Federal Home Loan Bank of Topeka 10-Q 2007 Q1 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 March 31, 2007

OR

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

For the transition period from                    to                    

Commission File Number 000-52004

FEDERAL HOME LOAN BANK OF TOPEKA

(Exact name of registrant as specified in its charter)

Federally chartered corporation	48-0561319
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
One Security Benefit Pl. Suite 100
Topeka, KS	66606
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 785.233.0507

     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):

o Large accelerated filer      o Accelerated filer      þ Non-accelerated filer

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 May 1, 2007
Class A Stock, par value $100		5,991,667
Class B Stock, par value $100		12,712,938

FEDERAL HOME LOAN BANK OF TOPEKA

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	4
Item 1.	Financial Statements	4
	Statements of Condition	5
	Statements of Income	6
	Statements of Capital	7
	Statements of Cash Flows	8
	Notes to Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
	Selected Financial Data	30
	Quarterly Overview	31
	Results of Operations	32
	Financial Condition	38
	Liquidity and Capital Resources	50
	Risk Management	53
	Critical Accounting Policies and Estimates	58
	Recently Issued Accounting Standards	58
	Recent Developments	59
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	67
PART II.	OTHER INFORMATION	68
Item 1.	Legal Proceedings	68
Item 1A.	Risk Factors	68
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68
Item 3.	Defaults Upon Senior Securities	68
Item 4.	Submission of Matters to a Vote of Security Holders	68
Item 5.	Other Information	68
Item 6.	Exhibits	68
Section 302 Certification
Section 302 Certification
Section 906 Certification

2

Important Notice about Information in this Quarterly Report

In this quarterly report, unless the context suggests otherwise, references to the “FHLBank,” “FHLBank Topeka,” “we,” “us” and “our” mean the Federal Home Loan Bank of Topeka, and “FHLBanks” mean the 12 Federal Home Loan Banks, including the FHLBank Topeka.

The information contained in this quarterly report is accurate only as of the date of this quarterly report and as of the dates specified herein.

The product and service names used in this quarterly report are the property of the FHLBank, and in some cases, the other FHLBanks. Where the context suggests otherwise, the products, services and company names mentioned in this quarterly report are the property of their respective owners.

The FHLBank filed an annual report on Form 10-K (referred in this report as “annual report on Form 10-K”) under the Securities Exchange Act of 1934 (“Exchange Act”) on March 30, 2007. Portions of the annual report on Form 10-K are incorporated by reference in this report.

Special Cautionary Notice Regarding Forward-looking Statements

The information included or incorporated by reference in this quarterly report on Form 10-Q contains certain forward looking statements with respect to our financial condition, results of operations, plans, objectives, projections, estimates, predictions, future financial performance and ongoing business, including without limitation: statements that are not historical in nature, or statements preceded by, followed by or that include words such as “believes,” “expects,” “may,” “will,” “should,” “could,” “anticipates,” “estimates,” “intends” or similar expressions. The FHLBank cautions that, by their nature, forward looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions and actual results may differ materially from those expressed, contemplated or implied by the forward looking statements or could affect the extent to which a certain plan, objective, projection, estimate or prediction is realized.

These forward-looking statements involve risks and uncertainties including, but not limited to, the following:

• Economic and market conditions;

• Demand for FHLBank advances resulting from changes in FHLBank members’ deposit flows and/or credit demands;

• The volume of eligible mortgage loans originated and sold by participating members to the FHLBank through its various mortgage finance products (MPF Program¹);

• Pricing of various mortgage finance products under the MPF Program by the MPF Provider since the FHLBank does not control pricing;

• Volatility of market prices, rates and indices that could affect the value of investments or collateral held by the FHLBank as security for the obligations of FHLBank stockholders and counterparties to derivatives and similar instruments;

• Political events, including legislative, regulatory, judicial, or other developments that affect the FHLBank, its stockholders, counterparties and/or investors in the consolidated obligations of the 12 FHLBanks;

• Competitive forces including, without limitation, other sources of funding available to FHLBank members, other entities borrowing funds in the capital markets and the ability to attract and retain skilled individuals;

• The pace of technological change and the ability to develop and support technology and information systems, including the Internet, sufficient to manage the risks and operations of the FHLBank’s business effectively;

• Changes in domestic and foreign investor demand for consolidated obligations of the 12 FHLBanks and/or the terms of derivatives and similar instruments including, without limitation, changes in the relative attractiveness of consolidated obligations as compared to other investment opportunities;

• Timing and volume of market activity;

• Ability to introduce new FHLBank products and services, and successfully manage the risks associated with those products and services, including new types of collateral used to secure advances;

• Risks related to the operations of the other 11 FHLBanks that could trigger our joint and several liability for debt issued by the other 11 FHLBanks;

• Risk of loss arising from litigation filed against the FHLBank; and

• Inflation/deflation.

¹   “Mortgage Partnership Finance,” “MPF” and “eMPF” are registered trademarks of the Federal Home Loan Bank of Chicago.

3

For additional information regarding these and other risks, see Item 1A — “Risk Factors” in the annual report on Form 10-K, incorporated by reference herein.

Any forward-looking statements made or incorporated by reference in this quarterly report on Form 10-Q or that we may make from time to time are representative only as of the date they are made, and we undertake no obligation to update any forward-looking statement.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

4

FEDERAL HOME LOAN BANK OF TOPEKA

STATEMENTS OF CONDITION — Unaudited

(In thousands, except par value)

	March 31,			December 31,
	2007			2006
ASSETS
Cash and due from banks	$	296		$	375
Interest-bearing deposits		4,497,036			4,327,459
Overnight Federal funds sold		6,007,000			5,935,500
Term Federal funds sold		1,424,000			2,119,000
Trading securities (Note 2)		655,347			704,125
Available-for-sale securities1(Note 3)		101,975			101,668
Held-to-maturity securities2 (Note 4)		7,653,034			8,377,383
Advances (Note 5)		26,715,893			28,445,245
Mortgage loans held for portfolio, net of allowance for credit losses on mortgage loans of $855 and $854 (Note 8)		2,348,612			2,372,939
Accrued interest receivable		154,045			176,087
Premises, software and equipment, net		19,803			19,797
Derivative assets (Note 12)		101,949			66,623
Other assets		86,065			92,766
TOTAL ASSETS	$	49,765,055		$	52,738,967
LIABILITIES AND CAPITAL
Liabilities:
Deposits:
Interest-bearing:
Demand	$	88,405		$	102,309
Overnight		1,175,600			1,005,500
Term		2,450			1,051
Other		34,000			1,400
Non-interest-bearing:
Demand		0			16
Other		7,229			8,130
Total deposits		1,307,684			1,118,406
Consolidated obligations, net (Note 9):
Discount notes		13,420,646			16,736,007
Bonds		32,406,120			32,038,999
Total consolidated obligations, net		45,826,766			48,775,006
Mandatorily redeemable capital stock (Note 10)		47,393			46,232
Accrued interest payable		328,825			336,743
Affordable Housing Program (Note 6)		37,993			36,023
Payable to Resolution Funding Corp. (REFCORP) (Note 7)		8,147			8,941
Derivative liabilities (Note 12)		146,692			203,579
Other liabilities		37,131			42,383
TOTAL LIABILITIES		47,740,631			50,567,313
Commitments and contingencies (Note 14)
Capital(Note 10):
Capital stock outstanding — putable:
Class A ($100 par value; 5,424 and 5,323 shares issued and outstanding)		542,386			532,321
Class B ($100 par value; 13,110 and 14,747 shares issued and outstanding)		1,310,967			1,474,671
Total capital stock		1,853,353			2,006,992
Retained earnings		177,277			171,755
Accumulated other comprehensive income:
Net unrealized loss on available-for-sale securities (Note 3)		(3,576	)		(4,437	)
Net unrealized loss relating to hedging activities		(102	)		(128	)
Defined benefit pension plan — prior service cost		66			66
Defined benefit pension plan — net loss		(2,594	)		(2,594	)
TOTAL CAPITAL		2,024,424			2,171,654
TOTAL LIABILITIES AND CAPITAL	$	49,765,055		$	52,738,967

1	Amortized cost: $105,551 and $106,105 at March 31, 2007 and December 31, 2006.
2	Fair value: $7,612,753 and $8,314,299 at March 31, 2007 and December 31, 2006.

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

5

FEDERAL HOME LOAN BANK OF TOPEKA

STATEMENTS OF INCOME — Unaudited

(In thousands)

	For the Three Months Ended
	March 31,
	2007			2006
INTEREST INCOME:
Interest-bearing deposits	$	56,888		$	51,246
Overnight Federal funds sold		76,943			34,331
Term Federal funds sold		16,044			15,963
Trading securities		8,659			9,271
Available-for-sale securities		620			634
Held-to-maturity securities		107,728			91,641
Advances		355,676			310,819
Prepayment fees on terminated advances		397			1,003
Mortgage loans held for portfolio		30,361			30,595
Overnight loans to other Federal Home Loan Banks		9			15
Other		996			1,093
Total interest income		654,321			546,611
INTEREST EXPENSE:
Deposits		12,132			8,707
Consolidated obligations:
Discount notes		170,178			147,071
Bonds		416,608			337,347
Overnight loans from other Federal Home Loan Banks		44			0
Other		460			482
Mandatorily redeemable capital stock (Note 10)		650			621
Total interest expense		600,072			494,228
NET INTEREST INCOME		54,249			52,383
Provision for (reversal of) credit losses on mortgage loans		(43	)		59
NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION		54,292			52,324
OTHER INCOME:
Service fees		360			336
Net realized gain (loss) on sale of held-to-maturity securities		(962	)		0
Net gain (loss) on trading securities (Note 2)		2,074			(11,905	)
Net gain (loss) on derivatives and hedging activities		(3,211	)		18,102
Other		960			(977	)
Total other income (loss)		(779	)		5,556
OTHER EXPENSES:
Compensation and benefits		5,082			4,460
Other operating		2,781			2,125
Finance Board		454			396
Office of Finance		518			435
Other		249			241
Total other expenses		9,084			7,657
INCOME BEFORE ASSESSMENTS		44,429			50,223
Affordable Housing Program (Note 6)		3,693			4,163
REFCORP (Note 7)		8,147			9,212
Total assessments		11,840			13,375
NET INCOME	$	32,589		$	36,848

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

6

FEDERAL HOME LOAN BANK OF TOPEKA

STATEMENTS OF CAPITAL FOR PERIODS ENDED MARCH 31, 2006 AND 2007 — Unaudited

(In thousands)

																Accumulated
																Other
	Capital Stock Class A1						Capital Stock Class B1						Retained			Comprehensive			Total
	Shares			Par Value			Shares			Par Value			Earnings			Income			Capital
BALANCE — DECEMBER 31, 2005		4,977		$	497,759			12,906		$	1,290,582		$	137,270		$	(7,434	)	$	1,918,177
Proceeds from sale of capital stock		2			230			910			90,997									91,227
Repurchase/redemption of capital stock								(79	)		(7,922	)								(7,922	)
Comprehensive income:
Net income														36,848
Other comprehensive income:
Net unrealized gain (loss) on available-for-sale (AFS) securities																	(687	)
Reclassification adjustment for gain (loss) on hedging activities included in net income																	27
Total comprehensive income																				36,188
Net transfer of shares to mandatorily redeemable capital stock		(468	)		(46,845	)		(625	)		(62,448	)								(109,293	)
Net transfer of shares between Class A and Class B		302			30,240			(302	)		(30,240	)								0
Dividends on capital stock (Class A — 3.9%, Class B — 5.6%):
Cash payment														(92	)					(92	)
Stock issued								226			22,577			(22,577	)					0
BALANCE — MARCH 31, 2006		4,813		$	481,384			13,036		$	1,303,546		$	151,449		$	(8,094	)	$	1,928,285
BALANCE — DECEMBER 31, 2006		5,323		$	532,321			14,747		$	1,474,671		$	171,755		$	(7,093	)	$	2,171,654
Proceeds from sale of capital stock								3,626			362,648									362,648
Repurchase/redemption of capital stock								(102	)		(10,174	)								(10,174	)
Comprehensive income:
Net income														32,589
Other comprehensive income:
Net unrealized gain (loss) on AFS securities																	861
Reclassification adjustment for gain (loss) on hedging activities included in net income																	26
Total comprehensive income																				33,476
Net transfer of shares to mandatorily redeemable capital stock		(253	)		(25,366	)		(5,077	)		(507,700	)								(533,066	)
Net transfer of shares between Class A and Class B		354			35,431			(354	)		(35,431	)								0
Dividends on capital stock (Class A — 4.5%, Class B — 6.5%):
Cash payment														(114	)					(114	)
Stock issued								270			26,953			(26,953	)					0
BALANCE — MARCH 31, 2007		5,424		$	542,386			13,110		$	1,310,967		$	177,277		$	(6,206	)	$	2,024,424

¹   Putable

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

7

FEDERAL HOME LOAN BANK OF TOPEKA

STATEMENTS OF CASH FLOWS — Unaudited

(In thousands)

	For the Three Months Ended
	March 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	32,589		$	36,848
Adjustments to reconcile income to net cash provided by (used in) operating activities:
Depreciation and amortization:
Premiums and discounts on consolidated obligations, net		(10,413	)		2,130
Concessions on consolidated obligation bonds		1,617			907
Premiums and discounts on investments, net		5,193			(1,180	)
Premiums, discounts and commitment fees on advances		(14,619	)		(13,166	)
Discounts on Housing and Community Development advances		(2	)		(1	)
Premiums, discounts and deferred loan costs on mortgage loans, net		348			295
Fair value adjustments on hedged assets or liabilities		15,688			13,905
Other comprehensive income		26			27
Premises, software and equipment		867			700
Provision for (reversal of) credit losses on mortgage loans		(43	)		59
Non-cash interest on mandatorily redeemable capital stock		645			620
Net realized (gain) loss on retirement of debt		0			1,813
Net realized (gain) loss on sale of held-to-maturity securities		962			0
Other gains		(10	)		(4	)
(Increase) decrease in trading securities		48,778			12,797
(Gain) loss due to change in net fair value adjustment on derivative and hedging activities		683			(23,698	)
(Increase) decrease in accrued interest receivable		22,042			245
(Increase) decrease in derivative asset — net accrued interest		(17,355	)		(13,384	)
(Increase) decrease in other assets		1,064			223
Increase (decrease) in accrued interest payable		(7,918	)		22,573
(Increase) decrease in derivative liability — net accrued interest		(5,565	)		(16,321	)
Increase (decrease) in Affordable Housing Program liability		1,970			2,546
Increase (decrease) in REFCORP liability		(794	)		(3,896	)
Increase (decrease) in other liabilities		(252	)		(598	)
Total adjustments		42,912			(13,408	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		75,501			23,440
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits		(169,577	)		(452,803	)
Net (increase) decrease in overnight Federal funds sold		(71,500	)		(147,500	)
Net (increase) decrease in term Federal funds sold		695,000			(100,000	)
Net (increase) decrease in short-term held-to-maturity securities		631,214			(206,053	)
Proceeds from sale of long-term held-to-maturity securities		81,087			0
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities		509,369			357,548
Purchases of long-term held-to-maturity securities		(497,923	)		(268,762	)
Principal collected on advances		129,827,478			98,919,602
Advances made		(128,074,091	)		(99,324,436	)
Principal collected on mortgage loans held for portfolio		65,405			64,306
Mortgage loans held for portfolio originated or purchased		(41,460	)		(51,276	)
Principal collected on other loans made		322			301
Purchases of premises, software and equipment		(873	)		(931	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		2,954,451			(1,210,004	)

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

8

FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS (continued) — Unaudited
(In thousands)

	For the Three Months Ended
	March 31,
	2007			2006
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	$	189,278		$	257,046
Net proceeds from sale of consolidated obligation:
Discount notes		173,061,508			218,927,893
Bonds		6,122,456			2,606,584
Payments for maturing and retired consolidated obligation:
Discount notes		(176,364,633	)		(219,292,093	)
Bonds		(5,853,450	)		(1,300,852	)
Net increase (decrease) in other borrowings		(5,000	)		(5,000	)
Proceeds from issuance of capital stock		362,648			91,227
Payments for repurchase/redemption of capital stock		(10,174	)		(7,922	)
Payments for repurchase of mandatorily redeemable capital stock		(532,550	)		(90,026	)
Cash dividends paid		(114	)		(92	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(3,030,031	)		1,186,765
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(79	)		201
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		375			148
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	296		$	349
Supplemental disclosures:
Interest paid	$	640,790		$	529,057
Affordable Housing Program payments	$	1,776		$	2,281
REFCORP payments	$	8,941		$	13,108

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

9

FEDERAL HOME LOAN BANK OF TOPEKA

Notes to Financial Statements (Unaudited)

March 31, 2007

NOTE 1 — FINANCIAL STATEMENT PRESENTATION

The accompanying interim financial statements of the Federal Home Loan Bank of Topeka (FHLBank) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X. The financial statements contain all adjustments which are, in the opinion of management, necessary for a fair statement of the FHLBank’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

The FHLBank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2006. The interim financial statements presented herein should be read in conjunction with the FHLBank’s audited financial statements and notes thereto, which are included in the FHLBank’s annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 30, 2007 (annual report on Form 10-K). The notes to the interim financial statements highlight significant changes to the notes included in the annual report on Form 10-K.

Adoption of SFAS 155:The FHLBank adopted Statement of Financial Accounting Standards (SFAS) No. 155,Accounting for Certain Hybrid Financial Instruments — An amendment of FASB Statements No. 133 and 140(herein referred to as “SFAS 155”) on January 1, 2007. This statement resolved issues addressed in Statement 133 Implementation Issue No. D1,Application of Statement 133 to Beneficial Interests in Securitized Financial Assets(DIG Issue D1). SFAS 155 amended SFAS 133Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137,Accounting for Derivative Instruments and Hedging Activities — Deferral of Effective Date of FASB Statement No. 133, as amended by SFAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities, as amended by SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities,and as amended by SFAS No. 155,Accounting for Certain Hybrid Financial Instruments(hereafter referred to as “SFAS 133”) to simplify the accounting for certain derivatives embedded in other financial instruments (a hybrid financial instrument) by permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise required bifurcation, provided that the entire hybrid financial instrument is accounted for on a fair value basis. SFAS 155 also establishes the requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, which replaces the interim guidance in DIG Issue D1. SFAS 155 amends SFAS 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a replacement of FASB Statement 125(SFAS 140) to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to beneficial interests other than another derivative financial instrument. The adoption of this statement did not have a material impact on the FHLBank’s financial condition, results of operations or cash flows.

Adoption of DIG Issue B40:In January 2007, the Financial Accounting Standards Board (FASB) posted Statement 133 Implementation Issue No. B40,Application ofParagraph 13(b) to Securitized Interests in Prepayable Financial Assets(herein referred to as “DIG Issue B40”). DIG Issue B40 provides a narrow scope exception from paragraph 13(b) of SFAS 133 for securitized interests that contain no embedded derivatives other than that which results solely from the embedded call options in the underlying financial asset and for which the right to accelerate settlement is not controlled by the investor. DIG Issue B40 is effective upon adoption of SFAS 155; therefore, the FHLBank adopted DIG Issue B40 on January 1, 2007. The adoption of this statement did not have a material impact on the FHLBank’s financial condition, results of operations or cash flows.

Issuance of SFAS 157:In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (herein referred to as “SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (January 1, 2008 for the FHLBank), and interim periods within those fiscal years. Early adoption is permitted. The FHLBank does not expect the adoption of this statement to have a material impact on its financial condition, results of operations or cash flows.

10

Issuance of SFAS 159:In February 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(herein referred to as “SFAS 159”). SFAS 159 permits the FHLBank to choose to measure eligible financial instruments and certain other items at fair value at specified election dates. Changes in the fair value for the selected items will be recorded in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument, with a few exceptions, is irrevocable and is applied to the entire instrument. SFAS 159 is effective as of the beginning of the FHLBank’s first fiscal year that begins after November 15, 2007 (January 1, 2008 for the FHLBank). The FHLBank has not yet determined the effect that the implementation of SFAS 159 will have on its financial condition, results of operations or cash flows.

Issuance of FSP FIN 39-1:In May 2007, the FASB issued FASB Staff Position (FSP) FIN 39-1 “Amendment of FASB Interpretation No. 39” (herein referred to as “FSP FIN 39-1”). FSP FIN 39-1 amends FASB Interpretation Number (FIN) 39 “Offsetting of Amounts Related to Certain Contracts — An interpretation of APB Opinion No. 10 and FASB Statement No. 105” (herein referred to as “FIN 39”), to replace the terms conditional contracts and exchange contracts with derivative instruments as defined in SFAS. FSP FIN 39-1 permits the FHLBank to offset fair value amounts recognized for cash collateral receivable or payable against fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements in accordance with paragraph 10 of FIN 39. FSP FIN 39-1 requires the FHLBank to consistently offset the derivative fair value and the collateral fair value. The FHLBank will be required to recognize the effects of applying FIN 39-1 through retrospective application to all financial statements presented unless it is impracticable to do so. The FHLBank, upon adoption of FSP FIN 39-1, will be permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007. The FHLBank is currently assessing the impact that adoption of this statement will have on its financial condition, results of operations and cash flows.

Use of Estimates:The preparation of financial statements under accounting standards generally accepted in the United States (GAAP) requires management to make estimates and assumptions as of the date of the financial statements in determining the reported amounts of assets, liabilities and estimated fair values and in determining the disclosure of any contingent assets or liabilities. Estimates and assumptions by management also affect the reported amounts of income and expense during the reporting period. Many of the estimates and assumptions, including those used in financial models, are based on financial market conditions as of the date of the financial statements. Because of the volatility of the financial markets, as well as other factors that affect management estimates, actual results may vary from these estimates.

NOTE 2 — TRADING SECURITIES

Major Security Types:Tradingsecurities as of March 31, 2007 and December 31, 2006 are summarized in the following table (in thousands):

	Estimated Fair Values
	March 31,		December 31,
	2007		2006
FHLBank obligations1	$	15,047	$	15,052
Fannie Mae2obligations		131,847		181,611
Freddie Mac2obligations		505,252		503,406
Federal Farm Credit Bank2obligations		0		620
Subtotal		652,146		700,689
Ginnie Mae mortgage-backed securities3		3,201		3,436
TOTAL	$	655,347	$	704,125

1	See Note 16 for transactions with other FHLBanks.
2	Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal Farm Credit Bank are government-sponsored enterprises (GSE). GSE securities are not guaranteed by the U.S. government.
3	Government National Mortgage Association (Ginnie Mae) securities are guaranteed by the U.S. government.

