10-12G

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934

FEDERAL HOME LOAN BANK OF PITTSBURGH

Federally chartered corporation	25-6001324
(State or other jurisdiction of incorporation or organization)	(IRS employer identification number)
601 Grant Street
Pittsburgh, PA	15219
(Address of principal executive offices)	(Zip code)

Telephone number, including area code:
(412) 288-3400

Securities to be registered pursuant to Section 12(g) of the Act.
Capital Stock, $100 per share par value

FEDERAL HOME LOAN BANK OF PITTSBURGH

TABLE OF CONTENTS

Item 1: Business	4
Item 2: Financial Information	15
Item 3: Properties	68
Item 4: Security Ownership of Certain Beneficial Owners and Management	68
Item 5: Directors and Executive Officers	69
Item 6: Executive Compensation	72
Item 7: Certain Relationships and Related Transactions	74
Item 8: Legal Proceedings	74
Item 9: Market for the FHLBank’s Common Stock and Related Security Holder Matters	74
Item 10: Recent Sales of Unregistered Securities	75
Item 11: Description of FHLBank Securities to be Registered	75
Item 12: Indemnification of Directors and Officers	76
Item 13: Financial Statements	77
Item 14: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	145
Item 15: Financial Statements and Exhibits	146
Exhibit 3.1
Exhibit 3.2
Exhibit 4.1
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 10.6
Exhibit 10.7
Exhibit 10.8
Exhibit 12.1
Exhibit 99.1

2

Forward-looking Information

Statements contained in this report, including statements describing the objectives, projections, estimates or future predictions of the Federal Home Loan Bank of Pittsburgh (“FHLBank”) may be “forward-looking statements.” These statements may use forward-looking terminology, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The FHLBank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that actual results could differ materially from those expressed or implied in these forward-looking statements.

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

• economic and market conditions;

• demand for member loans resulting from changes in the FHLBank’s member deposit flows and credit demands;

• volatility of market prices, rates and indices that could affect the value of investments or collateral held by the FHLBank as security for the obligations of FHLBank members and counterparties to interest rate exchange agreements and similar agreements;

• political events – including legislative, regulatory, judicial or other developments – that affect the FHLBank, its members, its counterparties and/or investors in the consolidated obligations of the FHLBank;

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

• ability to develop and support technology and information systems, including the Internet, sufficient to manage the risks of the FHLBank’s business activities effectively;

• changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements, including changes in the relative attractiveness of consolidated obligations as compared to other investment opportunities;

• timing and volume of market activity;

• ability to introduce new FHLBank products and services, and to successfully manage the risks associated with those products and services, including new types of collateral securing loans;

• risk of loss arising from litigation that might be filed against the FHLBank or other FHLBanks;

• inflation/deflation; and

• changes in credit ratings and related market pricing associated with the FHLBank’s investments.

3

Item 1: Business

General

     History. The Federal Home Loan Bank of Pittsburgh (FHLBank) is one of twelve Federal Home Loan Banks (FHLBanks). The FHLBanks operate as separate entities with their own management, employees and boards of directors. The twelve FHLBanks, along with the Office of Finance (the FHLBanks’ fiscal agent) and the Federal Housing Finance Board (the FHLBanks’ regulator) make up the Federal Home Loan Bank System (FHLBank System). The FHLBanks were organized under the authority of the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act). The FHLBanks are commonly referred to as government-sponsored enterprises (GSEs), which generally means they are a combination of private capital (see below) and public sponsorship. The public sponsorship attributes include: (1) being exempt from federal, state and local taxation, except real estate taxes; (2) being exempt from registration under the Securities Act of 1933 (1933 Act) (the FHLBanks are required by Finance Board regulation to register a class of their equity securities under the Securities Exchange Act of 1934 (1934 Act)); (3) having six of its directors appointed by its regulator; and (4) having a line of credit with the United States Treasury.

     Cooperative. The FHLBank is a cooperative institution, owned by financial institutions that are also its primary customers. Any commercial bank, savings and loan association, cooperative bank, homestead association, insurance company or insured depository institution that maintains its principal place of business in Delaware, Pennsylvania or West Virginia and that meets varying requirements can apply for membership in the FHLBank. All members are required to purchase capital stock in the FHLBank as a condition of membership. The capital stock of the FHLBank can be purchased only by members.

     Mission. The FHLBank’s primary mission is to intermediate between the capital markets and the housing market through member financial institutions. The FHLBank issues debt to the public (consolidated obligations and discount notes) in the capital markets through the Office of Finance (OF) and uses these funds to provide its member financial institutions with a reliable source of credit for housing and community development. The United States government does not guarantee, either directly or indirectly, the debt securities or other obligations of the FHLBank or the FHLBank System. The FHLBank provides credit for housing and community development through two primary programs. First, it provides members with loans against the security of residential mortgages and other types of high-quality collateral; second, the FHLBank purchases residential mortgage loans originated by or through member institutions. The FHLBank also offers other types of credit and non-credit products and services to member institutions. These include letters of credit, interest rate exchange agreements (interest rate swaps, caps, collars, floors, swaptions and similar transactions), affordable housing grants, securities safekeeping, and deposit products and services.

     Supervision and Regulation. The FHLBank is supervised and regulated by the Federal Housing Finance Board (Finance Board), which is an independent agency in the executive branch of the United States government. The Finance Board ensures that the FHLBank carries out its housing finance mission, remains adequately capitalized and able to raise funds in the capital markets, and operates in a safe and sound manner. The Finance Board establishes regulations and otherwise supervises the operations of the FHLBank, primarily via periodic examinations.

Business Segments

     The FHLBank reviews its operations by grouping its products and services within two business segments. The measure of profit or loss and total assets for each segment is contained in Note 21, Segments, in the Notes to Audited Financial Statements. The products and services provided reflect the manner in which financial information is evaluated by management of the FHLBank. These business segments are:

• Traditional Member Finance

• Mortgage Partnership Finance^® (MPF^®) Program

Traditional Member Finance

Loans

     General Process. The FHLBank makes loans (sometimes referred to as advances) to members and eligible nonmember housing associates on the security of pledged mortgages and other eligible types of collateral.

4

     Loan Programs. The following table describes the most common loan products offered by the FHLBank as of March 31, 2005. Information presented in the following discussion on loan programs relates expressly to Loans to Members and excludes mortgage loans and loans relating to the Banking on Business (“BOB”) program.

FHLBank of Pittsburgh - Loan Portfolio as of March 31, 2005

Product	Description	Pricing 1	Maturity	Portfolio %
RepoPlus	Short-term fixed-rate loans; principal and interest paid at maturity.	8 to 30 bps	1 day up to 3 months		28.2	%
Mid-Term Repo Plus	Mid-term fixed- and adjustable-rate loans; principal paid at maturity; interest paid quarterly.	8 to 30 bps	3 months to 3 years		26.6	%
Term Loans	Long-term fixed-rate and adjustable-rate loans; principal paid at maturity; interest paid quarterly; (includes amortizing loans with principal and interest paid monthly.	10 to 35 bps	> 3 years to 30 years		15.0	%
Convertible Select	Long-term fixed-rate and adjustable-rate loans with conversion options sold by member; principal paid at maturity; interest paid quarterly.	20 to 45 bps	1 year to 15 years		29.4	%
Hedge Select	Long-term fixed-rate and adjustable-rate loans with embedded options bought by member; principal paid at maturity; interest paid quarterly.	10 to 35 bps	1 year to 10 years		0.7	%
Returnable	Loans in which the member has the right to prepay the loan after a specified period.	10 to 35 bps	>3 years to 30 years		0.1	%

¹ Pricing spread over the FHLBank’s cost of funds.

     RepoPlus. The FHLBank serves as a major source of liquidity for its members. Access to the FHLBank’s loans for liquidity purposes can reduce the amount of low-yielding liquid assets a member would otherwise need to hold for liquidity purposes. One of the FHLBank’s primary loan products for member liquidity is RepoPlus, a revolving line of credit which allows members to borrow, repay and reborrow based on the terms of the line.

     Mid-Term RepoPlus. The FHLBank’s loan products also help members in asset/liability management. The FHLBank offers loans to minimize the risks associated with the maturity, amortization and prepayment characteristics of mortgage loans. Such loans from the FHLBank can reduce a member’s interest rate risk associated with holding long-term fixed-rate mortgages. The Mid-Term RepoPlus assists members with managing intermediate term interest rate risk. To assist members with managing the basis risk, or the risk of a change in the spread relationship between two indices, the FHLBank offers adjustable-rate Mid-Term RepoPlus with maturity terms between 3 months and 3 years. Adjustable-rate, Mid-Term RepoPlus can be priced based on a prime, Fed funds, 1-month LIBOR or 3-month LIBOR index. The LIBOR indices are most popular with the FHLBank’s members.

     Term Loans. For managing longer-term interest rate risk and to assist with asset/liability management, the FHLBank offers long-term fixed-rate loans for terms from 3 to 30 years. Amortizing long-term fixed-rate loans can be fully amortized on a monthly basis over the term of the loan or amortized balloon-style, based on an amortization term longer than the maturity of the loan.

     Convertible Select, Hedge Select, and Returnable. Some of the FHLBank’s loans contain embedded options. The member can either sell an embedded option to the FHLBank or it can purchase an embedded option from the FHLBank. As of March 31, 2005, loans to members for which the FHLBank had the right to call the loan, called Convertible Select, constituted $11.0 billion of the portfolio. Loans in which the members purchased an option from the FHLBank, called Hedge Select, constituted $252 million of the loan portfolio. Loans in which members have the right to prepay the loan, called Returnable, constituted $30 million of the portfolio.

5

     Collateral. The FHLBank is required to obtain and maintain a security interest in eligible collateral at the time it originates or renews a loan. Eligible collateral includes: 1) whole first mortgages on improved residential property, or securities representing a whole interest in such mortgages; 2) securities issued, insured, or guaranteed by the United States government or any of its agencies, including without limitation the Government National Mortgage Association (Ginnie Mae); 3) mortgage-backed securities issued or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) neither of which are guaranteed by the U.S. Government; 4) cash or deposits in the FHLBank; and 5) other real estate-related collateral acceptable to the FHLBank provided that such collateral has a readily ascertainable value and the FHLBank can perfect a security interest in such property. An affiliate of a member may pledge eligible collateral to secure the indebtedness of the member. The affiliate does not have to be an insured financial institution.

     Community financial institutions (CFIs), which are members that have less than $567 million in average assets over the past three years, may pledge a broader array of collateral as security for loans from the FHLBank, including small-business loans, farm loans, and agriculture loans. This type of collateral pledged by CFIs comprises about 1% of the FHLBank’s collateral pool as of March 31, 2005.

     The FHLBank determines the type and amount of collateral each member has available to pledge as security for FHLBank loans by reviewing the call reports the members file with their primary banking regulators. Approximately 52% of the collateral used to secure loans made by the FHLBank is single-family, residential mortgage loans, which include a very low amount of manufactured housing loans. The next major category of collateral is high quality securities, including U.S. Treasuries, U.S. Agencies, Agency mortgage-backed securities and private label mortgage-backed securities with a credit rating of at least AA, all of which account for approximately 25% of the total amount of collateral held by members. The FHLBank also accepts other real estate-related collateral (“ORERC”), which is primarily commercial mortgages. ORERC accounts for approximately 22% of the total amount of eligible collateral held by the members as of March 31, 2005. Other than ORERC and CFI collateral, the FHLBank does not have a loan secured by a member’s pledge of any other form of non-residential mortgage asset.

     As additional security for each member’s indebtedness, the FHLBank has a statutory lien on the member’s capital stock in the FHLBank.

     Priority. The FHLBank Act affords any security interest granted to the FHLBank by any member, or any affiliate of a member, priority over the claims and rights of any third party, including any receiver, conservator, trustee or similar party having rights of a lien creditor. The only two exceptions are: (1) claims and rights that would be entitled to priority under otherwise applicable law and are held by actual bona fide purchasers for value or (2) parties that are secured by actual perfected security interests.

     Blanket Lien and Perfection. Generally, the FHLBank lends to member institutions under a blanket lien, which grants the FHLBank a security interest in all eligible assets of the member. At the request of the member, the FHLBank will limit its security interest to specific assets pledged by the member. The FHLBank generally perfects its security interest under Article 9 of the Uniform Commercial Code by filing a financing statement. With respect to non-blanket lien borrowers (typically insurance companies and housing associates), the FHLBank takes control of all collateral at the time the loan is made through the delivery of securities or mortgages to the FHLBank or its custodian. In the event of a deterioration in the financial condition of a blanket lien member, the FHLBank will take control of sufficient eligible collateral to perfect its security interest in collateral pledged to secure the borrowers’ indebtedness to the FHLBank.

     Specialized Programs. The FHLBank helps members meet their Community Reinvestment Act responsibilities. Through community investment cash advance programs such as the Affordable Housing Program (AHP) and the Community Lending Program, members have access to subsidized and other low-cost funding. Members use the funds from these programs to create affordable rental and homeownership opportunities, and for commercial and economic development activities that benefit low- and moderate-income neighborhoods, thus contributing to the revitalization of their communities.

     Nonmember Borrowers. In addition to member institutions, the FHLBank is permitted under the FHLBank Act to make loans to nonmember housing associates that are approved mortgagees under Title II of the National Housing Act. These eligible housing associates must be chartered under law, be subject to inspection and supervision by a governmental agency, and lend their own funds as their principal activity in the mortgage field. The Finance Board must approve each applicant. Housing associates are not subject to certain provisions of the FHLBank Act that are applicable to members, such as the capital stock purchase requirements. However, they are generally subject to more restrictive lending and collateral requirements than those applicable to members. Housing associates, because they are not depository institutions, are not eligible to become FHLBank members and purchase capital stock in the FHLBank. Housing associates that are not also state

6

housing finance agencies are limited to pledging to the FHLBank as security for FHLBank loans their FHA mortgage loans and securities backed by FHA mortgage loans. Housing associates that are state housing finance agencies (that is, they are also instrumentalities of state or local government) may, in addition to pledging FHA mortgages and securities backed by FHA mortgages, also pledge as collateral for FHLBank loans: 1) U.S. Treasury and agency securities; 2) single and multifamily mortgages; 3) securities backed by single and multifamily mortgages; and 4) deposits with the FHLBank. As of March 31, 2005, the FHLBank had approved two state housing finance agencies as housing associate borrowers. One of the housing associates has borrowed from the FHLBank from time to time, although as of March 31, 2005, neither had any outstanding loans from the FHLBank.

Investments

     Overview. The FHLBank maintains a portfolio of investments for two main purposes: liquidity and additional earnings. For liquidity purposes, the FHLBank invests in shorter-term securities to ensure the availability of funds to meet member credit needs. These short-term investments comprise primarily overnight Federal funds, term Federal funds, interest-bearing certificates of deposit and commercial paper.

     The FHLBank further enhances interest income by maintaining a longer-term investment portfolio, which includes securities issued by the U.S. Treasury, U.S. government agencies, government sponsored mortgage agencies, state and local government agencies, and mortgage-backed securities. Investments in government-sponsored mortgage-backed securities are not included in the U.S. government agency obligations classification used throughout this Form 10. Securities carry the top two ratings from Moody’s Investors Service or Standard & Poor’s. The long-term investment portfolio provides the FHLBank with higher returns than those available in the short-term money markets. Investment income also bolsters the FHLBank’s capacity to meet its commitment to affordable housing and community investment, to cover operating expenses, and to satisfy its statutory Resolution Funding Corporation (“REFCORP”) assessment.

     Prohibitions. Under Finance Board regulations, the FHLBank is prohibited from investing in certain types of securities, including:

• instruments, such as common stock, that represent an ownership in an entity, other than stock in investment companies or certain investments targeted to low-income persons or communities;

• instruments issued by non-U.S. entities, other than those issued by United States branches and agency offices of foreign commercial banks;

• non-investment-grade debt instruments, other than certain investments targeted to low-income persons or communities and instruments that were downgraded after purchase by the FHLBank;

• whole mortgages or other whole loans, other than; (1) those acquired under a FHLBank’s mortgage purchase program; (2) certain investments targeted to low-income persons or communities; (3) certain marketable direct obligations of state, local or tribal government units or agencies, having at least the second highest credit rating from a nationally recognized statistical rating organization; (4) mortgage-backed securities or asset-backed securities backed by manufactured housing loans or home equity loans; and (5) certain foreign housing loans authorized under Section 12(b) of the FHLBank Act; and

• non-U.S.-dollar-denominated securities.

     The Finance Board regulations further limit the FHLBank’s investment in mortgage-backed securities (“MBS”) and asset-backed securities. This provision requires that the total book value of mortgage-backed securities owned by the FHLBank not exceed 300% of the FHLBank’s previous month-end capital on the day it purchases additional MBS securities. In addition, the FHLBank is prohibited from purchasing:

• interest-only or principal-only stripped mortgage-backed securities;

• residual-interest or interest-accrual classes of collateralized mortgage obligations and real estate mortgage investment conduits;

• fixed-rate or floating-rate mortgage-backed securities that on the trade date are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest rate change of 300 basis points.

7

     The FHLBanks are prohibited from purchasing a FHLBank consolidated obligation as part of the consolidated obligation’s initial issuance. The FHLBank Investment Policy prohibits the FHLBank from investing in a FHLBank issue at any time.

     The FHLBank does not have any special-purpose entities or any other type of off-balance-sheet conduits.

Deposits

     The FHLBank Act allows the FHLBank to accept deposits from its members, from any institution for which it is providing correspondent services, from other FHLBanks, or from other federal instrumentalities. Deposit programs provide some of the FHLBank’s funding resources, while also giving members a low-risk earning asset that satisfies their regulatory liquidity requirements. The FHLBank offers several types of deposit programs to its members including demand, overnight and term deposits.

Mortgage Partnership Finance® (MPF®) Program (Mortgage Loans Held for Portfolio)

     In 1999, the FHLBank began participating in the Mortgage Partnership Finance (MPF) Program under which the FHLBank invests in qualifying five- to 30-year conventional conforming and government-insured fixed-rate mortgage loans on one-to-four family residential properties. The MPF program was developed by the FHLBank of Chicago in 1997 to provide participating members a secondary market alternative that allows for increased balance sheet liquidity as well as removes assets that carry interest rate and prepayment risks from their balance sheets. In addition, the MPF program provides a greater degree of competition among mortgage purchasers and allows small and mid-sized community-based financial institutions to participate more effectively in the secondary mortgage market.

     The FHLBank held approximately $8.5 billion and $7.8 billion in mortgage loans at par under this program at December 31, 2004 and December 31, 2003 respectively. As of December 31, 2004 and 2003, mortgage loans represented approximately 13.9% and 14.7% of total assets, respectively. In terms of income, mortgage loans contributed about 20.6% to total interest income in 2004, and contributed 18.6% to total interest income in 2003. As of March 31, 2005, the FHLBank held $8.7 billion in mortgage loans at par under this program. For additional financial information regarding the MPF segment, see Footnote No. 21 “Segments” of the Audited Financial Statements.

     A key difference between the MPF program and other secondary market alternatives is the separation of various activities and risks associated with mortgage lending. Under the MPF program, participating members generally market, originate and service qualifying residential mortgages for sale to the FHLBank. Member banks have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing participating members to originate mortgage loans, whether through retail or wholesale operations, and to retain or acquire servicing of mortgage loans, the MPF program gives control of the functions that relate to credit risk to participating members. Members may also receive a servicing fee if they choose to retain loan servicing rather than transfer servicing rights to a third-party provider.

     Participating members are paid a credit enhancement fee for retaining and managing a portion of the credit risk in the mortgage loan portfolios sold to the FHLBank. The credit enhancement structure motivates participating members to minimize loan losses on mortgage loans sold to the FHLBank. Additionally, the FHLBank is responsible for managing the interest rate risk, prepayment risk, liquidity risk and a residual portion of the credit risk associated with the mortgage loans. These loans are then either held by the FHLBank in its portfolio or participated in whole or part to the FHLBank of Chicago or other FHLBanks.

     The FHLBank of Chicago, under agreement with the FHLBank, provides the operational support for the MPF program. As compensation for providing the support services, the FHLBank grants a 25% participation interest to the FHLBank of Chicago in most mortgage loans purchased by the FHLBank under the MPF program. All credit losses on individual mortgage loans or pools of loans with participations are shared with the FHLBank of Chicago or other FHLBanks on a pro rata basis to the extent of each FHLBank’s participation.

     The FHLBank offers various products under the MPF program that are differentiated primarily by their credit risk structures. While the credit risk structure may vary, the Finance Board requires that all pools of MPF loans purchased by the FHLBank have the credit risk exposure equivalent of a double-A rated mortgage instrument. The FHLBank maintains an allowance for credit losses on its mortgage loans that management believes is adequate to absorb any probable losses incurred beyond the credit enhancements provided by participating members. The FHLBank had approximately $725,000,

8

$680,000 and $514,000 in reserves for credit losses for this program at March 31, 2005, December 31, 2004 and December 31, 2003 respectively.

     The FHLBank offers the following three products under the MPF program: Original MPF, MPF Plus, and Original MPF for Federal Housing Administration/Veterans Administration (FHA/VA) Loans. The credit risk structure for each of the products can be briefly summarized as follows:

     Original MPF. Under Original MPF, the first layer of credit losses for each pool of loans (following any primary mortgage insurance coverage) is applied to a first loss account, which increases over the life of the loans. Any losses related to this first loss account are the responsibility of the FHLBank. The member then provides a credit enhancement obligation for each pool of loans. The member is paid a fixed credit enhancement fee for providing this credit enhancement obligation. Loan losses applied to the first loss account as well as losses in excess of the first loss account and the member’s credit enhancement obligation are recorded by the FHLBank.

     MPF Plus. Under MPF Plus, the first layer of losses (following any primary mortgage insurance coverage) is applied to a first loss account equal to a specified percentage of the loans in the pool as of the sale date. Any losses related to this first loss account are the responsibility of the FHLBank. The member obtains additional credit enhancement in the form of a supplemental mortgage insurance policy to cover losses in excess of the deductible of the policy, which is equal to the first loss account. Loan losses not covered by the first loss account and supplemental mortgage insurance are paid by the member, up to the amount of the member’s credit enhancement obligation for each pool of loans. If applicable, the member is paid a fixed credit enhancement fee and a performance-based fee for providing a credit enhancement obligation. Loan losses applied to the first loss account as well as losses in excess of the combined first loss account, the supplemental mortgage insurance policy amount, and the member’s credit enhancement obligation are recorded by the FHLBank.

     Original MPF for FHA/VA Loans. With Original MPF for FHA/VA loans, participating members obtain FHA insurance or a VA guarantee and are responsible for all unreimbursed servicing expenses. In addition to a servicing fee, the member receives a government loan fee. Since the member servicing these mortgage loans takes the risk with respect to amounts not reimbursed by either the FHA or VA, this product results in the FHLBank having mortgage loans that are expected to perform similar to Federal agency securities.

     Additional information regarding the MPF program and the products offered by the FHLBank is provided in Item 2: Management’s Discussion and Analysis of Financial Condition beginning on page 16.

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

Recoverable Assistance

     The FHLBank offers The Banking On Business (“BOB”) program to members, which is specifically targeted to small businesses in the FHLBank’s district. The program objective is to assist in the start up or expansion of small business. Under the Banking On Business program, the FHLBank makes funds available to its members to be used as additional equity for a member loan to an approved small business borrower, therefore enabling small businesses to qualify for credit that would not otherwise be available. Funds are awarded and disbursed as “recoverable assistance.” Members collect and remit to the FHLBank repayment of the recoverable assistance, with interest per the agreement, provided the business is able to repay the assistance provided.

9

Debt Financing—Consolidated Obligations

     Primary Funding. The primary source of funds for the FHLBank is the sale of debt securities, known as consolidated obligations. Consolidated obligations are the joint and several obligations of the FHLBanks, backed by the financial resources of the twelve FHLBanks. Consolidated obligations are not obligations of the United States, and the United States does not guarantee them, either directly or indirectly. Moody’s has rated consolidated obligations AAA/P-1, and Standard & Poor’s has rated them AAA/A-1+.

	Consolidated Obligations as of
(in thousands)	3/31/05		12/31/04		12/31/03
Consolidated Obligations:
Consolidated Bonds	$	42,312,954	$	41,383,521	$	36,621,817
Discount Notes		13,030,463		15,160,634		11,536,705
Total FHLBank Consolidated Obligations	$	55,343,417	$	56,544,155	$	48,158,522
Total FHLBank System Combined Consolidated Obligations – at par	$	872,733,059	$	869,241,591	$	759,528,850

     Office of Finance. The OF has responsibility for issuing and servicing consolidated obligations on behalf of the FHLBanks. The OF also serves as a source of information for the FHLBank on capital market developments, markets the FHLBank System’s debt on behalf of the FHLBank, selects and evaluates underwriters, prepares combined financial statements, administers REFCORP and the Financing Corporation (FICO), and manages the FHLBank’s relationship with the rating agencies with respect to the consolidated obligations.

     Consolidated Bonds. On behalf of the FHLBank, the OF issues consolidated bonds that the FHLBank uses to provide loans to members. The FHLBank also uses consolidated bonds to fund the MPF Program and its investment portfolio. Typically, the maturity of these bonds ranges from one year to ten years, but the maturity is not subject to any statutory or regulatory limit. Consolidated bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. To reduce interest rate risk, the FHLBank swaps much of its term debt issuance to floating rates through the use of interest rate swaps.

     Consolidated bonds can be issued in several ways. The first way is through a daily auction for both bullet (non-callable and non-amortizing) and American-style callable bonds. Consolidated bonds can also be issued through a selling group, which typically has multiple lead investment banks on each issue. The third way consolidated bonds can be issued is through a negotiated transaction with one or more dealers. The process for issuing consolidated bonds under the three general methods above can vary depending on whether the bonds are non-callable or callable.

     For example, the FHLBank can request funding through the TAP auction program (quarterly debt issuances that reopen or “tap” into the same CUSIP number) for fixed-rate non-callable (bullet) bonds. This program uses specific maturities that may be reopened daily during a three-month period through competitive auctions. The goal of the TAP program is to aggregate frequent smaller issues into a larger bond issue that may have greater market liquidity.

     Consolidated Discount Notes. The OF also sells consolidated discount notes to provide short-term funds for loans to members for seasonal and cyclical fluctuations in savings flows and mortgage financing, short-term investments, and other funding needs. Discount notes are sold at a discount and mature at par. These securities have maturities of up to 360 days.

     There are three methods for issuing discount notes. First, the OF auctions 1, 2, 3, & 6-month discount notes twice per week and any FHLBank can request an amount to be issued. The market sets the price for these securities. The second method of issuance is via the OF’s window program through which any FHLBank can offer a specified amount of discount notes at a maximum rate and a specified term up to 360 days. These securities are offered daily through a 16-member consolidated discount note selling group of broker-dealers. The third method is via reverse inquiry, wherein a dealer requests a specified amount of discount notes be issued for a specific date and price. The OF shows reverse inquiries to the FHLBanks, which may or may not choose to issue those particular discount notes.

10

Capital Resources

     Capital Plan. From its enactment in 1932, the FHLB Act provided for a subscription-based capital structure for the FHLBanks. The amount of capital stock that each FHLBank issued was determined by a statutory formula establishing how much FHLBank stock each member was required to purchase. With the enactment of the Gramm-Leach-Bliley Act, the statutory subscription-based member stock purchase formula was replaced with requirements for total capital, leverage capital, and risk-based capital for the FHLBanks. The FHLBanks were also required to develop new capital plans to replace the previous statutory structure.

     The FHLBank implemented its new capital plan on December 16, 2002 (“Capital Plan”). In general, the Capital Plan requires each member to own stock in an amount equal to the aggregate of a membership stock requirement and an activity-based stock requirement. The FHLBank may adjust these requirements from time to time within limits established in the Capital Plan.

     FHLBank capital stock may not be publicly traded, and it can be issued, exchanged, redeemed, and repurchased only at its stated par value of $100 per share. Under the new Capital Plan, capital stock may be redeemed upon five years’ notice, subject to certain conditions. In addition, the FHLBank has the discretion to repurchase excess stock from members. Ranges have been built into the Capital Plan to allow the FHLBank to adjust the stock purchase requirement to meet its regulatory capital requirements, if necessary. Please refer to the detailed description of the Capital Plan attached as Exhibit 99.1.

     Dividends and Retained Earnings. The FHLBank may pay dividends from current net earnings or previously retained earnings, subject to certain limitations and conditions. The FHLBank’s Board of Directors may declare and pay dividends in either cash or capital stock. The FHLBank currently pays a cash dividend. In the fourth quarter 2003, the FHLBank’s Board of Directors adopted a methodology for determining the FHLBank’s target level of retained earnings based on a number of criteria, including certain risk factors. The objective of this target is to provide reasonable protection against the possibility of a temporary impairment of value in the FHLBank’s capital stock and to promote greater stability of dividends. The FHLBank’s retained earnings plan currently calls for the FHLBank to achieve a balance of retained earnings of $200 million over time. As of March 31, 2005, the balance of retained earnings was $116.4 million. Since the fourth quarter 2003, in order to build retained earnings to reach this target, the FHLBank’s Board of Directors has declared dividends limited to 50 percent of management’s estimate of net income earned during the dividend period. The Board of Directors of the FHLBank will continue to review the targeted amount of retained earnings on a regular basis.

Derivatives and Hedging Activities

     The FHLBank enters into interest rate swaps, options, swaptions, interest rate cap and floor agreements, and forward contracts (collectively known as derivatives) to manage its exposure to changes in interest rates. The FHLBank uses these derivatives to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve its risk management objectives. The FHLBank uses derivative financial instruments in three ways: (1) by designating them as a fair value or cash flow hedge of an underlying financial instrument, a firm commitment or a forecasted transaction; (2) by acting as an intermediary between members and the capital markets; or (3) as an asset/liability management tool, such as a non-SFAS 133 economic hedge. See Note 17 “Derivatives and Hedging Activities” for additional information.

     For example, the FHLBank uses derivatives in its overall interest rate risk management to adjust the interest rate sensitivity of assets and liabilities. The FHLBank also uses derivatives to manage embedded options in assets and liabilities; to hedge the market value of existing assets, liabilities and anticipated transactions; to hedge the duration risk of prepayable instruments; and to reduce funding costs. To reduce funding costs, the FHLBank may enter into derivatives concurrently with the issuance of consolidated obligations. This strategy of issuing bonds while simultaneously entering into derivatives enables the FHLBank to offer a wider range of attractively priced loans to its members. The continued attractiveness of such debt depends on price relationships in both the bond market and derivative markets. If conditions in these markets change, the FHLBank may alter the types or terms of the bonds issued. In acting as an intermediary between members and the capital markets, the FHLBank enables its smaller members to access the capital markets in a cost-efficient manner.

     The Finance Board effectively regulates the FHLBank’s use of derivatives through its Financial Management Policy, which establishes guidelines for derivatives. The Financial Management Policy prohibits trading in or the speculative use of these instruments and limits credit risk arising from these instruments. The FHLBank may use derivatives only to manage its interest rate risk positions and mortgage prepayment risk positions. All derivatives are recorded in the Statement of Condition at fair value.

11

     The following table summarizes the primary derivative instruments, along with the specific hedge transaction utilized to manage various interest rate risks.

	Derivative Hedging
Hedge Classification	Instrument	Hedged Item	Purpose of Hedge Transaction
Economic Hedge Fair Value Hedge	Pay fixed, receive floating interest rate swap	Fixed-rate assets	To protect against an increase in interest rates by converting the asset’s fixed rate to a floating rate
Economic Hedge Fair Value Hedge	Receive fixed, pay floating interest rate swap	Noncallable fixed-rate debt	To protect against a decline in interest rates by converting the fixed rate to a variable rate
Economic Hedge Fair Value Hedge	Receive fixed, pay floating interest rate swap, call option	Callable fixed-rate debt	To protect against a decline in interest rates by converting the fixed rate to a variable rate.
Economic Hedge Cash Flow Hedge	Interest rate cap	Variable-rate debt	To protect against an increase in interest rates by providing an upper limit on the interest costs on debt in a rising rate environment
Economic Hedge	Interest rate floor	Variable-rate asset	To protect against a decrease in interest rates by providing a limit on interest earned on assets in a falling rate environment
Economic Hedge Fair Value Hedge	Indexed amortizing pay fixed, receive floating swap	Fixed-rate assets – mortgage loans	To protect against variability in interest rates and prepayment speeds by relating the notional principal of a pay fixed swap to a reference mortgage loan pool

     In the last hedge above, the FHLBank has entered into mortgage hedges using interest rate swaps whereby typically 30-year or 15-year mortgage pools are hedged for a term less than the contract. Initially, the notional amount of the swap equates to the principal amount of the mortgage. The notional amount of the swap adjusts to the amount remaining in a “reference pool” monthly. The reference pool is typically a GNMA or FNMA securitized mortgage pool. The term of the interest rate swap may vary based upon a number of factors, including management’s estimate of the term necessary to hedge most of the fair value risk in the specifically identified mortgage loans. These hedges receive fair value hedge treatment with any ineffectiveness recorded in the Statement of Operations.

Competition

     Loans to Members. The FHLBank competes with other suppliers of wholesale funding, both secured and unsecured, including investment banking firms, commercial banks, and brokered deposits largely on the basis of cost. Competition may be greater in regard to larger members, which have greater access to the capital markets.

     Purchase of Mortgage Loans. Members have several alternative outlets for their mortgage loan production including Fannie Mae, Freddie Mac, mortgage banker correspondent programs, and the national secondary loan market. The MPF Program competes with these alternatives on the basis of price and product attributes. Additionally, a member may elect to hold all or a portion of its mortgage loan production in portfolio potentially funded by a loan from the FHLBank.

     Issuance of Consolidated Obligations. The FHLBank competes with Fannie Mae, Freddie Mac and other government-sponsored enterprises as well as corporate, sovereign and supranational entities for funds raised through the issuance of unsecured debt in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt cost or lesser amounts of debt issued at the same cost than otherwise would be the case. In addition, the FHLBank’s status as a government-sponsored enterprise affords certain preferential treatment for its debt obligations under the current regulatory scheme for depository institutions operating in the United States as well as preferential tax treatment in a number of state and municipal jurisdictions. Any change in these regulatory conditions as they affect the holders of FHLBank debt obligations would likely alter the relative competitive position of such debt issuance resulting in potentially higher cost to the FHLBank.

12

     In addition, the sale of callable debt and the simultaneous execution of callable interest rate derivatives that mirror the debt have been an important source of funding for the FHLBank. There is considerable competition among high-credit-quality issuers in the markets for callable debt and for derivative agreements, which can raise the cost of issuing this form of debt.

Regulatory Oversight, Audits and Examinations

     Regulation. The Finance Board, an independent agency in the executive branch of the U.S. government, supervises and regulates the FHLBanks and the OF. The Finance Board establishes policies and regulations covering the operations of the FHLBanks. The Government Corporation Control Act provides that, before a government corporation issues and offers obligations to the public, the Secretary of the Treasury has the authority to prescribe the form, denomination, maturity, interest rate, and conditions of the obligations; the way and time issued; and the selling price. The U.S. Department of the Treasury receives the Finance Board’s annual report to Congress, monthly reports reflecting securities transactions of the FHLBanks, and other reports reflecting the operations of the FHLBanks.

     Final Rule on Registration Under the Securities Exchange Act of 1934. On June 23, 2004, the Finance Board adopted a final rule that requires the FHLBanks to register a class of securities with the Securities Exchange Commission (SEC) under Section 12(g) of the 1934 Act, bringing each FHLBank into the periodic disclosure regime as administered by the SEC. The FHLBank must register by June 30, 2005, with the registration becoming effective no later than August 29, 2005.

     Examination. The Finance Board conducts annual onsite examinations of the operations of the FHLBank. In addition, the Comptroller General has authority under the FHLBank Act to audit or examine the Finance Board and the FHLBank and to decide the extent to which they fairly and effectively fulfill the purposes of the FHLBank Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of the financial statements conducted by an independent registered public accounting firm. If the Comptroller General conducts such a review, then he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget, and the FHLBank in question. The Comptroller General may also conduct his or her own audit of any financial statements of the FHLBank.

     Audit. The FHLBank has an internal audit department that conducts routine internal audits and reports directly to the Audit Committee of the FHLBank’s Board of Directors. In addition, an independent registered public accounting firm audits the annual financial statements of the FHLBank. The independent registered public accounting firm (RPAF) conducts these audits following the Standards of the Public Company Accounting Oversight Board of the United States of America and Government Auditing Standards issued by the Comptroller General. The FHLBank, the Finance Board, and Congress all receive the audit reports.

Personnel

     As of May 31, 2005, the FHLBank had 221 full-time employee positions and five part-time employee positions, for a total of approximately 223.5 full-time equivalents. The employees are not represented by a collective bargaining unit and the FHLBank considers its relationship with its employees to be good.

Taxation

     The FHLBank is exempt from all federal, state and local taxation except for real estate property taxes.

Resolution Funding Corporation (REFCORP) and Affordable Housing Program (AHP) Assessments

     The FHLBank is obligated to make payments to REFCORP in an amount of 20% of net earnings after operating expenses and AHP expenses. The FHLBank must make these payments to REFCORP until the total amount of payments actually made by all twelve FHLBanks is equivalent to a $300 million annual annuity whose final maturity date is April 15, 2030. The Finance Board will shorten or lengthen the period during which the FHLBanks must make payments to REFCORP depending on actual payments relative to the referenced annuity. In addition, the Finance Board, in consultation with the Secretary of the Treasury, selects the appropriate discounting factors used in this calculation. The cumulative amount to be paid to REFCORP by the FHLBank is not determinable at this time due to the interrelationships of the future earnings of all FHLBanks and interest rates. See Note 1 “Summary of Significant Accounting Policies” of the Audited Financial Statements for additional information.

13

     In addition, annually the FHLBanks must set aside, on a combined basis, for the AHP the greater of an aggregate of $100 million or 10% of current year’s income before charges for AHP (but after expenses for REFCORP and restoring any interest expense related to dividends on capital stock treated as a liability under SFAS 150). Currently, combined assessments for REFCORP and AHP are the equivalent of a 26.5% effective rate for the FHLBank. The combined REFCORP and AHP assessments for the FHLBank were $36.4 million, $10.0 million, and $17.4 million for the years ended December 31, 2004, 2003 and 2002, respectively. The combined REFCORP and AHP assessments were $12.4 million and $10.7 million for the three months ended March 31, 2005, and 2004 respectively.

14

Item 2: Financial Information

Selected Financial Data

     The following table should be read in conjunction with the financial statements and related notes included in this report. The results of operations data for the three years ended December 31, 2004, 2003, and 2002 and the financial position data as of December 31, 2004 and 2003 are derived from the audited financial statements and footnotes included in this report. The results of operations data for the years ended December 31, 2001 and 2000, and the financial position data as of December 31, 2002, 2001 and 2000 are derived from the audited financial statements not included within this report. The results of operations data for the three months ended March 31, 2005 and 2004, and the financial position data are unaudited and are derived from the financial statements and footnotes included in this report.

(dollars in thousands)			Year ended December 31,
	3/31/05		2004		2003		2002		2001		2000
	(Unaudited)
Statement of Condition (at period-end)
Total assets	$	59,835,645	$	61,398,912	$	53,519,059	$	45,554,765	$	42,914,156	$	45,063,105
Mortgage loans held for portfolio, net		8,780,568		8,664,551		8,065,285		4,950,914		1,838,465		1,909,772
Loans to Members		37,766,906		38,989,126		34,671,987		29,262,399		29,315,410		25,945,961
Investments, interest-bearing deposits, deposits, federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities. (1)		12,483,302		12,926,347		9,991,942		10,395,503		11,063,887		15,378,269
Deposits and other borrowings		1,143,639		1,036,808		1,366,374		2,414,436		1,718,012		1,443,419
Consolidated obligations, net		55,343,417		56,544,155		48,158,522		39,361,793		38,270,470		40,432,863
Capital		2,589,231		2,778,578		2,372,542		1,899,740		1,978,055		2,174,490
AHP Payable		26,984		23,362		17,407		26,145		39,932		44,016
REFCORP Payable		9,761		8,942		2,505		2,822		6,498		10,017
Aggregate FHLB system wide consolidated Obligations – at par	$	872.7	$	869.2	$	759.5	$	680.7	$	637.3	$	614.1
(dollars in billions)

	Three months ended
Statement of Income	3/31/05			3/31/04			2004			2003			2002			2001			2000
	(Unaudited)
Net interest income before provision for credit losses on mortgage loans	$	52,082		$	25,476		$	134,562		$	112,007		$	202,333		$	238,592		$	262,155
Provision/(benefit)for credit losses on mortgage loans		44			12			166			(147	)		570			76			15
Other income		89			4,083			4,341			3,370			12,027			35,655			19,003
Net gain/(loss) on derivatives and hedging activities		8,067			12,784			31,182			(39,791	)		(109,869	)		(89,224	)		(58	)
Other expenses		13,552			10,461			41,233			38,023			38,519			46,406			45,280
Income before assessments		46,642			31,870			128,686			37,710			65,402			138,541			235,805
Assessments		12,385			10,687			36,373			10,004			17,352			34,378			62,560
Income before cumulative effect of change in accounting principle		34,257			21,183			92,313			27,706			48,050			104,163			173,245
Cumulative effect of change in accounting principle (2)		—			8,413			8,413			—			—			(8,962	)		—
Net income	$	34,257		$	29,596		$	100,726		$	27,706		$	48,050		$	95,201		$	173,245
Dividends declared	$	17,366		$	8,212		$	44,310		$	50,182		$	69,305		$	118,613		$	160,640
Weighted average dividend rate (3)		2.86	%		1.27	%		1.69	%		2.22	%		3.56	%		6.50	%		7.06	%
Return on average equity		5.37	%		4.84	%		3.74	%		1.18	%		2.37	%		4.90	%		7.24	%
Return on average assets		.24	%		.21	%		.17	%		.05	%		.10	%		.23	%		.36	%
Net interest margin (4)		.36	%		.19	%		.23	%		.22	%		.45	%		.59	%		.56	%
Total capital ratio (at period-end) (5)		4.33	%		4.64	%		4.53	%		4.43	%		4.17	%		4.61	%		4.83	%
Total average equity to average assets		4.38	%		4.42	%		4.60	%		4.47	%		4.38	%		4.68	%		4.96	%

15

Notes:

⁽¹⁾ None of these securities were purchased under agreement to resell.

⁽²⁾ The FHLBank adopted SFAS133 as of January 1, 2001, and recorded a net gain of $2.6 million on securities held at fair value and an $11.5 million net loss on derivatives and hedging activities. The FHLBank changed its method of amortizing and accreting deferred premiums and discounts on MBS and MPF loans as of June 30, 2004, and September 30, 2004, respectively. These changes were applied retroactively as of January 1, 2004. These changes resulted in cumulative income effects of $263,000 for the MBS and $8.2 million for the MPF loans that are reflected in the operating results of the year ended December 31, 2004. Please see Note 2—Change in Accounting Principle and Recently Issued Accounting Standards and Interpretations.

⁽³⁾ Weighted average dividend rates are dividends declared divided by the average of capital stock eligible for dividends based on the percentage of outstanding capital stock.

⁽⁴⁾ Net interest margin is net interest income before mortgage loan loss provision as a percentage of average earning assets.

⁽⁵⁾ Total capital ratio is capital stock plus retained earnings and accumulated other comprehensive income as a percentage of total assets at year-end.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations, including statements describing the objectives, projections, estimates or future predictions of the FHLBank and the OF may be “forward-looking statements.” These statements may use forward-looking terminology, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The FHLBank cautions that, by their nature, forward-looking statements involve risks and uncertainties including, but not limited to, the following: economic and market conditions;demand for member loans resulting from changes in the FHLBank’s member deposit flows and credit demands;volatility of market prices, rates and indices that could affect the value of investments or collateral held by the FHLBank as security for the obligations of FHLBank members and counterparties to interest rate exchange agreements and similar agreements;political events – including legislative, regulatory, judicial or other developments – that affect the FHLBank, its members, its counterparties and/or investors in the consolidated obligations of the FHLBank; competitive forces, including without limitation other sources of funding available to the FHLBank’s members, other entities borrowing funds in the capital markets, and the ability to attract and retain skilled individuals as employees of the FHLBank; ability to develop and support technology and information systems, including the Internet, sufficient to manage the risks of the FHLBank’s business activities effectively; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements, including changes in the relative attractiveness of consolidated obligations as compared to other investment opportunities; timing and volume of market activity; ability to introduce new FHLBank products and services, and to successfully manage the risks associated with those products and services, including new types of collateral securing loans; risk of loss arising from litigation that might be filed against the FHLBank or other FHLBanks; inflation/deflation; and changes in credit ratings and related market pricing associated with the FHLBank’s investments. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the FHLBank’s financial statements and notes included herein.

Uncertainties

     The following uncertainties that are known to management could cause reported financial information not to be necessarily indicative of future operating results or of future financial conditions.

     Limits or Changes in Access to Capital Markets. The U.S. Treasury Department has the authority to prescribe the form, denomination, maturity, interest rate and conditions of the obligations that the FHLBank issues to the public. It has been reported that the U.S. Treasury is considering imposing either limits or changes in the manner in which the FHLBanks may access the capital markets. A change in the frequency of accessing the capital markets could require the FHLBank to hold additional liquidity on its balance sheet, which could adversely impact the type of loan product the FHLBank could make available to its members as well as the financial performance of the FHLBank.

     Consolidation of Members. The number of members in the FHLBank continues to fall due to mergers, acquisitions and other consolidations among members and between members and non-member institutions. The loss of a significant number of members or a few large members that are large borrowers could impact the future performance of the FHLBank.

16

     Change in Borrowing Practices. The amount of loans to certain large members is very sensitive to FHLBank collateral practices and pricing. A change in the borrowing practice by large members could change the level of loans outstanding, either up or down, significantly in any period.

     Member Regulators. The regulators of the members have raised concerns about loan characteristics and collateral practices of the FHLBank. The level and type of loans to members could be adversely affected by action of the members’ regulators limiting the type and amount of borrowing from the FHLBank. Some regulators have also imposed limits on the amount of capital in the FHLBank a member may hold over and above its membership and activity based requirements.

Context and Overview

     The FHLBank is a government-sponsored enterprise (GSE), chartered by Congress to assure the flow of liquidity through its member financial institutions into the American housing market. As a GSE, the FHLBank’s principal strategic niche derives from its ability to raise funds in the capital markets at narrow spreads to the Treasury yield curve. This fundamental competitive advantage, coupled with the joint and several cross-guarantee on FHLBank System debt distinguishes the FHLBank in the capital markets, and enables the FHLBank to present attractively priced funding to members. Though chartered by Congress, the FHLBank is privately capitalized by its member institutions, which are voluntary participants in its cooperative structure. The character of the FHLBank as a voluntary cooperative with the status of a federal instrumentality differentiates this institution from a traditional banking company in three principal ways.

     First, members voluntarily commit capital required for membership principally in order to gain access to the funding and other services provided by the FHLBank. The value in membership does not derive only from a dividend on the capital investment, but also from the availability of favorably priced liquidity. It is important for the FHLBank to generate a reliable stream of earnings in order to provide dividends on capital stock, but management recognizes that financial institutions choose membership in the FHLBank principally for the value of the products offered within this cooperative.

     Second, because the FHLBank’s customers and shareholders are the same group of approximately 340 institutions, there is a need to balance the dividend expectations of shareholders, on the one hand, from the pricing expectations of customers, on the other, although both are the same institutions. By charging wider spreads on loans to customers, the FHLBank could generate higher dividends for shareholders. Yet these same shareholders viewed as customers would prefer narrower loan spreads. The FHLBank strives to achieve a balance between the twin goals of generating an attractive dividend and providing liquidity and other services to members at advantageous prices. The FHLBank does not strive to maximize the dividend yield on the stock as such, but to produce an earned dividend that compares favorably to short-term rates, compensating members for the cost of the capital they have invested in the FHLBank.

     Finally, the FHLBank is different from a traditional banking institution because its GSE charter is based on a public policy purpose to assure liquidity for housing, and especially, to enhance the availability of affordable housing for lower-income Americans. In upholding its public policy mission, the FHLBank offers a number of programs that consume a portion of earnings that might otherwise become available to its shareholders.

     The cooperative GSE character of this voluntary membership organization leads management to strive to maximize the value of FHLBank membership. That value is a combination of access to liquidity and other FHLBank services at favorable rates, plus a suitable dividend yield which is the outcome of the FHLBank’s financial performance.

Key Determinants of Financial Performance

     Many variables influence the financial performance of the FHLBank, but five factors exert the greatest effect, on the whole. These include:

• Earnings on Capital

• Spread Between the Yield on Assets and the Cost of Interest-bearing Liabilities

• Leverage

• Duration

• Interest Rates and Yield Curve Shifts

     Any discussion of the financial condition and performance of the FHLBank must necessarily focus on the interplay of these five factors.

17

     Earnings on Capital. Member institutions held $2.6 billion in capital stock in the FHLBank at March 31, 2005. These capital funds represent a source of funding for the FHLBank, and are invested in the FHLBank’s asset portfolios. The maturities of the FHLBank’s assets are generally short-term in nature, or they have interest rate resets that refer to short-term rates, or they have been hedged with interest rate exchange agreements in which a short-term interest rate is received. As a result, the rates earned on the FHLBank’s capital reflect short-term rates in the market. If short-term rates are rising, the absolute dollar earnings of the FHLBank will increase because the spread between asset yields and interest-free capital will widen. Similarly, if short-term interest rates are declining, the FHLBank will earn less in absolute dollars on its capital funding. Earnings on capital are a major component of net interest income in absolute terms, and will rise or fall with prevailing short-term interest rates.

     The FHLBank strives to earn a dividend that is attractive relative to short-term rates in the market. If rates are trending downward, FHLBank earnings will trend downwards due to lower earnings on capital. The decline in earnings in this case is not problematic in regard to dividends, however, since the dividend target is also ratcheting downward with rates.

     During 2004, financial markets reversed a three-year trend of declining interest rates, and the Federal Open Market Committee began a measured program of increasing the Federal funds rate, ending the year after five rate increases at the level of 2.25%. A higher level of short-term rates in 2005 would have the effect of increasing Bank net interest income because of the wider spread earned on capital. At the same time, however, a somewhat higher level of short-term rates will raise the expectations of members for an upward-adjusting dividend yield as well.

     Spread Between the Yield on Assets and the Cost of Interest-bearing Liabilities. Earnings on capital represent one of two components in the FHLBank’s net interest margin. The other component is the spread that the FHLBank earns between the yield on assets and the cost of interest-bearing liabilities. These liabilities included $1.1 billion in members’ deposits and $55.3 billion in consolidated obligation bonds and notes (COs) at March 31, 2005. Because of its GSE status and joint and several obligation, the FHLBank is able to issue debt in the capital markets at spreads to the Treasury yield curve which are narrower than non-GSE issuers. This Agency spread advantage is a strategic competitive advantage for the FHLBank.

     On a year-end to year-end basis over the last two years, indicative spreads of the FHLBank bullet debt to Treasuries narrowed in the long end (three to ten years) and generally widened in the short end (three months to two years) as rates trended lower from year-end 2002 through May of 2003, then started rising. The three main drivers of spreads were (1) supply-demand dynamics; (2) the general level and direction of interest rates; and (3) swap spreads. The predominant factor was supply-demand dynamics, as Fannie Mae and Freddie Mac significantly reduced issuance in the long end and foreign investors, large buyers of agency debt, moved out the curve. With respect to interest rates, spreads are generally directional, narrowing as rates fall and widening as rates rise. Finally, swap spreads moved in a fashion similar to FHLBank bullet spreads during this two year period, reflecting the market’s declining concern with credit quality.

     The FHLBank deploys its Agency-priced funding in three broad categories of assets. First, as a ready source of liquidity for members, the FHLBank maintains ample liquid asset portfolios of various money market, commercial paper, short term Treasury and Agency issues that can be promptly converted into cash to meet members’ loan demand. Because these liquid assets are short-term in nature and of the highest quality, spreads between these assets and CO funding are generally measured at 15 basis points or less.

     A second asset category is loans to members, or advances, which totaled $37.8 billion at March 31, 2005, and represented 63.2% of total assets. In order to maximize the value of membership, the FHLBank strives to price its advances at levels that members will find not only competitive, but positively advantageous relative to their other sources of wholesale funding, if any. Typically the aggregate spread on the FHLBank loan portfolio averages approximately 23 basis points over the FHLBank’s cost of funds. In effect, members of the FHLBank receive funding as if they were drawing funds from the capital markets as AAA-rated firms.

     Narrow spreads on liquid assets and on loans to members may not be sufficient to generate an adequate net interest margin. As a result, the FHLBank holds a third segment of its assets in mortgage-based investments. Mortgage-based investments are deemed to be consistent with the FHLBank’s housing mission and produce wider spreads against CO funding. Spreads on MBS are typically twice the spread that the FHLBank derives on loans to members. At March 31, 2005, the FHLBank held $8.0 billion in MBS assets.

     A second category of mortgage-based assets held by the FHLBank is originated through the Mortgage Partnership Finance Program (MPF). At March 31, 2005, MPF assets totaled $8.8 billion and represented 14.7% of the FHLBank’s assets. In terms of financial performance and impact on spread, the role of MPF is akin to the role of MBS. That is, the FHLBank expects to earn a wider spread on MPF assets in order to enhance the weighted-average spread on total assets.

18

     The FHLBank’s spread between asset yields and the cost of underlying funds is an area of keen focus for management. While earnings on capital are driven by market interest rates, the spread that the FHLBank earns between assets and interest-bearing funds is determined by several factors. The FHLBank must successfully intermediate between the amount, timing, structure and hedging of its debt issuance and the deployment of funds in loans to members or in attractive investment opportunities as they arise. The FHLBank must balance the need for balance sheet liquidity against the opportunity cost of holding a portfolio of lower-yielding assets. Management is challenged to find and position investment assets that conform to standards of AAA or AA-rated credit quality while respecting limits on interest rate risk exposure.

     For the full year 2004, the FHLBank’s spread between interest-earning assets and interest-bearing liabilities was 12 basis points. Its earnings on capital contributed 11 basis points, for a combined net interest margin of 23 basis points.

     Leverage. Under the Gramm-Leach-Bliley Act of 1999, the FHLBank is required at all times to maintain a ratio of capital-to-assets at a level of 4% or higher. Using the reciprocal, the ratio of assets-to-capital cannot exceed 25 turns (25X). Since the leverage limit of 25X capital cannot be exceeded, it necessary as a practical matter for the FHLBank to operate at a lower degree of leverage to allow for the day-to-day flow of assets and funds.

     The degree of leverage that the FHLBank maintains directly affects the FHLBank’s resulting return on equity (ROE), and therefore its dividend-paying capacity. The higher the degree of leverage allowed and attained, the higher the potential ROE that the FHLBank can achieve. During periods of a weak economy and reduced demand for loans by members, the FHLBank’s loan portfolio may shrink in size, and with limits on the size of allowable investment portfolios, the overall balance sheet size of the FHLBank may contract noticeably. FHLBank may strive to maintain an optimal degree of leverage by repurchasing excess capital stock held at discretion by members.

     As a rule, management of the FHLBank strives to maintain a level of assets in relation to capital stock in a range of 21X to 24X capital. This serves to optimize the FHLBank’s ROE within all applicable limits.

     Duration. The FHLBank uses various metrics to measure, monitor and control its interest rate risk exposure. Policies on interest rate risk management established by the Board of Directors focus on duration of equity as a key measurement and control device for managing and reporting on the FHLBank’s exposure to changing rate environments. Under Board policy, the FHLBank must maintain a base case duration of equity within 4.5 years, and in shock cases of +/- 200 basis points, within 7 years. Management believes that these duration limits are relatively conservative in contrast with a conventional financial institution. It is the intent of the Board and management to maintain a comparatively low interest rate risk profile. The FHLBank’s liquid asset portfolios, because of their short tenor, do not expose the FHLBank to meaningful interest rate risk. The FHLBank’s member loan portfolio is hedged and funded to a generally balanced position without material rate risk exposure. The interest rate risk in the FHLBank’s balance sheet is principally located in the MBS and MPF portfolios. These mortgage portfolios may be short-funded to a degree, giving rise to duration risk, and because of the extension and prepayment risk inherent in mortgage assets, the mortgage portfolios are also the principal source of convexity risk in the FHLBank.

     The flow of assets, funding and capital in the FHLBank causes the FHLBank’s duration position to fluctuate on a daily basis. Also, rising interest rates exert upward pressure on the FHLBank’s duration of equity, while falling rates tend to have the opposite effect. After the first quarter of 2004, the general upward trend in interest rates at the short end of the yield curve put upward pressure on the FHLBank’s duration position.

     The incremental cost of issuing higher-costing debt or purchasing option contracts to contain convexity can retard the FHLBank’s earnings momentum. It is the policy of the Board and management, however, to bear the cost of such measures in order to preserve what is considered to be a conservative interest rate risk profile.

     In a strengthening economy with rising interest rates, the FHLBank’s financial performance may be improved by higher earnings on capital, widening spreads on assets, and growing loan demand. Yet these positive influences are offset to some degree because the same economic circumstances increase the FHLBank’s duration and create a need to spend resources to reduce this exposure. Conversely, weak economic circumstances and falling rates typically reduce the FHLBank’s duration profile and the costs of policy compliance, but this benefit may be offset by declining earnings on capital.

     Interest Rates and Yield Curve Shifts. A final and important determinant in the financial performance of the FHLBank involves shifting movements in the yield curve. The FHLBank’s earnings are affected not only by rising or falling interest rates, but also by the particular path and volatility of changes in market interest rates and the prevailing shape of the yield

19

curve. As a rule, flattening of the yield curve tends to compress the FHLBank’s net interest margin, while steepening of the curve offers better opportunities to position assets with wider spreads to the cost of funding.

     The performance of the FHLBank’s portfolios of mortgage assets is particularly affected by shifts in the ten-year segment of the yield curve, which is the point that heavily influences mortgage pricing and refinancing trends. Significant or volatile movements in this sector of the yield curve can have either a positive or negative effect on premium amortization expense. Changes in the shape of the yield curve, particularly the portion that drives fixed-rate residential mortgage yields, also have a pronounced effect on the pace at which borrowers refinance to prepay their existing loans. Since the Bank’s mortgage portfolio is composed primarily of fixed-rate mortgages, changes in the yield curve can have a significant effect on earnings. When rates decline, prepayments increase, resulting in a shorter effective loan life. With shorter loan life comes an accelerated write-off of any associated premiums or discounts. In addition, when higher coupon mortgage loans turn over at a faster pace, the resulting aggregate yield on the remaining portfolio declines.

     The volatility of yield curve shifts may also exert an effect on the FHLBank’s duration of equity and the cost of duration policy compliance. Volatility in interest rates may force FHLBank management to spend resources on duration hedges to maintain compliance, even though a subsequent, sudden reversal in rates may make such hedges unnecessary a short while later. Volatility in rate levels and in the shape and slope of the yield curve increases the cost of duration compliance.

     In summary, volatility in interest rates, the shifting slope of the yield curve, and movements in the ten-year segment of the curve challenge management as it seeks to optimize spread, maintain duration compliance at the least cost, and hedge the volatility of premium expense.

Prospective Outlook and Key Business Strategies

     In addition to the five principal determinants of FHLBank performance described above, the FHLBank has particular business strategies in place to shape future performance in five key areas which merit discussion. These include:

• Increase Loans to Members

• Moderate MPF Activity

• Use Derivatives Effectively

• Reduce Cost of Liabilities

• Increase Retained Earnings

     Each of these strategies has been adopted to improve future performance and to create results more acceptable than those reported in 2002-2004.

     Increase Loans to Members. The primary business of the FHLBank, and the source of most of its earning assets, is the business of providing loans to members. Loans reached a historic peak in December, 1999 at a level of $36.5 billion. This peak in loan volumes occurred in the midst of a strong economy with heightened loan demand at member institutions. It was also propelled by the strength of the U.S. stock markets, which motivated retail customers at member banks to withdraw deposits and direct them into equity investments. With declining or stagnant deposit levels, many members turned to the FHLBank to replace lost funds. Finally, concerns for liquidity during the Y2K transition caused members to stockpile liquid funds as a precaution over year-end, 1999-2000, and members derived this spare liquidity from the FHLBank.

     During 2000, FHLBank loans to members decreased from the peak of $36.5 billion to a low of $24.2 billion primarily as a result of two events. First, a large borrower paid off several hundred million in loans as a result of acquiring deposits as part of an acquisition of branches. Second, another borrower sold its mortgage business and thereby reduced its need for funding. From 2000 through 2003, member demand for funds from the FHLBank did not rebound to previous levels. Loans to members averaged $32.3 billion in 2000, $27.0 billion in 2001, $29.8 billion in 2002 and $31.8 billion in 2003.

     In 2004 loan demand showed improvement as the economy began to strengthen and improve. In 2005 management expects that substantially all of the FHLBank’s balance sheet growth will derive from increases in the non-mortgage loan assets.

     Moderate MPF Activity The FHLBank originally viewed growth in MPF assets as a means to expand its business and provide the members with an attractive product. The MPF assets also offered potentially wider spreads than those available on loans to members. However, for reasons discussed below, the FHLBank is unlikely to continue building its MPF portfolio in coming years, and at least for the foreseeable future, will look again to growth in non-mortgage loan assets as its principal

20

source of assets. The FHLBank continues to solicit participation in the MPF program by its community bank members, and it will continue to purchase MPF Product flow from these local community institutions as it is presented under open delivery commitments. However, the FHLBank also includes in its membership certain large, nationwide mortgage origination institutions. In past years the FHLBank purchased product from large producers on a flow basis under open delivery commitments. This approach has proven to be unworkable since the FHLBank could not fully anticipate and hedge deliveries of material volumes of loans from such major producers. The FHLBank has implemented a new approach in such cases. In lieu of accepting very large, unpredictable inflows, the FHLBank may from time to time purchase mortgages in bulk from large producers on a pre-structured, specified coupon basis. This method allows the FHLBank to anticipate inflows, negotiate price and premiums, if any, and fund and hedge positions in conjunction with pricing and delivering loans. It also allows the FHLBank to control the growth of the portfolio more precisely, and to capitalize such asset growth with greater precision.

     Total mortgage loans in the MPF program averaged $8.6 billion in 2004. Management expects muted growth, if any, in 2005.

     Use Derivatives Effectively. The FHLBank utilizes derivative instruments in its normal course of business to hedge identifiable risks to its financial position arising from changes in interest rates. Derivatives may be utilized to offset the impact of interest rate changes on very specific assets and liabilities or may be utilized to offset more broadly the impact of interest rates on net interest income spread or loan premium amortization, for example. Unfortunately, the current accounting framework for derivatives is not always conducive to reflecting the economic effects of such hedging activities in the concurrent accounting period. As a general statement, the current accounting requirements favor the use of derivatives for hedging purposes to very narrowly defined risk parameters. In an effort to avoid the unintended consequence of actually increasing the variability of reported net income, the FHLBank has narrowed the use of derivatives over the past several years in its interest rate risk management activities.

     The majority of derivatives that qualify for hedge accounting are interest rate swaps. These derivatives are utilized to convert fixed rate assets or fixed rate liabilities into floating rate instruments coincident with the FHLBank’s asset acquisition and funding activities. Derivatives utilized to hedge the generalized effect of changing interest rates on the risk position of the loan portfolio or upon the market value of the FHLBank which do not qualify for hedge accounting, have been limited to option style instruments with one-sided risk profiles. Such option style derivative instruments offer the benefit of limiting reported losses in the case of adverse market movements.

     The FHLBank has de-emphasized the use of derivatives that do not qualify for hedge accounting under SFAS133. While the FHLBank’s margin and spreads have generally declined during the past several years, this shift in risk management approach is not expected to have a material affect on the FHLBank’s underlying economic earnings. The FHLBank’s overall risk profile has also remained largely unchanged as a result of this change in approach. This is due to the fact that these derivatives have generally been replaced with more traditional hedging and funding methods, such as the issuance of callable debt and/or the use of derivatives that qualify for hedge accounting under SFAS133.

     At times, the cost of these alternative hedging and funding techniques can be more costly than that of using derivatives, however this difference is not expected to have a material effect on earnings nor can it be readily calculated. This is due largely to the fact that, in extending credit to its members, the FHLBank’s practice is to add a spread over and above its cost of funds. As such, an increase in cost is implicitly reflected in the FHLBank’s loan pricing. Although the FHLBank’s overall risk profile has not changed materially as a result of this change in hedging/funding approach, future reported earnings are likely to be less variable inasmuch as the potential for one-sided fair valuation adjustments on derivative instruments has been reduced.

     Lower Costs of Liabilities. The net interest margin of the FHLBank will be significantly affected in 2005 because of important changes in the mix of interest-bearing liabilities. Earnings in the first half of 2004 and in earlier years were reduced by an overhang of high-cost debt issued in earlier years to fund assets that subsequently were prepaid, and in particular, by the presence of $1.3 billion in fixed-rate consolidated obligations with a weighted-average coupon of 6.3% that matured in the third quarter of 2004 and were not hedged. These high-costing bonds were non-callable with bullet maturities. As interest rates declined in the several years preceding 2004, the burden of negative carry on these bonds became increasingly onerous, and represented a major reason for the FHLBank’s relative under-performance in 2002, 2003 and the first half of 2004.

     Beginning in July, 2004, these high-cost liabilities began to mature in significant blocks. The largest portion matured in the third quarter, 2004, creating a step-up improvement in the net interest margin. The maturity of these bonds will continue in lesser amounts during 2005, and will be a key driver of earnings improvement in 2005 over 2004. To replace this high-cost funding, the FHLBank has issued term callable and bullet consolidated obligations at substantially lower coupon rates. The

21

new debt structure provides greater protection against adverse effects that could arise from significant interest rate movement in either direction. The reduction in liability costs, coupled with improving asset yields in the current environment, should combine to generate observable improvement in the net interest margin in 2005.

     Increase Retained Earnings. As a cooperative enterprise with an integrated membership base of customer/shareholders, the FHLBank offers capital stock that can be purchased only by member institutions. By statute and regulation, this stock is issued and repurchased at par value, which is set at $100.00 per share. There is no opportunity for capital appreciation in the value of this stock and no open market for exchanging it.

     In 1989, the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) required the FHLBank to hand over all of its retained earnings to the U.S. Treasury. In following years, with the need to pay suitable dividends to members, especially at a time when the FHLBank was actively recruiting new membership, the dividend pay-out ratio on earnings of the FHLBank often approached 95% to 100%. Still, the FHLBank did rebuild the retained earnings account to a level of $53.1 million by the end of 1997.

     The proper level of retained earnings in the FHLBank, and the need for balance between retained earnings growth and the dividends on capital stock, is an important and strategic policy question. Since 1997, several factors have suggested that the FHLBank needs to build a larger balance in retained earnings. These include the volatility in reported earnings resulting from new hedge accounting rules, the fluctuations in earnings due to accounting for the amortization of mortgage premiums, and the higher relative degree of risk introduced through the mortgage business.

     Management and the Board of Directors regularly evaluate the factors that influence the appropriate level of retained earnings for the FHLBank. These include such elements as risk-based capital requirements, amounts necessary to offset changes in the market value of equity to assure the FHLBank’s ability to redeem stock at par under various shock scenarios, and the amount suitable to sustain a steady dividend during periods of earnings pressure.

     The Board, in collaborative discussion with the FHLBank’s regulator, has established a target of $200 million for retained earnings. Until this target is achieved, the Board has announced that it will limit dividends to a pay-out of 50% of unaudited earnings in each quarter. In the fourth quarter, 2004, for example, the FHLBank’s financial performance generated an earned dividend rate of 4.76%. In past years, the FHLBank might have paid out most of these earnings in a dividend close to the same rate. However, under current practice, the Board declared a dividend of no more than 50% of estimated earnings at time of dividend payment, which was paid to shareholders at an annualized rate of 2.43%. At March 31, 2005, the retained earnings of the FHLBank totaled $116.4 million. Management currently estimates that the FHLBank will reach its $200 million retained earnings target during 2006.

     The key determinants of FHLBank financial performance described earlier, and this description of the FHLBank’s five prospective business strategies, provide background for an understanding of the FHLBank’s performance in 2004 and earlier.

Critical Accounting Policies

     The FHLBank’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Application of these principles requires management to make estimates, assumptions or judgments that affect the amounts reported in the financial statements and accompanying notes. The use of estimates, assumptions and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets and liabilities carried at fair value inherently result in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When such information is not available, valuation adjustments are estimated in good faith by management, primarily through the use of internal cash flow and other financial modeling techniques.

     The most significant accounting policies followed by the FHLBank are presented in Note 1 to the Audited Financial Statements included in Item 8 of this report. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates or assumptions, and those for which changes in in those estimates or assumptions could have a significant impact on the financial statements.

     Loans to Members and Related Allowance. At March 31, 2005 loans to members represented 63.2% of total assets. The Statement of Condition presents loans to members, net of unearned commitment fees and discounts. Amortization of such fees and discounts is calculated using the level-yield method and is reflected as a component of

22

periodic interest income. Since its establishment in 1932 the FHLBank has never experienced a credit loss on loans to members. Further, management does not anticipate credit losses on any loans currently outstanding to members. The FHLBank is required by statute to obtain sufficient collateral on member loans to protect against losses and to accept as collateral on member loans only certain United States government or government agency securities, residential mortgage loans, deposits in the FHLBank, and other real estate-related and Community Financial Institutions assets. The FHLBank has historically had rights to collateral loans or securities on a member-by-member basis with an estimated fair value in excess of the outstanding loans of each individual borrowing. Accordingly, there are no loss reserves for member loans.

     Allowance for Loan Loss on Mortgage Loans. The FHLBank bases the allowance for credit losses on management’s estimate of credit losses inherent in the FHLBank’s mortgage loan portfolio as of the balance sheet date taking into consideration, among other things, the FHLBank’s exposure within the First Loss Account. The FHLBank performs periodic reviews of its portfolio to identify the losses inherent within the portfolio and to determine the likelihood of collection of the portfolio. The overall allowance is determined by an analysis that includes consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral valuations, industry data, and prevailing economic conditions. The FHLBank evaluates its loan loss allowance based on the specific identification method. This method evaluates all impaired loans for an indication that a loss has occurred.

     Accounting for Premiums and Discounts on Mortgage Loans and Mortgage-backed Securities. Typically, the FHLBank purchases loans and mortgage-backed securities at amounts that are different than the contractual note amount. The difference between the purchase price and the contractual note establishes a premium or discount. The FHLBank also receives or incurs various mortgage related fees. Mortgage loans and MBS securities are reported on the Statement of Condition at their principal amount outstanding net of deferred loan fees and premiums or discounts. One of the methods that accounting guidelines permit is the amortization or accretion of these premiums (or discounts) such that the yield recognized on the underlying asset is constant over the asset’s contractual life. Management prefers the contractual method because the income effects of the amortization or accretion are recognized in a manner that reflects the actual behavior of the underlying assets during the period in which the behavior occurs. Also, this method tracks the contractual terms of the assets without regard to changes in estimates based on assumptions about future borrower behavior.

     Guarantees and Consolidated Obligations. The FHLBank is jointly and severally obligated for the payment of all the consolidated obligations of the entire FHLBanks system. Accordingly, if one or more of the FHLBanks were unable to repay its direct participation in the consolidated obligations, each of the other FHLBanks could be called upon to repay all or part of those obligations, as approved or directed by the Finance Board. The FHLBank does not recognize a liability for its joint and several obligations related to consolidated obligations issued for other FHLBanks. The FHLBank records on its Statement of Condition a liability for consolidated obligations associated only with the proceeds it receives from the issuance of those consolidated obligations.

     In accordance with new relevant accounting guidelines, for guarantees issued or modified after December 31, 2002, the FHLBank recognizes at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken in issuing the guarantee, namely the ongoing obligation to stand ready to perform over the term of the guarantee. No liability is recorded, however, for the joint and several obligation related to the other FHLBanks’ consolidated obligations due to the high-credit quality of each FHLBank and the remote possibility that the other FHLBanks would be unable to repay their respective participations.

     Accounting for Derivatives. The FHLBank regularly uses derivative instruments as part of its risk management activities to protect the value of certain assets, liabilites and future cash flows against adverse interest rate movements. The valuation and accounting assumptions related to derivatives is considered critical because mangement must make estimates based on judgments and assumptions that can significantly affect financial statement presentation.

     Derivative instruments are presented on the Statement of Condition at fair value. Any change in the fair value of a derivative is required to be reflected in current period earnings or other comprehensive income, regardless of how fair-value changes in the assets or liabilities being hedged may be treated. This accounting treatment, which management views as asymmetrical, can cause significant volatility in reported net income from period to period.

     Generally, the FHLBank strives to use derivatives when doing so is likely to provide a cost-effective means to mitigate the interest rate risk inherent in its business. However, management’s ability to use derivatives must be tempered by the capacity to withstand large, volatile swings in reported net income which, at the extreme, can adversely affect the FHLBank’s ability to maintain a market-based dividend rate.

23

     The most common objectives of hedging with derivatives include: (1) preserving an interest spread between the yield of an asset and the cost of a supporting liability of mismatched maturity, (2) mitigating the adverse earnings effects resulting from the potential prepayment or extension of certain assets and liabilities, and (3) protecting the value of existing asset or liability positions or of anticipated transactions. Much of the FHLBank’s hedging activity is directed toward reducing interest rate risk and basis risk from loans and supporting debt. Through the use of structured debt, low-cost funding is created, which is used primarily to provide more attractively priced loans to the FHLBank’s members. Derivatives are also used to create loans with specialized embedded pricing features, customized to meet individual member funding needs and/or to reduce member borrowing costs.

     It remains the FHLBank’s policy, consistent with Finance Board regulation, to use derivative instruments only to reduce the market risk exposures inherent in the otherwise unhedged asset and funding positions of the FHLBank. When doing so represents the most cost-efficient strategy and can be achieved while minimizing adverse earnings effects, management intends to continue utilizing derivative instruments as a means to reduce the FHLBank’s exposure to changes in market interest rates. Nonetheless, with the framework of new accounting standards in place, it is expected that reported net income will continue to exhibit greater variability than had been observed prior to implementation of new accounting standards. Notes 1 and 17 to the Financial Statements also provide further discussion on the accounting and use of derivative instruments.

     Future REFCORP Payments. The FHLBank’s financial statements do not include a liability for the FHLBank’s statutorily mandated future REFCORP payments. In the aggregate the FHLBanks are required to fund a $300 annual annuity whose final maturity date is April 15, 2030. As such the ultimate liability of the FHLBank is dependent on its own profitability and that of the other FHLBanks. The FHLBank pays 20% of its net earnings (after its AHP obligation) to support the payment of part of the interest on the bonds issued by REFCORP and, as such, the FHLBank is unable to estimate reasonably its future payments as would be required order to recognize this future obligation as a liability on its Statement of Condition. Accordingly, the FHLBank discloses the REFCORP obligation as a long-term statutory payment requirement and treats it in a manner similar to the typical treatment of income tax expense for accounting purposes under GAAP, by recording it as an expense in the period in which the related net earnings are accrued. Further discussion is provided in Note 1 to the Financial Statements.

     Fair-value Calculations and Methodologies. Certain of the FHLBank’s assets and liabilities and all derivatives, are presented in the Statement of Condition at fair value. Under GAAP, the fair value of an asset or liability is the price at which that asset could be bought or sold in a current transaction between willing parties, other than in liquidation. Fair values play an important role in the valuation of certain of the FHLBank’s assets, liabilities and hedging strategies. Fair values are based on market prices when they are available. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility, or on dealer prices and prices of similar instruments or observed prices in actual transactions. Generally, pricing models and their underlying assumptions are based on estimates obtained from qualified independent sources for discount rates, prepayment estimates, market volatility and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the related income and expense. The use of different models and assumptions, as well as changes in market conditions, can result in materially different amounts of net income and retained earnings.

     There is no available market price for the FHLBank’s loans to members, which currently have a carrying value of $39.0 billion and an overall calculated fair value of $39.0 billion. The FHLBank’s loans to members cannot be openly traded in the market place, since it is strictly an agreement between FHLBank and its members. The FHLBank therefore uses its own internal modeling system to value these loans for accounting purposes.

Years Ended December 31, 2004, 2003, and 2002

     Net Income and Return on Equity. The FHLBank’s net income totaled $100.7 million in 2004, representing a significant increase from $27.7 million in 2003. The primary reasons for the improvement in earnings were: (a) significantly lower mortgage loan premium amortization expense in 2004 than in 2003, (b) the maturation of higher-cost fixed-rate debt, especially during the third quarter of 2004, and (c) gains on derivatives in 2004 as compared to losses recorded in 2003. These key factors are discussed more fully below. Commensurate with the increase in net income, the FHLBank’s full-year return on equity (ROE) rose to 3.74% in 2004, up sharply from a full-year average ROE of 1.19% in 2003.

     During 2003, net income of $27.7 million was markedly lower than in 2002, during which net income equaled $48.1 million. Lower earnings in 2003 as compared to the previous year were primarily the result of: (a) a significant spike in mortgage loan premium amortization as compared to 2002, and (b) the effects of historically low market interest rates, offset only in part by (c) lower losses recorded on derivatives than had been recorded in 2002. These key earnings factors are

24

discussed more fully below. Commensurate with the lower net income as compared to the previous year, the FHLBank’s full-year average return on equity declined to 1.19% in 2003, compared to a full-year average of 2.37% in 2002.

     Dividend Rate. Because members may purchase and redeem their FHLBank capital stock shares only at par value, management regards quarterly dividend payments as an important vehicle through which a direct investment return is received. (Another key value of membership, as noted at the beginning of this discussion, derives from the availability of attractively priced liquidity.) The FHLBank’s dividend rate averaged 1.69% in 2004, 2.22% in 2003 and 3.56% in 2002. As discussed more fully below, the FHLBank drew upon retained earnings during 2002 and much of 2003 to supplement dividend payments otherwise available from current period earnings. Beginning in the fourth quarter of 2003, the FHLBank began to limit its quarterly dividend payments to 50% of current period estimated net income in order to increase its retained earnings balance.

     Asset and Loan Growth. FHLBank assets increased by $7.9 billion to $61.4 billion at December 31, 2004, up from $53.5 billion at December 31, 2003, primarily due to increases in loans outstanding to member institutions. Member loan balances typically vary significantly throughout each month, reflecting the changing daily needs of the FHLBank’s members for wholesale funding. At year-end 2004, the par value of member loans was at $38.3 billion as compared to $33.3 billion at year-end 2003.

     Year-end 2004 balances of mortgage loans retained by the FHLBank were at $8.7 billion, compared to $8.1 billion at year-end 2003. The increase in mortgage loans in 2004 is due to production exceeding payoffs. Total gross mortgage loan production during 2004 equaled $3.8 billion, compared to $14.3 billion during 2003. Net of participations to other FHLBanks, gross production retained by the FHLBank equaled $2.8 billion during 2004, compared to $6.6 billion during 2003. The net growth in outstanding mortgage loan balances during 2004 of only $0.6 billion, and $3.1 billion during 2003, reflects the significant paydown of previously retained mortgage loans balances during a period of record residential loan refinancing activity.

25

Net Interest Income

Average Balances/Net Interest Margin/Rates

	Year Ended December 31,
(dollars in thousands)	2004								2003								2002
	Average					Average			Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
Assets
Federal funds sold	$	2,044,743		$	28,399		1.39	%	$	1,488,076		$	15,898		1.07	%	$	1,109,201		$	18,439		1.66	%
Other short-term investments		143,039			1,996		1.40			208,558			2,724		1.31			240,801			4,670		1.94
Long-term investments (1)		8,406,314			321,378		3.82			8,741,829			326,829		3.73			10,222,131			456,823		4.47
Interest-bearing deposits in banks		876,600			12,195		1.39			711,682			8,157		1.14			1,112,632			20,071		1.80
Loans to members(3)		37,663,811			598,839		1.59			31,833,096			462,491		1.45			29,832,060			610,803		2.04
Mortgage loans held for portfolio(2) (3)		8,614,435			249,872		2.90			8,123,352			186,620		2.30			2,886,300			150,547		5.22
Total earning assets	$	57,748,942		$	1,212,679		2.10	%	$	51,106,593		$	1,002,719		1.96	%	$	45,403,125		$	1,261,353		2.78	%
Allowance for credit losses on mortgage loans		(530	)							(987	)							(257	)
Other assets		742,087								837,793								841,342
Total assets	$	58,490,499							$	51,943,399							$	46,244,210
Liabilities and Capital
Time deposits	$	2,160		$	24		1.11	%	$	25,051		$	242		0.97	%	$	10,900		$	187		1.72	%
Other interest-bearing deposits		1,307,316			14,813		1.13			2,367,500			20,715		0.87			2,255,714			32,499		1.44
Short-term borrowings		14,741,227			193,441		1.31			11,153,087			122,033		1.09			10,361,895			172,915		1.67
Long-term debt		38,176,855			866,437		2.27			33,481,986			741,339		2.21			29,851,617			844,428		2.83
Other borrowings		233,643			3,402		1.46			634,633			6,383		1.01			509,536			8,991		1.76
Total interest-bearing liabilities	$	54,461,201		$	1,078,117		1.98	%	$	47,662,257		$	890,712		1.87	%	$	42,989,662		$	1,059,020		2.46	%
Other liabilities		1,338,104								1,958,398								1,227,280
Total capital	$	2,691,194							$	2,322,744							$	2,027,268
Total liabilities and capital	$	58,490,499							$	51,943,399							$	46,244,210
Net interest income/ interest rate spread				$	134,562		0.12	%				$	112,007		0.09	%				$	202,333		0.31	%
Net interest margin							0.23	%							0.22	%							0.45	%
Average interest-earning assets to interest-bearing liabilities							106.04	%							107.23	%							105.61	%

Notes:

(1)	The amount of investment securities available-for-sale is based on fair values. Related yield information gives effect to changes in fair value otherwise reflected as a component of stockholders’ equity.
(2)	Non-performing loans are included in average balances in determining the average rate.
(3)	All loan amounts exclude BOB related balances and activity.

26

     Yield on Earning Assets and Cost of Funds. The difference between asset yields and funding costs is a primary determinant of the FHLBank’s net interest margin and resulting net interest income. During 2004, the FHLBank’s yield on earning assets averaged 2.10%, compared to an average of 1.96% for 2003, an increase of 14 basis points, or 7.1% in average gross yield. During 2004, the FHLBank’s average cost of interest-bearing funds also rose, averaging 1.98% compared to 1.87% during 2003, an increase of 11 basis points, or 5.9%. With asset yields rising more rapidly than related funding costs, the FHLBank’s net interest spread and resulting net interest income increased.

     Asset yields and related funding costs are both affected by a number of factors, especially changes in market interest rates. Typically, the FHLBank’s assets and liabilities do not respond to changes in market rates in tandem due to mismatches inherent in the FHLBank’s portfolios. Particularly during 2004, as a direct result of the rapid pace of turnover in long-term high-cost liabilities, the FHLBank’s net interest spread averaged 12 basis points as compared to an average of only 9 basis points during 2003. This improvement in spread resulted in an improved net interest margin and an overall improvement in the FHLBank’s earnings during 2004 over 2003.

     The amortization of loan premiums is recorded as a yield adjustment in the FHLBank’s portfolio and, as such, can have a significant effect on the effective yield on earning assets and resulting net interest income, especially during periods of change in borrower prepayment behavior. As noted above, during 2003 the FHLBank’s yield on earning assets averaged 1.96%. This was sharply lower than the average earning asset yield of 2.78% during 2002, a decline of 82 basis points.

     During 2003, the FHLBank’s average cost of interest-bearing funds also fell – reflecting sharply lower market interest rates that reached historic lows that year. Average funding costs reached 1.87% in 2003 compared to an average of 2.46% during 2002. However, this decline in aggregate funding cost of 59 basis points was insufficient to offset a greater decline in aggregate asset yield, 82 basis points, during the same period reflecting the impact of high-cost debt which remained on the books until the third quarter. As a result, in 2003 the FHLBank’s average net spread contracted to only 0.09%, compared to an average spread of 0.31% in 2002. This 22-basis-point contraction in net spread resulted in a significant decline in net interest, reflected in lower overall FHLBank earnings during 2003.

     Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between 2004 and 2003 and between 2003 and 2002.

	2004 vs. 2003								2003 vs. 2002
(dollars in thousands)	Volume			Rate		Total(1)			Volume			Rate			Total(1)
Increase (decrease) in interest income:
Federal funds sold	$	5,929		$	6,572	$	12,501		$	5,317		$	(7,858	)	$	(2,541	)
Other short-term investments		(856	)		128		(728	)		(727	)		(1,219	)		(1,946	)
Long-term investments		(13,424	)		7,973		(5,451	)		(79,412	)		(50,582	)		(129,994	)
Interest-bearing deposits		1,857			2,181		4,038			(7,258	)		(4,656	)		(11,914	)
Loans to members		84,571			51,777		136,348			50,316			(198,628	)		(148,312	)
Mortgage loans held for portfolio		11,139			52,113		63,252			273,763			(237,690	)		36,073
Total	$	89,216		$	120,744	$	209,960		$	241,999		$	(500,633	)	$	(258,634	)
Increase (decrease) in interest expense:
Time deposits	$	(221	)	$	3	$	(218	)	$	165		$	(110	)	$	55
Other interest-bearing deposits		(9,286	)		3,384		(5,902	)		(913	)		(10,872	)		(11,785	)
Short-term borrowings		39,172			32,236		71,408			9,408			(60,290	)		(50,882	)
Long-term debt		103,893			21,205		125,098			120,560			(223,649	)		(103,089	)
Other borrowings		(4,036	)		1,055		(2,981	)		597			(3,204	)		(2,607	)
Total	$	129,522		$	57,883	$	187,405		$	129,817		$	(298,125	)	$	(168,308	)
Increase (decrease) in net interest income	$	(40,306	)	$	62,861	$	22,555		$	112,182		$	(202,508	)	$	(90,326	)

⁽¹⁾ Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes.

27

     Another fundamental determinant of the FHLBank’s net interest income is the outstanding balances of assets and liabilities. As seen in the table above, in 2004, the FHLBank’s interest income increased by $210 million compared to 2003. Of this change, 42% is due to volume increases and 58% is due to interest rate increases. This reflects greater demand for wholesale funding by members whose own business activities expanded, coupled with higher market interest rates. In 2003, the FHLBank’s interest income decreased by $259 million compared to 2002. The portion of this change due to volume resulted in a $242 million increase, which was negated by a $501 million decrease caused by delining interest rates. The volume increases were driven primarily by mortgage loan production, which was up due to the declining interest rate environment.

     In 2004, interest expense increased by $187 million compared to 2003. Of this change, 69% was due to volume increases and 31% was due to interest rate increases. Average interest-bearing liabilities outstanding also increased to support the larger earning asset base, largely through the issuance of consolidated obligations. Similar to the FHLBank’s asset yield, funding costs also rose during 2004. The resulting net increase in interest expense during 2004, as compared to 2003, served to reduce the overall increase in net interest income. In 2003, interest expense decreased by $168 million compared to 2002. The portion of this change due to volume resulted in a $130 million increase, which was negated by a $298 decrease due to declining interest rates. Average interest-bearing liabilities outstanding also increased to support growth in earning assets, largely through the issuance of consolidated obligations. Similar to the FHLBank’s asset portfolio, funding costs also declined during 2003. Lower funding costs reduced interest expense as compared to 2002. This reduction in cost was not sufficient to offset the reduction in interest income, thus resulting in an overall net interest income decline of $90.3 million.

The following table separately quantifies the effects of the FHLBank’s derivative activities on its interest income and interest expense for 2004, 2003 and 2002.

Average Balances/Net Interest Spread/Rates	2004
	Average			Interest				Interest				Derivative			Impact
	Balance			with				without
				derivatives				derivatives
Investments:
Fed Funds Sold	$	2,044,743		$	28,399	1.39	%	$	28,399	1.39	%	$	—			—
Other Short term investments		143,039			1,996	1.40	%		1,996	1.40	%		—			—
Long-Term investments		8,406,314			321,378	3.82	%		321,378	3.82	%		—			—
Interest-bearing deposits in banks		876,600			12,195	1.39	%		12,195	1.39	%		—			—
Loans to members		37,663,811			598,839	1.59	%		1,219,930	3.24	%		(621,091	)		-1.65	%
Mortgage Loans held for portfolio		8,614,435			249,872	2.90	%		419,247	4.87	%		(169,375	)		-1.97	%
Total Earning Assets	$	57,748,942		$	1,212,679	2.10	%	$	2,003,145	3.47	%	$	(790,466	)		-1.37	%
Allowance for credit losses on mortgage loans		(530	)
Other assets		742,087
Total Assets	$	58,490,499
Liabilities and Capital
Time Deposits		2,160			24	1.11	%		24	1.11	%		—			—
Other interest bearing deposits		1,307,316			14,813	1.13	%		14,813	1.13	%		—			—
Short term borrowings		14,741,227			193,441	1.31	%		193,441	1.31	%		—			—
Long term debt		38,176,855			866,437	2.27	%		1,346,365	3.53	%		(479,928	)		-1.26	%
Other borrowings		233,643			3,402	1.46	%		3,402	1.46	%		—			—
Total interest-bearing liabilities	$	54,461,201		$	1,078,117	1.98	%	$	1,558,045	2.86	%	$	(479,928	)		-0.88	%
Other liabilities		1,338,104
Total capital		2,691,194
Total liabilities and capital	$	58,490,499
Net interest spread				$	134,562	0.12	%	$	445,100	0.61	%	$	(310,538	)		-0.49	%

28

Average Balances/Net Interest Spread/Rates		2003
	Average			Interest				Interest				Derivative			Impact
	Balance			with				without
				derivatives				derivatives
Investments:
Fed Funds Sold	$	1,488,076		$	15,898	1.07	%	$	15,898	1.07	%	$	—			—
Other Short term investments		208,558			2,724	1.31	%		2,724	1.31	%		—			—
Long-Term investments		8,741,829			326,829	3.74	%		326,829	3.74	%		—			—
Interest-bearing deposits in banks		711,682			8,157	1.15	%		8,157	1.15	%		—			—
Loans to members		31,833,096			462,491	1.45	%		1,110,306	3.49	%		(647,815	)		-2.04	%
Mortgage Loans held for portfolio		8,123,352			186,620	2.30	%		385,398	4.74	%		(198,778	)		-2.45	%
Total Earning Assets	$	51,106,593		$	1,002,719	1.96	%	$	1,849,312	3.62	%	$	(846,593	)		-1.66	%
Allowance for credit losses on
mortgage loans		(987	)
Other assets		837,793
Total Assets	$	51,943,399
Liabilities and Capital
Time Deposits		25,051			242	0.97	%		242	0.97	%		—			—
Other interest bearing deposits		2,367,500			20,715	0.87	%		20,715	0.87	%		—			—
Short term borrowings		11,153,087			122,033	1.09	%		122,033	1.09	%		—			—
Long term debt		33,481,986			741,339	2.21	%		1,333,315	3.98	%		(591,976	)		-1.77	%
Other borrowings		634,633			6,383	1.01	%		6,383	1.01	%		—			—
Total interest-bearing liabilities	$	47,662,257		$	890,712	1.87	%	$	1,482,688	3.11	%	$	(591,976	)		-1.24	%
Other liabilities		1,958,398
Total capital		2,322,744
Total liabilities and capital	$	51,943,399
Net interest spread				$	112,007	0.09	%	$	366,624	0.51	%	$	(254,617	)		-0.41	%

Average Balances/Net Interest Spread/Rates		2002
	Average			Interest				Interest				Derivative			Impact
	Balance			with				without
				derivatives				derivatives
Investments:
Fed Funds Sold	$	1,109,201		$	18,439	1.66	%	$	18,439	1.66	%	$	—			—
Other Short term investments		240,801			4,670	1.94	%		4,670	1.94	%		—			—
Long-Term investments		10,222,131			456,823	4.47	%		456,823	4.47	%		—			—
Interest-bearing deposits in banks		1,112,632			20,071	1.80	%		20,071	1.80	%		—			—
Loans to members		29,832,060			610,803	2.05	%		1,195,202	4.01	%		(584,399	)		-1.96	%
Mortgage Loans held for portfolio		2,886,300			150,547	5.22	%		181,703	6.30	%		(31,156	)		-1.08	%
Total Earning Assets	$	45,403,125		$	1,261,353	2.78	%	$	1,876,908	4.13	%	$	(615,555	)		-1.36	%
Allowance for credit losses on mortgage loans		(257	)
Other assets		841,342
Total Assets	$	46,244,210
Liabilities and Capital
Time Deposits		10,900			187	1.72	%		187	1.72	%		—			—
Other interest bearing deposits		2,255,714			32,499	1.44	%		32,499	1.44	%		—			—
Short term borrowings		10,361,895			172,915	1.67	%		172,915	1.67	%		—			—
Long term debt		29,851,617			844,428	2.83	%		1,528,964	5.12	%		(684,536	)		-2.29	%
Other borrowings		509,536			8,991	1.76	%		8,991	1.76	%		—			—
Total interest-bearing liabilities	$	42,989,662		$	1,059,020	2.46	%	$	1,743,556	4.06	%	$	(684,536	)		-1.59	%
Other liabilities		1,227,280
Total capital		2,027,268
Total liabilities and capital	$	46,244,210
Net interest spread				$	202,333	0.31	%	$	133,352	0.07	%	$	68,981			0.23	%

29

     Mortgage Loan and Premium/Discount. One of the most significant factors affecting the variability of the FHLBank’s net income between the years 2002 and 2004 was change in the amount of amortization and accretion of premiums and discounts on mortgage-related assets. The combination of historically low residential mortgage rates reflecting the Federal Reserve money policy, aggressive marketing by loan originators, and the availablity of low cost loan products to prospective borrowers, gave rise to a sharply higher pace of prepayment activity in the FHLBank’s mortgage loan portfolio than had been anticipated.

     When mortgage loans are acquired by the FHLBank under the MPF Program, a premium or discount is typically paid to the participating financial institution. Differences between the par value of the loan and the price paid by the FHLBank are recorded as mortgage loan premiums or discounts by the FHLBank. There are two primary reasons such differences arise: (a) prevailing market rates change between the date the mortgage loan is priced to the homeowner and the date the originating member locks in a commitment price at which to sell loans to FHLBank, and (b) borrowers elect to pay a higher-than-market rate on their mortgage loan in exchange for a reduction in up-front loan points, fees, and/or other loan closing costs. This practice of “financing the closing costs” results in a market-wide prevalence of premiums as opposed to discounts, as reflected in the FHLBank’s mortgage loan portfolio.

     As available mortgage refinancing rates declined to record lows in 2003, an increasing number of borrowers had strong financial incentives to pay off their existing loans and to refinance at more attractive prevailing market rates. During mid-2003, and to a lesser extent during early-2004, this resulted in a sharp increase in prepayment activity within the FHLBank’s mortage asset portfolios. When mortgage loans pay off prior to their contractual terms, any associated unamortized premiums or discounts are recorded in current period earnings. In addition, the observed increase in prepayment speeds gives rise to the expectation that other mortgage loans still remaining in the portfolio have become more subject to potential prepayment and as such, the estimated remaining life of these mortgage loans is shortened. Prior to 2004, the FHLBank’s method for amortizing premiums and discounts on mortgage-related assets included, in part, the results of an evaluation of the expected remaining life of the remaining assets. As discussed more fully below, in 2004, the FHLBank changed its method of amortization to one based only on the contractual terms of the mortgages and any actual prepayment behavior without regard to future expectations.

     During 2004, amortization and accretion of mortgage loan premiums and discounts resulted in a net expense of $40.3 million as compared to $62.8 million during 2003, and only $7.2 million during 2002. The significant annual differences in this expense during this three-year period is one of the primary reasons the FHLBank’s net income varied from year to year.

     The FHLBank changed its method for amortizing and accreting deferred premiums and discounts from the estimated life method to the contractual method. The accounting change was implemented for MBS in the second quarter of 2004 and for MPF loans in the third quarter of 2004. These changes resulted in a cumulative effect of change in accounting principle of $8.2 million relating to the mortgage loans and $263 thousand relating to the MBS. These changes were applied retroactively as of January 1, 2004. Under the contractual method, the income effects of premiums and discounts are recognized in a manner that reflects the actual behavior of the underlying assets. When contractual lives are used as the basis for amortization and accretion, there are no changes in estimated life adjustments that can potentially introduce interest income variability relating to changes in such estimates.

     The table below provides key information related to the FHLBank’s premium/discount on mortgage loans.

	Year Ended
	December 31,
(in thousands)	2004			2003			2002
Net premium/(discount) expense for the period	$	40,319		$	62,825		$	7,229
Mortgage loan related net premium balance at period-end	$	94,888		$	122,338		$	51,220
Mortgage loan par balance at period-end	$	8,514,395		$	7,844,466		$	4,792,050
Premium balance as a percent of mortgage loans (par)		1.11	%		1.56	%		1.07	%

     High-coupon Debt. Another factor cited above that significantly affected the FHLBank’s financial results in recent years has been the adverse effect on net interest income of high-cost, long-term, fixed-rate debt issued at what were, relative to prevailing market conditions, markedly higher interest rates. Issued by the FHLBank prior to the decline in market interest rates that began in early-2001, these bonds funded longer-term assets at what were at the time positive spreads. As market rates declined, increasing volumes of assets funded by this debt either prepaid or were called prior to maturity, leaving high-

30

cost funding in what became a low-rate environment. This served increasingly to pressure the FHLBank’s overall net interest margin. At year-end 2003, approximately $2.8 billion in unhedged debt remained with a weighted average interest coupon of 6.32%. Although portions of this debt supported remaining higher-yielding assets, an increasing proportion of this debt bore costs well in excess of yields on replacement assets then available in the market. The adverse earnings pressure resulting from carrying high-cost funding continued to pressure FHLBank earnings throughout the last several years.

     Although portions of this high-cost fixed-rate debt matured during each of the past three years, during the third quarter of 2004, a significant amount of debt matured, $1.3 billion with an average coupon rate of 6.28%. The maturity of this volume of debt helped to alleviate the adverse earnings effects of carrying the debt during previous quarters. At year end 2004, the FHLBank had approximately $943 million remaining in this higher-cost debt, with a weighted average coupon rate of 6.73%. Management expects $451 million of this higher cost debt to mature in 2005.

Other Income

	For the year ended December 31,
(in thousands)	2004			2003			2002
Services to members	$	4,120		$	5,926		$	6,724
Net gain on sale of held-to-maturity securities		2,576			2,492			—
Net gain on sale of available-for-sale securities		—			4,090			—
Net gain/(loss) on securities		(3,286	)		(12,310	)		7,253
Net gain/(loss) on derivatives and hedging activities		31,182			(39,791	)		(109,869	)
Other, net		931			3,172			(1,950	)
Total other income/(expense)	$	35,523		$	(36,421	)	$	(97,842	)

     Earnings Effects of Derivatives. The FHLBank enters into derivatives transactions to offset all or portions of the financial risk exposures inherent in its member lending, investment and funding activities. This usage is consistent with Finance Board regulations, which permit the FHLBank to use derivative instruments to mitigate identifiable risks. Unrealized losses or gains on derivative positions are recorded regardless of whether offsetting gains or losses on the associated assets or liabilities being hedged are permitted to be recorded in a symmetrical manner. As a result, the application of hedge accounting introduces the potential for a considerable mismatch between the timing of income recognition from assets or liabilities and the income effects of hedge instruments positioned to mitigate market risk and cashflow variability.

     Interest rate swaps are used to mitigate certain interest rate risk exposures inherent in the FHLBank’s business activities. At the time of inception, the fair market value of an interest rate swap generally equals or is close to zero. Notwithstanding the exchange of interest payments made during the life of an interest rate swap, which are recorded as either interest income/expense or as a gain/loss on derivative depending upon the accounting classification of the hedge instrument, the fair value of an interest rate swap returns to zero at the end of its contractual term. Therefore, although the fair value of an individual interest rate swap is likely to change over the course of its full term, upon maturation any unrealized gains and losses net out to zero.

     The FHLBank enters into interest rate swap, cap, floor, and swaption agreements and future and forward contracts, referred to collectively as interest rate exchange agreements and more broadly as derivative instruments. From time to time, the FHLBank serves as an intermediary for its member institutions by entering into offsetting interest rate exchange agreements between its members and other counterparties.

     The FHLBank faces uncertainty of mortgage asset cash flows arising from the ability of borrowers to prepay their loans. Prepayment behavior is influenced by changes in the general level of interest rates as well as demographic factors. One component of the FHLBank’s comprehensive interest rate risk management program is to incorporate funding and hedging techniques that offset a significant degree of the potential adverse earnings effects of asset prepayments. A significant proportion of the mortgage loans acquired by the FHLBank under the MPF Program are being hedged utilizing interest rate swaps whose notional principal is tied to the outstanding balance of mortgage loans in a reference pool with similar attributes to the MPF loans being hedged. As prepayments occur in the reference pool, the notional principal of the swap declines. The extent that the prepayment behavior between the hedged loans and the mortgage reference pools are not perfectly correlated is reflected in the fair value difference between the swap and the hedged loans and recorded in net gain/(loss) on derivatives and hedging activities. The income effect of the interest rate swap itself is included in the reported yield on the mortgage loan portfolio. Other techniques utilized by the FHLBank to offset the potential earnings effects of loan

31

prepayments include inclusion of callable debt instruments in the funding mix and the purchase of interest rate option contracts. Costs associated with callable debt instruments are reflected in the overall cost of funding included in the calculation of net interest margin. Gains and losses on purchased option positions are included in net gains and net losses on derivatives.

     Net income for the year 2004 includes net gains on derivatives of $31.2 million as compared to net losses of $39.8 million in 2003 and net losses of $109.9 million in 2002. As interest rates declined throughout 2002 and 2003, the adverse mark-to-market effects associated with many of the derivatives positioned by the FHLBank were not offset by positive mark-to-market effects on the instruments whose values were being protected primarily because many of these instruments did not qualify for hedge accounting treatment. This asymetry of accounting treatment is reflected in the gains and losses cited above.

     Upon implementation of SFAS133 in 2001, the FHLBank strived to manage its derivative positions with an emphasis on the economic efficiency of hedging techniques with lesser regard to the associated accounting conseqeuences. Apart from the pressures on FHLBank earnings discussed elsewhere herein, with the adoption of SFAS133 reported net income exhibited considerably greater period-to-period variability than exhibited in prior years. To permit emphasis to be placed on economic cost efficiency of hedging, management decided it was important that the FHLBank maintain an appropriate level of retained earnings to absorb income variability. Thus, the FHLBank accumulated additional retained earnings in the years leading up to the implementation of SFAS133.

     The Board drew from retained earnings in both 2002 and 2003 to maintain a quarterly dividend at a level that was both generally reflective of the FHLBank’s underlying earnings absent what were regarded as the SFAS133 non-cash earnings factors and consistent with dividend benchmarks in effect at the time. After consecutive years of material adverse earnings related to non-cash factors such as marking-to-market derivatives, and the accelerated mortgage loan premium amortization expense discussed above, the FHLBank’s level of retained earnings had been reduced by a considerable extent. With lower retained earnings, the FHLBank faced a reduced ability to withstand further non-cash losses due to adverse fair valuation marks and additional accelerated loan premium amortization expense. Therefore, during 2003 management reevaluated the balance between economic efficiency and the related accounting consequences, and decided to place greater emphasis on hedge accounting treatment than it had in past.

     As a result, during the second half of 2003, many of the derivative positions that had not received hedge accounting treatment were closed out and/or replaced by on-balance-sheet alternatives. The primary on-balance sheet instrument utilized by the FHLBank is the increased use of callable debt in its funding profile. Callable debt incorporates an interest rate option as an embedded feature. The cost of such embedded options is reflected in higher coupon rates than those associated with non-callable instruments of comparable maturity issued at the same point in time. The FHLBank had $27.6 billion and $25.8 billion of callable debt outstanding as of December 31, 2004 and 2003, respectively.

32

     The following table summarizes the net gains and losses on derivatives and hedging activities including hedge ineffectiveness:

		2004			2003			2002
Loans to members	Fair value	$	5,383		$	(4,669	)	$	5,538
	Cash flow					728			(54	)
Consolidated Obligations	Fair value		11,033			60			371
	Cash flow		(6	)		(3,153	)		(206	)
Mortgage Loans	Fair value		4,873			2,270			996
	Cash flow
Economic			9,516			(35,560	)		(113,598	)
Intermediaries			383			533			104
Firm commitments (no longer qualified for hedge accounting)			—			—			(3,020	)
Net gains/(losses) on derivatives and hedging activities		$	31,182		$	(39,791	)	$	(109,869	)

     The FHLBank utilizes fair value hedge accounting treatment for most of its fixed rate loans to members, MPF loans and consolidated obligations using interest rate swaps. The interest rate swaps convert these fixed rate instruments to a variable LIBOR rate. In 2004 the ineffectiveness related to these fair value hedges increased net income by $21.3 million in 2004 compared to a net decrease of $2.3 million in 2003 and a net increase of $6.9 million in 2002, while the overall notional amount remained relatively the same. Gains and losses reported for economic hedges were significant in both 2003 and 2002 due largely to the overall amount of notional amount of such hedges. During 2004 and 2003 the FHLBank reduced its economic hedges by approximately $9.7 billion in notional. The FHLBank combines interest income/expense and economic hedges with fair value changes in other income.

     Securities Gains and Losses. Certain investment securities within the FHLBank’s portfolio are classified as “trading,” and changes in the market value of such securities are recorded in income regardless of whether they are sold. During 2004, recorded losses associated with trading securities equalled $3.2 million. In 2003 and 2002, a net loss of $12.3 million and a net gain of $7.3 million were recorded, respectively.

     Included in the operating results for the year ended December 31, 2004, is a net gain on sale of $2.6 million relating to the sale of a municipal security investment previously classified as held-to-maturity. Sales of held-to-maturity securities are permissible given a change in one or more specified circumstances since the original time of the accounting classification. In this particular instance, the bonds were deemed by the FHLBank to have suffered a decline in value as a result of the credit rating downgrading of the issuer by two major rating bond agencies. Although credit deterioration had occurred the realizable market value at the time of the sale exceeded the original purchase price of the securities and, as such, the FHLBank realized a gain on the sale. For the year ended December 31, 2003, net gains on sales of securities classified as held-to-maturity totaled $2.5 million. These sales related to “odd lot” cleanup transactions involving mortgage-backed securities with remaining principal balances of less than 15% of the original purchase balances. No gains or losses relating to sales of available for sale or held to maturity securities were recorded in 2002.

     Termination Fee Gain. Included in other income for 2003 is the recognition of a gain of $1.8 million related to the termination of a monthly payment stream being received by the FHLBank from the FHLBank of Chicago. In 1999, in connection with its early support for the FHLBank of Chicago when it first introduced the MPF Program, the FHLBank made a program contribution payment of $750,000. As part of this arrangement, the FHLBank of Chicago made periodic payments to the FHLBank based on the subsequent performance of the MPF Program, subject to a monthly cap. As that capped amount was reached, payments received by the FHLBank became effectively fixed. During 2003, the FHLBank of Chicago offered to satisfy its future payment obligations pertaining to the FHLBank’s original program contribution with a lump sum payment

33

based on the present value of future payments at an agreed-upon discount rate. The $1.8 million gain recognized in 2003 represents that lump sum amount.

Other Expense

							Percentage			Percentage
	Year Ended						Increase/Decrease			Increase/Decrease
	2004		2003		2002		2004 vs. 2003			2003 vs. 2002
Salaries and employee benefits	$	24,091	$	18,503	$	18,901		30.2	%		-2.1	%
Occupancy cost		2,385		2,248		2,131		6.1	%		5.5	%
Other operating expense		11,298		14,659		14,948		(22.9	)%		(1.9	)%
		13,683		16,907		17,079		(19.1	)%		-1.0	%
Assessments:
Finance Board		1,743		1,292		1,275		34.9	%		1.3	%
Office of Finance		1,716		1,321		1,264		29.9	%		4.5	%
Total other expenses	$	41,233	$	38,023	$	38,519		8.4	%		-1.3	%

     FHLBank operating expenses totalled $41.2 million in 2004, compared to $38.0 million in 2003 and $38.5 million in 2002. Salaries and employee benefits increased to $24.1 million or 30.2% for the full year 2004, compared to the full year 2003. During the past two years, the FHLBank has significantly expanded staffing levels, particularly in the capital markets and mortgage areas, accounting and control, risk management, and information technology.

     Included in the “Other Operating Expenses” are other program expenses which pertain to the BOB program. During the year ended December 31, 2004, the FHLBank determined that it was accounting for the BOB program incorrectly. Previously, commitments under this program were treated as charges to the income statement when a commitment was made. Primarily driven by repayment collections on prior funded commitments, the FHLBank has determined that the program should be accounted for as a portfolio of loans. Accordingly, during the fourth quarter, the FHLBank recorded pre-assessment income of $5.9 million representing the correction of this error. Of this amount, $2.7 million related to prior years.

Assessments, AHP and REFCORP Payments

     Collectively, the twelve FHLBanks are responsible for the operating expenses of the Finance Board and the Office of Finance. These payments, allocated among the FHLBanks according to a cost-sharing formula, are reported as other expense on the FHLBank’s Statement of Operations and equalled $3.5 million in 2004, $2.6 million in 2003, and $2.5 million in 2002. The FHLBank has no control over the amount of assessment it receives from the Finance Board. The FHLBanks are able to exert a limited degree of control over the amount of Office of Finance assessments due to the fact that two of the Office of Finance’s directors are FHLBank Presidents. As a practical matter, all twelve FHLBanks have significant input into the plans and budgets of the Office of Finance.

     Although the FHLBanks are not subject to federal or state income taxes, the combined financial obligations of making payments to REFCORP (20%) and AHP contributions (10%) equate to a proportion of the FHLBank’s net income comparable to that paid in income tax by fully taxable entities. Inasmuch as both the REFCORP and AHP payments are each separately subtracted from earnings prior to the assessment of each, the combined effective rate is less than the simple sum of both (i.e., less than 30%). In passing the Financial Services Modernization Act of 1999, Congress established a fixed 20% annual REFCORP payment rate beginning in 2000 for each FHLBank. The fixed percentage replaced a fixed-dollar annual payment of $300 million which had previously been divided among the twelve FHLBanks through a complex allocation formula. The law also calls for an adjustment to be made to the total number of REFCORP payments due in future years so that, on a present value basis, the combined REFCORP payments of all twelve FHLBanks are equal in amount to what had been required under the previous calculation method.

     Application of the REFCORP percentage rate as applied to earnings during 2004, 2003 and 2002 resulted in annual expenses for the FHLBank of $25.2 million, $6.9 million and $12.0 million, respectively. The year-to-year changes in REFCORP payments made by the FHLBank reflect the changes in pre-REFCORP earnings.

34

Affordable Housing and Community Investment.

     The FHLBank’s mission includes the important public policy goal of making funds available for housing and economic development in the communities served by the members. In support of this goal, the FHLBank administers a number of programs, some mandated and some voluntary, that make funds available through member financial institutions. The Affordable Housing Program (AHP) provides grants and below-market-rate loans for affordable housing projects in competitive funding rounds. The Home Buyer Equity Fund (HBEF) provides grants to qualified low-income first-time homebuyers to assist with down payments and closing costs. Banking On Business offers funding in the form of recoverable assistance to small businesses for start-up and expansion costs. The Community Lending Program (CLP) offers loans at the FHLBank’s cost of funds for community development projects that benefit qualifying communities, create jobs or build infrastructure. In all of these programs, FHLBank funds flow through member financial institutions into areas of need throughout the region.

     Funding for project commitments made available in 2004 under the AHP and to first-time homebuyers under the FHLBank’s HBEF program totaled $6.1 million. Included in this amount was $3.0 million that, under regulatory authority, had been accelerated from amounts anticipated to be accrued during 2005.

     Although the Finance Board permits the FHLBank to make additional annual accelerated AHP payments, each of up to $3.0 million, each such accelerated payment may be carried forward for one year only. Therefore, the $3.0 million loan allocation made during 2003 lowered the amount otherwise available for project commitments made during 2004. This has the same effect as a one-time $3.0 million acceleration that may be rolled over; no new net increase in accelerated amounts beyond this cumulative $3.0 million level is permitted. Total AHP commitments in 2004 were $4.8 million with an additional $1.6 million committed under the FHLBank’s HBEF program.

     The CLP provides loans to members at the FHLBank’s own cost of funds, providing the full advantage of a low-cost funding source. CLP loans help member institutions finance housing construction and rehabilitation, infrastructure improvements, and economic and community development projects in low- to moderate-income neighborhoods. At December 31, 2004, the CLP loan balance totalled $305 million, as compared to $270 million at December 31, 2003, reflecting an increase of $35 million or 13.0%.

     The FHLBank’s BOB program funded $2.5 million, $3.1 million, and $5.3 million for the twelve month periods ended December 31, 2004, 2003, and 2002, respectively.

Financial Position and Condition

     Total assets increased $7.9 billion, or 14.8%, to $61.4 billion at year-end 2004, from $53.5 billion at year-end 2003. Housing finance-related assets, which include MPF loans, loans to members, investments secured by mortgage and mortgage-backed instruments, and other mission-related investments, increased by $6.1 billion, or 11.9%, to $57.0 billion at year-end 2004, from $50.9 billion at year-end 2003. Total housing finance-related assets accounted for 93% of assets as of December 31, 2004.

          Member Loans. (At year-end 2004, total loans to members equaled $38.9 billion, as compared to $34.7 billion as of year-end 2003, representing an increase of $4.2 billion, or 12.1%. The number of the FHLBank’s members using the loan products continues to be high by historical measures, although a significant concentration of the total dollar increase relates to loan growth at the FHLBank’s six largest borrowers, generally reflecting the asset concentration mix of the FHLBank’s membership base.

     The following table provides a distribution of the number of members, categorized by individual member asset size, that had an outstanding loan balance in each year:

Member Asset Size	2004		2003
$<100 million		52		52
>$100-$500 million		143		139
>$500 million-$1 billion		38		40
>$1-$5 billion		31		33
>$5 billion		11		8
Total borrowing members		275		272
Total membership		341		347

35

     Housing Agency Loans. The FHLBank has accepted two housing associates, the Delaware State Housing Agency and the West Virginia Housing Development, as non-members who may, under certain conditions, access certain credit products. At December 31, 2004, there was no outstanding exposure to either of these entities.

     Retained Earnings. The Finance Board has issued regulatory guidance to the FHLBanks relating to capital management and retained earnings. The guidance directs each FHLBank to assess, at least annually, the adequacy of its retained earnings position with consideration given to future possible financial and economic scenarios. The guidance also outlines the considerations that each FHLBank should undertake in assessing the adequacy of the FHLBank’s retained earnings.

     Beginning in the fourth quarter of 2003, the FHLBank’s Board of Directors limited the amount of dividends paid to 50% of quarterly net income estimated at time of payment. Prior to adopting this practice, the FHLBank had followed a practice of declaring quarterly dividends based in part upon the evaluation of the yield on alternative short-term high quality investments, as discussed above. During this time, to the extent that the dividend paid differed from the FHLBank’s quarterly net income, the Board drew upon or added to retained earnings.

     The FHLBank declared $44.3 million in dividends to members during 2004, and added $56.4 million to retained earnings. At December 31, 2004, FHLBank retained earnings stood at $99.5 million, representing an increase of $56.4 million, or 130.9%, over December 31, 2003. In increasing retained earnings to meet its longer-term target, currently established at $200 million, the FHLBank is likely to continue to declare dividends at the 50% ratio. The exact timeline over which this longer-term target is likely to be reached cannot be known with certainty. The retained earnings target has not been established as a static figure; it is subject to modification as conditions warrant and, as a matter of policy, on a regular basis the FHLBank’s Board of Directors continues to evaluate this target in light of prevailing conditions.

     The following table summarizes the change in retained earnings for the years ended December 31, 2004, 2003, and 2002.

(In thousands)	2004			2003			2002
Beginning	$	43,087		$	65,563		$	86,818
Net Income		100,726			27,706			48,050
Dividends Declared		(44,310	)		(50,182	)		(69,305	)
Ending	$	99,503		$	43,087		$	65,563
Dividends Declared/Net Income		44.0	%		181.1	%		144.2	%

Contractual Obligations and Commitments

     The following table summarizes significant contractual obligations and commitments at December 31, 2004:

(dollars in thousands)

			Less than		1-3		4-5		Thereafter
	Total Due		1 Year		Years		Years		Years
Debt:
Consolidated Bonds (a)	$	43,803,358	$	9,698,200	$	14,621,348	$	6,836,910	$	12,646,900
Index amortizing notes (a)		1,100,406				39,317		835,505		225,584
Consolidated Discount Notes		15,160,634		15,160,634
Operating Leases:
Premise		11,658		2,235		4,420		4,288		715
Equipment		160		150		10
	Total
	Committed
Commitments:
Consolidated obligations	$	502,000	$	502,000
Derivatives (notional)	$	527,000	$	527,000

36

     (a) Table indicates stated maturity date – certain specific bonds or notes incorporate features, such as call or index, that could cause redemption at different times than the stated maturity dates.

