Top 10 Advances Borrowers

As of December 31, 2006

($ amounts in thousands, at par)

Top 10 Advances Borrowers

As of December 31, 2005

($ amounts in thousands, at par)

AdvancesAdvances.. Members have access to a wide array of Advances and other credit products. A breakdown of Advances, by primary product line, as of December 31, 2006,2007, and December 31, 2005,2006, is provided below.

Advances by Product Line

($ amounts in thousands, at par)

Our primary Advance products include:

our members. Our entire menu of Advance products is generally available to each creditworthy member, regardless of the member’s asset size. Advances are typically priced at standard spreads above our cost of funds. Our board-approved credit policy allows us to offer lower prices on certain types of Advances transactions. Determination of such prices is based on factors such as volume, maturity, product type, funding costs, and competitive factors including the level of a member’s competitivein regard to other sources of funds and other appropriate guidelines.

As of September 30, 2006, 41 members had assets in excess of $1 billion, and together they comprised approximately 76% of the total member asset base. As of December 31, 2006, our two largest Advance borrowers accounted for 18% of member assets, i.e., the total, cumulative assets of our member institutions, and 47% of Advances. One of these members was part of a holding company headquartered outside our district; although the sale of its wholesale mortgage operations was announced on January 22, 2007, we are still able to transact Advances with that member. The loss of either of these members would significantly impact our financial performance.funds.

Credit risk can be magnified if a lender concentrates its portfolio in a few borrowers. Because of our limited territory, Indiana and Michigan, and because of continuing consolidation among the financial institutions that comprise the members of the FHLB System, we have only a limited pool of large borrowers. At December 31, 2006,2007, our top 10 borrowers accounted for 64%65% of total Advances outstanding. Because of this concentration in Advances, we perform frequent credit and collateral reviews on our largest borrowers. In addition, we regularly analyze the implications to our financial management and profitability if we were to lose the business of one or more of these customers.

As of September 30, 2007, 47 of our 420 members had assets in excess of $1 billion, and together they comprised approximately 78% of the total member asset base, i.e., the total, cumulative assets of our member institutions. As of December 31, 2007, our two largest Advance borrowers accounted for 14% of member assets and 40% of Advances. One of these members is owned by a holding company headquartered outside our district that could decide to consolidate its bank charters or move our member’s charter to a location outside of our district. The member’s wholesale mortgage operations were sold on March 1, 2007, significantly reducing the member’s participation in our MPP. However, we are still able to transact Advances with that member. The loss of either of these largest Advance borrowers would significantly impact our financial performance.

Our geographic membership requirement limits the potential for adding new members. Also, mergers and charter consolidations are reducing the universe of potential members. During 20062007 and the first quarter of 2007,2006, we lost members due to mergers or charter consolidations. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Operation—Executive Summary” for more information.

Collateral. All credit products extended to a member must be fully collateralized by the member’s pledge of eligible assets. Each borrowing member and its affiliates that hold collateral are required to grant us a security

interest in such collateral. All such security interests held by us are afforded a priority by the Competitive

Equality Banking Act over the claims of any party, including any receiver, conservator, trustee, or similar party having rights as a lien creditor, except for claims held by actual bona fide purchasers for value or by parties that are secured by prior perfected security interests, provided that such claims would otherwise be entitled to priority under applicable law. In addition, our claims are given certain preferences pursuant to the receivership provisions of the Federal Deposit Insurance Act. Based on these factors, we do not typically require our borrowing members to deliver collateral to us, other than securities collateral. Further, we file UCC-1 financing statements with respect to all borrowing members and any affiliate that pledges collateral, except when collateral is otherwise perfected through physical possession. This gives us a perfected security interest with priority over all creditors unless a secured creditor perfects by taking possession of our collateral without notice of our lien.

We take collateral on a blanket, specific listing, or delivery basis depending on the credit quality of the borrower.borrower, type of institution and our review of conflicting liens. Acceptable collateral includes certain investment securities, one-to-four family mortgages,and multi-family mortgage loans, deposits in our Bank, and certain ORERC assets. While we only extend credit based on the borrowing capacity for such approved collateral, our contractual arrangements typically allow us to take other assets as collateral to provide additional protection, including the borrower’s stock in our Bank. Loans that violate our anti-predatory lending policyAnti-Predatory Lending Policy for collateral and delinquent loans do not qualify as acceptable collateral and are required to be removed from any collateral value calculation.Atcalculation.

At year-end 2006,2007, ORERC reported by our members accounted for approximately $3.7$4.5 billion of borrowing capacity, compared to approximately $2.5$3.7 billion of borrowing capacity at December 31, 2005.2006. We have gradually implemented acceptance of newer collateral types as authorized by the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) amendment to the Bank Act. Typically, Advances must be over-collateralized based on the type of collateral, with standard requirements ranging from 100% for deposits (cash) to 145% for residential mortgages held under blanket lien status.liens. Less traditional types of collateral such as home equity loans and commercial real estate loans have coverage ratios up to 200%. Over-collateralization requirements are applied using market values for collateral in listing and delivery status and using book value for collateral pledged on blanket status. In no event would market values on whole loan residential collateral exceed par.

We verify collateral balances by performing periodic, on-site collateral audits on each of our borrowing members, which has allowedallows us to decreaseverify loan pledge eligibility, loan credit quality and loan documentation quality, as well as adherence to our Anti-Predatory Lending Policy and Subprime and Nontraditional Residential Mortgage Policy. In addition, on-site collateral coverage requirements for home equity loans, lines ofaudit findings are used to adjust over-collateralization amounts to mitigate credit risk and commercial real estate loans.loan liquidity concerns. Due to the security provided by collateral, management does not believe that loan loss reserves need to be held against Advances.

Affordable Housing and Community Investment Programs.Each Federal Home Loan Bank is required to set aside 10% of its annual net earnings, before interest expense for Mandatorily redeemable capital stock that is classified as debt and after the REFCORP assessment, to fund its AHP (subject to an annual FHLB System-wide minimum of $100 million). Through our AHP, we can provide cash grants or interest subsidies on Advances to our members, which are, in turn, provided to qualified individuals to finance the purchase, construction, or rehabilitation of low- to moderate-income owner-occupied or rental housing. Our AHP includes the following programs:

In addition to AHP, we also offer a variety of specialized Advance programs to support housing and community development needs. Through our Community Investment Program,CIP, we offer Advances to our members that are involved in community economic development activities benefiting low- or moderate-income families or neighborhoods. These Advances have maturities ranging from 30 days to 20 years and are priced at our cost of funds plus reasonable administrative expenses. These funds can be used for the development of housing, infrastructure improvements, or assistance to small businesses or businesses that are creating jobs in the member’s community for low- and moderate-income families. Advances made under our Community Investment Program, which are not part of the AHP assessment,CIP comprised 1.1%2.6% of our total Advances outstanding, at par, at December 31, 2006;2007, and 2.8%2.9% at December 31, 2005.