Redemption Terms: The estimated fair values of trading securities by contractual maturity as of March 31, 2007 and December 31, 2006 are shown in the following table (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

11

	March 31,		December 31,
	2007		2006
Due in one year or less	$	40,131	$	90,890
Due after one year through five years		459,799		354,844
Due after five years through 10 years		152,216		254,955
Due after 10 years		0		0
Subtotal		652,146		700,689
Mortgage-backed securities		3,201		3,436
TOTAL	$	655,347	$	704,125

For securities held on March 31, 2007 and 2006, the net unrealized gain (loss) on trading securities during the three months ended March 31, 2007 and 2006 included a net gain (loss) of $2,134,000 and $(11,483,000), respectively.

NOTE 3 — AVAILABLE-FOR-SALE SECURITIES

Major Security Types: The cost basis, unrealized gains and losses and estimated fair values of available-for-sale securities as of March 31, 2007 and December 31, 2006 are as follows (in thousands). All securities as of March 31, 2007 and December 31, 2006 were U.S. Treasury Obligations.

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Values
As of March 31, 2007	$	105,551	$	0	$	3,576	$	101,975
As of December 31, 2006	$	106,105	$	0	$	4,437	$	101,668

The FHLBank concluded that, based on the creditworthiness of the issuer, the unrealized loss on each security in the above table represents a temporary impairment and does not require adjustment to the carrying amount of any of the individual securities. Additionally, the FHLBank has the ability and the intent to hold such securities through to recovery of the unrealized losses.

Redemption Terms: The amortized cost and estimated fair values of available-for-sale securities by contractual maturity as of March 31, 2007 and December 31, 2006 are shown in the following table (in thousands). None of these securities are callable or prepayable.

	March 31, 2007				December 31, 2006
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Values		Cost		Fair Values
Due in one year or less	$	50,309	$	49,387	$	50,432	$	49,143
Due after one year through five years		55,242		52,588		55,673		52,525
Due after five years through 10 years		0		0		0		0
Due after 10 years		0		0		0		0
TOTAL	$	105,551	$	101,975	$	106,105	$	101,668

Interest Rate Payment Terms: All securities classified as available-for-sale securities as of March 31, 2007 and December 31, 2006, respectively, were fixed rate securities.

Gains and Losses:There were no sales of available-for-sale securities during the three months ended March 31, 2007 and 2006.

12

NOTE 4 — HELD-TO-MATURITY SECURITIES

Major Security Types: Held-to-maturity securities as of March 31, 2007 are summarized in the following table (in thousands) :

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated Fair
	Cost		Gains		Losses		Values
State or local housing agency obligations	$	217,875	$	774	$	1,091	$	217,558
Commercial paper		1,138,339		0		0		1,138,339
Subtotal		1,356,214		774		1,091		1,355,897
Mortgage-backed securities:
Fannie Mae1		1,342,029		3,935		5,630		1,340,334
Freddie Mac1		1,506,015		3,962		8,952		1,501,025
Ginnie Mae2		50,503		656		0		51,159
Other3		3,398,273		4,293		38,228		3,364,338
Mortgage-backed securities		6,296,820		12,846		52,810		6,256,856
TOTAL	$	7,653,034	$	13,620	$	53,901	$	7,612,753

Held-to-maturity securities as of December 31, 2006 are summarized in the following table (in thousands):

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Values
Fannie Mae1 obligations	$	100,008	$	0	$	8	$	100,000
Freddie Mac1 obligations		99,940		0		2		99,938
State or local housing agency obligations		238,873		1,444		4,211		236,106
Commercial paper		1,774,449		0		0		1,774,449
Subtotal		2,213,270		1,444		4,221		2,210,493
Mortgage-backed securities:
Fannie Mae1		1,145,425		2,269		7,942		1,139,752
Freddie Mac1		1,379,899		2,671		10,918		1,371,652
Ginnie Mae2		17,118		186		0		17,304
Other3		3,621,671		3,121		49,694		3,575,098
Mortgage-backed securities		6,164,113		8,247		68,554		6,103,806
TOTAL	$	8,377,383	$	9,691	$	72,775	$	8,314,299

1	Fannie Mae and Freddie Mac are GSEs. GSE securities are not guaranteed by the U.S. government.
2	Ginnie Mae securities are guaranteed by the U.S. government.
3	Primarily consists of private-label mortgage-backed securities

The FHLBank concluded that, based on the creditworthiness of the issuers and/or any underlying collateral, the unrealized loss on each security in the above tables represents a temporary impairment and does not require adjustment to the carrying amount of any of the individual securities. Additionally, the FHLBank has the ability and the intent to hold such securities through to recovery of the unrealized losses.

The amortized cost of the FHLBank’s mortgage-backed securities included net discounts of $11,831,000 and $9,859,000 as of March 31, 2007 and December 31, 2006, respectively. Other investments included net discounts of $0 and $52,000 as of March 31, 2007 and December 31, 2006, respectively.

Redemption Terms: The amortized cost and estimated fair values of held-to-maturity securities by contractual maturity as of March 31, 2007 and December 31, 2006 are shown in the following table (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

13

	March 31, 2007				December 31, 2006
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Values		Cost		Fair Values
Due in one year or less	$	1,138,339	$	1,138,339	$	1,974,397	$	1,974,386
Due after one year through five years		10,000		10,511		10,000		10,539
Due after five years through 10 years		445		446		600		620
Due after 10 years		207,430		206,601		228,273		224,948
Subtotal		1,356,214		1,355,897		2,213,270		2,210,493
Mortgage-backed securities		6,296,820		6,256,856		6,164,113		6,103,806
TOTAL	$	7,653,034	$	7,612,753	$	8,377,383	$	8,314,299

Interest Rate Payment Terms: The following table details interest rate payment terms for held-to-maturity securities as of March 31, 2007 and December 31, 2006 (in thousands):

	March 31,		December 31,
	2007		2006
Amortized cost of held-to-maturity securities other than mortgage-backed securities:
Fixed rate	$	1,251,499	$	2,098,195
Variable rate		104,715		115,075
Subtotal		1,356,214		2,213,270
Amortized cost of held-to-maturity mortgage-backed securities:
Pass-through securities:
Fixed rate		1,531		26,621
Variable rate		21,971		23,497
Collateralized mortgage obligations:
Fixed rate		3,512,179		3,645,173
Variable rate		2,761,139		2,468,822
Subtotal		6,296,820		6,164,113
TOTAL	$	7,653,034	$	8,377,383

Gains and Losses:Net losses were realized on the sale of securities during the three months ended March 31, 2007 and are included in other income. All securities sold had paid down below 15 percent of the principal outstanding at acquisition. There were no sales of securities during the three months ended March 31, 2006. Following are details of the 2007 sales (in thousands):

	Three months ended
	March 31, 2007
Total proceeds	$	81,087
Gross gains	$	378
Gross losses		(1,340	)
NET LOSS	$	(962	)

NOTE 5 — ADVANCES

Redemption Terms:As of March 31, 2007 and December 31, 2006, the FHLBank had advances outstanding at interest rates ranging from zero percent (AHP advances, see Note 6) to 8.64 percent at both period ends as summarized in the following table (in thousands):

14

	March 31, 2007						December 31, 2006
				Weighted						Weighted
				Average						Average
Year of Maturity	Amount			Interest Rate			Amount			Interest Rate
Due in one year or less	$	13,753,060			5.13	%	$	16,628,892			5.14	%
Due after one year through two years		2,916,777			4.81			1,815,262			4.57
Due after two years through three years		2,298,703			5.19			2,539,993			4.87
Due after three years through four years		1,675,847			5.39			1,788,008			5.46
Due after four years through five years		976,802			4.83			1,147,407			4.97
Due after five years		5,091,445			4.76			4,546,448			4.68
Total par value		26,712,634			5.03	%		28,466,010			5.02	%
Discounts on HCD advances		(49	)					(51	)
Premiums on other advances		116						125
Discounts on other advances		(74,790	)					(89,406	)
SFAS 133 fair value adjustments		77,982						68,567
TOTAL	$	26,715,893					$	28,445,245

In general, a borrower is charged a prepayment fee when an advance is repaid before its stated maturity. Prepayment fees are calculated using methods that make the FHLBank financially indifferent to the advance prepayments. The FHLBank’s advances outstanding include advances that contain call options that may be exercised with or without prepayment fees at the borrower’s discretion on specific dates (call dates) before the stated advance maturities (callable advances). The borrowers normally exercise their call options on these advances when interest rates decline (fixed rate advances) or spreads change (adjustable rate advances). The FHLBank’s advances as of March 31, 2007 and December 31, 2006 include callable advances totaling $3,698,017,000 and $3,781,912,000, respectively. Of these callable advances, there were $3,690,666,000 and $3,779,516,000 of adjustable rate advances as of March 31, 2007 and December 31, 2006, respectively. The table below summarizes the FHLBank’s advances by year of maturity, or by the next call date for callable advances (in thousands):

	March 31,		December 31,
Year of Maturity or Next Call Date	2007		2006
Due in one year or less	$	17,306,090	$	18,956,544
Due after one year through two years		1,957,648		1,697,254
Due after two years through three years		2,139,283		2,358,273
Due after three years through four years		1,519,190		1,657,008
Due after four years through five years		948,425		1,039,820
Due after five years		2,841,998		2,757,111
TOTAL PAR VALUE	$	26,712,634	$	28,466,010

The FHLBank’s advances outstanding also include advances that contain conversion options that may be exercised at the FHLBank’s discretion on specific dates (conversion dates) before the stated advance maturities (convertible advances). With convertible advances, the FHLBank effectively purchases put options from the borrowers that allow the FHLBank to convert the fixed rate advances to adjustable rate advances. In exchange for the options, borrowers are charged interest rates that are below those for fixed rate advances with comparable maturities. The FHLBank normally exercises its conversion options on these advances when interest rates increase. The FHLBank’s advances as of March 31, 2007 and December 31, 2006 included convertible advances totaling $4,119,766,000 and $3,996,241,000, respectively. The following table summarizes the FHLBank’s advances by year of maturity, or by the next conversion or put date for convertible advances (in thousands):

15

	March 31,		December 31,
Year of Maturity or Next Conversion or Put Date	2007		2006
Due in one year or less	$	16,919,450	$	19,600,307
Due after one year through two years		3,314,477		2,324,512
Due after two years through three years		1,902,703		2,242,244
Due after three years through four years		1,162,857		1,207,667
Due after four years through five years		357,027		591,682
Due after five years		3,056,120		2,499,598
TOTAL PAR VALUE	$	26,712,634	$	28,466,010

Interest Rate Payment Terms:The following table details additional interest rate payment terms for advances as of March 31, 2007 and December 31, 2006 (in thousands):

	March 31,		December 31,
	2007		2006
Par amount of advances:
Fixed rate	$	21,597,590	$	22,557,448
Adjustable rate		5,115,044		5,908,562
TOTAL	$	26,712,634	$	28,466,010

NOTE 6 — AFFORDABLE HOUSING PROGRAM

The Bank Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, requires each FHLBank to establish an AHP. As a part of its AHP, the FHLBank provides subsidies in the form of direct grants or below-market interest rate advances to members that use the funds to assist in the purchase, construction or rehabilitation of housing for very low-, low- and moderate-income households. To fund the AHP, the 12 district FHLBanks as a group must annually set aside the greater of $100,000,000 or 10 percent of the current year’s regulatory income. Regulatory income is defined as income calculated in accordance with GAAP before interest expense related to mandatorily redeemable capital stock under Statement of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity“ (herein referred to as “SFAS 150”) and the assessment for AHP, but after the assessment to REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory calculation determined by the Federal Housing Finance Board (Finance Board). The AHP and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The FHLBank accrues this expense monthly based on its income. Calculation of the REFCORP assessment is discussed in Note 7.

The amount set aside for AHP is charged to income and recognized as a liability. As subsidies are provided through the disbursement of grants or issuance of subsidized advances, the AHP liability is reduced accordingly. If the FHLBank’s regulatory income before AHP and REFCORP would ever be zero or less, the amount of AHP liability would generally be equal to zero. However, if the result of the aggregate 10 percent calculation described above is less than the $100,000,000 minimum for all 12 FHLBanks, then the Bank Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income for the previous year. There were no shortfalls for the three-month periods ended March 31, 2007 or 2006. If an FHLBank determines that its required AHP contributions are exacerbating any financial instability of that FHLBank, it may apply to the Finance Board for a temporary suspension of its AHP contributions. The FHLBank has never applied to the Finance Board for a temporary suspension of its AHP contributions.

The following table details the change in the AHP liability for the three months ended March 31, 2007 and 2006 (in thousands):

16

	Three months ended
	March 31,			March 31,
	2007			2006
Appropriated and reserved AHP funds as of the beginning of the period	$	36,023		$	30,567
AHP set aside based on current period income		3,693			4,163
Direct grants disbursed		(1,776	)		(2,281	)
Recaptured funds1		53			664
Appropriated and reserved AHP funds as of the end of the period	$	37,993		$	33,113

¹ Recaptured funds are direct grants returned to the FHLBank in those instances where the commitments associated with the approved use of funds are not met and repayment to the FHLBank is required by regulation. Recaptured funds are returned as a result of: (1) AHP-assisted homeowner’s transfer or sale of property within the five-year retention period that the assisted homeowner is required to occupy the property; or (2) unused grants. Recaptured funds are reallocated to future periods.

NOTE 7 — RESOLUTION FUNDING CORPORATION (REFCORP)

Each FHLBank is required to pay 20 percent of income calculated in accordance with GAAP after the assessment for AHP, but before the assessment for REFCORP. The AHP and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The FHLBank accrues its REFCORP assessment on a monthly basis. Calculation of the AHP assessment is discussed in Note 6. The Resolution Funding Corporation has been designated as the calculation agent for AHP and REFCORP assessments. Each FHLBank provides its interest expense related to mandatorily redeemable capital stock under SFAS 150 and net income before AHP and REFCORP to the Resolution Funding Corporation, which then performs the calculations for each quarter end and levies the assessments to the FHLBanks for the quarter.

The following table details the change in the REFCORP liability for the three months ended March 31, 2007 and 2006 (in thousands):

	Three months ended
	March 31,			March 31,
	2007			2006
REFCORP obligation as of the beginning of the period	$	8,941		$	12,962
REFCORP assessments		8,147			9,212
REFCORP payments		(8,941	)		(13,108	)
REFCORP obligation as of the end of the period	$	8,147		$	9,066

NOTE 8—MORTGAGE LOANS HELD FOR PORTFOLIO

The Mortgage Partnership Finance^® (MPF^®) Program involves the FHLBank investing in mortgage loans, which are either funded by the FHLBank through or purchased from its participating members. The total loans represent held-for-portfolio loans under the MPF Program whereby participating FHLBank members originate and credit enhance home mortgage loans that are owned by the FHLBank. Dependent upon a member’s product selection, however, the servicing rights can be retained or sold by the participating member. The FHLBank does not buy or own any mortgage servicing rights.

The following table presents information as of March 31, 2007 and December 31, 2006 on mortgage loans held for portfolio (in thousands):

17

	March 31,			December 31,
	2007			2006
Real Estate:
Fixed rate, medium-term1, single-family mortgages	$	808,899		$	829,718
Fixed rate, long-term, single-family mortgages		1,537,204			1,540,466
Total par value		2,346,103			2,370,184
Premiums		14,231			14,999
Discounts		(10,569	)		(11,090	)
Deferred loan costs, net		141			147
SFAS 133 fair value adjustments		(439	)		(447	)
Total before Allowance for Credit Losses on Mortgage Loans		2,349,467			2,373,793
Allowance for Credit Losses on Mortgage Loans		(855	)		(854	)
Mortgage Loans, net	$	2,348,612		$	2,372,939

¹ Medium-term defined as a term of 15 years or less.

The credit enhancement is an obligation on the part of the participating member that ensures the retention of credit risk on loans it originates on behalf of or sells to the FHLBank. The FHLBank pays the participating member a credit enhancement fee for managing this portion of the credit risk in the pool of loans. These fees are paid monthly based upon the remaining unpaid principal balance for the pool of loans. Credit enhancement fees paid by the FHLBank to participating members for assuming the credit enhancement obligation are netted against interest income when paid. Credit enhancement fees paid by the FHLBank to participating members totaled $607,000 and $635,000 for the three months ended March 31, 2007 and 2006, respectively.

The allowance for credit losses on mortgage loans for the three months ended March 31, 2007 and 2006 was as follows (in thousands):

	March 31,			March 31,
	2007			2006
Balance, beginning of period	$	854		$	756
Provision for (reversal of) credit losses on mortgage loans		(43	)		59
Charge-offs		44			(31	)
Balance, end of period	$	855		$	784

NOTE 9—CONSOLIDATED OBLIGATIONS

Consolidated obligations consist of consolidated bonds and discount notes and as provided by the Bank Act or Finance Board regulation, are backed only by the financial resources of the FHLBanks. The FHLBanks jointly issue consolidated obligations with the Office of Finance acting as their agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants issued on its behalf. The Office of Finance tracks the amounts of debt issued on behalf of each FHLBank. In addition, the FHLBank separately tracks and records as a liability its specific portion of consolidated obligations for which it is the primary obligor. The Finance Board and the U.S. Secretary of the Treasury have oversight over the issuance of FHLBank debt through the Office of Finance. Consolidated obligation bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits as to maturities. Consolidated obligation discount notes, which are issued to raise short-term funds, are issued at less than their face amounts and redeemed at par when they mature.

Redemption Terms:Following is a summary of the FHLBank’s participation in consolidated obligation bonds outstanding as of March 31, 2007 and December 31, 2006 (in thousands):

18

	March 31, 2007						December 31, 2006
				Weighted						Weighted
				Average						Average
Year of Maturity	Amount			Interest Rate			Amount			Interest Rate
Due in one year or less	$	6,637,787			4.42	%	$	7,279,075			4.15	%
Due after one year through two years		6,759,067			4.63			5,812,310			4.43
Due after two years through three years		3,108,906			4.67			2,919,046			4.58
Due after three years through four years		2,687,380			4.79			2,370,417			4.54
Due after four years through five years		2,417,470			4.57			2,489,170			4.66
Due after five years		11,077,379			5.01			11,546,082			4.97
Total par value		32,687,989			4.73	%		32,416,100			4.60	%
Premiums		8,388						9,065
Discounts		(15,115	)					(15,937	)
SFAS 133 fair value adjustments		(275,142	)					(370,229	)
TOTAL	$	32,406,120					$	32,038,999

The FHLBank’s participation in consolidated obligation bonds outstanding as of March 31, 2007 and December 31, 2006 includes callable bonds totaling $23,257,254,000 and $22,523,565,000, respectively. The FHLBank uses the unswapped callable bonds for financing its callable advances (Note 5), mortgage-backed securities (Notes 2 and 4) and MPF mortgage loans (Note 8). Contemporaneous with a majority of its fixed rate callable bond issues, the FHLBank will also enter into interest rate swap agreements (in which the FHLBank generally pays a variable rate and receives a fixed rate) with call features that mirror the options in the callable bonds (a sold callable swap). The combined sold callable swap and callable debt transaction allows the FHLBank to obtain attractively priced variable rate financing.

The following table summarizes the FHLBank’s participation in consolidated obligation bonds outstanding by year of maturity, or by the next call date for callable bonds (in thousands):

	March 31,		December 31,
Year of Maturity or Next Call Date	2007		2006
Due in one year or less	$	25,052,362	$	25,721,843
Due after one year through two years		3,617,296		2,722,032
Due after two years through three years		1,344,806		1,229,700
Due after three years through four years		773,105		716,905
Due after four years through five years		324,120		530,820
Due after five years		1,576,300		1,494,800
TOTAL PAR VALUE	$	32,687,989	$	32,416,100

Interest Rate Payment Terms:The following table summarizes interest rate payment terms for consolidated obligation bonds as of March 31, 2007 and December 31, 2006 (in thousands):

	March 31,		December 31,
	2007		2006
Par value of consolidated obligation bonds:
Fixed rate	$	20,669,685	$	18,934,185
Step ups		7,569,430		8,264,430
Step downs		150,000		150,000
Range bonds		4,116,925		4,888,375
Zero coupon		181,949		179,110
TOTAL PAR VALUE	$	32,687,989	$	32,416,100

19

Discount Notes:The following table summarizes the FHLBank’s participation in consolidated obligation discount notes, all of which are due within one year (in thousands):

					Weighted Average
	Book Value		Par Value		Interest Rates
March 31, 2007	$	13,420,646	$	13,470,121		5.11	%
December 31, 2006	$	16,736,007	$	16,769,707		5.07	%

NOTE 10 — CAPITAL

The FHLBank is subject to three capital requirements (i.e., risk-based capital, total capital-to-asset ratio and leverage capital ratio) under the provisions of the Gramm-Leach-Bliley Act (GLB Act) and the Finance Board’s capital structure regulation. The FHLBank must maintain at all times permanent capital in an amount at least equal to the sum of its credit risk, market risk and operations risk capital requirements. The risk-based capital requirements are all calculated in accordance with the rules and regulations of the Finance Board. Only permanent capital, defined as Class B Common Stock and retained earnings, can be used by the FHLBank to satisfy its risk-based capital requirement. The Finance Board may require the FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined, but the Finance Board has not placed any such requirement on the FHLBank to date. In addition, the GLB Act requires the FHLBank to maintain at all times at least a 4.0 percent total capital-to-asset ratio and at least a 5.0 percent leverage capital ratio, with the leverage capital ratio defined as the sum of permanent capital weighted 1.5 times and non-permanent capital (currently only Class A Common Stock) weighted 1.0 times divided by total assets.

The following table illustrates that the FHLBank was in compliance with its regulatory capital requirements at March 31, 2007 and December 31, 2006 (in thousands):

	March 31, 2007						December 31, 2006
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	428,848		$	1,488,856		$	466,642		$	1,647,068
Total capital-to-asset ratio		4.0	%		4.2	%		4.0	%		4.2	%
Total capital	$	1,990,602		$	2,078,023		$	2,109,559		$	2,224,979
Leverage capital ratio		5.0	%		5.7	%		5.0	%		5.8	%
Leverage capital	$	2,488,253		$	2,822,451		$	2,636,948		$	3,048,513

Note that for the purposes of the regulatory capital calculations in the above table, actual capital includes all capital stock subject to mandatory redemption that has been reclassified to a liability under SFAS 150.

Mandatorily Redeemable Capital Stock:The FHLBank adopted SFAS 150 on January 1, 2004, which requires the reclassification of all capital stock subject to mandatory redemption to a liability. The FHLBank is a cooperative whose members and former members own all of the FHLBank’s capital stock. Member shares cannot be purchased or sold except between the FHLBank and its members at its $100 per share par value.

20

The FHLBank’s activity for mandatorily redeemable capital stock was as follows for the three months ended March 31, 2007 and 2006 (in thousands).

