Federal Home Loan Bank of Des Moines 10-Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2007

OR

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

Commission File Number: 000-51999

FEDERAL HOME LOAN BANK OF DES MOINES

(Exact name of registrant as specified in its charter)

Federally chartered corporation	42-6000149
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification number)
Skywalk Level 801 Walnut Street, Suite 200 Des Moines, IA (Address of principal executive offices)	50309 (Zip code)

Registrant’s telephone number, including area code:(515) 281-1000

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

þ Yes      o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero      Accelerated filero      Non-accelerated filerþ

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

o Yes      þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Shares outstanding
	as of October 31, 2007
Class B Stock, par value $100		21,186,789

Table of Contents

Part I–Financial Information
Item 1. Financial Statements	2
Statements of Condition	2
Statements of Income	3
Statements of Changes in Capital	4
Statements of Cash Flow	6
Condensed Notes to the Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Selected Financial Data	34
Overview	36
Results of Operations	37
Statements of Condition	47
Liquidity and Capital Resources	54
Critical Accounting Policies and Estimates	62
Risk Management	63
Item 3. Quantitative and Qualitative Disclosures about Market Risk	79
Item 4. Controls and Procedures	79
Item 4T. Controls and Procedures	81
Part II–Other Information
Item 1. Legal Proceedings	81
Item 1A. Risk Factors	81
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	81
Item 3. Defaults Upon Senior Securities	81
Item 4. Submission of Matters to a Vote of Security Holders	82
Item 5. Other Information	82
Item 6. Exhibits	83
Signature	84
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART 1–FINANCIAL INFORMATION

Item 1. Financial Statements

FEDERAL HOME LOAN BANK OF DES MOINES

STATEMENTS OF CONDITION

(In thousands, except shares)

(Unaudited)

	September 30,			December 31,
	2007			2006
ASSETS
Cash and due from banks	$	18,802		$	30,181
Interest-bearing deposits		128			11,392
Securities purchased under agreements to resell		—			305,000
Federal funds sold		2,530,000			1,625,000
Investments
Available-for-sale securities include $209,270 and $513,457 pledged as collateral at September 30, 2007 and December 31, 2006 that may be repledged (Note 3)		3,233,687			562,165
Held-to-maturity securities (estimated fair value of $4,129,783 and $5,685,809 at September 30, 2007 and December 31, 2006) (Note 4)		4,158,398			5,715,161
Advances (Note 5)		31,758,972			21,854,991
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $250 at September 30, 2007 and December 31, 2006 (Note 6)		10,974,418			11,775,042
Accrued interest receivable		130,562			92,932
Premises and equipment, net		7,156			6,244
Derivative assets (Note 10)		54,771			36,119
Other assets		23,407			27,184
Total assets	$	52,890,301		$	42,041,411
LIABILITIES AND CAPITAL
LIABILITIES
Deposits
Interest-bearing	$	1,381,154		$	899,520
Noninterest-bearing demand		20,150			41,929
Total deposits		1,401,304			941,449
Securities sold under agreements to repurchase		200,000			500,000
Consolidated obligations, net (Note 7)
Discount notes		13,781,296			4,684,714
Bonds		34,247,192			33,066,286
Total consolidated obligations, net		48,028,488			37,751,000
Mandatorily redeemable capital stock		46,326			64,852
Accrued interest payable		349,428			300,139
Affordable Housing Program		43,212			44,714
Payable to REFCORP		7,148			5,945
Derivative liabilities (Note 10)		103,563			163,505
Other liabilities		20,802			20,836
Total liabilities		50,200,271			39,792,440
Commitments and contingencies (Note 11)
CAPITAL (Note 8)
Capital stock – Class B putable ($100 par value) authorized, issued, and outstanding 23,477,078 and 19,058,783 shares at September 30, 2007 and December 31, 2006		2,347,708			1,905,878
Retained earnings		355,398			344,246
Accumulated other comprehensive (loss) income
Net unrealized (loss) gain on available-for-sale securities		(11,852	)		188
Employee retirement plans		(1,224	)		(1,341	)
Total capital		2,690,030			2,248,971
Total liabilities and capital	$	52,890,301		$	42,041,411

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

2

FEDERAL HOME LOAN BANK OF DES MOINES

STATEMENTS OF INCOME

(In thousands)

(Unaudited)

	Quarter Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
INTEREST INCOME
Advances	$	338,613	$	305,732	$	926,032	$	837,994
Advance prepayment fees, net		218		59		596		236
Interest-bearing deposits		840		676		2,020		10,751
Securities purchased under agreements to resell		3,792		4,115		11,904		11,342
Federal funds sold		49,324		32,758		153,317		96,171
Investments
Trading securities		—		94		—		274
Available-for-sale securities		40,031		11,315		70,495		13,324
Held-to-maturity securities		66,078		63,414		214,301		207,530
Mortgage loans held for portfolio		138,571		151,632		425,375		466,660
Loans to other FHLBanks		—		—		—		7
Total interest income		637,467		569,795		1,804,040		1,644,289
INTEREST EXPENSE
Consolidated obligations
Discount notes		116,840		85,751		282,618		192,399
Bonds		456,465		428,891		1,336,766		1,290,347
Deposits		10,906		7,753		37,416		23,309
Borrowings from other FHLBanks		27		30		41		144
Securities sold under agreements to repurchase		7,217		7,576		22,022		20,896
Mandatorily redeemable capital stock		535		798		2,343		2,251
Other borrowings		—		31		—		31
Total interest expense		591,990		530,830		1,681,206		1,529,377
NET INTEREST INCOME		45,477		38,965		122,834		114,912
Reversal of provision for credit losses on mortgage loans		—		513		—		513
NET INTEREST INCOME AFTER MORTGAGE LOAN CREDIT LOSS PROVISION		45,477		39,478		122,834		115,425
OTHER INCOME
Service fees		530		594		1,671		1,846
Net gain (loss) on trading securities		—		14		—		(32	)
Net realized gain on held-to-maturity securities		—		—		545		—
Net gain on derivatives and hedging activities		2,167		191		1,706		2,079
Other, net		912		730		2,494		2,894
Total other income		3,609		1,529		6,416		6,787
OTHER EXPENSE
Salaries and Benefits		5,875		5,855		17,819		17,772
Operating		3,307		3,581		10,246		12,241
Finance Board		408		442		1,225		1,326
Office of Finance		244		223		823		705
Total other expense		9,834		10,101		30,113		32,044
INCOME BEFORE ASSESSMENTS		39,252		30,906		99,137		90,168
Affordable Housing Program		3,256		2,604		8,802		7,590
REFCORP		7,199		5,661		18,161		16,516
Total assessments		10,455		8,265		26,963		24,106
NET INCOME	$	28,797	$	22,641	$	72,174	$	66,062

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

3

FEDERAL HOME LOAN BANK OF DES MOINES

STATEMENT OF CHANGES IN CAPITAL

(In thousands)

(Unaudited)

										Accumulated
	Capital Stock									Other
	Class B (putable)						Retained			Comprehensive			Total
	Shares			Par Value			Earnings			Income (Loss)			Capital
												��
BALANCE DECEMBER 31, 2006		19,059		$	1,905,878		$	344,246		$	(1,153	)	$	2,248,971
Proceeds from issuance of capital stock		9,720			971,990			—			—			971,990
Repurchase/redemption of capital stock		(5,486	)		(548,562	)		—			—			(548,562	)
Net shares reclassified from mandatorily redeemable capital stock		184			18,402			—			—			18,402
Comprehensive income (loss)
Net income		—			—			72,174			—			72,174
Other comprehensive income
Net unrealized loss on available-for-sale securities		—			—			—			(12,040	)		(12,040	)
Net unrealized gain on employee retirement plans		—			—			—			117			117
Total comprehensive income (loss)		—			—			72,174			(11,923	)		60,251
Cash dividends on capital stock (4.25% annualized)		—			—			(61,022	)		—			(61,022	)
BALANCE SEPTEMBER 30, 2007		23,477		$	2,347,708		$	355,398		$	(13,076	)	$	2,690,030

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

4

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENT OF CHANGES IN CAPITAL
(In thousands)
(Unaudited)

										Accumulated
	Capital Stock									Other
	Class B (putable)						Retained			Comprehensive			Total
	Shares			Par Value			Earnings			Income (Loss)			Capital
BALANCE DECEMBER 31, 2005		19,321		$	1,932,054		$	329,241		$	(827	)	$	2,260,468
Proceeds from issuance of capital stock		5,494			549,397			—			—			549,397
Repurchase/redemption of capital stock		(5,084	)		(508,364	)		—			—			(508,364	)
Net shares reclassified to mandatorily redeemable capital stock		(27	)		(2,686	)		—			—			(2,686	)
Comprehensive income
Net income		—			—			66,062			—			66,062
Other comprehensive income
Net unrealized gain on available-for-sale securities		—			—			—			383			383
Total comprehensive income		—			—			66,062			383			66,445
Cash dividends on capital stock (3.69% annualized)		—			—			(53,786	)		—			(53,786	)
BALANCE SEPTEMBER 30, 2006		19,704		$	1,970,401		$	341,517		$	(444	)	$	2,311,474

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

5

FEDERAL HOME LOAN BANK OF DES MOINES

STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2007			2006
OPERATING ACTIVITIES
Net income	$	72,174		$	66,062
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization
Net premiums, discounts, and basis adjustments on investments, advances, mortgage loans, and consolidated obligations		49,183			40,797
Concessions on consolidated obligation bonds		3,393			4,634
Premises and equipment		723			323
Other		(441	)		(411	)
Net realized gain from sale of held-to-maturity securities		(545	)		—
Net change in fair value adjustment on derivatives and hedging activities		(21,843	)		(2,158	)
Net realized loss on disposal of premises and equipment		77			14
Net change in:
Trading securities		—			1,609
Accrued interest receivable		(37,630	)		(1,828	)
Accrued interest on derivatives		(26,127	)		20,651
Other assets		1,164			1,567
Accrued interest payable		49,289			(23,714	)
Affordable Housing Program (AHP) liability and discount on AHP advances		(1,526	)		(790	)
Payable to REFCORP		1,203			(45,233	)
Other liabilities		83			(1,420	)
Total adjustments		17,003			(5,959	)
Net cash provided by operating activities		89,177			60,103

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

6

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(In thousands)
(Unaudited)

	Nine Months Ended September 30,
	2007			2006
INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits		11,264			672,531
Securities purchased under agreements to resell		305,000			—
Federal funds sold		(905,000	)		1,030,000
Short-term held-to-maturity securities		1,003,181			1,041,009
Available-for-sale securities:
Proceeds from maturities		3,869,373			429,233
Purchases		(6,536,696	)		(1,039,971	)
Held-to-maturity securities:
Proceeds from sales		33,005			—
Proceeds from maturities		597,104			825,095
Purchases		(70,000	)		(494,584	)
Advances to members:
Principal collected		59,267,325			72,174,832
Originated		(69,055,007	)		(72,903,470	)
Mortgage loans held for portfolio:
Principal collected		1,067,492			1,229,921
Originated or purchased		(270,573	)		(268,925	)
Additions to premises and equipment		(1,843	)		(2,193	)
Proceeds from sale of premises and equipment		131			50
Net cash (used in) provided by investing activities		(10,685,244	)		2,693,528
FINANCING ACTIVITIES
Net change in deposits		459,855			(209,811	)
Securities sold under agreement to repurchase		(300,000	)		—
Net proceeds from issuance of consolidated obligations
Discount notes		471,080,927			550,664,693
Bonds		6,300,985			3,316,155
Payments for maturing and retiring consolidated obligations
Discount notes		(462,027,231	)		(547,951,604	)
Bonds		(5,292,130	)		(8,554,428	)
Proceeds from issuance of capital stock		971,990			549,397
Payments for issuance/repurchase/redemption of mandatorily redeemable capital stock		(124	)		(17,742	)
Payments for repurchase/redemption of capital stock		(548,562	)		(508,364	)
Cash dividends paid		(61,022	)		(53,786	)
Net cash provided by (used in) financing activities		10,584,688			(2,765,490	)
Net decrease in cash and due from banks		(11,379	)		(11,859	)
Cash and due from banks at beginning of the period		30,181			42,366
Cash and due from banks at end of the period	$	18,802		$	30,507
Supplemental disclosures
Cash paid during the period for
Interest	$	1,577,190		$	1,478,327
AHP	$	10,304		$	8,356
REFCORP	$	16,958		$	61,749
Transfer of MPF loans to real estate owned	$	6,623		$	7,136

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

7

FEDERAL HOME LOAN BANK OF DES MOINES

CONDENSED NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)

Background Information

The Federal Home Loan Bank of Des Moines (the Bank) is a federally chartered corporation 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). The FHLBanks were created under the authority of the Federal Home Loan Bank Act of 1932, as amended (the FHLBank Act). The FHLBanks are supervised and regulated by the Federal Housing Finance Board (Finance Board). The FHLBanks serve the public by enhancing the availability of funds (advances and mortgage loans) for residential mortgages and targeted community development. The Bank provides a readily available, low cost source of funds to its member institutions and eligible housing associates in Iowa, Minnesota, Missouri, North Dakota, and South Dakota. Regulated financial depositories and insurance companies engaged in residential housing finance may apply for membership. State and local housing authorities that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow, housing associates are not members of the Bank and, as such, are not required to hold capital stock.

Note 1—Basis of Presentation

The accompanying unaudited financial statements of the Bank for the three and nine months ended September 30, 2007, have been prepared in accordance with accounting principles generally accepted in the United States (U.S.) of America (GAAP) for interim financial information. Accordingly, they do not include all of the information required by GAAP for full year information and should be read in conjunction with the audited financial statements for the year ended December 31, 2006, which are contained in the Bank’s annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, for a fair statement of results for the interim periods. The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2007.

Descriptions of the significant accounting policies of the Bank are included in Note 1 (Summary of Significant Accounting Policies) of the Bank’s 2006 audited financial statements in the annual report on Form 10-K.

Reclassifications.Certain amounts in the 2006 financial statement have been reclassified to conform to the 2007 presentation.

8

Note 2—Recently Issued Accounting Standards & Interpretations

SFAS 157. On September 15, 2006, the Federal Accounting Standards Board (FASB) issued Statement of Financial Account Standards (SFAS) No. 157,Fair Value Measurements(SFAS 157). In defining fair value, SFAS 157 retains the exchange price notion in earlier definitions of fair value. However, the definition of fair value under SFAS 157 focuses on the price that would be received to sell an asset or paid to transfer a liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not expand the use of fair value in any new circumstances. SFAS 157 also establishes a fair value hierarchy that prioritizes the information used to develop assumptions used to determine the exit price. Under this standard, fair value measurements will be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Bank) and interim periods within those fiscal years. The Bank has not yet determined the effect that the adoption of this statement will have on its results of operations or financial condition.

SFAS 159.On February 15, 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115(SFAS 159). SFAS 159 creates a fair value option allowing, but not requiring, an entity to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities, with changes in fair value recognized in earnings as they occur. It requires entities to separately display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. Additionally, SFAS 159 requires an entity to provide information that would allow users to understand the effect on earnings of changes in the fair value on those instruments selected for the fair value election. SFAS 159 is effective at the beginning of an entity’s first fiscal year beginning after November 15, 2007 (January 1, 2008 for the Bank). The Bank has not yet determined the effect that the adoption of this statement will have on its results of operations or financial condition.

9

FIN 39-1.On April 30, 2007, the FASB issued FASB Interpretation (FIN) No. 39-1,Amendment of FIN No. 39(FIN 39-1). FIN 39-1 permits an entity to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instruments recognized at fair value executed with the same counterparty under a master netting arrangement. Under FIN 39-1, the receivable or payable related to cash collateral may not be offset if the amount recognized does not represent or approximate fair value or arises from instruments in a master netting arrangement that are not eligible to be offset. The decision whether to offset such fair value amounts represents an elective accounting policy decision that, once elected, must be applied consistently. FIN 39-1 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Bank), with earlier application permitted. An entity should recognize the effects of applying FIN 39-1 as a change in accounting principle through retrospective application for all financial statements presented unless it is impracticable to do so. Upon adoption of FIN 39-1, an entity is permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements. The Bank does not expect FIN 39-1 to have a material impact on its results of operations or financial condition at the time of adoption.

Note 3—Available-for-Sale Securities

Major Security Types.Available-for-sale securities at September 30, 2007 were as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated Fair
	Cost		Gains		Losses		Value
Non-mortgage-backed securities
Commercial paper	$	621,094	$	259	$	—	$	621,353
Government-sponsored enterprise obligations		524,373		155		61		524,467
Total non-mortgage-backed securities		1,145,467		414		61		1,145,820
Mortgage-backed securities Government-sponsored enterprises		2,100,072		1,709		13,914		2,087,867
Total	$	3,245,539	$	2,123	$	13,975	$	3,233,687

10

Available-for-sale securities at December 31, 2006 were as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated Fair
	Cost		Gains		Losses		Value
Government-sponsored enterprise obligations	$	561,977	$	245	$	57	$	562,165

Government-sponsored enterprise obligations and government-sponsored enterprise investments represented Federal National Mortgage Association (Fannie Mae) and/or Federal Home Loan Mortgage Corporation (Freddie Mac) debt securities.

