Certain statementsStatements contained in this annual report on Form 10-K, including statements describing objectives, projections, estimates, projections, statements relating toor future predictions in our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, areoperations, may be forward-looking statements. These forward-looking statements generally aremay be identified by the words “believes,” “projects,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” use of forward-looking terminology, such asbelieves, projects, expects, anticipates, estimates, intends, strategy, plan, may,and similar expressions. Forward-lookingwillor their negatives or other variations on these terms. By their nature, forward-looking statements are based on current expectationsinvolve risk or uncertainty, and assumptions that are subject to risks and uncertainties which may cause actual results tocould differ materially from those expressed contemplated, or implied by the forward-looking statements or could affect the extent to which a certain plan,particular objective, projection, estimate, or prediction is realized. These risks and uncertainties include, but are not limited to, the following:

We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. A detailed discussion of the risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included under “Item 1A-Risk Factors” at page 29.1A. Risk Factors.”

The Federal Home Loan Bank of Des Moines (the Bank, we, us, or our) is a federally chartered corporation organized on October 31, 1932, that is exempt from all federal, state, and local taxation except real property taxes and is one of 12 district Federal Home Loan Banks (FHLBanks).FHLBanks. The FHLBanks were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act). On July 30, 2008, which was amended by the passage of the “HousingHousing and Economic Recovery Act of 2008”2008 (Housing Act) amended certain provisions of the FHLBank Act. Prior to the passage of the Housing Act, the Federal Housing Finance Board (Finance Board), an independent agency in the executive branch of the U.S. Government, supervised and. The FHLBanks are regulated the FHLBanks and the Federal Home Loan Bank’s Office of Finance (Office of Finance). With the passage of the Housing Act,by the Federal Housing Finance Agency (Finance Agency) was established, whose mission is to provide effective supervision, regulation, and became the new independent Federal regulatorhousing mission oversight of the FHLBanks to promote their safety and the Office of Finance, as well as for Federal National Mortgage Association (Fannie Mae)soundness, support housing and Federal Home Loan Mortgage Corporation (Freddie Mac). The Finance Board will be abolished one year after the date of enactment of the Housing Act, which will be on July 30, 2009. During the one-year transition period, the Finance Board will be responsible for winding up its affairs. The Finance Agency’s principal purpose is to ensure that the FHLBanks operate infinance and affordable housing, and support a safestable and sound manner. In addition, the Finance Agency ensures that the FHLBanks carry out their housing finance mission and remain adequately capitalized.liquid mortgage market. The Finance Agency establishes policies and regulations governing the operations of the FHLBanks. Each FHLBank operates as a separate entity with its own management, employees, and board of directors.

Our net income is attributable to the difference between the interest income we earn on our advances, mortgage loans, and investments and the interest expense we pay on our consolidated obligations and member deposits, as well as anycomponents of other income (loss) (i.e., gains and losses on derivative and hedging activities.activities, investments, and debt extinguishments). We operate with narrow margins and expect to be profitable over the long-term based on our prudent lending standards, conservative investment strategies, and diligent risk management practices. Because we operate with narrow margins, the Bank’sour net income is sensitive to changes in market conditions that impact the interest we earn and pay.

The Bank manages operations by groupingWe have identified two primary operating segments based on our products and services within two business segments:as well as our method of internal reporting: Member Finance and Mortgage Finance. Effective July 1, 2008 the Bank enhanced its internal segment methodology and modified the segment information reported in the footnotes to the financial statements to reflect the manner in which management evaluates the Bank’s financial information. In particular, Housing Finance Authority (HFA) and Small Business Administration (SBA) investments were reclassified from the Member Finance segment to the Mortgage Finance segment as a result of their underlying mortgage characteristics. In addition, the Bank modified its allocation of capital to each segment. Previously, the Bank’s allocation of capital only included estimated capital stock for each segment. This was modified to include the estimated amount of capital stock, retained earnings, and other comprehensive income for each segment. A summary of each segments products and services can be found below.

The Member Finance segment includes advances, investments (excluding mortgage-backed securities (MBS), HFA,Housing Finance Authority (HFA) investments, and SBASmall Business Administration (SBA) investments), and the related funding and hedging ofinstruments related to those assets. Member deposits are also included in this segment. Net interest income for the Member Finance incomeSegment is derived primarily from the difference, or spread, between the yield on advances and investmentsthe assets in this segment and the borrowing,cost of the member deposit and hedging costsfunding related to those assets.