	Three months ended
	March 31,			March 31,
	2007			2006
Balance at beginning of period	$	46,232		$	64,355
Capital stock subject to mandatory redemption reclassified from equity during the period		533,066			109,293
Repurchase of mandatorily redeemable capital stock during the period		(532,550	)		(90,026	)
Stock dividend classified as mandatorily redeemable capital stock during the period		645			620
Balance at end of period	$	47,393		$	84,242

NOTE 11 – EMPLOYEE RETIREMENT PLANS

The FHLBank maintains a benefit equalization plan (BEP) covering certain senior officers. This non-qualified plan contains provisions for a deferred compensation component and a defined benefit pension component. The BEP is, in substance, an unfunded supplemental retirement plan.

Net periodic pension cost for the defined benefit portion of the FHLBank’s BEP was as follows for the three months ended March 31, 2007 and 2006 (in thousands).

	Three months ended
	March 31,			March 31,
	2007			2006
Service cost	$	60		$	24
Interest cost		75			72
Amortization of unrecognized prior service cost		(6	)		(6	)
Amortization of unrecognized net loss		54			89
Net periodic postretirement benefit cost	$	183		$	179

The FHLBank previously disclosed in its financial statements for the year ended December 31, 2006 that it expects to contribute $236,000 to the defined benefit portion of the FHLBank’s BEP in 2007. Management’s expectations have not changed.

NOTE 12–DERIVATIVES AND HEDGING ACTIVITIES

Nature of Business Activity:The FHLBank enters into interest rate swaps (including callable and putable swaps), swaptions, and interest rate cap and floor agreements (collectively, derivatives) to manage its exposure to changes in interest rates.

The FHLBank may utilize derivatives to adjust the effective maturity, re-pricing frequency or option characteristics of financial instruments to achieve risk management objectives. The FHLBank uses derivatives in three ways: (1) by designating them as either a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction; (2) by acting as an intermediary; or (3) in asset/liability management (i.e., an economic hedge). For example, the FHLBank uses derivatives in its overall interest rate risk management to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of assets (advances, investments and/or mortgage loans), and/or to adjust the interest rate sensitivity of advances, investments or mortgage loans to approximate more closely the interest rate sensitivity of liabilities.

In addition to using derivatives to manage mismatches of interest rate sensitivity between assets and liabilities, the FHLBank also uses derivatives as follows: (1) to manage embedded options in assets and liabilities; (2) to hedge the market value of existing assets and liabilities and anticipated transactions; (3) to hedge the duration risk of prepayable instruments; (4) to exactly offset other derivatives executed with members (when the FHLBank serves as an intermediary); and (5) to reduce funding costs.

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Effectiveness Measurements:Highly effective hedges that use interest rate swaps as the hedging instrument and that meet certain stringent criteria can qualify for “shortcut” fair value hedge accounting. Shortcut hedge accounting allows for the assumption of no ineffectiveness, which means that the change in fair value of the hedged item can be assumed to be equal to the change in fair value of the derivative. This is in contrast to fair value hedges designated under the “long haul” hedge accounting method, where the change in fair value of the hedged item must be measured separately from the derivative, and for which effectiveness testing must be performed regularly with results falling within established tolerances.

Long haul hedge accounting method – For hedge transactions that don’t qualify for shortcut hedge accounting, the FHLBank completes effectiveness testing at inception and on a monthly basis thereafter. The FHLBank utilizes the rolling regression method and the dollar-offset method to assess effectiveness. These methods are further explained below.

• Under the rolling regression method, the FHLBank models a series of 30 data points (market values) for the hedged item and the hedge instrument, using market data from the previous 30 calendar month-ends. A regression analysis is performed comparing the values of the hedged financial item and the hedge instrument. The hedge is deemed highly effective if: (1) the slope of the regression line is between -0.80 and -1.20, meaning that on average the change in value of the hedged financial instrument is offset by the change in value of the hedge instrument; (2) the correlation is 0.80 or higher; and (3) the calculated F statistic is 4 or higher. For new hedge transactions, the 30 data points (market values) are generated using historical market data.

• The dollar-offset method measures the change in fair value between periods on the hedge instrument versus the change in the fair value between periods on the hedged item. Under this methodology, at inception, the FHLBank evaluates effectiveness of the hedging relationship using interest rate scenario stress testing (interest rate shock scenarios). Thereafter on a monthly basis, the FHLBank compares the change in cumulative fair value of the hedging instrument to the change in cumulative fair value of the hedged item. The amount of dollar-offset between the two items must fall into a range of between 80 percent and 120 percent in order for the hedge to be deemed highly effective.

When a hedging relationship fails the effectiveness test, hedge accounting is discontinued. The FHLBank continues to mark the derivative to market on a monthly basis but no longer marks the hedged item to market. The fair value basis on the hedged item is amortized as a yield adjustment to income or expense.

Financial Statement Impact and Additional Financial Information: For the three months ended March 31, 2007 and 2006, the FHLBank recorded net gain (loss) on derivatives and hedging activities as follows (in thousands):

	March 31,			March 31,
	2007			2006
Gain (loss) related to fair value hedge ineffectiveness	$	940		$	2,043
Gain (loss) on economic hedges		(4,151	)		16,059
Net gain (loss) on derivatives and hedging activities	$	(3,211	)	$	18,102

22

The following table represents outstanding notional balances and estimated fair values of the derivatives outstanding by type of derivative and by hedge designation at March 31, 2007 and December 31, 2006 (in thousands):

	March 31, 2007					December 31, 2006
			Estimated					Estimated
	Notional		Fair Value			Notional		Fair Value
Interest rate swaps
Fair value	$	32,224,306	$	(195,176	)	$	31,789,398	$	(268,418	)
Economic		2,564,318		(1,776	)		2,394,758		1,025
Interest rate caps/floors
Fair value		142,500		10			217,500		76
Economic		1,885,000		4,938			1,660,000		6,042
Mortgage delivery commitments
Economic		17,273		(9	)		14,006		(31	)
TOTAL	$	36,833,397	$	(192,013	)	$	36,075,662	$	(261,306	)
Total derivative fair value excluding accrued interest			$	(192,013	)			$	(261,306	)
Accrued interest				147,270					124,350
NET DERIVATIVE FAIR VALUE			$	(44,743	)			$	(136,956	)
Net derivative asset balances			$	101,949				$	66,623
Net derivative liability balances				(146,692	)				(203,579	)
NET DERIVATIVE BALANCES			$	(44,743	)			$	(136,956	)

NOTE 13 – ESTIMATED FAIR VALUES

The following estimated fair value amounts have been determined by the FHLBank using available market information and the FHLBank’s best judgment of appropriate valuation methodologies. These estimates are based on pertinent information available to the FHLBank as of March 31, 2007 and December 31, 2006. Although the FHLBank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the FHLBank’s financial instruments, fair values in certain cases are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions. The Fair Value Summary Tables do not represent an estimate of the overall market value of the FHLBank as a going concern, which would take into account future business opportunities. The estimated fair values of the FHLBank’s financial instruments are more fully discussed in Note 16 in the audited financial statements included in the FHLBank’s annual report on Form 10-K.

The carrying value, net unrealized gains/(losses) and estimated fair values of the FHLBank’s financial instruments as of March 31, 2007 are summarized in the following table (in thousands):

23

				Net Unrealized			Estimated Fair
	Carrying Value			Gains (Losses)			Value
Assets:
Cash and due from banks	$	296		$	0		$	296
Interest-bearing deposits		4,497,036			0			4,497,036
Overnight Federal funds sold		6,007,000			0			6,007,000
Term Federal funds sold		1,424,000			0			1,424,000
Trading securities		655,347			0			655,347
Available-for-sale securities		101,975			0			101,975
Held-to-maturity securities		7,653,034			(40,281	)		7,612,753
Advances		26,715,893			283			26,716,176
Mortgage loans held for portfolio, net of allowance		2,348,612			(61,355	)		2,287,257
Accrued interest receivable		154,045			0			154,045
Derivative assets		101,949			0			101,949
Liabilities:
Deposits		1,307,684			0			1,307,684
Consolidated obligation discount notes		13,420,646			2,165			13,418,481
Consolidated obligation bonds		32,406,120			55,461			32,350,659
Mandatorily redeemable capital stock		47,393			0			47,393
Accrued interest payable		328,825			0			328,825
Derivative liabilities		146,692			0			146,692
Other Asset (Liability):
Standby letters of credit		(1,029	)		0			(1,029	)
Standby bond purchase agreements		(185	)		1,528			1,343

24

The carrying value, net unrealized gains/(losses) and estimated fair values of the FHLBank’s financial instruments as of December 31, 2006, are summarized in the following table (in thousands):

				Net Unrealized			Estimated Fair
	Carrying Value			Gains (Losses)			Value
Assets:
Cash and due from banks	$	375		$	0		$	375
Interest-bearing deposits		4,327,459			0			4,327,459
Overnight Federal funds sold		5,935,500			0			5,935,500
Term Federal funds sold		2,119,000			0			2,119,000
Trading securities		704,125			0			704,125
Available-for-sale securities		101,668			0			101,668
Held-to-maturity securities		8,377,383			(63,084	)		8,314,299
Advances		28,445,245			(4,729	)		28,440,516
Mortgage loans held for portfolio, net of allowance		2,372,939			(74,230	)		2,298,709
Accrued interest receivable		176,087			0			176,087
Derivative assets		66,623			0			66,623
Liabilities:
Deposits		1,118,406			1			1,118,405
Consolidated obligation discount notes		16,736,007			38			16,735,969
Consolidated obligation bonds		32,038,999			101,015			31,937,984
Mandatorily redeemable capital stock		46,232			0			46,232
Accrued interest payable		336,743			0			336,743
Derivative liabilities		203,579			0			203,579
Other Asset (Liability):
Standby letters of credit		(1,112	)		0			(1,112	)
Standby bond purchase agreements		(62	)		1,177			1,115

NOTE 14 – COMMITMENTS AND CONTINGENCIES

As described in Note 9, as provided by the Bank Act or Finance Board regulation, consolidated obligations are backed only by the financial resources of the FHLBanks. FHLBank Topeka is jointly and severally liable with the 11 other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. The par amounts for which FHLBank Topeka is jointly and severally liable were approximately $904,790,647,000 and $902,205,923,000 as of March 31, 2007 and December 31, 2006, respectively. To the extent that an FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Board determines that the primary obligor is unable to satisfy its obligations, then the Finance Board may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Board may determine. No FHLBank has

25

ever failed to make any payment on a consolidated obligation for which it was the primary obligor. As a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked.

Standby letters of credit are executed for members for a fee. A standby letter of credit is a short-term financing arrangement between the FHLBank and its member or non-member housing associate. If the FHLBank is required to make payment for a beneficiary’s draw, these amounts are converted into a collateralized advance to the member. As of March 31, 2007 and December 31, 2006, outstanding standby letters of credit totaled $2,206,841,000 and $2,125,187,000, respectively, and had original terms of seven days to seven years with a final expiration in 2011. Unearned fees, as well as the value of the guarantees related to standby letters of credit, are recorded in other liabilities and amounted to $1,029,000 and $1,112,000 at March 31, 2007 and December 31, 2006, respectively. Based upon management’s credit analysis and collateral requirements, the FHLBank does not expect to incur any credit losses on the letters of credit.

Commitments that unconditionally obligate the FHLBank to fund/purchase mortgage loans from participating FHLBank Topeka members in the MPF Program totaled $17,407,000 and $14,006,000 at March 31, 2007 and December 31, 2006, respectively. Commitments are generally for periods not to exceed 60 calendar days. In accordance with SFAS 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities,”certain commitments are recorded as derivatives at their fair value on the Statements of Condition. The FHLBank recorded mortgage delivery commitment derivative asset (liability) balances of $(9,000) and $(31,000) at March 31, 2007 and December 31, 2006, respectively. With one particular MPF product, the member originates mortgage loans as an agent for the FHLBank, and the FHLBank provides funds to close the mortgage loans. The commitments that unconditionally obligate the FHLBank to fund the mortgage loans related to this product are not considered derivatives under SFAS 149. Commitments for this product totaled $134,000 and $0 at March 31, 2007 and December 31, 2006, respectively.

The FHLBank has entered into standby bond purchase agreements with state housing authorities within its four-state district whereby the FHLBank, for a fee, agrees to purchase and hold the authorities’ bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLBank to purchase the bond. The bond purchase commitments entered into by the FHLBank expire no later than 2012, though some are renewable at the option of the FHLBank. Total commitments for bond purchases with two state housing authorities were $763,353,000 and $724,342,000 at March 31, 2007 and December 31, 2006, respectively. The FHLBank was not required to purchase any bonds under these agreements during the three month periods ended March 31, 2007 and 2006.

The FHLBank generally executes derivatives with counterparties having ratings of single-A or better by either Standard & Poor’s or Moody’s. These agreements are generally covered under bilateral collateral agreements between the FHLBank and the counterparties. As of March 31, 2007 and December 31, 2006, the FHLBank had delivered cash and securities with a book value of $48,010,000 and $67,430,000, respectively, as collateral to broker/dealers that have market-risk exposure to the FHLBank. Any held-to-maturity securities and trading securities delivered as collateral that can be sold or re-pledged are identified on the Statements of Condition. As of March 31, 2007 and December 31, 2006, cash that has been pledged in the amount of $48,010,000 and $67,430,000, respectively, is classified as interest-bearing deposits on the Statements of Condition.

NOTE 15 – TRANSACTIONS WITH STOCKHOLDERS AND HOUSING ASSOCIATES

The FHLBank is a cooperative whose members own the capital stock of the FHLBank and generally receive dividends on their investments. In addition, certain former members that still have outstanding transactions are also required to maintain their investments in FHLBank capital stock until the transactions mature or are paid off. Nearly all outstanding advances are with current members, and the majority of outstanding mortgage loans held for portfolio were purchased from current or former members. The FHLBank also maintains demand deposit accounts for members primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases.

As provided by statute, the only voting rights conferred upon the FHLBank’s members are for the election of directors. In accordance with the Bank Act and Finance Board regulations, members elect a majority of the FHLBank’s board of directors. The remaining directors are appointed by the Finance Board. Under the statute and regulations, each elective directorship is designated to one of the four states in the FHLBank’s district, and a member is entitled to vote only for candidates for the state in which the member’s principal place of business is

26

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 as of the record date for voting, subject to a statutory limitation. Under this statutory limitation, the total number of votes that a member may cast is limited to the average number of shares of the FHLBank’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 March 31, 2007 and December 31, 2006, no member owned more than 10 percent of the voting interests of the FHLBank due to the statutory limitation on members’ voting rights as discussed above.

Transactions with members are entered into in the ordinary course of business. In instances where members also have officers or directors who are directors of the FHLBank, transactions with those members are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as other transactions with members. For financial reporting and disclosure purposes, the FHLBank defines related parties in accordance with SFAS No. 57,Related Party Disclosures (herein referred to as “SFAS 57”) as FHLBank directors’ financial institutions and members with investments in excess of 10 percent of FHLBank’s total regulatory capital stock outstanding, which includes mandatorily redeemable capital stock.

Activity with Members that Exceed a 10 Percent Ownership in FHLBank Capital Stock:The following tables present information as of March 31, 2007 and December 31, 2006 on members that own more than 10 percent of outstanding FHLBank regulatory capital stock at either date (in thousands). None of the officers or directors of these members currently serve on the FHLBank’s board of directors.

March 31, 2007

Total

Total

Class A

Percent of

Class B

Percent of

Total

Percent of

Stock Par

Total Class

Stock Par

Total Class

Capital Stock

Total Capital

Member Name

State

Value

A

Value

B

Par Value

Stock

MidFirst Bank

OK

$

1,000

0.2

%

$

294,136

22.4

%

$

295,136

15.5

%

December 31, 2006
		Total					Total
		Class A		Percent of			Class B		Percent of			Total		Percent of
		Stock Par		Total Class			Stock Par		Total Class			Capital Stock		Total Capital
Member Name	State	Value		A			Value		B			Par Value		Stock
MidFirst Bank	OK	$	2,921		0.5	%	$	287,587		19.5	%	$	290,508		14.1	%
U.S. Central Federal Credit Union	KS		1,000		0.2			302,700		20.5			303,700		14.8
TOTAL		$	3,921		0.7	%	$	590,287		40.0	%	$	594,208		28.9	%

Advance and deposit balances with members that own more than 10 percent of outstanding FHLBank regulatory capital stock as of March 31, 2007 and December 31, 2006 are summarized in the following table (in thousands). Information is only listed for the period in which the member owned more than 10 percent of outstanding FHLBank regulatory capital stock. If the member did not own more than 10 percent for one of the periods presented, the applicable column is left blank.

	March 31, 2007					December 31, 2006					March 31, 2007					December 31, 2006
	Outstanding		Percent of			Outstanding		Percent of			Outstanding		Percent of			Outstanding		Percent of
Member Name	Advances		Total			Advances		Total			Deposits		Total1			Deposits		Total1
MidFirst Bank	$	5,522,400		20.7	%	$	5,696,400		20.0	%	$	298		0.0	%	$	2,804		0.3	%
U.S. Central Federal Credit Union							4,000,000		14.1								40		0.0
TOTAL	$	5,522,400		20.7	%	$	9,696,400		34.1	%	$	298		0.0	%	$	2,844		0.3	%

¹ Excludes cash pledged as collateral by derivative counterparties and classified as interest-bearing deposits.

Neither member originated mortgage loans for or sold mortgages into the MPF program during the three months ended March 31, 2006. Additionally, MidFirst did not originate any mortgage loans for or sell mortgages into the MPF program during the three months ended March 31, 2007.

Transactions with FHLBank Directors’ Financial Institutions:The following tables present information as of March 31, 2007 and December 31, 2006 for members that have an officer or director serving on the FHLBank’s board of directors (in thousands). Information is only listed for the period in which the officer or director served on the FHLBank’s board of directors. Capital stock listed is regulatory capital stock, which includes mandatorily redeemable capital stock.

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March 31, 2007
		Total										Total
		Class A		Percent of			Total		Percent of			Capital
		Stock Par		Total Class			Class B Stock		Total Class			Stock Par		Percent of
Member Name	State	Value		A			Par Value		B			Value		Total Stock
Centennial Bank of the West	CO	$	6,306		1.1	%	$	316		0.0	%	$	6,622		0.4	%
Vision Bank, NA	OK		3,049		0.5			428		0.0			3.477		0.2
Liberty Federal Savings Bank	OK		687		0.1			2,424		0.2			3,111		0.2
First National Bank	KS		1,600		0.3			1,232		0.1			2,832		0.1
Golden Belt Bank, FSA	KS		551		0.1			2,245		0.2			2,796		0.1
Morgan Federal Bank	CO		514		0.1			1,208		0.1			1,722		0.1
Chickasha Bank & Trust Co.	OK		509		0.1			107		0.0			616		0.0
Bankers Bank of Kansas, NA	KS		202		0.0			9		0.0			211		0.0
Lisco State Bank	NE		32		0.0			60		0.0			92		0.0
TOTAL		$	13,450		2.3	%	$	8,029		0.6	%	$	21,479		1.1	%

December 31, 2006
		Total										Total
		Class A		Percent of			Total		Percent of			Capital
		Stock Par		Total Class			Class B Stock		Total Class			Stock Par		Percent of
Member Name	State	Value		A			Par Value		B			Value		Total Stock
Centennial Bank of the West	CO	$	4,362		0.8	%	$	2,186		0.2	%	$	6,548		0.3	%
Farmers Bank & Trust, NA	KS		995		0.2			3,611		0.2			4,606		0.2
First National Bank	KS		1,686		0.3			1,110		0.1			2,796		0.1
Golden Belt Bank, FSA	KS		502		0.1			2,253		0.2			2,755		0.1
Morgan Federal Bank	CO		504		0.1			1,193		0.1			1,697		0.1
Citizens Bank & Trust Co.	OK		263		0.0			598		0.0			861		0.1
Saline State Bank	NE		197		0.0			625		0.0			822		0.1
Chickasha Bank & Trust Co.	OK		501		0.1			107		0.0			608		0.0
Lisco State Bank	NE		32		0.0			59		0.0			91		0.0
TOTAL		$	9,042		1.6	%	$	11,742		0.8	%	$	20,784		1.0	%

Advance and deposit balances with members that have an officer or director serving on the FHLBank’s board of directors as of March 31, 2007 and December 31, 2006 are summarized in the following table (in thousands). Information is only listed for the period in which the officer or director served on the FHLBank’s board of directors. If there was no director from that institution for one of the periods presented, the applicable column is left blank.

	March 31, 2007					December 31, 2006					March 31, 2007					December 31, 2006
	Outstanding		Percent			Outstanding		Percent			Outstanding		Percent			Outstanding		Percent
Member Name	Advances		of Total			Advances		of Total			Deposits		of Total			Deposits		of Total
Centennial Bank of the West	$	7,645		0.0	%	$	15,650		0.1	%	$	5,810		0.5	%	$	9		0.0	%
Vision Bank, NA		21,673		0.1								34		0.0
Liberty Federal Savings Bank		51,075		0.2								722		0.1
First National Bank		33,162		0.1			30,750		0.1			51		0.0			41		0.0
Golden Belt Bank, FSA		29,363		0.1			28,607		0.1			3,719		0.3			2,337		0.2
Morgan Federal Bank		20,452		0.1			17,829		0.1			589		0.0			620		0.1
Chickasha Bank & Trust Co.		3,308		0.0			3,395		0.0			8,623		0.7			4,424		0.4
Bankers Bank of Kansas, NA		0		0.0								8		0.0
Lisco State Bank		1,020		0.0			1,037		0.0			116		0.0			18		0.0
Farmers Bank & Trust, NA							85,950		0.3								5		0.0
Citizens Bank & Trust Co.							14,330		0.0								248		0.0
Saline State Bank							14,576		0.0								151		0.0
TOTAL	$	167,698		0.6	%	$	212,124		0.7	%	$	19,672		1.6	%	$	7,853		0.7	%

The following table presents mortgage loans funded or acquired during the three months ended March 31, 2007 and 2006 for members that had an officer or director serving on the FHLBank’s board of directors at March 31, 2007 and March 31, 2006 (in thousands). Information is only listed for the period in which the officer or director served on the FHLBank’s board of directors. If there was no director from that institution for one of the periods presented, the applicable column is left blank.