Available-for-sale securities with unrealized losses had fair values of $1.7 billion as of September 30, 2007. These securities, as of September 30, 2007 have been in a loss position for less than twelve months. The Bank reviewed its available-for-sale investments and has determined that all unrealized losses reflected above are temporary based on the creditworthiness of the issuers, the underlying collateral, and the Bank’s intent to hold the investments until a recovery of fair value, which may be maturity.

11

Note 4—Held-to-Maturity Securities

Major Security Types.Held-to-maturity securities at September 30, 2007 were as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Non-mortgage-backed securities
Commercial paper	$	321,593	$	—	$	—	$	321,593
State or local housing agency obligations		73,960		1,154		2		75,112
Other		8,717		165		—		8,882
Total non-mortgage-backed securities		404,270		1,319		2		405,587
Mortgage-backed securities
Government-sponsored enterprises		3,580,401		2,605		29,840		3,553,166
U.S. government agency-guaranteed		67,349		291		58		67,582
MPF shared funding		54,522		—		2,017		52,505
Other		51,856		—		913		50,943
Total mortgage-backed securities		3,754,128		2,896		32,828		3,724,196
Total	$	4,158,398	$	4,215	$	32,830	$	4,129,783

12

Held-to-maturity securities at December 31, 2006 were as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Non-mortgage-backed securities
Commercial paper	$	1,322,441	$	—	$	—	$	1,322,441
State or local housing agency obligations		4,930		12		6		4,936
Other		8,275		165		—		8,440
Total non-mortgage-backed securities		1,335,646		177		6		1,335,817
Mortgage-backed securities
Government-sponsored enterprises		4,144,054		5,081		33,510		4,115,625
U.S. government agency-guaranteed		81,053		500		23		81,530
MPF shared funding		60,364		—		1,897		58,467
Other		94,044		327		1		94,370
Total mortgage-backed securities		4,379,515		5,908		35,431		4,349,992
Total	$	5,715,161	$	6,085	$	35,437	$	5,685,809

Government-sponsored enterprise investments represented Fannie Mae or Freddie Mac securities. U.S. government agency-guaranteed mortgage-backed securities (MBS) represented Government National Mortgage Association (Ginnie Mae) securities and Small Business Administration (SBA) Pool Certificates. SBA Pool Certificates represent undivided interests in pools of the guaranteed portions of SBA loans. The SBA’s guarantee of the Pool Certificate is backed by the full faith and credit of the U.S. government.

At September 30, 2007 held-to-maturity securities totaling $1.8 billion have been in a loss position for less than twelve months and $1.4 billion have been in a loss position for greater than twelve months. All of the held-to-maturity securities with unrealized losses greater than twelve months have a fair market value that is within 98.3 percent of their respective amortized cost basis. The Bank reviewed its held-to-maturity investments and has determined that all unrealized losses reflected above are temporary based on the creditworthiness of the issuers, the underlying collateral, and the Bank’s intent to hold the investments to maturity.

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Note 5—Advances

Redemption Terms.The following table shows the Bank’s advances outstanding at September 30, 2007 and December 31, 2006 (dollars in thousands):

	September 30, 2007					December 31, 2006
				Weighted					Weighted
				Average					Average
				Interest					Interest
Year of Maturity	Amount			Rate %		Amount			Rate %
Overdrawn demand deposit accounts	$	1,180			—	$	628			—
Due in one year or less		13,525,734			4.96		5,624,396			4.81
Due after one year through two years		2,609,115			4.93		3,636,567			4.85
Due after two years through three years		2,842,414			5.25		2,048,650			5.10
Due after three years through four years		2,600,310			5.34		2,045,968			5.33
Due after four years through five years		2,590,400			4.96		2,171,469			5.20
Thereafter		7,469,147			4.93		6,322,940			4.88
Total par value		31,638,300			5.01		21,850,618			4.95
Commitment fees		(2	)				(3	)
Discounts on AHP advances		(98	)				(122	)
Net premiums on advances		411					410
Hedging fair value adjustments
Cumulative fair value gain (loss)		113,526					(3,298	)
Basis adjustments from terminated hedges		6,835					7,386
Total	$	31,758,972				$	21,854,991

The Bank offers members advances that may be prepaid on pertinent dates (call dates) without incurring prepayment or termination fees (callable advances). At September 30, 2007 and December 31, 2006, the Bank had callable advances of $1.3 billion and $339.2 million. Other advances may be prepaid only by paying a fee to the Bank (prepayment fee) that makes the Bank financially indifferent to the prepayment of the advance.

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Interest Rate Payment Terms.The following table details additional interest rate payment terms for advances at September 30, 2007 and December 31, 2006 (dollars in thousands):

	September 30,		December 31,
	2007		2006
Par amount of advances
Fixed rate	$	26,888,096	$	17,828,325
Variable rate		4,750,204		4,022,293
Total	$	31,638,300	$	21,850,618

Note 6—Mortgage Loans Held for Portfolio

The Mortgage Partnership Finance (register mark) (MPF (register mark)) program(Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago) involves investment by the Bank in mortgage loans that are held for portfolio which are either funded by the Bank through, or purchased from, participating members. The Bank’s members originate, service, and credit enhance home mortgage loans that are then sold to the Bank. Members participating in the servicing released program do not service the loans owned by the Bank. The servicing on these loans is sold concurrently by the member to a designated mortgage servicer.

Mortgage loans with a contractual maturity of 15 years or less are classified as medium term, and all other mortgage loans are classified as long-term. The following table presents information at September 30, 2007 and December 31, 2006 on mortgage loans held for portfolio (dollars in thousands):

	September 30,			December 31,
	2007			2006
Real Estate:
Fixed rate medium-term single family mortgages	$	2,645,981		$	2,943,839
Fixed rate long-term single family mortgages		8,316,955			8,816,457
Total par value		10,962,936			11,760,296
Premiums		99,860			112,726
Discounts		(96,134	)		(107,452	)
Basis adjustments from mortgage loan commitments		8,006			9,722
Allowance for credit losses		(250	)		(250	)
Total mortgage loans held for portfolio	$	10,974,418		$	11,775,042

The par value of mortgage loans held for portfolio outstanding at September 30, 2007 and December 31, 2006 consisted of government-insured loans totaling $477.5 million and $511.0 million and conventional loans totaling $10.5 billion and $11.2 billion, respectively.

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The allowance for credit losses was $0.3 million at September 30, 2007 and December 31, 2006. The Bank did not have any charge-offs or recoveries during the three and nine month periods ended September 30, 2007 and recorded a reversal to its provision for credit losses of $0.5 million during the three and nine month periods ended September 30, 2006. At September 30, 2007 and December 31, 2006, the Bank had $24.8 million and $23.5 million of nonaccrual loans. Interest income that was contractually owed to the Bank but not received on nonaccrual loans was $0.1 million for the three months ended September 30, 2007 and 2006 and $0.7 million for the nine months ended September 30, 2007 and 2006. At September 30, 2007 and December 31, 2006, the Bank’s other assets included $4.7 million and $6.3 million of real estate owned.

Mortgage loans, other than those included in large groups of smaller balance homogeneous loans, are considered impaired when, based on current information and events, it is probable the Bank will be unable to collect all principal and interest amounts due under the contractual terms of the mortgage loan agreement. At September 30, 2007 and December 31, 2006, the Bank had no recorded investments in impaired mortgage loans.

The Bank records credit enhancement fees paid to members as a reduction to mortgage loan interest income. Credit enhancement fees totaled $5.1 million and $5.7 million for the three months ended September 30, 2007 and 2006 and $15.8 million and $17.6 million for the nine months ended September 30, 2007 and 2006.

Note 7—Consolidated Obligations

Consolidated obligations are the joint and several obligations of the FHLBanks and consist of consolidated bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. Consolidated bonds are issued to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated discount notes are issued to raise short-term funds of less than one year. These discount notes sell at less than their face amount and are redeemed at par value when they mature. See the Bank’s annual report on Form 10-K for additional information regarding consolidated obligations.

The par amounts of the outstanding consolidated obligations of the 12 FHLBanks were approximately $1,148.5 billion and $951.7 billion at September 30, 2007 and December 31, 2006.

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Consolidated Bonds.The following table shows the Bank’s participation in consolidated bonds outstanding at September 30, 2007 and December 31, 2006 by year of contractual maturity (dollars in thousands):

	September 30, 2007					December 31, 2006
				Weighted					Weighted
				Average					Average
				Interest					Interest
Year of Maturity	Amount			Rate %		Amount			Rate %
Due in one year or less	$	6,112,100			4.08	$	6,098,300			3.40
Due after one year through two years		4,577,600			4.46		5,660,200			4.10
Due after two years through three years		5,131,300			4.87		4,505,300			4.51
Due after three years through four years		2,676,200			4.93		2,622,100			4.84
Due after four years through five years		2,293,950			4.72		2,291,800			4.97
Thereafter		10,875,100			5.17		9,223,600			5.09
Index amortizing notes		2,726,486			5.12		2,977,416			5.12
Total par value		34,392,736			4.79		33,378,716			4.51
Premiums		40,855					33,183
Discounts		(37,212	)				(22,578	)
Hedging fair value adjustments
Cumulative fair value gain		(34,210	)				(194,877	)
Basis adjustments from terminated hedges		(114,977	)				(128,158	)
Total	$	34,247,192				$	33,066,286

The following table shows the Bank’s total consolidated bonds outstanding at September 30, 2007 and December 31, 2006 (dollars in thousands):

	September 30,		December 31,
	2007		2006
Par amount of consolidated bonds
Noncallable or nonputable	$	24,797,936	$	22,421,116
Callable		9,594,800		10,957,600
Total par value	$	34,392,736	$	33,378,716

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Interest Rate Payment Terms.The following table shows interest rate payment terms for the Bank’s total consolidated bonds at September 30, 2007 and December 31, 2006 (dollars in thousands):

	September 30,		December 31,
	2007		2006
Par amount of consolidated bonds:
Fixed rate	$	33,871,236	$	32,623,716
Simple variable rate		15,000		90,700
Variable rate with cap		100,000		100,000
Step-up		232,500		327,500
Range bonds		174,000		236,800
Total par value	$	34,392,736	$	33,378,716

Consolidated Discount Notes.Consolidated discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to 365/366 days. These notes are issued at less than their face amount and redeemed at par value when they mature.

The Bank’s participation in consolidated discount notes, all of which are due within one year, was as follows at September 30, 2007 and December 31, 2006 (dollars in thousands):

	September 30, 2007					December 31, 2006
				Weighted					Weighted
				Average					Average
				Interest					Interest
	Amount			Rate %		Amount			Rate %
Par value	$	13,834,479			4.76	$	4,699,916			5.02
Discounts		(53,183	)				(15,202	)
Total	$	13,781,296				$	4,684,714

Note 8—Capital

The Bank must maintain at all times permanent capital in an amount at least equal to the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, calculated in accordance with Bank policy and rules and regulations of the Finance Board. Only permanent capital, defined by the Finance Board as Class B stock and retained earnings, satisfies this risk based capital requirement. The Bank is also required to maintain at least a four percent total capital-to-asset ratio.

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The following table shows the Bank’s compliance with the Finance Board’s capital requirements at September 30, 2007 and December 31, 2006 (dollars in thousands):

	September 30, 2007						December 31, 2006
	Required			Actual			Required			Actual
Regulatory capital requirements:
Total capital-to-asset ratio		4.00	%		5.20	%		4.00	%		5.50	%
Total regulatory capital	$	2,115,612		$	2,749,432		$	1,681,653		$	2,314,976

Mandatorily Redeemable Capital Stock.At September 30, 2007 and December 31, 2006 the Bank had $46.3 million and $64.9 million in capital stock subject to mandatory redemption with payment subject to a five year waiting period from the date of transfer. These amounts have been classified as “mandatorily redeemable capital stock” in the Statements of Condition.

The following table summarizes the Bank’s activity related to mandatorily redeemable capital stock for the nine months ended September 30, 2007 and for the year ended December 31, 2006 (dollars in thousands).

	September 30,			December 31,
	2007			2006
Mandatorily Redeemable Capital Stock
Balance, beginning of period	$	64,852		$	85,084
Shares reclassified (from)/to Mandatorily Redeemable Capital Stock		(18,402	)		2,717
Payments for issuance/repurchase/ redemption of mandatorily redeemable capital stock		(124	)		(22,949	)
Balance, end of period	$	46,326		$	64,852

Note 9—Segment Information

The Bank has identified two primary operating segments based on its method of internal reporting: Member Finance and Mortgage Finance. The products and services provided reflect the manner in which financial information is evaluated by management.

The Member Finance segment includes products such as advances, non-mortgage investments, and their related funding. Income from the Member Finance segment is derived primarily from the difference, or spread, between the yield on advances and non-mortgage investments and the borrowing and hedging costs related to those assets.

The Mortgage Finance segment includes mortgage loans acquired through the MPF program, MBS, Housing Finance Authority (HFA) investments, and their related funding. Income from the Mortgage Finance segment is derived primarily from the difference, or spread, between the yield on mortgage loans, MBS, and HFA investments and the borrowing and hedging costs related to those assets.

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Capital is allocated to the Mortgage Finance segment based on a percentage of the average balance of business segment assets; the remaining capital is then allocated to Member Finance.

The Bank evaluates performance of the segments based on adjusted net interest income after mortgage loan credit loss provision and therefore does not allocate other income, other expenses, or assessments to the operating segments.

The following shows the Bank’s financial performance by operating segment for the three months ended September 30, 2007 and 2006 (dollars in thousands):

	Member		Mortgage
	Finance		Finance		Total
Three months ended September 30, 2007
Adjusted net interest income	$	39,538	$	5,882	$	45,420
Provision for credit losses on mortgage loans		—		—		—
Adjusted net interest income after mortgage loan credit loss provision	$	39,538	$	5,882	$	45,420
Average assets for the period	$	31,863,288	$	16,253,436	$	48,116,724
Total assets at period end	$	36,012,006	$	16,878,295	$	52,890,301
Three months ended September 30, 2006
Adjusted net interest income	$	31,486	$	7,414	$	38,900
Reversal of provision for credit losses on mortgage loans		—		513		513
Adjusted net interest income after mortgage loan credit loss provision	$	31,486	$	7,927	$	39,413
Average assets for the period	$	26,545,477	$	16,930,807	$	43,476,284
Total assets at period end	$	26,330,169	$	16,649,314	$	42,979,483

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The Bank includes interest income and interest expense associated with economic hedges in its evaluation of financial performance for its two operating segments. Net interest income does not include these amounts in the statements of income for financial reporting purposes. Interest income and interest expense associated with economic hedges are recorded in other income in “Net gain on derivatives and hedging activities” on the statements of income. The following table reconciles the Bank’s financial performance by operating segment to the Bank’s total income before assessments for the three months ended September 30, 2007 and 2006 (dollars in thousands):

	Three Months Ended
	September 30,
	2007		2006
Adjusted net interest income after mortgage loan credit loss provision	$	45,420	$	39,413
Net interest income on economic hedges		57		65
Net interest income after mortgage loan credit loss provision		45,477		39,478
Other income		3,609		1,529
Other expenses		9,834		10,101
Income before assessments	$	39,252	$	30,906

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The following table shows the Bank’s financial performance by operating segment for the nine months ended September 30, 2007 and 2006 (dollars in thousands):

	Member		Mortgage
	Finance		Finance		Total
Nine months ended September 30, 2007
Adjusted net interest income	$	104,665	$	18,070	$	122,735
Provision for credit losses on mortgage loans		—		—		—
Adjusted net interest income after mortgage loan credit loss provision	$	104,665	$	18,070	$	122,735
Average assets for the period	$	29,965,051	$	15,940,325	$	45,905,376
Total assets at period-end	$	36,012,006	$	16,878,295	$	52,890,301
Nine months ended September 30, 2006
Adjusted net interest income	$	88,588	$	26,300	$	114,888
Reversal of provision for credit losses on mortgage loans		—		513		513
Adjusted net interest income after mortgage loan credit loss provision	$	88,588	$	26,813	$	115,401
Average assets for the period	$	26,702,474	$	17,368,054	$	44,070,528
Total assets at period-end	$	26,330,169	$	16,649,314	$	42,979,483

The following table reconciles the Bank’s financial performance by operating segment to the Bank’s total income before assessments for the nine months ended September 30, 2007 and 2006 (dollars in thousands):

	Nine Months Ended
	September 30,
	2007		2006
Adjusted net interest income after mortgage loan credit loss provision	$	122,735	$	115,401
Net interest income on economic hedges		99		24
Net interest income after mortgage loan credit loss provision		122,834		115,425
Other income		6,416		6,787
Other expenses		30,113		32,044
Income before assessments	$	99,137	$	90,168

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Note 10—Derivatives and Hedging Activities

The Bank may enter into interest rate swaps, swaptions, interest rate cap and floor agreements, calls, puts, and futures and forward contracts (collectively, derivatives) to manage its exposure to changes in interest rates. See the Bank’s annual report on Form 10-K for additional information regarding the Bank’s derivative and hedging activities.

