (loss) on available-for-sale securities in the Bank’s statement of capital. The change in fair value of the Bank’s available-for-sale securities is dependent upon changes in interest rates and market spread relationships. In accordance with SFAS 133, for those hedged securities that have been designated as available-for-sale and that qualify as being in a fair value hedging relationship, the Bank reclassifies the portion of the change in fair value attributable to the risk being hedged (interest rate risk) from OCI to earnings. Because the Bank is hedging interest rate risk, periodic changes in the fair value of these securities for purposes of SFAS 133 are calculated based solely upon changes in the interest rate swap curve. The portion of the change in value that has been reclassified from OCI to earnings is reported separately in the Bank’s statement of capital as a reclassification adjustment relating to hedged interest rate risk. The portion of the change in fair value attributable to the risk being hedged is reported in the statement of income in “realized and unrealized gains (losses) on derivatives and hedging activities” together with the related change in fair value of the associated interest rate exchange agreement.

During the three months ended March 31, 2005, the Bank recorded a $103 million net unrealized loss on its available-for-sale securities under SFAS 115. The unrealized loss was comprised of a $118 million unrealized loss that was attributable to increasing LIBOR rates (the hedged risk) and an unrealized gain of $15 million that was attributable to changes in interest rate spreads between agency securities and interest rate swaps. The unrealized loss attributable to rising LIBOR rates was substantially offset in the statement of income by an unrealized gain on the associated derivatives of $117 million.

During the year ended December 31, 2004, the Bank recorded a $16 million net unrealized loss on its available-for-sale securities under SFAS 115. As discussed in the section entitled “Results of Operations – Net Interest Income,” the Bank changed its method of amortizing and accreting premiums and discounts on certain of its available-for-sale securities from the straight-line method to the level-yield method in 2004. Approximately $3 million of the recorded loss on the available-for-sale securities was attributable to this accounting adjustment. The remainder was comprised of a $42 million unrealized loss that was attributable to increasing LIBOR rates (the hedged risk) and an unrealized gain of $29 million that was attributable to changes in interest rate spreads between agency securities and interest rate swaps. The unrealized loss attributable to rising LIBOR rates was substantially offset in the statement of income by an unrealized gain on the associated derivatives of $40 million.

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During the year ended December 31, 2003, the Bank recorded a $156 million unrealized loss on its available-for-sale securities under SFAS 115. The unrealized loss was comprised of a $178 million unrealized loss that was attributable to increasing LIBOR rates (the hedged risk) and an unrealized gain of $22 million that was attributable to changes in interest rate spreads between agency securities and interest rate swaps. The unrealized loss attributable to increasing LIBOR rates was substantially offset in the statement of income by an unrealized gain on the associated derivatives of $176 million.

During the three months ended March 31, 2005 and the years ended December 31, 2004 and 2003, the spread between yields of U.S. government-sponsored agency securities and comparable term interest rate swaps generally decreased, producing the net unrealized gains of $15 million, $29 million and $22 million, respectively, in OCI.

The Bank believes that the activity in OCI will continue to be volatile in the future, reflecting changes in the relationship between the yields on U.S. government-sponsored agency securities and LIBOR rates. As the instruments approach maturity or the difference between these yields decrease, the absolute value of the Bank’s accumulated OCI will decline.

For those securities that have been designated as trading, the Bank records the entire change in their fair value in the statement of income through “net gains (losses) on trading securities” in accordance with the provisions of SFAS 115. In accordance with SFAS 133, the changes in the fair values of the interest rate exchange agreements associated with the trading securities are reported in the statement of income through “net realized and unrealized gains (losses) on derivatives and hedging activities.” As a result, while not in a SFAS 133 hedging relationship, some offset does occur for the Bank’s trading securities and their associated (designated) derivatives by virtue of the accounting prescribed by both SFAS 115 and SFAS 133. While some of its securities are classified as trading, the Bank does not engage in active or speculative trading practices.

On December 27, 2001, the Finance Board published a final regulation that included amended rules governing the Bank’s investments in unsecured money market instruments such as overnight and term federal funds, commercial paper and bank notes. The amended regulation, which became effective on March 27, 2002, requires the Bank to base its investment limits on a counterparty’s long-term credit rating. The regulation also adjusts the limit on unsecured credit that may be extended to borrowers and includes a provision for the amount of unsecured credit that may be extended to an affiliated group of borrowers. The new regulations have thus far not had a significant impact on the Bank’s operations nor are they expected to significantly impact the Bank’s future operations.

Mortgage Loans Held for Portfolio

The Bank began offering the MPF Program to its members in 1998 as an additional method of promoting housing finance in its five-state region. The MPF Program, which was developed by the FHLBank of Chicago, allows members to retain responsibility for managing the credit risk of the residential mortgage loans that they originate while allowing the Bank (and/or, as described below, the FHLBank of Chicago) to manage the funding, interest rate, and prepayment risk of the loans. As further described below, participating members retain a portion of the credit risk in the originated mortgage loans and, in return, receive a credit enhancement fee from the purchasing FHLBank. Participating Financial Institutions (“PFIs”), which are Bank members that have joined the MPF Program, totaled 55, 53, 46, and 30 at March 31, 2005 and December 31, 2004, 2003 and 2002, respectively.

Under its initial agreement with the FHLBank of Chicago, the Bank retained an interest (ranging from one percent to 49 percent) in loans that were delivered by its PFIs; a participation interest equal to the remaining interest in the loans was acquired by the FHLBank of Chicago. In December 2002, the Bank and the FHLBank of Chicago agreed to modify the terms of the Bank’s participation in the MPF Program. Under the terms of the revised agreement, the Bank receives a participation fee for mortgage loans that are delivered by Ninth District PFIs and the FHLBank of Chicago acquires a 100 percent interest in the loans. Prior to June 23, 2003, this modification applied only to those loans that were delivered under master commitments that had been entered into on or after December 5, 2002. Effective June 23, 2003, this arrangement was expanded to include loans that are delivered under master commitments that were entered into prior to December 5, 2002. Under the revised agreement, the Bank has the option to retain up to a 50 percent interest in loans that are originated by Ninth District PFIs without receiving a participation fee, provided certain conditions are met. The agreement has an initial term of three years, after which it continues indefinitely unless terminated by either party upon 90 days’ prior notice. By not acquiring additional

35

mortgage loans, the Bank expects to reduce its interest rate and prepayment risk. The terms of the Bank’s participation in the MPF Program are more fully described in Item 1 – Business.

During the three months ended March 31, 2005 and 2004 and the years ended December 31, 2004 and 2003, the Bank received $118,000, $241,000, $684,000 and $1,725,000 of participation fees, respectively. No participation fees were earned in periods prior to 2003. The amount of participation fee income that the Bank will receive in the future is dependent primarily upon the volume of loans delivered by Ninth District PFIs into the MPF Program. The volume of loans delivered by Ninth District PFIs will depend, in part, on conditions in the residential mortgage market including, but not limited to, the volume of home sales and the level of mortgage refinancing activity, as well as competition from other financial institutions that purchase residential mortgage loans.

During the three months ended March 31, 2005 and 2004 and the years ended December 31, 2004, 2003 and 2002, the Bank’s PFIs delivered $95 million, $198 million, $569 million, $1.938 billion and $1.431 billion of mortgage loans, respectively, into the MPF Program. No interest in loans was retained by the Bank during the three months ended March 31, 2005 or the year ended December 31, 2004. In 2003 and 2002, the Bank’s retained interest in these loans at the time of purchase aggregated $224 million and $550 million, respectively. During the three months ended March 31, 2005 and 2004 and the years ended December 31, 2004, 2003 and 2002, the FHLBank of Chicago purchased $95 million, $198 million, $569 million, $1.714 billion and $885 million, respectively, of loans originated by the Bank’s PFIs. At March 31, 2005 and December 31, 2004 and 2003, the Bank held $662 million, $706 million and $972 million, respectively, of residential mortgage loans originated under the MPF Program. As of these dates, 48 percent, 49 percent and 51 percent, respectively, of the outstanding balances were government insured. The Bank’s allowance for loan losses decreased from $387,000 at the end of 2003 to $355,000 at December 31, 2004 and to $342,000 at March 31, 2005, reflecting the reduced balance of the portfolio. The Bank did not have any impaired loans at March 31, 2005, December 31, 2004 or December 31, 2003. Given its current arrangement with the FHLBank of Chicago, the Bank expects the balance of its mortgage loan portfolio to continue to decline.

For those loans in which the Bank has a retained interest, the Bank shares in the credit risk of the retained portion of such loans. The credit risk is shared between the Bank and the PFI by structuring the potential loss exposure into several layers. The initial layer of losses (after any private mortgage insurance coverage) on loans delivered under a master commitment is absorbed by a “first loss” account (FLA) established by the Bank. If losses extend beyond this account, they are absorbed by a second loss credit enhancement provided by the PFI, as specified in the master agreement. If the first and second loss credit enhancements are exhausted, the Bank is in a third loss position and absorbs any further losses. The size of the PFI’s second loss credit enhancement is the difference between the size of the FLA and the size of the overall amount of enhancement needed to achieve an “AA” rating from a rating agency on the Bank’s third loss position on the loans. The PFI receives from the Bank a credit enhancement fee for managing this portion of the inherent risk in the loans. This fee is paid monthly based upon the remaining unpaid principal balance. The required credit enhancement obligation amount varies depending upon the various product alternatives. For certain products, the monthly credit enhancement fee may be reduced depending upon the performance of the loans comprising each master commitment. During the three months ended March 31, 2005 and 2004 and the years ended December 31, 2004 and 2003, performance-based credit enhancement fees that were forgone and not paid to the Bank’s PFIs totaled $4,000, $14,000, $32,000 and $1,000, respectively. No credit enhancement fees were foregone during the year ended December 31, 2002.

Consolidated Obligations and Deposits

At March 31, 2005, the carrying values of consolidated obligation bonds and discount notes totaled $57.9 billion and $1.6 billion, respectively. As of March 31, 2005, the par value of the Bank’s outstanding bonds was $58.3 billion and the par value of the Bank’s outstanding discount notes approximated their carrying values.

At December 31, 2004, the carrying values of consolidated obligation bonds and discount notes totaled $51.5 billion and $7.1 billion, respectively. At year-end 2003, the carrying values of consolidated obligation bonds and discount notes totaled $40.7 billion and $11.6 billion, respectively. At December 31, 2004 and 2003, the par values of the Bank’s outstanding bonds were $51.7 billion and $40.6 billion, respectively. The par values of the Bank’s outstanding discount notes approximated their carrying values as of December 31, 2004 and 2003. The following table presents the composition of the Bank’s outstanding bonds at March 31, 2005, December 31, 2004 and December 31, 2003.

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

	March 31,					December 31,
	2005					2004					2003
			Percentage					Percentage					Percentage
	Balance		of Total			Balance		of Total			Balance		of Total
Fixed rate, callable	$	22,356		38.3	%	$	22,091		42.8	%	$	14,524		35.7	%
Fixed rate, non-callable		19,530		33.5			16,604		32.1			15,665		38.6
Callable step-up		7,868		13.5			7,998		15.5			7,900		19.4
Single-index floating rate		7,987		13.7			4,397		8.5			2,376		5.9
Conversion		415		0.7			390		0.8			—		—
Comparative-index		175		0.3			175		0.3			175		0.4
Total par value	$	58,331		100.0	%	$	51,655		100.0	%	$	40,640		100.0	%

Fixed rate bonds have coupons that are fixed over the life of the bond. Some fixed-rate bonds have fixed terms during which the bonds are not callable, while others contain provisions that enable the Bank to call the bonds at its option on predetermined call dates. Callable step-up bonds pay interest at increasing fixed rates for specified intervals over the life of the bond and contain provisions enabling the Bank to call the bonds at its option on the step-up dates. Single-index floating rate bonds have variable rate coupons that generally reset based on either one-month or three-month LIBOR; typically, these bonds contain caps that limit the increases in the floating rate coupons. Conversion bonds have coupons that may convert from fixed to floating, or from floating to fixed, at the Bank’s discretion. Comparative-index bonds have coupon rates determined by the difference between two or more market indices, typically the Constant Maturity Treasury rate and LIBOR.

Consistent with its risk management philosophy, the Bank uses interest rate exchange agreements to convert many of the fixed rate consolidated obligations that it issues to floating rate instruments that periodically reset to an index such as one-month or three-month LIBOR. As has been the case for the last several years, a majority of the consolidated obligations that the Bank issued and swapped to LIBOR in 2005, 2004 and 2003 were callable bonds. Callable bonds provide the Bank with the right to redeem the instrument on predetermined call dates in the future. When interest rate swapping callable consolidated obligation bonds to LIBOR, the Bank sells an option to the interest rate swap counterparty that offsets the option the Bank owns to call the bond. If market interest rates decline, the swap counterparty will generally cancel the interest rate swap and the Bank will then typically call the consolidated obligation bond. Conversely, if market interest rates increase, the swap counterparty generally elects to keep the interest rate swap outstanding and the Bank will then elect not to call the consolidated obligation bond.

With the continued low and generally declining market interest rates in 2002, 2003 and early 2004, the Bank’s swap counterparties cancelled a significant number of interest rate swaps and, in turn, the Bank called a significant amount of its callable bonds and replaced a large portion of them with new callable bonds. These transactions produced no realized gain or loss for the Bank. Other FHLBanks and the government-sponsored mortgage agencies experienced similar call activity during this time frame. During that same period, investor preferences resulted in the Bank issuing relatively larger volumes of callable bonds with relatively shorter lockout and maturity dates than those issued in prior periods. The combination of declining market interest rates and investor preferences resulted in the process of calling debt and replacing the called debt with new callable debt repeating itself multiple times.

These conditions resulted in the Bank issuing $43.6 billion of callable bonds in 2003, while its year-end balances of callable bonds only increased by $6.8 billion, from $18.0 billion at December 31, 2002 to $24.8 billion at year-end 2003. Beginning in April 2004, as market interest rates began to increase, the volume of debt being called by the Bank decreased, and the volume of new consolidated obligation bonds issued by the Bank declined in turn. The Bank issued $22.0 billion of callable bonds during 2004 and $2.6 billion of callable bonds during the first three months of 2005.

The marginal cost of the Bank’s primary funding structure (callable consolidated obligation bonds converted to a LIBOR floating rate through callable interest rate swaps) deteriorated approximately 13 basis points relative to the LIBOR benchmark between the end of 2000, when interest rates began to fall, and April 2004, when rates began to rise. Beginning in April 2004, the Bank’s marginal funding cost for callable debt improved by approximately 5 basis points to a level about 2.5 basis points more expensive than at December 31, 2003. As the Bank’s marginal

37

cost of funds has improved, however, the volume of debt being called and replaced has also declined, so it will take some period of time before this improvement in the Bank’s marginal cost of funds has a significant impact on the Bank’s overall average cost of funds. In the future, the cost of debt raised in this manner will depend on several factors, including the direction and level of market interest rates, competition from other issuers of government-sponsored agency debt, changes in the investment preferences of potential buyers of government-sponsored agency debt securities, and technical market factors.

During 2004, the Bank’s bond spreads improved by approximately 6 to 14 basis points and 1 to 8 basis points relative to same maturity U.S. treasury securities and interest rate swaps, respectively. As market rates increased during 2004 and the first quarter of 2005, the housing GSEs’ debt issuance declined, which, when combined with steady demand, led to debt spreads tightening relative to U.S. treasury securities and interest rate swaps.

Demand, overnight, and term deposits were $1.9 billion, $2.0 billion, $2.1 billion and $2.4 billion at March 31, 2005 and December 31, 2004, 2003 and 2002, respectively. The Bank introduced its deposit auction program in 2001. Under this program, deposits with varying maturities and terms are offered for competitive bid at periodic auctions. The deposit auction program offers the Bank’s members an alternative way to invest their excess liquidity at competitive rates of return, while providing an alternative source of funds for the Bank. Due primarily to increased use of this program in 2004, average balances in overnight accounts declined from 90 percent and 89 percent of the average deposit balances for the years ended December 31, 2002 and 2003, respectively, to 79 percent for the year ended December 31, 2004. The average balance in overnight accounts increased to 86 percent of the average deposit balance for the three months ended March 31, 2005. The size of the Bank’s deposit base varies as market factors change, including the attractiveness of the Bank’s deposit pricing relative to the rates available on alternative money market instruments, members’ investment preferences with respect to the maturity of their investments, and member liquidity.

Capital Stock

The Bank’s outstanding capital stock increased from $2.5 billion at December 31, 2004 to $2.6 billion at March 31, 2005 and its average outstanding capital stock increased from $2.4 billion for the year ended December 31, 2004 to $2.5 billion for the three months ended March 31, 2005. The growth in outstanding capital stock was attributable primarily to member stock purchases that were made to support their increased borrowing activity. In addition, the two large members who reduced their borrowings during the three months ended March 31, 2005 (see the section entitled “Advances”) did not reduce their capital stock holdings proportionately.

Although shareholders’ investment in the Bank’s capital stock increased by $158.8 million during the year ended December 31, 2004, the amount of capital stock classified as equity for financial reporting purposes decreased from $2.7 billion at December 31, 2003 to $2.5 billion at December 31, 2004. Similarly, average capital stock outstanding decreased from $2.6 billion for the year ended December 31, 2003 to $2.4 billion for the year ended December 31, 2004. The decline in the reported amount of outstanding capital stock was attributable to the Bank’s adoption of Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”) as of January 1, 2004. SFAS 150 establishes standards for how issuers classify and measure certain financial instruments with characteristics of both liabilities and equity. Among other things, it requires issuers to classify as liabilities certain financial instruments that embody obligations for the issuer (hereinafter referred to as “mandatorily redeemable financial instruments”). Under the provisions of SFAS 150, the Bank reclassifies shares of capital stock from the capital section to the liability section of its balance sheet at the point in time when a member exercises a written redemption right, gives notice of its intent to withdraw from membership, or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership, since the shares of capital stock then meet the SFAS 150 definition of a mandatorily redeemable financial instrument. Shares of capital stock meeting this definition are reclassified to liabilities at fair value. Following reclassification of the stock, any dividends paid or accrued on such shares are recorded as interest expense in the statement of income.

On January 1, 2004, the Bank reclassified $394.7 million of its outstanding capital stock to “mandatorily redeemable capital stock” in the liability section of the statement of condition. Mandatorily redeemable capital stock outstanding at March 31, 2005 and December 31, 2004 was $329.6 million and $327.1 million, respectively. For the

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three months ended March 31, 2005 and the year ended December 31, 2004, average mandatorily redeemable capital stock was $326.7 million and $365.9 million, respectively.

Since January 1, 2004, the majority of the mandatorily redeemable capital stock outstanding has been held by Washington Mutual Bank, a non-member borrower as described in the “Advances” section above. The following table presents mandatorily redeemable capital stock outstanding, by reason for classification as a liability, as of March 31, 2005, December 31, 2004 and January 1, 2004.

HOLDINGS OF MANDATORILY REDEEMABLE CAPITAL STOCK
(dollars in thousands)

	March 31, 2005				December 31, 2004				January 1, 2004
	Number of				Number of				Number of
Capital Stock Status	Institutions		Amount		Institutions		Amount		Institutions		Amount
Held by Washington Mutual Bank		1	$	319,854		1	$	319,502		1	$	386,382
Subject to withdrawal notice		2		141		2		147		2		168
Held by non-member borrowers		6		9,264		4		7,295		5		8,186
Held by non-member acquirers		2		297		2		177		—		—
Total		11	$	329,556		9	$	327,121		8	$	394,736

Although mandatorily redeemable capital stock is excluded from capital (equity) for financial reporting purposes, such stock is considered capital for regulatory purposes (see the section entitled “Risk-Based Capital Rules and Other Capital Requirements” for further information). Total outstanding capital stock for regulatory purposes (i.e., capital stock classified as equity for financial reporting purposes plus mandatorily redeemable capital stock) increased from $2.7 billion at the end of 2003 to $2.8 billion at December 31, 2004 and to $2.9 billion as of March 31, 2005.

At March 31, 2005 and December 31, 2004, the Bank’s ten largest stockholders held $1.6 billion and $1.5 billion, respectively, of capital stock (including mandatorily redeemable capital stock), which represented 54.5 percent and 54.2 percent, respectively, of the Bank’s total outstanding capital stock (including mandatorily redeemable capital stock) as of those dates. The following tables present the Bank’s ten largest stockholders as of March 31, 2005 and December 31, 2004.

TEN LARGEST STOCKHOLDERS AS OF MARCH 31, 2005
(Dollars in thousands)

					Percent of
			Capital		Total
Name	City	State	Stock		Capital Stock
World Savings Bank, FSB Texas	Houston	TX	$	510,190		17.7	%
Washington Mutual Bank	Stockton	CA		319,854		11.1
Guaranty Bank	Austin	TX		279,114		9.7
Hibernia National Bank	New Orleans	LA		116,885		4.0
International Bank of Commerce	Laredo	TX		86,627		3.0
Franklin Bank, SSB	Austin	TX		79,247		2.7
Trustmark National Bank	Jackson	MS		50,179		1.7
Beal Bank	Plano	TX		48,720		1.7
Beal Savings Bank	Plano	TX		42,911		1.5
Amegy Bank, N.A.*	Houston	TX		41,362		1.4
			$	1,575,089		54.5	%

*Previously known as Southwest Bank of Texas, N.A.

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TEN LARGEST STOCKHOLDERS AS OF DECEMBER 31, 2004
(Dollars in thousands)

					Percent of
			Capital		Total
Name	City	State	Stock		Capital Stock
World Savings Bank, FSB Texas	Houston	TX	$	506,506		18.0	%
Washington Mutual Bank	Stockton	CA		319,502		11.3
Guaranty Bank	Austin	TX		277,099		9.8
Hibernia National Bank	New Orleans	LA		117,976		4.2
Franklin Bank, SSB	Austin	TX		74,192		2.6
International Bank of Commerce	Laredo	TX		70,696		2.5
Trustmark National Bank	Jackson	MS		49,816		1.8
Beal Bank	Plano	TX		48,368		1.7
Southwest Bank of Texas, N.A.	Houston	TX		32,772		1.2
Sterling Bank	Houston	TX		31,350		1.1
			$	1,528,277		54.2	%

For a discussion of the status of Washington Mutual Bank, a non-member borrower, see the “Advances” section above. As of March 31, 2005 and December 31, 2004, all of the stock held by Washington Mutual Bank was classified as mandatorily redeemable capital stock (liability) in the statement of condition. The stock held by the other nine institutions shown in each of the tables above was classified as capital in the statements of condition at March 31, 2005 and December 31, 2004.

As described in Item 1 – Business and Item 11 – Description of Registrant’s Securities to be Registered, the Bank converted to its new capital structure on September 2, 2003. The conversion was considered a capital transaction and was accounted for at par value. Pursuant to the provisions of the Bank’s capital plan, 14 shareholders elected to opt out of the capital conversion and withdrew from membership in the Bank. In connection with these withdrawals, the Bank redeemed $43 million of capital stock.

Following the implementation of its new capital structure, the Bank established a policy under which it periodically repurchases a portion of members’ excess capital stock. Under this policy, the Bank generally repurchases surplus stock on the last business day of the month following the end of each calendar quarter. Surplus stock is currently defined as the amount of stock held by a member in excess of 120 percent of the member’s minimum investment requirement. A member’s surplus stock will not be repurchased if the amount of the surplus stock is $250,000 or less. From time to time, the Bank may modify the definition of surplus stock or the timing and/or frequency of surplus stock repurchases. As these repurchases are made at the sole discretion of the Bank, the shares underlying such repurchases do not meet the definition of mandatorily redeemable financial instruments under the provisions of SFAS 150 and, accordingly, are classified as equity until redeemed by the Bank. The following table sets forth the repurchases of surplus stock which have occurred since the policy was adopted.

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REPURCHASES OF SURPLUS STOCK
(dollars in thousands)

Date of Repurchase	Shares		Amount of
by the Bank	Repurchased		Repurchase
October 31, 2003		1,550,581	$	155,058
January 30, 2004		989,662		98,966
April 30, 2004		1,013,226		101,323
July 30, 2004		457,943		45,794
October 29, 2004		762,076		76,208
January 31, 2005		615,938		61,594
April 30, 2005		682,754		68,275

Upon implementation of its new capital plan, the Bank became subject to the Finance Board’s new risk-based capital rules and other capital requirements. These rules and requirements are discussed below in the section entitled “Risk-Based Capital Rules and Other Capital Requirements.”

Retained Earnings and Dividends

During the three months ended March 31, 2005, the Bank’s retained earnings increased by $1.6 million, from $143.9 million to $145.5 million. During the three months ended March 31, 2005, the Bank paid dividends on capital stock totaling $18.2 million, which equated to an average annualized dividend rate (for financial reporting purposes) of 2.95 percent. The Bank’s average annualized dividend rate exceeded the average federal funds rate for the three months ended March 31, 2005 by 48 basis points.

During the year ended December 31, 2004, the Bank’s retained earnings increased by $35.3 million, from $108.6 million to $143.9 million. During 2004, the Bank paid dividends on capital stock totaling $44.0 million, which equated to a weighted average dividend rate (for financial reporting purposes) of 1.86 percent. The Bank’s weighted average dividend rate exceeded the average 2004 federal funds rate by 51 basis points. In comparison, the Bank’s weighted average dividend rates for 2003 and 2002 were 2.24 percent and 2.93 percent, respectively. These dividend rates, reflecting dividends of $58.7 million and $68.6 million, respectively, exceeded the average federal funds rate for those years by 111 basis points and 126 basis points, respectively. For purposes of deriving the average rates for the three months ended March 31, 2005 and the year ended December 31, 2004, mandatorily redeemable capital stock and dividends thereon (totaling $2.4 million and $6.6 million, respectively) were excluded from the calculations as they are treated as liabilities and interest expense, respectively, for financial reporting purposes. However, the Bank pays dividends on all outstanding capital stock at the same rate regardless of the accounting classification of the stock.

The Bank is permitted by regulation to pay dividends only from current or previously retained earnings. Additional restrictions regarding the payment of dividends are discussed in Item 1 – Business and Item 11 – Description of Registrant’s Securities to be Registered. Dividends may be paid in the form of cash or capital stock as authorized by the Bank’s Board of Directors. Because the Bank’s returns 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.

As discussed in Item 1 – Business, the Finance Board recently encouraged all 12 FHLBanks to establish retained earnings targets and to specify the priority for increasing retained earnings relative to paying dividends. The Bank’s retained earnings policy is designed to build retained earnings over a number of years in order to protect the par value of members’ capital stock investment from potential economic losses and fluctuations in earnings caused by SFAS 133 accounting requirements or other factors. The Bank’s current retained earnings targets call for the Bank to build retained earnings from $145.5 million at March 31, 2005 to approximately $160 million by the end of 2005. Thereafter, the Bank will endeavor to build retained earnings at an average rate of $19 million to $22 million per year over the next 10 to 12 years. With certain exceptions, the Bank’s policy calls for the Bank to retain earnings in line with its targets prior to determining the amount of funds available to pay dividends.

41

Taking into consideration its retained earnings targets, the Bank currently expects to pay dividends during the remainder of 2005 at approximately 25 to 50 basis points above the average federal funds rate for the year. Consistent with its long-standing practice, the Bank expects to pay these 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. Stock dividends paid on capital stock that is classified as equity are reported as an issuance of capital stock. Effective January 1, 2004, stock dividends paid on capital stock that is classified as mandatorily redeemable capital stock are reported as either an issuance of capital stock or as an increase in the mandatorily redeemable capital stock liability depending upon the event that caused the stock on which the dividend is being paid to be classified as a liability. Stock dividends paid on stock subject to a written redemption notice are reported as an issuance of capital stock as such dividends are not covered by the original redemption notice. Stock dividends paid on stock that is subject to a withdrawal notice (or its equivalent) are reported as an increase in the mandatorily redeemable capital stock liability.

Results of Operations

Three Months Ended March 31, 2005 and 2004

Net Income

Net income for the three months ended March 31, 2005 and 2004 was $19.8 million and $21.0 million, respectively. The Bank’s net income for the three months ended March 31, 2005 represented an annualized return on average capital stock (ROCS) of 3.22 percent, which was 75 basis points above the average federal funds rate for the period. In comparison, the Bank’s ROCS was 3.70 percent for the three months ended March 31, 2004, which exceeded the average federal funds rate for that period by 270 basis points. To derive the Bank’s ROCS, net income is divided by average capital stock outstanding excluding stock that is classified as a liability under the provisions of SFAS 150. The factors contributing to the decline in ROCS compared to the average federal funds rate are discussed below.

While the Bank is exempt from all Federal, State and local taxation (except for real property taxes), it is obligated to set aside amounts for its AHP and to make quarterly payments to REFCORP. Assessments for AHP and REFCORP, which are more fully described below, equate to a minimum 26.5 percent effective income tax rate for the Bank. Because interest expense on mandatorily redeemable capital stock is not deductible for purposes of computing the Bank’s AHP assessment, the effective rate may exceed 26.5 percent in any period after 2003. During the three months ended March 31, 2005 and 2004, the effective rates were 27.2 percent and 27.0 percent, respectively. During these periods, the combined AHP and REFCORP assessments were $7.4 million and $7.7 million, respectively.

Income Before Assessments

During the three months ended March 31, 2005 and 2004, the Bank’s income before assessments was $27.2 million and $28.8 million, respectively. The $1.6 million decrease in income before assessments for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004 was attributable primarily to a reduction in net interest income of $1.6 million and a $1.1 million increase in other losses. These unfavorable period-to-period variances were offset by a $1.1 million reduction in other expenses, which was attributable primarily to a reduction (from period to period) in salaries and benefits expense.

All of the variances identified above are discussed in more detail in the following sections.

Net Interest Income

For the three months ended March 31, 2005 and 2004, the Bank’s net interest income was $45.4 million and $47.0 million, respectively, and its net interest margin (based on these results) was 28 basis points and 32 basis points, respectively. Net interest margin, or net interest income as a percent of average earning assets, is a function of net interest spread and the rates of return on assets funded by the investment of the Bank’s capital. Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.

42

The following table presents average balance sheet amounts together with the total dollar amounts of interest income and expense and the weighted average interest rates of major earning asset categories and the funding sources for those earning assets for the three months ended March 31, 2005 and 2004.

YIELD AND SPREAD ANALYSIS
(Dollars in millions)

	Three Months Ended March 31,
	2005							2004
			Interest							Interest
	Average		Income/		Average			Average		Income/		Average
	Balance		Expense		Rate(a)			Balance		Expense		Rate(a)
Assets
Interest-bearing deposits	$	641	$	4		2.50	%	$	335	$	1		1.02	%
Federal funds sold		2,971		18		2.54	%		2,415		6		1.01	%
Investments
Trading (b)		75		2		10.62	%		128		4		11.07	%
Available-for-sale (c)		5,732		36		2.50	%		5,998		25		1.64	%
Held-to-maturity		7,356		62		3.38	%		6,961		37		2.13	%
Advances (c)(d)		47,015		327		2.78	%		42,078		180		1.72	%
Mortgage loans held for portfolio		685		10		5.64	%		939		13		5.79	%
Total earning assets		64,475		459		2.85	%		58,854		266		1.81	%
Cash and due from banks		55							194
Other assets		303							290
Total assets	$	64,833		459		2.84	%	$	59,338		266		1.80	%
Liabilities and Capital
Interest-bearing deposits	$	1,910		11		2.39	%	$	2,255		5		0.94	%
Consolidated obligations
Bonds (c)		55,575		383		2.75	%		41,924		183		1.75	%
Discount notes (c)		3,243		18		2.25	%		11,208		29		1.05	%
Mandatorily redeemable capital stock and other borrowings		329		2		2.95	%		396		2		1.51	%
Total interest-bearing liabilities		61,057		414		2.71	%		55,783		219		1.57	%
Other liabilities		1,121							1,181
Total liabilities		62,178		414		2.66	%		56,964		219		1.54	%
Total capital		2,655							2,374
Total liabilities and capital	$	64,833				2.56	%	$	59,338				1.48	%
Net interest income			$	45						$	47
Net interest margin						0.28	%						0.32	%
Net interest spread						0.14	%						0.24	%
Impact of non-interest bearing funds						0.14	%						0.08	%

(a)	Percentages are annualized figures. Amounts used to calculate average rates are based on numbers in the thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
(b)	Interest income and average rates exclude the effect of associated interest rate exchange agreements as the net interest expense associated with such agreements is recorded in other income (loss) in the statements of income. Net interest expense on derivatives related to trading securities was $1.6 million and $3.3 million during the three months ended March 31, 2005 and 2004, respectively.
(c)	Interest income/expense and average rates include the effect of associated interest rate exchange agreements to the extent such agreements qualify for SFAS 133 fair value hedge accounting.
(d)	Interest income and average rates include prepayment fees on advances.

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Due to rising interest rates in 2005, the calculated yield on the Bank’s invested capital (the impact of non-interest bearing funds) increased from 8 basis points for the three months ended March 31, 2004 to 14 basis points for the comparable period in 2005. The average federal funds rate increased from 1.00 percent for the three months ended March 31, 2004 to 2.47 percent for the three months ended March 31, 2005.

Despite the $5.5 billion increase in the Bank’s total average assets from 2004 to 2005, the Bank’s net interest income declined from $47.0 million in the first quarter of 2004 to $45.4 million in the first quarter of 2005. This decrease in net interest income reflects a decline in the Bank’s net interest spread from 24 basis points during the first quarter of 2004 to 14 basis points during the first quarter of 2005. This decrease in net interest spread was due primarily to the following factors.

First, the net spread earned on approximately $750 million of fixed rate assets funded with floating rate debt declined by about 150 basis points due to the increase in short-term interest rates.

Second, during the three months ended March 31, 2005, the Bank issued a large volume of consolidated obligation bonds swapped to three-month LIBOR in anticipation of replacing approximately $13 billion of similarly swapped debt scheduled to mature at the end of April 2005 and to match debt maturities with Washington Mutual’s anticipated repayment of maturing advances in 2006. During the first quarter of 2005, this three-month LIBOR floating rate debt replaced one-month discount notes that would have had lower absolute rates.

Third, effective January 1, 2004, the Bank changed its method of amortizing and accreting premiums and discounts on certain of its available-for-sale securities from the straight-line method to the level-yield method to comply with the provisions of SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. The Bank assessed the impact of this change on all prior annual periods and all quarterly periods for 2003 and determined that if the amortization and accretion of premiums and discounts had previously been computed using the level-yield method, the effect would not have been material to the Bank’s financial condition or results of operations for any of those prior reporting periods. Net interest income was increased by $3.5 million during the quarter ended March 31, 2004 to reflect the accounting as if the level-yield method had been used in prior years. Net of assessments, this correction increased net income for the quarter ended March 31, 2004 by approximately $2.6 million.

Fourth, as discussed previously, the Bank’s balance sheet participation in the MPF program has been declining since 2003. As a result, the Bank held a smaller balance of relatively higher yielding fixed rate mortgage loans during the first quarter of 2005 as compared to the same period in 2004.

Fifth, the Bank’s trading securities have inverse floating rate coupons that caused the yield on those securities to decline as short-term interest rates rose in 2005. As discussed below, the offsetting net interest payments on the mirror image interest rate swaps that effectively convert the inverse floating rate coupons to simple LIBOR floating rates are reported in other income (loss).

Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between the three-month periods in 2005 and 2004. Changes in interest income and interest expense that cannot be attributed to either volume or rate have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.

44

RATE AND VOLUME ANALYSIS
(In millions of dollars)

	Three Months Ended March 31,
	2005 vs. 2004
	Increase (Decrease) Due To
	Volume			Rate		Total
Interest income
Interest-bearing deposits	$	1		$	2	$	3
Federal funds sold		1			11		12
Investments
Trading		(2	)		—		(2	)
Available-for-sale		(1	)		12		11
Held-to-maturity		2			23		25
Advances		23			124		147
Mortgage loans held for portfolio		(3	)		—		(3	)
Total interest income		21			172		193
Interest expense
Interest-bearing deposits		(1	)		7		6
Consolidated obligations
Bonds		73			127		200
Discount notes		(30	)		19		(11	)
Mandatorily redeemable capital stock and other borrowings		(1	)		1		—
Total interest expense		41			154		195
Changes in net interest income	$	(20	)	$	18	$	(2	)

The Bank reports realized gains and losses in the form of net interest payments on derivative instruments used to hedge interest-earning assets and interest-bearing liabilities as part of net interest income when the hedging relationships qualify for hedge accounting under SFAS 133. Conversely, net interest payments on derivatives used in economic hedges are reported in “net realized and unrealized gains (losses) on derivatives and hedging activities” together with the unrealized changes in fair value of the derivatives. The classification of these items is particularly significant for the Bank as it relates to economic hedge derivatives that effectively convert individual trading securities from complex coupons to simple floating rates.

While all of the Bank’s trading securities (except for $1.7 million held in a grantor trust as previously discussed) are part of specific fair value hedges that were implemented with offsetting interest rate swaps, they are not designated as fair value hedges under SFAS 133. As a result, the Bank reports income from its trading securities in interest income without the offsetting effects of the associated interest rate swaps. Because the Bank has synthetically converted the instruments’ cash flows through interest rate swap agreements, management considers the effects of the associated interest rate exchange agreements when evaluating changes in the Bank’s net interest income across different time periods and in relation to the movement in short-term interest rates. The net interest expense associated with economic hedge derivatives related to trading securities was $1.6 million and $3.3 million for the three months ended March 31, 2005 and 2004, respectively. The decline in interest income on trading securities reflected in the foregoing Yield and Spread and Rate and Volume Analyses has been substantially offset by declines in the net interest expense on the associated interest rate exchange agreements recorded in other income (loss). For the reasons set forth above, management also considers the effects of the associated interest rate exchange agreements when evaluating the yields on the Bank’s trading securities. When combined with the associated interest rate exchange agreements, the average rates earned on these securities are significantly lower than the rates shown in the Yield and Spread Analysis.

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Other Income (Loss)

The following table presents the various components of other income (loss) for the three months ended March 31, 2005 and 2004.

OTHER INCOME (LOSS)
(In thousands of dollars)

	Three Months Ended March 31,
	2005			2004
Net loss on trading securities	$	(2,096	)	$	(694	)
Unrealized gains on economic hedge derivatives related to trading securities		2,150			671
Hedge ineffectiveness on trading securities		54			(23	)
Net interest expense associated with economic hedge derivatives related to trading securities		(1,612	)		(3,255	)
Net interest expense associated with stand-alone economic hedge derivatives (basis swaps)		(224	)		—
Net interest expense associated with stand-alone economic hedge derivatives (advance / CO(1) swaps)		(285	)		(267	)
Total net interest expense associated with economic hedge derivatives		(2,121	)		(3,522	)
Realized and unrealized losses related to stand-alone economic hedge derivatives (caps and floors)		(1,164	)		(2,171	)
Unrealized gains related to other stand-alone derivatives (basis swaps)		48			—
Unrealized gains (losses) related to other stand-alone derivatives (advance / CO(1) swaps)		390			(55	)
Total net realized and unrealized losses related to stand-alone economic hedge derivatives		(726	)		(2,226	)
Unrealized gains (losses) related to SFAS 133 fair value hedge ineffectiveness
Net gain (loss) on advances and associated hedges		120			(88	)
Net loss on debt and associated hedges		(5,626	)		(1,625	)
Net loss on AFS(2) securities and associated hedges		(859	)		(345	)
Total SFAS 133 fair value hedge ineffectiveness		(6,365	)		(2,058	)
Realized gains on early extinguishment of debt		1,088			—
Realized losses on termination of interest rate swaps related to debt extinguishments		(964	)		—
Net gain on early extinguishment of debt		124			—
Service fees		661			475
Other, net		681			748
Total other		1,342			1,223
Total other income (loss)	$	(7,692	)	$	(6,606	)

⁽¹⁾ Consolidated obligations

⁽²⁾ Available-for-sale

46

As discussed above, the Bank uses interest rate swaps to hedge the risk of changes in the fair value of its trading securities. The difference between the change in fair value of these securities and the change in fair value of the associated interest rate swaps (representing economic hedge ineffectiveness) was a net gain of $54,000 for the three months ended March 31, 2005 and a net loss of $23,000 for the corresponding period in 2004. The change in fair value of the trading securities and the change in fair value of the associated interest rate swaps are reported

separately in the statements of income as “net loss on trading securities” and “net realized and unrealized losses on derivatives and hedging activities,” respectively.

Net interest expense associated with economic hedge derivatives related to trading securities fluctuates as a function of the balance of the trading securities and changes in interest rates. These interest rate swaps are structured so that their notional balances mirror the balance of the related trading securities and their pay leg coupons mirror the variable rate coupons of the related securities. Net interest expense associated with economic hedge derivatives related to trading securities declined by $1.6 million in the three-month period ended March 31, 2005, as compared to the three months ended March 31, 2004, due primarily to a reduction in the notional balance of the interest rate swaps. The reduction in the notional balances corresponded to a reduction of $53 million in the average balance of the trading securities portfolio, which was in turn attributable to principal repayments on the securities. As discussed above, the net interest payments associated with all economic hedge derivatives, including those hedging the Bank’s trading securities, are considered by management when analyzing the Bank’s net interest income as these derivative instruments synthetically convert the cash flows of assets and liabilities whose interest payments are reported in net interest income under generally accepted accounting principles.

As discussed previously, to reduce the impact that rising rates would have on its portfolio of capped CMO LIBOR floaters, the Bank has entered into various interest rate cap agreements having a total notional amount of $3.9 billion. The premiums paid for these caps totaled $33.9 million. Four agreements, with an aggregate notional amount of $1.2 billion, have strike rates of 7.5 percent and expire on various dates in October and November 2006. Six agreements, with an aggregate notional amount of $1.5 billion, have strike rates of 8.0 percent and expire on various dates beginning in July 2007 and ending in April 2008. Five agreements, with an aggregate notional amount of $1.2 billion, have strike rates of 7.0 percent and expire on various dates in April and May 2009.

The Bank also had a $500 million notional interest rate floor agreement that it entered into in October 2002 in order to hedge prepayment exposure related to its MPF portfolio. The premium paid for this interest rate floor agreement was $5.2 million. The interest rate floor had a strike rate of 3.75 percent and was scheduled to expire in October 2007. As further discussed below in the section describing results of operations for the years ended December 31, 2004 and 2003, this position was terminated in April 2004.

The fair value of the Bank’s interest rate caps and floors is dependent upon the level of interest rates, volatilities and remaining term to maturity. In general (assuming constant volatilities and no erosion in value attributable to the passage of time), the Bank’s interest rate caps will increase in value as market interest rates rise and will diminish in value as market interest rates decline. Conversely (under the same set of assumptions), the value of the Bank’s interest rate floors would increase in value as market interest rates declined and would decrease in value as market interest rates increased. The value of interest rate caps and floors will increase as volatilities increase and will decline as volatilities decrease. Absent changes in volatilities or interest rates, the value of caps and floors will decline with the passage of time. As stand-alone derivatives, the changes in the fair values of the interest rate caps and floors are (or were, in the case of the floors) recorded in earnings with no offsetting changes in the fair values of the hedged items (capped CMO LIBOR floaters and MPF loans) and therefore can be a source of considerable volatility, as was the case during the three months ended March 31, 2005 and 2004 and the years ended December 31, 2004, 2003 and 2002.

At March 31, 2005, the carrying values of the Bank’s stand-alone interest rate cap agreements totaled $3.8 million. Including realized and unrealized gains and losses, the recorded fair value changes in the Bank’s caps and floors was a loss of $1.2 million for the three months ended March 31, 2005, compared to a loss of $2.2 million for the corresponding period in 2004. The unrealized losses relating to the Bank’s interest rate caps were attributable primarily to lower interest rate volatility and the passage of time.

Effective January 1, 2004, the Bank changed the manner in which it assesses effectiveness for certain highly effective consolidated obligation hedging relationships. At December 31, 2003, the interest rate swaps used in these

47

relationships had an aggregate notional amount of $12.7 billion. Under its prior approach, the Bank inappropriately assumed no ineffectiveness for these hedging transactions. The interest rate swaps used in these relationships were structured with one settlement amount under the receive side of the swap that differed from all other receive-side settlements by an amount equivalent to the concession cost associated with the hedged consolidated obligation. Since the formula for computing net settlements under the interest rate swap is not the same for each net settlement, the Bank determined that it should change its approach to measure effectiveness during each reporting period. The Bank assessed the impact of this change on all prior annual periods since the adoption of SFAS 133 and all quarterly periods for 2003, and determined that had the Bank applied this new approach since January 1, 2001 it would not have had a material impact on the Bank’s financial condition or results of operations for any of these prior reporting periods. Income before assessments for the three months ended March 31, 2004 was reduced by $3.4 million to reflect the accounting as if the Bank had employed the new approach from the date of adoption of SFAS 133 (January 1, 2001) through December 31, 2003. The adjustment resulting from this change is included in “net loss on debt and associated hedges” for 2004 in the table above. Net of assessments, the prior period adjustment reduced net income by $2.5 million during the three months ended March 31, 2004. This change could lead to more volatility in the Bank’s future reported earnings. However, the unrealized gains and losses resulting from these transactions are transitory, as the net earnings impact will be zero over the life of the hedging relationships if the derivative and hedged item are both held to maturity or their call dates, which is generally the case for the Bank.

During the first quarter of 2005, market conditions were such that the Bank was able to extinguish certain consolidated obligation bonds at a gain, while issuing new consolidated obligations that could be converted (through the use of interest rate exchange agreements) to approximately the same terms as the extinguished debt. As a result, the Bank repurchased $25 million of its consolidated obligations in the secondary market and terminated the related interest rate exchange agreements, resulting in a net gain of approximately $124,000.

The Bank uses interest rate swaps to hedge the risk of changes in the fair value of its available-for-sale securities, as well as some of its advances and consolidated obligations. These hedging relationships are designated as fair value hedges under SFAS 133. To the extent these relationships continue to qualify for hedge accounting under SFAS 133, changes in the fair values of both the derivative (the interest rate swap) and the hedged item are recorded in earnings. For the three months ended March 31, 2005 and 2004, the difference between the change in fair value of the hedged items and the change in fair value of the associated interest rate swaps (representing hedge ineffectiveness) was a net loss of $6.4 million and $2.1 million, respectively; net of the accounting adjustment discussed above, the amount for the three months ended March 31, 2004 was a net gain of $1.3 million. To the extent these hedging relationships no longer qualify for SFAS 133 hedge accounting because they are determined to be ineffective, only the change in fair value of the derivative is recorded in earnings (in this case, there is no offsetting change in fair value of the hedged item). During the three months ended March 31, 2005 and 2004, the change in fair value of derivatives that were previously in SFAS 133 hedging relationships was $390,000 and ($55,000), respectively.

In the table above, the caption entitled “Other, net” (consistent with the term used in the statements of income) is comprised principally of MPF participation and letter of credit fees. As previously discussed, the Bank modified the terms of its participation in the MPF program in 2003 whereby it now receives fees for mortgage loans that are delivered by its PFIs to the FHLBank of Chicago. During the three months ended March 31, 2005 and 2004, the Bank received $118,000 and $241,000, respectively, of participation fees under this arrangement. During these same periods, letter of credit fees totaled $453,000 and $424,000, respectively. At March 31, 2005, outstanding letters of credit totaled $2.0 billion.

Other Expenses

Total other expenses, which include the Bank’s salaries and benefits, other operating expenses and its proportionate share of the costs of operating the Finance Board and the Office of Finance, totaled $10.5 million and $11.7 million for the three months ended March 31, 2005 and 2004, respectively.

Salaries and benefits were $5.3 million for the three months ended March 31, 2005, compared to $6.1 million for the corresponding period in 2004. The decline was attributable in large part to two factors. Effective January 1, 2004, the Bank changed its method of accounting for postretirement health and life insurance benefits in order to comply with the provisions of SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions

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(“SFAS 106”). Previously, the Bank had accounted for these benefits on a pay-as-you-go (cash) basis. The Bank assessed the impact of this change on all prior annual periods since January 1, 2001 and all quarterly periods for 2003 and determined that if the provisions of SFAS 106 had been applied earlier, the effect would not have been material to the Bank’s financial condition or results of operations for any of these prior reporting periods. For the three months ended March 31, 2004, salaries and benefits includes a $1.6 million charge for postretirement benefits relating to those prior periods. The period-to-period decline related to this accounting adjustment was offset by an increase in costs relating to the Bank’s participation in the Financial Institutions Retirement Fund. Expenses associated with this multiemployer defined benefit plan increased from $115,000 during the three months ended March 31, 2004 to $681,000 during the corresponding period in 2005.

Other operating expenses for the three months ended March 31, 2005 were comparable to those incurred in the corresponding period in 2004 ($4.2 million vs. $4.5 million).

The Bank, together with the other FHLBanks, is assessed annually for the cost of operating the Finance Board and the Office of Finance. The Bank’s share of these expenses totaled $1.0 million and $1.1 million for the three months ended March 31, 2005 and 2004, respectively.

AHP and REFCORP Assessments

As required by statute, each year the Bank contributes 10 percent of its earnings (after the REFCORP assessment discussed below and as adjusted for interest expense on mandatorily redeemable capital stock) to its AHP. The AHP provides grants that members can use to support affordable housing projects in their communities. Generally, the Bank’s AHP assessment is derived by adding interest expense on mandatorily redeemable capital stock to income before assessments and then subtracting the REFCORP assessment; the result of this calculation is then multiplied by 10 percent. For each of the quarters ended March 31, 2005 and 2004, the Bank contributed $2.5 million to its AHP.

Also as required by statute, the Bank contributes 20 percent of its reported earnings (after its AHP contribution) toward the payment of interest on REFCORP bonds that were issued to provide funding for the resolution of failed thrifts following the savings and loan crisis in the 1980s. To compute the REFCORP assessment, the Bank’s AHP assessment is subtracted from reported income before assessments and the result is multiplied by 20 percent. During the three months ended March 31, 2005 and 2004, the Bank charged $5.0 million and $5.3 million, respectively, of REFCORP assessments to earnings.

Years Ended December 31, 2004 and 2003

Net Income

Net income for 2004, 2003 and 2002 was $79.2 million, $89.8 million and $75.3 million, respectively. The Bank’s net income for 2004 represented a return on average capital stock (ROCS) of 3.35 percent, which was 200 basis points above the average federal funds rate for the year. In comparison, the Bank’s ROCS was 3.42 percent in 2003 and 3.22 percent in 2002; these rates of return exceeded the average federal funds rate for those years by 229 basis points and 155 basis points, respectively.

Assessments for AHP and REFCORP equate to a minimum 26.5 percent effective income tax rate for the Bank. Because interest expense on mandatorily redeemable capital stock is not deductible for purposes of computing the Bank’s AHP assessment, the effective rate may exceed 26.5 percent in any year after 2003. In 2004, the effective rate was 27.0 percent. In 2004, 2003 and 2002, the combined AHP and REFCORP assessments were $29.4 million, $32.4 million and $27.3 million, respectively.

Income Before Assessments

During 2004, 2003 and 2002, the Bank’s income before assessments was $108.6 million, $122.2 million and $102.7 million, respectively. The $13.6 million decrease in income before assessments for 2004 compared to 2003 was attributable primarily to larger fair value losses on the Bank’s interest rate caps and floors ($11.8 million), higher salaries and benefits ($4.1 million) and other operating expenses ($3.2 million), a change in the manner in which the

49

Bank assesses effectiveness for certain highly effective hedging relationships ($3.4 million) and other SFAS 133 fair value hedge ineffectiveness ($4.8 million). These unfavorable year-to-year changes were offset by a $2.7 million increase in the Bank’s net interest income and a $10.8 million reduction in realized losses in the form of net interest payments on interest rate swap agreements associated with the Bank’s trading securities.

The $19.6 million increase in income before assessments for 2003 compared to 2002 was attributable primarily to smaller fair value losses on the Bank’s interest rate caps and floors ($14.8 million), changes in the fair value adjustments for the Bank’s other stand-alone derivatives ($2.1 million), first-time participation fees from its new arrangement with the FHLBank of Chicago ($1.7 million) and an $8.4 million reduction in realized losses in the form of net interest payments on interest rate swap agreements associated with the Bank’s trading securities. These favorable year-to-year changes were partially offset by a $7.8 million decline in the Bank’s net interest income, which was attributable primarily to the effect of lower interest rates.

All of the variances identified above are discussed in more detail in the following sections.

Net Interest Income

In 2004, 2003 and 2002, the Bank’s net interest income was $177.4 million, $174.6 million and $182.5 million, respectively, and its net interest margin (based on these results) was 29 basis points, 31 basis points and 37 basis points, respectively. The following table presents average balance sheet amounts together with the total dollar amounts of interest income and expense and the weighted average interest rates of major earning asset categories and the funding sources for those earning assets for 2004, 2003 and 2002.

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YIELD AND SPREAD ANALYSIS
(Dollars in millions)

	2004							2003							2002
			Interest							Interest							Interest
	Average		Income/		Average			Average		Income/		Average			Average		Income/		Average
	Balance		Expense		Rate(a)			Balance		Expense		Rate(a)			Balance		Expense		Rate(a)
Assets
Interest-bearing deposits	$	465	$	7		1.47	%	$	542	$	6		1.16	%	$	279	$	5		1.68	%
Federal funds sold		2,365		33		1.38	%		2,824		32		1.14	%		2,858		48		1.68	%
Investments
Trading (b)		102		12		11.69	%		242		24		9.89	%		377		36		9.61	%
Available-for-sale (c)		5,844		97		1.67	%		5,610		71		1.27	%		4,535		82		1.81	%
Held-to-maturity		7,132		171		2.39	%		6,411		147		2.29	%		4,970		154		3.10	%
Advances (c)(d)		44,603		875		1.96	%		38,497		736		1.91	%		34,701		845		2.44	%
Mortgage loans held for portfolio		827		47		5.69	%		1,225		72		5.87	%		1,394		92		6.59	%
Total earning assets		61,338		1,242		2.02	%		55,351		1,088		1.97	%		49,114		1,262		2.57	%
Cash and due from banks		134							170							109
Other assets		264							410							521
Total assets	$	61,736		1,242		2.01	%	$	55,931		1,088		1.94	%	$	49,744		1,262		2.54	%
Liabilities and Capital
Interest-bearing deposits	$	2,194		29		1.31	%	$	2,709		29		1.07	%	$	2,505		40		1.62	%
Consolidated obligations
Bonds (c)		46,947		911		1.94	%		38,947		763		1.96	%		34,892		884		2.53	%
Discount notes (c)		8,548		118		1.38	%		10,349		122		1.19	%		9,018		156		1.73	%
Mandatorily redeemable capital stock and other borrowings		375		7		1.81	%		—		—		—			—		—		—
Total interest-bearing liabilities		58,064		1,065		1.83	%		52,005		914		1.76	%		46,415		1,080		2.33	%
Other liabilities		1,197							1,238							899
Total liabilities		59,261		1,065		1.80	%		53,243		914		1.72	%		47,314		1,080		2.28	%
Total capital		2,475							2,688							2,430
Total liabilities and capital	$	61,736				1.72	%	$	55,931				1.63	%	$	49,744				2.17	%
Net interest income			$	177						$	174						$	182
Net interest margin						0.29	%						0.31	%						0.37	%
Net interest spread						0.19	%						0.21	%						0.24	%
Impact of non-interest bearing funds						0.10	%						0.10	%						0.13	%

(a)	Amounts used to calculate average rates are based on numbers in the thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
(b)	Interest income and average rates exclude the effect of associated interest rate exchange agreements as the net interest expense associated with such agreements is recorded in other income (loss) in the statements of income. Net interest expense on derivatives related to trading securities was $10.8 million, $21.6 million and $30.0 million during the years ended December 31, 2004, 2003 and 2002, respectively.
(c)	Interest income/expense and average rates include the effect of associated interest rate exchange agreements to the extent such agreements qualify for SFAS 133 fair value hedge accounting.
(d)	Interest income and average rates include prepayment fees on advances.

Despite rising interest rates in 2004, the calculated yield on the Bank’s invested capital (the impact of non-interest bearing funds) did not increase in comparison to 2003 due primarily to the effects associated with the adoption of SFAS 150 (see the section entitled “Financial Condition – Capital Stock”). Under the provisions of SFAS 150, $6.6 million of dividends on mandatorily redeemable capital stock were classified as interest expense in 2004, resulting in a one basis point reduction in net interest margin. In 2003, the deployment of capital into assets whose yields declined with market interest rates accounted for 3 basis points of the reduction in net interest margin from 2002 to 2003, as the contribution of assets funded with capital to the net interest margin fell from 13 basis points in 2002 to 10 basis points in 2003.

The Bank’s net interest spread decreased from 21 basis points in 2003 to 19 basis points in 2004. As previously discussed, the Bank’s balance sheet participation in the MPF program declined during 2004, resulting in a decrease in higher-yielding mortgage loans as a percentage of total interest-earning assets. In addition, prepayment fees on advances decreased from approximately $10.5 million in 2003 to $7.4 million in 2004, while the average

51

outstanding balance of advances grew significantly. Finance Board regulations require the Bank to charge a prepayment fee on any advance with a maturity or repricing period greater than six months. Members may prepay such advances by paying a prepayment fee to the Bank that makes the Bank financially indifferent to the prepayment of the advance (for these advances, prepayment is not permitted during the first six months of the term). Members elect to prepay advances for a variety of reasons including, but not limited to, their individual balance sheet management activities, and, as a result, the Bank is unable to predict when, and to what extent, members will prepay advances.

The Bank’s net interest spread decreased from 24 basis points in 2002 to 21 basis points in 2003. This decrease in net interest spread was due primarily to an increase in the marginal cost of the Bank’s debt relative to LIBOR, as discussed above under the heading “Consolidated Obligations and Deposits.” In addition, the Bank began to deemphasize balance sheet participation in the MPF program during 2003, resulting in a decrease in higher-yielding mortgage loans as a percentage of total interest-earning assets.

Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between 2004 and 2003 and between 2003 and 2002. Changes in interest income and interest expense that cannot be attributed to either volume or rate have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.

RATE AND VOLUME ANALYSIS
(In millions of dollars)

	2004 vs. 2003									2003 vs. 2002
	Increase (Decrease) Due To									Increase (Decrease) Due To
	Volume			Rate			Total			Volume			Rate			Total
Interest income
Interest-bearing deposits	$	(1	)	$	2		$	1		$	3		$	(2	)	$	1
Federal funds sold		(5	)		6			1			(1	)		(15	)		(16	)
Investments
Trading		(16	)		4			(12	)		(13	)		1			(12	)
Available-for-sale		3			23			26			17			(28	)		(11	)
Held-to-maturity		17			7			24			39			(46	)		(7	)
Advances		117			22			139			85			(194	)		(109	)
Mortgage loans held for portfolio		(23	)		(2	)		(25	)		(11	)		(9	)		(20	)
Total interest income		92			62			154			119			(293	)		(174	)
Interest expense
Interest-bearing deposits		(6	)		6			—			3			(14	)		(11	)
Consolidated obligations
Bonds		155			(7	)		148			95			(216	)		(121	)
Discount notes		(22	)		18			(4	)		21			(55	)		(34	)
Mandatorily redeemable capital stock and other borrowings		7			—			7			—			—			—
Total interest expense		134			17			151			119			(285	)		(166	)
Changes in net interest income	$	(42	)	$	45		$	3		$	—		$	(8	)	$	(8	)

As previously discussed, the Bank reports income from its trading securities in interest income without the offsetting effects of the associated interest rate swaps. Because the Bank has synthetically converted the instruments’ cash flows through interest rate swap agreements, management considers the effects of the associated interest rate exchange agreements when evaluating changes in the Bank’s net interest income across different time periods and in relation to the movement in short-term interest rates. The net interest expense associated with economic hedge derivatives related to trading securities was $10.8 million, $21.6 million and $30.0 million in 2004, 2003 and 2002, respectively. The decline in interest income on trading securities reflected in the foregoing Yield and Spread and Rate and Volume Analyses has been substantially offset by declines in the net interest expense on the associated interest rate exchange agreements recorded in other income (loss). When combined with the associated interest rate exchange agreements, the average rates earned on these securities are significantly lower than the rates shown in the Yield and Spread Analysis.

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As discussed above in the section describing the results of operations for the three months ended March 31, 2005 and 2004, the Bank changed its method of amortizing and accreting premiums and discounts on certain of its available-for-sale securities effective January 1, 2004. Net interest income was increased by $3.5 million during the year ended December 31, 2004 to reflect the accounting as if the level-yield method had been used in prior years. Net of assessments, this correction increased net income for the year ended December 31, 2004 by approximately $2.6 million.

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Other Income (Loss)

The following table presents the various components of other income (loss) for the years ended December 31, 2004, 2003 and 2002.