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	Three months ended					Three months ended
	March 31, 2007					March 31, 2006
	Total					Total
	Mortgage		Percent of			Mortgage		Percent of
Member Name	Loans		Total			Loans		Total
Centennial Bank of the West	$	0		0.0	%	$	0		0.0	%
Vision Bank, NA		0		0.0
Liberty Federal Savings Bank		0		0.0
First National Bank		366		0.9			730		1.4
Golden Belt Bank, FSA		250		0.6			1,586		3.1
Morgan Federal Bank		0		0.0			0		0.0
Chickasha Bank & Trust Co.		0		0.0			0		0.0
Bankers Bank of Kansas, NA		0		0.0
Lisco State Bank		0		0.0			0		0.0
Farmers Bank & Trust, NA							0		0.0
Citizens Bank & Trust Co.							192		0.4
Saline State Bank							0		0.0
TOTAL	$	616		1.5	%	$	2,508		4.9	%

NOTE 16 – TRANSACTIONS WITH OTHER FHLBANKS

FHLBank Topeka had the following business transactions with other FHLBanks during the three months ended March 31, 2007 and 2006 (in thousands). All transactions occurred at market prices.

	Three months ended March 31,
Business Activity	2007		2006
YTD average overnight interbank loan balances to other FHLBanks1	$	667	$	1,333
YTD average overnight interbank loan balances from other FHLBanks1		3,333		0
YTD average deposit balance with FHLBank of Chicago for MPF transactions2		26		25
Transaction charges paid to FHLBank of Chicago for transaction service fees3		239		238
FHLBank system shared expenses4		127		19

1	Occasionally, the FHLBank loans (or borrows) short-term funds to (from) other FHLBanks. Interest income on loans to other FHLBanks and interest expense on borrowings from other FHLBanks are separately identified on the Statements of Income.
2	Balance is interest bearing and is classified on the Statements of Condition as interest-bearing deposits.
3	Fees are calculated monthly based on 5 basis points of outstanding loans funded since January 1, 2004 and are recorded in other expense.
4	These are fees paid by FHLBank of Chicago on behalf of the other FHLBanks (e.g., conference expenses, attorney expenses on joint issues) and are recorded in other operating expenses.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations reviews the financial condition of the FHLBank as of March 31, 2007 and December 31, 2006, and results of operations for the three-month periods ended March 31, 2007 and 2006. This discussion should be read in conjunction with the interim financial statements and notes presented under Part I Item 1 of this quarterly report on Form 10-Q and the annual report on Form 10-K, which includes audited financial statements and related notes for the year ended December 31, 2006.

Table 1 summarizes selected financial data for the periods indicated.

Table 1

Selected Financial Data (dollar amounts in thousands):

	03/31/2007			12/31/2006			09/30/2006			06/30/2006			03/31/2006
Statement of Condition (at period end)
Total assets	$	49,765,055		$	52,738,967		$	49,863,846		$	47,740,596		$	48,070,888
Investments1		20,338,392			21,565,135			20,291,024			17,041,004			17,970,178
Advances		26,715,893			28,445,245			26,884,116			27,984,188			27,396,914
Mortgage loans held for portfolio, net		2,348,612			2,372,939			2,387,378			2,406,021			2,408,635
Deposits		1,307,684			1,118,406			731,156			864,233			1,157,759
Consolidated obligations, net2		45,826,766			48,775,006			46,390,017			43,886,604			44,076,735
Mandatorily redeemable capital stock		47,393			46,232			50,928			61,266			84,242
Capital		2,024,424			2,171,654			2,047,018			1,999,143			1,928,285
Statement of Income (for the quarterly period ended)
Net interest income before provision for credit losses on mortgage loans		54,249			54,995			53,672			53,597			52,383
Provision for (reversal of) credit losses on mortgage loans		(43	)		167			104			28			59
Other income (loss)		(779	)		2,711			(3,190	)		(707	)		5,556
Other expenses		9,084			8,790			8,774			7,990			7,657
Income before assessments		44,429			48,749			41,604			44,872			50,223
Assessments		11,840			12,985			11,097			11,963			13,375
Net income		32,589			35,764			30,507			32,909			36,848
Ratios and Other Financial Data (for the quarterly period ended)
Dividends paid in cash3		114			89			91			82			92
Dividends paid in stock3		26,953			27,942			26,113			24,557			22,577
Class A Stock dividend rate		4.45	%		4.45	%		4.45	%		4.25	%		3.85	%
Class B Stock dividend rate		6.50	%		6.50	%		6.25	%		6.05	%		5.60	%
Weighted average dividend rate4		6.03	%		6.04	%		5.87	%		5.66	%		5.22	%
Dividend payout ratio		83.06	%		78.38	%		85.90	%		74.87	%		61.52	%
Return on average equity		6.46	%		6.87	%		6.13	%		6.80	%		7.66	%
Return on average assets		0.27	%		0.28	%		0.25	%		0.28	%		0.31	%
Average equity to average assets		4.11	%		4.14	%		4.11	%		4.06	%		4.08	%
Net interest margin5		0.44	%		0.44	%		0.45	%		0.45	%		0.45	%
Total capital ratio at period end6		4.07	%		4.12	%		4.11	%		4.19	%		4.01	%
Ratio of earnings to fixed charges7		1.07			1.08			1.07			1.08			1.10

1	Investments also include interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold.
2	Consolidated obligations are bonds and discount notes that the FHLBank is primarily liable to repay. See Note 9 to the quarterly financial statements

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	for a description of the total consolidated obligations of all FHLBanks for which the FHLBank is jointly and severally liable under the requirements of the Finance Board, which govern the issuance of debt for all FHLBanks in the FHLBank System.
3	Dividends classified as interest expense on mandatorily redeemable capital stock in accordance with SFAS 150 and not included as dividends under GAAP were $650,000, $633,000, $624,000, $716,000 and $621,000 for the quarters ended March 31, 2007, December 31, 2006, September 30, 2006, June 30, 2006 and March 31, 2006, respectively.
4	Weighted average dividend rates are dividends paid in cash and stock on both classes of stock divided by the average capital stock eligible for dividends.
5	Net interest margin is net interest income before mortgage loan loss provision as a percentage of average earning assets.
6	Total capital ratio is GAAP capital stock, which excludes mandatorily redeemable capital stock in accordance with SFAS 150, plus retained earnings and accumulated other comprehensive income as a percentage of total assets at period end.
7	The ratio of earnings to fixed charges (interest expense including amortization of premiums, discounts and capitalized expenses related to indebtedness) is computed by dividing total earnings by fixed charges.

Quarterly Overview

The FHLBank Topeka is a regional wholesale bank that makes advances (loans) to, purchases mortgages from, and provides other financial services to our member institutions. We are one of 12 district Federal Home Loan Banks which, together with the Office of Finance, a joint office of the FHLBanks, make up the “FHLBank System.” As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. The Federal Housing Finance Board (Finance Board), an independent agency in the executive branch of the United States Government, supervises and regulates the FHLBanks and the Office of Finance. The Finance Board ensures that the FHLBanks operate in a safe and sound manner, carry out their housing finance mission, remain adequately capitalized and are able to raise funds in the capital markets.

The FHLBank serves eligible financial institutions in Nebraska, Kansas, Oklahoma and Colorado (collectively, the Tenth District of the FHLBank System). Initially, members are required to purchase shares of Class A Common Stock to give them access to advance borrowings or to enable them to sell mortgage loans to the FHLBank under the Mortgage Partnership Finance^® (MPF^®) Program. The FHLBank’s capital increases when its members are required to purchase additional capital stock in the form of Class B Common Stock to support an increase in advance borrowings from the FHLBank or the sale of additional mortgage loans to the FHLBank. At its discretion, the FHLBank may repurchase excess capital stock from time to time if a member’s advances or mortgage loan balances decline. Despite fluctuations in total assets, liabilities and capital in recent quarters, the FHLBank has been able to: (1) achieve its housing mission by meeting member credit needs, and (2) pay market-rate dividends.

Total assets declined during the first three months of 2007, decreasing by 5.6 percent to $49.8 billion at March 31, 2007 from $52.7 billion at December 31, 2006. The overall decrease was primarily due to a $1.7 billion decrease in advances and a $1.2 billion decrease in investments, of which $0.6 billion was Federal funds sold. Discount notes, which are typically used to fund short-term advances and Federal funds sold, decreased by $3.3 billion while longer term consolidated obligations increased by $0.4 billion. The decline in advances was primarily attributable to one large member’s realignment of its liability structure by reducing advances.

The FHLBank’s net income for the three months ended March 31, 2007 was $32.6 million compared to $36.8 million for the three months ended March 31, 2006. The decrease was primarily attributable to the following:

• $1.9 million increase in net interest income (increase income);

• $1.0 million net realized loss on sale of held-to-maturity securities (decrease income);

• $14.0 million increase in net income related to net gain (loss) on trading securities (increase income);

• $21.3 million decrease in net income related to net gain (loss) on derivatives and hedging activities (decrease income);

• $1.9 million increase in other income (increase income);

• $1.4 million increase in other expenses (decrease income); and

• $1.5 million decrease in assessments (increase income).

The FHLBank’s net income for the first quarter of 2007 compared to the first quarter of 2006 was negatively affected by the net gain (loss) on derivative and hedging activities, which went from an $18.1 million gain during the first quarter of 2006 to a $3.2 million loss during the first quarter of 2007. This was partially offset by the net gain (loss) on trading securities, which went from an $11.9 million loss during the first quarter of 2006 to a $2.1 million gain during the first quarter of 2007. Financial performance was also negatively affected by the tightening of spreads between the return on the FHLBank’s investments and its cost of funds. However, a significant portion of the FHLBank’s equity capital, as evidenced by its relatively short duration of equity (DOE), earns the equivalent of a short-term money market rate and hence the return on this part of equity has increased with the rise in short-term interest rates. See “Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk Management” under Item 3 for additional discussion on the FHLBank’s DOE. The FHLBank’s net interest margin remained fairly

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constant from 0.45 percent for the three months ended March 31, 2006 to 0.44 percent for the three months ended March 31, 2007. The FHLBank’s return on equity (ROE) also decreased, to 6.46 percent for the first quarter of 2007 compared to 7.66 percent for the same period of 2006. This was primarily due to a decrease in net income related to the net gain (loss) on derivatives and hedging activities and net gain (loss) on trading securities mentioned previously.

Dividends paid for the first quarter of 2007 were 4.45 percent and 6.50 percent for Class A Common Stock and Class B Common Stock, respectively. This was an increase over dividends paid for the first quarter of 2006 of 3.85 percent and 5.60 percent for Class A Common Stock and Class B Common Stock, respectively. The increase in dividend rates corresponds with the increase in the average short-term interest rates for the periods. Refer to this Item 2 – “Liquidity and Capital Resources – Capital Distributions” for further information regarding FHLBank dividend payments.

Results of Operations

The primary source of the FHLBank’s earnings is net interest income (NII), which is the interest earned on advances, mortgage loans, investments and invested capital less interest paid on consolidated obligations, deposits, and other borrowings. The increase in NII for the first quarter of 2007 over the first quarter of 2006 is primarily attributable to the increase in short-term interest rates (e.g., average three-month LIBOR increased from 4.77 percent during the first quarter of 2006 to 5.36 percent during the first quarter of 2007 as indicated in Table 2) and the overall increase in the average balance of total assets. See Table 4 and Table 5 for further information regarding average balances and yields and changes in interest income.

Table 2 presents selected market interest rates as of the dates shown or the averages for the quarterly period ending on the dates shown.

Table 2

Market Instrument	March 31, 2007			March 31, 2006
Rates as of dates shown:
Federal Open Market Committee (FOMC) target rate for overnight Federal funds		5.25	%		4.75	%
3-month Treasury bill		5.00			4.61
3-month LIBOR		5.35			5.00
2-year U.S. Treasury note		4.58			4.82
5-year U.S. Treasury note		4.54			4.81
10-year U.S. Treasury note		4.65			4.85
Averages rates for the quarterly period ending on dates shown:
FOMC target rate for overnight Federal funds		5.25			4.44
3-month LIBOR		5.36			4.77
10-year U.S. Treasury note		4.68			4.57

Net income is subject to volatility not only from changes in interest rates but also from gains (losses) on trading securities and derivatives. See “Results of Operations – Net Gain (Loss) on Derivative and Hedging Activities” in this Item 2 for a discussion of the impact of these activities by period.

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Earnings Analysis– Table 3 presents changes in the major components of the FHLBank’s earnings for the first quarter of 2007 compared to the first quarter of 2006 (in thousands):

Table 3

	Increase (Decrease) in
	Earnings Components
	For the Three Months Ended
	March 31, 2007 vs. 2006
	Dollar			Percent
	Change			Change
Total interest income	$	107,710			19.7	%
Total interest expense		105,844			21.4
Net interest income before provision for credit losses on mortgage loans		1,866			3.6
Provision for (reversal of) credit losses on mortgage loans		(102	)		(172.9	)
Net interest income after provision for credit losses on mortgage loans		1,968			3.8
Net gain (loss) on trading securities		13,979			117.4
Net gain (loss) on derivatives and hedging activities		(21,313	)		(117.7	)
Other non-interest income		999			155.9
Total non-interest income		(6,335	)		(114.0	)
Operating expenses		1,278			19.4
Other non-interest expense		149			13.9
Total other expense		1,427			18.6
AHP assessments		(470	)		(11.3	)
REFCORP assessments		(1,065	)		(11.6	)
Total assessments		(1,535	)		(11.5	)
Net income	$	(4,259	)		(11.6	)%

Net Interest Income– Net interest income increased 3.6 percent from $52.4 million in the first quarter of 2006 to $54.2 million in the first quarter of 2007, while the FHLBank’s net interest margin decreased from 0.45 percent for first quarter of 2006 to 0.44 percent for the first quarter of 2007. The increase in net interest income is mostly the result of increased interest rates on invested capital from the first quarter of 2006 to the first quarter of 2007. Interest income on interest-earning assets increased primarily because of increasing interest rates but also because of an increase in the volume of interest-earning assets as reflected in Table 5. Similar interest rate and volume effects occurred in interest-bearing liabilities. There were similar changes in rates and volumes for both interest-earning assets and interest-bearing liabilities, but the net interest spread reflected in Table 4 declined from 0.21 percent for the first quarter of 2006 to 0.20 percent for the first quarter of 2007 as the FHLBank experienced a slight tightening between its returns on mortgage-related assets (e.g., mortgage loans and mortgage-backed securities (MBS)/collateralized mortgage obligations (CMOs)) and its cost of funds.

As explained in more detail in “Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk Management” under Item 3, the FHLBank’s DOE is relatively short. The short DOE is the result of the short maturities (or short reset periods) on the majority of the FHLBank’s assets and liabilities. Accordingly, the FHLBank’s net interest income is quite sensitive to the level of short-term interest rates. As short-term interest rates rose from 2006 to 2007, so did the FHLBank’s net interest income attributable to invested capital.

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Table 4 presents average balances and annualized yields of major earning asset categories and the sources funding those earning assets for the quarters ended March 31, 2007 and 2006 (in thousands):

Table 4

	For the Three Months Ended
			March 31, 2007							March 31, 2006
			Interest							Interest
	Average		Income/					Average		Income/
	Balance		Expense		Yield			Balance		Expense		Yield
Interest-earning assets:
Interest-bearing deposits	$	4,289,236	$	56,888		5.38	%	$	4,563,001	$	51,246		4.55	%
Federal funds sold		7,064,571		92,987		5.34			4,497,664		50,294		4.54
Investments6		8,823,833		117,007		5.38			8,213,353		101,546		5.01
Advances1,7		26,933,494		356,073		5.36			27,762,022		311,822		4.56
Mortgage loans held for portfolio1,4,5		2,361,198		30,361		5.21			2,414,541		30,595		5.14
Other interest-earning assets		63,553		1,005		6.41			70,470		1,108		6.38
Total earning assets		49,535,885		654,321		5.36			47,521,051		546,611		4.66
Other non-interest-earning assets		275,411							210,621
Total assets	$	49,811,296						$	47,731,672
Interest-bearing liabilities:
Deposits	$	955,708	$	12,132		5.15	%	$	820,604	$	8,707		4.30	%
Consolidated obligations:1
Discount Notes		13,159,324		170,178		5.24			13,530,360		147,071		4.41
Bonds		32,924,949		416,608		5.13			30,568,465		337,347		4.48
Other borrowings		88,211		1,154		5.31			99,030		1,103		4.52
Total interest-bearing liabilities		47,128,192		600,072		5.16			45,018,459		494,228		4.45
Capital and other non-interest-bearing funds		2,683,104							2,713,213
Total funding	$	49,811,296						$	47,731,672
Net interest income and net interest spread2			$	54,249		0.20	%			$	52,383		0.21	%
Net interest margin3						0.44	%						0.45	%

1	Interest income/expense and average rates include the effect of associated derivatives.
2	Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
3	Net interest margin is net interest income as a percentage of average interest-earning assets.
4	The FHLBank nets credit enhancement fee (CE fee) payments against interest earnings on the mortgage loans held for portfolio. The expense related to CE fee payments to PFIs was $607,000 and $635,000 for the quarters ended March 31, 2007 and 2006, respectively.
5	Mortgage loans held for portfolio average balance includes outstanding principal for non-performing loans. However, these loans no longer accrue interest.
6	The fair value adjustment on available-for-sale securities is excluded from the average balance for calculation of yield since the change runs through equity.
7	Advance income includes prepayment fees on terminated advances.

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Changes in the volume of interest-earning assets and the level of short-term interest rates influence changes in net interest income, net interest spread and net interest margin. Table 5 summarizes changes in interest income and interest expense between the first quarters of 2007 and 2006 (in thousands):

Table 5

	For the Three Months Ended
	March 31, 2007 vs. 2006
	Increase (Decrease) Due to
	Volume1			Rate2		Total
Interest Income:
Interest-bearing deposits	$	(3,075	)	$	8,717	$	5,642
Federal funds sold		28,705			13,988		42,693
Investments		7,548			7,913		15,461
Advances		(9,306	)		53,557		44,251
Mortgage loans held for portfolio		(676	)		442		(234	)
Other assets		(109	)		6		(103	)
Total earning assets		23,087			84,623		107,710
Interest Expense:
Deposits		1,434			1,991		3,425
Consolidated obligations:
Discount notes		(4,033	)		27,140		23,107
Bonds		26,005			53,256		79,261
Other borrowings		(121	)		172		51
Total interest-bearing liabilities		23,285			82,559		105,844
Change in net interest income	$	(198	)	$	2,064	$	1,866

1	Volume changes are calculated by taking (current period average balance minus prior period average balance) multiplied by prior period calculated yield.
2	Rate changes are calculated by taking (current period average rate minus prior period average rate) multiplied by current period average balance.

Management uses pre-derivative financial results, a non-GAAP financial measure, to evaluate the quality of the FHLBank’s earnings. Table 6 presents the non-GAAP impact of derivatives on gross interest income and gross interest expense, as if the FHLBank had not utilized derivatives during the three-month periods ended March 31, 2007 and 2006 (in thousands):

Table 6

	For the Three Months Ended
	March 31, 2007			March 31, 2006
Total interest income	$	654,321		$	546,611
Impact of derivatives on interest income		(4,220	)		7,034
Non-GAAP interest income excluding the impact of derivatives		650,101			553,645
Total interest expense		600,072			494,228
Impact of derivatives on interest expense		(28,965	)		(17,881	)
Non-GAAP interest expense excluding the impact of derivatives		571,107			476,347
Non-GAAP net interest income excluding the impact of derivatives	$	78,994		$	77,298

Net Gain (Loss) on Derivative and Hedging Activities– The volatility in other income is predominately driven by derivative and hedging adjustments related to Statement of Financial Accounting Standards (SFAS) No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137,Accounting for Derivative Instruments and Hedging Activities – Deferral of Effective Date of Financial Accounting Standards Board (FASB) Statement No. 133,as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, as amended by SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and as amended by SFAS No. 155, Accounting for Certain Hybrid Financial Instruments

35

(hereafter referred to as SFAS 133). The application of SFAS 133 resulted in a net gain (loss) on derivatives and hedging activities of ($3.2) million and $18.1 million for the quarters ended March 31, 2007 and 2006, respectively.

Net Gain (Loss) on Trading Securities– Historically, all of our trading securities have been related to economic hedges. Therefore, all of the gains/losses relating to trading securities are included in Table 7 and Table 8. Unrealized gains (losses) fluctuate as the fair value of our trading securities portfolio fluctuates. There are a number of factors that can affect the value of a trading security including the movement in absolute interest rates, changes in credit spreads, the passage of time and changes in volatility. Securities in this portfolio, for the most part, are longer dated fixed rate bonds and are more affected by changes in long-term interest rates (e.g., 5-year and 10-year rates) than by changes in short-term interest rates. In general, as interest rates rise, the value of this portfolio will decrease, causing an unrealized loss to be recorded. Conversely, as interest rates decrease, the value of this portfolio will increase, causing an unrealized gain to be recorded. For the quarter ended March 31, 2007, the FHLBank recorded a net gain of $2.1 million on trading securities (interest rates generally decreased during the period) compared to a net loss of $11.9 million for the quarter ended March 31, 2006 (interest rates generally increased during the period).

Table 7 categorizes the earnings impact by product for derivative hedging activities and trading securities for the first quarter of 2007 (in thousands):

Table 7

									Consolidated
									Obligation			Consolidated
							Mortgage		Discount			Obligation			Intermediary
	Advances			Investments			Loans		Notes			Bonds			Positions			Total
Amortization/accretion of hedging activities in net margin	$	(14,403	)	$	(1	)	$	7	$	0		$	(1,291	)	$	0		$	(15,688	)
Net gain (loss) on derivative and hedging activities:
Fair value hedges		18			0			0		0			922			0			940
Economic hedges – unrealized gain (loss) due to fair value changes		0			(4,191	)		23		(186	)		(130	)		(34	)		(4,518	)
Economic hedges – net interest received (paid)		0			335			0		(93	)		88			37			367
Subtotal		18			(3,856	)		23		(279	)		880			3			(3,211	)
Net gain (loss) on trading securities		0			2,074			0		0			0			0			2,074
TOTAL	$	(14,385	)	$	(1,783	)	$	30	$	(279	)	$	(411	)	$	3		$	(16,825	)

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Table 8 categorizes the earnings impact by product for derivative hedging activities and trading securities for the first quarter of 2006 (in thousands):

Table 8

										Consolidated
							Mortgage			Obligation			Intermediary
	Advances			Investments			Loans			Bonds			Positions			Total
Amortization/accretion of hedging activities in net margin	$	(12,957	)	$	(1	)	$	54		$	(1,028	)	$	0		$	(13,932	)
Net gain (loss) on derivative and hedging activities:
Fair value hedges		(478	)		0			0			2,521			0			2,043
Economic hedges - - unrealized gain (loss) due to fair value changes		0			13,595			(160	)		3,707			(58	)		17,084
Economic hedges - - net interest received (paid)		0			(1,232	)		0			146			61			(1,025	)
Subtotal		(478	)		12,363			(160	)		6,374			3			18,102
Net gain (loss) on trading securities		0			(11,905	)		0			0			0			(11,905	)
TOTAL	$	(13,435	)	$	457		$	(106	)	$	5,346		$	3		$	(7,735	)

Other Non-Interest Income– Included in other non-interest income are realized gains/losses from the sale of held-to-maturity securities. In the first quarter of 2007, several held-to-maturity securities were sold. All securities sold had paid down below 15 percent of the principal outstanding at acquisition. The FHLBank realized a net loss of $1.0 million for the three months ended March 31, 2007. There were no sales of securities during the three months ended March 31, 2006.