The Bank recorded the following net gain (loss) on derivatives and hedging activities in other income for the three and nine month periods ended September 30, 2007 and 2006 (dollars in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007		2006			2007		2006
Net gain related to fair value hedge ineffectiveness	$	616	$	682		$	697	$	2,175
Net gain (loss) related to economic Hedges		1,551		(491	)		1,009		(96	)
Net gain on derivatives and hedging activities	$	2,167	$	191		$	1,706	$	2,079

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The following table categorizes the notional amount and the estimated fair value of derivatives, excluding accrued interest, by derivative instrument and type of accounting treatment at September 30, 2007 and December 31, 2006 (dollars in thousands):

	September 30, 2007					December 31, 2006
			Estimated					Estimated
	Notional		Fair Value			Notional		Fair Value
Interest rate swaps
Fair value	$	29,660,318	$	(180,402	)	$	27,426,995	$	(228,998	)
Economic		500,000		(354	)		515,000		(192	)
Interest rate swaptions
Economic		4,650,000		216			1,425,000		2
Interest rate caps and floors
Economic		2,500,000		3,869			100,000		—
Forward settlement agreements
Economic		24,500		28			17,000		114
Mortgage delivery commitments
Economic		25,125		(21	)		15,792		(57	)
Total notional and fair value	$	37,359,943	$	(176,664	)	$	29,499,787	$	(229,131	)
Total derivatives, excluding accrued interest				(176,664	)				(229,131	)
Accrued interest				127,872					101,745
Net derivative balance			$	(48,792	)			$	(127,386	)
Net derivative assets				54,771					36,119
Net derivative liabilities				(103,563	)				(163,505	)
Net derivative balance			$	(48,792	)			$	(127,386	)

At September 30, 2007, the Bank did not have any embedded derivatives that required bifurcation. At December 31, 2006, the Bank had one callable bond with a par amount of $15.0 million that contained an embedded derivative that had been bifurcated from its host. The fair value of this embedded derivative was presented on a combined basis with the host contract and not included in the above table. The fair value of the embedded derivative was a liability of $0.1 million at December 31, 2006.

At September 30, 2007 and December 31, 2006, the Bank’s maximum credit risk related to derivative counterparties, as defined above, was $54.8 million and $36.1 million. These totals include $97.6 million and $28.3 million of net accrued interest receivable. In determining maximum credit risk, the Bank considers accrued interest receivables and payables and the legal right to offset derivative assets and liabilities by counterparty. The Bank held $11.5 million and $1.6 million as collateral at September 30, 2007 and December 31, 2006.

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Note 11—Commitments and Contingencies

As described in Note 7, the 12 FHLBanks have joint and several liability for all the consolidated obligations issued on their behalf. Accordingly, should one or more of the FHLBanks be unable to repay its participation in the consolidated obligations, each of the other FHLBanks could be called upon by the Finance Board to repay all or part of such obligations, as determined or approved by the Finance Board. No FHLBank has had to assume or pay the consolidated obligation of another FHLBank. The par amounts of the outstanding consolidated obligations issued on behalf of other FHLBanks for which the Bank is jointly and severally liable were approximately $1,100.3 billion and $913.6 billion at September 30, 2007 and December 31, 2006.

Standby letters of credit are executed for members for a fee. A standby letter of credit is a short-term financing arrangement between the Bank and a member. If the Bank is required to make payment for a beneficiary’s draw, these amounts are converted into a collateralized advance to the member. Outstanding standby letters of credit were approximately $1.3 billion at September 30, 2007, and had original terms between 8 days and 13 years with a final expiration in 2020. Outstanding standby letters of credit were $1.3 billion at December 31, 2006, and had original terms between five days and five years with a final expiration in 2011. The value of the guarantees related to standby letters of credit are recorded in other liabilities and amount to $0.7 million at September 30, 2007 and December 31, 2006. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have any provision for credit losses on these commitments.

Commitments that unconditionally obligate the Bank to fund or purchase mortgage loans from members in the MPF program totaled $25.1 million and $15.8 million at September 30, 2007 and December 31, 2006. Commitments are generally for periods not to exceed forty-five business days.

For managing the inherent credit risk in the MPF program, participating members receive base and performance based credit enhancement fees from the Bank. When the Bank incurs losses for certain MPF products, it reduces available credit enhancement fee payments until the amount of the loss is recovered up to the limit of the first loss account (FLA). The FLA is an indicator of the potential losses for which the Bank is liable (before the member’s credit enhancement is used to cover losses). The FLA amounted to $96.0 million and $94.1 million at September 30, 2007 and December 31, 2006.

Advances that had traded but not settled at September 30, 2007 and December 31, 2006 were $0.0 million and $7.5 million. Advance commitments are fully collateralized throughout the life of the agreements. Consolidated obligation discount notes that had traded but not settled at September 30, 2007 and December 31, 2006 were $17.4 million and $0.3 million par value. Consolidated obligation bonds that had traded but not settled at September 30, 2007 and December 31, 2006 were $8.6 million and $0.0 million par value. At September 30, 2007 and December 31, 2006 the Bank did not have any derivatives that had traded but not settled.

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The Bank generally executes derivatives with large highly rated banks and broker-dealers and enters into bilateral collateral agreements. The Bank had cash pledged as collateral to broker-dealers of $0.0 million and $11.3 million at September 30, 2007 and December 31, 2006 for derivatives. Cash pledged as collateral is classified as interest-bearing deposits in the statements of condition.

The Bank may be subject to legal proceedings that arise in the normal course of business. The Bank presently is not aware of any pending or threatened legal proceedings.

Notes 5, 6, 7, 8, and 10 discuss other commitments and contingencies.

Note 12—Activities with Stockholders and Housing Associates

Under the Bank’s capital plan, the only voting rights conferred upon the Bank’s members are for the election of directors. In accordance with the FHLBank Act and Finance Board regulations, members elect a majority of the Bank’s Board of Directors. The remaining directors are appointed by the Finance Board. Under statute and regulations, each elective directorship is designated to one of the five states in the Bank’s district and a member is entitled to vote for candidates for the state in which the member’s principal place of business is located. A member is entitled to cast, for each applicable directorship, one vote for each share of capital stock that the member is required to hold, subject to a statutory limitation. Under this limitation, the total number of votes that a member may cast is limited to the average number of shares of the Bank’s capital stock that were required to be held by all members in that state as of the record date for voting. Non-member stockholders are not entitled to cast votes for the election of directors. At September 30, 2007 and December 31, 2006, no member owned more than 10 percent of the voting interests of the Bank due to statutory limits on members’ voting rights as discussed above.

Transactions with Stockholders.The Bank is a cooperative, which means that current members own nearly all of the outstanding capital stock of the Bank and may receive dividends on their investment. Former members own the remaining capital stock to support business transactions still carried on the Bank’s statements of condition. All advances are issued to members and former members, and all mortgage loans held for portfolio are purchased from members. The Bank also maintains demand deposit accounts for members primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases. The Bank may not invest in any equity securities issued by its stockholders. The Bank extends credit to members in the ordinary course of business on substantially the same terms, including interest rates and collateral that must be pledged to us, as those prevailing at the time for comparable transactions with other members unless otherwise discussed. These extensions of credit do not involve more than the normal risk of collectibility and do not present other unfavorable features.

In addition, the Bank has investments in Federal funds sold, interest-bearing deposits, commercial paper, and MBS that were issued by affiliates of the Bank’s members. All investments are transacted at market prices and MBS are purchased through securities brokers or dealers.

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The following table shows transactions with members and their affiliates, former members and their affiliates, and housing associates at September 30, 2007 and December 31, 2006 (dollars in thousands):

	September 30,		December 31,
	2007		2006
Assets:
Federal funds sold	$	475,000	$	420,000
Investments		—		248,130
Advances		31,758,972		21,854,991
Accrued interest receivable		48,793		16,333
Derivative assets		10,648		6,507
Other assets		81		86
Total	$	32,293,494	$	22,546,047
Liabilities:
Deposits	$	1,372,182	$	903,426
Mandatorily redeemable capital stock		46,332		64,852
Accrued interest payable		1,037		424
Derivative liabilities		21,791		11,383
Other liabilities		682		663
Total	$	1,442,024	$	980,748
Notional amount of derivatives	$	3,024,901	$	2,534,362
Standby letters of credit		1,333,297		1,295,576

Transactions with Directors’ Financial Institutions. In the normal course of business, the Bank extends credit to its members whose directors and officers serve as its directors (Directors’ Financial Institutions). Finance Board regulations require that transactions with Directors’ Financial Institutions be subject to the same eligibility and credit criteria, as well as the same terms and conditions, as all other transactions. At September 30, 2007 and December 31, 2006, advances outstanding to the Bank Directors’ Financial Institutions aggregated $184.9 million and $158.7 million, representing 0.6 percent and 0.7 percent of the Bank’s total outstanding advances. There were $0.6 million in mortgage loans originated during the three months ended September 30, 2007 and no mortgage loans originated by the Bank Directors’ Financial Institutions during the three months ended September 30, 2006. Mortgage loans originated by the Bank Directors’ Financial Institutions were approximately $1.1 million and $0.4 million during the nine months ended September 30, 2007 and 2006. At September 30, 2007 and December 31, 2006, capital stock outstanding to the Bank Directors’ Financial Institutions aggregated $20.5 million and $19.4 million, representing 0.9 percent and 1.0 percent of the Bank’s total outstanding capital stock. The Bank did not have any investment or derivative transactions with Directors’ Financial Institutions during the nine months ended September 30, 2007 and 2006.

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Business Concentrations. The Bank has business concentrations with stockholders whose capital stock outstanding was in excess of 10 percent of the Bank’s total capital stock outstanding.

Capital Stock – The following tables present members and their affiliates holding 10 percent or more of outstanding capital stock (including stock classified as mandatorily redeemable) at September 30, 2007 and December 31, 2006 (shares in thousands):

			Shares at		Percent of
			September 30,		Total Capital
Name	City	State	2007		Stock
Superior Guaranty Insurance Corporation	Minneapolis	MN		4,572		19.1	%
Wells Fargo Bank, N.A.	Sioux Falls	SD		2,570		10.7
				7,142		29.8	%

			Shares at		Percent of
			December 31,		Total Capital
Name	City	State	2006		Stock
Superior Guaranty Insurance Corporation	Minneapolis	MN		4,639		23.5	%
Wells Fargo Bank, N.A.	Sioux Falls	SD		189		1.0
				4,828		24.5	%

The Bank paid Superior Guaranty Insurance Corporation (Superior), a Wells Fargo Bank, N.A. (Wells Fargo) affiliate, fees of $0 and $2,000 for the nine months ended September 30, 2007 and 2006 for participation in the MPF shared funding program. The Bank did not pay any fees during the three months ended September 30, 2007 and 2006.

Advances – The Bank had advances with Superior and Wells Fargo of $6.8 billion and $700.0 million at September 30, 2007 and December 31, 2006. During the three months ended September 30, 2007, the Bank made $6.1 billion in advances to Superior and Wells Fargo. The Bank did not make any advances to Wells Fargo during the nine months ended September 30, 2006.

Total interest income from Superior and Wells Fargo amounted to $23.5 million and $9.5 million for the three months ended September 30, 2007 and 2006 and $42.2 million and $26.8 million for the nine months ended September 30, 2007 and 2006. At September 30, 2007 and December 31, 2006, the Bank held sufficient collateral to cover the member’s advances and expected to incur no credit losses as a result of them.

Mortgage Loans – At September 30, 2007 and December 31, 2006, 83 and 85 percent of the Bank’s mortgage loans outstanding were purchased from Superior.

28

Other – The Bank has executed a lease for 20 years with an affiliate of Wells Fargo, which is a member of the Bank, to acquire space in a building for the Bank’s headquarters. The following table shows the future minimum rentals for the lease.

Year	Amount
Due in one year or less	$	869
Due after one year through two years		869
Due after two years through three years		869
Due after three years through four years		869
Due after four years through five years		869
Thereafter		13,254
Total	$	17,599

Note 13—Activities with Other FHLBanks

The Bank purchased MPF Shared Funding Certificates from the FHLBank of Chicago. See Note 4 – Held to Maturity Securities at page 12 for balances at September 30, 2007 and 2006.

In addition, the Bank recorded service fee expense as an offset to other income due to its relationship with the FHLBank of Chicago in the MPF program. The Bank recorded $0.2 million and $0.1 million in service fee expense to the FHLBank of Chicago for the three months ended September 30, 2007 and 2006 as a reduction of other income and $0.5 million and $0.4 million for the nine months ended September 30, 2007 and 2006.

The FHLBank of Chicago pays the Bank a monthly participation fee based on the aggregate amount of outstanding loans purchased under the MPF program. The Bank recorded other income of $0.1 million for each of the three months ended September 30, 2007 and 2006 and $0.2 million for each of the nine months ended September 30, 2007 and 2006.

29

The Bank may sell or purchase unsecured overnight and term Federal funds at market interest rates to or from other FHLBanks. The Bank did not make any loans to other FHLBanks during the three and nine months ended September 30, 2007 and 2006. The following table shows the borrowing activity from other FHLBanks for the nine months ended September 30, 2007 and 2006 (dollars in thousands):

	Beginning				Principal			Ending
Other FHLBank	Balance		Borrowings		Payment			Balance
September 30, 2007
Cincinnati	$	—	$	145,000	$	(145,000	)	$	—
San Francisco		—		135,000		(135,000	)		—
Total	$	—	$	280,000	$	(280,000	)	$	—
September 30, 2006
Cincinnati	$	—	$	245,000	$	(245,000	)	$	—
San Francisco		—		630,000		(630,000	)		—
Total	$	—	$	875,000	$	(875,000	)	$	—

Note 14—Subsequent Event

On November 13, 2007, the Board of Directors approved payment of a cash dividend at a rate of 4.50 percent per annum based on average capital stock balances for the three months ended September 30, 2007. The dividend amounted to $23.8 million and will be paid on November 19, 2007.

30

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and condensed notes at the beginning of this Form 10-Q and in conjunction with our Management’s Discussion and Analysis and annual report on Form 10-K.

Special Note Regarding Forward-looking Statements

Statements contained in this report, including statements describing the objectives, projections, estimates, or future predictions in our operations, may be forward-looking statements. These statements may be identified by the use of forward-looking terminology, such asanticipates,believes,could,estimates,may,should, andwillor their negatives or other variations on these terms. By their nature, forward-looking statements involve risk or uncertainty, and actual results could differ materially from those expressed or implied or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. You are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. We take responsibility for any forward-looking statement only as of the date the statement was made. We undertake no obligation to update or revise any forward-looking statement.

Forward-looking statements in this report include, among others, statements regarding the following:

• Our expectation that our record levels of borrowings from our members will be short-term as the markets rebound from its current condition.

• Our expectation that the volume of purchases for the Mortgage Partnership Finance (register mark) (MPF (register mark)) program(Mortgage Partnership Finance and MPF are registered trademarks of the Federal Home Loan Bank of Chicago) will continue to be at low levels, which will reduce Mortgage Finance’s net interest income. The expected decrease in Mortgage Finance’s net interest income may be partially offset by interest income from our Mortgage-Backed Securities (MBS) portfolio.

• Our expectation that our capital-to-asset ratio will not decline below the regulatory requirement.

There can be no assurance that unanticipated risks will not materially and adversely affect our results of operations. For a description of some of the risks and uncertainties that could cause our actual results to differ materially from the expectations reflected in our forward-looking statements see “Risk Factors” in the annual report on Form 10-K.

31

Conditions in the Financial Markets

Three and Nine Month Periods Ended September 30, 2007 and 2006 and December 31, 2006

During the three months ended September 30, 2007 general economic and financial market volatility had a positive impact on the Bank’s net interest income through their influence on (1) our advance, investment, and MPF volumes; (2) changes in the Bank’s funding costs and spreads; and (3) earnings on invested capital.

Significant credit and financial market volatility during the third quarter of 2007 led to a large increase in advances volume, increased net interest spread and margin, and resulted in higher spreads on invested capital. The subprime loan market concerns led to a significant liquidity crisis. Because of market turbulence, the Bank’s advance prices were attractive to members and the Bank experienced a large increase in its advances balance. The market’s “flight-to-quality” caused the Bank’s cost of short-term debt (discount notes) to decline dramatically during the months of August and September. In response to market volatility, the Federal Reserve Board reduced the Fed funds rate by 50 basis points in September.

Financial Market Conditions

During the nine months ended September 30, 2007, average short-term rates increased while longer-term market interest rates declined slightly when compared with 2006. The following table shows information on key average market interest rates for the three and nine month periods ended September 30, 2007 and 2006 and key market interest rates at December 31, 2006:

							Year-to-date			Year-to-date
	Third Quarter			Third Quarter			September 30,			September 30,
	2007			2006			2007			2006			December 31,
	3-Month			3-Month			9-Month			9-Month			2006
	Average			Average			Average			Average			Ending Rate
Fed effective1		5.09	%		5.25	%		5.20	%		4.88	%		5.17	%
Three-month LIBOR1		5.44			5.43			5.39			5.14			5.36
10-year U.S. Treasury1		4.73			4.89			4.75			4.84			4.70
30-year residential mortgage note2		6.55			6.56			6.37			6.47			6.18

1	Source is Bloomberg.
2	Average calculated usingThe Mortgage Bankers Association Weekly Application Survey; December 31, 2006 ending rates are from the last week in 2006.

32

During the three months ended September 30, 2007 average Fed funds decreased by 16 basis points compared to the same period in 2006. Credit and liquidity concerns caused the short-term interest rates to decrease. As a result for the nine months ended September 30, 2007 average Fed funds increased 38 basis points compared to the same period in 2006. During the nine months ended September 30, 2007, London Interbank Offered Rate (LIBOR) increased 25 basis points compared to the same period in 2006. The 10-year US Treasury rates declined by 16 basis points and nine basis points for the three and nine month periods respectively.