The Mortgage Finance segment includes mortgage loans purchased through the MPF program, MBS, HFA investments, and SBA investments and the related funding and hedging ofinstruments related to those assets. Net interest income for the Mortgage Finance incomesegment is derived primarily from the difference, or spread between the yield on mortgage loans, MBS, HFA, and SBA investmentsthese assets and the borrowing and hedging costscost of the funding related to those assets.

Borrowers use our various advance products as sources of funding for mortgage lending, affordable housing and other community lending (including economic development), and general asset-liability management. Advances are also used by CFIs for loans to small businesses, small farms, and small agribusinesses. Additionally, advances can provide competitively priced wholesale funding to membersborrowers who may lack diverse funding sources. Our primary advance products include the following:

The FHLBank Act permits us to make advances to eligible housing associates. Housing associates are approved mortgagees under Title II of the National Housing Act that meet certain criteria, including: chartered under law and have succession; subject to inspection and supervision by some governmental agency; and lending their own funds as their principal activity in the mortgage field. Because housing associates are not members, they are not subject to certain provisions of the FHLBank Act that are applicable to members and cannot own our capital stock. The same regulatory lending requirements that apply to our members generally apply to housing associates. Because housing associates are not members, eligible collateral is limited to Federal Housing Administration (FHA) mortgages or Government National Mortgage Association (Ginnie Mae) securities backed by FHA mortgages for pledged collateral. State housing associates may pledge additional collateral such as cash deposited in the Bank, or certain residential mortgage loans, including securities backed by such mortgages, for advances facilitating residential or commercial mortgage lending to benefit low- and moderate-income individuals or families.

Under the FHLBank Act, any security interest granted to the Bankus by any member of the Bank,our members, or any affiliate of any such member, has priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having the rights of a lien creditor), other than claims and rights that (1)(i) would be entitled to priority under otherwise applicable law and (2)(ii) are held by actual bona fide purchasers for value or by parties that are secured by actual perfected security interests. The Bank mayWe perfect itsour security interest in accordance with applicable state laws through means such asby filing Uniform Commercial Code (UCC) financing statements or through taking possession of collateral.

We generally make advances to borrowers under a blanket lien, which grants us a security interest in all eligible assets of the member to fully secure the member’s indebtedness to the Bank. The Bankus. We generally perfects itsperfect our security interest in the collateral pledged under the UCC.pledged. Other than securities collateral and cash deposits, the Bank doeswe do not initially take controldelivery of collateral pledged by blanket lien borrowers. In the event of deterioration in the financial condition of a blanket lien borrower, we have the ability to require delivery of pledged collateral sufficient to secure the borrower’s indebtedness to the Bank.us.

For conventional MPF loan products, PFIs retain a portion of the credit risk on the MPF loans they fund and sell to an MPF Bank by providing credit enhancement either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide supplemental mortgage insurance (SMI). The PFI’s maximum credit enhancement obligation for MPF loan losses is specified in the amountmaster commitment. PFIs are paid a credit enhancement fee for managing credit risk, and in some instances all or a portion of the First Loss Account (FLA). Seecredit enhancement fee may be performance based. We utilize an allowance for credit losses to absorb any credit related losses we may incur.

For a detailed discussion and analysis of our mortgage portfolio, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Statements of Condition — Mortgage Loans.” A detailed discussion of the different MPF loan products we offer and their related credit risk is provided in ��“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Risk Management — Credit Risk — Mortgage Assets”Assets.”

The MPF Provider maintains the structure of MPF loan products and the eligibility rules for MPF loans as established by the FHLBanks participating in the MPF program. In addition, the MPF Provider manages the pricing and delivery mechanism for MPF loans and the back-office processing of MPF loans in its role as master servicer and master custodian. The MPF Provider has engaged Wells Fargo Bank N.A. (Wells Fargo) as the vendor for master servicing and as the primary custodian for the MPF program. The MPF Provider has also contracted with other custodians meeting MPF program eligibility standards at page 110.the request of certain PFIs.

PFIs may choose to sellselling MPF loans to the Bank andmay either retain the servicing or transfer the servicing.servicing (excluding MPF Xtra). If a PFI chooses to retain the servicing, they receive a servicing fee to manage the servicing activities. If the PFI chooses to transfer servicing rights to aan approved third-party provider, the servicing is transferred concurrently with the sale of the MPF loan to us and the Bank.servicing fee is paid to the third-party provider.

Throughout the servicing process, the master servicer monitors the PFI’s compliance with MPF program requirements and makes periodic reports to the MPF Provider.