Controllable Operating Expenses- Controllable operating expenses include compensation and benefits and other operating expenses. These expenses, as shown in Table 9, increased from $6.6 million for the first quarter of 2006 to $7.9 million for the first quarter of 2007. A significant portion of the FHLBank’s operating expenses consists of compensation and benefits expense. Amounts paid for compensation and benefits increased as a result of increases in the number of FHLBank staff (employees added include those related to the Securities and Exchange Commission (SEC) registration, Sarbanes-Oxley Section 404 preparation and technology/programming needs) and increasing benefit costs (primarily the defined benefit retirement plan and health care costs). We expect an increase in the number of employees and a corresponding increase in compensation and benefit expenses for the remainder of 2007 and possibly beyond. The FHLBank’s occupancy costs increased as a result of its facilities expansion that was completed in mid-2006. The FHLBank expects that its occupancy costs will remain relatively stable during the remainder of 2007. The increase in other operating expenses when comparing the first quarter of 2006 to the first quarter of 2007 are related to the following: (1) increases in legal and professional fees (SEC-related reporting and preparations for compliance with the Sarbanes-Oxley Act of 2002, plus consultants for technology/programming needs); (2) costs related to the scheduled replacement of personal computers and other technology items costing less than $5,000; (3) depreciation on new equipment; and (4) increased amortization of software costs (both purchased and internally developed). Table 9 presents operating expenses for the three-month periods ended March 31, 2007 and 2006 (in thousands):

37

Table 9

	For the Three Months Ended
	March 31,		March 31,		Percent
	2007		2006		Change
Compensation and employee benefits	$	5,082	$	4,460		13.9	%
Occupancy cost		361		322		12.1
Other operating expense		2,420		1,803		34.2
Total controllable operating expenses	$	7,863	$	6,585		19.4	%

Non-controllable operating expenses include Finance Board and Office of Finance assessments, which are allocated annually by these entities to all 12 FHLBanks. FHLBank Topeka’s portion of these expenses was $1.0 million and $0.8 million for the three months ended March 31, 2007 and 2006, respectively.

Assessments: REFCorp and AHP Expenses– REFCorp and AHP expenses are based on a percentage of net income and fluctuate accordingly. As explained in Note 7 of the Notes to Financial Statements under Item 1, each of the 12 FHLBanks is required to pay a portion of its earnings to REFCorp. Additionally, each FHLBank is required to establish, fund and administer an AHP. As part of its AHP, the FHLBank provides subsidies in the form of direct grants or below-market interest rate advances to members, which use the funds to assist in the purchase, construction or rehabilitation of housing for very low-, low- and moderate-income households. The required annual AHP funding is charged to earnings and an offsetting liability is established.

Return on Equity– Return on equity was 6.46 percent (annualized) in the first quarter of 2007, a decrease of 120 basis points from the first quarter of 2006. This decrease reflects the 11.6 percent decline in net income, from $36.8 million in the first quarter of 2006 to $32.6 million in the first quarter of 2007. As discussed previously in “Results of Operations — Net Interest Income” in this Item 2 and reflected in Table 3, the primary contributor to the decrease in ROE was the decrease in net income related to net gain (loss) on derivatives and hedging activities.

Financial Condition

Overall– At March 31, 2007, the FHLBank’s assets totaled $49.8 billion, down 5.6 percent from $52.7 billion at December 31, 2006. This decrease is primarily attributable to a $0.7 billion decrease in term Federal funds, a decrease of $0.7 billion in held-to-maturity securities and a $1.7 billion decrease in advances. The decline in the FHLBank’s total assets during the first quarter of 2007 was approximately matched by a decline in consolidated obligations, which decreased from $48.8 billion at December 31, 2006 to $45.8 billion at March 31, 2007.

Total capital decreased from $2.2 billion at December 31, 2006 to $2.0 billion at March 31, 2007, with most of the decrease in capital coming from the FHLBank’s repurchase of excess Class B Common Stock related to redemption requests submitted by one of the FHLBank’s largest borrowers — U.S. Central Federal Credit Union — because of its reduction in advances outstanding during the quarter. During 2006 and the first quarter of 2007, the FHLBank did not carry out any mandatory repurchases of member capital stock; however, the FHLBank did complete periodic exchanges of excess Class B Common Stock for Class A Common Stock under the provisions of its capital plan. The FHLBank intends to continue to perform these periodic exchanges throughout 2007 and beyond. The FHLBank anticipates that any growth or decrease in capital stock should closely parallel advance growth or declines in future periods.

SFAS 133 Impact on Balances– In accordance with SFAS 133, all derivatives are marked to estimated fair value, netted by counterparty with any associated accrued interest and included on the statements of condition as an asset when there is a net estimated fair value gain or as a liability when there is a net estimated fair value loss. Assets or liabilities in hedging relationships with derivatives designated and qualifying as fair value hedges under SFAS 133 are adjusted for changes in the fair value of the hedged asset or liability that are attributable to the hedged risk resulting in fair value adjustments on the FHLBank’s statement of condition. Table 10 presents SFAS 133 fair value adjustment information for advances, mortgage loans and consolidated obligations as of March 31, 2007 and December 31, 2006 (in thousands):

38

Table 10

	March 31,			December 31,
	2007			2006
Advances at pre-SFAS 133 value	$	26,637,911		$	28,376,678
SFAS 133 basis adjustments		77,982			68,567
Advances at carrying value	$	26,715,893		$	28,445,245
Mortgage loans held for portfolio at pre-SFAS 133 value	$	2,349,051		$	2,373,386
SFAS 133 basis adjustments		(439	)		(447	)
Mortgage loans held for portfolio at carrying value	$	2,348,612		$	2,372,939
Consolidated obligations at pre-SFAS 133 value	$	46,101,908		$	49,145,235
SFAS 133 basis adjustments		(275,142	)		(370,229	)
Consolidated obligations at carrying value	$	45,826,766		$	48,775,006

Advances– Outstanding advances decreased by 6.1 percent from $28.4 billion on December 31, 2006 to $26.7 billion on March 31, 2007. During the first quarter of 2007, total fixed rate advances decreased by $1.0 billion and total adjustable rate advances, including line of credit, decreased by $0.8 billion (see Table 11). From December 31, 2006 to March 31, 2007, SFAS 133 basis adjustments on advances increased primarily as a result of the increased level of convertible advances, which are hedged by the FHLBank with derivatives.

We expect the FHLBank’s prospect for growth in advances to existing members for the remainder of 2007 will be limited as members’ originations of mortgage loans held in portfolio slow due to increased mortgage rates and the slowing housing market. We also expect that existing members will continue to utilize excess liquidity from maturing investments and from other sources to fund any increased loan demand before turning to the FHLBank for wholesale borrowings in the form of advances. The FHLBank expects that any advance growth during the remainder of 2007 will come from new FHLBank members, primarily from new or recent insurance company members.

Table 11 summarizes the FHLBank’s advances outstanding by product as of March 31, 2007 and December 31, 2006 (in thousands):

Table 11

	March 31, 2007					December 31, 2006
	Dollar		Percent			Dollar		Percent
Standard advance products:
Line of credit	$	673,049		2.5	%	$	1,196,241		4.2	%
Short-term fixed rate advances		10,742,126		40.2			10,944,904		38.4
Long-term fixed rate advances		5,605,754		21.0			6,470,905		22.7
Fixed rate callable advances		5,125		0.0			125		0.0
Fixed rate amortizing advances		503,289		1.9			521,289		1.8
Fixed rate callable amortizing advances		2,095		0.0			2,140		0.0
Fixed rate convertible advances		4,119,766		15.4			3,996,241		14.0
Adjustable rate advances		608,829		2.3			715,305		2.5
Adjustable rate callable advances		3,679,366		13.8			3,765,216		13.3
Customized advances:
Advances with embedded caps or floors		142,500		0.5			217,500		0.8
Standard housing and community development advances:
Fixed rate		312,518		1.2			319,207		1.1
Fixed rate amortizing advances		306,766		1.2			302,484		1.1
Fixed rate callable amortizing advances		131		0.0			131		0.0
Adjustable rate callable advances		11,300		0.0			14,300		0.1
Fixed rate amortizing advances funded through AHP		20		0.0			22		0.0
TOTAL PAR VALUE	$	26,712,634		100.0	%	$	28,466,010		100.0	%

Total advances as a percentage of total assets decreased slightly from 53.9 percent at December 31, 2006 to 53.7 percent at March 31, 2007. The percentage of total advances to total assets is expected to hold relatively steady

39

within a range from 53 to 60 percent in future periods as any growth in the mortgage loan portfolio is accommodated on the FHLBank’s balance sheet through a reduction in money market and other short-term investments. The average yield on advances, adjusted for the impact of derivatives, was 5.36 percent for the three months ended March 31, 2007, compared to 4.56 percent for the three months ended March 31, 2006 (see Table 12 for yield on advances not adjusted for impact of derivatives). As of March 31, 2007, line of credit advances (which reprice daily) and short-term, fixed rate advances (maturities of 93 days or less) represented 42.7 percent, adjustable rate advances (repricing daily to every three months) represented 16.6 percent, and convertible advances (swapped to three-month LIBOR, synthetically creating three-month advances) represented 15.4 percent of the total par value of outstanding advances. As of December 31, 2006, line of credit advances and short-term, fixed rate advances represented 42.6 percent, adjustable rate advances represented 16.6 percent and convertible advances represented 14.0 percent of the total par value of outstanding advances. As a result, 74.7 percent of the FHLBank’s advance portfolio as of March 31, 2007, reprices at least every three months compared to 73.2 percent as of December 31, 2006. Because of the relatively short nature of the FHLBank’s advance portfolio, the average yield in this portfolio typically responds quickly to changes in short-term interest rates. The level of short-term interest rates is primarily driven by FOMC decisions on the level of its overnight Federal funds target, but is also influenced by the expectations of capital market participants related to the strength of the economy, future inflationary pressure and other factors. See Tables 4 and 5 under “Results of Operations — Net Interest Income” in this Item 2 for further information regarding average balances and yields and changes in interest income.

Management believes that in order to fully understand the core operations of the FHLBank, it is critical to know the financial impact of the basic asset or liability separate from that of the derivative instrument associated with the asset or liability. Management utilizes pre-derivative financial results, a non-GAAP financial measure, to evaluate the quality of the FHLBank’s earnings, and believes that it provides a more complete disclosure of the impact of derivatives on financial results.

Table 12 presents the GAAP annualized yields on advances and the non-GAAP annualized calculated yields on advances without the impact of derivatives for the three-month periods ended March 31, 2007 and 2006 (in thousands):

Table 12

	For the Three Months Ended
	March 31,			March 31,
	2007			2006
GAAP advance yield		5.36	%		4.56	%
GAAP advance interest income1	$	356,073		$	311,822
Amortization of SFAS 133 fair value adjustments		14,404			12,957
Net interest settlements on derivatives tied to advances		(18,543	)		(5,924	)
Interest income without derivative impact	$	351,934		$	318,855
Average advance balance	$	26,933,494		$	27,762,022
Fair value basis adjustment		(64,899	)		(134,293	)
Advance balance without derivative impact	$	26,868,595		$	27,627,729
Advance yield without derivative impact		5.31	%		4.68	%

¹ Advance interest income for yield calculations includes prepayment fees on terminated advances.

The FHLBank’s potential credit risk from advances is concentrated in commercial banks, thrift institutions and credit unions, but also includes credit risk exposure to a limited number of insurance companies and housing associates. Table 13 presents information on the FHLBank’s five largest borrowers as of March 31, 2007 and December 31, 2006 (in thousands). Table 14 presents the interest income associated with these advances for the three-month periods ended March 31, 2007 and 2006 (in thousands). The FHLBank had rights to collateral with an estimated fair value in excess of the book value of these advances and, therefore, does not expect to incur any credit losses on these advances.

40

Table 13

			March 31, 2007					December 31, 2006
					Percent					Percent
			Advance		of Total			Advance		of Total
Borrower Name	City	State	Par Value		Advances			Par Value		Advances
MidFirst Bank	Oklahoma City	OK	$	5,522,400		20.7	%	$	5,696,400		20.0	%
Capitol Federal Savings Bank	Topeka	KS		3,096,000		11.6			3,296,000		11.5
U.S. Central Federal Credit Union	Lenexa	KS		2,750,000		10.3			4,000,000		14.1
Security Life of Denver Ins. Co.	Denver	CO		2,734,000		10.2			2,334,000		8.2
Security Benefit Life Insurance Co.	Topeka	KS		1,294,330		4.8			1,269,330		4.5
TOTAL			$	15,396,730		57.6	%	$	16,595,730		58.3	%

Table 14

			Three Months Ended					Three Months Ended
			March 31, 2007					March 31, 2006
					Percent					Percent
					of Total					of Total
			Advance		Advance			Advance		Advance
Borrower Name	City	State	Income		Income1			Income		Income1
MidFirst Bank	Oklahoma City	OK	$	72,668		21.6	%	$	59,293		19.5	%
U.S. Central Federal Credit Union	Lenexa	KS		39,748		11.8			33,805		11.1
Capitol Federal Savings Bank	Topeka	KS		35,441		10.5			36,696		12.0
Security Life of Denver Ins. Co.	Denver	CO		33,574		10.0			12,256		4.0
Security Benefit Life Insurance Co.	Topeka	KS		17,281		5.1			13,172		4.3
TOTAL			$	198,712		59.0	%	$	155,222		50.9	%

¹ Total advance income excludes net interest settlements on derivatives.

MPF Program- The FHLBank participates in the MPF Program through the MPF Provider, which is the FHLBank of Chicago. Under this program, participating members of an FHLBank either sell fixed rate, size-conforming, single-family mortgage loans to the FHLBank (closed loans) or originate these same loans on behalf of the FHLBank (table funded loans). There was a slight reduction in the MPF portfolio during the first quarter of 2007, as new loans acquired from in-district participating financial institutions (PFIs) almost exactly equaled the amount of loans paid down during the three months ended March 31, 2007. The FHLBank devoted resources in 2006 and the first quarter of 2007 to increase the volume of mortgage loans acquired from in-district PFIs and is committed to increasing the volume of acquired in-district mortgage loans during the remainder of 2007. The FHLBank did not acquire any out-of-district mortgage loans during 2006 or the first quarter of 2007 and is unlikely to do so during the remainder of 2007 unless the relative value of fixed rate mortgage loans to its cost of funds improves.

Table 15 presents the top five PFIs of the FHLBank, the outstanding balances (in thousands) of mortgage loans acquired from them as of March 31, 2007 and the percentage of those loans to total MPF loans outstanding at that date:

Table 15

			MPF Loan
			Balance as of		Percent of Total
PFI Name	City	State	March 31, 2007		MPF Loans
LaSalle National Bank, N.A.1	Chicago	IL	$	580,574		24.8	%
TierOne Bank	Lincoln	NE		493,700		21.0
Bank of the West2	San Francisco	CA		464,332		19.8
Sunflower Bank, NA	Salina	KS		62,936		2.7
Golden Belt Bank, FSA	Hays	KS		37,978		1.6
—
TOTAL			$	1,639,520		69.9	%

1	Out-of-district loans acquired from FHLBank of Chicago.
2	Formerly Commercial Federal Bank headquartered in Omaha, NE. Bank of the West acquired Commercial Federal Bank on December 2, 2005. Bank of the West is a member of the Federal Home Loan Bank of San Francisco.

41

Table 16 presents the top five PFIs of the FHLBank, the outstanding balances (in thousands) of mortgage loans acquired from them as of December 31, 2006 and the percentage of those loans to total MPF loans outstanding at that date:

Table 16

			MPF Loan
			Balance as of		Percent of Total
PFI Name	City	State	December 31, 2006		MPF Loans
LaSalle National Bank, N.A.1	Chicago	IL	$	601,399		25.4	%
TierOne Bank	Lincoln	NE		495,211		20.9
Bank of the West2	San Francisco	CA		476,467		20.1
Sunflower Bank, NA	Salina	KS		64,233		2.7
Golden Belt Bank, FSA	Hays	KS		38,520		1.6
—
TOTAL			$	1,675,830		70.7	%

1	Out-of-district loans acquired from FHLBank of Chicago.
2	Formerly Commercial Federal Bank headquartered in Omaha, NE. Bank of the West acquired Commercial Federal Bank on December 2, 2005. Bank of the West is a member of the Federal Home Loan Bank of San Francisco.

The average yield on mortgage loans for the first quarter of 2007 was 5.21 percent compared to 5.14 percent for the first quarter of 2006. The average yield on mortgage loans increased due primarily to the increase in mortgage interest rates and a decrease in the net write-off of the amortization of premium as a result of the decline in mortgage loan prepayments and the increase in estimated lives of existing mortgage loans because of increasing mortgage interest rates. The average yield on mortgage loans is expected to remain stable or increase slightly in response to anticipated increases in market interest rates during the remainder of 2007. See Tables 4 and 5 under “Results of Operations — Net Interest Income” in this Item 2 for further information regarding average balances and yields and changes in interest income.

Asset Quality: The FHLBank classifies conventional real estate mortgage loans as “non-performing” when they are contractually past due 90 days or more and interest is no longer accrued. Interest continues to accrue on government-insured real estate mortgage loans (e.g., Federal Housing Administration, Veterans’ Affairs, USDA Guaranteed Rural Housing Section 502, and HUD Section 184 Indian Home Loan Guarantee Program loans) that are contractually past due 90 days or more. Mortgage loans originated under the USDA Guaranteed Rural Housing Section 502 program and HUD Section 184 Indian Home Loan Guarantee Program became eligible for purchase by the FHLBank during the first quarter of 2007 as a result of changes to the MPF Program by the FHLBank of Chicago. Table 17 presents the unpaid principal balance for conventional and government-insured mortgage loans as of March 31, 2007 and December 31, 2006 (in thousands):

Table 17

	March 31,		December 31,
	2007		2006
Conventional mortgage loans	$	2,283,756	$	2,307,079
Government-insured mortgage loans		62,347		63,105
Total outstanding mortgage loans	$	2,346,103	$	2,370,184

Table 18 presents the unpaid principal balance for performing mortgage loans, non-performing mortgage loans and mortgage loans 90 days or more past due and accruing as of March 31, 2007 and December 31, 2006 (in thousands):

Table 18

	March 31,		December 31,
	2007		2006
Performing mortgage loans	$	2,340,351	$	2,365,122
Non-performing mortgage loans		5,130		4,379
Mortgage loans 90 days or more past due and accruing		622		683
Total outstanding mortgage loans	$	2,346,103	$	2,370,184

42

Table 19 presents the interest income shortfall on non-performing loans during the three months ended March 31, 2007 and 2006 (in thousands):

Table 19

	March 31,		March 31,
	2007		2006
Interest contractually due during the period on non-performing mortgage loans	$	92	$	73
Interest income received during the period on non-performing mortgage loans		58		52
Shortfall	$	34	$	21

MPF Allowance for Credit Losses on Mortgage Loans:At March 31, 2007 and December 31, 2006, the FHLBank had recorded an allowance for credit losses of $855,000 and $854,000, respectively. The FHLBank bases its allowance on management’s estimate of probable credit losses inherent in the FHLBank’s mortgage loan portfolio as of the statement of condition date. The estimate is based on an analysis of industry statistics for similar mortgage loan portfolios. Management believes that policies and procedures are in place to manage the credit risk on MPF mortgage loans.

Table 20 details the change in the allowance for mortgage loan losses for the three-month periods ended March 31, 2007 and 2006 (in thousands):

Table 20

	For the Three Months Ended
	March 31,			March 31,
	2007			2006
Balance, beginning of period	$	854		$	756
Provision for (reversal of) credit losses on mortgage loans		(43	)		59
Charge-offs		44			(31	)
Balance, end of period	$	855		$	784

The ratio of net charge-offs to average loans outstanding was less than one basis point for the three-month periods ended March 31, 2007 and 2006.

Investments– Total investments decreased 5.7 percent from December 31, 2006 to March 31, 2007. Investments are generally used by the FHLBank for liquidity purposes as well as to leverage capital during periods when advances decline and capital stock is not likewise reduced. The average yield on investments was 5.36 percent during the first quarter of 2007, compared to 4.77 percent during the first quarter of 2006. Since the FOMC has not raised the target overnight Federal funds rate since June 2006, the average yield on FHLBank’s investments has remained relatively stable over the last two quarters of 2006 and the first quarter of 2007. At this time, there is considerable uncertainty about the direction of the next change in the overnight Federal funds target rate. This uncertainty, together with the continued inversion of at least a portion of the U.S. Treasury yield curve, has resulted in a tightening of spreads between the yield on investments and the FHLBank’s cost of funds, which could put some downward pressure on average spreads that the FHLBank realizes on its investment portfolio in future periods. See Tables 4 and 5 under “Results of Operations - Net Interest Income” in this Item 2 for further information regarding average balances and yields and changes in interest income.

Short-term investments used for liquidity purposes consisted primarily of deposits in banks, overnight and term Federal funds, and commercial paper. Short-term investments, which include investments with remaining maturities of one year or less, were $13.2 billion at March 31, 2007, compared to $14.5 billion at December 31, 2006. The decrease was primarily due to a decrease in term Federal funds sold and commercial paper. The decrease in these two short-term liquidity portfolios was the result of the overall reduction in assets due to a decrease in the FHLBank’s total capital during the first quarter of 2007. The FHLBank’s overnight Federal funds sold position remained relatively constant at $6.0 billion. The FHLBank’s long-term investment portfolio, consisting of U.S. Treasury obligations, U.S. government agency and government sponsored enterprise (GSE) securities, MBS and taxable state or local housing finance agency securities, increased from $7.1 billion at December 31, 2006 to $7.2 billion at March 31, 2007

43

The FHLBank’s Risk Management Policy (RMP) restricts the acquisition of investments to high-quality, short-term money market instruments and highly rated long-term securities. The FHLBank uses short-term investments to sustain the liquidity necessary to meet member credit needs, to provide a reasonable return on member deposits and to maximize the FHLBank’s leverage ratio. Long-term securities are used to provide a reliable income flow and to achieve a desired maturity structure. The majority of these long-term securities are MBS, which provide an alternative means to promote liquidity in the mortgage finance markets while providing attractive returns to the FHLBank. See “Liquidity and Capital Resources — Liquidity” in this Item 2 for additional discussion regarding the FHLBank’s liquidity.