Agency Spreads

Developments in the Agency debt market increased the Bank’s longer-term cost of funds during the period. Although Agency spreads to LIBOR increased on the shorter maturities during the third quarter of 2007 in comparison to the third quarter of 2006, they decreased on longer maturities during the quarter due to market volatility. This resulted in more expensive funding for the Bank on a long-term basis.

	Third Quarter		Third Quarter
	2007		2006		December 31,
	3-Month		3-Month		2006
	Average		Average		Ending Rate
FHLB spreads to LIBOR (basis points)1
2-year	(18.1	)	(17.8	)	(13.7	)
5-year	(13.5	)	(15.6	)	(13.9	)
10-year	(9.8	)	(14.6	)	(15.1	)

¹ Source is Office of Finance.

Mortgage Market Conditions

Developments in the mortgage-backed security markets improved the attractiveness of mortgage investments for the Bank. Poor sub-prime mortgage credit performance has kept traditional investors out of the market as delinquencies and foreclosures reached all time highs on securities backed by these loans. Furthermore, certain segments of the mortgage market did not perform as originators found it difficult to sell or securitize certain classes of mortgage product. These concerns, along with increases in LIBOR option-adjusted spread (LOAS) during this same time period, increased the earnings potential on high quality non-sub-prime MBS investments. While we cannot predict future outcomes, to date we have not experienced credit losses for our holdings of mortgage loans or MBS, due primarily to our business model, conservative policy pertaining to advances collateral and investments, and reduced credit risk due to the design of our mortgage loan programs.

33

Selected Financial Data

The following selected financial data should be read in conjunction with the financial statements and condensed notes thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report, and our annual report on Form 10-K. The financial position data at September 30, 2007 and results of operations data for the three and nine month periods ended September 30, 2007 were derived from the unaudited financial statements and condensed notes thereto included in this report. The financial position data at December 31, 2006 was derived from the audited financial statements and notes not included in this report.

34

In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, for a fair statement of results for the interim periods and is in conformity with accounting principles generally accepted in the United States (U.S.) of America (GAAP). The results of operations for the three and nine month periods ended September 30, 2007 are not necessarily indicative of the results that may be achieved for the full year.

	September 30,			December 31,
Statements of Condition	2007			2006
(Dollars in millions)
Short-term investments1	$	3,997		$	3,826
Mortgage-backed securities		5,842			4,380
Other investments		83			13
Advances		31,759			21,855
Mortgage loans, net		10,974			11,775
Total assets		52,890			42,041
Securities sold under agreements to repurchase		200			500
Consolidated obligations2		48,028			37,751
Mandatorily redeemable capital stock		46			65
Affordable Housing Program		43			45
Payable to REFCORP		7			6
Total liabilities		50,200			39,792
Capital stock – Class B putable		2,348			1,906
Retained earnings		355			344
Capital-to-asset ratio3		5.09	%		5.35	%

	Three months ended September 30,						Nine months ended September 30,
Operating Results and Performance Ratios	2007			2006			2007			2006
(Dollars in millions)
Interest income	$	637.4		$	569.8		$	1,804.0		$	1,644.3
Interest expense		592.0			530.8			1681.2			1,529.4
Net interest income		45.4			39.0			122.8			114.9
Reversal of provision for credit losses on mortgage loans		—			0.5			—			0.5
Net interest income after mortgage loan credit loss provision		45.4			39.5			122.8			115.4
Other income4		3.7			1.5			6.5			6.8
Other expense		9.8			10.1			30.1			32.0
Total assessments5		10.5			8.2			27.0			24.1
Net income		28.8			22.7			72.2			66.1
Return on average assets		0.24	%		0.21	%		0.21	%		0.20	%
Return on average capital stock		5.56			4.59			4.92			4.55
Return on average total capital		4.76			3.92			4.18			3.86
Net interest margin		0.38			0.36			0.35			0.35
Operating expenses to average assets6		0.08			0.09			0.08			0.09
Annualized dividend rate		4.25			4.25			4.25			3.69
Cash dividends declared and paid	$	20.3		$	21.1		$	61.0		$	53.8

1	Short-term investments include: interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, commercial paper, and government-sponsored enterprise obligations. Short-term investments have terms less than one year.
2	The par amount of the outstanding consolidatedobligations for all 12 Federal Home Loan Banks (FHLBanks) was $1,148.5 billion and $951.7 billion at September 30, 2007 and December 31, 2006.
3	Capital-to-asset ratio is capital stock plus retained earnings and accumulated other comprehensive income (loss) as a percentage of total assets at the end of the period.
4	Other income includes change in fair value of derivatives.
5	Total assessments include: Affordable Housing Program and Resolution Funding Corporation (REFCORP).
6	Operating expenses to average assets ratio is salaries and benefits plus operating expenses as a percentage of average total assets.

35

Overview

The following discussion highlights significant factors influencing our results of operations and financial condition. Average balances are calculated on a daily weighted average basis. Amounts used to calculate percentage variances are based on numbers in thousands. Accordingly, recalculations may not produce the same results when the amounts are disclosed in millions.

The Bank’s members are both stockholders and customers. As a cooperative, we deliver value in a way that not only provides members with attractive product prices and reasonable returns on invested capital, but also provides the Bank with adequate retained earnings to support safe and sound business operations. The Bank’s financial policies and practices are designed to support those three key components.

During the three months ended September 30, 2007, we continued to emphasize delivering member value. To meet member funding needs, we expanded our advance products and added two new member owned option advances. Additionally the Bank received approval from our regulator, the Federal Housing Finance Board (Finance Board), for our members to use non-speculative construction loans secured by a first lien on 1-4 family dwellings as collateral that should increase the borrowing potential of our members beginning in November 2007. Finally, the Bank also received approval from the Finance Board to issue standby bond purchase agreements.

During the three months ended September 30, 2007, the Bank experienced record levels of advance borrowings from our members in response to the market liquidity crisis that began in August 2007. Our advance portfolio increased to $31.8 billion at September 30, 2007 from $21.9 billion at December 31, 2006, or approximately 45.2 percent. Our ability to access the capital markets and our AAA credit rating allows us to provide our members with a stable source of funding. Interest income on our advance portfolio increased $33.0 million or 10.8 percent for the three months ended September 30, 2007 compared with the same period in 2006. Interest income on our advance portfolio increased $88.4 million or 10.5 percent for the nine months ended September 30, 2007 compared with the same period in 2006. We expect these record levels of advances to be short-term as the markets stabilize.

Investments increased $1.7 billion to $9.9 billion at September 30, 2007 from $8.2 billion at December 31, 2006. The increase in investments was primarily due to the Bank’s efforts to increase its asset-to-capital ratio through the purchase of MBS. Developments in the MBS markets improved the attractiveness of mortgage investments for the Bank. Poor sub-prime mortgage credit performance kept traditional investors out of the market and therefore, in order to raise funds, counterparties were selling highly rated agency MBS investments at significant discounts. The Bank purchased these MBS investments at significant discounts that contributed to the increase in investment income of $47.7 million and $112.6 million or 42.4 percent and 33.2 percent for the three and nine month periods ended September 30, 2007, compared with the same periods in 2006.

36

At September 30, 2007, our mortgage loan portfolio declined approximately 6.8 percent to $11.0 billion compared with $11.8 billion at December 31, 2006 due primarily to pay-downs of the existing portfolio exceeding new loan acquisitions. Although the MPF portfolio experienced an overall decline during the nine months ended September 30, 2007, MPF originations increased during the nine months ended September 30, 2007, to $270.6 million from $268.9 million in the same period in 2006. While MPF originations cannot be anticipated and will vary based on member alternatives, the Bank’s MPF program remained very competitive during the current market crisis. Interest income from mortgage loans held for portfolio was $138.6 million and $151.7 million for the three months ended September 30, 2007 and 2006 and $425.4 million and $466.7 million for the nine months ended September 30, 2007 and 2006. The Bank anticipates that over time the MPF program assets will become a smaller portion of the Bank’s assets and income. Therefore, the Bank continues to analyze the impact of the decreasing mortgage loan portfolio on the Bank’s business and is considering alternatives to the current MPF program such as off balance sheet strategies.

The Bank’s consolidated obligations increased $10.3 billion or 27.2 percent to $48.0 billion at September 30, 2007 compared with December 31, 2006. The increase in consolidated obligations was primarily driven by discount notes which increased $9.1 billion or 194 percent to $13.8 billion at September 30, 2007 compared with December 31, 2006. As previously noted, the increase in advance volume was primarily short-term in nature and therefore was funded through the issuance of short-term discount notes. The discount notes were issued with historically large discounts due to the market’s “flight-to-quality” thereby increasing the Bank’s net interest margin and net interest spread.

Results of Operations

Three and Nine Month Periods Ended September 30, 2007 and 2006

Net Income– Net income increased $6.1 million for the three and nine month periods ended September 30, 2007 when compared to the same periods in 2006. Net income was $28.8 million and $22.7 million for the three months ended September 30, 2007 and 2006 and $72.2 million and $66.1 million for the each of the nine month periods ended September 30, 2007 and 2006.

Other income increased $2.2 million and decreased $0.3 million for the three and nine month periods ended September 30, 2007 when compared with the same periods in 2006 primarily due to changes in net gain (loss) on derivatives and hedging activities, which will fluctuate based on the Bank’s hedging activities and changes in interest rates. Other expense decreased $0.3 million and $1.9 million for the three and nine month periods ended September 30, 2007 when compared with the same periods in 2006 primarily due to decreased professional fees included within operating expenses. See additional discussion for other income on page 44 and other expense on page 46.

Net Interest Income–Net interest income is the primary measure of the performance for our ongoing operations. Fluctuations in average asset, liability, and capital balances, and the related yields and costs are the primary causes of changes in our net interest income.

37

Average assets increased to $45.9 billion during the nine months ended September 30, 2007 compared with $44.1 billion for the same period in 2006. The increase was primarily attributable to increased average short-term investments, Federal funds sold, and advances, partially offset by decreased average mortgage loans. Although the Bank’s advances in the statement of condition increased substantially at September 30, 2007 compared with December 31, 2006, the increase is not reflected through an equivalent increase in average balances as the volume increased during the latter half of the third quarter.

Average liabilities increased to $43.6 billion for the nine months ended September 30, 2007 from $41.8 billion for the same period in 2006. The increase was due to increased average consolidated obligations and deposits. Average consolidated obligations fluctuate depending on the Bank’s asset balances and funding needs and average deposits fluctuate depending on our members’ alternatives for short-term investments.

Average capital increased $21.6 million for the nine months ended September 30, 2007 compared to the same period in 2006. The increase was primarily due to an increase in capital stock requirements to support member activities related to increased advances as well as an increase in retained earnings.

The following table shows net interest income for the three and nine month periods ended September 30, 2007 and 2006 (dollars in millions):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Total interest income	$	637.4	$	569.8	$	1,804.0	$	1,644.3
Total interest expense		592.0		530.8		1,681.2		1,529.4
Net interest income before mortgage loan credit loss provision		45.4		39.0		122.8		114.9
Reversal of provision for credit losses on mortgage loans		—		0.5		—		0.5
Net interest income after mortgage loan credit loss provision	$	45.4	$	39.5	$	122.8	$	115.4

Net interest income before mortgage loan credit loss provision increased $6.4 million for the three month period ended September 30, 2007 compared to the same period in 2006 and increased 7.9 million for the nine month period ended September 30, 2007 compared with the same periods in 2006. The increase was primarily due to the increased investment income from our MBS securities and lower interest costs on our discount notes.

The yield on total interest-earning assets and cost of interest-bearing liabilities are impacted by our use of derivatives to adjust the interest rate sensitivity of assets and liabilities.

The two components of the Bank’s net interest income are earnings from our asset-liability spread and earnings on capital.

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Asset-liability Spread–This spread equals the yield on total assets minus the cost of total liabilities. Asset-liability spread income increased $5.1 million and $2.5 million for the three and nine month periods ended September 30, 2007 compared with the same periods in 2006. The increase in asset-liability spread income was due to increased net interest spreads during the three and nine month periods ended September 30, 2007 compared to the same periods in 2006. The significant increase in the net interest spread for the three month period was impacted by the lower cost on our discount note issuances and favorable spreads on MBS as previously discussed.

Earnings on Capital–We invest our capital to generate earnings, generally for the same repricing maturity as the assets being supported.

Earnings on capital increased $1.3 million and $5.4 million during the three and nine month periods ended September 30, 2007 compared with the same periods in 2006 due to increased average capital balances and higher net interest spreads. Average capital increased $86.7 million and $21.6 million during the three and nine month periods ended September 30, 2007 compared with the same periods in 2006 primarily due to an increase in capital stock requirements to support member activities related to advances as well as an increase in retained earnings.

39

The following tables present average balances and rates of major interest rate sensitive asset and liability categories for the three and nine month periods ended September 30, 2007 and 2006. The tables also present the net interest spread between yield on total interest-earning assets and cost of total interest-bearing liabilities and the net interest margin between yield on total assets and the cost of total liabilities and capital (dollars in millions).

	For the Three Months Ended September 30, 2007							For the Three Months Ended September 30, 2006
						Interest							Interest
	Average					Income/		Average					Income/
	Balance		Yield/Cost			Expense		Balance		Yield/Cost			Expense
Interest-earning assets
Interest-bearing deposits	$	62		5.34	%	$	0.8	$	50		5.32	%	$	0.7
Securities purchased under agreements to resell		282		5.34	%		3.8		305		5.35	%		4.1
Federal funds sold		3,723		5.26	%		49.3		2,445		5.32	%		32.8
Short-term investments1		2,690		5.27	%		35.8		862		5.45	%		11.8
Mortgage-backed securities1		5,141		5.37	%		69.6		4,715		5.29	%		62.9
Other investments		52		5.67	%		0.7		13		4.30	%		0.1
Advances		24,814		5.42	%		338.8		22,594		5.37	%		305.7
Mortgage loans2		11,089		4.96	%		138.6		12,228		4.92	%		151.7
Total interest-earning assets		47,853		5.29	%		637.4		43,212		5.23	%		569.8
Noninterest-earning assets		264		—			—		264		—			—
Total assets	$	48,117		5.26	%	$	637.4	$	43,476		5.20	%	$	569.8
Interest-bearing liabilities
Deposits	$	913		4.74	%	$	10.9	$	608		5.06	%	$	7.7
Consolidated obligations
Discount notes		9,170		5.05	%		116.8		6,508		5.23	%		85.8
Bonds		34,507		5.25	%		456.5		32,789		5.19	%		428.9
Other interest-bearing liabilities		529		5.84	%		7.8		576		5.81	%		8.4
Total interest-bearing liabilities		45,119		5.21	%		592.0		40,481		5.20	%		530.8
Noninterest-bearing liabilities		600		—			—		684		—			—
Total liabilities		45,719		5.14	%		592.0		41,165		5.12	%		530.8
Capital		2,398		—			—		2,311		—			—
Total liabilities and capital	$	48,117		4.88	%	$	592.0	$	43,476		4.84	%	$	530.8
Net interest income and spread				0.08	%	$	45.4				0.03	%	$	39.0
Net interest margin				0.38	%						0.36	%
Average interest-earning assets to interest-bearing liabilities				106.06	%						106.75	%
Composition of net interest income
Asset-liability spread				0.12	%	$	14.3				0.08	%	$	9.2
Earnings on capital				5.14	%		31.1				5.12	%		29.8
Net interest income						$	45.4						$	39.0

1	The average balances of available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value.
2	Nonperforming loans are included in average balances used to determine average rate.

40

	For the Nine Months Ended September 30, 2007							For the Nine Months Ended September 30, 2006
						Interest							Interest
	Average					Income/		Average					Income/
	Balance		Yield/Cost			Expense		Balance		Yield/Cost			Expense
Interest-earning assets
Interest-bearing deposits	$	50		5.35	%	$	2.0	$	314		4.58	%	$	10.8
Securities purchased under agreements to resell		297		5.36	%		11.9		305		4.97	%		11.3
Federal funds sold		3,866		5.30	%		153.3		2,633		4.88	%		96.2
Short-term investments1		2,560		5.31	%		101.7		872		4.89	%		31.9
Mortgage-backed securities1		4,544		5.36	%		182.1		4,830		5.22	%		188.8
Other investments		25		5.17	%		1.0		14		4.40	%		0.4
Advances		22,933		5.40	%		926.6		22,297		5.03	%		838.2
Mortgage loans2		11,367		5.00	%		425.4		12,551		4.97	%		466.7
Total interest-earning assets		45,642		5.28	%		1,804.0		43,816		5.02	%		1,644.3
Noninterest-earning assets		263					—		255		—			—
Total assets	$	45,905		5.25	%	$	1,804.0	$	44,071		4.99	%	$	1,644.3
Interest-bearing liabilities
Deposits	$	1005		4.98	%	$	37.4	$	672		4.64	%	$	23.3
Consolidated obligations
Discount notes		7,338		5.15	%		282.6		5,281		4.87	%		192.4
Bonds		34,113		5.24	%		1,336.8		34,500		5.00	%		1,290.4
Other interest-bearing liabilities		553		5.90	%		24.4		583		5.35	%		23.3
Total interest-bearing liabilities		43,009		5.23	%		1,681.2		41,036		4.98	%		1,529.4
Noninterest-bearing liabilities		587		—			—		748		—			—
Total liabilities		43,596		5.16	%		1,681.2		41,784		4.89	%		1,529.4
Capital		2,309		—			—		2,287		—			—
Total liabilities and capital	$	45,905		4.90	%	$	1,681.2	$	44,071		4.64	%	$	1,529.4
Net interest income and spread				0.05	%	$	122.8				0.04	%	$	114.9
Net interest margin				0.35	%						0.35	%
Average interest-earning assets to interest-bearing liabilities				106.12	%						106.78	%
Composition of net interest income
Asset-liability spread				0.09	%	$	33.7				0.10	%	$	31.2
Earnings on capital				5.16	%		89.1				4.89	%		83.7
Net interest income						$	122.8						$	114.9

1	The average balances of available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value.
2	Nonperforming loans are included in average balances used to determine average rate.