OTHER INCOME (LOSS)
(In thousands of dollars)

	2004			2003			2002
Net gain (loss) on trading securities	$	(7,860	)	$	(12,727	)	$	9,945
Unrealized gains (losses) on economic hedge derivatives related to trading securities		8,126			13,377			(9,437	)
Hedge ineffectiveness on trading securities		266			650			508
Net interest expense associated with economic hedge derivatives related to trading securities		(10,777	)		(21,602	)		(29,966	)
Net interest income associated with stand-alone economic hedge derivatives (basis swaps)		390			—			—
Net interest expense associated with stand-alone economic hedge derivatives (advance / CO(1) swaps)		(1,200	)		(924	)		(1,245	)
Total net interest expense associated with economic hedge derivatives		(11,587	)		(22,526	)		(31,211	)
Realized and unrealized losses related to stand-alone economic hedge derivatives (caps and floors)		(16,560	)		(4,745	)		(19,489	)
Unrealized losses related to other stand-alone derivatives (basis swaps)		(48	)		—			—
Unrealized gains (losses) related to other stand-alone derivatives (advance / CO(1) swaps)		841			610			(1,448	)
Total net realized and unrealized losses related to stand-alone economic hedge derivatives		(15,767	)		(4,135	)		(20,937	)
Unrealized gains (losses) related to SFAS 133 fair value hedge ineffectiveness
Net gain (loss) on advances and associated hedges		257			573			(1,361	)
Net gain (loss) on debt and associated hedges		(4,478	)		3,289			5,112
Net loss on AFS(2) securities and associated hedges		(2,008	)		(2,280	)		(1,195	)
Total SFAS 133 fair value hedge ineffectiveness		(6,229	)		1,582			2,556
Realized gains on early extinguishment of debt		3,651			—			—
Realized losses on termination of interest rate swaps related to debt extinguishments		(3,147	)		—			—
Net gain on early extinguishment of debt		504			—			—
Service fees		2,470			2,137			2,545
Other, net		2,526			3,085			536
Total other		4,996			5,222			3,081
Total other income (loss)	$	(27,817	)	$	(19,207	)	$	(46,003	)

(1)	Consolidated obligations
(2)	Available-for-sale

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As discussed above, the Bank uses interest rate swaps to hedge the risk of changes in the fair value of its trading securities. The difference between the change in fair value of these securities and the change in fair value of the associated interest rate swaps (representing economic hedge ineffectiveness) was a net gain of $266,000, $650,000 and $508,000 in 2004, 2003 and 2002, respectively. The change in fair value of the trading securities and the change in fair value of the associated interest rate swaps are reported separately in the statements of income as “net gain (loss) on trading securities” and “net realized and unrealized gains (losses) on derivatives and hedging activities,” respectively.

Net interest expense associated with economic hedge derivatives related to trading securities declined by $10.8 million from 2003 to 2004 and by $8.4 million from 2002 to 2003, due primarily to a reduction in the notional balance of the interest rate swaps. The reductions in the notional balances corresponded to reductions of $140 million and $135 million, respectively, in the average balances of the trading securities portfolio, which were in turn attributable to principal repayments on the securities. As discussed above, the net interest payments associated with all economic hedge derivatives, including those hedging the Bank’s trading securities, are considered by management when analyzing the Bank’s net interest income as these derivative instruments synthetically convert the cash flows of assets and liabilities whose interest payments are reported in net interest income under generally accepted accounting principles.

As discussed previously, to reduce the impact that rising rates would have on its portfolio of capped CMO LIBOR floaters, the Bank has entered into 15 interest rate cap agreements having a total notional amount of $3.9 billion. The premiums paid for these caps totaled $33.9 million, of which $14.0 million (for caps having a notional amount of $1.2 billion) was paid during 2004.

The Bank also had a $500 million notional interest rate floor agreement that it entered into in October 2002 in order to hedge prepayment exposure related to its MPF portfolio. The premium paid for this interest rate floor agreement was $5.2 million. The interest rate floor had a strike rate of 3.75 percent and was scheduled to expire in October 2007. Although market rates remained low subsequent to the Bank’s purchase of this floor agreement, mortgage loan prepayments were less than the Bank would have anticipated in the relatively low interest rate environment. Based on this evidence that its fixed rate mortgage portfolio had become relatively insensitive to declining interest rates, the Bank determined that the interest floor was no longer needed and the position was terminated in April 2004 at a realized loss of $4.1 million. Based on its carrying value at December 31, 2003, the sale of the interest rate floor generated a loss of approximately $392,000 during 2004. In 2002, in order to offset the negative earnings impact of higher-than-anticipated prepayments from its mortgage loan portfolio, the Bank terminated two interest rate floor agreements at a realized gain of $4.6 million and concurrently entered into the interest rate floor agreement referred to above. The two terminated agreements had notional amounts aggregating $350 million.

At December 31, 2004, the carrying values of the Bank’s stand-alone interest rate cap agreements totaled $4.9 million. Including realized and unrealized gains and losses, the recorded fair value changes in the Bank’s caps and floors were a loss of $16.6 million for the year ended December 31, 2004, compared to losses of $4.7 million and $19.5 million for the years ended December 31, 2003 and 2002, respectively. In 2004, the unrealized losses relating to the Bank’s interest rate caps were attributable primarily to lower interest rate volatility. The unrealized losses on the interest rate caps in 2003 and 2002 were due primarily to declining interest rates.

As discussed above in the section describing the results of operations for the three months ended March 31, 2005 and 2004, the Bank changed the manner in which it assesses effectiveness for certain highly effective consolidated obligation hedging relationships effective as of January 1, 2004. Income before assessments for the year ended December 31, 2004 was reduced by $3.4 million to reflect the accounting as if the Bank had employed the new approach from the date of adoption of SFAS 133 (January 1, 2001) through December 31, 2003. The adjustment resulting from this change is included in “net gain (loss) on debt and associated hedges” for 2004 in the table above. Net of assessments, the prior period adjustment reduced net income by $2.5 million during the year ended December 31, 2004.

During the second quarter of 2004, market conditions were such that the Bank was able to extinguish certain consolidated obligation bonds at a gain, while issuing new consolidated obligations that could be converted (through the use of interest rate exchange agreements) to approximately the same terms as the extinguished debt. As a result,

55

the Bank repurchased approximately $138 million of its consolidated obligations in the secondary market and terminated the related interest rate exchange agreements, resulting in a net gain of approximately $504,000.

The Bank uses interest rate swaps to hedge the risk of changes in the fair value of its available-for-sale securities, as well as some of its advances and consolidated obligations. These hedging relationships are designated as fair value hedges under SFAS 133. To the extent these relationships continue to qualify for hedge accounting under SFAS 133, changes in the fair values of both the derivative (the interest rate swap) and the hedged item are recorded in earnings. In 2004, 2003 and 2002, the difference between the change in fair value of the hedged items and the change in fair value of the associated interest rate swaps (representing hedge ineffectiveness) was a net gain (loss) of ($6.2 million), $1.6 million and $2.6 million, respectively; net of the accounting adjustment discussed above, the net loss for 2004 was $2.8 million. To the extent these hedging relationships no longer qualify for SFAS 133 hedge accounting because they are determined to be ineffective, only the change in fair value of the derivative is recorded in earnings (in this case, there is no offsetting change in fair value of the hedged item). In 2004, 2003 and 2002, the change in fair value of derivatives that were previously in SFAS 133 hedging relationships was $0.8 million, $0.6 million and ($1.4 million), respectively.

In the table above, the caption entitled “Other, net” is comprised principally of MPF participation and letter of credit fees. As previously discussed, the Bank modified the terms of its participation in the MPF program in 2003 whereby it now receives fees for mortgage loans that are delivered by its PFIs to the FHLBank of Chicago. In 2004 and 2003, the Bank received $0.7 million and $1.7 million, respectively, of participation fees under this new arrangement. No participation fees were earned in years prior to 2003. From 2003 to 2004 and from 2002 to 2003, letter of credit fees increased by $0.6 million and $0.7 million, respectively, as a result of increased use of this product. At December 31, 2004, 2003 and 2002, outstanding letters of credit totaled $1.7 billion, $1.6 billion and $0.8 billion, respectively.

Other Expenses

Total other expenses, which include the Bank’s salaries and benefits, other operating expenses and its proportionate share of the costs of operating the Finance Board and the Office of Finance, totaled $41.0 million, $33.2 million and $33.7 million in 2004, 2003 and 2002, respectively.

Salaries and benefits were $20.3 million for the year ended December 31, 2004, compared to $16.2 million for the year ended December 31, 2003. The increase in salaries and benefits of $4.1 million was due primarily to three factors. First, as previously discussed, the Bank changed its method of accounting for postretirement health and life insurance benefits effective January 1, 2004. As a result of this change, the Bank recorded a $2.4 million charge for postretirement health and life insurance benefits during 2004, of which $1.6 million related to prior years. Second, the costs relating to the Bank’s participation in the Financial Institutions Retirement Fund increased from 2003 to 2004. Contributions to this multiemployer defined benefit plan resumed effective July 1, 2003 following a 16-year period during which no contributions were required to be made as a result of favorable investment and other actuarial experience. The increase from 2003 to 2004 totaled $1.0 million, from $0.2 million in 2003 to $1.2 million in 2004. Third, in 2004, the Bank established the Special Non-Qualified Deferred Compensation Plan, a defined contribution plan that was created primarily to provide supplemental retirement benefits to most of the Bank’s executive officers. Contributions to this plan totaled $0.2 million during 2004.

From 2002 to 2003, salaries and benefits increased by $2.0 million, due in large part to additional headcount. The number of full time employees increased from 122 at December 31, 2002 to 135 at December 31, 2003. At December 31, 2004, the Bank employed 133 people.

Other operating expenses for the year ended December 31, 2004 were $17.4 million, a $3.2 million increase over other operating expenses of $14.2 million for the year ended December 31, 2003. The increase was due in part to an increased allocation to the Bank’s economic development grant program and higher expenses associated with the maintenance and enhancement of the Bank’s information technology infrastructure. Other operating expenses were $2.5 million less in 2003 as compared to 2002 ($14.2 million in 2003 versus $16.7 million in 2002) as a result of lower depreciation charges relating to the Bank’s information technology equipment.

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The Bank, together with the other FHLBanks, is assessed annually for the cost of operating the Finance Board and the Office of Finance. The Bank’s share of these expenses totaled $3.3 million, $2.9 million and $2.8 million in 2004, 2003 and 2002, respectively.

AHP and REFCORP Assessments

As previously discussed, each year the Bank contributes 10 percent of its earnings (after the REFCORP assessment and as adjusted for interest expense on mandatorily redeemable capital stock) to its AHP. In 2004, 2003 and 2002, the Bank contributed $9.5 million, $10.0 million and $8.4 million, respectively, to its AHP.

The Bank also contributes 20 percent of its reported earnings (after its AHP contribution) toward the payment of interest on REFCORP bonds, as previously discussed. During 2004, 2003 and 2002, the Bank charged $19.8 million, $22.4 million and $18.9 million of REFCORP assessments to earnings.

The calculations of the AHP and REFCORP assessments are discussed above in the section describing the Bank’s results of operations for the three months ended March 31, 2005 and 2004.

Critical Accounting Policies and Estimates

To understand the Bank’s financial position and results of operations, it is important to understand the Bank’s most significant accounting policies and the extent to which management uses judgment and estimates in applying those policies. These policies include those relating to the Bank’s accounting for derivatives and hedging activities, its estimation of the fair value of certain financial instruments, and the amortization of premiums and accretion of discounts associated with certain investment securities and mortgage loans.

The Bank considers these policies to be critical because they require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Management bases its judgments and estimates on current market conditions and industry practices, historical experience, changes in the business environment and other factors that it believes to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions and/or conditions. For additional discussion regarding the application of these and other accounting policies, see Note 1 to the Bank’s financial statements included in this registration statement.

Derivatives and Hedging Activities

The Bank enters into interest rate swap, cap and floor agreements to manage its exposure to changes in interest rates. Through the use of these derivatives, the Bank may adjust the effective maturity, repricing frequency or option characteristics of financial instruments to achieve its risk management objectives. By regulation, the Bank may only use derivatives to mitigate identifiable risks. Accordingly, all of the Bank’s derivatives are positioned to offset interest rate risk exposures inherent in its investment, funding and member lending activities.

SFAS 133 requires that all derivatives be recorded on the statement of condition at their fair value. Since the Bank does not have any cash flow hedges, changes in the fair value of all derivatives are recorded each period in current earnings. Under SFAS 133, the Bank is required to recognize unrealized gains and losses on derivative positions whether or not the transaction qualifies for hedge accounting, in which case offsetting losses or gains on the hedged assets or liabilities may also be recognized. Therefore, to the extent certain derivative instruments do not qualify for hedge accounting under SFAS 133, or changes in the fair values of derivatives are not exactly offset by changes in their hedged items, the accounting framework imposed by SFAS 133 introduces the potential for a considerable mismatch between the timing of income and expense recognition for assets or liabilities being hedged and their associated hedging instruments. As a result, during periods of significant changes in market prices and interest rates, the Bank’s earnings may exhibit considerable volatility.

The judgments and assumptions that are most critical to the application of this accounting policy are those affecting whether a hedging relationship qualifies for hedge accounting under SFAS 133 and, if so, whether an assumption of no ineffectiveness can be made. In addition, the estimation of fair values (discussed below) has a significant impact on the actual results being reported.

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At the inception of each hedge transaction, the Bank formally documents the hedge relationship and its risk management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk will be assessed. In all cases involving a recognized asset, liability or firm commitment, the designated risk being hedged is the risk of changes in its fair value attributable to changes in the designated benchmark interest rate (LIBOR). Therefore, for this purpose, changes in the fair value of the hedged item (e.g., an advance, investment security or consolidated obligation) reflect only those changes in value that are attributable to changes in the designated benchmark interest rate (hereinafter referred to as “changes in the benchmark fair value”).

For hedging relationships that are designated as hedges and qualify for hedge accounting under SFAS 133, the change in the benchmark fair value of the hedged item is recorded in earnings, thereby providing some offset to the change in fair value of the associated derivative. The difference in the change in fair value of the derivative and the change in the benchmark fair value of the hedged item represents “hedge ineffectiveness.” If a hedging relationship qualifies for the short-cut method of accounting, the Bank can assume that the change in the benchmark fair value of the hedged item is equal to the change in the fair value of the derivative and, as a result, no ineffectiveness is recorded in earnings. However, SFAS 133 limits the use of the short-cut method to hedging relationships of interest rate risk involving a recognized interest-bearing asset or liability and an interest rate swap, and then only if nine specific conditions are met.

If the hedging relationship qualifies for hedge accounting but does not meet all nine conditions specified in SFAS 133, the assumption of no ineffectiveness cannot be made and the long-haul method of accounting is used. Under the long-haul method, the change in the benchmark fair value of the hedged item is calculated independently from the change in fair value of the derivative. As a result, the net effect is that the hedge ineffectiveness has an impact on earnings.

In all cases where the Bank is applying fair value hedge accounting, it is hedging interest rate risk through the use of interest rate swaps and caps. For those interest rate swaps and caps that are in fair value hedging relationships that do not qualify for the short-cut method of accounting, the Bank uses regression analysis to assess hedge effectiveness. Effectiveness testing is performed at the inception of each hedging relationship to determine whether the hedge is expected to be highly effective in offsetting the identified risk, and at each month-end thereafter to ensure that the hedge relationship has been effective historically and to determine whether the hedge is expected to be highly effective in the future. Hedging relationships accounted for under the short-cut method are not tested for hedge effectiveness.

A hedge relationship is considered effective only if certain specified criteria are met. If a hedge fails the effectiveness test at inception, the Bank does not apply hedge accounting. If the hedge fails the effectiveness test during the life of the transaction, the Bank discontinues hedge accounting prospectively. In that case, the Bank continues to carry the derivative on its statement of condition at fair value, recognizes the changes in fair value of that derivative in current earnings, ceases to adjust the hedged item for changes in benchmark fair value and begins to amortize the cumulative basis adjustment on the formerly hedged item into earnings over its remaining term. Unless and until the derivative is redesignated in a SFAS 133 fair value hedging relationship, changes in its fair value are recorded in current earnings without an offsetting change in the benchmark fair value from a hedged item.

Changes in the fair value of derivative positions that do not qualify for hedge accounting under SFAS 133 (economic hedges) are recorded in current earnings without an offsetting change in the benchmark fair value of the hedged item.

As of March 31, 2005, the Bank’s derivatives portfolio included $26.9 billion (notional principal) that qualified for short-cut accounting treatment, $30.4 billion that qualified for long-haul accounting treatment, and $4.0 billion that did not qualify for hedge accounting.

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Estimation of Fair Values

Certain of the Bank’s assets and liabilities, including derivatives and investments classified as available-for-sale and trading, are presented in the statements of condition at fair value. Under U.S. generally accepted accounting principles, the fair value of an asset or liability is the amount at which that asset could be bought or sold, or that liability could be incurred or settled in a current transaction between willing parties (that is, other than in a forced or liquidation sale). Fair values are estimated based upon quoted market prices where available. However, most of the Bank’s financial instruments lack an available trading market characterized by frequent transactions between a willing buyer and willing seller engaging in an exchange transaction. In these cases, and in those instances where the Bank is calculating periodic changes in the benchmark fair values of hedged items for purposes of SFAS 133, such values are estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and their underlying assumptions are based upon management’s best estimates for appropriate discount rates, prepayments, market volatility and other factors, taking into account current observable market data and experience. These assumptions may have a significant effect on the reported carrying values of assets and liabilities, including derivatives, and the related income and expense. The use of different assumptions, as well as changes in market conditions, could result in materially different net income and reported carrying values.

Management uses available market data from multiple sources whenever possible to validate its model assumptions. In addition, the fair values reported in the financial statements are compared to independent fair value estimates obtained from third parties. Significant differences, if any, are investigated. In addition, the Bank’s pricing model is subject to annual independent validation. The Bank continually refines its assumptions and valuation methodologies to reflect market indications more effectively.

The Bank believes it has the appropriate personnel, technology, and policies and procedures in place to enable it to value its financial instruments in a reasonable and consistent manner. However, valuations are subject to change as a result of external factors beyond the Bank’s control that have a substantial degree of uncertainty.

Amortization of Premiums and Accretion of Discounts

The Bank estimates prepayments for purposes of amortizing premiums and accreting discounts associated with mortgage loans and certain investment securities. SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases (“SFAS 91”) requires premiums and discounts to be recognized in income at a constant effective yield over the life of the instrument. Because actual prepayments often deviate from the estimates, the Bank periodically recalculates the effective yield to reflect actual prepayments to date and anticipated future prepayments. Anticipated future prepayments are estimated using externally developed mortgage prepayment models. These models consider past prepayment patterns and current and past interest rate environments to predict future cash flows. Periodically, the models’ projections are compared to other industry sources to ensure they are producing reasonable results. Adjustments are recorded on a retrospective basis, meaning that the net investment in the instrument is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the instrument. As interest rates (and thus prepayment speeds) change, SFAS 91 can be the source of income volatility. Reductions in interest rates generally accelerate prepayments, which accelerate the amortization of premiums and reduce current earnings. Typically, declining interest rates also accelerate the accretion of discounts, thereby increasing current earnings. Conversely, in a rising interest rate environment, prepayments will generally extend over a longer period, shifting some of the premium amortization and discount accretion to future periods.

As of March 31, 2005, the unamortized premiums and discounts associated with investment securities for which prepayments are estimated totaled $4.5 million and $4.7 million, respectively. At that date, the carrying values of these investment securities totaled $2.5 billion and $2.9 billion, respectively.

Unamortized premiums and discounts associated with the Bank’s mortgage loans were $5.4 million and $0.8 million, respectively, at March 31, 2005. The carrying value of the Bank’s mortgage loans, inclusive of these unamortized premiums and discounts, was $662 million as of March 31, 2005.

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Liquidity and Capital Resources

In order to meet members’ credit needs and the Bank’s financial obligations, the Bank maintains a portfolio of money market instruments consisting of overnight federal funds, term federal funds, and commercial paper issued by highly rated entities. Overnight federal funds typically comprise the majority of the portfolio. The Bank manages its liquidity to ensure that, at a minimum, it has sufficient funds to meet its obligations due on any given day plus the statistically estimated (at the 99-percent confidence level) credit needs of its members and associates for one business day without accessing the capital or money markets (currently, the estimated amount required to meet member credit needs at this confidence level totals approximately $800 million). The Bank typically holds additional balances of short-term investments that fluctuate as the minimum targeted liquidity balance changes, as the Bank invests the proceeds of debt issued to replace maturing and called liabilities, and as the balance of deposits changes. At March 31, 2005 and December 31, 2004 and 2003, the Bank’s short-term investments, which were comprised entirely of overnight federal funds sold to domestic counterparties, totaled $4.6 billion, $2.7 billion and $3.0 billion, respectively.

The Bank’s primary source of funds is the proceeds it receives from the issuance of consolidated obligation bonds and discount notes in the capital markets. The market for the FHLBanks’ consolidated obligations is very active and liquid. The FHLBanks issue debt continuously throughout the business day in the form of discount notes and bonds with a wide variety of maturities and structures. The Bank has access to this market on a continual basis to acquire funds to meet its needs. On occasion, and as an alternative to issuing new debt, the Bank may assume the outstanding consolidated obligations for which other FHLBanks are the original primary obligors. This occurs in cases where the original primary obligor may have participated in a large consolidated obligation issue to an extent that exceeded its immediate funding needs in order to facilitate better market execution for the issue. The original primary obligor might then warehouse the funds until they were needed, or make the funds available to other FHLBanks. Transfers may also occur when the original primary obligor’s funding needs change, and that FHLBank offers to transfer debt that is no longer needed to other FHLBanks. Transferred debt is typically fixed rate, fixed term, non-callable debt, and may be in the form of discount notes or bonds.

The Bank participates in such transfers of funding from other FHLBanks when the transfer represents favorable pricing relative to a new issue of consolidated obligations with similar features. During the years ended December 31, 2004, 2003, and 2002, the Bank assumed consolidated obligations from the FHLBanks of Chicago and San Francisco with par amounts of $375 million, $5.7 billion, and $28.5 million, respectively. These amounts were relatively larger in 2003 and 2004 when market conditions for the FHLBanks’ callable debt were less favorable and the FHLBanks issued a larger proportion of fixed rate, non-callable debt in large issues. In addition, a substantial portion of the debt transfers in 2003 were in the form of short term discount notes. The Bank did not assume any consolidated obligations for which the other FHLBanks were the original primary obligors during the three months ended March 31, 2005.

The Bank also maintains access to wholesale funding sources such as federal funds purchased and securities sold under agreements to repurchase (e.g., borrowings secured by its agency debentures and MBS investments), in case its access to the capital markets is hindered.

The Bank’s liquidity policy further requires that it maintain adequate balance sheet liquidity and access to other funding sources should it be unable to issue consolidated obligations for five business days. The combination of funds available from these sources must be sufficient for the Bank to meet its obligations as they come due and the credit needs of its members, with the potential credit needs of members statistically estimated at the 99-percent confidence level. As of March 31, 2005 and December 31, 2004 and 2003, the Bank’s estimated contingent liquidity requirement was $12.7 billion, $8.8 billion and $8.7 billion, respectively. As of these dates, the Bank estimated that its contingent liquidity exceeded these requirements by approximately $4.2 billion, $6.0 billion and $6.6 billion, respectively.

When measuring its liquidity for this purpose, the Bank includes only the amount of funds it estimates would be available in the event the Bank were to pledge securities held in its long-term investment portfolio. While it believes purchased federal funds might be available, it does not include this potential source of funds in its calculation of available liquidity.

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The Bank’s access to the capital markets has never been interrupted to an extent that the Bank’s ability to meet its obligations was compromised and the Bank currently has no reason to believe that its ability to issue consolidated obligations will be impeded to that extent. However, if the capital markets were inaccessible for an extended period of time (i.e., beyond five days), the Bank would eventually exhaust the availability of purchased federal funds and repurchase agreements as sources of funds, and the Bank would be able to finance its operations only to the extent that the cash inflows from its interest-earning assets and proceeds from maturing assets exceeded the balance of principal and interest that came due on its debt obligations and the funds needed to pay its operating expenses. Once these sources of funds had been exhausted, and if access to the capital markets were not again available, the Bank’s ability to conduct its operations would be compromised. It is also possible that an event (such as a natural disaster) that might impede the Bank’s ability to raise funds by issuing consolidated obligations would also limit the Bank’s ability to access the markets for federal funds purchased and/or repurchase agreements. If this were the case, the Bank’s ability to conduct its operations would be compromised even earlier than if these funding sources were available.

The following table summarizes the Bank’s contractual cash obligations and off-balance-sheet lending-related financial commitments by due date or remaining maturity as of December 31, 2004. There have been no substantial changes in the Bank’s contractual obligations outside the normal course of business during the three months ended March 31, 2005.

CONTRACTUAL OBLIGATIONS
(In millions of dollars)

	Payments due by Period
	< 1 Year		1-3 Years		3-5 Years		> 5 Years		Total
Long-term debt	$	18,417.3	$	16,586.4	$	9,871.7	$	6,779.4	$	51,654.8
Mandatorily redeemable capital stock		—		—		327.1		—		327.1
Operating leases		0.4		0.6		0.5		0.2		1.7
Purchase obligations
Advances		1,059.2		16.3		2.1		7.5		1,085.1
Letters of credit		1,536.6		129.0		21.8		—		1,687.4
Total contractual obligations	$	21,013.5	$	16,732.3	$	10,223.2	$	6,787.1	$	54,756.1

In the table above, long-term debt excludes consolidated obligation discount notes and is based upon contractual maturities. The actual distribution of long-term debt could be impacted by factors affecting redemptions such as call options.

The above table presents the Bank’s mandatorily redeemable capital stock by year of earliest mandatory redemption, which is the earliest time at which the Bank is required to repurchase the shareholder’s capital stock. The earliest mandatory redemption date is based on the assumption that the activities associated with the activity-based stock will be concluded by the time the notice of redemption or withdrawal expires. However, the Bank expects to redeem activity-based stock as the associated activities are reduced, which may be before or after the expiration of the five-year redemption/withdrawal notice period. If the advances relating to such activity-based stock are repaid on their contractual maturity dates, the Bank anticipates repurchasing the mandatorily redeemable capital stock as follows (in millions):

2005	$	2.0
2006		168.2
2007		133.7
2008		16.4
2009		1.4
Thereafter		5.4
Total	$	327.1

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In addition to the above, stockholders may, at any time, request the Bank to repurchase excess capital stock. Excess stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum investment requirement (i.e., the amount of stock held in excess of their activity-based investment requirement and, in the case of a member, their membership investment requirement). Although the Bank is not obligated to repurchase excess stock prior to the expiration of a five-year redemption or withdrawal notification period, it will typically endeavor to honor such requests within a reasonable period of time (generally not exceeding 30 days) so long as the Bank will continue to meet its regulatory capital requirements following the repurchase. Excess capital stock totaled $426 million at March 31, 2005, of which $4 million was classified as mandatorily redeemable.

Risk-Based Capital Rules and Other Capital Requirements

Upon implementation of its capital plan on September 2, 2003, the Bank became subject to the Finance Board’s new risk-based capital rules and other capital requirements. This regulatory framework requires each FHLBank that has implemented its new capital plan to maintain at all times permanent capital (defined under the Finance Board’s rules as retained earnings and amounts paid in for Class B stock, regardless of its classification as equity or liabilities for financial reporting purposes, as further described above in the section entitled “Financial Condition – Capital Stock”) in an amount at least equal to its risk-based capital requirement, which is the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, as further described below. For reasons of safety and soundness, the Finance Board may require the Bank, or any other FHLBank that has already converted to its new capital structure, to maintain a greater amount of permanent capital than is required by the risk-based capital requirements as defined.

The Bank’s credit risk capital requirement is determined by adding together the credit risk capital charges for advances, investments, mortgage loans, derivatives, other assets and off-balance-sheet commitment positions (e.g., outstanding letters of credit and commitments to fund advances). Among other things, these charges are computed based upon the credit risk percentages assigned to each item as required by Finance Board rules, taking into account the time to maturity and credit ratings of certain of the items. These percentages are applied to the book value of assets or, in the case of off-balance-sheet commitments, to their balance sheet equivalents.

The Bank’s market risk capital requirement is determined by estimating the potential loss in market value of equity under a wide variety of market conditions and adding the amount, if any, by which the Bank’s current market value of total capital is less than 85 percent of its book value of total capital. The potential loss component of the market risk capital requirement employs a “stress test” approach, using a 99-percent confidence interval. Simulations of over 300 historical market interest rate scenarios dating back to January 1978 (using changes in interest rates and volatilities over each six-month period since that date) are generated and, under each scenario, the hypothetical impact on the Bank’s current market value of equity is determined. The hypothetical impact associated with each historical scenario is calculated by simulating the effect of each set of rate and volatility conditions upon the Bank’s current risk position, each of which reflects current actual assets, liabilities, derivatives and off-balance-sheet commitment positions as of the measurement date. From the complete set of resulting simulated scenarios, the fourth worst estimated deterioration in market value of equity is identified as that scenario associated with a probability of occurrence of not more than one percent (i.e., the 99-percent confidence limit). The hypothetical deterioration in market value of equity derived under the methodology described above represents the market risk component of the Bank’s regulatory risk-based capital requirement which, in conjunction with the credit risk and operations risk components, determines the Bank’s overall risk-based capital requirement.

The Bank’s operations risk capital requirement is equal to 30 percent of the sum of its credit risk capital requirement and its market risk capital requirement. At March 31, 2005, the Bank’s credit risk, market risk and operations risk capital requirements were $230 million, $182 million and $124 million, respectively. These requirements were $224 million, $182 million and $122 million, respectively at December 31, 2004 and $219 million, $202 million and $126 million, respectively, at December 31, 2003.

In addition to the risk-based capital requirement, the Bank is subject to two other capital requirements. First, the Bank must, at all times, maintain a minimum total capital to assets ratio of four percent. For this purpose, total capital is defined by Finance Board rules and regulations as the Bank’s permanent capital and the amount of any general allowance for losses (i.e., those reserves that are not held against specific assets). Second, the Bank is

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required to maintain at all times a minimum leverage capital to assets ratio in an amount at least equal to five percent of its total assets. In applying this requirement to the Bank, leverage capital includes the Bank’s permanent capital multiplied by a factor of 1.5 plus the amount of any general allowance for losses. The Bank did not have any general reserves at March 31, 2005, December 31, 2004 or December 31, 2003. Under the regulatory definitions, total capital and permanent capital exclude accumulated other comprehensive income (loss). The Bank is required to submit monthly capital compliance reports to the Finance Board. At all times during the period from September 2, 2003 through March 31, 2005, the Bank was in compliance with the new capital requirements. The following table summarizes the Bank’s compliance with the Finance Board’s capital requirements as of March 31, 2005 and December 31, 2004 and 2003.

CAPITAL REQUIREMENTS
(In millions of dollars, except percentages)

	March 31, 2005						December 31, 2004						December 31, 2003
	Required			Actual			Required			Actual			Required			Actual
Risk-based capital	$	536		$	3,034		$	528		$	2,964		$	547		$	2,770
Total capital	$	2,626		$	3,034		$	2,583		$	2,964		$	2,336		$	2,770
Total capital-to-assets ratio		4.00	%		4.62	%		4.00	%		4.59	%		4.00	%		4.74	%
Leverage capital	$	3,283		$	4,551		$	3,229		$	4,446		$	2,920		$	4,155
Leverage capital-to-assets ratio		5.00	%		6.93	%		5.00	%		6.88	%		5.00	%		7.11	%

Concurrent with the implementation of its new capital structure, the Bank revised its Risk Management Policy to adopt a minimum total capital-to-assets target ratio of 4.25 percent, higher than is required under the Finance Board’s new rules. Since its adoption, the Bank has, at all times, maintained a total capital-to-assets ratio in excess of its target. The target ratio is subject to change by the Bank as it deems appropriate, subject to the Finance Board’s minimum requirements.

As of March 31, 2005, the Bank was one of ten FHLBanks that had implemented their new capital plans. The capital rule provides a transition period that allows each FHLBank up to three years from the date the Finance Board approved its capital plan to implement its new capital structure. Until a FHLBank implements its new capital plan, the prior capital adequacy rules remain in effect. In particular, the FHLB Act requires members of those FHLBanks to purchase capital stock equal to the greater of one percent of their mortgage-related assets or five percent of their outstanding advances, subject to certain exceptions for non-thrift members. Members of those FHLBanks can withdraw from membership and redeem their capital stock at par value upon six months’ notice or, at the FHLBank’s discretion, redeem at par value any capital stock greater than their statutory requirement.

Recently Issued Accounting Standards and Interpretations

Adoption of SOP 03-3

The American Institute of Certified Public Accountants issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”) in December 2003. SOP 03-3 provides guidance on the accounting for differences between contractual and expected cash flows from a purchaser’s initial investment in loans or debt securities acquired in a transfer, if those differences are attributable, at least in part, to credit quality. Among other things, SOP 03-3: (i) prohibits the recognition of the excess of contractual cash flows over expected cash flows as an adjustment of yield, loss accrual or valuation allowance at the time of purchase; (ii) requires that subsequent increases in expected cash flows be recognized prospectively through an adjustment of yield; and (iii) requires that subsequent reductions in expected cash flows be recognized as an impairment. In addition, SOP 03-3 prohibits the creation or carryover of a valuation allowance in the initial accounting of all loans within its scope that are acquired in a transfer. The Bank adopted SOP 03-3 as of January 1, 2005. The new rules did not have a material impact on its results of operations or financial condition at the time of adoption.

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EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-1”)

In March 2004, the Financial Accounting Standards Board (“FASB”) reached a consensus on EITF 03-1, which clarifies the application of an impairment model to determine whether investments are other-than-temporarily impaired. The provisions of EITF 03-1 must be applied prospectively to all current and future investments accounted for in accordance with the provisions of SFAS 115. On September 15, September 30, and November 15, 2004, the FASB issued proposed staff positions to provide guidance on the application and scope of certain paragraphs and to defer the effective date of the impairment measurement and recognition provisions contained in specific paragraphs of EITF 03-1. This deferral will be superseded in the FASB’s final issuance of a staff position. The Bank does not expect EITF 03-1, as revised, to have a material impact on its results of operations or financial condition at the time of adoption.

Business Outlook

The Bank intends to continue to operate under its cooperative business model for the foreseeable future. Under this model, the Bank’s net income, excluding unrealized fair value adjustments required by SFAS 133, is expected to rise and fall with the general level of market interest rates, particularly short-term money market rates. Under that scenario, the Bank’s ROCS (excluding unrealized fair value adjustments required by SFAS 133) is expected to continue to track changes in the federal funds rate.

In addition to changes in the general economic and business environment, developments that are expected to have an impact on the extent to which the Bank’s ROCS (excluding unrealized fair value adjustments required by SFAS 133) exceeds the federal funds rate benchmark include the future cost of the Bank’s long-term debt relative to the LIBOR index, the availability of interest rate exchange agreements at competitive prices, whether the Bank’s larger borrowers continue to be members of the Bank and whether they maintain or increase their borrowing activity, and the extent to which the Bank’s smaller and mid-sized members continue to increase their utilization of Bank advances.

The Bank believes that there remains potential for advances growth from among its CFIs and other small and intermediate-sized institutions that could overcome the expected loss of advances to Washington Mutual. However, there remains uncertainty about whether the Bank’s future membership base will continue to 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.

In light of these factors, and in order to become a more valuable resource to its members, the Bank intends to evaluate opportunities to diversify its product offerings and its income stream. In particular, 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.

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Statistical Financial Information

Investment Portfolio

The following table summarizes the Bank’s held-to-maturity securities at December 31, 2004, 2003 and 2002.

HELD-TO- MATURITY SECURITIES PORTFOLIO
(at carrying value, in thousands of dollars)

	Year ended December 31,
	2004		2003		2002
U.S. government guaranteed obligations	$	178,869	$	227,911	$	275,383
State or local housing agency obligations		7,825		8,890		9,825
		186,694		236,801		285,208
Mortgage-backed securities
U.S. government guaranteed obligations		94,691		170,190		372,856
Government-sponsored enterprises		5,307,058		4,842,233		3,546,690
Other		1,675,890		1,761,301		1,848,871
		7,077,639		6,773,724		5,768,417
Total carrying value	$	7,264,333	$	7,010,525	$	6,053,625

The following table presents supplemental information regarding the maturities and yields of the Bank’s held-to-maturity securities as of December 31, 2004. Maturities are based on the contractual maturities of the securities.

HELD-TO- MATURITY SECURITIES
MATURITIES AND YIELD
(in thousands of dollars)

	Book Value		Yield
U.S. government guaranteed obligations
After one year through five years	$	60,215		2.51	%
After five years through ten years		11,198		4.48
After ten years		107,456		2.72
	$	178,869		2.76	%
State or local housing agency obligations
After ten years	$	7,825		2.29	%
	$	7,825		2.29	%
Mortgage-backed securities
Within one year	$	4		8.32	%
After one year through five years		469,197		6.20
After five years through ten years		61,741		5.37
After ten years		6,546,697		2.97
	$	7,077,639		3.21	%

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The following table summarizes the Bank’s available-for-sale securities at December 31, 2004, 2003 and 2002.

AVAILABLE-FOR-SALE SECURITIES PORTFOLIO
(at carrying value, in thousands of dollars)

	Year ended December 31,
	2004		2003		2002
U.S. government guaranteed obligations	$	81,115	$	85,958	$	90,822
Government-sponsored enterprises		4,487,350		4,512,271		4,075,034
Other FHLBanks’ bonds(1)		52,479		54,202		102,174
		4,620,944		4,652,431		4,268,030
Mortgage-backed securities
Government-sponsored enterprises		904,562		1,019,345		1,207,420
Other		260,086		278,810		289,095
		1,164,648		1,298,155		1,496,515
Total carrying value	$	5,785,592	$	5,950,586	$	5,764,545

⁽¹⁾   Represents consolidated obligations acquired in the secondary market for which one or more other FHLBanks are the primary obligors, and for which the Bank is jointly and severally liable.

The following table presents supplemental information regarding the maturities and yields of the Bank’s available-for-sale securities as of December 31, 2004. Maturities are based on the contractual maturities of the securities.

AVAILABLE-FOR-SALE SECURITIES
MATURITIES AND YIELD
(in thousands of dollars)

	Book Value		Yield
U.S. government guaranteed obligations
Within one year	$	51,355		8.81	%
After ten years		29,760		7.44
	$	81,115		8.31	%
Government-sponsored enterprises
After one year through five years	$	41,170		6.15	%
After five years through ten years		2,769,459		4.71
After ten years		1,676,721		6.36
	$	4,487,350		5.34	%
Other FHLBanks’ bonds
Within one year	$	8,080		11.84	%
After one year through five years		44,399		6.36
	$	52,479		7.20	%
Mortgage-backed securities
Within one year	$	8,150		6.60	%
After one year through five years		1,049,758		6.40
After ten years		106,740		6.75
	$	1,164,648		6.43	%

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The following table summarizes the Bank’s trading securities at December 31, 2004, 2003 and 2002.

TRADING SECURITIES PORTFOLIO
(at carrying value, in thousands of dollars)

	Year ended December 31,
	2004		2003		2002
Government-sponsored enterprises	$	—	$	—	$	29,703
Other FHLBanks’ bonds(1)		—		24,234		34,850
		—		24,234		64,553
Mortgage-backed securities
Government-sponsored enterprises		76,976		117,076		235,018
Other mortgage-backed securities		—		854		26,713
		76,976		117,930		261,731
Other		1,607		—		—
Total carrying value	$	78,583	$	142,164	$	326,284

⁽¹⁾   Represents consolidated obligations acquired in the secondary market for which one or more other FHLBanks are the primary obligors, and for which the Bank is jointly and severally liable.

The following table presents supplemental information regarding the maturities and yields of the Bank’s trading securities as of December 31, 2004. Maturities are based on the contractual maturities of the securities.

TRADING SECURITIES
MATURITIES AND YIELD
(in thousands of dollars)

	Book Value		Yield
Other
Within one year	$	1,607		1.53	%
	$	1,607		1.53	%
Mortgage-backed securities
After one year through five years	$	74,413		12.26	%
After five years through ten years		2,563		19.64
	$	76,976		12.51	%

The Bank held mortgage-backed securities issued by Countrywide Home Loans with both a book value and market value of $338 million at December 31, 2004. U.S. Government and government-sponsored agencies were the only remaining issuers whose securities exceeded ten percent of the Bank’s total capital at December 31, 2004.

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Loan Portfolio Analysis

The Bank’s outstanding loans, nonaccrual loans, and loans 90 days or more past due and accruing interest for each of the five years in the period ended December 31, 2004 were as follows:

COMPOSITION OF LOANS
(In thousands of dollars)

	Year ended December 31,
	2004		2003		2002		2001		2000
Advances	$	47,111,154	$	40,595,029	$	36,869,652	$	32,490,541	$	30,194,459
Real estate mortgages	$	706,203	$	971,500	$	1,395,913	$	1,438,472	$	1,382,493
Nonperforming real estate mortgages	$	938	$	1,133	$	796	$	48	$	3
Real estate mortgages past due 90 days or more and still accruing interest(1)	$	11,510	$	19,975	$	17,020	$	28,840	$	12,991
Interest contractually due during the year on nonaccrual loans	$	66
Interest actually received during the year on nonaccrual loans	$	25

⁽¹⁾   Only government guaranteed loans continue to accrue interest after they become ninety days past due.

Allowance for Credit Losses

Activity in the allowance for credit losses for each of the five years in the period ended December 31, 2004 is presented below. All activity relates to domestic real estate loans.

ALLOWANCE FOR CREDIT LOSSES
(In thousands of dollars)

	2004			2003			2002		2001		2000
Balance, beginning of year	$	387		$	437		$	311	$	17	$	2
Chargeoffs		(6	)		(23	)		—		—		—
Provision (reduction) for credit losses		(26	)		(27	)		126		294		15
Balance, end of year	$	355		$	387		$	437	$	311	$	17

Geographic Concentration of Mortgage Loans

The following table presents the geographic concentration of the Bank’s mortgage loan portfolio as of December 31, 2004.

     GEOGRAPHIC CONCENTRATION OF MORTGAGE LOANS

Midwest (IA, IL, IN, MI, MN, ND, NE, OH, SD, and WI)	12.1	%
Northeast (CT, DE, MA, ME, NH, NJ, NY, PA, PR, RI, VI, and VT)	1.6
Southeast (AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, and WV)	15.1
Southwest (AR, AZ, CO, KS, LA, MO, NM, OK, TX, and UT)	67.9
West (AK, CA, GU, HI, ID, MT, NV, OR, WA, and WY)	3.3
	100.0	%

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Deposits

Time deposits in denominations of $100,000 or more totaled $282.9 million at December 31, 2004. These deposits mature as follows: $276.4 million in less than three months, $6.4 million in three to six months and the remaining $0.1 million in six to twelve months.

Short-term Borrowings

Borrowings with original maturities of one year or less are classified as short-term. Supplemental information regarding the Bank’s short-term borrowings for the three years ended December 31, 2004, 2003, and 2002 is provided in the following table. All short-term borrowings during these periods were discount notes.

SHORT-TERM BORROWINGS
(In millions of dollars)

	December 31,
	2004			2003			2002
Outstanding at year end	$	7,085		$	11,627		$	12,873
Weighted average rate at year end		2.15	%		1.10	%		1.43	%
Daily average outstanding for the year	$	8,548		$	10,349		$	9,018
Weighted average rate for the year		1.38	%		1.19	%		1.73	%
Maximum outstanding at any month end	$	12,576		$	14,413		$	12,873

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Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As a financial intermediary, the Bank is subject to interest rate risk. Changes in the level of interest rates, the slope of the interest rate yield curve, or in the relationships (or spreads) between interest yields for different instruments have an impact on the Bank’s market value of equity and its net earnings. This risk arises from a variety of instruments that the Bank enters into on a regular basis in the normal course of its business.

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

The Bank has investments in MBS and MPF mortgage loans, both of which present prepayment risk. This risk arises from the uncertainty of when the mortgagees will repay their mortgages, making these mortgage-based assets sensitive to changes in interest rates. A decline in interest rates generally results in accelerated prepayment activity, shortening the effective maturity of the assets. Conversely, rising rates generally slow prepayment activity and lengthen an asset’s effective maturity.

The prepayment risk embedded in these mortgage assets is managed by purchasing highly structured tranches of mortgage securities that limit the effects of prepayment risk, by purchasing floating rate securities, by using interest rate derivative instruments to offset prepayment risk specific both to particular securities and the mortgage portfolio, and by purchasing options through callable debt issued to fund the mortgage loans.

The Bank utilizes risk measurements to monitor these risks. The Bank has made a substantial investment in sophisticated financial modeling systems to measure and analyze interest rate risk. These systems enable the Bank to routinely and formally measure its market value of equity and income sensitivity profiles under numerous interest rate scenarios, including scenarios of significant market stress. Management regularly monitors this information and provides the Bank’s Board of Directors with risk measurement reports. The Bank develops and implements funding and hedging strategies based on these periodic assessments.

The Bank’s Risk Management Policy provides a risk management framework for the financial management of the Bank consistent with the strategic principles outlined in its Strategic Business Plan. The Risk Management Policy restricts the amount of overall interest rate risk the Bank may assume by limiting the maximum estimated loss in market value of equity that the Bank would incur under simulated 200 basis point changes in interest rates to 15 percent. The Bank develops its funding and hedging strategies to ensure compliance with these risk limits.

Business Objectives

The Bank serves as a financial intermediary between the capital markets and its members. In its most basic form, this intermediation process involves raising funds by issuing consolidated obligations in the capital markets and lending the proceeds to member institutions at slightly higher rates. The interest spread between the cost of the Bank’s liabilities and the yield on its assets is the Bank’s primary source of earnings. The Bank’s goal is to manage its assets and liabilities in such a way that its aggregate interest spread is consistent across a wide range of interest rate environments.

The objective of maintaining a stable interest spread is complicated by the fact that the intermediation process outlined above cannot be executed for all of the Bank’s assets and liabilities on an individual basis. In the course of a typical business day, the Bank continuously offers a wide range of fixed and floating rate advances with maturities ranging from overnight to 30 years that members can borrow in amounts that meet their specific funding needs at any given point in time. At the same time, the Bank issues consolidated obligations on a continual basis to investors who have their own set of investment objectives and preferences for the terms and maturities of securities that they are willing to purchase.

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Since it is not possible to consistently issue debt simultaneously with the issuance of an advance to a member in the same amount and with the same terms as the advance, or to predict ahead of time what types of advances members might want or what types of consolidated obligations investors might be willing to buy on any particular day, the Bank must have a ready supply of funds on hand at all times to meet member advance demand.

In order to have a ready supply of funds, the Bank typically issues debt as opportunities arise in the market, and makes the proceeds of those debt issuances (many of which bear fixed interest rates) available for members to borrow in the form of advances. Holding fixed rate liabilities in anticipation of member borrowing subjects the Bank to interest rate risk, however, and there is no assurance in any event that members will borrow from the Bank in quantities or maturities that will match these warehoused liabilities. Therefore, in order to intermediate the mismatches between advances with a wide range of terms on the one hand, and consolidated obligations with an equally wide range of terms on the other, the Bank typically converts both assets and liabilities to a LIBOR floating rate index, and attempts to manage the interest spread between the pools of floating rate assets and liabilities.

This process of intermediating the timing, structure, and amount of Bank members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements. The Bank’s general practice is, as often as practical, to contemporaneously execute interest rate exchange agreements when acquiring assets and/or issuing liabilities in order to convert the cash flows to LIBOR floating rates. Doing so reduces the Bank’s interest rate risk exposure, which allows it to preserve the value of, and earn more stable returns on, members’ capital investment.

However, in the normal course of business, the Bank also acquires assets with structural characteristics that reduce the Bank’s ability to enter into interest rate exchange agreements having mirror image terms. These assets include small fixed rate, fixed term advances, fixed schedule amortizing advances and mortgage-related assets. These assets require the Bank to employ risk management strategies in which the Bank hedges against aggregated risks. The Bank may use fixed rate, callable or non-callable debt or interest rate exchange agreements to manage these aggregated risks.

Interest Rate Risk Measurement

As discussed above, the Bank measures and manages market risk by adhering to limitations on estimated market value of equity losses under 200 basis point interest rate shock scenarios. The Risk Management Policy restricts the amount of overall interest rate risk the Bank may assume by limiting the maximum estimated loss in market value of equity that the Bank would incur under simulated 200 basis point changes in interest rates to 15 percent. This limitation was adopted concurrently with the Bank’s conversion to its new capital structure in September 2003. Since that time, the Bank has been in compliance with this limit at all times.

The base case market value of equity is calculated by determining the estimated fair value of each instrument on the Bank’s balance sheet, and subtracting the estimated aggregate fair value of the Bank’s liabilities from the estimated aggregate fair value of the Bank’s assets. For purposes of these calculations, mandatorily redeemable capital stock is treated as equity rather than as a liability. The fair values of the Bank’s financial instruments (both assets and liabilities) are calculated based on current market conditions, and are generally determined by discounting estimated future cash flows at the replacement (or similar) rate for new instruments of the same type with the same or very similar characteristics. The market value of equity calculations include non-financial assets and liabilities, such as premises and equipment, other assets, payables for AHP and REFCORP, and other liabilities at their recorded carrying amounts.

For purposes of compliance with the Bank’s Risk Management Policy limit on estimated losses in market value, market value of equity losses are defined as the estimated net sensitivity of the value of the Bank’s equity (the net value of its portfolio of assets, liabilities and interest rate derivatives) to 200 basis point parallel shifts in interest rates. In addition, the Bank routinely performs projections of its future earnings over a rolling horizon that includes the current year and at least the next two calendar years under a variety of interest rate and business environments.

Between December 2003 and March 31, 2005, under scenarios that estimate the market value of equity under down 200 basis point interest rate shocks, the percentage increase in the estimated market value of equity from the base case has ranged from 2.52 percent to 7.19 percent. Under scenarios that estimate the market value of equity under up 200 basis point interest rate shocks, the percentage decrease in the estimated market value of equity from the base

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case has ranged from 5.99 percent to 8.92 percent. The following table provides the Bank’s estimated base case market value of equity and its estimated market value of equity under up and down 200 basis point interest rate shock scenarios (and, for comparative purposes, its estimated market value of equity under up and down 100 basis point interest rate shock scenarios) for each month during the period from December 2003 to March 2005. In addition, the table provides the percentage change in estimated market value of equity under each of these shock scenarios for the indicated periods.

MARKET VALUE OF EQUITY
(dollars in billions)

			Up 200 Basis Points			Down 200 Basis Points			Up 100 Basis Points			Down 100 Basis Points
	Base Case		Estimated		Percentage	Estimated		Percentage	Estimated		Percentage	Estimated		Percentage
	Market		Market		Change	Market		Change	Market		Change	Market		Change
	Value		Value		from	Value		from	Value		from	Value		from
	of Equity		of Equity		Base Case	of Equity		Base Case	of Equity		Base Case	of Equity		Base Case
December 2003	$	2.819	$	2.590	-8.12%	$	3.011	6.81%	$	2.721	-3.48%	$	2.867	1.70%
January 2004		2.767		2.528	-8.64%		2.966	7.19%		2.663	-3.76%		2.829	2.24%
February 2004		2.887		2.656	-8.00%		3.047	5.54%		2.786	-3.50%		2.939	1.80%
March 2004		2.964		2.760	-6.88%		3.136	5.80%		2.876	-2.97%		2.998	1.15%
April 2004		2.812		2.583	-8.14%		2.978	5.90%		2.713	-3.52%		2.871	2.10%
May 2004		2.891		2.633	-8.92%		3.064	5.98%		2.774	-4.05%		2.970	2.73%
June 2004		2.954		2.715	-8.09%		3.108	5.21%		2.849	-3.55%		3.035	2.74%
July 2004		2.843		2.609	-8.23%		2.983	4.92%		2.740	-3.62%		2.918	2.64%
August 2004		2.954		2.725	-7.75%		3.103	5.04%		2.853	-3.42%		3.033	2.67%
September 2004		3.027		2.831	-6.48%		3.144	3.87%		2.941	-2.84%		3.090	2.08%
October 2004		2.975		2.788	-6.29%		3.083	3.63%		2.893	-2.76%		3.036	2.05%
November 2004		3.022		2.814	-6.88%		3.136	3.77%		2.932	-2.98%		3.086	2.12%
December 2004		3.058		2.862	-6.42%		3.156	3.21%		2.974	-2.75%		3.117	1.93%
January 2005		3.039		2.857	-5.99%		3.120	2.67%		2.962	-2.53%		3.090	1.69%
February 2005		3.087		2.895	-6.22%		3.169	2.66%		3.007	-2.61%		3.139	1.68%
March 2005		3.136		2.937	-6.35%		3.215	2.52%		3.053	-2.66%		3.187	1.63%

In the up 100 and up 200 scenarios, the estimated market value of equity is calculated under assumed instantaneous + 100 and + 200 basis points parallel shifts in interest rates. In the down 100 and down 200 simulations, market value of equity is calculated under the assumption that interest rates instantaneously decline by 100 and 200 basis points, respectively, subject to a floor of 0.35 percent and other proportional adjustments.

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

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

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

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combined durations of the Bank’s assets and the combined durations of its liabilities is sometimes referred to as duration gap and provides a measure of the relative interest rate sensitivities of the Bank’s assets and liabilities.

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

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

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

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

Prior to the implementation of its new capital structure in September 2003, the Bank was required to comply with interest rate risk limits in a Financial Management Policy adopted and promulgated by the Finance Board. The Financial Management Policy included restrictions on the Bank’s interest rate risk that limited the Bank’s duration of equity in the base case to a positive or negative five years, and limited the duration of equity in plus or minus 200 basis point interest rate shock scenarios to a positive or negative seven years. The Bank was in compliance with these limits at all times they were in effect prior to the implementation of its new capital structure. The following table provides information regarding the Bank’s base case duration of equity as well as its duration of equity in up and down 100 and 200 basis point interest rate shock scenarios for each month during the period from December 2003 through March 2005.

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DURATION ANALYSIS
(Expressed in Years)

	Base Case Interest Rates
	Asset		Liability			Duration		Duration		Duration of Equity
	Duration		Duration			Gap		of Equity		Up 100		Up 200		Down 100		Down 200
December 2003		0.67		(0.56	)		0.11		2.69		4.07		5.13		2.10		0.52
January 2004		0.69		(0.56	)		0.13		3.05		4.32		5.33		1.64		0.79
February 2004		0.65		(0.53	)		0.12		2.90		4.09		5.09		1.23		0.10
March 2004		0.63		(0.54	)		0.09		2.37		3.47		4.31		0.76		(0.36	)
April 2004		0.61		(0.51	)		0.11		2.51		4.08		4.86		1.78		0.57
May 2004		0.63		(0.49	)		0.14		3.35		4.52		5.29		3.45		1.48
June 2004		0.61		(0.49	)		0.12		3.01		4.20		5.02		2.09		1.25
July 2004		0.60		(0.48	)		0.12		2.93		4.13		5.05		2.04		1.04
August 2004		0.58		(0.46	)		0.12		2.94		3.93		4.90		1.96		0.76
September 2004		0.57		(0.48	)		0.09		2.39		3.25		4.08		1.55		0.39
October 2004		0.56		(0.47	)		0.09		2.30		3.14		3.96		1.53		0.28
November 2004		0.53		(0.44	)		0.09		2.49		3.49		4.47		1.74		0.74
December 2004		0.54		(0.45	)		0.09		2.28		3.21		4.16		1.51		0.68
January 2005		0.51		(0.43	)		0.08		2.09		3.10		4.15		1.31		0.79
February 2005		0.50		(0.42	)		0.08		2.12		3.20		4.32		1.29		0.85
March 2005		0.48		(0.40	)		0.08		2.09		3.28		4.44		1.22		0.74

In the up 100 and up 200 scenarios, the duration of equity is calculated under assumed instantaneous +100 and + 200 basis points parallel shifts in interest rates. In the down 100 and down 200 simulations, duration of equity is calculated under the assumption that interest rates instantaneously decline by 100 or 200 basis points, respectively, subject to a floor of 0.35 percent and other proportional adjustments.

Interest Rate Risk Components

The Bank manages the interest rate risk of a significant percentage of its assets and liabilities on a transactional basis. Using interest rate exchange agreements, the Bank pays (in the case of an asset) or receives (in the case of a liability) a coupon that is identical or nearly identical to the balance sheet item, and receives or pays, respectively, a floating rate typically indexed to LIBOR in return. The combination of the interest rate exchange agreement with the balance sheet item has the effect of reducing the duration of the asset or liability to the term to maturity of the LIBOR index, which is typically either one month or three months. After converting the assets and liabilities to LIBOR, the Bank can then focus on managing the spread between the assets and liabilities while remaining relatively insensitive to overall movements in market interest rates. The mismatch between the average time to repricing of the assets and the liabilities converted to floating rates in this manner can, however, cause the Bank’s duration of equity to fluctuate by as much as 0.50 years from month to month.

In the normal course of business, the Bank also acquires assets whose structural characteristics and/or size limit the Bank’s ability to enter into interest rate exchange agreements having mirror image cash flows. These assets include fixed rate, fixed-schedule, amortizing advances and mortgage-related assets. The Bank manages the interest rate risk of these assets by issuing non-callable and callable liabilities, and by entering into interest rate exchange agreements that are not designated against specific assets or liabilities for accounting purposes (stand-alone derivatives). These hedging transactions serve to preserve the value of the asset and minimize the impact of changes in interest rates on the spread between the asset and liability due to maturity mismatches.

In the normal course of business, the Bank may issue fixed rate advances in relatively small blocks (e.g., $1.0 - $5.0 million) that are too small to efficiently hedge on an individual basis. These advances may require repayment of the entire principal at maturity or may have fixed amortization schedules that require repayment of portions of the original principal each month or at other specified intervals over their term. This activity tends to extend the Bank’s duration of equity. To hedge this risk, the Bank periodically evaluates the volume of such advances and issues a

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corresponding amount of fixed rate debt with similar maturities or enters into interest rate swaps to offset the interest rate risk created by the pool of fixed rate assets.

As of March 31, 2005, the Bank also holds approximately $6.3 billion of floating rate CMOs that reset monthly in accordance with one month LIBOR, but that contain terms that will cap their interest rates at levels predominantly between 7.0 and 8.0 percent. To offset the potential risk that the coupon on these securities might hit their caps at some point in the future, the Bank has purchased a total of $3.9 billion of stand-alone interest rate caps with strike rates of 7.0, 7.5 and 8.0 percent and maturities ranging from 2006 to 2009. The Bank periodically evaluates the residual risk of the caps embedded in the CMOs and determines whether to purchase additional caps. During the years ended December 31, 2004, 2003 and 2002, the Bank purchased caps with notional balances totaling $1.2 billion, $1.0 billion and $500 million, respectively, which have strike rates of 7.0 percent, 8.0 percent and 8.0 percent, respectively. During the three months ended March 31, 2005, no stand-alone interest rate caps were purchased.

In addition, the Bank holds a portfolio of mortgage loans acquired through the MPF program which are funded with a combination of floating and fixed rate, callable and non-callable debt. In order to more fully hedge the prepayment risk associated with these loans and offset the fair value losses that would have occurred on these loans had interest rates fallen, the Bank previously held interest rate floors as described below.

From time to time, albeit very infrequently, as the risk being hedged by such derivative positions materializes, the Bank may terminate, liquidate, or restructure the instrument(s) hedging the risk. This was the case in 2002 as declining market interest rates accelerated prepayments on the Bank’s fixed rate mortgage portfolio, shortening the maturity of the portfolio relative to the fixed rate debt issued to fund the portfolio. To reduce the effects of replacing relatively higher yielding mortgage assets with lower yielding ones, the Bank terminated $350 million of interest rate floors. Simultaneous with the termination of the interest rate floor agreements, the Bank purchased a $500 million interest rate floor with a strike rate reflecting the prevailing lower level of market interest rates, reducing the Bank’s exposure to further declines in interest rates. Although market rates remained low subsequent to the Bank’s purchase of the $500 million floor agreement, mortgage loan prepayments were less than the Bank would have anticipated in the relatively low interest rate environment. Based on this evidence that its fixed rate mortgage portfolio had become relatively insensitive to declining interest rates, the Bank determined that the interest rate floor was no longer needed and the position was terminated in 2004.

In practice, management analyzes a variety of factors in order to assess the suitability of the Bank’s interest rate exposure within the established risk limits. These factors include current and projected market conditions, including possible changes in the level, shape, and volatility of the term structure of interest rates, possible changes to the composition of the Bank’s balance sheet, and possible changes in the delivery channels for the Bank’s assets, liabilities, and hedging instruments. These same variables are also included in the Bank’s income modeling processes. While management considered the Bank’s interest rate risk profile to be appropriate given market conditions during 2002, 2003, 2004 and the first three months of 2005, the Bank may adjust its exposure to market interest rates based on the results of its analyses of the impact of these conditions on future earnings.

As noted above, the Bank typically manages interest rate risk on a transaction by transaction basis as much as possible. To the extent that the Bank finds it necessary or appropriate to modify its interest rate risk position, it would normally do so through one or more cash or related interest rate derivative transactions, or a combination of both. For instance, if the Bank wished to shorten its duration of equity, it would typically do so by issuing additional fixed rate debt with maturities that correspond to the maturities of specific assets or pools of assets that have not previously been hedged. This same result might also be implemented by executing one or more interest rate swaps to convert specific assets from a fixed rate to a floating rate of interest. A similar approach would be taken if the Bank determined it was appropriate to extend rather than shorten its duration.

Counterparty Credit Risk

By entering into interest rate exchange agreements, the Bank generally converts a defined market risk to the risk that the counterparty will not be able to fulfill its obligation in the future. The Bank manages this credit risk by spreading its transactions among many highly rated counterparties, by entering into collateral exchange agreements with all counterparties that include minimum collateral thresholds based on credit ratings, and by monitoring its exposure to

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each counterparty at least monthly. In addition, all of the Bank’s collateral exchange agreements include master netting arrangements whereby the fair values of all interest rate derivatives with each counterparty are offset for purposes of determining credit exposure. The collateral exchange agreements require the delivery of collateral generally consisting of very liquid, highly rated asset types if maximum credit risk exposures rise above the minimum thresholds. The maximum credit risk exposure is the cost, on a present value basis, of replacing at current market rates all interest rate exchange agreements with a counterparty with whom the Bank is in a net gain position. In accordance with these agreements, the maximum unsecured credit exposure that the Bank would have to any counterparty rated below A₃ is $1 million.