The Mortgage Finance investment portfolio includes investments in MBS, HFA securities, and SBA which due to their risk profiles, have hedging and funding strategies similar to mortgage loans purchased under the MPF program.securities. By regulation, we are permitted to invest in the following asset types, among others:

We have participated in the MPF shared funding program, which provides a means to distribute both the benefits and the risks of the mortgage loans among a number of parties. Under the MPF shared funding program, a participating member of the FHLBank of Chicago sponsorssponsored a trust (trust sponsor) and transferstransferred into the trust loans eligible to be MPF loans that the participating member of the FHLBank of Chicago originatesoriginated or acquires.acquired. Upon transfer of the assets into the trust, the trust issuesissued certificates with tranches that have credit risk characteristics consistent with the MPF program policy and are compliant with the applicable regulations. The tranches are backed by the underlying mortgage loans and all or nearly all of the tranches receive public credit ratings determined by an NRSRO.

The senior tranches (A Certificates) have a credit rating of AA or AAA and may have different interest rate risk profiles and durations. The A Certificates, which may be structured to present risk and investment characteristics attractive to different types of investors, were sold to the FHLBank of Chicago, either directly by the trust or by the trust sponsor. The lower-rated tranches (B Certificates) provide the credit enhancement for the A Certificates and are sold to the trust sponsor. The FHLBank of Chicago may subsequently sell some or all of its A Certificates to its members and to other FHLBanks and their members. We purchased A Certificates of the MPF shared funding program and hold approximately $33.2 million at December 31, 2009. No residuals are created or retained on the Statements of Condition of the FHLBank of Chicago or any other FHLBank.

Under Finance Agency regulations, we are prohibited from investing in whole mortgages or other whole loans other thanthan:

The Finance Agency’s Financial Management Policy (FMP) further limits the Bank’sour investment in MBS and asset-backed securities. This policy requires that the total book value of our MBS owned by the Bank mayto not exceed 300 percent of the Bank’sour capital at the time of purchase. The Finance Agency has excluded MPF shared funding certificates from this FMP limit.

Our primary source of funds to support our business segments is the sale of consolidated obligations in the capital markets. Consolidated obligations are the joint and several obligations of, the FHLBanks,and are backed only by the financial resources of the 12 FHLBanks. Consolidated obligations are not obligations of the U.S. Government, and the U.S. Government does not guarantee them. Currently,At February 28, 2010, Moody’s Investors Service, Inc. (Moody’s) has rated the consolidated obligations Aaa/P-1 and Standard & Poor’s Ratings Services, a division of McGraw-Hill Companies, Inc. (S&P) has rated them AAA/A-1+.

Although we are primarily liable for the portion of consolidated obligations issued on our behalf, we are also jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation whether or not the consolidated obligation represents a primary liability of such FHLBank. Although it has never happened, to the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank that is primarily liable for such consolidated obligation, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement from the noncomplying FHLBank for any payments made on behalf of the noncomplying FHLBank and other associated costs (including interest to be determined by the Finance Agency). If, however, the Finance Agency determines that the noncomplying FHLBank is unable to satisfy its repayment obligations, the Finance Agency may allocate the outstanding liabilities of the noncomplying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding. The Finance Agency reserves the right to allocate the outstanding liabilities for the consolidated obligations between the FHLBanks in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner.

Finance Agency regulations govern the issuance and servicing of consolidated obligations. The FHLBanks issue consolidated obligations throughThose regulations established the Office of Finance which has authority underto facilitate the FHLBank Act to issue jointissuance and severalservicing of consolidated obligations on behalf of the FHLBanks. The FHLBanks, through the Office of Finance as their agent, are the issuers of consolidated obligations for which they are jointly and severally liable. No FHLBank is permitted to issue individual debt without Finance Agency approval.

Pursuant to Finance Agency regulations, the Office of Finance has adopted policies and procedures for consolidated obligations that may be issued by the FHLBanks. The policies and procedures relate to the frequency and timing of issuance of consolidated obligations, issue size, minimum denomination, selling concessions, underwriter qualifications and selection, currency of issuance, interest rate change or conversion features, call or put features, principal amortization features, and selection of clearing organizations and outside counsel. The Office of Finance has responsibility for facilitating and approving the issuance of the consolidated obligations in accordance with these policies and procedures. In addition, the Office of Finance has the authority to restrict or deny the FHLBanks’ requests to issue consolidated obligations that are otherwise allowed by its policies and procedures if the Office of Finance determines that such action would be inconsistent with the Finance Agency requirement that consolidated obligations be issued efficiently and at the lowest all-in cost over time. The Office of Finance’s authority to restrict or prohibit our requests for issuance of consolidated obligations has not adversely impacted our ability to finance our operations.