41

Our net interest income is affected by changes in the dollar volumes of our interest-earning assets and interest-bearing liabilities and changes in the average rates of those assets and liabilities. The following table presents the changes in interest income and interest expense between the three and nine month periods ended September 30, 2007 and 2006. Changes that cannot be attributed to either rate or volume have been allocated to the rate and volume variances based on relative size (dollars in millions).

	Variance For the Three Months Ended									Variance For the Nine Months Ended
	September 30, 2007 vs. September 30, 2006									September 30, 2007 vs. September 30, 2006
							Total								Total
	Total Increase						Increase			Total Increase					Increase
	(Decrease) Due to						(Decrease)			(Decrease) Due to					(Decrease)
	Volume			Rate						Volume			Rate
Interest income
Interest-bearing deposits	$	0.1		$	—		$	0.1		$	(10.3	)	$	1.5	$	(8.8	)
Securities purchased under agreements to resell		(0.3	)		—			(0.3	)		(0.3	)		0.9		0.6
Federal funds sold		16.9			(0.4	)		16.5			48.2			8.9		57.1
Short-term investments		24.3			(0.4	)		23.9			66.8			3.0		69.8
Mortgage-backed securities		5.7			1.0			6.7			(11.6	)		4.9		(6.7	)
Other investments		0.6			0.1			0.7			0.5			0.1		0.6
Advances		30.4			2.7			33.1			24.7			63.7		88.4
Mortgage loans		(14.3	)		1.2			(13.1	)		(44.1	)		2.8		(41.3	)
Total interest income		63.4			4.2			67.6			73.9			85.8		159.7
Interest expense
Deposits		3.7			(0.5	)		3.2			12.3			1.8		14.1
Consolidated obligations
Discount notes		34.0			(3.0	)		31.0			78.6			11.6		90.2
Bonds		22.7			4.9			27.6			(14.7	)		61.1		46.4
Other interest-bearing liabilities		(0.6	)		—			(0.6	)		(1.2	)		2.3		1.1
Total interest expense		59.8			1.4			61.2			75.0			76.8		151.8
Net interest income	$	3.6		$	2.8		$	6.4		$	(1.1	)	$	9.0	$	7.9

42

Net Interest Income by Segment–The Bank’s segment results are analyzed on an adjusted net interest income basis. Adjusted net interest income is made up of net interest income and interest income and interest expense associated with economic hedges. The following shows the Bank’s financial performance by operating segment and a reconciliation of financial performance to net interest income for the three and nine month periods ended September 30, 2007 and 2006 (dollars in millions):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Adjusted net interest income by operating segment
Member Finance	$	39.5	$	31.5	$	104.6	$	88.6
Mortgage Finance		5.9		7.9		18.1		26.8
Total	$	45.4	$	39.4	$	122.7	$	115.4

Reconciliation to the Bank’s operating segment results to net interest income after mortgage loan credit loss provision

Adjusted net interest income	$	45.4	$	39.4	$	122.7	$	115.4
Net interest income on economic hedges		0.1		0.1		0.1		—
Net interest income after mortgage loan credit loss provision	$	45.5	$	39.5	$	122.8	$	115.4

Member Finance–Member Finance adjusted net interest income increased $8.0 million and $16.0 million during the three and nine month periods ended September 30, 2007 compared to the same periods in 2006. The increase was attributable to higher returns on invested capital due to an increase in the segment’s average assets as well as increased income from higher net interest spreads. The segment’s average assets increased to $30.0 billion for the nine months ended September 30, 2007 compared with $26.7 billion in the same period of 2006.

Mortgage Finance–The Mortgage Finance segment adjusted net interest income decreased $2.0 million and $8.7 million during the three and nine month periods ended September 30, 2007 when compared with the same periods in 2006. The decrease was attributable to a decrease in the mortgage finance segment’s average asset balance of $15.9 billion for the nine months ended September 30, 2007 from $17.4 billion for the nine months ended September 30, 2006.

43

The Bank currently expects that the volume of mortgage loan purchases for the MPF program will continue to be at or below the relatively low level that was experienced during 2006. To the extent that new production does not replace current mortgage loan portfolio runoff, we would experience declines in mortgage loan balances which would likely continue to reduce Mortgage Finance’s net interest income. The expected decrease in Mortgage Finance’s net interest income may be partially offset by interest income from the Bank’s MBS portfolio.

Other Income

The following table presents the components of other income for the three and nine month periods ended September 30, 2007 and 2006 (dollars in millions):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Service fees	$	0.5	$	0.6	$	1.7	$	1.8
Net realized gain on held-to- maturity securities		—		—		0.5		—
Net gain on derivatives and hedging activities		2.2		0.2		1.7		2.1
Other, net		1.0		0.7		2.6		2.9
Total other income	$	3.7	$	1.5	$	6.5	$	6.8

Other income can be volatile from period to period depending on the type of financial activity reported. For example, the net gain or loss on derivatives and hedging activities is highly dependent on changes in interest rates.

44

Other income increased $2.2 million during the three month period ended September 30, 2007 and decreased $0.3 million during the nine month period ended September 30, 2007 compared with the same periods in 2006 primarily due to changes in net gain (loss) on derivatives and hedging activities. Net gain on derivatives and hedging activities is made up of net gain (loss) related to fair value hedge ineffectiveness and net gain (loss) related to economic hedges. Economic hedges do not qualify for hedge accounting requiring the Bank to record gains or losses on the hedging instrument without recording the corresponding loss or gain on the hedged item. Additionally, the interest accruals on the hedging instrument are recorded as a component of other income instead of a component of net interest income. The Bank recorded the following net gain (loss) on derivatives and hedging activities for the three and nine month periods ended September 30, 2007 and 2006 (dollars in millions):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007		2006			2007		2006
Net gain related to fair value hedge ineffectiveness	$	0.6	$	0.7		$	0.7	$	2.2
Net gain (loss) related to economic hedges		1.6		(0.5	)		1.0		(0.1	)
Net gain on derivatives and hedging activities	$	2.1	$	0.2		$	1.7	$	2.1

Net gain related to economic hedges increased $2.1 million and $1.1 million during the three and nine month periods ended September 30, 2007 compared with the same periods in 2006. The increases were primarily due to gains recorded on interest rate floors partially offset by losses recorded on interest rate swaptions. Additionally, the Bank sold two interest rate swaptions prior to expiration and recognized a gain of approximately $1.2 million. The gains and losses were due to increased volatility in the market combined with a decline in interest rates late in the third quarter of 2007.

Net gain related to fair value hedge ineffectiveness decreased $0.1 million and $1.5 million during the three and nine month periods ended September 30, 2007 compared with the same periods in 2006. The decrease for the nine month period ended September 30, 2007 compared with the same period in 2006 was primarily due to an unrealized loss recognized on the implementation of an enhanced valuation methodology for certain long haul method hedge relationships during the first quarter of 2007. The enhancement to the methodology values the related hedged item using a market OAS at the inception of the hedge relationship and resulted in recording a loss on derivatives and hedging activities of $1.3 million.

45

Other Expenses

The following table shows the components of other expenses for the three and nine month periods ended September 30, 2007 and 2006 (dollars in millions):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Salaries and employee benefits	$	5.9	$	5.9	$	17.8	$	17.8
Occupancy cost		0.4		0.1		1.3		0.5
Other operating expenses		2.9		3.4		9.0		11.7
Total operating expenses		9.2		9.4		28.1		30.0
Finance Board		0.4		0.4		1.2		1.3
Office of Finance		0.2		0.3		0.8		0.7
Total other expense	$	9.8	$	10.1	$	30.1	$	32.0

Other expense decreased $0.3 million and $1.9 million during the three and nine month periods ended September 30, 2007 when compared with the same periods in 2006. The decrease was primarily due to other operating expenses. Other operating expenses decreased $0.5 million and $2.7 million during the three and nine month periods ended September 30, 2007 compared with the same periods in 2006. Approximately $0.7 million and $2.3 million of the decrease related to lower professional fees. The decrease in other expense was partially offset by increased occupancy costs of $0.3 million and $0.8 million for the three and nine month periods ended September 30, 2007, respectively, as compared to the same periods in 2006.

46

Statements of Condition

September 30, 2007 and December 31, 2006

Advances

The following table shows the composition of our advances based on remaining term to scheduled maturity at September 30, 2007 and December 31, 2006 was as follows (dollars in millions):

	September 30, 2007					December 31, 2006
			Percent of						Percent of
	Amount		Total			Amount			Total
Simple fixed rate advances
Overdrawn demand deposit accounts	$	1		—	%	$	1			—	%
One month or less		8,400		26.6			2,592			11.9
Over one month through one year		3,670		11.6			2,413			11.0
Greater than one year		6,563		20.7			5,592			25.6
		18,634		58.9			10,598			48.5
Simple variable rate advances
One month or less		134		0.3			17			0.1
Over one month through one year		143		0.5			344			1.6
Greater than one year		3,436		10.9			3,617			16.5
		3,713		11.7			3,978			18.2
Callable advances – fixed rate		239		0.8			268			1.2
Callable advances – variable rate		1,000		3.2			—			—
Putable advances
Fixed rate		6,693		21.1			5,833			26.7
Community investment advances
Fixed rate		1,008		3.3			892			4.1
Variable rate		37		0.0			45			0.2
Callable – fixed rate		61		0.2			71			0.3
Putable – fixed rate		253		0.8			166			0.8
Total par value		31,638		100.0	%		21,851			100.0	%
Hedging fair value adjustments
Cumulative fair value gain (loss)		114					(3	)
Basis adjustments from terminated hedges		7					7
Total advances	$	31,759				$	21,855

47

At September 30, 2007, the book value of advances totaled $31.8 billion or 45.2 percent more than the December 31, 2006 book value of $21.9 billion. The Bank experienced record levels of advance borrowings from our members in response to the market liquidity crisis that began in August 2007. As reflected in the table above, the increase was primarily due to increased simple fixed rate advances of $8.0 billion and callable, variable rate advances of $1.0 billion. The callable, variable rate advances were new products offered to members beginning in the third quarter of 2007. Additionally, as reflected in the previous table, the majority of the increase was in the shorter-term categories and therefore, we expect these record levels of advances to decline as the markets stabilize. Although advances have increased to record levels at September 30, 2007, we believe that under our collateral and underwriting requirements the credit risk exposure of the Bank has not increased. See additional discussion regarding our collateral requirements in the “Advances” section on page 68.

Substantially all of the cumulative fair value gains or losses on advances are offset by the net estimated fair value losses or gains on the related derivative contracts. See additional discussion regarding our derivative contracts in the “Derivatives” section on page 66.

48

The following tables show advance balances for our five largest member advance borrowers at September 30, 2007 and December 31, 2006 (dollars in millions):

			September 30,		Percent of
			2007		Total
Name	City	State	Advances1		Advances
Wells Fargo Bank, National Association	Sioux Falls	SD	$	5,550		17.5	%
ING USA Annuity and Life Insurance Company	Des Moines	IA		2,160		6.8
TCF National Bank	Wayzata	MN		2,125		6.7
Transamerica Occidental Life Insurance Company	Cedar Rapids	IA		2,050		6.5
AmerUs Life Insurance Company	Des Moines	IA		1,711		5.4
				13,596		42.9
Housing associates				3		—
All others				18,039		57.1
Total advances (at par value)			$	31,638		100.0	%

			December 31,		Percent of
			2006		Total
Name	City	State	Advances1		Advances
Transamerica Occidental Life Insurance Company2	Cedar Rapids	IA	$	1,600		7.3	%
AmerUs Life Insurance Company	Des Moines	IA		1,511		6.9
TCF National Bank	Wayzata	MN		1,425		6.5
Transamerica Life Insurance Company2	Cedar Rapids	IA		1,300		6.0
Bank Midwest, N.A.	Kansas City	MO		586		2.7
				6,422		29.4
Housing associates				4		—
All others				15,425		70.6
Total advances (at par value)			$	21,851		100.0	%

1	Amounts represent par value before considering unamortized commitment fees, premiums and discounts, and hedging fair value adjustments.
2	Transamerica Life Insurance Company and Transamerica Occidental Life Insurance Company are affiliates.

49

Mortgage Loans

The following table shows information at September 30, 2007 and December 31, 2006 on mortgage loans held for portfolio (dollars in millions):

	September 30,			December 31,
	2007			2006
Single family mortgages
Fixed rate conventional loans
Contractual maturity less than or equal to 15 years	$	2,643		$	2,941
Contractual maturity greater than 15 years		7,842			8,308
		10,485			11,249
Fixed rate government-insured loans
Contractual maturity less than or equal to 15 years		3			3
Contractual maturity greater than 15 years		475			508
		478			511
Total par value		10,963			11,760
Premiums		99			113
Discounts		(96	)		(108	)
Hedging fair value adjustments
Basis adjustments from mortgage loan commitments		8			10
Allowance for credit losses		—			—
Total mortgage loans held for portfolio, net	$	10,974		$	11,775

Mortgage loans decreased approximately $0.8 billion at September 30, 2007 as we purchased $0.3 billion of loans through the MPF programand received principal repayments of $1.1 billion for the nine months ended September 30, 2007. During the nine months ended September 30, 2006, we purchased $0.3 billion of loans and received principal repayments of $1.2 billion. The annualized weighted average pay-down rate for mortgage loans for the nine months ended September 30, 2007 and 2006 was approximately 12 percent.

Members are required to purchase and maintain capital stock to support outstanding mortgage loans. Changes in mortgage loans are accompanied by changes in capital stock, unless the member already owns excess activity-based stock. At September 30, 2007 and December 31, 2006, mortgage loan activity stock as a percentage of the mortgage portfolio was 4.4 percent.

50

Mortgage loans acquired from members have historically been concentrated with Superior Guaranty Insurance Corporation (Superior), a Wells Fargo Bank, N.A. (Wells Fargo) affiliate. At September 30, 2007 and December 31, 2006 we held mortgage loans acquired from Superior amounting to $9.1 billion and $10.0 billion, respectively. At September 30, 2007 and December 31, 2006 these loans represented 83 and 85 percent of total mortgage loans at par value. The Bank did not purchase any mortgage loans from Superior during the nine months ended September 30, 2007 and 2006.

Investments

The following table shows the book value of investments at September 30, 2007 and December 31, 2006 (dollars in millions):

	September 30, 2007					December 31, 2006
			Percent of					Percent of
	Amount		Total			Amount		Total
Short-term investments
Interest-bearing deposits	$	—			%	$	11		0.1	%
Securities purchased under agreements to resell		—		—			305		3.7
Federal funds sold		2,530		25.5			1,625		19.8
Commercial paper		943		9.5			1,323		16.1
Government-sponsored enterprise obligations		524		5.3			562		6.9
		3,997		40.3			3,826		46.6
Mortgage-backed securities
Government-sponsored enterprises		5,668		57.1			4,144		50.5
U.S. government agency-guaranteed		67		0.7			81		1.0
MPF Shared Funding		55		0.6			61		0.7
Other		52		0.5			94		1.1
		5,842		58.9			4,380		53.3
State or local housing agency obligations		74		0.7			4		0.0
Other		9		0.1			9		0.1
Total investments	$	9,922		100.0	%	$	8,219		100.0	%
Investments as a percent of total assets				18.8	%				19.5	%

51

Investment balances increased approximately 20.7 percent or $1.7 billion at September 30, 2007 compared with December 31, 2006 primarily due to increased MBS of $1.5 billion. Since December 31, 2006, the Bank has pursued a strategy of increasing its asset-to-capital ratio. During the earlier part of 2007, we increased our asset-to-capital ratio primarily through the purchase of money market securities. Due to favorable market conditions during the third quarter of 2007, the Bank purchased agency MBS that were rated AAA and have a history of no credit losses. The Bank has reviewed its available-for-sale and held-to-maturity investments and determined that all unrealized losses are temporary based on the creditworthiness of the issuers, underlying collateral, and our intent to hold the securities to maturity.

Consolidated Obligations

Consolidated obligations, which include discount notes and bonds, are the primary source of funds to support our advances, mortgage loans, and investments. We use derivatives to restructure interest rates on consolidated obligations to better match our funding needs and to reduce funding costs.