As of March 31, 2005 and December 31, 2004 and 2003, the Bank had outstanding interest rate derivative contracts with 20, 20 and 21 different counterparties, respectively, all of which had long-term credit ratings of A₃ or higher. None of these counterparties are member institutions, and none were affiliated with a member prior to March 31, 2005. An affiliate of one of the Bank’s counterparties acquired a member institution on March 31, 2005. The Bank has continued to enter into interest rate exchange agreements with that counterparty in the normal course of business and under the same terms and conditions since that acquisition was completed.

A large percentage of the transactions, representing 93 percent, 92 percent and 89 percent, respectively, of the notional principal of the derivatives and 100 percent of the maximum credit exposure, were with counterparties having ratings of Aa₃ or higher. The Bank did not have any credit exposure to its interest rate derivative counterparties at March 31, 2005. As of December 31, 2004 and 2003, the Bank’s maximum credit exposure to its interest rate derivative counterparties was $16.8 million and $92.7 million, respectively. After taking into account $11.4 million of collateral held by the Bank and $5.4 million of collateral due but not yet received by the Bank, the maximum credit exposure was reduced to zero at December 31, 2004. At December 31, 2003, the Bank held $50.3 million of collateral and had rights to an additional $27.8 million of collateral which was not yet received, reducing the maximum credit exposure to $14.6 million. At December 31, 2003, the largest maximum credit exposure to a single counterparty after taking into account collateral held or due to the Bank was $10 million to a Aa-rated entity. All of the credit ratings referred to above were provided by Moody’s. The following table provides additional information regarding the Bank’s derivative counterparty credit exposure as of March 31, 2005 and December 31, 2004 and 2003.

DERIVATIVES COUNTERPARTY CREDIT EXPOSURE
(Dollars in millions)

Credit	Number of		Notional		Maximum Credit		Collateral		Collateral		Net Exposure
Rating(1)	Counterparties		Principal(2)		Exposure		Held		Due(3)		After Collateral
March 31, 2005
Aaa		1	$	2.7	$	—	$	—	$	—	$	—
Aa(4)		17		57,361.0		—		—		—		—
A		2		4,240.3		—		—		—		—
Total		20	$	61,604.0	$	—	$	—	$	—	$	—
December 31, 2004
Aaa		1	$	3.4	$	—	$	—	$	—	$	—
Aa		17		59,483.0		16.8		11.4		5.4		—
A		2		4,878.4		—		—		—		—
Total		20	$	64,364.8	$	16.8	$	11.4	$	5.4	$	—
December 31, 2003
Aaa		1	$	6.7	$	—	$	—	$	—	$	—
Aa		18		48,841.0		92.7		50.3		27.8		14.6
A		2		6,308.1		—		—		—		—
Total		21	$	55,155.8	$	92.7	$	50.3	$	27.8	$	14.6

(1)	Credit ratings provided by Moody’s.
(2)	Includes amounts that had not settled as of March 31, 2005 and December 31, 2004 and 2003.
(3)	Amount of collateral to which the Bank had contractual rights under counterparty credit agreements based on December 31, 2004 and 2003 credit exposures. Collateral valued at $4.8 million and $21.8 million was delivered under these agreements in January 2005 and January 2004, respectively.
(4)	The figures for Aa-rated counterparties as of March 31, 2005 include transactions with one counterparty that became affiliated with a member institution on that date. Transactions with that counterparty as of March 31, 2005 had an aggregate notional principal of $2.9 billion and represented no credit exposure to the Bank as of that date.

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ITEM 3. PROPERTIES

The Bank owns a 159,000 square foot office building located at 8500 Freeport Parkway South, Irving, Texas. The Bank occupies approximately 71,000 square feet of space in this building.

The Bank also maintains a leased off-site business resumption facility comprising approximately 18,000 square feet of space.

ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Bank has only one class of stock authorized and outstanding, Class B Capital Stock, $100 par value per share. The Bank is a cooperative and all of its outstanding capital stock is owned by its members or, in some cases, by former members or non-member institutions that have acquired stock by virtue of acquiring member institutions. All stockholders are financial institutions. No individual owns any of the Bank’s capital stock. As a condition of membership, members are required to maintain an investment in the capital stock of the Bank that is equal to a percentage of the member’s total assets, subject to minimum and maximum thresholds. Members are required to hold additional amounts of capital stock based upon an activity-based investment requirement. Financial institutions that cease to be members are required to continue to comply with the Bank’s activity-based investment requirement until such time that the activities giving rise to the requirement have been fully extinguished.

As provided by statute, the only voting rights conferred upon the Bank’s members is for the election of directors. In accordance with the FHLB Act and Finance Board regulations, members elect a majority of the Bank’s Board of Directors. The remaining directors are appointed by the Finance Board. Under the statute and regulations, each elective directorship is designated to one of the five states in the Bank’s district and a member is entitled to vote only for candidates for the state in which the member’s principal place of business is located. A member is entitled to cast, for each applicable directorship, one vote for each share of capital stock that the member is required to hold, subject to a statutory limitation. Under this limitation, the total number of votes that a member may cast is limited to the average number of shares of the Bank’s capital stock that were required to be held by all members in that state as of the record date for voting. Non-member stockholders are not entitled to cast votes for the election of directors.

As of May 31, 2005, there were 28,356,880 shares of the Bank’s capital stock (including mandatorily redeemable capital stock) outstanding. The following table sets forth certain information with respect to each member or non-member institution that beneficially owned more than 5% of the Bank’s outstanding capital stock as of May 31, 2005. Each stockholder has sole voting and investment power for all shares shown (subject to the restrictions described above), none of which represent shares with respect to which the stockholder has a right to acquire beneficial ownership.

Beneficial Owners of More than 5% of the Bank’s Outstanding Capital Stock

			Percentage of
	Number of Shares		Outstanding Shares
Name and Address of Beneficial Owner	Owned		Owned
World Savings Bank, FSB Texas 2085 Westheimer Road, Houston, TX 77098		5,101,898		17.99	%
Washington Mutual Bank (non-member) 400 East Main Street, Stockton, CA 95290		3,175,430		11.20	%
Guaranty Bank 8333 Douglas Avenue, Dallas, TX 75225		2,791,143		9.84	%

The Bank does not offer any type of compensation plan under which its equity securities are authorized to be issued to any person. Eleven of the Bank’s 19 directorships are held by elected directors who by law must be officers or directors of a member of the Bank. The following table sets forth, as of May 31, 2005, the number of shares owned beneficially by members that have one of their officers or directors serving as a director of the Bank and the name of the director of the Bank who is affiliated with each such member. Each stockholder has sole voting and investment

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power for all shares shown (subject to the restrictions described above), none of which represent shares with respect to which the stockholder has a right to acquire beneficial ownership.

Security Ownership of Directors’ Financial Institutions

	Bank Director	Number		Percentage of
	Affiliated with	of Shares		Outstanding Shares
Name and Address of Beneficial Owner	Beneficial Owner	Owned		Owned
Guaranty Bank 8333 Douglas Avenue, Dallas, TX 75225	Ronald D. Murff		2,791,143		9.84	%
Southside Bank 1201 South Beckham, Tyler, TX 75701	Lee R. Gibson		265,889		*
Charter Bank 1881 St. Michael’s Drive, Santa Fe, NM 87501	Robert Wertheim		201,180		*
Colonial Savings, F.A. 2600 West Freeway, Fort Worth, TX 76102	James E. DuBose		184,483		*
State-Investors Bank 1041 Veterans Boulevard, Metairie, LA 70005	Anthony S. Sciortino		18,193		*
Omnibank, N.A. 4328 Old Spanish Trail, Houston, TX 77021	Chesley N. Brooks, Jr.		16,735		*
Texas Bank and Trust Company 300 East Whaley, Longview, TX 75601	Howard R. Hackney		16,074		*
Pine Bluff National Bank 912 Poplar Street, Pine Bluff, AR 71601	Charles G. Morgan, Jr.		11,659		*
Planters Bank and Trust Company 212 Catchings Street, Indianola, MS 38751	James H. Clayton		10,559		*
American National Bank 2732 Midwestern Parkway, Wichita Falls, TX 76308	John B. Stahler		10,422		*
Citizens National Bank of Bossier City 2711 East Texas Street, Bossier City, LA 71171	Will C. Hubbard		9,386		*
First National Banker’s Bank 7813 Office Park Boulevard, Baton Rouge, LA 70809	Will C. Hubbard		7,630		*
All Directors’ Financial Institutions as a group			3,543,353		12.50	%

* Indicates less than one percent ownership.

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ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS

Directors

The Bank’s Board of Directors is comprised of 19 directorships. Eleven directors are elected by the Bank’s member institutions and eight directors are appointed by the Finance Board. Currently, three appointive directorships are vacant.

Each year the Finance Board designates the number of elective directorships for each state in the Bank’s district. The Finance Board allocates the elective directorships among the states in the Bank’s district as follows: (1) one elective directorship is allocated to each state; (2) if the total number of elective directorships allocated pursuant to clause (1) is less than eight, the Finance Board allocates additional elective directorships among the states using the method of equal proportions (which is the same equal proportions method used to apportion seats in the House of Representatives among states) until the total allocated for the Bank equals eight; (3) if the number of elective directorships allocated to any state pursuant to clauses (1) and (2) is less than the number that was allocated to that state on December 31, 1960, the Finance Board allocates such additional elective directorships to that state until the total allocated to that state equals the number allocated to that state on December 31, 1960; and (4) after consultation with the Bank, the Finance Board may approve additional discretionary elective directorships. The Finance Board’s annual designation of the Bank’s elective directorships for 2005 was as follows: Arkansas – 1; Louisiana – 2 (the grandfather provision in clause (3) of the preceding sentence guarantees Louisiana two of the elective directorships in the Bank’s district); Mississippi – 1; New Mexico – 1; and Texas – 6 (the number of elective directorships for Texas includes two discretionary elective directorships).

To be eligible to serve as an elected director, a candidate must be: (1) a citizen of the United States and (2) an officer or director of a member institution that is located in the represented state and that meets all of the minimum capital requirements established by its federal or state regulator. For purposes of election of directors, a member is deemed to be located in the state in which a member’s principal place of business is located as of December 31 of the calendar year immediately preceding the election year (“Record Date”). A member’s principal place of business is the state in which such member maintains its home office as established in conformity with the laws under which it is organized; provided, however, a member may request in writing to the FHLBank in the district where such member maintains its home office that a state other than the state in which it maintains its home office be designated as its principal place of business. Within 90 calendar days of receipt of such written request, the board of directors of the FHLBank in the district where the member maintains its home office shall designate a state other than the state where the member maintains its home office as the member’s principal place of business, provided all of the following criteria are satisfied: (a) at least 80 percent of such member’s accounting books, records, and ledgers are maintained, located or held in such designated state; (b) a majority of meetings of such member’s board of directors and constituent committees are conducted in such designated state; and (c) a majority of such member’s five highest paid officers have their place of employment located in such designated state.

Candidates for elective directorships are nominated by members located in the state to be represented by that particular directorship. In certain cases, it is possible for directors to be elected without a vote, such as when the number of nominees from a state is equal to or less than the number of directorships to be filled from that state. In that case, the Bank shall notify the members in the affected voting state in writing (in lieu of providing a ballot) that the directorships are to be filled without an election due to a lack of nominees.

For each directorship that is to be filled in an election, each member institution that is located in the state to be represented by the directorship is entitled to cast one vote for each share of capital stock that the member was required to hold as of the Record Date; provided, however, that the number of votes that any member may cast for any one directorship cannot exceed the average number of shares of capital stock that are required to be held as of the Record Date by all members located in the state to be represented. A member may not split its votes among multiple nominees for a single directorship, nor, where there are multiple directorships to be filled for a voting state, may it cumulatively vote for a single nominee. Any ballots cast in violation of these restrictions shall be void.

No shareholder meetings are held for the election of directors; the entire election process is conducted by mail. The Bank’s Board of Directors does not solicit proxies, nor are member institutions permitted to solicit or use proxies to cast their votes in an election. No director, officer, employee, attorney or agent of the Bank may, directly or

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indirectly, support the nomination or election of a particular individual for an elective directorship. In the event of a vacancy in any elective directorship, such vacancy is to be filled by an affirmative vote of a majority of the Bank’s remaining directors, regardless of whether such remaining directors constitute a quorum of the Bank’s Board of Directors. A director so elected shall satisfy the requirements for eligibility which were applicable to his predecessor.

To be eligible to serve as an appointed director, a person must be: (1) a citizen of the United States and (2) a resident in the Bank’s district. Additionally, an appointed director is prohibited from serving as an officer of any FHLBank or as a director or officer of a member of any FHLBank. Lastly, an appointed director is prohibited from holding shares or any other financial interest in a member of any FHLBank. By statute, at least two of the appointed directors must be representatives from organizations with more than a two-year history of representing consumer or community interests on banking services, credit needs, housing, or financial consumer protections. In the event of a vacancy in any appointive directorship, such vacancy is to be filled through appointment by the Finance Board for the unexpired term.

Directors serve three-year terms that commence on January 1 and end on December 31. Elected directors cannot serve more than three consecutive terms. There is no limit on the number of terms that an appointed director can serve.

The following table sets forth certain information regarding each of the Bank’s directors (ages are as of May 31, 2005):

			Director		Expiration of		Board
Name	Age		Since		Term as Director		Committees
Chesley N. Brooks, Jr., Chairman (Elected)		64		1998		2006	(a)(b)(c)(d)(e)(f)
Mary E. Ceverha, ActingVice Chairman (Appointed)		60		2004		2006	(a)(b)(c)(d)(e)(f)
Sarah S. Agee (Appointed)		59		2004		2006	(a)(d)
Bobby L. Chain (Appointed)		75		2004		2006	(b)(c)
James H. Clayton (Elective directorship)		53		2005		2007	(d)(e)
James E. DuBose (Elected)		48		2003		2006	(a)(e)
Lupe L. Garcia (Appointed)		58		2003		2005	(a)(d)(f)
Lee R. Gibson (Elected)		48		2002		2005	(b)(c)(f)
Howard R. Hackney (Elected)		65		2003		2005	(a)(b)
Will C. Hubbard (Elected)		58		2002		2005	(d)(e)(f)
Ike J. Monty (Appointed)		50		2003		2005	(d)(e)
Charles G. Morgan, Jr. (Elected)		43		2004		2006	(a)(e)
Ronald D. Murff (Elected)		51		2001		2005	(b)(c)(f)
Anthony S. Sciortino (Elected)		57		2003		2006	(c)(d)
John B. Stahler (Elected)		57		2001		2007	(a)(b)(f)
Robert Wertheim (Elected)		72		2002		2007	(c)(e)

(a)	Member of Risk Management Committee
(b)	Member of Audit Committee
(c)	Member of Human Resources Committee
(d)	Member of Government Relations Committee
(e)	Member of Affordable Housing and Economic Development Committee
(f)	Member of Executive Committee

Chesley N. Brooks, Jr. is Chairman of the Board of Directors of the Bank and has served in that capacity since February 2005. Mr. Brooks has served as Chairman and Chief Executive Officer of Omnibank, N.A., a member of the Bank, since 1978. He joined Omnibank (Houston, Texas) in 1974. From 1994 to 1999, Mr. Brooks served on the Board of Directors of the Texas Bankers Association (TBA). From 1998 to 1999, he served on the TBA’s Executive Committee and as Chairman of its Government Relations Council. He currently serves on the Federal Home Loan Bank Committee of the American Bankers Association, the Legislative Committee of the Independent Bankers Association of Texas, and on the Council of Federal Home Loan Banks. Mr. Brooks currently serves as Chairman of the Executive Committee of the Bank’s Board of Directors. Previously, he served as Chairman of the Government Relations Committee of the Bank’s Board of Directors.

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Mary E. Ceverha has served as Acting Vice Chairman of the Board of Directors of the Bank since January 2005. Ms. Ceverha is the founder and current president of Trinity Commons, Inc., a not-for-profit enterprise organized in 2001 to coordinate activities relating to the construction of the Trinity River Project in Dallas, Texas. Through January 2005, she also served as a director of the Trinity Commons Foundation, a not-for-profit entity that she founded in 2001. Currently, Ms. Ceverha serves on the Council of Federal Home Loan Banks, the Executive Committee of the Greater Dallas Planning Council and on the board of the President’s Council for the University of Texas Southwestern Medical Center, which raises funds for medical research. She is a former board member and president of Friends of Fair Park, a non-profit citizens group dedicated to the preservation of Fair Park, a national historic landmark in Dallas, Texas. From 1995 to 2004, she served on the Texas State Board of Health. Ms. Ceverha also serves as Acting Vice Chairman of the Executive Committee of the Bank’s Board of Directors.

Sarah S. Agee served as an elected representative in the Arkansas House of Representatives from 1999 to 2004. From 2001 to 2004, she served on the legislature’s State Agencies and Governmental Affairs Committee. In 2003 and 2004, Ms. Agee served as the committee’s chairman. Since January 1, 2005, Ms. Agee has served as a policy advisor to the governor of Arkansas and as his liaison to the state legislature. In addition, she operates a family farm and cattle-raising operation in Northwest Arkansas. Ms. Agee previously served on the Prairie Grove School Board and Prairie Grove Police Committee.

Bobby L. Chain is the founder, Chairman and Chief Executive Officer of Chain Electric Company, a multi-state commercial, industrial and utility contractor in Hattiesburg, Mississippi. He has served as Chairman and Chief Executive Officer since 1994. Prior to that, he served as President and Chief Executive Officer from the company’s inception in 1955 until 1994.

James H. Clayton serves as Chairman and Chief Executive Officer of Planters Bank and Trust Company in Indianola, Mississippi. Mr. Clayton joined Planters Bank and Trust Company, a member of the Bank, in 1976 and has served as Chairman and Chief Executive Officer since 2003. From 1984 to 2003, he served as President and Chief Executive Officer. Mr. Clayton also serves as a director of Planters Holding Company. Mr. Clayton previously served as a member of the Executive Committee of the Mississippi Bankers Association and is a past president of the Indianola Chamber of Commerce. He currently serves on the Government Relations Council of the American Bankers Association (ABA) and is a member of its BankPac Committee. In February 2005, Mr. Clayton was appointed by the Bank’s Board of Directors to fulfill the unexpired term of an elected director representing the state of Mississippi.

James E. DuBose has served as President of Colonial Savings, F.A., in Fort Worth, Texas since 1995. He joined Colonial Savings, a member of the Bank, in 1983. Mr. DuBose currently serves on the Board of Governors of the Mortgage Bankers Association of America.

Lupe L. Garcia is President of Garcia Tire, LLC, a retail tire center in Santa Cruz, New Mexico. Mr. Garcia has served as President of the company since 1980. He currently serves as Chairman of the Government Relations Committee of the Bank’s Board of Directors.

Lee R. Gibson serves as Executive Vice President and Chief Financial Officer of Southside Bank (a member of the Bank) and its publicly traded holding company, Southside Bancshares, Inc. (Tyler, Texas). He has served as Executive Vice President since 1990 and as Chief Financial Officer since 2000. Mr. Gibson also serves as a director of Southside Bank. Before joining Southside Bank in 1984, Mr. Gibson served as an auditor for Ernst & Young. Mr. Gibson currently serves on the Executive Board of the East Texas Area Council of Boy Scouts and as Chairman of the Human Resources Committee of the Bank’s Board of Directors. He is a Certified Public Accountant.

Howard R. Hackney is a director of Texas Bank and Trust Company in Longview, Texas (a member of the Bank). From 1995 until his retirement in May 2004, Mr. Hackney served as President of Texas Bank and Trust Company. Since May 2004, he has provided consulting services to Texas Bank and Trust Company. In May 2005, Mr. Hackney was appointed to serve on the board of directors of Martin Midstream GP LLC, the general partner of Martin Midstream Partners L.P., a publicly traded master limited partnership. He also serves on the board of directors of the Sabine Valley MHMR Foundation and as Co-Chairman of the East Texas Corridor Council. Mr.

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Hackney previously served on the board of directors of the Good Shepard Medical Center. He currently serves as Vice Chairman of the Bank’s Audit Committee.

Will C. Hubbard has served as President and Chief Executive Officer of Citizens National Bank of Bossier City, a member of the Bank, since 1990. Mr. Hubbard is a past president of the Louisiana Bankers Association and he currently serves on the board of directors of First National Banker’s Bank (“First National”) in Baton Rouge, Louisiana. First National is also a member of the Bank. Mr. Hubbard currently serves on the boards of directors of the Community Bankers of Louisiana and the Greater Bossier Economic Development Foundation. He also serves as Chairman of the Affordable Housing and Economic Development Committee of the Bank’s Board of Directors.

Ike J. Monty has served as President of Investment Builders, Inc., a privately owned housing development company in El Paso, Texas, since 1993. He currently serves as Vice Chairman of the Affordable Housing and Economic Development Committee of the Bank’s Board of Directors.

Charles G. Morgan Jr. serves as President and Chief Operating Officer of Pine Bluff National Bank in Pine Bluff, Arkansas. Mr. Morgan joined Pine Bluff National Bank, a member of the Bank, in 1987 and has served as President and Chief Operating Officer since February 2005. From 1997 to February 2005, he served as Executive Vice President. Mr. Morgan currently serves on the boards of directors of the Jefferson Hospital Association and the United Way of Southeast Arkansas and as Vice Chairman of the Economic Development Alliance of Jefferson County. He is a past chairman of the Greater Pine Bluff Chamber of Commerce. Mr. Morgan also serves as Vice Chairman of the Risk Management Committee of the Bank’s Board of Directors.

Ronald D. Murff is President of Guaranty Bank’s Retail Bank, a member of the Bank, and has served in that capacity since June 2001. From 1995 to June 2001, he served as Executive Vice President and Chief Financial Officer of Guaranty Bank and its parent company, Guaranty Financial Services. From 1987 through 1995, he served as Chief Financial Officer of Guaranty Bank. Before joining Guaranty in 1987, Mr. Murff served as Senior Vice President and Controller of Bright Bank and as a Senior Auditor for Peat, Marwick, Mitchell & Company. He currently serves on the boards of directors of the Baylor University Medical Center and Guidestone Financial Resources. He is a past board member of the Baylor University Alumni Association and the Lady Bird Johnson Wildflower Center. Mr. Murff, a Certified Public Accountant, serves as Chairman of the Bank’s Audit Committee.

Anthony S. Sciortino has served as a board member, President and Chief Executive Officer of State-Investors Bank in Metairie, Louisiana since 1985. He joined State-Investors Bank, a member of the Bank, in 1975. Mr. Sciortino currently serves on the boards of directors of the New Orleans Area Habitat for Humanity and the Better Business Bureau of Greater New Orleans, and is a past chairman and current board member of the Community Bankers of Louisiana. He also serves as Vice Chairman of the Government Relations Committee of the Bank’s Board of Directors. Mr. Sciortino previously served as a director of the Bank from 1990 to 1996.

John B. Stahler has served as a board member, President and Chief Executive Officer of American National Bank in Wichita Falls, Texas since 1979. He joined American National Bank (“ANB”), a member of the Bank, in 1976. Mr. Stahler also serves as a director and President of Ameribancshares, Inc., ANB’s privately held holding company. He is a past president of the Texas Bankers Association and has served on the ABA’s Government Relations Committee. Mr. Stahler currently serves on the ABA’s BankPac Committee and as Chairman of the Risk Management Committee of the Bank’s Board of Directors.

Robert Wertheim has served as Chairman and Chief Executive Officer of Charter Companies, Inc. since 1976 and as Chairman of its affiliates (Charter Bank, a member of the Bank, Charter Mortgage Company and Charter Insurance Services, Inc.) since 1986. Mr. Wertheim also served as President of Charter Companies, Inc. from 1976 until 2000 and as President and Chief Executive Officer of Charter Bank from 1986 to 2001. He also served as President and Chief Executive Officer of Charter Mortgage Company from 1986 to 1992 and as its Chief Executive Officer from 1992 until 2000. Previously, Mr. Wertheim served on the Board of Governors and Executive Committee of the Mortgage Bankers Association of America and on the Board of Directors of Presbyterian Healthcare Services. He currently serves on the National Advisory Board of the Anderson School of Management at the University of New Mexico and as Vice Chairman of the Human Resources Committee of the Bank’s Board of Directors. Mr. Wertheim is a Certified Mortgage Banker.

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Executive Officers

Set forth below is certain information regarding the Bank’s executive officers (ages are as of May 31, 2005). The executive officers serve at the discretion of, and are elected annually by, the Bank’s Board of Directors.

Name	Age		Position Held	Officer Since
Terry Smith		48	President and Chief Executive Officer		1986
Robert Brick		54	Senior Vice President and Chief Risk Officer		2004
Paul Joiner		52	Senior Vice President and Chief Strategy Officer		1986
Karen Krug		46	Senior Vice President, Chief Administrative Officer and Corporate Secretary		2002
Tom Lewis		42	Senior Vice President and Chief Accounting Officer		2003
Nancy Parker		52	Senior Vice President and Chief Information Officer		1994
Michael Sims		39	Senior Vice President, Chief Financial Officer and Treasurer		1998
Earl Willey		56	Vice President and Director of Internal Audit		2003

Terry Smith serves as President and Chief Executive Officer of the Bank and has served in such capacity since August 2000. Prior to that, he served as Executive Vice President and Chief Operating Officer of the Bank, responsible for the financial and risk management, credit and collateral, financial services, accounting, and information systems functions. Mr. Smith joined the Bank in 1986 to coordinate the hedging and asset/liability management functions, and was promoted to Chief Financial Officer in 1988. He served in that capacity until his appointment as Chief Operating Officer in 1991. Mr. Smith currently serves on the boards of directors of the Financial Institutions Retirement Fund and the FHLBanks’ Office of Finance. He also serves on the Council of Federal Home Loan Banks and as Chairman of the Audit Committee of the FHLBanks’ Office of Finance.

Robert Brick serves as Senior Vice President and Chief Risk Officer of the Bank. He joined the Bank in March 2004 as Vice President and Chief Risk Officer and was promoted to Senior Vice President in May 2005. In his capacity as Chief Risk Officer, Mr. Brick is responsible for the Bank’s risk management functions and regulatory compliance. Before joining the Bank, Mr. Brick served as Assistant Director of Operations for the Office of Thrift Supervision for over 14 years (from October 1989 to March 2004). At the Office of Thrift Supervision, he was responsible for the examination and regulatory supervision of federally insured thrifts in Texas, Oklahoma, Louisiana, Mississippi and Tennessee.

Paul Joiner serves as Senior Vice President and Chief Strategy Officer for the Bank. In this role, Mr. Joiner has responsibility for corporate planning and research, including market research and analysis. He joined the Bank in 1983 and served in various marketing and financial positions prior to his appointment as Director of Research and Planning in September 1999. Mr. Joiner served as a Vice President of the Bank from 1986 until 1993. In 1993, he was promoted to Senior Vice President. In February 2005, Mr. Joiner was appointed Chief Strategy Officer.

Karen Krug serves as Senior Vice President, Chief Administrative Officer and Corporate Secretary and has served in that capacity since August 2002. She has responsibility for corporate administration, including human resources, legal, government relations and corporate communications. In February 2005, Ms. Krug’s responsibilities were expanded to include community investment. She previously held various administrative positions with the Bank from 1983 through 1993. From 1997 to August 2002, Ms. Krug served as Director of Corporate Strategy & Communications and Assistant Corporate Secretary for Campbell-Ewald, a national advertising and communications firm.

Tom Lewis serves as Senior Vice President and Chief Accounting Officer of the Bank. He joined the Bank in January 2003 as Vice President and Controller and was promoted to Senior Vice President in April 2004 and to Chief Accounting Officer in February 2005. From May 2002 through December 2002, Mr. Lewis served as Senior Vice President and Chief Financial Officer for Trademark Property Company (“Trademark”), a privately held commercial real estate developer. Prior to joining Trademark, Mr. Lewis served as Senior Vice President, Chief Financial Officer and Controller for AMRESCO Capital Trust (“AMCT”), a publicly traded real estate investment trust, from February 2000 to May 2002. From the company’s inception in 1998 until February 2000, he served as Vice President and Controller of AMCT. Mr. Lewis is a Certified Public Accountant.

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Nancy Parker serves as Senior Vice President and Chief Information Officer of the Bank. Ms. Parker has served as Chief Information Officer since January 1999. In addition to information technology, Ms. Parker oversees banking operations, production support services, security, and property and facilities management. She joined the Bank in 1987 as a Senior Systems Analyst, and was promoted to Financial Systems Manager in 1991 and to Information Technology Director in 1993. Ms. Parker served as a Vice President of the Bank from 1994 to 1996. In 1996, she was promoted to Senior Vice President. In February 2005, Ms. Parker’s responsibilities were expanded to include banking operations.

Michael Sims serves as Senior Vice President, Chief Financial Officer and Treasurer of the Bank. Prior to his appointment as Chief Financial Officer in February 2005, Mr. Sims served as Treasurer of the Bank. Mr. Sims joined the Bank in 1989 and has served in various financial and asset/liability management positions during his tenure with the institution. Since November 1998, he has had overall responsibility for the Bank’s treasury operations. In February 2005, Mr. Sims’ responsibilities were expanded to include member sales. Mr. Sims served as a Vice President of the Bank from 1998 to 2001. In 2001, he was promoted to Senior Vice President.

Earl Willey serves as Vice President and Director of Internal Audit. Mr. Willey joined the Bank in April 2003. From August 1999 through March 2003, Mr. Willey served as Senior Vice President and Director of Internal Audit for Local Oklahoma Bank, N.A. Prior to joining Local Oklahoma Bank, he served briefly as Director of Internal Audit for the Federal Home Loan Bank of Topeka and as Operations Manager for Bank One, Oklahoma. Before that, Mr. Willey spent over 15 years as the Director of Internal Audit for Liberty Bank, N.A. Mr. Willey is a Certified Internal Auditor and Certified Information Systems Auditor.

Relationships

There are no family relationships among any of the Bank’s directors or executive officers. Except as described above, none of the Bank’s directors hold directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940. There are no arrangements or understandings between any director or executive officer and any other person pursuant to which that director or executive officer was selected.

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ITEM 6. EXECUTIVE COMPENSATION

The following table sets forth the compensation of the President/Chief Executive Officer and the next four highest paid executive officers of the Bank (the “named executive officers”) for the year ended December 31, 2004. The Bank does not provide any form of equity or long-term incentive compensation to its named executive officers.

	Annual Compensation
					All Other
Name and Principal Position	Salary ($)		Bonus ($)		Compensation ($)
Terry Smith, President/Chief Executive Officer		525,000		143,973		167,355	(1)
Nancy Parker, SVP/Chief Information Officer		220,000		71,102		60,511	(2)
Paul Joiner, SVP/Chief Strategy Officer		200,000		74,638		27,370	(3)
Karen Krug, SVP/Chief Administrative Officer		197,500		73,830		23,212	(4)
Michael Sims, SVP/Chief Financial Officer		197,500		63,830		34,010	(5)

(1)	Includes $133,788 of Bank contributions to qualified and non-qualified vested and unvested defined contribution plans, and $33,567 of payouts for unused vacation and sick leave.
(2)	Includes $39,189 of Bank contributions to qualified and non-qualified vested and unvested defined contribution plans, and $21,322 of payouts for unused vacation and sick leave.
(3)	Includes $23,375 of Bank contributions to qualified and non-qualified vested and unvested defined contribution plans, and $3,995 of payouts for unused sick leave.
(4)	Includes $15,616 of Bank contributions to qualified and non-qualified vested and unvested defined contribution plans, and $7,596 of payouts for unused vacation.
(5)	Includes $21,094 of Bank contributions to qualified and non-qualified vested and unvested defined contribution plans, and $12,916 of payouts for unused vacation and sick leave.

Pension Plan

The Bank participates in the Financial Institutions Retirement Fund (FIRF), a qualified multiemployer defined benefit pension plan. The following table reflects estimated annual benefits payable from the FIRF to the named executive officers upon retirement at age 65, calculated in accordance with the formula currently in effect for specified years-of-service.

	Years of Service
Officer	15		20		25		30		35
Terry Smith	$	92,250	$	115,825	$	136,325	$	156,825	$	156,825
Nancy Parker		92,250		113,775		134,275		154,775		154,775
Paul Joiner		92,250		121,975		142,475		162,975		162,975
Karen Krug		62,525		83,025		103,525		124,025		124,025
Michael Sims		89,175		109,675		130,175		150,675		150,675

• The pension plan is a qualified defined benefit plan and is therefore subject to the Internal Revenue Service (“IRS”) maximum compensation limit, which for 2004 was $205,000 per year. The regular form of retirement benefit is a straight-life annuity that includes a lump-sum death benefit. The normal retirement age is 65, but the plan provides for an unreduced retirement benefit beginning at age 60 (if hired prior to July 1, 2003) or age 62 (if hired on or after July 1, 2003). The Bank does not have a supplemental defined benefit plan that covers compensation in excess of the IRS maximum limit; accordingly, the above table reflects the estimated pension benefits payable to the named executive

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	officers based solely on the IRS compensation limit as the compensation of all named executive officers exceeded such limit.
•	Compensation covered by the plan includes taxable compensation as reported on the named executive officer’s W-2 (exclusive of any compensation deferred from a prior year) plus any pre-tax contributions to the Bank’s Section 401(k) plan and/or Section 125 cafeteria plan, subject to the 2004 IRS limitation of $205,000 per year. The benefit is computed as:
	Starting July 1, 2003 – 2 percent x years of service x high three-year average compensation (consecutive years)
	Prior to July 1, 2003 – 3 percent x years of service x high three-year average compensation (consecutive years)
	The estimated annual pension benefits set forth above for each named executive officer were calculated based upon the 2004 IRS compensation limit of $205,000 per year. From time to time, the IRS will increase the maximum compensation limit for qualified plans; future increases, if any, would be expected to increase the estimated annual benefits payable to the named executive officers. In 2005, the maximum compensation limit was increased to $210,000 per year.
•	The pension plan limits the maximum years of benefit service (both prior to July 1, 2003 and after July 1, 2003) to 30 years.
•	As of December 31, 2004, the credited years of service for the named executive officers were as follows:

Terry Smith	18 years
Nancy Parker	17 years
Paul Joiner	21 years
Karen Krug	2 years
Michael Sims	15 years

In addition to the above, Ms. Krug has 10 years of credited service relating to her previous employment with the Bank. Upon retirement at age 65, Ms. Krug will be entitled to receive $16,344 per year in addition to the amounts shown in the table above as a vested benefit relating to her previous service with the Bank.

Special Non-Qualified Deferred Compensation Plan

The named executive officers also participate in the Bank’s Special Non-Qualified Deferred Compensation Plan (“the Plan”), a defined contribution plan that was established in October 2004 primarily to provide supplemental retirement benefits to most of the Bank’s executive officers. Each participant’s benefit under the Plan consists of contributions made by the Bank on the participant’s behalf, plus an allocation of the investment gains or losses on the assets used to fund the Plan. Generally, benefits under the Plan vest when the participant reaches age 62, except for certain amounts contributed on the President/Chief Executive Officer’s behalf and the earnings thereon, which provide for earlier vesting as specified in the Plan. If the officer terminates employment or is removed from the Plan prior to vesting, all benefits under the Plan are forfeited. Contributions to the Plan are determined solely at the discretion of the Bank’s Board of Directors; the Bank has no obligation to make future contributions to the Plan. The ultimate benefit to the participant is based solely on the contributions made on his or her behalf and the earnings thereon; the Bank does not guaranty a specific benefit amount or investment return to any participant. In addition, the Bank has the right at any time to amend or terminate the Plan, or remove a participant from the Plan at its discretion, provided, however, that no amendment, modification or termination may reduce the then vested account balance of any participant. If, at retirement, a participant’s vested account balance is at least $25,000, the participant may elect to receive such amount in quarterly installments over a period of one to five years or in a single lump sum payment. If a participant’s vested account balance is less than $25,000 at retirement, a lump sum payment is required. As of December 31, 2004, the unvested balances of the named executive officers’ accounts were as follows:

Terry Smith	$106,061 (of which $57,717 vests in 2010)
Nancy Parker	$	28,480
Paul Joiner	$	12,048
Karen Krug	$	3,989
Michael Sims	$	9,791

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Compensation of Directors

In accordance with Finance Board regulations, the Bank has established a formal policy governing the compensation and travel reimbursement provided to its directors. Directors are compensated based solely on the number of meetings attended and the level of responsibility assumed. During the year ended December 31, 2004, the Bank had seven board meetings. Directors were entitled to receive the full amount of eligible compensation if they attended at least six of the seven board meetings. For 2004, the annual directors’ compensation limits were $27,405 for the Chairman of the Board, $21,924 for the Vice Chairman of the Board, and $16,443 for all other directors. Directors are also reimbursed for reasonable and necessary Bank-related travel expenses. During the year ended December 31, 2004, directors’ fees and Bank-related travel expenses totaled $315,000 and $225,000, respectively. Directors may defer any or all of their fees under the terms of a non-qualified deferred compensation plan.

Compensation Committee Interlocks and Insider Participation

During 2004, the Bank’s Human Resources Committee consisted of Lee R. Gibson (Chairman), Robert Wertheim (Vice Chairman), Patricia P. Brister, Chesley N. Brooks, Jr., Bobby L. Chain, Stephen G. French, Ronald D. Murff, A. Fred Miller, Jr., and Anthony S. Sciortino, none of whom was, prior to or during 2004, an officer or employee of the Bank. None of the Bank’s executive officers served as a member of the compensation committee (or similar committee) or board of directors of any entity whose executive officers served on the Bank’s Human Resources Committee or Board of Directors. None of such persons had any relationships requiring disclosure under applicable rules and regulations. Ms. Brister, Mr. French and Mr. Miller no longer serve on the Bank’s Board of Directors. Ms. Brister and Mr. French served as public interest directors while Mr. Miller was an elected industry director.

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Bank’s capital stock can only be held by members of the Bank, or by non-member institutions that acquire stock by virtue of acquiring member institutions and former members of the Bank that retain capital stock to support advances or other activity that remain outstanding or until any applicable stock redemption or withdrawal notice period expires. All members are required by law to purchase stock in the Bank. As a cooperative, the Bank’s products and services are provided almost exclusively to its stockholders. In the ordinary course of business, transactions between the Bank and its stockholders are carried out on terms which either are determined by competitive bidding in the case of auction deposits or are established by the Bank, including pricing and collateralization terms, under its Member Products and Credit Policy, which treats all similarly situated members on a non-discriminatory basis. The Bank provides, in the ordinary course of its business, products and services to members whose officers or directors may serve as directors of the Bank (“Directors’ Financial Institutions”). Currently, 11 of the Bank’s 16 directors are officers or directors of member institutions. The Bank’s products and services are provided to Directors’ Financial Institutions and to holders of more than 5% of the Bank’s capital stock on terms that are no more favorable to them than comparable transactions with other similarly situated members of the Bank.

Since January 1, 2002, the Bank has not engaged in any transactions with any of the Bank’s directors, executive officers, or any members of their immediate families that require disclosure under applicable rules and regulations. Additionally, since January 1, 2002, the Bank has not had any dealings with entities that are affiliated with its directors which require disclosure under applicable rules and regulations, except as described above. No director or executive officer of the Bank or any of their immediate family members has been indebted to the Bank at any time since January 1, 2002.

As of March 31, 2005 and December 31, 2004, advances outstanding to Directors’ Financial Institutions aggregated $5.638 billion and $6.028 billion, respectively, representing 12.2 percent and 12.8 percent, respectively, of the Bank’s total outstanding advances as of those dates. During the years ended December 31, 2003 and 2002, the Bank acquired (net of participation interests sold to the FHLBank of Chicago) approximately $173 million and $493 million, respectively, of mortgage loans from (or through) Directors’ Financial Institutions. These loans were either funded by the Bank through, or purchased from, the Directors’ Financial Institutions. The Bank did not acquire any mortgage loans from (or through) Directors’ Financial Institutions during the three months ended March 31, 2005 or the year ended December 31, 2004. The loan participations sold to the FHLBank of Chicago were transacted

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concurrent with the Bank’s purchase of the loans from the Directors’ Financial Institutions. The loan purchases and simultaneous participations were transacted at the same price.

ITEM 8. LEGAL PROCEEDINGS

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

ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Bank is a cooperative and all of its outstanding capital 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 former members that retain capital stock either to support advances or other activity that remains outstanding. All of the Bank’s stockholders are financial institutions; no individual owns 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 May 31, 2005, the Bank had 891 stockholders and 28,356,880 shares of capital stock outstanding.

The Bank is permitted by regulation to pay dividends only from current or previously retained earnings. Dividends may be paid in the form of cash or capital stock as authorized by the Bank’s Board of Directors. 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 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 average capital stock held by each of the Bank’s stockholders during the period from the last dividend payment date (which is generally the last business day of the preceding quarter) through the date immediately preceding the last business day of the current quarter. The following table sets forth certain information regarding the quarterly dividends that were declared and paid by the Bank during the three months ended March 31, 2005 and the years ended December 31, 2004 and 2003. All dividends were paid in the form of capital stock except for fractional shares, which were paid in cash.

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DIVIDENDS PAID
(dollars in thousands)

	2005					2004					2003
			Annualized					Annualized					Annualized
	Amount (1)		Rate(3)			Amount (2)		Rate(3)			Amount		Rate(3)
First Quarter	$	20,550		2.95	%	$	10,012		1.50	%	$	15,419		2.50	%
Second Quarter							10,131		1.50			16,147		2.50
Third Quarter							13,271		1.92			13,615		2.00
Fourth Quarter							17,190		2.44			13,559		2.00

⁽¹⁾ Amount includes (in thousands) $2,350 of dividends paid on mandatorily redeemable capital stock for the first quarter. For financial reporting purposes, these dividends were classified as interest expense.

⁽²⁾ Amounts include (in thousands) $1,481, $1,492, $1,664 and $2,006 of dividends paid on mandatorily redeemable capital stock for the first, second, third and fourth quarters, respectively. For financial reporting purposes, these dividends were classified as interest expense.

⁽³⁾ Reflects the annualized rate paid on all of the Bank’s average capital stock outstanding regardless of its classification for financial reporting purposes as either capital stock or mandatorily redeemable capital stock.

On February 27, 2004, the Bank’s Board of Directors adopted a retained earnings policy that is designed to build retained earnings over a number of years in order to protect the par value of members’ capital stock. With certain exceptions, the Bank’s policy calls for the Bank to retain earnings in line with its targets prior to determining the amount of funds available to pay dividends. Taking into consideration its retained earnings targets, the Bank currently expects to pay dividends in 2005 at approximately 25 to 50 basis points above the average federal funds rate for the year. Restrictions on the Bank’s ability to pay dividends are discussed further in Item 1 – Business, Item 2 — Financial Information, and Item 11 – Description of Registrant’s Securities to be Registered.

ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES

To be provided by amendment.

ITEM 11. DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED

Securities to be Registered

The Bank is registering its Class B Capital Stock, the terms of which are described below. The Bank has no other authorized classes of capital stock.

Historical Overview of the FHLBanks’ Capital Structure and Related Requirements

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 residential mortgage assets and its borrowing activity with the FHLBank pursuant to a statutory formula. Under that capital regime, the Bank’s capital stock was issued and redeemed only at its par value of $100 per share. The FHLB Act required members to hold capital stock equal to the greater of one percent of their mortgage-related assets or five percent of their outstanding advances. Members could, at the FHLBank’s discretion, redeem any capital stock in excess of the minimum stock purchase requirements at its par value of $100 per share. Generally, members could withdraw from membership and redeem their capital stock upon six months’ notice.

The GLB Act, enacted in 1999, 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. On January 30, 2001, as

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required by the GLB Act,the Finance Board published a final rule implementing the new capital structure for the FHLBanks. In accordance with the new capital regulations, the Bank submitted its proposed capital plan to the Finance Board on October 29, 2001 for review and approval. The Finance Board approved the Bank’s capital plan on June 12, 2002 and the Bank converted to its new capital structure on September 2, 2003.

Under the provisions of the GLB Act and the Finance Board’s final rule, each FHLBank may issue Class A stock or Class B stock, or both, to its members. Each FHLBank must maintain sufficient permanent capital to meet a new risk-based capital requirement, enough total capital to meet a new total capital requirement, and enough leverage capital to meet a new leverage capital requirement. For this purpose, permanent capital is defined as amounts paid for Class B stock (including mandatorily redeemable capital stock) plus retained earnings. Total capital is defined as the sum of permanent capital, the amounts paid in for Class A stock, the amount of any general allowance for losses, and the amount of other instruments identified in a FHLBank’s capital plan that the Finance Board has determined to be available to absorb losses incurred by such FHLBank. Leverage capital is computed by multiplying a FHLBank’s permanent capital by 1.5 and adding to that product all other components of total capital.

Under the terms of the GLB Act, Class A stock is redeemable with six months’ written notice by the member and counts toward a FHLBank’s total and leverage capital requirements. Class B stock is redeemable with five years’ written notice by the member, confers on its holders a pro rata ownership interest in the retained earnings of a FHLBank, counts as permanent capital toward a FHLBank’s risk-based and total capital requirements and has a 1.5 weighting toward the leverage capital requirement.

Prior to the implementation of its new capital plan on September 2, 2003, the Bank was subject to a Finance Board-imposed leverage limit that limited the Bank’s assets to 21 times its total capital. However, if the Bank’s non-mortgage asset ratio, as defined by Finance Board regulations, did not exceed 11 percent, the Bank’s assets could equal up to 25 times its total capital. The non-mortgage asset ratio was calculated as the percentage of the Bank’s total assets that remained after deducting advances, MPF loans, MBS, capital, and member deposits. The Bank remained within all regulatory leverage limits in effect prior to the implementation of its new capital plan and maintained its non-mortgage asset ratio below 11 percent.

Upon implementation of its new capital plan, the Bank became subject to the Finance Board’s new risk-based capital rules and other capital requirements. As more fully described in Item 2 – Financial Information, this regulatory framework requires each FHLBank that has implemented its new capital plan to maintain at all times permanent capital in an amount at least equal to its risk-based capital requirement, which is the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement. In addition, each FHLBank is also required to maintain total capital in an amount at least equal to 4.0 percent of its total assets, and leverage capital in an amount at least equal to 5.0 percent of its total assets. For reasons of safety and soundness, the Finance Board may require the Bank, or any other FHLBank that has already converted to its new capital structure, to maintain a greater amount of capital, and the Bank may voluntarily impose a higher capital level that may be changed from time to time. The Bank is required to submit monthly capital compliance reports to the Finance Board. At all times during the period from September 2, 2003 through March 31, 2005, the Bank was in compliance with the applicable capital requirements.

Registrant’s Capital Plan

The Bank’s new capital plan provides that it will issue only Class B Capital Stock. The Bank’s Class B Capital Stock has a par value of $100 per share and may be purchased, redeemed, repurchased and transferred only at its par value. Class B Capital Stock is issued and held in book-entry form only and is transferable only upon the written approval of the Bank, which it may withhold in its sole discretion.

Dividends

The Bank’s Board of Directors may declare dividends to be paid on Class B Capital Stock on a quarterly basis or otherwise as it determines in its discretion. Dividend payments may be made in the form of cash, additional shares of Class B Capital Stock, or a combination thereof as determined by the Board of Directors. 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

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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.

Each stockholder is entitled to receive dividends on all Class B Capital Stock held during the applicable period for the period of time that the stockholder owns the Class B Capital Stock. The amount of dividends to be paid is based on the average number of shares held by a stockholder during the applicable dividend period. A member that has provided a withdrawal notice, or whose membership is otherwise terminated, will continue to receive dividends on its Class B Capital Stock as long as the institution or its successor owns the Bank’s Class B Capital Stock.

In accordance with the FHLB Act and Finance Board regulations, dividends may only be paid from current net earnings or previously retained earnings. In accordance with the regulations, the Bank’s Board of Directors may not declare or pay a dividend if the Bank is not in compliance with its minimum capital requirements or if the Bank would fall below its minimum capital requirements as a result of the payment of the dividend. Moreover, no FHLBank may pay dividends to its stockholders if the principal and interest due on any consolidated obligations issued through the Office of Finance has not been paid in full or, under certain circumstances, if a FHLBank becomes a non-complying FHLBank under Finance Board regulations as a result of its inability to comply with regulatory liquidity requirements or to satisfy its current obligations.

Except as otherwise provided in the Bank’s capital plan, or by regulation or statute, the Board of Directors has sole discretion to determine the amount, form, frequency and timing of dividend payments. Dividends are non-cumulative with respect to any payment obligation.

Members’ Minimum Investment Requirements

Prior to September 2, 2003, all members were required to maintain an investment in the capital stock of the Bank equal to the greater of 1.0 percent of the member’s residential mortgage assets as of the previous December 31, 5.0 percent of all currently outstanding advances, or $500. Under the Bank’s new capital structure, members are required to maintain an investment in Class B Capital Stock equal to the sum of a membership investment requirement and an activity-based investment requirement.

The Bank’s capital plan establishes ranges for each of these investment requirements, and the Bank’s Board of Directors has the authority to adjust the membership and activity-based investment requirements periodically within those ranges to ensure the Bank remains adequately capitalized. Adjustments outside the ranges specified in the capital plan for membership and activity-based investment requirements require that an amendment to the capital plan be adopted by the Bank’s Board of Directors and approved by the Finance Board.

As of March 31, 2005, the membership investment requirement was 0.15 percent of each member’s total assets as of the preceding December 31, subject to a minimum of $1,000 and a maximum of $25 million. The activity-based investment requirement was 4.25 percent of outstanding advances, plus 4.25 percent of the outstanding principal balance of any MPF loans that are delivered pursuant to master commitments executed on or after September 2, 2003 and retained on the Bank’s balance sheet. Since all new MPF loans delivered by PFIs subsequent to the capital stock conversion fall under the new arrangement with the FHLBank of Chicago (see Item 1 – Business and Item 2 – Financial Information), the Bank has not retained any MPF loan balances that would be subject to the activity-based investment requirement and no member has been required to purchase capital stock to support MPF loans. Members must comply with the activity-based investment requirements for as long as the relevant advances or MPF loans remain outstanding.

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The ranges and investment requirements applicable under the Bank’s capital plan as of March 31, 2005 were as follows:

	Minimum			Current			Maximum
Investment Requirement	Amount			Amount			Amount
Membership Investment Requirement
Percent of each member’s total assets		0.05	%		0.15%	(1)		0.30	%
Maximum membership investment requirement	$10 million			$25 million			$50 million
Activity-Based Investment Requirement
Advances (percent of advances outstanding)		3.5	%		4.25	%		5.0	%
AMA (percent of outstanding principal balance of MPF loans delivered under master commitments executed after conversion to the new capital structure — or delivered under master commitments executed prior to the conversion that stipulate they will be subject to the new AMA investment requirements — and retained by the Bank). Since the conversion to the Bank’s capital plan on September 2, 2003, there have been no MPF loans that have met these criteria.		0.0	%		4.25	%		5.0	%

⁽¹⁾ Reduced to 0.14 percent effective April 18, 2005 as discussed below

The membership investment requirement contained in the Bank’s capital plan as it was originally approved was 0.25 percent of members’ total assets. Prior to the conversion to the new capital plan, the Bank’s Board of Directors reduced the membership investment requirement to 0.20 percent of members’ total assets. On February 27, 2004, the Bank’s Board of Directors approved a reduction in the membership investment requirement from 0.20 percent to 0.15 percent of each member’s total assets. This modification, which was within the original range of 0.15 percent to 0.30 percent established in the capital plan, became effective April 2, 2004. On June 24, 2004, the Board of Directors adopted an amendment to the capital plan that would reduce the lower end of the range for the membership investment requirement to 0.05 percent of members’ total assets. That amendment was approved by the Finance Board on February 9, 2005.

The Bank’s Board of Directors reviews the membership and activity-based investment requirements at least annually, and may review one or more of the requirements more often as it deems appropriate or necessary, and determines whether any adjustments within the allowable ranges are needed. On April 18, 2005, the Bank reduced the membership investment requirement from 0.15 percent to 0.14 percent of members’ total assets. The other components of members’ minimum investment requirements remain unchanged. Notice of any future changes will be provided to members at least 30 days prior to the effective date of the changes. Changes to the advances investment requirement may apply to new advances or, at the discretion of the Bank’s Board of Directors, to current and new advances. Any increase in the AMA investment requirement will apply only to AMA acquired pursuant to master commitments executed after the effective date of the change, or to AMA acquired pursuant to commitments executed prior to the change that explicitly stipulate that those AMA will be subject to any future changes in AMA investment requirements. Any decrease in the AMA investment requirement will apply to AMA loans delivered under future master commitments, or, at the discretion of the Bank’s Board of Directors, both to new AMA loans and to AMA loans delivered under previously executed master commitments. The AMA investment requirement applies only to applicable loans held by the Bank.

Each member is required to comply promptly with any adjusted minimum investment requirements established by the Bank’s Board of Directors. However, members will be allowed a reasonable period of time to comply, not to

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exceed 30 days from the effective date established by the Board of Directors for the change in the minimum investment requirement. Members may reduce their outstanding advances activity (subject to any prepayment fees applicable to the reduction in activity) as an alternative to purchasing additional Class B Capital Stock. To the extent members are required to purchase additional Class B Capital Stock, the Bank may issue such stock in the name of the member and correspondingly debit the member’s demand deposit account at the Bank. However, the Bank ultimately may not be able to compel a member to purchase additional Class B Capital Stock.

Redemption and Repurchase of Capital Stock

As required by statute and regulation, and subject to certain limitations and restrictions, the Bank’s members may request the Bank to redeem excess Class B Capital Stock, or withdraw from membership and request the Bank to redeem all outstanding capital stock, with five years’ written notice to the Bank. Members that withdraw from membership may not reapply for membership for five years. The regulations also allow the Bank, in its sole discretion, to repurchase members’ excess stock at any time without regard for the five-year notification period as long as the Bank continues to meet its regulatory capital requirements after it repurchases such stock.

Subject to the limitations described below, Class B Capital Stock will be redeemable for cash at par value with five years’ prior written notice provided by the member to the Bank. A member may request redemption of Class B Capital Stock by providing a written stock redemption notice to the Bank indicating the number of shares of Class B Capital Stock to be redeemed, or by submitting a membership withdrawal notice in accordance with the Bank’s capital plan. The five-year stock redemption notice period will commence upon receipt by the Bank of the written stock redemption or withdrawal notice.

The Bank is not obligated to redeem a member’s Class B Capital Stock other than in accordance with the terms of the Bank’s capital plan. The Bank may repurchase excess stock at any time in accordance with the capital plan, including Class B Capital Stock for which a stock redemption notice has been submitted.

Notice of Redemption

A member may request redemption of Class B Capital Stock by submitting five years’ written notice to the Bank. Only Class B Capital Stock that is excess stock (stock that is not needed to meet the member’s minimum investment requirement) at the expiration of the five-year redemption notice period (as determined in accordance with the minimum investment requirements in effect at the end of the redemption notice period) will be redeemed pursuant to a stock redemption notice. A stock redemption notice does not constitute a membership withdrawal notice.

At the expiration of the five-year period following receipt by the Bank of the stock redemption notice, and subject to the limitations on stock redemptions contained in the Bank’s capital plan, the Bank will pay the stated par value of the Class B Capital Stock covered by the stock redemption notice to the member in cash to the extent the Bank determines that the Class B Capital Stock is excess stock. If the amount of Class B Capital Stock subject to the stock redemption notice exceeds the amount of excess stock held by the member, the Bank will redeem Class B Capital Stock equal to the amount of excess stock held by the member, and the stock redemption notice for the remaining shares of Class B Capital Stock subject to that notice will be cancelled and a redemption cancellation fee will be assessed. Alternatively, within five business days of the expiration of the redemption notice period, the member may reduce its activity with the Bank (subject to any applicable prepayment fees) to reduce its minimum investment requirement and increase its holdings of excess stock which would then be eligible for redemption.

Redemption Cancellation Notice

A member that has previously notified the Bank in writing of its intent to redeem some or all of its Class B Capital Stock may cancel the stock redemption notice for all or a portion of the shares of Class B Capital Stock subject to the stock redemption notice prior to the expiration of the redemption notice period by providing a written redemption cancellation notice to the Bank. A member that cancels a stock redemption notice more than 30 days after it is received by the Bank and prior to its expiration will be subject to a redemption cancellation fee equal to a percentage of the par value of the shares of Class B Capital Stock subject to the redemption cancellation notice. The cancellation fee is 1.0 percent during the first year after the Bank receives the original stock redemption notice, and

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it increases by 1.0 percent in each of the succeeding years to a maximum of 5.0 percent in the fifth year following the original redemption notification.

Excess Stock Repurchases

The Bank in its sole discretion may repurchase excess stock without regard to the five-year redemption notice period. Excess stock repurchases may be initiated by the Bank or requested by members, and are subject to the limitations described below. The decision to repurchase excess stock rests exclusively with the Bank and cannot be compelled by a member.

Upon 15 days’ written notice, the Bank may initiate the repurchase of any amount of members’ excess stock. The Bank will determine the criteria for excess stock repurchases from time to time, and will apply the repurchase criteria equally and without discrimination to any member. In addition, pursuant to an application submitted by a member to the Bank in writing or in such other form as the Bank may designate, the Bank may repurchase Class B Capital Stock that it determines to be excess stock. A member’s submission of a membership withdrawal notice, or its termination of membership in any other manner, will not, in and of itself, cause any Class B Capital Stock to be deemed excess stock.

Following the implementation of its new capital structure, the Bank established a policy under which it periodically repurchases a portion of members’ excess capital stock. Under this policy, the Bank generally repurchases surplus stock on the last business day of the month following the end of each calendar quarter. Surplus stock is currently defined as the amount of stock held by a member in excess of 120 percent of the member’s minimum investment requirement. A member’s surplus stock will not be repurchased if the amount of surplus stock is $250,000 or less. From time to time, the Bank may modify the definition of surplus stock or the timing and/or frequency of surplus stock repurchases.

Limitations on Redemption or Repurchase of Capital Stock

The Bank will not redeem or repurchase Class B Capital Stock without the prior written approval of the Finance Board if the Finance Board or the Bank’s Board of Directors has determined that the Bank has incurred, or is likely to incur, losses that result in, or are likely to result in, charges against the capital of the Bank, as defined in the Finance Board’s regulations. Such a determination may be made by the Finance Board or the Board of Directors even if the Bank is in compliance with its minimum capital requirements.

The Bank will not redeem or repurchase Class B Capital Stock if the Bank is not in compliance with its minimum capital requirements or if the redemption or repurchase would cause the Bank to be out of compliance with its minimum capital requirements, or if the redemption or repurchase would cause the member to be out of compliance with its minimum investment requirement. In addition, the Bank’s Board of Directors may suspend redemption of Class B Capital Stock if the Bank reasonably believes that continued redemption of Class B Capital Stock would cause the Bank to fail to meet its minimum capital requirements in the future, would prevent the Bank from maintaining adequate capital against a potential risk that may not be adequately reflected in its minimum capital requirements, or would otherwise prevent the Bank from operating in a safe and sound manner.

The Bank will not repurchase any Class B Capital Stock without the written consent of the Finance Board during any period in which the Bank has suspended redemptions of Class B Capital Stock. The Bank is required to notify the Finance Board if it suspends redemptions of Class B Capital Stock and set forth its plan for addressing the conditions that led to the suspension. The Finance Board may require the Bank to reinstate redemptions of Class B Capital Stock.

If at any time the Bank determines that the total amount of Class B Capital Stock subject to outstanding stock redemption or withdrawal notices with expiration dates within the following 12 months exceeds the amount of Class B Capital Stock the Bank could redeem and still comply with its minimum capital requirements, the Bank will determine whether to suspend redemption and repurchase activities altogether, to fulfill requests for redemption sequentially in the order in which they were received, to fulfill the requests on a pro rata basis, or to take other action deemed appropriate by the Bank.

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The Bank may not redeem or repurchase shares of Class B Capital Stock if the principal and interest due on any consolidated obligations issued through the Office of Finance has not been paid in full or, under certain circumstances, if the Bank becomes a non-complying FHLBank under Finance Board regulations as a result of its inability to comply with regulatory liquidity requirements or to satisfy its current obligations.

Retirement of Capital Stock

All shares of Class B Capital Stock that are acquired by the Bank pursuant to redemption or repurchase transactions will be retired.

Forms of Membership Termination and/or Withdrawal

Membership in the Bank may be terminated through voluntary withdrawal, through involuntary termination by action of the Bank’s Board of Directors, through acquisition of a member by another member institution, through acquisition of a member by a non-member institution, or otherwise through dissolution of a member’s charter. Under existing law, an institution that has withdrawn from membership, or the membership of which has been terminated otherwise, will not be eligible to become a member of any FHLBank for at least five years following the date its membership was terminated and all of its shares of stock were redeemed or repurchased.

Voluntary Withdrawal

A member may withdraw from membership in the Bank by providing five years’ prior written notice to the Bank. During the five-year period following receipt by the Bank of the member’s withdrawal notice, the member will be entitled to all the benefits and will incur all the obligations of membership, including the obligation to comply with all minimum investment requirements throughout the five-year period. However, the Bank may limit any new advances or AMA to terms that would mature on or before the expiration of the withdrawal notice period. A withdrawal notice also constitutes a stock redemption notice for the amount of Class B Capital Stock held by the member at the time the Bank receives the withdrawal notice. If a member purchases or receives any Class B Capital Stock after the date of receipt of the withdrawal notice, the five-year redemption period for that stock shall commence on the date such shares are acquired or received.

