Federal Home Loan Bank of Chicago 10-Q 2007 Q2 Quarterly report

Federal Home Loan Bank of Chicago

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2007

OR

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

For the transition period from            to            

Commission File No. 000-51401

FEDERAL HOME LOAN BANK OF CHICAGO

(Exact name of registrant as specified in its charter)

Federally chartered corporation	36-6001019
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
111 East Wacker Drive Chicago, IL	60601
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:(312) 565-5700

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. Yesx    No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

                        Large accelerated filer  ¨                            Accelerated filer  ¨                            Non-accelerated filerx                          

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

There were 26,594,698 shares of registrant’s capital stock outstanding as of July 31, 2007.

1

Federal Home Loan Bank of Chicago

TABLE OF CONTENTS

PART I
Item 1	Financial Statements
	Statements of Condition (unaudited) at June 30, 2007 and December 31, 2006	3
	Statements of Income (unaudited) for the three and six months ended June 30, 2007 and 2006	4
	Statements of Capital (unaudited) for the six months ended June 30, 2007 and 2006	5
	Statements of Cash Flows (unaudited) for the six months ended June 30, 2007 and 2006	6
	Notes to Financial Statements (unaudited)	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4	Controls and Procedures	42
Item 4T	Controls and Procedures	42
PART II
Item 1	Legal Proceedings	43
Item 1A	Risk Factors	43
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3	Defaults Upon Senior Securities	43
Item 4	Submission of Matters to a Vote of Security Holders	43
Item 5	Other Information	43
Item 6	Exhibits	43
	Signatures	S-1

2

Federal Home Loan Bank of Chicago

PART I

Item 1. Financial Statements

Statements of Condition (unaudited)

(Dollars in millions, except par value)

	June 30,           2007			December 31,           2006
Assets
Cash and due from banks	$	25		$	23
Federal Funds sold and securities purchased under agreements to resell		12,826			6,470
Investment securities -
Trading ($537 and $331 pledged)		622			532
Available-for-sale ($643 and $825 pledged)		2,808			3,097
Held-to-maturity 1 ($339 and $302 pledged)		12,102			11,915
Advances		23,836			26,179
MPF Loans held in portfolio, net of allowance for loan losses ($1 and $1)		35,963			37,944
Accrued interest receivable		384			379
Derivative assets		53			41
Software and equipment, net		47			51
Other assets		79			83
Total Assets	$	88,745		$	86,714
Liabilities and Capital Liabilities
Deposits -
Interest bearing ($12 and $11 from other FHLBs)	$	741		$	1,379
Non-interest bearing		122			114
Total deposits		863			1,493
Securities sold under agreements to repurchase		1,200			1,200
Consolidated obligations, net -
Discount notes		14,343			11,166
Bonds		67,159			67,744
Total consolidated obligations, net		81,502			78,910
Accrued interest payable		666			690
Mandatorily redeemable capital stock		19			14
Derivative liabilities		249			195
Affordable Housing Program assessment payable		54			63
Resolution Funding Corporation assessment payable		7			9
Other liabilities		51			57
Subordinated notes		1,000			1,000
Total Liabilities		85,611			83,631
Commitments and contingencies (Note 14)
Capital
Capital stock - putable ($100 par value per share) issued and outstanding shares - 26 million and 26 million shares		2,637			2,587
Retained earnings		617			606
Accumulated other comprehensive income (loss)		(120	)		(110	)
Total Capital		3,134			3,083
Total Liabilities and Capital	$	88,745		$	86,714

¹ Fair values: $11,965 and $11,872 at June 30, 2007 and December 31, 2006.

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

3

Federal Home Loan Bank of Chicago

Statements of Income (unaudited)

(In millions)

	Three months ended June 30,						Six months ended June 30,
	2007			2006			2007			2006
Interest income	$	1,122		$	1,071		$	2,234		$	2,081
Interest expense		1,053			956			2,094			1,845
Net interest income before provision for credit losses		69			115			140			236
Provision for credit losses		-			-			-			-
Net interest income		69			115			140			236
Non-interest income (loss) -
Trading securities		(10	)		(19	)		(8	)		(46	)
Sale of available-for-sale securities		-			1			-			(3	)
Derivatives and hedging activities		8			5			(5	)		16
Early extinguishment of debt transferred to other FHLBs		-			-			-			4
Other		2			3			3			3
Total non-interest income (loss)		-			(10	)		(10	)		(26	)
Non-interest expense -
Compensation and benefits		18			15			36			30
Amortization and depreciation of software and equipment		5			5			10			9
Finance Board and Office of Finance expenses		1			2			2			3
Other expense		8			9			14			18
Total non-interest expense		32			31			62			60
Income before assessments		37			74			68			150
Assessments -
Affordable Housing Program		4			6			6			12
Resolution Funding Corporation		6			14			12			28
Total assessments		10			20			18			40
Net Income	$	27		$	54		$	50		$	110

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

4

Federal Home Loan Bank of Chicago

Statements of Capital (unaudited)

(Dollars and shares in millions)

	Capital Stock - Putable					Retained   Earnings			Accumulated Other   Comprehensive   Income (Loss)			Total   Capital
	Shares		Value
Balance, December 31, 2005	38		$	3,759		$	525		$	(146	)	$	4,138
Comprehensive income -
Net income							110						110
Other comprehensive income (loss) -
Net unrealized gain (loss) on available-for-sale securities										(16	)		(16	)
Net unrealized gain (loss) on hedging activities										36			36
Total other comprehensive income (loss)							-			20			20
Total comprehensive income							110			20			130
Proceeds from issuance of capital stock	-			21									21
Reclassification of capital stock to mandatorily redeemable	(8	)		(820	)								(820	)
Cash dividends on capital stock (3.05% - annualized rate)	-			-			(56	)					(56	)
Balance, June 30, 2006	30		$	2,960		$	579		$	(126	)	$	3,413
Balance, December 31, 2006	26		$	2,587		$	606		$	(110	)	$	3,083
Comprehensive income -
Net income							50						50
Other comprehensive income (loss) -
Net unrealized gain (loss) on available-for-sale securities										(3	)		(3	)
Net unrealized gain (loss) on hedging activities										(7	)		(7	)
Total other comprehensive income (loss)										(10	)		(10	)
Total comprehensive income							50			(10	)		40
Proceeds from issuance of capital stock	-			57									57
Reclassification of capital stock to mandatorily redeemable	-			(7	)								(7	)
Cash dividends on capital stock (2.95% - annualized rate)	-			-			(39	)					(39	)
Balance, June 30, 2007	26		$	2,637		$	617		$	(120	)	$	3,134

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

5

Federal Home Loan Bank of Chicago

Statements of Cash Flows (unaudited)

(In millions)

	Six months ended June 30,	2007		2006
Operating	Net income	$	50	$	110
Activities	Adjustments to reconcile net income to net cash provided by (used in) operating activities -
	Amortization and depreciation		35		63
	Change in net fair value adjustment on trading securities and derivatives and hedging activities		29		115
	Other adjustments, incl. $0 and $(4) from early extinguishment of debt transferred to other FHLBs		(2)		(3)
	Net change in -
	Trading securities		(97)		257
	Accrued interest receivable		(6)		(28)
	Other assets		(22)		(21)
	Accrued interest payable		(24)		103
	Other liabilities		(19)		(13)
	Total adjustments		(106)		473
	Net cash provided by (used in) operating activities		(56)		583
Investing	Net change in Federal Funds sold and securities purchased under agreements to resell		(6,356)		(2,094)
Activities	Change in advances, net		2,325		107
	MPF Loans -
	Purchases, incl. $(44) and $(255) from other FHLBs		(691)		(807)
	Payments		2,576		2,893
	Held-to-maturity securities -
	Short-term held-to-maturity securities, net1		(1,031)		308
	Purchases		(9)		(3,655)
	Proceeds from maturities		858		503
	Available-for-sale securities -
	Purchases		(110)		(1,795)
	Proceeds from maturities and sales		395		1,023
	Proceeds from sale of foreclosed assets		28		26
	Capital expenditures for software and equipment		(5)		(7)
	Net cash provided by (used in) investing activities		(2,020)		(3,498)
Financing	Net change in deposits, incl. $1 and $0 from other FHLBs		(630)		175
Activities	Net proceeds from issuance of consolidated obligations -
	Discount notes		502,848		336,287
	Bonds, incl. $0 and $65 transferred from other FHLBs		11,856		13,283
	Payments for maturing and retiring consolidated obligations -
	Discount notes		(499,654)		(339,137)
	Bonds, incl. $(85) and $(485) transferred to other FHLBs		(12,358)		(7,659)
	Net proceeds from issuance of subordinated notes		-		994
	Proceeds from issuance of capital stock		57		21
	Redemptions of mandatorily redeemable capital stock		(2)		(1,000)
	Cash dividends paid		(39)		(56)
	Net cash provided by (used in) financing activities		2,078		2,908
	Net increase (decrease) in cash and due from banks		2		(7)
	Cash and due from banks at beginning of year		23		33
	Cash and due from banks at end of period	$	25	$	26
Supplemental	Interest paid	$	2,067	$	1,753
Disclosures	Affordable Housing Program assessments paid		15		17
	Resolution Funding Corporation assessments paid		15		26
	Capital stock reclassed to mandatorily redeemable capital stock		7		820
	Transfer of MPF Loans to real estate owned		27		20

¹  Short-term held-to-maturity securities consist of investments that had a maturity of less than three months when purchased.

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

6

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

Note 1 – Basis of Presentation

The Federal Home Loan Bank of Chicago¹, a federally chartered corporation and member-owned cooperative, is one of 12 Federal Home Loan Banks (the “FHLBs”) which, with the Federal Housing Finance Board (the “Finance Board”) and the Office of Finance, comprise the Federal Home Loan Bank System (the “System”). The 12 FHLBs are government-sponsored enterprises (“GSE”) of the United States of America and are organized under the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”). Each FHLB has members in a specifically defined geographic district. Our defined geographic district consists of the states of Illinois and Wisconsin.

We provide credit to our members principally in the form of secured loans called “advances.” We also provide funding for home mortgage loans to members approved as Participating Financial Institutions (“PFIs”) through the Mortgage Partnership Finance^® (“MPF^®”) Program². We also invest in other Acquired Member Assets (“AMA”) such as MPF Shared Funding^® securities. AMA are assets acquired from or through FHLB members or eligible housing associates by means of either a purchase or a funding transaction, subject to Finance Board regulations. These programs help us accomplish our mission of supporting the growth and success of our members.

Our accounting and financial reporting policies conform to generally accepted accounting principles in the United States of America (“GAAP”). The preparation of the unaudited financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses. Actual results could differ from those estimates. Certain amounts in the prior period have been reclassified to conform to the current presentation.

In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2006, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

¹ Unless otherwise specified, references to “we,” “us,” “our,” and “the Bank” are to the Federal Home Loan Bank of Chicago.

² “Mortgage Partnership Finance,” “MPF,” “MPF Shared Funding,” and “eMPF” are registered trademarks of the Federal Home Loan Bank of Chicago.

Note 2 – Business Developments

On May 1,2007, we conducted a reduction-in-force. In connection with this and other planned reductions through the remainder of 2007, we recognized a charge to second quarter income before assessments of $4 million which was recorded as a component of compensation and benefits.

On April 23, 2007, ABN Amro Holding NV announced a merger agreement with Barclays PLC. ABN Amro is the parent of our member La Salle Bank NA. Separately, ABN Amro agreed to sell LaSalle Bank to Bank of America Corporation. Despite a counter bid from a consortium headed by Royal Bank of Scotland to also acquire ABN Amro, on July 13, 2007 the Dutch Supreme Court confirmed that the LaSalle Bank sale to Bank of America can proceed. Bank of America is headquartered outside of our district in Charlotte, North Carolina. Bank of America subsidiaries maintain memberships with the FHLBs of Atlanta, Boston, San Francisco, and Seattle. At June 30, 2007 we held $2.8 billion par value of advances outstanding to LaSalle Bank which represented 12% of the total par value of advances outstanding. LaSalle Bank held capital stock of $230 million at June 30, 2007 which represented 9% of our capital stock balance.

On May 1, 2007 National City Corporation announced a definitive agreement to acquire MAF Bancorp, Inc., which is the parent of our member MidAmerica Bank. National City Corporation is headquartered outside of our district in Cleveland, Ohio and its subsidiary National City Bank is a member of the FHLB of Cincinnati. At June 30, 2007 we held $1.1 billion par value of advances outstanding to MidAmerica Bank which represented 5% of the total par value of advances outstanding. MidAmerica Bank held capital stock of $146 million at June 30, 2007 which represented 5% of our capital stock balance.

Accounting and Reporting Developments

SFAS 157–In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under accounting pronouncements that require fair value measurements, and expands disclosures about fair value measurements. In particular, fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

SFAS 157 requires that fair value measurements be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for fiscal years that begin after November 15, 2007. We will adopt SFAS 157 on January 1, 2008. SFAS 157 does

7

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

not require any new fair value measurements but may change our current practice. We have not yet determined the impact, if any, that the implementation of SFAS 157 will have on our results of operations or financial condition.

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”(“SFAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value. The FASB’s objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently (e.g. fair value versus amortized cost) without having to apply complex hedge accounting provisions. The fair value option may be applied, with a few exceptions, on an instrument by instrument basis. The election is irrevocable unless a new election date occurs. The election must be applied to the entire financial instrument and not to only specified risks, cash flows, or portions of that financial instrument. Certain financial instruments, such as deposit liabilities, are not eligible for the fair value option.

The difference between the carrying amount and the fair value of eligible items for which the fair value option is elected at the effective date will be removed from the statement of condition and included in the cumulative effect adjustment. Those differences may include, but are not limited to, (a) unamortized concession fees, premiums, and discounts; (b) allowance for loan losses; and (c) accrued interest, which would be reported as part of the fair value of the eligible item. Available-for-sale (“AFS”) and held-to-maturity (“HTM”) securities held at the effective date are eligible for the fair value option at that date. If the fair value option is elected for any of those securities at the effective date, cumulative unrealized gains and losses at that date will be in included in the cumulative-effect adjustment. Upfront costs and fees related to items for which the fair value option is elected will be recognized as incurred rather than deferred and amortized.

SFAS 159 is effective for fiscal years that begin after November 15, 2007. We will adopt SFAS 159 on January 1, 2008 consistent with our adoption of SFAS 157. We have

not yet determined the impact, if any, that the implementation of SFAS 159 will have on our results of operations or financial condition.