Major Security Types:Securities for which the FHLBank has the ability and intent to hold to maturity are classified as held-to-maturity securities and carried at amortized cost. The FHLBank classifies certain investments as trading securities and carries them at fair value. The FHLBank records changes in the fair values of these investments through other income and original premiums/discounts on these investments are not amortized. The FHLBank does not practice active trading, but holds trading securities for asset/liability management purposes. The FHLBank classifies certain investments that it may sell before maturity as available-for-sale and carries them at fair value. The available-for-sale portfolio is used by the FHLBank for asset/liability management purposes. See Notes 2 through 4 in the “Notes to Financial Statements” included under Item 1 — “Financial Statements” for additional information on the FHLBank’s different investment classifications including what types of securities are held under each classification. The carrying value and contractual maturity of the FHLBank’s investments as of March 31, 2007 and December 31, 2006 are summarized by security type in Tables 21 and 22 (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

44

Table 21

March 31, 2007
					Due after one		Due after five
	Carrying		Due in one year		year through		years through		Due after 10
Security Type	Value		or less		five years		10 years		years
Interest bearing deposits:
CDs	$	4,234,001	$	4,234,001	$	0	$	0	$	0
Bank notes		215,000		215,000		0		0		0
Swap cash collateral		48,010		48,010		0		0		0
MPF deposits		25		25		0		0		0
Total interest bearing deposits		4,497,036		4,497,036		0		0		0
Overnight Federal funds sold		6,007,000		6,007,000		0		0		0
Term Federal funds sold		1,424,000		1,424,000		0		0		0
Trading securities:
Non-mortgage-backed securities:
FHLBank obligations		15,047		15,047		0		0		0
Fannie Mae obligations1		131,847		25,084		52,141		54,622		0
Freddie Mac obligations1		505,252		0		407,658		97,594		0
Mortgage-backed securities:
Ginnie Mae obligations2		3,201		0		0		0		3,201
Total trading securities		655,347		40,131		459,799		152,216		3,201
Available-for-sale securities:
Non-mortgage-backed securities:
U.S. Treasury obligations		101,975		49,387		52,588		0		0
Total available-for-sale securities		101,975		49,387		52,588		0		0
Held-to-maturity securities:
Non-mortgage-backed securities:
Commercial paper		1,138,339		1,138,339		0		0		0
State or local housing agencies		217,875		0		10,000		445		207,430
Mortgage-backed securities:
Fannie Mae obligations1		1,342,029		0		0		0		1,342,029
Freddie Mac obligations1		1,506,015		0		0		0		1,506,015
Ginnie Mae obligations2		50,503		0		0		1,531		48,972
Other — non-government		3,398,273		0		0		0		3,398,273
Total held-to-maturity securities		7,653,034		1,138,339		10,000		1,976		6,502,719
TOTAL	$	20,338,392	$	13,155,893	$	522,387	$	154,192	$	6,505,920

¹  Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) are government-sponsored enterprises (GSE). GSE
   securities are not guaranteed by the U.S. government.

²  Government National Mortgage Association (Ginnie Mae) securities are guaranteed by the U.S. government.

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Table 22

December 31, 2006
					Due after one		Due after five
	Carrying		Due in one		year through		years through		Due after 10
Security Type	Value		year or less		five years		10 years		years
Interest bearing deposits:
CDs	$	3,985,000	$	3,985,000	$	0	$	0	$	0
Bank notes		275,000		275,000		0		0		0
Swap cash collateral		67,430		67,430		0		0		0
MPF deposits		29		29		0		0		0
Total interest bearing deposits		4,327,459		4,327,459		0		0		0
Overnight Federal funds sold		5,935,500		5,935,500		0		0		0
Term Federal funds sold		2,119,000		2,119,000		0		0		0
Trading securities:
Non-mortgage-backed securities:
Federal Farm Credit Bank obligations1		620		620		0		0		0
FHLBank obligations		15,052		15,052		0		0		0
Fannie Mae obligations1		181,611		75,218		52,063		54,330		0
Freddie Mac obligations1		503,406		0		302,781		200,625		0
Mortgage-backed securities:
Ginnie Mae obligations2		3,436		0		0		0		3,436
Total trading securities		704,125		90,890		354,844		254,955		3,436
Available-for-sale securities:
Non-mortgage-backed securities:
U.S. Treasury obligations		101,668		49,143		52,525		0		0
Total available-for-sale securities		101,668		49,143		52,525		0		0
Held-to-maturity securities:
Non-mortgage-backed securities:
Commercial paper		1,774,449		1,774,449		0		0		0
State or local housing agencies		238,873		0		10,000		600		228,273
Fannie Mae obligations1		100,008		100,008		0		0		0
Freddie Mac obligations1		99,940		99,940		0		0		0
Mortgage-backed securities:
Fannie Mae obligations1		1,145,425		0		536		2,395		1,142,494
Freddie Mac obligations1		1,379,899		0		0		3,664		1,376,235
Ginnie Mae obligations2		17,118		0		275		2,093		14,750
Other — non-government		3,621,671		0		0		0		3,621,671
Total held-to-maturity securities		8,377,383		1,974,397		10,811		8,752		6,383,423
TOTAL	$	21,565,135	$	14,496,389	$	418,180	$	263,707	$	6,386,859

¹ Fannie Mae, Freddie Mac and Federal Farm Credit Bank are GSEs. GSE securities are not guaranteed by the U.S. government.

² Ginnie Mae securities are guaranteed by the U.S. government.

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Table 23 presents the FHLBank’s MBS investment portfolio by categories of securities as of March 31, 2007 and December 31, 2006 (in thousands):

Table 23

	March 31, 2007					December 31, 2006
	Carrying		Percent of			Carrying		Percent of
	Value		Total			Value		Total
Private issue residential MBS	$	3,347,491		53.1	%	$	3,570,314		57.9	%
U.S. agency residential MBS		2,901,748		46.1			2,545,878		41.3
Private issue commercial MBS		40,534		0.7			40,538		0.7
Home equity loans		8,903		0.1			9,335		0.1
Manufactured housing		1,345		0.0			1,484		0.0
TOTAL	$	6,300,021		100.0	%	$	6,167,549		100.0	%

Yield Characteristics:Table 24 presents the yield characteristics of the FHLBank’s non-MBS investments, classified as held-to-maturity securities, available-for-sale securities and trading securities as of March 31, 2007:

Table 24

	March 31, 2007
	Held-to-maturity			Available-for-sale			Trading
	Securities			Securities			Securities
Due in one year or less		5.30	%		1.99	%		6.22	%
Due after one year through five years		7.15			2.69			5.28
Due after five years through 10 years		7.02			—			4.59
Due after 10 years		4.42			—			—

Table 25 presents the yield characteristics of the FHLBank’s MBS investments, classified as held-to-maturity securities, available-for-sale securities and trading securities as of March 31, 2007:

Table 25

	March 31, 2007
	Held-to-maturity			Available-for-sale			Trading
	Securities			Securities			Securities
Due in one year or less		—	%		—	%		—	%
Due after one year through five years		—			—			—
Due after five years through 10 years		6.96			—			—
Due after 10 years		5.04			—			6.01

Securities Ratings:Table 26 presents the percentage of FHLBank investments classified as held-to-maturity, available-for-sale or trading securities by rating as of March 31, 2007 and December 31, 2006:

Table 26

	Percent of Total
Investment Rating	March 31, 2007			December 31, 2006
Long-term rating:
AAA		85.7	%		80.0	%
AA		0.8			0.7
Short-term rating:
A-1 or higher/P-1		13.5			19.3
TOTAL		100.0	%		100.0	%

Deposits– The FHLBank offers deposit programs for the benefit of its members and certain other qualifying non-members. Deposit products offered include demand and overnight deposits, short-term CDs and a limited number of non-interest-bearing products. For the three months ended March 31, 2007 and 2006, the annualized average rate paid on interest-bearing deposits was 5.15 percent and 4.30 percent, respectively. The average rate paid on deposits

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increased in tandem with rising short-term interest rates during and between those periods. Most deposits are very short-term, and the FHLBank, as a matter of prudence, holds short-term assets with maturities similar to the deposits. The majority of the deposits are in overnight or demand accounts that reprice daily based upon a market index such as overnight Federal funds. The level of deposits at the FHLBank is driven by member demand for FHLBank deposit products which in turn is a function of the liquidity position of FHLBank members. Factors that influence deposit levels include turnover in members’ investment and loan portfolios, changes in members’ customer deposit balances, changes in members’ demand for liquidity and the FHLBank’s deposit pricing as compared to other short-term market rates. Total deposits were $1.3 billion at March 31, 2007, a slight increase from $1.1 billion at December 31, 2006.

Consolidated Obligations– Consolidated obligations are the joint and several debt obligations of the 12 FHLBanks and consist of bonds and discount notes. Consolidated obligations represent the primary source of liabilities used by the FHLBank to fund advances, mortgage loans and investments. As noted under “Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk Management” under Item 3, the FHLBank uses debt with a variety of maturities and option characteristics to manage its DOE and interest rate risk profile. The FHLBank makes extensive use of derivative transactions, executed in conjunction with specific consolidated obligation debt issues, to synthetically reconfigure funding terms and costs.

During the first quarter of 2007, the FHLBank’s total consolidated obligation balances decreased as funding needs for advances, mortgage loans and investments decreased. Outstanding consolidated obligations decreased 6.0 percent from December 31, 2006 to March 31, 2007. The period-end balances for March 31, 2007 and December 31, 2006 include fair value adjustments ((debit) credit adjustment) related to SFAS 133 of ($275.1) million and ($370.2) million, respectively. The average annualized effective rate paid on consolidated obligations, adjusted for the impact of derivatives (see Table 27 under this “Consolidated Obligations” section of Item 2, that presents effective rate paid without impact of derivatives), was 5.16 percent and 4.45 percent for the three months ended March 31, 2007 and 2006, respectively. The average effective rate paid on consolidated obligations increased in response to increasing market interest rates and increased volume in issuances of long-term fixed rate debt. The FHLBank has consciously increased the optionality in the liability portfolios used to fund assets with prepayment characteristics. However, during the last half of 2006 and first quarter of 2007, the FHLBank shifted its investment strategy from acquiring fixed rate MBS/CMOs to purchasing adjustable rate MBS/CMOs with embedded caps. The FHLBank also began purchasing interest rate caps as economic hedges to mitigate a portion of the cap risk embedded in the adjustable rate MBS/CMOs. Management expects that the net interest spread on its MBS/CMO portfolio will decline somewhat during the remainder of 2007 as a result of the increased costs of consolidated obligation debt with optionality relative to the yield on fixed rate MBS/CMOs as well as the cost of caps to hedge the cap risk. See Tables 4 and 5 under “Results of Operations - - Net Interest Income” in this Item 2 for further information on the affect of increasing interest rates on the three months ended March 31, 2007.

As stated previously, management uses pre-derivative financial results, a non-GAAP financial measure, to evaluate the quality of the FHLBank’s earnings. Table 27 presents the GAAP annualized rate on consolidated obligations and the non-GAAP annualized effective rate paid on consolidated obligations adjusted to remove the impacts of derivatives for the period ends noted (in thousands):

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Table 27

	For the Three Months Ended
	March 31, 2007			March 31, 2006
GAAP effective rate paid on consolidated obligations		5.16	%		4.45	%
GAAP consolidated obligation interest expense	$	586,786		$	484,418
Net interest settlements on derivatives tied to consolidated obligations		(27,647	)		(16,852	)
Amortization of SFAS 133 fair value adjustments		(1,317	)		(1,028	)
Interest expense without derivative impact	$	557,822		$	466,538
Average consolidated obligation balance	$	46,084,273		$	44,098,825
Fair value basis adjustment		338,536			535,272
Consolidated obligation balance without derivative impact	$	46,422,809		$	44,634,097
Effective rate paid on consolidated obligations without derivative impact		4.87	%		4.24	%

Derivatives– The FHLBank recorded derivative assets of $101.9 million and $66.6 million and derivative liabilities of $146.7 million and $203.6 million at March 31, 2007 and December 31, 2006, respectively. All derivatives are marked to estimated fair values, netted by counterparty with any associated accrued interest and included on the statements of condition as an asset when there is a net fair value gain or as a liability when there is a net fair value loss. Fair values of the FHLBank’s derivatives fluctuate as interest rates and the type/term/notional amount of outstanding derivative transactions fluctuate.

The notional amounts and estimated fair values (including accrued interest) by type of derivative held as of March 31, 2007 and December 31, 2006 are included in Table 28 (in thousands):

Table 28

	Notional Amounts				Estimated Fair Values
	March 31,		December 31,		March 31,			December 31,
	2007		2006		2007			2006
Derivatives:
Fair value hedges	$	32,366,806	$	32,006,898	$	(45,916	)	$	(137,261	)
Economic derivatives		4,466,591		4,068,764		1,173			305
TOTAL	$	36,833,397	$	36,075,662	$	(44,743	)	$	(136,956	)

The notional amount serves as a factor in determining periodic interest payments or cash flows received and paid, and does not represent the actual amount exchanged or the FHLBank’s exposure to credit and market risk. The amount potentially subject to credit loss is much less. See “Risk Management — Credit Risk Management” in this Item 2 for further information. Table 29 categorizes the notional amount and the estimated fair value of derivatives, excluding accrued interest, by product and type of accounting treatment. The “Fair Value” category represents hedge strategies qualifying for hedge accounting treatment. The “Economic” category represents hedge strategies not qualifying for hedge accounting treatment. Amounts at March 31, 2007 and December 31, 2006 are as follows (in thousands):

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Table 29

	March 31, 2007					December 31, 2006
	Notional		Estimated			Notional		Estimated
	Amount		Fair Value			Amount		Fair Value
Advances:
Fair value	$	8,094,110	$	(2,532	)	$	8,262,752	$	21,257
Investments:
Economic		2,532,701		2,406			2,359,018		5,961
Mortgage loans:
Fixed rate mortgage purchase commitments		17,273		(9	)		14,006		(31	)
Consolidated obligation discount notes:
Economic		1,250,000		(92	)		1,000,000		94
Consolidated obligation bonds:
Fair value		24,272,696		(192,634	)		23,744,146		(289,599	)
Economic		450,000		685			450,000		815
Subtotal		24,722,696		(191,949	)		24,194,146		(288,784	)
Intermediary:
Economic		216,617		163			245,740		197
TOTAL	$	36,833,397	$	(192,013	)	$	36,075,662	$	(261,306	)
Total derivative fair value excluding accrued interest			$	(192,013	)			$	(261,306	)
Net accrued interest receivable				147,270					124,350
NET DERIVATIVE FAIR VALUE			$	(44,743	)			$	(136,956	)
Net derivative assets balance			$	101,949				$	66,623
Net derivative liabilities balance				(146,692	)				(203,579	)
NET DERIVATIVE FAIR VALUE			$	(44,743	)			$	(136,956	)

Liquidity and Capital Resources

Liquidity– To meet its mission of serving as an economical short-term and long-term funding source for its members and housing associates, the FHLBank must maintain high levels of liquidity. The FHLBank is required to maintain liquidity in accordance with certain Finance Board regulations and with policies established by management and the board of directors. The FHLBank also needs liquidity to repay maturing consolidated obligations, to meet other financial obligations and to repurchase excess capital stock at its discretion, whether upon the request of a member or at its own initiative.

A primary source of the FHLBank’s liquidity is the issuance of consolidated obligations. The capital markets traditionally have treated FHLBank obligations as U.S. government agency debt. As a result, even though the U.S. government does not guarantee FHLBank debt, the FHLBank has ready access to funding at relatively favorable spreads to U.S. Treasury rates. The FHLBank is primarily and directly liable for its portion of consolidated obligations (i.e., those obligations issued on its behalf). In addition, the FHLBank is jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on the consolidated obligations of all 12 FHLBanks. The Finance Board, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations for which the FHLBank is not the primary obligor. Although it has never occurred, to the extent that an FHLBank would be required to make a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Board determines that the non-complying FHLBank is unable to satisfy its obligations, then the Finance Board may allocate the non-complying FHLBank’s outstanding consolidated obligation debt among the remaining FHLBanks on apro ratabasis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Board may determine.

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The FHLBank’s other primary sources of liquidity include deposit inflows, repayments of advances or mortgage loans, maturing investments and interest income. Primary uses of liquidity include issuing advances, funding or purchasing mortgage loans, purchasing investments, deposit withdrawals, maturing consolidated obligations and interest expense.

Cash and short-term investments, including commercial paper, totaled $13.1 billion and $14.2 billion as of March 31, 2007 and December 31, 2006, respectively. The maturities of these short-term investments are structured to provide periodic cash flows to support the FHLBank’s ongoing liquidity needs. The FHLBank also maintains a portfolio of U.S. Treasury and GSE debentures that can be pledged as collateral for financing in the repurchase/resell agreement market. U.S. Treasury and GSE investments totaled $0.7 billion and $1.0 billion in par value at March 31, 2007 and December 31, 2006, respectively. In order to ensure that the FHLBank can take advantage of those sources of liquidity that will affect its leverage capital requirements, the FHLBank manages its average capital ratio to stay sufficiently above its minimum regulatory and RMP requirements so that it can utilize the excess capital capacity should the need arise. While the minimum regulatory total capital requirement is 4.00 percent (25:1 asset to capital leverage), and its RMP minimum is 4.08 percent, the FHLBank manages capital in such a way as to keep its total capital ratio at or above 4.17 percent (24:1 asset to capital leverage). See Table 32 under “Liquidity and Capital Resources — Capital” in this Item 2 for the FHLBank’s compliance with its capital requirements. As a result, should the need arise, the FHLBank has the capacity to borrow an amount approximately equal to at least one-half its current capital position before it reaches any leverage limitation as a result of the minimum regulatory or RMP capital requirements.

In addition to the balance sheet sources of liquidity discussed previously, the FHLBank has established lines of credit with numerous counterparties in the Federal funds market as well as with the other 11 FHLBanks. The FHLBank expects to maintain a sufficient level of liquidity for the foreseeable future.

Capital– Total capital consists of Class A Common Stock, Class B Common Stock, accumulated other comprehensive income and retained earnings. Total capital decreased by 6.8 percent from December 31, 2006 to March 31, 2007. The decrease in capital stock is related to the decrease in advances during the quarter. The majority of the decrease in capital is due to the FHLBank’s repurchase of excess Class B Common Stock related to redemption requests submitted by one of the FHLBank’s largest borrowers — U.S. Central Federal Credit Union — because of its reduction in advances outstanding during the quarter.

Table 30 presents information on member institutions holding five percent or more of the total outstanding capital stock, which includes mandatorily redeemable capital stock, of the FHLBank as of March 31, 2007.

Table 30

				Number		Percent
Borrower Name	Address	City	State	of Shares		of Total
MidFirst Bank	501 NW Grand Blvd	Oklahoma City	OK		2,951,356		15.5	%
Capitol Federal Savings Bank	700 S Kansas Ave	Topeka	KS		1,573,442		8.3
U.S. Central Federal Credit Union	9701 Renner Blvd	Lenexa	KS		1,403,861		7.4
Security Life of Denver Ins. Co.	1290 Broadway	Denver	CO		1,387,309		7.3
—
TOTAL					7,315,968		38.5	%

Table 31 presents information on member institutions holding five percent or more of the total outstanding capital stock, which includes mandatorily redeemable capital stock, of the FHLBank as of December 31, 2006.

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Table 31

				Number		Percent
Borrower Name	Address	City	State	of Shares		of Total
U.S. Central Federal Credit Union	9701 Renner Blvd	Lenexa	KS		3,036,998		14.8	%
MidFirst Bank	501 NW Grand Blvd	Oklahoma City	OK		2,905,081		14.1
Capitol Federal Savings Bank	700 S Kansas Ave	Topeka	KS		1,678,291		8.2
Security Life of Denver Ins. Co.	1290 Broadway	Denver	CO		1,183,382		5.8
—
TOTAL					8,803,752		42.9	%

The FHLBank is subject to three capital requirements under provisions of the Gramm-Leach-Bliley (GLB) Act, the Finance Board’s capital structure regulation and the FHLBank’s capital plan: (1) a risk-based capital requirement, (2) a total capital requirement and (3) a leverage capital requirement. Under the risk-based capital requirement, the FHLBank is required to maintain permanent capital at all times in an amount at least equal to the sum of its credit risk, market risk and operations risk capital requirements, calculated in accordance with the rules and regulations of the Finance Board. Only permanent capital, defined as retained earnings and Class B Common Stock, can be used by the FHLBank to satisfy its risk-based capital requirement. The Finance Board, at its discretion, may require the FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirements. The FHLBank is also required to maintain total capital at all times of at least four percent of total assets. Total capital is the sum of permanent capital, Class A Common Stock, any general loss allowance (if consistent with GAAP and not established for specific assets) and other amounts from sources determined by the Finance Board as available to absorb losses. Finally, the FHLBank is required to maintain leverage capital of at least five percent of total assets. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and other capital weighted 1.0 times divided by total assets. The FHLBank has been in compliance with each of the aforementioned capital rules and requirements at all times since the implementation of its capital plan. The FHLBank was in compliance with the applicable capital requirements at March 31, 2007 and December 31, 2006 as demonstrated in Table 32 (amounts in thousands):

Table 32

	March 31, 2007						December 31, 2006
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	428,848		$	1,488,856		$	466,642		$	1,647,068
Total capital-to-asset ratio		4.0	%		4.2	%		4.0	%		4.2	%
Total capital	$	1,990,602		$	2,078,023		$	2,109,559		$	2,224,979
Leverage capital ratio		5.0	%		5.7	%		5.0	%		5.8	%
Leverage capital	$	2,488,253		$	2,822,451		$	2,636,948		$	3,048,513

Note that for the purposes of the regulatory capital calculations in Table 32, actual capital includes all capital stock subject to mandatory redemption that has been reclassified to a liability under SFAS 150.

Capital Distributions– Dividends may be paid in cash or Class B Common Stock as authorized by the FHLBank’s board of directors. Quarterly dividends can be paid out of current and previously retained earnings, subject to Finance Board regulation and the FHLBank’s capital plan. Dividends were paid at average annualized rates of 6.03 percent and 5.22 percent for the quarters ended March 31, 2007 and 2006, respectively.

The FHLBank has the ability under its capital plan to pay different dividend rates to the holders of Class A Common Stock and Class B Common Stock. This differential is implemented through a mechanism referred to as the dividend parity threshold. As defined in the FHLBank’s capital plan, the dividend parity threshold means a dividend rate expressed as a percentage per annum up to which the dividends paid per share on Class A Common Stock and Class B Common Stock must be equal before a higher rate can be paid on Class B Common Stock. The dividend parity threshold is a percentage per annum expressed as a positive or negative spread relative to a published reference interest rate index (e.g., LIBOR, Federal funds, etc.) or an internally calculated reference interest rate based upon any of the FHLBank’s assets or liabilities (e.g., average yield on advances, average cost of consolidated obligations, etc.), as determined by the board of directors from time to time. Class A stockholders and Class B stockholders share in dividends equally up to the dividend parity threshold for a dividend period, then the dividend rate for Class B stockholders can exceed the rate for Class A stockholders, but the dividend rate on Class A Common Stock can

52

never exceed the dividend rate on Class B Common Stock. The current dividend parity threshold is equal to the average three-month LIBOR for a dividend period minus 100 basis points.