The membership of an institution that has submitted a withdrawal notice will terminate at the expiration of the five-year period following receipt by the Bank of the withdrawal notice. At that time, if the withdrawing member has no outstanding advances or AMA that require maintenance of Class B Capital Stock, the Bank will redeem all of the outstanding Class B Capital Stock subject to the withdrawal notice. If the withdrawing member has outstanding advances or AMA that require maintenance of Class B Capital Stock, the Bank will redeem all the shares of Class B Capital Stock subject to the withdrawal notice, except those shares required to be held to comply with the activity-based investment requirement related to the remaining advances and AMA.

During the remaining term of advances or AMA outstanding after the termination of membership, the former member or its successor must continue to comply with any changes in the activity-based investment requirements related to the remaining advances or AMA. If the withdrawing member holds any Class B Capital Stock subject to a withdrawal notice that cannot be redeemed at the expiration of the withdrawal notice period because it is required to meet a continuing activity-based investment requirement, that stock will become redeemable when it is no longer needed to comply with an activity-based investment requirement.

As of the date on which the member’s voluntary withdrawal becomes effective, the institution will have no right to obtain any of the benefits of membership in the Bank, including access to the Bank’s products and services, and will no longer have any voting rights, other than as provided in regulations of the Finance Board, but shall be entitled to receive any dividends declared on its Class B Capital Stock until such Class B Capital Stock is redeemed or repurchased by the Bank.

A member may not withdraw from membership unless, on the date the membership is terminated, there is in effect a certification from the Finance Board that the withdrawal of a member will not cause the FHLBank System to fail to satisfy its obligation to contribute toward the payments owed on REFCORP obligations. The Finance Board has issued such a certification which is currently in effect, so case-by-case certification with respect to membership

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withdrawals is not currently necessary. However,there is no assurance that such a certification will remain in effect at any particular date in the future when a member seeks to withdraw from membership.

Withdrawal Cancellation Notice

A member that previously submitted a withdrawal notice to the Bank in writing may cancel such notice prior to the expiration of the withdrawal notice period by providing written notice to the Bank. The cancellation of a withdrawal notice will result in a redemption cancellation fee to the same extent as if the member had submitted a redemption cancellation notice with respect to the amount of Class B Capital Stock that is subject to redemption pursuant to the original withdrawal notice. The redemption cancellation fees and conditions applicable to a redemption cancellation notice will also apply to a withdrawal cancellation notice.

Involuntary Termination

The FHLB Act and the Finance Board’s regulations grant the Bank’s Board of Directors the authority to terminate the membership of any institution that (i) fails to comply with any requirement of the FHLB Act, Finance Board regulations, or the Bank’s capital plan; (ii) becomes insolvent or otherwise is subject to the appointment of a conservator, receiver or other legal custodian under federal or state law; or (iii) would jeopardize the safety and soundness of the Bank if it were to remain a member. The membership of an involuntarily terminated institution will terminate on the date the Bank’s Board of Directors acts to terminate the membership, and the five-year stock redemption period for the Class B Capital Stock then owned by such terminated institution will begin on the same date. The redemption period for stock acquired or received by an institution after the date on which its membership terminates shall commence on the date of such acquisition or receipt.

As of the date on which the Bank terminates an institution’s membership, the institution will have no right to obtain any of the benefits of membership in the Bank, including access to the Bank’s products and services, and will no longer have any voting rights, other than as provided in regulations of the Finance Board, but it will be entitled to receive any dividends declared on its Class B Capital Stock until such stock is redeemed or repurchased by the Bank.

Termination Through Acquisition of a Member

If an institution’s membership terminates by virtue of its acquisition by another institution or otherwise, the membership of the disappearing institution will terminate upon the cancellation of its charter. In the event of an acquisition of a member, the Class B Capital Stock held by the member will be transferred automatically to the acquiring institution. If the acquiring institution is a member of the Bank, the acquired Class B Capital Stock may be applied to the acquiring member’s minimum investment requirement, and any outstanding stock redemption notices will remain in effect. If the acquiring institution is not a member of the Bank, and does not apply for membership as provided in the Finance Board’s regulations, the five-year stock redemption period for the Class B Capital Stock then owned by the disappearing institution will begin on the date the institution’s membership terminates, unless it had begun earlier by virtue of the Bank having received a voluntary withdrawal notice from the disappearing member. The five-year redemption period for stock acquired or received by the surviving institution after the date the disappearing member’s charter is cancelled shall commence on the date of such acquisition or receipt.

The surviving non-member institution has no right to obtain any of the benefits of membership in the Bank, including access to the Bank’s products and services, nor does it have any voting rights, other than as provided in regulations of the Finance Board, but it is entitled to receive any dividends declared on its Class B Capital Stock until such stock is redeemed or repurchased.

Treatment of Outstanding Indebtedness of Terminated Member

Upon the termination of an institution’s membership, or upon the conclusion of the transition period provided in the regulations for acquiring institutions to make application for membership in the Bank, the Bank will determine an orderly manner for liquidating all remaining outstanding indebtedness (including prepayment fees) owed by that member to the Bank, and settling all other claims against the former member. After the expiration of any

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redemption periods applicable to Class B Capital Stock owned by a terminated institution, the Bank will redeem any such Class B Capital Stock unless it is necessary to support outstanding transactions of the institution that remain subject to an activity-based investment requirement. After all remaining obligations and claims of the terminated institution have been extinguished or settled, the Bank will redeem the remaining shares of Class B Capital Stock.

The Bank may repurchase, in its discretion, any excess stock of an institution whose membership has terminated prior to the expiration of the stock redemption periods applicable to such Class B Capital Stock. However, Finance Board regulations stipulate that the Bank may not redeem or repurchase any Class B Capital Stock that is required to support advances or AMA until the respective advances or AMA have been repaid.

Liquidation Rights

In the event the Bank is liquidated, the Board of Directors may authorize, subject to any order of the Finance Board, the pro rata distribution of any retained earnings, surplus, undivided profits, and equity reserves of the Bank to holders of Class B Capital Stock in proportion to each holder’s share of the total shares of outstanding Class B Capital Stock, provided that all payment obligations to the Bank’s existing creditors have been fully satisfied and all Class B Capital Stock has been redeemed at par value.

Effect of Consolidation or Merger

In the event the Bank is merged or consolidated into another FHLBank, the holders of its outstanding Class B Capital Stock will be entitled to the rights and benefits set forth in any applicable plan of merger and/or terms established or approved by the Finance Board. In the event another FHLBank is merged or consolidated into the Bank, the holders of the outstanding capital stock of the other FHLBank will be entitled to the rights and benefits set forth in any applicable plan of merger and/or terms established or approved by the Finance Board.

Transfer of Stock

A member may transfer, at par value, any excess stock to any other member or institution that has satisfied all conditions for becoming a member other than the purchase of the Class B Capital Stock required to satisfy its minimum investment requirement, subject to the prior approval of the Bank acting in its sole discretion. Approval for all transfers is subject to the requirement that, following the transfer, the transferring member would continue to hold sufficient stock to meet the member’s minimum investment requirement.

Voting Rights

Members’ voting rights are limited solely to the election of industry directors as provided by the FHLB Act. Each member is entitled to cast one vote in the election of directors from the member’s state for each share of capital stock that the member was required to hold as of the immediately preceding December 31, except that no member may cast a number of votes greater than the average number of shares of capital stock required to be held by all members in its state as of the preceding December 31. Shares of capital stock that were excess stock and held by members as of the preceding December 31 will not have voting rights in the election of directors. If any member’s actual holdings of capital stock were less than the applicable minimum investment requirement on the preceding December 31, the number of shares eligible to be voted will be based on the number of shares of capital stock actually held by that member as of the preceding December 31. Additional discussion regarding the election of directors is included in Item 5 – Directors and Executive Officers.

ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Bank’s Bylaws provide that the Bank will, to the fullest extent permitted by law, indemnify any director or officer who was or is a party, whether as a plaintiff acting with the approval of the Board of Directors, or as a defendant, or is threatened to be made a party to or is involved in, any threatened, pending or completed investigation, claim, action, suit or proceeding, whether civil, criminal, arbitrative, administrative or investigative and whether formal or informal (each of the foregoing a “Proceeding”), by reason of the fact that he is or was a director or officer of the Bank (or is or was serving at the Bank’s request as a director, officer, partner, trustee, or employee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity), or by

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reason of having allegedly taken or omitted to take any action in connection with any such position, against all liability (including the obligation to pay a judgment, settlement, penalty or fine, including any excise tax assessed with respect to an employee benefit plan), loss, and expenses (including attorneys’ fees) actually and reasonably incurred or suffered by him in connection with such Proceeding if, as determined in accordance with the provisions of the Bylaws, he acted in good faith and in a manner he reasonably believed to be in (or not opposed to) the best interests of the Bank, and, with respect to any Proceeding, had no reasonable cause to believe his conduct was unlawful. The Bank’s indemnification provisions do not extend to liabilities and expenses that are incurred because of a person’s breach of his duty of loyalty to the Bank or its stockholders, any act or omission by such person which involves willful misconduct or knowing violation of the criminal law, or any transaction from which such person derived any improper personal benefit. Any director or officer of the Bank who is or was rendering services to any joint office, committee or council of the Federal Home Loan Banks, the FIRF, the Financing Corporation, or the Resolution Funding Corporation is deemed to be serving or have served at the request of the Bank.

The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that (i) the person did not act in good faith and in a manner which he reasonably believed to be in (or not opposed to) the best interests of the Bank or (ii) with respect to any Proceeding, had reasonable cause to believe that his conduct was unlawful.

To the extent that a director or officer has been successful on the merits or otherwise in defense of any Proceeding, or in defense of any claim, issue, or matter therein, he will be indemnified to the fullest extent permitted by Article VIII of the Bank’s Bylaws.

A determination with respect to the indemnification of a director or officer in connection with any Proceeding will be made (i) by a majority vote of a quorum of the Bank’s directors who are not and have not been parties to such Proceeding or any similar Proceeding then pending (“Disinterested Directors”) or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of Disinterested Directors so directs, by independent legal counsel in the form of a written opinion. A director’s or officer’s costs and expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the Bank.

Under the Bank’s Bylaws, a director’s or officer’s reasonable expenses, including attorneys’ fees, incurred in defending a Proceeding shall be paid or reimbursed by the Bank in advance of the final disposition of such Proceeding upon receipt of (i) a written affirmation by the director or officer of such person’s good faith belief that he has met the standard of conduct set forth in the Bank’s Bylaws and (ii) a written undertaking by or on behalf of the director or officer to repay all amounts paid or reimbursed by the Bank only if it is ultimately determined that he is not entitled to be indemnified by the Bank. Under the Bank’s Bylaws, the required undertaking to repay expenses advanced by the Bank (x) is an unlimited general obligation of such person, (y) need not be secured, and (z) will be accepted by the Bank without reference to such person’s financial ability to make repayment.

The indemnification and advancement of expenses provided by the Bank’s Bylaws continue without any subsequent amendment or change as to a person who has ceased to be a director or officer and inure to the benefit of such person’s heirs, executors, and administrators. In the event that the Bylaws are changed to reduce, restrict, or eliminate the indemnification and advancement of expenses provisions, such provisions will continue unchanged as to any director or officer with respect to any action taken or omitted to be taken by such director or officer prior to the time that such change was made.

The Bank’s Bylaws authorize the President/Chief Executive Officer of the Bank to enter into indemnification contracts with each director and officer with respect to the indemnification provided in the Bylaws and to renegotiate such contracts as necessary to reflect changing laws and business circumstances. The Bank has not entered into any such contracts. The Bank may create a trust fund, grant a security interest, or use any other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect any indemnification and advancement of expenses as provided for in the Bylaws.

The Bank’s Bylaws authorize a director or officer to bring suit to enforce his rights to indemnification and the advancement of expenses under the Bank’s Bylaws if the Bank has not promptly paid a valid claim thereunder.

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The Bank maintains a Director and Officer Liability Insurance Policy under which former and current directors and officers are insured, subject to certain policy limitations and applicable exclusions.

ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Bank’s annual audited financial statements for the years ended December 31, 2004, 2003 and 2002, together with the notes thereto and the report of PricewaterhouseCoopers LLP thereon, are included in this Registration Statement on pages F-1 through F-45. Interim unaudited financial statements for the three months ended March 31, 2005 and 2004 are included in this Registration Statement on pages F-46 through F-57.

The following is a summary of the Bank’s unaudited quarterly operating results for the three months ended March 31, 2005 and the years ended December 31, 2004 and 2003.

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SELECTED QUARTERLY FINANCIAL DATA
(unaudited; in thousands)

	Three Months
	Ended
	March 31, 2005
Interest income	$	459,578
Net interest income		45,398
Other income (loss)
Net loss on trading securities		(2,096	)
Net realized and unrealized losses on derivatives and hedging activities		(8,026	)
Gain on early extinguishment of debt		1,088
Other, net		1,342
Other expense		10,488
Net income		19,814

	Year Ended December 31, 2004
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Interest income	$	266,299		$	265,626		$	324,009		$	386,577		$	1,242,511
Net interest income		47,016			40,688			46,165			43,506			177,375
Other income (loss)
Net loss on trading securities		(694	)		(3,640	)		(923	)		(2,603	)		(7,860	)
Net realized and unrealized losses on derivatives and hedging activities		(7,135	)		(10,801	)		(4,812	)		(5,856	)		(28,604	)
Gain on early extinguishment of debt		—			3,651			—			—			3,651
Other, net		1,223			1,318			1,218			1,237			4,996
Other expense		11,655			9,358			9,800			10,170			40,983
Net income		21,004			15,948			23,265			19,029			79,246

	Year Ended December 31, 2003
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Interest income	$	287,868		$	275,651		$	265,812		$	259,556		$	1,088,887
Net interest income		41,062			39,691			50,830			43,056			174,639
Other income (loss)
Net loss on trading securities		(1,828	)		(3,889	)		(4,794	)		(2,216	)		(12,727	)
Net realized and unrealized gains (losses) on derivatives and hedging activities		(6,522	)		(5,853	)		2,122			(1,449	)		(11,702	)
Other, net		1,178			1,420			1,585			1,039			5,222
Other expense		6,650			9,359			8,249			8,984			33,242
Net income		19,992			16,169			30,529			23,102			89,792

Effective January 1, 2004, the Bank changed its methods of accounting for three items. First, the Bank changed the manner in which it assesses effectiveness for certain highly effective consolidated obligation hedging relationships; as a result of this change, net realized and unrealized losses on derivatives and hedging activities was reduced by $3,374,000 during the first quarter of 2004 to reflect the accounting as if the Bank had employed its new methodology in prior years. Second, the Bank changed its method of accounting for postretirement health and life insurance benefits to comply with the provisions of SFAS 106; this correction increased other expense by

100

$1,624,000 in the first quarter of 2004. Third, the Bank changed its method of amortizing and accreting premiums and discounts on certain of its available-for-sale securities from the straight-line method to the level-yield method to comply with the provisions of SFAS 91; interest income (and net interest income) were increased by $3,532,000 during the first quarter of 2004 to reflect the accounting as if the level-yield method had been used in prior years. The Bank assessed the impact of these changes individually and in the aggregate and determined that if the new methods had been used previously, the effect would not have been material to the Bank’s financial condition or results of operations for any prior reporting period. Net of assessments, these adjustments (in the aggregate) reduced net income by $1,077,000 during the first quarter of 2004. Each of these adjustments is more fully described in Item 2 – Financial Information.

The Bank adopted SFAS 150 on January 1, 2004. From and after January 1, 2004, dividends on mandatorily redeemable capital stock are reported as interest expense in the Bank’s statement of income. Net interest income for the first, second, third and fourth quarters of 2004 and the first quarter of 2005 includes interest expense on mandatorily redeemable capital stock of $1,481,000, $1,492,000, $1,664,000, $2,006,000 and $2,372,000, respectively.

For each of the quarters in the year ended December 31, 2003, the Bank has reclassified prepayment fee income on advances to conform with the 2004 presentation. Previously, prepayment fee income was classified as other income (loss). These amounts have been reclassified and are now included as a component of interest income. As a result of this reclassification, interest income and other income (loss) for the first, second, third and fourth quarters of 2003 were adjusted by $921,000, $1,228,000, $6,969,000 and $1,399,000, respectively. The adjustments increased interest income (and net interest income) and reduced other income (loss). By comparison, interest income for the first, second, third and fourth quarters of 2004 and the first quarter of 2005 includes prepayment fee income on advances of $438,000, $827,000, $5,796,000, $379,000 and $356,000, respectively.

ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

101

ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS

(a)	Financial Statements
	Included herein on pages F-1 through F-57.
(b)	Exhibits

3.1	Organization Certificate of the Registrant
3.2	By-Laws of the Registrant
4.1	Amended and Revised Capital Plan of the Registrant, dated June 24, 2004.
10.1	Deferred Compensation Plan of the Registrant, effective July 24, 2004.
10.2	Non-Qualified Deferred Compensation Plan for the Board of Directors of the Registrant, effective July 24, 2004.
10.3	Form of Special Non-Qualified Deferred Compensation Plan of the Registrant, effective as of January 1, 2004.
12.1	Computation of Ratio of Earnings to Fixed Charges

102

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

	Federal Home Loan Bank of Dallas
	By /S/ Terry Smith
June 30, 2005
Date	Terry Smith President and Chief Executive Officer

103

Federal Home Loan Bank of Dallas

Index to Financial Statements

	Page No.
Annual Audited Financial Statements:
Report of Independent Registered Public Accounting Firm	F-2
Statements of Condition as of December 31, 2004 and 2003	F-3
Statements of Income for the years ended December 31, 2004, 2003 and 2002	F-4
Statements of Capital for the years ended December 31, 2004, 2003 and 2002	F-5
Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002	F-6
Notes to Financial Statements	F-7
Interim Unaudited Financial Statements:
Statements of Condition as of March 31, 2005 and December 31, 2004	F-46
Statements of Income for the three months ended March 31, 2005 and 2004	F-47
Statements of Capital for the three months ended March 31, 2005 and 2004	F-48
Statements of Cash Flows for the three months ended March 31, 2005 and 2004	F-49
Notes to Interim Unaudited Financial Statements	F-50

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
the Federal Home Loan Bank of Dallas

In our opinion, the accompanying statements of condition and the related statements of income, capital and of cash flows present fairly, in all material respects, the financial position of the Federal Home Loan Bank of Dallas (the “Bank”) at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2, the Bank adopted Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity on January 1, 2004.

/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 15, 2005, except for the last paragraph in Note 17 and the tables in Note 18,
     as to which the date is June 27, 2005

F-2

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CONDITION
(In thousands, except share data)

	December 31,
	2004			2003
ASSETS
Cash and due from banks (Note 3)	$	44,231		$	163,609
Interest-bearing deposits (Note 16)		631,398			302,582
Federal funds sold (Notes 17 and 18)		2,680,000			2,957,000
Trading securities (Notes 4 and 18)		78,583			142,164
Available-for-sale securities (a) (Notes 5 and 18)		5,785,592			5,950,586
Held-to-maturity securities (b) (Note 6)		7,264,333			7,010,525
Advances (Notes 7 and 17)		47,111,154			40,595,029
Mortgage loans held for portfolio, net of allowance for credit losses of $355 and $387 in 2004 and 2003, respectively (Notes 9 and 17)		706,203			971,500
Accrued interest receivable		208,301			174,133
Premises and equipment, net		27,313			25,426
Derivative assets (Note 14)		17,619			71,824
Other assets		31,586			31,623
TOTAL ASSETS	$	64,586,313		$	58,396,001
LIABILITIES AND CAPITAL
Deposits (Notes 10 and 17)
Interest-bearing
Demand and overnight	$	1,710,101		$	1,964,523
Term		283,090			149,807
Other		11,438			48,474
Non-interest bearing
Demand and overnight		124			2,832
Other		56			58
Total deposits		2,004,809			2,165,694
Consolidated obligations, net (Note 11)
Discount notes		7,084,765			11,627,325
Bonds		51,463,738			40,702,899
Total consolidated obligations, net		58,548,503			52,330,224
Mandatorily redeemable capital stock (Notes 2 and 12)		327,121			—
Accrued interest payable		331,154			331,991
Affordable Housing Program (Note 8)		33,811			34,098
Payable to REFCORP (Note 1)		4,320			5,776
Derivative liabilities (Note 14)		658,790			636,053
Other liabilities		43,841			150,720
Total liabilities		61,952,349			55,654,556
Commitments and contingencies (Notes 7, 8, 11, 13, 14 and 16)
CAPITAL (Notes 12 and 17)
Capital stock – Class B putable ($100 par value) issued and outstanding shares: 24,927,894 and 26,611,331 shares in 2004 and 2003, respectively		2,492,789			2,661,133
Retained earnings		143,897			108,612
Accumulated other comprehensive income (loss)
Net unrealized loss on available-for-sale securities, net of unrealized gains relating to hedged interest rate risk included in net income (Notes 5 and 14)		(2,722	)		(28,300	)
Total capital		2,633,964			2,741,445
TOTAL LIABILITIES AND CAPITAL	$	64,586,313		$	58,396,001

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

(a) Amortized cost: $5,430,222 and $5,578,836 at December 31, 2004 and 2003, respectively.

(b) Fair values: $7,358,647 and $7,115,852 at December 31, 2004 and 2003, respectively.

F-3

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF INCOME
(In thousands)

	For the Years Ended December 31,
	2004			2003			2002
INTEREST INCOME
Advances	$	868,075		$	725,370		$	840,423
Prepayment fees on advances		7,440			10,517			4,288
Interest-bearing deposits		6,832			6,303			4,688
Federal funds sold		32,546			32,240			47,947
Trading securities		11,918			23,920			36,231
Available-for-sale securities		97,320			71,062			82,304
Held-to-maturity securities		170,746			146,885			153,989
Mortgage loans held for portfolio		47,026			71,913			91,909
Other		608			677			849
Total interest income		1,242,511			1,088,887			1,262,628
INTEREST EXPENSE
Consolidated obligations
Bonds		911,476			762,938			883,442
Discount notes		118,030			122,388			156,159
Deposits		28,829			28,864			40,493
Mandatorily redeemable capital stock		6,643			—			—
Other borrowings		158			58			55
Total interest expense		1,065,136			914,248			1,080,149
NET INTEREST INCOME		177,375			174,639			182,479
Provision (reduction) for credit losses on mortgage loans		(26	)		(27	)		126
NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION		177,401			174,666			182,353
OTHER INCOME (LOSS)
Service fees		2,470			2,137			2,545
Net gain (loss) on trading securities		(7,860	)		(12,727	)		9,945
Net realized and unrealized losses on derivatives and hedging activities		(28,604	)		(11,702	)		(59,029	)
Gain on early extinguishment of debt		3,651			—			—
Other, net		2,526			3,085			536
Total other income (loss)		(27,817	)		(19,207	)		(46,003	)
OTHER EXPENSE
Salaries and benefits		20,344			16,191			14,189
Other operating expenses		17,367			14,152			16,655
Finance Board		1,862			1,579			1,423
Office of Finance		1,410			1,320			1,419
Total other expense		40,983			33,242			33,686
INCOME BEFORE ASSESSMENTS		108,601			122,217			102,664
Affordable Housing Program		9,543			9,977			8,412
REFCORP		19,812			22,448			18,927
Total assessments		29,355			32,425			27,339
NET INCOME	$	79,246		$	89,792		$	75,325

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

F-4

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)

																						Accumulated
	Capital Stock						Capital Stock -						Total									Other
	Class B - Putable						Putable						Capital Stock						Retained			Comprehensive			Total
	Shares			Par Value			Shares			Par Value			Shares			Par Value			Earnings			Income (Loss)			Capital
BALANCE, DECEMBER 31, 2001		—		$	—			21,426		$	2,142,596			21,426		$	2,142,596		$	70,883		$	2,881		$	2,216,360
Proceeds from sale of capital stock		—			—			3,918			391,793			3,918			391,793			—			—			391,793
Repurchase/redemption of capital stock		—			—			(1,323	)		(132,350	)		(1,323	)		(132,350	)		—			—			(132,350	)
Comprehensive income
Net income		—			—			—			—			—			—			75,325			—			75,325
Other comprehensive income (loss)
Net unrealized gain on available-for-sale securities		—			—			—			—			—			—			—			340,768			340,768
Reclassification adjustment for net unrealized gains relating to hedged interest rate risk included in net income		—			—			—			—			—			—			—			(394,434	)		(394,434	)
Total comprehensive income		—			—			—			—			—			—			—			—			21,659
Dividends on capital stock
Cash		—			—			—			—			—			—			(169	)		—			(169	)
Stock		—			—			684			68,479			684			68,479			(68,479	)		—			—
BALANCE, DECEMBER 31, 2002		—			—			24,705			2,470,518			24,705			2,470,518			77,560			(50,785	)		2,497,293
Proceeds from sale of capital stock		1,874			187,448			2,690			269,016			4,564			456,464			—			—			456,464
Repurchase/redemption of capital stock		(2,322	)		(232,233	)		(922	)		(92,182	)		(3,244	)		(324,415	)		—			—			(324,415	)
Comprehensive income
Net income		—			—			—			—			—			—			89,792			—			89,792
Other comprehensive income
Net unrealized loss on available-for-sale securities		—			—			—			—			—			—			—			(155,491	)		(155,491	)
Reclassification adjustment for net unrealized losses relating to hedged interest rate risk included in net income		—			—			—			—			—			—			—			177,976			177,976
Total comprehensive income		—			—			—			—			—			—			—			—			112,277
Conversion to Class B shares		26,788			2,678,832			(26,788	)		(2,678,832	)		—			—			—			—			—
Dividends on capital stock
Cash		—			—			—			—			—			—			(174	)		—			(174	)
Stock		271			27,086			315			31,480			586			58,566			(58,566	)		—			—
BALANCE, DECEMBER 31, 2003		26,611			2,661,133			—			—			26,611			2,661,133			108,612			(28,300	)		2,741,445
Proceeds from sale of capital stock		8,368			836,817			—			—			8,368			836,817			—			—			836,817
Repurchase/redemption of capital stock		(6,418	)		(641,843	)		—			—			(6,418	)		(641,843	)		—			—			(641,843	)
Shares reclassified to mandatorily redeemable capital stock		(4,071	)		(407,080	)		—			—			(4,071	)		(407,080	)		—			—			(407,080	)
Comprehensive income
Net income		—			—			—			—			—			—			79,246			—			79,246
Other comprehensive income
Net unrealized loss on available-for-sale securities		—			—			—			—			—			—			—			(16,380	)		(16,380	)
Reclassification adjustment for net unrealized losses relating to hedged interest rate risk included in net income		—			—			—			—			—			—			—			41,958			41,958
Total comprehensive income		—			—			—			—			—			—			—			—			104,824
Dividends on capital stock
Cash		—			—			—			—			—			—			(173	)		—			(173	)
Mandatorily redeemable capital stock		—			—			—			—			—			—			(26	)		—			(26	)
Stock		438			43,762			—			—			438			43,762			(43,762	)		—			—
BALANCE, DECEMBER 31, 2004		24,928		$	2,492,789			—		$	—			24,928		$	2,492,789		$	143,897		$	(2,722	)	$	2,633,964

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

F-5

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CASH FLOWS
(In thousands)

	For the Years Ended December 31,
	2004			2003			2002
OPERATING ACTIVITIES
Net income	$	79,246		$	89,792		$	75,325
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization
Net premiums and discounts on consolidated obligations, investments, mortgage loans, and deferred costs and fees received on derivatives		215			3,438			5,630
Concessions on consolidated obligation bonds		20,137			38,764			33,624
Premises, equipment and computer software costs		3,204			3,165			5,640
Provision for credit losses on mortgage loans held for portfolio		(26	)		(27	)		126
Non-cash interest on mandatorily redeemable capital stock		6,639			—			—
Decrease in trading securities		63,581			184,120			107,459
Loss (gain) due to change in net fair value adjustment on derivative and hedging activities		94			(53,021	)		(3,070	)
Gain on extinguishment of debt		(3,651	)		—			—
Net realized loss (gain) on disposal of premises and equipment		103			(5	)		5
Decrease (increase) in accrued interest receivable		(34,168	)		7,778			(24,637	)
Decrease (increase) in derivative asset-net accrued interest		(15,626	)		63,447			82,106
Increase (decrease) in derivative liability-net accrued interest		46,115			4,082			(3,139	)
Increase in other assets		(1,150	)		(745	)		(803	)
Increase (decrease) in Affordable Housing Program (AHP) liability		(287	)		1,654			(7,097	)
Decrease in accrued interest payable		(837	)		(87,784	)		(51,158	)
Increase (decrease) in payable to REFCORP		(1,456	)		3,589			(5,990	)
Increase (decrease) in other liabilities		(31,880	)		(18	)		27,986
Total adjustments		51,007			168,437			166,682
Net cash provided by operating activities		130,253			258,229			242,007
INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing deposits		(328,816	)		218,789			(347,618	)
Net decrease (increase) in federal funds sold		277,000			488,000			(1,264,000	)
Net decrease in short-term held-to-maturity securities		—			—			600,000
Proceeds from maturities of available-for-sale securities		140,185			463,151			286,217
Purchases of available-for-sale securities		—			(820,615	)		(1,909,714	)
Proceeds from maturities of long-term held-to-maturity securities		1,895,787			3,622,326			1,852,298
Purchases of long-term held-to-maturity securities		(2,224,610	)		(4,503,921	)		(3,385,583	)
Principal collected on advances		561,819,635			870,728,348			765,151,276
Advances made		(568,489,161	)		(874,586,768	)		(769,294,190	)
Principal collected on mortgage loans held for portfolio		260,241			658,041			592,819
Purchases of mortgage loans held for portfolio		—			(239,066	)		(553,162	)
Purchases of premises and equipment		(4,212	)		(1,624	)		(1,591	)
Net cash used in investing activities		(6,653,951	)		(3,973,339	)		(8,273,248	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits		(160,885	)		(475,783	)		34,720
Net proceeds from issuance of consolidated obligations
Discount notes		67,039,196			116,069,597			179,155,036
Bonds		29,931,197			48,197,915			30,581,139
Debt issuance costs		(16,765	)		(39,600	)		(30,934	)
Payments for maturing and retiring consolidated obligations
Discount notes		(71,583,269	)		(117,312,423	)		(172,880,200	)
Bonds		(18,913,331	)		(42,859,225	)		(28,968,806	)
Proceeds from issuance of capital stock		836,817			456,464			391,793
Payments for redemption of mandatorily redeemable capital stock		(86,624	)		—			—
Payments for repurchase/redemption of capital stock		(641,843	)		(324,415	)		(132,350	)
Cash dividends paid		(173	)		(174	)		(169	)
Net cash provided by financing activities		6,404,320			3,712,356			8,150,229
Net increase (decrease) in cash and cash equivalents		(119,378	)		(2,754	)		118,988
Cash and cash equivalents at beginning of the year		163,609			166,363			47,375
Cash and cash equivalents at end of the year	$	44,231		$	163,609		$	166,363
Supplemental disclosures
Interest paid	$	1,047,965		$	978,392		$	1,094,811
AHP payments	$	9,830		$	8,323		$	15,509
REFCORP payments	$	21,268		$	18,859		$	24,917
Stock dividends issued	$	43,762		$	58,566		$	68,479
Dividends paid through issuance of mandatorily redeemable capital stock	$	26		$	—		$	—
Capital stock reclassified to mandatorily redeemable capital stock	$	407,080		$	—		$	—

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

F-6

FEDERAL HOME LOAN BANK OF DALLAS

NOTES TO FINANCIAL STATEMENTS

Background Information

     The Federal Home Loan Bank of Dallas (the “Bank”), a federally chartered corporation, is one of 12 district Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System”) that were created by the Federal Home Loan Bank Act of 1932 (the “FHLB Act”). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The Bank serves eligible financial institutions in Arkansas, Louisiana, Mississippi, New Mexico and Texas (collectively, the Ninth District of the FHLBank System). The Bank provides a readily available, low-cost source of funds to its member institutions. The Bank is a cooperative whose member institutions own the capital stock of the Bank. Regulated financial depositories and insurance companies engaged in residential housing finance may apply for membership. All members must purchase stock in the Bank. State and local housing authorities that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow, housing associates are not members of the Bank and, as such, are not required to hold capital stock.

     The FHLBanks’ debt instruments (consolidated obligations) are the joint and several obligations of all the FHLBanks and are their primary source of funds. Deposits, other borrowings, and the proceeds from capital stock issued to members provide other funds. The Bank primarily uses these funds to provide advances (loans) to its members. The Bank also provides its members with a variety of correspondent banking services, including overnight and term deposit accounts, wire transfer services, reserve pass-through and settlement services, securities safekeeping and securities pledging services.

     The Office of Finance manages the sale of the FHLBanks’ consolidated obligations. The Federal Housing Finance Board (“Finance Board”), an independent agency in the executive branch of the United States Government, supervises and regulates the FHLBanks and the Office of Finance. The Finance Board’s principal purpose is to ensure that the FHLBanks operate in a safe and sound manner. In addition, the Finance Board ensures that the FHLBanks carry out their housing finance mission, remain adequately capitalized, and are able to raise funds in the capital markets. Also, the Finance Board establishes policies and regulations covering the operations of the FHLBanks. Each FHLBank operates as a separate entity with its own management, employees, and board of directors. The Bank does not have any special purpose entities or any other type of off-balance sheet conduits.

Note 1—Summary of Significant Accounting Policies

     Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates. These assumptions and estimates may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ from these estimates.

     Federal Funds Sold. These investments are used to manage the Bank’s short-term liquidity position and are carried at cost.

     Investments. The Bank carries investments for which it has both the ability and intent to hold to maturity (held-to-maturity securities) at cost, adjusted for the amortization of premiums and accretion of discounts using the level-yield method.

     The Bank classifies certain investments that it may sell before maturity as available-for-sale and carries them at fair value. The change in fair value of the available-for-sale securities not being hedged by derivative instruments is recorded in other comprehensive income as a net unrealized gain or loss on available-for-sale securities. For available-for-sale securities that have been hedged and qualify as a fair value hedge, the Bank records the portion of the change in value related to the risk being hedged in other income as “net realized and unrealized gain (loss) on derivatives and hedging activities” together with the related change in the fair value of the derivative, and records

F-7

the remainder of the change in other comprehensive income as “net unrealized gain (loss) on available-for-sale securities.”

     The Bank classifies certain other investments as trading and carries them at fair value. The Bank records changes in the fair value of these investments in other income (loss) in the statements of income. Although classified as trading, the Bank does not engage in active or speculative trading practices.

     The Bank computes the amortization and accretion of premiums and discounts on mortgage-backed securities for which prepayments are probable and reasonably estimable using the level-yield method over the estimated lives of the securities. This method requires a retrospective adjustment of the effective yield each time the Bank changes the estimated life as if the new estimate had been known since the original acquisition date of the securities. The Bank computes the amortization and accretion of premiums and discounts on other investments using the level-yield method to the contractual maturity of the securities.

     The Bank computes gains and losses on sales of investment securities, if any, using the specific identification method and includes these gains and losses in other income (loss) in the statements of income. The Bank treats securities purchased under agreements to resell, if any, as collateralized financings.

     The Bank regularly evaluates outstanding investments for impairment and determines if unrealized losses are temporary based in part on the creditworthiness of the issuers and the underlying collateral, as well as a determination of the Bank’s intent to hold such securities through to recovery of the unrealized losses. If there is an other-than-temporary impairment in the value of an investment, the decline in value is recognized as a loss in other income (loss). The Bank did not experience any other-than-temporary impairments in the value of investments during 2004, 2003 or 2002.

     Advances. The Bank presents advances net of unearned commitment fees and discounts on advances for the Affordable Housing Program (“AHP”), if any, as discussed below. The Bank credits interest on advances to income as earned. Following the requirements of the FHLB Act, as amended, the Bank obtains sufficient collateral on advances to protect it from losses. The FHLB Act limits eligible collateral to certain investment securities, residential mortgage loans, cash or deposits with the Bank, and other eligible real estate-related assets. As more fully described in Note 7, Community Financial Institutions (defined for 2004 as FDIC-insured institutions with average total assets of $548 million or less during the three-year period ended December 31, 2003) are eligible to utilize expanded statutory collateral rules for secured small business, small farm and small agribusiness loans. The Bank has not incurred any credit losses on advances since its inception in 1932. Because of the collateral held as security on advances and its repayment history, Bank management believes that an allowance for credit losses on advances is not warranted at this time.

     Mortgage Loans Held for Portfolio. The Bank participates in the Mortgage Partnership Finance® (“MPF”®) program offered by the FHLBank of Chicago. Through the program, the Bank has invested in government-insured and conventional residential mortgage loans which were originated by certain of its participating financial institutions (“PFIs”). The Bank manages the liquidity, interest rate and prepayment risk of the loans, while the PFIs retain the marketing and servicing activities. The Bank and the PFIs share in the credit risk of the loans with the Bank assuming the first loss obligation limited by the First Loss Account (“FLA”), and the PFIs assuming credit losses in excess of the FLA, up to the amount of the credit enhancement obligation as specified in the master agreement (“Second Loss Credit Enhancement”). The Bank assumes all losses in excess of the Second Loss Credit Enhancement.

     The credit enhancement is an obligation on the part of the PFI which ensures the retention of a portion of the credit risk on loans that it originates. The amount of the credit enhancement is determined so that any losses in excess of the enhancement are limited to those permitted for “AA” credit risks. The PFI receives from the Bank a credit enhancement fee for managing this portion of the inherent risk in the loans. This fee is paid monthly based upon the remaining unpaid principal balance. The required credit enhancement obligation amount varies depending upon the various product alternatives.

     In December 2002, the Bank’s participation in the MPF program was modified. Under the terms of the revised agreement, the Bank receives a participation fee for mortgage loans that are delivered by its PFIs and the FHLBank of Chicago acquires a 100-percent interest in the loans. Prior to June 23, 2003, this modification applied only to

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those loans that were delivered under master commitments that had been entered into on or after December 5, 2002. Effective June 23, 2003, this arrangement was expanded to include loans that are delivered under master commitments that were entered into prior to December 5, 2002. Under the revised agreement, the Bank has the option to retain up to a 50-percent interest in loans originated by its PFIs without receiving a participation fee, provided certain conditions are met.

     The Bank classifies mortgage loans held for portfolio as held for investment and, accordingly, reports them at their principal amount outstanding net of deferred premiums and discounts.

     The Bank defers mortgage loan premiums and discounts and amortizes them to interest income over the estimated lives of the related mortgage loans using the level-yield method. Actual prepayment experience and estimates of future principal prepayments are used in calculating the estimated lives of the mortgage loans. The Bank aggregates the mortgage loans by similar characteristics (type, maturity, note rate and acquisition date) in determining prepayment estimates. The estimated life method requires a retrospective adjustment each time the Bank changes the estimated amounts as if the new estimate had been known since the original acquisition date of the assets.

     The Bank records credit enhancement fees as an offset to mortgage loan interest income. The Bank records non-origination fees, such as delivery commitment extension fees, pair-off fees and participation fees, in other income (loss) under the caption “other, net” when received. Prior to the modifications described above, extension fees were received by the Bank when a PFI sought to extend the period of the delivery commitment beyond the original stated maturity. Pair-off fees were received when the amount funded was less than or greater than a specified percentage of the delivery commitment amount.

     The Bank places a mortgage loan on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due. When a conventional mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income. The Bank records cash payments received on nonaccrual loans first as interest income until it recovers all interest, and then as a reduction of principal. Government-guaranteed loans are not placed on nonaccrual status.

     The Bank bases the allowance for credit losses on management’s estimate of credit losses inherent in the Bank’s mortgage loan portfolio as of the balance sheet date, before consideration of credit enhancements. Actual losses greater than defined levels are offset by the PFIs’ credit enhancement up to their respective limits. The Bank performs periodic reviews to identify losses inherent within its portfolio and to determine the likelihood of collection. The overall allowance is determined by an analysis that includes consideration of various data such as past performance, current performance, loan portfolio characteristics, collateral valuations, industry data, and prevailing economic conditions. As a result of this analysis, the Bank has determined that an allowance for loan losses of $355,000 and $387,000 as of December 31, 2004 and 2003, respectively, is appropriate. Credit losses are charged against the allowance when the Bank determines that its recorded investment is unlikely to be recoverable.

     Affordable Housing Program. The FHLB Act requires each FHLBank to establish and fund an AHP (see Note 8). The Bank charges the required funding for AHP to earnings and establishes a liability. Typically, the 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. In addition to direct grants, the Bank may issue AHP advances at interest rates below the customary interest rate for non-subsidized advances. When the Bank makes an AHP advance, the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP advance rate and the Bank’s related cost of funds for comparable maturity funding is charged against the AHP liability, recorded as a discount on the AHP advance and amortized using the level-yield method.

     Prepayment Fees. The Bank charges its members a prepayment fee when members prepay certain advances before their original maturities. The Bank records prepayment fees, net of hedging adjustments included in the book basis of the advance (if any), as “prepayment fees on advances” in the interest income section of the statement of income. In cases in which the Bank funds a new advance concurrent with the prepayment of an existing advance, the Bank evaluates whether the new advance meets the criteria to qualify as a modification of an existing advance under the provisions of Emerging Issues Task Force (“EITF”) Issue No. 01-7, “Creditor’s Accounting for a Modification or Exchange of Debt Instruments.” If the new advance qualifies as a modification of the existing advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized over the life of the modified advance. This amortization is recorded in interest income on advances.

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If the modified advance is hedged, it is marked to fair value after the amortization of the basis adjustment. This amortization results in offsetting amounts being recorded in net interest income and “net realized and unrealized gain (loss) on derivatives and hedging activities” in other income (loss). If the Bank determines that the advance should be treated as a new advance, it records the net fees as “prepayment fees on advances” in the interest income section of the statement of income.

     Commitment Fees. The Bank defers commitment fees for advances, if any, and amortizes them to interest income using the level-yield method. Refundable fees, if any, are deferred until the commitment expires or until the advance is made. The Bank records commitment fees for letters of credit as a deferred credit when it receives the fees and amortizes them over the term of the letter of credit using the straight-line method.

     Derivatives and Hedging Activities. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities—Deferral of Effective Date of FASB Statement No. 133,” SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (hereinafter collectively referred to as “SFAS 133”), all derivatives are recognized on the statement of condition at their fair values and are designated as either (1) a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a “fair value” hedge) or (2) a non-SFAS 133 hedge of an asset or liability (“economic hedge”) for balance sheet management purposes. Changes in the fair value of a derivative that is effective as — and that is designated and qualifies as — a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect gains or losses on firm commitments), are recorded in current period earnings. Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative differs from the change in the fair value of the hedged item) is recorded in other income (loss) as “net realized and unrealized gain (loss) on derivatives and hedging activities.” Net interest income/expense associated with derivatives that qualify for fair value hedge accounting is recorded as a component of net interest income. Changes in the fair value of a derivative designated as an economic hedge are recorded in current period earnings with no fair value adjustment to an asset or liability. Both the net interest income/expense and the fair value adjustments associated with derivatives in economic hedging relationships are recorded in other income (loss) as “net realized and unrealized gain (loss) on derivatives and hedging activities.”

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

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

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

     During 2004, the Bank changed the manner in which it assesses effectiveness for certain highly effective consolidated obligation hedging relationships. This change is discussed more fully in Note 2.

     Premises and Equipment. The Bank records premises and equipment at cost less accumulated depreciation and amortization. At December 31, 2004 and 2003, the Bank’s accumulated depreciation and amortization relating to premises and equipment was $17,235,000 and $15,389,000 respectively. The Bank computes depreciation using the straight-line method over the estimated useful lives of assets ranging from 3 to 39 years. It amortizes leasehold improvements on the straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The Bank capitalizes improvements and major renewals but expenses ordinary maintenance and repairs when incurred. Depreciation and amortization expense was approximately $2,222,000, $2,088,000 and $4,679,000 during the years ended December 31, 2004, 2003 and 2002, respectively. The Bank includes gains and losses on disposal of premises and equipment, if any, in other income (loss) under the caption “other, net.”

     Computer Software. The cost of computer software developed or obtained for internal use is accounted for in accordance with Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). SOP 98-1 requires the cost of purchased software and certain costs incurred in developing computer software for internal use to be capitalized and amortized over future periods. As of December 31, 2004 and 2003, the Bank had $3,875,000 and $479,000, respectively, in unamortized computer software costs included in other assets. Amortization of computer software costs charged to expense was $982,000, $1,077,000 and $961,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

     Concessions on Consolidated Obligations. The Bank defers and amortizes, using the level-yield method, the amounts paid to dealers in connection with the sale of consolidated obligation bonds over the terms of the bonds. The Office of Finance prorates the amount of the concession to the Bank based upon the percentage of the debt issued that is assumed by the Bank. Unamortized concessions were $23,810,000 and $27,182,000 at December 31, 2004 and 2003, respectively, and are included in “other assets” on the statements of condition. Amortization of such concessions is included in consolidated obligation bond interest expense and totaled $20,137,000, $38,764,000 and $33,624,000 during the years ended December 31, 2004, 2003 and 2002, respectively. The Bank charges to expense as incurred the concessions applicable to the sale of consolidated obligation discount notes because of the short maturities of these notes. Concessions related to the sale of discount notes totaling $37,000, $80,000 and $325,000 are included in interest expense on consolidated obligation discount notes in the statements of income for the years ended December 31, 2004, 2003 and 2002, respectively.

     Discounts and Premiums on Consolidated Obligations. The Bank expenses the discounts on consolidated obligation discount notes using the straight-line method over the term of the related notes due to their short-term nature. It amortizes the discounts and premiums on consolidated obligation bonds to expense using the level-yield method over the term to maturity of the bonds.

     Resolution Funding Corporation Assessments. Although the Bank is exempt from ordinary federal, state, and local taxation except for local real estate taxes, it is required to make payments to the Resolution Funding Corporation (“REFCORP”). Each FHLBank is required to pay 20 percent of its reported earnings (after the AHP assessment) to REFCORP. The AHP and REFCORP assessments are calculated simultaneously because of their dependence on one another. To compute the REFCORP assessment, which is paid quarterly in arrears, the Bank’s AHP assessment (described in Note 8) is subtracted from reported income before assessments and the result is multiplied by 20 percent. REFCORP has been designated as the calculation agent for the AHP and REFCORP assessments. To enable REFCORP to perform these calculations, each of the FHLBanks provides quarterly earnings information to REFCORP.

     The FHLBanks will continue to expense the REFCORP amounts until the aggregate amounts actually paid by all 12 FHLBanks are equivalent to a $300 million annual annuity (or a scheduled payment of $75 million per calendar

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quarter) whose final maturity date is April 15, 2030, at which point the required payment of each FHLBank to REFCORP will be fully satisfied. The Finance Board, in consultation with the Secretary of the Treasury, selects the appropriate discounting factors to be used in this annuity calculation. Actual payments made are used to determine the amount of the future obligation that has been defeased. The cumulative amount to be paid to REFCORP by the Bank is not determinable at this time because it depends on the future earnings of all of the FHLBanks and interest rates. If the Bank experiences a loss during a calendar quarter but still has income for the calendar year, the Bank’s obligation to REFCORP would be calculated based upon its year-to-date income. The Bank would be entitled to a refund of amounts paid for the full year that were in excess of its calculated annual obligation. If the Bank experiences a loss for a full year, the Bank would have no obligation to REFCORP for that year. The Finance Board is required to extend the term of the FHLBanks’ obligation to REFCORP for each calendar quarter in which there is a deficit quarterly payment. A deficit quarterly payment is the amount by which the actual quarterly payment falls short of $75 million. There were no deficit quarterly payments during the years ended December 31, 2004, 2003 or 2002.

     The FHLBanks’ aggregate payments through 2004 exceeded the scheduled payments, effectively accelerating payment of the REFCORP obligation and shortening its remaining term to the first quarter of 2019. The FHLBanks’ aggregate payments through 2004 have satisfied $45 million of the $75 million scheduled payment for the first quarter of 2019 and all scheduled payments thereafter. This date assumes that all $300 million annual payments required after December 31, 2004 are made.

     The benchmark payments, or portions thereof, could be reinstated if the actual REFCORP payments of all of the FHLBanks fall short of $75 million in a calendar quarter. The maturity date of the REFCORP obligation may be extended beyond April 15, 2030 if such extension is necessary to ensure that the value of the aggregate amounts paid by the FHLBanks exactly equals a $300 million annual annuity. Any payments beyond April 15, 2030 would be paid to the Department of Treasury.

     Finance Board and Office of Finance Expenses. The Bank is assessed its proportionate share of the costs of operating the Finance Board and the Office of Finance. The Finance Board allocates its operating and capital expenditures to the FHLBanks based on each FHLBank’s percentage of total outstanding capital stock. The operating and capital expenditures of the Office of Finance are shared on a pro rata basis with one-third based on each FHLBank’s percentage of total outstanding capital stock, one-third based on each FHLBank’s issuance of consolidated obligations, and one-third based on each FHLBank’s total consolidated obligations outstanding. These costs are included in the other expense section of the statements of income. Outstanding capital stock for these purposes includes those amounts that are classified as mandatorily redeemable (see Notes 2 and 12).

     Estimated Fair Values. Some of the Bank’s financial instruments lack an available trading market characterized by transactions between a willing buyer and a willing seller engaging in an exchange transaction. Therefore, the Bank uses internal models employing assumptions regarding interest rates, volatility, cash flows, and other factors to perform present-value calculations when disclosing estimated fair values. The Bank assumes that book value approximates fair value for certain financial instruments with three months or less to repricing or maturity. The estimated fair values of the Bank’s financial instruments are presented in Note 15.

     Cash Flows. In the statements of cash flows, the Bank considers cash and due from banks as cash and cash equivalents.

     Reclassifications. Certain amounts in the 2003 and 2002 financial statements have been reclassified to conform with the 2004 presentation. In particular, for the years ended December 31, 2003 and 2002, the Bank has reclassified prepayment fee income on advances in the statements of income. Previously, prepayment fee income was classified as a separate line item within other income (loss). These amounts have been reclassified and are now included as a separate line item in interest income for the years ended December 31, 2003 and 2002. As a result of this reclassification, net interest income after mortgage loan loss provision and other income (loss) were adjusted by $10,517,000 and $4,288,000 for the years ended December 31, 2003 and 2002, respectively.

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Note 2 — Accounting Adjustments and Recently Issued Accounting Standards and Interpretations

     Accounting Adjustments. During 2004, the Bank changed the manner in which it assesses effectiveness for certain highly effective consolidated obligation hedging relationships. Under its prior approach, the Bank inappropriately assumed no ineffectiveness for these hedging transactions. The interest rate swaps used in these relationships were structured with one settlement amount under the receive side of the swap that differed from all other receive-side settlements by an amount equivalent to the concession cost associated with the hedged consolidated obligation. Since the formula for computing net settlements under the interest rate swap is not the same for each net settlement, the Bank determined that it should change its approach to measure effectiveness during each reporting period. The Bank assessed the impact of this change on all prior annual periods since the adoption of SFAS 133, all quarterly periods for 2003 and all relevant quarterly periods for 2004, and determined that had the Bank applied this approach since January 1, 2001 it would not have had a material impact on the results of operations or financial condition of the Bank for any of these prior reporting periods. For the year ended December 31, 2004, income before assessments was reduced by $3,374,000 to reflect the accounting as if the Bank had employed the new approach from the date of adoption of SFAS 133 (January 1, 2001) through December 31, 2003. The adjustment resulting from this change is included in “net realized and unrealized losses on derivatives and hedging activities” in the statement of income. Net of assessments, the prior period adjustment reduced net income by $2,479,000 during the year ended December 31, 2004.

     During 2004, the Bank changed its method of accounting for postretirement benefits to comply with the provisions of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“SFAS 106”). Previously, the Bank had accounted for these benefits on a pay-as-you-go (cash) basis. The Bank assessed the impact of this change on all prior annual periods since January 1, 2001, all quarterly periods for 2003 and all relevant quarterly periods for 2004 and determined that if the provisions of SFAS 106 had been applied earlier, the effect would not have been material to the Bank’s financial condition or results of operations for any of these prior reporting periods. For the year ended December 31, 2004, salaries and benefits expense includes a $1,624,000 charge for postretirement benefits relating to prior years. Net of assessments, this correction reduced net income for the year ended December 31, 2004 by approximately $1,193,000. For additional information regarding the Bank’s postretirement benefits, see Note 13.

     During 2004, the Bank changed its method of amortizing and accreting premiums and discounts on certain of its available-for-sale securities from the straight-line method to the level-yield method to comply with the provisions of SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” The Bank assessed the impact of this change on all prior annual periods, all quarterly periods for 2003 and all relevant quarterly periods for 2004 and determined that if the amortization and accretion of premiums and discounts had previously been computed using the level-yield method, the effect would not have been material to the Bank’s financial condition or results of operations for any of these prior reporting periods. Interest income on available-for-sale securities was increased by $3,532,000 during the year ended December 31, 2004 to reflect the accounting as if the level-yield method had been used in prior years. Net of assessments, this correction increased net income for the year ended December 31, 2004 by approximately $2,595,000.

     Adoption of SFAS 150. The Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”) in May 2003. SFAS 150 establishes standards for how issuers classify and measure certain financial instruments with characteristics of both liabilities and equity. Among other things, it requires issuers to classify as liabilities certain financial instruments that embody obligations for the issuer (hereinafter referred to as “mandatorily redeemable financial instruments”).

     SFAS 150 was effective for mandatorily redeemable instruments of nonpublic entities in fiscal periods beginning after December 15, 2003. For purposes of SFAS 150, a nonpublic entity is defined as “any entity other than one (a) whose equity securities trade in a public market either on a stock exchange (domestic or foreign) or in the over-the-counter market, including securities quoted only locally or regionally, (b) that makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market, or (c) that is controlled by an entity covered by (a) or (b)”. All of the Bank’s outstanding capital 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

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or former members that retain capital stock either to support advances or other activity that remains outstanding. 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). The Bank’s capital stock is not publicly traded, nor is there an established market for the stock. Furthermore, while the Bank is in the process of registering its equity securities with the Securities and Exchange Commission (“SEC”), this registration is not in preparation for the sale of these securities in a public market. The Bank is not controlled by any other entity. Therefore, the Bank meets the definition of a nonpublic entity, as defined in SFAS 150. FASB Staff Position No. FAS 150-3 “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“FAS 150-3”) deferred the effective date for applying the provisions of SFAS 150, but only for nonpublic entities that are not SEC registrants. For purposes of FAS 150-3, SEC registrants are defined as “entities, or entities that are controlled by entities, (a) that have issued or will issue debt or equity securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets), (b) that are required to file financial statements with the SEC, or (c) that provide financial statements for the purpose of issuing any class of securities in a public market.” Since the Bank met the definition of an SEC registrant, the deferral under FAS 150-3 was not applicable, and therefore the Bank adopted SFAS 150 as of January 1, 2004.

     Under the provisions of SFAS 150, the Bank reclassifies shares of capital stock from the capital section to the liability section of its balance sheet at the point in time when a member exercises a written redemption right, gives notice of its intent to withdraw from membership, or attains non-member status by merger or acquisition, charter termination, or involuntary termination from membership, as the shares of capital stock then meet the SFAS 150 definition of a mandatorily redeemable financial instrument. Shares of capital stock meeting this definition are reclassified to liabilities at fair value. Following reclassification of the stock, any dividends paid or accrued on such shares are recorded as interest expense in the statement of income. Redemption of these mandatorily redeemable financial instruments is reported as a cash outflow in the financing activities section of the statement of cash flows.

     If a member cancels a written redemption or withdrawal notice, the Bank reclassifies the shares subject to the cancellation notice from liabilities back to equity in accordance with SFAS 150. Following this reclassification to equity, dividends on the capital stock are once again recorded as a reduction of retained earnings.

     On January 1, 2004, the Bank reclassified $394,736,000 of its outstanding capital stock to “mandatorily redeemable capital stock” in the liability section of the statement of condition. During the year ended December 31, 2004, dividends on mandatorily redeemable capital stock in the amount of $6,643,000 were recorded as interest expense in the statement of income.

     Although mandatorily redeemable capital stock is excluded from capital for financial reporting purposes, it is considered capital for regulatory purposes. See Note 12 for more information, including restrictions on stock redemption.

     Adoption of SOP 03-3. The American Institute of Certified Public Accountants issued Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”) in December 2003. SOP 03-3 provides guidance on the accounting for differences between contractual and expected cash flows from a purchaser’s initial investment in loans or debt securities acquired in a transfer, if those differences are attributable, at least in part, to credit quality. Among other things, SOP 03-3: (i) prohibits the recognition of the excess of contractual cash flows over expected cash flows as an adjustment of yield, loss accrual or valuation allowance at the time of purchase; (ii) requires that subsequent increases in expected cash flows be recognized prospectively through an adjustment of yield; and (iii) requires that subsequent reductions in expected cash flows be recognized as an impairment. In addition, SOP 03-3 prohibits the creation or carryover of a valuation allowance in the initial accounting of all loans within its scope that are acquired in a transfer. The Bank will adopt SOP 03-3 as of January 1, 2005. The Bank does not expect the new rules to have a material impact on its results of operations or financial condition at the time of adoption.

     EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). In March 2004, the FASB reached a consensus on EITF 03-1, which clarifies the application of an impairment model to determine whether investments are other-than-temporarily impaired. The

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provisions of EITF 03-1 must be applied prospectively to all current and future investments accounted for in accordance with the provisions of SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” On September 15, September 30, and November 15, 2004, the FASB issued proposed staff positions to provide guidance on the application and scope of certain paragraphs and to defer the effective date of the impairment measurement and recognition provisions contained in specific paragraphs of EITF 03-1. This deferral will be superseded in the FASB’s final issuance of a staff position. The Bank does not expect EITF 03-1, as revised, to have a material impact on its results of operations or financial condition at the time of adoption.

     Adoption of FIN 46R. The FASB issued Interpretation No. 46R, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46R”) in December 2003. FIN 46R clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The Bank adopted FIN 46R on January 1, 2004 and the adoption had no impact on its financial statements. The Bank does not have any variable interest entities or any other type of off-balance sheet conduits. Additionally, the Bank has not engaged in any other activities for which consolidation is required under FIN 46R.

Note 3—Cash and Due from Banks

     Compensating Balances. The Bank maintains collected cash balances with commercial banks in return for certain services. These agreements contain no legal restrictions about the withdrawal of funds. The average compensating balances for the years ended December 31, 2004 and 2003 were approximately $58,020,000 and $75,470,000, respectively.

     In addition, the Bank maintained average required clearing balances with various Federal Reserve Banks and branches of approximately $70,176,000 and $86,831,000 for the years ended December 31, 2004 and 2003, respectively. These are required clearing balances and may not be withdrawn; however, the Bank may use earnings credits on these balances to pay for services received from the Federal Reserve Banks.

     Pass-through Deposit Reserves. The Bank acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. The amount reported as cash and due from banks includes pass-through reserves deposited with Federal Reserve Banks of approximately $32,631,000 and $68,959,000 as of December 31, 2004 and 2003, respectively. The Bank includes member reserve balances in “other liabilities” on the statements of condition.

Note 4—Trading Securities

     Major Security Types. Trading securities as of December 31, 2004 and 2003 were as follows (in thousands):

	2004		2003
Other FHLBanks’ bonds (see Note 5)	$	—	$	24,234
Mortgage-backed securities
Government-sponsored enterprises		76,976		117,076
Other mortgage-backed securities		—		854
Other		1,607		—
Total	$	78,583	$	142,164

     Net gain (loss) on trading securities during the years ended December 31, 2004, 2003 and 2002 included a change in net unrealized holding gain (loss) of $(7,860,000), $(12,727,000) and $9,945,000 for securities that were held on December 31, 2004, 2003 and 2002, respectively. There were no sales of trading securities during the years ended December 31, 2004, 2003 or 2002.

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Note 5—Available-for-Sale Securities

     Major Security Types. Available-for-sale securities as of December 31, 2004, were as follows (in thousands):

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. government guaranteed obligations	$	75,555	$	5,560	$	—	$	81,115
Government-sponsored enterprises		4,209,159		278,771		580		4,487,350
Other FHLBanks’ bonds		48,129		4,350		—		52,479
		4,332,843		288,681		580		4,620,944
Mortgage-backed securities
Government-sponsored enterprises		857,535		47,027		—		904,562
Other		239,844		20,242				260,086
		1,097,379		67,269		—		1,164,648
Total	$	5,430,222	$	355,950	$	580	$	5,785,592

Available-for-sale securities as of December 31, 2003, were as follows (in thousands):

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. government guaranteed obligations	$	76,052	$	9,906	$	—	$	85,958
Government-sponsored enterprises		4,267,672		249,690		5,091		4,512,271
Other FHLBanks’ bonds		48,190		6,012		—		54,202
		4,391,914		265,608		5,091		4,652,431
Mortgage-backed securities
Government-sponsored enterprises		937,108		82,237		—		1,019,345
Other		249,814		28,996		—		278,810
		1,186,922		111,233		—		1,298,155
Total	$	5,578,836	$	376,841	$	5,091	$	5,950,586

     The other FHLBanks’ bonds shown in the tables above (and in the table in Note 4) represent consolidated obligations acquired in the secondary market for which one or more other FHLBanks are the primary obligors, and for which the Bank is jointly and severally liable. See Notes 16 and 18 for a discussion of these investments and the Bank’s joint and several liability on consolidated obligations.

     The following table summarizes (in thousands) the available-for-sale securities with unrealized losses as of December 31, 2004. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

	Less Than				12 Months
	12 Months				Or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Government- sponsored enterprises	$	17,178	$	580	$	—	$	—	$	17,178	$	580

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     The following table summarizes (in thousands) the available-for-sale securities with unrealized losses as of December 31, 2003.