DIG Issue G26– In January 2007, the FASB cleared guidance for SFAS 133, Implementation Issue No. G26“Hedging Interest Cash Flows on Variable-Rate Assets andLiabilities That Are Not Based on a Benchmark Interest Rate” (“DIG Issue G26”). DIG Issue G26 limits the ability to use a cash flow hedge on a variable-rate financial asset or liability. Specifically, the risk being hedged cannot be designated as interest rate risk unless the cash flows of the hedged transaction are explicitly based on the same benchmark interest rate. We adopted DIG Issue G26 effective April 1, 2007. It did not have an impact on our results of operations or financial condition as we have no existing cash flow hedges related to any long-term variable-rate financial asset or liability that are not explicitly based on a benchmark interest rate.

FIN 39-1 – On April 30, 2007 the FASB issued FASB Staff Position (“FSP”) FIN 39-1,“Amendment of FASB Interpretation No. 39”. Under FSP FIN 39-1, we may offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or an obligation to return cash collateral (a payable) arising from derivative instrument(s) recognized at fair value. The receivable or payable related to collateral may not be offset if the amount recognized does not represent or approximate fair value. The decision whether or not to offset fair value amounts represents an elective accounting policy decision. Once elected, the accounting policy must be applied on a consistent basis. We will adopt FSP FIN 39-1 effective January 1, 2008.

Our current accounting policy is to offset derivative instruments of the same counterparty under a master netting arrangement. We have decided to continue this policy. As a result, we also will offset cash collateral upon adoption of this FSP on January 1, 2008. The effects of applying this FSP are to be recognized as a change in accounting principle through retrospective application for all financial statements presented. The effect at the time of adoption is not expected to be material for any financial statements presented.

8

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

Note 3 – Interest Income and Interest Expense

The following table presents interest income and interest expense for the periods indicated:

	Three months ended June 30,				Six months ended June 30,
	2007		2006		2007		2006
Interest Income -
Federal Funds sold and securities purchased under agreements to resell	$	149	$	107	$	269	$	194
Investment securities -
Trading		8		14		16		30
Available-for-sale		37		24		76		47
Held-to-maturity		154		124		311		224
Advances		308		294		621		562
MPF Loans held in portfolio		475		518		960		1,045
Less: Credit enhancement fees paid		(9)		(10)		(19)		(21)
MPF Loans held in portfolio, net		466		508		941		1,024
Total interest income		1,122		1,071		2,234		2,081
Interest Expense -
Deposits		12		13		28		24
Securities sold under agreements to repurchase		25		22		49		42
Consolidated obligation -
Discount notes		173		190		336		375
Bonds		828		727		1,652		1,398
Total consolidated obligations		1,001		917		1,988		1,773
Mandatorily redeemable capital stock		-		1		-		3
Subordinated notes		15		3		29		3
Total interest expense		1,053		956		2,094		1,845
Net interest income before provision for credit losses		69		115		140		236
Provision for credit losses		-		-		-		-
Net interest income	$	69	$	115	$	140	$	236

Note 4 – Investment Securities

Securities issued by GSEs are not guaranteed by the United States government. For accounting policies concerning our investment securities see Note 6 on page F-12 in our 2006 Form 10-K.

The following table presents the fair value of trading securities, including Mortgage-Backed Securities (“MBS”) as of the dates indicated:

	June 30, 2007		December 31, 2006
GSEs	$	552	$	447
Consolidated obligations of other FHLBs		25		25
Total non-MBS		577		472
MBS: GSEs		29		33
Government-guaranteed		6		6
Privately issued MBS		10		21
Total MBS		45		60
Total trading securities	$	622	$	532

9

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

Maturity Terms

The following table presents the amortized cost and fair value of AFS and HTM securities by contractual maturity as of June 30, 2007. Expected maturities of some securities and MBS may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment fees.

	Available-For-Sale				Held-To-Maturity
Year of Maturity As of June 30, 2007	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Non-MBS-
Due in one year or less	$	612	$	611	$	3,083	$	3,082
One year to five years		136		133		33		33
Five years to ten years		61		58		44		44
Due after ten years		-		-		62		62
Total non-MBS		809		802		3,222		3,221
Total MBS		2,010		2,006		8,880		8,744
Total	$	2,819	$	2,808	$	12,102	$	11,965

10

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

Amortized Cost and Fair Value

The following tables present the amortized cost and fair value of AFS and HTM securities as of the dates indicated.

	Available-For-Sale								Held-to-Maturity
June 30, 2007	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Commercial paper	$	-	$	-	$	-	$	-	$	2,524	$	-	$	(1)	$	2,523
Government-sponsored enterprises		809		-		(7)		802		100		-		-		100
State or local housing agency obligations		-		-		-		-		60		-		-		60
Small Business Administration/ Small Business Investment Companies		-		-		-		-		538		1		(1)		538
Total non-MBS		809		-		(7)		802		3,222		1		(2)		3,221
MBS:    GSEs		65		-		(5)		60		5,183		6		(118)		5,071
Government-               guaranteed		-		-		-		-		26		-		-		26
MPF Shared               Funding		-		-		-		-		351		-		(21)		330
Privately               issued		1,945		1		-		1,946		3,320		6		(9)		3,317
Total MBS		2,010		1		(5)		2,006		8,880		12		(148)		8,744
Total	$	2,819	$	1	$	(12)	$	2,808	$	12,102	$	13	$	(150)	$	11,965
December 31, 2006
Commercial paper	$	-	$	-	$	-	$	-	$	1,367	$	-	$	-	$	1,367
Government-sponsored enterprises		1,010		-		(7)		1,003		150		-		(1)		149
State or local housing agency obligations		-		-		-		-		65		-		-		65
Small Business Administration/ Small Business Investment Companies		-		-		-		-		656		-		-		656
Total non-MBS		1,010		-		(7)		1,003		2,238		-		(1)		2,237
MBS:    GSEs		70		-		(4)		66		5,560		22		(66)		5,516
Government-               guaranteed		-		-		-		-		36		-		-		36
MPF Shared               Funding		-		-		-		-		369		-		(16)		353
Privately               issued		2,025		3		-		2,028		3,712		19		(1)		3,730
Total MBS		2,095		3		(4)		2,094		9,677		41		(83)		9,635
Total	$	3,105	$	3	$	(11)	$	3,097	$	11,915	$	41	$	(84)	$	11,872

11

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

The amortized cost of our MBS classified as AFS included net discounts of less than $1 million at both June 30, 2007 and December 31, 2006. The amortized cost of our MBS classified as HTM included net discounts of $6 million and $7 million at June 30, 2007 and December 31, 2006.

Unrealized Losses

Included in the $12 million of gross unrealized losses on AFS securities at June 30, 2007, was $10 million of unrealized losses that have existed for a period greater than 12 months. These securities are GSE obligations or are rated AAA. The unrealized losses are due to overall increases in market interest rates, including spreads, from when the securities were originally purchased.

All of the AFS securities with unrealized losses aged greater than 12 months have a market value at June 30, 2007, that is within 94% of their respective amortized cost bases. We do not believe any other-than-temporary impairment existed with respect to our AFS investment securities as of June 30, 2007. The overall decline in value is considered temporary as we have the intent and ability to hold these investments to recovery in market value during the current interest rate cycle.

Included in the $150 million of gross unrealized losses on HTM securities at June 30, 2007, was $121 million of unrealized losses that have existed for a period greater than 12 months. These securities are GSE obligations or are predominantly rated AAA. The unrealized losses are due to overall increases in market interest rates, including spreads, from when the securities were originally purchased.

All of the HTM securities with unrealized losses aged greater than 12 months have a market value at June 30, 2007, that is within 92% of their respective amortized cost bases. We do not believe any other-than-temporary impairment existed with respect to our HTM investment securities as of June 30, 2007. The overall decline in value is considered temporary as we have the intent and ability to hold these investments to maturity and we expect to collect all contractual principal payments and interest.

Gains and Losses on Investment Securities

The net gain (loss) on trading securities for the periods indicated, were as follows:

Three months ended June 30,	2007			2006
Net realized gain (loss)	$	(1	)	$	(3	)
Net unrealized gain (loss)		(9	)		(16	)
Net gain (loss) on trading securities	$	(10	)	$	(19	)
Six months ended June 30,
Net realized gain (loss)	$	(1	)	$	(3	)
Net unrealized gain (loss)		(7	)		(43	)
Net gain (loss) on trading securities	$	(8	)	$	(46	)

The realized gains and losses from sales of AFS securities for the periods indicated were as follows:

Three months ended June 30,	2007		2006
Realized gain	$	-	$	1
Realized loss		-		-
Net realized gain (loss) from sale of AFS securities	$	-	$	1
Six months ended June 30,
Realized gain	$	-	$	1
Realized loss		-		(4	)
Net realized gain (loss) from sale of AFS securities	$	-	$	(3	)

12

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

Note 5 – Advances

For accounting policies concerning advances see Note 7 on page F-16 in our 2006 Form 10-K. We had advances outstanding to members at interest rates ranging from 2.24% to 8.47% at June 30, 2007 with contractual maturities summarized below:

Redemption Terms

June 30, 2007	Amount		Weighted   Average Interest   Rate
Due in one year or less	$	8,881	4.88%
One to two years		3,107	4.85%
Two to three years		4,125	4.41%
Three to four years		2,353	5.12%
Four to five years		1,141	4.86%
Thereafter		4,310	4.50%
Total par value		23,917	4.75%
SFAS 133 hedging adjustments		(81)
Total advances	$	23,836

At June 30, 2007 and December 31, 2006, we had $4.5 billion and $4.2 billion of putable advances outstanding and as of both dates had $100 million of fixed-rate callable advances outstanding.

Some of our advances are concentrated with commercial banks and thrift members that individually borrowed 10% or more of our total advances. LaSalle Bank N.A. held $2.8 billion at June 30, 2007 and $4.4 billion at December 31, 2006, which represented 12% and 17% of the total par value outstanding at those dates. M&I Marshall & Ilsley Bank held $2.4 billion or 10% of our outstanding advances at June 30, 2007 and $2.4 billion or 9% at December 31, 2006. We held sufficient collateral to cover the par value of these advances and do not expect to incur any credit losses. ABN Amro agreed to sell LaSalle Bank to Bank of America, see Note 2 on page 7 in this Form 10-Q for further information.

Note 6 – MPF Loans Held in Portfolio

We invest in mortgage loans through the MPF Program, a secondary mortgage market structure under which we purchase and fund eligible mortgage loans from, or through, PFIs and purchase participations in pools of eligible mortgage loans from other FHLBs (collectively, “MPF Loans”).

For accounting policies concerning MPF Loans held in portfolio see Note 8 on page F-18 in our 2006 Form 10-K.

The following table summarizes MPF Loan information as of the dates indicated:

	June 30,     2007		December 31,     2006
MPF Loans - single-family mortgages
Fixed-rate medium term:1
Conventional	$	11,732	$	12,605
Government3		298		328
Total fixed-rate medium term		12,030		12,933
Fixed-rate long term:2
Conventional		19,249		19,890
Government3		4,544		4,890
Total fixed-rate long term		23,793		24,780
Total par value of MPF Loans		35,823		37,713
Agent fees, premium (discount)		192		211
Loan commitment basis adjustment		(14)		(14)
SFAS 133 hedging adjustments		(38)		34
Receivable from future performance credit enhancement fees		1		1
Allowance for loan loss		(1)		(1)
Total MPF Loans held in portfolio, net	$	35,963	$	37,944

¹ The original term to maturity is 15 years or less.

² The original term to maturity is greater than 15 years.

³ Government is comprised of FHA, HUD, VA or Rural Housing Service loans which are insured or guaranteed governmental programs.

MPF Loans are placed on non-performing (non-accrual) status when it is determined that the collection of interest or principal is doubtful or when interest or principal is past due for 90 days or more, except when the MPF Loan is well secured and in the process of collection. We do not place MPF Loans on non-performing status where losses are not expected to be incurred as a result of the PFI’s assumption of credit risk on MPF Loans by providing credit enhancement protections. At June 30, 2007 and December 31, 2006, we had $8 million and $6 million of MPF Loans on non-performing status.

MPF Loans that are on non-performing status and that are viewed as collateral dependent loans are considered impaired. MPF Loans are viewed as collateral dependent loans when repayment is expected to be provided solely by the sale of the underlying property and there are no other available and reliable sources of repayment. We had impaired MPF Loans of $3 million at the end of both June 30, 2007 and December 31, 2006. We had no allowance on these loans at either date.

13

Federal Home Loan Bank of Chicago

Notes to Financial Statements- (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

For the three month period ended June 30, 2007 and 2006, the average balance of impaired MPF Loans was $3 and $5 million. Interest income recognized on impaired MPF Loans was less than $1 million for both periods. For the six month period ended June 30, 2007 and 2006 the average balance of impaired MPF Loans was $3 and $6 million. Interest income recognized on impaired MPF Loans was less than $1 million for both periods.

Where assets have been received in satisfaction of debt or as a result of actual foreclosures and in-substance foreclosures, MPF Loans are reclassified at fair value to real estate owned in other assets. We had $24 million in MPF Loans classified as real estate owned in other assets, which had been foreclosed but not yet liquidated at June 30, 2007 and $21 million at December 31, 2006.

For further detail on MPF Loans classified as non-performing, impaired, or real estate owned see Note 8 on page F-18 in our 2006 Form 10-K.

Note 7– Consolidated Obligations

For accounting policies and additional information concerning consolidated obligations see Note 13 on page F-22 in our 2006 Form 10-K.

Interest Rate Payment Terms

The following table presents the types of consolidated obligations for which we are the primary obligor as of the dates indicated. All discount notes are due within one year.