During 2007, we began offering HomeRetain with $100 million available ($50 million each for Indiana and Michigan members) to encourage members to provide mortgage modification or refinancing to homeowners with incomes at or below 115 percent of the U.S. Department of Housing and Urban Development area median incomes (family of four not adjusted for family size) who are at risk of delinquency or default.

Investments. We maintain a portfolio of investments, purchased from non-member counterparties, other Federal Home Loan Banks, or members and their affiliates, to provide liquidity and enhance our earnings. Our portfolio of low-risk, short-term investments in highly-rated entities, principally short-term federal funds, ensures the availability of funds to meet our members’ credit needs. The longer term investment portfolio provides higher returns and may consist of securities issued by the U.S. government and its agencies, other GSEs, mortgage-backed securities (“MBS”), and asset-backed securities (“ABS”) that are issued by government-sponsored mortgage agencies or private issuers, and securities that carry high ratings from Moody’s Investor Service (“Moody’s”), Standard and Poor’s Rating Service (“S&P”) or Fitch Ratings (“Fitch”). Our investments in housing GSEs are not guaranteed by the U.S. government.

AsAll unsecured investments, such as federal funds, including those with our members or their affiliates, are subject to selection criteria, including capital, legal structure and credit rating. Each unsecured counterparty has an exposure limit, which is computed in the same manner, regardless of December 31, 2004, we held $235 million par valuethe counterparty’s status as a member, affiliate of COs that were issueda member or unrelated party. The limitations are subject to periodic review by other Federal Home Loan Banks. These securities were sold duringour Treasury Risk Management Department. This review may result in a reduction of the third quarterline of 2005. The Finance Board issued a regulatory interpretation, dated March 30, 2005, that clarified thatcredit or the Federal Home Loan Banks maypermissible term of the investment.

Investments in MBS are not directly purchase COs issued by other Federal Home Loan Bankssubject to specific issuer limitations if the credit rating of the security is primarily derived from the Office of Finance or an initial underwriter. On December 14, 2005, the Finance Board issued a waiver of this regulation to the Office of Finance for the benefitstructure of the Federal Home Loan Banks, to the extent that a direct placement of a CO issued by a Federal Home Loan Bank to another Federal Home Loan Bank is necessary to ensure the timely payment of all principal and interest due on COs on a particular day. This waiver was requested to prevent the occurrence of daylight overdrafts resulting from changes made by the Federal Reserve Board in its payment procedures, which were effective on July 20, 2006. The Federal Home Loan Banks and the Office of Finance entered into an agreement on June 23, 2006 and implemented procedures to govern the placement of these COs and their repayment prior to July 20, 2006. The Finance Board has specified, however, that the Federal Home Loan Bank that is required to place a CO with another Federal Home Loan Bank shall pay interest on its obligation at a rate that is at least 500 basis points above the federal funds rate. No additional purchases of COs that have been issued by other Federal Home Loan Banks are currently planned, except to the extent necessary to deal with these payment delays.security. We do not purchase MBS issued by other Federal Home Loan Banks, although we have made MBS purchases issued by affiliates of our members.

Under the Finance Board’s regulations, we are prohibited from investing in the following types of securities:

The Finance Board’s regulations further provide that the total book value of our investments in MBS and ABS must not exceed 300% of our Total regulatory capital, consisting of Retained earnings, Class B stock, and Mandatorily redeemable capital stock, as of the previous month-end capital on the day we purchase the securities. If our outstanding investments in MBS and ABS exceed the limitation at any time, but were in compliance at the time we purchased the investments, we would not be considered out of compliance with the regulation but we would not be permitted to purchase additional MBS or ABS until we were back within the capital limitation.

Due to our repurchases of excess stock during 2006, our MBS portfolio temporarily exceeded the regulatory limit of three times our Total regulatory capital. We were in compliance with the regulatory limit at the time we purchased the MBS, but our MBS holdings exceeded the regulatory limit at December 31, 2006, and we were precluded from purchasing additional MBS until the first quarter of 2007 when the outstanding principal amount of our holdings fell below three times our Total regulatory capital. We are currently in compliance with this regulation, and we were in compliance at December 31, 2007. See “Item 7. Management’s Discussion and Analysis – Recent Accounting and Regulatory Developments” for information concerning a temporary increase in our investment authority passed by the Finance Board on March 24, 2008.

In addition, we are prohibited from purchasing:

Due to our repurchases of excess stock during 2006, our MBS portfolio currently exceeds the regulatory limit of three times our Total regulatory capital, consisting of Retained earnings, Class B stock, and Mandatorily redeemable capital stock. We were in compliance with the regulatory limit at the time we purchased our current MBS, so we are not required to sell any of our MBS and are not considered to be out of compliance with the regulatory limit. However, we are precluded from purchasing additional MBS until the outstanding principal amount of our current holdings falls below three times our Total regulatory capital.

All unsecured investments, such as federal funds, including those with our members or their affiliates, are subject to the same selection criteria. These criteria include capital, legal structure and credit rating. Each unsecured counterparty has an exposure limit, which is computed in the same manner, regardless of the counterparty’s status as a member, affiliate of a member or unrelated party. The limitations are subject to qualitative review by our Credit Department. This review may result in a reduction of the line of credit or permissible term of the investment.

Investments in MBS that are issued by a member, affiliate of a member, or an unrelated party are not subject to specific issuer limitations if the credit rating of the security is primarily derived from the structure of the security.

Deposits.Deposit programs provide a portion of our funding resources, while also giving members a high quality earning asset that satisfies their regulatory liquidity requirements. We offer several types of deposit programs to our members and other institutions including overnight and demand deposits. We may accept uninsured deposits from:

The following table shows the composition of our deposits as of December 31, 2006,2007, and December 31, 2005:2006:

Composition of Deposits

($ amounts in thousands)

To support deposits, the Bank Act requires us to have an amount equal to the current deposits invested in obligations of the United States, deposits in eligible banks or trust companies, or Advances with a maturity not exceeding five years.

As the following table shows, we were in compliance with the Bank Act liquidity requirements for deposits as of December 31, 2006,2007, and December 31, 2005.2006.

Liquidity Deposit Reserves

($ amounts in thousands)

On July 20, 2006, the Federal Reserve Board began requiring the Federal Reserve Banks to release interest and principal payments on securities issued by GSEs and international organizations only when the issuer’s Federal Reserve account contained sufficient funds to cover these payments. Prior to this, the Federal Reserve Banks had been processing and posting these payments to depository institutions’ Federal Reserve accounts by 9:15 a.m. Eastern Time, the same posting time as for U.S. Treasury interest and principal payments, even if the issuer had not fully funded its payments. On June 23, 2006, along with the eleven other Federal Home Loan Banks and the Office of Finance, we entered into the Federal Home Loan Banks P&I Funding and Contingency Plan Agreement to prevent any negative impact from the change in the Federal Reserve Board’s payment schedule. There has been no significant impact to our business as a result of this new Federal Reserve Board requirement.