	Less Than				12 Months
	12 Months				Or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Government-sponsored enterprises	$	849,149	$	5,091	$	—	$	—	$	849,149	$	5,091

     Based upon the creditworthiness of the issuers, the Bank believes that the unrealized losses represent temporary impairments. Additionally, the Bank has the ability and intent to hold such securities through to recovery of the unrealized losses.

     Redemption Terms. The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at December 31 are presented below (in thousands). The expected maturities of some securities will differ from their contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

	2004				2003
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
Year of Maturity	Cost		Value		Cost		Value
Due in one year or less	$	57,637	$	59,435	$	50,187	$	50,680
Due after one year through five years		80,007		85,569		137,767		152,465
Due after five years through ten years		2,698,978		2,769,459		2,709,707		2,759,767
Due after ten years		1,496,221		1,706,481		1,494,253		1,689,519
		4,332,843		4,620,944		4,391,914		4,652,431
Mortgage-backed securities		1,097,379		1,164,648		1,186,922		1,298,155
Total	$	5,430,222	$	5,785,592	$	5,578,836	$	5,950,586

     The amortized cost of the Bank’s mortgage-backed securities classified as available-for-sale includes net premiums of $308,000 and $415,000 at December 31, 2004 and 2003, respectively.

     Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as available-for-sale at December 31, 2004 and 2003 (in thousands):

	2004		2003
Amortized cost of available-for-sale securities other than mortgage-backed securities:
Fixed-rate	$	4,319,531	$	4,343,724
Variable-rate		13,312		48,190
		4,332,843		4,391,914
Amortized cost of available-for-sale mortgage-backed securities:
Fixed-rate pass-through securities		1,022,548		1,105,886
Fixed-rate collateralized mortgage obligations		74,831		81,036
		1,097,379		1,186,922
Total	$	5,430,222	$	5,578,836

     Gains and Losses. There were no sales of available-for-sale securities during the years ended December 31, 2004, 2003 or 2002.

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Note 6—Held-to-Maturity Securities

     Major Security Types. Held-to-maturity securities as of December 31, 2004, were as follows (in thousands):

			Gross		Gross		Estimated
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. government guaranteed obligations	$	178,869	$	587	$	772	$	178,684
State or local housing agency obligations		7,825		2		—		7,827
		186,694		589		772		186,511
Mortgage-backed securities
U.S. government guaranteed obligations		94,691		620		2		95,309
Government-sponsored enterprises		5,307,058		15,701		1,720		5,321,039
Other		1,675,890		80,264		366		1,755,788
		7,077,639		96,585		2,088		7,172,136
Total	$	7,264,333	$	97,174	$	2,860	$	7,358,647

     Held-to-maturity securities as of December 31, 2003, were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
U.S. government guaranteed obligations	$	227,911	$	981	$	552	$	228,340
State or local housing agency obligations		8,890		3		—		8,893
		236,801		984		552		237,233
Mortgage-backed securities
U.S. government guaranteed obligations		170,190		637		40		170,787
Government-sponsored enterprises		4,842,233		11,173		6,666		4,846,740
Other		1,761,301		101,563		1,772		1,861,092
		6,773,724		113,373		8,478		6,878,619
Total	$	7,010,525	$	114,357	$	9,030	$	7,115,852

F-18

     The following table summarizes (in thousands) the held-to-maturity securities with unrealized losses as of December 31, 2004. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.

	Less Than				12 Months
	12 Months				Or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. government guaranteed obligations	$	57,431	$	228	$	49,641	$	544	$	107,072	$	772
Mortgage-backed securities:
U.S. government guaranteed obligations		494		1		1,423		1		1,917		2
Government- sponsored enterprises		537,775		1,705		20,119		15		557,894		1,720
Other		155,624		160		120,746		206		276,370		366
		693,893		1,866		142,288		222		836,181		2,088
Total temporarily impaired	$	751,324	$	2,094	$	191,929	$	766	$	943,253	$	2,860

     The following table summarizes (in thousands) the held-to-maturity securities with unrealized losses as of December 31, 2003.

	Less Than				12 Months
	12 Months				Or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. government guaranteed obligations	$	18,474	$	50	$	69,695	$	502	$	88,169	$	552
Mortgage-backed securities:
U.S. government guaranteed obligations		10,021		30		13,722		10		23,743		40
Government-sponsored enterprises		2,040,786		6,182		161,292		484		2,202,078		6,666
Other		471,562		1,722		49,673		50		521,235		1,772
		2,522,369		7,934		224,687		544		2,747,056		8,478
Total temporarily impaired	$	2,540,843	$	7,984	$	294,382	$	1,046	$	2,835,225	$	9,030

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     The Bank believes, based upon the creditworthiness of the issuers and any underlying collateral, that the unrealized losses represent temporary impairments. Additionally, the Bank has the ability and intent to hold such securities through to recovery of the unrealized losses.

     Redemption Terms. The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at December 31 are presented below (in thousands). The expected maturities of some securities will differ from their contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

	2004				2003
			Estimated				Estimated
Year of Maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due after one year through five years	$	60,215	$	60,269	$	63,961	$	64,032
Due after five years through ten years		11,198		11,372		15,683		16,083
Due after ten years		115,281		114,870		157,157		157,118
		186,694		186,511		236,801		237,233
Mortgage-backed securities		7,077,639		7,172,136		6,773,724		6,878,619
Total	$	7,264,333	$	7,358,647	$	7,010,525	$	7,115,852

     The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net discounts of $185,000 and $256,000 at December 31, 2004 and 2003, respectively.

     Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as held-to-maturity at December 31, 2004 and 2003 (in thousands):

	2004		2003
Amortized cost of variable-rate held-to-maturity securities other than mortgage-backed securities	$	186,694	$	236,801
Amortized cost of held-to-maturity mortgage-backed securities:
Fixed-rate pass-through securities		6,712		10,649
Collateralized mortgage obligations:
Fixed-rate		809,528		816,649
Variable-rate		6,261,399		5,946,426
		7,077,639		6,773,724
Total	$	7,264,333	$	7,010,525

F-20

Note 7—Advances

     Redemption Terms. At December 31, 2004 and 2003, the Bank had advances outstanding at interest rates ranging from 1.00 percent to 8.80 percent and 0.50 percent to 8.80 percent, respectively, as summarized below (in thousands).

	2004					2003
			Weighted					Weighted
			Average					Average
Year of Maturity	Amount		Interest Rate %			Amount		Interest Rate %
Overdrawn demand deposit accounts	$	26		5.94	%	$	9		4.92	%
2004		—		—			10,225,474		1.44
2005		15,147,564		2.26			5,293,693		1.75
2006		9,927,115		2.49			7,476,542		1.58
2007		6,012,451		2.53			4,527,123		1.52
2008		5,058,184		2.67			4,340,425		1.83
2009		3,067,658		2.55			318,152		4.83
Thereafter		1,288,294		5.11			1,223,743		5.20
Amortizing advances		6,516,216		4.20			6,942,782		4.25
Total par value		47,017,508		2.75	%		40,347,943		2.18	%
SFAS 133 hedging adjustments		93,646					247,086
Total	$	47,111,154				$	40,595,029

     Amortizing advances require repayment according to predetermined amortization schedules.

     The Bank offers advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable advances). Other advances may only be prepaid by paying a fee to the Bank (prepayment fee) that makes the Bank financially indifferent to the prepayment of the advance. At December 31, 2004 and 2003, the Bank had callable advances of $148,543,000 and $141,075,000, respectively.

     The following table summarizes advances at December 31, 2004 and 2003, by year of maturity or next call date for callable advances (in thousands):

Year of Maturity or Next Call Date	2004		2003
Overdrawn demand deposit accounts	$	26	$	9
2004		—		10,266,221
2005		15,214,589		5,332,221
2006		9,930,861		7,489,673
2007		6,021,036		4,539,028
2008		5,081,322		4,367,015
2009		3,082,942		314,452
Thereafter		1,170,516		1,096,542
Amortizing advances		6,516,216		6,942,782
Total par value	$	47,017,508	$	40,347,943

     The Bank also offers cancelable advances. With a cancelable advance, the Bank effectively purchases a put option from the member that allows the Bank to terminate the fixed rate advance and offer a floating rate advance. At December 31, 2004 and 2003, the Bank had cancelable advances outstanding totaling $2,255,900,000 and $2,506,900,000, respectively.

F-21

     The following table summarizes advances at December 31, 2004 and 2003, by year of maturity or next put date (in thousands):

Year of Maturity or Next Put Date	2004		2003
Overdrawn demand deposit accounts	$	26	$	9
2004		—		12,431,375
2005		17,316,264		5,281,492
2006		9,537,115		7,111,542
2007		5,662,451		4,137,123
2008		4,556,084		3,828,325
2009		2,849,358		99,852
Thereafter		579,994		515,443
Amortizing advances		6,516,216		6,942,782
Total par value	$	47,017,508	$	40,347,943

     Security Terms. The Bank lends to financial institutions involved in housing finance within its district according to federal statutes, including the FHLB Act. The FHLB Act requires the Bank to obtain sufficient collateral on advances to protect against losses and to accept only certain U.S. government or government agency securities, residential mortgage loans, cash or deposits in the Bank, and other eligible real estate-related assets as collateral on such advances. However, in the case of Community Financial Institutions (“CFIs”), the Bank may also accept as collateral secured small business, small farm and small agribusiness loans. Borrowing members pledge their capital stock of the Bank as additional collateral for advances. At December 31, 2004 and 2003, the Bank had rights to collateral with an estimated value greater than outstanding advances.

Based upon the financial condition of the member, the Bank either:

     (1) Allows a member to retain possession of the collateral assigned to the Bank, if the member executes a written security agreement and agrees to hold such collateral for the benefit of the Bank; or

     (2) Requires the member to assign or place physical possession of such collateral with the Bank or its safekeeping agent.

     Beyond these provisions, Section 10(e) of the FHLB Act affords any security interest granted by a member to the Bank priority over the claims or rights of any other party. The only exceptions are those claims that would be entitled to priority under otherwise applicable law and are held by bona fide purchasers for value or by secured parties with perfected security interests.

     Credit Risk. The Bank has never experienced a credit loss on an advance to a member. While the expanded eligible collateral for CFIs provides the potential for additional credit risk for the Bank, the Bank believes it has the policies and procedures in place to appropriately manage this credit risk. Accordingly, the Bank has not provided any allowances for losses on advances.

     Due to the composition of its shareholders, the Bank’s potential credit risk from advances is concentrated in commercial banks and savings institutions. As of December 31, 2004 and 2003, the Bank had advances of $24 billion and $21 billion outstanding to its three largest stockholders, which represented 50 percent and 52 percent of total advances outstanding, respectively. The income from advances to these institutions totaled $395,833,000 and $305,416,000 during the years ended December 31, 2004 and 2003, respectively. The Bank held sufficient collateral to cover the advances to these institutions, and the Bank does not expect to incur any credit losses on these advances.

     The Bank’s second largest stockholder (and borrower) is a non-member institution that acquired a Bank member and dissolved its charter on February 13, 2001. The acquiring institution assumed the member’s advances, and the Bank expects those advances to remain fully collateralized until they are repaid. As of December 31, 2004, the

F-22

stockholder held $319,502,000 of mandatorily redeemable capital stock and had advances outstanding of approximately $7,471,600,000, which had final maturities in the years 2006 through 2008 (see Note 12).

     Interest Rate Payment Terms. The following table provides interest rate payment terms for advances at December 31, 2004 and 2003 (in thousands, based upon par amount):

	2004		2003
Fixed-rate	$	24,354,663	$	21,495,174
Variable-rate		22,662,845		18,852,769
Total par value	$	47,017,508	$	40,347,943

Note 8—Affordable Housing Program

     Section 10(j) of the FHLB Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and/or below market interest rate advances to members who use the funds to assist with the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Historically, the Bank has generally provided subsidies under its AHP only in the form of direct grants. Annually, each FHLBank must set aside for the AHP 10 percent of its current year’s income before charges for AHP (as adjusted for interest expense on mandatorily redeemable capital stock), but after the assessment for REFCORP, subject to a collective minimum contribution for all 12 FHLBanks of $100 million. If the result of the aggregate 10 percent calculation is less than $100 million for all 12 FHLBanks, then the FHLB Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income before AHP and REFCORP to the sum of the income before AHP and REFCORP of the 12 FHLBanks. There was no shortfall during the years ended December 31, 2004, 2003 or 2002.

     Generally, the Bank’s AHP assessment is derived by adding interest expense on mandatorily redeemable capital stock (see Notes 2 and 12) to reported income before assessments and then subtracting the REFCORP assessment; the result of this calculation is then multiplied by 10 percent. The calculation of the REFCORP assessment is described in Note 1. The Bank charges the amount set aside for AHP to income and recognizes it as a liability. The Bank relieves the AHP liability as members receive grants. In periods where the Bank’s income before AHP and REFCORP (as adjusted for interest expense on mandatorily redeemable capital stock) is zero or less, the amount of the AHP assessment is equal to zero. At December 31, 2004 and 2003, the Bank had no outstanding AHP-related advances.

     The following table summarizes the changes in the Bank’s AHP liability during the years ended December 31, 2004, 2003 and 2002 (in thousands):

	2004			2003			2002
Balance, beginning of year	$	34,098		$	32,444		$	39,541
AHP assessments		9,543			9,977			8,412
Grants funded		(9,830	)		(8,323	)		(15,509	)
Balance, end of year	$	33,811		$	34,098		$	32,444

F-23

Note 9—Mortgage Loans Held for Portfolio

     Mortgage loans held for portfolio represent held-for-investment loans under the MPF program whereby the Bank’s PFIs service and credit enhance home mortgage loans that are owned by the Bank. These loans were either funded by the Bank through, or purchased from, its PFIs. The following table presents information as of December 31, 2004 and 2003 for mortgage loans held for portfolio (in thousands):

	2004			2003
Fixed medium-term* single-family mortgages	$	174,688		$	218,194
Fixed long-term single-family mortgages		526,886			746,782
Premiums		5,865			7,903
Discounts		(881	)		(992	)
Total mortgage loans held for portfolio	$	706,558		$	971,887

*Medium-term is defined as a term of 15 years or less.

     The par value of mortgage loans held for portfolio at December 31, 2004 and 2003 was comprised of government-guaranteed loans totaling $343,061,000 and $492,665,000, respectively, and conventional loans totaling $358,513,000 and $472,311,000, respectively.

     The allowance for credit losses on mortgage loans held for portfolio was as follows (in thousands):

	2004			2003			2002
Balance, beginning of year	$	387		$	437		$	311
Chargeoffs		(6	)		(23	)		—
Provision (reduction) for credit losses		(26	)		(27	)		126
Balance, end of year	$	355		$	387		$	437

     At December 31, 2004 and 2003, the Bank had nonaccrual loans totaling $938,000 and $1,133,000, respectively. At December 31, 2004 and 2003, the Bank’s other assets included $572,000 and $704,000 of real estate owned.

     The estimated fair value of the mortgage loans held for portfolio as of December 31, 2004 and 2003 is presented in Note 15.

     Mortgage loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement. The Bank did not have any impaired loans at December 31, 2004 or 2003.

Note 10—Deposits

     The Bank offers demand and overnight deposits for members and qualifying non-members. In addition, the Bank offers short-term deposit programs to members and qualifying non-members. The weighted average interest rates paid on average outstanding deposits were 1.31 percent, 1.07 percent and 1.62 percent during 2004, 2003 and 2002, respectively. For additional information regarding other interest-bearing deposits, see Note 14.

Note 11—Consolidated Obligations

     Consolidated obligations are the joint and several obligations of the FHLBanks and consist of consolidated bonds and discount notes. The Bank records on its balance sheet only that portion of the consolidated obligations for which it is the primary obligor. The Bank is primary obligor for the portion of bonds and discount notes for which it has received the proceeds (i.e., those issued on its behalf). The FHLBanks issue consolidated obligations through the Office of Finance as their agent. Consolidated obligation bonds are issued primarily to raise intermediate and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on

F-24

maturity. Consolidated obligation discount notes are issued primarily to raise short-term funds. These notes sell at less than their face amount and are redeemed at par value when they mature. For additional information regarding the FHLBanks’ joint and several liability, see Note 16.

     The par amounts of the FHLBanks’ outstanding consolidated obligations, including consolidated obligations held by other FHLBanks, were approximately $869.2 billion and $759.5 billion at December 31, 2004 and 2003, respectively. Regulations require each of the FHLBanks to maintain unpledged qualifying assets equal to its participation in the consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the consolidated obligations; obligations of or fully guaranteed by the United States; obligations, participations, mortgages, or other instruments of or issued by Fannie Mae or Ginnie Mae; mortgages, obligations or other securities which are or have ever been sold by Freddie Mac under the FHLB Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBank is located.

     From July 1, 2000 until the implementation of its new capital structure, Finance Board regulations limited each FHLBank’s assets generally to no more than 21 times its total regulatory capital. Nevertheless, an FHLBank whose non-mortgage assets, after deducting deposits and capital stock, did not exceed 11 percent of its assets could have total assets in an amount not greater than 25 times its total regulatory capital. As a result of the implementation of its new capital structure on September 2, 2003 (see Note 12), the Bank is no longer required to follow this regulation. Prior to September 2, 2003, the Bank was in compliance with this regulation at all times.

     To provide the holders of consolidated obligations issued prior to January 29, 1993 (prior bondholders) the protection equivalent to that provided under the FHLBanks’ previous leverage limit of 12 times the FHLBanks’ capital stock, prior bondholders have a claim on a certain amount of the qualifying assets [Special Asset Account (“SAA”)] if capital stock (including mandatorily redeemable capital stock) is less than 8.33 percent of their consolidated obligations. At December 31, 2004 and 2003, the FHLBanks’ capital stock (including mandatorily redeemable capital stock) was 4.75 percent and 4.96 percent of the par value of consolidated obligations outstanding, and the required minimum pledged asset balance was approximately $219,000 and $23,989,000, respectively. Further, the regulations require each FHLBank to transfer qualifying assets in the amount of its allocated share of the FHLBanks’ SAA to a trust for the benefit of the prior bondholders if its regulatory capital-to-assets ratio falls below two percent. As of December 31, 2004 and 2003, no FHLBank had a regulatory capital-to-assets ratio below two percent; therefore, no assets were being held in a trust. In addition, no trust has ever been established as a result of this regulation, as the ratio has never fallen below two percent.

     General Terms. Consolidated obligations are issued with either fixed-rate coupon payment terms or variable-rate coupon payment terms that use a variety of indices for interest rate resets such as the London Interbank Offered Rate (“LIBOR”) and the Constant Maturity Treasury (“CMT”) rate. In addition, to meet the specific needs of certain investors in consolidated obligations, both fixed-rate bonds and variable-rate bonds may also contain complex coupon payment terms and call options. When such consolidated obligations are issued, the Bank enters into interest rate exchange agreements containing offsetting features that effectively convert the terms of the bond to those of a simple variable-rate bond or a fixed-rate bond.

     These consolidated obligations, beyond having fixed-rate or simple variable-rate coupon payment terms, may also have the following broad terms regarding either principal repayment or coupon payment terms:

     Optional principal redemption bonds (callable bonds) that the Bank may redeem in whole or in part at its discretion on predetermined call dates according to the terms of the bond offerings;

     Capped floating rate bonds pay interest at variable rates subject to an interest rate ceiling;

     Step-up bonds generally pay interest at increasing fixed rates for specified intervals over the life of the bond. These bonds generally contain provisions enabling the Bank to call bonds at its option on the step-up dates;

     Conversion bonds have coupons that may convert from fixed to floating, or floating to fixed, at the Bank’s discretion; and

F-25

     Comparative-index bonds have coupon rates determined by the difference between two or more market indices, typically CMT and LIBOR.

     Interest Rate Payment Terms. The following table provides interest rate payment terms for the Bank’s consolidated bonds at December 31, 2004 and 2003 (in thousands, at par value).

	2004		2003
Fixed-rate	$	38,695,324	$	30,188,465
Step-up		7,997,505		7,900,420
Simple variable-rate		4,397,000		2,376,000
Fixed that converts to variable		340,000		—
Variable that converts to fixed		50,000		—
Comparative-index		175,000		175,000
Total par value	$	51,654,829	$	40,639,885

     Redemption Terms. The following is a summary of the Bank’s participation in consolidated bonds outstanding at December 31, 2004 and 2003, by year of maturity (in thousands):

	2004						2003
				Weighted						Weighted
				Average						Average
				Interest						Interest
Year of Maturity	Amount			Rate			Amount			Rate
2004	$	—			—	%	$	7,871,255			3.15	%
2005		18,417,325			2.02			7,557,325			3.04
2006		10,169,500			2.78			5,080,000			3.32
2007		6,416,875			3.33			4,237,700			3.67
2008		5,526,370			3.50			5,881,420			3.42
2009		4,345,314			4.02			2,436,200			4.74
Thereafter		6,779,445			4.11			7,575,985			3.99
Total par value		51,654,829			2.94			40,639,885			3.50
Bond premiums		31,464						45,874
Bond discounts		(25,358	)					(27,525	)
SFAS 133 hedging adjustments		(179,397	)					62,465
		51,481,538						40,720,699
Bonds held in treasury		(17,800	)					(17,800	)
Total	$	51,463,738					$	40,702,899

     Consolidated bonds outstanding at December 31, 2004 and 2003, include callable bonds totaling $31,908,505,000 and $24,799,920,000, respectively. Simultaneous with the issuance of callable bonds, the Bank generally enters into an interest rate swap (in which the Bank pays variable and receives fixed) with a call feature that mirrors the option embedded in the debt (a sold callable swap). The combined sold callable swap and callable debt allows the Bank to provide members with attractively priced variable-rate advances. The Bank also uses fixed-rate callable debt to finance callable advances (see Note 7) and mortgage-backed securities.

     At December 31, 2004 and 2003, the Bank’s consolidated bonds outstanding include the following (at par value, in thousands):

	2004		2003
Non-callable or non-putable bonds	$	19,746,324	$	15,839,965
Callable bonds		31,908,505		24,799,920
Total par value	$	51,654,829	$	40,639,885

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     The following table summarizes the Bank’s consolidated bonds outstanding at December 31, 2004 and 2003, by year of maturity or next call date (in thousands):

Year of Maturity or Next Call Date	2004		2003
2004	$	—	$	27,105,175
2005		36,725,805		6,087,325
2006		7,719,500		2,557,500
2007		2,879,700		1,559,700
2008		1,374,000		1,269,000
2009		1,657,564		976,200
Thereafter		1,298,260		1,084,985
Total par value	$	51,654,829	$	40,639,885

     Consolidated Discount Notes. Consolidated discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to 360 days. These notes are issued at less than their face amount and redeemed at par value when they mature. The Bank’s participation in consolidated discount notes, all of which are due within one year, was as follows (in thousands):

					Weighted
					Average
	Book Value		Par Value		Interest Rate
December 31, 2004	$	7,084,765	$	7,100,000		2.15	%
December 31, 2003	$	11,627,325	$	11,650,000		1.10	%

     The FHLB Act authorizes the Secretary of the Treasury, at his or her discretion, to purchase consolidated obligations of the FHLBanks aggregating not more than $4 billion, under certain conditions. The terms, conditions, and interest rates are determined by the Secretary of the Treasury. There were no such purchases by the U.S. Treasury during the three years ended December 31, 2004.

Note 12—Capital

     The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) required a number of changes in the capital structure of all FHLBanks. In accordance with the GLB Act, the final Finance Board capital rule, which was published on January 30, 2001, required each FHLBank to submit a capital structure plan to the Finance Board by October 29, 2001. Under the final rule, each FHLBank may issue Class A stock or Class B stock, or both, to its members. The GLB Act provides a transition period to the new capital structure of up to three years from the date each FHLBank’s capital plan was approved. The Finance Board approved the Bank’s capital plan on June 12, 2002 and the Bank converted to its new capital structure on September 2, 2003. The conversion was considered a capital transaction and was accounted for at par value.

     The Bank’s new capital plan provides that it will issue only Class B capital stock. The Class B stock has a par value of $100 per share and is purchased, redeemed, repurchased and transferred only at its par value. As required by statute and regulation, under the new capital structure, members may request the Bank to redeem excess Class B stock, or withdraw from membership and request the Bank to redeem all outstanding capital stock, with five years’ written notice to the Bank. The regulations also allow the Bank, in its sole discretion, to repurchase members’ excess stock at any time without regard for the five-year notification period as long as the Bank continues to meet its regulatory capital requirements following any stock repurchases, as described below.

     Under the new capital structure, stockholders are required to maintain an investment in Class B stock equal to the sum of a membership investment requirement and an activity-based investment requirement. As of December 31, 2004, the membership investment requirement was 0.15 percent of each member’s total assets as of the preceding December 31, subject to a minimum of $1,000 and a maximum of $25,000,000. The activity-based investment requirement was 4.25 percent of outstanding advances, plus 4.25 percent of the outstanding principal balance of any MPF loans that were delivered after September 2, 2003 and retained on the Bank’s balance sheet (of which there were none).

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     Members and institutions that acquire members must comply with the activity-based investment requirements for as long as the relevant advances or MPF loans remain outstanding. The Bank’s Board of Directors has the authority to adjust these requirements periodically, within ranges established in the capital plan, as amended from time to time, to ensure that the Bank remains adequately capitalized. On February 25, 2005, the Bank’s Board of Directors approved a reduction in the membership investment requirement from 0.15 percent to 0.14 percent of members’ total assets; this change will become effective on April 18, 2005.

     Excess stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum investment requirement (i.e., the amount of stock held in excess of their activity-based investment requirement and, in the case of a member, their membership investment requirement). At any time, stockholders may request the Bank to repurchase excess capital stock. Although the Bank is not obligated to repurchase excess stock prior to the expiration of a five-year redemption or withdrawal notification period, it will typically endeavor to honor such requests within a reasonable period of time (generally not exceeding 30 days) so long as the Bank will continue to meet its regulatory capital requirements following the repurchase.

     Following the implementation of its new capital structure, the Bank established a policy under which it periodically repurchases a portion of members’ excess capital stock. Under this policy, the Bank generally repurchases surplus stock at the end of the month following the end of each calendar quarter (e.g., January 31, April 30, July 31 and October 31). Surplus stock is currently defined as the amount of stock held by a member in excess of 120 percent of the member’s minimum investment requirement. A member’s surplus stock will not be repurchased if the amount of surplus stock is $250,000 or less. From time to time, the Bank may modify the definition of surplus stock or the timing and/or frequency of surplus stock repurchases. The first repurchase under this policy occurred on October 31, 2003.

     The following table presents total excess stock, surplus stock and surplus stock meeting the repurchase criteria (i.e., surplus stock of individual institutions exceeding $250,000) at December 31, 2004 and 2003 (in thousands):

	2004		2003
Excess stock
Capital stock	$	318,645	$	342,106
Mandatorily redeemable capital stock		2,871		—
Total	$	321,516	$	342,106
Surplus stock
Capital stock	$	111,996	$	115,740
Mandatorily redeemable capital stock		422		—
Total	$	112,418	$	115,740
Surplus stock meeting repurchase criteria
Capital stock	$	69,436	$	83,242
Mandatorily redeemable capital stock		—		—
Total	$	69,436	$	83,242

     Under the new capital regulations, the Bank is subject to three capital requirements. First, the Bank must maintain at all times permanent capital (defined under the Finance Board’s rules and regulations as retained earnings and all Class B stock regardless of its classification for financial reporting purposes) in an amount at least equal to its risk-based capital requirement, which is the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, calculated in accordance with the rules and regulations of the Finance Board. The Finance Board may require the Bank to maintain a greater amount of permanent capital than is required by the risk-based capital requirements as defined. Second, the Bank must, at all times, maintain total capital in an amount at least equal to 4.0 percent of its total assets (capital-to-assets ratio). For the Bank, total capital is defined by Finance Board rules and regulations as the Bank’s permanent capital and the amount of any general allowance for losses (i.e., those reserves that are not held against specific assets). Finally, the Bank is required to maintain at all times a minimum leverage capital-to-assets ratio in an amount at least equal to 5.0 percent

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of its total assets. In applying this requirement to the Bank, leverage capital includes the Bank’s permanent capital multiplied by a factor of 1.5 plus the amount of any general allowance for losses. The Bank did not have any general reserves at December 31, 2004 or 2003. Under the regulatory definitions, total capital and permanent capital exclude accumulated other comprehensive income (loss). Additionally, mandatorily redeemable capital stock is considered capital (i.e., Class B stock) for purposes of determining the Bank’s compliance with its regulatory capital requirements.

     At all times during the period from September 2, 2003 through December 31, 2004, the Bank was in compliance with the aforementioned capital requirements. The following table summarizes the Bank’s compliance with the Finance Board’s capital requirements as of December 31, 2004 and 2003 (dollars in thousands):

	December 31, 2004						December 31, 2003
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	527,718		$	2,963,807		$	547,053		$	2,769,745
Total capital	$	2,583,453		$	2,963,807		$	2,335,840		$	2,769,745
Total capital-to-assets ratio		4.00	%		4.59	%		4.00	%		4.74	%
Leverage capital	$	3,229,316		$	4,445,711		$	2,919,800		$	4,154,618
Leverage capital-to-assets ratio		5.00	%		6.88	%		5.00	%		7.11	%

     The GLB Act also made membership voluntary for all members. Members that withdraw from membership will not be eligible to become a member of any FHLBank for at least five years following the date that their membership was terminated.

     The Bank’s Board of Directors may declare and pay dividends in either cash or capital stock only from retained earnings or current earnings.

     Mandatorily Redeemable Capital Stock. As discussed in Note 2, the Bank adopted SFAS 150 as of January 1, 2004. Under the provisions of SFAS 150, the Bank’s capital stock is classified as equity (capital) for financial reporting purposes until either a written redemption or withdrawal notice is received from a member or a membership withdrawal or termination is otherwise initiated, at which time the capital stock is reclassified to liabilities. The Finance Board has confirmed that the SFAS 150 accounting treatment for certain shares of its capital stock does not affect the definition of capital for purposes of determining the Bank’s compliance with its regulatory capital requirements.

     At December 31, 2004, the Bank had $327,121,000 in outstanding capital stock subject to mandatory redemption held by nine former members. This amount is classified as a liability in the statement of condition in accordance with SFAS 150.

     The Bank is not required to redeem or repurchase activity-based stock until the later of the expiration of the notice of redemption or withdrawal or until the activity no longer remains outstanding. If activity-based stock becomes excess stock as a result of reduced activity, the Bank, in its discretion and subject to certain regulatory restrictions, may repurchase excess stock prior to the expiration of the notice of redemption or withdrawal. The Bank will generally repurchase such excess stock as long as it expects to continue to meet its minimum capital requirements following the repurchase.

     The following table summarizes the Bank’s mandatorily redeemable capital stock at December 31, 2004 by year of earliest mandatory redemption and year of anticipated repurchase (in thousands). The earliest mandatory redemption reflects the earliest time at which the Bank is required to repurchase the shareholder’s capital stock, and is based on the assumption that the activities associated with the activity-based stock have concluded by the time the notice of redemption or withdrawal expires. The timing of anticipated repurchases is determined under the assumption that the Bank will redeem activity-based stock as the associated activities are reduced and that advances

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relating to such activity-based stock will be repaid on their contractual maturity dates (which may be before or after the expiration of the five-year redemption/withdrawal notice period).

	Earliest
	Mandatory		Anticipated
	Redemption		Repurchase
2005	$	—	$	1,966
2006		—		168,241
2007		—		133,669
2008		326,944		16,378
2009		177		1,440
Thereafter		—		5,427
Total	$	327,121	$	327,121

     The following table summarizes the Bank’s mandatorily redeemable capital stock activity during 2004 (in thousands). Amounts for 2003 and 2002 are not provided because the provisions of SFAS 150 were not applicable to the Bank prior to January 1, 2004.

Balance, December 31, 2003	$	—
Capital stock subject to mandatory redemption reclassified from equity upon adoption of SFAS 150 on January 1, 2004		394,736
Capital stock that became subject to mandatory redemption during the year		12,344
Redemption of mandatorily redeemable capital stock		(86,624	)
Stock dividends classified as mandatorily redeemable		6,665
Balance, December 31, 2004	$	327,121

     A member may cancel a previously submitted redemption or withdrawal notice by providing a written cancellation notice to the Bank prior to the expiration of the five-year redemption/withdrawal notice period. A member that cancels a stock redemption or withdrawal notice more than 30 days after it is received by the Bank and prior to its expiration is subject to a cancellation fee equal to a percentage of the par value of the capital stock subject to the cancellation notice.

     Limitations on Redemption or Repurchase of Capital Stock. The GLB Act imposes the following restrictions on the redemption or repurchase of the Bank’s capital stock.

• In no event may the Bank redeem or repurchase capital stock if the Bank is not in compliance with its minimum capital requirements or if the redemption or repurchase would cause the Bank to be out of compliance with its minimum capital requirements, or if the redemption or repurchase would cause the member to be out of compliance with its minimum investment requirement. In addition, the Bank’s Board of Directors may suspend redemption of capital stock if the Bank reasonably believes that continued redemption of capital stock would cause the Bank to fail to meet its minimum capital requirements in the future, would prevent the Bank from maintaining adequate capital against a potential risk that may not be adequately reflected in its minimum capital requirements, or would otherwise prevent the Bank from operating in a safe and sound manner.

• In no event may the Bank redeem or repurchase capital stock without the prior written approval of the Finance Board if the Finance Board or the Bank’s Board of Directors has determined that the Bank has incurred, or is likely to incur, losses that result in, or are likely to result in, charges against the capital of the Bank. Such a determination may be made by the Finance Board or the Board of Directors even if the Bank is in compliance with its minimum capital requirements.

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• The Bank may not repurchase any capital stock without the written consent of the Finance Board during any period in which the Bank has suspended redemptions of capital stock. The Bank is required to notify the Finance Board if it suspends redemptions of capital stock and set forth its plan for addressing the conditions that led to the suspension. The Finance Board may require the Bank to reinstate redemptions of capital stock.

• In no event may the Bank redeem or repurchase shares of capital stock if the principal and interest due on any consolidated obligations issued through the Office of Finance has not been paid in full or, under certain circumstances, if the Bank becomes a non-complying FHLBank under Finance Board regulations as a result of its inability to comply with regulatory liquidity requirements or to satisfy its current obligations.

• If at any time the Bank determines that the total amount of capital stock subject to outstanding stock redemption or withdrawal notices with expiration dates within the following 12 months exceeds the amount of capital stock the Bank could redeem and still comply with its minimum capital requirements, the Bank will determine whether to suspend redemption and repurchase activities altogether, to fulfill requests for redemption sequentially in the order in which they were received, to fulfill the requests on a pro rata basis, or to take other action deemed appropriate by the Bank.

     Prior Capital Rules. Prior to the Bank’s implementation of the new capital regulations, the prior capital rules were in effect. In particular, the FHLB Act required members to purchase capital stock equal to the greater of one percent of their mortgage-related assets or five percent of their outstanding Bank advances. Members could, at the Bank’s discretion, redeem at par value any capital stock greater than their statutory requirement or sell it to other Bank members at par value.

Note 13—Employee Retirement Plans

     The Bank participates in the Financial Institutions Retirement Fund (“FIRF”), a defined-benefit plan. The plan covers substantially all officers and employees of the Bank. The Bank’s contributions to FIRF through June 30, 1987, represented the normal cost of the plan. The plan reached the full-funding limitation, as defined by the Employee Retirement Income Security Act, for the plan year beginning July 1, 1987, because of favorable investment and other actuarial experience during previous years. As a result, FIRF suspended employer contributions for all plan years between July 1, 1987 and June 30, 2003. Contributions to the plan resumed effective July 1, 2003. Funding and administrative costs of FIRF charged to salaries and benefits expense during the years ended December 31, 2004, 2003 and 2002 were $1,205,000, $170,000 and $7,000, respectively. The FIRF is a multiemployer plan and does not segregate its assets, liabilities, or costs by participating employer. As a result, disclosure of the accumulated benefit obligations, plan assets, and the components of annual pension expense attributable to the Bank cannot be made.

     The Bank also participates in the Financial Institutions Thrift Plan (“FITP”), a defined contribution plan. The Bank’s contributions to the FITP are equal to a percentage of voluntary employee contributions, subject to certain limitations. During the years ended December 31, 2004, 2003 and 2002, the Bank contributed $454,000, $651,000 and $391,000, respectively, to the FITP. During the year ended December 31, 2003, the Bank’s contributions to the FITP included a one-time supplemental contribution of $227,000 for certain eligible employees. The supplemental contribution was made to partially offset a reduction in the employee service accrual rate applicable to the FIRF, which was effective July 1, 2003.

     Additionally, the Bank maintains a non-qualified deferred compensation plan that is available to some employees, which is, in substance, an unfunded supplemental retirement plan. The plan’s liability consists of the accumulated compensation deferrals and accrued earnings on those deferrals. The Bank’s minimum obligation under this plan was $770,000 and $699,000 at December 31, 2004 and 2003, respectively. Salaries and benefits expense includes accrued earnings on deferred employee compensation of $37,000, $37,000 and $36,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

     The Bank also maintains a non-qualified deferred compensation plan that is available to all of its directors. The plan’s liability consists of the accumulated compensation deferrals (representing directors’ fees) and accrued earnings on those deferrals. At December 31, 2004 and 2003, the Bank’s minimum obligation under this plan was

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$614,000 and $797,000, respectively.

     In October 2004, the Bank established the Special Non-Qualified Deferred Compensation Plan (“the Plan”), a defined contribution plan that was established primarily to provide supplemental retirement benefits to most of the Bank’s executive officers. Each participant’s benefit under the Plan consists of contributions made by the Bank on the participant’s behalf, plus an allocation of the investment gains or losses on the assets used to fund the Plan. Contributions to the Plan are determined solely at the discretion of the Bank’s Board of Directors; the Bank has no obligation to make future contributions to the Plan. The Bank’s accrued liability under this plan was $177,000 at December 31, 2004. During the year ended December 31, 2004, the Bank contributed $170,000 to the Plan.

     The Bank sponsors a retirement benefits program that includes health care and life insurance benefits for eligible retirees. The health care portion of the program is contributory while the life insurance benefits, which are available to retirees with at least 20 years of service, are offered on a noncontributory basis. Prior to January 1, 2005, retirees were eligible to remain enrolled in the Bank’s health care benefits plan if age 50 or older with at least 10 years of service at the time of retirement. In December 2004, the Bank modified the eligibility requirements relating to retiree health care continuation benefits. Effective January 1, 2005, retirees are eligible to remain enrolled in the Bank’s health care benefits plan if age 55 or older with at least 15 years of service at the time of retirement. Employees who were age 50 or older with 10 years of service and those who had 20 years of service as of December 31, 2004 are not subject to the revised eligibility requirements. Additionally, current retiree benefits were unaffected by these modifications. The Bank does not have any plan assets set aside for the retiree benefits program.

     As discussed in Note 2, the Bank changed its method of accounting for these postretirement benefits to comply with the provisions of SFAS 106 during the year ended December 31, 2004. For the year ended December 31, 2004, salaries and benefits expense includes a $2,363,000 charge related to these postretirement benefits, of which $1,624,000 related to prior years. Net of assessments, the correction relating to prior years reduced net income by approximately $1,193,000 during the year ended December 31, 2004.

     The Bank uses a December 31 measurement date for its retirement benefits program. For years prior to 2004, the calculated costs and liabilities relating to these postretirement benefits were determined for current retirees and employees using a valuation date of December 31, 2003 and a roll forward and roll back methodology. A reconciliation of the accumulated postretirement benefit obligation (“APBO”) and funding status of the benefits program for the years ended December 31, 2004 and 2003 is as follows (in thousands):

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	Year Ended December 31,
	2004			2003
Change in APBO
APBO at beginning of year	$	3,650		$	3,036
Service cost		229			192
Interest cost		240			215
Actuarial loss		356			286
Participant contributions		98			74
Benefits paid		(173	)		(153	)
APBO at end of year		4,400			3,650
Change in plan assets
Fair value of plan assets at beginning of year		—			—
Bank contributions		75			79
Participant contributions		98			74
Benefits paid		(173	)		(153	)
Fair value of plan assets at end of year		—			—
Funded status		(4,400	)		(3,650	)
Unrecognized net actuarial loss		948			609
Unrecognized prior service cost		1,163			1,417
Net cumulative liability that should have been recognized under SFAS 106		(2,289	)		(1,624	)
Other unrecognized amounts		—			1,624
Net liability recognized	$	(2,289	)	$	—

     The actuarial assumptions used in the measurement of the Bank’s benefit obligation included a gross health care cost trend rate of 14.0 percent for 2005; for 2004 and prior years, a gross health care cost trend rate of 15.0 percent was used. The health care cost trend rate is assumed to decline by 1.0 percent per year to a final rate of 5.0 percent in 2014 and thereafter. To compute the APBO at December 31, 2004 and 2003, weighted average discount rates of 5.75 percent and 6.25 percent were used. Weighted average discount rates of 6.25 percent, 6.75 percent, 7.25 percent and 7.50 percent were used to compute the net periodic benefit cost for 2004, 2003, 2002 and 2001, respectively.

     In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act provides for a prescription drug benefit under Medicare (Medicare Part D) as well as a 28 percent federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The calculated costs and liabilities relating to the Bank’s postretirement benefits do not reflect any amount associated with the subsidy because the Bank is currently unable to conclude whether the benefits provided by its plan are actuarially equivalent to Medicare Part D under the Act.

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     Components of net periodic benefit cost for the year ended December 31, 2004, and the distribution of these amounts had the provisions of SFAS 106 been applied in prior periods, were as follows (in thousands):

	Amount Recorded
	During the			Amount Relates To
	Year Ended			Year Ended		Year Ended			Year Ended			Year Ended
	December 31, 2004			December 31, 2004		December 31, 2003			December 31, 2002			December 31, 2001
Service cost	$	719		$	229	$	192		$	159		$	139
Interest cost		819			240		215			192			172
Amortization of prior service cost		1,016			254		254			254			254
Amortization of net loss		17			16		1			—			—
Less amounts previously recorded		(208	)		—		(79	)		(69	)		(60	)
Net periodic benefit cost	$	2,363		$	739	$	583		$	536		$	505

     A 1 percent increase in the health care cost trend rate would have increased the APBO at December 31, 2004 by $797,000 and the aggregate of the service and interest cost components of the net periodic benefit cost for the year ended December 31, 2004 by $102,000. Alternatively, a 1 percent decrease in the health care trend rate would have reduced the APBO at December 31, 2004 by $625,000 and the aggregate of the service and interest cost components of the net periodic benefit cost for the year ended December 31, 2004 by $78,000.

     The following net postretirement benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

	Expected Benefit
Year Ended	Payments, Net of
December 31,	Participant Contributions
2005	$	103
2006		130
2007		160
2008		175
2009		219
2010-2014		1,328
	$	2,115

Note 14—Derivatives and Hedging Activities

     The Bank enters into interest rate swap, cap and floor agreements (collectively, interest rate exchange agreements) to manage its exposure to changes in interest rates. The Bank may adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The Bank uses interest rate exchange agreements in two ways: either by designating them as a fair value hedge of a specific underlying financial instrument or firm commitment or by designating them as a hedge of some defined risk in the course of its balance sheet management (i.e., a non-SFAS 133 economic hedge). For example, the Bank uses interest rate exchange agreements in its overall interest rate risk management activities to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets (both advances and investments), and/or to adjust the interest rate sensitivity of advances, investments or mortgage loans to approximate more closely the interest rate sensitivity of its liabilities. In addition to using interest rate exchange agreements to manage mismatches between the coupon features of its assets and liabilities, the Bank also uses interest rate exchange agreements to manage embedded options in assets and liabilities, to preserve the market value of existing assets and liabilities, to hedge the duration risk of prepayable instruments, and to reduce funding costs.

     A non-SFAS 133 economic hedge is defined as an interest rate exchange agreement hedging specific or non-specific underlying assets or liabilities that does not qualify for or was not designated for hedge accounting under SFAS 133, but is an acceptable hedging strategy under the Bank’s Risk Management Policy. These strategies also comply with Finance Board regulatory requirements. Stand-alone derivatives include those instruments that are entered into as an economic hedge of a non-specific asset or liability and those designated against a specific asset or liability for which fair value hedge accounting has been discontinued. An economic hedge by definition introduces

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the potential for earnings variability as the change in fair value recorded on the interest rate exchange agreement(s) is not offset (under the provisions of SFAS 133) by a recorded corresponding change in the value of the economically hedged asset, liability or firm commitment.

     The Bank, consistent with Finance Board regulations, enters into interest rate exchange agreements only to reduce potential market risk exposures inherent in otherwise unhedged assets and liabilities. The Bank is not a derivative dealer and it does not trade derivatives for short-term profit. Bank management utilizes interest rate exchange agreements in the most cost efficient manner and may enter into interest rate exchange agreements that do not necessarily qualify for hedge accounting under SFAS 133. As a result, the Bank recognizes only the change in fair value of these interest rate exchange agreements in other income (loss) as “net realized and unrealized gain (loss) on derivatives and hedging activities” with no offsetting recorded fair value adjustments for the asset, liability or firm commitment. Some offset does occur in situations where a hedged asset is measured at fair value, with changes in fair value reported in current earnings (e.g., an investment security classified as trading).

     During the years ended December 31, 2004, 2003 and 2002, the Bank recorded net realized and unrealized losses on derivatives and hedging activities of $28,604,000, $11,702,000 and $59,029,000, respectively, in other income (loss). Net realized and unrealized gains (losses) on derivatives and hedging activities for the years ended December 31, 2004, 2003 and 2002 were as follows (in thousands):

	2004			2003			2002
Unrealized gains (losses) related to fair value hedge ineffectiveness	$	(6,229	)	$	1,582		$	2,556
Unrealized gains (losses) on economic hedge derivatives related to trading securities		8,126			13,377			(9,437	)
Net interest expense associated with economic hedge derivatives related to trading securities		(10,777	)		(21,602	)		(29,966	)
Realized gains (losses) related to stand alone economic hedge derivatives		(4,100	)		—			4,559
Realized losses related to fair value hedge derivatives		(3,147	)		—			—
Unrealized losses related to stand alone economic hedge derivatives		(11,667	)		(4,135	)		(25,496	)
Net interest expense associated with stand alone economic hedge derivatives		(810	)		(924	)		(1,245	)
Net realized and unrealized losses on derivatives and hedging activities	$	(28,604	)	$	(11,702	)	$	(59,029	)

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     The following table summarizes the outstanding notional balances and estimated fair values of the derivatives outstanding at December 31, 2004 and 2003 (in thousands):

	2004					2003
			Estimated					Estimated
	Notional		Fair Value			Notional		Fair Value
Interest rate swaps
Fair value	$	55,373,440	$	(676,894	)	$	51,240,731	$	(615,975	)
Economic		4,791,382		(21,954	)		128,063		(38,137	)
Interest rate caps/floors
Fair value		55,000		2,033			5,000		81
Economic		3,915,000		4,936			3,165,000		8,605
	$	64,134,822	$	(691,879	)	$	54,538,794	$	(645,426	)
Total derivatives excluding accrued interest			$	(691,879	)			$	(645,426	)
Accrued interest				50,708					81,197
Net derivative balances			$	(641,171	)			$	(564,229	)
Net derivative asset balances			$	17,619				$	71,824
Net derivative liability balances				(658,790	)				(636,053	)
Net derivative balances			$	(641,171	)			$	(564,229	)

     Hedging Activities. The Bank formally documents all relationships between derivatives designated as hedging instruments and their hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions and its method for assessing the effectiveness of hedging relationships. This process includes linking all derivatives that are designated as fair value hedges to: (1) specific assets and liabilities on the statement of condition or (2) firm commitments. The Bank also formally assesses (both at the inception of the hedging relationship and on a monthly basis thereafter) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of hedged items and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges. When it is determined that a derivative has not been, or is not expected to continue to be, effective as a hedge, the Bank discontinues hedge accounting prospectively, as discussed below.

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

     Investments – The Bank invests in U.S. agency securities, mortgage-backed securities, and the taxable portion of state or local housing finance agency securities. The interest rate and prepayment risk associated with these investment securities is managed through a combination of consolidated obligations and derivatives. The Bank may manage prepayment and duration risk by funding investment securities with consolidated obligations that have call features, by hedging the prepayment risk with caps or floors, or by adjusting the duration of the securities by using interest rate exchange agreements to modify the cash flows of the securities. These securities may be classified as “held-to-maturity,” “available-for-sale,” or “trading.”

     For available-for-sale securities that have been hedged and qualify as a fair value hedge, the Bank records the portion of the change in value related to the risk being hedged in other income (loss) as “net realized and unrealized

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gain (loss) on derivatives and hedging activities” together with the related change in the fair value of the interest rate exchange agreement, and the remainder of the change in the value of the securities in other comprehensive income as “net unrealized gain (loss) on available-for-sale securities.”

     The Bank may also manage the risk arising from changing market prices and volatility of investment securities classified as “trading” by entering into interest rate exchange agreements (economic hedges) that offset the changes in fair value of the securities. The market value changes of the trading securities are recorded in other income (loss) under the caption “net gain (loss) on trading securities.” Changes in the fair value of the related interest rate exchange agreements, and the associated net interest income/expense, are included in other income (loss) under the caption “net realized and unrealized gain (loss) on derivatives and hedging activities.”

     Advances – The Bank issues both fixed-rate and variable-rate advances. When appropriate, the Bank uses interest rate exchange agreements to adjust the interest rate sensitivity of its fixed-rate advances to more closely approximate the interest rate sensitivity of its liabilities. With issuances of convertible advances, the Bank may purchase from the member a put option that enables the Bank to, at some future date, convert an advance from a fixed rate to a floating rate if interest rates increase. Similarly, the Bank may purchase from the member a put option that enables the Bank, at some future date, to terminate a fixed-rate advance and extend replacement credit on new terms (a cancelable advance). These embedded options are clearly and closely related to the host advance contracts. The Bank may hedge a convertible or cancelable advance by entering into a cancelable interest rate exchange agreement where the Bank pays a fixed coupon and receives a variable coupon, and sells an option to cancel the swap to the swap counterparty. This type of hedge is treated as a fair value hedge under SFAS 133. The swap counterparty can cancel the interest rate exchange agreement on the call date and the Bank can convert the advance to a floating rate or cancel the advance and extend replacement credit on new terms.

     The optionality embedded in certain financial instruments held by the Bank can create interest rate risk. When a member prepays an advance, the Bank could suffer lower future income if the principal portion of the prepaid advance was invested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, the Bank generally charges a prepayment fee that makes it financially indifferent to a borrower’s decision to prepay an advance. When the Bank offers advances (other than short-term advances) that a member may prepay without a prepayment fee, it usually finances such advances with callable debt or otherwise hedges this option.

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

     Mortgage Loans – The Bank has invested in mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected maturities of these assets, depending on changes in estimated prepayment speeds. The Bank may manage against prepayment and duration risk by funding some mortgage loans with consolidated obligations that have call features. In addition, the Bank may use interest rate exchange agreements to manage the prepayment and duration variability of mortgage loans. Net income could be reduced if the Bank replaces the mortgages with lower-yielding assets and if the Bank’s higher funding costs are not reduced concurrently.

     The Bank manages the interest rate and prepayment risk associated with its mortgages through a combination of debt issuance and derivatives. The Bank issues both callable and non-callable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The Bank analyzes the duration, convexity, and earnings risk of its mortgage portfolio on a regular basis under various rate scenarios.

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

     To manage the risk arising from changing market prices and volatility of certain of its consolidated obligations, the Bank will match the cash outflow on a consolidated obligation with the cash inflow of an interest rate exchange

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agreement. In a typical transaction, fixed-rate consolidated obligations are issued for one or more FHLBanks, and the Bank simultaneously enters into a matching interest rate exchange agreement in which the counterparty pays fixed cash flows to the Bank which are designed to mirror in timing and amount the cash outflows the Bank pays on the consolidated obligation. Such transactions are treated as fair value hedges under SFAS 133. In this transaction, the Bank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate advances, typically three-month LIBOR. This intermediation between the capital and swap markets allows the Bank to raise funds at lower costs than would otherwise be available through the issuance of simple fixed-rate or floating-rate consolidated obligations in the capital markets.

     Credit Risk — The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative agreements. The degree of counterparty risk present in derivative agreements depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The Bank manages counterparty credit risk through credit analysis and collateral requirements and by following the requirements set forth in Finance Board regulations. Based on its master netting arrangements, credit analyses and collateral requirements with each counterparty, Bank management does not anticipate any credit losses on its derivative agreements at this time.

     The contractual or notional amount of interest rate exchange agreements reflects the involvement of the Bank in the various classes of financial instruments. The notional amount of interest rate exchange agreements does not measure the credit risk exposure to the Bank, and the maximum credit exposure to the Bank is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing favorable interest rate swaps and purchased caps and floors if the counterparty defaults, after taking into account the value of any related collateral. This collateral has not been sold or repledged.

     At December 31, 2004 and 2003, the Bank’s maximum credit risk, as defined above, was approximately $16,804,000 and $92,664,000, respectively. These totals include $12,373,000 and $54,046,000, respectively, of net accrued interest receivable. In determining maximum credit risk, the Bank considers accrued interest receivables and payables, and the legal right to offset assets and liabilities, by counterparty. The Bank held, as collateral, cash with a book value of $11,438,000 and $48,474,000 as of December 31, 2004 and 2003, respectively. At December 31, 2003, the Bank also held, as collateral, securities with a fair value of $1,800,000; no securities were held as collateral as of December 31, 2004. The cash collateral held is reported in other interest-bearing deposits in the statements of condition.

     The Bank transacts most of its interest rate exchange agreements with large banks and major broker-dealers. Some of these banks and broker-dealers (or their affiliates) buy, sell, and distribute consolidated obligations. Assets pledged by the Bank to these counterparties are described in Note 16.

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

     Interest rate exchange agreements in which the Bank is an intermediary may arise when the Bank enters into interest rate exchange agreements to offset the economic effect of other interest rate exchange agreements that are no longer designated to either advances, investments, or consolidated obligations. The notional principal of interest rate exchange agreements in which the Bank was an intermediary was $17,800,000 at both December 31, 2004 and 2003.

Note 15—Estimated Fair Values

     The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of December 31, 2004 and 2003. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the Bank’s financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors, and evaluation of those factors, change. Therefore, the estimated fair values presented below are not necessarily indicative of the amounts that would be realized in current market transactions.

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     The Fair Value Summary Tables do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities.

     Cash and due from banks. The estimated fair value approximates the recorded book balance.

     Interest-bearing deposits. Interest-bearing deposits earn interest at floating market rates; therefore, the estimated fair value of the deposits approximates the recorded book value.

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

     Investment securities. When available, the estimated fair value is determined based on quoted prices, excluding accrued interest, as of the last business day of the year. When quoted prices are not available, the estimated fair value is determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest receivable.

     Advances. The Bank determines the estimated fair value of advances with fixed rates and advances with complex floating rates by calculating the present value of expected future cash flows from the advances and reducing this amount for accrued interest receivable. The discount rates used in these calculations are the replacement advance rates for advances with similar terms. Under Finance Board regulations, advances with a maturity and repricing period greater than six months require a prepayment fee sufficient to make the Bank financially indifferent to the borrower’s decision to prepay the advances. Therefore, the estimated fair value of advances does not assume prepayment risk. The estimated fair value approximates the recorded book balance of advances with floating rates.

     Mortgage loans held for portfolio. The estimated fair values for mortgage loans have been determined based on quoted prices of similar mortgage loans available in the market. These prices, however, can change rapidly based upon market conditions and are highly dependent upon the prepayment assumptions that are used.

     Accrued interest receivable and payable. The estimated fair value approximates the recorded book value.

     Derivative assets/liabilities. The Bank estimates the fair values of its derivative instruments, all of which are interest rate exchange agreements, by calculating the present value of expected future cash flows, including accrued interest receivable and payable, for those instruments. The Bank uses available current market interest rates for interest rate exchange agreements with similar terms as discount rates in these calculations, and uses current market prices for swaptions or stand alone options with similar terms to estimate the value of similar instruments in the Bank’s portfolio. However, since active markets may not exist for all of the Bank’s interest rate exchange agreements, fair values must be estimated using management’s best judgment of the most comparable interest rates or prices available in the market. Management regularly evaluates these judgments against available market data. Such estimates are necessarily subjective, however, and changes in management’s judgments could have a material impact on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. The fair values are netted by counterparty where such legal right exists. If these netted amounts are positive, they are classified as an asset and, if negative, as a liability.

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

     Consolidated obligations. The Bank estimates fair values of consolidated obligations based on the cost of raising comparable term debt. The estimated cost of issuing debt includes non-interest selling costs.

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

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regulation, be purchased, redeemed, repurchased or transferred at any amount other than par.

     Commitments. The estimated fair value of the Bank’s commitments to extend credit, including advances and letters of credit, was not material at December 31, 2004 or 2003.

     The carrying values and estimated fair values of the Bank’s financial instruments at December 31, 2004, were as follows (in thousands):

2004 FAIR VALUE SUMMARY TABLE

	Carrying		Net Unrealized			Estimated
Financial Instruments	Value		Gains (Losses)			Fair Value
Assets:
Cash and due from banks	$	44,231	$	—		$	44,231
Interest-bearing deposits		631,398		—			631,398
Federal funds sold		2,680,000		—			2,680,000
Trading securities		78,583		—			78,583
Available-for-sale securities		5,785,592		—			5,785,592
Held-to-maturity securities		7,264,333		94,314			7,358,647
Advances		47,111,154		55,473			47,166,627
Mortgage loans held for portfolio, net		706,203		23,363			729,566
Accrued interest receivable		208,301		—			208,301
Derivative assets		17,619		—			17,619
Liabilities:
Deposits		2,004,809		—			2,004,809
Consolidated obligations:
Discount notes		7,084,765		1,702			7,083,063
Bonds		51,463,738		(94,657	)		51,558,395
Mandatorily redeemable capital stock		327,121		—			327,121
Accrued interest payable		331,154		—			331,154
Derivative liabilities		658,790		—			658,790

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     The carrying values and estimated fair values of the Bank’s financial instruments at December 31, 2003, were as follows (in thousands):

2003 FAIR VALUE SUMMARY TABLE

	Carrying		Net Unrealized			Estimated
Financial Instruments	Value		Gains (Losses)			Fair Value
Assets:
Cash and due from banks	$	163,609	$	—		$	163,609
Interest-bearing deposits		302,582		—			302,582
Federal funds sold		2,957,000		(14	)		2,956,986
Trading securities		142,164		—			142,164
Available-for-sale securities		5,950,586		—			5,950,586
Held-to-maturity securities		7,010,525		105,327			7,115,852
Advances		40,595,029		293,919			40,888,948
Mortgage loans held for portfolio, net		971,500		35,285			1,006,785
Accrued interest receivable		174,133		—			174,133
Derivative assets		71,824		—			71,824
Liabilities:
Deposits		2,165,694		—			2,165,694
Consolidated obligations:
Discount notes		11,627,325		1,503			11,625,822
Bonds		40,702,899		(374,499	)		41,077,398
Accrued interest payable		331,991		—			331,991
Derivative liabilities		636,053		—			636,053

Note 16—Commitments and Contingencies

     As described in Note 11, the Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBank System. The Finance Board, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Board determines that the primary obligor is unable to satisfy its obligations, then the Finance Board 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 Board 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.

     The joint and several obligations are mandated by Finance Board regulations and are not the result of arms-length transactions among the FHLBanks. As described above, the FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several liability. As the FHLBanks are under the common control of the Finance Board as it relates to decisions involving the allocation of the joint and several liability for the FHLBank System’s consolidated obligations, the Bank’s joint and several obligation is excluded from the initial recognition and measurement provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34.

     If the Bank were to determine that a loss was probable under its joint and several liability and the amount of such loss could be reasonably estimated, the Bank would charge to income the amount of the expected loss under the provisions of SFAS No. 5, Accounting for Contingencies. Based upon the creditworthiness of the other FHLBanks, the Bank currently believes that the likelihood of a loss is remote.

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     Commitments that legally bind and unconditionally obligate the Bank for additional advances totaled approximately $1,085,092,000 and $3,003,160,000 at December 31, 2004 and 2003, respectively. Commitments are generally for periods up to 12 months. Standby letters of credit are executed for members for a fee. A standby letter of credit is a short-term financing arrangement between the Bank and its member. If the Bank is required to make payment for a beneficiary’s draw, the amount is converted into a collateralized advance to the member. Outstanding standby letters of credit totaled $1,687,404,000 and $1,602,794,000 at December 31, 2004 and 2003, respectively. At December 31, 2004, outstanding letters of credit had original terms of up to 5 years with a final expiration in 2009. Unearned fees on standby letters of credit are recorded in other liabilities and totaled $996,000 and $1,107,000 at December 31, 2004 and 2003, respectively. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have any provision for credit losses on these commitments and letters of credit. Commitments and letters of credit are fully collateralized at the time of issuance (see Note 7).

     The Bank had no commitments to fund/purchase mortgage loans at December 31, 2004 or 2003.

     At December 31, 2004 and 2003, the Bank had commitments to issue $230,000,000 and $630,000,000, respectively, of consolidated obligation bonds/discount notes.

     Generally, the Bank executes interest rate exchange agreements with major banks and broker-dealers with whom it has bilateral collateral agreements. As of December 31, 2004, the Bank had pledged, as collateral, cash with a book value of $629,701,000 to broker-dealers who have market risk exposure from the Bank related to interest rate exchange agreements; at that date, the Bank had no securities pledged as collateral. At December 31, 2003, cash and securities pledged were $301,983,000 and $286,610,000, respectively. The pledged cash collateral is reported in interest-bearing deposits in the statements of condition. The securities pledged as of December 31, 2003 could not be sold or repledged.