     In addition to the commitments listed above the FHLBank is obligated to fund approximately $114.8 million in additional loans to members and $15.4 million of mortgage loans at December 31, 2004. Outstanding standby letters of credit were approximately $277.9 million at December 31, 2004.

     At December 31, 2004 the FHLBank had pledged, as collateral, cash and securities with a book value of $408.4 million to broker-dealers that have market exposure from the FHLBank related to interest rate exchange agreements.

Segments

     The FHLBank operates two segments differentiated by products. The first segment entitled Traditional Member Finance houses a majority of the FHLBank’s activities, including but not limited to, providing loans to members; investments; and deposits products. MPF or Mortgage Finance segment purchases loans from members and funds and hedges the resulting portfolio.

     Results of segments are presented based on management accounting practices and the FHLBank’s management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. Therefore, the financial results of the segments are not necessarily comparable with similar information at other FHLBanks or any other company.

     The management accounting process uses various balance sheet and income statement assignments and transfers to measure performance of the segment. Methodologies are refined from time to time as management accounting practices change. Borrowings are allocated to the Mortgage Finance segment based on loans outstanding. All remaining borrowings and all capital remain in the Traditional Member Finance business. The allowance for credit losses is totally allocated to the Mortgage Finance segment which is consistent with management’s assessment of the risk inherent in the loan portfolio. Derivatives are allocated to segments consistent with hedging strategies.

     Cost incurred by support areas not directly aligned with the segment are allocated based on estimated usage of services.

37

     The following table sets forth the FHLBank’s financial performance by operating segment for the years ended December 31, 2004 and 2003 (in thousands):

     BOB related loans are grouped with “Other assets” on the Statement of Condition. BOB related income is recorded net of the provision for loss and grouped with “Other income” on the Statement of Operations.

	Traditional			MPF®or
	Member			Mortgage
	Finance			Finance			Total
2004
Net interest income	$	109,040		$	25,522		$	134,562
Provision for credit losses on mortgage loans		—			(166	)		(166	)
Other income		36,833			(1,310	)		35,523
Other expenses		(38,322	)		(2,911	)		(41,233	)
Income before assessments		107,551			21,135			128,686
Affordable Housing Program		9,466			1,725			11,191
REFCORP		21,300			3,882			25,182
Total assessments		30,766			5,607			36,373
Net income before cumulative effect of change in accounting principle	$	76,785		$	15,528		$	92,313
2004
Total assets	$	52,734,361		$	8,664,551		$	61,398,912
2003
Net interest income	$	93,759		$	18,248		$	112,007
Provision for credit losses on mortgage loans		—			147			147
Other income/(loss)		(13,904	)		(22,517	)		(36,421	)
Other expenses		(36,389	)		(1,634	)		(38,023	)
Income before assessments		43,466			(5,756	)		37,710
Affordable Housing Program		3,548			(470	)		3,078
REFCORP		7,983			(1,057	)		6,926
Total assessments		11,531			(1,527	)		10,004
Net income before cumulative effect of change in accounting principle	$	31,935		$	(4,229	)	$	27,706
2003
Total assets	$	45,453,774		$	8,065,285		$	53,519,059

     The Mortgage Finance segment is comprised of residential mortgage loans purchased from members and the related hedging activity. Its operating results are highly dependent on interest rates. As interest rates decline, existing homeowners seek to refinance their mortgages in order to reduce their loan interest payments. This causes the FHLBank to experience unscheduled principal reductions or prepayment of the loans before their scheduled maturity. Offsetting this unscheduled reduction in loans is new loan volumes from either existing borrowers refinancing or first time home buyers who, given the low rate environment, find it affordable to buy a home.

     All of the residential mortgage loans in this segment are purchases at fair value. When a fair value is above or below its par value the FHLBank records a corresponding premium or discount. These premiums or discounts are amortized to interest income as a yield adjustment on the loan. The FHLBank’s portfolio has been primarily purchased above par resulting in premiums paid. During 2004, the FHLBank changed its amortization methodology from an estimated life method which amortized the premium based on expected life of the loans to the contractual life method. The contractual life method amortizes the premium over the contractual term of the loan at an effective yield taking into account unscheduled loan pay downs or pay offs as they occur.

     Net interest income increased $22.6 million, or 20.1%, to $134.6 million for 2004 as compared to $112.0 million in 2003. The primary reasons for the improvement were significantly lower mortgage loan premium amortization expense and

38

the maturation of higher cost fixed rate debt. Traditional Member Finance segment net interest income increased $15.2 million, or 16.3%, to $109.0 million for 2004 as compared to $93.8 million for 2003. Mortgage Finance segment net interest income increased $7.3 million, or 39.9%, to $25.5 million for 2004 as compared to $18.2 million for 2003.

     The provision for credit losses on mortgage loans relates entirely to the Mortgage Finance Segment. The provision increased $.3 million to $.2 million for 2004 as compared to a benefit of $(.1) million recognized in 2003. During 2003 the FHLBank revised its method of estimating credit losses (see Note 11 of the Audited Financial Statements for further discussion) resulting in a decrease to the credit loss reserve.

     Other non-interest income was $35.5 million for 2004, an increase of $71.9 million, as compared to a loss of ($36.4) million for 2003. The primary component of the change related to the net realized gain on derivatives and hedging activities of $31.2 million for 2004 as compared to a net realized loss on derivatives and hedging activities of ($39.8) million for 2003. Traditional Member Finance segment other non-interest income increased $50.7 million to $36.8 million for 2004 as compared to a loss of ($13.9) million for 2003. Mortgage Finance segment other net income increased $21.2 million to a loss of ($1.3) million for 2004 as compared to a loss of ($22.5) million for 2003.

     Other non-interest expense increased $3.2 million, or 8.4%, to $41.2 million for 2004 as compared to $38.0 million for 2003. Salaries and employee-related expenses increased $5.6 million, or 30.2%, to $24.1 million for 2004 as compared to $18.5 million for 2003 as the FHLBank has significantly expanded staffing levels in several key areas. Traditional Member Finance segment non-interest expense increased $1.9 million, or 5.3%, to $38.3 million for 2004 as compared to $36.4 million for 2003. Mortgage Finance Segment non-interest expense increased $1.3 million, or 78.2%, to $2.9 million for 2004 as compared to $1.6 million for 2003. A majority of the loans in this segment are fair value hedged. Fair value hedging requires the derivative and the loan to be marked to fair market value with any differences between the two fair values to be recorded in other income.

     AHP expenses increased 8.1 million to $11.2 million for 2004 as compared to $3.1 million for 2003. REFCORP expenses increased $18.3 million to $25.2 million for 2004 as compared to $6.9 million for 2003. AHP and REFCORP are calculated as a percentage of income and therefore vary accordingly for both reported segments.

Three Month Periods Ended March 31, 2005 and 2004

     The FHLBank recorded net income of $34.3 million for the three months ended March 31, 2005 compared to $29.6 million for the same period in 2004, an increase of $4.7 million or 15.9%. The major factor behind this increase was an almost three-fold increase in net interest spread, from 0.08% for the March 2004 quarter to 0.23% for the March 2005 quarter. The FHLBank is benefiting from a rising rate environment on asset yields and with the maturity of higher cost funding throughout 2004.

Included in the operating results of the FHLBank in the March 2004 quarter is $8.4 million income relating to a cumulative effect of change in accounting principle. The FHLBank changed its method for accounting of deferred premiums and discounts under SFAS91 effective January 1, 2004 from the retrospective method to the contractual method.

Return on equity equaled approximately 5.37% for the three months ended March 31, 2005 compared to 4.84% in the same period of 2004. The earned dividend rate was 5.73%, which provided for a paid dividend yield of 2.86% (at approximately a 50% payout rate of earnings estimated at the time of payment).

Other income totaled $8.2 million for the three months ended March 31, 2005 compared to $16.9 million for the same period in 2004. The primary component of this change related to a decrease in gains/loss on sales of securities and net gains/(losses) on derivatives. Expenses increased to $13.6 million for the three months ended March 31, 2005 compared to $10.5 million for the same period in 2004, primarily as a result of two factors — compensation and information systems enhancements.

Loans to members have remained relatively unchanged over the past twelve months, and total $37.8 million at March 31, 2005. Mortgage loan balances have also remained stable and total $8.8 million at March 31, 2005. Capital has decreased slightly, totaling $2.6 million at March 31, 2005, compared to $2.8 million at March 31, 2004 as the retained earnings increase was, offset by net decreases in capital stock outstanding.

39

Net Interest Income

Average Balances/Net Interest Margin/Rates

				Quarter Ended March 31,
	2005								2004
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
Assets
Federal funds sold	$	1,511,300		$	9,268		2.49	%	$	1,306,451		$	3,210		0.99	%
Other short-term Investments		62,258			400		2.61			144,010			430		1.20
Long-term investments (1)		9,282,889			92,033		4.02			7,775,704			74,026		3.87
Interest-bearing deposits in banks		710,594			4,309		2.46			1,026,620			2,619		1.04
Loans to members(3)		37,908,773			248,015		2.65			36,283,339			115,864		1.28
Mortgage loans held for portfolio(2) (3)		8,768,268			84,774		3.92			8,385,629			55,360		2.66
Total earning assets	$	58,244,082		$	438,799		3.05	%	$	54,921,753		$	251,509		1.84	%
Allowance for credit losses on mortgage loans		(707	)							(520	)
Other assets		809,254								740,702
Total assets	$	59,052,629							$	55,661,935
Liabilities and Capital
Time deposits	$	10,700		$	80		3.03	%	$	6,000		$	15		1.01	%
Other interest- bearing deposits		1,133,794			6,212		2.22			1,352,727			2,802		0.83
Short-term Borrowings		12,729,124			76,214		2.43			13,877,355			35,523		1.03
Long-term debt		41,543,457			303,331		2.96			36,082,959			186,931		2.08
Other borrowings		145,938			880		2.45			280,616			762		1.09
Total interest- bearing liabilities	$	55,563,013		$	386,717		2.82	%	$	51,599,657		$	226,033		1.76	%
Other liabilities		903,695								1,603,995
Total capital		2,585,921								2,458,283
Total liabilities and capital	$	59,052,629							$	55,661,935
Net interest income/ interest rate spread	$	2,681,070		$	52,082		0.23	%	$	3,322,096		$	25,476		0.08	%
Net interest margin							0.36	%							0.19	%
Average interest-earning assets to interest-bearing liabilities							104.83	%							106.44	%

Notes:

(1)	The amount of investment securities available-for-sale is based on fair values. Related yield information gives effect to changes in fair value otherwise reflected as a component of stockholders’ equity.
(2)	Non-performing loans are included in average balances in determining the average rate.
(3)	All loan amounts exclude BOB related balances and activity.

     Yield on Earning Assets and Cost of Funds. The FHLBank’s yield on earning assets averaged 3.05% for the three months ended March 31, 2005, compared to an average of 1.84% for the same period in 2004, an increase of 121 basis points. For these same periods, the FHLBank’s average cost of interest-bearing funds also rose, averaging 2.82% compared to 1.76%, an increase of 106 basis points. With asset yields rising more rapidly than related funding costs, the FHLBank’s net interest

40

spread and resulting net interest income increased. As a result, the FHLBank’s net interest spread almost tripled on a quarter to quarter comparison, from .08% in 2004 to .23% in 2005. Similarly, the FHLBank’s net interest margin increased from .19% for the quarter ended March 31, 2004 to .36% for the quarter ended March 31, 2005.

     Rate/Volume Analysis. The following table summarizes changes in interest income and interest expense between the three months ended March 31, 2005 and 2004, and the three months ended March 31, 2004 and 2003.

	3/31/05 vs. 3/31/04								3/31/04 vs. 3/31/03
(dollars in thousands)	Volume			Rate		Total(1)			Volume			Rate			Total(1)
Increase (decrease) in interest income:
Federal funds sold	$	473		$	5,585	$	6,058		$	(550	)	$	(822	)	$	(1,372	)
Other short-term investments		(246	)		216		(30	)		(249	)		(102	)		(351	)
Long-term investments		14,591			3,416		18,007			(18,229	)		430			(17,799	)
Interest-bearing deposits		(801	)		2,491		1,690			1,157			(757	)		400
Loans to members		4,188			127,963		132,151			27,013			(29,646	)		(2,633	)
Mortgage loans held for portfolio		2,047			27,366		29,413			15,373			(6,041	)		9,332
Total	$	20,252		$	167,037	$	187,289		$	24,515		$	(36,938	)	$	(12,423	)
Increase (decrease) in interest expense:
Time deposits	$	12		$	53	$	65		$	(81	)	$	(4	)	$	(85	)
Other interest-bearing deposits		(473	)		3,883		3,410			(2,880	)		(788	)		(3,668	)
Short-term borrowings		(3,209	)		43,900		40,691			9,572			(7,534	)		2,038
Long-term debt		26,507			89,893		116,400			33,422			(27,944	)		5,478
Other borrowings		(369	)		486		117			(1,862	)		(85	)		(1,947	)
Total	$	22,468		$	138,215	$	160,683		$	38,171		$	(36,355	)	$	1,816
Increase (decrease) in net interest income	$	(2,216	)	$	28,822	$	26,606		$	(13,656	)	$	(583	)	$	(14,239	)

⁽¹⁾ Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative sizes.

     Market rates rose in the first quarter of 2005, and the general shape of the yield curve flattened over this period as compared to the yield curve at December 31, 2004. The FHLBank’s interest income increased by $187 million for the three months ended March 31, 2005 compared to the same period in 2004. Of this change, 11% is due to volume increases and 89% is due to interest rate increases. This reflects a relatively flat demand for loans to members. Rising interest rates benefited the FHLBank. For the three months ended March 31, 2004, the FHLBank’s interest income decreased by $12 million compared to the same period in 2003. The portion of this change due to volume resulted in a $25 million increase, which was negated by a $37 million decrease caused by declining interest rates. The volume increases were driven primarily by mortgage loan production, which was higher due to the declining interest rate environment and loans to members.

     For the three months ended March 31, 2005, interest expense increased by $161 million compared to the same period in 2004. Of this change, 14% was due to volume increases and 86% was due to interest rate increases. Average interest-bearing liabilities outstanding increased $4.0 million or 7.8% to support the slightly larger earning asset base, largely through the issuance of consolidated obligations. Similar to the FHLBank’s asset yield, funding costs also rose during the three months ended March 31, 2005. The resulting net increase in interest expense during the March 31, 2005 quarter, as compared to the March 31, 2004 quarter, served to reduce the overall net interest income. In the quarter ended March 31, 2004, interest expense increased by $2 million compared to 2003. The proportional composition between rate and volume variances were approximately the same. This slight increase in interest expense, coupled with the reduction in interest income, resulted in an overall net interest income decline of $14.2 million.

41

     The following table separately quantifies the effects of the FHLBank’s derivative activities on its interest income and interest expense for the quarter ended March 31, 2005.

Average Balances/Net Interest Spread/Rates	March 31,
	2005
	Average			Interest				Interest				Derivative			Impact
	Balance			With				Without
				derivatives				Derivatives
Investments:
Fed Funds Sold	$	1,511,300		$	9,268	2.49	%	$	9,268	2.49	%	$	—			—
Other Short term investments		62,258			400	2.61	%		400	2.61	%		—			—
Long-Term investments		9,282,889			92,033	4.02	%		92,033	4.02	%		—			—
Interest-bearing deposits in banks		710,594			4,309	2.46	%		4,309	2.46	%		—			—
Loans to members		37,908,773			248,015	2.65	%		336,470	3.60	%		(88,455	)		-.23	%
Mortgage Loans held for portfolio		8,768,268			84,774	3.92	%		107,896	4.99	%		(23,122	)		-.26	%
Total Earning Assets	$	58,244,082		$	438,799	3.05	%	$	550,376	3.83	%	$	(111,577	)		-.19	%
Allowance for credit losses on mortgage loans		(707	)
Other assets		809,254
Total Assets	$	59,052,629
Liabilities and Capital
Time Deposits		10,700			80	3.03	%		80	3.03	%		—			—
Other interest bearing deposits		1,133,794			6,212	2.22	%		6,212	2.22	%		—			—
Short term borrowings		12,729,124			76,214	2.43	%		76,214	2.43	%		—			—
Long term debt		41,543,457			303,331	2.96	%		365,938	3.57	%		(62,607	)		-.15	%
Other borrowings		145,938			880	2.45	%		880	2.45	%		—			—
Total interest-bearing liabilities	$	55,563,013		$	386,717	2.82	%	$	449,324	3.28	%	$	(62,607	)		-0.11	%
Other liabilities		903,695
Total capital		2,585,921
Total liabilities and capital	$	59,052,629
Net interest spread				$	52,082	0.23	%	$	101,052	0.55	%	$	(48,970	)		-0.08	%

     Mortgage Loan and Premium/Discount. Mortgage loan prepayment activity has slowed in the first quarter of 2005 compared to the same period in 2004, and as a result the impact of amortization expense of net mortgage premium amortization (although still present) has also slowed.

     The table below provides key information related to the FHLBank’s premium/discount on mortgage loans.

(in thousands)	March 31, 2005			March 31, 2004
Net premium/(discount) expense for the period	$	7,413		$	8,773
Mortgage loan related net premium balance at period-end	$	92,634		$	128,261
Mortgage loan par balance at period-end	$	8,686,576		$	8,210,612
Premium balance as a percent of mortgage loans (par)		1.07	%		1.56	%

     High-coupon Debt. The FHLBank’s financial results have been adversely affected in recent years by high-cost, long-term, fixed-rate debt issued at what were, relative to prevailing market conditions, markedly higher interest rates. A significant amount of this unhedged debt, $1.3 billion, at a weighted average coupon of 6.28%, matured in the third quarter of 2004. An additional $120 million, at a weighted average cost of 7.13% matured in the first quarter of 2005. Maturing debt has been replaced with a mix of structured debt, floating rate debt, and fixed rate debt. Approximately $331 million at a weighted average coupon of 6.71% is scheduled to mature during the last three quarters of 2005.

42

Other Income

(in thousands)	March 31, 2005			March 31, 2004
Services to members	$	871		$	1,083
Net gain on sale of held-to-maturity securities		—			2,576
Net gain on sale of available-for-sale securities		—			—
Net gain/(loss) on trading securities		(999	)		78
Net gain/(loss) on derivatives and hedging activities		8,067			12,784
Other, net		217			346
Total other income/(expense)	$	8,156		$	16,867

Earnings Effects of Derivatives.

     Net income for the three months ended March 31, 2005 includes net gains on derivatives of $8.1 million as compared to $12.8 million for the same period in 2004.

     The following table summarizes the net gains and losses on derivatives and hedging activities including hedge ineffectiveness:

		March 31, 2005			March 31, 2004
Loans to members	Fair value	$	622		$	4,303
	Cash flow
Consolidated Obligations	Fair value		2,487			1,221
	Cash flow					(574	)
Mortgage Loans	Fair value		(1,574	)		1,849
	Cash flow
Economic			6,966			5,995
Intermediaries			(434	)		(10	)
Firm commitments (no longer qualified for hedge accounting)			—
Net gains/(losses) on derivatives and hedging		$	8,067		$	12,784

Other Expense

						Increase/Decrease
	March 31, 2005		March 31, 2004			2005 vs. 2004
Salaries and employee benefits	$	6,909	$	5,493			25.8	%
Other program expense		1,389		(12	)		*
Occupancy cost		611		540			13.1	%
Other operating expense		3,514		3,528			(0.4	)%
		12,423		9,549			30.1	%
Assessments:
Finance Board		636		518			22.8	%
Office of Finance		493		394			25.1	%
Total other expenses	$	13,552	$	10,461			29.6	%

43

     FHLBank operating expenses totalled $13.6 million for the three months ended March 31, 2005, compared to $10.5 million for the same period in 2004, an increase of $3.1 million or 29.6%. Salaries and employee benefits comprised the largest individual line item of this increase. The FHLBank continues to expand staffing levels, particularly in the capital markets and mortgage areas, accounting and control, risk management, and information technology.

     Included in the “Other Operating Expenses” are expenses which pertain to the BOB program. During the year ended December 31, 2004, the FHLBank determined that it was accounting for the BOB program incorrectly. Previously, commitments under this program were treated as charges to the income statement when a commitment was made. Primarily driven by repayment collections on prior funded commitments, the FHLBank has determined that the program should be accounted for as a portfolio of loans.

Assessments, AHP and REFCORP Payments

     The FHLBank’s share of expenses relating to the Finance Board and the Office of Finance totaled $1.1 million for the quarter ended March 31, 2005, compared to $0.9 million for the same period in 2004, an increase of $0.2 million or 22.2% which coincides with the increase in pre-assessment income.

     Application of the REFCORP percentage rate as applied to earnings during the quarters ended March 31, 2005 and 2004 resulted in expenses for the FHLBank of $8.6 million, and $7.4 million, respectively. Affordable Housing Program assessments totaled $3.8 million and $3.3 million for the quarters ended March 31, 2005 and 2004, respectively. The quarter to quarter changes in REFCORP and AHP payments made by the FHLBank reflect the changes in pre-assessment earnings.

Affordable Housing and Community Investment.

     Funding available for project commitments in 2005 under the AHP and the HBEF total $12.3 million. This amount includes the 2004 accrual of $10.7 plus recaptured and de-obligated amounts, along with $2.0 million that, under regulatory authority, has been accelerated from amounts anticipated to be accrued during 2005.

     Although the Finance Board permits the FHLBank to make additional annual accelerated AHP payments, each of up to $3.0 million, each such accelerated payment may be carried forward for one year only. Therefore, the $3.0 million loan allocation made during 2004 lowered the amount otherwise available for project commitments to be made during 2005. This has the same effect as a one-time $3.0 million acceleration that may be rolled over; no new net increase in accelerated amounts beyond this cumulative $3.0 million level is permitted. Total AHP commitments in 2004 were $4.8 million with an additional $1.6 million committed under the FHLBank’s HBEF program.

     The Community Lending Program “CLP” provides loans to members at the FHLBank’s own cost of funds, providing the full advantage of a low-cost funding source. CLP loans help member institutions finance housing construction and rehabilitation, infrastructure improvements, and economic and community development projects in low- to moderate-income neighborhoods. At March 31, 2005, the CLP loan balance totalled $322 million, as compared to $305 million at December 31, 2004, reflecting an increase of $17 million or 5.57%.

     The FHLBank’s BOB program funded $.9 million during the quarter ended March 31, 2005.

Financial Position and Condition

     Total assets decreased $1.6 billion, or 2.6%, to $59.8 billion at March 31, 2005, from $61.4 billion at year-end 2004 primarily driven by member loan declines. Housing finance-related assets, which include MPF loans, loans to members, investments secured by mortgage and mortgage-backed instruments, and other mission-related investments, decreased by $1.2 billion, or 2.1%, to $55.8 billion at March 31, 2005, from $57.0 billion at year-end 2004. Total housing finance-related assets accounted for 93% of assets as of December 31, 2004. Management of the FHLBank expects substantially all of the FHLBank’s balance sheet growth in 2005 to derive from increases in the non-mortgage loan assets.

     Member Loans. At March 31, 2005, total loans to members equaled $37.8 billion, as compared to $39.0 billion as of year-end 2004, representing a decrease of $1.2 billion, or 3.1%. Monthly variability in member borrowing remained tempered in the first quarter of 2005. The number of the FHLBank’s members using the loan products continues to be high by historical measures; 262 members, or 78%, have borrowings outstanding as of March 31, 2005. However, a significant concentration of the total dollar amounts relate to loan growth at the FHLBank’s six largest borrowers, generally reflecting the asset concentration mix of the FHLBank’s membership base.

44

     The following table provides a distribution of the number of members, categorized by individual member asset size, that had an outstanding loan balance in each year:

	March 31,		December 31,		December 31,
Member Asset Size	2005		2004		2003
$<100 million		51		52		52
>$100-$500 million		136		143		139
>$500 million-$1 billion		36		38		40
>$1-$5 billion		29		31		33
>$5 billion		10		11		8
Total borrowing members		262		275		272
Total membership		337		341		347

     Mortgage Loans. Mortgage loan balances have remained stable, totaling $8.8 billion as of March 31, 2005 as compared to $8.7 billion as of December 31, 2004. Mortgage loan balances have ranged from $8.5 billion to $8.9 billion over the twelve month period ended March 31, 2005, which is consistent with the FHLBank’s strategy of limiting growth of this product.

     Retained Earnings and Capital Stock. The FHLBank declared $17.4 million in dividends to members in the quarter ended March 31, 2005, and added $34.3 million to retained earnings. At March 31, 2005, FHLBank retained earnings stood at $116.4 million, representing an increase of $16.9 million, or 17.0%, over December 31, 2004. Retained earnings represented .19% of total assets as of March 31, 2005.

     The following table summarizes the change in retained earnings from 2002 through March 31, 2005.

(In thousands)	March 31, 2005			2004			2003			2002
Beginning	$	99,503		$	43,087		$	65,563		$	86,818
Net Income		34,257			100,726			27,706			48,050
Dividends Declared		(17,366	)		(44,310	)		(50,182	)		(69,305	)
Ending	$	116,394		$	99,503		$	43,087		$	65,563
Dividends Declared/Net Income		50.7	%		44.0	%		181.1	%		144.2	%

     The FHLBank operated on a lower capital stock base in the quarter ended March 31, 2005. Total capital stock was $2.6 billion at March 31, 2005, compared to $2.8 billion at December 31, 2004, a decrease of $0.2 billion or 7.1%. The FHLBank lowered the minimum stock purchase requirement during the first quarter of 2005 from .7% of unused borrowing capacity to .5%.

Mortgage Partnership Finance^® (MPF^®) Program (Mortgage Loans held for Portfolio)

     The following sections present combined Management’s Discussion and Analysis of Financial Condition and Results of Operations for both the years ended December 31, 2004 and the three months ended March 31, 2005.

     The Mortgage Partnership Finance (MPF) Program was created by the Federal Home Loan Bank of Chicago in 1997 to provide members with another secondary mortgage market alternative. The MPF program is designed around the principles of partnership and risk sharing, allocating the risks of fixed-rate housing finance between the FHLBank and its members to take advantage of their relative strengths. The distinctive feature of the MPF program and benefit for its members is that, rather than paying a guaranty fee to another secondary market participant, members are paid credit enhancement fees for sharing in the risk of loss on mortgage loans sold to the FHLBank. Members have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing members to originate mortgage loans, whether through retail or wholesale operations, and to retain servicing of mortgage loans, the MPF program gives control of the functions that relate to credit risk to its members. The credit enhancement structure motivates

45

members to minimize loan losses on mortgage loans sold to the FHLBank. The FHLBank is responsible for managing the interest rate risk, prepayment risk, liquidity risk and a residual portion of the credit risk associated with the mortgage loans.

     The FHLBank participates in the MPF program through an agreement with the FHLBank of Chicago. The FHLBank of Chicago provides program and operational support to the FHLBank and its members. The mortgage loan assets acquired by the FHLBank under the MPF program generally have the credit risk exposure of double-A rated mortgage assets to meet the credit risk sharing structure mandated by Finance Board regulation. The regulation requires the mortgage loans to be purchased by the FHLBank from its members and to be credit enhanced in part by its members. The FHLBank of Chicago has the financial models necessary to evaluate each loan purchased, and its models indicate the credit enhancement necessary to achieve various credit rating levels.

     The FHLBank generally acquires whole loans from its members but may also acquire loans from a member of another Home Loan Bank. The FHLBank may also acquire mortgage loan participations from other Home Loan Banks. The mortgage loans are qualifying conventional conforming and government fixed-rate mortgage loans secured by one-to-four family residential properties with maturities ranging from five to 30 years.

Mortgage Loan Portfolio

     As of March 31, 2005, the par value of the FHLBank’s mortgage loan portfolio totaled $8.7 billion, an increase of $0.2 billion or 2.4% from the December 31, 2004 balance of $8.5 billion. These balances were approximately 14.5% and 13.9% of period-end total assets, respectively. The average mortgage loan balance through March 31, 2005 was $8.8 billion, an increase of $0.2 billion or 1.8% from December 31, 2004. These increases were primarily due to new purchases exceeding loan portfolio paydowns. The tables below present additional mortgage loan portfolio statistics and portfolio balances categorized by term and product.

Mortgage Loan Portfolio Statistics

	Three Months Ended March 31,						Year Ended
(dollars in thousands)							December 31,
	2005			2004			2004
Mortgage loans net interest income	$	84,730		$	55,348		$	249,872
Average mortgage loan balance	$	8,767,562		$	8,385,109		$	8,614,435
Average yield		3.92	%		2.65	%		2.90	%
Weighted average coupon		5.84	%		5.98	%		5.65	%
Weighted average estimated life	5.7 years			3.7 years			6.2 years

(in thousands)	March 31, 2005			December 31, 2004
Real estate:
Fixed-rate 15-year single-family mortgages	$	1,743,758		$	1,808,119
Fixed-rate 20 and 30-year single-family mortgages		6,942,818			6,706,276
Subtotal par value	$	8,686,576		$	8,514,395
Unamortized premiums		119,846			122,661
Unamortized discounts		(27,211	)		(27,773	)
SFAS 133 hedging adjustments		2,082			55,948
Total mortgage loans held for investment	$	8,781,293		$	8,665,231
Less: Allowance for credit losses		725			680
Total mortgage loans, net of allowance for credit losses	$	8,780,568		$	8,664,551

46

	March 31, 2005					December 31, 2004
(in thousands, except percentages)	Balance		Percent			Balance		Percent
Mortgage loans outstanding by product:
Conventional loans:
Original MPF	$	394,437		4.5	%	$	372,342		4.4	%
MPF Plus		7,308,827		84.2	%		7,063,411		82.9	%
Total conventional loans	$	7,703,264		88.7	%	$	7,435,753		87.3	%
Government-insured loans:
Original MPF for FHA/VA		985,715		11.3	%		1,081,045		12.7	%
Subtotal par value	$	8,688,979		100.0	%	$	8,516,798		100.0	%
Less: Other real estate owned		2,403					2,403
Total par value	$	8,686,576				$	8,514,395

     The following table presents a geographic breakdown of the mortgage loans held by the FHLBank according to participating member loan originations and based on the unpaid principal balance at the end of each period:

	March 31, 2005			December 31, 2004
Regional concentrations
Midwest (IA, IL, IN, MI, MN, ND, NE, OH, SD and WI)		20	%		20	%
Northeast (CT, DE, MA, ME, NH, NJ, NY, PA, PR, RI, VI and VT)		18			18
Southeast (AL, DC, FL GA, KY, MD, MS, NC, SC, TN, VA and WV)		29			29
Southwest (AR, AS, CO, KS, LA, MO, NM, OK, TX and UT)		17			17
West (AK, CA, GU, HI, ID, MT, NV, IR, WA and WY)		16			16
Total		100	%		100	%

     Participating Financial Institution Agreement (PFI Agreement). Each participating financial institution (PFI) has executed a PFI Agreement with the FHLBank. The purpose of this PFI Agreement is to: (1) establish the member as an approved seller of mortgages to the FHLBank and an approved servicer of mortgages held by the FHLBank, and (2) to provide the terms and conditions for the origination, purchase, and servicing of the mortgages to be purchased by the FHLBank. Under the terms of the PFI Agreement, the FHLBank has no obligation to enter into any commitment to purchase loans or accept delivery. However, once the FHLBank enters into a delivery commitment, it is binding on both the PFI and the FHLBank.

     Mortgage Loan Purchases. Mortgage loans are purchased directly from PFIs. PFIs deliver mortgage loans by first obtaining a delivery commitment which is a binding commitment between the PFI and the FHLBank. Delivery commitment terms indicate a specific rate of interest, have a specified term, and are to be delivered within a specified time period. Prior to requesting funding for a mortgage loan, the PFI must designate under which delivery commitment the loan will be funded and must submit certain data concerning the loan so that a credit enhancement analysis and calculation can be completed. Typically, except for a minimal tolerance, the amount of the mortgage loans funded under a delivery commitment may not exceed the amount of the delivery commitment. Delivery commitments that exceed the minimal tolerance or are not fully funded by their expiration date are subject to pair-off fees or extension fees which protect the FHLBank against changes in market prices.

     As of March 31, 2005, 55 members were approved participants in the MPF program. Of the FHLBank’s ten largest members, five members have executed PFI agreements: PNC Bank, NA; Sovereign Bank; Chase Manhattan Bank, USA, NA; National City Bank of PA; and Citicorp Trust Bank, FSB. Based on MPF program total dollar volume purchased from participating members, National City Bank of PA represented 95% of volume purchased for the first quarter 2005. Due to this concentration, the FHLBank works closely with National City Bank to regularly monitor purchases.

     Mortgage Loan Participations. The services agreement described below allows for the sale of participation interests to other Home Loan Banks, institutional third party investors approved of in writing by the FHLBank of Chicago, and the member that provided the credit enhancement. The FHLBank has regularly sold participation interests in purchased mortgage loans to the FHLBank of Chicago as the services agreement provides for a 25% or greater participation in purchased mortgage loans to compensate for the transaction processing services provided by the FHLBank of Chicago. For the three months ended March 31, 2005, the volume of participation interests sold to the FHLBank of Chicago was $197

47

million. The outstanding principal balance of participation interests sold to other Home Loan Banks as of this date was $42.2 million. The FHLBank has not purchased any participation interests in mortgage loans from other Home Loan Banks since 1999 and currently holds no participations in other Home Loan Bank mortgage loans. The FHLBank is responsible for evaluating, monitoring, and initially certifying to any Home Loan Bank participant the creditworthiness of each relevant PFI. This certification is provided at least annually thereafter. The FHLBank is responsible for enforcing any obligations under the PFI Agreement with each PFI.

48

	March 31, 2005					March 31, 2004
(in thousands, except percentages)	Balance		Percent			Balance		Percent
Volume of mortgage loan purchases by product:
Conventional loans:
Original MPF	$	35,685		4.4	%	$	37,549		3.5	%
MPF Plus		772,284		95.6	%		1,046,396		96.5	%
Total conventional loans		807,969		100.0	%		1,083,945		100.0	%
Government-insured loans:
Original MPF for FHA/VA		—		0.0	%		—		0.0	%
Total volume of loan purchases, at par value	$	807,969		100.0	%	$	1,083,945		100.0	%
Less: Volume participated to the FHLBank Chicago		196,921					267,961
Volume retained by the FHLBank	$	611,048				$	815,984

     Under current market conditions, the size and volume of the FHLBank’s mortgage loan program would not be significantly affected if the FHLBank of Chicago could not purchase additional mortgage loan volume. The FHLBank has several available options to limit growth in its mortgage balances. If the FHLBank was faced with volume expectations that exceeded its acquisition plans, the FHLBank would first offer to sell mortgage loans to other FHLBanks. Also, the FHLBank’s PFI Agreement does not obligate the FHLBank to purchase mortgage loans from PFIs. In addition, in select instances the FHLBank has imposed monthly delivery limits on certain PFIs. The FHLBank would work with PFIs to adjust volume limits, as necessary.

     Restricted Securities. The FHLBank does not package any mortgage loan production into mortgage-backed securities. However, the FHLBank, along with several other FHLBanks, participated in a Shared Funding Program, which was administered by an unrelated third party. This program allows mortgage loans originated through the MPF program to be sold to a third party sponsored trust and pooled into securities. The FHLBank of Chicago purchased the pooled securities, which are rated at least double-A, and either retained or partially sold them to other FHLBanks. The collateral underlying these investments is mortgages purchased from PFIs. These securities are not publicly traded, are not guaranteed by any of the Home Loan Banks, and have certain sale restrictions. The amortized cost of these securities was $85.6 million and $90.4 million as of March 31, 2005 and December 31, 2004, respectively.

Servicing

     Services Agreement with the FHLBank of Chicago. In April 1999, the FHLBank and the FHLBank of Chicago entered into a services agreement, which sets forth the terms and conditions of the FHLBank’s participation in the MPF program. The FHLBank and the FHLBank of Chicago have agreed that the FHLBank will compensate the FHLBank of Chicago for its transaction processing services by granting at least a 25% participation interest in the mortgage loans funded by the FHLBank. The percentage in individual mortgage loans may vary from transaction to transaction by agreement between the FHLBank and the FHLBank of Chicago. In the event of losses on participated loans, losses are first applied to each participant’s first loss account on a pro-rata basis, then to the credit enhancement obligation of the PFI or supplemental mortgage insurance as indicated by the particular MPF product. Further losses are shared based on the participation interests of the FHLBank and the FHLBank of Chicago. Under the services agreement, there are no minimum sales levels or transaction fees.

     Mortgage loans are purchased directly from PFIs through the transactional services provided by the FHLBank of Chicago. As part of the services provided, the FHLBank of Chicago establishes daily pricing for mortgage loans and provides reporting for both the PFI and FHLBank. It also acts as the master custodian and master servicer for the FHLBank and provides the necessary quality control services on purchased mortgage loans. See Exhibit 10.7 for more information about the services agreement.

49

     Mortgage Loan Servicing. Under the program, PFIs may retain or sell servicing to third parties. The FHLBank does not service loans or own any servicing rights. The FHLBank must approve any transfers of servicing to third parties. The FHLBank of Chicago acts as the master servicer for the FHLBank and has contracted with Wells Fargo Bank, N.A., to fulfill the master servicing duties. The FHLBank pays the PFI or third party servicer a servicing fee to perform these duties; the fee is generally 25 basis points for conventional loans.

     Risks to the FHLBank include improper servicing and/or default by the PFI or third party servicer. The FHLBank has in place several controls or contractual terms to mitigate these risks. As master servicer, the FHLBank of Chicago must bring any material concerns to the attention of the FHLBank. Minor lapses in servicing, such as reporting delays, are charged to the PFI rather than included in determining a loss on a mortgage loan. Major lapses in servicing could result in a PFI’s servicing rights being terminated for cause and the servicing of the particular mortgage loans being transferred to a new qualified PFI. No PFI’s servicing rights have been terminated for cause in the history of the MPF program.

Credit Risk Exposure

     The FHLBank is required to put a credit enhancement structure in place that assures that the FHLBank’s exposure to credit risk on mortgage loans is no greater than that of a mortgage asset rated in the fourth-highest credit rating. A portion of the credit enhancement may be provided by insurance, but in all cases, the PFI must bear a specified portion of the direct economic consequences of actual credit losses on the individual mortgage loans or pool of loans. Each MPF product structure has various layers of loss protections which are described below. The first layer of protection with all products is the borrower’s equity in the real property securing the loan. As is customary for conventional mortgage loans, the next layer of loss protection comes from primary mortgage insurance issued by qualified mortgage insurance companies. Such coverage is required for mortgage loans with a loan-to-value ratio greater than 80%.

Layers of Loss Protection

	Original MPF	MPF Plus
First Layer	Borrower’s equity in the property	Borrower’s equity in the property
Second Layer	Primary mortgage insurance (if applicable)	Primary mortgage insurance (if applicable)
Third Layer	FHLBank First Loss Account (allocated amount)	FHLBank First Loss Account (upfront amount)
Fourth Layer	PFI credit enhancement amount	Supplemental mortgage insurance and/or PFI credit enhancement amount, if applicable
Final Layer	FHLBank loss	FHLBank loss

     First Loss Account. The risk of loss in mortgage loans sold to the FHLBank by a PFI is shared between the FHLBank and the PFI by structuring potential losses on conventional mortgage loans into layers with respect to each pool of mortgage loans purchased or funded by the FHLBank. Losses for each loan pool that are not paid by primary mortgage insurance are recorded in the financial statements up to an agreed upon amount, called a first loss account, which represents the third layer of loss protection. The first loss account is either a spread account, which builds over time, or an amount equal to an agreed-upon percentage of the aggregate balance of the mortgage loans purchased. The type of first loss account is established by MPF product. The FHLBank does not receive fees in connection with the first loss account. Recorded losses are shared based on the participation interests in the loan pool.

     Credit Enhancement. Losses for each loan pool in excess of the first loss account up to an agreed upon amount, called the credit enhancement amount, are covered by the PFI and/or supplemental mortgage insurance and represent the fourth layer of loss protection. The PFI’s credit enhancement amount for each pool of loans, together with any primary mortgage insurance or supplemental mortgage insurance coverage, is sized to equal the amount of losses in excess of the first loss account to the equivalent of a double-A rated mortgage investment. The financial model used by the FHLBank of Chicago provides an analysis of each pool of loans that is comparable to a methodology that a nationally recognized statistical rating agency would use in determining credit enhancement levels when conducting a rating review of the asset or pool of assets in a securitization transaction. By undertaking to credit enhance each loan pool, the PFI maintains an interest in the performance of the mortgage loans it originates or sells to and services for the FHLBank. For managing this risk, the PFI is paid a monthly credit enhancement fee by the FHLBank. Credit enhancement fees are recorded as an offset to mortgage loan net interest income in the Statement of Operations and were $2.4 million and $2.1 million for the periods ended March 31, 2005 and 2004, respectively.

50

     The differences between the Original MPF and MPF Plus products, other than the use of supplemental mortgage insurance coverage, are contained in the first loss account and the ability to recapture the performance-based credit enhancement fees paid to the PFIs. First loss accounts for both products are notational accounts for the FHLBank, and therefore, there are no cash flows associated with recording first loss accounts. The product differences are described in more detail below.

     In Original MPF, the first loss account starts out at zero on the day the first loan is purchased and increases steadily over the life of the loans. Loan losses not covered by primary mortgage insurance, but not to exceed the first loss account, are deducted from the first loss account and recorded as losses by the FHLBank for financial reporting purposes. Any loan loss in excess of the first loss account is paid by the PFI but not to exceed the aggregate credit enhancement amount. The PFI is paid a monthly credit enhancement fee, typically 10 basis points annually, based on the aggregate outstanding balance of the mortgage loans in the commitment. From the PFI’s perspective, the first loss account functions as a deductible on its credit enhancement amount. From the FHLBank’s perspective, the portion of the first loss account utilized to pay losses is an adjustment to interest income earned on the loans. Over time, the first loss account is expected to cover normal and expected losses on a pool of loans, although early losses could exceed the first loss account and be charged to the PFI’s credit enhancement amount. Loan losses in excess of both the first loss account and the credit enhancement amount are unlikely, but if any such final losses should occur, they would be recorded as losses by the FHLBank.

     In MPF Plus, the first loss account is an amount equal to the agreed-upon percentage of the aggregate balance of the mortgage loans purchased in the pool, but not less than the amount of expected losses. Loan losses not covered by primary mortgage insurance, but not to exceed the first loss account, are recorded in the financial statements by the FHLBank. The PFI is required to provide a supplemental mortgage insurance policy covering the mortgage loans with a deductible equal to the first loss account. Any loan losses in excess of the first loss account are normally covered by the supplemental mortgage insurance. Losses not covered by the first loss account or supplemental mortgage insurance are charged against the PFI’s credit enhancement amount, if any. The PFI may or may not have a direct credit enhancement amount. Credit enhancement fees are generally 13 or 14 basis points annually and apportioned about equally between two components: a fixed component and a performance-based component. The performance-based component is recorded as a recovery of any loan losses recorded by the FHLBank up to the amount of the first loss account.

     In MPF Plus, from the PFI’s perspective, the first loss account functions as a deductible on its credit enhancement amount. Generally, from the FHLBank’s perspective, the portion of the first loss account utilized to pay losses is an adjustment to the interest income earned on the loans. The FHLBank holds twelve months of the performance credit enhancement fees as a reserve payable to the PFI to recover losses against the first loss account. Beginning in the thirteenth month the performance-based credit enhancement fees are paid to the PFI monthly. The amount of this payable was $4.8 million and $4.6 million as of March 31, 2005 and December 31, 2004, respectively. Losses in excess of the first loss account, supplemental mortgage insurance coverage and PFI’s credit enhancement amount are unlikely, but if any such final losses should occur, they would be recorded as losses by the FHLBank.

     The following are outstanding balances in the first loss accounts for the Original MPF and MPF Plus products:

First Loss Account by MPF Program

(in thousands)	March 31, 2005		December 31, 2004
Original MPF	$	340	$	304
MPF Plus		43,567		41,539
Total	$	43,907	$	41,843

     Original MPF for FHA/VA. Only government-insured mortgage loans are eligible for sale under this product. The PFI provides and maintains FHA insurance or a VA guaranty for the government-insured mortgage loans. The PFI is responsible for compliance with all FHA or VA requirements and for obtaining the benefit of the FHA insurance or the VA guaranty with respect to defaulted government mortgage loans. The PFI’s servicing obligations are essentially identical to those undertaken for servicing loans of a Government National Mortgage Association security. Since the PFI servicing these mortgage loans takes the risk with respect to amounts not reimbursed by either the FHA or VA, the product results in the FHLBank having mortgage loans that are expected to perform the same as Government National Mortgage Association securities. The PFI is paid a monthly government loan fee equal to two basis points annually based on the month-end outstanding aggregate principal balance of the pool of loans. Only PFIs that are licensed or qualified to originate and service FHA and VA loans are eligible to sell and service government-insured mortgage loans under the MPF Program. In addition,

51

PFIs must maintain a mortgage loan delinquency ratio that is acceptable to the FHLBank of Chicago and be comparable to the national average and/or regional delinquency rates as published by the Mortgage Bankers Association.

     Other Real Estate Owned. A PFI is charged with the responsibility for disposing of real estate on defaulted mortgage loans on behalf of the FHLBank. Once a property has been sold, the PFI presents a summary of the gain or loss for the individual mortgage loan to the master servicer for reimbursement of the loss. Gains on the sale of a property are held for the benefit of the PFI to be allocated to the next loss in the pool of loans, ahead of any remaining balances in the first loss account. Losses are deducted from the first loss account, if it has not been fully utilized. As of March 31, 2005 and December 31, 2004, the FHLBank held $2.4 million and $2.4 million, respectively, of other real estate owned.

     Loan Loss Reserve. The FHLBank has established a loan loss reserve for mortgage loans that is based on management’s estimate of probable losses and calculated on a specific identification method. The analysis for the loan loss reserve includes performance history, current market trends and conditions, and the credit enhancement provided by the PFIs. When a mortgage loan is placed on non-accrual status, the FHLBank reviews information relative to the individual mortgage loan including primary mortgage insurance coverage, original and current loan-to-value ratios, the first loss account and credit enhancement structure, and forecasted selling expenses to estimate any loss to the FHLBank. As of March 31, 2005, no recorded loan losses have exceeded the first loss account on any outstanding loan or pool of loans. See Footnotes No. 1 and No. 11 of the Audited Financial Statements for additional information on loan loss reserves. See the Credit Risk section on page 58 for additional information on non-accrual and delinquent mortgage loan balances.

     Underwriting Standards. Purchased mortgage loans must meet certain underwriting standards established in the MPF program guidelines. Key standards and/or eligibility guidelines include the following loan criteria:

• Conforming loan size, established annually; the conforming loan size is set the same as the size limits established annually by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation

• Fixed-rate, fully-amortizing loans with terms from five to 30 years

• First lien mortgages

• 95% maximum loan-to-value; all loan-to-value ratios are based on the loan purpose, occupancy and borrower citizenship status; all loans with loan-to-value ratios above 80% require primary mortgage insurance coverage

• Owner-occupied dwellings and second family residences

• Unseasoned or current production with up to five payments made by the borrowers.

     The FHLBank of Chicago conducts a quality assurance review of the PFI’s initial mortgage loan deliveries. The PFI is required to purchase or repurchase any mortgage loans that are determined to be ineligible and for which the ineligibility cannot be cured.

Capital Resources

     Capital Plan. Under Finance Board implementation of the Gramm Leach Bliley Act, the FHLBank was required to adopt and maintain a plan (capital plan) subject to Finance Board approval. The Finance Board approved the FHLBank’s capital plan on May 8, 2002, and it was implemented on December 16, 2002. Under the capital plan, the FHLBank replaced its previous capital stock subscription structure. All outstanding capital stock was replaced with shares of new capital stock at a one-for-one exchange rate. Only one existing member declined to participate in the exchange. As intended, the implementation of the FHLBank’s capital plan resulted in a net reduction in the FHLBank’s capital of $48.1 million. See Note 15 “Capital” of the Audited Financial Statements for additional information.

     Under the capital plan, member institutions are required to maintain capital stock in an amount equal to no less than the sum of three amounts: (1) a specified percentage of their outstanding loans from the FHLBank; (2) a specified percentage of their unused borrowing capacity (defined generally as the remaining collateral value that can be borrowed against) with the FHLBank; and (3) a specified percentage of the principal balance of residential mortgage loans previously sold to the FHLBank and still held by the FHLBank (any increase in this percentage will be applied on a prospective basis only). These specified percentages may be adjusted by the FHLBank’s Board of Directors within pre-established ranges as contained in the capital plan. See Item 11. Description of FHLBank Securities to be Registered for additional information. These specified percentage ranges and established rates are as follows:

52

	Specified	Percentages Established as
	Percentage Ranges	of December 31, 2004
Outstanding member loans	4.5% to 6.0%	5.0%
Unused borrowing capacity	0.0% to 1.5%	0.5%
Outstanding residential mortgages previously sold to and held by the FHLBank	0.0% to 4.0%	0.0%

          The stock purchase requirement for unused borrowing capacity is referred to as the membership capital stock purchase requirement because it applies to all members. The other two stock purchase requirements are referred to as activity-based requirements. The Bank determines membership capital stock purchase requirements by considering the aggregate amount of capital necessary to prudently capitalize the FHLBank’s business activities. The amount of capital is dependent upon the size of the current balance sheet, expected members’ borrowing requirements, and other forecasted balance sheet changes.. As required by Finance Board regulation, the FHLBank’s Board of Directors is required to evaluate its members’ capital requirements periodically and to make adjustments as warranted and as permitted under the FHLBank’s capital plan. The FHLBank’s Board utilizes the flexibility designed into the capital plan to provide what it deems to be the best overall capitalization profile to enhance stockholder value, consistent with the safe and sound operation of the FHLBank.

          Prior to the implementation date of the FHLBank’s capital plan, the FHLBank operated under a “subscription” capital structure. Under that structure, a single class of capital stock was issued to members pursuant to a statutory formula. In accordance with that formula, each member was required to purchase stock in an amount equal to the greater of: (1) $500; (2) one percent of the mortgage loan principal on the member’s balance sheet; or (3) five percent of the FHLBank loans outstanding to the member. The stock was redeemable by members that sought to withdraw from FHLBank membership upon six months’ prior written notice to the Bank. Upon redemption, a member was entitled to receive the amount it originally paid for the stock.

          The subscription capital structure did not prescribe specific minimum levels for the FHLBanks. However, the Finance Board, by regulation, had required the FHLBanks to comply with a leverage limit based on a ratio of each FHLBank’s assets to its capital. This requirement generally provided that a FHLBank’s total assets could not exceed 21 times total capital. A FHLBank whose non-mortgage assets, after deducting deposits and capital, did not exceed 11 percent of its total assets was permitted to operate under a higher leverage limit such that its total assets may be up to 25 times its total capital. This leverage limit ceased to apply to the FHLBank upon the implementation of its capital plan and the new capital requirements described below now apply to the FHLBank.

     Dividends. Under regulation, the FHLBank may pay dividends from previously retained earnings and current earnings. Dividends paid to members are based on the average stock held for the dividend period. The FHLBank’s Board of Directors may declare and pay dividends in either cash or capital stock; the FHLBank currently pays a cash dividend. Since the fourth quarter 2003, the FHLBank has limited its dividend to no more than 50% of the net income earned during the dividend period. The FHLBank’s Board of Directors has established a target for retained earnings of $200 million. In order to build retained earnings to reach this target, the FHLBank’s Board of Directors is likely to continue to declare dividends lower than would otherwise be declared. The timeline over which the FHLBank’s level of retained earnings is likely to reach its target cannot be identified with certainty. The Board of Directors of the FHLBank will continue to review the targeted amount on a regular basis.

Risk-Based Capital (RBC) Requirement

     The FHLBank became subject to the Finance Board’s Risk-Based Capital (RBC) regulations upon implementation of its capital plan on December 16, 2002. This regulatory framework requires the FHLBank to maintain sufficient permanent capital, defined as retained earnings plus capital stock, to meet its combined credit risk, market risk and operational risk. Each of these components is computed as specified in directives issued by the Finance Board.

     Credit Risk Capital. The FHLBank’s credit risk capital requirement is determined by adding together the credit risk capital charges computed for assets, off-balance-sheet items, and derivative contracts based on the credit risk percentages assigned to each item as required by the Finance Board.

     Market Risk Capital. The FHLBank’s market risk capital requirement is determined by adding together the market value of the FHLBank’s portfolio at risk from movements in interest rates and the amount, if any, by which the FHLBank’s current market value of total capital is less than 85% of the FHLBank’s book value of total capital as of the measurement

53

calculation date. The market value of the FHLBank’s capital has not declined below 85% of its book value since the inception of the RBC regulations. The FHLBank calculates the market value of its portfolio at risk and the current market value of its total capital by using an internal market risk model that has been examined and approved by the Finance Board and is also subject to annual independent validation.

     The market risk component of the overall RBC framework is designed around a “stress test” approach. Simulations of several hundred historical market interest rate scenarios are generated and, under each scenario, the hypothetical beneficial/adverse effects on the FHLBank’s current market value of equity are determined. The hypothetical beneficial/adverse effect associated with each historical scenario is calculated by simulating the effect of each set of market conditions upon the FHLBank’s current risk position, which reflects current assets, liabilities, derivatives and off-balance-sheet commitment positions as of the measurement date.

     From the resulting simulated scenarios, the most severe deterioration in market value of equity is identified as that scenario associated with a probability of occurrence of not more than 1% (i.e., a 99% confidence interval). The hypothetical deterioration in market value of equity in this scenario, derived under the methodology described above, represents the market value risk component of the FHLBank’s regulatory RBC requirement which, in conjunction with the credit risk and operations risk components, determines the FHLBank’s overall RBC requirement. Although this modeling exercise is performed by the FHLBank, both the approach and underlying assumptions were subject to Finance Board review and approval prior to implementation of the capital plan and are reviewed and approved on an ongoing basis.

     Operational Risk Capital. The FHLBank’s operational risk capital requirement is equal to 30% of the sum of its credit risk capital requirement and its market risk capital requirement, unless the Finance Board were to approve a request for a percentage reduction by the FHLBank. The FHLBank has not requested a reduction.

(in thousands)	March 31, 2005		December 31, 2004
Permanent capital
Capital stock *	$	2,505,507	$	2,714,010
Retained earnings		116,394		99,503
Total permanent capital	$	2,621,901	$	2,813,513
Risk-based capital requirement
Credit risk capital	$	179,471	$	176,855
Market risk capital		249,050		182,925
Operations risk capital		128,557		107,934
Total risk-based capital	$	557,078	$	467,714

* Capital stock includes mandatorily redeemable capital stock

     The FHLBank held excess permanent capital over RBC requirements of $2.1 billion and $2.3 billion at March 31, 2005 and December 31, 2004, respectively.

Capital and Leverage Requirements

     In addition to the requirements for RBC, the Finance Board has mandated maintenance of certain capital and leverage ratios. The FHLBank must maintain total capital and leverage ratios of at least 4.0% and 5.0% of total assets, respectively. Management has an ongoing program to measure and monitor compliance with the ratio requirements.

(dollars in thousands)	March 31, 2005			December 31, 2004
Capital Ratio
Minimum capital (4.0% of total assets)	$	2,393,426		$	2,455,836
Actual capital (permanent capital plus loan loss reserve)		2,622,626			2,814,193
Total assets		59,835,645			61,398,912
Capital ratio (actual capital as a percent of total assets)		4.4	%		4.6	%
Leverage Ratio
Minimum leverage capital (5.0% of total assets)	$	2,991,782		$	3,069,796
Leverage capital (permanent capital multiplied by a 1.5 weighting factor plus loan loss reserve)		3,933,577			4,220,950
Leverage ratio (leverage capital as a percent of total assets)		6.6	%		6.9	%

54

     The FHLBank was in compliance with the capital and leverage ratio requirements as of March 31, 2005 and December 31, 2004. As of March 31, 2005 and December 31, 2004, excess capital stock available for repurchase at a member’s request and at the FHLBank’s discretion totaled $66.6 million and $25.5 million, respectively. Excess capital stock is defined as the amount of capital stock greater than the member’s minimum capital stock requirements, as defined above. It is the FHLBank’s current practice to promptly repurchase the excess capital stock of its members. The FHLBank does not honor other repurchase requests which are capital stock required to meet a member’s minimum capital stock purchase requirement. Assuming the above amounts of excess stock been repurchased as of the years ended, the resulting decrease in the above capital and leverage ratios would have been minimal. Management believes that based on the FHLBank’s business profile, balance sheet composition and various potential economic scenarios, the current capital and leverage ratios are adequate to ensure the safe and sound operation of the FHLBank.

Risk Management

     The FHLBank’s lending, investment, and funding activities and its use of derivative hedging instruments expose the Bank to a number of risks, including the following: market and interest rate risk, credit risk, liquidity and funding risk, operating risk and business risk.

     The FHLBank’s Board of Directors is charged with the fiduciary responsibility to oversee the FHLBank’s risk management process. The FHLBank’s Board of Directors and its committees have adopted a comprehensive risk governance structure to manage the FHLBank’s risk exposure. The Finance Committee of the Board has responsibility to focus on balance sheet management and market and interest rate risk, credit risk, and liquidity and funding risk management issues. The Audit Committee has responsibility for monitoring operating and business risk management. The Board has also established risk management policies to comply with and supplement Finance Board requirements. The Finance Board conducts an annual onsite examination of the FHLBank, as well as periodic offsite evaluations, and also requires each FHLBank to submit periodic compliance reports. Additionally, the FHLBank conducts risk assessments which are reviewed by the Board of Directors.

     In order to provide effective oversight for risk management strategies and tactics, the FHLBank has created a formal review and reporting structure implemented by three management committees. The Asset/Liability Management Committee (ALCO) focuses on financial management issues and is responsible for planning, organizing, developing, directing and executing the financial risk management process within Board-approved parameters. To provide effective oversight for credit risk management, a management Credit Committee oversees the FHLBank’s credit policies, procedures, positions and underwriting standards as well as decisions relating to extension and denials of credit and the adequacy of the allowance for loan losses. The FHLBank’s Operating and Business Risk Committee is responsible for management oversight of the FHLBank’s operating and business risks.

Market and Interest Rate Risk

     Market risk is defined as the risk of loss arising from adverse changes in market rates and prices, such as interest rates, and other relevant market rate or price changes, such as basis changes. Risk of loss is defined as the risk that the net market value or estimated fair value of the FHLBank’s overall portfolio of assets, liabilities and derivatives will decline as a result of changes in interest rates or financial market volatility, or that net earnings will be significantly reduced by interest rate changes.

     Interest rate risk is the risk that relative and absolute changes in prevailing market interest rates may adversely affect an institution’s financial performance or condition. The goal of an interest rate risk management strategy is not necessarily to eliminate interest rate risk, but to manage it by setting and operating within appropriate limits. The FHLBank’s general approach toward managing interest rate risk is to acquire and maintain a portfolio of assets, liabilities and hedges, which, taken together, limit the FHLBank’s expected exposure to interest rate risk. Interest rate risk arises from a variety of sources, including repricing risk, yield curve risk, basis risk, and options risk. The FHLBank faces repricing risk when a change in market interest rates results in a mismatch in the repricing of assets as compared to that of liabilities and hedges.

     Yield Curve. Even if the yields on the FHLBank’s assets and liabilities adjust to changes in market rates to the same extent on average, the FHLBank may still be exposed to yield curve risk. The yield curve represents the range of current market returns available for each of a series of fixed-income investments, which differ only with respect to their remaining maturity. Yield curve risk reflects the possibility that changes in the shape of the yield curve could have differing effects on the value of the FHLBank’s assets, liabilities and hedges.

55

     Basis Risk. Floating-rate assets and liabilities that reprice at similar times and have similar or identical maturities may still contain interest rate risk. If instruments have different base rates, the FHLBank will be subject to basis risk reflecting the possibility that the two base rates will diverge. Examples of different base rates include U.S. Treasury and agency rates, LIBOR, mortgage loan rates, mortgage-backed security yields and swap market rates.

     Optionality. Growth in the FHLBank’s MPF Program over the past several years, along with the FHLBank’s investment in mortgage-related investments and collateralized mortgage obligations, has increased the FHLBank’s level of option risk. Addressing the options risk embedded in mortgage-related investments has become increasingly important to the FHLBank’s earnings stream. Option (or prepayment) risk in mortgage-related investments results from the ability of homeowners to pay off their mortgage loans prior to maturity without financial penalty.

     The goal of market and interest rate risk management is the preservation of the financial strength of the FHLBank. Management regularly monitors the FHLBank’s sensitivity to interest rate changes. Multiple methodologies are used to calculate the FHLBank’s potential exposure to these changes. These include measuring repricing gaps, duration and convexity under assumed changes in interest rates, the shape of the yield curve and market volatility as implied in currently observable market prices. Interest rate exposure is managed by the use of appropriate funding instruments and by employing hedging strategies. Hedging may occur for a single transaction or group of transactions as well as for the overall portfolio. The FHLBank’s hedge positions are evaluated regularly and are adjusted as deemed necessary by management.

     Duration of Equity. One key risk metric used by the FHLBank, and which is commonly used throughout the financial services industry, is duration. Duration is a measure of the sensitivity of a financial instrument’s value, or the value of a portfolio of instruments, to a parallel shift in interest rates. Duration (typically measured in months or years) is commonly used by investors throughout the fixed-income securities market as a measure of financial instrument price sensitivity. Longer duration instruments generally exhibit greater price sensitivity to changes in market interest rates than shorter duration instruments. For example, the value of an instrument with a duration of five years is expected to change by approximately 5 percent in response to a 1 percentage point change in interest rates. Duration of equity, an extension of this conceptual framework, is a measure designed to capture the potential for the market value of a company’s equity base to change with movements in market interest rates. Higher duration numbers, whether positive or negative, indicate a greater potential exposure of market value of equity in response to changing interest rates. The Finance Board has issued an advisory bulletin relating to interest rate risk management that reviews various risk metric alternatives, including their related strengths and weaknesses. The FHLBank’s ALCO is currently reviewing alternative methods of measuring interest rate risk in connection with its ongoing review of its capital management policy.

     Primary Measurement Tools. Duration measurements and policy limitations, along with market value of equity volatility, are currently the primary tools used by the FHLBank to manage its interest rate risk exposure. Although since implementing its capital plan the FHLBank is no longer required by Finance Board regulation to operate within a specified duration of equity limit, the FHLBank’s policies specify acceptable ranges for duration of equity, and the FHLBank’s exposures are measured and managed against these limits. Through March 2005, the FHLBank’s policy limits remained more conservative than those that were previously required by Finance Board regulation.

     The table below reflects the FHLBank’s duration of equity exposure in accordance with its current capital management and asset/liability management policies.

Change in Interest Rates	March 31, 2005 (in years)	December 31, 2004 (in years)
Up 200 basis points	4.51	4.57
Up 100 basis points	4.29	3.95
Base Case	2.24	1.55
Down 100 basis points	-0.37	-0.61
Down 200 basis points	-2.56	-3.24

     Duration Range Limits. The FHLBank’s asset/liability management policy approved by the Board of Directors calls for duration of equity to be maintained within a +/- 4.5 year range in the base case. This +/- 4.5 year range in the base case represents an increase from 4.0 years as of March 31, 2004. In addition, the duration of equity exposure limit in an instantaneous parallel interest rate shock of +/- 200 basis points was increased from +/-6 years to +/-7 years in the second quarter of 2004. The FHLBank’s Board of Directors increased the duration of equity risk limit in both the base case and the +/- 200 basis point scenario in order to better reflect risk tolerance and business model and strategy associated with the mortgage loan business and the daily management of risk metrics.

56

     In addition to actions taken by management to manage risk exposures, changes in market interest rates may also serve to change the FHLBank’s duration of equity profile. Along with the base case duration calculation, the FHLBank performs instantaneous parallel interest rate shocks in increments of 50 basis points up to the 200 basis point scenarios identified above. Duration of equity increased from December 31, 2004 to March 31, 2005, in most of the above hypothetical scenarios. These increases were driven primarily by an increase in interest rates.

     Level of Interest Rates and Yield-curve Shape. In addition to the use of duration of equity, management also monitors the FHLBank’s exposure to changes in the shape of the yield curve and other factors, such as the level of interest rate volatility as implied in the market price of financial options. The yield curve is the set of interest rates associated with different maturities of the same financial instrument. A steeper yield curve is indicative of a larger yield differential between short-term and long-term instruments, whereas a flatter yield curve is indicative of a less material difference in yield between instruments of differing maturity. Because portions of the FHLBank’s asset base are expected to mature, or reprice, at different points in time than will portions of its funding base, the current and future shape of the yield curve can affect the FHLBank’s financial performance. Management’s overall risk management program includes analyses of the extent to which changes in the shape of the yield curve might affect the FHLBank’s future earnings stream and the fair value of its equity base. Management develops multiple scenarios simulating potential yield curve changes and measures the impact of such yield curve changes on the balance sheet and income statement. The results of these simulations are used to assist in determining appropriate hedging strategies and balance sheet composition.

     Market Value of Equity. Market value of equity represents the difference between the current theoretical market value of all assets less the current theoretical market value of all liabilities. Market values of assets and liabilities vary as interest rates change. As such, theoretical market values can be calculated under various interest rate scenarios, and the resulting changes in net equity can provide an indicator of the exposure of the FHLBank’s market value of equity to market volatility. Although volatility and fluctuation in market values vary with changes in interest rates, the FHLBank seeks to manage this risk exposure by maintaining a relatively stable and non-volatile market value of equity. The FHLBank’s Board of Directors has established a policy limit that the market value of equity should decline by no more than 5 percent given a hypothetical +/- 100 basis point instantaneous parallel change in interest rates. FHLBank staff analyzes the market value of equity exposure against this policy limit on a regular basis. In addition to measuring compliance against this policy limit, the FHLBank also analyzes the potential effects of a wide range of instant parallel yield curve shifts of as much as 300 basis points and evaluates the related impacts on market value of equity and duration of equity.

     The FHLBank’s Model. The FHLBank uses an externally developed model to perform its interest rate risk and market valuation modeling. This model, its approach and the underlying assumptions were subject to Finance Board review and approval prior to its implementation. Several methodologies are incorporated into the modeling process, which identifies the fair value of an instrument as the expected present value of its future cash flows. The present value is based upon the discrete forward portion of the yield curve that relates to the timing of each cash flow. Interpolation methods smooth the curve between yield-curve points. For option instruments, as well as instruments with embedded options, the value is determined by building a large number of potential interest rate scenarios, projecting cash flows for each scenario and then computing the present value averaged over all scenarios. It is important to note that the valuation process is an estimation of fair value, and there may be several approaches to valuation, each of which may produce a different result.

     Critical interest rates for modeling and risk management include U.S. Treasury and agency rates, LIBOR, interest rate swap rates and mortgage loan rates. The LIBOR swap curve is the principal curve used in valuation modeling since it is reflective of a market that is central to the behavior of the majority of transactions and markets in which the FHLBank operates. Perhaps the most critical assumption relates to the prepayment of principal in mortgage-related instruments. The FHLBank utilizes prepayment models that incorporate four factors (refinancing incentive, seasoning, seasonality and burnout) to project the cash flows of mortgage-related instruments.

57

     The following tables summarize the current market value of equity sensitivity as of March 31, 2005, and December 31, 2004.

	March 31, 2005					December 31, 2004
	Estimated market		Percentage			Estimated market		Percentage
	value of equity		change from			value of equity		change from
Change in Interest Rates	(in millions)		base case			(in millions)		base case
Up 300 basis points	$	2,260		-12.7	%	$	2,425		-12.0	%
Up 200 basis points	$	2,376		-8.2	%	$	2,548		-7.6	%
Up 100 basis points	$	2,490		-3.8	%	$	2,670		-3.1	%
Base Case	$	2,588		—		$	2,756		—
Down 100 basis points	$	2,613		1.0	%	$	2,767		0.4	%

     From December 31, 2004 to March 31, 2005, the market value of equity decreased in all of the above scenarios. These decreases were driven primarily by a decrease in the FHLBank’s capital.

     The hypothetical changes in the FHLBank’s market value of equity in the various scenarios shown assumes the absence of any management reaction to changes in market interest rates. Management does monitor market conditions on an ongoing basis and takes what it deems to be appropriate action to preserve the value of equity and earnings by changing the composition of the balance sheet or entering into, terminating, or restructuring hedges to mitigate the impact of adverse interest rate movements.

     Derivatives. The FHLBank enters into interest rate swaps, swaptions, interest rate cap and floor agreements, calls and puts (collectively known as derivatives) to assist in management of its exposure to changes in interest rates. Use of these instruments may serve to adjust the effective maturity, repricing frequency or option characteristics of financial instruments to achieve the FHLBank’s risk management objectives. The FHLBank uses derivatives in several ways: to hedge the risks inherent in an underlying financial instrument, to hedge the potential exposure inherent in an anticipated transaction, to hedge portfolio exposures, or to act as an intermediary on behalf of a member. In addition to using derivatives to manage mismatches of interest rate resets between assets and liabilities, the FHLBank also uses derivatives to manage the risk associated with option features that are embedded in FHLBank assets and liabilities; hedge the market value of existing assets, liabilities and anticipated transactions; adjust the duration risk of both fixed-term and prepayable instruments; and reduce the FHLBank’s expected all-in funding costs.

58

     The following table categorizes and summarizes the notional amounts and estimated fair value gains and losses of the FHLBank’s derivative instruments, excluding accrued interest, and related hedged items by product and type of accounting treatment under SFAS 133 as of December 31, 2004 and December 31, 2003. For those hedge strategies that do not qualify for hedge accounting, the derivative is still marked-to-market; however, there is no symmetrical mark-to-market offset available on the hedged item.

	December 31, 2004					December 31, 2003
	Notional		Estimated			Notional		Estimated
(in millions)	Principal		Gain/(Loss)			Principal		Gain/(Loss)
Qualifying for Hedge Accounting:
Loans	$	23,260	$	(676	)	$	20,615	$	(1,341	)
Mortgage loans		4,795		(33	)		5,618		(52	)
Consolidated obligations		24,751		164			20,619		265
Discount notes		400		1			400		4
Subtotal		53,206		(544	)		47,252		(1,124	)
Not Qualifying for Hedge Accounting:
Loans		304		(1	)		2,203		(1	)
Investments		82		(3	)		119		(7	)
Mortgage loans		4,221		1			4,222		—
Consolidated obligations		160		—			30		—
Intermediary transactions		369		1			436		1
Subtotal		5,136		(2	)		7,010		4(7	)
Total	$	58,342		(546	)	$	54,262	$	(1,131	)
Accrued interest				53					54
Net derivative market value balance			$	(493	)			$	(1,077	)
Net derivative asset balance			$	147				$	165
Net derivative liability balance				(640	)				(1,242	)
Net derivative market value balance			$	(493	)			$	(1,077	)

     The increase of $4.1 billion in notional value from December 31, 2003 to December 31, 2004, was primarily due to increases in derivative activity associated with loans and consolidated obligations. The net derivative market value balance increased by $584.0 million due to absolute changes in interest rates and the relative spreads between interest rates during the period.

     Receivables and payables related to the same counterparty have been netted to arrive at the net derivative asset and liability balances presented in the table above. The decrease in net derivative liabilities from December 31, 2003, to December 31, 2004, of $602.0 million, or 48.5%, primarily reflects the impact of interest rate changes as they affected the market values of hedged loans and those derivatives utilized as hedge instruments for loans. The FHLBank uses interest rate swaps extensively to hedge its exposure to interest rate risk. As a result, the FHLBank converts a fixed-rate asset or liability to a floating-rate, which may qualify for fair value hedge treatment. As interest rates fluctuate, the fair value of the interest rate swap may fluctuate accordingly. With a fair-value hedge, there are offsetting changes to fair value to the extent the hedge is effective. Therefore, changes in net derivative asset and liability balances above are generally offset with fair value gains and losses included in the basis of the associated hedged asset or liability. See Note 1 “Summary of Significant Accounting Policies” and Note 17 “Derivatives and Hedging Activities” of the Audited Financial Statements for additional information.

Credit Risk

     Credit risk is the risk that the market value of an obligation will decline as a result of deterioration in the obligor’s creditworthiness. Credit risk arises when FHLBank funds are extended, committed, invested or otherwise exposed through actual or implied contractual agreements. The financial condition of FHLBank members and all investment, mortgage loan and derivative counterparties is monitored to ensure that the FHLBank’s financial exposure to each member/counterparty is in compliance with the FHLBank’s credit policies and the Finance Board’s Financial Management Policy. Financial monitoring reports evaluating each member/counterparty’s financial condition are produced and reviewed by the FHLBank’s Credit Committee on a quarterly basis or more often if circumstances warrant.

59

     Loans. (Note that the credit risk discussion excludes BOB loans and related activities.) The FHLBank protects against credit risk on loans by monitoring the financial condition of borrowers and by requiring members or their affiliates to pledge sufficient eligible collateral for all loans. In addition, the FHLBank has the ability to call for additional or substitute collateral during the life of a loan to protect its security interest. The FHLBank Act limits eligible collateral to certain investment securities, residential mortgage loans, deposits with the FHLBank, and other real estate-related assets. In addition to member collateral, the financial condition of all members is routinely monitored for compliance with financial criteria as set forth in the FHLBank’s credit policies. Members deemed to be less creditworthy may have lending restrictions or increased collateral requirements imposed. The FHLBank determines the type and amount of collateral each member has available to pledge as security for FHLBank loans by reviewing the call reports the members file with their regulators.

     Under Finance Board implementation of the Gramm Leach Bliley Act, the FHLBank is allowed to expand eligible collateral for many of its members. Members that qualify as community financial institutions can pledge small-business, small-farm, and small-agribusiness loans as collateral for loans. Also, the FHLBank is allowed to make loans to nonmember housing associates that also have such expanded collateral requirements. The expanded eligible collateral for these community financial institutions and nonmember housing associates could introduce additional credit risk for the FHLBank. At March 31, 2005, loans to these institutions secured with both eligible standard and expanded collateral represented approximately $4.5 billion, or 12.1% of total loans outstanding. Expanded eligible collateral represented 7.4% of total eligible collateral for these loans. The following table presents collateral balances as of March 31, 2005:

Type of Collateral (in millions, except percentages)	Amount		Percent
Single-family residential mortgages	$	92,555		52.0	%
High quality investment securities		44,885		25.3	%
Other real-estate related collateral/Community financial institution eligible collateral		38,468		21.6	%
Multi-family residential mortgages		1,880		1.1	%
Total	$	177,788		100.0	%

     Based upon the financial condition of the member, the FHLBank classifies each member into one of three collateral categories: blanket-lien status, listing-specific pledge-collateral status, or possession-collateral status. Under the blanket-lien status, the FHLBank allows a member to retain possession of eligible collateral pledged to the FHLBank, provided the member executes a written security agreement and agrees to hold the collateral for the benefit of the FHLBank. Under listing-specific pledge-collateral status, the FHLBank or the FHLBank’s safekeeping agent holds physical possession of specific collateral pledged to the FHLBank. For members in possession-collateral status, the FHLBank requires the member to place physical possession of eligible collateral with the FHLBank sufficient to secure all outstanding obligations.

     The following table provides information regarding loans outstanding with member and non-member borrowers in listing-specific pledge- and possession-collateral status as of March 31, 2005, along with corresponding collateral balances.

(in thousands)	Number of Borrowers	Loans Outstanding		Collateral Held
Listing-specific pledge-collateral status	2	$	0	$	20,526
Possession-collateral status	23	$	485,360		641,338
Total par value	25	$	485,360	$	661,864

     Loans outstanding for the 239 members in blanket-lien status at March 31, 2005 totaled $37.0 billion, or 99% of total loans. For these members, the FHLBank has access to eligible collateral under written security agreements in which the member agrees to hold such collateral for the benefit of the FHLBank, totaling more than $175 billion. Additionally, all nonmember borrowers, including housing associates, are placed in possession-collateral status.

     Loan Concentration Risk. The FHLBank’s loan portfolio is concentrated in member commercial banks and thrift institutions. At March 31, 2005, the FHLBank had a concentration of loans to its ten largest borrowers totaling $22.3 billion or 59.4% of total loans outstanding. Average balances to these borrowers for this period were $22.1 billion (at par) or 59.0% of total average loans outstanding. During 2005, the maximum outstanding balance to any one borrower was $10.8 billion. The loans made by the FHLBank to these borrowers are secured by collateral with an estimated market value in excess of the book value of those loans. Therefore, the FHLBank does not presently expect to incur any credit losses on these loans. As of March 31, 2005, loans held by the top ten borrowers had an effective average yield of 3.29%, compared to an average yield of 4.06% for the remainder of the loan portfolio. This lower yield is a function of the product mix of the respective portions of the loan portfolio, volume discounts, and the phase of the interest rate cycle in which the loans were originated. The

60

following table lists the FHLBank’s top ten borrowers as of March 31, 2005, and their respective December 31, 2004 loan balances (at par) and percentage volumes.

(in millions, except percentages	March 31, 2005					December 31, 2004
Name of Borrower	Loan		Percent of			Loan		Percent of
	Balance		total loans			Balance		total loans
Sovereign Bank, PA *	$	9,543		25.4	%	$	9,710		25.3	%
ING Bank FSB, DE		3,300		8.8			1,944		5.1
Citicorp Trust Bank, DE		2,360		6.3			2,780		7.3
GMAC Bank, DE *		1,948		5.2			1,507		3.9
Lehman Brothers Bank FSB, DE		1,250		3.3			2,600		6.8
First Commonwealth Bank, PA *		985		2.6			1,021		2.7
Wilmington Savings Fund Society FSB, DE *		868		2.3			837		2.2
Citizens Bank of Pennsylvania, PA		750		2.0			1,450		3.8
Keystone Nazareth Bank & Trust Company, PA		647		1.8			661		1.7
ESB Bank, PA		643		1.7			601		1.7
Subtotal	$	22,294		59.4	%	$	23,111		60.5	%
Other borrowers		15,247					15,205
Total	$	37,541				$	38,316

* These borrowers have an officer who currently serves on the FHLBank’s Board of Directors.

     Because of this concentration in loans, the FHLBank has implemented specific credit and collateral review procedures for these members. The FHLBank currently applies these standards to both member and non-member institutions. In addition, the FHLBank analyzes the implication for its financial management and profitability if it were to lose one or more of these members. See Note 8 “Loans to Members” of the Audited Financial Statements for additional information.

     Investments. The FHLBank is also subject to credit risk on unsecured investments consisting primarily of money market investments and investment securities. The FHLBank places money market investments on an unsecured basis with large, high-quality financial institutions with long-term credit ratings no lower than single-A for terms up to 90 days and with long-term credit ratings no lower than triple-B for terms up to 30 days. Most money market investments expire within 90 days. Management actively monitors the credit quality of these investment counterparties. The FHLBank also invests in and is subject to credit risk related to mortgage-backed securities that are directly supported by underlying mortgage loans. Investments in mortgage-backed securities are permitted as long as they are rated triple-A at the time of purchase.

     At March 31, 2005, the FHLBank’s unsecured credit exposure to investment counterparties and broker-dealers other than the U.S. Government or U.S. Government-sponsored agencies and municipalities was $10.4 billion. This is a $0.4 billion decrease from the $10.8 billion unsecured credit exposure to such counterparties at December 31, 2004. Most of the money market exposure consisted of Federal funds sold; approximately 74% of the investments had an overnight maturity, 24% had a maturity from 2 to 30 days, and the remainder matured from 181-270 days. Exposure to U.S. branches of foreign banks amounted to approximately 45% of total unsecured interest-bearing deposit exposure. No individual investment counterparty represented more than 10% of the FHLBank’s total unsecured credit exposure.

61

     The following tables present the FHLBank’s investment credit exposure including accrued interest as of March 31, 2005 and December 31, 2004 and 2003 based on the lower of counterparties’ long-term credit ratings provided by Moody’s Investor Service Inc., Standard & Poor’s, or Fitch Ratings. As of March 31, 2005, approximately 13% of mortgage-backed securities issued by private trusts were sponsored by FHLBank members.

Investment Credit Exposure
March 31, 2005
(in millions)

Investment Category	AAA		AA		A		BBB		Total
Money market investments:
Interest-bearing deposits	$	—	$	375	$	304	$	—	$	679
Federal funds sold		—		1,947		490		65		2,502
Investment securities:
Commercial paper		—		—		68		—		68
Government sponsored enterprises		622		—		—		—		622
State or local agency obligations		190		375		—		—		565
MBS issued by Federal agencies		130		—		—		—		130
MBS issued by government-sponsored enterprises		1,373		—		—		—		1,373
MBS issued by private trusts		6,544		—		—		—		6,544
Total Investments	$	8,859	$	2,697	$	862	$	65	$	12,483

Investment Credit Exposure
December 31, 2004
(in millions)

Investment Category	AAA		AA		A		BBB		Total
Money market investments:
Interest-bearing deposits	$	—	$	728	$	613	$	—	$	1,341
Federal funds sold		—		1,790		400		65		2,255
Investment securities:
Commercial paper		—		—		70		—		70
Government sponsored enterprises		438		—		—		—		438
State or local agency obligations		188		375		—		—		563
MBS issued by Federal agencies		159		—		—		—		159
MBS issued by government-sponsored enterprises		1,513		—		—		—		1,513
MBS issued by private trusts		6,596		—		—		—		6,596
Total Investments	$	8,894	$	2,893	$	1,083	$	65	$	12,935

Investment Credit Exposure
December 31, 2003
(in millions)

Investment Category	AAA		AA		A		BBB		Total
Money market investments:
Interest-bearing deposits	$	—	$	494	$	334	$	—	$	828
Federal funds sold		—		800		200		—		1,000
Investment securities:
Commercial paper		—		—		170		70		240
Government sponsored enterprises		928		—		—		—		928
State or local agency obligations		268		358		—		—		626
MBS issued by Federal agencies		224		—		—		—		224
MBS issued by government-sponsored enterprises		1,712		—		—		—		1,712
MBS issued by private trusts		4,448		—		—		—		4,448
Total Investments	$	7,580	$	1,652	$	704	$	70	$	10,006

62

     Mortgage Loans. The FHLBank has established mortgage loan purchase programs as a service to members. The Finance Board has authorized the FHLBank to hold mortgage loans under the MPF Program. Under this program, the FHLBank acquires mortgage loans from members in a shared credit risk structure, including the necessary credit enhancement. These assets carry outside credit enhancements, which give them the approximate equivalent of a double-A credit rating, although the credit enhancement is not actually rated. The FHLBank had net mortgage loan balances of $8.8 billion and $8.7 billion as of March 31, 2005 and December 31, 2004, respectively. See Item 2: Financial Information, Mortgage Partnership Finance (MPF) Program for additional information.

     The FHLBank provides a loan loss allowance, net of credit enhancement, for any impaired loans. The FHLBank bases the allowance for loan losses for the mortgage loan portfolio on management’s estimate of probable losses in the portfolio as of the balance sheet date. The FHLBank performs periodic reviews of its portfolio to identify the probable losses within the portfolio. The overall allowance is determined by an analysis that includes consideration of observable data such as delinquency statistics, past performance, current performance, loan portfolio characteristics, and collateral valuations, taking into account the credit enhancement. Mortgage loan delinquencies and non-accrual balances as of March 31, 2005 and December 31, 2004, were as follows:

(in thousands, except percentages)	March 31, 2005			December 31, 2004
30-59 days delinquent	$	109,264		$	111,746
60-89 days delinquent		24,329			26,001
90 days or more delinquent		34,835			38,516
Total delinquencies	$	168,428		$	176,263
Non-accrual loans	$	14,493		$	13,607
Loans past due 90 days or more and still accruing interest	$	22,616		$	26,175
Delinquencies as a percent of total mortgage loans outstanding		1.94	%		2.07	%
Non-accrual loans as a percent of total mortgage loans outstanding		0.17	%		0.16	%

     The FHLBank places a residential mortgage loan on non-accrual status when the collection of the contractual principal or interest is 90 days or more past due. Loans past due 90 days or more and still accruing interest represent government insured FHA and VA loans. Loan loss reserves for mortgage loans were $0.7 million as of March 31, 2005, and December 31, 2004, which represented five percent of non-accrual loans. See Note 10 “Mortgage Loans Held for Portfolio” of the Audited Financial Statements for additional information on the allowance for loan losses.

     Derivatives. The FHLBank is subject to credit risk arising from the potential non-performance by derivative counterparties with respect to the agreements entered into with the FHLBank, as well as certain operational risks relating to the management of the derivative portfolio. The FHLBank follows guidelines established by its Board of Directors on unsecured extensions of credit. Unsecured credit exposure to any counterparty is limited by the credit quality and capital level of the counterparty, and by the capital level of the FHLBank.

     The FHLBank manages derivative counterparty credit risk through the combined use of credit analysis, collateral management, and other credit enhancements and risk mitigation techniques. The FHLBank requires collateral agreements on derivative financial instrument contracts. The extent to which the FHLBank is exposed to counterparty risk on derivatives is partially mitigated through the use of netting procedures contained in the FHLBank’s master agreement contracts with counterparties. The maximum net unsecured credit exposure amounts are established on an individual counterparty basis based on each individual counterparty’s current rating as reported by nationally recognized credit rating agencies. In determining maximum credit risk, the FHLBank considers accrued interest receivables and payables, and the legal right to offset assets and liabilities on an individual counterparty basis. Additionally, management includes an estimate of potential future credit exposure in determining total net exposure. As of March 31, 2005 and December 31, 2004 and 2003, the FHLBank’s net market value plus potential future exposure after allowing for the protection afforded by contractually required collateral is presented in the following tables.

63

Derivative Counterparty Credit Exposure
March 31, 2005
(dollars in thousands)

							Potential				Net Exposure
	Notional		Number of		Net Market		Future		Collateral		Plus PFE Less
Credit Rating	Amount		Counterparties		Value		Exposure		Held		Collateral
AAA	$	490,000		1	$	0	$	2,940	$	—	$	2,940
AA		15,335,646		11		39,784		98,516		44,809		93,491
A		40,665,003		11		79,598		275,340		104,141		250,797
Mortgage Loan Delivery Commitments		17,546				—		—		—		—
Member Intermediary Transactions		171,040				2,363		—		—		2,363
Total	$	56,679,235		23	$	121,745	$	376,796	$	148,950	$	349,591

Derivative Counterparty Credit Exposure
December 31, 2004
(dollars in thousands)

							Potential				Net Exposure
	Notional		Number of		Net Market		Future		Collateral		Plus PFE Less
Credit Rating	Amount		Counterparties		Value		Exposure		Held		Collateral
AAA	$	515,000		2	$	27	$	3,315	$	—	$	3,342
AA		16,987,429		12		43,825		108,459		44,937		107,347
A		40,773,162		10		52,723		265,504		64,040		254,187
Mortgage Loan Delivery Commitments		15,359				—		—		—		—
Member Intermediary Transactions		243,120				5,832		—		—		5,832
Total	$	58,534,070		24	$	102,407	$	377,278	$	108,977	$	370,708

Derivative Counterparty Credit Exposure
December 31, 2003
(dollars in thousands)

							Potential				Net Exposure
	Notional		Number of		Net Market		Future		Collateral		Plus PFE Less
Credit Rating	Amount		Counterparties		Value		Exposure		Held		Collateral
AAA	$	418,304		4	$	3,178	$	3,329	$	—	$	6,507
AA		14,181,661		12		128,852		100,319		98,985		130,186
A		36,277,358		11		7,851		226,007		6,337		227,521
Mortgage Loan Delivery Commitments		465,062				960		—		—		960
Member Intermediary Transactions		217,908				8,362		—		—		8,362
Total	$	51,560,293		27	$	149,203	$	329,655	$	105,322	$	373,536

     At March 31, 2005, four counterparties collectively represented approximately 55% of the total notional amount. The same four counterparties represented 65% of the net market value, and 54% of the net exposure after collateral held. Of the 23 rated counterparties at March 31, 2005, two were members. Lehman Brothers Special Finance, Inc. and J. P. Morgan Chase Bank individually represented 23% and 15%, respectively, of the total notional amount outstanding. Both counterparties are rated at least a single-A. All intermediary transactions were executed with unrated members. See Note 17 “Derivatives and Hedging Activities” of the Audited Financial Statements for additional information.

64

Liquidity and Funding Risk

     The FHLBank is required to maintain liquidity in accordance with certain Finance Board regulations and with policies established by management and the Board of Directors. The FHLBank needs liquidity to satisfy member demand for short- and long-term funds, repay maturing consolidated obligations and meet other obligations. The FHLBank also maintains liquidity to repurchase excess capital stock at its discretion upon request of a member. As of March 31, 2005, the FHLBank had outstanding capital redemption requests due to pending mergers of $18.2 million. See Note 15 “Capital” of the Audited Financial Statements for additional information.

     Additionally, in their asset/liability management planning, members may look to the FHLBank to provide standby liquidity. The FHLBank seeks to be in a position to meet its customers’ credit and liquidity needs without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. The FHLBank’s primary sources of liquidity are short-term investments, such as Federal funds purchased, and the issuance of new consolidated obligation bonds and discount notes. Consolidated obligations enjoy government-sponsored enterprise (GSE) status; however, they are not obligations of the United States, and the United States does not guarantee them. Consolidated obligations are rated AAA/P-1 by Moody’s Investor Service, Inc. and AAA/A-1+ by Standard & Poor’s. These ratings measure the likelihood of timely payment of principal and interest on the consolidated obligations. The GSE status and rating, which reflects the fact that all twelve FHLBanks share a joint and several obligation on consolidated obligations, have historically provided excellent capital market access. In addition, under certain circumstances, the U.S. Treasury may acquire up to $4.0 billion of consolidated obligations of the Home Loan Banks. Other short-term borrowings, such as securities sold under agreements to repurchase and loans from other Home Loan Banks, also provide liquidity. The FHLBank maintains contingency liquidity plans designed to enable it to meet its obligations and the liquidity needs of members in the event of operational disruptions at other Home Loan Banks or the Office of Finance, or short-term capital market disruptions.

     Further, the Finance Board and the FHLBank’s funds management policy require the FHLBank to hold contingency liquidity sufficient to meet the FHLBank’s liquidity needs for a minimum of five business days without access to the consolidated obligation debt markets. Both the Finance Board and the FHLBank’s liquidity measures depend on certain assumptions which may or may not prove valid in the event of an actual market disruption. Management believes that under normal operating conditions, routine member borrowing needs and consolidated obligation maturities could be met without access to the consolidated obligation debt markets for at least five days; however, under extremely adverse market conditions, the FHLBank’s ability to meet a significant increase in member loan demand could be impaired without immediate access to the consolidated obligation debt markets.

     Total investments (interest-bearing deposits, Federal funds sold, and investment securities) totaled $12.5 billion as of March 31, 2005, compared to $12.9 billion as of December 31, 2004. Investments in mortgage-backed securities (MBS) are limited by Finance Board regulations that prohibit the FHLBank from adding to its MBS portfolio during periods when its total MBS outstandings exceed 300% of its total capital. Excess capital stock repurchases associated with fluctuating member loan balances can cause the FHLBank’s capital base to decrease. This can curtail the FHLBank’s ability to add to its MBS portfolio as it can create a position where existing MBS balances exceed the 300% of total capital threshold. Finance Board regulations do not require the sale of MBS during such periods to meet the limitation; however, the FHLBank is not permitted to purchase additional MBS until the MBS-to-capital ratio returns to a level below the 300% threshold. Although this prohibition on additional MBS purchases did not occur in 2004 or 2003, it has occurred at various times both during and prior to 2002. As of March 31, 2005 and December 31, 2004, the FHLBank’s MBS outstandings represented approximately 311% and 298% of total capital, respectively.

     The FHLBank offers primarily demand and overnight deposits for members and qualifying nonmembers. Total deposits at March 31, 2005, increased to $1.1 billion from $1.0 billion at December 31, 2004, an increase of $0.1 billion, or 10.5%. Factors that generally influence deposit levels include turnover in members’ investment securities portfolios, changes in member demand for liquidity primarily due to member institution deposit growth, the slope of the market yield curve and the FHLBank’s deposit pricing as compared to other short-term money market rates. During periods when the FHLBank’s member deposit balances decline, this source of the FHLBank’s funding is typically replaced by the issuance of consolidated obligations. The FHLBank Act requires the FHLBank to have an amount equal to the current member deposits invested in obligations of the United States, deposits in eligible banks or trust companies, or loans with a maturity not exceeding five years. As of March 31, 2005 and December 31, 2004, total deposit reserves totaled $29.0 billion and $31.0 billion, respectively, and were significantly in excess of member deposits.

     Consolidated bonds and discount notes, along with member deposits, represent the primary funding sources used by the FHLBank to support its asset base. The joint and several backing of all twelve FHLBanks provides the FHLBank access to the capital markets on favorable terms. At March 31, 2005, the FHLBank’s long-term consolidated obligation bonds

65

outstanding totaled $42.3 billion, as compared to $41.4 billion as of December 31, 2004, an increase of $0.9 billion, or 2.2%. The FHLBank also issues discount notes, which are shorter-term consolidated obligations, to support its short-term member loan portfolio and other short-term asset funding needs. The FHLBank has expanded the use of discount notes during 2004, which largely reflects the growth in demand for shorter-term member loans. Total discount notes outstanding at March 31, 2005, decreased to $13.0 billion from $15.2 billion at December 31, 2004, a decrease of $2.2 billion, or 14.5%.

     The FHLBank combines consolidated obligations with derivatives in order to lower its effective all-in cost of funds and simultaneously reduce interest rate risk. The funding strategy of issuing bonds while simultaneously entering into swap agreements, typically referred to as the issuance of structured debt, enables the FHLBank to offer a wider range of loan products to its member institutions. Discount notes have not generally been combined with derivatives by the FHLBank, although this approach may be used by the FHLBank in the future.

     The Federal Reserve Board announced in February 2004 that it intends, beginning in July 2006, to require Reserve Banks to release interest and principal payments on the FHLBank System consolidated obligations only when there are sufficient funds in the FHLBanks’ account to cover these payments. This requirement is a fundamental change from the Federal Reserve’s past policy applicable to GSEs and certain international organizations of processing and posting these payments in the morning, even if these entities had not fully funded their payments. To comply with this new requirement, the FHLBank may need to take one or more of the following actions: (1) limit the use of overnight discount notes as a source of short-term liquidity, (2) change the time that principal and interest payments are made on consolidated obligations, (3) change cash management and liquidity management practices to increase liquid investments and early availability of cash, and/or (4) identify alternative sources, if any, of intraday private funding. These actions could reduce the ability of the FHLBank to provide liquidity to its members and could increase the cost of the FHLBank’s consolidation obligation issuance.

     Negative Pledge Requirement. Finance Board regulations require the FHLBank to maintain certain assets free from any lien or pledge in an amount at least equal to the amount of its consolidated obligations outstanding. These assets include: (1) cash; (2) obligations of, or fully guaranteed by, the United States; (3) secured loans to members; (4) mortgages which have any guaranty, insurance or commitment from the United States or a Federal agency; (5) investments described in Section 16(a) of the Act, which includes securities that a fiduciary or trust fund may purchase under the laws of any of the three states in which the FHLBank is located; and (6) other securities that are rated triple-A by Moody’s Investor Service or Standard and Poor’s. As of March 31, 2005 and December 31, 2004, the FHLBank held total non-pledge assets in excess of total consolidated obligations of $3.9 billion and $3.9 billion, respectively.

     Joint and Several Liability. Although the FHLBank is primarily liable for its portion of consolidated obligations, i.e., those issued on its behalf, the FHLBank is also jointly and severally liable with the other eleven Home Loan Banks for the payment of principal and interest on consolidated obligations of all the Home Loan Banks. If the principal or interest on any consolidated obligation issued on behalf of the FHLBank is not paid in full when due, the FHLBank may not pay dividends to, or redeem or repurchase shares of capital stock from, any member of the FHLBank. At its discretion, the Finance Board may require any Home Loan Bank to make principal or interest payments due on any consolidated obligations, whether or not the Home Loan Bank is the primary obligor. For example, the Finance Board may order the FHLBank to make principal and interest payments due on consolidated obligations for which it is not the primary obligor if the Home Loan Bank that is the primary obligor is unable to make the required payments due to a disruption in its debt servicing operations, such as a natural disaster or power failure. To the extent that a Home Loan Bank makes any payment on a consolidated obligation on behalf of another Home Loan Bank, the paying Home Loan Bank shall be entitled to reimbursement from the non-paying Home Loan Bank, which has a corresponding obligation to reimburse the Home Loan Bank to the extent of such assistance and other associated costs. However, if the Finance Board determines that the non-paying Home Loan Bank is unable to satisfy its obligations, then the Finance Board may allocate the outstanding liability among the remaining Home Loan Banks on a pro rata basis in proportion to each Home Loan Bank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Board may determine. See Note 14 “Consolidated Obligations” of the Audited Financial Statements for additional information. As of December 31, 2004, the FHLBank has never been required to assume or pay the consolidated obligations of another Home Loan Bank.

     Finance Board regulations govern the issuance of debt on behalf of the Home Loan Banks, and authorize the Home Loan Banks to issue consolidated obligations, through the Office of Finance as its agent. The FHLBank is not permitted to issue individual debt without Finance Board approval.

     The FHLBank’s total consolidated obligations bonds and discount notes represented 6.5% and 6.6% of total FHLBank System consolidated obligations as of March 31, 2005 and December 31, 2004, respectively. For the FHLBank System, total consolidated obligations were $856.8 billion and $854.8 billion as of March 31, 2005 and December 31, 2004, respectively.

66

     Consolidated obligation bonds and discounts notes outstanding for each of the FHLBanks acting as primary obligor is presented in the following table, exclusive of combining adjustments:

(in millions)	March 31, 2005						December 31, 2004
	Consolidated Obligations						Consolidated Obligations
			Discount						Discount
Home Loan Bank	Bonds		Notes		Total		Bonds		Notes		Total
Atlanta	$	115,189	$	4,599	$	119,788	$	105,917	$	13,014	$	118,931
Boston		28,112		17,899		46,011		27,680		20,091		47,771
Chicago		60,418		17,444		77,862		60,876		16,872		77,748
Cincinnati		51,635		22,683		74,318		51,818		18,632		70,450
Dallas		57,880		1,599		59,479		51,464		7,085		58,549
DesMoines		38,902		4,539		43,441		39,480		5,008		44,488
Indianapolis		30,524		9,836		40,360		29,816		10,631		40,447
New York		59,940		16,081		76,021		60,515		19,642		80,157
Pittsburgh		42,313		13,030		55,343		41,384		15,161		56,545
SanFrancisco		160,111		21,277		181,388		148,109		26,257		174,366
Seattle		39,559		3,736		43,295		41,305		2,801		44,106
Topeka		28,537		10,913		39,450		28,490		12,768		41,258
Total FHLBank System	$	713,120	$	143,636	$	856,756	$	686,854	$	167,962	$	854,816

Operating and Business Risk

     Operating risk is defined as the risk of unexpected loss resulting from human error, systems malfunctions, man-made or natural disasters, fraud, or circumvention or failure of internal controls. The FHLBank has established financial and operating polices and procedures, and insurance coverage is in force to further mitigate the potential for material losses from such occurrences. The FHLBank’s internal audit department, which reports directly to the Audit Committee of the FHLBank’s Board of Directors, regularly monitors compliance with established policies and procedures. In addition, the FHLBank has a business continuity plan that is designed to restore critical business processes and systems in the event of a disaster or business disruption. The FHLBank has established and periodically tests its business resumption plan under various disaster scenarios involving offsite recovery and the testing of the FHLBank’s operations and information systems. However, some operating risks exist which are beyond the FHLBank’s control, and the failure of other parties with which the FHLBank conducts business to adequately address their own operating risks could adversely affect the FHLBank.

     Business risk is defined as the risk of an adverse impact on the FHLBank’s profitability or financial or business strategies resulting from external factors that may occur in the short term and/or long term. Such factors may include, but are not limited to: continued financial services industry consolidation, a declining membership base, concentration of borrowing among members, the introduction of new competing products and services, increased non-FHLBank competition, initiatives to weaken the FHLBank System’s GSE status, changes in the deposit and mortgage markets for the FHLBank’s members, and other factors that may have a significant direct or indirect impact on the ability of the FHLBank to achieve its mission and strategic objectives. The FHLBank attempts to mitigate these risks through long-term strategic planning and through continually monitoring economic indicators and the external environment in which it operates.

Legislative and Regulatory Developments

     Final Rule on Registration under the Securities Exchange Act of 1934. On June 23, 2004, the Finance Board unanimously voted to require each of the twelve FHLBanks to register a class of securities with the Securities and Exchange Commission (SEC), thus making the twelve FHLBanks subject to the SEC’s disclosure requirements. The Finance Board decision requires initial filing by June 30, 2005, and registration effective by August 29, 2005.

     Proposed Changes to GSE Regulation. On January 26, 2005, a bill that would create a new regulator for Fannie Mae, Freddie Mac, and the FHLBanks was introduced in the Senate Banking Committee. The bill, if passed in its current form, would combine the Office of Federal Housing Enterprise Oversight and the Finance Board into a new regulatory agency. It is uncertain what, if any, provisions relating to the Finance Board or the FHLBanks will be included in the final version of such legislation, whether the House of Representatives and/or the Senate will approve such legislation, whether any bill would be signed into law, when such change would go into effect if enacted, or what effect the legislation would have on the Finance Board or the FHLBanks.

67

     Corporate Governance Review. Early in 2004, the Finance Board held two public hearings to gather information about corporate governance practices and to receive recommendations to strengthen corporate governance at the FHLBanks. Information from the hearings will be used by the Finance Board to determine whether regulatory changes or potential amendments to the FHLBank Act are warranted. The hearings were held to build upon the Finance Board’s Office of Supervision’s horizontal review of corporate practices at the FHLBanks, completed in 2003. It is uncertain what, if any, changes will be made and what effect the changes would have on the FHLBanks.

     Proposed Change in Federal Reserve Bank Policy Statement on Payments System Risk The Federal Reserve Board in February 2004 announced that it intends, beginning in July 2006, to require Federal Reserve Banks to release interest and principal payments on securities issued by GSEs and international organizations only when the issuer’s Federal Reserve account contains sufficient funds to cover these payments. The Federal Reserve Banks have been processing and posting these payments to depository institutions’ Federal Reserve accounts by 9:15 a.m. Eastern Time, the same posting time as for U.S. Treasury securities’ interest and redemption payments, even if the issuer has not fully funded its payments. The Federal Reserve Board requested comment by April 16, 2004, on how best to promote a smooth market adjustment while implementing this change in its Policy Statement on Payments System Risk. The FHLBank along with the other eleven FHLBanks, are evaluating the impact of this proposed change on its operations. If the proposed changes are made, they will impact the FHLBank. However, it is not known what, if any, changes will be made and what effect the changes would have on the FHLBank.

     Federal Home Loan Bank of Chicago Supervisory Agreement with the Finance Board. On July 1, 2004, the Finance Board announced an agreement with the FHLBank of Chicago for an independent review of risk management, internal audit, capital management, and accounting and financial recordkeeping practices as a result of a 2004 bank examination. The agreement called for the FHLBank of Chicago to submit a three-year business and capital plan, which has been submitted to and accepted by the Finance Board. The FHLBank of Chicago is also required to maintain a 5.1% regulatory capital ratio and limit the growth of acquired member assets. Based on discussions with the FHLBank of Chicago, management of the FHLBank does not believe that this agreement will impact the FHLBank’s mortgage purchase program as it relates to the FHLBank of Chicago serving as an outlet for its mortgage loan production. As of March 31, 2005, the FHLBank of Chicago was the primary obligor on $77 billion in total consolidated obligations.

     Federal Home Loan Bank of Seattle Supervisory Agreement with the Finance Board. On December 10, 2004, the Finance Board announced an agreement with the Federal Home Loan Bank of Seattle (FHLB of Seattle) that imposes certain requirements on the FHLBank of Seattle that are intended to strengthen its risk management, capital structure, governance, and capital plan. The FHLBank of Seattle is also required to maintain a 4.15% minimum regulatory capital to asset ratio and to limit the growth of its acquired member assets. It is uncertain how this agreement could impact the FHLBank. As of March 31, 2005, the FHLBank of Seattle was the primary obligor on $43 billion in total consolidated obligations.

Item 3: Properties

     The FHLBank occupies approximately 106,000 square feet of leased office space at 601 Grant Street, Pittsburgh, Pennsylvania 15219 and additional office space at 1301 Pennsylvania Avenue, Washington, DC 20004; 2300 Computer Avenue, Willow Grove, Pennsylvania, 19090; 30 South New Street, Dover, Delaware, 19904 and 140 Maffett Street, Wilkes Barre, Pennsylvania 18705. The Pennsylvania Avenue office space is shared with the FHLBank of Atlanta. The FHLBank also maintains a leased offsite backup facility. Essentially all of the FHLBank’s operations are housed at the Grant Street location.

Item 4: Security Ownership of Certain Beneficial Owners and Management

     The FHLBank may issue capital stock only to members. As a result, the FHLBank does not offer any compensation plan under which equity securities of the FHLBank are authorized for issuance.

Member Institutions Holding 5% or More of Outstanding Capital Stock as of April 30, 2005

	Capital		Percent of Total
Name and address	Stock		Capital Stock
Sovereign Bank, Wyomissing, PA	$	586,161,200		21.6	%
ING Bank, FSB, Wilmington, DE		306,586,300		11.3	%
Citicorp Trust Bank, FSB, Newark, DE		221,099,800		8.1	%

68

     Additionally, due to the fact that a majority of the Board of Directors of the FHLBank is elected from the membership of the FHLBank, these elected directors are officers and/or directors of member institutions that own the FHLBank’s capital stock. These institutions are provided in the following table.

Capital Stock Outstanding to Member Institutions Whose
Officers and/or Directors Serve as a Director of the FHLBank as of April 30, 2005

			Percent of Total
Name	Capital Stock		Capital Stock
Sovereign Bank, Wyomissing, PA	$	586,161,200		21.6	%
GMAC Bank, FSB, Wilmington, DE		130,964,900		4.8	%
First Commonwealth Bank, Indiana, PA		54,947,400		2.0	%
Wilmington Savings Fund Society, FSB, Wilmington, DE		45,096,200		1.7	%
Harleysville Savings Bank, Harleysville, PA		16,545,600		*
Willow Grove Bank, Maple Glen, PA		15,522,500		*
Summit Community Bank, Moorefield, WV		11,294,400		*
Laurel Savings Bank, Allison Park, PA		1,878,200		*
Columbia County Farmers National Bank, Bloomsburg, PA		948,600		*

(* Represents ownership of less than 1%)

Item 5: Directors and Executive Officers

Directors

     The following table sets forth certain information (ages as of April 30, 2005) regarding each of the FHLBank’s directors. No director of the FHLBank is related to any other director or executive officer of the FHLBank by blood, marriage, or adoption.

					Term
Name	Age		Director Since		Expires
Marvin N. Schoenhals (Chair) (e)		58		1997		2007
Dennis S. Marlo (Vice Chair) (e)		62		2003		2006
David M. Applegate (e)		44		2005		2007
Basil R. Battaglia (a)		69		2004		2006
William H. Genge (a)		81		2003		2005
H. Charles Maddy, III (e)		42		2002		2007
Frederick A. Marcell Jr. (e)		67		2003		2005
Edwin R. Maus (e)		63		1998		2006
Edward J. Molnar (e)		64		2004		2006
Willard L. Phillips Jr. (a)		64		2003		2005
Paul E. Reichart (e)		67		1997		2005
Gerard M. Thomchick (e)		49		2005		2007
Cecil Underwood (a)		82		2002		2006

(e)	Elected by the members
(a)	Appointed by the Finance Board

Marvin N. Schoenhals (chair)

Mr. Schoenhals has served as President and CEO of both Wilmington Savings Fund Society, FSB and WSFS Financial Corporation (bank holding company) since 1990. He also serves as Chairman of both Wilmington Savings Fund Society, FSB and WSFS Financial Corporation. He is also on the board of the Brandywine Fund, Inc., Brandywine Blue Fund, Inc. and Brandywine Advisors Fund.

69

Dennis S. Marlo (vice chair)

Mr. Marlo has served as Executive Vice President of Sovereign Bank since May 2004. From April 2001 to May 2004 he served as the Chief Risk Management Officer for both Sovereign Bancorp, Inc. (bank holding company) and Sovereign Bank and from 1999 through 2001 he served as CFO and Treasurer of both Sovereign Bank and Sovereign Bancorp. He also serves as a director of EnerSys.

David M. Applegate

Mr. Applegate has served as President and CEO of both GMAC Residential Holding Corporation (bank holding company) and GMAC Mortgage Corporation since 2001. He also serves as a director of GMAC Mortgage Group, Chairman of GMAC Home Services, Chairman of GMAC Bank and Chairman of GMAC Mortgage Corporation. From 1999 to January 2001, Mr. Applegate was COO of GMAC Mortgage.

Basil R. Battaglia

Mr. Battaglia is the sole proprietor of both Beckworth Title (title insurance) and Beckworth Consulting (consulting firm).

William H. Genge

Mr. Genge has been retired since 1993 from his position as CEO and Chairman of Ketchum Communications (advertising firm).

H. Charles Maddy, III

Mr. Maddy has served as President and CEO of Summit Financial Group (bank holding company) since 1994. He also serves as a director for Summit Financial Group.

Frederick A. Marcell Jr.

Mr. Marcell has served as President and CEO of Willow Grove Bank since 1992. His also serves as a director for Willow Grove Bank.

Edwin R. Maus

Mr. Maus has served as President and CEO of Laurel Savings Bank since 1992. He has served as President and CEO of Laurel Capital Group (bank holding company) since 1993. He also serves as a director for both Laurel Savings Bank and Laurel Capital Group.

Edward J. Molnar

Mr. Molnar has served as CEO of Harleysville Savings Financial Corporation since 1967. He also serves as Chairman of the Board for Harleysville Savings Financial Corporation.

Willard L. Phillips Jr.

Mr. Phillips has served as President and CEO of The Phillips Group (consulting firm) since 2001.

Paul E. Reichart

Mr. Reichart served as President and CEO of Columbia County Farmers National Bank from 1985 – 2002, when he retired. He serves as Chairman of Columbia County Farmers National Bank.

Gerard M. Thomchick

Mr. Thomchick has served as COO and Senior Executive Vice President of First Commonwealth Financial Corporation (bank holding company) since 1995.

Cecil Underwood

Mr. Underwood has served as the CEO of the Cecil H. Underwood Institute (public policy) since 2001. From 1997 to 2001 he served as the Governor of the State of West Virginia.

Audit Committee

     The Audit Committee has a written charter adopted by the FHLBank’s Board of Directors. The Audit Committee is directly responsible for the appointment, compensation and oversight of the FHLBank’s independent RPAF and chief internal auditor. The Audit Committee is also responsible for approving all audit engagement fees, as well as any permitted non-audit services with the independent RPAF. The Audit Committee preapproves all auditing services and permitted non-audit services to be performed for the FHLBank by the independent RPAF. The independent RPAF reports directly to the Audit Committee. The FHLBank’s internal auditor also reports directly to the Committee.

70

     Members of the Audit Committee shall evaluate the FHLBank’s compliance with laws, regulations, and policies and procedures, and determine that the FHLBank has established and is maintaining adequate administrative, operating and internal accounting controls.

     The Audit Committee is presently composed of Messrs., Maddy (Chair), Applegate, Marcell, Marlo and Battaglia. The Audit Committee regularly holds separate sessions with the FHLBank’s management, internal auditors, and independent RPAF.

Executive Officers

     The following table sets forth certain information (age as of April 30, 2005) regarding the executive officers of the FHLBank.

Executive Officer	Age		Capacity In Which Serves
James D. Roy		64	President and Chief Executive Officer
William G. Batz		57	Executive Vice President, Chief Operating Officer
Paul H. Dimmick		56	Senior Vice President, Capital Markets
J. Michael Hemphill		59	Senior Vice President, Chief Risk Officer
Craig C. Howie		42	Senior Vice President, Member Market Access
Eric J. Marx		48	Senior Vice President, Chief Financial Officer
Dana A. Yealy		46	Senior Vice President, General Counsel and Corporate Secretary

     James D. Roy has been president of the FHLBank since 1987. Before that, he was employed for 25 years with Mellon Bank, N.A., serving as the Senior Vice President, Finance; as Vice President and Manager, Corporate Financial Planning and Control; and in various management positions within the finance department. Mr. Roy currently serves on the Board of Directors of the Financing Corporation. Mr. Roy has announced his intention to retire at or around the end of 2005.

     William G. Batz has been the Executive Vice President and Chief Operating Officer of the FHLBank since 1988. Earlier he served as Senior Vice President – Finance for Mellon Bank Corporation, and held posts with Society Corporation and Peat, Warwick, Mitchell & Co.

     Paul H. Dimmick joined the FHLBank in August 2003 as Senior Vice President, Mortgage Finance, and in December 2004, was named Senior Vice President, Capital Markets. Prior to joining the FHLBank, he held various positions at Mellon Bank N.A., including Executive Vice President of Capital Markets, department head of Mellon Corporate Financing, and Director of Alternative Investments for Mellon Institutional Asset Management. Before coming to Pittsburgh, Mr. Dimmick was a Senior Managing Director with Chemical Bank and its predecessor, Manufacturers Hanover Trust, in New York. He started his banking career as a bank examiner for the Federal Reserve Bank of NY.

     J. Michael Hemphill joined the FHLBank of Pittsburgh in April 2000, as Director of Internal Audit, and he became the Chief Risk Officer for the Corporate Risk Management Department in June 2004. Prior to joining the FHLBank, he was the Director of Internal Audit at the Federal Home Loan Bank of Dallas. Mr. Hemphill joined the FHLBank of Dallas in 1986, and became controller during 1987.

     Craig C. Howie joined the FHLBank in 1990, and in 1997, was named Senior Vice President, Credit. In 2004, he was named Senior Vice President, Member Market Access, which is responsible for sales and marketing of loans and MPF. Before joining the FHLBank he worked for Chemical Bank in New York as an Assistant Vice President in Mortgage Capital Markets. Prior to that, Mr. Howie worked for GMAC Mortgage Corporation as an Assistant Vice President in Secondary Marketing.

     Eric J. Marx joined the FHLBank in 1995 as Senior Vice President and Chief Financial Officer. Prior to joining the FHLBank, he was employed by Chevy Chase FSB where he was Vice President of Financial Planning and Analysis. He also held the position of Vice President, Mortgage Investments and Asset/Liability Management at Goldome FSB. Prior to this,

71

Mr. Marx served in a succession of management positions in the finance and asset/liability management functions at Mellon Bank, N.A.

     Dana A. Yealy joined the FHLBank of Pittsburgh in 1986 as the FHLBank’s in-house counsel, was named Vice President and General Counsel in 1989 and has served as Senior Vice President and General Counsel since 1991. He was named Corporate Secretary in 2003. Prior to joining the FHLBank, he was an attorney with the Federal Home Loan Bank of Dallas.

     Each executive officer serves at the pleasure of the Board of Directors.

     The FHLBank has adopted a code of ethics for all of its employees and directors, including its CEO, principal financial officer, controller, and those individuals that perform similar functions. A copy of the code of ethics is on the FHLBank’s public web site and will be provided without charge upon request to the Legal Department of the FHLBank.

Item 6: Executive Compensation

Executive Officers’ Compensation

     The following table sets forth information concerning the compensation earned from the FHLBank for the three fiscal years ended December 31, 2004, by the persons who were in 2004 the FHLBank’s Chief Executive Officer and the four other highest paid Executive Officers. Annual compensation includes amounts deferred.