	June 30,     2007		December 31,     2006
Consolidated obligation bonds:
Fixed-rate non-callable	$	37,370	$	37,119
Fixed-rate callable		29,273		29,656
Zero coupon		2,150		2,150
Variable-rate		175		517
Step-up		150		160
Inverse floating rate		50		50
Total par value		69,168		69,652
Bond discounts, net		(1,510)		(1,514)
SFAS 133 hedging adjustments		(499)		(394)
Total consolidated obligation bonds	$	67,159	$	67,744
Discount Notes:
Par value	$	14,398	$	11,226
Book value	$	14,343	$	11,166

Redemption Terms

The following table summarizes consolidated obligation bonds for which we were the primary obligor at June 30, 2007 by contractual maturity:

June 30, 2007	Amount		Weighted   Average Interest   Rate
Due in one year or less	$	10,610	3.76%
One to two years		8,859	4.19%
Two to three years		10,366	4.87%
Three to four years		8,554	4.84%
Four to five years		6,670	5.44%
More than five years		24,109	4.79%
Total par value		69,168	4.64%
Bond discounts, net		(1,510)
SFAS 133 hedging adjustments		(499)
Total consolidated obligation bonds	$	67,159

Note 8 – Subordinated Notes

Subordinated notes are unsecured obligations and rank junior in priority of payment to our “senior liabilities.” Senior liabilities include all of our existing and future liabilities, such as deposits, consolidated obligations for which we are the primary obligor, and consolidated obligations of the other FHLBs for which we are jointly and severally liable. With respect to consolidated obligations for which we are jointly and severally liable, we may under certain circumstances, (1) have immediate payment obligations and (2) be designated as primary obligor. For further description of our subordinated notes see Note 14 on page F-24 in our 2006 Form 10-K.

In connection with our issuance of subordinated notes, the Finance Board granted approvals and waivers to allow us to include a percentage of the outstanding principal amount of the subordinated notes (the “Designated Amount”) in determining compliance with our regulatory capital and minimum regulatory leverage ratio requirements and in calculating our maximum permissible holdings of MBS, and unsecured credit, subject to phase-outs beginning in the sixth year following issuance, as follows:

Time Period	Percentage of     Designated     Amount	Designated     Amount     Included
Issuance through June 13, 2011	100%	$	1,000
June 14, 2011 to June 13, 2012	80%		800
June 14, 2012 to June 13, 2013	60%		600
June 14, 2013 to June 13, 2014	40%		400
June 14, 2014 to June 13, 2015	20%		200
June 14, 2015 to June 13, 2016	0%		-

14

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

Note 9 – Capital Stock and Mandatorily Redeemable Capital Stock

For accounting policies and other matters concerning capital stock and mandatorily redeemable capital stock see Note 16 on page F-27 in our 2006 Form 10-K. Regulatory capital is defined as the sum of the paid-in value of capital stock and mandatorily redeemable capital stock (together defined as “regulatory capital stock”) plus retained earnings. No members had concentrations of capital stock greater than or equal to 10% of total capital stock at June 30, 2007 or December 31, 2006.

The regulatory capital ratio required by Finance Board regulations for an FHLB that has not implemented a capital plan under the GLB Act is 4.0% provided that its non-mortgage assets (defined as total assets less advances, acquired member assets, standby letters of credit, intermediary derivative contracts, certain MBS, and other investments specified by Finance Board regulation) after deducting the amount of deposits and capital are not greater than 11% of the FHLB’s total assets. If the non-mortgage asset ratio is greater than 11%, Finance Board regulations require a regulatory capital ratio of 4.76%. In addition, our Written Agreement as amended requires a minimum regulatory capital ratio of at least 4.50%. We are permitted to include the Designated Amount of subordinated notes in calculating compliance with our regulatory capital ratio. Our non-mortgage assets were above the 11% threshold at June 30, 2007 but were below 11% at December 31, 2006. Thus we were subject to the 4.76% regulatory capital ratio at June 30, 2007 and the 4.50% ratio at December 31, 2006.

The following table summarizes our regulatory capital requirements as a percentage of our total assets:

	Regulatory Capital
	Requirement in effect			Actual
	Ratio	Amount		Ratio	Amount
June 30, 2007	4.76%	$	4,224	4.81%	$	4,273
December 31, 2006	4.50%		3,902	4.85%		4,207

Under Amendment No. 3 to our Written Agreement, effective June 13, 2006, we are also required to maintain an aggregate amount of regulatory capital stock plus the Designated Amount of subordinated notes of at least $3.500 billion. At June 30, 2007, we had an aggregate amount of $3.656 billion of regulatory capital stock plus the Designated Amount of subordinated notes.

The following tables summarize the number of members for which we reclassified their stock as mandatorily redeemable capital stock (“MRCS”) either due to voluntary withdrawals

from membership, or due to terminations of membership in conjunction with out-of-district mergers. In addition, the following tables show the number of former members for which we completed redemptions of their mandatorily redeemable capital stock during the periods indicated:

Three months ended June 30,	2007	2006
Number of members with MRCS, beginning of period	8	15
Withdrawal	2	3
Merger	1	-
Completed redemptions	-	(6)
Number of members with MRCS, end of period	11	12
Six months ended June 30,
Number of members with MRCS, beginning of period	7	12
Withdrawal	3	6
Merger	5	-
Completed redemptions	(4)	(6)
Number of members with MRCS, end of period	11	12

The following tables present MRCS activity for the periods indicated:

Three months ended June 30,	2007		2006
Balance, beginning of period	$	14	$	260
Capital stock reclassified to MRCS due to-
Withdrawal		4		2
Merger		1		-
Voluntary		-		780
Total capital stock reclassified		5		782
Redemption of MRCS due to-
Withdrawal		-		(205)
Merger		-		-
Voluntary		-		(795)
Total completed redemptions		-		(1,000)
Balance, June 30	$	19	$	42
Six months ended June 30,
Balance, beginning of period	$	14	$	222
Capital stock reclassified to MRCS due to-
Withdrawal		4		40
Merger		3		-
Voluntary		-		780
Total capital stock reclassified		7		820
Redemption of MRCS due to-
Withdrawal		-		(205)
Merger		(2)		-
Voluntary		-		(795)
Total completed redemptions		(2)		(1,000)
Balance, June 30	$	19	$	42

15

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

From July 1, 2007 through July 31, 2007, there were no mandatorily redeemable capital stock reclassifications due to member mergers or withdrawals from membership. Redemption of members’ mandatorily redeemable capital stock is honored subject to, among other things, our maintaining our minimum regulatory leverage and other capital requirements, liquidity requirements (under certain circumstances), and Finance Board approval, to the extent required.

For a further description of our minimum regulatory leverage and other capital requirements see Note 16 on page F-27 in our 2006 Form 10-K.

Note 10 – Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in accumulated Other Comprehensive Income (“OCI”) (loss) for the periods indicated:

	Available- for- sale securities			Cash flow  hedges			Employee  retirement  plans			Accumulated other  comprehensive  income (loss)
Balance, December 31, 2005	$	(9	)	$	(137	)	$	-		$	(146	)
Net unrealized gain/(loss)		(19	)		31			-			12
Recognized into net income		3			5			-			8
Net change		(16	)		36			-			20
Balance, June 30, 2006	$	(25	)	$	(101	)	$	-		$	(126	)
Balance, December 31, 2006	$	(8	)	$	(99	)	$	(3	)	$	(110	)
Net unrealized gain/(loss)		(3	)		(9	)		-			(12	)
Recognized into net income		-			2			-			2
Net change		(3	)		(7	)		-			(10	)
Balance, June 30, 2007	$	(11	)	$	(106	)	$	(3	)	$	(120	)

Note 11 – Derivatives and Hedging Activities

For accounting policies concerning derivatives and hedging activities see Note 20 on page F-34 in our 2006 Form 10-K.

We recorded a net gain (loss) on derivatives and hedging activities in non-interest income for the periods indicated as follows:

Three months ended June 30,	2007			2006
Fair value hedge ineffectiveness	$	(4	)	$	(10	)
Gain (loss) on economic hedges		12			15
Cash flow hedge ineffectiveness		-			-
Gain (loss) from firm commitments no longer qualifying as fair value hedges		-			-
Cash flow hedging gains (losses) on forecasted transactions that failed to occur		-			-
Net gain (loss) on derivatives and hedging activities	$	8		$	5
Six months ended June 30,
Fair value hedge ineffectiveness	$	(13	)	$	(20	)
Gain (loss) on economic hedges		8			36
Cash flow hedge ineffectiveness		-			-
Gain (loss) from firm commitments no longer qualifying as fair value hedges		-			-
Cash flow hedging gains (losses) on forecasted transactions that failed to occur		-			-
Net gain (loss) on derivatives and hedging activities	$	(5	)	$	16

Over the next 12 months it is expected that $26 million recorded in OCI on June 30, 2007, will be recognized as a component of interest expense. The maximum length of time over which we use cash flow hedges to reduce our exposure to variability in future cash flows for forecasted transactions, excluding those forecasted transactions related to the payment of variable interest on existing financial instruments, is six years.

In the second quarter, 2007 we recognized a $2 million gain as a component of derivatives and hedging activities as a result of a correction of a prior period error related to a SFAS 133 hedging adjustment of an underlying consolidated obligation bond. The impact of this adjustment on the current and all prior periods presented was immaterial.

16

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

The following table represents outstanding notional balances and estimated fair values of derivatives outstanding at the dates indicated:

	June 30, 2007				December 31, 2006
	Notional		Fair Value		Notional		Fair Value
Interest rate swaps:
Fair value	$	44,263	$	(245)	$	39,554	$	(215)
Economic		11,141		10		10,603		(11)
Total		55,404		(235)		50,157		(226)
Interest rate swaptions:
Fair value		5,213		38		4,990		36
Economic		4,250		-		4,919		5
Total		9,463		38		9,909		41
Interest rate caps/floors:
Cash flow		1,925		10		1,925		20
Economic		8		-		8		-
Total		1,933		10		1,933		20
Interest rate futures/forwards:
Fair value		2,930		1		6,111		(1)
Economic		420		-		-		-
Total		3,350		1		6,111		(1)
Delivery commitments of MPF Loans:
Economic		58		1		48		1
Total	$	70,208		(185)	$	68,158		(165)
Accrued interest, net at period end				(11)				11
Net derivative balance			$	(196)			$	(154)
Derivative assets			$	53			$	41
Derivative liabilities				(249)				(195)
Net derivative balance			$	(196)			$	(154)

Note 12 - Segment Information

We have two business segments: the Mortgage Partnership Finance segment and Traditional Member Finance segment. Our business segments are defined by the products and services we provide. The MPF segment income is derived primarily from the difference, or spread, between the yield on MPF Loans and the borrowing cost related to those MPF Loans.

The Traditional Member Finance segment includes products such as advances, investments, and deposits.

Our reporting process measures the performance of the business segments based on our structure and is not necessarily comparable with similar information for any other financial institution.

17

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

The following tables set forth our financial performance by segment for the periods shown:

Three months ended June 30,	MPF Segment				Traditional Member Finance				Total Bank
	2007		2006		2007		2006		2007		2006
Interest income	$	472	$	519	$	650	$	552	$	1,122	$	1,071
Interest expense		455		441		598		515		1,053		956
Provision for credit losses		-		-		-		-		-		-
Net interest income		17		78		52		37		69		115
Non-interest income (loss)		(8)		(2)		8		(8)		-		(10)
Non-interest expense		18		16		14		15		32		31
Assessments		(3)		17		13		3		10		20
Net income (loss)	$	(6)	$	43	$	33	$	11	$	27	$	54
Total assets as of June 30, 2007 and December 31, 2006 -	$	36,387	$	38,400	$	52,358	$	48,314	$	88,745	$	86,714
Six months ended June 30,
Interest income	$	954	$	1,046	$	1,280	$	1,035	$	2,234	$	2,081
Interest expense		924		875		1,170		970		2,094		1,845
Provision for credit losses		-		-		-		-		-		-
Net interest income		30		171		110		65		140		236
Non-interest income (loss)		(14)		(23)		4		(3)		(10)		(26)
Non-interest expense		34		33		28		27		62		60
Assessments		(5)		31		23		9		18		40
Net income (loss)	$	(13)	$	84	$	63	$	26	$	50	$	110

18

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

Note 13 - Estimated Fair Values

For additional information concerning the estimated fair values of our financial instruments see Note 22 on page F-41 in our 2006 Form 10-K. The carrying values and estimated fair values of our financial instruments at June 30, 2007 and December 31, 2006, were as follows:

	June 30, 2007						December 31, 2006
	Carrying   Value		Unrecognized   Gain or (Loss)		Fair   Value		Carrying   Value		Unrecognized   Gain or (Loss)		Fair   Value
Financial Assets
Cash and due from banks	$	25	$	-	$	25	$	23	$	-	$	23
Federal Funds sold and securities purchased under agreements to resell		12,826		-		12,826		6,470		-		6,470
Trading securities		622		-		622		532		-		532
Available-for-sale securities		2,808		-		2,808		3,097		-		3,097
Held-to-maturity securities		12,102		(137)		11,965		11,915		(43)		11,872
Advances		23,836		(107)		23,729		26,179		(94)		26,085
MPF Loans held in portfolio, net		35,963		(1,456)		34,507		37,944		(905)		37,039
Accrued interest receivable		384		-		384		379		-		379
Derivative assets		53		-		53		41		-		41
Total Financial Assets	$	88,619	$	(1,700)	$	86,919	$	86,580	$	(1,042)	$	85,538
Financial Liabilities
Deposits	$	(863)	$	-	$	(863)	$	(1,493)	$	-	$	(1,493)
Securities sold under agreements to repurchase		(1,200)		(95)		(1,295)		(1,200)		(108)		(1,308)
Consolidated obligations -
Discount notes		(14,343)		-		(14,343)		(11,166)		-		(11,166)
Bonds		(67,159)		388		(66,771)		(67,744)		29		(67,715)
Accrued interest payable		(666)		-		(666)		(690)		-		(690)
Mandatorily redeemable capital stock		(19)		-		(19)		(14)		-		(14)
Derivative liabilities		(249)		-		(249)		(195)		-		(195)
Subordinated notes		(1,000)		4		(996)		(1,000)		(29)		(1,029)
Total Financial Liabilities	$	(85,499)	$	297	$	(85,202)	$	(83,502)	$	(108)	$	(83,610)
Commitments1	$	-	$	-	$	-	$	-	$	-	$	-

¹  Carrying value and fair market value of commitments was less than $1 million at June 30, 2007 and December 31, 2006.

Note 14 – Commitments and Contingencies

We record a liability for consolidated obligations on our statements of condition for the proceeds we receive from the issuance of those consolidated obligations. For these issuances, we are designated the primary obligor. However, each FHLB is jointly and severally obligated for the payment of all consolidated obligations of all of the FHLBs. This guarantee is not reflected on our statements of condition. The par value of outstanding consolidated obligations for the FHLBs was $971 billion and $952 billion at June 30, 2007 and December 31, 2006. Accordingly, should one or more of the FHLBs be unable to repay the consolidated obligations for which they are the primary obligor, each of the other FHLBs could be called upon to repay all or part of such obligations, as determined or approved by the Finance Board. See Note 23 on page F-43 in our 2006 Form 10-K for further details on commitments and contingencies.