FHLBank management anticipates that dividend rates on Class A Common Stock will be close to or equal to the currently established dividend parity threshold for future dividend periods and that the differential between the two classes of stock will stay the same or increase slightly, subject to sufficient FHLBank earnings to meet retained earnings targets and still pay such dividends. While there is no assurance that the FHLBank’s board of directors will not change the dividend parity threshold in the future, the capital plan requires that the FHLBank provide members with 90 days notice prior to the end of a dividend period in which a different dividend parity threshold is utilized in the payment of a dividend.

Table 33 presents dividends paid by type for the periods ended March 31, 2007 and 2006 (in thousands):

Table 33

	For the Three Months Ended
			Dividends		Total
	Dividends		Paid in		Dividends
	Paid in Cash		Capital Stock		Paid
March 31, 20071,2	$	114	$	26,953	$	27,067
March 31, 20061,2		92		22,577		22,669

1	The cash dividends listed for 2006 and 2007 represent cash dividends paid for partial shares. Stock dividends are paid in whole shares.
2	The FHLBank implemented SFAS 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,effective January 1, 2004. For purposes of this table, dividends paid for any shares that are mandatorily redeemable have been treated as interest expense and are not treated as dividends.

The FHLBank expects to continue paying dividends primarily in capital stock for the remainder of 2007, but this may change depending on the impact of the Finance Board rule on excess stock that was published in the Federal Register on December 9, 2006. See Item 1 — “Legislation and Regulatory Developments —Proposed Finance Board Rules Regarding Excess Stock and Retained Earnings” in the annual report on Form 10-K, incorporated by reference herein, for additional discussion. If the FHLBank were to change its prior practice and pay dividends in the form of cash, it would utilize liquidity resources. Payment of cash dividends would not have a significant impact on the FHLBank’s liquidity position.

Change in Practice for Declaring Dividends —At its June 28, 2006 meeting, the FHLBank’s board of directors adopted a revised process for declaring dividends. Previously, dividends had been declared in the last month of a calendar quarter based on estimated net income for the calendar quarter and paid on the last business day of the quarter. Under the revised process, dividends for a quarter continue to be paid on the last business day of the calendar quarter but are based on actual net income for the three completed months preceding the date of the board meeting, which will continue to occur in the last month of a calendar quarter. The revised process did not change the FHLBank’s practice of paying a quarterly dividend based on the daily average stock holdings for the entire calendar quarter on the last business day of the month. Thus, under the FHLBank’s revised dividend declaration process, any dividend declared during a quarter does not include any uncertainty involved in declaring dividends based on estimated net income.

Risk Management

Proper identification, assessment and management of risks enables stakeholders to have confidence in the FHLBank’s ability to serve its members, earn a profit, compete in the industry and prosper over the long term. Active risk management continues to be an essential part of the FHLBank’s operations and a key determinant of its ability to maintain earnings to meet retained earnings targets and return a reasonable dividend to its stockholders. The FHLBank maintains comprehensive risk management processes to facilitate, control and monitor risk taking. Periodic reviews by internal auditors, Finance Board examiners and independent accountants subject the FHLBank’s practices to additional scrutiny, further strengthening the process.

Effective risk management programs include not only conformance to risk management best practices by management but also incorporate board of director oversight. The FHLBank’s board of directors plays an active role in the enterprise risk management (ERM) process by regularly reviewing risk management policies and reports on controls. In addition to the annual and business unit risk assessment reports, the board of directors reviews the RMP on at least an annual basis. Various management committees, including the Financial Risk Analysis Committee (FRAC) and the Asset/Liability Committee (ALCO), oversee the FHLBank’s risk management process. For more

53

detailed information, see Item 7A — “Quantitative and Qualitative Disclosures About Market Risk” in the annual report on Form 10-K, incorporated by reference herein.

Credit Risk Management– Credit risk is defined as the risk that counterparties to the FHLBank’s transactions will not meet their contractual obligations. The FHLBank manages credit risk by following established policies, evaluating the creditworthiness of its counterparties and utilizing collateral agreements and settlement netting for derivative transactions. The most important step in the management of credit risk is the initial decision to extend credit. Continuous monitoring of counterparties is performed for all areas where the FHLBank is exposed to credit risk, whether that is through lending, investing or derivative activities.

Credit risk arises partly as a result of the FHLBank’s lending and acquired member asset (AMA) activities (members’ CE obligations with respect to mortgage loans acquired by the FHLBank through the MPF Program). The FHLBank manages its exposure to credit risk on advances and members’ CE obligations through a combined approach that provides ongoing review of the financial condition of its members coupled with prudent collateralization requirements. The FHLBank is required by statute to obtain sufficient collateral on advances to protect against losses and to accept eligible collateral on such advances. For more detailed information, see Item 7A — “Quantitative and Qualitative Disclosures About Market Risk — Risk Management — Credit Risk Management” in the annual report on Form 10-K, incorporated by reference herein.

Credit risk arising from AMA activities under the FHLBank’s MPF Program falls into three categories: (1) the risk of credit losses on the mortgage loans represented in the FHLBank’s first loss account (FLA) and last loss positions, (2) the risk that a member or non-member PFI will not perform as promised with respect to its loss position provided through its CE obligations on mortgage pools; and (3) the risk that a third-party insurer (obligated under primary mortgage insurance (PMI) or supplemental mortgage insurance (SMI) arrangements) will fail to perform as expected. The FHLBank’s credit risk exposure to third-party insurers to which the FHLBank has PMI and/or SMI exposure is monitored on a monthly basis and regularly reported to the board of directors. The FHLBank performs credit analyses of third-party PMI and SMI providers on at least an annual basis.

Credit risk also arises from investing and derivative activities. As noted previously, the RMP restricts the acquisition of investments to high-quality, short-term money market instruments and highly rated long-term securities. The short-term investment portfolio represents unsecured credit. Therefore, counterparty ratings are monitored daily while performance and capital adequacy are monitored on a monthly basis in an effort to mitigate unsecured credit risk on short-term investments. MBS represent the majority of the FHLBank’s long-term investments. The FHLBank holds MBS issued by agencies and GSEs, CMOs securitized by GSEs, and AAA-rated private-issue MBS and CMOs securitized by whole loans. The FHLBank monitors the credit ratings, performance and capital adequacy of all PMI providers, SMI providers and master or principal servicers to which it has potential credit risk exposure within its MBS investment portfolio. Other long-term investments include U.S. Treasury, unsecured triple-A rated GSE and collateralized state and local housing finance agency securities. All of the FHLBank’s state and local housing finance agency securities are rated AA or higher.

The FHLBank has never experienced a loss on a derivative transaction because of a credit default by a counterparty. In derivative transactions, credit risk arises when counterparties to transactions, such as interest rate swaps, are obligated to pay the FHLBank the positive fair value or receivable resulting from the transaction terms. The FHLBank manages this risk by executing derivative transactions with experienced counterparties with high credit quality (rated A or better); by requiring netting of individual derivatives transactions with the same counterparty; by diversifying its derivatives across many counterparties; and by executing transactions under master agreements that require counterparties to post collateral if the FHLBank is exposed to a potential credit loss on the related derivatives exceeding an agreed-upon threshold. The FHLBank’s credit risk exposure from derivative transactions with member institutions is fully collateralized under the FHLBank’s Advance Pledge and Security Agreement. The FHLBank regularly monitors the exposures on its derivative transactions by determining the market value of positions using internal pricing models. The market values generated by the pricing model are compared to dealer model results on a monthly basis to ensure that the FHLBank’s pricing model is calibrated to actual market pricing methodologies utilized by the dealers.

The FHLBank requires that derivative counterparties enter into collateral agreements which specify maximum net unsecured credit exposure amounts that may exist before collateral requirements are triggered. The maximum amount of the FHLBank’s unsecured credit exposure to any counterparty is based upon the counterparty’s credit rating. That is, a counterparty must deliver collateral if the total market value of the FHLBank’s exposure to that counterparty rises above a specific level (see “Risk Management — Liquidity Risk Management” in this Item 2). As a result of these risk mitigation initiatives, management does not anticipate any credit losses on its derivatives.

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The contractual or notional amount of derivatives reflects the FHLBank’s involvement in various classes of financial instruments. The notional amount of derivatives does not measure the FHLBank’s credit risk. The maximum credit exposure is much less than the notional amount. The maximum credit exposure is the estimated cost of replacing the net receivable positions for individual counterparties on interest rate swaps and forward agreements, and purchased caps, floors and swaptions, net of the value of any related collateral, in the event of a counterparty default.

The FHLBank’s credit exposure to derivative counterparties, before considering collateral, was approximately $101.9 million and $66.6 million at March 31, 2007 and December 31, 2006, respectively. In determining credit exposure, the FHLBank considers accrued interest receivables and payables as well as the legal right to net swap transactions by counterparty. The FHLBank held collateral from its derivative counterparties valued at $37.4 million and $4.8 million at March 31, 2007 and December 31, 2006, respectively. The FHLBank’s net credit exposure after collateral was approximately $64.6 million and $61.8 million at March 31, 2007 and December 31, 2006, respectively. Additionally, collateral with respect to derivatives with member institutions includes collateral assigned to the FHLBank, as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBank.

Derivative counterparty credit exposure by whole-letter rating (in the event of a split rating, the FHLBank uses the lowest rating published by Moody’s or S&P) as of March 31, 2007 is indicated in Table 34 (in thousands):

Table 34

	AAA		AA		A		Member1		Total
Total net exposure at fair value	$	3,466	$	93,225	$	2,013	$	3,245	$	101,949
Collateral held		0		34,147		0		3,245		37,392
Net exposure after collateral	$	3,466	$	59,078	$	2,013	$	0	$	64,557
Notional amount	$	1,043,194	$	27,743,921	$	7,920,700	$	125,582	$	36,833,397

¹ Collateral held with respect to derivatives with member institutions represents either collateral physically held by or on behalf of the FHLBank or collateral
  assigned to the FHLBank as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBank.

Derivative counterparty credit exposure by whole-letter rating (in the event of a split rating, the FHLBank uses the lowest rating published by Moody’s or S&P) as of December 31, 2006, is indicated in Table 35 (in thousands):

Table 35

	AAA		AA		A		Member1		Total
Total net exposure at fair value	$	205	$	62,977	$	0	$	3,441	$	66,623
Collateral held		0		1,405		0		3,441		4,846
Net exposure after collateral	$	205	$	61,572	$	0	$	0	$	61,777
Notional amount	$	1,123,194	$	26,677,692	$	8,137,900	$	136,876	$	36,075,662

¹ Collateral held with respect to derivatives with member institutions represents either collateral physically held by or on behalf of the FHLBank or collateral
  assigned to the FHLBank as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBank.

Table 36 presents the counterparties that represent five percent or more of net exposure after collateral and their ratings (in the event of a split rating, the FHLBank uses the lowest rating published by Moody’s or S&P) as of March 31, 2007:

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Table 36

		Percent of Total			Percent of Net
		Net Exposure at			Exposure After
Counterparty Name	Counterparty Rating	Fair Value			Collateral
Barclays Bank PLC	AA		14.2	%		20.8	%
Credit Suisse International	AA-		12.3			19.5
Goldman Sachs Capital Markets	AA-		41.7			14.6
Royal Bank of Canada	AA-		8.4			13.3
ABN-AMRO Bank NV	AA-		7.0			11.0
Salomon Swapco	AAA		3.4			5.4
Royal Bank of Scotland PLC	AA		3.3			5.2
All other counterparties			9.7			10.2

Table 37 presents the counterparties that represent five percent or more of net exposure after collateral and their ratings (in the event of a split rating the FHLBank uses the lowest rating published by Moody’s or S&P) as of December 31, 2006:

Table 37

		Percent of Total			Percent of Net
		Net Exposure at			Exposure After
Counterparty Name	Counterparty Rating	Fair Value			Collateral
Barclays Bank PLC	AA		22.5	%		24.3	%
Credit Suisse International	AA-		22.4			24.1
Goldman Sachs Capital Markets	AA-		22.2			21.6
ABN-AMRO Bank NV	AA-		11.3			12.2
Royal Bank of Canada	AA-		7.2			7.8
All other counterparties			14.4			10.0

Liquidity Risk Management– Maintaining the ability to meet obligations as they come due and to meet the credit needs of the FHLBank’s members and housing associates in a timely and cost-efficient manner is the primary objective of managing liquidity risk. The FHLBank seeks to be in a position to meet its customers’ credit and liquidity needs without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. Operational liquidity, or the ability to meet operational requirements in the normal course of business, is defined as sources of cash from both the FHLBank’s ongoing access to the capital markets and its holding of liquid assets. The FHLBank manages its exposure to operational liquidity risk by maintaining appropriate daily average liquidity levels above the thresholds established by the RMP. The FHLBank is also required to manage its contingency liquidity needs by maintaining a daily liquidity level above certain thresholds also outlined in the RMP and by Finance Board regulations. For more detailed information, see Item 7A — “Quantitative and Qualitative Disclosures About Market Risk — Risk Management — Liquidity Risk Management” in the annual report on Form 10-K, incorporated by reference herein.

In addition to meeting statutory, regulatory and operational liquidity requirements, the Finance Board regulations and the FHLBank’s RMP require the FHLBank to maintain contingency liquidity, which is defined as sources of cash the FHLBank may use to meet its operational liquidity requirements for a minimum of five business days without access to the consolidated obligation debt markets. Eligible FHLBank investments for meeting the contingency liquidity requirement are defined below. Both the Finance Board and the FHLBank’s liquidity measures depend on certain assumptions which may or may not prove valid in the event of an actual market disruption. Management believes that under normal operating conditions, routine member borrowing needs and consolidated obligation maturities could be met without access to the consolidated obligation debt markets for at least five business days; however, under extremely adverse market conditions, the FHLBank’s ability to meet a significant increase in member advance demand could be impaired if the FHLBank is denied access to the consolidated obligation debt markets. The FHLBank completes its contingency liquidity calculation weekly, or more often if deemed necessary.

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Table 38 summarizes the FHLBank’s compliance with the Finance Board’s regulatory requirements and the FHLBank’s RMP requirements as of a recently available weekly computation dated May 1, 2007 (in thousands):

Table 38

	May 1, 2007
Sources of Contingency Liquidity:
Marketable securities with a maturity less than one year	$	5,208,583
Self liquidating assets with a maturity of 7 days or less		13,746,939
Securities available for repurchase agreements		3,517,927
Total Sources		22,473,449
Uses of Contingency Liquidity:
20 percent of deposits		192,507
100 percent of consolidated obligations and other borrowings maturing in one week		4,064,461
Less 100 percent of consolidated obligations settling in one week		(500,000	)
100 percent of consolidated obligations expected to be called in one week		320,000
Total Uses		4,076,968
EXCESS CONTINGENCY LIQUIDITY	$	18,396,481

An entity is vulnerable to any rating, event, performance or ratio trigger (collectively called triggers) that would lead to the termination of the entity’s credit availability or the acceleration of repayment of credit obligations owed by the entity. The FHLBank has reviewed the appropriate documents concerning its vulnerability to transactions that contain triggers and understands the manner in which risks can arise from such triggers. Triggers adverse to the FHLBank currently exist in agreements for derivatives and Stand-by Bond Purchase Agreements (SBPAs). The FHLBank’s staff monitors triggers in order to properly manage its potential risks from triggers.

All derivative transactions entered into by the FHLBank, including interest rate swaps, swaptions, caps and floors, have two-way bilateral triggers based on the ratings of the FHLBank or the counterparties, as applicable to the situation (i.e., which party is at risk). These transactions also have two-way rating triggers that provide for early termination, at the option of the FHLBank or the counterparty, if the other party’s rating falls to or below the rating trigger level. Early termination by a counterparty may result in losses to the FHLBank. The FHLBank’s agreements with counterparties incorporate termination triggers at ratings of BBB+ and Baa1 or lower. The triggers are incorporated in a master derivatives credit support annex or bilateral security agreement. Collateral-related triggers are designed to reduce the amount of unsecured credit risk exposure that the FHLBank or a counterparty is willing to accept for a given rating level determined by the Nationally-Recognized Statistical Rating Organizations (NRSRO). The maximum threshold amount of unsecured credit risk exposure for each rating level is defined in Table 39:

Table 39

S&P or Fitch Ratings	Moody’s Ratings	Exposure Threshold
AAA	Aaa	$50 million
AA+, AA, AA-	Aa1, Aa2, Aa3	$15 million
A+, A	A1, A2	$3 million
A-	A3	$1 million
Below A-	Below A3	$0

If the FHLBank’s or a counterparty’s exposure to the other ever exceeds the threshold based on the other’s NRSRO rating, an immediate margin call is issued requiring the party to collateralize the amount of credit risk exposure in excess of the exposure threshold. The agreement with one AAA/Aaa-rated special purpose vehicle also includes one ratings trigger event that would result in termination of any outstanding transactions at a mid-market level. The collateral posted by the FHLBank’s counterparties at March 31, 2007 and December 31, 2006 was in the form of cash.

The FHLBank has executed SBPAs with two in-district state housing finance authorities. All of the SBPAs contain rating triggers beneficial to the FHLBank providing that if the housing finance authority bonds covered by the SBPA are rated below investment grade (BBB/Baa), the FHLBank would not be obligated to purchase the bonds even though the FHLBank was otherwise required to do so under the terms of the SBPA contract. The SBPAs also generally provide that the FHLBank can be replaced as the liquidity provider in these transactions should its rating by a specified NRSRO ever fall below triple-A. As of March 31, 2007 and December 31, 2006, the FHLBank had 24 and 23 SBPAs that covered $763.4 million and $724.3 million in outstanding principal plus interest, respectively.

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Critical Accounting Policies and Estimates

The preparation of the FHLBank’s financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect the FHLBank’s reported results and disclosures. Several of the FHLBank’s accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to the FHLBank’s results. These assumptions and assessments include the following:

• Accounting related to derivatives;

• Fair-value determinations;

• Projecting mortgage prepayments to calculate the amortization of the deferred price components of mortgages and mortgage-related securities held in portfolio; and

• Determining the adequacy of the allowance for credit losses.

Changes in any of the estimates and assumptions underlying the FHLBank’s critical accounting policies could have a material effect on the FHLBank’s financial statements.

The FHLBank’s accounting policies that management believes are the most critical to an understanding of the FHLBank’s financial results and condition and require complex management judgment are described under Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in the annual report on Form 10-K, incorporated by reference herein. There were no substantial changes to the FHLBank’s critical accounting policies and estimates during the three months ended March 31, 2007.

Recently Issued Accounting Standards

Adoption of SFAS 155:The FHLBank adopted SFAS No. 155,Accounting for Certain Hybrid Financial Instruments — An amendment of FASB Statements No. 133 and 140(herein referred to as “SFAS 155”) on January 1, 2007. This statement resolved issues addressed in Statement 133 Implementation Issue No. D1,Application of Statement 133 to Beneficial Interests in Securitized Financial Assets(DIG Issue D1). SFAS 155 amended SFAS 133 to simplify the accounting for certain derivatives embedded in other financial instruments (a hybrid financial instrument) by permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise required bifurcation, provided that the entire hybrid financial instrument is accounted for on a fair value basis. SFAS 155 also establishes the requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, which replaces the interim guidance in DIG Issue D1. SFAS 155 amends SFAS 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a replacement of FASB Statement 125(SFAS 140) to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to beneficial interests other than another derivative financial instrument. The adoption of this statement did not have a material impact on the FHLBank’s financial condition, results of operations or cash flows.

Adoption of DIG Issue B40:In January 2007, the FASB posted Statement 133 Implementation Issue No. B40,Application ofParagraph 13(b) to Securitized Interests in Prepayable Financial Assets(herein referred to as “DIG Issue B40”). DIG Issue B40 provides a narrow scope exception from paragraph 13(b) of SFAS 133 for securitized interests that contain no embedded derivatives other than that which results solely from the embedded call options in the underlying financial asset and for which the right to accelerate settlement is not controlled by the investor. DIG Issue B40 is effective upon adoption of SFAS 155; therefore, the FHLBank adopted DIG Issue B40 on January 1, 2007. The adoption of this statement did not have a material impact on the FHLBank’s financial condition, results of operations or cash flows.

Issuance of SFAS 157:In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (herein referred to as “SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (January 1, 2008 for the FHLBank), and interim periods within those fiscal years. Early adoption is permitted. The FHLBank does not expect the adoption of this statement to have a material impact on its financial condition, results of operations or cash flows.

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Issuance of SFAS 159:In February 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 (herein referred to as “SFAS 159”). SFAS 159 permits the FHLBank to choose to measure eligible financial instruments and certain other items at fair value at specified election dates. Changes in the fair value for the selected items will be recorded in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument, with a few exceptions, is irrevocable and is applied to the entire instrument. SFAS 159 is effective as of the beginning of the FHLBank’s first fiscal year that begins after November 15, 2007 (January 1, 2008 for the FHLBank). The FHLBank has not yet determined the effect that the implementation of SFAS 159 will have on its financial condition, results of operations or cash flows.

Issuance of FSP FIN 39-1:In May 2007, the FASB issued FASB Staff Position (FSP) FIN 39-1 "Amendment of FASB Interpretation No. 39” (herein referred to as “FSP FIN 39-1”). FSP FIN 39-1 amends FASB Interpretation Number (FIN) 39 “Offsetting of Amounts Related to Certain Contracts — An interpretation of APB Opinion No. 10 and FASB Statement No. 105” (herein referred to as “FIN 39”), to replace the terms conditional contracts and exchange contracts with derivative instruments as defined in SFAS. FSP FIN 39-1 permits the FHLBank to offset fair value amounts recognized for cash collateral receivable or payable against fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements in accordance with paragraph 10 of FIN 39. FSP FIN 39-1 requires the FHLBank to consistently offset the derivative fair value and the collateral fair value. The FHLBank will be required to recognize the effects of applying FIN 39-1 through retrospective application to all financial statements presented unless it is impracticable to do so. The FHLBank, upon adoption of FSP FIN 39-1, will be permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007. The FHLBank is currently assessing the impact that adoption of this statement will have on its financial condition, results of operations and cash flows.