			Annual		Compensation		Long Term Compensation
									All Other
Name and							LTIC Payouts(2)		Compensation(1)
Principal Position	Year		Salary($)		Incentive($)		($)		($)
James D. Roy		2004		505,000		208,439				30,300
President and CEO		2003		505,000		—		—		40,726
		2002		490,000		173,774		315,805		38,758
William G. Batz		2004		341,902		103,852				20,514
EVP & COO		2003		341,902		—				25,680
		2002		331,944		86,089		106,969		26,609
Eric J. Marx		2004		291,127		85,975				17,468
SVP & CFO		2003		291,127		—				21,648
		2002		282,648		69,674		91,083		22,958
Paul Dimmick		2004		210,013		78,079				12,601
SVP Capital Markets		2003		75,170		—				53,588	(3)
Dana A. Yealy		2004		209,000		69,440				12,540
SVP & General Counsel		2003		200,000		—				15,870
		2002		191,352		64,504		61,663		15,480

(1)	Represents contributions or other allocations made by the FHLBank to qualified and/or non-qualified vested and unvested defined contribution plans.
(2)	Long-Term Incentive Compensation Plan payout, although paid in a lump sum as 2002 compensation, reflects results attained over a two-year performance period (2001 through 2002).
(3)	Mr. Dimmick began employment at the FHLBank in August, 2003, at an annual salary of $205,000: he received a $50,000 signing bonus.

     The FHLBank participates in the Financial Institutions Retirement Fund (FIRF), a tax-qualified multiple-employer defined-benefit plan for all employees. Certain executives participate in the Supplemental Employee Retirement Plan (SERP), a non-qualified retirement plan. A SERP ensures, among other things, that participants receive the full amount of benefits to which they would have been entitled under their pension plans in the absence of limits on benefits levels imposed by the Internal Revenue Service.

72

     The following table shows estimated annual benefits payable from FIRF and SERP combined upon retirement at age 65 and calculated in accordance with the formula currently in effect for specified years-of-service and remuneration classes for FHLBank employees participating in both plans.

Pension Plan Table

	Years of Service
Remuneration		5		10		15		20		25		30		35		40
$100,000	$	10,000	$	20,000	$	30,000	$	40,000	$	50,000	$	60,000	$	70,000	$	80,000
200,000		20,000		40,000		60,000		80,000		100,000		120,000		140,000		160,000
300,000		30,000		60,000		90,000		120,000		150,000		180,000		210,000		240,000
400,000		40,000		80,000		120,000		160,000		200,000		240,000		280,000		320,000
500,000		50,000		100,000		150,000		200,000		250,000		300,000		350,000		400,000
600,000		60,000		120,000		180,000		240,000		300,000		360,000		420,000		480,000
700,000		70,000		140,000		210,000		280,000		350,000		420,000		490,000		560,000
800,000		80,000		160,000		240,000		320,000		400,000		480,000		560,000		640,000
900,000		90,000		180,000		270,000		360,000		450,000		540,000		630,000		720,000

• Benefit formula for regular annual allowance is 2% x Years of Benefit Service x High 3 Year Average Salary.

• Compensation covered includes annual base salary plus short-term incentive compensation without regard to IRS limitations.

• Credited years of service as of December 31, 2004, is 17 years and 1 months for Mr. Roy, 16 years and 1 months for Mr. Batz, 9 years and 1 months for Mr. Marx, 1 year and 4 months for Mr. Dimmick and 19 years and 4 months for Mr. Yealy.

• The regular form of retirement benefits provides a single life annuity; a lump-sum option is also available.

• The benefits shown in the table are not subject to offset for social security or any other amounts.

     The FHLBank participates in the Financial Institution Thrift Plan (Thrift Plan), a retirement savings plan qualified under the Internal Revenue Code for employees of the FHLBank. The FHLBank matches employee contributions based on the length of service and the amount of employee contribution. Certain executives participate in the Supplemental Thrift Plan, a non-qualified plan. The Supplemental Thrift Plan ensures, among other things, that participants whose benefits under the Thrift Plan would otherwise be significantly restricted by the terms of the Thrift Plan or the Internal Revenue Code are able to make elective pretax deferrals and to receive the FHLBank match relating to such deferrals.

Directors’ Compensation

     In accordance with the Finance Board’s regulations, the FHLBank has established a formal policy governing the compensation provided to its directors. Directors are compensated based on the level of responsibility assumed. Fees are paid for attendance at certain meetings subject to an annual limit. The total directors’ compensation and expenses incurred by the FHLBank during 2004, 2003, and 2002 was $340,554, $561,338, and $374,074. The director compensation limits for 2005 are summarized below:

Director Meeting Fees

Type of Meeting	Position	Per meeting fee
Board	Chairman	$	1,500
Board	Vice Chairman	$	1,250
Board	Director	$	1,000
Board Committee or System Meeting	Chairman, Vice Chairman, Director	$	1,000

73

Director Annual Compensation Limits

Position	2005
Chairman	$	28,364
Vice Chairman	$	22,692
Director	$	17,019

Executive Severance Agreements

     The FHLBank has entered into an executive severance agreement with Mr. Marx. Mr. Marx is entitled to receive 12 month’s base salary if he is terminated for other than cause or he resigns for good reason In addition, the executive severance agreement provides Mr. Marx with 2.99 times the average of the three preceding years’ base salary, bonuses, and other cash compensation paid to Mr. Marx if there is a change in control of the FHLBank. The executive severance agreement also provides other non-cash benefits to Mr. Marx in the event any of the above qualifying events occur. See Exhibit 10.8 filed herewith for information on the executive severance agreement between the FHLBank and Mr. Marx.

Item 7: Certain Relationships and Related Transactions

     All members are required by law to purchase capital stock in the FHLBank. The capital stock of the FHLBank can be purchased only by members. As a cooperative, the FHLBank’s products and services are provided almost exclusively to its stockholders. In the ordinary course of business, transactions between the FHLBank and its stockholders are carried out on terms that are established by the FHLBank, including pricing and collateralization terms, that treat all similarly situated members on a nondiscriminatory basis.

     The FHLBank’s products and services are provided to members whose officers and directors serve on the FHLBank Board of Directors and to holders of more than 5% of the FHLBank’s capital stock on terms that are no more favorable to them than comparable transactions with other similarly situated members of the FHLBank. Loans included in such transactions did not involve more than the normal risk of collectibility or present other unfavorable terms. Currently, nine of the FHLBank’s thirteen directors are officers or directors of members.

     Since January 1, 2001, the FHLBank has not engaged in any transaction outside of the ordinary course of business with any of the FHLBank’s directors, executive officers, or any members of their immediate families that requires disclosure under applicable rules and regulations. Additionally, since January 1, 2001, the Bank has not had any dealings with entities that are affiliated with its directors that require disclosure under applicable rules and regulations. The FHLBank has made certain arrangements to allow several affiliates of Sovereign Bank to pledge collateral to the FHLBank on behalf of Sovereign Bank. Director Marlo is an officer of Sovereign Bank. These arrangements were established before Director Marlo started to serve as a director of the FHLBank. To date, the FHLBank has not extended any credit against collateral pledged by any of these affiliates. No director or executive officer of the FHLBank or any of their immediate family members has been indebted to the FHLBank at any time since January 1, 2001.

Item 8: Legal Proceedings

     The FHLBank is not currently subject to pending legal proceedings except those arising in the normal course of business.

Item 9: Market for the FHLBank’s Common Stock and Related Security Holder Matters

     The member financial institutions own all the capital stock of the FHLBank. There is no established marketplace for the FHLBank’s stock; the FHLBank’s stock is not publicly traded and may be redeemed by the FHLBank only at par value. The members may request that the FHLBank redeem all or part of the common stock they hold in the FHLBank five years after the FHLBank receives a written request by a member. In addition, the FHLBank may repurchase shares held by members in excess of their required stock holdings at the FHLBank’s discretion upon one day’s notice. Excess stock is FHLBank capital stock not required to be held by the member to meet its minimum stock purchase requirement under the FHLBank’s Capital Plan. The members’ minimum stock purchase requirement is subject to change from time to time at the discretion of the Board of Directors of the FHLBank. Par value of each share of capital stock is $100. As of April 30, 2005, 336 members owned FHLBank capital stock and 2 nonmembers held capital stock. The total number of shares of capital stock outstanding as of April 30, 2005 was 27,096,538, of which members held 26,881,965 shares and nonmembers held 214,573 shares.

74

     The FHLBank’s dividends declared as a percentage of par value are outlined in the table below. All dividends were paid in cash.

	2005			2004			2003
Quarter	Annualized Rate			Annualized Rate			Annualized Rate
First		2.86	%		1.37	%		1.40	%
Second					1.34	%		2.00	%
Third					1.60	%		2.25	%
Fourth					2.43	%		3.25	%

     Please see “Capital Plan – Dividends” included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations for in formation concerning restrictions on the FHLBank’s ability to pay dividends and the FHLBank’s current dividend policy.

Item 10: Recent Sales of Unregistered Securities

     The securities issued by the FHLBank are “exempt securities” under Section 3(a)(2) of the Securities Act of 1933 to the same extent as securities that are obligations of, or guaranteed as to principal and interest by, the United States. Registration statements with respect to offerings of FHLBank securities are not filed with the SEC. As stated above, FHLBank common stock is not publicly traded. The following table sets forth the securities sold for each of the periods presented. Consolidated obligations were sold through various underwriters. All securities were sold for cash.

Security	3 months ended		3 months ended
(in thousands)	March 31, 2005		March 31, 2004
Consolidated Obligation Bonds	$	5,017,554	$	6,971,950
Consolidated Obligation Discount Notes	$	249,803,284	$	284,063,648
Capital Stock	$	1,728,984	$	1,854,383

Security	12 months ended		12 months ended		12 months ended
(in thousands)	December 31, 2004		December 31, 2003		December 31, 2002
Consolidated Obligation Bonds	$	29,972,784	$	39,661,956	$	26,329,135
Consolidated Obligation Discount Notes	$	1,166,339,728	$	640,820,663	$	581,039,723
Capital Stock	$	5,805,390	$	2,727,083	$	3,915,082

Item 11: Description of FHLBank Securities to be Registered

     The FHLBank has only one class of capital stock issued and outstanding, capital stock, par value $100, which is five-year redeemable common stock. This stock was issued under a Capital Plan approved by the Finance Board on May 8, 2002 and implemented on December 16, 2002.

     FHLBank capital stock may be purchased only by member institutions. It is issued, redeemed and repurchased at par value of one hundred dollars ($100) per share. See the “Description of Capital Stock” section of the Information Statement filed herewith as Exhibit 99.1 (the “Information Statement”) regarding dividend rights, voting rights, liquidation rights. See the “Description of the Bank’s Capital Plan” section of the Information Statement regarding limitations on the repurchase and redemption of FHLBank capital stock.

     Upon a simple majority vote of all of the individual members of the FHLBank’s Board of Directors, not just a simple majority vote of a quorum, a request to amend the Capital Plan may be submitted to the Finance Board. See the “Amendment to the Capital Plan” section of the Information Statement for additional provisions regarding the modification of rights of holders of FHLBank capital stock. The information under the captions of the Information Statement referred to above is incorporated herein by reference.

75

Item 12: Indemnification of Directors and Officers

     Article VII, Section 6 of the FHLBank’s bylaws requires the FHLBank to indemnify the FHLBank’s directors and officers to the fullest extent of the law against all expenses, liability, and loss (including attorney’s fees, judgments, fines, ERISA excise taxes and penalties, and amounts paid or to be paid in settlement) when such person was or is a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative.

76

Item 13: Financial Statements

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
the Federal Home Loan Bank of Pittsburgh

In our opinion, the accompanying statements of condition and the related statements of income, capital and of cash flows present fairly, in all material respects, the financial position of the Federal Home Loan Bank of Pittsburgh (the “Bank”) at December 31, 2004 and 2003 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2, the Bank changed its method of accounting for amortization of deferred loan origination fees and premiums and discounts paid to and received on mortgage loans and securities under Statement of Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, effective January 1, 2004. The Bank also adopted Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, effective January 1, 2004.

/s/ PricewaterhouseCoopers LLP
June 24, 2005
McLean, Virginia

77

FEDERAL HOME LOAN BANK OF PITTSBURGH
STATEMENT OF CONDITION

	December 31,
(In thousands except par value)	2004			2003
ASSETS
Cash and due from banks (Note 3)	$	92,224		$	83,421
Interest-bearing deposits		1,341,147			828,255
Deposits with other FHLBanks for mortgage loan programs		5,862			7,072
Federal funds sold		2,255,000			1,000,000
Investments:
Trading securities (Note 5)		311,306			354,626
Available-for-sale securities (Note 6)		626,607			357,515
Held-to-maturity securities, at amortized cost, fair value of $8,260,806 and $7,411,330, respectively (Note 7)		8,386,425			7,444,474
Loans to members (Note 8)		38,989,126			34,671,987
Mortgage loans held for portfolio (Note 10), net of allowance for credit losses of $680 and $514, respectively (Note 11)		8,664,551			8,065,285
Accrued interest receivable		528,092			489,841
Premises and equipment, net (Note 4)		8,940			8,072
Derivative assets		147,180			164,972
Other assets		42,452			43,539
Total assets	$	61,398,912		$	53,519,059
LIABILITIES AND CAPITAL
LIABILITIES
Deposits: (Note 12)
Interest-bearing
Demand	$	952,129		$	1,238,358
Term		750			11,000
Other		64,040			55,980
Non-interest-bearing
Demand		1,681			1,036
Total deposits		1,018,600			1,306,374
Borrowings: (Note 13)
Loans from other FHLBanks		—			60,000
Mandatorily redeemable capital stock		18,208			—
Total borrowings		18,208			60,000
Consolidated obligations, net: (Note 14)
Bonds		41,383,521			36,621,817
Discount notes		15,160,634			11,536,705
Total consolidated obligations, net		56,544,155			48,158,522
Accrued interest payable		299,988			311,899
Affordable Housing Program (Note 9)		23,362			17,407
Payable to REFCORP (Note 1)		8,941			2,505
Derivative liabilities		640,156			1,241,964
Other liabilities		66,924			47,846
Total liabilities		58,620,334			51,146,517
Commitments and contingencies (Note 22)		—			—
CAPITAL (Note 15)
Capital stock - putable ($100 par value) issued and outstanding shares:
26,958 and 23,416 shares, respectively		2,695,802			2,341,627
Retained earnings		99,503			43,087
Accumulated other comprehensive loss		(16,727	)		(12,172	)
Total capital		2,778,578			2,372,542
Total liabilities and capital	$	61,398,912		$	53,519,059

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

78

FEDERAL HOME LOAN BANK OF PITTSBURGH
STATEMENT OF OPERATIONS

	Years Ended December 31,
(In thousands except for earnings per share)	2004			2003			2002
Interest income:
Loans to members	$	598,547		$	455,620		$	609,831
Prepayment fees on loans to members		292			6,871			972
Interest-bearing deposits		11,993			7,566			19,213
Deposits for mortgage loan programs with other FHLBanks		202			591			858
Federal funds sold		28,399			15,898			18,439
Investments:
Trading securities		10,746			22,791			84,397
Available-for-sale securities		10,097			13,696			16,263
Held-to-maturity securities		302,500			292,935			360,669
Mortgage loans held for portfolio		249,872			186,620			150,547
Loans to other FHLBanks		31			131			164
Total interest income		1,212,679			1,002,719			1,261,353
Interest expense:
Consolidated obligations		1,059,878			863,372			1,017,343
Deposits		14,837			20,956			32,686
Borrowings from other FHLBanks		1,358			2,117			1,690
Securities sold under agreements to repurchase		43			2,210			6,362
Other borrowings		2,001			2,057			939
Total interest expense		1,078,117			890,712			1,059,020
Net interest income before provision for credit losses on mortgage loans		134,562			112,007			202,333
Provision for credit losses on mortgage loans		166			(147	)		570
Net interest income after provision for credit losses on mortgage loans		134,396			112,154			201,763
Other income:
Services fees		4,120			5,926			6,724
Net gain (loss) on trading securities		(3,286	)		(12,310	)		7,253
Net gain on sale of available-for-sale securities		—			4,090			—
Net gain on sale of held-to-maturity securities		2,576			2,492			—
Net gain/ (loss) on derivatives and hedging activities		31,182			(39,791	)		(109,869	)
Other, net		931			3,172			(1,950	)
Total other income		35,523			(36,421	)		(97,842	)
Other expense:
Operating - salaries and benefits		24,091			18,503			18,901
Operating - other		13,683			16,907			17,079
Finance Board		1,743			1,292			1,275
Office of Finance		1,716			1,321			1,264
Total other expense		41,233			38,023			38,519
Income before Assessments		128,686			37,710			65,402
Affordable Housing Program		11,191			3,078			5,339
REFCORP		25,182			6,926			12,013
Total assessments		36,373			10,004			17,352
Income before cumulative effect of change in accounting principle		92,313			27,706			48,050
Cumulative effect of change in accounting principle (Note 2)		8,413			—			—
Net Income	$	100,726		$	27,706		$	48,050
Earnings per share:
Weight average shares outstanding		26,265			22,943			19,516
Earnings before cumulative effect of change in accounting principle	$	3.51		$	1.21		$	2.46
Cumulative effect of change in accounting principle		0.32			—			—
Basic and diluted earnings per share (Note 20)	$	3.83		$	1.21		$	2.46

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

79

FEDERAL HOME LOAN BANK OF PITTSBURGH
STATEMENT OF CASH FLOWS

	Years Ended December 31,
(In thousands)	2004			2003			2002
OPERATING ACTIVITIES:
Net income	$	100,726		$	27,706		$	48,050
Cumulative effect of change in accounting principle		(8,413	)		—			—
Income before cumulative effect of change in accounting principle		92,313			27,706			48,050
Adjustments to reconcile income before cumulative effect of change in accounting principle to net cash provided by operating activities:
Depreciation and amortization:
Net premiums and discounts on consolidated obligations, investments, and deferred costs and fees received on interest-rate exchange agreements		85,998			40,130			56,273
Net premiums and discounts on mortgage loans		38,854			76,635			7,228
Concessions on consolidated obligation bonds		17,348			30,833			24,205
Bank premises and equipment		2,894			3,145			2,794
Provision for credit losses on mortgage loans		166			(147	)		570
Net realized gain on held-to-maturity securities		(2,576	)		(2,492	)		—
Net realized gain on available-for-sale securities		—			(4,090	)		—
Decrease/(increase) in trading securities, net of transfers		43,320			868,486			(55,963	)
(Gain)/loss due to change in net fair value adjustment on derivative and hedging activities		995			(91,567	)		64,792
Net realized loss/(gain) on disposal of premises and equipment		140			26			2
(Increase)/decrease in accrued interest receivable		(38,251	)		35,507			7,028
Decrease/(increase) in derivative asset-net accrued interest		10,682			19,710			(3,435	)
(Decrease)/increase in derivative liability-net accrued interest		(9,200	)		(15,017	)		41,327
Decrease/(increase) in other assets		1,181			(6,871	)		5,650
Increase/(decrease) in Affordable Housing Program (AHP) liability and discount on AHP advances		5,623			(9,001	)		(14,148	)
(Decrease)/increase in accrued interest payable		(11,911	)		14,333			(42,597	)
Increase/(decrease) in REFCORP liability		6,437			(317	)		(3,676	)
Increase/(decrease) in other liabilities		11,190			2,956			13,417
Total adjustments		162,890			962,259			103,467
Net cash provided by operating activities		255,203			989,965			151,517
INVESTING ACTIVITIES:
Net (Increase)/decrease in interest bearing deposits		(512,892	)		(240,955	)		593,328
Net (Increase)/decrease in federal funds sold		(1,255,000	)		(18,000	)		145,000
Net Decrease/(increase) in short-term held-to-maturity securities		169,950			(239,889	)		249,187
Proceeds from sales of long-term held-to-maturity securities		71,261			87,333			—
Proceeds from maturities of long-term held-to-maturity securities		2,951,348			5,609,790			4,757,118
Purchases of long-term held-to-maturity securities		(4,123,330	)		(5,899,665	)		(3,539,093	)
Proceeds from sales of available-for-sale securities		—			1,820,036			—
Proceeds from maturities of available-for-sale securities		198,239			956,955			451,156
Purchases of available-for-sales securities		(466,988	)		(2,712,588	)		(1,732,853	)
Principal collected on loans to members		2,029,830,022			1,249,544,790			964,843,846
Loans made to members		(2,034,808,449	)		(1,255,454,484	)		(963,791,042	)
Principal collected on mortgage loans held for portfolio		2,171,306			3,515,222			1,052,764
Mortgage loans held for portfolio purchased		(2,845,691	)		(6,701,581	)		(4,076,384	)
Net decrease/(increase) in deposits to other FHLBanks for mortgage loan programs		1,211			(2,658	)		2,706
Net decrease/(increase) in loans to other FHLBanks		—			190,000			(190,000	)
Purchases of premises and equipment		(3,904	)		(2,162	)		(2,185	)
Proceeds from sale of bank premises and equipment		3			—			—
Net cash (used in) by investing activities		(8,622,914	)		(9,547,856	)		(1,236,452	)

80

	Years Ended December 31,
(In thousands)	2004			2003			2002
FINANCING ACTIVITIES
Net (decrease)/increase in deposits		(287,406	)		(1,108,062	)		696,424
Net increase in mandatorily redeemable capital stock		18,208			—			—
Net (decrease)/increase in loans from other FHLBanks		(60,000	)		60,000			—
Net proceeds from issuance of COs
Discount notes		1,166,339,728			640,820,663			581,039,723
Bonds		29,972,784			39,661,956			26,329,135
Payments for maturing and retiring:
Discount notes		(1,162,738,580	)		(639,691,415	)		(581,703,893	)
Bonds		(25,185,899	)		(31,692,646	)		(25,071,176	)
Proceeds from issuance of capital stock		5,805,390			2,727,083			3,915,082
Payments for redemption/repurchase of capital stock		(5,450,967	)		(2,225,198	)		(3,964,761	)
Cash dividends paid		(36,744	)		(41,782	)		(69,305	)
Net cash provided by financing activities		8,376,514			8,510,599			1,171,229
Net increase/(decrease) in cash and cash equivalents		8,803			(47,292	)		86,294
Cash and cash equivalents at the beginning of the year		83,421			130,713			44,419
Cash and cash equivalents at the end of the year	$	92,224		$	83,421		$	130,713
Supplemental disclosures:
Interest paid during the year	$	1,015,815		$	907,647		$	1,244,640
AHP payments		5,236			11,816			19,126
REFCORP payments		18,745			7,243			15,689

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

81

FEDERAL HOME LOAN BANK OF PITTSBURGH
STATEMENT OF CHANGES IN CAPITAL

	Capital Stock						Capital Stock									Accumulated
	Pre Gramm-Leach-Bliley						Putable									Other
													Retained			Comprehensive			Total
(In thousands)	Shares			Par Value			Shares			Par Value			Earnings			Income(Loss)			Capital
Balance, December 31, 2001		18,894		$	1,889,422			—		$	—		$	86,818		$	1,815		$	1,978,055
Proceeds from sale of capital stock		34,943			3,494,354			4,207			420,728									3,915,082
Redemption/repurchase of capital stock		(33,163	)		(3,316,349	)		(6,484	)		(648,413	)								(3,964,762	)
Stock transfers		(20,674	)		(2,067,427	)		20,674			2,067,427									—
Comprehensive income:
Net income														48,050						48,050
Other comprehensive income:
Net unrealized loss on available-for-sale securities																	(7,400	)		(7,400	)
Net unrealized loss relating to hedging activities																	(2,693	)		(2,693	)
Reclassification adjustment for gains included in net income																	2,836			2,836
Other																	(123	)		(123	)
Total other comprehensive income																	(7,380	)		(7,380	)
Total comprehensive income																				40,670
Cash dividends on capital stock														(69,305	)					(69,305	)
Balance, December 31, 2002		—			—			18,397			1,839,742			65,563			(5,565	)		1,899,740
Proceeds from sale of capital stock								27,271			2,727,083									2,727,083
Redemption/repurchase of capital stock								(22,252	)		(2,225,198	)								(2,225,198	)
Stock transfers																				—
Comprehensive income:
Net income														27,706						27,706
Other comprehensive income:
Net unrealized loss on available-for-sale securities																	(1,103	)		(1,103	)
Net unrealized loss relating to hedging activities																	(9,893	)		(9,893	)
Reclassification adjustment for gains included in net income																	4,369			4,369
Other																	20			20
Total other comprehensive income																	(6,607	)		(6,607	)
Total comprehensive income																				21,099
Cash dividends on capital stock														(50,182	)					(50,182	)
Balance, December 31, 2003		—			—			23,416			2,341,627			43,087			(12,172	)		2,372,542
Proceeds from sale of capital stock								58,054			5,805,390									5,805,390
Repurchase of capital stock								(54,330	)		(5,433,007	)								(5,433,007	)
Net shares reclassified to mandatorily redeemable capital stock								(182	)		(18,208	)								(18,208	)
Comprehensive income:
Net income														100,726						100,726
Other comprehensive income:
Net unrealized gain on available-for-sale securities																	322			322
Net unrealized loss relating to hedging activities																	(5,236	)		(5,236	)
Reclassification adjustment for gains included in net income																	431			431
Other																	(72	)		(72	)
Total other comprehensive income																	(4,555	)		(4,555	)
Total comprehensive income																				96,171
Cash dividends on capital stock														(44,310	)					(44,310	)
Balance, December 31, 2004		—		$	—			26,958		$	2,695,802		$	99,503		$	(16,727	)	$	2,778,578

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

82

FEDERAL HOME LOAN BANK OF PITTSBURGH
NOTES TO FINANCIAL STATEMENTS

Background Information

     The Federal Home Loan Bank of Pittsburgh (the FHLBank), a federally chartered corporation, is one of twelve district Federal Home Loan Banks (FHLBanks). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The FHLBank provides a readily available, low-cost source of funds to its member institutions. The FHLBank is a cooperative, which means that current members own nearly all of the outstanding capital stock of the FHLBank and may receive dividends on their investment. Former members own the remaining capital stock to support business transactions still carried on the FHLBank’s Statement of Condition. Generally, regulated financial depositories and insurance companies engaged in residential housing finance may apply for membership.

     All members must purchase stock in the FHLBank. Members must own capital stock in the FHLBank. Each member is also required to purchase activity-based capital stock as it engages in certain business activities with the FHLBank. As a result of these requirements, the FHLBank conducts business with related parties in the normal course of business. See Note 18 for additional information regarding related parties.

     The Federal Housing Finance Board (Finance Board), an independent agency in the executive branch of the United States government, supervises and regulates the FHLBanks and the Office of Finance. The Finance Board’s principal purpose is to ensure that the FHLBanks operate in a safe and sound manner, carry out their housing finance mission, remain adequately capitalized, and can raise funds in the capital markets. Also, the Finance Board establishes policies and regulations covering the operations of the FHLBanks. Each FHLBank operates as a separate entity with its own management, employees, and board of directors.

     The Office of Finance is a joint office of the FHLBanks established by the Finance Board to facilitate the issuing and servicing of the consolidated obligations of the FHLBanks. The FHLBank’s debt instruments (consolidated obligations) are the joint and several obligations of all the FHLBanks and are the primary source of funds for the FHLBank. Deposits, other borrowings, and capital stock issued to members provide other funds. The FHLBank uses these funds to primarily provide loans to members and to purchase mortgages from members through the Mortgage Partnership Finance® (MPF®) Program. The FHLBank also provides member institutions with correspondent services, such as safekeeping and settlement.

Note 1—Summary of Significant Accounting Policies

     Use of Estimates. The preparation of financial statements requires management to make assumptions and estimates. These assumptions and estimates affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ from these estimates.

     Federal Funds. The FHLBank has the ability to purchase or sell funds to eligible counterparties. These funds are usually purchased and sold for one-day periods, but can have longer terms up to three months.

     Investments. The FHLBank classifies its investment in securities as either trading, available-for-sale or held-to-maturity. The accounting for these investments is dependent on a number of factors including, but not limited to, marketability of the investment, the FHLBank’s intent and the nature of the investment.

     Certain basis adjustments to the carrying value of investment securities reflecting hedge accounting activity are amortized or accreted on a straight-line basis. The FHLBank has determined that the straight-line method and level-yield method are not materially different.

     The FHLBank computes gains and losses on sales of investment securities using the specific identification method and includes these gains and losses in other income. The FHLBank treats securities purchased under agreements to resell as collateralized financings.

     Trading. The FHLBank classifies certain investments acquired for purposes of liquidity and asset/liability management as trading and carries them at fair value. The FHLBank records changes in the fair value of these investments through other income. However, the FHLBank does not participate in active trading practices as it is prohibited from doing so by regulation.

83

     Available-for-Sale. The FHLBank classifies certain investments that it may sell before maturity as available-for-sale and carries them at fair value. The change in fair value of the available-for-sale securities not being hedged by derivative instruments is recorded in other comprehensive income as a “net unrealized gain (loss) on available-for-sale securities.” For available-for-sale securities that have been hedged and qualify as a fair value hedge, the FHLBank records the portion of the change in value related to the risk being hedged in other income as “net realized and unrealized gain (loss) on derivatives and hedging activities” together with the related change in the fair value of the derivative. The FHLBank records the remainder of the change in other comprehensive income as “net unrealized gain (loss) on available-for-sale securities.”

     Held-to-Maturity. The FHLBank carries, at cost, investments for which it has both the ability and intent to hold to maturity. The FHLBank may change its intent to hold a certain security to maturity and sell or transfer the security without calling into question its intent to hold other debt securities to maturity in the future, as long as the sale or transfer meets one of a number of restrictive parameters. These sales would be rare.

     Restricted Securities. The FHLBank, along with several other FHLBanks, participated in a “Shared Funding Program,” which was administered by an unrelated third party. This program allows mortgage loans originated through the MPF® Program to be sold to a third-party-sponsored trust and pooled into securities. The FHLBank of Chicago purchases the pooled securities, which are rated at least AA, and either retains or partially sells to other FHLBanks. Since the collateral underlying these investments is mortgages purchased from members, these investments are acquired-member-asset eligible securities. These held-to-maturity securities are not publicly traded, are not guaranteed by any of the FHLBanks and have certain sale restrictions.

     Premiums and Discounts. The FHLBank computes the amortization and accretion of premiums and discounts on mortgage-backed securities using the contractual method. The contractual method recognizes the income effects of premiums and discounts in a manner that is effectively proportionate to the actual behavior of the underlying assets and reflects the contractual terms of the assets without regard to changes in estimated prepayments based on assumptions about future borrower behavior. The FHLBank computes the amortization and accretion of premiums and discounts on other investments using the level-yield method to the contractual maturity of the securities.

     The FHLBank periodically evaluates outstanding investments for impairment and determines if unrealized losses are temporary based in part on the creditworthiness of the issuers and the underlying collateral as well as a determination of the FHLBank’s intent to hold such securities through to recovery of the unrealized losses. The FHLBank has not experienced any other-than-temporary impairment in value of investments. Securities with unrealized losses that have been deemed other-than-temporarily impaired would be written down to their current market value, with the recognized loss reflected through earnings as loss on securities.

     Loans to Members. The FHLBank presents loans to members, net of unearned commitment fees and discounts on Affordable Housing Program loans. The FHLBank amortizes the premiums and discounts on loans to members to interest income using the level-yield method. The FHLBank credits interest on loans to members to income as earned. Following the requirements of the Federal Home Loan Bank Act of 1932 (the FHLBank Act), as amended, the FHLBank obtains sufficient collateral on loans to members to protect it from losses. The FHLBank Act limits eligible collateral to certain investment securities, residential mortgage loans, cash or deposits with the FHLBank, and other eligible real estate-related assets. As Note 8 more fully describes, community financial institutions (FDIC-insured institutions with average assets over the preceding three-year period of $548 million or less during 2004) are eligible to utilize expanded statutory collateral rules that include small business and agricultural loans. The FHLBank has not incurred any credit losses on loans to members since its inception. Due to the collateral held as security for member loans and the repayment history of the FHLBank’s loans to members, management believes that an allowance for credit losses on these loans is unnecessary. Accordingly, the FHLBank has not provided any allowances for credit losses on loans to members.

     Mortgage Loans Held in Portfolio. The FHLBank participates in the MPF® Program under which the FHLBank purchases government-insured and conventional residential mortgage loans, which are purchased from a participating member. The FHLBank does not originate any residential mortgage loans. The FHLBank manages the liquidity, interest rate and options risk of the loans while the member retains the marketing and servicing activities. The FHLBank and the member share in the credit risk of the loans. The FHLBank assumes the first loss obligation, as limited by the first loss account (First Loss Account). The amount of the First Loss Account is determined by contract with members. The member assumes credit losses in excess of the First Loss Account up to an amount called the second loss credit enhancement, which is the credit enhancement obligation. The FHLBank assumes all losses in excess of the second loss credit enhancement.

     The second loss credit enhancement is an obligation on the part of the participating member, which ensures the retention of credit risk on loans it originates. The amount of the second loss credit enhancement is determined so that any losses in

84

excess of the enhancement are limited to those permitted for AA rated credit risks. The participating member receives from the FHLBank a credit enhancement fee for managing this portion of the risk inherent in the loans. This fee is paid monthly based upon the remaining unpaid principal balance. The required credit enhancement obligation amount may vary depending on the MPF product alternative selected.

     Mortgage Loan Fees and Premium/Discounts. The FHLBank classifies mortgage loans as held for investment and, accordingly, reports them at their principal amount outstanding net of deferred loan fees and premiums and discounts.

     The FHLBank defers and amortizes mortgage loan origination fees (agent fees), premiums and discounts paid to and received by the FHLBank’s participating member as interest income over the contractual life of the loan. The contractual method recognizes the income effects of premiums and discounts in a manner that is proportionate to the actual behavior of the underlying assets and reflects the contractual terms of the assets without regard to changes in estimates based on assumptions about future borrower behavior.

     The FHLBank records credit enhancement fees as an offset to mortgage loan interest income. The FHLBank records other non-origination fees, such as delivery commitment extension fees and pair-off fees, in other income as it is received. Extension fees are received when a member requests to extend the period of the delivery commitment beyond the original stated maturity. Pair-off fees are received when the amount of mortgages purchased is less than or greater than a specified percentage of the delivery commitment amount.

     Loan Sales/Securitization. The FHLBank does not securitize mortgage loans purchased from its members. All loan sales are MPF participations of loans, which the FHLBank sells to the FHLBank of Chicago. These participations are sold without recourse by the FHLBank and are executed at cost, so no gain or loss occurs upon sale.

     Impaired Loans. The FHLBank places a residential mortgage loan on non-accrual status when the collection of the contractual principal or interest is 90 days or more past due. These loans are considered impaired. When a residential mortgage loan is placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The FHLBank records cash payments received on non-accrual loans as interest income and a reduction of principal. Charge-offs are recorded when title is received in the foreclosure process.

     Allowance for Credit Losses. The FHLBank bases the allowance for credit losses on management’s estimate of credit losses inherent in the FHLBank’s mortgage loan portfolio as of the balance sheet date taking into consideration, among other things, the FHLBank’s exposure within the First Loss Account. The FHLBank performs periodic reviews of its portfolio to identify the losses inherent within the portfolio and to determine the likelihood of collection of the portfolio. The overall allowance is determined by an analysis that includes consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral valuations, industry data, and prevailing economic conditions. The FHLBank evaluates its loan loss allowance based on the specific identification method. This method evaluates all impaired loans for an indication that a loss has occurred. The Banking on Business (BOB) loans are discussed separately in Note 2 – “Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations.”

     The FHLBank purchases two types of mortgage loans: government-guaranteed FHA/VA and conventional loans. Because the credit risk on the government guaranteed loans is assumed by the FHA and VA, conventional loans constitute all of the reported loss allowance. The FHLBank reviews the entire loan portfolio on a quarterly basis, specifically past-due status, internal loan grade and geographic regions. In determining the loss allowance, the FHLBank applies a historical loss ratio based upon average charge-offs and recoveries on the entire conventional loan portfolio over the previous years. The loss ratio, currently 5%, is applied to those loans classified as impaired (non-accrual conventional loans).

     The FHLBank changed its loan loss allowance methodology in 2003, which resulted in a $1.2 million decrease in the allowance. When the FHLBank began the MPF® Program in 1999, no actual historical loss information was available for determining loss experience. As a result, the FHLBank considered various market data observations, loan portfolio characteristics, collateral valuations and prevailing geographic economic conditions. Based on available historical information and other analysis, the FHLBank established an allowance of nine basis points of the outstanding principal balance on the entire homogenous pool of conventional loans. The FHLBank has determined that the general market data used to arrive at the allowance was not representative of the FHLBank’s loss history. The FHLBank believes that moving to the specific identification method in 2003 provides a more accurate estimate of the FHLBank’s current credit risk position.

     Affordable Housing Program (AHP). The FHLBank is required by statute to establish and fund an AHP (see Note 9). The FHLBank charges the required funding for AHP to earnings and establishes a liability. The AHP funds provide subsidies to members to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income

85

households. This subsidy can be done by either a grant or a loan. The FHLBank primarily issues grants. AHP loans would be executed at interest rates below the customary interest rate for non-subsidized loans. When the FHLBank makes an AHP loan, the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP loan rate and the FHLBank’s related cost of funds for comparable maturity funding is charged against the AHP liability and recorded as a discount on the AHP loan. In the event the FHLBank records a full-year net loss, no AHP assessment is required to be accrued by the FHLBank. AHP assessments are made after REFCORP calculation, as discussed below.

     Prepayment Fees. The FHLBank charges a member a prepayment fee when the member prepays certain loans before the original maturity. The FHLBank records prepayment fees as net interest income. The FHLBank offsets gains and losses on derivatives associated with prepaid loans to members with prepayment fees in net interest income.

     Prepayment fees are determined by a formula that equates the fee owed at the time of loan prepayment to the present value of the foregone interest as compared to that of a replacement advance at prevailing market rates. Therefore, the overall effect on the loan portfolio yield and overall return on assets of recognizing such fee income equals the present value of this foregone income.

     In cases in which the FHLBank funds a new member loan concurrent with the prepayment of an existing loan, the FHLBank evaluates whether the new loan represents a modification of an existing loan or a new loan. Such determination is primarily based upon a comparison of the net present value of the old loan to the net present value of the new loan, along with qualitative factors such as material changes in loan type or term.

     If the new loan qualifies as a modification of the existing loan, the prepayment fee on the prepaid loan is deferred, recorded in the basis of the loan, and amortized over the life of the modified loan using the straight-line method, which is not materially different from the level-yield method. This amortization is recorded in interest income. If the modified loan is hedged, it is marked to fair value after the amortization of the basis adjustment. This amortization results in offsetting amounts being recorded in net interest income and “net realized and unrealized gain (loss) on derivatives and hedging activities” in other income. Should the loan not qualify as a modification of the existing loan, the new hedge relationship would not require amortization of the prepayment fee received. Both the new loan and hedging instrument would be marked-to-market and recorded in “net realized and unrealized gain (loss) on derivatives and hedging activities.”

     Commitment Fees. The FHLBank defers and amortizes on a level-yield commitment fees for loans to members when the fee exceeds $50 thousand. Refundable fees are deferred until the commitment expires or until the loan is made and amortized on a level-yield method over the term of the loan.

     Derivatives. All derivatives are recognized on the balance sheet at their fair values. Each derivative is designated as one of the following:

(1)	a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a “fair value” hedge);
(2)	a hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a “cash flow” hedge);
(3)	a non-qualifying hedge of an asset or liability (“economic” hedge) for asset/liability management purposes; or
(4)	a non-qualifying hedge of another derivative (an “intermediation” hedge) that is offered as a product to members or used to offset other derivatives with non-member counterparties.

     Fair Value Hedges. Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in current period net income as “other income — net realized and unrealized gain (loss) on derivatives and hedging activities.”

     When hedge accounting is discontinued because the FHLBank determines that the derivative no longer qualifies as an effective fair value hedge of an existing hedged item, the FHLBank continues to carry the derivative on the balance sheet at its fair value, ceases to adjust the hedged asset or liability for changes in fair value, and begins amortizing the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item. Normally the amortization is reflective of the same method applied to that asset or liability for other premiums and discounts. In some cases the straight-line method, which is not materially different from the level-yield method, is used. For fair value hedges of loans to members and consolidated obligations, the FHLBank uses straight-line amortization, which is not materially different from the level-yield method. For fair value hedges of mortgage loans held for portfolio, the FHLBank uses a proportional

86

paydown method which amortizes the basis adjustment in proportion to the paydown of the mortgage loan, which is not materially different from the level-yield method.

     Cash Flow Hedges. Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income as a component of capital. Earnings are affected by the variability of the cash flows of the hedged transaction. Other comprehensive income is affected as cash flows occur, which, in turn, affects net interest income within the margin.

     When hedge accounting is discontinued because the FHLBank determines that the derivative no longer qualifies as an effective cash flow hedge, the FHLBank continues to carry the derivative on the balance sheet at its fair value. The FHLBank amortizes the cumulative other comprehensive income adjustment to interest income or expense when interest income or expense is affected by the existing hedge item.

     Under limited circumstances, when the FHLBank discontinues cash flow hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period plus the following two months, but it is probable the transaction will still occur in the future, the gain or loss on the derivative remains in accumulated other comprehensive income and is recognized as earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within two months after that, the gains and losses that were accumulated in other comprehensive income are recognized immediately in current period net income.

     Fair Value and Cash Flow Hedge Ineffectiveness. For both fair value and cash flow hedges, any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction) is recorded in current period net income as “other income - - net realized and unrealized gain (loss) on derivatives and hedging activities.”

     Economic and Intermediation Hedges. The derivatives are recorded at fair value on the Statement of Condition with any changes in fair value being recorded in “other income — net realized and unrealized gain (loss) on derivatives and hedging activities.”

     Firm Commitments. Effective July 2003, all firm commitments are marked-to-market and treated as economic hedges. Prior to July 2003, the fair value of firm commitments was hedged. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the FHLBank continues to carry the derivative on the balance sheet at its fair value, removing from the balance sheet any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period net income.

     Embedded Derivatives. The FHLBank may issue debt and make loans to members in which a derivative instrument may be “embedded.” Upon execution of these transactions, the FHLBank assesses whether the economic characteristics of the embedded derivative are (1) clearly and closely related to the economic characteristics of the remaining component of the loan or debt (the host contract) and (2) whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When the FHLBank determines that the economic characteristics are not clearly and closely related and separate non-embedded derivatives with the same terms would meet the definition of a derivative, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument pursuant to an economic hedge. However, if the entire contract is to be measured at fair value, with changes in fair value reported in current period net income, or if the FHLBank cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract is carried on the balance sheet at fair value and no portion of the contract is designated as a hedging instrument.

     Premises and Equipment. The FHLBank records premises and equipment at cost less accumulated depreciation and amortization. The FHLBank computes depreciation on the straight-line method over the estimated useful lives of relevant assets ranging from one to ten years. It amortizes leasehold improvements on the straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The FHLBank capitalizes improvements and major renewals but expenses ordinary maintenance and repairs when incurred. Cost of computer software developed or obtained for internal use is capitalized and amortized over future periods.

     Concessions on Consolidated Obligations. For consolidated obligations issued after October 2001, the FHLBank defers and amortizes, using the level-yield method, the amounts paid to dealers in connection with the sale of consolidated obligation bonds over the term of the bonds. On consolidated obligations issued prior to October 2001, the FHLBank is amortizing concession fees on a straight-line basis, which is not materially different from the level-yield method. The Office

87

of Finance pro-rates the amount of the concession to the FHLBank based upon the percentage of the debt issued that is assumed by the FHLBank. The FHLBank charges to interest expense as incurred the concessions applicable to the sale of consolidated obligation discount notes because of the short maturities of these notes.

     Discounts and Premiums on Consolidated Obligations. The FHLBank amortizes the discounts on consolidated obligation discount notes using the level-yield method over the term of the related notes. It amortizes the discounts and premiums on consolidated bonds to expense using the level-yield method over the term to maturity of the consolidated obligation bonds. Should the consolidated obligation be called prior to maturity, the remaining discount, premium or concession is recorded to interest expense on that date.

     Resolution Funding Corporation (REFCORP) Assessments. Although the FHLBank is exempt from ordinary federal, state, and local taxation except for local real estate tax, it is required to make payments to REFCORP. Each FHLBank is required to pay 20 percent of income calculated in accordance with accounting principles generally accepted in the United States of America (GAAP) after the assessment for AHP, but before the assessment for REFCORP. The AHP and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The Bank accrues its REFCORP assessment on a monthly basis. Calculation of the AHP assessment is discussed in Note 9.

     The Resolution Funding Corporation has been designated as the calculation agent for AHP and REFCORP assessments. Each FHLBank provides their net income before AHP and REFCORP to the Resolution Funding Corporation, who then performs the calculations for each quarter end.

     The FHLBanks will continue to expense these amounts until the aggregate amounts actually paid by all 12 FHLBanks are equivalent to a $300 million annual annuity (or a scheduled payment of $75 million per quarter) whose final maturity date is April 15, 2030, at which point the required payment of each FHLBank to REFCORP will be fully satisfied. The Finance Board in consultation with the Secretary of the Treasury selects the appropriate discounting factors to be used in this annuity calculation. The FHLBanks use the actual payments made to determine the amount of the future obligation that has been defeased. The cumulative amount to be paid to REFCORP by the FHLBank is not determinable at this time because it depends on the future earnings of all FHLBanks and interest rates. If the FHLBank experienced a net loss during a quarter, but still had net income for the year, the FHLBank’s obligation to the REFCORP would be calculated based on the FHLBank’s year-to-date net income. The FHLBank would be entitled to a refund of amounts paid for the full year that were in excess of its calculated annual obligation. If the FHLBank had net income in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the FHLBank experienced a net loss for a full year, the FHLBank would have no obligation to the REFCORP for the year.

     The Finance Board is required to extend the term of the FHLBanks’ obligation to the REFCORP for each calendar quarter in which there is a deficit quarterly payment. A deficit quarterly payment is the amount by which the actual quarterly payment falls short of $75 million.

     The FHLBanks’ aggregate payments through 2004 exceeded the scheduled payments, effectively accelerating payment of the REFCORP obligation and shortening its remaining term to the first quarter of 2019. The FHLBanks’ aggregate payments through 2004 have satisfied $45.1 million of the $75 million scheduled payment for the first quarter of 2019 and all scheduled payments thereafter. This date assumes that all $300 million annual payments required after December 31, 2004 will be made.

     The benchmark payments or portions of them could be reinstated if the actual REFCORP payments of the FHLBanks fall short of $75 million in a quarter. The maturity date of the REFCORP obligation may be extended beyond April 15, 2030 if such extension is necessary to ensure that the value of the aggregate amounts paid by the FHLBanks exactly equals a $300 million annual annuity. Any payment beyond April 15, 2030 will be paid to the Department of Treasury.

     Finance Board and Office of Finance Expenses. The FHLBank is assessed for its proportionate share of the costs of operating the Finance Board, the FHLBank’s primary regulator, and the Office of Finance. The Finance Board allocates its operating and capital expenditures to the FHLBanks based on each FHLBank’s percentage of total capital. The Office of Finance allocates its operating and capital expenditures based on each FHLBank’s percentage of capital stock, percentage of consolidated obligations issued and percentage of consolidated obligations outstanding.

     Estimated Fair Values. Some of the FHLBank’s financial instruments lack an available trading market which is characterized as transactions between a willing buyer and a willing seller. Therefore, the FHLBank uses internal models employing significant estimates and present value calculations when determining and disclosing estimated fair values. The FHLBank assumes that book value approximates fair value for financial instruments with three months or less to repricing or

88

maturity. Note 19 details the estimated fair values of the FHLBank’s financial instruments.

     Cash Flows. In the Statement of Cash Flows, the FHLBank considers cash and due from banks as cash and cash equivalents.

     Earnings per Share. Basic earnings per share of common stock is computed on the basis of weighted average number of shares of capital stock outstanding. Mandatorily redeemable stock is excluded from the calculation. The FHLBank does not have diluted earnings per share because it has no financial instruments convertible to capital stock.

     Reclassifications. Certain amounts in the 2003 and 2002 financial statements have been reclassified to conform to the 2004 presentation. In particular, for the years ended December 31, 2003 and 2002, the FHLBank has reclassified prepayment fee income on the Statement of Operations. Previously, prepayment fee income was classified within other income and is now a separate line item in interest income. As a result of this reclassification, net interest income after provision for credit losses on mortgage loans increased by $6.9 million and $1.0 million (and other income decreased by similar amounts) for the years ended December 31, 2003 and 2002, respectively.

Note 2 —Change in Accounting Principle and Recently Issued Accounting Standards and Interpretations

     EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. In March 2004, the FASB Emerging Issues Task Force (EITF) released Issue 03-1, which addressed other-than-temporary impairment for certain debt and equity investments. The recognition and measurements requirements of Issue 03-1, and other disclosure requirements not already implemented, were to be effective for periods beginning after June 15, 2004. In September, 2004 the FASB staff issued FASB Staff Position EITF 03-1-1, which delayed the effective date for certain measurement and recognition guidance contained in Issue 03-1. The latter Issue, 03-1-1, requires the application of pre-existing other-than-temporary guidance during the delay until a final consensus is reached. The management of FHLBank is not able to determine what impact EITF 03-1 will have on its financial condition or results of operation until a final consensus is issued.

     SFAS 150. The FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (herein referred to as SFAS150) in May 2003. This statement establishes a standard for how certain financial instruments with characteristics of both liabilities and equity are classified in the financial statements and provides accounting guidance for, among other things, mandatorily redeemable financial instruments.

     The FHLBanks adopted SFAS150 as of January 1, 2004. In compliance with SFAS150, the FHLBanks reclassifies capital stock subject to mandatory redemption from equity to liability once a member exercises a written redemption right, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or involuntary termination from membership. Shares of capital stock meeting this definition are reclassified to a liability at fair value. Dividends related to capital stock classified as a liability are accrued at the expected dividend rate and reported as interest expense in the Statement of Operations. The repayment of these mandatorily redeemable financial instruments is reflected as a cash outflow in the financing activities section of the Statement of Cash Flows.

     If a member cancels its written notice of redemption or notice of withdrawal, the FHLBank reclassifies mandatorily redeemable capital stock back from a liability to equity at fair value. After the reclassification, dividends on the capital stock are no longer classified as interest expense.

     For the year ended December 31, 2004, dividends on mandatorily redeemable capital stock reclassified to other liabilities in the amount of $249 thousand were recorded as interest expense on other borrowings.

     Although the mandatorily redeemable capital stock is not included in capital for financial reporting purposes, such outstanding stock is considered capital for regulatory purposes. See Note 15 for more information, including significant restrictions on stock redemption.

     Adoption of SOP 03-3. The American Institute of Certified Public Accountants issued Statement of Position 03-3 (herein referred to as “SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer in December 2003. SOP 03-3 provides guidance on the accounting for differences between contractual and expected cash flows from the purchaser’s initial investment in loans or debt securities acquired in transfer, if those differences are attributable, at least in part, to credit quality. SOP 03-3 had no impact on the FHLBank upon becoming effective on January 1, 2005.

89

     Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154) during the 2^nd Quarter of 2005. Effective for fiscal years beginning after December 15, 2005 with early adoption encouraged, SFAS 154 replaces Accounting Principles Board Opinion No. 20, Accounting Changes (APB 20) and Statement of Financial Accounting Standards No. 3, Reporting Accounting Changes in Interim Periods (SFAS 3). SFAS 154 applies to all voluntary changes in accounting principle and also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. Retrospective application is defined as the application of a different accounting principle to prior periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. SFAS 154 also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. This statement carries forward without change the guidance contained in APB 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS 154 also carries forward the guidance in APB 20 requiring justification of a change in accounting principle on the basis of preferability. The FHLBank does not currently anticipate SFAS 154 to have a material impact on its statement of condition, operation, or cash flow.

     FASB Interpretation No. 46(R) – Consolidation of Variable Interest Entities (herein referred to as FIN 46). In January 2003, the FASB issued FIN 46, which provides guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE are to be included in an entity’s financial statements. During 2004, management evaluated the applicability of FIN 46 and determined that adoption of its provisions would not have a material impact on its financial condition, results of operation or cash flows. The FHLBank does not have any special purpose entities or any other type of off-balance-sheet conduits.

     Accounting Adjustments. During 2004, the FHLBank changed the manner in which it assesses effectiveness for certain highly effective consolidated obligation hedging relationships. Under the prior approach, the FHLBank inappropriately assumed no ineffectiveness for these hedging transactions since the consolidated obligation and the designated interest rate swap agreement had identical terms with the exception that the interest rate swaps used in these relationships were structured with one settlement amount under the pay side of the swap that differed from all other pay-side settlements by an amount equivalent to the concession cost associated with the consolidated obligation. Under the new approach, the FHLBank measures effectiveness for such transactions during each reporting period. If this approach had been applied previously, the effect would not have been material to the FHLBank’s financial condition or results of operations for any prior reporting period. The adjustment resulting from this change is included in “other income — net realized and unrealized gain (loss) on derivatives and hedging activities” in the Statement of Operations. Before assessments, the prior period adjustment increased net income by approximately $727 thousand during the year ended December 31, 2004.

     Change in Amortization and Accretion Method of Deferred Premiums and Discounts on Mortgage Loans. Amortization and accretion on premiums and discounts on mortgage-backed securities (MBS) and mortgage loans have been computed by the contractual method in accordance with Statement of Financial Accounting Standards No. 91,“Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases” (SFAS91), beginning in the quarter ended June 30, 2004, for the MBS and September 30, 2004, for the mortgage loans. Previously, amortization and accretion of premiums and discounts were computed using the estimated-life method. The estimated-life method requires a retrospective adjustment each time the FHLBank changed the estimated remaining life of the assets. The retrospective adjustment was intended to correct prior reported amounts as if the new estimate had been known since the original acquisition date of the assets. While both methods are acceptable under GAAP, the FHLBank believes that the contractual method is preferable to the estimated-life method because under the contractual method, the income effects of premiums and discounts are recognized in a manner that reflects the actual behavior of the underlying assets during the period in which the behavior occurs while also reflecting the contractual terms of the assets. In contrast, the estimated-life method is a retrospective view including estimates based on assumptions about future borrower behavior.

     The contractual method was applied retroactively as of January 1, 2004, for amortization and accretion of premiums and discounts on MBS and mortgage loans. For MBS, the cumulative effect of the change on prior years (after reduction of $70 thousand for REFCORP and AHP assessments) was $193 thousand. For mortgage loans, the cumulative effect of the change on prior years (after reduction of $2.2 million for REFCORP and AHP assessments) was $6.0 million. Both amounts are included in income for the year ended December 31, 2004.

90

     The pro forma results, assuming the new amortization/accretion method had been applied retroactively, is as follows (in thousands):

	Year Ended
	December 31,
	2004		2003
Income before cumulative effect of a change in accounting principle	$	92,313	$	27,706
Cumulative effect on prior years (to December 31, 2003) of changing to the contractual method of amortization/accretion
Mortgage-backed securities		263		—
Mortgage loans		8,150		—
Net income	$	100,726	$	27,706
Pro forma amounts assuming the contractual mortgage loan and MBS amortization/accretion method had been applied retroactively:
Impact on mortgage loans		—		3,315
Impact on MBS		—		72
Pro forma net income	$	92,313	$	31,093

     Banking on Business (BOB) Program. The FHLBank’s BOB program was developed to assist in the growth and development of small businesses in the FHLBank’s district. The FHLBank’s agreement with members, and the members’ agreement with the small business customer participant, does not include an absolute promise to repay.

     In 2000 the FHLBank of Pittsburgh established and started funding a program called Banking on Business (BOB) with member banks. The intent of the FHLBank with respect to BOB has always been to use BOB as a grant (gift-giving) program to member banks to help facilitate community economic development. Specifically, the FHLBank did not initially expect to collect the funds distributed under the program and if the funds were not repaid, the FHLBank would not pursue collection. Although the intent of the program is to give to the communities and to not expect repayment, the repayment provisions within the program terms do not reflect this intention. In general, the basic terms of a commitment to a member bank under the BOB program are as follows: 1) the committed funds are unsecured, 2) no repayment is due for the first two years, 3) repayments are due once annually on the condition that the member bank has been paid, and 4) the maturity dates are ten years. Based on the repayment terms of the BOB program contracts, BOB appears to meet the definition of a loan program. A loan is defined as a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor’s statement of financial position. The FHLBank felt it was appropriate to change the accounting for BOB from that of a grant (gift-giving) program, to that of a loan program, whereby an asset (loan receivable) would be recorded and an allowance for loan losses would be estimated and established through provision expense. As of December 31, 2004 the FHLBank recorded adjusting entries to reflect the cumulative effect of an error correction pertaining to BOB in our financial statements. The FHLBank recorded a $12.9 million asset and a $9.9 million allowance, which results in a net asset balance of $3 million. The 4^th Quarter 2004 income statement impact resulted in an increase of income before assessments of $5.9 million. The increase in AHP and REFCORP assessments of $1.6 million resulted in an overall increase in net income of $4.3 million for the 4^th Quarter of 2004. BOB related loans are grouped with “Other assets” on the Statement of Condition. BOB related income is recorded net of the provision for loss and grouped with “Other expense” on the Statement of Operations. On a go forward basis the FHLBank will adjust the allowance for loan losses based on actual experience.

Note 3—Cash and Due from Banks

     Compensating Balances. The FHLBank maintains cash balances at commercial banks in return for certain services. These agreements contain no legal restrictions about the withdrawal of funds. The average compensating balances for the years ended December 31, 2004 and 2003, were approximately $14.3 and $17.0 million, respectively.

     In addition, the FHLBank maintained average required clearing balances with various Federal Reserve Banks and branches of approximately $30 thousand for the years ended December 31, 2004 and 2003. These are required clearing balances and may not be withdrawn; however, the FHLBank may use earnings credits on these balances to pay for services received from the Federal Reserve Banks.

91

     Pass-through Deposit Reserves. The FHLBank acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. The amount shown as cash and due from banks includes pass-through reserves deposited with Federal Reserve Banks of approximately $31.0 million and $21.8 million as of December 31, 2004 and 2003, respectively. The FHLBank includes member reserve balances in other liabilities on the Statement of Condition.

Note 4 – Premises and Equipment

Premises and equipment consisted of the following (in thousands)

	December 31
	2004		2003
Computer Hardware & Software	$	21,196	$	18,128
Furniture		2,497		2,397
Leasehold Improvements		2,302		1,848
Equipment & Other		1,677		1,665
	$	27,672	$	24,038
Accumulated depreciation and amortization		18,732		15,966
	$	8,940	$	8,072

     Depreciation and amortization expense was $2.9 million, $3.1 million and $2.8 million for the years ended December 31, 2004, 2003 and 2002, respectively. Gains and losses on disposal of premises and equipment are included in other income. The net realized loss on disposal of premises and equipment was $140 thousand, $26 thousand, and $2 thousand for the years ended December 31, 2004, 2003 and 2002, respectively.

     During the year ended December 31, 2004, the FHLBank capitalized $2.3 million in costs associated with computer software being developed for internal use.

Note 5—Trading Securities

     Major Security Types as of December 31, 2004 and 2003 were as follows (in thousands):

	2004		2003
State or local agency obligations	$	222,000	$	222,000
Mortgage-backed securities
U.S. agency-guaranteed		19,908		30,421
Government-sponsored enterprises		69,398		102,205
		89,306		132,626
Total	$	311,306	$	354,626

     Net gain (loss) on trading securities for the years ended December 31, 2004, 2003 and 2002 included a change in net unrealized holding gain of ($3.3) million, $9.8 million and ($6.5) million for trading securities held on December 31, 2004, 2003 and 2002, respectively.

     Although these securities are classified as “trading,” the FHLBank is prohibited by regulation from trading activities. The FHLBank has, however, periodically sold securities from the Trading category. In December 2003, the FHLBank sold approximately $69.0 million of trading securities; these securities had been held by the FHLBank for approximately nine months. $222 million of the trading securities held as of December 31, 2004 have been classified as trading since the date of purchase in 2002. The remaining $89 million were transferred from held-to-maturity to trading in 2001 in conjunction with the adoption of SFAS 133.

92

Note 6—Available-for-Sale Securities

     Available-for-sale securities as of December 31, 2004, were as follows (in thousands):

			Gross Unrealized		Gross Unrealized			Estimated Fair
	Amortized Cost		Gains		Losses			Value
Mortgage-backed securities-other	$	626,325	$	375	$	(93	)	$	626,607

     Available-for-sale securities with unrealized losses as of December 31, 2004 had a fair value of $108.0 million and have been in an unrealized loss position for less than 12 months.

     Available-for-sale securities as of December 31, 2003, were as follows (in thousands):

			Gross Unrealized		Gross Unrealized			Estimated Fair
	Amortized Cost		Gains		Losses			Value
Mortgage-backed securities-other	$	357,555	$	—	$	(40	)	$	357,515

     Available-for-sale securities with unrealized losses as of December 31, 2003 had a fair value of $127.2 million and have been in an unrealized loss position for less than 12 months.

     The FHLBank reviewed its investment security holdings and determined that all unrealized losses reflected above are temporary. Factors reviewed included the creditworthiness of the issuers and the underlying collateral. Additionally, the FHLBank has the ability and the intent to hold such securities through to recovery of the unrealized losses.

     Redemption Terms. Contractual maturity of mortgage-backed securities-other will occur over a period exceeding 10 years. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

     The amortized cost of the FHLBank’s mortgage-backed securities classified as available-for-sale includes net discounts of $73 thousand and $6 thousand at December 31, 2004 and 2003, respectively.

     Interest Rate Payment Terms. All mortgage-backed securities are variable-rate.

     A gross gain of $5.5 million and a gross loss of $1.4 million were realized in the year ended December 31, 2003. No gains or losses were reported in the years ended December 31, 2004 and 2002.

93

Note 7—Held-to-Maturity Securities

     Major Security Types. Held-to-maturity securities as of December 31, 2004, were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Commercial paper	$	69,939	$	—	$	—		$	69,939
Other U.S. Obligations		10,598		349		—			10,947
Government-sponsored enterprises		200,000		1,180		—			201,180
State or local agency obligations		553,874		15,984		(755	)		569,103
		834,411		17,513		(755	)		851,169
Mortgage-backed securities:
U.S. agency-guaranteed		139,150		325		(1,988	)		137,487
Government-sponsored enterprises		1,443,608		1,451		(61,546	)		1,383,513
Other		5,969,256		5,752		(86,371	)		5,888,637
		7,552,014		7,528		(149,905	)		7,409,637
Total	$	8,386,425	$	25,041	$	(150,660	)	$	8,260,806

     Held-to-maturity securities as of December 31, 2003, were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Commercial paper	$	239,889	$	—	$	—			239,889
Other U.S. Obligations		17,039		1,284		—			18,323
Government-sponsored enterprises		679,573		8,907					688,480
State or local agency obligations		614,298		26,890		—			641,188
		1,550,799		37,081		—			1,587,880
Mortgage-backed securities:
U.S agency-guaranteed		193,382		872		(269	)		193,985
Government-sponsored enterprises		1,609,965		20,026		(39,409	)		1,590,582
Other		4,090,328		11,563		(63,008	)		4,038,883
		5,893,675		32,461		(102,686	)		5,823,450
Total	$	7,444,474	$	69,542	$	(102,686	)	$	7,411,330

     Restricted securities relating to the FHLBank Shared Funding Program are classified as held-to-maturity and are included in other mortgage-backed securities as identified above. They are reported at amortized costs of $90.4 million and $121.1 million as of December 31, 2004 and 2003, respectively. Held-to-maturity securities of $117.3 million and $307.5 million have been pledged as collateral that may be repledged as of December 31, 2004 and 2003, respectively.

94

     The following table summarizes the held-to-maturity securities with unrealized losses as of December 31, 2004. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (in thousands).

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
State or local agency obligations	$	—	$	—		$	11,810	$	(755	)	$	11,810	$	(755	)
Mortgage-backed securities:
U.S. agency-guaranteed		96,759		(1,988	)		—		—			96,759		(1,988	)
Government-sponsored enterprises		744,770		(17,289	)		565,760		(44,257	)		1,310,530		(61,546	)
Other		3,043,930		(51,618	)		1,397,553		(34,753	)		4,441,483		(86,371	)
		3,885,459		(70,895	)		1,963,313		(79,010	)		5,848,772		(149,905	)
Total	$	3,885,459	$	(70,895	)	$	1,975,123	$	(79,765	)	$	5,860,582	$	(150,660	)

     The following table summarizes the held-to-maturity securities with unrealized losses as of December 31, 2003 (in thousands).

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Mortgage-backed securities:
U.S agency-guaranteed	$	96,819	$	(270	)	$	—	$	—		$	96,819	$	(270	)
Government- sponsored enterprises		966,465		(39,382	)		2,364		(26	)		968,829		(39,408	)
Other		2,814,775		(62,822	)		138,753		(186	)		2,953,528		(63,008	)
	$	3,878,059	$	(102,474	)	$	141,117	$	(212	)	$	4,019,176	$	(102,686	)

     The FHLBank reviewed its investment security holdings and has determined that all unrealized losses reflected above are temporary. Factors reviewed included the creditworthiness of the issuers and the underlying collateral. Additionally, the FHLBank has the ability and the intent to hold such securities through to recovery of the unrealized losses. At December 31, 2004 and 2003 there were no securities with unrealized losses that were deemed to be classified as other than temporary.

     Redemption Terms. The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at December 31 are shown below (in thousands). Expected maturities of some securities and mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

	2004				2003
	Amortized		Estimated		Amortized		Estimated
Year of Maturity	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	269,939	$	271,119	$	719,462	$	721,729
Due after one year through five years		46,618		48,725		260,799		272,394
Due after five years through ten years		143,984		155,158		142,043		162,159
Due after ten years		373,870		376,167		428,495		431,598
		834,411		851,169		1,550,799		1,587,880
Mortgage-backed securities		7,552,014		7,409,637		5,893,675		5,823,450
Total	$	8,386,425	$	8,260,806	$	7,444,474	$	7,411,330

     The amortized cost of the FHLBank’s mortgage-backed securities classified as held-to-maturity includes net discounts of $52.2 million and $59.8 million at December 31, 2004 and 2003, respectively.

95

     Interest Rate Payment Terms. The following table details interest rate payment terms for investment securities classified as held-to-maturity at December 31, 2004 and 2003 (in thousands):

	2004		2003
Amortized cost of held-to-maturity securities other than mortgage-backed securities:
Fixed-rate	$	498,491	$	1,237,704
Variable-rate		335,920		313,095
		834,411		1,550,799
Amortized cost of held-to-maturity mortgage-backed securities:
Fixed-rate		7,129,999		5,582,546
Variable-rate		422,015		311,129
		7,552,014		5,893,675
Total	$	8,386,425	$	7,444,474

     Gains and Losses on sale of HTM Securities. Gross gains of $2.6 million and $2.5 million were realized on sales of $68.7 million and $86.7 million of held-to-maturity securities for the years ended December 31, 2004 and 2003, respectively. There were no realized gains or realized losses on sales of held-to-maturity securities for the year ended December 31, 2002. A $2.6 million net gain in 2004 related to the sale of a municipal security investment that was deemed to have undergone a decline in value as a result of a deterioration in the issuer’s creditworthiness as evidenced by two rating agency downgrades. Although the security was deemed to have undergone a decline in value due to the issuer’s creditworthiness, the realizable market value still exceeded the carrying value of the security, and as such, a gain was realized upon the sale.

     A net gain of $2.5 million in 2003 is related to the sale of mortgage-backed securities with remaining principal balances of less than 15% of the original purchase balances.

Note 8—Loans to Members

     Redemption Terms. At December 31, 2004 and 2003, the FHLBank had loans to members outstanding at interest rates ranging from 0% to 8.56% and (2.23)% to 8.56%, respectively, as summarized below (in thousands). Subsidized AHP advances have interest rates ranging between 0% and 6.5%.

	2004						2003
				Weighted						Weighted
				Average						Average
				Interest						Interest
Year of Maturity	Amount			Rate %			Amount			Rate %
Overdrawn demand deposit accounts	$	2,172			8.39	%	$	2,540			8.53	%
2004		—			—			12,330,446			1.26
2005		16,251,358			2.36			3,431,313			2.89
2006		4,285,225			3.01			2,122,913			3.06
2007		3,282,412			3.43			1,416,288			3.59
2008		3,264,278			4.47			3,408,880			4.63
2009		2,278,460			4.35			1,443,657			4.90
Thereafter		8,865,111			5.20			9,068,690			5.28
Index amortizing loans to members		86,824			2.40			113,055			1.73
Total par value		38,315,840			3.48	%		33,337,782			3.24	%
Discount on AHP advances		(2,058	)					(2,389	)
Premium on loans to members		38						47
SFAS 133 hedging adjustments		675,306						1,336,547
Total	$	38,989,126					$	34,671,987

     Index amortizing loans require repayment according to predetermined amortization schedules linked to the level of various indices. Usually, as market interest rates rise (fall), the maturity of an index amortizing loan to member extends (contracts).

96

     The FHLBank offers callable loans to members that may be prepaid on pertinent call dates without incurring prepayment or termination fees. Other loans to members may be prepaid only by paying a prepayment fee to the FHLBank that makes the FHLBank financially indifferent to the prepayment of the loan. At December 31, 2004 and 2003, the FHLBank had callable loans of $513 million and $512 million, respectively.

     The following table summarizes loans to members at December 31, 2004 and 2003, by year of maturity or next call date for callable loans to members (in thousands):

Year of Maturity or Next Call Date	2004		2003
Overdrawn demand deposit accounts	$	2,172	$	2,540
2004	$	—	$	12,841,946
2005		16,459,858		3,127,313
2006		4,085,225		1,922,913
2007		3,282,412		1,416,288
2008		3,257,778		3,402,380
2009		2,278,460		1,443,657
Thereafter		8,863,111		9,067,690
Index amortizing loans to members		86,824		113,055
Total par value	$	38,315,840	$	33,337,782

     The FHLBank also offers convertible loans to members. With a convertible loan, the FHLBank effectively purchases a put option from the member that allows the FHLBank to convert the fixed-rate loan to a floating-rate loan at certain specified intervals during the term of the loan. The FHLBank normally exercises this option when interest rates increase. At December 31, 2004 and 2003, the FHLBank had convertible loans outstanding totaling $12.2 billion and $13.6 billion, respectively.

     The following table summarizes loans to members at December 31, 2004 and 2003, by year of maturity or next put date for convertible loans (in thousands):

Year of Maturity or Next Put Date	2004		2003
Overdrawn demand deposit accounts	$	2,172	$	2,540
2004		—		24,250,621
2005		27,219,603		3,541,913
2006		4,524,325		2,199,513
2007		3,116,912		1,206,788
2008		1,365,778		891,380
2009		1,109,710		381,907
Thereafter		890,516		750,065
Index amortizing loans to members		86,824		113,055
Total par value	$	38,315,840	$	33,337,782

     Security Terms. The FHLBank lends to financial institutions involved in housing finance within its district according to federal statutes, including the FHLBank Act. The FHLBank Act requires the FHLBank to obtain sufficient collateral on loans to members to protect against losses and to accept only certain U.S. government or government agency securities, residential mortgage loans, cash or deposits and member capital stock in the FHLBank, and other eligible real estate-related assets as collateral on such loans to members. However, Community Financial Institutions (CFIs) are eligible to utilize expanded statutory collateral provisions dealing with loans to small business or agriculture. At December 31, 2004 and 2003, the FHLBank had rights to collateral with an estimated value greater than its outstanding loans to members. Based upon the financial condition of the member, the FHLBank:

     (1) Allows a member to retain possession of the collateral assigned to the FHLBank, if the member executes a written security agreement and agrees to hold such collateral for the benefit of the FHLBank; or

     (2) Requires the member specifically to assign or place physical possession of such collateral with the FHLBank or its safekeeping agent.

97

     Beyond these provisions, Section 10(e) of the Act affords any security interest granted by a member to the FHLBank priority over the claims or rights of any other party. The exceptions are those claims that would be entitled to priority under otherwise applicable law and are held by bona fide purchasers for value or by secured parties with perfected security interests.

     Credit Risk. While the FHLBank has never experienced a credit loss on a loan to a member, loans to nonmember housing associates and the expanded eligible collateral for loans to CFIs provide the potential for additional credit risk. The management of the FHLBank has the policies and procedures in place to appropriately manage this credit risk. Accordingly, the FHLBank has not provided any allowances for losses on loans to members.

     The FHLBank’s potential credit risk from loans to members is concentrated in commercial banks and savings institutions. At December 31, 2004, the FHLBank had $9.7 billion in loans outstanding to one member institution, representing approximately 25% of total loans to members. At December 31, 2003, the FHLBank had $10.8 billion in loans outstanding to two member institutions, representing approximately 31% of the total loans to members. The income from loans to these member institutions amounted to approximately $229.5 million and $275.5 million during the years ended December 31, 2004 and 2003, respectively. The FHLBank held sufficient collateral to cover the loans to members, and the FHLBank does not expect to incur any credit losses on these advances.

     Interest Rate Payment Terms. The following table details additional interest rate payment terms for loans to members at December 31, 2004 and 2003 (in thousands):

	2004		2003
Par amount of loans to members:
Fixed-rate – overnight	$	6,091,178	$	6,287,147
Fixed-rate – other		29,305,896		23,853,466
Variable-rate		2,918,766		3,197,169
Total	$	38,315,840	$	33,337,782

Note 9—Affordable Housing Program

     Section 10(j) of the FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the AHP the greater of $100 million or 10 percent of regulatory income. Regulatory income is defined as GAAP income before interest expense related to mandatorily redeemable capital stock under SFAS 150 and the assessment for AHP, but after the assessment for REFCORP. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory calculation determined by the Finance Board. The AHP and REFCORP assessments are calculated simultaneously because of their interdependence on each other. The FHLBank accrues this expense monthly based on its income. The FHLBank reduces the AHP liability as members use subsidies. The calculation of the REFCORP assessment is discussed in Note 1.

     The FHLBank charges the amount set aside for AHP to income and recognizes it as a liability. The FHLBank relieves the AHP liability as members use subsidies. In periods where the FHLBank regulatory income before AHP and REFCORP is zero or less, the amount of AHP liability is equal to zero, barring application of the following. If the result of the aggregate 10 percent calculation described above is less than $100 million for all 12 FHLBanks, then the FHLBank Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income before AHP and REFCORP to the sum of the income before AHP and REFCORP of the 12 FHLBanks. There was no shortfall in 2004, 2003 or 2002. The FHLBank had outstanding principal in AHP-related advances of $13.6 million and $14.5 million at December 31, 2004 and 2003, respectively.

98

     Following is a roll-forward of the AHP liability for the years ended December 31, 2004 and 2003 (in thousands):

Balance at 12/31/02	$	26,145
Committed Subsidy, net		(7,649	)
HBEF Set aside(1), net		(213	)
Uncommitted Pool, net		(876	)
Balance at 12/31/03		17,407
Committed Subsidy, net		(1,875	)
HBEF Set aside(1), net		127
Uncommitted Pool, net		7,703
Balance at 12/31/04	$	23,362

⁽¹⁾  Home Buyer Equity Fund – The FHLBank allocates 25% of the AHP subsidy pool on an annual basis to this program, which benefits qualifying first-time homebuyers.

Note 10—Mortgage Loans Held for Portfolio

     Under the MPF® Program, the FHLBank’s members originate, service, and credit enhance home mortgage loans that are then sold to the FHLBank. The FHLBank sells participation interests in some of its MPF® Program loans to other FHLBanks, and holds the rest in portfolio. The following table presents information as of December 31, 2004, and 2003 on mortgage loans held for portfolio for the foreseeable future (in thousands):

	2004			2003
Real Estate:
Fixed medium-term* single-family mortgages	$	1,808,119		$	1,739,005
Fixed long-term single-family mortgages		6,706,276			6,105,461
Premiums		122,661			128,850
Discounts		(27,773	)		(6,512	)
SFAS 133 hedging adjustments		55,948			98,995
Total mortgage loans held for portfolio	$	8,665,231		$	8,065,799

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

     The par value of mortgage loans held for portfolio outstanding at December 31, 2004 and 2003, was comprised of government-insured loans totaling $1.1 billion and $1.6 billion and conventional loans totaling $7.4 billion and $6.2 billion, respectively.

Note 11—Allowance for Credit Losses

(Note: Information presented excludes BOB related loan balances and activity.)

     The allowance for credit losses was as follows (in thousands):

	2004		2003			2002
Allowance for Credit Losses:
Balance, beginning of year	$	514	$	661		$	91
Revision in estimate		—		(1,214	)		—
Provision for credit losses		166		1,067			570
Balance, end of year	$	680	$	514		$	661

     During the third quarter of 2003, the FHLBank revised its estimate of required credit losses based on a methodology change. The revision resulted in an overall decrease to the credit loss reserve of $1.2 million.

     At December 31, 2004 and 2003, the FHLBank had $13.6 million and $10.3 million, respectively, of non-accrual loans which represent loans delinquent by 90 days of more. At December 31, 2004 and 2003, the FHLBank’s other assets included $2.4 million and $0.8 million, respectively, of other real estate owned.

99

     At December 31, 2004 and 2003 the FHLBank’s total exposure within the First Loss Account was $41.8 million and $32.4 million, respectively. This exposure includes both accrual and non-accrual loans.

Note 12—Deposits

     The FHLBank offers demand and overnight deposits for members and qualifying nonmembers. In addition, the FHLBank offers short-term deposit programs to members. A member that services mortgage loans may deposit in the FHLBank funds collected in connection with the mortgage loans, pending disbursement of such funds to the owners of the mortgage loans. The weighted average interest rates paid on outstanding deposits were 1.13%, 0.95% and 1.44% for the years ended December 31, 2004, 2003 and 2002, respectively.

Note 13—Borrowings

     Securities Sold Under Agreements to Repurchase. The FHLBank has sold securities under repurchase agreements. The amounts received under these agreements represent short-term borrowings and are liabilities on the Statement of Condition. The FHLBank has delivered securities sold under agreements to repurchase to the primary dealer. Should the market value of the underlying securities fall below the market value required as collateral, the FHLBank must deliver additional securities to the dealer. The FHLBank had no securities sold under agreements to repurchase at December 31, 2004 and 2003.

     Loans from Other FHLBanks. There were no short-term principal amounts of uncollateralized loans from other FHLBanks outstanding at December 31, 2004. There were $60.0 million of uncollateralized loans from other FHLBanks outstanding with a .91% interest rate at December 31, 2003.

Note 14—Consolidated Obligations

     Consolidated obligations are the joint and several obligations of the FHLBanks and consist of consolidated bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. The specific consolidated obligations issued on the behalf of the FHLBank are recognized within the Statement of Condition. Consolidated bonds are issued primarily to raise intermediate and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated discount notes are issued primarily to raise short-term funds. These notes sell at less than their face amount and are redeemed at par value when they mature.

     The Finance Board, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations. Although it has never occurred, to the extent that an FHLBank would make a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Board determines that the non-complying FHLBank is unable to satisfy its obligations, then the Finance Board may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Board may determine.

     The par amounts of the FHLBanks’ outstanding consolidated obligations, including consolidated obligations held by other FHLBanks, were approximately $ 869.2 billion and $759.5 billion at December 31, 2004 and 2003, respectively. Regulations require the FHLBank to maintain unpledged qualifying assets equal to its participation of the consolidated obligations outstanding. Qualifying assets are defined as (1) cash; (2) obligations of, or fully guaranteed by, the United States; (3) secured loans; (4) mortgages which have any guaranty, insurance or commitment from the United States or Federal agency; (5) investments described in Section 16(a) of the FHLBank Act, which includes securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located; and (6) other securities that are rated triple-A by Moody’s Investor Service or Standard and Poor’s.

     To provide the holders of consolidated obligations issued before January 29, 1993 (prior bondholders) the protection equivalent to that provided under the FHLBanks’ previous leverage limit of 12 times the FHLBanks’ capital stock, prior bondholders have a claim on a certain amount of the qualifying assets [Special Asset Account (SAA)] if capital stock is less than 8.33% of consolidated obligations. At December 31, 2004 and 2003, the FHLBanks’ capital stock was 4.5% and 5.0%, respectively, of the par value of consolidated obligations outstanding, and the required minimum unpledged qualifying asset balance was approximately $219 thousand and $24.0 million, respectively. Further, the regulations require each FHLBank to transfer qualifying assets in the amount of its allocated share of the FHLBanks’ SAA to a trust for the benefit of the prior bondholders if its capital-to-assets ratio falls below 2.0%. As of December 31, 2004 and 2003 there was no FHLBank with a capital-to-assets ratio less than 2.0%; therefore, no assets were being held in a trust. In addition, no trust has ever been

100

established as a result of this regulation because the ratio has never fallen below 2.0%.

     General Terms. Consolidated obligations are issued with either fixed-rate coupon payment terms or variable-rate coupon payment terms that use a variety of indices for interest rate resets including the London Interbank Offered Rate (LIBOR), Constant Maturity Treasury (CMT), 11th District Cost of Funds Index (COFI), and others. In addition, to meet the expected specific needs of certain investors in consolidated obligations, both fixed-rate bonds and variable-rate bonds may also contain certain features, which may result in complex coupon payment terms and call options. When such consolidated obligations are issued, the FHLBank enters into derivatives containing offsetting features that effectively convert the terms of the bond to those of a simple variable-rate bond or a fixed-rate bond.

     These consolidated obligations, beyond having fixed-rate or simple variable-rate coupon payment terms, may also have the following broad terms regarding either principal repayment or coupon payment terms:

     Indexed Principal Redemption Bonds (index amortizing notes) repay principal according to predetermined amortization schedules that are linked to the level of a certain index. As of December 31, 2004 and 2003, most of the index amortizing notes had fixed-rate coupon payment terms. Usually, as market interest rates rise (fall), the maturity of the index amortizing notes extends (contracts);

     Optional Principal Redemption Bonds (callable bonds) that the FHLBank may redeem in whole or in part at its discretion on predetermined call dates according to the terms of the bond offerings.

     With respect to interest payments, consolidated bonds may also have the following terms:

     Step-up Bonds generally pay interest at increasing fixed rates at specified intervals over the life of the bond. These bonds generally contain provisions enabling the FHLBank to call bonds at its option on the step-up dates;

     Conversion Bonds have coupons that the FHLBank may convert from fixed to floating, or floating to fixed, or from one U.S. or other currency index to another, at its discretion;

     Range Bonds pay interest at variable rates provided a specified index is within a range. The computation of the variable interest rate differs for each bond issue, but the bond generally pays zero interest or a minimal rate of interest if the specified index is outside the range;

     Comparative-Index Bonds have coupon rates determined by the difference between two or more market indices, typically Prime, CMT and LIBOR;

     Zero-Coupon Bonds are long-term discounted instruments that earn a fixed yield to maturity or the optional principal redemption date. All principal and interest are paid at maturity or on the optional principal redemption date, if exercised prior to maturity.

     The FHLBank has no outstanding consolidated obligations denominated in currencies other than U.S. dollars.

     Interest Rate Payment Terms. The following table details interest rate payment terms for consolidated bonds at December 31, 2004 and 2003 (in thousands). Range bonds are classified as comparative-index bonds.

	2004		2003
Par value of consolidated bonds:
Fixed-rate	$	30,181,568	$	25,441,375
Step-up		4,756,530		4,653,460
Simple variable-rate		301,000		3,106,625
Fixed that converts to variable		589,380		375,000
Variable that converts to fixed		3,696,000		721,000
Comparative-index		743,000		999,200
Zero-coupon		4,630,900		5,064,850
Other		5,386		8,339
Total par value	$	44,903,764	$	40,369,849

101

     Redemption Terms. The following is a summary of the FHLBank’s participation in consolidated bonds outstanding at December 31, 2004 and 2003, by year of maturity (in thousands):

	2004					2003
				Weighted					Weighted
				Average					Average
				Interest					Interest
Year of Maturity	Amount			Rate %		Amount			Rate %
2004	$	—			—	$	9,969,850			2.93
2005		9,698,200			2.44		4,858,000			2.89
2006		9,903,003			2.84		5,294,139			3.04
2007		4,718,345			3.30		2,277,050			4.05
2008		3,683,380			3.78		3,731,535			3.64
2009		3,153,530			3.75		950,000			4.41
Thereafter		12,646,900			2.98		13,096,750			5.49
Index amortizing notes		1,100,406			4.04		192,525			3.73
Total par value		44,903,764			3.01		40,369,849			3.94
Bond premiums		25,621					22,556
Bond discounts		(3,723,512	)				(4,052,614	)
SFAS 133 hedging adjustments		177,648					282,026
Total	$	41,383,521				$	36,621,817

     Consolidated bonds outstanding at December 31, 2004 and 2003 include callable bonds totaling $27.6 billion and $25.8 billion, respectively. The FHLBank uses a portion of its outstanding fixed-rate callable debt to finance callable loans to members (see Note 8) and mortgage-backed securities.

     The FHLBank’s consolidated bonds outstanding at December 31 includes (in thousands):

	2004		2003
Par amount of consolidated bonds:
Non-callable	$	17,287,295	$	14,561,989
Callable		27,616,469		25,807,860
Total par value	$	44,903,764	$	40,369,849

     The following table summarizes consolidated bonds outstanding at December 31, 2004 and 2003, by year of maturity or next call date (in thousands):

Year of Maturity or Next Call Date	2004		2003
2004	$	—	$	27,579,135
2005		25,998,663		4,444,050
2006		8,282,400		2,086,139
2007		1,844,295		550,000
2008		3,999,000		3,934,000
2009		2,220,000		900,000
Thereafter		1,459,000		684,000
Index amortizing notes		1,100,406		192,525
Total par value	$	44,903,764	$	40,369,849

     Consolidated Discount Notes. Consolidated discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to 360 days. These notes are issued at less than their face amount and redeemed at par value when they mature.

102

     The FHLBank’s participation in consolidated discount notes, all of which are due within one year, was as follows (in thousands):

					Weighted
					Average
	Book Value		Par Value		Interest Rate
December 31, 2004	$	15,160,634	$	15,173,091		1.86	%
December 31, 2003	$	11,536,705	$	11,542,000		.91	%

     The FHLBank Act authorizes the Secretary of the Treasury, at his or her discretion, to purchase consolidated obligations of the FHLBanks aggregating not more than $4.0 billion. The terms, conditions, and interest rates are determined by the Secretary of the Treasury. There were no such purchases by the U.S. Treasury during the two years ended December 31, 2004.

Note 15—Capital

     The Gramm-Leach-Bliley Act (GLB Act) required a number of changes in the capital structure of all FHLBanks. The final Finance Board capital rule was published on January 30, 2001, and required each FHLBank to submit a capital structure plan to the Finance Board by October 29, 2001 in accordance with the provisions of the GLB Act and final capital rules. The Finance Board approved the FHLBank’s capital plan on May 8, 2002. The FHLBank converted to its new capital structure on December 16, 2002 and was in compliance with its capital plan on the conversion date. The conversion was considered a capital transaction and was accounted for at par value.

     The FHLBank is subject to three capital requirements under the current capital structure plan. First, the FHLBank shall maintain at all times permanent capital in an amount at least equal to the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, calculated in accordance with the rules and regulations of the Finance Board. Only “permanent capital,” defined as retained earnings plus capital stock, satisfies the risk-based capital requirement. The Finance Board may require the FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirements as defined. In addition, the GLB Act requires the FHLBank to maintain at all times at least a 4.0% capital-to-asset ratio and at least a 5.0% leverage ratio, defined as the sum of permanent capital weighed 1.5 times and non-permanent capital weighed 1.0 times divided by total assets. The FHLBank was in compliance with the aforementioned capital rules and requirements at December 31, 2004 and 2003. The FHLBank was in compliance with the capital rules at December 31, 2004, with a 6.9 percent leverage ratio and weighted leverage capital of $4.2 billion, and a 4.6 percent capital-to-asset ratio and risk-based capital of $2.8 billion.

     The following table shows the FHLBank’s compliance with the Finance Board’s capital requirements at December 31, 2004 and 2003 (in thousands):

	December 31, 2004						December 31, 2003
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	467,714		$	2,813,513		$	385,795		$	2,384,714
Total capital-to-asset ratio		4.0	%		4.6	%		4.0	%		4.5	%
Total capital	$	2,455,836		$	2,814,193		$	2,140,762		$	2,385,229
Leverage ratio		5.0	%		6.9	%		5.0	%		6.7	%
Leverage capital	$	3,069,796		$	4,220,950		$	2,675,953		$	3,577,586

     The FHLBank offers stock that may be redeemed subject to certain restrictions by giving five years’ notice.

     The GLB Act made membership voluntary for all members. Any member that withdraws from membership must wait five years from the divestiture date for all capital stock that is held as a condition of membership, a requirement set out in the FHLBank’s capital plan, unless the institution has cancelled its notice of withdrawal prior to that date, before being readmitted to membership in any FHLBank.

     Mandatorily Redeemable Capital Stock. The FHLBanks adopted SFAS 150 as of January 1, 2004. In compliance with SFAS 150, the FHLBanks reclassified the stock subject to mandatory redemption from equity to liability once a member exercises a written redemption right, gives notice of intent to withdraw from membership, or attains nonmember status by

103

merger or acquisition, charter termination, or involuntary termination from membership. Mandatorily redeemable shares are reclassified to a liability at fair value.

     The Finance Board has confirmed that the liability accounting treatment for certain shares of its capital stock does not affect the definition of total capital for purposes of determining the FHLBank’s compliance with its regulatory capital requirements, calculating its mortgage securities investment authority (300% of total capital), calculating its unsecured credit exposure limit to other GSEs (100% of total capital), or calculating its unsecured credit limits to other counterparties (various percentages of total capital depending on the rating of the counterparty).

     Subject to certain restrictions, the FHLBank is required to redeem membership stock five years after the membership is terminated or the FHLBank receives notice of withdrawal. The FHLBank is not required to redeem activity-based stock until the latter of the expiration of the notice of redemption or the activity no longer remains outstanding. In accordance with the FHLBank’s current practice, if activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding, the FHLBank may choose to repurchase the excess activity-based stock.

     At December 31, 2004, the FHLBank had $18.2 million in capital stock subject to mandatory redemption from two former members. This amount has been classified as a liability in the Statement of Condition.

     A member may cancel or revoke its written notice of redemption or its notice of withdrawal from membership prior to the end of the five-year redemption period. The FHLBank’s capital plan provides that the FHLBank may charge the member a cancellation fee. The Board of Directors may change the cancellation fee with prior written notice to members.

     Statutory and Regulatory Restrictions on Capital Stock Redemption. In accordance with the GLB Act, FHLBank stock is considered putable with restrictions given the significant restrictions on the obligation/right to redeem and the limitation of the redemption privilege to a small fraction of outstanding stock. Statutory and regulatory restrictions on the redemption of FHLBank stock include the following:

• In no case may the FHLBank redeem any capital stock if, following such redemption, the FHLBank would fail to satisfy its minimum capital requirements (i.e., a statutory capital/asset ratio requirement, established by the GLB Act, and a regulatory risk-based capital/asset ratio requirement established by the Finance Board). By law, all member holdings of FHLBank stock immediately become non-redeemable if their FHLBank becomes undercapitalized and only a minimal portion of outstanding stock qualifies for redemption consideration.

• In no case may the FHLBank redeem any capital stock if either its Board of Directors, or the Finance Board, determine that it has incurred, or is likely to incur, losses resulting, or expected to result, in a charge against capital.

• In addition to possessing the authority to prohibit stock redemptions, the FHLBank’s Board of Directors has a right and an obligation to call for additional capital stock purchases by its members, as needed to satisfy statutory and regulatory capital requirements.

• If, during the period between receipt of a stock redemption notification from a member and the actual redemption (which may last indefinitely if the FHLBank is undercapitalized, does not have the required credit rating, etc.), the FHLBank becomes insolvent and is either liquidated or forced to merge with another FHLBank, the redemption value of the stock will be established either through the market liquidation process or through negotiation with the merger partner. In either case all senior claims must first be settled at par, and there are no claims which are subordinated to the rights of FHLBank stockholders.

• The GLB Act states that the FHLBank may repurchase, in its sole discretion, stock investments which exceed the required minimum amount.

• In no case may the FHLBank redeem or repurchase any capital stock if the principal or interest past due on any consolidated obligation issued by the Office of Finance has not been paid in full.

• In no case may the FHLBank redeem or repurchase any capital stock if the FHLBank fails to provide the Finance Board quarterly certification required by section 966.9(b)(1) of the Finance Board’s rules prior to declaring or paying dividends for a quarter.

• In no case may the FHLBank redeem or repurchase any capital stock if the FHLBank is unable to provide the required certification, projects that it will fail to comply with statutory or regulatory liquidity requirements or will be unable to timely and fully meet all of its obligations, actually fails to satisfy these requirements or obligations, or negotiates to enter or enters into an agreement with another FHLBank to obtain financial assistance to meet its current obligations.

     Prior Capital Plan. Prior to the FHLBank’s implementation of the new capital regulations, the prior capital rules were in effect. In particular, the FHLBank Act required members to purchase capital stock equal to the greater of 1.0% of

104

their mortgage-related assets or 5.0% of outstanding FHLBank advances. The GLB Act removed the provision that required a non-thrift member to purchase additional stock to borrow from the FHLBank if the non-thrift member’s mortgage-related assets were less than 65.0% of total assets. The FHLBank, at its discretion, can repurchase at par value any capital stock greater than a member’s requirement or allow the member to sell the excess capital stock at par value to another member of the FHLBank.

     Dividends. The FHLBank’s Board of Directors in consultation with the Office of Supervision of the Finance Board has agreed to limit dividend payments as part of the FHLBank’s retained earnings policy. The dividends are currently limited to 50% of net income. Dividends may be paid in either capital stock or cash. The FHLBank has historically paid cash dividends only. At December 31, 2004, the FHLBank was in compliance with its statutory minimum capital requirements.

     Accumulated other comprehensive loss. The following table summarizes the components of accumulated other comprehensive loss at December 31, (in thousands):

	2004			2003
Deferred compensation	$	(175	)	$	(103	)
Net unrealized gains on available-for-sale securities		282			(470	)
Net unrealized loss relating to hedging activities		(16,834	)		(11,599	)
Total	$	(16,727	)	$	(12,172	)

Note 16—Employee Retirement Plans

     The FHLBank participates in the Financial Institutions Retirement Fund (FIRF), a defined-benefit plan. The plan covers substantially all officers and employees of the FHLBank. The FHLBank’s contributions to FIRF through June 30, 1987, represented the normal cost of the plan. The plan reached the full-funding limitation, as defined by the Employee Retirement Income Security Act, for the plan year beginning July 1, 1987, because of favorable investment and other actuarial experience during previous years. As a result, FIRF suspended employer contributions for all plan years ending after June 30, 1987 through June 30, 2002. Contributions to the plan resumed in 2002. Funding and administrative costs of FIRF charged to other operating expenses were $2.8 million, $1.7 million, and $1.1 million for the years ended December 31, 2004, 2003, and 2002, respectively. FIRF is a multi-employer plan and does not segregate its assets, liabilities, or costs by participating employer. As a result, disclosure and accounting of the accumulated benefit obligations, plan assets, and the components of annual pension expense attributable to the FHLBank cannot be made.

     The FHLBank also participates in the Financial Institutions Thrift Plan, a defined contribution plan. The FHLBank’s contributions are equal to a percentage of participants’ compensation and a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The FHLBank contributed $532 thousand, $491 thousand, and $473 thousand for the years ended December 31, 2004, 2003, and 2002, respectively.

     In addition, the FHLBank maintains a deferred compensation plan, available to select employees, which is, in substance, an unfunded supplemental retirement plan. The plan’s liability consists of the accumulated compensation deferrals and accrued earnings on the deferrals. The FHLBank’s minimum obligation from these plans was $8.3 million and $7.2 million at December 31, 2004 and 2003, respectively. Operating expense includes deferred compensation and accrued earnings of $734 thousand, $689 thousand, and $826 thousand for the years ended December 31, 2004, 2003, and 2002, respectively.

     Post-retirement Benefits. The FHLBank sponsors a retiree benefits program that includes health care and life insurance benefits for eligible retirees. Retirees contribute to the cost of health care coverage until age 65; life insurance is provided at the FHLBank’s expense.

     Employees who retired prior to January 1, 1992 receive health care benefits at the FHLBank’s expense after age 65. Employees retiring after January 1, 1992, are required to contribute toward the cost of health care benefits above the established expense caps after attaining age 65. Those retiring after January 1, 1992, are also required to meet specific eligibility requirements of age 60 with ten years of service at the time of retirement to be eligible for retiree health and life insurance benefits. The approximate Accumulated Post-Retirement Benefit Obligation (APBO) as of December 31, 2004 is $3.1 million. The FHLBank does not have any plan assets, unrecognized prior service cost or any unrecognized transitional obligation as of December 31, 2004.

105

     The following table sets forth the changes in benefit obligation and plan assets (in thousands):

	Supplemental						Post-retirement
	Retirement						Health Benefit
	Plan						Plan
	2004			2003			2004			2003
Change in benefit obligation
Benefit obligation at beginning of year	$	3,717		$	3,261		$	3,050		$	1,979
Service cost		168			228			72			31
Interest cost		196			228			177			122
Actuarial loss (gain)		(806	)		—			(30	)		536
Amendment to benefit policy		—			—			—			549	(1)
Benefits paid		(172	)		—			(196	)		(167	)
Benefit obligation at end of year	$	3,103		$	3,717		$	3,073		$	3,050
Change in plan assets
Fair value of plan assets at beginning of year	$	—		$	—		$	—		$	—
Employer contribution		86			—			196			167
Benefits paid		(86	)		—			(196	)		(167	)
Fair value of plan assets at end of year	$	—		$	—		$	—		$	—
Funded status (2)	$	(3,103	)	$	(3,717	)	$	(3,073	)	$	(3,050	)
Unrecognized net actuarial loss		491			1,323			854			922
Unrecognized prior service cost (benefit)		(71	)		(23	)		529			569
Net amount recognized	$	(2,683	)	$	(2,417	)	$	(1,690	)	$	(1,559	)

(1)	Actuarially calculated effect of change in employer/retiree benefit contribution rates.
(2)	Future funding available from general FHLBank assets.

     Amounts recognized in the Statement of Condition for the FHLBank’s supplemental retirement plan at December 31, 2004 and 2003 were (in thousands):

	2004			2003
Accrued benefit liability	$	(2,858	)	$	(2,520	)
Net amount recognized		2,683			2,417
Accumulated other comprehensive loss(1)	$	(175	)	$	(103	)

⁽¹⁾ The change in this amount is reflected in other comprehensive income (loss) on the Statement of Changes in Capital.

     Components of the net periodic pension cost for the FHLBank’s supplemental retirement and post-retirement health plan for the years ended December 31, 2004, 2003 and 2002 were (in thousands):

	Supplemental Retirement Plan						Post-retirement Health Benefit Plan
	2004		2003		2002		2004		2003		2002
Service cost	$	168	$	228	$	237	$	72	$	31	$	25
Interest cost		196		228		204		177		122		119
Amortization of unrecognized prior service cost		48		48		48		39		2		—
Amortization of unrecognized net loss		26		111		126		40		14		—
Net periodic benefit cost	$	438	$	615	$	615	$	328	$	169	$	144

     The measurement date used to determine current year’s benefit obligation was December 31, 2004.

106

     Key assumptions and other information for the actuarial calculations for the FHLBank’s supplemental retirement plan for the years ended December 31, 2004 and 2003 were:

	2004			2003
Discount rate		5.75	%		7.00	%
Salary increases		5.00	%		5.00	%
Amortization period in years		9			10
Benefits paid during the year	$	86,000		$	—

     Key assumptions and other information for the FHLBank’s post-retirement health benefits plan for the years ended December 31, 2004 and 2003 were:

	2004			2003
Weighted average discount rate		5.75	%		6.00	%
Health care cost trend rates:
Assumed for next year		9.00	%		10.00	%
Ultimate rate		5.00	%		5.00	%
Year that ultimate rate is reached		2008			2009

     The effect of a percentage point increase in the assumed healthcare trend rates would be to increase postretirement benefit expense by $37 thousand and to increase accumulated post-retirement benefit obligation (APBO) by $277 thousand. The effect of a percentage point decrease in the assumed healthcare trend rates would be to decrease postretirement benefit expense by $31 thousand and to decrease APBO by $238 thousand.

     Estimated Future Benefit Payments.

     The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

	Supplemental		Post-retirement
	Retirement		Health Benefit
	Plan		Plan
2005	$	243	$	194
2006		167		200
2007		179		208
2008		201		211
2009		225		214
Thereafter		1,515		1,150

Note 17—Derivatives and Hedging Activities

     The FHLBank may enter into interest rate swaps (including callable and putable swaps), swaptions, interest rate cap and floor agreements, calls and puts (collectively, derivatives) to manage its exposure to changes in interest rates.

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

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

107

     An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities, or firm commitments that does not qualify or was not designated for hedge accounting, but is an acceptable hedging strategy under the FHLBank’s risk management program. Economic hedging strategies also comply with Finance Board regulatory requirements prohibiting speculative hedge transactions. An economic hedge by definition introduces the potential for earnings variability due to the changes in fair value recorded on the derivatives that are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments.

     Consistent with Finance Board regulation, the FHLBank enters into derivatives only to reduce the risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the FHLBank’s risk management objectives, or to act as an intermediary between members and counterparties. FHLBank management uses derivatives when they are considered to be the most cost-effective alternative to achieve the FHLBank’s financial and risk management objectives. Accordingly, the FHLBank may enter into derivatives that do not necessarily qualify for hedge accounting (economic hedges). As a result, the FHLBank recognizes only the change in fair value of these derivatives in other income as “net realized and unrealized gain (loss) on derivatives and hedging activities” with no offsetting fair value adjustments for the asset, liability, or firm commitment.

     For the years ended December 31, 2004, 2003 and 2002, the FHLBank recorded net realized and unrealized gain (loss) on derivatives and hedging activities of $31.2 million, $(39.8) million, and $(109.9) million, respectively, in other income. Net realized and unrealized gain (loss) on derivatives and hedging activities for the years ended December 31, 2004, 2003 and 2002 are as follows:

     Net Realized and Unrealized Gain (Loss) on Derivatives and Hedging Activities

	For the Year Ended
(in thousands)	2004			2003			2002
Gains (losses) related to fair value hedge ineffectiveness	$	21,289		$	(2,339	)	$	6,905
Net gains (losses) on firm commitment no longer qualifying as fair value hedge accounting					—			(3,020	)
Gains (losses) on economic hedges		9,899			(35,027	)		(113,494	)
Gains (losses) related to cash flow hedge ineffectiveness		(6	)		(2,425	)		(260	)
Net gains (losses) on derivatives and hedging activities	$	31,182		$	(39,791	)	$	(109,869	)

     The overall rising rate environment in 2004 as well as increased levels of notional amounts outstanding caused increased net gains related to fair value hedge ineffectiveness as most of the FHLBank’s assets are hedged with pay fixed receive floating rate (3-month Libor) swaps. The FHLBank’s economic hedges have been reduced significantly in 2004.

     No material amounts for the years ended December 31, 2004, 2003 and 2002 were reclassified into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted transactions would not occur by the end of the originally specified time period or within a two month period thereafter. As of December 31, 2004, the deferred net gains (losses) on derivative instruments accumulated in other comprehensive income expected to be reclassified to earnings during the next twelve months is not material. Normally, the maximum length of time over which the FHLBank hedges its exposure to the variability in future cash flows for forecasted transactions, excluding those forecasted transactions related to the payment of variable interest on existing financial instruments, is 45 days or less. The FHLBank did not have any hedges related to the exposure to the variability in future flows for forecasted transactions at December 31, 2004.

108

     The following table represents outstanding notional balances and estimated fair values of the derivatives outstanding at December 31, 2004 and 2003 (in thousands):

	2004					2003
			Estimated					Estimated
	Notional		Fair Value			Notional		Fair Value
Interest Rate Swaps:
Fair Value	$	52,644,233	$	(544,391	)	$	46,036,705	$	(1,129,043	)
Economic		585,479		(5,248	)		2,382,018		(8,341	)
Intermediation		368,802		754			435,824		556
Interest Rate Swaptions:
Economic		1,046,000		387			240,000		—
Interest Rate Caps/Floors:
Cash Flow		400,000		1,151			400,000		4,168
Economic		3,175,000		859			3,525,000		1,302
Interest Rate Forward Settlement Agreements:
Fair Value		77,000		106			290,000		142
Mortgage Delivery Commitments:
Economic		15,364		32			465,062		961
Other:
Economic		—		—			457,450		(1,012	)
Embedded Derivatives		30,000		464			30,000		(118	)
Total	$	58,341,878	$	(545,886	)	$	54,262,059	$	(1,131,385	)
Total derivatives excluding accrued interest			$	(545,886	)			$	(1,131,385	)
Accrued interest				52,910					54,393
Net derivative balances			$	(492,976	)			$	(1,076,992	)
Net derivative asset balances			$	147,180				$	164,972
Net derivative liability balances				(640,156	)				(1,241,964	)
Net derivative balances			$	(492,976	)			$	(1,076,992	)

     Hedging Activities. The FHLBank documents all relationships between derivative hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value or cash flow hedges to: (1) assets and liabilities on the balance sheet, (2) firm commitments, or (3) forecasted transactions. The FHLBank also formally assesses (both at the hedge’s inception and monthly) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain effective in future periods. The FHLBank typically uses regression analyses and other statistical analyses to assess the effectiveness of its hedges.

     The FHLBank discontinues hedge accounting prospectively when: (1) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur in the originally expected period; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging instrument is no longer appropriate.

     The FHLBank is not a derivative dealer and thus does not trade derivatives for short-term profit.

     Consolidated Obligations. While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank has consolidated obligations for which it is the primary obligor. The FHLBank enters into derivatives to hedge the interest rate risk associated with its specific debt issuances.

109

     For instance, in a typical transaction, fixed-rate consolidated obligations are issued for one or more FHLBanks, and the FHLBank simultaneously enters into a matching derivative in which the counterparty pays fixed cash flows to the FHLBank designed to mirror in timing and amount the cash outflows the FHLBank pays on the consolidated obligation. These transactions are treated as fair value hedges. In this typical transaction, the FHLBank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate loans to members, typically 3-month LIBOR. This intermediation between the capital and derivative markets permits the FHLBank to raise funds at lower costs than would otherwise be available through the issuance of simple fixed- or floating-rate consolidated obligations in the capital markets.

     Loans to Members. With issuances of convertible loans to members, the FHLBank may purchase from the member a put option that enables the FHLBank to convert a loan to member from a fixed rate to a floating rate if interest rates increase or to terminate the loan to member and extend additional credit on new terms. The FHLBank may hedge a convertible loan to a member by entering into a cancelable derivative in which the FHLBank pays a fixed rate and receives a variable rate. This type of hedge is treated as a fair value hedge. The derivative counterparty may cancel the derivative on the put date, an option the counterparty normally would exercise in a rising rate environment, and the FHLBank can convert the loan to member to a floating rate.

     The optionality embedded in certain financial instruments held by the FHLBank can create interest rate risk. When a member prepays a loan, the FHLBank could suffer lower future income if the principal portion of the prepaid loan were re-invested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, the FHLBank generally charges a prepayment fee that makes it financially indifferent to a member’s decision to prepay a loan. When the FHLBank offers loans that a member may prepay without a prepayment fee (other than short-term loans), it usually finances such loans with callable debt or otherwise hedges this option.

     Mortgage Loans. The FHLBank invests in fixed-rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected repayment of these loans, depending on changes in estimated prepayment speeds. The FHLBank manages the interest rate and prepayment risk associated with mortgages through a combination of debt issuance and derivatives. The FHLBank issues both callable and non-callable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLBank may use derivatives to attempt to match the expected prepayment characteristics of the mortgages. Interest rate swaps, to the extent the payments on the mortgages result in simultaneous reduction of the notional amount on the swaps, may receive fair value hedge accounting under which changes in the fair value of the swaps and changes in the fair value of the mortgages that are attributable to the hedged risk, are recorded in current period earnings in other income.

     Options may also be used to hedge prepayment risk on the mortgages, many of which are not identified to specific mortgages and, therefore, do not receive fair value or cash flow hedge accounting treatment. The options are marked-to-market through current earnings and presented in the Statement of Operations as “net realized and unrealized gain (loss) on derivatives and hedging activities.” The FHLBank may also purchase interest rate caps and floors, swaptions, callable swaps, calls, and puts to minimize the prepayment risk embedded in the mortgage loans. Although these derivatives are valid economic hedges against the prepayment risk of the loans, they are not specifically linked to individual loans and, therefore, do not receive either fair value or cash flow hedge accounting. The derivatives are marked-to-market through current period earnings in other income.

     Anticipated Streams of Future Cash Flows. The FHLBank may enter into an option to hedge a specified future variable cash stream as a result of rolling over short-term, fixed-rate financial instruments such as discount notes. The option will effectively cap the variable cash stream at a predetermined target rate.

     Firm Commitment Strategies. Prior to July 1, 2003, the FHLBank hedged the market value of purchase commitments on fixed-rate mortgage loans by using derivatives with similar market value characteristics. The FHLBank normally hedged these commitments by selling mortgage-backed securities to be announced (TBA MBS) or other derivatives for forward settlement. A TBA represents a forward contract for the sale of mortgage-backed securities at a future agreed-upon date. Upon the expiration of the mortgage purchase commitment, the FHLBank purchases the TBA to close the hedged position. When the derivative was settled, the current market value of the commitments was included with the basis of the mortgage loans and amortized accordingly. This transaction was treated as a fair value hedge. Mortgage purchase commitments entered into after June 30, 2003 are considered derivatives. Accordingly, both the mortgage purchase commitment and the derivatives used in the firm commitment hedging strategy are recorded as a derivative asset or derivative liability at fair value, with changes in fair value recognized in the current period earnings. When the mortgage purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan and amortized accordingly.

110

     The FHLBank may designate these mortgage purchase commitments as a cash flow hedge of the anticipated purchase of mortgage loans. The change in value of the delivery commitment is recorded in accumulated comprehensive income in the Statement of Condition. When the mortgage purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan. The basis adjustments on the resulting performing loans and the balance in accumulated other comprehensive income are then amortized into net interest income in offsetting amounts over the life of these loans.

     The FHLBank may also hedge a firm commitment for a forward starting loan to a member through the use of an interest rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent loan to member. The basis movement associated with the firm commitment will be rolled into the basis of the loan at the time the commitment is terminated and the loan is issued. The basis adjustment will then be amortized into interest income over the life of the loan to member.

     Investments. The FHLBank invests in U.S. Treasury, U.S. agency securities, mortgage-backed securities, and the taxable portion of state or local housing finance agency securities. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The FHLBank may manage the prepayment and interest rate risk by funding investment securities with consolidated obligations that have call features or by hedging the prepayment risk with caps or floors, callable swaps or swaptions. These investment securities may be classified as held-to-maturity, available-for-sale or trading securities.

     The FHLBank may also manage the risk arising from changing market prices or cash flows of investment securities classified as trading by entering into derivatives (economic hedges) that offset the changes in fair value or cash flows of the securities. The market value changes of both the trading securities and the associated derivatives are included in other income in the Statement of Operations and presented as part of the “net gains (loss) on trading securities” and “net realized and unrealized gain (loss) on derivatives and hedging activities.”

     Anticipated Debt Issuance. The FHLBank may enter into interest rate swaps for the anticipated issuance of fixed-rate bonds to lock in the cost of funding. The interest rate swap is terminated upon issuance of the fixed-rate bond, with the realized gain or loss on the interest rate swap recorded in other comprehensive income. Realized gains and losses reported in accumulated other comprehensive income are recognized as interest income or interest expense in the periods in which earnings are affected by the cash flows of the fixed-rate bonds.

     Intermediation. To assist its members in meeting their hedging needs, the FHLBank acts as an intermediary between the members and other counterparties by entering into offsetting derivatives. This intermediation allows smaller members access to the derivatives market. The derivatives used in intermediary activities do not qualify for hedge accounting treatment and are separately marked-to-market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the FHLBank. These amounts are recorded in other income and presented as “net realized and unrealized gain (loss) on derivatives and hedging activities.”

     Derivatives in which the FHLBank is an intermediary may arise when the FHLBank: (1) enters into derivatives with members and offsetting derivatives with other counterparties to meet the needs of members, and (2) enters into derivatives to offset the economic effect of other derivatives that are no longer designated to either loans to members, investments, or consolidated obligations.

     The notional amount of derivatives in which the FHLBank was an intermediary is $368.8 million and $435.8 million at December 31, 2004 and 2003, respectively. The net fair value of derivatives in which the FHLBank was an intermediary is $754 thousand and $556 thousand at December 31, 2004 and 2003, respectively.

     Credit Risk. (Note: Information presented excludes BOB related loan balances and activity.) The FHLBank is subject to credit risk due to the risk of nonperformance by counterparties to the derivative agreements. The degree of counterparty risk on derivative agreements depends on the extent to which master netting arrangements are included in such contracts to mitigate the risk. The FHLBank manages counterparty credit risk through credit analysis and collateral requirements and by following the requirements set forth in Finance Board regulations. Based on credit analyses and collateral requirements, the management of the FHLBank does not anticipate any credit losses on its derivative agreements.

     The contractual or notional amount of derivatives reflects the involvement of the FHLBank in the various classes of financial instruments. The notional amount of derivatives does not measure the credit risk exposure of the FHLBank. The maximum credit exposure of the FHLBank is substantially less than the notional amount. The maximum credit risk is the

111

estimated cost of replacing the derivative contract if the counterparty defaults, and the related collateral, if any, is of no value to the FHLBank.

     At December 31, 2004 and 2003, the FHLBank’s maximum credit risk, as defined above, was approximately $147.2 million and $165 million, respectively. These totals include $20.3 million and $31.0 million, respectively, of net accrued interest receivable. In determining maximum credit risk, the FHLBank considers accrued interest receivables and payables, and the legal right to offset assets and liabilities by counterparty. The FHLBank held securities and cash with a fair value of $109.0 million and $105.1 million as collateral as of December 31, 2004 and 2003, respectively. Two counterparties comprise 44% and 27% of the FHLBank’s total credit risk when measured after consideration for related collateral as of December 31, 2004. Additionally, collateral with respect to derivatives with member institutions includes collateral assigned to the FHLBank, as evidenced by a written security agreement and held by the member institution for the benefit of the FHLBank.

     The FHLBank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. Note 22 discusses assets pledged by the FHLBank to these counterparties.

Note 18—Transactions with Related Parties

     The FHLBank is a cooperative whose member institutions own the capital stock of the FHLBank and may receive dividends on their investments. In addition, certain former members that still have outstanding transactions are also required to maintain their investment in FHLBank capital stock until the transactions mature or are paid off. All loans are granted to members, and all mortgage loans held for portfolio are purchased from members. The FHLBank also maintains demand deposit accounts for members primarily to facilitate settlement activities that are directly related to loans to members and mortgage loan purchases. All transactions with members are entered into in the normal course of business. In instances where the member also has an officer who is a director of the FHLBank, those transactions are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as all other transactions. In accordance with Statement of Financial Accounting Standards (SFAS) No. 57, Related Party Disclosures, the FHLBank defines related parties as other FHLBanks in the System, members with capital stock outstanding in excess of 10% of total capital stock outstanding, and members that have an officer who is a director of the FHLBank,.

     The following table includes significant outstanding related party member balances as of December 31,

(in thousands)	2004		2003
Loans to members	$	11,421,087	$	13,029,738
Total deposits		14,787		82,324
Capital stock		691,959		770,429

     Total mortgage loan volume purchased from related party members during the years ended December 31, 2004, 2003 and 2002 was $61.8 million, $193.7 million and $102.6 million, respectively.

     From time to time, the FHLBank may borrow from or lend to other FHLBanks on a short term uncollateralized basis (See Note 13). The following table includes gross amounts transacted under these arrangements during the years ended December 31,

(in millions)	2004		2003		2002
Borrowed from other FHLBanks	$	28,548	$	47,428	$	29,886
Repaid to other FHLBanks		28,608		47,368		29,886
Loaned to other FHLBanks		1,121		3,661		1,285
Repaid by other FHLBanks		1,121		3,851		1,095

Note 19—Estimated Fair Values

     The following estimated fair value amounts have been determined by the FHLBank using available market information and the FHLBank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the FHLBank as of December 31, 2004 and 2003. Although the FHLBank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of the FHLBank’s financial

112

instruments, in certain cases fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these estimated fair values are not necessarily indicative of the amounts that would be realized in current market transactions. The Fair Value Summary Tables do not represent an estimate of the overall market value of the FHLBank. A going concern value would take into account future business opportunities.

     Cash and due from banks. The estimated fair value approximates the recorded book balance.

     Interest-bearing deposits and investment securities. The estimated fair value is determined based on quoted prices, excluding accrued interest, as of the last business day of the year. When quoted prices are not available, the estimated fair value is determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest receivable.

     Federal funds sold. The estimated fair value is determined by calculating the present value of the expected future cash flows for instruments with more than three months to maturity. The discount rates used in these calculations are the rates for Federal funds with similar terms. The estimated fair value approximates the recorded book balance of Federal funds with three months or less to maturity.