Our commitments at the dates shown were as follows:

	June 30,     2007		December 31,     2006
Consolidated obligation bonds traded, but not settled	$	145	$	407
Standby letters of credit		449		553
Standby bond purchase agreements		256		261
Delivery Commitments for MPF Loans		86		69
Commitments to fund additional advances		2		-
Unconditional software license renewal fees		6		5

19

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

We may be subject to various legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any such proceedings that might result in our ultimate liability in an amount that will have a material effect on our financial condition or results of operations.

Note 15 – Transactions with Related Parties and Other FHLBs

Related Parties

We are a member-owned cooperative. We define related parties as members that own 10% or more of our capital stock or members whose officers or directors also serve on our Board of Directors. Capital stock ownership is a prerequisite to transacting any member business with us. Members and former members own all of our capital stock. The majority of our directors are elected by members. Our advance and MPF Loan business is transacted almost exclusively with members. Therefore, in the normal course of business we extend credit to members whose officers and directors may serve on our Board of Directors. Our policy is to extend credit to members whose officers or directors serve as our directors on market terms that are no more favorable than the terms of comparable transactions with other members. In addition, we may purchase short-term investments, Federal Funds, and MBS from members (or affiliates of members) whose officers or directors serve on our Board of Directors. All investments are market rate transactions and all MBS are purchased through securities brokers or dealers. Derivative transactions with members and affiliates are executed at market rates.

Members

The following table summarizes balances we had with our members as defined above as related parties (including their affiliates) as reported in the statements of condition as of the dates indicated:

	June 30,   2007		December 31,   2006
Assets-
Federal Funds sold	$	700	$	465
Advances		3,474		5,198
Interest receivable-advances		16		18
Derivative assets		18		8
Liabilities-
Deposits	$	19	$	29
Derivative liabilities		1		-

Other FHLBs

The following table summarizes balances we had with other FHLBs as reported in the statements of condition as of the dates indicated:

	June 30,   2007		December 31,   2006
Assets-
Investment securities-trading	$	25	$	25
Accounts receivable		3		2
Liabilities-
Deposits	$	12	$	11

Trading Securities consisted of consolidated obligations of the FHLB of Dallas and San Francisco of $19 million and $6 million at both June 30, 2007 and December 31, 2006.

The following tables summarize transactions we had with other FHLBs as reported in the statements of income for the periods indicated:

Three months ended June 30,	2007		2006
Income-MPF Program transaction service fees	$	1	$	1
Gain on extinguishment of debt transferred to other FHLBs		-		-
Six months ended June 30,	2007		2006
Income-MPF Program transaction service fees	$	2	$	2
Gain on extinguishment of debt transferred to other FHLBs		-		4

20

Federal Home Loan Bank of Chicago

Notes to Financial Statements - (Unaudited)

(Dollars in millions except per share amounts unless otherwise indicated)

The following tables summarize transactions we had with other FHLBs as reported in the statements of cash flows for the periods indicated:

Three months ended June 30,	2007		2006
Investing activities
Purchase of MPF Loan participations from other FHLBs	$	23	$	131
Financing activities
Net change in deposits	$	1	$	(2	)
Transfer of consolidated obligation bonds to other FHLBs		85		38
Transfer of consolidated obligation bonds from other FHLBs		-		65

Six months ended June 30,	2007		2006
Investing activities
Purchase of MPF Loan participations from other FHLBs	$	44	$	255
Financing activities
Net change in deposits	$	1	$	-
Transfer of consolidated obligation bonds to other FHLBs		85		485
Transfer of consolidated obligation bonds from other FHLBs		-		65

21

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

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

Forward-Looking Information

Statements contained in this quarterly report on Form 10-Q, including statements describing the objectives, projections, estimates, or future predictions of management, may be “forward-looking statements.” These statements may use forward-looking terminology, such as “anticipates,” “believes,” “expects,” “could,” “estimates,” “may,” “should,” “will,” their negatives, or other variations of these terms. We caution that, by their nature, forward-looking statements involve risks and uncertainties related to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These risks and uncertainties could cause actual results to differ materially from those expressed or implied in these forward-looking statements and could affect the extent to which a particular objective, projection, estimate, or prediction is realized.

These forward-looking statements involve risks and uncertainties including, but not limited to, the following: the impact of discussions to combine our business operations with another FHLB and if an agreement to combine operations is reached, the failure to obtain regulatory approval of the proposed combination; the effect of the Written Agreement with the Finance Board; the effect of the Retained Earnings and Dividend Policy on our goal to strengthen our capital base; our ability to make additional redemptions of voluntary capital stock; our ability to develop and implement initiatives and business strategies focused on increasing net income and reducing expenses;

economic and market conditions; volatility of market prices, rates and indices or other factors, including natural disasters, that could affect the value of our investments or collateral; political events, including legislative, regulatory, judicial or other developments that affect us, our members, our counterparties, and/or investors in consolidated obligations; changes in the FHLB Act or Finance Board regulations; changes in our capital structure; membership changes, including the withdrawal of members due to our inability to satisfy all member requests for redemption of voluntary capital stock; changes in the demand by our members for advances; competitive forces, including the availability of other sources of funding for our members; our ability to attract and retain skilled individuals; the pace of technological change and our ability to develop and support technology and information systems; changes in investor demand for consolidated obligations and/or the terms of interest rate derivatives and similar agreements; our ability to introduce new products and services to meet market demand and to manage successfully the risk associated with new products and services; the impact of new business strategies to develop off balance sheet capabilities to fund MPF assets; the impact of new accounting standards and the application of accounting rules; and the ability of each of the other FHLBs to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which we have joint and several liability.

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and notes at the beginning of this Form 10-Q and in conjunction with our December 31, 2006 Form 10-K.

22

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

Financial Highlights

	Three months ended										Six months ended
	June 30,         2007		March 31,         2007		December 31,         2006		September 30,         2006		June 30,         2006		June 30,         2007		June 30,         2006
Selected statements of income data
Interest income	$	1,122	$	1,112	$	1,131	$	1,154	$	1,071	$	2,234	$	2,081
Net interest income		69		71		80		91		115		140		236
Non-interest income (loss)		-		(10)		1		(8)		(10)		(10)		(26)
Non-interest expense		32		30		32		26		31		62		60
Assessments		10		8		13		15		20		18		40
Net income		27		23		36		42		54		50		110
Selected ratios and data-annualized
Net income to average assets		0.12%		0.11%		0.17%		0.18%		0.25%		0.11%		0.25%
Return on average equity		3.48%		2.99%		4.50%		4.85%		5.44%		3.24%		5.44%
Total average equity to average assets		3.58%		3.52%		3.67%		3.80%		4.55%		3.55%		4.64%
Non-interest expense to average assets		0.15%		0.14%		0.14%		0.12%		0.14%		0.14%		0.14%
Interest spread between yields on interest- earning assets and interest-bearing liabilities		0.13%		0.15%		0.17%		0.22%		0.33%		0.13%		0.35%
Net interest margin on interest-earning assets		0.32%		0.33%		0.36%		0.41%		0.53%		0.32%		0.55%
Dividends declared 1	$	18	$	21	$	23	$	28	$	28	$	39	$	56
Annualized dividend rate declared		2.80%		3.10%		3.10%		3.10%		3.10%		2.95%		3.05%
Dividend payout ratio2		67%		91%		64%		67%		52%		78%		51%
As of	June 30,         2007		March 31,         2007		December 31,         2006		September 30,         2006		June 30,         2006
Selected statements of condition data
Federal Funds sold and securities purchased under agreements to resell	$	12,826	$	11,665	$	6,470	$	9,310	$	9,039
Investment securities		15,532		14,171		15,544		14,875		14,113
Advances		23,836		24,313		26,179		25,294		24,718
MPF Loans held in portfolio, net of allowance for loan losses		35,963		37,023		37,944		38,855		39,755
Total assets		88,745		87,719		86,714		88,906		88,384
Total consolidated obligations, net 3		81,502		79,921		78,910		80,869		80,485
Total liabilities		85,611		84,626		83,631		85,467		84,971
Total capital		3,134		3,093		3,083		3,439		3,413
Other selected data
Regulatory capital and
Designated Amount of subordinated notes	$	4,273	$	4,213	$	4,207	$	4,577	$	4,581
Regulatory capital to assets ratio 4		4.8%		4.8%		4.9%		5.1%		5.2%
All FHLBs consolidated obligations outstanding (par)5	$	970,857	$	951,470	$	951,990	$	958,024	$	958,570
Number of members		852		854		858		871		881
Number of active PFIs6		264		263		265		259		256
Headcount (full-time)		371		436		450		445		454
Headcount (part-time)		7		6		9		9		8

¹ On July 24, 2007, the Board of Directors declared and approved a 2.80% (annualized rate) cash dividend of $18 million based on second quarter 2007 results to be paid to members on August 15, 2007.

² The dividend payout ratio in this table equals the dividend declared and paid in the quarter divided by net income for the same quarter.

³ Consolidated obligations for which we are the primary obligor.

⁴ The ratio is calculated as follows: Regulatory capital plus the Designated Amount of subordinated notes divided by total assets.

⁵ We are jointly and severally liable for the consolidated obligations of the other FHLBs. See Note 7 on page 14 in this Form 10-Q.

⁶ Active PFIs are those PFIs that are currently servicing and/or credit enhancing MPF Loans.

23

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

Average Balances/Net Interest Margin/Rates

Three months ended June 30,	2007						2006						Increase / (Decrease) due to
	Average   Balance			Interest		Yield /     Rate	Average     Balance			Interest		Yield /     Rate	Volume			Rate			Net     Change
Assets
Federal Funds sold and securities purchased under agreements to resell	$	11,200		$	149	5.32%	$	8,552		$	107	5.00%	$	33		$	9		$	42
Total investments1		14,700			199	5.41%		12,696			162	5.10%		26			11			37
Advances 1		24,461			308	5.04%		25,088			294	4.69%		(7	)		21			14
MPF Loans held in portfolio1, 2, 3		36,285			466	5.14%		40,249			508	5.05%		(50	)		8			(42	)
Total interest-earning assets	$	86,646		$	1,122	5.18%	$	86,585		$	1,071	4.95%	$	2		$	49		$	51
Allowance for loan losses		(1	)					(1	)
Other assets		811						988
Total assets	$	87,456					$	87,572
Liabilities and Capital
Interest bearing deposits	$	978		$	12	4.91%	$	1,097		$	13	4.74%	$	(1	)	$	-		$	(1	)
Securities sold under agreements to repurchase		1,228			25	8.14%		1,203			22	7.32%		-			3			3
Consolidated obligation discount notes		13,161			173	5.26%		15,220			190	4.99%		(26	)		9			(17	)
Consolidated obligation bonds 1		67,014			828	4.94%		64,909			727	4.48%		24			77			101
Mandatorily redeemable capital stock		17			-	0.00%		209			1	1.91%		(1	)		-			(1	)
Subordinated notes		1,000			15	6.00%		198			3	6.06%		12			-			12
Total interest-bearing liabilities	$	83,398		$	1,053	5.05%	$	82,836		$	956	4.62%	$	8		$	89		$	97
Other liabilities		926						754
Total capital		3,132						3,982
Total liabilities and capital	$	87,456					$	87,572
Interest spread between yields on interest-earning assets and interest-bearing liabilities						0.13%						0.33%
Net interest margin on interest-earning assets	$	86,646		$	69	0.32%	$	86,585		$	115	0.53%	$	(6	)	$	(40	)	$	(46	)
Average interest-earning assets to interest-bearing liabilities						103.89%						104.53%

In this analysis, the change due to the combined volume/rate variance has been allocated to rate.

¹ Yields/Rates are based on average amortized cost balances.

² Non performing loans are included in average balances used to determine the yield.

³ Interest income includes amortization of net premiums of $12 million and $14 million for the three months ended June 30, 2007 and 2006; and $23 million and $29 million for the six months ended June 30, 2007 and 2006.

24

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

Six months ended June 30,	2007						2006						Increase / (Decrease) due to
	Average   Balance			Interest		Yield /     Rate	Average     Balance			Interest		Yield /     Rate	Volume			Rate			Net     Change
Assets
Federal Funds sold and securities purchased under agreements to resell	$	10,165		$	269	5.29%	$	8,204		$	194	4.73%	$	46		$	29		$	75
Total investments1		14,935			403	5.40%		12,102			301	4.97%		70			32			102
Advances 1		24,864			621	5.00%		25,155			562	4.47%		(7	)		66			59
MPF Loans held in portfolio 1, 2, 3		36,751			941	5.12%		40,756			1,024	5.03%		(101	)		18			(83	)
Total interest-earning assets	$	86,715		$	2,234	5.15%	$	86,217		$	2,081	4.83%	$	8		$	145		$	153
Allowance for loan losses		(1	)					(1	)
Other assets		783						1,003
Total assets	$	87,497					$	87,219
Liabilities and Capital
Interest bearing deposits	$	1,097		$	28	5.10%	$	1,046		$	24	4.59%	$	1		$	3		$	4
Securities sold under agreements to repurchase		1,214			49	8.07%		1,202			42	6.99%		-			7			7
Consolidated obligation discount notes		12,817			336	5.24%		15,789			375	4.75%		(71	)		32			(39	)
Consolidated obligation bonds1		67,355			1,652	4.91%		64,060			1,398	4.36%		72			182			254
Mandatorily redeemable capital stock		16			-	0.00%		227			3	2.64%		(3	)		-			(3	)
Subordinated notes		1,000			29	5.80%		99			3	6.06%		27			(1	)		26
Total interest-bearing liabilities	$	83,499		$	2,094	5.02%	$	82,423		$	1,845	4.48%	$	26		$	223		$	249
Other liabilities		892						748
Total capital		3,106						4,048
Total liabilities and capital	$	87,497					$	87,219
Interest spread between yields on interest-earning assets and interest-bearing liabilities						0.13%						0.35%
Net interest margin on interest-earning assets	$	86,715		$	140	0.32%	$	86,217		$	236	0.55%	$	(18	)	$	(78	)		(96	)
Average interest-earning assets to interest-bearing liabilities						103.85%						104.60%

In this analysis, the change due to the combined volume/rate variance has been allocated to rate.

¹ Yields/Rates are based on average amortized cost balances.

² Non performing loans are included in average balances used to determine the yield.