Consolidated obligations are generally issued with either fixed or variable rate payment terms that useusing a variety of indices for interest rate resets including LIBOR, Constant Maturity Treasury, and the Federal funds rate. To meet the specific needs of certain investors in consolidated obligations, both fixed and variable rate obligations may also contain certain embedded features that may resultresulting in complex coupon payment terms and call features. When such consolidated obligations are issued on our behalf, of the Bank, we may concurrently enter into derivative agreements containing offsetting features that effectively alteraltering the terms of the bond to a simple variable rate tied to an index. The Office of Finance may coordinate communication between underwriters, the Bank, and financial institutions that enterentering into interest rate exchange agreements to facilitate issuance.

The Office of Finance may also coordinate transfers of FHLBank consolidated obligations among other FHLBanks. We may, from time to time, assume the outstanding primary liability of another FHLBank rather than issue new consolidated obligations for which the Bank iswe are the primary obligor. If an FHLBank has acquired excess funding, that FHLBank may offer its debt to the other 11 FHLBanks at the current market rate of interest consistent with what may be expected in the auction process. We may choose to assume the outstanding primary liability of another FHLBank as it would have a known price compared with issuing debt through the auction process where actual pricing is unknown prior to issuance.

Finance Agency regulations require that each FHLBank to maintain the following types of assets, free from any lien or pledge, subject to such regulations, restrictions, and limitations as may be prescribed by the Finance Agency, in an amount at least equal to the amount of that FHLBank’s participation in the total consolidated obligations outstanding:

Bonds issued through the TAP program are generally fixed rate, noncallable structures issued inwith standard maturities of 18 months or two, three, five, seven, or ten years. The goal of the TAP program is to aggregate frequent smaller issues into a larger bond issue that may havefor greater market liquidity. We may participate in the TAP program to provide funding for our portfolio.

On a daily basis, we may request specific amounts of certain discount notes with specific maturity dates to be offered by the Office of Finance at a specific cost for sale to underwriters in the discount note selling group. One or more FHLBanks may also request amounts of those same discount notes to be offered for sale for their benefit 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. We may receive zero to 100 percent of the proceeds of the discount notes issued via this sales process depending on (1)(i) the maximum costs we or other FHLBanks participating in the same issue, if any, are willing to pay for the discount notes; (2)(ii) the order amounts for the discount notes submitted by underwriters; and (3)(iii) the guidelines for allocation of discount note proceeds among multiple participating FHLBanks administered by the Office of Finance.

Twice weekly, we may request specific amounts of discount notes with fixed terms to maturity ranging from four weeks to 26 weeks to be offered by the Office of Finance for sale via competitive auction conducted with underwriters in the discount note selling group. One or more FHLBanks may also request amounts of those same discount notes to be offered for sale for their benefit via the same auction. The discount notes offered for sale via competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. We may receive zero to 100 percent of the proceeds of the discount notes issued via competitive auction depending on (1)(i) the amounts of the discount notes bid by underwriters and (2)(ii) the guidelines for allocation of discount note proceeds among multiple participating FHLBanks administered by the Office of Finance.

For further analysis of our discount notes see “Consolidated“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Statements of Condition — Consolidated Obligations” and “Liquidity“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Liquidity and Capital Resources” at pages 63 and 69.Resources — Sources of Liquidity.”

The Bank usesWe use derivatives to manage our exposure to interest rate and prepayment risks. The Finance Agency’s regulations and the Bank’sour Enterprise Risk Management Policy (ERMP) establish guidelines for derivatives. We can use interest rate swaps, swaptions, interest rate cap and floor agreements, calls, puts, and futures and forward contracts as part of our interest rate and prepayment risk management and funding strategies for both business segments. The Finance Agency’s regulations and the Bank’sour policies prohibit trading in or the speculative use of these instruments and limit exposure to credit risk arising from the instruments.

We primarily use derivatives to manage our exposure to changes in interest rates. The goal of our interest rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. One key way we manage interest rate risk is to acquire and maintain a portfolio of assets and liabilities which, together with their associated derivatives, are conservatively matched with respect to the expected repricings of the assets and liabilities.

In general, weWe use derivatives as a fair value hedge of an underlying financial instrument and/or as an economic hedge, which does not qualify for hedge accounting treatment but serves as an asset-liability management tool. We also use derivatives to manage embedded options in assets and liabilities to hedge the market value of existing assets, liabilities, and anticipated transactions.