Mortgage Purchase Program

We began purchasing mortgage loans directly from our members through our MPP in the second quarter of 2001. By regulation, we are not permitted to purchase loans from any seller that is not a member of the FHLB System, and we do not use a trust or other entity to purchase the loans for us. We purchase conforming, medium- or long-term, fixed-rate, fully amortizing, level payment loans predominantly for primary, owner-occupied, detached residences, including single-family properties, and two-, three-, and four-unit properties. Additionally, to a lesser degree, we purchase loans for primary, owner-occupied, attached residences (including condominiums and planned unit developments), second/vacation homes, and investment properties.

All of our mortgage loan purchases are governed by a Finance Board regulation adopted in 2000, as amended. Prior to that time, the Federal Home Loan Banks could only purchase mortgage loans based upon individual approvals from the Finance Board. Further, while the regulation does not specifically limit us to purchasing fixed-rate loans, we would need to comply with the Finance Board’s regulation on new business activities to purchase adjustable-rate loans. The Finance Board regulations provide that any material changes to mortgage purchase programs that have a different risk profile would need to be approved by the Finance Board as a new business activity.

On October 27, 2006, the Finance Board approved our proposal to offer pool aggregation under our MPP. Our pool aggregation program is designed to reduce the credit enhancement costs to

small and mid-size members participating in the program. Members that participate in the MPP, known as “sellers”,“sellers,” are allowed to pool their loans with similar pools of loans originated by other sellers to create an aggregate pool of loans of approximately $100 million each. The costscost of obtaining supplemental mortgage insurance (“SMI”) for a pool of $100 million is less than the costscost of obtaining SMI for each of the smaller separate pools of loans.

The MPP was originally developed by our Bank and the Federal Home Loan Banks of Seattle and Cincinnati. These three Banks jointly developed the software and documentation for the MPP. In the event that another Federal Home Loan Bank wishes to purchase the MPP software and documentation to start its own program, the initial three MPP Banks, and each other Federal Home Loan Bank that has acquired the software and documentation, have agreed to determine a reasonable purchase price that is then shared with all the participating Banks on a pro ratapro-rata basis. The Federal Home Loan Bank of Atlanta purchased the software and documentation package and began its own program in April 2003. The Federal Home Loan Bank of Pittsburgh has purchased the software and documentation package, but has not initiated its program. Although each Bank operates its program separately, these Banks still cooperate on various technical issues common to their programs, excluding the Federal Home Loan Bank of Seattle, which discontinued its program in 2005.

All loans we purchase must meet guidelines for our MPP or be specifically approved as an exception based on compensating factors. Our guidelines are also accepted by our approved SMI providers and generally meet the underwriting standards of Fannie Mae and Freddie Mac. For example, the maximum loan-to-value for any mortgage loan purchased is 95%, and the borrowers must meet certain minimum credit scores depending upon the type of property or loan. Further, we will not knowingly purchase any loan that violates the terms of our anti-predatory lending policy.Anti-Predatory Lending Policy or our Subprime and Nontraditional Residential Mortgage Policy.

Sellers must complete all application documents and be in sound financial condition as determined by our Credit Department’s underwriting standards. In addition, a seller must meet the following requirements:

Our earnings from the MPP are comprised of the monthly interest payments we receive, which are computed on each loan at the mortgage note rate multiplied by the principal balance outstanding, adjusted for the following:

Government-insured (FHA) mortgage loans are considered to have a 100% United States government guarantee on the mortgage loans and, therefore, we believe that we have no credit risk exposure from these loans so no additional credit enhancements (such as an LRA or SMI) are required.

We consider the cost of the LRA and SMI when we formulate conventional loan pricing. Each of these credit enhancement structures is accounted for not only in our expected return on our acquired mortgage loans, but also in the risk review performed during the accumulation/pooling process. The pricing of each structure is dependent on a number of factors and is specific to the seller.seller or group of sellers.

We do not service the mortgage loans we purchase. Sellers may elect to retain servicing rights for the loans sold to us, or they may elect to sell servicing rights to an MPP-approved servicer. The servicers are responsible for all aspects of servicing, including, among other things, the administration of the foreclosure and claims processes, from the date we purchase the loan until the loan has been fully satisfied. In the past, we required payments only on a scheduled/scheduled basis, which meant that we received scheduled monthly principal and interest from the servicer, regardless of whether the mortgagee was making payments to the servicer. On June 1, 2006, we began offering an actual/actual remittance option. Under actual/actual servicing agreements, the servicers remit payments only as they are received from the borrowers.

Currently, Washington Mutual Bank, FA is the only approved servicer to which servicing rights may be sold.sold when we originally purchase the mortgage loans. Those sellers that retain servicing rights receive a monthly servicing fee, which currently averages 28.3628 basis points annually. The sellers that retain servicing rights must be approved by us and undergo an audit by a third party quality control contractor that advises the sellers of any deficiencies in servicing procedures or processes and then notifies us so that we can monitor their performance. The sellers that retain servicing rights can sell them at a later date, with approval from our Bank. Servicing activities, whether retained or released, are subject to review by our master servicer, Washington Mutual Mortgage Securities Corporation. If we deem servicing to be inadequate, we can require that the servicing of those loans be transferred to a servicer that is acceptable to us.

Under current regulations, all pools of mortgage loans purchased by us, other than government-insured mortgage loans, must have sufficient credit enhancement so that the pools of loans are at least investment grade. Further, additional risk-based capital must be maintained against the pools of mortgage assets that have an implied credit rating of less than AA. Therefore, we generally limit the pools of mortgage loans that we will purchase to those with an implied S&P credit rating of at least AA.

The required credit enhancement to reach the expected credit rating is determined by using S&P’s LEVELS™ Rating Model. An LRA is then established in an amount sufficient to achieve the expected credit rating. Credit losses on defaulted mortgage loans in the pool are paid from these sources in the following order:

The LRA is funded through a reduction to the net yield earned on loans and the corresponding purchase price paid to the member and is paid out of the periodic interest payments on the loans. As these funds are collected, they are held in escrow and used to pay the SMI deductible or to reimburse losses incurred by us or the SMI provider. If the mortgage loans perform better than expected, the remaining funds in the LRA are returned to the member, thus encouraging the member to sell us only good quality loans. SMI is added on any pools of loans where, after application of the LRA, the loan-to-value of the pool is still higher than 50%. The average LRA annual cost allocation is 7.347.32 basis points of the principal balance of the pool of loans sold, and the average SMI premium is 8.518.38 basis points. Any losses that exceed the funds available from the above sources would be absorbed by us.