³ Interest income includes amortization of net premiums of $12 million and $14 million for the three months ended June 30, 2007 and 2006; and $23 million and $29 million for the six months ended June 30, 2007 and 2006.

25

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

Results of Operations

Three months ended June 30,	2007			2006			Change
Interest income	$	1,122		$	1,071		5%
Interest expense		1,053			956		10%
Provision for loan losses		-			-		-
Net interest income		69			115		-40%
Non-interest income (loss)		-			(10	)	-100%
Non-interest expense		32			31		3%
Assessments		10			20		-50%
Net income	$	27		$	54		-50%
Selected Ratios - Annualized
Non-interest expense to average assets		0.15%			0.14%		0.01%
Interest spread between yields on interest-earning assets and liabilities		0.13%			0.33%		-0.20%
Net interest margin on interest-earning assets		0.32%			0.53%		-0.21%
Return on average equity		3.48%			5.44%		-1.96%
Six months ended June 30,	2007			2006			Change
Interest income	$	2,234		$	2,081		7%
Interest expense		2,094			1,845		13%
Provision for loan losses		-			-		-
Net interest income		140			236		-41%
Non-interest income (loss)		(10	)		(26	)	-62%
Non-interest expense		62			60		3%
Assessments		18			40		-55%
Net income	$	50		$	110		-55%
Selected Ratios - Annualized
Non-interest expense to average assets		0.14%			0.14%		0.00%
Interest spread between yields on interest-earning assets and liabilities		0.13%			0.35%		-0.22%
Net interest margin on interest-earning assets		0.32%			0.55%		-0.23%
Return on average equity		3.24%			5.44%		-2.20%

Overview

(All comparisons are to the same period in the prior year unless specified).

Net Income

The decrease in net income for the quarter resulted primarily from a decrease in net interest income. Our net interest income and net interest margin on interest earning assets decreased significantly in 2007 compared to 2006, both for the second quarter as well as six months to date. The factors outlined below contributed to this decrease, and we anticipate that these factors also will significantly lower future net income in 2007 and beyond compared to previous years and expect income over the remaining six months of 2007 to further decrease as compared to the first six months of 2007. See “Business Outlook” on page 28 in our 2006 Form 10-K.

• Certain consolidated obligations funding MPF Loans matured and were replaced by new debt issued at significantly higher market interest rates;

• a portion of the capital stock outstanding during 2006 was replaced by $1 billion of interest-bearing subordinated notes; and

• The effects of SFAS 133 hedging, which includes prior hedging costs that are being amortized into earnings, have significantly impacted our net interest income.

Member Developments

Two of our largest members based on capital stock outstanding and advance borrowings are subject to agreements to be acquired by other financial institutions outside of our district and the acquisitions are expected to close by year-end (LaSalle Bank N.A. by Bank of America of Charlotte, NC and MidAmerica Bank FSB by National City Corporation of Cleveland, OH). Although subsidiaries of Bank of America have maintained memberships in other FHLBs after making acquisitions, at the present time we do not know what impact the LaSalle Bank acquisition will have on its membership status or advance business with us. LaSalle had $2.8 billion in advances outstanding with the Bank at June 30, 2007. At December 31, 2006, MidAmerica had $2.2 billion of advances outstanding and has paid down that balance to $1.1 billion as of June 30, 2007. At this time we do not know what impact the MidAmerica acquisition will have on its membership status or advance business with us.

If LaSalle or MidAmerica elects to terminate its membership, such terminations would result in a reduction of our capital and any corresponding termination of advances would have an adverse effect on our interest income. The combined advance interest income from these two banks was 5% of our gross interest income from all sources for both the second quarter and six months to date. In addition, on a combined basis, these two banks held 14% of our capital stock outstanding as of June 30, 2007. See the discussion under the heading “Risk Factors — Member capital stock redemptions are limited and under limited circumstances a member could receive less than par value when redeeming capital stock upon membership withdrawal — Capital Stock Redemptions and Membership Withdrawals” on page 17 in our 2006 Form 10-K.

Regulatory Developments

We continue to discuss with the Finance Board possible strategic and operational alternatives to strengthen the Bank’s capital base and transition it to more traditional advance bank. These discussions may result in changes to

26

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

the Bank’s current Retained Earnings and Dividend Policy and current terms of the Written Agreement regarding redemptions of capital stock by withdrawing or terminating members.

Product Developments

Our MPF Loan portfolio continues to decrease as anticipated. As our MPF Loan balances decrease, we require less capital to support this business. We also face challenges in maintaining our advance volume as our members have access to competitive alternative funding sources and the financial services industry faces further consolidations.

Expense Reduction Initiatives

During the second quarter of 2007 we began implementing expense reduction initiatives that are expected to result in a net reduction of compensation and benefits and other expenses of approximately $13 million on an annualized basis. We anticipate that these initiatives will reduce expenses for the remainder of 2007 by approximately $4 million. We conducted a reduction-in-force on May 1, 2007. We plan to conduct additional such reductions through the remainder of 2007 in order to achieve the projected expense reductions. In connection with these moves, we recognized a charge to second quarter income before assessments of $4 million. We are continuing to review our expense structure throughout the Bank and focus our attention on ways to enhance efficiency. Further, we are unable to predict how or when further expense reduction initiatives will impact our overall profitability.

Balance Sheet Restructuring Initiatives

We are actively exploring other methods to increase our net income, including balance sheet restructuring alternatives. At this time, we are unable to predict whether we will implement such restructuring alternatives or the extent of reductions to retained earnings that may result from the implementation of such alternatives.

Preliminary Merger Discussions

On August 8, 2007, we announced that we are engaged in preliminary discussions with the FHLB of Dallas to determine the possible benefits and feasibility of a combination of the two institutions. The FHLB of Dallas has over 900 member institutions in the states of Arkansas, Louisiana,

Mississippi, New Mexico and Texas. No agreement has been reached and an agreement may not be finalized. If we agree on the terms of a combination with the FHLB of Dallas, that proposal would be subject to the approval of the Finance Board.

Net Interest Income

The following discussion should be read in conjunction with the Average Balance / Net Interest Margin / Rates table on pages 24 and 25 of this Form 10-Q

Our net interest income and net interest margin on interest earning assets decreased in 2007 compared to 2006, both for the second quarter as well as six months to date.

Daily average balances on advances outstanding did not change significantly from 2006 to 2007, for either the three or six month periods. Average yields on advances increased, as market rates increased and older advances with lower rates matured and were replaced by new advances at higher rates.

The estimated life or duration of our MPF Loan portfolio increased as short-term interest rates increased from 2006 to 2007. At the same time, some of the debt funding our MPF Loan portfolio matured. We replaced maturing debt with new debt issuances at current market rates that were significantly higher than the maturing debt. In addition, the average balance of our MPF Loan portfolio has decreased due to principal paydowns and maturities on existing MPF Loans which continue to exceed new purchases and fundings. Accordingly, yields on our MPF Loan portfolio have not increased as quickly as the rates on the debt funding MPF Loans. As a result, net interest income and net interest margin on earning assets declined.

Net interest income has historically been a function of our return on invested capital. The reduction in average capital was primarily a result of capital stock redemptions during 2006 which resulted in a decrease in our net interest income. In addition, we replaced a portion of our capital stock with $1 billion in interest bearing subordinated notes in 2006. The subordinated notes increased interest expense by $12 million and $29 million for the three and six months ended June 30, 2007 compared to the same periods in the prior years.

27

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

We actively hedge our interest rate risk associated with MPF Loans, advances and consolidated obligations using interest rate swaps and other derivatives under SFAS 133. When we discontinue such hedge relationships and the financial asset or liability remains outstanding or the hedged transactions impact earnings, we start amortizing SFAS 133 hedging adjustments into net interest income. Amortization of SFAS 133 basis adjustments on consolidated obligations and MPF Loans, as well as hedged forecasted transactions recorded in OCI has negatively impacted net interest income.

Non-interest Income

Three months ended June 30,	2007			2006			Change
Trading securities	$	(10	)	$	(19	)	47%
Sale of available for sale securities		-			1		-100%
Derivatives and hedging activities		8			5		60%
Early extinguishment of debt transferred to other FHLBs		-			-		-
Other, net		2			3		-33%
Total non-interest income (loss)	$	-		$	(10	)	100%
Six months ended June 30,	2007			2006			Change
Trading securities	$	(8	)	$	(46	)	83%
Sale of available for sale securities		-			(3	)	100%
Derivatives and hedging activities		(5	)		16		-131%
Early extinguishment of debt transferred to other FHLBs		-			4		-100%
Other, net		3			3		0%
Total non-interest income (loss)	$	(10	)	$	(26	)	62%

Non-interest income (loss) is principally comprised of net gains or losses on trading securities and net gains or losses from derivatives and hedging activities. Trading securities are hedged economically with interest rate swaps and the changes in fair value of these swaps are recognized in derivatives and hedging activities. Interest rate swaps hedging trading securities increased in fair value during the three and six month ended June 30, 2007 by $12 million and $10 million as market interest rates increased during these periods. The hedged trading securities decreased by $10 million and $8 million, offsetting the change in fair values on the derivatives.

We recognized $8 million and $17 million of fair value hedging costs associated with derivatives hedging our MPF Loan portfolio for the three and six months ended June 30, 2007. The hedging costs were principally due to time value decay from swaptions which are used to hedge duration and convexity risks associated with our MPF Loans. We recognized $5 million and $3 million of hedging gains associated with hedges of our consolidated obligations.

In the second quarter, 2007 we recognized a $2 million gain as a component of derivatives and hedging activities as a result of a correction of a prior period error related to a SFAS 133 hedging adjustment of an underlying consolidated obligation bond. The impact of this adjustment on the current and all prior periods presented was immaterial.

The following tables show the breakdown of hedging gains or losses recognized in the statements of income by type of hedged item. During 2007, we used more callable debt to manage our duration and convexity limits on our MPF Loan portfolio as opposed to actively managing these risks with derivative instruments.

	2007
Three months ended June 30,	Fair Value Hedges			Cash Flow Hedges		Economic Hedges			Total
Hedged Item-
Advances	$	-		$	-	$	-		$	-
Consolidated obligations		5			-		-			5
Investments		-			-		12			12
MPF Loans		(9	)		-		1			(8	)
Delivery commitments on MPF Loans		-			-		(1	)		(1	)
Total	$	(4	)	$	-	$	12		$	8
	2006
Three months ended June 30,	Fair Value Hedges			Cash Flow Hedges		Economic Hedges			Total
Hedged Item-
Advances	$	(1	)	$	-	$	-		$	(1	)
Consolidated obligations		-			-		-			-
Investments		-			-		17			17
MPF Loans		(9	)		-		(2	)		(11	)
Delivery commitments on MPF Loans		-			-		-			-
Total	$	(10	)	$	-	$	15		$	5

28

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

	2007
Six months ended June 30,	Fair Value Hedges			Cash Flow Hedges		Economic Hedges			Total
Hedged Item-
Advances	$	-		$	-	$	-		$	-
Consolidated obligations		3			-		-			3
Investments		-			-		10			10
MPF Loans		(16	)		-		(1	)		(17	)
Delivery commitments on MPF Loans		-			-		(1	)		(1	)
Total	$	(13	)	$	-	$	8		$	(5	)
	2006
Six months ended June 30,	Fair Value Hedges			Cash Flow Hedges		Economic Hedges			Total
Hedged Item-
Advances	$	-		$	-	$	-		$	-
Consolidated obligations		(2	)		-		(2	)		(4	)
Investments		-			-		46			46
MPF Loans		(18	)		-		(8	)		(26	)
Delivery commitments on MPF Loans		-			-		-			-
Total	$	(20	)	$	-	$	36		$	16

Non-interest Expense

Three months ended June 30,	2007		2006		Change
Compensation & benefits	$	18	$	15	20%
Amortization and depreciation of software and equipment		5		5	0%
Finance Board and Office of Finance		1		2	-50%
Other expense		8		9	-11%
Total non-interest expense	$	32	$	31	3%
Six months ended June 30,	2007		2006		Change
Compensation & benefits	$	36	$	30	20%
Amortization and depreciation of software and equipment		10		9	11%
Finance Board and Office of Finance		2		3	-33%
Other expense		14		18	-22%
Total non-interest expense	$	62	$	60	3%

Compensation and benefits increased principally due to a reduction in force that took place May 1, 2007. In addition to recording a charge for severance related to that reduction in force, we also included an additional severance charge for

expected future reductions in staffing levels. In total, we recorded $4 million in severance related expenses in compensation and benefits in the second quarter. Total headcount (full-time and part-time) as of June 30, 2007 was 378 employees, compared to 442 at March 31, 2007 and 459 at December 31, 2006.

Unrelated to the reduction in force, we revised our estimate of future payments under our long-term incentive compensation plans. As a result, we recorded a reduction to compensation and benefits of $2 million in the second quarter.

Other expense decreased principally due to a decrease in professional service fees as we reduced our use of outside consultants, primarily in systems related projects. Amortization and depreciation of software and equipment increased slightly, as a result of software projects being placed into service in 2007.

Operating Segment Results

We manage our operations by grouping products and services within two operating segments. For the measure of profit or loss and total assets for each segment see Note 12 on page 17 in this Form 10-Q. These operating segments are:

• The MPF segment which includes primarily MPF Loans and MPF Shared Funding investment securities.

• The Traditional Member Finance segment which includes traditional funding, liquidity, advances to members, derivative activities with members, standby letters of credit, investments, and deposit products.

MPF Segment

Results of Operations

Net interest income is the difference between interest income that we receive principally from MPF Loans and MPF Shared Funding investment securities classified as HTM less our funding costs. Funding of such assets comes predominantly from consolidated obligations. Interest income and expense from derivatives used to hedge MPF Loans and consolidated obligations are included in interest income and interest expense. All other economic hedging activities are included in non-interest income (loss).

29

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

The following tables summarize the results for the MPF segment for the periods indicated:

Three months ended June 30,	2007		2006		Change
Interest income	$	472	$	519	-9%
Interest expense		455		441	3%
Provision for credit losses		-		-	-
Net interest income		17		78	-78%
Non-interest income (loss)		(8)		(2)	-300%
Non-interest expense		18		16	13%
Assessments		(3)		17	-118%
Net Income (Loss)	$	(6)	$	43	-114%
Six months ended June 30,	2007		2006		Change
Interest income	$	954	$	1,046	-9%
Interest expense		924		875	6%
Provision for credit losses		-		-	-
Net interest income		30		171	-82%
Non-interest income (loss)		(14)		(23)	39%
Non-interest expense		34		33	3%
Assessments		(5)		31	-116%
Net Income (Loss)	$	(13)	$	84	-115%

Net interest income decreased due principally to:

• Reduced MPF Loans outstanding;

• Certain consolidated obligations funding MPF Loans matured and were replaced by new debt issued at significantly higher market interest rates;

• A portion of the capital stock outstanding during 2006 was replaced by $1 billion of interest-bearing subordinated notes; and

• The effects of SFAS 133 hedging, which includes prior hedging costs that are being amortized into earnings, have significantly impacted our net interest income.