     During the years ended December 31, 2004, 2003 and 2002, the Bank charged to operating expenses net rental costs of approximately $398,000, $424,000, and $388,000, respectively. Future minimum rentals at December 31, 2004, were as follows (in thousands):

Year	Premises		Equipment		Total
2005	$	224	$	148	$	372
2006		224		140		364
2007		226		33		259
2008		227		7		234
2009		227		—		227
Thereafter		174		—		174
Total	$	1,302	$	328	$	1,630

     Lease agreements for Bank premises generally provide for increases in the base rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the Bank.

     The Bank has entered into certain lease agreements to rent space to outside parties in its building. Future minimum rentals under these operating leases at December 31, 2004 were as follows (in thousands):

Year
2005	$	1,555
2006		1,314
2007		859
2008		653
2009		74
Total	$	4,455

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     The Bank is subject to legal proceedings arising in the normal course of its business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Bank’s financial condition, results of operations or liquidity.

     For a discussion of other commitments and contingencies, see notes 7, 8, 11, 13 and 14.

Note 17 — Transactions with Shareholders

     As a cooperative, the Bank’s capital stock is owned by its members, former members that retain the stock as provided in the Bank’s capital plan or by non-member institutions that have acquired members and must retain the stock to support advances or other activities with the Bank. No shareholder owns more than 10% of the voting interests of the Bank due to statutory limits on members’ voting rights. Members are entitled to vote only for directors; non-member shareholders are prohibited from participating in the director election process. Under the FHLB Act and Finance Board regulations, each of the Bank’s 11 elective directorships is designated to one of the five states in the Bank’s district and each member is entitled to vote only for candidates representing the state in which the member’s principal place of business is located. A member is entitled to cast, for each applicable directorship, one vote for each share of capital stock that the member is required to hold, subject to a statutory limitation that the total number of votes that a member may cast is limited to the average number of shares of the Bank’s capital stock that were required to be held by all members in that state as of the record date for voting. By law, elected directors must be officers or directors of a member of the Bank.

     Substantially all of the Bank’s advances (loans) are made to its shareholders, and all mortgage loans held for portfolio were either funded by the Bank through, or purchased from, certain of its shareholders. The Bank maintains demand deposit accounts for shareholders primarily as an investment alternative for their excess cash and to facilitate settlement activities that are directly related to advances and mortgage loans held for portfolio. As an additional service to members, the Bank also offers term deposit accounts. Periodically, the Bank may sell (or purchase) federal funds to (or from) shareholders and/or their affiliates. These transactions are executed on terms that are the same as those with other eligible third party market participants, except that the Bank’s Risk Management Policy specifies a lower minimum threshold for the amount of capital that members must have to be an eligible federal funds counterparty than non-members. The Bank may not invest in any equity securities, whether issued by shareholders, affiliates of shareholders, or otherwise, except for stock in small business investment companies or certain investments targeted to low-income persons or communities. The Bank has never held any equity securities. During the three years ended December 31, 2004, the Bank did not purchase any investment or mortgage-backed securities issued by any of its shareholders or their affiliates. Additionally, the Bank did not enter into any interest rate exchange agreements with any of its shareholders or their affiliates during this period.

All transactions with shareholders are entered into in the ordinary course of business. The Bank provides the same pricing for advances and other services to all members regardless of asset or transaction size, charter type, or geographic location.

The Bank provides, in the ordinary course of its business, products and services to members whose officers or directors may serve as directors of the Bank (“Directors’ Financial Institutions”). Finance Board regulations require that transactions with Directors’ Financial Institutions be made on the same terms as those with any other member. As of December 31, 2004 and 2003, advances outstanding to Directors’ Financial Institutions aggregated $6,028,000,000 and $6,255,000,000, respectively, representing 12.8 percent and 15.5 percent, respectively, of the Bank’s total outstanding advances as of those dates. During the years ended December 31, 2004, 2003 and 2002, the Bank acquired (net of participation interests sold to the FHLBank of Chicago) approximately $0, $173,000,000 and $493,000,000, respectively, of mortgage loans from (or through) Directors’ Financial Institutions. The loan participations sold to the FHLBank of Chicago were transacted concurrent with the Bank’s purchase of the loans from the Directors’ Financial Institutions. The loan purchases and simultaneous participations were transacted at the same price. As of December 31, 2004 and 2003, capital stock outstanding to Directors’ Financial Institutions aggregated $351,000,000 and $311,000,000, respectively, representing 12.4 percent and 11.7 percent of the Bank’s outstanding capital stock, respectively. For purposes of this determination, the Bank’s outstanding capital stock includes those shares that are classified as mandatorily redeemable.

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Note 18 — Transactions with Other FHLBanks

     Occasionally, the Bank loans (or borrows) short-term funds to (from) other FHLBanks. Interest income on loans to other FHLBanks totaled $179,000, $553,000 and $344,000 for the years ended December 31, 2004, 2003 and 2002, respectively. During these same periods, interest expense on borrowings from other FHLBanks totaled $4,000, $0 and $3,000, respectively. There were no loans to or from other FHLBanks outstanding at December 31, 2004 or 2003. The following table summarizes the Bank’s loans to other FHLBanks during the years ended December 31, 2004, 2003 and 2002 (in thousands).

	FHLBank of			FHLBank of			FHLBank of
	Boston			Pittsburgh			Atlanta
Balance, January 1, 2002	$	—		$	—		$	—
Loans made		94,000			6,430,000			—
Collections		(94,000	)		(6,430,000	)		—
Balance, December 31, 2002		—			—			—
Loans made		—			10,680,000			150,000
Collections		—			(10,680,000	)		(150,000	)
Balance, December 31, 2003		—			—			—
Loans made		—			4,793,000			100,000
Collections		—			(4,793,000	)		(100,000	)
Balance, December 31, 2004	$	—		$	—		$	—

     The following table summarizes the Bank’s borrowings from other FHLBanks during the years ended December 31, 2004, 2003 and 2002 (in thousands).

	FHLBank of
	Atlanta
Balance, January 1, 2002	$	—
Borrowings		75,000
Repayments		(75,000	)
Balance, December 31, 2002		—
Borrowings		—
Repayments		—
Balance, December 31, 2003		—
Borrowings		100,000
Repayments		(100,000	)
Balance, December 31, 2004	$	—

     The Bank’s investment securities portfolio includes consolidated obligations for which other FHLBanks are the primary obligors and for which the Bank is jointly and severally liable. The balances of these investments are presented in Notes 4 and 5. All of these consolidated obligations were purchased in the open market from third parties and are accounted for in the same manner as other similarly classified investments (see Note 1). Interest income earned on these consolidated obligations of other FHLBanks totaled $2,925,000, $5,582,000 and $11,751,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

     The Bank may, from time to time, assume the outstanding debt of another FHLBank rather than issue new debt. During the years ended December 31, 2004, 2003 and 2002, the Bank assumed consolidated obligations from the FHLBanks of Chicago and San Francisco with par amounts of $375,000,000, $5,705,000,000 and $28,500,000, respectively. The net premiums (discounts) associated with these transactions were $(3,789,000), $(12,110,000) and $1,608,000 in 2004, 2003 and 2002, respectively. The Bank accounts for these transfers in the same manner as it accounts for new debt issuances (see Note 1).

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     As discussed in Note 1, the Bank receives participation fees from the FHLBank of Chicago for mortgage loans that are originated by the Bank’s PFIs and purchased by the FHLBank of Chicago. These fees totaled $684,000 and $1,725,000 during the years ended December 31, 2004 and 2003, respectively. No participation fees were earned during the year ended December 31, 2002.

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FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CONDITION
(Unaudited; in thousands, except share data)

	March 31,		December 31,
	2005		2004
ASSETS
Cash and due from banks	$	195,094	$	44,231
Interest-bearing deposits (Note 8)		708,213		631,398
Federal funds sold		4,584,000		2,680,000
Trading securities		69,673		78,583
Available-for-sale securities (a)		5,595,680		5,785,592
Held-to-maturity securities (b)		7,404,980		7,264,333
Advances (Note 3)		46,161,537		47,111,154
Mortgage loans held for portfolio, net of allowance for credit losses of $342 and $355 at March 31, 2005 and December 31, 2004, respectively		662,147		706,203
Accrued interest receivable		207,915		208,301
Premises and equipment, net		26,990		27,313
Derivative assets (Note 6)		—		17,619
Other assets		34,900		31,586
TOTAL ASSETS	$	65,651,129	$	64,586,313
LIABILITIES AND CAPITAL
Deposits
Interest-bearing
Demand and overnight	$	1,778,601	$	1,710,101
Term		115,793		283,090
Other		—		11,438
Non-interest bearing
Demand and overnight		150		124
Other		56		56
Total deposits		1,894,600		2,004,809
Consolidated obligations, net (Note 4)
Discount notes		1,598,531		7,084,765
Bonds		57,880,185		51,463,738
Total consolidated obligations, net		59,478,716		58,548,503
Mandatorily redeemable capital stock		329,556		327,121
Accrued interest payable		361,857		331,154
Affordable Housing Program		33,053		33,811
Payable to REFCORP		4,546		4,320
Derivative liabilities (Note 6)		661,487		658,790
Other liabilities		170,277		43,841
Total liabilities		62,934,092		61,952,349
Commitments and contingencies (Note 8)
CAPITAL
Capital stock – Class B putable ($100 par value) issued and outstanding shares:
25,586,932 and 24,927,894 shares at March 31, 2005 and December 31, 2004, respectively		2,558,693		2,492,789
Retained earnings		145,511		143,897
Accumulated other comprehensive income (loss)
Net unrealized gain (loss) on available-for-sale securities, net of unrealized gains and losses relating to hedged interest rate risk included in net income		12,833		(2,722	)
Total capital		2,717,037		2,633,964
TOTAL LIABILITIES AND CAPITAL	$	65,651,129	$	64,586,313

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

(a)	Amortized cost: $5,343,095 and $5,430,222 at March 31, 2005 and December 31, 2004, respectively.
(b)	Fair values: $7,488,454 and $7,358,647 at March 31, 2005 and December 31, 2004, respectively.

F-46

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF INCOME
(Unaudited, in thousands)

	For the Three Months Ended
	March 31,
	2005			2004
INTEREST INCOME
Advances	$	326,903		$	180,033
Prepayment fees on advances		356			438
Interest-bearing deposits		3,960			847
Federal funds sold		18,580			6,039
Trading securities		1,983			3,551
Available-for-sale securities		35,871			24,572
Held-to-maturity securities		62,124			37,088
Mortgage loans held for portfolio		9,654			13,581
Other		147			150
Total interest income		459,578			266,299
INTEREST EXPENSE
Consolidated obligations
Bonds		382,275			183,146
Discount notes		18,239			29,350
Deposits		11,273			5,298
Mandatorily redeemable capital stock		2,372			1,481
Other borrowings		21			8
Total interest expense		414,180			219,283
NET INTEREST INCOME		45,398			47,016
Provision (reduction) for credit losses on mortgage loans		(15	)		2
NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION		45,413			47,014
OTHER INCOME (LOSS)
Service fees		661			475
Net loss on trading securities		(2,096	)		(694	)
Net realized and unrealized losses on derivatives and hedging activities		(8,026	)		(7,135	)
Gain on early extinguishment of debt		1,088			—
Other, net		681			748
Total other income (loss)		(7,692	)		(6,606	)
OTHER EXPENSE
Salaries and benefits		5,341			6,070
Other operating expenses		4,190			4,535
Finance Board		609			560
Office of Finance		348			490
Total other expense		10,488			11,655
INCOME BEFORE ASSESSMENTS		27,233			28,753
Affordable Housing Program		2,465			2,498
REFCORP		4,954			5,251
Total assessments		7,419			7,749
NET INCOME	$	19,814		$	21,004

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

F-47

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited, in thousands)

										Accumulated
	Capital Stock									Other
	Class B - Putable						Retained			Comprehensive			Total
	Shares			Par Value			Earnings			Income (Loss)			Capital
BALANCE, DECEMBER 31, 2004		24,928		$	2,492,789		$	143,897		$	(2,722	)	$	2,633,964
Proceeds from sale of capital stock		1,122			112,242			—			—			112,242
Repurchase/redemption of capital stock		(621	)		(62,102	)		—			—			(62,102	)
Shares reclassified to mandatorily redeemable capital stock		(23	)		(2,361	)								(2,361	)
Comprehensive income
Net income		—			—			19,814			—			19,814
Other comprehensive income
Net unrealized loss on available-for-sale securities		—			—			—			(102,785	)		(102,785	)
Reclassification adjustment for net unrealized losses relating to hedged interest rate risk included in net income		—			—			—			118,340			118,340
Total comprehensive income		—			—			—			—			35,369
Dividends on capital stock (at 2.95 percent annualized rate)
Cash		—			—			(43	)		—			(43	)
Mandatorily redeemable capital stock								(32	)					(32	)
Stock		181			18,125			(18,125	)		—			—
BALANCE, MARCH 31, 2005		25,587		$	2,558,693		$	145,511		$	12,833		$	2,717,037
BALANCE, DECEMBER 31, 2003		26,611		$	2,661,133		$	108,612		$	(28,300	)	$	2,741,445
Proceeds from sale of capital stock		2,812			281,241			—			—			281,241
Repurchase/redemption of capital stock		(1,618	)		(161,765	)		—			—			(161,765	)
Shares reclassified to mandatorily redeemable capital stock		(4,062	)		(406,233	)								(406,233	)
Comprehensive income
Net income		—			—			21,004			—			21,004
Other comprehensive income (loss)
Net unrealized gain on available-for-sale securities		—			—			—			154,304			154,304
Reclassification adjustment for net unrealized gains relating to hedged interest rate risk included in net income		—			—			—			(167,345	)		(167,345	)
Total comprehensive income		—			—			—			—			7,963
Dividends on capital stock (at 1.50 percent annualized rate)
Cash		—			—			(41	)		—			(41	)
Mandatorily redeemable capital stock								(24	)					(24	)
Stock		85			8,466			(8,466	)		—			—
BALANCE, MARCH 31, 2004		23,828		$	2,382,842		$	121,085		$	(41,341	)	$	2,462,586

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

F-48

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

	For the Three Months Ended
	March 31,
	2005			2004
OPERATING ACTIVITIES
Net income	$	19,814		$	21,004
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization
Net premiums and discounts on consolidated obligations, investments, mortgage loans, and deferred costs and fees received on derivatives		(13,511	)		(11,992	)
Concessions on consolidated obligation bonds		2,958			8,167
Premises, equipment and computer software costs		736			493
Provision for credit losses on mortgage loans held for portfolio		(15	)		2
Non-cash interest on mandatorily redeemable capital stock		2,349			1,478
Gain on early extinguishment of debt		(1,088	)		—
Decrease in trading securities		8,910			33,016
Loss due to change in net fair value adjustment on derivative and hedging activities		3,171			9,690
Decrease in accrued interest receivable		386			16,107
Decrease (increase) in derivative asset-net accrued interest		(30,979	)		12,885
Decrease in derivative liability-net accrued interest		(2,218	)		(16,626	)
Increase in other assets		(1,429	)		(1,252	)
Decrease in Affordable Housing Program (AHP) liability		(758	)		(560	)
Increase (decrease) in accrued interest payable		30,703			(39,162	)
Increase (decrease) in payable to REFCORP		226			(222	)
Increase (decrease) in other liabilities		(23,564	)		1,394
Total adjustments		(24,123	)		13,418
Net cash provided by (used in) operating activities		(4,309	)		34,422
INVESTING ACTIVITIES
Net increase in interest-bearing deposits		(76,815	)		(81,796	)
Net (increase) decrease in federal funds sold		(1,904,000	)		550,000
Net increase in loans to other FHLBanks		—			(225,000	)
Proceeds from maturities of long-term held-to-maturity securities		375,183			428,380
Purchases of long-term held-to-maturity securities		(365,913	)		(404,273	)
Proceeds from maturities of available-for-sale securities		83,395			67,546
Principal collected on advances		124,155,528			131,835,369
Advances made		(123,298,907	)		(135,623,964	)
Principal collected on mortgage loans held for portfolio		43,130			66,445
Purchases of premises and equipment		(414	)		(1,004	)
Net cash used in investing activities		(988,813	)		(3,388,297	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits		(110,209	)		287,355
Net proceeds from issuance of consolidated obligations
Discount notes		3,995,355			10,926,885
Bonds		11,235,403			16,082,749
Debt issuance costs		(4,250	)		(7,459	)
Payments for maturing and retiring consolidated obligations
Discount notes		(9,467,095	)		(14,775,040	)
Bonds		(4,553,008	)		(9,227,100	)
Proceeds from issuance of capital stock		112,242			281,241
Payments for redemption of mandatorily redeemable capital stock		(2,308	)		(7,107	)
Payments for repurchase/redemption of capital stock		(62,102	)		(161,765	)
Cash dividends paid		(43	)		(41	)
Net cash provided by financing activities		1,143,985			3,399,718
Net increase in cash and cash equivalents		150,863			45,843
Cash and cash equivalents at beginning of the period		44,231			163,609
Cash and cash equivalents at end of the period	$	195,094		$	209,452
Supplemental Disclosures:
Interest paid	$	405,535		$	251,194
AHP payments	$	3,223		$	3,058
REFCORP payments	$	4,728		$	5,473
Stock dividends issued	$	18,125		$	8,466
Dividends paid through issuance of mandatorily redeemable capital stock	$	32		$	24
Capital stock reclassified to mandatorily redeemable capital stock	$	2,361		$	406,233

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

F-49

FEDERAL HOME LOAN BANK OF DALLAS

NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS

Note 1—Basis of Presentation

     The accompanying interim financial statements of the Federal Home Loan Bank of Dallas (the “Bank”) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The financial statements contain all adjustments which are, in the opinion of management, necessary for a fair statement of the Bank’s financial position, results of operations and cash flows for the interim periods presented. Except as described below in Note 2, all such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

     The Bank’s significant accounting policies and certain other disclosures are set forth in the notes to the financial statements for the year ended December 31, 2004. The interim financial statements presented herein should be read in conjunction with the Bank’s audited financial statements and notes thereto, which are presented on pages F-2 through F-45 of this document. The notes to the interim financial statements highlight significant changes to the notes included in the audited financial statements.

     The Bank is one of 12 district Federal Home Loan Banks, each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System.” The Office of Finance manages the sale of the FHLBanks’ consolidated obligations. The Federal Housing Finance Board (“Finance Board”), an independent agency in the executive branch of the United States Government, supervises and regulates the FHLBanks and the Office of Finance.

     Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Significant estimates include the valuations of the Bank’s investment securities classified as trading and available-for-sale, and its derivative instruments and any associated hedged items. Actual results could differ from those estimates.

Note 2—Accounting Adjustments and Recently Issued Accounting Standards

     Accounting Adjustments. Effective January 1, 2004, the Bank changed the manner in which it assesses effectiveness for certain highly effective consolidated obligation hedging relationships. Under its prior approach, the Bank inappropriately assumed no ineffectiveness for these hedging transactions. The interest rate swaps used in these relationships were structured with one settlement amount under the receive side of the swap that differed from all other receive-side settlements by an amount equivalent to the concession cost associated with the hedged consolidated obligation. Since the formula for computing net settlements under the interest rate swap is not the same for each net settlement, the Bank determined that it should change its approach to measure effectiveness during each reporting period. The Bank assessed the impact of this change on all prior annual periods since the adoption of SFAS 133 and all quarterly periods for 2003, and determined that had the Bank applied this approach since January 1, 2001 it would not have had a material impact on the results of operations or financial condition of the Bank for any of these prior reporting periods. For the three months ended March 31, 2004, income before assessments was reduced by $3,374,000 to reflect the accounting as if the Bank had employed the new approach from the date of adoption of SFAS 133 (January 1, 2001) through December 31, 2003. The adjustment resulting from this change is included in “net realized and unrealized losses on derivatives and hedging activities” in the statement of income. Net of assessments, the prior period adjustment reduced net income by $2,479,000 during the three months ended March 31, 2004.

     Effective January 1, 2004, the Bank changed its method of accounting for postretirement health and life insurance benefits to comply with the provisions of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“SFAS 106”). Previously, the Bank had accounted for these benefits on a pay-as-you-go (cash) basis. The Bank assessed the impact of this change on all prior annual periods since January 1, 2001 and all quarterly periods for 2003 and determined that if the provisions of SFAS 106 had been applied earlier, the effect would not have been material to the Bank’s financial condition or results of operations for any of these prior reporting periods. For the three months ended March 31, 2004, salaries and benefits expense includes a $1,624,000 charge for postretirement benefits relating to prior years. Net of assessments, this correction reduced net income for the three months ended March 31, 2004 by approximately $1,193,000.

F-50

     Effective January 1, 2004, the Bank changed its method of amortizing and accreting premiums and discounts on certain of its available-for-sale securities from the straight-line method to the level-yield method to comply with the provisions of SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” The Bank assessed the impact of this change on all prior annual periods and all quarterly periods for 2003 and determined that if the amortization and accretion of premiums and discounts had previously been computed using the level-yield method, the effect would not have been material to the Bank’s financial condition or results of operations for any of these prior reporting periods. Interest income on available-for-sale securities was increased by $3,532,000 during the three months ended March 31, 2004 to reflect the accounting as if the level-yield method had been used in prior years. Net of assessments, this correction increased net income for the three months ended March 31, 2004 by approximately $2,595,000.

     Adoption of SOP 03-3. The American Institute of Certified Public Accountants issued Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”) in December 2003. SOP 03-3 provides guidance on the accounting for differences between contractual and expected cash flows from a purchaser’s initial investment in loans or debt securities acquired in a transfer, if those differences are attributable, at least in part, to credit quality. Among other things, SOP 03-3: (i) prohibits the recognition of the excess of contractual cash flows over expected cash flows as an adjustment of yield, loss accrual or valuation allowance at the time of purchase; (ii) requires that subsequent increases in expected cash flows be recognized prospectively through an adjustment of yield; and (iii) requires that subsequent reductions in expected cash flows be recognized as an impairment. In addition, SOP 03-3 prohibits the creation or carryover of a valuation allowance in the initial accounting of all loans within its scope that are acquired in a transfer. The Bank adopted SOP 03-3 as of January 1, 2005 and the adoption did not have a material impact on the Bank’s results of operations or financial condition.

Note 3—Advances

     Redemption Terms. At both March 31, 2005 and December 31, 2004, the Bank had advances outstanding at interest rates ranging from 1.00 percent to 8.80 percent. These advances are summarized below (in thousands).

	March 31, 2005					December 31, 2004
			Weighted					Weighted
			Average					Average
			Interest					Interest
Maturity	Amount		Rate %			Amount		Rate %
Overdrawn demand deposit accounts	$	786		6.87	%	$	26		5.94	%
Due in one year or less		17,852,700		2.78			15,147,564		2.26
Due after one year through two years		8,532,788		2.93			9,927,115		2.49
Due after two years through three years		5,715,436		3.02			6,012,451		2.53
Due after three years through four years		3,672,016		3.10			5,058,184		2.67
Due after four years through five years		2,728,829		3.08			3,067,658		2.55
Due after five years		1,275,862		5.10			1,288,294		5.11
Amortizing advances		6,382,478		4.22			6,516,216		4.20
Total par value		46,160,895		3.14	%		47,017,508		2.75	%
SFAS 133 hedging adjustments		642					93,646
Total	$	46,161,537				$	47,111,154

     Amortizing advances require repayment according to predetermined amortization schedules.

     The Bank offers advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable advances). Other advances may only be prepaid by paying a fee to the Bank (prepayment fee) that makes the Bank financially indifferent to the prepayment of the advance. At March 31, 2005 and December 31, 2004, the Bank had callable advances of $141,206,000 and $148,543,000, respectively.

F-51

     The following table summarizes advances at March 31, 2005 and December 31, 2004, by maturity or next call date for callable advances (in thousands):

Maturity or Next Call Date	March 31, 2005		December 31, 2004
Overdrawn demand deposit accounts	$	786	$	26
Due in one year or less		17,917,645		15,214,589
Due after one year through two years		8,537,346		9,930,861
Due after two years through three years		5,728,908		6,021,036
Due after three years through four years		3,695,183		5,081,322
Due after four years through five years		2,743,257		3,082,942
Due after five years		1,155,292		1,170,516
Amortizing advances		6,382,478		6,516,216
Total par value	$	46,160,895	$	47,017,508

     The Bank also offers cancelable advances. With a cancelable advance, the Bank effectively purchases a put option from the member that allows the Bank to terminate the fixed rate advance and offer a floating rate advance. At March 31, 2005 and December 31, 2004, the Bank had cancelable advances outstanding totaling $2,239,900,000 and $2,255,900,000 respectively.

     The following table summarizes advances at March 31, 2005 and December 31, 2004, by maturity or next put date (in thousands):

Maturity or Next Put Date	March 31, 2005		December 31, 2004
Overdrawn demand deposit accounts	$	786	$	26
Due in one year or less		20,016,400		17,316,264
Due after one year through two years		7,787,788		9,537,115
Due after two years through three years		5,563,636		5,662,451
Due after three years through four years		3,248,716		4,556,084
Due after four years through five years		2,550,229		2,849,358
Due after five years		610,862		579,994
Amortizing advances		6,382,478		6,516,216
Total par value	$	46,160,895	$	47,017,508

     Security Terms. The Bank lends to financial institutions involved in housing finance within its district according to federal statutes, including the FHLB Act. The FHLB Act requires the Bank to obtain sufficient collateral on advances to protect against losses and to accept only certain U.S. government or government agency securities, residential mortgage loans, cash or deposits in the Bank, and other eligible real estate-related assets as collateral on such advances. However, in the case of Community Financial Institutions (CFIs), the Bank may also accept as collateral secured small business, small farm and small agribusiness loans. Borrowing members pledge their capital stock of the Bank as additional collateral for advances. At March 31, 2005 and December 31, 2004, the Bank had rights to collateral with an estimated value greater than outstanding advances.

     Credit Risk. The Bank has never experienced a credit loss on an advance to a member. While the expanded eligible collateral for CFIs and nonmember housing associates provides the potential for additional credit risk for the Bank, the Bank believes it has the policies and procedures in place to appropriately manage this credit risk. Accordingly, the Bank has not provided any allowances for losses on advances.

     Due to the composition of its members, the Bank’s potential credit risk from advances is concentrated in commercial banks and savings institutions. As of March 31, 2005, the Bank had advances of $22.7 billion outstanding to three institutions, which represented 49 percent of total advances outstanding. The Bank held sufficient collateral to cover the advances to these institutions, and the Bank does not expect to incur any credit losses on these advances.

F-52

     The Bank’s second largest stockholder (and borrower) is a non-member institution that acquired a Bank member and dissolved its charter on February 13, 2001. The acquiring institution assumed the member’s advances, and the Bank expects those advances to remain fully collateralized until they are repaid. As of March 31, 2005, that stockholder held $319,854,000 of mandatorily redeemable capital stock and had advances outstanding of approximately $7.5 billion, which had final maturities in the years 2006 through 2008.

     Interest Rate Payment Terms. The following table provides interest rate payment terms for advances at March 31, 2005 and December 31, 2004 (in thousands, based upon par amount):

	March 31, 2005		December 31, 2004
Fixed-rate	$	24,170,051	$	24,354,663
Variable-rate		21,990,844		22,662,845
Total par value	$	46,160,895	$	47,017,508

Note 4—Consolidated Obligations

     Interest Rate Payment Terms. The following table provides interest rate payment terms for the Bank’s consolidated bonds at March 31, 2005 and December 31, 2004 (in thousands, at par value).

	March 31, 2005		December 31, 2004
Fixed-rate	$	41,886,228	$	38,695,324
Step-up		7,867,505		7,997,505
Simple variable-rate		7,987,000		4,397,000
Fixed that converts to variable		365,000		340,000
Variable that converts to fixed		50,000		50,000
Comparative-index		175,000		175,000
Total par value	$	58,330,733	$	51,654,829

     Redemption Terms. The following is a summary of the Bank’s participation in consolidated bonds outstanding at March 31, 2005 and December 31, 2004, by maturity (in thousands):

	March 31, 2005						December 31, 2004
				Weighted						Weighted
				Average						Average
				Interest						Interest
Maturity	Amount			Rate			Amount			Rate
Due in one year or less	$	17,498,025			2.13	%	$	18,417,325			2.02	%
Due after one year through two years		18,156,575			2.98			10,169,500			2.78
Due after two years through three years		6,850,800			3.40			6,416,875			3.33
Due after three years through four years		6,533,895			3.81			5,526,370			3.50
Due after four years through five years		4,111,268			4.10			4,345,314			4.02
Thereafter		5,180,170			4.20			6,779,445			4.11
Total par value		58,330,733			3.05	%		51,654,829			2.94	%
Bond premiums		36,451						31,464
Bond discounts		(27,718	)					(25,358	)
SFAS 133 hedging adjustments		(441,481	)					(179,397	)
		57,897,985						51,481,538
Bonds held in treasury		(17,800	)					(17,800	)
Total	$	57,880,185					$	51,463,738

     Consolidated bonds outstanding at March 31, 2005 and December 31, 2004 include callable bonds totaling $30,658,505,000 and $31,908,505,000, respectively. Simultaneous with the issuance of callable bonds, the Bank generally enters into an interest rate swap (in which the Bank pays variable and receives fixed) with a call feature that mirrors the option embedded in the debt (a sold callable swap). The combined sold callable swap and callable debt allows the Bank to provide members with attractively priced variable-rate advances. The Bank also uses fixed-rate callable debt to finance callable advances (see Note 3) and mortgage-backed securities.

F-53

     At March 31, 2005 and December 31, 2004, the Bank’s consolidated bonds outstanding included the following (at par value, in thousands):

	March 31, 2005		December 31, 2004
Non-callable or non-putable bonds	$	27,672,228	$	19,746,324
Callable bonds		30,658,505		31,908,505
Total par value	$	58,330,733	$	51,654,829

     The following table summarizes the Bank’s consolidated bonds outstanding at March 31, 2005 and December 31, 2004, by maturity or next call date (in thousands):

Maturity or Next Call Date	March 31, 2005		December 31, 2004
Due in one year or less	$	35,150,530	$	36,725,805
Due after one year through two years		15,448,375		7,719,500
Due after two years through three years		3,367,800		2,879,700
Due after three years through four years		1,775,800		1,374,000
Due after four years through five years		1,354,243		1,657,564
Thereafter		1,233,985		1,298,260
Total par value	$	58,330,733	$	51,654,829

     Discount Notes. The Bank’s participation in consolidated discount notes, all of which are due within one year, was as follows (in thousands):

					Weighted
					Average
	Book Value		Par Value		Interest Rate
March 31, 2005	$	1,598,531	$	1,600,000		2.47	%
December 31, 2004	$	7,084,765	$	7,100,000		2.15	%

Note 5—Employee Retirement Plans

     The Bank sponsors a retirement benefits program that includes health care and life insurance benefits for eligible retirees. Components of net periodic benefit cost related to this program for the three months ended March 31, 2005 and 2004 were as follows (in thousands):

	Three Months Ended March 31,
	2005		2004
Service cost	$	37	$	547
Interest cost		48		639
Amortization of prior service cost		16		825
Amortization of net loss		10		5
Less amounts previously recorded		—		(208	)
Net periodic benefit cost	$	111	$	1,808

     As discussed in Note 2, the Bank changed its method of accounting for these postretirement benefits to comply with the provisions of SFAS 106 effective January 1, 2004. Components of net periodic benefit cost for the three months ended March 31, 2004, and the distribution of these amounts had the provisions of SFAS 106 been applied in prior periods, were as follows (in thousands):

F-54

	Amount Recorded
	During the			Amount Relates To
	Three Months Ended			Three Months Ended		Year Ended			Year Ended			Year Ended
	March 31, 2004			March 31, 2004		December 31, 2003			December 31, 2002			December 31, 2001
Service cost	$	547		$	57	$	192		$	159		$	139
Interest cost		639			60		215			192			172
Amortization of prior service cost		825			63		254			254			254
Amortization of net (gain) loss		5			4		1			—			—
Less amounts previously recorded		(208	)		—		(79	)		(69	)		(60	)
Net periodic benefit cost	$	1,808		$	184	$	583		$	536		$	505

     In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act provides for a prescription drug benefit under Medicare (Medicare Part D) as well as a 28 percent federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The calculated costs and liabilities relating to the Bank’s postretirement benefits do not reflect any amount associated with the subsidy because the Bank is currently unable to conclude whether the benefits provided by its plan are actuarially equivalent to Medicare Part D under the Act.

Note 6—Derivatives and Hedging Activities

     The following table summarizes the outstanding notional balances and estimated fair values of the derivatives outstanding at March 31, 2005 and December 31, 2004 (in thousands):

	March 31, 2005					December 31, 2004
			Estimated					Estimated
	Notional		Fair Value			Notional		Fair Value
Interest rate swaps
Fair value	$	57,117,501	$	(734,970	)	$	55,373,440	$	(676,894	)
Economic		91,524		(18,505	)		4,791,382		(21,954	)
Interest rate caps
Fair value		165,000		4,311			55,000		2,033
Economic		3,915,000		3,772			3,915,000		4,936
	$	61,289,025	$	(745,392	)	$	64,134,822	$	(691,879	)
Total derivatives excluding accrued interest			$	(745,392	)			$	(691,879	)
Accrued interest				83,905					50,708
Net derivative balances			$	(661,487	)			$	(641,171	)
Net derivative asset balances			$	—				$	17,619
Net derivative liability balances				(661,487	)				(658,790	)
Net derivative balances			$	(661,487	)			$	(641,171	)

     The contractual or notional amount of interest rate exchange agreements reflects the involvement of the Bank in various classes of financial instruments. The notional amount of interest rate exchange agreements does not measure the credit risk exposure to the Bank, and the maximum credit exposure to the Bank is substantially less than the notional amount. The maximum credit risk is the estimated cost of replacing favorable interest rate swaps and purchased caps if the counterparty defaults, and the related collateral, if any, is of no value to the Bank.

     At March 31, 2005, the Bank did not have any credit risk, as defined above. In determining maximum credit risk, the Bank considers accrued interest receivables and payables, and the legal right to offset assets and liabilities, by counterparty. At December 31, 2004, the Bank’s maximum credit risk was approximately $16,804,000, which included $12,373,000 of net accrued interest receivable. The Bank held as collateral cash with a fair value of $11,438,000 as of December 31, 2004.

F-55

Note 7 — Transactions with Shareholders

     During the three months ended March 31, 2005, the Bank purchased from a third party $130,000,000 of mortgage-backed securities issued by an affiliate of Washington Mutual Bank, a non-member borrower/stockholder.

     The Bank did not enter into any interest rate exchange agreements with shareholders or their affiliates during the three months ended March 31, 2005 or 2004. However, an affiliate of one of the Bank’s counterparties (Citigroup) acquired a member institution on March 31, 2005. The Bank has continued to enter into interest rate exchange agreements with Citigroup in the normal course of business and under the same terms and conditions since that acquisition was completed. In addition, at March 31, 2005, the Bank held previously purchased mortgage-backed securities with a par value of $40 million that were issued by one or more entities that are now part of Citigroup.

Note 8—Commitments and Contingencies

     The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBank System. The Finance Board, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Board determines that the primary obligor is unable to satisfy its obligations, then the Finance Board 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 Board may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. If the Bank were to determine that a loss was probable under its joint and several liability and the amount of such loss could be reasonably estimated, the Bank would charge to income the amount of the expected loss under the provisions of SFAS No. 5, Accounting for Contingencies. Based upon the creditworthiness of the other FHLBanks, the Bank currently believes that the likelihood of a loss is remote.

     Commitments that legally bind and unconditionally obligate the Bank for additional advances totaled approximately $1,247,962,000 and $1,085,092,000 at March 31, 2005 and December 31, 2004, respectively. Commitments are generally for periods up to 12 months. Standby letters of credit are executed for members for a fee. A standby letter of credit is a short-term financing arrangement between the Bank and its member. If the Bank is required to make payment for a beneficiary’s draw, the amount is converted into a collateralized advance to the member. Outstanding standby letters of credit totaled $1,972,682,000 and $1,687,404,000 at March 31, 2005 and December 31, 2004, respectively. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have any provision for credit losses on these commitments and letters of credit. Commitments and letters of credit are fully collateralized at the time of issuance.

     The Bank had no commitments to fund/purchase mortgage loans at March 31, 2005 or December 31, 2004.

F-56

     At March 31, 2005 and December 31, 2004, the Bank had commitments to issue $315,000,000 and $230,000,000, respectively, of consolidated obligation bonds/discount notes.

     Generally, the Bank executes interest rate exchange agreements with major banks and broker-dealers with whom it has bilateral collateral agreements. As of March 31, 2005 and December 31, 2004, the Bank had pledged, as collateral, cash with a book value of $707,791,000 and $629,701,000 to broker-dealers who have market risk exposure from the Bank related to interest rate exchange agreements; at those dates, the Bank had no securities pledged as collateral. The pledged cash collateral is reported in interest-bearing deposits in the statements of condition.

F-57

EXHIBIT INDEX

Exhibit No.
3.1	Organization Certificate of the Registrant
3.2	By-Laws of the Registrant
4.1	Amended and Revised Capital Plan of the Registrant, dated June 24, 2004.
10.1	Deferred Compensation Plan of the Registrant, effective July 24, 2004.
10.2	Non-Qualified Deferred Compensation Plan for the Board of Directors of the Registrant, effective July 24, 2004.
10.3	Form of Special Non-Qualified Deferred Compensation Plan of the Registrant, effective as of January 1, 2004.
12.1	Computation of Ratio of Earnings to Fixed Charges

EX-3.1

Exhibit 3.1

ORGANIZATION CERTIFICATE

THE FEDERAL HOME LOAN BANK OF

L I T T L E            R O C K

     The undersigned directors of the Federal Home Loan Bank of Little Rock, now organizing, all of whom are citizens of the United States, bona fide residents of the district in which this Bank is located, and nine at least of whom are now directly connected with the home financing business, having been appointed by the Federal Home Loan Bank Board and having been directed by the Act of Congress, known as the Federal Home Loan Bank Act, approved July 22, 1932, and in accordance with rules and regulations prescribed by said Board;

     Now, THEREFORE, in order that the statutes of the United States may be fully complied with and that the incorporation of this Bank may be perfected as a Federal Home Loan Bank, the following Organization Certificate is made and executed.

     1. The title of this Bank shall be the FEDERAL HOME LOAN BANK OF LITTLE ROCK

     2. The location of the principal office of this Bank will be in the City of Little Rock, State of Arkansas, or at such other city as the Federal Home Loan Bank Board may from time to time determine is suited to the convenient and customary course of business of the institutions eligible to become Members of this Bank.

     3. This Bank shall be established in the City of Little Rock, State of Arkansas, in District Number Nine, as defined by the Federal Home Loan Bank Board, or as may from time to time be readjusted or modified by said Board. Said District Number Nine as now defined is as follows:

         The States of Arkansas, Louisiana, Mississippi, New Mexico and Texas

     4. This Bank shall engage in the business authorized by said Federal Home Loan Bank Act, and it shall exercise such powers as are permitted or prescribed by said Act, subject to the supervision of the Federal Home Loan Bank Board.

     5. The minimum amount of capital stock for the organization of this Bank shall be an amount to be determined by the Federal Home Loan Bank Board, with the approval of the Secretary of the Treasury, which amount shall not be less than Five Million ($5,000,000.00) Dollars, divided into shares of the par value of One Hundred ($100.00) Dollars each and shall be issued at par. After the amount of the minimum capital shall have been subscribed, any stock issued thereafter shall be issued at such price not less than par as may be fixed by the Federal Home Loan Bank Board. The capital stock of this Bank may from time to time be increased to such amount or amounts as may be necessary to provide for the issue of shares to members in accordance with the provisions of the Federal Home Loan Bank Act and the stock of this Bank shall from time to time be paid off and retired in accordance with the requirements and subject to the conditions and limitations prescribed in said Act, and with such rules, regulations, and orders, not inconsistent with law, as the Federal Home Loan Bank Board may from time to time prescribe or issue.

     6. This Certificate is made for the purpose of carrying out the provisions of the Act of Congress, known and cited as the Federal Home Loan Bank Act, approved July 22, 1932, and such other acts as may be passed by Congress amending or supplementing the said Federal Home Loan Bank Act, in so far as it or they may be applicable to the Federal Home Loan Bank of Little Rock, and is subject to such changes or additions, not inconsistent with law, as the Federal Home Loan Bank Board may deem necessary or expedient and may from time to time direct.

     7. This Bank shall have succession until dissolved by the Federal Home Loan Bank Board under this Act or by further Act of Congress.

(1)

     IN WITNESS WHEREOF, We, the directors aforesaid, have hereunto set our hands this Thirteenth day of October, 1932.

Name I. Friedlander

Address Houston, Texas

Name J. G. Leigh

Address Little Rock, Arkansas

Name W. C. Ermon

Address New Orleans, Louisiana

Name R. H. McCune

Address Roswell, New Mexico

Name A. D. Geoghegan

Address New Orleans, Louisiana

Name E. H. Bradshaw

Address Jackson, Mississippi

Name O. W. Boswell

Address Paris, Texas

Name Philip Lieber

Address Shreveport, Louisiana

Name Gordon H. Campbell

Address Little Rock, Arkansas

Name E. E. Shelton

Address Dallas, Texas

Name J. F. Lucey

Address Dallas, Texas

(2)

State of Ark.

County of Pulaski

BE IT REMEMBERED, that on this 13 day of Oct., 1932, before me, the undersigned, a Notary Public within and for the county and State aforesaid, came

I. Friedlander,	J. G. Leigh
A. D. Geoghegan,	R. H. McCune
J. F. Lucey,	O. W. Boswell
Philip Lieber,	E. E. Shelton
W. C. Ermon,	G. H. Campbell

and E.H. Bradshaw, personally known to me to be the same persons who executed the foregoing writing and duly acknowledged the making and execution of the same as their act and deed.

A. G. Brasfield
     Notary Public.

[SEAL]

My commission expires June 21, 1933

     I hereby certify that the foregoing certificate, which was made and executed on the 13th day of October, 1932, by the directors of the Federal Home Loan Bank of Little Rock, was filed with and approved by the Federal Home Loan Bank Board on the 20th day of October, 1932.

     Given under my hand this 20th day of October, 1932.

/s/ William E. Murray

Secretary, Federal Home Loan Bank Board.

(4)

FEDERAL HOME LOAN BANK BOARD

No. 83-193

Date: April 6, 1983

WHEREAS, the Federal Home Loan Bank Board has carefully considered the recommendation of the Board of Directors of the Federal Home Loan Bank of Little Rock, at a meeting held on February 26, 1983, that the Ninth District Federal Home Loan Bank be moved from Little Rock., Arkansas, to the Dallas, Texas SMSA; and

WHEREAS, the Bank’s Board of Directors has expressed its desire to have the Bank relocated to a city in which the Bank can better serve the District and the Bank’s member institutions and where transportation facilities better facilitate frequent personal discussion and visits between Bank officers and members on a routine basis; and

WHEREAS, the Dallas metropolitan area is one of the largest in the Ninth District, and offers superior accessibility both to member associations and to related governmental activities, having one of the nation’s major airports in terms of passenger emplanements, with non-stop service or through-plane connections to numerous cities within said district and throughout the nation;

WHEREAS, it appears that the relocation will promote the best interests of the Bank and of its member institutions and will be in the public interest;

NOW, THEREFORE, BE IT RESOLVED, that the Ninth District Federal Home Loan Bank, located at Little Rock, Arkansas, shall be moved to the Dallas, Texas, SMSA as expeditiously as possible its name shall be changed from Federal Home Loan Bank of Little Rock to Federal Home Loan Bank of Dallas effective upon the date of the move.

BE IT FURTHER RESOLVED, that, subject to Section 524.6 of the Regulations for the Federal Home Loan Bank System, said Federal Home Loan Bank is hereby authorized and directed, and invested with the required powers, to accomplish the transfer to the Dallas SMSA of the facilities and personnel of said Bank now at Little Rock as rapidly as possible.

FEDERAL HOME LOAN BANK BOARD

No. 83-193

Page Two

BE IT FURTHER RESOLVED, that Articles 1, 2, and 3 of the Organization Certificate of the Federal Home Loan Bank of Little Rock, only insofar as said Articles refer to the name, location, and establishment of said Bank, are hereby amended effective upon the date of the move, by changing the name, location of the principal office of the Bank, and the place where the Bank is to be established, from Little Rock to Dallas.

EX-3.2

Exhibit 3.2

BYLAWS

OF

FEDERAL HOME LOAN BANK OF DALLAS

ARTICLE I

OFFICES

     SECTION 1.01 Principal Office. The principal office of Federal Home Loan Bank of Dallas (the “Bank”) shall be located in the Dallas/Fort Worth standard metropolitan statistical area, State of Texas.

     SECTION 1.02 Other Offices. In addition to its principal office, the Bank may maintain offices at any other place, or places, either within or without the State of Texas, as the Board of Directors of the Bank (the “Board”) shall from time to time determine appropriate or the business of the Bank may require.

     SECTION 1.03 Seal. The seal of the Bank shall be of such design as shall be approved and adopted from time to time by the Board, and may be affixed to any document by impression, by printing, by rubber stamp, or otherwise. The seal of the Bank shall be kept in the custody of the Secretary of the Bank. If and when so directed by the Board, a duplicate of the Seal may be kept and used by the Treasurer or any assistant secretary or assistant treasurer as designated by the Board.

ARTICLE II

MEETINGS OF STOCKHOLDERS

     SECTION 2.01 Annual Meeting. An annual meeting of stockholders each year shall not be required. The Board, at its option, may provide for an annual meeting in any particular year by adoption of a resolution stating the place, day, and hour for such annual meeting. At an annual meeting, the stockholders shall be entitled to transact such business as may properly be brought before the meeting. The Board, any officer of the Board, or the Chief Executive Officer of the Bank may submit such matters to the annual meeting as such persons may deem to be appropriate. The Chairperson of the Board, or in his absence the Vice Chairperson of the Board, or in the absence of both, the Chief Executive Officer of the Bank, shall preside at all annual meetings of the stockholders.

     SECTION 2.02 Stockholder Voting. The stockholders of the Bank shall be entitled to vote for the election of the elective Directors of the Bank in accordance with the Federal Home Loan Bank Act (as amended or otherwise modified from time to time, the “Act”) and the rules and regulations of the Federal Housing Finance Board (as such rules and

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regulations may be amended or otherwise modified from time to time, the “Rules and Regulations”). The stockholders shall be entitled to vote with respect to such other matters, if any, as may be provided for in the Capital Plan of the Bank (as in effect from time to time, the “Capital Plan”) subject to such rules and procedures as may be established in the Act, the Capital Plan, or these Bylaws.

     SECTION 2.03 Special Meetings. Special meetings of the stockholders shall be held upon the call of either a majority of the Board or upon the written request of the Chief Executive Officer of the Bank. Only business within the purpose or purposes described in the notice required by Section 2.04 may be conducted at a special meeting of shareholders.

     SECTION 2.04 Notice of Meeting. Written or printed notices of all meetings, stating the place, day, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of such meeting, either personally or by mail, by or at the direction of the Chief Executive Officer, the Secretary or the officer or person calling the meeting, to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States Postal Service addressed to the stockholder at his address as it appears on the records of the Bank with postage thereon prepaid. Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Bank under these Bylaws shall be effective if given by a form of electronic transmission permitted by law as a substitute for written notice delivered in person or electronically.

     SECTION 2.05 Waiver of Notice. Attendance by a stockholder at a meeting, whether in person or by proxy, without objection to the notice or lack thereof, shall constitute a waiver of notice of the meeting.

ARTICLE III

DIRECTORS

     SECTION 3.01 Number, Qualifications, and Compensation. The Board shall consist of such persons as shall be appointed or elected thereto in accordance with the Act and the Rules and Regulations. The Directors shall be compensated in accordance with the Rules and Regulations and the Act. The Directors shall be reimbursed for their expenses in the performance of their duties in accordance with the Rules and Regulations, the Act, and the resolutions adopted by the Board.

     SECTION 3.02 Regular Meetings. Regular meetings of the Board may be held on such days and at such times and places as shall be determined from time to time by the Board. Regular meetings may be held without notice thereof, but the Board may direct the giving of five days’ notice of such meeting to each Director.

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     SECTION 3.03 Special Meetings. Special meetings of the Board may be called by its Chairperson, its Vice Chairperson, or the Chief Executive Officer of the Bank on at least two days’ prior notice to each Director, and shall be called by the Secretary of the Bank upon like notice on the written request addressed to the Secretary of the Bank of three Directors stating the reasons therefor. The notice of each such special meeting shall stipulate the day, time, and place of such meeting and shall contain a statement of the purpose or purposes of each such meeting. Each such meeting may be held on any day and at any time and place without previous notice if all of the Directors are actually present and two-thirds of the Directors consent thereto.

     SECTION 3.04 Quorum Voting. Except as otherwise provided herein, at any regular meeting or any special meeting of the Board, a majority of the Directors shall constitute a quorum for the transaction of business, but a smaller number may adjourn from time to time until a quorum is present. A majority of the Directors present at any meeting, a quorum being present, shall decide questions submitted for decision.

     SECTION 3.05 Officers of the Board. The officers of the Board shall be a Chairperson and a Vice Chairperson, each elected from among the directors for a two-year term by a majority of the Board. In the event of the absence or disability of the Chairperson for any period or in the event of a vacancy during the term of office of the Chairperson, the Vice Chairperson shall perform such duties until the vacancy has been filled for the remaining term of the Chairperson or the remaining term of the Chairperson has expired. In the event that neither the Chairperson nor the Vice Chairperson is available to carry out the requirements of the Chairperson for any period or in the event of concurrent vacancies during the term of office of the Chairperson and the Vice Chairperson, a majority of the Board (a) shall elect from among the directors an acting Chairperson to fulfill the duties usually performed by the Chairperson of the Board until the vacancy has been filled for the remaining term of the Chairperson or the remaining term of the Chairperson has expired, and (b) may elect from among the directors an acting Vice Chairperson to fulfill the duties usually performed by the Vice Chairperson of the Board until the vacancy has been filled for the remaining term of the Vice Chairperson or the remaining term of the Vice Chairperson has expired. The Chairperson and the Vice Chairperson shall have such duties as are usually incident to their respective offices and such as may be assigned to them by the Board.

     SECTION 3.06 Removal of Officers of the Board. Upon the request of any member of the Board, the Chairperson, the Vice Chairperson, or the Chief Executive Officer shall convene a meeting of the Board to determine whether the Chairperson, Vice Chairperson, Acting Chairperson, or Acting Vice Chairperson should be removed from office for good cause. Notice shall be given to each Director five days prior to the meeting. The notice of such meeting shall stipulate the day, time, and place of such meeting and shall contain a statement of the purpose or purposes of such meeting. At such meeting, the person calling the meeting shall report fully on the reason for the meeting. If a majority of the Board determines that there is an adequate basis to conclude that good cause may exist for removal, the Executive Committee shall be charged with the responsibility for making a full investigation of the facts bearing on whether the Chairperson, Vice Chairperson, Acting Chairperson or Acting Vice Chairperson should be removed for good cause and for recommending the action to be taken, if any, in any particular case. Removal for good cause, at a minimum, should be based upon a violation of the Bank’s Code of Conduct and Ethics, the Directors Conflict of Interest Policy, or the Director’s

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duties and obligations as provided under the Act and the Rules and Regulations, including, without limitation, a Director’s attendance record at meetings of the Board and its committees. All Executive Committee members, except for the Chairperson, Vice Chairperson, Acting Chairperson or Acting Vice Chairperson who is the subject of the investigation, as the case may be, shall be permitted to participate in the deliberations and actions of the Executive Committee. The Executive Committee shall provide the Chairperson, Vice Chairperson, Acting Chairperson or Acting Vice Chairperson who is the subject of the investigation a reasonable opportunity to be heard and to respond to the charges. After completion of the investigation, the Executive Committee shall report to the Board at a regular meeting or a special meeting called for such purpose with respect to its investigation and its recommendation as to action to be taken, if any. Upon receiving such recommendation, the Board by a two-thirds vote of all directors eligible to serve on the Board, except for the person who is the subject of the removal proceeding, may remove the respective Chairperson, Vice Chairperson, Acting Chairperson or Acting Vice Chairperson for good cause. Removal of the Chairperson, Vice Chairperson, Acting Chairperson or Acting Vice Chairperson shall not affect such individual’s right to continue as a director.

     SECTION 3.07 Procedure to Fill Vacancy of Elective Director. In the event of a vacancy during the term of office of an elective Director, the Chairperson of the Board shall develop a recommendation to fill the vacancy for the Board’s consideration. In developing his recommendation, the Chairperson of the Board may consider one or more of the following factors which are intended to be illustrative, but not exhaustive:

(a)	the length of time remaining on the applicable term of office;
(b)	the results of the previous election in the applicable state;
(c)	the recommendations of other elective directors from the applicable state, if any;
(d)	the recommendations of other members from the applicable state;
(e)	the recommendations of trade associations from the applicable state;
(f)	geographic diversity;
(g)	previous experience as a director of the Bank;
(h)	needs of the Board for expertise in a particular area such as finance, accounting, residential housing, or law;
(i)	the desirability of representation of a particular charter-type such as a commercial bank, credit union, or insurance company; and
(j)	the capital investment, outstanding advances, and other activities of a member with the Bank.

Upon completion of his deliberations, his recommendation of one or more candidates will be reported to the Board at the next scheduled meeting of the Board. The Board will then vote to

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fill the vacancy. The candidate receiving the vote of a majority of all remaining Directors (excluding vacancies), regardless of whether such remaining Directors constitute a quorum of the Bank’s Directors, shall be declared the winner. If a majority vote is not obtained, a second vote shall be taken including only the names of candidates receiving the most or second most votes in the previous vote. This process shall continue until a candidate receives the required votes or the election is postponed to a future meeting of the Board.

     SECTION 3.08 Order of Business. At meetings of the Board, business shall be transacted in such order as, from time to time, the Board may determine. At all meetings of the Board, the Chairperson, or in his absence the Vice Chairperson, or in the absence of both of these officers, a chairperson pro tempore selected by the Board, shall preside.

     SECTION 3.09 Designation of Depositories. Except as otherwise provided by the Act or the Rules and Regulations, the Board shall designate the trust company, trust companies, bank, or banks (which may include a Federal Reserve Bank), in which shall be deposited the monies or securities of the Bank. Notwithstanding the foregoing provisions of this section, any special series United States Treasury obligations owned by the Bank shall be held with such depository or depositories as may be provided in the Rules and Regulations.

     SECTION 3.10 Voting; Presumption of Assent. At all meetings of the Board, each Director present shall have one vote. A Director of the Bank who is present at the meeting of the Board at which action on any matter is taken shall be presumed to have assented to the action unless such Director’s dissent shall be entered in the minutes of the meeting or unless such Director shall either file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or forward any dissent by certified or registered mail to the Secretary of the Bank as promptly as practicable after adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favor of such action.

     SECTION 3.11 Telephone Meetings. Unless restricted by the Organization Certificate of the Bank (as amended or otherwise modified from time to time, the “Organization Certificate”), the Act, or the Rules and Regulations, any one or more members of the Board or any committee thereof may participate in a meeting of the Board or such committee by means of a conference telephone or other communications equipment, by means of which all persons participating in the meeting can speak and be heard by each other. Participation by such means shall constitute presence in person at a meeting.

     SECTION 3.12 Duties and Powers of Directors. The Board shall have such powers and duties as are provided for by the Act, the Rules and Regulations, the Organization Certificate, and the Bylaws.

     SECTION 3.13 Notice of Meeting. Except as otherwise provided herein, notice of meetings of the Board may be communicated by any usual means of communication. Such notice may be communicated, without limitation, in person; by telephone, facsimile, or other electronic transmission; or by mail or private carrier. Written notice of a meeting of the Board is effective at the earliest of the following: (a) when received; (b) upon its deposit in the Untied States mail, as evidenced by the postmark, if mailed with postage thereon prepaid and correctly addressed; (c) if by facsimile or other electronic transmission, by acknowledgment of the

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electronic transmission; or (d) on the date shown on the confirmation or refusal of delivery issued by a nationally recognized private carrier, if sent by a nationally recognized private carrier to the address of the Director last known to the Bank. Oral notice is effective when actually communicated to the Director.

     SECTION 3.14 Action Without a Meeting. Any action required or permitted to be taken by the Board at a Board meeting may be taken without a meeting if all Directors then in office consent thereto in writing, provided that such writing or writings shall be filed with the minutes of proceedings of the Board. Such a written consent and the signing thereof may be accomplished by one or more electronic transmissions. Action taken under this Section 3.14 shall be effective when the last Director signs the consent unless the consent specifies a later effective date, in which event such action shall be effective as of the later date specified therein, provided that the consent contains or otherwise indicates the date of execution of each Director. A consent signed under this Section shall have the effect of a meeting vote and may be described as such in any document.

ARTICLE IV

COMMITTEES

     SECTION 4.01 Standing Committees. The Standing Committees described in this Section shall have such responsibilities and authority as are set forth herein, together with such other responsibilities and authority provided for by the Act, the Rules and Regulations, the respective charters of such Standing Committees, and as otherwise may from time to time be provided in resolutions adopted by the Board. The Board shall designate members of the Standing Committees from among its members. Meetings of each Standing Committee may be held without notice if all members of the Standing Committee are actually present and consent thereto. Each Standing Committee shall, subject to the provisions of these Bylaws, fix its own rules of procedure, and shall meet as provided by such rules, its charter, or by resolution of the Board, and it shall also meet at the call of the Chairperson of the Board or of the Chief Executive Officer of the Bank. Unless otherwise set forth in the Act, the Rules and Regulations, resolutions adopted by the Board, or the charter of a Standing Committee, each Standing Committee shall have the power to select, engage, and retain staff, legal counsel, and other outside advisers and consultants to perform such duties as a Standing Committee may from time to time prescribe.

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     (a) Executive Committee. At its first meeting in each calendar year at which all elective and appointive directors have received notice of the meeting, the Board shall select an Executive Committee, consisting of the Chairperson of the Board, the Vice Chairperson of the Board, and the chairperson of each Standing Committee. At such meeting, the Board by resolution may specify that the members of the Executive Committee present and not disqualified from voting at a meeting of the Executive Committee, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at such meeting in place of any absent or disqualified member. The vice chairperson of each Standing Committee will be an alternate member of the Executive Committee and will act at any Executive Committee meeting in place of the chairperson of such Standing Committee if such chairperson is unable to act at any meeting of the Executive Committee. The Chairperson of the Board, or in his absence, the Vice Chairperson, or in the absence of both, a member, designated by a majority of the members present at any meeting, shall serve as Chairperson of the Executive Committee. Vacancies in the Executive Committee shall be filled by the Board.

     During the intervals between the meetings of the Board, the Executive Committee shall possess and may exercise all of the powers of the Board, other than those powers assigned to the Audit Committee and those powers set forth in Section 7.08, in the management and direction of the affairs of the Bank in all cases in which specific directions shall not have been given by the Board.

     All actions by the Executive Committee shall be reported to the Board at its meeting next succeeding such actions, and shall be subject to revision and alteration by the Board; provided, however, that no rights of third parties shall be affected by any such revision or alteration. Regular minutes of the proceedings of the Executive Committee shall be kept in a book provided for that purpose.

     In the event of a national emergency, if all of the persons herein before authorized to call a meeting of the Executive Committee are unavailable for duty, a meeting may be called by any other member of the Board.

     (b) Audit Committee. At its first meeting in each calendar year at which all elective and appointive directors have received notice of the meeting, the Board shall select an Audit Committee, consisting of five or more members of the Board, each of whom shall meet the criteria of independence set forth in the Act and the Rules and Regulations. The Audit Committee shall possess and may exercise all of the powers and duties provided for in the Act, in the Rules and Regulations, in the Bank’s Audit Committee charter, and by the Board.

     (c) Risk Management Committee. At its first meeting in each calendar year at which all elective and appointive directors have received notice of the meeting, the Board shall select a Risk Management Committee. The Risk Management Committee shall oversee the process by which the Bank manages its credit, market, interest rate, liquidity, and operational risks and the process used to determine, and the adequacy of, the Bank’s loss reserves. The Risk Management Committee shall monitor the performance of the Bank’s internal risk review function.

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     (d) Affordable Housing and Economic Development Committee. At its first meeting in each calendar year at which all elective and appointive directors have received notice of the meeting, the Board shall select an Affordable Housing and Economic Development Committee. The Affordable Housing and Economic Development Committee, with respect to affordable housing and economic development, shall oversee the Bank’s programs and activities to ensure that the Bank complies with the Act and the Rules and Regulations. At least annually, the Affordable Housing and Economic Development Committee shall review the Bank’s Community Lending Plan, Affordable Housing Implementation Plan, and Affordable Housing Conflict of Interest Policy and make recommendations to the Board on any amendments or modifications to such plans and policies. The Affordable Housing and Economic Development Committee shall review and approve, prior to implementation, any recommendations made to the Board regarding the Bank’s Affordable Housing Program. The Affordable Housing and Economic Development Committee shall review and approve, prior to funding, all grants recommended for funding under the Bank’s Affordable Housing Program.

     (e) Human Resources Committee. At its first meeting in each calendar year at which all elective and appointive directors have received notice of the meeting, the Board shall select a Human Resources Committee. The Human Resources Committee shall review and recommend to the Board actions that should be taken on those human resources policies and procedures as presented by the management of the Bank, or as deemed appropriate by the Board, or as required by federal statute or regulation, or as required by benefit plan design or prior corporate resolution. The Human Resources Committee shall make recommendations regarding the appointment of officers of the Bank. The Human Resources Committee shall be responsible for monitoring the Bank’s advancement of the Bank’s Affirmative Action Plan objectives and shall make recommendations to the Board with respect to all aspects of the President’s compensation and terms of employment.