A more detailed discussion regarding our use of derivatives is located in “Management’s“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning at page 41Operation — Statements of Condition — Derivatives” and in “Risk Management” beginning at page 96.“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Risk Management — Credit Risk — Derivatives.”

The Bank’sOur Capital Plan requires each member to own capital stock in an amount equal to the aggregate of a membership stock requirement and an activity-based stock requirement. WeOur Board of Directors may adjust these requirements within ranges established in the Capital Plan. All stock issued is subject to a five year notice of redemption.

BankOur capital stock is not publicly traded. It can behas a par value of $100 per share, and all shares are issued, exchanged, redeemed, and repurchased only by the Bankus at its stated par valuepar. We have two subclasses of $100 per share. In addition,capital stock; membership capital stock and activity-based capital stock. Each member must purchase and hold membership capital stock equal to a percentage of its total assets as of the preceding December 31^st. Each member is also required to purchase activity-based capital stock equal to a percentage of its outstanding transactions and commitments and to hold that activity-based capital stock as long as the transactions and commitments remain outstanding.

Although we havedo not redeem activity-based capital stock prior to the discretion toexpiration of the five year notice period prescribed under our Capital Plan, we, in accordance with our Capital Plan, automatically, but at our option, repurchase excess activity-based capital stock from members. Forthat exceeds an operational threshold on at least a detailed description ofmonthly basis, subject to the limitations set forth in our Capital Plan. To review our Capital Plan, see Exhibit 4.1 to the Bank’s Registration Statement onour Form 10, as amended,8-K/A, filed on July 10, 2006.March 31, 2009.

During the fourth quarter ofOn December 22, 2008, as a result of market conditions, the Bank indefinitely discontinued itswe suspended our practice of voluntarily repurchasing excess activity-based capital stock. Members may continuestock to use thispreserve capital during an uncertain economic environment. As a result of improved market conditions during 2009, we resumed our normal practice of voluntarily repurchasing excess activity-based capital stock to satisfy activity-based capital stock requirements. The Bank believes this recent action will help conserve its capital levels during the current stressed economic environment.on December 18, 2009.

The Bank’sOur Board of Directors may declare and pay dividends in either cash or capital stock or a combination thereof.thereof; however, historically, we have only paid cash dividends. Under Finance Agency regulation, an FHLBank isregulations, we are prohibited from paying a dividend in the form of additional shares of FHLBank capital stock if, after the issuance, the outstanding excess capital stock at the FHLBank would be greater than one percent of itsour total assets. By regulation, the Bankwe may pay dividends from current earnings or retained earnings. An FHLBankearnings, but we may not declare a dividend based on projected or anticipated earnings. TheOur Board of Directors may not declare or pay dividends if it would result in Bankour non-compliance with capital requirements. Furthermore, perPer regulation, an FHLBankwe may not declare or pay a dividend if the par value of the FHLBank’s stock is impaired or is projected to become impaired after paying such dividend. In addition, subject to certain exceptions, before declaring or paying any dividend, we must certify to the Finance Agency that we will remain in compliance with regulatory liquidity requirements and will remain capable of making full and timely payment of our current obligations coming due during the next quarter.

Demand for the Bank’sour advances is affected by, among other things, the cost of other available sources of funds for our borrowers. We compete with other suppliers of secured and unsecured wholesale funding that includeincluding investment banks and dealers, commercial banks, other GSEs or government agencies such as the Farm Credit System, FDIC, Federal Reserve, and, in certain circumstances, other FHLBanks. Certain holding companies have subsidiary institutions located in various states that may be members of different FHLBanks. To the extent a holding company has access through multiple subsidiaries to more than one FHLBank;FHLBank, the holding company can choose the most cost effective advance product available from among the FHLBanks to which it has access. Thus,Under this scenario, FHLBanks may compete with each other to fund advances to members in different FHLBank districts that are subsidiaries of a holding company.districts. The availability of alternative funding sources to our members and their deposit levels, can significantly influence the demand for our advances and can vary as a result of a varietynumber of factors including market conditions, member creditworthiness and size, and availability of collateral.