We do not receive any transaction or other fees other than a 0.25% to 0.75% fee on cash-out refinancing transactions, and a 1.5% fee on loans on investment properties and certain additional fees for loans with low FICO scores and high loan-to-value ratios that are consistent with industry standards. We also adjust the market price we pay for loans depending upon market

conditions. We continue to evaluate the scope and rate of such fees as they evolve in the industry and may change our fee structure to be similar to those of the other GSEs. We do not pay the sellers any fees other than the servicing fee discussed above when the seller retains the servicing rights.

Our current SMI providers are Mortgage Guaranty Insurance Corporation (“MGIC”) and Genworth Financial.Residential Mortgage Insurance Corporation of North Carolina (“Genworth”). We enter into the insurance directly with the SMI provider, but a contract is written for each pool or aggregate pool. Pursuant to Finance Board regulation, the seller must be responsible for all expected credit losses on the mortgages sold to us. Therefore, the seller is the purchaser of the SMI policy and we are designated as the beneficiary. Although we remit the insurance payments to the SMI provider, the payments are the responsibility of the seller. We collect the SMI premiums from the monthly mortgage remittances received from the sellers or their designated servicer and remit them to the SMI provider as an administrative convenience.

Finance Board regulations require that all providers of SMI be rated not lower than AA-, and our sellers are legally obligated to maintain such insurance with an insurer rated not lower than AA-. If at any time one of our SMI providers is downgraded below AA-, we would be required by the Finance Board to seek replacement insurance from another company that meets the rating requirement. Alternatively, we may be required to seek regulatory forbearance if such alternative insurance is unavailable. Depending upon market conditions at that time, the cost of replacement insurance could be higher than the current cost, which could have a material adverse impact on the profitability of our MPP portfolio.

The following table presents the concentration of SMI insurance on our conventional loans as of December 31, 2007, and the current related credit ratings of our SMI providers:

It is the servicer’s responsibility to initiate loss claims on the loans. No payments from the LRA (other than amounts returned to the seller as described in Note 1 to the financial statements) or SMI are made prior to initiation of the foreclosure or claims process. Once it is determined that a loss is insurable, the SMI provider pays the claim in full and seeks reimbursement from the LRA. The SMI provider is entitled to reimbursement for credit losses from funds available in the LRA that are equal to the aggregate amounts contributed to the LRA less any amounts paid for previous claims and any amounts that have been released from the LRA and paid to us. If the LRA is still being funded, the SMI provider could make claims against those payments as they are received up to the full reimbursable amount of the claim, and these amounts would be reflected as additional deductions from the LRA as they were paid. Although losses not covered by the LRA or the SMI would be absorbed by us, the LRA and SMI are generally sufficient to protect us from any loss in an amount up to approximately 50% of the home’s original value, with the presumption that the home’s then current collateral value, together with primary mortgage insurance, if any, would be sufficient to equal at least 50% of the original value at the time the loss is computed. See “Item 7. Financial Information —– Management’s Discussion and Analysis of Financial Condition and Results of Operations —– Risk Management —– Credit Risk Management” for further information.

In the first quarter of 2005, we negotiated to obtain an aggregate loss/benefit limit or “stop-loss” on any master commitment contracts that equal or exceed $35,000,000. The stop-loss is equal to the total initial principal balance of loans under the master commitment contract multiplied by the stop-loss percentage, as is then in effect, and represents the maximum aggregate amount payable by the SMI provider under the SMI policy for that pool. Even with the stop-loss provision, the aggregate of the LRA and the amount payable by the SMI provider under an SMI stop-loss contract will be equal to or greater than the amount of credit enhancement required for

the pool to have an implied S&P credit rating of at least AA.AA at the time of purchase. Non-credit losses, such as uninsured property damage losses which are not covered by the SMI, can be recovered from the LRA to the extent that there has been no credit loss claim on those LRA funds.

MPP Concentration. Based upon the average balances of MPP loans outstanding, at par, and imputing the amount of interest income, no member contributed interest income that exceeded 10% of our totalTotal interest income for the yearyears ended December 31, 2007, or December 31, 2006. Our board has established a limit of 50% of the MPP loans outstanding purchased from any one MPP seller. Loans purchased from one MPP customer, LaSalle Bank Midwest NA, contributed interest income that exceeded 10% of our total interest income for the year ended December 31, 2005. Total mortgage loans outstanding as of December 31, 2005, purchased from LaSalle Bank Midwest NA were $4.1 billion or 42.7% of total mortgage loans outstanding, at par. The amount of imputed interest income earned during the year ended December 31, 2005, from mortgage loans purchased from LaSalle Bank Midwest NA was $199.9 million or 11.1% of total interest income.

On January 22,March 1, 2007, LaSalle Bank Midwest NA, announced the sale ofsold its subsidiary, ABN AMRO Mortgage Group to Citigroup. The loss of this MPP seller’s mortgage subsidiary willcould have a materialan adverse effectimpact on this segment.segment’s Net Income. Our MPP purchase volume has declined due to the loss of this seller’s mortgage subsidiary and our other two large sellers. We lost one of these two large MPP sellers due to an out-of-district merger, and the other one sold its primary mortgage origination subsidiary that produced most of the loans that we purchased from it. Going forward, we expect that the outstanding balance of our MPP loans could continue to decline due to the loss of these three large sellers. See the sections entitled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” and “Item 1A. RISK FACTORS —Risk Factors – Loss of One or More Large Customers Could Adversely Impact Us.”

Funding Sources

The primary source of funds for each of the Federal Home Loan Banks is the sale of debt securities, known as COs, in the capital markets. The Finance Board’s regulations govern the issuance of debt on our behalf and authorize us to issue COs, through the Office of Finance, our agent, under Section 11(a) of the Bank Act. By regulation, all of the Federal Home Loan Banks are jointly and severally liable for the COs issued under Section 11(a). No Federal Home Loan Bank is permitted to issue individual debt under Section 11(a) without the approval of the Finance Board.

While COs, which consist of bondsBonds and Discount Notes,notes, are, by regulation, the joint and several obligations of the Federal Home Loan Banks, the primary liability for COs issued to provide funds for a particular Federal Home Loan Bank rests with that Bank. COs are backed only by the financial resources of the Federal Home Loan Banks, and there has never been a default in the payment of any CO. Although each Federal Home Loan Bank is a GSE, COs are not obligations of, and are not guaranteed by, the U.S. government. The Moody’s and S&P ratings for COs of Aaa and AAA, respectively, reflect the likelihood of timely payment of principal and interest on the COs. The aggregate par amount of the FHLB System’s outstanding COs was approximately $1,189.7 billion at December 31, 2007, and $951.7 billion at December 31, 2006, and $937.5 billion at December 31, 2005.2006.