Recent Developments

On March 28, 2007, the House of Representatives Financial Services Committee passed the Federal Housing Finance Reform Act of 2007 (H.R. 1427) by a vote of 45-19. It remains unclear whether any change in the regulatory structure of the FHLBanks will be signed into law and what impact such changes may have on the FHLBank if this legislation is enacted. Additionally on April 12, 2007, the Federal Housing Enterprise Regulator Reform Act of 2007 (S. 1100) was introduced in the Senate. There are no other material changes from the legislation and regulatory developments discussed under Item 1 — “Business — Legislative and Regulatory Developments” in the annual report on Form 10-K, incorporated by reference herein.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk Management– The FHLBank measures interest rate risk exposure by various methods, including the calculation of duration of equity and market value of equity.

Duration of Equity (DOE):DOE aggregates the estimated sensitivity of market value for each of the FHLBank’s financial assets and liabilities to changes in interest rates. In essence, DOE indicates the sensitivity of theoretical market value of equity to changes in interest rates. A positive DOE generally indicates that the FHLBank has a degree of interest rate risk exposure in a rising interest rate environment, and a negative DOE indicates a degree of interest rate risk exposure in a declining interest rate environment. Higher DOE numbers, whether positive or negative, indicate greater volatility of market value of equity in response to changing interest rates.

Under the RMP approved by FHLBank’s board of directors, FHLBank’s DOE is limited to a range of +5.0 to -5.0 assuming current interest rates. The FHLBank’s DOE is limited to a range of +7.0 to -7.0 assuming an instantaneous parallel increase or decrease in interest rates of 200 basis points. The DOE parameters established by the FHLBank’s board of directors represent one way to establish limits on the amount of interest rate risk that the FHLBank can accept. If the FHLBank’s DOE was ever to exceed the policy limits established by the board of directors, and especially if this situation were allowed to persist over more than one end-of-month reporting period, management would be subject not only to significant negative action by the board of directors, but likely also punitive action by the Finance Board. The Finance Board has very strong expectations that FHLBank management will adhere to all policy limits established by its board of directors. The FHLBank maintains DOE within the above ranges through management of the durations of its assets, liabilities and derivatives. Significant resources in terms of staffing, software and equipment are continuously devoted to assuring that the level of interest rate risk existing in the FHLBank’s balance sheet is properly measured and limited to prudent and reasonable levels. If the FHLBank’s DOE exceeds the limits established by policy, corrective actions that would be taken may include: (1) the purchase of caps, floors, swaptions or other derivatives, and/or (2) the addition to the balance sheet of assets or liabilities

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having characteristics that are such that they counterbalance any excessive duration observed. Similar actions may be taken if the FHLBank’s DOE exceeds the more narrowly-defined limits to which the FHLBank manages its duration, but the extent of any such action would depend upon existing market conditions, management’s expectations and objectives, and other factors.

The FHLBank calculates its duration each month and reports the results of the DOE calculations to its board of directors monthly and to the Finance Board as of the end of each quarter. While the FHLBank is no longer subject to the Finance Board’s DOE limitations as of the implementation of the FHLBank’s capital plan on September 30, 2004, the FHLBank has retained and incorporated these DOE limits into its RMP. However, as previously discussed, the FHLBank is subject to the Finance Board’s risk-based capital requirements.

Matching the duration of assets with the duration of liabilities funding those assets is accomplished through the use of different debt maturities and embedded option characteristics, as well as the use of derivatives, primarily interest rate swaps, caps, floors and swaptions. Interest rate swaps increase the flexibility of the FHLBank’s funding alternatives by providing desirable cash flows or characteristics that might not be as readily available or cost-effective if obtained in the standard GSE debt market. Finance Board regulation prohibits the speculative use of derivatives, and the FHLBank does not engage in derivatives trading for short-term profit. Because the FHLBank does not engage in the speculative use of derivatives through trading or other activities, the primary risk posed to the FHLBank by derivative transactions is credit risk, in that a counterparty may fail to meet its contractual obligations on a transaction and thereby force the FHLBank to replace the derivative at market price (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Credit Risk Management” under Item 2 for additional information).

Another element of interest rate risk management is the funding of mortgage loans and prepayable assets with liabilities that have similar duration or average cash flow patterns over time. To achieve the desired liability durations, the FHLBank issues debt across a broad spectrum of final maturities. Because the durations of mortgage loan and prepayable assets change as interest rates change, callable debt with similar duration characteristics is frequently issued.

The FHLBank’s duration of equity for recent quarter end dates is indicated in Table 40.

Table 40

	Duration of Equity
Date	Up 200 Bps		Up 100 Bps		Base		Down 100 Bps		Down 200 Bps
03/31/2007		5.4		4.3		2.3		-1.3		-3.9
12/31/2006		5.4		4.5		2.8		-0.6		-3.0
09/30/2006		5.6		4.7		2.9		-0.7		-3.5
06/30/2006		5.3		4.8		3.8		0.6		-3.9
03/31/2006		5.6		5.1		3.5		-0.4		-4.5

The DOE for March 31, 2007 of +2.3 in the base scenario is within management’s typical operating range of ±2.5, and is well within the board of directors’ approved limits of ±5.0. The decrease in DOE in the first quarter of 2007 was primarily caused by a lengthening in the duration of the fixed rate liability portfolio as maturing and called bonds were at least partially replaced with longer duration fixed rate liabilities. FHLBank management issued these long-term, fixed rate consolidated obligations to help offset the extension in the duration of assets and thus ensure that DOE remains well within the approved limits, especially in the up shock scenarios. Also during the first quarter, the FHLBank purchased interest rate caps to partially offset the interest rate caps embedded in the variable rate CMOs acquired in the first quarter. Management continues to closely monitor the FHLBank’s DOE and expects to take additional steps in the second quarter of 2007 to further manage DOE. Any asset/liability actions, such as entering into derivatives or issuing additional bullet or callable fixed rate consolidated obligations, will be targeted to reduce the FHLBank’s overall risk profile, but over time such actions are likely to increase the FHLBank’s cost of funds and thus negatively affect its future profitability.

In calculating DOE, the FHLBank also calculates its duration gap, which is the difference between the duration of its assets and the duration of its liabilities. The FHLBank’s base duration gap was 1.0 months and 1.3 months at March 31, 2007 and December 31, 2006, respectively. The decrease in duration gap during the first three months of the year was the result of the same extension of the duration of the fixed rate liabilities portfolio as noted previously. All 12 FHLBanks are required to submit this number to the Office of Finance as part of the quarterly reporting

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process created by the Finance Board. Management believes that the potential exists for duration gap to substantially understate the level of interest rate risk being taken and that DOE is a more reliable measure of the FHLBank’s interest rate risk.

Market Value of Equity:Market value of equity is the net value of the FHLBank’s assets and liabilities. Estimating sensitivity of the FHLBank’s market value of equity to changes in interest rates is another measure of interest rate risk. However, market value of equity should not be considered indicative of the market value of the FHLBank as a going concern or the value of the FHLBank in a liquidation scenario. The FHLBank maintains a market value of equity within limits specified by the board of directors in the RMP, which specifies that the market value of equity under a ±200 basis-point instantaneous shock in interest rates shall not decline by more than 15 percent from the market value of equity measured in the unchanged interest rate scenario. Table 41 expresses the market value of equity as a percent of book value of equity for the base case and for ±100 basis-point and ±200 basis-point instantaneous interest rate shock scenarios. In all cases, based on the ±200 basis-point shocks, the market value as a percent of book value equals or exceeds 85 percent. The increase in this ratio in the up 200 bps shock scenario from December 31, 2006 to March 31, 2007 is a function of the extension of the duration of the fixed rate liabilities as previously discussed. The decrease in this ratio in the down 200 bps shock scenario from December 31, 2006 to March 31, 2007 is a function of increased issuance of long-term, fixed rate consolidated obligations funding the fixed rate MBS and mortgage loan portfolios. The FHLBank was in compliance with its RMP limitation at the end of each quarter shown.

Table 41 presents market value of equity as a percent of the book value of equity for the quarter end dates indicated.

Table 41

	Market Value of Equity as a Percent of Book Value of Equity
Date	Up 200 Bps		Up 100 Bps		Base		Down 100 Bps		Down 200 Bps
03/31/2007		88		92		95		96		93
12/31/2006		87		92		95		96		94
09/30/2006		86		91		95		96		93
06/30/2006		86		90		94		96		95
03/31/2006		85		90		94		96		93

Detail of Derivative Instruments by Type of Instrument by Type of Risk: Various types of derivative instruments are utilized by the FHLBank to mitigate the interest rate risks described in the preceding section. The FHLBank currently employs derivative instruments by designating them as either a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction; by acting as an intermediary; or in asset/liability management (i.e., an economic hedge). An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities or firm commitments that does not qualify for hedge accounting but is an acceptable hedging strategy under the FHLBank’s RMP. Hedges, designated as fair value or cash flow, are further evaluated to determine whether shortcut hedge accounting, as permitted under SFAS 133, paragraph 68, can be applied. For hedging relationships that do not meet the established criteria for shortcut hedge accounting, the FHLBank formally assesses (both at the hedge’s inception and monthly on an ongoing basis) whether the derivatives that are used have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. The FHLBank typically uses rolling regression analyses to assess the effectiveness of its long haul hedges. See Note 12 – Derivatives and Hedging Activities in the Notes to Financial Statements under Item 1 for information on effectiveness methods used by the FHLBank. The FHLBank determines the hedge accounting to be applied when the hedge is entered into by completing detailed documentation, which includes a checklist with criteria for hedge accounting and additional criteria for shortcut hedge accounting.

Table 42 presents the notional amount, accounting designation and effectiveness method for derivative instruments by risk and by type of derivative used to address the noted risk for the period ended March 31, 2007 (in thousands):

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Table 42

	Notional Amount
	Accounting	Effectiveness	Interest Rate				Purchase
Risk Hedged	Designation	Method	Swaps		Caps/Floors		Commitments		Total
Advances
Interest rate risk associated with embedded caps and floors clearly and closely related	Fair Value Hedge	Dollar Offset	$	0	$	142,500	$	0	$	142,500
Interest rate risk associated with fixed rate non-callable advances	Fair Value Hedge	Shortcut		2,795,000		0		0		2,795,000
Interest rate risk associated with fixed rate convertible advances	Fair Value Hedge	Rolling Regression		5,156,610		0		0		5,156,610
Investments
Fair value risk associated with fixed rate trading investments	Economic Hedge	Not Applicable		647,701		0		0		647,701
Risk of changes in interest rates associated with adjustable rate MBS with embedded caps	Economic Hedge	Not Applicable		0		1,685,000		0		1,685,000
Floors hedging duration of equity risk in a declining interest rate environment	Economic Hedge	Not Applicable		0		200,000		0		200,000
Mortgage Loans Held for Portfolio
Fair value risk associated with fixed rate mortgage purchase commitments	Economic Hedge	Not Applicable		0		0		17,273		17,273
Consolidated Obligation Discount Notes
Risk of changes in interest rates created by asset/liability mismatches	Economic Hedge	Not Applicable		1,250,000		0		0		1,250,000
Consolidated Obligation Bonds
Risk of changes in interest rates creating unacceptable duration changes or increasing costs of funds	Economic Hedge	Not Applicable		450,000		0		0		450,000
Interest rate risk associated with fixed rate callable consolidated obligations	Fair Value Hedge	Rolling Regression		6,316,000		0		0		6,316,000
Interest rate risk associated with fixed rate callable consolidated obligations	Fair Value Hedge	Shortcut		3,720,100		0		0		3,720,100
Interest rate risk associated with fixed rate non-callable consolidated obligations	Fair Value Hedge	Rolling Regression		375,000		0		0		375,000
Interest rate risk associated with fixed rate non-callable consolidated obligations	Fair Value Hedge	Shortcut		1,920,705		0		0		1,920,705

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	Notional Amount
	Accounting	Effectiveness	Interest Rate				Purchase
Risk Hedged	Designation	Method	Swaps		Caps/Floors		Commitments		Total
Interest rate risk associated with fixed rate callable step-up or step-down consolidated obligations	Fair Value Hedge	Rolling Regression		7,719,430		0		0		7,719,430
Interest rate risk associated with zero-coupon callable consolidated obligations	Fair Value Hedge	Rolling Regression		104,536		0		0		104,536
Interest rate risk associated with complex fixed rate consolidated obligations	Fair Value Hedge	Rolling Regression		4,116,925		0		0		4,116,925
Intermediary Derivatives
Interest rate risk associated with intermediary derivative instruments with members	Economic Hedge	Not Applicable		216,617		0		0		216,617
TOTAL			$	34,788,624	$	2,027,500	$	17,273	$	36,833,397

Table 43 presents the fair value (excluding accrued interest) of derivative instruments by risk and by type of instrument used to address the noted risk for the period ended March 31, 2007 (in thousands):

Table 43

	Fair Value
	Accounting	Effectiveness	Interest Rate					Purchase
Risk Hedged	Designation	Method	Swaps			Caps/Floors		Commitments			Total
Advances
Interest rate risk associated with embedded caps and floors clearly and closely related	Fair Value Hedge	Dollar Offset	$	0		$	10	$	0		$	10
Interest rate risk associated with fixed rate non-callable advances	Fair Value Hedge	Shortcut		31,868			0		0			31,868
Interest rate risk associated with fixed rate convertible advances	Fair Value Hedge	Rolling Regression		(34,410	)		0		0			(34,410	)
Investments
Fair value risk associated with fixed rate trading investments	Economic Hedge	Not Applicable		(2,532	)		0		0			(2,532	)
Risk of changes in interest rates associated with adjustable rate MBS with embedded caps	Economic Hedge	Not Applicable		0			2,970		0			2,970
Floors hedging duration of equity risk in a declining interest rate environment	Economic Hedge	Not Applicable		0			1,968		0			1,968
Mortgage Loans Held for Portfolio
Fair value risk associated with fixed rate mortgage purchase commitments	Economic Hedge	Not Applicable		0			0		(9	)		(9	)

63

	Fair Value
	Accounting	Effectiveness	Interest Rate					Purchase
Risk Hedged	Designation	Method	Swaps			Caps/Floors		Commitments			Total
Consolidated Obligation Discount Notes
Risk of changes in interest rates created by asset/liability mismatches	Economic Hedge	Not Applicable		(92	)		0		0			(92	)
Consolidated Obligation Bonds
Risk of changes in interest rates creating unacceptable duration changes or increasing costs of funds	Economic Hedge	Not Applicable		685			0		0			685
Interest rate risk associated with fixed rate callable consolidated obligations	Fair Value Hedge	Rolling Regression		(23,502	)		0		0			(23,502	)
Interest rate risk associated with fixed rate callable consolidated obligations	Fair Value Hedge	Shortcut		(7,588	)		0		0			(7,588	)
Interest rate risk associated with fixed rate non-callable consolidated obligations	Fair Value Hedge	Rolling Regression		3,321			0		0			3,321
Interest rate risk associated with fixed rate non-callable consolidated obligations	Fair Value Hedge	Shortcut		5,170			0		0			5,170
Interest rate risk associated with fixed rate callable step-up or step-down consolidated obligations	Fair Value Hedge	Rolling Regression		(84,623	)		0		0			(84,623	)
Interest rate risk associated with zero-coupon callable consolidated obligations	Fair Value Hedge	Rolling Regression		70,001			0		0			70,001
Interest rate risk associated with complex fixed rate consolidated obligations	Fair Value Hedge	Rolling Regression		(155,413	)		0		0			(155,413	)
Intermediary Derivatives
Interest rate risk associated with intermediary derivative instruments with members	Economic Hedge	Not Applicable		163			0		0			163
TOTAL			$	(196,952	)	$	4,948	$	(9	)	$	(192,013	)

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Table 44 presents the notional amount of derivative instruments by risk and by type of instrument used to address the noted risk for the period ended December 31, 2006 (in thousands):

Table 44

	Notional Amount
	Accounting	Effectiveness	Interest Rate				Purchase
Risk Hedged	Designation	Method	Swaps		Caps/Floors		Commitments		Total
Advances
Interest rate risk associated with embedded caps and floors clearly and closely related	Fair Value Hedge	Dollar Offset	$	0	$	217,500	$	0	$	217,500
Interest rate risk associated with fixed rate non-callable advances	Fair Value Hedge	Shortcut		2,995,000		0		0		2,995,000
Interest rate risk associated with fixed rate convertible advances	Fair Value Hedge	Rolling Regression		5,050,252		0		0		5,050,252
Investments
Fair value risk associated with fixed rate trading investments	Economic Hedge	Not Applicable		699,018		0		0		699,018
Risk of changes in interest rates associated with adjustable rate MBS with embedded caps	Economic Hedge	Not Applicable		0		1,460,000		0		1,460,000
Floors hedging duration of equity risk in a declining interest rate environment	Economic Hedge	Not Applicable		0		200,000		0		200,000
Mortgage Loans Held for Portfolio
Fair value risk associated with fixed rate mortgage purchase commitments	Economic Hedge	Not Applicable		0		0		14,006		14,006
Consolidated Obligation Discount Notes
Risk of changes in interest rates created by asset/liability mismatches	Economic Hedge	Not Applicable		1,000,000		0		0		1,000,000
Consolidated Obligation Bonds
Risk of changes in interest rates creating unacceptable duration changes or increasing costs of funds	Economic Hedge	Not Applicable		450,000		0		0		450,000
Interest rate risk associated with fixed rate callable consolidated obligations	Fair Value Hedge	Rolling Regression		4,741,000		0		0		4,741,000
Interest rate risk associated with fixed rate callable consolidated obligations	Fair Value Hedge	Shortcut		3,635,100		0		0		3,635,100
Interest rate risk associated with fixed rate non-callable consolidated obligations	Fair Value Hedge	Rolling Regression		125,000		0		0		125,000

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	Notional Amount
	Accounting	Effectiveness	Interest Rate				Purchase
Risk Hedged	Designation	Method	Swaps		Caps/Floors		Commitments		Total
Interest rate risk associated with fixed rate non-callable consolidated obligations	Fair Value Hedge	Shortcut		1,835,705		0		0		1,835,705
Interest rate risk associated with fixed rate callable step-up or step-down consolidated obligations	Fair Value Hedge	Rolling Regression		8,414,430		0		0		8,414,430
Interest rate risk associated with zero-coupon callable consolidated obligations	Fair Value Hedge	Rolling Regression		104,536		0		0		104,536
Interest rate risk associated with complex fixed rate consolidated obligations	Fair Value Hedge	Rolling Regression		4,888,375		0		0		4,888,375
Intermediary Derivatives
Interest rate risk associated with intermediary derivative instruments with members	Economic Hedge	Not Applicable		245,740		0		0		245,740
TOTAL			$	34,184,156	$	1,877,500	$	14,006	$	36,075,662

Table 45 presents the fair value (excluding accrued interest) of derivative instruments by risk and by type of instrument used to address the noted risk for the period ended December 31, 2006 (in thousands):

Table 45

	Fair Value
	Accounting	Effectiveness	Interest Rate					Purchase
Risk Hedged	Designation	Method	Swaps			Caps/Floors		Commitments		Total
Advances
Interest rate risk associated with embedded caps and floors clearly and closely related	Fair Value Hedge	Dollar Offset	$	0		$	76	$	0	$	76
Interest rate risk associated with fixed rate non-callable advances	Fair Value Hedge	Shortcut		44,653			0		0		44,653
Interest rate risk associated with fixed rate convertible advances	Fair Value Hedge	Rolling Regression		(23,472	)		0		0		(23,472	)
Investments
Fair value risk associated with fixed rate trading investments	Economic Hedge	Not Applicable		(81	)		0		0		(81	)
Risk of changes in interest rates associated with adjustable rate MBS with embedded caps	Economic Hedge	Not Applicable		0			4,294		0		4,294
Floors hedging duration of equity risk in a declining interest rate environment	Economic Hedge	Not Applicable		0			1,748		0		1,748

66

	Fair Value
	Accounting	Effectiveness	Interest Rate					Purchase
Risk Hedged	Designation	Method	Swaps			Caps/Floors		Commitments			Total
Mortgage Loans Held for Portfolio
Fair value risk associated with fixed rate mortgage purchase commitments	Economic Hedge	Not Applicable		0			0		(31	)		(31	)
Consolidated Obligation Discount Notes
Risk of changes in interest rates created by asset/liability mismatches	Economic Hedge	Not Applicable		94			0		0			94
Consolidated Obligation Bonds
Risk of changes in interest rates creating unacceptable duration changes or increasing costs of funds	Economic Hedge	Not Applicable		815			0		0			815
Interest rate risk associated with fixed rate callable consolidated obligations	Fair Value Hedge	Rolling Regression		(33,473	)		0		0			(33,473	)
Interest rate risk associated with fixed rate callable consolidated obligations	Fair Value Hedge	Shortcut		(10,793	)		0		0			(10,793	)
Interest rate risk associated with fixed rate non-callable consolidated obligations	Fair Value Hedge	Rolling Regression		2,501			0		0			2,501
Interest rate risk associated with fixed rate non-callable consolidated obligations	Fair Value Hedge	Shortcut		1,946			0		0			1,946
Interest rate risk associated with fixed rate callable step-up or step-down consolidated obligations	Fair Value Hedge	Rolling Regression		(117,239	)		0		0			(117,239	)
Interest rate risk associated with zero-coupon callable consolidated obligations	Fair Value Hedge	Rolling Regression		66,605			0		0			66,605
Interest rate risk associated with complex fixed rate consolidated obligations	Fair Value Hedge	Rolling Regression		(199,146	)		0		0			(199,146	)
Intermediary Derivatives
Interest rate risk associated with intermediary derivative instruments with members	Economic Hedge	Not Applicable		197			0		0			197
TOTAL			$	(267,393	)	$	6,118	$	(31	)	$	(261,306	)

Item 4. Controls and Procedures

Disclosure Controls and Procedures.The FHLBank’s senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be

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disclosed by the FHLBank in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. The FHLBank’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the FHLBank in the reports that it files or submits under the Exchange Act is accumulated and communicated to the FHLBank’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the FHLBank’s disclosure controls and procedures, the FHLBank’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 FHLBank’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

Management of the FHLBank 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) as of the end of the quarterly period covered by this report. Based upon that evaluation, the CEO and CFO have concluded that the FHLBank’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal quarter covered by this report.

Internal Control over Financial Reporting.There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2007.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The FHLBank is subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on the FHLBank’s financial condition or results of operations.

Item 1A. Risk Factors.

For a discussion of certain risks applicable to the FHLBank, see Item 1A – “Risk Factors” in the annual report on Form 10-K, incorporated by reference herein. There were no material changes during the quarter in the Risk Factors described in the annual report on Form 10-K.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6: Exhibits

Exhibit
No.	Description
31.1	Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of President and Chief Executive Officer and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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 Topeka
Date: May 15, 2007	By:	/s/ Andrew J. Jetter
		Andrew J. Jetter
		President and Chief Executive Officer
Date: May 15, 2007	By:	/s/ Mark E. Yardley
		Mark E. Yardley
		Executive Vice President and Chief Financial Officer

69