Our borrowing costs and access tocost of funds werewas also adversely affected by changes in investor perception of the systemic risks associated with the housing GSEs. Issues relating to Fannie Mae, Freddie Mac, and the FHLBanks have, at times, created pressure on debt pricing, as investors have perceived such obligations as bearing greater risk than some other debt products. In response to investor and financial concerns, in September 2008, the Finance Agency placed Fannie Mae and Freddie Mac in conservatorship. Additionally, the U.S. Treasury put in place a set of financing agreements, which expired on December 31, 2009, to ensure that Fannie Mae, Freddie Mac, and the FHLBanks continue to meet their obligations to holders of bonds that they have issued or guaranteed. Beginning in the last three months of 2008, as a result of these government actions, the Bank experienced higher borrowing costs for its debt. These higher borrowing costs, if sustained in the future, will continue to negatively impact our business.

The purchase of mortgage loans through the MPF program is subject to significant competition on the basis of prices paid for mortgage loans, customer service, and ancillary services such as automated underwriting. We compete primarily with other GSEs, such as Fannie Mae, Freddie Mac, and other financial institutions and private investors for acquisition of conventional fixed rate mortgage loans.

The Finance Agency is required to shorten the term of the FHLBanks’ obligation to the REFCORP for each calendar quarter in which there is an excess quarterly payment. An excess quarterly payment is the amount by which the actual quarterly payment exceeds $75 million. The Finance Agency is required to extend the term of the FHLBanks’ obligation to the 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.

The Finance Agency has broad authority to bring administrative and supervisory actions against an FHLBank andand/or its directors andand/or executive officers. The Finance Agency may initiate proceedings to suspend or remove FHLBank directors andand/or executive officers for cause. The Finance Agency may issue a notice of charges seeking the issuance of a temporary or permanent cease and desist order to an FHLBank or any director or executive officer if the Finance Agency determines that any such party is engaging in, has engaged in, or the Finance Agency has cause to believe the party is about to engage inin:

The Finance Agency may issue a notice seeking the assessment of civil monetary penalties against an FHLBank or, in some cases, any director or executive officer that

The Finance Agency is funded through assessments levied against the FHLBanks and other regulated entities. No tax dollars or other appropriations from the U.S. Government support the operations of the Finance Agency. The Finance Agency allocates its applicable operating and capital expenditures to the FHLBanks based on each FHLBank’s percentage of the Bank System’s total FHLBank capital. Unless otherwise instructed in writing by the Finance Agency, each FHLBank pays the Finance Agency its pro rata share of an assessment in semiannualsemi–annual installments during the annual period covered by the assessment.

The Comptroller General of the U.S. Government has authority under the FHLBank Act to audit or examine the Finance Agency and the BankFHLBanks and to decide the extent to which they fairly and effectively fulfill the purposes of the FHLBank Act. Further, 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, he/she must report the results and provide his/her recommendations to the Congress, the Office of Management and Budget, and the FHLBank in question. The Comptroller General may also conduct his/her own audit of any financial statements of the Bank.FHLBanks.

The FHLBanks are supervisedGSEs, organized under the authority of the FHLBank Act, and, regulatedas such are governed by the Finance Agency and subject to rulesfederal laws and regulations promulgated, adopted, and applied by the Finance Agency. From time to time, Congress may pass legislation andamend the Finance Agency may promulgate regulationsFHLBank Act or other statutes in ways that significantly affect (i) the rights and obligations of the FHLBanks, and (ii) the manner in which the FHLBanks carry out their housing-finance mission and business operations. New or modified legislation enacted by Congress or regulations adopted by the Finance Agency or other financial services regulators could adversely impact our ability to conduct business or the cost of doing business.

ForAs an example inof the foregoing, the enactment of the Housing Act on July 31, 2008, and subsequent actions by the Finance Agency to adopt or modify regulations, orders or policies, could adversely impact our business operations, and/or financial condition. We cannot predict how any such action may adversely impact our business operations, and/or financial condition.

Additionally, the U.S. House of Representatives passed the Wall Street Reform and Consumer Protection Act (the Reform Act), which, if passed by the U.S. Senate passed and the President of the United States signed into law by the HousingPresident, would, among other things: (i) create a Consumer Financial Protection Agency; (ii) create an inter-agency oversight council that will identify and regulate systemically-important financial institutions; (iii) regulate the over-the-counter derivatives market; (iv) reform the credit rating agencies; (v) provide shareholders with an advisory vote on the compensation practices of the entity in which they invest including for executive compensation and golden parachutes; (vi) revise the assessment base for FDIC deposit insurance assessments; (vii) require lenders to retain a portion of the credit risk of the mortgages that they originate and sell; and (viii) create a federal insurance office that will monitor the insurance industry. Depending on whether the Reform Act, a housing relief package that,or similar legislation, is signed into law and on the final content of any such legislation, our business operations, funding costs, rights, obligations, and/or the manner in which we carry out our housing-finance mission may be impacted.