Interest expense increased on our consolidated obligations as we replaced maturing debt with new debt issued at significantly higher market interest rates. For the second quarter of 2007, our average rate on consolidated obligation bonds was 5.11% compared to 4.59% for the second quarter 2006. For the six months to date, the rate for 2007 was 5.10% versus 4.50% for 2006. These rate increases more than offset the reduction in interest expense due to a decline in the balance of consolidated obligations outstanding funding our MPF Loan balances.

The following tables summarize information related to our net premium/ (discount) and cumulative basis adjustments on MPF Loans:

Three months ended June 30,	2007		2006
Net premium amortization expense	$	12	$	14
MPF Loans, net premium balance at period-end		191		233
Total Cumulative basis adjustments on MPF Loans1		(52)		(191)
Closed portion of cumulative basis adjustments		(57)		(226)
Net amortization of closed basis adjustments		(2)		(1)
MPF Loans, par balance at period-end		35,823		39,714
Premium balance as a percent of MPF Loans		0.53%		0.59%
Six months ended June 30,	2007		2006
Net premium amortization expense	$	23	$	29
MPF Loans, net premium balance at period-end		191		233
Total Cumulative basis adjustments on MPF Loans1		(52)		(191)
Closed portion of cumulative basis adjustments		(57)		(226)
Net amortization of closed basis adjustments		(3)		(1)
MPF Loans, par balance at period-end		35,823		39,714
Premium balance as a percent of MPF Loans		0.53%		0.59%

¹ Cumulative basis adjustment on MPF Loans includes SFAS 133 hedging adjustments and loan commitment basis adjustments.

We typically purchase or fund mortgage loans at a premium or discount from our PFIs, because market interest rates will change from the time a homeowner locks in a rate with our PFI and the time the PFI locks in a delivery commitment with the Bank. In addition, borrowers typically elect to pay a higher than market rate on their mortgage loans in exchange for a reduction in up-front loan origination points, fees and other loan costs. As a result, MPF Loans typically are purchased at a net premium. We also hedge a portion of our MPF Loan portfolio in accordance with SFAS 133, creating hedging adjustments on MPF Loans. When the hedge relationships are discontinued, any remaining hedge adjustments are amortized into interest income or expense, similar to premiums and discounts. Premiums, discounts, and SFAS 133 hedging adjustments are amortized over the contractual life of the individual MPF Loans which cause variability in interest income as interest rates rise or fall.

If interest rates increase, prepayments on MPF Loans tend to decrease because borrowers are less likely to refinance their existing mortgage loans at a higher interest rate. The

30

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

inverse is true in a falling rate environment because it becomes more economical for borrowers to refinance their existing mortgage loans. As a result, we closely monitor our net premium position and SFAS 133 hedging adjustments. During 2007, changes in interest rates have not resulted in significant prepayment activity as mortgage rates increased.

The change in cumulative basis adjustments on MPF Loans is attributable to the discontinuance of hedge relationships on MPF Loans, resulting in a $154 million increase in closed cumulative basis adjustment

Non-interest income (loss) improved for the six months ended June 30, 2007 compared to the prior year. Non-interest income (loss) consists principally of derivatives and hedging activities. We recognized losses due to hedge ineffectiveness and economic hedges of MPF Loans of $17 million in the first half of 2007 compared to a loss of $26 million in the first half of 2006. During 2007, we used more callable debt to manage duration and convexity associated with MPF Loans as opposed to actively managing these risks with derivative instruments.

MPF Segment Statements of Condition Overview

The following table summarizes the major assets of the MPF segment:

	June 30,		December 31,
	2007		2006		Change
MPF Loans	$	35,963	$	37,944	-5%
Investments- MPF Shared Funding securities		351		369	-5%
Other assets		73		87	-16%
Total assets	$	36,387	$	38,400	-5%

Total MPF segment assets decreased as principal pay-downs and maturities of existing MPF Loans have exceeded new purchases and fundings. We have not purchased or funded MPF Loans at the same levels as in the past due to capital limitations resulting from reductions in our voluntary capital stock.

The following tables summarize MPF Loan information by product:

	June 30, 2007
MPF Loans by type as of	Medium Term1		Long Term 2		Total
MPF Program type-
Conventional loans-
Original MPF	$	1,681	$	3,577	$	5,258
MPF 100		1,879		3,136		5,015
MPF 125		294		647		941
MPF Plus		7,878		11,889		19,767
Government loans		298		4,544		4,842
Total par value of MPF Loans	$	12,030	$	23,793		35,823
Agent fees, premium (discount)						192
Loan commitment basis adjustment						(14	)
SFAS 133 hedging adjustments						(38	)
Receivable from future performance credit enhancement fees						1
Allowance for loan loss						(1	)
Total MPF Loans held in portfolio, net					$	35,963
	December 31, 2006
MPF Loans by type as of	Medium Term1		Long Term 2		Total
MPF Program type-
Conventional loans-
Original MPF	$	1,750	$	3,447	$	5,197
MPF 100		1,997		3,171		5,168
MPF 125		303		607		910
MPF Plus		8,555		12,665		21,220
Government loans		328		4,890		5,218
Total par value of MPF Loans	$	12,933	$	24,780		37,713
Agent fees, premium (discount)						211
Loan commitment basis adjustment						(14	)
SFAS 133 hedging adjustments						34
Receivable from future performance credit enhancement fees						1
Allowance for loan loss						(1	)
Total MPF Loans held in portfolio, net					$	37,944

¹ Contractual maturity of 15 years or less.

² Contractual maturity of greater than 15 years.

31

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

The par value of MPF Loans purchased or funded by MPF product type were as follows:

Three months ended June 30,	Purchased/Funded
	2007		2006		Change
MPF Product type-
Original MPF	$	198	$	171	16%
MPF 100		92		87	6%
MPF 125		44		32	38%
MPF Plus		14		95	-85%
Government		20		34	-41%
Total par value of MPF Loans
purchased/funded	$	368	$	419	-12%
Six months ended June 30,	Purchased/Funded
	2007		2006		Change
MPF Product type-
Original MPF	$	370	$	340	9%
MPF 100		171		151	13%
MPF 125		85		59	44%
MPF Plus		23		193	-88%
Government		34		67	-49%
Total par value of MPF Loans
purchased/funded	$	683	$	810	-16%

Our MPF Loan portfolio continues to decrease as anticipated and as we refocus our business on providing mortgage financing alternatives to our small and medium sized members and we expect this trend to continue.

Traditional Member Finance Segment Results of Operations

Net interest income is the difference between (i) interest income that we receive principally from advances, investment securities (excluding MPF Shared Funding investment securities classified as HTM) and Federal Funds sold, and (ii) our funding costs predominantly from consolidated obligation bonds. Interest income and expense from derivatives used to hedge advances and consolidated obligation bonds are included in interest income and interest expense. All other economic hedging activities, such as hedges of investment securities classified as trading, are included in non-interest income (loss).

The following tables summarize the results for the Traditional Member Finance segment:

Three months ended June 30,	2007		2006		Change
Interest income	$	650	$	552	18%
Interest expense		598		515	16%
Provision for credit losses		-		-	-
Net interest income		52		37	41%
Non-interest income (loss)		8		(8)	200%
Non-interest expense		14		15	-7%
Assessments		13		3	333%
Net Income	$	33	$	11	200%
Six months ended June 30,
Interest income	$	1,280	$	1,035	24%
Interest expense		1,170		970	21%
Provision for credit losses		-		-	-
Net interest income		110		65	69%
Non-interest income (loss)		4		(3)	233%
Non-interest expense		28		27	4%
Assessments		23		9	156%
Net Income	$	63	$	26	142%

Net interest income increased as a result of higher average balances in investments and Federal funds sold. Average yields increased as a result of an increase in market interest rates, but were largely offset by our increased funding costs.

Non-interest income (loss) is principally comprised of net gains or losses from trading securities and net gains or losses from derivatives and hedging activities. Trading securities are hedged economically with interest rate swaps and changes in fair value of these swaps are recognized in derivatives and hedging activities.

32

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

Traditional Member Finance Segment Statements of Condition Overview

The following tables summarize the major assets of the Traditional Member Finance segment and detail the breakdown of advances by type:

	June 30, 2007		December 31, 2006		Change
Advances	$	23,836	$	26,179	-9%
Investment securities		15,181		15,175	0%
Federal Funds sold and securities purchased under agreement to resell		12,826		6,470	98%
Other assets		515		490	5%
Total Assets	$	52,358	$	48,314	8%
As of	June 30, 2007		December 31, 2006		Change
Fixed-rate	$	12,339	$	15,105	-18%
Variable-rate		6,113		6,210	-2%
Putable-rate		4,939		4,538	9%
Other advances		526		388	36%
Total par value of advances		23,917		26,241	-9%
SFAS 133 hedging and other adjustments		(81)		(62)	-31%
Total advances	$	23,836	$	26,179	-9%

During the latter part of 2006 our advance balances increased as a result of greater member demand for short-term advances. We have experienced greater day-to-day volatility in overall advance balances as our members’ demand for liquidity fluctuates. Since the end of 2006, short-term advances decreased principally due to daily variability in demand from two members, especially on the quarter-end dates. Daily average balances on advances outstanding did not change significantly from 2006 to 2007, for either the three or six month periods. In addition, as the yield curve continues to remain flat, member demand for fixed rate putable advances has increased.

Federal Funds sold and securities purchased under agreements to resell increased during 2007, which caused our minimum regulatory capital ratio requirement to increase. In 2006, we purchased MBS securities to increase

our MBS investment portfolio to a level near the maximum we were allowed to hold. For a description of our minimum regulatory leverage and other capital requirements see Note 9 – Capital Stock and Mandatorily Redeemable Capital Stock on page 15 in this Form 10-Q.

Liquidity, Funding, and Capital Liquidity

Liquidity

We are required to maintain liquidity in accordance with certain Finance Board regulations and with policies established by our Board of Directors. Our policies include requirements for overnight liquidity, liquidity over a cumulative five-business-day period, and liquidity covering member deposits. For a description of these regulations and policies see “Liquidity, Funding, and Capital Resources” on page 45 in our 2006 Form 10-K.

Our policy requires overnight liquid assets to be at least equal to 5% of total assets. As of June 30, 2007, we had overnight liquidity of 14% of total assets, resulting in excess overnight liquidity of $8.4 billion.

The cumulative five-business-day liquidity measurement assumes there is a localized credit crisis for all FHLBs where the FHLBs do not have the ability to issue new consolidated obligations or borrow unsecured funds from other sources (e.g., purchasing Federal Funds or customer deposits). Our net liquidity in excess of our total uses and reserves over a cumulative five-business-day period was $21.8 billion as of June 30, 2007.

To support our liquidity on member deposits, Finance Board regulations require us to have an amount at least equal to current deposits invested in obligations of the United States government, deposits in eligible banks or trust companies, and/or advances with a maturity not exceeding five years. As of June 30, 2007, we had excess liquidity of $31.8 billion to support member deposits.

In light of our available liquidity under all three liquidity measures, we expect to be able to remain in compliance with our liquidity requirements.

Funding

Consolidated Obligations

For details of our consolidated obligations see Note 7 on page 14 in this Form 10-Q. For details of the amounts of consolidated obligations outstanding for the entire FHLB system, see Financial Highlights on page 23 in this Form 10-Q.

33

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

The following table provides additional information on our consolidated obligation discount notes outstanding as of the dates indicated. Discount notes have terms ranging from one day to one year in length.

	June 30, 2007		December 31, 2006
Weighted average rate at period-end		5.03%		5.04%
Daily average outstanding for the period ended	$	12,817	$	14,846
Weighted average rate for the year		5.24%		5.02%
Highest outstanding at any month-end	$	14,343	$	17,238

Capital

	June 30, 2007			December 31, 2006
	Capital Stock		% of total	Capital Stock		% of total
LaSalle Bank N.A. 1	$	230	9%	$	230	9%
One Mortgage Partners Corp.2		172	6%		172	7%
MidAmerica Bank, FSB1		146	5%		146	6%
M&I Marshall & Isley Bank		132	5%		120	5%
Associated Bank, NA		121	5%		121	5%
All other members		1,855	70%		1,812	68%
Total regulatory capital stock		2,656	100%		2,601	100%
Less MRCS3		(19)			(14)
Capital stock		2,637			2,587
Retained earnings		617			606
Accumulated OCI (loss)		(120)			(110)
Total capital	$	3,134		$	3,083
Total regulatory capital stock	$	2,656		$	2,601
Designated Amount of subordinated notes 4		1,000			1,000
Regulatory capital stock plus Designated Amount of subordinated notes		3,656			3,601
Retained earnings		617			606
Total regulatory capital plus Designated Amount of subordinated notes	$	4,273		$	4,207
Voluntary capital stock	$	989		$	912
As a percent of total		23.1%			21.7%

¹ LaSalle Bank N.A and MidAmerica Bank, FSB are subject to agreements to be acquired by institutions outside our district. See Note 2 on page 7 in this Form 10-Q.

² One Mortgage Partners Corp. is a subsidiary of JPMorgan Chase & Co.

³ Mandatorily redeemable capital stock is recorded as a liability but is included in the calculation of the regulatory capital and leverage ratios.

⁴ For the definition of Designated Amount see Note 9 on page 15 in this Form 10-Q.

34

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

Capital stock increased since December 31, 2006 primarily due to the statutory requirement that members purchase capital stock equal to the greater of 1% of their mortgage-related assets at the most recently available calendar year-end, or 5% of their outstanding advances, subject to minimum purchase requirements.

The other items making up total capital are retained earnings offset by accumulated OCI (loss). Retained earnings increased because of our Retained Earnings & Dividend Policy, as described in further detail below. This was offset by a similar increase in accumulated OCI (loss), which increased as a result of unrealized losses on hedging activity.