     (f) Government Relations Committee. At its first meeting in each calendar year at which all elective and appointive directors have received notice of the meeting, the Board shall select a Government Relations Committee. The Government Relations Committee shall advise management of the Bank with respect to the Bank’s relationship with legislative bodies and executive agencies that impact the Bank and its operations.

     SECTION 4.02 Other Committees. The Board may delegate from time to time to suitable committees any duties that are required to be executed during the intervals between the meetings of the Board, and such committees shall report and make recommendations to the Board when and as required by the Board. Such committees shall be selected so as to employ the services as nearly as is feasible of all of the membership of the Board. Nothing in this section shall limit the power of the Board to establish additional committees on an ad hoc or standing basis or to assign additional responsibilities to any committee. No such committee appointed by the Board under this Section 4.02 shall have the authority of the Board in reference to any powers reserved to the full Board by any Board resolution, these Bylaws, or the charter of any committee so established, including, without limitation, the powers of the Board set forth in Section 7.08.

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     SECTION 4.03 Telephone Meetings. Members of any committee of the Board may participate in a meeting of such committee by means of a telephone or other communications equipment allowing all persons participating in the meeting to speak to and hear each other at the same time. Participation by such means shall constitute presence in person at a meeting.

     SECTION 4.04 Quorum. Unless otherwise set forth in the Act, the Rules and Regulations, resolutions adopted by the Board, or the charter of a committee, a majority of any committee shall be necessary and sufficient to constitute a quorum and in every case the affirmative vote of a majority of the members present at a meeting at which a quorum is present shall be necessary and sufficient for the passage of any resolution. Each committee may act by the written resolution of a quorum thereof although not formally convened; provided, however, that to the extent practicable each member of the committee will be given notice of the matter that is the subject of the written resolution.

ARTICLE V

OFFICERS AND EMPLOYEES

     SECTION 5.01 Officers. The corporate officers of the Bank shall be a President, one or more Senior Vice Presidents, one or more Vice Presidents, a Treasurer, a Secretary, and such other officers, assistant or deputy officers, all of whom shall be appointed and confirmed by the Board.

     The President shall also be the Chief Executive Officer of the Bank and shall, subject to the direction of the Board, have responsibility for the general and active management of the business of the Bank, and shall see that all orders and resolutions of the Board are carried out.

     The same person may hold two or more offices but no person shall execute, acknowledge or verify any instrument in more than one capacity and the offices of President and Secretary shall not be held by the same person. All corporate officers shall hold office for one year or until their respective successors are appointed and confirmed by the Board. The Board may also appoint such other corporate officers as it shall deem necessary who shall have such authority and shall perform such duties as from time to time may be prescribed by the Board.

     Each of the salaried corporate officers of the Bank shall devote his entire time, skill and energy to the business of the Bank, unless the contrary is expressly consented to the Board. The corporate officers shall have such powers and duties as are usually incident to their respective offices and such as may be assigned to them by the Board. They shall have full responsibility for the operation of the Bank under the direction of the Board and the President. They shall make a full report to appropriate committees of the Board of matters under consideration or to be considered by such committees and shall see that a full report of the operation of the Bank is made to the President and to the Board at each regular meeting thereof.

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     The corporate officers of the Bank designated by the Board may extend or deny credit and take such other action in conformity with the policies and procedures approved by the Board and governing the extension of credit to the Bank’s members and others authorized to obtain extensions of credit from the Bank.

     SECTION 5.02 Employees and Legal Counsel. There shall also be such other employees (which may include inside legal counsel) as the Board may authorize or whose appointment the Board may ratify; and they shall have such duties as shall be assigned to them by the Board and the Chief Executive Officer of the Bank. The Board may retain outside legal counsel.

     SECTION 5.03 Removal. Any officer may be removed by the Board whenever in its judgment the best interests of the Bank would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the persons so removed. Appointment or confirmation of an officer shall not of itself create contract rights of such officer with respect to the Bank.

     SECTION 5.04 Vacancies. Whenever any vacancies shall occur in any office by death, resignation, increase in the number of officers of the Bank, or otherwise, the same shall be filled by the Board, and the officers so elected shall hold office until their successors are chosen and qualified.

     SECTION 5.05 Resignations. Any officer may resign at any time. Such resignations shall be made in writing and shall take effect at the time specified therein, or, if no time be specified, at the time of its receipt by the President. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. An officer’s resignation does not itself affect the contract rights, if any, between the officer and the Bank.

     SECTION 5.06 Compensation. The compensation of officers, other than the President, shall be set by the Board annually. The form and amount of the compensation paid to the President shall be set by the Board.

ARTICLE VI

CAPITAL STOCK

     SECTION 6.01 Issuance, Transfer, Redemption, Repurchase, and Dividends. Each member and former member of the Bank shall be required to acquire and retain capital stock in the manner and amount prescribed by the Act, the Rules and Regulations, and the Capital Plan. The manner of issuance, transfer, redemption, and repurchase of capital stock as well as the payment of dividends thereon shall be as prescribed in the Capital Plan, subject to the provisions of the Rules and Regulations.

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ARTICLE VII

GENERAL PROVISIONS

     SECTION 7.01 Minutes. Accurate minutes of all meetings of the stockholders of the Bank, of the Board, and of the committees of the Board, shall be signed by the presiding officer and attested under the seal of the Bank by the Secretary, Assistant Secretary or other person designated to record the minutes of such meeting. The original copies of such minutes shall be preserved by the Bank in minute books in custody of the Secretary of the Bank.

     SECTION 7.02 Banking Hours. The Bank shall be kept open for business for such hours as the Board shall fix, and employees shall remain in performance of their duties for such hours as may be required by said Board or the President of the Bank.

     SECTION 7.03 Budget. The President and the Chief Executive Officer of the Bank shall, prior to the end of each calendar year, prepare and submit to the Board a proposed operating expense budget and a proposed capital expenditure budget for the following calendar year. The Board shall promptly consider the proposed budget and shall adopt a budget for the following calendar year.

     SECTION 7.04 Surety Bonds and Insurance. The Bank shall maintain adequate surety bonds as determined by the Board, covering all officers, employees, attorneys, or agents having control over or access to monies, securities, or other property owned by the Bank or in its possession. The Bank shall comply with all provisions of the law as to the maintenance of liability, workers’ compensation, or other insurance, and shall maintain such additional forms and amounts of insurances as the Board may, from time to time, determine necessary or desirable for the protection of the Bank.

     SECTION 7.05 Signing of Papers. All checks, contracts, deeds, bonds, assignments, releases, or other documents of the Bank shall be signed in the name of the Bank by any officer or employee designated by the Board of Directors. When authorized by the Board, checks may be issued by the Bank bearing the facsimile signature of any officer or employee designated by the Board. Any device used to affix a facsimile signature shall be used and controlled in the manner and by the person or persons designated by the Board.

     SECTION 7.06 Operations. The Bank shall operate and do business within the provisions of the Act, the Rules and Regulations, the Organization Certificate, the Capital Plan, these Bylaws, and such directives not inconsistent with the foregoing as the Board may from time to time adopt.

     SECTION 7.07 Fiscal Year. The fiscal year of the Bank shall begin on the first day of January.

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     SECTION 7.08 Amendment. These Bylaws may be altered, amended, restated, or repealed and new Bylaws may be adopted at any meeting of the Board, at which a quorum is present, by a majority vote of Directors present at such meeting so long as notice of the action proposed to be taken in respect of the Bylaws shall have been given to each Director at least ten (10) days prior to such meeting.

     SECTION 7.09 Invalid Provisions. If any part of these Bylaws shall be held invalid or inoperative for any reason, the remaining parts, so far as it is possible and reasonable, shall remain valid and operative.

     SECTION 7.10 Waiver. Whenever any notice is required to be given under the provisions of the Organization Certificate, the Act, the Rules and Regulations, or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice.

     SECTION 7.11 Time Periods. In applying any provision of these Bylaws which requires that an act be done or not be done within a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used in making such computation, the day of the doing of the act shall be excluded and the day of the event shall be included.

     SECTION 7.12 Construction. The masculine gender, where appearing in these Bylaws, shall be deemed to include the feminine gender. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa.

ARTICLE VIII

INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES

     SECTION 8.01 General (a) The Bank shall, to the fullest extent permitted by law, indemnify any person who was or is a party, whether as a plaintiff acting with the approval of the Board, or as a defendant, or is threatened to be made a party to or is involved (including, without limitation, as a witness) in, any threatened, pending or completed investigation, claim, action, suit or proceeding, whether civil, criminal, arbitrative, administrative or investigative (including, without limitation, any action, suit, or proceeding by or in the right of the Bank to procure a judgment in its favor) and whether formal or informal (each of the foregoing a “Proceeding”), by reason of the fact that he is or was a director, officer, or employee of the Bank, or is or was serving at the request of the Bank as a director, officer, partner, trustee, or employee of another corporation, partnership, joint venture, trust, or other enterprise (including service with respect to an employee benefit plan), or by reason of having allegedly taken or omitted to take any action in connection with any such position, against all liability (including the obligation to pay a judgment, settlement, penalty or fine, including any excise tax assessed with respect to an employee benefit plan), loss, and expenses (including attorneys’ fees) actually and reasonably incurred or suffered by him in connection with such Proceeding if, as determined in accordance with Section 8.02, he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Bank, and, with respect to any Proceeding, had no reasonable cause to believe his conduct was unlawful, except such liabilities and expenses as are incurred

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because of such person’s breach of his duty of loyalty to the Bank or its stockholders, any act or omission by such person which involves willful misconduct or knowing violation of the criminal law, or any transaction from which such person derived any improper personal benefit. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that (i) the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Bank or (ii) with respect to any Proceeding, had reasonable cause to believe that his conduct was unlawful. Any director, officer, or employee of the Bank who is or was rendering services to the Financial Institutions Retirement Fund, the Financing Corporation, the Resolution Funding Corporation, the Office of Finance, the Council of Federal Home Loan Banks and any Federal Home Loan Bank System committee, including but not limited to the Bank Presidents Conference, and their successors, shall be deemed to be serving or have served, at the request of the Bank.

     (b) Notwithstanding anything else to the contrary in these Bylaws, to the extent any director, officer, employee, partner, or trustee has been successful on the merits or otherwise in defense of any Proceeding referred to in this Article VIII, or in defense of any claim, issue, or matter therein, he shall be indemnified to the fullest extent permitted by this Article VIII.

     SECTION 8.02 Procedure. Any indemnification under this Article VIII (unless otherwise ordered by a court) shall be made by the Bank only as authorized in the specific case or categories of cases upon a determination that indemnification of the director, officer, employee, partner, or trustee is proper in the circumstances because, in the Board’s discretion, such person has met the applicable standard of conduct set forth in this Article VIII.

     Such determination shall be made promptly, but in any event no later than sixty (60) days after the date on which a written request from the person seeking indemnification was received by the Secretary of the Bank, (a) by the Board by a majority vote of a quorum of the Directors who are not and have not been parties to such Proceeding or any similar Proceeding then pending (“Disinterested Directors”) or (b) if such a quorum is not obtainable, or, even if obtainable, a quorum of Disinterested Directors so directs, by independent legal counsel in a written opinion.

     Such person’s costs and expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the Bank.

     SECTION 8.03 Advancement of Expenses. Reasonable expenses, including attorneys’ fees, incurred in defending a Proceeding shall be paid or reimbursed by the Bank in advance of the final disposition of such Proceeding upon receipt by the Secretary of the Bank of (a) a written affirmation by the director, officer, employee, partner, or trustee of such person’s good faith belief that he has met the standard of conduct set forth in this Article VIII and (b) a written undertaking by or on behalf of the director, officer, employee, partner, or trustee to repay all amounts paid or reimbursed only if it shall ultimately be determined that he is not entitled to be indemnified by the Bank. The undertaking required by clause (b) of this Section 8.03 (i) shall be an unlimited general obligation of such person, (ii) need not be secured, and (iii) shall be accepted without reference to financial ability to make repayment.

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     SECTION 8.04 Rights Not Exclusive. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any law, bylaw, agreement, vote of stockholders or Disinterested Directors, or otherwise, both as to actions in his official capacity and as to actions in another capacity undertaken at the request of the Bank.

     SECTION 8.05 Indemnification of Agents of the Bank. The Bank may, to the extent authorized by the Board from time to time, grant rights to indemnification and advancement of expenses to agents of the Bank to the full extent of the provisions of this Article VIII with respect to the indemnification of directors, officers, employees, partners, or trustees of the Bank.

     SECTION 8.06 Insurance. The Bank, pursuant to a resolution of the Board, shall have the power to purchase and maintain insurance, at the Bank’s expense, on behalf of itself and any person who is or was a director, officer, employee, partner, trustee, or agent of the Bank, or is or was serving at the request of the Bank as a director, officer, employee, partner, trustee, or agent of any corporation, partnership, joint venture, trust or other enterprise against any expense, liability, or loss asserted or threatened against him or incurred or suffered by him in any such capacity, or arising out of his status as such, whether or not the Bank would have the power to indemnify him against such expense, liability, or loss under the provisions of this Article VIII.

     SECTION 8.07 Survival Of Rights. The indemnification and advancement of expenses provided by, or granted pursuant to this Article VIII, shall continue without any subsequent amendment or change as to a person who has ceased to be a director, officer, employee, partner, trustee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. In the event that any change is made to these Bylaws to reduce, restrict, or eliminate the indemnification and advancement of expenses provisions of this Article VIII, such provisions shall continue unchanged as to any director, officer, employee, partner, trustee, or agent of the Bank, with respect to any action taken or omitted by such director, officer, employee, partner, trustee, or agent (in such person’s position with the Bank or any other entity for which such person is or was serving as a director, officer, employee, partner, trustee, or agent at the request of the Bank) prior to the time that such change in the Bylaws was made.

     SECTION 8.08 Contracts of Indemnification. The Chief Executive Officer is authorized to enter into contracts of indemnification with each director, officer, employee, or agent of the Bank with respect to the indemnification provided in this Article VIII and to renegotiate such contracts as necessary to reflect changing laws and business circumstances. The Bank may create a trust fund, grant a security interest, or use any other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect any indemnification and advancement of expenses as provided in this Article VIII.

     SECTION 8.09 Right of Indemnitee to Bring Suit. The rights to indemnification and to the advancement of expenses conferred in this Article VIII shall be contract rights. If (a) the Bank denies a director’s, officer’s, employee’s, partner’s, trustee’s, or agent’s written claim for indemnification under this Article VIII, (b) the Bank has not paid an indemnification claim in full within ten days after the Board or court determines that indemnification of the director,

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officer, employee, partner, trustee, or agent requesting such indemnification is proper, or (c) the Bank has not paid in full within twenty days after the requirements for the advancement of expenses set forth in this Article VIII have been satisfied, the director, officer, employee, partner, trustee, or agent requesting such payment may at any time thereafter apply to any court of competent jurisdiction for an order directing the Bank to provide indemnification or to make an advancement of expenses. The court shall order the Bank to make an advancement of expenses or to provide indemnification, as the case may be, if it determines that the director, officer, employee, partner, trustee, or agent requesting such payment is entitled under these Bylaws to such an advancement of expenses or indemnification, and in such event shall order the Bank to pay such person’s reasonable expenses (including attorneys’ fees) to obtain the order. Neither the failure of the Bank (including, the Board, any committee, legal counsel, or its stockholders) to have made a determination, as provided in Section 8.02, prior to the commencement of such action permitted by this Section, that such person is entitled to receive indemnification, nor the determination by the Bank (including, the Board, any committee, legal counsel, or its stockholders) that such person is not entitled to an advancement of expenses or indemnification, shall create a presumption to that effect or otherwise itself be a defense to such person’s application for an advancement of expenses or indemnification.

Adopted by the Board of Directors on
December 16, 2004

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EX-4.1

Exhibit 4.1

CAPITAL PLAN

for the

Federal Home Loan Bank of Dallas

This capital plan is neither an offer to sell or exchange nor a solicitation of an offer to purchase or exchange any capital stock of the Federal Home Loan Bank of Dallas.

Amended and Revised

June 24, 2004

(Approved as Amended by Federal Housing Finance Board on February 9, 2005)

Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

Table of Contents

Section		Page
Definition of Terms		4
Section 1:	Overview	5
1.1	General
1.2	Legal Authorities
1.3	Amendments to the Capital Plan
Section 2:	Capital Structure	5
2.1	Authorized Class of Capital Stock
2.2	Par Value of Capital Stock
2.3	Ownership of Retained Earnings
2.4	Preference in Liquidation, Consolidation or Merger
2.5	Finance Board Authority
Section 3:	Capital Stock	6
3.1	Purchase of Capital Stock
3.2	Transfers of Capital Stock
3.3	Redemption of Capital Stock
3.4	Repurchase of Capital Stock
3.5	Limitations on Redemption or Repurchase of Capital Stock
3.6	Retirement of Capital Stock
3.7	Dividends on Capital Stock
3.8	Voting Rights

2

Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

Section		Page
Section 4:	Minimum Investment Requirements	10
4.1	Membership Investment Requirement
4.2	Activity-Based Investment Requirement
4.3	Periodic Review of Minimum Investment Requirements
4.4	Member Compliance
Section 5:	Termination of Membership	13
5.1	Voluntary Withdrawal
5.2	Involuntary Termination of Membership
5.3	Termination by Charter Dissolution
5.4	General Membership Termination Provisions
Section 6:	Capital Structure Conversion	15
6.1	Capital Structure Conversion Process
6.2	Transition Procedures
Section 7:	Capital Plan Reviews	18
7.1	Independent Certified Public Accountant
7.2	Nationally Recognized Statistical Rating Organization
7.3	Good Faith Determination

3

Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

Definition of Terms

1.	Acquired Member Assets (“AMA”) means assets that may be acquired by the Bank through its members in accordance with the Regulations.
2.	Capital Plan means the plan for a new capital structure as required by Section 6(b) of the Bank Act, 12 U.S.C. §1426(b).
3.	Class B Stock means capital stock held by members and issued by the Bank pursuant to the Capital Plan, which will be redeemable by the Bank for cash at Par Value with five years prior written notice provided by a member to the Bank.
4.	Conversion Date means the date upon which the Bank converts to the new capital structure described in this Capital Plan and the existing capital stock is exchanged for Class B Stock.
5.	Excess Stock means that amount of Class B Stock held by a member in excess of the member’s minimum investment requirement as defined in this Capital Plan.
6.	Minimum Capital Requirement(s) means the amount of capital the Bank is required to hold in order to comply with all statutory and regulatory capital requirements, or any other capital requirement that may be imposed on the Bank by the Finance Board.
7.	Par Value means the par value specified in Section 2.2 of this Capital Plan for shares of Class B Stock issued in accordance with this Capital Plan.
8.	Stock Redemption means redemption of Class B Stock by the Bank pursuant to a stock redemption notice in accordance with Section 3.3 of the Capital Plan or pursuant to a withdrawal notice in accordance with Section 5.1 of the Capital Plan.
9.	Stock Repurchase means repurchase of Class B Stock by the Bank at its discretion in accordance with the Regulations and Section 3.4 of the Capital Plan. The decision to repurchase Class B Stock rests with the Bank and cannot be compelled by a member.

4

Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

1. Overview

1.1	General
	Pursuant to the Federal Home Loan Bank Act, as amended (12 U.S.C. §1421, et seq.) (“the Bank Act”) and the governing Regulations (“Regulations”) of the Federal Housing Finance Board (“Finance Board”), the Board of Directors of the Federal Home Loan Bank of Dallas (“the Bank”) hereby establishes this Capital Plan to provide a new capital structure for the Bank, and ensure that the Bank is able to comply with its Minimum Capital Requirements at all times after the Conversion Date. This Capital Plan is designed to facilitate the continuation of the Bank’s cooperative business model.
1.2	Legal Authorities
	This document is governed by the Bank Act and the Regulations. Any action designated by this Capital Plan as being subject to the “discretion” or “sole discretion” of the Bank or the Board of Directors shall nevertheless be subject to the regulatory oversight of the Finance Board.
1.3	Amendments to the Capital Plan
	In accordance with the Regulations, any amendments to this Capital Plan must be submitted by the Bank’s Board of Directors to the Finance Board for approval prior to implementation.

2. Capital Structure

2.1	Authorized Class of Capital Stock
	The Board of Directors of the Bank hereby authorizes the issuance of one class of capital stock to be designated as Class B Stock, which will have a five year redemption notice period.
2.2	Par Value of Capital Stock
	All Class B Stock will have a Par Value of $100 per share. All Class B Stock will be issued, redeemed, repurchased and transferred only at Par Value.
2.3	Ownership of Retained Earnings
	In accordance with the Bank Act (12 U.S.C. §1426(h)(1)), the retained earnings, surplus, undivided profits and equity reserves, if any, of the Bank are owned by the holders of Class B Stock in proportion to each holder’s share of the total outstanding shares of Class B Stock. Holders of Class B Stock have no right to receive any portion of the retained earnings, surplus, undivided profits and equity reserves, if any, of the Bank except through the declaration of a dividend or capital distribution approved by the Board of Directors, or upon liquidation of the Bank.
2.4	Preference in Liquidation, Consolidation or Merger
	In the event of liquidation of the Bank, the Board of Directors may authorize the pro rata distribution of any retained earnings, surplus, undivided profits, and equity reserves of the Bank, to holders of Class B Stock in proportion to each holder’s share of the total shares of outstanding Class B Stock, provided that all payment obligations to the Bank’s existing creditors have been fully satisfied, and all Class B Stock has been redeemed at Par Value.
	In the event the Bank is merged or consolidated into another Federal Home Loan Bank, the holders of the outstanding Class B Stock of the Bank will be entitled to the rights and benefits set forth in any applicable plan of merger and/or terms established or approved by the Finance

5

Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

	Board. In the event another Federal Home Loan Bank is merged or consolidated into the Bank, the holders of the outstanding capital stock of the other Federal Home Loan Bank will be entitled to the rights and benefits set forth in any applicable plan of merger and/or terms established or approved by the Finance Board.
2.5	Finance Board Authority
	No part of Section 2.4 of this Capital Plan will be construed to limit the authority granted to the Finance Board under 12 U.S.C. §1446 to prescribe rules, regulations or orders governing the liquidation, reorganization or merger of a Federal Home Loan Bank.

3. Capital Stock

	All members are required to purchase and redeem capital stock in accordance with the requirements of the Bank Act, the Regulations and this Capital Plan, and the Bank will not issue capital stock other than in accordance with the Regulations.
3.1	Purchase of Capital Stock
	All members are required to purchase Class B Stock as a condition of membership in accordance with the requirements of Section 4 of this Capital Plan. The Class B Stock of the Bank may be issued only to members of the Bank and institutions that have been approved by the Bank to be members, and may be held only by members of the Bank, non-member institutions that acquire Class B Stock by virtue of acquiring member institutions, or by former members that retain Class B Stock in accordance with this Capital Plan following termination of membership. The Class B Stock of the Bank may be traded only between the Bank and its members. All Class B Stock will be issued in book entry form, and the Bank will act as its own transfer agent.
3.2	Transfers of Capital Stock
	In accordance with the Regulations, and only with the prior approval of the Bank as it deems appropriate, a member may transfer, at Par Value, any Excess Stock to any other member or institution that has satisfied all conditions for becoming a member other than the purchase of the Class B Stock required to satisfy its minimum investment requirement. All transfers of Class B Stock will be effective upon being recorded on the appropriate books and records of the Bank. Approval for all transfers is subject to the requirement that, following the transfer, the transferring member would continue to hold sufficient stock to meet the member’s minimum investment requirement. Except as provided in Section 5.3 of the Capital Plan, stock redemption notices will not transfer with Excess Stock that is transferred.
3.3	Redemption of Capital Stock
	Subject to the limitations in this Capital Plan, Class B Stock will be redeemable for cash at Par Value with five (5) years prior written notice provided by the member to the Bank. A member may request redemption of Class B Stock by providing a written stock redemption notice to the Bank in accordance with Section 3.3.1 of this Capital Plan indicating the number of shares of Class B Stock to be redeemed and the date(s) those shares were issued to the member, or by submitting a membership withdrawal notice in accordance with Section 5.1 of this Capital Plan. If the redemption notice fails to properly identify the particular shares to be redeemed, the member shall be deemed to have requested redemption of the most recently issued shares that are not already subject to a pending redemption request. The five-year stock redemption notice period will commence upon receipt by the Bank of the written stock redemption or withdrawal notice. A member may not have more than one stock redemption or withdrawal notice outstanding at any one time for the same shares of Class B Stock.

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Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

The Bank will not be obligated to redeem a member’s Class B Stock other than in accordance with this Capital Plan. Nothing in this section will preclude the Bank from repurchasing Excess Stock in accordance with Section 3.4 of this Capital Plan, including Class B Stock for which a stock redemption notice has been submitted.

3.3.1	Notice of Redemption
	Subject to the limitations in this Capital Plan, a member may request redemption of Class B Stock by submitting five years written notice to the Bank. No member may have more than one stock redemption notice outstanding for the same share(s) of Class B Stock. To facilitate this limitation, no member may have one or more stock redemption notices in effect at any one time that represent an aggregate amount of Class B Stock that is greater than the total amount of Class B Stock the member owns. If, subsequent to submitting a stock redemption notice, a member’s holdings of Class B Stock fall below the amount of Class B Stock subject to outstanding stock redemption notices, the Bank will automatically reduce the number of shares of stock subject to stock redemption notices. If a member has more than one stock redemption notice outstanding, this reduction will be applied first to the most recently received stock redemption notice unless specified otherwise by the member in writing within 30 days of the reduction in Class B Stock.
	At the expiration of the five year period following receipt by the Bank of the stock redemption notice, and subject to the limitations contained in Section 3.5 of this Capital Plan, the Bank will pay the stated Par Value of the Class B Stock covered by the stock redemption notice to the member in cash to the extent the Bank determines that the Class B Stock is Excess Stock, as determined in accordance with the minimum investment requirements in effect at the end of the redemption notice period.
	Only Class B Stock that is Excess Stock at the expiration of the five year redemption notice period will be redeemed pursuant to a stock redemption notice. A stock redemption notice does not constitute a withdrawal notice as described in Section 5.1 of this Capital Plan. At the expiration of the redemption notice period, if the amount of Class B Stock subject to the stock redemption notice exceeds the amount of Excess Stock held by the member, the Bank will redeem Class B Stock equal to the amount of Excess Stock held by the member, and the stock redemption notice for the remaining shares of Class B Stock subject to that notice will be cancelled and a redemption cancellation fee will be assessed in accordance with Section 3.3.2 of this Capital Plan. Alternatively, within five business days of the expiration of the redemption notice period, the member may reduce its activity with the Bank (subject to any applicable prepayment fees) to reduce its minimum investment requirement and increase its holdings of Excess Stock which would then be eligible for redemption.
3.3.2	Redemption Cancellation Notice
	A member that has previously notified the Bank in writing of its intent to redeem some or all of its Class B Stock may cancel the stock redemption notice for all or a portion of the shares of Class B Stock subject to the stock redemption notice prior to the expiration of the redemption notice period by providing a written redemption cancellation notice to the Bank. A member may rescind a redemption cancellation notice by providing written notice to the Bank within 30 days of the original redemption cancellation notice.
	A member that cancels a stock redemption notice more than 30 days after it is received by the Bank and prior to its expiration will be subject to a redemption cancellation fee calculated as a percentage of the Par Value of the shares of Class B Stock subject to the

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Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

redemption cancellation notice.

When a member submits a redemption cancellation notice more than 30 days after the original redemption notice is received by the Bank but during the first year after the Bank receives the original stock redemption notice, the redemption cancellation fee will be 1.0 percent of the Par Value of the shares of Class B Stock subject to the redemption cancellation notice; the fee during the second year will be 2.0 percent of the Par Value of the shares of Class B Stock subject to the redemption cancellation notice; the fee during the third year will be 3.0 percent of the Par Value of the shares of Class B Stock subject to the redemption cancellation notice; the fee during the fourth year will be 4.0 percent of the Par Value of the shares of Class B Stock subject to the redemption cancellation notice; and the fee during the fifth year will be 5.0 percent of the Par Value of the shares of Class B Stock subject to the redemption cancellation notice.

The Bank’s Board of Directors may from time to time modify the redemption cancellation fee to any percentage(s) of the Par Value of the shares of Class B Stock subject to the redemption cancellation notice that is not less than 0.0 percent and not more than the percentages specified in the preceding paragraph. In the event the Board of Directors reduces the redemption cancellation fee, the Board of Directors will also determine whether the reduced fee will apply to cancellation of previously submitted stock redemption notices as well as those submitted in the future. Otherwise, the fee in effect at the time the stock redemption notice was originally received by the Bank will apply to the cancellation of that notice. The Bank will notify members in writing at least 30 days in advance of any changes in the redemption cancellation fee. Any change in the redemption cancellation fee will be applied equally and without discrimination to all members.

3.4	Repurchase of Capital Stock
	The Bank in its sole discretion may repurchase Excess Stock from time to time without regard to the five year redemption notice period. Excess Stock repurchases may be initiated by the Bank or requested by members, and will be subject to the limitations contained in Section 3.5 of this Capital Plan. The decision to repurchase Excess Stock will rest with the Bank and cannot be compelled by a member.
	Upon 15 days written notice, the Bank may initiate the repurchase of any amount of members’ Excess Stock. The Bank will determine the criteria for Excess Stock repurchases from time to time, and will apply the repurchase criteria equally and without discrimination to all members. Pursuant to an application submitted by a member to the Bank in writing or in such other form as the Bank may designate from time to time, the Bank may repurchase Class B Stock that the Bank determines to be Excess Stock.
	Unless the Bank is notified by a member otherwise in writing within 30 days of a Class B Stock repurchase transaction, repurchases of Excess Stock will automatically reduce the amount of Class B Stock subject to any outstanding stock redemption or withdrawal notices by the amount of Class B Stock repurchased. If a member has more than one stock redemption and / or withdrawal notice outstanding, this reduction will be applied first to the most recently received stock redemption or withdrawal notice.
	A member’s submission of a withdrawal notice in accordance with Section 5.1 of this Capital Plan, or its termination of membership in any other manner, will not, in and of itself, cause any Class B Stock to be deemed Excess Stock for purposes of this section.

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Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

3.5	Limitations on Redemption or Repurchase of Capital Stock
	The Bank will not redeem or repurchase Class B Stock without the prior written approval of the Finance Board if the Finance Board or the Board of Directors has determined that the Bank has incurred, or is likely to incur, losses that result in, or are likely to result in, charges against the capital of the Bank, as defined in the Regulations. This prohibition will apply even if a Bank is in compliance with its Minimum Capital Requirements, and will remain in effect for however long the Bank continues to incur such charges or until the Finance Board determines that such charges are not expected to continue.
	The Bank will not redeem or repurchase Class B Stock if the redemption or repurchase would cause the Bank to be out of compliance with its Minimum Capital Requirements, or if the redemption or repurchase would cause the member to be out of compliance with its minimum investment requirement.
	In accordance with the Regulations, the Bank’s Board of Directors may suspend redemption of Class B Stock if the Bank reasonably believes that continued redemption of Class B Stock would cause the Bank to fail to meet its Minimum Capital Requirements in the future, would prevent the Bank from maintaining adequate capital against a potential risk that may not be adequately reflected in its Minimum Capital Requirements, or would otherwise prevent the Bank from operating in a safe and sound manner.
	In accordance with the Regulations, the Bank will not repurchase any Class B Stock without the written consent of the Finance Board during any period in which the Bank has suspended redemptions of Class B Stock in accordance with this section. As required by the Regulations, in the event the Bank suspends Class B Stock redemptions, the Bank will notify the Finance Board in writing within two business days of the date of the decision to suspend redemptions, informing the Finance Board of the reasons for the suspension and the Bank’s strategies and time frames for addressing the conditions that led to the suspension. The Finance Board may require the Bank to re-institute the redemption of Class B Stock.
	If at any time the Bank determines that the total amount of Class B Stock subject to outstanding stock redemption or withdrawal notices with expiration dates within the following 12 months exceeds the amount of Class B Stock the Bank could redeem and still comply with its Minimum Capital Requirements, the Bank will determine whether to suspend redemption and repurchase activities altogether, to fulfill requests for redemption sequentially in the order in which they were received, to fulfill the requests on a pro rata basis, or to take other action deemed appropriate by the Bank.
3.6	Retirement of Capital Stock
	All shares of Class B Stock that are acquired by the Bank pursuant to redemption or repurchase transactions will be retired.
3.7	Dividends on Capital Stock
	The Board of Directors may declare dividends to be paid on Class B Stock on a quarterly basis or otherwise as it determines in its discretion. Each member will be entitled to receive dividends on all Class B Stock held during the applicable period for the period of time that the member owns the Class B Stock. Dividends are non-cumulative with respect to payment obligation. A member that has provided a withdrawal notice, or whose membership is otherwise terminated, will continue to receive dividends on its Class B Stock as long as the institution or its successor owns Class B Stock.

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Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

	In accordance with the Bank Act and the Regulations, dividends may only be paid from current earnings or previously retained earnings. In accordance with the Regulations, the Bank’s Board of Directors may not declare or pay a dividend if the Bank is not in compliance with its Minimum Capital Requirements or if the Bank would fall below its Minimum Capital Requirements as a result of the payment of the dividend. Dividend payments may be made in the form of cash, additional shares of Class B Stock, or a combination thereof as determined by the Bank’s Board of Directors.
	Except as otherwise provided herein or by regulation or statute, the Bank’s Board of Directors has sole discretion to determine the amount, form, frequency and timing of dividend payments.
3.8	Voting Rights
	Members’ voting rights are limited to the election of directors as provided by the Bank Act. The voting rights of holders of the Bank’s Class B Stock are as follows:

3.8.1	Allocation of Elected Director Seats and Votes
	In accordance with the Bank Act and the Regulations, the Finance Board will designate elected director seats by state annually. Each member will be entitled to vote in the election of directors representing the state in which the member is located. Each member will be entitled to cast one vote in the election of directors for each share of capital stock that the member was required to hold as of the immediately preceding December 31, except that no member may cast a number of votes greater than the average number of shares of capital stock required to be held by all members in the state as of the preceding December 31. Shares of capital stock held by members that were Excess Stock as of the preceding December 31 will not convey voting rights in the election of directors.
3.8.2	Initial Election of Directors after Conversion
	In accordance with the Regulations, the number of votes eligible to be cast in the initial election of directors after the Conversion Date will be based on the number of shares of capital stock that members were required to hold as of the immediately preceding December 31. If this Capital Plan was in effect on the preceding December 31, the minimum investment requirements of this Capital Plan will be used to determine the number of votes; otherwise, the number of votes will be determined based on the number of shares required to be held in accordance with the Regulations in effect prior to the implementation of the Capital Plan.
	If any member’s actual holdings of capital stock were less than the applicable minimum investment requirement on the preceding December 31, the number of shares eligible to be voted will be based on the number of shares of capital stock actually held by that member as of the preceding December 31.

4. Minimum Investment Requirements

The Bank requires all members to purchase Class B Stock of the Bank and to maintain a minimum investment in Class B Stock equal to the sum of the membership investment requirement described in Section 4.1 plus the activity-based investment requirement described in Section 4.2. The Bank’s Board of Directors will periodically review and may adjust these investment requirements as described in Section 4.3.

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Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

4.1	Membership Investment Requirement
	Beginning on the Conversion Date, each member will be required to maintain at all times a membership investment requirement equal to 0.25 percent of the member’s total assets as of the most recent December 31, as reported on the member’s regulatory financial report for that date, or its audited financial statements for that date if the member does not file regulatory financial reports, subject to a minimum membership investment requirement of $1,000 and a maximum membership investment requirement of $25 million.
	As described in Section 4.3, the Bank’s Board of Directors may from time to time increase or decrease the membership investment requirement to an amount not less than 0.05 percent of each member’s total assets nor more than 0.30 percent of each member’s total assets. The Bank’s Board of Directors may also increase or decrease the maximum membership investment requirement to an amount not less than $10 million or more than $50 million.
	The membership investment requirement will be calculated for all members at least annually during the first calendar quarter of the year, or as soon thereafter as members’ applicable financial data becomes available. The annual recalculation of membership investment requirements will become effective on or within 30 days of April 1 of each year. For new members, the membership investment requirement will be calculated based on the new member’s total assets as of the end of the most recent calendar quarter for which financial information is available. Members will be notified in writing of the amount of their membership investment requirements at least 10 days in advance of the effective date.
	The Bank may recalculate all members’ membership investment requirements more often than annually if it deems appropriate, and may recalculate individual members’ membership investment requirements more often than annually at the member’s request. In each of these cases, membership investment requirements will be recalculated based on members’ total assets as of the end of the most recent calendar quarter for which financial data is available. In addition, after the end of each calendar quarter, at the time the quarterly financial data used to calculate members’ membership investment requirements becomes available, the Bank will recalculate the membership investment requirements for institutions whose membership terminated during the quarter.
4.2	Activity-Based Investment Requirement
	In addition to its membership investment requirement, each member must maintain an activity-based investment requirement equal to the sum of the advances investment requirement described in Section 4.2.1 and the AMA investment requirement described in Section 4.2.2. Each member, former member, or successor to a member with applicable activity outstanding must comply with the activity-based investment requirement for as long as the relevant activity remains outstanding, including periods beyond the termination of the member’s membership in the Bank.
	The activity-based investment requirement for each member, former member, or successor to a member will change whenever the institution’s activity with the Bank changes. In addition, the Bank’s Board of Directors may periodically adjust the activity-based investment requirements in accordance with Section 4.3 of this Capital Plan.

4.2.1	Advances Investment Requirement
	Beginning on the Conversion Date, each member must maintain an activity-based investment in Class B Stock in an amount equal to 4.25 percent of the outstanding principal balance of all advances outstanding. The Bank’s Board of Directors may from time to time increase or decrease the advances-based investment requirement to an

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Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

	amount not less than 3.5 percent of members’ advances outstanding nor more than 5.0 percent of members’ advances outstanding. The Bank’s Board of Directors may apply changes to the advances investment requirement only to new advances, or to current and new advances.
	The advances investment requirement will be calculated daily and each time a member enters into a new advances transaction. Complying with the advances investment requirement at the time a new advances transaction is funded will be a condition of funding the new transaction.
4.2.2	Acquired Member Asset (AMA) Investment Requirement
	Beginning on the Conversion Date, each member must maintain an activity-based investment in Class B Stock in an amount equal to 4.25 percent of the outstanding principal balance of all Acquired Member Assets (AMA) acquired by the Bank through the member and currently outstanding on the Bank’s balance sheet. However, this AMA investment requirement will apply only to AMA acquired pursuant to commitments executed after the Conversion Date, or AMA acquired pursuant to commitments executed prior to the Conversion Date that explicitly stipulate that those AMA will be subject to AMA investment requirements.
	The Bank’s Board of Directors may from time to time increase or decrease the AMA investment requirement to an amount not less than 0.0 percent of AMA outstanding on the Bank’s balance sheet nor more than 5.0 percent of AMA outstanding on the Bank’s balance sheet. At the discretion of the Board of Directors, any reduction in the AMA investment requirement percentage may be applied only to AMA acquired pursuant to commitments executed after the reduction becomes effective, or to previously acquired and new AMA. Any increase in the AMA investment requirement will apply only to AMA acquired pursuant to commitments executed after the effective date of the change, or to AMA acquired pursuant to commitments executed prior to the effective date of such change that explicitly stipulate that those AMA will be subject to future changes in AMA investment requirements.
	The AMA investment requirement for outstanding AMA will be calculated at least monthly (and as often as daily at the Bank’s discretion), and for new AMA each time new AMA are funded. Complying with the AMA investment requirement at the time applicable AMA transactions are funded will be a condition of funding the new transactions.

4.3

Periodic Review of Minimum Investment Requirements

In accordance with the Bank Act and the Regulations, and to ensure ongoing compliance with the Bank’s Minimum Capital Requirements, the Bank’s Board of Directors will review the Bank’s Capital Plan at least annually, or more often as the Board of Directors deems necessary. As part of this review, the Board of Directors will determine whether changes in the minimum investment requirements are necessary to ensure that the Bank remains in compliance with its Minimum Capital Requirements, or are otherwise appropriate. Adjustments may be made to the specific percentages and the maximum amount for the membership investment requirement as specified in Section 4.1, and the specific percentages for the activity-based investment requirements as specified in Section 4.2. Any changes the Bank’s Board of Directors makes to the minimum investment requirements will be communicated by written notice (and otherwise as deemed appropriate by the Bank in its sole discretion) to be sent to Bank members at least 30 days in advance of their effective date.

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Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

	Any changes to members’ minimum investment requirement deemed appropriate by the Bank’s Board of Directors but not authorized by this Capital Plan may be implemented only after the Finance Board approves an amended Capital Plan reflecting such changes.
4.4	Member Compliance
	The Bank will monitor the minimum investment requirement of each member on an ongoing basis to ensure that the member remains in compliance with the applicable requirement. Each member is required to comply promptly with any adjusted minimum investment requirements established by the Board of Directors. However, members will be allowed a reasonable time to comply, not to exceed 30 days from the effective date established by the Board of Directors for the change in minimum investment requirement. Members may reduce their outstanding activity with the Bank (subject to any prepayment fees applicable to the reduction in activity) as an alternative to purchasing additional Class B Stock.
	To facilitate the sale of additional stock which members are required to purchase as a result of any changes in their minimum investment requirements, the Bank is authorized to issue stock in the name of a member and to debit the member’s demand deposit account at the Bank.

5. Termination of Membership

	Membership in the Bank may be terminated through voluntary withdrawal, through involuntary termination by action of the Bank’s Board of Directors, through acquisition of a member by another member institution, through acquisition of a member by a non-member institution, or otherwise through dissolution of a member’s charter.
5.1	Voluntary Withdrawal
	A member may withdraw from membership in the Bank by providing five years prior written notice to the Bank. During the five year period following receipt by the Bank of the member’s withdrawal notice, the member will be entitled to all the benefits and will incur all the obligations of membership, including the obligation to comply with all minimum investment requirements throughout the five year period. However, the Bank may limit any new advances or AMA to terms that would mature on or before the expiration of the withdrawal notice period. The membership of an institution that has submitted a withdrawal notice will terminate at the expiration of the five year period following receipt by the Bank of the withdrawal notice.
	A withdrawal notice will also constitute a stock redemption notice for the amount of Class B Stock held by the member at the time the Bank receives the withdrawal notice. At the expiration of the five year period following receipt by the Bank of the member’s withdrawal notice, the member’s membership in the Bank will terminate and, subject to the limitations contained in Section 3.5 of this Capital Plan, the Bank will pay the stated Par Value of the Class B Stock covered by the withdrawal notice to the member in cash in accordance with the following conditions.
	If the withdrawing member has no outstanding advances or AMA that require maintenance of Class B Stock in accordance with Section 4.2 of this Capital Plan, the Bank will redeem all of the outstanding Class B Stock subject to the withdrawal notice. If the withdrawing member has outstanding advances or AMA that require maintenance of Class B Stock in accordance with Section 4.2 of this Capital Plan, the Bank will redeem all the shares of Class B Stock subject to the withdrawal notice, except those shares of Class B Stock required to be held to comply with the activity-based investment requirement related to the remaining advances and AMA.

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Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

During the remaining term of advances or AMA outstanding after the termination of membership, the former member or its successor must continue to comply with any changes in the activity-based investment requirements related to the remaining advances or AMA. If the withdrawing member holds any Class B Stock subject to a withdrawal notice that cannot be redeemed at the expiration of the withdrawal notice period because it is required to meet a continuing activity-based investment requirement, that stock will become redeemable when it is no longer needed to comply with an activity-based investment requirement.

Nothing in this section will preclude the Bank from repurchasing Excess Stock in accordance with Section 3.4 of this Capital Plan.

5.1.1	Automatic Stock Redemption Notice
	If a member has filed a withdrawal notice, that notice will also automatically constitute a stock redemption notice for any shares of Class B Stock subsequently acquired, with such automatic redemption notice to be effective and the redemption notice period to begin on the date any additional Class B Stock is acquired. Such Class B Stock will be redeemable at the end of its respective redemption notice period in accordance with Section 3.3.1 or, if such Class B Stock is required to comply with an ongoing activity-based investment requirement, that Class B Stock will become redeemable when it is no longer needed to comply with an activity-based investment requirement.
5.1.2	Withdrawal Cancellation Notice
	A member that has previously submitted a withdrawal notice to the Bank in writing in accordance with Section 5.1 of this Capital Plan may cancel its withdrawal notice prior to the expiration of the withdrawal notice period by providing written notice to the Bank. A member may also rescind a withdrawal cancellation notice by providing written notice to the Bank within 30 days of the original withdrawal cancellation notice and incur no redemption cancellation fee.
	A withdrawal cancellation notice or withdrawal notice rescission will constitute a redemption cancellation notice for the amount of Class B Stock subject to redemption pursuant to the original withdrawal notice. The redemption cancellation fees and conditions contained in Section 3.3.2 of this Capital Plan will also apply to a withdrawal cancellation notice. A withdrawal cancellation notice or withdrawal notice rescission will also cancel without fee any related automatic notices of redemption created by the original withdrawal notice pursuant to Section 5.1.1 of this Capital Plan, unless otherwise directed by the member.

5.2	Involuntary Termination of Membership
	The Bank Act and the Regulations grant the Board of Directors the authority to terminate an institution’s membership under certain specified conditions. In the event the Board of Directors terminates a member’s membership, that membership will terminate on the date the Board of Directors acts to terminate the membership, and the five year stock redemption notice period will begin on the same date.
5.3	Termination by Charter Dissolution
	If an institution’s membership terminates by virtue of the dissolution of its charter either through acquisition by another institution or otherwise, the membership of the disappearing institution will terminate upon the cancellation of its charter. In the event of an acquisition of a member,

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Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

	the Class B Stock held by the member will be transferred automatically to the acquiring institution.
	If the acquiring institution is a member of the Bank, the acquired Class B Stock may be applied to the acquiring member’s minimum investment requirement, and any outstanding stock redemption notices will remain in effect. If the acquiring institution is not a member of the Bank, and does not apply for membership as provided in the Regulations, the five year stock redemption notice period will begin on the date the institution’s membership terminates, or earlier if the Bank has received a withdrawal notice from the disappearing member.
5.4	General Membership Termination Provisions
	Upon the termination of an institution’s membership, or upon the conclusion of the transition period provided in the Regulations for acquiring institutions to make application for membership in the Bank, the Bank will determine an orderly manner for liquidating all remaining outstanding indebtedness (including prepayment fees) owed by that member to the Bank, and settling all other claims against the member. After the expiration of any redemption notice periods required by this Capital Plan, the Bank will redeem any remaining Class B Stock in accordance with the provisions of this Capital Plan and applicable Finance Board regulations. After all remaining obligations and claims have been extinguished or settled, the Bank will redeem the remaining shares of Class B Stock.
	Nothing in this section will preclude the Bank from repurchasing any Excess Stock in accordance with the provisions of this Capital Plan prior to the expiration of the stock redemption notice periods, or redeeming Class B Stock in accordance with the provisions of this Capital Plan prior to the extinguishment or settlement of all obligations and claims against a member whose membership is being or has been terminated. However, in accordance with the Regulations and this Capital Plan, the Bank may not redeem or repurchase any Class B Stock required to support advances or AMA in accordance with Section 4.2 of this Capital Plan until the respective advances or AMA have been repaid.

6.	Capital Structure Conversion
	The Conversion Date for this Capital Plan will be not later than 25 months following Finance Board approval of the Capital Plan.

6.1 Capital Structure Conversion Process

6.1.1	Preliminary Estimate of Members’ New Minimum Investment Requirements
	At least 60 days prior to the Conversion Date, the Bank will calculate an estimate of each member’s new minimum investment requirement, with the membership investment requirement calculated based on the member’s total assets as of the immediately preceding December 31 for which financial information is available, and the activity-based investment requirement calculated based on the member’s outstanding balances of advances and applicable AMA as of the most recent month end. The Bank will provide this preliminary minimum investment requirement to each member by written notice.
6.1.2	Member Choice to Opt Out of Capital Plan
	A member that chooses to opt out of this Capital Plan must notify the Bank in writing at least 30 days prior to the Conversion Date of its decision not to participate in the capital structure conversion process set forth herein. An opt out notice will constitute a notice of the member’s intention to withdraw from membership and must be submitted to the

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Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

	Finance Board as well as the Bank at least 30 days prior to the Conversion Date for this Capital Plan. If the Finance Board and the Bank receive the opt out notice more than six months prior to the Conversion Date, the notice will be governed by the six month notification requirement and the redemption terms in effect prior to the implementation of the Capital Plan. In this case, the member’s membership will terminate six months from the date the Finance Board receives the opt out / withdrawal notice, and its old capital stock will be redeemable on that date.
	If the Finance Board and the Bank receive the opt out notice less than six months but at least 30 days in advance of the Conversion Date, the member’s membership will terminate and its old capital stock will be redeemable on the Conversion Date.
	If the opt out notice is received less than 30 days prior to the Conversion Date, the Bank will exchange the member’s existing shares of capital stock for an equal number of shares of Class B Stock in accordance with Section 6.1.5 of this Capital Plan; the member’s membership will terminate and its Class B Stock will become redeemable five years from the date the opt out / withdrawal notice was received. A member that elects to opt out of the Capital Plan and whose opt out notice is received less than 30 days prior to the Conversion Date will be required to purchase additional shares of Class B Stock to comply with the minimum investment requirements of this Capital Plan and to support any new activity entered into by the member after the Conversion Date until its membership terminates. Any additional shares of Class B Stock acquired after the Conversion Date by an institution that elects to opt out of the Capital Plan will be subject to the same terms and conditions as any other shares of Class B Stock acquired by any member after the Conversion Date.
	If an institution has withdrawn from membership in the Bank prior to the Conversion Date (either through the opt out provisions of this Section of the Capital Plan or otherwise) but still owns capital stock at the Conversion Date related to activity that remains outstanding, that institution’s existing capital stock will be converted to Class B Stock on the Conversion Date. The amount of Class B Stock required to be maintained by that institution while the activity remains outstanding will be the lesser of the amount of capital stock owned immediately prior to the conversion date, the amount of capital stock required to be held to support that activity immediately prior to the conversion date, or the activity-based investment requirement specified in this Capital Plan.
6.1.3	Member Transition Period
	In accordance with the Bank Act and the Regulations, members that joined a Federal Home Loan Bank after November 12, 1999 must comply with the minimum investment requirements of the Capital Plan on the Conversion Date. Any institution that becomes a member of the Bank after the Conversion Date must comply with the minimum investment requirements of this Capital Plan as of the date on which it becomes a member of the Bank.
	Members that joined a Federal Home Loan Bank on or before November 12, 1999 and for which this Capital Plan establishes a higher minimum investment requirement than under the requirements in effect immediately prior to implementation of this Capital Plan will have the option to meet the additional minimum investment requirement in four equal quarterly increments, provided, however, that members must immediately purchase Class B Stock required to support any change in member activity subsequent to the Conversion Date. A member must advise the Bank in writing of its intent to exercise this option at least 30 days prior to the Conversion Date.

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Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

	For a member eligible to elect to utilize these transition provisions and that elects to do so, the Bank will reduce the membership investment requirement during the first quarter following the Conversion Date by an amount equal to 100 percent of the amount by which this Capital Plan increases the member’s total minimum investment requirement; during the second quarter following the Conversion Date, the Bank will reduce the membership investment requirement by 75 percent of the amount by which the Capital Plan increases the member’s total minimum investment requirement; during the third quarter following the Conversion Date, the Bank will reduce the membership investment requirement by 50 percent of the amount by which the Capital Plan increases the member’s total minimum investment requirement; and during the fourth quarter following the Conversion Date, the Bank will reduce the membership investment requirement by 25 percent of the amount by which the Capital Plan increases the member’s total minimum investment requirement. At all times beginning on the Conversion Date, the member must comply with all applicable activity-based investment requirements.
6.1.4	Minimum Investment Requirements on Conversion Date
	Each member’s minimum investment requirement at the opening of business on the Conversion Date will be calculated as the sum of the membership investment requirement based on the member’s total assets as of the immediately preceding December 31 for which the applicable financial information is available (subject to any applicable transition adjustments as described in Section 6.1.3), and the application of the relevant activity-based investment requirements to the member’s outstanding balances of advances and applicable AMA at the close of business on the business day immediately prior to the Conversion Date.
6.1.5	Conversion Date Process
	The following actions, which constitute the Bank’s Plan of Reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder, are to be taken in order to implement this Capital Plan.
	At the opening of business on the Conversion Date, the Bank will:

1.	Exchange the member’s existing shares of capital stock for an equal number of shares of Class B Stock.
2.	Advise the member by written or electronic notice the details of its new minimum investment requirement, including an explicit notation of the member’s excess or deficit position.
3.	A member whose investment in capital stock on the Conversion Date exceeds the new minimum investment requirement will hold Excess Stock that the Bank may repurchase in accordance with the provisions of Section 3.4 of this Capital Plan.
4.	A member whose actual holdings of capital stock on the Conversion Date are less than the minimum investment requirement on the Conversion Date must purchase sufficient additional Class B Stock to satisfy the new minimum investment requirement. A member eligible to utilize the transition provisions of Section 6.1.3 of this Capital Plan and that elects to do so may purchase the additional shares of Class B Stock in four equal quarterly installments as described in Section 6.1.3. To facilitate the purchase of any required additional shares of Class B Stock, the Bank is authorized to issue Class B Stock in the

17

Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

member’s name and debit the member’s demand deposit account at the Bank.

6.1.6	Post-Conversion Activity-Based Stock Purchases
	Any member that obtains an advance or enters into any AMA transaction subject to an activity-based investment requirement subsequent to the Conversion Date is required to comply with the activity-based investment requirement related to that transaction at the time the transaction occurs.

6.2 Transition Procedures

6.2.1	The Bank’s Transition
	It is the Bank’s intent to be in full compliance with its Minimum Capital Requirements on the Conversion Date.
6.2.2	Member Transition
	For a member eligible to utilize the transition provisions of Section 6.1.3 of this Capital Plan and that elects to do so, the membership investment requirement will increase in even increments over four quarterly periods as specified in Section 6.1.3 of this Capital Plan. Additional purchases of Class B Stock required to maintain compliance with the minimum investment requirements of this Capital Plan will be made automatically by issuing stock in the member’s name and debiting the member’s demand deposit account at the Bank.

7. Capital Plan Reviews

7.1	Independent Certified Public Accountant
	PricewaterhouseCoopers (PwC), an independent Certified Public Accounting (CPA) firm, reviewed the October 22, 2001 draft of this Capital Plan and concluded, to the extent possible, that the implementation of this Capital Plan would not result in any write-down of the redeemable stock owned by the Bank’s members. A copy of PwC’s review has been provided to the Finance Board. The Bank represents that no substantive modifications have been made to the October 22, 2001 draft in this Capital Plan that it believes would have an impact on PwC’s conclusion. A letter from PwC confirming that conclusion for this Capital Plan will be provided following Finance Board approval of the Capital Plan.
7.2	Nationally Recognized Statistical Rating Organization (NRSRO)
	Standard & Poor’s (S&P), a Nationally Recognized Statistical Rating Organization (NRSRO), reviewed the July 19, 2001 draft of this Capital Plan and determined, to the extent possible, that the implementation of this Capital Plan would not have a material effect on the credit rating of the Bank. A copy of S&P’s review has been provided to the Finance Board with this Capital Plan. The Bank represents that no substantive modifications have been made to the July 19, 2001 draft in this Capital Plan that it believes would have an impact on the Bank’s credit rating. A letter from S&P confirming that conclusion for this Capital Plan will be provided following Finance Board approval of the Capital Plan.

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Federal Home Loan Bank of Dallas Capital Plan: Revised June 24, 2004

7.3	Good Faith Determination
	The Bank has made a good faith determination that this Capital Plan can be implemented. The Bank has provided evidence of this determination to the Finance Board.

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EX-10.1

Exhibit 10.1

DEFERRED COMPENSATION PLAN
OF THE
FEDERAL HOME LOAN BANK OF DALLAS

The Deferred Compensation Plan (the “Plan”) of the Federal Home Loan Bank of Dallas (the “Bank”) is hereby amended effective July 24, 2004. All Participants with vested Tier I and Tier II benefits accrued under the Plan prior to January 1, 1995 will continue to be governed under the provisions of the original Plan document and the previously adopted Plan Amendments #1 and #2. All Schedule A and Schedule B vested benefits to Participants accrued after December 31, 1994 shall be governed exclusively under the provisions of this Plan document.

ARTICLE I

Definitions

     1.01 Administrative Committee shall mean the committee appointed pursuant to Article VII of the Plan.

     1.02 Adoption Agreement shall mean the initial written agreement between a Participant and the Bank, whereby a Participant agrees to defer a portion of his or her Compensation pursuant to the provisions of the Plan, and the Bank agrees to make benefit payments in accordance with the provisions of the Plan.

     1.03 Beneficiary shall mean any person, persons, or entities designated by a Participant to receive benefits hereunder upon the death of such Participant.

     1.04 Benefit Account shall mean the account maintained on the books of the Bank for each Participant pursuant to Section 5.01 hereof.

     1.05 Compensation shall mean (a) the total amount of all base salary payments made by the Bank to an employee for services rendered by the employee to the Bank; and (b) the total amount of all Variable Pay Program award payments made by the Bank to an employee. Compensation shall not include employee expense reimbursements, contributions made by the Bank under the Plan, payments made by the Bank for group life insurance, long-term disability insurance, medical insurance and like benefits, or contributions made by the Bank under any employee benefit plan the Bank maintains. Any deferred compensation payments under this Plan shall not be deemed salary or other compensation to the Participant eligible for the computation of benefits which he or she may be entitled to under the defined benefit plan, defined contribution plan, or other arrangement of the Bank for the benefit of its employees. The deferred compensation payments are compensation for all other purposes as per the regulations promulgated by the Internal Revenue Service under its applicable code sections.

     1.06 Deferral Period shall mean the period of time during which Compensation is being deferred pursuant to the Participant’s Adoption Agreement and Article III of the Plan.

     1.07 Determination Date shall mean the last day of the Plan year.

     1.08 Highly Compensated Employees shall mean all employees of the Bank who are designated as Highly Compensated Employees by the Administrative Committee. A person designated as a Highly Compensated Employee shall remain so until such designation is revoked by the Administrative Committee, in its sole discretion.

     1.09 Hardship shall mean an unforeseen financial emergency suffered by a Participant. The financial emergency must be beyond the Participant’s control and must be of sufficient magnitude to cause the Participant hardship if early withdrawal of the Participant’s benefits were not allowed, or if a change in the Participant’s stated deferral was not allowed. Any early withdrawal by reason of Hardship shall be limited to the amount necessary to meet the stated financial emergency.

     1.10 Interest Yield shall mean the interest rate equivalent to the FUND B interest rate of the Financial Institutions Thrift Plan. This interest rate shall be determined quarterly and is to be equal to the average Fund B interest rate calculated by the Financial Institutions Thrift Plan for the preceding three calendar months. (For example, the Interest Yield for the first three months of 1995 shall be equal to the average Fund B interest rate for January, February, and March 1995.)

     1.11 Participant shall mean a Highly Compensated Employee of the Bank who has enrolled in the Plan by completing an Adoption Agreement.

     1.12 Plan Entry Date shall mean January 1 of each Plan Year.

     1.13 Plan Year shall mean the twelve-month period on which the plan records are kept, which shall begin on January 1 of one year and end on December 31 of the same year.

     1.14 Qualified Plan shall mean the qualified defined contribution plan (Financial Institutions Thrift Plan) maintained by the Bank which qualifies under Internal Revenue Code 401(a).

     1.15 Service shall mean the period of time from the date of employment by the Bank to date of Termination of Employment with the Bank.

     1.16 Stated Deferral shall mean the amount of Compensation the Participant agrees to defer in the Adoption agreement, and on subsequent annual Plan election forms.

     1.17 Termination of Employment shall mean the Participant’s ceasing to be employed by the Bank for any reason whatsoever, voluntary or involuntary, including by reason of death, or disability as defined in Section 1.08 of the original plan document dated November 16, 1986.

ARTICLE II

Eligibility and Participation

     2.01 Participation. From time to time the Administrative Committee, in its sole discretion, may designate those Highly Compensated Employees to whom the opportunity to participate in the Plan shall be extended.

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     2.02 Enrollment Requirements. An employee designated as an eligible Participant in the Plan shall enroll in the Plan by (a) entering into an Adoption Agreement with the Bank, which shall specify the amount and type of benefit payment under this Plan that will be provided for such employee, and (b) completing such other forms and furnishing such other documents as the Bank may require.

     2.03 Enrollment Time Period. A newly hired employee must execute the Adoption Agreement within the sixty (60) day period immediately following the first date of employment. Otherwise, the Adoption Agreement must be executed within thirty (30) days before the Plan Entry Date of the Plan Year in which the Agreement is to be effective.

     2.04 Failure of Eligibility. A Participant shall cease to be a Participant at Termination of Employment (unless the Participant qualifies for benefits set forth in Article VI), or upon revocation by the Administrative Committee of the Participant’s status as a Highly Compensated Employee. A person who ceases to be a Participant during the Deferral Period will have no further right to defer Compensation. However, the employment of a Participant shall not be deemed to be terminated by reason of an approved leave of absence granted in accordance with Bank policy under uniform rules applied in a nondiscriminatory manner.