Although we are primarily liable for those COs that are issued on our behalf, we are also jointly and severally liable, along with the other Federal Home Loan Banks, for the payment of principal and interest on COs of all the Federal Home Loan Banks. If the principal or interest on any CO wasis not paid in full when due, we couldwill not be allowed to pay dividends to, or redeem or repurchase shares of stock from, any of our members. The Finance Board, in its discretion, may require us to make principal or interest payments due on any Federal Home Loan Bank’s COs. To the extent that we make any payment on a CO as to which we are not the primary obligor, we are entitled to reimbursement from the Federal Home Loan Bank that is the primary obligor. However, if the Finance Board determines that such Federal Home Loan Bank is unable to satisfy its obligations, then the Finance Board may allocate the outstanding liability among the remaining Federal Home Loan Banks on a pro ratapro-rata basis in proportion to each Federal Home Loan Bank’s participation in all COs outstanding, or on any other basis the Finance Board may determine.

The Finance Board’s regulations also state that we must maintain the following types of assets free from any lien or pledge in an amount at least equal to the amount of COs outstanding on our behalf:

The following table shows a comparison of the aggregated amount of the above-noted asset types to the total amount of outstanding COs issued on our behalf as of December 31, 2006,2007, and December 31, 2005,2006, and verifies that we maintain assets in excess of our required amounts. The amount of aggregate qualifying assets and COs reflects the effects of SFAS 133 fair value hedging adjustments.

Aggregate Qualifying Assets

($ amounts in thousands)

Office of Finance

The issuance of the COs is facilitated and executed by the Office of Finance. It also services all outstanding debt, provides information on capital market developments, manages our relationship with the rating agencies with respect to COs, and administers payments to REFCORP and the Financing Corporation. These two corporations were established by Congress in the 1980s to help recapitalize the savings and loan industry’s deposit insurance fund and resolve insolvent savings institutions. The Office of Finance serves as the Federal Home Loan Banks’ fiscal agent for debt issuance and can control the timing and amount of each issuance. The U.S. Treasury can affect debt issuance for the Federal Home Loan Banks through its oversight of the U.S. financial markets. See “Supervision and Regulation —– Government Corporation Control Act” herein.

REFCORP

The purpose of REFCORP is to provide funds to the Resolution Trust Corporation (“RTC”) to allow it to resolve troubled savings and loan institutions in receivership during the 1980s and early 1990s. REFCORP has no employees but instead uses the officers, employees, and agents of the Federal Home Loan Banks. It is subject to such regulations, orders, and directions as the Finance Board prescribes. REFCORP was authorized by Congress in 1989 to issue bonds, notes, debentures, and similar obligations in an aggregate amount not to exceed $30 billion. REFCORP obligations are not obligations of, or guaranteed as to principal by, the FHLB System, the Federal Home Loan Banks, or the U.S. government. However, the U.S. government pays interest on such obligations as required, and, by statute, 20% of the net earnings after operating expenses and AHP expense of each Federal Home Loan Bank is used to fund the interest payments on these obligations.

In 1989, Congress established the amount of the total interest payments to be paid by the Federal Home Loan Banks at $300 million per year, or $75 million per quarter. A regulatory formula, which is no longer applicable, established how the $300 million was to be allocated among the Federal Home Loan Banks and how funding shortfalls were to be addressed. In 1999, the GLB Act changed the annual assessment to a flat rate of 20% of net earnings after operating expenses and AHP expense for each Federal Home Loan Bank. Because this amount cannot be changed without further legislation, the expiration of the obligation is shortened as payments in excess of $75 million per quarter are accrued by the 12 Federal Home Loan Banks. As specified in the Finance Board regulation that implemented Section 607 of the GLB Act, the payment amount in excess of the $75 million required quarterly payment is used to simulate the purchase of zero-coupon treasury bonds to defease all or a portion of the most distant remaining $75 million quarterly payment. The Finance Board, in consultation with the Secretary of Treasury, selects the appropriate zero-coupon yields used in this calculation.

Through December 31, 2006,2007, the Federal Home Loan Banks have exceeded the $300 million annual annuity requirements for all years between 2000 and 2006.2007, effectively accelerating payment of the REFCORP obligation and shortening its remaining term to October 15, 2013. The Federal Home Loan Banks’ aggregate payments through 2007 have satisfied $24 million of the $75 million scheduled payment due on October 15, 2013, and all scheduled payments thereafter, assuming that the Federal Home Loan Banks will pay exactly $300 million annually after December 31, 2007, until the annuity is satisfied. These defeased payments, or portions thereof, could be

restored in the future if actual REFCORP payments of the 12 Federal Home Loan Banks fall short of $75 million in any given quarter. Contributions to REFCORP will be discontinued once all obligations have been fulfilled. However, due to the interrelationships of all future earnings of the 12 Federal Home Loan Banks, we are not able to determine the total cumulative amount to be paid by our Bank to REFCORP.

Consolidated Obligation Bonds

Consolidated Obligation bonds (“CO Bonds”) satisfy term funding requirements and are issued with a variety of maturities and terms under various programs. The maturities of these securities can range from 1 yearsix months to 30 years, but the maturities are not subject to any statutory or regulatory limit. The CO Bonds can be fixed or adjustable rate and callable or non-callable. They are issued and distributed daily through negotiated or competitively bid transactions with approved underwriters or selling group members.

We request funds primarily through automated systems developed by the Office of Finance. Our request may include parameters such as program type, issuance size, pricing and coupon levels, maturity, and option characteristics. We receive 100% of the proceeds of a bond issued via direct negotiation with underwriters of FHLB System debt when we are the only Federal Home Loan Bank involved in the negotiation; consequently, we are the primary obligor on that CO Bond. When, along with one or more of the other Federal Home Loan Banks, we jointly negotiate the issuance of a CO Bond directly with underwriters, we receive a portion of the proceeds of the CO Bond agreed upon with the other Federal Home Loan Banks; in those cases, we are the primary obligor for a pro-rata portion of the CO Bond based on the amount of proceeds we receive. The majority of our CO Bond issuances, including both those that do and do not involve participation by other Federal Home Loan Banks, are conducted via direct negotiation with underwriters of the FHLB System CO Bonds.

We may also request specific amounts of particular CO Bonds to be offered by the Office of Finance for sale via competitive auction conducted with underwriters in a bond selling group. One or more other Federal Home Loan Banks may also request that amounts of those same CO Bonds be offered for sale for their benefit via the same auction. We may receive from 0% to 100% of the proceeds of the Bonds issued via competitive auction depending on: (a) the amounts and costs for the CO Bonds bid by the underwriters; (b) the maximum costs we, and any other Federal Home Loan Bank(s) participating in the same issue, are willing to pay for the CO Bonds; and (c) guidelines for allocation of CO Bond proceeds among multiple participating Federal Home Loan Banks as administered by the Office of Finance.