Our primary business is making advances to our members. Demand for advances is impacted by, among other things, createdalternative sources of liquidity and loan funding for our members. We compete with other suppliers of secured and unsecured wholesale funding including investment banks and dealers, commercial banks, other GSEs, and, in certain circumstances, other FHLBanks. The availability of alternative funding sources to members can significantly influence the Finance Agency, a new single regulatordemand for our advances.

Our funding costs also impact the pricing of our advances. We compete with the U.S. Government, Fannie Mae, Freddie Mac, and theother GSEs, including other FHLBanks, and addressed other GSE reform issues that have been considered over the past few years. The Housing Act, among other things, enables the U.S. Treasury to temporarily increase purchases of debt of Fannie Mae, Freddie Mac, and the FHLBanks and authorizes purchases of equity of Fannie Mae and Freddie Mac, as well as requirescorporate entities, for funds raised through the Finance Agency to consultissuance of debt in the national and global markets. Increases in supply of competing debt products may result in higher debt costs or lower amounts of debt issued at the same cost by the FHLBanks. Although the FHLBank System’s debt issuances have kept pace with the Federal Reservefunding requirements of our members, there can be no assurance that this will continue.

Additionally, many of our competitors are not subject to the same body of regulation that we are, which enables those competitors to offer products and terms that we may not be able to offer. Efforts to effectively compete with other suppliers of wholesale funding by changing the pricing of our advances may result in a decrease in the profitability of our advance business. A decrease in the demand for advances, or a decrease in the profitability on a varietyadvances would negatively affect our financial condition, results of issues relatedoperations, and value of the Bank to safetyour membership.

In response to the economic downturn and the continuing recession, the U.S. Government enacted certain governmental programs. There have been adverse impacts to our business from these programs, including increased funding costs, decreased investment liquidity, and increased competition for FHLBank System debt andadvances. To the extent the U.S. Government extends these programs or creates new programs, they may have resulted in new regulations which willa material adverse impact the FHLBanks.

Our net incomeprimary source of funds is attributablethe sale of consolidated obligations in the capital markets, including the short-term discount note market. Our access to funds in the difference betweencapital markets may be affected by the interest incomeactual or perceived credit rating of the FHLBank system or the U.S. Government. Negative perception or a downgrade in our credit rating may result in reduced investor confidence, which could adversely affect our cost of funds and the ability to issue consolidated obligations on acceptable terms. A higher cost of funds or an impaired ability to issue consolidated obligations on acceptable terms could also adversely affect the FHLBanks’ financial condition, results of operations, and value to our membership. While we earndo not believe the FHLBanks have suffered a material adverse impact on their ability to issue consolidated obligations, we cannot predict the effect of further changes in, or developments in regard to, these risks on our advances, mortgage loans, and investments andability to raise funds in the interest expense we paymarketplace or on other aspects of our consolidated obligations and member deposits, as well as any gains and losses on derivative and hedging activities. We operate with narrow margins and expect to be profitable based on our prudent lending standards, conservative investment strategies, and diligent risk management practices. Because we operate with narrow margins, the Bank’s net income is sensitive to changes in market conditions that impact the interest we earn and pay.operations.

Each of the FHLBanks relies upon the issuance of consolidated obligations as a primary source of funds. Consolidated obligations are the joint and several obligations of all FHLBanks, backed only by the financial resources of the FHLBanks. We are jointly and severally liable with the other FHLBanks for the consolidated obligations issued by the FHLBanks through the Office of Finance, regardless of whether the Bank receiveswe receive all or any portion of the proceeds from any particular issuance of consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation at any time, whether or not the FHLBank who was the primary obligor has defaulted on the payment of that obligation. Furthermore, the Finance Agency may allocate the liability for outstanding consolidated obligations among one or more FHLBanks on a pro rata basis or on any other basis the Finance Agency may determine. Accordingly, we could incur significant liability beyond our primary obligation under consolidated obligations. Moreover, we may not pay dividends to, or redeem or repurchase capital stock from, any of our members if timely payment of principal and interest on the consolidated obligations of the entire FHLBank System has not been made. As a result, our ability to pay dividends to our members or to redeem or repurchase shares of our capital stock may be affected not only by our own financial condition, but also by the financial condition of the other FHLBanks.