     Loans to members and other loans. The FHLBank determines the estimated fair value of loans to members with fixed rates and more than three months to maturity and loans to members with complex floating rates by calculating the present value of expected future cash flows from the loans and excluding the amount for accrued interest receivable. The discount rates used in these calculations are the replacement loan rates for loans to members with similar terms. Under the Finance Board’s regulations, loans to members with a maturity and repricing period greater than six months require a prepayment fee sufficient to make the FHLBank financially indifferent to the borrower’s decision to prepay the loans. Therefore, the estimated fair value of loans to members does not assume prepayment risk. The estimated fair value approximates the recorded book balance of loans to members with floating rates and fixed rates with three months or less to maturity or repricing.

     Mortgage loans held for portfolio. The estimated fair values for mortgage loans are determined based on quoted market prices of similar mortgage loans. These prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions.

     Accrued interest receivable and payable. The estimated fair value approximates the recorded book value.

     Derivative assets/liabilities. The FHLBank bases the estimated fair values of derivatives with similar terms or available market prices including accrued interest receivable and payable. However, active markets do not exist for many types of financial instruments. Consequently, fair values for these instruments must be estimated using techniques such as discounted cash flow analysis and comparisons to similar instruments. Estimates developed using these methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Because these estimates are made as of a specific point in time, they are susceptible to material near term changes. The fair values are netted by counterparty where such legal right exists. If these netted amounts are positive, they are classified as an asset and if negative, a liability.

     Deposits. The FHLBank determines estimated fair values of FHLBank deposits with fixed rates and more than three months to maturity by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms. The estimated fair value approximates the recorded book balance for deposits with floating rates and fixed rates with three months or less to maturity or repricing.

     Consolidated obligations. The FHLBank estimates fair values based on the cost of raising comparable term debt. The estimated cost of issuing debt includes non-interest selling costs.

     Borrowings. The FHLBank determines the estimated fair value of borrowings with fixed rates and more than three months to maturity by calculating the present value of expected future cash flows from the borrowings and reducing this amount for accrued interest payable. The discount rates used in these calculations are the cost of borrowings with similar terms. For borrowings with floating rates and fixed rates with three months or less to maturity or repricing, the estimated fair value approximates the recorded book balance.

113

     Mandatorily Redeemable Capital Stock. The fair value of capital stock subject to mandatory redemption is generally equal to par value. Fair value also includes accrued interest at the time of reclassification from equity to liabilities, until such amount is paid, and any subsequently declared dividends pertaining to such stock. Stocks can be acquired by members only at par value and redeemed or repurchased at par value. Stock is not traded and no market mechanism exists for the exchange of stock outside the cooperative structure of the FHLBank.

     Commitments. The estimated fair value of the FHLBank’s commitments to extend credit, including letters of credit, was immaterial at December 31, 2004 and 2003. The estimated fair value of the FHLBank’s commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The estimated fair value of standby letters of credit is based on the present value of fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The FHLBank currently has no fees associated with commitments and letters of credit.

     The carrying value and estimated fair values of the FHLBank’s financial instruments at December 31, 2004, were as follows (in thousands):

2004 Fair Value Summary Table

			Net
	Carrying		Unrealized			Estimated
Financial Instruments	Value		Gains (Losses)			Fair Value
Assets:
Cash and due from banks	$	92,224	$	—		$	92,224
Interest-bearing deposits		1,347,009		(141	)		1,346,868
Federal funds sold		2,255,000		(271	)		2,254,729
Held-to-maturity securities		8,386,425		(125,619	)		8,260,806
Available-for-sale securities		626,607		—			626,607
Trading securities		311,306		—			311,306
Loans to members		38,989,126		(14,208	)		38,974,918
Mortgage loans held for portfolio, net		8,664,551		126,544			8,791,095
Accrued interest receivable		528,092		—			528,092
Derivative assets		147,180		—			147,180
Other Assets (1)		51,392		—			51,392
Liabilities:
Deposits	$	1,018,600		—		$	1,018,600
Mandatorily redeemable capital stock		18,208		—			18,208
Consolidated obligations:
Discount notes		15,160,634		(2,327	)		15,158,307
Bonds		41,383,521		(25,326	)		41,358,195
Accrued interest payable		299,988		—			299,988
Derivative liabilities		640,156		—			640,156
Other liabilities		99,227		—			99,227

⁽¹⁾   Includes BOB loans.

114

The carrying value and estimated fair values of the FHLBank’s financial instruments at December 31, 2003, were as follows (in thousands):

2003 Fair Value Summary Table

			Net
	Carrying		Unrealized			Estimated
Financial Instruments	Value		Gains (Losses)			Fair Value
Assets:
Cash and due from banks	$	83,421	$	—		$	83,421
Interest-bearing deposits		835,327		(23	)		835,304
Federal funds sold		1,000,000		—			1,000,000
Held-to-maturity securities		7,444,474		(33,144	)		7,411,330
Trading securities		357,515		—			357,515
Securities held at fair value		354,626		—			354,626
Loans to members		34,671,987		(13,891	)		34,658,096
Mortgage loans held for portfolio, net		8,065,285		83,020			8,148,305
Accrued interest receivable		489,841		—			489,841
Derivative assets		164,972		—			164,972
Other assets (1)		51,611		—			51,611
Liabilities:
Deposits	$	1,306,374		—		$	1,306,374
Loans from other FHLBanks		60,000		—			60,000
Consolidated obligations:
Discount notes		11,536,705		(97	)		11,536,608
Bonds		36,621,817		113,771			36,735,588
Accrued interest payable		311,899		—			311,899
Derivative liabilities		1,241,964		—			1,241,964
Other Liabilities		67,758		—			67,758

(1) Includes BOB loans.

Note 20—Earnings per Share of Capital

     The following table sets forth the computation of earnings per share of capital (in thousands):

	Years Ended December 31,
	2004		2003		2002
Income before cumulative effect of change in accounting principle	$	92,313	$	27,706	$	48,050
Cumulative effect of change in accounting principle		8,413		—		—
Net Income available to stockholders	$	100,726	$	27,706	$	48,050
Weighted average number of shares of capital used to calculate earnings per share(1)		26,265		22,943		19,516
Earnings per share of capital before cumulative effect of change in accounting principle	$	3.51	$	1.21	$	2.46
Cumulative effect of change in accounting principle		.32		—		—
Basic and diluted earnings per share of capital	$	3.83	$	1.21	$	2.46

⁽¹⁾   Does not include shares reclassified as liabilities.

Note 21—Segments

     The FHLBank operates two segments differentiated by products. The first segment entitled Traditional Member Finance houses a majority of the FHLBank’s activities, including but not limited to, providing loans to members; investment;

115

and deposits products. MPF or Mortgage Finance segment purchases loans from members and funds and hedges the resulting portfolio.

     Results of segments are presented based on management accounting practices and the FHLBank’s management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. Therefore, the financial results of the segments are not necessarily comparable with similar information at other FHLBanks or any other company.

     The management accounting process uses various balance sheet and income statement assignments and transfers to measure performance of the segment. Methodologies are refined from time to time as management accounting practices change. Net mortgage loans held for portfolio are the only significant assets related to the operations of the Mortgage Finance segment. Borrowings are allocated to the Mortgage Finance segment based on loans outstanding. All remaining borrowings and all capital remain in the Traditional Member Finance business. The allowance for credit losses is totally allocated to the Mortgage Finance segment which is consistent with management’s assessment of the risk inherent in the loan portfolio. Derivatives are allocated to segments consistent with hedging strategies.

     Cost incurred by support areas not directly aligned with the segment are allocated based on estimated usage of services.

     The following table sets forth the FHLBank’s financial performance by operating segment for the years ended December 31, 2004 and 2003 (in thousands). BOB related loans are grouped with “Other assets” on the Statement of Condition. BOB related income is recorded net of the provision for loss and grouped with “Other income” on the Statement of Operations.

	Traditional			MPF®or
	Member			Mortgage
	Finance			Finance			Total
2004
Net interest income	$	109,040		$	25,522		$	134,562
Provision for credit losses on mortgage loans		—			(166	)		(166	)
Other income		36,833			(1,310	)		35,523
Other expenses		(38,322	)		(2,911	)		(41,233	)
Income before assessments		107,551			21,135			128,686
Affordable Housing Program		9,466			1,725			11,191
REFCORP		21,300			3,882			25,182
Total assessments		30,766			5,607			36,373
Net income before cumulative effect of change in accounting principle	$	76,785		$	15,528		$	92,313
2004
Total assets	$	52,734,361		$	8,664,551		$	61,398,912
2003
Net interest income	$	93,759		$	18,248		$	112,007
Provision for credit losses on mortgage loans		—			147			147
Other income/(loss)		(13,904	)		(22,517	)		(36,421	)
Other expenses		(36,389	)		(1,634	)		(38,023	)
Income before assessments		43,466			(5,756	)		37,710
Affordable Housing Program		3,548			(470	)		3,078
REFCORP		7,983			(1,057	)		6,926
Total assessments		11,531			(1,527	)		10,004
Net income before cumulative effect of change in accounting principle	$	31,935		$	(4,229	)	$	27,706
2003
Total assets	$	45,453,774		$	8,065,285		$	53,519,059

116

Note 22—Commitments and Contingencies

     As described in Note 14, the twelve FHLBanks have joint and several liability for all the consolidated obligations issued on their behalf. Accordingly, should one or more of the FHLBanks be unable to repay its participation in the consolidated obligations, each of the other FHLBanks could be called upon to repay all or part of such obligations, as determined or approved by the Finance Board. The FHLBank does not recognize a liability for its joint and several obligation related to other FHLBanks’ consolidated obligations.

     The FHLBank considered the guidance under FASB interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including indirect guarantees of indebtedness of others (FIN 45), and determined it was not necessary to recognize the fair value of the FHLBank’s joint and several liability for all of the consolidated obligations. The FHLBank considers the joint and several liability as a related party guarantee. Related party guarantees meet the recognition scope exceptions in FIN 45. Accordingly, the FHLBank has not recognized a liability for its joint and several obligation related to other FHLBanks’ consolidated obligations at December 31, 2004 and 2003. In addition to the consolidated obligations recognized on the FHLBank’s Statement of Condition, the par amounts of the FHLBanks’ outstanding consolidated obligations for which the FHLBank is jointly and severally liable, were approximately $809.1 billion and $707.6 billion at December 31, 2004 and 2003, respectively.

     Commitments that legally bind and unconditionally obligate the FHLBank for additional loans to members totaled approximately $114.8 million and $309.9 million at December 31, 2004 and 2003, respectively. Commitments generally are for periods up to 12 months. Standby letters of credit are executed for members for a fee. A standby letter of credit is a short-term financing arrangement between the FHLBank and its member. If the FHLBank is required to make payment for a beneficiary’s draw, these amounts are converted into a collateralized loan to the member. Outstanding standby letters of credit were approximately $277.9 million and $123.6 million at December 31, 2004 and 2003, respectively, and had original terms of up to six years with a final expiration in 2007. Based on management’s credit analyses and collateral requirements, the FHLBank does not deem it necessary to have any additional liability on these commitments and letters of credit. Commitments and letters of credit are fully collateralized at the time of issuance (see Note 8).

     Commitments that unconditionally obligate the FHLBank to fund/purchase mortgage loans totaled $15.4 million and $465.0 million at December 31, 2004 and 2003, respectively. Commitments are generally for periods not to exceed 365 days. Commitments entered into after June 30, 2003, were recorded as derivatives at their fair value.

     The FHLBank generally executes derivatives with major banks and broker-dealers and generally enters into bilateral collateral agreements. As of December 31, 2004, the FHLBank had pledged, as collateral, cash and securities with a book value of $408.4 million to broker-dealers that have market risk exposure from the FHLBank related to interest rate exchange agreements.

     The FHLBank charged to operating expenses net rental costs of approximately $2.2 million, $2.1 million, and $2.2 million for the years ended December 31, 2004, 2003, and 2002, respectively. Future minimum rentals at December 31, 2004, were as follows (in thousands):

Year	Premises		Equipment		Total
2005	$	2,235	$	150	$	2,385
2006		2,213		8		2,221
2007		2,207		2		2,209
2008		2,144		—		2,144
2009		2,144		—		2,144
Thereafter		715		—		715
Total	$	11,658	$	160	$	11,818

     Lease agreements for FHLBank premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the FHLBank.

117

     The FHLBank has committed at December 31, 2004, to issue or purchase in 2005 the following financial instruments (in thousands):

Consolidated obligations	$	502,000
Derivatives (notional)	$	527,000

     Notes 1, 8, 9, 10, 14, 15, 16, and 17 discuss other commitments and contingencies.

Note 23—Other Developments

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

SUPPLEMENTAL INFORMATION (unaudited)

Supplementary financial data for each full quarter within the two years ended December 31, 2004, are included in the below tables. BOB related loans are grouped with “Other assets” on the Statement of Condition. BOB related income is recorded net of the provision for loss and grouped with “Other income” on the Statement of Operations.

(dollars in thousands)	March 31			June 30			September 30			December 31
2004
Interest income	$	251,510		$	258,482		$	322,012		$	380,675
Interest expense		226,033			235,428			283,309			333,347
Net interest income before provision		25,477			23,054			38,703			47,328
Provision for credit loss		12			(42	)		83			113
Net interest income after provision		25,465			23,096			38,620			47,215
Non-interest income		16,866			3,171			5,041			10,445
Non-interest expense		21,148			13,599			21,046			21,813
Income before cumulative effect of change in accounting principle		21,183			12,668			22,615			35,847
Cumulative effect of change in accounting principle		8,413			—			—			—
Net income	$	29,596		$	12,668		$	22,615		$	35,847
2003
Interest income (a)	$	263,933		$	260,927		$	240,424		$	237,435
Interest expense		224,217			235,638			212,257			218,600
Net interest income before provision		39,716			25,289			28,167			18,835
Provision for credit loss		511			400			(1,161	)		103
Net interest income after provision		39,205			24,889			29,328			18,732
Non-interest income (a)		(8,008	)		(10,602	)		(29,375	)		11,564
Non-interest expense		15,886			11,913			6,737			13,491
Net income	$	15,311		$	2,374		$	(6,784	)	$	16,805

(a) Interest income increased and non-interest income decreased by $332, $185, $3,054 and $3,300 as a result of the reclassification of prepayment fee income for the quarters ended March 31, June 30, September 30 and December 31, 2003, respectively.

118

Supplementary financial data on the FHLBank’s investment securities for the year ended December 31 are included in the tables below.

(dollars in thousands)	2004		2003		2002
Held-to-maturity securities:
Mortgage-backed securities	$	7,552,014	$	5,893,675	$	5,013,577
U.S. government and federal agencies		210,598		696,612		1,548,235
States or local housing agency obligations		553,874		614,298		426,347
Commercial paper		69,939		239,889		—
Total held-to-maturity securities	$	8,386,425	$	7,444,474	$	6,988,159

(dollars in thousands)	2004		2003		2002
Available-for-sale securities:
Mortgage-backed securities	$	626,607	$	357,515	$	320,516
U.S. government and federal agencies		—		—		100,000
Total available-for-sale securities	$	626,607	$	357,515	$	420,516

(dollars in thousands)	2004		2003		2002
Trading securities:
Mortgage-backed securities	$	89,306	$	132,626	$	218,344
U.S. government and federal agencies		—		—		782,769
States or local housing agency obligations		222,000		222,000		222,000
Total trading securities	$	311,306	$	354,626	$	1,223,113

As of December 31, 2004, held-to-maturity securities had the following maturity and yield characteristics.

(dollars in thousands)	Book Value		Yield
U.S. government and federal agencies
Within one year	$	200,000		3.90	%
After one but within five years		10,598		7.56
		210,598		4.08
State or local housing agency obligations
After one but within five years		36,020		6.10
After five but within ten years		143,984		5.66
After ten years		373,870		2.86
		553,874		3.80
Mortgage-backed securities		7,552,014		3.96
Commercial paper
Within one year		69,939		2.37
Total held-to-maturity securities	$	8,386,425		3.94	%

119

As of December 31, 2004, available-for-sale securities had the following maturity and yield characteristics.

Mortgage-backed securities	$	626,607	2.64	%
Total available-for-sale securities	$	626,607	2.64	%

As of December 31, 2004, trading securities had the following maturity and yield characteristics.

(dollars in thousands)	Book Value		Yield
State or local housing agency obligations After one but within five years	$	222,000		2.08	%
Mortgage-backed securities		89,306		6.45
Total trading securities	$	311,306		3.33	%

As of December 31, 2004, the FHLBank held securities from the following issuers with a book value greater than 10% of FHLBank capital.

	Total		Total
Name of Issuer (dollars in thousands)	Book Value		Fair Value
Countrywide Home Loans	$	669,412	$	661,597
Structured Asset Securities Corporation		548,709		532,829
Structured Adjustable Rate Mortgage Loan Trust		490,751		489,171
Washington Mutual		467,802		459,167
Lehman ABS Corporation		439,180		417,762
J.P. Morgan Mortgage Trust		385,243		384,325
Pennsylvania Housing Finance Agency		373,870		376,167
Residential Accredit Loans Incorporated		369,743		363,990
Bear Stearns Adjustable Rate Mortgages		311,084		307,849
General Motors Acceptance Corporation		290,299		288,608
Wells Fargo Mortgage Backed Securities Trust		278,271		277,719
TOTAL	$	4,624,364	$	4,559,184

Loan Portfolio Analysis

(Note: Information presented excludes BOB related loan balances and activity.)

The FHLBank’s outstanding loans, nonperforming loans and loans 90 days or more past due and accruing interest for the years ended December 31 are as follows:

(dollars in thousands)	2004		2003		2002		2001		2000
Domestic:
Loans to members	$	38,989,126	$	34,671,987	$	29,262,399	$	29,315,410	$	25,945,961
Real estate mortgages	$	8,665,231	$	8,065,799	$	4,951,575	$	1,838,556	$	1,909,787
Nonperforming real estate mortgages	$	13,608	$	10,290	$	1,814	$	452	$	28
Real estate mortgages past due, 90 days or more, and still accruing interest*	$	22,530	$	31,937	$	9,604	$	67,176	$	—

120

All of the real estate mortgages held by the FHLBank are fixed rate.

The allowances for credit losses on real estate mortgage loans for the years ended December 31, are as follows:

(dollars in thousands)	2004		2003			2002		2001		2000
Domestic:
Balance at the beginning of period	$	514	$	661		$	91	$	15	$	—
Charge-offs		—		—			—		—		—
Recoveries		—		—			—		—		—
Net (charge-offs) recoveries		514		661			91		15		—
Provision/(benefit) for credit losses		166		(147	)		570		76		15
Balance at end of period	$	680	$	514		$	661	$	91	$	15

The ratio of net (charge-offs) recoveries to average loans outstanding was less than 1 basis point for the years ended December 31, 2004, 2003, 2002, 2001 and 2000. The allowance for loan loss is allocated expressly to real estate mortgages held by the FHLBank.

*Government loans (e.g., FHA, VA) continue to accrue after 90 days or more delinquent.

Borrowings with original maturities of one year or less are classified as short-term.

The following is a summary of short-term borrowings for each of the three years ended December 31:

(dollars in thousands)	2004			2003			2002
Federal funds purchased and loans from other
FHLBanks
Outstanding at year-end	$	—		$	60,000		$	—
Weighted average rate at year-end		2.40	%		0.91	%		—
Daily average outstanding for the year	$	226,018		$	354,285		$	159,973
Weighted average rate for the year		1.38	%		1.18	%		1.64	%
Highest outstanding at any month-end	$	2,377,000		$	2,775,000		$	460,000
Securities under repurchase agreements
Outstanding at year-end	$	—		$	—		$	—
Weighted average rate at year-end		—			—			—
Daily average outstanding for the year	$	3,048		$	189,097		$	349,563
Weighted average rate for the year		1.43	%		1.17	%		1.82	%
Highest outstanding at any month-end		-0-		$	699,409		$	503,750
Discount notes
Outstanding at year-end	$	15,160,634		$	11,536,705		$	10,394,875
Weighted average rate at year-end		2.09	%		0.91	%		1.11	%
Daily average outstanding for the year	$	14,741,227		$	10,925,668		$	10,361,896
Weighted average rate for the year		1.31	%		12	%		1.67	%
Highest outstanding at any month-end	$	18,650,485		$	12,559,158		$	13,498,298
Total short-term borrowings
Outstanding at year-end	$	15,178,842		$	11,596,705		$	10,394,875
Weighted average rate at year-end		2.12	%		0.91	%		1.11	%
Daily average outstanding for the year	$	14,974,870		$	11,469,050		$	10,871,432
Weighted average rate for the year		1.31	%		1.12	%		1.67	%

121

At December 31, 2004, time deposits in denominations of $100,000 or more totaled $750 thousand. The table below presents the maturities for time deposits in denominations of $100,000 or more:

					Over 6
			Over 3 months		months but
By Remaining Maturity at December 31, 2004	3 months or		but within 6		within 12
(in thousands)	less		months		months		Total
Time certificates of deposit ($100,000 or more)	$	750	$	—	$	—	$	750

122

FEDERAL HOME LOAN BANK OF PITTSBURGH
STATEMENT OF CONDITION

(In thousands except par value)	March 31,			December 31,
	2005			2004
	(Unaudited)
ASSETS
Cash and due from banks	$	55,646		$	92,224
Interest-bearing deposits		679,366			1,341,147
Deposits with other FHLBanks for mortgage loan programs		6,071			5,862
Federal funds sold		2,502,000			2,255,000
Investments:
Trading securities		—			311,306
Available-for-sale securities		557,895			626,607
Held-to-maturity securities, at amortized cost, fair value of $8,584,451
and $8,260,806, respectively		8,737,970			8,386,425
Loans to members		37,766,906			38,989,126
Mortgage loans held for portfolio net of allowance for credit losses of $725 and $680, respectively		8,780,568			8,664,551
Accrued interest receivable		541,140			528,092
Premises and equipment, net		9,756			8,940
Derivative assets		160,987			147,180
Other assets		37,340			42,452
Total assets	$	59,835,645		$	61,398,912
LIABILITIES AND CAPITAL
LIABILITIES
Deposits:
Interest-bearing
Demand	$	979,822		$	952,129
Term		40,000			750
Other		104,141			64,040
Non-interest-bearing
Demand		1,468			1,681
Total deposits		1,125,431			1,018,600
Borrowings:
Loans from other FHLBanks		—			—
Mandatorily redeemable capital stock		18,208			18,208
Total borrowings		18,208			18,208
Consolidated obligations, net:
Bonds		42,312,954			41,383,521
Discount notes		13,030,463			15,160,634
Total consolidated obligations, net		55,343,417			56,544,155
Accrued interest payable		316,872			299,988
Affordable Housing Program		26,984			23,362
Payable to REFCORP		9,761			8,941
Derivative liabilities		344,076			640,156
Other liabilities		61,665			66,924
Total liabilities		57,246,414			58,620,334
Commitments and contingencies		—			—
CAPITAL
Capital stock - putable ($100 par value) issued and outstanding shares:
24,873 and 26,958 shares, respectively		2,487,299			2,695,802
Retained earnings		116,394			99,503
Accumulated other comprehensive loss		(14,462	)		(16,727	)
Total capital		2,589,231			2,778,578
Total liabilities and capital	$	59,835,645		$	61,398,912

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

123

FEDERAL HOME LOAN BANK OF PITTSBURGH
STATEMENT OF OPERATIONS

	Three Months Ended March 31,
(In thousands except for earnings per share)	2005			2004
	(Unaudited)			(Unaudited)
Interest income:
Loans to members	$	247,412		$	115,642
Prepayment fees on loans to members		603			222
Interest-bearing deposits		4,258			2,551
Deposits for mortgage loan programs with other FHLBanks		51			68
Federal funds sold		9,268			3,210
Investments:
Trading securities		2,700			2,819
Available-for-sale securities		4,175			1,435
Held-to-maturity securities		85,558			70,200
Mortgage loans held for portfolio		84,774			55,360
Loans to other FHLBanks		—			3
Total interest income		438,799			251,510
Interest expense:
Consolidated obligations		379,545			222,454
Deposits		6,292			2,818
Borrowings from other FHLBanks		173			305
Securities sold under agreements to repurchase		32			—
Other borrowings		675			457
Total interest expense		386,717			226,034
Net interest income before provision for credit losses on mortgage loans		52,082			25,476
Provision for credit losses on mortgage loans		44			12
Net interest income after provision for credit losses on mortgage loans		52,038			25,464
Other income:
Services fees		871			1,083
Net gain (loss) on trading securities		(999	)		78
Net gain on sale of available-for-sale securities		—			—
Net gain on sale of held-to-maturity securities		—			2,576
Net gain/ (loss) on derivatives and hedging activities		8,067			12,784
Other, net		217			346
Total other income		8,156			16,867
Other expense:
Operating — salaries and benefits		6,909			5,493
Operating — other		5,514			4,056
Finance Board		493			394
Office of Finance		636			518
Total other expense		13,552			10,461
Income before Assessments		46,642			31,870
Affordable Housing Program		3,821			3,288
REFCORP		8,564			7,399
Total assessments		12,385			10,687
Income before cumulative effect of change in accounting principle		34,257			21,183
Cumulative effect of change in accounting principle		—			8,413
Net Income	$	34,257		$	29,596
Basic earnings per share:
Weight average shares outstanding		24,818			24,099
Earnings before cumulative effect of change in accounting principle	$	1.38		$	0.88
Cumulative effect of change in accounting principle		—			0.35
Basic and diluted earnings per share	$	1.38		$	1.23

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

124

FEDERAL HOME LOAN BANK OF PITTSBURGH
STATEMENT OF CASH FLOWS

	Three Months Ended March 31,
(In thousands)
	2005			2004
	(Unaudited)			(Unaudited)
OPERATING ACTIVITIES:
Net income	$	34,257			29,596
Cumulative effect of change in accounting principle		—			(8,413	)
Income before cumulative effect of change in accounting principle		34,257			21,183
Adjustments to reconcile income before cumulative effect of change in accounting principle to net cash provided by operating activities:
Depreciation and amortization:
Net premiums and discounts on consolidated obligations, investments, and deferred costs and fees received on interest-rate exchange agreements		22,675			10,213
Net premiums and discounts on mortgage loans		9,761			11,426
Concessions on consolidated obligation bonds		2,809			6,703
Bank premises and equipment		694			757
Provision for credit losses on mortgage loans		44			12
Net realized gain on held-to-maturity securities		—			(2,576	)
Net realized gain on available-for-sale securities		—			—
Decrease/(increase) in trading securities, net of transfers		89,306			6,520
(Gain)/loss due to change in net fair value adjustment on derivative and hedging activities		(25,254	)		(15,691	)
Net realized loss/(gain) on disposal of premises and equipment		—			10
(Increase)/decrease in accrued interest receivable		(13,047	)		8,799
Decrease/(increase) in derivative asset-net accrued interest		—			(907	)
(Decrease)/increase in derivative liability-net accrued interest		—			30,581
Decrease/(increase) in other assets		6,068			4,153
Increase/(decrease) in Affordable Housing Program (AHP) liability and discount on AHP advances		3,651			2,221
(Decrease)/increase in accrued interest payable		16,885			(60,543	)
Increase/(decrease) in REFCORP liability		1,014			4,421
Increase/(decrease) in other liabilities		(6,825	)		3,341
Total adjustments		107,781			9,440
Net cash provided by operating activities		142,038			30,623
INVESTING ACTIVITIES:
Net (Increase)/decrease in interest–bearing deposits		661,781			(431,586	)
Net (Increase)/decrease in federal funds sold		(247,000	)		400,000
Net Decrease/(increase) in short-term held-to-maturity securities		1,475			5,011
Proceeds from sales of long-term held-to-maturity securities		—			71,261
Proceeds from maturities of long-term held-to-maturity securities		430,807			987,594
Purchases of long-term held-to-maturity securities		(558,283	)		(821,194	)
Proceeds from sales of available-for-sale securities		—			—
Proceeds from maturities of available-for-sale securities		68,979			14,408
Purchases of available-for-sale securities		—			(155,000	)
Principal collected on loans to members		422,025,126			497,722,915
Loans made to members		(421,250,594	)		(500,815,224	)
Principal collected on mortgage loans held for portfolio		453,730			449,361
Mortgage loans held for portfolio purchased		(631,070	)		(822,053	)
Net decrease/(increase) in deposits to other FHLBanks for mortgage loan programs		(209	)		(1,275	)
Net decrease/(increase) in loans to other FHLBanks		—			—
Purchases of premises and equipment		(1,510	)		(397	)
Proceeds from sale of bank premises and equipment		—			—
Net cash (used in) by investing activities		953,232			(3,396,179	)

125

	Three Months Ended March 31,
(In thousands)	2005			2004
	(Unaudited)			(Unaudited)
FINANCING ACTIVITIES
Net (decrease)/increase in deposits		106,831			183,925
Net (decrease)/increase in other borrowings					1,550,000
Net increase in mandatorily redeemable capital stock		—			—
Net (decrease)/increase in loans from other FHLBanks		—			767,000
Net proceeds from issuance of COs
Discount notes		249,803,284			284,063,648
Bonds		5,017,554			6,971,950
Payments for maturing and retiring:
Discount notes		(251,939,317	)		(280,917,550	)
Bonds		(3,895,617	)		(9,525,757	)
Proceeds from issuance of capital stock		1,728,984			1,854,383
Payments for redemption/repurchase of capital stock		(1,937,487	)		(1,591,103	)
Cash dividends paid		(16,080	)		(8,377	)
Net cash provided by financing activities		(1,131,848	)		3,348,119
Net increase/(decrease) in cash and cash equivalents		(36,578	)		(17,437	)
Cash and cash equivalents at the beginning of the year		92,224			83,421
Cash and cash equivalents at the end of the year	$	55,646			65,984
Supplemental disclosures:
Interest paid during the year	$	255,508			250,160
AHP payments		199			998
REFCORP payments		7,745			2,978

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

126

FEDERAL HOME LOAN BANK OF PITTSBURGH
STATEMENT OF CHANGES IN CAPITAL

	Capital Stock									Accumulated
(In thousands)	Putable									Other
(Unaudited)							Retained			Comprehensive			Total
	Shares			Par Value			Earnings			Income (Loss)			Capital
Balance, December 31, 2002		18,397		$	1,839,742		$	65,563		$	(5,565	)	$	1,899,740
Proceeds from sale of capital stock		27,271			2,727,083									2,727,083
Redemptions/repurchase of capital stock		(22,252	)		(2,225,198	)								(2,225,198	)
Stock transfers														—
Comprehensive income:
Net Income								27,706						27,706
Other comprehensive income:
Net unrealized loss on available-for-sale securities											(1,103	)		(1,103	)
Net unrealized loss relating to hedging activities											(9,893	)		(9,893	)
Reclassification adjustment for gains included in net income											4,369			4,369
Other											20			20
Total other comprehensive income											(6,607	)		(6,607	)
Total comprehensive income														21,099
Cash dividends on capital stock								(50,182	)					(50,182	)
Balance, December 31, 2003		23,416			2,341,627			43,087			(12,172	)		2,372,542
Proceeds from sale of capital stock		58,054			5,805,390									5,805,390
Repurchase of capital stock		(54,330	)		(5,433,007	)								(5,433,007	)
Net shares reclassified to mandatorily redeemable capital stock		(182	)		(18,208	)								(18,208	)
Comprehensive income:
Net Income								100,726						100,726
Other comprehensive income:
Net unrealized gain on available-for-sale securities											322			322
Net unrealized loss relating to hedging activities											(5,236	)		(5,236	)
Reclassification adjustment for gains included in net income											431			431
Other											(72	)		(72	)
Total other comprehensive income											(4,555	)		(4,555	)
Total comprehensive income														96,171
Cash dividends on capital stock								(44,310	)					(44,310	)
Balance, December 31, 2004		26,958		$	2,695,802		$	99,503		$	(16,727	)	$	2,778,578
Proceeds from sale of capital stock		17,290			1,728,984									1,728,984
Repurchase of capital stock		(19,375	)		(1,937,487	)								(1,937,487	)
Comprehensive income:
Net Income								34,257						34,257
Other comprehensive income:
Net unrealized gain on available-for-sale securities											256			256
Net unrealized gain relating to hedging activities											2,009			2,009
Reclassification adjustment for gains included in net income											—			—
Other											—			—
Total other comprehensive income											2,265			2,265
Total comprehensive income														36,522
Cash dividends on capital stock								(17,366	)					(17,366	)
Balance, March 31, 2005		24,873		$	2,487,299		$	116,394		$	(14,462	)	$	2,589,231

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

127

FEDERAL HOME LOAN BANK OF PITTSBURGH
NOTES TO FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP and should be read in conjunction with the audited financial statements for the year ended December 31, 2004. However, such information reflects all adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim period.

The results of operations for the three months ended March 31, 2005, are not necessarily indicative of the results to be expected for the year ended December 31, 2005. The unaudited financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2004.

Certain reclassifications have been made in the prior-year financial statements to conform to current presentation.

Note 2 —Recently Issued Accounting Standards and Interpretations

     EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. In March 2004, the FASB Emerging Issues Task Force (EITF) released Issue 03-1, which addressed other-than-temporary impairment for certain debt and equity investments. The recognition and measurements requirements of Issue 03-1, and other disclosure requirements not already implemented, were to be effective for periods beginning after June 15, 2004. In September, 2004 the FASB staff issued FASB Staff Position EITF 03-1-1, which delayed the effective date for certain measurement and recognition guidance contained in Issue 03-1. The latter Issue, 03-1-1, requires the application of pre-existing other-than-temporary guidance during the delay until a final consensus is reached. The management of FHLBank is not able to determine what impact EITF 03-1 will have on its financial condition or results of operation until a final consensus is issued.

     Adoption of SOP 03-3. The American Institute of Certified Public Accountants issued Statement of Position 03-3 (herein referred to as “SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer in December 2003. SOP 03-3 provides guidance on the accounting for differences between contractual and expected cash flows from the purchaser’s initial investment in loans or debt securities acquired in transfer, if those differences are attributable, at least in part, to credit quality. SOP 03-3 had no impact on the FHLBank upon becoming effective on January 1, 2005.

     Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154) during the 2^nd Quarter of 2005. Effective for fiscal years beginning after December 15, 2005 with early adoption encouraged, SFAS 154 replaces Accounting Principles Board Opinion No. 20, Accounting Changes (APB 20) and Statement of Financial Accounting Standards No. 3, Reporting Accounting Changes in Interim Periods (SFAS 3). SFAS 154 applies to all voluntary changes in accounting principle and also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. Retrospective application is defined as the application of a different accounting principle to prior periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. SFAS 154 also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. This statement carries forward without change the guidance contained in APB 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS 154 also carries forward the guidance in APB 20 requiring justification of a change in accounting principle on the basis of preferability. The FHLBank does not currently anticipate SFAS 154 to have a material impact on its statement of condition, operation, or cash flow.

128

Note 3—Cash and Due from Banks

     Compensating Balances. The FHLBank maintains cash balances at commercial banks in return for certain services. These agreements contain no legal restrictions about the withdrawal of funds. The average compensating balances for the three months ended March 31, 2005 and 2004, were approximately $15.1 and $14.3 million, respectively.

     In addition, the FHLBank maintained average required clearing balances with various Federal Reserve Banks and branches of approximately $30 thousand at March 31, 2005 and December 31, 2004. These are required clearing balances and may not be withdrawn; however, the FHLBank may use earnings credits on these balances to pay for services received from the Federal Reserve Banks.

     Pass-through Deposit Reserves. The FHLBank acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. The amount shown as cash and due from banks includes pass-through reserves deposited with Federal Reserve Banks of approximately $29.0 million and $31.0 million March 31, 2005, and December 31, 2004, respectively. The FHLBank includes member reserve balances in other liabilities on the Statement of Condition.

Note 4—Trading Securities

     Major Security Types as of March 31, 2005 and December 31, 2004 and 2003 were as follows (in thousands):

	3/31/05		12/31/04		12/31/03
State or local agency obligations		—	$	222,000	$	222,000
Mortgage-backed securities
U.S. agency-guaranteed		—		19,908		30,421
Government-sponsored enterprises		—		69,398		102,205
		—		89,306		132,626
Total		—	$	311,306	$	354,626

     Net realized (loss) on trading securities for the three months ended March 31, 2005 was ($1.0) million. The FHLBank liquidated or reclassified the trading portfolio and currently has no securities classified as trading. The years ended December 31, 2004, and 2003 included a change in net unrealized holding gain of ($3.3) million, and $9.8 million for trading securities (held on December 31, 2004, and 2003, respectively).

Note 5—Available-for-Sale Securities

     Available-for-sale securities as of March 31, 2005, were as follows (in thousands):

			Gross Unrealized		Gross Unrealized
	Amortized Cost		Gains		Losses			Estimated Fair Value
Mortgage-backed securities-other	$	557,358	$	576	$	(39	)	$	557,895

     Available-for-sale securities with unrealized losses as of March 31, 2005 had a fair value of $59.1 million and have been in an unrealized loss position for less than 12 months.

     Available-for-sale securities as of December 31, 2004, were as follows (in thousands):

			Gross Unrealized		Gross Unrealized
	Amortized Cost		Gains		Losses			Estimated Fair Value
Mortgage-backed securities-other	$	626,325	$	375	$	(93	)	$	626,607

129

     Available-for-sale securities with unrealized losses as of December 31, 2004 had a fair value of $108.0 million and have been in an unrealized loss position for less than 12 months.

     The FHLBank reviewed its investment security holdings and determined that all unrealized losses reflected above are temporary. Factors reviewed included the creditworthiness of the issuers and the underlying collateral. Additionally, the FHLBank has the ability and the intent to hold such securities through to recovery of the unrealized losses.

     Redemption Terms. Contractual maturity of mortgage-backed securities-other will occur over a period exceeding 10 years. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

     The amortized cost of the FHLBank’s mortgage-backed securities classified as available-for-sale includes net discounts of $61 thousand and $73 thousand at March 31, 2005, and December 31, 2004, respectively.

     Interest Rate Payment Terms. All mortgage-backed securities are variable-rate.

Note 6—Held-to-Maturity Securities

     Major Security Types. Held-to-maturity securities as of March 31, 2005, were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Commercial paper	$	68,465	$	—	$	—		$	68,465
Other U.S. Obligations		10,574		211		—			10,785
Government-sponsored enterprises		394,814		420		(5,630	)		389,604
State or local agency obligations		774,561		10,156		(814	)		783,903
		1,248,414		10,787		(6,444	)		1,252,757
Mortgage-backed securities:
U.S. agency-guaranteed		130,502		189		(1,658	)		129,033
Government-sponsored enterprises		1,373,413		9,432		(45,352	)		1,337,493
Other		5,985,641		1,408		(121,881	)		5,865,168
		7,489,556		11,029		(168,891	)		7,331,694
Total	$	8,737,970	$	21,816	$	(175,335	)	$	8,584,451

     Held-to-maturity securities as of December 31, 2004, were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Commercial paper	$	69,939	$	—	$	—		$	69,939
Other U.S. obligations		10,598		349		—			10,947
Government-sponsored enterprises		200,000		1,180		—			201,180
State or local agency obligations		553,874		15,984		(755	)		569,103
		834,411		17,513		(755	)		851,169
Mortgage-backed securities:
U.S. agency-guaranteed		139,150		325		(1,988	)		137,487
Government-sponsored enterprises		1,443,608		1,451		(61,546	)		1,383,513
Other		5,969,256		5,752		(86,371	)		5,888,637
		7,552,014		7,528		(149,905	)		7,409,637
Total	$	8,386,425	$	25,041	$	(150,660	)	$	8,260,806

     Restricted securities relating to the FHLBank Shared Funding Program are classified as held-to-maturity and are included in other mortgage-backed securities as identified above. They are reported at amortized costs of $85.6 million and $90.4 million as of March 31, 2005 and December 31, 2004, respectively. Held-to-maturity securities of $48.6 million and

130

$117.3 million have been pledged as collateral that may be repledged as of March 31, 2005, and December 31, 2004, respectively.

The following table summarizes the held-to-maturity securities with unrealized losses as of March 31, 2005. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (in thousands)

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Government-sponsored enterprises	$	189,184	$	(5,630	)		—		—		$	189,184	$	(5,630	)
State or local agency obligations		—		—		$	11,751	$	(814	)	$	11,751	$	(814	)
Mortgage-backed securities:
U.S agency-guaranteed	$	2,236,150		(26,734	)		3,082,388		(95,147	)		5,318,538		(121,881	)
Government- sponsored enterprises		190,644		(8,095	)		803,953		(37,257	)		994,597		(45,352	)
Other		3,930		(24	)		92,860		(1,634	)		96,790		(1,658	)
	$	2,619,908	$	(40,483	)	$	3,990,952	$	(134,852	)	$	6,610,860	$	(175,335	)

     The following table summarizes the held-to-maturity securities with unrealized losses as of December 31, 2004. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (in thousands).

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
State or local agency obligations	$	—	$	—		$	11,810	$	(755	)	$	11,810	$	(755	)
Mortgage-backed securities:
U.S. agency-guaranteed		96,759		(1,988	)		—		—			96,759		(1,988	)
Government-sponsored enterprises		744,770		(17,289	)		565,760		(44,257	)		1,310,530		(61,546	)
Other		3,043,930		(51,618	)		1,397,553		(34,753	)		4,441,483		(86,371	)
		3,885,459		(70,895	)		1,963,313		(79,010	)		5,848,772		(149,905	)
Total	$	3,885,459	$	(70,895	)	$	1,975,123	$	(79,765	)	$	5,860,582	$	(150,660	)

     The FHLBank reviewed its investment security holdings and has determined that all unrealized losses reflected above are temporary. Factors reviewed included the creditworthiness of the issuers and the underlying collateral. Additionally, the FHLBank has the ability and the intent to hold such securities through to recovery of the unrealized losses. At March 31, 2005, and December 31, 2004, there were no securities with unrealized losses that were deemed to be classified as other than temporary.

131

     Redemption Terms. The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at March 31, 2005, and December 31, 2004, are shown below (in thousands). Expected maturities of some securities and mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

	March 31, 2005				December 31, 2004
	Amortized		Estimated			Amortized		Estimated
Year of Maturity	Cost		Fair Value			Cost		Fair Value
Due in one year or less	$	268,465	$	268,885		$	269,939	$	271,119
Due after one year through five years		268,594		269,918			46,618		48,725
Due after five years through ten years		144,221		151,438			143,984		155,158
Due after ten years		567,134		562,515			373,870		376,167
		1,248,414		1,252,756			834,411		851,169
Mortgage-backed securities		7,489,556		7,331,695			7,552,014		7,409,637
Total	$	8,737,970	$	8,584,451		$	8,386,425	$	8,260,806

     The amortized cost of the FHLBank’s mortgage-backed securities classified as held-to-maturity includes net discounts of $48.3 million and $52.2 million at March 31, 2005, and December 31, 2004, respectively.

     Interest Rate Payment Terms. The following table details interest rate payment terms for investment securities classified as held-to-maturity at March 31, 2005, and December 31, 2004 (in thousands):

	March 31, 2005		December 31, 2004
Amortized cost of held-to-maturity securities other than mortgage-backed securities:
Fixed-rate	$	690,494	$	498,491
Variable-rate		557,920		335,920
		1,248,414		834,411
Amortized cost of held-to-maturity mortgage-backed securities:
Fixed-rate		6,926,153		7,129,999
Variable-rate		563,403		422,015
		7,489,556		7,552,014
Total	$	8,737,970	$	8,386,425

     Gains and Losses on sale of HTM Securities. The FHLBank had no sales of held-to-maturity securities in the three months ended March 31, 2005. Gross gains of $2.6 million were realized on sales of $68.7 million of held-to-maturity securities for the year ended December 31, 2004. A $2.6 million net gain in 2004 related to the sale of a municipal security investment that was deemed to have undergone a decline in value as a result of a deterioration in the issuer’s creditworthiness as evidenced by an agency downgrade. Although the security was deemed to have undergone a decline in value due to the issuer’s creditworthiness, the realizable market value still exceeded the carrying value of the security, and as such, a gain was realized upon the sale.

132

Note 7—Loans to Members

     Redemption Terms. At March 31, 2005 and December 31, 2004, the FHLBank had loans to members outstanding, including AHP loans to members, at interest rates ranging from 0% to 8.56% as summarized below (in thousands).

	3/31/05						12/31/04
				Weighted						Weighted
				Average						Average
				Interest						Interest
Year of Maturity	Amount			Rate %			Amount			Rate %
Overdrawn demand deposit accounts	$	—					$	2,172			8.39	%
Due in 1 year or less		16,433,895			2.83	%		16,251,358			2.36	%
Due after 1 year through 2 years		4,032,068			3.16	%		4,285,225			3.01	%
Due after 2 years through 3 years		3,969,707			3.78	%		3,282,412			3.43	%
Due after 3 years through 4 years		3,115,372			4.41	%		3,264,278			4.47	%
Due after 4 years through 5 years		2,404,630			4.64	%		2,278,460			4.35	%
Thereafter		7,503,687			5.16	%		8,865,111			5.20	%
Index amortizing advances		81,835			2.40	%		86,824			2.40	%
Total par value	$	37,541,194			3.67	%	$	38,315,840			3.48	%
Unamortized commitment fees
Discount on AHP advances		(1,886	)					(2,058	)
Premium/(discounts) on advances		35						38
SFAS 133 hedging adjustments		227,563						675,306
Total	$	37,766,906					$	38,989,126

     Index amortizing loans require repayment according to predetermined amortization schedules linked to the level of various indices. Usually, as market interest rates rise (fall), the maturity of an index amortizing loan to member extends (contracts).

     The FHLBank offers returnable loans to members that may be prepaid on pertinent call dates without incurring prepayment or termination fees. Other loans to members may be prepaid only by paying a prepayment fee to the FHLBank that makes the FHLBank financially indifferent to the prepayment of the loan. At March 31, 2005 and December 31, 2004, the FHLBank had callable loans of $539 million and $513 million, respectively.

     The following table summarizes loans to members at March 31, 2005 and December 31, 2004, by year of maturity or next call date for callable loans to members (in thousands):

Year of Maturity or Next Call Date	3/31/05		12/31/04
Overdrawn demand deposit accounts	$	—	$	2,172
Due or callable in 1 year or less		16,442,395		16,459,858
Due or callable after 1 year through 2 years		4,032,068		4,085,225
Due or callable after 2 years through 3 years		3,994,707		3,282,412
Due or callable after 3 years through 4 years		3,113,872		3,257,778
Due or callable after 4 years through 5 years		2,404,630		2,278,460
Thereafter		7,471,687		8,863,111
Index amortizing advances		81,835		86,824
Total par value	$	37,541,194	$	38,315,840

     The FHLBank also offers convertible loans to members. With a convertible loan, the FHLBank effectively purchases a put option from the member that allows the FHLBank to convert the fixed-rate loan to a floating-rate loan at certain specified intervals during the term of the loan. The FHLBank normally exercises this option when interest rates increase. At March 31, 2005 and December 31, 2004, the FHLBank had convertible loans outstanding totaling $11 billion and $12.2 billion, respectively.

133

     The following table summarizes loans to members at March 31, 2005 and December 31, 2004, by year of maturity or next put date for convertible loans (in thousands):

Year of Maturity or Next Put Date	3/31/05		12/31/04
Overdrawn demand deposit accounts	$	—	$	2,172
Due or putable in 1 year or less		26,543,140		27,219,603
Due or putable after 1 year through 2 years		4,072,918		4,524,325
Due or putable after 2 years through 3 years		3,299,007		3,116,912
Due or putable after 3 years through 4 years		1,502,822		1,365,778
Due or putable after 4 years through 5 years		1,058,410		1,109,710
Thereafter		983,062		890,516
Index amortizing advances		81,835		86,824
Total par value	$	37,541,194	$	38,315,840

     Interest Rate Payment Terms. The following table details additional interest rate payment terms for loans to members at March 31, 2005 and December 31, 2004 (in thousands):

	3/31/05		12/31/04
Par amount of loans to members:
Fixed-rate – overnight	$	7,443,736	$	6,091,178
Fixed-rate – other		26,176,258		29,305,896
Variable-rate		3,921,200		2,918,766
Total	$	37,541,194	$	38,315,840

Note 8—Affordable Housing Program

     The FHLBank had outstanding principal in AHP-related advances of $12.7 million and $13.6 million at March 31, 2005, and December 31, 2004, respectively.

     Following is a roll-forward of the AHP liability for the three months ended March 31, 2005 and the year ended December 31, 2004 (in thousands):

Balance at 12/31/03	$	17,407
Committed Subsidy, net		(1,875	)
HBEF Set aside(1), net		127
Uncommitted Pool, net		7,703
Balance at 12/31/04	$	23,362
Committed Subsidy, net		(758	)
HBEF Set aside(1), net		2,708
Uncommitted Pool, net		1,672
Balance at 3/31/05	$	26,984

⁽¹⁾ Home Buyer Equity Fund – The FHLBank allocates 25% of the AHP subsidy pool on an annual basis to this program, which benefits qualifying first-time homebuyers.

134

Note 9—Mortgage Loans Held for Portfolio

     Under the MPF® Program, the FHLBank’s members originate, service, and credit enhance home mortgage loans that are then sold to the FHLBank. The FHLBank sells participation interests in some of its MPF® Program loans to other FHLBanks, and holds the rest in portfolio. The following table presents information as of March 31, 2005, and December 31, 2004, on mortgage loans held for portfolio for the foreseeable future (in thousands):

	3/31/05			12/31/04
Real Estate:
Fixed medium-term* single-family mortgages	$	1,743,758		$	1,808,119
Fixed long-term single-family mortgages		6,942,818			6,706,276
Premiums		119,846			122,661
Discounts		(27,211	)		(27,773	)
SFAS 133 hedging adjustments		2,082			55,948
Total mortgage loans held for portfolio	$	8,781,293		$	8,665,231

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

     The par value of mortgage loans held for portfolio outstanding at March 31, 2005, and December 31, 2004, was comprised of government-insured loans totaling $1.1 billion and $1.6 billion and conventional loans totaling $7.7 billion and $7.4 billion, respectively.

Note 10—Allowance for Credit Losses

(Note: Information presented excludes BOB related loan balances and activity.)

     The allowance for credit losses was as follows (in thousands):

	3/31/05		12/31/04
Allowance for Credit Losses:
Balance, beginning of year	$	680	$	514
Provision for credit losses		44		166
Balance, end of year	$	724	$	680

     At March 31, 2005 and December 31, 2004, the FHLBank had $14.5 million and $13.6 million, respectively, of non-accrual loans which represent loans delinquent by 90 days of more. At March 31, 2005 and December 31, 2004, the FHLBank’s other assets included $2.4 million of other real estate owned.

Note 11—Consolidated Obligations

     Consolidated obligations are the joint and several obligations of the FHLBanks and consist of consolidated bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. The specific consolidated obligations issued on the behalf of the FHLBank are recognized within the Statement of Condition. Consolidated bonds are issued primarily to raise intermediate and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated discount notes are issued primarily to raise short-term funds. These notes sell at less than their face amount and are redeemed at par value when they mature.

135

     Interest Rate Payment Terms. The following table details interest rate payment terms for consolidated bonds at March 31, 2005 and December 31, 2004 (in thousands). Range bonds are classified as comparative-index bonds.

	3/31/05		12/31/04
Par value of consolidated bonds:
Fixed-rate	$	33,010,560	$	30,181,568
Step-up		4,886,530		4,756,530
Simple variable-rate		596,000		301,000
Fixed that converts to variable		524,380		589,380
Variable that converts to fixed		1,711,000		3,696,000
Comparative-index		673,000		743,000
Zero-coupon		4,560,900		4,630,900
Other		5,005		5,386
Total par value	$	45,967,375	$	40,903,764

     Redemption Terms. The following is a summary of the FHLBank’s participation in consolidated bonds outstanding at March 31, 2005, and December 31, 2004, by year of maturity (in thousands):

	3/31/05					12/31/04
				Weighted					Weighted
				Average					Average
				Interest					Interest
Year of Maturity	Amount			Rate %		Amount			Rate %
Due in 1 year or less	$	10,441,200			2.52	$	9,698,200			2.44
Due after 1 year through 2 years		8,923,003			3.10		9,903,003			2.84
Due after 2 years through 3 years		5,389,675			3.48		4,718,345			3.30
Due after 3 years through 4 years		3,528,000			3.81		3,683,380			3.78
Due after 4 years through 5 years		3,361,530			3.83		3,153,530			3.75
Thereafter		12,325,900			2.92		12,646,900			2.98
Index amortizing notes		1,998,067			4.37		1,100,406			4.04
Total par value		45,967,375			3.03		44,903,764			3.01
Bond premiums		29,726					25,621
Bond discounts		(3,650,249	)				(3,723,512	)
SFAS 133 hedging adjustments		(33,899	)				177,648
Total	$	42,312,953				$	41,383,521

     Consolidated bonds outstanding at March 31, 2005 and December 31, 2004 include callable bonds totaling $30.4 billion and $27.6 billion, respectively. The FHLBank uses a portion of its outstanding fixed-rate callable debt to finance callable loans to members (see Note 8) and mortgage-backed securities.

     The FHLBank’s consolidated bonds outstanding includes (in thousands):

	3/31/05		12/31/04
Par amount of consolidated bonds:
Non-callable/non putable	$	15,521,295	$	17,287,295
Callable		30,446,080		27,616,469
Total par value	$	45,967,375	$	44,903,764

136

     The following table summarizes consolidated bonds outstanding at March 31, 2005 and December 31, 2004, by year of maturity or next call date (in thousands):

Year of Maturity or Next Call Date	3/31/05		12/31/04
Due in 1 year or less	$	28,229,613	$	25,998,663
Due after 1 year through 2 years		5,903,400		8,282,400
Due after 2 years through 3 years		2,123,295		1,844,295
Due after 3 years through 4 years		4,026,000		3,999,000
Due after 4 years through 5 years		2,428,000		2,220,000
Thereafter		1,259,000		1,459,000
Index amortizing notes		1,998,067		1,100,406
Total par value	$	45,967,375	$	44,903,764

     Consolidated Discount Notes. Consolidated discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to 360 days. These notes are issued at less than their face amount and redeemed at par value when they mature.

     The FHLBank’s participation in consolidated discount notes was as follows (in thousands):

					Weighted
	Book Value		Par Value		Average
					Interest Rate
March 31, 2005	$	13,030,463	$	13,043,934		2.60	%
December 31, 2004	$	15,160,634	$	15,173,091		1.86	%

Note 12—Capital

     The FHLBank is subject to three capital requirements under the current capital structure plan. First, the FHLBank shall maintain at all times permanent capital in an amount at least equal to the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, calculated in accordance with the rules and regulations of the Finance Board. Only “permanent capital,” defined as retained earnings plus capital stock, satisfies the risk-based capital requirement. The Finance Board may require the FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirements as defined. In addition, the GLB Act requires the FHLBank to maintain at all times at least a 4.0% capital-to-asset ratio and at least a 5.0% leverage ratio, defined as the sum of permanent capital weighed 1.5 times and non-permanent capital weighed 1.0 times divided by total assets. The FHLBank was in compliance with the aforementioned capital rules and requirements at March 31, 2005 and December 31, 2004. The FHLBank was in compliance with the capital rules at March 31, 2005, with a 6.6 percent leverage ratio and weighted leverage capital of $3.9 billion, and a 4.4 percent capital-to-asset ratio and risk-based capital of $2.6 billion.

     The following table shows the FHLBank’s compliance with the Finance Board’s capital requirements at March 31, 2005 and December 31, 2004 (in thousands):

	March 31, 2005						December 31, 2004
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	557,078		$	2,621,901		$	467,714		$	2,813,513
Total capital-to-asset ratio		4.0	%		4.4	%		4.0	%		4.6	%
Total capital	$	2,393,426		$	2,622,626		$	2,455,836		$	2,814,193
Leverage ratio		5.0	%		6.6	%		5.0	%		6.9	%
Leverage capital	$	2,991,782		$	3,933,577		$	3,069,796		$	4,220,950

     The FHLBank offers stock that may be redeemed subject to certain restrictions by giving five years’ notice.

     The GLB Act made membership voluntary for all members. Any member that withdraws from membership must wait five years from the notice date for all capital stock that is held as a condition of membership, a requirement set out in the FHLBank’s capital plan, unless the institution has cancelled its notice of withdrawal prior to that date, before being readmitted to membership in any FHLBank. As of March 31, 2005, and December 31, 2004, the FHLBank had $18.2 million

137

in capital stock subject to mandatory redemption from two former members. This amount has been classified as a liability in the Statement of Condition.

     Accumulated other comprehensive loss. The following table summarizes the components of accumulated other comprehensive loss at March 31, 2005 and December 31, 2004 (in thousands):

	3/31/05			2004
Deferred compensation	$	(175	)	$	(175	)
Net unrealized gains on available-for-sale securities		537			282
Net unrealized loss relating to hedging activities		(14,824	)		(16,834	)
Total	$	(14,462	)	$	(16,727	)

Note 13—Derivatives and Hedging Activities

     For the three months ended March 31, 2005 and 2004, the FHLBank recorded net realized and unrealized gain (loss) on derivatives and hedging activities of $8.1 million, and $12.8 million, respectively, in other income. Net realized and unrealized gain (loss) on derivatives and hedging activities for the three months ended March 31, 2005 and 2004 are as follows:

     Net Realized and Unrealized Gain (Loss) on Derivatives and Hedging Activities

	For the Three Month Period
	Ended
(in thousands)	3/31/05		3/31/04
Gains (losses) related to fair value hedge ineffectiveness	$	1,535	$	7,373
Net gains (losses) on firm commitment no longer qualifying as fair value hedge accounting
Gains (losses) on economic hedges		6,532		5,985
Gains (losses) related to cash flow hedge ineffectiveness		—		(574	)
Net gains (losses) on derivatives and hedging activities	$	8,067	$	12,784

Note 14—Transactions with Related Parties

     The FHLBank defines related parties as those members with capital stock outstanding in excess of 10% of total capital stock outstanding, those members that have an officer who is a director of the FHLBank, and other FHLBanks.

     The following table includes significant outstanding related party member balances as of March 31, 2005, and December 31, 2004.

(in thousands)	3/31/05		12/31/04
Loans to members	$	17,448,016	$	11,421,087
Total deposits		17,031		14,787
Capital stock		1,045,447		691,959

     Total mortgage loan volume purchased from related party members during the three months ended March 31, 2005 and the year ended December 31, 2004, was $0.9 million, and $61.8 million, respectively.

138

     From time to time, the FHLBank may borrow from or lend to other FHLBanks on a short term uncollateralized basis. The following table includes gross amounts transacted under these arrangements during the three months ended March 31, 2005 and the year ended December 31, 2004.

(in millions)	3/31/05		12/31/04
Borrowed from other FHLBanks	$	2,434	$	28,548
Repaid to other FHLBanks	$	2,434		28,608
Loaned to other FHLBanks		—		1,121
Repaid by other FHLBanks		—		1,121

Note 15—Estimated Fair Values

     The following estimated fair value amounts have been determined by the FHLBank using available market information and the FHLBank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the FHLBank as of March 31, 2005, and December 31, 2004. Although the FHLBank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology.

     The carrying value and estimated fair values of the FHLBank’s financial instruments at March 31, 2005, were as follows (in thousands):

March 31, 2005 Fair Value Summary Table

			Net
	Carrying		Unrealized			Estimated
Financial Instruments	Value		Gains (Losses)			Fair Value
Assets:
Cash and due from banks	$	55,646	$	—		$	55,646
Interest-bearing deposits		679,365		(4	)		679,361
Federal funds sold		2,502,000		51			2,502,051
Held-to-maturity securities		8,737,970		(153,519	)		8,584,451
Available-for-sale securities		557,895		—			557,895
Trading securities		—		—			—
Loans to members		37,766,906		(36,493	)		37,730,413
Mortgage loans held for portfolio, net		8,780,568		9,728			8,790,296
Accrued interest receivable		541,140	$	—			541,140
Derivative assets		160,987		—			160,987
Other Assets (1)		44,150		—			44,150
Liabilities:
Deposits		1,125,431		—			1,125,431
Mandatorily redeemable capital stock		18,208		—			18,208
Consolidated obligations:
Bonds		42,312,954		(194,239	)		42,118,715
Discount notes		13,030,463		(4,283	)		13,026,180
Accrued interest payable		316,872		—			316,872
Derivative liabilities		344,076		—			344,076
Other liabilities		99,033		—			99,033

⁽¹⁾   Includes BOB loans.

139

     The carrying value and estimated fair values of the FHLBank’s financial instruments at December 31, 2004, were as follows (in thousands):

December 31, 2004 Fair Value Summary Table

			Net
	Carrying		Unrealized			Estimated
Financial Instruments	Value		Gains (Losses)			Fair Value
Assets:
Cash and due from banks	$	92,224	$	—		$	92,224
Interest-bearing deposits		1,347,009		(141	)		1,346,868
Federal funds sold		2,255,000		(271	)		2,254,729
Held-to-maturity securities		8,386,425		(125,619	)		8,260,806
Available-for-sale securities		626,607		—			626,607
Trading securities		311,306		—			311,306
Loans to members		38,989,126		(14,208	)		38,974,918
Mortgage loans held for portfolio, net		8,664,551		126,544			8,791,095
Accrued interest receivable		528,092		—			528,092
Derivative assets		147,180		—			147,180
Other Assets (1)		48,392		—			48,392
Liabilities:
Deposits	$	1,018,600		—		$	1,018,600
Mandatorily redeemable capital stock		18,208		—			18,208
Consolidated obligations:
Discount notes		15,160,634		(2,327	)		15,158,307
Bonds		41,383,521		(25,326	)		41,358,195
Accrued interest payable		299,988		—			299,988
Derivative liabilities		640,156		—			640,156
Other liabilities		100,573		—			100,573

(1) Includes BOB loans.

Note 16—Earnings per Share of Capital

     The following table sets forth the computation of earnings per share of capital (in thousands):

	3/31/05		3/31/04
Income before cumulative effect of change in accounting principle	$	34,257	$	21,183
Cumulative effect of change in accounting principle		—		8,413
Net Income available to stockholders	$	34,257	$	29,596
Weighted average number of shares of capital used to calculate earnings per share(1)		24,817		24,099
Earnings per share of capital before cumulative effect of change in accounting principle	$	1.38	$	.88
Cumulative effect of change in accounting principle		—		0.35
Basic and diluted earnings per share of capital	$	1.38	$	1.23

⁽¹⁾   Does not include shares reclassified as liabilities.

140

Note 17—Segments

     The FHLBank operates two segments differentiated by products. The first segment entitled Traditional Member Finance houses a majority of the FHLBank’s activities, including but not limited to, providing loans to members; investment; and deposits products. MPF or Mortgage Finance segment purchases loans from members and funds and hedges the resulting portfolio.

     Results of segments are presented based on management accounting practices and the FHLBank’s management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. Therefore, the financial results of the segments are not necessarily comparable with similar information at other FHLBanks or any other company.

     The management accounting process uses various balance sheet and income statement assignments and transfers to measure performance of the segment. Methodologies are refined from time to time as management accounting practices change. Net mortgage loans held for portfolio are the only significant assets related to the operations of the Mortgage Finance segment. Borrowings are allocated to the Mortgage Finance segment based on loans outstanding. All remaining borrowings and all capital remain in the Traditional Member Finance business. The allowance for credit losses is totally allocated to the Mortgage Finance segment which is consistent with management’s assessment of the risk inherent in the loan portfolio. Derivatives are allocated to segments consistent with hedging strategies.

     Cost incurred by support areas not directly aligned with the segment but are allocated based on estimated usage of services.

     The following table sets forth the FHLBank’s financial performance by operating segment for the three months ended March 31, 2005 and 2004 (in thousands). BOB related loans are grouped with “Other assets” on the Statement of Condition. BOB related income is recorded net of the provision for loss and grouped with “Other income” on the Statement of Operations.

	Traditional
	Member			MPF® or Mortgage
	Finance			Finance			Total
March 31, 2005
Net interest income	$	40,358		$	11,724		$	52,082
Provision for credit losses on mortgage loans		—			(44	)		(44	)
Other income		7,354			802			8,156
Other expenses		(12,787	)		(765	)		(13,552	)
Income before assessments		34,925			11,717			46,642
Affordable Housing Program		2,865			956			3,821
REFCORP		6,412			2,152			8,564
Total assessments		9,277			3,108			12,385
Net income before cumulative effect of change in accounting principle	$	25,648		$	8,609		$	34,257
Total assets	$	51,055		$	8,781		$	59,836

141

	Traditional			MPF®or
	Member			Mortgage
	Finance			Finance			Total
March 31, 2004
Net interest income	$	13,273		$	12,203		$	25,476
Provision for credit losses on mortgage loans		—			(12	)		(12	)
Other income		11,310			5,557			16,867
Other expenses		(9,812	)		(649	)		(10,461	)
Income before assessments		14,771			17,099			31,870
Affordable Housing Program		1,892			1,396			3,288
REFCORP		4,258			3,141			7,399
Total assessments		6,150			4,537			10,687
Net income before cumulative effect of change in accounting principle		8,621			12,562			21,183
Total assets	$	48,733		$	8,505		$	57,238

Note 18—Other Developments

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

SUPPLEMENTAL INFORMATION (unaudited)

     Supplementary financial data on the FHLBank’s investment securities for March 31 and December 31 are included in the tables below.

(dollars in thousands)	3/31/05		12/31/04		12/31/03
Held-to-maturity securities:
Mortgage-backed securities	$	7,489,556	$	7,552,014	$	5,893,675
U.S. government and federal agencies		405,388		210,598		696,612
States or local housing agency obligations		774,561		553,874		614,298
Commercial paper		68,465		69,939		239,889
Total held-to-maturity securities	$	8,737,970	$	8,386,425	$	7,444,474

(dollars in thousands)	3/31/05		12/31/04		12/31/03
Available-for-sale securities:
Mortgage-backed securities	$	557,358	$	626,607	$	357,515
U.S. government and federal agencies		—		—		—
Total available-for-sale securities	$	557,358	$	626,607	$	357,515

(dollars in thousands)	3/31/05		12/31/04		12/31/03
Trading securities:
Mortgage-backed securities		—	$	89,306	$	132,626
U.S. government and federal agencies		—		—		—
States or local housing agency obligations		—		222,000		222,000
Total trading securities		—	$	311,306	$	354,626

142

     As of March 31, 2005, held-to-maturity securities had the following maturity and yield characteristics.

(dollars in thousands)	Book Value		Yield
U.S. government and federal agencies
Within one year	$	200,000		3.90	%
After one but within five years		10,574		8.50
After ten years		194,814		4.05
		405,388
State or local housing agency obligations
After one but within five years		258,020		3.47
After five but within ten years		144,221		5.67
After ten years		372,320		3.27
		774,561
Mortgage-backed securities		7,489,556		3.93
Commercial paper
Within one year		68,465		—
Total held-to-maturity securities	$	8,737,970		3.90

     As of March 31, 2005, available-for-sale securities had the following maturity and yield characteristics.

Mortgage-backed securities	$	557,358	3.08	%
Total available-for-sale securities	$	557,358	3.08	%

     As of March 31, 2005, the FHLBank held securities from the following issuers with a book value greater than 10% of FHLBank capital.

	Total		Total
Name of Issuer (dollars in thousands)	Book Value		Fair Value
Structured Asset Securities Corporation	$	596,052	$	585,130
Countrywide Home Loans	$	522,836	$	510,772
Wells Fargo Mortgage Backed Securities Trust	$	471,569	$	464,492
Structured Adjustable Rate Mortgage	$	469,330	$	462,437
JP Morgan Mortgage Trust	$	460,992	$	455,100
Washington Mutual	$	413,086	$	399,492
Lehman ABS Corporation	$	343,665	$	323,312
Residential Accredit Loans, Inc.	$	338,589	$	329,345
Bear Stearns Adjustable Rate Mortgage	$	293,592	$	289,811
GMAC Mortgage Corporation Loan Trust	$	283,378	$	380,705
TOTAL	$	4,193,089	$	4,100,596

143

Loan Portfolio Analysis

(Note: Information presented excludes BOB related loan balances and activity.)

     The FHLBank’s outstanding loans, nonperforming loans and loans 90 days or more past due and accruing interest for the March 31, 2005, December 31, 2004, December 31, 2003, December 31, 2002 and December 31, 2001 are as follows:

(dollars in thousands)	3/31/05		12/31/04		12/31/03		12/31/02		12/31/01
Domestic:
Loans to members	$	37,766,906	$	38,989,126	$	34,671,987	$	29,262,399	$	29,315,410
Real estate mortgages	$	8,781,293	$	8,665,231	$	8,065,799	$	4,951,575	$	1,838,556
Nonperforming real estate mortgages	$	14,492	$	13,608	$	10,290	$	1,814	$	452
Real estate mortgages past due, 90 days or more, and still accruing interest*	$	22,616	$	22,530	$	31,937	$	9,604	$	67,176

All of the real estate mortgages held by the FHLBank are fixed rate.

The allowances for credit losses on real estate mortgage loans for March 31, 2005, December 31, 2004, December 31, 2003, December 31, 2002 and December 31, 2001 are as follows:

(dollars in thousands)	3/31/05		12/31/04		12/31/03			12/31/02		12/31/01
Domestic:
Balance at the beginning of period	$	680	$	514	$	661		$	91	$	15
Charge-offs		—				—			—		—
Recoveries		—		—		—			—		—
Net (charge-offs) recoveries		680		514		661			91		15
Provision/(benefit) for credit losses		44		166		(147	)		570		76
Balance at end of period	$	724	$	680	$	514		$	661	$	91

The ratio of net (charge-offs) recoveries to average loans outstanding was less than 1 basis point for three months ended March 31, 2005 and the years ended December 31, 2004, 2003, 2002, and 2001. The allowance for loan loss is allocated expressly to real estate mortgages held by the FHLBank.

* Government loans (e.g., FHA, VA) continue to accrue after 90 days or more delinquent.

Item 14: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None

144

Item 15: Financial Statements and Exhibits

(a)(1) Financial Statements

The following Financial Statements and related notes, together with the report of PricewaterhouseCoopers, LLP, appear in Item 13.

Statement of Condition as of December 31, 2004 and 2003
Statement of Operations for each of the three years ended December 31, 2004
Statement of Cash Flows for each of the three years ended December 31, 2004
Statement of Change in Equity for each of the three years ended December 31, 2004

(2) Financial Statement Schedules

The schedules and exhibits for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission appear in Item 13, “Financial Statements and Supplementary Data.”

(b) List of Exhibits

The following is a list of the exhibits filed herewith:

3.1	Certificate of Organization
3.2	The Bylaws of the Federal Home Loan Bank of Pittsburgh
4.1	FHLBank Capital Plan
10.1	Severance Policy
10.2	Federal Home Loan Bank of Pittsburgh Incentive Compensation Plan
10.3	Federal Home Loan Bank of Pittsburgh Long-Term Incentive Compensation Plan
10.4	Federal Home Loan Bank of Pittsburgh Supplemental Thrift Plan
10.5	Federal Home Loan Bank of Pittsburgh Supplemental Executive Retirement Plan
10.6	Directors’ Fee Policy
10.7	Services Agreement with FHLBank of Chicago
10.8	Executive Severance Agreement with CFO Eric Marx
12.1	Ratio of Earnings to Fixed Charges
99.1	Information Statement of the FHLBank dated September 20, 2002 pertaining to the FHLBank’s Capital Plan

145

SIGNATURES

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

Federal Home Loan Bank of Pittsburgh
(Registrant)

Date:		June 29, 2005
By:	/s/ James D. Roy
		James D. Roy President & Chief Executive Officer

146

EX-3.1

Exhibit 3.1

Organization Certificate
The Federal Home Loan Bank of Pittsburgh

     The undersigned directors of the Federal Home Loan Bank of Pittsburgh, now organizing, all of whom are citizens of the United States, bona fide residents of the district in which this Bank is located, and nine at least of whom are now directly connected with the home financing business, having been appointed by the Federal Home Loan Bank Board and having been directed by the Act of Congress, known as the Federal Home Loan Bank Act, approved July 22, 1932, and in accordance with rules and regulations prescribed by said Board;

     Now, Therefore, in order that the statutes of the United States may be fully complied with and that the incorporation of this Bank may be perfected as a Federal Home Loan Bank, the following Organization Certificate is made and executed.

     1. The title of this Bank shall be the FEDERAL HOME LOAN BANK OF Pittsburgh.

     2. The location of the principal office of this Bank will be in the City of Pittsburgh, State of Pennsylvania, or at such other city as the Federal Home Loan Bank Board may from time to time determine is suited to the convenient and customary course of business of the institutions eligible to become Members of this Bank.

     3. This Bank shall be established in the City of Pittsburgh, State of Pennsylvania, in District Number Three, as defined by the Federal Home Loan Bank Board, or as may from time to time be readjusted or modified by said Board. Said District Number Three as now defined is as follows:

     The States of Pennsylvania, West Virginia and Delaware.

     4. This Bank shall engage in the business authorized by said Federal Home Loan Bank Act, and it shall exercise such powers as are permitted or prescribed by said Act, subject to the supervision of the Federal Home Loan Bank Board.

     5. The minimum amount of capital stock for the organization of this Bank shall be an amount to be determined by the Federal Home Loan Bank Board, with the approval of the Secretary of the Treasury, which amount shall not be less than Five Million ($5,000,000.00) Dollars, divided into shares of the par value of One Hundred ($100.00) Dollars each and shall be issued at par. After the amount of the minimum capital shall have been subscribed, any stock issued thereafter shall be issued at such price not less than par as may be fixed by the Federal Home Loan Bank Board. The capital stock of this Bank may from time to time be increased to such amount or amounts as may be necessary to provide for the issue of shares to members in accordance with the provisions of the Federal Home Loan Bank Act and the stock of this Bank shall from time to time be paid off and retired in accordance with the requirements and subject to the conditions and limitations prescribed in said Act, and with such rules, regulations, and orders, not inconsistent with law, as the Federal Home Loan Bank Board may from time to time prescribe or issue.

     6. This Certificate is made for the purpose of carrying out the provisions of the Act of Congress, known and cited as the Federal Home Loan Bank Act, approved July 22, 1932, and such other acts as may be passed by Congress amending or supplementing the said Federal Home Loan Bank Act, in so far as it or they may be applicable to the Federal Home Loan Bank of Pittsburgh, and is subject to such changes or additions, not inconsistent with law, as the Federal Home Loan Bank Board may deem necessary or expedient and may from time to time direct.

     7. This Bank shall have succession until dissolved by the Federal Home Loan Bank Board under this Act or by further Act of Congress.

(1)

day of October _____, 1932.
Name	A. E. Sheller
Address	No. 71 Altoona Trust Bldg., Altoona, PA
Name	Samuel Leroy Caum
Address	1104, Prospect Ave., Bethlehem, PA
Name	Francis S. Guthrie
Address	338, 4th Ave., Pittsburgh, PA
Name	Hubbs Weimer
Address	1202 Grandview Ave., Pittsburgh, PA
Name	Charles Warner
Address	2311 W 11th ST., Wilmington, Delaware
Name	J. G. H. Reass, JR.
Address	25 11th ST., Wheeling, WV
Name	H. C. Ogden
Address	1500 Main Street, Wheeling, WV
Name	Ernest T. Trigg
Address	322 Race St., Philadelphia
Name	William F. Bell
Address	1201 5th Ave., Beaver Falls, PA
Name	C. Fred Woodward
Address	31 E Upsal St., Germantown, Philadelphia, PA
Name	Henry Brachhold
Address	6422 N. Cayac St., Philadelphia

(2)

State of PENNSYLVANIA.	ü
	ý	ss:
County of ALLEGHENY.	þ

     Be it remembered, that on this Tenth day of October, 1932, before me, the undersigned, a Notary Public within and for the county and State aforesaid, came

A. E. Sheller,	J. G. H. Reass, Jr.
Samuel Leroy Caum,	H. C. Ogden
Francis S. Guthrie,	Ernest T. Trigg
Hubbs Weimer,	William F. Bell
Charles Warner,	C. Fred. Woodward

and Henry Brachhold, personally known to me to be the same persons who executed the foregoing writing and duly acknowledged the making and execution of the same as their act and deed.

	/s/ Margaret J. Grundman
[seal]	Notary Public.
	MARGARET J. GRUNDMAN, Notary Public
	MY COMMISSION EXPIRES
	JANUARY 6th, 1935

My commission expires January 6th, 1935.

(3)

     I hereby certify that the foregoing certificate, which was made and executed on the 10^th day of October, 1932, by the directors of the Federal Home Loan Bank of Pittsburgh, was filed with and approved by the Federal Home Loan Bank Board on the 25^th day of October, 1932.

     Given under my hand this 25^th day of October, 1932.

/s/ William E. Murray

Secretary, Federal Home Loan Bank Board.

EX-3.2

Exhibit 3.2

Federal Home Loan Bank of Pittsburgh

Bylaws

ARTICLE I
Offices

Section 1 – Principal Office: The principal office of the Bank shall be located in the city of Pittsburgh, the county of Allegheny, the Commonwealth of Pennsylvania.

Section 2 – Other Offices: The Bank may have such other offices as the Board of Directors may designate or as the business of the Bank may require, from time to time.

ARTICLE II
Stockholders Meeting

Section 1 – Annual Meeting: The Board of Directors shall determine annually whether there shall be a meeting of the stockholders.

Section 2 – Special Meetings: Special meetings of the stockholders for any purpose or purposes may be called by the President or by any seven members of the Bank’s Board of Directors, or by the stockholders of the Bank entitled to cast one-fourth of the votes eligible to be cast at any such meeting.

Section 3 – Time and Place of Meeting: The Board of Directors may designate the time, day, and place for any annual meeting or any special meeting called by the Board of Directors. If a special meeting is called by the President, the Board of Directors shall designate the time, day, and place for a special meeting to be held not less than 15 days, nor more than 60 days after such request therefor. Should the Board of Directors fail to act for a period of 30 days after the request for a special meeting, the Corporate Secretary shall designate a time, day, and place for such a meeting. Any annual or special meeting shall be held within the Third District.

Section 4 – Notice of Meeting: The Corporate Secretary shall mail to each stockholder at its last known address as shown on the books of the Bank a notice of any annual or special meeting. Such notice shall be sent at least 10 days before such meeting and shall contain a statement of the purpose(s) and of the time, day, and place of the meeting.

Section 5 – Quorum: The stockholders present shall constitute a quorum for the transaction of any business at a meeting of the stockholders.

Section 6 – Voting: Each stockholder of the Bank shall be entitled at every meeting of the stockholders to cast one vote for the transaction of any business coming before the meeting. The board of directors of each stockholder shall designate the officer or agent that may cast a vote at the stockholders meeting.

ARTICLE III
Directors

Section 1 – General Powers: The management of the business and the affairs of the Bank shall be vested in its Board of Directors.

Section 2 – Number, Tenure, and Qualifications: The number of Directors of the Bank shall be 14, who shall be appointed and elected in such manner and for such terms of office as provided for in §7 of the Federal Home Loan Bank Act, as amended, and the Rules and Regulations of the Federal Housing Finance Board, and who shall meet and maintain the eligibility requirements for such office.

Section 3 – Regular Meetings: Regular meetings of the Board of Directors may be held at such place and time as shall be determined, from time to time, by resolution of the Board of Directors; provided, however, that such meetings shall be held at least quarter-annually. Regular meetings may be held without notice thereof. Regular meetings may be held by telephone conference at which all members of the Board attending the meeting are able to hear and be heard by all other persons who are participating.

Section 4 – Special Meetings: Special meetings of the Board of Directors may be called by its Chairman or the President of the Bank and shall be called by the Corporate Secretary on the written request of three Directors stating the reasons therefor.

Section 5 – Special Meeting Notice: Notice of any special meeting shall be given at least 5 days previously thereto by written notice delivered or mailed to each Director, by telegram or by facsimile. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, properly addressed with postage thereon prepaid. If notice is given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. If notice is given by facsimile, such notice shall be deemed to be delivered when the notice has been transmitted with a machine-produced receipt of proper transmittal generated. Any Director may waive notice of any meeting. The attendance of a Director at a meeting shall constitute a waiver of notice of such meeting except where a Director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convenient. The notice of such special meeting shall stipulate the time and place of such meeting and shall contain the statement of the purpose(s) of such meetings. Such meetings may be held at any time and place

without previous notice if all the Directors are actually present, or notice may be waived by any Director.

Section 6 – Quorum: At any regular or special meeting of the Board of Directors, the majority of those authorized to act as Directors shall constitute a quorum for the transaction of business. If less than the majority is present at a meeting, the majority of the Directors present may adjourn the meeting, from time to time, without further notice.

Section 7 – Chairman: There shall be a Chairman who shall be designated by the Board of Directors. The Chairman of the Board of Directors shall, when present, preside at all meetings of the Board of Directors and of the stockholders. He shall in general perform all duties incident to the office and such other duties as shall be prescribed by the Board of Directors, from time to time.

Section 8 – Vice Chairman: There shall be a Vice Chairman who shall be designated by the Board of Directors. In the absence or disability of the Chairman, the Vice Chairman of the Board of Directors shall exercise all powers and discharge all of the duties of the Chairman of the Board, including presiding at meetings of the Board of Directors and of the stockholders. The Vice Chairman of the Board shall also perform all duties incident to the office and such other duties as shall be prescribed by the Board of Directors, from time to time.

Section 9 – Corporate Secretary. The Corporate Secretary shall (a) keep the minutes of the proceedings of the Board of Directors and Executive Committee in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these bylaws; (c) be custodian of the corporate records and of the seal of the Bank; and (d) in general perform all duties incident to the office of the Corporate Secretary and such other duties as, from time to time, may be assigned to him or her by the President or by the Board of Directors.

Section 10 – Order of Business: At meetings of the Board of Directors, business shall be transacted in such order as, from time to time, the Board of Directors may determine by resolution. In the absence of the Chairman and Vice Chairman, a Chairman pro tempore selected by the Board of Directors shall preside.

Section 11 – Vacancies. In the event that there is a vacancy created in an elected directorship, the remaining members of the Board of Directors shall elect a replacement to fill the vacant directorship. Vacancies created in an appointed directorship shall be filled by an appointment of the Federal Housing Finance Board.

Section 12 – Compensation: Members of the Board of Directors shall receive compensation for their services as provided for in a resolution appropriately

adopted by the Board of Directors, from time to time, subject to the limits set forth in the Federal Home Loan Bank Act.

ARTICLE IV
Committees

Section 1 – Executive Committee: At the first meeting of each fiscal year, the Board of Directors shall select an Executive Committee consisting of the Chairman of the Board, who shall serve as Chairman of the Executive Committee; the Chairman of each Standing Committee of the Board of Directors, if any; and any other member of the Board so elected to the Executive Committee. The Secretary of the Executive Committee shall be the Corporate Secretary. During the intervals between the meetings of the Board of Directors, the Executive Committee shall possess and may exercise all of the powers of the Board of Directors in the management and direction of the affairs of the Bank in all cases in which specific directions shall not have been given by the Board of Directors. All action by the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action and shall be subject to revision and alteration by the Board of Directors; provided, however, that no rights of third party shall be effected by any such revision or alteration. Regular minutes of the proceeding of the Executive Committee shall be kept in a book provided for that purpose. In the event that any member(s) of the Executive Committee named by the Board of Directors are unavailable for duty, any member of the Board of Directors may be selected by the person calling a meeting of the Executive Committee and may serve and shall be in power to act as an alternate member of the Executive Committee. A majority of the Executive Committee shall be necessary to constitute a quorum, and in every case, the affirmative vote of the majority of the members shall be necessary for the passage of any resolution. The Executive Committee may act by the written resolution of a quorum thereof although not formally convened; it shall fix its own rules and procedures; and shall also meet at the call of the Chairman, Vice Chairman, the President or Vice President of the Bank.

Section 2 – Executive Committee Telephone Meetings: Whenever the person calling a meeting of the Executive Committee or the Executive Committee by resolution shall determine that in the interest of time and economy, it is desirable that a meeting(s) of the Executive Committee to be so held, such meeting shall be conducted by telephone conference at which all members of the Executive Committee attending the meeting are able to hear and be heard by all other persons who are participating. At such telephone meetings, the Executive Committee is in power to act upon any matter(s) requiring action, notwithstanding that the same may not have been included in an agenda submitted to members prior to such meeting. The majority of the Executive Committee shall be necessary for the passage of any resolution. Minutes of the telephonic meetings

of the Executive Committee shall be kept in the same manner as the minutes of other meetings.

Section 3 – Audit Committee: At the first meeting of each fiscal year, the Board of Directors shall select an Audit Committee comprised of five or more Directors each of whom shall meet the criteria for independence set forth in the Finance Board Regulations. The Audit Committee shall include a balance of representation of community financial institutions and other members as well as a balance of Elected and Appointed Directors. The terms of the members of the Audit Committee shall be staggered to provide for continuity of service. The Secretary of the Audit Committee shall be the Internal Auditor of the Bank. The Audit Committee shall operate in accordance with the Rules and Regulations of the Finance Board and its Charter.

Section 4 – Governance Committee: At the first meeting of each fiscal year, the Board of Directors shall select a Governance Committee that shall have general responsibility for establishing and overseeing the processes of the Board of Directors. The Governance Committee shall be responsible for nominating candidates for the positions of Chair and Vice Chair of the Board of Directors, and for nominating candidates for the positions of Chairs and members of the each Committee of the Board. The Governance Committee shall also have the responsibility to oversee the election of director process. The Secretary of the Governance Committee shall be the General Counsel of the Bank. The Governance Committee shall operate in accordance with its Charter.

Section 5 – Committees: The Board of Directors may elect such other Standing Committees each to consist of two or more Directors as it may, from time to time, determine which committee shall serve for such term and shall have and may exercise such duties, functions, and powers as the Board of Directors may, from time to time, prescribe in the charter for such committees. In addition to the foregoing, the Board of Directors may, from time to time, designate a member(s) of the Board of Directors as a special Ad Hoc Committee to handle such matters and with such powers as the Board of Directors may specify. All action taken by any committee shall be reported to the Board of Directors at such times as the Board of Directors shall direct.

ARTICLE V
Officers and Employees

Section 1 – Election or Appointment of Officers: The officers of the Bank shall be a President, Treasurer, Secretary and one or more Vice Presidents, all of whom shall be appointed by the Board of Directors. One person may hold any two offices. The Board of Directors may also appoint such other officers as they shall deem necessary and who shall have such authority and shall perform such duties as, from time to time, may be prescribed by the Board of Directors.

Section 2 – President: The President shall be the Chief Executive Officer of the Bank and as such shall be primarily responsible for the operation and management of the Bank and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall preside at all meetings of the stockholders, in the absence of the Chairman and the Vice Chairman of the Board.

Section 3 – Vice President: The other officers shall have such powers and duties as are usually incident to their respective offices and such as may be assigned to them by the Board of Directors or the President. They shall have full responsibility for the operation of the Bank under the direction of the Board of Directors, the Executive Committee and the President. They shall make a full report to the committees of the Board of Directors of matters under consideration or to be considered by such committees and shall see that a full report of the operation of the Bank is made to the Board of Directors at each regular meeting. When so designated by resolution of the Board of Directors and under such directions as be stated therein, the President or Vice President or other officers may act as ex officio members of any committee of the Board of Directors, except the Executive Committee, provided that the presence of only one such ex officio member may be counted and determined for the requirement of a quorum.

Section 4 – Term of Office. The Board of Directors shall designate the officers of the Bank, or in its sole discretion it may elect to designate only a subset of officers delegating to the President the authority to designate other officers of the Bank. All officers shall hold office until their respective successors are appointed and qualified. Any officer appointed by the Board of Directors may be removed from the office at any meeting of the Board of Directors with or without cause by the affirmative vote of the majority of the Directors then in office whenever, in their judgment, the business interest of the Bank will be served thereby. Any officer appointed by the President may be removed by the President with or without cause at any time whenever, in the judgement of the President the business interest of the Bank will be served thereby. An officer may resign by written notice to the Bank. The resignation shall be effective upon receipt by the Bank or at a subsequent time specified in the notice of resignation. The Board of Directors or the President as so delegated shall have the power to fill any vacancy in any offices occurring from whatever reason.

Section 5 – Compensation. The Board of Directors shall fix the compensation of the officers or a subset of officers and may delegate the authority to set the salaries of all other officers and employees to the President.

Section 6 – Employees: There shall also be such other employees as the President or Board of Directors may authorize or whose appointment the Board of Directors may ratify, and they shall have such duties as shall be assigned to them by the Board of Directors and the President of the Bank.

Section 7 – Legal Counsel: The Board of Directors may appoint a General Counsel who shall advise the Board of Directors and officers on all legal matters affecting the Bank, and shall perform such additional duties as may be assigned to him or her by the Board of Directors or the President.

ARTICLE VI
Capital Stock

Section 1 – Issue of Stock: The Bank shall maintain a book entry system whereby the Bank shall issue stock upon payment therefor, and the member stockholder shall acquire ownership interest in stock so issued solely and exclusively by notation upon the books of the Bank of the number of shares of stock issued in the name of the member stockholder.

Section 2 – Transfer of Stock: Subject to the provisions of the Federal Home Loan Bank Act, as amended, and the Rules and Regulations of the Federal Housing Finance Board, shares of stock of the Bank shall be transferable only upon its books by the duly authorized representative of the member stockholder thereof as shown on the books of the Bank.

Section 3 – Certificates of Stock: If expressly requested to do so by a stockholder, the President shall issue or cause to issue a certificate or certificates signed by any two officers of the Bank with the seal of the Bank affixed thereto in such form as the Board of Directors of the Bank shall approve certifying the number of shares of stock of the Bank owned by such stockholder. Such signatures and seal may be a facsimile and may be mechanically reproduced thereon. Such certificates shall state on their face that they are not negotiable or transferable except by the Bank and they may not be used as security except as additional security to repay any Bank advance.

Section 4 – Dividends: Dividends may be declared by the Board of Directors at its discretion out of current net earnings or previously retained earnings remaining after all reserves and charge-offs required under the Federal Home Loan Bank Act, as amended, have been provided for.

ARTICLE VII
General Provisions

Section 1 – Minutes: Accurate minutes of all meetings of the Board of Directors, the Executive Committee, the Audit Committee, the Governance Committee, and any other committee shall be signed by the presiding officer and attested to by the Secretary officiating at such meetings. The original copies of such minutes shall be preserved by the Bank in minute books in custody of the Corporate

Secretary but available to any member of the Board of Directors, or to any Board member, examiner or other official representative of the Federal Housing Finance Board.

Section 2 – Banking Hours: The Bank shall be kept open for business for such hours as the Board of Directors or President shall fix, and employees shall remain in performance of their duties for such hours as may be required by the Board of Directors or President.

Section 3 – Deposits: All funds of the Bank not otherwise employed shall be deposited, from time to time, to the credit of the Bank in such banks, trust companies, or other depositories as the Board of Directors may select, all in accordance with Federal Housing Finance Board policy.

Section 4 – Budget: The President of the Bank shall prepare and submit to the Board of Directors a proposed budget for the following calendar year. The Board of Directors shall promptly consider the proposed budget and shall adopt the budget for the following calendar year.

Section 5 – Insurance: The Bank shall have the power to purchase and maintain insurance on the assets of the Bank and surety bonds covering all officers, employees, and agents having control over or access to monies or securities owned by the Bank or in its possession. The Bank may also purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Bank or is or was serving at the request of the Bank as a director, officer, employee or agent of any corporation, partnership, joint venture, trust or other enterprise against any liability asserted or threatened against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Bank would have the power to indemnify him against such liability under the provisions of this Article VII.

Section 6 – (a) Right to Indemnification. Each person who was or is a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (“Proceeding”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Bank or, as a director or officer of the Bank, is or was serving at the request of the Bank or as required by law as a director, officer, employee, member or agent of another corporation, partnership, joint venture, trust, council, advisory committee or other enterprise, including service with respect to employee benefit plans, whether the basis of such Proceeding is alleged action in an official capacity as a director, officer, trustee, employee or agent or in any other capacity, shall be indemnified and held harmless by the Bank to the fullest extent not prohibited by law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Bank to provide broader indemnification rights than said law permitted the Bank to provide prior to

such amendment), against all expenses, liability and loss (including attorney’s fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith; provided, however, that the Bank shall indemnify any such person seeking indemnity in connection with an action, suit or proceeding (or part thereof) initiated by such person only if such action, suit or proceeding (or part thereof) initiated by such person was authorized by the Board of Directors of the Bank. Such right shall include the right to be paid by the Bank expenses, including attorney’s fees, incurred in defending any such Proceeding in advance of its final disposition; provided, however, that the payment of such expenses in advance of the final disposition of such Proceeding shall be made only upon delivery to the Bank of an undertaking, by or on behalf of such director or officer, in which such director or officer agrees to repay all amounts so advanced if it should be ultimately determined that such person is not entitled to be indemnified under this resolution or otherwise.

     (b) Determination of Right to Indemnification. Indemnification under paragraph (a) shall be made promptly, and in any event within thirty days after a written claim therefor has been received by the Bank, unless a determination is made by the Bank reasonably and within such thirty-day period, in the manner described herein, that the Bank is prohibited from paying such indemnification. Such determination shall be based on the facts known at the time and shall be made (i) by a majority vote of a quorum consisting of Directors of the Bank who were not and are not parties to or threatened to be made a party to such Proceeding, or (ii) if such a quorum of disinterested directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services, for the Office of Finance, any Federal Home Loan Bank, or any person to be indemnified, or (iii) by the court in which such Proceeding was brought or any other court of competent jurisdiction.

     (c) Right of Claimant to Bring Suit. (i) If a claim under paragraph (a) is not paid in full by the Bank within thirty days after a written claim therefor has been received by the Bank, the claimant may any time thereafter bring suit against the Bank to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking has been tendered to the Bank) that the Bank is prohibited by law to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Bank.

(ii) Neither the failure of the Bank (including its Board of Directors or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances nor an actual determination by the Bank (including its Board of Directors or independent

legal counsel) that the claimant is not entitled to indemnification, shall be a defense to the action or create a presumption that the claimant is not entitled to the indemnification.

     (d) Contractual Rights; Applicability. The right to be indemnified or to the reimbursement or advancement of expenses pursuant hereto (i) is a contract right based upon good and valuable consideration, pursuant to which the person entitled thereto may bring suit as if the provisions hereof were set forth in a separate written contract between the Bank and the director or officer, (ii) is intended to be retroactive and shall be available with respect to events occurring prior to the adoption hereof, and (iii) shall continue to exist after the rescission or restrictive modification hereof with respect to events occurring prior thereto.

     (e) Requested Service. Any director or officer of the Bank who solely by virtue of being a director or officer of the Bank is or was serving as a director, officer, employee, member or agent of another corporation, partnership, joint venture, trust, council, advisory committee or other enterprise, including service with respect to employee benefit plans, shall be deemed to be doing so at the request of the Bank.

     (f) Non-Exclusivity of Rights. The rights conferred on any person by paragraphs (a) and (c) shall not be exclusive of and shall be in addition to any other right which any person may have or may hereafter acquire under any statute, provision of the Articles of Incorporation, Code of Regulations, resolution, agreement, vote of disinterested directors or otherwise.

Section 7 – Checks, Drafts, Etc.: All checks, drafts, or other orders for the payment of money, notes or other evidence of indebtedness issued in the name of the Bank shall be signed by any two such officers or agents and in such manner as shall, from time to time, be determined by resolution of the Board of Directors.

Section 8 – Signing of Papers: All contracts, deeds, bonds, assignments, releases, or other legal documents of the Bank shall be signed by an officer or other authorized employee of the Bank.

Section 9 – Operations: The Bank shall operate and conduct business within the provisions of the Federal Home Loan Bank Act, as amended, the Rules and Regulations of the Federal Housing Finance Board, its certificate of organization and these bylaws.

Section 10 – Fiscal Year: The fiscal year of the Bank shall begin on the first day of January.

Section 11– Amendment: The bylaws of the Bank may be amended by the affirmative vote of a majority of the Board of Directors at any regular or special

meeting of the Board of Directors provided that each Director shall have been given notice of the proposed amendment and of the form of such amendment at least 10 days preceding any meeting called for such purpose. The bylaws may be amended by the affirmative vote of the majority of the Board of Directors at any regular meeting without written notice of the proposed amendment and of the form of the amendment being given to each Director provided that the form of the proposed amendment has been submitted to the previous regular meeting of the Board of Directors and has been incorporated in the minutes of said meeting.

Section 12 – Corporate Seal: The seal of the Bank shall be as affixed hereto and shall be in charge of the Corporate Secretary.

Revised 12/2000

EX-4.1

Exhibit 4.1

CAPITAL PLAN

of the

Federal Home Loan Bank of Pittsburgh

As Approved by the Executive Committee on

April 26, 2002

TABLE OF CONTENTS

I. Purpose	3
A. General	3
II. Stock Investment	3
A. General	3
B. Minimum Amount	3
C. Adjustments to Minimum Amount	7
III. Transition Rule	7
A. Manner of conversion	7
B. Right to opt out of Capital Plan	8
C. Effects of Opting Out of the Conversion	8
D. Failure of a Member to affirm election to convert	8
E. Timetable for transition and full capital compliance	8
IV. Par Value, Rights, Terms, and Preferences of Capital Stock	8
A. Par Value	8
B. Ownership	8
C. Limitations	9
D. Dividends	9
E. Redemption	9
F. Cancellation of Redemption	9
G. Limited Transferability	9
H. Termination of Membership	9
I. Voting rights	11
J. Rights in Bank Merger	11
K. Rights in Bank Liquidation	11
V. Bank Review of Plan	11
A. Review by Independent CPA	11
B. Review by NRSRO	11
C. Good faith effort determination	12
D. Approval by FHFB	12
E. Process for Amending this Plan	12
VI. Definitions	12
Exhibit A — General instructions for maximum borrowing capacity (MBC) calculation
Exhibit B. — Line description for MBC calculation — banks
Exhibit C — Line descriptions for MBC calculation — thrifts
Exhibit D — Line descriptions for MBC calculation — credit unions
Exhibit E — Line descriptions for MBC calculation — insurance companies
Schedule A

Page 2 of 16

I.   Purpose

A.   General. This Capital Plan is being implemented to comply with the provisions of the Bank Act and Capital Regulation.

1.	Effective Date. The Capital Plan will become effective on the Recalculation/Conversion Date, which shall be the date stated in a Notice to Members. Unless directed otherwise by the Finance Board, the Recalculation/Conversion Date shall not be greater than 18 months after the Finance Board approves the Capital Plan nor less than sixty (60) days after the date of the Notice to Members.
2.	Capitalized Terms. All capitalized terms used but not defined elsewhere in the Capital Plan shall have the meaning ascribed to such terms in Section VI.

II.   Stock Investment

A.

General. Adequate capitalization is required to: (a) provide for the safe and sound operation of the Bank; (b) permit prudent leveraging into products and services of benefit to Members and Housing Associates; (c) provide appropriate risk-adjusted Member dividend returns; (d) protect creditors of the Bank and the Bank System against loss; (e) generate earnings sufficient to meet the Bank’s various community support and public purpose obligations; and (f) comply with prevailing Minimum Regulatory Capital Requirements. Towards these objectives, this Capital Plan requires Members to make certain Minimum Member Stock Investments in the Bank.

B.

Minimum Amount

1.

General. The need for capital is in great part a function of the volumes of and risks inherent in the products and services provided by the Bank to its Members, including the potential for Members to borrow from the Bank. Therefore, the Capital Stock of the Bank should be contributed in general proportion to the distribution of such products and services to its Members, including their potential borrowing activities. Each Member must purchase and maintain a minimum investment in the Capital Stock of the Bank in an amount determined in accordance with the requirements of this Capital Plan.

2.

Minimum Member Stock Investment. Each Member is required to maintain a Minimum Member Stock Investment, both as a condition to becoming and remaining a Member and as a condition to obtaining Loans from the Bank, access to the Bank’s credit products through its Unused Borrowing Capacity, and to support Acquired Member Assets with the Bank. The total amount of the required minimum investment of all Members shall be sufficient to ensure that the Bank stays in compliance with the Minimum Regulatory Capital Requirements under the Capital Regulation. The Board of Directors will monitor and, as necessary, adjust

Page 3 of 16

the minimum investment to provide for Capital Stock purchases and maintenance by all Members sufficient to allow the Bank to remain in compliance with its Minimum Regulatory Capital Requirements.

a)   Member Loan Stock Purchase Requirement. Each Member is required to purchase and hold Capital Stock in an amount equal to the Bank’s Member Loan Stock Purchase Percentage multiplied by all the Loans extended from the Bank to that Member. The Member Loan Stock Purchase Requirement will be calculated at the time each Loan is Transacted. The Member Loan Stock Purchase Percentage is set forth on Schedule A. From time to time, upon approval by the Board of Directors, the Member Loan Stock Purchase Percentage may be adjusted to as high as six percent (6.0%) or to as low as four and one half percent (4.5%). Changes outside this range would constitute an amendment to this Capital Plan that would require Finance Board approval. An adjustment in the Member Loan Stock Purchase Percentage may be applied in either of the following manners:

(1)

A change in the Member Loan Stock Purchase Percentage may be applied prospectively, affecting only Loans Transacted subsequent to the change in the Member Loan Stock Purchase Percentage, or

(2)

A change in the Member Loan Stock Purchase Percentage may be applied retrospectively, in which case the new Member Loan Stock Purchase Percentage would be applied both to the Member Loans outstanding at the time of such change and to any Loans Transacted subsequent to such change. If a change in Member Loan Stock Purchase Requirement is made retrospectively, the Board of Directors may choose to either:

(i)	apply the new Member Loan Stock Purchase Percentage to all Member Loans outstanding at the time of such change, or
(ii)	apply the new Member Loan Stock Purchase Percentage only to Member Loans which do not include a Principal Prepayment Fee.

b)   Unused Borrowing Capacity Stock Purchase Requirement. Each Member is required to purchase and hold Capital Stock in an amount equal to the Bank’s Unused Borrowing Capacity Percentage multiplied by the principal amount of Unused Borrowing Capacity of that Member. The amount of Unused Borrowing Capacity shall be calculated no later than April 10 ^th of each year and at the time each Loan is Transacted. The Unused Borrowing Capacity Percentage is set forth on Schedule A. From time to time, upon approval by the Board of Directors, the Unused Borrowing Capacity Percentage may be adjusted to as high as one and one-half percent (1.5%) or to as low as zero percent (0%).

Page 4 of 16

Changes outside this range would constitute an amendment to this Capital Plan, which would require Finance Board approval. An adjustment in the Unused Borrowing Capacity Percentage will be applied to the principal amount of Unused Borrowing Capacity for all future calculations. From time-to-time, in the discretion of the Board, the amount any one Member would have to purchase under the Unused Borrowing Capacity Stock Purchase Requirement may be subject to a cap of no less than $10 million.

c)

Acquired Member Asset Purchase Requirement. Each Member is required to purchase and hold Capital Stock in an amount equal to the Bank’s Acquired Member Asset Purchase Percentage multiplied by the amount of Acquired Member Assets delivered by that Member and held by the Bank at the time the transaction occurs (in the Bank’s discretion, it may recalculate the member’s Acquired Member Asset Purchase Requirement from time-to-time to capture any reductions in the amount of Acquired Member Assets then being held by the Bank). The Acquired Member Asset Purchase Percentage is set forth on Schedule A. From time to time, upon approval by the Board of Directors, the Acquired Member Asset Purchase Percentage may be adjusted to as high as four percent (4.0%) or to as low as zero percent (0.0%). Changes outside this range would constitute an amendment to this Capital Plan that would require Finance Board approval. Adjustments made to the Bank’s Acquired Member Assets Purchase Percentage, if any, shall be applied in accordance with the following:

(1)   Any increase in Acquired Member Asset Purchase Percentage shall be applied only on a prospective basis, i.e., affecting only master commitments entered into between a Member and the Bank subsequent to such increase in the Acquired Member Asset Purchase Percentage.

(a)   Any Acquired Member Assets delivered to the Bank under a master commitment made prior to an increase in Acquired Member Asset Purchase Percentage shall be subject to the lower Acquired Member Asset Purchase Percentage, if any, that had been in effect at the time that master commitment was originally accepted by the Bank.

(2)   Any decrease in Acquired Member Asset Purchase Percentage may, in the sole discretion of the Bank, be applied either retrospectively, affecting all Acquired Member Assets previously delivered and held by the Bank or to be delivered under existing master commitments, or prospectively, affecting only master commitments entered into subsequent to such decrease in the Acquired Member Asset Purchase Percentage.

Page 5 of 16

3.   Excess Stock Investment. A Member may hold Excess Stock to the extent it has the legal authority under applicable statutes and regulations, subject to the following:

a)	Repurchase. With Notice to Members of at least one (1) Business Day, the Bank, in its sole discretion, may elect to Repurchase Excess Stock shares at any time. The Bank will Repurchase Excess Stock from all Members on a pro rata basis (provided, however, in the event a Member has given Written Notice of its intent to redeem Excess Stock the Bank may, in its sole discretion, Repurchase the Excess Stock of that Member as set forth below). The effect of Repurchasing Capital Stock by the Bank is to retire such shares. The one (1) Business Day Notice to Members does not apply to the repurchase of Capital Stock on the Recalculation/Conversion Date.
b)	Redemption. A Member may, at its discretion, request a Redemption of Capital Stock by providing Written Notice. A Member may request a Redemption of some or all of its Capital Stock in accordance with the Redemption terms of this Capital Plan. The 5-year Redemption period commences upon the receipt of the Written Notice that specifies the number of shares to be redeemed. Following Written Notice of a Member’s intent to redeem shares, but prior to actual Redemption, the Bank may, in its sole discretion, elect to Repurchase those Excess Stock shares for which it has already received a Redemption request. In the event that multiple Redemption requests are pending, the Bank may, in its sole discretion, elect to Repurchase Excess Stock on a prorated basis or according to the order in which the Redemption requests were received by the Bank, or according to another allocation method as necessary to maintain ongoing compliance with the Bank’s Capital Regulations. The effect of Redeeming Excess Stock shares by the Bank is to retire such shares. A request by a Member (whose Membership has not been terminated) to redeem Capital Stock shall automatically be cancelled if the Bank is prevented from redeeming the Member’s Capital Stock because such redemption would cause the Member to fail to meet its Minimum Member Stock Investment. The effective date of the automatic cancellation shall be five (5) business days after the expiration of the applicable redemption notice period.
c)	Limitation on Repurchase and Redemption. The Repurchase and Redemption of Capital Stock will be subject to the applicable restrictions set forth in 12 C.F.R. sections 931.7 and 931.8. A Member’s right to the Repurchase or Redemption of its Excess Stock may be impaired by these regulatory requirements if the Bank has used the Member’s Excess Stock to provide the necessary capital support for its investments and other assets.

Page 6 of 16

C.   Adjustments to Minimum Amount

1.

Member Acceptance. Each Member is required to comply with any changes adopted in the Bank’s Capital Plan, including any adjustments made by the Board of Directors that may lead to an increase in a Member’s Minimum Member Stock Investment. In order to effectuate the sale of additional Capital Stock required due to such changes in terms, the Bank is authorized to issue Capital Stock in the name of a Member and to withdraw appropriate payment from the Member’s Demand Deposit Account.

2.

Prior Notice. The Bank shall provide at least fifteen (15) days Notice to Members prior to implementing any adjustment to the Member Loan Stock Purchase Percentage, Unused Borrowing Capacity Percentage, or Acquired Member Asset Purchase Percentage if doing so affects the total Minimum Member Stock Investment of the Member. The Bank shall implement the adjustments on the date stated in the Notice to Members.

III.   Transition Rule

A.   Manner of conversion. The following steps shall be taken to implement the Bank’s Capital Plan:

1.	Stock Conversion. On the Recalculation/Conversion Date, each currently outstanding share of Bank stock shall be converted into one share of Capital Stock.
2.	Recalculation of Minimum Member Stock Purchase Requirement. On the Recalculation/Conversion Date, immediately following the conversion of currently outstanding Bank stock into Capital Stock, each Member’s Minimum Member Stock Investment will be recalculated by the Bank.
3.	Identify each Member’s excess/deficient stock positions. On the Recalculation/Conversion Date, after recalculating each Member’s Minimum Member Stock Investment, each Member’s Recalculated Stock Excess/(Shortfall) shall be determined by the Bank.
4.	Adjust each Member’s stock holdings. Each Member’s holdings of Capital Stock will be adjusted on the Recalculation/Conversion Date as follows:

a)   Recalculated Stock Excess. If a Member has a Recalculated Stock Excess position, the Bank will Repurchase at par a sufficient number of shares of Capital Stock to eliminate the Member’s Excess Stock position (subject to the Bank remaining in compliance with its Minimum Regulatory Capital Requirement). Proceeds from the share Repurchase will be credited to the Member’s Demand Deposit Account with the Bank.

Page 7 of 16

b)   Recalculated Stock Shortfall. If a Member has a Recalculated Stock Shortfall, the Bank will issue at par a sufficient number of shares of Capital Stock to eliminate the Member’s Recalculated Stock Shortfall position. Proceeds for the share issuance will be debited from the Member’s Demand Deposit Account with the Bank.

B.	Right to opt out of Capital Plan. Each Member retains the right to opt-out of the conversion as contained herein by providing the Finance Board with written notice of its intent to withdraw its Membership from the Bank prior to the Recalculation/Conversion Date. The written notice of its intent to withdraw must be filed with the Finance Board prior to the Opt-Out Date, which Opt-Out Date will be set forth in the Notice to Members setting forth the Recalculation/Conversion Date. The Opt-Out Date shall be 30 days prior to the Recalculation/Conversion Date.
C.	Effects of Opting Out of the Conversion. The Membership of a Member that opts-out of the conversion according to this Plan shall terminate at the earlier of: (1) six months from the date that the written notice of withdrawal was filed with the Finance Board; or (2) the effective date of this Capital Plan. On the date the Membership is terminated, all outstanding indebtedness of the Member to the Bank shall become immediately due and payable. The Bank shall cancel each currently outstanding share of Bank stock on the date the Membership terminates provided that the Bank, after such cancellation, shall remain in full compliance with the Minimum Regulatory Capital Requirement. Any Member that provides the Finance Board with written notice of its intent to withdraw after the Opt-Out Date but before the effective date of the Capital Plan shall have its existing stock converted into Capital Stock on the Recalculation/Conversion Date and the written notice shall commence the applicable five (5) year waiting period to redeem the Capital Stock.
D.	Failure of a Member to affirm election to convert. The failure to provide the written notice as set forth in Section III. B above shall be deemed by the Bank as acceptance of the terms of conversion and of the terms of this Capital Plan.
E.	Timetable for transition and full capital compliance. Immediately following the Recalculation/Conversion Date, it is anticipated that the Bank will be in full compliance with the Capital Regulation.

IV.   Par Value, Rights, Terms, and Preferences of Capital Stock

A.

Par Value. The par value of Capital Stock shall be $100. The Capital Stock shall be issued, redeemed and repurchased at par value.

B.

Ownership. The retained earnings, surplus, undivided profits and equity reserves, if any, of the Bank are owned by the holders of Capital Stock proportionate to their ownership of all outstanding shares of Capital Stock. The holders of Capital Stock shall have no right to receive any portion of these items, however, except through the declaration of a dividend or capital distribution approved by the Board of Directors or through liquidation of the Bank.

Page 8 of 16

C.	Limitations.The Bank may only issue Capital Stock in accordance with this Capital Plan and the Capital Regulations. The Bank may only issue Capital Stock to Members and only Members may hold Capital Stock.
D.	Dividends. Dividends are to be declared and paid on Capital Stock from time to time as determined by the Bank’s Board of Directors, and are non-cumulative with respect to payment obligation and are not to exceed the sum of current net earnings plus net earnings previously retained by the Bank. The Board of Directors may declare and pay dividends on Capital Stock provided the Bank’s capital position is not below its Minimum Regulatory Capital Requirement nor will it be below its Minimum Regulatory Capital Requirement subsequent to the payment of the dividend.
E.	Redemption.Capital Stock shares are redeemable for cash at par value following five (5) years prior Written Notice, however, a Member may not have pending at any one time more than one Redemption request for the same share of Capital Stock.
F.	Cancellation of Redemption . In the event a Member, having previously notified the Bank in writing of its intent to redeem some or all of its Capital Stock, wishes to cancel its Redemption request before the completion of the five (5) year notification period, it may elect to do so by providing Written Notice to the Bank of its intent to cancel its Redemption request. The Bank will impose a Redemption Cancellation Fee on the Member that either voluntarily or involuntarily cancels its Redemption request; provided, however, the Bank may waive the fee for a bona fide business purpose consistent with section 7(j) of the Bank Act. The Redemption Cancellation Fee is the fee in effect at the time the Member provides Written Notice of cancellation. The Member has ten (10) business days from the date the Bank sends the Notice to Member of the amount of the Cancellation Fee to provide Written Notice of its intent to revoke the cancellation and to proceed with the Redemption of the Capital Stock it previously sought to redeem according to the original Redemption timetable, thereby avoiding the Redemption Cancellation Fee. The Redemption Cancellation Fee is calculated by taking the percentage set forth on Schedule A and multiplying it against the par value of the Capital Stock subject to the notice of Redemption. The Redemption Cancellation Fee percentage may be adjusted at the discretion of the Board of Directors to as high as five percent (5%) and to as low as zero percent (0%).
G.	Limited Transferability. A Member may only transfer any Excess Stock of the Bank it holds to another Member of the Bank or to an institution that has been approved for Membership in the Bank and that has satisfied all conditions for becoming a Member, other than the purchase of the minimum amount of Capital Stock that it is required to hold as a condition of Membership. Any such Capital Stock transfers shall be at par value and shall be effective upon being recorded on the appropriate books and records of the Bank. Capital Stock may only be traded between the Bank and its Members.
H.	Termination of Membership.The following terms pertain to the termination of a Member’s Membership in the Bank.

Page 9 of 16

1.   Voluntary Withdrawal.

a)	A Member may withdraw from Membership by providing the Bank Written Notice of its intent to withdraw. A Member may cancel its notice of withdrawal at any time prior to its effective date by providing the Bank Written Notice of such cancellation. The Bank will impose a fee on a Member that cancels a notice of withdrawal; provided, however, the Bank may waive the fee for a bona fide business purpose consistent with section 7(j) of the Bank Act. The Withdrawal Cancellation Fee is the fee in effect at the time the Member provides Written Notice of cancellation. The Member has ten (10) business days from the date the Bank sends the Notice to Member of the amount of the Membership Withdrawal Cancellation Fee to provide Written Notice of its intent to revoke the cancellation, thereby avoiding the Membership Withdrawal Cancellation Fee. The Membership Withdrawal Cancellation Fee is calculated by taking the percentage set forth on Schedule A and multiplying it against the par value of the Capital Stock held by the Member. The Membership Withdrawal Cancellation Fee percentage may be adjusted at the discretion of the Board of Directors to as high as five percent (5%) and to as low as zero percent (0%).
b)	The Membership of a Member that has submitted a Written Notice of withdrawal shall terminate as of the date on which the last of the applicable Capital Stock Redemption periods ends for the Capital Stock comprising the Member’s Membership Stock Purchase Requirement, as of the date the Written Notice of withdrawal is submitted, unless the Member has cancelled its notice of withdrawal prior to that date.
c)	The receipt by the Bank of Written Notice of withdrawal shall commence the 5-year Redemption period for the Capital Stock held by the Member that is not already subject to a pending request for Redemption. In the case of a Member whose Membership has been terminated as a result of a merger or other consolidation into a non-member or a member of another Home Loan Bank, the Redemption period for any Capital Stock that is not already subject to a pending request for Redemption shall be deemed to commence on the date on which the charter of the former Member is cancelled.
d)	No Member may withdraw from Membership unless, on the date the Membership is terminated, there is in effect a certification from the Finance Board that the withdrawal of a Member will not cause the Bank System to fail to satisfy its Refcorp Obligations.

2.   Involuntary Terminations. The Board of Directors of the Bank has the right to terminate the Membership of any Member that: 1) fails to comply with any requirement of the Bank Act, Finance Board Regulations, or the Capital Plan; 2) becomes insolvent or otherwise subject to the appointment

Page 10 of 16

of a conservator, receiver or other legal custodian under federal or state law; or 3) would jeopardize the safety and soundness of the Bank if it were to remain a Member.

a)   The 5-year Redemption period for all the Capital Stock owned by the Member and not already subject to a pending request for Redemption shall commence on the date the Bank terminates the Member’s Membership.

3.

Liquidation of Capital Stock. If an institution ceases to be a Member of the Bank for any reason, the Bank shall require the institution to continue to hold the Capital Stock necessary to support the Loans outstanding and/or Acquired Member Assets under the terms of the Capital Plan in effect at that time. Upon the repayment of outstanding indebtedness to the Bank, including any Principal Prepayment Fees and settlement of the Member’s risk sharing obligations under any Acquired Member Asset program, the Capital Stock that was necessary to support the Loan and/or Acquired Member Asset program shall become Excess Stock subject to Repurchase by the Bank in its discretion.