Discount Notes

We also issue Discount Notesnotes to provide short-term funds for Advances to members and for other investments. These securities can have maturities upthat range from one day to 360 days,one year, and are offered daily through a Discount Notenote selling group and through other authorized securities dealers. Discount Notesnotes are sold at a discount and mature at par.

On a daily basis, we may request specific amounts of Discount Notesnotes with specific maturity dates to be offered by the Office of Finance at a specific cost for sale to underwriters in the Discount Notenote selling group. One or more other Federal Home Loan Banks may also request that Discount Notesnotes with the same maturities be offered for sale for their benefit on the same day. The Office of Finance commits to issue Discount Notesnotes on behalf of the participating Federal Home Loan Bank(s) when underwriters in the selling group submit orders for the specific Discount Notesnotes offered for sale. We may receive from 0% to 100% of the proceeds of the Discount Notesnotes issued via this sales process depending on: (a) the maximum costs we or the other Federal Home Loan Banks participating in the same discountDiscount notes, if any, are willing to pay for the Discount Notes;notes; (b) the amounts of orders for the Discount Notesnotes submitted by underwriters; and (c) guidelines for allocation of Discount Notenote proceeds among participating Federal Home Loan Banks administered by the Office of Finance.

Twice weekly, we may also request that specific amounts of Discount Notesnotes with fixed maturity dates ranging from 4 weeks to 26 weeks be offered by the Office of Finance for sale via competitive auction conducted

with underwriters in the Discount Notenote selling group. One or more other Federal Home Loan Banks may also request amounts of those same Discount Notesnotes be offered for sale for their benefit via the same auction. The Discount Notesnotes offered for sale via competitive auction are not subject to a limit on the maximum costs the Federal Home Loan Banks are willing to pay. We may receive from 0% to 100% of the proceeds of the Discount Notesnotes issued via competitive auction depending on: (a) the amounts and costs for the Discount Notesnotes bid by underwriters; and (b) guidelines for allocation of Discount Notenote proceeds among multiple participating Federal Home Loan Banks administered by the Office of Finance.

Other Indebtedness

Although the majority of our total indebtedness consists of CO Bonds and Discount Notesnotes outstanding, and deposits from our members, we are also obligated to pay other liabilities owed and payable in the form of:

A summary of our total indebtedness at December 31, 2006,2007, and December 31, 2005,2006, follows.

Total Indebtedness

($ amounts in thousands)

address corporate and accounting fraud and establish a new accounting oversight board that enforces auditing standards and restricts the scope of services that accounting firms may provide to their public company audit clients. Among other things, SOX

Under SOX, the SEC is required to regularly and systematically review corporate filings, based on certain enumerated factors. To deter wrongdoing, SOX

Federal and State Banking Laws

We are not generally subject to the state and federal banking laws affecting retail depository financial institutions in the U.S. However, as we do provide our members with certain correspondent services, such as wire transfer services, our activities are subject to the Bank Secrecy Act, as amended by the U.S. Patriot Act. We are, therefore, required to report suspicious activity involving the movement of large amounts of cash or the attempted wire transfer of funds to persons or countries that are on the U.S. government’s restricted list. Further, we may become subject to additional requirements if the U. S. Treasury issues regulations governing our activities in this area.

As a wholesale secured lender and a secondary market purchaser of mortgage loans, we are not directly subject to the various federal and state laws regarding consumer credit protection, such as anti-predatory lending laws. However, as non-compliance with these laws could affect the value of these loans as collateral or acquired assets, we require our members to warrant that all of the loans pledged or sold to us are in compliance with all applicable laws. The Finance Board advised all of the Federal Home Loan Banks in August 2005 that they must have a policy in place that requires members to comply with applicable anti-predatory lending laws with respect to both pledged collateral and mortgage loans to be sold to us. In November 2005, our board adopted anti-predatory lending policiesAnti-Predatory Lending Policies for both collateral and acquired member assets that prohibited the pledge or sale of such loans from our members to us. After additional discussions with the Finance Board, our board adopted a revised policy in June 2006.

Proposed Changes in GSE Regulation

Since mid-2003,Congress is considering proposed legislation that is designed to strengthen the housing-related GSEs, includingregulation of Fannie Mae, Freddie Mac and the Federal Home Loan Banks have come under increased scrutiny by Congress because of accounting and financial issues raised by certainto address other GSE reform issues. The House Financial

Services Committee approved a GSE regulatory agencies. Consequently, numerous legislative proposals have been introduced in Congressreform bill (H.R. 1427), which would, among other things, establish a new regulator for the purpose of enhancing regulatory oversight. Some ofhousing GSEs. On May 22, 2007, the proposals have included capping the size of Fannie Mae’s and Freddie Mac’s mortgage portfolios, creation of a new affordable housing fund from Fannie Mae’s and Freddie Mac’s profits, and the combination of the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, and the Finance Board into a new regulatory agency. The U.S. House of Representatives passed H.R. 1427. The Senate Banking Committee held hearings on GSE reform legislation in February 2008, but has not yet introduced a bill containing these provisions in October 2005. However, the bill expired without action by the U.S. Senate and new bills are being considered by both the House and the Senate.on GSE reform. It is impossible to predict what, ifwhether any provisions relating to the Finance Board and the Federal Home Loan Banks will be included in any such legislation

that might be approved by Congress, and what such provisions may be. It is further impossible to predict whether the Senate will approve such legislation and whether any such change in regulatory structure will be signed into law.

Any changes made by Congress Finally, it is impossible to predict when any such change would go into effect if it were to be enacted, and what effect the housing-related GSEs regulatory structure may also impactlegislation would ultimately have on the structure and operation ofFinance Board or the Office of Finance. These changes could have a material adverse effect on future earnings, shareholder returns and our ability to fulfill our mission.Federal Home Loan Banks.

Regulatory Enforcement Actions

While examination reports are confidential between the Finance Board and a Federal Home Loan Bank, the Finance Board may publicly disclose supervisory actions or agreements that the Finance Board has entered into with a Federal Home Loan Bank. The Finance Board entered into two such agreements, with the Federal Home Loan Bank of Chicago and the Federal Home Loan Bank of Seattle, in 2004. As the Federal Home Loan Banks issue COs jointly, these agreements may adversely affect our cost of funds. The Seattle Bank was released from its supervisory agreement in January 2007.

SeveralOn October 10, 2007, the Federal Home Loan Bank of Chicago entered into a consensual cease and desist order (“Order”) with the Finance Board, which concurrently terminated the prior supervisory agreement. The Order states that the Finance Board has determined that requiring the Federal Home Loan Bank of Chicago to take the actions specified in the Order will “improve the condition and practices of the Federal Home Loan Banks, including our Bank restated prior year financial statements, resulting inof Chicago, stabilize its capital, and provide the Federal Home Loan Bank of Chicago an opportunity to address the principal supervisory concerns identified by the Finance Board”.