Bonds–The following table shows the Bank’s participation in consolidated bonds based on remaining term to maturity at September 30, 2007 and December 31, 2006 (dollars in millions):

	September 30,			December 31,
Year of Maturity	2007			2006
Due in one year or less	$	6,112		$	6,098
Due after one year through two years		4,578			5,660
Due after two years through three years		5,131			4,505
Due after three years through four years		2,676			2,622
Due after four years through five years		2,294			2,292
Thereafter		10,875			9,224
Index amortizing notes		2,726			2,978
Total par value		34,392			33,379
Premiums		41			33
Discounts		(37	)		(23	)
Hedging fair value adjustments
Cumulative fair value gain		(34	)		(195	)
Basis adjustments from terminated hedges		(115	)		(128	)
Total bonds	$	34,247		$	33,066

Consolidated obligation bonds increased $1.2 billion to $34.2 billion at September 30, 2007 compared with the same period in 2006. The increase is primarily due to funding the Bank’s MBS purchases and MPF originations.

52

Discount Notes–The following table shows the Bank’s participation in consolidated discount notes, all of which are due within one year, at September 30, 2007 and December 31, 2006 (dollars in millions):

	September 30,			December 31,
	2007			2006
Par value	$	13,834		$	4,700
Discounts		(53	)		(15	)
Total discount notes	$	13,781		$	4,685

Discount notes increased $9.1 billion to $13.8 billion at September 30, 2007 compared with December 31, 2006. As previously discussed the increase in discount notes was primarily due to the increase in the Bank’s short-term advance portfolio.

Deposits

The following table shows our deposits by product type at September 30, 2007 and December 31, 2006 (dollars in millions):

	September 30, 2007					December 31, 2006
			Percent of					Percent of
	Amount		Total			Amount		Total
Interest-bearing
Overnight	$	1,202		85.8	%	$	737		78.3	%
Demand		142		10.1			142		15.1
Term		37		2.7			20		2.1
Total interest-bearing		1,381		98.6			899		95.5
Noninterest-bearing		20		1.4			42		4.5
Total deposits	$	1,401		100.0	%	$	941		100.0	%

Deposits increased to $1.4 billion at September 30, 2007 from $941 million at December 31, 2006. The increase in the level of deposits was primarily due to increased overnight deposits of $465 million, which was driven in part by a change in our deposit pricing strategy that made the Bank’s deposits more competitive with market alternatives available to our members.

Capital

At September 30, 2007 and December 31, 2006, total capital (including capital stock, retained earnings, and accumulated other comprehensive income) was $2.7 billion and $2.2 billion, respectively. The increase was primarily due to an increase in capital stock requirements to support member activities related to advances as well as an increase in retained earnings.

53

Liquidity and Capital Resources

Our liquidity and capital positions are actively managed in an effort to preserve stable, reliable, and cost-effective sources of cash to meet current and future operating financial commitments, regulatory liquidity and capital requirements, and the possibility of an unforeseen liquidity event. To achieve these objectives, we establish liquidity and capital management requirements and maintain liquidity and capital in accordance with Finance Board regulations and our own policies. We are not aware of any conditions that will result in unplanned uses of liquidity or capital in the future. Accordingly, we believe our sources of liquidity and capital will cover future liquidity and capital resource needs.

Liquidity

Sources of Liquidity

The Bank’s primary source of liquidity is proceeds from the issuance of consolidated obligations (discount notes and bonds) in the capital markets. Because of the FHLBanks’ credit quality, efficiency, and standing in the markets, the FHLBanks have historically had ready access to funding.

During the nine months ended September 30, 2007, we received proceeds from the issuance of short-term consolidated discount notes of $471.1 billion and proceeds from the issuance of intermediate- to long-term consolidated bonds of $6.3 billion. During the nine months ended September 30, 2006, we received proceeds from the issuance of short-term consolidated discount notes of $550.7 billion and proceeds from the issuance of intermediate- to long-term consolidated bonds of $3.3 billion. Short-term consolidated discount note issuances decreased during the nine months ended September 30, 2007 compared with the same period in 2006 as the Bank restricted its investment activity to short-term investments. This restriction led to elevated levels of discount note issuances during 2006 to fund the short-term investment activity. Additionally, short-term advance activity was higher in the first nine months of 2007 than the first nine months of 2006. In 2007, the Bank relied more heavily on the issuance of long-term consolidated obligations in support of its asset/liability management strategy thereby decreasing the need to continuously roll over maturing short-term discount notes.

Long-term consolidated obligation issuances increased during the three and nine month periods ended September 30, 2007 compared with the same periods in 2006, primarily due to the Bank’s management of interest rate risk associated with our MBS and MPF portfolios. During 2007, the Bank issued more long-term debt to fund purchases of MBS investments and to hedge the risk in our mortgage portfolio.

54

Although we are primarily liable for our portion of consolidated obligations (i.e. those 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 par amounts of outstanding consolidated obligations issued on behalf of other FHLBanks for which the Bank is jointly and severally liable were approximately $1,100.3 billion and $913.6 billion at September 30, 2007 and December 31, 2006.

Consolidated obligations of the FHLBanks are rated Aaa/P-1 by Moody’s and AAA/A-1+ by Standard & Poor’s (S&P). These ratings measure the likelihood of timely payment of principal and interest on the consolidated obligations. Our ability to raise funds in the capital markets as well as our cost of borrowing can be affected by these credit ratings.

Other sources of liquidity include cash, short-term investments, payments collected on advances and mortgage loans, proceeds from the issuance of capital stock, member deposits, Federal funds purchased, other FHLBank borrowings, securities sold under agreements to repurchase, and current period earnings. Additionally, in the event of significant market disruptions or local disasters, the Bank President or his designee is authorized to establish interim borrowing relationships with other FHLBanks and the Federal Reserve if funds are made available to the FHLBanks during a time of crisis. To provide further access to funding, the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act) authorizes the Secretary of the Treasury to purchase consolidated obligations from all FHLBanks up to an aggregate principal amount of $4.0 billion. This type of funding was not accessed during the nine months ended September 30, 2007 or all of 2006.

We had cash and short-term investments with a book value of $4.0 billion at September 30, 2007 compared with $3.8 billion at December 31, 2006. We manage the level of cash and short-term investments according to changes in other asset classes and levels of capital. Additionally, we adjust cash and short-term investments to maintain our targeted asset-to-capital ratio and to manage excess funds.

Uses of Liquidity

Our primary use of liquidity is the repayment of consolidated obligations. During the nine months ended September 30, 2007, we made payments for maturing short-term consolidated discount notes of $462.0 billion and payments for maturing and retiring intermediate- to long-term consolidated bonds of $5.3 billion. During the nine months ended September 30, 2006, we made payments for maturing short-term consolidated discount notes of $548.0 billion and payments for maturing and retiring intermediate- to long-term consolidated bonds of $8.6 billion.

Other uses of liquidity include issuance of advances, purchases of mortgage loans and investments, repayment of member deposits, redemption or repurchase of capital stock, and payment of dividends.

55

Liquidity Requirements

Regulatory Requirements–Finance Board regulations mandate three liquidity requirements. First, contingent liquidity sufficient to meet our liquidity needs which shall, at a minimum, cover five business days of inability to access the consolidated obligation debt markets. The following table shows our sources of contingent liquidity to support operations for five business days compared to our liquidity needs at September 30, 2007 and December 31, 2006 (dollars in billions):

	September 30,		December 31,
	2007		2006
Unencumbered marketable assets maturing within one year	$	3.8	$	3.3
Advances maturing in seven days or less		5.1		1.3
Unencumbered assets available for repurchase agreement borrowings		5.8		4.4
Total	$	14.7	$	9.0
Liquidity needs for five business days	$	5.5	$	2.8

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Second, Finance Board regulations require us to have available at all times an amount greater than or equal to members’ current deposits invested in advances with maturities not to exceed five years, deposits in banks or trust companies, and obligations of the U.S. Treasury. The following table shows our compliance with this regulation at September 30, 2007 and December 31, 2006 (dollars in billions):

	September 30,		December 31,
	2007		2006
Advances with maturities not exceeding five years	$	24.2	$	15.5
Deposits in banks or trust companies		—		—
Total	$	24.2	$	15.5
Deposits	$	1.4	$	0.9

Third, Finance Board regulations require us to maintain, in the aggregate, unpledged qualifying assets in an amount at least equal to the amount of our participation in the total consolidated obligations outstanding. The following table shows our compliance with this regulation at September 30, 2007 and December 31, 2006 (dollars in billions):

	September 30,		December 31,
	2007		2006
Total qualifying assets	$	52.8	$	41.9
Less: pledged assets		0.2		0.5
Total qualifying assets free of lien or pledge	$	52.6	$	41.4
Consolidated obligations outstanding	$	48.0	$	37.8

Operational and Contingent Liquidity–Bank policy requires that we maintain additional liquidity for day-to-day operational and contingency needs. Effective June 1, 2007 Bank policy requires that contingent liquidity should not be greater than available assets which include cash, money market, agency, and MBS securities. The Bank will maintain contingent liquidity to meet average overnight and one-week advances, meet the largest projected net cash outflow on any day over a projected 90-day period, and maintain repurchase agreement eligible assets of at least twice the largest projected net cash outflow on any day over a projected 90 day period.

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The following table shows our contingent liquidity requirement at September 30, 2007 and December 31, 2006 (dollars in billions):

	September 30,			December 31,
	2007			2006
Required liquidity	$	(3.4	)	$	(2.5	)
Available assets		6.2			3.8
Excess contingent liquidity	$	2.8		$	1.3

The Bank was in compliance with its contingent liquidity policy at September 30, 2007.

Capital

We had 23.5 million shares of capital stock outstanding at September 30, 2007 compared with 19.1 million shares outstanding at December 31, 2006. We issued 9.7 million shares to members and repurchased 5.5 million shares from members during the nine months ended September 30, 2007. Approximately 84 percent and 80 percent of our capital stock outstanding at September 30, 2007 and December 31, 2006 was activity-based stock that fluctuates primarily with the outstanding balances of advances made to members and mortgage loans. The increase was due to an increase in capital stock requirements to support member activities related to advances as well as an increase in retained earnings.

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The following tables present our five largest stockholders and their percentages of total capital stock outstanding (including capital stock classified as mandatorily redeemable) at September 30, 2007 and December 31, 2006 (dollars in millions):

					Percent of
			September 30,		Total Regulatory
Name	City	State	2007		Capital Stock
Superior Guaranty Insurance Company1	Minneapolis	MN	$	457		19.1	%
Wells Fargo Bank, National Association1	Sioux Falls	SD		257		10.8
ING USA Annuity and Life Insurance Company	Des Moines	IA		106		4.4
TCF National Bank	Wayzata	MN		105		4.4
Transamerica Occidental Life Insurance Company2	Cedar Rapids	IA		101		4.2
Total			$	1,026		42.9	%
Total regulatory stock			$	2,394

1	Superior and Wells Fargo are affiliates.
2	Excludes 2.8 percent of capital stock owned by Transamerica Life Insurance Company, an affiliate of Transamerica Occidental Life Insurance Company.

					Percent of
			December 31,		Total Regulatory
Name	City	State	2006		Capital Stock
Superior Guaranty Insurance Company1	Minneapolis	MN	$	464		23.6	%
Transamerica Occidental Life Insurance Company2	Cedar Rapids	IA		81		4.1
AmerUs Life Insurance Company	Des Moines	IA		78		3.9
TCF National Bank	Wayzata	MN		74		3.8
Transamerica Life Insurance Company2	Cedar Rapids	IA		68		3.4
Total			$	765		38.8	%
Total regulatory stock			$	1,971

1	Excludes 1.0 percent of capital stock owned by Wells Fargo, an affiliate of Superior.
2	Transamerica Life Insurance Company and Transamerica Occidental Life Insurance Company are affiliates.

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The Bank’s capital stock balances categorized by type of financial services company, as well as capital stock held by former members, are noted in the following table at September 30, 2007 and December 31, 2006 (dollars in millions):

	September 30,		December 31,
Institutional Entity	2007		2006
Commercial Banks	$	1,244	$	929
Insurance Companies		887		771
Savings and Loan Associations and Savings Banks		144		140
Credit Unions		73		78
Former Members		46		53
Total regulatory capital stock	$	2,394	$	1,971

Former members own capital stock to support business transactions still carried on the Bank’s statements of condition following their termination from membership. This stock is mandatorily redeemable. See further discussion in “Mandatorily Redeemable Capital Stock” below.

Our members are required to maintain a certain minimum capital stock investment in the Bank. The minimum investment requirements are designed so that we remain adequately capitalized as member activity changes. To ensure we remain adequately capitalized within ranges established in the capital plan, these requirements may be adjusted upward or downward by the Bank’s Board of Directors. At September 30, 2007 and December 31, 2006, approximately 87 and 85 percent of our total capital was capital stock.

Stock owned by members in excess of their minimum investment requirements is known as excess stock. The Bank’s excess capital stock, including amounts classified as mandatorily redeemable capital stock, were $91.7 million and $91.9 million at September 30, 2007 and December 31, 2006.

Mandatorily Redeemable Capital Stock

Although the mandatorily redeemable capital stock is not included in capital for financial reporting purposes, the Finance Board requires that such outstanding stock be considered capital for determining compliance with regulatory requirements.

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At September 30, 2007, we had $46.3 million in capital stock subject to mandatory redemption from 41 members and former members. At December 31, 2006, we had $64.9 million in capital stock subject to mandatory redemption from 34 members and former members. This amount has been classified as mandatorily redeemable capital stock in the statements of condition in accordance with Statement of Financial Account Standards (SFAS) 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The following table shows the amount of capital stock subject to mandatory redemption by the time period in which we anticipate redeeming the capital stock based on our practices at September 30, 2007 and December 31, 2006 (dollars in millions):

	September 30,		December 31,
Year of Redemption	2007		2006
Due in one year or less	$	12	$	1
Due after one year through two years		8		25
Due after two years through three years		17		16
Due after three years through four years		5		20
Due after four years through five years		4		2
Thereafter		—		1
Total	$	46	$	65

A majority of the capital stock subject to mandatory redemption at September 30, 2007 and December 31, 2006 was due to voluntary termination of membership as a result of a merger or consolidation into a nonmember or into a member of another FHLBank. In addition, during the second quarter of 2005, a member submitted a notice of withdrawal. The balance in mandatorily redeemable capital stock related to this withdrawal was $11.3 million at December 31, 2006. During the third quarter of 2007, this member rescinded their notice of withdrawal and we reclassified $24.1 million from mandatorily redeemable capital stock to capital stock. The remainder of mandatorily redeemable capital stock was due to members requesting partial repurchases of excess stock. These partial repurchases amounted to $0.4 million at September 30, 2007 and December 31, 2006.

Capital Requirements

The FHLBank Act requires that the Bank maintain at all times permanent capital greater than or equal to the sum of its credit, market, and operations risk capital requirements, all calculated in accordance with the Finance Board’s regulations. Only permanent capital, defined as Class B stock and retained earnings, can satisfy this risk based capital requirement. The FHLBank Act requires a minimum four percent capital-to-asset ratio, which is defined as total capital divided by total assets. The FHLBank Act also imposes a five percent minimum leverage ratio based on total capital, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times divided by total assets.

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For purposes of compliance with the regulatory minimum capital-to-asset and leverage ratios, capital includes all capital stock plus retained earnings. The following table shows the Bank’s compliance with the Finance Board’s capital requirements at September 30, 2007 and December 31, 2006 (dollars in millions):

	September 30, 2007						December 31, 2006
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk based capital	$	603		$	2,749		$	491		$	2,315
Total capital-to-asset ratio		4.00	%		5.20	%		4.00	%		5.50	%
Total regulatory capital	$	2,116		$	2,749		$	1,682		$	2,315
Leverage ratio		5.00	%		7.80	%		5.00	%		8.26	%
Leverage capital	$	2,645		$	4,124		$	2,102		$	3,472

The decrease in the capital-to-asset ratio from 5.50 percent at December 31, 2006 to 5.20 percent at September 30, 2007, was primarily due to the increase in our assets at September 30, 2007. Although the ratio declined, it significantly exceeds the regulatory requirement and we do not expect it to decline below that requirement. The Bank’s regulatory capital-to-asset ratio at September 30, 2007 and December 31, 2006 would have been 5.02 percent and 5.29 percent if all excess capital stock had been repurchased.

Dividends

We paid cash dividends of $61.0 million during the nine months ended September 30, 2007 compared to $53.8 million during the same period of 2006. The annualized dividend rate for the nine months ended September 30, 2007 was 4.25 percent compared with an annualized dividend rate for the nine months ended September 30, 2006 of 3.69 percent.

The Bank had retained earnings of $355.4 million and $344.2 million at September 30, 2007 and December 31, 2006. A significant portion of our retained earnings was derived from the acceleration of income related to the loss of hedge accounting and subsequent termination of certain mortgage loan hedging relationships in the fourth quarter of 2005. While the high level of retained earnings puts the Bank in an advantageous position with regard to capital adequacy, the accelerated recognition of what would otherwise have been future income from the mortgage portfolio will result in a decrease in the Bank’s anticipated income in future periods.

Critical Accounting Policies and Estimates

The Bank did not implement any material changes to its accounting policies or estimates, nor did the Bank implement any new accounting policies that had a material impact on the Bank’s results of operations or financial condition during the nine months ended September 30, 2007. For additional discussion of our critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in the Bank’s annual report on Form 10-K.

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Risk Management

We have risk management policies, established by our Board of Directors, that monitor and control our exposure to market, liquidity, credit, operational, and business risk. Our primary objective is to manage assets, liabilities, and derivative exposures in ways that protect the par redemption value of capital stock from risks, including fluctuations in market interest rates and spreads. Additionally the Bank’s risk management strategies and limits decrease volatility in earnings.