4.

Liquidation of Indebtedness. The Bank will liquidate the indebtedness of any institution that ceases to be a Member in an orderly manner according to a schedule established by the Bank in its sole discretion. The Bank may require the immediate repayment of all indebtedness, in which case the Member shall be subject to any applicable Principal Prepayment Fees. In the alternative, and in the Bank’s sole discretion, the Bank may allow the institution to continue to hold on to any indebtedness for any length of period up to and including maturity.

I.	Voting rights. The voting rights associated with Capital Stock are defined herein. The voting rights associated with the election of directors are governed by Part 915 of the Rules and Regulations of the Finance Board. There shall be no voting preferences for any share of Capital Stock.
J.	Rights in Bank Merger. In the event the Bank merges with or consolidates into another Home Loan Bank, the Member will be entitled to the rights and benefits set forth in the agreement of merger approved by the Board of Directors of each Home Loan Bank and the Finance Board.
K.	Rights in Bank Liquidation. In the event the Bank is liquidated, the Member will be entitled to the rights and benefits granted to it by the Finance Board and/or Congress.

V.   Bank Review of Plan

A.	Review by Independent CPA
	Attached.
B.	Review by NRSRO
	Attached.

Page 11 of 16

C.	Good faith effort determination
	Pro forma financial projections attached.
D.	Approval by FHFB
	To be attached upon receipt
E.	Process for Amending this Plan

1.   General. In order to safeguard the ability to serve its Members and protect their capital investment, accommodate changes in the Bank’s product or business mix, and maintain compliance with Capital Regulations, from time to time this Plan may be amended. Capital Plan amendments may be made as follows:

a)	Board of Directors. Upon a simple majority vote of all of the individual members of the Board of Directors, not just a simple majority vote of a quorum, a request to amend this Capital Plan may be submitted to the Finance Board. The effective date(s) for any proposed change(s) to the terms of this Capital Plan shall be contained in any amendment request as submitted to the Finance Board.
b)	Shareholder Notification. The Bank will provide Notice to Members of any request submitted to the Finance Board to amend this Capital Plan at least thirty (30) days prior to the effective date of any such requested amendment.
c)	Finance Board. To become effective, any amendment to this Capital Plan must be approved by the Finance Board.

VI.	Definitions
	Certain terms used within this Capital Plan are defined as follows:

Acquired Member Asset means the outstanding principal balance of assets purchased or funded by the Bank from a Member or Housing Associate pursuant to Part 955 of the Rules and Regulations of the Finance Board.

Acquired Member Asset Purchase Percentage means the percentage set by the Board of Directors from time to time that determines how much Capital Stock a Member must purchase in relationship to the outstanding principal balance of Acquired Member Assets delivered by a Member and held the Bank.

Acquired Member Asset Purchase Requirement means the Activity Based Stock Purchase Requirement based upon Acquired Member Assets as specified in this Plan.

Page 12 of 16

Activity-Based Member Stock Purchase Requirement means a stock purchase requirement under which a Member must acquire a specific amount of Capital Stock as a function of the volume of a particular product or service provided to that Member by the Bank.

Bank means the Federal Home Loan Bank of Pittsburgh.

Bank Act means the Federal Home Loan Bank Act, as amended, 12 U.S.C. 1421 through 1449.

Board of Directors means the Board of Directors of the Bank.

Business Day means any day on which the Bank is open to conduct business.

Charge Against Capital means a required reduction in the value of paid-in capital.

Capital Plan means the plan adopted by the Board of Directors and approved by the Finance Board pursuant to the Capital Regulation.

Capital Regulation means Subchapter E of Chapter IX of Title 12 of the Code of Federal Regulations.

Capital Stock means “Class B Stock” as defined by the Bank Act and Capital Regulation.

Capital Sufficiency Assets mean the book value of the Bank’s total assets less the book value of both the Bank’s outstanding Loans and its Short Term Investments maturing in one year or less.

Excess Stock means that amount of Capital Stock held by a Member in excess of its Minimum Member Stock Investment as required by this Capital Plan.

Finance Board means the Federal Housing Finance Board.

Finance Board Regulations mean Chapter IX of Title 12 of the Code of Federal Regulations, as may be amended from time to time.

GAAP means Generally Accepted Accounting Principles as applied in the United States of America.

Housing Associate means an entity that has been approved as nonmember mortgagee pursuant to part B of Part 950 of the Code of Federal Regulations.

Loan means the outstanding principal balance of an advance, as defined in Section 950.1 of the Advances Regulations.

Market Risk Model means the internal market risk model or the internal cash flow model used to calculate the market risk component of the Banks’ risk-based capital requirement approved by the Finance Board.

Member means an institution that has been approved for Membership in Bank and that has satisfied its Minimum Member Stock Investment requirement.

Page 13 of 16

Member Demand Deposit Account means one or more demand deposit accounts maintain with the Bank and which are subject to the terms and conditions of the Bank’s Demand Deposit Account Agreement.

Member Loan Stock Purchase Percentage means the percentage set by the Board of Directors from time to time that determines how much Capital Stock a Member must purchase in relationship to its outstanding Loans from the Bank.

Member Loan Stock Purchase Requirement means the Activity-Based Stock Purchase Requirement based upon Loans as specified in this Plan.

Membership Stock Purchase Requirement means a stock purchase requirement under which a Member must acquire a specific amount of Capital Stock as a condition of Membership.

Membership means all of the rights, privileges and obligations associated with being a Member of the Bank.

Membership Withdrawal Cancellation Fee means the fee the Bank may impose upon a Member who having given notice of its intent to withdraw from Membership, subsequently revokes that withdrawal notice.

Minimum Member Stock Investment means the minimum amount of Capital Stock that a Member is required to purchase and hold in order to be a Member and in order to obtain Loans from the Bank and to engage in other business activities with the Bank in accordance with this Plan. The Minimum Member Stock Investment shall be the sum of (a) the Member’s Member Loan Stock Purchase Requirement, plus (b) the Member’s Unused Borrowing Capacity Stock Purchase Requirement, plus (c) the Acquired Members Asset Purchase Requirement; provided, however, that the minimum investment of each Member in the Capital Stock of the Bank shall be no less than Ten Thousand Dollars ($10,000).

Minimum Regulatory Capital Requirement means the minimum regulatory capital requirement established for the Bank in either the Capital Regulation or by order of the Finance Board.

Notice to Members means any written notice from the Bank to the Members regarding any element of the Capital Plan, and also includes any electronic writing related to the Capital Plan, including electronic mail and posting on the Bank’s public or private web site.

Opt-Out Date means the date by which a Member wishing not to have its current stock converted into Capital Stock shall provide the Finance Board with written notice of its intent to withdraw from Membership.

Plan means the Capital Plan.

Principal Prepayment Fee means the fee charged by the Bank under the Advances, Collateral Pledge and Security Agreement when a Member pays off a Loan before maturity.

Page 14 of 16

Recalculation/Conversion Date means the date upon which current stock shares are converted into Capital Stock shares and each Member’s Minimum Member Stock Investment is initially calculated.

Recalculated Stock Excess/Shortfall means the difference between a Member’s Minimum Member Stock Investment as determined on the Recalculation/Conversion Date and that Member’s stock holding immediately prior to the implementation of this Capital Plan, where an “excess” refers to a Minimum Member Stock Investment which is less than the Member’s Capital Stock holdings and a “shortfall” refers to a Minimum Member Stock Investment which is greater than the Member’s Capital Stock holdings.

Redemption Cancellation Fee means the fee the Bank may impose upon a Member who, having given Written Notice of its intent to redeem Capital Stock shares, subsequently revokes that Redemption request.

Redemption means the acquisition by the Bank of outstanding Capital Stock from a Member at par value following the expiration of the statutory Redemption request period.

Refcorp Obligations means the obligations under 12 U.S.C. 1441b(f)(2)(C) to contribute interest payments owed on obligations issued by the Resolution Funding Corporation.

Repurchase means the acquisition by the Bank of Excess Stock of a Member either on the Bank’s own initiative or prior to the expiration of the statutory Redemption request period.

Risk Assessment Procedures and Controls means the risk assessment procedures and controls to be used to manage the Bank’s credit, market, and operation risks approved by the Finance Board.

Short Term Investments mean cash and marketable investments with a stated maturity of one year or less that, as of the calculation date, are instruments in which the Bank may invest in full compliance with all Finance Board regulations, plus scheduled payments of principal and interest over the next year on all assets that are fully compliant with Finance Board regulations on the date of calculation. Such investments do not include Loans, Acquired Member Assets, or assets with a maturity longer than one year even if there is an optional or firm commitment to sell such assets within one year.

Transacted means the origination, repayment or renewal of a Loan.

Unused Borrowing Capacity for a Member equals maximum borrowing capacity as calculated per Exhibit B for banks, Exhibit C for thrifts, Exhibit D for Credit Unions and Exhibit E for Insurance Companies, less outstanding Member Loans, the aggregate maximum amount that may be lent under outstanding letters of credit, and the netted market value of intermediary derivative transactions.

Page 15 of 16

Unused Borrowing Capacity Percentage means the percentage set by the Board of Directors from time to time that determines how much Capital Stock a Member must purchase in relation to its Unused Borrowing Capacity.

Unused Borrowing Capacity Stock Purchase Requirement serves as the Membership Stock Purchase Requirement based upon a Member’s Unused Borrowing Capacity as specified in this Plan.

Written Notice means a letter or other business writing, signed by an officer of the Member, sent by certified mail, return receipt requested, to the Bank’s Corporate Secretary at the Bank’s home office, currently 601 Grant Street, Pittsburgh, Pennsylvania, 15219.

Page 16 of 16

SCHEDULE A

In Effect As Of January 13, 2005

Member Loan Stock Purchase Percentage		5	%
Unused Borrowing Capacity Stock Purchase Percentage		.50	%
Acquired Member Asset Stock Purchase Percentage		0	%
Cap on Unused Borrowing Capacity Stock Purchase Requirement	$	N/A
Redemption Cancellation Fee		2	%
Membership Withdrawal Cancellation Fee		2	%
MBC Percentage		30	%

EXHIBIT A

general instructions for maximum borrowing capacity (MBC) calculation:

I)	The Bank will calculate MBC on a quarterly basis using regulatory data approximately 60 days after each quarter end (see schedules for regulatory line items used).
	The MBC used in determining annual Unused Borrowing Capacity Stock Purchase Requirement will be based on year-end December 31 regulatory data.
II)	MBC is based on the lower of total weighted (haircuted) qualifying collateral value or the level of residential housing finance assets (RHFA).
	To determine total weighted qualifying collateral value, specific asset balances (market and/or book value) within each qualifying collateral category are derived from regulatory data. Those balances are weighted by applicable haircut percentages, and are then aggregated to arrive at total collateral value, netting out assets pledged to other creditors or other borrowings secured by qualifying collateral.
	NOTE: The weighted value for other real estate-related collateral is limited by policy not to exceed a certain percentage of the final calculated MBC (“MBC Percentage”). The current MBC Percentage is set forth on Schedule A.
	The RHFA level is determined by adding balances that represent all residential mortgage loan and mortgage-related securities assets.
	example:
	total weighted qualifying collateral method:

collateral category	balance		haircut		value
1. treasury & agency securities	$	15,000		95%	$	14,250
2. agency mortgage backed securities	$	25,000		90%	$	22,500
3. non-agency mortgage backed securities	$	10,000		87%	$	8,700
4. single-family residential mortgages (net of past dues)	$	50,000		80%	$	40,000
5. multi-family residential mortgages (net of past dues)	$	7,000		65%	$	4,550
6. other real estate-related (value limited by MBC Percentage)	$	12,500		50%	$	6,250
7. minus securities pledged to other creditors or other					-$	6,500
borrowings secured by qualifying collateral		total collateral value			$	89,750

note:     for Mortgage Partnership Finance (MPF) participants, the maximum credit enhancement amount is deducted from the total collateral value.

     RHFA method:

collateral category	balance		haircut		value
1. all residential mortgage loans	$	65,750		n/a	$	65,750
2. all mortgage-related securities	$	35,000		n/a	$	35,000
		total RHFA value			$	100,750
calculated MBC (lesser of total collateral or RHFA value):					$	89,750

III)   The Bank may further refine a member’s MBC due to the following:

1.	collateral eligibility factors determined from on-site collateral audits.
2.	documented pledging activity not found in regulatory data.
3.	adjustments for affiliate collateral pledging.

EXHIBIT B

Line descriptions for MBC calculation — banks

For banks	(data from fed. depository inst. corp. call report)
qualifying collateral assets
			current			current
			blanket			specific			range for
	line	schedule/	collateral			collateral			collateral
category	description	line number	weighting			weighting			weighting
treasury and agency securities	ustreshfv	RC-B-0213		95	%		90	%		85% - 98	%
	ustresafv	RC-B-1287		95	%		90	%		85% - 98	%
	issbyaghfv	RC-B-1295		95	%		90	%		85% - 98	%
	issbyagafv	RC-B-1298		95	%		90	%		85% - 98	%
	issbyushfv	RC-B-1290		95	%		90	%		85% - 98	%
	issbyusafv	RC-B-1293		95	%		90	%		85% - 98	%
govt. and agcy. mortgage	passisshfv	RC-B-1705		90	%		85	%		80% - 93	%
backed securities	passissafv	RC-B-1707		90	%		85	%		80% - 93	%
	passgtyhfv	RC-B-1699		90	%		85	%		80% - 93	%
	passgtafv	RC-B-1702		90	%		85	%		80% - 93	%
	cmoisshfv	RC-B-1715		90	%		85	%		80% - 93	%
	cmoissafv	RC-B-1717		90	%		85	%		80% - 93	%
non-agency mortgage	passpvthfv	RC-B-1710		87	%		82	%		72% - 92	%
backed securities	passpvtafv	RC-B-1713		87	%		82	%		72% - 92	%
	cmocolhfv	RC-B-1719		87	%		82	%		72% - 92	%
	cmocolafv	RC-B-1732		87	%		82	%		72% - 92	%
	cmopvthfv	RC-B-1734		87	%		82	%		72% - 92	%
	cmopvtafv	RC-B-1736		87	%		82	%		72% - 92	%
1-4 fam. mtgs. - 1st lien	refamfstln	RC-C-5367		80	%		75	%		65% - 85	%
(less troubled assets)	(CL1ST30-89)	(RCNC236)
	(CL1ST90MOR)	(RCNC237)
	(CL1STNACC)	(RCNC229)
multi-family mtgs.	remltagg	RC-C-1460		65	%		60	%		35% - 70	%
(less troubled assets)	(resmul30-89)	(RC-N-5436 or 3499)
	(mltrs90mor)	(RC-N-5437 or 3500)
	(mltrsnonac)	(RC-N-5438 or 3501)
other real estate	recons - RE secured construction loans	RC-C-1415		50	%		45	%		35% - 70	%
related & community	refarm - RE secured farmland loans	RC-C-1420		50	%		45	%		35% - 70	%
financial inst. collateral	relineofcr - SF revolving, open-end loans	RC-C-1797		50	%		45	%		35% - 70	%
(less troubled assets)	refamjrln - SF junior lien mortgage loans	RC-C-5368		50	%		45	%		35% - 70	%
	renonfarm - nonfarm, nonresidential	RC-C-1480		50	%		45	%		35% - 70	%
	farm - loans for agricultural production *	RC-C-1590		50	%		45	%		35% - 70	%
	cilnsus - commercial, industrial loans *	RC-C- 1763		50	%		45	%		35% - 70	%
NOTE: total limited to	(cnld30-89)	(RC-N- 5424 or 2759)
30% of total MBC	(const90mor)	(RC-N- 5425 or 2769)
	(constnonac)	(RC-N- 5426 or 3492)
	(frml30-89)	(RC-N- 5427 or 3493)
	(farm90mor)	(RC-N- 5428 or 3494)
* community financial	(farmnonac)	(RC-N- 5429 or 3495)
inst. eligible only	(revoe30-89)	(RC-N- 5398)
	(revrs90mor)	(RC-N- 5399)
	(revrsnonac)	(RC-N- 5400)
	(snfrn30-89)	(RC-N- 5439 or 3502)
	(nonrs90mor)	(RC-N- 5440 or 3503)
	(nonrsnonac)	(RC-N- 5441 or 3504)
	(agpf30-89) *	(RC-N- 1230 or 1594)
	(pdfrm90mor) *	(RC-N- 1231 or 1597)
	(farmnonacc) *	(RC-N- 1232 or 1583)
	(cmlpd30-89) *	(RC-N- 1606)
	(pdci90more) *	(RC-N- 1607)
	(cinonaccrl) *	(RC-N- 1608)
(less pledged securities)	(secpledge)	(RC-B-0416)
note: for Mortgage Partnership Finance (MPF) participants, the maximum credit enhancement amount is deducted from the              total collateral value.
RESIDENTIAL HOUSING FINANCE ASSETS (no haircuts)
	line	schedule/
category	description	line number
revolving 1-4 mtgs.	relineofcr	RC-C-1797
1-4 fam. mtgs. - 1st lien	refamfstln	RC-C-5367
1-4 fam. mtgs. - junior lien	refamjrln	RC-C-5368
multi-family mtgs.	remltagg	RC-C-1460
govt. and agcy. mortgage	passisshfv	RC-B-1705
backed securities	passissafv	RC-B-1707
	passgtyhfv	RC-B-1699
	passgtafv	RC-B-1702
	cmoisshfv	RC-B-1715
	cmoissafv	RC-B-1717
non-agency mortgage	passpvthfv	RC-B-1710
backed securities	passpvtafv	RC-B-1713
	cmocolhfv	RC-B-1719
	cmocolafv	RC-B-1732
	cmopvthfv	RC-B-1734
	cmopvtafv	RC-B-1736

NOTE: The MBC is based on the lower of the qualifying collateral assets or residential housing finance assets.

EXHIBIT C

Line Descriptions for MBC Calculation

FOR THRIFTS	(from OTS Thrift Financial Report)
QUALIFYING COLLATERAL ASSETS
									range for
	LINE		CURRENT BLANKET			CURRENT SPECIFIC			collateral
CATEGORY	NUMBER(S)		COLLATERAL WEIGHTING			COLLATERAL WEIGHTING			weighting
US Government and		SC130		95	%		90	%		85% - 98	%
Agency Securities
US Govt. Agcy. MBS		SC210		90	%		85	%		80% - 93	%
Non-Agency and		SC215		87	%		82	%		72% - 92	%
Other MBS		SC217		87	%		82	%		72% - 92	%
		SC219		87	%		82	%		72% - 92	%
		SC222		87	%		82	%		72% - 92	%
1-4 Fam. Mtgs.		SC254		80	%		75	%		65% - 85	%
(less troubled assets)	(pd123+pd223+pd323)
Multi-Family Mtgs.		SC256		65	%		60	%		35% - 70	%
(less troubled assets)	(pd125+pd225+pd325)
Other Real Estate-	SC251 - revolving open end 1-4 mtg. loans			50	%		45	%		35% - 70	%
Related & Community Financial	SC255 - junior lien 1-4 mtg. loans			50	%		45	%		35% - 70	%
Institution Collateral
	SC230 - SF construction loans			50	%		45	%		35% - 70	%
(less troubled assets)	SC235 - MF construction loans			50	%		45	%		35% - 70	%
	SC240 - nonresidential constr. loans			50	%		45	%		35% - 70	%
NOTE: total limited to	SC260 - mortgages on nonres. property			50	%		45	%		35% - 70	%
30% of Total MBC	SC265 - mortgages on land			50	%		45	%		35% - 70	%
	SC 300 - commercial, non-mtg., secured *			50	%		45	%		35% - 70	%
* Community Financial	SC303 - commercial, unsecured *			50	%		45	%		35% - 70	%
Institution eligible only
	SC306 - commercial, financing leases *			50	%		45	%		35% - 70	%
	(PD 115/215/315)
	(PD 121/221/321)
	(PD 124/224/324)
	(PD 135/235/335)
	(PD 138/238/338)
	(PD 140/240/340) *
(less Other Borrowings	(SC72)
assumed collateralized)	exclude FHLB advances
Note: For Mortgage Partnership Finance (MPF) participants, the maximum credit enhancement amount is deducted from the total collateral value.
RESIDENTIAL HOUSING FINANCE ASSETS (No Haircuts)
	LINE
CATEGORY	NUMBER
Tot. Net Mortgage Loans		SC26
(less non-residential	(SC240+SC265+SC260)
property and land)
US Govt. Agcy. MBS		SC210
Non-Agency and		SC215
Other MBS		SC217
		SC219
		SC222

     NOTE: The MBC is based on the lower of the Qualifying Collateral Assets or Residential Housing Finance Assets.

EXHIBIT D

Line descriptions for MBC calculation - credit unions

For credit unions			(data from National Credit Union Administration reports)
qualifying collateral assets
			current			current
			blanket			specific			range for
			collateral			collateral			collateral
category	acct. codes		weighting			weighting			weighting
treasury and		741C		95	%		90	%	85% — 98%
agency securities		742C
govt. and agcy. mortgage		732		90	%		85	%	80% — 93%
backed securities
non-agency mortgage		733		87	%		82	%	72% — 92%
backed securities
1-4 fam. mtgs. - 1st lien				80	%		75	%	65% — 85%
fixed rate		704
adjustable rate		705
other real estate related				50	%		45	%	35% — 70%
collateral
revolving mortgage loans		708
non first lien fixed rate loans		706
non first lien adj. rate loans		707
NOTE: total limited to 30% of
total MBC
less other collateralized		860C
borrowings

note:  for Mortgage Partnership Finance (MPF) participants, the maximum credit enhancement amount is deducted from the total collateral value.

  RESIDENTIAL HOUSING FINANCE ASSETS (no haircuts)

category	acct. codes
mortgage loans
first lien fixed rate		704
first lien adjustable rate		705
revolving mortgage loans		708
non first lien fixed rate loans		706
non first lien adj. rate loans		707
govt. and agcy. mortgage backed securities		732
non-agency mortgage backed securities		733

NOTE:  The MBC is based on the lower of the qualifying collateral assets or Residential Housing Finance Assets.

EXHIBIT E

Line descriptions for MBC calculation - insurance co.

For insurance companies	(data from audited financials and/or delivered collateral records)
qualifying collateral assets
	current			current
	blanket			specific			range for
	collateral			collateral			collateral
category	weighting			weighting			weighting
treasury and agency securities		95	%		90	%	85% — 98%
govt. and agcy. mortgage backed securities		90	%		85	%	80% — 93%
non-agency mortgage backed securities		87	%		82	%	72% — 92%

RESIDENTIAL HOUSING FINANCE ASSETS (no haircuts)

category

govt. and agcy. mortgage backed securities

non-agency mortgage backed securities

NOTE:  The MBC is based on the lower of the qualifying collateral assets or Residential Housing Finance Assets.

EX-10.1

Exhibit 10.1

Human Resources Policy
Revised 11/03
Policy 2.10

POLICY
SEVERANCE POLICY

I.	Policy
	The Bank provides for payment of severance benefits to any eligible employee upon involuntary termination of employment.
II.	Scope
	This policy applies to full-time and part-time employees (>20 hours per week) with a minimum of 6 months of service whose employment with the Bank is discontinued due to, but not limited to, any of the following events: elimination of employee’s position, general reduction in staff, substantial job modification resulting in employee’s inability to qualify or perform the revised job, changing business needs, reorganization of Bank staff, or reassignment of staff requiring relocation of employee’s primary residence. Employees who are terminated for cause are not eligible for benefits under this policy.
III.	Responsibility
	Overall responsibility for this policy is assigned to the Manager, Human Resources and Administration. Bank management is responsible for identifying and providing written documentation regarding any reduction in staff. Exceptions to this policy must be approved by the President. Benefits provided to executive and senior management under this policy must be reviewed and approved by the Human Resources Committee of the Board of Directors.
IV.	Administration
	Notification
	Employees are provided a minimum of two weeks’ notice in the event of the termination of their employment. The Bank may, at its discretion, provide salary continuation in lieu of notice.
	Policy Benefits
	Salary Continuation
	The salary continuation benefit reflects the employee’s current salary, position and length of Bank service. The benefit is calculated as follows:

•   Executive and Senior Management –

ü	4 weeks base salary per year of service
ü	26-week minimum
ü	52-week maximum

Severance
Page 2 of 3

•   Exempt Employees (paygrade 35 and above) –

ü	3 weeks base salary per year of service
ü	4-week minimum
ü	36-week maximum

•   Exempt Employees (below paygrade 35) –

ü	2 weeks of base salary per year of service
ü	3-week minimum
ü	26-week maximum

•   Non-Exempt Employees –

ü	1 week of base salary per year of service
ü	2-week minimum
ü	13-week maximum

Under certain circumstances the Bank may extend salary continuation beyond the described benefit levels.

Years of Service

Years of service are calculated based upon the employee’s service years as of the most recent service anniversary. Employees with more than one year of service receive no credit for partial years. Employees with less than one full year of service receive the minimum severance benefit. Any prior service within Bank system is included as service in the calculation of severance benefits.

Payment

Salary continuation is paid in semi-monthly installments in accordance with the Bank’s regular semi-monthly pay periods. Salary continuation begins with the first full pay period after termination date. Payments are subject to all required withholdings. Salary continuation may be paid in a lump sum at the employee’s request.

Benefit Continuation

The Bank continues to provide employee medical coverage for the length of the salary continuation period. The medical carrier and level of coverage (single, two party, family) remains the same as the employee benefit election in effect at the time of the termination of employment.

The employee’s medical benefit contribution will be automatically deducted from the salary continuation payments. Employees who request lump sum payment must submit payment directly to the Bank for their portion of the medical cost. The Bank will not pay cash in lieu of medical benefits.

Page 3 of 3

All terminating employees and their dependents who are participants in the Bank’s dental and vision benefits have an option to continue coverage for a specified number of months following termination of their coverage. The employee is responsible for the full cost of such continuing coverage plus a 2% administrative fee. A letter outlining the option of benefit continuation is sent to employees following termination of their coverage (see Benefit Continuation procedure).

Any vested retirement and/or thrift plan benefits are handled in the same manner as any employee who separates their employment from the Bank. All terminated employees, regardless of position, receive payment for earned, unused vacation.

Tuition assistance approved and paid by the Bank prior to the termination date need not be reimbursed upon termination.

Outplacement Services

As part of this policy, the Bank may provide the following outplacement services:

•   COO/Senior Management — formal individualized 12-month executive outplacement program

•   Exempt Employees — 3-month individualized program

•   Non-Exempt Employees — group career workshop

Outplacement services are required to begin within 30 days of termination. The Bank will not pay cash in lieu of outplacement services.

Separation Agreement

The Bank will require a signed Separation Agreement between the Bank and the employee relative to any salary, benefits, or services offered through this policy. The agreement includes a description of the severance benefits and provides a general release by the employee for any claims against the Bank relative to the separation action as well as any other claims relating to employment with the Bank.

Approvals/Exceptions

All severance packages must have the approval of the President. No exceptions to this policy may be made without the approval of the President.

Right to Amend or Terminate

The Bank reserves the right to amend, modify, or terminate this policy at any time without notice.

EX-10.2

Exhibit 10.2

FEDERAL HOME LOAN BANK OF PITTSBURGH

ANNUAL INCENTIVE COMPENSATION PLAN

(Revised 1/1/05)

I.	EFFECTIVE DATE
	The Annual Incentive Compensation Plan (the Plan) of the Federal Home Loan Bank of Pittsburgh is effective as of January 1, 1991. Annual Incentive Compensation Awards (Awards) may be paid for each Plan Year (January 1 to December 31) thereafter, in accordance with the provisions of the Plan.
II.	PURPOSE AND OBJECTIVES
	The Annual Incentive Compensation Plan is designed to attract, retain and motivate key Bank employees. The Plan seeks to support the annual planning process and achievement of the Bank’s operational and profitability goals. Within this overall purpose, there are three primary objectives:

•   To focus attention on the establishment and achievement of objective goals which are linked to the Bank’s business plan and success factors.

•   To provide opportunities to earn financial rewards based on improved Bank performance and individual contributions to that performance.

•   To ensure that variable compensation opportunities are reasonable and comparable with incentive payments made to employees of other similar businesses, including financial institutions, with similar duties and responsibilities.

III.	PLAN ADMINISTRATION
	The Plan is administered by the President, the Human Resources Committee of the Board of Directors (the Committee), and the Board of Directors (the Board).

A.   Responsibilities of the President

The President will provide recommendations to the Committee and the Board regarding Plan participation, Bank and individual performance goals, Bank and individual achievements, and Awards for executive management. The President is responsible for approval of Plan participation, Bank and individual performance goals, Bank and individual achievements, and Awards for staff below the executive management level. The President’s responsibilities also include monitoring the effectiveness of the Plan, the payment process, and providing recommendations to the Committee and the Board regarding modifications to the Plan.

FEDERAL HOME LOAN BANK OF PITTSBURGH
ANNUAL INCENTIVE COMPENSATION PLAN
Page 2

B.   Responsibilities of the Committee

The Committee will review all Plan recommendations and revisions (including all performance goals and Awards) from the President and present final recommendations to the Board for its approval. In addition, the Committee will review the performance of the President and determine an annual Award, to be recommended to the Board for its approval.

C.   Responsibilities of the Board

	The Board will review and approve as appropriate all recommendations from the Committee and the President.
IV.	ELIGIBILITY
	All Bank staff are eligible to participate in the Plan. Participation for executive management is recommended by the President to the Committee and approved by the Board.
	Eligibility is reviewed annually to assure continued appropriateness, and participants are notified by Human Resources of their participation in the Plan. Upon designation as a participant, each participant will be given a copy of the Plan. No employee will have the automatic right to be selected as a participant for any year or, having been selected as a participant for one year, be considered a participant for any other year.
V.	INCENTIVE AWARD OPPORTUNITY
	Certain positions have a greater and more direct impact than others on the achievement of Bank performance. Those differences are recognized by varying the incentive opportunity, expressed as a percentage of a participant’s base salary or, in the case of non-exempt employees such employees’ total base salary and overtime earnings over the plan year.
	A summary of the annual incentive plan award levels is attached as Attachment 1. Each participant shall be provided with a separate attachment showing their level of participation in the Plan. Awards for performance results between the threshold and maximum levels are calculated as a percentage of the target level.
VI.	PERFORMANCE MEASURES
	The Plan is designed to reward participants to the extent the participant meets objective performance goals related to Bank and/or individual performance criteria established by the Board. The mix of Bank and individual performance goals is determined for each participant at the onset of each Plan Year.

FEDERAL HOME LOAN BANK OF PITTSBURGH
ANNUAL INCENTIVE COMPENSATION PLAN
Page 3

Bank-wide Performance Goal

One or more Bank-wide goal(s) are established for each Plan Year. These goals can be both quantitative and qualitative, and are established on the basis of the annual operating budget and business plan as approved by the Board.

A performance schedule is established to indicate potential total awards payable at various levels of performance: the threshold level below which no award is paid, the target objective, and a maximum level which defines the limit of maximum incentive payment under the plan.

For executive management and various other positions in the Bank, generally the greater the control and influence a participant can exert over Bank-wide goals, the larger a portion of their incentive award will be based on Bank performance.

Individual Goals

The establishment of individual goals is based upon objective individual performance initiatives which are mutually agreed upon by the participant and Bank management. These goals represent clearly defined and meaningful accomplishments desired within the framework of the responsibilities of the participant. Each goal will be designed to be attainable, within specific timeframes, but not without significant effort.

Goals may be related solely to one individual, or may relate to a group of two or more individuals whose efforts are required to produce the results. At the President’s discretion, the goals may be equally weighted or assigned different weights and emphasis. The minimum weight is 10% and the total weightings equal 100%. Goals will be established at three performance levels: threshold, target, and maximum, if appropriate.

Individual goals are normally established on the basis of the annual operating budget and business plan. Goals may apply to the full Plan Year or to a portion of the Plan Year, as appropriate. For the President, goals will be established by the Board. For the Executive Vice President, in addition to the Bank’s financial goal(s), the President establishes additional individual performance goals based upon criteria established by the Board.

Revisions and Amendments

Bank-wide and Individual performance goals are determined for the entire year. Recognizing, however, that circumstances and priorities may change during the year, the President may submit to the Committee and the Board revisions to Bank-wide goals during the course of the Plan Year at such time as he may choose. The Committee and the Board will determine, at its discretion, whether Bank-wide goals will be amended. The President will inform the Committee of any revisions to executive management’s individual goals which are required throughout the Plan Year.

FEDERAL HOME LOAN BANK OF PITTSBURGH
ANNUAL INCENTIVE COMPENSATION PLAN
Page 4

VII.	AWARD DETERMINATION
	At the conclusion of each Plan Year, the President, after considering the Bank’s performance against its Bank-wide goal(s) and each participant’s performance against his/her individual performance goals, shall recommend to the Committee and the Board the annual incentive award to be paid to executive management for that Plan Year, if any. The President is responsible for approval of Awards to be paid to staff below the executive management level. A participant who is on formal corrective action for performance anytime during the plan year will not be eligible for an award. In order for any annual incentive payment to be made, the most recent examination by the Federal Housing Finance Board of the participant’s area(s) of responsibility must not have identified any unsafe or unsound practice or condition.
	Unless otherwise directed by the Board, payments of Awards under the Plan shall be made as soon as possible after the Board has made a determination regarding the payment of Awards but no later than 2 1/2 months after the close of the Plan year. Appropriate provisions shall be made for any taxes that the Bank determines are required to be withheld from any Awards under the applicable laws or other regulations of any governmental authority, whether federal, state, or local. The payment of any Award shall be subject to such obligations, terms and conditions as the Committee or the Board may specify in making the Award and, in exercising its discretion to make any Award determination hereunder, the Board may choose to consider factors such as overall Bank financial performance, operating environment, and other relevant considerations. Acceptance of any Award shall constitute agreement by the participant to all obligations, terms, conditions, and restrictions so imposed.
	Participants who terminate employment with the Bank for any reason, other than death, disability or retirement prior to the end of the Plan Year will not be eligible for an Award. If a participant ceases employment after the Plan Year ends, but before the Board approves the Awards, the President will consider whether the participant should receive an Award.
	Participants who are hired prior to July 1 during the Plan year or whose employment ends due to involuntary termination (excluding involuntary termination for cause), death, disability or retirement during the Plan Year may be eligible to be considered for a prorated incentive award.
	Each payment of an Award shall be from the general assets of the Bank.
VIII.	TERMINATION OR AMENDMENT
	The Plan, in whole or in part, may at any time or from time-to-time be amended, suspended, or reinstated and may at any time be terminated by action of the Board. Until a determination of Award payment has been made by the Board, no participant has a vested right to an Award under the Plan.

FEDERAL HOME LOAN BANK OF PITTSBURGH
ANNUAL INCENTIVE COMPENSATION PLAN
Page 5

	No amendment, suspension, or termination of the Plan by the Board shall, without the consent of the participant, affect the rights of the participant to any Award previously determined by the Board which has not yet been paid to the participant.
IX.	MISCELLANEOUS PROVISIONS

A.	Neither the adoption of the Plan nor its operation shall in any way affect the right and power of the Bank to dismiss any employee, or otherwise terminate the employment or take other action including, but not limited to, removing the employee from the incentive-eligible position, at any time, for any reason, with or without cause.
B.	No participant will have the right to alienate, assign, encumber, hypothecate, or pledge his or her interest in any Award under the Plan, voluntarily or involuntarily, and any attempt to do so dispose of any such interest will be void.
C.	This document is a complete statement of the Plan and as of the date below, supersedes all prior plans, representations and proposals written or oral relating to its subject matter. The Bank will not be bound by or liable to any employee for any representation, promise, or inducement made by any person which is not embodied in this document.
D.	The Board has the power and authority to construe, interpret, and administer the Plan. Any decision arising out of or in connection with the construction, interpretation or administration of the Plan will lie within the Board’s absolute discretion and will be binding on all parties.

ATTACHMENT 1
FEDERAL HOME LOAN BANK OF PITTSBURGH
ANNUAL INCENTIVE COMPENSATION PLAN

	Payout									Performance
Eligibility	Threshold			Target			Maximum				Bank	Shared/Individual
Level 1		20.0	%		35.0	%		50.0	%		40.0%		60.0%
Level 2		18.75	%		25.0	%		37.5	%		Up to 40.0%		Up to 70.0%
Level 3		15.0	%		20.0	%		30.0	%		Up to 30.0%		Up to 100.0%
Level 4		14.5	%		19.0	%		26.5	%		Up to 30.0%		Up to 100.0%
Level 5		11.0	%		14.0	%		19.0	%		Up to 30.0%		Up to 100.0%
Level 6		7.5	%		9.0	%		11.5	%		Up to 30.0%		Up to 100.0%
Level 7		3.5	%		5.0	%		7.5	%		Up to 100.0%		Up to 100.0%

EX-10.3

Exhibit 10.3

FEDERAL HOME LOAN BANK OF PITTSBURGH

LONG-TERM INCENTIVE COMPENSATION PLAN

JANUARY 1, 2001

(Revised 3/1/05)

Purpose and Objectives

The Federal Home Loan Bank of Pittsburgh (the Bank) has established a Long-Term Incentive Compensation Plan (the Plan) for eligible executives. The purpose of the plan is to focus senior management on the achievement of key strategic objectives and reward long-term business success. The specific objectives of the plan include:

•   Rewarding long-term customer/shareholder value creation and community mission achievement;

•   Attracting and retaining high-performing staff by providing long-term compensation opportunities which are reasonable relative to the financial services marketplace; and

•   Putting a portion of the total executive compensation package at risk and dependent upon performance results.

Performance Period

The Plan covers a three-year performance period. A new cycle, or performance period, commences every three years, coterminous with the Strategic Planning cycle.

Eligibility

Plan participants include those who, in the opinion of the President and as confirmed by the Human Resources Committee (the Committee) and the Board of Directors (the Board), hold positions having the capacity to significantly impact long-term Bank performance.

Any individual hired or promoted into (or transferred out of) an eligible position during the performance period may be eligible to receive a pro-rated award under the plan based upon his/her tenure in the eligible position. Eligibility for a pro-rated award is subject to approval by the Board.

Performance Goals

Performance goals are established at the onset of each three-year performance period and will be finalized no later than the end of the first quarter of the first year in the performance period. Goals are established by the Board. In the event that multiple performance goals are selected, it is the responsibility of the Board to establish an appropriate weighting for each goal.

The performance goals are established in conjunction with the Bank’s Strategic Plan and encompass the Bank’s performance relative to shareholders, customers, and mission achievement. A performance schedule is established for each goal to indicate potential awards payable at various levels of performance:

•   the threshold is the minimally acceptable level of performance below which no award is paid;

1

•   the target is a realistic level of performance representing a stretch beyond current performance levels; and

•   the maximum represents truly outstanding performance and defines the limit of incentive compensation payable under the plan.

Once set, performance goals are intended to continue without change throughout the performance period.

Award Potential

Award opportunities are established by the Board. The award range for each position includes a threshold, target, and maximum award opportunity. Eligible positions are grouped into award levels based upon competitive compensation levels as well as position responsibilities and impact on the Bank’s long-term business success.

In the event that performance falls between threshold and target or between target and maximum, award payment will be determined by interpolation. Awards are defined as a percentage of the incumbent’s base salary in effect at the end of the performance period.

Award Determination

A participant must achieve at least a successful performance evaluation in each year of the plan cycle to be eligible for any award under the plan. If a participant receives an overall developmental performance evaluation, the participant will be ineligible for any award for that calendar year.

In the event a Federal Housing Finance Board examination identifies an unsafe or unsound practice or condition in a participant’s area of responsibility, the participant will not be eligible for an award for the period of the unsafe and unsound condition and until Internal Audit has confirmed that corrective action has been put in place.

In the event the Federal Housing Finance Board examination results in regulatory enforcement action during the performance period, there will be no payout for any participant.

In the event a critical internal audit issue is identified in a participant’s area of responsibility, the participant will be ineligible for an award until the issue is resolved and confirmed by Internal Audit review. In any case, the period of ineligibility will be a minimum of six months.

At the conclusion of each performance period, performance results will be presented to the Board. Final performance results and corresponding calculation of award payments are subject to Board approval.

2

Award Payment

Unless otherwise directed by the Board, payment of awards will be made as soon as possible after Board approval. Participants may voluntarily elect to defer a portion of their award payment under the terms of the Bank’s Supplemental Thrift Plan. All award payments will be subject to required tax withholdings.

Plan participants who terminate employment with the Bank by reason of normal retirement, death, or disability prior to the conclusion of a three-year performance period will receive a pro-rated award payment based on the months of completed service as a plan participant. Eligibility for a pro-rated award in the event of a participant’s early retirement is subject to approval by the Board. Pro-rated payments will be made at the same time as all other award payments upon completion of the three-year performance period. Any beneficiary of such payments will be the same as identified in the Bank’s qualified Retirement Plan.

Participants who terminate employment with the Bank during the three-year performance period (for reasons other than retirement, death, or disability) forfeit any award under the plan.

In the event a participant terminates employment after the end of the three-year performance period but prior to payment of the award (e.g. terminate after December 31 but before awards are determined and paid), the Board, in its sole discretion, may approve an award if it deems appropriate.

Termination or Amendment

The plan, in whole or in part, may at any time or from time-to-time be amended, suspended, or reinstated and may at any time be terminated by action of the Board. Until a determination of award payment has been made by the Board, no participant has a vested right to an award under the plan.

No amendment, suspension, or termination of the plan by the Board shall, without the consent of the participant, affect the rights of the participant to any award previously determined by the Board which has not yet been paid to the participant.

Miscellaneous Provisions

Neither the adoption of the Plan or its operation shall in any way affect the right and power of the Bank to dismiss any employee or otherwise terminate the employment or take other action including, but not limited to, removing the employee from the incentive-eligible position, at any time, for any reason, with or without cause.

Award payments under this plan shall have no impact on a participant’s level of benefit coverage under any of the Bank’s benefits plans including, but not limited to, qualified or non-qualified thrift or retirement benefits, life and accident insurance, or disability coverage.
Participants in this plan are ineligible to participate in the Bank’s Performance Sharing Plan.

3

No participant will have the right to alienate, assign, encumber, hypothecate, or pledge his or her interest in any Award under the Plan, voluntarily or involuntarily, and any attempt to so dispose of any such interest will be void.

This document is a complete statement of the Plan and as of the date below, supersedes all prior plans, representations and proposals written or oral relating to its subject matter. The Bank will not be bound by or liable to any employee for any representation, promise, or inducement made by any person which is not embodied in this document.

The Board has the power and authority to construe, interpret, and administer the Plan. Any decision arising out of or in connection with the construction, interpretation or administration of the Plan will lie within the Board’s absolute discretion and will be binding on all parties.

Effective date: January 1, 2001

4

FEDERAL HOME LOAN BANK OF PITTSBURGH

LONG-TERM INCENTIVE COMPENSATION PLAN

TERMS OF THE 2003-2005 PERFORMANCE PERIOD

5

Performance Period

The performance period commences on January 1, 2003 and ends on December 31, 2005.

Award Opportunity

Eligibility				Annualized						Over 3-Year Performance Period
Level	Threshold			Target			Maximum			Threshold			Target			Maximum
1		12.5	%		25	%		50	%		37.5	%		75	%		150	%
2		10	%		20	%		40	%		30	%		60	%		120	%
3		7.5	%		15	%		30	%		22.5	%		45	%		90	%

Note that the annualized award opportunities are provided for illustration only since awards will be paid only following completion of the full performance period. The award opportunity represents a percentage of base salary at the end of the performance period.

6

EX-10.4

Exhibit 10.4

Federal Home Loan Bank of Pittsburgh

Supplemental Thrift Plan

Table of Contents

Article		Page
	Preamble		1
I.	Definitions		2
II.	Participation and Vesting		4
III.	Employee Deferrals; Bank Deferrals		5
IV.	Accounts and Investment Vehicles		6
V.	Distribution of Benefits		7
VI.	Administration of the Plan		8
VII.	General Provisions		10

Preamble

The Federal Home Loan Bank of Pittsburgh (the “Bank”) participates in the Financial Institutions Thrift Plan (the “Thrift Plan”), a retirement savings plan qualified under the Internal Revenue Code (the “Code”) for employees of the Federal Home Loan Bank of Pittsburgh. The Thrift Plan permits eligible employees to elect to reduce and defer a percentage of their compensation, contributing the same to the Thrift Plan. The Bank matches employee contributions based on length of service and the amount of employee contributions.

However, as a result of the limitations imposed upon the aggregate amount of contributions which can be made to the Thrift Plan under Section 415 and other sections of the Code, such limitations causing a reduction in the benefits otherwise provided to certain of the Bank’s executives, the Bank has adopted this nonqualified, unfunded Supplemental Thrift Plan (the “Plan”). The purpose of this plan is to allow those employees whose benefits under the Thrift Plan would otherwise be significantly restricted by the terms of the Thrift Plan itself or the Code to make elective pretax deferrals and to receive the Bank match relating to such deferrals. Additionally, under the Plan, the Bank will match 200% of such employee’s contributions, not to exceed 3% of the employee’s compensation (as defined in the Plan), less the Bank’s contribution to the Thrift Plan.

1

Article I
Definitions

1.1	“Account” means the book reserve account established and maintained hereunder to record the contributions deemed to be made by the Participant and the Bank, as well as the increase in value attributable to the earnings thereon, all as described hereafter.
1.2	“Bank” means the Federal Home Loan Bank of Pittsburgh.
1.3	“Bank Deferrals” means the amounts contributed by the Bank under the Plan.
1.4	“Board” or “Board of Directors” means the Board of Directors of the Federal Home Loan Bank of Pittsburgh.”
1.5	“Beneficiary” means the person or persons designated by a Participant under the provisions of this Supplemental Thrift Plan to receive his benefits in the event of his death prior to receipt of all benefits hereunder.
1.6	“Compensation” means the annual base salary plus incentive compensation, excluding any Long Term Incentive compensation (“LTI”), which would be payable to a Participant for services rendered to the Bank (before reductions or deductions for any reason) on account of his employment with the Bank.
1.7	“Deferral Election” means a Participant’s election to defer a portion of his Compensation.
1.8	“Deferral Period” means the period commencing with the date a Deferred Amount is first credited to a Participant’s Account and continuing until payment of the final installment of a Participant’s Deferred Amount.
1.9	“Deferred Amount” means the sum of all amounts deferred pursuant to a Participant’s Deferral Election, plus the Bank match, plus investment earnings thereon, plus any increments thereof credited to the Participant’s Account, less any benefit payments made from the Participant’s Account.
1.10	“Disability” means a Participant’s total or partial disability as determined by the Thrift Plan.
1.11	“Effective Date” means January 1, 1991.
1.12	“Employee Deferrals” means the amounts deferred by the Participant under the Plan.
1.13	“Human Resources Committee” means the Human Resources Committee of the Board.
1.14	“Participant” means an executive who has been recommended by the President, and confirmed by the Board, as eligible to participate in the plan.

2

1.15   “Plan Administrator” means an officer(s) of the Bank who has been appointed by the Human Resources Committee to administer the Plan as set forth in Section 6.1 of the Plan.

3

Article II
Participation and Vesting

2.1	Eligibility to Participate. A Participant shall become eligible for Plan participation on the later of the first day of the calendar month coincident with or next following the date his participation is approved by the Board or the Effective Date. Once selected as a Participant, the Participant shall continue as a Participant until the Board determines otherwise. No executive shall have the right to be continued as a Participant in the Plan.
	Upon designation as a Participant, each Participant will be given a copy of the Plan. Upon becoming eligible to participate in the Plan a Participant shall have the option to make a Deferral Election to defer a portion of his annual Compensation.
2.2	Termination of Participation. Participation under the Plan shall terminate if employment with the Bank terminates.
2.3	Vesting. All benefits under the Plan are fully vested at all times subject only to Forfeiture for Cause as defined in Section 7.6.

4

Article III
Employee Deferrals; Bank Deferrals

3.1	Deferral Election. The Plan Administrator shall provide each Participant with a Deferral Election at least 30 days prior to the commencement of the calendar year in which the Compensation is to be earned and paid. Each Participant shall execute and deliver the Deferral Election to the Plan Administrator no later than the last business day preceding the calendar year in which Compensation is to be earned and paid.
	An executive who becomes eligible to participate during a calendar year shall have the option to execute a Deferral Election within 30 days of the date he becomes eligible to participate, which such election shall only apply to Compensation earned after the execution of the Deferral Election.
	The Deferral Election will state the percentage of Compensation and LTI (if applicable) which the Participant elects to defer for the forthcoming calendar year. A Deferral Election by the Participant shall be irrevocable for the calendar year for which the deferral is elected unless changes occur to the Thrift Plan which require Participant’s reconsideration. If such an event occurs, the Plan Administrator will communicate in writing with the Participant to request a new Deferral Election.
3.2	Employee Deferrals. Consistent with the Deferral Election, Participant Compensation and LTI (if applicable) shall deferred by the Bank crediting amounts to the Participant’s Thrift Plan account and Participant Account under this Plan in accordance with the annual distribution schedule provided to each Participant. Amounts deferred under this Plan may not exceed eighty percent (80%) of the sum of the Participant’s Compensation and LTI, less Participant’s contributions to the Thrift Plan. The maximum amount of contributions allowable under the Thrift Plan is based on limitations imposed by Section 401(k) and other sections of the Code, and shall include any employee after-tax contributions to the Thrift Plan. The amounts so deferred under this Plan shall be referred to as “Employee Deferrals” and shall be credited to the Participant’s Account as further described in Article IV.
3.3	Bank Deferrals. For each Deferral Period, the Bank shall credit to the Participant’s Account, a matching contribution equal to: (1) 200% of the Employee Deferrals (not to exceed 3% of the Participant’s Compensation), less (2) the Bank’s matching contribution to the Thrift Plan on behalf of the Participant. The Bank contributions under this Plan shall be referred to as “Bank Deferrals” and shall be credited to the Participant’s Account as further described in Article IV.

5

Article IV
Accounts and Investment Vehicles

4.1	Accounts. The total of the Employee and Bank Deferrals shall be credited monthly as earned to the applicable Participant Account and shall be recorded on the financial books and records of the Bank as a liability owed to the Participant.
4.2	Notional Investments. All Employee and Bank Deferrals credited to the Participant’s Account will be assumed to be notionally invested in the investment funds offered under the Thrift Plan. Each Participant’s notional share in the investment fund is represented by units as in the Thrift Plan. Each month the number of new units credited to a Participant in the notional investment funds is determined by dividing the total amount of Employee and Bank Deferrals invested in the notional investment funds during the month by the unit value of the notional investment funds as of the next valuation date (generally the last business day of the month). The allocations of Employee and Bank Deferrals to the notional investment funds shall be as set forth in the investment election forms (“Investment Election”) completed by Participant and submitted to the Plan Administrator from time to time.
4.3	Records. The Plan Administrator shall maintain such records as it deems necessary to administer this Plan and shall direct the calculation of amounts in the Participants’ Accounts. To this end, the Plan Administrator is authorized to use Bank employees, agents or contractors to calculate the benefits due hereunder.

6

Article V
Distribution of Benefits

5.1	Payment of Benefits. The amounts held in a Participant’s Account hereunder shall become payable to him as of the earliest of the date of his termination of employment, Disability, or retirement, in accordance with the form of payment described below.
5.2	Form of Payment. The Participant’s Account shall be paid in a lump sum, or, if the Participant elects: a) in yearly installments of up to 10 years or b) in yearly installments over the life of the Participant, based on actuarial calculations approved by the Plan Administrator. The elections hereunder will become effective on January 1st of the year that follows the expiration of a twelve-month period following the election. Failure to make an election shall result in a lump sum payment.
5.3	Death Benefits. In the event of a Participant’s death, the amount then held in Participant’s Account shall become payable to his Beneficiary in the same manner as the Participant elected in §5.2.
5.4	Amount of Benefits. A Participant’s Account shall be valued as of the last day of the month preceding each month with respect to which Participant is entitled to receive a distribution hereunder, assuming no further contributions are made since the last day of the preceding month.
5.5	Hardship and Other Withdrawals. A Participant may at any time submit a request, through the Plan Administrator, to the Human Resources Committee seeking a distribution of part or all of the amount credited to such Participant’s Account for reasons of severe financial hardship or other reasons as permitted under the Thrift Plan. The Human Resources Committee may, in its absolute discretion, grant or refuse any such request. It is the intention of the Board that hardship and other withdrawals shall be available for the same reasons as such withdrawals are available from the Thrift Plan and that the Participant shall provide such proof and documentation as is required for hardship and other withdrawals from the Thrift Plan.
5.6	Loans. No loans are available from the Plan.

7

Article VI
Administration of the Plan

6.1

Human Resources Committee. The Board has delegated to the Human Resources Committee authority over, and responsibility for, the interpretation and administration of the Plan; except that, the power to determine eligibility for participation in the Plan pursuant to Section 2.1, is reserved to the Board. The Human Resources Committee shall interpret and construe the Plan and have the responsibility to ensure that its provisions are carried out. The Human Resources Committee shall exercise such power and responsibilities in its sole and absolute discretion. The Human Resources Committee shall designate an officer(s) of the Bank to act as administrator of the operations of the Plan.

6.2

Plan Administration. The Plan Administrator shall:

	•	act as the point of contact for submission of claims for benefits due under the Plan;
	•	calculate the benefits due under the Plan or arrange for the calculation of benefits;
	•	inform Participants of the terms of the Plan and respond to their questions regarding the Plan;
	•	review and process claims for the payment of benefits under the Plan;
	•	provide necessary reporting to Bank management, Participants, the Human Resources Committee, the Board, and others as necessary; and
	•	take such other action as required to perform the tasks listed hereunder or otherwise administer the terms of the Plan. In fulfilling the responsibilities in this section the Plan Administrator may use other Bank staff, other agents or engage contractors.
6.3	Claims Procedure. All claims for benefits shall be in writing and shall be filed with the Plan Administrator. If the Plan Administrator wholly or partially denies a Participant’s or Beneficiary’s claim for benefits, the Plan Administrator shall, within 90 days after the Plan’s receipt of the claim, give the claimant written notice setting forth in understandable language:

(i)	the specific reason(s) for the denial;
(ii)	specific reference to pertinent plan provisions on which the denial is based;
(iii)	a description of any additional material or information which must be submitted to perfect the claim, and an explanation of why such material or information is necessary; and
(iv)	an explanation of the Plan’s review procedure.
The claimant shall have 60 days after the day on which such written notice of denial is handed or

8

mailed to him, in which to apply (in person or by authorized representative) to the Human Resources Committee, in writing, for a full and fair review of the denial of his claim. In connection with such review, the claimant (or his representative) shall be afforded reasonable opportunity to review pertinent documents, and may submit issues and comments in writing.

The Human Resources Committee shall issue its decision on review promptly and within 60 days after the Plan’s receipt of the request for review, unless special circumstances require an extension to not later than 120 days after receipt of the request for review. (Written notice of any such extension shall be furnished to the claimant before the commencement of such extension.) The decision shall be in writing and shall in understandable language set forth specific reasons for the decision and specific references to pertinent Plan provisions on which the decision is based.

9

Article VII
General Provisions

7.1	Rights to Employment. The establishment of the Plan, and selection of an executive for inclusion as a Participant in the Plan, shall not be construed as conferring any legal rights upon any Participant or other person for the continuation of employment, nor shall it interfere with the rights of the Bank to discharge any Participant and to treat him without regard to the effect such treatment might have upon him as a Participant in the Plan.
7.2	Source of Funding—Participant as General Creditor. The Bank shall not establish any form of trust or funded account for the purpose of providing benefits under this Plan. Any Participant who may have or claim any interest in or right to any payable hereunder, shall rely solely upon the unsecured promise of the Bank as set forth herein, for the payment of the claim. Nothing herein contained should be construed to give to or vest in any Participant, now or at any time in the future, any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatever owned by the Bank, or in which the Bank may have any right, title or interest, now or at any time in the future. The Plan is not intended to be a qualified plan within the meaning of Section 401 (a) of the Code and the Bank shall not be required to qualify the Plan under the Code.
7.3	Incapacity. In the event that the Human Resources Committee shall find that a Participant is unable to care for his affairs because of illness or accident, the Human Resources Committee may direct that any payment due him, unless claim shall have been made therefore by a duly appointed legal representative, be paid to his spouse, a child, a parent or other blood relative, or to a person with whom he resides, and any such payment so made shall be a complete discharge of the liabilities of the Plan therefore.
7.4	Taxes. The Bank shall have the right to deduct from each payment to be made under the Plan any required withholding taxes and shall withhold or cause to be withheld from all payments or accruals of benefits under the Plan (if applicable), all federal, state or local taxes required to be withheld by law. The Participant shall be liable for the payment of all taxes on the benefits under the Plan that are the Participant’s responsibility under the laws establishing such taxes.
7.5	Alienation of Benefits under the Plan. Benefits payable under this Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, whether voluntary or involuntary, including any such liability which is for alimony or other payments for the support of a spouse or former spouse, or for any other relative of the Participant, prior to actually being received by the person entitled to the benefits under the terms of the Plan, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void; nor shall any such distribution or payment be in any way liable for or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to such distribution or payment. If any Participant or Beneficiary is adjudicated bankrupt or purports to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any such distribution or payment voluntarily or involuntarily, the Bank, in its discretion, may hold or cause to be held or applied such distribution or payment or any part thereof to or for the benefit of such Participant or Beneficiary in such manner as the Bank shall direct.

10

7.6   Forfeiture for Cause. The Bank Deferrals and the earnings on the Bank Deferrals otherwise payable by the Plan may be subject to forfeiture for cause at any time. “Cause” shall mean:

(i)	the perpetration by a Participant of a defalcation involving the Bank or any affiliate;
(ii)	willful, reckless or grossly negligent conduct of a Participant entailing a substantial violation of any material provision of the laws, rules, regulations or orders of any governmental agency applicable to the Bank or an affiliate;
(iii)	the repeated and deliberate failure by a Participant to comply with reasonable policies or directives of the Board of Directors; or
(iv)	the breach by a Participant of a noncompetitive covenant or agreement with the Bank or affiliate.

Whether the facts in any given case amount to “Cause” shall be determined by the Board of Directors.

7.6	Compliance with Laws. The provisions of the Plan shall be construed, administered and governed under the laws of the United States and, to the extent they defer to state law, the laws of the Commonwealth of Pennsylvania. Whenever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and whenever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. Titles of Articles and Sections hereof are for convenience of reference only and are not to be taken into account in construing the provisions of this Plan. In case any provision of the Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts of the Plan, but the Plan shall be construed and enforced as if said illegal and invalid provision had never been inserted herein.
7.8	Amendment and Termination. The Bank specifically reserves the right, in the sole and unfettered discretion of its Board, at any time, to amend, in whole or in part, any or all of the provisions of the Plan and to terminate the Plan in whole or in part; provided, however, that no such amendment or termination shall reduce or eliminate the rights of a Participant accrued hereunder to the date of such amendment or termination.
7.9	Binding on Successors. The Plan shall be binding upon and inure to the benefit of the Bank and its successors and assigns. The Plan shall also be binding upon and inure to the benefit of any successor organization succeeding to substantially all of the assets and business of the Bank, but nothing in the Plan shall preclude the Bank from merging or consolidating into or with, or transferring all or substantially all of its assets to, another organization which assumes the Plan and all obligations of the Bank hereunder. The Bank agrees that it will make appropriate provision for the preservation of Participants’ rights under the Plan in any agreement or plan which it may enter into to effect any merger, consolidation, reorganization or transfer of assets. Upon such a merger, consolidation, reorganization, or transfer of assets and assumption of Plan obligations of the Bank, the term “Bank” shall refer to such other organization and the Plan shall continue in full force and effect.

11

EX-10.5

Exhibit 10.5

Federal Home Loan Bank of Pittsburgh

Supplemental Executive Retirement Plan

Table of Contents

Article		Page
	Preamble		1
I.	Definitions		2
II.	Participation and Vesting		3
III.	Amount and Payment of Supplemental Benefits		4
IV.	Administration of the Plan		6
V.	General Provisions		8

Preamble

The Federal Home Loan Bank of Pittsburgh (the “Bank”) participates in the Financial Institutions Retirement Fund (“Retirement Fund”), a defined benefit retirement plan qualified under the Internal Revenue Code (the “Code”) for employees of the Federal Home Loan Bank of Pittsburgh. The Retirement Fund provides benefits to employees based upon age at retirement, years of service, and high three year average salary.

However, as a result of the limitations imposed upon the aggregate amount of benefits that a Participant may receive from the Retirement Fund under Section 415 and other sections of the Code, such limitations causing a reduction in the benefits otherwise provided to certain of the Bank’s executives, the Bank has adopted this non-qualified, unfunded Supplemental Executive Retirement Plan (“Plan”). The purpose of this Plan is to allow certain executives whose benefits under the Retirement Fund would otherwise be significantly restricted by the terms of the Retirement Fund itself or the Code to receive benefits under the Plan in order to make up the benefits lost under the Retirement Fund.

1

Article I
Definitions

1.1	“Bank” means the Federal Home Loan Bank of Pittsburgh.
1.2	“Board” or “Board of Directors” means the Board of Directors of the Federal Home Loan Bank of Pittsburgh.
1.3	“FIRF Beneficiary” means the person or persons designated by a Participant under the provisions of the Retirement Fund to receive his benefits in the event of his death prior to receipt of all benefits hereunder.
1.4	“SERP Beneficiary” means the person or persons designated by a Participant under the provisions of the Supplemental Executive Retirement Plan to receive his benefits in the event of his death prior to receipt of all benefits hereunder.
1.5	“Compensation” means the annual base salary plus incentive compensation (excluding any long term incentive compensation) which would be payable to a Participant for services rendered to the Bank (before reductions or deductions for any reason) on account of his employment with the Bank.
1.6	“Effective Date” means January 1, 1991.
1.7	“Human Resources Committee” means the Human Resources Committee of the Board of Directors.
1.8	“Participant” means an executive who has been recommended by the Bank President, and confirmed by the Board, as eligible to participate in the Plan.
1.9	“Plan Administrator” means an officer(s) of the Bank who has been appointed by the Human Resources Committee of the Board as set forth in Section 4.1 of the Plan.
1.10	“Retiree” means a Participant who has retired under the terms of the Retirement Fund on a normal retirement benefit, an early retirement benefit, or a total and permanent incapacity benefit.
1.11	“Supplemental Thrift Plan” means the Federal Home Loan Bank of Pittsburgh Supplemental Thrift Plan.
1.12	“Supplemental Benefits” means the benefits under this Plan.

2

Article II
Participation and Vesting

2.1	Participation. An executive shall become eligible for Plan participation on the later of the first day of the calendar month coincident with or next following the date participation is approved by the Board or the Effective Date. Once selected as a Participant, a Participant shall continue to be a Participant until the Board determines otherwise. No executive shall have the right to be continued as a Participant in the Plan. Upon designation as a Participant, the Participant will be given a copy of the Plan.
2.2	Termination of Participation. A Participant’s eligibility for Supplemental Benefits under the Plan, if any, shall terminate if his employment with the Bank terminates; unless, at that time the Participant is entitled to a vested benefit from the Retirement Fund. A Participant’s Supplemental Benefits under this Plan may be subject to Forfeiture for Cause, at any time, as defined in Section 5.6.
2.3	Vesting of Supplemental Benefits. Supplemental Benefits in this Plan shall vest when benefits vest under the Retirement Fund subject to the Forfeiture for Cause as defined in Section 5.6.

3

Article III
Amount and Payment of Supplemental Benefits

3.1	Obligation to Pay the Supplemental Benefits. The Supplemental Benefits under this Plan shall be payable by the Bank only with respect to Retirees who die, or who terminate with vested benefits from the Retirement Fund. Consistent with Section 5.2, such Supplemental Benefits shall be payable only from the general assets of the Bank.
3.2	Amount of Supplemental Benefits. The amount, if any, of the annual Supplemental Benefits shall be equal to the excess of (a) minus (b), where:

(a)   is the annual benefit that would be payable as calculated by the Retirement Fund (for services to the Bank) on the basis of the form of payment elected under the Retirement Fund to, or on account of the Participant in the Retirement Fund, if the provisions of the Retirement Fund were administered:

(i)	without regard to the limitations imposed by Section 401(a)(17) and Section 415 of the Internal Revenue Code;
(ii)	with benefit service calculated from date of hire with the Bank;
(iii)	with restoration of Compensation reduced as a result of the Participant’s deferral of such Compensation under the terms of the Supplemental Thrift Plan; and
(iv)	using the Compensation definition in this Plan.

(b)   is the annual benefit as calculated by the Retirement Fund (for services to the Bank), on the basis of the form of payment elected under the Retirement Fund, payable to or on account of the Participant in the Retirement Fund.

3.3

Form and Timing of Payment of Supplemental Benefits. If a Participant has elected to participate in the Bank’s Split-Dollar Life Insurance Program (by executing an applicable Split-Dollar Agreement with the Bank) and has filed a valid Advance CSV Election (as defined by the Split-Dollar Agreement), then the Supplemental Benefits payable under this Plan shall be payable at such time and in such form as indicated on the Advance CSV Election.

If a Participant has not elected to participate in the Split Dollar Life Insurance Program or has failed to file a valid Advance CSV Election, then a Participant must file a written election with the Plan Administrator indicating the beginning payment date, and the form of payment of Supplemental Benefits under this Plan; provided, however, that any election made within one year of the first day of the calendar year in which the Participant would become eligible for Supplemental Benefits under this Plan shall not be effective, and the election in

4

effect immediately prior to the election(s) made within such one year period shall be deemed to be the election of the Participant. If a Participant fails for any reason to have a valid and effective written election, Supplemental Benefits under this Plan shall begin to be paid on the first of the month following the later of the month in which the Participant retires or attains age 65 and shall be paid in the form of a lump sum payment. Payment of Supplemental Benefits under this Plan shall begin no earlier than the time provided for the payment of benefits under the Retirement Fund. The available form of payment for the Supplemental Benefits payable under this Plan shall be the same as the forms of payment under the Retirement Fund, except that in the event an annuity option is selected for payment of the Supplemental Benefits, such annuity payments will be made annually.

3.4   Death Benefit. In the event of the death of a Participant while in active service, but prior to becoming a Retiree, the death benefit will equal the excess of (a) minus (b) where:

(a)

is the death benefit (as calculated by the Retirement Fund) that would otherwise be payable to the FIRF Beneficiary under the Retirement Fund, if the provisions of the Retirement Fund were (i) administered without regard to the limitations imposed by Sections 401(a)(17) and 415 of the IRC and (ii) calculated from the date of hire. For purposes of determining the annual benefit under this subsection (a), (i) any deferrals made by or on account of the Participant to the Supplemental Thrift Plan are to be included as Compensation and (ii) Compensation shall be defined as under this Plan.

(b)

is the death benefit, as calculated by the Retirement Fund.

3.5   Restoration of Employment. If a Retiree is restored to employment with the Bank, the payments under the Plan shall be discontinued. Upon subsequent retirement from employment with the Bank, the Participant’s Supplemental Benefits under the Plan shall be recomputed in the manner of the applicable provisions of this Plan and the Retirement Fund, and shall again become payable to such Participant in accordance with the provisions of the Plan, but be reduced by the amounts already paid to the Participant under the Plan.

5

Article IV
Administration of the Plan

4.1

Human Resources Committee. The Board has delegated to the Human Resources Committee authority over, and responsibility for, the interpretation and administration of the Plan; except that, the power to determine eligibility for participation in the Plan pursuant to Section 2.1, is reserved to the Board. The Human Resources Committee shall interpret and construe the Plan and have the responsibility to ensure that its provisions are carried out. The Human Resources Committee shall exercise such power and responsibilities in its sole and absolute discretion. The Human Resources Committee shall designate an officer(s) of the Bank to act as administrator of the operations of the Plan.

4.2

Plan Administrator. The Plan Administrator shall:

•   act as the point of contact for submission of claims for Supplemental Benefits under the Plan;

•   calculate the Supplemental Benefits due under the Plan or arrange for the calculation of Supplemental Benefits;

•   inform Participants of the terms of the Plan and respond to their questions regarding the Plan;

•   review and process claims for the payment of Supplemental Benefits under the Plan;

•   provide necessary reporting to Bank management, Participants, the Human Resources Committee, the Board, and others, as necessary; and

•   take such other action as required to perform the tasks listed hereunder or otherwise administer the terms of the Plan. In fulfilling the responsibilities in this section the Plan Administrator may use other Bank staff, other agents or engage contractors.

4.3   Claims Procedure. All claims for Supplemental Benefits shall be in writing and shall be filed with the Plan Administrator. If the Plan Administrator wholly or partially denies a Participant’s or SERP Beneficiary’s claim for Supplemental Benefits hereunder, the Plan Administrator shall, within 90 days after the Plan’s receipt of the claim, give the claimant written notice setting forth in understandable language:

(i)	the specific reason(s) for the denial;
(ii)	specific reference to pertinent Plan provisions on which the denial is based;
(iii)	a description of any additional material or information which must be

6

submitted to perfect the claim, as well as an explanation of why such material or information is necessary; and

(iv)   an explanation of the Plan’s review procedure.

The claimant shall have 60 days after the day on which such written notice of denial is handed or mailed to him, in which to apply (in person or by authorized representative), to the Human Resources Committee, in writing, for a full and fair review of the denial of his claim. In connection with such review, the claimant (or his representative) shall be afforded reasonable opportunity to review pertinent documents, and may submit issues and comments in writing.

The Human Resources Committee shall issue its decision on review promptly and within 60 days after the Plan’s receipt of the request for review, unless special circumstances require an extension to not later than 120 days after receipt of the request for review. (Written notice of any such extension shall be furnished to the claimant before the commencement of such extension.) The decision shall be in writing and shall be in understandable language setting forth specific reasons for the decision and specific references to pertinent Plan provisions on which the decision is based.

7

Article V
General Provisions

5.1	Rights to Employment. The establishment of the Plan, and selection of an executive for inclusion as a Participant in the Plan, shall not be construed as conferring any legal rights upon any Participant or other person for the continuation of employment, nor shall it interfere with the rights of the Bank to discharge any Participant and to treat him without regard to the effect such treatment might have upon him as a Participant in the Plan.
5.2	Source of Funding—Participant as General Creditor. The Bank shall not be required to establish any form of trust or funded account for the purpose of providing the Supplemental Benefits under this Plan. The Bank, in its sole discretion, may choose to establish funding arrangements with respect to the Plan on such terms and conditions as the Bank deems appropriate; provided, however, that the assets of the Bank held pursuant to any such arrangement shall remain subject to the claims of the Bank’s general creditors. Any Participant who may have or claim any interest in or right to any Supplemental Benefits payable hereunder, shall rely solely upon the unsecured promise of the Bank as set forth herein, for the payment of the claim. Nothing herein contained should be construed to give to or vest in any Participant, now or at any time in the future, any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatever owned by the Bank, or in which the Bank may have any right, title or interest, now or at any time in the future. The Plan is not intended to be a qualified plan within the meaning of Section 401(a) of the Internal Revenue Code and the Bank shall not be required to qualify the Plan under the Internal Revenue Code.
5.3	Incapacity. In the event that the Human Resources Committee shall find that a Participant is unable to care for his affairs because of illness or accident, the Human Resources Committee may direct that any Supplemental Benefits payment due him, unless claim shall have been made therefore by a duly appointed legal representative, be paid to his spouse, a child, a parent or other blood relative, or to a person with whom he resides, and any such payment so made shall be a complete discharge of the liabilities of the Plan therefore.
5.4	Taxes. The Bank shall have the right to deduct from each Supplemental Benefits payment to be made under the Plan any required withholding taxes and shall withhold or cause to be withheld from all payments or accruals of Supplemental Benefits under the Plan (if applicable), all federal, state or local taxes required to be withheld by law. The Participant shall be liable for the payment of all taxes on the Supplemental Benefits under the Plan that are the Participant’s responsibility under the laws establishing such taxes.
5.5	Alienation of Supplemental Benefits under the Plan. Supplemental Benefits payable under this Plan shall not be subject in any manner to anticipation,

8

alienation, sale, transfer, assignment, pledge, encumbrance or charge, whether voluntary or involuntary, including any such liability which is for alimony or other payments for the support of a spouse or former spouse, or for any other relative of the Participant, prior to actually being received by the person entitled to the Supplemental Benefits under the terms of the Plan, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void; nor shall any such distribution or payment be in any way liable for or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to such distribution or payment. If any Participant or SERP Beneficiary is adjudicated bankrupt or purports to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any such distribution or payment voluntarily or involuntarily, the Bank, in its discretion, may hold or cause to be held or applied such distribution or payment or any part thereof to or for the benefit of such Participant or SERP Beneficiary in such manner as the Bank shall direct.

5.6   Forfeiture for Cause. The Supplemental Benefits otherwise payable under the Plan to a Participant may be subject to forfeiture for cause at any time. “Cause” shall mean:

(i)	the perpetration by a Participant of a defalcation involving the Bank or any affiliate;
(ii)	willful, reckless or grossly negligent conduct of a Participant entailing a substantial violation of any material provision of the laws, rules, regulations or orders of any governmental agency applicable to the Bank or an affiliate;
(iii)	the repeated and deliberate failure by a Participant to comply with reasonable policies or directives of the Board; or
(iv)	the breach by a Participant of a noncompetitive covenant or agreement with the Bank or affiliate.
Whether the facts in any case amount to “Cause” shall be determined by the Board of Directors.

5.7   Compliance with Laws. The provisions of the Plan shall be construed, administered and governed under the laws of the United States and, to the extent they defer to state law, the laws of the Commonwealth of Pennsylvania. Whenever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and whenever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. Titles of Articles and Sections hereof are for convenience of reference only and are not to be taken into account in construing the provisions of this Plan. In case any provision of the Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts of the Plan, but the Plan shall be construed and enforced as if said illegal and invalid provision had never been inserted

9

herein.

5.8

Amendment and Termination. The Bank specifically reserves the right, in the sole and unfettered discretion of its Board, at any time, to amend, in whole or in part, any or all of the provisions of the Plan and to terminate the Plan in whole or in part; provided, however, that no such amendment or termination shall reduce or eliminate the rights of a Participant accrued hereunder to the date of such amendment or termination.

5.9

Binding on Successors. The Plan shall be binding upon and inure to the benefit of the Bank and its successors and assigns. The Plan shall also be binding upon and inure to the benefit of any successor organization succeeding to substantially all of the assets and business of the Bank, but nothing in the Plan shall preclude the Bank from merging or consolidating into or with, or transferring all or substantially all of its assets to, another organization which assumes the Plan and all obligations of the Bank hereunder. The Bank agrees that it will make appropriate provision for the preservation of Participants’ rights under the Plan in any agreement or plan which it may enter into to effect any merger, consolidation, reorganization or transfer of assets. Upon such a merger, consolidation, reorganization, or transfer of assets and assumption of Plan obligations of the Bank, the term “Bank” shall refer to such other organization and the Plan shall continue in full force and effect.

10

EX-10.6

EXHIBIT 10.6

DIRECTORS’ FEE POLICY

2005

GENERAL

Section 918.2 of the Rules and Regulations of the Federal Housing Finance Board requires the Board of Directors to adopt a written policy to provide for the payment of reasonable compensation to Bank Directors for the performance of their duties as members of the Board of Directors. Pursuant to that regulation, this Directors’ Fee Policy (“Policy”) sets forth the activities and functions for which attendance is necessary and appropriate and may be compensated, and sets forth the methodology for determining the amount of compensation to be paid. This Policy shall be reviewed annually by the Governance Committee.

TOTAL COMPENSATION AND STATUTORY LIMITS

In no event shall the compensation paid to Directors exceed the limits set forth in the Federal Home Loan Bank Act, as adjusted by the Federal Housing Finance Board to reflect the percentage increase in the preceding year’s Consumer Price Index. The statutory limits for 2005 are $28,364 for the Chair, $22,692 for the Vice Chair, and $17,019 for each of the other directors.

BOARD MEETING FEES

In order to compensate Directors for their time while serving as Directors, each Director that attends a meeting of the Board of Directors (including participating by telephone) shall be paid a Board Meeting Attendance Fee. The amount of the Board Meeting Attendance Fee varies depending on the role served at the meeting. The following Board Meeting Attendance Fees shall be paid to Directors in attendance at Board of Director’s meetings (including telephonic Board meetings):

Chairman	$	1,500
Vice Chair	$	1,250
All other Directors	$	1,000

In the absence of the Chairman, the Acting Chairman, whether it be the Vice Chairman or Chairman Pro Tem, shall receive the Chairman Board Meeting Attendance Fee. Board Meeting Attendance Fees are paid per meeting day.

STANDING COMMITTEE MEETING FEES

In order to compensate Directors for their time while serving as Directors, each Director that attends a Standing Committee meeting (including participating by telephone) shall be paid a Standing Committee Meeting Attendance Fee. The amount of the Standing Committee Meeting Attendance Fee does not vary among Directors in attendance at the meeting. The following Standing Committee Meeting Attendance Fees shall be paid to Directors in attendance at Committee Director’s meetings:

All Directors $ 1,000

Committee Meeting Attendance Fees are paid per meeting day, not per Committee meeting. No Committee Attendance Fee will be paid if a Board Meeting Attendance Fee is paid for the same day.

AD HOC COMMITTEES, TASK FORCE MEETINGS, AND OTHER SERVICE

In order to compensate Directors for their time while serving the Bank in attendance at Ad Hoc Committee meetings, Task Force meetings, or otherwise serving the Bank on official Bank business, each Director that attends such a meeting (including participating by telephone) may be paid a Special Meeting Attendance Fee with the approval of the Board. The amount of the fee does not vary among Directors in attendance at the special meeting. Each Director that attends a special meeting approved by the Board shall be paid the following Special Meeting Attendance Fee:

All Directors $ 1,000

Special Meeting Attendance Fees are paid per meeting day.

SYSTEM MEETINGS

In order to compensate Directors for their time while serving the Bank in attendance at Bank System meetings including meetings of the Council of the Federal Home Loan Banks, each Director that attends a Bank System meeting (including participating by telephone) shall be paid a Bank System Meeting Attendance Fee. The amount of the fee does not vary among Directors in attendance at the meeting. Each Director that attends a Bank System meeting shall be paid the following Bank System Board Meeting Attendance Fee:

All Directors $ 1,000

Bank System Attendance Meeting Fees are paid per meeting day. The Finance Board, the Board of Directors, the Chairman or the President may from time to time designate individual Directors to attend Bank System meetings on behalf of the Board.

AFFORDABLE HOUSING ADVISORY COUNCIL MEETINGS

In order to compensate Directors for their time while serving the Bank in attendance at Affordable Housing Advisory Council meetings, each Director that attends an Affordable Housing Advisory Council meeting (including participating by telephone) shall be paid an AHAC Meeting Attendance Fee. The amount of the fee does not vary among Directors in attendance at the meeting. Each Director is encouraged to attend at least one Affordable Housing Advisory Council meeting per year. Each Director that attends an Affordable Housing Advisory Council meeting shall be paid the following AHAC Meeting Attendance Fee:

All Directors $ 1,000

AHAC Attendance Meeting Fees are paid per meeting day.

TRAVEL

The Directors shall be reimbursed for travel, subsistence and other related expenses incurred in connection with the Directors duties under the terms and conditions of the Bank’s Travel and Expense Policy; provided, however, a Director may not be paid or reimbursed for gift or entertainment expenses.

DISCLOSURE

The Bank shall disclose in its annual report the following items:

(i)	the sum of the total actual compensation paid to Directors;
(ii)	the sum of the total actual expenses paid to Directors; and
(iii)	a summary of this Policy.

EX-10.7

Exhibit 10.7

MORTGAGE PARTNERSHIP FINANCE-^®
SERVICES AGREEMENT

     This MORTGAGE PARTNERSHIP FINANCE (“MPF^®”) Services Agreement (the “Agreement”) is entered into as of the 30th day of April, 1999 and is executed by the FEDERAL HOME LOAN BANK OF PITTSBURGH (the “Pittsburgh Bank”), a corporation of the United States of America, having its principal office at 601 Grant Street, Pittsburgh, Pennsylvania 15219, and the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF Provider”), a corporation of the United States of America, having its principal office at 111 East Wacker Drive, Suite 700, Chicago, Illinois 60601.

RECITALS:

     WHEREAS, the MPF Provider and Pittsburgh Bank are Federal Home Loan Banks (“FHLBs”) established under the authority of the Federal Home Loan Bank Act, 12 U.S.C. § 1421 et seq., to carry out a housing finance mission which includes supporting mortgage finance in a safe and sound manner;

     WHEREAS, in support of its housing finance mission, the MPF Provider has developed the MPF Program, a financial services product whereby an FHLB funds or purchases residential mortgage loans (“Mortgage Loans,” and individually a “Mortgage Loan”) through or from members of the MPF Provider, pursuant to separate Participating Financial Institution Agreements (“PFI Agreements”) with each participating member;

     WHEREAS, the Pittsburgh Bank wishes (i) to fund Mortgage Loans through its own members who pursuant to the MPF Program will be acting as agent for the Pittsburgh Bank in closing such Mortgage Loans, (ii) to purchase Mortgage Loans from its own members, and (iii) to have the MPF Provider operate and maintain the MPF Program for the benefit of the Pittsburgh Bank and any other FHLBs that are or may desire to participate in the MPF Program, including providing support services for the Pittsburgh Bank’s participation in the MPF Program; and

     WHEREAS, the MPF Provider is agreeable to making the MPF Program available to the Pittsburgh Bank so that it can be offered to the Pittsburgh Bank’s members, and is willing to operate and maintain the MPF Program for the benefit of the Pittsburgh Bank and other FHLB participants in the MPF Program, subject to the terms and conditions set forth in this Agreement; and

     WHEREAS, the parties contemplate entering into a participation pooling arrangement with other FHLBs whereby each FHLB that joins in the arrangement will contribute participation interests in MPF assets to a pool and in return will receive a pro rata interest in the total pool of participation interests; such arrangement is expected to supplement rather than supersede this Agreement.

     NOW THEREFORE, in consideration of the foregoing recitals, for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged and the mutual covenants and conditions herein contained, the parties hereto hereby agree as follows:

ARTICLE I
CERTAIN DEFINITIONS

     As used herein, the following terms shall have the following respective meanings:

     “Additional Participation Fee” shall mean fees payable to certain MPF Banks by the MPF Provider that are subject to the limit that the cumulative amount of Additional Participation Fees paid to all MPF Banks shall not exceed the Program Contribution Fund.

     “Agency Loan” shall mean a Mortgage Loan which is originated by a member of a FHLB as agent for that FHLB under the MPF Program, and which is therefore owned by such FHLB from the moment of its origination.

     “Borrower” shall mean the obligor or obligors under any Mortgage Loan.

     “Business Day” shall mean any day that the MPF Provider is open for business.

     “Clearing Account” shall mean the Pittsburgh Bank’s Daily Investment Deposit (DID) account or accounts at the MPF Provider, pursuant to the MPF Provider’s standard agreement for such account(s) from time to time, for the clearing of debits and credits between the MPF Provider and the Pittsburgh Bank.

     “Closed Loan” shall mean a Mortgage Loan that was owned by a PFI prior to the sale of the Mortgage Loan to a FHLB under the MPF Program.

     “Custodian” shall mean, at any time, the custodian utilized by the MPF Provider under the MPF Program to hold the Mortgage Loan Documents pertaining to the Program Loans.

     “Default Rate” shall mean a rate equal to the then current 10 year U.S. Treasury note rate.

     “Designated Loans” shall have the meaning set forth in Section 7.1.1.

     “Event of Default” shall have the meaning set forth in Section 7.2.

     “Fair Market Value” shall mean the current value of a given group of Mortgage Loans as determined by the MPF Provider obtaining bids or quotes on a given day, taking into consideration any delinquencies and assuming that the Pittsburgh Bank’s obligations under Section 7.4. will benefit and be enforceable by the MPF Provider. The bids or quotes will be obtained from three leading participants in the market for mortgage backed securities of a similar type to the Mortgage Loans and the determined value will be the average of the three bids or

- 2 -

quotes. The three participants to be contacted shall be agreed upon by both the MPF Provider and the Pittsburgh Bank.

     “FHLB Guide” shall mean the Guide for the MPF Banks published by the MPF Provider detailing policy and procedures for MPF Bank participation in the MPF Program, as the same may be amended from time to time, and which is hereby incorporated by reference in this Agreement.

     “Guides” shall mean, collectively, the Origination Guide and the Servicing Guide promulgated by the MPF Provider for the MPF Program, as revised from time to time.

     “Initial Term” shall have the meaning set forth in Section 2.1.

     “Later FHLBs” shall mean those FHLBs that sign agreements substantially in the form of this Agreement to offer the MPF Program except for the Pittsburgh Bank and the Federal Home Loan Bank of New York (“FHLB New York”).

     “Master Commitment” shall mean an agreement between an MPF Bank and its participating member pursuant to which the member agrees to originate Agency Loans or sell Closed Loans for or to such MPF Bank and service such Mortgage Loans thereafter, in accordance with the Guides.

     “Master Servicer” shall mean, at any time, the entity utilized by the MPF Provider as the master servicer of Program Loans.

     “Mortgage” shall mean, for any Mortgage Loan, the mortgage, deed of trust or other security documents executed and delivered by the applicable Borrower as security for such Mortgage Loan.

     “Mortgage Loan Documents” shall mean, for any Mortgage Loan, the Mortgage Note, the Mortgage and all other documents evidencing or securing such Mortgage Loan, as the same may be amended, supplemented, modified or restated from time to time.

     “Mortgage Note” shall mean, for any Mortgage Loan, the promissory note of the Borrower evidencing such Mortgage Loan.

     “MPF Banks” shall mean the Pittsburgh Bank and any other FHLB that has entered into an agreement with the MPF Provider to offer the MPF Program to their respective members.

     “ MPF Program” shall mean the MORTGAGE PARTNERSHIP FINANCE^® Program of the MPF Provider, which is based upon the Guides, the PFI Agreements and the Master Commitments.

     “MPF System” shall mean the proprietary software developed or owned by the MPF Provider for funding and purchasing Program Loans through or from PFIs, but does not include any software or models licensed to the MPF Provider by third parties.

- 3 -

     “PFIs”, and individually, a “PFI” shall mean a member of the MPF Bank that elects to participate in the MPF Program by executing a PFI Agreement with the MPF Bank.

     “Program Contribution” shall mean the fee payable by a FHLB to the MPF Provider for the right to offer the MPF Program to its members. The amount of the Pittsburgh Bank’s Program Contribution is set forth in Section 2.2.

     “Program Contribution Fund” shall mean at any time, an amount equal to 20% of the aggregate amount of Program Contributions paid or imputed to be paid by Later FHLBs, less the Regular Participation Fees and Additional Participation Fees previously paid by the MPF Provider to the Pittsburgh Bank and FHLB New York.

     “Program Loans”, and individually a “Program Loan”, shall mean Agency Loans or Closed Loans funded or purchased under the MPF Program.

     “Regular Participation Fee” shall mean a fee paid to certain MPF Banks by the MPF Provider without limitation as to the source of funds from which to make such payments, in the amount described in Section 2.4.

     “Servicer” shall mean, for any Program Loan, the PFI acting in its capacity as a servicer, or any subsequent servicer of such Mortgage Loan for the Pittsburgh Bank under the applicable Servicing Agreement.

     “Servicing Agreement” shall mean the PFI Agreement entered into between a PFI and the Pittsburgh Bank, pursuant to which the PFI agrees to service Program Loans for the account of the Pittsburgh Bank, and in the event that servicing for any Program Loan is transferred to some other party, the agreement pursuant to which such Program Loan is serviced for the account of the Pittsburgh Bank.

     “Term” shall mean the Initial Term and any renewed periods that are exercised as provided in Section 2.1, unless terminated earlier as provided in this Agreement.

     “Termination Event” shall mean any of the following: (a) a court of competent jurisdiction determines that the FHLBs do not have the authority to offer the MPF Program, which would include, without limitation, an adverse ruling in Texas Savings & Community Bankers Assoc., et al. v. Federal Housing Finance Board, Case No. A 97 CA 421SS (W. Dist. Texas); (b) the Federal Housing Finance Board (“Finance Board”) orders or otherwise causes the MPF Banks to stop offering the MPF Program or otherwise never approves the Pittsburgh Bank’s participation in the MPF Program; (c) legislation is enacted which withdraws the FHLBs authority to offer the MPF Program; or (d) the MPF Program is conclusively determined to violate consumer or other federal or relevant state laws or otherwise does not comply with applicable law.

     Other terms used herein shall be defined as set forth in this Agreement. Any capitalized term used herein which is not so defined shall have the meaning ascribed to such term in the

- 4 -

Guides. Terms referring to time periods, such as months or years, unless otherwise defined herein shall mean calendar periods, such as a calendar month or calendar year.

ARTICLE II
TERM AND FEES

     2.1. Term of Agreement. The initial term of this Agreement shall be three (3) years from the date the Finance Board grants approval of the Pittsburgh Bank’s request to offer the MPF Program (“Initial Term”). At the expiration of the Initial Term, the Pittsburgh Bank shall have the right to renew the Agreement for an additional one year term. At the expiration of the one year renewal, the Pittsburgh Bank shall have the right to renew the Agreement for a three-year term upon payment of the Extension Fee set forth in Section 2.2. To exercise any of its renewal rights the Pittsburgh Bank must give the MPF Provider written notice of its intention to renew this Agreement at least ninety (90) days prior to the renewal period. The MPF Provider shall use its best efforts to notify the Pittsburgh Bank of its renewal option at least one hundred twenty (120) days prior to each renewal period. If the Pittsburgh Bank fails to exercise all of its renewal rights, the Pittsburgh Bank shall promptly return to the MPF Provider all marketing and confidential materials previously provided by the MPF Provider, unless continuing use of said materials is licensed to the Pittsburgh Bank.

     2.2. Program Contribution and Extension Fee. To obtain the right to offer the MPF Program, the Pittsburgh Bank shall pay the MPF Provider a one time Program Contribution in the amount of $750,000. The Pittsburgh Bank has already paid a first installment in the amount of $250,000. The remaining $500,000 shall be paid upon the execution of this Agreement. No additional Program Contribution shall be due on any renewal or extension of the Term of this Agreement except that an Extension Fee in the amount of $750,000 shall be payable by the Pittsburgh Bank to exercise the three-year renewal term that follows the one-year renewal period.

     2.3. Exit Fee. If the Pittsburgh Bank elects not to renew the Agreement for either the one-year renewal period or the three-year renewal period that follows the one-year renewal period, then provided that (i) the Pittsburgh Bank has funded $1 Billion or more in Program Loans, (ii) no Event of Default attributable to the MPF Provider has occurred, and (iii) no Termination Event has occurred, the Pittsburgh Bank shall pay an Exit Fee in the amount of $500,000 to the MPF Provider on the next Business Day following the expiration of the one-year renewal period or three-year renewal period, whichever may apply.

     2.4. Participation Fees.

     (a) The MPF Provider shall pay, if applicable, a Regular Participation Fee and, if applicable, an Additional Participation Fee, each month (x) during the Term of this Agreement, and (y) if any renewal options are not exercised, then during the Term plus a period of ten (10) years, in an amount determined in accordance with the schedule listed below, such payment to be credited to the Pittsburgh Bank’s Clearing Account not later than the fifth Business Day of the next succeeding month. The amount of each Regular or Additional Participation Fee shall be

- 5 -

dependent upon the aggregate amount of all the Program Loans funded and outstanding at the end of the month by all the FHLBs (including the MPF Provider) and calculated based on the portion of the Program Contribution previously paid by the Pittsburgh Bank in cash, as follows:

     (i) If the aggregate amount of outstanding Program Loans is less than $2 Billion, no Regular Participation Fee shall be paid but an Additional Participation Fee in an amount equal to 1.2500 % the Pittsburgh Bank’s Program Contribution shall be paid, to the extent of the funds available for such payment as provided in Section 2.4.(b);

     (ii) If the aggregate amount of outstanding Program Loans is at least $2 Billion but less than $3 Billion, a Regular Participation Fee in an amount equal to 0.4167 % of the Pittsburgh Bank’s Program Contribution shall be paid, plus an Additional Participation Fee in an amount equal to 0.8333 % the Pittsburgh Bank’s Program Contribution, to the extent of the funds available for such payment as provided in Section 2.4.(b);

     (iii) If the aggregate amount of outstanding Program Loans is at least $3 Billion but less than $5 Billion, a Regular Participation Fee shall be paid in an amount equal to 0.8333 % of the Pittsburgh Bank’s Program Contribution, plus an Additional Participation Fee in an amount equal to 0.4167 % of the Pittsburgh Bank’s Program Contribution, to the extent of the funds available for such payment as provided for in Section 2.4.(b);

     (iv) If the aggregate amount of outstanding Program Loans is at least $5 Billion but less than $7 Billion, a Regular Participation Fee in an amount equal to 1.2500 % of the Pittsburgh Bank’s Program Contribution;

     (v) If the aggregate amount of outstanding Program Loans is at least $7 Billion but less than $10 Billion, a Regular Participation Fee in an amount equal to 1.6667 % of the Pittsburgh Bank’s Program Contribution;

     (vi) If the aggregate amount of outstanding Program Loans is $10 Billion or more, a Regular Participation Fee in an amount equal to 2.0833 % of the Pittsburgh Bank’s Program Contribution.

     (b) In determining the amount of Additional Participation Fees under clauses (i), (ii) and (iii) above, the amount payable to the Pittsburgh Bank in any given month shall be limited to its then current pro rata share of the Program Contribution Fund.

     (c) No Regular or Additional Participation Fees shall be payable under this Section 2.3 from and after the date the Pittsburgh Bank’s entire Program Contribution is refunded under Section 7.3 to the Pittsburgh Bank.

     2.5 Transaction Services Participation. The parties acknowledge that the MPF Provider will provide transaction processing services to the Pittsburgh Bank in connection with the

- 6 -

Pittsburgh Bank’s funding and purchasing Program Loans, such services to include recording Master Commitments, completing Delivery Commitments, maintaining credit enhancement and funding records, custodial services, administration of vendor agreements, data processing, servicing oversight, quality control and support of future product enhancements. In consideration of the transaction processing services necessary to the funding, purchasing and holding of Program Loans, the Pittsburgh Bank hereby agrees to grant the MPF Provider a twenty-five percent (25%) participation interest in each Program Loan the Pittsburgh Bank funds or purchases under the MPF Program during the Term of this Agreement (“Transaction Services Participation”), and the MPF Provider agrees to acquire the Transaction Services Participation, provided, however, that the Transaction Services Participation or any other participation interest shall be set for each Master Commitment and may not be changed for that Master Commitment once Program Loans have been funded or purchased thereunder with the exception of interests created in Designated Loans. The Transaction Services Participation will be granted and acquired pursuant to the terms of a separate MPF Pro Rata Participation Agreement in a form mutually acceptable to the parties. None of the foregoing provisions shall prevent the parties from entering into participation arrangements with respect to Program Loans in addition to those provided for in this Agreement.

ARTICLE III
TRAINING AND SALES SUPPORT

     3.1. Training of Pittsburgh Bank Personnel.

       3.1.1. Sales Training. During the first three months of the Initial Term, the MPF Provider will provide a four week sales training course (“Sales Training”) for up to five of the Pittsburgh Bank’s employees but to no more than two employees at any one time. The Sales Training shall take place at the offices of the MPF Provider which will provide cubicles and access to computers, along with appropriate training materials and classroom instruction to the trainees. The dates for Sales Training shall be scheduled by mutual agreement. Sales Training shall cover the following topics:

1.	Overview of the MPF Program and its systems and models.
2.	Handling sales and installation calls and meetings with the management of potential PFIs.
3.	Completing PFI Agreements and Master Commitments.

The Pittsburgh Bank shall be responsible for preparing its employees for the Sales Training by providing training in the basics of the mortgage business prior to the Sales Training or by selecting employees with adequate experience in the mortgage finance business. The Pittsburgh Bank shall pay all travel and lodging expenses of its employees in connection with their attending Sales Training. If the MPF Provider’s staff should make any joint sales calls with Pittsburgh Bank employees to any Pittsburgh Bank members,

- 7 -

the Pittsburgh Bank will pay all travel and lodging expenses of the MPF Provider’s staff in making such joint sales calls, except for the first $2,500.00 of such expenses which shall be paid by the MPF Provider.

     3.1.2. Operations Training. During the first year of the Initial Term, the MPF Provider will provide a two week operations training course (“Operations Training”) for up to five, but no more than two at a time, of the Pittsburgh Bank’s employees. The Operations Training shall take place at the offices of the MPF Provider which will provide cubicles and access to computers, along with appropriate training materials and classroom instruction to the trainees. The dates for Operations Training shall be scheduled by mutual agreement. Operations Training shall cover the following topics:

1.	Funding and purchasing Loans under the MPF Program.
2.	Servicing, Quality Control and Reporting.

The Pittsburgh Bank shall be responsible for selecting employees with adequate knowledge of the Pittsburgh Bank’s operations and systems, as well as residential mortgage operations. The Pittsburgh Bank shall pay all travel and lodging expenses of its employees in connection with their attendance at Operations Training.

     3.1.3. Follow-Up Training on Location. The MPF Provider will provide follow- up training to the Pittsburgh Bank’s trainees at the Pittsburgh Bank’s premises for up to three (3) person days per month (or such greater number as may be acceptable to the MPF Provider) for three (3) months following the Sales Training and Operations Training. The Pittsburgh Bank shall pay all reasonable travel and lodging expenses of the MPF Provider’s employees in connection with the provision of such follow-up training. The MPF Provider shall supply additional operations training or sales assistance as requested by the Pittsburgh Bank, at times to be mutually agreed upon, at a cost to the Pittsburgh Bank of $750 per day plus all travel and lodging expenses of the MPF Provider’s staff providing such training or assistance.

       3.2. On Going Technical and Sales Support. Within thirty (30) days after completion of the Sales Training and Operations Training, the MPF Provider will establish a system or method for electronic and telephonic communications with the Pittsburgh Bank sufficient to allow the Pittsburgh Bank’s personnel to have access to the MPF Provider’s MPF Program personnel that is equivalent to the access available to the MPF Provider’s own Banking Group and MPF Program Marketing function. The Pittsburgh Bank shall cooperate with the MPF Provider in setting up this communications method or system. As soon as practicable after the execution of this Agreement, the MPF Provider will cause the Guides to be published in an electronic format generally accessible to the MPF Banks and their PFIs.

- 8 -

ARTICLE IV
OPERATIONAL SYSTEMS

       4.1. Systems Support. The MPF Provider shall work with the Pittsburgh Bank to develop an appropriate interface or method for receiving reports from the MPF Provider. Data regarding the Pittsburgh Bank’s PFIs and the Mortgage Loans the Pittsburgh Bank has funded or purchased, and that are serviced by its PFIs will be processed on the same system the MPF Provider uses to process the MPF Provider’s MPF Program data. The MPF Provider intends toupdate this system as it deems necessary to keep the system operating in a commercially reasonable manner.

       4.2. Deliverables. The MPF Provider shall provide the following reports, inquiry capabilities, and electronic data transmission to the Pittsburgh Bank or its PFIs, as applicable:

     4.2.1. PFI Reports. Subject to the timely receipt of accurate data from the Pittsburgh Bank, the MPF Provider shall transmit the same reports to the Pittsburgh Bank’s PFIs as the MPF Provider supplies to the MPF Provider’s PFIs. These reports are generally described in the Guides. Any supplemental reports will be made available to the Pittsburgh Bank’s PFIs in the same way that they are made available to the MPF Provider’s PFIs.

     4.2.2. Management Reports. The MPF Provider shall provide such reports to the Pittsburgh Bank as are described and with the frequency set forth in the FHLB Guide.

     4.2.3. On-Line Inquiry. Access to certain information in the MPF System will be made available through on-line inquiry by the Pittsburgh Bank. The method for making inquiry and the nature of the available data is set forth in the FHLB Guide.

     4.2.4. Electronic Data Transmission. Certain accounting and PFI transaction account data shall be transmitted by the MPF Provider to the Pittsburgh Bank the evening of each Business Day to enable the Pittsburgh Bank to post such data to its general ledger and to the Pittsburgh Bank’s PFIs’ transaction clearing accounts with the Pittsburgh Bank. The method for transmission will be developed with the cooperation of the Pittsburgh Bank and the specific types of data to be transmitted is set forth in the FHLB Guide.

     4.2.5. Implementation. The MPF Provider and the Pittsburgh Bank have prepared an implementation schedule to govern the initiation and testing of the various deliverables described in this Agreement. This schedule includes dates for training the Pittsburgh Bank’s personnel. Both the MPF Provider and the Pittsburgh Bank shall diligently work to implement the installation and training in the agreed upon time frame. The parties recognize that the implementation schedule represents a best estimate of the time and actions needed to be taken rather than a precise prediction, and therefore, that such implementation schedule is subject to modification as needed to deal with unforeseen circumstances.

- 9 -

     4.2.6. Penalties For Delayed Implementation. The MPF Provider shall make all the capabilities described in Sections 4.1. and 4.2. available for testing by the Pittsburgh Bank not later than four months after the date this Agreement is executed. Should the MPF Provider fail to make these capabilities available within the six month period following execution of this Agreement, the Pittsburgh Bank’s Program Contribution shall be reduced by $100,000 for each ninety (90) day period or part thereof in which such capabilities are not made available past the initial six month period.

       4.3. Program Enhancements.

     4.3.1. System Review. The MPF Provider shall hold periodic meetings , at least once a quarter during 1999, to discuss possible changes and enhancements to the MPF Program system and to prioritize the scheduling of any such enhancements. Such meetings will be open to all FHLBs participating in the MPF Program, who can attend in person or telephonically.

     4.3.2. Customized Enhancements. For the first six (6) months after the Pittsburgh Bank’s first Mortgage Loan is funded or purchased through the MPF Program it may not request enhancements to the MPF Program system that would be solely for the benefit of the Pittsburgh Bank (“Customized Enhancements”). Thereafter, the Pittsburgh Bank may request Customized Enhancements to be made by the MPF Provider. The MPF Provider shall develop any Customized Enhancements requested by the Pittsburgh Bank provided that such Customized Enhancements do not negatively impact the performance or operation of the MPF Program system for other MPF Banks. The MPF Provider shall promptly advise the Pittsburgh Bank of its estimate of the cost and anticipated billing schedule, and the time period necessary to develop such Customized Enhancements. Commencement of work on any Customized Enhancements is subject to the Pittsburgh Bank’s acceptance of the estimates provided by the MPF Provider. The Pittsburgh Bank will reimburse the MPF Provider for the MPF Provider’s costs and expenses to develop any Customized Enhancements as provided for in the FHLB Guide, such payment to be made by the MPF Provider debiting the Pittsburgh Bank’s Clearing Account. The MPF Provider shall provide progress reports with its statement of development costs and expenses. The MPF Provider shall use its best efforts to develop Customized Enhancements for not more than the estimated cost and within the expected time frame. However, the MPF Provider does not guarantee that any Customized Enhancements can be developed or, if they can be developed, what the final cost will be or how long it may take to do so. The Pittsburgh Bank may request the MPF Provider to cease development of Customized Enhancements at any time but shall remain liable for all costs and expenses (including uncancellable contracts) incurred by the MPF Provider up to the date it receives such request to cease its development activities. Any Customized Enhancement with an estimated cost greater than $50,000 shall be developed pursuant to a separate development agreement between the MPF Provider and the Pittsburgh Bank.

- 10 -

     4.3.3. Reimbursement by Other FHLBs. If, during any Term of this Agreement, other FHLBs adopt any Customized Enhancements paid for by the Pittsburgh Bank, the Pittsburgh Bank will be reimbursed for a portion of the development costs of such Customized Enhancements in accordance with the following formula:

RA = (CE x 1.15) / Participating FHLBs

In the above formula, “RA” means the reimbursement amount due from each FHLB that adopts the Customized Enhancements; “CE” means the cost of the Customized Enhancement; and “Participating FHLBs” means the number of FHLBs participating in the MPF Program at the time of the development request (including the Pittsburgh Bank and the MPF Provider). Customized Enhancements shall no longer be considered “Customized Enhancements” on the third anniversary of their acceptance by the MPF Bank that requested such enhancements.

ARTICLE V
PARTICIPATION IN MPF PROGRAM

       5.1 MPF Provider to Act as Custodian for MPF Program Loans.

       (a) The MPF Provider shall act as the custodian for the Pittsburgh Bank with respect to all Mortgage Loans funded or purchased by the Pittsburgh Bank pursuant to the MPF Program. The MPF Provider may discharge this duty by entering into a custody agreement (a “Custody Agreement”) with Norwest Bank Minnesota, N.A. or any other entity which the MPF Provider deems qualified to act as the Custodian. The Custodian shall at all times be a federal or state chartered bank or trust company authorized to transact business in all applicable jurisdictions, and maintain customary fidelity and other insurance in connection with the performance of its obligations under the Custody Agreement and, upon request, provide an officer’s certificate certifying that such policy or coverage is in full force and effect. The MPF Provider shall have direct and primary responsibility to the Pittsburgh Bank for the performance of the duties of the Custodian under the Custody Agreement.

       (b) The MPF Provider shall perform or cause the Custodian to perform the following custodial duties for the Pittsburgh Bank’s Program Loans, which shall be done in compliance with the provisions of the PFI Agreements and the incorporated Guides:

(i) To hold the Mortgage Loan Documents and any other documents or papers relating to the Mortgage Loans which come into the Custodian’s possession (the “Custodial Files”) for the benefit of, and as an agent for and bailee of, the Pittsburgh Bank and to maintain continuous custody of all Custodial Files in accordance with customary standards for such custody;

(ii) To review the documents received with respect to a Mortgage Loan to determine whether they comply with the requirements of the Origination Guide;

- 11 -

(iii) To work with the applicable PFI to resolve any exceptions to said requirements;

(iv) To provide exception reports and status reports regarding Mortgage Loan Documents as provided for in the FHLB Guide;

(v) Upon the payment in full or the purchase or repurchase by a PFI of a Mortgage Loan, or as needed for servicing or foreclosure purposes, to release the Mortgage Loan Documents to the Servicer or notify the Servicer that the Mortgage Loan Documents are no longer held by the Custodian; and

(vi) To maintain or cause the Custodian to maintain customary fidelity and other insurance in connection with the performance of the obligations under the Custody Agreement and, upon request, to provide an officer’s certificate certifying that such policy or coverage is in full force and effect.

As part of its custodial duties hereunder, the MPF Provider, for the benefit of the Pittsburgh Bank, shall use its best efforts to enforce the obligations of the Custodian under the Custody Agreement. Such enforcement shall be in such form and carried out to such an extent and at such time as the MPF Provider, in its good faith business judgment, would require if it were the owner of the related Mortgage Loans. Notwithstanding the terms of any Custody Agreement, no delegation of custodial obligations to the Custodian pursuant to such Custody Agreement shall relieve the MPF Provider from its custodial obligations hereunder, and the MPF Provider shall remain obligated and primarily liable to the Pittsburgh Bank for the custody of the Mortgage Loans in accordance with the provisions of this Agreement.

     (c) In the event that the Custodian fails to produce a Mortgage Loan Document that was in its possession pursuant to the Custody Agreement when requested by the Servicer, and provided that (i) the Custodian previously acknowledged in writing that it had possession of such Mortgage Loan Document, (ii) such Mortgage Loan Document is not outstanding pursuant to a prior request for release from the Servicer, and (iii) such Mortgage Loan Document was held by the Custodian on behalf of the Pittsburgh Bank (a “Custodial Delivery Failure”), then the MPF Provider shall, with respect to any missing Mortgage Loan Document, furnish or cause the Custodian to furnish a lost Mortgage Loan Document affidavit in a form reasonably satisfactory to the Pittsburgh Bank and to indemnify (such indemnification to survive any termination of the Custody Agreement) the Pittsburgh Bank and the Servicer, and their respective designees, harmless against any and all direct liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements, including reasonable attorneys’ fees, that may be imposed on, incurred by, or asserted against it or them in any way relating to or arising out of such Custodial Delivery Failure, provided that neither the MPF Provider nor the Custodian shall be liable for consequential damages.

     (d) The MPF Provider shall immediately forward from the Custodian, or cause the Custodian to deliver to the Pittsburgh Bank, periodic reconciliation reports applicable to the Pittsburgh Bank’s Program Loans regarding Mortgage Loan Documents received and the status of requests for unreconciled or missing documents as provided in the FHLB Guide. The Custodian shall acknowledge that it holds the Mortgage Loan Documents pertaining to Mortgage Loans owned or held by the Pittsburgh Bank which come into its possession for the benefit of the

- 12 -

Pittsburgh Bank, and shall dispose of the same only in accordance with instructions furnished by the MPF Provider on behalf of the Pittsburgh Bank. The Custodian shall not, however, be required to verify the validity, sufficiency or genuineness of any Mortgage Loan Document. Upon request of the Pittsburgh Bank from time to time, the MPF Provider shall cause the Custodian to provide to the Pittsburgh Bank a list of all Mortgage Loans for which the Custodian holds Mortgage Loan Documents pursuant to the Custody Agreement.

     5.2 MPF Provider to Act as Master Servicer for MPF Program Loans.

     (a) The MPF Provider shall act as the master servicer for the Pittsburgh Bank with respect to all Mortgage Loans funded or purchased by the Pittsburgh Bank pursuant to the MPF Program. The MPF Provider may discharge this duty by entering into a master servicing agreement (a “Master Servicing Agreement”) with Norwest Bank Minnesota, N.A. or any other entity which the MPF Provider deems qualified to act as the Master Servicer. Subject to the provisions of Section 5.6., the MPF Provider shall have direct and primary responsibility to the Pittsburgh Bank for the performance of the duties of the Master Servicer under the Master Servicing Agreement.

     (b) The MPF Provider shall perform or cause to be performed the following master servicing duties, which shall be done in compliance with the provisions of the Servicing Agreements, and the incorporated Guides:

(i) To supervise, monitor and oversee the servicing of the Mortgage Loans and the performance of each Servicer of its services, duties and obligations under the Servicing Guide;

(ii) To receive and review all reports and data that are provided and are deliverable under the Servicing Guide by each Servicer;

(iii) To cause the Master Servicer to use reasonable efforts to enforce the obligations of the Servicers under each of the Servicing Agreements;

(iv) To collect information, reconcile such information with each Servicer, and submit reports pertaining to the Mortgage Loans and any funds due with respect thereto, to the Pittsburgh Bank as provided for in the FHLB Guide;

(v) To consult with the Pittsburgh Bank and recommend corrective action to be taken relative to any Servicer that fails to comply with the terms and conditions of the applicable Servicing Agreement and the Servicing Guide with respect to defaulted Mortgage Loans or the property encumbered as security for Mortgage Loans;

(vi) To deliver annually an officer’s certificate of the MPF Provider or an officer of the Master Servicer, certifying as the signer thereof that: the master servicing activities during the preceding calendar year have been reviewed under such officer’s supervision; to the best of such officer’s knowledge, the responsibilities and obligations of the Master Servicer have been performed throughout the year, or, if there has been a default, specifying each such default known to such officer and the nature and status thereof; and that nothing came to such officer’s attention

- 13 -

that indicated the Master Servicer was not in compliance with the provisions of the Master Servicing Agreement;

(vii) To notify the Pittsburgh Bank in the event a Servicer has defaulted under the Servicing Agreement or the Servicing Guide and to advise the Pittsburgh Bank of its recommended response to the default;

(viii) To maintain or cause the Master Servicer to maintain customary fidelity and other insurance in connection with the performance of the obligations under the Master Servicing Agreement and, upon request, to provide an officer’s certificate certifying that such policy or coverage is in full force and effect; and

(ix) To make its books and records relating to the services performed under the Master Servicing Agreement or those of the Master Servicer accessible for inspection and copying by the supervisory agents and examiners of the Finance Board and by the Pittsburgh Bank at any time during normal business hours.

As part of its master servicing duties hereunder, the MPF Provider, for the benefit of the Pittsburgh Bank, shall use its best efforts to enforce the obligations of the Master Servicer under the Master Servicing Agreement. Such enforcement shall be in such form and carried out to such an extent and at such time as the MPF Provider, in its good faith business judgment, would require if it were the owner of the related Mortgage Loans. Notwithstanding the MPF Provider’s delegation of master servicing obligations to the Master Servicer pursuant to the Master Servicing Agreement, the MPF Provider shall not be relieved from its master servicing obligations hereunder, and the MPF Provider shall remain obligated and primarily liable to the Pittsburgh Bank for the master servicing of the Mortgage Loans in accordance with the provisions of this Agreement, provided, however, that the MPF Provider shall have no liability arising from or related to its master servicing obligations under Sections 5.1 and 5.2, except for any such liability resulting from the MPF Provider’s or Master Servicer’s negligence or willful misconduct.

     5.3. Ancillary Support Services of the Program Loans by the MPF Provider.

     (a) The MPF Provider shall provide ancillary support services with respect to the Program Loans being administered under the MPF Program. Without limiting the generality of the foregoing, the MPF Provider will provide to the Pittsburgh Bank the specific ancillary support services relating to the MPF Program set forth in this Article V and the FHLB Guide.

     (b) The MPF Provider represents and warrants to the Pittsburgh Bank that (i) the software used by the MPF Provider in providing ancillary support services with respect to the Program Loans being administered under the MPF Program (the “Servicing Software”) will operate prior to, during and after December 31, 1999 without error relating to date data, including without limitation, date data which represents different centuries or more than one century, (ii) the Servicing Software will not operate abnormally or provide invalid or incorrect results as a result of date data representing different centuries or more than one century, (iii) the Servicing Software is designed to ensure year 2000 capability, including without limitation, date data recognition, calculations which accommodate same century and multi-century formulas and data values, and date data interface values that reflect the century, (iv) the Servicing Software will accurately and correctly manage and manipulate data involving dates, including single

- 14 -

century formulas and multi-century formulas, and will not cause an abnormally functioning or ending scenario within the application or generate incorrect values or invalid results involving such dates, and (v) the Servicing Software will accurately process date/time data from, into and between the twentieth and twenty-first centuries, and the years 1999 and 2000, and will accurately perform leap year calculations during and for the twentieth and twenty-first century, including the leap year 2000. Notwithstanding any other provision in this Agreement to the contrary, the MPF Provider’s liability under this Section 5.3. (b) shall be limited to direct compensatory damages and in no event shall the MPF Provider be liable under this Section 5.3. (b) for consequential or punitive damages (except for willful misconduct or gross negligence on the part of the MPF Provider).

     (c) The MPF Provider shall deliver or cause to be delivered to the Pittsburgh Bank such monthly and other periodic reports relating to all Mortgage Loans for which the MPF Provider is providing ancillary support services for the account of the Pittsburgh Bank, containing categories of information and in such format and at such intervals to allow the Pittsburgh Bank to reasonably prepare its required financial and regulatory reports, the specific requirements of which shall be set forth in the FHLB Guide.

     5.4. Selection of Pittsburgh Bank’s PFIs. The Pittsburgh Bank shall determine those of its members through which it will fund Mortgage Loans or from which it will purchase Mortgage Loans pursuant to the MPF Program, and shall enter into a PFI Agreement with each such member in the form provided by the MPF Provider, subject only to modifications agreed to in writing by the parties hereto and the parties thereto. The MPF Provider reserves the right to revise the form of the PFI Agreement from time to time. The Pittsburgh Bank shall use the most current form of PFI Agreement as supplied to it by the MPF Provider when executing a PFI Agreement with a member. Any changes to the form of the PFI Agreement must be approved in writing by the MPF Provider prior to the execution of the agreement by the Pittsburgh Bank (which approval shall not be unreasonably withheld).

     5.5. Creditworthiness of PFIs. The Pittsburgh Bank shall be responsible for evaluating the creditworthiness of each of its PFIs to provide the credit enhancement required of a PFI under the MPF Program. The Pittsburgh Bank understands and acknowledges that the performance of each PFI is a risk incident to originating or purchasing Loans pursuant to the MPF Program, and that the profitability of such investments is contingent, in part, on the creditworthiness of the PFIs it selects to do business with under the MPF Program.

     5.6. Training of Pittsburgh Bank’s PFIs. The Pittsburgh Bank shall be responsible for training the personnel of its PFIs to enable them to participate in the MPF Program as Originators, sellers and servicers in accordance with the Guides. The Pittsburgh Bank shall provide adequate personnel to provide such PFI training. Subject to the limitation in Section 3.1.1, the MPF Provider shall assist the Pittsburgh Bank in designing and organizing its PFI training program,as requested by the Pittsburgh Bank at a cost of $750 per day plus travel and lodging expenses of the MPF Provider’s employees. All PFI training materials shall be approved by the MPF Provider. In the event a Pittsburgh Bank PFI fails to service Program Loans in accordance with the Guides, then to the extent that such servicing problems are not attributable to the Master Servicer, and

- 15 -

provided that the MPF Provider first consults with the Pittsburgh Bank regarding such servicing breach, the Pittsburgh Bank shall pay the MPF Provider for the time spent by the MPF Provider’s staff in resolving such problems at a rate of $750 per day plus travel expenses, if any.