The mandatorily redeemable capital stock balance as of June 30, 2007 consists of 11 members that have requested voluntary withdrawal of membership or terminated membership due to an out-of-district merger. We expect to redeem $12 million of mandatorily redeemable capital stock over the next 12 months. There were no redemptions of voluntary capital stock in the first six months of 2007. The increase in the amount of our voluntary capital stock outstanding is due to the decline in advances outstanding since the beginning of the year. As members repay advances, capital stock no longer required to support the statutory requirement becomes voluntary capital stock.

Although by regulation we have the discretion to redeem voluntary capital stock at any time, our policy since May 2006 has been to redeem voluntary capital stock only during announced redemption windows authorized by the Finance Board, in accordance with our capital stock redemption guidelines and subject to meeting our minimum regulatory capital requirements. Our previously announced intention to redeem voluntary capital stock in the fourth quarter of 2007 is subject to regulatory authorization and may be impacted by our continuing efforts to develop a new capital/business plan or the possible business combination with the FHLB of Dallas, both of which will require Finance Board approval.

From October 2005 through May 2006, we discontinued voluntary capital stock redemptions as permitted by the FHLB Act and Finance Board regulations. See “Regulatory Agreement and Related Actions” on page 14 in our 2006 Form 10-K for further discussion of our voluntary capital stock redemptions.

From July 1, 2007 through July 31, 2007, there were no mandatorily redeemable capital stock reclassifications due to member mergers or withdrawals from membership. Redemption of members’ mandatorily redeemable capital stock is honored subject to, among other things, maintenance of our minimum regulatory leverage and other capital requirements, liquidity requirements (under certain circumstances), and Finance Board approval, to the extent required.

Minimum Regulatory Capital Requirements

During the second quarter of 2007 we invested in more short-term assets; as a result, the balance of our non-mortgage assets increased above 11% of our total assets, requiring us to maintain a 4.76% regulatory capital ratio. For a description of our minimum regulatory leverage and other capital requirements see Note 9 – Capital Stock and Mandatorily Redeemable Capital Stock on page 15 in this Form 10-Q.

Retained Earnings & Dividend Policy

Our Retained Earnings & Dividend Policy requires minimum additions to retained earnings for each of the years 2006 through 2009 of a fixed dollar amount. It also limits the amount of earnings payable as dividends to Adjusted Core Net Income minus the Retained Earnings Dollar Requirement, multiplied by the Dividend Payout Limitation (to the extent the Retained Earnings Dollar Requirement had been accumulated from the current year’s net income). For 2007, the Retained Earnings Dollar Requirement is $35 million and the Dividend Payout Limitation is 80%.

Adjusted Core Net Income for purposes of this policy is defined as our GAAP net income excluding gains or losses arising from significant non-recurring events, such as: advance prepayment fees, gains or losses on debt transfers and associated derivative contracts, other hedge instruments, and business restructuring. For a complete description of our policy see “Retained Earnings and Dividend Policy” on page 53 in our 2006 Form 10-K.

The following table sets forth the calculations under the Retained Earnings & Dividend Policy for 2007 year-to-date:

Six months ended June 30,	2007
Net income	$	50
Adjusted Core Net Income	$	53
Dividend rate on year to date earnings1		2.80%
Dividend amount to be paid on year to date earnings1	$	36

¹ Dividends as declared and paid in the quarter subsequent to the period earned.

We expect that the anticipated significant decrease in our net income and the requirement to retain earnings under our Retained Earnings & Dividend Policy will negatively impact our ability to pay future dividends at levels consistent with those paid previously, unless specific actions to improve income are implemented or the Policy is modified. We exceeded our required Retained Earnings Dollar Requirement for 2006 by $10 million, which we expect to apply to our Retained Earnings Dollar Requirement for 2007. We also retained $7 million of earnings from the first

35

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

six months of 2007. Based on this, we are required to retain an additional $18 million over the remainder of 2007 to meet our total $35 million requirement.

Dividends declared by the Board of Directors may be in the form of cash, stock, or a combination of cash and stock, subject to applicable regulations, including regulations prohibiting an FHLB with excess (voluntary) stock greater than 1% of total assets from paying dividends in the form of stock. Since our voluntary stock is greater than 1% of assets, we are required to pay dividends in cash, which has been our practice since the beginning of 2006. See “Financial Highlights” on page 23 in this Form 10-Q for a summary of cash dividends declared and paid.

Off- Balance-Sheet Arrangements

We believe we meet the scope exception for qualified special purpose entities under FIN 46-(R) “Consolidation of Variable Interest Entities,” as amended, and accordingly, do not consolidate our investment in MPF Shared Funding securities. Instead, the retained MPF Shared Funding securities are classified as HTM and are not publicly traded or guaranteed by any of the FHLBs. We do not have any other involvement in special purpose entities or off-balance-sheet conduits.

Contractual Obligations and Commitments

For additional information see “Contractual Obligations and Commitments” on page 37 in our 2006 Form 10-K. We have not experienced any material changes in contractual obligations and commitments from December 31, 2006.

Critical Accounting Policies and Estimates

We did not implement any material change to our accounting policies or estimates, nor did we implement any new accounting policy that had a material impact on our results of operations or financial condition, during the quarter ended June 30, 2007. See “Critical Accounting Policies and Estimates” on page 55 in our 2006 Form 10-K. For the impact that recently issued accounting standards will have on our financial statements, see Accounting and Reporting Developments in Note 2 on page 7 in this Form 10-Q.

Risk Management

Credit Risk

Credit risk is the risk of loss due to default or non-performance of an obligor or counterparty. We are exposed to credit risk principally through advances or commitments to our members, MPF Loans and mortgage insurance providers, derivatives counterparties, and issuers of investment securities. We have established policies and procedures to limit and help monitor our exposures to credit risk.

We are also subject to certain regulatory limits on the amount of unsecured credit outstanding to any one counterparty or group of affiliated counterparties, based in part on our total regulatory capital. As part of the Finance Board’s actions on April 18, 2006, we were authorized to determine compliance with the unsecured credit limits based on the sum of our outstanding capital stock, retained earnings, and the Designated Amount of outstanding subordinated notes for any period that we are subject to the Regulatory Leverage Limit.

36

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

Investments

The following table summarizes the carrying value of our investment securities portfolio by type of investment and credit rating:

			Long Term Rating				Short Term         Rating
As of June 30, 2007	Government		AAA		AA		A-1 or Higher		Unrated		Total
Non-Mortgage Backed Securities:
Commercial paper	$	-	$	-	$	-	$	2,524	$	-	$	2,524
Government-sponsored enterprises		1,454		-		-		-		-		1,454
Consolidated obligations of other FHLBs		25		-		-		-		-		25
State or local housing agency obligations		-		8		52		-		-		60
Small Business Administration/Small Business Investment Companies		538		-		-		-		-		538
Total non-MBS		2,017		8		52		2,524		-		4,601
Mortgage Backed Securities:
Government-sponsored enterprises		5,267		-		-		-		5		5,272
Government-guaranteed		32		-		-		-		-		32
Privately Issued		-		5,267		-		-		9		5,276
MPF Shared Funding		-		340		11		-		-		351
Total MBS		5,299		5,607		11		-		14		10,931
Total investment Securities	$	7,316	$	5,615	$	63	$	2,524	$	14	$	15,532

We maintain a portfolio of investments for liquidity purposes and to generate additional earnings. To ensure the availability of funds to meet member credit needs, we maintain a portfolio of short-term liquid assets, principally overnight and term Federal Funds. Our investment securities portfolios include securities issued by the United States government, United States government agencies, and GSEs, MPF Shared Funding securities, and MBS that are issued by GSEs or that carry the highest ratings from Moody’s, S&P, or Fitch. Securities issued by GSEs are not obligations of, and are not guaranteed, by the United States government.

At June 30, 2007 our MBS portfolio included $5.3 billion in AAA rated, privately issued mortgage backed securities. We classify our privately issued mortgage-backed securities portfolio as prime, non-traditional or sub-prime based upon the asset category of the majority of underlying mortgages collateralizing the security at origination. Sub-prime and non-traditional mortgage loans may suffer from higher delinquencies and greater loss severities than traditional prime mortgages. We implemented a policy to monitor concentration limits for sub-prime and non-traditional mortgage loans in order to manage this credit risk. $1.7 billion and $3.3 billion of privately issued AAA rated MBS securities are collateralized by mortgage loans that are considered sub-prime or non-traditional.

As of July 31, 2007 none of the tranches we hold have been downgraded from their initial AAA rating or put on a credit

watch list. Also, none of these tranches have losses which have existed for a period greater than 12 months. See Item 1A. Risk Factors on page 43 in this Form 10-Q

Advances

We are required by the FHLB Act to obtain sufficient collateral on advances, after discounting for liquidation and other risks, to protect against losses. At June 30, 2007 and December 31, 2006, we had a security interest in collateral, with an estimated liquidation value in excess of outstanding advances. We have not recorded any allowance for losses on our advances. For further discussion of eligible collateral and our credit risk exposure on advances, see “Advances” on page 60 in our 2006 Form 10-K.

Under our collateral guidelines, members may pledge mortgage loans and MBS that could include sub-prime and non-traditional mortgage loans. For collateral purposes, we define sub-prime mortgage loans as loans originated by a member or its affiliate under a segregated Sub-prime Lending Program, as defined by our member’s regulator. Non-traditional mortgage loans consist of closed-end, adjustable-rate mortgages that allow the borrower to defer repayment of interest, unless the mortgage is underwritten at the fully indexed rate and contains annual caps on interest rate increases.

Based upon a review of the MBS collateral pledged to the Bank and delinquency ratios of our members’ mortgage loan portfolios, we do not believe that the amount of

37

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

sub-prime and non-traditional mortgage loans and MBS was material compared to the total amount of residential mortgage loan and MBS collateral pledged to us. As part of the credit review process, we may require more collateral or limit or restrict members from pledging sub-prime and non-traditional mortgage loans or sub-prime and non-traditional mortgage MBS as collateral, if we determine that a member has a concentration of them in its pledged collateral.

MPF Loans

Under the MPF Program, we purchase conforming conventional and government fixed-rate mortgage loans secured by one-to-four family residential properties with maturities from five to 30 years. We do not purchase or fund sub-prime or non-traditional mortgages through the MPF Program.

Credit Enhancement Structure Overview

Under the MPF Program, the PFI’s credit enhancement obligation (“CE Amount”) represents a direct liability to pay credit losses incurred with respect to a Master Commitment or the requirement of the PFI to obtain and pay for a supplemental mortgage insurance (“SMI”) policy insuring us for a portion of the credit losses arising from the Master Commitment. The PFI’s credit enhancement protection (“CEP Amount”) may take the form of the CE Amount and/or the PFI may contract for a contingent performance based credit enhancement fee whereby such fees are reduced by losses up to a certain amount arising under the Master Commitment.

The credit risk on MPF Loans is the potential for financial loss due to borrower default and depreciation in the value of the real estate collateral securing the MPF Loan, offset by the PFI’s CEP Amount. We also face credit risk on MPF Loans to the extent such losses are not recoverable under the primary mortgage insurance (“PMI”) or SMI, as well as the PFI’s failure to pay servicer paid losses not covered by FHA or HUD insurance, or VA or RHS guarantees. The amount of our MPF Loan portfolio exposed to credit losses not recoverable from third party sources was approximately $30 billion and $31 billion at June 30, 2007 and December 31, 2006.

Our actual credit exposure is significantly less than these amounts. The borrower’s equity, which represents the fair value of the underlying property in excess of the outstanding MPF Loan balance, has not been considered because the fair value of all underlying properties is not readily determinable.

A significant decline in the value of the underlying property would have to occur before we would be exposed to credit

losses. However, our average loan-to-value (“LTV”) ratio at origination was 67% for both dates and for those loans with an LTV over 80%, PMI is required. In addition, our outstanding MPF Loan portfolio balance had a weighted average FICO^® score of 738 and 737 for June 30, 2007 and December 31, 2006. Our conventional (non-government) MPF Loans have not experienced any appreciable change in the rate of delinquencies 90 days or more, including foreclosures, over the past year. This rate was 0.26% at June 30, 2006, 0.24% at December 31, 2006, and 0.25% at June 30, 2007.

The allowance for loans losses for MPF Loans was $1 million at both June 30, 2007 and December 31, 2006. There have been no material charge-offs or recoveries to the allowance for loan losses during the six months ended June 30, 2007.

For more information on our credit risk exposure on MPF Loans, see “Credit Risk Exposure” on page 63 in our 2006 Form 10-K.

Setting Credit Enhancement Levels

Finance Board regulations require that MPF Loans be credit enhanced so that our risk of loss is equivalent to the losses of an investor in an “AA” rated mortgage-backed security, unless we maintain additional retained earnings in addition to a general allowance for losses. In our role as MPF Provider, we analyze the risk characteristics of each MPF Loan (as provided by the PFI) using S&P’s LEVELS model in order to determine the required CE Amount for a loan or group of loans to be funded or acquired by an MPF Bank (“MPF Program Methodology”).

The PFI’s CE Amount (including the SMI policy for MPF Plus) is calculated using the MPF Program Methodology to equal the difference between the amount needed for the Master Commitment to have a rating equivalent to a “AA” rated mortgage-backed security and our initial first loss account (“FLA”) exposure (which is zero for the Original MPF product). We determine our FLA exposure by taking the initial FLA and reducing it by the estimated value of any performance based credit enhancement fees (“CE Fees”) that would otherwise be payable to the PFI but which we expect to retain to recoup FLA losses.

The MPF Bank and PFI share the risk of credit losses on MPF Loans by structuring potential losses on conventional MPF Loans into layers with respect to each Master Commitment. The first layer or portion of credit losses that an MPF Bank is potentially obligated to incur is the FLA, as determined based upon the MPF product selected by the PFI. The FLA functions as a tracking mechanism for determining the point after which the PFI, in its role as credit

38

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

enhancer, would be required to cover losses. The FLA is not a cash collateral account, and does not give an MPF Bank any right or obligation to receive or pay cash or any other collateral. For MPF products with performance based CE Fees, the MPF Bank may withhold CE Fees to recover losses at the FLA level essentially transferring a portion of the first layer risk of credit loss to the PFI.