The Bank’s Board of Directors has determined that the Bank should operate under a risk management philosophy of maintaining an AAA rating. An AAA rating provides the Bank with ready access to funds in the capital markets. In line with the above objective, the Financial Risk Management Policy (FRMP) establishes risk measures, with limits consistent with the maintenance of an AAA rating, to monitor the Bank’s liquidity risk, market risk, and capital adequacy. In addition to the risk methods used to measure and manage risk as disclosed in the Bank’s annual report on Form 10-K, the FRMP replaced prior risk measures with the following risk measures:

Market Risk:	Mortgage Portfolio Market Value
	Net Market Value of Capital Stock
Liquidity Risk:	Contingent Liquidity
Capital Adequacy:	Economic Capital Ratio

Market Risk/Capital Adequacy

We define market risk as the risk that net interest income or net market value of capital stock will change as a result of changes in market conditions such as interest rates, spreads, and volatilities. Interest rate risk was the predominant type of market risk exposure throughout the nine months ended September 30, 2007 and throughout 2006. Our FRMP is designed to provide an asset and liability management framework to respond to changes in market conditions while minimizing balance sheet stress and income volatility. Bank management and the Board of Directors routinely reviews both the policy limits and the actual exposures to verify the interest rate risk in our balance sheet remains at prudent and reasonable levels.

The goal of the Bank’s interest rate risk management strategy is to manage interest rate risk by setting and operating within an appropriate framework and limits. The Bank’s general approach toward managing interest rate risk is to acquire and maintain a portfolio of assets, liabilities and hedges, which, taken together, limit the Bank’s expected exposure to market and interest rate risk. Management regularly monitors the Bank’s sensitivity to interest rate changes by monitoring its market risk measures in parallel and non-parallel interest rate shifts. Interest rate exposure is managed by the use of appropriate funding instruments and by employing hedging strategies. Hedging may occur for a single transaction or group of transactions as well as for the overall portfolio. The Bank’s hedge positions are evaluated regularly and are adjusted as deemed necessary by management. The Bank’s key market risk and capital adequacy measures are quantified and disclosed below.

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Net Market Value of Capital Stock

Net market value of capital stock, is defined by the Bank as the present value of assets minus the present value of liabilities plus the net present value of derivatives. See the “Net Market Value of Capital Stock” section in the Bank’s annual report on Form 10-K for additional information.

Effective June 1, 2007, our FRMP states that the net market value of capital stock should not be lower than the base case by more than $5 per share in the up and down 100 basis points parallel interest rate shift scenarios and by more than $10 per share in the up and down 200 basis points parallel rate shift scenarios.

The following tables show our net market value of capital stock and the dollar per share change, based on outstanding shares including shares classified as mandatorily redeemable, from base case assuming instantaneous shifts in interest rates at each quarter-end during 2007 and 2006 (dollars in millions except dollars per share).

	Net Market Value of Capital Stock
	Down 200			Down 150			Down 100			Down 50			Base Case		Up 50			Up 100			Up 150			Up 200
2007
September		2,215			2,225			2,235			2,252			2,258		2,246			2,222			2,188			2,148
June		1,936			1,976			1,978			1,982			1,984		1,979			1,966			1,947			1,922
March		1,807			1,898			1,956			1,990			1,992		1,969			1,933			1,890			1,842
2006
December		1,795			1,886			1,950			1,988			1,985		1,958			1,917			1,868			1,814
September		1,708			1,863			1,960			1,996			1,994		1,971			1,936			1,895			1,849
June		1,826			1,934			1,988			2,011			2,015		2,007			1,993			1,972			1,947
March		1,850			1,959			2,007			2,009			1,982		1,936			1,880			1,818			1,752
	Dollar Per Share Change from Base Case
	Down 200			Down 150			Down 100			Down 50			Base Case		Up 50			Up 100			Up 150			Up 200
2007
September	$	(1.81	)	$	(1.41	)	$	(0.97	)	$	(0.24	)	$	—	$	(0.49	)	$	(1.53	)	$	(2.95	)	$	(4.60	)
June	$	(2.40	)	$	(0.42	)	$	(0.32	)	$	(0.13	)	$	—	$	(0.25	)	$	(0.90	)	$	(1.87	)	$	(3.09	)
March	$	(9.53	)	$	(4.84	)	$	(1.83	)	$	(0.10	)	$	—	$	(1.17	)	$	(3.02	)	$	(5.26	)	$	(7.70	)
2006
December	$	(9.66	)	$	(5.05	)	$	(1.78	)	$	0.12		$	—	$	(1.40	)	$	(3.49	)	$	(5.97	)	$	(8.69	)
September	$	(14.00	)	$	(6.42	)	$	(1.68	)	$	0.10		$	—	$	(1.14	)	$	(2.84	)	$	(4.86	)	$	(7.11	)
June	$	(9.17	)	$	(3.91	)	$	(1.32	)	$	(0.20	)	$	—	$	(0.35	)	$	(1.05	)	$	(2.07	)	$	(3.31	)
March	$	(6.58	)	$	(1.14	)	$	1.27		$	1.37		$	—	$	(2.29	)	$	(5.09	)	$	(8.16	)	$	(11.47	)

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The increase in net market value of capital stock at September 30, 2007 compared with June 30, 2007 was primarily attributable to an increase in capital stock requirements to support member activities related to advances and mortgage loans. The increase was offset by increased OAS on our mortgage loans, and increased volatility in the market. To protect the net market value of capital stock from large interest rate swings, we use hedging transactions, such as entering into or canceling interest rate swaps on existing debt and altering the funding structures of new mortgage purchases. The Bank was in compliance with its net market value of capital stock measure, as described in our FRMP policy, at September 30, 2007.

Capital Adequacy

The capital adequacy risk measure ensures we maintain our required capital-to-asset ratio on a market value basis under a wide range of market scenarios. An adequate capital position is necessary for providing safe and sound operations of the Bank and in protecting our AAA credit rating.

Economic capital ratio is defined as market value of equity divided by market value of assets and is required to be greater than four percent in the base case and up and down 200 basis points parallel interest rate shift.

The following table shows the economic capital ratio assuming parallel interest rate shifts up and down 200 basis points in 100 basis point increments at each quarter-end during 2007 and 2006.

	Economic Capital Ratio
	Down 200			Down 100			Base Case			Up 100			Up 200
2007
September		4.11	%		4.20	%		4.29	%		4.28	%		4.21	%
June		4.05	%		4.19	%		4.26	%		4.29	%		4.26	%
March		4.16	%		4.54	%		4.68	%		4.62	%		4.48	%
2006
December		4.20	%		4.60	%		4.74	%		4.66	%		4.49	%
September		3.92	%		4.53	%		4.67	%		4.61	%		4.48	%
June		4.15	%		4.57	%		4.71	%		4.74	%		4.72	%
March		4.11	%		4.50	%		4.51	%		4.36	%		4.14	%

During the three months ended September 30, 2007, the Bank decreased its asset-to-capital ratio to 19.7 at September 30, 2007 from 20.5 at June 30, 2007. The decrease in our asset-to-capital ratio had a positive impact to the Bank’s economic capital ratio, but was partially offset by market conditions such as an increase in mortgage OAS and market volatility. The overall effect led to a slight increase in the economic capital ratio for the base case at September 30, 2007 when compared to June 30, 2007.

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Derivatives

We enter into derivative agreements to manage our exposure to changes in interest rates. We use derivatives to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. We do not use derivatives for speculative purposes. Our current hedging strategies relate to hedges of existing assets and liabilities that qualify for fair value hedge accounting treatment and economic hedges that are used to reduce market risk at the balance sheet or portfolio level.

The notional amount of derivatives reflects the volume of our hedges, but it does not measure the credit exposure of the Bank because there is no principal at risk. The following table categorizes the notional amount of our derivatives at September 30, 2007 and December 31, 2006 (dollars in millions):

	September 30,		December 31,
	2007		2006
Notional amount of derivatives
Interest rate swaps
Noncancelable	$	17,261	$	15,697
Cancelable by counterparty		12,899		12,245
		30,160		27,942
Interest rate swaptions		4,650		1,425
Interest rate caps and floors		2,500		100
Forward settlement agreements		25		17
Mortgage delivery commitments		25		16
Total notional amount	$	37,360	$	29,500

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The following table categorizes the notional amount and the estimated fair value of derivative financial instruments, excluding accrued interest, by product and type of accounting treatment. The category “fair value” represents hedges that qualify for fair value hedge accounting. The category “economic” represents hedge strategies that do not qualify for hedge accounting. Amounts at September 30, 2007 and December 31, 2006 were as follows (dollars in millions):

	September 30, 2007					December 31, 2006
			Estimated					Estimated
	Notional		Fair Value			Notional		Fair Value
Advances
Fair value	$	13,210	$	(123	)	$	11,935	$	(8	)
Economic		500		—			500		—
Mortgage Assets
Mortgage-backed securities
Economic		—		—			100		—
Forward settlement agreements
Economic		25		—			17		—
Mortgage delivery commitments
Economic		25		—			16		—
Consolidated obligations
Bonds
Fair value		16,450		(58	)		15,492		(221	)
Economic		—		—			15		—
Balance Sheet
Economic		7,150		4			1,425		—
Total notional and fair value	$	37,360	$	(177	)	$	29,500	$	(229	)
Total derivatives, excluding accrued interest				(177	)				(229	)
Accrued interest				128					102
Net derivative balance			$	(49	)			$	(127	)
Net derivative assets				55					36
Net derivative liabilities				(104	)				(163	)
Net derivative balance			$	(49	)			$	(127	)

We record derivatives on the statements of condition at fair value. After netting the fair market values and accrued interest of the derivative instruments by counterparty, we classify positive counterparty balances as derivative assets and negative counterparty balances as derivative liabilities. Derivative assets represent our maximum credit risk to counterparties, and derivative liabilities represent the exposure of counterparties to us. Except for economic hedging relationships, substantially all of the net estimated fair value gains and losses on our derivative contracts are offset by net hedging fair value adjustment losses and gains or other book value adjustments on the related hedged items.

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Liquidity Risk

See “Liquidity” beginning on page 54 for additional detail of our liquidity management.

Credit Risk

We define credit risk as the potential that our borrowers or counterparties will fail to meet their obligations in accordance with agreed upon terms. The Bank’s primary credit risks arise from our ongoing lending, investing, and hedging activities. Our overall objective in managing credit risk is to operate a sound credit granting process and to maintain appropriate credit administration, measurement, and monitoring practices.

Advances

We engage in secured lending activities with eligible borrowers. Credit risk arises from the possibility that the collateral pledged to us is insufficient to cover the obligations of a borrower in default.

We manage credit risk by securing borrowings with sufficient collateral acceptable to us, monitoring borrower creditworthiness through internal and independent third-party analysis, and performing collateral review and valuation procedures to verify the sufficiency of pledged collateral. We are required by law to make advances solely on a secured basis and have never experienced a credit loss on an advance since our inception. Based upon the collateral held as security and prior repayment history, we do not believe an allowance for credit losses on advances is necessary at this time.

At September 30, 2007 and December 31, 2006, seven borrowers and four borrowers, respectively, had outstanding advances greater than $1.0 billion. These advance holdings represented approximately 51 percent and 27 percent of the total par value of advances outstanding at September 30, 2007 and December 31, 2006. For further discussion on our largest borrowers of advances, see “Advances” on page 47.

We assign discounted values to collateral pledged to the Bank based on its relative risk. At September 30, 2007 and December 31, 2006, borrowers pledged $55 billion and $45 billion of collateral (net of applicable discount or margin factors) to support $33 billion and $23 billion of advances and other activities with the Bank. Borrowers pledge collateral in excess of their collateral requirement mainly to demonstrate liquidity availability and to borrow in the future.

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The following table shows the dollar and percentage composition (net of applicable discount and margin factors) of collateral pledged to the Bank at September 30, 2007 and December 31, 2006 (dollars in billions):

	September 30,					December 31,
	2007					2006
Collateral Type	Dollars		Percent			Dollars		Percent
Residential mortgage loans	$	23.0		41.8	%	$	20.8		46.5	%
Other real estate related collateral		16.1		29.3			15.5		34.8
Investment securities/insured loans		15.0		27.3			7.5		16.8
Secured small business, small farm, and small agribusiness loans		0.9		1.6			0.9		1.9
Total collateral	$	55.0		100.0	%	$	44.7		100.0	%

Mortgage Assets

Mortgage asset credit risk is the risk that we will not receive timely payments of principal and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage assets is affected by numerous characteristics, including loan type, down-payment amount, borrower’s credit history, and other factors such as home price appreciation. We are exposed to mortgage asset credit risk through our participation in the MPF program and certain investment activities.

We offer a variety of MPF products to meet the differing needs of our members. The Bank allows participating members to select the products they want to use. These products include Original MPF, MPF 100, MPF 125, MPF Plus, and Original MPF FHA/VA. The Bank is permitted by regulation to hold assets acquired from or through members by means of either a purchase or a funding transaction.

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    The following table provides a comparison of the MPF products:

		Participating	Average PFI
		Financial	Credit
		Institution	Enhancement			Base and		Additional
		(PFI) Credit	Amount as			Performance		Credit
		Enhancement	Percent of			Based Credit	Credit	Enhance-
	MPF Bank	Size	Master			Enhancement	Enhancement	ment Fee to	Servicing
Product Name	FLA Size	Description	Commitment1			Fee to PFI	Fee Offset2	PFI3	Fee to PFI
(1) Original MPF	3 to 6 basis points per year based on the remaining unpaid principal balance	Equivalent to AA		2.73	%	8 to 11 basis points per year paid monthly	No	0 to 3.75 basis points per year paid monthly	25 basis points per year
(2) MPF 100	100 basis points fixed based on the size of the loan pool at closing	After FLA to AA		0.75	%	7 to 11 basis points per year paid monthly	Yes–after 3 years	0 to 3.75 basis points per year paid monthly	25 basis points per year
(3) MPF 125	100 basis points fixed based on the size of the loan pool at closing	After FLA to AA		1.38	%	7 to 10 basis points per year paid monthly	Yes	0 to 3.75 basis points per year paid monthly	25 basis points per year
(4) MPF Plus4	Sized to equal expected losses	0 to 20 basis points after FLA and supplemental mortgage insurance		1.30	%	6.5 to 8.5 basis points per year fixed plus 8.0 to 10.0 basis points per year performance based (delayed for 1 year); all paid monthly	Yes – performance based only	0 to 3.86 basis points per year paid monthly	25 basis points per year
(5) Original MPF FHA/VA	NA	Unreimbursed servicing expenses	NA			2 basis points per year paid monthly	No	0 to 5.0 basis points per year paid monthly	44 basis points per year

1	MPF Program Master Commitments participated in or held by the Bank at September 30, 2007.
2	Future payouts of performance based credit enhancement fees are reduced when losses are allocated to the First Loss Account (FLA).
3	Additional credit enhancement fee is fixed and cannot be reduced when losses are allocated to the FLA. The additional credit enhancement fee does not relate to any residual credit risk in the underlying mortgages in the MPF program.
4	PFI credit enhancement amount includes supplemental mortgage insurance (SMI) policy coverage.

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The FLA is a memorandum account which is a record-keeping mechanism we use to track the amount of losses for which the Bank could have a potential loss exposure (before the member’s credit enhancement is used to cover losses). The table on page 70 provides information on potential exposure related to the FLA for each MPF product. The FLA is not funded by the Bank or the participating member. Reductions in the amount of base or performance based credit enhancement fees paid to the participating member offset any losses incurred by the Bank, up to the limit of the FLA, except for the Original MPF product. The Bank maintains the FLA for each master commitment. Losses in excess of a participating member’s FLA have been negligible since the inception of the MPF program.

PFIs are paid credit enhancement fees as an incentive to minimize credit losses, share in the risk on MPF loans, and pay for supplemental mortgage insurance (SMI). These fees are paid monthly and are determined based on the remaining principal balance of the MPF loans. The amount of the required credit enhancement fee may vary depending on the MPF products selected. Credit enhancement fees are recorded as a reduction to mortgage loan interest income. The Bank also pays performance based credit enhancement fees which are based on actual performance of the mortgage loans. In general, base or performance based fees are net of cumulative unrecovered losses paid by the Bank. To the extent that losses in the current month exceed base or performance based credit enhancement fees accrued, the remaining losses are recovered from future base or performance based credit enhancement fees payable to the member. The Bank recorded credit enhancement fees of $5.1 million and $5.7 million for the three months ended September 30, 2007 and 2006 and $15.8 million and $17.6 million for the nine months ended September 30, 2007 and 2006. Our liability for credit enhancement fees was $7.7 million and $8.5 million at September 30, 2007 and December 31, 2006.