     5.7. MPF Program Materials.The MPF Provider may revise the form of the PFI Agreements, the Guides or any other MPF Program document at any time, provided that, when appropriate, the effective date of changes to the Guides shall be delayed to allow for the distribution of such changes to all MPF Banks’ participating members. The MPF Provider shall send revisions to the Guides to the Pittsburgh Bank in advance of sending them directly to the Pittsburgh Bank’s PFIs.

     5.8. Support of Pittsburgh Bank’s PFIs. The MPF Provider shall be responsible for providing operational support to all MPF Banks’ participating members by establishing an MPF Program Service Center (“Service Center”) that can be reached by means of toll-free telephone and facsimile numbers and which will be staffed by MPF Provider personnel during such hours as may be agreed to by the parties from time to time. The MPF Provider shall ensure that the Service Center is adequately staffed to fully service the Pittsburgh Bank’s PFIs in a commercially reasonable manner and with no less service than the MPF Provider is providing to its own participating members.

     5.9. Execution and Terms of Master Commitments. Upon delivery by a PFI of an estimate of the number, characteristics and dollar amount of Mortgage Loans it will originate for or sell to the Pittsburgh Bank during the term of a proposed Master Commitment, the Pittsburgh Bank will establish the Spread Account percentage, the Maximum Credit Enhancement Amount, the credit enhancement fee and the servicing fee for that Master Commitment in accordance with the Guides. Upon execution of a Master Commitment, the Pittsburgh Bank will provide timely notification of the Master Commitment to the Service Center whose personnel will then enter it into the MPF Program system in accordance with the Guides.

     5.10. Delivery Commitments, Pricing and Quality Control.

     5.10.1. Delivery Commitments. The MPF Provider’s Service Center will publish Rate and Fee Schedules for Agency Loans as provided for in the Guides which will be made available to the Pittsburgh Bank and its PFIs. Rate and Fee Schedules for Closed Loans shall be calculated by the MPF Provider for each Delivery Commitment when the Mortgage Loans have been analyzed and a settlement date has been agreed upon by the Pittsburgh Bank and its PFI and communicated to the MPF Provider. Rate and Fee Schedules are subject to change as provided for in the Guides. The Pittsburgh Bank’s PFIs will contact the Service Center to obtain and fill Delivery Commitments. The Service Center will provide regular reports of all Delivery Commitment activities of the Pittsburgh Bank’s PFIs to the Pittsburgh Bank, either electronically or by facsimile, including, without limitation, all requests for funding of individual Mortgage Loans made by Pittsburgh Bank’s PFIs. The Pittsburgh Bank shall fund all Mortgage Loans originated by its PFIs in accordance with the requirements of the Guides. The Service Center will compute any Pairoff Fees (defined in the Guides) that are owed to the

- 16 -

Pittsburgh Bank and will report these amounts to the Pittsburgh Bank. The Pittsburgh Bank shall be responsible for collecting Pairoff Fees from its PFIs.

     5.10.2. Pricing of Mortgage Loans. Pursuant to the delegation of pricing authority established by the Finance Board in Resolution No. 98-41, dated September 23, 1998, the Pittsburgh Bank has elected to utilize the pricing methodology developed by the MPF Provider. Thus, the MPF Provider shall be responsible for the calculation and publication of the prices applicable to both Agency Loans and Closed Loans.

     5.10.3. Quality Control and Loss Mitigation. The MPF Provider will perform, or cause to be performed, the same level of quality control review for the Pittsburgh Bank’s Mortgage Loans as it performs, or has performed, for its own Mortgage Loans and will communicate the results of its quality control activities promptly to the persons designated by the Pittsburgh Bank to receive such reports. The MPF Provider will review the servicing and loss mitigation oversight of the Pittsburgh Bank’s Mortgage Loans in the same manner as it reviews the servicing and loss mitigation oversight of its own Mortgage Loans and will provide the Pittsburgh Bank with prompt reports of its reviews. The Pittsburgh Bank will be responsible for managing the performance of its PFIs to assure a commercially reasonable standard of performance in the origination and servicing of Mortgage Loans under the MPF Program, including the performance of loss mitigation oversight. Neither the MPF Provider nor any of its shareholders, directors, officers, employees or agents shall be liable to the Pittsburgh Bank for any obligation, undertaking, act or judgment of any PFI. The obligation of the Pittsburgh Bank to manage its PFIs’ performance of these activities with respect to Mortgage Loans in the MPF Program shall survive termination of this Agreement.

     5.11. Transactional Relationships.

     5.11.1. Maintenance of an Account at the MPF Provider. The Pittsburgh Bank will establish and maintain the Clearing Account with the MPF Provider.

     5.11.2. Funding of Pittsburgh Bank’s Share of Expenses. The Pittsburgh Bank will fund the Clearing Account sufficiently from time to time upon demand of the MPF Provider. The Pittsburgh Bank hereby consents to the MPF Provider withdrawing funds from such account from time to time to satisfy the Pittsburgh Bank’s obligations to pay its obligations under this Agreement (whether or not the particular provision of this Agreement makes reference to such right of the MPF Provider to effect such satisfaction by withdrawal from the Pittsburgh Bank’s Clearing Account, and whether or not any such withdrawal shall cause the balance in the Pittsburgh Bank’s Clearing Account to become negative).

     5.11.3. Interest on Clearing Account. The MPF Provider will credit to the Pittsburgh Bank’s Clearing Account interest on the outstanding balance thereof from time to time at the rate of interest customarily paid by the MPF Provider on its DID accounts from time to time (the “DID Rate”).

- 17 -

     5.11.4. Overdrafts. In the event that any withdrawal from the Pittsburgh Bank’s Clearing Account shall cause the balance in such account to become negative, such deficit shall be deemed a loan from the MPF Provider to the Pittsburgh Bank, payable upon demand and bearing interest at the overdraft rate established by the MPF Provider for all its DID accounts.

5.12.   Relationship of the Parties; Restrictions on Transfers. The MPF Provider is not an agent of the Pittsburgh Bank except with respect to its obligations in Sections 5.1. and 5.2., and the MPF Provider shall have no fiduciary obligations to the Pittsburgh Bank except with respect to its custodial duty as provided in Section 5.1., and the Pittsburgh Bank shall have no fiduciary obligations to the MPF Provider except with respect to the obligations of Pittsburgh Bank set forth in Section 7.4.(c) of this Agreement. Notwithstanding the foregoing, the Pittsburgh Bank acknowledges that it will not sell or transfer any of its Program Loans or its rights under this Agreement, or any portion of any thereof or any interest in any thereof, except (i) to another FHLB, (ii) to an institutional third party investor approved of in writing by the MPF Provider, which approval shall not be unreasonably withheld, or (iii) to the PFIs providing the credit enhancement for such Mortgage Loans, provided, however, that for sales or transfers under clauses (i) and (ii), the Pittsburgh Bank shall continue to monitor the creditworthiness of its PFIs and, when appropriate to protect the interests of the holders of the Mortgage Loans, demand and hold collateral to secure any of its PFI’s obligations under their respective PFI Agreements. Without limiting the foregoing, if the Pittsburgh Bank elects to transfer participations other than on a Master Commitment basis in its Program Loans, the MPF Provider will continue to provide reports defined by Master Commitment and the Pittsburgh Bank shall be responsible for any additional reporting necessitated by such participations. Further, the parties acknowledge that (i) the method for obtaining a security interest in a PFI’s assets under the PFI Agreement is by the incorporation by reference into that document of the PFI’s Advances, Collateral Pledge and Security Agreement executed with the Pittsburgh Bank (the “Security Agreement”), and (ii) pursuant to the Security Agreement, all collateral subject to the security interest created thereby secures all the obligations of a PFI to the Pittsburgh Bank on a pari passu basis, including the credit enhancement and other obligations arising under the PFI Agreement and the obligation to repay advances made by the Pittsburgh Bank, unless (x) collateral is specifically pledged to secure the PFI’s credit enhancement obligations under the PFI Agreement or some other specific obligation, and (y) the MPF Provider is notified of the specific collateral pledge, in which case, the specifically pledged collateral will first secure the specifically collateralized obligation.

5.13. Use of Intellectual Property.

  (a) The MPF Provider hereby licenses to the Pittsburgh Bank the limited right to use the trademarks “MORTGAGE PARTNERSHIP FINANCE” and “MPF” (individually, a “Mark” and together, the “Marks”) subject to the following terms and conditions:

- 18 -

     (i) The term of this license shall be the same as this Agreement. Upon termination of this license, all rights in and to the Marks shall automatically revert to the MPF Provider.

     (ii) When using either of the Marks in any external communications, including letters, agreements, program descriptions and marketing materials, the Pittsburgh Bank agrees to adhere to the standards governing the use of the Marks set forth in the FHLB Guide.

     (iii) The MPF Provider reserves the right to inspect or monitor the use of the Marks and the services provided in connection with the Marks to assure compliance with this Agreement and the FHLB Guide.

     (iv) The Pittsburgh Bank hereby recognizes the value of the goodwill associated with the Marks and acknowledges that all rights in and to the Marks belong exclusively to the MPF Provider and that the Marks may have acquired secondary meaning in the mind of the public. The Pittsburgh Bank agrees, during the term of this Agreement and thereafter, never to attack or assist any one else in attacking the rights of the MPF Provider in the Marks or the validity of the license of the Marks being granted herein.

     (b) Should the Pittsburgh Bank elect the option to use the MPF System as provided in Section 7.3.2., prior to such use of the MPF Provider’s proprietary intellectual property, the Pittsburgh Bank shall execute a licensing agreement in form customary in the software industry, and on terms reasonably satisfactory to the MPF Provider.

ARTICLE VI
REPRESENTATIONS AND COVENANTS

     6.1. Pittsburgh Bank’s Risk of Loss. The Pittsburgh Bank assumes all risk of loss in connection with its funding or purchasing each Program Loan, and the execution of each PFI Agreement and each Master Commitment, except (i) to the extent of participation interests transferred to the MPF Provider and (ii) for any losses covered by the MPF Provider’s indemnification of the Pittsburgh Bank set forth in Section 6.6, provided, however, that such assumption of risk is not intended to waive or release the liability of any person who is not a party to this Agreement.

     6.2. Pittsburgh Bank’s Covenants. The Pittsburgh Bank covenants and agrees as follows:

     6.2.1. Use of Proprietary Information and Confidentiality. The Pittsburgh Bank has previously been, and may from time to time be, furnished with certain materials and information relating to the MPF Program that are confidential and proprietary information of the MPF Provider (collectively, the “Confidential Information”). All documents and

- 19 -

information furnished by the MPF Provider regarding the MPF Program shall be presumed to be Confidential Information unless listed as disclosable in the FHLB Guide. The Pittsburgh Bank shall (i) keep the Confidential Information confidential using reasonable means, not less than those used to protect its own proprietary material, (ii) not disclose the Confidential Information to any one other than (solely in connection with the MPF Program) to its officers or employees who have a need to know its contents to perform their duties for the Pittsburgh Bank and to those third party agents who have signed confidentiality agreements protecting the MPF Provider, in form and substance reasonably satisfactory to the MPF Provider, unless required to do so pursuant to the process or requirement of any court or governmental agency, and (iii) upon completion of its use of the Confidential Information or at any time upon the MPF Provider’s request, promptly return the Confidential Information to the MPF Provider, including all copies made thereof in any format and all notes pertaining to the same.

     6.2.2. Third Party Request for Confidential Information. The Pittsburgh Bank agrees that if it is served with process or any other governmental or regulatory request for the Confidential Information, it will notify the General Counsel of the MPF Provider by telephone at (312) 565-5805 or by facsimile transmission at (312) 565-6938 or such telephone numbers as may be set forth in the FHLB Guide, prior to complying with such process, order or request, except where such prior notice is prohibited by law.

     6.2.3. Use and Licensing of MPF System. Should the Pittsburgh Bank elect to use the MPF System as provided in Section 7.3.2., prior to such use of the MPF System, the Pittsburgh Bank shall (I) execute a licensing agreement in form customary in the software industry, and on terms reasonably satisfactory to the MPF Provider, which shall, amongst other provisions, prohibit the Pittsburgh Bank from using the MPF System for Program Loans funded through or purchased from PFIs that are members of any other FHLB and from permitting the use of or transferring the MPF System by or to any party other than the Pittsburgh Bank and (II) pay a one time license fee of $750,000. The MPF Provider shall then deliver to the Pittsburgh Bank a copy of the source code and any and all other required materials necessary to the operation of the MPF System. The MPF Provider makes no representations that the MPF System will operate without errors on the Pittsburgh Bank’s computer systems.

     6.3. Authorization and Enforceability Representations. The MPF Provider and the Pittsburgh Bank each hereby represents to the other party hereto that (i) all necessary corporate and other action has been taken to authorize it to execute, and to perform its obligations under, this Agreement, and (ii) all necessary regulatory approvals to engage in the MPF Program have been received, and (iii) this Agreement is the legal, valid and binding obligation of such party, enforceable against it in accordance with its terms.

     6.4.MPF Provider Representations and Warranties. In addition to the above representations, the MPF Provider represents and warrants to the Pittsburgh Bank that the MPF Program is fully compliant with all state and federal laws, including consumer laws, and federal banking regulatory rules and regulations, except for any ruling arising in Texas Savings &

- 20 -

Community Bankers Assoc., et al. v. Federal Housing Finance Board, Case No. A 97 CA 421SS (W. Dist. Texas). The MPF Provider also represents to the Pittsburgh Bank that the accounting firm of Price Waterhouse has provided a letter confirming that the accounting treatment utilized by the MPF Provider in connection with the MPF Program is fully consistent with Generally Accepted Accounting Principles. Further, the MPF Provider represents to the Pittsburgh Bank and warrants that all copyrights, trademarks, service marks, patents and other intellectual property rights used in the MPF Program do not infringe upon the rights of any third parties.

     6.5. Pittsburgh Bank’s Indemnification Obligation. The Pittsburgh Bank acknowledges that the ability to participate in the MPF Program will be based upon its representations and warranties set forth above, and the Pittsburgh Bank agrees to indemnify, defend and hold harmless the MPF Provider, its affiliates and each stockholder, director, officer, employee and agent, if any, thereof from and against any and all loss, damage, liability or expense, including (without limitation) costs and attorneys’ fees and expenses, to which it may be put or which it may incur by reason of, or in connection with, any misrepresentation made by the Pittsburgh Bank in this Agreement, any breach by the Pittsburgh Bank of its warranties and/or any failure by the Pittsburgh Bank to fulfill any of its covenants or agreements set forth in this Agreement provided that such failure was due to the negligence or willful misconduct of the Pittsburgh Bank. The Pittsburgh Bank’s indemnification under this section does not include any loss, damage, liability or expense arising out of any litigation challenging the authority of the MPF Provider to engage in the MPF Program, including Texas Savings & Community Bankers Assoc., et al. v. Federal Housing Finance Board, Case No. A 97 CA 421SS (W. Dist. Texas).

     6.6. MPF Provider’s Indemnification Obligation. Without limiting or modifying the provisions of Section 5.1. (c), the MPF Provider agrees to indemnify, defend and hold harmless the Pittsburgh Bank, its affiliates and each stockholder, director, officer, employee and agent, if any, thereof from and against any and all loss, damage, liability or expense, including (without limitation) costs and attorney’s fees and expenses, to which it may be put or which it may incur by reason of, or in connection with, any misrepresentation made by the MPF Provider in this Agreement, any breach by MPF Provider of its warranties and/or any failure by the MPF Provider to fulfill any of its covenants or agreements set forth in this Agreement provided that such failure was due to the negligence or willful misconduct of the MPF Provider. The MPF Provider’s indemnification under this section does not include any loss, damage, liability or expense arising out of Texas Savings & Community Bankers Assoc., et al. v. Federal Housing Finance Board, Case No. A 97 CA 421SS (W. Dist. Texas).

     6.7. Review of MPF Provider’s Accounting Books and Records. From time to time upon reasonable advance request, the Pittsburgh Bank shall be entitled to review, at its cost, the accounting books and records of the MPF Provider with respect to the Pittsburgh Bank’s participation in the MPF Program. The Pittsburgh Bank agrees and acknowledges that the MPF Provider need not provide copies of confidential bank examiner’s reports. The MPF Provider will disclose to the Pittsburgh Bank any material deficiency in the controls or economic model of the MPF system of which it becomes aware.

-21-

     6.8. Exclusive Marketing to PFIs. The Pittsburgh Bank shall have the exclusive right to market the MPF Program to its members.

ARTICLE VII
ASSET LIQUIDITY AND TERMINATION

     7.1. Liquidity of MPF Program Assets; Purchase by MPF Provider.

       7.1.1. Liquidity Option. From time to time, the Pittsburgh Bank may elect to grant to the MPF Provider a 100% participation in all the Agency Loans funded pursuant to Delivery Commitments entered into by the Pittsburgh Bank on a given Business Day after the MPF Provider has received notice from the Pittsburgh Bank of its intent to exercise this Liquidity Option (“Designated Loans”). The MPF Provider hereby agrees to acquire a 100% participation in the Designated Loans designated by the Pittsburgh Bank, pursuant to a MPF Liquidity Option Participation Agreement in a form mutually acceptable to the parties. The Pittsburgh Bank shall designate Designated Loans by giving notice to the MPF Provider in accordance with the procedures set forth in the FHLB Guide.

       7.1.2. Rights Upon Discontinuance or Expiration. Subject to the provisions of Sections 5.10.3., 5.12. and 7.4., the Pittsburgh Bank shall have the right to discontinue its participation in the MPF Program at any time, with or without cause, provided that the Pittsburgh Bank’s election to discontinue shall not relieve it of liability for any prior breach or violation of its obligations under this Agreement nor for any obligations that survive termination of this Agreement. If, upon the Pittsburgh Bank’s discontinuance of the MPF Program or the expiration of the Term of this Agreement, the aggregate amount of the Pittsburgh Bank’s Program Loans does not exceed $100 Million, then the Pittsburgh Bank shall have the right, but not the obligation, to sell its Program Loans to the MPF Provider at the then current Fair Market Value, by giving the MPF Provider written notice not later than the last day of the Term of this Agreement. The MPF Provider shall continue to provide updates to the FHLB Guide, the Servicing Guide and any other bulletins or items issued to servicers under the MPF Program to the Pittsburgh Bank and its PFIs servicing outstanding Program Loans until such time as all of the Pittsburgh Bank’s Program Loans are repaid or otherwise removed from the MPF Program (which obligation shall survive termination or expiration of this Agreement).

       7.1.3. Transfers of Required Acquisitions. Nothing in this Agreement shall limit the right of the MPF Provider to transfer participation interests in Program Loans that it may acquire from the Pittsburgh Bank pursuant to Sections 7.1.1., or 7.1.2.

     7.2. Events of Default. It shall be an Event of Default under this Agreement if either party fails to perform its obligations or breaches any of its covenants under this Agreement and such failure to perform or breach is not cured (i) within sixty (60) days from the date the non- breaching party gives written notice of such default, if the default is capable of being cured within such time limit, or (ii) within a reasonable time after the expiration of the sixty (60) day

-22-

period following notice, if the default is not capable of being cured within sixty (60) days following notice.

     7.3. Termination and Other Remedies.

       7.3.1. Remedies for the Pittsburgh Bank’s Default. Upon the occurrence and during the continuance of an Event of Default caused by the Pittsburgh Bank, (i) the Pittsburgh Bank shall cease issuing new Master Commitments under the MPF Program, (ii) the MPF Provider shall have no obligation to refund any Program Contribution, or to pay a Regular Participation Fee accruing after the occurrence and during the continuance of the Event of Default, and (iii) the MPF Provider may discontinue providing ancillary support services on one hundred eighty (180) days’ notice to the Pittsburgh Bank, such services to be provided in the interim at the MPF Provider’s then current rate charged to other MPF Banks.

       7.3.2. Remedies for the MPF Provider’s Default or for a Termination Event. Upon the occurrence of an Event of Default caused by the MPF Provider or a Termination Event, the Pittsburgh Bank shall have the right to cease issuing new Master Commitments, and, at the election of the Pittsburgh Bank:

       (i) If the aggregate balance of the Pittsburgh Bank’s outstanding Program Loans is less than or equal to $25 Million:

          (A) the MPF Provider shall purchase the Pittsburgh Bank’s Loans at Fair Market Value; and

          (B) the MPF Provider shall refund the full amount of the Program Contribution paid by the Pittsburgh Bank;

       (ii) If the aggregate balance of the Pittsburgh Bank’s outstanding Program Loans is greater than $25 Million but less than or equal to $100 Million:

          (A) (I) subject to the provisions of Section 6.2.3., the MPF Provider shall license the MPF System to the Pittsburgh Bank to operate on its own computer hardware to the Pittsburgh Bank and the Pittsburgh Bank shall engage its own custodian and master servicer and assume responsibility for the oversight of those functions with respect to its outstanding and future Program Loans; or (II) the MPF Provider shall purchase the Pittsburgh Bank’s outstanding Program Loans at Fair Market Value, or (III) the MPF Provider will continue to provide ancillary support services and act as custodian and master servicer for the Pittsburgh Bank’s outstanding Program Loans without charge to the Pittsburgh Bank, or (IV) the Pittsburgh Bank may engage its own custodian and master servicer and assume responsibility for the oversight of those functions with respect to its outstanding Program Loans; and

-23-

        (B) the MPF Provider shall refund the Program Contribution paid by the Pittsburgh Bank in accordance with the following schedule:

        (I) In the first year of the Term, 75% of paid Program Contribution;

        (II) In the 2nd year of the Term, 50% of paid Program Contribution; or

        (III) After the 2nd year of the Term, 25% of paid Program Contribution.

     (iii) If the aggregate balance of the Pittsburgh Bank’s outstanding Program Loans is greater than $100 Million:

        (A) (I) subject to the provisions of Section 6.2.3., the MPF Provider shall license the MPF System to the Pittsburgh Bank to operate on its own computer hardware and the Pittsburgh Bank shall engage its own custodian and master servicer and assume responsibility for the oversight of those functions with respect to its outstanding and future Program Loans; or (II) the MPF Provider will continue to provide ancillary support services and act as custodian and master servicer for the Pittsburgh Bank’s outstanding Program Loans in accordance with the provisions of Article V, for an annual fee equal to four (4) basis points (0.04%) of the outstanding amount of the Pittsburgh Bank’s Program Loans (subject to adjustment to reflect any increase in the Master Servicer’s fees and/or Custodian’s fees for such Program Loans), or (II) the Pittsburgh shall engage its own custodian and master servicer and assume responsibility for the oversight of those functions with respect to its outstanding Program Loans, and

        (B) the MPF Provider shall refund the Program Contribution paid by the Pittsburgh Bank in accordance with the following schedule:

        (I) In the first year of the Term, 75% of paid Program Contribution;

        (II) In the 2nd year of the Term, 50% of paid Program Contribution; or

        (III) After the 2nd year of the Term, 25% of paid Program Contribution.

       7.4. Obligations Regarding PFIs; Support for Sold Loans.

     (a) In the case of any sale of Mortgage Loans to the MPF Provider under this Article VII, the Pittsburgh Bank’s covenant to monitor the credit and collateral of the Pittsburgh Bank’s PFIs set forth in Section 5.12 and its obligations under its PFI Agreements and the FHLB Guide, shall apply and shall survive the expiration or termination of this Agreement. The Pittsburgh Bank shall inform the MPF Provider of any adverse changes in the financial condition of such PFIs of which it becomes aware. The Pittsburgh Bank hereby represents and warrants to the MPF Provider that the

-24-

creditworthiness of its PFIs will have been evaluated in connection with the credit enhancements provided for any and all Program Loans which it may sell or participate to the MPF Provider under the terms of this Agreement, in the same way as it evaluates the creditworthiness of its PFIs to extend advances.

     (b) The provisions of this Section 7.4. apply to any and all Program Loans the Pittsburgh Bank sells to the MPF Provider. The Pittsburgh Bank hereby acknowledges that the MPF Provider has the need to have the credit enhancement obligations of any Pittsburgh Bank PFI relating to purchased Program Loans secured if the creditworthiness of such Pittsburgh Bank PFI should become impaired. To assist the MPF Provider in ascertaining the creditworthiness of Pittsburgh Bank PFIs, the Pittsburgh Bank agrees to notify the MPF Provider of any adverse changes in the financial condition of those PFIs who provide credit enhancements for any sold Program Loans and to share relevant credit assessments and information on those PFI with the MPF Provider.

     (c) Upon the request of the MPF Provider, the Pittsburgh Bank agrees to call, hold and monitor such collateral of a Pittsburgh Bank PFI for the benefit of the MPF Provider, except when prohibited by law. In addition, the Pittsburgh Bank agrees to hold for the MPF Provider’s benefit any and all collateral as may be provided by Pittsburgh Bank PFIs under their respective PFI Agreements to secure their obligations under PFI Agreements relating to sold Program Loans.

     (d) The MPF Provider shall not have an interest in any (i) other property taken as security for any other credit, loan or financial accommodation made or furnished to any PFI by the Pittsburgh Bank in which the MPF Provider has no financial interest; (ii) property now or hereafter in the Pittsburgh Bank’s possession or under the Pittsburgh Bank’s control other than by reason of any PFI Agreement; or (iii) deposits or other indebtedness which may be or might become security for performance or payment of any obligations and liabilities of any PFI under the PFI Agreement by reason of the general description contained in any instrument other than the PFI Agreement held by the Pittsburgh Bank or by reason of any right of setoff, counterclaim, banker’s lien or otherwise. If, however, such property, deposit, indebtedness or the proceeds thereof shall actually be applied to the payment or reduction of principal, interest, fees, commissions or any other amounts owing by any PFI in connection with any Program Loan which the Pittsburgh Bank shall have sold to the MPF Provider, then the MPF Provider shall be entitled to such application with respect to such Loan.

       7.5. Exculpation of MPF Provider. Neither the MPF Provider nor any of its shareholders, directors, officers, employees or agents shall be liable to the Pittsburgh Bank for any obligation, undertaking, act or judgment of any Borrower, any guarantor or any other person liable on a Mortgage Loan, or be bound to ascertain or inquire as to the performance or observance of any provision of any Mortgage Loan or any of the Mortgage Loan Documents.

       7.6. Mediation of Disputes; Jurisdiction and Venue. (a)Neither the Pittsburgh Bank nor the MPF Provider shall institute a proceeding before any tribunal to resolve any controversy

-25-

or claim arising out of or relating to the Agreement, or the breach, termination or invalidity thereof (a “Dispute”), before such party has sought to resolve the dispute through mediation. If the parties do not promptly agree on a mediator, either party may request the then Chairman of the Board of the Finance Board to appoint a mediator. All mediation proceedings under the Agreement shall be held in Washington, D.C. or such other location as the parties may agree upon. If the mediator is unable to facilitate a settlement of the Dispute within a reasonable time, as determined by the mediator, the mediator shall issue a written statement to the parties to that effect and the complaining party may then pursue any other remedy available to it at law or in equity. The fees and expenses of the mediator shall be paid by the party initiating mediation.

(b) The Pittsburgh Bank hereby consents to the exercise of jurisdiction over its person and its property by any court of competent jurisdiction situated in the State of Illinois (whether it be a court of the State of Illinois or a court of the United States of America situated in Illinois) for the enforcement of this Agreement or in any other controversy, dispute or question arising hereunder, and the Pittsburgh Bank hereby waives any and all personal or other rights to object to such jurisdiction for such purposes. The Pittsburgh Bank, for itself and its successors and assigns, hereby waives any objection which it may have to the laying of venue of any such action, suit or proceeding in any such court; provided, that the provisions of this paragraph shall not be deemed to preclude any other appropriate forum. If such litigation is commenced at any time, the Pittsburgh Bank agrees that service of process may be made, and personal jurisdiction over the Pittsburgh Bank obtained, by service of a copy of the summons, complaint and other pleadings required to commence such litigation by United States certified or registered mail, return receipt requested, addressed to the Pittsburgh Bank at its address for notices as provided in this Agreement. The Pittsburgh Bank waives all claims of lack of effectiveness or error by reason of any such service.

ARTICLE VIII
MISCELLANEOUS

     8.1. Notices. Whenever notice is required under this Agreement or by applicable law, it must be given as described in this section, unless otherwise expressly provided in this Agreement. All demands, notices and communications under this Agreement shall be in writing (except as expressly provided in Section 8.2. below) and shall be either (i) delivered in person, (ii) sent by certified United States mail, postage prepaid, return receipt requested, (iii) sent by facsimile transmission, or (iv) sent through a nationally recognized overnight delivery service, addressed at the applicable party’s address. Any such notice shall be deemed delivered upon the earlier of actual receipt and, in the case of notice by United States mail, three Business Days after deposit with the United States post office, and in the case of notice by overnight courier, the Business Day immediately following the date so deposited with the overnight delivery service.

     8.2. The Guides and Other Documents. Copies of the Guides, including (without limitation) any amendments or supplements, or of any changes or pronouncements with respect thereto, shall be provided from time to time by the MPF Provider, at its option, either (a) by regular mail or otherwise, or (b) electronically to the Pittsburgh Bank.

-26-

     8.3. Addresses. For purposes of this Agreement, the addresses and facsimile numbers for the MPF Provider and the Pittsburgh Bank and the electronic transmission information for the Pittsburgh Bank) are as set forth below their respective signatures to this Agreement. Any such change must be given in writing and given in accordance with the provisions of Section 8.1., but shall be effective only upon actual receipt.

     8.4. Effect of Agreement and Relationship of Parties. The MPF Provider will have no obligation or responsibility to the Pittsburgh Bank except as specifically stated herein, and the MPF Provider shall not have a fiduciary duty to the Pittsburgh Bank except as set forth in Section 5.1. of this Agreement. The Pittsburgh Bank will have no obligation or responsibility to the MPF Provider except as specifically stated herein, and the Pittsburgh Bank shall not have a fiduciary duty to the MPF Provider except as set forth in Section 7.4. (c) of this Agreement. This Agreement constitutes the entire agreement among the parties, and no representation, promise, inducement or statement of intent has been made by the MPF Provider to the Pittsburgh Bank which is not embodied in this Agreement. This Agreement supersedes the letter of intent dated as of March 31, 1998, previously executed by the parties.

     8.5. Execution in Counterparts; Facsimile Execution Permitted. This Agreement may be executed in any number of counterparts and by the parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed an original and all of which counterparts, taken together, shall constitute but one and the same Agreement. The parties further agree that this Agreement and signature pages thereof may be transmitted between them by facsimile machine and that counterpart facsimile copies are included in the Agreement. The parties intend that faxed signatures may constitute original signatures and that a faxed signature page containing the signature (original or faxed) of all parties is binding on the parties.

     8.6. Governing Law. This Agreement shall be a contract made under, and governed in every respect by, the internal laws (and not the conflicts law) of the State of Illinois.

     8.7. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

     8.8. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the MPF Provider and the Pittsburgh Bank and their respective successors and permitted assigns (subject to Section 5.11).

     8.9. Waivers and Amendments. No delay on the part of the either party in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by one party of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment to, modification or waiver of, or consent with respect to, any provision of this Agreement shall in any event be effective unless in writing and executed and delivered by the MPF Provider and the Pittsburgh Bank, except for

-27-

the subsequent modifications to the FHLB Guide which may be made by the MPF Provider after consultation with all the MPF Banks.

     8.10. References to Sections, Exhibits and Agreement; Captions. Unless otherwise indicated either expressly or by context, any reference in this Agreement to a “Section” or “Exhibit” shall be deemed to refer to a Section of or Exhibit to this Agreement. All references herein to this “Agreement” shall, as of any time after the date hereof, be deemed to include all amendments hereto which have been made prior to such time in accordance with Section 8.9. Article and Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement.

     8.11. Specific Performance. The parties hereto recognize and agree that it may be impossible to measure in money the damages which will accrue to any party hereto or its successors or assigns by reason of a failure to perform any of the obligations arising under this Agreement. Therefore, if a party or its successors or assigns shall institute any action or proceeding to enforce any provision hereof, any party against whom such action or proceeding is brought hereby agrees that specific performance may be sought and obtained for any breach of this Agreement, without the necessity of providing actual damages.

          8.12. Mediation of Disputes; Jurisdiction and Venue. (a) Neither the Pittsburgh Bank nor the MPF Provider shall institute a proceeding before any tribunal to resolve any controversy or claim arising out of or relating to the Agreement, or the breach, termination or invalidity thereof (a “Dispute”), before such party has sought to resolve the dispute through mediation. If the parties do not promptly agree on a mediator, either party may request the then Chairman of the Board of the Finance Board to appoint a mediator. All mediation proceedings under the Agreement shall be held in Washington, D.C. or such other location as the parties may agree upon. If the mediator is unable to facilitate a settlement of the Dispute within a reasonable time, as determined by the mediator, the mediator shall issue a written statement to the parties to that effect and the complaining party may then pursue any other remedy available to it at law or in equity. The fees and expenses of the mediator shall be paid by the party initiating mediation, unless the parties agree otherwise.

(b) The Pittsburgh Bank hereby consents to the exercise of jurisdiction over its person and its property by any court of competent jurisdiction situated in the State of Illinois (whether it be a court of the State of Illinois or a court of the United States of America situated in Illinois) for the enforcement of this Agreement or in any other controversy, dispute or question arising hereunder, and the Pittsburgh Bank hereby waives any and all personal or other rights to object to such jurisdiction for such purposes. The Pittsburgh Bank, for itself and its successors and assigns, hereby waives any objection which it may have to the laying of venue of any such action, suit or proceeding in any such court; provided, that the provisions of this paragraph shall not be deemed to preclude any other appropriate forum. If such litigation is commenced at any time, the parties agrees that service of process may be made, and personal jurisdiction over either party obtained, by service of a copy of the summons, complaint and other pleadings required to commence such litigation by United States certified or registered mail, return receipt requested, addressed to such party at its address for notices as provided in this Agreement. The Pittsburgh

-28-

Bank and MPF Provider waive all claims of lack of effectiveness or error by reason of any such service.

     8.13. Option to Modify the Agreement. The Pittsburgh Bank shall have the right to have this Agreement modified to conform to the terms and provisions accepted by any subsequent MPF Banks in negotiating a similar agreement with the MPF Provider, subject to the limitation that the Pittsburgh Bank must elect all the modifications made for any other MPF Bank in its agreement with the MPF Provider rather than select some modifications and not others.

-29-

IN WITNESS WHEREOF, each of the MPF Banks and the MPF Provider has caused this Agreement to be executed by its duly authorized officers, as of the dates first above written.

MPF PROVIDER:
FEDERAL HOME LOAN BANK OF CHICAGO
By:	/s/ Alex J. Pollock
	Alex J. Pollock, President & Chief Executive Officer
Address :		111 East Wacker Drive, Suite 700
		Chicago, Illinois 60601
		Attention: Mr. Kenneth L. Gould
		Executive Vice President
Facsimile No.: (312) 565-5855
Electronic Transmission: kgould@fhlbc.com
MPF BANK:
FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/ James D. Roy
	James D. Roy, President & CEO
By:	/s/ Jane P. Duffy
	Jane P. Duffy, Senior Vice President
Address :		601 Grant Street, 15th Floor
		Pittsburgh, Pennsylvania 15219-4455
		Attention: MPF Operations Manager
Facsimile No.: (412) 288-7318
Electronic Transmission: renee.pfender@fhlb-pgh.com

-30-

FIRST AMENDMENT TO
MORTGAGE PARTNERSHIP FINANCE^®
SERVICES AGREEMENT

THIS FIRST AMENDMENT TO THE SERVICES AGREEMENT (the “Amendment”) is made as of the 8th day of May, 2000, between the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF^® Provider”) and the FEDERAL HOME LOAN BANK OF PITTSBURGH (the “Pittsburgh Bank”).

RECITALS:

WHEREAS, the Pittsburgh Bank and the MPF Provider have previously entered into that certain MORTGAGE PARTNERSHIP FINANCE Services Agreement dated April 30, 1999 (the “Agreement”) pursuant to which the parties agreed, among other things, to make the MORTGAGE PARTNERSHIP FINANCE (MPF) Program available to members of the Pittsburgh Bank; and

WHEREAS, other Federal Home Loan Banks participating in the MPF Program (“MPF Banks”) have requested certain changes which would effect the Clearing Account established by the Pittsburgh Bank as required by the Agreement, and the MPF Provider is willing to make such changes.

NOW THEREFORE, in consideration of the foregoing recitals and the covenants contained herein and in the Agreement, the parties here agree as follows:

1. The Agreement is hereby amended by deleting Section 5.11.3. in its entirety and substituting the following in its place:

     Section 5.11.3. Interest on Clearing Account.

     The MPF Provider will credit to the Pittsburgh Bank’s Clearing Account interest on the outstanding balance thereof from time to time at the rate of interest paid by the MPF Provider to all MPF Banks under the MPF Program, as the same is published in the FHLB Guide from time to time (the “MPF Bank Rate”). Until such time as the MPF Bank Rate is published in the FHLB Guide, the MPF Bank Rate, for any day, shall be equal to the MPF Provider’s Fed Funds Rate for that day less 5 basis points (0.05%). For purposes of this Agreement, the term “Fed Funds Rate” shall mean, for any day, a rate equal to the weighted average rate the MPF Provider earns on its overnight investments in the federal funds market, determined as of the close of business for that day. In the event that any withdrawal from the Pittsburgh Bank’s Clearing Account shall cause the balance in such account to become negative, such deficit shall be deemed a loan from the MPF Provider to the Pittsburgh Bank, payable upon demand and bearing interest at a the rate charged by the MPF Provider to all MPF Banks under the MPF Program, as the same is published in the FHLB Guide from time to time (the “MPF Bank Default Rate”). Until such time as the MPF Bank Default Rate is published in the FHLB Guide, the MPF Bank Default Rate, for any day, shall be equal to the MPF Bank Rate for that day plus 200 basis points (2.0%).

2. Except for the foregoing amendment, the Agreement remains unmodified and in full force and effect.

IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers as of the date first above written.

FEDERAL HOME LOAN BANK OF CHICAGO		FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/ Kenneth L. Gould	By:	/s/ Craig C. Howie
Name:  Kenneth L. Gould		Name: Craig C. Howie
Title:  Executive Vice President		Title: Senior Vice President and Chief Credit Officer

2

SECOND AMENDMENT TO
MORTGAGE PARTNERSHIP FINANCE^®
SERVICES AGREEMENT

THIS SECOND AMENDMENT TO SERVICES AGREEMENT (the “Amendment”) is made as of the 19^th day of May, 2000, between the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF® Provider”) and the FEDERAL HOME LOAN BANK OF PITTSBURGH (the “Pittsburgh Bank”).

RECITALS:

WHEREAS, the Pittsburgh Bank and the MPF Provider have previously entered into that certain MORTGAGE PARTNERSHIP FINANCE Services Agreement dated as of April 30, 1999, and amended by a First Amendment dated May 8, 2000 (together, the “Agreement”) pursuant to which the parties agreed, among other things, to make the MORTGAGE PARTNERSHIP FINANCE Program available to members of the Pittsburgh Bank; and

WHEREAS, the parties desire to amend the Agreement to change the MPF Provider’s interest in any Designated Loans purchased pursuant to the Specified MCs (hereinafter defined), and to permit, for any given Business Day, exercise of either a “100 % liquidity option” for all Delivery Commitments issued by the Pittsburgh Bank, or a “variable liquidity option” solely for Delivery Commitments for the Specified MCs, as set forth in this Amendment. Any capitalized terms not defined in this Amendment shall have the meaning assigned to them in the Agreement.

NOW THEREFORE, in consideration of the foregoing recitals and the covenants contained herein and in the Agreement, the parties here agree as follows:

1. The Agreement is hereby amended with respect to the Specified MCs only, but not with respect to any other Master Commitments, by amending Section 7.1.1. by inserting a subsection heading “(a)” at the beginning of the text (following the heading) and by adding the following as a new subsection (b):

(b) In lieu of the Designated Loans provided for in Section 7.1 .1. (a) above, the Pittsburgh Bank shall have the right to change the participation percentage to be transferred to the MPF Provider with respect to Designated Loans by notifying the MPF Provider, not later than 9:00 a.m. Central Time, on a given Business Day of the participation percentage to be between 26% and 100% (“Designated Percentage Interest”) with respect to any Delivery Commitments issued with respect to the Specified MCs for that Business Day (“Designated Delivery Commitments”). The MPF Provider hereby agrees to acquire the Designated Percentage Interest in the Program Loans purchased under Designated Delivery Commitments issued pursuant to the Specified MCs (also called “Designated Loans”). Any notice of Designated Percentage Interest must be given to the MPF Provider in writing, whether electronically or by facsimile or as otherwise provided for giving notices under the Agreement (or may be given telephonically if confirmed in writing in electronic or paper format), and shall also specify the percentage interest(s) of any participating MPF Banks in the Designated Loans

under the Designated Delivery Commitments (provided such MPF Bank has executed an authorization to the MPF Provider to administer its participation in the Designated Loans). The MPF Provider’s participation interest in the Program Loans purchased under Designated Delivery Commitments shall be pursuant to the Liquidity Option MPF Participation Agreement dated as of April 30,1999, as the same may be amended from time to time.

2. The Agreement is hereby amended with respect to the Specified MCs only, and not with respect to any other Master Commitments, by adding the following definition to Article I:

     “Specified MCs” shall mean either or both of, as the context requires, (i) the Master Commitment the Pittsburgh Bank entered into with Chase Manhattan Bank USA, National Association, Number 7193, dated April 11, 2000 for up to $ 10 billion, and (ii) the Master Commitment the Pittsburgh Bank entered into with Travelers Bank & Trust, FSB, Number 7213, dated May 8, 2000 for up to $ 6 billion.

3. The Agreement is hereby amended with respect to the Specified MCs only, and not with respect to any other Master Commitments, by adding the following sentence to the end of Section 5.12.:

Without limiting the foregoing, the Pittsburgh Bank may grant the Federal Home Loan Bank of New York (“New York Bank”) the right to transfer participation interests in Program Loans the New York Bank acquires from the Pittsburgh Bank to any members of the New York Bank.

4. Except for the amendments contained herein, the Agreement remains unmodified and in full force and effect.

IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers as of the date first above written.

FEDERAL HOME LOAN BANK OF CHICAGO		FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/ Kenneth L. Gould	By:	/s/ Craig C. Howie
Name:		Name: Craig C. Howie
Title:		Title: Senior Vice President

2

	111 East Wacker Drive	Chicago, Illinois 60601	(312) 565-5700
	August 21, 2000
VIA FACSIMILE

Mr. Craig C. Howie
Senior Vice President and Chief Credit Officer
Federal Home Loan Bank of Pittsburgh
601 Grant Street
Pittsburgh, PA 15219

Re: mortgage partnership finance^® (“mpf”^®) Program — Clarification and Correction of Second Amendment to Services Agreement

Dear Craig,

This serves to clarify and correct that certain Second Amendment to mortgage partnership finance Services Agreement between the parties dated as of May 19, 2000, (the “Second Amendment”) which amended the Services Agreement dated April 30, 1999, previously amended by a First Amendment dated May 8, 2000 (the “Services Agreement”) between the Federal Home Loan Bank of Chicago (the “MPF Provider”) and the Federal Home Loan Bank of Pittsburgh (the “Pittsburgh Bank”). Any capitalized terms not defined herein shall have the meaning set forth in the Second Amendment or the Services Agreement, as applicable.

The Second Amendment permits the Pittsburgh Bank, for any given Business Day, to either exercise a “100% liquidity option” for all Delivery Commitments issued by the Pittsburgh Bank, or a “variable liquidity option” solely for Delivery Commitments for the Specified MCs, and the parties desire to clarify and correct that provision to reflect their understanding that the Pittsburgh Bank is permitted to both the exercise of the “100% liquidity option” under Section 7.1.1(a) with respect to all Master Commitments other than the Specified MCs, and may exercise a “variable liquidity option” for the Specified MCs on the same Business Day under Section 7.1.1 (b).

Therefore, the phrase “In lieu of the Designated Loans provided for in Section 7.1.1 (a) above” appearing in Section 7.1.1(b) of the Services Agreement as amended by the Second Amendment, shall not be deemed to limit the Pittsburgh Bank’s rights to either exercise a liquidity option under §7.1.1 for all Master Commitments or §7.1.1 (b) for the Specified MCs, but shall be understood to permit either the exercise of §7.1.1(a) or §7.1.1(b) solely with respect to the Specified MCS, while the exercise of the “100% liquidity option” under §7.1.1 would apply continue to be available with respect to any Master Commitments other than the Specified MCs.

Mr. Craig C. Howie
Federal Home Loan Bank of Pittsburgh
August 21, 2000
Page 2

If the foregoing reflects the Pittsburgh Bank’s understanding regarding the Second Amendment and the Services Agreement, please indicate that acceptance by signing below and having a signed copy of this letter returned to the mpf Provider.

		Sincerely,
		/s/ Kenneth L. Gould
		Kenneth L. Gould
		Executive Vice President
		MORTGAGE PARTNERSHIP FINANCE Group
Accepted this 23rd day of August, 2000 by
FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/ Craig C. Howie
Title: Senior Vice President
cc:	Peter E. Gutzmer
	Frank D. Whelan
	Sybil C. Malinowski

THIRD AMENDMENT TO
MORTGAGE PARTNERSHIP FINANCE^®
SERVICES AGREEMENT

THIS THIRD AMENDMENT TO SERVICES AGREEMENT (the “Amendment”) is made as of the 1st day of February, 2001, between the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF^® Provider”) and the FEDERAL HOME LOAN BANK OF PITTSBURGH (the “Pittsburgh Bank”).

RECITALS:

WHEREAS, the Pittsburgh Bank and the MPF Provider have previously entered into that certain mortgage partnership finance Services Agreement dated as of April 30, 1999, and amended by a First Amendment dated May 8, 2000, a Second Amendment dated May 19, 2000, and two supplemental letters dated May 16, 2000 and August 21, 2000 (together, the “Agreement”) pursuant to which the parties agreed, among other things, to make the mortgage partnership finance Program available to members of the Pittsburgh Bank; and

WHEREAS, the Pittsburgh Bank desires to enter into a Master Commitment for the Original MPF for FHA Insured /VA Guaranteed Loans dated February 1, 2001 (the “Nat City Government MC”) with National City Bank of Pennsylvania (“Nat City”) and to utilize a form for the Nat City Government MC that is not the currently published form provided by the MPF Provider for such purpose, and the MPF Provider is willing to consent to such non-standard form to evidence the Nat City Government MC, subject to the terms and conditions of this Amendment. Any capitalized terms not defined in this Amendment shall have the meaning assigned to them in the Agreement, which includes those terms defined in the PFI Agreement and the Guides and by reference included in the Agreement.

NOW THEREFORE, in consideration of the foregoing recitals and the covenants contained herein and in the Agreement, the parties here agree as follows:

1. The Agreement is hereby amended with respect to the Nat City Government MC only, but not with respect to any other Master Commitments, by amending Section 2.5 so that the Nat City Government MC shall be excluded from the grant by the Pittsburgh Bank of a Transaction Services Participation to the MPF Provider, and the MPF Provider shall waive its right to receive a Transaction Services Participation in the Nat City Government MC.

2. The Pittsburgh Bank anticipates purchasing Three Hundred Million Dollars ($300,000,000) of FHA/VA Loans under the Nat City Government MC, and that the foregone Transaction Services Participation that would otherwise have been granted to the MPF Provider is an amount equal to twenty-five percent (25%) of the final amount of Program Loans delivered under the Nat City Government MC, such amount to be determined at the time the Nat City Government MC is filled or expires, whichever comes first (such, amount referred to herein as the “Forgone Participation Amount”). In consideration of waiving its right to receive a Transaction Services Participation under the Nat City Government MC, the MPF Provider agrees

to accept in lieu thereof: (i) an increased percentage Transaction Services Participation from 25% to such percentage necessary to give the MPF Provider an anticipated additional interest equal to two-thirds of the Forgone Participation Amount in a Conventional Loan Master Commitment executed by the Pittsburgh Bank on or before August 14, 2001 (“Substitute Conventional MC”); and (ii) an increased percentage Transaction Services Participation from 25% to such percentage necessary to give the MPF Provider an anticipated additional interest equal to one-third of the Forgone Participation Amount in a Master Commitment for the Original MPF for FHA Insured /VA Guaranteed Loans executed by the Pittsburgh Bank on or before August 14, 2001 (“Substitute Government MC”, and together with the Substitute Conventional MC referred to as the “Substitute MCs”), provided, however, that if such increased Transaction Services Participation equal to the Forgone Participation Amount is not granted to the MPF Provider on or before August 14, 2001, then commencing in September, 2001, the MPF Provider shall charge the Pittsburgh Bank a Transaction Services Fee with respect to the Nat City Government MC (the first fee covering the period from February through August, and each month thereafter covering each preceding month), and the Pittsburgh Bank shall pay to the MPF Provider a monthly Transaction Services Fee, based on an annual rate of ten basis points (0.10%), on the outstanding principal balances of the Loans in the Nat City Government MC as compensation for the services to be provided to the Pittsburgh Bank under the Agreement for the Nat City Government MC, all payments to be made by the MPF Provider debiting the Pittsburgh Bank’s Clearing Account.

3. The parties agree that at the time the Substitute MCs are filled or expire, if the amount of the Participation Share granted to the MPF Provider under the Substitute MCs is less than 90% of an amount equal to the Forgone Participation Amount plus twenty-five percent (25%) of the amount of Program Loans delivered under the Substitute MCs (such difference referred to as the “Participation Shortfall”), then the Pittsburgh Bank shall grant increased Participation Shares to the MPF Provider in the next Master Commitments executed by the Pittsburgh Bank (for Conventional Loans and Government Loans) in the aggregate amount equal to the Participation Shortfall, such Participation Interest to be allocated between the two Master Commitments in the same ratio as that provided for the Substitute MCs.

4. The Agreement is hereby amended with respect to the Nat City Government MC only, but not with respect to any other Master Commitments, by amending Section 7.1.1. so that in the event the Pittsburgh Bank elects to exercise the Liquidity Option granted thereunder and Nat City requests any Delivery Commitments under the Nat City Government MC, the MPF Provider shall notify Nat City that no Delivery Commitments will be issued for the remainder of the Business Day, or such longer period for which the Pittsburgh Bank has exercised its Liquidity Option, with respect to the Nat City Government MC, unless the Pittsburgh Bank expressly excludes the Nat City Government MC from its Liquidity Option notice.

5. Except for the amendments contained herein, the Agreement remains unmodified and in full force and effect.

2

IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers as of the date first above written.

FEDERAL HOME LOAN BANK OF CHICAGO		FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/ Kenneth L. Gould	By:	/s/ William G. Batz
Name: Kenneth L. Gould		Name: William G. Batz
Title: Executive Vice President		Title: Executive Vice President / COO
		By:	/s/ Craig C. Howie
		Name: Craig C. Howie
		Title: Senior Vice President / CCO

3

111 East Wacker Drive Chicago, Illinois 60601 (312) 565-5700

January 31, 2002

Mr. Craig C. Howie
Senior Vice President and
     Chief Credit Officer
Federal Home Loan Bank of Pittsburgh
601 Grant Street
Pittsburgh, PA 15219

RE:     Third Amendment to MORTGAGE PARTNERSHIP FINANCE^® Services Agreement

Dear Craig:

The Federal Home Loan Bank of Pittsburgh (the “Pittsburgh Bank”) and the Federal Home Loan Bank of Chicago in its capacity as MPF Provider (the “MPF Provider”) entered into a MORTGAGE PARTNERSHIP FINANCE Services Agreement dated as of April 30, 1999 (the “Services Agreement”), which was amended by First and Second Amendments dated May 8, 2000 and May 19, 2000 respectively, and with two supplemental letters dated May 16, 2000 and August 21, 2000. The Services Agreement was further amended by a Third Amendment dated as of February 1, 2001 (the “Third Amendment”), which required the Pittsburgh Bank to take certain actions in connection with an MPF^® Master Commitment to purchase Government Mortgages dated February 1, 2001 and issued to National City Bank of Pennsylvania (the “Nat City Commitment”).

In response to your request, the MPF Provider hereby affirms that the Pittsburgh Bank has complied with all conditions of the Third Amendment. Consequently, the MPF Provider and the Pittsburgh Bank hereby acknowledge that, except for the waivers granted in Section 1 of the Third Amendment, the terms and conditions set forth in the Third Amendment shall cease to apply to either party and that the Services Agreement shall continue to be in full force and effect and unamended as if the Third Amendment had never been executed by the parties.

If the above paragraphs are consistent with your understanding of the status of the Third Amendment, please sign and return to me the enclosed copy of this letter.

Sincerely,

/s/ Kenneth L. Gould
Kenneth L. Gould
Executive Vice President
Mortgage Partnership Finance Group

Agreed and acknowledged by:
FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/ Craig C. Howie
Typed Name:	Craig C. Howie
Title:	Senior Vice President
Date:	2/4/02

FOURTH AMENDMENT TO
MORTGAGE PARTNERSHIP FINANCE^®
SERVICES AGREEMENT

THIS FOURTH AMENDMENT TO SERVICES AGREEMENT (the “Amendment”) is made as of the 1st day of October, 2003, between the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF^® Provider”) and the FEDERAL HOME LOAN BANK OF PITTSBURGH (the “Pittsburgh Bank”).

RECITALS:

WHEREAS, the Pittsburgh Bank and the MPF Provider have previously entered into that certain MORTGAGE PARTNERSHIP FINANCE Services Agreement dated as of April 30, 1999, and amended by a First Amendment dated May 8, 2000, a Second Amendment dated May 19, 2000, Third Amendment dated February 1, 2001, and two supplemental letters dated May 16, 2000 and August 21, 2000 (together, the “Agreement”) pursuant to which the parties agreed, among other things, to make the MORTGAGE PARTNERSHIP FINANCE Program available to members of the Pittsburgh Bank; and

WHEREAS, the Pittsburgh Bank has requested that the MPF Provider make a lump sum payment of the Participation Fees payable by the MPF Provider under Section 2.4 of the Agreement, and the MPF Provider is willing to do so. Any capitalized terms not defined in this Amendment shall have the meaning assigned to them in the Agreement, which includes those terms defined in the PFI Agreement and the Guides and by reference included in the Agreement.

NOW THEREFORE, in consideration of the foregoing recitals and the covenants contained herein and in the Agreement, the parties here agree as follows:

1. The MPF Provider hereby agrees to pay the Pittsburgh Bank the sum of One Million Seven Hundred Fifty Thousand Dollars ($1,750,000) (the “Settlement Amount”) on October 7, 2003 in full and final settlement of its obligation to pay the Regular Participation Fee previously provided in Section 2.4 (a) of the Agreement, and upon making the payment as provided in Section 2 of this Amendment, the MPF Provider shall be relieved of its obligation to pay any and all Regular Participation Fees and Additional Participation Fees under the terms of the Agreement. The parties agree that the Settlement Amount is the present value of the uncertain future Regular Participation Fee and uncertain future Additional Participation Fee that would otherwise have been payable under Section 2.4 of the Agreement.

2. Effective October 1, 2003, Section 2.4 of the Agreement is hereby deleted in its entirety and the following is hereby substituted in its place:

     2.4. Participation Fees.

     On October 7, 2003, the MPF Provider shall pay the lump sum of One Million Seven Hundred Fifty Thousand Dollars ($1,750,000) to the Pittsburgh Bank which amount is the present value of the uncertain future monthly Regular Participation Fee

and Additional Participation Fee previously required under Section 2.4 of the Agreement, by crediting the Pittsburgh Bank’s Clearing Account.

3. Except for the amendments contained in this Amendment, the Agreement remains unmodified and in full force and effect.

IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers as of the date first above written.

FEDERAL HOME LOAN BANK OF CHICAGO		FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/ Kenneth L. Gould	By:	/s/ William G. Batz
	Kenneth L. Gould	Name:	William G. Batz
	Executive Vice President	Title:	C.O.O.
		By:	/s/ Craig C. Howie
		Name:	Craig C. Howie
		Title:	C.C.O.

MORTGAGE PARTNERSHIP FINANCE^® and MPR^® are registered trademarks of the Federal Home Loan Bank of Chicago.

FIFTH AMENDMENT TO
MORTGAGE PARTNERSHIP FINANCE^®
SERVICES AGREEMENT

THIS FIFTH AMENDMENT TO SERVICES AGREEMENT (the “Amendment”) is made as of the 5th day of November, 2003, between the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF^® Provider”) and the FEDERAL HOME LOAN BANK OF PITTSBURGH (the “Pittsburgh Bank”).

RECITALS:

WHEREAS, the Pittsburgh Bank and the MPF Provider have previously entered into that certain MORTGAGE PARTNERSHIP FINANCE Services Agreement dated as of April 30, 1999, and amended by a First Amendment dated May 8, 2000, a Second Amendment dated May 19, 2000, Third Amendment dated February 1, 2001, Fourth Amendment dated October 1, 2003, and two supplemental letters dated May 16, 2000 and August 21, 2000 (together, the “Agreement”) pursuant to which the parties agreed, among other things, to make the MORTGAGE PARTNERSHIP FINANCE Program available to members of the Pittsburgh Bank; and

WHEREAS, the Pittsburgh Bank desires to enter into a Three Billion Dollar ($3,000,000,000) MPF Plus Master Commitment, bearing Number 7977 (“MC 7977”) with National City Bank of Pennsylvania (“Nat City”); and

WHEREAS, the parties have agreed that the Pittsburgh Bank will retain a 75% interest in MC 7977 and will transfer a 25% Participation Share to the MPF Provider under MC 7977, subject to the terms and conditions of this Amendment. Any capitalized terms not defined in this Amendment shall have the meaning assigned to them in the Agreement, which includes those terms defined in the PFI Agreement and the Guides and by reference included in the Agreement.

NOW THEREFORE, in consideration of the foregoing recitals and the covenants contained herein and in the Agreement, the parties here agree as follows:

1. Section 7.1.1 of the Agreement is hereby amended with respect to the MC 7977 only, but not with respect to any other Master Commitments, so that the Pittsburgh Bank may elect (i) to exercise the Liquidity Option granted by Section 7.1.1, and expressly include MC 7977 in its Liquidity Option notice, in which case the MPF Provider will deactivate MC 7977 for the remainder of the Business Day, (ii) to exercise the Liquidity Option granted by Section 7.1.1, and expressly exclude MC 7977 from its Liquidity Option notice, or (iii) to give a Liquidity Option notice solely for MC 7977 for the Business Day as provided in the FHLB Guide, in which case the MPF Provider will deactivate MC 7977 for the remainder of the Business Day. If Nat City requests any Delivery Commitments under MC 7977 after the Pittsburgh Bank has delivered a Liquidity Option notice that pertains to or includes MC 7977, the MPF Provider shall inform Nat City that MC 7977 has been deactivated at the request of the Pittsburgh Bank.

2. The Pittsburgh Bank agrees that it will not approve the PFI exceeding the monthly maximum for all Conventional Loans of $650 Million set forth in Section 10 of the Addendum to MC 7977, without first obtaining the written agreement of the MPF Provider. Further, the Pittsburgh Bank agrees that in the event the PFI breaches the representation and warranty in said

Section 10 and the Bank requires the repurchase of any Mortgage due to such breach, the Pittsburgh Bank will reimburse the MPF Provider for its pro rata share of the Loan Repurchase Amount as calculated in accordance with Chapter 24.3.2 of the Origination Guide without regard to whether the Pittsburgh Bank ever receives or collects the Loan Repurchase Amount from the PFI with respect to each such Mortgage.

3. The Pittsburgh Bank agrees to require Nat City to contact the Pittsburgh Bank prior to requesting the issuance of any Delivery Commitment issued under MC 7977, and to obtain the Pittsburgh Bank’s approval for such Delivery Commitment. Further, the parties agree that the MPF Provider shall be entitled to presume that Nat City has obtained the Pittsburgh Bank’s prior approval whenever Nat City requests a Delivery Commitment under MC 7977.

4. Except for the amendments contained in this Amendment, the Agreement remains unmodified and in full force and effect.

IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers as of the date first above written.

FEDERAL HOME LOAN BANK OF CHICAGO		FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/ Thomas D. Sheehan	By:	/s/ William G. Batz
Name:	Thomas D. Sheehan	Name:
Title:	Senior Vice President	Title:
		By:	/s/ James D. Roy
		Name:
		Title:

MORTGAGE PARTNERSHIP FINANCE^® and MPR^® are registered trademarks of the Federal Home Loan Bank of Chicago.

2

SIXTH AMENDMENT TO
MORTGAGE PARTNERSHIP FINANCE^®
SERVICES AGREEMENT

THIS SIXTH AMENDMENT TO SERVICES AGREEMENT (the “Amendment”) is made as of the 15^th day of March, 2004, between the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF^® Provider”) and the FEDERAL HOME LOAN BANK OF PITTSBURGH (the “Pittsburgh Bank”).

RECITALS:

WHEREAS, the Pittsburgh Bank and the MPF Provider have previously entered into that certain MORTGAGE PARTNERSHIP FINANCE Services Agreement dated as of April 11, 2000, and amended by two supplemental letters dated May 16, 2000 and August 21, 2000, and five prior amendments dated May, 8, 2000, May 19, 2000, February 1, 2001, October 1, 2003, November 5, 2003 (together, the “Agreement”) pursuant to which the parties agreed, among other things, to make the MORTGAGE PARTNERSHIP FINANCE Program available to members of the Pittsburgh Bank; and

WHEREAS, the Pittsburgh Bank desires to enter into two new Master Commitments, one being a One Billion Dollar ($1,000,000,000) MPF Plus Master Commitment, bearing Number 8116 (“MC 8116”) and the other being a One Billion Dollar ($1,000,000,000) Original MPF for FHA/VA Master Commitment, bearing Number 8115 (“MC 8115), with CHASE MANHATTAN BANK U.S.A., NATIONAL ASSOCIATION (“Chase”); and

WHEREAS, the parties have agreed that the Pittsburgh Bank will retain a 75% interest in MC 8116 and MC 8115 (together, the “Subject MCs”) and will transfer a 25% Participation Share to the MPF Provider under the Subject MCs, subject to the terms and conditions of this Amendment. Any capitalized terms not defined in this Amendment shall have the meaning assigned to them in the Agreement, which includes those terms defined in the PFI Agreement and the Guides and by reference included in the Agreement.

NOW THEREFORE, in consideration of the foregoing recitals and the covenants contained herein and in the Agreement, the parties here agree as follows:

1. Section 7.1.1 of the Agreement is hereby amended with respect to the Subject MCs only, but not with respect to any other Master Commitments, so that the Pittsburgh Bank may elect (i) to exercise the Liquidity Option granted by Section 7.1.1, and expressly include one or more of the Subject MCs in its Liquidity Option notice, in which case the specified Subject MCs will be inactive for the remainder of the Business Day (any of the Subject MCs not expressly included in the Liquidity Option notice shall automatically be excluded from the Liquidity Option), or (ii) to give a Liquidity Option notice solely for one or more of the Subject MCs for the Business Day as provided in the FHLB Guide, in which case the MPF Provider will deactivate the relevant Subject MCs for the remainder of the Business Day. If Chase requests Delivery Commitments under any of the Subject MCs after the Pittsburgh Bank has delivered a Liquidity Option notice that includes such Subject MCs, the MPF Provider may inform

Chase that the relevant Subject MCs have been deactivated at the request of the Pittsburgh Bank. Nothing in this Section is intended to amend or modify the terms of separate Actual/Actual Remittance Option Arrangements that govern Master Commitments serviced under the Actual/Actual Remittance Option.

2. The Pittsburgh Bank agrees that it will not approve Chase exceeding either the monthly maximum for all Conventional Loans of $250 Million set forth in the Addendum to MC 8116, or the monthly maximum for all Government Loans of $150 Million set forth in the Addendum to MC 8115, in either or both cases, without first obtaining the written agreement of the MPF Provider. Further, the Pittsburgh Bank agrees that in the event Chase breaches the representation and warranty in the Addenda to MC 8116 and MC 8115 with respect to the permitted Note Rate and the Bank requires the repurchase of any Mortgage due to such breach, the Pittsburgh Bank will reimburse the MPF Provider for its pro rata share of the Loan Repurchase Amount as calculated in accordance with Chapter 24.3.2 of the Origination Guide without regard to whether the Pittsburgh Bank ever receives or collects the Loan Repurchase Amount from Chase with respect to each such Mortgage.

3. The Pittsburgh Bank agrees to require Chase to contact the Pittsburgh Bank prior to requesting the issuance of any Delivery Commitment issued under any of the Subject MCs, and to obtain the Pittsburgh Bank’s approval for such Delivery Commitment. Further, the parties agree that the MPF Provider shall be entitled to presume that Chase has obtained the Pittsburgh Bank’s prior approval whenever Chase requests a Delivery Commitment under any of the Subject MCs.

4. The parties intend the FHLB Guide (referenced in and incorporated into the Agreement) to provide operational and administrative details that are not appropriate for the Agreement but which are binding on both parties, provided, however, to the extent that any provision the FHLB Guide conflicts with the provisions of the Agreement, the provisions of the Agreement controls.

5. Except for the amendments contained in this Amendment, the Agreement remains unmodified and in full force and effect.

IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers as of the date first above written.

FEDERAL HOME LOAN BANK OF CHICAGO		FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/ Thomas D. Sheehan	By:	/s/ Craig C. Howie
Name:	Thomas D. Sheehan	Name:	Craig C. Howie
Title:	Sr. Vice President	Title:	Chief Credit Officer
		By:	/s/ Renee A. Pfender
		Name:	Renee A. Pfender
		Title:	Senior Vice President

MORTGAGE PARTNERSHIP FINANCE^® and MPR^® are registered trademarks of the Federal Home Loan Bank of Chicago.

2

SEVENTH AMENDMENT TO
MORTGAGE PARTNERSHIP FINANCE^®
SERVICES AGREEMENT

THIS SEVENTH AMENDMENT TO SERVICES AGREEMENT (the “Amendment”) is made as of the 25^th day of May, 2004, between the FEDERAL HOME LOAN BANK OF CHICAGO (the “MPF^® Provider”) and the FEDERAL HOME LOAN BANK OF PITTSBURGH (the “Pittsburgh Bank”).

RECITALS:

WHEREAS, the Pittsburgh Bank and the MPF Provider have previously entered into that certain MORTGAGE PARTNERSHIP FINANCE Services Agreement dated as of April 11, 2000, and amended by two supplemental letters dated May 16, 2000 and August 21, 2000, and five prior amendments dated May, 8, 2000, May 19, 2000, February 1, 2001, October 1, 2003, November 5, 2003 and March 15, 2004 (together, the “Agreement”) pursuant to which the parties agreed, among other things, to make the MORTGAGE PARTNERSHIP FINANCE Program available to members of the Pittsburgh Bank; and

WHEREAS, the Pittsburgh Bank desires to enter into, from time to time, certain Master Commitments in the amount of One Billion Dollars ($1,000,000,000) or greater (each, a “Subject MC” and collectively, the “Subject MCs”) with various participating financial institution members of the Pittsburgh Bank (each, a “Subject PFI”); and

WHEREAS, the parties have agreed that the Pittsburgh Bank will retain a 75% interest in each Subject MC and will transfer a 25% Participation Share to the MPF Provider under each Subject MC, subject to the terms and conditions of this Amendment, unless the parties agree otherwise in writing. Any capitalized terms not defined in this Amendment shall have the meaning assigned to them in the Agreement, which includes those terms defined in the PFI Agreement and the Guides and by reference included in the Agreement.

NOW THEREFORE, in consideration of the foregoing recitals and the covenants contained herein and in the Agreement, the parties here agree as follows:

1 . It is understood that none of the Subject MCs and none of the Master Commitments serviced under the Actual/ Actual Remittance Option (“A/A MCs”) will be deemed to be included in, and subject to, a Liquidity Option notice given by the Pittsburgh Bank pursuant to Section 7.1.1 of the Agreement except to the extent that any one or more of the Subject MCs and/or A/A MCs are expressly included in such Liquidity Options Notice. Further, nothing in this Amendment is intended to amend or modify the terms of separate Liquidity Option arrangements that govern A/A MCs.

2. Section 7.1.1 of the Agreement is hereby amended with respect to the Subject MCs only, but not with respect to any other Master Commitments, so that the Pittsburgh Bank may elect (i) to exercise the Liquidity Option granted by Section 7.1.1, and expressly include one or more of the Subject MCs in its Liquidity Option notice, in which case the specified Subject MCs will be inactive for the remainder of the Business Day, or (ii) to give a Liquidity Option notice solely for

one or more of the Subject MCs for the Business Day as provided in the FHLB Guide, in which case the MPF Provider will deactivate the relevant Subject MCs for the remainder of the Business Day. If a Subject PFI requests Delivery Commitments under one of its Subject MCs after the Pittsburgh Bank has delivered a Liquidity Option notice that includes such Subject MC, the MPF Provider may inform the Subject PFI that such Subject MC has been deactivated at the request of the Pittsburgh Bank.

3. The parties agree that each Subject MC (i) shall provide for a maximum dollar amount of Program Loans that can be delivered by the Subject PFI in any calendar month (the “Monthly Maximum”) and (ii) may limit the permitted Note Rate(s) for Mortgages to be delivered under such Subject MC. The Pittsburgh Bank agrees that it will not approve each Subject PFI exceeding the Monthly Maximum for all Conventional Loans or the Monthly Maximum for all Government Loans, as the case may be, for each Subject MC without first obtaining the written agreement of the MPF Provider.

4. The Pittsburgh Bank agrees that in the event a Subject PFI should breach the representation and warranty with respect to the permitted Note Rate(s) specified in a Subject MC and the Bank requires the repurchase of any Mortgage due to such breach, the Pittsburgh Bank will reimburse the MPF Provider for its pro rata share of the Loan Repurchase Amount as calculated in accordance with Chapter 24.3.2 of the Origination Guide without regard to whether the Pittsburgh Bank ever receives or collects the Loan Repurchase Amount from the Subject PFI with respect to each such Mortgage.

5. The Pittsburgh Bank agrees to require each Subject PFI to contact the Pittsburgh Bank prior to requesting the issuance of any Delivery Commitment issued under any of the Subject MCs, and to obtain the Pittsburgh Bank’s approval for such Delivery Commitment. Further, the parties agree that the MPF Provider shall be entitled to presume that each Subject PFI has obtained the Pittsburgh Bank’s prior approval whenever a Subject PFI requests a Delivery Commitment under any of the Subject MCs.

6. Except for the amendments contained in this Amendment, the Agreement remains unmodified and in full force and effect.

IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers as of the date first above written.

FEDERAL HOME LOAN BANK OF CHICAGO		FEDERAL HOME LOAN BANK OF PITTSBURGH
By:	/s/ Thomas D. Sheehan	By:	/s/ Craig C. Howie
Name: Thomas D. Sheehan		Name: Craig C. Howie
Title: Sr. V. P.		Title: SVP
		By:	/s/ Renee A. Pfender
		Name: Renee A. Pfender
		Title: SVP

MORTGAGE PARTNERSHIP FINANCE^® and MPR^® are registered trademarks of the Federal Home Loan Bank of Chicago.

2

EX-10.8

Exhibit 10.8

CONFIDENTIAL TREATMENT REQUESTED BY THE FEDERAL HOME LOAN BANK OF PITTSBURGH

EXECUTIVE SEVERANCE AGREEMENT

This Executive Severance Agreement (“Agreement”) dated this 31^st day of January, 1996 is entered into by and between Eric J. Marx (“Executive”) and the Federal Home Loan Bank of Pittsburgh (“Bank”).

WHEREAS The Executive had been previously offered employment with the Bank; and

WHEREAS That offer of employment provided that the Executive was to be covered by a Key Executive Severance Plan (“Plan”) as a condition of employment; and

WHEREAS The Executive has accepted the offer of employment and has acted thereon by resigning his employment elsewhere; and

WHEREAS The Bank desires to convert the Plan into an agreement with the Executive to ensure that he is the only executive at the Bank covered by the terms of the Plan; and

WHEREAS The Bank is willing to continue to provide the benefits that were provided for under the Plan to the Executive if the Executive agrees to convert the Plan to an agreement.

NOW THEREFORE, In consideration of the mutual promises contained herein and intending to be legally bound hereby, the parties agree as follows:

Section 1.0 EFFECTIVE DATE

This Agreement is effective as of the date first written above.

Section 2.0 UNILATERAL RIGHT TO AMEND AND TERMINATE

This Agreement may at any time or from time-to-time be amended, suspended, or reinstated, in whole or in part, and may at any time be terminated by action of the Board of Directors. However, no amendment, suspension, or termination of the Agreement by the Board of Directors shall, without the consent of the Executive, affect the rights of the Executive to any benefits previously determined by the Board to be payable which has not yet been paid to the Executive.

Under no circumstances are the terms or benefits provided under this Agreement to be construed to constitute a continuing obligation, promise or contract on the part of the Bank, or to vary the at-will employment relationship between the Bank and the Executive.

1

CONFIDENTIAL TREATMENT REQUESTED BY THE FEDERAL HOME LOAN BANK OF PITTSBURGH

Executive Severance Agreement
Page 2

Section 3.0 BENEFITS PROVIDED

Until this Agreement is modified, suspended, or terminated, the Executive is eligible for severance benefits when a Qualifying Event occurs as defined below:

3.1   Qualifying Event - Job Loss:

(i)	The Executive’s employment is terminated for other than Cause; or
(ii)	The Executive resigns employment for Good Reason.

3.2   Qualifying Event - Change-in-Control

(i)   The occurrence of the Executive’s Job Loss as define in Section 3.1 within twelve months before or twelve months after the occurrence any of the following events:

-   The Bank is merged or consolidated or reorganized into or with another bank or other entity, or another bank or other entity is merged into the Bank;

-   The Bank sells or transfers all, or substantially all of its business and/or assets to another bank or other entity; or

-   The adoption of any plan or proposal for the liquidation or dissolution of the Bank.

3.3   Severance Payments

(a)	Upon the occurrence of a Qualifying Event- Job Loss, the Executive is entitled to 12 months base salary.
(b)	Upon the occurrence of a Qualifying Event- Change-in-Control, the Executive is entitled to 2.99 times the average of the three preceding calendar years’ base salary, bonuses, and any other cash compensation paid to the Executive during such years.

2

CONFIDENTIAL TREATMENT REQUESTED BY THE FEDERAL HOME LOAN BANK OF PITTSBURGH

Executive Severance Agreement
Page 3

(c)   Payment under either Section 3.3(a) or Section 3.3(b) will be made in the form of a lump sum, or in the form of salary continuation, at the Bank’s sole discretion. In no case may the payment(s) to the Executive result in the Executive receiving more than 80% of the Bank President’s compensation in any given calendar year period. It is hereby agreed that the Bank shall not be obligated or required to make a payment that would violate statute, regulation or policy of the Federal Housing Finance Board.

3.4   Other Severance Benefits:

(a)	The Bank will continue the Executive’s medical, dental, and life insurance premium payments just as though the Executive were an active employee during the period of salary continuation. In the event the severance payment(s) are provided in the form of a lump sum payment, the Executive’s medical, dental, and life insurance coverage will be continued for the period under which the Executive was eligible for salary continuation payments.
(b)	The Bank will provide the services of an outplacement assistance firm to the Executive for a period of one year following separation of employment. The selection of an outplacement firm and the scope of outplacement assistance services provided to the Executive will be at the discretion of the Bank.
(c)	The Executive may be eligible to be considered for a prorated incentive award, based on the recommendation of the President and as approved by the Board of Directors.
(d)	The Executive may purchase the Bank-provided automobile, if applicable, at the fair market value.
(e)	The executive will receive payment of all unused, accrued vacation benefits in the next regular payroll following the separation date.
(f)	The Executive’s participation in the Bank’s qualified and non qualified retirement and thrift plans, and all other Bank compensation programs, will cease as of the Executive’s last day of active employment.

3

CONFIDENTIAL TREATMENT REQUESTED BY THE FEDERAL HOME LOAN BANK OF PITTSBURGH

Executive Severance Agreement
Page 4

3.5   Exclusions:

The Executive is not eligible to receive benefits under the Agreement in the event of death, Disability, or Retirement, as defined in Section V.

Section 4.0 DEFINITIONS

4.1	Retirement. For purposes of this Agreement only, termination of the Executive’s employment based on Retirement shall mean the planned and voluntary termination by the Executive on or after reaching the earliest retirement age permitted by the Bank’s qualified retirement plans.
4.2	Disability. For purposes of this Agreement only, if, as a result of the Executive’s incapacity due to physical or mental illness, the Executive shall have been absent from his duties with the Bank for an aggregate of twelve (12) out of fifteen (15) consecutive months and, within thirty (30) days after notice, the Bank may terminate Executive’s employment with the Bank for “Disability”.
4.3	Cause. The Bank may terminate the Executive’s employment for Cause. For purposes of this Agreement only, the Bank shall have “Cause” to terminate the Executive’s employment hereunder only upon (i) the continued failure of the Executive to perform his duties with the Bank (other than any such failure resulting from Disability), after a demand for performance is delivered to the Executive by the President of the Bank, which specifically identities the manner in which the Executive has not performed his duties, (ii) the personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, or willful violation of any law, rule or regulation (other than traffic violations or similar offenses); or (iii) the removal of the Executive for cause by the Federal Housing Finance Board pursuant to 12 U.S.C. 1422b(a)(2). The Executive will not be deemed to have been terminated for Cause until the President has obtained the approval of the Board of Directors. Approval by the Board is not required if the Executive is terminated for cause by the Federal Housing Finance Board pursuant to 12 U.S.C. 1422b(a)(2).

4

CONFIDENTIAL TREATMENT REQUESTED BY THE FEDERAL HOME LOAN BANK OF PITTSBURGH

Executive Severance Agreement
Page 5

4.4   Good Reason. The Executive may terminate his employment for Good Reason. For purposes of this Plan “Good Reason” shall mean any of the following:

(i)	a change in the Executive’s status or position as a key employee of the Bank which does not represent a promotion from the Executive’s status and position (“Position”), or the assignment to the Executive of any duties or responsibilities which are inconsistent with such Position, or any removal of the Executive from such Position (including, without limitation, all demotions and harassing assignments), except in connection with the termination of the Executive’s employment for Cause or Disability, or as a result of the Executive’s death;
(ii)	any failure by the Bank to continue in effect any plan or arrangement, including, without limitation, benefit and incentive plans, in which the Executive is participating, unless such Plans have been replaced with similar benefits that are not materially less than the Executive’s benefits under such Plans;
(iii)	the Executive’s relocation to any place more than seventy-five (75) miles from the location at which the Executive performed his duties, except for required travel by the Executive on the Bank’s business to an extent substantially consistent with the Executive’s business travel obligations; or
(iv)	any material breach by the Bank of any provisions of this Agreement.

Section 5.0 BENEFIT DETERMINATION

Until a determination of eligibility for payment has been made by the Board of Directors, the Executive does not have a vested right to benefits under the Agreement.

5

CONFIDENTIAL TREATMENT REQUESTED BY THE FEDERAL HOME LOAN BANK OF PITTSBURGH

Executive Severance Agreement
Page 6

Section 6.0 MISCELLANEOUS PROVISIONS

Any decision arising out of or in connection with the construction, interpretation or administration of this Agreement will lie within the Board’s absolute discretion and will be binding on all parties.

IN WITNESS WHEREOF, the parties have set their hand and seal as of the date first written above.

FEDERAL HOME LOAN BANK		ERIC J. MARX
OF PITTSBURGH
BY:	/s/ Jane P. Duffy	BY:	/s/ Eric J. Marx
TITLE:	SVP

6

EX-12.1

Exhibit 12.1

CONFIDENTIAL TREATMENT REQUESTED BY THE FEDERAL HOME LOAN BANK OF PITTSBURGH

RATIO OF EARNINGS TO FIXED CHARGES

          The table below presents the FHLBank’s ratio of earnings to fixed charges by dividing the FHLBank’s earnings by fixed charges. For this purpose, “earnings” is the sum of income before assessments and fixed charges less cumulative effect of change in accounting principle. “Fixed charges” consist of total interest expense on all indebtedness related to continuing operations (including bonds, notes, member deposits, fed funds purchased, reverse repos, and dividends relating to mandatory redemption of stock). The ratios are based solely on historical information and no pro forma adjustments have been made.

	Years Ended December 31,
(in thousands)	2004			2003		2002		2001		2000
Fixed Charges
Interest Expense		1,078,117			890,712		1,059,020		1,753,837		2,819,254
Total Fixed Charges		1,078,117			890,712		1,059,020		1,753,837		2,819,254
Earnings
Income before Assessments		128,686			37,710		65,402		138,541		235,805
Cumulative effect of change in accounting principle		(8,413	)		—		—		8,962		—
Add: fixed charges		1,078,117			890,712		1,059,020		1,753,837		2,819,254
Total Earnings		1,198,390			928,422		1,124,422		1,901,340		3,055,059
Ratio of earnings to fixed charges		1.1x			1.0x		1.1x		1.1x		1.1x

1

EX-99.1

Exhibit 99.1

INFORMATION STATEMENT

Federal Home Loan Bank of Pittsburgh

Capital Stock

The Federal Home Loan Bank of Pittsburgh (“Bank”) is offering shares of new capital stock, five-year redeemable and par value $100 (“Capital Stock”), to its stockholders (referred to as “members”) in connection with the implementation of a new capital structure for the Bank as mandated by the Gramm-Leach-Bliley Act of 1999 (“GLB Act”), which amended the Federal Home Loan Bank Act (“Bank Act”). The shares will be issued pursuant to a capital plan (“Capital Plan”) of the Bank, which was approved by the Federal Housing Finance Board (“Finance Board”) on May 8, 2002. The Bank is one of the twelve Federal Home Loan Banks (“FHLBanks”), which were created by Congress in 1932 to provide liquidity in the mortgage market and to promote homeownership in the United States. Bank members should review and be thoroughly familiar with the Bank Act, as amended by the GLB Act, and implementing regulations of the Finance Board, as they relate to the new capital structure of the Bank.

At close of business on December 16, 2002 (“Effective Date” of the Capital Plan), the outstanding shares of the existing capital stock of the Bank, other than the shares of members that have opted out of the conversion process, shall automatically be deemed converted into and exchanged for an equal amount of Capital Stock. Thereafter, the Bank may issue Capital Stock from time to time either to new members or to current members in accordance with the Capital Plan, and as necessary to satisfy the Bank’s minimum capital requirements established by the GLB Act.

The shares of Capital Stock offered hereby will be issued at par value and will not trade in a market. Redemptions and repurchases of such stock by the Bank, and any transfers of such stock from one member to another, must also be made at par value. For a discussion of the redemption, repurchase and transfer provisions relating to such stock, see “Limitations on Redemption” and “Limitations on Repurchase” on pages 33 and 34, as well as “Transfer of Stock” on page 38.

There are differences between the existing capital stock of the Bank outstanding prior to the Effective Date of the Capital Plan and the new Capital Stock offered hereby. For a discussion of those differences, see “Capital Requirements – Pre-GLB Act, Post-GLB Act” and “Comparison of Terms of Existing Stock and Capital Stock” on pages 22 to 26.

IF YOU DO NOT OPT OUT OF THE CAPITAL CONVERSION ON OR BEFORE NOVEMBER 15, 2002, YOUR OUTSTANDING SHARES OF EXISTING BANK STOCK WILL BE AUTOMATICALLY CONVERTED TO NEW CAPITAL STOCK REDEEMABLE ONLY UPON FIVE YEARS’ NOTICE TO THE BANK.

IF YOU DO OPT OUT OF THE CAPITAL CONVERSION AND WITHDRAW FROM MEMBERSHIP, YOU MAY NOT BE READMITTED TO MEMBERSHIP IN ANY FHLBANK FOR A PERIOD OF FIVE YEARS FROM THE DATE ON WHICH YOUR

MEMBERSHIP TERMINATED AND YOU DIVESTED ALL SHARES OF BANK STOCK.

This Information Statement should be read in conjunction with the Bank’s 2001 Annual Report distributed to members and filed with the Finance Board. See “Incorporation of Certain Documents by Reference.”

The Capital Stock is exempt from registration under the Securities Act of 1933, as amended. The Capital Stock has not been approved or disapproved by the Securities and Exchange Commission, or any state securities commission, nor has the Securities and Exchange Commission, the Finance Board, or any state securities commission passed upon the adequacy or accuracy of this Information Statement. Any representation to the contrary is a criminal offense.

The United States Government does not guarantee payments due on funds invested in the stock or indebtedness of the Bank, any dividend payments on shares of Capital Stock or the profitability of the Bank.

No person has been authorized to make representations or warranties, either express or implied, with respect to the Capital Stock, except the representations contained herein. Only information contained herein, or in documents incorporated herein by reference, may be relied upon by any member as constituting representations of the Bank.

This Information Statement does not constitute an offer to sell or the solicitation of an offer to buy any of the Capital Stock in any jurisdiction in which such offer or solicitation would be unlawful.

The Date of this Information Statement is September 20, 2002.

TABLE OF CONTENTS

I.	INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE	1
II.	AVAILABLE INFORMATION	1
III.	INTRODUCTORY STATEMENT	1
	A. Summary Of Capital Stock	3
	B. Summary Financial Data	8
IV.	FORWARD-LOOKING STATEMENTS	10
V.	CAPITALIZATION	11
	A. Capital Requirements	11
	1. Capital Ratio Compliance	11
	2. Leverage Capital Ratio Compliance	12
	3. Permanent Capital Compliance	12
	B. Material Assumptions	14
VI.	BUSINESS OF THE BANK	14
	A. General	14
	B. Lending	15
	C. Acquired Member Asset Programs	15
	D. Correspondent Banking Services	16
	E. Affordable Housing Program and Community Investment Programs	16
	F. REFCORP Obligation	17
VII.	FUNDING SOURCES	17
	A. General	17
	B. Strategy with Respect to Interest Rate Exchange Agreements	18
	C. Joint and Several Liability	19
	D. Negative Pledge Requirements	20
	E. Office of Finance	20
VIII.	CAPITAL REQUIREMENTS	22
	A. Pre-GLB Act – Prior Capital Structure	22
	B. Post-GLB Act – New Capital Structure	22
	1. General	22
	2. Leverage-Related Capital Requirements	23
	3. Risk-Based Capital Requirement	23
	C. Comparison of Terms of Existing Stock and Capital Stock	24
IX.	DESCRIPTION OF THE BANK’S CAPITAL PLAN	26
	A. Background	26
	B. Development of the Bank’s Capital Plan	26
	C. Conversion and Purchase of Capital Stock on the Effective Date	27
	D. Minimum Stock Investment Requirements	28
	1. General	28
	2. Member Loan Stock Purchase Requirement	28
	3. Unused Borrowing Capacity Stock Purchase Requirement	29
	4. Acquired Member Asset Purchase Requirement	30
	5. Excess Stock Investment	31

	6. Limitations on Redemption	33
	7. Limitations on Repurchase	34
	8. Adjustments to Minimum Amount	34
	E. Termination of Membership	34
	1. Voluntary Withdrawal	35
	2. Involuntary Terminations	36
	F. Rights Upon Withdrawal, Liquidation, Consolidation or Merger of the Member	36
	1. Liquidation of Capital Stock	36
	2. Liquidation of Indebtedness	36
	G. Amendments to the Capital Plan	36
X.	DESCRIPTION OF CAPITAL STOCK	37
	A. Voting Rights – Election of Directors	37
	B. Par Value	37
	C. Ownership of Retained Earnings	37
	D. Limitations	37
	E. Transfer of Stock	38
	F. Dividends	38
	G. Rights in Bank Liquidation, Merger or Consolidation	38
XI.	RISK FACTORS	38
	A. Risks Relating to the New Capital Structure	38
	1. Member Minimum Stock Investment Requirement May Increase	38
	2. No Public Market for Capital Stock	39
	3. Restrictions on Redemption and Repurchase of Excess Stock	40
	4. Risk-Weighting of Capital Stock	41
	5. Ability to Pay Dividends	42
	6. Capital Plan Amendments	42
	7. Rights of Members in the Event of Liquidation or Merger	42
	B. Risks Relating to the FHLBank System	43
	1. Joint and Several Liability on Consolidated Obligations	43
	2. Changes in Statute or Regulations	43
	3. Multi-district Membership	43
	C. Risks Relating to the Business of the Bank	44
	1. Changes in Interest Rates	44
	2. Reduction in Retained Earnings Due to FAS133 Adjustments	45
	3. Convexity Risks in Mortgage Assets	45
	4. Counterparty Credit Risk	45
	5. Concentration of Loans	46
	6. Concentration of Capital Stock	46
	7. Inability to Access the Capital Markets	46
	8. Competition in the Lending Business	46
	9. Loan Pricing	47
	10. Lower AHP Subsidies	47
	11. Lower Dividends Resulting from Increased AHP Contribution	47
XII.	SELECTED FINANCIAL DATA	48

XIII.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	49
	A. Financial Trends	50
	1. Conditions in Financial Markets	50
	2. Statement of Condition	50
	3. Debt Financing Activity	54
	B. Results of Operations	55
	1. Net Income and Net Interest Income	55
	2. Operating Expenses	58
	3. Finance Board and Office of Finance Expenses	59
	4. Affordable Housing Program	59
	C. REFCORP Payment	59
	D. Risk Management	60
	1. Liquidity	60
	2. Managing Interest Rate Risk	61
	3. Derivatives and Hedging Activities	62
	4. Managing Credit Risk	69
	5. Mortgage Loans	70
	6. Operational Risk	71
	E. Regulatory Developments	72
	1. Unsecured Credit Limits	72
	2. Multiple-Membership Petitions	72
	3. Non-mortgage Assets Redefinition	72
	F. Capital Adequacy	72
	G. Transactions with Related Parties	73
	H. Membership Trends	73
	1. Members	74
	2. Member Borrowers	75
	3. Top Ten Loan Holding Members	76
	4. Housing Associates	76
XIV.	GOVERNMENT REGULATION	77
	A. General	77
	B. Loans	78
	1. General	78
	2. Pricing	78
	3. Collateral	78
	4. Loans to Housing Associates	79
	5. Capital Stock Requirements	80
	C. Standby Letters of Credit	80
	D. Acquired Member Assets	80
	E. Permissible Investments	81
	1. Statutory Authority	81
	2. The Investment Regulation	81
	3. Investment Limitations	81
	4. Derivatives Contracts and Other Activities	82
	F. New Business Activities	83

	1. Accepting Mutual Funds As Collateral from Members	83
	2. Community Development Fund Investment	83
	3. Investing in Money Market Investments Rated Single-A or Triple-B	84
	4. Investment in Small Business Investment Company	84
	G. Liquidity Requirements	84
	1. Deposit Liquidity Requirement	84
	2. Contingency Liquidity Requirement	85
	3. Risk Management Policy	85
	H. Unsecured Credit Limits	85
	I. Responsibilities of the Bank Board of Directors and Senior Management	85
	1. Risk Management Policy	85
	2. Strategic Business Plan	86
	3. Internal Controls	86
	4. Audit Committee	86
	5. Internal Market Risk Model and Risk Assessment Procedures	87
	6. Governance	87
	J. Additional Oversight	87
	K. Tax Status	88
XV.	FEDERAL INCOME TAX IMPLICATIONS	88
	A. General	88
	B. Taxation of the Recapitalization	89
	C. Taxation of Stock Redemptions and Repurchases	90
	D. Future Distributions	91
	1. Cash Distributions	91
	2. Stock Dividends	91
XVI.	DIRECTORS AND SENIOR OFFICERS	94
	A. Board of Directors	94
	B. Senior Bank Officers	95
XVII.	INDEX TO FINANCIAL STATEMENTS	96
	EXHIBIT A - Capital Plan	103
	EXHIBIT B - Form of Opt Out Notice	139

I.	INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
	The following information contained in the Bank’s 2001 Annual Report (“Annual Report”) is incorporated by reference in this Information Statement:

•   Supplemental Information to Financial Statements at pages 16-17;

•   Financial Review at pages 18-27;

•   Report of Independent Accountants at page 29; and

•   the audited financial statements of the Bank and notes thereto at pages 30-57.

Incorporation by reference means that the information contained in the indicated portions of the Annual Report is deemed to be included in this Information Statement. The information incorporated by reference is an integral part of this Information Statement and should be reviewed by members in evaluating the Bank’s Capital Plan and in determining whether to opt out from the conversion of their existing capital stock.

Any statement contained in the portions of the Annual Report incorporated by reference is deemed to be modified or superseded to the extent that any statement in this document contains new or additional information. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Information Statement.

II.	AVAILABLE INFORMATION
	Copies of the Annual Report and other information concerning the Bank may be obtained without charge from your relationship manager or from the corporate secretary, Federal Home Loan Bank of Pittsburgh, 601 Grant Street, Pittsburgh, Pennsylvania 15219-4455, telephone (800) 288-3400. The Annual Report can also be obtained by accessing the Bank’s Web site on the Internet at www.fhlb-pgh.com.
III.	INTRODUCTORY STATEMENT
	This Information Statement is provided to furnish information in connection with the issuance of shares of Capital Stock of the Bank in connection with the implementation of its new capital structure as mandated by the GLB Act. The Capital Stock will be issued at the close of business on the Effective Date of the Capital Plan, attached as Exhibit A.
	The GLB Act imposes new minimum leverage and risk-based capital requirements on each of the twelve regional FHLBanks. The GLB Act further requires the FHLBanks to implement a new capital structure to replace the stock subscription structure that has been in effect since 1932. Under the new capital structure, the FHLBanks may issue Class A

1

stock or Class B stock, or both, to their members. Such stock must be issued in amounts sufficient to enable the FHLBanks to satisfy their new minimum capital requirements.

The principal difference between Class A and Class B stock is that Class A stock is redeemable upon six months’ notice, whereas Class B stock is redeemable upon five years’ notice. Class B stock also has a higher weighting than Class A stock for purposes of calculating the Bank’s minimum leverage requirement.

The Bank has determined to implement its new capital structure through the issuance of Class B stock, which herein is referred to as Capital Stock. Capital Stock will be issued by the Bank pursuant to its Capital Plan, which was approved by the Finance Board on May 8, 2002. Each of the other regional FHLBanks is also required to implement a new capital structure pursuant to capital plans approved by the Finance Board.

Under the Bank’s Capital Plan, the existing stock of members shall automatically be deemed converted and exchanged for an equal amount of Capital Stock unless a member files a written notice with the Finance Board by November 15, 2002 (“Opt-Out Date”), to withdraw from membership in the Bank. This notice must also be filed with the Bank. The membership of an institution that files its notice to withdraw on or before the Opt-Out Date shall terminate on December 16, 2002.

Each member is required to maintain a certain minimum investment in Capital Stock of the Bank. The minimum investment requirement is determined by a “membership” investment component and an “activity-based” investment component. The Bank may adjust these investment requirements from time to time within the limits established in the Capital Plan. For a discussion of the minimum investment requirements initially established by the Bank, see “Minimum Stock Investment Requirements” on pages 28 to 35.

Capitalized terms not otherwise defined shall have the meanings ascribed to them in the Capital Plan.

2

A.	Summary Of Capital Stock
	This summary contains selected information about the Capital Stock. It does not contain all of the information a member should consider before determining whether to opt out of the conversion to Capital Stock and thereby withdraw from membership in the Bank. Members should refer to the remainder of this Information Statement and any incorporated documents for further information.

Issuer	Federal Home Loan Bank of Pittsburgh
Securities Offered	Shares of Capital Stock, par value $100 per share.
	On the Effective Date, each member that does not opt out of the conversion will have its existing stock converted to Capital Stock on a share-per-share basis. Immediately thereafter, each member shall purchase or the Bank shall repurchase shares of Capital Stock such that each member shall own an amount of Capital Stock equal to the sum of the following:
	(1)      5% of the member’s outstanding principal balance of loans from the Bank, plus
	(2)      0.5% of the member’s unused borrowing capacity from the Bank.
	After the Effective Date, the Board of Directors of the Bank has the right, but not the obligation, to adjust from time to time the above percentages, place a cap on the dollar amount of Capital Stock any member would have to purchase as a result of the unused borrowing capacity stock purchase requirement, as well as add an acquired member asset stock purchase requirement. Each member is required to comply promptly with any adjustments in the minimum stock purchase requirement.

3

Dividends	The Board of Directors of the Bank may, but is not required to, declare and pay non-cumulative dividends in either cash or stock.
Restrictions	The Board of Directors of the Bank cannot declare a dividend if: 1) the Bank’s capital position is below its minimum regulatory capital requirement; 2) the Bank’s capital position will be below its minimum regulatory capital requirement after paying the dividend; or 3) the principal or interest due on any consolidated obligations issued by the Office of Finance has not been paid in full.
Redemption	A member may request to have its Capital Stock redeemed at par value payable in cash five years after providing the Bank with written notice. No member may withdraw from membership unless, on the date the membership is terminated, there is in effect a certification from the Finance Board that the withdrawal of a member will not cause the FHLBanks to fail to satisfy their obligation to pay the payments to the Resolution Funding Corporation (“REFCORP”) established under the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The member may be assessed a fee for canceling any such request either voluntarily or involuntarily (if the member is required to hold such Capital Stock in order to meet its minimum stock purchase requirement). The Bank has the right to repurchase Capital Stock that is subject to a redemption request prior to the expiration of the 5-year notice period, but is under no obligation to do so. In no event may the Bank redeem any Capital Stock if, following the redemption: 1) the Bank would fail to meet any minimum capital requirement; 2) the member would fail to maintain its minimum investment in

4

Capital Stock; 3) the Finance Board or the Board of Directors of the Bank has determined that there are likely to be charges against the Bank’s capital and the Finance Board has not granted the Bank written permission to continue redemptions; 4) the Board of Directors of the Bank or subcommittee thereof suspends stock redemptions due to its reasonable belief that continued redemption of stock would cause the Bank to fail to meet its minimum capital requirements, prevent the Bank from maintaining adequate capital against a potential risk that may not adequately be reflected in its minimum capital requirements, or otherwise prevent the Bank from operating in a safe and sound manner; or 5) the principal or interest due on any consolidated obligation issued by the Office of Finance has not been paid in full.

Repurchase of Excess Stock

The Bank has the right, but not the obligation, to repurchase for par value payable in cash Capital Stock that is not required to be held to meet a member’s minimum stock purchase requirement. The Bank shall give the member one business day’s notice before repurchasing such Capital Stock. In no event may the Bank repurchase any Capital Stock if, following the repurchase: 1) the Bank would fail to meet any minimum capital requirement; 2) the member would fail to maintain its minimum investment in Capital Stock; 3) the Finance Board or the Board of Directors of the Bank has determined that there are likely to be charges against the Bank’s capital and the Finance Board has not granted the Bank written permission to continue repurchases; 4) the Board of Directors of the Bank or subcommittee thereof suspends stock repurchases due to its reasonable belief that continued repurchases of stock would cause the Bank to fail to meet its minimum capital

5

	requirements, prevent the Bank from maintaining adequate capital against a potential risk that may not adequately be reflected in its minimum capital requirements, or otherwise prevent the Bank from operating in a safe and sound manner; or 5) the principal or interest due on any consolidated obligation issued by the Office of Finance has not been paid in full.
Liquidation Rights	In the event the Bank is liquidated, the member will be entitled to the rights and benefits granted to it by the Finance Board and/or Congress.
Voting Rights for Election of Directors	Members have voting rights only in the election of a portion of the Bank’s Board of Directors. Each member shall be entitled to cast one vote for each share of Capital Stock that the member was required to hold as of the record date (annually December 31); except that, the number of votes that each member may cast for each directorship shall not exceed the average number of shares of Capital Stock that were required to be held by all members located in that state on the record date. There shall not be any voting preferences for any share of Capital Stock.
Minimum Investment Requirements	Each member is required to hold Capital Stock as a condition to both (1) becoming and remaining a member of the Bank and (2) obtaining loans from the Bank, access to the Bank’s credit products, and participating in the acquired member asset program of the Bank. The minimum Capital Stock investment is the sum of the:
	(1) member loan stock purchase requirement; (2) unused borrowing capacity stock purchase requirement; and (3) acquired member asset purchase requirement.
	The “member loan stock purchase requirement” is equal to the percentage in

6

	effect at the time multiplied by the outstanding principal balance of the loans made by the Bank to the member. At the Effective Date, the loan stock purchase requirement percentage will be 5%. From time to time the Board of Directors of the Bank can adjust the percentage to as high as 6% or as low as 4.5%.
	The “unused borrowing capacity stock purchase requirement” is equal to the percentage in effect at the time multiplied by the unused borrowing capacity of the member. At the Effective Date, the unused borrowing capacity stock purchase percentage will be 0.5%. From time to time the Board of Directors of the Bank can adjust the percentage to as high as 1.5% or as low as 0%.
	The “acquired member asset purchase requirement” is equal to the percentage in effect at the time multiplied by the outstanding principal balance of assets purchased or funded by the Bank from the member. At the Effective Date, the acquired member asset purchase requirement percentage will be 0%. From time to time the Board of Directors of the Bank can adjust the percentage to as high as 4% or as low as 0%, any increase in the percentage would be on a prospective basis.
Effective Date	The Effective Date of the conversion of existing Bank stock to Capital Stock is close of business on December 16, 2002.
Opt-Out Date	Any member that elects not to have its existing stock converted to Capital Stock must provide the Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006, with written notice of its intent to withdraw from membership in the Bank. A copy of the notice must also be filed with the Bank. This notice must be received by the Finance Board on or before November 15, 2002.

7

B.

Summary Financial Data

The following table sets forth selected financial data and other statistical information for the Bank. The financial data was derived from the Bank’s financial statements. This information is qualified in its entirety by reference to, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” appearing elsewhere herein, the “Supplemental Information to Financial Statements” and “Financial Review” appearing in and incorporated by reference to the Annual Report, and the Bank’s financial statements and related notes appearing herein and incorporated by reference to the Annual Report.

														(Unaudited)
														Six months ended
	Year ended December 31,													June 30,
($ in millions)	1997			1998			1999			2000		2001		2001		2002
Statement of Condition
Loans	$	16,980		$	25,770		$	36,527		$	25,946	$	29,315	$	26,161	$	28,232
MPF loans		—			5			3			1,910		1,839		1,961		2,551
Investments (1)		10,737			10,125			12,614			15,378		11,064		12,429		15,957
Total assets		28,861			36,860			50,603			45,063		42,914		41,386		47,649
Deposits and borrowings		1,536			2,271			1,252			1,443		1,718		1,815		2,523
Consolidated obligations		25,281			31,916			45,923			40,433		38,271		36,891		41,706
Capital stock		1,387			1,754			2,318			2,065		1,889		1,705		1,861
Retained earnings		53			72			98			110		87		119		68
Other comprehensive income		(2	)		(4	)		(3	)		—		2		2		(6	)

															(Unaudited)
															Six months ended
	Year ended December 31,														June 30,
($ in millions)	1997			1998			1999			2000			2001		2001		2002
Averages
Loans	$	14,070		$	21,133		$	29,181		$	32,349		$	27,009	$	26,214	$	29,241
MPF loans		—			2			3			831			1,979		1,946		2,021
Investments		10,713			9,120			11,960			13,695			11,587		12,013		12,615
Total assets		25,233			30,859			42,075			48,268			41,527		41,240		44,681
Deposits and borrowings		1,123			1,837			1,549			955			1,917		1,615		2,666
Consolidated obligations		22,325			26,825			37,602			43,843			36,734		36,746		39,051
Capital stock		1,276			1,548			1,994			2,278			1,826		1,857		1,945
Retained earnings		56			72			96			117			115		122		83
Other comprehensive income		(5	)		(2	)		(1	)		(2	)		1		—		(3	)

8

																(Unaudited)
																Six months ended
	Year ended December 31,															June 30,
($ in millions)	1997			1998			1999			2000			2001			2001			2002
Income Statement Data:
Operating Results
Net income	$	110		$	143		$	184		$	173		$	95		$	71		$	18
Dividends paid	$	81		$	101		$	132		$	161		$	119		$	62		$	37
Weighted average dividend rate		6.38	%		6.50	%		6.63	%		7.06	%		6.50	%		6.75	%		3.87	%
Return on average equity		8.32	%		8.86	%		8.80	%		7.24	%		4.90	%		7.26	%		1.84	%
Return on average assets		0.44	%		0.46	%		0.44	%		0.36	%		0.23	%		.35	%		.08	%
Net interest margin		0.55	%		0.57	%		0.54	%		0.56	%		0.52	%		.57	%		.31	%

																(Unaudited)
																Six months ended
	Year ended December 31,															June 30,
($ in millions)	1997			1998			1999			2000			2001			2001			2002
Capital
Total capital ratio		4.98	%		4.95	%		4.77	%		4.83	%		4.61	%		4.41	%		4.03	%
Leverage ratio		20.07	%		20.22	%		20.97	%		20.72	%		21.70	%		22.67	%		24.78	%

Notes:

(1)	Investments also include interest-bearing deposits in banks, securities purchased under resale agreements, loans to other FHLBanks, and federal funds sold.
(2)	Net interest margin is net interest income before loan loss provision as a percentage of average earning assets.
(3)	Total capital ratio is total GAAP capital as a percentage of total assets at period end.
(4)	Through 1999, the Bank’s REFCORP obligation was charged directly to retained earnings. Beginning in 2000 as a result of the GLB Act, the Bank was required to pay 20% of net earnings to REFCORP, and is shown on the Statement of Operations.
(5)	The Bank implemented Financial Accounting Standard 133 “Accounting for Derivative Instruments and Hedging Activities” on January 1, 2001, requiring all derivative instruments be recorded on the balance sheet at their fair value.
(6)	Certain amounts have been reclassified in prior years to conform to current year financial information.

9

IV.	FORWARD-LOOKING STATEMENTS
	This Information Statement includes statements describing anticipated developments, projections, estimates, or future predictions of the Bank. These statements may use forward-looking terminology, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including risks set forth below, in the “Risk Factors” section and elsewhere in this Information Statement, and that actual results could differ materially from those expressed or implied in these forward-looking statements. As a result, members are cautioned not to place undue reliance on such statements. The Bank does not undertake to update any forward-looking statement herein or that may be made from time to time on behalf of the Bank.
	These forward-looking statements involve risks and uncertainties including, but not limited to, the following:

•   economic and market conditions;

•   demand for Bank loans resulting from changes in members’ deposit flows and credit demands;

•   volatility of market prices, rates and indices that could affect the value of collateral held by the Bank as security for the obligations of Bank members and counterparties to interest rate exchange agreements and similar agreements;

•   political events, including legislative, regulatory, judicial or other developments that affect the Bank, its members, counterparties and/or investors in the consolidated obligations of the twelve FHLBanks;

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

•   ability to develop and support technology and information systems, including the Internet, sufficient to manage the risks of the Bank’s business effectively;

•   changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements;

•   timing and volume of market activity;

•   ability to introduce new Bank products and services, and manage successfully the risks associated with those products and services, including new types of collateral securing loans;

•   risk of loss arising from litigation filed against one or more of the twelve FHLBanks; and

•   inflation/deflation.

10

V. CAPITALIZATION

A.	Capital Requirements
	The GLB Act specifies that the FHLBanks must meet certain minimum capital standards, including the maintenance of a minimum level of permanent capital as a cushion against loss. The Bank must maintain: (1) a capital ratio of at least 4.0%; (2) a leverage capital ratio of at least 5.0%; and (3) permanent capital in an amount equal to or greater than the “Risk-Based Capital Requirement” the sum of its credit risk, market risk and operations risk capital requirements described in detail below.
	The following sets forth, for the month ended June 30, 2002, the Bank’s (1) average actual capitalization and (2) average pro forma capitalization, adjusted to give effect to the implementation of the Capital Plan as if the Effective Date had occurred on June 30, 2002. This table is based on various assumptions set forth below and should be read in conjunction with the financial statements of the Bank and the related notes attached hereto and contained in the Annual Report.

1.	Capital Ratio Compliance
	The capital ratio is the ratio of the Bank’s total capital to its total assets. Total capital is the sum of: (1) Capital Stock; (2) retained earnings; (3) the amount of the Bank’s general allowance for losses (if any); and (4) such other amounts (if any) as may be approved by the Finance Board. All are determined in accordance with generally accepted accounting principles (“GAAP”).

	Average
	June, 2002
($ in thousands)	Actual			Pro Forma
Capital Stock	$	1,871,378		$	1,715,761
Retained Earnings		77,111			77,111
General Allowance for Loan Losses 1	NA				0
Total Capital		1,948,489			1,792,872
Total Assets		45,050,682			43,061,037
Capital Ratio		4.33	%		4.16	%
Minimum Capital Ratio		4.00	%		4.00	%

¹ Actual total capital before the Effective Date excludes the general allowance for loan losses.

11

2.	Leverage Capital Ratio Compliance
	Leverage capital ratio is the ratio of: (a)(i) 1.5 times the sum of the Bank’s Capital Stock and retained earnings, plus (ii) the other components of total capital detailed in (1) above to (b) its total assets.

	Average
	June, 2002
($ in thousands)	Actual		Pro Forma
Total capital	$	1,948,489	$	1,792,872
Leverage capital		NA		2,689,498
Total assets		45,050,682		43,061,037
Leverage Capital Ratio		NA		6.25	%
Minimum Leverage Capital Ratio		NA		5.00	%

3.	Permanent Capital Compliance
	Permanent capital is the capital available to cushion against market, credit, and operating risk losses. It is equal to the sum of Capital Stock and retained earnings and is used to meet the risk-based capital requirement. The Bank is required to maintain permanent capital in an amount that exceeds the Bank’s risk-based capital requirement. The risk-based capital requirement has three components:

(a)	“Credit risk capital” is the sum of the capital charges for the Bank’s assets, off-balance-sheet items and derivatives contracts. These charges are calculated using the methodology and risk weights assigned to each classification in the Finance Board’s regulation. The Bank may request approval from the Finance Board at some future date to use a model-based approach for determining credit risk but has not done so at this time;
(b)	“Market risk capital” is the sum of (1) the market value of the Bank’s portfolio at risk and (2) the amount, if any, by which the market value of total capital is less than 85% of the book value of total capital, as calculated using the methodology in the Finance Board regulations; and
(c)	“Operations Risk Capital” is 30% multiplied by the sum of the Bank’s (1) credit risk capital requirement and (2) market risk capital requirement. The Bank may request approval from the Finance Board at some future date for the implementation of an alternative methodology for calculating operations risk but has not done so at this time.

12

	Average
	At June 30, 2002
($ in thousands)		Pro Forma
Credit risk capital	$	143,941
Market risk capital		151,047
Operations risk capital		88,496
Risk-Based Capital Requirement 2		383,484
Permanent Capital		1,772,900

The three tables set forth above indicate that on a pro forma basis for June 30, 2002, the Bank would have met or exceeded its capital requirements. It is anticipated that upon implementation of the Capital Plan on the Effective Date, the Bank will meet or exceed all three of its minimum capital requirements.

In addition, the pro-forma shows that the Bank would need to liquidate approximately $2 billion of assets to: 1) repurchase $155.6 million of Excess Stock and 2) meet the capital ratio regulatory requirement and the Bank’s target operating ratios. If, at December 16, 2002 (the Effective Date) the Bank’s actual calculation of its required amount of Capital Stock shows similar results, management anticipates that the Bank will liquidate money market investments and other securities to be able to repurchase the Excess Stock and meet its regulatory capital requirement and/or target operating ratios, as applicable. After December 16, 2002, the Bank may determine to adjust the member loan stock purchase or unused borrowing capacity percentage requirements to meet its target capital ratios.

²  The components of the pro forma risk-based capital requirement set forth above are calculated as follows:

•   The credit risk capital component is calculated pursuant to Finance Board rules and is based on assets, off-balance-sheet items and derivatives contracts as of June 30, 2002.

•   The market risk capital component is estimated based on the process described in Management’s Discussion and Analysis of Financial Condition and Results of Operations, “ Quantitative Disclosure about Market Risk,” page 67.

•   The operations risk capital component is calculated as 30% of the sum of the credit risk capital component and the market risk capital component.

•   The pro forma requirement is based on a risk-based capital estimate of the actual June 30, 2002 balance sheet.

13

B.	Material Assumptions
	The pro forma capitalization, capital ratio and leverage ratio set forth above are calculated based upon the Capital Stock requirements calculated on an individual member basis:

•   The Capital Stock requirements were calculated using 5.0% of each member’s outstanding principal balance of loans from the Bank as of June 30, 2002, plus 0.5% of each member’s unused borrowing capacity from the Bank as of March 31, 2002, based on the most recent quarter-end member regulatory data available to the Bank.

•   This calculation would have resulted in approximately $155.6 million of Excess Stock from the members if June 30, 2002, were the Effective Date. Pro forma total capital is adjusted based on the assumption that this Excess Stock was repurchased for cash.

•   Capital ratio and leverage ratio compliance were calculated based on average monthly balances, consistent with existing Finance Board regulatory guidance. The $155.6 million Excess Stock repurchase was assumed to occur on a monthly average basis.

•   The total assets reflected in the pro forma schedule reflect a reduction of approximately $2 billion in liquid money market and other investments on a monthly average basis to meet the capital ratio requirement and the Bank’s target operating ratios.

VI. BUSINESS OF THE BANK

A.

General

The Bank is one of twelve regional FHLBanks, created by Congress to increase the supply of funds to local lenders that, in turn, finance loans for home mortgages, small businesses, agriculture and farms, and otherwise help finance the country’s housing and community development needs. Commercial banks, savings banks, savings and loan associations, credit unions and insurance companies that meet certain requirements are eligible for membership in the FHLBank for the region in which such institutions are located. Certain housing finance agencies and similar organizations are eligible to become borrowers from a FHLBank without buying stock. The Bank’s region comprises the state of Delaware, the state of West Virginia, and the commonwealth of Pennsylvania. At June 30, 2002, the Bank had 363 members.