We attempt to mitigate credit risk through collateral requirements and credit analysis.analysis of our counterparties. We require collateral on advances, mortgage loan credit enhancements which may include SMI, letters of credit, certain investments, and derivatives. Specifically, we require that all outstanding advances and member provided mortgage loan credit enhancements be fully collateralized. We evaluate the types of collateral pledged by our borrowers and assign a borrowing capacity to the collateral, generally based on a percentage of its estimated market value. If a member or counterparty fails, the Bankwe would take ownership of the collateral covering our advances and mortgage loan credit enhancements. However, if the market price of the collateral is less than the obligation or there is not a market into which we can sell the collateral, the Bankwe may incur losses that could adversely affect our financial condition, results of operations, and value of the Bank to our membership.

Although management has policies and procedures in place to manage credit risk, the Bankwe may be exposed because the outstanding advance value may exceed the liquidation value of the Bank’sour collateral. The Bank mitigatesWe mitigate this risk through applying collateral discounts, requiring most borrowers to execute a blanket lien, taking delivery of collateral, and limiting extensions of credit. The BankWe may incur losses that could adversely affect our financial condition, results of operations, and value to our membership.

We realize income primarily from the spread between interest earned on our outstanding advances, mortgage assets (including MPF, MBS, HFA and SBA investments), non-mortgage investments, and interest paid on our consolidated obligations, member deposits, and other liabilities as well as components of other income. We may experience instances when either our interest bearing liabilities will be more sensitive to changes in interest rates than our interest earning assets, or vice versa. In either case, interest rate movements contrary to our position could negatively affect our financial condition, results of operations, and value of the Bank to our membership.

Advances to our members and eligible housing associates are secured by mortgages and other eligible collateral. Eligible collateral includes whole first mortgages on improved residential property or securities representing a whole interest in such mortgages; securities issued, insured, or guaranteed by the U.S. Government or any of the GSE’s, including without limitation MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae; cash deposited in the Bank; guaranteed student loans made under the Department of Education’s FFELP; and other real estate-related collateral acceptable to the Bankus provided such collateral has a readily ascertainable value and the Bankwe can perfect a security interest in such property. Additionally, CFIs may pledge collateral consisting of secured small business, small farm, or small agribusiness loans, including secured business and agri-business lines of credit. The Bank estimatesWe estimate the value of collateral securing each borrower’s obligations by using collateral discounts, or haircuts. Additionally, members can provide a blanket security agreement, pledging other assets as additional collateral.

In 2008, continuedContinued deterioration of economic conditions led to a significant decrease in real-estate property values in some parts of the country. As a result, real-estate collateral held by the Bankwe hold from itsour members may have decreased in value. In order to remain fully collateralized, the Bankwe required members to pledge additional collateral, when deemed necessary. This requirement may impact those members that lack additional assets to pledge as collateral. If members are unable to secure their obligations with the Bank, the Bank’sus, our advance levels could decrease, negatively impacting our financial condition, results of operations, and value of the Bank to our membership.

Over the last two years, the financial services industry has experienced increasing defaults on, among other things, home mortgage, commercial real estate, and credit card loans, which caused increased regulatory scrutiny and capital to Interest Rate Risk

Further, member failures may force us to liquidate pledged collateral if the outstanding advances are not repaid. The inability to liquidate collateral on terms acceptable to us may cause financial statement losses. Additionally, as members become financially distressed, in less liquidityaccordance with established policies, we may decrease lending limits or, in the derivatives market; (2) increased volatility in the marketplace due to uncertain economic conditions; and (3) increased uncertainty related to the potential change in regulations regarding over-the-counter derivatives.certain circumstances, cease lending activities. If wemember banks are unable to manageobtain sufficient liquidity from us it may cause further deterioration of those member institutions. This may negatively impact our hedging positions effectively, we may be unable to manage our interest ratereputation and, other risks, which may result in earnings volatility, and could adverselytherefore, negatively impact our financial condition and results of operations, and value of the Bank to our membership.operations.

Our mortgage assets provide homeowners the option to prepay their mortgages prior to maturity. The effect of changes in interest rates can exacerbate prepayment and extension risk, which is the risk that mortgage assets will be refinanced by the mortgagor in low interest rate environments or will remain outstanding longer than expected at below-market yields when interest rates increase. Our advances, consolidated obligations, and derivatives may provide us, the Bank, borrower, issuer, or counterparty with the option to call or put the asset or liability. These options leave the Bankus susceptible to unpredictable cash flows associated with our financial assets and liabilities. The exercise of the option and the prepayment or extension risk is dependent on general market conditions and if not managed appropriately could have a material effect on our financial condition, results of operations, and value of the Bank to our membership.