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The following table presents our MPF portfolio by product type at September 30, 2007 and December 31, 2006 at par value (dollars in billions):

	September 30, 2007					December 31, 2006
Product Type	Dollars		Percent			Dollars		Percent
Original MPF	$	0.2		1.8	%	$	0.2		1.7	%
MPF 100		0.1		0.9			0.1		0.8
MPF 125		1.2		10.8			1.1		9.3
MPF Plus		9.0		81.1			9.9		83.2
Total conventional loans		10.5		94.6			11.3		95.0
Government-insured loans		0.5		4.5			0.5		4.2
Total mortgage loans		11.0		99.1			11.8		99.2
MPF Shared Funding recorded in investments		0.1		0.9			0.1		0.8
Total MPF related assets	$	11.1		100.0	%	$	11.9		100.0	%

The MPF Shared Funding Certificates included in the preceding table are mortgage-backed certificates created from conventional conforming mortgages using a senior/subordinated tranche structure. The Bank’s investment is recorded in held-to-maturity securities. The following table shows our Shared Funding Certificates and credit ratings at September 30, 2007 and December 31, 2006 (dollars in millions):

	September 30,		December 31,
Credit Rating	2007		2006
AAA	$	52	$	58
AA		3		2
Total MPF Shared Funding Certificates	$	55	$	60

At September 30, 2007 and December 31, 2006, we held mortgage loans acquired from Superior amounting to $9.1 billion and $10.0 billion. At September 30, 2007 and December 31, 2006, these loans represented 83 percent and 84 percent of total mortgage loans at par value. The loans are primarily MPF Plus and government-insured loans.

We also manage the credit risk on our mortgage loan portfolio by monitoring portfolio performance and the creditworthiness of our participating members. All loans purchased by the Bank must comply with underwriting guidelines which follow standards generally required in the secondary mortgage market.

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The following table shows portfolio characteristics of the conventional loan portfolio at September 30, 2007 and December 31, 2006. Portfolio concentrations are calculated based on unpaid principal balances.

	September 30,			December 31,
	2007			2006
Portfolio Characteristics
Regional concentration1
Midwest		36.6	%		35.4	%
West		19.2	%		19.8	%
Southwest		16.4	%		16.3	%
Southeast		15.4	%		15.9	%
Northeast		12.3	%		12.6	%
State concentration
Minnesota		13.9	%		13.3	%
California		10.1	%		10.3	%
Iowa		6.6	%		5.9	%
Illinois		5.8	%		5.9	%
Missouri		4.5	%		4.1	%
Weighted average FICO (register mark) score at origination2		735			734
Weighted average loan-to-value at origination		68	%		68	%
Average loan amount at origination	$	158,764		$	159,275
Original loan term
Less than or equal to 15 years		25	%		26	%
Greater than 15 years		75	%		74	%

1	Midwest includes IA, IL, IN, MI, MN, ND, NE, OH, SD, and WI. West includes AK, CA, Guam, HI, ID, MT, NV, OR, WA, and WY. Southeast includes AL, District of Columbia, FL, GA, KY, MD, MS, NC, SC, TN, VA, and WV. Southwest includes AR, AZ, CO, KS, LA, MO, NM, OK, TX, and UT. Northeast includes CT, DE, MA, ME, NH, NJ, NY, PA, Puerto Rico, RI, U.S. Virgin Islands, and VT.
2	FICO (register mark) is a widely used credit industry model developed by Fair, Isaac, and Company, Inc. to assess borrower credit quality with scores ranging from a low of 300 to a high of 850.

We monitor the loan characteristics because they can be strong predictors of credit risk. For example, local economic conditions affect borrowers’ ability to repay loans and the value of the underlying collateral. Geographic diversification helps reduce mortgage credit risk at the portfolio level. Higher FICO (register mark) scores generally indicate a lower risk of default while lower scores can indicate a higher default risk. The likelihood of default and the gross severity of a loss in the event of default are typically lower as loan-to-value ratios decrease.

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We monitor the delinquency levels of our mortgage loan portfolio on a monthly basis. A summary of our delinquencies at September 30, 2007 follows (dollars in millions):

	Unpaid Principal Balance
				Government-
	Conventional			Insured			Total
30 days	$	101		$	20		$	121
60 days		16			5			21
90 days		6			2			8
Greater than 90 days		3			1			4
Foreclosures and bankruptcies		36			4			40
Total delinquencies	$	162		$	32		$	194
Total mortgage loans outstanding	$	10,485		$	478		$	10,963
Delinquencies as a percent of total mortgage loans		1.5	%		6.7	%		1.8	%
Delinquencies 90 days and greater plus foreclosures and bankruptcies as a percent of total mortgage loans		0.4	%		1.0	%		0.4	%

A summary of our delinquencies at December 31, 2006 follows (dollars in millions):

	Unpaid Principal Balance
				Government-
	Conventional			Insured			Total
30 days	$	105		$	22		$	127
60 days		19			5			24
90 days		6			2			8
Greater than 90 days		1			—			1
Foreclosures and bankruptcies		33			—			33
Total delinquencies	$	164		$	29		$	193
Total mortgage loans outstanding	$	11,249		$	511		$	11,760
Delinquencies as a percent of total mortgage loans		1.5	%		5.7	%		1.6	%
Delinquencies 90 days and greater plus foreclosures and bankruptcies as a percent of total mortgage loans		0.3	%		0.0	%		0.3	%

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For additional information related to delinquent mortgage loans, see “Mortgage Assets” in the Bank’s annual report on Form
10-K.

The allowance for credit losses was $0.3 million at September 30, 2007 and December 31, 2006. The Bank did not have any charge-offs or recoveries during the three and nine month periods ended September 30, 2007. We decreased our provision for credit losses by $0.5 million for the three and nine month periods ended September 30, 2006. At September 30, 2007 and December 31, 2006, the Bank had $24.8 million and $23.5 million of nonaccrual loans. Interest income that was contractually owed to the Bank but not received on nonaccrual loans was $0.1 million for the three and nine months ended September 30, 2007 and 2006 and $0.7 million for the nine months ended September 30, 2007 and 2006. At September 30, 2007 and December 31, 2006, the Bank’s other assets included $4.7 million and $6.3 million of real estate owned.

In accordance with the Bank’s allowance for credit losses policy, the allowance estimate is based on historical loss experience, current delinquency levels, economic data, and other relevant factors using a pooled loan approach. On a regular basis, we monitor delinquency levels, loss rates, and portfolio characteristics such as geographic concentration, loan-to-value ratios, property types, and loan age. Other relevant factors evaluated in our methodology include changes in national/local economic conditions, changes in the nature of the portfolio, changes in the portfolio performance, and the existence and effect of geographic concentrations. Based upon our evaluation, the Bank determined that an allowance for credit losses of $0.3 million was sufficient to cover projected losses in our MPF portfolio at September 30, 2007. The Bank believes we have minimal exposure to sub-prime loans due to the design of our mortgage loan programs.

As part of the mortgage portfolio, we also invest in mortgage-backed securities. Finance Board regulations allow us to invest in securities guaranteed by the U.S. government, government-sponsored housing enterprises, and other mortgage-backed securities that are rated Aaa by Moody’s, AAA by S&P, or AAA by Fitch on the purchase date. We are exposed to credit risk to the extent that these investments fail to perform adequately. We do ongoing analysis to evaluate the investments and creditworthiness of the issuers, trustees, and servicers for potential credit issues.

At September 30, 2007, we owned $5.7 billion of mortgage-backed securities that were guaranteed by the U.S. government or issued by government-sponsored housing enterprises. In addition, we had $0.1 billion of other mortgage-backed securities that were rated AAA by a nationally recognized statistical rating organization (NRSRO). At December 31, 2006, we owned $4.2 billion of mortgage-backed securities that were guaranteed by the U.S. government or issued by government-sponsored housing enterprises. In addition, we had $0.1 billion of other mortgage-backed securities that were rated AAA by an NRSRO. We have participated in the MPF Shared Funding Program that has periodically created mortgage-backed certificates.

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The Bank also invests in state housing finance agency bonds. At September 30, 2007, we had $74 million of state agency bonds rated AA or higher compared with $4.9 million at December 31, 2006.

Investments

We maintain an investment portfolio to provide liquidity and promote asset diversification. Finance Board regulations and policies adopted by the Board of Directors limit the type of investments we may purchase.

The largest unsecured exposure to any single short-term counterparty excluding government-sponsored enterprises was $325 million at September 30, 2007 and $298 million at December 31, 2006. The following tables show our unsecured credit exposure to investment counterparties (including accrued interest receivable) at September 30, 2007 and December 31, 2006 (dollars in millions):

	September 30, 2007
	Certificates of		Commercial		Overnight		Term		Other
Credit Rating1	Deposit		Paper		Fed Funds		Fed Funds		Obligations2		Total
AAA	$	—	$	149	$	—	$	—	$	524	$	673
AA		—		595		400		907		41		1,943
A		—		199		980		255		2		1,436
Total	$	—	$	943	$	1,380	$	1,162	$	567	$	4,052

	December 31, 2006
	Certificates of		Commercial		Overnight		Term		Other
Credit Rating1	Deposit		Paper		Fed Funds		Fed Funds		Obligations2		Total
AAA	$	—	$	297	$	—	$	—	$	567	$	864
AA		—		896		575		—		—		1,471
A		—		130		1,050		—		—		1,180
Total	$	—	$	1,323	$	1,625	$	—	$	567	$	3,515

1	Credit rating is the lowest of S&P, Moody’s, and Fitch ratings stated in terms of the S&P equivalent.
2	Other obligations represent obligations in government-sponsored enterprises and derivatives.

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Derivatives

Most of our hedging strategies use over-the-counter derivative instruments that expose us to counterparty credit risk because the transactions are executed and settled between two parties. When an over-the-counter derivative has a market value above zero, the counterparty owes that value to the Bank over the remaining life of the derivative. Credit risk arises from the possibility the counterparty will not be able to fulfill its commitment to pay the amount owed to us.

Excluding mortgage delivery commitments that were fully collateralized, we had 26 active derivative counterparties at September 30, 2007 and December 31, 2006, most of which were large highly rated banks and broker-dealers. At September 30, 2007 and December 31, 2006, five counterparties represented approximately 52 percent and 57 percent, respectively, of the total notional amount of outstanding derivative transactions, and all five had a credit rating of A or better. At September 30, 2007, one counterparty with an AA credit rating, Citibank N.A., represented $10.6 million or approximately 25 percent of our net derivatives exposure after collateral. At December 31, 2006, one counterparty with an AA credit rating, HSBC Bank USA, N.A., represented $9.7 million or approximately 27 percent of our net derivatives exposure after collateral. In addition, we had mortgage delivery commitment derivatives with notional amounts of $25.1 million at September 30, 2007 compared with $15.7 million at December 31, 2006, which were fully collateralized. Participating members are assessed a fee for failing to fulfill their mortgage delivery commitments.

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The following tables show our derivative counterparty credit exposure at September 30, 2007 and December 31, 2006, excluding mortgage delivery commitments and after applying netting agreements and collateral (dollars in millions):

	September 30, 2007
					Total		Value		Exposure
Credit	Active		Notional		Exposure at		of Collateral		Net of
Rating1	Counterparties		Amount2		Fair Value3		Pledged		Collateral4
AAA		2	$	1,440	$	—	$	—	$	—
AA		21		30,974		53		12		41
A		3		4,921		2		—		2
Total		26	$	37,335	$	55	$	12	$	43

	December 31, 2006
					Total		Value		Exposure
Credit	Active		Notional		Exposure at		of Collateral		Net of
Rating1	Counterparties		Amount2		Fair Value3		Pledged		Collateral4
AAA		3	$	1,761	$	—	$	—	$	—
AA		18		21,036		31		—		31
A		5		6,687		5		2		3
Total		26	$	29,484	$	36	$	2	$	34

1	Credit rating is the lower of the S&P, Moody’s, and Fitch ratings stated in terms of the S&P equivalent.
2	Notional amounts serve as a factor in determining periodic interest amounts to be received and paid and generally do not represent actual amounts to be exchanged or directly reflect our exposure to counterparty credit risk.
3	For each counterparty, this amount includes derivatives with a net positive market value including the related accrued interest receivable/payable (net).
4	Amount equals total exposure at fair value less value of collateral pledged as determined at the counterparty level.

Operational Risk

We define operational risk as the risk of loss resulting from inadequate or failed internal processes, people, systems, or external events. Operational risk is inherent in all of our business activities and processes. Management has established policies and procedures to reduce the likelihood of operational risk and designed our annual risk assessment process to provide ongoing identification, measurement, and monitoring of operational risk. For additional information related to operational risk, see “Operational Risk” in the Bank’s annual report on Form 10-K.

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Business Risk

We define business risk as the risk of an adverse impact on the Bank’s profitability resulting from external factors that may occur in both the short- and long-term. Business risk includes political, strategic, reputation, regulatory, and/or environmental factors, many of which are beyond our control. We control business risk through strategic and annual business plans and monitoring the Bank’s external environment.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See “Market Risk” beginning on page 63 and the sections referenced therein for Quantitative and Qualitative Disclosures about Market Risk.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Bank’s senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports it files or submits under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC). The Bank’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bank’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the Bank’s disclosure controls and procedures, the Bank’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Bank’s management necessarily should consider applying its judgment in evaluating the cost-benefit relationship of controls and procedures.

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Management of the Bank has evaluated the effectiveness of the design and operation of its disclosure controls and procedures, with the participation of the President and Chief Executive Officer (CEO) and Chief Financial Officer (CFO), at September 30, 2007. Based upon that evaluation, the President and CEO and CFO have concluded that the Bank’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-13(e) and 15d-15(e), were not effective at September 30, 2007. This determination is based on management’s identification of the following material weakness in our internal control over financial reporting.

• The Bank did not maintain effective controls over its use of spreadsheets used in the financial close and reporting process. Specifically, the Bank did not have effective controls in place to monitor and ensure that spreadsheet formula logic was adequately tested and analyzed in order to provide accurate and complete spreadsheet calculations. This control deficiency could result in a misstatement of any of our financial statement accounts and disclosures that would result in a material misstatement of the annual or interim financial statements that would not be prevented or detected.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The Bank has taken and is planning on taking certain remedial actions to address this material weakness as described in “Changes in Internal Control over Financial Reporting” and “Plan of Remediation for Identified Material Weakness” herein.

Changes in Internal Control over Financial Reporting

For the three months ended September 30, 2007, the Bank’s management implemented and enhanced certain controls and procedures affecting its internal control over financial reporting as they relate to the material weakness identified in “Disclosure Controls and Procedures” above. Specifically, the Bank’s management instituted the following material changes in our internal control over financial reporting:

• Completed spreadsheet certification process that documents and tests the control environment residing with spreadsheets involved in the financial reporting process.

• Implemented internally developed information technology (IT) solutions that have replaced or supplemented certain manual complex spreadsheets.

• Implemented additional internal controls to support and validate the Bank’s manual complex spreadsheets, including installation and phased-in implementation of a software tool to assist with creating an audit trail for changes to spreadsheets.

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Plan of Remediation for Identified Material Weakness

The Bank has been following a plan to remediate the material weakness. In addition to actions already taken, the plan includes the following elements still in progress:

• Continued testing on the operating effectiveness of selected spreadsheet controls.

• Continued development of IT solutions to replace and supplement manual complex spreadsheets.

These planned remedial actions reflect the ongoing remediation efforts the Bank has instituted in response to the material weakness in our internal control over financial reporting identified within “Disclosure Controls and Procedures” above. Additional remediation efforts may be put in place as management continues to assess our internal control over financial reporting as it relates to spreadsheet controls.

Item 4T. Controls and Procedures

Not applicable.

PART II–OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently aware of any pending or threatened legal proceedings against the Bank that could have a material adverse effect on its financial condition, results of operations, or cash flows.

Item 1A. Risk Factors

There were no material changes from the risk factors previously disclosed in the Bank’s annual report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on March 30, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

Election and appointment of Directors

On August 14, 2007, Michael J. Finley was declared elected by the Bank to our Board of Directors for a three-year term commencing January 1, 2008. The directorship is being filled without an election because only one nominee accepted nomination for the one Minnesota directorship. For more information see the Bank’s Form 8-K furnished to the Securities and Exchange Commission on August 14, 2007.

On October 25, 2007, Joseph C. Stewart III from Missouri and Eric Hardmeyer from North Dakota, were elected to the Bank’s Board of Directors for three year terms commencing January 1, 2008. For more information see the Bank’s Form 8-K furnished to the Securities and Exchange Commission on October 26, 2007.

On October 31, 2007, the Finance Board reappointed Johnny A. Danos, Gerald D. Eid, and David R. Frauenshuh to the Bank’s Board of Directors to fill three-year terms beginning on January 1, 2008. For more information see the Bank’s Form 8-K furnished to the Securities and Exchange Commission on November 2, 2007.

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Item 6. Exhibits

3.1	Organization Certificate of the Federal Home Loan Bank of Des Moines dated October 13, 1932.*
3.2	Bylaws of the Federal Home Loan Bank of Des Moines effective January 12, 2006.*
4.1	Federal Home Loan Bank of Des Moines Capital Plan dated July 8, 2002, approved by the Federal Housing Finance Board July 10, 2002.*
4.2	Reserve Capital Policy effective August 1, 2006 and as amended August 24, 2006.**
31.1	Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the executive vice president and chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the president and chief executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the executive vice president and chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*	Incorporated by reference to the correspondingly numbered exhibit to our Form 10 filed with the Securities and Exchange Commission on May 12, 2006.
**	Incorporated by reference to the correspondingly numbered exhibit to our Form 8-K furnished to the Securities and Exchange Commission on August 30, 2006.

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SIGNATURE

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

FEDERAL HOME LOAN BANK OF DES MOINES
(Registrant)

Date:	November 13, 2007
By:	/s/ Richard S. SwansonRichard S. Swanson
	President and Chief Executive Officer

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