14

	The FHLBanks borrow funds to support their operations principally through the sale of debt securities, known as consolidated obligations, to the public through the Office of Finance. The Office of Finance is a joint office of the FHLBanks and has the responsibility for facilitating and executing the issuance of consolidated obligations. Each FHLBank is jointly and severally liable with the other FHLBanks for the consolidated obligations issued through the Office of Finance. Consolidated obligations are not obligations of the United States, and the U. S. government does not guarantee them.
	The Bank’s principal place of business is located at 601 Grant Street, Pittsburgh, Pennsylvania 15219-4455. The Bank had 178 employees at June 30, 2002.
	The descriptions of Bank products and services generally describe the Bank’s current products and services. The Bank makes no representation that it will continue to offer any or all of the described products and services in the future or that the terms on which the Bank offers such products or services will remain as described in this Information Statement.
B.	Lending
	The Bank offers a wide range of credit products to help members meet local credit needs, manage interest rate risk, serve their communities and enhance profits. The Bank’s primary business is making secured loans to its members. The Bank’s members can pledge as collateral for their loans: 1) one-to-four family and multifamily mortgages; 2) Treasury and U.S. government-agency securities; 3) mortgage-backed securities; 4) commercial and other real estate loans; and 5) for those members with assets under $527 million, 2 small-business and small-farm loans. Members can use their loans from the Bank to make mortgage and business loans in their communities. The Bank also offers a wide variety of credit products to help members manage liquidity, improve interest rate risk profiles, manage assets and liabilities, improve margins and enhance profitability. Products available through the Bank’s money desk include short-term and long- term adjustable-, variable- and fixed-rate loans (including option-embedded loans and amortizing loans); standby letters of credit; and interest rate exchange products.
C.	Acquired Member Asset Programs
	The FHLBanks are permitted to acquire assets from their members in a risk sharing structure. These programs are referred to as Acquired Member Asset (“AMA”) programs. The Bank offers members the Mortgage Partnership Finance® (MPF®3 Program) as an alternative to originating and selling long-

2	Adjusts annually.
3	“Mortgage Partnership Finance” and “MPF” are registered trademarks of the FHLBank of Chicago.

15

	term, fixed-rate mortgages in the secondary market. In the MPF Program, the Bank funds or purchases conforming fixed-rate mortgages originated by its members. Members are then paid a fee for assuming a portion of the credit risk of the mortgages acquired by the Bank while the Bank assumes the interest rate risk of holding the mortgages in its portfolio as well as a portion of the credit risk. MPF Program options include closed-loan purchases or table-funded loans, and actual/actual or scheduled/scheduled remittance. The MPF Program funds mortgages with terms up to 30 years.
D.	Correspondent Banking Services
	The Bank offers its members and those institutions eligible for membership an array of correspondent banking services including depository services, funds transfer services, settlement services and safekeeping services. Depository services include processing of customer transactions in their demand deposit accounts, the central account each customer has with the Bank. All customer- related transactions – deposits, Federal Reserve Bank (Fed) settlements, inclearings, loans, securities transactions, wires – are posted to these accounts each business day, and the resulting balances are an integral part of each customer’s cash positions. Funds transfer services provide domestic and foreign wire transfers as well as automated clearing house transactions received through the Bank’s Fed account for Bank customers. In settlement services, the Bank is responsible for the transit, availability and reconcilement of customers’ accounts for which the Bank is their primary correspondent. Through Deutsche Bank, the Bank offers customers a range of securities custodial services, such as settlement of book entry (electronically held) and physical securities.
E.	Affordable Housing Program and Community Investment Programs
	Each FHLBank contributes ten percent of its net income to its Affordable Housing Program (“AHP”) to be used to make grants or subsidized loans to members to support housing for very-low- and low-income individuals and families. The Bank’s AHP is a competitive program that supports projects that provide affordable housing to individuals and families whose incomes are 51% to 80% of the area median income. In addition to the AHP, the Bank offers other programs to support housing for low- and moderate-income individuals and communities: the Community Lending Program (“CLP”); the Home Buyer Equity Fund (“HBEF”) and the Banking On Business (“BOB”) program.
	Members can use CLP funds to provide financing for housing, community or economic development projects that serve low- and moderate-income individuals and communities. CLP is a noncompetitive revolving loan pool. When member loans are repaid, that money is available to be loaned to other projects. CLP loan rates are typically below the Bank’s regular loan rates. The HBEF provides grant assistance – through member financial institutions – to be used for down payment and closing costs to families at or below 80% of the area median income. A

16

	portion of the Bank’s annual AHP contribution is used to fund the Bank’s HBEF program. BOB funds may be used by members in financing the start-up or expansion of a small business. The Bank makes a determination as to how much of its net income to voluntarily contribute to the BOB program annually. In 2001 the Bank contributed $5 million, in 2002 $3.8 million. As part of the program, each participating member must make a loan to a customer in combination with recoverable assistance using BOB funds. When its customer repays the BOB-funded loan, the member must remit these payments to the Bank annually. Funds are then recycled into the program.
F.	REFCORP Obligation
	Each FHLBank must pay 20% of its net earnings (after its AHP contribution) to REFCORP to support the payment of part of the interest on the bonds issued by REFCORP. The FHLBanks must make these payments to REFCORP until the total amount of payments made is equivalent to a $300 million annual annuity whose final maturity date is April 15, 2030. The period during which the FHLBanks must make such payments to REFCORP will be adjusted depending on actual payments relative to the referenced annuity. The Finance Board, in consultation with the Secretary of the Treasury, selects the appropriate discounting factors used in this calculation.

VII. FUNDING SOURCES

A.	General
	The principal funding source for the Bank is consolidated obligations, issued to the public through the Office of Finance, which consist of consolidated bonds and consolidated discount notes. Deposits of members and certain other parties and the proceeds from the issuance of capital stock are also funding sources of the Bank. Generally, discount notes are consolidated obligations with maturities up to 360 days, and consolidated bonds have maturities of one year or longer. The Bank determines its participation in each issuance of consolidated obligations based on, among other things, its own funding and operating requirements and the amounts, maturities, rates of interest and other terms available in the marketplace. The terms of the issuance of consolidated obligations are established by the Office of Finance and subject to approval by the Secretary of the Treasury. The Bank Act authorizes the Secretary of the Treasury to purchase consolidated obligations up to an aggregate principal amount of $4 billion.
	Consolidated bonds satisfy term funding requirements. Typically, the maturity of these securities ranges from one year to ten years, but their maturity is not subject to any statutory or regulatory limit. Consolidated bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. Consolidated discount notes are a

17

	significant funding source for loans with short-term maturities or short repricing intervals, for convertible loans and for money-market investments. These securities have maturities up to 360 days and are offered daily through a 16-member consolidated discount note selling group. Discount notes are sold at a discount and mature at par.
	Consolidated obligation bonds and discount notes, along with member deposits, represent the principal funding sources that support the Bank’s asset base. It has been the Bank’s practice to combine consolidated obligations with interest rate exchange agreements to lower the all-in effective cost of funds and reduce interest rate risk. The funding strategy of issuing bonds while simultaneously entering into swap agreements, a combination typically referred to as structured debt, enables the Bank to offer a wider range of attractively priced loan products to its member institutions. Shorter-term consolidated obligations, referred to as discount notes, are not typically combined with interest rate exchange agreements.
	Factors that generally influence deposit levels include turnover in members’ portfolios, change in member demand for liquidity, the slope of the market yield curve, and the Bank’s deposit pricing as compared to other shorter-term market rates. When the Bank’s member deposit balances decline, funding is typically replaced through the issuance of consolidated debt.
B.	Strategy with Respect to Interest Rate Exchange Agreements
	The Bank enters into interest rate exchange agreements (swaps, caps, floors, and swaption agreements) and future and forward contracts – more broadly referred to as derivative agreements – for the purposes of managing interest rate risk and creating attractively priced funds to support loans to members. From time to time the Bank serves as an intermediary, entering into offsetting derivatives agreements between its members and other counterparties.
	Under Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS133”), 4 effective January 1, 2001, the Bank is required to carry derivative instruments on its Statement of Condition at fair value. Any change in the fair value of a derivative is required to be reflected in current period earnings or other comprehensive income, regardless of how fair-value changes in the assets or liabilities being hedged may be treated. The Bank’s general practice has remained that of utilizing derivatives when doing so appears to provide a more cost-effective means of managing the risks inherent in its underlying business.

⁴  When used in notes to the financial statements in the 2001 Annual Report, FAS133 is referred to as SFAS 133.

18

	The most common objectives of hedging with derivatives include: 1) preserving an interest spread between the yield of an asset and the cost of a supporting liability of mismatched maturity; 2) mitigating the adverse earnings effects resulting from potential prepayment or extension of certain assets and liabilities; and 3) protecting the value of existing asset or liability positions or of anticipated transactions. Much of the Bank’s hedging activity is directed toward reducing interest rate risk and basis risk from loans and supporting debt.
	Through the use of structured debt, low-cost funding is created, which is used primarily to provide attractively priced loans to the Bank’s members. Derivatives are also used to create loans with specialized embedded pricing features, customized to meet individual member funding needs and/or to reduce member borrowing costs.
	It remains the Bank’s policy to use derivative instruments only to reduce the market risk exposures inherent in the otherwise unhedged asset and funding positions of the Bank. When doing so represents what Bank management believes to be a more cost-efficient strategy, management intends to continue utilizing derivative instruments as a means to reduce the Bank’s exposure to changes in market interest rates. As such, the central focus of the financial management practices of the Bank remains that of preserving and enhancing the long-term economic performance of the Bank. Under FAS133, however, it is expected that reported GAAP net income will exhibit greater variability than had been prior to implementation of the new accounting standard.
C.	Joint and Several Liability
	Although the Bank is primarily liable for its portion of consolidated obligations (i.e., those issued on its behalf), the Bank is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on consolidated obligations of all the FHLBanks. If the principal or interest on any consolidated obligation is not paid in full when due, the Bank may not pay dividends to, or redeem or repurchase shares of stock from, any member of the Bank. The Finance Board, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation.
	To the extent that a FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the non-complying FHLBank. However, if the Finance Board determines that the non-complying FHLBank is unable to satisfy its obligations, then the Finance Board may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Board may determine.

19

D.	Negative Pledge Requirements
	The Bank must maintain certain assets free from any lien or pledge in an amount at least equal to its pro rata share of the total amount of outstanding consolidated obligations and equal to its participation in such outstanding consolidated obligations. Eligible assets for this purpose include: (1) cash; (2) obligations of, or fully guaranteed by, the United States; (3) secured loans; (4) mortgages, that have any guaranty, insurance, or commitment from the United States or any agency of the United States; (5) investments described in Section 16(a) of the Bank Act, which, among other items, includes securities that a fiduciary or trust fund may purchase under the laws of the state in which the Bank is located; and (6) other securities that are rated Aaa by Moody’s or AAA by Standard & Poor’s.
E.	Office of Finance
	The Office of Finance is a joint office of the twelve FHLBanks which issues consolidated obligations, as agent, on behalf of the FHLBanks. The Office of Finance also services all outstanding debt, provides the FHLBanks with credit information, serves as a source of information for the FHLBanks on capital market developments, manages the FHLBanks’ relationships with rating agencies, and prepares and distributes the combined annual and quarterly financial reports for the twelve FHLBanks.
	The Office of Finance is governed by a board of directors, which consists of three part-time members appointed by the Finance Board. Under current Finance Board regulations, two of these members are presidents of FHLBanks and the third is a private citizen of the United States with a demonstrated expertise in financial markets. The private citizen member of the Finance Board serves as its chairperson. The Finance Board has regulatory oversight and enforcement authority over the Office of Finance and its directors and officers to the same extent as it has such authority over a FHLBank and its respective directors and officers. The FHLBanks are responsible for jointly funding the expenses of the Office of Finance.
	The Finance Board recently amended its regulations governing the issuance of consolidated obligations. Through December 31, 2000, consolidated obligations were issued by the Finance Board through the Office of Finance under the authority of Section 11(c) of the Bank Act. The Bank Act provides that debt issued under Section 11(c) is the joint and several obligation of the FHLBanks. The amended regulation authorizes the FHLBanks to issue consolidated obligations through the Office of Finance under the authority of Section 11(a) of the Bank Act. While the Bank Act does not impose joint and several liability on the FHLBanks for debt issued under Section 11(a), the Finance Board determined in the amended regulation that the same rules governing joint and several liability should apply whether consolidated obligations are issued by the Finance Board under Section 11(c) or by the FHLBanks under Section 11(a). Since January 2,

20

2001, the FHLBanks have issued consolidated obligations in their own name through the Office of Finance under Section 11(a) of the Bank Act. No FHLBank is permitted to issue individual debt under Section 11(a) of the Bank Act without Finance Board approval.

One of the responsibilities of the board of directors of the Office of Finance is to establish policies regarding consolidated obligations to ensure that, among other things, such obligations are issued efficiently and at the lowest all-in funding costs over time consistent with prudent risk management practices and other market and regulatory parameters. In this regard, the FHLBanks recently formed a Debt Cost Task Force (“Task Force”) to undertake a review of the debt costs of the FHLBanks and the programs and practices related to the issuance of such debt. In February 2002, the Task Force issued its report to the Presidents of the FHLBanks. Among other things, the Task Force concluded that certain improvements in the issuing process should be pursued in order to reduce the costs of debt financing for the FHLBank System. The Task Force recommended that the board of directors of the Office of Finance be reconstituted to comprise all twelve FHLBank Presidents and to oversee the broad policy issues associated with the maintenance and enhancement of FHLBank debt programs, products and policies.

In May 2002, the Finance Board distributed to the FHLBanks a working draft of a proposed regulation (“Working Draft”) to reorganize the Office of Finance. Under the Working Draft, the board of directors of the Office of Finance would consist of 13 members. Each of the twelve FHLBanks would have a representative member on the board. The other member would be a private
U. S. citizen appointed by the Finance Board to serve as chairperson of the board. Under the Working Draft, the duties and functions of the Office of Finance would be expanded beyond the debt management functions that it currently performs. Specifically, at the request of one or more FHLBanks, the Office of Finance could facilitate or provide services for the management or the administration of banking or other operations in which the FHLBanks may be engaged on a joint basis. In addition, the Office of Finance may adopt and administer systems to enable the FHLBanks to jointly manage their liquidity and to facilitate the sharing of best practices regarding hedging, asset management, liability management, debt financing and financial disclosure.

The Chairman of the Finance Board has stated that the Working Draft is subject to further review and analysis after consultation with the FHLBanks and other appropriate parties. If the Finance Board determines to pursue a restructuring of the Office of Finance, the Working Draft, in its current or modified form, likely would be issued as a proposed regulation subject to formal notice and comment. The Finance Board also may determine not to restructure the Office of Finance. In the most recent regulatory agenda issued by the Finance Board and published in the Federal Register on May 13, 2002, the Finance Board identified the topic of

21

FHLBank securities offerings and activities of the Office of Finance as a long-term action.

VIII. CAPITAL REQUIREMENTS

A.	Pre-GLB Act – Prior Capital Structure
	Prior to the enactment of the GLB Act in 1999, the Bank Act provided for a “subscription” capital structure for the FHLBanks. Under that structure, which remains in effect for each FHLBank until the effective date of its capital plan, a single class of capital stock is issued to members pursuant to a statutory formula. In accordance with that formula, each member is required to purchase stock in its FHLBank in an amount equal to the greater of: (1) $500, (2) 1% of the mortgage loan principal on the member’s balance sheet, or (3) 5% of the FHLBank loans outstanding to the member. The stock is redeemable by members that seek to withdraw from FHLBank membership upon six months’ prior written notice to the Bank. Upon redemption, a member shall receive the amount it originally paid for the stock.
	The pre-GLB Act version of the Bank Act did not prescribe specific capital requirements for the FHLBanks. However, the Finance Board, by regulation, has required the FHLBanks to comply with a leverage limit based on a ratio of each FHLBank’s assets to its capital. This requirement generally provides that a FHLBank’s total assets may not exceed 21 times total capital. A FHLBank whose non-mortgage assets, after deducting deposits and capital, do not exceed 11% of its total assets is permitted to operate under a higher leverage limit such that its total assets may be up to 25 times its total capital. As of June 30, 2002, the Bank was in compliance with this leverage limit as its total assets were 24.8 times total capital. This leverage limit shall cease to apply to the Bank upon the Effective Date of its Capital Plan and the new GLB Act capital requirements shall apply to the Bank, provided that the Bank is, as of that date, in compliance with its minimum regulatory capital requirements (as defined below).

B.   Post-GLB Act – New Capital Structure

1.

General

The GLB Act amended the Bank Act and created statutory capital requirements for the FHLBanks. Under the GLB Act, the FHLBanks must satisfy two leverage-related capital requirements and a risk-based capital requirement. The Finance Board has issued regulations to apply uniform capital standards to the FHLBanks and to effectuate the new capital requirements. These new capital requirements, including any capital

22

	requirements imposed on an individual FHLBank on a case-by-case basis by the Finance Board, are referred to herein as the “minimum regulatory capital requirements” of the FHLBanks.
	The GLB Act also provided for a more flexible and permanent capital structure for the FHLBanks by requiring each FHLBank to develop and implement a capital plan that, among other things, would replace the existing single-class capital stock with a new capital structure comprised of Class A stock, Class B stock or both. Class A stock is redeemable by members upon six months’ prior written notice to the FHLBank. Class B stock is redeemable by members upon five years’ prior written notice to the FHLBank. Both classes of stock may be issued, redeemed, repurchased and transferred only at their par value.
	Under the GLB Act, the requirements regarding the purchase and retention of capital stock by a member of a FHLBank that were in effect on the day before the enactment of the GLB Act will generally remain in effect until a FHLBank implements a capital plan that has been approved by the Finance Board.
2.	Leverage-Related Capital Requirements
	A FHLBank must maintain total capital of at least 4% of the FHLBank’s total assets, as determined in accordance with GAAP. Total capital is defined as a FHLBank’s permanent capital, plus the amount paid in by the members for any Class A stock, any general allowance for losses, and the amount of any other instruments identified in a FHLBank’s capital plan that the Finance Board has determined are available to absorb losses incurred by the FHLBank. Permanent capital is defined as the retained earnings of a FHLBank determined in accordance with GAAP, plus the amount paid in for a FHLBank’s Class B stock. For reasons of safety and soundness, the Finance Board may require an individual FHLBank to maintain a greater amount of total capital than the 4% of total assets requirement.
	A FHLBank must also maintain a weighted ratio of total capital to total assets of at least 5%. For purposes of determining this weighted ratio, total capital is computed by multiplying the FHLBank’s permanent capital by 1.5 and adding to this product all other components of total capital.
3.	Risk-Based Capital Requirement
	Under the risk-based capital requirement, a FHLBank must maintain permanent capital equal to the sum of its: (1) credit risk capital requirement, (2) market risk capital requirement and (3) operations risk capital requirement. A FHLBank’s credit risk capital requirement is

23

determined by adding together the credit risk capital charges computed for assets, off-balance-sheet items and derivative contracts based on, among other things, the credit risk percentages assigned to such assets, items and contracts by the Finance Board. A FHLBank’s market risk capital requirement is determined by adding together the market value of the FHLBank’s portfolio at risk from movements in interest rates, foreign exchange rates, commodity prices and equity prices that could occur during times of market stress and the amount, if any, by which the FHLBank’s current market value of total capital is less than 85% of the FHLBank’s book value of total capital. Each FHLBank shall calculate the market value of its portfolio at risk and the current market value of its total capital by using either an internal market risk model or internal cash flow model approved by the Finance Board. The Bank’s market risk model was approved by the Finance Board on September 19, 2002. A FHLBank’s operations risk capital requirement is equal to 30% of the sum of its credit risk capital requirement and its market risk capital requirement, subject to a reduction with Finance Board approval to no less than 10% of the sum of its credit risk capital requirement and its market risk capital requirement.

For reasons of safety and soundness, the Finance Board may require an individual FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement. The leverage-related and risk-based capital requirements are the Bank’s minimum regulatory capital requirements.

C.   Comparison of Terms of Existing Stock and Capital Stock

ISSUE	EXISTING STOCK	CAPITAL STOCK
Voting Rights in Regard to the Election of Directors	One vote for each share required to be held on the record date up to the state average.	Same as existing stock.
Dividends	To produce an earned dividend that, when combined with the other benefits of membership, compensates members for their capital investment. The target dividend was the six-month Treasury Bill rate plus 50 to 100 basis points.	To produce an earned dividend that, when combined with the other benefits of membership, compensates members for their capital investment. The Bank does not intend to significantly change its risk profile and therefore does not expect the earned dividend to change significantly from the current target.
Redemption	The member has no right to	The member has the right to

24

ISSUE	EXISTING STOCK	CAPITAL STOCK
	have its stock redeemed until it withdraws from membership, which requires six months’ prior written notice. However, as a matter of practice, the Bank has honored member requests for redemption of a member’s excess stock when it suited the capitalization needs of the Bank.	have its Capital Stock redeemed upon five years’ prior written notice unless one of the specified limitations applies. The member does not have to withdraw from membership in order to redeem its Excess Stock. The Bank intends to continue to repurchase Excess Stock subject to a redemption request when it will meet the capitalization needs of the Bank.
Repurchase	The Bank has repurchased the excess stock of individual members when it suited the capitalization needs of the Bank.	The Bank may repurchase the Excess Stock of: (1) all members on a pro-rata basis or (2) an individual member when a member submits a request to redeem Excess Stock.
Rights upon the Liquidation of the Bank	The Bank Act and Finance Board regulations are silent on the issue.	Same as current except as to the ownership rights of the retained earnings (see below).
Transfer of Stock	Under current Finance Board regulations, transfers of stock can only occur in connection with a member’s merger or consolidation with another institution. A member may transfer stock only to another member or to an institution that has been approved for membership and that has satisfied all conditions for becoming a member other than the purchase of Bank stock. Any transfer shall be at par value and shall be recorded on the books of the Bank.	A member may transfer its Excess Stock to another member or to an institution that has been approved for membership and that has satisfied all conditions for becoming a member other than the purchase of Bank stock. Any transfer shall be at par value and shall be recorded on the books of the Bank. Transfers are not limited to mergers and consolidations.
Call for Additional Capital	The Bank does not have the right to increase the required minimum stock investment requirements.	The Bank has the right to increase the required minimum stock purchase requirements. Members are

25

ISSUE	EXISTING STOCK	CAPITAL STOCK
		required to comply promptly with any increase in the required minimum stock investment requirements.
Rights to the Retained Earnings of the Bank	Congress has previously required the Banks to contribute the retained earnings of the Bank, which has suggested that the members have no rights in the retained earnings of the Bank.	Holders of Capital Stock own the retained earnings and they are entitled to their share of the retained earnings upon the liquidation of the Bank as determined by the Finance Board and/or Congress. It is uncertain how each member’s share will be determined.
Minimum Stock Investment Requirement	The greater of: (1) $500, (2) one percent of the outstanding mortgage loan principal on a member’s balance sheet, and (3) 5% of loans from the Bank.	On the Effective Date, the sum of 5% of loans from the Bank, plus 0.5% of the member’s unused borrowing capacity from the Bank.
Par Value	$100 per share.	Same as existing stock.

IX. DESCRIPTION OF THE BANK’S CAPITAL PLAN

A.	Background
	The GLB Act and Finance Board regulations require the FHLBanks to adopt capital plans that, when implemented, provide them with sufficient capital to meet their minimum regulatory capital requirements. Each capital plan must include, among other things, provisions relating to the minimum investment required of each member, the classes of stock to be offered by a FHLBank (Class A, Class B or both), the rights, terms, and preferences associated with each class of stock, the criteria for the redemption, repurchase and transfer of FHLBank stock, and the disposition of FHLBank stock held by institutions that withdraw from membership.
	The new regulatory capital requirements do not become effective with respect to a FHLBank until the effective date of its capital plan.
B.	Development of the Bank’s Capital Plan
	Bank management analyzed various possible capital structures that would meet the new standards and the needs of its members. In the summer of 2000 at four regional stockholder meetings, the Bank briefed its members on the upcoming changes. In the fall of 2000, Bank management held a meeting for members in Pittsburgh, a second meeting in Philadelphia, and a third meeting by

26

	teleconference, where it made presentations on the new capital regulations and the recommendations of Bank management regarding a new capital structure. The members that participated in the meetings were given the opportunity to ask questions and provide feedback on the proposed capital structures. In the summer of 2001 at its regional stockholder meetings, the Bank provided an update on the development of the Capital Plan to the members.
	Management developed a written Capital Plan and presented it to the Bank’s Board of Directors on May 18, 2001. The Board of Directors unanimously approved the Capital Plan. On May 31, 2001, the Bank submitted the plan to the Finance Board for its approval. Finance Board staff reviewed the Capital Plan in the spring of 2002. After making some revisions to the original Capital Plan in response to comments from the Finance Board, the executive committee of the Bank’s Board of Directors approved the final version of the Capital Plan. On May 8, 2002, the Finance Board approved the Bank’s Capital Plan, subject to the Bank’s full Board of Directors ratifying the Capital Plan. On June 21, 2002, the Board of Directors of the Bank ratified the final version of the Capital Plan.
C.	Conversion and Purchase of Capital Stock on the Effective Date
	The Effective Date of the Capital Plan is December 16, 2002. At the close of business on December 16, 2002, each outstanding share of existing Bank stock held by members that do not opt out of the conversion shall be converted into one share of Capital Stock. Immediately following that conversion, each member’s minimum member stock investment requirement shall be recalculated by the Bank as set forth below. If after the recalculation a member holds Capital Stock in excess of its minimum member stock investment requirement, then the Bank shall repurchase at par a sufficient number of shares of Capital Stock to eliminate the excess position. Proceeds from the share repurchase shall be credited to the member’s demand deposit account with the Bank. If after the recalculation a member holds Capital Stock short of its minimum member stock investment requirement, then the Bank shall issue at par a sufficient number of shares of Capital Stock to eliminate the shortfall. The cost of the share issuance shall be debited to the member’s demand deposit account with the Bank. Under the Capital Plan, a member that does not wish to convert its existing stock into Capital Stock must file a written notice of withdrawal from membership with the Finance Board at 1777 F Street, N.W., Washington, D.C. 20006, on or before November 15, 2002, the Opt-Out Date. The notice of withdrawal must also be filed with the Bank.
	The membership of a member that opts out of the conversion shall terminate on December 16, 2002. On the date the membership is terminated, all outstanding indebtedness of the member to the Bank shall become immediately due and payable along with any applicable prepayment fees. The Bank shall cancel each currently outstanding share of existing stock held by the member on the date the membership terminates provided that the Bank, after such cancellation, shall

27

	remain in full compliance with its minimum regulatory capital requirement. Any member that provides the Finance Board with written notice of its intent to withdraw after November 15, 2002, but before December 16, 2002, shall have its existing stock converted into Capital Stock on December 16, 2002, and the written notice shall commence the applicable five-year waiting period to redeem the Capital Stock. The Bank may cancel the conversion of all members’ existing stock if the Bank will not be in compliance with its minimum capital requirements on the Effective Date as a result of members opting out of the conversion. In the event of cancellation of the conversion, the withdrawal notice of any member that elected to opt out of the conversion shall be deemed null and void.
	The failure of a member to provide the Finance Board with written notice on or before the Opt-Out Date of its intent to withdraw from membership shall be deemed by the Bank as acceptance of the terms of conversion and the terms of the Capital Plan.
D.	Minimum Stock Investment Requirements

1.	General
	The Capital Plan is designed to provide the Bank with sufficient capital to meet its minimum regulatory capital requirements. Toward this end, the Capital Plan requires that members purchase and maintain a minimum stock investment. On the Effective Date, each member shall purchase and maintain a certain minimum investment in Capital Stock based on the sum of the “member loan stock purchase requirement” and the “unused borrowing capacity stock purchase requirement” as those terms are defined in the Capital Plan and generally explained below. After the Effective Date, the Board of Directors of the Bank has the right, but not the obligation, to adjust from time to time the percentages set forth below, to place a cap on the dollar amount of Capital Stock any member would have to purchase as a result of the unused borrowing capacity stock purchase requirement, as well as to implement an “acquired member asset stock purchase requirement” as defined in the Capital Plan and generally explained below.
2.	Member Loan Stock Purchase Requirement
	Each member is required to purchase and hold Capital Stock in an amount equal to the Bank’s member loan stock purchase percentage multiplied by the total of all loans extended from the Bank to that member. The member loan stock purchase requirement will be calculated at the time each loan is transacted. The member loan stock purchase percentage is initially set at 5% of a member’s outstanding principal balance of loans from the Bank. At close of business on the Effective Date, the Bank will calculate each member’s loan stock purchase requirement by multiplying 5% times the

28

member’s actual outstanding principal balance of loans from the Bank through the Effective Date. From time to time, upon approval by the Bank’s Board of Directors, the member loan stock purchase percentage may be adjusted to as high as 6.0% or to as low as 4.5%. Changes outside this range would constitute an amendment to the Capital Plan that would require Finance Board approval. The Bank anticipates that the member loan stock purchase percentage will be adjusted within the range on a quarterly basis but reserves the right to adjust the percentage more frequently. The Bank shall provide 15 days’ prior written notice of any adjustment in the member loan stock purchase requirement.

An adjustment in the member loan stock purchase percentage may be applied in either of the following manners:

•   A change in the member loan stock purchase percentage may be applied prospectively, affecting only loans transacted subsequent to the change in the member loan stock purchase percentage, or

•   A change in the member loan stock purchase percentage may be applied retrospectively, in which case the new member loan stock purchase percentage would be applied both to the member loans outstanding at the time of such change and to any loans transacted subsequent to such change. If a change in member loan stock purchase requirement is made retrospectively, the Bank’s Board of Directors may choose to either: 1) apply the new member loan stock purchase percentage to all member loans outstanding at the time of such change or 2) apply the new member loan stock purchase percentage only to member loans which do not include a principal prepayment fee.

3.

Unused Borrowing Capacity Stock Purchase Requirement

Each member is required to purchase and hold Capital Stock in an amount equal to the Bank’s unused borrowing capacity percentage multiplied by the unused borrowing capacity of that member. For purposes of the member’s minimum stock investment, the amount of unused borrowing capacity shall be calculated quarterly and at the time each loan is transacted. The unused borrowing capacity stock purchase percentage is initially set at 0.5% of a member’s unused borrowing capacity from the Bank. At the close of business on the Effective Date, based on quarter-end data available from the member’s regulator, the Bank shall calculate each member’s unused borrowing capacity stock purchase requirement by multiplying 0.5% times the principal balance of the eligible assets held by the member. From time to time, upon approval by the Bank’s Board of Directors, the unused borrowing capacity percentage may be adjusted to as high as 1.5% or to as low as 0%. Changes outside this range would

29

	constitute an amendment to the Capital Plan that would require Finance Board approval. The Bank anticipates that the percentage will be adjusted within the range quarterly but the percentage may be adjusted more frequently. The Bank shall provide 15 days’ prior written notice of any adjustment in the unused borrowing capacity stock purchase requirement.
	An adjustment in the unused borrowing capacity percentage will be applied to the member’s unused borrowing capacity for all future calculations. From time-to-time, in the discretion of the Bank’s Board of Directors, the amount any one member would have to purchase under the unused borrowing capacity stock purchase requirement may be subject to a cap of no less than $10 million.
4.	Acquired Member Asset Purchase Requirement
	Each member is required to purchase and hold Capital Stock in an amount equal to the Bank’s acquired member asset purchase percentage multiplied by the amount of acquired member assets delivered by that member and held by the Bank at the time the transaction occurs. In the Bank’s discretion, it may recalculate the member’s acquired member asset purchase requirement from time to time to capture any reductions in the amount of acquired member assets then being held by the Bank. The acquired member asset purchase percentage is initially set at 0%. From time to time, upon approval by the Bank’s Board of Directors, the acquired member asset purchase percentage may be adjusted to as high 4.0% or to as low as 0.0%. Changes outside this range would constitute an amendment to the Capital Plan that would require Finance Board approval. The Bank shall provide 15 days’ prior written notice of any adjustment in the acquired member asset purchase percentage.
	Adjustments made to the Bank’s acquired member asset purchase percentage, if any, shall be applied in accordance with the following:

•   Any increase in the acquired member asset purchase percentage shall be applied only on a prospective basis, i.e., affecting only master commitments entered into between a member and the Bank subsequent to such increase in the acquired member asset purchase percentage. Any acquired member assets delivered to the Bank under a master commitment made prior to an increase in acquired member asset purchase percentage shall be subject to the lower acquired member asset purchase percentage, if any, that had been in effect at the time that master commitment was originally accepted by the Bank.

•   Any decrease in the acquired member asset purchase percentage may, in the sole discretion of the Bank, be applied either

30

retrospectively, affecting all acquired member assets previously delivered and held by the Bank or to be delivered under existing master commitments, or prospectively, affecting only master commitments entered into subsequent to such decrease in the acquired member asset purchase percentage.

5.	Excess Stock Investment
	A member may hold Capital Stock in excess of its minimum investment requirement (“Excess Stock”) to the extent it has the legal authority under applicable statutes and regulations, subject to the following:

(a)

Repurchase. With notice to members of at least one business day, the Bank, in its sole discretion, may elect to repurchase Excess Stock shares at any time. The Bank will repurchase Excess Stock from all members on a pro rata basis (provided, however, in the event a member has given written notice of its intent to redeem Excess Stock, the Bank may, in its sole discretion, repurchase the Excess Stock of that member as set forth below). The effect of repurchasing Excess Stock, by the Bank is to retire such shares. The one business day notice to members does not apply to the repurchase of Capital Stock on the Effective Date. It has been the practice of the Bank from time to time to redeem the excess existing stock held by a member that was not necessary to meet the member’s minimum stock purchase requirement. Although the Bank currently intends to continue this practice, there is no guarantee that the Bank will always continue to repurchase Excess Stock. The need to support investments, MPF loans and other activities for which there is not an associated Capital Stock purchase requirement may dictate the need to use Excess Stock of the members in order to meet the Bank’s minimum regulatory capital requirement.

(b)

Redemption. A member may, at its discretion, request a redemption of Capital Stock by providing a letter or other business writing, signed by an officer of the member, sent by certified mail, return receipt requested, to the Bank’s corporate secretary at the Bank’s home office, currently 601 Grant Street, Pittsburgh, PA 15219-4455. A member may request redemption of some or all of its Capital Stock in accordance with the redemption terms of the Capital Plan. A member may not have pending at any one time more than one redemption request for the same share of Capital Stock. The five-year redemption period commences upon the receipt of the written notice that specifies the number of shares to be redeemed. Following written notice of a member’s intent to redeem shares, but prior to actual redemption, the Bank may, in its

31

sole discretion, elect to repurchase those Excess Stock shares for which it has already received a redemption request. The Bank intends to repurchase Excess Stock subject to a redemption request when it will meet the capitalization needs of the Bank. In the event that multiple redemption requests are pending, the Bank may, in its sole discretion, elect to repurchase Excess Stock on a prorated basis or according to the order in which the redemption requests were received by the Bank, or according to another allocation method as necessary to maintain ongoing compliance with the Finance Board’s capital regulations. The effect of redeeming Excess Stock shares by the Bank is to retire such shares. A request by a member (whose membership has not been terminated) to redeem Capital Stock shall automatically be cancelled if the Bank is prevented from redeeming the member’s Capital Stock because such redemption would cause the member to fail to meet its minimum member stock investment requirement. The effective date of the automatic cancellation shall be five business days after the expiration of the applicable redemption notice period.

(c)

Cancellation of Redemption . In the event a member, having previously notified the Bank in writing of its intent to redeem some or all of its Capital Stock, wishes to cancel its redemption request before the completion of the five-year notification period, it may elect to do so by providing a letter or other business writing, signed by an officer of the member, sent by certified mail, return receipt requested, to the Bank’s corporate secretary notifying the Bank of its intent to cancel its redemption request. The Bank will impose a redemption cancellation fee on any member that either voluntarily or involuntarily cancels its redemption request (provided, however, the Bank may waive the fee for a bona fide business purpose consistent with Section 7(j) of the Bank Act). The redemption cancellation fee is the fee in effect at the time the member provides written notice of cancellation. Following receipt of the redemption cancellation notice, the Bank will notify the member of the cancellation fee amount. The member has ten business days from the date the Bank sends the notice to the member of the amount of the cancellation fee to then provide written notice to the Bank (sent by certified mail to the Bank’s corporate secretary) of its intent to revoke the cancellation and to proceed with the redemption of the Capital Stock it previously sought to redeem according to the original redemption timetable, thereby avoiding the redemption cancellation fee. The redemption cancellation fee is calculated by taking the redemption cancellation fee percentage set forth on Schedule A of the Capital Plan (initially 2%) and multiplying it against the par value of the Capital Stock subject to the notice of redemption. The redemption cancellation fee percentage may be

32

adjusted at the discretion of the Bank’s Board of Directors to as high as 5% and to as low as 0%. Changes outside this range would constitute an amendment to the Capital Plan that would require Finance Board approval.

6.	Limitations on Redemption
	The Bank’s ability to redeem Capital Stock is subject to a number of contingencies. Accordingly, there can be no assurance that a member’s shares of Capital Stock subject to a redemption notice will, in fact, be redeemed at the expiration of the applicable stock redemption period. The potential limitations on redemptions are as follows:

(a)	In order to qualify for redemption upon the expiration of the applicable stock redemption period, the shares subject to the redemption notice must be shares that are held in excess of the member’s minimum stock investment requirements at that time. If a redemption of such shares would be prevented for five business days following the expiration of the stock redemption period because the member would not meet its minimum stock investment requirements following the redemption, the stock redemption notice applicable to such shares shall be automatically cancelled and the member may be subject to a redemption cancellation fee.
(b)	The Bank may not redeem shares if, following such a redemption, it would not be in compliance with each of its minimum regulatory capital requirements.
(c)	Approval from the Finance Board for the redemption of shares would be required if the Finance Board or the Board of Directors of the Bank determined that the Bank has incurred, or is likely to incur, losses that result in, or are likely to result in, charges against the capital of the Bank. Under such circumstances, there can be no assurance that the Finance Board would grant such approval or, if it did, upon what terms it might do so.
(d)	The Bank may, subject to certain conditions, determine to suspend redemptions if it reasonably believes that such redemptions would cause the Bank to fail to meet any of its minimum regulatory capital requirements, would prevent the Bank from maintaining adequate capital against potential risks that are not adequately reflected in its minimum regulatory capital requirements or would otherwise prevent the Bank from operating in a safe and sound manner.

33

(e)   The Bank may not redeem shares if the principal or interest due on any consolidated obligations issued through the Office of Finance has not been paid in full.

7.	Limitations on Repurchase
	The Bank’s ability to repurchase Excess Stock is subject to a number of contingencies. Specifically, the Bank may not repurchase Excess Stock if: (1) following any such repurchase, the Bank would not be in compliance with each of its minimum regulatory capital requirements; (2) a determination has been made by the Finance Board or the Board of Directors of the Bank that the Bank has incurred, or is likely to incur, losses that result in, or are likely to result in, charges against the capital of the Bank, unless the Bank has obtained approval from the Finance Board for such repurchase; (3) the Bank has suspended redemptions and the Finance Board has not approved the Bank’s repurchase of stock during the period such suspension is in effect; or (4) the principal or interest due on any consolidated obligation issued through the Office of Finance has not been paid in full. Accordingly, there can be no assurance that some or all of a member’s shares of Excess Stock will be repurchased by the Bank at any particular time.
8.	Adjustments to Minimum Amount

(a)

Member Acceptance . Each member is required to comply with any changes adopted in the Bank’s Capital Plan, including any adjustments made by the Bank’s Board of Directors that may lead to an increase in a member’s minimum member stock investment. In order to effectuate the sale of additional Capital Stock required due to such changes in terms, the Bank is authorized to issue Capital Stock in the name of a member and to withdraw appropriate payment from the member’s demand deposit account(s) with the Bank.

(b)

Prior Notice. The Bank shall provide at least 15 days’ written notice to members prior to implementing any adjustment to the member loan stock purchase percentage, unused borrowing capacity percentage, or acquired member asset purchase percentage if doing so affects the total minimum stock investment of the member. The Bank shall implement the adjustments on the date stated in the notice to members.

E.	Termination of Membership
	The following terms pertain to the termination of a membership in the Bank.

34

1.	Voluntary Withdrawal
	After December 16, 2002, the following terms and conditions will apply to a member that elects to withdraw from membership. A member may withdraw from membership by providing the Bank a letter or other business writing, signed by an officer of the member, sent by certified mail, return receipt requested, to the Bank’s corporate secretary at the Bank’s home office. A member may cancel its notice of withdrawal at any time prior to its effective date by providing the Bank similar written notice of such cancellation. The Bank will impose a fee on a member that cancels a notice of withdrawal (provided, however, the Bank may waive the fee for a bona fide business purpose consistent with Section 7(j) of the Bank Act). The withdrawal cancellation fee is the fee in effect at the time the member provides such written notice of cancellation. The member has ten business days from the date the Bank sends the notice to the member of the amount of the membership withdrawal cancellation fee to provide written notice of its intent to revoke the cancellation, thereby avoiding the membership withdrawal cancellation fee. The membership withdrawal cancellation fee is calculated by taking the membership withdrawal cancellation fee percentage set forth on Schedule A of the Capital Plan then in effect (initially 2%) and multiplying it against the par value of the Capital Stock held by the member. The membership withdrawal cancellation fee percentage may be adjusted at the discretion of the Bank’s Board of Directors to as high as 5% and to as low as 0%.
	The receipt by the Bank of written notice of withdrawal shall commence the five-year redemption period for the Capital Stock held by the member that is not already subject to a pending request for redemption. The five-year redemption period, as to all Capital Stock held by the member at that time, begins on the date of the Bank’s receipt of the member’s withdrawal notice. If a member purchases any Capital Stock after that date but before its membership is terminated, the member does not have the right to redeem such additional shares of Capital Stock, except upon providing an additional five years’ written notice to the Bank. However, the Bank has the right, but not the obligation, to repurchase any additional Capital Stock purchased by the member during the period between its notice of withdrawal and the date on which its membership terminates. In the case of a member whose membership has been terminated as a result of a merger or other consolidation into a non-member or a member of another FHLBank, the redemption period for any Capital Stock that is not already subject to a pending request for redemption shall be deemed to commence on the date on which the charter of the former member is cancelled.
	No member may withdraw from membership unless, on the date the membership is terminated, there is in effect a certification from the Finance Board that the withdrawal of a member will not cause the

35

	FHLBank System to fail to satisfy its obligation to make the payments to REFCORP.
2.	Involuntary Terminations
	The Board of Directors of the Bank has the right to terminate the membership of any member that: 1) fails to comply with any requirement of the Bank Act, Finance Board regulations, or the Capital Plan; 2) becomes insolvent or otherwise is subject to the appointment of a conservator, receiver or other legal custodian under federal or state law; or 3) would jeopardize the safety and soundness of the Bank if it were to remain a member. The five-year redemption period for all Capital Stock owned by the member and not already subject to a pending request for redemption shall commence on the date the Bank terminates the member’s membership.

F.   Rights Upon Withdrawal, Liquidation, Consolidation or Merger of the Member

1.	Liquidation of Capital Stock
	If an institution ceases to be a member of the Bank for any reason, the Bank shall require the institution to continue to hold the Capital Stock necessary to support the member’s loans outstanding and/or acquired member assets under the terms of the Capital Plan in effect at that time. Upon the repayment of all outstanding indebtedness to the Bank, including any prepayment fees and settlement of the member’s risk-sharing obligations under any acquired member asset program, the Capital Stock that was necessary to support the member’s loans and/or acquired member asset program shall become Excess Stock subject to repurchase by the Bank in its discretion.
2.	Liquidation of Indebtedness
	The Bank will liquidate the indebtedness of any institution that ceases to be a member in an orderly manner according to a schedule established by the Bank in its sole discretion. The Bank may require the immediate repayment of all indebtedness, in which case the member shall be subject to any applicable prepayment fees. In the alternative, and in the Bank’s sole discretion, the Bank may allow the institution to continue to hold on to any indebtedness for any length of time up to and including maturity.

G.	Amendments to the Capital Plan
	Upon a simple majority vote of all of the individual members of the Bank’s Board of Directors, not just a simple majority vote of a quorum, a request to amend the Capital Plan may be submitted to the Finance Board. The effective date(s) for

36

any proposed change(s) to the terms of the Capital Plan shall be contained in any amendment request as submitted to the Finance Board. The Bank shall provide notice to members of any request submitted to the Finance Board to amend the Capital Plan at least 30 days prior to the effective date of any such requested amendment. To become effective, any amendment to the Capital Plan must be approved by the Finance Board.

X. DESCRIPTION OF CAPITAL STOCK

A.	Voting Rights – Election of Directors
	Voting rights in regard to the election of directors are set forth in 12 C.F.R. Section 915. The Bank shall annually calculate each member’s minimum stock purchase requirement for purposes of determining its voting shares based on its preceding December 31 (record date) balance sheet, outstanding loans, and acquired member asset information (if applicable). Each member is eligible to vote for the number of open elected director seats in the state in which its principal place of business is located. Each member shall be entitled to cast one vote for each share of Capital Stock that the member was required to hold as of the record date; except that, the number of votes that each member may cast for each directorship shall not exceed the average number of shares of Capital Stock that were required to be held by all members located in that state on the record date. There are no voting preferences for any share of Capital Stock.
B.	Par Value
	The par value of Capital Stock is $100 per share. Capital Stock is issued, redeemed and repurchased at par value.
C.	Ownership of Retained Earnings
	The retained earnings, surplus, undivided profits and equity reserves, if any, of the Bank are owned by the holders of Capital Stock proportionate to their ownership of all outstanding shares of Capital Stock. The holders of Capital Stock shall have no right to receive any portion of these items, however, except through the declaration of a dividend or capital distribution approved by the Bank’s Board of Directors or through liquidation of the Bank.
D.	Limitations
	The Bank may issue Capital Stock only in accordance with its Capital Plan and the capital regulations adopted by the Finance Board. The Bank may issue Capital Stock only to members, and generally only members may hold Capital Stock.

37

E.	Transfer of Stock
	A member may transfer any of its Excess Stock of the Bank only to another member of the Bank or to an institution that has been approved for membership in the Bank and that has satisfied all conditions for becoming a member other than the purchase of the minimum amount of Capital Stock that it is required to hold as a condition of membership. No other transfers of Capital Stock are permitted under the Capital Plan. Any such transfer of Excess Stock shall be at par value and shall be effective upon being recorded on the appropriate books and records of the Bank. There may be accounting issues involved in the transfer of Excess Stock between members, and accordingly, any member considering receiving or transferring Excess Stock in such a manner should consult with its accounting and tax advisors.
F.	Dividends
	The Bank’s Board of Directors may, but is not obligated to, declare and pay non- cumulative dividends in either cash or stock. The Board of Directors cannot declare a dividend: (1) if the Bank’s capital position is below its minimum regulatory capital requirement; (2) if the Bank’s capital position will be below its minimum regulatory capital requirement after paying the dividend; or (3) the principal or interest due on any consolidated obligation has not been paid in full.
G.	Rights in Bank Liquidation, Merger or Consolidation
	In the event the Bank is liquidated, the member shall be entitled to the rights and benefits granted to it by the Finance Board and/or Congress. In the event the Bank merges with or consolidates into another FHLBank, the member shall be entitled to the rights and benefits set forth in the agreement of merger approved by the boards of directors of both FHLBanks and the Finance Board.

XI. RISK FACTORS

A.   Risks Relating to the New Capital Structure

1.

Member Minimum Stock Investment Requirement May Increase

Under the Capital Plan, the Board of Directors of the Bank may increase the minimum stock investment requirements of members within certain ranges specified in the Capital Plan. The minimum stock investment requirements may also be increased pursuant to an amendment to the Capital Plan that must be approved by the Finance Board. The Bank must provide members with 15 days’ written notice prior to the effective date of any increase in their minimum stock investment requirements. Members are required to purchase additional stock in the Bank as necessary to

38

	comply with such new requirements. In order to facilitate the purchase by members of any required additional stock, the Bank shall charge the member’s demand deposit account at the Bank for the appropriate amount. Thus, no affirmative action is required to be taken by members to purchase additional stock in the Bank as a result of an increase in the minimum stock investment requirements.
	The GLB Act requires members to “comply promptly” with any increase in the required minimum stock investment requirements to ensure that the Bank continues to satisfy its minimum regulatory capital requirements. However, in the preamble to its amendments to the final capital regulation published in the Federal Register on January 30, 2001 (at page 8304), the Finance Board stated that it does not believe this provision provides the FHLBanks with an unlimited call on the assets of their members. According to the Finance Board, it is not clear whether the Bank or the Finance Board would have the legal authority to compel a member to invest in additional amounts of Capital Stock in the Bank.
	Thus, while the Capital Plan contemplates that members would be required to purchase whatever amounts of Capital Stock are necessary to ensure that the Bank continues to satisfy its capital requirements, and while the Bank may seek to enforce this aspect of the Capital Plan which has been approved by the Finance Board, it is uncertain if the Bank ultimately could compel a member to purchase additional Capital Stock in the Bank that the member did not wish to purchase. Nevertheless, even if a member could not be compelled to make additional Capital Stock purchases, the failure by a member to comply with the Capital Stock purchase requirements of the Capital Plan could subject it to substantial penalties, including the possible termination of its membership in the Bank. In the event of such termination of membership, the Bank may call any indebtedness on loans made to the member prior to the maturity of such loans and the member would be subject to any fees applicable to the prepayment of such indebtedness.
2.	No Public Market for Capital Stock
	Capital Stock is subject to redemption upon the expiration of a five-year redemption period. Only stock in excess of a member’s minimum stock investment requirements (Excess Stock), stock of a member that has submitted a notice to withdraw from membership, or stock held by a member whose membership is otherwise terminated may be redeemed at the end of the five-year redemption period. However, there is no guarantee that a member will be able to redeem its investment even at the end of the applicable redemption period. If the redemption of Capital Stock, or the repurchase of such stock by the Bank, would cause the Bank to fail to meet its minimum regulatory capital requirements, then such

39

	redemption or repurchase would be prohibited. Likewise, a redemption would not be honored by the Bank if such redemption would cause the member to fail to maintain its required minimum investment in the stock of the Bank. Moreover, Capital Stock may in general be owned only by its members, and the Capital Plan prohibits one member from transferring stock to another member unless the transfers are of Excess Stock.
	The Bank also may determine to suspend the redemption or repurchase of Capital Stock if it reasonably believes that such redemptions or repurchases would cause the Bank to fail to meet its minimum capital requirements, would prevent the Bank from maintaining adequate capital against a potential risk, or would otherwise prevent the Bank from operating in a safe and sound manner. In addition, approval from the Finance Board for redemptions or repurchases would be required if the Finance Board or the Board of Directors of the Bank determined that the Bank has incurred, or is likely to incur, losses that result in, or are likely to result in, charges against the capital of the Bank. Under such circumstances, there can be no assurance that the Finance Board would grant such approval or, if it did, upon what terms it might do so.
	Accordingly, notwithstanding the expiration of the applicable stock redemption period, there are a variety of circumstances that would preclude the Bank from redeeming or repurchasing the Capital Stock of a member. Since there is no public market for the Capital Stock and transfers of Excess Stock only between members are permitted, there can be no assurance that a member’s purchase of Capital Stock would not effectively become an illiquid investment in the Bank.
3.	Restrictions on Redemption and Repurchase of Excess Stock
	The Bank may rely from time to time upon the Excess Stock of members in addition to the amounts of Capital Stock members are required to own, in order to satisfy its minimum regulatory capital requirements. In such case, a member that owns Excess Stock in the Bank would be unable to redeem such stock for cash – nor could the Bank repurchase such stock – as long as the Bank needs such Excess Stock to satisfy its minimum regulatory capital requirements. Under such circumstances, which may occur particularly in periods of growth in the Bank’s assets which do not directly require matching stock investments by members, a member’s investment in Excess Stock effectively would become a permanent investment in the Bank and would remain so unless and until the Bank were able to find another source of capital (which could occur, for example, through an increase in its membership and/or activity-based stock requirements) with which to satisfy its minimum regulatory capital requirements.

40

As of the Effective Date of the Capital Plan, the Bank does not intend to rely upon Excess Stock to satisfy its minimum capital requirements. However, it is possible that the Bank might at some point in the future seek to rely upon Excess Stock to satisfy such requirements. To the extent that this were to be the case, and depending on the amount of Excess Stock that a member holds and the extent to which the Bank relies on Excess Stock to satisfy its minimum capital requirements, a member that owns Excess Stock may be unable to redeem such stock at the end of the five-year stock redemption period and the Bank may be prevented from repurchasing such stock from a member.

4.   Risk-Weighting of Capital Stock

It is possible that one or more of the regulatory agencies might seek to increase the risk weighting that would be applicable to Capital Stock held by members for which such agency is the primary regulator. To the extent that this were to occur with respect to a particular category of member institutions, such members would be required to maintain a higher level of risk-based capital per share of Capital Stock than they currently are required to hold per share of existing stock. Depending on which regulatory agencies imposed increased risk weightings on Capital Stock, this might serve as a disincentive for some members to hold Capital Stock, which could discourage member transactions with the Bank and adversely affect the Bank’s future earnings and financial condition.

Regulations or policies of the regulatory agencies also could limit the ability of members to purchase or hold Excess Stock. Under Finance Board regulations, a member may purchase Excess Stock as long as such purchase is approved by the Bank and is permissible under the applicable laws under which the member operates. At least one bank regulatory agency has previously issued guidance on the extent to which its constituents could purchase excess stock in a FHLBank. In 1996, the Office of the Comptroller of the Currency issued an interpretive letter stating that a national bank could purchase excess stock only to the extent that such excess stock facilitates the national bank’s plans to expand funding of residential housing finance assets and such plans are documented in the bank’s business plans. It is possible that federal or state agencies that regulate the activities of members could seek to further limit the ability of their constituents to purchase or hold Excess Stock. In such case, the Bank may be unable to issue Excess Stock to certain members, and this could adversely affect its ability to raise additional capital. Restrictions on the use of Excess Stock generally could also result in the imposition of higher minimum stock investment requirements for members.

41

5.   Ability to Pay Dividends

The Bank may pay dividends on its Capital Stock only out of previously retained earnings or current net earnings. However, a FHLBank that is not in compliance with its minimum regulatory capital requirements may not pay dividends to members; nor may a FHLBank pay dividends if, after doing so, it would fail to meet any of such minimum requirements. Moreover, a FHLBank may not pay dividends to members if any principal or interest due on consolidated obligations issued through the Office of Finance has not been paid in full or, under certain circumstances, if it fails to satisfy liquidity requirements under applicable Finance Board regulations and policies. While the Bank intends to declare and pay dividends on the Capital Stock on a quarterly basis, there can be no assurances as to the level of Bank dividends or that the Bank will be able to pay dividends in the future.

6.   Capital Plan Amendments

Under the Capital Plan, the Board of Directors of the Bank is authorized to amend the Capital Plan. All amendments must be approved by the Finance Board before they may become effective. However, under the Capital Plan, amendments to the Capital Plan are not subject to member consent or approval. While amendments must be consistent with the Bank Act and Finance Board regulations, it is possible that they would result in changes to the Capital Plan that could adversely affect the rights and obligations of members.

7.   Rights of Members in the Event of Liquidation or Merger

Holders of Capital Stock own the retained earnings, surplus, undivided profits, and equity reserves of the Bank. The Bank’s Capital Plan provides, with respect to a liquidation, that members shall be entitled to the rights and benefits granted to them by the Finance Board and/or Congress. With respect to a merger or consolidation of the Bank, members shall be entitled to the rights and benefits set forth in the agreement of merger approved by both FHLBanks’ boards of directors and the Finance Board. The Bank cannot predict how the Finance Board might exercise its authority with respect to liquidations or reorganizations, or whether any actions taken by the Finance Board in this regard would be inconsistent with the provisions of the Bank’s Capital Plan or the rights of holders of Capital Stock in the retained earnings of the Bank.

42

B.   Risks Relating to the FHLBank System

1.   Joint and Several Liability on Consolidated Obligations

The Bank is jointly and severally liable with the other FHLBanks for the consolidated obligations issued by the FHLBanks through the Office of Finance. The Bank may not pay any dividends to members nor redeem or repurchase any shares of Capital Stock unless the principal and interest due on all consolidated obligations have been paid in full. If another FHLBank were to default on its obligation to pay principal or interest on any consolidated obligations, the Finance Board may allocate the outstanding liability among one or more of the remaining FHLBanks on a pro rata basis or on any other basis the Finance Board may determine. Accordingly, the Bank’s ability to pay dividends to its members or to redeem or repurchase shares of its Capital Stock could be affected not only by its own financial condition, but also by the financial condition of one or more of the other FHLBanks.

2.   Changes in Statute or Regulations

The FHLBanks are governed by the Bank Act and regulations adopted thereunder by the Finance Board. The FHLBanks were created to further the government policy of facilitating the flow of mortgage credit and the promotion of homeownership in the United States. From time to time, Congress has amended the Bank Act in ways that have significantly affected the rights and obligations of the FHLBanks and the manner in which they carry out their housing finance mission. It is possible that legislative changes to the Bank Act in the future could adversely affect the business, operations or financial condition of the Bank.

Regulations and policies of the Finance Board govern, among other things, the permissible investments and activities of the FHLBanks, risk management practices, capital requirements and management and supervisory issues. It is possible that new regulations or policies adopted by the Finance Board, or changes to existing regulations or policies, also could adversely affect the business, operations or financial condition of the Bank.

3.   Multi-district Membership

On October 3, 2001, the Finance Board solicited comments on the implications for the FHLBank System if institutions were permitted to become members of more than one FHLBank. The request was prompted by the submission of several petitions asking the Finance Board to permit a single depository institution involved in an interstate merger transaction

43

to become a member of two or more FHLBanks concurrently. A decision by the Finance Board to approve these petitions or permit multi-district membership generally could significantly affect the business and operations of the Bank and the FHLBank System.

While the issues are complex and unprecedented, it is possible that multi-district membership likely would result in a greater level of competition among the FHLBanks on a variety of levels. Multi-district membership would also raise a myriad of operational issues including, among other things, whether a single institution would be required to comply with the stock purchase requirements of multiple FHLBanks, how collateral pledged by a single institution to secure loans should be apportioned among multiple FHLBanks and the extent to which a single institution should be permitted to have representation on the boards of directors of multiple FHLBanks. On the other hand, if, as is currently the case, multi-district membership is not permitted, interstate mergers involving members from different FHLBank districts may result in an increase in the concentration of large members in some FHLBanks and a decrease in membership and loss of business in other FHLBanks.

On January 22, 2002, the Finance Board announced that it intends to defer action on multi-district membership petitions until it decides on a course of action to address broader membership issues. It is unclear what action, if any, the Finance Board ultimately will take on the multi-district membership petitions or multi-district membership issues in general.

C.   Risks Relating to the Business of the Bank

1.   Changes in Interest Rates

Like many financial institutions, the Bank realizes income primarily from the spread between interest earned on its loans and investments and the interest paid on its borrowings. It is expected that the Bank, from time to time, will experience “gaps” in the interest rate sensitivities of its assets and liabilities, meaning that either its interest-bearing liabilities will be more sensitive to changes in market interest rates than its interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to the Bank’s position, the “gap” will adversely affect the Bank’s earnings and the net present value of the Bank’s interest-sensitive assets and liabilities.

One of the Bank’s fundamental asset-liability management objectives is the preservation of the member’s investment; i.e., ensuring that the market value of the Bank’s equity does not change materially from its par value or book value under a variety of different interest rate environments. In order to achieve this objective, management uses interest rate derivatives

44

to convert a substantial portion of the Bank’s fixed-rate assets and liabilities to floating-rate cash flows that vary with the level of interest rates. This technique stabilizes market value fluctuations in the Bank’s assets, liabilities and equity, but does tend to create volatility in the Bank’s absolute level of dividends and earnings.

2.   Reduction in Retained Earnings Due to FAS133 Adjustments

In order to increase member returns, management uses more economically efficient hedges to control the Bank’s exposure to interest rate risk. Many of these hedges, while effective in reducing the Bank’s long-term risk exposure, can create considerable volatility in net income and retained earnings under the reporting requirements of FAS133 as FAS133 requires the Bank to recognize unrealized losses on its derivative contracts. If the Bank were required to recognize large unrealized losses on derivative contracts, the Bank’s net income for any period could be significantly reduced or eliminated. Because Finance Board regulations prohibit a FHLBank from exhausting its GAAP retained earnings to pay a dividend, unfavorable FAS133 marks could limit the Bank’s ability to pay a dividend. The Bank’s ability to use retained earnings to supplement current earnings in order to pay dividends is not unlimited.

3.   Convexity Risks in Mortgage Assets

There are significant convexity risks associated with long-term fixed-rate mortgage loans purchased or funded under the MPF Program and held on the Bank’s balance sheet. The Bank actively hedges this risk through a variety of risk management tools. However, it is impossible to perfectly hedge convexity risk in mortgage loans, and therefore, the income of the Bank could be adversely affected by this risk.

4.   Counterparty Credit Risk

The Bank assumes some level of unsecured credit risk when entering into securities transactions, money market transactions and derivative contracts with counterparties. The Bank has a policy that limits the amount of unsecured credit risk it can assume with any counterparty. In regard to derivative contracts, the Bank uses master agreements that contain provisions that allow the Bank to net the exposure under all transactions with the counterparty to one net amount. The Bank enters into derivative contracts with foreign counterparties where the law is not certain that the netting provisions are enforceable in insolvency. The Bank manages this risk by obtaining a right to terminate all transactions with the counterparty when the credit rating of the counterparty falls to an agreed-upon level. The Bank actively monitors the credit rating of all counterparties. There is no guarantee that the Bank would be able to terminate the agreement with

45

a foreign counterparty before the counterparty would become subject to an insolvency proceeding.

5.   Concentration of Loans

As of June 30, 2002, more than 42% of the Bank’s loans to members are held by four institutions. The average remaining term of the loans to these institutions is 3.2 years. If these members were to repay the loans as they became due and no other loans were made to replace them, the Bank’s income could be adversely affected. The loss of large members could have a material adverse impact on the Bank’s dividend until appropriate adjustments are made to the Bank’s investment, derivative and debt portfolios. The duration and magnitude of the adjustment period would depend on a number of factors, including: (a) the amount of any stock redemptions; (b) the profitability of any loans that were repaid; (c) the profitability of the Bank’s investment portfolio; and (d) the remaining level of loans.

6.   Concentration of Capital Stock

As of June 30, 2002, more than 53% of the Bank’s current stock is held by ten institutions. If these members were to terminate their memberships, the Bank’s capital base would be reduced and the Bank’s ability to generate earnings could be adversely affected. In addition, to the extent that the Bank may rely from time to time upon the Excess Stock of members, the Bank may be required to increase the minimum stock purchase requirement of the remaining members to remain in compliance with the Bank’s minimum capital requirements in the event of a substantial reduction in the Bank’s capital base due to membership withdrawals.

7.   Inability to Access the Capital Markets

The business of the Bank is reliant on its ability to access the capital markets at competitive market rates. The Bank maintains a minimum amount of liquidity to meet five business days of funding needs both through investments in liquid assets and maintenance of available borrowing capacity. Although the Bank maintains lines of credit to repo and other money market counterparties, the Bank’s income would be adversely affected if it were not able to access the capital markets at competitive rates for a long period of time.

8.   Competition in the Lending Business

The primary business of the Bank is to make loans to its members. The Federal Reserve has recently considered entering into the short-term

46

lending business with its members. Fannie Mae and Freddie Mac have at times entered into reverse repurchase agreements with members that are a source of competition for short- and medium-term loans from the Bank. The capital markets are another source of competition for Bank loans. Any of these sources of competition could adversely affect the income of the Bank.

9.   Loan Pricing

The Board of Directors and management are of the opinion that the primary benefits of Bank membership should accrue to borrowing members in the form of low-cost loans. Decisions to further lower loan spreads, to gain volume or increase the subsidy transfer to borrowing members, could result in lower earnings, which could result in lower dividend yields.

10.   Lower AHP Subsidies

Lower earnings could result in a lower level of AHP subsidies being available to the Bank’s members. The Bank contributes ten percent of its net income to its AHP. Accessing the subsidies in the AHP can be a benefit to the members. If the Bank’s earnings were to be adversely affected, the level of subsidies, and therefore one of the benefits of membership, would be reduced.

11.   Lower Dividends Resulting from Increased AHP Contribution

The FHLBanks are required to contribute the greater of ten percent of their annual net income or $100 million to the AHP. If the net income of the FHLBank System were to fall below $1 billion, then each FHLBank would be required to contribute more than ten percent of its net income to the AHP. Increasing the Bank’s AHP contribution percentage would reduce earnings and potentially reduce the dividend paid to members.

47

XII.   SELECTED FINANCIAL DATA

The following table sets forth selected financial data and other statistical information for the Bank. The financial data were derived from the Bank’s financial statements. This information is qualified in its entirety by reference to, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” which follows, the “Supplemental Information to Financial Statements” and “Financial Review” appearing in and incorporated by reference to the Annual Report, and the Bank’s financial statements and related notes appearing herein and incorporated by reference to the Annual Report.

														(Unaudited)
														Six months ended
	Year ended December 31,													June 30,
($ in millions)	1997			1998			1999			2000		2001		2001		2002
Statement of Condition
Loans	$	16,980		$	25,770		$	36,527		$	25,946	$	29,315	$	26,161	$	28,232
MPF loans		—			5			3			1,910		1,839		1,961		2,551
Investments (1)		10,737			10,125			12,614			15,378		11,064		12,429		15,957
Total assets		28,861			36,860			50,603			45,063		42,914		41,386		47,649
Deposits and borrowings		1,536			2,271			1,252			1,443		1,718		1,815		2,523
Consolidated obligations		25,281			31,916			45,923			40,433		38,271		36,891		41,706
Capital stock		1,387			1,754			2,318			2,065		1,889		1,705		1,861
Retained earnings		53			72			98			110		87		119		68
Other comprehensive income		(2	)		(4	)		(3	)		—		2		2		(6	)

															(Unaudited)
															Six months ended
	Year ended December 31,														June 30,
($ in millions)	1997			1998			1999			2000			2001		2001		2002
Averages
Loans	$	14,070		$	21,133		$	29,181		$	32,349		$	27,009	$	26,214	$	29,241
MPF loans		—			2			3			831			1,979		1,946		2,021
Investments		10,713			9,120			11,960			13,695			11,587		12,013		12,615
Total assets		25,233			30,859			42,075			48,268			41,527		41,240		44,681
Deposits and borrowings		1,123			1,837			1,549			955			1,917		1,615		2,666
Consolidated obligations		22,325			26,825			37,602			43,843			36,734		36,746		39,051
Capital stock		1,276			1,548			1,994			2,278			1,826		1,857		1,945
Retained earnings		56			72			96			117			115		122		83
Other comprehensive income		(5	)		(2	)		(1	)		(2	)		1		—		(3	)

48

																(Unaudited)
																Six months ended
	Year ended December 31,															June 30,
($ in millions)	1997			1998			1999			2000			2001			2001			2002
Income Statement Data:
Operating Results
Net income	$	110		$	143		$	184		$	173		$	95		$	71		$	18
Dividends paid	$	81		$	101		$	132		$	161		$	119		$	62		$	37
Weighted average dividend rate		6.38	%		6.50	%		6.63	%		7.06	%		6.50	%		6.75	%		3.87	%
Return on average equity		8.32	%		8.86	%		8.80	%		7.24	%		4.90	%		7.26	%		1.84	%
Return on average assets		0.44	%		0.46	%		0.44	%		0.36	%		0.23	%		.35	%		.08	%
Net interest margin		0.55	%		0.57	%		0.54	%		0.56	%		0.52	%		.57	%		.31	%

																(Unaudited)
																Six months ended
	Year ended December 31,															June 30
($ in millions)	1997			1998			1999			2000			2001			2001			2002
Capital
Total capital ratio		4.98	%		4.95	%		4.77	%		4.83	%		4.61	%		4.41	%		4.03	%
Leverage ratio		20.07	%		20.22	%		20.97	%		20.72	%		21.70	%		22.67	%		24.78	%

Notes:

(1)   Investments also include interest-bearing deposits in banks, securities purchased under resale agreements, loans to other FHLBanks and federal funds sold.

(2)   Net interest margin is net interest income before loan loss provision as a percentage of average earning assets.

(3)   Total capital ratio is total GAAP capital as a percentage of total assets at period-end.

(4)   Through 1999, the Bank’s REFCORP obligation was charged directly to retained earnings. Beginning in 2000 as a result of the GLB Act, the Bank was required to pay 20% of net earnings to REFCORP, and is shown on the Statement of Operations.

(5)   The Bank implemented Financial Accounting Standard 133 “Accounting for Derivative Instruments and Hedging Activities,” on January 1, 2001, requiring all derivative instruments be recorded on the balance sheet at their fair value.

(6)   Certain amounts have been reclassified in prior years to conform to current-year financial information.

XIII.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations relates to the six months ended June 30, 2002. It should be read in conjunction with the “Supplemental Information to Financial Statements” and “Financial Review” appearing in the Annual Report, which discuss the Bank’s financial condition and results of operations for the year ended December 31, 2001, and with the Bank’s financial statements and related notes appearing herein and incorporated by reference to the Annual Report.

Amounts used to calculate percentage variances from June 30, 2002, to the most recent year-end and comparable preceding interim period are based on numbers in the millions.

49

Accordingly, recalculations may not produce the same results when the relevant amounts are disclosed only in billions.

A.   Financial Trends

1.   Conditions in Financial Markets

During the first half of 2002, the financial markets continued to exhibit significant volatility as the U.S. economy began to recover from the terrorist attacks of September 11, which adversely affected the stock market, eroded consumer confidence and disrupted commerce. The stock market continued to be affected by reports of poor earnings, allegations of corporate malfeasance, lowered growth expectations by numerous industrial and service companies, and the announcement of substantial employee layoffs by many companies.

In response to economic conditions, the Federal Reserve Board, through its Federal Open Market Committee, cut the discount rate eleven times for a total of 475 basis points during 2001. As a result of lower interest rates, a significant volume of redemptions of callable Bank consolidated obligations were triggered, with those bonds being replaced by bonds with lower interest rates. As spreads narrowed, given the overall downward shift in interest rates, the Bank’s funding spreads have also compressed.

The continued low level of interest rates in the first half of 2002 has had a demonstrable impact on the Bank’s profitability, particularly because a majority of its investments are subject to prepayment or are of a short-term nature. The lower level of interest rates also affects the Bank directly through lower earnings on invested capital. Historically, approximately one-half of the Bank’s net interest income is attributable to earnings on invested member capital. As such, when the general level of interest rates rises or falls, the Bank’s net interest income will tend to rise and fall, albeit on a lagged basis commensurate with investment portfolio turnover. Inasmuch as net interest income is the primary earnings source for the Bank and, therefore, significantly affects the potential member dividend yield, the Bank’s stock dividend yield similarly tends to rise and fall with the general level of interest rates on a lagged basis.

2.   Statement of Condition

FAS133 requires that, beginning in 2001, the assets and liabilities hedged with derivative instruments designated and effective under fair-value hedging relationships be adjusted for changes in fair value even as other assets and liabilities continue to be carried on a historical cost basis. In discussing changes in the Statement of Condition for the first six months of 2002 compared to 2001, the FAS133 fair-value adjustment information

50

for loans, investments and consolidated obligations has been included. The FAS133 basis adjustments for loans, investments and consolidated obligations are as follows:

Federal Home Loan Bank of Pittsburgh

FAS133 Basis Adjustments
($ in millions)

				At June 30,
	2002				2001
Loans at pre-FAS133 value	$	27,228			$	25,788
FAS133 basis adjustments		1,004				373
Loans at carrying value	$	28,232			$	26,161
Investments at pre-FAS133 value (1)	$	15,959			$	12,432
FAS133 basis adjustments		(2	)			(3	)
Investments at carrying value	$	15,957			$	12,429
Consolidated obligations at pre-FAS133 value	$	41,182			$	36,720
FAS133 basis adjustments		524				171
Consolidated obligations at carrying value	$	41,706			$	36,891

(1)   Investments also include interest-bearing deposits in banks, securities purchased under resale agreements, loans to other FHLBanks, and federal funds sold.

Loans totaled $28.2 billion at June 30, 2002. Loans decreased by 3.7% from December 31, 2001 and increased by 7.9% from June 30, 2001.

More than 69.5% of the loans outstanding at June 30, 2002, had a remaining maturity greater than one year compared with 67% at December 31, 2001, and 74.3% at June 30, 2001. Loan originations totaled $471 billion in the first six months of 2002, up 106.4% from originations of $228 billion during the first six months of 2001, reflecting higher demand by members for wholesale funding from the Bank.

The principal investments of the Bank are mortgage-backed securities, overnight and term federal funds sold, commercial paper, agency securities and U.S. government securities. At June 30, 2002, investments grew by $4.9 billion, or 44.2% from the year-end 2001 balance of $11.1 billion. Investments grew by $3.5 billion, or 28.4% from June 30, 2001. It has been the Bank’s general practice to utilize as much of its mortgage-backed securities regulatory investment authority as is practical and prudent given prevailing market conditions. The Finance Board’s Financial Management Policy (“FMP”) limits purchases of additional mortgage-backed security investments during periods when the existing portfolio of the Bank exceeds 300% of the Bank’s capital. Aggregate mortgage-backed security investments of $6.5 billion at June 30, 2002, were 339.2% of total Bank capital at that time. From time to time, the mortgage-backed securities percentage of capital may exceed 300%. For example, this can occur when member capital stock levels decline

51

following paydowns of member loan balances; depending upon an individual member’s stock position, a loan paydown may prompt a proportionate reduction in that member’s required capital stock position. Although regulations prohibit the purchase of additional mortgage-backed securities during periods when the ratio exceeds 300%, there is no regulatory requirement that existing mortgage-backed securities within a FHLBank’s portfolio be sold during periods when the ratio exceeds this threshold. Mortgage-backed securities investments represented 284.9% and 325.6% of total Bank capital at December 31, 2001 and June 30, 2001, respectively. The Bank makes use of derivatives agreements to alter the cash flow characteristics of certain investment securities.

Federal funds sold were $2.8 billion (17.4% of total investments) at June 30, 2002, compared with $1.1 billion (10.2% of total investments) at year-end 2001 and $1.7 billion (13.6% of total investments) at June 30, 2001. The Bank typically uses federal funds as a part of its daily liquidity management program. In connection with liquidity management, which entails maintaining an ongoing presence in the federal funds market, the Bank’s federal funds position can and often does change significantly on a daily basis.

The Bank held commercial paper investments of $0.3 billion (1.6% of total investments) at June 30, 2002, compared with $0.2 billion (2.3% of total investments) at year-end 2001 and $0.4 billion (3.2% of total investments) at June 30, 2001. As part of the Bank’s short-term liquid asset portfolio, high-grade commercial paper investments are regarded as an additional source of liquidity and, as such, holdings can and often do change significantly over the short-term.

The Bank also invests in U.S. agency obligations, primarily callable and other structured debt issued by other Government Sponsored Enterprises (“GSEs”). U.S. agency obligations rose to $3.6 billion or 22.8% of total investments at June 30, 2002, up from $2.4 billion or 22.1% of total investments at year-end 2001 and $2.3 billion or 18.5% at June 30, 2001. Investments in such securities are readily marketable and therefore represent another source of liquidity. However, the Bank’s primary intent in positioning U.S. agency securities is to generate earnings sufficient to maintain targeted pricing on member loans and to produce a fair dividend return on member capital. All of the Bank’s investment portfolios, in conjunction with their related funding, are subject to the Bank’s market and credit risk limits.

Mortgage loans held increased to $2.6 billion at June 30, 2002 from $1.8 billion at December 31, 2001, and $2.0 billion at June 30, 2001. The increase in mortgage loans relates to an increase in the retained portion of the Bank’s loan production under the MPF Program, through which the

52

Bank purchases mortgages from its member financial institutions. Despite lower interest rates leading to homeowners’ refinancing their mortgage loans, new loan production outpaced the accelerated prepayment pace. For the first six months of 2002, repayments and prepayments were approximately $0.4 billion while retained originations were approximately $1.1 billion. The increase in retained MPF loans has been made in conjunction with an increase in the use of related funding and hedging transactions that permit the Bank to increase the aggregate portfolio in a manner consistent with the Bank’s current risk limits. As discussed in detail elsewhere, these risk limits are more conservative than those required under Finance Board regulation.

The principal funding source for Bank operations is consolidated obligations, which consist of consolidated bonds and consolidated discount notes. Member deposits and capital are also funding sources. Generally, consolidated discount notes have maturities up to 360 days, and consolidated bonds have maturities of one year or longer. Discount notes are a significant funding source for loans with short-term maturities or short repricing intervals, and for money-market investments. The Bank makes significant use of interest rate exchange agreements to alter the cash flows on consolidated obligations to better match its funding needs and to reduce its overall funding costs. Consolidated obligations outstanding increased 9.0% between June 30, 2002, and year-end 2001, rising to $41.7 billion at June 30, 2002. Consolidated obligations outstanding increased 13.1% between June 30, 2002, and June 30, 2001. Consolidated discount notes outstanding increased 3.2% from December 31, 2001, and 8.5% from June 30, 2001, reaching $11.4 billion at June 30, 2002. Consolidated bonds outstanding increased by 11.3% from December 31, 2001, and 14.9% from June 30, 2001, to a balance of $30.3 billion at June 30, 2002. For each period cited, the growth in discount notes and consolidated obligations largely mirrored the growth in the Bank’s total assets. Changes in the funding portfolio mix between discount notes and consolidated obligations primarily reflect changes in asset portfolio mix, i.e., between shorter-term and longer-term maturities and repricing. From time to time, the Bank will also adjust its funding mix between discount notes and longer-term consolidated obligations in response to market conditions in order to prudently minimize aggregate funding costs, subject to its liquidity management policies.

The Bank’s total capital decreased by $0.06 billion or 2.8% between December 31, 2001, and June 30, 2002, and increased by $0.1 billion or 5.3% from June 30, 2001, to June 30, 2002, due to commensurate decreases and increases in loans, partially offset by the application of previously retained earnings to absorb temporary earnings volatility resulting from FAS133. Over the same periods, total assets grew, causing the Bank’s capital-to-asset ratio to decrease to 4.0% at June 30, 2002,

53

from 4.6% at year-end 2001 and 4.4% at June 30, 2001.

The Bank’s leverage limit is based on the average monthly ratio of assets to capital. A FHLBank’s assets are generally limited to no more than 21 times its capital. Nevertheless, a FHLBank whose non-mortgage assets, after deducting deposits and capital, does not exceed a monthly average of eleven percent of its monthly average assets is permitted under regulation to maintain total average monthly assets in an amount not greater than 25 times its monthly average capital. During June 2002, the Bank’s asset-based leverage averaged 23.2 to 1 for the month. The Bank met the Finance Board regulatory leverage requirements during June 2002. The Bank’s asset-based leverage averaged 21.6 to 1 during the month of December 2001 and averaged 21.4 to 1 during the month of June 2001.

After the Effective Date, the Bank shall be subject to a three-part capitalization requirement which includes total capital, leverage capital, and risk-based capital, as described in detail above.

3.   Debt Financing Activity

Increases in deposits and borrowings of $0.8 billion or 46.8% and consolidated obligations outstanding of $3.4 billion or 9.0% from December 31, 2001, financed most of the increase in Bank assets through June 30, 2002. Increases in Bank assets from June 30, 2001, were financed primarily by the increase in consolidated obligations of $4.8 billion or 13.1% from June 30, 2001 to June 30, 2002. Bonds comprised 72.6% of consolidated obligations outstanding at June 30, 2002, with the remainder being discount notes.

Federal Home Loan Bank of Pittsburgh

Composition of Consolidated Bonds Outstanding
(Par amounts in billions )

	June 30, 2002		December 31, 2001
Fixed-rate, non-callable	$	10.2	$	9.2
Fixed-rate, callable		14.6		14.2
Single-index floating rate		1.0		.9
Zero-coupon, non-callable		.1		.1
Zero-coupon, callable		7.6		7.6
Other		2.3		1.0
Total	$	35.8	$	33.0

The decision to issue a bond using a particular structure is based upon the funding level to be achieved and the ability of the Bank to hedge the

54

associated interest rate risks. The issuance of a bond with an associated interest rate exchange agreement, which effectively converts the bond into a simple fixed- or floating-rate bond, usually results in a funding vehicle with a lower cost than the Bank could otherwise achieve. The continued attractiveness of such debt depends on price relationships in both the bond and interest rate exchange markets. If conditions in these markets change, then the Bank may alter the types or terms of the bonds it seeks to issue.

Discount notes are also a significant funding source for the Bank. The Bank uses discount notes primarily to fund short-term loans and money market investments. Discount notes comprised 27.4% of outstanding consolidated obligations at June 30, 2002. The Bank actively manages its funding mix. Other FHLBanks and GSEs are also active in the agency debt market. Factors which affect the Bank’s targeted funding mix include asset portfolio changes, liquidity management considerations, and both current and anticipated market conditions for agency debt issuance.

Federal Home Loan Bank of Pittsburgh

Average Consolidated Obligations Outstanding
($ in billions)

			At
			June 30,
	2002			2001
Discount notes	$	10.0		$	4.5
Bonds		29.0			32.2
Total consolidated obligations	$	39.0		$	36.7

B.   Results of Operations

1.   Net Income and Net Interest Income

During any reporting period, the Bank’s net income is typically most significantly affected by changes in net interest income earned. For the first six months of 2002, the decrease in net interest income was $46.3 million, a 41.0% decrease from the same period in 2001. The decrease is largely attributable to the effects of lower market interest rates and the continuing effects of FAS133-related adjustments.

As covered in detail in the Bank’s 2001 Annual Report, FAS133 was adopted on January 1, 2001. For the six months ended June 30, 2002, the Bank recorded net losses on derivatives and hedging activities of $25.9 million and net unrealized losses on securities held at fair value of $7.8 million. For the same period during 2001, the Bank recorded net losses on derivatives and hedging activities of $1.0 million, net unrealized gains on securities held at fair value of $10.0 million, and a $9.0 million decrease to

55

net income as the cumulative effect of change in accounting principle. Under FAS133, all derivatives are recorded at fair value and the Bank is required to recognize unrealized losses or gains on derivative positions regardless of whether offsetting gains or losses on the underlying assets or liabilities being hedged are permitted to be recognized in a symmetrical manner. Therefore, FAS133 introduces the potential for considerable timing differences between income recognition from assets or liabilities and the income effects of hedge instruments entered into to mitigate interest rate risk and cash-flow variability. Because the Bank manages its derivatives position with primary emphasis on economic cost-effectiveness as opposed to symmetrical accounting result, the adoption of FAS133 has led to volatility in the Bank’s reported earnings due to changes in market prices and interest rates.

The following table presents average balances and yields of major earning asset categories and the sources funding those earning assets. It also presents spreads between yields on total earning assets and the cost of interest-bearing liabilities and spreads between yields on total earning assets and the cost of total funding sources (i.e., interest-bearing liabilities plus capital plus other interest-free liabilities funding earning assets). The primary source of the Bank’s earnings is net interest income, which is the interest earned on loans, mortgages, investments and capital less interest paid on consolidated obligations, deposits, and other borrowings. The spread earned on total interest-bearing liabilities during the first half of 2002 decreased as compared to the first half of 2001 which primarily reflects the effect of narrower spreads earned on reinvested principal on investment and mortgage-related assets that have been called or prepaid. The spread earned on total funding sources (net interest margin) during the first half of 2002 decreased as compared to the first half of 2001 which reflects both the narrower spread on interest-bearing liabilities noted above, and also the sharp decline in market interest rates. Lower market interest rates serve to reduce the yields earned on non-interest-bearing funding sources, primarily invested capital.

56

Federal Home Loan Bank of Pittsburgh

Spread and Yield Analysis
($ in millions)

	For the six months
	ended June 30,
	2002 Average					2001 Average
	Balance		Yield			Balance		Yield
Earning assets:
Loans	$	29,241		2.14	%	$	26,214		5.47	%
Mortgage loans		2,021		5.80			1,946		7.03
Investments		12,615		3.83			12,013		6.22
Total earning assets	$	43,877		2.79	%	$	40,173		5.77	%
Funded by:
Consolidated obligations	$	39,051		2.69	%	$	36,746		5.49	%
Interest-bearing deposits and other borrowings		2,666		1.58			1,615		4.52
Total interest-bearing liabilities		41,717		2.61	%		38,361		5.45	%
Capital and other non-interest-bearing funds		2,964					2,879
Total funding	$	44,681				$	41,240
Spread on:
Total interest-bearing liabilities				.18	%				.32	%
Total funding (net interest margin)				.31	%				.57	%

A significant portion of the Bank’s net interest income results from earnings on assets funded by non-interest-bearing capital. Average total capital for the six months ended June 30, 2002, was $2,024.5 million, which was $45.4 million or 2.3% greater than average total capital of $1,979.1 million for the six months ended June 30, 2001. Growth in loan levels contributed to the increase in average total capital.

Changes in both the volume/mix of and the interest rates earned or paid on financial instruments influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense in the first six months of 2002 and 2001. Changes in interest income and interest expense not directly identifiable as either volume-related or rate-related have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.

57

Federal Home Loan Bank of Pittsburgh

Rate and Volume Analysis
($ in millions)

	For the six months
	ended June 30,
	2002 vs. 2001
	Increase (Decrease) Due to
	Volume/Mix		Rate			Total
Interest Income:
Loans	$	82	$	(483	)	$	(401	)
Mortgage loans		2		(12	)		(10	)
Investments		18		(149	)		(131	)
Total interest income		102		(644	)		(542	)
Interest Expense:
Consolidated obligations		35		(516	)		(481	)
Deposits and other borrowings		26		(41	)		(15	)
Total interest expense		61		(557	)		(496	)
Changes in net interest income	$	41	$	(87	)	$	(46	)

As seen above, net interest income was $46 million lower during the first six months of 2002 as compared to the comparable period of 2001. This is largely attributable to the adverse rate effect, reflecting a contraction in the Bank’s spread earned on its total funding base. Lower market interest rates serve to reduce the yield on assets. A portion of the Bank’s funding base is non-interest bearing, primarily member capital. Therefore, when the Bank’s aggregate asset yield increases, this has the effect of widening the Bank’s effective net interest spread and, alternatively, during periods of declining market rates and lower asset yields, the Bank’s effective net interest spread will contract. During 2002, the Bank’s asset yields were considerably lower, reflecting lower market interest rates. As seen above, this served to reduce the Bank’s net interest income by approximately $87 million during the first six months of 2002 as compared to the same period of 2001.

The average size of the Bank’s earning asset base increased during the first six months of 2002 as compared to the comparable period of 2001. Apart from changes in rates, the Bank’s net interest income will tend to increase or decrease proportionately with changes in asset levels. As seen above, net interest income increased by $41 million as a result of a larger average earning asset base during the first six months of 2002 as compared to the same period of 2001. This effect partially offset the contraction in net interest income associated with narrower spreads cited above.

2.   Operating Expenses

The following table presents operating expenses for the six months ended June 30, 2002 and 2001:

58

Federal Home Loan Bank of Pittsburgh

Operating Expenses
($ in thousands)

	For the six
	months ended				Percentage
	June 30,				Increase/
	2002		2001		(Decrease)
Salaries and employee benefits	$	9,013	$	10,746		(16.1	)
Occupancy cost		1,099		1,408		(21.9	)
Other		7,145		10,583		(32.5	)
Total operating expenses	$	17,257	$	22,737		(24.1	)

Total Bank operating expenses for the first six months of 2002 were $17.3 million, which is $5.5 million or 24.1% below total operating expenses for the first six months in 2001. The decrease in salaries and benefits and other operating costs in the first six months of 2002 reflects the sale of the Bank’s item-processing business operation to Fiserv, Inc., as discussed in the Bank’s 2001 Annual Report. The reduction in Other Expenses relates primarily to the elimination of third party contract service costs associated with the item-processing business. Operating expenses as a percent of average assets on an annualized basis were 7.8 basis points and 11.1 basis points for the first six months of 2002 and 2001, respectively.

3.   Finance Board and Office of Finance Expenses

The Bank is assessed a proportionate share of the costs of operating the Finance Board and the Office of Finance. The Bank’s share of these expenses totaled $1.4 million for the first six months in 2002, an increase of 16.0% from $1.2 million for the same period in 2001. The Bank has no direct control over the amount of these assessments.

4.   Affordable Housing Program

The Bank’s AHP contribution for the first six months in 2002 was $2.1 million, 74.1% less than the $7.9 million AHP contribution for the first six months in 2001. The base AHP assessment is 10% of net income after the required payment to REFCORP. Therefore, the base AHP assessment will generally increase or decrease proportionately with the level of Bank income.

C.   REFCORP Payment

Each FHLBank must pay 20% of its net earnings (after its AHP contribution) to REFCORP to support the payment of part of the interest on the bonds issued by REFCORP. The Bank’s REFCORP assessment was $4.6 million for the first half

59

of 2002 compared to a $17.8 million assessment for the same period in year 2001 commensurate with lower net income.

D.   Risk Management

The fundamental business of the Bank is to provide member institutions and housing associates with loans and other credit products in a wide range of maturities and terms to meet their funding needs, particularly as they relate to housing finance assets. The principal sources of funds for these activities are consolidated obligations and, to a lesser extent, capital and deposits from members. Lending and investing funds, and engaging in interest rate exchange agreements, have the potential for exposing the Bank to a number of risks, including credit and interest rate risk. The Bank is also subject to operational risk. To control these risks, the Bank has established policies and practices to evaluate and manage its credit, business, operating and interest rate risk positions. The Finance Board has established regulations governing the risk management practices of the FHLBanks. In connection with these regulations, the Bank must file periodic compliance reports with the Finance Board. The Finance Board conducts annual on-site examinations of each FHLBank and the Office of Finance, and also performs off-site analyses.

The Bank does not own any special purpose entities nor use any other type of off-balance-sheet conduit. All derivatives are recorded on the balance sheet at fair value. The Finance Board’s investment regulations prohibit the speculative use of derivatives agreements. The Bank does not trade derivatives for short-term profit.

1.   Liquidity

The Bank is required to maintain liquidity in accordance with regulations and with policies established by its Board of Directors. The Bank needs liquidity to satisfy member demand for short- and long-term funds, repay maturing consolidated obligations, and meet other obligations. In their asset/liability management planning, members may look to the Bank to provide standby liquidity. The Bank seeks to be in a position to meet its customers’ credit and liquidity needs without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. The Bank’s primary sources of liquidity are short-term investments and the ability to issue new consolidated obligation bonds and discount notes. Other short-term borrowings, such as federal funds purchased, securities sold under agreements to repurchase, and loans from other FHLBanks, also provide liquidity. The Bank maintains a contingency liquidity plan designed to enable it to meet its obligations and the liquidity needs of members in the event of operational disruptions at the Bank, the Office of Finance, or broader capital market disruptions.

60

2.   Managing Interest Rate Risk

Interest rate risk is the risk that relative and absolute changes in interest rates may adversely affect an institution’s financial condition. The goal of an interest rate risk management strategy is not necessarily to eliminate interest rate risk but to manage it by setting appropriate limits. The current general approach of the Bank toward managing interest rate risk is to acquire and maintain a portfolio of assets and liabilities, which, together with their associated interest rate exchange agreements, limit the expected duration mismatch. The Bank manages interest rate risk in several different ways, as discussed below.

Under the terms of the Finance Board’s resolution approving the Bank’s Capital Plan, on the Effective Date, the Bank shall no longer be subject to the FMP duration limits. After the Effective Date, in addition to maintaining its compliance with the risk-based capital requirement, the Bank anticipates that it will manage its interest rate risk within duration and/or market value of equity limits established by the Bank. At the time of conversion, the Bank intends to continue to operate within the same duration limits set forth in its policies that were in effect immediately prior to the Effective Date; however, the Bank may adjust these limits at some point in the future and/or change to a risk limit model other than duration of equity.

Early repayment of certain financial instruments held by the Bank can introduce interest rate risk. When a member repays a loan, the Bank could suffer lower future income if the principal portion of the repaid loan were reinvested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, the Bank generally charges a fee to preserve the economics of the original loan transaction. When the Bank offers loans (other than short-term loans) with embedded options that a member may prepay without a fee, it typically finances such loans with callable debt or otherwise hedges this option.

The Bank holds mortgage-related investments, including mortgage loans, mortgage-backed securities, and agency obligations. The prepayment options embedded in mortgages can result in extensions or contractions in the expected maturities of these investments, depending on changes in interest rates. The FMP establishes limits on this source of interest rate risk by restricting the amount and types of mortgage-backed securities a FHLBank may own. The amount of mortgage-backed securities the Bank can own is limited to 300% of its capital stock on the trade date of the purchase. In addition, the Bank is limited to those mortgage-backed securities with limited potential average life changes under certain specified interest rate shock scenarios. The Bank may hedge against contraction risk by funding some of its holdings of mortgage-related

61

investments with consolidated obligations that contain call features. In addition, the Bank may use caps, floors, and other interest rate exchange agreements to manage the extension and contraction variability of mortgage-related investments. The Bank may also use interest rate exchange agreements to transform the characteristics of investment securities other than mortgage-backed securities.

3.   Derivatives and Hedging Activities

(a)   General

The Bank enters into interest rate swaps, swaptions, interest rate cap and floor agreements, calls, puts and forward contracts (generally, derivatives agreements) to manage its exposure to changes in interest rates. It may adjust the effective maturity, repricing frequency or option characteristics of financial instruments to achieve risk-management objectives. The Bank uses derivatives agreements in three ways: (1) as fair-value or cash-flow hedges of specific underlying financial instruments or forecasted transactions; (2) as offsetting structures between members and counterparties, in which the Bank acts as an intermediary; or (3) as a management tool for overall Bank-wide asset-liability management. For example, the Bank uses derivatives agreements in its overall interest rate risk management to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of assets (loans, investments and mortgage-related investments), and/or to adjust the interest rate sensitivity of loans, investments or mortgage-related investments to approximate more closely the interest rate sensitivity of liabilities. In addition to using derivatives agreements to manage mismatches of interest rates between assets and liabilities, the Bank also uses derivatives agreements to manage embedded options in assets and liabilities, to hedge the market value of existing assets and liabilities and anticipated transactions, to hedge the duration risk of prepayable instruments and to reduce funding costs.

(b)   Consolidated Obligations

The Bank manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the interest received on the derivatives agreement with the interest paid on the consolidated obligation. In addition, the Bank requires collateral agreements on most interest rate exchange agreements. While consolidated obligations are the joint-and-several obligations of all twelve of the FHLBanks, each FHLBank serves as an individual

62

counterparty in connection with those derivatives agreements associated with specific debt issues on which it is primarily liable.

(c)   Loans

When issuing convertible loans, the Bank has purchased from the member one or more put options that enable the Bank to convert a loan from fixed rate to floating rate were interest rates to increase or, alternatively, to terminate the loan and, upon request of the member, extend replacement loans on new terms. The Bank may fund a convertible loan by using short-term floating-rate funds and entering into a cancelable derivatives agreement whereby the Bank pays a fixed rate and receives a variable rate. In this type of hedge, the fixed interest paid on the derivatives agreement mirrors in timing and amount the interest received on the loan. If interest rates rise, the swap counterparty can cancel the derivatives agreement on the call date, and the Bank can convert the loan to a floating-rate obligation.

Prepayments of certain financial instruments held by the Bank can also introduce interest rate risk. When a member prepays a loan, the Bank could suffer lower future income were the principal portion of the prepaid loan reinvested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, the Bank generally charges a prepayment fee that results in it being financially indifferent to a borrower’s decision regarding prepaying a loan. When the Bank offers loans (other than short-term loans) that a member may prepay without a prepayment fee, the Bank usually finances such loans with callable debt or otherwise hedges the related prepayment option.

(d)   Mortgage-related Assets

The Bank invests in mortgage-backed securities and mortgage loans originated through its member mortgage asset program. The prepayment options embedded in mortgage-related assets can result in extensions or contractions in the expected maturities of these assets, depending upon subsequent changes in market interest rates. The Bank may manage against contraction risk by funding some mortgage-related assets with consolidated obligations that have call features. In addition, the Bank may use derivatives agreements, including interest rate caps and floors, to manage the extension and contraction variability of mortgage-related assets. Net income could be reduced were the Bank to replace the mortgage-related assets with lower-yielding assets and were the Bank’s higher funding costs to remain unchanged.

63

The Bank manages the interest rate and prepayment risk associated with mortgages through a combination of debt issuance and derivatives. The Bank issues both callable and non-callable debt to achieve cash-flow patterns and liability durations similar to those expected on the mortgage loans. The Bank also uses derivatives to approximate the expected prepayment characteristics of the mortgages. Interest rate swaps, to the extent the payments on the mortgages result in simultaneous reduction of the notional amount on the swaps, may receive fair-value hedge accounting under which changes in the fair value of the swaps and changes in the fair value of the mortgages that are attributable to the hedged risk, are recorded in current-period earnings. A portfolio of interest rate swaps and various options, including futures, may be used to hedge pools of mortgage loans with similar asset characteristics, such as loan type and coupon tranche, in a fair-value hedge relationship. Options may also be used to hedge prepayment risk on the mortgages, many of which are not identified as to specific mortgages and, therefore, do not receive fair-value or cash-flow hedge accounting treatment. Changes in the fair value of derivatives are recognized in current period earnings. The Bank also purchases interest rate caps and floors, swaptions, callable swaps, calls and puts to minimize the prepayment risk embedded in its mortgage-related assets. Although these derivatives are valid economic hedges against the prepayment risk of the loans, they are not specifically linked to individual loans and, therefore, do not receive either fair-value or cash-flow hedge accounting.

(e)   Investments

The Bank invests in U.S. agency securities, mortgage-backed securities and the taxable portion of state or local housing finance agency securities. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The Bank may manage its prepayment and duration risk by funding investment securities with consolidated obligations that contain call features. The Bank may also manage the risk arising from changing market prices and volatility of investment securities by matching the cash outflow on the interest rate exchange agreements with the cash inflow on the investment securities. Certain derivatives currently associated with investment securities are designated as economic hedges with the changes in fair values of the derivatives being recorded in current earnings. The hedged investment securities are classified as securities held at fair value.

64

(f)   Anticipated Debt Issuance

The Bank periodically enters into swaps on the anticipated issuance of debt to “lock in” the cost of funding. The swap is terminated upon issuance of the debt instrument, and amounts reported in accumulated other comprehensive income are then reclassified as earnings in the periods in which earnings are affected by the variability of the cash flows of the debt that was issued.

(g)   Intermediation

To meet the hedging needs of its members, the Bank enters into offsetting derivatives agreements, acting as an intermediary between members and other counterparties. This intermediation allows smaller members indirect access to the swap market. The derivatives used in intermediary activities do not receive FAS133 hedge accounting and are separately marked-to-market through earnings. The net result of the accounting for these derivatives does not significantly affect the operating results of the Bank.

(h)   Derivative Notional Amount

At June 30, 2002, the Bank had $52.2 billion total notional amount of interest rate exchange agreements outstanding compared with $51.7 billion at December 31, 2001 and $48.4 billion at June 30, 2001. The notional amount serves as a factor in determining periodic interest payments or cash flows received and paid, and does not represent actual amounts exchanged or the Bank’s exposure to credit and market risk. The amount potentially subject to credit loss is considerably less. Notional values are not meaningful measures of the risks associated with derivatives. The risk of derivatives can be measured meaningfully only on a portfolio basis, taking into account a number of factors including the terms of the derivatives, the items being hedged, overall exposures to a particular counterparty, and any offsets between them. The Bank adopted FAS133 on January 1, 2001. FAS133 requires that all derivative instruments be recorded on the Statement of Condition at their fair values. At June 30, 2002, the Bank had derivative assets of $175.7 million and derivative liabilities of $651.7 million. At December 31 and June 30, 2001, the Bank had derivative assets of $94.2 million and $140.7 million, and derivative liabilities of $537.9 million and $202.3 million, respectively.

65

(i)   Derivative Credit Risk Exposure

In addition to market risk, the Bank is subject to credit risk, because of the risk of potential non-performance by counterparties to the derivatives agreements, as well as to operational risks. The degree of counterparty credit risk on derivatives depends on the extent to which netting is used to mitigate the risk. The Bank manages counterparty credit risk through credit analysis, collateral management and other credit enhancements, and by following the requirements set forth by Finance Board regulations. The Bank requires collateral agreements on derivatives agreements, and establishes maximum net unsecured credit exposure amounts that may exist before collateral delivery requirements are triggered based upon each individual counterparty’s rating. For example, a counterparty must deliver collateral to the Bank if the total market value of the Bank’s exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation procedures, management does not anticipate any material credit losses on its derivatives agreements.

The contractual or notional amount of interest rate exchange agreements reflects the involvement of the Bank in the various classes of financial instruments. The notional amount of interest rate exchange agreements does not measure the credit risk exposure of the Bank. The maximum credit exposure of the Bank is considerably less than the notional amount. The maximum credit risk is the estimated cost of replacing favorable interest rate swaps, forward agreements, and purchased caps and floors were the counterparty to default, and the related collateral, if any, were to be of no value to the Bank.

At June 30, 2002, the Bank’s maximum credit risk, as defined above, was approximately $175.7 million. In determining maximum credit risk, the Bank considers accrued interest receivables and payables, and the legal right to offset assets and liabilities by individual counterparty. The Bank’s exposure, net of collateral, was approximately $115.1 million at June 30, 2002.

(j)   Counterparty Ratings

The Bank has 27 counterparties, which make up 99.7% of the total notional amount of derivatives agreements outstanding at June, 2002 of $52.2 billion, including intermediary derivative notional amounts of $172.8 million used for members. Most are derivative dealers and major domestic and international banks, some of which

66

may be affiliated with underwriters of consolidated obligations and members. Most of the counterparties are rated AA/Aa or higher. Of the $52.0 billion notional amount of derivatives agreements outstanding at June 30, 2002, with the 27 counterparties, 64.7% is with 20 counterparties rated AA or higher and 35.3% is with seven counterparties rated A.

(k)   Foreign Currencies

From time to time, the Bank has issued consolidated obligations denominated in currencies other than U.S. dollars and used forward exchange contracts to hedge currency risk. These contracts were agreements to exchange different currencies at specified future dates and at specified rates. The use of these contracts effectively simulated the conversion of these consolidated obligations denominated in foreign currencies to the financial equivalent of debt denominated in U.S. dollars. At June 30, 2002, the Bank had no outstanding consolidated obligations denominated in foreign currencies.

(l)   Quantitative Disclosure about Market Risk

Duration is the primary means used by the Bank to measure its exposure to changes in interest rates. Duration is the weighted average maturity (typically measured in months or years) of an instrument’s cash flows, weighted by the present value of those cash flows. Duration measures the time required to recapture an investment, reinvesting repaid principal. As duration lengthens, the risk increases. Duration is also a measure of price volatility. The value of an instrument with a duration of five years will change by approximately 5% with a one-percentage-point change in interest rates.

Duration of equity is the market value-weighted duration of assets minus the market value-weighted duration of liabilities divided by the market value of equity. The FMP has required that each FHLBank’s duration of equity (at current interest rate levels using the consolidated obligation cost curve or an appropriate discounting methodology) be maintained within a range of +/-5 years. Each FHLBank must also maintain its duration of equity, under an assumed instantaneous +/-200 basis points parallel shift in interest rates, within a range of +/-7 years.

67

The Bank has an internal modeling system for measuring duration of equity. The table below reflects the results of the Bank’s own measurement of its exposure to interest rate risk in accordance with Finance Board regulations.

Federal Home Loan Bank of Pittsburgh

Duration of Equity
(In years)

June 30, 2002						December 31, 2001							June 30, 2001
Up	Base		Down			Up		Base		Down			Up		Base		Down
4.5		1.2		(2.9	)		1.6		0.3		(3.6	)		4.1		2.2		(3.9	)

Up = +200 basis points. Down = — 200 basis points.

In addition to the regulatory duration limits, the Bank’s Board of Directors has adopted a set of asset/liability management policies which include limitations on the sensitivity of market value of equity, minimum retained earnings and additional duration limits which have been more stringent than those permitted under regulation. After the Effective Date, the Finance Board’s FMP duration limits shall no longer apply to the Bank. However, the Bank anticipates that it will continue to manage its interest rate risk within either duration and/or other market value of equity limits as established by the Bank.

Beginning on the Effective Date, the Bank shall become subject to a new risk-based capital regulatory framework. This framework requires each FHLBank to maintain sufficient permanent capital to meet its combined credit risk, market risk, and operations risk (see “Risk-Based Capital Requirement” under the “CAPITAL REQUIREMENTS” section). The market risk component of the overall risk-based capital framework is designed on a “stress test” approach, using 99% confidence. Simulations of several hundred historical market interest rate scenarios dating back over the past 24 years are generated and, under each scenario, the hypothetical adverse effects on the Bank’s current market value of equity is determined. The hypothetical adverse effect associated with each historical scenario is calculated by simulating the effect of each set of market conditions upon the Bank’s current risk position, which reflects the Bank’s current actual assets, liabilities, derivatives and off-balance-sheet commitment positions as of the measurement date. From the complete set of resulting simulated scenarios, the most severe deterioration in market value of equity is identified as that scenario associated with a probability of occurrence of not more than one percent (i.e., 99% confidence limit).

The hypothetical deterioration in market value of equity derived under the methodology described above represents the market value risk component

68

of the Bank’s regulatory risk-based capital requirement which, in conjunction with credit risk and operations risk components, determines the Bank’s overall risk-based capital requirement. The market risk modeling is performed by the Bank. However, the Bank’s modeling approach and underlying assumptions are subject to Finance Board review and approval, both prior to implementation and on an ongoing basis thereafter.

Since the Finance Board passed its new capital regulations, the Bank has been developing and testing the market risk model expected to be used to conduct the risk-based capital calculation. Based on these tests, management believes that the Bank would have had sufficient capital to meet the new regulatory risk-based capital requirements had the new requirements already been in effect.

After the Effective Date, in addition to maintaining its compliance with the risk-based capital requirement, the Bank anticipates that it will continue to manage its interest rate risk within either duration and/or other market value of equity limits established by the Bank.

4.   Managing Credit Risk

Credit risk is the risk of loss due to default. The Bank protects against credit risk on loans through collateralization of all loans. In addition, the Bank can call for additional or substitute collateral during the life of a loan to protect its security interest. The Bank has never experienced a credit loss on a loan extended to a member.

While the Bank faces minimal credit risk on loans, it is subject to credit risk on some investments and on derivatives agreements. The Bank follows regulations established by the Finance Board and policies of its Board of Directors on unsecured extensions of credit. Finance Board regulations limit the amounts and terms of unsecured credit exposure a FHLBank may have to an individual counterparty other than to the U.S. government. Unsecured credit exposure to individual counterparties is limited by the credit quality and capital level of the counterparty and by the capital level of the FHLBank. (See “Regulatory Developments – Unsecured Credit Limits.”)

At June 30, 2002, the Bank’s unsecured credit exposure to counterparties other than the U.S. government or U.S. government agencies and instrumentalities was $4.3 billion, much of which consisted of federal funds sold and commercial paper. This represented a $2.1 billion increase from the $2.2 billion in unsecured credit exposure to such counterparties at December 31, 2001. The increase is commensurate with the increase in the Bank’s investment portfolio. About 64.6% of this exposure at June 30,

69

2002 had an overnight maturity, 16.9% had a maturity from two to 30 days, 15.4% had a maturity from 31 to 90 days, and the remainder had a maturity less than 271 days.

At June 30, 2002, the Bank had federal funds sold of $2.8 billion. At the same date, the Bank held $.2 billion of commercial paper.

5.   Mortgage Loans

The Bank began offering its members a residential mortgage loan product, the MPF Program, in 1999. Participating members provide a measure of credit loss protection to the Bank on loans generated through the program, for which they receive a credit enhancement fee. This financial partnership yields a high-credit-quality investment opportunity for the Bank and superior wholesale market loan pricing for members. The success of this program further promotes housing finance in the Bank’s region, to the benefit of both members and their customers. At June 30, 2002, the Bank’s total number of participating member institutions was 23 with $4.9 billion in gross MPF loan production through the first half of 2002.

At the time it originally joined the MPF Program, the Bank entered into an agreement with the FHLBank of Chicago under which loans originated by participating Bank members could be directed to the Chicago Bank for inclusion in its portfolio. Such redirection does not affect the terms available to the Bank’s participating members. Through such redirection, the Bank’s outstanding mortgage loan portfolio balance has been maintained at a considerably lower level than its gross production volume. Having directed a significant portion of its production to the Chicago Bank, at June 30, 2002, the Bank’s MPF balance stood at $2.6 billion. The Bank believes that future prospects for mortgage programs established in partnership with member institutions remain attractive and continues to explore ways to ensure the long-term viability of such product offerings. The Bank anticipates continuing to increase the amount of MPF assets it holds on its balance sheet.

Under the MPF Program, the Bank acquires mortgage assets from or through members, and the members continue to bear a significant portion of the credit risk. These assets may have more credit risk than traditional Bank loans made directly to member institutions, even though the member provides credit enhancement. The Bank has established what it regards as an appropriate loan loss allowance given the credit risk exposure inherent in its retained loan portfolio. Neither the member credit enhancements nor the mortgage loans produced under the MPF Program are rated by an independent credit rating organization. Under the new capital requirements, the Bank must hold risk-based capital against such acquired

70

member assets or pools of such assets that have an implied credit rating lower than double-A.

The acquired member asset rule of the Finance Board specifies that assets must be whole loans eligible to secure member loans (excluding mortgages above the conforming loan limit), whole loans secured by manufactured housing, or state and local housing finance agency bonds. In addition, the rule mandates a member or housing associate nexus. Under current regulations, pools of acquired member assets must have a credit-risk-sharing arrangement with a member, housing associate, or third-party mortgage insurance that limits the Bank’s credit risk exposure to no less than investment grade, as determined by a formal rating or a comparable methodology.

6.   Operational Risk

Operational risk is the risk of potential loss due to human error, systems malfunctions, man-made or natural disasters, fraud, or circumvention or failure of internal controls. The Bank has established comprehensive financial and operating policies and procedures and appropriate insurance coverage to mitigate the likelihood of, and potential losses from, such occurrences. The Bank’s policies and procedures include controls to ensure that system-generated data are reconciled to source documentation on a regular basis. The Bank’s internal audit department, which reports directly to the audit committee of the Bank’s Board of Directors, regularly monitors compliance with established polices and procedures. In addition, the Bank has a business continuity plan designed to restore critical business processes and systems in the event of a disaster. However, some of the operational risks are beyond the control of the Bank, and the failure of other parties to address adequately their operational risk could adversely affect the Bank.

The Bank has adopted a risk management policy, which the Bank’s Board of Directors must review on an annual basis and re-adopt every three years. The risk management policy provides the scope of risks, outlines the internal control environment, establishes the risk and control assessment process, specifies oversight, and defines director, management and committee oversight and internal audit responsibilities with regard to risk.

Management conducts an annual risk assessment, which is reasonably designed to identify and evaluate all material risks, including both quantitative and qualitative aspects, that could adversely affect its objectives. The audit committee of the Board of Directors of the Bank reviews the results of the annual risk assessment.

71

A strong environment of risk control requires active and engaged participation of the entire management team and Board of Directors. Business unit management is responsible for identifying, managing and controlling risk that the Bank assumes in the course of ordinary business. The Board of Directors is actively engaged in reviewing management’s efforts to control risk.

E.   Regulatory Developments

1.   Unsecured Credit Limits

The Finance Board’s final rule governing the amount of unsecured credit that a FHLBank can extend to a particular counterparty became effective March 27, 2002. The rule requires a FHLBank to base its credit limit on the long-term credit rating of the counterparty, codifies the amount of unsecured credit that may be extended to a GSE at the level allowed under the FMP, adjusts the limits for sales of overnight federal funds and limits for unsecured credit extended to groups of affiliated counterparties, addresses how unsecured credit limits should be applied to certain housing finance agency bonds, and clarifies how a FHLBank should calculate its credit exposures from on- and off-balance-sheet items and derivative contracts.

2.   Multiple-Membership Petitions

The Finance Board published a solicitation of comments on the implications for the FHLBanks raised by structural changes occurring in their membership. The solicitation was prompted by the submission of several petitions requesting that the Finance Board permit a single depository institution to become a member of two FHLBanks concurrently. On January 22, 2002, the Finance Board announced that it intends to defer action on multi-district membership petitions until it decides on a course of action to address broader membership issues.

3.   Non-mortgage Assets Redefinition

On May 21, 2002, the Finance Board published its final rule amending its regulation of FHLBank consolidated obligations in order to redefine the term “non-mortgage assets” as used in the provision on FHLBank leverage limits. The amendment allows a FHLBank to more easily maintain its assets-to-capital ratio. The final rule became effective June 20, 2002.

F.   Capital Adequacy

The Bank Act prescribes minimum member capital stock requirements and, under Finance Board regulation, the Bank is subject to a leverage limit. At June 30,

72

2002, 96.8% of the Bank’s capital was capital stock. Under Finance Board regulatory guidance, capital adequacy is measured on a monthly average basis as opposed to a single-day basis. During June 2002, the Bank’s aggregate capital-to-asset ratio averaged 4.3%. During the months of December 2001 and June 2001, the Bank’s average monthly capital-to-asset ratio was 4.6% and 4.7%, respectively. At June 30, 2002, the Bank had an aggregate capital-to-asset ratio of 4.0%. This compares with a capital-to-asset ratio of 4.6% at December 31, 2001, and 4.4% at June 30, 2001. Upon the Effective Date, the Bank will be subject to the following capital requirements and the Bank expects that it will meet these capital requirements.

	Regulatory Requirements
Total Capital	4.0% of total assets
Leverage Capital	5.0% of total assets
Permanent Capital	Expressed as a dollar amount of capital required to satisfy the credit, market, and operating risks calculated using a Finance Board-approved risk-based capital model (see “Quantitative Disclosure about Market Risk” at page 67).

G.   Transactions with Related Parties

The Bank is a cooperative. The members own all the stock of the Bank, the majority of the directors of the Bank are elected by and from the membership, and the Bank conducts its loans and other business almost exclusively with members. Therefore, in the normal course of business, the Bank extends credit to members whose officers or directors may serve as directors of the Bank. At June 30, 2002, the Bank had $1.0 billion of loans outstanding to members whose officers or directors were serving as directors of the Bank. This amounted to 3.8% of total loans.

H.   Membership Trends

At June 30, 2002, there were 363 members of the Bank, an increase of one member since December 31, 2001.

Federal Home Loan Bank of Pittsburgh

Membership

	Commercial				Credit		Insurance
	Banks		Thrifts		Unions		Companies		Total
December 31, 1999		229		128		9		1		367
December 31, 2000		226		121		11		3		361
December 31, 2001		226		120		13		3		362
June 30, 2002		225		120		15		3		363

73

1.   Members

Membership is voluntary. Under the Bank’s Capital Plan, a member will be required to give five years’ notice of its intent to withdraw, compared to the six months’ notice currently required. Both currently and under the Capital Plan, members that withdraw from membership may not be readmitted to membership for five years.

At June 30, 2002, total capital stock was $1,861 million, a decrease of $28.9 million since December 31, 2001. Under existing member capital stock purchase requirements, capital stock levels typically change in response to changes in outstanding member loan balances. Commercial bank members hold 44.5% of the capital stock and thrift institution members hold 53.9%.

Federal Home Loan Bank of Pittsburgh

Capital by Member Type
($ in millions)

	Commercial				Credit		Insurance
	Banks		Thrifts		Unions		Companies		Total
December 31, 1999	$	1,287	$	1,010	$	12	$	10	$	2,319
December 31, 2000		1,226		815		13		10		2,064
December 31, 2001		852		1,016		14		7		1,889
June 30, 2002		828		1,003		23		7		1,861

The following table presents information on the ten largest holders of Bank capital stock at June 30, 2002.

Federal Home Loan Bank of Pittsburgh

Top Ten Capital Stock Holding Members in the Bank
at June 30, 2002

					Percent of
			Capital Stock		Total
Name	City	State	($ in millions)		Capital Stock
Sovereign Bank, FSB	Reading	PA	$	330		17.74	%
PNC Bank, N.A.	Pittsburgh	PA		186		9.98	%
Lehman Brothers Bank, FSB	Wilmington	DE		94		5.04	%
Waypoint Bank	Harrisburg	PA		91		4.88	%
Travelers Bank and Trust, FSB	Newark	DE		74		3.98	%
ING Bank, FSB	Wilmington	DE		58		3.12	%
Chase Manhattan Bank USA, N.A.	Wilmington	DE		57		3.08	%
National City Bank of Pennsylvania	Pittsburgh	PA		43		2.30	%
Citizens Bank of Pennsylvania	Philadelphia	PA		42		2.24	%
United National Bank	Parkersburg	WV		27		1.43	%
			$	1,002		53.79	%

74

2.   Member Borrowers

The total number of borrowing members increased from 240 at year-end 2001 to 245 at June 30, 2002. The percent of total members borrowing increased to 67.5% at June 30, 2002, from 66.3% at December 31, 2001.

Federal Home Loan Bank of Pittsburgh

Member Borrowers

	Commercial				Credit		Insurance
	Banks		Thrifts		Unions		Companies		Total
December 31, 1999		183		91		4		1		279
December 31, 2000		176		84		4		1		265
December 31, 2001		156		79		2		3		240
June 30, 2002		159		79		4		3		245

While 67.5% of the Bank’s members held loans at June 30, 2002, the five borrowers with loan holdings of $1 billion or more at June 30, 2002, held 46.7% of the Bank’s total loans. At year-end 2001, four borrowers held loans greater than $1 billion, representing 48.8% of total Bank loans.

Federal Home Loan Bank of Pittsburgh

Member Loans
($ in thousands)

	Commercial				Credit		Insurance
	Banks		Thrifts		Unions		Companies		Total(1)
December 31, 1999	$	18,495,998	$	17,899,609	$	57,700	$	75,000	$	36,528,307
December 31, 2000		13,959,619		11,890,742		18,780		75,000		25,944,141
December 31, 2001		10,723,526		17,628,202		16,034		106,341		28,474,103
June 30, 2002		9,954,669		17,138,436		31,292		106,341		27,230,738

⁽¹⁾ Member loan amounts and the total loan amounts are at par value, and the total loan amount will not agree to the Statements of Condition. The difference between the par and book value amounts relates to basis adjustments arising from hedges under FAS133 for book purposes.

75

3.   Top Ten Loan Holding Members

The following table presents information on the ten largest borrowers from the Bank at June 30, 2002.