The Order places several restrictions on the Federal Home Loan Bank of Chicago:

Federal Home Loan Bank of Chicago management believes that the requirements under the Order could result in delays couldor denials of capital stock redemptions in connection with membership withdrawal or termination and significantly reduce dividend levels compared to recent period dividends.

On August 8, 2007, the Federal Home Loan Banks of Chicago and Dallas jointly announced that they are engaged in discussions aimed at evaluating the benefits and feasibility of combining the business operations of their two institutions. They have that effect.not yet announced a definitive agreement.

Tax Status/Assessments

Although we are exempt from all federal, state, and local taxation, except for real propertyestate taxes, we are obligated to make payments to REFCORP in the amount of 20% of net earnings after operating expenses and AHP expense. Additionally, in the aggregate, the 12 Federal Home Loan Banks are required annually to set aside, for the AHP, the greater of $100 million or 10% of the current year’s net earnings before interest expense for Mandatorily redeemable capital stock that is classified as debt (but after expenses for REFCORP). Currently, combined assessments for REFCORP and the AHP are approximately the equivalent of a 26.7% effective income tax rate. Despite our tax exempttax-exempt status, any cash dividends issued by us to members are taxable dividends to the members and do not benefit from the exclusion for corporate dividends received exclusion. received.

The preceding sentencetax information is for general information only. It is not tax advice. Members should consult their own tax advisors regarding particular federal, state, and local tax consequences for purchasing, holding, and disposing of our Class B Stock, including the consequences of any proposed change in applicable law.

Membership Trends and Geographic Distribution

At December 31, 2006,2007, we had 430421 members, compared to 432430 members at December 31, 2005.2006. Our membership territory is comprised of the states of Indiana and Michigan. The following tables present the geographic distribution of our members and Advances and the composition of our members by type of financial institution:

Distribution of Members by State

		As of December 31,
		2007					2006
		Number		%			Number		%
Indiana		197		47	%		205		48	%
Michigan		224		53	%		225		52	%
Total		421		100	%		430		100	%

Distribution of Advances to Members by State

Composition of Members by Type

If there is continuing consolidation in the financial institution industry, it may adversely affect our number of members, which may, therefore, affect our business and financial condition. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historically, few of our members have chosen to withdraw from membership other than in connection with mergers and consolidations.

Competition

We operate in a highly competitive environment. Demand by members for Advances is affected by, among other things, the cost of their other available sources of funds, including deposits. We compete with other suppliers of wholesale funding, both secured and unsecured. Such other suppliers may include investment banking concerns, commercial banks, and in certain circumstances, other Federal Home Loan Banks. TheseAn example of these circumstances includeoccurs when a financial holding company has subsidiary banks that are members of different Federal Home Loan Banks, and can, therefore, choose to take Advances from the Federal Home Loan Bank with the best rate. Larger institutions may have access to all of the alternatives listed as well as independent access to the national and global credit markets. The availability of alternative funding sources to members can significantly influence the demand for Advances and can be affected by a variety of factors, including market conditions, members’ creditworthiness, regulatory restrictions on the members, and availability of collateral.

Likewise, MPP is subject to significant competition. The most direct competition for mortgage purchases comes from other buyers of conventional, conforming fixed-rate mortgage loans such as Fannie Mae and Freddie Mac, with additional competition coming from other Federal Home Loan Banks and other national, regional, or local mortgage purchasers or conduits.

We also compete with Fannie Mae, Freddie Mac and other GSEs as well as corporate, sovereign, and supranational entities for funds raised through the issuance of CO Bonds, Discount Notes,notes, and other debt instruments. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs to us or lesser amounts of debt issued on our behalf at the same cost than otherwise would be the case.

Employees

As of December 31, 2006,2007, we had 144 full-time employees and 7 part-time employees, compared to 147 full-time employees and 9 part-time employees compared to 151 full-time employees and 7 part-time employees at December 31, 2005.2006. A collective bargaining unit does not represent the employees.

Available Information

Our Annual and Quarterly Reports on Forms 10-K and 10-Q, together with our Current Reports on Form 8-K, are filed with the SEC through the EDGAR filing system. You may link to EDGAR through our public website atwww.fhlbi.com by selecting “News,“Investor Relations/Financial Publications.” then “Web Resources,” then “SEC”. You may also request a copy of any report through our Corporate Secretary at 8250 Woodfield Crossing, Indianapolis, IN 46240, (317) 465-0200.

ITEM 1A.

RISK FACTORS

We have identified the following risk factors that could have a material adverse effect on our business or results of operations.

Adverse Changes in Interest Rates Could Have a Material Adverse Effect Including Potential Loss or Impairment of Capital.

We operate under regulatory and internal constraints that reduce the potential for significant losses due to changes in interest rates. However, an adverse change in interest rates could result in declining earnings and market value of equity or even cause us to suffer a loss or an impairment of capital. We purchase mortgage loans, MBS, and ABS at both premiums and discounts. Further, while not anticipatingalthough we don’t anticipate any growth in the size of our mortgage asset portfolio, any growth would increase our interest rate risk. A decrease in the size of the mortgage asset portfolio could have an adverse effect on financial performance. A number of measures are used to monitor and manage interest rate risk. We make certain key assumptions, including prepayment speeds on mortgage-related assets, cash flows, loan volumes, and pricing. These assumptions are inherently uncertain and, as a result, it is impossible to accurately predict the impact of higher or lower interest rates on netNet interest income.

Economic Downturns and Changes in Federal Monetary Policy Could Have an Adverse Effect on Our Business Operations or Earnings.

Business growth and earnings are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, money supply, fluctuations in both debt and equity capital markets, and the strength of the U.S. economy and the local economies in which we conduct business. During the second half of 2007, there were world-wide disruptions in the credit and mortgage markets and an overall downturn in the U.S. economy and the local economies in which we operate. Our district is comprised of the states of Indiana and Michigan, and economic data for Michigan have generally been unfavorable compared to national data, with both unemployment and foreclosure rates higher than national rates. If any of these conditions worsen, our business and earnings could be adversely affected. For example, a prolonged economic downturn could increaseresult in deterioration in the numberfinancial condition of customers whoour members, which could cause them to become delinquent or default on their loans. In addition, weakening real estate prices and adverse trends in the mortgage markets could reduce the value of collateral securing these loans. In combination, these circumstances could increase the possibility of under-collateralization of Advances and the risk of loss. Deterioration in the mortgage markets could also impact the value of our MBS or MPP portfolios, resulting in potential losses, declines in value or other-than-temporary impairment.

In addition, our business and earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies. We are particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the United States. The Federal Reserve Board’s policies directly and indirectly influence the yield on interest-earning assets and the cost of interest-bearing liabilities. Changes in those policies are beyond our control and difficult to predict.

Inability to Access Capital Markets Could Adversely Affect Our Liquidity.