In determining the estimated rating for Master Commitments with an FLA equal to 100 basis points (all MPF 100, MPF 125 and some MPF Plus Master Commitments), we partially rely on our ability to reduce performance based CE Fees when measuring our effective FLA exposure. As a result, we can either hold additional retained earnings against the related Master Commitments in accordance with the AMA regulations or purchase SMI to upgrade the estimated rating of the Master Commitment to the equivalent of an “AA” rated mortgage-backed security. We elected to cancel our additional SMI policies effective May 31, 2007. The amount of coverage required decreased, so the policies were no longer beneficial. Instead, we have elected to hold additional retained earnings of $49 million against the related Master Commitments, for a total of $99 million at June 30, 2007.

For MPF Plus, the PFI is required to provide an SMI policy as part of the product’s structure. As of June 30, 2007 and December 31, 2006, the outstanding balance of MPF Plus Loans for which the PFIs have obtained SMI coverage was $19 billion and $21 billion and the amount of coverage provided against losses was $449 million at June 30, 2007 and $666 million at December 31, 2006.

Concentration Risks

In conjunction with assessing credit risks on the MPF Loan portfolio, we also assess concentration risks which could negatively impact this portfolio. A summary of the concentration risks are discussed below:

CE Amount Concentration – At June 30, 2007 one PFI provided 10% or more of the outstanding MPF Loan CE Amount. This PFI had $34 million or 12% of the total MPF Loan CE Amount outstanding. If this PFI failed to meet its contractual obligation to cover losses under the CE Amount, which in some instances requires the maintenance of SMI, we may incur increased credit losses depending upon the performance of the related MPF Loans.

SMI Provider Concentration – Mortgage Guaranty Insurance Company (“MGIC”) and Genworth Mortgage Insurance Corp. provided 57% and 16%, of SMI coverage for MPF Loans at June 30, 2007 and 64% and 12 % at December 31, 2006. As of June 30, 2007, we had SMI

coverage for MPF Loans from MGIC of $256 million and from Radian of $6 million.

On February 6, 2007 MGIC Investment Corporation, parent company of MGIC, announced plans to merge with Radian Group, Inc., which provided 1% of SMI coverage for MPF Loans at June 30, 2007 and December 31, 2006. The merger was approved by shareholders and is expected to be complete by the fourth quarter 2007.

Historically, we have not claimed any losses in excess of the policy deductible against an SMI company. If MGIC and/or Genworth Mortgage Insurance Corp. were to default on their insurance obligations and loan level losses for MPF Loans were to increase, we may experience increased credit losses.

We perform a quarterly analysis evaluating the concentration risk with the SMI companies. In addition, based on MPF Program requirements, if an SMI company’s claims paying ability rating falls below AA-, the PFI will have six months, at its option, to replace the SMI policy with coverage from another approved SMI company, accept the obligation as its own undertaking, or forego the performance based CE fees. Fitch analysts have downgraded MGIC’s insurance financial strength to AA and placed Radian’s insurance financial strength AA rating on a negative credit watch as a result of concerns surrounding the their investment in Credit-Based Asset Servicing and Securitization LLC (“C-BASS”), a New York-based mortgage company which has faced margin calls recently due to its participation in the subprime market. In light of this C-BASS impairment, MGIC is analyzing whether it is obligated to complete its pending merger with Radian. Fitch has stated that they expect to affirm the rating of Radian at the present level following completion of the merger, but if the merger does not occur they expect the rating to be downgraded by one notch.

Geographic Concentration – We have MPF Loans in all 50 states, Washington, D.C., and Puerto Rico. No single zip code represents more than 1% of MPF Loans on our statements of condition. Our largest concentrations of MPF Loans (of 10% or more) were secured by properties located in Wisconsin, Illinois, and California. An overall decline in the economy or the residential real estate market of, or the occurrence of a natural disaster in these states could adversely affect the value of the mortgaged properties and increase the risk of delinquency, foreclosure, bankruptcy or loss on MPF Loans.

Derivatives

We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative

39

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

agreements. The degree of counterparty risk depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. We manage counterparty credit risk through credit analysis, collateral requirements, and adherence to the requirements set forth in our policies and Finance Board regulations. Based on credit analyses and collateral requirements, we do not anticipate any credit losses on our derivative agreements.

The contractual or notional amount of derivatives reflects our involvement in the various classes of financial instruments. The notional amount of derivatives does not measure our credit risk exposure, and our maximum credit exposure is substantially less than the notional amount. We require collateral agreements on all derivatives that establish collateral delivery thresholds. Our maximum credit risk is the estimated cost of replacing interest-rate swaps, forward agreements, mandatory delivery commitments for MPF Loans, and purchased caps and floors that have a net positive market value if the counterparty defaults and the related collateral, if any, is of no value. This collateral has not been sold or repledged. In determining maximum credit risk, we consider accrued interest receivables and payables, and the legal right to offset derivative assets and liabilities by counterparty. Collateral with respect to derivatives with members includes collateral assigned to us, as evidenced by a written security agreement and held by the member for our benefit. At June 30, 2007 and December 31, 2006 our maximum credit risk as defined above was $53 million and $41 million.

We engage in most of our derivative transactions with large money-center banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations.

At June 30, 2007 we had two counterparties that accounted for approximately 29% of the total outstanding notional amount of our derivative contracts. At June 30, 2007 we did not have any credit exposure to these counterparties. No other derivative counterparty accounted for greater than 10% of the total outstanding notional amount of our derivative contracts.

The following table summarizes our derivative counterparty credit exposure which is monitored on an individual counterparty basis. Net Exposure after Collateral may not equal the difference between Exposure at Fair Value and Collateral Held because some individual counterparties are over-collateralized.

Counterparty   Credit Rating as of   June 30, 2007	Notional   Amount		Exposure at     Fair Value		Collateral     Held		Net Exposure After   Collateral
AAA	$	25	$	-	$	-	$	-
AA		31,356		8		-		8
A		29,210		22		16		6
BBB		9		-		-		-
Member institutions1		90		1		-		-
Affiliates2 -
AAA		1,861		3		3		-
AA		7,657		19		19
A		-		-		-		-
Total derivatives	$	70,208	$	53	$	38	$	14

¹ Member Institutions include: (i) derivatives with members where we are acting as an intermediary, and (ii) delivery commitments for MPF Loans.

² Affiliates are derivative counterparties who are affiliates of our members.

Debt Ratings

There have been no changes to our debt ratings or to the ratings on the consolidated obligations of the FHLBs since December 31, 2006. See “Debt Ratings” on page 68 in our 2006 Form 10-K for further details.

Operational and Business Risk

See “Risk Management” on page 58 in our 2006 Form 10-K for information regarding operational risk.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk Management

Market risk is the potential for loss due to market value changes in financial instruments we hold. Interest rate risk is a critical component of market risk. We are exposed to interest rate risk primarily from the effect of changes in interest rates on our interest-earning assets and our funding sources which finance these assets. Mortgage-related assets are the predominant sources of interest rate risk in our market risk profile. Those assets include MPF Loans and mortgage-backed securities. To mitigate the risk of loss, we have established policies and procedures, which include guidelines on the amount of exposure to interest rate changes we are willing to accept. In addition, we monitor the risk to our revenue, net interest margin and average maturity of our interest-earning assets and funding sources. See “Market Risk Management” on page 69 in our 2006 Form 10-K for further discussion.

40

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

Impact of Interest Rates Changes on the Net Value of Financial Instruments

We perform various sensitivity analyses that quantify the impact of interest rate changes on the fair value of equity, which is defined as the net fair value our assets, liabilities (excluding mandatorily redeemable capital stock), and commitments. These analyses incorporate assumed changes in the interest rate environment, including selected hypothetical instantaneous parallel shifts in the yield curve. The Finance Board and our members use these sensitivity analyses to assess our market risk profile relative to other FHLBs.

The following table summarizes the estimated change in fair value of equity given hypothetical instantaneous parallel shifts in the yield curve.

Interest Rate Change	Fair Value Change as of:
	June 30, 2007	December 31, 2006
-2.00%	-3.1%	-4.8%
-1.00%	3.0%	-0.7%
-0.50%	1.9%	0.8%
Base	0.0%	0.0%
+0.50%	-0.9%	-2.0%
+1.00%	-0.2%	-3.2%
+2.00%	3.8%	-3.6%

The estimated change in fair value is driven by changes in duration, which is the exposure to changes in interest rate levels, and convexity, which measures duration changes as a function of interest rate changes. The duration and convexity profiles across all parallel interest rate shifts has improved since December 31, 2006, resulting in more favorable outcomes in the estimated changes in the fair value of equity. As shown in the previous table, all parallel interest rate scenarios produce either smaller losses, larger gains, or, in the cases of the -1.00% and +2.00% parallel interest rate shifts, gains where previously losses were projected.

This sensitivity analysis is limited in that it captures only changes in duration and convexity. Other risk exposures, including option volatility, non-parallel changes in the yield curve, and spreads are held constant or are not incorporated into the analysis. The sensitivity analysis only reflects a particular point in time. It does not incorporate changes in the relationship of one interest rate index versus another. As with all models, it is subject to the accuracy of the assumptions used, including prepayment forecasts and discount rates. It does not incorporate other factors that would impact our overall financial performance. Lastly, not all changes in fair value would impact current or future period earnings. Significant portions of the assets and liabilities on the statements of condition are not held at fair value.

12-Month Average Duration Gap

Duration gap is calculated by aggregating the dollar duration of all assets, liabilities and derivatives, and dividing that amount by the total fair value of assets. Dollar duration is the result of multiplying the fair value of an instrument by its duration. Duration gap is expressed in months and determines the sensitivity of assets, liabilities, and derivatives to interest rate changes. A positive duration gap indicates that the portfolio has exposure to rising interest rates, whereas a negative duration gap indicates the portfolio has exposure to falling interest rates.

The 12-month average duration gap is calculated based upon 12 consecutive month-end observations of duration gap for the periods ending on the dates shown. The following table presents our 12-month rolling average duration gap and calculated duration gap at June 30, 2007 and December 31, 2006.

Portfolio Duration Gap (in months)	June 30, 2007	December 31, 2006
Actual as of date shown	0.8	0.9
12-month rolling average ended	0.5	0.5

Duration of Equity

Duration of equity measures the impact of interest rate changes on the value of equity. It is calculated using the net interest rate sensitivity of the portfolio to a ±25 basis point parallel shock across the yield curve (change in market value of equity) and dividing that amount by the total fair value of equity. Duration of equity is reported in years.

Finance Board policy requires that we maintain our duration of equity within a range of ±5 years at current interest rate levels. If one assumes an instantaneous parallel increase or decrease in interest rates of 200 basis points the duration of equity must stay within a range of ±7 years. Our approach to managing interest rate risk is to maintain duration of equity within the advisory guideline by utilizing economic and SFAS 133 hedges as opposed to taking a specific duration position based on forecasted interest rates.

The table below shows our exposure to interest rate risk in accordance with the Finance Board policy and our advisory guideline.

Duration of Equity (in years) as of	Down 200	Base	Up 200
June 30, 2007	-4.2	3.2	-4.7
December 31, 2006	1.4	3.1	0.0

We perform an attribution analysis to take a retrospective look at the changes in fair values of our financial assets,

41

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

liabilities and equity and determine the individual impact that results from changes in duration, convexity, curve, volatility, spread and other factors. As of June 30, 2007, we had an unrecognized market value loss of $1.4 billion, whereas as of December 31, 2006, the unrecognized loss was $1.2 billion. The ratio of market value to book value of equity also declined over this period from 63% to 55%. This decline in the market value of equity relative to book value is principally due to the $551 million increase in unrecognized losses in the MPF Loans over this period from $905 million to $1.5 billion. This increase in unrecognized losses can be attributed to two major factors that have negatively impacted the market value of our MPF loans: (1) interest rates have risen from the historically low-rate environment when a majority of the MPF loans were originated (i.e., 2003-05); and (2) spreads have increased related to the overall credit and liquidity concerns in the US mortgage market.

We currently manage the market value changes due to the effects of duration, convexity and volatility associated with MPF loans by using derivatives and callable debt, but, we do not manage the market value changes due to changes in spread.

Derivatives

See Note 11 on page 16 in this Form 10-Q for details regarding the nature of our derivative and hedging activities, in addition to the instruments used on assets and liabilities being hedged.

Item 4. Controls and Procedures

Pursuant to Section 404 of the Sarbanes-Oxley Act and SEC rules thereunder, our management will be required to provide a report on the internal control over financial reporting beginning with the annual report on Form 10-K for the year ended December 31, 2007.

Disclosure Controls and Procedures

Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, the principal executive officer and principal financial officer concluded as of the Evaluation Date that the disclosure controls and procedures were effective such that information relating to us that is required to be disclosed in reports filed with the SEC (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

For the second quarter of 2007 there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

Consolidated Obligations

Our disclosure controls and procedures include controls and procedures for accumulating and communicating information relating to our joint and several liability for the consolidated obligations of other FHLBs. For further information, see “Controls and Procedures” on page 72 of our 2006 Form 10-K.

Item 4T. Controls and Procedures

Not applicable.

42

Federal Home Loan Bank of Chicago

(Dollars in millions except per share amounts unless otherwise indicated)

PART II

Item 1. Legal Proceedings

We may be subject to various legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any such proceedings that might result in our ultimate liability in an amount that will have a material effect on our financial condition or results of operations.

Item 1A. Risk Factors

This item should be read in conjunction with the risk factors set forth in our 2006 Form 10-K.

We are subject to increased credit risk exposures related to sub-prime and non-traditional mortgage loans that back our MBS investments, and any increased delinquency rates and credit losses could adversely affect the yield on or value of our investments.

We invest in AAA rated tranches of privately issued MBS which may be backed by sub-prime and non-traditional mortgage loans. In recent months, delinquencies and losses with respect to residential mortgage loans generally have increased, particularly in the sub-prime and non-traditional sectors. In addition, residential property values in many states have declined or remained stable, after extended periods during which those values appreciated. If delinquency and loss rates on sub-prime and non-traditional mortgages continue to increase, or there is a rapid decline in residential real estate values, we could experience reduced yields or losses on our MBS investments. In addition, the fair value of our related MBS investments may be adversely affected.

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

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
32.1	Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer
32.2	Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer

43

Federal Home Loan Bank of Chicago

Signatures

Pursuant to the requirements 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 Chicago
	/s/    J. Mikesell Thomas
	By: J. Mikesell Thomas
	Title: President and Chief Executive Officer
	(Principal Executive Officer)
Date: August 10, 2007
	/s/     Roger D. Lundstrom
	By: Roger D. Lundstrom
	Title: Executive Vice President – Financial Information
	(Principal Financial Officer and Principal Accounting Officer)
Date: August 10, 2007

S-1