Federal Home Loan Bank of Pittsburgh

Top Ten Loan Holding Members in the Bank
at June 30, 2002

			Loans		Percent of
Name	City	State	($ Millions)		Total Loans (1)
Sovereign Bank, FSB	Reading	PA	$	6,600		24.24	%
Lehman Brothers, FSB	Wilmington	DE		1,875		6.89	%
Waypoint Bank	Harrisburg	PA		1,817		6.67	%
PNC Bank, N.A.	Pittsburgh	PA		1,275		4.68	%
ING Bank, FSB	Wilmington	DE		1,158		4.25	%
National City Bank of Pennsylvania	Pittsburgh	PA		851		3.13	%
United National Bank of Parkersburg	Parkersburg	WV		533		1.96	%
ESB Bank	Ellwood City	PA		462		1.70	%
Wilmington Savings Fund Society, FSB *	Wilmington	DE		460		1.69	%
First Commonwealth Bank	Indiana	PA		433		1.59	%
			$	15,464		56.80	%

(1)	The information presented on loans in the table is for individual Bank members. The data are not aggregated to the holding company level. Some of the institutions listed may be affiliates of the same holding company, and some of the institutions listed have affiliates that are members but that are not listed in the tables.
*	An asterisk indicates that an officer or director of the member was a Bank director in 2002.

4.   Housing Associates

At June 30, 2002, the Bank had no loans outstanding to a housing associate. Housing associates eligible to borrow include the three state housing finance agencies within the Bank’s region, county housing finance agencies and city housing authorities.

76

XIV.   GOVERNMENT REGULATION

A.   General

The FHLBanks are entities created under the Bank Act whose purpose is to fulfill government objectives related to increasing the flow of credit to home mortgage markets and for community development purposes. The FHLBanks are regulated by the Finance Board, an independent agency in the executive branch of the federal government. A five-member board of directors manages the Finance Board. The Secretary of the Department of Housing and Urban Development serves or appoints a designee as a director of the Finance Board. The President appoints the other four directors with the advice and consent of the Senate. Appointed directors hold office for terms of seven years and serve on a full-time basis. The President designates one of the four appointed directors to serve as the chairperson of the Finance Board.

The Finance Board’s primary purpose is to ensure the safety and soundness of the twelve FHLBanks. In addition, the Bank Act directs the Finance Board to ensure that the FHLBanks carry out their housing finance mission. Toward this end, the Finance Board has issued regulations and policies that govern, among other things, the permissible activities, powers and investments of the FHLBanks, risk management practices, capital requirements and the authorities and duties of Bank directors and senior management. Certain of these regulations and policies are referred to below or elsewhere in this document.

The Finance Board is responsible for ensuring that the FHLBanks remain adequately capitalized and able to raise funds in the capital markets. The capital plans adopted by the FHLBanks pursuant to the GLB Act, and any amendments to those plans, must be reviewed and approved by the Finance Board. The Finance Board also has broad enforcement authority over the FHLBanks. It may suspend or remove for cause a director, officer, employee or agent of any FHLBank and may bring enforcement proceedings, such as cease-and-desist orders and the imposition of civil money penalties, against a FHLBank, or any of its executive officers or directors, for engaging in unsafe or unsound practices or violations of laws, rules, regulations or orders of the Finance Board. The Bank Act requires the Finance Board to conduct annual examinations of the FHLBanks.

The references to laws, regulations and policies which are applicable to the Federal Home Loan Bank of Pittsburgh set forth below and elsewhere herein are brief summaries, which do not purport to be complete and which are qualified in their entirety by reference to such laws, regulations and policies.

77

B.   Loans

1.   General

The Bank makes loans to members on the security of mortgages and other collateral pledged by members. The Bank develops its own loan program to meet the particular needs of its members. Finance Board regulations authorize the Bank to make loans for up to ten years, but permit loans with longer maturities consistent with the safe and sound operation of the Bank. The Bank generally may make loans with maturities of greater than five years only for the purpose of enabling any member to purchase or fund new or existing residential housing finance assets and, in the case of members that qualify as “community financial institutions,” small-business and agriculture-related loans. A community financial institution is an FDIC-insured institution with average total assets over the preceding three-year period less than a specified amount, which for the year 2002 is $527 million.

2.   Pricing

The Bank is generally prohibited from pricing loans to members below the marginal cost to the Bank of raising matching term and maturity funds and related administrative and operation costs. In pricing its loans, the Bank may distinguish among its members based on, among other things, its assessment of the credit and other risks of lending to a particular member. Loans with a maturity or repricing period greater than six months generally require a prepayment fee sufficient to make the Bank financially indifferent should the borrower decide to prepay the loan.

3.   Collateral

The Bank is required, at the time it originates or renews a loan, to obtain and maintain a security interest in eligible collateral of a member, or an affiliate of a member. Collateral eligible to secure loans includes assets in the following categories:

(a)   fully disbursed, whole first mortgages on improved residential property (not more than 90 days delinquent) or securities representing an interest in such mortgages;

(b)   securities issued, insured, or guaranteed by the U.S. government or any of its agencies including, without limitation, mortgage backed securities issued or guaranteed by Freddie Mac, Fannie Mae, or Ginnie Mae;

78

(c)	cash or deposits in a FHLBank;
(d)	other real estate-related collateral (including, but not limited to, home equity loans, commercial real estate loans and mortgage loan participations), provided that such collateral has a readily ascertainable value and the Bank can perfect a security interest in such property; or
(e)	in the case of a member that qualifies as a community financial institution, secured small-business and agriculture-related loans, or securities representing a whole interest in such loans, provided that such collateral has a readily ascertainable value and the Bank can perfect a security interest in such property.

The Bank has the right to take such steps as it deems necessary to protect its secured position on outstanding loans, including requiring additional collateral, whether or not such additional collateral would otherwise be eligible to secure a loan. As additional security for a member’s indebtedness, the Bank has a statutory lien upon that member’s Capital Stock.

The Bank Act affords any security interest granted by any member of the Bank, or any affiliate of any such member, priority over the claims and rights of any party, including any receiver, conservator, trustee, or similar party having rights of a lien creditor provided that such security interest shall not be entitled to priority over claims and rights that (1) would be entitled to priority under otherwise applicable law or (2) are held by an actual bona fide purchaser for value or by parties that are secured by actual perfected security interests.

4.   Loans to Housing Associates

The Bank is authorized to make loans to non-member “housing associates” located in this region. Housing associates are approved mortgagees under Title II of the National Housing Act. Eligible housing associates must also be chartered under law and have succession, be subject to inspection and supervision by some governmental agency, and lend their own funds as their principal activity in the mortgage field. Housing associates are not required to purchase Capital Stock in the Bank and are not subject to many provisions of the Bank Act that apply to members. However, the same regulatory lending requirements apply to them as apply to members.

79

5.   Capital Stock Requirements

With the passage of the GLB Act, the prior statutory limit stating that the aggregate amount of outstanding loans made by the Bank to a member may not exceed 20 times the amount paid in by such member for existing stock in the Bank is eliminated upon implementation of the Capital Plan. Until that time, the Bank remains subject to the limitation under the Finance Board’s loan regulations. Upon the Effective Date, Bank members shall no longer be subject to this limit, but will be subject to the member loan stock purchase requirement contained in the Bank’s Capital Plan. See “DESCRIPTION OF THE BANK’S CAPITAL PLAN – Minimum Stock Investment Requirements – Member Loan Stock Purchase Requirement, (page 29).”

C.   Standby Letters of Credit

The Bank is authorized to issue or confirm on behalf of members standby letters of credit (including direct pay) to (1) assist members in facilitating residential housing finance, (2) assist members in facilitating community lending, (3) assist members with asset/liability management and (4) provide members with liquidity or other funding. At the time the Bank issues or confirms a standby letter of credit, it must obtain and maintain a security interest in collateral that is sufficient to fully secure a member’s obligation to reimburse the Bank for value given by the Bank to the beneficiary under the terms of the standby letter of credit.

D.   Acquired Member Assets

The Bank holds certain assets acquired from or through its members or housing associates. These assets may include whole loans eligible to secure loans from the Bank (excluding mortgages above the conforming loan limit), whole loans secured by manufactured housing, or state or local housing finance agency bonds. Regulation requires members and housing associates to provide credit enhancement for acquired member assets such that the Bank’s exposure to credit risk is no greater than that of an asset rated in the fourth highest credit rating category by a credit rating agency regarded as a Nationally Recognized Statistical Rating Organization (“NRSRO”) by the Securities and Exchange Commission, or such higher rating as the Bank may require. The portion of the credit enhancement that is an obligation of the member or housing associate must be fully secured. A portion of the credit enhancement may also be covered by insurance, subject to limitations specified in the AMA regulation.

The Bank, like each of the FHLBanks, has established a member mortgage asset program, which involves the investment by the Bank in home mortgage loans originated by or through members or housing associates. The Bank acquires mortgage assets from or through members or housing associates, and the members

80

or housing associates continue to bear a significant portion of the credit risk through credit enhancement they provide with respect to such assets. The programs provide members with an alternative to retaining mortgages in portfolio or selling them in the traditional secondary market. The Bank currently acquires mortgages through the MPF Program, which is administered by the FHLBank of Chicago.

E.   Permissible Investments

1.   Statutory Authority

Subject to such regulations, restrictions and limitations as the Finance Board may impose, the Bank Act authorizes the Bank to invest surplus funds and certain reserve accounts in certain specified securities, instruments and obligations. Until recently, the Finance Board established the parameters of this authority through its FMP, which included a list of specific investments the Bank was permitted to hold in its portfolios. The investments on this list generally were viewed by the Finance Board as narrower than that which could be deemed permissible under the statute.

2.   The Investment Regulation

On July 17, 2000, the Finance Board adopted a regulation which, in part, superseded the FMP ( “Investment Regulation”). For the most part, and subject to certain limitations, the Investment Regulation tracks the investment authority set forth in the Bank Act. Under the Investment Regulation, the Bank may invest in (1) obligations of the United States; (2) deposits in banks and trust companies; (3) obligations, participations, or other instruments of or issued by Fannie Mae or Ginnie Mae; (4) mortgages, obligations, or other securities that are, or ever have been, sold by Freddie Mac pursuant to 12 U.S.C. Sections 1454 or 1455; (5) stock, obligations, or other securities of any small-business investment company formed pursuant to 15 U.S.C. Section 681 (when made for the purpose of aiding Bank members); and (6) such instruments as fiduciary and trust funds may be invested in under the laws of the state in which the Bank is located.

3.   Investment Limitations

The Investment Regulation sets forth several specific limitations on the investment authority of the Bank. These limitations generally prohibit the Bank from investing in:

(a)   instruments, such as common stock, that represent an ownership interest in an entity, other than stock in small-business investment

81

corporations, or certain investments targeted to low-income persons or communities;

(b)	instruments issued by non-United States entities, other than those issued by United States branches and agency offices of foreign commercial banks;
(c)	non-investment-grade debt instruments, other than certain investments targeted to low-income persons or communities and instruments that were downgraded after purchase by the Bank;
(d)	whole mortgages or other whole loans, or interests in mortgages or loans, other than: those acquired under the MPF Program, certain investments targeted to low-income persons or communities; certain marketable direct obligations of state, local, or tribal government units or agencies, having at least the second highest credit rating from a nationally recognized statistical rating organization; mortgage-backed securities; asset-backed securities backed by manufactured housing loans or home equity loans; and certain foreign housing loans authorized under Section 12(b) of the Bank Act.

Moreover, under the Investment Regulation, the limitations and restrictions on certain authorized investments set forth in the FMP remain in effect. The Finance Board’s resolution approving the Bank’s Capital Plan also provides for the continued applicability of FMP investment limitations on mortgage-backed securities. Under these continuing limitations, the Bank’s investment in mortgage-backed securities (“MBS”), collateralized mortgage obligations (“CMOs”) and real estate mortgage investment conduits (“REMICs”) and in asset-backed securities secured by manufactured housing or home equity loans is limited to a total amount equal to 300% of the Bank’s capital on the trade date of the purchase. The Bank is also prohibited under provisions of the FMP that will remain in effect from purchasing: (1) interest-only or principal-only stripped MBS, (2) residual-interest or interest-accrual classes of CMOs or REMICs; (3) fixed-rate or floating-rate MBS, with average lives that vary by more than six years under an instantaneous 300 basis point interest rate change scenario; and (4) non-U.S. dollar denominated securities.

4.   Derivatives Contracts and Other Activities

The Investment Regulation also authorizes the Bank to enter into derivatives contracts (which are generally defined to mean a financial contract, the value of which is derived from the values of one or more underlying assets, reference rates or indices of asset value or credit-related events and which may include interest rate, foreign exchange rate,

82

precious metals, commodity, and credit contracts, and any other instruments that pose similar risks). The Investment Regulation provides that derivatives instruments that do not qualify as hedging instruments pursuant to GAAP may be used only if a non-speculative use is documented by the Bank. The Investment Regulation also authorizes the Bank to enter into forward asset purchases and sales, commitments to make loans and commitments to make or purchase other loans.

F.   New Business Activities

The Bank generally must provide notice to the Finance Board at least 60 days prior to engaging in any new business activity (“Notice Period”). A “new business activity” means any business activity conducted or engaged in by the Bank that it has not previously conducted or engaged in or that it previously conducted or engaged in under materially different terms which (1) involves the acceptance of certain types of collateral for loans, (2) entails risks not previously and regularly managed by the Bank, its members or both or (3) involves operations not previously undertaken by the Bank.

During the Notice Period, the Finance Board may among other things, (1) disapprove a proposed new business activity, (2) instruct the Bank not to commence the activity pending further consideration by the Finance Board or (3) request additional information from the Bank. The Finance Board may require the Bank to comply with certain conditions, to be determined by the Finance Board in its discretion, in order to commence a new business activity.

1.   Accepting Mutual Funds As Collateral from Members

On April 29, 2002, the Bank submitted a new business activity notice to the Finance Board regarding acceptance of mutual funds backed by eligible collateral under the Bank Act and Finance Board regulations as collateral pledged by the members to secure their loans and other indebtedness to the Bank. Under the Finance Board’s collateral regulation, the Bank may accept as collateral any security the ownership of which represents an undivided equity interest in underlying assets, all of which qualify either as (1) eligible collateral under 12 C.F.R. Section 950.7(a)(1), (2), (3) or (4), or (2) cash or cash equivalents. The Finance Board approved the Bank’s new business activity notice on August 19, 2002.

2.   Community Development Fund Investment

On October 3, 2001, the Bank submitted a new business activity notice to the Finance Board in which the Bank proposed to invest in one or more community development “fund of funds” structures designed to support Small Business Investment Company (“SBIC”) financing and targeted

83

venture capital investing. The Bank would reduce its exposure to the equity risk by entering into an equity for interest swap with an approved counterparty. The request is still under review and consideration by the Finance Board.

3.   Investing in Money Market Investments Rated Single-A or Triple- B

On June 20, 2002, the Bank submitted a new business activity notice to the Finance Board regarding its plans to purchase money market investments rated Single-A or Triple-B by NRSRO (“Money Market Investments”). The Finance Board approved the Bank’s new business activity notice on August 2, 2002 with the stipulation that, until such time as the Bank’s Capital Plan is implemented, these Single-A and Triple-B money market investments are subject to the capital requirements of 12 C.F.R. Section 956.4 such that the Bank is required to hold retained earnings equal to the difference between the amount of capital that would be required under Section 956.4 for the Money Market Investments and the amount of capital that would be required for rated assets for the second highest investment grade with a remaining maturity of less than one year.

4.   Investment in Small Business Investment Company

Under Section 11(h) of the Bank Act, the Bank is expressly authorized to invest in SBICs. On August 14, 2001, the Bank submitted a new business activity notice to the Finance Board regarding its plans to invest up to $500,000 in a SBIC. The Finance Board approved the Bank’s request on October 2, 2001.

G.   Liquidity Requirements

The Bank is required to maintain liquidity in accordance with the FMP, certain Finance Board regulations, and policies established by its Board of Directors. The Bank needs liquidity to satisfy member demand for short- and long-term funds, repay maturing consolidated obligations and meet other obligations. The specific liquidity requirements applicable to the Bank are described briefly below.

1.   Deposit Liquidity Requirement

The Bank is required to invest in (1) obligations of the United States, (2) deposits in banks or trust companies or (3) member loans with a maturity not to exceed five years, in an amount at least equal to the amount of current deposits received from its members. In addition to accepting deposits from its members, the Bank may accept deposits from any institution for which it is providing correspondent services, from any other FHLBank or from other government instrumentalities.

84

2.   Contingency Liquidity Requirement

The Bank is also required to hold “contingency liquidity” in an amount sufficient to enable it to meet its liquidity needs, assuming an inability to access the consolidated obligation debt markets for at least five business days. Contingency liquidity means the sources of cash the Bank may use to meet its operational requirements when its access to the capital markets is impeded and includes (1) marketable assets with a maturity of one year or less, (2) self liquidating assets with a maturity of one year or less, (3) assets that are generally acceptable as collateral in the repurchase market and (4) irrevocable lines of credit from financial institutions rated not lower than the second highest credit rating category by a consistency NRSRO.

3.   Risk Management Policy

Upon the Effective Date, the FMP liquidity requirements shall cease to apply to the Bank. The Bank sets standards in its risk management policy for day-to-day operational liquidity and contingency liquidity needs that enumerate the specific types of investments to be held by the Bank to satisfy such liquidity needs. These standards also establish the methodology to be used by the Bank for determining its operational and contingency liquidity needs.

H.   Unsecured Credit Limits

Finance Board regulations restrict the amount of unsecured credit that the Bank can extend to a particular counterparty. The regulations require the Bank to base its credit limit for a counterparty on a formula generally based on the long-term credit rating of the counterparty, which is then applied to the lesser of the Bank’s total capital or a specified measure of the counterparty’s capital. The regulation also sets the amount of unsecured credit that can be extended to a GSE established to serve public purposes, but whose obligations are not obligations of the United States or guaranteed by the United States.

I.   Responsibilities of the Bank Board of Directors and Senior Management

1.   Risk Management Policy

The Bank’s Board of Directors is required to have in effect a risk management policy that addresses the Bank’s exposure to credit risk, market risk, liquidity risk, business risk and operation risk. The Bank’s Board of Directors is required to review the risk management policy at least annually and to amend the policy as appropriate. Following approval of the Bank’s Capital Plan by the Finance Board, but prior to the Capital Plan taking effect, the Bank must amend its risk management policy to

85

describe the steps that it will take to comply with its Capital Plan and to include specific target ratios of total capital and permanent capital to total assets. On September 20, 2002, the Bank amended its risk management policy to incorporate provisions pertaining to its Capital Plan. The amended policy provides that the Bank intends to operate within the following target operating capital to assets ratios:

	Total Capital	Leverage Capital
Maximum Ratio (% of assets)	5.00%	7.50%
Minimum Ratio (% of assets)	4.08%	6.12%

2.   Strategic Business Plan

The Bank’s Board of Directors is required to have in effect a strategic business plan that describes how the business activities of the Bank will achieve the Bank’s mission consistent with the Finance Board’s core mission activity regulation. This regulation identifies the following activities as core mission activities of the Bank: (1) loans, (2) acquired member assets, (3) standby letters of credit, (4) intermediary derivative contracts, (5) debt or equity investments that primarily benefit households having a targeted income level or areas targeted for redevelopment, and which serve housing and community development objectives, and (6) other debt or equity investments involving SBICs or which are issued or guaranteed under certain federal government programs.

3.   Internal Controls

The Bank is required to establish and maintain an effective internal control system. The internal control system must address the efficiency and effectiveness of the Bank’s activities; the safeguarding of Bank assets; the reliability, completeness and timely reporting of financial and management information; and compliance with applicable laws, regulations, policies and supervisory directives of the Bank’s Board of Directors and senior management.

4.   Audit Committee

The Board of Directors of the Bank is required to establish an audit committee. The audit committee has the duty, among other things, to (1) direct senior management to maintain the reliability and integrity of the accounting policies and financial reporting and disclosure practices of the Bank, (2) review the basis for the Bank’s financial statements, and the external auditor’s opinion with respect to such statements, (3) ensure that policies are in place that are reasonably designed to achieve disclosure and transparency regarding the Bank’s true financial performance and governance practices and (4) oversee the internal and external audit function.

86

5.   Internal Market Risk Model and Risk Assessment Procedures

Before the Bank’s Capital Plan may take effect, the Bank must obtain the Finance Board’s approval for the internal market risk model used to calculate the market risk capital component of its risk-based capital requirement and for the risk assessment procedures and controls to be used to manage its credit, market and operation risks. The Bank adopted an internal market risk model and risk assessment procedures, which were approved by the Finance Board on September 19, 2002.

6.   Governance

An active and informed Board of Directors is the cornerstone of good corporate governance. The Board of Directors of the Bank fully embraces its responsibility with regard to establishing and following solid corporate governance principles in order to protect the interests of the members and other constituencies of the Bank. To this end, in 2000, the Board of Directors established a committee on governance, dedicated solely to improving the processes and procedures, and ultimately the effectiveness, of the Board of Directors. The governance committee is charged with ensuring that the Bank’s Board of Directors has the systems and structures in place necessary to oversee management and serve effectively as trustee for all the Bank’s constituencies. Consistent with corporate governance best practices, the governance committee works to assure that the Board is appropriately structured, has adequate resources, receives timely and appropriate information from management, has direct access to independent outside professionals, addresses issues that may help management fulfill the Bank’s mission, and that individual Board members receive appropriate training opportunities necessary to discharge effectively their fiduciary responsibilities.

J.   Additional Oversight

Like each FHLBank and the Office of Finance, the Bank has an internal audit department and audit committee. An independent public accounting firm audits the annual financial statements of each FHLBank and the annual combined financial statements as prepared by the Office of Finance. The independent accountant conducts these audits following generally accepted auditing standards and Government Auditing Standards issued by the Comptroller General. The FHLBanks, the Finance Board, and the Congress receive the audit reports. Each FHLBank must submit annual management reports to the Congress, the President, the Office of Management and Budget, and the Comptroller General. These reports include a statement of financial condition, a statement of operations, a statement of cash flows, a statement of internal accounting and administrative

87

control systems, and the report of the independent public accountants on the financial statements.

The Comptroller General has authority under the Bank Act to audit or examine the Finance Board and the FHLBanks and to decide the extent to which they fairly and effectively fulfill the purposes of the Bank Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of the financial statements conducted by an independent public accounting firm. If the Comptroller General conducts such a review, then he must report the results and provide his recommendations to the Congress, the Office of Management and Budget, and the FHLBank in question. The Comptroller General may also conduct his own audit of any financial statements of a FHLBank.

K.   Tax Status

The FHLBanks are exempt from all federal, state, and local taxation except for real property taxes; however, the FHLBanks are required to set aside a portion of their earnings to satisfy certain public policy objectives. In particular, they are obligated to make payments to REFCORP in the amount of 20% of net earnings after operating expenses and AHP expense. In addition, annually the FHLBanks must set aside for their AHPs the greater of an aggregate of $100 million or 10% of their current year’s income before charges for AHP (but after expenses for REFCORP).

XV.   FEDERAL INCOME TAX IMPLICATIONS

A.   General

The following is a general summary of the anticipated U.S. federal income tax implications of the recapitalization and certain other transactions to holders of Bank stock. This discussion assumes that such shares are held as capital assets and does not address all of the U.S. federal income tax consequences that may be relevant to particular stockholders in light of their individual circumstances.

The following discussion is based upon the Internal Revenue Code of 1986, as amended (“Code”), laws, regulations, rulings and decisions in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect. Tax consequences under state, local and foreign laws are not addressed herein. No ruling has been or will be sought from the Internal Revenue Service (“IRS”) as to the U.S. federal income tax implications of the recapitalization, and the following discussion is not binding on the IRS or the courts. Furthermore, no assurance can be given that the IRS will not successfully challenge certain of the conclusions set forth below. This discussion does not address tax consequences of the purchase, ownership, or disposition of Capital Stock by holders of Capital Stock other than

88

those holders who acquired their Capital Stock pursuant to the recapitalization. THIS SUMMARY DOES NOT CONSTITUTE, AND SHOULD NOT BE CONSIDERED AS, LEGAL OR TAX ADVICE TO MEMBERS. THE TAX IMPLICATIONS FOR INDIVIDUAL MEMBERS OF THE RECAPITALIZATION AND CERTAIN OTHER TRANSACTIONS DISCUSSED HEREIN WILL DEPEND ON THE PARTICULAR FACTS AND CIRCUMSTANCES OF EACH SUCH MEMBER. MEMBERS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE RECAPITALIZATION, INCLUDING THE APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS BASED ON EACH MEMBER’S PARTICULAR FACTS AND CIRCUMSTANCES.

B.   Taxation of the Recapitalization

The Capital Plan provides for an exchange of each member’s shares of existing capital stock for an equal number of shares of newly issued Capital Stock. Immediately after the exchange, each member’s Capital Stock holdings will be adjusted to conform with the member’s minimum member stock investment. Members having an Excess Stock position will receive cash at par in exchange for the member’s Excess Stock. Members having a stock shortfall will be required to purchase additional shares of Capital Stock at par.

The Bank intends that the implementation of its new Capital Plan will constitute a recapitalization of the Bank qualifying as a “reorganization” within the meaning of Section 368(a)(1)(E) of the Code. Accordingly, members should not recognize gain or loss on the receipt of Capital Stock in exchange for the stock in the Bank that they currently hold. Members receiving cash in the recapitalization, however, may be required to recognize income.

Members receiving cash will recognize income equal to the lesser of:

•   The cash received, or

•   The excess of (a) the aggregate fair market value of cash and Capital Stock received in the recapitalization, over (b) the member’s tax basis in the stock exchanged.

A member’s gain will be taxed as a capital gain unless the receipt of the cash is deemed to “have the effect of the distribution of a dividend,” in which case, the gain would be taxable as ordinary income. In determining whether the receipt of cash “has the effect of the distribution of a dividend,” the dividend equivalency rules of Code Section 302(b) are to be considered. Under Code Section 302(b), any recognized gain by a member will be treated as capital gain if the effect of the exchange and receipt of cash is (1) a “substantially disproportionate” redemption

89

or repurchase of stock with respect to such member, or (2) is “not essentially equivalent to a dividend” with respect to such member.

A redemption or repurchase of a member’s stock will be “substantially disproportionate” if as a result of the exchange, both (1) the member owns less than 50% of the stock of the Bank and (2) the ratio determined by dividing the number of shares of stock owned by the member immediately after the exchange by the total number of shares of stock outstanding is less than 80% of the same ratio calculated immediately before the exchange. In making this determination, members should be aware that, under Section 318 of the Code, a member may be considered to own the stock owned (and in some cases, constructively owned) by certain related entities.

Whether the receipt of cash in the exchange is “not essentially equivalent to a dividend” is to be determined based upon the particular facts and circumstances of the exchange. Case law has generally required a “meaningful reduction” in a shareholder’s proportionate equity interest in order to find a redemption or exchange “not essentially equivalent to a dividend.” The unique aspects of the Federal Home Loan Bank System may, however, substantiate a position that the cash received by members in the exchange for their Capital Stock in the Bank, is “not essentially equivalent to a dividend.” Facts supporting such a conclusion include (1) the long-term industry practice, (2) the regulatory oversight of the capital sufficiency of the Bank, (3) the fact that redemptions and repurchases are mandated at par (the original amount of the purchase price for the shares) and (4) the Bank’s periodic redemptions and repurchases of member stock are required to balance the cost of the capital structure of the Bank. The IRS may, however, take a contrary view. No ruling has been requested from the IRS on this issue.

C.   Taxation of Stock Redemptions and Repurchases

Under the Capital Plan, each member is required to maintain a minimum investment in Capital Stock, as a condition of both becoming and remaining a member of the Bank. The Bank’s Board of Directors will monitor and, as necessary, adjust the minimum investment to provide for Capital Stock purchases and maintenance of Capital Stock investments by all members sufficient to allow the Bank to comply promptly with its minimum regulatory capital requirements. Under the terms of the Capital Plan, the shares of Capital Stock held by members at any time in excess of the minimum stock purchase requirement may be repurchased by the Bank or redeemed at the request of the member (subject to certain limiting provisions).

The redemption or repurchase of a member’s Capital Stock will be treated as a sale of the stock, unless it is neither “substantially disproportionate” nor “not essentially equivalent to a dividend” under the rules of Section 302(b) discussed above in the context of the recapitalization. If the redemption or repurchase is

90

treated as a sale of stock, the member will have capital gain or loss equal to the difference, if any, between the proceeds received in the transaction and the member’s basis in the stock. If, however, the transaction does not satisfy the tests under Section 302(b), it will be treated as a dividend. Members should consult their tax advisors as to the tax treatment of a redemption or repurchase of their Capital Stock.

D.   Future Distributions

Following the recapitalization, the Bank may pay dividends on the Capital Stock in the form of cash or additional Capital Stock. The Bank intends to continue to pay dividends in cash, although it may determine to pay stock dividends in the future. Historically, the Bank has never paid a stock dividend.

1.   Cash Distributions

If a dividend distribution is paid in cash, the distribution is first treated as ordinary dividend income to the extent of the Bank’s accumulated or current earnings and profits. The amount of the distribution received in excess of such earnings and profits will be treated next as a non-taxable return of capital to the extent of the member’s basis in its Capital Stock and, thereafter, as a capital gain to the extent it exceeds the member’s basis. The Bank anticipates that its available earnings and profits will be sufficient such that cash distributions provided by the Bank will be taxed in full as ordinary dividend income.

2.   Stock Dividends

A common stock dividend payable on outstanding common stock is generally tax-free to the recipient shareholder under Section 305(a) of the Code. However, the IRS in the past (prior to the GLB Act) attempted to treat stock dividends paid by a FHLBank as taxable under a special exception contained in Section 305(b)(1), which provides that a distribution by a corporation of its stock will be treated as a taxable dividend distribution if, at the “election” of any of the shareholders, the distribution is payable either in the corporation’s stock or in cash or other property. Accordingly, in the case of the Bank, if any one member has such an “election,” the distribution will be taxable to all the recipient members, regardless of whether the election is actually exercised. However, several courts and, ultimately, the IRS ruled that a pattern exhibited by a FHLBank in granting member requests to have excess stock redeemed did not confer upon the member an “election” under Section 305(b)(1) to receive a dividend in the form of stock or cash, given the discretion vested in the FHLBank under applicable laws and regulations (prior to the GLB Act) in honoring such requests.

91

In the case of a Capital Stock dividend payable after the recapitalization on outstanding Capital Stock, the Bank intends to maintain records and procedures to identify the particular shares of Capital Stock distributed. Assuming these identification procedures are considered adequate, the Bank does not believe that the receipt of such a Capital Stock dividend is taxable under Section 305(b)(1) of the Code merely because, under the Finance Board regulations, shares of such stock are redeemable if certain conditions are met. In particular, the member must first submit its written redemption notice with respect to a particular share and then such share may be redeemed following the expiration of a five-year period, assuming the notice is not subsequently withdrawn by a member, and provided certain conditions are met at that subsequent time, including that (1) following the redemption, the member continues to meet its minimum stock investment requirements, (2) the Bank continues to meet its minimum regulatory capital requirements, (3) in the event of an impairment of the Bank’s capital, the Finance Board approves the redemption, and (4) the Bank has not decided, based on certain circumstances, to suspend redemptions. Moreover, the Bank believes that its right to repurchase Excess Stock held by a member does not render a Capital Stock dividend payable on outstanding Capital Stock taxable under Section 305(b)(1) because such right, as under pre-GLB Act law, is within the Bank’s discretion. However, a dividend payable in Capital Stock on outstanding Capital Stock conceivably could be taxable under other provisions of the Code, including other provisions contained in section 305(b). Accordingly, members should consult their tax advisors regarding the treatment of stock dividends.

To the extent that the receipt of a stock dividend is tax-free, the basis in the old stock with respect to which the new Capital Stock was issued is generally allocated between the old and new stock in proportion to the fair market value of each on the date of distribution, and the holding period of the new Capital Stock received will generally include the period for which the member held the old Bank’s stock. If the stock distribution is taxable, the fair market value of the stock distributed must be treated by the member as an ordinary dividend distribution, taxable as described above, and the shares received in the distribution shall have a fair market value basis, and a new holding period for the new shares shall begin as of the date following the acquisition of such shares by the member.

THE PRECEDING DISCUSSION DOES NOT CONSTITUTE, AND SHOULD NOT BE CONSIDERED AS, LEGAL OR TAX ADVICE TO MEMBERS. THE PRECEDING DISCUSSION IS GENERAL IN NATURE AND DOES NOT CONSIDER ANY PARTICULAR MEMBER’S INDIVIDUAL FACTS AND CIRCUMSTANCES. SINCE THE TAX CONSQUENCES OF THE RECAPITALIZATION AND CERTAIN OTHER TRANSACTIONS DISCUSSED HEREIN TO

92

MEMBERS WILL DEPEND ON THEIR PARTICULAR FACTS AND CIRCUMSTANCES, MEMBERS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS AS TO THE TAX IMPLICATIONS TO THEM OF THE RECAPITALIZATION AND OTHER TRANSACTIONS DISCUSSED HEREIN.

93

XVI. DIRECTORS AND SENIOR OFFICERS

A. Board of Directors

Chairman of the Board

John T. Connelly
Director
Leesport Bank
Leesport, Pennsylvania
Joined the Board in January 1996
Appointed Vice Chairman January 1998
Appointed Chairman January 2002
Serves on Executive Committee

Vice Chairman of the Board

David W. Curtis

Executive Vice President
Leon N. Weiner & Associates, Inc.
Wilmington, Delaware
Joined the Board in March 1996
Appointed Chairman July 1999
Appointed Vice Chairman January 2002
Serves on Executive Committee

K. Scott Baker
Government Affairs Consultant
Klett Rooney Lieber & Schorling
Pittsburgh, Pennsylvania
Joined the Board in March 2002
Serves on Audit, Governance, and
Mission Advancement Committees

Rev. Luis Antonio Cortes Jr.
President
Nueva Esperanza, Inc.
Philadelphia, Pennsylvania
Joined the Board in March 2002
Serves on Affordable Housing &
Community Investment, Credit &
Investment Policy, and Human
Resources Committees

J. Ardie Dillen
Chairman, President and Chief
Executive Officer
BankPittsburgh
Wexford, Pennsylvania
Joined the Board in January 1999
Serves on Executive, Audit, and
Mission Advancement Committees

Terry K. Dunkle
Chairman and Chief Executive
Officer
Three Rivers Bancorp, Inc.
Monroeville, Pennsylvania
Joined the Board in January 1998
Serves on Executive, Governance,
and Human Resources Committees

Russell P. Kanjorski, Esq.
Cornerstone Technologies, LLC
Wilkes-Barre, Pennsylvania
Joined the Board in September 1999
Serves on Executive, Credit &
Investment Policy, and Governance
Committees

H. Charles Maddy III
President and Chief Executive
Officer
Summit Financial Group, Inc.
Moorefield, West Virginia
Joined the Board in January 2002
Serves on Audit, Governance, and
Mission Advancement Committees

Edwin R. Maus
President, Chief Executive Officer
and Director
Laurel Savings Bank
Allison Park, Pennsylvania
Joined the Board in January 1998
Serves on Executive, Credit &
Investment Policy, Human
Resources, and Mission
Advancement Committees

Sarah E. Peck
Principal
Progressing Housing Ventures, LLC
Malvern, Pennsylvania
Joined the Board in January 1997
Serves on Executive, Affordable
Housing & Community Investment,
and Human Resources Committees

Paul E. Reichart
President and Chief Executive
Officer
Columbia County Farmers National
Bank
Bloomsburg, Pennsylvania
Joined the Board in January 1997
Serves on Affordable Housing &
Community Investment, Audit, and
Credit & Investment Policy
Committees

Marvin N. Schoenhals
Chairman, President and Chief
Executive Officer
WSFS Financial Corporation and
Wilmington Savings Fund Society,
FSB
Wilmington, Delaware
Joined the Board in January 1997
Serves on Executive, Audit, and
Credit & Investment Policy
Committees

Willard A. Snyder
Chairman of the Board
The New Tripoli National Bank
New Tripoli, Pennsylvania
Joined the Board in January 1996
Serves on Affordable Housing &
Community Investment, Audit, and
Human Resources Committees

Cecil H. Underwood
Chief Executive Officer
Cecil H. Underwood Institute
Charleston, West Virginia
Joined the Board in March 2002
Serves on Affordable Housing &
Community Investment,
Governance, and Mission
Advancement Committee

94

B. Senior Bank Officers

James D. Roy
President
Chief Executive Officer
Joined the Bank in November 1987

William G. Batz
Executive Vice President
Chief Operating Officer
Joined the Bank in November 1988

Marshal S. Auron
Senior Vice President
Risk Management
Joined the Bank in May 1992

John J. Bendel
Senior Vice President
Director of Community Investment
Secretary, Affordable Housing and
Community Investment Committee of
the Board of Directors
Joined the Bank in February 1995

Teresa M. Donatelli
Senior Vice President
Information Systems
Joined the Bank in November 1992

Leigh A. Dunhoff
Senior Vice President
Director of Correspondent Banking
Services
Joined the Bank in November 1973

J. Michael Hemphill
Senior Vice President
Director of Internal Audit
Secretary, Audit Committee of the
Board of Directors
Joined the Bank in April 2000

Craig C. Howie
Senior Vice President
Chief Credit Officer
Secretary, Mission Advancement
Committee of the Board of Directors
Joined the Bank in December 1990

G. Robert Jorgenson Jr.
Senior Vice President
Director of Marketing
Joined the Bank in June 1993

Linda M. Kimak
Senior Vice President
Human Resources and Administration
Secretary, Human Resources
Committee of the Board of Directors
Joined the Bank in September 1988

Robert S. Kovach
Senior Vice President
Chief Investment Officer
Joined the Bank in April 1996

Eric J. Marx
Senior Vice President
Chief Financial Officer
Secretary, Credit and Investment
Policy Committee of the Board of
Directors
Joined the Bank in November 1995

Peter A. Rubinsky
Senior Vice President
Treasurer
Joined the Bank in December 1991

Dana A. Yealy
Senior Vice President
General Counsel
Secretary, Governance Committee of
the Board of Directors
Joined the Bank in May 1986

95

XVII. INDEX TO FINANCIAL STATEMENTS

     Federal Home Loan Bank of Pittsburgh:

     Audited Financial Statements:

     The following annual financial statements of the Bank are incorporated by reference to the Bank’s 2001 Annual Report:

	Annual
	Report
	Page
Report of Independent Auditors		29
Statements of Condition as of December 31, 2001 and 2000		30
Statements of Operation for the years ended December 31, 2001, 2000 and 1999		31
Statements of Changes in Capital for the years ended December 31, 2001, 2000 and 1999		32
Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999		33
Notes to Financial Statements		34
Interim Financial Statements (Unaudited):
Statement of Condition as of June 30, 2002 and December 31, 2001		97
Statement Operations for the six months ended June 30, 2002 and 2001		98
Statement of Changes in Capital for the six months ended June 30, 2002 and 2001		99
Statement of Cash Flows for the six months ended June 30, 2002 and 2001		100
Notes to Financial Statements		102

96

FINANCIAL STATEMENTS

Federal Home Loan Bank of Pittsburgh

STATEMENT OF CONDITION

	June 30,			December 31,		June 30,
	2002			2001		2001
($ in millions)	(Unaudited)			(Audited)		(Unaudited)
ASSETS
Cash and due from bank	$	94		$	44	$	125
Interest-bearing deposits in bank		1,215			1,181		1,628
Deposits for mortgage loan programs with other FHLBanks		49			7		86
Federal funds sold		2,780			1,127		1,690
Held-to-maturity securities		9,189			5,078		6,408
Available-for-sale securities		393			120		155
Securities held at fair value		1,761			3,551		2,462
Loans		28,232			29,315		26,161
Mortgage loans		2,551			1,839		1,961
Less: allowance for credit losses on mortgage loans		—			—		—
Mortgage loans, net		2,551			1,839		1,961
Loans to other FHLBanks		570			—		—
Accrued interest receivable		592			532		536
Premises and equipment, net		9			10		13
Derivative assets		176			94		141
Other assets		38			16		20
Total assets	$	47,649		$	42,914	$	41,386
LIABILITIES
Deposits:
Demand and overnight	$	1,954		$	1,692	$	1,677
Term		6			13		17
Other		59			13		46
Total deposits		2,019			1,718		1,740
Borrowings:
Other FHLBanks		—			—		75
Securities sold under repurchase agreements		504			—		—
Total borrowings		504			—		75
Consolidated obligations, net:
Discount notes		11,422			11,070		10,530
Bonds		30,284			27,201		26,361
Total consolidated obligations		41,706			38,271		36,891
Accrued interest payable		361			340		373
Affordable Housing Program		30			40		45
Payable to REFCORP		3			6		10
Derivative liabilities		652			538		202
Other liabilities		451			23		224
Total liabilities		45,726			40,936		39,560
CAPITAL
Capital stock ($100 par value)		1,861			1,889		1,705
Retained earnings		68			87		119
Accumulated other comprehensive income:
Net unrealized gains (losses) on available-for-sale securities		(6	)		1		1
Net unrealized gain on hedging activities		—			1		1
Total capital		1,923			1,978		1,826
Total liabilities and capital	$	47,649		$	42,914	$	41,386

97

Federal Home Loan Bank of Pittsburgh

STATEMENT OF OPERATIONS

	Unaudited
	For the six
	months ended
	June 30,
($ in millions)	2002			2001
INTEREST INCOME
Loans	$	310		$	711
Interest-bearing deposits in banks		11			17
Deposits for mortgage loan programs with other FHLBanks		—			1
Federal funds sold		10			79
Held-to-maturity securities		157			210
Available-for-sale securities		9			7
Securities held at fair value		53			57
Mortgage loans		58			68
Total interest income		608			1,150
INTEREST EXPENSE
Consolidated obligations		520			1,001
Deposits		16			36
Borrowings from other FHLBanks		1			—
Securities sold under repurchase agreements		4			—
Total interest expense		541			1,037
NET INTEREST INCOME BEFORE LOAN LOSS PROVISION		67			113
Loan loss provision		—			—
NET INTEREST INCOME AFTER LOAN LOSS PROVISION		67			113
OTHER INCOME
Net unrealized gains (losses) on securities held at fair value		(8	)		10
Net (losses) on derivatives and hedging activities		(26	)		(1	)
Service fees		3			8
Net gains on sale of securities held at fair value		8			—
Total other income		(23	)		17
OTHER EXPENSE
Operating expenses		17			23
Finance Board and Office of Finance expenses		2			1
Total other expenses		19			24
INCOME BEFORE ASSESSMENTS		25			106
Affordable Housing Program		2			8
REFCORP		5			18
Total assessments		7			26
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		18			80
Cumulative effect of change in accounting principle		—			(9	)
NET INCOME	$	18		$	71

98

Federal Home Loan Bank of Pittsburgh

STATEMENT OF CHANGES IN CAPITAL

(Unaudited)

										Accumulated
										Other
							Retained			Comprehensive
($ in millions)	Shares			Par Value			Earnings			(Loss) / Income			Total Capital
BALANCE, DECEMBER 31, 2000		21		$	2,065		$	110		$	—		$	2,175
Proceeds from sale of capital stock		15			1,530									1,530
Redemption of capital stock		(19	)		(1,890	)								(1,890	)
Comprehensive income:
Net income								71						71
Other comprehensive income:
Net unrealized gains on available-for-sale securities											1			1
Cumulative effect of change in accounting principle											—			—
Net unrealized gains relating to hedging activities											1			1
Total comprehensive income														74
Dividend on capital stock:
Cash								(62	)					(62	)
Stock
BALANCE, JUNE 30, 2001		17		$	1,705		$	119		$	2		$	1,826
BALANCE, DECEMBER 31, 2001		19		$	1,889		$	87		$	2		$	1,978
Proceeds from sale of capital stock		16			1,569									1,569
Redemption of capital stock		(16	)		(1,597	)								(1,597	)
Comprehensive income:
Net income								18						18
Other comprehensive income:
Net unrealized losses on available-for-sale securities											(7	)		(7	)
Net unrealized losses relating to hedging activities											(1	)		(1	)
Total comprehensive income														10
Dividend on capital stock:
Cash								(37	)					(37	)
Stock
BALANCE, JUNE 30, 2002		19		$	1,861		$	68		$	(6	)	$	1,923

99

Federal Home Loan Bank of Pittsburgh

STATEMENT OF CASH FLOWS

	Unaudited
	For the six
	months ended
	June 30,
($ in millions)	2002			2001
OPERATING ACTIVITIES
Net income	$	18		$	71
Cumulative effect of change in accounting principle		—			9
Income before cumulative effect of change in accounting principle		18			80
Adjustments to reconcile income before cumulative effect of change in accounting principle to net cash provided by operating activities:
Depreciation and amortization:
Net premiums and discounts on consolidated obligations and investments, and deferred costs and deferred fees received on interest rate exchange agreements		153			72
Concessions on consolidated obligations		7			4
Deferred loss on interest rate exchange agreements, net
Premises and equipment		1			2
Net premiums and discounts on mortgage loans		2			5
Other
Provision for credit losses on mortgage loans
Net realized gains on held-to-maturity securities
Net realized losses on available-for-sale securities
Increase in securities held at fair value, net transfers and transition adjustments		(594	)		(997	)
Losses due to change in net fair value adjustment on derivative and hedging activities		38			1
(Increase)/decrease in accrued interest receivable		(59	)		826
Increase in derivative assets — accrued interest		(18	)		(68	)
Increase/(decrease) in derivative liabilities — accrued interest		22			(62	)
Decrease/(increase) in other assets		4			(8	)
(Decrease)/increase in Affordable Housing Program (AHP) liability and discount on AHP loans		(10	)		1
Increase/(decrease) in accrued interest payable		21			(572	)
Decrease in REFCORP liability		(3	)		—
Increase in other liabilities		129			11
Total adjustments		(307	)		(785	)
Net cash used in operating activities		(289	)		(705	)
INVESTING ACTIVITIES
Net increase in interest-bearing deposits in banks		(34	)		(465	)
Net (increase)/decrease in federal funds sold		(1,653	)		3,777
Net (increase)/decrease in short-term held-to-maturity securities		(1	)		47
Proceeds from maturities of long-term held-to-maturity securities		1,123			1,458
Purchases of long-term held-to-maturity securities		(1,559	)		(850	)
Proceeds from maturities of available-for-sale securities		226			216
Purchases of available-for-sale securities		(1,480	)
Principal collected on loans		476,667			229,557
Loans made		(475,417	)		(229,400	)
Principal collected on mortgage loans		442			437
Mortgage loans made		(1,148	)		(477	)
Net increase in deposits to other FHLBanks for mortgage loan programs		(42	)		(56	)
Net increase in loans to other FHLBanks		(570	)		—
Increase in premises and equipment		(1	)		(1	)
Net cash (used in) provided by investing activities		(3,447	)		4,243

100

Federal Home Loan Bank of Pittsburgh

STATEMENT OF CASH FLOWS — (Continued)

	Unaudited
	For the six
	months ended
	June 30,
($ in millions)	2002			2001
FINANCING ACTIVITIES
Net increase in deposits	$	300		$	294
Net increase in securities sold under repurchase agreements		504			—
Net increase/(decrease) in loans from other FHLBanks		—			75
Net proceeds from sale of consolidated obligations:
Discount notes		272,361			352,747
Bonds		10,587			3,193
Payments for maturing and retiring consolidated obligations:
Discount notes		(272,097	)		(344,018	)
Bonds		(7,804	)		(15,723	)
Proceeds from issuance of capital stock		1,569			1,530
Payments for redemption of capital stock		(1,597	)		(1,890	)
Cash dividends paid		(37	)		(62	)
Net cash provided by/(used in) financing activities		3,786			(3,854	)
Net increase/(decrease) in cash and cash equivalents		50			(316	)
Cash and cash equivalents at beginning of period		44			441
Cash and cash equivalents at end of period	$	94		$	125
Supplemental Disclosures:
Interest paid	$	427		$	1,488

101

Notes to Financial Statements (Unaudited)

Note 1 — Basis of Presentation

     The accompanying interim financial statements for the six months ended June 30, 2002, should be read in conjunction with the audited financial statements for the year ended December 31,2001, which are contained in the Federal Home Loan Bank of Pittsburgh’s 2001 Annual Report.

     The results of operations for interim periods are not necessarily indicative of results to be expected for the year ending December 31, 2002.

Reclassifications. Certain amounts in the 2001 year-end December 31, 2001 and second quarter 2001 financial statements have been reclassified to conform with the June 30, 2002 presentation.

102

EXHIBIT A

CAPITAL PLAN
of the
Federal Home Loan Bank of Pittsburgh

As Approved by the Executive Committee

on April 26, 2002

103

TABLE OF CONTENTS

I. Purpose			105
	A.	General	105
II. Stock Investment			105
	A.	General	105
	B.	Minimum Amount	105
	C.	Adjustments to Minimum Amount	109
III. Transition Rule			109
	A.	Manner of conversion	109
	B.	Right to opt out of Capital Plan	110
	C.	Effects of Opting Out of the Conversion	110
	D.	Failure of a Member to affirm election to convert	110
	E.	Timetable for transition and full capital compliance	110
IV. Par Value, Rights, Terms, and Preferences of Capital Stock			110
	A.	Par Value	110
	B.	Ownership	110
	C.	Limitations	111
	D.	Dividends	111
	E.	Redemption	111
	F.	Cancellation of Redemption	111
	G.	Limited Transferability	111
	H.	Termination of Membership	112
	I.	Voting Rights	113
	J.	Rights in Bank Merger	113
	K.	Rights in Bank Liquidation	114
V. Bank Review of Plan			114
	A.	Review by Independent CPA	114
	B.	Review by NRSRO	114
	C.	Good faith effort determination	114
	D.	Approval by FHFB	114
	E.	Process for Amending this Plan	114
VI. Definitions			114

Exhibit A – General instructions for maximum borrowing capacity (MBC) calculation

Exhibit B – Line description for MBC calculation – banks

Exhibit C – Line descriptions for MBC calculation – thrifts

Exhibit D – Line descriptions for MBC calculation – credit unions

Exhibit E – Line descriptions for MBC calculation – insurance companies

Schedule A

104

I.   Purpose

A.   General. This Capital Plan is being implemented to comply with the provisions of the Bank Act and Capital Regulation.

1.	Effective Date. The Capital Plan will become effective on the Recalculation/Conversion Date, which shall be the date stated in a Notice to Members. Unless directed otherwise by the Finance Board, the Recalculation/Conversion Date shall not be greater than 18 months after the Finance Board approves the Capital Plan nor less than sixty (60) days after the date of the Notice to Members.
2.	Capitalized Terms. All capitalized terms used but not defined elsewhere in the Capital Plan shall have the meaning ascribed to such terms in Section VI.

II.   Stock Investment

A.

General. Adequate capitalization is required to: (a) provide for the safe and sound operation of the Bank; (b) permit prudent leveraging into products and services of benefit to Members and Housing Associates; (c) provide appropriate risk-adjusted Member dividend returns; (d) protect creditors of the Bank and the Bank System against loss; (e) generate earnings sufficient to meet the Bank’s various community support and public purpose obligations; and (f) comply with prevailing Minimum Regulatory Capital Requirements. Towards these objectives, this Capital Plan requires Members to make certain Minimum Member Stock Investments in the Bank.

B.

Minimum Amount

1.

General. The need for capital is in great part a function of the volumes of and risks inherent in the products and services provided by the Bank to its Members, including the potential for Members to borrow from the Bank. Therefore, the Capital Stock of the Bank should be contributed in general proportion to the distribution of such products and services to its Members, including their potential borrowing activities. Each Member must purchase and maintain a minimum investment in the Capital Stock of the Bank in an amount determined in accordance with the requirements of this Capital Plan.

2.

Minimum Member Stock Investment. Each Member is required to maintain a Minimum Member Stock Investment, both as a condition to becoming and remaining a Member and as a condition to obtaining Loans from the Bank, access to the Bank’s credit products through its Unused Borrowing Capacity, and to support Acquired Member Assets with the Bank. The total amount of the required minimum investment of all Members shall be sufficient to ensure that the Bank stays in compliance

105

with the Minimum Regulatory Capital Requirements under the Capital Regulation. The Board of Directors will monitor and, as necessary, adjust the minimum investment to provide for Capital Stock purchases and maintenance by all Members sufficient to allow the Bank to remain in compliance with its Minimum Regulatory Capital Requirements.

a)   Member Loan Stock Purchase Requirement. Each Member is required to purchase and hold Capital Stock in an amount equal to the Bank’s Member Loan Stock Purchase Percentage multiplied by all the Loans extended from the Bank to that Member. The Member Loan Stock Purchase Requirement will be calculated at the time each Loan is Transacted. The Member Loan Stock Purchase Percentage is set forth on Schedule A. From time to time, upon approval by the Board of Directors, the Member Loan Stock Purchase Percentage may be adjusted to as high as six percent (6.0%) or to as low as four and one half percent (4.5%). Changes outside this range would constitute an amendment to this Capital Plan that would require Finance Board approval. An adjustment in the Member Loan Stock Purchase Percentage may be applied in either of the following manners:

(1)

A change in the Member Loan Stock Purchase Percentage may be applied prospectively, affecting only Loans Transacted subsequent to the change in the Member Loan Stock Purchase Percentage, or

(2)

A change in the Member Loan Stock Purchase Percentage may be applied retrospectively, in which case the new Member Loan Stock Purchase Percentage would be applied both to the Member Loans outstanding at the time of such change and to any Loans Transacted subsequent to such change. If a change in Member Loan Stock Purchase Requirement is made retrospectively, the Board of Directors may choose to either:

(i)	apply the new Member Loan Stock Purchase Percentage to all Member Loans outstanding at the time of such change, or
(ii)	apply the new Member Loan Stock Purchase Percentage only to Member Loans which do not include a Principal Prepayment Fee.

b)   Unused Borrowing Capacity Stock Purchase Requirement. Each Member is required to purchase and hold Capital Stock in an amount equal to the Bank’s Unused Borrowing Capacity Percentage multiplied by the principal amount of Unused Borrowing Capacity of that Member. The amount of Unused Borrowing Capacity shall be calculated no later than April 10^th of each year and at the time each Loan is Transacted. The Unused Borrowing Capacity Percentage is set forth on Schedule A. From

106

time to time, upon approval by the Board of Directors, the Unused Borrowing Capacity Percentage may be adjusted to as high as one and one-half percent (1.5%) or to as low as zero percent (0%). Changes outside this range would constitute an amendment to this Capital Plan, which would require Finance Board approval. An adjustment in the Unused Borrowing Capacity Percentage will be applied to the principal amount of Unused Borrowing Capacity for all future calculations. From time-to-time, in the discretion of the Board, the amount any one Member would have to purchase under the Unused Borrowing Capacity Stock Purchase Requirement may be subject to a cap of no less than $10 million.

c)   Acquired Member Asset Purchase Requirement. Each Member is required to purchase and hold Capital Stock in an amount equal to the Bank’s Acquired Member Asset Purchase Percentage multiplied by the amount of Acquired Member Assets delivered by that Member and held by the Bank at the time the transaction occurs (in the Bank’s discretion, it may recalculate the member’s Acquired Member Asset Purchase Requirement from time-to-time to capture any reductions in the amount of Acquired Member Assets then being held by the Bank). The Acquired Member Asset Purchase Percentage is set forth on Schedule A. From time to time, upon approval by the Board of Directors, the Acquired Member Asset Purchase Percentage may be adjusted to as high as four percent (4.0%) or to as low as zero percent (0.0%). Changes outside this range would constitute an amendment to this Capital Plan that would require Finance Board approval. Adjustments made to the Bank’s Acquired Member Assets Purchase Percentage, if any, shall be applied in accordance with the following:

(1)   Any increase in Acquired Member Asset Purchase Percentage shall be applied only on a prospective basis, i.e., affecting only master commitments entered into between a Member and the Bank subsequent to such increase in the Acquired Member Asset Purchase Percentage.

(a)   Any Acquired Member Assets delivered to the Bank under a master commitment made prior to an increase in Acquired Member Asset Purchase Percentage shall be subject to the lower Acquired Member Asset Purchase Percentage, if any, that had been in effect at the time that master commitment was originally accepted by the Bank.

(2)      Any decrease in Acquired Member Asset Purchase Percentage may, in the sole discretion of the Bank, be applied either retrospectively, affecting all Acquired Member Assets previously delivered and held by the Bank or to be delivered under existing master commitments, or prospectively, affecting only master commitments entered

107

into subsequent to such decrease in the Acquired Member Asset Purchase Percentage.

3.   Excess Stock Investment. A Member may hold Excess Stock to the extent it has the legal authority under applicable statutes and regulations, subject to the following:

a)	Repurchase. With Notice to Members of at least one (1) Business Day, the Bank, in its sole discretion, may elect to Repurchase Excess Stock shares at any time. The Bank will Repurchase Excess Stock from all Members on a pro rata basis (provided, however, in the event a Member has given Written Notice of its intent to redeem Excess Stock the Bank may, in its sole discretion, Repurchase the Excess Stock of that Member as set forth below). The effect of Repurchasing Capital Stock by the Bank is to retire such shares. The one (1) Business Day Notice to Members does not apply to the repurchase of Capital Stock on the Recalculation/Conversion Date.
b)	Redemption. A Member may, at its discretion, request a Redemption of Capital Stock by providing Written Notice. A Member may request a Redemption of some or all of its Capital Stock in accordance with the Redemption terms of this Capital Plan. The 5-year Redemption period commences upon the receipt of the Written Notice that specifies the number of shares to be redeemed. Following Written Notice of a Member’s intent to redeem shares, but prior to actual Redemption, the Bank may, in its sole discretion, elect to Repurchase those Excess Stock shares for which it has already received a Redemption request. In the event that multiple Redemption requests are pending, the Bank may, in its sole discretion, elect to Repurchase Excess Stock on a prorated basis or according to the order in which the Redemption requests were received by the Bank, or according to another allocation method as necessary to maintain ongoing compliance with the Bank’s Capital Regulations. The effect of Redeeming Excess Stock shares by the Bank is to retire such shares. A request by a Member (whose Membership has not been terminated) to redeem Capital Stock shall automatically be cancelled if the Bank is prevented from redeeming the Member’s Capital Stock because such redemption would cause the Member to fail to meet its Minimum Member Stock Investment. The effective date of the automatic cancellation shall be five (5) business days after the expiration of the applicable redemption notice period.
c)	Limitation on Repurchase and Redemption. The Repurchase and Redemption of Capital Stock will be subject to the applicable restrictions set forth in 12 C.F.R. sections 931.7 and 931.8. A Member’s right to the Repurchase or Redemption of its Excess Stock may be impaired by these regulatory requirements if the

108

Bank has used the Member’s Excess Stock to provide the necessary capital support for its investments and other assets.

C.   Adjustments to Minimum Amount

1.

Member Acceptance. Each Member is required to comply with any changes adopted in the Bank’s Capital Plan, including any adjustments made by the Board of Directors that may lead to an increase in a Member’s Minimum Member Stock Investment. In order to effectuate the sale of additional Capital Stock required due to such changes in terms, the Bank is authorized to issue Capital Stock in the name of a Member and to withdraw appropriate payment from the Member’s Demand Deposit Account.

2.

Prior Notice. The Bank shall provide at least fifteen (15) days Notice to Members prior to implementing any adjustment to the Member Loan Stock Purchase Percentage, Unused Borrowing Capacity Percentage, or Acquired Member Asset Purchase Percentage if doing so affects the total Minimum Member Stock Investment of the Member. The Bank shall implement the adjustments on the date stated in the Notice to Members.

III.   Transition Rule

A.   Manner of conversion. The following steps shall be taken to implement the Bank’s Capital Plan:

1.	Stock Conversion. On the Recalculation/Conversion Date, each currently outstanding share of Bank stock shall be converted into one share of Capital Stock.
2.	Recalculation of Minimum Member Stock Purchase Requirement. On the Recalculation/Conversion Date, immediately following the conversion of currently outstanding Bank stock into Capital Stock, each Member’s Minimum Member Stock Investment will be recalculated by the Bank.
3.	Identify each Member’s excess/deficient stock positions. On the Recalculation/Conversion Date, after recalculating each Member’s Minimum Member Stock Investment, each Member’s Recalculated Stock Excess/(Shortfall) shall be determined by the Bank.
4.	Adjust each Member’s stock holdings. Each Member’s holdings of Capital Stock will be adjusted on the Recalculation/Conversion Date as follows:

a)   Recalculated Stock Excess. If a Member has a Recalculated Stock Excess position, the Bank will Repurchase at par a sufficient number of shares of Capital Stock to eliminate the Member’s Excess Stock position (subject to the Bank remaining in compliance with its Minimum Regulatory Capital Requirement).

109

Proceeds from the share Repurchase will be credited to the Member’s Demand Deposit Account with the Bank.

b)   Recalculated Stock Shortfall. If a Member has a Recalculated Stock Shortfall, the Bank will issue at par a sufficient number of shares of Capital Stock to eliminate the Member’s Recalculated Stock Shortfall position. Proceeds for the share issuance will be debited from the Member’s Demand Deposit Account with the Bank.

B.	Right to opt out of Capital Plan. Each Member retains the right to opt-out of the conversion as contained herein by providing the Finance Board with written notice of its intent to withdraw its Membership from the Bank prior to the Recalculation/Conversion Date. The written notice of its intent to withdraw must be filed with the Finance Board prior to the Opt-Out Date, which Opt-Out Date will be set forth in the Notice to Members setting forth the Recalculation/Conversion Date. The Opt-Out Date shall be 30 days prior to the Recalculation/Conversion Date.
C.	Effects of Opting Out of the Conversion. The Membership of a Member that opts-out of the conversion according to this Plan shall terminate at the earlier of: (1) six months from the date that the written notice of withdrawal was filed with the Finance Board; or (2) the effective date of this Capital Plan. On the date the Membership is terminated, all outstanding indebtedness of the Member to the Bank shall become immediately due and payable. The Bank shall cancel each currently outstanding share of Bank stock on the date the Membership terminates provided that the Bank, after such cancellation, shall remain in full compliance with the Minimum Regulatory Capital Requirement. Any Member that provides the Finance Board with written notice of its intent to withdraw after the Opt-Out Date but before the effective date of the Capital Plan shall have its existing stock converted into Capital Stock on the Recalculation/Conversion Date and the written notice shall commence the applicable five (5) year waiting period to redeem the Capital Stock.
D.	Failure of a Member to affirm election to convert. The failure to provide the written notice as set forth in Section III. B above shall be deemed by the Bank as acceptance of the terms of conversion and of the terms of this Capital Plan.
E.	Timetable for transition and full capital compliance. Immediately following the Recalculation/Conversion Date, it is anticipated that the Bank will be in full compliance with the Capital Regulation.

IV.   Par Value, Rights, Terms, and Preferences of Capital Stock

A.	Par Value. The par value of Capital Stock shall be $100. The Capital Stock shall be issued, redeemed and repurchased at par value.
B.	Ownership. The retained earnings, surplus, undivided profits and equity reserves, if any, of the Bank are owned by the holders of Capital Stock proportionate to

110

their ownership of all outstanding shares of Capital Stock. The holders of Capital Stock shall have no right to receive any portion of these items, however, except through the declaration of a dividend or capital distribution approved by the Board of Directors or through liquidation of the Bank.

C.	Limitations. The Bank may only issue Capital Stock in accordance with this Capital Plan and the Capital Regulations. The Bank may only issue Capital Stock to Members and only Members may hold Capital Stock.
D.	Dividends. Dividends are to be declared and paid on Capital Stock from time to time as determined by the Bank’s Board of Directors, and are non-cumulative with respect to payment obligation and are not to exceed the sum of current net earnings plus net earnings previously retained by the Bank. The Board of Directors may declare and pay dividends on Capital Stock provided the Bank’s capital position is not below its Minimum Regulatory Capital Requirement nor will it be below its Minimum Regulatory Capital Requirement subsequent to the payment of the dividend.
E.	Redemption. Capital Stock shares are redeemable for cash at par value following five (5) years prior Written Notice, however, a Member may not have pending at any one time more than one Redemption request for the same share of Capital Stock.
F.	Cancellation of Redemption. In the event a Member, having previously notified the Bank in writing of its intent to redeem some or all of its Capital Stock, wishes to cancel its Redemption request before the completion of the five (5) year notification period, it may elect to do so by providing Written Notice to the Bank of its intent to cancel its Redemption request. The Bank will impose a Redemption Cancellation Fee on the Member that either voluntarily or involuntarily cancels its Redemption request; provided, however, the Bank may waive the fee for a bona fide business purpose consistent with section 7(j) of the Bank Act. The Redemption Cancellation Fee is the fee in effect at the time the Member provides Written Notice of cancellation. The Member has ten (10) business days from the date the Bank sends the Notice to Member of the amount of the Cancellation Fee to provide Written Notice of its intent to revoke the cancellation and to proceed with the Redemption of the Capital Stock it previously sought to redeem according to the original Redemption timetable, thereby avoiding the Redemption Cancellation Fee. The Redemption Cancellation Fee is calculated by taking the percentage set forth on Schedule A and multiplying it against the par value of the Capital Stock subject to the notice of Redemption. The Redemption Cancellation Fee percentage may be adjusted at the discretion of the Board of Directors to as high as five percent (5%) and to as low as zero percent (0%).
G.	Limited Transferability. A Member may only transfer any Excess Stock of the Bank it holds to another Member of the Bank or to an institution that has been approved for Membership in the Bank and that has satisfied all conditions for becoming a Member, other than the purchase of the minimum amount of Capital Stock that it is required to hold as a condition of Membership. Any such Capital

111

Stock transfers shall be at par value and shall be effective upon being recorded on the appropriate books and records of the Bank. Capital Stock may only be traded between the Bank and its Members.

H.   Termination of Membership. The following terms pertain to the termination of a Member’s Membership in the Bank.

1.   Voluntary Withdrawal.

a)	A Member may withdraw from Membership by providing the Bank Written Notice of its intent to withdraw. A Member may cancel its notice of withdrawal at any time prior to its effective date by providing the Bank Written Notice of such cancellation. The Bank will impose a fee on a Member that cancels a notice of withdrawal; provided, however, the Bank may waive the fee for a bona fide business purpose consistent with section 7(j) of the Bank Act. The Withdrawal Cancellation Fee is the fee in effect at the time the Member provides Written Notice of cancellation. The Member has ten (10) business days from the date the Bank sends the Notice to Member of the amount of the Membership Withdrawal Cancellation Fee to provide Written Notice of its intent to revoke the cancellation, thereby avoiding the Membership Withdrawal Cancellation Fee. The Membership Withdrawal Cancellation Fee is calculated by taking the percentage set forth on Schedule A and multiplying it against the par value of the Capital Stock held by the Member. The Membership Withdrawal Cancellation Fee percentage may be adjusted at the discretion of the Board of Directors to as high as five percent (5%) and to as low as zero percent (0%).
b)	The Membership of a Member that has submitted a Written Notice of withdrawal shall terminate as of the date on which the last of the applicable Capital Stock Redemption periods ends for the Capital Stock comprising the Member’s Membership Stock Purchase Requirement, as of the date the Written Notice of withdrawal is submitted, unless the Member has cancelled its notice of withdrawal prior to that date.
c)	The receipt by the Bank of Written Notice of withdrawal shall commence the 5-year Redemption period for the Capital Stock held by the Member that is not already subject to a pending request for Redemption. In the case of a Member whose Membership has been terminated as a result of a merger or other consolidation into a non-member or a member of another Home Loan Bank, the Redemption period for any Capital Stock that is not already subject to a pending request for Redemption shall be deemed to commence on the date on which the charter of the former Member is cancelled.

112

d)   No Member may withdraw from Membership unless, on the date the Membership is terminated, there is in effect a certification from the Finance Board that the withdrawal of a Member will not cause the Bank System to fail to satisfy its Refcorp Obligations.

2.   Involuntary Terminations. The Board of Directors of the Bank has the right to terminate the Membership of any Member that: 1) fails to comply with any requirement of the Bank Act, Finance Board Regulations, or the Capital Plan; 2) becomes insolvent or otherwise subject to the appointment of a conservator, receiver or other legal custodian under federal or state law; or 3) would jeopardize the safety and soundness of the Bank if it were to remain a Member.

a)   The 5-year Redemption period for all the Capital Stock owned by the Member and not already subject to a pending request for Redemption shall commence on the date the Bank terminates the Member’s Membership.

3.

Liquidation of Capital Stock. If an institution ceases to be a Member of the Bank for any reason, the Bank shall require the institution to continue to hold the Capital Stock necessary to support the Loans outstanding and/or Acquired Member Assets under the terms of the Capital Plan in effect at that time. Upon the repayment of outstanding indebtedness to the Bank, including any Principal Prepayment Fees and settlement of the Member’s risk sharing obligations under any Acquired Member Asset program, the Capital Stock that was necessary to support the Loan and/or Acquired Member Asset program shall become Excess Stock subject to Repurchase by the Bank in its discretion.

4.

Liquidation of Indebtedness. The Bank will liquidate the indebtedness of any institution that ceases to be a Member in an orderly manner according to a schedule established by the Bank in its sole discretion. The Bank may require the immediate repayment of all indebtedness, in which case the Member shall be subject to any applicable Principal Prepayment Fees. In the alternative, and in the Bank’s sole discretion, the Bank may allow the institution to continue to hold on to any indebtedness for any length of period up to and including maturity.

I.	Voting rights. The voting rights associated with Capital Stock are defined herein. The voting rights associated with the election of directors are governed by Part 915 of the Rules and Regulations of the Finance Board. There shall be no voting preferences for any share of Capital Stock.
J.	Rights in Bank Merger. In the event the Bank merges with or consolidates into another Home Loan Bank, the Member will be entitled to the rights and benefits set forth in the agreement of merger approved by the Board of Directors of each Home Loan Bank and the Finance Board.

113

K.   Rights in Bank Liquidation. In the event the Bank is liquidated, the Member will be entitled to the rights and benefits granted to it by the Finance Board and/or Congress.

V.   Bank Review of Plan

A.	Review by Independent CPA
	Attached.
B.	Review by NRSRO
	Attached.
C.	Good faith effort determination
	Pro forma financial projections attached.
D.	Approval by FHFB
	To be attached upon receipt
E.	Process for Amending this Plan

1.   General. In order to safeguard the ability to serve its Members and protect their capital investment, accommodate changes in the Bank’s product or business mix, and maintain compliance with Capital Regulations, from time to time this Plan may be amended. Capital Plan amendments may be made as follows:

a)	Board of Directors. Upon a simple majority vote of all of the individual members of the Board of Directors, not just a simple majority vote of a quorum, a request to amend this Capital Plan may be submitted to the Finance Board. The effective date(s) for any proposed change(s) to the terms of this Capital Plan shall be contained in any amendment request as submitted to the Finance Board.
b)	Shareholder Notification. The Bank will provide Notice to Members of any request submitted to the Finance Board to amend this Capital Plan at least thirty (30) days prior to the effective date of any such requested amendment.
c)	Finance Board. To become effective, any amendment to this Capital Plan must be approved by the Finance Board.

114

VI.   Definitions

Certain terms used within this Capital Plan are defined as follows:

Acquired Member Asset means the outstanding principal balance of assets purchased or funded by the Bank from a Member or Housing Associate pursuant to Part 955 of the Rules and Regulations of the Finance Board.

Acquired Member Asset Purchase Percentage means the percentage set by the Board of Directors from time to time that determines how much Capital Stock a Member must purchase in relationship to the outstanding principal balance of Acquired Member Assets delivered by a Member and held the Bank.

Acquired Member Asset Purchase Requirement means the Activity Based Stock Purchase Requirement based upon Acquired Member Assets as specified in this Plan.

Activity-Based Member Stock Purchase Requirement means a stock purchase requirement under which a Member must acquire a specific amount of Capital Stock as a function of the volume of a particular product or service provided to that Member by the Bank.

Bank means the Federal Home Loan Bank of Pittsburgh.

Bank Act means the Federal Home Loan Bank Act, as amended, 12 U.S.C. 1421 through 1449.

Board of Directors means the Board of Directors of the Bank.

Business Day means any day on which the Bank is open to conduct business.

Charge Against Capital means a required reduction in the value of paid-in capital.

Capital Plan means the plan adopted by the Board of Directors and approved by the Finance Board pursuant to the Capital Regulation.

Capital Regulation means Subchapter E of Chapter IX of Title 12 of the Code of Federal Regulations.

Capital Stock means “Class B Stock” as defined by the Bank Act and Capital Regulation.

Capital Sufficiency Assets mean the book value of the Bank’s total assets less the book value of both the Bank’s outstanding Loans and its Short Term Investments maturing in one year or less.

Excess Stock means that amount of Capital Stock held by a Member in excess of its Minimum Member Stock Investment as required by this Capital Plan.

115

Finance Board means the Federal Housing Finance Board.

Finance Board Regulations mean Chapter IX of Title 12 of the Code of Federal Regulations, as may be amended from time to time.

GAAP means Generally Accepted Accounting Principles as applied in the United States of America.

Housing Associate means an entity that has been approved as nonmember mortgagee pursuant to part B of Part 950 of the Code of Federal Regulations.

Loan means the outstanding principal balance of an advance, as defined in Section 950.1 of the Advances Regulations.

Market Risk Model means the internal market risk model or the internal cash flow model used to calculate the market risk component of the Bank’s risk-based capital requirement approved by the Finance Board.

Member means an institution that has been approved for Membership in the Bank and that has satisfied its Minimum Member Stock Investment requirement.

Member Demand Deposit Account means one or more demand deposit accounts maintained with the Bank and which are subject to the terms and conditions of the Bank’s Demand Deposit Account Agreement.

Member Loan Stock Purchase Percentage means the percentage set by the Board of Directors from time to time that determines how much Capital Stock a Member must purchase in relationship to its outstanding Loans from the Bank.

Member Loan Stock Purchase Requirement means the Activity-Based Stock Purchase Requirement based upon Loans as specified in this Plan.

Membership Stock Purchase Requirement means a stock purchase requirement under which a Member must acquire a specific amount of Capital Stock as a condition of Membership.

Membership means all of the rights, privileges and obligations associated with being a Member of the Bank.

Membership Withdrawal Cancellation Fee means the fee the Bank may impose upon a Member who having given notice of its intent to withdraw from Membership, subsequently revokes that withdrawal notice.

Minimum Member Stock Investment means the minimum amount of Capital Stock that a Member is required to purchase and hold in order to be a Member and in order to obtain Loans from the Bank and to engage in other business activities with the Bank in accordance with this Plan. The Minimum Member Stock Investment shall be the sum of (a) the Member’s Member Loan Stock

116

Purchase Requirement, plus (b) the Member’s Unused Borrowing Capacity Stock Purchase Requirement, plus (c) the Acquired Member Asset Purchase Requirement; provided, however, that the minimum investment of each Member in the Capital Stock of the Bank shall be no less than Ten Thousand Dollars ($10,000).

Minimum Regulatory Capital Requirement means the minimum regulatory capital requirement established for the Bank in either the Capital Regulation or by order of the Finance Board.

Notice to Members means any written notice from the Bank to the Members regarding any element of the Capital Plan, and also includes any electronic writing related to the Capital Plan, including electronic mail and posting on the Bank’s public or private web site.

Opt-Out Date means the date by which a Member wishing not to have its current stock converted into Capital Stock shall provide the Finance Board with written notice of its intent to withdraw from Membership.

Plan means the Capital Plan.

Principal Prepayment Fee means the fee charged by the Bank under the Advances, Collateral Pledge and Security Agreement when a Member pays off a Loan before maturity.

Recalculation/Conversion Date means the date upon which current stock shares are converted into Capital Stock shares and each Member’s Minimum Member Stock Investment is initially calculated.

Recalculated Stock Excess/Shortfall means the difference between a Member’s Minimum Member Stock Investment as determined on the Recalculation/Conversion Date and that Member’s stock holding immediately prior to the implementation of this Capital Plan, where an “excess” refers to a Minimum Member Stock Investment which is less than the Member’s Capital Stock holdings and a “shortfall” refers to a Minimum Member Stock Investment which is greater than the Member’s Capital Stock holdings.

Redemption Cancellation Fee means the fee the Bank may impose upon a Member who, having given Written Notice of its intent to redeem Capital Stock shares, subsequently revokes that Redemption request.

Redemption means the acquisition by the Bank of outstanding Capital Stock from a Member at par value following the expiration of the statutory Redemption request period.

Refcorp Obligations means the obligations under 12 U.S.C. 1441b(f)(2)(C) to contribute interest payments owed on obligations issued by the Resolution Funding Corporation.

117

Repurchase means the acquisition by the Bank of Excess Stock of a Member either on the Bank’s own initiative or prior to the expiration of the statutory Redemption request period.

Risk Assessment Procedures and Controls means the risk assessment procedures and controls to be used to manage the Bank’s credit, market, and operation risks approved by the Finance Board.

Short Term Investments mean cash and marketable investments with a stated maturity of one year or less that, as of the calculation date, are instruments in which the Bank may invest in full compliance with all Finance Board regulations, plus scheduled payments of principal and interest over the next year on all assets that are fully compliant with Finance Board regulations on the date of calculation. Such investments do not include Loans, Acquired Member Assets, or assets with a maturity longer than one year even if there is an optional or firm commitment to sell such assets within one year.

Transacted means the origination, repayment or renewal of a Loan.

Unused Borrowing Capacity for a Member equals maximum borrowing capacity as calculated per Exhibit B for banks, Exhibit C for thrifts, Exhibit D for Credit Unions and Exhibit E for Insurance Companies, less outstanding Member Loans, the aggregate maximum amount that may be lent under outstanding letters of credit, and the netted market value of intermediary derivative transactions.

Unused Borrowing Capacity Percentage means the percentage set by the Board of Directors from time to time that determines how much Capital Stock a Member must purchase in relation to its Unused Borrowing Capacity.

Unused Borrowing Capacity Stock Purchase Requirement serves as the Membership Stock Purchase Requirement based upon a Member’s Unused Borrowing Capacity as specified in this Plan.

Written Notice means a letter or other business writing, signed by an officer of the Member, sent by certified mail, return receipt requested, to the Bank’s Corporate Secretary at the Bank’s home office, currently 601 Grant Street, Pittsburgh, Pennsylvania, 15219.

118

EXHIBIT A

general instructions for maximum borrowing capacity (MBC) calculation:

(I)	The Bank will calculate MBC on a quarterly basis using regulatory data approximately 60 days after each quarter end (see schedules for regulatory line items used).
	The MBC used in determining annual Unused Borrowing Capacity Stock Purchase Requirement will be based on year-end December 31 regulatory data.
(II)	MBC is based on the lower of total weighted (haircuted) qualifying collateral value or the level of residential housing finance assets (RHFA).
	To determine total weighted qualifying collateral value, specific asset balances (market and/or book value) within each qualifying collateral category are derived from regulatory data. Those balances are weighted by applicable haircut percentages, and are then aggregated to arrive at total collateral value, netting out assets pledged to other creditors or other borrowings secured by qualifying collateral. NOTE: The weighted value for other real estate-related collateral is limited by policy not to exceed a certain percentage of the final calculated MBC (“MBC Percentage”). The current MBC Percentage is set forth on Schedule A.
	The RHFA level is determined by adding balances that represent all residential mortgage loan and mortgage-related securities assets.
	example:
	total weighted qualifying collateral method:

collateral category	balance		haircut				value
1. treasury & agency securities	$	15,000		95	%		$	14,250
2. agency mortgage backed securities	$	25,000		90	%		$	22,500
3. non-agency mortgage backed securities	$	10,000		87	%		$	8,700
4. single-family residential mortgages (net of past dues)	$	50,000		80	%		$	40,000
5. multi-family residential mortgages (net of past dues)	$	7,000		50	%		$	3,500
6. other real estate-related (value limited by MBC Percentage)	$	12,500		50	%		$	6,250
7. minus securities pledged to other creditors or other						-	$	6,500
borrowings secured by qualifying collateral	total collateral value						$	88,700

note:   for Mortgage Partnership Finance (MPF) participants, the maximum credit enhancement amount is deducted from the total collateral value.

RHFA method:
collateral category		balance		haircut		value
1. all residential mortgage loans		$	65,750		n/a	$	65,750
2. all mortgage-related securities		$	35,000		n/a	$	35,000
		total RHFA value				$	100,750
	calculated MBC (lesser of total collateral or RHFA value):					$	88,700

(III)   The Bank may further refine a member’s MBC due to the following:

1. collateral eligibility factors determined from on-site collateral audits.

2. documented pledging activity not found in regulatory data.

3. adjustments for affiliate collateral pledging.

119

EXHIBIT B

Line descriptions for MBC calculation - banks

For banks                    (data from Federal Deposit Insurance Corporation call report)
qualifying collateral assets
			current	current
			blanket	specific	range for
	line	schedule/	collateral	collateral	collateral
category	description	line number	weighting	weighting	weighting
treasury and	ustreshfv	RC-B-0213	95%	90%	85% - 98%
agency securities	ustresafv	RC-B-1287	95%	90%	85% - 98%
	issbyaghfv	RC-B-1295	95%	90%	85% - 98%
	issbvagafv	RC-B-1298	95%	90%	85% - 98%
	issbyushfv	RC-B-1290	95%	90%	85% - 98%
	issbyusafv	RC-B-1293	95%	90%	85% - 98%
govt. and agcy. mortgage	passisshfv	RC-B-1705	90%	85%	80% - 93%
backed securities	passissafv	RC-B-1707	90%	85%	80% - 93%
	passgtyhfv	RC-B-1699	90%	85%	80% - 93%
	passatafv	RC-B-1702	90%	85%	80% - 93%
	cmoisshfv	RC-B-1715	90%	85%	80% - 93%
	cmoissafv	RC-B-1717	90%	85%	80% - 93%
non-agency mortgage	passpythfv	RC-B-1710	87%	82%	72% - 92%
backed securities	passpvtafv	RC-B-1713	87%	82%	72% - 92%
	cmocolhfv	RC-B-1719	87%	82%	72% - 92%
	cmocolafv	RC-B-1732	87%	82%	72% - 92%
	cmopvthfv	RC-B-1734	87%	82%	72% - 92%
	cmopvtafv	RC-B-1736	87%	82%	72% - 92%
1-4 fam. mtgs. - 1st lien	refamfstln	RC-C-5367	80%	75%	65% - 85%
(less troubled assets)	(othrs30-89)	(RC-N-5433 or 5401)
	(othrs90mor)	(RC-N-5434 or 5402)
	(othrsnonac)	(RC-N-5435 or 5403)
multi-family mtgs.	remltagg	RC-C-1460	50%	45%	35% - 70%
(less troubled assets)	(mltrs30-89)	(RC-N-5436 or 3499)
	(mttrs90mor)	(RC-N-5437 or 3500)
	(mltrsnonac)	(RC-N-5438 or 3501)
other real estate	recons - RE secured construction loans	RC-C-1415	50%	45%	35% - 70%
related & community	refarm - RE secured farmland loans	RC-C-1420	50%	45%	35% - 70%
financial inst. collateral	relineofcr- SF revolving, open-end loans	RC-C-1797	50%	45%	35% - 70%
(less troubled assets)	refamjrln - SF junior lien mortgage loans	RC-C-5368	50%	45%	35% - 70%
	renonfarm - nonfarm, nonresidential	RC-C-1480	50%	45%	35% - 70%
	farm - loans for agricultural production *	RC-C-1590	50%	45%	35% - 70%
	cilnsus-commercial, industrial loans	RC-C-1763	50%	45%	35% - 70%
NOTE: total limited to	(const30-89)	(RC-N- 5424 or 2759)
30% of total MBC	(const90mor)	(RC-N-5426 or 2769)
	(constnonac)	(RC-N-5426 or 3492)
	(farm30-89)	(RC-N-5427 or 3493)
	(farm90mor)	(RC-N-5428 or 3494)
*   community financial	(farmnonac)	(RC-N-5429 or 3495)
inst. eligible only	(revrs30-89)	(RC-N- 5398)
	(revrs90mor)	(RC-N- 5399)
	(revrsnonac)	(RC-N- 5400)
	(nonrs30-89)	(RC-N- 5439 or 3502)
	(nonrs90mor)	(RC-N- 5440 or 3503)
	(nonrsnonac)	(RC-N- 5441 or 3504)
	(pdfrm30-89) *	(RC-N- 1230 or 1594)
	(pdfrm90mor) *	(RC-N- 1231 or 1597)
	(farmnonacc) *	(RC-N- 1232 or 1583)
	(ci30-89us) *	(RC-N- 5421 or 1251)
	(ci90morus) *	(RC-N- 5422 or 1252)
	(cinonaccus) *	(RC-N- 5423 or 1253)
(less pledged securities)	(secpledge)	(RC-B-0416)
note: for Mortgage Partnership Finance (MPF) participants, the maximum credit enhancement amount is deducted from the total collateral value.
RESIDENTIAL HOUSING FINANCE ASSETS (no haircuts)
	line	schedule/
category	description	line number
revolving 1-4 mtgs.	relineofcr	RC-C-1797
1-4 fam. mtgs. - 1st lien	refamfstln	RC-C-5367
1-4 fam. mtgs. - junior lien	refamjrln	RC-C-5368
multi-family mtgs.	remltagg	RC-C-1460
govt. and agcy. mortgage	passisshfv	RC-B-1705
backed securities	passissafv	RC-B-1707
	passgtyhfv	RC-B-1699
	passgtafv	RC-B-1702
	cmoisshfv	RC-B-1715
	cmoissafv	RC-B-1717
non-agency mortgage	passpvthfv	RC-B-1710
backed securities	passpvtafv	RC-B-1713
	cmocolhfv	RC-B-1719
	cmocolafv	RC-B-1732
	cmopvthfv	RC-B-1734
	cmopvtafv	RC-B-1736

NOTE:  The MBC is based on the lower of the qualifying collateral assets or residential housing finance assets.

120

EXHIBIT C

Line descriptions for MBC calculation - thrifts

For thrifts                    (data from Office of Thrift Supervision tfr)
qualifying collateral assets
		current	current
		blanket	specific	range for
		collateral	collateral	collateral
category	line numbers	weighting	weighting	weighting
treasury and agency securities	SC130	95%	90%	85% - 98%
govt. and agcy. mortgage backed securities	SC210	90%	85%	80% - 93%
non-agency mortgage backed securities	SC215	87%	82%	72% - 92%
	SC150	87%	82%	72% - 92%
1-4 fam. mtgs.	SC250	80%	75%	65% - 85%
(less junior lien mtgs.)	(CMR311+CMR312)
(less troubled assets)	(pd120+pd220+pd320)
multi-family mtgs.	SC256	50%	45%	35% - 70%
(less troubled assets)	(pd125+pd225+pd325)
other real estate-	CMR311- adj. rate junior lien mortgages	50%	45%	35% - 70%
related & community fin.	CMR312 - fixed rate junior lien mortgages	50%	45%	35% - 70%
inst. collateral	SC230 - sf construction loans	50%	45%	35% - 70%
(less troubled assets)	SC235 - mf construction loans	50%	45%	35% - 70%
	SC240 - nonresidential constr. loans	50%	45%	35% - 70%
NOTE: total limited to	SC260 - mortgages on nonres. property	50%	45%	35% - 70%
30% of total MBC	SC265 - mortgages on land	50%	45%	35% - 70%
	SC 300 - commercial, non-mtg., secured *	50%	45%	35% - 70%
	SC303 - commercial, unsecured *	50%	45%	35% - 70%
	SC306 - commercial, financing leases *	50%	45%	35% - 70%
*   community financial inst.	(PD135)
eligible only	(PD 235)
	(PD 335)
	(PD 138)
	(PD 238)
	(PD 338)
	(PD 140)
	(PD 240)
	(PD 340)
(less other borrowings	(SC72)
assumed collateralized)	exclude FHLB advances
note: for Mortgage Partnership Finance (MPF) participants, the maximum credit enhancement amount is deducted from the total collateral value.
RESIDENTIAL HOUSING FINANCE ASSETS (no haircuts)
	line
category	numbers
mortgage loans (less non-residential	SC23
property and land)	(SC240+SC265+SC260)
govt. and agcy. mortgage backed securities	SC210
non-agency mortgage	SC215
backed securities	SC150

NOTE: The MBC is based on the lower of the qualifying Collateral assets or Residential Housing Finance Assets.

121

EXHIBIT D

Line descriptions for MBC calculation - credit unions

	For credit unions		(data from National Credit Union Administration reports)
	qualifying collateral assets
				current	current
				blanket	specific	range for
				collateral	collateral	collateral
	category	acct. codes		weighting	weighting	weighting
	treasury and	741C		95%	90%	85% - 98%
	agency securities	742C
	govt. and agcy. mortgage backed securities	732		90%	85%	80% - 93%
	non-agency mortgage backed securities	733		87%	82%	72% - 92%
	1-4 fam. mtgs. - 1st lien			80	75%	65% - 85%
	fixed rate	704
	adjustable rate	705
	other real estate related collateral			50%	45%	35% - 70%
	revolving mortgage loans	708
	non first lien fixed rate loans	706
	non first lien adj. rate loans	707
	NOTE: total limited to 30% of total MBC
	less other collateralized borrowings	860C
	note: for Mortgage Partnership Finance (MPF) participants, the maximum credit amount is deducted from the total collateral value.
	RESIDENTIAL HOUSING FINANCE ASSETS (no haircuts)
category		acct. codes
	mortgage loans
	first lien fixed rate	704
	first lien adjustable rate	705
	revolving mortgage loans	708
	non first lien fixed rate loans	706
	non first lien adj. rate loans	707
	govt. and agcy. mortgage backed securities	732
	non-agency mortgage backed securities	733

NOTE: The MBC is based on the lower of the qualifying assets or Residential Housing Finance

122

EXHIBIT E

Line descriptions for MBC calculation - insurance co.

For insurance Companies	(data from audited financials and/or delivered collateral records)
qualifying collateral assets
		current	current
		blanket	specific	range for
		collateral	collateral	collateral
category		weighting	weighting	weighting
treasury and agency securities		95%	90%	85% - 98%
govt. and agcy. mortgage backed securities		90%	85%	80% - 93%
non-agency mortgage backed securities		87%	82%	72% - 92%
RESIDENTIAL HOUSING FINANCE ASSETS (no haircuts)
category
govt. and agcy. mortgage backed securities
non-agency mortgage backed securities

NOTE: The MBC is based on the lower of the qualifying collateral assets or Residential Housing Finance Assets.

123

SCHEDULE A

In Effect As Of December 16, 2002

Member Loan Stock Purchase Percentage		5	%
Unused Borrowing Capacity Stock Purchase Percentage		.50	%
Acquired Member Asset Stock Purchase Percentage		0	%
Cap on Unused Borrowing Capacity Stock Purchase Requirement	$	N/A
Redemption Cancellation Fee		2	%
Membership Withdrawal Cancellation Fee		2	%
MBC Percentage		30	%

124

	No.:	2002-20
	Date:	May 8, 2002

Federal Housing Finance Board

Capital Structure Plan of the Federal Home Loan Bank of Pittsburgh

WHEREAS, the Gramm-Leach-Bliley Act (GLB Act) amended section 6 of the Federal Home Loan Bank Act (Bank Act) in order to enhance the safety and soundness of the Federal Home Loan Bank (Bank) System by replacing the existing subscription capital structure with a permanent capital structure that includes risk-based and leverage capital requirements; and

WHEREAS, the Federal Housing Finance Board (Finance Board) has adopted regulations to implement the capital provisions of the GLB Act, which regulations have established the risk-based and leverage capital requirements for the Banks, as well as the requirements for the capital structure of each Bank; and

WHEREAS, section 6(b) of the Bank Act and the implementing regulations of the Finance Board, 12 C.F.R. § 933.1(a), require the board of directors of each Bank to develop and submit for Finance Board approval a plan to establish and implement a new capital structure for such Bank; and

WHEREAS, the board of directors of the Federal Home Loan Bank of Pittsburgh (Pittsburgh Bank) has submitted to the Finance Board a capital structure plan for the Pittsburgh Bank dated April 26, 2002 (Pittsburgh Capital Plan or Plan); and

WHEREAS, the Pittsburgh Capital Plan was approved by vote of the Executive Committee of the board of directors of the Pittsburgh Bank (Executive Committee); and

WHEREAS, Finance Board regulations preclude a Bank from implementing its capital plan until the Finance Board has approved the capital plan, as well as the internal market risk model or the internal cash flow model that the Bank intends to use to calculate the market risk component of the Bank’s risk-based capital requirement, and the risk assessment procedures and controls to be used to manage its credit, market and operation risks, 12 C.F.R. §§ 932.1 and 933.1(a); and

WHEREAS, the Board of Directors has considered the Pittsburgh Capital Plan, its supporting materials, as well as a memorandum from the Office of Policy, Research and Analysis, and the Office of General Counsel that analyzed the Plan and recommends its approval; and

WHEREAS, the use of the terms “discretion” or “sole discretion” in the Capital Plan when describing actions that may be taken by the Pittsburgh Bank’s board of directors cannot limit any authority granted the Finance Board under the Bank Act to review, prohibit or otherwise regulate such actions; and

125

Page 2

No.: 2002-20

WHEREAS, the Board of Directors has determined that the Pittsburgh Capital Plan meets all statutory and regulatory requirements regarding capital structure, and does not compromise the safety and soundness of the Pittsburgh Bank or of the Bank System;

NOW, THEREFORE, IT IS RESOLVED that the Board of Directors hereby approves the Pittsburgh Capital Plan, pursuant to sections 2B(a)(1) and 6(b) of the Bank Act, 12 U.S.C. §§ 1422b(a)(1) and 1426(b), and 12 C.F.R. § 933.1(c), subject to the terms of this resolution;

IT IS FURTHER RESOLVED that the approval of the Pittsburgh Capital Plan does not imply that the Finance Board intends to limit any authority granted it under the Bank Act to review, prohibit or otherwise regulate actions that, under the terms of the Pittsburgh Capital Plan, may be taken in the “discretion” or “sole discretion” by the board of directors of the Pittsburgh Bank;

IT IS FURTHER RESOLVED that the Pittsburgh Bank’s internal market risk model and its risk assessment procedures and controls will be approved pursuant to 12 C.F.R. § 932.1, subject to the right of the Board of Directors to review the approval, in accordance with 12 C.F.R. § 907.7;

IT IS FURTHER RESOLVED that prior to implementing the Pittsburgh Capital Plan, the Pittsburgh Bank shall submit to the Finance Board written confirmation from the independent certified public accountant and the credit ratings organization that have reviewed the initial version of the Pittsburgh Capital Plan in accordance with 12 C.F.R. § 933.3, that they have reviewed the final version of the Pittsburgh Capital Plan and reaffirm their prior determinations that the implementation of the Plan will not cause the Pittsburgh Bank to write down the value of its capital stock nor will it affect the credit rating of the Bank;

IT IS FURTHER RESOLVED that prior to implementing the Pittsburgh Capital Plan, the Pittsburgh Bank shall submit to the Finance Board written confirmation that the full board of directors of the Bank has ratified the Executive Committee’s approval of the Plan;

IT IS FURTHER RESOLVED that in the event that the board of directors of the Pittsburgh Bank exercises its authority under 
Section II.B.2.a.-c. of the Plan to revise the applicable percentage of any stock purchase requirement, then the Pittsburgh Bank shall promptly notify the Finance Board of such changes.

By the Board of Directors of the Federal Housing Finance Board

/s/ John T. Korsmo

John T. Korsmo

Chairman

126

	PricewaterhouseCoopers LLP
	1301 K Street, N.W. 800W
	Washington DC 20005-3333
	Telephone (202) 414 1000
August 5, 2002

Mr. James D. Roy
President and Chief Executive Officer
Federal Home Loan Bank of Pittsburgh
601 Grant Street
Pittsburgh, PA 15219-4455

Dear Mr. Roy:

Introduction

We have been engaged to report on the appropriate application of accounting principles generally accepted in the United States of America (“GAAP”) by the Federal Home Loan Bank of Pittsburgh (“Bank”) and by its members to its conversion of outstanding stock into newly issued Class B Capital Stock (“Capital Stock”) in accordance with its proposed capital plan (“Plan”).

Our engagement has been conducted in accordance with standards established by the American Institute of Certified Public Accountants (“AICPA”). Our engagement is pursuant to the requirement imposed on the Bank by the Gramm-Leach-Bliley Act, to obtain an independent review of the Bank’s Plan by an independent accountant subsequent to approval of the final plan by the Bank’s independent regulator, the Federal Housing Finance Board (“Finance Board”).

Background

The Financial Services Modernization Act or Gramm-Leach-Bliley Act (“GLBA”) that was enacted on November 12,1999 contained several important reforms impacting the Federal Home Loan Banks. Among the reforms were a new capital structure for the banks and new minimum capital requirements. The new capital structure provided for two classes of stock that individual banks may issue: class A capital stock that is redeemable with six months prior written notice and class B capital stock, redeemable with 5 years prior written notice. Furthermore, the statute provides that the Class B Capital Stock is to confer an ownership interest in the retained earnings, surplus, undivided profits and equity reserves of the respective bank. The new minimum capital

127

Mr. James D. Roy
Federal Home Loan Bank of Pittsburgh
August 5, 2002

requirements are comprised of total capital, leverage and risk-based requirements. The minimum total capital requirement is 4% of total bank assets. The minimum leverage requirement is a 5% ratio determined as the sum of, permanent capital multiplied by 1.5 added to other components of total capital, divided by total bank assets. The minimum risk-based capital requirement is comprised of credit, market and operations risk components, the sum of which must equal total permanent capital of the bank.

In connection with the new capital structure and requirements, the GLBA provides that the banks each establish the minimum required investment in the capital stock of the bank by its members. The minimum required investment in the bank’s capital stock may be based upon a percentage of each member’s total assets, outstanding advances, any other business activity or any other basis approved by the Finance Board or combination of requirements.

Finally, the GLBA requires the board of directors of each bank to submit a capital plan to the Finance Board for approval. The capital plan is to establish and implement a new capital structure for the bank that complies with the new capital requirements. The GLBA required that each board of directors submit the plan for its respective bank to the Finance Board for approval no later than October 29, 2001. Each plan is to establish the following:

a)	minimum investment by the bank’s members,
b)	classes of capital stock to be issued by the bank,
c)	manner in which the bank will pay dividends on the capital stock,
d)	date on which the bank will implement the new capital structure and the manner in which the bank will issue its classes of capital stock to its members,
e)	criteria for transactions in its capital stock,
f)	how it will dispose of capital stock held by members who terminate their membership in the bank,
g)	demonstration that the bank will be able to implement the plan and will be in compliance with the new capital requirements after the plan is implemented.

Prior to submitting the plan to the Finance Board, the GLBA requires each bank to conduct an independent review of its capital plan by engaging independent accountants to review the application of accounting principles generally accepted in the United States of America to the conversion of the capital stock to ensure, to the extent possible, that the implementation of the plan would not result in any write-down of the redeemable stock owned by its members, and review by at least one Nationally Recognized Statistical Rating Organization (NRSRO) to determine whether the implementation of the plan will have a material effect on the credit rating of the bank. The banks are to submit a copy of each independent review report as part of its proposed and final capital plan.

128

Mr. James D. Roy
Federal Home Loan Bank of Pittsburgh
August 5, 2002

Analysis and conclusions

We have reviewed the Bank’s Plan dated April 26, 2002 and understand its terms as follows:

Description of the Transaction

Terms of the Class B Capital Stock

•   The Bank will issue only one form of Class B Capital Stock (the Bank will not issue any Class A Capital Stock).

•   Par value of the Capital Stock will be $100.

•   Holders of the Capital Stock will own a proportionate share of the Bank’s retained earnings, surplus, undivided profits and equity reserves. However, holders of the Capital Stock shall have no right to receive any portion of these items except through the declaration of a dividend or capital distribution approved by the Board of Directors or through liquidation of the Bank.

•   The Bank may only issue Capital Stock to members and only members may hold Capital Stock. Accordingly, members may only transfer Capital Stock to other members.

•   Dividends may be declared from time to time by the Bank’s Board of Directors and are non-cumulative with respect to payment obligation and are not to exceed the sum of current net earnings plus net earnings previously retained by the Bank.

•   Shares will be redeemable for cash at the option of the member at par value following five years written notice. However, a member may not have more than one redemption request pending at any one time.

•   Membership in the Bank is voluntary and may be terminated. If a member terminates its membership, and upon the repayment of outstanding indebtedness to the Bank,(including any principal prepayment fees and settlement of the member’s risk sharing obligations under any Acquired Member Asset program, as defined in the Plan) the Capital Stock that was necessary to support the loan and/or acquired member asset program shall become excess stock subject to repurchase by the Bank at its discretion.

•   With regard to election of directors of the Bank, each member is entitled to cast one vote for each share of Capital Stock held as of the record date for the election. Notwithstanding this provision, the number of votes cast by any one member shall not exceed the average number of shares held in each member’s state,

•   With regard to matters other than the election of directors, members will be entitled to one vote regardless of the number of shares held.

•   There are not any voting preferences for any share of Capital Stock.

129

Mr. James D. Roy
Federal Home Loan Bank of Pittsburgh
August 5, 2002

Conversion transaction

•   The Capital Plan is effective on the Recalculation/Conversion Date (as defined in the Plan), which will be stated in a notice to members. The Recalculation/Conversion Date shall not be greater than 18 months after the Finance Board approves the Plan, nor less than sixty (60) days after the date of the notice to the members.

•   On the Recalculation/Conversion Date, each currently outstanding share of Bank stock shall be converted into one share of Class B Capital Stock.

•   On the Recalculation/Conversion Date, immediately following the conversion of currently outstanding Bank stock into Class B Capital Stock, the Bank will recalculate each member’s minimum member stock investment in accordance with the terms of the Plan. Each member’s minimum member stock investment will be recalculated as the sum of:

•   The member’s Member Loan Stock Purchase Requirement (as defined in the Plan). This requirement will initially be 5% of outstanding loans from the Bank to the member. This requirement may be adjusted by the Bank’s Board of Directors, from time to time, to as high as 6% or to as low as 4.5%. Changes outside of this range would constitute an amendment to the Plan that would require Finance Board approval.

•   A change to this requirement may be applied prospectively, affecting only loans transacted subsequent to the change or retrospectively, affecting both outstanding loans as of the date of the change and to any loans transacted subsequent to the date of the change. If a change in a member loans stock purchase requirement is made retrospectively, the Bank’s Board of Directors may choose to either apply the new requirement to all member loans or only to loans that do not include a principal prepayment fee.

•   The member’s Unused Borrowing Capacity Stock Purchase Requirement (as defined in the Plan). This requirement will initially be 0.50% of the principal amount of unused borrowing capacity of each member. This requirement may be adjusted by the Bank’s Board of Directors, from time to time, to as high as 1.5% or to as low as 0%. Changes outside of this range would constitute an amendment to the Plan that would require Finance Board approval. The amount of unused borrowing capacity shall be calculated no later than April 10^th of each year and at the time each loan is transacted.

•   An adjustment in the unused borrowing capacity percentage shall be applied to the principal amount of unused borrowing capacity for all future calculations. From time to time, at the Bank’s Board of Director’s discretion, the amount any one member would be required to purchase under the unused

130

Mr. James D. Roy
Federal Home Loan Bank of Pittsburgh
August 5, 2002

borrowing capacity stock purchase requirement may be subject to a cap of no less than $10 million.

•   The member’s Acquired Member Asset Purchase Requirement (as defined in the Plan). Each member is required to purchase and hold Capital Stock with a par value equal to the Bank’s acquired member asset purchase percentage multiplied by the amount of acquired member assets delivered by that member and held by the Bank (at the Bank’s discretion, it may recalculate the member’s acquired member asset purchase requirement from time to time to capture any reductions in the amount of acquired member assets then being held by the Bank). This requirement will initially be 0%. However, from time to time, the Bank’s Board of Directors may adjust this requirement to as high as 4.0% or to as low as 0%. Changes outside of this range will constitute an amendment to the Plan that requires approval from the Finance Board. Adjustments to this requirement may be applied prospectively or retrospectively. Increases to the requirement will only be applied prospectively affecting only master commitments entered into between a member and the Bank subsequent to such increase. Any decrease in this requirement may be applied either retrospectively, affecting all acquired member assets or prospectively, affecting only master commitments entered into subsequent such decrease.

•   In no case, shall a member’s minimum stock investment be less than $10,000.

•   After the conversion and recalculation of each member’s minimum stock investment, each member’s stock holdings will be adjusted to their respective minimum member stock investment either by issuing additional shares at par to eliminate a shortfall or by repurchasing shares, at par, to eliminate an excess position, subject to the Bank remaining in compliance with its minimum regulatory capital requirement.

•   Each member retains the right to opt out of the Plan by providing the Finance Board written notice of its intent to withdraw its membership from the Bank prior to the Recalculation/Conversion Date. The written notice of intent to withdraw must be filed with the Finance Board prior to the opt-out date set forth in the notice to members, establishing the Recalculation/Conversion date. The opt-out date shall be 30 days prior to the Recalculation/Conversion date.

•   The membership of a member that opts out of the conversion as set forth in the Plan shall terminate at the earlier of (a) six months from the date that the written notice of withdrawal was filed with the Finance Board, or (b) the effective date of the Plan. On the date the member’s membership is terminated, all outstanding indebtedness of the member to the Bank becomes immediately due and payable. The Bank shall cancel each outstanding share of Bank stock on the date of membership termination, provided the Bank remains in compliance with all regulatory capital requirements. Any member that provides the Finance Board with written notice of withdrawal intent after the opt out date, but prior to the effective date of the Plan shall have its existing stock converted into capital stock on the Recalculation/Conversion Date. The written

131

Mr. James D. Roy
Federal Home Loan Bank of Pittsburgh
August 5, 2002

notice shall commence the applicable five (5) year waiting period to redeem the Capital Stock.

•   All Capital Stock shall be issued, redeemed and repurchased at par value.

•   A request by a member (whose membership has not been terminated) to redeem Capital Stock shall be cancelled automatically if the Bank is prevented from redeeming the member’s Capital Stock because such redemption would cause the member to fail to meet its minimum member stock investment. The effective date of the automatic cancellation shall be five (5) business days after the expiration of the applicable redemption notice period.

We also understand that the:

a)	Bank has not, at any time in the past, paid stock dividends to any of its members,
b)	Par value of the Bank’s currently outstanding capital stock is $100, and
c)	Issuances, redemptions and other transactions in the Bank’s currently outstanding capital stock have all been at par value.

Accounting by the Bank

Applicable accounting principles

Paragraph 9 of Technical Bulletin 85-6, Accounting for a Purchase of Treasury Shares at a Price Significantly in Excess of the Current Market Price of the Shares and the Income Statement Classification of Costs Incurred in Defending against a Takeover Attempt issued by the Financial Accounting Standards Board (“FASB”) states:

“Most transactions by an enterprise in shares of its own stock are solely capital transactions, that is, the transactions involve only the transfer of ownership of the enterprise’s stock or rights associated with ownership of the stock. Those transactions do not result in recognition of income or expense by the enterprise.”

Chapter 1B of Accounting Research Bulletin 43 indicates that differences between par value and purchase price of treasury stock be accounted for as a capital transaction and not through the earnings of the enterprise.

“Apparently there is general agreement that the difference between the purchase price and the stated value of a corporation’s common stock purchased and retired should be reflected in capital surplus.”

Paragraph 12 of Accounting Principles Board Opinion No. 6 further expanded on this guidance by clarifying that amounts be credited to capital surplus or to retained earnings in treasury stock transactions.

132

Mr. James D. Roy
Federal Home Loan Bank of Pittsburgh
August 5, 2002

“When a corporation’s stock is retired, or purchased for constructive retirement (with or without an intention to retire the stock formally in accordance with applicable laws):

     i. an excess of purchase price over par or stated value may be allocated between capital surplus and retained earnings

     ii. an excess of par or stated value over purchase price should be credited to capital surplus.

When a corporation’s stock is acquired for purposes other than retirement (formal or constructive), or when ultimate disposition has not yet been decided, the cost of acquired stock may be shown separately as a deduction from the total of capital stock, capital surplus, and retained earnings, or may be accorded the accounting treatment appropriate for retired stock, “Gains” on sales of treasury stock not previously accounted for as constructively retired should be credited to capital surplus; “losses” may be charged to capital surplus to the extent that previous net “gains” from sales or retirements of the same class of stock are included therein, otherwise to retained earnings.”

Conclusion

The conversion of currently outstanding stock into new Capital Stock is a capital transaction and should be accounted for by the bank at par value in the Capital Stock account. This will not require recognition of an accounting transaction to the account because the par value of the Capital Stock will be equivalent to the par value of the current outstanding stock (i.e. no difference between par value and conversion price) and because the current outstanding stock will be converted into Capital Stock at a conversion ratio of one-for-one

Accounting by the members

Applicable accounting principles

The accounting guidance for the treatment of capital transactions is primarily contained in ARB 43. However, in an analogous situation, the FASB issued guidance on the accounting for the receipt of participating preferred stock of the Federal Home Loan Mortgage Corporation by members of the FHLB’s in Technical Bulletin 85-1 (“TB 85-1”), Accounting for the Receipt of Federal Home Loan Corporation Participating Preferred Stock. That guidance was based upon the authority for accounting for non-monetary transactions, Accounting Principles Board Opinion No. 29.

Paragraph 2 of TB 85-1 states:

“The distribution of preferred stock grants the member institutions an ownership right to the residual net assets of the FHLMC that they did not have previously,

133

Mr. James D. Roy
Federal Home Loan Bank of Pittsburgh
August 5, 2002

directly or indirectly, since the only previously outstanding capital stock was redeemable at par. The preferred stock is a non-monetary asset that should be recognized by member institutions at its fair value as of December 31, 1984, in accordance with Opinion 29. The resulting income should be reported as an extraordinary item in accordance with Opinion 30.”

Further, in the Background to TB 85-1, paragraph 9 states:

“The threshold accounting issue is whether something of value has been received by the member institutions to which they previously were not entitled.”

However, in the case of the Bank’s conversion of its outstanding stock into Capital Stock, the members are not receiving anything of value that they do not already directly or indirectly have. Shares of stock, as noted in TB 85-1, are non-monetary assets and the conversion must be accounted for according to Accounting Principles Board Opinion No. 29, Accounting for Non-monetary Transactions, (“APB 29”)

Generally, APB 29 bases the accounting for non-monetary transactions on the fair value of the assets involved. Under this principle, the cost of a non-monetary asset acquired in exchange for another non-monetary asset is the fair value of the asset surrendered to obtain it, and a gain or loss, if applicable, should be recognized on the exchange. The fair value of the asset received should be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered.

Under APB 29, there are exceptions to this basic principle, including the following:

•   Accounting for a non-monetary transaction should not be based on the fair values of the assets transferred unless those fair values are determinable within reasonable limits.

•   If an exchange of non-monetary assets is not essentially the culmination of an earning process, the accounting for the exchange should be based on the recorded amount of the non-monetary asset relinquished.

Each of these points is considered further below:

Premise:

Fair value of the Capital Stock is not determinable within reasonable limits

With respect to measuring “fair value,” APB 29 indicates:

“If neither the fair value of a non-monetary asset transferred nor the fair value of a non-monetary asset received in exchange is determinable within reasonable limits,

134

Mr. James D. Roy
Federal Home Loan Bank of Pittsburgh
August 5, 2002

the recorded amount of the non-monetary asset transferred from the enterprise may be the only available measure of the transaction.”

The AICPA Audit and Accounting Guide for Banks and Savings Institutions further states:

“[FHLB stock] does not have a readily determinable fair value ... because its ownership is restricted and it lacks a market.” – paragraph 5.95

Thus, our view is that the fair values of neither the current outstanding Bank stock nor the Capital Stock are not determinable within reasonable limits.

Premise:

Exchange of shares does not constitute the culmination of an earning process

The exchange of current outstanding shares of Bank stock for the Capital Stock with equivalent terms would represent, in our view, a transaction that is not essentially the culmination of an earning process. In entering into such an exchange transaction, the member would be converting from one form of equity ownership interest to a slightly different form, but the underlying purpose of such ownership – to the member with access to the Bank’s products and services – would not change. Moreover, after the exchange, the member would still be required to maintain an ownership interest (at whatever level and in whatever proportions may be prescribed) in order to continue to have access to the Bank’s products and services. Additionally, the fundamental characteristics of the members’ equity ownership remain the same before and after the conversion. Specifically, both before and after the transaction:

•   the Bank has the unconditional right to call members for additional capital;

•   the Capital Stock is redeemable at par;

•   the member owns a proportionate share of retained earnings, surplus, undivided profits, and equity reserves;

•   the Capital Stock earns dividends as determined by the Board of Directors; and

•   members’ voting rights for election of directors remain constant at one vote per share of Capital Stock.

Our views on the accounting for the exchange of shares are also based on the nature of the member’s investment in the System. Under the principles of APB 29, we believe it is appropriate to consider the member’s investment in Bank stock, even though not accounted for by any individual member on an equity basis, to be in substance a “productive asset.” It is our understanding that in virtually all instances a member voluntarily holds stock in the System not primarily for traditional investment purposes

135

Mr. James D. Roy
Federal Home Loan Bank of Pittsburgh
August 5, 2002

(i.e. current yield and capital appreciation), but rather for purposes of maintaining and ensuring a source of low-cost funding and other services. In so doing, the member’s objective is to maximize its profitability and manage its financial risks effectively.

We understand that these reasons for holding the Bank’s stock are expected to remain constant after the exchange transaction. Accordingly, we believe that the member’s stock holdings in the Bank are distinguishable from other equity investments and that it is appropriate to view such holdings in essentially the same manner as would be viewed other assets held for or used in the production of goods or services by the members. As indicated above, an exchange of similar productive assets not held for sale in the ordinary course of business is not considered to be essentially the culmination of an earning process and, therefore, is excluded from fair value accounting treatment under APB 29.

Conclusion

We conclude that members should account for the Capital Stock transaction at their respective recorded amount for their current investment in Bank stock. We base our conclusion on the application of APB 29 in that:

a)	the fair value of neither the currently outstanding Bank stock nor the Capital Stock are determinable within reasonable limits; and
b)	the conversion transaction is not the culmination of an earning process.

Limitations

We have prepared this report to the Bank for assistance in applying accounting principles to the conversion transaction. Our conclusions in this letter do not contemplate events outside the context of the conversion transaction itself. Thus, events that occur outside the context of the conversion transaction may have a bearing upon our conclusions with respect to the accounting for the Capital Stock by the Bank or its members.

The ultimate responsibility for the decision on the appropriate application of accounting principles generally accepted in the United States of America rests with management of the Bank and with the management of each of the members. Our judgments on the appropriate application of GAAP for the conversion transaction are based solely on the facts provided to us as described above and the final Capital Plan of the Bank dated April 26, 2002. Should these facts and circumstances differ, or should the Capital Plan be amended, our conclusions may change.

Furthermore, our conclusions in this letter are based upon accounting principles generally accepted in the United States of America in effect as of the date of this letter.

136

Mr. James D. Roy
Federal Home Loan Bank of Pittsburgh
August 5, 2002

Accordingly, our conclusions in this letter may change as a result of new accounting pronouncements or regulations that become effective subsequent to the date of this letter.

This report is intended solely for the information and use of the Bank’s Board of Directors, management and the Finance Board and is not intended and should not be used by anyone other than these specified parties.

Very truly yours,

137

financial Institutions Ratings
55 Water Street
New York NY 10041-0003
Tel 212 438 2000
Fax 212 438 7375

July 17, 2002

Mr. Eric J. Marx
Chief Financial Officer
Federal Home Loan Bank of Pittsburgh
601 Grant Street
Pittsburgh, PA 15219-4455

Dear Mr. Marx:

As part of Standard & Poor’s review of The Federal Home Loan Bank of Pittsburgh’s (FLHB-Pittsburgh) capital plan, as outlined in our Engagement Letter for the Rating Evaluation Service, dated February 20, 2001, we have reviewed your most recent changes made to the capital plan as outlined in your bank’s e-mail to Victoria Wagner dated June 6, 2002. Based upon our review of the changes made to FLHB-Pittsburgh’s Capital Plan dated April 26, 2002 in comparison to the original plan submitted May 4, 2001, our original finding stand as stated in our letter dated May 3l, 2001, that Standard & Poor’s has determined that your bank’s implementation of the capital plan would not have a material effect on your bank’s credit rating.

Sincerely,

Mark E. Bachmann
Managing Director

138

EXHIBIT B

Opt Out Notice

[Date]

Elaine Baker
Executive Secretariat
Federal Housing Finance Board
1777 F Street, N.W.
Washington, DC 20006

RE: NOTICE OF OPT OUT OF FEDERAL HOME LOAN BANK OF PITTSBURGH (“BANK”) CAPITAL CONVERSION AND WITHDRAWAL FROM MEMBERSHIP

Dear Ms. Baker:

With this letter the [insert name of institution] (“Member”) hereby provides notice that it is opting out of the conversion of its existing Bank stock to new Capital Stock (defined as Class B stock under Finance Board regulations) and withdrawing from membership in the Bank.

Sincerely,

[signature of officer of the Member]

cc:	Federal Home Loan Bank of Pittsburgh
	Attn: Corporate Secretary
	601 Grant Street
	Pittsburgh, PA 15219

139