The FHLB System issues COs in the capital markets to fund its assets. Because access to capital markets is critical, we maintainhave developed contingency plans that are designed to address the risk of our inability to access the capital markets. However, there is no way to be assured that they would be effective in all situations, which could result in a decrease in liquidity and our inability to meet member funding needs.

Changes in Regulatory Environment Could Negatively Impact our Ability to Do Business.

We could be materially adversely affected by (1) the adoption of new laws, policies or regulations, (2) changes in existing laws, policies or regulations, including changes to their interpretations or applications by the Finance Board or as the result of judicial review that modify the present regulatory environment, or (3) the

failure of certain rules or policies to change in the manner we anticipated at the time we established our own rules and policies. Changes that restrict the growth of our current business or prohibit the creation of new products or services could negatively impact our earnings. Further, the regulatory environment affecting members could be changed in a manner that would negatively impact their ability to own Class B Stock or take advantage of our products and services.

Competition Could Negatively Impact Advances and Earnings, Access to Funding, and the Supply of Mortgage Loans for MPP.

We operate in a highly competitive environment. Demand for Advances is affected by, among other things, the cost of other available sources of liquidity for our members, including deposits. We compete with other suppliers of wholesale funding, both secured and unsecured. Such other suppliers may include investment banking concerns, commercial banks and, in certain circumstances, other Federal Home Loan Banks. Large institutions may also have independent access to the national and global credit markets. The availability of alternative funding sources to members can significantly influence the demand for Advances and can vary as a result of a variety of factors, including market conditions, members’ creditworthiness, and availability of collateral. Lower demand for Advances could negatively impact earnings by reducing interest income.

We also compete with Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of CO Bonds, Discount Notes,notes, and other debt instruments. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs to us or lesser amounts of debt issued at the same cost than otherwise would be the case. Although our supply of funds through issuance of COs has kept pace with our funding needs, there can be no assurance that this will continue.

Likewise, the MPP is subject to significant competition. The most direct competition for purchases of mortgages comes from other buyers of conventional, conforming, fixed-rate mortgage loans, such as Fannie Mae and Freddie Mac. Increased competition can result in the acquisition of a smaller market share of the mortgages available for purchase and, therefore, lower income from this business segment. Further, due to certain tax regulations in Michigan, mortgage loans are often originated and held by institutions that are not members of the Bank but that may be affiliated with our members. As we can not purchase such loans directly from these affiliates, this impacts the supply of loans available to us that are fully available for purchase by many of our competitors.

Joint and Several Liability for Consolidated Obligations Could Negatively Impact Our Members.

We are jointly and severally liable with the other Federal Home Loan Banks for the COs issued on behalf of the Federal Home Loan Banks through the Office of Finance. We may not pay any dividends to members or redeem or repurchase any shares of our capital stock unlessif the principal and interest due on all COs have not been paid in full.full when due. If another Federal Home Loan Bank were to default on its obligation to pay principal or interest on any COs, the Finance Board may allocate the outstanding liability among one or more of the remaining Federal Home Loan Banks on a pro ratapro-rata basis or on any other basis the Finance Board may determine. As a result, our ability to pay dividends to our members or to redeem or repurchase shares of our capital stock could be affected not only by our own financial condition, but also by the financial condition of one or more of the other Federal Home Loan Banks. However, no Federal Home Loan Bank has ever defaulted on its debt obligations since the FHLB System was established in 1932.

Our Credit Rating Could be Lowered, Which Could Adversely Impact Our Cost of Funds.

We currently have a counterparty rating of AAA/A-1+, with a stable outlook from S & P and Moody’s. It is possible that either rating could be lowered at some point in the future, which might adversely affect our costs of doing business, including the cost of issuing debt. Our changing business profile, including prior-year growth in mortgage-based assets relative to Advances, exposes us to a higher level of interest rate risk. Changing levels of fixed-rate mortgage loans acquired through MPP and additional investments in MBS requires prudent interest rate risk management. Our costs of doing business and ability to attract and retain members could also be adversely affected if the credit ratings of one or more other Federal Home Loan Banks are lowered, or if other Federal Home Loan Banks incur losses. Our costs of doing business and ability to attract and retain members could also be adversely affected if the credit ratings assigned to the COs, which remain AAA/Aaa, were lowered.

Finance Board regulations require all Federal Home Loan Banks to maintain not less than an AA rating. The following table shows the S&P and Moody’s ratings for each of the Federal Home Loan Banks:

Federal Home Loan Banks

Long-term Credit Ratings

As of February 28, 200729, 2008

Circumstances Beyond Our Control Could Cause Unexpected Losses.

Operations risk is the risk of unexpected losses attributable to human error, systems failures, fraud, unenforceability of contracts, or inadequate internal controls and procedures. Although management has systems and procedures in place to address each of these risks, some operational risks are beyond our control, and the failure of other parties to adequately address their operational risks could adversely affect us.

Loss of One or More Large Customers Could Adversely Impact Us.

As of December 31, 2006,2007, our top two Advances customers accounted for 47%40% of Advances, at par. The loss of either of these customers could adversely impact our profitability and business prospects and the ability to achieve growth objectives.

At December 31, 2006,2007, our top three MPP customers accounted for 83%81% of outstanding MPP assets, at par. During 2007 and 2006, we lost one of these MPP customers due to an out-of-district merger, and the first quarterother two customers sold their primary mortgage origination subsidiaries that produced most of 2007,the loans that we lost all three of our largest MPP customers.purchased from them. Although the mortgage loans purchased through our MPP will remain outstanding until prepayment or maturity, we willare no longer be able to purchase mortgage loans from these customers.the customer that merged, and the volume of loans available for sale, if any, from the other two has fallen significantly. We expect the MPP portfolio to continue to decline during 2007, and it is likely that the loss2008, as we transition from a small group of these customers will adversely impact the profitabilitylarge volume sellers to a larger group of our mortgage portfolio.smaller sellers.

The loss of a large customer could result from a variety of factors, including acquisition, consolidation into an out-of-district institution, and the consolidation of charters within a bank holding company. Deterioration in the credit quality of any of these borrowers could have a significant impact on the Bank, resulting in possible losses on Advances, as well as decreased interest income on new Advances not made or mortgage loans not purchased.

Damage Caused by Natural Disasters or Acts of Terrorism Could Adversely Impact Us or Our Members.

Damage caused by natural disasters or acts of terrorism could adversely impact us or our members, leading to impairment of assets and/or potential loss exposure. Real property that could be damaged in these events may

serve as collateral for Advances, or security for the mortgage loans we purchase from our members and the non-agency MBS securities we hold as investments. If this real property is not sufficiently insured to cover the damages that may occur, the member may have insufficient collateral to secure its Advances, or the mortgage loan sold to us may be severely impaired in value.

U.S. DepartmentIncreased Delinquency Rates and Credit Losses Could Adversely Affect the Yield on or Value of MBS Investments.