ARTICLE III

Participant Compensation Deferral

     3.01 Initial Deferral. Any Highly Compensated Employee not currently participating in the Plan shall, within thirty (30) days before the Plan Entry Date of the Plan Year in which the Agreement is to be effective, execute an Adoption Agreement and elect to defer a portion of his or her Compensation earned and payable commencing with the first pay period in which the election becomes effective. A newly hired employee must execute the Adoption Agreement within the sixty (60) day period immediately following the first date of employment and elect to defer a portion of his or her Compensation earned and payable on or after the date of such election and before the commencement of the pay period in which the election becomes effective.

     3.02 Subsequent Deferrals. Subsequent to the initial deferral provided for in Section 3.01 above, any election to defer Compensation hereunder shall be made no later than January 1 of each Plan Year.

     3.03 Procedure for Deferral. The Highly Compensated Employee shall make the election provided for in Sections 3.01 and 3.02 above by executing the Adoption Agreement in the form provided by the Bank. The Adoption Agreement shall set forth the Highly Compensated Employee’s Stated Deferral. After the initial Stated Deferral, the election shall be made on a separate document provided by the Bank for that purpose. The amount deferred shall be subtracted from the Compensation otherwise payable to the Participant during the year of the deferral. Unless otherwise permitted by the Bank under Section 3.06 of the Plan, the deferral specified in the Adoption Agreement shall be deferred, and the Participant’s Compensation shall be correspondingly reduced.

     3.04 Schedule A Stated Deferral. Schedule A Stated Deferral shall mean a voluntary Participant deferral into an equivalent interest bearing account payable upon Retirement, or

3

Termination of Employment. The minimum required deferral is $83.33 per pay period if only deferring to a Schedule A Stated Deferral account, or a minimum of $41.67 to the Schedule A Stated Deferred if an equal or greater amount is being deferred into a Schedule B Stated Deferral account.

     3.05 Schedule B Stated Deferral. Schedule B Stated Deferral shall mean a voluntary Participant deferral into an equivalent interest bearing account. Schedule B Stated Deferrals will be deferred for a specific period of time, with the minimum deferral period being twelve (12) months from the date of the last deferral, and payable as stated in the Adoption Agreement or the deferral election form. The minimum required deferral is $83.33 per pay period if only deferring to a Schedule B Stated Deferral account, or a minimum of $41.67 to the Schedule B Stated Deferred if an equal or greater amount is being deferred into a Schedule A Stated Deferral account.

     3.06 Election to Defer Irrevocable; Exceptions. Except as otherwise provided herein, a Participant’s election to defer Compensation shall be irrevocable except for changes allowed at Plan Entry Date. The Administrative Committee, in its sole discretion, upon demonstration of substantial Hardship by the Participant, may permit subsequent alteration of a Participant’s deferral election. A request to alter the amount of Compensation deferred shall be submitted by a Participant in writing to the Administrative Committee. The application shall set forth in detail the reasons for the requested reduction.

ARTICLE IV

Bank Contributions

     4.01 Bank Contributions. For each Plan Year, the Bank shall make an addition to each Participant’s Benefit Account of a monthly matching contribution in an amount based on the following schedule:

1st year of Bank service	=	no Bank match
2nd and 3rd years of employment	=	100% match on the first 3% of monthly salary contributed in any combination to the Deferred Compensation Plan and the Qualified Plan.
4th and 5th years of employment	=	150% match on the first 3% of monthly salary contributed in any combination to the Deferred Compensation Plan and the Qualified Plan.
6 or more years of employment	=	200% match on the first 3% of monthly salary contributed in any combination to the Deferred Compensation Plan and the Qualified Plan.

Note:       (a) The Participant’s monthly salary amount used to calculate the matching Bank contribution to the Qualified Plan is reduced by the amount of the

4

Participant’s contribution to the Deferred Compensation Plan. The above schedule ensures that the total matching Bank contribution amount shall be provided to the Participant, as allowed, in either the Qualified Plan, the Deferred Compensation Plan, or a combination of the two plans.

               (b) The amount of the matching Bank contribution added to the Participant’s Benefit Account is solely dependent on the Participant’s length of service and the amount of the corresponding matching contribution, if any, added to the Participant’s Qualified Plan account.

               (c) The amount of the matching Bank contribution as determined from the above schedule will be first applied to the participant’s Qualified Plan. The difference between the maximum Bank contribution as determined from the above schedule and the amount applied to the Qualified Plan shall then be applied to the Deferred Compensation Plan.

               (d) Compensation for the purpose of calculating the matching Bank contribution to the Participant’s Benefit Account is limited to that portion of the monthly base salary deferred, or as provided for under (a) above. Under no circumstances will the Plan provide a Bank matching contribution on the amount of any VPP award deferred into the Participant’s Benefit Account.

     4.02 Designation of Bank Contributions to Stated Deferral Benefit Account. The Plan shall require the Bank to first place matching contributions into the Participant’s Schedule A Benefit Account as calculated in Section 4.01, with the residual, if any, placed in the Participant’s Schedule B Benefit Account.

ARTICLE V

Participant Benefit Account and Vesting

     5.01 Benefit Account. The Bank shall establish a Benefit Account on its books for each Participant, and shall credit to each Participant’s Benefit Account the following amounts at the times specified:

               (a) The amount of Compensation that the Participant has previously deferred or elects to defer pursuant to Section 3.04 and Section 3.05 of the Plan, credited as of the date the Participant would otherwise have received the Compensation. The Bank shall deduct any amounts it is required to withhold under state, federal or local law for taxes other than charges from the Participant’s deferred Compensation.

               (b) The amount of the Bank matching contribution for each Participant as set forth in Section 4.01 of the Plan.

               (c) As of the last day of each calendar quarter, an amount equal to the earnings attributable to the Participant’s Benefit Account. For the period of August 1, 2004 through December 31, 2004 the earnings will be an amount equal to the greater of: (1) the product of the Benefit Account balance as of that date multiplied by the Interest

5

Yield for that quarter, with interest credited for the actual days the funds were in the Benefit Account during the quarter or (2) the earnings attributable to the investment performance of assets contributed to a grantor trust as defined in Section 671 of the Code (the “Trust”) established by the Bank on behalf of the Plan with such earnings allocated to each Benefit Account based upon the ratio each Participant’s Benefit Account balance bears to the total balances of all Benefit Accounts held by the Trust that is attributable to this Plan. For the period subsequent to January 1, 2005, Benefit Account earnings will be determined based upon the investment elections made by the Participant described in more detail below. The Participant must make a one-time irrevocable election to have earnings on the portion of his or her Benefit Account attributable to deferrals prior to January 1, 2005 calculated based upon either (i) the Interest Yield or (ii) the investment return attributable to the deemed investments selected by the Participant based upon the benchmark funds provided by the Bank. Once an investment election is made by the Participant, the Participant cannot change his or her election between such investment alternatives. Prior to the commencement of each year (beginning January 1, 2005) for which deferrals of Compensation will be made, the Participant will make an election to have the earnings on all of future deferrals calculated based upon the investment return attributable to the deemed investments selected by the Participant based upon the benchmark funds provided by the Bank.

               (d) The Bank shall deduct any amounts it is required to withhold under state, federal or local law or regulations for taxes or other charges from the Participant’s deferred Compensation, or earnings thereon.

A Participant’s Benefit Account shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to the Plan. A Participant’s Benefit Account shall not constitute or be treated as a trust fund of any kind. All benefits payable under this Plan shall be paid as they become due and payable by the Bank out of its general assets. Provided, the Bank may establish and/or continue a grantor trust as defined in Section 671 of the Code to provide a source of funding for amounts deferred under the Plan.

     5.02 Determination of Account. Each Participant’s Benefit Account as of each Determination Date shall consist of the balance of the Participant’s Benefit Account as of the immediately preceding Determination Date, plus the amounts required to be credited to such account by the Bank pursuant to Section 5.01 less the amount of all distributions, if any, made from such Benefit Account since the immediately preceding Determination Date. The Administrative Committee shall determine the accrual of benefit (Participant deferrals and matching Bank Contributions to the Participant’s Benefit Account(s) on the basis of the Plan Year.

     5.03 Freezing of the Tier I Benefit Amount. All Participants with a vested Tier I monthly benefit amount payable at retirement, along with the monthly survivor benefit payable to a Beneficiary in the event of the Participant’s death shall have these benefit amounts frozen at the accrued benefit level as of the Plan Year ending on December 31, 1994.

     5.04 Non-Forfeitable Value of Tier I and Tier II Account Determination. The amount of the non-forfeitable value of the Tier I and Tier II benefit amounts and the corresponding account balances shall be credited with interest as described in Section 5.01 beginning with the Plan Year

6

commencing on January 1, 1995. However, the non-forfeitable value of the Tier I account balance shall only apply in the case of a lump sum distribution of the Tier I Benefit Account upon termination.

     5.05 Statement of Account. The Administrative Committee shall provide each Participant, within 120 days after the close of the Plan Year, a statement in such form as the Administrative Committee deems desirable setting forth the balance to the credit of such Participant in his or her Benefit Account(s) as of the last day of the preceding Plan Year.

     5.06 Vesting of Benefit Account. All Compensation deferred by a Participant and the related matching Bank Contributions to the Benefit Account(s) shall be one hundred percent (100%) vested at all times.

ARTICLE VI

Payment of Benefits

     6.01 Schedule A Benefits Upon Termination of Employment Prior to Age 45. The Schedule A Stated Deferral Benefit Account balance shall be payable to the Participant, or his or her Beneficiary, in a lump sum cash payment within ninety (90) days from the date of Termination of Employment.

     6.02 Schedule A Benefits Upon Termination of Employment At Age 45 or Older. Based on the Participant’s most recent annual election form completed prior to Termination of Employment, whether for involuntary of voluntary reasons, the Schedule A Stated Deferral Benefit Account balance will be payable to the Participant as follows:

               (a) In the form of annual installments for a period of from two (2) to twenty (20) years payable on January 31 of each year immediately following Termination of Employment, or as a deferred vested benefit with payments to begin at a designated later calendar date.

               (b) In a lump sum cash payment within ninety (90) days from the date of Termination of Employment.

     6.03 Schedule B Benefits. The Participant can elect to receive the Schedule B Stated Deferral Benefit Account balance(s) as follows:

               (a) The Participant may designate in the Adoption Agreement or on the annual election form to have each annual deferred Compensation amount, plus interest, paid in a lump sum on a specific calendar date. The date of this payment must be, at a minimum, twelve (12) months after the date of the last Schedule B pay period deferral associated with this benefit payout.

               (b) The Participant may designate in the Adoption Agreement or on the annual election form to have the accumulated annual deferred Compensation account balance for several Plan Years, plus interest, paid in a lump sum on a specific calendar date.

7

The date of this payment must be, at a minimum, twelve (12) months after the date of the last Schedule B pay period deferral associated with this benefit payout.

               (c) The Participant may designate in the Adoption Agreement or on the annual election form to have the accumulated annual deferred Compensation account balance for several Plan Years, plus interest, paid in annual installments for a period of from two (2) to four (4) years. The Participant must designate in the Adoption Agreement and on the annual election forms the date payment is to be made each year. The date of the first payment must be, at a minimum, twelve (12) months after the date of the last Schedule B pay period deferral associated with this benefit payout.

     In addition to the election options (a) through (c), the Participant may also designate a contingent lump sum distribution option on the annual election form for the Plan. This option is effective only in the event the Participant’s employment is terminated, for any reason, prior to the scheduled distribution date(s) selected in options (a), (b), or (c). If so designated on the Participant’s annual election form most recently completed prior to Termination of Employment, the total Schedule B Stated Deferral Benefit Account balance will be payable to the Participant in a lump sum cash payment within ninety (90) days from the date of Termination of Employment.

     6.04 Hardship Distribution. The Administrative Committee may, in its sole discretion, upon finding that the Participant has suffered or is suffering a Hardship, distribute to such Participant all or a portion of his or her Compensation deferred under the Plan. In the event the distribution is based on Tier I Stated Deferrals, if applicable, the amount of monthly benefits payable under this Plan shall be adjusted accordingly by the Administrative Committee. Distributions pursuant to Hardship shall include interest based upon the Interest Yield as described in Section 1.09.

     6.05 Bank Obligations and Source of Payments. All benefits payable under this Plan shall be paid as they become due and payable by the Bank out of its general assets. Nothing contained in this Plan shall be deemed to create a trust of any kind for the benefit of the Participants or create any fiduciary relationship between the Bank and the Participants or their beneficiaries. To the extent that any person acquires a right to receive benefits under this Plan, such rights shall be no greater than the right of any unsecured general creditor of the Bank.

     6.06 Recipients of Payments: Designation of Beneficiary. All payments to be made by the Bank shall be made to the Participant, if living. In the event of a Participant’s death prior to receipt of all benefit payments, all subsequent payments to be made under the Plan shall be to the Beneficiary or Beneficiaries of the Participant. Each Participant shall file with the Bank a designation of Primary Beneficiary and Secondary Beneficiary to whom the Participant’s interest under the Plan shall be paid in the event of death. The initial designation of Beneficiary shall be made in the Participant’s Adoption Agreement. Such designation may be changed by the Participant at any time without the consent of any previously designated Beneficiary. In the absence of an effective Beneficiary designation as to any portion of a Participant’s interest under the Plan, such amount shall be paid to the Participant’s personal representative, but if the Bank believes none has been appointed within six months after the Participant’s death, the Bank may direct that such amount shall not be paid until a personal representative has been appointed or may direct that such amount be paid to the Participant’s surviving spouse, or if there is none, to the Participant’s

8

surviving children and issue of deceased children by right of representation, or there be none, the Participant’s surviving parents and if none, according to the laws of descent and distribution of the State of Texas. In the event a benefit is payable to a minor or person declared incompetent or a person incapable of handling the disposition of his property, the Administrative Committee may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent or person. The Administrative Committee may require proof of incompetency, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.

ARTICLE VII

Administration

     7.01 Administrative Committee. The Plan shall be administered by the Administrative Committee in accordance with its terms and purposes. The Bank’s Board of Directors shall appoint the Administrative Committee, which shall consist of three (3) or more persons to act on behalf of the Bank. Interpretation by the Administrative Committee shall be final and binding upon a Participant. The Administrative Committee shall select the Participating Highly Compensated Employees eligible to participate in the Plan and shall be responsible for administration of the Plan in accordance with the terms and provisions herein.

     7.02 Claims Procedure.

               (a) All claims shall be filed in writing by the Participant, his or her beneficiary or authorized representative of the claimant, by completing such procedures as the Administrative Committee shall require. Such procedures shall be reasonable and may include the completion of forms and the submission of documents and additional information.

               (b) If a claim is denied, notice of denial shall be furnished by the Administrative Committee to the claimant within ninety (90) days after receipt of the claim by the Administrative Committee, unless special circumstances require an extension of time for processing the claim, in which event notification of the extension shall be provided to the Participant or beneficiary and the extension shall not exceed ninety (90) days.

               (c) The Administrative Committee shall provide adequate notice, in writing, to any claimant whose claim has been denied, setting forth the specific reasons for such denial, specific reference to pertinent Plan provisions, a description of any additional material or information necessary for the claimant to perfect his or her claim and any explanation of why such material or information is necessary, all written in a manner calculated to be understood by the claimant. Such notice shall include appropriate information as to the steps to be taken if the claimant wishes to submit his or her claim for review. The claimant or the claimant’s authorized representative must request such review within the reasonable period of time prescribed by the Administrative Committee. In no event shall such period of time be less than sixty (60) days. A decision on review shall be made not later than sixty (60) days after the Bank’s receipt of the request for review. If special circumstances require further extension of time for processing, a decision shall be

9

rendered not later than one hundred twenty (120) days following the Bank’s receipt of the request for review. If such an extension of time for review is required, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. The decision on review shall be furnished to the claimant. Such decision shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, as well as specific references to the pertinent Plan provisions on which the decision is based.

ARTICLE VIII

Miscellaneous

     8.01 Employment Not Guaranteed by Plan. Neither the Plan nor any action taken hereunder shall be construed as giving a Participant the right to be retained as a Highly Compensated Employee or as an employee of the Bank for any period of time.

     8.02 Amendment and Termination. The Board of Directors of the Bank may, at any time, amend or terminate the Plan, provided that the Board may not reduce or modify any benefit being paid to a Participant or a Participant’s Beneficiary as a result of the death or retirement of such Participant prior to such amendment or termination. Furthermore, in the event the Plan is terminated by the Board of Directors, the Bank shall distribute to the Participant or a Participant’s Beneficiary, in the form of a lump sum payment within ninety (90) days from the date of the Board resolution to terminate the Plan, the Participant’s then total Benefit Account balance. After such payment, any and all obligations of the Bank under the Plan shall be considered satisfied, and the Bank shall have no further obligations under the Plan to Participants or their Beneficiaries. Such notice of termination or Plan Amendment shall be provided in writing to all Participants.

     8.03 Assignment of Benefits. No Participant or Beneficiary shall have the right to assign, transfer, hypothecate, encumber, or anticipate his or her interest in any benefits under this Plan, nor shall the benefits under this Plan be subject to any legal process to levy upon or attach the benefits for payment of any claim against the Participant or his or her Beneficiary. In the event of an attempted assignment or transfer, the Bank shall have no further liability hereunder.

     8.04 Disposition of Unclaimed Payments. Each Participant must file with the Bank from time to time in writing his or her post office address and each change of post office address. The communication, statement, or notice addressed to a Participant at the last post office address filed with the Bank, or if no address is filed with the Bank, then at the last post office address as shown on the Bank’s records, will be binding upon Participant and his or her beneficiaries for all purposes of the Plan. The Bank shall not be required to search for or locate a Participant or his or her Beneficiary.

     8.05 Taxes. The Bank shall deduct from all payments made hereunder all applicable federal and state taxes required by law to be withheld from such payments.

     8.06 Independence of Benefits. The benefits payable under this Plan shall be independent of, and in addition to, any other benefits of compensation whether by salary or however characterized.

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     8.07 GOVERNING LAW. THIS PLAN IS INTENDED TO CONSTITUTE AN UNFUNDED PLAN FOR A SELECT GROUP OF MANAGEMENT OR HIGHLY COMPENSATED EMPLOYEES AND RIGHTS THEREUNDER SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS.

     8.08 Form of Communication. Any election, application, claim, notice or other communication required or permitted to be made by a Participant to the Administrative Committee shall be made in writing and in such form as the Administrative Committee shall prescribe. Such communication shall be effective upon mailing, if sent by first class letter, postage pre-paid, and addressed to the Bank’s offices as follows:

Attention: Deferred Compensation Committee
Federal Home Loan Bank of Dallas
8500 Freeport Parkway South, Suite 600
Irving, Texas 75063-2547

     8.09 Severability. The invalidity of any portion of this Plan shall not invalidate the remainder thereof, and said remainder shall continue in full force and effect.

     8.10 Binding Agreement. The provisions of this Plan shall be binding upon the Participants and the Bank and their respective successors, assigns, heirs, executors, and beneficiaries.

     This Deferred Compensation Plan of Federal Home Loan Bank of Dallas reflects the governing provisions of the Plan effective July 24, 2004 and incorporates all revisions and amendments for the period January 1, 1995 through July 24, 2004.

Bank:
FEDERAL HOME LOAN BANK OF DALLAS
By:	/s/ Timothy J. Heup
	Corporate Officer

ATTEST:

/s/ Karen A. Krug

Corporate Secretary

11

EX-10.2

Exhibit 10.2

NONQUALIFIED DEFERRED COMPENSATION PLAN
FOR THE
BOARD OF DIRECTORS
OF THE
FEDERAL HOME LOAN BANK OF DALLAS

The Nonqualified Deferred Compensation Plan (the “Plan”) for the Board of Directors of the Federal Home Loan Bank of Dallas (the “Bank”) is hereby amended effective July 24, 2004. This document shall serve as the revised Plan Document and Adoption Agreement for Plan Years occurring on or after January 1, 1995.

ARTICLE I

Definitions

     1.01 Administrative Committee shall mean the committee appointed pursuant to Article VI of the Plan.

     1.02 Adoption Agreement shall mean the initial written agreement between a Participant and the Bank, whereby a Participant agrees to defer a portion of his or her Director’s Fees pursuant to the provisions of the Plan, and the Bank agrees to make benefit payments in accordance with the provisions of the Plan.

     1.03 Beneficiary shall mean any person, persons, or entities designated by a Participant to receive benefits hereunder upon the death of such Participant.

     1.04 Benefit Account shall mean the account maintained on the books of the Bank for each Participant pursuant to Article IV hereof.

     1.05 Deferral Period shall mean the period of time during which the Director’s Fees are being deferred pursuant to the Participant’s Adoption Agreement.

     1.06 Determination Date shall mean the last day of the Plan Year.

     1.07 Director shall mean the person elected or appointed as a Director of the Bank pursuant to the Federal Home Loan Bank Act, as amended, although the oath of office has not been administered.

     1.08 Director’s Fee shall mean the total amount of all compensation payments made by the Bank to a Director for services rendered by a Director in fulfilling his or her responsibilities associated with serving as a member of the Bank’s Board of Directors. Director’s Fees shall not include expense reimbursements, or any deferred compensation payments under this Plan. The deferred compensation payments are compensation for all other purposes as per the regulations promulgated by the Internal Revenue Service under its applicable code sections.

     1.09 Hardship shall mean an unforeseen financial emergency suffered by a Participant. The financial emergency must be beyond the Participant’s control and must be of sufficient

magnitude to cause the Participant hardship if early withdrawal of the Participant’s benefits were not allowed, or if a change in the Participant’s stated deferral was not allowed. Any early withdrawal by reason of Hardship shall be limited to the amount necessary to meet the stated financial emergency.

     1.10 Interest Yield shall mean the interest rate equivalent to the FUND B interest rate of the Financial Institutions Thrift Plan. This interest rate shall be determined quarterly and is to be equal to the average Fund B interest rate calculated by the Financial Institutions Thrift Plan for the three preceding calendar months. (For example, the Interest Yield for the first quarter of a given year shall be equal to the average Fund B interest rate for January, February, and March of that year.)

     1.11 Participant shall mean a duly elected or appointed Director of the Bank who has enrolled in the Plan by completing an Adoption Agreement.

     1.12 Plan Entry Date shall mean January 1 of each Plan Year.

     1.13 Plan Year shall mean the twelve-month period on which the plan records are kept, which shall begin on January 1 of one year and end on December 31 of the same year.

     1.14 Stated Deferral shall mean the amount of the Director’s Fee the Participant agrees to defer in the Adoption Agreement, and on subsequent annual Plan election forms.

ARTICLE II

Eligibility and Participation

     2.01 Participation. Participation in this Plan is limited to those Directors elected or appointed as a Director of the Bank pursuant to the Federal Home Loan Bank Act, as amended, although the oath of office has not been administered.

     2.02 Enrollment Requirements. A Director shall enroll as a Participant in the Plan by (a) entering into an Adoption Agreement with the Bank, which shall specify the distribution of benefits under this Plan for such Director, and (b) by completing such other forms and furnishing such other documents as the Bank may require.

     2.03 Enrollment Time Period. The Adoption Agreement must be executed within thirty (30) days before the Plan Entry Date of the Plan Year in which the Agreement is to be effective.

     2.04 Failure of Eligibility. A Participant shall cease to be a Participant at such time as his or her term of office on the Board of Directors has expired.

ARTICLE III

Participant Compensation Deferral

     3.01 Initial Deferral. Any Director not currently participating in the Plan shall, within thirty (30) days before the Plan Entry Date of the Plan Year in which the Agreement is to be

2

effective, execute an Adoption Agreement and elect to defer all or a portion of his or her Director’s Fees earned and payable commencing with the first month in which the election becomes effective.

     3.02 Subsequent Deferrals. Subsequent to the initial deferral provided for in Section 3.01 above, any election to continue to defer, revise, or terminate the deferral of Director’s Fees hereunder shall be made no later than January 1 of each Plan Year. Should the Participant terminate the deferral, the Benefit Account cannot be distributed until such time as requested and stated in the Adoption Agreement, or on the most recent annual deferral election form.

     3.03 Procedure for Deferral. The Director shall make the election provided for in Section 3.01 and Section 3.02 above by executing the Adoption Agreement in the form provided by the Bank. The Adoption Agreement shall set forth the Director’s Stated Deferral. After the initial Stated Deferral, the election to continue, revise, or terminate the deferral shall be made on a separate document provided by the Bank for that purpose. The amount deferred shall be subtracted from the compensation otherwise payable to the Participant during the year of the deferral, less any applicable state or federal taxes required to be withheld.

     3.04 Stated Deferral. The Stated Deferral shall mean a voluntary Participant deferral, less any applicable state or federal taxes required to be withheld, into an interest bearing account established on the books of the Bank.

     3.05 Election to Defer Irrevocable; Exceptions. Except as otherwise provided herein, a Participant’s election to defer Director’s Fees shall be irrevocable except for changes allowed at Plan Entry Date. The Administrative Committee, in its sole discretion, upon demonstration of substantial Hardship by the Participant, may permit subsequent alteration of a Participant’s deferral election. A request to alter the amount of Compensation deferred shall be submitted by a Participant in writing to the Administrative Committee and shall set forth in detail the reasons for the requested reduction.

ARTICLE IV

Participant Benefit Account and Vesting

     4.01 Benefit Account. The Bank shall establish a Benefit Account on its books for each Participant, and shall credit to each Participant’s Benefit Account the following amounts at the times specified:

(a) The amount of Director’s Fees that the Participant has previously deferred or elects to defer pursuant to Section 3.01 of the Plan, credited as of the date the Participant would otherwise have received the fee compensation. The Bank shall deduct any amounts it is required to withhold under state, federal or local law for taxes or other charges from the Participant’s Director’s Fees.

(b) As of the last day of each calendar quarter, an amount equal to the earnings attributable to the Participant’s Benefit Account. For the period of August 1, 2004 through December 31, 2004 the earnings will be an amount equal to the greater of: (1) the product of the Benefit Account balance as of that date multiplied by the Interest Yield for that quarter, with interest credited for the

3

actual days the funds were in the Benefit Account during the quarter or (2) the earnings attributable to the investment performance of assets contributed to a grantor trust as defined in Section 671 of the Code (the “Trust”) established by the Bank on behalf of the Plan with such earnings allocated to each Benefit Account based upon the ratio each Participant’s Benefit Account balance bears to the total balances of all Benefit Accounts held by the Trust that is attributable to this Plan. For the period subsequent to January 1, 2005, Benefit Account earnings will be determined based upon the investment elections made by the Participant described in more detail below. The Participant must make a one-time irrevocable election to have earnings on the portion of his or her Benefit Account attributable to deferrals prior to January 1, 2005 calculated based upon either (i) the Interest Yield or (ii) the investment return attributable to the deemed investments selected by the Participant based upon the benchmark funds provided by the Bank. Once an investment election is made by the Participant, the Participant cannot change his or her election between such investment alternatives. Prior to the commencement of each year (beginning January 1, 2005) for which deferrals of Director’s Fees will be made, the Participant will make an election to have the earnings on all future deferrals calculated based upon the investment return attributable to the deemed investments selected by the Participant based upon the benchmark funds provided by the Bank.

(c) The Bank shall deduct any amounts it is required to withhold under state, federal or local law or regulations for taxes or other charges from the Participant’s deferred Director’s Fees, or earnings thereon.

A Participant’s Benefit Account shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to the Plan. A Participant’s Benefit Account shall not constitute or be treated as a trust fund of any kind. All benefits payable under this Plan shall be paid as they become due and payable by the Bank out of its general assets. Provided, the Bank may establish and/or continue a grantor trust as defined in Section 671 of the Code to provide a source of funding for amounts deferred under the Plan.

       4.02 Determination of Account. Each Participant’s Benefit Account as of each Determination Date shall consist of the balance of the Participant’s Benefit Account as of the immediately preceding Determination Date, plus the amounts required to be credited to such account by the Bank pursuant to Section 4.01.

       4.03 Statement of Account. The Bank shall provide each Participant, within 120 days after the close of the Plan Year, a statement in such form as the Bank deems appropriate setting forth the balance to the credit of such Participant in his or her Benefit Account as of the last day of the preceding Plan Year.

       4.04 Vesting of Benefit Account. All Director’s Fees deferred by a Participant and the interest credited to the Benefit Account shall be one hundred percent (100%) vested at all times.

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ARTICLE V

Payment of Benefits

     5.01 Distribution of Benefit Account to Participant. At the end of the deferral period, the distribution of deferred amounts and accrued interest in the Benefit Account shall be made payable to the Participant in either a lump sum cash payment, or in the form of annual installments for a period of from two (2) to twenty (20) years commencing on the date so designated in the Adoption Agreement, or the most recent annual election form.

     5.02 Recipients of Payments: Designation of Beneficiary. All payments to be made under this Plan by the Bank shall be made to the Participant, if living. In the event of a Participant’s death prior to receipt of all benefit payments, all subsequent payments to be made under the Plan shall be to the Beneficiary or Beneficiaries of the Participant. Each Participant shall file with the Bank a designation of Primary Beneficiary and Secondary Beneficiary to whom the Participant’s interest under the Plan shall be paid in the event of death. The initial designation of Beneficiary shall be made in the Participant’s Adoption Agreement. Such designation may be changed by the Participant at any time without the consent of any previously designated Beneficiary. In the absence of an effective Beneficiary designation as to any portion of a Participant’s interest under the Plan, such amount shall be paid to the Participant’s personal representative, but if the Bank believes none has been appointed within six months after the Participant’s death, the Bank may direct that such amount shall not be paid until a personal representative has been appointed or may direct that such amount be paid to the Participant’s surviving spouse, or if there is none, to the Participant’s surviving children and issue of deceased children by right of representation, or there be none, the Participant’s surviving parents and if none, according to the laws of descent and distribution of the State of Texas. In the event a benefit is payable to a minor or person declared incompetent or a person incapable of handling the disposition of his property, the Administrative Committee may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent or person. The Administrative Committee may require proof of incompetency, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.

     5.03 Hardship Distribution. The Administrative Committee may, in its sole discretion, upon finding that the Participant has suffered or is suffering a Hardship, distribute to such Participant all or a portion of his or her compensation deferred under the Plan. Distributions pursuant to Hardship shall include interest based upon the Interest Yield as described in Section 1.10.

     5.04 Bank Obligations and Source of Payments. All benefits payable under this Plan shall be paid as they become due and payable by the Bank out of its general assets. Nothing contained in this Plan shall be deemed to create a trust of any kind for the benefit of the Participants or create any fiduciary relationship between the Bank and the Participants or their Beneficiaries. To the extent that any person acquires a right to receive benefits under this Plan, such rights shall be no greater than the right of any unsecured general creditor of the Bank.

5

ARTICLE VI

Administration

     6.01 Administrative Committee. The Plan shall be administered by the same Administrative Committee appointed by the Board of Directors to administer the Bank’s Employee Deferred Compensation Plan. This administration shall be in accordance with this Plan’s terms and purposes. Interpretation by the Administrative Committee shall be final and binding upon a Participant. The Administrative Committee shall be responsible for administration of the Plan in accordance with the terms and provisions herein.

     6.02 Claims Procedure.

          (a) All claims shall be filed in writing by the Participant, his or her beneficiary or authorized representative of the claimant, by completing such procedures as the Administrative Committee shall require. Such procedures shall be reasonable and may include the completion of forms and the submission of documents and additional information.

          (b) If a claim is denied, notice of denial shall be furnished by the Administrative Committee to the claimant within ninety (90) days after receipt of the claim by the Administrative Committee, unless special circumstances require an extension of time for processing the claim, in which event notification of the extension shall be provided to the Participant or Beneficiary and the extension shall not exceed ninety (90) days.

          (c) The Administrative Committee shall provide adequate notice, in writing, to any claimant whose claim has been denied, setting forth the specific reasons for such denial, specific reference to pertinent Plan provisions, a description of any additional material or information necessary for the claimant to perfect his or her claim and any explanation of why such material or information is necessary, all written in a manner calculated to be understood by the claimant. Such notice shall include appropriate information as to the steps to be taken if the claimant wishes to submit his or her claim for review. The claimant or the claimant’s authorized representative must request such review within the reasonable period of time prescribed by the Administrative Committee. In no event shall such period of time be less than sixty (60) days. A decision on review shall be made not later than sixty (60) days after the Bank’s receipt of the request for review. If special circumstances require further extension of time for processing, a decision shall be rendered not later than one hundred twenty (120) days following the Bank’s receipt of the request for review. If such an extension of time for review is required, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. The decision on review shall be furnished to the claimant. Such decision shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, as well as specific references to the pertinent Plan provisions on which the decision is based.

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ARTICLE VII

Miscellaneous

     7.01 Amendment and Termination. The Board of Directors of the Bank may, at any time, amend or terminate the Plan, provided that the Board may not reduce or modify any benefit being paid to a Participant or a Participant’s Beneficiary as a result of the death of such Participant prior to such amendment or termination. Furthermore, in the event the Plan is terminated by the Board of Directors, the Bank shall distribute to the Participant or a Participant’s Beneficiary, in the form of a lump sum payment within ninety (90) days from the date of the Board resolution to terminate the Plan, the Participant’s then total account balance from all sources, interest on such amounts calculated at the Interest Yield and accrued through the calendar day immediately preceding the date of the lump sum distribution. After such payment, any and all obligations of the Bank under the Plan shall be considered satisfied, and the Bank shall have no further obligations under the Plan to Participants or their Beneficiaries. Such notice of termination or Plan amendment shall be provided in writing to all Directors participating in the Plan.

     7.02 Assignment of Benefits. The Board of Directors of the Bank may, at any time, amend or terminate the Plan, provided that the Board may not reduce or modify any benefit being paid to a Participant or a Participant’s Beneficiary as a result of the death of such Participant prior to such amendment or termination. Furthermore, in the event the Plan is terminated by the Board of Directors, the Bank shall distribute to the Participant or a Participant’s Beneficiary, in the form of a lump sum payment within ninety (90) days from the date of the Board resolution to terminate the Plan, the Participant’s then total Benefit Account balance. After such payment, any and all obligations of the Bank under the Plan shall be considered satisfied, and the Bank shall have no further obligations under the Plan to Participants or their Beneficiaries. Such notice of termination or Plan amendment shall be provided in writing to all Participants.

     7.03 Disposition of Unclaimed Payments. Each Participant must file with the Bank from time to time in writing his or her post office address and each change of post office address. The communication, statement, or notice addressed to a Participant at the last post office address filed with the Bank, or if no address is filed with the Bank, then at the last post office address as shown on the Bank’s records, will be binding upon Participant and his or her Beneficiaries for all purposes of the Plan.

     7.04 Taxes. The Bank shall deduct from all payments made hereunder all applicable federal and state taxes required by law to be withheld from such payments.

     7.05 GOVERNING LAW. THIS PLAN IS INTENDED TO CONSTITUTE AN UNFUNDED PLAN FOR THE BOARD OF DIRECTORS AND RIGHTS THEREUNDER SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS.

     7.06 Form of Communication. Any election, application, claim, notice or other communication required or permitted to be made by a Participant to the Bank regarding this Plan shall be made in writing and in such form as the Bank or Board of Directors shall prescribe. Such

7

communication shall be effective upon mailing, if sent by first class letter, postage pre-paid, and addressed to the Bank’s offices as follows:

Attention: Directors Nonqualified Deferred Compensation Plan
Federal Home Loan Bank of Dallas
8500 Freeport Parkway South, Suite 600
Irving, Texas 75063-2547

     7.07 Severability. The invalidity of any portion of this Plan shall not invalidate the remainder thereof, and said remainder shall continue in full force and effect.

     7.08 Binding Agreement. The provisions of this Plan shall be binding upon the Participants and the Bank and their respective successors, assigns, heirs, executors, and beneficiaries.

     This Nonqualified Deferred Compensation Plan for the Board of Directors reflects the governing provisions of the Plan effective July 24, 2004 and incorporates all revisions and amendments for the period January 1, 1995 through July 24, 2004.

Bank:
FEDERAL HOME LOAN BANK OF DALLAS
By:	/s/ Timothy J. Heup
	Corporate Officer

ATTEST:

    /s/ Karen A. Krug

Corporate Secretary

8

EX-10.3

Exhibit 10.3

Federal Home Loan Bank of Dallas

Form of Special Non-Qualified Deferred Compensation Plan

(Amended and Restated Effective: January 1, 2004)

FEDERAL HOME LOAN BANK OF DALLAS
SPECIAL NON-QUALIFIED DEFERRED COMPENSATION PLAN

Table Of Contents

		Page
ARTICLE I NAME AND PURPOSE OF PLAN			1
1.1	Name of Plan		1
1.2	Purpose		1
ARTICLE II DEFINITIONS			1
2.1	Account		1
2.2	Base Salary		1
2.3	Bank		1
2.4	Beneficiary		1
2.5	Benefit		1
2.6	Board		1
2.7	Code		1
2.8	Contributions		2
2.9	Disability		2
2.10	Effective Date		2
2.11	Employee		2
2.12	Group One Participants		2
2.13	Group Two Participants		2
2.14	Group Three Participants		2
2.15	Investment Performance		2
2.16	Normal Retirement Age		2
2.17	Participant		2
2.18	Plan		2
2.19	Plan Entry Date		2
2.20	Plan Year		2
2.21	Thrift Plan		2
2.22	Trustees, Trust, Trust Agreement, Trust Assets and Trust Fund		3
ARTICLE III ELIGIBILITY FOR PARTICIPATION			3
3.1	Participation		3
3.2	Cessation of Participation		3
ARTICLE IV CONTRIBUTIONS			3
4.1	Contributions by the Bank		3
4.2	Recordkeeping		4
4.3	Limitations		4
ARTICLE V INVESTMENT FUNDS			4
5.1	Investment Funds		4
5.2	Allocation of Investment Performance		4

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		Page
ARTICLE VI VESTING			4
6.1	Termination of Employment – Vesting of Account		4
6.2	Vesting		5
6.3	Forfeitures		5
6.4	No Forfeitures for Cause		5
ARTICLE VII BENEFITS			5
7.1	Retirement Benefits		5
7.2	Application for Benefits		6
7.3	Payment to Beneficiary		6
7.4	Beneficiary Designations		6
7.5	Changes in Payment Date		6
ARTICLE VIII ADMINISTRATION			7
8.1	Plan Administrator		7
8.2	Authority of the Bank		7
8.3	Action of the Bank		7
8.4	Claims Procedure		7
ARTICLE IX GENERAL PROVISIONS AND LIMITATIONS REGARDING BENEFITS			8
9.1	Non-Alienation of Retirement Rights or Benefits		8
9.2	Amendment and Termination		8
9.3	Funding		9
9.4	Plan Non-Contractual		9
9.5	Claims of Other Persons		9
9.6	Finality of Determination		9
9.7	Merger, Consolidation, or Transfers of Plan Assets		9
9.8	Tax Consequences Not Guaranteed		10
9.9	Tax Withholding		10
9.10	Governing Law		10
9.11	Construction		10
9.12	Severability		10

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FEDERAL HOME LOAN BANK OF DALLAS
SPECIAL NON-QUALIFIED DEFERRED COMPENSATION PLAN

     The Board of Directors of the Federal Home Loan Bank of Dallas adopted the retirement plan entitled the “FEDERAL HOME LOAN BANK OF DALLAS SPECIAL NON-QUALIFIED DEFERRED COMPENSATION PLAN” effective January 1, 2003. The Board has determined that it is necessary for the effective administration of the Plan to amend and restate the Plan. The terms of this amended and restated Plan shall apply to all Contributions and to Participants from the effective date of the Plan of January 1, 2003.

ARTICLE I
NAME AND PURPOSE OF PLAN

     1.1 Name of Plan. This Plan shall be hereafter known as the FEDERAL HOME LOAN BANK OF DALLAS SPECIAL NON-QUALIFIED DEFERRED COMPENSATION PLAN.

     1.2 Purpose. The purpose of the Plan is to provide supplemental retirement benefits for the Participants in accordance with the terms of the Plan.

ARTICLE II
DEFINITIONS

     The words and phrases defined in this Article have the following meanings throughout this plan document:

     2.1 Account. “Account” means the separate account established for each Participant. The balance of the Account reflects all Contributions described in Article IV, expense charges, and Investment Performance allocated to the Account in the manner described in Article V.

     2.2 Base Salary. “Base Salary” means the Participant’s annualized gross rate of salary paid before any deductions of any kind whatsoever excluding overtime, bonuses, commissions and other extraordinary compensation.

     2.3 Bank. “Bank” means the Federal Home Loan Bank of Dallas, an instrumentality of the United States government.

     2.4 Beneficiary. “Beneficiary” means the individual, trustee, or estate designated by the Participant to receive the Participant’s Benefit in the event of his death.

     2.5 Benefit. “Benefit” means the balance in the Participant’s Account.

     2.6 Board. “Board” means The Board of Directors for the Federal Home Loan Bank of Dallas.

     2.7 Code. “Code” means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code includes not only the section but any comparable section or sections of any future legislation that amends, supplements, or supersedes the section.

     2.8 Contributions. “Contributions” mean contributions by the Bank under this Plan to Participant Accounts, as provided by Article IV.

     2.9 Disability. “Disability” shall mean the date when a Participant will be eligible to receive payments due to “disability” as defined in the applicable long-term disability plan of the Bank.

     2.10 Effective Date. “Effective Date” means January 1, 2003, which is the Effective Date of the Plan.

     2.11 Employee. “Employee” means any employee of the Bank who is performing services for the Bank and is receiving compensation for such services.

     2.12 Group One Participants. “Group One Participants” means Employees who (i) are listed on Exhibit “A” attached hereto and (ii) are eligible to receive a Contribution pursuant to Subsection 4.1(a).

     2.13 Group Two Participants. “Group Two Participants” means Employees who (i) are listed on Exhibit “B” attached hereto, (ii) were not eligible to receive a Bank matching contribution under the Thrift Plan on December 31, 2002, (iii) were employed by the Bank on June 30, 2003, and (iv) are eligible to receive a Contribution pursuant to Subsection 4.1(b).

     2.14 Group Three Participants. “Group Three Participants” means Employees who are listed on Exhibit “C” attached hereto and are eligible to receive Contributions pursuant to Subsection 4.1(c).

     2.15 Investment Performance. “Investment Performance” means the earnings or losses attributable to the contributions as more specifically described in Article V.

     2.16 Normal Retirement Age. “Normal Retirement Age” shall mean the sixty-second (62^nd) birthday of the Participant.

     2.17 Participant. “Participant” shall mean those employees of the Bank eligible to participate in the Plan who are designated on Exhibits “A,” “B” and “C” attached hereto or who are subsequently selected by the Board to participate in the Plan.

     2.18 Plan. “Plan” means the Federal Home Loan Bank of Dallas Special Non-Qualified Deferred Compensation Plan.

     2.19 Plan Entry Date. “Plan Entry Date” means January 1, 2003 for the Participants identified on Exhibits “A,” “B” and “C” and such other date as specified by the Board with respect to any future Participants who are selected to participate in the Plan.

     2.20 Plan Year. “Plan Year” means the 12-consecutive-month period beginning on January 1 and ending on December 31 of each calendar year.

     2.21 Thrift Plan. The words “Thrift Plan” means the Financial Institutions Thrift Plan as adopted by the Federal Home Loan Bank of Dallas.

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     2.22 Trustees, Trust, Trust Agreement, Trust Assets and Trust Fund. “Trustees” shall mean the Trustees, or their successors, named in that certain trust agreement (the “Trust Agreement”), dated as of the same date as this Plan, which governs the “Trust” styled: “Federal Home Loan Bank of Dallas Non-Qualified Deferred Compensation Trust,” being the trust which, in conjunction with this Plan, shall hold and invest Contributions made by the Bank under the Plan. The words “Trust Assets” and “Trust Fund” shall mean the assets held in the Trust. The Trust shall be a “grantor trust” as defined in Section 671 of the Code.

ARTICLE III
ELIGIBILITY FOR PARTICIPATION

     3.1 Participation. The Group One Participants identified on Exhibit “A” attached hereto are eligible to participate in the Plan effective January 1, 2003 if they were employed by the Bank on June 30, 2003. Group Two Participants identified on Exhibit “B” attached hereto are eligible to participate in the Plan for the Plan Year ending December 31, 2003 provided they were (i) employed by the Bank on June 30, 2003, and (ii) were not eligible to receive a matching contribution by the Bank pursuant to the terms of the Thrift Plan as of December 31, 2002. Group Three Participants identified on Exhibit “C” attached hereto are eligible to participate in the Plan effective November 1, 2004. No other Employee shall ever become eligible to participate in this Plan unless the Board specifically selects such Employee for participation in the Plan.

     3.2 Cessation of Participation. Participants shall not be eligible to participate in the Plan if they are no longer employed by the Bank or the Board elects to remove them as a Participant in the Plan in future Plan Years.

ARTICLE IV
CONTRIBUTIONS

     4.1 Contributions by the Bank. The Contributions to a Participant’s Account shall be made solely by the Bank and Contributions by Participants are not permitted. Contributions to a Participant’s Account will only be made in the sole discretion of the Board. Contributions for the 2003 Plan Year will be made as follows:

          (a) Group One Participants: The Bank will contribute the amount described on Exhibit “A” attached hereto to Group One Participants’ Accounts.

          (b) Group Two Participants: Group Two Participants shall have contributed to their Account an amount as determined in the sole discretion of the Bank. For the Plan Year ending December 31, 2003, the Bank shall contribute an amount described on Exhibit “B” attached hereto.

          (c) Group Three Participants: The Bank will make an initial contribution of the amount described on Exhibit “C” attached hereto to Group Three Participants’ Accounts. Further Contributions may be made in the discretion of the Board.

          The fact that the Bank makes a Contribution to a Participant’s Account for the Plan Year ending December 31, 2003, does not require the Bank to make Contributions to such

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Participant’s Account for any Plan Year commencing after December 31, 2003. Participants will be notified by the Bank of the amount of Contributions made in subsequent Plan Years.

     4.2 Recordkeeping. Records for each Participant under this Plan are maintained on the basis of the January 1 through December 31 Plan Year. At least once a Plan Year, the Bank will send the Participant a report summarizing the status of his Account. Similar reports or illustrations may be obtained by the Participant upon termination of employment or at any other time by writing directly to the Bank’s Director of Human Resources.

     4.3 Limitations. Notwithstanding anything to the contrary contained in this Plan, the obligation of the Bank to make Contributions is subject to the provisions relating to the amendment and termination of the Plan; provided that no amendment or termination will affect any obligation of the Bank to make Contributions with respect to any Plan Years before the date of such amendment or termination.

ARTICLE V
INVESTMENT FUNDS

     5.1 Investment Funds. Amounts contributed to the Trust representing Contributions to Group One and Group Two Participant Accounts will be invested at the discretion of the Trustee. Amounts contributed to the Trust representing Contributions to Group Three Participant Accounts will be invested based upon the investment election filed by the Group Three Participant. Group Three Participants will be permitted to select among the same investment alternatives offered under the Deferred Compensation Plan of the Federal Home Loan Bank of Dallas.

     5.2 Allocation of Investment Performance. At the end of each calendar quarter, the Investment Performance of Trust Assets attributable to Group One Participant and Group Two Participant Accounts established under this Plan will be allocated to the Accounts of Participants as determined by the Trustee each Plan Year based upon the ratio as of the first day of such calendar quarter that each Participant’s Account balance bears to the total of the Account balances of all Group One and Group Two Participants held by the Trust that are attributable to this Plan. The Investment Performance of the Trust Assets attributable to the Group Three Participant Accounts will be determined based upon the actual performance of the investment alternatives selected by the Participant.

ARTICLE VI
VESTING

     6.1 Termination of Employment – Vesting of Account. Unless sooner vested, a Participant will have a 100% vested and nonforfeitable interest in the balance of his Account upon attaining Normal Retirement Age or terminating employment due to Disability or death. Provided however, the Board may accelerate the vesting of a Participant’s interest in the balance of his or her Account upon termination of employment due to special circumstances as determined by the Board in its sole and absolute discretion.

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     6.2 Vesting.

          (a) Earlier Vesting for Group Two Participants. Group Two Participants shall vest and have nonforfeitable rights in the balance of their Account in accordance with the percentages set forth in the following table:

Years of Credited	Amount of
Service Completed	Vested Benefit
0	0%
1	100%

          (b) Group Three Participants. Group Three Participants shall vest and have nonforfeitable rights in the balance of their Account at the date specified on Exhibit “C” with respect to the initial Contribution and upon the date specified by the Board for future Contributions.

     6.3 Forfeitures. In the event that a Participant terminates employment at any point in time, other than termination due to death or Disability and if the Participant is less than 100% vested in his Benefit, then, the Participant shall forfeit the unvested portion of such Benefit, if any, and such unvested portion will be applied to reduce the Bank’s Contribution to the Plan.

     6.4 No Forfeitures for Cause. The vested and nonforfeitable Benefit represented by the balance of a Participant’s Account shall not be forfeited regardless of whether the Participant’s employment is terminated for cause.

ARTICLE VII
BENEFITS

     7.1 Retirement Benefits. Except for payments due for an unforeseeable emergency as discussed in Section 7.7 below, the Participant’s vested Account balance will only be paid following retirement, Disability or earlier termination of employment as described below.

          (a) Installment Payments. If a Participant’s vested Account balance is at least $25,000, the Participant is eligible to elect quarterly installment payments payable over a period of 1 to 5 years. The first installment shall commence within 30 days of the calendar quarter following the Participant’s date of termination or date of Disability with each subsequent quarterly installment paid within 30 days of the first day of each subsequent calendar quarter until all installment payments have been paid. If a Participant qualifies for an installment payment but fails to make an effective designation as to the method of payment, the Participant’s Account will be distributed in a lump sum.

          (b) Lump Sum Payment. If a Participant (i) terminates employment for any reason with a vested Account balance of less than $25,000 or (ii) elects to receive payment in the form of a single lump sum payment, payment will be made in the form of a lump sum within 30

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days following the last day of the month of the Participant’s date of termination of employment or Disability.

          (c) Changes in Method of Payment. Subject to such other restrictions as imposed by the Code, the method of payment may be changed from time to time by the Participant with the approval of the Bank, but in no event will such change be considered valid if the change occurs within the 12-month period prior to the date payment is scheduled to commence.

     7.2 Application for Benefits. Procedures for receipt of benefits are initiated by writing directly to the Bank. Benefits will be payable by the Bank upon receipt of a satisfactorily completed application for benefits and supporting documents. The necessary forms will be provided to the Participant, the surviving spouse, or the Beneficiary by the Bank.

     7.3 Payment to Beneficiary. If a Participant dies with a balance credited to the Participant’s Account the then current vested balance of the Participant’s Account shall be paid to the Participant’s Beneficiary in a lump sum.

     7.4 Beneficiary Designations. A Participant shall designate on a Beneficiary designation form provided by the Bank a Beneficiary who, upon the Participant’s death, will receive payments that otherwise would have been paid to the Participant under the Plan. All Beneficiary designations must be in writing. Beneficiary designations will be effective only if and when delivered to the Bank during the lifetime of the Participant. A Participant may change a Beneficiary or Beneficiaries by filing a new Beneficiary designation form. The latest Beneficiary designation form shall apply to the Accounts of the Participant. If a Beneficiary of a Participant predeceases the Participant, the designation of such Beneficiary shall be void. If a Beneficiary to whom benefits under the Plan remain unpaid dies after the Participant and the Participant failed to specify a contingent Beneficiary on the appropriate Beneficiary designation form, the balance of the Participant’s Account will be paid to such Beneficiary’s estate. If a Participant fails to designate a Beneficiary or if such designation is ineffective, in whole or in part, any payment that otherwise would have been paid to such Participant shall be paid to the Participant’s estate.

     7.5 Changes in Payment Date. If the Participant experiences an unforeseeable emergency, payment of the vested portion of the Participant’s Account, prior to the Participant’s termination date may occur with the approval of the Bank subject to the following conditions:

          (a) The maximum emergency withdrawal cannot exceed the lesser of the amount necessary to alleviate the financial hardship or 100% of the vested Account balance;

          (b) The Participant must submit a written request to the Bank at least 30 days prior to the date of payment the Participant requests. The written notice must state the reason necessitating the early payment and provide documentation that the financial hardship cannot be satisfied by other assets;

          (c) The emergency must result from a severe financial hardship to the Participant resulting from (1) a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Section 152(a) of the Code) of the Participant, (2) loss of the

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Participant’s property due to casualty, or (3) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The need to send a Participant’s child to college or the desire to purchase a home shall not be considered emergencies for purposes of this Subsection 7.5; and

          (d) The decision whether to allow an emergency withdrawal from the Participant’s Account shall be made in the sole and absolute discretion of the Bank.

ARTICLE VIII
ADMINISTRATION

     8.1 Plan Administrator. Federal Home Loan Bank of Dallas, 8500 Freeport Parkway South, Suite 100, Irving, Texas 75063-2547, is the Administrator of this Plan, to be responsible for performing duties required for the operation of the Plan.

     8.2 Authority of the Bank. The Bank has all the powers and authority expressly conferred upon it herein and further shall have discretionary and final authority to manage and control the assets of the Plan, to determine all questions concerning eligibility and Contributions under the Plan, to interpret and construe all terms of the Plan, including any uncertain terms in its sole discretion, and to determine any disputes arising under and all questions concerning administration of the Plan. Any determination made by the Bank shall be given deference, in the event it is subject to judicial review, and shall be overturned only if it is arbitrary or capricious. In exercising these powers and authority, the Bank will at all times exercise good faith, apply standards of uniform application, and refrain from arbitrary action. The Bank may employ attorneys, agents, and accountants as it finds necessary or advisable to assist it in carrying out its duties. The Bank, by action of its Board, may designate a person or persons other than the Bank to carry out any of its powers, authority, or responsibilities. Any delegation will be set forth in writing.

     8.3 Action of the Bank. Any act authorized, permitted, or required to be taken by the Bank under the Plan, which has not been delegated in accordance with Section 8.2, may be taken by a majority of the members of the Board, either by vote at a meeting, or in writing without a meeting. All notices, advice, directions, certifications, approvals, and instructions required or authorized to be given by the Bank under the Plan will be in writing and signed by either (i) a majority of the members of the Board, or by any member or members as may be designated by an instrument in writing, signed by all members, as having authority to execute the documents on its behalf, or (ii) as delegated to an Officer of the Bank or a person who becomes authorized to act for the Bank in accordance with the provisions of Section 8.2. Any action taken by the Bank which is authorized, permitted, or required under the Plan and is in accordance with the Bank’s contractual obligations are final and binding upon the Bank, and all persons who have or who claim an interest under the Plan, and all third parties dealing with the Bank.

     8.4 Claims Procedure.

          (a) The Bank shall make all determinations as to the right of any person to Benefits. If any request for Benefits is wholly or partially denied, the Bank shall notify the

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person requesting such Benefits, in writing, of such denial, including in such notification the following information:

               (i) the specific reason or reasons for such denial;

               (ii) the specific references to the pertinent Plan provisions upon which the denial is based;

               (iii) a description of any additional material and information which may be needed to clarify the request, including an explanation of why such information is required; and

               (iv) an explanation of this Plan’s review procedure with respect to denial of such Benefits.

Any such notice to be delivered to any Participant or Beneficiary shall be personally delivered within a reasonable time to such Participant by obtaining a signed receipt therefore or shall be mailed by certified or registered mail with return receipt requested to such Participant or Beneficiary. Such notice shall be written to the best of the Bank’s ability in a manner that may be understood without legal counsel.

          (b) Any Participant or Beneficiary whose claim has been denied in accordance with the foregoing Subsection (a) herein may appeal to the Bank for review of such denial by making a written request therefor within 60 days of receipt of the notification of such denial. Such Participant or Beneficiary may examine documents pertinent to the review and may submit to the Bank written issues and comments. Within 60 days (45 days in the case of a claim involving a disability determination) after receipt of the request for review, the Bank shall communicate to the claimant, in writing, its decision, and the communication shall set forth the reason or reasons for the decision and specific reference to those Plan provisions upon which the decision is based.

ARTICLE IX
GENERAL PROVISIONS AND LIMITATIONS REGARDING BENEFITS

     9.1 Non-Alienation of Retirement Rights or Benefits. No right or benefit under this Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such benefit. If any Participant or the Participant’s Beneficiary under this Plan should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right to a benefit hereunder, then, such right or benefit shall cease and terminate.

     9.2 Amendment and Termination. Subject to the last sentence of this Section 9.2, the Bank reserves the right at any time to amend, otherwise modify, or terminate the Plan, or to discontinue any further Contributions to Participants’ Accounts or payments under the Plan, by resolution of its Board. In the event of a termination of the Plan or complete discontinuance of Plan Contributions, the Bank will notify the Participants of the termination. No amendment,

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modification or termination may reduce the then vested Account balance of any Participant or the obligation of the Bank and Plan to make payments of such vested Participant’s Account in accordance with the provisions of the Plan in effect immediately prior to such amendment, modification or termination and as allowed under the Code. The Bank may, at its sole discretion, amend or modify the Plan to bring it in compliance with the Code.

     9.3 Funding. The benefits described in this Plan are obligations of the Bank to pay compensation for services, and shall constitute a liability to the Participants and/or their Beneficiaries in accordance with the terms hereof. All amounts paid under this Plan shall be paid in cash from the general assets of the Bank and shall be subject to the general creditors of the Bank. Benefits shall be reflected on the accounting records of the Bank but shall not be construed to create, or require the creation of, a trust, custodial or escrow account. No Participant shall have any right, title or interest whatever in or to any investment reserves, accounts, funds or assets that the Bank may purchase, establish or accumulate to aid in providing the benefits described in this Plan. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust or a fiduciary relationship of any kind between the Bank and a Participant or any other person; provided, however, the Bank may establish and/or continue the Trust. Neither a Participant nor the Beneficiary of a Participant shall acquire any interest hereunder greater than that of an unsecured creditor of the Bank who is the Employer of such Participant.

     9.4 Plan Non-Contractual. Nothing contained in this Plan will be construed as a commitment or agreement on the part of any person to continue his or her employment with the Bank, and nothing contained in this Plan will be construed as a commitment on the part of the Bank to continue the employment or the rate of compensation of any person for any period, and all employees of the Bank will remain subject to discharge to the same extent as if the Plan had never been put into effect.

     9.5 Claims of Other Persons. The provisions of the Plan will in no event be construed as giving the Participant or any other person, firm, or corporation, any legal or equitable right against the Bank, its officers, employees, or directors, except the rights that are specifically provided for in this Plan or created in accordance with the terms and provisions of this Plan.

     9.6 Finality of Determination. All determinations with respect to the crediting of Years of Credited Service under the Plan are made on the basis of the records of the Bank, and all determinations made are final and conclusive upon employees, former employees, and all other persons claiming a benefit interest under the Plan. There will be no duplication of Years of Credited Service credited to an employee for any one period of his employment.

     9.7 Merger, Consolidation, or Transfers of Plan Assets. The Plan will not be merged or consolidated with any other Plan, nor will any of its assets or liabilities be transferred to another Plan, unless, immediately after a merger, consolidation, or transfer of assets or liabilities, each Participant would receive a benefit under the Plan which is at least equal to the benefit he or she would have received immediately prior to a merger, consolidation, or transfer of assets or liabilities (assuming in each instance that the Plan had then terminated).

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     9.8 Tax Consequences Not Guaranteed. The Bank does not warrant that this Plan will have any particular tax consequences for Participants or Beneficiaries and shall not be liable to them if tax consequences they anticipate do not actually occur. The Bank shall have no obligation to indemnify a Participant or Beneficiary for lost tax benefits (or other damage or loss) in the event the Plan is amended or terminated as permitted under Section 10.1, accelerated, or because of change in Plan design or funding; e.g., establishment of a “secular trust.”

     9.9 Tax Withholding. The Employer may withhold from a payment or accrued benefit or from the Participant’s other compensation any federal, state, or local taxes required by law to be withheld with respect to such payment or accrued benefit and such sums as the Bank may reasonably estimate as necessary to cover any taxes for which the Employer may be liable and which may be assessed with regard to Plan Contributions or payments under this Plan.

     9.10 Governing Law. Except as provided under federal law, the provisions of the Plan are governed by and construed in accordance with the laws of the State of Texas.

     9.11 Construction. Except when otherwise indicated by the context, any masculine terminology when used in the Plan shall also include the feminine gender, and the definition of any term in the singular shall also include the plural.

     9.12 Severability. If any provision of the Plan is held invalid or illegal for any reason, any illegality or invalidity shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had never been contained therein. The Bank shall have the privilege and opportunity to correct and remedy such questions of illegality or invalidity by amendment.

     IN WITNESS WHEREOF, this amended and restated Plan has been executed on behalf of Federal Home Loan Bank of Dallas this 29^th day of October, 2004.

FEDERAL HOME LOAN BANK OF DALLAS
By:	/s/ Timothy J. Heup
	Timothy J. Heup, Senior Vice President

ATTEST:

     /s/ Karen Krug

Karen Krug, Senior Vice President and

Corporate Secretary

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EX-12.1

Exhibit 12.1

COMPUTATION OF EARNINGS TO FIXED CHARGES
(dollars in thousands)

	Three Months Ended March 31,				Year Ended December 31,
	2005		2004		2004		2003		2002		2001		2000
Fixed charges — interest expensed	$	414,180	$	219,283	$	1,065,136	$	914,248	$	1,080,149	$	1,802,210	$	2,358,998
Earnings
Income before assessments	$	27,233	$	28,753	$	108,601	$	122,217	$	102,664	$	157,305	$	175,149
Fixed charges		414,180		219,283		1,065,136		914,248		1,080,149		1,802,210		2,358,998
Total earnings	$	441,413	$	248,036	$	1,173,737	$	1,036,465	$	1,182,813	$	1,959,515	$	2,534,147
Ratio of earnings to fixed charges		1.07		1.13		1.10		1.13		1.10		1.09		1.07